Title: Prehn v. Hodge

State: idaho

Issuer: Idaho Supreme Court (civil)

Document:

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IN THE SUPREME COURT OF THE STATE OF IDAHO 
Docket No. 42465 
 
 
DONNELLY PREHN and DWIGHT 
BANDAK, 
 
       Plaintiffs-Respondents, 
 
v. 
 
MICHAEL L. HODGE, II, 
 
       Defendant-Appellant, 
 
and 
 
THE SOURCE STORE, LLC; THE 
SOURCE, LLC; GEORGE M. BROWN; 
and CHRISTOPHER CLAIBORNE, 
 
       Defendants. 
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Boise, August 2016 Term 
 
2016 Opinion No. 143 
 
Filed: December 8, 2016 
 
Stephen W. Kenyon, Clerk 
    
       
 
Appeal from the District Court of the Fourth Judicial District of the 
State of Idaho, Ada County.  Hon. Patrick H. Owen, District Judge. 
 
We affirm. Attorney fees and costs on appeal are awarded to 
respondent. 
 
Davison, Copple, Copple & Copple, Boise, attorneys for appellant. Ed 
Guerricabeitia argued. 
 
Taylor Law Offices, PLLC, Boise, attorneys for respondents. Matthew 
K. Taylor argued. 
 
_______________________ 
 
W. JONES, Justice 
 
I. NATURE OF THE CASE 
The Source Store LLC (“Source 1”), The Source LLC (“Source 2”), Michael L. Hodge 
(“Hodge”), George M. Brown (“Brown”), and Christopher Claiborne (“Claiborne”) (collectively 
“Appellants”)  appeal the district court’s order denying their Joint Motion to Dismiss, by which 
they sought to dismiss the derivative claims brought by Donnelly Prehn (“Prehn”) and Dwight 
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Bandak (“Bandak”) (collectively “Respondents”)  on behalf of Source 1. Additionally, 
Appellants appeal the district court’s finding that Hodge breached his fiduciary duty to Source 1 
and its members.    
II. FACTUAL AND PROCEDURAL BACKGROUND 
A. Background of Source 1 
In 2002, Hodge and Prehn founded Source 1, an Idaho LLC, which designed, produced, 
and sold merchandise and apparel for its clients.1 For Source 1’s initial years, it did not generate 
an annual profit. During this time, Prehn made loans to Source 1 with the understanding that he 
would be paid back with 10% interest accruing annually. Also during this time, Prehn was not 
paid a salary for a number of months, with the understanding that he would be paid at a later time 
with interest.  
Source 1 began to show an annual profit around 2008. Due to his deteriorating 
relationship with Hodge, Prehn stopped working as a fulltime employee of Source 1 after 
December 2010, but Hodge worked fulltime until its dissolution in 2012.  Hodge was the 
managing member and main salesperson of Source 1 from its inception until its dissolution, but 
he was not its only employee. Between the formation of Source 1 in 2002 and February 2011, 
Bandak, Brown, and Claiborne joined Source 1 as part owners. By the time of its dissolution, the 
members’ interests in Source 1 were as follows: Prehn—37.975%; Hodge—39.637%; Bandak—
11.025%; and Brown and Claiborne—11.363% (combined). 
In February 2011, Hodge proposed a salary increase for himself from the $60,000 per 
year he was being paid at the time, to $144,000 per year. Prehn and Bandak opposed the 
proposal, but Hodge, Brown, and Clairborne voted in favor, so the increase was approved and 
effectuated.  
On November 1, 2011, Source 1 moved its main office to 3637 Lake Harbor Blvd., 
Boise, Idaho. Unbeknownst to Prehn, Hodge purchased the Lake Harbor building on April 5, 
2012. On December 31, 2011, Source 1’s in-house accountant/bookkeeper informed Hodge and 
Prehn that the outstanding balance on Prehn’s loan was $79,232.51, and that the present balance 
of back pay Source 1 owed Prehn was $67,500. Source 1 made no further payments to Prehn.  
Also in 2011, Hodge borrowed $40,000 from Source 1. By April 26, 2012, the remaining 
balance on his loan was $20,084.61. Hodge has not made any payments on the loan since, but 
                                                 
1 Prior to 2002, Hodge operated Source 1 as a sole proprietorship.  
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argued to the district court that he voluntarily reduced his salary from Source 1 in 2012 and that 
the reduction should have been credited against his debt. On February 3, 2012, a valuation of 
Source 1 by a business brokerage firm determined that the most likely selling price for Source 1 
was $1,367,068. On March 15, 2012, Hodge made an offer to purchase Prehn’s interest in Source 
1 for $337,000. Prehn rejected the proposal.  
B. Dissolution of Source 1 
The members unanimously voted to dissolve Source 1 on April 4, 2012, with the 
dissolution to be as of April 1, 2012. The Operating Agreement for Source 1 (“Operating 
Agreement”) provided that in case of the dissolution of Source 1, a “Liquidator” was to be 
appointed by a “Majority Vote of Membership Shares” to “wind up the affairs of the company 
and make final Distributions as provided in this Agreement and in the Act.” The Liquidator was 
to work “diligently” at the task with “all of the power and authority of the Members.” The 
Operating Agreement required the Liquidator to give an accounting of Source 1’s assets and 
liabilities “[a]s promptly as possible after dissolution and again after final liquidation,” give 
notice to its creditors, and “sell or liquidate all of the Company’s assets.”  
The Operating Agreement further provided that the proceeds of such sale or liquidation 
were to be distributed first to the Company’s creditors—including Members—then to establish 
“any Reserve that the Liquidator deems reasonably necessary for contingent or unforeseen 
obligations of the Company.” Any balance remaining was to be distributed to the Members in 
accordance with the “positive balances in their Capital Accounts.” Hodge, Brown, and 
Clairborne voted to appoint Hodge as Liquidator, and Hodge accepted the appointment.  
  On April 9, 2012, Source 1 received a very large order ($233,481.84) from its largest 
customer, Bodybuilding.com. Source 1 never processed this order. On April 13, 2012, the 
members participated in a telephone conference call with Source 1’s attorney concerning the 
dissolution process. Hodge estimated that Source 1 could still fill its existing orders if it reduced 
its staff by half and that the orders could be filled by the first week of June. Hodge also predicted 
that such orders could be filled at a profit. 
On April 16, 2012, Brown filed a Certificate of Organization for Source 2, which listed 
Brown, Hodge, and Desiree Clairborne as members. Hodge is the majority owner and a 
managing member of Source 2. On April 25, 2012, the final Statement of Dissolution for Source 
1 was filed. After the dissolution of Source 1, both Prehn and Hodge planned to create new 
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businesses to operate in the same market in which Source 1 previously operated. Prehn and 
Bandak filed this suit against Appellants on April 27, 2012.   
C. Miscellaneous Assets and Benefits    
Prior to its dissolution, Source 1 provided Hodge with a vehicle. On April 26, 2012, 
Source 1 still owed $19,761.22 on the vehicle, which Hodge paid on or about April 26, 2012. As 
of April 31, 2012, the value of the vehicle was $22,060.  Before its dissolution, Source 1 made a 
deposit of $36,000 to a shaker cup manufacturer to gain a discount on shaker cup orders. 
Because Source 1 only used $17,712.17 of the credit, Source 2 used the balance of $18,287.83 to 
obtain a discount on its orders of shaker cups. Source 1 also made a deposit of $12,400 on a 
second shaker cup mold priced at $31,000. Source 2 used the deposit made by Source 1 to obtain 
the second mold after it paid the balance of $18,600.  
Source 1 also purchased a license to the business software “ProfitMaker” for $8,000 and 
had its employees spend time to improve it. Hodge transferred the software to Source 2 before 
the dissolution of Source 1 even though he claimed at the district court that he purchased it at the 
auction. Neither Hodge nor Source 2 ever compensated Source 1 for the credits toward the 
discount with the manufacturer or the credits toward the second shaker cup mold. Nor did they 
pay Source 1 for the “ProfitMaker” software. Prehn and Bandak filed their Complaint—and First 
Amended Complaint—against Source 1 and derivative actions on behalf of Source 1 against 
Hodge, Brown, and Clairborne on April 27, 2012, alleging breach of agreement and breach of 
fiduciary duty. On May 7, 2012, Source 1 issued a check for $20,000 to counsel for Hodge to 
cover litigation costs from defending this action.  
D. Order of Dissolution 
The parties stipulated to the entry of an Order for the Dissolution of Source 1 on May 8, 
2012, and the district court issued the Order of Dissolution on May 17, 2012. The Order of 
Dissolution stated that the dissolution was to take place “as soon as reasonably practicable, with 
the participation and cooperation of all parties, in a manner which is fully transparent, 
accountable, fair and equitable to all members of Source 1.” The Order of Dissolution further 
stated that the dissolution would be conducted with the goal of paying off all of Source 1’s debts 
and maximizing the funds left over for the members. According to the Order of Dissolution, 
Source 1 had approximately $900,000 in open purchase orders, which were to be filled by 
Source 1 employees using company assets. The Order of Dissolution further stated that the 
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members had agreed to reduce the overhead of Source 1 during its dissolution to the absolute 
minimum required to fill the open orders.  
In addition, the Order of Dissolution stipulated that Hodge would propose a budget for 
the completion of the dissolution and circulate the budget among the members. The budget 
included those employees that Hodge deemed necessary to complete the open orders. The Order 
of Dissolution also indicated that no party was to use any of Source 1’s assets for the benefit of 
“Source 2 or any other person or entity.”  
E. Auction of Source 1’s Assets 
As the Liquidator of Source 1, Hodge prepared an auction of the company’s assets on 
May 18, 2012. Prehn and Hodge submitted the following bids at the auction:   
Lot 1: Shaker cup molds. Hodge bid $40,200. Prehn bid $96,000. 
Lot 2: Embroidery machines. Hodge bid $10,010. Prehn bid $9,000. 
Lot 3: Office Inventory. Hodge bid $6,000. Prehn bid $15,100. 
Lot 4: Intellectual Property (including trademarks). Hodge bid $44,200. Prehn bid $5,100. 
All of lots 1-4: Hodge bid $105,010. Prehn bid $125,200. 
Before the auction, the shaker cup manufacturer estimated that the molds were worth 
$40,000 to $50,000, if used to manufacture cups, but were only worth $1,900 as scrap metal. 
After the auction, Hodge argued that because he was the high bidder on the intellectual property 
in Lot 4, no one else could use the shaker cup molds without violating the intellectual property 
rights he purchased. Because Prehn bid on the shaker cup molds intending to use them to 
manufacture cups, he subsequently decided not to pay Source 1 for the lots for which he was the 
highest bidder. As a result, Hodge declared himself the lone bidder for the items and purchased 
lots 1-4 for his $105,010 bid. Hodge did not use any of the proceeds from the auction to repay 
the Prehn loan or to compensate Prehn for his back wages. Prehn and Bandak filed a Second 
Amended Complaint on June 29, 2012.  
F. Growth of Source 2 
At the same time that he began working as the Liquidator in the dissolution of Source 1, 
Hodge started operating Source 2, which is essentially a carbon copy of Source 1. Source 2 does 
the same work as Source 1 (i.e., designing, developing, producing, and selling apparel and 
merchandise for promotional and marketing purposes). The office of Source 2 is the same office 
that was used by Source 1 and owned by Hodge. Source 2 had the same customers as Source 1 
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and employed many of the same people, including the employees tasked with completing the 
open orders for Source 1. On June 14, 2012, Bodybuilding.com placed an order with Source 2 
identical to its earlier order with Source 1. This order was filled by Source 2.  
As the Liquidator for the dissolution of Source 1, Hodge was responsible for completing 
the company’s existing purchase orders, which were completed by September 2012. During the 
first three months of 2012, Source 1 had net sales of $782,854 with an operating profit of 
$83,135 or 10.62%. During this time, Source 1 reported General and Administrative expenses 
totaling $189,799.55 or 24.24%. Source 1 had net sales of $825,716 during the rest of 2012 and 
an operating loss of approximately $83,755 or 10.13%. This Report shows that during its 
dissolution, Source 1 exhausted its profits from the first three months of 2012 and all, or nearly 
all, of the proceeds from the asset auction. Source 1 reported paying Hodge a total of $26,124 
during the first three months of 2012 and a total of $97,386 during the rest of the year. Hodge 
was also paid $9,999.97 by Source 2 in 2012.  
Source 1’s counsel filed a Report of Wind Up with the district court on January 17, 2013. 
The Report included a financial statement for 2012, which showed total sales for that year of 
$1,608,570 and an operating loss of approximately $620. In addition, the Report stated that there 
was a cash balance of $20,547.86, which was still subject to litigation expenses. Hodge, as the 
Liquidator, did not distribute any payment to any of the members of Source 1.  
G. Lawsuit and Bench Trial 
Source 1 incurred legal and accounting fees of $2,417 during the first three months of 
2012 and $59,495.84 during its dissolution. On September 26, 2012, the district court scheduled 
a bench trial for April 1, 2013. Hodge and Source 1 filed a Joint Motion to Dismiss the derivative 
claims on March 1, 2013, which the district court refused to hear on April 1, 2013, on the 
grounds it was not timely filed. On March 11, 2013, the parties filed a stipulation to dismiss with 
prejudice nine claims from the Second Amended complaint, which the court granted on June 6, 
2013.   
On June 19, 2013, the district court rescheduled the bench trial for December 2, 2013. A 
four-day bench trial was held from December 2–6, 2013. On February 19, 2014, the district court 
issued its Findings of Fact and Conclusions of Law. The district court found for Prehn and 
Bandak and awarded damages in the following amounts: 
1. Source 1 owed Prehn $79,232 with 10% interest from December 29, 2011; 
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2. Source 1 owed Prehn $67,500 in back salary; 
3. Source 2 owed Source 1 $38,687.83 for the software, the shaker cup discount, and the   
shaker cup mold credit; and 
4. Hodge owed Source 1 $217,214.39 for the shortfall from the auction, lost profits, the 
difference between the value of the vehicle and the loan that Hodge paid, litigation costs 
for defense of this action, and the personal loan he received from Source 1.  
Hodge, Brown, Clairborne, and Source 1 timely appealed the judgment.  
III. 
ISSUES ON APPEAL 
1. Whether the district court erred in denying Appellants’ Joint Motion to Dismiss. 
2. Whether the district court erred in finding that Hodge breached his fiduciary duty 
to Source 1 and its members. 
3. Whether the district court erred in awarding attorney’s fees under Idaho Code 
section 12-120(3) and section 30-25-802 for the derivative actions. 
IV. 
STANDARDS OF REVIEW 
Pursuant to Idaho Rule of Civil Procedure 16, a district court may issue a scheduling 
order governing deadlines for pretrial proceedings. A scheduling order may only be modified for 
good cause, and this Court will not reverse a district court’s decision regarding whether to 
consider a late-filed motion absent evidence that the district court abused its discretion. 
Weinstein v. Prudential Property and Cas. Ins. Co., 149 Idaho 299, 310, 233 P.3d 1221, 1232 
(2010).   
This Court reviews de novo conclusions of law from a district court in a bench trial, but 
“will not disturb findings of fact on appeal that are supported by substantial and competent 
evidence, even if there is conflicting evidence at trial.” Watkins Co., LLC v. Storms, 152 Idaho 
531, 535, 272 P.3d 503, 507 (2012) (citing Panike & Sons Farms, Inc. v. Smith, 147 Idaho 562, 
565–66, 212 P.3d 992, 995–96 (2009)). Consequently, “[t]his Court will ‘liberally construe the 
trial court’s findings of fact in favor of the judgment entered, as it is within the province of the 
trial court to weigh conflicting evidence and testimony and judge the credibility of witnesses.’” 
Id. (quoting Oregon Mut. Ins. Co. v. Farm Bureau Mut. Ins. Co. of Idaho, 148 Idaho 47, 50, 218 
P.3d 391, 394 (2009)).  
“The award of attorney fees and costs is within the discretion of the district court and 
reviewed for an abuse of that discretion.” Kugler v. Nelson, 160 Idaho 408, 413, 374 P.3d 571, 
576 (2016) (quoting Jim & Maryann Plane Family Trust v. Skinner, 157 Idaho 927, 932, 342 
P.3d 639, 644 (2015)).   
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V.  ANALYSIS 
A. We Do Not Reverse the District Court’s Decision Regarding Whether to Consider 
the Late-Filed Joint Motion to Dismiss  
Appellants argue that the district court erred in denying their Joint Motion to Dismiss as 
untimely. Appellants argue that Prehn and Bandak could not bring derivative actions on behalf of 
Source 1 because they did not fairly represent the interests of the members of Source 1 as a 
whole and had interests that were “economically antagonistic to Source 1.” Appellants argue that 
Prehn and Bandak did not “fairly and adequately represent the interests of shareholders or 
members” as required by Idaho Rule of Civil Procedure 78, but were suing in pursuit of their 
own pecuniary interests.2 Specifically, Appellants argue that Prehn’s claims were antagonistic to 
Source 1 since he was simultaneously suing Source 1 for back salary and loan payments while 
bringing derivative claims on behalf of Source 1. Accordingly, Appellants reason, Prehn and 
Bandak’s claims should have been asserted as direct claims rather than as derivative claims. 
Appellants further argue that Prehn and Bandak failed to make a demand that Source 1 take an 
action to enforce its right as required by Idaho Code section 30-25-8023 or demonstrate that such 
a demand would be futile. Accordingly, Appellants argue that Prehn and Bandak lack standing 
for derivative claims on behalf of Source 1.  
Finally, Appellants assert that Prehn created an inherent conflict of interest by being 
represented by the same attorney for both his suit on behalf of Source 1 and his suit against 
Source 1. To support this claim, Appellants cite Idaho Rule of Professional Conduct 1.7—
prohibiting dual representation of clients with conflicting interests—and a decision by the district 
court in Vorse v. D&R Real Estate. Blaine County Case No. CV-2010-763.  
Respondents argue that the district court correctly refused to hear Appellants’ Joint 
Motion to Dismiss because it was filed late. Respondents argue that Appellants knew well in 
advance that the lawsuit included derivative claims and that Appellants had every opportunity to 
object to Respondents’ standing for those claims before the deadline. Moreover, Respondents 
argue that even though the district court declined to hear Appellants’ Joint Motion to Dismiss, 
Appellants were not prejudiced because the district court permitted them to make arguments 
concerning the standing issue during the bench trial. In addition, Respondents argue that they did 
                                                 
2 Appellants do not cite any Idaho case law in support of their argument that parties with interests that are 
“economically antagonistic” to an LLC cannot bring derivative actions. Instead, Appellants rely on the Ninth Circuit 
case of Larson v. Dumke, 900 F.2d 1363 (9th Cir. 1990) to support their assertions.  
3 Formerly cited as Idaho Code section 30-6-902.  
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demonstrate that a demand to the members of Source 1 to enforce their rights would have been 
futile.  
Lastly, Respondents argue that independent counsel for Source 1 to pursue the derivative 
claim was not necessary, and Respondents should have raised a motion to disqualify counsel if 
they felt that Respondents’ counsel could not properly represent the interests of Source 1. In 
addition, Respondents argue that Vorse is distinguishable because in that case, the LLC took a 
more active role in the lawsuit and insisted on separate counsel being appointed to represent it on 
the derivative claims. In contrast, Respondents argue that Source 1 took a passive and neutral 
approach in this case, thereby waiving “any right to exercise any business judgment or control 
over the derivative claims.”  
A district court may issue a scheduling order governing deadlines for pretrial 
proceedings. I.R.C.P. 16. Absent evidence of a trial court’s abuse of discretion, this Court will 
not reverse a district court’s decision regarding whether to consider a late-filed motion. 
Weinstein v. Prudential Property and Cas. Ins. Co., 149 Idaho 299, 310, 233 P.3d 1221, 1232 
(2010).  
Appellants fail to claim, much less demonstrate, that the district court abused its 
discretion in denying the Joint Motion to Dismiss. Therefore, we will not reverse the district 
court’s decision regarding whether to consider the late-filed Joint Motion to Dismiss.4  
B. The District Court Did Not Err in Finding That Hodge Breached His Fiduciary 
Duty to Source 1 and Its Members 
In order to recover for a claim of breach of fiduciary duty, Respondents had to establish 
that Hodge owed them and/or Source 1 “a fiduciary duty and that the fiduciary duty was 
breached.” High Valley Concrete, LLC. v. Sargent, 149 Idaho 423, 428, 234 P.3d 747, 752 
(2010) (quoting Tolley v. THI Co., 140 Idaho 253, 261, 92 P.3d 503, 511 (2004)). As a manager 
of Source 1, Hodge owed the company and its members a fiduciary duty of loyalty and care 
under the Idaho Uniform Limited Liability Company Act, which required him to act in a way he 
“reasonably believe[d] to be in the best interests of the company.” I.C. § 30-6-409.5  
Additionally, Hodge had a contractual fiduciary duty to Source 1 and its members under the 
                                                 
4 Appellants’ argument regarding Respondents’ standing is unavailing. The demand requirement of a derivative 
claim is not part of a standing analysis. 
5 While section 30-6-409 has since been repealed by the legislature, its effective dates include the time of the 
complained of transactions in this case. Moreover, its current equivalent—Idaho Code section 30-25-409—requires 
a similar standard of care for managers.  
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Operating Agreement to “exercise reasonable skill, care and business judgment.” See, I.C. § 30-
25-105(a)(2)(establishing that an LLC’s operating agreement governs “the rights and duties 
under this act of a person in the capacity of manager”). Moreover, under the Order of 
Dissolution, all members of Source 1 were required to participate and cooperate “in a manner 
which is fully transparent, accountable, fair and equitable to all members of Source 1 . . . .”  
“Generally, whether a fiduciary has breached his duty is a question of fact,” Bushi v. Sage 
Heath Care, PLLC., 146 Idaho 764, 769, 203 P.3d 694, 699 (2009) (citing First Bank & Trust of 
Idaho v. Jones, 111 Idaho 481, 484, 725 P.2d 186, 189 (Ct.App. 1986)). As such, this Court will 
not reverse the district court’s decision as long as there was “substantial and competent 
evidence” to support the district court’s findings. Watkins Co., LLC v. Storms, 152 Idaho 531, 
535, 272 P.3d 503, 507 (2012) (citing Panike & Sons Farms, Inc. v. Smith, 147 Idaho 562, 565–
66, 212 P.3d 992, 995–96 (2009)). 
1. The Asset Auction  
Appellants argue that the district court erred in finding that Hodge breached his fiduciary 
duty to Source 1 and its members by creating an unfair asset auction. Appellants further argue 
that Prehn’s decision to place a high bid on the shaker cup molds but not on the intellectual 
property is not evidence that Hodge breached his fiduciary duty.  
Respondents counter that the district court correctly held that Hodge breached his 
fiduciary duty to Source 1 and its members by structuring the asset auction in a misleading 
manner. Consequently, Respondents assert that the district court was correct in holding that the 
damage to Source 1 was the difference between what Hodge paid for the lots and what the total 
would have been if Hodge and Prehn had each paid for the lots for which he was the highest 
bidder.  
There was substantial, competent evidence to support the district court’s decision. While 
the record showed that Hodge did accept the suggestion of a closed bidding process and agreed 
to submit his final bid before the others had placed their final bids, the record also supports the 
conclusion that Hodge did so reluctantly. The record also indicates that he intentionally wrote a 
misleading label for the intellectual property lot and did not advise the other members that it 
included the design for the shaker cup molds. The substantial difference between the $5,000 bid 
from Prehn and the $44,000 bid from Hodge for the intellectual property strongly suggests that 
Hodge knew the true value of the intellectual property was in the shaker cup molds. Conversely, 
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Prehn’s high bid on the shaker cup molds demonstrates that he did not understand that they could 
not be used without the intellectual property. 
Although Hodge was not required to give Prehn business advice, the district court did not 
err in holding that Hodge did not act fairly or in the best interest of Source 1 by not advising 
Prehn that the shaker cup molds could not be used without the intellectual property. While Prehn 
was represented by counsel during the dissolution, Hodge cannot simply invoke the doctrine of 
caveat emptor to demonstrate that he acted in good faith. As such, there is sufficient, competent 
evidence to support the district court’s finding that, but for Hodge’s breach of his fiduciary duty, 
Source 1 would have received $165,310 from the asset auction. Thus, we affirm the award of 
$60,300 to Source 1; the difference between the $165,310 Source 1 would have received if 
Hodge and Prehn had both paid the full amount for the lots they won and the $105,010 that 
Hodge paid for all of the lots.      
2. Failure to Minimize Source 1’s Expenses during the Dissolution 
Appellants argue that the district court erred in holding that Hodge breached his fiduciary 
duty by failing to minimize Source 1’s expenses during the dissolution. Specifically, Appellants 
argue that Respondents did not meet their burden to prove the damages for lost profits with 
reasonable certainty.  
Respondents argue that the district court did not err in finding that Hodge breached his 
fiduciary duty to minimize the expenses for Source 1 during the final nine months of dissolution. 
Respondents argue that Hodge did not minimize the expenses for Source 1 by giving himself a 
large salary as manager and Liquidator, by keeping highly compensated employees on the 
payroll even though they were also working for Source 2, and by charging Source 1 a higher rent 
for the building than it had been charged in the past. Respondents further argue that while there 
was some conflicting testimony regarding the best way to calculate how much profit Source 1 
should have made during those nine months, there was still competent evidence to support the 
district court’s damage award.  
The district court compared Source 1’s number of total sales, costs of sales, gross profit, 
selling expenses, and general and administrative expenses for January–March of 2012 with those 
from April–December 2012.6 The district court noted that the only “glaring anomaly,” was the 
                                                 
6 Most of the numbers were comparable. Total sales were slightly more for the final nine months of 2012 ($825,716 
compared to $782,854); total costs were 61.18% of total sales for January–March and 65.62% for April–December; 
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sudden spike in general and administrative expenses from 24.24% for January–March to 43.03% 
for April–December. Other than the litigation costs for Source 1, Hodge was not able to 
demonstrate why the general and administrative costs had increased drastically during Source 1’s 
dissolution.  
  The district court noted that the 24.24% for general and administrative expenses for 
January–March was comparable to the 25.34% recorded for 2011 and the 27.61% recorded for 
2010. The district court concluded that the sudden increase in general and administrative 
expenses was the reason that Source 1 did not turn a gross profit for the year of 2012. The district 
court found that one of the biggest expenses for Source 1 was Hodge’s salary. From April–
December 2012, Source 1 paid Hodge $97,386, despite the fact that he was concurrently working 
at Source 2—generating more than $1  million in sales—which only paid him $9,999.97 for all 
of 2012. The district court held that Hodge’s overcompensation by Source 1 and 
undercompensation by Source 2 demonstrated a breach of Hodge’s fiduciary duty to minimize 
expenses for Source 1.  
Another expense that the district court noted was the increase in rent charged for the 
building Source 1 (and later Source 2) used as its office. In 2011, Source 1 paid approximately 
$2,900 per month for rent. In the first three months of 2012, Source 1 paid an average of $3,018 
per month. After Hodge purchased the building in April of 2012, Source 1 paid an average of 
$5,841 per month from April–July when Source 2 took over the building. The district court 
found that this dramatic increase in rent was also a breach of Hodge’s fiduciary duty to minimize 
expenses for Source 1.  
Lastly, the district court determined that Hodge breached his fiduciary duty by converting 
the April 9, 2012 Bodybuilding.com purchase order from Source 1 to Source 2. The 
Bodybuilding.com order was for $223,481, and the district court held that Source 1 could have 
fulfilled it since many of the employees for Source 2 that filled the order also worked for Source 
1. Moreover, Bodybuilding.com had placed an identical order with Source 1 before the 
dissolution order and before the formation of Source 2.  
The district court found that Respondents had convincingly shown that Hodge redirected 
the order to Source 2 in breach of his fiduciary duty to Source 1. As such, the district court held 
                                                                                                                                                             
total gross profits for April–December were 34.32%, only slightly lower than the 38.82% from January–March; and 
selling expenses dropped from 4.03% for the first three months to 2.66% for April–December. 
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that Source 1’s total purchase orders for the final nine months of (April–December) 2012 should 
have been $825,716 (purchase orders fulfilled by Source 1) plus $223,841 (Bodybuilding.com 
purchase order) for a total of $1,049,557. Using Source 1’s profit margin for 2011 (8.66%), the 
district court calculated Source 1’s lost profits for the dissolution period as $90,891. Because 
Appellants showed that Source 1 did incur additional legal and accounting fees during the 
dissolution period in the amount of $59,496, the district court subtracted that sum from the total 
profit, which resulted in a lost profit calculation of $31,395 for the dissolution period. When 
added to $83,135 in net profits from January–March, the district court found that Source 1’s net 
profits for 2012 should have been $114,530.    
While Appellants’ expert testified that Prehn’s calculations of lost profits was erroneous, 
the district court did not find his testimony persuasive, and he did not offer an alternative 
calculation. Thus, the district court found that Hodge breached his fiduciary duty to minimize 
expenses for Source 1 and awarded Source 1 $114,530 in lost profits. Although there was 
conflicting evidence regarding how to calculate lost profits, the record indicates that there was 
competent, substantial evidence supporting the district court’s conclusion that Hodge breached 
his fiduciary duty to minimize Source 1’s expenses. Further, there was competent, substantial 
evidence to support the district court’s calculation of damages. As such, we affirm the district 
court’s award of $114,530 in lost profits to Source 1.  
3. Back Salary and Reimbursement for the Loan 
Appellants do not assert that the district court erred in finding that Source 1 owes Prehn 
$67,500 in back salary and $79,232.51 for his loan to Source 1. Accordingly, we will not disturb 
the district court’s finding.   
4. Unjust Enrichment 
The district court also found that Hodge’s breach of fiduciary duty led to him and Source 
2 being unjustly enriched in the following amounts: $20,084.61 for the balance of his personal 
loan from Source 1; $2,299.78 for the difference between the value of the vehicle and the amount 
Hodge paid on the loan; $8,000 for the ProfitMaker software license for Source 2; $18,287.83 for 
the value of the shaker cup credit used by Source 2; $12,400 for the value of the shaker cup mold 
deposit used by Source 2; and $20,000 for the legal fees paid to Hodge and Source 2’s counsel 
by Source 1. 
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The district court rejected Hodge’s argument that his debt should have been reduced 
because he did not collect all of his $144,000 salary for 2012. The district court determined that 
under the Operating Agreement, Hodge was only entitled to “reasonable compensation” and that 
during the dissolution period, his old salary from Source 1 was no longer reasonable because he 
was spending considerable time working for Source 2. Consequently, the district court held that 
Hodge had been unjustly enriched by not paying the balance of his loan from Source 1 because 
he received a benefit from it (i.e., the loan), he appreciated the benefit, and it would be 
inequitable for him to accept the benefit without paying for it.  
The district court also determined that Source 2 was unjustly enriched by acquiring 
certain benefits from Source 1 without payment. The district court further determined that Hodge 
breached his fiduciary duty to Source 1 by allowing Source 2 to utilize the ProfitMaker software 
license, the shaker cup credit payed for by Source 1, and the deposit on the shaker cup mold. 
Substantial, competent evidence supports the district court’s findings that Hodge and Source 2 
were unjustly enriched by receiving the aforementioned benefits. While Hodge argued that he 
purchased the ProfitMaker software at the auction, the record supports the district court’s 
determination that he transferred the software to Source 2 before the asset auction. Therefore, we 
affirm the district court’s findings that Hodge and Source 2 were unjustly enriched and its order 
that they compensate Source 1. In sum, we affirm the district court’s award of damages in all 
amounts as being supported by substantial, competent evidence.  
C. The District Court Did Not Err in Awarding Attorney’s Fees  
The district court awarded $187,500 in attorney’s fees. Of that amount, $162,500 was 
apportioned for the derivative claims and $25,000 was apportioned for Prehn’s individual claims. 
Initially, the $162,500 awarded to Prehn and Bandak was enforceable against Source 1 and 
Hodge. However, in its Second Amended Judgment for Source 1, the district court recognized 
that it erred by allowing the same award to be enforced against both Source 1 and Hodge 
simultaneously. Accordingly, it explained that Source 1 was awarded $162,500 in attorney’s fees 
enforceable against Hodge, and Prehn and Bandak were awarded $162,500 from Source 1. 
Although poorly explained, the district court’s award of attorney’s fees was correct.  
As a preliminary matter, the $25,000 award for Prehn’s individual claims was unaffected 
by the district court’s Second Amended Judgment. In regards to the award of $162,500, there are 
two relevant statutes. First, Idaho Code section 12-120(3) mandates that when “the gravamen of 
15 
 
a lawsuit” is a commercial transaction, the prevailing party is entitled to attorney’s fees. Kugler 
v. Nelson, 160 Idaho 408, 413, 374 P.3d 571, 579 (2016). Under the statute, a “commercial 
transaction” is any “transaction[] except transactions for personal or household purposes.” I.C. § 
12-120(3). The award of $162,500 to Source 1, enforceable against Hodge, was pursuant to this 
statute because the gravamen of the action between Source 1 and Hodge arose out of a 
commercial transaction. 
 Second, Idaho Code section 30-25-806 allows a plaintiff in a derivative action to recover 
reasonable attorney’s fees and costs if he/she prevails in whole or in part. I.C. § 30-25-806. 
Specifically, subsection (b) provides: “If a derivative action is successful in whole or in part, the 
court may award the plaintiff reasonable expenses, including reasonable attorney’s fees and 
costs, from the recovery of the limited liability company.” I.C. § 30-25-806. It is important to 
highlight the fact that the attorney’s fees are deducted from the recovery of the LLC. In 
accordance with this statute, the district court awarded Prehn and Hodge, as derivative plaintiffs 
asserting claims to enforce the rights of Source 1, $162,500 enforceable against Source 1.  
In sum, the $162,500 in attorney’s fees was first awarded to Source 1 enforceable against 
Hodge pursuant to Idaho Code section 12-120(3). Then, pursuant to Idaho Code section 30-25-
806(b), the district court awarded Prehn and Bandak $162,500 enforceable against Source 1. 
Thus, the $162,500 first transfers from Hodge to Source 1, then from Source 1 to Prehn and 
Bandak.  
VI.  
ATTORNEY’S FEES AND COSTS ON APPEAL 
Both parties request attorney’s fees and costs on appeal. Appellants assert that they are 
entitled to costs and attorney’s fees pursuant to the Operating Agreement, which provides for 
reasonable costs and attorney’s fees if a person covered under the Operating Agreement 
successfully defends a claim on its merits arising from the Operating Agreement. Respondents 
counter that because Hodge breached his fiduciary duty to Source 1, he committed “Disabling 
Conduct” that disqualifies him from being covered by the Operating Agreement even if 
Appellants prevail on appeal. Respondents further assert that they are entitled to attorney’s fees 
pursuant to Idaho Code section 12-120(3) as the prevailing party on appeal. We hold that 
Respondents are the prevailing party; thus, costs and attorney’s fees on appeal are awarded to 
Respondents. 
VII.  CONCLUSION 
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We do not reverse the district court’s decision not to hear Appellants’ Joint Motion to 
Dismiss. Further, we affirm the district court’s finding that Hodge breached his fiduciary duty to 
Source 1 and its members. Specifically, we affirm the district court’s awards related to the 
following: (1) Hodge’s breach of his fiduciary duty as to the management of the asset auction; 
(2) Hodge’s breach of his fiduciary duty related to his failure to minimize expenses during 
dissolution; (3) Prehn’s entitlement to back salary and reimbursement for the loan; and (4) the 
unjust enrichment of Hodge and Source 2.  We affirm the district court’s award of attorney’s 
fees. Costs and attorney’s fees on appeal to Respondents.  
Chief Justice J. JONES, Justices EISMANN, BURDICK and HORTON CONCUR.