Joseph Spreitzer Vs. Hawkeye State Bank

IN THE SUPREME COURT OF IOWA
No. 06–0877
Filed October 30, 2009
JOSEPH SPREITZER,
Appellee,
vs.
HAWKEYE STATE BANK,
Appellant.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Johnson County,
Amanda P. Potterfield, Judge.
Further review of a decision by the court of appeals reversing
district court judgment on a jury verdict for a claim of fraudulent
misrepresentation and affirming the decision of the district court to
refuse to submit punitive damages. DECISION OF COURT OF APPEALS
VACATED; JUDGMENT OF DISTRICT COURT REVERSED AND CASE
REMANDED FOR NEW TRIAL.
Patrick M. Roby and Robert M. Hogg of Elderkin & Pirnie, P.L.C.,
Cedar Rapids, for appellant.
Kevin J. Caster, Mark L. Zaiger, and Sarah Jane Gayer of
Shuttleworth & Ingersoll, P.L.C., Cedar Rapids, for appellee.
2
CADY, Justice.
In this appeal and cross-appeal, we consider whether there was
sufficient evidence to support a jury verdict for fraudulent
misrepresentation and whether a claim for punitive damages should have
been submitted to the jury. In doing so, we primarily examine the
justifiable-reliance element of the tort and the requirement that the
misrepresentation cause the damage claimed. The district court entered
judgment for fraud based on a jury verdict, but refused to submit a claim
for punitive damages. The court of appeals held there was insufficient
evidence to support the verdict for fraud. Upon our review, we vacate the
decision of the court of appeals. We conclude there was insufficient
evidence to support the amount of compensatory damages and that
punitive damages should have been submitted to the jury. We reverse
the judgment of the district court and remand for a new trial on the issue
of compensatory and punitive damages.
I. Background Facts and Proceedings.
Joseph Spreitzer is a successful businessman from Cedar Rapids.
He has a degree in mechanical engineering and owns several businesses,
including a family business that sells heavy equipment used in mining,
quarrying, and road building. During his career, he has invested in
several business enterprises.
In 1998, Spreitzer learned through a business partner that a
company called RJ Manufacturing was looking for investors. RJ was
located in Lisbon, Iowa, and manufactured agricultural sprayers. The
company had been in operation since 1993 and needed to raise capital,
primarily to pay a host of warranty claims against the company involving
manufacturing defects in the sprayers.
3
Spreitzer pursued the investment opportunity by first talking to
Byron Ross and Richard Rank. Ross was the managing partner of a
large accounting firm and was an investor and director of RJ, as well as
the company treasurer. Spreitzer had known Ross for nearly thirty years
and had been involved with him in other business opportunities in the
past. He considered Ross a friend and advisor. Rank was the president
of RJ. Some directors wanted to resign from the board after RJ started
to receive the warranty claims, and Rank was considering new investors
to replace them, including Spreitzer.
Spreitzer talked to several other financial advisors about the
investment opportunity in RJ, including an accountant, bankers, and
lawyers. He had access to all company records, including financial
statements and business plans. He knew RJ was facing the potential for
substantial warranty expenses and was aware the company planned to
buy out at least one of its investors.
The financial records of RJ also revealed the company had
obtained a series of loans from Hawkeye State Bank located in Iowa City.
The bank was owned by Russell Gerdin. The president of the bank was
Ray Glass. Glass and Ross were friends, and Glass was the individual in
the bank who was in charge of the RJ loans. The loans began in 1994
and included a loan to RJ for $1,000,000 in 1997, in addition to two
separate loans for $300,000 made within the following nine months.
After completing his investigation, Spreitzer decided to invest in
RJ. He invested $200,000 on September 15, 1998, and $200,000 on
October 5, 1998.
On November 1, 1998, Spreitzer also signed a personal guaranty
together with Ross and Rank. Under the terms of the guaranty, the three
4
men promised to be personally liable for the company debt to Hawkeye
State Bank up to $1.5 million.
Ross had executed a prior personal guaranty of the company debt
to Hawkeye State Bank. He asked the bank to release him from his prior
guaranty a few weeks before the personal guaranty was executed on
November 1, 1998, but the bank refused. Spreitzer was unaware of the
request.
Spreitzer continued to put money into the company from time to
time, in various amounts, to help RJ meet its obligations. In one
instance, he gave Rank $12,000 so RJ could meet its payroll obligation.
By December 1999, Spreitzer had infused a total of $740,000 into RJ.
Spreitzer became increasingly concerned about the financial
viability of RJ. From October 1998 to September 1999, RJ had
accumulated $1.8 million in warranty obligations. Spreitzer personally
hired an accountant to review the overall operation of the company in
hopes of finding a way to allow it to become profitable. He also hired a
management firm. The management firm issued a report in January
2000. The report described the administration of the company as
“dysfunctional.” It concluded “RJ Manufacturing is terminally ill and
without financial restructuring or sale” the company would “eventually
be forced to cease operations.” The report presented RJ with two
options: sale of the company or bankruptcy.
Spreitzer favored bankruptcy, while Ross wanted to avoid
bankruptcy. Glass, the bank president, also wanted to avoid
bankruptcy, in part to avoid any scrutiny of the bank by government
banking regulators. 1
1During
this time, Glass was engaged in an ongoing embezzlement scheme of
bank assets. In 2004, Glass was convicted and sentenced to imprisonment for
embezzlement and misappropriation of bank funds, as well as engaging in transactions
5
Ross proposed that Spreitzer purchase the assets of RJ and start a
new company as an alternative to bankruptcy. Spreitzer, with the advice
of accountants and attorneys, eventually agreed to form a new company
to take over the RJ assets. This company was called Walker
Manufacturing, and Spreitzer was its sole shareholder and president.
Walker Manufacturing purchased the RJ assets by obtaining a
$1.5 million loan from Hawkeye State Bank to pay off the RJ loan to the
bank and purchase the RJ assets. This note was due and payable in
March 2001. Additionally, Spreitzer and Ross signed a new personal
guaranty of the $1.5 million loan to Walker Manufacturing from Hawkeye
State Bank. Ross agreed to personally guarantee the Walker
Manufacturing loan as part of Spreitzer’s agreement to purchase RJ.
The circumstances surrounding the execution of the personal
guaranty form the essence of the claim that gives rise to this litigation.
Spreitzer was unwilling to proceed with the purchase if Ross would not
join him in signing the personal guaranty of the loan by the bank to the
new company. In fact, Spreitzer originally wanted Ross to enter into an
indemnification agreement concerning their personal responsibility to the
bank for the company’s debt. Ross rejected such an agreement, but
agreed to cosign the personal guaranty.
The guaranty was signed at the bank on May 10, 2000, in the
presence of Glass, Spreitzer, and Ross. It included the following
provisions:
1. The guaranty was “an absolute unconditional and
continuing guaranty.”
2. The bank “shall not be required to first resort for
payment of the indebtedness to borrower or other persons or
involving criminally derived property. These crimes were unrelated to the core facts of
this case.
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their properties, or first to enforce, realize upon or exhaust
any collateral security for indebtedness, before enforcing this
guaranty.”
3. The guaranty was “enforceable against either, any
or all the undersigned.”
4. The guaranty could “not be waived, modified,
amended, terminated, released or otherwise changed, except
by a writing signed by the undersigned and a lender.”
Notwithstanding these provisions, Spreitzer signed the personal
guaranty with an understanding he would only be personally responsible
for $750,000 of the bank loan to Walker Manufacturing and that the
bank would equally pursue both coguarantors in the event of a default.
This understanding was derived from a statement made by Glass in
response to a request for clarification made by Spreitzer at the time the
guaranty was executed. Spreitzer testified Glass specifically said the
bank would collect the personal guaranty “equally” if the new business
defaulted on the loan. Glass did not further explain his response, and
Spreitzer did not seek a further explanation. Nevertheless, Glass knew at
the time that Ross had structured his personal assets to limit his
personal exposure to less than $100,000, and Glass knew Spreitzer was
relying on the bank to enforce the personal guaranty against Ross.
Spreitzer assumed Ross had the means to satisfy his portion of the
obligation and further assumed the two men would each pay one-half of
the Walker Manufacturing debt in the event the company failed.
Spreitzer maintained he would not have agreed to purchase the business
if he had known Ross restructured his assets and did not intend to pay
his portion of the debt in the event the bank enforced the personal
guaranty.
Walker Manufacturing was plagued by financial problems. It also
became involved in litigation with a competitor, forcing it to incur
substantial legal fees. Other problems hampered the company, including
7
sale and distribution difficulties. These problems required Spreitzer to
infuse money into the company. Between the time Spreitzer purchased
the RJ assets in May 2000 and March 2001, he put money into the
company nearly every month.
When the Hawkeye State Bank note came due in March 2001,
Walker Manufacturing was unable to meet its obligation to pay the note.
On March 6, 2001, the bank informed Spreitzer it expected the loan to be
paid by March 31 and further informed him that he and Ross were
“jointly and individually, 100% liable for the debt.”
In response to the notice by the bank, Ross claimed to be judgment
proof. Spreitzer, however, agreed to pay the bank $750,000 under two
conditions. The first condition was that the bank would release him from
further liability under the personal guaranty. The second condition was
that the bank would assign its rights under the personal guaranty to
allow him to pursue Ross.
After the bank rejected the second condition, Spreitzer agreed to
drop the request for an assignment and to pay the bank $750,000 in
exchange for a release from the personal guaranty. Spreitzer also wanted
the bank to allow him the opportunity to purchase the Walker
Manufacturing note and assign its security interest and personal
guaranty to him in the event he was able to find a buyer for the Walker
Manufacturing assets. A settlement was eventually reached, and
Spreitzer paid the bank $750,000. Spreitzer was at all times assisted by
legal counsel.
In October 2001, the bank informed Spreitzer that Ross had
refused to pay his obligation under the personal guaranty.
Consequently, the bank informed Spreitzer it planned to collect the
remaining debt from Walker Manufacturing by selling its assets. Walker
8
Manufacturing eventually surrendered its assets to the bank, except for
the lawsuit against the competitor. 2 Spreitzer had invested a total of
$663,000 in Walker Manufacturing prior to the sale of its assets. The
bank sold the company assets for $850,000. 3 Ultimately, Ross paid
nothing on the personal guaranty.
Spreitzer filed an action against Ross, Glass, and Hawkeye State
Bank based on fraud, misrepresentation, and breach of fiduciary duty.
The fraud claim ultimately centered on the statement by Glass that the
bank would enforce the personal guaranty “equally.” Spreitzer claimed
this promise was the reason he agreed to form Walker Manufacturing
and the reason he invested new money of $663,000 before the bank sold
its assets.
Some of the claims were dismissed prior to trial, and the case was
eventually tried to a jury. The jury rendered a verdict against Ross for
$175,000 for fraudulent misrepresentation and nondisclosure. The jury
also returned a verdict against Glass for $838,000 for fraudulent
misrepresentation. Additionally, the jury determined Hawkeye State
Bank was vicariously liable for the actions of Glass. The district court
refused to submit Spreitzer’s claims for punitive damages to the jury.
Hawkeye State Bank filed an appeal, and Spreitzer cross-appealed.
The bank claims the judgment against it must be reversed for four
reasons. First, the bank claims there was insufficient evidence of fraud
because the evidence produced at trial failed to establish that the pivotal
2Spreitzer subsequently settled the lawsuit for $500,000 and received a net
payment of $319,000. There was evidence in the record of a second lawsuit in which
Spreitzer recovered a settlement payment. The impact of this lawsuit was not used by
the bank in resolving the issues raised on appeal.
3Glass embezzled this sum of money from the bank as part of the ongoing
money-laundering and embezzlement scheme he had engaged in for many years while
president of the bank.
9
oral statement by Glass was false (the bank did not, in fact, enforce the
personal guaranty against Spreitzer in excess of $750,000) or that it was
false at the time it was made. Second, the bank claims there was
insufficient evidence that Spreitzer acted reasonably in relying on the
pivotal oral statement made by Glass since it was contrary to the
language of the written personal guaranty. Third, the bank claims there
was insufficient evidence to support damages since the claimed
misrepresentation actually reduced Spreitzer’s personal liability from
$1.5 million to $750,000. Finally, the bank claims there was insufficient
evidence to support damages of $838,000 because Spreitzer only claimed
the fraudulent misrepresentation caused him to invest an additional
$663,000 in the company. Furthermore, the bank points out that
Spreitzer netted $319,000 in settling the Walker Manufacturing lawsuit
against its competitor.
On cross-appeal, Spreitzer claims the district court erred in
refusing to submit its claim for punitive damages to the jury. He also
claims the appeal by the bank is moot because the bank failed to appeal
from the finding by the jury that it was vicariously liable for the conduct
of Glass, and Glass has not appealed from the judgment for fraud
entered against him. Thus, Spreitzer claims the bank is vicariously
liable for the final judgment against Glass for fraud.
We transferred the case to the court of appeals. The court of
appeals reversed the judgment entered by the district court against the
bank and affirmed the decision by the district court to refuse to submit
the claim for punitive damages to the jury. It found insufficient evidence
that Spreitzer reasonably relied on the oral promise by Glass to support
fraud since the oral promise was contrary to the written guaranty. It
10
remanded the case for entry of judgment for the bank. Spreitzer sought,
and we granted, further review.
II. Standard of Review.
We review a district court judgment on a ruling for judgment
notwithstanding the verdict for corrections of errors at law. Gibson v. ITT
Hartford Ins. Co., 621 N.W.2d 388, 391 (Iowa 2001). We examine
whether substantial evidence supports each element of the claim. Id.
The evidence is viewed in a light most favorable to the nonmoving party.
Id. “ ‘Evidence is substantial if a jury could reasonably infer a fact from
the evidence.’ ” Id. (quoting Balmer v. Hawkeye Steel, 604 N.W.2d 639,
641 (Iowa 2000)).
III. Fraudulent Misrepresentation.
A. Res Judicata. Spreitzer initially claims the bank is precluded
from arguing insufficient evidence to support a finding of fraud by the
jury. Essentially, Spreitzer claims the unappealed judgment entered
against Glass, the bank president, serves as a final adjudication of the
claim. He claims this judgment is now binding on the bank under the
doctrine of res judicata because the bank did not challenge its vicarious
responsibility for the actions of its president in this appeal. Spreitzer
principally relies on Peppmeier v. Murphy, 708 N.W.2d 57 (Iowa 2005).
In Peppmeier, a patient sued her doctor for medical malpractice
and the doctor’s employer under a theory of vicarious liability. 708
N.W.2d at 59. The district court held the plaintiff failed to establish an
applicable standard of care because she had not designated an expert
witness for that purpose, and the district court granted summary
judgment for both defendants. Id. at 61. We transferred the appeal to
the court of appeals, and it held the plaintiff could establish the
applicable standard of care through the hearsay testimony offered by the
11
patient of another employee of the doctor’s employer. Id. Accordingly,
the court of appeals reversed the summary judgment against the
employer and affirmed the summary judgment in favor of the agent-
doctor because the hearsay testimony was not admissible against him.
Id. The employer sought further review of the decision by the court of
appeals, but the plaintiff did not seek further review of the summary
judgment in favor of the agent. Id. On further review, we held the final
judgment in favor of the agent and against the plaintiff barred the
plaintiff’s subsequent request for further review from a judgment in favor
of the principal. Id. Spreitzer asserts this principle is not only applicable
to judgments against an injured person, but is also applicable to
judgments in favor of the injured person.
Judgments for or against an injured party involving claims against
persons who have a relationship that makes one vicariously responsible
for the conduct of the other may be conclusive against the injured
person, the primary obligor, and the vicariously responsible person. See
Restatement (Second) of Judgments § 51 (1982). However, when the
primary obligor and the vicariously responsible person are tried together
in one action and only the vicariously responsible defendant appeals
from an adverse judgment, it could be unjust to apply the doctrine of
res judicata as a bar to such an appeal. In Peppmeier, the plaintiff could
have sought further review of the judgment, which we later held to bar
her claim. 708 N.W.2d at 62. In this case, Spreitzer argues we should
bar the bank from seeking further review based on the failure of the
agent to appeal. Thus, Spreitzer argues for the offensive use of
res judicata to bar defense by a party who did not have the opportunity
to appeal the final judgment being used to bar its defense. Notably, the
judgment being used to bar the bank’s defense was obtained against a
12
party who was not represented by legal counsel at trial or an appeal.
Under the circumstances of this case, it would be unfair to allow the
doctrine of res judicata to bar an appeal from a judgment by the
vicariously responsible party.
B. Sufficiency of Evidence. We recognize eight elements to a
claim for fraudulent misrepresentation. Gibson, 621 N.W.2d at 400.
These elements are:
(1) [the] defendant made a representation to the plaintiff, (2)
the representation was false, (3) the representation was
material, (4) the defendant knew the representation was
false, (5) the defendant intended to deceive the plaintiff, (6)
the plaintiff acted in [justifiable] reliance on the truth of the
representation . . ., (7) the representation was a proximate
cause of [the] plaintiff’s damages, and (8) the amount of
damages.
Id. The bank claims the elements of false representation, justifiable
reliance, and damages were not supported by sufficient evidence at trial.
We turn to the sufficiency of evidence to support the jury’s verdict on
those elements.
1. False representation. The bank argues the oral promise by its
president to “equally” enforce the personal guaranty was not false at the
time it was made. It also claims the promise was not false because the
bank did in fact limit Spreitzer’s personal liability under the personal
guaranty to $750,000, or one-half of the amount of the debt owed to the
bank.
Under the law, a representation must be false at the time it was
made to support a claim of fraud, and a representation that was true
cannot serve as a basis for a claim of fraud. Hannoon v. Fawn Eng’g
Corp., 324 F.3d 1041, 1048 (8th Cir. 2003). Thus, the arguments
asserted by the bank require us to examine the representation made by
13
the bank president at the heart of this case. We first consider if there
was substantial evidence that the representation was false.
The representation made by the bank president to equally enforce
the personal guaranty gave rise to two interpretations. The bank
interpreted the representation as a promise to limit the liability of each
guarantor to one-half of the total debt. Spreitzer interpreted the
representation as a promise by the bank to pursue both guarantors for
payment of the debt up to one-half of the total amount in the event of a
default. The distinction between the two interpretations is critical, as
revealed by the arguments of the parties.
The bank argues the representation was not false under its
interpretation because the bank did in fact limit Spreitzer’s liability
under the personal guaranty to $750,000. Spreitzer argues the
representation was fraudulent under his interpretation because the bank
never pursued Ross. He points to evidence that the bank exclusively
looked to him for payment under the personal guaranty and never
intended to pursue Ross or hold Ross responsible for the debt under the
personal guaranty.
An ambiguous representation does not necessarily preclude a
claim for fraud. Under the Restatement (Second) of Torts section 527
(1977), a representation known by the maker “to be capable of two
interpretations, one of which he knows to be false and the other true”
can serve as a basis for fraud if, among other circumstances, the
representation is made “with the intention that it be understood in the
sense in which it is false.”
In this case, the proposal for Spreitzer to buy the assets of the
manufacturing company required him to execute a new agreement with
the bank to be personally responsible for the company’s $1.5 million loan
14
to the bank. Yet, Spreitzer was unwilling to make the purchase without
the help of Ross to share in the personal responsibility for the company
debt in the event of a default. Spreitzer initially sought to enter into an
indemnification agreement with Ross that would ensure the two men
shared the company’s debt burden in the event of a default by the
company. Ross rejected the agreement with Spreitzer, but agreed to join
Spreitzer in signing a personal guaranty and to promise the bank to pay
the new debt in the event of a default by the newly formed company.
Spreitzer wanted Ross to be responsible for paying one-half of the debt,
and the bank knew it.
Under the terms of the personal guaranty, Spreitzer and Ross were
separately liable to the bank for the full amount of the debt.
Nevertheless, the bank president orally represented to Spreitzer that the
bank would enforce the personal guaranty equally between the two
guarantors if the company defaulted on the debt. There is substantial
evidence that Spreitzer understood this representation to mean the bank
would seek payment from both guarantors to satisfy the debt.
Under the circumstances, the representation at issue was capable
of two interpretations, and the evidence supported a finding that the
bank president intended the representation to be understood as meaning
the bank would use its resources to pursue payment of the debt by both
guarantors in the event of a default. There was evidence the president of
the bank knew Spreitzer would not go through with the asset purchase if
Ross was not included in the personal guaranty. There was also
evidence to infer the president knew Spreitzer was relying on Ross to
help pay the new company’s debt in the event of a default and that the
president knew Spreitzer was relying on the bank to enforce the personal
guaranty against Ross. Yet, the president knew Ross had restructured
15
his personal finances to severely limit the amount of assets available to
creditors. With this evidence, a jury could conclude the bank president
made the representation to Spreitzer so that Spreitzer would believe the
bank would equally pursue both guarantors in the event of a default.
Moreover, a jury could conclude the representation was false when made
in light of the evidence that the bank knew at the time of the
representation that Ross had restructured his assets so the bank would
be unable to collect from him under the personal guaranty. There was
also sufficient evidence for the jury to conclude the bank did not comply
with the promise to equally pursue Ross. Thus, we conclude there was
sufficient evidence in the record to support the false-representation
element of the tort.
2. Justifiable reliance. The bank claims Spreitzer could not have
justifiably relied on the oral representation by the bank president to
equally enforce the personal guaranty because the representation was
contrary to the terms of the written guaranty and Spreitzer was a
sophisticated investor who acted upon the advice of lawyers and
accountants. Spreitzer asserts there was sufficient evidence to support
the finding of justifiable reliance.
Justifiable reliance is an essential element of a claim for fraud. In
re Marriage of Cutler, 588 N.W.2d 425, 430 (Iowa 1999). Thus, the
plaintiff must not only act in reliance on the misrepresentation, but the
reliance must be justified. Gibson, 621 N.W.2d at 400.
Like most jurisdictions, we require reliance on the representation
to be justified, not reasonable. Lockard v. Carson, 287 N.W.2d 871, 878
(Iowa 1980); see Field v. Mans, 516 U.S. 59, 72–74 & n.12, 116 S. Ct.
437, 444–46 & n.12, 133 L. Ed. 2d 351, 363–65 & n.12 (1995) (listing
states); Sutton v. Greiner, 177 Iowa 532, 536, 159 N.W. 268, 271–72
16
(1916) (holding defendant’s reliance was “justified”). While the terms
“justifiable” and “reasonable” are often used interchangeably in
addressing the element of reliance, they can describe different
approaches. See Field, 516 U.S. at 71–74, 116 S. Ct. at 444–46, 133
L. Ed. 2d at 362–65. We simply clarify that the justified standard
followed in Iowa means the reliance does not necessarily need to conform
to the standard of a reasonably prudent person, but depends on the
qualities and characteristics of the particular plaintiff and the specific
surrounding circumstances. Lockard, 287 N.W.2d at 878; accord
Restatement (Second) of Torts § 545A cmt. b. This standard reflects that
fraudulent misrepresentation is an intentional tort, and like other
intentional torts, recovery is not necessarily barred by the fault of the
plaintiff that contributed to the damage. See Restatement (Second) of
Torts § 545A cmt. a.
The justifiable-reliance standard does not mean a plaintiff can
blindly rely on a representation. Lockard, 287 N.W.2d at 878. Instead,
the standard requires plaintiffs to utilize their abilities to observe the
obvious, and the entire context of the transaction is considered to
determine if the justifiable-reliance element has been met. Emergent
Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 195 (2d
Cir. 2003); see also Lockard, 287 N.W.2d at 878 (justifiable-reliance
element viewed in light of plaintiff’s own information and intelligence).
The federal courts have outlined a host of relevant factors to
consider in federal securities fraud cases and rule 10b–5 violation cases
to determine if reliance by a plaintiff on a misrepresentation claim is
justified. See Davidson v. Wilson, 973 F.2d 1391, 1400 (8th Cir. 1992);
see also Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1516 (10th Cir. 1983).
Our common-law fraud claim parallels the federal fraud claim, and these
17
factors are helpful in determining the justifiable-reliance element of our
common-law fraud action. The relevant factors are:
“(1) the sophistication and expertise of the plaintiff in
financial . . . matters; (2) the existence of long-standing
business or personal relationships; (3) access to the relevant
information; (4) the existence of a fiduciary relationship; (5)
concealment of the fraud; (6) the opportunity to detect the
fraud; (7) whether the plaintiff initiated the . . . transaction
or sought to expedite the transaction; and (8) the generality
or specificity of the misrepresentations.”
Davidson, 973 F.2d at 1400 (quoting Zobrist, 708 F.2d at 1516). Our
own cases have previously identified some of these factors. See Lockard,
287 N.W.2d at 878.
An additional factor has been identified in cases involving oral
representations. This factor considers whether the oral representation
clearly contradicts a written agreement. See In re Access Cardiosys., Inc.,
404 B.R. 593, 649 (Bankr. D. Mass. 2009). 4 In such instances, reliance
on the oral representation by a plaintiff can be utterly unjustified in the
face of a clear written contradiction. See Marram v. Kobrick Offshore
Fund, Ltd., 809 N.E.2d 1017, 1031 (Mass. 2004). An example of the
circumstances when reliance by a plaintiff on an oral representation that
4Some courts consider the contradiction between an oral representation and a
written agreement either as a separate factor to use in deciding if reliance is justifiable
or as a circumstance to consider in conjunction with the third factor involving plaintiff’s
access to relevant information. Compare, e.g., Kennedy v. Josephthal & Co., 814 F.2d
798, 805 (1st Cir. 1997) (considering oral misrepresentation at odds with a written
memorandum as part of the third factor); with In re Access Cardiosys., Inc., 404 B.R. at
649 (stating courts consider oral representations that contradict written material as an
additional factor). Other courts consider the parol evidence rule in addressing claims of
fraud based on oral misrepresentations that contradict written agreements, especially
integrated agreements. Nevertheless, almost all courts recognize the issue is primarily
one of whether the plaintiff is justified in relying on the promise. Consequently, most
courts inevitably recognize that the application of the parol evidence rule by a judge to
avoid altering the terms of a written agreement “is not necessarily equivalent to the
judge’s obligation to direct a verdict for a defendant on the basis that there could be no
reasonable reliance as a matter of law.” Gen. Corp. v. Gen. Motors Corp., 184 F. Supp.
231, 238–39 (D. Minn. 1960). In this case, the bank did not argue that the parol
evidence rule played a role in the resolution of this issue.
18
is directly contrary to a written agreement is unjustified can be found in
Smidt v. Porter, 695 N.W.2d 9 (Iowa 2005). In Smidt, we determined that
a former employee could not establish a claim for fraud against a former
employer based on an oral promise of long-standing employment and
benefits allegedly made by the employer when the former employee had
unsuccessfully attempted to negotiate such terms as a part of a written
employment contract that did not include the disputed terms. 695
N.W.2d at 22–23. This approach is consistent with the established view
that the justifiable-reliance element means a plaintiff cannot close his or
her eyes to an obvious contradiction. Kennedy v. Josephthal & Co., 814
F.2d 798, 805 (1st Cir. 1987).
The bank argues Spreitzer was not justified as a matter of law in
relying on the oral representation to pursue both guarantors equally.
Primarily, the bank relies on the inconsistency between the oral
representation and the terms of the guaranty that permitted the bank to
collect from a single guarantor, as well as the evidence presented during
trial that Spreitzer was a sophisticated investor who acted on the advice
of several professionals in making his decisions to purchase the RJ
assets and to sign the guaranty.
We acknowledge many of the factors favor a finding in this case
that the reliance was unjustified. Yet, no one factor is dispositive in
determining if reliance by a plaintiff is justified, and the scale is tipped in
one direction or the other only by a balance of all of the factors. See
Zobrist, 708 F.2d at 1516–17. We recognize the oral representation in
this case was somewhat vague and was inconsistent with the term of the
written guaranty that permitted the bank to pursue collection of the debt
against one guarantor. On the other hand, the parties to the transaction
were friends and engaged in a face-to-face exchange over the manner in
19
which the guaranty would be enforced. They did not resort to the
language of the written personal guaranty when discussing questions of
enforcement, and the bank president admitted he told Spreitzer the bank
would pursue both guarantors in the event of a default. Moreover, the
bank president was authorized to alter terms of the written agreement.
This case did not rise to the level of the circumstances presented in
Smidt. In this case, the parties did not negotiate the terms of the
personal guaranty, but signed a standard form agreement. The bank
president did not rely on the terms of the written agreement to guide the
discussion prior to the execution of the agreement, but guided Spreitzer
by his oral representations. Unlike Smidt, there was no evidence the
written guaranty was a product of the give and take of negotiations by
the parties so as to make it unjustified for a party to rely on an oral
representation covered by the negotiations that was clearly inconsistent
with the written agreement. See Robinson v. Perpetual Servs. Corp., 412
N.W.2d 562, 567 (Iowa 1987) (recognizing fine print, boilerplate written
contract terms may not reflect the intentions of the parties to the
contract).
Normally, the decision whether or not reliance by a plaintiff is
justified is one for the fact finder to resolve. See Holcomb v.
Hoffschneider, 297 N.W.2d 210, 213 (Iowa 1980); Christy v. Heil, 255
Iowa 602, 611, 123 N.W.2d 408, 413 (1963). After considering all the
circumstances, we conclude this case does not create an exception to
this general rule. This conclusion is not to say that integrated written
contracts cannot thwart a claim for fraud based upon an oral
representation clearly inconsistent with the contract. We only conclude
the finding of justifiable reliance made by the jury in this case was
supported by the evidence.
20
3. Damage caused by misrepresentation. An essential element of
fraud requires the plaintiff to show the fraud resulted in damage.
Sanford v. Meadow Gold Dairies, Inc., 534 N.W.2d 410, 413 (Iowa 1995).
Fraud without resulting injury is not actionable. Vorpahl v. S. Sur. Co.,
208 Iowa 348, 352, 223 N.W. 366, 368 (1929).
Spreitzer sought damages in the form of his lost investment in the
business in the amount of $663,000 and the payment he made under
the personal guaranty of $750,000 after the company defaulted on its
loan obligations. He supported these claims primarily with his testimony
that he would not have agreed to buy the RJ assets, sign the personal
guaranty, and invest in a new company if he had known the bank would
not enforce the personal guaranty equally between the coguarantors.
The bank provides two primary arguments in support of its
position that the damages Spreitzer claims were not caused by his
reliance. First, the bank claims Spreitzer lost his investment of
$663,000 due to the continued financial decline of the business based on
factors unrelated to a promise to equally enforce the personal guaranty.
In the bank’s view, the business failed due to product design problems,
insufficient sales, and a lack of new investors. Second, the bank claims
the decision to agree to the personal guaranty—found by the jury to be
fraudulently induced—could not have caused any damage to Spreitzer
because it was merely a continuation of a prior obligation by Spreitzer to
be personally responsible for RJ’s debt, which was not alleged to have
been induced by fraud.
The challenge by the bank to the damage award is tied to the
causation element of a claim for fraud. Often, damages and causation
are intertwined concepts. See Midwest Home Distrib., Inc. v. Domco
Indus. Ltd., 585 N.W.2d 735, 739 (Iowa 1998). In this case, the bank’s
21
first argument does not speak so much to the amount or measure of
damages as it does to the absence of evidence to show the specific
damages claimed by Spreitzer, and awarded by the jury, were caused by
the misrepresentation. 5
As with other torts, it is generally recognized the causation element
of a fraud claim is composed of both factual and legal causation of the
loss. See W. Page Keeton, Prosser & Keeton on the Law of Torts § 110, at
767 (5th ed. 1984) [hereinafter Prosser & Keeton]. Under the
Restatement, the fraudulent misrepresentation must not only be a
factual cause of the loss, but it must also be a legal cause. Restatement
(Second) of Torts §§ 546 (factual cause), 548A (legal cause). Each must
be satisfied.
The factual causation component addresses the question whether
the representation, that is believed to be true but is actually fraudulent,
caused the losses in some way. If the plaintiff did not rely on the
representation in entering into the transaction in which the losses were
suffered, the representation is not in fact a cause of the loss.
Restatement (Second) of Torts § 546 cmt. a.
In this case, sufficient evidence was presented to support a finding
by the jury that the misrepresentation to equally enforce the personal
guaranty was a factual cause of the losses suffered by Spreitzer. Based
on the evidence, the jury could have found Spreitzer would not have
5Spreitzer impliedly suggested that the damage claims in the case involved out-
of-pocket damages. Generally, Iowa law recognizes two basic methods to measure
damages in fraud cases. Midwest Home Distrib., 585 N.W.2d at 739. The first measure
of damages provides compensation for the benefit of the bargain. Id. The second
measure of damages is the out-of-pocket rule. Id. However, these measures of
damages have primarily been developed in cases of fraud involving the transfer of
property. Yet, even when property is not transferred between the defendant and the
plaintiff, a defrauded plaintiff is entitled to recover those losses proximately caused by
reliance on the misrepresentation.
22
suffered the losses he claims because he would not have invested in the
business and would not have signed the new personal guaranty that was
ultimately enforced against him if he had known the representation was
false. In applying the “but for” test of factual causation, we conclude
there was sufficient evidence that the losses claimed would not have
occurred “but for” Spreitzer’s reliance on the false representation. See
Sweeney v. City of Bettendorf, 762 N.W.2d 873, 884 (Iowa 2009)
(explaining “cause in fact”).
The legal causation component goes further to address the
question whether the losses that in fact resulted from the reliance were
connected to the misrepresentation in a way to which the law attaches
legal significance. Kelly v. Sinclair Oil Corp., 476 N.W.2d 341, 349 (Iowa
1991) (explaining second component of causation as “the question of
whether the policy of the law will extend responsibility to those
consequences which have in fact been produced by an actor’s conduct”);
see also Restatement (Second) of Torts § 548A cmt. a.
Legal causation is a critical component of the causation element of
the tort of fraud. Without legal causation, the chain of losses resulting
from an investment would be virtually limitless. See Movitz v. First Nat’l
Bank of Chicago, 148 F.3d 760, 762 (7th Cir. 1998) (explaining
importance of requiring more than mere “but for” causation in assigning
legal responsibility for a plaintiff’s loss). 6 Contractual counterparties
6Theseparate requirements of factual causation and legal causation have been
developed in federal security fraud cases wherein the concepts are known as
“transaction causation” and “loss causation.” Movitz, 148 F.3d at 763. “Transaction
causation” is met when the plaintiff shows the misrepresentation caused the plaintiff to
make the investment (i.e., where the plaintiff shows that, if the plaintiff had known the
truth, the plaintiff would not have made the investment). Bruschi v. Brown, 876 F.2d
1526, 1530 (11th Cir. 1989). “Loss causation” requires the plaintiff to additionally
show that the false representation touches upon and relates to the reasons for the
investment losses suffered. Id.
23
would become virtual insurers against the risks inherent in business
investing.
The modern trend is to refocus the analysis of legal causation from
the foreseeability of harm to a risk-based standard. See Restatement
(Third) of Torts, Liability for Physical Harm § 29 cmt. j (Proposed Final
Draft No. 1 2005). In negligence cases causing physical harm, tort
liability now focuses on whether the risk that produces liability actually
caused the damages suffered. Id. § 29. The scope of liability is limited to
harms that result from the risks that made the actor’s conduct tortious.
Id. The shift in analysis has primarily occurred to clarify the often
confusing concept of legal causation, not to change the substantive scope
of liability. Id. § 29 cmt. j (explaining analytical connection between
reasonable foreseeability and risk-based standards).
We readily acknowledge legal causation for intentional torts often
reaches a broader range of damages for harm than legal causation
reaches in cases involving unintentional torts. See id. § 33(b). This
principle may also apply to intentional torts involving nonphysical harm,
including fraud actions involving lost investments. Nevertheless, “[t]he
cases are in accord that even a willful or intentional [tortfeasor] does not
become an insurer of the safety of those whom he has wronged.”
Johnson v. Greer, 477 F.2d 101, 106 (5th Cir. 1973). As with the scope
of liability for unintentional torts, “intentional and reckless tortfeasors
are not liable for harms whose risks were not increased by the tortious
conduct, even if that conduct was a factual cause of the harm.”
Restatement (Third) of Torts, Liability for Physical Harm § 33(c) & cmt. f.
Even though the authors of the venerable Prosser treatise on torts
have traditionally used foreseeability to frame this component of legal
24
causation, the substantive rule that has been charted essentially
remains unchanged:
In general and with only a few exceptions, the courts have
restricted recovery to those losses which might have
expected to follow from the fraud and from those events that
are reasonably foreseeable. . . . But if false statements are
made in connection with the sale of corporate stock, losses
due to a subsequent decline in the market, or insolvency of
the corporation brought about by business conditions or
other factors [that] in no way relate to the representations[,]
will not afford any basis for recovery. It is only where the
fact misstated was of a nature calculated to bring about
such a result that damages for it can be recovered.
Prosser & Keeton, at 767.
Stated in terms of risk instead of foreseeability, this principle limits
the scope of liability for tortious conduct by requiring the conduct to
have “enhanced (at the time the defendant acted) the chances of the
harm occurring or that it would increase the chances [(risk)] of a similar
accident [(harm)] in the future if the defendant should repeat the same
wrong.” Zuchowicz v. United States, 140 F.3d 381, 388 n.7 (2d Cir.
1998). In other words, a tortfeasor “ ‘is not liable to a person whom he
intended to harm and who has been harmed, unless from the standpoint
of a reasonable man, his act has in some degree increased the risk of
that harm.’ ” Johnson, 477 F.2d at 107 (quoting Restatement of Torts
§ 870 cmt. g (1939)).
This risk-based approach is compatible with a long-established
principle of legal causation, reflected in time-honored cases. For
example, in Berry v. Sugar Notch Borough, 43 A. 240 (Pa. 1899), a
speeding trolley car was struck by a falling tree. The court held the
causation requirement was not met. Id. at 240. “This result was correct
since, although the accident would not have occurred but for the trolley’s
25
speeding, speeding does not increase the probability of trees falling on
trolleys.” Zuchowicz, 140 F.3d at 388 n.7.
Spreitzer acknowledges the factual-causation element of a fraud
claim, but suggests we have relaxed the legal-causation component in
fraud cases involving investments by requiring nothing more than a
showing that the plaintiff would not have made the investment if the
truth of the misrepresentation had been known. Spreitzer relies on
Midwest Management Corp. v. Stephens, 353 N.W.2d 76 (Iowa 1984), to
illustrate this point.
In Stephens, an investment corporation invested $400,000 in a
securities venture proposed by three entrepreneurs. 353 N.W.2d at 82.
The investment made by the corporation was based on a representation
by a director of the corporation, who was also the father of one of the
entrepreneurs, that the director and the three entrepreneurs would
personally invest in the new venture by acquiring stock. Id. at 78. The
investment corporation wanted the instigators of the business venture to
have a personal stake in the venture as an incentive to operate the
business profitably. Id. The instigators never invested in the business
as promised, and the business failed. Id. at 80.
In holding the investment corporation was entitled to recoup its
lost investment as damages based on the false promise that the
entrepreneurs would also personally invest in the venture, we observed,
as in this case, the plaintiff would not have invested in the venture but
for the misrepresentation. Id. at 82. We also observed, as in this case,
that there was ample evidence that the venture would have failed even if
the promise had been true. Id. Based on these observations, Stephens
appears on the surface to support Spreitzer’s position.
26
In Stephens, the investment made by the plaintiff in the venture
was recoverable as damages, not only because the plaintiff corporation
would not have invested in the venture if it knew the representation was
false, but also because the promise made and relied upon as truthful
was calculated to minimize the risk of investing in the venture. Based on
plaintiff’s belief that the venture would be less likely to fail if those
operating it had their own money invested in the venture, the falsity of
the promise increased the risk of the damage suffered. Thus, the losses
(loss of invested funds) that did in fact occur by entering into the
transaction were also losses whose risks were increased by the falsity of
the promise (greater risk of losing invested funds if the entrepreneurs are
not personally invested). Legal causation was established in Stephens by
the presence of facts that showed the type of false promise increased the
scope of damages, but only because the risk of harm increased as a
result of the false promise. The damages sought by plaintiff (invested
funds) were within the risk of harm covered by the false promise.
Thus, legal causation in fraudulent-representation cases requires,
at a minimum, that the tortious aspect of the conduct increased the risk
of the damages claimed. This amount of damage is distinguishable from
the greater universe of losses caused by the mere fact that a false
representation induced the investment. That is, the plaintiff must show
not only that the reliance would not have occurred but for the
defendant’s decision to misrepresent the truth, but the plaintiff must
also show that the fact misrepresented increased the risk of the specific
damages claimed.
Thus, in considering legal causation, we return to the false
representation at issue. The representation concerned the term of the
27
personal guaranty that the bank would equally pursue the coguarantors
in the event of a default by the business on its $1.5 million loan.
In the procedural context of this case, we must apply the rules for
legal causation to the bank’s challenge to the sufficiency of the evidence
to support the jury verdict. With all these guiding principles in mind, the
question becomes whether substantial evidence exists in the record to
support a jury finding that the false promise to equally pursue the
coguarantors increased the risk of damages amounting to $838,000.
We begin with the loss suffered by Spreitzer through the
investment he made in the business. The question is whether the fact
Glass did not intend to equally pursue the coguarantors increased the
risk Spreitzer would lose his investments.
Generally, an investor invests in a business operation to obtain a
return on the investment through the receipt of profits from the
operation of the business, through the future sale of the business at a
profit, or through the sale of the investor’s interest in the business. In
this case, the business purchased by Spreitzer failed within a relatively
short period of time, and Spreitzer never realized any operational
business profits from his investment of $663,000. Spreitzer failed to
explain how the false promise to equally enforce the personal guaranty of
the business debt between the coguarantors increased the risk of
unprofitability of the business, and we can discern no such explanation
from the record. He did not show the business would have produced a
return on his investment if the bank would have pursued his
coguarantor. For sure, all the evidence revealed the business would have
failed to be profitable even if the bank would have pursued Ross equally
as promised. Consequently, the misrepresentation was not a legal cause
of the loss of the $663,000 invested by Spreitzer in the company.
28
We next consider whether or not the misrepresentation was a legal
cause of the payment of $750,000 by Spreitzer under the personal
guaranty. The bank had the contractual right to bypass Walker
Manufacturing and demand satisfaction of the debt from Spreizter. This
meant that even if the bank had pursued satisfaction of the Walker
Manufacturing loan from Ross as represented, Spreitzer was still
obligated to pay up to $750,000. Thus, the falsity of the promise to
pursue the coguarantors equally did not increase the risk Spreitzer
would have had to pay $750,000 under the personal guaranty.
Finally, we consider whether the falsity of the bank’s promise
increased the risk Spreitzer would lose some portion of his interest in the
assets of Walker Manufacturing. When a creditor bypasses the assets of
a debtor and collects the debt from a guarantor under the terms of a
personal guaranty, the guarantor may assert rights of reimbursement
against the debtor to recoup the amount paid on the guaranty. 7 See
Hills Bank & Trust Co. v. Converse, 772 N.W.2d 764, 772 (Iowa 2009)
7The term “reimbursement” is contrasted here with the related concept in the
law of suretyship, “subrogation.” “Reimbursement” is a legal remedy for a guarantor in
an implied surety contract between the guarantor and primary debtor in a three-party
loan contract. Restatement (Third) of Suretyship and Guaranty § 22 cmt. a (1996).
Some courts may use the term “subrogation” to refer to a “bundle of rights” against the
primary debtor that a guarantor possesses after fulfilling the underlying obligation to a
creditor, including the right to reimbursement from the primary debtor. 38 Am. Jur. 2d
Guaranty § 120, at 971 (1999); see also In re XTI Xonix Tech. Inc., 156 B.R. 821, 827
(Bankr. D. Or. 1993) (noting that, under Oregon law, “[subrogation] consists of the
rights of indemnity (or reimbursement), contribution, subrogation and exoneration”). In
contrast, the Restatement defines “subrogation” as an equitable assignment of the
creditor’s rights to the guarantor, an enforcement mechanism with which the guarantor
may be more adequately assured of reimbursement from the primary debtor. See
Restatement (Third) of Suretyship and Guaranty §§ 27 cmt. a, 18 cmt. b, 28 cmt. c. In
most cases, the rights under the two remedies will not differ significantly. Id. at § 28
cmt. c. However, a guarantor is eligible for subrogation only when the underlying
obligation to the creditor has been fully satisfied, regardless of any limit on the amount
of debt the guarantor agreed to pay. Id. at § 27 cmt. b; Am. Sur. Co. of N.Y. v.
Westinghouse Elec. Mfg. Co., 296 U.S. 133, 137, 56 S. Ct. 9, 11, 80 L. Ed. 105, 109–10
(1935). Spreitzer did not pay the entire underlying debt to the bank in this case.
Consequently, we use the reimbursement remedy for the rights at issue and do not
address any associated right to subrogation.
29
(adopting the Restatement (Third) of Suretyship and Guaranty position
on reimbursement); 38 Am. Jur. 2d Guaranty § 120, at 971–72 (1999).
Any assets of the company would be available to the coguarantors under
claims of reimbursement for payments made to the bank. Thus, the
bank’s failure to pursue Ross as promised increased the likelihood the
bank would collect the remaining portion of the debt from the company,
which would diminish or exhaust the assets of the company available to
Spreitzer under either a claim for reimbursement or a claim of
ownership. Therefore, the falsity of the representation increased the
likelihood Spreitzer’s reimbursement or ownership interests would be
less valuable. In this way, some damages could satisfy the legal
causation rule applied in this case.
While some damages relating to the diminution of company assets
could satisfy the legal causation standard, the amount would be limited
by legal causation to those assets that were likely diminished by the
tortious aspect of the bank’s conduct. The tortious aspect of Glass’
conduct was the falsity of his representation regarding equal enforcement
of the guaranty. Even though the falsity of the promise increased the
likelihood the bank would forego satisfaction from Ross, the falsity of the
promise did not affect the amount of money the bank would have actually
collected from Ross were the guaranty to be enforced equally.
Consequently, Spreitzer’s losses cannot exceed the amount of money he
would have recovered from the company if the bank had equally pursued
both coguarantors as promised.
The evidence at trial supported a finding that the company was
ultimately sold for $850,000. It also supported a finding that the value
of the company’s interest in the litigation was $319,000. The bank
received the $850,000 in satisfaction of the remaining debt obligation,
30
and Spreitzer received the litigation proceeds of $319,000. In
determining the amount of damages, the ultimate question in this case is
what amount of the total company assets ($1.069 million) would
Spreitzer have received if the representation had been true—if the bank
had pursued Ross. While it is apparent Spreitzer was damaged in some
amount as result of the misrepresentation, this amount is far from the
jury award of $838,000.
For example, if the bank had pursued Ross as promised and
recovered $750,000 from him as contemplated by Spreitzer, then
Spreitzer and Ross would have had the company assets of $1.069 million
($750,000 plus $319,000) available to them to satisfy their claims for
reimbursement. 8 Having paid the bank the debt of $1.5 million, the two
guarantors could have each netted $534,500 in company assets. As it
turned out, Spreitzer only received $319,000 in company assets. Thus,
Spreitzer would have been damaged by the false representation in the
amount of $215,500 under this scenario.
On the other hand, if the bank had pursued Ross as promised but
recovered nothing from him, the company assets actually received by the
bank ($850,000) and Spreitzer ($319,000), as shown by the evidence,
would be the same amounts they would have received if the bank had
performed its promise. In this event, the falsity of the representation
would not have increased the risk of any of the damages claimed by
Spreitzer. Of course, if the bank had pursued Ross as promised and
recovered some amount, but an amount less than $750,000, then
8Although the face value of the bank note was $1.5 million, the bank ultimately
recovered $1.6 million. While not explained by the record, the bank was apparently
entitled to the additional amount, which means the bank would have also been entitled
to receive this amount before Spreitzer and Ross would have been entitled to any
reimbursement from the company assets.
31
Spreitzer’s damages would fall between the two extremes based on the
amount recovered from Ross by the bank.
We conclude there was insufficient evidence to support the jury
award of $838,000. The record does not contain evidence of $838,000 of
damages that were increased by the tortious aspect—the falsity—of the
fraudulent misrepresentation at issue. The evidence at trial would have
supported an award of some amount of damages, but there was clearly
insufficient evidence of damages of $838,000.
The bank requests that we remand the case for entry of judgment
in an amount supported by the evidence. We acknowledge this is a
procedure we have followed in the past when the amount of a jury award
was found to be unsupported by the evidence. See Midland Mut. Life Ins.
Co. v. Mercy Clinics, Inc., 579 N.W.2d 823, 834 (Iowa 1998). However,
the amount of the award will depend upon findings of fact, which is not
our role under the applicable standard of review. As we will
subsequently conclude, however, the district court erred in failing to
submit Spreitzer’s punitive-damage claim to the jury. Thus, the case
must ultimately be remanded for a new trial, and it would be appropriate
under the circumstances of this case for the new trial to include both
claims of compensatory and punitive damages.
In summary, the claim for compensatory damages under the
theory of liability determined by the jury in this case will involve a two-
step process on retrial. The jury must first determine the amount of
money the bank would have recovered from Ross if the bank had equally
pursued both guarantors under the personal guaranty. Based upon this
amount, the jury must then determine any additional amount (over the
$319,000 received) Spreitzer would have netted in a claim for
reimbursement against the company.
32
IV. Punitive Damages.
Punitive damages may be awarded in an action for fraud when, in
conjunction with the fraud, the defendant acts with legal malice or
engages in other aggravating conduct amounting to actual malice. See
Tratchel v. Essex Group, Inc., 452 N.W.2d 171, 176 (Iowa 1990). Legal
malice involves wrongful conduct committed “with a reckless disregard of
another’s rights.” Stephens, 353 N.W.2d at 82.
The district court rejected the claim for punitive damages based on
evidence that the bank president partially complied with his promise to
equally enforce the personal guaranty by limiting Spreitzer’s personal
liability to one-half of the total debt. In other words, the district court
found the bank did not perpetrate the fraud in order to collect the entire
debt from Spreitzer. The district court also found the bank president
hoped Spreitzer would succeed with his new business. It also pointed
out Spreitzer was a sophisticated investor and was not financially
vulnerable. The bank echoed these arguments on appeal in support of
its claim that the district court did not err in granting a directed verdict
on punitive damages. 9
The fraudulent conduct in this case consisted of the promise to
equally enforce the personal guaranty between the two guarantors.
There was evidence Spreitzer would not have purchased the business
without the promise. There was also evidence the company would likely
have been forced into bankruptcy if Spreitzer would not have agreed to
the takeover. Consequently, the fraud was a key component to
Spreitzer’s decision to take on the risk of purchasing the business.
9The bank did not claim on appeal, nor did the district court determine at trial,
that the bank cannot be liable for punitive damages based on the conduct of an
employee. See Restatement (Second) of Torts § 909 (punitive damages properly awarded
when agent was manager and acted within scope of employment).
33
Although the bank president may have wanted Spreitzer to succeed in
the business, the jury could have found his desire was primarily
motivated by his own greed and self-interest. He only wanted Spreitzer
to succeed as a means for his own success, and he purposely misled
Spreitzer into believing Ross would help absorb the company debt if the
business failed.
Even sophisticated and wealthy investors have a right to truthful
investment information. The bank president acted with his interests in
the forefront in making the false promise, and there was sufficient
evidence from which a jury could conclude that the promise was made
with a conscious and reckless disregard for the rights of Spreitzer. The
bank president knew the company was failing, and he knew it required a
capital investment to have any hope of survival. In the event of a default
on the note by the company, he also knew that Ross would not be
available to help Spreitzer satisfy the company’s debt to the bank. This
is the type of conduct that can give rise to punitive damages, and it was
a question the jury should have been able to decide. Consequently,
Spreitzer is entitled to a new trial to allow the jury to determine the
punitive damage claim. 10
V. Conclusion.
We have fully and carefully considered all claims raised by the
parties on the appeal and cross-appeal. We vacate the decision of the
court of appeals and reverse the judgment of the district court. We
conclude Spreitzer is entitled to a new trial on issues of compensatory
10Punitive damages would only be recoverable if Spreitzer recovers compensatory
damages. See Pringle Tax Serv., Inc. v. Knoblauch, 282 N.W.2d 151, 154 (Iowa 1979)
(stating the general rule that compensatory damages must be established before
punitive damages may be awarded). If Spreitzer fails to prove damages caused by
reliance on the misrepresentation on retrial, punitive damages will not be recoverable.
34
and punitive damages. Compensatory damages shall be calculated in
the manner described in this opinion, and punitive damages shall be
submitted on the theory of liability used to support the prior finding of
fraud.
DECISION OF COURT OF APPEALS VACATED; JUDGMENT OF
DISTRICT COURT REVERSED AND CASE REMANDED FOR NEW
TRIAL.
All justices concur except Baker, J., who takes no part.