LLC Manager Not Entitled to Attorney Fees Incurred Litigating Against LLC

On March 4, 2022, the Iowa Supreme Court held that a manager of an LLC was not entitled to attorney fees incurred defending himself against claims brought by the LLC or prosecuting claims against the LLC. A manager of an LLC may recover costs incurred “in the course of the member’s or manager’s activities on behalf of the company.” Iowa Code § 489.408(1). Because the manager incurred costs litigating against the LLC, the Supreme Court reversed the district court and Court of Appeals rulings and held that the statute did not require the company to indemnify the manager.

Background

Four siblings were members of an LLC. One brother, Joseph served as a manager. Relationships soured and two of the siblings brought multiple claims in both state and federal court against Joseph for breach of fiduciary duty. In early 2017, Joseph was removed as a manager.

Soon after, Joseph petitioned for indemnification for the costs incurred as a manager defending himself against the breach of duty claims. He requested a total of $141,451. This included $95,231 for the costs incurred in defending himself against the LLC’s breach of duty claim, and an additional $46,238 for the “fees-on-fees” incurred bringing his indemnification claim against the LLC.

The district court dismissed the breach of duty claims against him and granted Joseph’s petition for indemnification for the costs incurred defending himself in the lawsuits. However, it declined to award “fees-on-fees” for the cost sustained bringing the indemnification claim. In a split decision, the Court of Appeals held that because Joseph’s costs resulted from his service as manager, Joseph was entitled to both the original award and the “fees-on-fees.” One justice dissented. The LLC applied for further review, and the Iowa Supreme Court agreed to hear the case.  

Indemnification of LLC Manager

On review, the Iowa Supreme Court considered whether a manager must receive reimbursement for costs incurred litigating against the LLC. An LLC must reimburse a manager for any “debt, obligation, or other liability incurred” on behalf of the LLC. Iowa Code § 489.408(1). The Supreme Court held that under the plain language of the statute, an LLC must only reimburse a manager for costs incurred on behalf of the company. The Court noted that this would include actions such as defending the company in a lawsuit or bringing a claim for the company.

While the litigation arose from his actions as a manager, Joseph incurred the attorney fees defending himself against the LLC and seeking to recover indemnification from the LLC. Additionally, unlike other sections of Iowa’s Uniform Limited Liability Company Act, the statute in question here did not require the LLC to pay attorney fees to the prevailing party. See Iowa Code § 489.906(2).

The Court distinguished the case at hand from a derivative claim against an LLC. Here, Joseph brought his lawsuit against the company itself. The Court also pointed out that even though the Uniform Limited Liability Company Act does not require the cost to be incurred on behalf of the company to receive reimbursement, Iowa has not enacted that provision. Accordingly, the Court held that section 489.408(1) did not compel the LLC to pay Joseph’s attorney fees.