Father and Son Breach Fiduciary Duties in Closely Held Farming Corporation but Did Not Commit Fraud

May 12, 2023 | Jennifer Harrington

The Iowa Court of Appeals found that the defendants, a father and son, violated their fiduciary duty to a family farm corporation. Father was president and a board member of the corporation. He by engaged in self-dealing by paying personal expenses using the business’s accounts, and he allowed his son, who was the operational manager, to misappropriate corn. The son, as an agent of the corporation also breached his duty of loyalty by misappropriating corn. The court did not find that the conduct of the defendants rose to the level of fraud.  


The Hora family put their farmland and farming operation into Hora Farms, Inc. (HFI) in 1974. At the time of the litigation, HFI had two classes of stock: Class A voting and Class B non-voting. The Class A stock was held by Keith (the father), his two siblings, and a trust formed at the time Keith’s wife died. The Class B  stock was held Keith, the trust, and Keith’s six children. Keith is the trustee for his wife’s trust.

Keith has been a director of HFI since its incorporation and President since 1995. According to Keith, part of his compensation included football tickets, department-store purchases, groceries, and travel and lodging paid for by the corporation with corporate accounts. The tax forms for the company had expensed these purchases as crop expenses or building-repair costs.

Keith’s son Kurt has been operations manager since 2001. As an employee, Kurt received hourly pay, bonuses based on production, and certain reimbursements. Kurt claims corn from HFI was part of his compensation and that corn was used as feed in his separate swine operation. 

In 2015, Gregg and Brian, shareholder sons of Keith, raised concerns about HFI’s financial situation. They were concerned with the company’s negative cash flow and missing corn.  Although the exact amount of missing corn was unknown, they estimated that up to one third of the corn produced each year went missing.

Kurt did not have a clear answer for what happened to the corn and often changed his reason for why so much corn went missing. Kurt admitted to taking at least 85,000 bushels of corn, but claimed it was compensation for his job at HFI.  This compensation was not reported on Kurt’s tax return. Keith estimated that over 200,000 bushels of corn had gone missing.

District Court

In August 2017, plaintiffs Gregg and Brian filed a derivative action against Keith, Kurt, Kurt’s wife, and Kurt’s swine operation. By the time of the trial in 2020, there were four counts: (1) Keith and Kurt breached their fiduciary duties to HFI, (2) Keith and Kurt committed fraud, (3) a custodian should be appointed for HFI, and (4) Keith breached his duties as trustee of his deceased wife’s trust. The defendants pleaded the affirmative defenses of estoppel, laches, and unclean hands. They also claimed the plaintiffs lacked standing and that the statute of limitations had passed.

After the eleven-day trial, the district court rejected and dismissed all four of the plaintiffs’ counts. On the issue of fiduciary duties, it found that the plaintiffs did not prove Keith’s actions were unfair to the corporation. It also found that Kurt did not owe fiduciary duties to the company since he was neither a director nor an officer. Further, the court found there was no fraud, no need for a custodian of the corporation, and that Keith could remain the trustee of his deceased wife’s trust.

The court found that the statute of limitations allowed for a review of Keith and Kurt’s actions from August 18, 2012, based on a 5-year statute of limitations. All affirmative defenses raised by the defendants were rejected by the court. The court did not award attorney fees to either party and did not rule on whether Keith’s attorney fees could be paid for by the corporation under an indemnification clause found in the corporation’s bylaws.

Both parties appealed the district court’s decisions. The defendants believed their affirmative defenses should have defeated the lawsuit. The plaintiffs believed their counts were wrongly dismissed, that they should be awarded attorney fees, and that Keith’s attorney fees should not have been paid for by the corporation.

Court of Appeals Analysis

Affirmative Defenses

The Court of Appeals first determined that the plaintiffs, as shareholders, had standing to bring the derivative action and that  the five-year statute of limitations was correctly applied. The court rejected the defendants’ affirmative defenses of laches, estoppel by acquiescence, and unclean hands.

Fiduciary Duties

The court then reviewed the breach of fiduciary duty claims. Iowa Code §§ 490.830 and 490.842 establish duties of care and loyalty on officers and directors. While the business judgment rule allows for “judicial deference to business decisions[,]” this rule does not apply where the conduct advances the director’s or officer’s own self-interest or the interests of any party other than the corporation.. When there has been self-dealing or a conflict of interest, Iowa law requires the director or officer to prove that the transaction was “fair to the corporation.” Iowa Code § 490.860(3) requires that the transaction was comparable to an arm’s length transaction.

The court found that Keith violated his fiduciary duties by engaging in self-dealing. Specifically, Keith used the corporate checking account to pay for $200,000 in personal expenses. The court found that these expenses, including football tickets and personal shopping, were not arm’s length transactions that were fair to the corporation. Further, these expenses resulted in “false or incomplete business tax returns,” which was detrimental to the legal and tax position of the corporation. Second, Keith allowed his son Kurt to take HFI corn to feed Kurt’s swine. Not only did this lead to monetary loss, but  also created missed tax deductions, tax issues, possible criminal liability, and it likely impacted the corporation’s credit availability.

The plaintiffs had also claimed that Keith violated his fiduciary duties with poor record-keeping and bad management. The court found that these allegations did not involve self-dealing or lack of objectivity. The business judgment rule applied for these suggested infractions, and they did not rise to a breach of fiduciary duty.

Next, the court found that Kurt, as an agent of the corporation, breached his common law duty of loyalty to the company. Misappropriation of the corporation’s property was a breach of this duty.  The court found that the plaintiffs had successfully shown that the missing corn was the result of a “deliberate and repeat series of choices” by Kurt. The corn was not compensation because it was not reported on Kurt’s tax filings.

Finally, the court found that Kurt’s wife and Kurt’s company did not owe fiduciary duties to the corporation.


Despite the breaches of fiduciary duty, the court found that the defendants’ actions did not rise to the level of fraud. Plaintiffs were required to prove fraud and they did not meet their burden. Keith and Kurt’s conduct was “dishonest and contrary to HFI’s interests,” but it did not meet the high burden of fraud.  

Custodian of Corporation and Removal of Trustee

The court decided to remand the questions of whether to implement a custodian for the company or remove Keith as trustee back to the district court. The court reasoned that the district court’s decision to not appoint a custodian or remove Keith as trustee was based on its finding that there was no breach of fiduciary duties. The court noted that the district court has “considerable flexibility” to craft a remedy on these issues.

Attorney Fee and Court Costs

The court ruled that each side was to pay their own court and attorney fees for the appeal.

The corporation paid Keith’s attorney fees under the indemnification clause in the corporation’s bylaws. The court remanded this issue back to the district court. Since the court found that there was a breach of fiduciary duties, the district court must determine if indemnification is still allowed under the bylaws. If not, the court explained that Keith must reimburse HFI.