Plaintiffs’ Hands Were Dirty, But Not From Farm Work; Barred From Bringing Suit

One of Iowa’s most litigious farm families is at it again. This time (as the plaintiffs in this case) they participated in a conspiracy to defraud a bank, but it didn’t work out they way they anticipated.  Here, they entered into two separate written farm lease agreements- the first with a married couple (the defendants) and the second with the couple’s son and daughter-in-law.   In total, they leased about 1000 acres of Adair County farmland for five years.  At the time the leases were executed, the defendants were in default on several bank notes with the First National Bank of Creston. In an attempt to settle the debt, the bank and the defendants negotiated a settlement agreement.  The agreement stated that the defendants could keep two ten-acre tracts of land where the homesteads were located and the rest would be sold at public auction, with the proceeds going to the bank to satisfy the bank debt. 

Unfortunately, the defendants failed to disclose to the bank the existence of the leases which, by the way, were below market value leases.  In addition, the defendants intentionally platted the ten-acre tracts they received in the settlement in a manner that would decrease the value of the surrounding farmland at auction.  Eventually, the bank discovered the lease agreements and the other indiscretions and brought a foreclosure action against the defendants. The bank also sued the plaintiffs, under the suspicion that the parties had conspired to bring about the settlement agreement.  At the public auction of the land, the plaintiffs just happened to be the high bidder on the parcels.  The plaintiffs then sued for specific performance of the settlement agreement between the bank and the defendants, and filed a cross-claim for specific performance of the purchase contract.  

The jury didn’t get suckered into the parties’ scheme, finding that the plaintiffs and the defendants entered into a conspiracy to defraud the bank by inducing the bank to settle with the defendants. The jury based its decision on evidence presented at trial that the lease terms gave the plaintiffs an advantage in the auction bidding process – the plaintiff already had the land tied up for five years. Consequently, the trial court granted the bank a rescission of the settlement agreement and a foreclosure judgment.  

The plaintiffs then sued the defendants for damages resulting from breach of the lease agreement. However, the trial court dismissed the case because the plaintiffs were barred from bringing suit under the legal doctrines of issue preclusion(matter has already been judged) and in pari delicto (similar to the defense of unclean hands, meaning that the plaintiffs were guilty of wrongdoing (along with the defendants) and thus should not recover).  The plaintiffs appealed, arguing that the doctrine of in pari delicto did not apply, because they didn’t meet the court’s test for use of the doctrine. 

In Iowa, the in pari delicto doctrine bars a plaintiff’s recovery where (1) the plaintiff was guilty of illegal or fraudulent conduct, and (2) the plaintiff was “equally or more culpable than the defendant or acted with the same of greater knowledge as to the illegality or wrongfulness of the transaction.”  The plaintiffs argued that since the jury failed to assess punitive damages against him, they hadn’t committed illegal or fraudulent conduct. Further, the plaintiffs argued that they were not as guilty as the defendants. 

The Court of Appeals completely disagreed with the plaintiffs.  Since the trial court found that the parties had conspired, punitive damages were not necessary for the court to use the doctrine of in pari delicto.  The court also found that the plaintiffs were not innocent by any means and had actual knowledge of the conspiracy. They had the intent to accomplish a wrongful act. 

The court also said the plaintiffs couldn’t sue because the four prerequisites of issue preclusion in Iowa were met. The issue concluded was identical, it was raised and litigated in a prior action, it was material and relevant to the disposition of that prior action, and the determination made by the court in the prior action was “necessary and essential” to the resulting judgment. Mitchell v. Holliday, No. 9-735/08-1461, 2009 Iowa App. LEXIS 1664 (Iowa Ct. App., Dec. 30, 2009)