Green River Associates v. Mark Twain Kansas City Bank

TURNAGE, Judge.

Green River Associates filed suit against Mark Twain Kansas City Bank in three counts. Count I was on a theory of failure of consideration and sought to invalidate a note and deed of trust executed by the general partner of Green River and delivered to the Bank. Count II was for negligent disbursement of the proceeds of the loan and sought damages, and Count III alleged bad faith on the part of the Bank in dealing with a fiduciary and sought damages. The trial court found in favor of the Bank on all counts but found the Bank acted negligently. Green River has appealed and contends the note is invalid for failure of consideration. As a precaution in the event the negligence count is reached on appeal, the Bank has appealed from the trial court finding that it was negligent. Reversed in part and affirmed in part and the Bank’s appeal is dismissed.

This is another sorry chapter in the collapse of Kroh Brothers, a real estate company. The facts are not in dispute. Green River is a limited partnership whose sole business is the ownership and operation of a mobile home park in Riverside County, California. Ewing Kauffman is the principal investor in Green River and he with three other individuals are the remaining limited partners. Green River was formed in June, 1978, and shortly thereafter Kroh Brothers Equity (KBE) became the general partner. KBE was a wholly owned subsidiary of Kroh Brothers Development Company.

The Bank began loaning money to Kroh Brothers in February, 1986, and by June these loans totaled more than $8 million. On June 4, 1986, Jenna Garretson, Assistant Vice-President of Kroh Brothers Development Company and also of KBE wrote to Scott Spiker, Senior Vice-President of the Bank, requesting a loan to be made to Green River. Garretson said that the purpose of the loan was to buy Kauff-man’s limited partnership interest. The Bank had never dealt with Green River prior to this time but was well aware that KBE was the general partner and also a Kroh Brothers subsidiary. The Bank felt confident of its “growing relation” with Kroh Brothers by the time Garretson’s request arrived. Spiker made a presentation to the Bank’s loan committee and strongly recommended that a loan to Green River in the amount of $3.1 million be approved based on the financial evaluation he made of Green River in its operation and on the Bank’s “solid relationship with the Kroh Brothers.” Spiker obtained a copy of the Green River partnership agreement and thoroughly reviewed it. The Bank never contacted Kauffman to verify that Green River was going to buy out his interest in the partnership.

After the loan had been approved and Spiker was prepared to disburse the pro*896ceeds, he contacted Garretson for instructions. Garretson told Spiker to wire the loan proceeds to a United Missouri Bank account that Spiker knew belonged to Kroh Brothers. Spiker also knew that the account to which the loan proceeds were wired did not belong to KBE or Green River. Spiker withheld fees charged by the Bank and wired $3,057,790 to the Kroh Brothers account as instructed by Garret-son.

Spiker had questioned Garretson about the reason for wiring the proceeds to the Kroh Brothers account rather than having the proceeds going to an account in the name of Green River or KBE. Garretson said neither KBE nor Green River had a bank account and without further inquiry Spiker wired the proceeds to the Kroh Brothers account as directed by Garretson.

In late 1986, after the loan to Green River had been completed, it became public knowledge that Kroh Brothers and its various entities were in deep financial trouble. Green River failed to repay the loan and in January, 1987, the Bank instituted non-judicial foreclosure proceedings in California. Thereafter Green River instituted this suit as a means of determining the validity of the note and deed of trust given to secure it.

The case was tried to the court which entered findings of fact and conclusions of law. The court found that Kroh Brothers Development and KBE are now in bankruptcy. The court found that this loan was obtained by KBE after an intent had been formed by KBE to obtain the loan and misappropriate the proceeds. The court found that under the partnership agreement KBE had only apparent authority to obtain the loan and that the loan was made without knowledge on the part of the Bank of the fraudulent purpose of KBE.

The court found that of the $3.1 million loan Green River only received $45,000 and an asset entry on the records of Kroh Brothers.1 The court found that the Uniform Fiduciaries Law, § 456.250, RSMo 1986, applies in this case and that the Bank was dealing with a fiduciary and was thereby protected from the misappropriation made by KBE. The court found that the note and deed of trust were obtained for a valid consideration because KBE had apparent authority to obtain the loan and Green River had the responsibility to use an honest fiduciary. The court found that the loss should be borne by Green River because it chose a dishonest fiduciary.

Green River contends that the note is invalid because there was a failure of consideration because Green River never received the money for the loan. The further contention is that the Uniform Fiduciaries Law does not protect the Bank because the proceeds were not paid by the Bank to a fiduciary. Green River does not question the authority of KBE to obtain the loan. The Bank contends that under the partnership agreement KBE had authority to direct the loan proceeds to be paid to Kroh Brothers.

The partnership agreement provided “[t]he Partnership shall maintain checking and other accounts at such banks and other financial institutions as the General Partner shall determine and all funds received by the Partnership shall be deposited therein.” The bank contends that this provision did not expressly require that KBE maintain separate bank accounts in the name of Green River but could maintain such accounts as it “shall determine and deposit partnership funds therein.” The Bank reasons that KBE had actual and apparent authority to direct the proceeds to the account it had determined was to be used for the deposit of the loan proceeds.

The Bank misreads the partnership agreement. The agreement in clear language requires (1) the partnership to maintain checking and other accounts, (2) at such banks and other financial institutions as the general partner shall determine, and (3) that all funds received by the partnership shall be deposited therein. The Bank reads the provision to say that accounts be *897maintained “as the General Partner shall determine.” This overlooks the requirement that the partnership shall maintain cheeking and other accounts and that all funds received by the partnership shall be deposited therein. Certainly it would require the account to be in the name of the partnership for the partnership to maintain a checking or other account. It would be impossible for the partnership to maintain an account which was not in its name. Further, the requirement that all funds received by the partnership be deposited in such accounts requires that the partnership maintain checking and other accounts in its own name.

The Bank knew that the partnership agreement required that all funds received by the partnership were to be deposited in an account to be maintained by the partnership. When the Bank wired the money to the Kroh Brothers account it knew that such action was contrary to the partnership agreement.

Despite the fact that the Bank knew that all partnership funds were to be deposited in a partnership account, the bank argues that KBE had apparent authority to direct the Bank to disburse the funds to an entity other than the partnership. But the Bank may not rely on the apparent authority of KBE to direct the funds to be deposited in an account not in the name of Green River when the Bank knew from the agreement that the general partner was violating the agreement when it directed the funds to be deposited in the name of another entity. In Distassio v. American United Life Ins. Co., 238 Mo.App. 279, 179 S.W.2d 610, 612[3] (1944), this court stated:

It follows that if the third party had actual or constructive knowledge of restrictions and limitations on the authority of the general agent, then they must contract with him with those restrictions and limitations in mind and cannot blindly rely on his apparent authority.

This court further quoted from Slocum v. New York Life Ins. Co., 228 U.S. 364, 33 S.Ct. 523, 57 L.Ed. 879 (1913):

One who deals with an agent, knowing that he is clothed with a circumscribed authority and that his act transcends his powers, cannot hold his principal; ...

Id., 179 S.W.2d at 613.

It is clear that under the law the Bank could not rely upon apparent authority on the part of KBE to direct that the proceeds of the loan be deposited in the Kroh Brothers account when it had actual knowledge of the duty of KBE to deposit all funds belonging to the partnership in a partnership account. With knowledge of the restrictions on KBE in dealing with money going to Green River, the Bank may not rely on the apparent authority of KBE to act beyond its actual authority.

The Bank further argues that KBE had been commingling partnership funds with other money handled by it and therefore it was permissible for KBE to commingle the loan proceeds with other Kroh Brothers money. Even if this argument had any legal effect, it fails because there is no evidence that the Bank had knowledge of such commingling when the loan proceeds were paid into the Kroh Brothers account.2

The Bank also contends that it is protected by the Uniform Fiduciaries Law *898because it dealt with KBE, who was a fiduciary. Section 456.250 provides that a person who pays a fiduciary is not responsible for the proper application of the money received by the fiduciary. The answer to this contention is that the money was not paid to KBE, who was the fiduciary, but was paid to Kroh Brothers Development, who was not a fiduciary. The Bank further contends that KBE had the authority to direct the money to be paid to another institution and since KBE was the fiduciary the Bank is protected when it followed the fiduciary’s direction. The answer to that argument is that § 456.250 does not state that a person who pays money to another at the direction of the fiduciary is not responsible for the proper application of the money received. That section states that only those who pay money to a fiduciary are protected.

To adopt such argument would require this court to rewrite § 456.250. The statute is clear that the Bank is protected when it makes payment to a fiduciary. This court would be required to hold that the section reads “when payment is made to a fiduciary or to such entity as the fiduciary may direct.” This would be a dangerous broadening of the statute and this court has no power to add words to a statute to broaden its meaning.

The language of the statute is clear and unambiguous. The duty of this court is to give the unambiguous language of a statute its plain and natural meaning. Farmers’ & Laborers’ v. Dir. of Revenue, 742 S.W.2d 141, 145[8] (Mo. banc 1987). Giving the statute its plain and natural meaning can only result in the conclusion that the Bank is protected if it pays a fiduciary, but not if it pays someone else, even if it is at the direction of the fiduciary.

When- the Bank paid money to Kroh Brothers Development, who was not a fiduciary, it did not fall within the provision of § 456.250 and therefore it is not entitled to the protection of the Uniform Fiduciaries Law. The Bank makes other arguments of a peripheral nature which have been considered and found to be without merit.

Green River was obligated to prove by clear and cogent evidence that the note should be declared void on the ground of lack of consideration. Lillo v. Thee, 676 S.W.2d 77, 80[2] (Mo.App.1984). Here, the facts are conceded by the Bank as set out above and the Bank does not dispute the court’s finding that Green River only received $45,000 from the $3.1 million loan obtained in its name. The fact that the Bank paid the proceeds to an entity having no relationship to Green River and that Green River did not actually receive any of the loan proceeds, except for the $45,000, demonstrate a failure of consideration. See Anchor Partners LTD v. Mercantile Bank, 803 S.W.2d 23, 33 (Mo. banc 1991).

Section 400.3-408, RSMo 1986, provides that a want or failure of consideration is a defense as against any person who is not a holder in due course of an instrument. The Bank is not a holder in due course because the note was payable to it. That section further provides that partial failure of consideration is a defense pro tanto.

The court misapplied the law when it found that KBE had apparent authority to direct the proceeds of the loan to be paid to Kroh Brothers Development and in finding that the Uniform Fiduciaries Law applied. The court should have found that KBE did not have apparent authority to direct payment of the loan proceeds to another entity and the money from the loan was not paid to a fiduciary, therefore, the Bank was not protected by the Uniform Fiduciaries Law. The court should have found that because Green River did not receive any money from the loan, except for $45,000, that there was a failure of consideration for the balance of the loan.

The parties make other arguments concerning whether the Bank acted in bad faith but it is not necessary to discuss that aspect because the Uniform Fiduciaries Law requires both an act in good faith and a payment to a fiduciary. On finding that payment was not made to a fiduciary, the *899question of whether the Bank acted in good faith becomes irrelevant.3

Also irrelevant is any discussion of whether the Bank acted negligently in paying the loan proceeds. A finding that Green River is entitled to relief on Count I of its petition for failure of consideration disposes of Count II of the petition which was an alternative theory of relief based on negligence if the failure of consideration claim failed. The court correctly found in favor of the Bank on Count II. For the reasons stated the appeal by the Bank from the finding of negligence is dismissed.

Count III of the petition was based on a violation of the Uniform Fiduciaries Law. The holding that such law does not apply because money was not paid to a fiduciary means that the court correctly found in favor of the Bank on Count III.

The judgment in favor of the Bank on Count I is reversed and this cause is remanded with directions to enter judgment in favor of Green River finding that the note and deed of trust are invalid for failure of consideration except to the extent of $45,000. The judgment shall declare the note and deed of trust to be valid to the extent of $45,000 from the date of the note. The judgment in favor of the Bank on Counts II and III is affirmed. The appeal of the Bank is dismissed. Costs are assessed against the Bank.

GAITAN, J., concurs.

KENNEDY, J., dissents in separate opinion filed.

. To state the obvious, the asset entry on the records of a bankrupt did not prove to be of any value to Green River.

. The dissent would deny Green River the right to prevail on the theory of estoppel. As noted, there is no evidence that the bank had any knowledge of the commingling of funds prior to the time it paid the loan proceeds to the Kroh Brothers account. Further, there is no evidence of any statement or act by Green River which would estop it from asserting-the present cause of action. The elements essential to establishing a claim of estoppel are stated in Lake St. Louis Community Association v. Ravenwood Properties, Ltd., 746 S.W.2d 642, 646[8] (Mo.App.1988), to be, first, an admission, statement, or act by the person to be estopped that is inconsistent with the claim later asserted; second, action taken by the second party on the faith of such admission, statement, or act; and third, an injury resulting to the second party if the first party is permitted to contradict or repudiate his admission, statement, or act. It is apparent from the facts that the bank cannot point to any admission, statement, or act on the part of Green River that led it to pay the money to Kroh Brothers. Absent such evidence, there can be no estoppel in this case. Neither can there be waiver or acquiescence under the facts presented here.

. The dissent relies upon the statement that as between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss. That statement applies when one entrusts a bearer document to the care of another who misapplies it. The rule applicable to the facts in this case is stated in Pashalian v. Big-4 Chevrolet Company, 348 S.W.2d 628, 634[7] (Mo.App.1961):

[W]here one of two innocent parties shall suffer by reason of the fraud of a third person, the one who permits himself to be deceived and thus puts it in the power of such third person to defraud another shall be the loser rather than the latter.
In this case, the bank permitted itself to be deceived by the instructions to deposit the funds in the Kroh Brothers account when it knew the agreement required the funds to be deposited in a Green River account. In that situation, as between the bank and Green River, the loss should fall on the bank in view of the fact that Green River had no knowledge of the loan or that the bank was paying the proceeds of the loan to an account not in Green River’s name. All the bank had to do was insist that the proceeds would be paid to an account in the name of Green River and it would be free of liability.