Opinion
No. 3-710 / 02-1234.
Filed January 14, 2004.
Appeal from the Iowa District Court for Linn County, David S. Good, Judge.
Phillip Sparrgrove appeals from a judgment in favor of Palo Alto Savings Bank awarding attorney fees incurred defending priority of security interest against claims of third-party creditor to collateral securing promissory note cosigned by Sparrgrove, as well as attorney fees incurred in prosecution of this action and defense of Sparrgrove's counterclaims. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
Robert F. Wilson, Cedar Rapids, for appellant.
Thomas P. Peffer and Robert K. Porter of Shuttleworth Ingersoll, P.L.C., Cedar Rapids, for appellee.
Considered by Huitink, P.J., and Vaitheswaran and Eisenhauer, JJ.
I. Background Facts Proceedings
Palo Savings Bank partially financed Marshall Kroemer's purchase of an auto repair business. Phillip Sparrgrove cosigned Kroemer's initial $30,000 promissory note payable to the Bank (loan No. 74457). This loan was secured by the assets of Kroemer's business. Kroemer subsequently borrowed an additional $5640 from the Bank (loan No. 75438), secured by the same collateral. Sparrgrove was unaware of this transaction and did not cosign the second promissory note.
Following Kroemer's death, the Bank declared both notes in default, took possession of the collateral securing the notes, and sold the assets of Kroemer's business at public auction. The resulting net proceeds were first applied to retire loan No. 75438. The remaining proceeds were credited against the unpaid balance of loan No. 74457. The Bank demanded and received $14,704.20 from Sparrgrove to satisfy the balance remaining on loan No. 74457. The Bank's demand letter stated:
Please forward this amount [$14,706.20] to the bank to payoff note #74457 per your guarantee on this note dated October 8, 1997. The payment in full of this note does not constitute a full release of your cosigner obligation as Iowa Mutual Insurance Company has made a claim on some of the sale proceeds which were applied to your loan balance. Additional funds may be required for attorney fees and principal repayment due to the claim by the insurance company.
The Bank subsequently incurred an additional $2606.83 in attorney fees successfully defending its security interest against Iowa Mutual's claims to Kroemer's assets. When Sparrgrove refused to reimburse the Bank for these fees, the Bank sued him in small claims court. The Bank's petition included the following:
YOU ARE HEREBY NOTIFIED that the plaintiff(s) demand(s) from you the amount of $2,606.83 plus court costs based on . . . attorney's bills to Shuttleworth Ingersoll, P.L.C. for the defense of Palo Savings Bank claim against all business assets of Marshall Kroemer against Iowa Mutual Insurance Company. Mr. Sparrgrove was a cosignor on note #75438 and Palo Savings Bank requests payment of this bill per the loan agreement.
Sparrgrove denied liability for the Bank's attorney fees incurred in defending its interest against Iowa Mutual's claims. Sparrgrove also claimed the Bank misapplied the sale proceeds and demanded judgment against the Bank for the resulting $5480.17 overpayment he made on Kroemer's notes. In a separate count, Sparrgrove sued the Bank claiming the Bank breached a fiduciary duty to him by intentionally and deliberately misleading him concerning the extent of Kroemer's loans and how they were secured. Because the amount at issue exceeded the jurisdictional limit of small claims court, the case was transferred to district court. The Bank subsequently amended its prayer for attorney fees to include those incurred in this litigation of its claims against Sparrgrove for additional attorney fees and defense of his counterclaims. All of these issues were tried to a jury.
The trial court directed a verdict for the Bank on Sparrgrove's counterclaims, finding as a matter of law that the Bank correctly applied the auction sale proceeds. The court also determined the Bank did not owe a fiduciary duty to Sparrgove and dismissed his claims based on that theory. The court denied Sparrgrove's motion for a directed verdict on the Bank's claim for attorney fees, and submitted that issue to the jury. The relevant jury instruction states:
INSTRUCTION NO. 7
The Plaintiff must prove all of the following propositions:
1. The terms of Note #74457 require Defendant to pay the attorney fees being sought by the Plaintiff.
2. The Defendant has breached the contract.
3. The amount of the attorney fees.
If the Plaintiff has failed to prove any of these propositions, the Plaintiff is not entitled to damages. If the Plaintiff has proved all of these propositions, the Plaintiff is entitled to recover a judgment for the attorney fees.
The jury returned a verdict awarding the Bank $13,698 attorney fees. The court denied Sparrgrove's motions for a new trial and for judgment notwithstanding the verdict, resulting in this appeal.
The jury's general verdict form states:
We, the Jury, find in favor of the Plaintiff, Palo Savings Bank, and fix the amount of its recovery against the Defendant, Philip Sparrgrove, at $13,698.
On appeal Sparrgrove claims the district court should not have granted a directed verdict to the Bank because the Bank improperly applied the sale proceeds first to the loan which he had not cosigned, and then to the note he cosigned. He also claims the court should have granted his motion for judgment notwithstanding the verdict on the Bank's claim for attorney fees.
II. Standard of Review
Our review of rulings on motions for directed verdict and for judgment notwithstanding the verdict is for correction of errors at law. Iowa R. App. P. 6.4. On both motions, we view the evidence in the light most favorable to the party opposing the motion. Iowa R. App. P. 6.14(6)( b); Midwest Home Distrib. v. Domco Indus. Ltd., 585 N.W.2d 735, 738 (Iowa 1998). We consider whether substantial evidence exists to support the parties' claims, justifying submission of the case to the jury. Channon v. United Parcel Serv., 629 N.W.2d 835, 859 (Iowa 2001). Evidence is substantial if a jury could reasonably infer a fact from the evidence. Balmer v. Hawkeye Steel, 604 N.W.2d 639, 641 (Iowa 2000).
III. Impairment of Collateral and Application of Sale Proceeds
The note which Sparrgrove signed provided, "Any extension of new credit to any of us, or renewal of this note by all or less than all of us will not release me from my duty to pay it." The note also provided, "I waive any defenses I have based on suretyship or impairment of collateral."
In the absence of any challenge to the validity or enforceability of this provision, we find Sparrgrove has waived any claims or defense based on the Bank's application of the sale proceeds. See Farmers State Bank v. Huebner, 475 N.W.2d 640, 646 (Iowa Ct. App. 1991) (stating similar facts supported waiver of cosigner's potential impairment of collateral defenses). The Bank was free to apply the sale proceeds in the manner it chose because both notes were secured by the same collateral, and there is no evidence that Kroemer or his estate expressed any contrary intentions. See id. We affirm on this issue.
IV. Attorney Fees
As noted earlier, the Bank's claim was tried and submitted based on its entitlement to attorney fees under the express terms of the note Sparrgrove cosigned. The gist of Sparrgrove's argument is that he is not liable for the Bank's attorney fees incurred to successfully defend the Bank's priority interest claim in its collateral against Iowa Mutual Insurance Company because those fees were not incurred in collecting the note he cosigned.
Attorney fees are generally not recoverable in the absence of a statute or a provision in a written agreement. See Iowa Code § 625.22 (2001); see also Foxley Cattle Co. v. Midwest Soya Int'l, Inc., 585 N.W.2d 231, 232 (Iowa 1998). Because a promissory note is a contract, we give its words their plain and ordinary meaning. Federal Land Bank v. Woods, 480 N.W.2d 61, 66 (Iowa 1992); Riley Law Firm, P.C. v. Tang, 521 N.W.2d 758, 759 (Iowa Ct. App. 1994).
The note Sparrgrove cosigned provided in part:
I agree to pay all costs of collection, replevin or any other or similar type of cost if I am in default. In addition, if you hire an attorney to collect this note, I also agree to pay any fee you incur with such attorney plus court costs (except where prohibited by law).
(Emphasis added.) The commonly recognized purpose of such provisions has been described in these terms:
It was intended that if resort be had to legal proceedings for the collection of the note the plaintiff should be at no expense, but that reasonable attorney's fees should be allowed him, and this, we think, is the proper construction of the note.
Davidson v. Vorse, 52 Iowa 384, 388, 3 N.W. 477, 481 (1879).
The Bank, by virtue of the earlier cited language of the note is accordingly entitled to recover attorney fees incurred to establish its right to recovery of the amount of the notes and in defending against Sparrgrove's counterclaims and defenses as well as appellate attorney fees. See Federal Land Bank, 480 N.W.2d at 70 (awarding the creditor bank full recovery under the note along with appellate attorney fees). The dispositive question, however, is whether the fees incurred in defending its secured position against third party claims is covered by the same language.
The parties have not cited nor do we find any controlling Iowa authority specifically addressing this issue. The most factually similar case we have found is In re Elk Creek Salers, Ltd., 290 B.R. 712, 717 (Bankr. W.D. Mo. 2003). In Elk Creek Salers, a bank sued to recover attorney fees from the debtor following adversarial proceedings against the debtor and another creditor to determine the validity and priority of its security interest in disputed property. Elk Creek Salers, Ltd., 290 B.R. at 714. Like Palo Savings Bank, that bank argued the fees incurred fell under the "collection" definition included in the attorney fee provision of the promissory note. Id. The court, applying the customary and normally understood meaning of "collection," disagreed and held the term "collection" did not encompass the fees incurred in establishing a bank's priority against other creditors. Id. at 716. The court reasoned the proceeding in question was not an action to "collect," but was instead "an action to enhance the Bank's secured position and perhaps give it greater leverage and greater ability to collect all that it is owed." Id.
The Bank cites Washington Trust Co. v. Fatone, 256 A.2d 490 (R.I. 1969), to support its claim that Sparrgrove should be responsible for the attorney fees in question. Washington Trust Co. is factually distinguishable. First, the guarantor was not asked to pay attorney fees to protect collateral from third parties, but was asked to pay attorney fees to prosecute an action against the original borrowers on the note. Washington Trust Co., 256 A.2d at 494. Second, the court found, "It was within defendant's power to terminate his liability for further counsel fees at any time by making a tender of payment." Id. at 495. Here Sparrgrove tendered full payment of the unpaid balance on demand by the Bank.
Lastly the Bank argues that inclusion of the disputed attorney fees within the collection language of the note, not only advances the underlying purpose of making the Bank whole, but also requires Sparrgrove to bear the cost of protecting the value of collateral that ultimately reduced the amount he owed the Bank. Although the Bank correctly notes the purpose advanced and the resulting benefit to Sparrgrove, its theory must still be squared with the language of the note. We, for the reasons cited in Elk Creek, find Palo Savings Bank's request for attorney fees to secure its priority interest is not allowable under the terms of its promissory note. The note restrictively allowed for fees associated with "collection" and was not expansive enough to encompass the fees utilized to secure its priority interest. Elk Creek Salers, 290 B.R. at 715-16 (stating notes with all-encompassing language allow for fees beyond collection costs).
V. Summary and Disposition
We accordingly hold that the trial court erred by failing to grant that part of Sparrgrove's motions for a directed verdict and judgment notwithstanding the verdict relating to the Bank's claims for attorney fees incurred in successfully defending its secured position against the claims of third party creditors as well as attorneys fees and costs incurred in litigating the present action to recover the disputed fees. We also hold that the trial court correctly denied Sparrgrove's motions relating to the Bank's recovery of attorney fees and costs incurred in defending against Sparrgrove's counterclaims. The Bank is also entitled to appellate attorney fees incurred in defense of that portion of the judgment. Because the jury returned a general verdict, we are unable to determine the amount by which the damages awarded must be reduced. We accordingly affirm in part, reverse in part, and remand for an evidentiary hearing before the trial court to determine the amount of the trial and appellate attorney fees and costs incurred defending against Sparrgrove's counterclaim. See Federal Land Bank, 480 N.W.2d at 69-70.