First Western Bank, Sturgis v. Livestock Yards Co.

Citation466 N.W.2d 853
Decision Date06 March 1991
Docket NumberNo. 17134,17134
PartiesFIRST WESTERN BANK, STURGIS, a South Dakota banking corporation, Plaintiff and Appellant, v. LIVESTOCK YARDS COMPANY, a limited partnership, Livestock Yards Co., a South Dakota corporation and the Bank of Belle Fourche, a South Dakota banking corporation, Defendants and Appellees.
CourtSupreme Court of South Dakota

Keith R. Smit of Morman, Smit, Hughes, Strain, Molstad & Haivala, Sturgis, for plaintiff and appellant (Michael W. Strain of Morman, Smit, Hughes, Strain, Molstad & Haivala, on brief).

Harlan A. Schmidt, Spearfish, for defendant and appellee Livestock Yards Co. HERTZ, Acting Justice.

First Western Bank, Sturgis (Bank), appeals from a judgment entered pursuant to a jury verdict in favor of Livestock Yards Company (Partnership) on Bank's foreclosure action. Bank contends that Partnership was not entitled to a jury trial, that Partnership's agent had authority to undertake the loan at issue as a matter of law, and that the trial court erred in instructing the jury. We affirm.

FACTS

Madden's Livestock Market, Inc. (Corporation) was a commission sales barn at St. Onge, South Dakota, which was owned and operated by Michael Madden (Madden). In 1983, Madden and his wife formed a limited partnership pursuant to his plan to split the ownership of the sales barn facilities from its operation. Madden sold $1.2 million of limited partnership interests, and he was the general partner of the limited partnership. The limited partnership then purchased the sales barn from Corporation. Corporation, as the operating company, entered into an operating agreement leasing the sales barn from partnership, and as holding company, Corporation held all licenses and permits to operate the sales barn.

The Certificate of Limited Partnership of Livestock Yards Company provided in part as follows:

ARTICLE X.

Powers and Limitations of Partnership

The partnership shall have all of the powers of a partnership without limited partners under the South Dakota Uniform Partnership Act, including, by way of amplification and not in limitation, the power to:

. . . . .

B. to borrow money;

C. to mortgage, pledge or encumber in any manner all or any part of any real or personal property or any interest therein[.]

. . . . .

ARTICLE XI.

Power and Authority of Partners

A. The general partner shall have exclusive power and authority to conduct the business and affairs of the partnership. Any action taken by the general partner shall constitute the act of and bind the partnership. No person dealing with this partnership shall be required to inquire into the authority of the general partner.

B. The general partner shall have ... full power and authority to take any action consistent with the purpose of the partnership ..., or carry out any of the powers of the partnership[.]

The certificate also created an advisory board, the purpose of which was to review loans, contracts, leases and other transactions. The board's function was limited to determining whether individual transactions were fair and favorable; the board had no power to take any action in regard to transactions of partnership.

A few years after the limited partnership was started, Madden devised a plan to form a new corporation to buy back the sales barn from the limited partners, and to buy a second sales barn in Belle Fourche along with some property in Montana. In April, 1987, Madden approached Bank's president, John E. Johnson (Johnson), for a loan of $250,000. Johnson testified that Madden told him the money was to be used to pay outstanding bills, and that the loan would be repaid from the proceeds of the pending sale of Corporation. Johnson asked Madden to provide Bank with additional information, and subsequently Madden delivered to Johnson a copy of the certificate of limited partnership, a list of the names of the limited partners, and the December 31, 1986, financial statement of Partnership.

Johnson brought this information to a meeting of Bank's loan committee on April 21, 1987, where Madden's loan application was considered. The loan committee tentatively approved the loan, subject to the requirement that Johnson obtain a list of the bills payable, a confirmation of the sale of Corporation, the written approval of Partnership's Advisory Board and a list of the names of the limited partners. The next day, April 22, 1987, Johnson relayed to Madden the committee's tentative approval and the additional documentation needed. That same day, Madden brought to the Bank a list of bills payable, as follows:

                Madden's Livestock Market, Inc. & Livestock Yards Co
                Telephone system                                          $13,693.92
                Truck scale                                                38,224.38
                Posts & Plank                                               8,790.60
                Insurance                                                  18,820.00
                Taxes                                                       9,262.06
                Scale repair                                                3,964.69
                Back-up beam scale                                          3,341.68
                Trailer loading chutes                                     13,500.00
                Repair sewer system                                         1,350.00
                Hay contracts                                              71,000.00
                Corn                                                        3,115.61
                April Payroll                                              25,000.00
                April Payables                                             12,000.00
                                                                         -----------
                                         Total                           $222,062.94
                                                                         -----------
                                                                         -----------
                

Johnson admitted that he never tried to distinguish or allocate the bills between the two entities, and only inquired as to one of the listed expenditures. In fact, Johnson admitted that he knew that the bills for hay, corn, payroll, and payables were not Partnership debts, and that the financial statement Madden had provided him showed Partnership to be solvent and well-capitalized with no short-term payables. Although he knew that at least $111,115.00 (the total of hay, corn, payroll, and payables) of the bills were attributed to Corporation, Johnson suggested that the loan be made to Partnership since it owned the sales barn and the forty acres upon which it was situated. Even though Madden said he needed the loan to pay existing debts of Partnership, Johnson never inquired if any of the bills listed were for materials already purchased or debts actually incurred.

Because Partnership held the only available collateral, Bank prepared, and Madden, as general partner, executed a 30-day promissory note and mortgage on behalf of Partnership on April 22, 1987. Madden and his wife personally guaranteed the loan, and Bank issued Madden a certified check payable to Partnership that day. Madden immediately diverted the funds and none of the loan proceeds were ever received by or deposited to accounts of Partnership. Johnson did not satisfy the loan committee's requirements for approval of the loan as Madden never provided Bank with a confirmation of the sale of Corporation or written approval of the Advisory Board. In fact, the limited partners were not aware of the loan until after Madden defaulted.

When Madden defaulted, Bank brought this action for reformation of the legal description of the mortgage and foreclosure of the mortgage. Partnership counterclaimed, alleging that Bank was negligent in loaning Madden the money on behalf of Partnership. The trial court granted Bank's motion for summary judgment, reforming the legal description, foreclosing the mortgage, and dismissing Partnership's counterclaim. We reversed and remanded for trial. First Western Bank v. Livestock Yards Co., 444 N.W.2d 387 (S.D.1989) (First Western Bank I ). The case was tried before a jury which returned a verdict disallowing both Bank's action and Partnership's counterclaim. Bank appeals.

ISSUES

1. Did the trial court err in permitting the case to be tried to a jury?

2. Did the trial court err in submitting to the jury the question of Madden's authority?

3. Did the trial court err in instructing the jury?

ANALYSIS

1. Jury Trial.

Bank contends that Partnership was not entitled to a jury trial because its counterclaim alleging negligence was in fact an affirmative defense to its equitable action of foreclosure. Partnership counters that its claim against Bank for negligence was a substantive legal counterclaim and a compulsory counterclaim, and consequently Partnership was entitled to a jury trial as a matter of right.

We have considered whether a party to a civil action is entitled to a jury trial on a number of occasions. We stated our general rule most recently in Nizielski v. Tvinnereim, 453 N.W.2d 831 (S.D.1990):

The right to a jury trial is guaranteed both litigants in Article VI, Sec. 6 of the South Dakota Constitution and SDCL 15-6-38(a), (b). This right, however, does not exist in all civil cases. In cases where the pleadings seek equitable relief or where the legal relief is incidental, a jury trial is a matter for the trial court's discretion. Conversely, when the action is at law, either party has a right to a jury trial. To determine whether the action arises at law or equity, we look to the pleadings, including the complaint, answer, cross-complaint and prayer for relief.

Id. at 832-33 (citations omitted); Skoglund v. Staab, 312 N.W.2d 29, 31 (S.D.1981). In examining the development of this rule, however, we note that the United States Supreme Court has abolished the requirement that a legal claim must not be incidental. In Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962), the Court held that in view of the flexible procedures of the Federal Rules of Civil...

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