Robert Valley and Marlene Valley v. Douglas Kiel and Jan Kiel

IN THE COURT OF APPEALS OF IOWA

No. 17-1666
Filed October 10, 2018

ROBERT VALLEY and MARLENE VALLEY,
Plaintiffs-Appellants,

vs.

DOUGLAS KIEL and JAN KIEL,
Defendants-Appellees.
________________________________________________________________

Appeal from the Iowa District Court for Fayette County, John J.

Bauercamper, Judge.

Robert and Marlene Valley appeal the district court order denying their

petition and entering judgment in favor of Douglas and Jan Kiel. REVERSED AND

REMANDED.

Jeffrey E. Clements, West Union, for appellant.

Patrick B. Dillon of Dillon Law, P.C., Sumner, for appellee.

Considered by Vaitheswaran, P.J., and Doyle and Mullins, JJ.
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DOYLE, Judge.

Robert and Marlene Valley appeal the district court order denying their

petition and entering judgment in favor of Douglas and Jan Kiel. They claim the

district court erred in applying the law to their cause of action.

I. Background Facts and Proceedings.

For thirty-two years, Robert Valley owned and operated Midwest Cleaning

Systems, a business that sold and serviced pressure washers and cleaning

equipment. For the last thirty years, the business sold and serviced Alkota brand

equipment after having sold and serviced two other brands during its first two years

in operation. When Robert decided to sell the business, Douglas Kiel was one of

four people interested in buying it.

On September 23, 2014, the Valleys and the Kiels signed an asset

purchase agreement. The Kiels agreed to purchase the assets of Midwest

Cleaning Systems “in their current condition, ‘as is’ with all faults” for $120,000.

Exhibit A, a handwritten attachment to the agreement, listed all of the assets sold

under the agreement and their values. The purchase agreement called for the

Kiels to pay $40,000 at closing with the remaining $80,000 plus interest due on or

before December 1, 2015. It also required the Kiels to execute a security

agreement that granted the Valleys a security interest in all of the assets sold under

the purchase agreement, which the Kiels signed the same day they signed the

purchase agreement. The Valleys filed a UCC financing statement with the Iowa

Secretary of State.

When the Kiels failed to make the $80,000 plus interest payment by

December 1, 2015, Robert contacted Douglas. Douglas thought the payment was
3

due on December 31, not December 1. The Kiels then sent the Valleys a check

dated December 2, 2015 in the amount of $40,800. Since the check was not for

the full amount due, Robert again contacted Douglas. Robert gave the Kiels until

March 1, 2016 to pay the balance due under the contract. The Kiels only paid an

additional $144.66 before the March 1, 2016 deadline. No further payments were

made.

On November 23, 2016, the Valleys filed a petition to foreclose on the

collateral provided in the security agreement. They sought judgment against the

Valleys for $40,000 plus interest, attorney fees, and costs. They also requested

an order granting them the right to possession of the collateral for a sale to be held

with the net proceeds from the sale to be applied toward the judgment against the

Kiels.

The Kiels filed their answer on December 9, 2016, denying the Valleys’

claims. They alleged Robert Valley had assured them that the business had “a

defined, protected territory in which [Midwest Cleaning Systems] was the exclusive

Alkota Dealer,” which it did not. They also claimed that the purchase price

originally included a building that the Valleys later withdrew from the assets and

the purchase price “should have been reduced to reflect the withdrawal of the

building.” The Kiels further alleged the value of the assets outlined in Exhibit A

was “drastically overstated” and that they “had no way to ascertain these

deficiencies until they took possession.” Finally, they claimed that they had paid

the Valleys “the true value of all assets transferred, and no further payment should

be due.” They asked the court to dismiss the Valleys’ petition, assess the costs to
4

the Valleys, award them attorney fees, and grant “such other and further relief as

the Court deems just and equitable.”

Following a bench trial, the district court found the Valleys failed to prove

“all elements of their claim for breach of contract” and that the Kiels had proved

that the Valleys breached the contract. The court denied the petition and assessed

court costs to the Valleys. The Valleys appeal.

II. Scope of Review.

The parties agree our review is for correction of errors at law. See Iowa R.

App. P. 6.907. We are bound by the trial court’s fact findings if supported by

substantial evidence. See Iowa R. App. P. 6.904(3)(a).

III. Discussion.

The Valleys contend the district court erred in applying the law to their cause

of action. Specifically, they argue the court erred in analyzing their claim as one

of breach of contract rather than enforcement of a security interest. We may

reverse the district court by finding in favor of the Valleys on their security interest

claim, even though it was not decided by the district court. See Hawkeye

Foodserv. Distribution, Inc. v. Iowa Educators Corp., 812 N.W.2d 600, 609-10

(Iowa 2012) (citing Fencl v. City of Harpers Ferry, 620 N.W.2d 808, 811-12, 818-

19 (Iowa 2000)).

A security agreement is a means by which a lender can secure payment of

a debt in the event a debtor defaults. See Iowa Code § 554.9601 (2016) (setting

out a secured party’s rights after default). If default occurs, the secured party may

reduce the claim to judgment or foreclose on the collateral. See id.
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§ 554.9601(1)(a). “A sale pursuant to an execution is a foreclosure of the security

interest . . . .” Id. § 554.9601(6).

The Valleys filed a petition seeking to enforce their security interest by

asking the court to both reduce the claim to judgment against the Kiels and execute

an order granting them the right to possession of the collateral for sale, with the

net proceeds of the sale applied toward the judgment. In order to enforce their

security interest against the Kiels, the Valleys were required to show that: (1) value

was given, (2) the Kiels have rights in the collateral, and (3) the Kiels authenticated

a security agreement that provides a description of the collateral. See id.

§ 554.9203(2)(a)-(c)(1). They also had to show the Kiels defaulted on the

purchase agreement. See id. § 554.9601(1).

The record shows that the Valleys gave value to the Kiels by transferring

the business and its assets and financing $80,000 of the agreed purchase price.

The Kiels have rights in the collateral, which the security agreement described as

the assets listed in the purchase agreement. The Kiels also defaulted under the

purchase agreement by failing to provide a final payment of $40,000 plus interest.

On this basis, the Valleys have met the requirements to enforce their security

interest.

The Kiels deny they owe any money to the Valleys under the purchase

agreement. The district court analyzed the case as a breach of contract claim.1

To prove a breach of contract, the Kiels must show (1) the existence of a contract,

(2) the terms and conditions of the contract, (3) their performance of all the terms

1
In their opening statements, both counsel introduced the case as one of breach of
contract. Closing arguments were not reported.
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and conditions required under the contract, (4) the Valleys breached the contract,

and (5) the Kiels have suffered damages as a result of the Valleys’ breach. See

Royal Indem. Co. v. Factory Mut. Ins. Co., 786 N.W.2d 839, 846 (Iowa 2010). After

reviewing the contract, we are unable to find the Valleys breached any of the terms

of the contract as written. See Pillsbury Co. v. Wells Dairy, Inc., 752 N.W.2d 430,

436 (Iowa 2008) (noting the words of the agreement are still the most important

evidence of the party’s intentions at the time they entered into the contract).

In their answer, the Kiels claimed they did not receive the full benefit of what

they bargained for because “[a]t best the contract was negotiated through mutual

mistake,” and “[a]t worst [the Valleys] procured the sale contract through fraud in

the inducement.” Regardless of which occurred, they asserted in their answer that

“judicial revision of the contract is required.” They claim the money they paid to

date—$40,000 less than the price stated in the purchase agreement—is “the true

value” of the benefit received under the contract as written and, therefore, “no

further payment should be due.” Essentially, the Kiels argued that in light of fraud

and/or mistake, the court should reform the purchase agreement to lower the

purchase price by $40,000. Although the district court did not consider this claim,

we may decide it on appeal. See Hawkeye Foodserv., 812 N.W.2d at 610 (citing

Kern v. Palmer Coll. of Chiropractic, 757 N.W.2d 651, 662-66 (Iowa 2008)). In

denying the Valleys’ petition, the court effectively reformed the contract to reduce

the purchase price by $40,000.

“Iowa law permits reformation of a written agreement that fails to reflect the

‘true agreement’ between the parties.” See Peak v. Adams, 799 N.W.2d 535, 545

(Iowa 2011) (citation omitted). Written instruments may be reformed if “the party
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seeking reformation establishes a mutual mistake, or a mistake on the part of one

party and fraud or inequitable conduct on the part of the other, and that the policy

as written does not express the agreement of the parties.” Schuknecht v. W. Mut.

Ins. Co., 203 N.W.2d 605, 608 (Iowa 1973). The party seeking reformation must

establish these elements by clear, satisfactory, and convincing evidence. 2 See

Iowa R. App. P. 6.904(3)(k). In reforming a written instrument, the court must only

speak the true contract—not make contracts for the parties. See Wallace v. Spray,

78 N.W.2d 406, 408 (Iowa 1956). Therefore, in order to reform a contract,

a definite intention or agreement on which the minds of the parties
had met must have preexisted the instrument in question. There can
be no reformation unless there is a preliminary or prior agreement,
either written or verbal, between the parties, furnishing the basis for
rectification or to which the instrument can be conformed.

Peak, 799 N.W.2d at 545 (citing Sun Valley Iowa Lake Ass’n v. Anderson, 551

N.W.2d 621, 636 (Iowa 1996) (quoting 66 Am. Jur. 2d Reformation of Instruments

§ 4, at 529 (1973))).

The Kiels sought reformation of the purchase agreement, claiming it failed

to reflect the true agreement of the parties in three respects. In their answer, they

alleged: (1) Robert Valley falsely assured them they would be the exclusive

distributor of Alkota equipment in “a defined, protected territory”; (2) the purchase

price was based on the inclusion of a building in the sale and was never lowered

when the building was later withdrawn from the sale; and (3) the values of the

2
Although the Valleys’ action to enforce their security interest is an action at law, the Kiels
were permitted to seek the equitable remedy of reformation. See Markley v. Lockwood,
176 N.W. 294, 295 (Iowa 1920) (holding petition to intervene in an action at law could seek
equitable relief of reformation); see also Ayers v. Nopoulos, 216 N.W. 258, 260 (Iowa
1927) (“The action was commenced at law, and it continued to be such even though the
defendant interposed an equitable defense by way of answer.”).
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assets listed in Exhibit A were “drastically overstated,” which they could not have

discovered before taking possession of the assets.

To grant reformation based on mutual mistake of fact, it “is necessary the

mistake be mutual, and both parties understood the contract as the petition alleges

it ought to have been, and as in fact it was except for the mistake.” Gouge v.

McNamara, 586 N.W.2d 710, 713 (Iowa Ct. App. 1998). Clearly, the mistake here

was not mutual. A unilateral mistake by one party may be the basis for reformation

if it is accompanied by fraud or inequitable conduct by the other party. Id. A finding

of fraud requires “(1) a material misrepresentation; (2) made knowingly; (3) with

the intent to induce the plaintiff to act or refrain from acting; (4) justifiable reliance;

and (5) damages.” Id. at 713-14.

The only evidence concerning any representation that Kiels would receive

an exclusive Alkota sales territory is the testimony of Robert Valley and Douglas

Kiel. Robert Valley testified that the general sales area Alkota assigned him was

not an exclusive territory, that he never claimed it was exclusive, and that he told

Douglas Kiel that “[y]ou cannot keep people from coming up” and selling in the

sales area. In contrast, Douglas Kiel testified that Robert Valley told him that the

purchase included an exclusive sales territory. Douglas Kiel agreed the written

contract did not state he was getting an exclusive sales territory. Instead, he

claimed that the agreement’s non-competition clause indicates an exclusive sales

area. But the clause states only that the Valleys would not compete with the Kiels’

business in “the Alkota Northeast Iowa distributing area”—not that no other sellers

would compete in the area. Douglas Kiel also testified he believed the reference

to the “goodwill of the seller” in the portion of the purchase agreement concerning
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the assets being sold indicated an exclusive right to sell within the territory. The

paragraph in question states the Valleys were selling the Kiels the “assets,

business, and goodwill of Seller.” Nothing in the purchase agreement states or

indicates the Kiels would receive an exclusive sales territory. Furthermore, the

contract specifically states it “supersedes all prior agreements and understandings

between the parties.”

With regard to the inclusion of a building with the sale of the business,

Robert Valley testified that he verbally agreed to give Douglas Kiel a building on

the property when Kiel expressed an interest in having it. Douglas Kiel testified

that the building “was given to [him]” but he decided not to move it. When Douglas

Kiel told Robert Valley that he would instead advertise to see if someone wanted

to buy the building, Robert Valley told him, “Well, I’ll take it back then.” When

asked, “But you paid nothing for it, . . . correct?” Douglas Kiel replied, “What

difference does that make?” The building is not listed as an asset and is not

otherwise mentioned in the purchase agreement.

Finally, with regard to the value of the assets listed in Exhibit A to the

purchase agreement, Robert Valley testified that the Kiels inspected or viewed the

assets before signing the agreement. Douglas Kiel testified he and his wife were

at Valley’s place of business a “couple of times” and had a chance to “look at his

parts bins and those types of things.” The Kiels claim that they received parts by

other manufacturers, but Robert Valley testified that he gave the Kiels those parts,

he did not sell them, and therefore they were not listed in Exhibit A. Robert Kiel

testified those parts were in the asset purchase agreement “somewhere,” and “I’m

sure they are in there as parts.”
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The Kiels fall short of proving by clear and convincing evidence that the

Valleys practiced fraud in inducing them to sign the agreement. Accordingly, there

is no basis for reforming the purchase agreement to decrease the purchase price

by $40,000. The Kiels defaulted by failing to pay the Valleys $40,000 by December

1, 2015, as specified in the purchase agreement.

The Valleys have met their burden of proving their claim to enforce the

security interest. We reverse the district court order denying their petition and

assessing them the costs of the action. We enter judgment in favor of the Valleys

in the amount of $42,162.73. We assess costs of the action to the Kiels. We

remand to the district court to determine the amount of attorney fees to award the

Valleys pursuant to Iowa Code section 625.22.

REVERSED AND REMANDED.