John Ernest Lucken Revocable Trust v. Heritage Bancshares Grp., Inc., C16-4005-MWB

THE JOHN ERNEST LUCKEN REVOCABLE TRUST,and JOHN LUCKEN and MARY LUCKEN, TRUSTEES, and JOHN LUCKEN,Individually, and MARY LUCKEN, Individually, Plaintiffs, v. HERITAGE BANCSHARES GROUP, INC., HERITAGE BANK NATIONAL ASSOCIATION,THOMAS GEIGER and GARY GEIGER, directors of Heritage Bank, ROBERT MATHIASEN,Chief Credit Officer of Heritage Bank, and DOES 1-100, Defendants.

No. C16-4005-MWB

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF IOWA WESTERN DIVISION

August 15, 2017

OPINION AND ORDER REGARDING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

TABLE OF CONTENTS

I. INTRODUCTION AND BACKGROUND ............................................................. 2

A. Factual Background ..................................................................................... 2

1. Parties and principal actors .............................................................. 3

2. John Lucken ...................................................................................... 3

3. Dirks Motor's Financing .................................................................. 4

4. Luckens' involvement in Dirks Motor's financing .......................... 6

B. Procedural Background ............................................................................... 8

II. LEGAL ANALYSIS ................................................................................................. 9

A. Summary Judgment Standards .................................................................... 9

B. Plaintiffs' Fraud Claim .............................................................................. 11

1. Elements of fraud claim .................................................................. 11

2. Plaintiffs' fraud claim ..................................................................... 11

3. Analysis of claim ............................................................................. 13

a. Floor plan financing representations .................................. 13 b. Knowledge of falsity and with intent to deceive ................................................................................... 13

c. Damages ............................................................................... 15

C. Bank Tying Claim ....................................................................................... 16

D. Officer and Director Liability .................................................................... 18

E. Unjust Enrichment Claim .......................................................................... 18

F. Breach of Duty to Disclose ......................................................................... 21

G. Rescission Claim ......................................................................................... 23

III. CONCLUSION ...................................................................................................... 26

This case results from the fallout of the Great Recession on a longstanding rural Iowa automobile dealership and plaintiffs' last-ditch efforts to come to that dealership's financial rescue. Plaintiffs contend that the defendants, the automobile dealership's bank and its officers, committed a wide array of torts against them to shield the bank from the blowback of the automobile dealership's failure. Defendants now seek summary judgment on all of plaintiffs' claims against them.

I. INTRODUCTION AND BACKGROUND

A. Factual Background

I will not attempt here an exhaustive dissertation on the undisputed and disputed facts in this case. Rather, I will set forth sufficient of the facts, both undisputed and disputed, to put in context the parties' arguments concerning the defendants' Motion for Summary Judgment. Unless otherwise indicated, the facts recited here are undisputed, at least for purposes of summary judgment. Additional factual allegations and the extent towhich they are or are not disputed or material will be discussed, if necessary, in my legal analysis.

1. Parties and principal actors

Plaintiffs John and Mary Lucken ("the Luckens") are Iowa citizens and residents of Akron, Iowa. The Luckens' home serves as the principal office of the John Ernest Lucken Revocable Trust ("The Trust").

Defendants Heritage Bank ("Heritage Bank") and Heritage Bancshares Group, Inc. ("Heritage Bancshares") are headquartered in Spicer, Minnesota. Prior to June 30, 2011, Heritage Bancshares owned and controlled Heritage Bank National Association, Holstein, Iowa ("Heritage Holstein") and Heritage Bank National Association, Spicer, Minnesota ("Heritage Spicer"). Heritage Holstein maintained a branch in Sioux City, Iowa ("Heritage Sioux City").

Defendant Robert Mathiasen is the Chief Banking Officer and Chief Loan Officer for Heritage Bank. In 2009, Heritage Sioux City's predecessor bank hired Sterling Crim ("Crim") as its lender and branch manager. After Heritage Bank acquired the Sioux City bank, Crim remained on staff there. He left Heritage Sioux City in October 2012, when he was terminated. Crim currently works as an agricultural and commercial lender for Pinnacle Bank.

Richard E. Dirks was the principal owner of Dirks Motor Company ("Dirks Motor") from 1960 until it was sold to Total Motors, a dealership in LeMars, Iowa. Dirks's father and two uncles started Dirks Motor in 1923, and the business remained in the Dirks family for 93 years. Dirks sold 50 percent of the business to his two sons in the late 1990's.

2. John Lucken

John Lucken lived in Akron, Iowa, until he graduated from high school in 1957. Following high school, he obtained a bachelor of science and masters' degrees in engineering. After college, he went to work for Mobil Oil in Casper, Wyoming. He subsequently provided consulting services to energy companies, as an explorationgeologist, in their search for oil. John Lucken also invested in MAJR, a company that bought and financed "Class B loans." The Luckens were employed by MAJR for a period. John Lucken's role with MAJR was to raise capital.

The Luckens moved back to Akron in April 2000. In 2004, John Lucken began investing in oil exploration with a group based in San Antonio, Texas. In addition to being fiscally sophisticated themselves, the Luckens have a financial adviser, CPA, and a business consultant, Bill Petersen. Since 1996, John Lucken has also invested with Petersen.

John Lucken currently has investments in Natural Innovative Renewable Energy ("NIRE"), an Iowa L.L.C., which was formed to build a plant that would produce biodiesel from animal waste. Lucken has also made loans to two local Akron businesses, and has donated a house and farmland to the City of Akron to enable it to build a new care center. He has made charitable donations to other Akron groups.

3. Dirks Motor's Financing

In April 2007, Dirks Motor and/or Dirks and his two sons, took out loans from three local banks: First National Bank Akron, First American Bank, and People's Bank. Additional loans were taken out in 2008. By 2009, the balances on these loans totaled $1,412,739. In late 2008, or January 2009, Dirks approached Heritage Bank about obtaining a consolidation loan backed by a Small Business Administration ("SBA") guarantee.

Dirks worked with Crim in obtaining the loan backed by the SBA. On October 6, 2009, the SBA authorized an "SBA 7(a) Guaranteed Loan" to Dirks Motor for $1,775,000. The SBA loan had an interest rate of 6 percent and monthly payments of $13,900. The SBA loan required the following "collateral conditions" of Heritage Bank:

Lender must obtain a lien on 100% of the interests in the following collateral and properly perfect all lien positions:

1. First mortgage (including due on sale clause, water rights, if any and assignment of rents) on landand improvements located at 300 hwy 12 North, Akron. This property is commercial.

a. Subject to no other liens.

b. Evidence and title of priority of lien must be based upon:

(1) Title and/or Lien Search or evidence of proper ownership and lien position.

2. First Perfected Security Interest, subject to no other liens, in the following personal property (including any proceeds and products), whether now owned or later acquired, wherever located:

Equipment; Inventory; Accounts; Instruments; Chattel Paper; General Intangibles.

Defendants' App. at 234.

In addition to Heritage Bank's SBA loan, Dirks Motor had "floor plan" financing with Ford Motor Credit ("Ford Credit"). Under this plan, Ford Credit bought new vehicles from Ford and then shipped the vehicles to Dirks Motor where they were offered for sale. Once a vehicle sold, Dirks Motor was obligated to pay Ford Credit for the vehicle. Ford Credit's financing was secured by the vehicle on the lot itself. In April 2011, as bridge financing, Heritage Bank loaned Dirks Motor $193,100. Heritage Bank loaned Dirks Motor an additional $135,000 after gaining the SBA's approval.

By May 19, 2011, Dirks Motor was "out of trust" with Ford Credit, and Dirks Motor's floor plan financing was suspended.¹ Dirks sought additional time to not only pay off Ford Credit, but to find a new source of floor plan financing for his dealership. Ford Credit agreed to delay foreclosing on Dirks Motor. Dirks, however, could not find alternate financing and turned over his remaining inventory to Ford Credit for sale on September 9, 2011. Despite having no new car inventory for sale, Dirks again requested additional timeto find alternate financing. Ford Credit again agreed to forebear on foreclosing until December 30, 2011, but Dirks had to pay Ford Credit at least $177,386 — $122,154 of this amount was related to vehicles sold "out of trust." This payment resulted in the forfeited vehicles being returned to Dirks Motor, and it could obtain new vehicles provided that it had "a firm customer's order." Ford Credit Letter at ¶ 5; Defendants' App. at 293.

4. Luckens' involvement in Dirks Motor's financing

In "late summer or early fall of 2011," Dirks met with Crim to tell him that Dirks Motor "had to have floor planning." Dirks Dep. at 55-56; Plaintiffs' App. at 316. Dirks "re...