Richard J. Erwin v. Michael G. Erwin and Erwin Farms II, LLC ( 2021 )

IN THE COURT OF APPEALS OF IOWA
No. 19-1978
Filed February 3, 2021
RICHARD J. ERWIN,
Plaintiff-Appellant/Cross-Appellee,
vs.
MICHAEL G. ERWIN and ERWIN FARMS II, LLC,
Defendants-Appellees/Cross-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Warren County, Martha L. Mertz,
Judge.
Richard J. Erwin appeals, and Michael G. Erwin and Erwin Farms II, LLC
cross-appeal, the district court’s orders regarding the management and
administration of Erwin Farms II, LLC. AFFIRMED IN PART, REVERSED IN
PART, AND REMANDED.
Elizabeth R. Meyer, Sarah K. Franklin, and Lucas B. Draisey (until
withdrawal) of Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, for
appellant.
Brant D. Kahler and James W. White of Brown, Winick, Graves, Gross &
Baskerville, P.L.C., Des Moines, for appellees.
Heard by Bower, C.J., and Doyle and Mullins, JJ.
2
MULLINS, Judge.
Richard J. Erwin (R.J.) appeals, and Michael G. Erwin (Mike G.) and Erwin
Farms II, LLC (Erwin II) cross-appeal, the district court’s orders regarding the
management and administration of Erwin II. R.J. argues Michael breached his
fiduciary duties as the manager of Erwin II and appeals the district court’s findings
regarding damages and injunctive relief. Mike G. cross-appeals and agues there
was no breach of fiduciary duties, he is entitled to injunctive relief, and the district
court’s findings regarding a skid loader are errant.1
I. Background Facts and Proceedings
Mike G. and his wife, Janet, (Erwins) own land used for farming in Warren
County. In an effort to create an estate plan to pass to their adult son, R.J., a
portion of the land without incurring tax liability, they created Erwin II in 2012 and
transferred ownership of the Turner Farm to the LLC by warranty deed, without the
deed reciting the transfer was subject to any mortgage. Prior to the transfer, the
Turner Farm had been encumbered by a mortgage to secure a note or notes that
had been incurred in connection with the farming operation and/or the purchase of
the land. It is clear the Erwins used the farm income as a source for payments on
the obligation under the note or notes. It is also obvious the Erwins intended the
farm to continue to be a source for payments toward the obligation. After the
creation of the LLC and the transfer of the Turner Farm to it, the Erwins gifted to
1 R.J. failed to cite any supporting legal authority for his argument related to Mike
G.’s counterclaim. Mike G. failed to cite any supporting legal authority for his
arguments related to the skid loader, donations to college savings accounts, and
the counterclaim arguing damages based on income distributions were errant. We
deem these arguments waived. Iowa R. App. P. 6.903(2)(g)(3).
3
R.J. 500,000 membership units when he signed an acknowledgement of the
operating agreement in December 2012. “[R.J.]’s interest is all Class B non-voting
membership units. [The Erwins], who own the remaining 500,000 membership
units, own part Class A voting membership units and part Class B non-voting
membership units.”2
Erwin II is governed by an operating agreement naming Mike G. the
manager. “The Operating Agreement contains terms regarding membership
interests, the Company’s purpose, management, distributions, accounting,
reports, and similar provisions.” Erwin II’s largest asset is the Turner Farm. Since
the transfer of the Turner Farm to the LLC, “the Erwins twice took out loans for
improvements to the land.”
Between the creation of Erwin II in December 2012 and the end of
2016, Mike G., as manager of Erwin II, used income generated by
Erwin II to pay off indebtedness associated with the Turner Farm or
to reimburse him and Janet for their personal funds used to pay such
debts. Mike G. and Janet did not refinance the property when they
created Erwin II, so the mortgage and notes remained in the Erwins’
names. At the time of trial, the property owned by Erwin II was debt
free.
. . . . Mike G., like many farmers, often handled the farm operation
with little attention to paperwork details. He did not treat his farm
income as separate from other income and made deposits and paid
expenses from his personal bank account. Until the end of the first
year Erwin II was in operation, it never occurred to Mike G. the
Company should have a separate bank account. It would not have
occurred to him then, except his tax advisor “strongly suggested”
Mike G. separate his personal income from Erwin II income.
2 All quotations contained in this section are to the district court’s April 11, 2019
ruling.
4
The Erwins’ tax accountant discovered Mike G. was commingling personal and
Erwin II funds in 2013, and that they had also been commingled with funds from
Erwin Farms I, LLC, a company established for the benefit of another child.
Mike G. tried to remedy the 2013 tax issues created by commingling funds
by “[giving] R.J. a check for approximately $32,000.00 and insisted that R.J. give
the money back in two equal checks, one to Mike G. and one to Janet.” R.J.
complied with the request and began to request financial records for Erwin II from
Mike G. and the attorney who helped the Erwins establish Erwin II. R.J. never
received the information and ultimately filed the lawsuit leading to this appeal.
R.J. and Mike G. established an oral crop-share lease agreement for the
Turner farm shortly before the creation of Erwin II. “R.J. got 70% of the crop
income and paid all the input expenses. While the Erwins only got 30% of the
income, they only paid for crop insurance and trucking expenses. . . .” 3 They also
had an oral agreement for R.J. to cash rent hay and pasture land from Erwin II.
However, when Mike G. received notice of the lawsuit, he terminated R.J.’s lease.
The termination “made it impossible for R.J. to comply with the terms of a purchase
agreement [for livestock] he had made with Mike G.” and forced him to sell the
livestock at a loss. Mike G. also “placed the land leased to R.J. in the Conservation
Reserve Program [(CRP)] before R.J.’s lease expired and without R.J.’s consent.
Because the Farm Service Agency (FSA) knew R.J. was the tenant, Mike G.
needed R.J.’s consent to put the land in CRP.” Mike G. used a power of attorney
3 The district court was no doubt reciting what happened, even though at the time
it was Erwin II that should have received the 30% income and paid the expenses.
5
executed in 2002 as authority to enter into the CRP contract. Since that time, the
FSA “concluded the CRP contract was valid.”
Trial was held in July and August 2018. The district court ruling was issued
in April 2019. Both parties filed motions to reconsider pursuant to Iowa Rule of
Civil Procedure 1.904(2). The district court denied the motions and declined to
award attorney fees to either party.
II. Standard of Review
This case was tried in equity, so our review is de novo. Iowa Rule App.
P. 6.907. “In equity cases, we are not bound by the district court’s factual findings;
however, we generally give them weight, especially with regard to the credibility of
witnesses.” Soults Farms, Inc. v. Schafer, 797 N.W.2d 92, 97 (Iowa 2011).
We review awards of attorney fees for an abuse of discretion. NevadaCare,
Inc. v. Dep’t of Human Servs., 783 N.W.2d 459, 469 (Iowa 2010). An award will
be reversed only on “grounds that are clearly unreasonable or untenable.” Id.III. Discussion
A. Personal Debt Payments
R.J. argues the district court erred in finding Mike G. did not breach fiduciary
duties or the operating agreement when he used Erwin II funds to pay personal
debts related to the Turner Farm. His argument insists the Turner Farm debt was
personal debt, not company debt, even though ownership of the property was
transferred to Erwin II. Mike G. argues the district court’s finding that no breach
occurred when Erwin II funds were used to pay debts that encumbered company
property was correct.
6
Duties of loyalty and care are statutorily imposed upon managers of limited
liability companies. Iowa Code § 489.409(1) (2016). The duty of loyalty requires
managers “a. To account to the company and hold as trustee for it any property,
profit, or benefit derived by the members . . . ,” “b. to refrain from dealing the with
company in the conduct or winding up of the company’s activities as or on behalf
of a person having an interest adverse to the company,” and “c. To refrain from
competing with the company in the conduct of the company’s activities before
dissolution of the company.” Id. § 489.409(2). A defense to the duty of loyalty may
be raised claiming “the transaction was fair to the limited liability company.” Id.
§ 489.409(5). The duty of care requires managers
in the conduct and winding up of the company’s activities [] to act
with the care that a person in a like position would reasonably
exercise under similar circumstances and in a manner the member
reasonably believes to be in the best interests of the company. In
discharging this duty, a member may rely in good faith upon opinions,
reports, statements, or other information provided by another person
that the member reasonably believes is a competent and reliable
source for the information.
Id. § 489.409(3). A manager may raise a defense to a claim for breach of the duty
of care pursuant to the business judgment rule. If a plaintiff can make a prima
facie case showing a manager engaged in self-dealing, the burden of proof shifts
to the manager. If the manager can provide evidence of “good faith, honesty, and
fairness,” the business judgment rule provides a presumption that a manager’s
“decisions are informed, made in good faith, and honestly believed by them to be
in the best interests of the company.” Cookies Food Prods., Inc., by Rowedder v.
Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 453 (Iowa 1988).
7
R.J.’s argument cites to three alleged violations of the operating agreement.
Section 2.1 states, “The Company shall hold all of its Property in the name of the
Company and not in the name of any Interest Holder or Manager.” Section 4.1(k)
directs the manager
[t]o open accounts and deposits and maintain funds in the name of
the Company in banks or savings and loan associations insured by
the Federal Deposit Insurance Corporation or Federal Savings and
Loan Insurance corporation; provided, however, that the Company’s
funds shall not be commingled with the funds of any other Person.
Section 4.11 also makes directions to the manager.
Fiduciary Duty. The Managers shall be under a fiduciary duty to
conduct the affairs of the Company in the best interests of the
Company, including the safekeeping of all Property and the use
thereof for the exclusive benefit of the Company. The Company shall
not enter into any transaction with the Managers or Affiliates of the
Managers unless it is in the ordinary course of Company business,
is beneficial to the Company, and is on terms that would be
competitive with those which could be obtained if the transaction
were entered into with a non-affiliate.
R.J. argues Erwin II never incurred liability to pay the mortgage debt on the
Turner Farm. “It is a well-settled rule of law that where property is conveyed
subject to an existing mortgage, the grantee is not liable for the payment of such
a mortgage.” Des Moines Joint Stock Land Bank of Des Moines v. Allen, 261 N.W.
912, 915 (Iowa 1935). But, a “court, sitting in equity, has considerable flexibility in
resolving [a] dispute” among members and managers of limited liability companies.
Baur v. Baur Farms, Inc., 832 N.W.2d 663, 677–78 (Iowa 2013). “In fashioning
appropriate remedies, we have explained that trial courts should regard requests
for general equitable relief with considerable liberality. We caution, however, that
courts must be careful when determining relief to avoid giving the minority a
foothold that is oppressive to the majority.” Id. at 678–79.
8
The fact that there was a mortgage on the Turner Farm when the deed was
transferred to Erwin II is not in dispute. The debt pre-existed creation of the
company. There is also no dispute that none of the deeds executed nor the
operating agreement state the encumbrance. Debt service for the Turner Farm,
and presumably all the farming operations, was historically derived from the Turner
Farm and other farm property. There is little doubt that when the Erwins created
Erwin II they intended income from the LLC would service the debt associated with
the Turner Farm. R.J. was not one of the initial shareholders in the LLC and thus
was not a party to the initial transactions creating Erwin II and capitalizing it with
Turner Farm. His legal interest in Erwin II occurred later as a result of shares that
were gifted to him after the formation of Erwin II and the transfer of the Turner Farm
to it.
Each alleged statutory and contractual breach is based on the assumption
that Mike G. harmed Erwin II. Yet, the record reveals that the reinvestment of
Erwin II financial assets back into the company was a benefit to the company, and
even directly to R.J. personally. In fact, the statutory defenses and applicable
contractual provisions contain exceptions to the rules allowing a manager to take
otherwise barred actions that benefit the company. Mike G. paid the mortgage on
the Turner Farm to maintain ownership of the property and, eventually, leave it to
R.J. with a minimal tax liability. The facts of this case establish that Mike G.’s
conduct reinvesting Erwin II financial assets by paying the Turner Farm mortgage
was done in good faith and for the benefit of Erwin II and R.J. In effect, R.J.’s
complaint is that if Erwin II was paying the mortgage and other debt associated
with the Turner Farm, he did not receive as much value from the Turner Farm as
9
he thought he was gifted or should have been gifted. Given the undisputed facts
of the history of the Turner Farm and the creation of Erwin II, we find no inequity
in the Turner Farm income being used to pay the debts arising out of the Turner
Farm purchase and operating loans.
B. Tax Returns and Financial Information
R.J. argues Mike G. breached the operating agreement by filing inaccurate
tax returns from 2013 through 2015 and failing to produce financial information
upon R.J.’s request. Mike G. and Erwin II argue the district court’s findings were
correct.
Again, R.J. points to three provisions of the operating agreement that have
allegedly been breached. Section 9.1 requires the manager to maintain “true and
full financial records and books of account.” Section 9.2 instructs the manager to
keep said books at the principal office and that members “upon reasonable notice
to the Managers, shall have access to such books, records, and documents during
reasonable business hours and may inspect and make copies of them.” Section
9.5 requires the manager to create annual financial reports and file tax returns.
The parties had separate experts testify regarding the income taxes
prepared for Erwin II. The accountant who prepared the taxes also testified. The
district court found the following.
Mike G. failed to establish a bank account for Erwin II for over a year.
In the meantime, he deposited Erwin II income to his personal bank
account and paid Erwin II expenses from the same account. Mike
G. failed to maintain separate bookkeeping records for Erwin II. In
addition, he did not prepare annual reports as required by the
Operating Agreement.
10
The district court classified these failures as omissions and discussed the big-
picture function of the company as an estate-planning device. The court appeared
to be lenient regarding the use of the Erwin’s personal bank account because they
funded the operation and then used the account for income and expenses. The
court also noted Mike G.’s limited understanding of his full duties as manager of
Erwin II and learning process throughout the course of proceedings.
This court agrees with the list of duties Mike G. failed to perform as the
manager of Erwin II. Both parties could have avoided this litigation if Mike G. had
read the operating agreement and worked with his attorney to fully understand the
details when Erwin II was created in 2012. “A failure to fully ready and consider
the contract cannot relieve [a party] of its provisions.” Bartlett Grain Co., LP v.
Sheeder, 829 N.W.2d 18, 28 (Iowa 2013) (quoting Bryant v. Am. Express Fin.
Advisors, Inc., 595 N.W.2d 482, 486 (Iowa 1999)). But there is no evidence in the
record that Mike G. acted to harm Erwin II in these activities. His purpose was to
preserve the company’s assets for R.J. We also agree that, in these practices,
Mike G. was acting in good faith to do what he believed was best for Erwin II.
Mike G. worked with an accountant to prepare tax returns for Erwin II. There
is no evidence that Mike G. did more than provide certain records to the accountant
for preparation of the income tax returns. There is no provision of the operating
agreement or Iowa Code barring a manager of a limited liability company from
relying in good faith on a tax professional.
Section 9.2 of the operating agreement instructs a manager to provide
financial records to a member “upon reasonable notice.” That duty is also required
pursuant to Iowa Code section 489.10(2)(b).
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b. During regular business hours and at a reasonable location
specified by the company, a member may obtain from the company
and inspect and copy full information regarding the activities,
financial condition, and other circumstances of the company as is
just and reasonable if all of the following apply:
(1) The member seeks the information for a purpose material
to the member’s interest as a member.
(2) The member makes a demand in a record received by the
company, describing with reasonable particularity the information
sought and the purpose for seeking the information.
(3) The information sought is directly connected to the
member’s purpose.
c. Within ten days after receiving a demand pursuant to
paragraph “b”, subparagraph (2), the company shall in a record
inform the member that made the demand all of the following:
(1) Of the information that the company will provide in
response to the demand and when and where the company will
provide the information.
(2) If the company declines to provide any demanded
information, the company’s reasons for declining.
Iowa Code § 489.410(2)(b), (c).
R.J. requested a copy of the operating agreement, financial records, and
tax information for Erwin II via email on February 23, 2016. That email exchange
also included the attorney who worked with the Erwins to establish the company.
As the email exchange continued, R.J. repeated his request for documents on
February 25 and 29 and March 1. R.J.’s language consistently identifies the
documents he would like to access, satisfying section 489.10(2)(b)(2). The
February 23 request also discusses the Turner Farm lease issue but does not state
a precise purpose for all of the documents requested. R.J. made one statement
related to the tax documents requested, “Need to figure out the issues with
Taxes/IRS since none of this has been reported correctly on this whole mess.
Meeting with accountant to figure out these details.” However, rather than stating
a “purpose material to [his] interest as a member,” R.J.’s comment appears to be
12
directed at the status of his lease and not a concern that he may be exposed to
tax liability. On Thursday, February 25, R.J.’s request said that if the documents
are “not received by [Friday] night [R.J.] will hire attorney Monday to request them
and schedule arbitration.” Instead of stating a purpose with the February 25
request, R.J. threatened legal action. The February 29 request contained no
language that could be construed as a purpose for the document request. R.J.’s
March 1 email stated he would like to inspect and compare the records with his
own records. Again, the language obviously requests the documents, but does
not give a purpose for the inspection and comparison. On our review of the record,
we agree with the district court that R.J’s requests for the records failed to comply
with the statutory requirements of Iowa Code section 489.10(2)(b).
C. Removal of the Manager
R.J. argues the district court erred in failing to remove Mike G. from the role
of manager of Erwin Farms II. R.J. points to no statutory provision allowing the
court to impose this remedy but argues that the failure to remove Mike G. would
result in a failure of justice. See Drennen v. Olmstead, 224 N.W. 85, 85–86 (Iowa
1937). He cites one case involving minority shareholder oppression that discusses
a district court’s flexibility in imposing a remedy. See Baur, 832 N.W.2d at 677–
78. Mike G. argues the only authority to remove a manager is as set out in the
operating agreement and does not lie with the court. The operating agreement
provides, “A Manager may be removed at any time by a majority vote of the Class
A Members; provided, however, if there are no Class A Members, a Manager may
be removed at any time by a majority vote of the Members.”
13
The district court appointed a receiver to ensure statutory and contractual
compliance for Erwin II through the course of proceedings. The court agreed with
Mike G. that it lacked the authority to remove the manager pursuant to the terms
of the operating agreement. The district court also stated it lacked removal
authority because no party sought dissolution of the company pursuant to Iowa
Code section 489.602. The district court’s remedy was to retain jurisdiction of the
issue, allow Mike G. to continue as manager, and impose reporting requirements
followed by a compliance hearing to confirm his dedication to the role. The district
court established clear expectations of Mike G. and invited the parties’ attorneys
to attend the compliance hearing if they desired. Our review of the record shows
the district court exercised its flexibility in fashioning an equitable remedy for the
issue.
D. Injunctive Relief
R.J. argues the district court erred in failing to order a permanent injunction
barring Mike G. from breaching the operating agreement in the future. Mike G.
argues that the issue is not ripe and that other legal remedies are available.
“A permanent injunction is a remedy that should be granted only with
caution,” but “is warranted when it is necessary to prevent irreparable injury to the
plaintiff and when there is no other adequate remedy at law.” In re Langholz, 887
N.W.2d 770, 779 (Iowa 2016). “A plaintiff who seeks a permanent injunction must
establish ‘(1) an invasion or threatened invasion of a right; (2) that substantial injury
or damages will result unless the request for an injunction is granted; and (3) that
there is no adequate legal remedy.’” Id. (quoting City of Okoboji v. Parks, 830
N.W.2d 300, 309 (Iowa 1999)). “Court[s] must weigh the relative hardship to each
14
party,” and must be tailored to provide relief but “not [to] interfere with the legitimate
and proper actions of the person against whom it is granted A permanent
injunction should only be ordered to prevent damage likely to occur in the future; it
is not meant to punish for past damage.” Id. 779–80.
R.J.’s request would require us to find that no other legal remedy exists. Id.
at 779. But, as R.J.’s argument regarding removal reveals, district courts, sitting
in equity, have flexibility to create a remedy and that several options exist. Baur,
832 N.W.2d at 677–78 (listing cases and remedies). The district court’s remedy
imposed specific duties on Mike G. to provide reports and comply applicable
statues and the operating agreement. His failure to do so would result in the district
court exercising its retained jurisdiction to impose another remedy. Because other
legal remedies exist, injunctive relief is improper at this time.
E. Damages
R.J. argues the district court erred in calculating damages. He argues he is
entitled to damages due to reliance on admittedly errant tax returns, missing
income, alleged personal debt payments, management fees, and the CRP
incident. Mike G. contests these claims. Speculative damages will be denied.
Miller v. Rohling, 720 N.W.3d 562, 572 (Iowa 2006).
The district court awarded damages to R.J. in the amount of $47,866.00,
the sum of annual distributions “he should have received as a member of Erwin II.”
The district court used income tax returns to reach the value of the annual
distributions because they “are the only documents available to the Court and
acknowledged by Defendant to show what ordinary income he received from Erwin
15
II.” Our review of the record reaches the same conclusion regarding evidence of
ordinary income and its use.
R.J. argues his damage award should include half of the income from
allegedly lost grain. However, our review of the record reveals those funds were
included in the district court’s calculation of Erwin II’s income on Attachment A to
the district court’s ruling. The funds were included with the label “plus Disputed
Income.”
R.J. argues he is entitled to half of the Erwin II funds used to pay allegedly
personal debt. Based on our discussion of the debt related to the Turner Farm
above, we reiterate that the funds were used to reinvest in the property, to pay the
debt on the property to maintain the assets of Erwin II. No damage resulted.
R.J. also argues Mike G.’s poor performance as manager negates the
necessity to pay the manager’s fee pursuant to the operating agreement. Mike G.
never took the 10% gross revenue fee the operating agreement entitles a manager
to take. Based on testimony that the standard manager’s fee is 6–7% and the
court’s discussion of Mike G.’s level of services provided, the fee was reduced to
4% for 2013 and 2014 and 6% for 2015. The manager’s fee awarded to Mike G.
was ultimately set off by the amount Mike G. was to reimburse Erwin II for
donations made to college savings accounts. Mike G.’s performance was, in some
situations, “dismally poor.” However, prior to instigation of litigation, he worked to
promote and maintain the assets of Erwin II. It is obvious that issues between
father and son soured the relationship, but the company assets will, based on the
record, perform their intended estate-planning purpose. Our review of the record
reveals the district court properly exercised its discretion when it reduced the fees.
16
R.J. finally argues he is entitled to $2985.76 in damages for the four months
lost due to Mike G.’s enrollment of the crop-share land in CRP. Mike G. argues
the benefit of the agreement had already been realized because the four months
of occupancy lost were after harvest and that the United States Department of
Agriculture verified the validity of the CRP contracts. The record establishes that
R.J. was deprived of occupancy for four months and Erwin II breached the lease
as a result of Mike G.’s wrongful use of a power of attorney and his bad faith
misconduct as manager. R.J. paid $8957.27 for the 51.52 acres and is entitled to
damages payable by Mike G. in the amount of $2985.76 to refund him for the four
months occupancy he lost due to Mike G.’s misconduct.
F. Attorney Fees
R.J. argues the district court erred in failing to award him attorney fees as a
partially prevailing party. Mike G. argues R.J. was not a prevailing party and is not
entitled to an award. Parties to a contract may enter into “an agreement to pay an
attorney fee.” Iowa Code § 625.22. Section 11.14 of the operating agreement
instructs that “the unsuccessful party or parties in [litigation arising from the
operating agreement] shall pay to the prevailing party or parties all reasonable
costs and expenses, including, without limitation, attorney fees and expenses,
incurred by the prevailing party or parties in the action.”
The district court found that both parties prevailed on certain aspects of their
claims and, as members of Erwin II, were entitled to attorney fees. Mike G.
breached duties imposed both by statute and the operating agreement. Mike G.
also prevailed in the derivative action. Ultimately, the district court awarded no
attorney fees to either party. It refused to create further financial burdens and add
17
more fuel to an already extensive and painful dispute between family members.
On our review of the record, we find nothing clearly untenable or unreasonable
about the district court’s exercise of discretion regarding the attorney fee award.
See NevadaCare, Inc., 783 N.W.2d at 469.
Section 4.13 of the operating agreement grants a manager the right to
indemnification for expenses paid,
(including reasonable attorney fees and expenses) incurred by the
Managers at any time by reason of or arising out of any act
performed or omitted to be performed by the Managers on behalf of
the Company or in furtherance of the interest of the Company, except
for liability for bad faith . . . .
The indemnification also applies to successful defenses of derivative actions. The
district court found it had no authority to determine whether Mike G. was entitled
to indemnity and that the matter must be decided by the members of the LLC. The
court found no ambiguity in the provision and that it could not modify the terms of
the contract.
Our findings diverge from the district court’s only regarding the CRP
incident. The district court found Mike G. acted in bad faith but did not award any
damages. We find the bad-faith conduct should result in a damage award to R.J.
Bad faith is listed as an exception to the indemnification provision of the operating
agreement. Because Mike G. acted in bad faith, we find he is not entitled to
indemnification for attorney fees in this action.
IV. Conclusion
On our de novo review of the record, we agree with the district court that
Mike G. did engage in conduct that breached fiduciary duties and the operating
agreement but agree with the remedy fashioned by the district court. We reverse
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the district court regarding the CRP incident, finding that Mike G.’s admittedly
purposeful conduct was in bad faith and award R.J. damages in the amount of
$2985.76. We find no abuse of discretion in the district court’s decision to decline
any award of attorney fees. Finally, we find Mike G.’s bad-faith conduct regarding
the CRP incident renders him ineligible for indemnification due to the clear terms
of the operating agreement. We remand the matter to the district court for entry of
an order consistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.