Fort Knox Nat. Bank v. Gustafson

• Decision Date: 18 December 1964
• Citation: 385 S.W.2d 196
• Parties: 2 UCC Rep.Serv. 336 FORT KNOX NATIONAL BANK, Appellant, v. Edith M. GUSTAFSON et al., Appellees.
• Court: United States State Supreme Court — District of Kentucky

Page 196

385 S.W.2d 196

2 UCC Rep.Serv. 336

FORT KNOX NATIONAL BANK, Appellant, v. Edith M. GUSTAFSON et al., Appellees.

Court of Appeals of Kentucky.

Dec. 18, 1964.

Robert E. Hatton, L. Lyne Smith, Jr., Louisville, for appellant.

Edwin O. Davis, Louisville, for appellees.

DAVIS, Commissioner.

Appellee Edith M. Gustafson recovered judgment against appellant Fort Knox National Bank (hereinafter referred to as bank), pursuant to a jury's verdict awarding her compensatory damages of $20,500 and punitive damages of $15,000. The judgment was predicated upon appellee's claim that appellant was guilty of the tort of 'abuse of process.' The 'process' involved was a claim and delivery action which the bank filed for the purpose of obtaining possession of a mobile diner on which it had a security interest, created by security agreement executed to it by Arthur J. Gustafson and Edith M. Gustafson. (We shall hereafter refer to the Gustafsons by their first names.)

The basic questions to be adjudged are: (1) did the bank have legal cause to accelerate the maturity date of the note due it from Arthur and Edith; (2) if so, was the claim and delivery proceeding so improperly prosecuted as to give rise to the damages allowed by the jury and the judgment? There are subordinate questions to be discussed in the course of the opinion. Determination of the dispute will necessitate consideration of pertinent portions of the Uniform Commercial Code (hereafter designated as UCC), which is embraced in KRS Chapter 355.

The factual background from which this lawsuit developed is as follows: Arthur and Edith executed their joint note to the bank on October 12, 1960, in the sum of $7,380, by the terms of which they agreed to repay the bank in monthly payments of $205 each. Simultaneously with the loan, and as a part of the transaction, Arthur and Edith assigned to the bank a certain lease in which E. H. Harris was lessor and the Gustafsons were lessees. The lease provided rental payments of $100 per month for a lot upon which the Gustafsons located the mobile diner; a restaurant was operated in the diner by the Gustafsons.

The note contained an acceleration clause, authorizing the holder to precipitate the maturity date in the event the makers defaulted in any monthly payment. The acceleration clause also provided that the holder of the note could declare it due before maturity if the holder felt insecure. This type of acceleration is permitted by the UCC:

'A term providing that one party or his successor in interest may accelerate payment or performance or require collateral or additional collateral 'at will' or 'when he deems himself insecure' or in words of similar import shall be construed to mean that he shall have power to do so only if he in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against whom the power has been exercised.' KRS 355.1-208.

At the outset, Arthur and Edith operated the restaurant together. Arthur was engaged in several other enterprises, but none of them prospered. In fact, it was shown that after the loan was made checks aggregating more than $20,000 were presented to the bank against one of Arthur's accounts, but were returned because of insufficient funds. The bank account for the restaurant business had been overdrawn during thirteen of the twenty-five months next after the loan date.

At the time the loan was made, Arthur was a member of the U. S. Army, with seventeen years of service and a stated regular income from the government. After the loan was made, Arthur resigned from the army--as a hardship case--in an effort to rehabilitate his deteriorating financial enterprises.

In October, 1961, Edith went to Texas on account of the critical illness of her father. Arthur's financial position in the restaurant business so worsened that he abandoned the restaurant and betook himself to New York. This occurred in June, 1962.

Edith then returned from Texas and learned that Arthur had failed to pay the rent for the lot whereon the diner was situated, so that an obligation of $800 for eight months of unpaid rent had accrued. Edith discussed the dismal financial condition with an officer of the bank. The bank's officer testified that he assured Edith that the bank would 'go along' with her efforts to rehabilitate the business, but only upon the condition that she could furnish the bank a list of all the creditors, along with their assurance that they too would 'go along.' The bank's officer said that an oral 'indulgence' had been made to Arthur, by the terms of which the bank permitted the monthly payments to be one day less than two months in arrear without asserting default. The officer told Edith the bank would grant her that indulgence, but only if she could obtain the consent of all creditors to refrain from closing in.

Sometime in July or August, 1962, Edith discussed possible bankruptcy proceedings, looking toward obtaining the debtor relief provided by a composition with creditors. This discussion was had with attorney Morris Britt--the same attorney who subsequently represented the bank in filing the claim and delivery action.

By avowal, it was shown that sometime in September, 1962, an incident occurred on the lot leased from Harris. The episode related to an alleged disorder on the lot which drew the attention of local police. Harris said he was called by telephone about 4:00 a. m. incident to the alleged disorder. According to Harris, the reports of disorders, plus the rental default, prompted him to insist that Edith vacate the lot by October 1, 1962.

The hazard insurance policy covering the diner and contents was permitted to lapse for nonpayment of premium. According to evidence for the bank, Edith assured the bank's officer that she would procure insurance, but she failed to do it--and finally stated that she had no funds for the premium. The bank advanced $242.49 for insurance, as permitted by the terms of the security agreement. (Later this insurance was cancelled so that the actual premium liability was only $16.25.)

On September 5, 1962 Edith obtained a 'payoff' statement from the bank; this statement recited that the amount required to discharge the loan was $2,936.93, and that, 'This payoff is good through October 12, 1962.' Edith explained to the bank's officer that she contemplated refinancing her indebtedness. This statement did not extend maturity date.

On or about September 18, 1962, the bank caused its attorney, Morris Britt, to investigate the records of Meade County to determine what claims, if any, appeared of record against the Gustafsons. About the same time the bank had learned from Harris, the landlord, that Harris desired that the diner be removed from his lot. Britt reported a chattel mortgage of $596.80 to People's Industrial Plan, which appeared to create a second lien on the diner, plus a 'blanket' lien of $38.59 relating to certain unemployment insurance liabilities. Also, Britt advised the bank that he had learned of a judgment against Arthur and Edith in the sum of $1,704.42; the judgment had been rendered September 8, 1961; execution had been issued upon the judgment, but not levied.

On September 25, 1962, the bank paid Harris $800 to cover the past due rent, and took from him an assignment of his interest in the lease. On the same day the bank filed the claim and delivery action from which the present appeal stems. It is shown that the bank had not advised Edith of its intent to file the claim and delivery, although the day before the bank had made arrangements with a garageman from Elizabethtown to remove the diner.

For Edith, it was shown that she vigorously protested against the repossession, and that she assured the bank's officers she had made arrangements to fully pay the loan. She was corroborated in this by testimony from a Mr. Tandenhaus, executive officer of a lending agency in Louisville. The latter testified that he spoke over the telephone with officers of the bank during the progress of the discussions attendant upon the repossession, and assured them that 'you don't have a thing to worry about,--Fort Knox Bank is going to be paid off, we have okayed the loan.' The bank's officer denied that Tandenhaus had made such unequivocal assurances of paying the loan. Evidence was heard to the effect that one bank official said he did not 'give a damn' what had to be done toward effecting the physical removal of the diner as opposed to the claim that Edith...