Opinion ID: 2617682
Heading Depth: 1
Heading Rank: 2

Heading: Was Black's negligence the proximate cause of Wichita Federal's damages?

Text: Black argues that Wichita Federal did not establish a causal connection between his negligent trading and the damages incurred. Although the trial court did not originally make a specific finding on the issue of causation, it did address the issue in ruling on Black's motion to amend findings of fact and conclusions of law. [W]hether there is a causal connection between the breached duty and the injuries sustained is ... a question of fact. Durflinger v. Artiles, 234 Kan. 484, 488, 673 P.2d 86 (1983). Black argues there was no evidence indicating that, if he had received the proper authority from the Board and the Bank, the outcome would have been any different. In other words, Black argues that his failure to inform the Board or the Bank is not the proximate cause of Wichita Federal's loss. At trial, Douglas Pittman, supervisory agent and assistant vice-president of the Federal Home Loan Bank Board, testified as follows: Q. If Wichita Federal Savings had submitted a plan to your office to sell Treasury Bond contracts short against this loan portfolio, would that have been approved? A. Not unless there was identified intent those loans were to be sold because without that intent there would be no economic justification to enter into the contracts to hedge the fixed-loan portfolio. The evidence was uncontroverted that Wichita Federal had no intention of selling its fixed-rate loan portfolio. Pittman testified that he would not have approved the plan. Black cites Karlen v. Ray E. Friedman & Co. Commodities, 688 F.2d 1193, 1205 (8th Cir.1982). In that case, Karlen was a customer who sued his broker for losses incurred when the broker made unauthorized transactions on Karlen's accounts. The court held there was no evidence that would have enabled the jury to determine that the losses would not have occurred but for the broker's unauthorized trading. In the case at bar, there is no doubt that the $17.5 million loss was a result of Black's unauthorized trading. The evidence indicates that, if Black had complied with the appropriate regulations and directives from the Bank, the trading would never have occurred because the Bank would not have approved it. Black's negligent trading in financial futures was the cause which in natural and continuous sequence, unbroken by any efficient intervening cause, produced the injury to Wichita Federal. See State Farm Mutual Automobile Ins. Co. v. Cromwell, 187 Kan. 573, 576, 358 P.2d 761 (1961). Can the plaintiff collaterally attack the Federal Home Loan Bank Board's determination that the transaction was a hedge? Black argues that, because Wichita Federal acquiesced in the Bank's finding that the transactions were a proper hedge, subject to deferral accounting, it is now estopped from claiming that the transactions were speculation. In Newton v. Hornblower, Inc., 224 Kan. at 515, this court said: The party raising the defense of estoppel is himself bound to exercise good faith in the transaction. [Citation omitted.] Thus, a party may not properly base a claim of estoppel in his favor on his own wrongful act or dereliction of duty, or fraud committed or participated in by him, or acts or omissions induced by his own conduct, concealment or representations. The trial court made the following finding of fact: 97. Nelson and bank initially concluded that a portion of this loss was the result of a `hedge,' and plaintiff filed its tax return claiming all of the loss as a result of a `hedge.' Defendant claims that plaintiff is estopped to claim it wasn't a hedge. Defendant was not harmed by these factors and did not rely on his detriment upon them. Indeed, it was defendant who persuaded the auditors and bank that a hedge was intended. Had he not been so persuasive, plaintiff would have been insolvent and plaintiff in this case could have well been FSLIC. Nelson testified that had he known at the time of the audit that the transaction was designated as a `hedge' after the fact, he would not have certified that any portion of this loss could be deferred.... Both Nelson and the bank relied upon the representations of defendant and Kane as to intent, and upon plaintiff's Exhibit 40A for justification for the number of contracts. Neither of those representations nor plaintiff's Exhibit 40A are reliable. Pittman testified that, in making a determination as to whether the transactions met the appropriate standards for deferral accounting, the Bank need not consider whether there was sufficient authorization for the transactions or whether the transactions had a legitimate business purpose. Pittman testified that, even if Wichita Federal were to recover the losses from Black, the deferral would still be allowed. Black does not argue that the Bank's treatment of the transactions as a hedge precludes a finding that Black was negligent. Black emphasizes that Wichita Federal accepted the benefits of the deferral accounting. At page 25 of his brief, Black says, One of the benefits to plaintiff from the use of deferral accounting was to avoid the showing of negative net worth and possible liquidation. Naturally, Black fails to mention that, but for his negligent transactions in financial futures, Wichita Federal would not have been put in the position of negative net worth and possible liquidation. Black has cited a number of cases in support of his estoppel argument. F.P.C. v. Colorado Interstate Gas Co., 348 U.S. 492, 99 L.Ed. 583, 75 S.Ct. 467 (1955), was an appeal of a rate reduction order of the Federal Power Commission. There, the Supreme Court held that the Court of Appeals could not consider an objection which had not been raised before the Commission in an application for rehearing, nor could the Court of Appeals invalidate the reduction order where the gas company had acquiesced in the order as a condition of allowing a merger. The case at bar is not an appeal of the Bank's determination that Black's transactions were a hedge, but is a state law negligence action against Black. Kaneb Services v. Federal Sav. & Loan Ins., 650 F.2d 78 (5th Cir.1981), was also a direct challenge of an administrative order. In Kaneb, the FSLIC had allowed Kaneb to acquire a savings and loan holding company on the condition that the amount of dividends paid out by one of the savings and loans acquired would be restricted. In holding that Kaneb was estopped from challenging the dividend restriction, the Court of Appeals said, [A] party with full knowledge of the facts, which accepts the benefits of a transaction, contract, statute, regulation, or order may not subsequently take an inconsistent position to avoid the corresponding obligations or effects. 650 F.2d at 81. Black does not explain how Wichita Federal, by trying to recover their losses from Black, is avoiding the corresponding obligations or effects. If Wichita Federal recovers from Black, it will have to claim the recovery as an ordinary gain and will be appropriately taxed for such a gain pursuant to 26 C.F.R. § 1.165-1(d)(2)(iii) (1989). Another distinguishing factor of Colorado Interstate Gas Co. and Kaneb is that both involved official orders of an administrative agency. In the case at bar, the Bank made its determination that the transactions could qualify as a hedge for purposes of deferral in the course of its investigation into the solvency of Wichita Federal. The Bank also determined that Black's trading was unauthorized and was an unsafe and unsound practice. The issue of collateral estoppel in relation to administrative actions was discussed in Nasem v. Brown, 595 F.2d 801 (D.C. Cir.1979), and Intern. Tel. & Tel. Corp. v. American Tel. & Tel., 444 F. Supp. 1148 (S.D.N.Y. 1978). In those cases, the courts cited United States v. Utah Constr. Co., 384 U.S. 394, 16 L.Ed.2d 642, 86 S.Ct. 1545 (1966), for the rule that collateral estoppel effect could be given to findings of an administrative agency where the agency was acting in a judicial capacity and the parties were given a fair opportunity to litigate the issues. There are three reasons that Black's estoppel argument fails. First, the hedge/speculation issue is not relevant to a determination of negligence. Second, Black cannot properly raise the issue under the test set out in Newton v. Hornblower, Inc., 224 Kan. at 515. Finally, the Bank's determination that the transactions were a hedge was not the type of administrative agency action which invokes collateral estoppel. Black argues that Wichita Federal should have sought review of the Bank's findings through the appropriate procedures under the Administrative Procedure Act. Black ignores the fact that this case is not an appeal of the Bank's findings, but a state law negligence action. To challenge the Bank's findings would be against the best interests of Wichita Federal, as it was those very findings which enabled Wichita Federal to remain open. Black cites North Mississippi Sav. & Loan Ass'n v. Hudspeth, 756 F.2d 1096 (5th Cir.1985), in which the court dismissed a claim for breach of contract brought by a former president of a savings and loan association. The savings and loan association had been placed in receivership of the FSLIC and, therefore, the court reasoned that Hudspeth must bring his claims before the Federal Home Loan Bank Board before seeking judicial review. In the case at bar, Wichita Federal has not been placed in FSLIC receivership. In addition, Hudspeth was essentially overturned this year in Coit Independence v. FSLIC, 489 U.S. ___, ___, 103 L.Ed.2d 602, 622, 109 S.Ct. 1361 (1989): Indeed, we hold explicitly in Part III that Coit is entitled to de novo consideration of its state law claims in court, and that FSLIC has no statutory authority to divest the courts of subject matter jurisdiction over those claims. Peoples' Sav. & Loan v. First Federal Sav. & Loan, 677 F. Supp. 1104 (D. Kan. 1988), which is cited by Black, also relies on Hudspeth. While the courts of this state need not always accept an administrative agency's interpretation of its own regulations [citation omitted], it has long been recognized that, in order to insure effectiveness and uniformity, an agency's own interpretation of its regulations will be given great weight and, in some cases, controlling weight. Hemry v. State Board of Pharmacy, 232 Kan. 83, 85-86, 652 P.2d 670 (1982). Black's argument that the findings of the Bank should have been given deference has some merit. The history of judicial review of the actions of federal banking authorities, that is, the Comptroller of the Currency and the FHLBB, is therefore marked by extraordinary deference to the technical policy decisions of the agencies in areas where Congressional guidance is slight. [Citations omitted.] City Fed. Sav. & Loan Ass'n v. Fed. Home Loan Bank, 600 F.2d 681, 688 (7th Cir.1979). In its proposed findings of fact, Wichita Federal made the following statements: The defendant has argued that since a portion of this loss qualified for deferral, it must have been a hedge. If it was a hedge, then there is no negligence. This argument wholly misses the point. For accounting purposes, the propriety or business objectives for attempting a hedge are irrelevant. All that is important for accounting purposes is the intent, irrespective of how negligently it was done. Although the trial court may have erred in finding that the transactions were speculation rather than a hedge, that finding does not affect the outcome of this litigation. The fact that the transactions were treated as a hedge for accounting purposes did not preclude a finding of negligence on the part of Black. Is the plaintiff estopped from recovering from the defendant because of representations the plaintiff made on its tax return and audited financial statement? Black argues that Wichita Federal should not be able to recover the loss from him because it claimed the loss on its 1985 income taxes and received tax benefits for its loss. It is uncontroverted that Wichita Federal claimed the loss and received a $7.3 million tax benefit because of the loss. Black bases his argument on a theory of quasi-estoppel. Quasi-estoppel applies where a party has previously taken a position which is so inconsistent with the position now taken as to render the present claim unconscionable. Fast v. Fast, 209 Kan. 24, 29, 496 P.2d 171 (1972). Again, Black cites no authority for the proposition that claiming the loss as a hedge loss precludes a finding that he was negligent. Black downplays his role in the tax treatment of the hedge loss. 26 U.S.C. § 1256(e)(2)(C) (1982) requires that the transaction be clearly identified as a hedge on the day on which it is made. It was Black's representations to the Bank and the auditor that he intended a hedge which led to the finding that the loss could be claimed as a hedge. The Internal Revenue Service regulations require that there be no reasonable prospect of recovery before a loss can be claimed pursuant to 26 U.S.C. § 165(a) (1982). 26 C.F.R. § 1.165-1(d)(2)(i) (1989). Black contends that the doctrine of quasi-estoppel should preclude recovery from him because Wichita Federal represented that it had no reasonable prospect of recovery when it claimed the loss on its 1985 tax return. Black cites a number of cases interpreting the reasonable prospect of recovery requirement. All of these cases, however, are taxpayer appeals of the Commissioner of Internal Revenue's finding that they could not claim their loss in a certain year because they still had a reasonable prospect for recovery of all or part of the loss. None of those cases stand for the proposition that a suit for recovery of losses is barred by a prior claim of the losses on a tax return. 26 C.F.R. § 1.165-1(d)(2)(iii) provides for the situation in which the taxpayer has claimed a loss and subsequently receives reimbursement for the loss. A review of cases involving 26 U.S.C. § 111 (1982 and Supp. V 1987) indicates that, where a taxpayer has deducted a loss in a previous year and received tax benefits as a result, the taxpayer must claim any subsequent recovery of the loss as gross income and be appropriately taxed for that income. In Randall v. Loftsgaarden, 478 U.S. 647, 92 L.Ed.2d 525, 106 S.Ct. 3143 (1986), the Supreme Court found that this tax benefit rule prevents undeserved windfalls where the taxpayer subsequently recovers a loss deducted and precludes the necessity of an offset for previous tax benefits received on the loss. The record does disclose that Wichita Federal was contemplating recovery from Black at the time it filed its 1985 tax return. The issue of whether Wichita Federal made misrepresentations on its 1985 tax return is best left to the Internal Revenue Service. The parties cite a number of cases which discuss the effect that taking certain tax benefits has on the outcome of subsequent litigation. In H.J. Baker & Bro. v. Orgonics, Inc., 554 A.2d 196 (R.I. 1989), Baker sought recovery of money owed to it by Orgonics, alleging that Orgonics and its chief stockholder conspired to defraud Baker in the collection of the debt and that conveyances of real estate and other corporate assets of Orgonics to the stockholder were fraudulent. The defendants sought to present evidence that Baker had written the Orgonics debt off on Baker's 1984 tax return under I.R.C. § 166(a)(1) (1984), which requires that one have the belief that no recovery is possible in order to write off a bad debt. The Supreme Court of Rhode Island concluded: We agree with plaintiff's contention that claiming a § 166(a)(1) deduction does not bar a subsequent suit for the debt. [Citations omitted.] Because plaintiff was not precluded from taking the bad-debt deduction and simultaneously continuing efforts to collect the debt, any evidence of the deduction was irrelevant and properly excluded. 554 A.2d at 203. In Matter of Stafos, 666 F.2d 1343 (10th Cir.1981), the court denied Stafos a discharge in bankruptcy because he had made a materially false statement in writing concerning his financial condition which precluded discharge pursuant to 11 U.S.C. § 32(c)(3) (1970). The evidence showed that Stafos had furnished a written financial statement to a credit agency in 1967 which claimed Stafos' business had a net profit of $46,598.85 in 1966. Stafos' individual federal and state income tax returns for 1966 claimed a net loss of $9,442.70. The Court of Appeals found that the bankruptcy judge was justified in finding that the 1966 income tax return was correct and in refusing discharge. The income tax return was used to show that Stafos had lied on other financial statements. In the case at bar, it is not contended that Wichita Federal made any representations about the amount of its losses in financial futures which conflicted with the losses claimed on its income taxes. In Meccage v. Spartan Ins. Co., 156 Mont. 135, 477 P.2d 115 (1970), the plaintiff sued his insurer for fire losses on his trailer home. The issue was whether the trailer home was an improvement of real property or personal property. The insurance company sought to estop the plaintiff from claiming that the trailer home was an improvement of real property because the plaintiff had claimed the trailer was personal property on the county tax assessment list and therefore had paid less tax then he would if the trailer had been claimed as an improvement of real property. The Supreme Court of Montana held: There is no basis for claiming an estoppel against such claim by the plaintiff here. The elements of estoppel are lacking. The record is devoid of any false or misleading representation by plaintiff to defendant insurer. There is nothing to indicate reliance by defendant insurer on the tax classification of plaintiff's property. Whatever the county's rights may be here, defendant insurer has no basis for claiming thereunder. 156 Mont. at 139. Wichita Federal cites Kornegay v. Thompson, 157 Ga. App. 558, 278 S.E.2d 140 (1981), which was a trover action brought for the recovery of a valuable diamond ring. The defendant claimed that the plaintiff gave the ring to her as a gift. The evidence indicated that, at the time the plaintiff purchased the ring, he used the name of the defendant and an out-of-state address in order to avoid Georgia sales tax. The court said: Although we in no way condone this admitted violation of our tax laws, the defendant was also party to this conduct and had full knowledge thereof. Because of defendant's knowledge and the lack of evidence of any adverse change of position by defendant in reliance on plaintiff's misrepresentations, this conduct by plaintiff results in no estoppel upon which defendant may rely. [Citations omitted.] 157 Ga. App. at 560. Black attempts to distinguish Kornegay because the defendant in that case was a participant in the violation of the tax law. That fact, however, is what makes Kornegay analogous to this case. It was Black's assertion that he intended a hedge which led to the tax treatment of the loss. Black also distinguishes the cases cited by Wichita Federal because they discuss equitable estoppel and detrimental reliance. Black argues that detrimental reliance is not an element of quasi-estoppel. Black argues that, by alleging that the transactions were speculation, Wichita Federal has taken a position inconsistent with its 1985 tax return and its audited financial statement, and that quasi-estoppel should be applied. Although claiming the transactions were speculation may be inconsistent with the accounting treatment, a claim that Black was negligent is not necessarily inconsistent with the accounting and tax treatment of the transaction. In his reply brief, Black admits that a finding that the transactions were a proper hedge does not necessarily preclude a finding of negligence. Given Black's role in the auditor's determination that the transactions could be given deferral treatment, it does not appear that Wichita Federal's previous claims were so inconsistent with its current claims as to make the current claims unconscionable.