Opinion
No. 2-999 / 02-0436.
Filed June 25, 2003.
Appeal from the Iowa District Court for Poweshiek County, Dan F. Morrison, Judge.
Three subcontractors appeal from the denial of their suit to foreclose mechanic's liens against real estate owned by St. Francis Manor, Inc. AFFIRMED.
Robert Downer and Margaret Lainson of Meardon, Sueppel Downer, P.L.C., Iowa City, Charles Manly of Manly Law Firm, Grinnell, and Roger Sunleaf of McNeil Sunleaf, Montezuma, for appellants.
Donald Charnetski of Brierly Charnetski, L.L.P., Grinnell, for appellees.
Heard by Sackett, C.J., and Zimmer and Vaitheswaran, JJ.
Three subcontractors appeal from the denial of their suit to foreclose mechanic's liens against real estate owned by St. Francis Manor, Inc. We affirm.
I. Background Facts and Proceedings . St. Francis Manor, Inc. (SFM), a not-for-profit corporation, owns and operates a nursing home facility. In 1989 SFM's board of trustees acted to organize Seeland Park (Seeland), a cooperative retirement association. See Iowa Code chs. 499, 523D (1987). Under Seeland's articles of incorporation there are two classes of members: non-voting retirement community residents; and SFM trustees, who are empowered to elect themselves to serve as Seeland's directors. The trustees exercised this right, and the boards of the two organizations are identical.
SFM owns several tracts of land that it has leased to Seeland on a long-term basis. Seeland arranges for construction of independent residential housing units for senior citizens on the leased land. Seeland retains ownership of the buildings, and enters into subscription contracts with prospective residents for the costs of individual units. Seeland does not pay SFM a set amount of rent for the land. Instead, when the right to occupy a dwelling unit is sold, SFM receives the net proceeds from the sale, after any owed equity refund is paid to the former resident. The amount SFM receives depends on the length of time the seller has occupied the dwelling unit. Seeland does not share in the proceeds.
Seeland residents are "stockholders" in the cooperative organization. Residents pay for the construction of their individual units. Rather than deeds, they are issued certificates of residency, which entitle them to reside in the units so long as they are capable of independent living.
Seeland contracts with SFM for the management of the units, for which SFM is paid a set amount per unit per month. The management duties are performed by Dion Schrack, SFM's administrator. Schrack directs the construction of the cooperative housing units for Seeland, and enters into the construction contracts on Seeland's behalf. He also oversees sale of the individual units.
On occasion, if Seeland did not have enough available cash to pay for work on the property, Schrack would pay the debt with SFM funds. Generally, rather than repaying SFM directly, Schrack would use Seeland funds to pay for an expense normally born by SFM under the management contract. Schrack would "adjust" the books of each organization accordingly. This occurred on about six occasions, and Seeland made compensation within a fairly short period of time.
In 1999 Schrack arranged for construction of a ten-plex and three duplexes at Seeland Park. He contacted Tim Minner of Minner Construction and solicited bids for the project. When Schrack decided to award the job to Minner he did not require a written contract as he typically did when arranging for the construction of Seeland Park units. According to Schrack, Seeland's long history with Minner made a written contract unnecessary.
Schrack never explicitly stated which organization he was representing in the transaction, and Minner never asked. Minner "assumed" the contract for the ten-plex was made with SFM because he believed SFM owned the land on which the ten-plex was based, while he assumed the contracts for the three duplexes had been entered into with Seeland because he believed Seeland owned that realty. Minner billed only Seeland for work performed under the oral contract. Schrack generally made payments to Minner Construction with checks written on Seeland's account. On one occasion, however, Minner was paid $20,000 from an SFM account. This was apparently one of the approximately half-dozen occasions when SFM forwarded funds that were later repaid, in some fashion, by Seeland.
In fact, all the land was owned by SFM.
Minner subcontracted with S S Electric, Inc., Jim's Heating and Air Conditioning Limited Company and Criswell Painting and Wallcovering, Inc. (the subcontractors) for work on the buildings. In the summer or fall of 2000, Minner ceased paying the subcontractors. Although Seeland paid Minner for the work done by the subcontractors, Minner used the money for unrelated bills and expenditures.
The subcontractors filed a mechanic's lien foreclosure action against SFM, and Seeland was later added as a defendant by stipulation. At trial there was no dispute that the subcontractors were legitimately owed the funds claimed in the liens, for work performed under their subcontracts with Minner, who was the general contractor on the project. The trial court found that the subcontractors' work had ultimately been performed as a result of the oral contract between Minner and Seeland, but declined to enforce the liens because Seeland was not an owner within the meaning of Iowa Code section 572.2 (2001). It also declined to pierce the corporate veil and hold SFM responsible for Seeland's obligations. Accordingly, the court dismissed the petition. The subcontractors appeal.
II. Scope of Review . Because this is an action in equity, our review is de novo. Iowa Code § 572.26; Iowa R.App.P. 6.4. We give weight to, but are not bound by, the factual findings of the district court. Baumhoefener Nursery, Inc. v. A D P'ship, II, 618 N.W.2d 363, 366 (Iowa 2000).
III. Identity of Contracting Party . The subcontractors claim a right to foreclose their mechanic's liens against the land owned by SFM. Under Iowa Code section 572.2, a subcontractor is entitled to file a lien for work performed pursuant to a contract with an owner or its agent, or the owner's contractor. The lien may be filed against either the building to which the improvement was made, or against land belonging to the owner upon which the building and improvement are found. Iowa Code § 572.2. We acknowledge that a mechanic's lien, which is purely statutory in nature, should be liberally construed to promote restitution, the prevention of unjust enrichment, and to assist parties in obtaining justice. Carson v. Roediger, 513 N.W.2d 713, 715 (Iowa 1994). We therefore assume without deciding that SFM could meet the statutory definition of an owner, or one for whose benefits the improvements were made. See Iowa Code § 572.1(3).
The subcontractors must nevertheless establish an underlying, binding relationship between SFM and Minner. They claim that such relationship is derived from the fact Minner entered into the contract for construction of the housing units with Schrack, who was SFM's agent. Thus, they argue, Minner contracted with SFM as the owner of the underlying realty. They urge us to reach this result by applying the doctrine of liberal construction. However, determining whether Schrack contracted on behalf of SFM is not a matter of statutory construction, but an application of agency principals to the facts of this case.
To the extent the subcontractors are arguing that they contracted with Schrack directly after Minner ceased paying them, the evidence is simply insufficient to support their contention.
A. Apparent authority. There is no dispute that Schrack contracted with Minner for construction of the housing units as an agent, and that anything Schrack did within the scope of his authority as an agent would bind the principal from whom that authority flowed. See Gabelmann v. NFO, Inc., 571 N.W.2d 476, 481 (Iowa 1997). It also seems clear that Schrack served as SFM's agent in two different capacities. As SFM's administrator he was authorized to deal with the day-to-day running of the corporation. He was also authorized by SFM to act as its representative in fulfilling its obligations under the management contract with Seeland. As SFM's representative under the management contract, Schrack was authorized to bind Seeland, and Seeland only, to a construction contract. Because the subcontractors seek to bind SFM, they must show that Schrack entered into a contract with Minner on behalf of SFM, within the scope of his general administrative authority from SFM.
The subcontractors do not appear to argue that contracting for construction of the units on behalf of SFM was within Schrack's actual authority as SFM's administrator. In any event, such a claim would fail, as there is no evidence SFM intentionally conferred authority on Schrack, "by writing or through other conduct which, reasonably interpreted, allows the agent to believe that he has the power to act." Id. at 481 (citation omitted). Instead, the subcontractors argue Schrack had apparent authority to contract on behalf of SFM for construction of the units.
In order to establish the existence of apparent authority, the subcontractors must show that SFM acted in a manner that led Minner to believe Schrack had authority to bind SFM to a construction contract. Waukon Auto Supply v. Farmers Merch. Sav. Bank, 440 N.W.2d 844, 847 (Iowa 1989). Proof of apparent authority focuses on the actions of the principal. Id. Such authority is authority which has been knowingly permitted by the principal or which the principal has held the agent out as possessing. Magnusson Agency v. Public Entity Nat'l Co.-Midwest, 560 N.W.2d 20, 25-26 (Iowa 1997).
The record does demonstrate that the trustees essentially left the day-to-day running of SFM, and the management of Seeland under the management contract, in Schrack's hands. The evidence is unrefuted, however, that neither the board, nor Schrack himself, ever intended or believed that Scharck was authorized to contract on behalf of SFM for the construction of housing units. Nor is there evidence of the trustees engaging in conduct that could be interpreted as authorizing Schrack to contract for the construction of housing units on SFM's behalf.
At best, the trustees' acquiescence to Schrack's daily control over SFM's administration and the management of Seeland gave rise to an ambiguity as to which entity Schrack was representing at the time he contracted with Minner. It is tempting to hold SFM accountable for the ambiguity, and find that the trustees' actions or, more accurately, the lack thereof, gave rise to apparent authority in Schrack to bind SFM to the construction contract. However, the trustees' actions must be measured by what Minner knew or should have known at the time of contract. See Curran Hydraulic Corp. v. National-Ben Franklin Ins. Co. of Illinois, 261 N.W.2d 822, 826-27 (Iowa 1978).
Minner testified that he simply assumed his contract for the ten-plex was with SFM, while the contracts for the three duplexes had been entered into with Seeland. While the management agreement between Seeland and SFM may not have been filed or recorded, it is clear Minner knew of Seeland's existence and its involvement in the project. His claimed assumption as to ownership is undermined by the fact he billed Seeland for work performed on all the buildings.
The subcontractors bear the burden of proving Schrack had authority to enter into a contract on SFM's behalf for the construction of the housing units. Waukon Auto Supply, 440 N.W.2d at 847. Under the record in this case, they have failed to meet that burden. Moreover, their apparent authority claim suffers from a fatal factual flaw. Schrack testified he was acting in his capacity as Seeland's manager when he contracted with Minner. No evidence in the record contradicted this claim. While Schrack was acting as SFM's agent at the time, it was within the scope of the authority granted to SFM by its management contract with Seeland.
B. Inherent agency. The subcontractors alternately argue that even if entering into a contract with Minner was not within the scope of Schrack's authority as SFM's administrator, SFM is nevertheless bound because Schrack acted within his "inherent agency power." Such power is derived from the mere existence of the agency relationship. Restatement (Second) of Agency § 8A (1958). It exists for the protection of those who deal with the agent. Id.
Under this doctrine an agent contractually binds the principal, even in the absence of authority to do so, by engaging in an action similar to what he is authorized to do. See id. at cmt. b. For example, a principal could be bound by an unauthorized act of an agent, where that act typically accompanies or is incidental to a transaction the agent is authorized to conduct, and where the other party reasonably believed the agent was authorized to act. Id. at § 161. The inherent agency doctrine has been recognized in Iowa. See Newberry v. Barth, Inc., 252 N.W.2d 711, 715 (Iowa 1977) ("Inherent agency power . . . extends to acts generally within the powers of persons holding such position.").
Even if we assume that Schrack was generally authorized to contract on behalf of SFM, such authority would have been for contracts incidental to SFM's business. See Restatement (Second) Agency § 73 (noting that, absent an agreement to the contrary, an agent who manages a business is presumed to have the authority to enter into contracts that "are incidental to such business, are usually made in it, or are reasonably necessary in conducting it"). It would not have extended to the making of unusual or extraordinary contracts. Id. at cmt. b. The record indicates that contracting on SFM's behalf for the construction of housing units at Seeland Park would have fallen into the later, rather than the former category. In addition, the inherent agency claim suffers from the same factual flaw as the apparent authority argument: Schrack's testimony that he was acting in his capacity as Seeland's manager is uncontradicted. The subcontractors have failed to establish a theory under which Schrack bound SFM directly for the oral construction contract.
IV. Piercing the Corporate Veil . The subcontractors contend that, even if the construction contract was executed between Minner and Seeland, Seeland was a mere shell or alter ego of SFM, and the corporate veil should be pierced to hold SFM responsible for Seeland's obligations. A court is allowed to disregard corporate structure under limited circumstances. In re Marriage of Ballstaedt, 606 N.W.2d 345, 349 (Iowa 2000). The corporate veil may be pierced
"where the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice." The burden is on the party seeking to pierce the corporate veil to show the exceptional circumstances required. Factors that would support such a finding include (1) the corporation is undercapitalized; (2) it lacks separate books; (3) its finances are not kept separate from individual finances, or individual obligations are paid by the corporation; (4) the corporation is used to promote fraud or illegality; (5) corporate formalities are not followed; and (6) the corporation is a mere sham.
Id. (citations omitted).
We agree with the subcontractors that it is difficult to imagine two organizations more closely intertwined. However, we cannot conclude that they have demonstrated the "exceptional circumstances" necessary to hold SFM responsible for Seeland's actions. While the boards of the two organizations are identical and hold back-to-back meetings at SFM, they are nevertheless two distinct bodies that keep separate and detailed corporate minutes. There is no evidence of fraud or illegality. Although the subcontractors argue the land leases between SFM and Seeland are not commercially reasonable, they offer nothing to support this assertion. While SFM may not receive regular and set rent for the land, it clearly profits from the resale of residential units.
Seeland has a net worth of approximately $300,000, and there is no direct proof that this amount is insufficient to support Seeland's operating needs. The claim that Seeland is undercapitalized is, in effect, speculation based on the fact Seeland occasionally ran short of cash funds. Schrack did forward funds from SFM on a handful of occasions, but such actions arguable fell under the auspices of the management agreement. The funds were not repaid directly, but they were repaid in kind. The forwarded funds and in-kind repayments were reflected as debit and credit entries in the separate books of the two organizations. There was no commingling of assets. In addition to separate checking accounts, books and minutes, each organization maintained separate records and financial reports. Finally, the subcontractors' claims that corporate formalities were not observed by Seeland are largely unsupported, and unconvincing.
We acknowledge that, in failing to pierce the corporate veil, the subcontractors are deprived of what is perhaps their only avenue of relief. SFM's organization of Seeland insulated it from claims to which perhaps, in fairness, it should be subject. However, courts find and set aside a corporate fiction
if there is such unity of interest and ownership that the individuality of the corporation and its owners have ceased and the facts demonstrate observance of the fiction of separate existence would, under the circumstances, sanction a fraud or promote injustice.
Benson v. Richardson, 537 N.W.2d 748, 761 (Iowa 1995) (citing Minich v. Gem State Developers, Inc., 99 Idaho 911, 917, 591 P.2d 1078, 1084 (1979)). While SFM and Seeland are intimately intertwined, we cannot conclude that Seeland has lost all independent identity, and serves as a mere alter ego for SFM.
V. Attorney Fees . The subcontractors seek both district court and appellate attorney fees under Iowa Code section 572.32. As that section allows attorney fee awards to prevailing parties, the request is denied.
AFFIRMED.
Vaitheswaran, J. concurs, Sackett, C.J., dissenting .
I dissent from the majority's well-written decision. This is a close issue. We review de novo. I would find Schrack was the agent of defendant land owner, St. Francis Manor. I would reverse the district court and establish the requested lien and remand to the district court to fix appropriate attorney fees for plaintiffs.