Glubauer v. Smith

• Decision Date: 08 September 1969
• Docket Number: CA-CIV,No. 1,1
• Citation: 458 P.2d 532,10 Ariz.App. 328
• Parties: Leo A. GLUBAUER, aka L. Arnold GeBauer; Lakeland Development Company, Inc., an Arizona corporation, Appellants, v. H. Cornell SMITH, Appellee. 961.
• Court: Arizona Court of Appeals

Page 532

458 P.2d 532

10 Ariz.App. 328

Leo A. GLUBAUER, aka L. Arnold GeBauer; Lakeland Development Company, Inc., an Arizona corporation, Appellants, v. H. Cornell SMITH, Appellee.

No. 1 CA-CIV 961.

Court of Appeals of Arizona, Division 1.

Sept. 8, 1969.

Stephen W. Connors, Phoenix, for appellants.

Jennings, Strouss, Salmon & Trask, by T. Patrick Flood, Phoenix, for appellee.

MOLLOY, Judge.

The appellee, H. Cornell Smith, suing as assignee of a bank, recovered judgment on six notes executed by the appellant, Leo A. GeBauer (preferred spelling). The contentions urged on appeal are that certain setoffs should have been allowed against the $155,153.23 face value of the notes, that GeBauer was prejudiced by assertedly improper inquiry into his previous criminal convictions and civil litigation in which he had been involved, and that judgment on one of the six notes should not have been rendered against the appellant, Lakeland Development Company, Inc., which executed and was the payee of one of the notes in question.

This abortive episode in the annals of midwestern and southwestern finance centers around the East Side National Bank of Wichita, Kansas. On February 18, 1964, and for some time prior thereto, the plaintiff-appellee, Smith, was the chief executive officer of the bank. On that date, the defendant-appellant, GeBauer, a Phoenix resident with a broad range of actual and apparent business interests, was elected a director of the bank. At or near the same time, substantial accounts were established in the bank for GeBauer (there usually called Glubauer) and for several corporations which he controlled, including LuBauer Petroleum Co., Inc.; Lubco Oil Refining Co., Inc.; Lubco Pipeline Purchasing Co.; the appellant Lakeland Development Company, Inc.; Bauer Drilling Company; and LuBauer Connex Petroleum Company. The great bulk of the funds in these accounts was borrowed from the bank at the request of GeBauer and on the strength of notes executed by him individually and as an officer of the various corporate borrowers (with the exception of one note, payable to one corporation, which was individually guaranteed by GeBauer).

Although GeBauer apparently indicated on various occasions that the various loan accounts would be more or less regularly reduced by repayments, repayments were not in fact forthcoming. Since GeBauer could not remain a director of the bank if loans to his interests were in default, the loans were frequently renewed, at which times GeBauer would execute new notes replacing those previous executed. Checks were sometimes drawn on accounts with insufficient funds. To cope with all these adjustments and irregularities, 'reserve accounts' were created by the bank with respect to the various accounts, and Smith was given authority to transfer funds from one account to another to maintain them and the loan accounts in some semblance of conformity with applicable rules and regulations. Smith's summary of this Modus operandi and the reasons for it are as follows:

'Mr. Glubauer came to the bank to borrow money. At no time, to my recollection, did he ever place any sizable deposit in the bank of his own money. The only money he had, therefore, was the money he borrowed from the bank.

'He had several accounts. He was increasing his credits in the bank to the amount of credit that was issued to him.

'The proceeds of the notes were credited to the proper department or proper company that he had, and since the balances left that he didn't check out were very small, he had notes maturing and by the latter part of the fall season of '64 or early in '64 (sic) he usually came back to the bank to ask for renewal of the notes.

'And he had no funds with which to pay the interest on a renewal, so he asked me how he could take care of that and not make him default in the bank. No director could be in debt to the bank with a past due. They had to be current. And he recognized that.

'So, he asked our cooperation as a director, which we were privileged to have him as a director, to help him keep his account in good order. He asked how to accomplish this since he had no money of his own.

'I told him the only way was to take some small portion of the proceeds of the loan granted to him, which was done some time in '64.

'So, transfers were made from one account to the other one that he knew all about, that he authorized in a blanket authorization. He told me one day, 'Cornell, you have a perfect right and my authorization to transfer any one of my funds in any account to take care of the good standing of my account so I won't be in default.

'He said he was traveling twenty-five days a month and he couldn't afford to be, for us to seek communication with him, if we couldn't reach him. And so many transfers were made from one account to another one for that purpose, to have a small deposit in his account, so charges against his accounts could be paid. He did have a number of checks coming through on certain accounts that couldn't be paid because of insufficient funds.

'That is the reason for our handling his accounts the way we did.'

Smith also gave the following testimony with respect to the reserve accounts:

'And I said (to GeBauer), 'The only way fair to you and appropriate would be to take a small sum out of the proceeds of every loan granted to you from now on', which would be the latter part of the fall season of '64, I imagine, 'And set it aside in a reserve account. Then you would have money to pay'--either the miscellaneous items that came through to be charged to his account and some money to pay renewal fees and interest charges on the renewal of the notes.

'Q (by counsel) Did you personally or the East Side National Bank ever take any monies from the reserve account for your personal use or the bank's personal use other than legitimate obligations or bank charges?

'A We certainly did not.'

The notes sued upon are the last batch of renewal notes, executed by GeBauer in June and July of 1965. The notes total $155,153.23, the amount sought by plaintiff, plus interest as provided. GeBauer admitted execution and delivery of the notes to the bank. The notes were assigned by the bank to Smith when he sold his interest in the bank in October, 1965. Additional facts will be referred to in connection with the various points raised. Findings of facts were neither requested nor rendered, and in those circumstances it is presumed that the trial court found every fact necessary to sustain its judgment which may reasonably be adduced from the evidence. Silva v. DeMund, 81 Ariz. 47, 50, 299 P.2d 638, 640 (1956); Upton v. East-West Realty Co., 81 Ariz. 58, 60, 299 P.2d 646, 647 (1956).

The appellant GeBauer first contends that appellee's judgment should have been reduced by some $15,000 because appellee was unable to produce canceled checks or other withdrawal slips from the bank's records showing disposition of that alleged sum of the total loan proceeds borrowed by GeBauer for himself and his companies. GeBauer's basic assertion in this connection is that appellee manipulated the various GeBauer accounts in such a way that neither GeBauer nor his corporations received the benefit of the funds for which there were no checks or other withdrawal memoranda.

Appellee did produce, however, besides the notes sued upon, detailed bank records of each of the GeBauer accounts, which show deposit of the amounts loaned and disposition of the funds. Copies of periodic statements were regularly sent to GeBauer or his corporations. GeBauer assertedly kept a 'machine bookkeeping' system for his various enterprises and the evidence showed that he and his enterprises enjoyed the assistance of one or more accountants.

Production of a property executed note, valid and unsatisfied on its face, makes a prima facie case. Burke v. Gottfried, 7 Ariz.App. 96, 98, 436 P.2d 488, 490 (1968). It then becomes incumbent upon the party liable thereon to establish a defense if he can. Id. If these principles are ever subject to exception or qualification, they are not in this case. It was clearly established that GeBauer borrowed substantial sums of money which he did not repay. It was likewise established that GeBauer and his corporate interests got the benefit of the vast bulk of the funds borrowed. The legality or illegality of the banking practices revealed is not before us. It is clear, however, that GeBauer invited the very 'manipulation' of which he now complains. The evidence does not disclose any breach of trust on the part of appellee. With respect to those funds for which there are no canceled checks or other memoranda, there was no affirmative showing by GeBauer that his interests failed to get their benefit; there is...