Norwest Bank Iowa, N.A. v. Richard Lockard

Promissory Note - Business - I. Factual Background. Jacque S. Pfaffle ("Pfaffle") owned and
operated a Mail Boxes, Etc. franchise in Cedar Falls, Iowa. The
business was undercapitalized and situated in a poor location. In
the Spring of 1995, Pfaffle began discussing the sale of an
ownership interest in the business to Richard A. Lockard
("Lockard"), a friend who had previously been engaged in farming.
Lockard agreed to pay Pfaffle $42,000 for a fifty percent interest
in the business. Lockard paid a portion of his investment in the
company when he borrowed $4934 on a credit card to pay some of
Pfaffle's business debt which was then past due.

Lockard and Pfaffle formed a corporation known as Seasons Change,
Inc., on August 18, 1995. They and their spouses were officers of
the corporation. Corporate resolutions provided Lockard and
Pfaffle had equal authority to execute checks and borrow money.

On August 30, 1995, Lockard borrowed $24,354.76 from Norwest Bank
Iowa, N.A. ("Norwest"). Norwest took a security interest in two
motor vehicles owned by Pfaffle, who signed the note not as a
maker, but as owner of the collateral. Lockard claims the Norwest
loan officer, James Lizarraga, assured him he had no risk of
liability on the note because the debt would be paid from
Pfaffle's Vinton home sale proceeds. Lockard paid accrued
interest and signed modification/deferral agreements on
November 30, 1995, and February 27, 1996. The interest rate
established in the note was not changed by the modification
agreements which were designed to merely extend the due date of
the note. Handwriting on the face of the second of the
modification agreements stated: "Source of repayment is sale of
home. Home to be paid off 4-1-96." That agreement also provided
the principal amount of the note and accrued interest would be
paid April 1, 1996.

Lockard decided to withdraw from the business in January of 1996,
and at his insistence, Pfaffle gave him two promissory notes in
amounts equal to his monetary contributions to the business.
Pfaffle's Vinton house was sold, but she failed to apply the sale
proceeds against Lockard's debt to Norwest. Pfaffle filed
bankruptcy and discharged her promissory note obligations to
Lockard. When Lockard failed to pay the note and further accrued
interest owed to Norwest, the lender commenced this action on
November 26, 1996. The collateral (vehicles) pledged by Pfaffle to
secure the note was not applied against Lockard's debt to Norwest.

In his answer, Lockard admitted execution of the note. He alleged,
by affirmative defense, Norwest's employee, Lizarraga, had
represented the note would be satisfied with proceeds from the
sale of Pfaffle's house. In a counterclaim, Lockard pled breach of
contract and fraudulent misrepresentation theories against
Norwest. He alleged Norwest's actions were willful and wanton, and
prayed for actual and punitive damages. In his "Pre-Trial
Statement," however, Lockard subsequently advised the district
court he did not seek actual damages but did assert breach of
contract and misrepresentation or estoppel as affirmative
defenses. Lockard's pre-trial statement further informed the court
if the affirmative defenses of fraudulent misrepresentation or
estoppel were established by the evidence, he wished to have the
jury consider his counterclaim for punitive damages in an amount
sufficient to deter Norwest from such wrongful conduct in the
future, bearing a reasonable relationship to the injury he
sustained (viz., "the potential liability on the note.").

The
district court sustained Norwest's motion for directed verdict on
Lockard's counterclaim for punitive damages on the grounds of
insufficient evidence and failure to prove actual damages.
Lockard's brief claims the jury submitted a written question to
the court during deliberations inquiring whether they could
consider the value of collateral pledged by Pfaffle in arriving at
their verdict; and the district court instructed the jurors they
were not permitted to do so. The jury subsequently returned a
verdict which awarded Norwest the principal amount of the note
($24,354.76), but no interest. The court then entered judgment in
the amount of the verdict "with interest as allowed by law." The
clerk of court's judgment on verdict specifically included
interest at the rate of ten percent from November 26, 1996, the
date Norwest commenced the action.

Unknown

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Affirmed by the Court of Appeals of Iowa. See: Iowa App. 10-27-1999. The above date reflects the appellate court decision date, not the original trial date. Reported by kkm.