Killion v. Bank Midwest, N.A.

• Decision Date: 15 December 1998
• Docket Number: No. WD,WD
• Parties: Mabel N. KILLION, Mike E. Killion, Mika J. Killion, Richard Killion, Tresa Killion, Bill J. Killion & Mitzi Killion, Respondents, v. BANK MIDWEST, N.A. and Dickinson Financial Corporation and John Crist, Appellants. 53455.
• Court: Missouri Court of Appeals

Page 801

987 S.W.2d 801

Mabel N. KILLION, Mike E. Killion, Mika J. Killion, Richard Killion, Tresa Killion, Bill J. Killion & Mitzi Killion, Respondents, v. BANK MIDWEST, N.A. and Dickinson Financial Corporation and John Crist, Appellants.

No. WD 53455.

Missouri Court of Appeals Western District.

Dec. 15, 1998.

Motion for Rehearing and/or Transfer to

Supreme Court Denied Feb. 2, 1999.

Application to Transfer Denied

April 27, 1999.

R. Lawrence Ward, Philip W. Bledsoe, Shughart Thomson & Kilroy, Kansas City, Donald G. Stouffer, Marshall, for appellants.

Mark T. Kempton, J. Christopher Spangler, Wesner, Kempton, Russell and Dominique, Sedalia, for respondents.

Before HOWARD, P.J., BRECKENRIDGE and HANNA, JJ.

BRECKENRIDGE, J.

Bank Midwest, N.A., formerly known as Community Bank (the Bank), and Dickinson Financial Corporation (Dickinson) appeal the trial court's judgment against them and in favor of Mabel Killion, Mike E. Killion, Mika J. Killion, Richard Killion, Tresa Killion, Bill J. Killion, and Mitzi Killion (the Killions) for $55,000 in compensatory damages and $500,000 in punitive damages on the Killions' prima facie tort claim. On appeal, the Bank and Dickinson claim the Killions did not make a submissible case of prima facie tort. The Bank and Dickinson also contend that the trial court erred in overruling their objections to (1) the Killions' reading to the jury allegedly inflammatory and prejudicial remarks made by a judge in a prior proceeding between the parties; and (2) the Killions' arguing to the jury that it could draw improper conclusions from the failure of the Bank and Dickinson to call Paul Shepherd, former legal counsel for the appellants, to testify. Additionally, the Bank and Dickinson argue that the trial court should not have submitted the Killions' claim for punitive damages to the jury because the Killions did not make a submissible claim for punitive damages, and the punitive damage instruction did not require proof by clear and convincing evidence. Because the Killions failed to make a submissible case of prima facie tort, the judgment of the trial court is reversed.

Factual and Procedural Background

This court is to review the evidence in the light most favorable to the plaintiffs' case, and disregard all contrary evidence. Gary Surdyke Yamaha, Inc. v. Donelson, 743 S.W.2d 522, 523 (Mo.App.1987). In that light, the evidence is that the Killions owned and operated a 643-acre farm in Pettis County. Noah, who died in August, 1995, and his wife Mabel lived in a house on the farm. The remaining respondents are the sons and daughters-in-law of Noah and Mabel.

In 1988, the Killions had three mortgages on the farm which totalled $435,000.00. Two of the mortgages were from the Federal Land Bank, and one was a purchase money mortgage for 250 acres from the seller, a Mr. Bales. The Killions were in default on the Federal Land Bank mortgages, so Noah went to Don Brown, interim president of the Bank, to inquire about refinancing the loans. Noah had a long-standing relationship with the Bank, and had served for 17 years as an advisory director on its board of directors. Noah's role as an advisory director was to solicit bank business and attend monthly meetings to review loans in default and vote on extensions of credit. On June 8, 1988, the Killions executed a promissory note payable to the Bank in the amount of $345,000.00 (the "land note"). The note paid off the loans from the Federal Land Bank. The Killions also executed a separate note in the amount of $125,827.63 (the "equipment note"). Both notes were secured by a deed of trust on the Killions' 643 acres of real property in Pettis County, and a first security interest in all growing crops, government payments or lease payments received for the land, all machinery and equipment, and all money, securities, and other property held by the Killions at the time the notes were executed and in the future. Both loans were serviced by Dickinson Financial Corporation, the sole owner and stockholder of the Bank.

The promissory notes and the deeds of trust were drafted by Paul Shepherd, legal counsel for the Bank and Dickinson. Under the terms of the land note, the Killions were to make one payment of $42,000.00 each year, and a balloon payment of the remaining principal and any accrued but unpaid interest at the end of six years. One of the conditions of default on the land note was the failure of the Killions to sell the farm within ten years after the note's execution. The land note also contained a contingent interest clause, which provided that upon the sale of the farm, the Killions would owe additional interest. The additional interest would be the lesser of $90,000.00 or 40% of the amount by which the gross sales price of the farm exceeded the outstanding principal balance of the loan on the date of sale if the farm was sold prior to the maturity date, or the outstanding principal balance due on the maturity date if it was sold after the maturity date. The land note also granted the holder of the note the right of first refusal to purchase the farm and, in the deed of trust, the Killions waived their equity of redemption. Thus, pursuant to the deed and note, the Killions had to sell the farm within ten years after signing the note, regardless of whether they had paid all of the principal and interest due, the Bank had the right to buy it at a price discounted by the contingent interest amount, and the Killions could not exercise the right of redemption to buy back their farm.

The Killions timely made the first payments on the notes, which were due December 31, 1988. However, the Killions were late in making their payments for the next three years. The Bank allowed the Killions to pay late, but charged them interest which was 3.0 percentage points higher during the periods they were late, as allowed by the terms of the notes. When the Killions were not able to timely pay their 1991 payment, the Bank extended another loan to the Killions to cover the Killions' interest payment for 1991 and their crop input cost. The Killions repaid that loan at an eleven percent interest rate.

By the fall of 1991, the Killions decided they would need to sell some of their land and equipment because they were having difficulty making their loan payments. The Killions had discussions with John Crist, the loan officer at Dickinson assigned to service their loan. They told Mr. Crist that they wanted to partially liquidate their property and modify the terms of the land note to reduce the annual payment amount so that they would be able to service the note. In February of 1992, the Killions held an auction and sold 250 acres of their land and most of the farm equipment. The Killions gave the Bank the proceeds from the sale, which were significantly more than the deficiency in their 1991 payment. The Bank reduced the principal balance on the land note to approximately $171,500.00 and the principal balance on the equipment note to $25,000.00. The Bank also applied $35,129.09 of the proceeds toward the payment of contingent interest. The remaining real property and equipment securing the notes was valued at $356,000.00.

Mr. Crist testified that he knew there was no authority under the land note to collect contingent interest from the Killions without a sale of the entire property or the note maturing, and that there was no authority under the note to compute a contingent interest amount of $35,129.09 at that time. He testified that his authority for collecting contingent interest at that time and in that amount came from the modification agreement the Bank had proposed to the Killions.

When they learned that the Bank had applied a portion of the sale proceeds to the payment of contingent interest, the Killions consulted an attorney, Adam Fischer, because the promissory note provided for payment of contingent interest only "[u]pon the sale of all the real property which secures this note." (Emphasis added). The Killions also asked Mr. Fischer to review the Bank's proposed modification agreement. Mr. Fischer advised the Killions not to sign the modification agreement, as it contained an exculpatory clause on usurious or illegal interest, disclaimed a fiduciary relationship between the Killions and the Bank, and provided that the Killions released the Bank from liability for any claims the Killions might have had against it. Mr. Fischer also advised the Killions not to make any further payments on the land note because he was concerned that the Bank would apply more payments toward contingent interest, and the contingent interest on this note was owed on the difference between the principal balance on the note and the sale price of the property. Every time the Killions made a payment reducing the principal balance, they were actually increasing the amount of contingent interest due. During this time, the Killions began negotiating with Chemical Bank of Sweet Springs to refinance the loan; however, Chemical Bank would not commit to the refinancing until it was determined whether the Killions owed $90,000.00 in contingent interest.

Mr. Fischer wrote a letter to the Bank, dated October 23, 1992, advising it that the Killions would not sign the modification agreement. He told the Bank that he believed the contingent interest provision was not enforceable because the Bank had misrepresented to the Killions when they signed the note how the contingent interest would be calculated, and that the terms of the note did not entitle the Bank to collect contingent interest upon the sale of only part, but not all, of the real estate. He also told the Bank that the exculpatory language in the modification agreement was not acceptable to the Killions. Mr. Fischer testified that he had served as in-house counsel for two banks for a total of twenty-eight years, and had reviewed note modification agreements. In his experience, the exculpatory clause on illegal interest...