First State Bank of Floodwood v. Jubie

• Decision Date: 23 October 1993
• Docket Number: Civ. No. 5-91-86.
• Citation: 847 F. Supp. 695
• Parties: FIRST STATE BANK OF FLOODWOOD, Floodwood Agency, Inc., John F. Schilling, William J. Gravell, Joseph Bullyan and Eugene J. Stowell, Plaintiffs, v. Jerry J. JUBIE, Irene M. Jubie, Kirk M. Suonvieri, Janine I. Suonvieri, Todd Jubie, Thomas Jubie, Kathie Jubie and Timothy Jubie, Defendants.
• Court: U.S. District Court — District of Minnesota

847 F. Supp. 695

FIRST STATE BANK OF FLOODWOOD, Floodwood Agency, Inc., John F. Schilling, William J. Gravell,¹ Joseph Bullyan and Eugene J. Stowell, Plaintiffs, v. Jerry J. JUBIE, Irene M. Jubie, Kirk M. Suonvieri, Janine I. Suonvieri, Todd Jubie, Thomas Jubie, Kathie Jubie and Timothy Jubie, Defendants.

Civ. No. 5-91-86.

United States District Court, D. Minnesota, Fifth Division.

October 23, 1993.

John F. Bonner, III, Parsinen, Bowman & Levy, Minneapolis, MN, for plaintiffs.

Keith M. Brownell, Brownell Law Office, Duluth, MN, for defendants.

ORDER

ERICKSON, United States Magistrate Judge.

I. Introduction

This matter came before the undersigned United States Magistrate Judge, pursuant to the consent of the parties as authorized by Title 28 U.S.C. § 636(c)(3), upon the Plaintiffs' Motion for Partial Summary Judgment in the following respects:

1. On Count One of the Plaintiffs' Amended Complaint for fraud committed in violation of Title 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5.

2. On Count Two of the Plaintiffs' Amended Complaint for fraud committed in violation of Minnesota Statutes Sections 80A et seq., Regulation of Securities.

3. On Count Three of the Plaintiffs' Amended Complaint for fraud in the sale of securities in violation of Minnesota Statutes Sections 325F.68 through .70.

4. On Count Four of the Plaintiffs' Amended Complaint for common law fraud.

5. On Count Six of the Plaintiffs' Amended Complaint for breach of contract in that the Defendants purportedly failed to disclose information that was required under the terms of a contract.

6. On Count Twelve of the Plaintiffs' Amended Complaint for a declaration that the Retirement Account of the Defendant Jerry J. Jubie ("Jubie") is void.

7. On Count Thirteen of the Plaintiffs' Amended Complaint for common law fraud for the failure of the Defendants to disclose a Federal Deposit Insurance Corporation ("FDIC") action against Jubie.

8. On Count Fourteen of the Plaintiffs' Amended Complaint for breach of contract in that the Defendants allegedly departed from the "generally accepted accounting practices" that they had contractually agreed to follow.

9. On the Defendants' First Counterclaim, which seeks a recovery of damages for a wrongful termination of the Jubies' health benefits.

10. On the Defendants' Second Counterclaim which seeks damages for defamation.

11. On the Defendants' Third Counterclaim, which alleges that the Plaintiffs breached the terms and conditions of the Jubies' Retirement Agreement.

In addition, the Plaintiffs seek an award of their reasonable costs and attorneys' fees as would be permitted by Minnesota Statutes Sections 325F.68 through .70 and Section 8.31.

At a Hearing on the Motions, the Plaintiffs appeared by John F. Bonner III, Esq., and the Defendants appeared by Keith M. Brownell, Esq.

For reasons which follow, we grant the Plaintiffs' Motion for Summary Judgment as to the Second of the Defendants' Counterclaims, while the remainder of the Plaintiffs' Motions are denied.

II. Factual Background

On October 9, 1988, Jerry J. and Irene M. Jubie ("Jubies"), both individually and as the sole shareholders of Floodwood Agency, Inc.,² entered into a Purchase Agreement with John F. Schilling ("Schilling"), William Gravelle ("Gravelle") and certain assignees, for the sale of all of the then available outstanding common stock of the First State Bank of Floodwood ("Bank"). The buyers agreed to pay the sum of 95% of the book value of the common shares if the Sellers owned 100% of the Bank's stock at the time of sale. The book value of the stock, as defined by the terms of the Agreement, was to be determined on or before October 30, 1987.

As pertinent to the issues presented by the Plaintiffs' Motions, the Purchase Agreement contained the following recitals³:

5. The Sellers i.e., the Jubies further represent that the books and records of the bank are kept in accordance with generally accepted accounting practices, and that the statements of the bank are true and accurate. * * *.

6. This sale is subject to approval by all required State and Federal regulatory authorities.

7. The Buyers i.e., Schilling and Gravelle represent that they will promptly proceed with all due haste to provide the necessary documents to secure regulatory approval. In any event, they agree that they will apply for regulatory approval under the Change in Bank Control Act by October 17, 1987.

8. Buyers shall be permitted access to all State and Federal regulatory agency records, studies, audits and other information, including those performed by or on behalf of FDIC. Sellers shall arrange a meeting between the Buyers, representatives of FDIC and representatives of the Minnesota Department of Commerce, Banking Division, said meeting shall be on or before October 21, 1987.

9. Buyers shall be afforded access to all bank records for a detailed examination of the same, in order to determine that the bank conditions are as represented, and that all bank assets and liabilities are disclosed, that all bank practices are being conducted according to law and in conformance with good banking standards.

* * * * * *

12. In the event the Buyers, after an examination of the books, have any complaint with regard to the condition of the bank, they may void this transaction by a Notice to Sellers on or before October 16, 1987.

* * * * * *

14. Sellers agree that family loans, except brother's loans, will be paid or paid down to adequate security. Any family loan which becomes uncollectible in the future may be offset against amounts owing to owner or his wife pursuant to a Retirement Agreement between owner, his wife and the bank, which Agreement is dated March 10, 1987.

15. Said Retirement Agreement, a copy of which is attached hereto and marked "Exhibit A," shall remain in full force and binding on the bank; except that it is agreed that the Agreement will be amended to provide: * * * 2) If there is any cost to the bank for life and health group policies of insurance for the benefit of the Jubies, then and in that event, the Jubies will reimburse the bank for any expenses of that nature, it is sic being the intent of this Agreement that the Jubies be able to continue to maintain the life and health policies through the bank. 3) That the final two years payments, pursuant to said agreement, shall be forfeited if, during the two year period following the closing, the annual average outstanding balance of retail installment sales contracts acquired from Schneiderman's Furniture is less than 90 percent of the balance of said contracts at the date of closing.

* * * * * *

19. Sellers represent that during the negotiations preceeding sic this agreement and up until the time of closing, that the Seller sic will continue to operate the Bank according to law and in conformance with good banking standards. Seller sic shall contact Bank management daily to ascertain any information which materially alters the condition of the Bank. Any such information which Seller sic becomes aware of, or should have become aware of, shall be immediately disclosed to Buyers.

20. All recitations, covenants, warranties and conditions of this agreement shall survive the closing and will give rise to a cause of action or exercise of right of setoff for either Buyer of sic after closing.

The record before the Court establishes that both parties to this Agreement were represented by legal counsel.⁴

Due to delays in obtaining the approvals of the applicable State and Federal regulatory agencies, the parties⁵ entered an "Addendum to Purchase Agreement" on July 28, 1988, which modified the terms and conditions of the sale of the Bank.⁶ Among its other recitals, the Addendum established the purchase price of the Bank at $528,582.00, which was 95% of the book value of the Bank, as disclosed by the Bank's financial statements for the period ending as of June 30, 1988. The stated purchase price was subject to certain adjustments including the "usual and customary month-end adjustments as made by the Jubies' accountant, Al Skur, whose judgment BUYERS would accept as to those adjustments."

In addition, Paragraph 4 of the Addendum provided in pertinent part:

The BUYERS have objected to the BANK'S reserve for bad debts as being inadequate. The parties have agreed to settle this dispute by the SELLERS, individually and severally, guaranteeing the BUYERS and the BANK that in the event of default of certain loans, SELLERS will pay up to one-half of the present balance of said loans. The loans and the amount of the guarantee are as follows:

                                    Total       Guarantee
                U.M.D. Equipment   25,500.00    12,500.00
                Kurtock            27,000.00    13,500.00
                Mark Peterson      34,475.00    17,238.00
                Rosenthal          30,000.00    15,000.00
                

At such time as the BANK has disposed of collateral or otherwise exhausted all judicial proceedings and reasonable collection efforts against the debtors on each of the above loans, the BANK shall notify the SELLERS of the amount of loss sustained by the BANK on that loan. * * * The BANK and BUYERS shall be permitted to proceed against the SELLERS for any amounts owing pursuant to this provision by any and all legal proceedings including the right to off-set amounts owing from the BANK to the SELLERS pursuant to the Retirement Agreement referred to herein and pledge as collateral for this guarantee. * * *

Consistent with the provisions of Paragraph 14 of the original Purchase Agreement, certain of the family loans were either paid-off, paid-down, or were guaranteed for payment by the Jubies. In this respect, Paragraph 6 of the Addendum provided in part:

6. The SELLERS hereby pledge and offer as security to the BUYERS and the BANK any an all sums owing to the SELLERS pursuant to that certain Retirement Agreement attached to the Agreement of the 9th day of October, 1987 (Exhibit A). Said pledge and security is offered for complete compliance of all of the covenants,

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