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THE SUPREME COURT OF NEW HAMPSHIRE

___________________________

Rockingham

No. 95-670

TAMARA C. OLBRES & a.

v.

HAMPTON COOPERATIVE BANK

August 6, 1997

Shaines & McEachern, P.A., of Portsmouth (John H. McEachern on the brief and orally), for the plaintiffs.

Casassa and Ryan, of Hampton (John J. Ryan on the brief and orally), for the defendant.

Gallagher, Callahan & Gartrell, P.A., of Concord (Daniel E. Lyford on the brief), for the New Hampshire Bankers Association, as amicus curiae.

HORTON, J., Following a bench trial in Superior Court (Gray, J.) arising from a failed loan transaction, the court concluded: (1) that the defendant, Hampton Cooperative Bank, did not owe or breach any duty to plaintiff Tamara C. Olbres (Tamara) in setting off funds deposited pursuant to RSA chapter 384-D (1983) by her parents, plaintiffs Anthony Olbres and Shirley Olbres (the Olbreses); (2) that the defendant violated a duty of good faith owed to the Olbreses by setting off the deposited funds; (3) that the defendant did not act improperly in failing to disburse loan funds; and (4) that the defendant did not act negligently, wrongfully, or in bad faith in regard to a foreclosure sale. The defendant appeals the court's ruling as to its violation of a duty of good faith; the plaintiffs cross-appeal the court's other rulings. We affirm in part, reverse in part, and remand.

The trial court found the following facts. In 1991, the Olbreses successfully applied for a $300,000 loan from the defendant in order to pay off existing mortgage indebtedness and to fund improvements to fire-damaged commercial property. As part of this construction loan transaction, the defendant agreed to reduce the interest rate in exchange for the Olbreses' agreement to establish a $100,000 certificate of deposit (CD) account with the defendant for a three-year term. The transaction closed in October 1991, when the parties executed various loan documents and the Olbreses established a $100,000 CD account "ITF Tamara C. OLBRES" -- in trust for Tamara. It is undisputed that Tamara did not contribute any funds toward the $100,000 CD account.

The promissory note signed by the Olbreses provides in relevant part:

No Rights of Set-Off by Borrower.

No payment of principal hereof or interest hereon shall be subject to set-off, reduction or recoupment by the Borrower for any cause whatsoever relating to or based on dealings between the Borrower and the Lender or any subsequent Holder. In addition to the foregoing, any and all of the deposits or other sums at any time credited by or due from Lender to Borrower or to any endorser or guarantor of this Note, and any cash, securities, instruments, or other property of Borrower or of any endorser or guarantor, whether for safekeeping, or otherwise, shall at all times constitute security for this Note, and may be applied or set off by you against such liabilities at any time whether or not such liabilities are then due and whether or not other collateral is available to Lender.

Subsequent to the closing, the Olbreses failed to honor some of the defendant's requests for financial information and construction plans. The defendant therefore classified the loan as substandard. In March 1993, the defendant set off the funds in the CD account against the balance of the loan, thereby reducing it from the then current balance of $200,000 to $100,000. At the time of the defendant's set-off, the Olbreses were current with payments on the loan.

In July 1993, the Olbreses ceased making payments, and the defendant subsequently foreclosed on the commercial property that secured the loan. The property, which had been appraised prior to the loan at $330,000, was sold by the defendant for $135,000 in February 1994. The defendant applied the proceeds from the foreclosure sale to satisfy the loan, including outstanding interest and associated costs, and retained surplus proceeds of approximately $18,000. The defendant refused to turn over the surplus proceeds because of knowledge of a federal tax lien on any property of the Olbreses in its possession and because of uncertainty about the outcome of this litigation.

After the defendant's set-off, the plaintiffs commenced this action alleging that the defendant acted wrongfully in converting funds of Tamara in the CD account and in refusing to disburse loan funds to the Olbreses. Following the foreclosure, the plaintiffs asserted additional claims based on wrongful foreclosure, failure to obtain a higher price for the property, and improper retention of the surplus proceeds of $18,000.

The trial court ruled that the CD account belonged to the Olbreses, not Tamara, see RSA 384-D:2, I(a), and that the defendant therefore breached no duty to Tamara in setting off the CD account. The court reasoned, however, that the note provision authorizing set-off

obligated the [defendant] to exercise good faith in exercising that right. The Court finds that the [defendant] did not exercise good faith when it set-off the loan balance with the CD account funds at a time when no payments were due on the Note. The [defendant's] feelings of insecurity based on the [Olbreses'] refusal to provide all financial information requested at that time is not enough to overcome this finding.

Accordingly, the trial court awarded the Olbreses damages in the amount of $100,000. As to the plaintiffs' claim that the defendant acted negligently or in bad faith by failing to disburse loan funds, the court found for the defendant: "The evidence shows that the plaintiffs failed to present sufficient plans and other information to justify the disbursement of the construction loan funds." The court also found for the defendant on the plaintiffs' claim that the defendant acted wrongfully with respect to the foreclosure, ruling that the defendant "adequately advertised the property and otherwise acted in a reasonable manner." Finally, the court concluded that the defendant's knowledge of the federal tax lien provided sufficient justification for its refusal to turn over the $18,000 of surplus proceeds from the foreclosure sale.

Both sides appeal. The defendant argues that the trial court erred in concluding that it violated a duty of good faith in setting off the CD account because: (1) the terms of the note plainly permitted its action; and (2) the Olbreses' failure to provide financial and construction information constituted a permissible reason for the set-off. The plaintiffs argue that the superior court erred: (1) in interpreting RSA 384-D:2 to mean that the CD account was the property of the Olbreses, rather than Tamara; (2) in finding that the defendant did not act wrongfully in refusing to disburse loan funds; (3) in finding that the defendant's actions with respect to the foreclosure sale were not wrongful; and (4) in failing to order the defendant to turn over the surplus proceeds of $18,000.

"We will not disturb the findings of the trial court unless they lack evidentiary support or are erroneous as a matter of law." Key Bank of Maine v. Latshaw, 140 N.H. 634, 636, 670 A.2d 1041, 1043 (1996). Legal conclusions, as well as the application of law to fact, "are reviewed independently for plain error." Fleet Bank-N.H. v. Chain Constr. Corp., 138 N.H. 136, 139, 635 A.2d 1348, 1350 (1993). Accordingly, "[o]ur inquiry is to determine whether the evidence presented to the trial court reasonably supports the court's findings, and then whether the court's decision is consonant with applicable law." Id.

I. Interpretation of RSA Chapter 384-D

RSA chapter 384-D concerns various aspects of trust deposits in banks, including certificates of deposit, see RSA 384-D:6, II. According to the statute, a deposit made in the name of two individual depositors in trust for a named beneficiary creates "a trust of the moneys at any time standing to the credit of such account for the named beneficiary, with the individual depositors . . . as trustees." RSA 384-D:2, I. A trust created in such a manner, however, is

revocable at will by each of the individual depositors or the survivor of them, but only to the extent of withdrawals of, charges against or pledges of the moneys to the credit of the account made or authorized by the individual depositors or either of them during their respective lives. Each such withdrawal or charge, and each such pledge to the extent not subsequently redeemed, shall constitute a pro tanto revocation of such trust.

RSA 384-D:2, I(a).

The parties do not dispute that these statutory provisions govern the $100,000 CD account established by the Olbreses in trust for Tamara. The plaintiffs argue that the CD account was either Tamara's property or the property of the Olbreses as trustees, but not the property of the Olbreses as individuals. They therefore contend that the trial court erred in ruling that the CD account was subject to the set-off provision of the note. We disagree.

We distinguish a trust arising pursuant to RSA 384-D:2, I, from trusts created by will, trust agreement, other fiduciary instrument, statute, court decree, or fiduciary relationship. See RSA 384-D:3 (identifying types of bank deposit trusts to which RSA chapter 384-D does not apply). In the typical trust, a trustee holds legal title to the trust property, but the property is not subject to the trustee's debts. See 6 Am. Jur. 2d Attachment and Garnishment