Rural American Bank of Greenwald v. Herickhoff, CX-90-2341

• Decision Date: 05 June 1992
• Docket Number: No. CX-90-2341,CX-90-2341
• Citation: 485 N.W.2d 702
• Parties: RURAL AMERICAN BANK OF GREENWALD, Appellant, v. Ben HERICKHOFF, Respondent, Anna HERICKHOFF, et al., Defendants. Ben Herickhoff, Respondent, v. Mark HERICKHOFF, Respondent.
• Court: Minnesota Supreme Court

Page 702

485 N.W.2d 702

RURAL AMERICAN BANK OF GREENWALD, Appellant, v. Ben HERICKHOFF, Respondent, Anna HERICKHOFF, et al., Defendants.

Ben Herickhoff, Respondent, v. Mark HERICKHOFF, Respondent.

No. CX-90-2341.

Supreme Court of Minnesota.

June 5, 1992.

Syllabus by the Court

The Minnesota credit agreement statute, Minn.Stat. § 513.33 (1990 & Supp.1991), does not bar respondent's breach of contract defense where credit agreement was in writing, drafted and typed by appellant Bank's officer on Bank letterhead stationery, and otherwise meets the requirements of the statute.

Maclay R. Hyde, Laura Hein, Gray, Plant, Mooty, Mooty & Bennett, Minneapolis, for appellant.

Michael D. Miller, Cousineau, McGuire & Anderson, Chartered, Minneapolis, for Ben Herickhoff.

Scott B. Lundquist, Lundquist & Roth, Minneapolis, for Mark Herickhoff.

Heard, considered and decided by the court en banc.

KEITH, Chief Justice.

This case involves the interpretation of Minnesota's credit agreement statute, Minn.Stat. § 513.33 (1990 & Supp.1991), ¹ and its application to agriculture operational loans made to a retired farmer and his son and daughter-in-law.

Appellant, Rural American Bank of Greenwald (Bank), commenced this action against respondent, Ben Herickhoff, seeking to recover on a promissory note for $175,000, interest and attorney fees. Respondent asserted, as defenses, fraud and breach of the contractual provisions of the Loan Agreement underlying the note. Two weeks before trial, the Bank amended its complaint to assert, as a defense to respondent's breach of contract claim, the Minnesota credit agreement statute which requires credit agreements to be in writing and signed by the parties. Minn.Stat. § 513.33, subd. 2 (1990).

A jury trial was held and the jury, by special interrogatory, returned a verdict in favor of Ben Herickhoff finding that the Bank had breached the Loan Agreement underlying the Promissory Note. One month later, the court granted judgment in favor of the Bank finding that respondent was barred from asserting breach of contract as a defense because the Loan Agreement was signed only by Mark and Donna Herickhoff and not by the Bank and thus failed to meet the requirements of section 513.33, subd. 2.

The Court of Appeals reversed the trial court's post-verdict judgment and ordered reinstatement of the jury verdict. Rural American Bank v. Herickhoff, 473 N.W.2d 361 (Minn.App.1991). The Bank petitioned for further review. We affirm.

I.

Mark and Donna Herickhoff farm 2,300 acres in rural Minnesota. Some of their farm land was part of the Herickhoff family farm which had been farmed since the 1930s by Mark's parents, Ben Herickhoff and his wife, Anna, now in their eighties and retired. Mark and Donna's operation requires large amounts of cash yearly to purchase inputs to plant such acreage. In the spring of 1986 the Herickhoffs needed more cash than their bank, the State Bank of Greenwald (State Bank), could lend to them. A solution to the State Bank's lending limit was devised, whereby the State Bank agreed to lend $175,000 to Mark and Donna Herickhoff and, separately lend, $175,000 to Ben Herickhoff. The Herickhoffs had been one of the State Bank's largest farm customers for many years. Ben was initially hesitant to be involved in this loan, but agreed, on the condition that the proceeds from the sale of the crops be applied to first pay off his loan.

All of the documents related to these transactions were executed in the State Bank on May 1, 1986. Bernard Sunderman, then a loan officer and currently President of the Rural American Bank of Greenwald, Doug Winter, then Vice President, Ben and Mark Herickhoff met at the State Bank's board room to finalize the loans. Mark signed a promissory note for $175,000. Ben also signed a promissory note for $175,000. Security agreements and lines of credit were also signed by the parties.

A final document entitled "Loan Agreement for Mark and Donna Herickhoff" (Loan Agreement) was drafted and typed on the State Bank's letterhead by the State Bank's Vice President, Doug Winter. This Loan Agreement contained the arrangement regarding the priority repayment of Ben's loan. It was dated May 1, 1986 and signed by both Mark and Donna. This document, which is at the heart of this action, states, in part:

Mark and Donna Herickhoff ... agree to use the funds that are borrowed from Ben Herickhoff to be used for the sole purpose of the 1986 inputs for crops.... We agree that all income from crops ... shall be applied to the principal amount oweing (sic), First to the Loan of Ben Herickhoff.

Doug Winter testified that "according to the loan agreement that was signed, it was the understanding that Ben would have priority to Mark." The entire transaction was reviewed and approved by the State Bank's Loan Committee and all documentation, including the Loan Agreement, was placed in the Herickhoff loan file.

The 1986 crop yield was disastrous and the loans could not be repaid. Both Ben's and Mark's notes were renewed in December of 1986 and in July of 1987. No additional loan agreements were executed at either renewal date nor were any loan terms changed.

The 1987 crop yield was better and the Herickhoffs were able to apply over $233,000 to the debt. Despite the priority repayment plan of the Loan Agreement, the proceeds from the sale of the crops were not applied to Ben's loan but rather were applied to pay off the entirety of Mark's loan. In response to the Herickhoff's questioning regarding the handling of the loans, Bernard Sunderman, the State Bank's Loan Officer, told the Herickhoffs that "the Bank comes first."

On October 2, 1987, the Commissioner of Commerce of the State of Minnesota determined that the State Bank of Greenwald was insolvent, closed it, took possession of its assets and appointed the FDIC as receiver. Deposit obligations and assets, including the Herickhoff loans, were transferred to the Rural American Bank of Greenwald. Bernard Sunderman became the president of the new bank.

Shortly thereafter, the Bank informed Ben that his loan was due and demanded payment in full. When he refused to pay, the Bank commenced suit against Ben. The parties engaged in extensive discovery and numerous motions were made by both sides. Shortly before trial, the Bank brought a motion to amend its pleadings so that it could formally invoke the Minnesota credit agreement statute, Minn.Stat. § 513.33 (1990). The Bank's motion to amend was granted by the court two weeks before trial.

On the first day of the jury trial, the Bank brought a motion in limine seeking to prohibit introduction of the Loan Agreement and evidence of oral promises regarding the Loan Agreement. They also brought a motion for a directed verdict alleging that section 513.33, subdivision 2, barred Ben's defense. The court allowed the admission of the Loan Agreement and any related oral evidence and took the motion for a directed verdict under advisement.

The jury returned a special verdict for Ben Herickhoff finding, among other things, that the Bank had breached its contract with Ben, that Ben had not waived the breach, and that the Bank had not fraudulently induced Ben to enter into the loan. One month later, the court reversed the jury verdict. The court concluded that the Loan Agreement was a "financial accommodation" within the meaning of the credit agreement statute but that the signature of the Bank could not be inferred from the use of the letterhead stationery and therefore the signature requirement of the statute was not met.

The Herickhoffs appealed the trial court's ruling. The Court of Appeals reversed and reinstated the jury verdict upon their conclusion that the Loan Agreement signed by Mark and Donna Herickhoff was neither a credit agreement nor a financial accommodation within the meaning of section 513.33. Rural American Bank of Greenwald v. Herickhoff, 473 N.W.2d at 363.

During the pendency of the appeal, the Herickhoffs took their legal problem to their State Representative, Sylvester Uphus. Representative Uphus then introduced legislation in the Minnesota House which originally read: "A credit agreement need not be signed by the creditor if: (1) the creditor prepared the agreement on the creditor's letterhead stationery; and (2) the credit agreement does not contain a signature line for the creditor." H.F. 895, as read for the first time in the House, March 18, 1991. Mark and Donna Herickhoff, along with their attorney, testified in favor of the legislation. This language was subsequently amended to read: " 'signed' has the meaning specified in section 336.1-201(39)." H.F. 895, read for the second time, April 24, 1991. The amended language was ultimately enacted into law and is codified at Minn.Stat. § 513.33, subd. 1(4) (Supp.1991).

II.

The issue is whether the Minnesota credit agreement statute bars respondent from asserting breach of the contractual provisions of the Loan Agreement as a defense to the Bank's claim. To answer this question, we must decide whether the Loan Agreement is a "credit agreement" within the meaning of the credit agreement statute, and if so, whether it meets the signing requirements of subdivision 2 of the statute.

The Minnesota credit agreement statute was enacted in 1985 to protect lenders from having to litigate claims of oral promises to renew agricultural loans. Becker v. First American State Bank of Redwood Falls, 420 N.W.2d 239, 241 (Minn.App.1988) (the farm financing problems prompted the enactment of § 513.33); Rural American Bank of Greenwald v. Herickhoff, 473 N.W.2d at 363. The farm crisis of the 1980s produced cash-strapped and financially unsophisticated farmers who claimed reliance upon their bank officers' oral promises to renew their loans. Numerous lawsuits arose over the bankers' alleged oral promises. The credit agreement statute was passed to prevent the litigation of such difficult claims.

The statute defines a "credit...