Production Credit Ass'n of Lancaster v. Croft

• Decision Date: 11 February 1988
• Docket Number: No. 86-1868,86-1868
• Parties: PRODUCTION CREDIT ASSOCIATION OF LANCASTER, Wisconsin, a federal corporation, Plaintiff-Respondent, v. Roger A. CROFT and Combined Crofts Corporation, a Wisconsin corporation, Defendants-Appellants.
• Court: Wisconsin Court of Appeals

Page 544

423 N.W.2d 544

143 Wis.2d 746

PRODUCTION CREDIT ASSOCIATION OF LANCASTER, Wisconsin, a federal corporation, Plaintiff-Respondent, v. Roger A. CROFT and Combined Crofts Corporation, a Wisconsin corporation, Defendants-Appellants.

No. 86-1868.

Court of Appeals of Wisconsin.

Submitted on Briefs Dec. 1, 1987.

Opinion Released Feb. 11, 1988.

Opinion Filed Feb. 11, 1988.

Review Denied.

Carlton Roffa, Hales Corners, for defendants-appellants.

R.R. Roggensack of Morse & Roggensack, Lancaster, for plaintiff-respondent.

Before DYKMAN, EICH and SUNDBY, JJ.

SUNDBY, Judge.

Roger Croft and Combined Crofts Corporation appeal from an order granting the Production Credit Association summary judgment dismissing the appellants' counterclaims. The appellants limit the issues on appeal to: (1) Did the PCA owe a fiduciary duty to them which it breached? (2) Was the PCA negligent in making loans to the appellants which the PCA knew or should have known they could not repay? (3) Did the trial court erroneously substitute summary judgment for a trial? Liberally construed, the appellants' counterclaims also allege that the PCA violated a duty to them of disclosure. The appellants' counterclaims alleging a breach of fiduciary duty and negligence do not state claims upon which relief can be granted. The PCA fulfilled its duty to appellants of disclosure. We therefore affirm.

I. BACKGROUND OF THE CASE

In 1980 appellants signed a loan agreement with the PCA. In 1983 they executed a supplementary loan agreement with the PCA to pay accrued interest. In February and March of 1984, the PCA made additional loans to appellants to provide feed for appellants' livestock. The appellants secured the loans by two real estate mortgages and by security agreements.

The PCA commenced action against appellants to foreclose its real estate mortgages and security agreements. Appellants answered and made the counterclaims which are the subject of this appeal. The trial court granted the PCA summary judgment dismissing the counterclaims.

II. BREACH OF FIDUCIARY DUTY

In reviewing the grant or denial of a summary judgment, we follow the same methodology as the trial court. Franke v. Durkee, 141 Wis.2d 172, 174, 413 N.W.2d 667, 668 (Ct.App.1987). "The first step of that methodology requires the court to examine the pleadings to determine whether a claim for relief has been stated." Green Spring Farms v. Kersten, 136 Wis.2d 304, 315, 401 N.W.2d 816, 820 (1987).

Thus our first task is to determine whether appellants' claim for breach of a fiduciary duty to them states a claim for relief. In determining whether a claim states a cause of action upon which relief can be granted, we take as true the facts pleaded and all inferences which can reasonably be derived from those facts. Green Spring Farms, 136 Wis.2d at 317, 401 N.W.2d at 821. Pleadings are to be liberally construed with a view toward substantial justice to the parties. Sec. 802.02(6), Stats. A complaint should be dismissed as legally insufficient only if it is quite clear that under no circumstances can the plaintiff recover. Green Spring Farms, supra.

Appellants argue that their claim establishes a fiduciary relationship between them and the PCA and states a cause of action for the breach of that relationship. The trial court determined that no claim for relief was stated because as a matter of law, the mere existence of a lender-borrower-customer relationship does not create a fiduciary relationship. We first consider whether a fiduciary relationship, under the facts as pled, existed.

Appellants allege:

40. That the plaintiff, and its duly constituted agents had been engaged in the business of farm financing and farm credit for a long period of time prior to June 17, 1980 and is substantially and professional trained, sophisticated and possessed of superior knowlege in the marketplace regarding business, money, finances, mortgage loans, security interests, contracts and interest rates.

41. That the individual defendants, and the defendant farm corporation, derivatively, are substantially untrained and unsophisticated in the field of business, money and finances and were compelled to rely upon the honesty, integrity and representations of the plaintiff, and its duly constituted agents, servants and employees, in the circumstances surrounding the execution of the subject Basic Loan Agreement, Supplementary Loan Agreements, Real Estate Mortgages, assignments, financing statements, security interests and promissory notes.

42. That, due to its contractual status with the defendants, the plaintiff, and its duly constituted agents, servants and employees, occupied a position of trust and a fiduciary relationship to these defendants and further owed them a duty to disclose and communicate the time, manner and amounts of any and all payments of principal and interest, together with disclosing the annual interest percentage rates and their variability.

Generally, there are two types of fiduciary relationships: (1) those specifically created by contract or a formal legal relationship such as principal and agent, attorney and client, trust and trustee, guardian and ward, and (2) those implied in law due to the factual situation surrounding the transactions and relationships of the parties to each other and to the questioned transactions. Denison State Bank v. Madeira, 230 Kan. 684, 640 P.2d 1235, 1241 (Kan.1982). Appellants do not argue that the lender-borrower relationship alone imposes fiduciary duties. They allege, however, that the contract transcended the usual lender-borrower relationship, and that the disparity in knowledge and experience between the PCA and them imposed fiduciary duties on the PCA.

(a) Contract. Appellants argue that because their loan agreements gave the PCA ultimate control of the repayment requirements a fiduciary relationship was created. They rely on Southern Pacific Co. v. Bogert, 250 U.S. 483, 492, 39 S.Ct. 533, 537, 63 L.Ed. 1099 (1919), where it is stated: "It is the fact of control of the common property held and exercised, not the particular means by which or manner in which the control is exercised, that creates the fiduciary obligation."

The 1980 loan agreement recognized that because of the nature of farm business, the parties could not always determine in advance the exact number and dates for appropriate repayments. Thus the PCA was given ultimate control of the repayment requirements and was allowed to vary the specific repayment requirements from time to time. Under the supplementary loan agreement, appellants agreed not to sell or trade any machinery or equipment pledged as loan security without the PCA's prior written consent, to furnish the PCA with an updated inventory of livestock and feed, to allow the PCA to inspect inventory monthly, and to notify the PCA of any offer to purchase the real estate.

We conclude that a fiduciary relationship was not created by the contracts.

Lenders, under certain circumstances, require borrowers to comply with loan covenants restricting the operation of the borrower's business.... These covenants often include promises to maintain the collateral and promises to obtain lender approval of certain transactions. These Bahls, Termination of Credit for the Farm or Ranch: Theories of Lender Liability, 48 Mont.L.Rev. 213, 233 (1987) (footnotes omitted). We adopt this reasoning. The loan provisions appellants rely on were to protect the PCA's security interests and did not vest in the PCA control of appellants' property.

covenants may serve [143 Wis.2d 754] to keep a "leash" on the operations of the borrower. Arrangements such as these should not give rise to the creation of a fiduciary duty so long as the lender's restraints are reasonably necessary to protect its interest in the collateral and are made in good faith.

Bogert, 250 U.S. at 492, 39 S.Ct. at 537, is inapposite. It deals with a well-settled and often applied rule of corporation law and equity that a majority stockholder occupies a fiduciary relationship toward minority stockholders. Id. at 487-88, 39 S.Ct. at 535. Appellants' reliance on cases cited in Lundgren, Liability of a Creditor in a Control Relationship with Its Debtor, 67 Marq.L.Rev. 523 (1984), is also misplaced. Those cases involved the domination of a debtor's business by a lender and suits by trade creditors against the lender as principal on the debtor's obligations under agency, alter ego, trust fund and negligence theories. We also reject appellants' reliance on Merrill Lynch, Pierce, etc. v. Boeck, 127 Wis.2d 127, 377 N.W.2d 605 (1985), because that case dealt with the duties owed by a broker to a customer on a nondiscretionary account, as opposed to the duty owed on a discretionary account. The PCA's loan arrangements with appellants did not constitute a discretionary account in which the PCA made the investment decisions.

(b) Implied in Law. Appellants suggest that because they sought financial advice from the PCA, and it represented that it was a partner and knowledgeable agricultural advisor, the law implies a fiduciary relationship. Appellants also argue that a fiduciary relationship existed because of the PCA's sophistication and superior knowledge in the marketplace regarding business, money and finances and because of their reliance on the trust, honesty, integrity and representations of the PCA. They advance a theory used with increasing frequency as a consequence of the farm crisis. See Bahls,supra, 48 Mont.L.Rev. at 231-33.

"A fiduciary relationship arises from a formal commitment to act for the benefit of another ... or from special circumstances from which the law will assume an obligation to act for another's benefit." Boeck, 127 Wis.2d at 136, 377 N.W.2d at 609. However,

[a] fiduciary relationship between a lender and borrower may be established when a borrower demonstrates that a lender acted as financial advisor to a subservient borrower and the...