No Malpractice in Representation of Family Farm Corporation Shareholder

June 20, 2024 | Jennifer Harrington

On May 22, 2024, the Iowa Court of Appeals affirmed post-trial rulings from the district court in a shareholder’s unsuccessful legal malpractice action. The shareholder brought the action against the law firm representing him during mediation and a trial relating to a requested dissolution and buy out of his siblings’ shares in a family-farm corporation.

Facts

Circle G Farms, Inc. was an S corporation that held 798 acres of mortgage-free farmland. There were 7,000 shares split among seven siblings. Thomas Goettsch, the plaintiff, and his brother Brian farmed the corporate land in the name of their separate partnership. In 2005, the seven shareholders entered into a Buy-Sell Agreement, restricting the transfer of corporate shares outside the family.

Thomas purchased one sibling’s shares shortly after they executed the buy-sell agreement. In 2012, Thomas proposed purchasing the shares of the remaining four non-farming siblings at a shareholder meeting. The siblings voted in favor of the transaction, and a few days later one sibling surrendered his shares in exchange for 80 acres of corporate land and $50,000 in cash. He also agreed to lease his property to the brothers’ partnership for $40,000 per year over five years. The remaining three siblings initially voted in favor of the offer, but they did not execute a contract. Instead, realizing the significant tax consequences of the proposal, they asked to be bought out over time. Thomas rejected the extended buy out. The three siblings then sued Thomas, Circle G Farms, Brian, and the partnership in federal court, asking the court to dissolve the corporation and alleging oppressive conduct and breach of fiduciary duty by Thomas.

Heidman’s Representation of Thomas

At this point, Heidman Law firm began to represent Thomas, Circle G, the partnership, and Brian. In 2014, all parties entered into a stipulation as a result of mediation. In the stipulation, Thomas, the partnership, or Circle G Farms would purchase the three siblings’ shares at “fair value” as determined by the Iowa business court in a buyout trial. The buyout trial would also determine whether Thomas, individually, or Circle G Farms had purchased the one sibling’s shares in 2012.

The buyout trial was held in November 2014. The court found that the 2012 shareholder meeting did not create an enforceable sales contract, that Circle G Farms had redeemed the selling sibling’s shares, that the buy-sell agreement executed in 2005 did not apply to the stipulated buyout, and that 1,000 shares were valued at $1.4 million. Thomas did not appeal this ruling, and Circle G and Thomas bought the three siblings’ shares for $4 million dollars.

Malpractice Suit

In 2019, more than four years after the ruling, Thomas sued Heidman and the attorneys that worked on the buyout matter. Thomas alleged that the attorneys were negligent, resulting in an excess award to the siblings. Specifically, he alleged that the attorneys failed to meet their standard of care by not advising him during the mediated stipulation that: (1) the valuation under the proposal would be highly favorable to the three siblings and (2) he could not insist on valuation terms found in the 2005 buy-sell agreement. Thomas sought damages for overpayment of shares in an amount of $3,562,000, interest related to the loan he incurred to complete the buyout, lost income from the land he sold to pay off the loan, and “lost gain” from taxes not attributable to his siblings due to the delayed sale of farmland.  The suit was transferred to business court for trial.

Prior to the trial, Thomas filed a motion in limine to prevent findings from the business court in the buyout trial from being presented in the malpractice trial. The court denied the motion and ruled that it would make “judgment calls during the trial” as evidence was presented. The law firm filed its own motion in limine, asking the court give preclusive effect to the buyout court’s judgment that the 2012 shareholder meeting did not create an enforceable contract. The court granted this motion.

After trial, the jury returned a unanimous verdict finding that Heidman and its attorneys were not negligent. Thomas filed a post-trial motion requesting a new trial, objecting to the court’s rulings on the motions in limine, and asserting that the court should have included certain requested jury instructions. The court dismissed these and other claims and denied Thomas’ motion for a new trial.

On appeal, Thomas challenged the court’s denial of the requested jury instructions and the rulings on the motions in limine.

Opinion

The Court of Appeals began by addressing Thomas’s jury instruction appeal. Thomas had requested that the jury instruction on the breach of duty claim include three acts or omissions. The court allowed the instruction to list two acts, but it denied his request to include an instruction that the law firm breached its duty by “failing to advise Thomas Goettsch that an alternative claim be made to set aside the [effectuated 2012 sibling buyout] transaction.” In a negligence action, the damages sought must relate to the alleged act or omission that constitutes a breach. The court found that Thomas never offered any argument or evidence that the law firm’s failure to advise him to bring an alternative claim in federal court led to the damages he sought. The court went further and stated that even if some evidence was presented tying together the damages and the failure to bring an alternative claim, it relied on a series of “condition-precedent hypotheticals” that would still not have been the actual and legal cause of the specific damages claimed.

The court then addressed whether the trial court erred when it gave preclusive effect to the buyout trial’s determination that the 2012 shareholder meeting did not create an enforceable sales contract. The court found that whether the agreement was enforceable was an essential and necessary finding in the business court’s ruling determining the value of the shares and the tax consequences of a sale.

The court then addressed Thomas’s motion in limine seeking to exclude the non-preclusive findings of the business court. The court found that Thomas had not properly preserved this alleged error. First, the district court initially reserved ruling on the motion until trial and Thomas did not object when the buyout trial’s entire ruling was entered into evidence at trial. Second, and most importantly, Thomas’s malpractice attorney was the one who offered the unredacted ruling into evidence. An attorney “cannot…challenge the admission of his own evidence as error.”