In this case, a mother and her ex-con son operated a hog farm on 500 acres. They had an operating loan of $125,000 with a local bank. Because of the availability of lower interest rates, they became interested in refinancing the loan. But, one of the son’s fellow ex-inmates also had interests in a start-up company that both Mom and son became considered investing in – even though they didn’t have the necessary funds. That’s when an third party rode to the rescue and helped the son find the funds to invest. The third party and the son (Mom had previously named the son her agent under a power of attorney) approached a Nebraska bank that agreed to loan $530,000 (to purchase stock in the start-up), with the farmland as collateral. Mom signed the mortgage and loan documents. According to Mom, she was “encouraged” to sign the documents by the Nebraska banker after she expressed concerns that she might lose her farm. She claimed that the banker told her that the loan would be paid for by the sale of stock in the start-up. However, the loan document did specify that the bank has not studied or endorsed the stock purchase.
Upon receipt of the loan funds, Mom paid off the operating loan for the farm with the local bank, and used the balance of the loan proceeds to buy stock in the start-up company. Unfortunately, the start-up company did not perform well and Mom defaulted on the loan. The Nebraska bank filed a petition to foreclosure the mortgage on the farm.
At trial, Mom claimed that the bank had engaged in predatory practices, conspiracy to commit fraud and had violated federal and Iowa securities laws. Mom also claimed that the loan documents should be rescinded based on equity. The trial court dismissed Mom’s claims and found that she had knowingly consented to the loan transaction and that no securities laws were violated.
On appeal, the Iowa Court of Appeals first addressed the concept of fraudulent inducement. Mom had claimed that the bank owed her a fiduciary duty because they had superior knowledge with respect to the loan they were making and because she was an elderly woman who was generally ill-informed of financial matters. But, the court noted, to assert a claim for fraudulent inducement in Iowa, the party asserting the claim must prove that a false, material misrepresentation was made with the intent to deceive and that the party asserting fraudulent inducement relied on the misrepresentation to their detriment, resulting in injury and damage. The appellate court found no evidence of the bank’s intent to defraud, pointing out that Mom was capable of handling her own affairs and had been doing so for many years.
The appellate court next addressed the issue of Iowa securities law violations by the Nebraska bank. Though the start-up company violated the Iowa securities laws by offering stock and investment contracts that were not federally covered securities and making misleading and untrue statements about the start-up, the Nebraska bank did not aid and abet that venture. In addition, no evidence suggested that the banker knew about the company’s actions. So, Mom was on the hook for the entire loan amount. Pender State Bank v. Remington, No. 9-543/08-1799, 2009 Iowa App. LEXIS 1439 (Iowa Ct. App., Nov. 12, 2009).