Dale Meyer v. Norwest Bank Iowa ( 1997 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
Nos. 96-2346/2414
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Dale Meyer, doing business as *
Wagner Livestock Sales Company, *
*
Cross Appellant/Appellee, *
* Appeals from the United States
v. * District Court for the District
* of South Dakota.
Norwest Bank Iowa, National *
Association, *
*
Appellant/Cross Appellee. *
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Submitted: March 13, 1997
Filed: April 30, 1997
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Before WOLLMAN and MURPHY, Circuit Judges, and GOLDBERG,1 Judge.
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MURPHY, Circuit Judge.
This case involves a dispute between a livestock sales barn and a
bank arising out of two dishonored checks. The sales barn, Wagner
Livestock Sales Company (WLS), sold cattle to a feedlot, D&R Feedlots,
which paid with two checks. The feedlot’s bank and secured creditor,
Norwest Bank Iowa, did not honor the checks because it had closed the
account under a setoff agreement with the feedlot. WLS sued the bank for
conversion, the jury awarded WLS $216,518.30, and the district court denied
the bank’s motion for judgment as a matter of law. On appeal the bank
claims it is entitled to judgment, and WLS argues that the jury
instructions erroneously limited its recovery. We reverse.
1
The Honorable Richard W. Goldberg, Judge, United States Court
of International Trade, sitting by designation.
The feedlot purchased cattle from sale barns, such as WLS, and sold
them to meat packers at slightly higher prices. As its business grew, it
experienced cash flow problems. Since the feedlot regularly purchased
cattle from WLS, the two reached an understanding that when the feedlot
purchased cattle, WLS would hold the check for a week before depositing it.
The bank was a creditor of the feedlot. During relevant time periods
the bank had extended a line of credit to the feedlot and maintained a
security interest in its cattle, accounts and other payables, machinery and
vehicles, and certain certificates of deposits. The feedlot also
maintained a demand deposit checking account with the bank, the terms of
which gave the bank a right to setoff any amounts the feedlot owed the
bank. The feedlot regularly deposited proceeds from different cattle sales
into this account and used the account to pay various operating expenses.
The bank was generally aware of how the feedlot conducted its
business and would periodically inspect the collateral offered to secure
its loan. Part of this collateral was the feedlot’s inventory of cattle.
Typically, a bank representative would travel to the feedlot once a month
and find 1,500 to 1,800 head of cattle, valued from $1.5 million to $1.7
million.
On February 10, 1994, a bank representative inspected the collateral
and found fewer than 300 head of cattle. The bank became concerned that
the feedlot had insufficient collateral to secure its obligations to the
bank and put a hold on the feedlot’s account on February 11, 1994. At that
time the account contained $27,846.81. On February 14, 1994, the bank
closed the account and applied these remaining funds towards the feedlot’s
debt to it.
This dispute arose because the feedlot had incurred obligations to
WLS prior to the actions taken by the bank limiting access to the account.
On February 1, 1994, the feedlot gave WLS
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a check for $246,048.13 to pay for cattle purchased that day. WLS did not
present the check for payment until February 7, 1994, and the check was
returned for insufficient funds. When WLS redeposited the check, it was
returned a second time and marked “account closed.” In the meantime, the
feedlot had purchased an additional $73,777.57 worth of cattle from WLS on
February 8. WLS held this check as well, depositing it on February 14.
This second check was also returned and marked “account closed.”
The cattle purchased from WLS in these transactions were either
resold or held in inventory. Some cattle were immediately resold to a meat
packing operation called IBP, Inc. (IBP); the proceeds were deposited in
the feedlot’s account on or before February 11, 1994. The other cattle
were shipped directly to the feedlot and held as inventory.
WLS sued the bank in March of 1994, alleging conversion, common law
fraud, deceit, and breach of fiduciary duty. The district court granted
partial summary judgment for the bank, dismissing all claims against it
other than conversion.
At trial, WLS argued that it had a proprietary interest in the cattle
it sold the feedlot, that it had a traceable interest in the proceeds
deposited into the feedlot’s account, and that the bank had wrongfully
converted that money when it setoff the debts the feedlot owed the bank.
WLS’s conversion claim encompassed both proceeds from the sale of cattle
to IBP and the value of the cattle shipped directly to the feedlot. The
instructions to the jury on damages limited the possible recovery to the
amount of the proceeds from the IBP sales, and WLS argues on its cross
appeal that it should also have included the value of cattle shipped
directly to the feedlot.
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The standard of review of the denial of a motion for judgment as a
matter of law is de novo. Lamb Eng’g & Constr. Co. v. Nebraska Pub. Power
Dist., 103 F.3d 1422, 1430 (8th Cir. 1997). The district court used the
South Dakota rule for determining such a motion which is to
view the evidence in a light that is most favorable to the non-
moving party and give that party the benefit of all reasonable
inferences that fairly can be drawn from the evidence. . . .
If sufficient evidence exists so that reasonable minds could
differ, a [judgment as a matter of law] is not appropriate.
Olson v. Judd, 534 N.W.2d 850, 852 (S.D. 1995)(citations omitted). This
is similar to the federal rule which requires that a jury verdict be
affirmed “unless, viewing the evidence in the light most favorable to the
prevailing party, we conclude that a reasonable jury could have not found
for that party.” Chicago Title Ins. Co. v. Resolution Trust Corp., 53 F.3d
899, 904 (8th Cir. 1995). Under either formulation the result here is the
same.
The act that WLS claims was a conversion of its property was the
bank’s hold placed on the feedlot’s account on February 11, 1994. The jury
was told in Instruction 11 that WLS was required to prove the following
elements to establish conversion by the bank:
1. That WLS had an ownership or possessory interest in
feedlot’s deposits;
2. That WLS’s possessory interest in those deposits was
greater than that of the bank;
3. That the bank’s exercise of dominion and control over the
deposits was inconsistent and in derogation of WLS’s
possessory interests in the deposits; and
4. That WLS suffered damages as a result.
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In order to demonstrate an ownership or possessory interest in funds
in the feedlot’s account, WLS offered evidence to show that it sold cattle
to the feedlot which were then sold to the packer IBP for cash, which was
deposited into the feedlot account. In other words, WLS believes that its
ability to trace proceeds from the cattle sales into the account before
February 11, 1994 demonstrates that the bank converted those funds when it
closed the account on that date. The bank counters that tracing the funds
into the account at some point prior to its placing the hold is not
sufficient; the funds would have had actually to be in the account at the
time of the hold.
Under South Dakota law, “[t]racing is an equitable principle which
allows a party with the right to property to trace that property through
any number of transactions in order to reach the final proceeds or result.”
Temple v. Temple, 365 N.W.2d 561, 567 (S.D. 1985). Tracing is allowed “so
long as such property, its product or its proceeds is capable of
identification. McFarland v. McFarland, 470 N.W.2d 849, 852 (S.D. 1991).
WLS’s ability to trace the funds into the account before February 11,
1994 is not sufficient to establish an ownership or possessory interest in
those proceeds. In order to demonstrate that the bank converted its
property, WLS must demonstrate an ownership or possessory interest in the
account at the time of the alleged conversion. Restatement (Second) of
Torts §§ 224A, 225; 89 C.J.S. Trover & Conversion §§ 72, 99(c) (1955 &
Supp. 1996); See, e.g., Bradford v. Dumond, 675 A.2d 957, 962 (Me. 1996);
Huntsville Golf Dev., Inc. v. Ratcliff, Inc., 646 So. 2d 1334, 1336 (Ala.
1994); Napoleon Livestock Auction, Inc. v. Rohrich, 406 N.W.2d 346, 352-53
(N.D. 1987); Western Idaho Prod. Credit Ass’n v. Simplot Feed Lots, Inc.,
678 P.2d 52, 54 (Ida. 1984); Allen v. Dealer Assistance, Inc., 299 N.W.2d
744, 747 (Neb. 1980); Prod. Credit Ass’n of Chippewa Falls v. Equity Coop
Livestock Sales Ass’n, 261
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N.W.2d 127, 129 (Wis. 1978); Larson v. Archer-Daniels-Midland Co., 32
N.W.2d 649, 650 (Minn. 1948). If the claimant cannot show a possessory
interest in the property at the time of the alleged conversion, it cannot
demonstrate that the defendant’s actions actually interfered with the
property. The key question is whether WLS was able to identify an
ownership or possessory interest in the account funds on February 11, 1994,
the date the bank allegedly converted WLS’s property.
This inquiry is complicated by the fact that the account held funds
from a number of sources. In a variety of contexts, courts have traced
commingled funds in a bank account by using the “lowest intermediate
balance” rule.2 In re Columbia Gas Sys., Inc., 997 F.2d 1039, 1063 (3rd
Cir. 1993)(rights of trust beneficiaries in a commingled account); Harley-
Davidson Motor Co. v. Bank of New Eng.-Old Colony, 897 F.2d 611, 622 (1st
Cir. 1990)(secured party’s interest in a commingled account); First Wis.
Fin. Corp. v. Yamaguchi, 812 F.2d 370, 375 (7th Cir. 1987)(liability of
guarantor for commingled funds); United States v. Banco Cafetero Pan., 797
F.2d 1154, 1159 (2d. Cir. 1986)(commingled funds in drug forfeiture case);
Universal C.I.T. Credit Corp. v. Farmers Bank of Portageville, 358 F. Supp.
317, 325 (E.D. Mo. 1973)(secured party’s interest in commingled account).
Under the lowest intermediate balance rule, it is assumed the traced
proceeds are the last funds withdrawn from a contested account. In re
Columbia, 997 F.2d at 1063. Once the traced proceeds are withdrawn,
however, they are
2
WLS argues that the bank failed to raise arguments premised
on the lowest intermediate balance rule in a timely fashion before
the district court. However, the district court discussed the
application of the rule in its memorandum opinion, both parties
briefed it on appeal, and it is a purely legal issue which does not
require additional fact finding. In these circumstances it is not
inappropriate for us to consider the application of the lowest
intermediate balance rule. See, e.g., Digi-Tel Holdings, Inc. v.
Proteq Telecomm. (PTE), Ltd., 89 F.3d 519, 523 n.6 (8th Cir. 1996).
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treated as lost, even though subsequent deposits are made into the account.
Id.
WLS argues that the lowest intermediate balance rule is inconsistent
with South Dakota law because it conflicts with the state law which defines
damages for conversion as “[t]he value of the property at the time of the
conversion, with the interest from that time. . . .” S.D. Codified Laws
§ 21-3-3(1) (Michie 1988 & Supp. 1996). This statute requires that damages
be measured from the time of conversion, and the lowest intermediate
balance rule allows a claimant to trace otherwise unreachable proceeds at
the time of conversion by creating a presumption that its funds were the
last proceeds spent from a commingled account. The lowest intermediate
balance rule is a tool to permit the calculation of damages at the time of
conversion. It does not contradict the statute.
The following chart summarizes the evidence presented at trial about
the funds which moved through the account in early February:
IBP sale deposits in Total Balance in
Date feedlot account feedlot account
2/1/94 $152,000.00 $381,675.92
2/4/94 $27,510.12 -($191,298.77)
2/8/94 $31,000.00 $211,893.43
2/9/94 ----- -(648,462.33)
Account placed on hold
with final balance of
$27,846.81
2/11/94 $6,008.18
Applying the lowest intermediate balance rule to this case, the only
proceeds from WLS cattle in the account at the time it was
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closed were the $6008.18 deposited on February 11. Three of the four
checks representing IBP’s payment for cattle had been deposited in the
feedlot’s account before February 9, 1994. On that date the account was
overdrawn in the amount of $648,462.33, and there were no proceeds in it
which WLS could trace to its cattle. Funds were then paid out to parties
other than the bank on or before February 9. The last check from IBP for
$6008.18 was deposited in the account on February 11, and the balance did
not drop below that amount between the time of the deposit and the time the
account was closed. This $6008.18 is the only part of the proceeds that
WLS is able to demonstrate an ownership or possessory interest in at the
time of the alleged conversion. Even considering all the evidence in favor
of WLS, there is no evidence from which a reasonable jury could conclude
that WLS had an interest in the account at the time of the alleged
conversion that exceeded $6008.18.
Because WLS never took measures to protect its interest in the
proceeds, this case is factually different from South Cent. Livestock
Dealers, Inc. v. Security State Bank of Hedley, Tex., 614 F.2d 1056 (5th
Cir. 1980). In South Central the plaintiff’s funds were specifically
earmarked in a separate custodial account designed for individual feedlot
customers. Id. at 1058. There was no need to trace funds because the
plaintiff’s interest in the account was already established.3 Here, tracing
is required because WLS is trying to demonstrate an ownership interest in
the feedlot’s general account that was used for its everyday operations.
WLS could have taken measures to protect or segregate its interest in the
cattle by a purchase money security interest in the cattle or
3
Rensch v. Riddle’s Diamonds of Rapid City, Inc., 393 N.W.2d
269 (S.D. 1986), cited by WLS, is also distinguishable and does not
provide authority to show WLS had a possessory interest in the
funds in the feedlot’s account.
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a separate account or legal relationship with the feedlot, but it did not.
WLS also argues that the bank’s bad faith undermined its security
interest in the feedlot account and that therefore the bank did not have
a legal interest in the funds. In an action for conversion a claimant must
recover on the strength of its own interest in the property, without regard
to the weakness of the adversary. See 89 C.J.S. Trover & Conversion § 74
(1955 & Supp. 1996); see, e.g., Merchants-Produce Bank v. Mack Trucks,
Inc., 411 F.2d 1174, 1177 (8th Cir. 1969)(applying Missouri law); Jerry
Harmon Motors, Inc. v. First Nat’l Bank & Trust Co., 472 N.W.2d 748, 755
(N.D. 1991); Napoleon Livestock Auction, Inc. v. Rohrich, 406 N.W.2d 346,
352-53 (N.D. 1987); Allen v. Dealer Assistance, Inc., 299 N.W.2d 744, 747
(Neb. 1980). In order for the bank’s behavior to be relevant, WLS must
first demonstrate that it had a property interest in the funds seized by
the bank on February 11, 1994. Since it was unable to show such an
interest in the additional $210,510.12 it claimed, the bank’s conduct is
irrelevant in respect to those funds.
For WLS to prevail as to the $6008.18 remaining in the account on
February 11, it also had to show that its interest in these proceeds was
greater than that of the bank. WLS argues that its rights as an unpaid
cash seller are superior to the rights of the bank as a secured creditor
because the bank acted in bad faith. See S.D. Codified Laws § 57A-2-403(1)
(Michie 1988 & Supp. 1996); Burk v. Emmick, 637 F.2d 1172, 1174 (8th Cir.
1980). Assuming without deciding that WLS correctly states the law, its
argument fails because the evidence does not show the bank acted in bad
faith.
“Good faith” means “honesty in fact in the conduct or transaction
concerned,” S.D. Codified Laws § 57A-1-201(19) (Michie
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1988 & Supp. 1996), or for merchants “honesty in fact and the observance
of reasonable commercial standards of fair dealing in the trade.” S.D.
Codified Laws §57A-2-103(1)(b) (1988 & Supp. 1996). The burden is on WLS
to show that the bank did not act in good faith. The worst evidence
against the bank included testimony that it was aware the feedlot floated
checks and that the bank may have ignored signs of the feedlot’s precarious
financial situation. Poor or unwise management by a lender does not equal
bad faith, however.
Actual knowledge that funds belong to a third party can limit a
bank’s ability to setoff funds in good faith. See Four Circle Co-op v.
Kansas State Bank & Trust Co., 771 F. Supp. 1144, 1149 (D.Kan. 1991). The
bank here did not have knowledge about the specific transactions between
WLS and the feedlot. Its general knowledge that the account was used for
the feedlot’s business transactions is not enough to charge it with bad
faith. Otherwise, a bank would be liable every time it exercised rights
under a setoff agreement.
This case is also factually different from Iola State Bank v. Bolan,
679 P.2d 720 (Kan. 1984), relied on by WLS. In Iola, the defendant bank
was found to have acted in bad faith where there was evidence it had
intentionally waited for proceeds to be deposited in the disputed account
before exercising its right of setoff. Here, on the other hand, the bank
froze and set off the account only after it realized its collateral was
insufficient, at a point when the account held a meager amount of funds,
and after a series of several substantial overdrafts by the feedlot.
Even considering the evidence in the light most favorable to WLS,
there is not sufficient evidence to support a conclusion that the bank
acted in bad faith and that its interest in the proceeds was inferior to
that of WLS. WLS failed to demonstrate that its
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interest in the remaining $6008.18 was superior to the bank’s, and it
therefore failed on the second element of conversion. There is no part of
the proceeds from the IBP sales that a reasonable jury could have concluded
was converted by the bank.4
For these reasons the judgment is reversed, and the case is remanded
for entry of judgment in favor of the bank.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
4
This determination makes it unnecessary to consider the
bank’s argument that specific jury instructions were incorrect or
the arguments of WLS on its cross appeal that the instructions
improperly limited the amount of its recovery.
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