Barkalow v. Clark
| Decision Date | 14 May 2021 |
| Docket Number | No. 19-1790,19-1790 |
| Citation | 959 N.W.2d 410 |
| Parties | Tracy BARKALOW, TSB Holdings, LLC, and Big Ten Property Management, LLC, Appellees/Cross-Appellants, v. Bryan CLARK and Jeffrey Clark, Appellants/Cross-Appellees, and Joseph Clark, Appellee/Cross-Appellee. |
| Court | Iowa Supreme Court |
Kevin J. Caster (argued) and Laurie L. Dawley of Shuttleworth & Ingersoll, P.L.C., Coralville, for appellants/cross-appellees.
William W. Graham and Wesley T. Graham (argued) of Duncan Green, P.C., Des Moines, for appellees/cross-appellants.
John E. Beasley (argued) and William N. Toomey of Phelan Tucker Law LLP, Iowa City, for appellee/cross-appellee.
Mansfield, J., delivered the opinion of the court, in which all participating justices joined. Oxley, J., took no part in the consideration or decision of the case.
Hawkeye fans attending football games at Kinnick Stadium may sometimes wonder, Some of them, it turns out, belong to the limited liability company involved in this case. Unfortunately, the members in this LLC seem to have spent more time squabbling than enjoying the fruits of their wise investment. Claims and counterclaims led to a trial in the Johnson County District Court. After the trial, the district court entered an order resolving all claims and decreeing dissolution of the LLC.
The case now comes to us on appeal. For the most part, we conclude that the district court properly adjudicated the parties’ rights. However, we determine that the court erred in ordering dissolution of the LLC. The court failed to give itself credit for having resolved the major controversies in the LLC. The LLC can continue to operate profitably, without deadlock, and in accordance with its certificate of organization and its operating agreement. Dissolution is not needed because it is "reasonably practicable to carry on the company's activities in conformity with the certificate of organization and the operating agreement." Iowa Code § 489.701(d )(2) (2017). For these reasons, we affirm the judgment of the district court, except to the extent it ordered judicial dissolution and, as part of dissolution, reclassification of member capital contributions as debt. On this point, we reverse the district court.
This case concerns an LLC named Outside Properties. Founded in 2009 by three brothers and a brother-in-law, the LLC came to own seven rental properties, several of them quite near to the University of Iowa football stadium.
A. Formation of the LLC (2009). Tracy Barkalow has been involved in real estate since leaving school. He is the sole owner of two companies: Big Ten Property Management, a property management company, and TSB Holdings, which owns apartment buildings.
In August 2009, Barkalow had the opportunity to purchase a rental property on Melrose Avenue in Iowa City, but he lacked the required cash. He asked Bryan Clark to lend it to him. Bryan was married to the sister of Barkalow's wife, so Barkalow knew him socially and they had a good relationship. Barkalow also knew Bryan's brother Jeff, who was married to another sister of Barkalow's and Bryan's spouses. Bryan and Jeff had supported Barkalow's borrowing in the past by cosigning loans for him.1
After holding discussions, Barkalow, Bryan, Jeff, and a third Clark brother (Joe) decided to form an LLC to acquire the Melrose Avenue property. The LLC became known as Outside Properties. The plan was for each of the four to put in $37,500 to cover the $150,000 down payment on the property. Because an initial $14,000 installment payment was also required, the total capital contribution from each member came to $41,000. Barkalow didn't have the funds for his share, so the Clarks loaned it to him on a verbal agreement.
According to the certificate of organization, the purpose of Outside Properties was primarily "to invest in real estate holdings." Under the heading "Additional Liability of Members," the certificate of organization stated, "[N]o additional capital contributions will be required." The certificate also stated that the members (or managers elected by them) would conduct the business of the company and that "[t]he return of capital and the distribution of profits shall be determined from the company's books."
The operating agreement generally provided for each member to have a single vote on management issues. However, it contained a "demand" rule, under which any member could demand that "voting on a particular issue shall be in proportion to the capital contributions of each member to the company, as adjusted from time to time to reflect any additional contributions or withdraw[al]s." The quorum was also based on "a majority of the equity interests, as determined by the capital contribution of each member as reflected on the books of the company." The operating agreement required unanimous agreement for the distribution of profits.
B. Expansion of the LLC (2010–11). Over time, Outside Properties acquired six other rental properties in Iowa City. Most of the properties were located near Kinnick Stadium. To cover the down payments, the Clarks loaned money to Outside Properties. Either the seller, a bank, or the Clarks financed the remaining balance. Thus, in 2010, Outside Properties acquired three properties from Ellis Shultz in 2010 for a total of $1.2 million, with $1,080,000 financed by Shultz. The loan provided for a balloon payment due to seller on December 1, 2015.
The four members performed different roles in the LLC. Barkalow provided the day-to-day management of the seven rental properties, which together encompassed eleven rental units. Bryan performed maintenance. Jeff did some remodeling. Joe was more of an investor. The Clarks were responsible for arranging financing because Barkalow's financial resources were limited during much of this time. As Barkalow put it, "It was kind of a team effort up to a point on how to get things done."
Barkalow, Bryan, and Jeff and their respective sister–spouses also socialized together during the 2009 through 2013 time period. They took vacations together. Joe was less involved in this social circle.
In 2010, the members agreed to amend the operating agreement for estate tax planning purposes. Under this amendment, two classes of interests were created. The interests of Barkalow, Bryan, Jeff, and Joe were recognized as Class A voting interests. However, each was given the ability to transfer units to family members who would then become nonvoting Class B members.
After this amendment took effect, Bryan, Jeff, and Joe transferred Class A units to their respective children. This reduced each of the Clark brothers’ interests in Outside Properties to 11%, while providing each set of children with a 14% (nonvoting) interest.
C. Disagreements Among Members (2013–15). In 2013, the relationship between Barkalow, on the one hand, and Bryan and Jeff, on the other, began to deteriorate. Barkalow claimed he had always had an oral agreement to buy the entire company at a fee to be set by the Clarks, which the brothers denied. Bryan and Jeff were tired of having their funds tied up in various loans to Barkalow that he used to sustain his other property investments. Also, Barkalow began to question the validity of the Clark loans to Outside Properties, taking the position, "no note, no mortgage, no payment." In 2014, Outside Properties stopped making payments on the Clark loans.2 Barkalow also unilaterally halted efforts by the LLC to obtain bank financing to replace the Clark loans. Furthermore, without approval of the other members, Barkalow arranged for some electronic payments totaling $8,000 to be made to Big Ten for management fees. Additionally, Barkalow had never paid for his initial capital contribution in Outside Properties, and did not do so until September 2016.
Joe avoided these disputes and tried to be a peacemaker between his brothers and Barkalow. Yet, the dissension only mounted. Another bone of contention was Barkalow's assertion that each of the Clark brothers had reduced his ultimate voting power to 11% by transferring interests to his respective children.3
D. The Disputed Capital Contributions (December 2015–July 2016) . The Shultz balloon payment was due on December 1, 2015, and Barkalow refused to cooperate in arranging outside financing to pay off Shultz. Shultz was only willing to agree to a minimal extension of the due date to December 9. Bryan, Jeff, and Joe did not want to go into default. All four members met on December 7 and were unable to resolve their differences.
Accordingly, Bryan, Jeff, and Joe agreed to make capital contributions of $333,956.62 each to the LLC in order to cover the balloon payment and avoid default. Their action was communicated by email on December 9 and ratified at a December 17 member meeting attended by all four members. Barkalow was given the opportunity to participate in the capital contribution and declined to do so.
At the same time as Barkalow declined to contribute capital to Outside Properties, he was expanding his TSB real estate portfolio. As Barkalow later testified, "So you're asking me to deprive myself of gaining another company to benefit [Outside Properties], correct, I did not do that at the time, correct."
On February 19, 2016, another member meeting was held. The Clarks made an offer to Barkalow to buy out his interest in Outside Properties for the undiscounted fair market value assuming...
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