Opinion ID: 2807353
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: [¶2.] This suit involves four members of the Stabler family. Stan and Rose Stabler are the parents of Brad, who is married to Brenda. The four Stablers will sometimes be collectively referred to as “Plaintiffs.” Brad and Brenda incorporated Edmunds County Ag Services, Inc., (ECAS) in 1999, a business that provided services to farmers. As part of the startup funding for the business, they borrowed money from FSB, whose president at the time was John Beyers. FSB and Beyers are sometimes referred to collectively throughout this opinion as “Defendants.” To secure the debt, FSB took liens on property along with a personal guarantee by Brad. In 2000, Stan and Rose also executed a mortgage in favor of FSB to secure ECAS debt. (The 2000 Mortgage.) See infra ¶ 5, Transaction 1. The mortgage secured a loan for an ECAS building that was being erected on Stan and Rose’s property. The mortgage covered the quarter of land where the building was being -1- #26917, #26918, #26965, #26993 built. Throughout the course of FSB and Stablers’ business relationship, the parties entered into numerous other financial arrangements. Not all of these transactions concerned ECAS; some were for Stablers’ personal and separate businesses. ECAS liquidated in May 2002 and paid FSB the proceeds from its property; however, it still owed FSB roughly $350,000. FSB had the option at that time to foreclose on the 2000 Mortgage or call on Brad’s guaranty, but did not do so. In July 2002, Stan and Rose executed a collateral real estate mortgage (CREM) that provided security for some of the remaining debt, part of which is disputed. (The 2002 CREM.) See infra ¶ 5, Transaction 2. [¶3.] Brad and Brenda subsequently went through bankruptcy in 2003. The bankruptcy discharged Brad’s personal guaranty of the ECAS loans, but the liens were not discharged by bankruptcy. 1 FSB still held liens and the option to foreclose to recover the debt secured by the 2000 Mortgage and the 2002 CREM. In November 2003, after the bankruptcy was completed, Brad signed a promissory note that refinanced previous obligations. See infra ¶ 5, Transaction 3. Stan also signed a promissory note in November 2003. See infra ¶ 5, Transaction 4. John Beyers then sought out all four Stablers to sign a $650,000 note and CREM in 2004 that repackaged debt of Brad, Brenda, ECAS, Stan, and Rose. (The 2004 Transaction.) See infra ¶ 5, Transaction 5. The bank represented that the debt in the 2004 Transaction included Brad and Stan’s debt. The circuit court recited that 1. Stablers mention that their bankruptcy attorney failed to list debt on their bankruptcy schedules. Although the attorney representing them in Bankruptcy, who is also FSB’s attorney, failed to list ECAS debt, the trial court explained that Brad’s guarantee of this debt was still discharged. -2- #26917, #26918, #26965, #26993 this was an elaborate scheme to defraud Stablers. The 2004 Transaction was the exact same amount and in the same form of debt as existed prior to Brad and Brenda’s bankruptcy. [¶4.] Remaining at FSB was approximately $150,000 of Brad and Brenda’s debt, which was paid off in early February 2005 with a loan to Brad and Brenda from the Ipswich State Bank (ISB note). See infra ¶ 5, Transaction 6. Beyers induced ISB to loan $150,000 to Brad and Brenda. The circuit court found that Beyers falsified financial records and personally guaranteed the loan to convince ISB to extend a loan to Brad and Brenda. The proceeds from this loan went to FSB, but it is still disputed whether the proceeds paid off valid liens or reaffirmed discharged debt. Brad and Brenda eventually defaulted on the note, so Beyers, as guarantor, paid ISB the remaining balance and took an assignment of the note. Brad and Brenda started a bankruptcy court action to stop Beyer’s collection on the note, alleging that it was in violation of the post-discharge injunction. 2 See Stabler 2. 11 U.S.C. § 524(a) provides that bankruptcy discharge: (1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived; (2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; and (3) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the (continued . . .) -3- #26917, #26918, #26965, #26993 v. Beyers (In re Stabler), Bankr. No. 03-10179, Adv. No. 09-1002, 2009 WL 1651441 (Bankr. D.S.D. June 11, 2009), aff’d, 418 B.R. 764 (B.A.P. 8th Cir. 2009). “The bankruptcy court dismissed the adversary proceeding based on the application of collateral estoppel to a prior state-court judgment and on a determination that permissive abstention was warranted under 28 U.S.C. § 1334(c)(1).” In re Stabler, 418 B.R. at 766. In state circuit court, Brad and Brenda elected to rescind in accordance with SDCL 53-11-2(1). 3 The circuit court held that they had not met _____________________ ( . . . continued) debtor of the kind specified in section 541(a)(2) of this title that is acquired after the commencement of the case, on account of any allowable community claim, except a community claim that is excepted from discharge under section 523, 1228(a)(1), or 1328(a)(1), or that would be so excepted, determined in accordance with the provisions of sections 523(c) and 523(d) of this title, in a case concerning the debtor’s spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on such community claim is waived. 3. SDCL 53-11-2 provides: A party to a contract may rescind the same in the following cases only: (1) If consent of the party rescinding or of any party jointly contracting with him was given by mistake or obtained through duress, fraud, or undue influence exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party; (2) If through fault of the party as to whom he rescinds, the consideration for his obligation fails in whole or in part; (3) If the consideration becomes entirely void from any cause; (4) If such consideration before it is rendered to him fails in a material respect from any cause; or (5) By consent of all the other parties. -4- #26917, #26918, #26965, #26993 their burden under SDCL 53-11-2(1) to show that their consent was given by “mistake or obtained through duress, fraud, or undue influence exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party[.]” The court noted that if ISB were trying to collect on the note, nothing would prevent it from doing so and, because Beyers, as assignee, has the rights of ISB, he is entitled to enforce the note against Brad and Brenda. [¶5.] Relevant to this lawsuit are the following Transactions: (1) Signed in April 2000, a $200,000 promissory note by ECAS to FSB, secured by ECAS property, Brad’s personal guaranty, and a real estate mortgage on Stan and Rose’s property, loan #45210. (The 2000 Mortgage) (2) Signed in July 2002, a collateral real estate mortgage for $300,000 on Stan and Rose’s property to provide additional security on ECAS debt. (2002 CREM) a. This 2002 CREM secured six obligations 4: i. $200,000.00 promissory note of ECAS due December 15, 2013, Loan #45210. ii. $122,221.50 ECAS’s promissory note due August 1, 2002. iii. $105,400.00 ECAS’s promissory note due September 1, 2002, loan #46575. iv. $70,000.00 Brad’s promissory note due April 14, 2000. v. $195,328.17 Brad’s promissory note due October 1, 2002, loan #46576. vi. $75,000.00 Stan’s promissory note due July 15, 2003, loan #46601. 4. The Stablers contested whether the 2002 CREM appropriately secured the obligations listed, but upon the incorporation of the 2002 debt into the 2004 Transaction, the issue was subsumed in the 2004 Transaction issues. -5- #26917, #26918, #26965, #26993 (3) Loan #47365, see infra (5)(a)(iv), signed November 17, 2003, 5 a promissory note to FSB by Brad for $196,861.67, secured by the 2002 CREM. (4) Loan #47367, see infra (5)(a)(vi), signed November 18, 2003, a promissory note to FSB by Stan and Rose for $186,000 “Farm Operating Renewal.” (5) Signed in March 2004, a promissory note for $650,000 by Brad, Brenda, Stan, and Rose, secured by a CREM on substantially all Stablers’ real property and a lien on substantially all their personal property. (2004 Transaction) 6 a. The note refinanced various obligations. After refinancing, the CREM secured the following 7: i. $266,000 ECAS Loan #47124. ii. $110,900 ECAS Loan #45210. iii. $39,100 Stabler Farm Loan #46952. 8 iv. $132,990 Stabler Farm Loan #47365. 9 v. $1,010 Stabler Farm Loan #47563. vi. $100,000 Stan Stabler Farm Loan #47367. 10 5. This note was executed post-bankruptcy discharge of Brad and Brenda’s personal obligations on the debt they had with FSB. 6. The 2004 Transaction was initially divided and assigned to independent partiesRoger Ernst (individual) in the amount of $213,000, Schurrs (a partnership) in the amount of $416,000, and H&K Acres, LLC, in the amount of $21,000. H&K Acres, LLC, was paid by Brad and Brenda, eliminating that obligation. The other two assignments were eventually assigned to Beyers in 2008. 7. Beyers alleged multiple of these loans were ones previously secured by the 2000 Mortgage, or the 2002 CREM, or both. 8. By the note’s terms, it is a renewal of loan #46576, see supra Transaction 2(a)(v), secured by the 2000 Mortgage and the 2002 CREM. 9. A refinance of the promissory note signed by Brad in November 2003. See supra Transaction 3. 10. A refinance of the promissory note signed by Stan and Rose in November 2003. See supra Transaction 4. -6- #26917, #26918, #26965, #26993 (6) February 9, 2005, promissory note to Ipswich State Bank in the principal amount of $150,000. Beyers guaranteed this loan and subsequently took an assignment of it on July 3, 2007. (ISB note). [¶6.] The 2004 Transaction is the main subject of this litigation. See supra ¶ 5, Transaction 5. In circuit court, Brad and Brenda claimed it was an invalid reaffirmation of debt discharged in bankruptcy. Stan and Rose claimed Beyers knowingly misrepresented that Brad and Brenda owed amounts contained in the 2004 Transaction. [¶7.] Under the Bankruptcy Code, a post-bankruptcy agreement to pay dischargeable debt between the holder of a claim and the debtor, known as a reaffirmation agreement, must meet specific requirements. 11 U.S.C. § 524(c) (2012). 11 Therefore, any agreement that Brad and Brenda entered into with FSB 11. 11 U.S.C. § 524(c) states: (c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if-- (1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title; (2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement; (3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that-- (continued . . .) -7- #26917, #26918, #26965, #26993 after their bankruptcy, “the consideration for which, in whole or in part, is based on a debt that is dischargeable[,]” needed to be filed with the bankruptcy court. Id. It is undisputed that FSB did not follow that procedure. Therefore, all four of the Stablers instigated this lawsuit alleging that the bank and Beyers misrepresented to Stan and Rose that $550,000 in the 2004 Transaction was Brad’s debt, when in fact Brad did not owe that debt because the bank did not follow the proper procedure to reaffirm his debt with the bank. FSB and Beyers responded that an agreement by a holder of a claim to not foreclose its interest (on liens that pass through bankruptcy unaffected) is new consideration to support a post-bankruptcy agreement without the intervention of the bankruptcy court. Further, Defendants alleged that when Stablers instigated this suit in 2007, there was a split of authority across the nation on the enforceability of the type of agreement that Brad signed in this litigation. Compare Shields v. Stangler (In re Stangler), 186 B.R. 460, 464 (Bankr. D. Minn. 1995), and Minister State Bank v. Heirholzer (In re Heirholzer), 170 B.R. 938, 941 (Bankr. N.D. Ohio 1994), with In re Zarro, 268 B.R. _____________________ ( . . . continued) (A) such agreement represents a fully informed and voluntary agreement by the debtor; (B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and (C) the attorney fully advised the debtor of the legal effect and consequences of-- (i) an agreement of the kind specified in this subsection; and (ii) any default under such an agreement . . . . -8- #26917, #26918, #26965, #26993 715, 722 (Bankr. S.D.N.Y. 2001), In re Arnold, 206 B.R. 560, 563 (Bankr. N.D. Ala. 1997), and In re Gardner, 57 B.R. 609, 610 (Bankr. D. Me. 1986). The circuit court ultimately held that this agreement was an invalid reaffirmation. Therefore it granted Brad and Brenda rescission on the 2004 Transaction, which had been reduced to roughly $629,000 due to payments by Brad and Brenda. [¶8.] Stan and Rose are in a different position with regard to the 2004 Transaction. They were not debtors in the 2003 bankruptcy. Therefore, the reaffirmation procedure in the Bankruptcy Code is not applicable to them. Instead, they alleged fraud based on the theory that Defendants knowingly misrepresented to Stan and Rose that Brad and Brenda owed amounts contained in the 2004 Transaction and Defendants thereby fraudulently induced Stan and Rose to enter into the agreement, guarantying Brad’s discharged debt that they otherwise would not have guaranteed. [¶9.] Throughout a series of summary judgment and pre-trial hearings, Stan and Rose elected to affirm the 2004 Transaction and sue for damages caused by the alleged fraud perpetrated upon them. The circuit court issued a memorandum decision on the parties’ motions for summary judgment on February 3, 2011. It held the obligations secured by the 2000 Mortgage and the 2002 CREM were discharged by execution of the 2004 Transaction. Accordingly, on summary judgment motion by Stan and Rose, it dismissed Beyers’ counterclaims for foreclosure against Stan and Rose on the basis of either the 2000 Mortgage or the 2002 CREM, which allegedly secured some of the same obligations. It further held that the 2002 CREM had partially lapsed due to a failure to timely file addendums according to SDCL -9- #26917, #26918, #26965, #26993 44-8-26. The court limited Stan and Rose to seeking damages at the jury trial, stating that they could not rescind the 2004 Transaction. At trial, the question of fraud went to the jury, which decided that $439,100 of the 2004 Transaction was procured by fraud. The court entered a judgment declaring $439,100 uncollectible. This resulted in an enforceable amount of $210,900. The jury also awarded $20,000 exemplary damages to Stan and Rose, but the circuit court dismissed those as not supported by a compensatory damage award. [¶10.] The parties appeal, raising the following issues: 1. Whether FSB and Beyers were entitled to judgment as a matter of law on Stablers’ fraud claims and Beyers’ counterclaims. 2. Whether Stan and Rose should have been allowed to pursue emotional distress damages as part of the fraud and conspiracy claims against Beyers and FSB. 3. Whether Stan and Rose’s $20,000 exemplary damage verdict should be upheld. 4. Whether the 2004 CREM lapsed because the 2009 addendum was not signed by the mortgagee Beyers. 5. Whether the 2002 CREM lapsed. 6. Whether Beyers is a holder in due course of the ISB promissory note. 7. Whether Beyers and FSB are entitled to their attorneys’ fees and costs for work done in bankruptcy court. 8. Whether FSB and Beyers are entitled to a new trial.