author: Robert H. Dudley, Justice. Steele Hays, Justice,

text:
    VIKING INSURANCE COMPANY of Wisconsin v. Ramona JESTER
    91-253
    836 S.W.2d 371
    Supreme Court of Arkansas
    Opinion delivered July 20, 1992

      Laser, Sharp, Mayes, Wilson, Bufford & Watts, P.A., and Griffin, Rainwater & Draper, P.A., for appellant.

      Mathis & Dejanes, by: Travis Mathis, for appellee.
   Robert H. Dudley, Justice.

The plaintiff, Ramona Jester, sued her insurance company, Viking Insurance Company of Wisconsin, for the conversion of her car and the first party tort of bad faith in refusing to settle her claim for damages to her car. The defendant insurance company answered, but the trial court later struck the answer because the insurance company violated a court order requiring it to produce its entire claim file and because of a pattern of conduct designed to obstruct the discovery process. The trial court also entered a default judgment as to liability against the defendant. The case went to trial, and the jury returned a verdict of $1,000.00 compensatory damages and $250,000.00 punitive damages. The insurance company appeals. We affirm the judgment.

The facts, viewed in the light most favorable to the appelleeplaintiff, as we must do, are as follows. The plaintiff, a single parent with five children and ten grandchildren, some of whom live with her, lives on a dirt road in a remote area sixteen miles from Gurdon and works at the International Paper Company mill that is located one mile from Gurdon. She commutes the thirty-four miles each working day, and, when she was without a car, sometimes had to hitchhike to and from work. Her principal job is to cut logs as they come into the mill. She described her job as running a chainsaw, rolling logs with a cant hook, and using a shovel. The record fairly implies that she has a very limited education.

In September 1988, the plaintiff traded her older model Chevrolet Camaro for a newer 1984 model Chevrolet Camaro and paid the difference between her trade-in and the new Camaro with a loan from the First State Bank of Gurdon. She figures that the amount of the loan plus the value of her older car amounted to a purchase price of about $5,500.00 on her 1984 Camaro. The bank required her to have collision insurance on the car. She went to the bank’s in-house agency, the First State Bank Insurance Agency, and purchased insurance. The agency placed the insuranee with the defendant insurance company and the defendant issued its policy which insured “damage to your car” less a $1,000.00 deductible. The premium for one year was $1,038.00 payable at a rate of $173.00 per month for the first six months of the policy. Plaintiff made the premium payments at all material times.

On August 2, 1989, the plaintiff was involved in a one-car accident in which her car was damaged beyond repair. The state trooper who investigated the accident caused her car to be towed to a nearby service station. The plaintiff promptly notified the insurance agent who relayed the information to the defendant, and one of the defendant’s employees told the agent that the plaintiff must give a recorded statement about the details of the accident. Plaintiff went to the agency and, by telephone, gave a recorded statement to the defendant’s claims representative in Austin, Texas. After the recorder was turned off, the claims representative, Ms. Cantu, asked the plaintiff whether she wanted to keep the salvage. Plaintiff, who had no experience in settling claims, responded that she did not want the salvage if the defendant paid her a just amount for the car. The plaintiff, who still owed the bank $2,150.00 on the car loan, asked a bank employee what her car was worth at the time of the accident. The employee replied that it had a value of $3,800.00, so the plaintiff guessed that, even with the deductible, she would receive a settlement of a few hundred dollars more than the outstanding loan amount, which was enough for a down payment on another car.

A few days later the claims representative, Ms. Cantu, called the plaintiff at the mill where she worked. There are 450 employees at the mill, and when a call comes for an employee who works out in the mill, it is necessary to relay the call to a foreman. The foreman then goes out to the employee and informs him or her of the call, and the employee then goes into the area where the telephones are located. Understandably, the company has a strict policy against employees receiving non-emergency calls at the mill. The plaintiff returned the call after she got off work and, after explaining the company’s policy, asked Ms. Cantu not to call her again at work. Plaintiff explained to Ms. Cantu that she had critically ill family members, and when she received calls at work it scared her. Ms. Cantu responded, “Oh, well, that just sounds like a personal problem to me,” and she offered to pay only the amount of the car loan to the bank plus $50.00 to the plaintiff. The plaintiff declined the offer. Ms. Cantu mailed to the plaintiff something she said explained her appraisal, but the plaintiff said it looked like “a bunch of [newspaper] clippings” to me.

A week later Ms. Cantu again called the plaintiff at the mill. The call angered plaintiff’s foreman. After work, the plaintiff returned the call. Ms. Cantu said that it was time to settle the claim and that the plaintiff needed to accept the $50.00. She asked the plaintiff why she was asking more than $50.00 and the plaintiff responded that a car dealer had told her that her car was worth between $3,800.00 and $4,200.00. Ms. Cantu replied that the car dealer said that “expecting you to jew [him] down.” Ms. Cantu additionally told the plaintiff that she “did not know how big business is handled” and that she was “just a dumb broad from a hick town in Arkansas.” The plaintiff again declined the offer.

In a later phone conversation, the plaintiff explained to Ms. Cantu that she could sell the parts from her car for more than $50.00, and so she would keep it rather than take the $50.00 for it. The plaintiff saw that her car was no longer at the service station and asked where it was. Ms. Cantu did not answer but instead transferred her to a man in the insurance company’s salvage section who told her that her car was still at the service station. A few moments later, Ms. Cantu called the plaintiff and asked if she had gotten the salvage matter straightened out. The plaintiff said she had not, and Ms. Cantu told her that she was going to pay the amount of the car loan to the bank and pay $50.00 to her. Again, the plaintiff declined the offer. Ms. Cantu responded: “Well, hell, you’re going to have to take what we offer anyway.”

In their final conversation, Ms. Cantu told the plaintiff that she was going to pay the bank the amount of the loan and pay her $50.00, and if she did not accept the $50.00 right then, she would keep it and use the money to clean the car’s dirty carpet, and if that happened the plaintiff would get nothing. The plaintiff then learned that the defendant had sold the salvage to a man named Randy Weeks who had already partially dismantled the car.

The plaintiff employed counsel and filed suit in which she alleged that the defendant insurance company was guilty of the first party tort of bad faith in refusing to settle her claim and of converting her car to its own use. Subsequently, the trial court issued its order compelling discovery, and in it, directed the defendant to provide “[y]our entire claim file pertaining to Plaintiffs claim for damages, including but not limited to any and all documents relating to Plaintiffs claim for damages.” The order also contained the following clear notice:

Failure to comply with this Order shall result in the imposition of sanctions against the Defendant in conformity with the Arkansas Rules of Civil Procedure and shall include the award of attorney’s fees to the Plaintiffs attorney.

Obviously, a central issue in the conversion count of the suit was whether the defendant insurance company was authorized to dispose of the wrecked car. The defendant’s files were critical to discovering the truth about the matter. The plaintiffs attorneys suspected that Ms. Cantu had told the salvage department to dispose of the car before Ms. Cantu talked with the plaintiff, and that was a part of an oppressive strategy to force the plaintiff to accept the offer. The defendant originally maintained a master file of the claim along with a salvage subfile. At some time before the order compelling discovery, these two files were merged into one, but the defendant did not provide the plaintiffs attorneys with the salvage section of the file prior to discovery. The day before the claims representative was to give her deposition, the trial attorney for the insurance company learned of his client’s failure to supply the salvage part of the file, but said nothing about it to plaintiff’s counsel. This part of the file contained most of the pertinent information concerning the conversion of plaintiffs car. Also missing from the file was an underwriting risk notice and a request for evaluation form. The evaluation form was material to whether the defendant acted in bad faith in evaluating its offer of settlement. Plaintiffs counsel’s pointed and persistent questions during the deposition of the claims representative brought out the fact that the salvage part of the file was missing. The defendant supplied the salvage subfile at that time, but did not provide the underwriting risk notice or the evaluation request form.

At the same deposition, the plaintiffs attorney tried to question Ms. Cantu about the sequence of the events surrounding the conversion of the car. Ms. Cantu stated that she made entries out of sequence in the activity report. The plaintiffs attorney asked to see the original activity report in order to examine the different colors of ink used in making the entries on different days since that might reflect the sequence of making entries. The defense attorney refused the request because “the deposition had already taken too long” and there were “handwritten notes on the report” which plaintiffs counsel were not entitled to see. In sum, even at the deposition session, the plaintiffs attorney was not allowed to inspect the original of the activity report that contained the entries made in different colors of ink on different days, which might have shown the true sequence of events pertinent to the claim of conversion. The deposition of another of defendant’s employees, David Boyd, was taken at the same time, and while plaintiffs counsel was again trying to determine the sequence of events, it became apparent that the defendant’s telephone records might disclose the sequence in which the events took place. At that time defendant’s counsel agreed to provide those records, but in fact, they were withheld until the court later ordered them produced. When they were finally produced, they showed that some of the calls the defendant’s employees claimed to have made, in fact, were never made.

Plaintiffs counsel moved for sanctions against defendant. The trial court ordered counsel to appear for a hearing on the matter, and after hearing evidence and arguments from both counsel, entered an order which provided in part:

The Defendant adduced no evidence on the foregoing matters and the Court found defense counsel’s arguments to be unpersuasive. From the evidence adduced by the Plaintiff the Court further finds as follows:
A. The Defendant violated the Order of this Court by its failure to provide its salvage subfile, the underwriting risk notice and the request for evaluation form to the Plaintiff by January 8, 1991;
B. The Plaintiff adduced sufficient evidence to show a pattern on the part of the Defendant to obstruct the discovery process;
C. The Defendant has failed to provide the Plaintiff with the telephone records, the underwriting risk notice and the request for evaluation form, all of which she requested at the depositions in Austin and later in Requests to Produce, and that the time for producing such documents has expired;
D. The Plaintiff was entitled to review the original records she requested at the depositions in Austin, at the time of the deposition, and the failure to allow her such inspection deprived her of the opportunity to question the witnesses concerning the original entries in those records;
E. Failure of the Defendant to provide the Plaintiff with all of its claim file prior to the time of the depositions deprived her of the opportunity to properly prepare for those depositions; ....

Appellant’s first assignment of error is that the trial court erred in entering the sanctions of striking the answer, declaring a default as to liability, and awarding fees and costs. The defendant divides the argument into three subparts. In the first subpart, it argues that the trial court abused its discretion in granting the sanctions since the defendant only refused to allow the plaintiff to inspect an original document at a deposition. The argument is without merit. As can be seen from the trial court’s order, the sanctions were imposed only after the trial court considered all of the circumstances surrounding the defendant’s refusal to obey the court order to produce its “entire claim file.”

The defendant insurance company additionally argues that it produced a copy of the activity report, and that is all that was required under the order, since the order did not require it to produce the original of the report. The argument is specious. It is true that the trial court’s order only provided for the “entire” claim file, not the “original,” but the word “entire” means “with no element or part missing.” Webster’s Third New International Dictionary 758 (1961). Without the different colored pen markings made on different days, the claim file produced was not delivered entirely.

Under this first subpart, the appellant also argues that A.R.C.P. Rule 37 does not authorize sanctions for refusing to allow inspection of an original document during depositions. The argument misses the mark because the trial court ordered the defendant to produce its “entire claim file,” and it did not do so. A.R.C.P. Rule 37(b) provides for sanctions for “Failure to Comply with Order.”

In the second subpart of the first assignment of error, the defendant-appellant argues that the trial court abused its discretion in imposing the harshest of the sanctions when there was no showing of a willful and deliberate violation of the trial court’s order. The short answer to the argument is that we have held that our rules of civil procedure do not require a finding of willful or deliberate disregard of the order before sanctions may be imposed. Cook v. Wills, 305 Ark. 442, 808 S.W.2d 758 (1991); Cagle v. Fennel, 297 Ark. 353, 761 S.W.2d 926 (1988).

We have said that the imposition of sanctions for the failure to make discovery rests in the trial court’s discretion, Goodwin v. Harrison, 300 Ark. 474, 780 S.W.2d 518 (1989), and “[w]e have [repeatedly] upheld the trial courts’ exercise of discretion in granting severe Rule 37 sanctions for flagrant discovery violations.” Rogers v. McRaven’s Cherry Pickers, Inc., 302 Ark. 140, 145, 788 S.W.2d 227, 230 (1990). Indeed, this court has upheld the trial court’s imposition of the most severe sanctions in several cases in which a party has failed to timely respond to a discovery request within the time provided in a trial court’s order for it to do so and when the order contained notice of the possible imposition of sanctions for failure to comply. Cagle v. Fennel, 297 Ark. 353, 761 S.W.2d 926 (1988); Harper v. Wheatley Implement Co., Inc., 278 Ark. 27, 643 S.W.2d 537 (1982); Burton v. Sparler, 272 Ark. 254, 613 S.W.2d 394 (1981); Mann v. Ray Lee Supply, 259 Ark. 565, 535 S.W.2d 65 (1976).

In the present case, the trial court imposed the most severe sanctions for defendant’s failure to comply with its order to provide plaintiff with its entire claim file. The trial court’s order was issued on November 21, 1990. Pursuant to its motion for an extension of time to respond, the defendant had until January 8, 1991, to provide the material. On January 3, 1991, defendant sent plaintiff what it purported to be its entire claim file. However, almost three months later, during the taking of the depositions of the two employees responsible for the claim file, plaintiffs attorney discovered that the material provided did not contain the subfile which showed how the salvage of plaintiffs car was handled. Also missing from the claim file were the underwriting risk notice and the request for evaluation form.

Defendant provided the salvage subfile at the deposition, but did not provide the other two documents at that time. Trial defense counsel, who is not the same as appellate defense counsel, learned of the existence of the subfile the day before the depositions but did not inform the plaintiff of its existence before the depositions. No explanation was given in the deposition for the failure to provide this subfile. In the hearing on the motion for sanctions, defendant’s counsel stated only that the subfile was not produced due to an oversight. The salvage subfile had been crated by appellant’s salvage handler, Ms. Williams, after the claims representative, Ms. Cantu, had determined by the report of an adjuster that appellee’s car was damaged beyond repair. Ms. Cantu also kept a file on her part of the work on the claim. Ms. Cantu’s and Ms. Williams’ files were merged on September 26, 1989, when Ms. Cantu allegedly thought that she had reached a settlement and sent her file to Ms. Williams. Ms. Williams eventually sent the file back to Ms. Cantu after she learned that a settlement had not been reached. Both knew of the existence of the salvage subfile and that it contained highly relevant information but did not provide it until nearly three months after the time prescribed by the court. Thus, under our precedent, the trial court did not abuse its discretion. Defendant’s employees violated the court’s order without explanation by not complying within the prescribed time. Such action is sufficient to warrant sanctions. Cagle v. Fennel, 297 Ark. 353, 761 S.W.2d 926 (1988); Harper v. Wheatley Implement Co., Inc., 278 Ark. 27, 643 S.W.2d 537 (1982); Mann v. Ray Lee Supply, 259 Ark. 565, 535 S.W.2d 65 (1976); Graham v. Sledge, 28 Ark. App. 121, 771 S.W.2d 296 (1989).

At the time of the hearing on plaintiffs motion for sanctions, the defendant still had not provided the underwriting risk notice and evaluation request form. Defense counsel said that he had not been able to locate these documents but promised he would provide them. In a pretrial hearing the day before trial, defense counsel stated that he had discovered the evaluation form never existed, because the claims representative had made the request for evaluation by telephone. In this respect the present case is similar to Cook v. Wills, 305 Ark. 442, 808 S.W.2d 758 (1991). There, we affirmed the trial court’s imposition of severe sanctions for the appellant’s failure to produce a requested tax return by the time of trial, at which time she said she could not find the form. The trial court had not issued a discovery order because the appellant had repeatedly promised that she would produce the form. We noted that there were at least three pretrial hearings at which the appellant could have apprised the trial court of her difficulty in producing the tax return. Likewise, the defendant in this case had at least two opportunities prior to trial to inform the court that the evaluation request form did not exist. Accordingly, we hold that the trial court did not abuse its discretion in imposing the sanctions.

Defendant’s third subpoint for reversal under the first assignment of error is that the trial court abused its discretion in entering a default judgment absent an affirmative showing of prejudice to the plaintiff as required by A.R.C.P. Rule 55(a). This argument has no merit as Rule 55(a) is applicable to default judgments entered due to the failure of a defending party to appear or respond to a claim. It does not apply to default judgments as to liability entered as a sanction pursuant to Rule 37. See Sphere Drake Ins. Co. v. Bank of Wilson, 307 Ark. 122, 817 S.W.2d 870 (1991).

The defendant insurance company’s second assignment of error contains two subparts. The first is that the trial court erred in giving an instruction to the jury on the issue of punitive damages because there was not sufficient evidence to warrant such an instruction. In Aetna Casualty & Surety v. Broadway Arms, 281 Ark. 128, 133-34, 664 S.W.2d 463, 465-66 (1983), we set out the elements of the first party tort of bad faith for the refusal to settle a claim. There, we acknowledged that unfair and oppressive pressure to settle may constitute the first party tort of bad faith. Here, there was evidence indicating the claims representative dealt dishonestly with the plaintiff in the appraisal of the value of her car, and at the same time, was oppressive in calling her at the mill, abusive in her language, and coercive in dealing with her insured. In addition, there was evidence implying that the defendant converted the wrecked car in order to place the plaintiff under pressure to settle. Indeed, for the trial court to have refused to instruct on the tort of bad faith would have been error, for a jury should be instructed on all theories of recovery which the evidence warrants. Daniel v. Quick, 270 Ark. 528, 606 S.W.2d 81 (1980).

The plaintiffs second subpoint with regard to the instruction is that it violates the defendant insurance company’s right of due process. Before addressing the substantive law of the subpoint, we address the procedural law and our limited review of this case under the circumstances before us.

Objections to instructions to the jury are covered by A.R.C.P. Rule 51. It provides, in material part:

No party may assign as error the giving or the failure to give an instruction unless he objects thereto before or at the time the instruction is given, stating distinctly the matter to which he objects and the grounds of his objection, and no party may assign as error the failure to instruct on any issue unless such party has submitted a proposed instruction on that issue.

In accordance with the rule, we have said that in order to preserve an objection regarding an erroneous instruction of the law, the party appealing must make a timely objection by telling the trial judge why the instruction was wrong, and when the point of appeal is that the court failed to give an instruction, the party appealing must submit a proposed instruction on the issue. Peoples Bank and Trust Co. v. Wallace, 290 Ark. 589, 721 S.W.2d 659 (1986).

At trial, the defendant asked the court to give its proposed instruction No. 1 in light of the Supreme Court’s ruling in Pacific Mutual Life Ins. Co. v. Haslip, 111 S. Ct. 1032 (1991). The trial court refused to give defendant’s proffered instruction No. 1. Whether the trial court erred in refusing to give the defendant’s proffered instruction is the only issue before us. We set this out because the defendant seeks to modify its argument and, for the first time on appeal, argues that the state procedure for awarding punitive damages violates due process. As we have said many times, we do not consider arguments on appeal that were not raised in the trial court. Stated another way, the general rule is that a trial court will not be reversed unless it committed some prejudicial error, and if an issue was never presented to the trial court, it could not have committed error on that issue.

In Pacific Mutual Life Ins. Co. v. Haslip, the Supreme Court established three criteria to judge whether a particular award violated the Due Process Clause. Those criteria are: (1) Whether the jurors were given sufficient guidance and instruction on punitive damages so that they could reach a rational decision. (This criterion deals with instructions.) (2) Whether there were sufficiently established post-trial procedures and standards in the trial court for scrutinizing punitive damage awards. (This criterion does not deal with instructions.) (3) Whether there are sufficiently established standards for appellant review. (This criterion does not deal with instructions.)

For the reasons set out, we do not consider any of the defendant insurance company’s arguments under (2) and (3) above. We do consider that part of (1) above relating the trial court’s failure to give defendant’s proffered instructing No. 1.

The defendant’s proffered instruction No. 1 was submitted to the trial court exactly as follows:

Defendant’s Proposed
Instruction No. 1
In addition to compensatory damages for any actual loss that Ramona Jester may have sustained, she asks for punitive damages from Viking Insurance Company of Wisconsin. Punitive damages may be imposed to punish a wrongdoer and to deter others from similar conduct. In order to recover punitive damages from Viking Insurance Company of Wisconsin, Ramona Jester has the burden of proving:
That Viking Insurance Company of Wisconsin engaged in affirmative misconduct which was dishonest, malicious, or oppressive in an attempt to avoid its liability under the insurance policy issued to Ramona Jester. Actual malice is that state of mind in which a person’s conduct is characterized by hatred, ill will, or a spirit of revenge. Malice may be inferred from conduct and surrounding circumstances.
You are not required to assess punitive damages against Viking Insurance Company of Wisconsin but you may do so if justified by the evidence.
If you find that punitive damages are justified by the [The proffered instruction ends in mid-sentence.]

Instead, the trial court gave the following instruction on punitive damages rather than defendant’s proposed No. 1.

In addition to compensation for any actual loss that Ramona Jester may have sustained, she asks for punitive damages from Viking Insurance Company of Wisconsin. Punitive damages may by imposed to punish a wrongdoer and to deter others from similar conduct. In order to recover punitive damages from Viking Insurance Company, Ramona Jester has the burden of proving that Viking Insurance Company of Wisconsin engaged in affirmative misconduct which was dishonest, malicious, or oppressive in an attempt to avoid its liability under the insurance policy issued to Ramona Jester. Actual malice is that state of mind in which a person’s conduct is characterized by hatred, ill will, or a spirit of revenge, actual malice need not be proved but may be inferred from conduct and surrounding circumstances.
In arriving at the amount of punitive damages, you may consider the financial condition of Viking Insurance Company as shown by evidence.

As can be immediately seen, the only distinction between the instruction that was given and the defendant’s proposed instruction is that the instruction given told the jurors they “may” impose punitive damages while the proposed instruction told them that they were not required to assess punitive damages but “may” do so. However, the trial court also gave the pattern A.M.I. instruction on the burden of proof and preponderance of the evidence, and in another discussed punitive damages “if appropriate.” This slight difference between the instruction given and the proffered one did not violate the defendant’s right to due process, and this is especially so in light of the fact that the trial court had already granted a default as to “liability for actual and punitive’'’ claims. Both the instruction given and the proposed instruction use the same language in explaining the nature and purpose of punitive damages, punishment and deterrence. Both identify the damages as punishment for civil wrongdoing, and both provide that it was within the discretion of the jury to award such damages. See Haslip, 111 S. Ct. at 1044-45. Under the Has lip examination, there is no material difference between the instruction given and the proposed instruction. Thus, the trial court did not err in refusing defendant’s proffered instruction No. 1.

The defendant’s final point of appeal is that the punitive damages are excessive and demonstrate that the jury was motivated by passion and prejudice. We have always carefully scrutinized punitive damage awards. See Robertson Oil Co., Inc. v. Phillips Petroleum Co., 779 F. Supp. 994 (W.D. Ark. 1991). We have written, “[P]unitive damages constitute a penalty and must be sufficient not only to deter similar conduct on the part of the same tortfeasor, but also to deter any others who might engage in similar conduct.” Maxwell v. Walser, 296 Ark. 70, 73, 751 S.W.2d 351, 353 (1988). That statement is particularly appropriate in this case. Each case must be reviewed on its own facts, Clark County Lumber Co. v. Collins, 249 Ark. 465, 459 S.W.2d 800 (1970), and the financial condition of the defendant is a proper matter to consider. Holmes v. Hollingsworth, 234 Ark. 347, 352 S.W.2d 96 (1961). The amount of actual damages is but one criterion for the assessment of punitive damages. Matthews v. Rodgers, 279 Ark. 328, 651 S.W.2d 453 (1983).

The oppressive actions of the defendant that should be deterred are adequately set out in the beginning of this opinion and need not be repeated. In addition to those facts, the defendant’s financial report shows that in 1989 it had assets of $165,306,703.00, premium income of $146,992,431.00, net income of $9,132,487.00, and a net worth of $49,562,012.00. The damages awarded are not excessive in view of this State’s interest in punishing the conduct of this defendant and deterring others from engaging in such conduct.

Affirmed.

Hays, J. dissenting.

Glaze, J., not participating.

Steele Hays, Justice,

dissenting. The offending conduct in this case, failure to timely deliver a subfile pursuant to discovery, may well have been inadvertent, or, at worst, neglectful. As best I can determine, it was not onerous to appellee and did not impede the progress of the trial. Yet the trial court struck the pleadings of the appellant, leaving it defenseless and vulnerable to claims for compensatory and punitive damages. Before the harshest sanction possible under the law is imposed there ought to be a stronger showing of culpability than I can glean from this record. Because I regard the penalty as seriously disproportionate to the offense, I respectfully dissent.


source: Caselaw Access Project

author: Steele Hays, Justice.

license: Public Domain

text:
    Dunavant Charles HICKMAN and Pernie Boyles, Guardian of the Estate of Tracy Butler, An Incompetent v. The TRUST OF HEATH, HOUSE AND BOYLES; Julian B. Fogleman, Trustee and Individually; Heath and House Construction Co., Inc., James A. Heath, J.O. House; Grace Ann Stephenson; Claudia Heath Howe; David Randall House; Paula Jeane House and Jeffrey Lewis House
    91-310
    835 S.W.2d 880
    Supreme Court of Arkansas
    Opinion delivered July 20, 1992

      Donald A. Forrest, for appellant Dunavant Charles Hickman.

      William P. Rainey, for appellant Tracy Butler.

      Sloan, Rubens, & Peeples, by: Kent J. Rubens; and Rieves & Mayton, by: Martin W. Bowen, for appellees.
   Steele Hays, Justice.

Appellants brought this suit in equity to have certain writings declared to be an express trust for their benefit. The trial court held the evidence was insufficient to establish that the plaintiffs were designated beneficiaries and they appeal from that order. We affirm the chancellor.

Heath & Scarbrough Construction' Company, Inc., owed $19,171.08 to each of its three stockholders, James Heath, J.O. House and Mason Boyles. Each stockholder held a promissory note from the corporation.

On November 6, 1973, at a special meeting of the directors of Heath & Scarbrough, the establishment of the Trust of Heath, House & Boyles was the subject of discussion. The minutes of that special meeting read as follows:

The chairman stated the purpose of the special meeting to discuss the sale of the company’s office building and warehouse property to a trust being created on this day by James O. House, James A. Heath, and D. Mason Boyles known as “Trust of Heath, House and Boyles.”
The chairman pointed out that the corporation on this date recognized that it owed to each Heath, House and Boyles, notes of $18,399.80 plus accrued interest thereon of $771.28 ($19,171.08 total to each) for an aggregate sum of $57,513.24. Further, the chairman noted that as of this date the corporation has been notified that each of the above has transferred his note to the above referred to trust and hereby instructs the secretary, upon surrender of the individual notes, to issue a new note payable to “Trust of Heath, House & Boyles” in the amount of $57,513.24, interest at 6% payable on demand. The secretary proceeded to immediately perform these acts and instructs the chairman that they have been accomplished.
The chairman then presented an appraisal dated and received this date, November 6, 1973, from Robert E. McCarley on the company’s office building property, such appraisal having been authorized by Mr. Heath. After lengthy discussion, the appraised amount of $59,000.00 was agreed to be a fair and accurate amount. The warehouse property was discussed and it was mutually agreed that $8,000 was a fair and accurate value of that property.
After further discussion, motion was made, seconded and unanimously passed that the company office property and the warehouse property be sold to the “Trust of Heath, House and Boyles” for $67,000.00 and that the consideration for such sale be:
Cancellation of the note due “Trust” $57,513.24
Execution of a 6% demand note from “Trust” to corporation 9,486.76
Total consideration $67,000.00
The chairman was instructed and authorized by the vote of the Board to perform such acts as to have these transactions, agreed by all parties, to be taking place as of this date, to be property documented. [A.l 19-121.]

The minutes are signed by Heath, as chairman and as a director, by House, as a director, and by Mason Boyles, as secretary of the corporation. Beneficiaries are not designated in these minutes.

A warranty deed dated November 6, 1973, was then executed by Heath & Scarbrough (by James Heath as President, and J.O. House as assistant secretary) to the Trust of Heath, House & Boyles. The deed was not recorded until 1976.

A year later, on December 9, 1974, a trust agreement was prepared, referring back to November 6, 1973, and stating that the agreement was executed as of November 6, 1973. This agreement is signed by James Heath and J.O. House, but not by Mason Boyles. The trust agreement names beneficiaries for all three trustors, designating the appellants as beneficiaries of Mason Boyles.

A later warranty deed was prepared for the purpose of correcting defects in the earlier deed and acknowledged on September 1, 1977, by James Heath as President and J.O. House as Secretary. The deed is not recorded but was delivered to the trustee.

Mason Boyles died in 1990 without ever having signed the trust agreement. The evidence is undisputed that he was aware of the trust agreement and refused to sign it.

The trust agreement was to terminate after the eleventh year. At that time appellants were notified by James Heath and J.O. House and their beneficiaries that appellants would not be recognized as beneficiaries of the trust because Mason Boyles had not signed the trust agreement. The appellants, a stepdaughter and a grandson, filed suit to have the trust declared valid as to them as beneficiaries of Mason Boyles. An intervention was filed by Dunavant Boyles, Gwen Boyles Odom and Belinda Gail Skillen, who are Mason Boyles’s heirs at law, children of an earlier marriage.

The case was tried to the chancery judge in Crittenden County. An attempt was made by the appellants to show an express trust through both the minutes of the special board meeting, which lacked the designation of any beneficiaries, but was signed by Mason Boyles, and the trust agreement prepared a year later, which contained all the elements of a trust but which was never signed by Boyles. There was evidence attempting to show that the beneficiaries in the trust agreement were parties Boyles had intended to be beneficiaries of the trust. However, there was no evidence produced to show who was the source of the names supplied for the Boyles beneficiaries in the trust agreement and there was evidence of three different versions of Boyles beneficiaries, beyond that in the trust agreement. There was no proof that Boyles intended to sign the trust agreement but was somehow prevented from doing so.

At the end of the plaintiffs’ case, a motion to dismiss was made. The motion was granted by the court on the basis that plaintiffs had not met their burden of proof, and failed to prove by clear and convincing evidence that they were the beneficiaries of • the trust. Appellants appeal from that order.

Appellants’ principal argument on appeal is that the trial court erred in finding that appellants were not the named beneficiaries of Mason Boyles under the Heath, House & Boyles Trust. Appellants argue that we should find either the signed minutes of the special board meeting of November 6,1973, or the trust agreement sufficient to create a valid express trust.

The first document, the minutes, even if otherwise sufficient, was lacking because no beneficiaries were designated. A beneficiary is an essential element of a trust. W. Fratcher, II Scott on Trusts § 112 (1987); 76 Am. Jur. 2d Trusts § 59 (1992).'

It is stated in Scott, Id:

Where the owner of property declares himself trustee for persons to be selected by him, the selection to be wholly within his control, no trust is created and the settlor continues to hold the property for his own benefit. A trust will not arise unless and until he names the beneficiaries. Similarly, if the owner of property transfers it to another in trust for such persons as the settlor may designate, no one other than the settlor has a beneficial interest in the property until he designates others as beneficiaries. In such a case there is a resulting trust for the settlor, and he can at any time require the trustee to return the property to him. [Our emphasis.]

The second document, the unsigned trust agreement, under the statute of frauds was not effective without his signature. Ark. Code Ann. § 4-59-103(3)(1) (1984) provides:

All declarations or creations of trusts or confidences of any lands or tenements shall be manifested and proved by some writing signed by the party who is or shall be by law enabled to declare the trusts, or by his last will in writing, or else they shall be void.

This is also the general rule. See G. Bogert, Trusts and Trustees §§ 81 -87 (1984).

The trust agreement, written up a year after the special meeting of the board of directors, remained in existence for six years before Mason Boyles’ death, and it is undisputed that he was aware of the agreement, steadfastly refused to sign it, and died without doing so. Appellants have cited no authority, nor are we aware of any, that would remove this case from the requirement of the maker’s signature under the statute of frauds. This is precisely the kind of situation to which the statute of frauds was intended to apply.

Appellants insist that even if these two documents are separately incomplete, they can be read together, each supplying one deficiency for the other. The general rule does permit multiple writings to determine if a trust has been created. G. Bogert, Trusts & Trustees § 90 (1984). However, not all writings qualify and the case before us presents such a situation.

More difficult problems arise where there is a writing signed by the party enabled to declare the trust and also a document unsigned by that party. Throughout this section “signed” is used as meaning “signed by the party by law enabled to create or declare the trust,” and “unsigned” is used with the opposite meaning. A paper signed by a party having no power to create a memorandum is “unsigned” for the purposes of the Statute. If one assumes that both signed and unsigned papers are incomplete, but that the signed paper expressly incorporates the unsigned into it by direct statement amounting to an authentication of the unsigned paper, it is naturally held that the two instruments may be used together. In the converse case, however, where an unsigned document purports to incorporate a signed paper into itself, the Statute is not satisfied. The signer has not validated the unsigned paper. The incorporation leaves the combined writings as having no more force than a single unsigned paper.

G. Bogert, Trusts & Trustees § 90 (1984).

Clearly, the signed writing in this case, the minutes, does not expressly incorporate the unsigned paper by direct statement. At best, it contains an ambiguous provision directing that the “transactions” of the day be “properly documented.” See Minutes, supra. That statement in the minutes does not constitute a direct statement that expressly incorporates a trust agreement written a year later, particularly where the agreement contains provisions not mentioned at the board meeting.

Appellants propose to establish the beneficiaries by proof of the trustor’s intent through parol evidence. That is not consistent with the law.

Oral evidence will not be received to supply terms in the writing which are wholly absent, for example, the name of the beneficiary, the description of the land to which the trust attached or other essential terms of the trust. If the memorandum is deficient in regard to one or more of its essential items, parol proof cannot be used to supplement it. . . .
The courts have however, distinguished between using oral evidence to supply a term entirely missing and offering oral testimony to clear up ambiguities, explain doubtful terms and give a setting to the writing. If all the essential elements of the writing are present, they may be clarified by nondocumentary evidence.

G. Bogert, supra at § 88.

But we are not here confronted with an ambiguity or the need for an explanation of terms. There was simply no mention of any beneficiaries in the minutes. That ends the inquiry.

Appellants argue in the alternative that should we agree with the trial court that there was no express trust as to the Boyles beneficiaries, we should find that a trust arose by implication in favor of these beneficiaries. What type of implied trust appellants propose is not clear. The term “implied trusts” encompasses both constructive trusts and various types of resulting trusts. See 76 Am. Jur. 2d Trusts §§ 159-163 (1992); W. Fratcher, V Scott on Trusts §§ 404-404.2 (1989) (describing the three types of resulting trusts) and W. Fratcher, V Scott on Trusts § 462 (1989) (describing constructive trusts). However, we need not reach that question as nothing appears in the abstracted record reflecting that an argument for any type' of implied trust was formulated in the trial court, or that any ruling was given. Having failed to adequately raise the point below or obtain a ruling on the matter, appellants have waived review of that issue.

Appellants have raised two other points that require no extended discussion. The first involves the admissibility of testimony as to statements by Boyles reflecting his intent with respect to the beneficiaries of the trust. The trial court excluded the testimony and appellants assign error to his ruling. It was not necessary for the chancellor to rule on these objections. Parol evidence cannot be used to prove an express trust of land when it is used to supply terms that are wholly absent. G. Bogert, supra § 88.

The other point concerns a letter from the trustee to counsel for the appellants written on behalf of the beneficiaries of Messrs. House and Heath, offering $84,000 to the Boyles beneficiaries as “full and final settlement with them for their interest in the assets of this trust.” The trial court ruled the letter was inadmissible under A.R.E. Rule 408 which prohibits evidence of offers of compromise when there is a “claim which was disputed as to validity or amount.” Appellants maintain there was no evidence that at the time the letter was sent in 1986 there was any dispute and, therefore, Rule 408 is inapplicable.

We are not persuaded by the argument. Certainly an incipient dispute was in the offing, if on no other basis than Mason Boyles’s refusal to sign the trust agreement, on which appellants’ claim largely rested. Besides, the evident purpose of the letter was to show that beneficiaries of the other settlors, Heath and House, recognized appellants’ status as beneficiaries of Mason Boyles. Whether that is probative of what Boyles’s intentions were is debatable, at best, and could not have substantially affected appellants’ case. A.R.E. Rule 103(a).

Affirmed.

Brown, J., not participating.


author: Steele Hays, Justice. David Newbern, Justice,

text:
    J.W. REYNOLDS LUMBER CO. v. SMACKOVER STATE BANK
    91-212
    836 S.W.2d 853
    Supreme Court of Arkansas
    Opinion delivered July 20, 1992

      Spencer, Spencer, Depper, & Guthrie, by: Robert L. Depper, Jr., for appellant.

      Compton, Prewett, Thomas, & Hickey, P.A., by: William I. Prewett, for appellee.
   Steele Hays, Justice.

This is a civil suit for damages resulting from an embezzlement by Ms. Jimmie Brown, a long time bookkeeper of J.W. Reynolds Lumber Company (plaintiff-appellant). Reynolds filed suit against Smackover State Bank (defendant-appellee), contending the Bank wrongfully permitted Ms. Brown to obtain funds from a Reynolds account in breach of an express trust and of a contractual agreement. Reynolds advanced several theories of liability by the Bank, and those theories are renewed on appeal. Finding no error, we affirm.

Ms. Jimmie Brown began working for Reynolds in 1962 as as assistant to Mr. Toland, bookkeeper for a variety of operations in connection with Reynolds’s lumber and other businesses. Checks payable to Reynolds were endorsed “For Deposit Only” and taken to the Bank by Toland. When necessary, Toland would obtain cash by a “less cash” notation on the deposit slip and use it to replenish the cash drawer at Reynolds. Toland was authorized to write checks on Reynolds’s account at the Bank on his signature alone.

On Mr. Toland’s retirement, Ms. Brown succeeded him as bookkeeper and she continued the “less cash” procedure, but she had no authority to make withdrawals from the account without an additional signature. Sometime in 1974 Ms. Brown began to take money for her personal use from the cash drawer, which she would then replace with cash obtained from the “less cash” procedure notations on the deposit slips. Between 1974 and 1986, when she resigned to take another job, Ms. Brown’s expropriations totaled $74,897.78.

The defalcation went undiscovered over many years because the general manager, N.T. Rutledge, the accountants and other employees, while they audited the bank statements and records of the company’s operations, did not examine the deposit slips, which were regularly filed at Reynolds’ office.

Ms. Brown’s successor noticed the “less cash” notation on some deposit slips and questioned these transactions since she was not accustomed to that procedure. She brought it to the attention of her employer and Ms. Brown was asked for an explanation. She readily admitted the embezzlement and some of Reynolds’ loss has been recovered.

I.

Whether The Court Erred In Holding That An Implied Trust Did Not Exist Between the Appellant and Appellee

The complaint alleged an express trust, but at trial Reynolds relied on the existence of a constructive or implied trust between it and the Bank. Reynolds contends the Bank breached a fiduciary obligation arising from the trust relationship. The chancellor held there was no implied trust between the Bank and Reynolds, rather the relationship was that of debtor/creditor. We believe that holding was correct.

This court has stated that a constructive trust is an implied trust, arising by operation of law to satisfy the demands of justice. Hall v. Superior Federal Bank, 303 Ark. 125, 794 S.W.2d 611 (1990). While a confidential or fiduciary relationship does not in itself give rise to a constructive trust, an abuse of confidence rendering the acquisition or retention of property by one person unconscionable against the other, suffices generally to ground equitable relief in the form of declaration and enforcement of a constructive trust. Id.

“A trust is a fiduciary relationship. . . .” Halliburton Co. v. Owen Family Trust, 28 Ark. App. 314, 773 S.W.2d 453 (1989). In Cherokee Carpet Mills v. Worthen Bank, 262 Ark. 776, 561 S.W.2d 310 (1987) we stated, “[i]t is unquestionably the law that a general deposit of money in a bank passes the title to the bank and establishes the relation of debtor and creditor between the bank and the depositer. ...” See also B. Clark, The Law of Bank Deposits, Collections and Credit Cards % 2.1 (1981); J. White & R. Summers, Uniform Commercial Code § 18-1 (1988).

It is axiomatic that persons cannot be held liable as a trustee unless they expressly, or by necessary implication, agreed to act as such and are aware of the terms under which the deposit has been made and the conditions upon which it may be released. Lasley v. Bank of Northeast Arkansas, 4 Ark. App. 42, 627 S.W.2d 261 (1982). Reynolds does not cite any evidence which supports the theory of implied trust. As mentioned by the Bank, Reynolds bears the burden of demonstrating that an error occurred at the trial level. Looper v. Madison Guaranty Savings & Loan Associates, 292 Ark. 225, 729 S.W.2d 156 (1987).

There are circumstances under which the debtor/creditor relationship between banks and depositors is altered, but the existence of a trust relationship is dependent upon the bank having knowledge or notice sufficient to put it on inquiry. Cherokee Carpet Mills, supra; In re Brittenum & Associates, Inc., v. Cross County Bank, 83 B.R. 574 (E.D. Ark. 1988).

Here there were no facts to indicate that Reynolds and the Bank had any relationship beyond that of debtor/creditor. That being so, there was no fiduciary relationship and the chancellor did not err in dismissing the claim based upon implied trust.

II.

Whether The Court Erred In Holding That There Was No Contract Existing Between The Parties, Therefore, There Was No Breach of Contract By The Bank

Reynolds argues that the signature card, executed by it and the Bank establishes the existence of a written contract between the parties which the Bank breached. The relevant part of the signature card states:

TO SMACKOVER STATE BANK, SMACK-OVER, ARKANSAS. Below please find duly authorized signatures which you are to recognize in payment of checks on you and in the transaction of any other business on my/ our account.

The chancellor held that the signature card did not establish a contract between the parties because it states that certain signatures are required to sign checks but nothing in the signature card deals with deposits. The chancellor noted that if a contract was breached it was an implied contract not in writing. The chancellor further found that Ark. Code Ann. § 4-4-406 (1987), which provides a time limitation in which a customer may notify a bank that it has paid over an unauthorized signature, was not applicable because under the statute the original deposit slip had to have been returned to the customer, whereas here it was retained by the Bank. The chancellor also found that Reynolds’s failure over a span of twelve years to discover the embezzlement would constitute contributory negligence on the part of Reynolds that was “at least as much a cause of the loss to plaintiff as was the negligence of the employees of defendant.” Finally, the chancellor held the equitable defenses of laches and estoppel would preclude Reynolds from recovery under a contract theory.

The CEO of the Bank testified that it was the Bank’s custom to allow a person making a deposit marked “For Deposit Only” to receive “less cash” if the person was authorized to withdraw from the account. A senior vice president-cashier testified that the “less cash” transaction on deposits of “For Deposit Only” items had always been the Bank’s policy and was followed generally by other banks. A banking consultant, Don Coker, testifying as an expert witness, stated that in business accounts allowing a person to receive cash from a deposit marked “For Deposit Only” is not a sound or common banking practice. The chancellor held that the bank allowing cash to be given on such deposits was a breach of an implied contract, but Reynolds could not recover because of the defenses of laches and equitable estoppel.

We agree. The theory of laches and equitable estoppel are based on the fact that Reynolds allowed this practice to go on for twelve years without complaining. This court stated that for silence to constitute an estoppel there must be both the opportunity and the duty to speak. Lavaca School Dist. No. 3 v. Charleston School Dist. No. 9, 304 Ark. 104, 800 S.W.2d 703 (1990). The action of the person asserting the estoppel must be the natural result of the silence, and the silent party must be in a situation to know that someone is relying on the silence to his detriment. Id. Laches is based on the theory that it is the unreasonable delay of the party seeking relief under such circumstances as to make it inequitable or unjust for the party to seek relief now. Briarwood Apartments v. Lieblong, 12 Ark. App. 94, 671 S.W.2d 207 (1984).

Appellant does not argue on appeal that the doctrines of equitable estoppel and laches are not applicable. Banks give depositors duplicate deposit slips to verify their actions. For twelve years, Reynolds received duplicate deposit slips which were kept in the company’s records but not checked, while the embezzlement went undetected. Only the bank statements, which did not show the “less cash” withdrawals, were checked by the company.

III.

Whether The Court Erred In Holding That Appellant’s Negligence Action Was Barred By Appellee’s Defenses of Contributory Negligence and Laches and Estoppel

The chancellor held the Bank was negligent in allowing cash withdrawals against checks deposited with the endorsement “For Deposit Only.” We think that was correct because the Bank’s actions in paying over the specific endorsement were clearly negligent under Ark. Code Ann. §§ 4-3-205 -206 (1987). However, the chancellor also found Reynolds could not recover damages on the negligence theory because it failed to review the duplicate deposit slips maintained over the twelve years in its office which would have disclosed the dishonesty. Therefore, the court held that the Bank’s defenses of contributory negligence, laches and estoppel precluded any recovery.

Relying on First Bank & Trust of Jonesboro v. Vaccari, 288 Ark. 233, 703 S.W.2d 867 (1986), Reynolds argues, with respect to the issue of comparative fault, the question of the Reynolds’s negligence is irrelevant until the Bank established it acted according to reasonable commercial standards. Since there was testimony that the Bank’s practice was not sound banking practice, Reynolds contends the chancellor was wrong to address the negligence of Reynolds.

In Vaccari, supra, a judgment was obtained against a bank on a claim of conversion arising from embezzlement of funds by a company employee who signed company checks, deposited them into an account opened for her own use under the company’s name and appropriated the funds to her own use. Vaccari was decided under Ark. Stat. Ann. § 85-3-419 (3) which was codified at Ark. Code Ann. § 4-3-419 (1987). Vaccari is a decision made under prior law and Ark. Code Ann. § 4-3-420 (1987) now governs conversion of instruments. Furthermore, the requirement on the bank to show it acted in good faith and in accordance with reasonable commercial standards is only a requirement of U.C.C. § 3-419(3) dealing with conversion. It was intended to relieve certain banks of any liability for conversion beyond the proceeds remaining in the bank’s hands, when the bank was able to prove it acted in good faith following reasonable commercial standards. Annotation, Bank’s Reasonable Commercial Standards Defense Under UCC § 3-419(3), 49 A.L.R. Fed. 888 (1986 and Supp. 1991). Therefore, Vaccari is not applicable to appellant’s negligence claim, and Reynolds’s argument here must fail.

IV.

Whether The Court Erred In Holding That The Bank Was Not Guilty Of Conversion

Reynolds argues it should have prevailed in its conversion theory. Conversion is an intent to exercise dominion or control over property which is inconsistent with the owner’s right. City National Bank of Fort Smith v. Goodwin, 301 Ark. 182, 783 S.W.2d 335 (1990). Reynolds maintains the Bank converted its funds because the checks that Ms. Brown presented to the Bank were the property of Reynolds and when the Bank gave her money that, according to the restrictive endorsement, was supposed to be deposited in Reynolds’s account, the Bank converted its property.

The chancellor held there was no conversion on these facts and we agree. It would be stretching the definition of conversion in this case because the Bank was not exercising any dominion or control over the money. It was simply depositing the money in Reynolds account or giving Ms. Brown the “less cash” proceeds in accordance with its custom and practice. Furthermore, as the Bank points out, there was no evidence of intent. The Bank did not intentionally exercise control over this money, counter to the rights of its customer, because the Bank had no knowledge the transactions were inconsistent with those rights.

V.

Whether The Court Erred In Dismissing Appellant’s Bailment Cause Of Action

Reynolds argues that because the checks were endorsed “For Deposit Only,” a bailment was created between Reynolds and the Bank. Reynolds contends that due to the restrictive endorsement, the deposits were for a special purpose.

As we have noted previously, general deposits of money in a bank merely create a debtor/creditor relationship between a bank and its customer. Only if money is placed in the bank for the purpose of safekeeping or on an understanding that the bank shall act as bailee, does the deposit become a speciál deposit and the bank becomes an agent or bailee with no right to use the money except pursuant to the terms of the bailment agreement. Lasly v. Bank of Northeast Arkansas, 4 Ark. App. 42, 627 S.W.2d 261 (1982).

Here there was no evidence of a bailment agreement between the parties, instead, there is only evidence that this was a general account where the Bank had a right to use the money on deposit and commingle it with its own funds. Thus, the chancellor did not err by dismissing the cause of action based on bailment.

VI.

Subject Matter Jurisdiction

We do not share our colleagues’ view that four years of hard fought litigation must go for naught and these parties sent back to square one to begin anew. While the complaint alleges an express trust, before trial it appeared the real remedy sought by appellant was a trust by implication of law and the case was tried without objection on that theory. When an issue is tried by consent of the parties, express or implied, it is “in all respects” as if the issue had been raised in the pleadings. Ark. R. Civ. P. 15(b). As to whether equitable jurisdiction attaches to issues involving trust, there can be little doubt. “Courts of equity have inherent and exclusive jurisdiction of trusts, independently of statute, whether they arise by express trust or result by implication of law.” Spradling v. Spradling, 101 Ark. 451, 142 S.W.2d 848 (1911).

Broadly stated, courts of equity always have jurisdiction of the subject matter in a case in which there is an element of trust. Such courts have jurisdiction of suits to establish the existence, to protect, or to compel the performance of, a trust, or to protect the beneficiary, and have jurisdiction over suits or proceedings which otherwise involve trusts or trustees, whether the trust is one that is express or arises by operation of law.

76 Am. Jur. 2d § 660 (1992).

Certainly it is settled law that subject matter jurisdiction, if lacking, cannot be induced simply because there is no objection. But that general rule applies only where jurisdiction could not “under any circumstances” exist, Crittenden County v. Williford, 283 Ark. 289, 675 S.W.2d 631 (1984); Smith v. Whitmire, 273 Ark. 120, 617 S.W.2d 845 (1981); Whitten Developments, Inc., et al. v. Agee, 256 Ark. 968, 511 S.W.2d 466 (1974); Price v. Madison County Bank, 90 Ark. 195, 118 S.W. 706 (1909); or where chancery court is “wholly incompetent to grant the relief sought.” Carter v. Phillips, 291 Ark. 94, 722 S.W.2d 590 (1987); Titan Oil & Gas v. Shipley, 257 Ark. 278, 517 S.W.2d 210 (1974). Examples would be where a circuit court granted a divorce, or ordered specific performance, or where a chancery court heard an election contest or, to borrow from the dissent, assumed jurisdiction over a personal injury action upon an allegation that the alleged tort-feasor was holding the plaintiffs anticipated damages in trust. The transparency of that example is self-evident, as there are striking dissimilarities between it and the facts of this case. Reynolds’ theory of liability was that the Bank was bound to honor withdrawals from Reynolds account on not less than two signatures. Thus, when the Bank effectively permitted withdrawals on only one signature under the “less cash” device, the money it delivered to the embezzler was not Reynolds’, but its own; and those accumulated funds were held in trust for Reynolds by implication of law. Admittedly, it is a novel theory, and not one which the chancellor found persuasive, but novel theories are not strangers to the law and bear no stigma and we think it beyond dispute that chancery was not wholly lacking in jurisdiction, but was, by long tradition, competent to grant the relief sought in the premises had Reynolds prevailed.

It must be noted, as well, and notwithstanding the inchoate objection to jurisdiction mentioned in the dissent, that these parties and the trial court were quite content to try this case in chancery. That “objection,” mentioned casually in opening statement at trial, was plainly perfunctory and tactical. In fact, counsel for appellee stated forthrightly in oral argument that he did not object to jurisdiction of chancery court, did not move to transfer — an essential step to a jurisdictional challenge— and was not sure but that Reynolds might develop some theory of an implied trust. Significantly, from the outset the Bank raised the affirmative defense of laches as its primary defense, a defense the chancellor specifically sustained. That defense is cognizable only in courts of equity and is available only where equitable relief is sought. Rinke v. Schuman, 246 Ark. 976, 440 S.W.2d 765 (1969); Owen v. Johnson, 222 Ark. 872, 262 S.W.2d 480 (1954); Eades v. Joslin, 219 Ark. 688, 544 S.W.2d 623 (1951).

Nor can we agree there is anything untoward in the admission of counsel for Reynolds that the choice of forum was influenced by the fact that defenses available in equity were less formidable than at law. Such considerations by prospective litigants are entirely appropriate to our system and, indeed, were the very genesis of courts of equity.

We conclude that equitable jurisdiction of the subject matter was not wholly lacking and no useful purpose would be served by a dismissal of this appeal.

Affirmed.

Dudley and Newbern, JJ., dissent.

David Newbern, Justice,

dissenting. This is a garden variety embezzlement case. The Chancery Court lacked jurisdiction, and the case should be remanded for transfer to a circuit court.

The only allegation in Reynolds’ complaint suggesting chancery court jurisdiction was one of “express trust,” but no fact, such as a reference to a trust instrument, was alleged in support of finding an express trust. In his letter opinion the Chancellor states that Reynolds alleged an implied trust (apparently meaning constructive or resulting trust), and apparently that was a theory upon which Reynolds proceeded before the Chancellor without amending the complaint.

At the outset of the hearing before the Chancellor, counsel for the Bank pointed out that Reynolds had a complete and adequate remedy at law and, “Simply putting in an allegation of a so-called implied trust does not divest Circuit Court of jurisdiction. And we continue to object to Chancery Court jurisdiction throughout the trial.” The Chancellor apparently did not explicitly rule on the objection. There was no motion to transfer the case to a circuit court. While the Bank has not raised the question of subject matter jurisdiction in this appeal, it is an issue we have a duty to raise on our own. See Coran v. Keller, 295 Ark. 308, 748 S.W.2d 349 (1988); Arkansas S. & L. v. Corning, 252 Ark. 264, 478 S.W.2d 431 (1972).

In the opening paragraphs of Reynolds’ argument to this Court, it is clearly stated that there was no express trust, and the argument proceeds on theories of constructive or resulting trust as well as legal theories of bailment, breach of contract, conversion, and negligence.

Chancery courts have original jurisdiction in matters of equity. Ark. Code Ann. § 16-13-304 (1987). See Ark. Const., art. 7, §§ 1,11 and 15; Ark. R. Civ. P. 2. The remainder of the general subject matter jurisdiction of Arkansas trial courts is retained in the circuit courts. Ark. Const., art. 7, § 11.

In Bierbaum v. City of Hamburg, 262 Ark. 532, 559 S. W.2d 20 (1977), Bierbaum sought a mandatory injunction against the City to compel it to remove a water pumping station it had mistakenly built on land owned by him. The City counterclaimed for condemnation. The Chancellor denied the injunction and held that the City had the right to condemn the property. He then transferred the case to the Circuit Court for determination of damages, despite the lack of any motion to transfer or demand for jury trial. We held the Chancellor had no authority to transfer a case to a circuit court on his own motion and should have retained the case under the cleanup doctrine to determine the damages.

In Liles v. Liles, 289 Ark. 159, 711 S.W.2d 447 (1986), we attempted to reconcile the Bierbaum case with our cases on “subject matter jurisdiction” of chancery courts. We concluded that the matter is most often one of “propriety” rather than jurisdiction in the traditional sense and that we would not reverse a chancery court decision on subject matter jurisdiction grounds unless there was no tenable nexus whatever with a chancery court’s equitable or statutory jurisdiction.

Arkansas is a fact pleading jurisdiction. Ark. R. Civ. P. 8; West v. Searle & Co., 305 Ark. 33, 806 S.W.2d 608 (1991); Harvey v. Eastman Kodak Co., 271 Ark. 783, 610 S.W.2d 582 (1981). The jurisdiction of the trial court of the subject matter of a claim is determined initially from the pleadings. Walker v. State, 308 Ark. 498, 825 S.W.2d 822 (1992); McKinney v. City of Eldorado, 308 Ark. 284, 824 S.W.2d 826 (1992). If the pleadings state no fact in support of the Court’s jurisdiction, the trial court should not proceed. Martin v. Couey Chrysler Plymouth, Inc., 308 Ark. 325, 824 S.W.2d 832 (1992) (subject matter jurisdiction); Malone & Hyde, Inc. v. Chisley, 308 Ark. 308, 822 S.W.2d 394 (1992) (personal jurisdiction). In other words, it is not enough just to name an equity theory cognizable in a chancery court and then state facts which would not support the equity theory but which might support legal claims. While the Liles case gave as examples of lack of a tenable nexus instances of specific statutory and constitutional assignment of classes of cases to certain courts, it was not meant to suggest that a party could invoke chancery jurisdiction merely by naming an equitable theory or remedy and have jurisdiction sustained without stating, proving or even arguing to the chancellor any fact in support of that theory or remedy.

There are, of course, instances in which pleadings state facts upon which jurisdiction depends, and those facts turn out to be untrue, thus depriving the court of jurisdiction. In such cases, we have, on many occasions, stated that prohibition will not lie at the beginning of the case but that a jurisdictional error can be corrected on appeal. See, e.g., Statewide Health Coordinating Council v. Circuit Court of Pulaski County, 287 Ark. 84, 696 S.W.2d 729 (1985); Isely v. Isely, 287 Ark. 401, 700 S.W.2d 49 (1985). In considering subject matter jurisdiction of a chancery court, a complication arises because of the cleanup doctrine. If a chancery court obtains jurisdiction for one purpose, such as to decide a fact upon which availability of an equitable remedy, and thus equitable jurisdiction, might rest, then it may decide all issues presented. That is illustrated in Bierbaum case where we held that the chancellor should have decided the issue of damages despite the fact that the equitable remedy was no longer at issue.

When questioned on subject matter jurisdiction during oral argument, Reynolds’ counsel candidly stated, as he had done before the Chancellor, his reason for seeking application of a trust was simply that the statute of limitations would bar Reynolds’ claim for nearly all of the 12-year embezzlement period if he were to have asserted his bailment, breach of contract, and negligence claims in a circuit court where they belonged.

In oral argument before this Court, Reynolds contended the “implied trust” theory was a legitimate invocation of chancery jurisdiction upon which to base jurisdiction of the other claims under the clean up doctrine. The argument is that the money given to Ms. Brown as “less cash” was the Bank’s money, not Reynolds’ money, and thus the Bank continues to hold Reynolds’ money in its possession in trust.

Regardless of the merits of this characterization of the facts, and its direct inconsistency with paragraph 12. of Reynolds’ complaint that “the Bank gave Lumber Company money to “Ms. Brown, I cannot regard the pleadings as having been amended to conform to that version, as I can find no evidence in Reynolds’ abstract that it was presented to the Chancellor. The record contains a trial brief submitted to the Chancellor at the conclusion of the trial, but no post-hearing briefs are included in the record. If he had argued that the money given to Ms. Brown belonged to the Bank, it would have been inconsistent with Reynolds’ counsel’s consistent references before the Chancellor, which are included in the record and are consistent with Reynolds’ pleading, to money given by the Bank to Ms. Brown as having come from the deposits or from the Bank’s account. I cannot say the pleadings were amended to conform to proof which was not offered or argued.

It is clear that no fact was stated in support of subject matter jurisdiction in the Chancery Court; nor was any evidence of a fact which would have established a constructive or resulting trust offered or even argued. That the Chancellor apparently considered (arid correctly declined) arguments on trust theories does not change the fact that the case should not have remained in Chancery Court beyond the pleadings stage. The Chancery Court lacked jurisdiction and should have transferred the case to the Circuit Court at the outset. See Ark. Code Ann. § § 16-13-401 and 16-57-104(a) (1987); Linder v. Howard, 296 Ark. 414, 757 S.W.2d 549 (1988); Meeks v. Arkansas Power & Light Co., 147 Ark. 232, 227 S.W.2d 405 (1921).

This case is no different from one in which a party to an automobile accident files a complaint in a chancery court claiming injury and asserting that the money he is due in the form of damages is being held in trust by the defendant and thus a chancery court has jurisdiction. The Liles case opinion went as far as this Court should go toward minimizing the problems caused by the continued separation of our equity and law courts. The majority opinion in this case crosses the line and violates Ark. Const. art. 7, §§ 11 and 15.

I fully realize that it seems a waste of judicial resources to remand this case for transfer when both parties are, now at least, happy with the choice of trial forum. There is, however, a larger question involved which the majority of the members of this Court choose to ignore. Separation of equity courts from law courts may be an anachronism, but it is a constitutional anachronism. If we wink at it or turn our heads we do the law a great disservice in two ways. First, we display our willingness to ignore our fundamental organic document, and that weakens the law and this Court. Second, we make it easier for the people and the General Assembly to continue to decline badly needed reform of our Constitution’s judicial article.

I respectfully dissent.

Dudley, J., joins in this dissent.


author: Steele Hays, Justice. Robert L. Brown, Justice, Jack Holt, Jr., Chief Justice,

text:
    Jimmy Lee JARRETT v. STATE of Arkansas
    CR 92-171
    833 S.W.2d 779
    Supreme Court of Arkansas
    Opinion delivered July 20, 1992

      C.D. Mitchell, for appellant.

      Winston Bryant, Att’y Gen., by: Didi Sallings, Asst. Att’y Gen., for appellee.
   Steele Hays, Justice.

The appellant, Jimmy Lee Jarrett, was convicted of first degree battery and rape of Earl Easom. The jury imposed consecutive sentences of twenty years and life imprisonment, respectively. Jarretts’ sole point of error on appeal is that the trial court erred in admitting evidence of prior bad acts. Finding no abuse of discretion by the trial court, we affirm the judgment.

Jarrett lived in Lawrence County with his wife, Mary Jarrett, and their two children, Joanna and Jimmy Joe. Also living in the home were Barbara Easom and her children, Earl and Lisa. The Easoms had begun living with the Jarretts thirteen years ago when Lisa was about seven and Earl about five. The charges in this case, and Jarrett’s subsequent conviction, arose from Earl Easom’s allegations that Jarrett forced him to engage in anal and oral intercourse and committed batteries by striking his testicles with a wooden board.

In addition to Earl Easom, Lisa Easom, Barbara Easom, and Mary Jarrett, two disinterested witnesses testified for the state. Robert Mankey said he had known Jimmy Lee Jarrett for thirty years, since they were schoolmates. He said that last April or May he had three conversations with Jarrett relative to Earl Easom and Jarrett said “I’m going to bust his nuts again.” In a later conversation he said Jarrett laughed about it, and said, “I made him cup them and busted them with the board. He hit the ground. He just rolled. Then I told him, ‘Spit them up.’ He just laughed about it.” Mankey described a third conversation in which Jarrett confirmed that he had been striking Earl’s testicles.

Mrs. Diana Neldon, a neighbor, testified to a conversation which occurred in her front yard. She said Robert Mankey, Jimmy Lee Jarrett, Mary Jarrett and Lisa Easom were present. Asked what Jarrett said about Earl’s testicles, she responded.

He said he made Earl drop his pants. He said, “I busted him so hard that you could hear him for a mile and brought him to his knees.” And then he said, he said, “His balls were swollen this big (indicating).”

During an investigation of allegations against Jarrett, various members of the household gave statements to the police describing other incidents of sexual and physical abuse inflicted by Jarrett. Jarrett filed a pretrial motion in limine to exclude testimony of these allegations. Following a hearing the trial court announced that it would reserve a ruling on the admissibility of each prior act until offered at trial, at which time the court would determine its admissibility under A.R.E. Rule 403, which requires a weighing of probative value against the danger of unfair prejudice, and Rule 404(b), containing exceptions to the admissibility of bad character evidence. Testimony admitted at trial, over Jarrett’s objection, included evidence that Jarrett had had ongoing sexual intercourse with Lisa Easom, Earl’s sister, and that Jarrett had shot both Earl and Mary Jarrett, his wife.

Lisa, who was nineteen at the time of trial, testified Jarrett began forcing her to have sexual intercourse when she was about ten years old and this continued until three to four months before trial. Barbara Easom confirmed Lisa’s testimony and stated she became aware of this fact only in the last couple of years.

Earl testified at trial that Jarrett raped him by by forcing him to have anal and oral intercourse. He stated this happened numerous times over the past ten years. As to the battery charge, Earl testified as follows:

Q: Okay. Just tell the jury what he did, how, how would he go about this?
A: Okay. The first time he did it, he made me pull my pants down and I had to bend over and he grabbed them and he got ahold of them and he squeezed them where they’d be, they’d be tight? Then he took a board and took it and just swing and hit me.
Q: Okay, and what was the effect on you?
A: I had to, I couldn’t hardly walk. I, I got real bad stomach pains. I, I couldn’t hardly use the bathroom. And then after he done it a couple more times, I had to be put in the hospital for about a week and a half to get them drained.
Q: What’d you mean drained?
A: They had to put a nee— had to put, lance them, had to stick a needle in them to, to drain all that pus and stuff out of them; and they had to, when they lanced, they had to squeeze it to try to get all that stuff out of it, they were swelled up so bad. I was busted open.

Asked if Jarrett had “done anything else” to him, Earl testified that Jarrett had shot him in the foot and had shot Mary Jarrett in the arm. Over Jarrett’s objection, the trial court ruled the evidence was admissible.

Mary Jarrett testified regarding her fear of her husband and of his threats to her and her children if she told the police the truth about Jarrett’s abuse. Mrs. Jarrett admitted she initially lied to authorities, explaining that she believed Jarrett’s threats since he had shot her as well as Earl. Mrs. Jarrett stated the shooting incident occurred when Jarrett pointed the gun at her four-year-old son, threatening to kill him. She testified “I pushed the gun down, Earl got it in the feet and I laid in traction for forty-five days with my arm up in the air. . . .” She testified:

Q: Now when Mr. Jarrett said he would kill you if you if you told the sheriff the truth, did you believe him?
A: Yes, sir, I did.
Q: Why did you believe him?
A: He’d already shot me once and shot the boy.

The trial court admitted the testimony to explain her prior inconsistent statements to the sheriff. On appeal, Jarrett maintains the testimony as to prior bad acts was highly prejudicial and of little probative value. The state, on the other hand, argues that this testimony was admissible on either of two grounds: One, to show a plan or scheme pursuant to A.R.E. 404(b), and, two, refute Jarrett’s contention that the charges against him were fabrications.

As to the testimony of Lisa Easom, it is well established that evidence of similar sexual acts with other children is admissible when it tends to show a proclivity toward a specific act with a person or class of persons with whom the accused has had an intimate relationship. Marcum v. State, 299 Ark. 30, 771 S.W.2d 250 (1989); Free v. State, 293 Ark. 65, 732 S.W.2d 452 (1987). The testimony of Lisa Easom was relevant to prove the charge of rape, and its probative value far outweighed any prejudice it may have had.

As to the testimony concerning the shooting, on cross examination the family members admitted that when the sheriff first investigated the reported abuse by Jarrett they denied any wrongdoing. Thus, the state contends the testimony concerning the shootings was relevant to whether the witnesses had reason to fear Jarrett and whether those fears affected their earlier statements.

It was proper for the state to refute the inference that the initial denials to the sheriff by the state’s witnesses were the result of fear and intimidation rather than a lack of veracity. Gustafson v. State, 267 Ark. 830, 593 S.W.2d 187 (C.A. 1980). Where the testimony of a witness is weakened, discredited or obscured by cross examination, it is permissible to rebut the discrediting effect of damaging admissions so elicited. Allen v. State, 260 Ark. 466, 541 S.W.2d 675 (1976).

As to the balancing process contemplated by A.R.E. Rule 403 and 404(b), the trial court weighed the evidence, specifically found the probative effect was not outweighed by substantial prejudice, and chose to admit the proof. We have said repeatedly that the admission or rejection of evidence under Rule 404(b) is left to the sound discretion fo the trial court and will not be disturbed on appeal absent a manifest abuse of discretion. Bennett v. State, 297 Ark. 115, 759 S.W.2d 799 (1988); Harris v. State, 295 Ark. 456, 748 S.W.2d 666 (1988).

The testimony by the state’s witnesses was wholly unchallenged. The appellant has not demonstrated a manifest abuse of discretion and, accordingly, the judgment is affirmed.

Brown, J., concurs.

Holt, C.J., and Dudley and Newbern, JJ., dissent.

Robert L. Brown, Justice,

concurring. I join in the opinion of Justice Hays but write to emphasize an additional point. The two families in this case lived together and were clearly terrorized by Jarrett’s actions. In a real sense, it was an abused household. The appellant assaulted the family members sexually and physically and shot Earl Easom in the foot and Mary Jarrett in the arm. The facts are murky as to when this happened (it may have been eight years previously) or whether it occurred in one incident or two. With each day we are confronted with new cases of battered children, battered spouses, and battered families. In cases where the battered child syndrome is at issue, the courts have typically allowed a full recapitulation of the parent-child relationship. See United States v. Harris, 661 F.2d 138 (10th Cir. 1981) (evidence of repeated incident relevant to prove child abuse); State v. Tanner, 675 P.2d 539 (Utah 1983) (complete story required to show defendant’s pattern of behavior toward a child). The Utah Supreme Court was correct in Tanner when it said:

Where the presence of the battered child syndrome is shown in the child and the defendant is the child’s caretaker, logic and the interest of justice demand as complete a story as possible concerning the crime and the surrounding circumstances.

675 P.2d at 548. This also holds true with respect to the criminal defense of battered woman syndrome where, typically, a history of the battery is presented to the jury followed by an expert’s evaluation. See generally “Assisting the Jury in Understanding Victimization: Expert Psychological Testimony on Battered Woman Syndrome and Rape Trauma Syndrome,” 25 Colum. J.L. & Soc. Probs. 277 (1992). In Thompson v. State, 306 Ark. 193, 813 S.W.2d 249 (1991), we referred to the necessity of foundation testimony of historic battering as essential to a battered-woman-syndrome defense.

Moreover, this court has accepted evidence of violent behavior towards persons other than the victim in assessing whether to transfer the case of a juvenile charged with rape to juvenile court. Slay v. State, 309 Ark. 507, 832 S.W.2d 217 (1992). And we have held a number of times that we will allow testimony of similar sexual acts with children if it tends to show a proclivity to the same behavior. See, e.g., Fry v. State, 309 Ark. 316, 829 S.W.2d 415 (1992); George v. State, 306 Ark. 360, 813 S.W.2d 792 (1991).

The same rationale applies to the battered family. Evidence of violent behavior toward the family members, whether sexual or physical, is distinctly relevant. Ark. R. Evid. 404(b) permits evidence of past wrongs for purposes “such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity or absence of mistake or accident.” (Emphasis added.) At the very least, the evidence of the shootings is admissible under Rule 404(b) as a pattern of violent behavior toward Earl Easom and Mary Jarrett.

But, in truth, the correct analysis should be under Rule 403 because the prior shootings are so clearly relevant. The issue then becomes whether the relevancy is outweighed by the danger of unfair prejudice. Admissibility of this evidence was not unfair to this appellant but, rather, it established why and how he controlled the household.

For these reasons and for the reasons expressed in the majority opinion, I concur.

Jack Holt, Jr., Chief Justice,

dissenting. The evidence of prior shootings should not have been admitted and, for this reason, I respectfully dissent.

The majority premises its holding as to the admissibility of the shooting incidents on the fact that it was properly admissible to rebut damaging inferences on cross-examination. First of all, this ignores the fact that the evidence of Jarrett’s shooting of Earl and Mary was first brought out, not in rebuttal, but in the State’s case-in-chief. Second, although we have held the list of exceptions in this rule is not exhaustive, see White v. State, 290 Ark. 130, 717 S.W.2d 784 (1986), and although the testimony regarding the previous shootings may have been relevant to various collateral issues in the case, I do not find it was relevant, either in time or in nature, to the crimes with which Jarrett was charged.

In White, we reasoned that prior acts of violence, like prior acts of child abuse and incest, are admissible to show a propensity to commit the particular sort of crime in question with the same person or class of persons with whom the accused shares an intimate relationship. There, however, the admitted evidence consisted of testimony that the defendant severely beat his wife just two weeks prior to his murdering her in the same manner. Similarly, in Sterling v. State, 301 Ark. 603, 786 S.W.2d 114 (1990), we upheld the admissibility of evidence that, as recently as three days before shooting his wife, the defendant threatened to kill her with a gun and beat her. The evidence was necessary to prove premeditation and deliberation for first degree murder. See also Limber v. State, 264 Ark. 479, 572 S.W.2d 402 (1978)(evidence of physical abuse of one child in the home admitted to prove intent and lack of mistake or accident in the beating death of that child’s sibling); Rudd v. State, 308 Ark. 401, 825 S.W.2d 565 (1992) (prior theft and burglary convictions admitted to show defendant’s intent to commit burglary and to counter defense of mistake in entering home).

Evidence that Jarrett once shot the victim and Mary Jarrett, some eight or nine years ago, was, in no way, related to the incidents of rape and the specified battery charge nor was it necessary to show Jarrett’s intent. The intent was obvious in the nature of the crimes committed. Furthermore, the State failed to elicit clear testimony as to when the shootings occurred and even whether they were part of one or separate incidents. The only connection in time was a single statement by Earl that the rapes began occurring ten years ago, two years prior to when he claimed to have been shot in the foot. (We note the information confined the charges to a date three months prior to trial for battery and to “within the past three years” for rape.)

The testimony was simply irrelevant to the crimes at issue and could only have served to show Jarrett “acted in conformity therewith.” Rule 404(b). It follows that the prejudice to Jarrett outweighed the probative value of the evidence, and, for these reasons, I would grant Jarrett a new trial.

I also take issue with the concurring opinion filed by Justice Brown. Evidence of the shootings is not admissible under Rule 403. Rule 403 pertains to the exclusion of relevant evidence by weighing its probative value against the charge of unfair prejudice. Here, again, I say the evidence of the shootings, some eight years prior to the charges in question, is not relevant in time, nor in nature.

For these reasons, I would reverse and remand for retrial.

Dudley and Newbern, JJ., join in this dissent.