Opperman v. M. & I. DEHY, INC.

• Decision Date: 08 May 2002
• Docket Number: No. 00-1314.,00-1314.
• Citation: 644 N.W.2d 1
• Parties: Elizabeth OPPERMAN, Appellant, v. M. & I. DEHY, INC., Appellee.
• Court: Iowa Supreme Court

644 N.W.2d 1

Elizabeth OPPERMAN, Appellant, v. M. & I. DEHY, INC., Appellee.

No. 00-1314.

Supreme Court of Iowa.

May 8, 2002.

John F. Lorentzen and Debra L. Hulett of Nyemaster, Goode, Voigts, West, Hansell & O'Brien, P.C., Des Moines, for appellant.

A. Eric Neu of Neu, Minnich, Comito & Neu, P.C., Carroll, for appellee.

LAVORATO, Chief Justice.

Elizabeth Opperman sued M. & I. Dehy, Inc. (M. & I.) in equity to rescind and cancel a mortgage on property owned by Elizabeth. Elizabeth and her husband, Ivan, executed a promissory note and the mortgage in question to M. & I., a corporation owned by their son, John. The court held that Elizabeth failed to prove the mortgage was without consideration as she had contended and denied her relief. The court awarded M. & I. attorney fees and costs.

Elizabeth appealed and we transferred the case to the court of appeals, which agreed with Elizabeth's contention that the note and mortgage were without consideration. The court held that the district court erred in (1) denying Elizabeth's petition to rescind and cancel the mortgage and (2) awarding M. & I. attorney fees and costs.

M. & I. filed an application for further review, which we granted. We find the mortgage was not supported by valid consideration. However, we apply the maxim of "clean hands" to deny relief to the parties. We therefore vacate the court of appeals' decision and affirm in part and reverse in part the district court's judgment.

I. Scope of Review. Because this is an equitable action, our review is de novo. Norwest Bank Nebraska v. Philips Realty Co., 594 N.W.2d 3, 6 (Iowa 1999). Although we are not bound by the district court's factual findings, we give weight to those findings, especially when witness credibility is in issue. Iowa R.App. P. 6.14(6)(g); Norwest Bank Nebraska, 594 N.W.2d at 6. Because the district court had the witnesses before it, we think it was in a far better position to judge their credibility. Hatheway v. Hanson, 230 Iowa 386, 396, 297 N.W. 824, 828 (1941).

II. Facts.

Besides John, Elizabeth and Ivan have a son, Jim, a daughter, Valarie Opperman Roberts, and three other daughters. In 1985, M. & I. became an active corporation. Jim and John Opperman owned the company in 1990. The main business of the corporation is alfalfa processing.

Also in 1985, Delray, Inc. (Delray) was formed for the sole purpose of purchasing farmland owned by Ivan. At that time, the farmland was subject to litigation and perhaps foreclosure by Farm Credit Services. The initial ownership of Delray is not clear from the record. Jim testified that he was the owner of Delray in 1990, but John testified he owned at least half and up to 100 percent of Delray.

Valarie Opperman Roberts—the two brothers' sister—owned a house in Manning, Iowa. She lived there a short time and moved sometime during the 1980s. The house remained unoccupied until 1990, and was in need of major improvements. During this time, Ivan and Elizabeth needed a place to live. The two sons and their parents decided—with Valarie's approval—that the parents could live in Valarie's house provided the necessary improvements were made.

By 1990, Ivan and Elizabeth had lost almost all of their assets and were living off social security benefits and a small weekly salary Ivan received from M. & I. John and Jim decided that Delray would purchase the house from Valarie and that M. & I. would pay for the necessary improvements because it had a monthly cash flow from its operations. Delray had only an annual income.

By the purchase and improvements, the two sons intended to place their parents in a comfortable home during their retirement years. John and Jim never intended to seek reimbursement for the improvements. Nor was it their intention to sell the Manning property to their parents or to charge them rent.

Improvements were made to the Manning property beginning in 1990, while Valarie still owned the property. John and Jim signed checks drawn on M. & I.'s account to pay for the improvements. At this point in time, there was no agreement for the parents to pay for the house or the improvements. John testified that at the time the improvements were made during 1990 and 1991, he did not care whether Delray repaid M. & I. for amounts spent on the improvements. This was so, he testified, because both he and Jim owned the two companies, which made it "like moving money from your left ... pocket and putting it in your right pocket."

The parents moved into the Manning property in 1991, and since then have never paid any rent. In April 1992, Delray purchased the Manning property on contract from Valarie and her husband for $18,000. A warranty deed to Delray in satisfaction of the contract was recorded on August 12, 1993. The parents made no agreement to repay amounts Delray paid to purchase the home. In 1993, John decided to expand his farm operations to include a hog confinement operation. Jim and John agreed that a thirty-acre tract of farmland owned by Delray would be set aside for the operation, but John was to obtain the necessary financing. Delray transferred without consideration the thirty acres to M. & I. for use in the hog confinement operation.

After John failed to obtain the necessary financing for the hog confinement operation, he suggested Delray mortgage the Manning property. At the time, due to the improvements, the property was appraised at $80,000, which supported a $44,000 loan. Delray used the $44,000 to pay off a mortgage on the thirty acres to be set aside for the hog confinement operation, pay Valarie the balance of the purchase price for the Manning property, and finance the purchase of assets for the hog building. At the time of trial, Delray was current on the monthly payments toward satisfaction of the mortgage securing the $44,000 loan. John and his wife are personally liable on this debt.

In 1995, Ivan learned about a program offering home improvement subsidies. The subsidies were available to low-income homeowners. Because these subsidies were not available to a non-owner of real estate, Ivan suggested Delray deed the Manning property to him. Delray quitclaimed the Manning property to Ivan on May 17, 1995. The deed, recorded in May 1995, stated, "[t]he consideration for this deed is less than $500 and therefore is exempt from the tax imposed by Chapter 428A of the 1995 Code of Iowa, as amended." Jim and John, as president and secretary of Delray, respectively, signed the deed.

Shortly after Delray transferred the Manning property to Ivan, one of Ivan's unsecured creditors, a bank, threatened to collect his outstanding obligation to the bank by pursuing Ivan's interest in the property. Ivan told Jim and John about the creditor's threat, which prompted a discussion on how to avoid a loss of the real estate to the creditor.

As a result of that discussion, Ivan executed a promissory note, and mortgage securing the note to M. & I. Ivan executed the note and mortgage on June 1, 1995, in the amount of $35,000. The note indicated it was "finally and fully due, owing and payable on June 1, 2020." The note bore a ten percent interest rate, but made no provisions for periodic payments of interest or principal. The mortgage provides that it was given as security for a promissory note dated June 1, 1995, for $35,000, which has a due date of June 1, 2020. The mortgage was recorded on June 8, 1995. On the same date, Ivan quitclaimed the Manning property to Elizabeth.

Jim and Ivan testified that John arrived at the $35,000 figure by subtracting the first mortgage ($44,000) from the appraised value of the property ($80,000). John testified the $35,000 amount represented the costs incurred by M. & I. in fixing up the Manning property, but admitted M. & I. incurred at least another $7,000 in expenses.

The evidence supports a finding that the parties never intended that Ivan would pay the note or that M. & I. would ever foreclose on the mortgage. This becomes evident from the note's due date of 2020. The parties arrived at the due date of 2020 because it was far enough in the future that Elizabeth and Ivan would likely be deceased by that time and the home would revert back to Jim and John, the owners of M. & I. at the time of the mortgage.

John testified that he and Jim did not want to "give[ ] up the house," so the mortgage and note were "interpreted that through default down the road ... Jim and I would get [the house] ... because at that time Delray and M. & I. were still fifty percent owned by both of us." In contrast, Jim and Ivan testified that the Manning property and the improvements were a gift to Ivan.

Ownership of M. & I. and Delray became the subject of litigation in the mid 1990s. In 1996, following a settlement, John became sole owner of M. & I., and Jim became sole owner of Delray.

After Ivan and Elizabeth executed the 1995 promissory note and mortgage, John's relationship with his parents deteriorated. John and his parents have not spoken to each other since 1995. The final blow came when Elizabeth omitted John from her will, leaving her estate to be divided among her remaining children. So if Elizabeth is successful in this suit, John would have no interest in the property upon his parents' deaths.

II. Issues.

On appeal, Elizabeth contends the district court erred in refusing to rescind and cancel the mortgage. In support of her contention, she argues the district court erred in holding that she failed to prove the mortgage was not supported by consideration.

Not surprising, M. & I. contends there was sufficient consideration for the mortgage. In the alternative, M. & I. seeks to uphold the district court's ruling on the ground that if fraud was involved, we should leave the parties where they stand. The alternative ground is based on the equity maxim of "clean hands," a theory M. & I. pled and a theory to which the district court gave serious consideration in refusing Elizabeth relief.

III. Conside...