Logan Bank & Trust v. Letter Shop
Annotate this Case
September 1993 Term
___________
No. 21610
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LOGAN BANK & TRUST COMPANY,
A WEST VIRGINIA BANKING CORPORATION,
Plaintiff Below, Appellee,
v.
THE LETTER SHOP, INC., A WEST VIRGINIA CORPORATION,
JAMES W. MULLINS, BRENDA G. MULLINS,
THOMAS J. GEORGE AND LINDA M. GEORGE,
Defendants Below, Appellees,
LOUIS A. CAPALDINI, JACQUELINE M. CAPALDINI,
VERNON N. MULLINS AND VICKI L. MULLINS,
Defendants Below, Appellants
_______________________________________________________
Appeal from the Circuit Court of Logan County
Honorable Alfred E. Ferguson, Judge
Civil Action Nos. 91-C-238 and 91-C-239
REVERSED AND REMANDED
_______________________________________________________
Submitted: September 21, 1993
Filed: October 28, 1993
K. Paul Davis
B. Judd Hartman
Spilman, Thomas, Battle and Klostermeyer
Charleston, West Virginia
Attorney for the Appellee,
Logan Bank & Trust Company
Philip B. Hereford
David L. Watson
Hereford & Hereford
Charleston, West Virginia
Attorneys for the Appellants,
Louis A. Capaldini and
Jacqueline M. Capaldini
John A. Rollins
Timbera Carte Wilcox
Frances W. McCoy
Lewis, Friedberg, Glasser, Casey & Rollins
Charleston, West Virginia
Attorneys for the Appellants,
Vernon L. Mullins and
Vickie L. Mullins
JUSTICE BROTHERTON delivered the Opinion of the Court.
SYLLABUS BY THE COURT
1. "Even if the trial judge is of the opinion to
direct a verdict, he should nevertheless ordinarily hear evidence
and, upon a trial, direct a verdict rather than try the case in
advance on a motion for summary judgment." Syllabus point 1,
Masinter v. WEBCO Co., 164 W.Va. 241, 262 S.E.2d 433 (1980).
2. "A motion for summary judgment should be granted
only when it is clear that there is no genuine issue of fact to
be tried and inquiry concerning the facts is not desirable to
clarify the application of the law." Syllabus point 3, Aetna
Casualty & Surety Co. v. Federal Ins. Co. of New York, 148 W.Va.
160, 133 S.E.2d 770 (1963).
3. We hereby adopt the disclosure rule in § 124 of the
Restatement of the Law of Security (1941), which lists three
prerequisites to finding that a creditor has a duty to disclose
certain facts that it is aware of about the debtor to the surety.
These conditions are: (1) "the creditor has reason to believe"
that the facts materially increase the surety's risk "beyond that
which the surety intends to assume;" (2) the creditor "has reason
to believe that the facts are unknown to the surety;" and (3) the
creditor "has a reasonable opportunity to communicate the facts
to the surety."
Brotherton, Justice:
The appellants, Vernon N. Mullins, Vickie L. Mullins,
Louis A. Capaldini and Jacqueline M. Capaldini, appeal from the
September 2, 1992, orders of the Circuit Court of Logan County,
West Virginia, which granted summary judgment against them in two
consolidated civil actions.
On March 21, 1991, the appellee, Logan Bank & Trust
Company (LB&T), initiated civil proceedings in the Circuit Court
of Logan County, seeking to collect from the appellants as
guarantors of a $500,000.00 promissory note which was in default.
LB&T moved for summary judgment on February 26, 1992, and a
hearing was held on the motion on August 26, 1992. The court
determined that there was no genuine issue of material fact
concerning the appellants' liability to LB&T, and granted LB&T's
motion for summary judgment.
The appellants now argue that by granting summary
judgment, the lower court rejected their primary defense to
liability, which was that LB&T's conduct violated both public
policy and specific provisions of the Uniform Commercial Code
which are set forth in W.Va. Code §§ 46-1-103 and 46-1-203. The
appellants charge that LB&T failed to disclose material facts in
order to induce them to act as personal guarantors on the loan in
question.
In Warren v. Branch, 15 W.Va. 21 (1876), this Court
discussed disclosure to a surety in a different context and under
conditions which were obviously far different from those which
exist in today's world of finance. Because we have never
specifically addressed the issue of a bank's duty to disclose
adverse material information regarding a loan to potential
guarantors, the appellants now urge this Court to follow the lead
of a number of other courts and adopt the principles found in §
124 of the Restatement of the Law of Security (1941). Section
124, titled "Non-Disclosure By Creditor," provides, in part,
that:
(1) Where before the surety has undertaken his obligation the creditor knows
facts unknown to the surety that materially
increase the risk beyond that which the creditor has reason to believe the
surety intends to assume, and the creditor also has
reason to believe that these facts are unknown to the surety and has a
reasonable opportunity to communicate them to the
surety, failure of the creditor to notify the surety of such facts is a defense
to the surety. (Emphasis added.)
Comment (a) makes it clear that "[n]on-disclosure of material
facts in the circumstances of the rule stated in this Section
constitutes fraud on the surety. The rule is merely a special
application in suretyship of the rule of Contracts that fraud
creates a defense." In addition, Comment (b) to § 124 explains
that:
b. Although in applying the rule stated in
this Section to particular situations there
is often considerable difficulty in
ascertaining the precise degree of knowledge
of surety and creditor and even in
determining the materiality of the facts
alleged to be concealed, the rule itself is
simple. It does not place any burden on the
creditor to investigate for the surety's
benefit. It does not require the creditor to
take any unusual steps to assure himself that
the surety is acquainted with facts which he
may assume are known to both of them. Among
facts that are material are the financial
condition of the principal, secret agreements
between the parties, or the relations of
third parties to the principal. If the
surety requests information, the creditor
must disclose it. Where he realizes that the
surety is acting or is about to act in
reliance upon a mistaken belief about the
principal in respect of a matter material to
the surety's risk, he should afford the
surety the benefit of his information if he
has an opportunity to do so.
Every surety by the nature of his obligation
undertakes risks which are the inevitable
concomitants of the transactions involved.
Circumstances of the transactions vary the
risks which will be regarded as normal and
contemplated by the surety. While no surety
takes the risk of material concealment, what will be deemed material concealment in
respect of one surety may not be regarded so
in respect of another. A creditor may have a
lesser burden of bringing facts to the notice of a compensated surety who is known to make
careful investigations before taking any
obligation than to a casual surety who relies
more completely upon the appearances of a
transaction. The rule stated in this Section
applies an objective test of the materiality
of the facts not disclosed rather than the
intent of the creditor if failing to make the
disclosure.
We hereby adopt the disclosure rule in § 124 of the
Restatement of the Law of Security (1941), which lists three
prerequisites to finding that a creditor has a duty to disclose
certain facts that it is aware of about the debtor to the surety.
These conditions are: (1) "the creditor has reason to believe"
that the facts materially increase the surety's risk "beyond that
which the surety intends to assume;" (2) the creditor "has reason
to believe that the facts are unknown to the surety;" and (3) the
creditor "has a reasonable opportunity to communicate the facts
to the surety."
However, the adoption of § 124 does not dispose of the
question which now confronts us, because the application of the
objective test found in § 124 to the facts presented in this case
is unclear. "As the comments to [§ 124] indicate, there may be
some difficulty in ascertaining the precise degree of knowledge
possessed by the surety and in determining the materiality of
facts which were not disclosed . . . But these ordinarily will
be questions for the trier of fact." First National Bank & Trust
Co. of Racine v. Notte, 97 Wis.2d 207, 293 N.W.2d 530, 536
(1980).
The appellants maintain that summary judgment was
inappropriate because there is a factual dispute about whether
LB&T acted in good faith in this matter. LB&T counters this
position by questioning whether it actually owed the appellants a
duty of good faith. The bank maintains that there was not a
fiduciary relationship between the parties. LB&T also asserts
that the guarantors had a duty to inquire and make themselves
aware of information relevant to the loan.
Because of the complex factual issues which remain in
dispute in this case, we conclude that summary judgment was
improper. For the reasons discussed below, we reverse the
circuit court's summary judgment orders and remand this case to
that court for trial by jury.
Facts relevant to our inquiry reveal that Thomas J.
George and James W. Mullins became partners in a business
enterprise known as The Letter Shop, Inc., in the Spring of 1983.
At the time, Thomas George was working for Logan Media, Inc., as
its President and Publisher. James W. Mullins is the son of one
of the appellants herein, Jacqueline M. Capaldini.
Initial financing for The Letter Shop acquisition was
provided by LB&T. First, however, in December, 1984, The Letter
Shop attempted to get a Small Business Administration (SBA)
guaranty of 80% of a $250,000.00 loan. The SBA refused to grant
the guaranty. In a letter dated January 8, 1985, the SBA
explained that its refusal was based on the insufficient
information provided in the original application.
Robert L. Wright, a certified public accountant, then provided the SBA with an extensive response on behalf of LB&T. By letter dated January 21, 1985, LB&T submitted the information compiled by Mr. Wright to the SBA and advised that it hoped the SBA, like LB&T, would consider the requested $250,000.00 as a secured loan, given the financial status of the anticipated guarantors of the loan. The proposed guarantors on this initial $250,000.00 loan included the Georges and Logan Media, Inc.
However, none of the appellants herein had any involvement in
this transaction.
The SBA denied approval of LB&T's request for a
guaranty of the proposed Letter Shop loan by letter dated January
29, 1985. The reasons given were as follows: (1) disproportion
of the $250,000.00 loan requested, along with other debts, to net
worth of The Letter Shop before and after the loan; (2) lack of
reasonable assurance of ability to repay the requested loan and
other obligations from earnings; (3) gross disproportion between
owner's actual investment and the loan requested; and (4) the
collateral, when considered with other factors, was deemed
insufficient.
Although the SBA refused the guaranty, LB&T proceeded
with the loan. On March 4, 1985, a $250,000.00 promissory note
was signed on behalf of The Letter Shop by its President, James
Mullins. In addition, Mr. and Mrs. George and Mr. and Mrs.
Mullins executed a Guaranty Agreement, by which they agreed to
jointly and severally guaranty the note. Mr. George's name also
appears on the guaranty on behalf of Logan Media, Inc., as its
President.
Finally, in order to secure the $250,000.00 note, an
Assignment of Promissory Note as Collateral Security was also
executed on March 4, 1985, whereby Mr. George assigned to LB&T,
as security, a promissory note payable to him in the amount of
$450,715.20 by Bay St. Louis, Inc.
In March, 1987, The Letter Shop submitted a proposal to
LB&T for a new $500,000.00 loan. This proposal included an
outline for restructuring The Letter Shop's ownership to include
James W. Mullins (from 48% owner to 25% owner), Thomas J. George
(from 51% owner to 25% owner), Louis A. Capaldini (new 25%
owner), and Vernon N. Mullins (new 25% owner). This proposal
also included the offer from a group of individuals (referred to
collectively as "the Mullins family group") to act as personal
guarantors on this loan. This group of prospective guarantors
was comprised of James W. Mullins, Brenda G. Mullins, Vernon N.
Mullins, Vicki L. Mullins, Thomas J. George, Linda M. George,
Louis A. Capaldini, and Jacqueline M. Capaldini.
On April 24, 1987, the original $250,000.00 Letter Shop
loan was "paid off" with the proceeds of the subsequent
$500,000.00 loan, which is at the center of the controversy in
this case. The four appellants herein were the personal
guarantors of this $500,000.00 loan.
The appellants now maintain that a review of the loan
history shows that when the $500,000.00 loan now at issue was
made on April 24, 1987, the original $250,000.00 loan was in
serious default. No payments had been made on this loan for
three months. According to the appellants, from the inception of
the original $250,000.00 loan in March, 1985, through April 24,
1987, payments to LB&T were late on a regular basis.
However, the appellants contend that it was only after
The Letter Shop defaulted on the $500,000.00 loan and LB&T
instituted a civil action against them that they became aware of
certain "revealing events" and what they refer to as a "course of
deception" by LB&T. For this reason, the appellants argue that
they are entitled to trial by jury to determine whether LB&T knew
certain material facts which, had they been disclosed, may have
caused the appellants to refuse to participate as guarantors of
the $500,000.00 loan.
In granting LB&T's motion for summary judgment, the
lower court made extensive findings of fact. The appellants
herein (defendants below) maintain that they were unaware of and
did not review the $500,000.00 loan proposal until after the
consolidated civil actions were instituted against them.
However, the lower court found that "[t]he risks, whether known
or unknown, associated with the signing of the said guaranty
agreement were voluntarily assumed by defendants Vernon N.
Mullins, Vicki L. Mullins, Louis A. Capaldini and Jacqueline M.
Capaldini primarily for the purpose of helping the family,
specifically, helping family members James W. Mullins, Brenda G.
Mullins, Linda M. George and Thomas J. George."
In its conclusions of law, the circuit court stated
that there was not a fiduciary relationship between LB&T and the
appellant/guarantors, that LB&T did not conceal any material
facts which it had a duty to disclose, and that LB&T had no duty
to disclose "to the guarantors its knowledge or any information
regarding the financial condition of The Letter Shop or the
history of the original $250,000.00 loan." Thus, the lower court
granted summary judgment, concluding that the
appellant/guarantors "assumed the risk associated with the
execution of the guaranty agreement."
"We have traditionally recognized that a summary
judgment constitutes a decision that there are no genuine issues
of material fact between the parties, and therefore a trial on
the merits is foreclosed. For this reason, we have viewed
summary judgment with suspicion . . . ." Masinter v. WEBCO Co.,
164 W.Va. 241, 262 S.E.2d 433, 435 (1980), citing Gavitt v.
Swiger, 162 W.Va. 238, 248 S.E.2d 849 (1978); Johnson v. Junior
Pocahontas Coal Co., Inc., 160 W.Va. 261, 234 S.E.2d 309 (1977);
Oakes v. Monongahela Power Co., 158 W.Va. 18, 207 S.E.2d 191
(1974); Hines v. Hoover, 156 W.Va. 242, 192 S.E.2d 485 (1972);
State ex rel. Payne v. Mitchell, 152 W.Va. 448, 164 S.E.2d 201
(1968).
In Masinter, our review of a number of cases yielded
the conclusion that ". . . summary judgment should not be
utilized in complex cases, particularly where issues involving
motive and intent are present." Id. at 436. Consequently, we
determined that "[e]ven if the trial judge is of the opinion to
direct a verdict, he should nevertheless ordinarily hear evidence
and, upon a trial, direct a verdict rather than try the case in
advance on a motion for summary judgment." Id. at syl. pt. 1.
There is no question that the case now before us is one
involving complex issues, including questions which may be
related to motive and intent. The "facts" presented by the
appellants/guarantors to support their contention that they were
misled differ significantly from the "facts" that LB&T offers to
show why it believes it had no duty to disclose information,
adverse or otherwise, to parties who made no inquiries. For this
reason, we cannot uphold the lower court's conclusion that
summary judgment was proper. "A motion for summary judgment
should be granted only when it is clear that there is no genuine
issue of fact to be tried and inquiry concerning the facts is not
desirable to clarify the application of the law." Syl. pt. 3,
Aetna Casualty & Surety Co. v. Federal Ins. Co. of New York, 148
W.Va. 160, 133 S.E.2d 770 (1963).
Further inquiry into the facts is not only desirable,
but necessary in this instance. There are significant questions
of fact related to what each party knew and when they knew it
regarding the financial transactions which are at the heart of
this matter. Clarification of these facts is needed in order to
ascertain the exact nature of the relationships between the
parties, whether the appellants should have inquired into the
financial condition of The Letter Shop, and whether the bank had
a duty to disclose any adverse information that might affect the
appellants' decision to guaranty the loan. For example, is there
any evidence which suggests that the guarantors were fully aware
of The Letter Shop's precarious financial condition? Or, is
there evidence to indicate that LB&T withheld material
information in order to persuade the appellants to guaranty the
loan? Did LB&T actively withhold information, or did the bank
simply assume that because they were family members, the
guarantors must have been aware of what they were getting into
when they agreed to guaranty the $500,000.00 loan?
There are far too many inferences that could be drawn
from the facts which are alleged for this court to permit the
matter to be disposed of on a motion for summary judgment. Thus,
we reverse the September 2, 1992, orders of the Circuit Court of
Logan County and remand this case for trial by jury.
Reversed and remanded.
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