Iowa Court Resolves Family Farm LLC Dispute Following Death of Member

On April 28, 2021, the Iowa Court of Appeals affirmed, as modified, the district court’s remedy in a lawsuit seeking an accounting and a determination of the proper ownership interest of a deceased member of a family farm LLC.   

Background

Two brothers, Greg and Dennis Somers, along with Dennis’s wife, owned an Iowa farm LLC together. The LLC’s operating agreement defined “Capital Interest” as the proceeds a member would receive if the LLC’s assets were sold at fair market value in a complete liquidation. It stated that if the manager chose to make a cash distribution, it must be in proportion to each member’s interest.

After Greg passed away in 2011, Dennis wrote to Greg’s attorney, claiming that Greg owned 10 percent of the LLC. He attempted to enforce the LLC buy-sell agreement to purchase his brother’s interest. The attorney advised Dennis that he was not the estate attorney and nothing could be done until probate was filed.

Greg’s life partner was appointed as the executor of the estate soon after. In 2015, believing that Greg actually owned a 50 percent interest in the LLC, the executor initiated this lawsuit requesting an accounting of the LLC and a declaration that Greg’s estate now owned the 50 percent interest. Dennis resisted, maintaining the position that Greg had a 10 percent share and seeking a declaration that Dennis was the sole remaining member of the LLC.

At trial, the executor, able to piece together the information removed from Greg’s office, presented evidence such as tax documents and USDA farm operating plans, filed by Dennis, showing that Greg owned 50 percent of the LLC from 2005 to 2012, while Dennis and his wife each owned 25 percent.

In response to the request for an accounting, Dennis provided a one-page document listing the LLC assets and liabilities, which included property values he “felt” was fair.

Dennis also claimed that the brothers had personally co-signed a loan for a $150,000 line of credit for the brothers’ tech company, which used 150 acres of hunting land owned by the LLC as collateral. Unable to make payments, the loan amount was approximately $148,000 at Greg’s death. After adding in the $57,577 alleged value of Greg’s interest, Dennis claimed he was owed $16,439.

However, the executor testified of a second loan Dennis obtained after Greg’s death. The day after receiving the $225,000, Dennis paid off the remaining line of credit balance. Four months later, the lender recorded a mortgage listing the LLC’s hunting property as collateral. Within three years, the lender foreclosed on the property.

Dennis testified that the second loan was made out to the LLC and admitted that $148,238 payment should be considered a loan to the tech company and an asset of the LLC. When questioned about the additional unused $75,000, he stated that he placed the money into an account in his name.

District Court Findings

In its ruling, the district court found that that Greg had a 50 percent interest in the LLC at the time of death and that Greg’s estate, as a transferee member, was entitled to an accounting of the LLC’s financial condition since September 2011. It also found that while Greg may have consented to Dennis’s actions, Dennis engaged in oppressive conduct towards the estate.

The court ordered Dennis, under the terms of the LLC’s operating agreement, to pay at least $75,000 for any distribution received by Dennis, but not the estate. Additionally, Dennis was to determine and pay Greg’s Capital Interest to the estate as of September 2011, using the true value, not estimates and excluding the debt owed to the tech company. While rejecting the estate’s request for a dissolution, the district court ordered Dennis to pay the Capital Interest within 120 days. If not, Dennis was directed to liquidate as many of the LLC assets as necessary to meet this obligation. Dennis appealed

Partial Liquidation of the LLC

On appeal, Dennis claimed that the estate, as a judgment creditor, was entitled to a charging order; therefore, partial liquidation was inequitable. While Dennis failed to raise this argument in the district court, the Court of Appeals nevertheless found that the court “has considerable flexibility in resolving the dispute.” Baur v. Baur Farms, Inc., 832 N.W.2d 663, 677–78 (Iowa 2013). When a dissolution of an LLC is requested by a member or transferee, the court may “order a remedy other than dissolution.” Iowa Code § 489.701(2). The court affirmed the remedy.

Double Recovery of Assets

The court next considered whether the district court’s order allowed the estate a double recovery by including the value of the hunting land in the minimum capital interest calculation as well as ordering a $75,000 distribution. The Court of Appeals affirmed the district court finding that these calculations were separate and distinct.

Start of Interest Accrual

Lastly, the court addressed the interest calculations. The district court allowed prejudgment interest to accrue on the Capital Interest starting after the date Dennis received the use of the asset and retained it after knowing the estate did not consent to the use. See Iowa Code § 535.2(1)(d). In this case, there was a genuine issue of material fact that Greg had a 10 percent interest. It wasn’t until judgment was rendered that these disputes were resolved and the court set a minimum capital interest. Therefore, the court found that under Iowa Code § 668.13, interest should accrue beginning on the date of judgment.