Mayer v. First Nat. Bank of Or.

• Decision Date: 29 September 1971
• Citation: 489 P.2d 385,93 Or.Adv.Sh. 554,260 Or. 119
• Parties: Donald J. MAYER, Appellant and Cross-Respondent, v. FIRST NATIONAL BANK OF OREGON, Respondent, Ferris F. Boothe, individually and as trustee, et al., Respondents and Cross-Appellants.
• Court: Oregon Supreme Court

Page 385

489 P.2d 385

260 Or. 119

Donald J. MAYER, Appellant and Cross-Respondent, v. FIRST NATIONAL BANK OF OREGON, Respondent Ferris F. Boothe, individually and as trustee, et al Respondents and Cross-Appellants.

Supreme Court of Oregon.

Argued and Submitted June 2, 1971.

Decided Sept. 29, 1971.

David W. Harper and Donald H. Pearlman, Portland, argued the cause for appellant and cross-respondent. On the briefs were Keane, Haessler, Harper & Pearlman, and Alan L. Schneider, Portland.

Douglas M. Ragen, Portland, argued the cause for respondent First National Bank. With him on the briefs were Miller, Anderson, Nash, Yerke & Wiener, Portland.

Ferris F. Boothe, Portland, argued the cause pro se; and Robert L. Allen, Portland argued the cause for respondents and cross-appellants. Anderton, Pierce and Nehl. On the brief were Black, Kendall, Tremaine, Boothe & Higgins and Morrison & Bailey and Robert L. Allen, Portland.

Before O'CONNELL, C.J., and McALLISTER, DENECKE, HOLMAN, and HOWELL, JJ.

McALLISTER, Justice.

This declaratory judgment proceeding was brought by Donald J. Mayer to obtain a declaration of his rights arising out of a series of financial transactions involving Pam Corporation, a manufacturing concern, the First National Bank of Oregon, and others, including plaintiff. The transactions occurred during a three-year period preceding Pam's bankruptcy in 1967. A brief re sume of these transactions is necessary to an understanding of the issues involved in this appeal.

In 1964 First National Bank extended a line of credit to Pam and took as security for its loans a security interest in Pam's inventory, accounts receivable, and contract rights. Thereafter, until its bankruptcy, Pam was at all times indebted to the bank in varying amounts, all secured by that security interest. ¹

Pam also borrowed money from defendant Ferris F. Boothe, an officer and director of Pam, and from defendant Helen Anderton, the mother of David Anderton, Pam's president and majority shareholder. In October, 1965, at the request of the bank, defendants Boothe and Anderton executed Subordination Agreements, in which they agreed to subordinate Pam's debts to them to all present and future indebtedness of Pam to the bank. They promised, in these agreements, not to accept any payments or to take any security from Pam without the prior written consent of the bank. These agreements were to terminate when all of Pam's obligations to the bank were fully discharged.

In 1966 plaintiff, who had not previously had any dealings with Pam, became interested in the company. Pam was in need of additional operating capital and the bank was unwilling to increase its loan at that time on the strength of the collateral it then held. Plaintiff agreed with Pam to deposit with the bank certain shares of stock in Sawyer's, Inc., owned by him as additional collateral for the bank's loans to Pam. In return, Pam agreed to loan plaintiff $25,000 in cash, to give him a position on Pam's board of directors, and to give him an option to purchase up to 3,000 shares of Pam stock at $10 per share.

Plaintiff, pursuant to this agreement, deposited his Sawyer's stock with the bank on May 9, 1966. As a part of this transaction, Pam executed in favor of the bank a Collateral Agreement in which the bank was given various powers in connection wih the new collateral, including the following:

'The Bank may assign the whole or any part of said indebtedness, obligations or liabilities of the undersigned and may transfer therewith as collateral security therefor the whole or any part of the collaterals covered by this agreement, * * *.'

On the same printed form plaintiff signed an agreement reciting the deposit of his stock with the bank and providing:

'Said property may be held by the Bank as collateral security for the payment of any and all indebtedness of the Debtor (Pam) now or hereafter owing, to the same extent, in the same manner and for the same purposes as though said property were owned by the Debtor and were included in the foregoing Collateral Agreement.'

The only restriction which the agreement imposed on the bank's use of plaintiff's stock was that it could only be used as security for a maximum of $100,000 of Pam's indebtedness. ²

In November, 1966, Pam executed a loan security agreement giving defendant Boothe, individually and as trustee for defendant Anderson and certain other creditors of Pam, a security interest in Pam's inventory, operating equipment and accounts receivable. So far as the record shows, the bank did not consent in writing to this arrangement--a consent which Boothe and Anderton, under the terms of the Subordination Agreements of October, 1965, were required to obtain before taking any security from Pam.

By February, 1967, Pam was again in need of operating capital which the bank was unwilling to loan. To help supply the needed funds, defendants Boothe, Pierce and Nehl ³ each agreed to make $10,000 available to the corporation on a secured basis. To accomplish this they arranged to advance the money to Pam through the bank. This arrangement is embodied in Participation Agreements, executed by these defendants, in which they each agreed to deliver $10,000 to the bank and the bank agreed to issue to them participation certificates which were to be 'deemed an assignment of participation' in Pam's indebtedness to the bank. The agreements further provided for the order in which payments, collections, and 'proceeds of any security' were to be applied to the bank's share of the indebtedness and to the participators' shares. The $30,000 was made available to the bank on these terms, and was advanced to Pam by the bank.

Pam's affairs continued to deteriorate, and in the summer of 1967 it became bankrupt. In June, about a month before the petition in bankruptcy was filed, Pam surrendered its accounts receivable and inventory to the bank and its operating equipment to Boothe as trustee for the secured parties under the November, 1966, Loan Security Agreement. Boothe, with the knowledge of the bank, proceeded to realize on the equipment by sale and lease. The bank took over collection of Pam's accounts receivable and began to realize on the inventory. In November, 1967, the bank sold some of plaintiff's stock and applied the proceeds to the Pam indebtedness. In May, 1969, the bank sold more of plaintiff's stock and returned the unsold shares to plaintiff. The bank eventually recovered all of its loan to Pam and repaid to Boothe, Pierce and Nehl their participating shares in this loan plus interest.

In his complaint, plaintiff alleged his contentions that he was subrogated to the rights of the bank against Boothe and Anderton under the Subordination Agreements of October, 1965, and that the repayments to Boothe, Anderton, and Nehl of their participation shares were made out of the proceeds of plaintiff's stock in violation of his rights and should be repaid to him. Other controversies were also alleged, which are not involved in this appeal. Plaintiff prayed for a declaration of all of the rights of the parties, and for appropriate money judgments.

The issues as framed by the pleadings were quite complex. At a pre-trial conference the parties and the court agreed to try certain segregated issues before the court without a jury before proceeding to a determination of the remaining issues in the case. No record was made of this pre-trial conference. In a letter to the court, with copies to other counsel, plaintiff's counsel indicated his understanding of the issues segregated for trial to the court:

'The segregated issues as the Court stated them are as follows:

'1. In the transaction of May 9, 1966 between Bank, Pam and Mayer, was Mayer putting up collateral security or making an investment? (It is plaintiff's contention that as a matter of law the result is the same under the facts in this case regardless of how the Court decides this issue).

'2. Is Mayer subrogated to the rights of the bank? (Here I would assume the same issue to be whether Mayer was a surety or guarantor of Pam for its debt to the bank. It is our understanding that we are not going to cover any collateral issues raised by subsequent activities after May 9, 1966, except for the facts admitted in the pleadings.)'

Plaintiff's restatement of the issues in this letter apparently went unchallenged by the other parties. A trial was held and thereafter the court entered its 'Findings of Fact and Conclusions of Law and Judgment and Decree' in which it held that plaintiff, when he deposited his stock with the bank as security for Pam's indebtedness, did so as a pledgor, not as an investor. As pledgor, the trial court concluded, plaintiff had 'certain of the rights of a surety'; however, plaintiff was held not to be entitled, by virtue of subrogation to the rights of the bank, to enforce the Subordination Agreements of October, 1965, against defendants Boothe and Anderton. The trial court also held that plaintiff had no right to recover from defendants Boothe, Pierce, and Nehl the amounts they received from the bank under their Participation Agreements of February, 1967.

Plaintiff on appeal claims that both of these questions were incorrectly decided by the trial court. He also vigorously asserts that neither of these issues ought to have been decided by the trial court at all because they were not within the issues which the parties had agreed to try as segregated issues before the court and because they involved issues of fact which plaintiff had a right to have tried to a jury.

As to the question of his right to enforce the Subordination Agreements, plaintiff insists, as he did in the trial court proceedings, that this was not involved in the issue of whether he was subrogated to the rights of the bank. He contends that the existence of the right of subrogation is a separate issue from the enforceability of that right, and that the trial court should have...