Ted A. Torstenson, Individually, and Toby T. Torstenson, Individually, plaintiffs/counterclaim v. Birchwood Estate, L.L.C., defendant/counterclaim ( 2017 )

IN THE COURT OF APPEALS OF IOWA
No. 16-0118
Filed March 22, 2017
TED A. TORSTENSON, Individually, and
TOBY T. TORSTENSON, Individually,
Plaintiffs/Counterclaim Defendants-Appellants,
vs.
BIRCHWOOD ESTATE, L.L.C.,
Defendant/Counterclaim Plaintiff-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, David M. Porter,
Judge.
Ted and Toby Torstenson appeal from the district court’s ruling on their
claim for reimbursement against Birchwood Estate, L.L.C. REVERSED AND
REMANDED WITH INSTRUCTIONS.
David Swinton, Steven P. Wandro, and Brian J. Lalor of Wandro &
Associates, P.C., Des Moines, for appellants.
Allison M. Steuterman and Douglas A. Fulton of Brick Gentry, P.C., Des
Moines, for appellee.
Heard by Danilson, C.J., and Vogel and Vaitheswaran, JJ.
2
DANILSON, Chief Judge.
Ted and Toby Torstenson appeal from the district court’s ruling on their
claim for reimbursement against Birchwood Estate, L.L.C. (Birchwood) for
payments made by the Torstensons on behalf of Birchwood under personal
guaranties. We conclude the Torstensons were entitled to reimbursement from
Birchwood for the amounts paid under the Torstensons’ personal guaranties. We
further conclude the district court erred in considering the law of contribution
among co-guarantors, finding Tierra Linda, L.L.C. (TL) breached a fiduciary duty
to Birchwood, piercing the corporate veil of TL and holding the Torstensons
personally liable, and awarding the money in dispute to the members of Central
Iowa Developers, L.L.C. (CID), who were not parties to the suit. We therefore
reverse the ruling of the district court and remand for entry of judgment in favor of
the Torstensons.1
I. Background Facts & Proceedings.
Birchwood is a limited liability company established in 2004 for the
purpose of purchasing and developing the Birchwood Estate Property in
Winterset. Birchwood consists of two members: CID and TL.2 CID is a limited
1
We acknowledge Birchwood filed a motion to strike the Torstensons’ final reply brief
due to noncompliance with Iowa Rule of Appellate Procedure 6.904(4)(b). At oral
argument, counsel for the Torstensons conceded the motion to strike should be granted
for the reasons stated in the motion. Accordingly, we have disregarded the Torstensons’
reply brief.
2
As to the members of Birchwood, the operating agreement states, “THIS AGREEMENT
is among Central Iowa Developers, L.L.C. and Tierra Linda, L.L.C. (the ‘initial
Members’); Birchwood Estates, L.L.C., an Iowa limited liability company (the ‘Company’);
and other persons who hereafter become additional or substitute members (together
with the initial Members the “Members”) under the terms of this agreement.” At the time
Birchwood was formed, CID had four members including Michael Knapp, William Kline,
James Koolhof and Dan Cornelison. TL initially had three members including Ted and
3
liability company with three members: Michael Knapp, James Koolhof, and
William Kline. TL is also a limited liability company and has two members: Ted
and Toby Torstenson.
In March 2004, Birchwood executed a promissory note in the amount of
$1,700,000 secured by a mortgage on the Birchwood Estate Property and by
unconditional guaranties signed by CID and TL. CID and TL each made a capital
contribution of $25,000 to Birchwood. Ted Torstenson testified it was his belief at
the outset of the business endeavor that after the original capital contributions
Birchwood would be able to cover its own debt service and expenses from
money earned selling lots on the property. Koolhof testified there was no
expectation CID or TL would have assets beyond the $25,000 capital
contributions and it was also the intent for CID to be able to “cash flow to the
greatest degree possible from loans from the bank and sales from the property.”
From 2004 to 2006, the proceeds from lot sales covered Birchwood’s
payments on the promissory note and expenses as expected. However, in 2006,
the real estate market collapsed and lot sales slowed. Because Birchwood had
no assets other than the property, it could not pay the amounts due on the
promissory note. CID and TL began making payments to Birchwood on an
alternating basis to make the requisite payments on the note. This arrangement
continued until mid-2010 when TL stopped making payments to Birchwood. CID
continued making payments to Birchwood and, in April 2011, paid an impairment
payment to the bank in the amount of $387,107.09 to extend the note. However,
Toby Torstenson and Jason Reels. Cornelison and Reels are no longer associated with
CID and TL.
4
according to Birchwood’s exhibit, “Birchwood Estates Capital Contributions,” CID
also eventually stopped capitalizing Birchwood in November 2014. In 2012, in
order to prevent the note from going into default, Knapp and his wife purchased
the note for the outstanding principal balance of $426,615.53 plus interest.
In order to effectuate an extension of the note in 2007, the members of
CID and TL—Knapp, Koolhof, Kline, and each of the Torstensons—had made
personal guaranties securing the note. After Birchwood became unable to
continue making payments on the note, Knapp and his wife brought suit in
August 2013 against TL and each of the Torstensons individually to enforce the
guaranties. In a September 30, 2014 settlement agreement reached by the
parties to the action, TL and the Torstensons agreed to pay $245,287.05 to
Knapp and his wife pursuant to their obligation as guarantors and $189,440.95 to
CID for a portion of the impairment payment.3
Subsequently, on December 3, 2014, the Torstensons filed this action
against Birchwood for reimbursement of money paid to Knapp and his wife on
the guaranties. On March 29, 2015, Birchwood filed an answer and counterclaim
against the Torstensons alleging the Torstensons caused Birchwood to default
on the loan by failing to capitalize TL in order to continue making payments to
Birchwood. Birchwood noted CID had made payments to Birchwood amounting
to $733,090.74, while TL had only contributed $520,381.86, leaving a deficit of
$212.708.88. Birchwood asserted the proceeds of the final sales of Birchwood
Estate Property lots should be paid out to the members in a manner equalizing
the capital accounts, providing reimbursement to the Torstensons under the
3
Birchwood was administratively dissolved in 2015.
5
guaranties would result in unjust enrichment, and the Torstensons breached their
fiduciary duty to Birchwood by attempting to obtain funds from Birchwood without
satisfying the obligations of TL to Birchwood and CID.
The district court acknowledged under Iowa law a guarantor is entitled to
reimbursement when the guarantor pays the debt of the principal obligor. See
Hills Bank & Tr. Co. v. Converse, 772 N.W.2d 764, 772 (Iowa 2009). However,
the court stated, “the Torstensons’ claim has run aground on contrary authority
dealing with [the] law on co-guarantors.” The court determined “[t]he member
paying a lesser contribution is liable for equalization of the burden or payments.”
Citing Farmers & Merchants Bank v. Gibson, 7 B.R. 437, 411 (Bankr. N.D. Fla.
1980) and In re Vermont Toy Works, Inc., 82 B.R. 258, 316-17 (Bankr. D. Vt.
1987), the court determined the “[p]ayments made by the Torstensons, Knapp,
Koolhof, and Kline, under the guaranties, were more capital
contribution/payments of expenses than guarantor payments.” The court held:
As a capital contribution/expense, there would be no right to
exoneration or right to contribution by the guarantor from the
principal . . . [therefore] the Torstensons would not stand as general
creditors seeking payment of a debt, but rather as a member
seeking their fair share of distribution of the company’s assets
based on their proportionate contributions to Birchwood.
Citing Iowa Code section 489.403 (2014), the court further held TL was
responsible for reimbursement or equalization of capital contributions or
expenses paid by CID and CID’s members and the Torstensons were liable by
way of piercing the corporate veil. The court reasoned:
By failing to adequately capitalize TL and subsequently
assist in the adequate capitalization of Birchwood, the Torstensons
breached their duty of care and failed to exercise care that a person
in a like position (i.e., Knapp, Koolhof, and Kline as members of
6
CID) would reasonably exercise under similar circumstances and in
a manner the member reasonably believes to be in the best
interests of the company. TL was obligated to continue to make
equal capital contribution/call payments and is liable for the
payments made on behalf of CID. The Torstensons simply cannot
argue that their current demand for reimbursement is in
Birchwood’s best interests, considering it was their inability [to]
adequately capitalize TL, which caused TL to be unable to continue
contributing to the capital calls/contributions for Birchwood, which
caused Birchwood to ultimately default on the Note.
Simply put, Birchwood is equitably obligated to pay CID,
which made payments on the Note on its behalf. CID has made
significant capital contributions over and above those of TL
($733,090.74 vs. $520,381.86) and attempts by the Torstensons,
the sole members of TL, to obtain an equal share of any proceeds
of [Birchwood] would unjustly enrich them.
The court therefore ordered:
The $114,000[4] held in trust pending this action shall be paid out to
the debts of Birchwood Estate, L.L.C. as follows:
1. First toward attorneys’ fees incurred in defending
Birchwood in this action;
2. Second to members [of] CID for amounts expended in
excess of the amounts expended by TL for expenses/capital
contributions so as to even out contributions and expenses paid
($212,708.88); and
3. Finally, any remainder to all members, equally.
The Torstensons now appeal.
II. Standard of Review.
Both parties agree this case was filed and tried at law. We review an
action at law for correction of errors at law. Van Sloun v. Agans Bros., Inc., 778
N.W.2d 174, 179 (Iowa 2010). “Under this standard of review, the trial court’s
findings carry the force of a special verdict and are binding if supported by
substantial evidence.” Id. However, “the district court’s legal conclusions and
4
As explained at oral argument, the parties agreed to place one half of the assets of
Birchwood—$114,000—into escrow pending the outcome of the case. The Torstensons
seek a judgment in the sum of $114,000.
7
application of legal principles are not binding on the appellate court.” Land O’
Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 2000). “If ‘the trial court has
applied erroneous rules of law [that] materially affected its decision,’ we must
reverse on appeal.” Id. (alteration in the original) (citation omitted).
Because unjust enrichment is an equitable remedy, our review of its
application to these facts is de novo. Iowa Waste Sys., Inc., v. Buchanan Cty.,
617 N.W.2d 23, 30 (Iowa Ct. App. 2000).
III. Analysis.
The Torstensons raise three issues on appeal: (I) whether the district court
erred in rejecting the Torstensons’ claim for reimbursement from Birchwood for
their payments under the guaranties; (II) whether the district court erred in
applying the law regarding contribution among co-guarantors; and (III) whether
the district court erred in piercing the corporate veil of TL and holding the
Torstensons responsible for breach of fiduciary duty allegedly owed to
Birchwood.
(I) Reimbursement. The Torstensons first contend they are entitled under
Iowa law to reimbursement for payments made on the guaranties executed on
behalf of Birchwood.
In Hills Bank & Trust Co., the supreme court adopted the position of
Restatement (Third) of Suretyship and Guaranty section 22 on the issue of
reimbursement and held, “Under the Restatement, when a principal obligor has
notice of the secondary obligation, the principal obligor has the duty to reimburse
the secondary obligor to the extent the secondary obligor is called upon to
perform, or if the secondary obligor settles with the obligee.” 772 N.W.2d at 772.
8
Under these facts, Birchwood is the principal obligor, having executed the
promissory note, and the Torstensons are secondary obligors, having executed
personal guaranties to pay when the principal obligor was unable to do so. Thus,
the Torstensons’ claim for reimbursement is supported by Iowa law. See
Spreitzer v. Hawkeye State Bank, 779 N.W.2d 726, 743 (Iowa 2009) (“When a
creditor bypasses the assets of a debtor and collects the debt from a guarantor
under the terms of a personal guaranty, the guarantor may assert rights of
reimbursement against the debtor to recoup the amount paid on the guaranty.”).
Neither party disputes Iowa law provides a remedy for a guarantor to seek
reimbursement from the principal obligor when the guarantor pays a debt owed
by the principal obligor. The Torstensons, as individuals, made payments on
behalf of Birchwood under their personal guaranties. In the petition, the
Torstensons, as individuals, sought reimbursement for amounts paid pursuant to
the guaranties via the settlement agreement. The settlement agreement
identified Knapp’s claim against the Torstensons was for breach of guaranty and
required the Torstensons to pay $245,287.05 to Knapp upon execution of the
settlement agreement.5 The settlement amount was paid to Knapp as assignee
of the note by the Torstensons under their obligations as guarantors. As such,
the Torstensons are entitled to reimbursement from the principal obligor,
Birchwood.
5
To the extent the Torstensons sought reimbursement for money paid to CID for
contribution to the impairment payment, we note Hills Bank & Trust Co., 772 N.W.2d at
772, and the Restatement (Third) of Suretyship & Guaranty section 22 does not provide
for reimbursement.
9
The district court erred in applying Farmers & Merchants Bank, 7 B.R. at
441, and Vermont Toy Works, Inc., 82 B.R. at 316-17, 329-33, and concluding
payments made by the Torstensons under the guaranties were actually capital
contributions or payments of expenses. Both cases dealt specifically with the
doctrine of marshaling, which relates to secured creditors and is not at issue in
this case. See Farmers & Merchs. Bank, 7 B.R. at 441 (“[I]n a marshaling
context, the balance of equities tips in favor of the creditors of the principal as
against the guaranty claimant with respect to any individually owned property
which was specifically pledged to secure the guaranty and obtain working
capital.”(emphasis added)); see also Vt. Toy Works, Inc., 82 B.R. at 319(explaining the analysis relates to “the contributions to capital exception to
marshaling”).6 Further, Farmers & Merchants Bank was subsequently vacated
by Peacock v. Gibson, 7 B.R. 437, 443 (Bankr. N.D. Fla. 1980), and Vermont Toy
Works, Inc., was reversed in In re Vermont Toy Works, Inc., 135 B.R. 762, 773
(D. Vt. 1991). Thus, there is no support for the district court’s determination that
the payments made by the Torstensons under the guaranties were actually
capital contributions or payments of expenses.
6
The doctrine of marshaling
is applied when two or more secured creditors claim against one debtor
and the senior secured creditor can reach two or more of a debtor’s
property interests or funds while the junior secured creditor may reach
only one. By forcing the senior secured creditor to elect the fund which is
not subject to satisfaction by the junior secured creditor, both the junior
and senior secured creditors may realize satisfaction of their respective
claims against the common debtor.
Vt. Toy Works, Inc., 82 B.R. at 290.
10
The payments made by the Torstensons to Knapp under the settlement
agreement were payments under the Torstensons’ guaranties, and the
Torstensons are thus entitled to reimbursement.
(II) Contribution. The Torstensons next claim the district court erred in
considering the law of contribution among co-guarantors in reaching its
determination in this case. The Torstensons assert application of the law on co-
guarantor contribution is improper because none of the co-guarantors are parties
to the lawsuit.7 More importantly, the Torstensons further point out each of the
co-guarantors released any claims for contribution related to payment of the
guaranties under the settlement agreement in the previous lawsuit. Thus, the
Torstensons’ assert there is not, and cannot be, a claim by any of the co-
guarantors against the Torstensons for contribution and “the law governing
contribution among co-guarantors simply has no bearing on [their] claim against
Birchwood.”
Birchwood argues the district court correctly considered the law on
contribution among co-guarantors in addition to the law regarding reimbursement
from the principal obligor. Birchwood also asserts the district court correctly
found CID was entitled to reimbursement of capital contributions or expense
payments from Birchwood and TL and, ultimately, from the Torstensons.
7
On September 15, 2015, CID, Knapp, and Koolhof filed a motion to intervene and/or
join as indispensable parties to the lawsuit. The motion was denied. The district court
noted that a trial scheduling order filed March 27, 2015, stated “[n]o new parties may be
added later than 180 days before trial.” The district court denied the motion to intervene
and/or join because it was filed less than sixty days before trial and was untimely. The
court stated “the prospective intervenors may have been permitted to intervene under
[Iowa Rule of Civil Procedure] 1.407(2) if a timely application had been made. The court
does not find that the prospective intervenors are ‘indispensable parties’ as defined in
rule 1.234.”
11
Birchwood contends any other outcome would result in the unjust enrichment of
the Torstensons.
We find the district court also erred in considering contribution in this case.
While under Restatement (Third) of Suretyship and Guaranty section 55 “each
cosurety has the right of contribution against other cosureties,” Hills Bank & Trust
Co., 772 N.W.2d at 772-73, the Torstensons correctly assert contribution is not at
issue in this matter. The co-guarantors were not joined as parties to this case,
and any error in the district court’s ruling on the motion to intervene and/or join
was not raised on appeal. More importantly, under the settlement agreement,
Knapp and his wife agreed to
[r]elease, acquit and discharge Tierra Linda, the
Torstensons, CID, Kline, and Koolhof from any and all Claims that
Ellyn and Knapp may now or hereafter have against the
Torstensons, including but not limited to any and all Claims or
defenses that were brought or could have been brought in the Civil
Case related to the amounts due and owing under the Note,
Guarantees and Impairment Payments.
Koolhof and Kline agreed to identical releases in the agreement.
Despite the fact that CID, Knapp, Koolhof, and Kline were not parties to
the lawsuit, the district court ultimately awarded the $114,000 at issue to be paid
to the members of CID to equalize deficient capital accounts. Absent
intervention or joinder of the co-guarantor parties,8 or Birchwood’s bringing an
8
The other co-guarantors would also have a right to reimbursement from Birchwood for
any payments made under their guaranties. However, they did not properly join this
action. Birchwood remains in possession of approximately an additional $114,000.
12
action for interpleader,9 the court erred in entering judgment in favor of CID,
Knapp, Koolhof, and Kline who are not parties to the case.10
(III) Breach of Fiduciary Duty and Piercing the Corporate Veil. Last, the
Torstensons contend the district court erred in piercing the corporate veil and
holding the Torstensons personally responsible for breach of fiduciary duty
allegedly owed to Birchwood.
A. Breach of Fiduciary Duty. The Torstensons assert this matter involves
only Birchwood and not the Torstensons in their individual capacity. The
Torstensons therefore contend they did not individually owe a fiduciary duty to
Birchwood.
The district court relied upon Iowa Code sections 489.409 and .403 to hold
TL’s refusal to continue making capital contribution payments constituted a
breach of fiduciary duty and the duty of care to Birchwood and CID. Section
489.409(3) provides, in relevant part,
the duty of care of a member of a member-managed limited liability
company in the conduct and winding up of the company’s activities
is to act with the care that a person in a like position would
9
Iowa Rule of Civil Procedure 1.251 provides, “A person who is or may be exposed to
multiple liability or vexations litigation because of several claims against the person for
the same thing, may bring an equitable action of interpleader against all such claimants.”
Iowa Rule of Civil Procedure 1.252 also permits “[a] defendant to an action exposed to
similar liability or litigation [to] obtain interpleader by counterclaim or cross-petition. Any
claimant not already before the court may be brought in to maintain or relinquish that
claim to the subject of the action, . . .” In support of its request that the proceeds of the
final sales of Birchwood Estate Property lots be paid out to the members in a manner
equalizing the capital accounts, Birchwood could have brought an action for interpleader
adding TL, CID, and CID’s members to the case. However, Birchwood did not do so.
10
To render a binding judgment, a court must have both subject matter and personal
jurisdiction over the case. See Schott v. Schott, 744 N.W.2d 85, 87-88 (Iowa 2008); see
also Book v. Doublestar Dongfeng Tyre Co., 860 N.W.2d 576, 583-84 (Iowa 2015). “A
judgment may be considered void where the court acted without or in excess of its
jurisdiction.” McCourt Mfg. v. Rasmussen, No. 09-1483, 2010 WL 3894485, at *3 (Iowa
Ct. App. Oct. 6, 2010) (citation omitted).
13
reasonably exercise under similar circumstances and in a manner
the member reasonably believes to be in the best interests of the
company.
The district court held:
By failing to adequately capitalize TL and subsequently
assist in the adequate capitalization of Birchwood, the Torstensons
breached their duty of care and failed to exercise care that a person
in a like position (i.e. Knapp, Koolhof, and Kline as members of
CID) would reasonable exercise under similar circumstances and in
a manner the member reasonably believes to be in the best interest
of the company.
The district court also noted Iowa Code section 489.403 relating to a
member’s liability for contributions provides, “A person’s obligation to make a
contribution to a limited liability company is not excused by the person’s death,
disability, or other inability to perform personally.” The district court determined
“[w]hether the payments were capital contributions or expenses, under Iowa law,
TL is responsible for reimbursement/equalization of such contribution/expense
payments and is now liable” under section 489.403.
We conclude the court erred in holding TL, and thereby the Torstensons,
liable for failing to continue making capital contributions and determining the
Torstensons, as individuals, owed a fiduciary duty to Birchwood. It is significant
that the settlement payments were made by the Torstensons as individuals
pursuant to their individual personal guaranties. As individuals, the Torstensons
had no obligation to make capital contributions to Birchwood because they were
not members of Birchwood. Rather, the Torstensons were members of TL. Any
capital contributions were solely the responsibility of TL and CID. The settlement
agreement does not recite that the guaranty payments shall constitute capital
contributions on behalf of TL. None of the statutory methods to become a
14
member of a limited liability company apply to the Torstensons.11 Because the
Torstensons were not members of Birchwood, they owed no fiduciary duty to
Birchwood.
Moreover, a member of a limited liability company is not always obligated
to make contributions. See Iowa Code § 489.401(5) (“A person may become a
member without . . . being obligated to make a contribution to the limited liability
company.”). The operating agreement dictates the initial contribution, if any, as
well as subsequent required contributions. See id. § 489.110(1)(a) (providing the
operating agreement governs “[r]elations among the members as members and
between the members and the limited liability company”); see also id. §
489.111(1) (“A limited liability company is bound by and may enforce the
operating agreement, . . .”).
Under the terms of Birchwood’s operating agreement, TL was not required
to continue making capital contributions and was not to be held responsible for
equalizing the capital accounts. Section 5.01 of Birchwood’s operating
agreement provides, “The Company’s initial capital shall consist of cash or
property to be contributed by the initial Members in the amounts indicated on
Exhibit A. Additional calls for capital may be agreed upon by a majority of the
Members.” And Section 5.03 provides:
Except as provided in Article IX, a Member is not entitled to
demand or receive the return of any Capital Contribution prior to the
Company’s dissolution and winding up. In the event of a
dissolution and winding-up, no Member shall receive out of the
Company’s property any part of its Capital Contribution until all
liabilities of the Company, except liabilities to Members on account
11
See Iowa Code § 489.401(4)(a) (providing a person becomes a member of a limited
liability company “[a]s provided in the operating agreement”).
15
of their Capital Contributions, have been paid or there remains
property in the Company sufficient to make such payments.
Further, section 5.04 states, “No Member shall be obligated to satisfy a negative
Capital Account balance.” Section 9.03 regarding termination and dissolution of
the company provides:
The Members shall look solely to the assets of the Company
for the return of their capital contributions, and if the assets of the
Company remaining after payment or discharge of the debts and
liabilities of the Company are insufficient to return such capital
contributions, they shall have no recourse against any other
Members for such purpose.
And section 3.04 of Birchwood’s operating agreement provides, “No Member
shall be personally liable for any debts or obligations of the Company unless
otherwise required by the Act.”
Ted Torstenson testified it was his understanding by agreeing to these
provisions that TL would not be required to make capital contributions without
TL’s consent. The district court held that TL and the Torstensons “waived their
right to later contest the validity of additional capital contributions” by failing to
attend meetings after they stopped contributing funds to TL to make payments to
Birchwood in order to satisfy the note. However, section 5.01 expressly states
capital contributions may be required only as agreed upon by the members, and
there is no dispute TL remained a member notwithstanding the lack of
representation at the meetings. Prior to discontinuing payments to Birchwood,
the Torstensons explained TL could not keep making the payments and no
longer assented to the capital contributions. TL’s agreement was necessary to
require further capital contribution payments. The provision of section 5.01 could
only be amended by “the unanimous approval of the Members to amend the
16
terms of the operating agreement” pursuant to section 4.07(b)(v). The section
was not amended.
Under the terms of the operating agreement, TL was not obligated to
continue making capital contributions, and TL and the Torstensons’ failure to
continue making such payments does not constitute a breach of fiduciary duty or
the duty of care. The Torstensons were not members of Birchwood and owed no
fiduciary duty to Birchwood. Only the members of Birchwood—TL and CID—
were obligated to comply with the duties created by the operating agreement.
The operating agreement provides no basis to offset a personal guarantor’s
reimbursement for payment made under a guaranty by a member’s obligation for
expenses, costs, damages, or a member’s deficiency in its capital contributions.
The court erred in holding the Torstensons personally liable for breach of
fiduciary duty.12
B. Piercing the Corporate Veil. The Torstensons also argue the decision
to pierce the corporate veil in this case was not supported by substantial
evidence because TL was properly capitalized at the time of formation and TL
was handled in a manner consistent with its existence as a separate legal entity.
Birchwood asserts, “The failure of TL to be adequately capitalized, which
was the fault of the Torstensons’ general practice or otherwise, caused
Birchwood to default on the note and the Torstensons should not be allowed to
12
We note section 8.05(b)(2) of the operating agreement provides, in part, “The Member
shall, however, remain liable for any obligation to the Company that existed prior to the
effective date of the dissociation, including any costs or damages resulting from the
Member’s breach of this Agreement.” But Birchwood has not alleged this provision is
applicable to these facts, and TL is not a party to this action.
17
escape their requisite and proportional liability for the outstanding expenses of
Birchwood.”
The district court determined TL was obligated to continue making equal
capital contributions and is liable for breach of fiduciary duty and the duty of care
for failing to do so. The district court then determined it was appropriate to pierce
the corporate veil and hold the Torstensons personally liable.
The district court found:
The Torstensons formed TL for the purpose of having an
entity that could be a member of Birchwood. TL did not have its
own assets and was only able to make payments on the note via
funds or payments from its individual members—Ted and Toby
Torstenson. Plaintiffs were the sole owners and provided all capital
to TL. Regrettably, TL was not adequately capitalized, which
resulted in Birchwood being inadequately capitalized. Based on the
testimony of Ted Torstenson, traditional formalities of limited liability
entities were not followed, nor did the Torstensons maintain
separate books. Because of this, the “corporate veil” can be
pierced, and TL can be held liable for the undercapitalization or
unequal capitalization.
In respect to piercing the corporate veil, the theory underlying the doctrine
is that a “limited liability company is an entity distinct from its members,” Iowa
Code § 489.104(1), and the separate limited liability company enables the
members to limit their personal liability, see Iowa Code § 489.304, but “the
corporate device cannot in all cases insulate the owners from personal liability.”
Briggs Transp. Co. v. Starr Sales Co., 262 N.W.2d 805, 809-10 (Iowa 1978).
“The corporate veil may be pierced under exceptional circumstances, for
example, where the corporation is a mere shell, serving no legitimate business
purpose, and used primarily as an intermediary to perpetuate fraud or promote
injustice.” Id. at 810. “The burden is on the party seeking to pierce the corporate
18
veil to show the exceptional circumstances required.” In re Marriage of
Ballstaedt, 606 N.W.2d 345, 349 (Iowa 2000) (citing C. Mac Chambers Co. v.
Iowa Tae Kwon Do Academy, Inc., 412 N.W.2d 593, 598 (Iowa 1987)).
The factors to be considered when determining whether the corporate veil
may be pierced and the individuals held personally liable include:
(1) the corporation is undercapitalized; (2) it lacks separate books;
(3) its finances are not kept separate from individual finances, or
individual obligations are paid by the corporation; (4) the
corporation is used to promote fraud or illegality; (5) corporate
formalities are not followed; and (6) the corporation is a mere sham.
Cemen Tech, Inc. v. Three D Indus., L.L.C., 753 N.W.2d 1, 6 (Iowa 2008)
(citation omitted).
The problem here is no judgment was awarded against either TL, a
nonparty, or the Torstensons, and thus no reason exists to pierce the corporate
veil. The doctrine is an equitable remedy to protect creditors. Minger Const.,
Inc. v. Clark Farms, Ltd., No. 14-1404, 2015 WL 7019046, at *6 (Iowa Ct. App.
Nov. 12, 2015) (McDonald, J., concurring) (“The decision to impose liability on a
shareholder for corporate obligations where there is no basis for liability at law, is
necessarily an equitable remedy . . .” (citation omitted)); see also Boyd v. Boyd &
Boyd, Inc., 386 N.W.2d 540, 544 (Iowa Ct. App. 1986) (“[O]ne of the
circumstances which may move a court to disregard corporate entity is where
limited liability would be inequitable. 6 Hays, Iowa Practice Business
Organizations § 882 at 298 (1985); Hornstein, Corporation Law and Practice §
752 at 265 (1959). Hayes further specifies that ‘[t]he corporate veil may be
disregarded when recognition would work inequitably against one or more groups
of creditors of the enterprise . . .’ Hayes, § 886 at 308.” (alteration in original)).
19
The doctrine does not entail the assignment or delegation of a fiduciary duty
owed by a corporation, or a breach thereof, to its members except as it relates to
creditors. Birchwood is not alleged to be a creditor needing to pierce the
corporate veil of TL. In fact, Birchwood is more akin to a disinterested entity
holding funds that may face multiple claims for the same monies, similar to a
party having the right of interpleader,13 rather than a party seeking payment for
some obligation owed to it. See C.F. Sales, Inc. v. Amfert, Inc., 344 N.W.2d 543,
550 (Iowa 1983) (“Interpleader originated in equity as a means by which a
disinterested stakeholder of money or property could avoid vexatious litigation
with multiple claimants by making them defendants and requiring them to
establish their claims among each other to the fund or res.” (citing 45 Am. Jur. 2d
Interpleader § 2 (1969); 48 C.J.S. Interpleader § 4 (1981)).) However, Birchwood
never brought an action or counterclaim of interpleader, and its efforts to join
additional parties, including CID, were denied by the district court.
Further, piercing the corporate veil was unwarranted in this case based on
the finding that TL was inadequately capitalized. In determining if the L.L.C. was
undercapitalized, “[t]he relevant inquiry is the capital structure of the entity at or
near the time of incorporation.” Minger Const., Inc., 2015 WL 7019046, at *9. At
the time Birchwood was formed, both parties were required to contribute the
initial $25,000 capitalization. No other capitalization was expected at that time,
as it was the intent of both members that Birchwood would be able to cover its
expenses and debt service with income from the sale of portions of the property.
When TL and CID were subsequently required to make additional capital
13
See Iowa R. Civ. P. 1.251.
20
contributions, the members of TL paid funds into TL to be paid to Birchwood.
The record reveals CID made capital contributions to Birchwood in the same
manner. The fact that the Torstensons at some point in time discontinued
providing capital to TL so TL could continue providing capital to Birchwood in
light of the real estate market crash is not significant to the issue of whether TL
was initially inadequately capitalized. Moreover, if all of TL’s and the
Torstensons’ payments were treated as capital contributions as urged by
Birchwood, they paid over $520,000 in total, an amount far in excess of the initial
expectation that $25,000 was sufficient.
The district court erred in determining the circumstances warranted
piercing the corporate veil of TL, a nonparty, and thereby holding the
Torstensons personally liable. Under these facts, there is no legal ground to
pierce the corporate veil.
(IV) Unjust enrichment. Birchwood’s counterclaim also raises the theory
of unjust enrichment. The district court determined the Torstensons would be
unjustly enriched in concluding:
Simply put, Birchwood is equitably obligated to pay CID,
which made payments on the Note on its behalf. CID has made
significant capital contributions over and above those of TL
($733,090.74 vs. $520,381.86) and attempts by the Torstensons,
the sole members of TL, to obtain an equal share of any proceeds
of the L.L.C. would unjustly enrich them. Individuals Knapp,
Koolhof, and Kline have made payments by way of capital
contributions to CID and payments under their own personal
guarantees resulting in those individuals investing significantly
more funds into Birchwood than the Torstensons.
In essence, Birchwood’s unjust enrichment argument underlies each of
the three issues on appeal. We consider it as an independent claim as well
21
because it was pled as a part of the counterclaim. Unjust enrichment “has not
only given rise to specific derivative theories, such as contribution and indemnity,
but can stand on its own as an open-ended, broad theory of restitution.” State
Dep’t of Human Servs. ex rel Palmer v. Unisys Corp., 637 N.W.2d 142, 150
(Iowa 2012). Although not raised as a separate issue on appeal, we address it
because “we may affirm a district court ruling on an alternative ground provided
the ground was urged in that court.” St. Malachy Roman Catholic Congregation
of Geneseo v. Ingram, 841 N.W.2d 338, 351 n.9 (Iowa 2013). But we are unable
to affirm on this theory because the Torstensons are seeking reimbursement for
their payments made on their personal guaranties and it was TL that was alleged
to have not paid equal capital contributions to CID. The Torstensons, as
individuals, have not been unjustly enriched, but rather are entitled to be
compensated for the monies they expended towards Birchwood’s obligation.
IV. Conclusion.
We conclude the Torstensons were entitled to reimbursement from
Birchwood for the amounts paid under the Torstensons’ personal guaranties. We
further conclude the district court erred in considering the law of contribution
among co-guarantors, finding TL breached a fiduciary duty to Birchwood,
piercing the corporate veil of TL and holding the Torstensons personally liable,
and awarding some of the funds in dispute to the members of CID, who were not
parties to the suit. We therefore reverse the district court order and remand for
entry of judgment in favor of the Torstensons in the sum of $114,000.
REVERSED AND REMANDED WITH INSTRUCTIONS.