               IN THE SUPREME COURT OF IOWA
                                No. 14–1783

                             Filed May 6, 2016

                         Amended August 22, 2016


LENORA CARUSO,

      Appellee,

vs.

APTS. DOWNTOWN, INC.,

      Appellant.


      Appeal from the Iowa District Court for Johnson County,

Douglas S. Russell, Judge.



      A landlord appeals and a tenant cross-appeals a district court

ruling affirming in part and reversing in part a small claims court

decision in a residential landlord–tenant dispute. AFFIRMED IN PART,

REVERSED IN PART, AND REMANDED.


      James W. Affeldt and Robert M. Hogg of Elderkin & Pirnie, P.L.C.,

Cedar Rapids, for appellant.



      Christopher S. Warnock and Christine E. Boyer of Iowa Tenants’

Project, Iowa City, for appellee.
                                    2

APPEL, Justice.

      This is a case under the Iowa Uniform Residential Landlord and

Tenant Act (IURLTA).       The district court affirmed a magistrate’s

determination in small claims court that the landlord violated the

IURLTA by attempting to pass the cost of an interior door repair onto the

tenants and by requiring tenants to automatically pay for the cost of

carpet cleaning upon the termination of the lease. The district court also

affirmed the magistrate’s award of damages for bad-faith retention of a

rental deposit. Additionally, the district court affirmed the magistrate’s

award of two months’ rent payments for knowing use of lease provisions

prohibited by the IURLTA.      While the district court awarded tenant

attorneys’ fees, the district court reduced the amount to keep the total

recovery below the $5000 jurisdictional limit of small claims court.

      Many of the issues raised in this appeal were identical or similar to

those decided in De Stefano v. Apts. Downtown, Inc., 879 N.W.2d 155

(2016).   In addition, however, this appeal involves a different claim—

namely, whether the landlord knowingly used provisions in its lease that

violated the IURLTA, thereby entitling the tenant to an award of up to

three months’ rent under Iowa Code section 562A.11(2) (2011).

      For the reasons expressed below, on the landlord’s appeal we

affirm the district court in all respects except on the issue of a knowing

use of provisions violating the IURLTA and bad-faith retention of the

rental deposit.   We conclude the record does not contain sufficient

evidence to support a knowing violation and therefore reverse the

judgment of the district court on this issue. We also conclude there was

insufficient fact-finding on the issue of bad-faith retention of the rental

deposit and so remand the case to the district court for the development

of the record.
                                      3

      With respect to the tenant’s cross-appeal challenging the district

court’s limitation of attorneys’ fees in small claims actions, we reverse

the district court based on our holding in De Stefano and remand the

case to the district court for recalculation of permissible attorneys’ fees.

      I. Factual Background and Proceedings.

      Lenora Caruso and two others rented a three-bedroom apartment

from Apts. Downtown (Apartments Downtown) starting in August 2010.

Upon entering into the lease, the tenants paid a $1270 rental deposit.

The lease between the tenants and the landlord was a standard form

utilized by the landlord. The lease contained the same automatic carpet-

cleaning provisions that was at issue in De Stefano.             Specifically,

paragraph 37(e) provided,

      The carpets throughout the building are professionally
      cleaned each time apartments turn over occupancy. Tenants
      agree to a charge starting at $95 (efficiency) not to exceed
      $225 (6+ bedrooms) being deducted from the deposit for
      professional cleaning at the expiration of the Lease.

In addition, the lease contained a provision related to certain repairs.

Paragraph 33(a) read, “Unless the Landlord is negligent, Tenants are

responsible for the cost of all damages/repairs to windows, screens,

doors, carpet, and walls, regardless of whether such damage is caused by

residents, guests or others.”

      After the lease ended and the tenants moved out in July 2012, the

landlord deducted $904.33 from the rental deposit.            Specifically, it

deducted $134 as an automatic carpet-cleaning charge, $105 in other

cleaning charges, $40 to replace drip pans, and $625.33 for “past due

rent and fees.”     The past due rent and fees included $199.33 for

replacement of an interior door, which the tenants refused to pay, and

monthly penalties totaling $400 for failure to pay for the door.
                                    4

      Caruso filed a small claims action. Among other claims, the tenant

alleged the landlord unreasonably failed to return the rental deposit and

willfully used a rental agreement with known prohibited provisions. In

addition to damages, the tenant sought punitive damages and an award

of attorneys’ fees.

      A hearing was held before the magistrate.        Both parties offered

testimony and various photographic exhibits related to the condition of

the premises at the termination of the lease.          The parties offered

conflicting evidence that related to whether the interior door was

damaged and, if so, to what extent.     With respect to the carpets, the

tenant’s evidence suggested that great efforts were made to clean the

premises, including the carpets, and that the premises were in pristine

condition at the conclusion of the lease.       The landlord’s evidence

suggested that the carpet was stained, that the drip pans were dirty, and

that the premises were not generally clean when inspected by the

landlord.

      After receipt of the evidence, the magistrate found that the

automatic carpet-cleaning provision was “in violation of § 562A.12 and is

unconscionable.”      The magistrate further found that the automatic

cleaning provision required the tenant to forgo her rights under Iowa

Code section 562A.7(2) by preventing the tenant from contesting the

need for the cleaning and by failing to require the landlord to meet its

burden of proof in showing that the cleaning was necessary.            The

magistrate further found, as a matter of fact, that the landlord failed to

show that the carpet was damaged beyond ordinary wear and tear. The

magistrate also found that the amounts for cleaning charges should not

have been withheld from the tenant’s rental deposit.
                                     5

      On the question of door repair, the magistrate found, as a matter

of fact, that the damage to the door, if any, was not caused by the

tenants, their guests, or visitors. The magistrate held that under Iowa

Code section 562A.15 the landlord was required to maintain the

premises in a fit and habitable condition. The magistrate found that the

provision holding the tenant liable for repairs prevented the tenant from

challenging the assessed cost. As a result, the magistrate concluded the

provision seeking to automatically asses the tenants for the repair of the

door abdicated the landlord’s responsibilities, evaded the landlord’s

obligations, and therefore was unconscionable and unenforceable. As a

result of her ruling on the door issue, the magistrate found the landlord

could not lawfully withhold $40 per month, or $400 total, in penalties

arising from nonpayment of the door repair from the rental deposit.

      The magistrate next considered whether the tenant was entitled to

punitive damages for bad-faith retention of the rental deposit and an

award of two months’ rent for willfully using provisions in its rental

agreement that violated the IURLTA.          The magistrate awarded the

tenants $200 for bad-faith retention of the rental deposit.           The

magistrate further found the landlord willfully used a rental agreement

that contained two provisions known by the landlord to be prohibited

under Iowa Code section 562A.11. As a result, the tenant was awarded

an additional two months’ rent in the amount of $2770. In addition to

the total of $3874.33 awarded to the tenant, the magistrate awarded

attorneys’ fees in the amount of $1200 for attorney Christine Boyer and

$2400 for attorney Christopher Warnock.

      The landlord appealed the small claims judgment to the district

court. The district court first addressed issues related to the award of

attorneys’ fees by the magistrate.       The district court determined the
                                    6

amount of attorneys’ fees needed to be reduced to keep the total award

within the $5000 jurisdictional limit for small claims. The district court

then affirmed the magistrate’s conclusion that the provisions of the lease

related to the repair of the door and the automatic carpet cleaning

violated Iowa Code section 562A.12(3).

      The district court determined these provisions deprived the tenant

of the opportunity to require the landlord to show, by a preponderance of

the evidence, that the charges were necessary to restore the dwelling unit

to its condition at the commencement of the tenancy and were not the

result of ordinary wear and tear.        As a result, the district court

determined that paragraph 37(e) of the lease imposing an automatic

carpet-cleaning charge was illegal. The district court further credited the

factual findings of the magistrate that the apartment was clean at the

conclusion of the lease.

      The district court also found that paragraph 33(a) of the lease,

which shifted the cost of the door repair to the tenant, was unlawful.

First, the district court noted that the magistrate “was in the best

position to consider the credibility of witnesses at the time of trial” and

that the district court gives deference to magistrates’ credibility

determinations. The magistrate, the district court concluded,

      clearly did not find credible the testimony offered by
      [Apartments Downtown] regarding the requirement that
      [Apartments Downtown] show the fees they assessed for
      cleaning were based on actual damage to the apartment.
      This includes [Apartments Downtown’s] claim that there was
      damage to the bathroom door.

Moreover, even if there was some question as to whether the bathroom

door was damaged, the cost-shifting provision was prohibited. According

to the district court, this provision was prohibited because Apartments

Downtown was “not required to show actual damage before seeking
                                    7

payment from the tenant.” The district court concluded “[t]here [was] not

sufficient evidence in the record to show that actual damage was

sustained by [Apartments Downtown] based on the claimed damage to

the door.”

      The district court further found the landlord willfully used a rental

agreement containing provisions known by the landlord to be prohibited

in violation of Iowa Code section 562A.11(2).    The district court noted

there was evidence that the landlord was familiar with the IURLTA and

specifically Iowa Code section 562A.11.         The district court thus

concluded the magistrate’s assessment of two months’ rent due to willful

use in the rental agreement of provisions prohibited by the IURLTA

should be upheld on appeal.

      The district court also affirmed the magistrate on the question of

bad-faith retention of the rental deposit under Iowa Code section

562A.12(7). The district court concluded, at a minimum, that there was

a bad-faith retention based on the inclusion of an automatic carpet-

cleaning fee provision in the lease. The district court also found there

was bad faith in the defendant’s assertion that the apartment was not

sufficiently cleaned when it was vacated.

      On appeal, the landlord challenges several aspects of the district

court judgment.     First, the landlord claims that the district court

judgment should be reversed because the small claims court lost

jurisdiction when it awarded attorneys’ fees and damages that exceeded

the small claims court’s monetary limit of $5000. Second, the landlord

asserts there was no evidence that the landlord had actual knowledge

any provision of the lease was prohibited under the IURLTA. Third, the

landlord asserts the provision of its lease that related to door repair was

not prohibited because it was agreed upon by the parties and addresses
                                     8

only payment for repairs, not the obligation to make repairs. Fourth, the

landlord claims the carpet-cleaning provision was not prohibited because

it was agreed upon by the parties and because it benefits tenants by

ensuring carpets are cleaned at the start of the tenancy.     Finally, the

landlord asserts the district court erred by upholding the $200 award for

bad-faith retention of the rental deposit.

      The tenant cross-appealed, claiming the district court erred by

reducing the amount of attorneys’ fees awarded by the magistrate to

bring the total award in the case within the $5000 subject matter

jurisdiction of the small claims court. The tenant argues that attorneys’

fees are costs that are not included in the calculation of the amount in

controversy for purposes of small claims jurisdiction.

      II. Standard of Review.

      “In a discretionary review of a small claims decision, the nature of

the case determines the standard of review.” GE Money Bank v. Morales,

773 N.W.2d 533, 536 (Iowa 2009). Our review of small claims actions

tried at law is for corrections of errors at law. Midwest Check Cashing,

Inc. v. Richey, 728 N.W.2d 396, 399 (Iowa 2007). “A review of statutory

construction is at law.”    GE Money Bank, 773 N.W.2d at 536.         The

district court’s factual findings, however, are binding upon the court if

supported by substantial evidence. Barnhill v. Iowa Dist. Ct., 765 N.W.2d

267, 272 (Iowa 2009).

      III. Discussion.

      A. Small Claims Jurisdiction. We first address the questions the

parties present to us regarding the relationship between attorneys’ fees

awarded under the IURLTA and the small claims jurisdictional limit of

$5000. We considered a similar attorneys’ fees issue in De Stefano, 879

N.W.2d at 179, concluding that attorneys’ fees are not included for
                                    9

purposes of determining whether the award exceeds the $5000

jurisdictional threshold of small claims court. Id. at 173. Our holding in

De Stefano is dispositive on the issue.        As a result, we reject the

landlord’s argument that the small claims court lost jurisdiction when it

awarded attorneys’ fees which, when combined with damages under the

IURLTA, exceeded the $5000 jurisdictional limit for small claims.      We

therefore reverse the district court on this issue and remand the case to

the district court to determine the appropriate amount of appellate

attorneys’ fees in this case.

      B. Legality of Automatic Cleaning Deposit.         In De Stefano, we

considered the legality under the IURLTA of an automatic cleaning

charge identical to the provision in this lease. In De Stefano, we noted

that Iowa Code section 562A.12(3) authorizes only three grounds for

withholding amounts from the rental deposit. Id. at 184. We noted the

problem with an automatic carpet-cleaning provision is that it generates

a deduction from the rental deposit even if none of the conditions of Iowa

Code section 562A.12(3) are met.        Id.   We emphasized that a rental

deposit is not designed to serve as an advance payment of amounts that

will always be due under the lease. Id. at 185.

      As with the attorneys’ fee issue, our holding in De Stefano is

dispositive of the question of whether the automatic cleaning charge is

unlawful under the IURLTA. We affirm the district court on this issue.

      C. Legality of the Door-Repair Provision.         In this case, with

respect to the door-repair issue, the magistrate held that

      [Iowa Code] Section 562A.15 requires the landlord, not the
      tenant to maintain fit premises, including making all repairs
      and doing whatever is necessary to put and keep the
      premises in a fit and habitable condition. The written
      provision that the tenant is liable for “repairs” removes the
                                     10
       obligation of the landlord to maintain fit premises and
       assesses the cost of upkeep of the premises to the tenant.

       The district court affirmed the trial court. It noted that

       the clause in the lease requiring the tenants in this case to
       pay for the allegedly damaged door is illegal. Under the
       terms of the lease, [the landlord] is not required to show
       actual damage before seeking payment from the tenant for
       repair of items such as doors. There is not sufficient
       evidence in the record to show that actual damage was
       sustained by [the landlord] based on the claimed damage to
       the door.

       The landlord first contends that the door-repair provision of

paragraph 33(a) of the lease is not unlawful as found by the district court

for a narrow reason.       The landlord argues that Iowa Code section

562A.9(1) generally authorizes a landlord to enter into a rental agreement

with a tenant including any terms and conditions not prohibited by the

statute or other rule of law.      The landlord argues that the statute

prohibits only a few narrow categories. See Iowa Code § 562A.11(1)(a)–

(d).

       The landlord recognizes, and for purposes of the appeal accepts,

that it has statutory responsibilities under Iowa Code section 562A.15.

This Code provision includes the duty of the landlord to maintain the

premises in a fit and habitable condition.        Id. § 562A.15(1)(b).   The

landlord does not claim that the repair of the door in this case does not

implicate the duty to maintain the premises in a fit and habitable

condition. The landlord instead only argues that the duty to maintain

the premises in a fit and habitable condition simply means that the

landlord has a duty to make sure that necessary repairs are made.

Under the landlord’s theory of Iowa Code section 562A.15(1)(b), the

landlord had a duty to make the repairs, but may shift the financial

responsibility of those repairs to the tenant in a lease agreement.
                                    11

      In addition to this narrow legal point, the landlord on appeal

questions the factual findings of the district court.   According to the

landlord, the evidence overwhelmingly showed that the door had been

damaged by someone in the Caruso’s apartment and needed repair.

Apartments Downtown argues even if it failed in its factual presentation

to the trial court, that does not mean the repair provision of paragraph

33(a), which required the tenant to pay for the cost of damage to the

door, is illegal, but only that it does not apply under the facts and

circumstances of this case.

      The tenant first responds that she testified the door was not

damaged and offered photographs supporting her position. Further, the

tenant notes that this court should be deferential to the factual findings

below.   See State v. Carter, 696 N.W.2d 31, 36 (Iowa 2005).     On legal

issues, the tenant, like the landlord, points to Iowa Code section 562A.15

as making landlords responsible for repair and maintenance. Like the

landlord, the tenant assumes that repair of the door was required under

Iowa Code section 562A.15.       The tenant argues, however, that the

landlord does not discharge its statutory duty by performing the repair

and shifting the cost onto the tenant.

      The tenant concedes, however, that under Iowa Code section

562A.17(6), a tenant has a duty to “[n]ot deliberately or negligently

destroy, deface, damage, impair or remove a part of the premises or

knowingly permit a person to do so.” But in order for such costs to be

withheld from the rental deposit, the tenant cites Mastland, Inc. v. Evans

Furniture, Inc., for the proposition that the landlord may keep the rental

deposit only “if the damages beyond ordinary wear and tear result from

the deliberate or negligent acts of the tenant, or the tenant knowingly

permits such acts.” 498 N.W.2d 682, 687 (Iowa 1993). According to the
                                    12

tenant, the repair provision in the rental agreement makes the tenant

responsible for all repairs, no matter what the cause.

      Based on the issue as framed by the parties, the landlord cannot

prevail.    In De Stefano, we concluded that a landlord cannot shift the

financial costs of repairs necessary to comply with its duty of fitness and

habitability under Iowa Code section 562A.15 to the tenant. 879 N.W.2d

at 183. In this appeal, the landlord does not claim that the door repair is

outside the scope of its mandatory statutory duty. We take no view on

the question of whether a landlord could shift the cost of a repair or

damage through its lease that was not within the scope of the landlord’s

duty imposed by Iowa Code section 562A.15.

      In any event, we note the district court also found that “[t]here is

not sufficient evidence in the record to show that actual damage was

sustained by [the landlord] based on the claimed damage to the door.”

Although not artfully phrased, the district court in effect, in its de novo

review of the record, concluded the landlord had failed to sustain its

claim for damages to the door based on the record developed by the

parties. Sunset Mobile Home Park v. Parsons, 324 N.W.2d 452, 454 (Iowa

1982) (analyzing the district court’s de novo review on the record

established in small claims proceeding). In light of the testimony of the

tenant that she and her cotenants were unaware of any damage to the

door other than a slight coming or pulling apart, we conclude that the

district court’s factual determination is supported by substantial

evidence.

      D. Willfully Using a Lease Provision Prohibited by the IURLTA.

      1. Introduction.   In this case, the district court determined the

landlord willfully used provisions in its lease that the landlord knew to be

prohibited under the IURLTA. As the above discussion demonstrates, we
                                     13

agree with the district court that the two provisions of the lease at issue

were in fact prohibited. The question remains, however, whether on the

record developed before the magistrate and reviewed by the district court,

the tenant met its burden to show that the landlord willfully used “a

rental agreement containing provisions known by the landlord to be

prohibited.”   Iowa Code § 562A.11(2) (emphasis added).       In order to

answer this question, we must first decide what legal standard to apply.

Once we determine what that legal standard is, we must then canvass

the facts to determine whether the district court’s determination is

supported by substantial evidence.

      2. Legal standard for willfully using a lease provision known by the

landlord to be prohibited.   Iowa Code section 562A.11(2) prohibits a

landlord from “willfully us[ing] a rental agreement containing provisions

known by the landlord to be prohibited” under the IURLTA. The landlord

argues this language establishes a requirement of actual, subjective

knowledge on the part of the landlord that the specifically challenged

lease provisions are prohibited.     The tenant does not disagree, but

asserts that circumstantial evidence in the record is sufficient to support

a factual finding that the landlord actually knew the automatic carpet-

cleaning and repair-deduction provisions of the lease violated the rental-

deposit provisions of Iowa Code section 562A.12(3).

      There is little doubt that the use of the term “known” in the statute

requires actual knowledge.    State v. Leckington, 713 N.W.2d 208, 214

(Iowa 2006).   Actual knowledge may be established by direct proof, of

course, but it also may be established by circumstantial evidence

sufficient to infer the person’s mental state. State v. Lewis, 514 N.W.2d

63, 66 (Iowa 1994).      In order to prove actual knowledge through

circumstantial evidence, however, the evidence must be sufficient to
                                   14

draw a conclusion that a reasonable person simply could not have

known otherwise.     Wold v. Lacey, 182 N.W.2d 130, 132 (Iowa 1970).

Actual knowledge thus can be established by circumstantial evidence

only in rare cases. Id.

      3. Application of legal standard to facts of this case. The record

contains no direct evidence that the landlord had actual knowledge that

paragraphs 33(a) and 37(e) violated Iowa Code section 562A.12(3).

Instead, the record at best contains circumstantial evidence.     Joseph

Clark, a landlord representative, testified that he was familiar “for the

most part” with the IURLTA and that he was familiar with the nonwaiver

provisions of Iowa Code section 562A.11. He was not asked, however,

whether he knew that the automatic carpet-cleaning or repair-deduction

provisions violated the rental-deposit protection provisions of the

IURLTA. There was evidence that an attorney drafted the lease, thereby

at least implying some reliance on counsel to ensure the provisions of the

lease were lawful.

      Until De Stefano, there has been no authoritative Iowa court case

on the validity under the IURLTA of automatic deductions from rental

deposits such as those in this case. In De Stefano, we noted there was

some authority from at least one other jurisdiction sustaining an

automatic carpet-cleaning deduction from what appeared to be a rental

deposit.   879 N.W.2d at 186 (citing Shaeffer v. Murphy, 640 P.2d 857

(Ariz. 1982)). We noted in De Stefano that rent is broadly defined under

the IURLTA to include “a payment to be made to the landlord under the

rental agreement,” id. at 189 (quoting Iowa Code § 562A.6(9)), and that

rent could be deducted from rental deposits under Iowa Code section

562A.12(3)(a)–(c), id. at 184. There is no evidence in the record that the

landlord ever considered whether the automatic carpet-cleaning or
                                     15

repair-deduction provisions conflicted with the procedural requirements

of Iowa Code section 562A.12(3).

      The tenant argues that the landlord is sophisticated and must

have known the automatic deductions from the rental deposit violated

Iowa Code section 562A.12(3). The record developed in the small claims

court on the level of sophistication of the landlord is limited. The nature

of the lease documents, the existence of multiple employees to tend to

the landlord’s business, and the use of counsel to draft the lease

documents certainly suggest that the landlord is not an amateur.

      Yet, actual knowledge is a very high standard. On the record in

this case we do not think there is substantial evidence to support a

finding of actual knowledge that the automatic repair-deduction and

carpet-cleaning provisions of the lease violated Iowa Code section

562A.12(3) beyond speculation that the landlord, as a sophisticated

party, must have known the provisions were illegal. See Barbour–Amir v.

Comcast of Ga./Va., 772 S.E.2d 231, 234 (Ga. Ct. App. 2015) (holding

actual knowledge cannot be based on speculation and conjecture). We

reverse that portion of the district court decision finding willful use of

provisions “known by the landlord” to be prohibited under the IURTLA.

We therefore vacate the district court’s award of two months’ rent under

Iowa Code section 562A.11(2).

      In the future, of course, landlords will face a different environment

if automatic deductions similar to those contained in the lease are

utilized.   We have now unambiguously held in De Stefano and in this

case that such lease provisions violate Iowa Code section 562A.12(3).

The existence of our precedent alone, however, will not prove actual

knowledge of illegality in a future case, but it will be a circumstance to be

considered by the fact finder in making that determination.
                                      16

         E. Bad-Faith Retention of Rental Deposit.        Iowa Code section

562A.12(7) provides that the bad-faith retention of a deposit by a

landlord shall “subject the landlord to punitive damages not to exceed

two hundred dollars in addition to actual damages.”          The burden of

showing bad-faith withholding of a security deposit rests with the tenant.

Lewis v. Jaeger, 818 N.W.2d 165, 187 (Iowa 2012).

         In this case, the district court determined the landlord violated

Iowa Code section 562A.12(7) by withholding the security deposit in bad

faith.    The district court’s determination was based upon the district

court’s view that the automatic cleaning provision was unlawful and

that, in fact, the premises in this case were very clean and in pristine

condition at the close of the term of the lease.

         In De Stefano, we considered whether the imposition of an

automatic carpet-cleaning charge amounted to bad faith under Iowa

Code section 562A.12(7). We emphasized that Apartments Downtown’s

position shows a basic misunderstanding of the nature of a security

deposit under the IURLTA. De Stefano, 879 N.W.2d at 163. Nonetheless,

we concluded that the proper standard for determining bad faith under

Iowa Code chapter 562A.12(7) is “dishonesty in fact.”        Id. at 188.   As

discussed in De Stefano, bad faith thus requires actual, subjective

dishonesty. Id. at 189.

         We think there is not substantial evidence in the record to support

a conclusion that the landlord acted with dishonesty in fact by including

the unlawful provisions in the form leases utilized in this case. Although

it is not clear that the district court or the magistrate utilized the correct

legal standard for bad faith, a remand is not necessary as we conclude as
                                     17

a matter of law that the evidence is insufficient to support a penalty

based upon this theory.

      The district court and the magistrate, however, relied on a second

rationale for its bad-faith finding, namely, that the apartment was in fact

in clean, if not pristine, condition at the close of the lease. While the

district court characterized the landlord’s actions as being in bad faith, it

is not clear what standard the district court employed in making that

determination.   Did the district court regard the landlord’s position as

dishonest in fact with totally contrived evidence, or merely mistaken?

Based on our review of the record, we think this question is in a different

posture than the bad-faith theory based upon the use of illegal contract

terms. Before we review the question, we need more precise fact-finding

by the district court using the proper standard of bad faith. Therefore,

we remand the case to the district court to determine whether the tenant

was entitled to a statutory penalty under Iowa Code section 562A.12(7) of

$200 on the theory that the landlord’s factual defense at the hearing was

dishonest in fact, thereby entitling the tenant to the punitive damages

penalty under the statute.

      IV. Conclusion.

      For all of the above reasons, the decision of the district court on

the appellant’s appeal is affirmed in part and reversed in part. On the

appellee cross-appeal, the decision of the district court is reversed and

the case remanded to the district court for further proceedings to apply

the dishonesty-in-fact bad-faith standard to determine whether the

tenant is entitled to $200 penalty under Iowa Code section 562A.12(7).

The case is also remanded for a determination of the proper amount of

attorneys’ fees, including appellate attorneys’ fees, to be awarded under
                                   18

the IURLTA.    Costs are assessed seventy-five percent to Apartments

Downtown and twenty-five percent to Caruso.

      AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

      All justices concur except Mansfield, Waterman, and Zager, JJ.,

who concur in part and dissent in part.
                                     19

                                      #14–1783, Caruso v. Apts. Downtown

MANSFIELD, Justice (concurring in part and dissenting in part).

      I agree with Parts III.B, D, and E of the court’s opinion. I dissent

from Part III.A for the reasons stated in my concurrence in part and

dissent in part in De Stefano v. Apts. Downtown, Inc., 879 N.W.2d 155,

192 (Iowa 2016) (Mansfield, J., concurring in part and dissenting in

part). I also dissent from Part III.C for the following reasons.

      In this case, the tenants occupied the apartment from August 5,

2010, to July 30, 2012.     The lease here, like the lease in De Stefano,

required the tenants to pay for damage to doors unless the landlord was

at fault.   Midway through the tenancy, in July 2011, the landlord

conducted a routine maintenance inspection and found that an interior

bathroom door was coming apart, allegedly because it had been kicked.

The landlord replaced the door and charged the tenants $199.33. The

tenants objected to the charge.      The landlord provided a photograph

showing the damage. The dispute was never resolved, and the cost of the

door plus late fees was ultimately deducted from the tenants’ security

deposit when they moved out a year later.

      At trial there was conflicting testimony as to whether this

bathroom door had been damaged.           The tenants said one thing; the

landlord’s representatives said another. The small claims court found it

unnecessary to resolve that dispute. It determined the deduction from

the security deposit was improper in any event because

             [t]he evidence presented by Defendant Apartments
      Downtown, Inc. regarding the damage to the bathroom door,
      was insufficient to prove that the problems with the door, if
      any, were caused by the Plaintiff, another tenant, or a guest
      or visitor of the Plaintiff or other tenants.
                                    20

It also found that the lease improperly required “the tenant to make all

repairs to all doors, no matter what the cause.”

      These portions of the small claims court’s ruling were quoted

verbatim in the district court’s ruling. However, the district court went

further. It added that “[the small claims court] also clearly did not find

credible the testimony offered by Defendants . . . . that there was damage

to the bathroom door.”     Thus, the district court stated, “There is not

sufficient evidence in the record to show that actual damage was

sustained by Defendant based on the claimed damage to the door.”

      I disagree with the small claims court’s interpretations of the lease

and landlord–tenant law, as described above. Read in context, the lease

does not impose strict liability on tenants for all door repairs, regardless

of the reason for the repair, nor did the landlord ever argue for that

interpretation.   Paragraph 30 makes the tenants responsible for “all

damages” to the apartment doors, “including random acts of vandalism.”

Paragraph 33(a) makes the tenants responsible for “the cost of all

damages/repairs” to doors, “regardless of whether such damage is

caused by residents, guests or others,” but not if the landlord was

“negligent.”   Under a plain reading of these provisions, I think the

tenants are responsible only for “damages”—e.g., a door that breaks

because it is kicked—not for ordinary wear and tear or deterioration due

to the passage of time. True, the word “repairs” is used once, but only

when joined to the word “damages,” in a sentence that refers again later

to “damages.” So, I do not think the lease requires the tenants to replace

a door that simply wears out without being damaged by anybody.

      Under the Iowa Uniform Residential Landlord and Tenant Act

(IURLTA), a tenant can be required to bear the cost of interior door

damage that occurs during the tenancy, even if it is unclear who inflicted
                                      21

the damage.       Unlike the exterior door in De Stefano, this is not a

question of habitability.    Therefore, I do not believe Iowa Code section

562A.15 (2011) even applies.      Rather, the relevant provision is section

562A.9, which allows the landlord and tenant to “include in a rental

agreement, terms and conditions not prohibited by this chapter or other

rule of law.” Iowa Code § 562A.9(1). It is certainly reasonable, in my

view, for a tenant to be required to pay for the wrecking of an interior

door during the lease term, without requiring the landlord to prove who

wrecked the door.

        The majority nonetheless affirms the tenant’s recovery of the door-

repair charges here for two reasons.        First, it faults the landlord for

making only the broader argument that it could charge the door-repair

costs to the tenants whether the issue was one of habitability or not, i.e.,

the argument the court rejects today in De Stefano.         In the majority’s

view, to preserve error, the landlord also needed to make the narrower

argument that it could charge the door-repair costs in this case because

there was no issue of habitability. My colleagues have a point, but the

landlord did not have the benefit of De Stefano until now. In deciding

appeals, we often do not accept an appellant’s argument in its entirety,

but only under terms we set forth in our decision. See State v. Iowa Dist.

Ct., 828 N.W.2d 607, 617 n.7 (Iowa 2013). I would follow that approach

here.

        In addition, the majority upholds the district court’s factual finding

that the landlord did not prove actual damage to the door. I agree that

the district court’s factual findings based upon its review of the small

claims record should be upheld if supported by substantial evidence.

See Hyde v. Anania, 578 N.W.2d 647, 648 (Iowa 1998) (“If the [small

claims] action is a law case, we review the district judge’s ruling on
                                    22

error.”). However, in this case, the district court appears not so much to

have made a finding as to have misread what the small claims court

actually did. Contrary to the district court’s statement, the small claims

court did not determine there was insufficient credible evidence of door

damage; rather, it declined to address the issue because it did not need

to. Thus, it remains an open question for me whether the bathroom door

was, in fact, damaged as alleged by the landlord. I would remand for a

determination of that issue.

      For the foregoing reasons, I concur in part and dissent in part.

      Waterman and Zager, JJ., join this concurrence in part and

dissent in part.
