#24638, #24641-a-RWS
2008 SD 83
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
* * * *
FIRST AMERICAN BANK
& TRUST, N.A., Plaintiff and Appellee,
v.
FARMERS STATE BANK OF CANTON, Defendant and Appellee,
and
MIDWEST COPIER SOLUTIONS, INC.
and S.A. ENTERPRISES, INC., Intervenors and Appellants.
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FIRST AMERICAN BANK & TRUST, N.A., Plaintiff, Defendant to
Complaint in Intervention,
and Third Party Plaintiff,
v.
STUART HAMILTON and S.A.
ENTERPRISES, INC., Third Party Defendants.
* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
LINCOLN COUNTY, SOUTH DAKOTA
* * * *
HONORABLE BRADLEY G. ZELL
Judge
* * * *
ARGUED MAY 21, 2008
OPINION FILED 08/13/08
THOMAS J. WELK
MICHAEL F. TOBIN of
Boyce, Greenfield, Pashby & Welk, LLP
Sioux Falls, South Dakota Attorneys for plaintiff
and appellee First
American Bank & Trust.
PATRICK DOUGHERTY of
Dougherty & Dougherty, LLP
Sioux Falls, South Dakota Attorneys for defendant
and appellee Farmers State
Bank of Canton.
RONALD A. PARSONS, JR.
STEVEN M. JOHNSON
TAMARA A. WILKA of
Johnson, Heidepriem, Janklow,
Abdallah & Johnson, LLP
Sioux Falls, South Dakota Attorneys for intervenors
and appellants.
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SABERS, Justice.
[¶1.] First American Bank & Trust (First American) brought a declaratory
action against Farmers State Bank (Farmers Bank) to determine which party was
in the first position secured party. Midwest Copier Solutions, Inc. (Copier) 1
intervened and alleged various causes of actions against both banks. All parties
moved for partial summary judgment. After the circuit court ruled against Copier,
it appealed. We affirm.
FACTS
[¶2.] On January 17, 2003, Copier sold its business to Keith Beachler’s
newly formed company, Midwest Communications (Communications).
Communications purchased the business for $855,576.00 pursuant to an asset sale
agreement. Communications also entered into a five-year lease with S.A.
Enterprises 2 for the building in Sioux Falls, South Dakota. Communications made
a $100,000.00 down payment and signed a promissory note for the balance. The
promissory note and accompanying documents gave Copier a security interest in all
of Communications’ assets. Beachler personally guaranteed the obligations. Copier
filed a UCC-1 financing statement with the Secretary of State’s office, perfecting its
security interest on January 29, 2003.
[¶3.] Hamilton, the owner of both Copier and S.A. Enterprises, had various
loans with First American that he wanted to refinance. S.A. Enterprises took out a
1. Copier is owned by Stuart Hamilton, who also owns a separate business, S.A.
Enterprises, Inc.
2. See note 1.
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$650,000.00 loan on February 28, 2003. This loan was secured by a real estate
mortgage on out-of-state property and the UCC-1 financing statement in which
Copier perfected its security interest in Communications’ assets
(Copier/Communications UCC-1). Hamilton signed the security agreement with
First American, which provided for collateral assignment of the
Copier/Communications UCC-1 and “authorize[d] [First American] to file a
financing statement covering the Property.” On March 4, 2003, First American filed
a UCC-3 assignment form with the Secretary of State’s office. The form listed
Copier as the secured party, First American as the assignee of the secured party
and Communications as the debtor. The UCC-3 also referenced the
Copier/Communications UCC-1 as the original financing statement. However, the
UCC-3 filed by First American failed to note that it was only a collateral
assignment of Copier’s secured interest in Communications assets. S.A. Enterprises
paid the $650,000.00 debt in October of 2003, but no termination statement was
requested and the UCC-3 was not canceled or amended at the Secretary of State’s
office.
[¶4.] Starting January 2003, First American also loaned money to
Communications. However, First American did not file a financing statement.
Therefore, while First American was a secured party, it was not perfected. First
American made a series of loans to Communications, each time taking a security
interest in all of Communications’ business assets. This continued until August of
2004, when First American refused to extend Communications any more credit.
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[¶5.] Communications approached Farmers Bank about obtaining a loan.
Farmers Bank indicated it might refinance the debt if it could be placed as the first
position secured party. Communications requested, and First American provided, a
letter which indicated that First American had the first perfected security interest
in Communications’ business assets and if Farmers Bank paid Communications’
outstanding debt with First American, it would “either satisfy the assigned filing or
reassign it to another lender.” All parties now agree that First American’s
conclusion that it was the first position secured party was erroneous and Copier
actually held the first position at all times.
[¶6.] Farmers Bank loaned $340,000.00 to Communications; $202,107.11
went to First American to pay Communications’ debt to First American. On
September 13, 2004, First American collaterally assigned its security interest to
Farmers Bank, listing the Copier/Communications UCC-1 as the initial financing
statement. On September 20, 2004, Farmers Bank filed its own UCC-1 to secure
Communications’ debt to its bank (Farmers/Communications UCC-1). Farmers
Bank did not list the UCC-3 assignment in the Farmers/Communications UCC-1.
[¶7.] Communications was frequently delinquent in its obligations to Copier
from time to time during late 2003 and 2004, but Copier did not declare default nor
accelerate the debt. Copier did not declare Communications in default until the
spring of 2005. Communications was delinquent $115,841.24 to Copier under the
note and $19,339.44 to S.A. Enterprises for the lease. Keith Gauer, Copier’s
attorney at the time, sent a letter of default notice to Communications on March 17,
2005, giving Communications thirty days to cure the default.
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[¶8.] Communications did not respond to the notice of default and Gauer
learned from Communications’ bankruptcy attorney, Clair Gerry, that
Communications would be unable to cure the default. Gauer did a UCC search and
found First American had filed a UCC-3 assigning the Copier/Communications
UCC-1 to Farmers Bank. Gauer spoke with First American regarding the
assignment and they discovered an error had occurred. First American sent a letter
to Farmers Bank on May 12, 2005, which explained that the UCC-3 assignment
purportedly assigned to Farmers Bank in connection with the Farmers Bank
refinancing was in error because the Copier/Communications UCC-1 was only
collaterally assigned and did not relate to a loan transaction between First
American and Communications. First American requested that Farmers Bank
correct the mistakenly filed assignment of the UCC-3. Farmers Bank replied that it
relied on First American’s representations when it decided to extend credit to
Communications and pay Communications’ outstanding debt to First American.
Therefore, it would only correct the filing if First American paid Communications’
outstanding debt of $339,123.26 plus per diem interest.
[¶9.] In the meantime, Communications’ business began a rapid downhill
slide. Employees quit and began working for a competitor. In early May 2005, the
South Dakota Department of Revenue and Regulation threatened to close
Communications for failure to pay sales tax. Copier alleges that it wanted to take
over the business in order to run it until another buyer could be found. It argues
that due to the confusion regarding the first position security interest, it was unable
to do so. Ultimately, Communications surrendered its assets to Copier on June 15,
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2005. On August 25, 2005, Copier’s attorney at this time, Roger Damgaard, noticed
all Communications’ creditors that Copier was going to auction Communications’
assets on September 6, 2005. The auction net proceeds, $11,693.93, were deposited
in a trust account pending the resolution of the priority dispute.
[¶10.] On July 27, 2005, First American brought a declaratory judgment
action against Farmers Bank to determine which party held the first position
security interest. Copier and S.A. Enterprises intervened in the action and brought
various causes of action against each bank. Copier’s amended intervenor complaint
alleged eleven counts. Against First American, Copier alleged: 1) breach of express
or implied contract; 2) breach of contract – implied covenant of good faith and fair
dealing; 3) breach of fiduciary duty; 4) negligence; 5) conversion; 6) violation of
SDCL 57A-9-509 and 57A-9-625; 7) unjust enrichment and constructive trust; and
8) declaratory judgment. Copier brought the following claims against Farmers
Bank: 1) unjust enrichment and constructive trust; 2) negligence; 3) conversion; 4)
violations of SDCL 57A-9-509 and SDCL 57A-9-625; and 5) declaratory judgment.
First American filed a third party complaint which alleged S.A. Enterprises and its
owner, Hamilton, were in default on the loan from First American to S.A.
Enterprises for some real property owned by S.A. Enterprises.3
[¶11.] Farmers Bank filed an answer to Copier’s amended complaint and
cross-claimed against First American. First American answered Copier’s complaint
and brought cross-claims against Farmers Bank. On August 18, 2006, all parties
3. The real property is the building that Communications leased from S.A.
Enterprises.
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moved for partial summary judgment. 4 After a hearing, the circuit court granted
First American’s and Farmers Bank’s motions for partial summary judgment
against Copier except for Count VII (Unjust Enrichment and Constructive Trust).
It denied Copier’s motion for partial summary judgment regarding all issues except
Count XI (Declaratory Judgment). 5 The circuit court found that Copier had a first
position security interest in Communications’ assets “that was at all times superior
to the interests of” First American and Farmers Bank. Copier’s motion for partial
summary judgment against Farmers Bank was denied except that the circuit court
4. First American brought a partial summary judgment motion against Copier
on the claims for: breach of contract, breach of good faith and fair dealing,
breach of fiduciary duty, negligence, conversion and the violations of the UCC
(SDCL 57A-9-509 and SDCL 57A-9-625), unjust enrichment and constructive
trust and declaratory judgment. Farmers Bank brought a motion for
summary judgment against Copier on the claims for declaratory judgment,
unjust enrichment and constructive trust, negligence, conversion and the
violation of the UCC. Copier brought a partial summary judgment motion
against First American on Copier’s issues of breach of contract, breach of
good faith and fair dealing, breach of fiduciary duty, conversion and the
violations of the UCC. Copier also brought a partial summary judgment
motion against Farmers Bank on the claims of conversion and violations of
the UCC.
5. Farmers Bank and First American made cross-motions for summary
judgment. Farmers Bank brought a motion for summary judgment against
First American for breach of contract and requested First American pay back
the money Farmers Bank paid to First American for the assignment of its
financing statement and filing date. First American brought a partial motion
for summary judgment against Farmers Bank for dismissal of the
counterclaims of constructive fraud, implied covenant of good faith and fair
dealing, failure of consideration, negligent misrepresentation, mistake of fact
and rescission. The circuit court granted First American’s motion for
summary judgment in part and dismissed the claims for failure of
consideration and mistake of fact, but denied the motion in all other respects.
The circuit court denied Farmers Bank’s motion for summary judgment. The
issues regarding these claims are not on appeal.
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declared Copier was entitled to the $11,693.93 in proceeds from the sale of
Communications’ assets held in trust. 6
[¶12.] In order to appeal, Copier motioned for certification and entry of
judgment as provided for in SDCL 15-6-54(b). The parties stipulated to the motion
and the circuit court entered a final judgment. Copier appeals the circuit court’s
decision and raises three issues. We restate the issues as:
1. Whether the circuit court correctly held that First American and
Farmers Bank had no duty to Copier under the circumstances
and properly granted summary judgment on the negligence
claims.
2. Whether the circuit court correctly granted summary judgment
on Copier’s conversion claim against Farmers Bank.
STANDARD OF REVIEW
[¶13.] Our standard of review of a circuit court’s grant of summary judgment
is well settled:
[W]e must determine whether the moving party demonstrated
the absence of any genuine issue of material fact and showed
entitlement to judgment on the merits as a matter of law. The
evidence must be viewed most favorably to the nonmoving party
and reasonable doubts should be resolved against the moving
party. The nonmoving party, however, must present specific
facts showing that a genuine, material issue for trial exists. Our
task on appeal is to determine only whether a genuine issue of
material fact exists and whether the law was correctly applied.
If there exists any basis which supports the ruling of the trial
court, affirmance of a summary judgment is proper.
Wojewski v. Rapid City Reg’l Hosp., Inc., 2007 SD 33, ¶12, 730 NW2d 626, 631
(quoting Read v. McKennan Hosp., 2000 SD 66, ¶8, 610 NW2d 782, 784) (additional
6. At the time of this judgment, the proceeds had already been released to
Copier.
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citations omitted). “Summary judgment is proper in negligence cases if no duty
exists as a matter of law.” Stone v. Von Eye Farms, 2007 SD 115, ¶6, 741 NW2d
767, 770 (quoting Bordeaux v. Shannon County Schools, 2005 SD 117, ¶11, 707
NW2d 123, 126). Whether a duty exists is a question of law reviewed de novo.
Casillas v. Schubauer, 2006 SD 42, ¶14, 714 NW2d 84, 88 (citing Bordeaux, 2005
SD 117, ¶11, 707 NW2d at 126).
[¶14.] 1. Whether the circuit court correctly held that First
American and Farmers Bank had no duty to Copier
under the circumstances and properly granted summary
judgment on the negligence claims.
[¶15.] Copier argues that First American and Farmers Bank had a duty to
act for the benefit of Copier and to refrain from “creating a dispute regarding
Copier’s security interest[.]” The circuit court concluded that neither First
American nor Farmers Bank had a duty with regard to Copier. Therefore, the
circuit court granted summary judgment on this issue in favor of the banks.
[¶16.] In determining whether a duty exists, we examine whether “a
relationship exists between the parties such that the law will impose upon the
defendant a legal obligation of reasonable conduct for the benefit of the plaintiff.”
Casillas, 2006 SD 42, ¶14, 714 NW2d at 88 (citing Estate of Shuck, 1998 SD 32, ¶8,
577 NW2d 584, 586). Additionally, a duty can be created by common-law or statute.
Hendrix v. Schulte, 2007 SD 73, ¶7, 736 NW2d 845, 847 (citing Kuehl v. Horner
Lumber Co., 2004 SD 48, ¶11, 678 NW2d 809, 812). Duty is also based upon
foreseeability. As we have explained:
Foreseeability may also create a duty. Although foreseeability is
a question of fact in some contexts, foreseeability in defining the
boundaries of a duty is always a question of law. Foreseeability
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in the ‘duty’ sense is different from foreseeability in fact issues
bearing on negligence (breach of duty) and causation.
Kuehl, 2004 SD 48, ¶10, 678 NW2d at 812 (quoting Braun v. New Hope Twp., 2002
SD 67, ¶9, 646 NW2d 737, 740). Therefore, “[w]hether a common-law duty exists
depends on the foreseeability of injury.” Luke v. Deal, 2005 SD 6, ¶19, 692 NW2d
165, 170 (quoting Poelstra v. Basin Elec. Power Co-op., 1996 SD 36, ¶16, 545 NW2d
823, 826).
First American
[¶17.] Copier argues that it was clearly foreseeable that injury would occur
when First American erroneously purported to assign a first position security
interest, which rightfully belonged to Copier, to Farmers Bank. First American
argues: 1) that the UCC does not allow these negligence actions and 2)
foreseeability does not create a duty for First American. First American argues
that summary judgment was proper because no duty existed.
[¶18.] First, the UCC does not preclude a negligence action. Section 1-103 of
the UCC [SDCL 57A-1-103(b))] provides:
Unless displaced by the particular provisions of this title, the
principles of law and equity, including the law merchant and the
law relative to capacity to contract, principal and agent,
estoppel, fraud, misrepresentation, duress, coercion, mistake,
bankruptcy, or other validating or invalidating cause shall
supplement its provisions.
We have previously noted that “[t]he U.C.C. provides that our common-law is
effective in commercial transactions unless specifically displaced by a particular
Code section.” Maryott v. First Nat’l Bank of Eden, 2001 SD 43, ¶20, 624 NW2d 96,
103. First American does not provide this Court with any explicit provision of the
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UCC that displaces common-law negligence. Therefore, First American’s first
argument fails.
[¶19.] Second, we examine whether a duty was created by foreseeability.
Specifically, we determine whether it was foreseeable to First American that
purporting to assign a first position security interest in Communications’ business
assets would harm Copier. We conclude it was not foreseeable; therefore, First
American did not have a duty to Copier.
[¶20.] As First American points out in its brief, at the time it purported to
assign a first position security interest, it could not foresee that Farmers Bank
would refuse to acknowledge Copier’s rightful first security interest. See Peterson
v. Spink Elec. Co-op, Inc., 1998 SD 60, ¶14, 578 NW2d 589, 592 (quoting Wildeboer
v. South Dakota Jr. Chamber of Commerce Inc., 1997 SD 33, ¶14, 561 NW2d 666,
669) (“[N]o one is required to guard against or take measures to avert that which a
reasonable person under the circumstances would not anticipate as likely to
happen.”)) (additional citation omitted). Farmers Bank argued that it had the first
position security interest until immediately before the summary judgment hearing.
In contrast, First American agreed with Copier that Copier had the first security
interest when the mistake was first discovered. Copier argues that First American
or “any bank should reasonably foresee that its own misunderstanding and
misrepresentations to third parties, including lenders, regarding the nature of its
interest in collateral might result in injury to the secured party with the true first
position in those assets.” In support of this argument, Copier cites Brandriet v.
Norwest Bank of South Dakota, N.A., 499 NW2d 613 (SD 1993) and First Western
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Bank, Sturgis, v. Livestock Yards Co., 444 NW2d 387 (SD 1989). However, these
cases do not provide sufficient support that foreseeability created a duty for First
American.
[¶21.] In Brandriet, Brandriets had two mortgages with Norwest Bank at
12.5% and 13.75% when they learned that they could apply for a United States
Department of Veterans Affairs (VA) loan at 8.5% that would replace the two higher
rate loans. 499 NW2d at 614. They intended to apply for the VA loan at a different
bank when the vice-president of business banking informed Brandriets that
Norwest was a “certified” VA lender and that Norwest could provide the VA loan.
Id. at 615. After applying, the loan officer rejected Brandriets’ application, and
without forwarding the application to the VA, told them that the VA had rejected
the loan due to insufficient income. By the time Brandriets learned the truth, the
interest rate on the VA loan had risen to over 10%.
[¶22.] At trial, Brandriets alleged negligent processing, fraudulent
misrepresentation, and negligent misrepresentation. Id. at 616. On appeal,
Norwest Bank challenged the jury’s verdict regarding sufficiency of the evidence on
negligent and fraudulent misrepresentation and negligent processing, the jury
instruction regarding a confidential relationship, and punitive damages. Id. at 617.
We affirmed the jury verdict and damages award. We noted that there were several
misrepresentations of fact, such as that Norwest was a “certified” VA lender and
that the VA rejected the application, both of which supported the jury’s verdict. Id.
at 616-17. Moreover, Brandriets relied on these misrepresentations to their
detriment.
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[¶23.] Additionally, Norwest Bank challenged the jury instruction that a
confidential relationship existed between the bank and Brandriets. Id. at 617-18.
We held that the lower court did not err in finding a confidential relationship
existed due to the facts and circumstances of the case. We noted that the
“Brandriets placed their trust and confidence in Norwest to process the VA loan;
Norwest officials were supposed to be acting with the Brandriets’ interest in mind.
Where such an exchange of trust and action exists, a confidential relation also
exists.” Id. at 618 (citing Schwartzle v. Dale, 74 SD 467, 471, 54 NW2d 361, 363
(1952)).
[¶24.] In First Western Bank, the bank loaned money to Madden, the sole
general partner of the partnership, purportedly on behalf of the partnership. 444
NW2d at 388. The partnership was the holding company for Madden’s Livestock
Market (Livestock Corporation). Livestock Corporation was run by Madden. The
bank was aware of the different partnership and corporation owners,
responsibilities, holdings and debts. Madden did not use the money for partnership
business, but instead deposited the money into a bank in Hawaii and a Livestock
Corporation account.
[¶25.] Upon default, the bank sought to reform the legal description of the
mortgage and foreclose upon the mortgage given by Madden on behalf of the
partnership. Id. The limited partners counterclaimed alleging the bank was
negligent in loaning Madden money on behalf of the partnership. The circuit court
found the loan was made on behalf of the partnership and granted summary
judgment in favor of the bank. We reversed the circuit court’s grant of summary
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judgment and concluded there were genuine issues of material fact whether the
bank knew or should have known the loan proceeds were for the Livestock
Corporation and not the partnership. Id. at 390. These genuine issues of fact
precluded summary judgment.
[¶26.] Both cases are distinguishable from the present case. There is not a
confidential relationship between First American and Copier. This was an arms
length business transaction, not a customer applying for a VA loan. First American
took an interest in the Copier/Communications UCC-1 to protect its interest in the
$650,000.00 loan to S.A. Enterprises.
[¶27.] Furthermore, under the UCC, First American had the right to assign
the UCC-3 (which noted the interest in the Copier/Communications UCC-1).
Hamilton, as the owner of S.A. Enterprises, signed the UCC-3 authorizing First
American as the assignee. SDCL 57A-9-509(e) 7 authorizes First American to file
amendments. The security agreement provided that the interest secured current
and any future indebtedness. 8 Moreover, the security agreement was still in effect.
The security agreement provided that the agreement would be in effect “until
terminated in writing, even if the Secured Debts are paid and Secured Party is no
longer obligated to advance funds to Debtor or Borrower.”
7. SDCL 57A-9-509(e) provides that “[i]f there is more than one secured party of
record for a financing statement, each secured party of record may authorize
the filing of an amendment under subsection (d).”
8. Although the language in the security agreement provided for future loans,
the parties agree there were none contemplated at the time of executing the
agreement.
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[¶28.] “Issues of negligence . . . and proximate cause are ordinarily questions
of fact and it must be a clear case before a trial judge is justified in taking these
issues from the jury.” Luther v. City of Winner, 2004 SD 1, ¶24, 674 NW2d 339,
348 (citation omitted). “It is only when reasonable people can draw but one
conclusion from facts and inferences that they become a matter of law and this
rarely occurs.” Steffen v. Schwan’s Sales Enterprises, Inc., 2006 SD 41, ¶26, 713
NW2d 614, 622 (additional citation omitted) (Zinter, J., concurring in part and
dissenting in part). While First American may have told Farmers Bank it held a
first position security interest, it could only assign whatever interest it actually
held. 9 Copier was the first position security interest the whole time and Copier’s
alleged damages were not proximately caused by First American’s assignment of its
interest to Farmers Bank. Despite Farmers Bank’s claim that it was in first
position (due to First American’s misrepresentation to Farmers Bank),
Communications relinquished its business assets to Copier and Copier auctioned off
the assets without impediment from either First American or Farmers Bank. As
Copier was always in the first position, it could have seized the assets immediately,
but it failed to do so. “Only when legal minds cannot differ as to the failure of
proximate cause is judgment as a matter of law . . . appropriate.” Maryott, 2001 SD
43, ¶11, 624 NW2d at 101 (citing Walther v. KPKA Meadowlands Ltd. Partnership,
9. Whether First American made fraudulent or negligent misrepresentations to
Farmers Bank is not an issue in this appeal as summary judgment on this
issue was denied below. Assuming First American owed a duty to Farmers
Bank, it does not translate into a duty to Copier, despite Copier’s attempt to
argue so. See Palsgraff v. Long Island R. Co., 162 NE 99, 101 (NY 1928).
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1998 SD 78, ¶54, 581 NW2d 527, 537). Here, Copier’s damages were not
proximately caused by First American’s actions.
[¶29.] Given these facts and circumstances, First American did not have a
legal duty to act for the benefit of Copier and First American’s acts did not
proximately cause any alleged injury suffered by Copier as a matter of law.
Therefore, summary judgment was properly granted.
Farmers Bank
[¶30.] Copier alleges that “once Farmers Bank was made expressly aware
that it had received an invalid assignment of a security interest in the
Communications assets and was asked to cooperate in correcting the situation, it
had a duty to do so.” Copier also claims “[i]t was clearly foreseeable to Farmers
Bank that Copier might be damaged by the bank’s failure to cooperate in correcting
the record and removing the dispute over Copier’s security interest.” Copier also
asserts that “[b]ecause there are, at a minimum, disputed material facts on the
question of whether Farmers Bank breached a duty to Copier and the damages
resulting from that breach,” the circuit court should be reversed.
[¶31.] Like the negligence claim against First American, Copier points to no
statute or case law which creates a duty on the part of Farmers Bank. See Delka v.
Continental Cas. Co., 2008 SD 28, ¶17, 748 NW2d 140, 148 (noting that “we have
been directed to nothing in the statutes or common law . . . imposing . . . a . . . duty .
. . to potential employees/enrollees . . . that would support [plaintiff’s] claim of
negligence.”). Instead, Copier claims it was clearly foreseeable an injury might
arise and therefore, Farmers Bank had a duty.
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[¶32.] Foreseeability does not provide a duty in this instance. It is not
foreseeable that by claiming to hold the first position security interest, Copier would
be injured. Farmers Bank claimed the first position for over a year, only
abandoning that claim at the summary judgment hearing. However, as noted
above, Communications relinquished its business assets to Copier long before that
and Copier auctioned off the assets without impediment from either First American
or Farmers Bank. Furthermore, as a secured party of record, SDCL 57A-9-509(e)
allowed Copier to file a termination statement and the alleged “cloud on the title”
would have disappeared.
[¶33.] Moreover, Farmers Bank had the right to take a reasonable amount of
time to determine its position as it claims it paid First American over $200,000.00
for the assignment. While normally reasonableness would be a jury determination,
under the facts of this case, Farmers Bank did not unreasonably delay as a matter
of law. In this case, the business was delinquent and insolvent in its obligations for
over a year before going defunct very quickly. Despite knowing there were delays in
payment for over a year, Copier did not declare default until March 17, 2005, and
even then, Communications was given thirty days to cure. Thirty days later, the
default was not cured and the business was in operations for only fifteen more days,
until May 2, 2005. After the last day Copier was in operation, Gauer on behalf of
Copier, wrote a letter indicating Copier was unable to determine who had the first
priority. Moreover, as early as May 10, 2005, Gauer concluded that
Communications could not survive as a going concern. It was not until May 12,
2005, that First American concluded the UCC-3 was ineffective and Farmers Bank
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was then notified. During this time, Farmers Bank held the theory it was in first
secured position as stated by First American. However, under these facts, an
unreasonable amount of time had not passed; unfortunately, during this short time
the business lost its value, but that does not create a duty or liability on behalf of
Farmers Bank. Communications already went out of business and Gauer already
determined the business would not survive as a going concern before Farmers Bank
was notified of a problem with the priorities and security interests.
[¶34.] “No one is required to guard against or take measures to avert that
which a reasonable person under the circumstances would not anticipate as likely to
happen.” Poelstra v. Basin Elec. Power Co-op, 1996 SD 36, ¶18, 545 NW2d 823, 827
(citations omitted). Moreover, foreseeability “relates to the time when the act or
omission occurred.” On May 12, 2005, the date of the letter to Farmers Bank, it was
not foreseeable that Copier would suffer injury for inability to sell the business as a
going concern.
[¶35.] At the time Farmers Bank received the notice of potential priority
problems, the Department of Revenue had already threatened to shut the business
down for failure to pay sales tax, the employees had quit and went to work for a
competitor, and Copier (through their attorney, Gauer) had acknowledged that
Communications could not survive as a going concern. Therefore, Farmers Bank
had only been aware of the situation for a few days. 10 That period of time is not
unreasonable as a matter of law.
10. Even if Farmers Bank was aware of Copier’s default and failure to cure, only
fifteen days had passed from the deadline to cure, which was April 17, 2005,
(continued . . .)
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[¶36.] Under these factual circumstances, there is no showing that the circuit
court erred in granting summary judgment in favor of Farmers Bank. We affirm.
[¶37.] 2. Whether the circuit court correctly granted summary
judgment on Copier’s conversion claim against Farmers
Bank.
[¶38.] Copier claims Farmers Bank should be held liable for conversion.
“Conversion is the unauthorized exercise of control or dominion over personal
property in a way that repudiates an owner’s right in the property or in a manner
inconsistent with such right.” Chem-Age Industries, Inc. v. Glover, 2002 SD 122,
¶20, 652 NW2d 756, 766 (additional citation omitted). According to the South
Dakota Pattern Jury Instructions, Copier must prove the following elements in
order to prevail on conversion: (1) Copier owned or had a possessory interest in the
property; (2) Copier’s interest in the property was greater than Farmers Bank; (3)
Farmers Bank exercised dominion or control over or seriously interfered with
Copier’s interest in the property; and (4) such conduct deprived Copier of its interest
in the property. See SD Pattern Jury Instructions (civil) 170-30-2. Copier’s
conversion claim must fail because Copier was never deprived of its first position
security interest in Communications’ business assets. It simply perceived or
imagined it was deprived of its first position.
[¶39.] The circuit court found that “Copier was never deprived of its first
perfected position in the business assets of Communications.” Moreover, all parties
________________________
(. . . continued)
and complete failure of the business on May 2, 2005. The necessity of
Farmers Bank acting quickly had already dissipated.
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agree that Copier is, and at all times was, in the first perfected position. Therefore,
the conversion claim against Farmers Bank fails as a matter of law as Copier was
never deprived of its interest.
[¶40.] Under the facts of this case, we conclude that the circuit court did not
err in determining as a matter of law that neither bank has liability to Copier
because: 1) there was no violation of the UCC provisions – First American had the
right to file amendments; 2) there is no statute or case law that extends a duty
under the facts of this case; 3) Copier is bound to know its own position that it was
always in first position security interest; 4) it was not foreseeable to First American
that Farmers would refuse to acknowledge Copier’s superior security interest for
almost two years after it was told of the claimed mistake; 5) Farmers had the right
to take a reasonable amount of time to determine its position and any damages or
loss of value had already occurred before a reasonable amount of time expired; and
6) Copier’s damages, if any, were not proximately caused by either banks’ actions,
but by its own delay in asserting its first position security interest. The circuit
court correctly ruled Farmers Bank was not liable for conversion as Copier was
always in first secured position and therefore, was never deprived of its interest.
[¶41.] Copier was in reality a competing lender with respect to the same
collateral. In the world of commercial finance, it is always foreseeable that there
will be conflicting claims to collateral and that all secured parties will assert
whatever rights they may have in any collateral. They have no duty to do
otherwise. Therefore, in the absence of any authority, it is an incredible stretch
under these circumstances to claim either bank has a duty to a competing lender in
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the same collateral. For all of the foregoing reasons, we affirm the circuit court’s
grant of summary judgment in all respects.
[¶42.] Affirmed.
[¶43.] GILBERTSON, Chief Justice, and ZINTER, Justice, concur.
[¶44.] KONENKAMP and MEIERHENRY, Justices, dissent on Issue 1.
KONENKAMP, Justice (dissenting on Issue 1).
[¶45.] Midwest Copier asserts that the circuit court erred in declaring that
First American Bank and Farmers Bank were not negligent as a matter of law. In
affirming summary judgment, this Court rules there was no legal forseeability. But
it was certainly foreseeable that the true first position secured party could be
injured when First American erroneously assigned an ersatz first security interest
to a third party. It was equally foreseeable that the true first position secured party
could be injured when Farmers Bank, made aware of the error, refused to recognize
its junior position. Because injury was foreseeable, First American and Farmers
Bank each owed a duty to Midwest Copier.
[¶46.] The existence of a common law duty depends on the foreseeability of
injury. Luke v. Deal, 2005 SD 6, ¶19, 692 NW2d 165, 170 (quoting Poelstra v. Basin
Elec. Power Co-op., 1996 SD 36, ¶16, 545 NW2d 823, 826). Foreseeability of injury
is examined at the time the allegedly negligent act occurred. Poelstra, 1996 SD 36,
¶18, 545 NW2d at 827. This is distinguished from foreseeability as it relates to the
issue of proximate cause, which is examined at the time the damage is done. Id.;
see also Peterson v. Spink Elec. Co-op., Inc., 1998 SD 60, ¶15, 578 NW2d 589, 592.
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[¶47.] When the Court declares that First American owed no duty to Midwest
Copier, it fails to distinguish between “[f]oreseeability in the ‘duty’ sense” and
“foreseeability in fact issues bearing on negligence (breach of duty) and causation.”
See Kuehl v. Horner (J.W.) Lumber Co., 2004 SD 48, ¶10, 678 NW2d 809, 812
(quoting Braun v. New Hope Twp., 2002 SD 67, ¶9, 646 NW2d 737, 740).
Foreseeability in the duty sense asks: is it foreseeable that an injury would occur to
the true first position secured party when First American purported to assign its
false first position security interest to a third party? In the Court’s view, “[First
American] could not foresee that Farmers Bank would refuse to acknowledge
[Midwest] Copier’s rightful first security interest.” See supra ¶20. This conclusion,
however, considers facts that bear on the issue of causation, not whether a duty
exists. Farmers Bank’s refusal to acknowledge Midwest Copier’s first security
interest is irrelevant to whether it was foreseeable that Midwest Copier would be
injured by First American’s negligent act. Similarly, Midwest Copier’s failure to
request a termination statement from First American of its UCC filing and First
American’s right to assign whatever interest it had are facts unrelated to the
determination of whether First American owed a duty to Midwest Copier.
[¶48.] Foreseeability of injury and whether a duty exists is properly
examined at the time First American erroneously assigned a first position secured
interest to a third party. There is no dispute that First American misrepresented to
a third party that First American had a first position security interest when in fact
Midwest Copier had such position. This allegedly negligent act could certainly
cause injury to the true first position secured party, and therefore, a duty existed.
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[¶49.] Nevertheless, the Court holds that as a matter of law Midwest Copier’s
damages were not proximately caused by First American’s actions. It reasons that
because First American could only assign whatever rights it actually held,
mistakenly assigning its non-existent first secured position to a third party could
not have caused Midwest Copier’s damages. In so holding, the Court declares that
legal minds could not differ on the conclusion that First American’s actions did not
proximately cause Midwest Copier’s damages. See supra ¶28.
[¶50.] Proximate cause is a question for the jury except in the “rarest of
cases.” Bauman v. Auch, 539 NW2d 320, 325 (SD 1995); see also Tipton v. Town of
Tabor, 1997 SD 96, ¶68, 567 NW2d 351, 374 (Sabers, J., dissenting) (“It is axiomatic
that questions of breach, proximate cause, and damages are resolved by the jury in
all but the rarest of cases.”). “We are obliged to view the facts in a light most
favorable to the nonmoving party.” Smith ex rel. Ross v. Lagow Const. & Dev. Co.,
2002 SD 37, ¶15, 642 NW2d 187, 191 (citing Pickering v. Pickering, 434 NW2d 758,
760 (SD 1989)). Here, Midwest Copier alleges that because First American
breached its duty, Midwest Copier was prevented “from quickly stepping in to
preserve the viability of the business.” Midwest Copier further claims that because
of First American’s actions, “Communications was stripped of its value as an
ongoing enterprise, rendering Midwest Copier’s secured position virtually
worthless.” Viewing the evidence in a light most favorable to Midwest Copier, the
dispute caused by First American’s misrepresentation could have caused Midwest
Copier’s damages.
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[¶51.] It is important to note that imposing a duty on First American does not
end the matter. The issues of breach, proximate cause, and damages are still
hurdles Midwest Copier must overcome. The question on appeal is only whether a
duty exists: was an injury foreseeable at the time of the allegedly negligent act?
The answer to that question against First American is yes, and the circuit court
erred when it granted First American summary judgment on Midwest Copier’s
negligence claim.
[¶52.] The court similarly erred when it granted summary judgment in favor
of Farmers Bank on Midwest Copier’s negligence claim. It was foreseeable to
Farmers Bank that the true first position secured party could be injured when
Farmers Bank, informed that its interest was not superior, refused to acknowledge
its junior interest. The Court contends that no duty existed because Farmers Bank
had a right to determine its true position as a secured party. The Court further
finds as a matter of law that the amount of time Farmers Bank took to determine
its position was reasonable.
[¶53.] Whether a duty exists does not depend on the reasonableness of
Farmers Bank’s conduct. Nor does the existence of a duty depend on what actions
Midwest Copier took with respect to the default of Communications, when
Communications actually relinquished its assets, what in fact caused Midwest
Copier’s damage, or what notice the Department of Revenue sent regarding the
demise of Communications. See Kuehl, 2004 SD 48, ¶10, 678 NW2d at 812
(“[f]oreseeability in the ‘duty’ sense is different from foreseeability in fact issues
bearing on negligence (breach of duty) and causation”) (quoting Braun, 2002 SD 67,
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¶9, 646 NW2d at 740). Duty is determined by asking whether injury was
foreseeable at the time the negligent act occurred. Here, the allegedly negligent act
occurred when Farmers Bank was informed that its interest in the assets of
Communications was junior to Midwest Copier’s and Farmers Bank continued to
assert its position as the first secured party. It was foreseeable that this allegedly
negligent conduct could injure the true first position secured party, Midwest Copier.
Therefore, a duty exists and summary judgment was improperly granted on Issue 1.
[¶54.] MEIERHENRY, Justice, joins this dissent.
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