LBM, Inc. v. Rushmore State Bank

• Decision Date: 27 April 1995
• Docket Number: No. 18882,18882
• Citation: 29 UCCRep.Serv.2d 1356,543 N.W.2d 780,1996 SD 12
• Parties: 29 UCC Rep.Serv.2d 1356, 1996 SD 12 LBM, INC. and Ronald J. Loftus, Plaintiffs and Appellants, v. RUSHMORE STATE BANK, Defendant and Appellee. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 780

543 N.W.2d 780

29 UCC Rep.Serv.2d 1356, 1996 SD 12

LBM, INC. and Ronald J. Loftus, Plaintiffs and Appellants, v. RUSHMORE STATE BANK, Defendant and Appellee.

No. 18882.

Supreme Court of South Dakota.

Considered on Briefs April 27, 1995.

Decided Feb. 7, 1996.

Robert F. LaFleur and Jon J. LaFleur of LaFleur and LaFleur, Rapid City, for plaintiffs and appellants.

Wayne F. Gilbert of Johnson Huffman, PC, Rapid City, for defendant and appellee.

McMURCHIE, Circuit Judge.

¶1 Ronald J. Loftus (Loftus) and LBM, Inc. (LBM) brought an action against Rushmore State Bank (Rushmore) alleging the bank had breached a fiduciary duty during negotiations for the sale and the pursuant release of a lien held by Rushmore on personal property located at the "Supreme Courts Racquetball Club" (Club) in Rapid City, South Dakota. Loftus and LBM claimed that due to Rushmore's actions in the disposition of the personal property, property in which Loftus and LBM still possessed a present ownership interest, Rushmore should be estopped from collecting the balance of the loan. The jury returned a trial verdict in favor of Loftus and LBM.

¶2 On August 22, 1994, the circuit court entered a judgment notwithstanding the verdict in favor of Rushmore, holding that Loftus and LBM had divested themselves of all ownership in the property when they executed bills of sale in November 1987 to United National Bank (United National) and First Interstate Bank (First Interstate), United National's successor. We affirm.

FACTS

¶3 Loftus and other shareholders formed the LBM corporation in 1979 for the purpose of building and operating the Supreme Courts Racquetball Club, in Rapid City, South Dakota. The Club's real estate was financed through a down payment of $400,000, while the $560,000 balance was funded through United National, via economic development bonds issued by the City of Rapid City. On March 13, 1980, United National obtained a mortgage on the real estate as security, which did not include equipment, machinery, or other personal property owned or leased by LBM.

¶4 On March 27, 1980, LBM executed a lease agreement with Collateral Financial Services (CFS) to acquire athletic and office equipment for use in the Club. The original lease agreement did not contain an option to purchase. An addendum to the original lease executed on August 29, 1980, did grant LBM an option to purchase equipment of the lease and also listed Leola Loftus Allen (Leola), Loftus' mother, as one of the lease's guarantors. Subsequently, from September 8, 1980 to November 20, 1980, six lease supplements which encompassed the purchases of various athletic equipment and furnishings were incorporated into the CFS/LBM lease agreement.

¶5 On October 15, 1980, United National and LBM entered into an additional loan, which was separate and distinct from the real estate mortgage, to enable the purchase of more equipment. United National perfected a security interest in the loan by filing general financing statement # 096054 with the Secretary of State on October 17, 1980, listing LBM's inventory, equipment, furniture and fixtures as the property covered. Between April 30, 1981 and July 31, 1984, United National and its successor, Rushmore, entered into a series of renewal loans which included an influx of new funds with LBM for short term operating funds, business expenses and working capital. From the record, it appears that the series of loans were ultimately paid in full on February 1, 1985.

¶6 On October 27, 1983, Leola exercised the option to purchase in the CFS/LBM lease agreement. CFS executed a bill of sale transferring ownership of the personal property to Leola. Subsequently, LBM and Leola entered into a lease agreement for the equipment obtained from CFS, with lease payments scheduled to begin on November 1, 1987.

¶7 In July 1984, the Rapid City branch of United National was sold and became known as Rushmore State Bank. The Sioux Falls branch of United National (United National-SF) was not sold and it retained the real estate mortgage and loan which financed the purchase of the building and land for the Club. Rushmore purchased certain assets of United National in the sale, which included the LBM loans perfected by United National in 1980, secured by some of the personal property located at the Club.

¶8 On or about February 6, 1985, Rushmore and LBM executed a security agreement for an LBM loan to be used for interest payment and loan consolidation. Rushmore perfected its interest by filing general financing statement # 259959 with the Secretary of State on February 12, 1985, listing "all cash, inventory, equipment, accounts and other rights to payment and all general intangibles, whether now owned or hereafter acquired" as the covered property. On August 9, 1985 Rushmore filed a continuation for financing statement # 096954 originally filed by United National on October 17, 1980. Rushmore again entered into a loan for renewal and consolidation with LBM on February 26, 1987.

¶9 In 1987 LBM failed to make monthly real estate mortgage installments to United National and a foreclosure lawsuit was filed in the Seventh Judicial Circuit in Pennington County on June 22, 1987. However, on November 25, 1987, LBM, Loftus, his wife Cheryl, and Leola, entered into a Compromise and Settlement Agreement (Agreement) with United National-SF in regards to the foreclosure action. Pursuant to § 3, parts 1 and 2 of the Agreement, LBM, the Loftuses, and Leola agreed to sell and convey all interest it/they held in certain fixtures, equipment, and furniture to United National-SF and expressly warranted to United National-SF that each and every item of said property was free and clear of all liens, encumbrances, and claims of any and all third parties, except Rushmore. In conjunction with the Agreement, LBM, the Loftuses, and Leola executed bills of sale selling and conveying all interest held in the subject personal property to United National-SF.

¶10 Although Rushmore was named as a party defendant and submitted a separate answer to the foreclosure complaint alleging a superior security interest in the personal property at the Club, it was not a party to the Agreement between United National-SF, LBM, the Loftuses and Leola. The Agreement in § 3, part 3, acknowledged that Rushmore "may" claim an interest in personal property conveyed by "LBM only," and that none of the parties conveying any interest "make any warranties as to the nature, extent or validity of any lien interest that Rushmore may claim or possess." Additionally, LBM's Bill of Sale also made no warranty as to any lien Rushmore may claim against any of LBM's personal property. Neither the Loftuses' or Leola's bills of sale mentioned the alleged Rushmore lien as to their property.

¶11 On the same day of the Agreement and the bills of sale, November 25, 1987 United National-SF and LBM entered into a lease agreement, leasing back to LBM all of the real and the same personal property. The lease included an option to purchase as per the term of the lease, six months. At this same time, United National-SF listed all of the Club's property for sale.

¶12 Later in 1987, First Interstate purchased United National-SF, acquiring all the rights and interests previously procured from LBM, the Loftuses and Leola pursuant to the Agreement. On October 18, 1988, LBM and First Interstate entered into a lease agreement of the same real and personal property that did not include an option to purchase and terminated on March 31, 1989. First Interstate subsequently entered into a listing agreement with ERA on February 15, 1989.

¶13 On January 31, 1990, Rushmore filed a continuance for financing statement # 259950 originally filed on February 12, 1985. LBM and Rushmore entered into a loan modification agreement on February 28, 1990. Less than two months later, Rushmore filed an amendment to financing statement # 259950 which included lists of equipment previously conveyed in LBM's, the Loftuses' and Leola's bills of sale to United National-SF.

¶14 On July 11, 1990, First Interstate and Glen Plummer entered into a purchase agreement for the Club which encompassed all real estate and personal property owned by First Interstate. The purchase agreement provided that First Interstate would furnish Plummer with a clear title to all real and personal property. The fact that some of the Club's personal property may be subject to a lien held by Rushmore was not disclosed by First Interstate in the purchase agreement.

¶15 Sometime thereafter, Plummer informed Loftus he had purchased the Club and its equipment. However, Loftus claimed he still owned the personal property subject to Rushmore's lien. Loftus then contacted a Rushmore bank officer who assured him of the validity of the bank's lien and advised him of the bank's awareness of the Plummer/First Interstate transaction. On September 5, 1990, Loftus provided a letter to Rushmore as per Rushmore's request, which read:

I, Ronald James Loftus hereby authorize Rushmore State Bank to negotiate a settlement on my behalf for the sale of all equipment now located in the Supreme Courts Health Club at 2040 Jackson Blvd. I understand the entire debt is my responsibility and agree to continue payment as set forth by Rushmore State Bank.

¶16 Loftus told Rushmore that he owned all of the collateral at that time.

¶17 First Interstate threatened suit against Rushmore one week later and finally on September 18, 1990, Rushmore agreed with First Interstate to release its lien and extinguish its claim against the property in exchange for $12,500. On September 20, 1990, Rushmore applied the $12,500 towards Loftus and LBM's loan account.

STANDARD OF REVIEW

¶18 In reviewing the propriety of a judgment notwithstanding the verdict, this Court is required to view the evidence in a light most favorable to the jury verdict and must give the prevailing party the benefit of every inference and resolve...