Vreugdenhil v. First Bank of South Dakota, N.A.

• Decision Date: 20 September 1990
• Docket Number: No. 17005,17005
• Citation: 467 N.W.2d 756
• Parties: Edwin VREUGDENHIL and Loretta Vreugdenhil, Plaintiffs/Appellants, v. FIRST BANK OF SOUTH DAKOTA, N.A., and Western Surety Company, Defendants/Appellees. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 756

467 N.W.2d 756

Edwin VREUGDENHIL and Loretta Vreugdenhil, Plaintiffs/Appellants, v. FIRST BANK OF SOUTH DAKOTA, N.A., and Western Surety Company, Defendants/Appellees.

No. 17005.

Supreme Court of South Dakota.

Considered on Briefs Sept. 20, 1990.

Decided March 27, 1991.

J.M. Grossenburg, Winner, and Rick Johnson, Gregory, for plaintiffs/appellants.

Francis M. Smith of Woods, Fuller, Shultz & Smith, P.C., Sioux Falls, for defendants/appellees.

WUEST, Justice.

Edwin and Loretta Vreugdenhil appeal from an order denying their claim for exemplary damages. We reverse and remand.

In 1972, Ed Vreugdenhil (Ed) purchased a one-half interest in Menning Implement Company (Menning) of Corsica, South Dakota. Ed and Sidney Hoekstra (Hoekstra), the owner of the remaining one-half interest, operated the business together until 1979 when Ed purchased Hoekstra's interest in Menning. A portion of the down-payment for this purchase was financed by First Bank of South Dakota, N.A., (First Bank) Corsica, South Dakota. ¹ First Bank financed the operation and improvements of Menning under Ed's management. In December 1979, First Bank requested and received a security interest in Menning's inventory, accounts receivable, supplies, equipment and contract rights and a personal guarantee from Ed and Loretta.

In late 1980, Ed formed Solar Marketing, Inc. (Solar), an insulation manufacturing enterprise. Solar was financed by a loan from First Bank, with a 90% guarantee by the United States Small Business Administration (SBA). As security for the Solar loan, Ed mortgaged his residence, the real estate of Menning and the real estate of Solar. Ed also pledged the personal property and chattels of Menning and any interest he had in the Contract with Hoekstra. In addition to the initial financing, First Bank advanced Ed operating cash for Solar.

As the economy slowed in the early 1980's so did the business of Menning and Solar. First Bank advanced Ed the money needed to meet the periodic installments due under his Contract with Hoekstra and carried Ed when he was unable to service his business debts. By early 1982, it was apparent to First Bank that the Menning and Solar credits would have to be liquidated.

In late April 1982, Ed auctioned off some of the inventory of Menning. The auction raised approximately $130,000. Ed expressed to First Bank his desire to pay off the Contract with Hoekstra using a portion of the auction proceeds. First Bank discouraged Ed from applying the proceeds to the Hoekstra Contract and requested that Ed use the money to write down the loan to Menning. Ed contends he agreed to apply the proceeds to the Menning loan only after First Bank promised to advance him the last installment due Hoekstra, January 1, 1983. First Bank denies having agreed to make such a loan.

In mid-1982, Ed endeavored to sell Menning and Solar or otherwise refinance the loans to pay off First Bank. By the fall of 1982 it was apparent that Ed would not be able to timely sell either business and First Bank prepared for liquidation. To this end, First Bank arranged for the repurchase of the Solar loan by the SBA. On November 29, 1982, First Bank notified Ed that he would have until December 10, 1982 to remedy his default on the Menning loan. Ed was unable to meet this demand.

On January 4, 1983, Ed went to First Bank seeking a loan for the last installment on the Hoekstra Contract. First Bank refused to make the loan. On January 5, 1983, Ed received a letter from Hoekstra noticing his intention to cancel and terminate the Contract unless payment was made within ninety days. Subsequently, First Bank purchased the Contract from Hoekstra for the amount of the last installment and interest.

On January 19, 1983, First Bank set-off against Ed's accounts at the Bank and applied the proceeds toward the Menning debt. As a result of the set-off, checks to state and federal taxing authorities bounced, thus subjecting Ed to criminal liability.

On January 20, 1983, Ed was served at Menning with Claim and Delivery papers, including an Order and Order to Show Cause. ² The sheriff contacted Ed at home that evening and requested Ed to open Menning. Ed refused and indicated that he wanted to speak with his lawyer. Later that evening Ed received word from the sheriff that he was going to break into Menning unless Ed would open it. Ed left home and proceeded to Menning.

Upon arrival at the store, Ed was met by the President of First Bank, two bank employees, the sheriff and a local attorney. The sheriff requested Ed to open the door to the business. Ed again refused and stated that he "did have rights." The attorney who was present acknowledged that Ed did, indeed, have rights. Nonetheless, the President of First Bank requested the sheriff to break open the door to the business, which he did. Once inside Menning, the President of First Bank informed Ed that he would no longer have control of the business and that First Bank had taken possession of Menning. Ed was then escorted out of Menning by the sheriff.

Ed and his wife brought suit against First Bank and Western Surety Company, surety in the Claim and Delivery action. ³ The defendants moved and the trial court entered an order barring introduction of certain evidence at trial. ⁴ Because this order barred introduction of much of the evidence which supported plaintiff's claim for exemplary damages, plaintiffs moved and were granted a hearing pursuant to SDCL 21-1-4.1.

SDCL 21-1-4.1 provides:

In any claim alleging punitive or exemplary damages, before any discovery relating thereto may be commenced and before any such claim may be submitted to the finder of fact, the court shall find, after a hearing and based upon clear and convincing evidence, that there is a reasonable basis to believe that there has been willful, wanton or malicious conduct on the part of the party claimed against.

Ed was the only witness at the hearing in which numerous exhibits were introduced and admitted. Defendants put on no evidence to rebut Ed's testimony.

The trial court found that First Bank was legally entitled to institute the Claim and Delivery action and, although the court's order granting First Bank possession of Menning violated SDCL 21-15-3, ⁵ the mere filing of the Claim and Delivery action did not establish by clear and convincing evidence a reasonable basis to believe the conduct of First Bank was willful, wanton or malicious. The trial court also found the acts or omissions of First Bank during the course of its association with Ed did not constitute clear and convincing evidence of a reasonable basis to believe that the acts or omissions of First Bank were willful, wanton or malicious. Consequently, the court concluded that plaintiffs had failed to demonstrate their claim for exemplary damages should be submitted to the jury. It is from the trial court's order denying plaintiff's claim for exemplary damages that plaintiffs appeal.

Initially, we note that SDCL 21-1-4.1 controls only the discovery and submission to the jury of punitive damages claims and does not, itself, define the causes of action in which exemplary damages may be recovered. South Dakota law prohibits a claim and award of punitive damages unless expressly provided by statute. SDCL 21-1-4. Express statutory authorization for punitive damages is found in SDCL 21-3-2. ⁶

SDCL 21-1-4.1 conditions the submission of punitive damages to the jury on a showing by "clear and convincing evidence, that there is a reasonable basis to believe that there has been willful, wanton or malicious conduct." The burden the proponent bears is demonstrating a "reasonable basis" to believe punitive damages are warranted. This "reasonable basis" must be shown by "clear and convincing evidence." Thus, the proponent's burden is a preliminary, lower-order quantum of proof than must be established at trial. It is a "prima facie case" for punitive damages.

Flockhart v. Wyant, 467 N.W.2d 473, 475 (S.D.1991).

The trial court found the plaintiffs did not establish by clear and convincing evidence that there was a reasonable basis to believe the actions of First Bank constituted willful, wanton or malicious conduct. Where, as here, evidence was submitted through witness testimony, ⁷ the trial court is in a unique position to assess the credibility of the witness. Therefore, barring a clearly erroneous interpretation of such evidence, we will not disturb the trial court's findings. SDCL 15-6-52(a); In Interest of A.D., 416 N.W.2d 264 (S.D.1987); Sperry Corp., Sperry New Holland Div. v. Schaeffer, 394 N.W.2d 727 (S.D.1986).

Although the note was in default and First Bank, therefore, had a right to claim and deliver its collateral, the taking of the collateral was done without a prior hearing, contrary to SDCL 21-15-3. See Baldwin v. First Nat'l Bank, 362 N.W.2d 85 (S.D.1985). Ed was thereby denied his constitutional right of due process. The attorney, present when the sheriff broke down the door to Menning, openly acknowledged that Ed did, indeed, have rights. And, indeed, the legal community has known for years that procedural due process requires a hearing before a person is deprived of any significant property interest. See Fuentes v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556, reh'g denied, 409 U.S. 902, 93 S.Ct. 177, 34 L.Ed.2d 165 (1972). These facts clearly and convincingly establish a reasonable basis to believe the actions of First Bank were at least wanton. The finding of the trial court to the contrary was clearly erroneous. We reverse and remand for trial including the punitive damages claim.

MILLER, C.J., and HENDERSON and SABERS, JJ., concur.

MORGAN, Retired J., concurs in part and dissents in part.

AMUNDSON, J., not having been a member of the court at the time this case was considered, did not participate.

MORGAN, Retired Justice (concurring in part and dissenting in part).

I concur in the result but I must respectfully...