Engstrand v. West Des Moines State Bank

• Decision Date: 25 May 1994
• Docket Number: No. 91-1378,91-1378
• Parties: Ralph A. ENGSTRAND, Leola M. Engstrand, Mark A. Engstrand, Michael C. Engstrand, and Ralph's Distributing Co., Appellants, v. WEST DES MOINES STATE BANK and Boats Unlimited, Appellees.
• Court: Iowa Supreme Court

Page 797

516 N.W.2d 797

Ralph A. ENGSTRAND, Leola M. Engstrand, Mark A. Engstrand, Michael C. Engstrand, and Ralph's Distributing Co., Appellants, v. WEST DES MOINES STATE BANK and Boats Unlimited, Appellees.

No. 91-1378.

Supreme Court of Iowa.

May 25, 1994.

Lawrence L. Marcucci of Shearer, Templer, Pingel & Kaplan, P.C., West Des Moines, for appellants.

Robert G. Allbee, Wade R. Hauser III, and Michael J. Eason of Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee, P.C., Des Moines, for appellee West Des Moines State Bank.

David L. Charles of Gamble & Davis, Des Moines, for appellee Boats Unlimited.

Considered by McGIVERIN, C.J., and LARSON, CARTER, NEUMAN, and SNELL, JJ.

LARSON, Justice.

Ralph Engstrand and several members of his family owned wholesale and retail boat companies, which were financed by West Des Moines State Bank. When the companies defaulted on the loan, the bank began collection proceedings, including the liquidation of the companies' inventory.

The plaintiffs filed this suit against the bank and Boats Unlimited (the corporation set up to conduct the liquidation) alleging negligence in the disposition of the collateral and breach of a fiduciary duty by the bank. The court granted a directed verdict in favor of Boats Unlimited, but a jury returned substantial verdicts against the bank. The court entered a judgment notwithstanding that verdict, and the plaintiffs appealed. We affirm.

The Engstrand family owned a wholesale boat company in Ankeny called Ralph's Distributing Company (Ralph's). Ralph, Mark, and Michael Engstrand were the sole shareholders in Ralph's. Ralph's expanded into the retail business by opening a Des Moines store called Des Moines Boating Center (DMBC), a wholly owned subsidiary of Ralph's. A second retail operation, called Boatland, was opened in Lincoln, Nebraska. Boatland was also owned solely by Ralph's.

Because of a combination of adverse factors, the businesses fell on hard times, and in 1988 the companies showed a loss of $600,000. In December 1988, the two retail establishments, DMBC and Boatland, filed bankruptcy under chapter 11. The cases were subsequently ordered into chapter 7 liquidations by the bankruptcy court, and various creditors began to scramble to claim their collateral.

The retail buildings and grounds were packed with inventory, including boats and boating accessories. Many secured creditors attempted to pick up their collateral from the premises. In the meantime, the defendant bank began to dictate the disposition of the collateral in which it had a security interest.

In July 1989, this suit was filed against West Bank and Boats Unlimited. The plaintiffs alleged that West Bank was negligent in its lending relationship with the plaintiffs, negligent in failing to allow the plaintiffs an active role in the liquidation, and negligent in failing to dispose of the collateral in a commercially reasonable manner. See Iowa Code § 554.9504 (1987). The plaintiffs also alleged that the bank breached a fiduciary duty to the plaintiffs.

The issues on appeal in this case are whether the court erred in ruling as a matter of law that the bank did not owe a fiduciary duty to the plaintiffs and ruling that neither the bank nor Boats Unlimited owed a "special duty" to the plaintiff shareholders to allow them to sue for alleged wrongs committed against the corporations. See Cunningham v. Kartridg Pak Co., 332 N.W.2d 881, 883 (Iowa 1983). The issue in a companion appeal is whether the bank properly foreclosed a real estate mortgage given as additional security. That opinion, West Des Moines State Bank v. Ralph's Distrib. Co., 516 N.W.2d 801 (Iowa 1994), is also filed today.

I. The Fiduciary Relationship Issue.

The nature of a two-party relationship may be enough in itself to create a fiduciary duty. For example, a fiduciary duty arises between attorneys and clients, guardians and wards, and principals and agents. Kurth v. Van Horn, 380 N.W.2d 693, 696 (Iowa 1986). This, however, is not true as to a bank's relationship with its customers, whether they are borrowers or depositors. The banking-customer relationship does not automatically create a fiduciary duty. Id.

Here, the bank agreed to make a loan on certain conditions, and the plaintiffs agreed to accept the loan with those conditions. The bank was acting on its own behalf and not on behalf of the plaintiffs in a confidential or trust relationship.

There was no evidence that the bank was acting as an advisor to the plaintiffs or that it exercised any influence over the plaintiffs' business except to enforce its loan agreement.

Viewing the evidence in the light most favorable to the verdict, we agree that it is not sufficient to create a fiduciary relationship, and the court correctly directed a verdict on this issue.

II. The Special Duty Issue.

The district court ruled as a matter of law that the defendants owed to the plaintiffs no "special duty" that would permit a direct suit as shareholders. On that basis, the court granted a judgment notwithstanding the verdict in favor of the defendants.

In reviewing a judgment notwithstanding the verdict, we view the evidence in the light most favorable to the party against whom the motion is directed. Johnson v. Dodgen, 451 N.W.2d 168, 171 (Iowa 1990). The motion should be denied when there is any substantial evidence to support the jury's verdict. Id.

The Engstrands were shareholders in Ralph's, which was, in turn, the sole shareholder of the retail businesses known as Des Moines Boating and Boatland. Thus, all claims by these plaintiffs are as shareholders, either in Ralph's or through Ralph's' ownership of the shares in the retail outlets. All of the plaintiffs' claims arise out of wrongs allegedly committed against the corporations. They claim that they may pursue these claims in their own right because the defendants owed them a "special duty" because the bank had agreed that the plaintiffs would be actively involved in the liquidation of their assets and because they had personally guaranteed the corporations' indebtedness.

We have recognized that,

[a]s a matter of general corporate law, shareholders have no claim for injuries to their corporations by third parties unless within the context of a derivative action.

There is, however, a well-recognized exception to the general rule: a shareholder has an individual cause of action if the harm to the corporation also damaged the shareholder in his capacity as an individual rather than as a shareholder....

... [T]he test is best stated in the disjunctive: in order to bring an individual cause of action for direct injuries a shareholder must show that the third-party owed him a special duty or that he suffered an injury separate and distinct from that suffered by the other shareholders.

Cunningham, 332 N.W.2d at 883 (citations omitted); accord 12B William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5911, at 484 (perm. ed. rev. vol. 1993) [hereinafter Fletcher]; 19 Am.Jur.2d Corporations § 2246, at 148-49 (1986); 18 C.J.S. Corporations § 398, at 735-36 (1990).

As one court has noted,

[t]here are several well-founded reasons why a stockholder is precluded from asserting a personal right of action against a third party whose actions have...