JANICE A. MEINCKE, Plaintiff-Appellant, vs. NORTHWEST BANK & TRUST COMPANY and SCRAMM ENTERPRISES, L.C., Defendants-Appellees. NORTHWEST BANK & TRUST COMPANY, Cross-Claimant, vs. SCRAMM ENTERPRISES, L.C., Cross-Defendant. NORTHWEST BANK & TRUST COMPANY, Third-Party Plaintiff, vs. SANDRA R. MARTI and C.A. MEINCKE PLUMBING, INC., Third-Party Defendant.
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IN THE COURT OF APPEALS OF IOWA
No. 7-829 / 06-1541
Filed December 28, 2007
JANICE A. MEINCKE,
Plaintiff-Appellant,
vs.
NORTHWEST BANK & TRUST COMPANY
and SCRAMM ENTERPRISES, L.C.,
Defendants-Appellees.
________________________________________________________________
NORTHWEST BANK & TRUST COMPANY,
Cross-Claimant,
vs.
SCRAMM ENTERPRISES, L.C.,
Cross-Defendant.
_______________________________________________________________
NORTHWEST BANK & TRUST COMPANY,
Third-Party Plaintiff,
vs.
SANDRA R. MARTI and C.A. MEINCKE
PLUMBING, INC.,
Third-Party Defendant.
________________________________________________________________
Appeal from the Iowa District Court for Scott County, Mark D. Cleve,
Judge.
Plaintiff appeals the trial court’s judgment in favor of the defendant.
REVERSED.
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Timothy L. Baumann, Christopher L. Surls, and William B. Norton of Wm.
B. Norton Law Firm, P.C., Lowden, for appellant.
Michael J. McCarthy, McCarthy, Lammers & Hines Law Firm, Davenport,
for appellee.
Heard by Sackett, C.J., and Vaitheswaran and Baker, JJ.
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SACKETT, C.J.
Plaintiff-appellant, Janice Meincke, appeals the trial court’s ruling in favor
of defendant-appellee, Northwest Bank & Trust Company (Northwest Bank).
Plaintiff urges us to reconsider existing precedent concerning whether a party
may prevent enforcement of a financing agreement due to a defective
acknowledgment. Plaintiff also contends the trial court erred by (1) finding the
subordination agreement between the plaintiff and Northwest Bank was
supported by consideration, (2) finding that Northwest Bank did not intentionally
interfere with plaintiff’s contractual relations with the debtor, and (3) denying
plaintiff’s motion to amend her pleadings to conform to the evidence. We reverse
finding no consideration to support the contract.
I.
BACKGROUND.
This case involves a family’s financially troubled businesses and the debt
the businesses incurred from an elderly family member and from two banks.
C.A. Meincke Plumbing and Scramm Enterprises are owned by Sandra Marti and
Craig Meincke. The plaintiff is Sandra’s mother and is Craig’s aunt. She is
eighty-two years old. In July 2002, Sandra and Craig approached the plaintiff for
a loan for the businesses. At the time, the plaintiff’s husband was in the hospital
and in very poor health. Sandra and Craig visited the hospital and made the
request. The plaintiff and her husband initially refused to give the loan. After
Sandra and Craig told them they would go bankrupt without the money, the
plaintiff loaned Scramm Enterprises $90,000. The plaintiff’s husband died two
months after the loan was made. To secure the loan, Scramm gave the plaintiff
a mortgage on the business’s land and buildings. Scramm had already granted
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two mortgages on this property to secure loans from Rock Island Bank. Sandra
and Craig had also mortgaged their personal homes to secure loans to the
businesses.
James Legare was a loan officer at Rock Island Bank who worked with
Craig and Sandra to obtain financing for the businesses. At some point, James
Legare began working for Northwest Bank and eventually became vice president.
He also helped the businesses obtain loans through this bank. In 2003, Scramm
obtained loans from Northwest Bank and granted yet another mortgage on the
property. The record shows a pattern of financial difficulty for the businesses.
The businesses sought, and Northwest Bank approved, continual loan renewals
and extensions, loans for paying suppliers, and loans to pay off other lenders. In
2003 and 2004 the businesses’ payments on various loans were late over thirty
times. In 2004, Sandra and Craig sought another loan from Northwest Bank.
The loan was needed primarily to pay the balance owed to Rock Island Bank
because these loans were due and Rock Island Bank refused to renew the loans.
Northwest Bank agreed to provide these funds on the condition that Northwest
Bank acquired the first lien on the mortgaged property.
At this time, Rock Island Bank had first priority to the property, the plaintiff
had second priority, and Northwest Bank had third priority. If Northwest Bank
expended the funds owed to Rock Island Bank, the plaintiff would have first
priority and Northwest Bank would have second priority. To protect its financial
interest, Northwest Bank would not provide additional funding unless the plaintiff
was willing to subordinate her priority position to Northwest Bank.
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At trial, Sandra testified that she knew a subordination agreement was
required but never discussed this or any financial matters of the businesses with
the plaintiff. The plaintiff testified that Craig called her saying “I had to sign this
paper to be second in line.” A Northwest Bank employee drafted a subordination
agreement and Craig went with the bank’s vice president, James Legare, to the
plaintiff’s house to get her signature. Legare said hello to the plaintiff but no one
discussed the agreement. Legare testified that he believed Craig had already
explained the agreement to the plaintiff. The plaintiff signed the agreement. A
notary was not present at the signing. Legare had the agreement notarized at a
later time. The plaintiff was not present when it was notarized.
After the subordination agreement was obtained, Northwest Bank made
two loans to the businesses in March of 2004, issuing funds on behalf of the
businesses in the amount of approximately $716,907.
Of this amount,
approximately $474,500 was paid for the Rock Island Bank loans. Approximately
$242,000 was applied to refinance other Northwest Bank Loans. Sandra testified
that this was a refinancing transaction and none of these funds were actually
paid directly to the businesses. Jim Legare testified, and the banking documents
show, that the transaction also provided another $4,000 in a line of credit to the
businesses. It appears the businesses drew approximately $2,209 from this line
of credit two days after the loan was made.
Approximately two months later, the plumbing business ceased operations
because of financial problems. In 2005, Scramm and Northwest Bank entered
into an agreement for non-judicial foreclosure.
The mortgaged property was
sold. Due to the subordination agreement, the proceeds from the sale were
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applied to the Northwest Bank loans first. The proceeds were insufficient to
repay the total owed to Northwest Bank and consequently, the plaintiff received
nothing toward the debt owed her. The plaintiff filed suit against Northwest Bank
claiming, among other things, the subordination agreement was invalid and
Northwest Bank intentionally interfered with the plaintiff’s contract with Scramm
Enterprises. At the close of the evidence at a bench trial, the plaintiff moved to
amend her pleadings to conform to the evidence, seeking to add a claim of fraud.
The trial court denied this motion and ruled in favor of the defendant on all
counts. The plaintiff appeals the trial court’s rulings.
II.
STANDARD OF REVIEW.
Claims based on a contract tried at law are reviewed for correction of
errors at law. Iowa R. App. P. 6.4; Equity Control Assocs., Ltd. v. Root, 638
N.W.2d 664, 670 (Iowa 2001). The trial court’s fact findings are binding upon us
if they are supported by substantial evidence and we view the findings in a light
most favorable to upholding the ruling. Equity Control Assocs., 638 N.W.2d at
670. We reverse if there is an erroneous application of the law. Id.
III.
CONSIDERATION.
The plaintiff contends the trial court erred in finding the subordination
agreement was supported by consideration.
We must determine whether
substantial evidence supports this finding. Id. A subordination agreement is
generally governed by the rules of contract law.
Transactions § 741 (2007).
68A Am. Jur. 2d Secured
“We presume a written, signed agreement is
supported by consideration.” Kristerin Dev. Corp. v. Granson Inv., 394 N.W.2d
325, 331 (Iowa 1986); see also Iowa Code § 537A.2. “Either a benefit to a
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promisor or a detriment to a promisee constitutes consideration.” Doggett v.
Heritage Concepts, Inc., 298 N.W.2d 310, 311 (Iowa 1980).
There is
consideration even if the benefit flows to a third party. Clayman v. Bibler, 210
Iowa 497, 500, 231 N.W. 334, 336 (1930); Moench v. Hower, 137 Iowa 621, 624,
115 N.W. 229, 230 (1908). We determine whether there is consideration from
what is stated in the instrument or by what was contemplated by the parties at
the time of the agreement. Hubbard Milling Co. v. Citizens State Bank, 385
N.W.2d 255, 259 (Iowa 1986); Lane v. Richards, 119 Iowa 24, 26-27, 91 N.W.
786, 787 (1902). The further extension of credit can serve as consideration in a
subordination agreement. One treatise explains,
An agreement subordinating a senior mortgage to a junior one is
supported by consideration where the agreement is based on a
conviction that further advances from the junior mortgagee would
not be possible without the agreement, and that these future
advances are necessary to carry on operations on the land to
prevent the senior mortgage debt from being lost.
55 Am. Jur. 2d Mortgages § 320 (2007) (citing Stockmeyer v. Tobin, 139 U.S.
176, 189, 11 S. Ct. 504, 509, 35 L. Ed. 123, 128 (1891)).
However, a party to a subordination agreement can use the failure of
consideration or lack of consideration as a defense to invalidate the contract.
Iowa Code § 537A.3; Hubbard Milling Co., 385 N.W.2d at 259.
In Hubbard
Milling, the court invalidated a subordination agreement for failure of
consideration.
Hubbard Milling Co., 385 N.W.2d at 259.
The purported
consideration stated in the agreement was a bank’s promise to subordinate to
another creditor in exchange for that creditor’s promise to loan a farmer funds to
purchase pig feed. Id. at 257, 259. The creditor never loaned the funds and no
pig feed was purchased so the consideration failed. Id. at 259. The Eighth
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Circuit has also invalidated a subordination agreement on the ground that it
lacked consideration.
In re Sepco, 750 F.2d 51, 53 (8th Cir. 1984).
Consideration was lacking when the subordination clause was hidden, the
creditor failed to explain the effect of the clause, and no benefit was provided to
the subordinating creditor besides assurance it would get paid. In re Sepco, Inc.,
36 B.R. 279, 286 (Bkrtcy. S.D. 1984).
The trial court found there was some consideration for the subordination
agreement. It ruled that the plaintiff benefited by helping her relatives. The
family businesses benefited because the refinancing provided by Northwest Bank
allowed the businesses to continue operating at a lower monthly cost by reducing
Scramm’s monthly loan payments.
The court also found Northwest Bank
suffered a detriment through the agreement by loaning additional funds. The trial
court explained, “[t]he fact that the Plaintiff’s secured position on her mortgage
was worsened as a result of the subordination agreement and the new loans in
no way affects the outcome of the consideration issue.”
Although the court properly analyzed the transaction to identify a potential
benefit or detriment to serve as consideration, we find the court erred in failing to
identify whether, in fact, this consideration was bargained for and contemplated
by the parties at the time of the transaction.
“Consideration requires the
voluntary assumption of an obligation by one party on the condition of an act or
forbearance by the other.” Summerhays v. Clark, 509 N.W.2d 748, 751 (Iowa
1994) (emphasis added). If a detriment to a party is serving as the consideration,
“it must appear that the disadvantage was suffered at the request of the
promisor, express or implied.” Heggen v. Clover Leaf Coal & Mining Co., 217
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Iowa 820, 824, 253 N.W. 140, 142 (1934) (emphasis added).
These cases
illustrate the requirement of reciprocal inducement or a bargained for exchange
for a finding of consideration.
Comments to the Restatement (Second) of
Contracts explains:
[T]he law is concerned with the external manifestation rather
than the undisclosed mental state: it is enough that one party
manifests an intention to induce the other’s response and to be
induced by it and that the other responds in accordance with the
inducement. But it is not enough that the promise induces the
conduct of the promisee or that the conduct of the promisee
induces the making of the promise; both elements must be present,
or there is no bargain. Moreover, a mere pretense of bargain does
not suffice, as where there is a false recital of consideration or
where the purported consideration is merely nominal.
Restatement (Second) of Contracts § 71, comment b, at 173 (1981) (emphasis
added). Parties may have additional motives and other factors may induce a
party’s performance. Restatement (Second) of Contracts § 81, and comments a
and b, at 206 (1981). However, both parties must manifest an intent to induce
the other and be induced by the transaction for there to be bargained for
consideration.
Restatement (Second) of Contracts § 81, comment a, at 206
(1981).
It is the bargained for exchange requirement that is lacking in this
transaction. There is no consideration stated in the instrument to identify what
exchange was contemplated by the parties. The record shows no indication that
the plaintiff subordinated her priority to induce Northwest Bank to make additional
loans to the businesses. The plaintiff testified that she signed the agreement to
get her money back. She stated that she really did not think of it as helping Craig
and Sandra but conceded it may have benefited Craig and Sandra since they
asked her to do it. It is clear that the plaintiff did not understand what was
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occurring in the transaction and did not contemplate a bargained exchange. In
fact, the record shows that the plaintiff was unaware of any other loans or
mortgages to the property. According to the plaintiff, she signed the paper to be
“second in line.” The testimony suggested that the plaintiff was not aware of her
priority before she signed the subordination agreement. She simply believed she
needed to sign the paper to obtain the funds owed to her from the sale of the
business property.
Of particular concern is the plaintiff’s apparent lack of
knowledge about the final loan made to the businesses by Northwest Bank.
Although this final loan was supposed to be the inducement for the plaintiff’s
promise to subordinate, there is no evidence in the record that the plaintiff even
knew that her signing the subordination agreement was a condition precedent to
the businesses obtaining this funding.
Under these circumstances, we find
substantial evidence does not support a finding that this contract was supported
by consideration. Rather, the subordination agreement is invalid due to a lack of
consideration.
Given our resolution on this issue, we need not address the other claims
of error. We reverse the trial court’s ruling and hold as a matter of law, the
subordination agreement is invalid due to a want of consideration.
REVERSED.
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