Heartland Coop. Co. v. Murphy, 15–0446.
| Decision Date | 28 September 2016 |
| Docket Number | No. 15–0446.,15–0446. |
| Citation | 888 N.W.2d 680 (Table) |
| Parties | HEARTLAND COOPERATIVE COMPANY, Plaintiff–Appellee/Cross–Appellant, v. Gerald MURPHY, Defendant–Appellant/Cross–Appellee, Heartland Cooperative Company, Plaintiff–Appellant, v. Gary Fell, Defendant–Appellee. |
| Court | Iowa Court of Appeals |
Gina C. Badding of Neu, Minnich, Comito & Neu, P.C., Carroll, for Gerald Murphy and Gary Fell.
John F. Lorentzen of Nyemaster Goode, P.C., Des Moines, and Sarah J. Gayer of Nyemaster Goode, P.C., Cedar Rapids, for Heartland Cooperative Company.
Heard by DANILSON, C.J., and MULLINS and BOWER, JJ.
Gerald Murphy appeals the district court's judgment in favor of Heartland Cooperative Company (Heartland) on its breach-of-contract and fraudulent-misrepresentation claims. Heartland challenges the district court's judgment in favor of Gary Fell, alleging the district court abused its discretion by not entering default judgment against Fell as a discovery sanction. For the reasons stated herein, we affirm in part, reverse in part, and remand.
At issue in this case are forty-one hedge-to-arrive (HTA) contracts, which the district court described as follows:
A hedge-to-arrive contract, as pertinent to this case, obligates the seller to deliver a specified quantity of grain to a specified location by a particular date. The buyer agrees to pay a specific price for the grain upon delivery. Use of a hedge-to-arrive or cash-forward contract provides a [seller] an opportunity to establish a favorable sales price prior to harvest. The contract is a "hedge" because the [seller] possesses or reasonably anticipates possession of grain in sufficient quantities to deliver to the [buyer] at the delivery date. These types of contracts are not regulated by the Commodities Exchange Act, 7 U.S.C. section 1(a)(11).
Heartland, an Iowa cooperative, is in the business of buying and selling grain and offers HTA contracts. To minimize its risk, Heartland sells futures contracts on the Chicago Board of Trade (CBOT) to offset its obligation to buy the grain under the HTA contracts.
Of the forty-one contracts in dispute, thirty were originally entered into by Heartland and UY Partnership (UY) in 2009 and early 2010. Murphy, who has a degree in agricultural business and holds a patent he describes as involving a "bundling strategy for financing, crop insurance, and commodity trading," was a general manager of UY.
The district court summarized the history of UY, which was formed in 2006, as follows:
Fell farmed approximately 5500 acres in 2005. Murphy assisted him with marketing grain. At some point during this 2005 timeframe, Fell was investigated by the Farm Service Agency [ (FSA) ], which administers crop programs on behalf of the U.S. Department of Agriculture, for noncompliance with farm program requirements and was disqualified from receiving government farm program payments. In order to circumvent Fell's disqualification, Fell and Murphy approached [David Smith and Lynn Smith], who had worked for Fell, about forming UY Partnership. UY would not be eligible for farm program payments if Fell participated in its management. Thus, [Murphy] and the Smiths were reported as UY's general partners.... Operational control of the 5500 acres Fell had farmed, or a substantial portion thereof, was transferred to UY.
The district court found, based in part on the testimony of David Smith, that "Fell continued to participate in management of the UY farming operations." As a partner of UY, Murphy entered into a number of HTA contracts with Heartland, placing phone calls to Heartland to create the contracts.1
In late 2008, Murphy withdrew as a partner from UY, purportedly due to conflicts between the Smiths and Fell. Murphy testified he informed Heartland of his departure from the partnership in or before June 2009, which he contends is confirmed by Heartland's notation of "Don't Use" on its customer records for UY. However, a witness for Heartland testified Heartland was not notified until 2011, testimony the district court deemed more credible. The district court also found Murphy continued to exercise control over UY's grain marketing even after his withdrawal, relying at least in part on certain HTA confirmation documents executed by Murphy on behalf of UY in 2009.
In 2009, FSA notified UY it was disqualified from future participation in the FSA programs and ordered repayment of certain monies already received because the FSA had determined UY and its members had "adopted and participated in a scheme and device that had the effect of evading the payment limitation and payment eligibility provisions for the 2007 crop year." By the spring of 2009, UY was defunct. The Smiths began farming through a partnership called UY09; Fell started producing grain under Fell Partnership; Murphy farmed through JM48 LLC. The above-referenced thirty HTA contracts executed with UY in 2009 and 2010 (the UY contracts) were formed after UY had stopped producing grain and after Murphy had withdrawn from UY.
The district court summarized the events after UY became defunct:
Control of the 5500 Fell acres was transferred to these various entities prior to the 2009 crop year. The result was that UY was out of the grain farming business. Murphy continued to enter into HTA contracts for UY, even though he had dissociated from the partnership and even though UY was no longer producing grain. Fell partnership, UY09, and JM48 sold grain harvested from these farms to other elevators or merchants.
(Footnote omitted.)
Heartland became concerned about the HTA contracts in early 2010, at which point Heartland representatives met with Murphy. Murphy contended Heartland asked him to provide a successor entity to UY that could fulfill UY's contracts; Heartland argued, and the district court found, Murphy proposed rolling the UY contracts into another name. Murphy executed a grain trade authorization form for Equity Control Group (ECG). All but three of the thirty UY contracts were rolled into contracts with ECG. Murphy also entered into eleven new HTA contracts on behalf of ECG in 2010 (the ECG contracts).2
At trial, Murphy testified Heartland was well-aware ECG was an entity "in name only," with no actual legal status and no ability to independently perform the contracts executed, relying in part on Heartland's failure to request a taxpayer identification number or other identifying information from ECG. The district court found Murphy's testimony not credible, concluding Heartland was never told ECG and Murphy were not in the farming business, did not produce grain, and had no means to fulfill the contracts.
During the summer of 2010, Heartland learned a bank had seized some of UY's grain.3 At Murphy's request, the three outstanding UY contracts were rolled into 2011.
In 2011, Murphy requested all the existing contracts be rolled to a different date; Heartland refused when Murphy was unable to collateralize the contracts. In March 2011, Fell delivered beans to a Heartland facility. Heartland applied the proceeds to two of the UY contracts that had been transferred to ECG and issued contracts for the balance on the Fell Partnership account. Murphy testified Heartland did the same thing with grain delivered to one of its elevators by JM48, applying the proceeds to one of the ECG contracts. Murphy and Fell contended they stopped delivering grain to Heartland as a result. Heartland claimed Murphy and Fell sold their grain to other buyers who paid a substantially higher price than they would have received under the UY or ECG contracts.
In 2012, Heartland sold its futures positions on the CBOT with respect to the HTA contracts. Had Murphy and Fell disclosed in the spring of 2010 that UY and ECG could not deliver the contracted grain, Heartland could have liquidated its futures positions thereby minimizing or preventing its losses.
On April 24, 2012, Heartland filed its petition against Murphy and Fell, alleging they were personally liable for the breach of the HTA contracts and had tortiously interfered with the contracts. In their answer, Murphy and Fell denied Heartland's allegations and asserted a number of affirmative defenses. On September 19, 2014, Heartland sought leave to file an amended petition in which it asserted Murphy and Fell had intentionally interfered with the HTA contracts, had breached the contracts, and had committed fraud. The district court granted Heartland's motion to amend on October 20. In their answer, Murphy and Fell generally raised the same affirmative defenses.
The matter proceeded to a bench trial on November 18. On January 12, 2015, the district court entered its findings of fact, conclusions of law, and judgment, finding in favor of Heartland and against Murphy on the breach-of-contract and fraud claim and entering judgment against Murphy in the amount of $1,962,009.44 plus postjudgment interest. The court dismissed Heartland's claims against Fell and dismissed the intentional-interference-with-contract claim against Murphy. The court also found both Murphy and Fell guilty of two counts of contempt of court for violating the court's discovery orders and ordered each defendant to pay $500 fines on each count.
In January 2015, Heartland filed a motion to retax costs and an attorney-fee application. Heartland also filed a motion to amend or enlarge judgment, seeking prejudgment interest. Murphy resisted the filings. Following a hearing, the district court entered an amended and substituted judgment, adjusting the judgment against Murphy to $2,217,608.20 to include prejudgment interest and awarding Heartland attorney fees in the amount of $215,761.27 plus interest. Murphy appeals the district court's judgment against him; Heartland appeals the district court's judgment in favor of Fell.
On appeal, Murphy challenges the district court's denial of his motion to dismiss and finding he breached the HTA contracts and committed fraudulent...
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