Title: Lawrence Warehouse Co. v. Dove Creek State Bank

State: colorado

Issuer: Colorado Supreme Court

Document:

470 P.2d 838 (1970) LAWRENCE WAREHOUSE COMPANY, Plaintiff in Error, v. DOVE CREEK STATE BANK, United States Bank of Grand Junction, Harold Tanner and Marian Tanner, Montelores Bean Co., and J. W. Lancaster, Defendants in Error. No. 22517. Supreme Court of Colorado, En banc. June 8, 1970. As Modified on Denial of Rehearing June 29, 1970. *839 Fairfield & Woods, Charles J. Beise, Denver, Wallace, Garrison, Norton & Ray, William R. Ray, San Francisco, Cal., for plaintiff in error. Parga & Dyer, Robert E. Parga, Cortez, for defendant in error Dove Creek State Bank. Smith, Holmes, Williams & Turner, Anthony W. Williams, Grand Junction, for defendant in error United States Bank of Grand Junction. No appearance for defendants in error Harold Tanner and Marian Tanner, Montelores Bean Co., and J. W. Lancaster. LEE, Justice. This writ of error arises out of the retrial of a controversy the first trial of which was reversed and remanded by this Court in Dove Creek State Bank v. Lawrence, 157 Colo. 263, 402 P.2d 369. We refer to the parties as follows: Lawrence Warehouse Company as "Lawrence"; Dove Creek State Bank as "Dove Creek"; United States Bank of Grand Junction as "United States Bank"; Harold Tanner, Marian Tanner, and Montelores Bean Co. as "Tanner"; and J. W. Lancaster as "Lancaster." In the interests of clarity, we incorporate in part this Court's statement of facts contained in Dove Creek State Bank v. Lawrence, supra, as follows: Dove Creek's complaint against Lawrence, United States Bank, Tanner and Lancaster, asserted eight claims for relief. The judgments of the trial court on all claims were affirmed except as to the third and fourth claims which were reversed by the decision in Dove Creek State Bank v. Lawrence, supra, and it is with the retrial of the third and fourth claims with which we are here concerned. We set forth the analysis of the pleadings as to these claims as found in Dove Creek State Bank v. Lawrence, supra: Although not mentioned in the foregoing statement of the pleadings, an amendment to the answer of United States Bank alleged that it was a victim of fraud practiced upon it by Dove Creek; that Dove Creek knew the warehouse receipts delivered to United States Bank were false and that there were no commodities as described in the receipts; that the receipts were represented to be valid; and that the United States Bank purchased the notes in direct reliance upon the purportedly valid warehouse receipts. We here note that Harold Tanner, Marian Tanner, Montelores Bean Co. and J. W. Lancaster did not appear and defend against Dove Creek's claims for relief or against any cross-claims, either in the first case or in the retrial, and default was entered against them by the court. *842 In the first trial the court determined there were no disputed issues of fact to submit to the jury. The jury was dismissed and the court entered its findings of fact, conclusions of law, and judgments. Dismissal of the jury by the trial court was one of the fundamental errors causing reversal and requiring retrial. In the retrial the issues were tried to a jury. At the conclusion of the evidence, Lawrence and United States Bank each moved for a directed verdict. These motions were denied. The court then submitted four special interrogatories. The interrogatories and the jury's answers thereto are as follows: The court then entered findings of fact and conclusions of law, upon which judgments were thereafter entered as follows: Lawrence and the United States Bank each filed motions for judgment notwithstanding the verdicts and motions for a new trial. All motions were denied. Lawrence seeks reversal of the judgment for $83,026.84 against it in favor of Dove Creek. Lawrence does not contest the judgment against it in favor of United States Bank, admitting liability on its warehouse receipt to the United States Bank. The United States Bank seeks reversal of the judgment for $83,026.84 against it in favor of Dove Creek. Lawrence's main contention for reversal is that the trial court erred in failing to grant its motion for directed verdict and for judgment notwithstanding the verdict. Lawrence contends the jury's answers to special interrogatories Nos. 2 and 3 are not supported by the evidence and that a judgment of dismissal of Dove Creek's claims against Lawrence should have been granted. We agree. A review of the entire record fails to reveal any substantial, competent, credible evidence upon which a jury could return the answers it did to interrogatories Nos. 2 and 3. The answers are contrary to the evidence and we regard them as arbitrary and capricious. In such circumstances a judgment cannot stand. Accessory Supply Co. v. Kayser, 160 Colo. 315, 417 P.2d 481; Burns-Moore Mining and Tunnel Co. v. Watson, 45 Colo. 91, 101 P. 335. Lawrence's defense was based upon its charge of fraudulent conduct imputed to Dove Creek through its agent and officer, Brandt, who was the vice president, cashier and chief operating officer of Dove Creek State Bank. The essence of Lawrence's charge of fraud was that Brandt, the bank officer in charge of the Tanner loan accounts, conspired with Tanner for the fabrication of false warehouse receipts in order to obtain the renewal of the two overdue $60,000 notes which Dove Creek had sold to the United States Bank. The undisputed evidence showed that by reason of speculative losses in the pinto bean market Tanner enterprises had become heavily indebted to Dove Creek and were in desperate financial condition. As of June 1959 Tanner owed Dove Creek approximately $500,000 of which $200,000 was unsecured. The combined capital and surplus of Dove Creek State Bank was only $150,000. This excessive over-loan situation was the product of Tanner's negotiations with Brandt who handled all of Dove Creek's loans to Tanner. It was not shown that United States Bank was aware of this condition, and in July of 1959 Tanner's account with United States Bank showed a zero balance. On July 29, 1959, the first two $60,000 notes were sold to United States Bank by Dove Creek. Although Brandt represented that these notes were secured by warehouse receipts, which Dove Creek purportedly held, there were in fact no such receipts, all of which was admitted by Brandt in his deposition. When these notes matured in October of 1959, the loans were renewed by new notes which Brandt likewise represented to be secured by warehouse receipts in Dove Creek's possession. No such receipts existed. And, at last, when the October notes matured, United States Bank made as a firm condition of renewal the delivery to it of warehouse receipts. Faced with this situation, Brandt made his demand for the receipts upon Tanner. As stated in Dove Creek State Bank v. Lawrence, supra, the critical issue to be resolved at the trial was whether Brandt had knowledge there were no commodities in the warehouse to support the receipts, or whether he had knowledge of facts sufficient to charge him with the duty of further inquiry into the situation. At the first trial the only direct evidence of knowledge or duty to inquire was that contained in the deposition of Brandt in which, although he flatly denied that he had knowledge or reason to believe the beans which were the subject of the warehouse receipts were not in existence, he admitted testifying in a federal criminal trial where Tanner was the defendant that he had been advised by Tanner there were not enough beans in the warehouse at the time to support the warehouse receipts. Brandt who was in New Mexico at the time of the retrial did not return to Colorado to testify in the retrial. The same deposition was again read into evidence. However, whereas in the first trial the only evidence of his knowledge of these matters was the admissions contained in his deposition, in the retrial Tanner (who at the first trial refused to testify under his Fifth Amendment rights) did testify unequivocally that when first *844 requested by Brandt to furnish warehouse receipts he told Brandt there were no commodities to cover the receipts; that Brandt told him to furnish the receipts anyway; that he obtained the receipts by persuading Lancaster, the warehouse manager, to issue the false receipts, by assuring Lancaster that he would shortly borrow funds from sources in Texas to pay off the obligations in question; that he delivered the receipts to Brandt and again told Brandt there were no commodities to cover them, and instructed Brandt to hold the receipts while he went to Texas to borrow the money to pay off the delinquent notes. Tanner in fact did go to Texas for this purpose but was unsuccessful in this mission. In addition to Tanner's testimony, there was the evidence of witness Blythe Buckingham who testified that Brandt, at a time subsequent to the collapse of the Tanner enterprises, in a discussion concerning Brandt's financial difficulties, admitted that Tanner's testimony in federal court was correctthat he, Brandt, had been told there were no beans for the receipts and that it was necessary for him to claim lack of knowledge because of his problems at the bank and at home. Also, there was further evidence of Brandt's knowledge from witness Herbert Bacon, vice president of the United States Bank, who testified Brandt admitted to him shortly before the first renewal note became due and payable that he was dubious that there were beans in existence to support the warehouse receipts. Additionally, admitted into evidence concerning the question of Brandt's knowledge was a copy of Dove Creek's complaint in the United States District Court against Indemnity Insurance Company of North America in a suit by which Dove Creek sought to recover damages on its officers' fidelity bond. In this complaint Dove Creek specifically sought recovery on the grounds of fraud perpetrated by Brandt in connection with the transactions in question, in addition to other fraudulent involvements. The foregoing direct evidence bearing upon Brandt's knowledge or duty to inquire concerning the validity of the warehouse receipts, when weighed in the light of the circumstances existing in July of 1959 when the original $60,000 notes were negotiated, and the admitted fraudulent renegotiation of said notes in the fall of 1959, can only lead to one conclusion: that reasonable men could draw but one inference from the evidence, that is, that Brandt, and Dove Creek constructively, had knowledge of the fraud, or sufficient reason to cast upon them a duty of further inquiry to investigate whether in fact the warehouse receipts were actually supported by the commodities as represented therein. The jury's verdict rendered in favor of Dove Creek against Lawrence should have been set aside by the trial court upon Lawrence's motion. We conclude that Dove Creek is chargeable with the fraudulent conduct of Brandt, its chief executive officer and agent, just as Lawrence is chargeable for the issuance of the false warehouse receipts by Lancaster, its manager and agent. Neither Dove Creek nor Lawrence, being in pari delicto by reason of their participation in the fraudulent scheme to fabricate the false collateral, should be allowed to prevail against the other in their efforts to recoup their consequent losses. The judgment in favor of Dove Creek against Lawrence must be reversed. Inasmuch as the trial court concluded as a matter of law that Lawrence should recover on its cross-claims from Tanner and Lancaster the amounts adjudged against it in favor of Dove Creek and the United States Bank, we, having reversed the judgment in favor of Dove Creek against Lawrence, must also reverse the judgment hereinbefore referred to as "additional judgment" which was entered by reason of the judgment in favor of Dove Creek against Lawrence, which we have now reversed. United States Bank alleges error in the trial court's entry of judgment *845 against it for $83,026.84 in favor of Dove Creek, asserting that Dove Creek's fraud should bar it from recovery. It will be recalled that when Tanner defaulted in payment of the renewal notes, and it was then discovered that recovery could not be made by foreclosure of the warehouse receipts, the United States Bank debited Dove Creek's account with the amount due and owing, including attorney's fees. In Dove Creek State Bank v. Lawrence, supra, this Court denied the right of United States Bank to make such setoff inasmuch as the Tanner loan exceeded the statutory maximum. It was there held that an arrangement by which Dove Creek agreed to guarantee an excessive loan was contrary to public policy and, accordingly, a setoff based upon such a guarantee was not permissible. Mr. Justice Pringle speaking for the Court said: Herbert Bacon, vice president of United States Bank admitted he knew of the capital-surplus structure of Dove Creek State Bank. Having such knowledge, if he was not actually aware of the excess loan of $60,000, he should have been, as he was an officer of a state banking institution and is presumed to have known the law relating to lending limits. Such being so, public policy forbids enforcement of the guarantee of the excess loan, notwithstanding the existence of the fraud of Dove Creek which we deem to be collateral and nonactionable as to Dove Creek under these circumstances. We observe here that United States Bank, having already recovered one-half of the amount due it by means of the set-off against the account of Dove Creek, recovered the balance owing it on Tanner's obligations by way of judgment against Lawrence for $83,026.84. The judgment in favor of Dove Creek State Bank and against United States Bank is affirmed. The judgment in favor of Dove Creek State Bank and against Lawrence Warehouse Company is reversed and this claim is ordered dismissed. The judgment referred to herein as "additional judgment" in favor of Lawrence Warehouse Company on its cross-claim against Harold Tanner, Marian Tanner, Montelores Bean Company and J. W. Lancaster is reversed and the cross-claim on which said judgment was based is ordered dismissed. DAY and PRINGLE, JJ., dissenting. GROVES, J., not participating. PRINGLE, Justice (dissenting): I respectfully dissent. In my view, Dove Creek State Bank v. Lawrence, 157 Colo. 263, 402 P.2d 369, is determinative of this case. There we remanded the case for a new trial stating that the issue of whether Bruce Brandt, who was an officer of Dove Creek Bank, had knowledge that there were no commodities in the warehouse to support the receipts or whether he had knowledge of the facts sufficient to charge him with the duty of further inquiry into the situation was a question for the jury. That became the law of this case. The disputed issues of fact were submitted to the jury for determination by way of the four special interrogatories. These special interrogatories were answered by the jury in the negative. In my view, this court cannot substitute its judgment for that of the jury and this court is bound by the jury's determination of the disputed issues of fact, and I would affirm. DAY, J., authorizes me to say that he joins in this dissent.