Equity Control Associates, Ltd. v. Root

• Decision Date: 19 December 2001
• Docket Number: No. 99-1459.,99-1459.
• Citation: 638 N.W.2d 664
• Parties: EQUITY CONTROL ASSOCIATES, LTD., Appellant, v. David ROOT, Rita Root and D & R Farms, Inc., Appellees.
• Court: Iowa Supreme Court

638 N.W.2d 664

EQUITY CONTROL ASSOCIATES, LTD., Appellant, v. David ROOT, Rita Root and D & R Farms, Inc., Appellees.

No. 99-1459.

Supreme Court of Iowa.

December 19, 2001.

Rehearing Denied February 6, 2002.

Michael G. Byrne of Winston & Byrne, P.C., Mason City, for appellant.

Christopher C. Foy of Leslie, Collins & Foy, Waverly, for appellees.

TERNUS, Justice.

This case provides our court with its first opportunity to interpret and apply the Iowa Loan Brokers Act, Iowa Code chapter 535C (1995). The district court held that the appellant, Equity Control Associates, Ltd., charged an advance fee to the appellees, David and Rita Root, when it contracted with them to assist in obtaining financing for their turkey operation. Because such a fee is prohibited by Iowa Code section 535C.2A, the court rejected Equity Control's claim to recover its contractual fees and awarded the Roots statutory penalties and attorney fees. Equity Control appealed and we affirm.

I. Background Facts and Proceedings.

David and Rita Root are husband and wife and have been engaged in farming for many years in Bremer County, Iowa. At the time of the events giving rise to this lawsuit they operated a turkey farming operation through a corporation they formed in 1981, Tripoli Ag Center, Inc.

In 1992 Tripoli Ag began to experience financial difficulties. By 1996 the corporation had long-term indebtedness in excess of $840,000 and short-term debt of roughly $150,000. Most of the long-term debt was in the form of loans from or guaranteed by the Small Business Administration (SBA). The remaining indebtedness was owed to local banks.

With the assistance of their attorney the Roots were able to negotiate a compromise of their delinquent debts with the SBA. The SBA offered to accept a lump-sum payment of $287,000 in full payment of Tripoli Ag's indebtedness to the SBA, provided payment was made by October 29, 1996. This compromise gave the Roots ninety days to obtain the necessary funds.

David's mother agreed to loan the couple $120,000, but by the middle of September, the Roots had not secured a commitment from another lender for the balance of the required funds. Only one bank, Security State Bank of Waverly, had even shown any interest in making a loan, but it was dragging its feet in making a decision on the Roots' application. With the deadline rapidly approaching, the Roots had little hope that they would obtain the funds necessary to prevent the SBA from foreclosing on Tripoli Ag's assets, as well as the Roots' personal assets that also secured the loans.

It was about this time that a turkey feed supplier told the Roots about Equity Control Associates, Ltd. and its president, Gerald Murphy. The Roots were told that Murphy had been able to get loans for other troubled turkey farmers.

Equity Control Associates, Ltd. is a professional services corporation in Clear Lake, Iowa, managed by its president, Gerald Murphy. Murphy described his occupation as a professional business planner. He also performed accounting work, but was not a certified public accountant. He was, however, a certified financial planner, a certification he had obtained through home study. Although Murphy had experience in farm loan restructuring and reorganization, he testified his primary business was "business planning with business acquisitions, mergers, startups, [and] consulting for banks."

Rita Root contacted Murphy by phone on September 14, 1996. She provided Murphy with background information concerning the Roots' financial situation and informed him of the approaching deadline. Murphy said he would do some "research" on their business and the turkey industry to decide whether to accept their case. Murphy then talked to the Roots' feed supplier and with a representative of a turkey meat processor. Upon learning that the turkey meat processor was willing to consider a three-year contract with Tripoli Ag, Murphy thought the business might become profitable, so he agreed to help the Roots.

Approximately two weeks before the SBA deadline, the Roots met with Murphy. They provided him with financial information concerning their turkey operation such as tax returns and cash flow data and projections. They also executed a "Compensation and Authorization Agreement" presented to them by Murphy. In pertinent part, the contract stated:

3. Duties of EQUITY

In consideration for the compensation paid by Client as set forth in this contract, EQUITY agrees to perform the following duties:

(I.) Business Planning and establishing Business Structures; Tax Planning; Debt Restructuring Strategy; and writing and formulating applications for financing and capital, or any other hourly type of work required by the Client.

(II.) To act as an agent for Client in the procurement of monies, including, but not limited to, operating loans, capital financing and private investment placements for long term financing to purchase, obtain, or get control of turkey facilities (buildings) and related real estate; moving existing debt from one lender to another; locating another lender to pay off existing real estate mortgages or contracts; the purchase of real estate; lines of credit for daily cash flow needs and/or working capital.

. . .

(IV.) To act as an agent for Client in restructuring the following debt of Client. Restructuring the debt of Client shall mean moving debt from one lender to another lender, private or lending institution; changing the terms of indebtedness at an existing creditor; debt "write-down" meaning debt write-off, partially or in total, by any Federal Government Agency i.e. SBA, Bank or any other lending institution. Restructuring shall also include debt write-off from or by any creditor.¹

According to the contract, Equity Control was to be compensated at the rate of $60 per hour for the services set forth in paragraph 3(I) and was to be reimbursed for its expenses. In addition, the Roots were required to pay a retainer of $1000, to "be deposited in a Client Trust Account," from which payment for monthly charges for fees and expenses would be drawn. In consideration of the services set forth in paragraph 3(II), Equity Control was to be paid 2% of the amount of any loan obtained. Lastly, the Roots were required to pay Equity Control 2½% of any write-down. The contract stated that each percentage fee was "separate and in addition to any fees set forth in this contract for services provided" under other paragraphs of the agreement. The Roots paid the $1000 retainer and Equity Control deposited these funds into its general account, not its trust account.

In the days immediately following this meeting Murphy attempted to persuade Security State Bank to make a loan to the Roots. He reworked the financial figures and prepared a twenty-page document entitled "Loan Request." This document, according to Murphy, was designed to fill in the gaps and correct the problems in the underlying financial information previously submitted by the Roots in support of their loan application. During this time, Murphy also advised the Roots to use the $120,000 from David's mother to form and capitalize a new corporation.

On October 15, Security State Bank turned down the Roots' loan application. Murphy then contacted American Savings Bank of Tripoli, which held some of Tripoli Ag's short-term and long-term debt. There is considerable dispute in the record concerning the negotiations with American Savings. Murphy contends he contacted Les Johnson of American Savings and informed him of Murphy's concept of a new corporation and the potential capital infusion from David's mother. Johnson testified he learned of the funds available from David's mother at a meeting with the Roots on October 16. Johnson contended that he had no negotiations with Murphy, but conceded that he did look at the figures presented by Equity Control. In any event, on October 16, 1996, American Savings agreed to provide the loan necessary to meet the SBA's demands, as well as a line of credit. On October 28, 1996, one day before the SBA deadline, the loan was closed. Murphy attended the loan closing and thereafter provided no further services to the Roots.

On October 31, 1996, Equity Control sent the Roots an itemized statement for $14,320.81 ($15,320.81 minus the $1000 retainer). The bill covered services from October 1 through October 28, 1996. Of the total amount, $4,175.81 represented the itemized charges for Murphy's hourly services and expenses, and the balance was calculated using the percentages from the contract applied to the SBA write-down, the new loan and the line of credit. The Roots refused to pay the bill.

Equity Control then filed this lawsuit seeking payment of its charges and attorney fees incurred in collecting its bill.² The Roots filed a counterclaim contending that the compensation agreement constituted a "loan brokerage agreement" as that term is used and defined in Iowa Code chapter 535C. See Iowa Code § 535C.2(5). The defendants further contended that the plaintiff's solicitation and acceptance of an advance fee was prohibited by chapter 535C and entitled them to statutory remedies. See Id. §§ 535C.2A,.10(1)(e). The defendants sought to recover the $1000 retainer, plus a penalty of twice the amount sought by Equity Control in its petition, as well as attorney fees.

The case was tried to the court. The district court found that the compensation agreement executed by the parties was a "loan brokerage agreement" under chapter 535C and that Equity Control, acting through Murphy, was a "loan broker" as defined in that chapter. The court held that solicitation and acceptance of the retainer violated chapter 535C's prohibition against advance fees. See id. § 535C.10. Based on its findings of fact and conclusions of law, the court entered judgment against Equity Control on its petition. The court also granted damages on the Roots' counterclaim, awarding a statutory penalty in the amount of...