Guge v. Kassel Enters., Inc.

962 N.W.2d 764

Susan A. GUGE and Peggy McDonald, Appellees,

v.KASSEL ENTERPRISES, INC., Appellant,Craig L. Kassel, Deborah M. Kassel, Kassel Farms, Inc., and Great Oaks Farms, Inc., Defendants.

No. 19-2151

Supreme Court of Iowa.

Submitted December 16, 2020

Filed June 18, 2021

Rehearing Denied August 25, 2021

Thomas D. Hanson (argued) and Emily A. Staudacher of Dickinson, Mackaman, Tyler & Hagen P.C., Des Moines, for appellant.

Seth R. Delutri (argued), Mark C. Feldmann, and Justin E. LaVan of Bradshaw, Fowler, Proctor & Fairgrave, P.C., Des Moines, for appellees.

McDermott, J., delivered the opinion of the court, in which Christensen, C.J., and Appel, Waterman, and Mansfield, JJ., joined, and in which McDonald and Oxley, JJ., joined except for division III.B. Oxley, J., filed a special concurrence, in which McDonald, J., joined.

McDERMOTT, Justice.

Shareholders in Iowa corporations may sue to dissolve a corporation when those in control have engaged in oppressive conduct. But in lieu of defending a dissolution proceeding, the law allows the corporation to force the complaining shareholders to sell their stock for the "fair value" of their shares. This statutory buyout right provides a chance for those in control to avoid both the tribulations that come with defending against the misconduct claims and, presumably, the future grief that comes with trying to run a business with antagonistic shareholders. Because filing for dissolution could result in the forced sale of the filer's own stock, this buyout right also helps deter shareholders from strategic abuse of dissolution petitions.

If the parties can't agree to a stock valuation on their own, the "fair value" determination rests with the court. In this appeal, the parties ask us for the first time to address a "fair value" determination under Iowa's election-to-purchase-in-lieu-of-dissolution statute. In particular, we must decide what adjustments should be made in this case to the corporation's asset values to set the "fair value" of the plaintiffs’ shares and whether the petitioning shareholders established that probable grounds of oppression existed to permit the district court's award of their fees and expenses.

I. Factual and Procedural Background.

Lawrence and Georgia Kassel owned a family farming operation that they incorporated in 1977 under the name Kassel Enterprises, Inc. They had three children: Susan Guge, Peggy McDonald, and Craig Kassel. Lawrence passed away in 2005; Georgia in 2017. Through a series of gifts of stock during their lives, bequests in their wills after their deaths, and Craig's purchase of additional shares from his mother after his father's death, Lawrence and Georgia ultimately transferred all of the corporation's stock to their children. At the time this lawsuit arose, Susan and Peggy each owned 23.75% of the corporation's shares and Craig the remaining 52.5%.

After Georgia's death, Susan and Peggy filed a lawsuit against Craig, Craig's wife, two of Craig's separately-owned corporations, and Kassel Enterprises. Count I of the lawsuit sought judicial dissolution of Kassel Enterprises under Iowa Code section 490.1430(1)(b)(2) (2018) (for "illegal, oppressive, or fraudulent" conduct) and section 490.1430(1)(b )(4) (for waste or misapplication of corporate assets). Five additional claims, counts II through VI, sought money damages based on claims for breach of fiduciary duty, fraud, breach of contract, third-party beneficiary rights, and civil conspiracy. The defendants denied the claims and added three counterclaims against Susan and Peggy.

Kassel Enterprises invoked Iowa Code section 490.1434, electing to purchase Susan and Peggy's shares for fair value in lieu of a judicial dissolution of the corporation. Because the parties failed to reach their own agreement on the fair value of the shares within sixty days, the district court set the matter for a hearing to determine the fair value of Susan and Peggy's shares for the buyout. See Iowa Code § 490.1434(4) (requiring the district court, upon application of any party, to determine the fair value of the petitioner's shares if the parties are unable to reach an agreement within sixty days).

In the interim, the parties filed motions for summary judgment on the other claims in the case. Before the summary judgment hearing, Susan and Peggy voluntarily dismissed all of their claims against the defendants in counts II through VI except for part of their breach of fiduciary duty claim in count II against Craig and his wife. Craig and his wife likewise dismissed one of their counterclaims.

The district court used an asset-based method to calculate the fair value of the shares. It started with the parties’ agreed valuation of the corporation's total assets ($5,804,403), then subtracted the corporation's total liabilities ($22,046), to arrive at a total shareholder equity of $5,782,357. Dividing the total shareholder equity amount by the number of outstanding shares (847), the district court determined that the fair value of each share was $6826.87. Susan and Peggy each owned 201.165 shares, so their respective shareholdings totaled $1,373,327. The district court didn't apply any discounts urged by Craig for transaction costs or tax liabilities for built-in gains associated with a hypothetical sale of corporate assets, and it didn't apply any additions as urged by Susan and Peggy based on Craig's alleged waste and misapplication of corporate assets. The district court granted Susan and Peggy's request for an award of reasonable fees and expenses of their attorneys and expert witnesses under Iowa Code section 490.1434(5) of $93,620.74 and $6540, respectively. The district court directed the purchase of Susan and Peggy's stock through an installment plan payable over five years and secured by personal guarantees from Craig and his wife and the shares of stock. See Iowa Code § 490.1434(5) (authorizing the court to order payment in installments and to provide for security to assure payment).

In its ruling on the motions for summary judgment, the district court ruled in Craig's favor on count II, finding that the claims of wrongdoing by Craig and his wife required a finding of injury to Kassel Enterprises as a corporate entity, not injury to Susan and Peggy as individual shareholders, and thus were "derivative" claims. Determining that the substantive and procedural requirements for bringing derivative claims had not been met, the district court dismissed count II. The district court ruled in Susan and Peggy's favor on Craig's counterclaims for equitable setoff and unjust enrichment.

No party appeals any summary judgment ruling, but both sides appeal the district court's determination of fair value. Craig argues the district court erred in determining the fair value of Susan and Peggy's shares without any discount for transaction costs or built-in gain taxes, and in awarding their attorney fees and expert expenses against the corporation. In a cross-appeal, Susan and Peggy argue that the district court erred in failing to increase the fair value of their shares based on Craig's alleged waste and misapplication of Kassel Enterprises’ assets.

II. Standard of Review.

Corporate dissolution actions are equitable in nature, so our review is de novo. See Baur v. Baur Farms, Inc. , 832 N.W.2d 663, 668 (Iowa 2013). In equity cases, we aren't bound by the district court's factual findings, but we generally give them weight, particularly as to witness credibility determinations. Soults Farms, Inc. v. Schafer , 797 N.W.2d 92, 97 (Iowa 2011).

We review a district court's application of a statutory fee-shifting provision for correction of legal error. See Seeberger v. Davenport C.R. Comm'n , 923 N.W.2d 564, 568 (Iowa 2019). We review an attorney fee award for an abuse of the district court's discretion. Smith v. Iowa State Univ. of Sci. & Tech. , 885 N.W.2d 620, 624 (Iowa 2016) (per curiam).

III. Determination of Fair Value.

Iowa Code chapter 490 (the Iowa Business Corporation Act) grants the court authority to dissolve a corporation in shareholder proceedings where "[t]he directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent" or where "corporate assets are being misapplied or wasted." Iowa Code § 490.1430(1)(b )(2), (4) (2018). But the corporation (or, if the corporation fails to exercise the right, other shareholders) may avoid dissolution proceedings with an irrevocable election "to purchase all shares owned by the petitioning shareholder at the fair value of the shares." Id. § 490.1434(1). An order directing the purchase of a petitioning shareholder's shares requires the court to dismiss the dissolution claim and extinguishes all the petitioning shareholder's rights as a shareholder. Id. § 490.1434(6).

Section 490.1434 doesn't define "fair value," but appraisal rights provisions in the same chapter of the Code state that fair value is determined "[u]sing customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal" and "[w]ithout discounting for lack of marketability or minority status." Id. § 490.1301(4)(b )–(c ) ; see also Baur , 832 N.W.2d at 669 n.5 ("Our legislature made a policy decision when it adopted the current definition of ‘fair value.’ By not allowing a discount for lack of marketability or minority status, the legislature implicitly required shares to be valued on a marketable, control interest basis." (quoting Nw. Inv. Corp. v. Wallace , 741 N.W.2d 782, 787–88 (Iowa 2007) )).

Fair value represents a shareholder's pro rata share of the value of the corporation as a going concern. See Nw. Inv. Corp. , 741 N.W.2d at 787 ; Cavalier Oil Corp. v. Harnett , 564 A.2d 1137, 1144 (Del. 1989). We've long discussed the challenges in ascertaining the fair value of stock in a closely-held, operating business. See Sieg Co. v. Kelly , 512 N.W.2d...