Hogg v. First Nat. Bank of Aberdeen

• Decision Date: 14 May 1986
• Docket Number: Nos. 14920,14921,s. 14920
• Citation: 386 N.W.2d 921
• Parties: Daryl K. HOGG and Donna Hogg, d/b/a Hogg Hereford Farms, Plaintiffs and Appellants, v. FIRST NATIONAL BANK OF ABERDEEN, a National Bank; Lyle D. Paschke, Richard Larson; John Doe and John Does, Defendants and Appellees.
• Court: South Dakota Supreme Court

Page 921

386 N.W.2d 921

Daryl K. HOGG and Donna Hogg, d/b/a Hogg Hereford Farms Plaintiffs and Appellants, v. FIRST NATIONAL BANK OF ABERDEEN, a National Bank; Lyle D Paschke, Richard Larson; John Doe and John Does Defendants and Appellees.

Nos. 14920, 14921.

Supreme Court of South Dakota.

Argued Feb. 11, 1986.

Decided May 14, 1986.

Philip M. Kneifl of Kneifl & Kneifl, Omaha, Neb., for plaintiffs and appellants; Scott C. Petersen of McFarland, Petersen & Nicholson, Sioux Falls, on brief.

James A. Wyly of Richardson, Groseclose, Kornmann, Wyly, Wise & Klinkel, Aberdeen, for defendants and appellees.

HENDERSON, Justice.

ACTION

This is an appeal from a jury verdict in favor of the defendants and the defendants' counterclaim. Plaintiffs appeal this adverse verdict. Defendants appeal the denial of their post-verdict motions to increase the damage award of $375,000. This case concerns the propriety of certain bank transactions but the verdict is based upon a promissory note. We affirm in part and modify in part; namely, we modify the judgment below to increase the amount to $468,556.79.

PARTIES

Plaintiffs-appellants are Daryl and Donna Hogg, d/b/a Hogg Hereford Farms. Plaintiffs will be referred to as the Hoggs or Daryl Hogg. Defendants-appellees are the First National Bank of Aberdeen (Bank), presently known as Norwest Bank, which is a national bank located in Redfield, South Dakota. Lyle Paschke (Paschke) is the vice-president and manager of the Bank. Richard Larson (Larson), at the time of the events in question, was an agricultural loan officer, assistant vice-president, and assistant manager with the Bank.

FACTS

In 1982, the Hoggs had two checking accounts with the Bank. One was a general farm account on which the Hoggs wrote personal and business checks; the other was a Farmers Home Administration (FmHA) supervised account. This latter account was subject to a Deposit Agreement between the Hoggs, the FmHA, and the Bank. According to the terms of this Deposit Agreement, the Hoggs could only write checks on that account with the countersignature of the FmHA and the FmHA could order the Bank to pay over the balance therein to the FmHA.

In April 1982, the Hoggs executed a $335,000 promissory note. The Bank was the holder of this note which represented a general farm loan based on an 18 1/2% variable interest rate. Principal and interest were due on October 1, 1982.

Hoggs were interested in obtaining further operating financing but the Bank told the Hoggs to seek such financing elsewhere. Hoggs then approached the FmHA in Faulkton, South Dakota, about further financing. In negotiating an FmHA loan, it was Daryl Hogg's concern that some of the money go to the Bank, the Hoggs' primary lender, so as to reduce the April 1982 note and open up future operating financing from the Bank. The FmHA, however, determined that the Hoggs' real estate could not bear any more real estate debt; further, that the proceeds of any FmHA loan would have to be used to pay taxes and defray Federal Land Bank and FmHA payments; further, that the remainder be applied to a prior FmHA loan which bore a higher interest rate. In effect, the Hoggs would be paying less interest because a prior FmHA loan with a 9% interest rate was being paid by an FmHA loan with a 5% interest rate. Critical facts are that the terms of the loan, the recipients of the funds, and that the Bank was not to receive any of the FmHA loan money, was made explicitly clear to Daryl Hogg on numerous occasions by FmHA officers and the Hoggs' attorney, Ray Gallagher.

On June 6, 1982, an FmHA loan of $400,000 to the Hoggs was closed. At the closing, the following checks were made out: Federal Land Bank payment--$41,275.84; FmHA payment on current loans--$34,352.50; Faulk County Treasurer--$16,565.11 ; Spink County Treasurer--$1,040.95; Attorney Gallagher--$1,100; FmHA loan payoff--$305,665.60. These checks were signed by Daryl Hogg and countersigned by the FmHA but Daryl Hogg wrote the account number of the Hoggs' general farm checking account on the checks. These checks, however, were supposed to be drawn from the Hoggs' FmHA supervised checking account, into which the loan was to be deposited, but no one noticed the account number written by Daryl Hogg. Daryl Hogg refused to sign the $305,665.60 FmHA check stating that he wanted to confer with the FmHA district director about it. The FmHA $400,000 loan check was then delivered to Attorney Gallagher who was to take it to Redfield and deposit it in the Bank the next day. On the back of this loan check was stamped "For Deposit Only in the Supervised Bank Account of Hogg Hereford Farms in the First National Bank, Redfield, Pursuant to Deposit Agreement Dated 8/10/81."

The next day, June 9, 1982, Daryl Hogg went to Attorney Gallagher's office and obtained the FmHA loan check. Daryl Hogg stated he wanted to deposit the check into another account. Attorney Gallagher then pointed out the restrictive endorsement quoted above. Daryl Hogg thereafter proceeded to the Bank. At the Bank, Daryl Hogg sought to deposit the FmHA loan check in the Hoggs' general farm checking account. Larson pointed out the restrictive endorsement, but Daryl Hogg stated that five checks had been drawn on the Hoggs' general farm account and that these checks had been countersigned by the FmHA. Daryl Hogg indicated the approximate amounts of these checks and further stated that he was negotiating with the FmHA for the balance of the money; further, that he wanted to temporarily put $300,000 on his April 1982 Bank note so as to save some interest. When Larson was convinced that all of the FmHA loan money could be accounted for, he allowed Daryl Hogg to deposit the FmHA loan check into the Hoggs' general farm account. Daryl Hogg then wrote a $300,000 check to the Bank from this general account, which was agreed to be credited on the April 1982 note but to be returned to Daryl Hogg after he negotiated concerning the balance with FmHA.

Several days later, the FmHA discovered that the loan check had not been deposited in the supervised account. FmHA then demanded that the Bank place the funds in the proper account. When the Bank learned that Daryl Hogg's statements were untrue, the Bank rescinded the deposit into the general farm account, rescinded the payment on the April 1982 Bank note, and placed the FmHA loan funds into the FmHA supervised account. The FmHA thereafter requested that the balance of the FmHA supervised account be returned to it, whereupon the FmHA applied these funds as originally contemplated in the June 1982 FmHA $400,000 loan to the Hoggs.

Hoggs brought suit for $6,000,000 claiming that the Bank's unauthorized actions of canceling the deposit into the Hoggs' general farm account and transferring that money into the FmHA supervised account constituted breach of contract, negligence, and conversion. The Bank answered and counterclaimed for the amount of principal and interest due under the April 1982 Bank note. At the time of trial, this amounted to $468,556.79. A jury trial resulted in findings for the Bank on the Hoggs' claims and findings for the Bank on the counterclaim. The jury assessed the Bank's recovery on the counterclaim to be $375,000. The Bank moved the trial court, on three separate grounds, to increase the jury award on the counterclaim to $468,556.79. The trial court denied these motions.

From the jury's verdict, the Hoggs appeal. From the trial court's denial of the Bank's post-verdict motions, the Bank appeals. Various, uncorresponding issues are projected in the briefs. We distill them into three issues.

DECISION

I.

DID THE TRIAL COURT ERR IN ISSUING JURY INSTRUCTION NO. 28-A? THIS ISSUE IS NOT PROPERLY RAISED ON APPEAL.

SDCL 57A-4-207(1)(a) provides that each customer who obtains payment or acceptance of an item, warrants to the payor bank, who pays or accepts the item in good faith, that he has good title to the item or is authorized to obtain payment or acceptance on behalf of one who has good title. Based on this statute, the Bank's apparent trial theory was that Daryl Hogg breached this presentment warranty when he induced the Bank to accept the deposit into the Hoggs' general farm account; thus, the Bank could rescind the deposit and place it in the FmHA supervised account. Jury Instruction No. 28-A, given by the trial court, reads:

A customer of a bank who transfers a check and receives consideration for such check warrants to the bank that the customer has good title to the check and is authorized to obtain payment and the transfer is otherwise rightful.

Thus Daryl Hogg, in placing the [FmHA] check in his personal account, warranted to the bank such transfer was rightful. For breach of such warranty, the transaction could be rescinded.

Further, in paying the $300,000 in funds to the bank, Daryl Hogg warranted to the bank he had the right to do so. If he did not, Daryl Hogg breached such warranty. For breach of such warranty, the bank had the right to rescind the transaction.

On appeal, Hoggs contend that this instruction is a misstatement of the law because it fails to refer to the "good faith" acceptance element of SDCL 57A-4-207(1). Hoggs' theory is that the Bank accepted the $400,000 FmHA loan check for deposit in the Hoggs' general farm account with knowledge and notice of the restrictive endorsement; thus, the Bank did not accept the deposit in good faith and therefore the Bank is not entitled to rely on the presentment warranties of SDCL 57A-4-207(1)(a) or to rescind its acceptance for breach of those presentment warranties.

The Uniform Commercial Code defines "good faith" as "honesty in fact in the conduct or transaction concerned." SDCL 57A-1-201(19). Based on this definition, the Bank contends its knowledge of the restrictive endorsement is irrelevant. Bank reasons the instruction did not have to refer to "good faith" acceptance because there was no evidence that the Bank acted...