National Farmers Organization, Inc. v. Kinsley Bank

• Decision Date: 29 March 1984
• Docket Number: 81-2075,Nos. 81-2008,s. 81-2008
• Citation: 731 F.2d 1464
• Parties: NATIONAL FARMERS ORGANIZATION, INC., Plaintiff, Kenneth Burkhart, Judy Catherine Burkhart, and David G. Arst, Trustee in Bankruptcy, Plaintiffs-Appellees/Cross-Appellants, v. The KINSLEY BANK, Defendant-Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1464

731 F.2d 1464

NATIONAL FARMERS ORGANIZATION, INC., Plaintiff Kenneth Burkhart, Judy Catherine Burkhart, and David G Arst, Trustee in Bankruptcy Plaintiffs-Appellees/Cross-Appellants, v. The KINSLEY BANK, Defendant-Appellant/Cross-Appellee.

Nos. 81-2008, 81-2075.

United States Court of Appeals Tenth Circuit.

March 29, 1984.

Emmet A. Blaes of Jochems, Sargent & Blaes, Wichita, Kan., and Stan Wisdom of Stinson, Wisdom, Lasswell & Wilson, Wichita, Kan., for defendant-appellant/cross-appellee.

James M. Concannon, III, Topeka, Kan. (Michael J. Friesen, Garden City, Kan., with him on the brief), for plaintiffs-appellees/cross-appellants.

Charles N. Henson and Anne L. Baker of Eidson, Lewis, Porter & Haynes, Topeka, Kan., filed an amicus curiae brief for The Kansas Bankers Ass'n.

Before BARRETT, DOYLE and LOGAN, Circuit Judges.

LOGAN, Circuit Judge.

The Kinsley Bank has appealed a jury verdict in favor of plaintiffs Kenneth Burkhart (Burkhart), his wife Judy Burkhart, and David Arst, Kenneth Burkhart's Trustee in Bankruptcy. The jury found the bank reneged on an agreement to loan Burkhart a large sum of money to purchase feeder lambs, and rendered a judgment against the bank for $196,736.83. On appeal the bank asserts three defenses to liability: that the loan was illegal because it was beyond the bank's authorized lending limits, that the bank president lacked authority to make the loan, and that the loan commitment was too indefinite. It also makes several objections to the damages award. Plaintiffs have cross-appealed, urging that the trial court erred in refusing to give instructions on fraud and punitive damages. Jurisdiction is based on diversity of citizenship ¹, and Kansas law applies.

This suit arose out of events that occurred in 1976. At that time Kenneth Burkhart was in the business of feeding and trading sheep. He had done business with the Kinsley Bank for several years, and the bank had made him a number of loans ranging in amount from $1,000 to $20,000. In April 1976 Burkhart talked to the president of the Kinsley Bank, Clair Allison, about borrowing money to buy 15,000 to 20,000 lambs from National Farmers Organization, Inc. (NFO). Burkhart explained that NFO would deliver the lambs in the fall and that the purchase price would be $50.50 per hundredweight. Burkhart told Allison he thought he could make a profit of $1 to $3 a head on the lambs. At first Allison refused to make any loan for the deal. But Burkhart persisted, and eventually Allison agreed to lend him money. Before Burkhart and NFO signed a contract, a representative of NFO called Allison to verify that the bank would finance Burkhart's purchase. Once NFO was satisfied that Burkhart had adequate financing, NFO and Burkhart signed a contract. Burkhart then gave NFO a check for $17,190 drawn on the Kinsley bank as a downpayment of $1 a head on 17,190 lambs. Several days later Burkhart signed a promissory note payable to the Kinsley Bank for $17,190, and the bank took a security interest in all of Burkhart's interest in the lambs. It was the customary course of business between Burkhart and the bank for the bank to honor Burkhart's checks even though Burkhart had not yet signed a note. In August 1976 Burkhart began to take delivery of the lambs. To pay for the first truckloads Burkhart drew a check for $75,861 on his account at the Kinsley Bank. The bank dishonored Burkhart's check, and Allison told Burkhart that the bank would not lend Burkhart the money he needed to pay NFO. As a result, NFO stopped delivery of the lambs and eventually sold them to another buyer for $43 per hundredweight.

No one disputes that the bank agreed to lend Burkhart the money for the downpayment. The bank argued at trial, however, that all it had agreed to loan Burkhart was the money for the downpayment. Burkhart and NFO, on the other hand, argued that the bank had agreed to provide whatever amount Burkhart needed to fulfill his obligation to NFO. We are bound by the jury's finding that the bank agreed to lend Burkhart the money he needed to pay for the lambs unless the court erred in submitting the issue to the jury.

I

Liability

A

The bank's first defense is that the contract, if made, was unenforceable because the bank could not legally lend Burkhart the amount he needed to buy the lambs. The bank argues that the district court should have granted its motion for summary judgment based on the illegality of the contract and should not have instructed the jury, as it did, that a bank "may agree to loan funds in excess of its legal loan limit, and if it does, the borrower may hold the bank liable for breach of contract to make a loan even though the bank would exceed its limit in making such a loan." ²

Kansas law limits the amount a bank can lend any one borrower to 15 percent of the bank's unimpaired capital and surplus. Kan.Stat.Ann. Sec. 9-1104. At the time Burkhart contracted with NFO, the Kinsley Bank's loan limit was approximately $150,000. To finance the contract, the bank would have had to lend Burkhart nearly $1,000,000, far more than it could lend him legally. No Kansas case appears to have considered whether a borrower can enforce against a bank an agreement to make a loan in excess of its lending limits. Several older cases outside of Kansas have held such contracts unenforceable. Wald v. Wheelon, 27 N.D. 624, 147 N.W. 402 (1914); E. Swindell & Co. v. Bainbridge State Bank, 3 Ga.App. 364, 60 S.E. 13 (1908). A 1956 Ninth Circuit case denied enforcement of a contract between a bank and its cashier, who the court said should know the bank's capital and surplus, to make a loan in excess of the bank's lending limits. Jaynes v. First National Bank, 236 F.2d 258 (9th Cir.1956). International Dairy Queen, Inc. v. Bank of Wadley, 407 F.Supp. 1270 (M.D.Ala.1976), denied enforcement of such a loan agreement against a bank, emphasizing that the contract was wholly executory. Other cases have enforced contracts to make a loan in excess of a bank's lending limits. First American National Bank v. Alcorn, Inc., 361 So.2d 481 (Miss.1978); Labor Discount Center, Inc. v. State Bank & Trust Co., 526 S.W.2d 407 (Mo.App.1975); Bank of College View v. Nelson, 106 Neb. 129, 183 N.W. 100 (Neb.1921); Goldstein v. Union National Bank, 109 Tex. 555, 213 S.W. 584, 588 (1919) (dictum).

Although it is a close question, we believe the Kansas Supreme Court would today enforce against a bank an agreement to make a loan above legal lending limits. Most cases denying enforcement or implying that the court would deny enforcement arose before the FDIC insured bank accounts and before the widespread use of correspondent banks to participate in loans in excess of a bank's lending limits. An important consideration is whether lending limits were intended primarily as a tool to permit state officials to enforce good banking practices or to express a public policy declaring these transactions void. We are impressed by the analysis set out in Bank of College View v. Nelson, 183 N.W. at 101:

"Was the contract void in the sense that [the bank] could violate it without becoming liable for resulting damages? In limiting the amount of an individual loan to 20 per cent. of the capital and surplus and in directing punishment for exceeding that limit, the statute established a rule for the government of the bank. Rev.St.1913, Sec. 312. The penalty for violating the act applies to 'any officer, director, or employee' of the bank. An excessive loan does not subject the borrower to a penalty. He does not stand before the statute in the same light as the offending banker. The penalty is a matter between the state and the lender. The general rule is that an excessive borrower cannot prevent the collection of his debt by pleading and proving a violation of the statute. In demanding performance of the bank's contract for an excessive loan, the borrower is not in a worse situation than the banker who is subject to a penalty for violating the law governing the bank in the transaction of its business. The borrower has nothing to do with the business management to which the statutory limitation applies. The maximum amount lendable to an individual varies with the capital and surplus. The facts are not equally available to both contracting parties at all times. The statute does not declare that excessive loans are void. They are generally enforced. In the present case both parties had performed the contract to such an extent that a heavy loss fell on the borrowers through failure of the lender to perform fully all of its obligations. Where the law permits a bank to enforce a contract for an excessive loan, it should not be permitted to escape liability for the damages resulting from its failure to fully perform such a contract."

Further, we note that Kan.Stat.Ann. Sec. 17-6104 would deny the bank the defense of ultra vires, a doctrine some of the cases have relied upon to deny recovery.

The bank cites Board of Commissioners v. Miller, 132 Kan. 52, 294 P. 863 (1931), for the proposition that Kansas courts will not maintain an action to enforce a contract prohibited by statute. That proposition, however, is an overly broad generalization because in certain situations Kansas courts have enforced such contracts. In fact, in Elmo State Bank v. Hildebrand, 103 Kan. 705, 708-09, 177 P. 6, 8 (1918), the Kansas Supreme Court stated in dictum that a borrower could not raise the illegality of the contract for a loan in excess of the statutory limit as a defense in a suit on the contract. Thus, the bank, at whom the prohibition is directed, can enforce a contract for a loan in excess of the statutory limit. In Wycoff v. Quick Way Homes, Inc., 201 Kan. 442, 441 P.2d 886 (1968), the court noted that illegal contracts are generally unenforceable but, because of the equities involved, the court allowed damages for breach of a contract that required one party to act illegally. The plaintiffs in...