Opinion
No. 1-377 / 00-1593.
Filed February 20, 2002.
Appeal from the Iowa District Court for Scott County, J. HOBART DARBYSHIRE, Judge.
R.V. Hopkins, Inc. appeals a district court ruling granting PJ-GO, Inc.'s replevin action to obtain possession of a drum reclamation furnace owned by R.V. Hopkins, Inc. AFFIRMED IN PART AND REVERSED IN PART.
John T. Flynn of Brubaker, Flynn Darland, P.C., Davenport, for appellant.
Peter C. Riley of Tom Riley Law Firm, P.L.C., Cedar Rapids, and James A. Piersall of Piersall Law Firm, P.C., Cedar Rapids, for appellee.
Heard by VOGEL, P.J., and MILLER and EISENHAUER, JJ.
Defendant R.V. Hopkins, Inc. appeals a district court ruling granting PJ-GO, Inc.'s replevin action to obtain possession of a drum reclamation furnace. R.V. Hopkins argues the district court erred in (1) finding sufficient consideration for the purchase of the furnace; (2) ruling that PJ-GO, Inc. was entitled to a writ of replevin; (3) admitting plaintiff's exhibits 1, 2, and 2A over its objections; (4) finding the alleged transaction between the parties was a transfer of title; (5) concluding PJ-GO, Inc. was entitled to judicial relief; and (6) ruling that Harold Abdo had authority to sell the furnace.
I. Background Facts and Proceedings . R.V. Hopkins, Inc. (Hopkins, Inc.) is a Davenport business that recycles metal drums. Richard V. Hopkins is the owner of the company and its only shareholder. Harold Abdo, financial manager of Hopkins, Inc., was responsible for running the day-to-day affairs of the company as Hopkins rarely went to the company's offices or plant. In fact, Hopkins was living in Atlanta, Georgia during the time in question.
Hopkins, Inc. developed financial difficulties in 1995 as a result of a tax debt owed to the IRS in the amount of $102,000. Abdo sought to obtain a loan from United Securities Bank in exchange for security in various Hopkins, Inc. assets, including a drum reclamation furnace. After touring the plant and finding it in poor condition, bank president Carl Schuettpelz declined to make a loan to Hopkins, Inc.
John Jelinek and Steve Powell both knew Harold Abdo from childhood. Abdo had approached both men on prior occasions to secure short-term loans for Hopkins, Inc. Because United Securities Bank would not loan money to Hopkins, Inc. without personal guarantees, Jelinek, Powell, and two other business associates, Tom Owen and John Gearhart, individually cosigned a $120,000 loan with Hopkins, Inc. In return, Hopkins, Inc. transferred title of the drum reclamation furnace to PJ-GO, Inc. (PJ-GO), a company formed by the four men. A bill of sale for the furnace was issued to PJ-GO for a stated consideration of $240,000. PJ-GO then leased the furnace back to the company until the loan was repaid, at which time Hopkins, Inc. would re-obtain title. Although no one from PJ-GO talked with Richard Hopkins, Abdo assured them he agreed to the financial arrangement.
Hopkins, Inc. defaulted on its payments under the lease and PJ-GO filed a replevin action against Hopkins, Inc., seeking possession of the furnace. Hopkins, Inc. resisted, contending Abdo had no authority to enter into the sale/lease agreement and the contract was unenforceable for lack of consideration. The court ruled it was satisfied by a preponderance of the evidence that Hopkins sanctioned Abdo's activities and Abdo had the authority to broker such a deal. The court issued a writ of replevin awarding PJ-GO possession of the furnace, but declined to enter judgment against Hopkins, Inc. for past due lease payments. Hopkins, Inc. appeals.
II. Scope of Review . The standard of review in a replevin action is for errors at law. Prenger v. Baker, 542 N.W.2d 805, 807 (Iowa 1995). We are bound by the trial court's findings of fact as long as they are supported by substantial evidence. Id. "Evidence is substantial if reasonable minds could accept it as adequate to reach the same findings." Dettmann v. Kruckenberg, 613 N.W.2d 238, 251 (Iowa 2000) (quoting Olson v. Nieman's Ltd., 579 N.W.2d 299, 313 (Iowa 1998)).
III. Consideration . Hopkins, Inc. first argues the sale/lease agreement was unenforceable due to failure of consideration because PJ-GO never paid the $240,000 stated in the agreement.
A failure of consideration exists where a contract is validly formed but unenforceable because the bargained for performance has not been rendered. Federal Land Bank v. Woods, 480 N.W.2d 61, 66 (Iowa 1992). Such failure will discharge the other party from their obligation to perform under the contract and give them the right to restitution. Id. Failure of consideration may be total or partial. Id. It is the burden of the party alleging failure of consideration to prove this failure. See id.
The written contract between the parties states Hopkins, Inc. will sell the drum reclamation furnace to PJ-GO for the sum of $240,000. Hopkins, Inc. argues there is failure of consideration on the part of PJ-GO because both Jelinek and Powell testified at trial that they did not pay Hopkins, Inc. $240,000. However, at trial PJ-GO introduced a promissory note it executed to Hopkins, Inc. in the amount of $120,000 as evidence of payment. Hopkins, Inc. also received a $120,000 loan based on the signatures of the shareholders of PJ-GO. To constitute a complete defense the alleged failure of consideration must be total. Johnson v. Dodgen, 451 N.W.2d 168, 172 (Iowa 1990). Therefore, we find there was consideration for the agreement.
Hopkins, Inc. claims the district court erred in substituting the loan guarantee by the individual shareholders of PJ-GO as consideration for the purchase of the furnace. It argues the parol evidence rule excludes evidence that PJ-GO gave any form of consideration to Hopkins, Inc. other than the $240,000 stated in the bill of sale. The parol evidence rule prevents the admission of evidence that would vary or contradict the terms of the written agreement. First Interstate Equip. v. Fielder, 449 N.W.2d 100, 102 (Iowa Ct. App. 1989). However, extrinsic evidence is admissible to explain the real meaning of the parties by the language used in the contract. Montgomery Properties Corp. v. Econ. Forms Corp., 305 N.W.2d 470, 476 (Iowa 1981). Because the promissory note for the loan and the promissory note executed by PJ-GO were offered to explain the meaning of the sum in the bill of sale, we find such evidence was admissible and properly considered by the district court.
IV. Transfer of Title . Hopkins, Inc. argues the transaction was a pledge of collateral and not a transfer of title, and that it has a right to redeem the furnace.
Iowa Code section 554.1201(37)(a) (1995) defines a security interest as "an interest in personal property or fixtures which secures payment or performance of an obligation."
[A] transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, and the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.
Here, Hopkins, Inc. had no ability to terminate the lease and, at the end of the lease period, it could become owner of the drum reclamation furnace for the nominal consideration of one dollar. As the district court noted, "In reality, [the drum reclamation furnace] is merely collateral for the loan guarantee." Therefore, we find the transaction created a security interest, not an ownership interest, in the drum reclamation furnace.
V. Replevin . Hopkins, Inc. asserts PJ-GO failed to satisfy its burden of proof that it was entitled to immediate possession of the furnace.
Replevin is a statutory remedy designed to restore possession of property to the party entitled to possession. Roush v. Mahaska State Bank, 605 N.W.2d 6, 9 (Iowa 2000). In order to succeed, a plaintiff must be entitled to immediate possession of the disputed property. Marx Truck Line, Inc. v. Fredricksen, 260 Iowa 540, 546, 150 N.W.2d 102, 105 (1967). The plaintiff has the burden of proving by a preponderance of the evidence it was entitled to possession at the time it filed the action. Id.
Because Hopkins, Inc. defaulted on the agreement, PJ-GO has the right to take possession of the drum reclamation furnace. See Iowa Code § 554.9503. Because PJ-GO had the right to immediate possession of the furnace, the court did not err in issuing a writ of replevin. However, Hopkins, Inc. has a right to redeem the furnace prior to its disposal by fulfilling all of its obligations secured by the collateral, plus expenses. Iowa Code § 554.9506.
VI. Admissibility of Evidence . Hopkins, Inc. argues the bill of sale and lease are inadmissible under Iowa Rules of Evidence 1002 and 1003, the statute of frauds, and the parol evidence rule.
We review the district court's evidentiary rulings for corrections of errors at law. Bangs v. Maple Hills, Ltd., 585 N.W.2d 262, 265 (Iowa 1998). "Error may not be predicated upon a ruling which admits or excludes evidence unless a substantial right of the party is affected. . . ." Iowa R. Evid. 103(a). The trial court has broad discretion in ruling on the admissibility of evidence. Gamerdinger v. Schaefer, 603 N.W.2d 590, 594 (Iowa 1999). We will not disturb the trial court's rulings unless there is a clear and prejudicial abuse of discretion. Id.
A. Bill of Sale . Hopkins, Inc. first alleges the court erred in admitting Exhibit 1, the unsigned bill of sale for the reclamation furnace, because PJ-GO was unable to recover the original. Iowa Rule of Evidence 1002 requires the original in order to prove the contents of a writing, unless otherwise excepted. One exception is where the original has been lost. Iowa R. Evid. 1004(1). Where an original has been lost, other evidence of the contents of the writing are admissible. Id. However, Hopkins, Inc. alleges PJ-GO failed to prove by clear and convincing evidence the bill of sale was signed by Hopkins and subsequently lost. See Craig v. Welch, 231 Iowa 1009, 1014, 2 N.W.2d 745, 747 (1942). While no witness testified they recalled seeing Hopkins signature on the bill of sale, the executed original lease agreement that was introduced into evidence allows for the presumption that the bill of sale was signed. Otherwise, they would have nothing to lease. As a result, we find the district court did not abuse its discretion in admitting the unsigned bill of sale over Hopkins, Inc.'s objection.
Hopkins, Inc. next argues the court erred in allowing parol evidence to alter the terms of the bill of sale. The bill of sale referred to transfer of the furnace for $240,000. The parol evidence rule prohibits the admission of evidence at odds with the written terms of a contract. Commercial Trust Sav. Bank v. Toy Nat'l Bank, 373 N.W.2d 521, 523 (Iowa Ct. App. 1985). The evidence admitted did not attempt to vary the terms of the bill of sale but went to explain the transactions. The three documents prepared by Mr. Adbo along with the testimony of Powell and Jelinek explained the way Hopkins received the money it needed to pay its taxes. We find no error on this issue.
Finally, Hopkins, Inc. argues the bill of sale was inadmissible under the statute of frauds. To the extent Hopkins, Inc. argues the bill of sale was unsigned, we find the signed lease agreement allows for the presumption that the bill of sale was signed. To the extent Hopkins, Inc. argues Harold Abdo did not have authority to sign the bill of sale, we address this issue in section VII.
B. Lease Agreement . Hopkins, Inc. argues the court erred in admitting into evidence Exhibit 2, the photocopy of the lease agreement, and Exhibit 2A, the original lease agreement. To the extent Hopkins, Inc. argues admitting the lease agreement violates the statute of frauds because Harold Abdo did not have authority to sign the lease agreement, we address this issue in section VII.
We find the admission of Exhibits 2 and 2A was not in error. While Exhibit 2 was not the original lease agreement, it falls under the lost document exception of Iowa Rule of Evidence 1004(1).
Furthermore, we do not believe excluding the original lease agreement would be an appropriate discovery sanction when Carl Schuettpelz, who is not a party in this case, unknowingly had possession of the original. The confusion stems from the fact the original was signed in black ink and virtually identical to the duplicates.
VII. Authority to Sell the Furnace . Hopkins, Inc. lastly contends the district court erred in concluding Abdo had authority to secure the loan with the furnace because he had no apparent or implied authority to do so. Upon review of the record, we find substantial evidence supports the district court's extensive findings that Harold Abdo had authority to sell the drum reclamation furnace.
VIII. Clean Hands . Hopkins, Inc. raises the doctrine of clean hands for the first time in its reply brief. Although the court may consider the doctrine on its own motion, we decline to do so. See Sisson v. Janssen, 244 Iowa 123, 130, 56 N.W.2d 30, 34 (Iowa 1953). The trial court made no findings of fraud, but instead commented on Hopkin's "lack of candor" and lack of credibility. We find no evidence of conspiracy to defraud Hopkins by the Plaintiffs and Adbo.
IX. Summary . We affirm that portion of the district court's ruling that grants the writ of replevin. However, we conclude there was no transfer of title of the drum reclamation furnace to the Plaintiff and, therefore, Hopkins, Inc. retains a right to redeem.
AFFIRMED IN PART AND REVERSED IN PART.