General Motors Acceptance Corp. v. Central Nat. Bank of Mattoon

• Decision Date: 05 September 1985
• Docket Number: No. 84-1928,84-1928
• Citation: 773 F.2d 771
• Parties: GENERAL MOTORS ACCEPTANCE CORPORATION, Plaintiff-Appellee, v. CENTRAL NATIONAL BANK OF MATTOON, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 771

773 F.2d 771

GENERAL MOTORS ACCEPTANCE CORPORATION, Plaintiff-Appellee, v. CENTRAL NATIONAL BANK OF MATTOON, Defendant-Appellant.

No. 84-1928.

United States Court of Appeals, Seventh Circuit.

Argued April 8, 1985.

Decided Sept. 5, 1985.

Theodore M. Becker, Becker & Tenenbaum, Chicago, Ill., for plaintiff-appellee.

Kenneth L. Bast, Kidwell, Cummins & Bast, Matton, Ill., for defendant-appellant.

Before BAUER, POSNER, Circuit Judges, and PECK, Senior Circuit Judge. ^*

BAUER, Circuit Judge.

The defendant in this diversity action, Central National Bank of Mattoon, Illinois, (hereinafter referred to as Bank), appeals from a decision that it defrauded plaintiff, General Motors Acceptance Corporation (GMAC), while providing information about a borrower, Bob Smith Oldsmobile-Cadillac-GMC, Inc. (Dealership). The district court, after a bench trial, found for GMAC and awarded damages of $426,315.83. We affirm the decision as to liability, but reduce the amount of damages awarded.

Since 1975, the GMAC office in Decatur, Illinois, had been doing business with Dealership, a new and used car sales outlet in Mattoon, Illinois. On June 4, 1976, GMAC entered into a wholesale security agreement whereby it would advance funds to Dealership to purchase new automobiles in return for a security interest in the vehicles (or in the proceeds from the sale thereof). In addition, Dealership would make a contract of sale with a car buyer, subject to GMAC's prior approval, and turn it over to GMAC in repayment of the funds that GMAC furnished for the wholesale purchase of the car. When there was a cash sale, Dealership was required to pay off GMAC's financing within twenty-four hours. To allow Dealership immediate access to the proceeds from each sale, GMAC permitted its owner, Bob Smith, to write retail sight drafts on GMAC funds in a Decatur Bank equal to the dealer's share of each sales contract.

Bank began doing business with Dealership in 1977. Dealership maintained a checking account at Bank. Bank provided wholesale financing for Dealership's used cars, in exchange for a security interest in inventory, under a so-called "floor plan" financing arrangement. On December 21, 1977, Bank lent Dealership $110,000 as capital funds and received as collateral 349 1/2 common shares of Dealership stock and a life insurance policy on Bob Smith. On July 10, 1978, Bob Smith executed a personal note for $5,500 in favor of Bank. By the beginning of 1979 Bank had a total of approximately $320,000 in loans outstanding to Bob Smith individually and to Dealership, which, as the district court noted, was near Bank's legal debt limit.

To ensure that its arrangements were secure, GMAC would periodically mail questionnaires, referred to as IND-B forms, to trade creditors and banks doing business with the car dealers that it served. It is largely because of its responses to these questionnaires concerning Dealership that Bank got into trouble.

GMAC mailed its first IND-B form to Bank on December 30, 1977. Larry Cripe, Loan Officer and Assistant Vice President of Bank, responded that Dealership had no NSF checks and was current on its loans. In response to another IND-B inquiry from GMAC, Cripe indicated that Dealership was maintaining its accounts in a satisfactory manner, with a "medium five figure" balance, and that it was current on loans. Cripe also included a letter to GMAC stating, "If you need any assistance or information in the future, I would be more than happy to assist you."

The misrepresentations found by the district judge apparently started on January 12, 1979, when Cripe, responding to another of GMAC's IND-B forms, stated that Dealership was maintaining a low five-figure balance and was current on its loans. In fact, Dealership was current on its loans only because it had renegotiated its December 1977 loan (now valued at $91,963). Further, Dealership had a five-figure checking balance on only one day between GMAC's mailing of the questionnaire and Bank's response. On April 2, 1979, Cripe completed another IND-B form, by indicating that Bank had had 15 months of experience with Dealership and, in reference to Dealership's checking account, by responding "no" to the questions, "Any NSF Checks?" and "Any recent overdrafts?" In reality, Bank's statement of account for Dealership reflects a $9,116 negative balance on that very day and two other negative balances on February 19 and March 26, of $32,859 and $6,639, respectively.

Bank lent Bob Smith $15,000 on May 15, 1979, and recorded a mortgage on property owned by Smith and his wife on that day. On May 31, 1979, Dealership executed a note to Bank for a loan of $5,000. Bank gave Bob Smith a $90,000 emergency loan on June 26, 1979, which was deposited in Dealership's account, and recorded three mortgages on property owned by Smith and his wife on July 16, 30 and 31, to cover this loan. During a semiannual review, for the period through June 30, Dealership failed to advise GMAC about the $90,000 deposit from funds that Bank had lent to Smith.

On June 30, 1979, GMAC sent another IND-B form, which Bank returned undated and signed. On it, Bank indicated that Dealership was current on a medium six-figure secured loan but left blank all portions of the questionnaire involving Dealership's checking account. Statements of account to Dealership indicate a negative checking balance on six of eight banking days, between June 15 and June 26, 1979, including a negative balance of $92,198 on June 25.

GMAC had taken Bob Smith's personal guaranty to support Dealership's credit in 1977. As part of GMAC's mid-year review, Bob Smith filed a statement of his personal financial condition as of June 30, 1979. Smith's statement to GMAC failed to disclose the Bank's $15,000 loan of May 15 1979, the $90,000 loan of June 26, and the $15,000 mortgage on Smith's property. Bank's president, James Singer, admitted at trial that he was concerned about the accuracy of Smith's statements, but Bank never warned GMAC that they were incomplete.

GMAC sent Bank an IND-B form concerning Bob Smith personally on August 30, 1979. Greta Grafton, Bank's Vice President and Chief Cashier, completed the form on September 26, 1979. She indicated that Smith had only a "medium four figure" unsecured loan from Bank. In fact, Bank had at least four mortgages on property owned by Smith, and within the previous five months, had made personal loans to Smith totalling $110,000. ¹

On October 8, 1979, Greta Grafton executed another IND-B form concerning Dealership, which GMAC had sent on September 28. Grafton indicated that Dealership maintained a low five-figure balance in its checking account, had had no NSF checks or recent overdrafts, and was current on a medium six-figure secured loan. In fact, Bank had sent an overdraft notice to Dealership on August 31, 1979, on a check for $39,270 that had been "paid," and an overdraft notice on September 7, 1979, for a $35,660 check that had been "paid." In addition, the record contains seven overdraft notices sent to Dealership in the month of July involving over $78,000 in "paid" checks. ² The district court found that Bank held checks payable to itself and presented them for payment only when Dealership had made sufficient deposits to cover them. GMAC presented evidence that Bank had been doing this as early as August 30, 1979, thereby giving Dealership a false appearance of solvency. Had the Bank not done so, GMAC contends, Dealership would have been chronically overdrawn.

On October 18, 1979, Bank recorded a mortgage on other real estate owned by Bob Smith. The mortgage was back-dated to May 15, 1979, but states on its face that it was given to secure the $90,000 loan to Smith, although the loan was not made until June 26, 1979. ³

On Sunday, October 28, 1979, Dealership agreed to sell Don Stone Ford, Inc., of Bloomington, Illinois, sixteen vehicles in exchange for the purchase of thirty older vehicles. Dealership received a check from Don Stone Ford for $122,650 and issued three checks totalling $127,350. ⁴ The next day, Don Stone Ford deposited Dealership's three checks into its bank account in Bloomington, and Dealership deposited the Stone check with Bank. Bank immediately placed Dealership's account on "no-pay" status. Also on October 29, 1979, nine checks to GMAC, drawn on Dealership's account, were presented to Bank. On October 30, Bank's president, James Singer, instructed Greta Grafton to write a letter to GMAC, telling her that it would help both Bank and Dealership. The letter stated:

The checks drawn on Bob Smith Oldsmobile-Cadillac Mattoon, Illinois being returned by us today, totalling $121,472.89, are being returned "uncollected funds" and we anticipate the funds being collected by November 1, 1979.

Grafton testified that this was the only instance, in her thirty-two year employment with Bank, that Bank had sent such a letter. She also stated that she called the Bloomington bank and found that there were enough funds in Stone's account to cover his checks. She testified, however, that at the time she suspected that Smith and Stone were involved in a check-kiting scheme, although she did not indicate these suspicions in her letter to GMAC. Bob Smith personally delivered the Grafton letter to the GMAC office in Decatur, Illinois, late in the day on October 30, and confirmed that there would be no difficulties in collecting the funds. From October 31 onwards, Jim Bridges, the Assistant Control Branch Manager of the GMAC branch in Decatur, called Grafton daily and was assured that the GMAC checks would clear. At 10:15 a.m. on October 31, 1979, Dealership stopped payment on the three checks it had given to Don Stone Ford. Smith called Don Stone because Bank wouldn't credit Dealership's account until the check from Don Stone Ford was collected. Stone assured Smith that the check was alright, but immediately afterwards went to his own bank and found that...