Hunter Three Farms, LLC v. Hunter

• Docket Number: 22-1601
• Decision Date: 24 January 2024
• Parties: HUNTER THREE FARMS, LLC, Plaintiff-Appellant, v. RICHARD HUNTER, individually and as member of Hunter Three Farms, LLC, Defendant-Appellee.
• Court: Iowa Court of Appeals

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HUNTER THREE FARMS, LLC, Plaintiff-Appellant, v. RICHARD HUNTER, individually and as member of Hunter Three Farms, LLC, Defendant-Appellee.

No. 22-1601

Court of Appeals of Iowa

January 24, 2024

Appeal from the Iowa District Court for Greene County, Derek Johnson, Judge.

An LLC appeals from a district court ruling finding the LLC lacked standing to file a lawsuit against a member.

Bradley M. Strouse and Adam J. Babinat of Redfern, Mason Larsen &Moore, P.L.C., Cedar Falls, for appellant.

Justine E. LaVan and Benjamin J. Kenkel of Bradshaw, Fowler Proctor &Fairgrave, P.C., Des Moines, for appellee.

Considered by Bower, C.J., and Buller and Langholz, JJ.

BULLER, JUDGE.

Hunter Three Farms, an Iowa limited liability company(LLC), appeals from a district court ruling that granted summary judgment in favor of Richard Hunter, one of the company's three member-managers.The district court concluded Hunter Three Farms lacked standing to sue Richard because filing a lawsuit required unanimous consent of all member-managers and Richard did not consent to being sued.On appeal, we analyze the relevant statutory language and conclude an LLC may sue one of its member-managers under exceptional circumstances if all disinterested members authorize litigation.We reverse and remand for further proceedings consistent with this opinion.

I.Background Facts and Proceedings

Richard, Robert, and Gary Hunter are brothers who have farmed in several Iowa counties for decades.Until 2016, the brothers had a general partnership farming operation, Hunter Farms, which they converted to a limited partnership, Hunter Three Farms, LP.As part of a global settlement among the brothers and their various business entities, structural changes were made to the business.One of those changes was that the "Hunter Farms" partnership was converted into Hunter Three Farms, LLC.We'll refer to Hunter Three Farms, LLC, which is the entity party to this appeal, as "the LLC" to distinguish it from the other similarly named entities.

The LLC has three voting members: Richard, the Robert P. Hunter Revocable Trust, and the Gary G. Hunter Revocable Trust.Each voting member controls one-third of the voting interest.Hunter of Iowa, Inc., an Iowa corporation in which all three brothers were shareholders, also holds a non-voting interest.

The brothers formed the LLC without an operating agreement.Shortly after formation, the LLC filed a five-paragraph statement of authority, executed only by Robert Hunter as organizer.The first paragraph established a mailing address, the second included the legal description of certain real estate, the third restricted the sale or mortgage of that real estate at certain price points, and the fifth established the entity's principal address.Pertinent to this appeal, the fourth paragraph provided: "A majority of the voting membership interests are authorized to make ordinary business decisions.All other decisions, including any change to this statement of authority, will require the consent of all members."The statement of authority did not define "ordinary business decisions."

The record includes limited information about the LLC's business activities.It is undisputed that the LLC or its tenants farmed the parcels of real estate specified in the statement of authority.Gary testified he and Robert met "whenever a decision needs done" because they had a majority interest, while Richard received information but did not participate in decision-making.Gary characterized his and Robert's decision-making as concerning the farm tenants, income, expenses, bills, and grain.An employee testified to filing reports with the federal government concerning crop acres planted, and there is some evidence the company owns mineral rights.

On one occasion, the LLC's members separately signed a written resolution granting unanimous consent for each member to receive monthly bank statements from the LLC's accounts.But beyond that, the record does not disclose if there was ever a formal or informal business meeting between all three LLC members.

In 2018, Richard submitted an application to a claims-administration program intended to compensate buyers of certain corn seeds from Syngenta.He did not tell the other members of the LLC that the program existed or that he was making a claim.He listed "Hunter Farms"(the general partnership that preceded the LP that preceded the LLC) as the producer and used his personal address (different from the LLC's address) on the claim form.But he used the LLC's tax identification number and signed a form indicating:

I declare that I am the Producer (or Representative Claimant) entitled and/or authorized to make claims for the bushels listed in this Claim Form, and that no other person or entity has made claims for my share in the bushels listed in this Claim Form to the best of my knowledge.If the Producer is a business or other legal entity, I certify that I am authorized to act on behalf of the Producer submitting this Claim Form.

Richard received a $62,467.01 settlement payment from the claim.He deposited the payment in a bank account that he owned or operated, under the name of "Hunter Iowa Farms, Inc."The LLC did not own or have access to that account.The settlement program issued a 1099-MISC to the LLC's tax identification number, not Richard's social security number or his Hunter Iowa Farms tax identification number.

The LLC's other members found out about Richard's settlement payment when they learned the LLC had to pay tax on the income.Robert and Gary then sent Richard a letter by certified mail asserting the settlement payment belonged to the LLC.That letter demanded Richard deposit the proceeds in the LLC's bank account or divide the proceeds three ways and pay the cost of any potential tax consequences.Richard responded that he only applied for his third of the settlement payment and disclaimed any wrongdoing.

After that response, Robert and Gary met and decided the LLC would file a lawsuit.The LLC brought four claims against Richard personally and in his capacity as a member of the LLC: breach of fiduciary duty, breach of the duty of good faith and fair dealing, conversion, and unjust enrichment.Richard answered and denied the claims, and then filed a motion for summary judgment urging, among other grounds, that the LLC lacked standing to bring suit against one of its members because suing a member-manager was not an ordinary business activity and thus would require a unanimous vote of the member-managers, including the potential defendant.

After hearing arguments from the parties, the district court granted Richard's motion for summary judgment.The court found that the LLC did "not have standing" because the lawsuit was "not within the scope of [the LLC's] ordinary course of business and [the LLC] needed consent of all members to file this action."Based on this finding, the court declined to reach the merits.The LLC appeals.

II.Standard of Review

We review the grant or denial of summary judgment for correction of errors at law.Slaughter v. Des Moines Univ. Coll. of Osteopathic Med., 925 N.W.2d 793, 800(Iowa2019)(citation omitted)(alteration in original).Summary judgment is appropriate when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."Iowa R. Civ. P. 1.981(3).

Evidence "is viewed in the light most favorable to the nonmoving party," but "the nonmoving party may not rest upon the mere allegations of his pleading [and] must set forth specific facts showing the existence of a genuine issue for trial."Hlubek v. Pelecky, 701 N.W.2d 93, 95(Iowa2005)."Speculation is not sufficient to generate a genuine issue of fact."Id. at 96.

"Summary judgment is not a dress rehearsal or practice run; 'it is the put up or shut up moment in a lawsuit, when a [nonmoving]party must show what evidence it has that would convince a trier of fact to accept its version of the events.'"Slaughter, 925 N.W.2d at 808(alteration in original)(citation omitted).

III.Discussion

On appeal, the parties battle over whether Richard had an effective veto over the suit against him, based on his position that an LLC may not sue a member-manager without unanimous consent-including from the potential defendant.Gary and Robert urge that the unanimous vote of all disinterested member-managers (them) was adequate authorization.Before turning to the merits of that question, we address two preliminary matters.First, we resolve a debate between the parties over whether their dispute concerns standing or authority.Second, we address the possibility this case could have been filed as a derivative suit and whether that matters to our ultimate analysis.Then, we address the merits and consider whether Iowa's LLC chapter authorizes direct suit against member-managers, and, if so, what voting interest is required to approve litigation.For the reasons that follow, we hold Robert and Gary (as the unanimous disinterested members) lawfully authorized the suit against Richard, and we reverse the district court's summary-judgment ruling and remand for further proceedings.

A.Standing or Authority

The district court characterized the legal issue before it as one of standing, citing Iowa Citizens for Community Improvement v. State, 962 N.W.2d 780(Iowa2021).In that case, our supreme court found the citizens' claimed injury was too speculative to support standing to sue the State regarding alleged water pollution.Id. at 793-94.Richard adopts that position on appeal.Meanwhile, Robert and Gary argue the issue is really one of "authority," in the sense of whether the LLC is authorized to bring this suit absent the...