Carolyn Ahrens, Substituted for Richard Ahrens v. Ahrens Agricultural Industries Co., A/K/A Miraco and B. Carter Thomson, and Mike Witt and Susan Witt

IN THE COURT OF APPEALS OF IOWA
No. 14-0564
Filed May 6, 2015
CAROLYN AHRENS, Substituted for
RICHARD AHRENS,
Plaintiff-Appellant,
vs.
AHRENS AGRICULTURAL INDUSTRIES
CO., a/k/a MIRACO and B. CARTER
THOMSON,
Defendants-Appellees,
And
MIKE WITT and SUSAN WITT,
Defendants.
________________________________________________________________
Appeal from the Iowa District Court for Poweshiek County, Annette J.
Scieszinski, Judge.
Richard Ahrens appeals the district court’s dismissal of his claims for
financial compensation and other equitable relief, including breach of fiduciary
duty, oppression, and unjust enrichment. AFFIRMED.
Stephen R. Eckley and David W. Nelmark of Belin McCormick, P.C., Des
Moines, for appellant.
Gregory A. Witke and Jason W. Miller of Patterson Law Firm, L.L.P., Des
Moines, for appellees.
Heard by Danilson, C.J., and Potterfield and Bower, JJ.
2
BOWER, J.
Richard Ahrens appeals1 the district court’s dismissal of his claims for
financial compensation and other equitable relief, including breach of fiduciary
duty, oppression, and unjust enrichment. We find Richard’s claims are not
supported by the evidence and affirm the district court’s dismissal.
I. BACKGROUND FACTS AND PROCEEDINGS
Ahrens Agricultural Industries Co. (AAI) is a business located in Grinnell,
Iowa, that produces fifty types of livestock-watering products under the trade
name Miraco. Originally Miraco was a division of Miracle Recreation Equipment,
a playground equipment company owned by Claude Ahrens (Claude) 2. In 1983,
Claude made Miraco a separate “subchapter S” corporation. For approximately
the past twenty years, B. Carter Thompson (Carter) and Mike Witt (Mike) have
overseen the day-to-day operations and overall company management. Miraco
consists of 10,000 authorized shares of common stock; only 2000 shares were
initially issued, with 200 of the issued shares retained as treasury stock to award
to key employees. Miraco currently has sixteen shareholders, and has not
issued additional shares of stock.
The Miraco board of directors consists of Carter, Mike, and Susan Witt
(Susan) (Claude’s granddaughter and Mike’s wife). Carter began working for
Miracle after his discharge from the army in 1971. In 1979 Miraco separated
1
Richard Ahrens died while this action was pending. Carolyn Ahren’s motion to
substitute party was granted by this court on April 24, 2015. For ease of reference we
will continue to refer to the defendant as Richard Ahrens.
2
Miracle was sold in 1993, and Claude used the proceeds from the sale to fund the
Ahrens Foundation. The foundation focused on developing parks and recreation
projects in Grinnell.
3
from Miracle and Claude asked Carter to help develop the first Miraco products.
Carter subsequently served as vice president of Miraco until approximately 1994
when Claude promoted him to president; he was made a director in 2007 or
2008. Currently, Carter is still the president and he holds 11.5% of the company
stock. Shortly after his marriage to Susan, Mike began working for Miraco as a
salesman in the early 1990s. He now acts as the vice president and chairs the
company’s board. Mike holds 26.25% of the company stock. Susan has worked
in the office operations since the early 1990s. She holds 26.25% of the company
stock and serves as the board’s secretary.
Richard Ahrens (Richard) became involved with Miraco when Claude (his
uncle) brought him into the company to groom him for a future leadership role. In
1993, Claude made Richard a shareholder by selling him 450 shares of stock
(25% of the company stock at that time).3 Richard served as vice-chairman and
was on the board of directors. Richard was responsible for the overall
investment of Miraco and for overseeing new product design. Richard worked in
the office with Claude’s mentoring and Carter’s supervision, but the majority of
Richard’s time was spent working on a park project for Claude’s charitable
foundation. During this time, Richard and his wife moved into Claude’s home
and resided with him.
In December 1995, Claude terminated Richard’s employment with Miraco.
Concerning the termination, Carter recalled Claude was unhappy with the way
things were going and did not want Richard to be actively involved with the
3
Claude sold the stock to Richard for $750,000 ($1666.66 per share). Richard was
allowed to finance purchase of the stock through a financing agreement.
4
company anymore. Claude also asked Richard and his wife to move out of his
house.
In 1996, Claude gave Susan 241 shares of stock and sold another 241
shares to Mike.4 Following the stock transfer, Mike and Susan collectively held
26.7778% of Miraco. Richard retained his 450 shares and his involvement with
the company became one of a minority shareholder only.5 Richard occasionally
attended the shareholder meetings, but usually sent a representative.
In 1998 Claude gifted and sold an additional 242 shares to Mike and
Susan. Claude passed away two years later and the management duties
seamlessly transferred to Mike and Carter. At this point, Richard still owned 25%
of the outstanding Miraco shares, Susan and Mike each owned 26.88%.6
On January 2, 2008, the Miraco board of directors (Mike and Susan) held
a special board meeting for the purpose of selling the remaining 1667 shares of
treasury stock to key employees. Richard was not given notice of the meeting or
the board’s intention to sell the 166 shares. The board voted to issue forty-two
4
The terms of the stock sale were identical to the sale of stock to Richard—$1666.67
per share financed at a reasonable interest rate to allow the Miraco dividends to service
the payment installments.
5
Claude wanted Richard to retain the Miraco stock to provide an “income safety net” for
Richard and his wife.
6
In 1998 the shares were divided as follows: Mike—483 shares, Susan—483 shares,
Richard—450 shares, Carter—160 shares, others—224 shares, and treasury—200
shares.
7
After buying back stock from a deceased employee and following Claude’s corporate
vision, in 2006 Miraco issued fifty-four shares of treasury stock to three key employees.
5
shares to Mike, forty-two shares to Susan, seventy shares to Carter, and four
shares each to three other employees.8 The district court noted:
Mike credibly testifies that Claude’s corporate legacy instructed the
leadership team on the discretion that should be, and was,
exercised in stock sales. The purpose of the transfers was to
reward loyalty and service, and inspire key employees. Major
strides were being made as Miraco modernized, adapted to new
technology, and consolidated job descriptions within the corporate
office—leading Carter and Mike to take on responsibilities that had
historically required a separate employee. In approving of the
treasury-stock sales, Miraco officials did not consider how the
purchasing employees’ ownership interests would affect others’
interests, including Richard’s.
In 2009, Richard wrote a letter to Mike voicing his dissatisfaction with the
decision to issue the remaining treasury shares.9 Richard requested an
additional fifty shares to return his percentage of Miraco stock to his historical
25% amount, as the issuance of the final treasury shares diluted his ownership in
the company. Richard also requested a job as a salaried sales representative to
service the California and Arizona markets. In another undated letter, Richard
requested Miraco provide him and his wife with health insurance. Mike did not
respond to either letter.
Richard personally attended the 2010 shareholder meeting to protest the
sale of the treasury shares and bonuses received by the Miraco leadership. The
district court summed up the meeting:
Without analysis of the merits of the incentive pay, [Richard]
focused on the dividend return he felt had been denied due to
8
The terms of the stock sale were identical to the other stock sales in the past at
$1666.67 per share plus a financing agreement.
9
During this period, Richard’s health began to decline and his newly created table
business was failing. Richard had pledged Miraco stock as security for loans he took out
for his failing table business.
6
management compensation. Importantly, C.P.A. Tim Baker who
was familiar with industry practices, Miraco’s financial
circumstances, and the enlargement of responsibilities shouldered
by Carter and Mike, had actually counseled management on the
propriety of the bonuses. Miraco’s good performance under
Carter’s and Mike’s leadership was obvious, prompting another
shareholder at the same 2010 meeting to verbally endorse the
bonus pay. Don Meredith “stated he was extremely happy with the
management of Miraco and that bonuses were earned.” Thus,
despite [Richard]’s protests, Miraco did not retreat from its
management course—including its bonus payments.
After the 2010 meeting, Richard approached Mike (followed by a letter)
and asked for cash to be withdrawn for him from Miraco’s retained earnings.
Traditionally, Miraco paid annual dividends consisting of total net earnings. Due
to recessionary conditions, in 2009 the company decided to divide its dividend
payouts throughout the year in order to retain a measure of earnings to ensure
operating cash flow and avoid bank loans. All retained earnings were distributed
by the end of the year. Richard’s request for $127,000 of those retained
earnings was refused. Due to the increasing pressure from creditors for his
failing business, Richard resorted to selling off his Miraco stock. From 2010
through 2013 Richard sold 194 shares.
Richard filed suit against Miraco, Carter, Mike, and Susan, alleging breach
of fiduciary duty, oppression, and unjust enrichment. At the outset of trial,
Richard dismissed Carter and Miraco. He also amended his demands to be:
Relinquishment by Mike and Susan of a total of twenty-
seven shares to restore Richard to 25% ownership (assuming that
he had not transferred his own shares);
Cash payment by Mike and Susan of $44,315.06 for
dividends Richard did not collect on the twenty-seven shares (net of
the cost of the shares which would have been paid from Richards
dividends on them);
7
Cash payment by Mike and Susan of $56,660 to restore
Richard’s imputed share of dividends for allegedly excess bonuses
Mike received;
Cash payment by Mike and Susan of $120,000 representing
two years of employment Richard felt entitled to, but was denied,
factored at $60,000 annually and based upon Mike and Susan’s
receipt of the savings via additional dividend revenue; and
Reimbursement by Mike and Susan to Miraco for their cost
of litigation defense.
The district court concluded its findings of fact by stating:
After Richard’s audition for being Claude’s successor
withered, Susan and Mike evolved to be the familial thread in
Claude’s succession. Along with Carter, Mike emerged as the
driving force in shepherding Miraco’s growth and enduring success.
Richard’s fortunes tanked. Remorse over the divergence of his
financial course, from that of Susan and Mike in the same time
frame, has been projected into dismay over rival corporate savvy
and ultimately into a contempt-inspired lawsuit. What fuels this
litigation is not corporate mistreatment of a shareholder or a
malfeasance in the offices of Miraco management, but human
desperation.
The paradox presented in this record is best illustrated in the
dramatic series of entreaties when Richard, whose personal,
physical, and economic worlds were collapsing, approaches Mike in
his role as a Miraco executive, and pleads for corporate charity.
Richard implores it as a familial courtesy—something perhaps in
the legacy of Claude—a supposed job, healthcare coverage,
money, and more stock. But, it probably came as no surprise to
Richard at each juncture, that Mike—the seasoned and decisive
corporate executive—proceeded in that very managerial vein. After
all, it made no financial sense, nor served any company-building
purpose, for Miraco to grant any of Richard’s demands for
economic mercy.
The district court dismissed Richard’s claims and assessed him all court
costs. Richard now appeals.10
10
Richard passed away on June 21, 2014.
8
II. STANDARD OF REVIEW
We review the district court’s declaratory ruling de novo since the case
was tried in equity. Baur v. Baur Farms, Inc., 832 N.W.2d 663, 668 (Iowa 2013).
We defer to the “district court’s findings where the credibility of witnesses is a
factor in the outcome.” Cookies Food Prods., Inc. v. Lakes Warehouse Distrib.,
Inc., 430 N.W.2d 447, 448 (Iowa 1988). “We will affirm a decree in equity if it can
be sustained upon any pleaded basis which is supported by the record,
regardless of the basis used by the trial court.” Citizens First Nat’l Bank v. Hoyt,
297 N.W.2d 329, 332 (Iowa 1980).
III. ANALYSIS
A. Breach of Fiduciary Duty
1. Error Preservation
At trial there was some debate as to whether Richard’s breach-of-fiduciary
duty claim was a derivative or a direct action.11 At the close of Richard’s case,
Richard’s counsel clarified his position by stating that while the claim was pled as
a derivative action, Richard was not “standing in the shoes of all shareholders
making a derivative claim against the company.”12 His counsel went on to state
their position was this is a “closely-held corporation” case and, since Richard
11
Derivative actions are ones in which shareholders allege that corporate directors
harmed the corporation by their acts or omissions, such that the corporation experienced
a loss. Weltzin v. Nail, 618 N.W.2d 293, 295 (Iowa 2000); see also Whalen v. Connelly,
593 N.W.2d 147, 152 (Iowa 1999) (stating derivative action is challenge to board’s
managerial power). They are distinct from direct actions where a plaintiff complains of a
loss separate from that of other shareholders or alleges a special duty owed to the
shareholder distinct from duties owed to the corporation. Ezzone v. Riccardi, 525
N.W.2d 388, 394–95 (Iowa 1994).
12
Richard’s counsel also made an oral motion to clarify his petition and strike all
allegations that could be considered “derivative.”
9
owned a substantial minority of the Miraco shares, he was owed a special duty
by the Miraco board. In his post-trial reply brief, Richard noted his claim “falls
within one or more of the categories generally appropriate for direct action.” He
also noted, regardless, the reasons for derivative/direct dichotomy do not apply
because Miraco is a closely held corporation.13 Without delving into Richard’s
close-corporation claim, the district court decided his claim was for direct action,
rather than an individual action for derivative relief.
On appeal, Mike and Susan claim error was not preserved on Richard’s
individual action for derivative relief, and therefore Richard is barred from raising
this claim on appeal. In the alternative, Susan and Mike urge us to view
Richard’s claim solely as a derivative action and, since it does not meet the
requirements for a derivative action, it should be dismissed. We decline this
invitation, but find error was not preserved on Richard’s individual action for
derivative relief because the district court did not rule on the issue and Richard
did not file a post-trial motion to preserve this issue on appeal. “When a district
court fails to rule on an issue properly raised by a party, the party who raised the
issue must file a motion requesting a ruling in order to preserve error for appeal.”
13
For this proposition, Richard cites to Redecker v. Litt, No. 04-0637, 2005 WL 1224697(Iowa Court App. May 25, 2005). In Redecker, taking a discretionary approach, we
allowed an individual action for derivative relief—involving a closely held corporation—
where the policy reasons for imposing the requirement of a derivative action were
absent. Id. at *5–6. The policy reasons to allow an individual suit for derivative relief
include: (1) the action will not unfairly expose the corporation to multiple actions, (2) the
action will not prejudice the interests of creditors of the corporation, and (3) the action
will not interfere with a fair distribution of the recovery amongst all interested persons.
Id. at *6 (citing American Law Institute Principle of Corporate Governance §701(d)). We
also discussed this issue in Lakes Gas Co. v. Terminal Properties Inc., No. 05-1266,
2006 WL 1229934, at *6 (Iowa Ct. App. April 26, 2006), and adopted the same American
Law Institute discretionary approach on whether to allow a shareholder to intervene, in
its individual capacity, on behalf of a corporation.
10
Meier v. Senecaut, 641 N.W.2d 532, 537 (Iowa 2002); see also Freedom Fin.
Bank v. Estate of Boesen, 805 N.W.2d 802, 809 (Iowa 2011) (stating that raising
an issue for the first time in a reply brief is insufficient to preserve error on that
issue). Following the lead of the district court, we will analyze Richard’s claim as
one for direct action.14
2. Merits
“[I]n order to bring an individual cause of action for direct injuries a
shareholder must show that the third-party owed him a special duty or that he
suffered an injury separate and distinct from that suffered by the other
shareholders.” Cunningham v. Kartridg Pak Co., 332 N.W.2d 881, 883 (Iowa
1983); see also Ezzone, 525 N.W.2d at 394–95. The district court found Richard
failed to prove the elements required for a direct action, and therefore he failed to
show there was any breach of a fiduciary duty by Mike and Susan. We agree.
We adopt the district court’s concise conclusions concerning Richard’s claim:
Frustrated expectations of preferential purchase of treasury
stock by minority shareholders pro rata, and Richard’s other
financial demands related to dividend income, are interests that
likewise inure to all shareholders who do not wield majority
ownership of Miraco. Richard’s professed entitlement to
employment income and health-insurance coverage does not
emanate from his historic involvement with the corporation, nor
14
Richard’s claim that he should be able to proceed with individual action seeking
derivative relief also fails on the merits since Richard is seeking, in part, individual relief
and not solely relief for the corporation as a whole. Both plaintiffs in Redecker and
Lakes Gas sought relief only on behalf of a closely held corporation and not for
themselves as individuals. See Lakes Gas, 2006 WL 1229934, at *4–5; Redecker, 2005
WL 1224697, at *4. Additionally, Richard’s claim runs afoul of some of the policy
reasons against allowing an individual action for derivative relief. See Redecker, 2005
WL 1224697, at *5–6. For example, Richard’s action could expose Miraco to a
“multiplicity of lawsuits” because there are at least nine other shareholders who could
make the same claim as Richard. Id. at *6.
11
from his familial ties with Claude. In addition, Richard’s status as a
“majority minority” shareholder does not trigger any special
fiduciary duties for his benefit, nor particularize to his detriment, the
lack-of-opportunity injuries of which he complains.
It is granted that Mike and Susan have close personal and
financial interests in the operations of Miraco. Yet, throughout their
dealings with, and on behalf of the corporation as directors, their
relationship as shareholders and as employees has been open and
obvious, and business transactions have been completed with
transparency, fairness, and were ultimately approved by other
shareholders in due course. No conflict-of-interest liability lies in
their actions, which have been shown to be fair to the corporation in
all respects. See Iowa Code § 490.832.
B. Oppression
Richard claims the district court erred in failing to find Mike and Susan’s
actions of issuing treasury stock, granting bonuses to key employees, and
denying Richard’s request for employment constituted oppression. Recently, in
Baur our supreme court adopted a reasonableness standard for the evaluation of
minority shareholder claims of oppression in Iowa, and stated:
We adopt today a reasonableness standard for the adjudication of
minority shareholder claims of oppression in Iowa. This standard
comports with principles announced in our earlier decisions
protecting the interests of minority shareholders in closely held
corporations. Management-controlling directors and majority
shareholders of such corporations have long owed a fiduciary duty
to the company and its shareholders. Cookies Food Prods., Inc. v.
Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 451 (Iowa 1988).
This fiduciary duty encompasses a duty of care and a duty of
loyalty to the corporation. Id. The fiduciary duty also mandates
that controlling directors and majority shareholders conduct
themselves in a manner that is not oppressive to minority
shareholders.
832 N.W.2d at 673–74.
Richard first claims he should be awarded twenty-seven shares of
treasury stock to return him to the 25% ownership position he held before the
12
issuance of the remaining treasury stock. Richard denies his claim is one of
preemptive right, but rather his claim is Mike and Susan’s oppressive action
failed to satisfy his “reasonable expectations.” The record shows the issuance of
the remaining shares of treasury stock was done to award key employees for
their commitment to the company—fulfilling Claude’s vision for the treasury stock
and his employee ownership ideal. As the district court found, Richard’s
expectation of a preemptive or preferential right to obtain a certain share of the
treasury stock was unfounded. Richard failed to present evidence showing Mike
and Susan acted in an oppressive manner toward Richard or the other
shareholders.
Second, Richard claims it was reasonable for him to expect his dividends
would not be diluted by the increase in compensation to certain employees. On
this issue we echo the district court’s reasoning:
Miraco’s employer-employee relationship with Carter and Mike
supported the officer salaries and additional compensation
accomplished through bonuses. The corporation had sought
independent C.P.A. counsel in calibrating its executive
compensation, and the company acted reasonably in following the
advice it received. See Iowa Code § 490.830(5)(b). The bonuses
paid to Mike and Carter were affordable for Miraco, particularly in
consideration of efficiencies captured by management and the
resultant increases in workload for the president and vice-president.
There is no proof that bonuses pushed total executive pay into a
realm that would be objectively seen as out of line for a company
with an economic profile like Miraco’s.
Finally, Richard claims Mike and Susan unreasonably denied him
employment and therefore acted in an oppressive manner. The opposite is true.
The record shows Miraco had a contract and a twenty-year relationship with a
company to represent its sales in multiple states, including California and
13
Arizona—employing a salaried salesman in that territory could expose Miraco to
litigation. Additionally, Richard’s expectation of employment based on his status
as a substantial minority shareholder is unreasonable. This exact claim has not
been addressed in Iowa, though our supreme court has cited to out-of-state case
law supporting this conclusion. See Baur, 832 N.W. 2d at 671 (citing Ford v.
Ford, 878 A.2d 894, 904 (Pa. Super. Ct. 2005) (explaining expectation of lifetime
employment was unreasonable absent an express agreement to that effect)).
We affirm the district court’s dismissal of Richard’s oppression claim.
C. Unjust Enrichment
Richard claims, without supporting authority,15 the district court erred by
failing to find Mike and Susan ignored their fiduciary duties and unjustly enriched
themselves. Richard also claims it is unlawful or inequitable for the company to
pay for the pretrial defense of itself and its officers.
The doctrine of unjust enrichment is based on the principle that a party
should not be permitted to be unjustly enriched at the expense of another or
receive property or benefits without paying just compensation. Credit Bureau
Enters., Inc. v. Pelo, 608 N.W.2d 20, 25 (Iowa 2000). Although it is referred to as
a quasi-contract theory, it is equitable in nature, not contractual. See Iowa Waste
Sys., Inc. v. Buchanan Cnty., 617 N.W.2d 23, 29 (Iowa Ct. App. 2000). It is
contractual only in the sense that it is based on an obligation that the law creates
to prevent unjust enrichment. See id. at 29–30. Recovery based on unjust
enrichment can be distilled into three basic elements of recovery. They are: (1)
15
Iowa R. App. P. 6.903(2)(g)(3) (“Failure to cite authority in support of an issue may be
deemed a waiver of that issue.”).
14
defendant was enriched by the receipt of a benefit, (2) the enrichment was at the
expense of the plaintiff, and (3) it is unjust to allow the defendant to retain the
benefit under the circumstances. See Credit Bureau, 608 N.W.2d at 25; see also
West Branch State Bank v. Gates, 477 N.W.2d 848, 851-52 (Iowa 1991).
For reasons we have already stated, the record is devoid of proof Mike
and Susan breached their fiduciary duty to Miraco and its shareholders, thus
Richard’s unjust enrichment claim fails. Again, as the district court noted:
Richard’s post-trial charge that it is unlawful or inequitable
for the company to pay for the pretrial defense of itself as a
corporate body and to defend its officers and directors through trial,
ignores the very circumstances and outcome of this litigation. Iowa
Code § 490.851(1), et seq. Credible evidence vouches for the
good faith exercised by Mike and Susan in their acts that were
indeed fair to Miraco and served the best interests of both the
corporation and its shareholders.
In conclusion, we affirm the district court’s dismissal of Richard’s claims.
AFFIRMED.