Iowa Court Affirms District Court’s Discount of Farm Corporation Shares During Buyout

On October 19, 2022, the Iowa Court of Appeals affirmed the discount rate for transactional costs in a farm corporation buyout. After the Iowa Supreme Court held that transaction costs for asset liquidation should be included in the valuation, it remanded the case to the district court to determine and apply the appropriate discount rate. Guge v. Kassel Enterprises, Inc., 962 N.W.2d 764 (Iowa Sup. Ct. 2021). Here, the district court followed the Supreme Court’s remand order and conducted a credibility assessment of the parties’ expert witnesses to find the appropriate discount. The court also affirmed the award of attorney fees in favor of the plaintiffs.

Background

Three siblings jointly owned their family farm corporation. The brother (the defendant) owned 52.5 percent of the corporate shares while his two sisters (the plaintiffs) each owned 23.75 percent. In 2017, the plaintiffs sought judicial dissolution of the corporation and alleged that the defendant engaged in oppressive conduct. The corporation, under Iowa Code § 490.1434, elected to buy the plaintiffs’ shares at fair market value. 

Unable to agree on the fair market value of the shares, the district court held a hearing to decide the matter. See Iowa Code § 490.1434(4). Because the corporation’s main value came from its farmland holdings, the district court used an asset-based method to determine the value of the corporation in which it subtracted the corporation’s liabilities ($22,046) from its assets ($5,804,403) to reach a fair market value of $5,782,357.

Iowa Supreme Court Finds Transaction Costs Must be Deducted from Fair Market Value

The defendant appealed the valuation claiming that the district court erred by failing to take into account a discount for transaction costs. Persuaded by both expert witnesses’ opinion, the Iowa Supreme Court held that a deduction for transaction costs should have been included. However, because the record lacked “sufficient detail . . . to make this important determination,” the Court remanded the case for the district court to “determine and apply the appropriate deduction of transaction costs.”

Remand Ruling

On remand, the district court found the plaintiffs’ expert more credible and applied a 3 percent discount to the value of their shares. In reaching its conclusion, the district court relied on the previously presented evidence and rejected the brother’s argument that he was “entitled to the opportunity to be heard and present evidence and argument on remand.”

Shortly after the district court’s decision, the plaintiffs requested $57,161 in appellate attorney fees for the cost incurred during the appeal to the Supreme Court. The district court awarded $14,290.25. The brother appealed both the 3 percent discount valuation and the award of attorney fees.

Fair-Value Determination

In the current case, the Court of Appeals first considered whether the district court erred in its remand ruling. After finding the “the record lacking in sufficient detail,” the Supreme Court ordered the district court to “determine and apply the appropriate deduction of transaction costs.” The defendant argued that the district court, with the same record the Supreme Court found insufficient, could not have made the determination without additional evidence.

The district court cannot contradict or go beyond the scope of the remand order. The Supreme Court found this was an equity case that “may be remanded for such further proceedings as the circumstances may require.” Dee v. Collins, 15 N.W.2d 883, 887 (1944). Here, that required “receipt of evidence that was not before the supreme court due to the trial court’s refusal to receive such evidence.” As a result, the Court of Appeals concluded that “the insufficiency of the record cited by the supreme court was a lack of a determination on this issue by the district court.” Therefore, the remand order did not mandate an opportunity to appear, present evidence, and be heard.

Additionally, the record supported the district court’s ruling. On remand, the district court found the plaintiffs’ expert more credible. The plaintiffs’ expert based his 3 percent discount on nearby auctions of other parcels of a lower value and recent sales which included the auctioneer’s price was 2% “plus some additional fees.” Conversely, the defendant’s expert opinion had a significant amount of variability. Because the district court conducted a credibility determination and applied the appropriate deduction, the district court did not err.

Appellate Attorney Fees

The defendant also appealed the district court’s award of appellate attorney fees. The defendant argued that the district court did not have the authority to award attorney fees because the remand order did not direct the district court to consider appellate attorney fees.

The district court may consider collateral issues on remand. In Schaffer v. Frank Moyer Construction, Inc., the Supreme Court found the district court had the authority to award appellate attorney fees even though the remand order did not direct them to do so. 628 N.W.2d 11 (Iowa 2001).

The defendant also argued that award was unreasonable because the fee affidavit submitted by the plaintiffs’ counsel was not itemized. However, the district court considered many factors in reaching its decision including the facts that the plaintiffs were already awarded trial attorney fees, the appeal involved an issue of first impression; and the fee affidavit lacks detail, “which can commonly be expected considering the nature of appellate litigation.” Because the district court had the authority to consider the plaintiffs’ request and the award was not unreasonable, the Court of Appeals affirmed the award.