Michael Bagby v. First Street Deli II, LLC, Kim Harker, and Alexis Brown

IN THE COURT OF APPEALS OF IOWA

No. 22-1704
Filed August 9, 2023

MICHAEL BAGBY,
Plaintiff-Appellant,

vs.

FIRST STREET DELI II, LLC, KIM HARKER, and ALEXIS BROWN,
Defendants-Appellees.
________________________________________________________________

Appeal from the Iowa District Court for Buchanan County,

Richard D. Stochl, Judge.

A creditor appeals the dismissal of his petition for breach of contract and

unjust enrichment. REVERSED AND REMANDED.

Benjamin M. Lange and Austin McMahon of Swisher & Cohrt, PLC,

Waterloo, for appellant.

Jeremy B. Hahn of Roberts & Eddy, P.C., Independence, for appellees.

Considered by Schumacher, P.J., and Chicchelly and Buller, JJ.
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CHICCHELLY, Judge.

Michael Bagby appeals the district court ruling dismissing his claims for

breach of contract and unjust enrichment. Bagby’s debtors—First Street Deli II,

LLC (the LLC) and Kim Harker and Alexis Brown, individually and as members of

the LLC—argued that their contract with Bagby was unconscionable. Bagby

asserts the district court erred in finding that the contract was unconscionable and

its late-fee provision was an unenforceable penalty. Finding errors of law in both

the unconscionability and penalty analyses, we reverse and remand to the district

court for entry of an order consistent with this opinion.

I. Background Facts and Proceedings.

The parties entered into the contract in question on August 31, 2020. The

language of the contract is straightforward: Bagby was to loan $15,000 to the LLC,

Harker, and Brown (collectively, the debtors). The debtors were to repay Bagby

$15,000 in six months, with a specific schedule outlined for twenty payments of

$750 that would be due roughly every one to two weeks. There would be a late

fee of $25 per day applied to any past-due payments.

In reality, Bagby only loaned the debtors $10,000, and they made fifteen of

the twenty payments for a total of $11,250 in return. Many of the payments were

submitted late. Bagby never supplied the debtors with an invoice or other notice

of the amount due until this lawsuit was filed in July 2021. He provided an

accounting of the loan in which he applies late fees from the eighth payment

onward, even though five of the first seven payments were received late. In this

accounting, Bagby applies new payments to the late fees first rather than to the

principal amount owed. The contract was silent as to how future payments should
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be applied in relation to late fees. Importantly, Bagby’s accounting reflects that the

debtors owed a principal amount of $15,000 despite him only loaning them

$10,000. Harker testified that this discrepancy in the principal was purposeful, as

they had orally agreed to this arrangement in order for Bagby to avoid claiming

interest for tax purposes. Bagby estimated a total amount remaining due of

$50,775 and requested the court enter a judgment whereby additional late fees

would be added from the date he filed suit up until judgment.

For context, Bagby and Harker have known each other for more than twenty

years. They engaged in a romantic relationship, which Bagby described as “casino

buddies,” from approximately April 2018 until June 2020. Harker explained the

relationship continued in an on-again, off-again fashion until May 2021. Although

Bagby disputed this timeline, he acknowledged they were romantically involved

again after June 2020. Prior to the contract in question, Bagby loaned Harker

varying amounts of money in a personal capacity. We do not have substantial

information about these dealings.

At some point, Harker asked Bagby to purchase a deli shop that she was

planning to buy with her daughter (co-debtor Brown) and lease it to them. Bagby

declined. On August 29, Harker was at Bagby’s home explaining that she needed

$10,000 in order to move forward with the purchase of the deli shop in a couple of

days. Bagby acknowledges that Harker was in a bad state and that she told him

that she was going to commit suicide on his front lawn. The parties dispute

whether Harker requested a loan from Bagby or he offered her the money. In any

event, they agreed to proceed with a loan. Initially, Harker offered a $10,000 loan

in exchange for $20,000 paid back in two months. These were the same terms
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she proposed to three other people who declined her offer. Harker and Bagby

ultimately lowered the repayment plan to $15,000 over a six-month period. Harker

typed up the contract and included the aforementioned late-fee provision. It is not

clear who proposed this clause. Harker and her daughter, Brown, signed the

contract in their individual capacities and on behalf of the LLC.

The court held a bench trial on this matter in September 2022. The court

found the contract was unconscionable and its late fee provision was against public

policy, and it declined to enforce any of the contract terms. The court ruled that

the debtors repaid all the money Bagby loaned to them and owed nothing more.

Accordingly, the court dismissed Bagby’s petition and ordered him to pay the costs

of the action. Bagby filed a timely appeal.

II. Review.

“In a law action tried to the court, our review is for the correction of errors at

law, and the district court’s findings of fact are binding on us if they are supported

by substantial evidence.” Poller v. Okoboji Classic Cars, LLC, 960 N.W.2d 496,

509 (Iowa 2021) (citation omitted). “Evidence is substantial for purposes of

sustaining a finding of fact when a reasonable mind would accept it as adequate

to reach a conclusion.” Falczynski v. Amoco Oil Co., 533 N.W.2d 226, 230 (Iowa

1995).

III. Discussion.

Bagby argues the district court erred in finding the contract was

unconscionable. “Whether an agreement is unconscionable must be determined

at the time it was made.” Bartlett Grain Co., LP v. Sheeder, 829 N.W.2d 18, 27

(Iowa 2013). “A contract is unconscionable where no person in his or her right
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senses would make it on the one hand, and no honest and fair person would accept

it on the other hand.” Id. (citation omitted). “Neither [the] court nor the legislature

has attempted to precisely define the term ‘unconscionable’ in the context of

commercial contracts.” In re Marriage of Shanks, 758 N.W.2d 506, 514 (Iowa

2008). However, “[t]here are two generally recognized components of

unconscionability: procedural and substantive.” Bartlett Grain, 829 N.W.2d at 27.

“The former includes the existence of factors such as ‘sharp practices[,] the use of

fine print and convoluted language, as well as a lack of understanding and an

inequality of bargaining power.’ The latter includes ‘harsh, oppressive, and one-

sided terms.’” Id. (alteration in original) (internal citations omitted).

With regard to the contract in question, we find its bargain is neither

procedurally or substantively unconscionable. Bagby attempted no procedural

antics like fine print or convoluted language. The debtors do not allege that Bagby

attempted to deceive or compel them to sign the contract. In fact, Harker and

Brown acknowledge that they each understood the terms of the agreement and

signed it voluntarily. We are given pause by Bagby’s knowledge of Harker’s

individually weaker bargaining position due to her suicidal state. See Shanks, 758

N.W.2d at 515 (listing factors contributing to a finding of unconscionability to

include: “knowledge of the stronger party that the weaker party is unable

reasonably to protect his interests by reason of physical or mental infirmities”

(citation omitted)). However, Harker does not argue that her mental state

prevented her from understanding the bargain she struck, negotiating its terms, or

pursuing other financing or even employment options. Ultimately, the totality of

the circumstances do not give rise to a finding of procedural unconsionability. See
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Peffer v. Ulmer, No. 02–0752, 2003 WL 21229554, at *1 (Iowa Ct. App. May 29,

2003) (finding a contract was not unconscionable despite a party’s slowed mental

functioning, in part because he “was fully aware of the critical lease provisions”

and knew he was giving the other party a very favorable deal that he himself

proposed).

Even though the late fees turned out to be a bad deal for Harker, the bargain

itself was not substantively so unjust as to require invalidation of the overall

contract. Harker herself proposed the terms and proceeded to negotiate a more

favorable deal. Moreover, the written contract outlines an even exchange of

$15,000 between the parties.1 An equal bargain surely cannot be said to be

unconscionable. Even the parties’ oral agreement of $15,000 in exchange for

$10,000 is not outright unconscionable. The record reflects that the debtors

needed cash immediately and were unable to secure more traditional financing,

but it does not expound upon the reasons. We must remember:

It is not sufficient that a party made an imprudent bargain:
People should be entitled to contract on their
own terms without the indulgence of paternalism by
courts in the alleviation of one side or another from the
effects of a bad bargain. Also, they should be
permitted to enter into contracts that actually may be
unreasonable or which may lead to hardship on one
side. It is only where it turns out that one side or the
other is to be penalized by the enforcement of the
terms of a contract so unconscionable that no decent,
fair-minded person would view the ensuing result

1 As the district court did not address the consequences of the discrepancy
between the written and oral agreements, and the parties do not dispute the
amount in controversy on appeal, we decline to further question this term of the
contract. After all, our appellate rules require us to confine our review to issues
raised and ruled on below that do not require us to assume a partisan role in
research and advocacy. See Inghram v. Dairyland Mut. Ins. Co., 215 N.W.2d 239,
239 (Iowa 1974).
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without being possessed of a profound sense of
injustice, that equity will deny the use of its good offices
in the enforcement of such unconscionability.

Shanks, 758 N.W.2d at 515 (citation omitted). We find the bargain was not

unconscionable, so we reverse and remand for entry of an order consistent with

this opinion.

As for the late-fee provision, we find the district court erred in ruling it a

penalty because the debtors did not meet their burden of proof. See Gordon v.

Pfab, 246 N.W.2d 283, 288 (Iowa 1976) (“A party who contends that a liquidation

clause is in reality a penalty has the burden to plead that fact and prove the actual

damages in the trial court.”). The debtors denied that the late-fee provision was a

liquidation clause, never claimed that it was a penalty, and offered no evidence of

damages, or lack thereof. Accordingly, we reverse the court’s ruling in regard to

the late-fee provision as well and find the court should determine the

consequences of this clause in light of the overall disposition.

REVERSED AND REMANDED.