Soults Farms Inc. v. Schafer

• Citation: 797 N.W.2d 92
• Decision Date: 06 May 2011
• Docket Number: 08–1590,08–1778.,Nos. 07–0744,s. 07–0744
• Parties: SOULTS FARMS, INC., Appellant,v.Charles J. SCHAFER, Appellee.Charles J. Schafer, Appellee,v.Soults Farms, Inc., Appellant.
• Court: United States State Supreme Court of Iowa

797 N.W.2d 92

SOULTS FARMS, INC., Appellant,

v.Charles J. SCHAFER, Appellee.Charles J. Schafer, Appellee,

v.Soults Farms, Inc., Appellant.

Nos. 07–0744

08–1590

08–1778.

Supreme Court of Iowa.

May 6, 2011.

Wade R. Hauser III and Amanda G. Wachuta of Ahlers & Cooney, P.C., Des Moines, for appellant.Randy V. Hefner (until withdrawal) and Matthew J. Hemphill of Hefner & Bergkamp, P.C., Adel, for appellee.WIGGINS, Justice.

This is a consolidated appeal brought by Plaintiff-Appellant, Soults Farms, Inc. (SFI), against Defendant-Appellee, Charles J. Schafer (Schafer), arising from SFI's quiet title action seeking to remove Schafer's purportedly spurious mortgage from SFI farmland. Schafer filed a counterclaim asking for judgment on the notes he had with SFI. In the counterclaim, he also sought to foreclose on his mortgage. The district court entered judgment in favor of Schafer. SFI seeks to reverse the district court's ruling granting summary judgment against SFI and denying its quiet title action. SFI also seeks to reverse the district court's ruling denying its petition to correct, vacate, or modify judgment or grant a new trial, and the district court's decision to award attorney fees to Schafer.

The court of appeals affirmed the district court's denial of SFI's petition to correct, vacate, or modify judgment or grant a new trial, and its decision to award attorney fees. In its decision, the court of appeals, however, did not consider the merits of SFI's quiet title action and Schafer's counterclaims. Accordingly, on further review, we affirm the decision of the court of appeals. We affirm the district court's rulings, and we remand the case to the district court to determine reasonable attorney fees and expenses incurred by Schafer on appeal.

I. Issues.

This appeal presents with multiple issues. First, we must decide the extent to which SFI is liable for the notes executed by Marion R. Soults (Bud). Second, we must determine whether Bud had authority to bind SFI to the mortgage agreement. Third, we must decide whether valid consideration supported the mortgage. Fourth, we must evaluate issues concerning the interpretation of the mortgage. Fifth, we must consider SFI's petition to vacate judgment or grant a new trial in light of Bud's testimony taken after trial. Finally, we must determine the issue of attorney fees.

II. Loan and Mortgage Issues.

A. Scope of Review. The quiet title and mortgage foreclosure proceedings were tried to the bench in equity. We review equitable proceedings de novo. Green v. Wilderness Ridge, L.L.C., 777 N.W.2d 699, 702 (Iowa 2010) (citing Iowa R.App. P. 6.907). In equity cases, we are not bound by the district court's factual findings; however, we generally give them weight, especially with regard to the credibility of witnesses. Simpson v. Kollasch, 749 N.W.2d 671, 673 (Iowa 2008).

We also feel it is necessary to note that the district court's initial ruling, particularly its conclusions of law, is practically a copy of Schafer's posttrial brief. We have admonished trial courts from the wholesale adoption of one party's advocacy because “the decision on review reflects the findings of the prevailing litigant rather than the court's own scrutiny of the evidence and articulation of controlling legal principles.” Rubes v. Mega Life & Health Ins. Co., 642 N.W.2d 263, 266 (Iowa 2002); see also NevadaCare, Inc. v. Dep't of Human Servs., 783 N.W.2d 459, 465 (Iowa 2010). Normally, when the district court incorporates verbatim a party's brief, we will “scrutinize the record more closely and carefully when performing our appellate review.” NevadaCare, 783 N.W.2d at 465. However, because upon our de novo review we will carefully scrutinize the record in making our own findings of fact, no additional level of scrutiny is required. We reiterate, however, that a court should never abdicate its duty to independently determine facts, synthesize law, and apply the facts to the law.

B. Background Facts and Proceedings. Upon our de novo review, we find the following facts with additional facts set out in subsequent sections as necessary to resolve this appeal. SFI is an Iowa corporation in the business of hog and grain farming. SFI was incorporated in 1974 by Marion R. Soults (Marion). SFI is a family-run corporation. At all times relevant, Marion and his son, Bud, were responsible for SFI's operation and were SFI's only two directors. In 1991 Marion moved to Iowa Falls and became less involved in SFI's operation. Bud was responsible for SFI's day-to-day operations and maintained SFI's finances at all times relevant to this appeal. Bud was also SFI's majority shareholder during the events leading to this litigation. In 1999 Marion had a stroke. He passed away on March 15, 2000, at the age of 93.

For several years preceding Marion's death, Bud signed and publicly filed SFI's annual and biennial corporate reports with the secretary of state. The reports filed for the years 1998, 1999, 2000, and 2002 list Bud as president and secretary and Marion as vice-president and treasurer even though Marion died in 2000. SFI's attorney, Martin Fisher, maintained internal annual shareholder meeting minutes. These internal minutes stated Bud held different officer positions other than those noted in the publicly filed reports. The 1998 and 1999 shareholder minutes state Bud was elected president and treasurer and Marion was elected vice-president and secretary. The year 2000 minutes list Bud as president, treasurer, and secretary. SFI's articles of incorporation also contradicted SFI's publicly filed reports. SFI's articles of incorporation prohibited the president from serving as either vice-president or secretary. The articles also required signatures by both the president and either the vice-president or secretary to execute a mortgage on SFI's real property.

Beginning on June 29, 1999, Schafer and Bud entered into a series of loans evidenced by promissory notes and checks. On January 18, 2000, Bud unilaterally mortgaged SFI real property to secure debt owed to Schafer in the amount of $300,000. The mortgage lists SFI as the mortgagor and is signed by Bud as “Robert Soults, Pres.” At the time the mortgage was issued, Bud had two outstanding promissory notes owed to Schafer totaling $300,000. The loans continued through August 2002, totaling $440,000. None of the promissory notes or checks reference SFI. Bud signed the promissory notes “Robert Soults” and the checks were made to the order of “Robert Soults.” All loan proceeds were deposited into Bud's personal checking account. Of the $440,000 in loan proceeds, $359,000 was promptly transferred into SFI's corporate account. The deposit slips substantiating Bud's transfer of funds into SFI's corporate accounts had the notation “loan repayment” on them. Bud told Schafer the loan proceeds were for farm expenses when soliciting the loans.

Tax records also indicate that Bud owed SFI substantial amounts of money. From 1996 through December 2001, Bud transferred more than $2,800,000 from his personal account into an oil investment scheme. Bud believed this scheme would make him hundreds of millions of dollars. Bud received no return on his investment. During this period of time, Bud borrowed millions of dollars from family, friends, and lending institutions. Bud secured some of the loans without fully disclosing his existing liabilities to his lenders. In 1997 Bud received a $1,000,000 loan from his cousin Don Soults (Don), and in exchange, Bud pledged his majority shares in SFI in the event of default. The loan agreement also prohibited Bud from altering SFI's current debt ratio in the future. Bud violated the debt restriction later that year by engaging in transactions with Security State Bank (SSB).

In 1997 Bud originally executed with SSB two agricultural notes on SFI's behalf and one in his personal capacity. The notes were secured by a mortgage on SFI's farmland. The debts were restructured in 1998, resulting in a corporate SFI note for $646,787.02 and a personal note for $153,751.29. Each note was secured by two mortgages on SFI's farmland. In 2002 SSB filed a petition to foreclose the mortgages. The district court granted SSB's motion for summary judgment and our court of appeals affirmed.

On October 1, 2002, during the pendency of the SSB foreclosure proceeding, Bud abandoned SFI. His whereabouts were unknown. Pursuant to their 1997 loan agreement, Don became SFI's majority shareholder. Don lived in Virginia and had little knowledge of SFI's operations. He found SFI's corporate documents and financial records to be highly disorganized. There was little documentation to substantiate SFI's corporate activity.

In 2005 SFI commenced this case seeking to quiet title on Schafer's mortgage. Schafer filed an answer and asserted a counterclaim against SFI, and a third party claim against Bud, seeking judgment against SFI and Bud for the ten loans he made with Bud from 1999 to 2002. Schafer also sought to foreclose the mortgage. SFI replied and denied its liability for the Schafer loans, and argued Bud did not have authority to mortgage SFI real property.

On December 13, 2006, the court made its ruling in favor of Schafer. Posttrial motions were filed, including a motion filed by Schafer for attorney fees. The judgment was clarified on March 27, 2007. The district court found SFI and Bud liable for the Schafer loans and foreclosed the mortgage. The district court awarded judgment against Bud and SFI in the amount of $436,765.92 as principal due on the loans with interest accrued to August 22, 2006, in the amount of $162,118.42 and interest accruing upon the balance at eight percent per annum. The district court also awarded Schafer $61,354.75 in attorney fees. SFI filed a notice of appeal on April 19, 2007. The appeal was transferred to the court of appeals and scheduled for hearing on June 4, 2008.

On March 18, 2008, SFI filed a petition to correct,...