Lamb Bros., Inc. v. First State Bank
| Citation | 285 Or. 39,26 UCC Rep. 1395,589 P.2d 1094 |
| Decision Date | 23 January 1979 |
| Docket Number | No. 415-078,415-078 |
| Parties | , 26 UCC Rep.Serv. 1395 LAMB BROTHERS, INC., an Oregon corporation, Respondent-Cross-Appellant, v. FIRST STATE BANK of Oregon, an Oregon banking corporation, Appellant-Cross- Respondent. ; SC 25089. |
| Court | Oregon Supreme Court |
David C. Haugeberg, McMinnville, argued the cause for appellant-cross-respondent. With him on the brief were Frances E. Marsh of Marsh, Marsh & Haugeberg, P. C., McMinnville, and J. W. Rosacker, Portland.
Barnes H. Ellis of Davies, Biggs, Strayer, Stoel & Boley, Portland, argued the cause for respondent-cross-appellant. With him on the brief was Gregory R. Mowe, Portland.
Before HOLMAN, P. J., and TONGUE, HOWELL, BRYSON, LENT and LINDE, JJ.
Plaintiff brought this action against defendant bank to recover damages for the negligent sale of collateral by defendant, a secured party. The case was tried without a jury and judgment was entered in favor of plaintiff. Defendant bank appeals. Plaintiff also appeals from the trial court's failure to award certain damages.
Clyde and Franklin Lamb are brothers. Clyde Lamb was the sole owner of all of the shares of plaintiff corporation. Clyde had experience as a stockbroker and desired to establish a business for himself as a broker-dealer but lacked the required capital. Franklin had the necessary capital assets. The brothers agreed, in October of 1973, that Franklin would lend Lamb Brothers, Inc., certain securities as capital for the business Clyde was establishing. Franklin owned 10,000 shares of Reynolds Metals Stock, which was registered to Franklin and held by Blythe, Eastman, Dillon & Co., to secure Franklin's margin account of $67,614.49. The brothers contacted defendant bank, on the recommendation of Clyde's accountant, to arrange for a loan with the Reynolds Metals stock as collateral. Defendant bank made an original loan of $70,000 to Franklin on his note. The bank paid Blythe, Eastman, Dillon $67,614.49, who then forwarded the 10,000 shares of Reynolds Metals to the bank. The bank forwarded the balance of the loan to plaintiff. The price of the Reynolds shares varied, of course, but at the time of the negotiations with the bank, late in 1973, it was valued at approximately $200,000.
Certain relevant events occurred in the following chronological order.
Mid-September, 1973: Plaintiff Lamb Brothers, Inc., was incorporated as a brokerage firm. Clyde was the sole stockholder.
October, 1973: Clyde and Franklin Lamb agreed that Franklin would provide assets for Clyde's business.
October-November 1973: Clyde and Franklin entered into negotiations with defendant bank for a loan.
November 6, 1973: Defendant bank approved a line of credit to Franklin Lamb.
November 6, 1973: Defendant bank loaned Franklin Lamb $70,000 on his note, which was secured by the 10,000 shares of Reynolds Metals. Franklin signed a pledge agreement in the bank's favor and the 10,000 shares of Reynolds was forwarded to the bank, as previously set forth.
January 8, 1974: Defendant bank loaned Franklin an additional $30,000 with the same security. Franklin turned the money over to Lamb Brothers, Inc.
March 28, 1974: The Securities and Exchange Commission gave approval to plaintiff to act as a broker-dealer, and plaintiff began operation in May, 1974. Plaintiff was also registered as a broker-dealer by the Oregon Corporation Commissioner to do business in Oregon pursuant to ORS 59.165 et seq. Franklin and plaintiff executed a subordination agreement required by the Securities and Exchange Commission to establish plaintiff's required capital.
March 29, 1974: The bank transferred the loan made to Franklin personally to Lamb Brothers, Inc., in the amount of $100,000. Plaintiff Lamb Brothers, per Clyde Lamb, the sole shareholder, signed a 90-day promissory note in favor of defendant bank for $100,000. Franklin, as guarantor, signed a guarantee agreement in favor of the bank to pay plaintiff's indebtedness in the amount of $100,000 and granted the bank the right to extend the time for payment "without the consent from the Guarantor." Franklin also executed an "Hypothecation Agreement" pledging the 10,000 shares of Reynolds Metals as collateral for the loan. Plaintiff orally pledged the Reynolds shares with defendant as security for the loan.
The evidence shows that Franklin was the owner of the Reynolds shares subject to the previously mentioned indebtedness. Plaintiff used the Reynolds shares, received as a loan from Franklin, as evidenced by a subordination agreement between Franklin and Lamb Brothers, Inc., to satisfy the Securities and Exchange Commission capital requirements. Plaintiff also used Franklin's Reynolds shares as collateral for the loan from the bank. At this same time, Franklin signed guarantee and pledge agreements in favor of the bank for payment of plaintiff's notes to the bank and executed an hypothecation agreement on the Reynolds shares, as previously mentioned. The bank had possession of the Reynolds shares at all times.
June 27, 1974: Lamb Brothers signed a 90-day renewal note for $100,000.
September 25, 1974: Lamb Brothers signed a 30-day renewal note for $100,000.
October 3, 1974: Lamb Brothers signed a 22-day note for an additional loan of $11,314. The total loan was $111,314, with interest.
October 25, 1974: This was the due date for the Lamb Brothers' promissory notes. The notes were not renewed and were not paid.
In the meantime, plaintiff, acting through Clyde, experienced financial difficulty by buying stocks without sufficient funds in plaintiff's bank account with defendant to cover the check for the purchase. Ultimately, defendant dishonored plaintiff's check in the amount of $183,624.65 to Foster & Marshall, which was tantamount to putting Lamb Brothers out of business.
Indeed, on October 29, 1974, the Corporation Commissioner gave "Notice of Taking Possession" to Lamb Brothers, Inc., stating in part:
On October 29, 1974, defendant wrote to plaintiff advising that the bank had received "an official 'Notice of Taking Possession' " from the Corporation Commissioner and notified plaintiff that it would sell the Reynolds Metals shares to "payoff (sic) the loan to Lamb Brothers, Inc., in the amount of $111,314.00 plus interest to the date of sale."
On December 18, 1974, Reynolds shares declined to $14 per share on the market, and defendant sold 800 shares at $14. Plaintiff asserts that thereafter the parties agreed that the bank would not sell any more collateral if plaintiff supplemented the collateral. Franklin appeared at the bank on December 18 to supplement the collateral, but the bank refused his tender. Thereafter, on the evening of the 18th, Clyde and Franklin agreed with the Corporation Commissioner that if plaintiff paid $5,000 to one of its creditors the commissioner would tell the bank to quit selling stock. On the 19th of December, when sufficient money to pay the creditor was delivered, the commissioner told the bank to cancel the sale. The bank tried to cancel the sale order on the Reynolds shares but it was too late. The broker had completed the sale. Three thousand shares were sold at $14 per share. In any case, the bank did not agree or promise plaintiff that it would cancel the sale.
In the afternoon of December 19 a bank official introduced a Corporation Commission employee to Harris Upham & Co., the bank's broker. The bank told Harris Upham that the Commission employee had authority to sell stock on defendant's account. The Corporation Commissioner then ordered the remaining 6,200 Reynolds shares to be sold. They were sold on December 20, 1974, at prices between $13.50 and $13.75 per share. The price of Reynolds shares on the New York Stock Exchange subsequently increased.
A summary of the sales of Reynolds Metals, the price received by defendant bank, and the excess of funds received from the sales over the amount due the bank is as follows:
Net Rec'd by Bank
After Broker's
Shares Gross Amt. Fees, Taxes
Sale Date Sold Price/Share Received & Postage
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12-18-74 800 $14.00 $11,200 $ 10,957.64
12-19-74 3,000 14.00 42,000 41,327.76
12-20-74 600 13 3/4 8,250 8,137.49
12-20-74 200 13 5/8 2,725 2,687.58
12-20-74 5,400 13 1/2 72,900 71,889.82
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$135,000.29
Amt. due bank (principal) 111,314.00
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Excess of funds received $ 23,686.29
The record shows that the bank was in possession of the 10,000 shares of Reynolds Metals stock at all times after it made the original loan and paid off the margin account of $67,614.49 to Blythe, Eastman, Dillon & Co.; that plaintiff is no longer registered or doing business as a broker-dealer, and its general creditors have been paid.
On March 7, 1975, defendant filed an interpleader suit in the Circuit Court...
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