Iola State Bank v. Bolan

• Decision Date: 24 March 1984
• Docket Number: No. 55742,55742
• Citation: 679 P.2d 720,235 Kan. 175
• Parties: , 38 UCC Rep.Serv. 755 The IOLA STATE BANK, Appellant, v. Lorraine BOLAN, et al., Appellees.
• Court: Kansas Supreme Court

Page 720

679 P.2d 720

235 Kan. 175, 38 UCC Rep.Serv. 755

The IOLA STATE BANK, Appellant, v. Lorraine BOLAN, et al., Appellees.

No. 55742.

Supreme Court of Kansas.

March 24, 1984.

Syllabus by the Court

1. Prior to the adoption of the Uniform Commercial Code, cash sales were governed by the "cash sale doctrine." The cash sale doctrine was abolished by the adoption of K.S.A. 84-1-101 et seq.

2. When sellers entrust goods to a person with voidable title, the person so entrusted has the power to transfer title to a good faith purchaser. Where the goods have been delivered under a transaction of purchase, the purchaser has such power even though the delivery was in exchange for a check which is later dishonored.

3. Similarly, a cash seller of goods is subordinated to a bank financing the buyer if the check given for the goods is dishonored and the bank acts in good faith. In these cases, the debtor has no rights in the collateral as against the seller, but he does have the power to pass good title to the financing bank as good faith purchaser, so that the security interest attaches under this section. K.S.A. 84-2-403(1).

4. K.S.A. 84-1-201(19) defines "good faith" as meaning honesty in fact in the conduct or transaction concerned.

5. Where the trial court has made findings of fact and conclusions of law, the function of this court on appeal is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law.

6. In reviewing a directed verdict, we are to resolve all facts and inferences in favor of the party against whom the ruling is sought and if the evidence is such that reasonable minds could reach a different conclusion thereon the motion should be denied.

7. It is a general rule that when a depositor is indebted to a bank and the debts are mutual--that is, between the same parties and in the same right--the bank may apply the deposit, or such portion thereof as may be necessary, to the payment of the debt due it by the depositor, provided there is no express agreement to the contrary and the deposit is not specifically applicable to some other particular purpose.

8. Where a bank knows sums deposited in the account of one of its depositors belongs to a third party, it does not act in good faith when it applies such funds of the third party against the depositor's debts to the bank. Under such circumstances the third party has an action directly against the bank for conversion of the third party's funds from the debtor's accounts.

9. Whether or not an attorney has been apprised of all the facts underlying the client's proposed actions and those underlying facts are such that the client's actions would subject it to punitive damages, liability may not be avoided by claiming it acted upon the advice of counsel.

10. It is difficult, if not impossible, to lay down precise rules to test the question of when a verdict of punitive damages is excessive.

11. Prejudgment interest becomes a part of the judgment itself; postjudgment interest relates only to the payment of the original judgment, and accordingly the postjudgment interest is computed on the entire amount of the judgment granted.

Charles N. Henson, of Eidson, Lewis, Porter & Haynes, Topeka, argued the cause, and Anne L. Baker, Topeka, of the same firm, and John Toland, of Toland & Thompson, Iola, were with him on briefs, for appellant.

Frank T. Forbes, Burlington, argued the cause, and Dennis D. Roth, of Buckles & Roth, Chartered, also Burlington, was with him on brief, for appellees.

Barkley Clark, Lawrence, of University of Kansas School of Law, was on the amicus curiae brief for Kansas Bankers Assn.

LOCKETT, Justice:

This case was originally a part of Iola State Bank v. Biggs. The action was separated into two cases. The first case was decided on appeal at 233 Kan. 450, 662 P.2d 563 (1983). The appellees in the present appeal intervened in the original Biggs case because checks issued to the intervenors from Biggs Feed and Grain, Inc. (Biggs) were dishonored by the drawee, Iola State Bank (Bank). The case was tried to a jury. After all the evidence was presented, the trial court directed a verdict in favor of the intervenors against the Bank in the sum of $26,663.14. The issue of whether punitive damages should be awarded to the intervenors was submitted to the jury. The jury awarded the intervenors punitive damages in the amount of $150,000.00. The Bank appeals.

Biggs operated a feed and grain elevator at Waverly, Kansas. Biggs purchased and sold grain. Biggs conducted its banking business with the Iola State Bank.

Biggs was indebted to the Bank by virtue of its promissory note dated February 13, 1981, in the sum of $294,000.00, with interest at the rate of 17% per annum. Biggs had never been financially able to make any payment of principal or interest on the note, which had become due in July, 1981.

Biggs was in the business of buying grain from farmers and selling grain to large dealers of grain. Joe Biggs, president of Biggs, checked the market daily to price the grain Biggs purchased. Upon the delivery of grain to the elevator, Biggs issued weight slips to the farmers/sellers, stating both the unit price and total price for the delivery. Frequently, it would be days or weeks before the farmers/sellers would be paid for the grain sold Biggs. Biggs would resell the grain it purchased to dealers. Biggs was entitled to the profits or losses suffered from the resale of the grain. When Biggs received payment for its sale to the large grain dealers, it would deposit the funds in its general checking account with the Bank. Biggs wrote the checks to pay the farmers/sellers from its general account with the Bank.

The Bank financed the grain operation since its inception in 1974. Security agreements were executed on May 20, 1975, and August 15, 1980, between Biggs and the Bank. The 1980 agreement provided the Bank with a security interest in all inventory of seed and grain and a purchase money security interest in all wheat, soybeans and feed grains owned or acquired by Biggs. The Bank filed a financing statement June 3, 1975, and a continuation statement on March 10, 1980, with the Secretary of State's office.

The farmers/sellers (intervenors) each sold grain to Biggs. Biggs issued checks, payable to the respective farmer/seller. The checks were presented to the Bank for payment from Biggs' account. When issued, Biggs' account at the Bank was sufficient to cover all the outstanding checks. From September, 1981, until December 31, 1981, proceeds from Biggs' resale of grain constituted 95% of all deposits in the account.

During an examination conducted in July, 1981, the Biggs indebtedness was criticized by the Bank examiners. The Bank examiners noted the total indebtedness and that 18 months had elapsed without any reduction in principal or interest. The Bank assured the examiners the Biggs matter would be taken care of within 90 days.

On August 14, 1981, Howard K. Gilpin, president of the Bank, had a conference with Joe Biggs. Biggs was informed the note was past due and was given 90 days from the bank examination, to the middle of October, to find other financing or a buyer for the business. The Bank discovered its deadline fell during the middle of the soybean harvest season. At Joe Biggs' request, Gilpin extended the Bank's deadline until November 15, 1981.

Biggs was unable to make payment by the deadline. On November 23, 1981, Ralph E. Smith, the Bank's agricultural loan officer, wrote Biggs demanding payment. No further extension would be granted by the Bank. Joe Biggs received the letter but failed to respond.

On December 7, 1981, checks issued by Biggs to the farmers/sellers for past grain sales to Biggs began to arrive at the Bank. The Bank took affirmative steps to collect Biggs' indebtedness due the Bank. Being advised by its legal counsel, the Bank set off Biggs' general checking account and applied the funds against the balance due on the Biggs' note. Checks received by the Bank for payment prior to setoff were dishonored because of insufficient funds in the Biggs' checking account. The checks had been written by Biggs between August 17, 1981, and December 2, 1981. On the same day as the setoff, the Bank filed suit against Biggs, and Joe Biggs and his wife individually, seeking payment of the balance due on the note and foreclosure of its security interest, and against the Bybees, Joe Biggs' in-laws who had guaranteed his note, as guarantors of the note.

The farmers/sellers intervened in the suit. The case was separated into two actions. This case was tried to a jury. After all of the evidence had been presented, the trial court directed a verdict in favor of the farmers/sellers for $26,663.14. The issue of punitive damages was submitted to the jury. The jury awarded the farmers/sellers punitive damages of $150,000.00. The Bank appealed.

Prior to the adoption of the Uniform Commercial Code, cash sales were governed by the "cash sale doctrine." A cash buyer did not receive title to the goods purchased until the seller was paid in full. A cash buyer who had not paid the seller in full could not pass title to a bona fide purchaser. A cash seller who was not fully paid for the goods retained title and could reclaim the goods from the purchaser. The cash sale doctrine restricted the free flow of goods in commerce. The cash sale doctrine was abolished by the adoption of K.S.A. 84-1-101 et seq.

These are commercial transactions between the parties and governed by the provisions of the Kansas Uniform Commercial Code (UCC), K.S.A. 84-1-101 et seq. The UCC, when originally enacted, created substantial changes in the existing law. The underlying purposes and policies of the Code were to simplify, clarify and modernize the law governing commercial transactions. K.S.A. 84-1-102. The Act was to be liberally construed in...