IN THE SUPREME COURT
FOR THE STATE OF NORTH DAKOTA
|American Bank Center,|
|Supreme Court No. 20100027|
|David L. Wiest,||Cass County District|
|Court No. 07-C-01721|
|Defendant/Third Party Plaintiff,|
|Howard Palmer and Louis|
APPEAL FROM THE JUDGMENT ENTERED NOVEMBER 16, 2009,
PURSUANT TO FINDINGS OF FACT, CONCLUSIONS OF LAW, AND
ORDER FOR JUDGMENT DATED SEPTEMBER 17, 2009
IN THE CASS COUNTY DISTRICT COURT
EAST CENTRAL JUDICIAL DISTRICT
THE HONORABLE FRANK L. RACEK, PRESIDING
BRIEF OF APPELLANT
|Richard P. Olson (ID #03183)|
|OLSON & BURNS P.C.|
|17 First Avenue SE|
|P.O. Box 1180|
|Minot, ND 58702-1180|
|ATTORNEYS FOR APPELLANT|
|AMERICAN BANK CENTER|
|TABLE OF CONTENTS|
|Table of Authorities||1|
|I.||Statement of the Issues Presented for Review||2|
|II.||Statement of the Case||3|
|III.||Statement of Facts||5|
|IV.||Law and Argument||10|
|A. Standard of Review||11|
|B. The trial court erred in finding that loan officer Palmer|
|had a fiduciary relationship with Wiest||15|
|1. Wiest Placed His Trust and Confidence in Lou||17|
|C. The Court erred in granting recission of Loan No. 2010171||31|
|1. Wiest Benefitted from Loan No. 2010171||33|
|2. Wiest Received Consideration for Loan No.2010171||42|
|a. Lack of truck collateral||48|
|3. Wiest Had Unclean Hands||57|
|D. The Trial Court erred in imputing Palmer's fraud to the Bank||62|
|Certificate of Service||66|
|Certificate of Compliance||67|
|TABLE OF AUTHORITIES|
|Aetna Indemnity Co. v. Schroeder, 95 N.W. 436 (N.D. 1903)||64|
|Argabright v. Rodgers, 2003 ND 59, ¶6,659 N.W.2d 369||30|
|Beavers v. Walters, 537 N.W.2d 647, 650-51 (N.D. 1995)||61|
|Buxcel v. First Fidelity Bank, 1999 S.D. 126, 601 N.W.2d||25|
|CAP Partners v. Cameron, 1999 ND 178, ¶ 11, 599 N.W.2d 309||14|
|Cross v. Farmers' Elevator Co., 153 N.W. 279 (N.D. 1915)||61|
|Dewey v. Lutz, 462 N.W.2d 435, 443-444 (N.D.1990)||63|
|In re Estate of Elken, 2007 ND 107, ¶ 4,735 N.W.2d 842||12|
|Farmers & Merchants Nat. Bank of Hatton v. Lee,||43|
|333 N.W.2d 792, 794 (N.D. 1983)|
|First Nat'l Bank & Trust Co. v. Brakken, 468 N.W.2d 633, 637||12, 23|
|First State Bank of Buxton v. Thykeson, 361 N.W.2d 613, 617||46|
|Heinsohn v. William Clairmont, Inc., 364 N.W.2d 511 (N.D. 1985)||58|
|Krank v. A.O. Smith Harvestore Prods., Inc., 456 N.W.2d 125,128||30|
|May v. First Nat'l. Bank of Grand Forks, 427 N.W.2d 285, 290 (1988)||25|
|Midwest Federal Sav. and Loan Ass'n of Minot v. Miller,||47|
|349 N.W.2d 19, 21 (N.D. 1984)|
|National Bank of Harvey v. Pauly, 280 N.W.2d 85, 92 (N.D. 1979)||56|
|Nicoll v. Community State Bank, 529 N.E.2d 386,389||23|
|(Ind. Ct. App.1988)|
|Matter of Estate of Rohrich, 496 N.W.2d 566, 573 (N.D.1993)||13|
|Towne v. Dinius,1997 N.D. 125, ¶11, 565 N.W.2d 762||64|
I. STATEMENT OF THE ISSUES PRESENTED FOR REVIEW
A. Whether the trial court erred in finding that loan officer Palmer had a fiduciary relationship with Wiest.
B. Whether the trial court erred in permitting recission of Loan No. 2010171.
C. Whether the Trial court erred in imputing Palmer's fraud to the Bank.
II. STATEMENT OF THE CASE
¶4 David L. Wiest ("Wiest") defaulted on two loans from American Bank Center ("Bank"), and Bank brought suit requesting judgment against Wiest for principal, interest, and late charges on the notes. (App. pp. 11, 12) Wiest filed an Answer, and Amended Answer on November 26, 2007 (App. pp. 19, 22), and a Third-Party Complaint on December 17, 2007, against Bank loan officer Howard Palmer ("Palmer") and Wiest's erstwhile friend, Louis Burckhardsmeier ("Lou").(App. p. 24) Trial was held before Judge Frank L. Racek on July 14-17, 2009; Post-Trial Briefs were submitted and Findings of Fact, Conclusions of Law, and Order for Judgment were issued on September 17, 2009. (App. p. 65) Judgment was entered on November 16, 2009, granting Bank judgment against Wiest for $76,678.65, only a portion of the balance of Loan No. 2010429. The court also found that Bank cannot collect any part of the balance of the $250,000 loan (Loan No. 2010171). This appeal timely followed. (App. pp. 91, 93)
III. STATEMENT OF FACTS
¶6 On October 27, 2005, Wiest entered into Loan No. 2010171 for $250,000.00. (App. p. 57) He entered into Loan No. 2010403 for $50,000 on January 20, 2006 (App. p. 44), which was renewed into Loan No. 2010429 for $200,000 (App. p. 59) on January 26, 2006. He also gave a Security Agreement dated January 24, 2006. (App. p. 34) Wiest defaulted, and the amount due is as follows:
¶7 Loan No. 2010171:
Unpaid Principal: $184,149.16
Interest through January 25, 2010: $ 55,711.44
Late Charges: $135.00
plus interest thereafter at the rate of $26.86 per diem.
Loan No. 2010429:
Unpaid Principal: $198,939.20
Interest through January 25, 2010: $ 59,401.97
Late Charges: $135.00
plus interest thereafter at the rate of $29.016 per diem.
¶8 Wiest claimed that he should not have to repay Loan No. 2010171 because Palmer and Lou fraudulently induced him to enter into this note by leading him to believe that the purpose of the loan was for Glass Blast Media, Inc. ("GBM"), of which he was a shareholder, to purchase a number of semi trucks and trailers, and that the loan was to be only for a few weeks duration while they were waiting for SBA funding to be put into place; however, the actual note provided for a three-year maturity date. (App. p. 57) A loan advance request dated November 1, 2005, called for Bank to advance $249,900 from Loan No. 2010171, and issue a cashier's check into GBM's account. (App. p. 61)
¶9 Wiest also claimed that he should not have to repay Loan No. 2010429 because he would never have entered into it had he known the trucks and trailers had not been purchased with Loan No. 2010171. However, he testified he was not lied to with regard to what the Loan No. 2010429 proceeds were to be used for and that he himself either directed or was aware where the money went. (Tr. p. 113, lines 21-25; pp. 114-117) Wiest admitted he took out Loan No. 2010429 because GBM had "pressing bills" at that time. (Tr. p. 40) The evidence does not support his claims that he would not have made Loan No. 2010429 had he known that he was "misled" into making Loan No. 2010171. Three months had passed since he entered into Loan No. 2010171 and still the allegedly promised SBA financing was not in place; moreover, financial statements given in early January 2006 showed no trucks had been purchased. (App. p. 64) Wiest either turned a blind eye to the facts and relied upon Lou, or his claim about being deceived about Loan No. 2010171 was false. Wiest wanted Loan No. 2010171, and Palmer worked to get it for him, going so far as deceiving the Bank about the trucking business because otherwise the Bank would have considered Loan No. 2010171 an "undesirable" loan. What he gained from both loans was payment of GBM bills. Wiest specifically benefitted from Loan No. 2010171 and Loan No. 2010429, generally benefitted from the dealings of Lou and Palmer, and utterly relied on Lou's business decisions.
IV. LAW AND ARGUMENT
¶11 A. STANDARD OF REVIEW.
¶12 1. Issue: Whether the trial court erred in finding that loan officer Palmer had a fiduciary relationship with Wiest. Standard: "Whether a fiduciary relationship exists is generally a question of fact, dependent upon a showing of special circumstances." First Nat'l Bank & Trust Co. v. Brakken, 468 N.W.2d 633, 637 (N.D.1991). In actions tried without a jury, a district court's findings of fact are governed by the clearly erroneous standard of review under N.D.R.Civ.P. 52(a). In re Estate of Elken, 2007 ND 107, ¶ 4,735 N.W.2d 842.
¶13 2. Issue: Whether the court erred in permitting recission of Loan No. 2010171. Standard: Recission is an equitable consideration, and"[w]hen a trial court exercises its discretion after weighing the equities of a case, we will not interfere on appeal absent a showing of an abuse of discretion." Matter of Estate of Rohrich, 496 N.W.2d 566, 573 (N.D.1993).
¶14 3. Issue: Whether the court erred in imputing Palmer's fraud to the Bank. Standard: The existence of fraud is treated as a question of fact, which is clearly erroneous if it has no support in the evidence, if, although there may be some evidence to support it, a reviewing court is left with a firm conviction a mistake has been made, or if it is induced by an erroneous conception of the law. CAP Partners v. Cameron, 1999 ND 178, ¶ 11, 599 N.W.2d 309.
¶15 B. THE TRIAL COURT ERRED IN FINDING THAT LOAN OFFICER PALMER HAD A FIDUCIARY RELATIONSHIP WITH WIEST.
¶16 The trial court found that Bank can collect only a portion of the outstanding balance on Loan No.2010429, and began its analysis of why the whole amount was not collectable by finding that Howard Palmer owed a fiduciary duty to Wiest. (App. p. 82) The finding of a fiduciary duty was clearly erroneous, as review of the entire record will show. The evidence simply did not demonstrate the special circumstances necessary for a fiduciary relationship giving rise to a "fiduciary duty."
¶17 1. Wiest Placed His Trust and Confidence in Lou.
¶18 Wiest had a long history of friendship and financial deals with Lou, who acted as the go-between for Wiest and Palmer and who introduced Wiest to Palmer. Wiest had such regard for Lou's business savvy that his son served as an intern in Lou's office. Lou was the man who made the GBM business decisions and who had made Wiest a lot of money in the past; Wiest wanted him to make more in the glass recycling business. Wiest testified that in 2004 Lou put together a transaction with a Mike Greenberg in Florida wherein Wiest lent Greenberg $280,000 at 40% interest (App. pp. 27, 45), which netted Wiest $75,000 in interest.(Tr. pp. 18-21) The loan was collateralized with motor vehicles, and Lou arranged for Ken Martin, a stranger to Wiest, to hold the titles in escrow. (Tr. p. 19) Lou set up another deal between Wiest and Greenberg, wherein Wiest lent $150,000 in February 2005; in May 2005 he was repaid $160,000 -- $10,000 in interest -- for four months use of his money. (Tr. pp. 21-22) This loan was also secured by motor vehicles, and this time the titles were held by Lou. (Tr. p. 23, lines 1-8) Lou also set up deals for Wiest through Mattson Innovations, and Wiest personally lent money to Burckhardsmeier Financial Solutions ("BFS"), Lou's company. (Tr. p. 24-25) The first deal with GBM between Wiest and Lou was when Lou brokered the sale of a glass burner from Wiest and his fellow shareholders to GBM. (Tr. p. 27, lines 10-25; p. 28) Fellow GBM investor Craig Johnson testified that the basis in the purchase of the burner was less than $10,000 (split between the four partner/investors) and they sold it to GBM at a 2,000% markup:
¶19 A. Those -- there were 2 proposals: One was for $225,000.00. I don't think that one was accepted. I think that one was for $180,000.00. And we're supposed to get 50,000 each. And we're gettin' 5 percent interest each in Glass Blast Media. And I think that's the one that was agreed to. So --
Q. So that was the one agreed to. That's in excess of a 2,000 percent markup on this burner? And so I assume that that was -that was part of what made the 4 of you interested in going forward with this company because now you had a vested interest in-in getting paid for the burner and you had-you were now a shareholder by virtue of selling this burner to GBM?
A. Exactly. Yeah. Right. Correct.
(Tr. p. 246, lines 9-22) Clearly, until Wiest realized in May 2006 that GBM wasn't making the money Lou had projected, Lou had the Midas touch for Wiest and he was willing to enter into whatever deal Lou told him to. Wiest also admitted that at the time of entering into Loan No. 2010171 he was aware GBM had defaulted on loans and he knew Lou was making the company decisions:
¶20 A. I knew he was the one that was functioning as a chief officer, yes.
Q. And you knew that he was the one that handled the burner transaction?
A. Yes, he did.
Q. And the -- the -- were you aware that he was the one that contracted with Mr. Johnson to build the building on behalf of Glass Blast Media?
A. I believe he did the negotiation, talked to doctor -- or Craig Johnson, excuse me, Kevin Johnson also.
Q. Is it fair for us to assume then in October of 2005 that you know Mr. Burckhardsmeier is in charge of GBM and you know that it has defaulted on at least two promises to make payments to creditors?
A. I knew that they had defaulted, yes.
Q. We also established before lunch, Dr. Wiest, that as a borrower and investor you know that loan lenders do not start entities for their borrowers, correct?
A. What do you mean by start entities?
Q. Create a corporation or LLP.
A. I believe that's correct.
(Tr. p. 575, lines 5-19) The claim that Palmer was exerting control over Wiest in making loan decisions is contradicted time and again by Wiest's testimony. One of many examples that Lou was the man in charge, not Palmer, was Wiest's testimony about taking out the loan and entering into the building lease with GBM:
¶21 Q: Now what is it that inspired the 4 of you to take out this this loan and enter into this lease with GBM?
A: Again it was based on projections that were provided as far as what kind of revenue they thought they would bring in.
Again it was significant portion of it was with the as I said this Mr. Belec in Canada in that they could generate enough revenue to pay the rent that would be required for a hundred by 200 building.
Q: This was about 1.2 million dollar building; is that reasonable?
A: Approximately. Approximately 1.1 to 1.5, somewhere in there.
Q: So it sounds like you -- you did the due diligence that you thought was necessary to figure out whether this company could make those rental payments to you?
A: We felt they could.
Q: And I suppose as part of that you must have got some financial's from them, didn't you?
A: No, we didn't get financial's. We had the projections and we had the fact that Lou felt that the Canadian people were going to take so many tons per month, etc.
Q: Okay. So again the 4 of you are going to borrow approximately or spend 1.2 million dollars for a building and you didn't ask for financial's then, you talked to Lou and based your decision on his projections?
A: Well, we did ask for we asked repeatedly for financial's and we were told every time that Brady Martz was working on them.
(Tr. p.85, lines 9-25; p.86, lines 1-13) They never did get the financials, but they dove right in with only the information from Lou. Too, Wiest testified that he never saw GBM glass contracts and received his information only from Lou:
¶22 A. I never saw specific contracts. I mean I knew, as I said, through discussions either with Lou or at a meeting he would say, "Well, we're bringing in glass from Minneapolis." And we knew he was bringing it in 3 to 6 truck loads a day in late probably in early -- late 2005, late 2006. And several thousand tons are still piled up in Fargo-Moorhead as we speak today.
Q. And that -- again that's not my question, Dr. Wiest. I asked you whether you saw the contracts. It doesn't sound like you did. What you did was you'd see the glass and talk to Lou, is that fair?
A. That's correct.
Q. So your source of information was Mr. Burckhardsmeier concerning the contracts?
(Tr. p.82, lines 26-25; p.83, lines 1-16) Palmer was at the loan meetings with GBM and he did offer advice, but as the loan officer he could not do otherwise. The close, trusting, dependant relationship was between Wiest and Lou, not Wiest and Palmer.
¶23 The "fiduciary relationship" was discussed in First Nat'l Bank & Trust Co. v. Brakken, 468 N.W.2d 633, 637 (N.D.1991), wherein the court found that the relationship between a bank and its customers is viewed as a debtor-creditor relationship which does not ordinarily impose a fiduciary duty upon a bank. Id. "Whether a fiduciary relationship exists is generally a question of fact, dependent upon a showing of special circumstances." Id. Some courts have found that a fiduciary relationship may arise under circumstances which reflect a borrower's reposing of faith, confidence and trust in a bank with a resulting domination, control or influence exercised by the bank over the borrower's affairs. Id.(citing Nicoll v. Community State Bank, 529 N.E.2d 386,389 (Ind. Ct. App.1988)). The borrower or party reposing the confidence must be in a position of inequality, dependence, weakness, or lack of knowledge. Id. Wiest testified that he had a lot of "confidence" in Palmer, but trial revealed that his faith, confidence, and trust was actually in old friend Lou, not Palmer. The party that exercised "domination, control or influence" over Wiest's affairs was Lou, not Palmer. If anyone was influencing Wiest to further some fraudulent scheme, it was Lou, not Palmer.
¶24 Moreover, Wiest was experienced in investing and risky transactions and not even he maintained that he was ever in a position of "inequality, dependence, or weakness." Certainly, with financial statements showing a net worth of nearly $5 million around the time of execution of the notes, it is difficult to cast Wiest as weak or financially unsophisticated under the standards of the law. (App. pp. 36-37) As for "lack of knowledge,"any lack of knowledge on Wiest's part came from putting his trust and faith in Lou without due diligence.
¶25 The trial court erroneously relied upon Buxcel v. First Fidelity Bank, 1999 S.D. 126, 601 N.W.2d for the premise that "[a] bank's duty to disclose in certain situations is well-illustrated" in Buxcel. (App. p. 83) The Buxcel facts are so unlike the Wiest case that it is inapposite. Buxcel did find that there existed a fiduciary relationship between the bank and borrowers, but it also noted that a "'disparity of business experience and invited confidence' are a basis for finding such a [fiduciary] relationship." Id. at ¶14,citing May v. First Nat'l. Bank of Grand Forks, 427 N.W.2d 285, 290 (1988). The court observed that not only was the bank actively involved in the efforts to make a go of the business, the only business experience of Plaintiffs Clifford and Elaine Buxcel "came from toiling long hours on a farming/ranching operation." Id. ¶14. Contrast this with Wiest's business acumen and his testimony that he relied on Lou's decisions regarding GBM. Palmer wasn't deeply involved in the efforts to make a go of GBM. The Buxcel borrowers are so different from Wiest and the circumstances so different that this case supports the Bank more than Wiest. Wiest portrayed himself at trial as a simple country doctor who was snookered by a lender; in reality he was a sophisticated investor who knew exactly what was going on. His own expert did not think Wiest was a neophyte:
¶26 Q. In your meetings with Dr. Wiest did he strike you as a sophisticated investor or a novice?
A. Meaning -- looking at his financial statement I would say that he's probably a sophisticated investor.
Q. What is it about his financial statement that struck you that he was a sophisticated investor?
A. Well, the size of his investment portfolio and the net worth.
(Tr. p.555, lines 23-25; p. 556, lines 1-5) Not only are Wiest and the Buxcel borrowers poles apart in investment experience and sophistication, there exist no "additional circumstances" in Wiest's arm's-length dealings like the conflict of interest that moved the Buxcel bank to lure investors into a certain-to-fail investment.
¶27 Wiest's pleadings never alleged the existence of a fiduciary relationship, but were simply that he would not have made these loans had he known what the Bank knew about the financial condition of GBM, and that that information was not disclosed to him when he was "fraudulently induced" to take out Loan No. 2010171. However, the Bank didn't have GBM's signed consent to disclose its financial information to Wiest, and Wiest never asked it for a consent. The trial court's creation of a fiduciary relationship when a loan officer attends all the loan meetings puts North Dakota lenders into a precarious position. Banks are not obliged to enter into loans blindfolded - loan officers attend loan meetings, investigate the finances of the parties, and give advice as needed. That reality does not create a fiduciary duty to the borrower. Absent a consent to disclose financial information, a lender with knowledge unknown to the investor can't disclose a corporation's shaky finances to the investor. See N.D.C.C. § 6-08.1-03.
¶28 Lou led Wiest into the loan and Wiest led Palmer to believe that Lou acted for him and on his behalf. Appendix p. 61 shows a Loan Advance Request sent to Lou for his signature, and Appendix p. 63 shows Wiest's cashier's check ratifying Lou's authorization. Likewise, Appendix p. 47 shows Lou's written directions to the Bank telling Palmer how to allocate funds for Loan No. 2010403, and App. p. 52 shows cashier's checks executed by Wiest validating Lou's directions:
¶29 Q: 008, what is that writing?
A: That is Lou Burckhardsmeier's writing directing Howard that of the 50,000 he wanted 15,000 wired to Vision Bank payable to Glass Blast Media; and 35,000 to Glass Blast Media in Bismarck.
Q: And 007 are the cashier's checks confirming that?
A: That is correct.
Q: And that's where you wanted that money to go?
A: That's where it was to be directed, yes.
(Tr. p.39, lines 21-25; p.40, lines1-4). Wiest signed the cashier's checks to be paid out on accounts named by Lou, thereby ratifying Lou's action and creating an agency. An "agency may be created and an authority may be conferred by a prior authorization or a subsequent ratification." N.D.C.C. §3-01-06. Wiest repeatedly testified that he relied on Lou for handling matters at GBM the glass contracts, managing the construction of partnership WJB's building, "handling" the matter of the truck titles. GBM itself also let Lou do all the talking with the Bank, though as early as November 28, 2005, Palmer attempted via e-mail to get direction from GBM owner Duane Miller instead of Lou:
¶30 "4. Let's develope [sic] a regular conference call with you, me, and Lou. (At least once a week) The purpose of the call is to gradually switch the process of the bank taking instruction from Lou to you ... (Unless Lou is in this for the long term, you will need to tell me when and how this transistion [sic] will be complete.)"
(App. p. 55) This doesn't show Palmer exerting control over the loan transaction, but does show that both GBM and Wiest led Palmer to believe Lou was an agent representing them."An agency is ostensible when the principal intentionally or by want of ordinary care causes a third person to believe another to be his agent, who really is not employed by him." Argabright v. Rodgers, 2003 ND 59, ¶6,659 N.W.2d 369 (citing N.D.C.C.§3-01-03). "An apparent or ostensible agency must rest upon conduct or communications of the principal which, reasonably interpreted, causes a third person to believe that the agent has authority to act for and on behalf of the principal." Id. (citing Krank v. A.O. Smith Harvestore Prods., Inc., 456 N.W.2d 125,128 (N.D.1990)). Wiest cannot use the fact that Palmer worked closely with Lou as evidence of the existence of a fiduciary relationship when Wiest led Palmer to reasonably believe that Lou had the authority to act on his behalf. Even if Lou was defrauding Wiest, Palmer reasonably thought Lou had the authority to speak for Wiest. Clearly, the trial court erred in finding that a fiduciary relationship existed between Wiest and Palmer, and Wiest is liable for all of Loan No. 2010429 rather than just $76,678.65.
¶31 C. THE COURT ERRED IN GRANTING RECISSION OF LOAN NO. 2010171.
¶32 The trial court found that equitable recission was appropriate in this case and that the Bank could not recover any of the $250,000 loan to Wiest. (App. p. 80) The court found that Wiest did not personally receive any portion of the $250,000 proceeds of Loan No.2010171 because the entirety was deposited into GBM's checking account. Id. It also found that "although Wiest bargained for the proceeds to be used to purchase trucks and equipment, the money was not used for this purpose. Therefore, Wiest received no benefit under the loan agreement and has nothing of value to return to the Bank upon recission." Id. ¶33 1. Wiest Benefitted from Loan No. 2010171.
¶34 Recission is not applicable because Wiest also accepted the benefit of the loan, and acceptance of a benefit equals consent:
9-03-25. Acceptance of benefit equivalent to consent. A voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it so far as the facts are known or ought be to known to the person accepting.
N.D.C.C. §9-03-25. Testimony and evidence show Wiest accepted the benefits of the transaction and the loan funds were disbursed per his directions. (App. pp. 61, 62, 63) Palmer did not direct where the money was to go once it was released to GBM:
¶35 Q. Okay. I'm confused on the 250,000. Who or what did you
authorize that to be disbursed to?
A. The money was to be disbursed for the purchase of trucks and trailers.
Q. Dr. Wiest, my question was not what. To whom.
A. To whom?
A. What person?
Q. What person or what company.
A. The disbursement was to be to Glass Blast to purchase trucks and trailers.
Q. Okay. Now, this is completely different than what you told Mr. Turman. Now you're telling us the bank was authorized to disburse to Glass Blast Media, Inc.; isn't that correct?
A. The disbursement was to be --
Q. No, I get to ask the questions and you get to respond to them. Because that's what you -- you told us time after time that Glass Blast Media was where the money was supposed to go, that 250, correct?
A. The money was to go to the purchase of trucks and trailers.
Q. Well, you don't want to answer my --
A. Through Glass Blast Media, yes.
Q. Okay. And who controlled Glass Blast Media?
A. I would say that Duane Miller was the principal owner. I would say the person who did the day-to-day financial thing would be Lou Burckhardsmeier.
Q. And he is the one that came to you and requested money time after time after time; isn't that correct?
A. In the past he had, yes.
Q. Yes. And all the way up until May apparently of the following year; isn't that correct?
A. As far as the request for the line of credit, correct.
Q. And at the time the line of credit was made you knew that was not to be used for trucks; isn't that correct?
A. The line of credit?
Q. The 200,000 line of credit.
A. Correct. That was not to be used for trucks.
Q. You knew that was to be used for the general operating purposes of Glass Blast Media; isn't that correct?
A. The purchase -- or excuse me, the purpose of that second note or line of credit in January of 2006 was to be used for various, not only operating but as I said we borrowed on it previously for WBJ and stock purchase, correct.
(Tr. p.564, lines 24-25; p.565, lines 1-25; p.566, lines 1-19) Bank money helped GBM to live on as Glass Advantage and pay rent to Wiest as an owner of the GBM building. That benefitted Wiest. As App. p. 38 shows, the Bank ultimately charged off $383,088.36 for Wiest's loans. Without that money, GBM would have gone out of business; it didn't, and Wiest increased his percentage ownership of an extant company thanks to the Bank's cash infusions. Wiest's testimony was also riddled with inconsistencies disregarded by the trial court. He testified that when he took out Loan No. 2010429 on January 26, 2009, he was unaware that there were no trucks and trailers:
¶36 Q. Now, did Howard Palmer tell you prior to taking out this line of credit, Exhibit 11, that there were no trucks and trailers?
A. No, he never mentioned anything about trucks and trailers.
Q. He never told you there weren't any trucks and trailers, did he?
A. I never heard there were no trucks and trailers. In fact, there were some trucks and trailers sitting in front of he building for a period of time and then all of a sudden they disappeared. They -- I didn't know if they were sold or someone took them back.
(Tr. p. 68, line 25; p. 69, lines 1-11) However, according to fellow investor Craig Johnson, Wiest would have seen from the financial information presented to the shareholders at the January 13, 2005 meeting that the trucks had not been purchased:
¶37 Q. Now, at some point -- oh, you indicated that GBM never owned any trucks or trailers?
A. Not to my knowledge.
Q. And you knew that the entire time?
A. I knew the entire time that we never owned any trucks and trailers. Yeah, they never showed up on any balance sheets that I ever saw. First time I ever saw them even showing up on a balance sheet was in February of 2006.
Q. Okay. How did they show up on the balance sheet in February of 2006?
A. On January 13, 2006 the most recent balance sheet was -- which was as of November 30, 2005, showed vehicles at $5,000.00 and plant equipment at $1,049,199.67.
Q. And the financial statement you're referring to, was that given to all the investors of GBM?
(Tr. p. 234, lines 15-25,235, lines 1-5) Additionally, regarding a disbursement authorization dated March 31, 2006 (App. p. 41), Wiest testified he would never had made those advances had he known the true state of GBM's finances:
¶38 Q. Did you know at that time that Glass Blast had a million 8 in loans outstanding?
A. There's no way that there were any assets nor do we have any direct information that we felt was credible that would have confirmed that kind of a loan - loan value.
Q. If you would have been aware of that, that amount, would you have made these advances?
A. Absolutely not.
Q. Why not?
A. Because first of all that kind of a debt load in the way the company was going - at that time again was not enough revenue generated. It wasn't even cash flowing per se. And with that kind of a debt load, first of all I would have questioned even if I had seen a document like that as to where that money even went. There were basically -- the equipment that was in there, there were either notes on it, they had never paid any rent since they had moved in, no bills were being paid. So for somebody to tell me they had 1.9 million dollars in notes we would have asked where's the - no, where's the money gone.
(Tr. p.70, lines 17-25; p.71, lines 1-12) His professed lack of knowledge of the finances of GBM prior to making Loans 2010403 and 2010429 was also contradicted by Craig Johnson who testified that prior to the January 20 and 26 loans the shareholders had seen financial information that showed GBM's finances.
¶39 Q. Okay. You reviewed Exhibit 76 which apparently was in your file and it was a summary of a meeting, January 13, 2006?
Q. And was that a fair depiction of what was discussed at that meeting?
A. Yes. All of this was discussed at that meeting.
Q. And you indicated that at that meeting or prior to that meeting you had the November 30, 2005 financial statement?
A. I had the -- I think I had the August, the October and the November, 2005 financial statements as well as they showed us the picture of the glass and the -- they also had a picture of the building, what stage of construction it was in at that time.
Q. And did the November 30, 2005 statement indicate the amount that GBM owed?
A. Yeah. It was a balance sheet as of November 30, 2005 that was printed on January 13, 2006.
Q. How much did GBM owe November 30, 2005?
A. Total current liabilities were $1,124,792.86. And long term liabilities at that time were $526,494.95.
Q. So the outstanding indebtedness exceeded 1.6 million at that point?
A. It was $1,651,287.81.
(Tr. p.231, lines 11-25; p. 232, lines 1-10) Wiest also admitted he knew, prior to taking out Loan No.2010403 and Loan No. 2010429, that GBM was not cash flowing and that he'd need to make cash infusions to keep the company running:
¶40 Q. Well, if I look at Exhibit 308 to me it looks -- to me it looks like it was generated sometime around that December 31, 2005 because the next line it's trying to project additional equipment and expenses for the first quarter of 2006. Do you remember reviewing this at some point, either at the end of December, '05 or the beginning of January, '06?
A. I may have seen this at a meeting, yes.
Q. Okay. And it looks -- or at least it would appear to me that there's current liabilities of $1,222,000.00 which to me that's -- that's not long term debt. You appreciate the distinction between long term and current liabilities?
A. Actually I'm not an accountant so I would read current liabilities as moneys owed I guess.
Q. Moneys owed within short period of time: 30 days, 60 days?
A. Whatever the ongoing liabilities would be is how would interpret that.
Q. How about the January to March, 2006 projected additional equipment and expenses of 692,000. Did you have discussions with your shareholders and with the officers of Glass Blast Media where that money was going to come from in the first quarter of 2006?
A. Well, that's partially what we were working with with Howard through either obtaining an SBA type loan or seeing how things would be refinanced. That was really the essence of where Howard's expertise was going to come in to look at how this would best be packaged.
Q. How about under the expenses, the first one it says is cash flow shortage. Did you have a discussion about where that cash flow shortage was going to be made up?
A. Well, that was basically what investors felt, or everyone felt that we would have to carry it through the winter months when they generally sell less glass.
Q. So when you say the investors, you're talking about the shareholders?
A. Shareholders, correct.
Q. Mr. Miller, yourself, Dr. Berglund and the two Johnson brothers?
(Tr. p. 110, lines 6-25; p.111, lines 1-19) (App. p. 64) Clearly, Wiest was aware of the current liabilities of GBM and had information showing GBM did not own any trucks at the January 13, 2006 meeting, before he made Loan Nos. 2010403 and 2010429, so the ownership of trucks wasn't determinative to that decision. When questioned by Bank counsel, Wiest also claimed that "I never even knew there was a thing like a loan committee meeting until this period of time in May." (Tr. p.117, lines 6-8) This is contradicted by his testimony that he authorized disbursements on March 31, 2006 as shown at App. p. 41 because he wanted to avoid problems for Palmer with the loan committee.
¶41 A: I was informed that there was some receipts coming in and that this these lines of credit had to be paid in time for what's called I believe a bank committee meeting that Howard was involved with. And they had not been paid up to date that Howard would have undergone a great deal of pressure at the bank because these notes weren't paid.
(Tr. p. 45, lines14-19) Together, these contradictions show that in March 2006 Wiest knew what a "loan committee" was, was aware of the lack of trucks, and knew where the loan proceeds were going. Starting with Loan No. 2010171, the proceeds were going into his investment, GBM.
¶42 2. Wiest Received Consideration for Loan No. 2010171.
¶43 The trial court found that Wiest "bargained" for the proceeds of Loan No.2010171 to be used for the purchase of trucks and equipment, which bargain the Bank did not keep. (App. p. 80) In the language of the Uniform Commercial Code, this is saying that there was a failure of or lack of consideration for Loan No. 2010171 because the trucks were not purchased. As an initial matter, the law presumes there was consideration for the note, and the burden was on Wiest to overcome the presumption. "A written instrument is presumptive evidence of consideration." N.D.C.C.§ 9-05-10. "The burden of proving a lack of consideration lies with the party seeking to invalidate the instrument." Farmers & Merchants Nat. Bank of Hatton v. Lee, 333 N.W.2d 792, 794 (N.D. 1983).
¶44 "Consideration" for a negotiable instrument such as the promissory note for Loan No. 2010171 is present under N.D.C.C.§ 41-03-29, which provides that:
1. An instrument is issued or transferred for value if any of the following exist:
a. The instrument is issued or transferred for a promise of performance, to the extent the promise has been performed.
N.D.C.C. § 41-03-29(1). As shown above, the Bank kept its promise by routing the funds where Wiest directed. It is undisputed that with Loan No. 2010171 the Bank parted with $250,000 of its money which was put into the GBM account according to Wiest's directions. Once the money was put into the GBM account, Wiest admitted that Lou was to obtain the trucks and trailers -- not the Bank:
¶45 Q: So once the money went to GBM you were relying upon Lou Burckhardsmeier to get you trucks and trailers?
(Tr. p. 38, lines 1-3) Wiest directed where the money was to go, the Bank complied, and it was used by GBM. It is undeniable that Wiest benefited from that loan:
¶46 Q. Well, Dr. Wiest, you're still a 25 percent shareholder in WBJ?
Q. And how much of Glass Advantage do you own?
A. 22 percent about.
Q. Okay. And so you own the building still and you own 22 percent of the tenant of the operation?
Q. So you own 22 percent of all the equipment Glass Blast Media owned?
A. That would be correct.
(Tr. p.570, lines 23-25; p.571, lines 1-8) If Bank money pays GBM's bills, that benefits Wiest as a shareholder, even if no trucks were purchased. Certainly then, the "lack of consideration" theory falls flat. See First State Bank of Buxton v. Thykeson, 361 N.W.2d 613, 617 (N.D. 1985) (finding that "[i]t is apparent that the banks parted with $600,000 (a detriment) and that the directors and the Association in which they had interests received the $600,000 (a benefit). Accordingly, the defense of lack of consideration is of no merit.")
¶47 There was no failure of consideration for the agreement because Wiest received from the Bank exactly what he asked for, that being payment of $250,000 into the account of GBM. See, e.g. Midwest Federal Sav. and Loan Ass'n of Minot v. Miller, 349 N.W.2d 19, 21 (N.D. 1984) (finding "[t]here was no failure of consideration in the case at bar. Midwest did furnish the advances to be made. Midwest did pay money out on the Millers' account. Goods and services were delivered and rendered to and for the Millers. At least some of the proceeds came into the Millers' hands by being applied toward the construction of their house.") Likewise, bills were paid for GBM.
¶48 a. Lack of truck collateral.
¶49 The trial court appeared to disregard the relationship and history of Wiest and Lou and focused solely on the fact that no trucks were procured with Loan No. 2010171. There was no collateral securing the loan, and the court apparently believed the Bank had an affirmative duty to get that collateral. Testimony from both Wiest and Palmer was that neither of them knew when Loan No. 2010171 was executed, that there was no security available in the collateral that turned out to be double-pledged. Palmer testified he did not check to see whether the same collateral was being pledged because he had no reason to suspect that it would be the same:
¶50 THE COURT: So you loan this $250,000.00 to Dr. Wiest to buy trucks and that was in late October of '05?
THE WITNESS: Yes.
THE COURT: And then in December of '05 two months later the same collateral is offered up on the Development Fund loan?
THE WITNESS: Yes.
THE COURT: Okay. And why didn't you catch that?
THE WITNESS: There was no reason to do that. To this day I still don't understand why there would be a reason to do that. Was never obvious to me. It was presumptive. There's no reason to do that. Nothing in the course of dealing between Lou Burckhardsmeier and this company and me would have indicated to me that that would have happened.
(Tr. p. 385, lines 11-25) Palmer also testified that he knew Wiest and Lou were friends and business partners, so he didn't expect that there was a problem with the titles:
¶51 Q. (By Mr. Hogue) Mr. Palmer, under questioning from this Court you were asked some questions about why you wouldn't satisfy yourself that the -- that the trucks and trailers that were being pledged by Glass Blast were one in the same as the trucks and trailers that were pledged on the $288,000.00 loan to the Commerce Department. Do you recall that?
A. There was no reason to do that, number one. There was no benefit to anyone involved in this to do that. It was counterproductive to what we were trying to accomplish here in any of those scenarios. There was no reason to do that.
Q. Were you aware of the relationship between Mr. Burckhardsmeier and Mr. Wiest?
A. Relationship? Can I ask for a clarification of the question
Q. Did you know that they were friends?
Q. Did you know that they would be business partners?
(Tr. p. 395, lines 4-24) Undeniably, Palmer was reckless and a rogue lender throughout, but the lack of collateral cannot be blamed solely on him rather than Lou. Safety and soundness officer Dawn Ystaas testified that typically it is the loan officer's responsibility to properly collateralize a loan (Tr. p.437, lines 17-25; p.438, lines1-10), but here, however, this collateral was not essential to collecting on the loan. Palmer also testified he did not know until July that the trucks were double-pledged by Lou, and he did not think at any time that he deceived Wiest. (Tr. p. 328, lines 19-25; p.329, lines 1-15) The Bank knows Palmer was defrauding it, but the trial didn't prove Palmer knew that Lou was defrauding Wiest. Perfection would have been for the protection of the Bank, not Wiest. As Palmer testified, the lender is the injured party when collateral is not secured, and that as owner it was Wiest's job to bring in the truck titles:
¶52 Q. And you're looking to the customer or the seller to bring that title then to you; is that correct?
A. That's correct.
Q. Now, yesterday I mean you were questioned at length at why you didn't bring Dr. Wiest the titles that he was supposed to bring to you. Do you have any explanation as to how Dr. Wiest would have an expectation that he would bring his own titles to you that you were taking as security for his loan?
Q. We talk about loan collateral. Why does a bank take collateral for a loan?
A. It's additional source of repayment.
Q. In case the borrower doesn't pay on the loan?
Q. It's for the benefit of the lender?
(Tr. p.353, lines 15-25; p. 354, lines 1-7) Clearly, Wiest, under Lou's influence, was not following up about the collateral. That said, no provision of the U.C.C., the Wiest loan documents, or banking regulations imposes an affirmative duty upon Bank to hunt it's collateral down and perfect it. As Dawn Ystaas testified, while it is in the Bank's best interest to perfect the security, the "credit quality" determines the security and would determine whether the collateral would be perfected:
¶53 Q. I want to return to the issue of getting collateral for loans and specifically collateral that is titled by motor vehicles, semi trucks, trailers and the like. And I heard from you that there was some flexibility in the way that those titles would be perfected; is that true?
A. I guess -- you mean flexibility in who would perfect them?
Q. Well, let me give you an example. If -- if -- if there are two friends and they're both customers of the bank and they had told the loan officer of the bank that one is going to sell vehicles to the other friend would the bank object if the two of them perfected their titles?
A. Again I would say it goes to the borrower relationship but it could be a possibility, yes.
Q. The bank would not insist on perfecting the titles to sell?
A. I would say no. Your lender can probably answer you better. But as I said I think it depends on the borrower relationship that you have as far as flexibility in those situations.
Q. Well, would it depend for example in this -- in this particular case I noticed in one of the credit presentations Mr. Palmer noted that Dr. Wiest is an orthopedic surgeon, that he has a significant net worth, and that if this quote side venture doesn't workout they can -- they being the bank -- can look to Mr. Wiest for collection on the loan. Would that be a variable that would affect whether the bank would permit two friends to exchange motor vehicle titles?
A. I think in advancing funds the entire borrower relationship has to be looked at. The credit worthiness is obviously one of them and as I said before perfecting the security is in the bank's best interests because if the loan goes into default from the first repayment source, which is cash flow of the borrower, then the collateral is our second repayment source. So, yes, obviously the credit quality of the borrower would have an effect on the flexibility.
(Tr. p.466, lines 1-25; p.467, lines 1-13) She also testified that in this particular situation it would be the responsibility of either Wiest or Lou to obtain the truck titles the money was given to GBM. Indeed, it would be easier for the Bank to pursue Wiest's other assets to collect on these loans rather than foreclosing on truck collateral. Not only is the Bank not obligated to go after the truck collateral first, the collateral itself was not that crucial to the Bank because Wiest's financial statements indicated he could pay the note off without the Bank resorting to the collateral. Ms. Ystaas also testified that failure to disburse the funds so as to perfect the collateral is not a violation of banking regulations:
¶54 Q. But if the bank is taking a security interest in collateral isn't it -- as a safety and soundness officer wouldn't you expect that they'd disburse the collateral, the loan officer would, so that the security interest would be perfected?
A. From a safety and soundness standpoint I would say that perfecting the collateral would be in the bank's best interest to protect the bank.
Q. And wouldn't that be a preferred practice?
Q. If -- if a bank examiner were to come in and examine a loan and found out that it had not been disbursed wouldn't the loan be criticized?
A. That -- the loans had not been disbursed?
Q. Well, if the loan had not been disbursed in such a fashion as to perfect the security interest, wouldn't that loan be criticized by the banking examiners?
A. Not necessarily if the loan was performing. I mean repayment source on a loan from an exam standpoint is cash flow from the borrower. Collateral is second to repayment. So it would depend on how that loan was performing at that time. That would be my opinion.
(Tr. p. 424, lines 15-25; p. 425, lines 1-11) In sum, Palmer's failure to procure collateral is a breach of his duty to the Bank, not to Wiest. However, the collateral wasn't essential to the Bank, so that breach was not noticeable.
¶55 For Loan No. 2010171, Wiest claims the loan was to be of a few weeks duration and the collateral was intended to satisfy the debt, but the loan documents contradict his version of what he was allegedly told:
¶56 Q. And you were aware that the bank had the option to look at you even though there was other collateral pledged to this note?
A. If that's what it says then yes.
Q. Well, you want to look at the -- and I think the Court has a clearer copy of the back side -- obligations independent.
A. That clause is there. I certainly note that I was informed that there was absolutely adequate collateral to cover this note which is what I never envisioned that that clause would ever be needed based on what I was told with regards to the purchase of the trucks and trailers.
Q. Okay. So your understanding of the transaction was that the bank had to look at trucks and trailers first?
Q. Is there anything in writing that tells me that, Dr. Wiest?
A. It was only verbal.
Q. Okay. And then I'm sure you're aware that the note tells you that no modification of this agreement may be made without your express written consent. So there's nothing in writing, there is no express written consent of that modification, is there, Dr. Wiest?
A. Not that I'm aware of.
Q. You indicate that, and I'm a little confused, Burckhardsmeier was to set up yet another company outside GBM?
A. That is correct.
Q. And at some point you tell me that Howard Palmer was going to be part of that, some point you tell me he wasn't. What were the -- what were you told at the time you signed the note?
A. I was told that Howard Palmer was in the process of setting up an SBA loan which would then repay this note and then the trucks/ trailers would be transferred to the company owned by Lou Burckhardsmeier.
Q. Okay. So at no time was Howard Palmer going to be an owner of this new company?
A. Not that I was aware of.
Q. So your Amended Answer you tell us the loan was only to be for a short period of time to enable Howard Palmer and Lou Burckhardsmeier to form a new corporation. You did not mean then that Howard Palmer was going to be a part of that new corporation?
A. My understanding totally was that Howard Palmer was working on the financing for it and I did not know who would be owners other than Lou Burckhardsmeier.
Q. Okay. And how short term was this going to be?
A. I was told that it would take less than a month to finish the paperwork and get the SBA funded.
Q. Then why, and I'll shoot a why question out even though I'm not supposed to, why then is maturity like 2 years, 3 years down the road, 10/27/2008?
A. No. 1, with that short of maturity with no pre- penalty clause I really didn't care what maturity it was. Similar to a car loan I may take out and pay prematurely. It really had no relevance to what I was doing in my opinion.
(Tr. p. 34, lines 11-25; p.35; p.36, 1-16) The loan documents themselves did not require the Bank to look for the truck collateral for repayment nor do the loan documents say the loan was to be for less than a month. Wiest is an intelligent man experienced in financial transactions - he was aware of what he was signing and cannot claim the Bank did not keep its end of the bargain. Moreover, the Bank had no reason to question what Palmer was doing, especially because his loans did not have any "red flags" to suggest a review. There was no reason for the Bank to look over the shoulder of a banker with over 20 years experience and no previous disciplinary problems. Even if Palmer had told Wiest within two weeks or a month or two months that there were no trucks, Wiest would be in no better position on Loan No. 2010171 because the trucks pledged were actually subject to a prior lien and the Bank would not have been able to resort to that collateral anyway. In addition, the Bank was obligated to follow Wiest's disbursement directions even if the money was not being used to buy trucks. See, e.g., National Bank of Harvey v. Pauly, 280 N.W.2d 85, 92 (N.D. 1979). In sum, there was no failure of consideration even if no trucks were purchased.
¶57 3. Wiest Had Unclean Hands.
¶58 Not only did Wiest actually benefit from the loans, he didn't come to this action with clean hands. Rescission of a contract, whether the object of a suit in equity or an action at law, is governed by equitable principles. See, e.g. Heinsohn v. William Clairmont, Inc., 364 N.W.2d 511 (N.D. 1985).
¶59 Wiest testified that he used the loans - the Bank's money - to pay GBM's bills, and as a percentage owner of GBM he had an incentive to pay GBM's bills. The bank committee meeting was coming up and if these payments weren't made "red flags" would be raised and it was in Wiest's best interests to prevent any red flags:
¶60 Q: And do you recall using that more colorful language red flags?
A: Well, yeah, that's how I understood the problem with the bank committee.
Q: And why was that adverse to you?
A: Well, No. 1, we had tremendous confidence in Howard's ability to look at refinancing, some of the issues with Glass Blast, and he was in the midst of looking at various forms of SBA loans, 504 loans, and how to put together a financing package.
So we had we, like I said relied, a great deal on his expertise in that area; and at that time he was working actively on doing that for us.
Q: So you didn't want to spoil your chances of getting some refinance out of American Bank Corp?
A: Either American Bank Corp. or SBA. SBA is where we were heading, is what he wanted us to look at.
(Tr. p. 46, lines 2-18) The disbursements from Bank money to his company, GBM, and to companies unconnected with Wiest in "red flag avoidance" can be seen at App. pp. 33, 41, 43, 51, 53, 62. His objective was to help Palmer help him get an SBA loan with better interest rates and conditions, and those payments prevented the Bank from noticing that it should review Palmer's portfolio. Through his efforts to get a good deal on a loan, Wiest kept Palmer's portfolio out of Bank's notice and Bank has been harmed by millions of dollars of bad loans. His own expert testified that if a number of loans became delinquent, that would have been a red flag to the Bank, that Wiest's payment of these loans would also have been irregular, and that Wiest didn't tell his expert of his role in keeping red flags off Palmer's portfolio:
¶61 Q. Okay. And Exhibit 25 is also signed and authorized by Dr. Wiest where he authorizes loan proceeds to go to some 20 different loans from mostly companies he has no interest in to keep their loan payments current. Were you aware of that?
Q. Now, Dr. Wiest testified that, gee, if these loans were not kept current certain red flags would arise at the bank. Would that be a true statement?
Q. I mean for example 22, if those 9 loans all of a sudden at American Bank Corp became delinquent would that be a red flag to the management of the bank of some problems?
A. I would hope so, yes.
Q. And similarly when 20 loans were covered by Dr. Wiest if they hadn't been made current would that be a red flag to the bank?
(Tr. p. 552, lines 2-18) N.D.C.C.§ 31-11-05(8) states "A person cannot take advantage of that person's own wrong," and this Court has relied on that maxim in holding a wrongdoer may not take advantage of his own wrong against the victim of his wrongdoing. See, e.g., Beavers v. Walters, 537 N.W.2d 647, 650-51 (N.D. 1995). This is essential to the doctrine of equity, requiring that he who comes into equity must come with "clean hands." Cross v. Farmers' Elevator Co., 153 N.W. 279 (N.D. 1915). Because Wiest's own actions injured the Bank and contributed to his own alleged harm, he should not be permitted to rescind the notes. The Bank is a victim of Palmer's bad loans, and Wiest was a willing accomplice in hiding Palmer's irregular loans in furtherance of his own interests. Whether he knew Palmer was actually injuring the Bank or not is immaterial -- he knew he was helping to prevent "red flags" going up for the Bank and he was doing it for his own gain. Therefore, Wiest's unclean hands make the remedy of rescission unavailable.
¶62 D. THE TRIAL COURT ERRED IN IMPUTING PALMER'S FRAUD TO THE BANK.
¶63 Ordinarily, fraud, deceit, or misrepresentations of an agent may be imputed to a principle. See, e.g. Dewey v. Lutz, 462 N.W.2d 435, 443-444 (N.D.1990). However, even if Wiest was fraudulently induced into Loan No. 2010171 by Palmer and Lou, that should not be imputed to the Bank because the elements required to extend any fraud to the Bank are not present. Dewey imputed the wrongdoing of the agent to the principal bank where the president and owner of the bank was involved in the purchase of certain farmland, which fact was not known to the sellers. Dewey, 462 N.W.2d at 437. Based on the seller's lack of information and their agreement with the person they thought was the actual purchaser, they did not record their mortgage for the sale of the property. Id. Subsequently, another lender recorded its mortgage, putting the Deweys in second place. Id. at 438. Among the parties they sued was bank president Richter, alleging that he had fraudulently schemed to deprive the Deweys of any security interest in their property. Id. On appeal, the bank asserted that the trial court erred in submitting to the jury the question of its participation in a common scheme to commit fraud and deceit against the Deweys. Id. at 441. The jury determined that the bank participated in such a scheme. Id. This Court found that the jury verdict should not be overturned because
"[i]n this case, Richter admitted that he and the Bank were 'one.' In addition, the Bank benfited from the fraudulent and deceitful scheme. Not only did the Bank directly receive part of the proceeds of the Federal Land Bank loan, but also the Bank's third mortgage position on the [co-defendant's] condominium was improved when almost $30,000 was paid on the first mortgage to an Arizona bank. Under these facts, Richter's fraud and deceit could have been imputed to the Bank."
Dewey v. Lutz, 462 N.W.2d at 443- 44. Contrast this with the Wiest case - Palmer and the Bank are not "one", and Palmer was acting contrary to the Bank's interests. The Bank was unaware that the money was going to pay GBM bills and the Bank was harmed by Palmer's series of loans, including the loan to Wiest. The Bank was unaware that Palmer was drastically deviating from Bank policy regarding Wiest's loan until sometime in July. Because Wiest did not stop making payments on his loan until after the May payment, there was no real reason for the Bank to review that file specifically. Moreover, the Bank was prevented from noticing any major irregularities with any loan in Palmer's portfolio because Wiest was making payments on loans to which he had no connection to prevent any "red flags" that would jeopardize his plans to refinance with an SBA loan. (Tr. p. 46, lines 2-18) Wiest bears responsibility for actively working to hide from the Bank the true state of Palmer's portfolio, steps taken to benefit himself.
¶64 In Towne v. Dinius,1997 N.D. 125, ¶11, 565 N.W.2d 762, the Court used an analogy to show how the fraud of an agent may be imputed to a principal: "If a salesman at a car dealership misrepresented the condition of a vehicle, the purchaser certainly can sue the dealership for rescission or damages based upon the salesman/agent's conduct. The same rule applies here." Dewey and Towne illustrate why the fraud of Palmer should not be imputed to the Bank. In Towne, Mr. Towne bought a car from Marilyn Dinius, the owner, for $500. Towne,1997 N.D.125,¶2. George Dinius negotiated the sale of the car on his wife's behalf, and died two months later. Id. Towne alleged that Mr. Dinius told him the car had its original frame and warranted that the vehicle was "road worthy." Id. Towne brought an action against Mrs. Dinius in small claims court after a mechanic told him that the frame had been altered and the car was unsafe. Id. at ¶ 2-3. The trial court ordered dismissal for failure to state a claim, finding that Marilyn Dinius could not be held liable for any misrepresentations made by her husband when he negotiated the sale of her car. Id. at ¶10. This Court found, however, that there were "disputed issues of material facts and potential legal theories to hold Marilyn liable for her husband's alleged misrepresentations" and that "it could be found that George was acting as Marilyn's agent in selling her car. . . " Id. Necessary to its holding was its finding that principal/Marilyn had a close and intimate relationship with agent/George, she received money from the sale of the car, thereby directly benefitting, and she knew that the car had been damaged in an accident. Contrast that with this case; there was no "close relationship" between Palmer and Wiest, but there was between Wiest and Lou. Wiest benefitted by the loan transactions, but the Bank did not. The Bank was unaware of Palmer's impaired portfolio, but Wiest was not and made cash infusions so the Bank would remain unaware. Not only do the facts of these imputability cases differ greatly from the Wiest case, there exist exceptions to the general rule that knowledge of facts gained by an agent while in the employ of the principal is imputed to the principal. Aetna Indemnity Co. v. Schroeder, 95 N.W. 436 (N.D. 1903) articulates this as follows:
"The exception is that, in cases where the agent is nominally acting for another in ministerial matters, he will not be presumed to disclose to his nominal principal matters within his knowledge, when he is in reality acting for himself or for another as principal, and his or his real principal's interests are adverse to those of the nominal principal."
Id. at 438. The trial court acknowledged Wiest did not rely upon the loan committee meetings that had misrepresentations - but the Bank did. Palmer's authority did not extend to perpetrating fraud upon the Bank, and Palmer intended to deliberately deceive the Bank. Animated by some still-unknown motive, Palmer obtained loan committee approval by false presentations. His duty to the Bank required him to provide full, truthful presentations, and to communicate to the Bank his knowledge that GBM was floundering and had never cash-flowed. Palmer's conduct in this case was a gross violation of his duty to the Bank, was deceitful to his principal, and in the interest of other parties. The Bank should not be held responsible for Palmer's acts when cumulatively it has been harmed by millions of dollars. The facts clearly show an exception to the imputability rule because Wiest himself had a hand in and benefitted from the agent's deceit against the principal.
For all of the reasons set out above, the Bank respectfully requests that this Court reverse the trial court on these issues.
|Dated this 19th day of March, 2010.|
|OLSON & BURNS P.C.|
|s/s Richard P. Olson|
|Richard P. Olson (ID #03183)|
|Attorneys for Appellant American Bank Center|
|P.O. Box 1180|
|Minot, ND 58702-1180|