First State Bank of St. Charles v. Frankel

• Decision Date: 01 October 2002
• Docket Number: No. ED 79669.,ED 79669.
• Citation: 86 S.W.3d 161
• Parties: FIRST STATE BANK OF ST. CHARLES, MISSOURI, Respondent, v. Irwin James Frankel and Karen FRANKEL, Appellants.
• Court: Missouri Court of Appeals

86 S.W.3d 161

FIRST STATE BANK OF ST. CHARLES, MISSOURI, Respondent, v. Irwin James Frankel and Karen FRANKEL, Appellants.

No. ED 79669.

Missouri Court of Appeals, Eastern District, Division Four.

October 1, 2002.

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Gerald Phillip Greiman, Spencer Fane Britt & Browne, LLP, Clayton, MO, for Appellant.

James T. Barry Jr., Gregory Francis Herkert, Barry Law Firm, Clayton, MO, for Respondent.

SHERRI B. SULLIVAN, J.

Introduction

Irwin James Frankel (Frankel) and Karen Frankel (collectively the Frankels) appeal from a trial court judgment entered after a jury trial against the Frankels and in favor of First State Bank of St. Charles, Missouri (the Bank) in the amount of $303,058 for damages and attorney's fees for breach of a guaranty agreement. We affirm.

Factual and Procedural Background

Construction Network, Inc. (CNI), a defendant below, is a defunct construction company. At all pertinent times, Jeff T. McNeal (McNeal), also a defendant below, owned and operated CNI. Frankel and McNeal were acquaintances. The Bank was a client of Frankel's law firm. Around the fall of 1997, CNI began a project known as "the Enclave," an eight-unit residential development for senior citizens. The project consisted of four buildings with two units in each building.

The estimated cost to construct the Enclave was $576,000. McNeal had purchased the Enclave property previously, utilizing a Bank loan. The Bank agreed to loan CNI $480,000, or 80% of the estimated construction cost. The eight units were to be built sequentially, with the units sold as they were completed and the profits from the earlier units funding the remaining 20% of the estimated construction cost.

Frankel was approached about providing a Bank loan guaranty for the Enclave. Frankel had provided Bank loan guaranties for two smaller CNI projects a couple of years earlier. Robert Niedergerke (Niedergerke) handled the Enclave transaction on behalf of the Bank, as he had the two previous Frankel Bank loan guaranties for CNI.

The Frankels executed and delivered a guaranty (the Frankel Guaranty) to the Bank on October 3, 1997. The $480,000 loan was reflected in a promissory note dated October 3, 1997, which indicated the purpose of the loan as "business: construction loan." The note was secured by a "future advance d/t dated 10/3/97 and personal guaranty dated 10/3/97." The Deed of Trust securing the note identified the Enclave property.

From the $480,000 loan, the Bank applied about $53,269 to pay off a previous CNI Bank loan, of which about $22,000 was unrelated to the Enclave. Also, $4,907 of the $480,000 was applied to loan origination and miscellaneous fees. The Bank transferred the remaining $421,824 to an escrow account with Davis Title Company for disbursement to CNI.¹

CNI experienced cost overruns during the construction of the Enclave. On January 15, 1998, the Bank extended a $50,000 loan to CNI, which was reflected in a promissory note with the purpose of the loan indicated as "business: working capital." The note was secured² by a "future advance deed of trust dated 1/15/98 and personal guaranty dated 12/13/94 executed by Jeff T. McNeal and Teri L. McNeal."³ The Deed of Trust securing the note identified the Enclave property. Niedergerke testified that the primary purpose of the loan was for cost overruns on the Enclave as well as other operating expenses for CNI.

On March 31, 1998, the Bank extended a $105,025 loan to CNI, which was reflected in a promissory note with the purpose of the loan indicated as "business: working capital." The note did not indicate any security. Niedergerke testified that the primary purpose of the loan was for expenses towards the Enclave cost overruns as well as operating expenses for CNI.

On June 30, 1998, the Bank extended a $160,000 loan to CNI, which was reflected in a promissory note with the purpose of the loan indicated as "business: business." The note was secured by "future advance dot dated 10-3-97, per gty by Jeff & Teri McNeal dated 12-13-94." Niedergerke testified that this loan was used primarily for the Enclave overdrafts and business expenses.

McNeal testified⁴ that in addition to constructing the Enclave, some of the loan proceeds were used to keep CNI going, which McNeal told Niedergerke. The Enclave, although the biggest CNI project, was not the only CNI project at the time. However, McNeal did not know how much of any of the four loans went into any of the other projects besides the Enclave. Had the money not been available, CNI would have gone out of business and construction on the Enclave would have ceased. Niedergerke also did not know how much of any of the four loans went towards construction of the Enclave.

At McNeal's direction, Zara Stone, a CNI accounting employee, with the assistance of Diann Sherman, a CNI clerical employee, prepared a report, using checkbook ledgers, monthly checking account statements and cancelled checks, invoices, and payroll time sheets, summarizing the cost of the Enclave from the last quarter of 1997 through December 1998, although the project was not completed. The report broke down the cost into material, payroll, and overhead categories. The report indicated the following cost amounts: materials $433,000; payroll $102,393; overhead $124,561; total $659,597.⁵ The report was prepared for the Bank, not for litigation, and the Bank relied on the report to determine how much of the loans went into the Enclave.

Niedergerke testified that he would not have extended any of the four loans, totaling $795,025, on behalf of the Bank to CNI without the Frankel Guaranty. CNI did not meet the Bank's standard of credit worthiness based upon CNI's own assets and income. The Bank did not notify Frankel that it was extending the latter three loans to CNI. In August 1998, the Bank declined to advance any additional funds to CNI. McNeal approached Frankel to ask for more money and Frankel told McNeal that he needed to deal with the Bank.

Units one and two of the Enclave sold in April 1998 for a total of $158,000. Units three, four, five and six sold in November 1998 for a total of $339,500. Unit seven sold in April 1999 for $93,000. In December 2000, the Bank foreclosed on unit eight, and it received $40,100 in foreclosure proceeds.⁶ Thus, the sale/foreclosure proceeds from all eight Enclave units totaled $630,600.

At some point during the sales of the units and the application of the proceeds, Matthew Johannesman (Johannesman) replaced Niedergerke. From the sale proceeds of unit one, $57,319⁷ was applied to the October 3, 1997 Note, $16,690 was distributed to CNI's checking account,⁸ and $4,991 was distributed to third parties.⁹ From the sale proceeds of unit two, $50,319 was applied to the October 3, 1997 Note, $23,155 was distributed to CNI's checking account, and $5,526 was distributed to third parties.

From the sale proceeds of unit three, $71,471 was applied to the October 3, 1997 Note and $5,571 was distributed to third parties. The disposition of $42 remained unclear. From the sale proceeds of unit four, $84,748 was applied to the October 3, 1997 Note and $6,252 was distributed to third parties.

From the sale proceeds of units five and six, $155,025 was applied to pay off in full the January 15, 1998 Note and the March 31, 1998 Note. Johannesman testified that he applied the proceeds to these notes to consolidate the number of notes the Bank had in its relationship with CNI. Also from these proceeds, $11,374 was distributed to third parties and the disposition of $5,101 remained unclear.

From the sale proceeds of unit seven, $14,034 was distributed to CNI's checking account and $6,466 was disbursed to third parties. The closing statement indicated that $72,500 was retained in an escrow account with $62,500 to be used to finish the unit.

Although originally applying the $40,100 foreclosure proceeds from unit eight to the October 3, 1997 Note, the Bank ultimately credited CNI with the proceeds to pay down its Bank debt. Johannesman testified that because unit eight was not included in the CNI report summarizing the cost of the Enclave on which the Bank relied to determine the outstanding amounts under all four promissory notes that it would seek from the Frankels, the Bank decided not to credit the Frankels with the foreclosure proceeds.

On September 16, 1999, the Bank filed a petition against CNI, the Frankels, and the McNeals¹⁰ seeking to recover the outstanding amounts under all four promissory notes and the guaranty agreements. The Frankels filed an answer, as well as counterclaims and affirmative defenses. On December 28, 2000, the trial court entered a default judgment against CNI and McNeal and in favor of the Bank.

At trial, the Bank claimed $256,988 in outstanding principal and interest under the October 3, 1997 Note.¹¹ That amount reflected Bank credits of $22,000 and $4,801 for previous applications to CNI indebtedness unrelated to the Enclave and interest on those principal credits. Under the January 15, 1998 Note, the Bank claimed $4,181 in interest only. Under the March 31, 1998 Note, the Bank claimed $7,519 in interest only. Under the June 30, 1998 Note, the Bank claimed $200,040 in outstanding principal and interest.¹² Thus, under all four promissory notes, the Bank claimed a total of $468,728 in outstanding principal and interest. However, relying on the CNI report summarizing the cost of the Enclave, the Bank utilized a percentage to determine a total of $319,065 in outstanding principal and interest under all four promissory notes related to the cost of the Enclave, and thus were guaranteed by the Frankel Guaranty.

In January 2001, after a four-day trial, the jury returned a verdict against the Frankels and in favor of the Bank in the amount of $185,058 on the October 3, 1997 Note. The jury found in favor of the Frankels on the January 15, March 31, and June...