Central Iowa Power Cooperative v. Consumers Energy, No. 7-402/06-1060 (Iowa App. 9/19/2007), 7-402/06-1060
| Decision Date | 19 September 2007 |
| Docket Number | No. 7-402/06-1060,7-402/06-1060 |
| Parties | CENTRAL IOWA POWER COOPERATIVE, Plaintiff-Appellee, v. CONSUMERS ENERGY, EAST-CENTRAL IOWA RURAL ELECTRIC COOPERATIVE, FARMERS ELECTRIC COOPERATIVE, INC., MAQUOKETA VALLEY ELECTRIC COOPERATIVE, PELLA COOPERATIVE ELECTRIC ASSOCIATION, and T.I.P. RURAL ELECTRIC COOPERATIVE, Defendants-Appellants. |
| Court | Iowa Court of Appeals |
Appeal from the Iowa District Court for Polk County, Scott D. Rosenberg, Judge.
The defendants appeal from the ruling on a petition for declaratory judgment. AFFIRMED.
Fred L. Dorr of Wasker, Dorr, Wimmer & Marcouiller, P.C., West Des Moines, for appellants.
William Fanter and Jason C. Palmer of Bradshaw, Fowler, Proctor & Fairgrave, P.C., Des Moines, for appellee.
Heard by Huitink, P.J., and Vogel and Baker, JJ.
The plaintiff in this action, Central Iowa Power Cooperative (CIPCO), filed a petition seeking a declaration that an amendment to its corporate bylaws was duly adopted and thus effective. The defendants, six "member associations" of CIPCO, filed an answer and counterclaim seeking an alternate declaration seeking to void the bylaw and asking the court to order CIPCO to seat a new board member. The district court upheld CIPCO's bylaw amendment and dismissed the counterclaim. The defendants appeal.
Background Facts.
CIPCO is a generating and transmission cooperative (G&T) that accumulates and transmits electrical energy. It is comprised of twelve electrical distribution cooperatives and a municipal cooperative association that receive energy from CIPCO and which then delivers that energy to its customers throughout southern and eastern Iowa.1 CIPCO's business and affairs are managed by a board of directors, as are each of the member associations governed by their own board of directors.
The member associations each nominate a director to serve on the CIPCO board. Additionally, each member association is entitled to select one "authorized representative" to send to the CIPCO meetings. One primary role of the authorized representatives is to cast votes in the annual elections for the CIPCO board. An individual is nominated for the CIPCO board by the representatives from his or her member association. After receiving these nominations, the representatives of all of the member associations vote to elect the CIPCO board. Thus, a nominee from one member association is subject to the vote and approval of the representatives from all of the other associations.
On December 10, 2004, the local board of one of the member associations, Maquoketa Valley Electric Cooperative, sought to remove its CIPCO board director, Dick Bishop, and replace him with Jim Lauzon, the association's manager who was also its chief executive officer. Maquoketa Valley's legal counsel, John Ward, had earlier advised that it could replace its CIPCO director and replace it with its chief executive officer. On December 15, Maquoketa Valley's local board president, Bruce Reade, forwarded a letter to Keith Wirt, then chairman of the CIPCO board, advising him of the local board's attempted action.
This attempted action was met with disfavor by members of the CIPCO board, and on December 17 after consulting with attorney Ward, Wirt called a special meeting of the board to be held on December 20. The purpose of the meeting, as stated in its notice, was to consider a bylaw amendment prohibiting employees of a member association, such as Jim Lauzon, from becoming CIPCO board directors.
At the start of that meeting, three CIPCO board members submitted identical letters to Wirt which insisted the first order of business at the meeting be to seat Jim Lauzon as a new CIPCO board director. Attorney Ward was asked to give his advice on this request. He responded that because Bishop remained a duly elected board member, the proposed action violated CIPCO's articles and bylaws. Based on this advice, the board took no action on the request to seat Lauzon. Rather, it considered and voted on a proposal to amend its bylaws relating to the qualifications of persons to serve as a CIPCO director. That proposed amendment stated:
In order to become or remain a director or to hold any position of trust in the Association, a person shall be required to be (a) a director of a corporate member of the Association who is not an employee of said corporate member, or (b) an officer of a corporate member of the Association who is not an employee of said corporate member.
After extended debate, the CIPCO board voted to approve the above amended bylaw, on a vote of eleven in favor and three opposed.2 The stated rationale of the amendment prohibiting employees of its member associations from serving as a CIPCO director was that a paid employee of an association would present a conflict of interest that would manifest itself in decision making marked by a preference for the local board's interests rather than CIPCO's interests. Prior to this time, no employee had ever been put forward as a possible CIPCO board director.
Subsequent to this board action, a dispute over the bylaw amendment arose between CIPCO and the six member associations named as defendants in this action. As a result, CIPCO filed this declaratory judgment action, in which it sought a declaration that the amendment was valid and effective. The defendants' counterclaim contends CIPCO should have seated Lauzon as a director. The counterclaim sought a further declaration that member associations may unilaterally remove their director from the CIPCO board.
Following a trial, the district court issued a ruling in which it upheld CIPCO's December 20, 2004 bylaw amendment and dismissed the defendants' counterclaims. In particular, it held that the actions taken to remove and replace a member of the CIPCO board were not undertaken in violation of the articles and bylaws of CIPCO. The defendants have appealed from this ruling.
Scope of Review.
We review declaratory judgment actions according to the manner in which the case was tried in the district court. Smith v. Bertram, 603 N.W.2d 568, 570 (Iowa 1999). This action was tried in equity, and the parties agree that our review is de novo. See Iowa R. App. P. 6.4. While we are not bound by the trial court's findings of fact, we give weight to those findings, especially with respect to the credibility of witnesses. Owens v. Brownlie, 610 N.W.2d 860, 865 (Iowa 2000).
Fiduciary Duties.
The defendants first maintain the court "erred in failing to recognize continuous and simultaneous fiduciary duties of CIPCO board members to both CIPCO and its member cooperatives." The defendants cite three components in this assertion of error: (1) a duty to keep cooperative members informed; (2) a conflict of interest; and (3) a duty to recognize a fiduciary obligation to members. They assert that a CIPCO director's duty is not served by looking solely to the best interests of CIPCO; rather, that directors should act in a manner that is also consistent with and mindful of their responsibilities to their member associations as well.
On this issue, the district court held:
A CIPCO Board director has the same duties of loyalty and care to CIPCO that any other corporate director would have to his or her corporation. More importantly, these duties clearly run to the corporation, not primarily and solely to a member entity that claims it is "represented" by the board member. Thus, officers and directors of a corporation, like Bishop, owe a fiduciary duty to the company and its shareholders on matters related to the corporation. Any duty or obligation to the member associations is fulfilled by actions done in the best interest of CIPCO that in turn inure to the benefit of all member associations.
(Citations omitted.)
As a subset of this fiduciary duty argument, the defendants argue the CIPCO board breached its "duty of obedience" in failing to keep cooperative members informed of its December 20, 2004 board meeting. In addition, they urge that due to a conflict of interest, Director Bishop breached a duty of loyalty when he participated in the vote that amended CIPCO's bylaws. Our analysis of the defendants' claims leads us to two guiding principles in this case: (1) an application of the "business judgment rule," and (2) the question of to whom a fiduciary duty is owed by a CIPCO director.
We turn to the first of those two issues. Iowa Code section 490.830 requires directors to discharge their duties:
(a) In good faith, and
(b) In a manner the director reasonably believes to be in the best interests of the corporation.
These obligations represent a fiduciary duty to a company and its shareholders. Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447 451 (Iowa 1988). They include two types of duties: (1) a duty of care and (2) a duty of loyalty. Id. Generally, the decisions of directors are presumed to be informed, made in good faith, and believed to be made in the best interests of the company. Id. at 453. This presumption is known as the business judgment rule. Id. In light of this presumption, the burden of proving a violation of a duty of care rests with the defendants. Id.
The purpose of the rule is to severely limit second-guessing of business decisions which have been made by those whom the corporation has chosen to make them. Hanrahan v. Kruidenier, 473 N.W.2d 184, 186 (Iowa 1991). Courts are disinclined to interfere in internal corporate operations involving management decisions,...
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