Dutrac Community Credit Union, plaintiff-appellant/cross-appellee v. Douglas P. Hefel and Sheila K. Hefel, defendants-appellees/cross-appellants. ( 2015 )

IN THE COURT OF APPEALS OF IOWA
No. 15-0143
Filed November 25, 2015
DUTRAC COMMUNITY CREDIT UNION,
Plaintiff-Appellant/Cross-Appellee,
vs.
DOUGLAS P. HEFEL and
SHEILA K. HEFEL,
Defendants-Appellees/Cross-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Dubuque County, Monica L.
Ackley, Judge.
The credit union appeals the district court’s ruling entering judgment
against the Hefels on their guaranty of a loan, and the Hefels cross-appeal.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED ON APPEAL;
AFFIRMED ON CROSS-APPEAL.
Peter D. Arling and McKenzie R. Hill of O’Connor & Thomas, P.C.,
Dubuque, for appellant.
Steve P. Wandro and Michael R. Keller of Wandro & Associates, P.C.,
Des Moines, for appellees.
Heard by Potterfield, P.J., and Doyle and Tabor, J.
2
TABOR, Judge.
We are confronted with the aftermath of two property-development
foreclosures and the revocation of the personal guarantors’ discharge in
bankruptcy. The commercial lender appeals and the guarantors cross-appeal
the amount of accrued interest on the deficiency, the amount of attorney fees,
and the availability of prejudgment interest on the attorney fees. For the reasons
discussed below, we affirm in part, reverse in part, and remand for more specific
findings on the attorney-fee award.
I. Background Facts and Proceedings
On October 9, 2008, Star Properties, LLC executed a commercial loan
agreement and note in favor of DuTrac Community Credit Union and obtained
financing exceeding $2 million. Star Properties used the loan to purchase and
develop two residential subdivisions for commercial purposes. The first property,
Waterford Estates, was located in Dubuque County, and the second, Riviera
Belle Estates, was located in Jackson County. As security for its obligations,
Star Properties granted mortgages to DuTrac on both properties. Douglas and
Sheila Hefel, the sole members of Star Properties, signed the documents on
behalf of the company, as president and vice president respectively. Also on
October 9, the Hefels executed a personal guaranty as additional security for
those transactions:
[T]o induce DuTrac . . . to extend credit to Star Properties,
L.L.C. (“Debtor”), the [Hefels] jointly and severally guarantee
payment of and promise to pay . . . to [DuTrac] when due all [of
Debtor’s] loans, . . . notes, and . . . liabilities of every kind and
description . . . (“the indebtedness”) . . . including interest and
charges, and . . . all costs, expenses, . . . and attorney fees at any
3
time paid or incurred in endeavoring to collect . . . the
indebtedness, or to realize upon the Guaranty . . . .
The [Hefels] . . . agree that this shall be a continuing,
absolute and unconditional guaranty and shall be in force and be
binding upon [them] until the indebtedness is fully paid and this
guaranty is revoked.
Foreclosure. After Star Properties defaulted, DuTrac filed separate
foreclosure actions in 2010, suing the company personally and also seeking in
rem judgments against the properties. In the same actions DuTrac sued the
Hefels, alleging personal liability under the guaranty. On October 8, 2010, and
immediately before entry of a foreclosure judgment in Jackson County, the
Hefels filed a chapter 7 bankruptcy petition. The federal filing automatically
stayed the proceedings against the Hefels in both counties. The Hefels’
bankruptcy filing listed DuTrac as an unsecured creditor and stated the Hefels
owed DuTrac $2,112,079 under their “personal guaranty of Star Properties debt.”
Also on October 8, DuTrac dismissed the Hefels without prejudice in the
foreclosure cases, and the district court entered a judgment of foreclosure
against Star Properties in Jackson County. On October 15, 2010, the district
court entered a judgment against Star Properties in Dubuque County. Both
judgments provided:
1. That [DuTrac] have and recover judgment against
defendant Star Properties, LLC, and in rem against [the real estate]
in the sum of $2,112,079 plus accrued interest and late charges of
$88,388.44, plus interest accruing at the rate of 8.50% per annum
from and after June 2, 2010, plus attorney fees in the amount of
$2332.70, plus abstracting costs and expenses as determined by
the court and for such other all costs hereafter accruing.
....
3. That special execution issue for sale of the premises . . .
with interest accruing, for all court costs, including statutory
attorneys’ fees and costs and interest hereafter accruing.
4
In May 2011, DuTrac was the successful bidder at sheriff’s sales for both
properties.1 DuTrac received sheriff’s deeds. Meanwhile in federal court, the
Hefels received a discharge in bankruptcy, and the bankruptcy estate paid
DuTrac $34,325.04 in settlement of its claim based on the personal guaranty.
The Hefels’ Bankruptcy Fraud. In February 2012, DuTrac filed an
adversary complaint in bankruptcy, seeking to revoke the Hefels’ discharge on
the grounds they committed fraud and fraudulently concealed property. After
trial, the bankruptcy court’s 2013 order stated “[r]evocation of a discharge is an
extraordinary remedy to be sparingly applied” and, nevertheless, invoked the
“extraordinary remedy” and revoked the Hefels’ discharge. The bankruptcy court
rejected the Hefels’ alleged justifications:
If DuTrac had not commenced this adversary proceeding, [the
Hefels’] interests in several valuable trusts and multiple life
insurance policies, and the transfer of the boat would not have
been uncovered. The circumstances as a whole indicate that [the
Hefels] are unwilling to make full disclosure of their property
interests. DuTrac and Trustee went to great lengths to determine
the extent of [the Hefels’] assets with [the Hefels] blocking them at
every turn. The Bankruptcy Code requires complete, truthful and
reliable information from debtors . . . . [The Hefels] have never fully
complied with the duty to provide that information.
The Hefels appealed. The federal district court reviewed the “substantial
record” and upheld the revocation, ruling the order was “well supported.”
Litigation on the Hefels’ Personal Guaranty. As a result of the
revocation of the Hefels’ discharge, their personal liability under the guaranty was
not extinguished in bankruptcy. It is undisputed the Hefels did not revoke the
1
Waterford in Dubuque County sold for $891,000. Riviera Belle in Jackson County sold
for $662,000.
5
guaranty. In August 2013, DuTrac filed the petition in the instant case based on
the Hefels’ guaranty. DuTrac alleged the Hefels owed $1,312,152.21 and sought
reasonable attorney fees as determined by the court. The Hefels answered and
pleaded as an affirmative defense that DuTrac was requesting an unreasonable
amount of attorney fees.
DuTrac filed its first motion for summary judgment In January 2014.
Shortly before the summary judgment hearing, the Hefels filed a motion to
continue, seeking time to conduct discovery. DuTrac resisted, and also stated it
had erroneously omitted prejudgment interest on attorney fees and costs,
“although the same was contractually agreed to be paid.” DuTrac attached an
amortization schedule showing the dates it paid attorney fees, the amounts paid,
and interest from the dates of payment. After a hearing, the court denied
summary judgment in March 2014, ruling whether DuTrac’s attorney fees in the
Hefels’ initial bankruptcy action and the subsequent fraud action “are related to
this action is a question of fact. Hefels are entitled to put forth evidence
supporting their position.”
The Hefels conducted discovery. In June 2014, DuTrac filed its second
motion for summary judgment and an application for allowance of attorney fees
with an updated amortization schedule. The Hefels filed a resistance, including
their own amortization schedule that used a “constructive” date for the sheriff’s
sales. The Hefels claimed, under equitable principles, DuTrac was not entitled to
6
interest that accrued from the originally scheduled foreclosure sales (November
2010) to the later-occurring sales (May 2011).2
In July 2014, the summary judgment hearing commenced. DuTrac
explained it was seeking judgment based on the Hefels’ unlimited personal
guaranty for the obligations of Star Properties. DuTrac pointed out, as owner of
the judgment, it controls the judgment and the timing of the subsequent sheriff’s
sales and nothing shows DuTrac acted inappropriately in resetting the sale
dates. DuTrac also claimed the Hefels cannot contest the dates because they
waived their defenses in the guaranty. Finally, DuTrac claimed it was entitled to
all the costs it expended in “pursuing, preserving, protecting, and liquidating the
collateral or trying to obtain judgment. It’s in the contract.”
The Hefels countered “the fighting issue” was merger, and there was “no
dispute [the Hefels owe] that deficiency judgment.” Specifically, they alleged that
once DuTrac received its judgment, “all of those contracts [note, mortgages, and
guaranty] are done because [DuTrac] won.” Therefore, the $2332.70 in each
foreclosure judgment is the total attorney fees the Hefels owe DuTrac. In the
alternative, the Hefels claimed “$430,000 is a lot of money to come after a
$700,000 judgment” and noted their attorneys defended for about $125,000. At
2
The Hefels also filed a supplemental resistance to summary judgment, claiming
because DuTrac had recorded releases of the mortgages in March 2013, DuTrac’s
“claims should be dismissed in total.” The district court disagreed, and the Hefels do not
reassert this challenge on appeal. See Peoples Bank & Trust Co. v. Lala, 392 N.W.2d
179, 183-84 (Iowa Ct. App. 1986) (“[I]t is apparent the intention of the bank was to
release the collateral not the debt.”). Nevertheless, DuTrac was forced to defend in the
district court.
7
the end of their argument, the Hefels dropped their request for a trial, agreeing
the court could resolve the issues through summary judgment.
DuTrac replied the Hefels’ fees were billed by a law firm that was newly
involved at the time of the adversary claim and significant litigation had preceded
the adversary claim. DuTrac also pointed out it had faced a heavy burden to
successfully prove its fraud claims and obtain an “extraordinary remedy.”
On November 3, 2014, the district court granted DuTrac’s motion for
summary judgment, holding the merger doctrine did not apply:
[T]he doctrine of merger does not operate to overcome the
continuing guaranty executed by the Hefels. The guaranty has not
been revoked or extinguished and therefore is the basis for
[DuTrac’s] right to recovery herein. [The Hefels] were not parties to
the note and mortgages. The note and mortgages were contracts
between [DuTrac] and Debtor, Star Properties. Foreclosure
judgments were obtained as to these contracts. [The Hefels’]
liability arises from the guaranty, inclusive of attorney’s fees,
tabulated with interest at the contract rate.
After post-trial motions, the court awarded judgment in favor of DuTrac for the
principal “amount of $726,448.61 plus accrued interest at the rate of 8.5 percent
from and after June 14, 2014,” and for attorney fees “in the amount of $332,546”
with postjudgment interest on the attorney fees at the contract rate. The court
rejected DuTrac’s request for prejudgment interest on its attorney fees and
assessed costs against the Hefels. This appeal by DuTrac and cross-appeal by
the Hefels followed.
II. Scope and Standards of Review
We generally review a summary judgment ruling for the correction of
errors of law. See Kelly v. Iowa Mut. Ins. Co., 620 N.W.2d 637, 641 (Iowa 2000).
8
The parties agree that we review the questions of merger and contract
interpretation for legal error. A contract action is generally treated as one at law.
Van Sloun v. Agans Bros., Inc., 778 N.W.2d 174, 178 (Iowa 2010). Where the
basic rights of the parties derive from the nonperformance of a contract, the
remedy is monetary, and the damages are “full and certain,” the action is
considered at law. Id. at 179.
The parties agree we review de novo “the Hefels’ arguments in equity for
a reduction in the award on equitable grounds.” See Iowa R. App. P. 6.907.
We review the reasonableness of the district court’s award of attorney
fees for an abuse of discretion. City of Riverdale v. Diercks, 806 N.W.2d 643,
652 (Iowa 2011). We will reverse only if the court rests its discretionary ruling on
grounds that are clearly unreasonable or untenable. GreatAmerica Leasing
Corp. v. Cool Comfort Air Conditioning & Refrigeration, Inc., 691 N.W.2d 730,
732 (Iowa 2005).
III. Merger Doctrine
We first address the merger doctrine raised in the Hefels’ cross-appeal
because if merger applies, the attorney-fee issues are moot. The Hefels
contend: “When DuTrac reduced the various documents underlying the debt to
judgment in the foreclosure actions, the terms of those documents merged into
the resulting judgment, and DuTrac cannot now maintain an action for additional
fees based on those documents.” The Hefels claim DuTrac’s present action
“should be limited to pursuing the deficiency remaining after the sale of the
foreclosed properties along with the interest on the same.”
9
“The doctrine of merger is an aspect of res judicata which prevents
relitigation of existing judgments.” Brenton State Bank v. Tiffany, 440 N.W.2d
583, 585 (Iowa 1989) (Tiffany II). “Merger has the effect of issue preclusion. It
serves to prevent the splitting of causes of action.” Id. (citation omitted). But the
doctrine of merger “is not as relentless and destructive as it might first appear.
Merger does not discharge the debt for all purposes.” Id. Additionally, the
doctrine “is limited by concerns of justice” and “will not be carried any further than
the ends of justice require. Although it is meant to prevent excessive litigation, its
application to deprive a litigant [here, DuTrac] of a cause of action is limited by
equitable concerns.” Id. (citation omitted). Also, a creditor’s [here DuTrac’s]
“right to join related causes of action does not bar [its] subsequent litigation of a
distinct cause of action that was not joined.” See id. at 587.
In support of the claim that their personal guaranty merged into DuTrac’s
foreclosure judgments against Star Properties, the Hefels cite Farm Credit Bank
v. Faught, 492 N.W.2d 422 (Iowa 1992) (Faught II). But, to fully understand
Faught II, we first turn to Faught I, 468 N.W.2d 793, 795 (Iowa 1991).
In Faught I, the bank filed foreclosure actions against the Faughts and a
family corporation seeking personal judgments and foreclosure of farm
mortgages. 468 N.W.2d at 794. The Faught family filed for bankruptcy, and the
bankruptcy court lifted the bankruptcy stay “only as to the mortgaged real estate.”
Id. The bank elected to amend its petition, eliminating its request for personal
judgments and inserting “a prayer for a judgment only against the realty.” Id.The court “entered a decree in rem, foreclosing the mortgages against the
10
farmland.” Id. After special execution and sheriff’s sale, a deficiency remained,
and the bank sought to levy a general execution on the Faught family’s personal
property. Id. Our supreme court ruled the bank was “precluded from any remedy
relating to the deficiency because [it] elected to obtain an in rem judgment.” Id.at 794-95 (citing Schnuettgen v. Mathewson, 222 N.W. 893, 896 (Iowa 1929)
(“[W]e have never held that a mortgagee who has foreclosed [its] mortgage . . .
may afterwards maintain the separate action upon his promissory note.”). The
Faught I court held that at the time of the bank’s judgment in rem, “it was the only
relief being sought. The petition for in personam judgment had, for whatever
reason, been withdrawn. The effect was to resolve the dispute then existing
between the parties.” Id. at 795. Because the sale of the farms satisfied the
judgment in rem, the bank “could not thereafter obtain a general execution to
satisfy the deficiency.” Id.
Several distinctions exist between Faught I and the instant case. In
Faught I, the creditor originally sued the debtors personally on the notes and
accompanying mortgages; nothing suggests the creditor also sued to recover on
an unlimited continuing guaranty from one who was not a debtor-mortgagor. See
id. The Hefels did not execute the note and mortgages, those documents were
executed by debtor-mortgagor Star Properties. Second, the Faught I court’s
ruling was based on foreclosure statutes applicable when a creditor brings
separate actions “in the same county on the bond or note, and on the mortgage
given to secure it.” See id. DuTrac sued Star Properties personally in two
counties and in both counties DuTrac joined its actions on the note and
11
mortgage. Thus, DuTrac did not split its actions. Third, as admitted by the
Hefels in their brief, DuTrac obtained personal judgments against debtor-
mortgagor Star Properties, “thus allowing [DuTrac] to continue to seek a recovery
on the deficiency.”
While the appeal in Faught I was pending, the “bank brought a separate
action to recover personal judgment” on the debtors’ delinquent notes, claiming
“it was legally and equitably entitled to personal judgment on the debtors’ notes
because the debtors’ bankruptcy action had prevented it from pursuing this
remedy along with the foreclosure.” Faught II, 492 N.W.2d at 423. The Faught II
court held the bank’s second action was “barred by the doctrine of merger”:
[The bank] overreacted to the federal court’s limited lifting of
the bankruptcy stay. [The bank] doing so was not without
consequences. It unmistakably signaled an intent to proceed
against the real estate and not against the [debtors], personally,
thereby freeing them to dismiss the bankruptcy action altogether.
To permit the bank to now backtrack on that decision would tip the
scales unfairly in the bank’s favor. The [debtors] could have
discharged their indebtedness in bankruptcy, thereby leaving the
bank in the same position in which it now finds itself.
Id. at 424-25; see In re Wade, 354 B.R. 876, 883 (Bankr. N.D. Iowa 2006)
(stating in Faught II, the bank was “attempting to seek a personal judgment and
general execution on a note already included in a foreclosure action”).
In Faught II, the bank alternatively argued the equities in its favor, as
recognized for the bank in Tiffany II, should permit its second action to proceed.
Id. at 425 (citing Tiffany II, 440 N.W.2d at 586-88) (stating if court would apply the
merger doctrine and hold that bank was limited to its mortgage-foreclosure action
as its sole remedy, court would be required to disregard the unambiguous
12
language in the security agreement stating bank’s remedies against debtors are
“cumulative and not alternative,” and although bank is “entitled to only one
satisfaction of its debt, it was not bound to join its replevin action with its
foreclosure action, and concluding “real estate foreclosure judgment does not
merge with the replevin remedy” where the debtors’ “underlying debt still remains
unpaid”)). The Faught II court decided the bank, in claiming it was entitled to
equitable relief because there had not been a multiplicity of suits, “misconstrues
the whole notion of merger. The bank had its day in court. It chose the
expedient route of taking the real estate in satisfaction of its indebtedness.” Id.The Hefels argue, based on Faught II, the documents forming the basis of
DuTrac’s foreclosure suit merged into the two judgments. The judgments are
then the higher decree with the underlying personal guaranty inferior to the terms
of the judgment. We agree as to “the documents forming the basis of DuTrac’s
foreclosure suit,” but those “underlying documents” did not include the separate
and distinct personal guaranties of the Hefels. The Star Properties’ foreclosure
judgments were based on personal jurisdiction against debtor-mortgagor Star
Properties and are clearly distinguishable from the in rem judgment in the Faught
cases that was the basis for the Faught II court’s application of the merger
doctrine.
Here, the only attorney fees expended and sought at the time of the
foreclosure judgment were the fees leading up to the routine foreclosure based
on “the mortgages and associated” note. The Hefels’ personal guaranties
contain separate and distinct promises to pay attorney fees. The Hefels have not
13
cited any cases applying the merger doctrine to a continuing guaranty executed
by a guarantor who was not the debtor-mortgagor in the foreclosure action and
who was not a party to the foreclosure action that resulted in a personal
judgment against the debtor. Accordingly, we are not persuaded Faught II
supports an application of the merger doctrine in the circumstances of this case.
The Hefels recognize the court in Tiffany II allowed the bank to pursue a
subsequent action and also recognize the guaranty between the Hefels and
DuTrac was in force. The Hefels therefore seek to distinguish Tiffany II by
claiming DuTrac “here seeks not to recoup the deficiency in its initial judgment
but rather to add hundreds of thousands of dollars to that deficiency by
essentially adding an additional judgment for attorney fees—and those are
primarily from fees and costs incurred in separate litigation in the bankruptcy
court.” According to the Hefels, DuTrac wants to expand “the limited exceptions
to the doctrine of merger” by using this action “to entirely redefine the debt at
issue.”
Contrary to the Hefels’ claim, we conclude DuTrac is seeking to “recoup
the deficiency in its initial judgment” and is not asking us to “redefine the debt at
issue.” Star Properties’ judgment debt, for which the ongoing continuing
guaranty is a separate and distinct security, remains unpaid. See City of
Davenport v. Shewry Corp., 674 N.W.2d 79, 86 (Iowa 2004) (stating a guaranty
is a contract by one party (the Hefels) to a second party (DuTrac) for the
fulfillment of a promise of a third party (Star Properties)). DuTrac is now seeking
relief from the Hefels, who are neither debtor nor mortgagor, but who are
14
separately liable for the debtor’s unpaid judgments based on the guaranty. See
id. (stating a guarantor’s liability is “determined by reference to the obligations
assumed by the guarantor in the guaranty, not by reference to the contract of the
primary obligor”); see also Aetna Life Ins. Co. v. Anderson, 848 F.2d 104, 107
(8th Cir. 1988) (stating a guarantor’s liability is primarily defined by the guaranty).
As a result of their improper bankruptcy discharge, the Hefels’ liability for Star
Properties’ debt under the separate guaranty had not been adjudicated and
reduced to judgment. Thus, we agree with the district court’s conclusion that the
Hefels are not entitled to the benefits of merger.3 See Allison-Bristow Cmty. Sch.
Dist. v. Iowa Civil Rights Comm’n, 461 N.W.2d 456, 460 (Iowa 1990) (“[T]his
case is not a situation of relitigation of an issue already decided. Neither do we
believe that one who is not a party to the [initial] suit may claim the benefits of
merger.”).
Finally, an independent and separate basis for our rejection of the Hefels’
merger challenge is found in the Hefels’ waiver of such defenses in the guaranty;
the Hefels agreed to “waive any and all acts or thing by [DuTrac] to be done to
establish the liability of the undersigned in the premises, agree that no act or
thing, except payment shall in any way affect or impair this guaranty.” See
Anderson, 848 F.2d at 107 (stating “in the guaranty a guarantor may waive
defenses he otherwise would be entitled to raise” and ruling guarantor waived
3
The Hefels’ guaranty provided: “The liability hereunder shall in no way be affected or
impaired by and [DuTrac] is hereby expressly authorized to make . . . any sale . . .
settlement, release . . . modification or other disposition of the indebtedness.”
15
defense that property mortgagee received as result of foreclosure sale had
satisfied mortgagor’s debt).
Having found the merger doctrine does not apply, we turn to the issues
raised by DuTrac.
IV. Accrued Interest
DuTrac claims the district court erred as a matter of law in failing to award
accrued interest (June 2, 2010 to June 14, 2014) in the amount of $245,398.02,
plus interest accruing thereon at the rate of 8.5% per annum from and after June
14, 2014. The Hefels agree the district court “left off this segment of interest in
issuing its judgment and are unaware of a basis for the exclusion of the same in
total.” But as a cross-appeal challenge, the Hefels contend DuTrac “is not
entitled to interest that accrued during the time period from when the foreclosure
sales were originally ordered (November 2010) to when they actually occurred
(May 2011).” The Hefels claim the “district court erred in failing to use its
equitable powers to constructively treat the sales as if they had occurred on
November 16, 2010.” See Iowa Code § 654.5 (2013) (“If the mortgagor does not
file a demand for delay of sale, the sale shall be held promptly after entry of
judgment.”).
As DuTrac points out, nothing in the record shows DuTrac acted
inequitably in postponing the sales. We find persuasive the directive of our
supreme court: “A judgment when entered is subject to the control of the party in
whose favor it is. He, his agent or attorney, may, in the use of the proper
process of the law, enforce it, and no other person. It is his judgment.” Ex Parte
16
Hampton, 2 Greene 137, 139 (Iowa 1849). Thus, DuTrac owns and may
unilaterally act on its judgment by dictating the process to use in enforcing the
judgment. See id. During oral argument, the Hefels’ attorney acknowledged
there is no Iowa case requiring a judgment creditor to hold its foreclosure sale
within a specific time after judgment entry. But, the Iowa Code does provide one
guideline by allowing the owner of a foreclosure judgment a minimum of two
years for execution. See Iowa Code § 615.1 (providing a two-year statute of
limitations for execution on a judgment resulting from “the foreclosure of the real
estate mortgage”). DuTrac’s sale dates met its statutory obligation, and we find
no basis for “inherent equitable relief.”
As before, an independent and separate basis for our rejection of the
Hefels’ “constructive sales” challenge is found in the Hefels’ waiver of such
defenses in the guaranty. See Anderson, 848 F.2d at 107. Accordingly, we
conclude the district court erred in failing to award $245,398.02, plus additional
interest thereon. We remand for entry of a modified judgment in accordance with
this opinion.
V. The Court’s Reduction in the Amount of Requested Attorney Fees
DuTrac contends the district court abused its discretion in reducing its
request for attorney fees by $102,671.47—from $435,217.47 to $332,546. The
lender is critical of the court’s failure to offer specific reasons for slashing nearly
one-quarter of the amount requested.
DuTrac bears the burden of showing the legal services at issue were
reasonably necessary and the charges were reasonable in amount. See
17
GreatAmerica Leasing, 691 N.W.2d at 733. In fixing the attorney fee award, the
court must consider the following matters: (1) the time spent; (2) the nature and
extent of the services; (3) the amount of money involved; (4) the difficulty of
handling and importance of issues; (5) the responsibility assumed; (6) the results
obtained; (7) the standing of the attorneys in the profession; and (8) the
customary changes for similar service. Schaffer v. Frank Moyer Cnstr., Inc., 628
N.W.2d 11, 24 (Iowa 2001).
The district court found the hourly rate charged by DuTrac’s attorneys was
reasonable and “within the realm of acceptable rates within the Dubuque County
legal community.” The court was also impressed with the efforts by DuTrac’s
attorneys on complex legal tasks in the bankruptcy proceedings. The district
court rejected the Hefels’ claim they should not have to pay attorney fees for
“unsuccessful legal attempts,” holding “DuTrac had every right to pursue each
and every avenue it could to try to uncover any and all hidden assets the Hefels
chose to try to secrete from the bankruptcy court to avoid their liability under the
guarantee.”
In its ruling, the district court did voice two criticisms regarding DuTrac’s
fee request. First, the court agreed with the Hefels that “some of the actions
post-entry of judgment relate to action taken on behalf of DuTrac relating to the
ownership of their newly-acquired asset and not related to the lawsuit.” Second,
the court believed some of the work itemized by DuTrac was “duplicative” as to
18
“research that should have been accomplished at the inception of the case.”
DuTrac argues on appeal that those criticisms “pale in comparison” to the court’s
findings which support DuTrac’s position.
It is true that DuTrac’s attorneys were called to litigate a variety of issues
as part of its foreclosure on two residential subdivisions. The lender rightly
argues that had the Hefels not engaged in fraud, DuTrac would not have been
forced to incur additional legal fees to investigate and to pursue a revocation of
their bankruptcy discharge. The question is whether the court abused its
discretion in awarding $332,546 in attorney fees rather than $435,217.47 as
requested by DuTrac. Our concern on appeal stems from our mathematical
computation based on the court’s ruling:
The month of the revocation trial alone, the firm utilized more
than six members of the firm, to wit: four shareholders, one
associate and one paralegal for a total of 242 hours at a charge of
$42,354.00. In 2012, the firm charged $197,462. In 2013 the firm
charged $120,381. DuTrac paid $14,703 for services in the present
action.
....
Judgment is hereby awarded in favor of DuTrac . . . in the
amount of $332,546.00 [for attorney fees].
When we add together the 2012 fees ($197,462) and the 2013 fees ($120,381)
and the fees for the present action ($14,703), those years equal the amount the
court awarded—$332,546.00. Therefore, the time frame for the court’s fee
award appears to be two and one-half years. We affirm the district court’s award
of attorney fees for those years. But we are concerned the court may have
inadvertently failed to award fees requested for legal work done in 2010 and
19
2011. The award of fees only for 2012 and 2013 appears inconsistent with the
court’s intention (expressed earlier in the ruling) to hold the Hefels liable for fees
over three and one-half years:
The time taken to preserve DuTrac’s rights under the terms of the
lending contracts was extensive in that it lasted over three and one-
half years. During that time frame, there were many hours of
investigation and legal research undertaken by various members of
the firm. The most intricate of the legal tasks performed is the
three-day trial in federal bankruptcy court to seek revocation of the
[Hefels’] discharge. In fact, as DuTrac points out, the action itself is
considered extraordinary . . . . The attorneys were also engaged in
trial preparation, discovery, expert interviewing and retention,
appeals (three to be exact), and review of voluminous documents
that would not have otherwise been required had the [Hefels] been
honest with the court.
Accordingly, we remand for clarification and a “fresh consideration” of
whether the court intended to exclude (1) all of DuTrac’s attorney fees for 2010,
some of which pertain to the Hefels’ initial bankruptcy action and (2) all of
DuTrac’s attorney fees for 2011, many of which relate to the foreclosure sales
and to the ongoing bankruptcy issues. See GreatAmerica Leasing, 691 N.W.2d
at 733-34. The court’s ruling on remand should explain its reasons for awarding
or declining to award all or some of DuTrac’s 2010 and 2011 attorney fees in the
context of the Schaffer factors and in the context of “the whole picture.” See 628
N.W.2d at 24 (stating the court should use independent judgment with the benefit
of hindsight to award a “total fee appropriate for handling the complete case”);
see also Dutcher v. Randall Foods, 546 N.W.2d 889, 897 (Iowa 1996) (stating
effective appellate review requires the district court to make findings of fact and
to provide a “clear explanation of the reasons for the fee award”); Lynch v. City of
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Des Moines, 464 N.W.2d 236, 240 (Iowa 1990) (“The court can arrive at this
general conclusion without specifying with exactness each hour of time
unnecessarily spent.”).
VI. Prejudgment Interest on the Award of Attorney Fees Taxed as Costs
The parties agree the contracts obligate the Hefels to pay DuTrac’s
attorney fees. But DuTrac argues the district court erred in failing to rule the
Hefels contractually agreed to pay “interest on the attorney fees from the date
paid by DuTrac” and in failing to award such interest. DuTrac cites to language
in the commercial loan agreement:
COLLECTION, EXPENSES AND ATTORNEYS’ FEES. To
the extent permitted by law, Borrower agrees to pay all expenses of
collection, enforcement and protection of Lender’s rights . . . .
Expenses include . . . reasonable attorneys’ fees . . . court costs
and other legal expenses. These expenses will bear interest from
the date of payment until paid in full at the contract interest rate.
(Emphasis added.) DuTrac also cites a provision in the mortgages:
EXPENSES; ADVANCES ON COVENANTS; ATTORNEYS’
FEES; COLLECTION COSTS. Except when prohibited by law,
Mortgagor agrees to pay all of Lender’s expenses if Mortgagor
breaches any covenant in this Mortgage . . . . Mortgagor agrees to
pay all costs and expenses incurred by Lender in enforcing or
protecting Lender’s rights and remedies under this Mortgage,
including . . . attorneys’ fees, court costs, and other legal expenses
. . . . All such amounts . . . will bear interest from the time of the
advance . . . as provided in the Evidence of Debt and as permitted
by law.
(Emphasis added.) Finally, DuTrac cites to the Hefels’ guaranty:
[T]he [Hefels] jointly and severally . . . promise to pay . . . to
Bank when due all loans . . . notes, and all other debts . . . arising
out of . . . credit . . . granted . . . by Bank to Debtor . . . (the
“Indebtedness”) . . . including interest and charges, and to the
extent not prohibited by law, all costs, expenses, fees and attorney
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fees at any time paid or incurred in endeavoring to collect . . . the
Indebtedness, or to realize upon this Guaranty.
(Emphasis added). The Hefels counter the district court correctly denied
DuTrac’s request for prejudgment interest on the reasonable attorney fees
awarded as costs because those fees were “unliquidated until awarded and were
awarded as costs and not monetary damages.” Existing case law supports the
Hefels’ position. See Vasquez v. LeMars Mut. Ins. Co., 477 N.W.2d 404, 407
(Iowa 1991) (“‘Liquidated’ means the claim is certain and known.”).
DuTrac cites Schimmelpfennig v. Eagle National Assurance Corporation,
641 N.W.2d 814 (Iowa 2002), claiming the court determined that a claim for
attorney fees was “liquidated and complete” when the plaintiff paid the fees. We
are not persuaded. The court’s ruling was in the context of an insured suing for
indemnification from a liability insurer that had breached its duty to defend. 641
N.W.2d at 815. The court did not discuss attorney fees awarded as costs under
Iowa Code section 625.22, rather the court discussed attorney fees as an
element of the plaintiff-insured’s damages. See id. at 816; see also FNBC Iowa,
Inc. v. Jennessey Group, L.L.C., 759 N.W.2d 808, 810-11 (Iowa Ct. App. 2008)
(“As a general rule an indemnitee is entitled to recover, as a part of the damages,
reasonable attorney’s fees.”). Accordingly, Schimmelpfennig is not persuasive
as to attorney fees taxed as costs under section 625.22.
Assuming the contracts provided that interest on attorney fees
commenced from the time DuTrac paid each attorney-fee billing, we are required
to read a contract’s attorney-fees provision in tandem with the attorney fees
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authorized by “section 625.22, the statutory provision for attorney fees provided
for in contracts.” See Bankers Trust Co. v. Woltz, 326 N.W.2d 274, 278 (Iowa
1982); see also Van Sloun, 778 N.W.2d at 182 (“Iowa Code section 625.22
declares that when attorney fees are permitted under a contract provision, the
court is permitted to tax a reasonable amount of those fees as a part of costs.”).
We recognize “the presumption that parties incorporate applicable statutes into
their contracts.” Miller v. Marshall Cnty., 641 N.W.2d 742, 751 (Iowa 2002).
Further, “the parties may not contract in defiance of a statute [regulating] the
subject matter of their agreement.” Cornick v. Sw. Iowa Broad. Co., 107 N.W.2d
920, 921 (Iowa 1961). All the contracts herein recognize the presumption
incorporating applicable statutes into the contracts, stating: (1) loan agreement—
(“[t]o the extent permitted by law”); (2) mortgage—(“[e]xcept when prohibited by
law” and “as permitted by law”); and (3) guaranty—(“to the extent not prohibited
by law”).
Turning to existing case law on the taxation of contractual attorney fees as
costs, in a similar case where the bank sued the individual guarantors of a
corporate debtor and then sought to recover contractual attorney fees, our
supreme court stated: “[T]he right to attorney fees and costs is statutory and
depends upon the statute in force at the termination of the proceedings.” See
Woltz, 326 N.W.2d at 278. The statute in force at the termination of the instant
proceedings, Iowa Code section 625.22, provides: “When judgment is recovered
upon a written contract containing an agreement to pay an attorney fee, the court
shall allow and tax as a part of the costs a reasonable attorney fee to be
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determined by the court.” In its analysis of the identical statutory language, the
Woltz court ruled:
Since no party is entitled to costs until a judgment is recovered,
Iowa Code section 625.22 (1981), a party [DuTrac] has no vested
right to costs at the commencement of the action. The right to
costs accrues at the termination of the proceedings and this right
exists solely by virtue of the statute. The extent of the right can be
governed only by the statute in existence at the time the right vests.
326 N.W.2d at 278 (emphasis added). As acknowledged by DuTrac during oral
arguments, no Iowa court has ruled Iowa Code section 625.22 authorizes an
award of prejudgment interest on the attorney fees taxed as costs after entry of
judgment. This court’s role is to apply “existing legal principles.” See Iowa R.
App. P. 6.1101(3). We therefore affirm the district court’s ruling, for the reasons
stated above, and hold DuTrac is not entitled to prejudgment interest on the
court’s award of reasonable attorney fees taxed as costs under section 625.22.
VII. Conclusion
We affirm the district court’s ruling finding the merger doctrine
inapplicable, declining the Hefels’ request to use a “constructive” sale date, and
declining DuTrac’s request for prejudgment interest on attorney fees taxed as
costs under section 625.22. We reverse and remand for entry of a modified
judgment ordering the Hefels to pay accrued interest in the amount of
$245,398.02, plus interest accruing at the contract rate from and after June 14,
2014. We affirm the court’s award of attorney fees for 2012 and the years
thereafter in the amount of $332,546. We remand for the court to make specific
findings of fact, based on the existing record, as to whether DuTrac has proven
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its entitlement to none, some, or all of its attorney fees for 2010 and 2011. We
do not retain jurisdiction.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED
ON APPEAL; AFFIRMED ON CROSS-APPEAL.