Walker v. Daniels

1

JANET WALKER and LINDA MARTENS, Plaintiffs-Appellees, v. MARLIN DANIELS, GLENN DANIELS, and DAVID DANIELS, each in their capacity as Co-Executors of the Estate of Lucille Daniels, Deceased, and individually, ESTATE OF LUCILLE DANIELS, and DANIELS, INC. Defendants-Appellants.

No. 23-0711

Court of Appeals of Iowa

May 22, 2024

Appeal from the Iowa District Court for Lyon County, Charles Borth Judge.

A family farm corporation and its majority shareholders appeal the district court's determination of the fair value of petitioning shareholders' shares after the corporation elected to buy the shares in lieu of corporate dissolution under Iowa Code section 490.1434 (2021). AFFIRMED.

Zachary P. Armstrong (pro hac vice) of DeWitt LLP Minneapolis, Minnesota, and Julie L. Vyskocil of Brick Gentry, P.C., West Des Moines, for all appellants.

Mike Austin (until withdrawal) and Paul Kippley of Austin Haberkorn, Kippley & Wippert, PLC, Rock Rapids, for appellants Marlin Daniels, Glenn Daniels, and David Daniels, in their capacity as co-executors of the Estate of Lucille Daniels.

Jeff W. Wright, Allyson C. Dirksen, and Zack A. Martin of Heidman Law Firm, P.L.L.C., Sioux City, for appellees.

Heard by Tabor, P.J., and Buller and Langholz, JJ.

LANGHOLZ, Judge.

This is a dispute between two groups of siblings-three brothers and two sisters-over their family farming operation. While their conflict has spawned much litigation, only a narrow question is before us: did the district court properly value the sisters' shares of the family farm corporation that runs their farming operation and owns about 1100 acres of northwest Iowa farmland? This valuation determines how much the corporation (and thus, practically, the brothers) must pay to buy out their sisters' shares in the corporation after it (again, really the brothers) elected to do so in the face of court-ordered dissolution under Iowa Code section 490.1434 (2021).

The siblings dispute the correct date of valuation and whether the valuation should include discounts for taxes or transaction costs that would be incurred in a hypothetical liquidation. Because of increasing land values, using the brothers' proposed earlier date and applying the discounts would have valued each sister's shares at a total of $1.5 million. But the court agreed with the sisters and ordered the corporation to pay them each nearly $2.9 million for their shares.

We likewise agree that the sisters have the better argument on each point of dispute. The plain text of section 490.1434(4) presumptively sets the valuation date as the day before the sisters filed their amended petition first asserting a dissolution claim-not the day before their original petition seeking damages for common law minority-shareholder oppression. And since a sale of the farming corporation's assets was not imminent-or expected ever-it is proper not to discount the fair value for hypothetical tax consequences or transaction costs. We thus affirm the district court's fair-value determination of the sisters' shares.

I. Factual Background and Proceedings

Daniels, Inc. is a family farm corporation that runs a farming operation in northwest Iowa. It owns about 1100 acres of farmland around George, Iowa. And it farms additional rented land, sells seed, transports harvested crops, and installs drainage tile. Five siblings and the estate of their mother, Lucille Daniels, own all the corporation's shares. The three brothers-David, Glenn, and Marlin Daniels- and the estate own a majority (70.4%) of the shares. The brothers are also actively engaged in the corporation's operations. The remaining shares are owned by the two sisters-Janet Walker and Linda Martens-who each own 14.8% of the corporation's shares. The sisters are not involved in the farming operations.

In 2019, the relationship between the brothers and the sisters soured. Because it is not relevant to any issue on appeal, we do not dwell on the specifics. But the conflict over Daniels, Inc. escalated. And finally, the sisters went to court.

On December 16, 2020, the sisters sued Daniels, Inc. and its majority shareholders-all three brothers and their mother's estate.^[1] They brought a single claim: minority-shareholder oppression under the common law.^[2] They alleged that the brothers engaged in oppressive conduct-including keeping corporate records from them, self-dealing, taking corporate money, and failing to make any distributions-to prevent them from participating in the corporation or getting any meaningful return from their shares. And they sought compensatory and punitive damages, attorney fees, and the standard catchall-"such other and further relief that the Court may deem just and equitable." The litigation went on.

Then, the sisters filed an amended petition on August 24, 2021. In it, they added a claim for dissolution of Daniels, Inc. under Iowa Code section 490.1430 for the first time. They alleged that dissolution was warranted under that statute because the brothers "as directors and officers in control of the Company, have acted and continue to act in a manner that is illegal, oppressive and/or fraudulent in connection with the Company and/or the corporate assets are being misapplied or wasted." The corporation did not elect to buy the sisters' shares within ninety days, as it was entitled to do under section 490.1434. So the back and forth in court-with more claims and counterclaims not relevant here-again continued on.

Eventually, the sisters' oppression and dissolution claims were both tried to the court in January 2023. On the third and final day of trial, the brothers decided they wanted the corporation to exercise its right to buy out the sisters' shares for fair value under section 490.1434 in lieu of dissolution. The sisters agreed that the court could permit the late election, and the court did so. See Iowa Code § 490.1434(2) (authorizing election "at such later time as the court in its discretion may allow"). Because the siblings did not reach agreement on the fair value of the shares, this issue remained for the court to decide.

In reaching its valuation decision, the district court first agreed with the sisters that the presumptive valuation date under Iowa Code section 490.1434(4) is August 23, 2021-the day before they filed their amended petition first asserting a dissolution claim. And it rejected both the brothers' and the sisters' arguments for exercising its discretion to select an earlier or later date, reasoning "that equity does not call for the court to depart from the statutory presumptive date."

The court then found that the sisters' expert witness "provided the only credible evidence as to the value of Daniels, Inc., as of August 23, 2021." The court noted that both the sisters' and brothers' experts agreed that the net-asset method of valuation was appropriate. And the court recognized that the experts disagreed about whether to discount the value of the corporate assets for tax consequences or transaction costs from a hypothetical liquidation. But the court found the opinion of the sisters' expert that the discounts should not be included "more credible" than that of the brothers' expert, particularly because the brothers presented no evidence of any contemplated sale of assets and one brother testified they intended to keep farming all their land for "generations to come."

Like the sisters' expert, the court acknowledged that Daniels, Inc. is a C corporation rather than an S corporation and thus could have to pay corporate taxes if its assets are ever sold. But the court reasoned this is "not the determining factor." It pointed to the expert's opinion that "with operations continuing into the foreseeable future and no liquidation events imminent, management has ample time to take strategic action to minimize or evade altogether any hypothetical tax consequences," including "conversion to an S-Corporation five years prior to a sale or a 1031 Election to defer taxes."

Consistent with the sisters' expert's opinion, the district court found the fair value of each sister's shares to be $2,860,128.90. So the court ordered Daniels, Inc. to buy each sister's shares for that amount. And as required by the election-in-lieu-of-dissolution statute, it dismissed the sisters' dissolution claims. See Iowa Code § 490.1434(6). The brothers now appeal the district court's fair-value determination.

II. Date of Valuation

When a corporation decides to avoid its dissolution by buying the shares of shareholders petitioning for dissolution under Iowa Code section 490.1430(1)(b), the corporation must do so "at the fair value of the shares." Id. § 490.1434(1). And "[i]f the parties are unable to reach an agreement" on the fair value, a party may ask the court to "determine the fair value of the petitioner's shares as of the day before the date on which the petition under section 490.1430, subsection 1, paragraph 'b', was filed or as of such other date as the court deems appropriate under the circumstances." Id. § 490.1431(4). Because this is an equitable proceeding, we review the district court's fair-value determination de novo. Guge v. Kassel Enters., Inc., 962 N.W.2d 764, 770 (Iowa 2021).^[3]

The brothers argue that the district court erred in holding that August 23, 2021-the day before the sisters filed their amended petition first asserting a dissolution claim-is "the day before the date on which the petition under section 490.1430, subsection 1, paragraph 'b', was filed." Iowa Code § 490.1434(4). According to the brothers, the proper date is December 15, 2020 the day before the sisters filed their original petition asserting a common law minority-shareholder oppression claim. They reason mainly that because the original...