McGowen, Hurst, Clark & Smith, P.C. v. Commerce Bank

• Decision Date: 27 August 2021
• Docket Number: No. 20-1925,20-1925
• Citation: 11 F.4th 702
• Parties: MCGOWEN, HURST, CLARK & SMITH, P.C., Plaintiff - Appellee v. COMMERCE BANK, Defendant - Appellant
• Court: U.S. Court of Appeals — Eighth Circuit

11 F.4th 702

MCGOWEN, HURST, CLARK & SMITH, P.C., Plaintiff - Appellee

v.COMMERCE BANK, Defendant - Appellant

No. 20-1925

United States Court of Appeals, Eighth Circuit.

Submitted: May 13, 2021

Filed: August 27, 2021

Counsel who presented argument on behalf of the appellant was William Laurence Moran, of Saint Paul, MN. The following attorney(s) appeared on the appellant's brief; Kelly S. Hadac, of Saint Paul, MN.

Counsel who presented argument on behalf of the appellee and appeared on the appellee's brief, was Jason Michael Craig, of Des Moines, IA. The following attorney(s) also appeared on the appellee's brief; John Douglas Hintze, of Des Moines, IA.

Before SMITH, Chief Judge, SHEPHERD and GRASZ, Circuit Judges.

SMITH, Chief Judge.

Robert McGowen obtained a personal loan from Commerce Bank ("Commerce"). At all relevant times, McGowen served as the president, was on the board of directors, and was a shareholder of McGowen, Hurst, Clark & Smith, P.C. (MHCS), an accounting firm. Commerce attempted to secure McGowen's personal loan by his signature on a pledge ("Pledge") that purportedly made his shares of stock in MHCS collateral. Commerce also required that McGowen obtain MHCS's signature on a document acknowledging the Pledge ("Acknowledgment"). Upon McGowen's default, the parties disputed the enforceability of the Pledge and the Acknowledgment against MHCS. Both parties moved for summary judgment. The district court¹ entered summary judgment in MHCS's favor. Commerce appeals. We affirm.

I. Background

MHCS is an accounting firm that is organized as a professional corporation in Iowa. It is run by a board of directors that is comprised of the company's shareholders. All of the directors own an equal interest in MHCS. From 1975 to 2018, McGowen was a shareholder in MHCS. And between 1993 and 2016, McGowen served as MHCS's president and managing shareholder.

Under MHCS's bylaws, "all ... written contracts and agreements to which [MHCS] [is] a party [must] be executed in [MHCS's] name by the president or the vice president and attested by the secretary or an assistant secretary," but entrance into such written instruments is "[s]ubject always to the specific directions of the board of directors." J.A. at 222. The bylaws further provide that MHCS can only enter a loan or issue any "evidence[ ] of indebtedness" if "authorized by a resolution of the board of directors." Id.

During McGowen's tenure with MHCS, he began having financial difficulties. In 2011, he sought to obtain a personal loan from Commerce. Commerce agreed to loan McGowen over $1.2 million. As part of the loan, McGowen signed the Pledge, which purported to give Commerce a security interest in McGowen's MHCS stock as collateral for the loan.

Before completing the loan, Commerce also required that McGowen obtain MHCS's signature on another document, the Acknowledgment. Initial drafts of the Acknowledgment would have required all of MHCS's shareholders to sign, but that requirement was eventually deleted. It was replaced with a single signature block for McGowen to sign for MHCS as MHCS's president. Both Commerce and McGowen believed that the signed Acknowledgment sufficed to, among other things, bind MHCS to (1) "acknowledge[ ] and consent[ ] to the existence, effectiveness[,] and enforceability of the Pledge," (2) "acknowledge[ ] and consent[ ] to the transfer of [McGowen's] shares of stock ... to Commerce" if Commerce "exercise[d] its rights under the Pledge," and (3) not amend MHCS's shareholder agreement without Commerce's approval. Id. at 175. McGowen signed the Pledge and Acknowledgment on March 30, 2011, without the consent or even knowledge of MHCS's other shareholders.

At the time McGowen signed the Pledge and Acknowledgment, MHCS's shareholder agreement provided for retirement and stock redemption when a shareholder turned 65 years old. Under the original shareholder agreement, MHCS's board of directors could vote to allow a shareholder who was older than 65 years old to continue being a shareholder. But MHCS altered the shareholder agreement in 2012. The new shareholder agreement provided for mandatory retirement when a shareholder turned 67 years old—without an exemption for board-approved shareholders—and the company would still redeem the shareholder's stock.

Several years passed without incident, until McGowen turned 67 years old. In mid-2018, MHCS redeemed McGowen's shares at the end of the company's fiscal year. In January 2019, Commerce sent a letter to MHCS threatening to sue the accounting firm for violating the Acknowledgment and Commerce's rights to McGowen's shares of stock. According to Commerce, MHCS violated the Acknowledgment by altering the shareholder agreement and redeeming McGowen's shares, among other violations. MHCS responded by seeking a declaratory judgment in federal district court that the Pledge was unenforceable. MHCS argued that the Pledge was illegal under Iowa law and therefore unenforceable by Commerce against MHCS and that McGowen did not have actual or apparent authority to enter the Acknowledgment on MHCS's behalf. Commerce made counterclaims against MHCS for breach of contract, negligent misrepresentation, and fraudulent misrepresentation.

Both parties moved for summary judgment. The district court first determined that MHCS had standing to seek the declaratory judgment. Second, it reasoned that the Pledge was illegal and void under Iowa law. Third, it found that McGowen did not have actual or apparent authority to enter into the Acknowledgment. Then, it determined that Commerce's counterclaims failed for essentially the same reasons. As a result, the district court entered judgment in favor of MHCS, granting its motion for summary judgment, denying Commerce's motion, and dismissing Commerce's claims against MHCS. Commerce appeals the district court's order.

II. Discussion

On appeal, Commerce makes three arguments. First, it asserts that MHCS lacks standing to seek a declaratory judgment regarding the Pledge. Second, it argues that the Pledge and Acknowledgment are legal under Iowa law. Third, it claims that McGowen had actual and apparent authority to enter into the Acknowledgment on MHCS's behalf.

A. Standing

MHCS, as plaintiff, must show standing for its cause of action. The existence of a plaintiff's Article III standing is a jurisdictional prerequisite, and we will not reach the merits if the plaintiff does not have standing. See Sanzone v. Mercy Health , 954 F.3d 1031, 1046 (8th Cir. 2020). We review the issue of standing de novo. Jones v. Gale , 470 F.3d 1261, 1265 (8th Cir. 2006). In diversity cases,² the plaintiff must not only "meet[ ] the ‘case or controversy’ requirements of [A]rticle III of the Constitution [but] also [must have] standing to sue under the relevant state law." W. Heritage Ins. Co. v. Asphalt Wizards , 795 F.3d 832, 836 (8th Cir. 2015) (quoting Wolfe v. Gilmour Mfg. Co. , 143 F.3d 1122, 1126 (8th Cir. 1998) ). Iowa law governs this dispute.

Under Iowa law, "[a] plaintiff must (1) have a specific personal or legal interest in the litigation and (2) be injuriously affected." Godfrey v. State , 752 N.W.2d 413, 418 (Iowa 2008) (cleaned up). But these two elements "do not fully capture" Iowa's standing doctrine. Id. For the full picture, Iowa courts "have frequently supplemented and elaborated on these elements by drawing on the federal law on standing." Id. "In fact, [Iowa] doctrine on standing parallels the federal doctrine, even though standing under federal law is fundamentally derived from [federal] constitutional strictures not directly found in the Iowa Constitution." Id.

A plaintiff seeking federal jurisdiction must establish the three Article III standing requirements: "(1) the plaintiff must have suffered an injury in fact, (2) there must be a causal connection between the injury and the conduct complained of, and (3) it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision." Sanzone , 954 F.3d at 1046 (cleaned up). There is an injury in fact if the alleged injury is "(a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical." Id. (quoting Lujan v. Defs. of Wildlife , 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) ). "Traceability requires proof of causation, a showing that the injury resulted from the actions of the defendant and not from the independent action of some third party not before the court"—that is, the injury is "fairly traceable to the challenged action of the defendant." Miller v. Thurston , 967 F.3d 727, 734, 735 (8th Cir. 2020) (cleaned up).

Plaintiffs seeking a declaratory judgment under 28 U.S.C. § 2201 must meet these same Article III requirements. See Maytag Corp. v. Int'l Union, United Auto., Aerospace & Agric. Implement Workers of Am. , 687 F.3d 1076, 1081 (8th Cir. 2012) ; California v. Texas , ––– U.S. ––––, 141 S. Ct. 2104, 2115, ––– L.Ed.2d –––– (2021). But due to the nature of declaratory judgments, "the difference between an abstract question and an Article III case or controversy ‘is necessarily one of degree.’ " Maytag Corp. , 687 F.3d at 1081 (quoting Md. Cas. Co. v. Pac. Coal & Oil Co. , 312 U.S. 270, 273, 61 S.Ct. 510, 85 L.Ed. 826 (1941) ). "Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." MedImmune, Inc. v. Genentech, Inc. , 549 U.S. 118, 127, 127 S.Ct. 764, 166 L.Ed.2d 604 (2007) (quoting Md. Cas. Co. , 312 U.S. at 273, 61 S.Ct. 510 ).

On these facts, we conclude MHCS has standing to seek a declaratory judgment regarding the Pledge. Commerce argues that MHCS lacks standing because MHCS is not a party to the Pledge, and thus, Commerce has not sought to enforce the Pledge against MHCS. While it is true that MHCS is alleged...