City of Davenport v. Shewry Corp.

• Decision Date: 22 January 2004
• Docket Number: No. 02-0460.,02-0460.
• Citation: 674 N.W.2d 79
• Parties: CITY OF DAVENPORT, Appellee, v. The SHEWRY CORPORATION d/b/a Tri-City Fabricating and Welding Co., Inc., and Donald Shewry, Appellants.
• Court: Iowa Supreme Court

674 N.W.2d 79

CITY OF DAVENPORT, Appellee, v. The SHEWRY CORPORATION d/b/a Tri-City Fabricating and Welding Co., Inc., and Donald Shewry, Appellants.

No. 02-0460.

Supreme Court of Iowa.

January 22, 2004.

Steven J. Havercamp of Stanley, Lande & Hunter, Davenport, for appellants.

Christopher S. Jackson, Davenport, for appellee.

TERNUS, Justice.

The district court entered a judgment against the appellants, The Shewry Corporation and its principal owner, Donald Shewry, for the return of economic development grant monies the company received from the appellee, City of Davenport, based on the company's failure to meet its obligations under an economic development agreement with the City. Shewry and the company appeal, claiming the district court erred in three particulars: (1) in dismissing their claim for an accounting by the City; (2) in failing to hold the repayment provision in the parties' agreement was unconscionable and a prohibited penalty clause; and (3) in entering judgment against the company for the amount of the grants, $150,000, and against Shewry for the amount of his guaranty, $75,000. Finding no error, we affirm.

I. Background Facts and Proceedings.

In 1996 The Shewry Corporation, d/b/a Tri-City Fabricating and Welding Co., Inc., entered into an economic development agreement (EDA) with the City of Davenport. This agreement contemplated that the company would build a new welding and fabrication facility on property acquired by the company in a tax increment financing (TIF) district located in the City of Davenport. The City agreed to provide up to $200,000 of economic development grant money to the company in three phases coinciding with the company's construction of taxable improvements to its property. The issuance of each phase of grant money was dependent upon the company making the specified improvements. In addition, the company was required to create 60 new full-time positions within thirty-six months of the date of the agreement, retain 186 existing jobs, and maintain at least 246 full-time equivalent positions from the thirty-sixth month through the one-hundred-twentieth month of the agreement.

The EDA provided that a material breach of the agreement by the company would require repayment of all grant monies already received. Moreover, the agreement specified that the company's failure to meet the employment requirements would be considered a material breach.

The parties also executed assessment agreements for each phase of the project, which were incorporated in the EDA. See generally Iowa Code § 403.6(19) (1997) (authorizing municipalities to enter into assessment agreements upon entering into a development agreement). The assessment agreements expressed the parties' intent that the "property taxes generated by the net gain in taxable values to be created by the [company] through its timely construction and equipping of its new facilities [would] be more than sufficient to completely repay the [bonds] issued by the City." To ensure this result, the company and the City agreed to a specific "minimum actual value" upon which the property would be assessed until the bonds were retired.

The liability of the company under the EDA was secured by two guaranties. Shewry, the president and owner of the company, signed a personal guaranty in the amount of $75,000 to secure the company's obligation under the agreement. In addition, Shewry signed a guaranty as president of the company that also secured the contractual obligation. The company's guaranty was similarly limited to $75,000.

Pursuant to the EDA, the City advanced $50,000 to the company on August 30, 1996, and an additional $100,000 on March 18, 1997. The company used these funds to finance improvements to its property, resulting in increased valuations and increased property tax assessments, as contemplated by the agreement. Unfortunately, the company did not meet the employment requirements of the contract. The company eventually sold the facility without reaching phase III of the economic development project.

On March 9, 2001, the City filed this action against the company and Shewry, seeking to recoup the $150,000 in grant money previously dispersed. It sought the entire sum from the company based on the company's repayment obligation under the EDA, and $75,000 from Shewry based on his personal guaranty.

The defendants claimed the repayment requirement of the EDA was an unconscionable penalty, but Judge Kelley held it was not in his ruling on the City's motion for summary judgment. The company and Shewry also sought an accounting, claiming that any increased tax revenues generated by the improvements made to the company's property should serve as an offset against its liability for repayment under the EDA.

The defendants' counterclaim was tried to the court, Judge Darbyshire, along with the City's claim. The district court denied the defendants' request for an accounting, and entered judgment against the company for $150,000 and against Shewry for $75,000. In a subsequent ruling on the defendants' Iowa Rule of Civil Procedure 1.904(2) motion, the court clarified that the judgment against Shewry was "only upon his guaranty" and that he would have no liability if the company satisfied the $150,000 judgment. The defendants appealed.

II. Issues on Appeal and Scope of Review.

The defendants first challenge the district court's adverse ruling on their counterclaim, which they have characterized as a claim for an "accounting." Based on this characterization, they assert de novo review is required. See Atlantic Veneer Corp. v. Sears, 232 N.W.2d 499, 502 (Iowa 1975)

(stating "accounting issues are usually deemed to stand in equity"). We are not entirely convinced the counterclaim asserts an equitable claim to an accounting, as opposed to simply seeking a contractual offset against the company's liability. Nor are we certain the district court tried the matter in equity. Notwithstanding these reservations, we will review the trial court's disposition of this claim de novo for two reasons: (1) our ultimate resolution of this issue is the same under a de novo review as it would be under a review for correction of errors of law; and (2) the parties appear to be in agreement that the counterclaim was equitable and was tried in equity. See Johnson v. Kaster, 637 N.W.2d 174, 177 (Iowa 2001) (stating court "will hear a case on appeal in the same manner in which it was tried in the district court").

The second issue on appeal is a challenge to the district court's summary judgment ruling that the repayment provision was not an unconscionable penalty clause as a matter of law. We review this ruling for correction of errors of law. See Kelly v. Iowa Mut. Ins. Co., 620 N.W.2d 637, 641 (Iowa 2000)

. In doing so, we must "`determine whether a genuine issue of material fact exists and whether the law was correctly applied.'" Id. (citation omitted).

The defendants' final issue on appeal is that the maximum liability of the company and Shewry was $75,000 and the court erred in entering judgment against the company for $150,000. We review this alleged error for correction of errors of law. See In re Mount Pleasant Bank & Trust Co., 426 N.W.2d 126, 129 (Iowa 1988). The factual findings made by the district court are binding on appeal if supported by substantial evidence. See id. We are not bound, of course, by the trial court's conclusions of law or its application of legal principles. See id.

III. Dismissal of Defendants' Counterclaim For an Accounting.

In their counterclaim, the defendants allege the company paid approximately $134,000 in real estate taxes from 1997 through 2002 specifically allocated to the TIF district on its property tax statements. See generally Iowa Code § 403.19 (allowing portion of property taxes to be allocated to tax increment financing). The defendants assert the City wrongly refused to account for these payments and credit this sum against the company's liability under the EDA. The district court concluded the EDA did not provide for such an offset, and therefore there was no legal basis upon which to require an accounting. Upon our de novo review, we think the trial court was correct.

The EDA clearly evidences the City's intent to issue general obligation bonds to fund the economic development grants to the company. The contract documents also recite the City's plan to retire these bonds using the increased tax revenues generated by the improvements to the company's property and the assessment agreements. What is not present in the parties' agreement, however, is any express statement or implication that property taxes paid by the company and allocated to the TIF district would be credited against the company's liability under the EDA. The parties' clear intent that the tax revenues would be used to amortize the bonds does not reveal an intent that the tax revenues would be used to repay the grants. Retirement of the bonds and repayment of the grants are different obligations imposed on different parties.

We also reject the defendants' argument that our decision in Norwest Credit, Inc. v. City of Davenport, 626 N.W.2d 153 (Iowa 2001), requires the requested offset. In that case the property owner, Brammer Company, LLC, had entered into an assessment agreement with the City of Davenport in exchange for a $500,000 economic development grant. Norwest Credit, 626 N.W.2d at 154. The issue in the case was whether this agreement was binding on the purchaser of the property upon the foreclosure of a mortgage recorded prior to the assessment agreement. Id. at 154-55.

The defendants rely on the following general comments in that case:

An assessment agreement is a way to finance improvements to local real estate, usually in blighted areas. See Black's Law Dictionary 111-12 (7th ed. 1999).

These assessments are, in a certain sense, taxes. But an assessment differs from a general tax in that an assessment is levied

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