Smith v. Bitter, 63837

Decision Date19 May 1982
Docket NumberNo. 63837,63837
Citation319 N.W.2d 196
PartiesJoseph J. SMITH and Steve J. Smith, Appellees, v. Joseph J. BITTER, Appellant, and Gomer's, Inc., Defendant.
CourtIowa Supreme Court

Joseph J. Bitter, Dubuque, appearing pro se.

William C. Fuerste of Fuerste, Carew, Coyle, Juergens & Sudmeier, Dubuque, for appellees.

Considered en banc.

LeGRAND, Justice.

This litigation culminates what started as a business venture among friends and, although financially successful, terminated in acrimony and mutual distrust. Defendant Bitter appeals from adverse rulings on plaintiffs' petition and his own cross-petition, both asking for declaratory judgments, as well as from denial of his counterclaim for damages. We affirm in part and reverse in part.

In 1975 Bitter, a Dubuque lawyer, acted as attorney in several matters for two brothers, Joseph J. Smith and Steve J. Smith. They became fast friends, and a warm social relationship developed between the Smiths and Bitter. Within a short time, the three began discussing the possibility of going into the tavern business in an area convenient to Dubuque's "college community", consisting of Loras and Clarke colleges and the University of Dubuque.

The parties bought real estate housing an existing tavern, took title in the name of Gomer's, Inc., a corporation which Bitter formed for the Smiths and himself, and entered into extensive remodeling of the building. Bitter was to furnish legal services and loan expertise in getting the business started. The Smiths were to be primarily responsible for remodeling. The tavern was to be operated under the name of "Gomer's Bar," capitalizing on the nickname "Gomer" which had identified Steve J. Smith when he attended Loras College.

Early in the game differences arose. The Smiths became convinced that Bitter was not carrying his share of the load. He, in turn, was fearful the Smiths were trying to freeze him out. There is evidence to support both of these views. Over Bitter's vigorous protests, the Smiths assumed virtual control of the remodeling and of plans for opening the tavern.

Originally Bitter brought suit against the Smiths, and the Smiths countered by filing a petition for declaratory judgment. Later Bitter's original action was dismissed pursuant to Iowa R.Civ.P. 215.1 for lack of prosecution. Bitter raised the same issues, however, in his cross-petition for declaratory relief. He also filed a counterclaim asking both actual and punitive damages.

Smiths' petition for declaratory judgment asked a determination of rights under the agreement of the parties and a declaration of each party's interest in Gomer's, Inc. Bitter's cross-petition for declaratory relief asked the court to determine the existence of a partnership and to confirm that he held a one-third interest therein. He also asked for an accounting, the appointment of a receiver, and a finding that Gomer's, Inc. is not a "viable corporation."

In addition Bitter filed a counterclaim for $100,000 actual and $250,000 punitive damages, alleging willful and malicious breach of fiduciary duties by both Smiths, causing him emotional distress and "other harm and damage."

The trial court dismissed Bitter's counterclaim. The court also found the parties had formed a corporation under the name of Gomer's, Inc., in which Joseph J. Smith, Steve J. Smith, and Joseph J. Bitter each owned a one-third interest. We refer to other findings of the court later.

At the outset we recognize this as a most difficult case in which to achieve a totally satisfactory result. The parties are the victims of their own folly, and they now look to the courts to redeem them from the resulting chaos and confusion. The trial court apparently attempted to do this, and in some respects accomplished a better practical solution than ours will be. Nevertheless we must decide the case on the issues presented and the evidence produced.

Both sides have warned--or threatened--that this is only the beginning skirmish of the litigation which will surely follow. Their differences are already seven years old. If they persist, perhaps they can yet turn this highly successful business into a losing one. They seem dedicated to this course. At the risk of rushing in where we should not go, we cannot forego the temptation to say that if ever a case cried out for settlement, this is it. Be that as it may, we must decide what is here, and we must do so under established rules of law according to the evidence disclosed by the record. We now take up that onerous and thankless task.

First, we address briefly a matter which pervades this case. It concerns the questionable professional judgment of Bitter in representing clients with whom he has a conflict of interest. The trial court attributed part of the present turmoil to this conflict, and we believe this is incontrovertible.

The Canons of Professional Responsibility, DR 5-104(A), state in part as follows:

DR 5-104 Limiting Business Relations with a Client.

(A) A lawyer shall not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise his professional judgment therein for the protection of the client, unless the client has consented after full disclosure.

If not apparent from the very start, it soon became clear that the Smiths and Bitter were embroiled in irreconcilable differences. Whether Bitter violated this canon is not a proper matter for review now. We point out, however, as did the trial court, the dangers which face a lawyer who is both business associate and lawyer for those he must "independently" represent. For a discussion of the harsh and demanding responsibilities of an attorney under those circumstances, see Committee on Professional Ethics and Conduct of the Iowa State Bar Association v. Mershon, 316 N.W.2d 895, 898-900 (Iowa 1982). Even a violation of professional ethics, however, would not subject Bitter to the penalty of forfeiting an otherwise valid business interest, a result which the Smiths seem to urge upon us.

This appeal presents the following issues for our consideration:

1. Error in holding the business operated by the Smiths and Bitter is a corporation, not a partnership.

2. Error in finding the real estate in question is owned by Gomer's, Inc.

3. Error in refusing to appoint a receiver.

4. Error in fixing a salary for Steve J. Smith as manager of the business.

5. Error in denying Bitter's counterclaim for damages.

I. Partnership v. Corporation

Although there are several other substantial issues, the overriding question in this case concerns the form of the business intended by the parties--corporate or partnership. The resolution of this dispute is made difficult by the vacillating testimony of the principals throughout this ongoing battle. Neither side comes away with much credibility; both shifted positions from time to time as best suited their immediate purpose.

Dealing with Bitter's ambivalence first, we note he organized a corporation under the name of Gomer's, Inc., took title to the real estate in that name, gave a title opinion to obtain a $50,000 mortgage certifying the corporation as the fee simple owner, and advised the Smiths the corporate form should be used to avoid personal liability. Now Bitter disavows the corporation, says it was never "viable," and insists the three principals always intended the tavern to be operated as a partnership venture.

Bitter, however, isn't the only one to change course. In an apparent effort to obtain control of the business, the Smiths, too, abandoned the position they earlier espoused. Originally the Smiths represented themselves to be partners, filed tax returns as a partnership, took out a beer license in their individual names, and did not object when Bitter made representations of which they were aware to several lending institutions that the business was a partnership. Now they brush all this aside and insist the business was a corporate venture.

The prize of all this, of course, is control over the business, a vital concern now that Bitter is an unwelcome associate. Clearly Bitter, as a one-third partner, would be in a much stronger position to protect his interest than if he owns one-third of the stock in Gomer's, Inc.

The trial court found Joseph J. Smith, Steve J. Smith, and Joseph J. Bitter each owned a one-third interest in the business and all its assets. There is no appeal from this ruling. The question thus becomes this: What did each own a one-third interest in--a partnership or a corporation?

In attempting to determine the intended form of ownership, the trial court faced the same impasse that confronts us. The court attempted to reconcile the differences and conflicting testimony by holding the business operated as a partnership until November 1, 1977, and as a corporation after that date. We must reject this solution, appealing as it is on practical grounds. If there was a partnership until November 1, 1977, then there was a partnership after that date as well. Nothing happened on November 1, 1977, to convert the business from one form to another.

We have purposely ignored until now the circumstance which is determinative of this dilemma. It lies in the pleadings. In two separate instruments--the plaintiffs' reply to defendant's answer to their petition and the plaintiffs' answer to Bitter's counterclaim--the Smiths admitted the existence of a partnership.

In the first of these, Bitter amended his answer to plaintiffs' petition for declaratory judgment to allege the parties entered into an oral partnership agreement "for the purpose of owning and developing a tavern in the City of Dubuque, Iowa." The Smiths filed a reply admitting this allegation.

A similar concession was made in plaintiffs' amended answer to Bitter's cross-petition for declaratory judgment. There the Smiths admitted that if "plaintiffs and Joseph J. Bitter would make equal financial or other...

To continue reading

Request your trial
9 cases
  • Grider v. Quinn
    • United States
    • Court of Appeals of Washington
    • March 1, 2022
    ...relief without an express request in the complaint. In a declaratory action, the ordinary rules of pleading apply. Smith v. Bitter, 319 N.W.2d 196, 201 (Iowa 1982). The same liberal pleading standards applied in other actions also govern declaratory actions. Stew-Mc Development, Inc. v. Fis......
  • Long v. McAllister
    • United States
    • United States State Supreme Court of Iowa
    • May 19, 1982
    ...from the date of filing of the petition. When a fact alleged in a pleading is admitted, the fact is no longer an issue. Smith v. Bitter, 319 N.W.2d 196, 199 (Iowa 1982) (filed separately this date); Cowles Communications, Inc. v. Board of Review of Polk County, 266 N.W.2d 626, 631 (Iowa 197......
  • George H. Wentz, Inc. v. Sabasta
    • United States
    • United States State Supreme Court of Iowa
    • August 17, 1983
    ...McAllister, 319 N.W.2d 256, 258 (Iowa 1982) (admission of plaintiff's entitlement to prejudgment interest held binding); Smith v. Bitter, 319 N.W.2d 196, 199 (Iowa 1982) (binding admission business was formed as partnership); Welter v. Heer, 181 N.W.2d 134, 136 (Iowa 1970) (admission of exi......
  • Stew-Mc Development, Inc. v. Fischer
    • United States
    • United States State Supreme Court of Iowa
    • August 14, 2009
    ...was insufficient to accommodate the proposed development. In a declaratory action, the ordinary rules of pleading apply. Smith v. Bitter, 319 N.W.2d 196, 201 (Iowa 1982). Declaratory actions are thus governed by the same liberal pleading standards that are applied in other civil actions. As......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT