Zions First Nat. Bank v. Rocky Mountain Irr., Inc.

• Decision Date: 12 July 1990
• Docket Number: No. 20985,20985
• Citation: 795 P.2d 658
• Parties: RICO Bus.Disp.Guide 7539 ZIONS FIRST NATIONAL BANK, Plaintiff and Appellee, v. ROCKY MOUNTAIN IRRIGATION, INC., Valley View Enterprises, Inc., Grant S. Cooper, and Ruby Cooper, et al., Defendants and Appellants, v. Vern H. HASLAM, Third-Party Defendant and Appellee.
• Court: Utah Supreme Court

Page 658

795 P.2d 658

RICO Bus.Disp.Guide 7539

ZIONS FIRST NATIONAL BANK, Plaintiff and Appellee, v. ROCKY MOUNTAIN IRRIGATION, INC., Valley View Enterprises, Inc., Grant S. Cooper, and Ruby Cooper, et al., Defendants and Appellants, v. Vern H. HASLAM, Third-Party Defendant and Appellee.

No. 20985.

Supreme Court of Utah.

July 12, 1990.

Earl S. Spafford, Lynn C. Spafford, Julian D. Jensen, Salt Lake City, for Rocky Mountain Irrigation, Inc.

R. Willis Orton, Adam M. Duncan, James R. Holbrook, John A. Beckstead, Wallace R. Bennett, Salt Lake City, for Zions First Nat. Bank.

John Spencer Snow, Salt Lake City, and Herm Olsen, Logan, for receiver.

Joseph Chambers, Logan, for defendant Gifford Hill and Co.

William L. Fillmore, Logan, for defendant Hastings Irrigation.

Bruce M. Hale, Salt Lake City, for defendant State Tax Com'n.

Bruce L. Jorgensen, Logan, for defendants Harold and Gloria Thomson.

Brent Ward, C. William Ryan, William Hansen, Salt Lake City, for defendants U.S. and Small Business Administration.

DURHAM, Justice:

Defendants-appellants Rocky Mountain Irrigation, Inc., Valley View Enterprises, Inc., Grant S. Cooper, and Ruby Cooper (collectively "Rocky Mountain") appeal a partial directed verdict and related findings by the court for plaintiff-appellee Zions First National Bank ("Zions") and third-party defendant and appellee Vern H. Haslam ("Haslam"). Rocky Mountain also appeals the trial court's denial of leave to amend the pleadings to conform to evidence presented at trial and refusal to give certain jury instructions relating to the proffered amended claims. We reverse in part, affirm in part, and remand for retrial of those issues affected by our reversal, as discussed below.

The action underlying this appeal is a consolidation of several lawsuits involving claims by both Rocky Mountain and Zions arising out of their banking relationship. In the mid- and late-1970s, Rocky Mountain was a supplier and manufacturer of sprinkler irrigation equipment and systems. It relied on First National Bank of Logan ("the Bank") for capital loans as its business expanded and for short term credit to cover temporary cash flow shortages caused by delays in collecting receivables. During the course of the business relationship, the Bank merged with Zions, which assumed all assets and liabilities. Haslam was the Bank's president and, after the merger, a senior vice president at Zions. He personally handled Rocky Mountain's accounts.

By early 1979, the Bank and Rocky Mountain both wanted a more convenient credit arrangement so that the Coopers would not have to come into Logan so often--two to three times per week--to sign new notes for advances to Rocky Mountain. On the advice of an outside bank examiner, Haslam suggested that Rocky Mountain open a revolving line of credit with the Bank. This was the first time the Bank had used such an arrangement with one of its customers. On June 4, 1979, the Coopers signed a "master note" in the face amount of $350,000 securing $349,552.03 of existing indebtedness. This note created a revolving line of credit. The line of credit was extended to $435,000 by an additional $85,000 note executed on November 27, 1979.

The notes creating the revolving line of credit bore different fixed rates of interest. Both notes were on preprinted forms with typed insertions for the relevant parties, interest rates, dates of execution, etc. Both notes also contained the following language, typed in a separate paragraph off to one side:

Future advances against this note and the collateral securing it will be made at variable rates of interest depending upon the prime rate at the time.

Rocky Mountain contended at trial that this paragraph was an "alteration" of the notes--that it was added after the notes were executed. Zions contended that the paragraph was on each note at the time it was signed.

From mid-June 1979 through October 1981, when these lawsuits were filed, about three million dollars were advanced and repaid on this revolving credit line. During this time, Rocky Mountain built a new store and expanded its business to include sales of groceries, hardware, and other goods in addition to irrigation equipment. It borrowed money to build and stock its store.

By the summer of 1981, Rocky Mountain's businesses were in trouble. Its remaining credit on the revolving line was sometimes insufficient to cover its day-to-day needs; checks presented by its suppliers were periodically dishonored by Zions. On October 9, 1981, Rocky Mountain filed suit against Zions for breach of contract with regard to the line of credit, wrongful dishonor of checks, and damage to its businesses. On October 13, 1981, Zions filed suit against Rocky Mountain to enforce notes, to take possession of collateral under security agreements, and to foreclose mortgages, all of which had been given by Rocky Mountain to secure various loans including the revolving line of credit. In the complaint, Zions declared Rocky Mountain to be in default and accelerated all of the indebtedness. Zions had a receiver appointed by the district court and took possession of the collateral.

These actions, and two others not the subject of this appeal and involving additional parties, were consolidated by the trial court. Zions was aligned as plaintiff, with Rocky Mountain as defendant and counterclaimant. Rocky Mountain later brought in Haslam as a third-party defendant when it amended its counterclaim to include a claim under the Utah Racketeering Influences and Criminal Enterprises Act (RICE).

Rocky Mountain raises three categories of claims on appeal. It claims that the trial court improperly (1) denied Rocky Mountain's right to a jury trial on the issue of the alleged "material and fraudulent" alteration of the two notes by reserving the issue to itself and then ruling against Rocky Mountain as to its affirmative defense and directing a verdict as to the RICE counterclaim and third-party claim; (2) refused to allow Rocky Mountain to amend its pleadings to incorporate claims of common law fraud, breach of fiduciary duty, and attempted theft by deception allegedly tried by implicit consent of the parties; and (3) refused to give certain jury instructions based on these claims when requested by Rocky Mountain.

I. RIGHT TO JURY TRIAL ON ALTERATION OF NOTES

At a pretrial hearing, the court ruled that the issue of whether the two notes creating the line of credit were fraudulently altered was for the court to determine. ¹ It may have been unclear at the time whether this order included determination of the issue as it related to Rocky Mountain's claims, as opposed to affirmative defenses, which defenses were specifically mentioned in the order. At the close of trial, the court made clear that its findings against Rocky Mountain on the issue would be binding on the jury, but also went on to direct a verdict on that issue.

Apparently, the trial court reasoned that its equitable jurisdiction over Zions' foreclosure action precluded the jury from considering any matters related to the underlying debt. In an ordinary foreclosure, and as to the six notes Zions sued on that were not part of the line of credit, the trial court's approach does not present any problem. Although the existence of a debt is a triable legal issue in contract law, a trial court's equitable jurisdiction over foreclosure extends to the existence of the debt underlying the mortgage being foreclosed. Cf. Dugan v. Jones, 615 P.2d 1239, 1243 (Utah 1980). Before the advent of rules pleading, this equitable jurisdiction over a legal issue would have been incidental or concurrent. ²

The distinction between issues triable at law and those triable in equity serves to delineate the scope of the right to a jury trial under our case law. In International Harvester Credit Corp. v. Pioneer Tractor & Implement, Inc., 626 P.2d 418 (Utah 1981), we held that article I, section 10 of the Utah Constitution guarantees the right to a jury trial in civil cases. In Hyatt v. Hill, 714 P.2d 299 (Utah 1986), we made it clear that this constitutional right to a jury trial in civil cases extends only to cases that would have been cognizable at law at the time the constitution was adopted.

Rocky Mountain was the first of the parties to bring suit. Because of the later realignment of the various actions by the court, Rocky Mountain's claims were transformed into affirmative defenses and counterclaims. This realignment could not have changed, and did not change, the nature of any issue from legal to equitable. Rocky Mountain should have been afforded its right to a jury trial on the issue of whether the two notes creating the line of credit were materially and fraudulently altered. Such a claim raised by a plaintiff at the time our constitution was adopted would have been triable to a jury. See, e.g., Petty v. Clark, 102 Utah 186, 189-91, 129 P.2d 568, 569-70 (1942). The facts that the claim also constituted an affirmative defense to a foreclosure and that foreclosures were tried in equity at the time the constitution was adopted do not change the issue from legal to equitable.

In International Harvester, we noted that our analysis was in harmony with that of the United States Supreme Court on the issue of the right to a jury trial in civil cases when equitable issues are also involved. International Harvester, 626 P.2d at 421 n. 2. In the federal courts, there is no question that when legal and equitable issues turn on the same operative facts, a jury must decide the legal issue first; the jury's factual determination binds the trial court in its determination of the parallel equitable issue. See, e.g., Lytle v. Household Manufacturing, Inc., 494 U.S. 545, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990); Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959), cited with approval in International Harvester; see generally C. Wright & A. Miller, Federal Practice and...