Stokes v. Southern States Cooperative, Inc.Stokes v. Southern States Cooperative, Inc.
Plaintiff George Stokes appeals the district court’s grant of summary judgment to Defendant Southern States Cooperative (SSC) on Stokes’ claim of malicious prosecution under Arkansas law. The district court held Stokes failed to present evidence sufficient to withstand summary judgment on two of the five elements necessary to sustain his claim; namely, that in suing Stokes on a loan guaranty, SSC (1) lacked probable cause and (2) acted with
I.
Stokes, an Arkansas landowner, rented farmland to Pat Roberts and his wife Karen, d/b/a/ P & K Farms, on a 25% crop share basis for the 1999 crop year. SSC, an agricultural supply co-op, sold crop inputs (e.g., seeds, fertilizers, and pesticides) to Roberts on credit. Roberts executed two notes to SSC for $365,000.00 and $65,000.00. Stokes guaranteed those notes to a limit of $261,010.00.
Meanwhile, Roberts executed a cash note for $250,000.00 to another creditor, Statesman Financial Corporation. Stokes did not (nor did anyone) guarantee any part of Roberts’ cash note to Statesman. 3 Formerly, Statesman was a wholly-owned subsidiary of SSC. During the period relevant to this dispute, however, SSC held only a 38% stake in Statesman. Apparently, SSC shared common offices, officers, and employees with Statesman.
Roberts began tendering payments from his crop sales to SSC in July 1999. Those payments, which totaled $482,092.36 through March 2000, were tendered in the form of checks payable to SSC, or to SSC and P & K Farms. None of those checks named Statesman as a payee. Nonetheless, without Stokes’ prior knowledge or approval, SSC permitted Statesman to first apply Roberts’ payments to Statesman’s unguaranteed cash note.
Statesman credited Roberts $257,400.68, representing the principal amount of the note and $7,400.68 in interest. Only after Statesman’s cash note had been satisfied did SSC begin to apply Roberts’ payments to its own notes. As of March 22, 2000, a purported balance of $249,854.03 remained on the two notes that Roberts, the tenant farmer, had executed in favor of SSC, and Stokes, the landowner, had guaranteed to a limit of $261,010.00.
Soon thereafter, a regional credit manager for SSC informed Stokes that Roberts’ crop proceeds were insufficient to pay the debt owed SSC. Based on the 25% share of the crop proceeds he had received from Roberts, Stokes figured Roberts’ 75% share was sufficient to satisfy the debt owed SSC. Stokes phoned SSC to inquire about the amount of crop proceeds it had received from Roberts, but got no response. In a letter to SSC’s general credit manager dated April 19, 2000, Stokes wrote that because he was a guarantor on Roberts’ notes, he considered “it vital that [SSC] make a special effort to collect all income from 1999 crops plus government payments.” Joint Appendix (JA) at 257.
SSC did not respond to Stokes’ letter. Instead, SSC declared Roberts’ notes in default without ever informing Stokes, in the form of an accounting or otherwise, that Roberts had tendered the entirety of his 1999 crop proceeds to it. Around June
Stokes answered the complaint pro se, stating, among other things, that SSC must provide “[a] complete accounting of money borrowed and money repaid.... Claims cannot be evaluated without this data.” JA at 52. SSC was not forthcoming. Only through the discovery process did Stokes learn a year later, in June 2001, that SSC had misapplied Robert’s payments of the crop proceeds to Statesman’s cash note.
Ultimately, the state court held the guaranty was valid but Stokes was not liable because the payments Roberts had tendered to SSC were sufficient to pay off the underlying notes:
The Guaranty of Payment signed by ... Stokes guaranteed payment to Southern States Cooperative, Inc., not to Statesman Financial Corporation. These two corporations were separate entities during the pertinent times. Harnischfeger Sales Corp. v. Ramey,190 Ark. 913 [82 S.W.2d 1 ] (1935), held that a creditor “had no right to accept a check tendered for one purpose and apply its proceeds to another purpose.” The Court finds the Guaranty has been satisfied by ... Stokes, and no fact issues remain.
Merchants & Planters Bank v. P & K Farms, A P’ship, No. E-97-181-2, Order Granting Renewed and Restated Motion for Summary Judgment (Desha Co., Ark., filed Feb. 17, 2005) (unpublished). SSC did not appeal that decision. •
An understandably irate Stokes subsequently sued SSC for malicious prosecution in federal court on the basis of diversity jurisdiction, 28 U.S.C. § 1332. Applying Arkansas law, the district court granted SSC summary judgment because, according to the court, Stokes “failed to provide evidence that [SSC] brought the underlying case either without probable cause or with malice.”
Stokes v. Southern States Coop.,
II.
To establish the tort of malicious prosecution in Arkansas, a plaintiff must prove “(1) a proceeding instituted or continued by the defendant against the plaintiff; (2) termination of the proceeding in favor of the plaintiff; (3) absence of proba
A.
The requirement that a plaintiff prove the absence of probable cause and the presence of malice to recover on a claim of malicious prosecution has long been a part of Arkansas jurisprudence. In
Lemay v. Williams,
[W]hen a party in fact has no valid cause of action ... these circumstances with others, tend to show a want of probable cause, and if sufficiently strong may be used as evidence of malice, and an intention to injure the party against whom the process is issued, because the party suing out the process must be presumed to know whether he has a legal debt, ... and if in fact the creditor sues out a process without a legal debt, ... these circumstances strongly tend to fix upon him the penalties of the law for malicious prosecution, which may, however, to some extent be repelled by other evidence tending to show probable cause.
Id. at *5 (emphasis added).
Expounding upon
Lemay,
the Arkansas Supreme Court in
Foster v. Pitts,
The law of malicious prosecution in Arkansas has not much changed over the course of time. Today, probable cause in the context of a malicious prosecution action based upon a prior civil proceeding means a state of facts or credible information that would cause a person of “ordinary caution” to believe the defendant is liable and a lawsuit against him might be successful.
Milton Hambrice, Inc. v. State Farm Fire & Cas. Co.,
Ordinary caution is a standard of reasonableness.
See Wal-Mart Stores, Inc. v. Binns,
[T]o have a probable-cause basis to file a lawsuit, a person need only have the opinion that the chances are good that a court will decide the suit in his favor. Restatement (Second) of Torts § 675 comment, (f) at 460 (1977). The question is not whether the person is correct in believing that his complaint is meritorious, but whether his opinion that his complaint is meritorious was a reasonable opinion. Id. A person need have only a reasonable opinion that his complaint is meritorious because “[t]o hold that the person initiating civil proceedings is liable unless the claim proved to be valid would throw an undesirable burden upon those who by advancing claims not heretofore recognized nevertheless aid in making the law consistent with changing conditions and changing opinions.” Id.
Carmical v. McAfee,
C.
At the same time, Arkansas law still today defines malice as “ ‘any improper
or
sinister motive for instituting the suit.’ ”
Cordes v. Outdoor Living Ctr., Inc.,
Of course,
Lemay
in the context of a malicious prosecution action described malice in 1877 not as “spite or hatred against the individual,” but as a bad intention (“mate
animus
”) “and denoting that the party is actuated by improper and indirect motives.”
Lemay,
Today, the Restatement endorses a broad definition of malice much like the Arkansas Supreme Court first did in Lemay and Foster. 8 And absent some convincing argument to the contrary, we believe the Arkansas Supreme Court, in the context of an action for malicious prosecution generally, would continue to endorse a definition of similar ilk. The commentary to § 676 tells us “ ‘malice’ in the literal sense of the term ... is frequently expanded beyond that sense to cover any improper purpose.” 9 Restatement § 676 cmt. c. Section 676 defines an improper purpose as “a purpose other than that of securing the proper adjudication of the claim” upon which the proceeding is based. Id. § 676. For instance, litigation initiated to force a settlement unrelated to the merits of the claim is brought for an improper purpose. See § 676 cmt. c. This occurs where a plaintiff, having no reasonable chance of success on the merits, “brings a ‘nuisance suit’ ... for the purpose of forcing the defendant to pay a sum of money in order to avoid the financial and other burdens that a defense against [suit] would put upon him.” Id.
On appeal, Stokes first asserts the district court erred in concluding that SSC “had probable cause to believe that Stokes was liable for the deficiency even if the [state] court ultimately ruled in Stokes favor.”
Stokes,
Indeed, that is what SSC ostensibly believed. To prove it SSC referred the district court to an “intercreditor agreement” between itself and Statesman apparently providing the cash portions of crop loans would be repaid first. Id. at *3. During his deposition, Gary Dickerson, SSC’s national credit manager, was asked whether Stokes had guaranteed Statesman’s cash note. Dickerson answered in less than confident terms that SSC “felt” Stokes had:
Q: And your contention was that the guarantee covered debts owed to another entity other than [SSC]?
A: Well ... I guess to answer your question, yes.
Q. Well, from the four corners of [the guaranty], can you give me any ... support for that contention?
A: No, I cannot.
JA at 269-71.
Dickerson heads the credit department of an agricultural co-op doing business in 23 states through 1,200 retail locations. See About Southern States Cooperative, http://www.southernstates.com/sscinfo/ history/index.aspx (visited August 22, 2011). Dickerson tells us he “oversee[s] anywhere from as much as four hundred fifty million dollars of roaming credit lines with either individuals, with wholesale or with some retail outlets.” JA at 223. One might be somewhat skeptical that he, and therefore SSC, really believed SSC could misapply Roberts’ loan payments to Statesman’s note without adversely affecting Stokes’ legal rights as guarantor. But what SSC subjectively believed based upon undisclosed past practices, the intercreditor agreement, or its relationship with Statesman, does not alone give rise to a “genuine legal dispute” constituting probable cause for SSC’s suit against Stokes on the guaranty.
SSC asserts Stokes offers no evidence to contradict its “honest and strong” belief that it could apply Roberts’ payments to Statesman’s note. But even
assuming
for the moment that SSC’s belief was sincere, Stokes need not contradict SSC’s subjective belief to establish want of probable cause. As we have learned, the determination of whether SSC lacked probable cause to sue Stokes on the guaranty involves both a factual and legal inquiry.
See Kable,
SSC makes no serious attempt under Arkansas law, or any law for that matter, to justify the legal basis for its state court complaint against Stokes. Nor does SSC attempt to establish that the law need be
A fortiori, no law, absent some prior understanding among all interested parties, would countenance a lender purportedly accepting a debtor’s loan payment on a guaranteed debt by way of a check made payable to that lender, and applying such payment to an unguaranteed debt the same debtor owes another lender — regardless of the relationship between the two lenders. Any contrary decision would throw the guarantor together with the law of guaranty under the bus. Caveat guarantor! Cf. Restatement (Third) of Surety-ship & Guaranty § 46 (1996) (stating that where a creditor refuses a debtor’s tender of payment, the guarantor is discharged to the extent of the tender).
SSC’s (and Statesman’s) self-serving practice, however long such “customary” practice endured, impaired Stokes’ contractual rights under the guaranty and threatened to chill the course of agricultural commerce. SSC’s suit against Stokes on the guaranty had no basis in law, none whatsoever. And a person of ordinary caution cognizant of the facts and versed in the law would well understand this.
10
See Milton Hambrice, Inc.,
IV.
Stokes next asserts the district court erred in concluding that the evidence
The facts, none of which SSC contests, are: (1) SSC and Statesman were at all relevant times separate business entities; (2) The plain language of Stokes’ guaranty secured Roberts’ debt to SSC, not Statesman; (3) Prior to suing Stokes, SSC never disclosed its past practice, or intercreditor agreement with Statesman; (4) The crop checks Roberts tendered to SSC named SSC as a payee, not Statesman; (5) SSC’s regional credit manager informed Stokes that Roberts’ crop proceeds were insufficient to satisfy the latter’s debt to SSC; (6) SSC did not respond to Stokes’ phone and letter inquiries regarding the disposition of Roberts’ crop proceeds; (7) SSC’s demand letter and complaint failed to incorporate an accounting of Roberts’ loan payments; (8) Stokes only learned months later through the compulsion of state court discovery that SSC had permitted the misapplication of Roberts’ payments; and finally (9) SSC advised Stokes, through their respective attorneys as part of a settlement offer, that the fees and costs associated with its lawsuit would be “extremely high,” but SSC had the resources to “stay the course” and was “committed to do so.” JA at 303.
We suppose a jury upon these facts could find SSC held a sincere belief that it had a valid claim against Stokes or at least did not harbor a malicious state of mind in suing him on the guaranty.
See Kellerman v. Zeno,
By way of checks made payable to SSC with all proper endorsements, SSC ostensibly accepted Roberts’ payments in satisfaction of the notes Stokes had guaranteed, and then, without Stokes’ knowledge or approval, permitted Statesman to misapply those payments to satisfy its cash note. SSC permitted this despite the fact that (1) SSC and Statesman were legally distinct entities, (2) none of the checks that Roberts tendered to SSC named Statesman as a payee, and (3) nothing in Stokes’ guaranty suggested he had guaranteed Statesman’s note. This scenario alone is sufficient to give pause to a person of ordinary sensibility. But there’s more.
When a credit manager at SSC first informed Stokes that Roberts’ crop proceeds were insufficient to pay off SSC’s notes, Stokes understandably and justifi
The district court discounted SSC’s apparent reticence:
Stokes ... had access to the payment records when his attorney began taking depositions of [SSC] employees in June 2001. At that time, he had ample opportunity to discover where and how the payments had been applied. Aside from mere allegations, Stokes has presented no evidence to support the conclusion that SSC actively concealed information about the amounts paid or the application of payments to the Statesman note.
Stokes,
Based on the surrounding facts, a jury too might wonder what to make of SSC’s October 2004 letter to Stokes reminding him of the possible financial consequences of continuing to resist settlement. We agree with the district court that SSC’s “letter does not provide sufficient evidence for a reasonable jury to conclude that [SSC] brought or continued the lawsuit with malice.”
Stokes,
We conclude a jury must decide what was SSC’s motive or purpose in suing Stokes
if
it
in fact
understood it had no reasonable chance of prevailing on the merits of its claim against Stokes. A reasonable jury could infer from the undisputed facts, considered in their entirety, that SSC brought its lawsuit against Stokes for an improper purpose, that is, “a purpose other than that of securing the proper adjudication of [its] claim.”
Restatement
§ 676. Certainly, nothing in the record before us suggests that SSC acted out of hatred or revenge in suing Stokes on the guaranty.
See Binns,
REVERSED and REMANDED for further proceedings consistent with this opinion.
Notes
. The Honorable Brian S. Miller, United States District Judge for the Eastern District of Arkansas.
. As a crop-share landlord, Stokes did not guarantee Roberts’ cash loan because the use of cash, unlike the use of the inputs, is unrestricted.
. The state court consolidated SSC's action on the guaranty with four other actions arising from Stokes' and Roberts' agricultural dealings. The convoluted procedural history of these consolidated actions has no bearing upon our resolution of this matter.
See generally Stokes v. Farmers Grain Terminal, Inc.,
. We summarily reject SSC's suggestion that the state trial court did not terminate SSC's action on the guaranty in favor of Stokes because during the course of the consolidated proceedings the trial court ruled the guaranty was valid and Stokes was not entitled to attorney fees.
See Southern States Coop., Inc. v. Stokes,
. "If the law imputed malice from want of probable cause alone, then there would be no distinct requirement of malice, but want of
. Chapter 30 of the Restatement refers to an action based upon the prior improper institution of a civil proceeding as the "wrongful use of civil proceedings.” This distinguishes such action from an action based upon the prior institution of a criminal proceeding, which Chapter 29 of the Restatement refers to as the "wrongful use of criminal proceedings” or "malicious prosecution.”
. We are well aware that as to a claim for damages based on malicious prosecution, the Arkansas Model Jury Instructions suggest a plaintiff must show the defendant "acted out of hatred, ill will, or a spirit of revenge.”
Arkansas Model Jury Instr., Civil,
AMI 413 (2010). The decisions the model instruction cites as stating the elements of malicious prosecution in Arkansas, however, say no such thing. Rather the earliest case cited and its predecessors simply say a plaintiff must prove "[mjalice on the part of the defendant.”
Farm Serv. Co-op., Inc. v. Goshen Farms, Inc.,
. "In general, States permitting recovery for malicious prosecution ... require the plaintiff to prove malice or improper purpose as a necessary element.”
Business Guides, Inc. v. Chromatic Commc’ns Enter., Inc.,
. Here we simply note that where probable cause is absent, a defendant in a malicious prosecution action nonetheless must be exonerated if the facts establish that such defendant made a full and fair disclosure to competent counsel of all facts known and acted in good faith reliance upon counsel’s advice. Of course, the burden is upon the defendant to establish such facts and good faith reliance.
See Harold McLaughlin Reliable Truck Brokers, Inc. v. Cox,
. Under Arkansas law, probable cause is a question of law when " 'the facts relied upon to create probable cause and the
reasonable
inferences to be drawn from the facts are undisputed.’”
Milton Hambrice, Inc.,