State Bank of Towner, Inc. v. Rauh, 9651 and 9652

• Decision Date: 24 January 1980
• Docket Number: No. 9651 and 9652,9651 and 9652
• Citation: 288 N.W.2d 299
• Parties: STATE BANK OF TOWNER, INC., Plaintiff and Appellee, v. J. T. RAUH, Defendant, Third-Party Plaintiff and Appellee, v. PIONEER CREDIT COMPANY, INC., Robert E. Larson, Individually Third-Party Defendants and Appellees, and Hayden Thompson, Individually and as agent for Plaintiff State Bank of Towner and Third-Party Defendant Pioneer Credit Company, Third-Party Defendant and Appellant. PIONEER CREDIT COMPANY, INC., Plaintiff and Appellee, v. J. T. RAUH, Defendant, Third-Party Plaintiff and Appellee, v. STATE BANK OF TOWNER, INC., Robert E. Larson, Individually, Third-Party Defendants and Appellees, and Hayden Thompson, Individually and as agent for Plaintiff Pioneer Credit Company, Inc., and Third-Party Defendant State Bank of Towner, Inc., as assignee of Pioneer Credit Company, Inc., Third-Party Defendant and Appellant. Civ.
• Court: North Dakota Supreme Court

Page 299

288 N.W.2d 299

STATE BANK OF TOWNER, INC., Plaintiff and Appellee, v. J. T. RAUH, Defendant, Third-Party Plaintiff and Appellee, v. PIONEER CREDIT COMPANY, INC., Robert E. Larson, Individually

Third-Party Defendants and Appellees,

and

Hayden Thompson, Individually and as agent for Plaintiff

State Bank of Towner and Third-Party Defendant

Pioneer Credit Company, Third-Party

Defendant and Appellant.

PIONEER CREDIT COMPANY, INC., Plaintiff and Appellee, v. J. T. RAUH, Defendant, Third-Party Plaintiff and Appellee, v. STATE BANK OF TOWNER, INC., Robert E. Larson, Individually, Third-Party Defendants and Appellees, and Hayden Thompson, Individually and as agent for Plaintiff

Pioneer Credit Company, Inc., and Third-Party Defendant

State Bank of Towner, Inc., as assignee of Pioneer Credit

Company, Inc., Third-Party Defendant and Appellant.

Civ. No. 9651 and 9652.

Supreme Court of North Dakota.

Jan. 24, 1980.

Rehearing Denied Feb. 14, 1980.

Farhart, Rasmuson, Lian & Maxson, Minot, for third-party defendant and appellant Hayden Thompson; argued by Gary R. Sorenson, Minot.

Pringle & Herigstad, Minot, for plaintiff and appellee State Bank of Towner and third-party defendant and appellee. Pioneer Credit Co; argued by Richard P. Olson, Minot.

Pancratz, Kruger, Wold, Yuill & Johnson, Fargo, for defendant, third-party plaintiff and appellee J. T. Rauh; argued by Robert A. Feder, Fargo.

SAND, Justice.

Hayden Thompson appealed from two separate judgments of the Ward County District Court and the subsequent denials by that court of Thompson's motions to alter or amend the judgments. The two cases were consolidated for trial and again on appeal. We affirm.

Robert E. Larson was a farmer and cattle feeder near Minot, North Dakota. Hayden Thompson was the president and principal stockholder of Pioneer State Bank in Towner, North Dakota, until 5 Aug 1975. He was also engaged in numerous business ventures which involved livestock. Larson and Thompson associated in numerous livestock endeavors and, in 1973, entered into a written agreement whereby the two embarked upon a cattle feeding enterprise which Thompson financed and Larson operated. The profits were to be divided equally between the two partners. This particular operation was contracted to terminate some time in 1974, but at trial Larson acknowledged a 1976 statement that he was not sure the Larson-Thompson partnership had ceased. Larson, however, indicated that the partnership appeared to have ceased by the time of trial in this action, because Thompson was no longer providing Larson with financing.

Between 1973 and 1975, the Larson-Thompson feeding operation had incurred substantial losses, and as a result Larson became indebted to Thompson in the sum of $250,000. Larson was also substantially indebted to Thompson's bank, Pioneer State Bank, and its subsidiary, Pioneer Credit Company. Because of these large debts, Larson's line of credit at the two financial institutions was cut off.

At the urging of Thompson, Larson approached J. T. Rauh, a Minot, North Dakota, medical doctor, several times in early 1975 and attempted to get Rauh involved in Larson's cattle feeding operation, but Rauh resisted each time. Then, on 24 June 1975, a meeting was held at Rauh's home with Rauh, Larson, and Thompson in attendance. Again, the purpose of this meeting was to persuade Rauh to become involved in the Larson cattle feeding operation in order to generate additional capital needed to keep the feedlot operating. Thompson spent several hours explaining his problems in financing Larson due to his position at Pioneer State Bank and how Rauh's assistance was needed. Thompson told Rauh about his ownership of Pioneer State Bank and Pioneer Credit Company, and disclosed that he was worth many millions of dollars. Rauh testified:

"I was led to believe that these two fellows were using my credit in their partnership to raise and feed and sell cattle. They had established a partnership, they sustained some losses, and they needed somebody with a fresh, untarnished, credit to use to obtain the credit, to profit from the market when it was good. That is what they told me, it was not what I was led to believe. That is what they told me. . . ."

Larson and Thompson proposed that Rauh borrow $400,000 from Pioneer State Bank and Pioneer Credit Company to be used to purchase 1,000 head of feeder cattle and feed to "finish" the cattle. Larson was to feed and care for the cattle which would be sold in a transaction monitored by Thompson for a sizable profit. When Rauh requested a written guarantee, the following note was handwritten by Thompson, and signed by Larson and Thompson:

"Agreement

"This agreement is dated this 24th day of June, 1975, between Hayden Thompson, Towner, N. D; Robert Larson, Minot, N. D., and Jay T. Rauh, Minot, N. D. The parties agree to the following:

1. Thompson and Larson guarantee to Rauh a return of 16% Annual net return based on the principal borrowed for the number of days the money is used.

2. Rauh anticipates purchasing approximately 1000 head of 750 # to 950 # feeder cattle to be placed in Larson's feedlot and Larson and Thompson agree to see that these cattle are hedged at a profit with the Mercantile Commodity Exchange or a major packer. H Thompson and Larson further guarantee to Rauh that they will absorb any loss that may be incurred on these cattle

S/ ROBERT E. LARSON

S/ HAYDEN THOMPSON"

Rauh subsequently submitted a loan application for the cattle feeding enterprise and, upon its acceptance by Pioneer State Bank, borrowed $135,000 from Pioneer State Bank and $265,000 from Pioneer Credit Company. Larson purchased the cattle with his personal check and gave Pioneer State Bank a receipt for the price paid. The bank debited Rauh's escrow account and credited Larson's checking account for the amount sufficient to cover the purchase price. Larson then fed, cared for, and sold the cattle without any assistance from Rauh. The proceeds of the sale were deposited at Pioneer State Bank and applied on the Rauh loans. On 27 Dec 1975, Rauh received a check from Larson for $5,808.81. Rauh understood this money to be his guaranteed "profit" from the sale of cattle by Larson throughout the fall and early winter of 1975.

Because the initial Rauh cattle feeding investment was a financial success, Larson was anxious to get Rauh involved in a follow-up venture. Larson told Rauh that the cattle market looked good and that he wanted to get more cattle in the feedlot. Larson suggested the same kind of Rauh credit arrangement with Pioneer State Bank and Pioneer Credit Company. Rauh declined Larson's invitation to invest again, and stated that any income he realized would be treated as "ordinary income" for taxation and would serve him no useful purpose because he already had a sizable annual income from his medical practice.

On 27 Dec 1975, another meeting was held between Rauh, Larson, and Thompson. Thompson had by that time sold his interest in Pioneer State Bank and was no longer the bank's president, but Rauh testified that he was ignorant of these facts until a later date. The meeting lasted approximately two hours, most of which was spent by Thompson explaining to Rauh what was and was not possible to do in the livestock industry with taxes. Thompson advised Rauh that if Rauh invested in a second cattle feeding venture, the income used to purchase feed could be deferred from taxation until the following year if Rauh this time personally wrote checks for cattle feed. Thompson then produced a livestock feeding contract, a checkbook, two notes in the total sum of $400,000, and some articles relating to the tax consequences of feeding operations.

Before Rauh committed himself a second time he wanted assurances that the arrangement between the parties was the same. Rauh, being questioned at trial by his attorney, testified as follows:

"Q Did you ask Bob Larson if this was the same deal?

"A Yes.

"Q And what did he say?

"A He said, 'Yes.'

"Q Did you ask Hayden Thompson if it was the same deal?

"A I asked him directly across the table if it was the same deal and if he was personally guaranteeing this and he told me directly, 'Yes' he was."

Larson testified similarly when questioned by Rauh's attorney:

"Q Now, did Dr. Rauh at this time indicate he would go again if the same things happened the second time as happened the first time? In other words, he wanted to go again on the same terms and same conditions?

"A In essence that was the question Dr. Rauh asked me.

"Q If it would be the same as before?

"A Right.

"Q Yes. And what did you respond?

"A Specifically, Dr. Rauh said to me, 'Will this be the same deal?' and I said, 'Yes.'

"Q Meaning what?

"A As far as I am concerned, I was guaranteeing the repayment of that loan, myself, and that I was also guaranteeing him the profit we had spoke of in the previous deal.

"Q Did Mr. Thompson say, 'No, it is not the same deal'?

"A No, he did not."

The guarantees testified to by Rauh and Larson concerning a second investment were never written, and Thompson denied that either he or Larson was asked "if it was the same deal."

Rauh agreed to participate in the second cattle feeding venture using his credit to obtain loans of $400,000 to purchase 1,000 head of feeder cattle and feed. He executed a note of $135,000 to Pioneer State Bank and a note of $265,000 to Pioneer Credit Company. Rauh also executed a "feeding contract" with Larson on 27 Dec 1975 to give him an advantage in deducting feed costs for tax purposes.

In Jan of 1976 the cattle market appeared to be on the upswing and Rauh and Larson decided to use the entire proceeds of the loans to purchase cattle, with the expectation that Larson had sufficient feed on the lot to feed the cattle until spring. A total of 1,682 head of cattle were bought by Larson, and Rauh paid Larson for them by check.

In May 1976 Larson sold some of the cattle to raise money...