Iowa Farm Bureau Federation v. Daden Group, Inc. ( 2020 )

IN THE COURT OF APPEALS OF IOWA
No. 18-1145
Filed March 4, 2020
IOWA FARM BUREAU FEDERATION, an Iowa Non-Profit Corporation,
Plaintiff/Counterclaim Defendant-Appellee,
vs.
DADEN GROUP, INC., an Iowa Corporation; DANA RUPE, individually; and
WILLIAM GANSEN, Individually,
Defendants/Counterclaim Plaintiffs-Appellants.
_________________________________
DADEN GROUP, INC., DANA RUPE,
and WILLIAM GANSEN,
Third-Party Plaintiffs-Appellants,
vs.
ADAM KOPPES,
Third-Party Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Linn County, Christopher L. Bruns,
Judge.
Daden Group, Dana Rupe, and William Gansen appeal the findings of the
district court that a subrogation agreement was enforceable, a company and its
principals waived certain defenses, and a director of the company did not breach
a fiduciary duty. AFFIRMED.
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Kate B. Mitchell and Eric W. Johnson of Beecher, Field, Walker, Morris,
Hoffman & Johnson, P.C., Waterloo, for appellants.
Jeffrey A. Stone, Roger W. Stone, and Gail Brashers-Krug of Simmons
Perrine Moyer Bergman PLC, Cedar Rapids, for appellee.
Heard by Vaitheswaran, P.J., Mullins, J., and Potterfield, S.J.*
*Senior judge assigned by order pursuant to Iowa Code section 602.9206
(2020).
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VAITHESWARAN, Presiding Judge.
We must decide whether a subrogation agreement was enforceable,
whether a company and its principals waived certain defenses, and whether a
director of the company breached a fiduciary duty.
I. Background Facts and Proceedings
A privately held sports and footwear company known as Daden Group,
obtained a business loan from First American Bank. The loan agreement was
signed by Daden’s director, William James Gansen, and its president, Dana Rupe.
The bank took a security interest in “all of [Daden Group’s] assets” and Gansen
and Rupe executed individual guaranty agreements in favor of the bank.
Iowa Farm Bureau Federation (“Farm Bureau”) was a large investor in
Daden Group. Its investment manager, Adam Koppes, as well as a member of
one of Farm Bureau’s investment funds1 held two of the five seats on Daden
Group’s board of directors. Farm Bureau had an existing relationship with First
American Bank, which was the repository of its wealth management accounts.
Like Gansen and Rupe, Farm Bureau executed a “limited continuing
payment guaranty” in favor of First American Bank. Under the guaranty
agreement, Farm Bureau “unconditionally, absolutely, and irrevocably
guarantee[d] to [First American Bank] the full and prompt payment and
performance when due . . . of all Obligations of [Daden Group] to the [bank].” Farm
Bureau’s exposure under the agreement was $4 million. According to Farm
Bureau’s general counsel, the wealth management accounts served as “[s]ecurity
1According to Farm Bureau’s general counsel, Farm Bureau was the general
partner in the “Rural Vitality Fund.”
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for this [g]uaranty.” Documents indicated the accounts also served as security for
the underlying loan.
As consideration for Farm Bureau’s guarantee, Daden Group agreed to
pay Farm Bureau fees totaling “approximately $504,000.” Daden Group paid
$75,000 toward the obligation. Daden Group also made the following concession
to Farm Bureau: “In the event that [Farm Bureau] is required to make payment to
First American Bank, or any third party, in fulfillment of the Guaranty, [Daden
Group] covenants and agrees that it shall repay [Farm Bureau] any such amounts
paid by [Farm Bureau.]”
Daden Group defaulted on its loan. In the words of Koppes, the company
was “under water,” meaning that “its [l]iabilities exceeded assets.” Farm Bureau
agreed to repay the loan. It executed a subrogation agreement with First American
Bank under which it would be “fully subrogated to the rights of” First American
Bank “upon payment of the indebtedness.” 2
After paying off Daden Group’s loan, Farm Bureau sued Daden Group,
Gansen, and Rupe. Farm Bureau raised several claims and demanded “judgment
against the defendants together with interest, attorney’s fees, expenses, and
costs.” The defendants filed counterclaims and a third-party claim against Koppes
for breach of fiduciary duty. Following trial, the district court ruled in favor of Farm
Bureau, entering judgment against Daden Group, Gansen, and Rupe for
$3,893.081.14 with interest and granting Farm Bureau other relief. The court
2 Farm Bureau’s general counsel testified Farm Bureau “agreed to provide the
funds immediately in cash in exchange for executing the [subrogation] agreement.”
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denied Daden Group’s counterclaim for breach of fiduciary duty against Koppes
and his employer, Farm Bureau.
On appeal, Daden Group, Gansen, and Rupe (collectively “Daden”), argue
(A) the subrogation agreement between Farm Bureau and First American Bank
was unenforceable; (B) Farm Bureau was not a subsurety, as the district court
found, (C) the district court should have recognized a claim of lender liability
against Farm Bureau; and (D) the district court erred in denying the claim against
Farm Bureau and its investment manager for breach of fiduciary duty.
II. Analysis
A. Subrogation Agreement
The subrogation agreement between Farm Bureau and First American
Bank recited that “for . . . good and valuable consideration, the receipt and
sufficiency of which the parties acknowledge,” Farm Bureau would pay the bank
“an amount equal to the amount of [Daden’s] indebtedness” to the bank. The
agreement further provided that “upon payment of the [i]ndebtedness . . . [Farm
Bureau would] be fully subrogated to the rights of [the bank] pursuant to [the] Loan
Documents to the maximum extent provided by applicable law.” The agreement
was one of the bases of Farm Bureau’s claim for money judgment against Daden.
The district court addressed Farm Bureau’s subrogation claim as follows:
(1) there was consideration for the subrogation agreement; (2) the defendants
executed waivers and acknowledgements indicating they “always intended” to be
“held liable for the full amount of the indebtedness regardless of whether [Farm
Bureau] had paid [First American Bank] on its guarantee”; (3) “[b]ecause [Farm
Bureau] . . . successfully stepped into [First American Bank’s] shoes, it [could]
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enforce those waivers and acknowledgments”; and, accordingly, (4) the
defendants were “jointly and severally liable to [Farm Bureau] for the full amount
of the indebtedness.”
Daden contends the subrogation agreement was unenforceable because
“[o]nce [Farm Bureau] paid off [First American Bank] in full, [the bank] had no
remaining rights to which [Farm Bureau] could be ‘subrogated.’” Farm Bureau
responds that the argument is “fundamentally at odds with the basic tenets of
subrogation law,” which “typically” afford subrogation rights when a person has
“satisfied an obligation that arguably should have been satisfied by someone else.”
Farm Bureau is correct.
Subrogation “means to substitute or put in place of another.” Allied Mut.
Ins. Co. v. Heiken, 675 N.W.2d 820, 824 n.1 (Iowa 2004) (citing 4 Rowland H.
Long, The Law of Liability Insurance § 23:01, at 23–2 (1998)). The entity that is
“substituted succeeds to the rights of the other in relation to the debt or claim, and
its rights, remedies, or securities.” Kent v. Bailey, 164 N.W. 852, 853 (Iowa 1917).
Farm Bureau’s discharge of Daden’s obligation to First American Bank allowed
Farm Bureau to pursue its subrogation rights against Daden. Id. (stating
subrogation “has been styled a legal fiction whereby an obligation which has been
discharged by a third person is treated as still subsisting for his benefit, so that by
means thereof one creditor is substituted to the rights, remedies, and securities of
another”); see also Spreitzer v. Hawkeye State Bank, 779 N.W.2d 726, 743 n.7
(Iowa 2009) (“[A] guarantor is eligible for subrogation only when the underlying
obligation to the creditor has been fully satisfied, regardless of any limit on the
amount of debt the guarantor agreed to pay.”); Hills Bank & Tr. Co. v. Converse,
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772 N.W.2d 764, 772 (Iowa 2009) (adopting Restatement (Third) of Suretyship &
Guaranty § 22 (1996)); Restatement (Third) of Suretyship & Guaranty § 22(1)(b)
(1996) (stating generally “when the principal obligor is charged with notice of the
secondary obligation it is the duty of the principal obligor to reimburse the
secondary obligor to the extent that the secondary obligor: . . . makes a settlement
with the obligee that discharges the principal obligor, in whole or part, with respect
to the underlying obligation”). By the terms of the subrogation agreement, Farm
Bureau succeeded to the bank’s rights. Daden’s arguments to the contrary are
unavailing. We conclude the district court did not err in finding the subrogation
agreement enforceable. See NevadaCare, Inc. v. Dep’t of Human Servs., 783
N.W.2d 459, 465 (Iowa 2010) (“A breach-of-contract claim tried at law to the district
court is reviewed by us for correction of errors at law.”).
B. Subsurety
In addressing Daden’s argument that the subrogation agreement was
unenforceable, the district court stated the outcome dictated by the agreement was
“consistent with the law of surety . . . because [Farm Bureau] was a subsurety and
Gansen and Rupe were principal sureties.” Daden takes issue with the finding.
We need not address the merits of Daden’s surety argument because
Gansen’s and Rupe’s guaranty agreements expressly waived “all defenses of
suretyship.” As discussed below, we find the waiver enforceable.
C. Lender Liability
Daden filed a counterclaim against Farm Bureau alleging “[t]o the extent
[Farm Bureau] asserts that it has been subrogated to the rights of [First American
Bank] under the Subrogation Agreement . . . , [Farm Bureau] is subject to the
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obligations of the lender to the same extent as was [First American Bank].” Daden
further alleged Farm Bureau breached its obligation not to increase Daden’s risk
or “undermine the Guarantors’ remedies by releasing the collateral secured by the
[Farm Bureau] Security Agreement.” The collateral Daden referenced were Farm
Bureau’s wealth management accounts at First American Bank.
The district court found that the wealth management accounts secured
Farm Bureau’s guaranty agreement rather than the underlying loan. Based on this
finding, the court concluded, “Whether the collateral for the guarantee could be
released was a matter solely between [Farm Bureau] and [First American Bank]”
and Daden’s lender liability claim lacked a factual basis. The court further
concluded that waivers in the loan documents executed by Daden and the bank
allowed the bank to “release, impair, sell or otherwise dispose of any security or
collateral” and the waivers were “sufficient to preclude” the lender liability claim.
As noted at the outset, the record is conflicting on whether the wealth
management accounts served as security for Farm Bureau’s guaranty agreement
with the bank or whether they served as security for the underlying loan. We need
not resolve the conflict because, whatever the accounts secured, Daden waived
its right to challenge how the accounts were handled. Specifically, the “commercial
line of credit agreement and note” executed by Gansen and Rupe on behalf of
Daden stated Daden “waive[d] . . . any . . . notice and defense due to . . . any
substitution or release of collateral.” The same language appeared in the
“commercial promissory note.” And Gansen and Rupe individually waived the
bank’s “failure to protect, preserve, or resort to any collateral” and “any defense
that could be asserted by Borrower, including defenses arising out of . . . lender
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liability.” They also waived “any and all rights, benefits, and defenses . . . that
might operate . . . to limit Guarantor’s liability under, or the enforcement of, this
Guaranty.”
The waivers were enforceable. See Farmers State Bank, Grafton v.
Huebner, 475 N.W.2d 640, 646 (Iowa 1991) (enforcing waiver language in a note
and stating party “waived any right to complain”); Palo Sav. Bank v. Sparrgrove,
No. 02-1234, 2004 WL 57466, at *2 (Iowa Ct. App. Jan. 14, 2004) (concluding the
defendant “waived any claims or defense based on the Bank’s application of the
sale proceeds”). Accordingly, we conclude the district court did not err in granting
judgment in favor of Farm Bureau on Daden’s counterclaim based on lender
liability.
D. Breach of Fiduciary Duty
Daden filed a counterclaim alleging Farm Bureau’s investment manager
Adam Koppes breached a fiduciary duty to Daden when he served on its Board of
Directors and Farm Bureau was vicariously liable for his actions. Following trial,
the district court denied the counterclaim, finding no breach or, alternatively, no
causal connection between a breach and damages.
On appeal, Daden insists Koppes “was not looking out for the interests of
Daden and its shareholders, but rather, for the interests of [Farm Bureau].” Farm
Bureau responds by pointing to the district court’s findings that Daden’s evidence
lacked credibility. Both sides agree our review is de novo. See Iowa R. App.
P. 6.907; Weltzin v. Nail, 618 N.W.2d 293, 300 (Iowa 2000) (“Money damages to
remedy the corporation are not uncommon in derivative suits—yet the case
remains in equity.”); cf. Westco Agronomy Co. v. Wollesen, 909 N.W.2d 212, 226
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(Iowa 2017) (noting breach-of-fiduciary-duty claim for which damages were sought
was a legal claim).
The statutory standards of conduct for directors are as follows: “1. Each
member of the board of directors, when discharging the duties of a director, shall
act in conformity with all of the following: a. In good faith. b. In a manner the
director reasonably believes to be in the best interests of the corporation.” Iowa
Code § 490.830(1) (2017). These obligations have been described as a fiduciary
duty owing to a company and its shareholders. Cookies Food Prods., Inc. v. Lakes
Warehouse Distrib., Inc., 430 N.W.2d 447, 451 (Iowa 1988); cf. Hanrahan v.
Kruidenier, 473 N.W.2d 184, 186 (Iowa 1991) (characterizing the statutory
standard as “the business judgment rule,” and stating “[w]hen directors act in good
faith in making a business decision, when the decision is reasonably prudent, and
when the directors believe it to be in the corporate interest, there can be no
liability”).
Koppes, as a member of Daden’s board, owed a fiduciary duty to Daden.
See Iowa Code § 490.830(1); Cookies, 430 N.W.2d at 451.3 The key question is
whether he breached that duty. Our de novo review of the record discloses the
following pertinent facts.
3At trial, Farm Bureau appeared to argue Koppes owed no fiduciary duty to Daden
because Daden was insolvent. Farm Bureau abandoned the argument on appeal.
Cf. Boyd v. Boyd & Boyd, Inc., 386 N.W.2d 540, 542 (Iowa Ct. App. 1986) (“Iowa
allows an insolvent corporation to prefer its own directors or other officers if they
are bona fide creditors and if the preference is given in return for a
contemporaneous loan or advance to the corporation. . . . In other words, Iowa
prohibits preferences to corporate directors granted to satisfy preexisting debts.”).
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Gansen and Rupe had an exclusive sales relationship with their footwear
supplier, Caleres. When they learned Caleres was selling product to other
vendors, they stopped paying Caleres. In time, Daden discussed a proposed “debt
swap” with Caleres to resolve their differences. Rupe testified that, under the “two-
for-one swap,” Caleres was “willing to forgive a dollar of debt” for every dollar paid
down by Daden. She and Gansen “were excited and interested” in the proposal,
but they “need[ed] cash” to implement the agreement. They discussed the
proposal with Koppes. According to Rupe, “The idea fell flat with him.” Gansen
similarly testified Koppes “slammed the door shut” on the proposal. Nonetheless,
Gansen and Rupe brought the proposal to Daden’s board. Koppes and the other
Farm Bureau-affiliated board member rejected it. Rupe believed the remaining
three members of the board could not override the two votes.
An amendment to the articles of incorporation supports Rupe’s belief that a
majority of the board members may have had difficulty countermanding the
minority position. But, even if Koppes understood he could unilaterally block the
swap proposal, his decision to do so did not violate his fiduciary duty to Daden.
Rupe admitted the swap required an infusion of cash by Daden. Rupe conceded
Daden was experiencing financial difficulties at the time, and she also conceded
Farm Bureau had the right to elect against injecting additional money. Although
she maintained she and Gansen could have invested their own funds or obtained
funding from other sources but for Koppes’ objection, she acknowledged those
“options were not explored.”
Even if we assume Koppes was the person who stymied pursuit of other
funding sources as Rupe maintained, there is scant evidence to suggest he did so
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to harm Daden. To the contrary, the record suggests Koppes was aware of
Daden’s financial difficulties and he determined an additional infusion of cash by
Daden would exacerbate those difficulties. See Dennison v. Mediacomm, Inc., No.
05-0308, 2006 WL 1627998, at *4 (Iowa Ct. App. June 14, 2006) (noting “the
company’s long-term prospects were bleak”); Kelly v. Englehart Corp., No. 1-241,
2001 WL 855600, at *7–8 (Iowa Ct. App. July 31, 2001) (noting “a general
downturn” in a company’s business operations did not establish self-dealing).
Notably, Rupe agreed to accept Koppes’ assistance in negotiations with Caleres,
after it became clear Rupe and Gansen had hit a dead end. Contrary to the
assertions of Rupe and Gansen, Koppes testified his goal was not to subvert a
deal with Caleres but to “try[] to keep the relationship [with Caleres] intact.” He
noted that Daden had “a bunch of inventory” and “keeping the relationship intact
in some way, shape or form would have allowed the company to continue to sell”
that inventory. He did not believe he undermined Rupe and Gansen in his
discussions with Caleres, and he denied telling Caleres that they were out of the
company and the creditors were now in control, as Rupe and Gansen claimed.
The district court afforded Koppes’ testimony more credibility than the
testimony of Rupe and Gansen. We give weight to the credibility finding, in light
of the court’s first-hand ability to assess demeanor, notwithstanding Koppes’
imprecise recollection of certain events. See In re Marriage of Hoffman, 867
N.W.2d 26, 38 (Iowa 2015) (Waterman, J., dissenting) (noting the difficulty of
assessing credibility from a cold transcript).
At the end of the day, Koppes made a business decision to work on
salvaging the relationship with Caleres without throwing good money after bad. As
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Farm Bureau stated in its trial brief, his interest aligned with the interests of Rupe
and Gansen insofar as all three wanted Daden to prosper. We agree with the
district court that the decision was made in good faith and Koppes reasonably
believed he was acting in Daden’s best interests. We conclude Koppes did not
breach his fiduciary duty to Daden and the district court acted equitably in denying
relief on Daden’s counterclaim.
We affirm the district court’s judgment in favor of Farm Bureau.
AFFIRMED.