Cooperative Finance Ass'n, Inc. v. Garst

Citation917 F. Supp. 1356
Decision Date21 February 1996
Docket NumberNo. C 94-3052.,C 94-3052.
PartiesThe COOPERATIVE FINANCE ASSOCIATION, INC., Plaintiff, v. David GARST and Marilyn Garst, Defendants. David GARST, Counterclaimant, v. The COOPERATIVE FINANCE ASSOCIATION, INC., Counterclaim Defendant.
CourtU.S. District Court — Northern District of Iowa

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Rodney P. Kubat of Whitfield & Eddy, P.L.C., in Des Moines, Iowa, and Mark A. Shaiken of Stinson, Mag & Fizzell, P.C., in Kansas City, Missouri, for Plaintiff and Counterclaim Defendant CFA.

Peter C. Riley of the Tom Riley Law Firm, P.C., in Cedar Rapids, Iowa, for Defendant and Counterclaimant David Garst.

Timothy S. White and Allison M. Heffern of White & Johnson, P.C., in Cedar Rapids, Iowa, for Defendant Marilyn Garst.

                                                TABLE OF CONTENTS
                  I. INTRODUCTION ................................................................... 1363
                 II. STANDARDS FOR SUMMARY JUDGMENT ................................................. 1365
                III. FINDINGS OF FACT ............................................................... 1367
                     A. Undisputed Facts ............................................................ 1367
                     B. Disputed Facts .............................................................. 1370
                IV.  LEGAL ANALYSIS ................................................................. 1371
                     A. David Garst's Counterclaim .................................................. 1371
                        1. Procedural posture of the review of the order striking the counterclaim
                           .......................................................................... 1371
                        2. The standard of review ................................................... 1372
                        3. Propriety of striking the counterclaim ................................... 1373
                        4. Striking of "defenses" ................................................... 1377
                     B. CFA's Claim ................................................................. 1378
                        1. Is CFA entitled to judgment on the note? ................................. 1378
                           a. Greenwald's authority to draw against the line of credit .............. 1378
                              i. The partnership agreement .......................................... 1378
                             ii. The power of attorney .............................................. 1379
                            iii. Authority under the loan documents ................................. 1380
                             iv. Apparent authority established by course of conduct ................ 1380
                           b. CFA's right to pursue judgment on the note ............................ 1382
                        2. Who is liable on the note? ............................................... 1383
                           a. David Garst ........................................................... 1383
                           b. Marilyn Garst ......................................................... 1384
                              i. Procedural bars to Marilyn Garst's affirmative defenses ............ 1385
                             ii. Adequacy of the affirmative defenses ............................... 1386
                V.  CONCLUSION ...................................................................... 1388
                
MEMORANDUM OPINION AND ORDER REGARDING PLAINTIFF/COUNTERCLAIM DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

BENNETT, District Judge.

After a falling out between partners, and a falling out between one of the partners and his wife, who also signed a note for a loan to the partnership, the question confronting the court here is, "Who pays a debt of the partnership?" One partner and his estranged wife, who are defendants here, each say, "Not I." The lender, however, says, "Either or both." In this lawsuit to recover the outstanding balance on a loan to a farming partnership, the plaintiff lender has moved for summary judgment against one of the partners and his estranged wife, both of whom signed the note on the loan. Another partner, who also signed the note, is not a party here. The defendant partner filed a counterclaim for damages allegedly caused by misconduct of the lender in conducting business of the partnership with the other partner. The defendant partner's counterclaim has been ordered stricken by a magistrate judge as a sanction for refusal to make discovery and for failure to comply with court orders, and the lender asserts that the defendants have no defenses to the original claim. The wife of the partner has resisted summary judgment as to her by belatedly asserting various affirmative defenses arising from her purported status as merely an "accommodation party" on the loan papers. Both defendants insist genuine issues of material fact preclude the entry of summary judgment in this case.

I. INTRODUCTION

Plaintiff Cooperative Finance Association, Inc. (CFA), filed this diversity lawsuit on July 28, 1994, seeking a judgment in the amount of the outstanding balance on a note for a loan made to a farming partnership known as Double G Ranch (DGR). The partners in DGR were Orben Greenwald and defendant David Garst. The only defendant named in the original complaint was David Garst; however, on August 23, 1994, prior to any answer, CFA filed a first amended complaint adding as a defendant David Garst's estranged wife, Marilyn Garst, who had also signed the note for the loan in question. The amended complaint seeks judgment in the sum of just over one hundred thousand dollars, plus interest, costs, and attorney fees.

Both defendants answered the amended complaint on September 22, 1994.1 The defendants' answer consisted only of denials of some of the factual allegations in the complaint, but did not include any counter allegations or assertions of any affirmative defenses. David Garst subsequently filed a counterclaim on October 6, 1994, alleging generally that CFA was barred from recovering on the note owing to its misconduct, which apparently consisted of conducting business of the partnership with Orben Greenwald, the other member of the partnership, who is not a party here, knowing that Greenwald and David Garst were at odds over operation of the partnership, and also alleging some failure to give notice to David Garst concerning the loan to DGR. CFA answered the counterclaim on October 24, 1994.

The parties commenced discovery, but it did not proceed altogether smoothly. Discovery requests propounded by CFA to David Garst on December 29, 1994, regarding his counterclaim, went unanswered. CFA moved to compel answers on April 27, 1995. Several hearings and status conferences with Chief Magistrate Judge John A. Jarvey during the summer and fall of 1995 and an order compelling discovery by Judge Jarvey, dated September 28, 1995, followed. Each time the issue was raised, David Garst's counsel assured the court and CFA that responses to CFA's discovery requests would be forthcoming. CFA finally moved for discovery sanctions, including dismissal of the counterclaim, on October 17, 1995. Garst has never provided responses to the discovery requests at issue. Judge Jarvey heard the motion for sanctions on January 16, 1996, and, on January 17, 1996, entered an order, inter alia, striking David Garst's counterclaim for failure to make discovery, pursuant to Fed.R.Civ.P. 37(b)(2)(B) & (C), and for failure to comply with court orders, pursuant to Fed.R.Civ.P. 41(b).

Judge Jarvey determined that the long record of delays, unfulfilled assurances that discovery would be forthcoming, and lack of any legitimate explanation for the delay demonstrated that the failure to make discovery or to comply with the court order compelling discovery was "willful." In determining the appropriate sanction, Judge Jarvey concluded that an award of attorney fees would give CFA "nothing that it does not already have," because, as the result of a state court receivership, CFA currently has a lien on David Garst's property that covers the debt owed CFA, interest on the debt, and CFA's attorney fees in this action. Judge Jarvey therefore concluded that striking the counterclaim was an appropriate sanction for David Garst's misconduct. No party filed objections to Judge Jarvey's order striking the counterclaim nor any motion for reconsideration of that order.

On February 6, 1996, although Judge Jarvey's order striking the counterclaim was not cast as a report and recommendation for dismissal, but as an order imposing discovery sanctions, in an abundance of caution, this court allowed the parties ten more days to state any objections to Judge Jarvey's determination that the counterclaim should be stricken. This court recognized something of a split in authority on the power of a magistrate judge to dismiss a claim or counterclaim as a discovery sanction, compare Devore & Sons v. Aurora Pacific Cattle Co., 560 F.Supp. 236 (D.Kan.1983) (§ 636(b)(1)(A) prevents a magistrate judge from disposing of cases on the merits, but does not preclude Fed.R.Civ.P. 37(b) sanctions, including striking a party's counterclaim, because the district court retains the power to review for clear error or to reconsider such a decision), with Donovan v. Gingerbread House, Inc., 106 F.R.D. 57 (D.Colo.1985), rev'd and remanded on other grounds, 907 F.2d 115 (10th Cir.1989) (a magistrate judge does not have the authority to involuntarily dismiss an action as a discovery sanction pursuant to Fed.R.Civ.P. 37(b)(2)(C), and the court will treat the magistrate judge's order dismissing a claim as a report and recommendation, applying de novo review under an arbitrary and capricious standard), but declined to resolve that dispute in this litigation. Instead, the court afforded the parties, and principally David Garst, one last opportunity to be heard on whether the counterclaim should remain part of this case.

On February 16, 1996, David Garst took advantage of this last opportunity by filing an objection to Judge Jarvey's order striking his...

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