Opinion
No. 4-514 / 03-1772
Filed January 13, 2005
Appeal from the Iowa District Court for Henry County, R. David Fahey, Judge.
Bank appeals from a summary judgment entered in favor of corporate depositor and one of its two co-owners on bank's claim to recover overdrafts on the account. REVERSED AND REMANDED.
Wm. Scott Power and Brent Ruther of Aspelmeier, Fisch, Power, Engberg Helling, P.L.C., Burlington, for appellant.
Myron L. Gookin of Foss, Kuiken, Gookin Cochran, P.C., Fairfield, for appellees.
Heard by Huitink, P.J., and Mahan, Miller, and Vaitheswaran, JJ., and Brown, S.J.
Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2003).
The issue in this appeal is whether certain promissory notes satisfied a preexisting debt created by bank overdrafts. The district court granted summary judgment dismissing plaintiff Farmers National Bank of Winfield's petition and it appeals. We find there are material issues of fact precluding the grant of summary judgment and therefore reverse and remand.
I. Background and proceedings.
Defendant Winfield Implement Co., Ltd. (Winfield) was formed in 1992 by defendant Jerry D. Steele, owner of forty-nine percent of the stock, and James H. Hassenfritz, owner of the remaining fifty-one percent. Steele opened a checking account for Winfield at plaintiff Farmers National Bank of Winfield (the bank). The account agreement, signed by Steele personally and on behalf of Winfield, provided that Steele and Winfield would be jointly and severally liable "for any account shortage resulting from charges or overdrafts, whether caused by you or another with access to this account."
Several account agreements were signed, but all were signed by Steele and contained the same language regarding joint and several liability for overdrafts. One of the agreements was also signed by a Jeff Suter. Steele's testimony indicated Suter was a Winfield employee and his signature was merely to authorize Suter to sign checks for Winfield. No relief is sought regarding Suter in this case.
Financial problems, primarily in its dealings with John Deere, overtook Winfield beginning in 2000. The checking account at the bank fluctuated between negative and positive balances, as the bank honored overdrafts. The overdraft deficit grew to $372,068.81 on September 26, 2001. The bank was requesting payment. On September 27, 2001, it accepted an $83,000.00 note from Steele, and the next day a $290,000.00 note from Hassenfritz, both in favor of the bank. Both notes matured on January 2, 2002. The proceeds of both notes were applied to Winfield's checking account, resulting in a positive balance. Steele's $83,000.00 note was repaid; the $290,000.00 Hassenfritz note was not, as he was insolvent.
The bank then sued Steele and Winfield for $217,934.08, which it claimed was the balance due after the application of all credits. The bank claimed Steele and the corporation were jointly responsible for this balance under the depositor's agreement noted above. Winfield and Steele denied responsibility, raising novation/substituted contract, accord and satisfaction, payment, waiver of performance, unconscionability, and reasonable expectations.
Cross-motions for summary judgment were filed. In sustaining the defendants' motion, the district court reasoned that because the two notes were credited to Winfield's checking account, the negative balance was erased and consequently there could be no overdraft debt remaining as a matter of law. The bank claims the district court erred in granting summary judgment to Winfield and Steele, and in not awarding summary judgment to the bank. Winfield and Steele, in addition to supporting the district court's decision, maintain the other defenses they raised also support summary judgment in their favor.
II. Standard of review.
Our review of the grant of summary judgment in this breach of contract action is for errors at law. Racing Ass'n of Cent. Iowa v. Fitzgerald, 648 N.W.2d 555, 557 (Iowa 2002), reversed on other grounds by Fitzgerald v. Racing Ass'n of Cent. Iowa, 593 U.S. 103, 123 S. Ct. 2156, 156 L. Ed. 2d 97 (2003).
Summary judgment is proper when there is no genuine issue of [material] fact and the moving party is entitled to the judgment as a matter of law. The burden of showing the nonexistence of a material fact is upon the moving party. While an adverse party generally cannot rest upon his pleadings when the moving party has supported his motion, summary judgment is still not proper if reasonable minds could draw different inferences and conclusions from the undisputed facts. In this respect, summary judgment is functionally akin to a directed verdict; every legitimate inference that reasonably can be deduced from the evidence should be afforded the nonmoving party, and a fact question is generated of reasonable minds could differ on how the issues should be resolved.
Bailey v. Batchelder, 576 N.W.2d 334, 337 (Iowa 1998) (quoting from Knapp v. Simmons, 345 N.W.2d 118, 121 (Iowa 1984) (citations omitted)). "The district court should grant a party's motion for summary judgment if there is no issue as to any material fact and the moving party is entitled to judgment as a matter of law." Nationwide Mut. Ins. Co. v. Kelly, 687 N.W.2d 272, 274 (Iowa 2004). Significant to this appeal, even when facts are undisputed, a fact question may result if reasonable minds could reach a different conclusion based on those facts. Iowa R. App. P. 6.14(6)( q); Schermer v. Muller, 380 N.W.2d 684, 687 (Iowa 1986).
III. Discussion.
A. Winfield and Steele's summary judgment motion — payment.
The district court determined that when the bank credited the overdrawn account of the defendantswith the amount of the Steele and Hassenfritz notes the overdrafts were paid and no longer existed. We believe crediting the account with the note proceeds is evidence that there had been payment, but it is not conclusive.
A bank may, but is not obliged to, honor overdrafts of its customer. 11 Am. Jur. 2d Banks and Financial Institutions § 939 at 92 (1997). In the event it does honor them, the bank is considered to have made a loan to its customer. Id. § 937, at 90; see also Clinton Nat'l Bank v. Saucier, 580 N.W.2d 717, 721 (Iowa 1998).
The issue here is whether the notes constitute payment of those loans by the bank to Winfield and Steele. ```Payment' is defined as the discharge of a pecuniary obligation by money or what is accepted as the equivalent of a specific sum of money." 60 Am.Jur. 2d Payment § 1 at 713 (2004). Payment requires the mutual agreement of the parties, and thus depends mainly on the intention of the parties. Id. § 2 at 714.
The general rule is that a note from a customer in favor of the bank will not constitute payment of a preexisting obligation, unless the parties so agree. Id. § 46 at 742; see also Orcutt v. Hanson, 163 N.W.2d 914, 916 (Iowa 1969). The note is only conditional payment, the condition being payment of the note. The note delays the required performance of the underlying obligation until the note is paid, but does not satisfy the underlying obligation. Orcutt, 163 N.W.2d at 916. Generally, if the creditor's underlying security is impaired, the note will not be considered payment. Id.
Winfield and Steele claim there was such an agreement and the bank maintains there was not. The parties do agree to the extent the subject was not explicitly discussed and there was no express agreement the notes would replace the overdraft debt. It is true, however, the agreement need not be an express one, but "a clear agreement or manifestation of intention of both the parties that a note shall constitute payment is essential." 60 Am.Jur. 2d Payment § 51 at 745. That same authority indicates that, unless there is an express agreement, "compelling circumstances" which "clearly indicate [a] contrary intention of [the] parties" must exist before promissory notes will be considered payment for a preexisting debt. Id.; accord A. Leschen Sons Rope Co. v. Mayflower Gold Mining Reduction Co., 173 F. 855, 859 (8th cir. 1909) (stating "clear agreement" or "indubitable intention of the parties" required)
In support of their contention there was such an agreement, Winfield and Steele point to several aspects of the notes and surrounding circumstances. They first seek to uphold the district court's rationale by pointing to the language of Steele's note reciting, "I will receive all of this principal sum ($83,000.00) on 09-27-2001." This amount, they assert, was paid into the account which, along with the Hassenfritz note, brought the account to a plus balance. The bank claims the crediting of the account with the amounts of the two notes was an accounting process only, and the substance of the transaction was an attempt by the bank to further secure the overdraft indebtedness. We believe the fact the bank credited the account with the amounts of the two notes may be considered by a fact-finder as evidence that a new agreement had been reached between the bank and Steele and Hassenfritz. We do not believe it establishes that agreement as a matter of law, as the district court concluded.
Steele also supports his contention there was an agreement that the two notes were considered payment of the overdraft position by pointing out that while Winfield and Steele were obligated originally by the account agreement, the new notes, in contrast, made Hassenfritz, his wife, and Steele's wife, obligors as well, and did not include Winfield or Suter. They also point out that the relative amount of the obligations changed: Steele would originally have been responsible for the entire debt, but the notes reduced his responsibility to $83,000. The terms changed as well because interest accrued under the notes and the debt went from an unsecured loan to an ostensibly secured one, in that the two notes indicate they are secured by real estate mortgages and other collateral.
The record does not reflect whether such security was actually taken.
Steele also points out that his note was marked paid and to statements made by Kim Robb, the bank's officer who dealt most closely with this situation, that the "proceeds" of the notes were deposited in the Winfield account and "went against these overdrafts," and that the proceeds made the account balance "go positive." Robb further stated that once a negative balance goes positive, the bank would have no right to demand further money be deposited in the account and the bank would have no right of setoff against other accounts.
The bank responds that marking Steele's note as paid only indicated that amount was credited against the total overdraft deficit, not that Steele was discharged from all obligations. The bank's principal contention throughout is that the new notes were intended only to enhance the bank's security on the overdraft debt and were never intended to release Steele's joint and several liability under the account agreement. Kim Robb testified to that end repeatedly in his deposition. Steele testified he understood that was the bank's position at the time because of comments made by Robb. Steele was clear in his statements that he had never discussed the effect of the two notes with the bank.
We readily acknowledge the evidence referred to by Steele might convince a fact-finder of the merits of his position. However, weighing the evidence is not our prerogative when evaluating the correctness of a grant of summary judgment. Schermer, 380 N.W.2d at 687. Our task is only to ascertain whether there is sufficient evidence to be weighed; if so, summary judgment is not appropriate. We believe those same facts cited by Steele may also support an interpretation favorable to the bank. They can be interpreted to show that the bank was indeed only trying to strengthen its position, not discharge it. We believe the finder of fact must make that determination.
We note that accepting Steele's contention would result in the bank releasing Steele from his joint and several liability for the whole amount, thus impairing the bank's initial security. This is generally considered antithetical to the concept of payment and the formation of a new agreement. Orcutt, 163 N.W.2d at 916. We also note that our supreme court stated in Orcutt that the testimony of one of the parties that he did not consider the new note to be a substitution for the obligation of a previous account was sufficient to defeat summary judgment. Id.
We hold the district court erred in granting Winfield and Steele's motion for summary judgment.
B. Winfield and Steele's Summary judgment motion — other theories.
Winfield and Steel alternatively claim summary judgment was nevertheless appropriate based on the other theories they urged. We may uphold the district court's decision on a basis other than one relied on by the district court, if the ground was urged in the trial court. Devoss v. State, 648 N.W.2d 56, 61 (Iowa 2002).
1. Novation/substituted contract and waiver.
Winfield and Steele also claim the affirmative defenses of novation or substituted contract and waiver will support a grant of summary judgment. We disagree. Novation or substituted contract requires clear and satisfactory proof that there was a prior valid obligation, agreement of all the parties to a new contract, extinguishment of the old contract, and validity of the new contract. In re Integrated Res. Life Ins. Co., 562 N.W.2d 179, 182 (Iowa 1997). "The mere fact that a new contract obligates a third party to assume the financial obligation of the debtor will not alone support a presumption that the creditor accepts the new debtor and releases the old one." Id. Our previous discussion regarding an agreement that the new notes constituted payment of the prior overdraft obligation is equally applicable here. There is a material issue of fact as to whether a new agreement came into being which precludes summary judgment on the defense of novation or substituted contract.
Waiver involves the "voluntary or intentional relinquishment of a known right." Sheetz v. IMT Ins. Co., 324 N.W.2d 302, 302 (Iowa 1982). We consider the evidence to be ambiguous in this case, and its proper interpretation to be for the finder of fact. See id. (waiver is generally a fact question; only if the evidence is undisputed is it a question of law).
2. Unconscionability and reasonable expectations.
Winfield and Steele posit that the account agreement, by holding Steele personally liable for corporate obligations, is beyond what a businessman would reasonably expect to be included in such an agreement, and therefore its inclusion is bizarre and oppressive and unconscionable as a matter of law. See C J Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169, 176 (Iowa 1975) (discussing doctrine of reasonable expectations in insurance policies).
Absent authority supporting such a result, we are unable to conclude that the inclusion of such a provision in a business depositor's account agreement is unconscionable or beyond the reasonable expectations of the customer as a matter of law.
C. Farmers National Bank's summary judgment motion.
The bank not only claims the district court erred in granting Winfield and Steele's motion for summary judgment, but that the court should have granted the bank's motion. We have already attempted to explain why we conclude that summary judgment is not appropriate regarding Winfield and Steele's motion. We believe the same rationale precludes summary judgment in favor of the bank. There are material issues of fact, particularly regarding the formation of an agreement that the promissory notes given by Steele and Hassenfritz relieved Steele of his joint and several obligation under the account agreement, which must be resolved by a finder of fact.
IV. Disposition.
We reverse the district court's grant of summary judgment in favor of Winfield Implement Co., Ltd. and Jerry D. Steele and remand for further proceedings consistent with this opinion.