Sargent County Bank v. Wentworth

• Decision Date: 17 May 1993
• Docket Number: No. 920100,920100
• Citation: 500 N.W.2d 862
• Parties: SARGENT COUNTY BANK, Plaintiff and Appellee, v. John WENTWORTH and Beth R. Wentworth, Defendants and Appellants. Civ.
• Court: North Dakota Supreme Court

Page 862

500 N.W.2d 862

SARGENT COUNTY BANK, Plaintiff and Appellee, v. John WENTWORTH and Beth R. Wentworth, Defendants and Appellants.

Civ. No. 920100.

Supreme Court of North Dakota.

May 17, 1993.

W. Todd Haggart (argued), of Vogel, Brantner, Kelly, Knutson, Weir & Bye, Ltd., Fargo, for plaintiff and appellee. Appearance by Harlan Klefstad, President of Sargent County Bank.

Robert J. Snyder (argued) and James J. Coles (appearance), of Wheeler Wolf, Bismarck, for defendants and appellants. Appearances by John and Beth Wentworth.

MESCHKE, Justice.

John and Beth R. Wentworth appeal from a judgment awarding Sargent County Bank a deficiency judgment of nearly $216,000 against them and dismissing their counterclaims against the Bank. We reverse and remand for a new trial before a different trial judge.

Resolution of this case requires a protracted recitation of the background. The Wentworths operated a large farm and ranch in Sargent County. Since 1968, the Wentworths did business with the Bank, and after 1970, dealt primarily with its loan officer and vice president, D. Dean Rockswold. During the 1980s, the Wentworths received numerous loans ¹ from the Bank which were secured by four security agreements. ²

In February 1984, the Bank's statutory lending limit was $225,000 per customer. As of March 6, 1984, the Wentworths owed the Bank a total of $225,000 in chattel loans based on a $200,000 promissory note dated December 5, 1983, and on a $25,000 promissory note dated February 24, 1984. The accrued interest on these two notes totaled $6,910.94. Rockswold learned of a Farmers Home Administration [FmHA] loan guarantee program and suggested a guarantee to the Wentworths. Because the amount guaranteed by FmHA would not count toward the Bank's per customer lending limit, the Bank could continue its financial assistance to the Wentworths. According to the Bank, this was the first time Rockswold had applied for a FmHA guarantee. As part of the application process, the Bank certified that the guarantee was necessary for the continuation of a viable farming or ranching operation. At that time, the Wentworths had an equity cushion of more than $60,000 between their debt and the value of their collateral.

On March 6, 1984, John Wentworth signed a promissory note for $225,000, representing the same debts covered by the December 1983 and February 1984 notes. FmHA soon guaranteed 90 percent of this note. The note designated a variable interest rate and was payable in seven annual installments of $52,476.38 each, with the first installment due on March 6, 1985. As primary security to FmHA for the loan guarantee, the Bank designated 200 of the Wentworths' stock cows and six bulls valued at $120,000, and farm equipment valued at $212,500. According to the Bank, this was the security intended by the Wentworths, the Bank, and FmHA to apply to the March 1984 note.

The December 1983 and February 1984 notes were not stamped "renewed" at that time, the Bank explained, because the Wentworths were unable to pay the $6,910.94 in accrued interest at the time. Also, the Bank claimed that it decided not to enter the March 1984 note into its books because the Wentworths had not paid the interest owed and because the computerized accounting service used by the Bank at the time was unable to accept a variable rate note involving multiple annual installment payments. As a result, the Bank apparently kept track of the interest accrual and payments made on the $225,000 debt based on the December 1983 and February 1984 notes, which the Bank continued on its books.

In early December 1984, the Wentworths sold 177 calves for $43,801.50. These proceeds were turned over to the Bank on December 17, 1984, to be applied toward the March 6, 1985 annual payment due on the FmHA guaranteed note. The Bank, however, decided instead to apply the proceeds to the interest due on the December 1983 and February 1984 notes, without informing either the Wentworths or FmHA, and applied only the balance to the principal owing on the $225,000 debt. On December 17, 1984, John Wentworth signed a single-maturity, 15-month note in the principal amount of $208,177.37, reflecting the amount of the principal payment made on the $225,000 debt. On that date, the Bank finally marked the December 1983 and February 1984 notes "renewed."

The December 17, 1984 note recited "FHA 90% Guaranteed Loan on livestock and equipment" and set forth a variable interest rate, which was listed as 14 percent as of that date, the same rate then in effect under the March 1984 note. According to the Bank, the December 1984 note was placed on the Bank's books and was thereafter used to keep track of interest accrual and payments on the FmHA guaranteed loan. At that time, John Wentworth advised the Bank that he expected to have no additional income before March 6, 1985, to apply toward the installment payment of $52,476.38 due on that date for the March 1984 note. Although the December 1984 note was a single-maturity, 15-month note, the Bank contended that the Wentworths were told that, absent a default, only an installment payment of $52,476.38, as called for by the March 1984 note, would be due on March 6, 1986.

No additional payment was made by the Wentworths on the installment due March 6, 1985, leaving a total shortfall of $8,674.88 due on that installment. The Bank, the Wentworths, and FmHA agreed to defer collection of the balance of the installment, and no foreclosure or collection action was undertaken by the Bank or encouraged by FmHA.

Between the time the Wentworths and the Bank executed a security agreement on March 27, 1985, granting the Bank a security interest in the Wentworths' 1985 crops, and December 16, 1985, the Bank made operating loans to the Wentworths totaling $148,700. By December 16, 1985, the Wentworths had repaid $42,300 on the 1985 operating loans. The unpaid balance of $106,400 was renewed in a new note for that amount. This note was due March 6, 1986. Although the Wentworths previously had some carry-over operating debt from year to year, the operating debt carry-over at the end of 1985 was much larger than it had ever been because of losses caused by hail damage and conditions making harvest impossible.

The Wentworths and the Bank did not establish an operating budget for the 1986 crop year because, the Bank claims, the Wentworths were unable to demonstrate how they would be able to repay their operating debt from 1985 or meet their other financial obligations. The Bank, however, loaned the Wentworths funds for living expenses and for planting and harvesting a crop.

During March 1985 and March 1986, the Wentworths sold cull cows and turned the proceeds over to the Bank. These cull cows were part of the security for the FmHA guarantee, and the Bank applied the proceeds directly to the principal on, or to the "back end" of, the FmHA guaranteed loan. The Bank claimed that this action was in accordance with FmHA practices and procedures for handling the proceeds from the sale of security. These proceeds were not counted toward the annual installment payments called for by the March 1984 note.

By April 20, 1986, the Wentworths' past due operating debt to the Bank was $143,095.03. In addition, the Wentworths owed a past due March 6, 1986 installment payment of $52,476.38 on the FmHA guaranteed loan. During April 1986, the Wentworths sold their 1985 calf crop for $52,128.48. They also received $7,596.91 for the sale of some grain. John Wentworth turned these proceeds over to the Bank on April 21, 1986, and requested that the $52,128.48 in calf sale proceeds be applied by the Bank to the delinquent installment payment due on the FmHA guaranteed loan.

Instead, Rockswold told Wentworth that the Bank would apply the calf proceeds entirely to the past due operating debt. According to the Bank, because the operating loans had enabled the Wentworths to produce the calf crop, and because the calves were considered "normal income security" under FmHA policy and procedures, the FmHA did not object to the Bank applying the calf sale proceeds to payment of the loans for operating expenses, ahead of the scheduled payment on the guaranteed loan. The Wentworths did not make the March 6, 1986 installment payment on the FmHA guaranteed loan, and they made no other payments on that debt.

In May 1986, the Wentworths and the Bank began working with a farm counselor who prepared a proposal for restructuring all of the Wentworths' debts. In August 1986, FmHA rejected the proposal for restructuring, claiming that the anticipated crop yields were unrealistic and that the plan did not show a reasonable likelihood that the Wentworths' debts to the Bank could ever be repaid. FmHA apparently believed that the Wentworths would have a substantial negative cash flow for the year, and that the equity in the farm's current and intermediate assets had deteriorated steadily from 1982 through 1986, leaving virtually no equity in the assets that secured the debt.

After FmHA rejected the restructuring proposal, the Bank made three additional loans to the Wentworths, totaling over $19,000, and released $6,324.59 in government payments to them, principally for living and harvesting expenses. The Wentworths met with Bank officers on November 6, 1986.

The Bank contends that, at this meeting, the Wentworths agreed to sell their cow herd in December 1986 because the cattle were not profitable. The Wentworths did not turn over the sale proceeds of $55,367.72 to the Bank. ³ The Wentworths did not make the March 6, 1987 installment payment of $52,476.38 due on the FmHA guaranteed note.

In May 1987, FmHA approved the Bank's plan for liquidation of the Wentworths' collateral. According to the Bank, FmHA considered the Bank "laggard" in taking action. The Bank then sued the Wentworths to foreclose its security interest in the farm equipment, livestock, crops, and proceeds securing a series of 15...