Unpublished Disposition, 919 F.2d 146 (9th Cir. 1989)

MEMORANDUM^* 

Valley National Bank of Arizona ("VNB") appeals the district court's judgment, following a jury trial, in favor of Statewide Insurance Company of Illinois and Northwestern National Insurance Company (collectively "Statewide") in Statewide's diversity action for special deposit, equitable estoppel/conversion, and bad faith. We reverse and remand for entry of judgment in favor of VNB.

BACKGROUND FACTS

Hopkins Excavating Co. ("Hopkins") was an Arizona corporation in the business of excavating, ditching, and selling concrete ready-mix and asphalt. Hopkins started its business in 1976, and also began its relationship with VNB at that time. Hopkins had one VNB checking account through which all of its receipts and expenses for both aspects of its business were funneled. Prior to 1984, Hopkins used a revolving line of credit from VNB to finance its construction projects.

In May of 1984, VNB became concerned about Hopkins' deteriorating financial condition and referred Hopkins' account to VNB's Broadway office, an office with more expertise in handling credit problems. VNB also loaned Hopkins $406,013.00, seventy percent of which was guaranteed by the Small Business Administration ("SBA"). In addition, VNB changed its lending practices with Hopkins. It replaced the former revolving line of credit method of financing all of Hopkins' projects with an individualized, limited line of credit method of financing each of Hopkins' projects. VNB financed the three projects at issue in this case--Mohave, Acoma and Ak-Chin--in the latter manner. Statewide and Northwestern were Hopkins' sureties and provided bonding for these projects.

The financing for each project involved a separate line of credit note, security agreement,¹  and assignment of contract proceeds. The amount of the line of credit was based upon the projected payroll costs for the project. Credit was extended on a progressive basis. Hopkins would submit its anticipated payroll costs for the week to VNB. VNB would then credit Hopkins' account with that sum of money.

Although Hopkins assigned all of its progress payments from each project to VNB, they orally agreed that the bank was to be repaid only the outstanding payroll loans incurred during that pay period on the project in question, and that the remaining balance of the payment would be available to pay materialmen and other project expenses. Every progress payment was to be transferred directly to VNB or deposited by Hopkins. This was accomplished either by an assignment and direct transmittal of the progress payments from the owner of the project to VNB, as in the Acoma project, or by a joint check which Hopkins would deposit in its account, as in the Mohave project. Hopkins' account would then be debited the amount of the outstanding payroll debt for the particular project from which Hopkins was being paid. It was agreed that the balance would not be used to satisfy payroll debts for other projects, but would instead be available to Hopkins to pay its suppliers and other project expenses. However, although the funds in the account were available, their use was unrestricted. They were completely at Hopkins' disposal, and Hopkins used them as it saw fit.

In early July of 1985, the outstanding balances on Hopkins' payroll debts for each project were so high that when VNB applied the progress payments to the debt, there was no remaining balance with which to pay materialmen, suppliers, and other project costs. Therefore, checks written on Hopkins' account were returned for insufficient funds. In response, Hopkins requested an immediate meeting with VNB's loan officers.

On July 8, 1985, VNB loan officers met with Hopkins to discuss the situation. VNB indicated that it had a right to apply the full progress payments received on the projects to the outstanding payroll loans for the respective projects because the total payroll debt exceeded the amount of the payment. VNB also stated that it planned to continue to apply the entire amount of the progress payment to the outstanding payroll debt if necessary. Hopkins requested that VNB loan Hopkins at least enough money to make payroll for the week. VNB agreed. However, any other checks that Hopkins needed to write had to be preapproved by VNB officers.

On July 18, 1985, the parties met again to try dealing with Hopkins' financial situation. At the meeting, VNB extended Hopkins another line of credit not to exceed $230,000.00 which was to be used to pay suppliers. This was a consolidated note for all projects. The $230,000.00 figure was the amount VNB had calculated was necessary to get suppliers to finish the Ak-Chin project without first contacting Statewide. The note was secured by payment rights to Hopkins' other projects. At that time, work on two of the three projects (Mohave and Acoma) had already been completed, but the suppliers had not been paid. Therefore, some of the consolidated line advances went to pay suppliers on those projects.

On July 25, 1985, the bank advanced Hopkins $146,053.58 to pay suppliers. According to the testimony of Diane Hopkins, the availability of the funds was conditioned upon Hopkins supplying VNB with the $212,087.30 payment that was due on the Mohave project. On July 26, 1985, Hopkins deposited the $212,087.30 payment from the Mohave project into its account. On that same day, the bank withdrew over $200,000.00 and applied it to the outstanding payroll debts for all three projects. Also, within a month VNB had paid the majority of the checks that had been originally returned for insufficient funds.

The funds advanced on the consolidated line of credit were strictly monitored by VNB for the first couple of weeks after VNB provided the line of credit. VNB subsequently loosened some of its controls over the account.

The last advance by the bank was September 11, 1985. At that point, the Ak-Chin project was basically completed. After the completion of the Ak-Chin project, Hopkins continued to do business, but reduced the scale of the projects in which it became involved, and began selling off its equipment. The smaller contracts were unbonded and internally financed.

From late October 1985 through 1987, Northwestern and Statewide received unpaid bills from suppliers and materialmen for the three projects. Statewide paid a total of $162,256.43 in claims. Northwestern paid a total of $52,408.48 in claims. Since Statewide reinsured Northwest against claims, Statewide was ultimately forced to pay all claims on the bonds for all three projects. In May of 1986, Hopkins ceased doing business. Jack and Diane Hopkins filed for Chapter 7 bankruptcy individually and the assets of the corporation were liquidated by VNB and Statewide.

On January 27, 1987, VNB charged off $50,404.74 which was the part of the SBA loan that was not secured. It also charged off $31,545.62 on the remaining debt.

On May 20, 1987, Statewide commenced this action in federal court. The trial began on November 8, 1988. At the end of the plaintiff's presentation of the evidence, VNB moved for a directed verdict. Its motion was denied. VNB immediately thereafter rested and moved for a directed verdict. Again, its motion was denied. On November 10, the jury found in favor of the plaintiffs and awarded $168,481.74 in damages. Post trial motions, including a motion for a judgment notwithstanding the verdict and new trial, were filed and subsequently denied on January 9, 1989.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction pursuant to 28 U.S.C. § 1332. We have jurisdiction pursuant to 28 U.S.C. § 1291.

We review a challenge to a jury verdict to determine whether the verdict is supported by substantial evidence. In making such a determination, we evaluate whether the verdict is supported by admissible evidence that is adequate to support the jury's conclusion. Oltz v. St. Peter's Comm. Hosp., 861 F.2d 1440, 1450 (9th Cir. 1988).

DISCUSSION

Statewide has essentially conceded, as it must, that in order to assert a valid claim against VNB it must do so as a subrogee of either Hopkins or the suppliers. As such, it may only recover if either the suppliers or Hopkins had a valid claim against VNB. See Employers Mutual Liability Ins. Co. v. Robert E. McKee General Contractors, Inc., 16 Ariz.App. 77, 491 P.2d 27 (1971).

Special Deposit Agreement² 

Statewide claims that VNB breached a special deposit agreement with Hopkins and that Statewide as the subrogee is entitled to compensation for the damages that resulted from that breach.

VNB contends that there was no special deposit agreement. It argues that it had a right to apply the excess monies from the progress payments against the loan balances for the other projects. It claims that those projects were collateral in which it had a first security interest, and that the integration clauses in the security agreements cross-collateralized the loans.

The record reveals evidence that VNB and Hopkins expressly orally agreed that progress payments were to be deposited into the Hopkins account and that VNB was entitled to the progress payments for the amount of payroll debt that Hopkins had incurred for the time period covered by the progress payment.³  At least that was to be true in the absence of a default, and there was no default during the events which are pertinent to this action. We turn then to the quesitons of whether this oral agreement constituted a special deposit agreement, and, if so, whether VNB breached that agreement.

Existence of Special Deposit Agreement

While the parties earnestly argue about whether there was or was not a special deposit agreement in this case, they have not cited any recent Arizona cases which directly discuss that concept. Moreover, our research has not uncovered any. We may, however, properly declare that Arizona recognizes the idea that there can be special deposits, which will not be subject to the normal rules applied to general deposits. See, e.g., United Bank & Trust Co. v. Washburn & Condon, 37 Ariz. 223, 292 P. 1025 (1930) (deposit general rather than special); Hammons v. Nat'l Surety Co., 36 Ariz. 459, 287 P. 292 (1930) (deposit of guardianship assets was like a trust fund); Bledsoe v. Hammons, 36 Ariz. 489, 287 P. 297 (1930) (no special deposit, when trust funds commingled with depositor's other money); In re Citizens' Bank & Trust Co., 31 Ariz. 478, 254 P. 485 (1927) (stock held for safekeeping was a special deposit). Perhaps more to the point, Arizona would enforce special agreements between a bank and its depositor, since, as the Supreme Court of Arizona said long ago:

It may be stated as a general rule that when a depositor is indebted to a bank, and the debts are mutual--that is, between the same parties and in the same right--the bank may apply the deposit or such portion thereof as may be necessary, to the payment of the debt due it by the depositor, provided there is no express agreement to the contrary, and the deposit is not specifically applicable to some other particular purpose.

P. Pastene & Co., Inc. v. First Nat'l Bank of Nogales, 19 Ariz. 493, 172 P. 653, 657 (1918).

VNB contends that the agreement was not a special agreement because there was no limitation on how the deposits or the account were to be administered. However, contrary to VNB's contentions, there were some at least transitory limits on Hopkins' use of the progress payment deposits. The money was to be deposited into Hopkins' general account, and Hopkins was restricted from using the deposit until after VNB had deducted the payroll debts on the project. However, once payroll was deducted, Hopkins was free to use the payments as it desired. This special arrangement made it different from the normal banking relationship, and made the handling of the payments and the account different from the typical general deposit account arrangement. In other words, it was special in that sense. However, it was not special in the sense that VNB was to hold the funds for anyone other than itself or Hopkins.⁴ 

Breach of Agreement

Statewide contends that VNB breached its agreement with Hopkins: 1) by applying the entire amount of the July progress payments for each project to the payroll debt for the respective project instead of reserving a portion to pay the suppliers, and 2) by applying the balance of a progress payment from one project to Hopkins' outstanding payroll debts on other projects.

We are not persuaded by Statewide's first contention. Statewide appears to argue that VNB was not entitled to apply a progress payment to the whole payroll debt outstanding on a project at the time that payment was received, but was only entitled to apply it to the portion of the debt accrued during the period covered by the progress payment itself. If so, it could be said that VNB breached the agreement by applying the full progress payment to the entire outstanding payroll debt at the date of receipt of the payment. However, Hopkins suffered no damages as a result of that breach. All of the projects were finished and VNB saw to it that Hopkins had sufficient funds to accomplish that. If Hopkins failed to generate sufficient funds from the completed projects to pay its own suppliers and VNB, that can hardly be laid at VNB's door.

Statewide's second contention is equally problematic. Statewide claims that VNB applied the balance of a progress payment from one project to Hopkins' outstanding payroll debts on other projects in violation of its agreement with Hopkins. We agree in part. VNB's agreement with Hopkins was that a progress payment on a project would be applied to relieve the payroll indebtedness on that project only. VNB's action in applying part of the balance of the $212,087.30 Mohave payment to other project payroll loans was a breach of that special agreement with Hopkins.

Had the misapplication taken place before the consolidated line of credit came into existence, Hopkins may have been wronged since the progress payment money otherwise available to Hopkins for the payment of suppliers or for other expenses would have been diverted to the payment of other payroll debts.⁵  Until the consolidated line was created, VNB's advances on the projects were only for payroll; after it was created, VNB was also advancing funds for the payment of suppliers. There is no doubt that VNB could have applied any excess from the Mohave project payment to satisfy supplier advances from the consolidated line of credit. Thus, Hopkins was not entitled to place its hands on the balance of the Mohave progress payment money in any event. Hopkins owed money to VNB for payroll and supplier-expense advances on the projects. From Hopkins' perspective, it could make no real difference if the new money went to pay one debt or the other. In fact, the overall effect was that at least $146,053.58 from the consolidated line had gone to pay suppliers, and the total amount over payroll expenses from the $212,087.00 Mohave payment was less than that. Hopkins' suppliers may have actually received more of Hopkins' money than they would have otherwise. Statewide is hardly in a position to complain about that, especially since it was the surety on all three projects. Moreover, as already noted, all of the projects were completed thanks to the loans from VNB. If Hopkins wound up with a shortage of funds, that was due to its own mismanagement.

When all is said and done, Statewide failed to present evidence from which the jury could find that either Hopkins or the suppliers suffered any damage at the hands of VNB. The most Statewide showed was that if VNB had not advanced Hopkins funds from the consolidated line of credit, Hopkins might have collapsed sooner, Statewide might have suffered a smaller loss, and VNB might have suffered a larger one. Neither Hopkins nor the suppliers had the right to demand that. In short, this looks like the kind of situation referred to by the Arizona Supreme Court in Pastene, 172 P. at 657, where it said: "The bank being thus vigilant to protect itself, it is not apparent upon what ground the court would be justified in gathering the fruits of such vigilance for the benefit of [appellee]."⁶ 

CONCLUSION

Statewide presented evidence that VNB may have committed technical violations of special agreements it had with Hopkins regarding the use of progress payments received on certain projects. It presented no evidence from which a jury could determine that VNB breached any duties to suppliers when it did that, or that VNB's actions caused any damage to Hopkins. Statewide concedes that it was entitled to a verdict only if it could show that VNB was legally responsible for some injury visited upon Hopkins or upon the suppliers. It did not make that showing.

Therefore, we reverse the judgment and remand for entry of judgment in favor of VNB. The parties' requests for attorney fees are denied.

REVERSED AND REMANDED.

TANG, Circuit Judge, Concurring in Part, Dissenting in Part.

I concur in the majority's conclusion that a special deposit existed. Moreover, both the majority and I agree that Hopkins deposited progress payments for the special purpose of ensuring payments to Valley National Bank ("VNB") for the payment of payroll debt for each project. However, I dissent from the majority's conclusion that, other than the special purpose in favor of VNB, Hopkins' use of the progress payment deposits was unrestricted. I also dissent from the majority's conclusion that VNB's setoff does not matter despite the special deposit because Hopkins "suffered no damage."

Before discussing the specifics of these objections, it is essential to understand (1) what issue the jury verdict resolved and (2) what is the issue on this appeal. The majority's failure to grasp these two basic issues has resulted in its erroneous conclusion.

* This case is a setoff case. A "setoff" is the right of a bank to set off a delinquent loan against the borrower's general deposit account. See T. Crandell, R. Hagedorn & F. Smith, Debtor-Creditor Law Manual at 5-8 (Warren, Gorham & Lamont 1985). Banks use their setoff rights because they can exercise the right unilaterally without any judicial intervention. Thus, the setoff is a bank's most powerful collection tool. Id.

A bank loses its setoff rights if the bank knows that a depositor has made a special deposit. See, e.g., In Re Airwest International, 70 Bankr. 914, 919 (Bankr.D.Hawaii 1987) ("Although, banks have a right of set-off against funds held by it in a general deposit account, a bank cannot exercise its right to set-off when the deposit is for a special purpose (i.e. pledged as security for a specific debt)."); Debtor-Creditor Law Manual at 5-13 ("If the debtor-depositor has deposited funds to be used for a special purpose to the bank's knowledge, the bank may not set off these funds because they are not a part of the bank's general deposits, but are held by the bank in trust or as a mere bailee.").

A special deposit is a deposit made for a special purpose, such as paying a particular creditor of the depositor. See, e.g., Spencer Companies v. Chase Manhattan Bank, 81 Bankr. 194, 200 (D. Mass. 1987) ("Accounts which are devoted to one or only a few purposes are most clearly special deposits not subject to setoff."); Rainsville Bank v. Willingham, 485 So. 2d 319, 323 (Ala.1986) (a bank has a general setoff right unless the bank knows the customer has made a deposit for a special purpose); Hugh v. Washington Industrial Bank, 757 P.2d 1154, 1155 (Colo.App.1988) (generally, a bank to which a depositor owes a debt may set off or apply his general deposit to discharge the obligation; however, a bank cannot exercise this right of setoff when it knowingly accepts a deposit for a special purpose.).

Against this backdrop, the positions of the parties become clear. VNB asserts that because no special deposit existed, the progress payments were merely general deposits against which it could exercise its setoff right unfettered. Statewide contends that Hopkins' deposit of the progress payments constituted a special deposit because VNB had notice that Hopkins had deposited the progress payment for just two special purposes--payment of payroll debt and payment of suppliers. Because a special deposit existed, Statewide argues that VNB could not set off its claims against the progress payment deposits.

There can be no question that Statewide sought to prove a case that had a well-founded legal basis. As noted, the well-established law of setoffs and special deposits flatly prohibits an exercise of a setoff when a special deposit exists, and a special deposit exists whenever funds are deposited with the knowledge of the bank for special purposes. For example, in Rainsville, 485 So. 2d 319, 323, the Alabama Supreme Court ruled in favor of a depositor in circumstances exactly like those Statewide sought to prove. In Rainsville, the bank knew that the depositor intended to use his deposit to pay particular bills. Id. Because the bank knew the depositor intended to use his funds for just a few purposes, a special deposit existed and the bank lost its right to setoff. Id. As in Rainsville, Statewide sought to prove a case that rests at the core of the law of setoffs and special deposits.

Thus, the jury had to resolve one basic issue: Did VNB know that Hopkins deposited progress payments for two special purposes--payment of the payroll debt and of suppliers. If the jury found that VNB knew about the special purposes of Hopkins' progress payments deposits, then it would have to find for Statewide because a special deposit existed, and VNB had no right of setoff. Because the jury found for Statewide, it necessarily also found as a matter of fact that VNB was on notice of Hopkins' special purposes. Such a finding is one of fact subject to a clearly erroneous standard of review.

II

The issue on this appeal narrows to whether the jury's verdict is supported by substantial evidence. See Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d 1001, 1013-14 (9th Cir. 1985) ("The standard for reviewing a jury verdict is whether it is supported by substantial evidence.").¹  On this issue, one must conclude from review of the record that substantial evidence supports the jury's verdict. As discussed, in accordance with well-established law, Statewide proceeded on the theory that Hopkins deposited the progress payments for two special purposes: payment of payroll debt and payment of suppliers. Four witnesses gave testimony from which the jury could have concluded that VNB knew that Hopkins had deposited the progress payments for two special purposes--payment of payroll debt and payment of suppliers. Substantial evidence thus supports the jury's verdict.

First, Gordon Wise, Hopkins' general manager, testified that he discussed the project's financing with Felix Fernandez, an employee of VNB. Wise specifically testified that Fernandez knew that the progress payment had been earmarked for the two special purposes, payment of payroll debt and of suppliers. Thus, Wise's testimony indicates that VNB knew that the progress payments were special deposits not subject to a setoff. In relevant part, Wise stated:

BY MR. MANN:² 

Q. Well, I'll see if I can repeat it.

Based on your conversations with Mr. Fernandez, what was your understanding as to what portion of each payment received from Cannon Structures was to be repaid to Valley Bank?

A. My understanding was, or our discussion was that if we started a project and drew money weekly for payroll, to whatever extent during a calendar month, as that was your usual billing period, we would repay that amount of money from the receipt of that on--per that billing, which it was assumed would--would be proportionately less than the billing.

Q. So then there would be some amount from the Cannon progress payment that would be remaining after paying the bank; is that right?

MR. SEGAL: Objection, Your Honor. Leading, Your Honor.

THE COURT: Try not to lead the witness.

MR. MANN: Okay.

BY MR. MANN:

Q. Would there--was it contemplated by you that there would be an amount remaining--

A. Yes, there was.

Q. --after paying the bank?

What was to happen to the remaining amount of each progress payment from Cannon structure?

A. We were to pay the materials, supplies, equipment rental people, our fuel bill, and general overhead expenses from the balance.³ 

Q. To your knowledge as general manager of Hopkins Excavating, was the same arrangement in effect for the Acoma project?

A. Yes.

Q. To your knowledge, based on your experience as general manager of Hopkins Excavating, was the same arrangement in effect for the Ak Chin Lateral 8 project?

A. Yes.

1 Record Transcript 23-25 (emphasis added).

Second, Ann Claflin, the chief loan officer of the VNB branch that made Hopkins the loans, confirmed Wise's testimony that the progress payment deposits had two special purposes--payment of payroll debt and of suppliers. Because Claflin is VNB's agent, her testimony gave the jury a sound basis for concluding that Hopkins had put VNB on notice about the special purposes of the deposits. She testified:

Mann: Let me ask you, based on your involvement with the Hopkins Excavating account, you know that the loans made to Hopkins Excavating by Valley Bank were intended to provide advance for labor costs, correct?

A. That's correct.

Q. And you knew that the intention when the loans were made was that the bank was to be repaid for payroll advances from draws received from project owners, correct?

A. That is correct.

Q. And you knew that when a draw would be received from a project owner, that portion attributable to the payroll advance would be paid to the bank, and the balance of the draw was to pay material and job expenses at Hopkins Excavating, correct?

A. That was the original premise.

1 Record Transcript 85-86 (emphasis added).

Third, Diana Hopkins, an owner of Hopkins Excavating, also verified that the progress payment deposits had two special purposes, payment of payroll debt and suppliers. Her testimony indicated that VNB knew that the progress payments had been earmarked for these two special purposes. Indeed, her testimony indicated VNB itself suggested these two special purposes. She testified:

Mann: ... You were about to tell us about a meeting or conversation [with VNB representatives]. About what time was that? How long after the SBA loan?

A. Oh, I'm not really sure. A couple months, the first time we got a chance to bid on a large job. And we wanted to know, you know, if the bank would stand behind us or what. So we went to Tucson and had a meeting with Felix Fernandez. And he said that they wouldn't extend another revolving line of credit, but that like I said, that they would loan on the job-to-job basis. And he explained to us how it would be handled.

Q. What did he explain to you, if you can recall, on how the repayment would be handled:

A. Well, we would be repaying as we got the draws on the jobs, the percentage of the job that the draw was for we would repay that much for the percentage that we had borrowed in that time frame.

Q. Was anything said about what would happen to the rest of the draw from the owner?

A. Well, the loan was only for the payroll. The balance of the draw would be used to pay the suppliers on the job.

2 Record Transcript 8-9 (emphasis added).

Finally, Felix Fernandez, the assistant vice-president of VNB who handled Hopkins' account, also testified that the progress payments were special deposits which had two special purposes, payment of payroll debt and suppliers. His testimony again is another basis upon which the jury could conclude that VNB knew that Hopkins deposited the progress payments for two special purposes. Fernandez stated:

[Mann]: Okay. Now these project loans that were made to Hopkins Excavating after May, 1984, were to finance labor only, right?

A. That's correct.

Q. The intent, when the loans were made, was that the payroll loans were to be repaid from project draws, right? Perhaps I should--let me rephrase the question. The intent was that payroll advances made by the bank were to be repaid when Hopkins Excavating got draw payments from owners?

A. When they got paid, right. That's correct.

Q. But, of course, it was also intended that suppliers and subcontractors at Hopkins' projects would get paid, right?

A. That's correct.

Q. And the original intent was that when a check would be received from the owner, the bank would be repaid for the amount that it had advanced for the period of--that Hopkins was getting paid for and the balance of the money from the owner would be used to pay project bills; isn't that correct?

A. That's correct.

Q. Okay. And you explained that intent or procedure to Hopkins Excavating on many occasions from May, 1984, until June, 1985?

A. That's correct. Yes, that's true.

2 Record Transcript 73 (emphasis added).

In sum, Statewide presented a theory of liability to the jury which is well-established in the law. In having found for Statewide, the jury must have determined that VNB knew that Hopkins deposited the progress payments for two special purposes--payment of payroll debt and suppliers. Because substantial evidence supports the jury's verdict for Statewide, the majority errs in overturning the verdict.

III

The majority acknowledges that at least a special arrangement existed, but argues that the purposes of the special deposit did not include the holding of money for suppliers. The majority never addresses whether Hopkins put VNB on notice that the progress payments should be spent on only payroll debts and payments for suppliers. Instead, the majority reasons that no special deposit existed with respect to suppliers because the suppliers could not sue on Hopkins' bank account. See Majority at 9 n. 4. However, as discussed, to determine whether VNB lost its setoff rights, we examine only whether VNB knew Hopkins deposited the progress payments for a special purpose. What rights the suppliers may have had against Hopkins is irrelevant. By focusing on suppliers' rights, the majority rules against Statewide, revealing a basic misunderstanding about the nature of special deposits.

The majority also shows its misunderstanding of the nature of special deposits by stating that VNB held the funds in excess of the amount due payroll debts for Hopkins. Id. If it were true that VNB held these funds only for Hopkins, there was no special deposit; those funds were merely general deposits, and VNB therefore could exercise a setoff against them. Thus, the majority's conclusion is internally inconsistent. It cannot conclude on the one hand the progress payments were special deposits; and on the other hand that certain portions of this special deposit were not earmarked for a special purpose.

The majority evinces further its misunderstanding in its recitation of the facts. In the statement of facts, the majority reveals that funds in excess of those necessary for payment of payroll were to go to "suppliers and other project expenses." This fact indicates that Hopkins had made a special deposit which precluded VNB's right of setoff. As the majority's own statement of facts thus reveals, VNB had no right to set off delinquent loans against the progress payments.⁴ 

IV

Because the facts support the jury's conclusion that Hopkins made a special deposit which precluded VNB from having setoff rights to the progress payments, I also reject the majority's conclusion that Hopkins "suffered no damages." Without a setoff right, VNB had no legal right to the money. Therefore, at a minimum, VNB was liable for conversion. Certainly, VNB's conversion of $168,000 damaged Hopkins in its denial of Hopkins' rightful possession of its money.

The majority assumes that wrongful use of Hopkins' money makes no difference because Hopkins owed VNB a great deal of money in any event. This reasoning is flawed. First, of course, a conversion is a wrongful use of another's property.

Second, contrary to the majority's assertion, VNB's wrongful use of Hopkins' money did make a difference to Statewide; the misuse injured Statewide while it benefited VNB. Statewide insured Hopkins and was therefore liable when Hopkins failed to pay the suppliers. Therefore, had Hopkins paid the suppliers with the money VNB wrongfully seized as Hopkins had a right to do, Statewide's exposure would have been reduced. Of course, if the suppliers had received their rightful payments instead of VNB, VNB's exposure would have been greater when Hopkins underwent bankruptcy. Because VNB converted the special deposit funds, Statewide--rather than VNB--had to face greater exposure from Hopkins' subsequent bankruptcy.

V

The majority finally concludes that even if a special deposit agreement prevented VNB from seizing Hopkins' funds prior to July 1985, as of that date a consolidated loan agreement superceded any special deposit agreement and entitled VNB to setoffs. Majority at 11. The majority reasons that prior to the consolidation, VNB understood it was entitled only to payment for payroll debt, and that the balance of Hopkins' funds was reserved for payment of suppliers. Id. Because the consolidated loan was also designated for supplier payments, VNB was thereafter entitled to set off all funds deposited in Hopkins' account. Id.

The majority errs factually, however, when it states VNB "misapplied" no funds prior to the July 18, 1985 consolidation loan. On June 27, 1985, VNB seized without notice an $87,307.62 payment from the Acoma project; on July 10, 1985, VNB seized without notice a $61,110.00 payment from the Mohave project. At the time, Hopkins was not in default on any VNB loans. As a result of these seizures prior to the consolidated loan agreement, Hopkins' VNB checks to suppliers on these projects were returned for insufficient funds. While VNB might eventually have been entitled to a portion of these payments to satisfy Hopkins' payroll debt, the point is that VNB began unilaterally to set off entire deposits to Hopkins' account prior to entering the consolidated loan agreement.

Moreover, nothing in the consolidated loan agreement itself indicates that the parties rescinded their special deposit agreement or that VNB obtained new set off rights. The consolidated loan agreement is a form contract. Therefore, both Statewide and VNB presented evidence at trial concerning what the parties orally agreed about the parties' rights under the agreement.

The majority adopts VNB's version of this oral agreement, that the consolidated credit line obviated the prior special deposit agreement. The jury, however, must have believed Hopkins' version of this oral agreement in finding for Hopkins' sureties. According to Hopkins, the consolidated loan agreement did not modify the parties' prior agreement that deposited funds in excess of payroll debt must remain available for payments to suppliers. Therefore, Hopkins protested when in June 1985 VNB began seizing all funds deposited, and it continued to protest VNB's unilateral set offs through September.⁵ 

In sum, the purpose of the new consolidated credit line has no bearing on whether VNB had setoff rights to the progress payment deposits. A new loan is merely another obligation a bank may set off against a general deposit. A new loan, no matter what its purpose, does not create any setoff rights against an existing special deposit. Therefore, because the progress payments were held in a special deposit, no new loan could give VNB a right to set off these funds.

VI

The record in this case without question shows that VNB was on notice that Hopkins' progress payments were to be used for only two special purposes, payment of payroll debt and of suppliers. Indeed, the record suggests that VNB demanded this arrangement. The existence of these special purposes rendered each progress payment a special deposit not subject to a setoff. Because a special deposit existed, VNB's subsequent setoff was a conversion.

The majority has ignored this evidence in the record and the facts found by the jury. Further, the majority commits two key legal errors. First, the majority mistakenly assumes that whether a special deposit existed depended on the rights the suppliers had in Hopkins' account rather than on whether Hopkins put VNB on notice that the progress payment deposits were earmarked for special purposes. Second, the majority erroneously assumes that VNB's conversion is harmless and makes no difference.

The majority's decision is particularly troubling because it grants to VNB an unwarranted collection tool. Though the majority claims it merely protects VNB's right to use the legal process vigilantly; in fact, the majority has approved VNB's vigilantism.

Because substantial evidence supports the jury's verdict in this case and the majority rests its decision on mistaken assumptions about the validity of VNB's right of setoff, I must respectfully dissent.