Corporation Bound by Acts of Shareholder

This case involved the validity of mortgage agreements affecting an Iowa farming corporation’s real property. The court was asked to determine whether the corporation was liable for notes and mortgage agreements executed by those involved with the corporation and whether there was valid consideration for those documents. Further, the court was asked to determine the issue of attorney’s fees.

The corporation raised hogs and grain, and was founded by a father and son who were solely responsible for the day-to-day operations and the maintenance of the corporation’s finances. When the father died in 2000, the son became the majority shareholder.  The son was routinely listed as the president and secretary of the corporation in publicly-filed corporate documents. However, the articles of incorporation filed with the state prohibited one party from holding both offices at the same time. 

Around the time of his father’s death, the son entered into a series of loan agreements (totaling $440,000) with the appellee, in this case, unilaterally mortgaging the corporation’s real property. The son told the appellee that the loans were being used solely for farming expenses and operations. However, some of the loan proceeds were deposited into the son’s personal checking account. Only $359,000 was transferred to the corporate account. Upon further investigation, the court found that prior to the son’s dealings with the appellee he had transferred nearly $3,000,000 from his personal account into an oil investment scheme. Unfortunately, the “investment” yielded no return and the son borrowed millions of dollars from friends, family, and banks to keep the farming corporation going. The son got in so far over his head that he even “disappeared” for some time in 2002 and, during this time, there was little corporate activity.  The son was eventually found in an assisted living facility as a ward of the state of California after suffering a stroke. He was able to speak, but could not articulate full sentences.  

In 2005, the corporation (without it’s president) commenced a suit against the appellee, seeking to quiet title on his mortgage with the corporation.  The appellee countersued, seeking a judgment against the son and the farm for payment of the loans. The corporation denied any liability for the loans and further argued that the son did not have the authority to mortgage the corporation’s real property. The trial court ruled for the appellee and the mortgage was foreclosed. In 2008, the corporation filed a petition to vacate or modify the trial court’s ruling, because the son had “reappeared” and given a deposition. The corporation asked for a new trial. The trial court denied the corporation’s claims and awarded the appellee attorney’s fees. The corporation, of course, appealed. 

The first question the Iowa Supreme Court addressed was whether the son had the authority to act as the corporation’s agent and to bind the corporation to the loan agreements with the appellee. The Iowa Uniform Commercial Code (IUCC) defines an agent as “an officer of a corporation or association… or any other person empowered to act for another.” Thus, the main question before the court was whether the corporation had “manifested assent” to allow the son to act on behalf of the corporation. Here, the son’s personal finances and the finances of the corporation were so “closely interwoven” that they were nearly impossible to separate. The appellate court held that the son was acting on behalf of the corporation. 
Did the son have the “actual authority” to enter into the loan agreements with the appellee? Actual authority in Iowa can be express or implied (direct or circumstantial evidence that the agent has the authority to act.) This was a family farm corporation and it appeared, to the court, that the son had complete autonomy to operate the corporation after his father’s death.  He was the majority shareholder and the only individual intimately acquainted with the farming corporation (as it appears from the facts). Ultimately, the appellate court held that the corporation was liable for the loans and mortgage because the son was acting as the corporation’s agent and had the “actual authority” to obtain the loans. 

Next, the corporation claimed that there was insufficient consideration for the mortgage (or a lack of “bargained-for” exchange). However, the Iowa Supreme Court was quick to dismiss this claim, because the corporation and the son, individually, received the loan funds and the appellee received security in exchange for the funds. The mortgage, in this case, was “supported by bargained-for consideration.” 

The corporation also argued that the loan and mortgage agreements were invalid because the lending agreements were informal and that the son did not keep detailed or organized financial records. The appellate court found that the parties manifested the intent to mortgage the corporation’s real property to secure the funds advanced by the appellee and that minor mistakes in the drafting of the loan agreements did not make them invalid. Merely reforming the contract to more accurately express the parties’ intent did not change the parties’ original agreement. Basically, it cleared up any minor misunderstandings. 

Next, the corporation argued that the son’s testimony after he was found in California demonstrated that he intended the loans to be personal loans and did not intend to bind the farming corporation. However, the court rejected this claim and found that all other evidence submitted by the parties indicated that the son fully intended to execute agreements on behalf of the farming corporation at the time. 

Finally, the Iowa Supreme Court awarded attorney fees to the appellee’s attorney for the lengthy and complicated dispute. The court did remand the case to the trial court to determine a reasonable amount of fees. Soults Farms, Inc. v. Schafer, No. 07-0744/08-1590/08-1178, 2011 Iowa Sup. LEXIS 31 (Iowa Sup. Ct. May 6, 2011).