US Bank Nat. Ass'n v. Scott

• Decision Date: 23 December 2003
• Docket Number: No. 22498.,22498.
• Citation: 2003 SD 149,673 N.W.2d 646
• Parties: U.S. BANK NATIONAL ASSOCIATION, f/k/a First Bank of South Dakota, N.A., successor in interest by merger to Western Bank, Plaintiff and Appellee, v. Michael L. SCOTT and Linda L. Scott, Defendants and Appellants.
• Court: South Dakota Supreme Court

673 N.W.2d 646

2003 SD 149

U.S. BANK NATIONAL ASSOCIATION, f/k/a First Bank of South Dakota, N.A., successor in interest by merger to Western Bank, Plaintiff and Appellee, v. Michael L. SCOTT and Linda L. Scott, Defendants and Appellants.

No. 22498.

Supreme Court of South Dakota.

Argued March 24, 2003.

Decided December 23, 2003.

James E. Moore and Daniel J. Harmelink of Woods, Fuller, Shultz & Smith, Sioux Falls, South Dakota, Attorneys for plaintiff and appellee.

Gale Fisher, Sioux Falls, South Dakota, Attorney for defendants and appellants.

ENG, Circuit Judge.

[¶ 1.] U.S. Bank National Association (Bank) alleged that on August 21, 1985, Bank's predecessor in interest, Western Bank, loaned Michael L. Scott and Linda L. Scott (Scotts) $200,000 as represented by a promissory note (note) in that principal amount. The note was subsequently modified through three allonges. Bank contends that when the note matured Scotts owed $109,948.79, plus interest. As an affirmative defense Scotts asserted that the note was paid in full. Neither the Bank nor Scotts had complete records of payments made. As a result, a determining factor below was which party bore the burden of establishing the balance due on the note. Bank moved for summary judgment and the trial court granted summary judgment after determining Scotts had not met their burden of establishing that genuine issues of material fact concerning payment remain for trial. Scotts appeal from the judgment.

FACTS AND PROCEDURE

[¶ 2.] On August 21, 1985, Bank issued a commercial loan to Scotts in the principal amount of $200,000 to finance Scotts' opening and operation of a Mexican style restaurant in Sioux Falls, El Pollo Asado. As consideration for the loan Scotts delivered a promissory note to Bank in the principal amount of $200,000. The terms of the note required monthly payments of $2,950 beginning on November 21, 1985.

[¶ 3.] Two months later Scotts requested an additional $20,000 loan to cover cost overruns for improvements made to the restaurant facility. Bank extended the additional amount and the parties executed an allonge for attachment to the note dated October 31, 1985. The allonge increased the principal amount of the note to $220,000 with monthly payments of $3,240 and the payments were to commence on November 21, 1985. The Small Business Administration (SBA) also agreed to guaranty ninety percent of Scotts' loan.

[¶ 4.] From the outset Scotts struggled to operate El Pollo Asado at a profit. In the first year of operation Scotts missed two loan payments—June and July 1986. To remedy a default under the terms of the note caused by these missed payments Scotts and Bank entered into an extension agreement on August 11, 1986.¹ That extension agreement deferred the payments due in June and July 1986 and re-set the maturity date of the note to August 21, 1995.²

[¶ 5.] In either May or early June 1987, Scotts liquidated several pieces of excess restaurant equipment for a sum of $38,800 and applied the proceeds to the outstanding principal and interest due on the note. The only documentation of this $38,800 payment by Bank or Scotts is a letter from Bank to SBA dated June 18, 1987, which states the $38,800 payment brought the loan "current to date for principal and interest." Thereafter, Scotts missed two additional payments in June and July 1987. Bank and Scotts entered into a second allonge for attachment to note on July 20, 1987, which deferred payment on the June and July 1987 installments and lowered the interest rate on the note.

[¶ 6.] Scotts ultimately closed the restaurant in June 1988. Shortly thereafter, Scotts submitted an offer in compromise to Bank and SBA in which they proposed new repayment terms on the note. The offer acknowledged that the remaining principle balance was $185,000 as of September 16, 1988, and proposed a lump-sum payment of $125,000 in full satisfaction of this balance. Bank and SBA declined the offer.

[¶ 7.] In October 1988, Scotts again approached Bank concerning repayment of the note and requested Bank lower the interest rate. Bank agreed and the parties entered into a third allonge for attachment to note. The third allonge decreased the interest rate and lowered the monthly payment to $2,270 effective on October 15, 1988.

[¶ 8.] The note ultimately matured on August 21, 1995, with an unpaid balance of $109,948.79 according to Bank's records. Bank notified Scotts of this outstanding balance. On September 12, 1995, Scotts met with Bank to discuss ways in which they could repay the outstanding debt. Subsequently, Mike Scott wrote a letter to Bank stating:

After my meeting with you on Tuesday September 12, 1995, I went to my local bank in Yankton and discussed with them borrowing the money to pay off your bank. They were not interested in making a loan on a business that was not in operation.

I have no way of coming up with $110,000 to pay off the loan. Equipment that is 10 years old will in no way cover this loan.

[¶ 9.] The letter also requested that Bank extend the maturity date of the note until 2005 in order to enable Scotts to pay the remaining $110,000 due.

[¶ 10.] It appearing to Bank Scotts might be unable to make repayment in full, on November 30, 1995, Bank asked SBA to pay off the guaranteed portion. However, SBA indicated a reluctance to do so because Bank's records of payments on the note were incomplete. In December 1997, SBA terminated its guaranty on the note due to the failure of Bank and Scotts to come to an agreement regarding the outstanding balance.

[¶ 11.] On November 16, 1998, Bank commenced the present action to collect on the note by service of a summons and complaint. In their answer, Scotts did not deny the validity or the authenticity of the signatures on the note but, instead, contended that the note was paid in full.

[¶ 12.] Because of this asserted defense Bank requested a number of documents from Scotts concerning payment on the note. By October 2000 Scotts failed to produce the requested documents and Bank filed a motion to compel. Apparently, Scotts still failed to produce many of these documents. As a result, on January 25, 2001, the trial court entered an order prohibiting Scotts from introducing at trial any documents responsive to any of Bank's requests for production of documents which were not produced on or before November 30, 2000.

[¶ 13.] In April 2002, Bank moved for summary judgment. Scotts responded with the affidavit of Michael Scott. In his affidavit, Scott claimed the note had been paid in full and offered the amortization schedule prepared by Kyle Repp, the Scotts' accountant, in support of this contention. Scotts then asked Repp to formulate an amortization schedule showing the note had been paid in full. This amortization schedule was based on assorted tax returns, but was not supported by any bank statements or cancelled checks showing payments that had been made. The circuit court determined Scotts had the burden of demonstrating payment on the note as a matter of law and Scotts failed to present admissible evidence of payment beyond those payments already acknowledged by Bank. Therefore, the circuit court granted summary judgment to Bank. Scotts appeal.³

STANDARD OF REVIEW

[¶ 14.] The standard under which we review summary judgment is well established:

Summary judgment shall be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. We will affirm only when there are no genuine issues of material fact and the legal questions have been correctly decided. All reasonable inferences drawn from the facts must be viewed in favor of the nonmoving party. The burden is on the moving party to clearly show an absence of any genuine issue of material fact and an entitlement to judgment as a matter of law. On the other hand, the party opposing a motion for summary judgment must be diligent in resisting the motion, and mere general allegations and denials which do not set forth specific facts will not prevent issuance of a judgment.

Greene v. Morgan, Theeler, Cogley & Petersen, 1998 SD 16, ¶ 6, 575 N.W.2d 457, 459.

[¶ 15.] This Court reviews the evidentiary rulings of the trial court under an abuse of discretion standard. "Evidentiary rulings made by a trial court are presumed to be correct and are reversed only if there is an abuse of discretion." In re Dokken, 2000 SD 9, ¶ 39, 604 N.W.2d 487, 498.

ANALYSIS

ISSUE ONE

[¶ 16.] Whether Article 3 of the Uniform Commercial Code and the burden shifting framework of SDCL 57A-3-308 govern this case.

[¶ 17.] Since the note is a negotiable instrument, Bank's action to collect is governed by SDCL 57A-3-308. That statute provides in relevant part:

a) In an action with respect to an instrument, the authenticity of, and authority to make, each signature on the instrument is admitted unless specifically denied in the pleadings....

b) If the validity of signatures is admitted or proved and there is compliance with subsection (a), a plaintiff producing the instrument is entitled to payment if the plaintiff proves entitlement to enforce the instrument under § 57A-3-301,⁴ unless the defendant proves a defense or claim in recoupment....

[¶ 18.] The burden shifting framework subsequently adopted by the legislature in SDCL 57A-3-308 was addressed by this Court in Frank Stinson Chevrolet, Inc. v. Connelly, 356 N.W.2d 480, 482-83 (S.D.1984). Therein, the Court stated:

Proof of the instrument of indebtedness in the hands of the party seeking payment creates a presumption of indebtedness and places the burden of proving payment on the party seeking to rely on payment.

Id. (citing Bensinger v. West, 255 S.W.2d 29 (Ky.Ct.App. 1953); Guerin v. Cassidy, 38 N.J.Super. 454, 119 A.2d 780 (1955); Mann v. Whitely, 36 N.M. 1, 6 P.2d 468...