Northwestern Serv. V. Si-Tanka Huron

• Decision Date: 28 March 2007
• Docket Number: No. 24135.,24135.
• Parties: NORTHWESTERN SERVICES CORPORATION, Plaintiff and Appellant, v. SI-TANKA HURON UNIVERSITY, Defendant, and Wells Fargo Bank South Dakota, N.A., (f/k/a Marquette Bank, N.A.), Defendant and Appellee.
• Court: South Dakota Supreme Court

731 N.W.2d 625

2007 SD 32

NORTHWESTERN SERVICES CORPORATION, Plaintiff and Appellant, v. SI-TANKA HURON UNIVERSITY, Defendant, and Wells Fargo Bank South Dakota, N.A., (f/k/a Marquette Bank, N.A.), Defendant and Appellee.

No. 24135.

Supreme Court of South Dakota.

Argued January 10, 2007.

Decided March 28, 2007.

Donald T. Campbell of Leonard, Street and Deinard, P.A., Minneapolis, MN, Stephen C. Landon of Cadwell, Sanford, Deibert & Garry, Sioux Falls, SD, for plaintiff and appellant.

Thomas J. Welk, Michael F. Tobin of Boyce, Greenfield, Pashby & Welk, Sioux Falls, SD, for defendant and appellee.

GILBERTSON, Chief Justice.

[¶ 1.] On February 2, 2004, Northwestern Services Corporation (NSC) commenced an action in the South Dakota Third Judicial Circuit for breach of contract against Si-Tanka Huron University (Si-Tanka) and to enforce a guarantee by Wells Fargo Minnesota, N.A. (Wells Fargo). On June 2, 2005, NSC filed a motion for summary judgment against Wells Fargo. On October 21, 2005, Wells Fargo filed a cross-motion for summary judgment against NSC. A hearing was held on the motions on January 23, 2006. The circuit court issued its memorandum opinion on April 21, 2006, granting Wells Fargo's motion and denying NSC's. On May 2, 2006, the order on the motions was filed and judgment in favor of Wells Fargo was entered. We reverse and remand for proceedings consistent with this opinion.

FACTS AND PROCEDURE

[¶ 2.] The facts upon which our review of this appeal is based are not in dispute. In September 1999, Marquette Bank, N.A. (Marquette) issued a loan to Newco, L.L.C. (Newco) for the purchase of Huron University (the University), located in Huron, South Dakota. The amount of the loan was $3.6 million. Prior to the transaction, Newco owned the heating, ventilation and air-conditioning system (HVAC) installed at the University.

[¶ 3.] Contemporaneous with its purchase of the University, Newco negotiated a sale-lease-back agreement with NSC for the HVAC. The terms of the agreement were memorialized in the Facility Management Contract, dated September 1, 1999(FMC). In addition to NSC and Newco, Marquette was also a signatory to the contract.

[¶ 4.] The terms of the FMC provided that NSC would pay $250,000.00 for the HVAC. Newco agreed to lease back the HVAC from NSC at a stated monthly installment. The installment included not only the cost of the equipment lease, but also provided for maintenance and the cost of natural gas to be supplied by NSC. In addition, NSC at its discretion was permitted to upgrade the HVAC at a cost of up to an additional $250,000.00. The term of the lease was fifteen years. At the end of the term, Newco could purchase the original HVAC for $1.00 and any upgrade equipment at its retail price less accumulated straight-line depreciation. In anticipation of the HVAC transaction, on August 11, 1999, Marquette's credit committee approved the loan to Newco with the infusion of the $250,000.00 purchase funds from NSC. NSC paid the $250,000.00 for the purchase of the HVAC from Newco, directly to Marquette. Marquette applied the funds to pay down Newco's loan.

[¶ 5.] The FMC also included a "Buyout Provision" that would trigger in the event Newco defaulted on the lease or became subject to lender foreclosure. The provision stated that Marquette would purchase the HVAC from NSC if the buyout was triggered. Marquette's purchase price would be calculated by taking the retail price of the original equipment, valued at $250,000.00, and the retail value of any upgrade equipment, less the accumulated straight-line depreciation of each component. Since it was agreed that upgrades would not exceed $250,000.00, Marquette's purchase price could not exceed $500,000.00.¹ Marquette's loan-to-value (LTV) analysis contemplated a maximum LTV ratio of 66.5% based on the market value of the University assets less Marquette's maximum buyout purchase price of $500,000.00. Marquette's loan approval documents included a discussion of the risk minimizing benefits of the HVAC transaction for its loan to Newco weighed against Marquette's maximum exposure of $500,000.00, in the event the HVAC buyout provisions were triggered.

[¶ 6.] In April 2001, the Cheyenne River Sioux Tribe purchased the University from Newco and changed its name to Big Foot (Si-Tanka) College (herein collectively referred to together with Si-Tanka Huron University as "Si-Tanka").² On April 26, 2001, Marquette and Si-Tanka executed a loan agreement in the principal amount of $3.3 million for the purchase. This agreement expressly provided that Si-Tanka would "assume the rights, duties and obligations owed to [NSC] . . . by Newco . . . pursuant to the terms of the [FMC]." On that same day, NSC, Si-Tanka, Newco, Marquette and the United States Department of Agriculture³ executed a document entitled "Consent to Assume" (the Consent). The Consent included NSC's consent to Si-Tanka's assumption of the terms of the FMC. The Consent also restated the continuing obligations of the parties under the FMC as well as "their successors and assigns."

[¶ 7.] After making several monthly installment payments as required under the FMC, Si-Tanka discontinued making payments in October 2001. As required by the FMC, on January 14, 2003, NSC sent Si-Tanka notice of default with 30 days to cure. During the intervening time, Marquette was acquired by Wells Fargo.⁴ When Si-Tanka failed to cure, NSC sent notice to Wells Fargo on February 14, 2003, of its intent to exercise its option to invoke the buyout provisions of the FMC, thus compelling Wells Fargo to purchase the HVAC. NSC calculated the purchase price, based on the value of the HVAC and upgrade equipment less accumulated strait-line depreciation, to be $450,000.00. Under the terms of the FMC, Wells Fargo had six months to satisfy its purchase obligations. Having failed to do so, NSC initiated an action in the South Dakota Third Judicial Circuit against Wells Fargo on February 2, 2004, alleging breach of a guarantee for failure to perform its purchase obligations under the FMC. After NSC and Wells Fargo filed cross-motions for summary judgment, the circuit court entered its order on the motions and judgment in favor of Wells Fargo on May 2, 2006. NSC appeals raising the following issue:

Whether Wells Fargo's obligation, to purchase the HVAC when Si-Tanka defaulted on its lease obligations under the FMC, was an enforceable guarantee.

STANDARD OF REVIEW

Under our familiar standard of review in summary judgment cases, we decide only whether genuine issues of material fact exist and whether the law was correctly applied. If any legal basis exists to support the trial court's ruling, we will affirm. "With the material facts undisputed, our review is limited to determining whether the trial court correctly applied the law." Kobbeman v. Oleson, 1998 SD 20, ¶ 4, 574 N.W.2d 633, 635.

Schulte v. Progressive Northern Ins. Co., 2005 SD 75, ¶ 5, 699 N.W.2d 437, 438 (internal citations omitted).

ANALYSIS AND DECISION

[¶ 8.] Whether Wells Fargo's obligation, to purchase the HVAC when Si-Tanka defaulted on its lease obligations under the FMC, was an enforceable guarantee.

[¶ 9.] There is no dispute as to the fact that at all times relevant both Marquette and Wells Fargo were nationally chartered banks. Wells Fargo argues that as national banks, neither Marquette nor Wells Fargo was statutorily authorized to guarantee the obligations of the FMC lessee. Wells Fargo contends that the buyout provision of the FMC, obligating it to purchase the HVAC in the event of lessee default, constituted a guarantee of a third party obligation — here originally that of Newco whose lease obligations were assumed by Si-Tanka. As such, Wells Fargo avers that Marquette's agreement to be obligated under the buyout provision, subsequently assumed by Wells Fargo when it acquired Marquette, is ultra vires and thus unenforceable.

The General Rule

[¶ 10.] We have observed that national banks derive their authority to conduct business from 12 U.S.C. § 24. Western Petroleum Co. v. First Bank Aberdeen (N.A.), 367 N.W.2d 773, 777 (S.D.1985). The authority to guarantee the debts of another is not provided within this statute. Id. "It is therefore generally held that `a national bank cannot lend its credit by guaranteeing the debt of another solely for his benefit.'" Id. at 777-78 (quoting 9 CJS Banks and Banking § 661, at 1214 (1938)) (additional citations omitted). Many venerable cases have recognized this principle. See Federal Intermediate Credit Bank of Omaha v. L'Herisson, 33 F.2d 841, 847 (8th Cir.1929) (citations omitted) (noting that a national bank does not have the statutory authority, even when solvent, to lend its credit for the benefit of another); Merchants' Bank of Valdosta v. Baird, 160 F. 642, 646 (8th Cir.1908) (holding that a guarantee by a national bank, to honor checks of its depositor within a given period and without regard to amount, was an unenforceable loan of the bank's credit where the bank had no interest in the obligations created therein by the depositor); Commercial Nat'l Bank v. Pirie, 82 F. 799, 801-02 (8th Cir.1897) (recognizing that the federal law authorizing the organization of national banks confers upon them no authority to guarantee the payment of debts contracted by a third person for his benefit and that acts of this nature are necessarily ultra vires); Bowen v. Needles Nat'l Bank, 94 F. 925, 931 (9th Cir.1899) (holding ultra vires a national bank's guarantee to pay all checks of a third person, although such person had no funds on deposit); Thilmany v. Iowa Paper-Bag Co., 108 Iowa 333, 79 N.W. 68, 69 (Iowa 1899) (holding that a national bank's guarantee for the fulfillment of the obligation of another is not authorized unless such guarantee is made in connection with the transfer of a chose in action or other property belonging to the bank); First Nat'l Bank v. American Nat'l Bank, 173 Mo. 153, 72...