Clinton Federal Sav. & Loan Ass'n v. Iowa-Des Moines Nat. Bank

• Decision Date: 04 June 1986
• Docket Number: IOWA-DES,No. 84-1875,84-1875
• Citation: 391 N.W.2d 712
• Parties: CLINTON FEDERAL SAVINGS & LOAN ASSOCIATION, Pioneer Federal Savings & Loan Association, Mississippi Valley Savings & Loan Association, Peoples Savings & Loan Association, Independence Federal Savings & Loan Association, First Federal Savings & Loan Association of Carroll, and Northwest Federal Savings & Loan Association of Spencer, Plaintiffs-Appellants, v.MOINES NATIONAL BANK, n/k/a Norwest Bank Des Moines National Association, Defendant-Appellee.
• Court: Iowa Court of Appeals

Page 712

391 N.W.2d 712

CLINTON FEDERAL SAVINGS & LOAN ASSOCIATION, Pioneer Federal Savings & Loan Association, Mississippi Valley Savings & Loan Association, Peoples Savings & Loan Association, Independence Federal Savings & Loan Association, First Federal Savings & Loan Association of Carroll, and Northwest Federal Savings & Loan Association of Spencer, Plaintiffs-Appellants, v. IOWA-DES MOINES NATIONAL BANK, n/k/a Norwest Bank Des Moines National Association, Defendant-Appellee.

No. 84-1875.

Court of Appeals of Iowa.

June 4, 1986.

Craig D. Warner and Robert A. Engberg of Aspelmeier, Fisch, Power, Warner & Engberg, Burlington, for plaintiffs-appellants.

Ross H. Sidney, Mark J. Weidenfeld and Patrick J. McNulty of Grefe & Sidney, Des Moines, for defendant-appellee.

Heard by DONIELSON, P.J., and SNELL and HAYDEN, JJ.

DONIELSON, Presiding Judge.

Plaintiffs, seven savings and loan institutions, appeal from an adverse final judgment granted to defendant bank by the trial court pursuant to a participation agreement entered into by the parties in connection with the extension of construction financing for a hotel project.

In 1973, the developer-borrower began seeking financing for a hotel project to be located in West Des Moines, Iowa, near Interstate 80. After an unsuccessful initial attempt to secure financing, the developer in the winter of 1974 contacted Iowa-Des Moines National Bank, n/k/a Norwest Bank Des Moines, and subsequently received a loan commitment letter. On March 28, 1974, a lender's symposium was held and attended by the developer, the defendant, and some of the plaintiffs. Shortly thereafter, the participation agreement was distributed among the parties and signed by all. In June of 1974, eleven savings and loan institutions ("participating lenders") located throughout Iowa and the Iowa-Des Moines National Bank ("lead lender") agreed to finance construction of a Hilton Hotel in West Des Moines which became known as the Country Club Hotel Project.

The lead lender asserts it agreed to lend $2.7 million dollars on the condition 90% of the amount would be participated in by others and it would retain only 10% of the loan. The lead lender contends the commitment was subject to the borrower's paying interest on construction funds advanced and contemplated the hotel would open and operate so as to pay back the principal of the loan.

Construction began in July of 1974 and the builder made payments on the interest from July through October. In November of 1974, the developer was in default. One-half of the loan amount, at this time, had been disbursed. It was not until May of 1975, however, that a second meeting of investors was called to discuss the default period from December of 1974 through March of 1975 and refinancing. In the interim period between the default and the second meeting, the lead lender paid the interest for the developer, which was not disclosed to the participating lenders.

It is the respective rights and obligations of the parties under the loan participation agreement that is in dispute among the parties now. Basically the participating lenders contend the lead lender had the obligation to assure that adequate funding for completion of the project was secured by the developer. The developer had anticipated selling approximately $840,000 worth of limited partnerships to complete the hotel and to pay the costs for furniture, fixtures, and construction interest; however, none were ever sold. It was submitted that the hotel did not open on time due to the failure to secure this additional financing. In essence, the participating lenders contend the lead lender knew the borrower was in trouble and should have apprised them of his trouble at the earliest possible time, which it did not.

The building was 90% complete in May before the second meeting, and 90% of the loan was disbursed, or approximately $2.4 million. The developer estimated he needed $1,559,000 to complete the project. Even though the lead lender and participating lenders agreed to refinance the project, Commercial Loan Insurance Corporation (CLIC), the insurer of 20% of the mortgage, would not agree to refinancing. Thus, the lead lender and participating lenders could not refinance as desired and had to foreclose.

The lead lender brought a mortgage foreclosure action in August of 1975. The property was purchased by the lead lender in December of 1975, for $1.45 million, and ultimately sold in April of 1979. Immediately after sale, nine of the participating lenders brought this action against the lead lender to recover damages resulting from the lead lender's alleged mismanagement of the loan. Those nine participating lenders now number seven after two mergers.

In their original petition, the participating lenders pleaded various theories of relief including negligence, breach of contract, breach of warranty, and breach of trust. The trial court dismissed all divisions other than those stating a claim in negligence on the ground that the participation agreement "clearly and unambiguously reflects the intention of the parties to limit their liability to each other to losses due to negligence." Paragraph 12 of the participation agreement provided:

LIABILITY AND REPRESENTATIONS--None of the parties hereby make any express or implied warranty of any kind with respect to said Loan; and no party shall be liable to any other for any loss not due to its own negligence; but all loss or losses shall be borne proportionately by PRINCIPAL (the Bank) and PARTICIPANTS (the savings and loans) according to their respective interest in the Loan; and no party shall be responsible beyond that degree of ordinary care it would have exercised in the conduct and management of its own business.

The trial court upheld its earlier ruling in its final judgment. The court held this developer was in default on November of 1974, the participation agreement exclusively governed the rights, obligations and duties of the parties, and that absent the participation agreement, the lead lender and the participating lenders did not owe each other any duty.

The participating lenders attempted to prove the lead lender negligently breached the participation agreement by failing to disclose to them the alleged default of the developer in failing to make construction interest payments, by advancing construction interest to the developer, and by disbursing loan proceeds when it should have known the developer could not open the hotel. The court held the participating lenders had failed to carry their burden of proof on each and every one of the allegations. The court held the participating lenders failed to prove by a preponderance of the evidence that the lead lender negligently breached the participation agreement, that such negligent breach was beyond the degree of ordinary care the lead lender exercised in the conduct and management of its own business, and that such negligence was a proximate cause of any damages. The court, then, entered judgment for the lead lender.

The participating lenders contend the trial court erred: (1) in excluding evidence offered to establish how the lead lender conducts and manages its own business in real estate lending on income producing project loans; (2) in excluding evidence offered to establish the acceptable standard of care exercised by lenders on income-producing real estate loans and that lead lender's conduct fell below that standard of care; (3) in finding the participating lenders did not carry their burden of proof that the lead lender breached the participation agreement in two major areas, and that such breaches were not negligence nor the proximate cause of the participating lenders' damages; (4) in concluding that lead lender's failure to communicate to the participating lenders the developer's default in failing to pay construction interest and the lead lender's continued disbursal of loan proceeds was neither negligent nor the proximate cause of damages to the participating lenders; (5) in finding the lead lender acted with due diligence as if it were dealing with defaults in connection with its other similar investments in trying to cure the developer's default and in finding that the lead lender does not cure a developer's default by stopping construction but rather it cures defaults by completing construction; (6) in finding that the only collateral required by the participation agreement was a mortgage; and (7) in granting summary judgment for the lead lender dismissing all divisions of the petition other than divisions stating negligent claims for relief.

I.

Our review of this action at law is on assigned error. Iowa R.App.P. 4. The findings of fact of the trial court have the effect of a special verdict. Id. These findings are binding upon this court if they are supported by substantial evidence. Iowa R.App.P. 14(f)(1).

The participating lenders sought repeatedly to introduce evidence as to how the lead lender normally handled loans in an attempt to show the lead lender's actions in this instance fell below its usual standard of care because no equity financing was obtained before the loan was granted and by not disclosing the November 1974 default until March of 1975. See Iowa R.Evid. 401; State v. Clay, 213 N.W.2d 473 (Iowa 1973). The lead lender objected to such questions as irrelevant and immaterial because the participation agreement was a contract which explicitly outlined the lead lender's duties towards the participating lenders so that the lead lender's liability, if any, could only be judged in relationship to what the contract called for, not what the lead lender or other similar lending institutions had done in the past. See 57 Am.Jur.2d Negligence, § 47, at 395-97 (1971); M & W Farm Service Co. v. Callison, 285 N.W.2d 271, 276 (Iowa 1979). The trial court ruled that the only relevant and material inquiry was in regard to that provided in the participation agreement and...