U.S. v. Vahlco Corp.

• Decision Date: 09 December 1983
• Docket Number: No. 82-1511,82-1511
• Citation: U.S. v. Vahlco Corp., 720 F.2d 885 (5th Cir. 1983)
• Parties: 37 UCC Rep.Serv. 1210 UNITED STATES of America, Plaintiff-Appellee, v. VAHLCO CORPORATION, et al., A Texas Corporation, Defendants, Magnum Machine and Tool Corporation, a Texas Corporation, and Vahlco Corporation, a Texas Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 885

720 F.2d 885

37 UCC Rep.Serv. 1210

UNITED STATES of America, Plaintiff-Appellee, v.VAHLCO CORPORATION, et al., A Texas Corporation, DefendantsMagnum Machine and Tool Corporation, a Texas Corporation and Vahlco Corporation, a Texas CorporationDefendants-Appellants.

No. 82-1511.

United States Court of Appeals Fifth Circuit.

Dec. 9, 1983.

Van Kleef & Robbins, William R. Wepfer, Harlingen, Tex., for Vahlco Corp., etc.

Nicholas V. Hile, Brownsville, Tex., for Magnum, et al.

J. Christopher Kohn, James J. Brown, Deputy Chief, Enforcement Unit, Civ. Div., Linwood C. Wright, Jr., Dept. of Justice, Washington, D.C., for plaintiff-appellee.

Appeals from the United States District Court for the Western District of Texas.

Before GEE, GOLDBERG and TATE, Circuit Judges.

GEE, Circuit Judge:

In 1973, appellantVahlco Corp.(Vahlco) opened a line of credit with the First National Bank of Seguin (the Bank) in the amount of $350,000.This loan was 90% guaranteed by the Small Business Administration (SBA) pursuant to the Small Business Act, 15 U.S.C. Sec. 631 et seq.As is customary in such transactions, the extension of the major line of credit was preceded by a small "start-up" loan (here, $10,000) secured by assets of much greater value (here, Vahlco's business premises) which were made security for the major loan by a future advances clause in the security instrument.Here, the deed of trust executed with the $10,000 loan contained a dragnet clause effectively rendering the property security for the line of credit to be opened.When Vahlco defaulted on both notes, the Bank assigned its interest to the SBA, which is now attempting to collect the security pledged.

On this appeal, Vahlco and its successor in interest Magnum Machine and Tool Corporation(Magnum) attempt to prevent the SBA from foreclosing on the property.We find none of the reasons they advance persuasive and affirm the district court's directed verdict for the SBA.

I.The Transaction(s) at Issue

In August 1973, appellantVahlco Corporation borrowed $10,000 from the Bank.To secure the loan, Vahlco executed a deed of trust in favor of the Bank.The deed covered land in Guadalupe County, Texas, on which Vahlco's business premises were located.The deed also contained a future advances clause stating that this property would secure future advances to Vahlco from the Bank.¹

In December 1973, Vahlco executed a second note for a $350,000 line of credit with the Bank to finance a construction project.The SBA guaranteed 90% of this loan; further security was provided by the assignment to the Bank of contract proceeds on jobs performed by Vahlco and Vahlco's accounts receivable.²

During 1974 and most of 1975, Vahlco was engaged in a substantial construction project in Houston, Texas.The Bank routinely applied Vahlco's contract proceeds to its debt, extending additional credit to Vahlco up to the $350,000 line of credit.Thus, for almost two years, ³ Vahlco and the Bank engaged in a rolling loan transaction secured by the $350,000 note and approved by the SBA.

In November of 1974, Vahlco sold to Magnum the property secured by the deed of trust and future advance clause of Vahlco's $10,000 note to the Bank.Magnum purchased the property subject to the existing indebtedness.John Osborn, acting as an officer of both Vahlco and Magnum, completed the transaction.

By early 1976, Vahlco's Houston construction project had become mired in litigation due to structural failures.Unable to meet its obligation to the Bank on the $10,000 note and on the $350,000 line of credit, Vahlco defaulted on both.In an attempt to clear the lien created by the deed of trust on the property now owned by Magnum, Magnum tendered to the Bank the outstanding balance on the $10,000 note ($5,368.33), demanding that the Bank withdraw a posting on the Guadalupe property used as collateral by Vahlco for the $10,000 note.The Bank accepted the payment, applying it to the interest due and owing on the two notes of Vahlco then in default, but neither retired the $10,000 note nor released the deed of trust.

On that same date, the SBA purchased from the Bank the defaulted $350,000 note pursuant to the guaranty agreement between the SBA and the Bank, and the Bank assigned the $350,000 note to the SBA.Approximately six weeks later the Bank assigned to SBA the Bank's interest in the $10,000 note and the deed of trust executed by Vahlco.The SBA subsequently sued Vahlco and several guarantors ⁴ for the balance of both notes and sought a foreclosure sale of the real estate.

A jury trial in the case began in March 1982.At the close of the SBA's evidence, the trial judge granted its motion for a directed verdict.The court found Texas law applicable to the contract issues ⁵ and concluded as a matter of Texas law that neither Vahlco nor Magnum could establish any contractual defense.Accordingly, the court entered judgment against them and ordered a foreclosure sale of Magnum's real estate.

II.The Timing of the Directed Verdict

Vahlco and Magnum contend as an initial matter that the district court erred by granting the SBA's motion for a directed verdict pursuant to Fed.R.Civ.Proc. 50(a) at the close of the SBA's case, following on its pre-trial determination that Vahlco's and Magnum's defenses were inadequate as a matter of law.

The standard for reviewing directed verdicts is the same on appeal as in the trial court.A directed verdict should be granted only where, when the facts and inferences are viewed in the light most favorable to the opposing party,

"the facts and inferences point so strongly and overwhelmingly in favor of one party that the Court believes that reasonable men could not arrive at a contrary verdict, ..."

Boeing Co. v. Shipman, 411 F.2d 365, 374(5th Cir.1969)(en banc);accordMaxey v. Freightliner Corp., 665 F.2d 1367, 1371(5th Cir.1982)(en banc).We do not quarrel with the district court's determination; indeed, as we explain more fully below, we too conclude that the jury could not reasonably have found in favor of Vahlco or Magnum.We do not, however, much approve of the irregular procedure that the trial court followed in granting a directed verdict before the nonmoving party had a chance to put in evidence.

Rule 50(a) speaks of a motion for directed verdict"at the close of the evidence offered by an opponent."This Rule "expresses the general law that after a party has rested, the case may be decided against it on the basis of the evidence the party itself introduced."Gonzalez v. LaConcorde Compagnie D'Assurances, 601 F.2d 606, 608(1st Cir.1979).However, it is within the power of the trial court to direct a verdict at any point in the trial where it is apparent that there is a complete absence of any question to send to the jury.Best v. District of Columbia, 291 U.S. 411, 415, 54 S.Ct. 487, 489, 78 L.Ed. 882(1933)("There is no question as to the power of the trial court to direct a verdict for the defendant upon the opening statement of plaintiff's counsel where that statement establishes that the plaintiff has no right to recover.")Federal courts have exercised this power to grant directed verdicts for the defendant at the close of plaintiff's opening statement, seeBest, 291 U.S. 411, 54 S.Ct. 487, 78 L.Ed. 882;Oliver v. Southern Railway Co., 475 F.2d 895(D.C.Cir.1972);Morgan v. Koch, 419 F.2d 993(7th Cir.1969); and, on rare occasions, to grant directed verdicts for the plaintiff at the close of defendant's opening statement, seeGundersheimer's, Inc. v. Bakery, etc., Union, 119 F.2d 205(D.C.Cir.1941);Houk Mfs. Co. v. Cowen Co., 467 Fed. 787(2d Cir.1920), cert. denied, 254 U.S. 637, 41 S.Ct. 9, 65 L.Ed. 450(1920);Franklin v. Matoa Gold Min. Co., 158 Fed. 941(8th Cir.1907).See alsoGonzalez, 601 F.2d at 609 n. 4("A directed verdict might be proper at the close of plaintiff's case if defendant rests without putting in evidence or if defendant's tendered evidence is rejected as legally inadmissible or the like....").The existence and scope of this power comports with the purpose of the directed verdict "to save [the] time and trouble involved in lengthy jury determination."Rutherford v. Central Illinois R.R., 278 F.2d 310, 312(5th Cir.), cert. denied, 364 U.S. 922, 81 S.Ct. 288, 5 L.Ed.2d 261(1960).

This power must nonetheless be exercised with great restraint in order to avoid the possibility that a party will be precluded from presenting facts which make out a question for the jury.Where there is any doubt at all as to the propriety of a directed verdict, district courts should not jump the gun but should wait until both sides have presented their evidence before ruling on motions for directed verdict.See generally C. Wright and A. Miller, Federal Practice and Procedure: CivilSec. 2533(1971)(better practice to defer ruling on motion for directed verdict until both sides have rested).

In the instant case, however, the district court's action does not constitute reversible error.On appeal, Vahlco and Magnum assert only that the granting of the directed verdict prevented them from tendering evidence on their asserted contractual defenses.Therefore, if the district court was correct in its pre-trial determination that these defenses were defective as a matter of law, Vahlco and Magnum were not prejudiced by the grant of the directed verdict before they could present evidence.⁶Whether the district court's grant of the directed verdict constituted reversible error thus turns on whether each of appellants' defenses is deficient as a matter of law.Since, for reasons stated below, we conclude that each defense is so deficient, we do not find reversible error in the timing of the directed verdict.

III.Vahlco's Defenses

Vahlco's sole defense is that the SBA unjustifiably impaired loan collateral, and that to the extent that the SBA did so, Vahlco is discharged from its obligations under the note by ...