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Westco Agronomy Co. LLC v. Wollesen

Supreme Court of Iowa

December 22, 2017


         On review from the Iowa Court of Appeals.

         Appeal from the Iowa District Court for Story County, Michael J. Moon, Judge.

         An agricultural cooperative and its subsidiary seek further review of a court of appeals decision affirming in part and reversing in part a judgment entered after summary judgment and jury trial proceedings.

          John F. Lorentzen, Thomas H. Walton, Ryan W. Leemkuil (until withdrawal), and Ryan G. Koopmans (until withdrawal) of Nyemaster Goode, P.C., Des Moines, and John A. Gerken of Wilcox, Gerken, Schwarzkopf, Copeland & Williams, P.C., Jefferson, for appellants.

          Joel D. Vos and John C. Gray of Heidman Law Firm, L.L.P., Sioux City, and Samuel L. Blatnick, John P. Passarelli, and Meredith A. Webster of Kutak Rock, LLP, Kansas City, Missouri, for appellees.

          MANSFIELD, Justice.

         This complex dispute involving an agricultural cooperative, a large customer of the cooperative, and a dishonest salesman resulted in a three-week jury trial and a substantial damages verdict in favor of the customer and against the cooperative. We elect to limit our consideration of the case to the three matters raised in the cooperative's application for further review.

         As to one of those matters, we conclude the district court properly denied the cooperative's motion for new trial based on inconsistent verdicts. We also conclude the district court did not abuse its discretion in denying the cooperative's pretrial motion to have equitable issues tried first.

         The third question is more thorny-relating to the constitutionality of Iowa Code section 706A.2(5) (2011). The district court found the section unconstitutional and, therefore, dismissed the customer's claim under that section before trial.

         We too determine that Iowa Code section 706A.2(5) unconstitutionally shifts the burden to the defendant. Specifically, any person who provides property or services that end up being used to facilitate "specified unlawful activity" must prove his or her own lack of negligence to avoid liability. However, we find the burden-shifting provision contained in section 706A.2(5)(b)(4) can be severed from the rest of the statute. Accordingly, while we otherwise affirm the district court, we reverse the district court's dismissal of this claim. We thus remand for further proceedings, without foreclosing the possibility of other defenses to the customer's section 706A.2(5) claim.

         I. Background Facts and Proceedings.

         West Central Cooperative is an agricultural cooperative owned by farmers. Westco Agronomy Co., L.L.C. is a wholly-owned subsidiary of West Central formed in 2005 for the purpose of streamlining delivery of agronomy products, including seed, fertilizer, and chemicals.[1] In 2002, Westco hired Chad Hartzler to work in the agronomy division selling seed and eventually chemicals. He was later promoted to sales director but retained oversight of some of Westco's largest accounts, including the Wollesens.

         The Wollesens farm in Lake View. Bill and Kristi Wollesen, along with their son, John, are partners in Iowa Plains Farms.[2] During the relevant time period of this case, the Wollesens farmed more than 6000 acres. The Wollesens became Westco members in 2001, and Hartzler became their sales representative in 2005.

         The parties' accounts differ as to how and when Hartzler first met the Wollesens. According to Jay Sturtz, the Westco sales representative before Hartzler, Hartzler met the Wollesens in the summer of 2003 when Sturtz took Hartzler to the Wollesens' farm. Hartzler confirmed this timing. However, Bill Wollesen claimed he did not meet Hartzler until December 2005 at one of Westco's office locations.

         Hartzler testified he entered into a bribery scheme with Bill Wollesen in the summer of 2005. According to his testimony,

[Bill Wollesen] said, "How about if I just give you a little cash to give you a little bit of cash and these beans are a little cheaper." . . .
So that day, sitting at his table, he walked into his office and brought out $2, 000 cash as a discount. That was the only time he ever paid me in cash. But he gave me $2, 000.
He wrote a check to West Central for the amount he paid them.

         He gave me $2, 000 cash. Bill Wollesen denied this version of events. He maintained that he never bribed Hartzler.

         For the next several years until 2011, the Wollesens purchased seed, fertilizer, and chemicals from Westco at what they understood to be very reduced prices. For instance, the Wollesens paid approximately thirty percent less on average for seed corn than customers with like volume. The Wollesens asserted that their direct payments to Hartzler were on Hartzler's instruction as "commission" for his sales and that the reduced prices were not suspect because Hartzler touted himself as "the deal maker." After purchasing products from Westco at reduced prices, the Wollesens-through their company ByRite Farm Supply-resold many of the products for a profit.

         To conceal from Westco his low-price sales to the Wollesens, Hartzler input higher prices into the sales system than he actually charged the Wollesens. As a result, Westco consistently billed the Wollesens more than the Wollesens actually paid. The effect was a growing deficit in the Wollesens' account on Westco's books. Although Westco maintained that it sent regular bills to the Wollesens based upon the higher prices reflected on its own books, the Wollesens generally denied having received the statements and later suggested Hartzler had intercepted them. The Wollesens also insisted they had been prepaying for product, based on representations made to them by Hartzler.

         In early 2011, the Wollesens made payments totaling $2.1 million. They understood this to be entirely a prepayment for products for the 2011 crop year, whereas Hartzler applied it to the deficit on the Westco books. This resulted in the Wollesens' account with Westco having a positive balance.

         On April 30, 2011, Hartzler suddenly resigned via a brief email to Westco's chief operating officer. The email said, "[D]on't deliver any more product to Iowa [P]lains . . . ." In his attached resignation letter, Hartzler vaguely admitted wrongdoing and stated that he had "lied about several things over the past 5 or 6 years to cover up poor management of [his] divisions" and to hide a gambling addiction.

         Following receipt of this letter, Westco management arranged a phone call with Hartzler. On the call, Hartzler revealed that he had accepted direct payments from the Wollesens in exchange for lower prices on Westco products.

         In 2013, Hartzler was charged with wire fraud in the United States District Court for the Northern District of Iowa. See 18 U.S.C. § 1343 (2000). The federal information alleged that Hartzler had engaged in a scheme with Bill Wollesen to defraud Westco. Hartzler pled guilty and was sentenced to fifty-one months in prison. None of the Wollesens, however, were charged.

         Meanwhile, Westco and the Wollesens blamed each other for Hartzler's scheme. Westco argued that the Wollesens bribed Hartzler repeatedly over a period of years to obtain prices below Westco's own costs. The Wollesens argued that Westco should have been aware of Hartzler's scheme, that they themselves were not aware of it, and that they had previously made clear to Westco they did not want to purchase any products on credit.

         On May 12, 2011, Westco brought suit against the Wollesens and Hartzler in the Iowa District Court for Story County, alleging commercial bribery, theft, conversion, breach of fiduciary duty, breach of loyalty, unjust enrichment, foreclosure of an agricultural lien, and violations of Iowa Code chapter 706A. Westco's petition sought damages under each count, except the foreclosure count. On the ongoing unlawful conduct count (chapter 706A), Westco requested both damages and injunctive relief. Westco's petition included a jury demand. On May 25, Westco amended its petition to add a breach of contract claim, for which it again sought damages.

         On November 14, the Wollesens answered, denying liability. They also filed counterclaims against Westco for breach of contract, fraud, negligent retention, breach of fiduciary duty, and violations of Iowa Code section 706A.2(1)(a) and section 706A.2(5).

         On May 6, 2013, both sides filed motions for summary judgment. Thereafter, the district court dismissed all but three of Westco's claims: breach of contract, breach of fiduciary duty, and violation of chapter 706A-specifically section 706A.2(1)(a). The district court also dismissed all but three of the Wollesens' counterclaims: breach of contract, fraudulent misrepresentation, and violation of Iowa Code section 706A.2(1)(a). In its summary judgment ruling, the district court found the provisions of section 706A.2(5) unconstitutional in light of Hensler v. City of Davenport, 790 N.W.2d 569, 588-89 (Iowa 2010). The court also determined that severance of the unconstitutional burden-shifting provision in section 706A.2(5) from the remainder of the statute was not possible, thus invalidating the entire claim under this subsection.

         On June 17, 2014, Westco moved for equitable issues to be tried in equity before any jury trial. Westco maintained that the Wollesens were relying on alleged contracts resulting from commercial bribery, that those contracts were subject to the equitable defenses of rescission and restitution, and that those equitable matters should be heard first. Simultaneously, although the deadline for amendment of pleadings had passed weeks before, Westco moved to amend its petition to seek rescission and restitution as specific remedies for its existing claims. The district court denied both motions in a July 1 order. Westco subsequently voluntarily dismissed its breach of contract claim, leaving only two of its claims-breach of fiduciary duty and section 706A.2(1)(a)-for trial.

         The case proceeded to trial on July 8. Trial lasted fifteen trial days. The following instruction was given to the jury as No. 29:

If you find that Bill Wollesen, Kristi[] Wollesen, John Wollesen, the Trust, and/or Iowa Plains Farms proved the following propositions, no judgment may be entered against such parties, and Westco cannot recover against such parties on account of its claims against such parties for ongoing criminal conduct
1. West Central possessed the same or greater knowledge as to the illegality or wrongfulness of the activity giving rise to such unlawful conduct, or
2. West Central was equally or more culpable than the respective party against whom the ongoing criminal conduct is asserted.

         Westco was allowed to make a written record on the jury instructions. It objected to this instruction as being "one-sided." Westco's written comments continued, "In pari delecto is a defense available to any party against whom a claim is asserted under [chapter] 706A." The district court overruled this objection.

         The jury was also given a verdict form and special interrogatories. In its special verdicts, the jury indicated that Westco had proved both its breach of fiduciary duty claim and its ongoing unlawful conduct claim under Iowa Code section 706A.2(1)(a) against Hartzler. The jury thus found for Westco on its claims against Hartzler and awarded damages against Hartzler equal to the "commissions" he had received from the Wollesens: $485, 315.

         However, the jury also indicated that none of the Wollesens had conspired with Hartzler to breach the duties Hartzler owed to Westco, and that none of the Wollesens had engaged in ongoing unlawful conduct. The jury thus declined to award any damages to Westco against the Wollesens.

         On the Wollesens' counterclaims, the jury found that Westco committed both breach of contract and fraudulent misrepresentation. Hence, the jury awarded the Wollesens $576, 189 in damages against Westco. This amount represented the cost of replacement product after Westco refused to deliver any 2011 product to the Wollesens, despite their earlier $2.1 million payment. ...

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