Hora v. Hora ( 2023 )

IN THE COURT OF APPEALS OF IOWA
No. 22-0259
Filed February 8, 2023
BRIAN HORA and GREGG HORA, Individually and on behalf of HORA
FARMS, INC., and PRECISION PARTNERS CORP.,
Plaintiffs-Appellants/Cross-Appellees,
vs.
KEITH HORA and KURT HORA, Individually and in their capacity as
Shareholders, Directors, Officers, Managers, and Employees of HORA
FARMS, INC., HEATHER HORA, and HK FARMS, INC.,
Defendants-Appellees/Cross-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Washington County,
Sean W. McPartland, Judge.
The plaintiffs appeal, and the defendants cross-appeal, from the ruling
denying the plaintiffs’ shareholder derivative claims and the plaintiffs’ request to
remove a trustee. AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED WITH DIRECTIONS.
John F. Lorentzen of Nyemaster Goode, PC, Des Moines, and Sarah J.
Gayer of Nyemaster Goode, PC, Cedar Rapids, for appellants/cross-appellees.
Stephen J. Holtman and Abram V. Carls of Simmons, Perrine, Moyer,
Bergman, PLC, Cedar Rapids, for appellee/cross-appellant Keith Hora.
Joseph W. Younker and Matthew G. Brand of Bradley & Riley, PC, Iowa
City, for appellees/cross-appellants Kurt Hora, Heather Hora, and HK Farms, Inc.
Heard by Bower, C.J., and Badding and Buller, JJ.
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BULLER, Judge.
This dispute centers on the management of Hora Farms, Inc. (HFI).
Brothers Brian and Gregg Hora filed this shareholder derivative lawsuit on behalf
of HFI, claiming breach of fiduciary duty and fraud, seeking appointment of a
custodian for HFI, and requesting removal of the trustee of a shareholder trust.
After an eleven-day trial, the district court dismissed Brian and Gregg’s claims, and
they appeal. The defendants cross-appeal, reasserting their defenses below and
requesting appellate attorney fees. We affirm in part and reverse in part, finding
the district court erred in its application of the law regarding self-dealing and breach
of fiduciary duty. We find Defendants Keith Hora and Kurt Hora breached their
duties, and we remand for further proceedings consistent with this opinion,
including a determination of damages and ruling on indemnification. We also
vacate the ruling on appointment of a custodian and removal of the trustees, and
we remand for the district court to decide that question in light of this opinion.
Finally, we deny all requests for appellate attorney fees.
I. Background Facts and Proceedings
A. The Hora Family and Relevant Entities
Keith Hora was born on an Iowa farm in 1938 to George and Marie Hora.
He has two younger siblings: Kathy and Kevin. Keith married Celeste in 1959, and
together they had six children between 1960 and 1968: Gregg, Brian, Dana, Kurt,
Darren, and Heidi. Kurt is married to Heather.
The Celeste N. Hora Trust (“the Trust”) is a testamentary trust, created upon
Celeste’s death in 1989. Keith has been the Trust’s sole trustee since its creation.
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Keith and Celeste’s six children are the Trust’s beneficiaries, with each child to
receive an equal share of trust property, per stirpes, upon Keith’s death.
HFI was incorporated in Iowa in 1974, with George and Keith serving as the
initial directors. HFI owns 1075 acres of land in or near Washington County, and
it grew corn and soybeans at all times relevant here. At the time of trial, HFI had
1200 Class A voting shares: Keith owns 501 shares, the Trust owns 303 shares,
and Kathy and Kevin each own 198 shares. HFI also had 3600 Class B non-voting
shares: Keith owns 868 shares, the Trust owns 867 shares, Kathy and Kevin each
own 548 shares, and Keith and Celeste’s six children each own 128 or 129 shares.
Kurt and Heather formed HK Farms, Inc., through which Kurt grows crops
and feeds swine from wean to finish. Brian and his wife formed Precision Partners
Corp., through which Brian conducts farm activities.
B. Pre-Litigation Facts
Gregg worked for HFI from 1982 to 1985; he then left HFI and the area and
had no further involvement in HFI’s daily operations. Brian began working for HFI
in 1985. Kurt began working for HFI in 1988. Brian supervised Kurt and HFI’s
operations during this time, and Kurt testified Brian was “extremely difficult to work
with.”
George died in 1995. Marie soon replaced George as a director of HFI
alongside Keith. Keith has served as HFI’s president since George’s death, while
Marie has never held an officer position.
In fall 2000, an argument on the farm erupted between Keith, Brian, and
Kurt. Kurt ended up quitting HFI, and Brian was fired. Brian has since done a little
farm work for HFI but has had no involvement with managing the company. HFI
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rehired Kurt in 2001 in a managerial role, and he continued to serve as operations
manager through trial. When Kurt returned to HFI, he received hourly pay,
bonuses based on production, and reimbursement for certain expenses. Kurt also
claims he took part of his compensation in corn used for feed in his swine
operation. In 2003 or 2004, Kurt and Keith agreed to estimate Kurt’s use of corn
at nine bushels per hog Kurt sold.
Marie continued as a director until her death in March 2015 at the age of
ninety-nine. Soon after her death, Gregg and Brian began raising concerns to
Keith and Kurt about HFI’s financial situation, specifically HFI’s negative cash flow
and corn that could not be found and was not sold. In August, Gregg was elected
to replace Marie as director alongside Keith. Gregg resigned less than one year
later, stating Keith and Kurt were preventing HFI from adopting changes needed
to reverse HFI’s trend of accumulating more debt. Darren was elected as a director
in 2017, and he and Keith continued to serve as directors at the time of trial.
On August 18, 2017, Brian, Gregg, and Precision Partners (plaintiffs) filed
their petition against Keith, Kurt, Heather, and HK Farms1 (defendants). The
plaintiffs eventually amended their petition and advanced five counts: (1) Keith and
Kurt breached their fiduciary duties to HFI through mismanagement, self-dealing,
and other actions; (2) Keith and Kurt committed fraud, fraudulent concealment, and
fraudulent misrepresentation; (3) a custodian should be appointed for HFI; (4)
Keith should be removed as trustee of the Trust; and (5) Keith interfered with the
business relations of Precision Partners. On the plaintiffs’ motion, the court
1 The petition also included claims against Keith’s current wife. The court denied
those claims, and the plaintiffs do not pursue those claims on appeal.
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severed Count 5 for a separate trial on the interference-with-business-relations
count. The court later granted the defendants’ partial motion for summary
judgment, finding the five-year statute of limitations barred the plaintiffs’ claims
arising before August 18, 2012.
The facts developed at trial established multiple family members, including
Keith, expressed concern about the significant discrepancy between the amount
of corn produced by HFI and the amount of corn actually sold. By some estimates,
as much as nearly one third of the corn produced each year was missing. Related
concerns were expressed about HFI’s lack of profitability and increasing debt when
the market for corn and soybeans was quite good. At the same time the business
was losing money, Kurt and his farming operation had an increased net worth of
nearly $1.5 million. Keith’s net worth also increased during the same time period,
though perhaps not to the same extent as Kurt’s. When minutes were circulated
after a meeting, Heather (Kurt’s wife) e-mailed the family reminding everyone that
they had discussed “Keith[’]s personal net worth & debt” because “this may be
important in finding the holes in the dam or however it was put.”
Kurt obfuscated and offered shifting stories to explain what happened to the
missing corn. At one point, Kurt claimed that all of the missing corn was
explainable due to damage or shrink during processing. But evidence in the record
undermines that claim. For example, Kurt claimed a monitoring-equipment failure
to the tune of 3.3% for eight years, yet such a malfunction was never reported to
the crop insurer. At another point, Kurt claimed to have loaned a nebulous “corn
tab” in excess of 85,000 bushels to HFI through his company, HK Farms. Yet
Kurt’s own settlement sheets indicate he sold or used HK Farms’s entire corn
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production in the relevant years, and no documentation of the loan appears in tax
forms or business records for either entity. Kurt also claimed that the missing corn
could be explained by the cleaning process, but for that explanation to work,
hundreds of semi-trailers worth of debris would have been removed from the farm,
and there is no evidence that ever happened.
Faced with significant evidence that he used HFI corn as feed in his swine
operation, Kurt eventually admitted to taking at least 85,000 bushels of corn, but
he claimed he was entitled to the corn as compensation or backpay. No
corroboration for the backpay was submitted at trial, and it is undisputed that Kurt
did not report use of the corn taken from HFI on either his personal tax returns or
HK Farms’s tax returns. A conservative valuation of corn taken by Kurt is roughly
$450,000 for 85,000 bushels, and a more-aggressive valuation is more than $1
million for at least 200,000 bushels. The more-aggressive valuation, from the
plaintiffs’ expert, is generally consistent with Keith’s own estimates of missing corn.
The more-aggressive valuation is also corroborated by Keith reporting to the family
that HFI’s long-time banker repeatedly asked Keith why HFI’s records show it sells
all the soybeans produced “but never come[s] close to selling and accounting for
the bushels of corn that were produced.” In any event, the amount of backpay Kurt
claimed was $179,000, and he took at least $250,000 more in corn than he was
he was allegedly owed, even if his version of events was true.
Given the abysmal record-keeping, all parties admit some difficulty in
determining the exact amount of corn taken by Kurt. Kurt claimed to have originally
estimated what he took based on an Iowa State University formula, but this could
not be reconciled with other record evidence regarding the amount of corn missing
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from HFI each year during the relevant periods. Kurt admitted at trial that his
estimate system was not accurate, and he conceded that he should have switched
to a computerized system at least ten years sooner. In 2015, Keith sent a message
to the family members observing that, if all of the missing corn was used by Kurt
to feed his swine, “then I AM a terrible manager and will seek outside help” to
manage the farms and resolve the issue. Keith also remarked to family members
that Kurt “had too good of a deal,” at the expense of the company. Consistent with
these remarks, HFI’s paid consultant described Kurt’s deal with Keith as “too
sweet.”
Trial evidence also established, with little dispute, that Keith used HFI
resources to pay personal expenses for himself and his wife without any legitimate
business purpose. The expert testimony valued these personal expenses at
$193,223. The $193,233 includes football tickets that were falsely accounted for
as crop expenses or building-repair costs, as well as department-store purchases,
travel lodging or time-share purchases, and groceries from a variety of locations in
and outside of Iowa. Keith did not deny the expenses, but he claimed they were
part of his compensation. No documentation corroborated this claim or established
that HFI paying thousands of dollars in personal expenses was compensation for
any of Keith’s roles. Keith also failed to report the income to taxing authorities as
compensation or pay appropriate tax on it. In addition, HFI double-compensated
Keith for his vehicle, paying both mileage and all of the operating expenses (fuel,
service, maintenance, license, and insurance) for the same vehicle. In other
words, Keith double-dipped his vehicle reimbursement.
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Following an eleven-day trial in July and August 2020, the district court
rejected the plaintiffs’ claims and dismissed Counts 1 through 4. The plaintiffs
voluntarily dismissed Count 5. The plaintiffs filed a motion to reconsider, which the
court denied in full other than nonsubstantive corrections to the facts. The
defendants also filed an application for costs and fees, which the court denied.
The plaintiffs appeal the dismissal of Counts 1 through 4 and seek appellate
attorney fees. The defendants cross-appeal, also seeking appellate attorney fees.
II. Standard of Review
The parties agree the claims below were tried in equity, implicating our de
novo review. Iowa R. App. P. 6.907. We give weight to the fact findings of the
district court, especially with regard to witness credibility, but we are not bound by
them. Iowa R. App. P. 6.904(3)(g).
III. Defendants’ Preliminary Defenses
We first address the various preliminary defenses asserted by the
defendants, including statutory claims based on standing and the statute of
limitations, as well as equitable claims based on the doctrines of estoppel, laches,
and unclean hands. The district court partially agreed with the defendants
regarding the statute of limitations but otherwise rejected all preliminary defenses.
We do the same on appeal, with a modification regarding the statute of limitations
due to our subsequent holding regarding breach of fiduciary duties.
A. Standing
The defendants below asserted that the plaintiffs lacked standing under the
Iowa Business Corporation Act. See Iowa Code ch. 490 (2017). The district court
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found standing during the summary-judgment proceedings and re-affirmed that
finding following the lengthy bench trial. We affirm these rulings.
Iowa law generally bars derivative actions unless the plaintiffs are (1)
shareholders (2) who fairly and adequately represent the interests of the
corporation. Id. § 490.741. The district court correctly noted that no Iowa case
law speaks to how the burden is allocated under this section, but we agree with
the district court that the text of the statute allocates the burden of proving standing
to the plaintiffs. Id. (prohibiting suit “unless the shareholder satisfies” the statutory
requirements).
It is undisputed that Brian and Gregg were shareholders of HFI at all
relevant times. We also have little difficulty concluding that they fairly and
adequately represent the interests of the corporation. The remedies they seek are
not for their individual profit, but instead to benefit all shareholders and to further
the corporation’s interests. We also affirmatively find that the plaintiffs did not
initiate this derivative action for any improper purpose. The plaintiffs have carried
their burden to prove standing.
The only substantial case law marshaled by the defendants is a Wisconsin
case, Read v. Read, 556 N.W.2d 768 (Wis. Ct. App. 1996). But we find Read
easily distinguished, and we share the district court’s observation that the
defendants’ reliance on Read is “misplaced if not misleading.” The procedural
posture of Read involved the plaintiffs seeking to amend a suit to allege a closely
held corporation more than two years after the suit was filed and less than two
weeks before trial. See 556 N.W.2d at 563–74. Here, the petition always alleged
a closely held corporation. As a result, this case does not involve the issue at the
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heart of Read, which concerns available remedies for bringing suit against a
closely held corporation (which may operate more like a partnership) as compared
to a traditional corporation. See, e.g., Redeker v. Litt, No. 04-0637, 2005 WL
1224697, at *4 (Iowa Ct. App. May 25, 2005) (noting a distinction in available
remedies). Read does not alter our analysis, and the district court did not err in
finding standing.
Last, we reject the claim made in Keith’s appellate brief that seeking to
appoint a custodian or guardian for the corporation necessarily obviates standing
due to the original purpose of HFI’s incorporation. It is not improper for concerned
shareholders to request this equitable remedy when the allegations concern
corrupt management and self-dealing, as the plaintiffs allege here.
B. Statute of Limitations
The district court twice partially granted and partially denied the statute-of-
limitations claim below, first at the summary-judgment stage and again following
trial. In short, the court limited the evidence to claims based on conduct that arose
on or after August 18, 2012, based on the five-year statute of limitations. See Iowa
Code § 614.1(4).
Now on appeal, both parties seek to relitigate the statute of limitations. We
affirm the district court. Given our ruling later in this opinion, however, we clarify
application of the statute of limitations as it relates to the conduct we find breached
an essential duty.
First, we reject Kurt’s claim on appeal that the misappropriated-corn claim
is barred by the statute of limitations. Kurt admitted at trial that he took at least
30,000 bushels in 2015, and he failed to prove that any portion of the
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misappropriated corn was taken before August 2012. Under these circumstances,
we find that all damages related to misappropriated corn are recoverable by the
plaintiffs, and we direct the district court to abide by this ruling when evaluating
damages consistent with the balance of this opinion. See Earl v. Clark, 219
N.W.2d 487, 491 (Iowa 1974) (“If the [statute of limitations] defense is partial only,
barring only a part of the damage, defendant has the burden of proving what part
of the damage occurred before the running of the limitation period.” (citation
omitted)). Second, to the extent our directions on remand implicate a similar
question concerning Keith’s personal expenses, the district court shall determine
damages consistent with this opinion. Finally, to the extent any dicta in the district
court’s ruling is inconsistent with these directions, the dicta is vacated.
C. Estoppel and Laches
On appeal, the defendants reiterate their equitable defenses, arguing equity
principles should have been a complete bar to litigation. While the defendants
concede the district court “properly articulated” the law regarding laches and
estoppel, they claim the district court improperly melded the statute of limitations
and these equitable defenses. We affirm.
Estoppel by acquiescence occurs when “a person knows or ought to know
that she is entitled to enforce her right or to impeach a transaction and neglects to
do so for such a time as would imply that she intended to waive or abandon her
right.” Davidson v. Van Lengen, 266 N.W.2d 436, 438 (Iowa 1978). Similarly, but
not identically, “[l]aches is an equitable doctrine premised on unreasonable delay
in asserting a right, which causes disadvantage or prejudice to another.” State ex
rel. Holleman v. Stafford, 584 N.W.2d 242, 245 (Iowa 1998). A party alleging
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laches has the burden to prove its application by clear, convincing, and satisfactory
evidence—including “a showing of substantial prejudice.” Id. at 245–46.
We start with the laches claim and the heavy burden it imposes on the
defendants. See id. We affirm the district court’s rejection of the claim, and we
independently conclude that the defendants did not meet their burden by clear,
convincing, and satisfactory evidence. We find the defendants have not proven
prejudice, let alone substantial prejudice, that would impair their defense of any
claims at issue in this appeal or otherwise harm their interests. We also note that
laches is generally unavailable for any claim brought within the statute of limitations
period, though we find it unnecessary to rest our decision on this ground. See Life
Invs. Ins. Co. of Am. v. Est. of Corrado, 838 N.W.2d 640, 645 (Iowa 2013)
(“Ordinarily the doctrine of laches does not apply within the statute of limitations
unless there is a showing of a special detriment to another.”).
While the estoppel-by-acquiescence claim does not require the same proof
of prejudice, see Davidson, 266 N.W.2d at 439, we find the defendants have not
properly invoked this equitable doctrine either. Even without the prejudice
requirement, the burden to prove estoppel is borne by the party invoking the
doctrine and requires proof “by clear and convincing evidence.” ABC Disposal
Sys., Inc. v. Dep’t of Nat. Res., 681 N.W.2d 596, 606 (Iowa 2004). The defendants
did not carry their burden on this claim, as the record evidence is insufficient to
prove that the plaintiffs intended to waive or abandon any rights related to the
claims at issue in this appeal. To the contrary, the record shows affirmative
investigation and other acts that tend to show objection to Keith’s and Kurt’s
misconduct, rather than acquiescence—particularly as relates to the
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misappropriated-corn and personal-expenses claims that we find meritorious
elsewhere in this opinion.
Last, having affirmed the district court’s rejection of the equitable defenses
based on the defendants not carrying their initial burden, we find it unnecessary to
reach the plaintiffs’ claim that the defendants’ “misleading tactics and
concealments” would independently bar the equitable doctrines. See Holden v.
Constr. Mach. Co., 202 N.W.2d 348, 356 (Iowa 1972) (refusing to apply “estoppel
and laches upon the basis of [the defendants’] own concealments, misleading
tactics and misrepresentations”).
D. Unclean Hands
The defendants also sought to invoke below, and reiterate on appeal, a
claim that the plaintiffs’ “unclean hands” barred the suit outright. We affirm the
district court’s rejection of this claim.
This doctrine, sometimes referred to as the “clean hands” doctrine, “is not a
favored doctrine of the courts and should not be invoked when the only loser would
be the public.” Cedar Mem’l Park Cemetery Ass’n v. Pers. Assocs., Inc., 178
N.W.2d 343, 353 (Iowa 1970). When properly invoked, the unclean-hands doctrine
requires proof that the plaintiff “dirtied [his hands] in acquiring the rights he now
asserts.” Anita Valley, Inc. v. Bingley, 279 N.W.2d 37, 41 (Iowa 1979) (citation
omitted). The doctrine exists “to protect the integrity of the court where granting
affirmative equitable relief would run contrary to public policy or lend the court’s
aid to fraudulent, illegal or unconscionable conduct.” Myers v. Smith, 208 N.W.2d
919, 921 (Iowa 1973).
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As a threshold matter, we note the plaintiffs are likely correct in their claim
that the unclean-hands doctrine applies only to equitable claims, rather than law
claims grounded in statute for damages. See Opperman v. M. & I. Dehy, Inc., 644
N.W.2d 1, 6 (Iowa 2002) (noting the doctrine’s application to “granting affirmative
equitable relief”); In re Est. of Herm, 284 N.W.2d 191, 196–97 (Iowa 1979)
(similar). We elect to address the merits of the defendants’ argument, rather than
parse out its application to different aspects of the suit.
On the merits, we reject application of the unclean-hands doctrine to Brian
and Gregg. While the record includes some evidence of less-than-ideal business
practices by the two during their own involvement with HFI preceding this lawsuit,
we agree with the district court that this conduct was generally not during the same
time period as the claims giving rise to the lawsuit (some was more than thirty
years prior) and that the claims (even if proven) fall short of the misconduct
necessary to invoke the doctrine. We also independently conclude that, even if
we were more troubled by the plaintiffs’ conduct, and even if it were more
contemporaneous, the rights the plaintiffs seek to vindicate in this suit were not
obtained through the alleged misconduct. In other words, no hands were
“dirtied . . . in acquiring the rights [the plaintiff] now asserts,” which bars application
of the doctrine. See Anita Valley, 279 N.W.2d at 41. Finally, we are not persuaded
by the defendants’ reliance on Tope ex rel. Peripheral Solutions, Inc. v. Greiner,
No. 15-1571, 2017 WL 6033871, at *4 (Iowa Ct. App. Dec. 6, 2017). There, the
nominal plaintiff stole from the corporation, unlawfully converted some $40,000 in
assets to his personal use, and forwarded mail to a location inaccessible to the
business and in hinderance of the corporate interests. Tope, 2017 WL 6033871,
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at *4. The record does not contain evidence of comparable conduct by these
plaintiffs, and Tope does not undermine the district court’s ruling.
IV. Plaintiffs’ Claims
Having affirmed rejection of all preliminary defenses put forward by the
defendants, we move to the plaintiffs’ claims. They assert (1) breach of fiduciary
duty, (2) fraud, (3) appointment of a custodian for HFI, and (4) removal of Keith as
trustee of the Trust. As discussed below, we affirm the district court in part on
these issues, reverse in part, and remand for further proceedings consistent with
our opinion, including a determination of damages and a ruling on indemnification.
A. Breach of Fiduciary Duties
By statute, corporate officers and directors have a duty of care, which
imposes “the duty to act in conformity with . . . the care that a person in a like
position would reasonably exercise under similar circumstances.” Iowa Code
§ 490.842(1)(b). Officers and directors also have a duty of loyalty, which imposes
the duty to act “[i]n good faith” and “[i]n a manner [the officer or director] reasonably
believes to be in the best interests of the corporation.” Iowa Code §§ 490.830(1);
490.842(1).
Most analysis of corporate decision making is guided by the business-
judgment rule. “The ‘heart of the business judgment rule’ is ‘judicial deference to
business decisions by corporate directors.’” Oberbillig v. W. Grand Towers Condo.
Ass’n, 807 N.W.2d 143, 154 (Iowa 2011) (citation omitted). However, “the
business judgment rule governs only where a director is shown not to have a self
interest in the transaction at issue.” Cookies Food Prods., Inc., by Rowedder v.
Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 453 (Iowa 1988).
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The law affords special regulation to self-dealing and transactions that
involve a conflict of interest. Historically, the Iowa Supreme Court required
“directors who engage in self-dealing to establish the additional element that they
have acted in good faith, honesty, and fairness,” in addition to the informed consent
of shareholders or disinterested directors.2 Id. The modern statute appears to
make the requirement disjunctive. See Iowa Code § 490.861(2). Because the
defendants did not plead any affirmative defense under section 490.861(2)(a) or
(b), any defense of a self-dealing claim requires the director or officer to
affirmatively prove that “[t]he transaction, judged according to the circumstances
at the relevant time, is established to have been fair to the corporation.” Iowa Code
§ 490.861(2)(c). “Fair to the corporation” means
that the transaction as a whole was beneficial to the corporation,
taking into appropriate account whether it was all of the following:
a. Fair in terms of the director’s dealings with the
corporation.
b. Comparable to what might have been obtainable in
an arm’s length transaction, given the consideration paid or
received by the corporation.
Iowa Code § 490.860(3).
The law also prohibits application of the business judgment rule when a
director lacks
objectivity due to the director’s familial, financial, or business
relationship with, or a lack of independence due to the director’s
domination or control by, another person having a material interest
2 We are mindful that the General Assembly has adopted statutory amendments
since Cookies, but we agree with the commentary that Cookies is still largely good
law and the modern statute should be interpreted similarly or identically. See
Matthew Doré, Iowa Practice Series: Business Organizations § 28:11 (West Oct.
2022 update) [hereinafter Iowa Practice Series]. In any event, no party urges that
the relevant principles have changed since Cookies.
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in the challenged conduct, which also meets both of the following
criteria:
(a) Which relationship or which domination or control could
reasonably be expected to have affected the director’s judgment
respecting the challenged conduct in a manner adverse to the
corporation.
(b) After a reasonable expectation to such effect has been
established, the director shall not have established that the
challenged conduct was reasonably believed by the director to be in
the best interests of the corporation.
Iowa Code § 490.831(1)(b)(3). As a commentator explains,
Courts . . . refuse to apply the business judgment rule where
the director’s conduct advances the director’s own self-interest or the
interests of any party other than the corporation. Such situations
involve a potential violation of the director’s duty of loyalty, so that
review of the director’s conduct under deferential business judgment
rule standards is inappropriate.
Iowa Practice Series § 28:6 (internal footnote omitted) (also collecting cases).
With this backdrop, we review the district court’s analysis of the plaintiffs’
numerous claims of misconduct by the defendants.
1. Keith Engaged in Self-Dealing Concerning Personal
Expenses and Double-Dipping Mileage Reimbursements
The plaintiffs contend that Keith engaged in self-dealing by paying personal
expenses with corporate assets. The undisputed record evidence is that Keith and
his wife paid nearly $200,000 in personal expenses from the corporate checking
account without reimbursing the company and without documented authorization.
The record discloses no legitimate business purpose for these expenses. Despite
these facts, the district court found that Keith did not engage in self-dealing.
We discern two errors in the district court’s ruling. First, because Keith
engaged in self-dealing, the district court erred in assigning the burden regarding
fairness to the plaintiffs rather than Keith. See Cookies, 430 N.W.2d at 453.
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Second, the district court erred in finding that Keith’s conduct was excused
because Keith’s self-dealing reflected “consistent practices of all Hora family
members who were employed by and/or involved in the operation of Hora Farms
over the years.” While it may be true that other family members also behaved
poorly, a breach-of-fiduciary-duty claim focuses on the action of the fiduciary. See
Iowa Code § 490.842; Cookies, 430 N.W.2d 453–54. If anything, evidence that
others also engaged in misconduct tends to support the plaintiffs’ claims that Keith
breached fiduciary duties by mismanaging HFI.
Because our review is de novo, we resolve the merits of this claim. We find
Keith engaged in self-dealing and that these transactions are not shielded by the
business-judgment rule. See Iowa Code § 490.860(3). We also find that Keith did
not carry his burden to prove that this transaction was fair to the corporation and
comparable to an arms-length transaction. While there is some record evidence
suggesting that the total compensation Keith received could have been
appropriate, an arms-length transaction would not include athletic tickets and
personal shopping paid for with crop and infrastructure accounts or the double-
dipping vehicle reimbursements. We also find independent harm to the
corporation through the false or incomplete business tax returns and other records
filed under Keith’s management, as the records failed to adequately document or
authorize payment of the personal expenses as compensation, which impacted
available deductions and tax owed by HFI and exposed the corporation to legal
liability.
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We reverse the district court on this personal-expenses self-dealing claim,
and we remand for the district court to enter judgment in favor of the plaintiffs and
determine damages.
2. Keith Allowed Kurt to Misappropriate HFI Corn
The plaintiffs also contend that Keith breached his duty because he knew
Kurt was feeding HFI corn to Kurt’s swine and relatedly knew that HFI was not
selling a substantial portion of the produced corn. The district court found that this
conduct, as it relates to Keith, did not involve self-dealing. We disagree. The
beneficiary of Keith failing to monitor the corn taken by Kurt was Kurt, who is Keith’s
son. We have little trouble concluding that this qualifies as a self-dealing or
conflicted transaction. See Iowa Code §§ 490.860(2)(c) (regulating transactions
when “the director knew that a related person was a party or had a material
financial interest”), (5)(b) (defining “related person” to include “[a] child”);
490.831(1)(b)(3) (noting the lack of protection for directors who lack objectivity due
to familial relationships).
Again, because our review is de novo, we now determine whether Keith met
his burden to affirmatively prove fairness to the corporation. See Iowa Code
§ 490.860(3). We find that Keith has not carried his burden. At core, what Keith
enabled was civil conversion or criminal theft of HFI corn by his son Kurt. While
perhaps there is some debate as to the extent Keith knew about the conversion or
theft, there is no question he knew it was happening. Keith’s own words from the
2015 message to his family are damning, given his admission that allowing Kurt to
convert or steal a large quantity of corn reflected on “terrible” management and
weighed in favor of seeking “outside help.” So too for Keith’s moment of honesty
20
in disclosing that Kurt had “too good of a deal” at the expense of the company,
which was consistent with HFI’s expert describing the deal as “too sweet.” Yet
Keith continued to engage in his own self-dealing, enabled Kurt to do the same,
and did not ask any disinterested party to review the arrangements.
We find the conduct related to misappropriated corn was not fair to the
corporation and was not the equivalent of an arms-length transaction. In addition,
we find this breach harmed the corporation not only through monetary loss, but
also due to its broader impact on HFI’s financials and legal liabilities: because the
payment-by-commodity arrangement (if that is truly what occurred) was not
properly reported, HFI was unable to take advantage of all relevant tax deductions,
failed to pay applicable employment taxes, and may now face significant tax
difficulties (if not severe liability and penalties). Cf. Seraph Garrison, LLC ex rel.
Garrison Enters., Inc. v. Garrison, 787 S.E.2d 398, 406 (N.C. Ct. App. 2016)
(finding an officer breached his fiduciary duty through “indifference to the payroll
tax,” which “presented the corporation with a myriad of legal problems”). We also
find harm to HFI because the abject lack of documentation (no W-2s, 1099s, or
other papers) for the bushels misappropriated by Kurt may lead to criminal liability
for aiding and abetting Kurt in the commission of state and federal tax fraud or
evasion. Finally, we find harm to HFI in its lending process because, as the
certified fraud examiner explained, Keith allowing or facilitating the
misappropriation of corn resulted in HFI providing “materially incomplete” records
to its lenders, which likely impacted financial decision making or loan availability.
We reverse the district court on this self-dealing claim, and we remand for
the district court to enter judgment in favor of the plaintiffs and determine damages.
21
We do not opine as to whether damages on this count are joint and several with
Kurt or any other defendant.
3. Other Claims Keith Breached Duties
The plaintiffs below and on appeal also make a variety of other allegations
that Keith breached his duties. To summarize, the plaintiffs claim Keith essentially
diminished the value of shares in the corporation through poor record-keeping and
bad management. Keith disputes error preservation, but we bypass the error-
preservation concern given our resolution of the issue on the merits. See State v.
Taylor, 596 N.W.2d 55, 56 (Iowa 1999) (bypassing error-preservation concern and
proceeding to the merits).
The remaining allegations (other than the personal-expenses and
misappropriated-corn claims) do not involve self-dealing or unjust enrichment of
Keith or his immediate family members—at least not to the same extent as the
personal-expenses and misappropriated-corn claims. We find the remainder of
claims against Keith are either shielded by the business-judgment rule or are not
supported by sufficient record evidence that would allow us to find bad faith,
dishonesty, intention to harm, or unfairness to the corporate interest. We therefore
affirm the district court’s finding that the additional allegations do not warrant relief.
4. Kurt Misappropriated Corn
The district court did not address any alleged breaches of duty by Kurt,
reasoning in a footnote that claims of breach and self-dealing were limited to
corporate directors or officers. Kurt’s appellate brief defends the suit on the merits,
rather than by relying on the footnote. On de novo review, we find the district court
erred in not analyzing whether Kurt breached the duties he owed to HFI.
22
At minimum, Kurt owed HFI the common law duty of loyalty all agents owe
to a principal. E.g., Condon Auto Sales & Serv., Inc. v. Crick, 604 N.W.2d 587,
598–99 (Iowa 1999). Kurt conceded this in his pleadings below and at oral
argument, and his trusted position as operations manager of HFI justifies the
imposition of fiduciary duties. See id. at 599 (recognizing fiduciary duties arise
when an employee or agent has “greater authority to act for the principal”). It is
well-established that an agent or employee breaches this duty through
misappropriation of the employer’s property. See id. at 600.
On this issue, we note the debate between the parties about who bears the
burden. We ultimately find it unnecessary to resolve this question, as the evidence
convinces us the plaintiffs proved breach. We find Kurt’s repeat misappropriation
of HFI corn for his personal use without reimbursement (which could likely be
termed civil conversion or criminal theft) breached his duty. This misappropriation
was not a mere accounting error but a deliberate and repeat series of choices that
involved taking the corn, making false estimates of the amount taken, and
inaccurately recording the taking to such a degree that precise accounting was
made difficult or nearly impossible. We also reject Kurt’s claim that the corn was
permissible compensation, as Kurt never claimed it as income on his tax filings
and HFI never reported the transactions in its filings. Last, we observe that Kurt’s
shifting stories (all of which conflict, to varying degrees, with more credible
evidence) provide substantive proof of his culpability. Cf. State v. Cox, 500 N.W.2d
23, 25 (Iowa 1993) (“A false story told by a defendant to explain or deny a material
fact against him is by itself an indication of guilt and the false story is relevant to
show that the defendant fabricated evidence to aid his defense.”).
23
We reverse the portion of the district court’s order finding Kurt did not breach
a duty, direct the district court to enter judgment for the plaintiffs on this claim, and
remand for the district court to determine damages. We again decline to opine on
whether these damages are joint and several with Keith or any other defendant.
5. Other Alleged Breaches of Duty by Kurt
The plaintiffs also make a variety of other claims of misconduct against Kurt,
alleging improper payments to HK Farms for crop inputs and overcharging HFI for
labor. We find that the district court should have addressed these claims, based
on our conclusion regarding the duty Kurt owed to HFI farms. However, although
we are hindered by the lack of fact-finding on this claim, we are convinced on de
novo review that the plaintiffs did not carry their burden. Our review has been
informed, but not bound by, the district court’s conclusion that the plaintiffs’ expert
testimony (the sole basis of these claims) was “less credible than other testimony
in the case.”
As to the crop inputs, we find the deeply conflicting evidence in the record
is not sufficient for the plaintiffs to prove by a preponderance of evidence that any
overpayment was sufficient to violate the agent–principal duty Kurt owed to HFI.
Unlike the misappropriated-corn claim, Kurt has plausible explanations and did not
engage in deceptive conduct regarding the crop inputs.
As to the labor billing, we find Kurt’s record-keeping was sloppy and
incomplete, but did not rise to the level of violating a duty to HFI. While we are
hesitant to reward Kurt’s bad record-keeping by finding his poor accounting
prevented the plaintiffs from meeting their burden, we are persuaded that we must
do so here because these records were essentially the sole basis for the expert’s
24
conclusions regarding labor billing. Cf. N. Skunk River Greenbelt Ass’n, Inc. v.
Allen, No. 18-0842, 2019 WL 6358298, at *7 (Iowa Ct. App. Nov. 27, 2019) (finding
plaintiffs failed to carry burden in part due to “abysmal” recordkeeping and financial
books that were a “nightmare”). Like the crop-inputs claim, Kurt has plausible
explanations, and this claim also lacks the deceptive conduct that convinces us
Kurt breached a duty with regard to the misappropriated corn.
We deny the plaintiffs’ claims with regard to any additional misconduct
committed by Kurt, though we reiterate our condemnation of both his conduct and
poor record-keeping.
B. Fraud
Although there is some overlap in the claims of fraud and breach of fiduciary
duty, the elements are different enough that outcomes may be different in
litigation—as is the case here. To the extent the plaintiffs independently pursue a
fraud theory, we agree with the district court that Keith’s and Kurt’s conduct, while
dishonest and contrary to HFI’s interests, does not rise to the level of fraud,
fraudulent concealment, or fraudulent misrepresentation. See Phoenix v. Stevens,
127 N.W.2d 640, 642 (Iowa 1964) (summarizing the specific elements necessary
to demonstrate actionable fraud). We are persuaded of this in part because the
corporate records, while sloppy, contained sufficient information to allow this
derivative suit to go forward and provided the basis for us to grant relief on at least
some of the relevant claims. We recognize more or better claims may have been
possible with better record-keeping, but the burden for fraud is high and must be
borne by the plaintiffs. See id. We therefore affirm the district court on the fraud
analysis.
25
C. Custodian and Removal of a Trustee
In Count III of their petition, the plaintiffs requested appointment of an
independent custodian due to the claimed egregiousness of the defendants’
violations. Because we have reversed and vacated three underlying breach-of-
duty claims that impacted the district court’s analysis of this issue, we vacate and
remand for the district court to decide the question with the correct legal footing on
the underlying claims.
We order the same remedy for the claim made in Count 4 of the petition,
concerning the trust. This claim should also be decided anew on remand with the
benefit of our opinion.
We note that, given the equitable nature of the remedies, the district court
may consider whether any further deficiencies have been remedied or discovered
in the course of litigation. As our supreme court has said, in crafting an equitable
remedy, the district court “has considerable flexibility in resolving the dispute.” See
Baur v. Baur Farms, Inc., 832 N.W.2d 663, 677 (Iowa 2013).
D. Heather and HK Farms
The plaintiffs on appeal challenge the district court’s findings that Heather
and HK Farms also had liability for breach of fiduciary duty or fraud. Here, we
agree with the district court that the plaintiffs did not carry their burden to prove
that Heather or HK Farms facilitated the conduct at issue or acted as co-
conspirators. The best evidence the plaintiffs point to is Heather’s signature on
tax forms, but there is little or no credible evidence she knew of the fiduciary
breaches when signing the documents. We affirm the district court’s conclusion
that neither Heather or HK Farms have any liability in this action.
26
E. Fees, Costs, and Indemnification
The district court determined that the plaintiffs raised sufficient concerns
that an award of fees and costs to the defendants was not appropriate. See Iowa
Code § 490.746 (allowing the district court to award a party’s expenses incurred in
a derivative suit). We agree. See Vaughan v. Must, Inc., 542 N.W.2d 533, 540
(Iowa 1996) (where an award of attorney fees is authorized by statute, we review
such a decision for abuse of discretion). However, because we have reversed
some (but not all) of the claims decided by the district court, we direct that the
district court can revisit the question of the plaintiffs’ trial fees and costs if our
opinion would have affected its analysis in the first instance.
The plaintiffs and defendants each seek appellate attorney fees and costs.
See Bankers Tr. Co. v. Woltz, 326 N.W.2d 274, 278 (Iowa 1982) (holding a statute
allowing an award of attorney fees includes an award of appellate attorney fees).
When available, appellate attorney fees are a matter of this court’s discretion. See
Christy v. Lenz, 878 N.W.2d 461, 469 (Iowa Ct. App. 2016). Both parties have
prevailed on some issues and been defeated on others. We deny the request for
attorney fees on appeal and direct that the parties pay their own costs. We also
affirmatively reject the defendants’ claim that the plaintiffs commenced the suit for
improper purposes. And we note that, although we have affirmed that neither
Heather or HK Farms have liability, the questions presented by the suit and
addressed in the brief jointly filed by Kurt, Heather, and HK Farms are sufficiently
grounded in fact that we find an award of fees to any individual entity who shared
in the briefing is not appropriate.
27
Finally, the plaintiffs contest whether Keith was properly indemnified for his
legal fees. By statute, corporate officers are indemnified in suits brought when the
director “was wholly successful, on the merits or otherwise.” Iowa Code § 490.852.
This provision is intended to mandate indemnification when “the proceeding is
disposed of on a basis which does not involve a finding of liability.” Allen, 2019
6358298, at *6 (quoting Iowa Practice Series § 28:16). Regardless of the statute,
articles of incorporation may restrict indemnification. See Iowa Code § 490.858.
Article III, section 14 of HFI’s Articles of Incorporation provides that
indemnification is not available if the director or officer has been found “liable for
negligence or misconduct in the performance of duty.” The district court did not
address this issue, presumably because it found no breach of duty. Because we
found breaches of duty and reversed on the personal-expenses and
misappropriated-corn issues related to Keith, we direct the district court to decide
indemnification on remand. We find no basis for permissive indemnification under
section 490.851, given the evidence and arguments made below. If the district
court finds that Keith engaged in “negligence or misconduct in the performance of
duty” as those terms are used in Article III, section 14, the district court shall order
Keith to repay HFI the sum of any erroneous indemnification and make all
necessary fact-findings to effectuate such an order.
F. Disposition
As to Keith, we reverse the district court on the personal-expenses and
misappropriated-corn claims, and we remand for the district court to enter
judgment against Keith and determine damages. The district court must also
28
determine the applicability of the indemnification clause and order repayment to
HFI if appropriate.
As to Kurt, we reverse the district court on the misappropriated-corn claim
and direct the district court to determine damages.
As to the appointment of a custodian and removal of the trustee, we vacate
and remand for the district court to determine these issues in light of our ruling on
the breach-of-duty claims.
We affirm on all other grounds presented by the parties, whether addressed
in this opinion explicitly or implicitly. The parties shall pay their own costs on
appeal.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED WITH
DIRECTIONS.