Macon County Livestock Market, Inc. v. Kentucky State Bank, Inc.

• Citation: 724 S.W.2d 343
• Decision Date: 02 April 1986
• Docket Number: No. 85-125-II,85-125-II
• Parties: MACON COUNTY LIVESTOCK MARKET, INC. and Jimmy Doss, Plaintiffs/Appellants, v. KENTUCKY STATE BANK, INC., Defendant/Appellee, and Steve Holmes, Defendant. 724 S.W.2d 343
• Court: Court of Appeals of Tennessee

Page 343

724 S.W.2d 343

MACON COUNTY LIVESTOCK MARKET, INC. and Jimmy Doss Plaintiffs/Appellants, v. KENTUCKY STATE BANK, INC., Defendant/Appellee and Steve Holmes, Defendant.

No. 85-125-II

724 S.W.2d 343

Court of Appeals of Tennessee Middle Section, at Nashville.

April 2, 1986.

Permission to Appeal Denied by

Supreme Court Feb. 2, 1987.

Charles R. Ray, Barrett & Ray, Nashville, for plaintiffs/appellants.

James W. Chamberlain, Lafayette, Stephen C. Todd, Bowling Green, Ky., Secrest & Secrest, Scottsville, Ky., for defendant/appellee.

OPINION

KOCH, Jr., Judge.

This appeal arises out of a dispute between the owner of a failed livestock market and his former business associate. The owner filed this action following the demise of the business in the Chancery Court for Macon County against his former associate and the bank where his associate maintained his separate accounts. He alleged, in part, that the bank had caused his business losses by failing to inform him of his associate's precarious financial condition. The plaintiff's action against the bank was dismissed in an order entered on January 7, 1985 granting the bank's motion for summary judgment. The plaintiff has perfected this appeal. For the reasons stated herein, we affirm the trial court.

I.

The parties engaged in a lengthy discovery process before the trial court granted the bank's motion for summary judgment. In the two years between the time the complaint was filed and the time it was dismissed, they deposed sixteen witnesses. ¹ The following material facts emerge from this evidence.

Jimmy Earl Doss is a native of Macon County, Tennessee. Macon County shares its northern border with Allen County, Kentucky. Doss operated retail tire stores in Lafayette, Tennessee and Scottsville, Kentucky for a number of years. He moved to Scottsville in 1978. Later he sold his Tennessee tire store to concentrate on operating the Scottsville Tire Exchange. He had no experience in the cattle business prior to the events that give rise to this dispute.

Doss first became acquainted with Steve Holmes as one of the customers of his tire business. Holmes operated a livestock business in Scottsville known as Holmes Livestock, Inc. Doss and Holmes became good friends during their twelve year association. Holmes was reputed to be quite knowledgeable about cattle. He had been convicted of a felony in 1978 stemming from a cattle transaction in Carthage, Tennessee. Doss was aware of Holmes' conviction but gave him the benefit of the doubt.

Both men maintained separate banking relationships with the Kentucky State Bank in Scottsville. Doss' banking relationship with the Kentucky State Bank began when he moved to Scottsville. Normally, he dealt with the bank's president, James A. Lones. He was considered to be a good customer.

Holmes had also been a customer of the Kentucky State Bank for a number of years. He dealt primarily with the bank's executive vice president, James R. Steenbergen. Holmes had borrowed substantial sums from the bank to operate his cattle business. The bank began to watch him more closely in 1978 following his criminal conviction in Tennessee.

The bank changed its operating policy with regard to checking account overdrafts in 1979. As a result of this change, the bank began to monitor the accounts of customers who frequently overdrew their checking accounts in large amounts. Holmes was one of the customers whose accounts were monitored. At first, when overdrafts were discovered, the bank would call Holmes to inform him that large checks had been presented for payment without sufficient funds in his account. Like other customers, Holmes was given the opportunity to make an immediate deposit to cover the check before it was returned to the payee because of insufficient funds. This happened with such frequency with Holmes' account that Holmes and Steenbergen eventually agreed that Holmes would call the bank, almost on a daily basis, to discover how much was needed to cover the checks he had already written. He would then go to the bank each day to deposit enough money to cover the checks that had been presented for payment. ² On days when Holmes could not make the necessary deposits, the Kentucky State Bank began to make him short-term loans to cover the checks that had been presented. ³ Holmes was able to repay these loans within three or four days after they were made.

Lones did not think that Holmes was a good customer even though Steenbergen thought he was satisfactory. Despite its uneasiness about Holmes, the bank did not consider closing his accounts because it wanted to give Holmes a chance to repay the money he had borrowed. Thus, as long as Holmes continued to make sufficient deposits to avoid overdrawing his accounts and to repay his short-term loans, the bank continued to do business with him.

The livestock market in Lafayette, Tennessee was put up for sale in 1980. Holmes approached Doss in the Fall of 1980 with the proposition that they buy the livestock market and go into the cattle business together. Notwithstanding the stories he had heard about Holmes, Doss decided to go into business with his friend. He sought advice from no one about this idea even though he knew nothing about the livestock business.

The Macon County Livestock Market, Inc. was incorporated in Tennessee on November 18, 1980. Doss was the president, Holmes the vice president, and Donald Ray Gibbs the secretary/treasurer. ⁴ Each original incorporator agreed to furnish $10,000 for the initial capital and to obtain the remaining funds from the Citizens Bank of Lafayette where Doss had done business when he lived in Tennessee.

Doss borrowed his $10,000 capital contribution from the Kentucky State Bank. Doss told Lones at the time he borrowed the money that this was one of the "finest deals he had ever got into." He did not seek Lones' opinion about Holmes or the wisdom of this venture. Lones did not volunteer any information about Holmes.

The three incorporators then met with Charles E. Darnell, the president of Citizens Bank of Lafayette, to work out the details of the loan for the additional funds needed to operate the market. Darnell was knowledgeable about the cattle business. While he knew Doss, he was not acquainted with either Holmes or Gibbs. Thus, Darnell decided to look into their background before he agreed to make the loan. Although the Kentucky State Bank apparently told Darnell that Holmes was a satisfactory customer, Darnell discovered that Holmes had been in financial and criminal trouble.

Notwithstanding this information, Darnell decided to loan the funds to the livestock market on the strength of Doss' reputation as well as Holmes' estimate that the loan could be repaid within two or three years if the market was able to sell 400 to 500 cattle each week. ⁵ However, he put several conditions on this loan in light of what he had discovered about Holmes' background. The bank required, and the parties agreed, that Doss would have the primary responsibility for the financial management of the business. Holmes was responsible for developing the business, locating the cattle to be sold at the market and assisting in the weekly sales. However, Holmes was not to be given any independent access to the funds of the corporation. The corporation also agreed to maintain all of its accounts with the Citizens Bank of Lafayette. The Kentucky State Bank played no role in the formation of this business or in its operation other than to make an individual loan to Doss for his share of the initial capital.

Doss did not publicize his involvement with the livestock market because he was concerned that it might affect his tire business. However, acquaintances warned him repeatedly about doing business with Holmes after it became known that he and Holmes were operating the livestock market. Doss later admitted that he discounted these warnings because he thought he knew more than the others did.

The success of the livestock market was directly related to the number of cattle being sold at the weekly livestock auctions. The market received a commission for each head of cattle sold and was able to sell between 450 and 550 head of cattle each week from the day it opened. Thus, the business prospered. Holmes traveled throughout Tennessee and Kentucky finding cattle to be sold at the market. However, he also continued to be active in his own livestock business headquartered in Scottsville. In order to help maintain the sales volume at the market, Holmes, on behalf of Holmes Livestock, Inc., agreed with Doss that all the cattle his company purchased in the area would be sold at their livestock market rather than other available markets. ⁶

The Macon County Livestock Market, like other regulated markets, was required to adopt certain business procedures designed to maintain the solvency of the market. The market was required to pay persons selling cattle at the market immediately on the day of sale. These payments were made from the market's bonded custodial account. The market was required to maintain funds in this account that would be sufficient to pay the sellers immediately after their cattle were sold. ⁷ Buyers were generally required to pay for their cattle immediately after the sale and were not permitted to remove the cattle from the market until payment had been made. However, it was a common practice at this and other livestock markets to permit large, well established buyers to purchase cattle on "open account." Persons accorded this privilege were permitted to remove the cattle they had purchased and to remit payment to the livestock market several days later as long as they maintained a record of prompt payment.

Doss was aware from the beginning that Holmes was purchasing cattle in the name of Holmes Livestock, Inc. at the market's weekly livestock sales. At first, like most other buyers, Doss required Holmes to pay for the cattle he purchased before...