Opinion
No. 3-952 / 03-0494
April 14, 2004.
Appeal from the Iowa District Court for Guthrie County, Gregory A. Hulse, Judge.
A corporate farm appeals from an adverse summary judgment ruling which resulted in a decree that foreclosed two mortgages on corporate real estate. AFFIRMED.
James Brewer of Newbrough, Johnston, Brewer, Maddux Howell, L.L.P., Ames, for appellant.
Jeffrey Bump of Bump Bump, Panora, for appellee.
Heard by Zimmer, P.J., and Miller and Hecht, JJ.
Defendant Soults Farms, Inc. appeals from a district court decree, entered following an adverse summary judgment ruling, that entered judgment in favor of plaintiff Security State Bank upon a promissory note, and foreclosed two mortgages upon corporate real estate that secured the note. We affirm.
Background Facts and Proceedings.
In June 2002, Security State Bank (Bank) brought a mortgage foreclosure action against Soults Farms, Inc. (Soults Farms) and its sole corporate officer, Marion Robert (Bud) Soults. The action was based on two notes executed in 2001, which were secured by two mortgages on corporate property. The first note, with an obligation of $646,787.02, was entered into on behalf of Soults Farms by Bud Soults as corporation president (Corporate Note). The second note, with an obligation of $153,751.59, was entered into by Bud Soults in his personal capacity (Personal Note).
The amended petition also named entities and an individual, each holding a mortgage, lien or judgment on or against the real estate in question, and requested an establishment of priorities. However, no questions of priority are at issue on appeal.
Both notes are renewals of preexisting obligations. In 1997 Bud Soults, as president of Soults Farms, executed two agricultural notes on behalf of the corporation. He also executed an agricultural note in his personal capacity. In 1998 the Bank renegotiated both the corporate and personal obligations, and required that they be cross-collateralized. Accordingly, Bud Soults executed, on behalf of the corporation, a promissory note that combined the original 1997 corporate notes, a mortgage on corporate real estate that secured the newly-combined corporate obligation, and a second mortgage on the same corporate real estate that secured Soults's personal note. Both mortgages listed the corporation as mortgagor, and contained a clause stating the mortgage would secure the payment and performance of all the mortgagor's, i.e. Soults Farms's, future debt. The Corporate Note was renewed in 2000 and again in 2001. The 2001 Corporate Note specifically stated that it was secured by both of the 1998 mortgages.
Although the Personal Note was also renewed, it is not at issue on appeal.
All the corporate notes and both mortgages on corporate property were executed on behalf of the corporation by Bud Soults in his capacity as president. Soults Farms's articles of incorporation provide that all "mortgages . . . and other instruments affecting the corporation's interests in real estate shall be executed by any two of the following officers: the president, vice president or secretary." At the time Bud Soults executed the two corporate notes in 1997 and the combined note and mortgages in 1998, he was the president, secretary, and one of two directors of the corporation. His father, Marion Soults, now deceased, served as treasurer and the other director. At the time of the 2000 and 2001 renewals, Bud Soults was the sole director, president, secretary, and treasurer.
The corporation did not then, nor anytime thereafter, have a vice-president.
The Bank was aware at time the original corporate notes were executed that at least part of the funds loaned to the corporation were going to be used by Bud Soults to make a personal investment. According to Claude Havick, Bank president in 1997, the Bank understood the funds were being loaned to the corporation, which would in turn use at least part of the funds to make a personal loan to Bud Soults. The Bank "didn't care where [the loan money] went as long as it went to the corporation. The corporation . . . could do what they wanted. And [Soults] was the major stockholder, so what he said is the way it was." At the time the 1998 note and mortgages were executed, the Bank was aware that, of the original $1,051,850 loaned to the corporation, only $300,000 had been used for farm operating expenses. The rest, along with the personal loan to Bud Soults, had ultimately been used for Soults's personal investment.
Although the district court made a contrary finding, the Bank acknowledges the record established it was aware at all relevant times that Bud Soults was only the majority shareholder of Soults Farms. The record indicates that at times relevant to this proceeding, Bud Soults held either 2690 or 3225 of the total 4595 shares of corporate stock. The remaining shares were held by his two sisters, Maurene Kleven and Jeanne Lutze, his father Marion R. Soults and/or the Marion R. Soults Trust, and the Alice Soults Trust.
From the inception of the original notes in 1997 through June 2002, the corporation made payments of principal and interest on the notes in excess of one million dollars. The Corporate and Personal Notes were declared in default on March 12, 2002, and in June 2002 the Bank filed its petition for an entry of judgment on the notes and foreclosure of the mortgages securing them. In September 2002 the Bank requested the court enter summary judgment in its favor against the defendants.
It appears corporate funds were used to meet not only the corporate obligation, but also the personal obligation of Bud Soults.
The court granted the Bank's requests in separate rulings. On December 30, 2002 the court entered partial summary judgment against Bud Soults, who had not filed a resistance to the Bank's summary judgment motion. On February 18, 2003, following hearing, the court entered summary judgment against Soults Farms. On February 25, the court entered a judgment and decree of foreclosure that awarded the Bank judgments against Soults Farms on the Corporate Note and Bud Soults on the Personal Note, and foreclosed the two mortgages securing the notes. The decree also awarded twenty-one percent interest on abstracting, attorney fees and advancements.
Soults Farms appeals. It contends the court erred in granting summary judgment as Bud Soults's actions in initially obtaining the corporate notes, securing the combined corporate note with a mortgage on corporate real estate, and securing his own personal indebtedness with a second mortgage on corporate property, were not authorized by Soults Farms. Soults Farms further asserts summary judgment was inappropriate because the Bank knew, at the time the original corporate notes were executed and thereafter, that at least a portion of the proceeds from the corporate loans were for personal investments of Bud Soults. Finally, it contends the court imposed an improper interest rate on abstracting, attorney fees, and advancements.
Scope and Standard of Review.
Summary judgment rulings are reviewed for correction of errors at law. Iowa R. App. P. 6.4; General Car Truck Leasing Sys., Inc. v. Lane Waterman, 557 N.W.2d 274, 276 (Iowa 1996). The court reviews the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits, if any. City of West Branch v. Miller, 546 N.W.2d 598, 600 (Iowa 1996). All facts are viewed in the light most favorable to the party opposing the motion for summary judgment. Bearshield v. John Morrell Co., 570 N.W.2d 915, 917 (Iowa 1997). Summary judgment is appropriate where no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Iowa R. Civ. P. 1.981(3); City of West Branch, 546 N.W.2d at 600. No fact issue exists if the dispute is over legal consequences flowing from undisputed facts. City of West Branch, 546 N.W.2d at 600.
Enforceability of Corporate Note and Mortgages.
To obtain judgment against Soults Farms on the Corporate Note, and the foreclosure of the corporate property securing the Corporate Note, the Bank bore the burden of proving that Bud Soults was authorized to enter into the various agreements on the corporation's behalf. See Waukon Auto Supply v. Farmers Merchants Sav. Bank, 440 N.W.2d 844, 847 (Iowa 1989). Although the nature and extent of an agent's authority are generally questions of fact, see Mayrath Co. v. Helgeson, 258 Iowa 543, 547, 139 N.W.2d 303, 305-06 (1966), the Bank would be entitled to summary judgment if the undisputed facts before the district court demonstrated that Bud Soults had authority to enter into, on behalf of the corporation, the financial documents at issue in this case. See Iowa R. Civ. P. 1.981. We conclude this standard has been met.
Soults Farms's articles of incorporation provided Bud Soults the express authority to execute mortgages and "other documents affecting the corporation's interest in real estate." See Gabelmann v. NFO, Inc., 571 N.W.2d 476, 481 (Iowa 1997) (citation omitted) (finding actual authority exists where the principal "by writing or through other conduct which, reasonably interpreted, allows the agent to believe that he has the power to act"). Nothing in the record indicates that he was required to seek prior or further authorization from any other director, or the minority shareholders. Like the district court, we conclude the plain language of the articles provided Bud Soults with the actual authority to enter into, on the corporation's behalf, loans, promissory notes, and mortgages. Soults Farms asserts, however, that this authority did not extend to transactions involving or relating to a director's personal indebtedness.
The record also contains a "Statement of Legal Entity," made in 1996, that states, "Resolution of Board of Directors dated 3/17/93 authorizes President to apply for loans and authorizes President to mortgage real estate or personal property of the corporation and to execute promissory notes and other instruments of debt or security."
Soults Farms relies on two cases where an obligee was precluded from enforcing a debt against a company or corporation, when that debt had allegedly been authorized by a corporate officer. We find these cases to be of little assistance, as in each instance the officer was wholly without power to bind the company or corporation See Smoltz v. North Waterloo Meat Co., 224 N.W. 536, 537 (Iowa 1929) (rejecting claim that loan was made to defendant company where president had no implied power to borrow the money); Black Hawk Nat. Bank v. Monarch Co., 201 Iowa 240, 245, 207 N.W.2d 121, 123 (1926) (finding corporation not bound to pay on accommodation paper approved by corporation president, as absent special authorization president had no authority to issue accommodation paper in corporation's name). Bud Soults was authorized to borrow and mortgage on the corporation's behalf.
Soults Farms correctly points out that, when interpreting an agent's authority, it is inferred that the agent has been granted authority to act for the benefit of the principal alone. See Crane v. Iowa Dep't of Job Serv., 412 N.W.2d 194, 197 (Iowa Ct.App. 1987) (citing Restatement (Second) of Agency § 39 (1958)). This inference extends to authorizations to borrow money. Restatement (Second) of Agency § 75, cmt. d. However, a principal will not escape liability under a contract the agent purported to make on the principal's behalf simply because an agent acted for his own or an improper purpose. Id. § 165. Rather, the other party must have notice the agent is not acting for the principal's benefit. Id. Thus, "[i]f an agent borrows for an improper purpose, the principal is not liable to a lender having notice of such purpose." Id. § 75, cmt. d.
Soults Farms contends the Bank had such knowledge, because it was aware that some if not all of the funds were going to be and ultimately were in fact used by Bud Soults for a personal investment. However, a close review of the undisputed facts in the record demonstrates it was the Bank's understanding that it was making the loan to Soults Farms, which would in turn make a personal loan to Bud Soults. The record further indicates that monies loaned under the Corporate Note were in fact placed by the Bank into the corporate account, rather than Soults's personal account. Nothing in the record demonstrates the Bank had any reason to question Soults's authority, as president, secretary, one of two directors, and majority shareholder of this closely held corporation, to speak to the corporation's ultimate disposition of the funds it had been loaned. As stated by the Bank's then president, "we didn't care where [the loan money] went as long as it went to the corporation."
Based on the undisputed facts before the district court, Bud Soults was authorized in 1997 to borrow funds on behalf of the corporation, without further approval from the one other corporate director or the minority shareholders. The undisputed facts further indicate the Bank's knowledge and belief that Soults was in fact borrowing funds for the corporation, and that Soults's personal use of the funds was an internal, corporate matter. Based on the record, there is no evidence the Bank possessed knowledge sufficient to obviate Soults Farms's liability under the note. See Restatement (Second) Agency, §§ 75, 165.
We find wholly unsupported any assertion that the Bank's mere knowledge of the personal use of the funds independently precludes its recovery against the corporation. Nor does Soults Farms offers any persuasive authority for the proposition that the Bank had a duty make further inquiry into the scope of Bud Soults's authority to enter into the various financial documents at issue. We also reject any suggestion that a failure to make such further inquiry requires the Bank to reimburse Soults Farms for payments it made upon the notes, particularly as the corporation did not file a counterclaim on this issue.
This analysis does not change when we look to the 1998 mortgages Soults executed, in the corporation's name, to secure the 1998 combined corporate note. Although one of the two mortgages was given primarily to secure Bud Soults's personal indebtedness, by its own terms it also cross-collateralized the corporate debt. Moreover, the two mortgages cover the exact same corporate property. Thus, even if the mortgage securing Bud Soults's personal indebtedness was somehow invalid, the Bank would still be entitled to foreclose against the corporate property, for satisfaction of the Corporate Note, under the mortgage that primarily secured the Corporate Note.
Interest Rate.
Soults Farms also contends the district court erred when it imposed twenty-one percent per annum interest on unpaid abstracting, attorney fees, and advancements. However, we agree with the Bank that such interest rate was authorized by the 1998 mortgages, in conjunction with the 2001 Corporate Note.
The mortgages allow the Bank to collect "outstanding Obligations," and require the corporation to reimburse the Bank for all expended amounts, including attorney fees and legal expenses, "together with interest thereon at the lower of the highest rate described in any Obligation or the highest rate allowed by law. . . . These sums shall be included in the definition of Obligations herein and shall be secured by the interest granted herein." The mortgage itself does not provide for a twenty-one percent interest rate. Such rate is, however, provided for in the 2001 Corporate Note. Based on the language of the mortgage, the Corporate Note is one of the previously described obligations:
2. OBLIGATIONS. This Mortgage shall secure the payment and performance of all of Borrower and Mortgagor's present and future, indebtedness, liabilities, obligations, and covenants (cumulatively "Obligations") to Lender pursuant to:
(a) this Mortgage and the following promissory notes and other agreements: . . . all other present or future written agreements between Borrower or Mortgagor and Lender . . .;
(b) all amendments, modifications, replacements or substitutions to any of the foregoing.
Accordingly, we find no error in the district court's ruling.