In Another Attorney Fee Dispute, Iowa Court of Appeals Awards Costs for “Fees-on-Fees”

On June 16, 2021, the Iowa Court of Appeals issued another opinion in a family dispute involving several litigious siblings. This time, the court considered whether Iowa Code § 489.408(1) allows attorney “fees-on-fees” to be awarded. Because the costs arose from the plaintiff seeking indemnification as the LLC manager, the court determined that the additional fees constituted a debt under the statute and should be included in the award.

Background

This case involves an LLC whose members are four siblings, Joseph, Jeanne, Renee, and Michael. Beginning in 2010, Joseph served as a manager. His actions during his tenure as manager gave rise to the multiple claims against him in both federal and state court. In April 2017, Joseph, in a four-count petition, requested indemnification for costs incurred as manager in a series of lawsuits.

In the petition, Joseph requested a total of $141,451. This included $95,231 for the costs incurred in defending the LLC’s breach of duty claim against him, and an additional $46,238 for the “fees-on-fees” incurred “in the present action prosecuting [Joseph’s] indemnification claim from the prior action.” The court awarded indemnification in the amount of $68,831, but declined to award “fees-on-fees.” Joseph appealed, and the LLC cross-appealed.

Fees-on-Fees

On appeal, Joseph claimed that under Iowa Code § 489.408(1), he was entitled to “fees-on-fees,” or the attorney fees incurred seeking indemnification for prior actions. In general, attorney fees cannot be recovered unless a statute or contractual provision explicitly allow it. Van Sloun v. Agans Bros., 778 N.W.2d 174, 182 (Iowa 2010). Without guidance from the LLC’s organizational document, the Court of Appeals turned to § 489.408(1) which states that generally, an LLC must reimburse and indemnify any “debt, obligation, or other liability incurred by . . . the manager . . . in the course of the . . . manager’s activities on behalf of” the LLC.  The court noted that the purpose of § 489.408(1) is to compensate an agent on behalf of an entity. See In re Estate of Bockwoldt, 814 N.W.2d 215 (Iowa 2012). Other Iowa cases, while addressing fee-shifting statutes for cases involving public entities or public interest, demonstrate a rationale to make a claimant whole. Lynch v. City of Des Moines, 464 N.W.2d 236 (Iowa 1990); D.D. v. Davenport Community School District, No. 11-2094 (Iowa Ct. App. Sept. 18, 2013).

While not explicitly listed, the Court of Appeals found that attorney fees are included in the definition of “debt” under Iowa Code 489.408(1). Debt is defined as “a specific sum of money due by an agreement or otherwise.” Debt, Black’s Law Dictionary (11th ed. 2019). Because an attorney fee is a debt held by a client, the court ruled that it therefore qualified for reimbursement. Additionally, the court determined that Joseph incurred the fees-on-fees “on behalf of the LLC” when filing suit seeking indemnification. Because Joseph’s costs resulted from his service as manager, they fell within the purpose of the statute to make a claimant whole. Concluding that the “fees-on-fees” qualified for indemnification, the Court of Appeals reversed the district court’s denial.

Claim Splitting

The court next considered whether Joseph’s indemnification lawsuit resulted from improper claim splitting of Counts I and III. Under the doctrines of claim preclusion and issue preclusion, a party must litigate all claims arising out of an event at one time and cannot re-litigate claims resolved in a previous action. Lemartec Eng’g & Constr. v. Advance Conveying Techs., L.L.C., 940 N.W.2d 775, 779 (Iowa 2020).

A court must consider if a claim is precluded by examining whether both claims can be sustained by the same relevant evidence. Here, the court found that Joseph’s request for fees was based on four independent actions. Although the claims against Joseph were based on the same actions, each of Joseph’s indemnity claims came from a distinct set of facts. Therefore, none of the claims were precluded.  

Dissent

Judge May wrote a dissenting opinion. Judge May argued that § 489.408(1) did not require a LLC to pay for attorney fees incurred litigating against the LLC and that a manager would not be entitled to “fees-on-fees” when suing for prior litigation costs. The statute states that a manager may recover debts incurred on behalf of the company. Therefore, he concluded that § 489.408(1) did not require the LLC to pay Joseph for attorney fees incurred.