IN THE COURT OF APPEALS OF IOWA

No. 16-0118

Filed March 22, 2017

TED A. TORSTENSON, Individually, and 

TOBY T. TORSTENSON, Individually,

Plaintiffs/Counterclaim Defendants-Appellants,

vs.

BIRCHWOOD ESTATE, L.L.C.,

Defendant/Counterclaim Plaintiff-Appellee.

________________________________________________________________

Appeal from the Iowa District Court for Polk County, David M. Porter, 

Judge.

Ted and Toby Torstenson appeal from the district court’s ruling on their 

claim for reimbursement against Birchwood Estate, L.L.C. REVERSED AND 

REMANDED WITH INSTRUCTIONS.

David Swinton, Steven P. Wandro, and Brian J. Lalor of Wandro & 

Associates, P.C., Des Moines, for appellants.

Allison M. Steuterman and Douglas A. Fulton of Brick Gentry, P.C., Des 

Moines, for appellee.

Heard by Danilson, C.J., and Vogel and Vaitheswaran, JJ.
2

DANILSON, Chief Judge.

Ted and Toby Torstenson appeal from the district court’s ruling on their 

claim for reimbursement against Birchwood Estate, L.L.C. (Birchwood) for 

payments made by the Torstensons on behalf of Birchwood under personal 

guaranties. We conclude the Torstensons were entitled to reimbursement from 

Birchwood for the amounts paid under the Torstensons’ personal guaranties. We 

further conclude the district court erred in considering the law of contribution 

among co-guarantors, finding Tierra Linda, L.L.C. (TL) breached a fiduciary duty 

to Birchwood, piercing the corporate veil of TL and holding the Torstensons 

personally liable, and awarding the money in dispute to the members of Central 

Iowa Developers, L.L.C. (CID), who were not parties to the suit. We therefore 

reverse the ruling of the district court and remand for entry of judgment in favor of 

the Torstensons.1

I. Background Facts & Proceedings.

Birchwood is a limited liability company established in 2004 for the 

purpose of purchasing and developing the Birchwood Estate Property in 

Winterset. Birchwood consists of two members: CID and TL.

2

 CID is a limited 

 

1 We acknowledge Birchwood filed a motion to strike the Torstensons’ final reply brief 

due to noncompliance with Iowa Rule of Appellate Procedure 6.904(4)(b). At oral 

argument, counsel for the Torstensons conceded the motion to strike should be granted 

for the reasons stated in the motion. Accordingly, we have disregarded the Torstensons’ 

reply brief.

2 As to the members of Birchwood, the operating agreement states, “THIS AGREEMENT 

is among Central Iowa Developers, L.L.C. and Tierra Linda, L.L.C. (the ‘initial 

Members’); Birchwood Estates, L.L.C., an Iowa limited liability company (the ‘Company’); 

and other persons who hereafter become additional or substitute members (together 

with the initial Members the “Members”) under the terms of this agreement.” At the time 

Birchwood was formed, CID had four members including Michael Knapp, William Kline, 

James Koolhof and Dan Cornelison. TL initially had three members including Ted and 
3

liability company with three members: Michael Knapp, James Koolhof, and 

William Kline. TL is also a limited liability company and has two members: Ted 

and Toby Torstenson. 

In March 2004, Birchwood executed a promissory note in the amount of 

$1,700,000 secured by a mortgage on the Birchwood Estate Property and by 

unconditional guaranties signed by CID and TL. CID and TL each made a capital 

contribution of $25,000 to Birchwood. Ted Torstenson testified it was his belief at 

the outset of the business endeavor that after the original capital contributions 

Birchwood would be able to cover its own debt service and expenses from 

money earned selling lots on the property. Koolhof testified there was no 

expectation CID or TL would have assets beyond the $25,000 capital 

contributions and it was also the intent for CID to be able to “cash flow to the 

greatest degree possible from loans from the bank and sales from the property.”

From 2004 to 2006, the proceeds from lot sales covered Birchwood’s 

payments on the promissory note and expenses as expected. However, in 2006,

the real estate market collapsed and lot sales slowed. Because Birchwood had 

no assets other than the property, it could not pay the amounts due on the 

promissory note. CID and TL began making payments to Birchwood on an 

alternating basis to make the requisite payments on the note. This arrangement 

continued until mid-2010 when TL stopped making payments to Birchwood. CID 

continued making payments to Birchwood and, in April 2011, paid an impairment 

payment to the bank in the amount of $387,107.09 to extend the note. However,

 

Toby Torstenson and Jason Reels. Cornelison and Reels are no longer associated with 

CID and TL. 
4

according to Birchwood’s exhibit, “Birchwood Estates Capital Contributions,” CID 

also eventually stopped capitalizing Birchwood in November 2014. In 2012, in 

order to prevent the note from going into default, Knapp and his wife purchased 

the note for the outstanding principal balance of $426,615.53 plus interest.

In order to effectuate an extension of the note in 2007, the members of 

CID and TL—Knapp, Koolhof, Kline, and each of the Torstensons—had made 

personal guaranties securing the note. After Birchwood became unable to 

continue making payments on the note, Knapp and his wife brought suit in 

August 2013 against TL and each of the Torstensons individually to enforce the 

guaranties. In a September 30, 2014 settlement agreement reached by the 

parties to the action, TL and the Torstensons agreed to pay $245,287.05 to 

Knapp and his wife pursuant to their obligation as guarantors and $189,440.95 to 

CID for a portion of the impairment payment.3 

Subsequently, on December 3, 2014, the Torstensons filed this action 

against Birchwood for reimbursement of money paid to Knapp and his wife on 

the guaranties. On March 29, 2015, Birchwood filed an answer and counterclaim 

against the Torstensons alleging the Torstensons caused Birchwood to default 

on the loan by failing to capitalize TL in order to continue making payments to 

Birchwood. Birchwood noted CID had made payments to Birchwood amounting 

to $733,090.74, while TL had only contributed $520,381.86, leaving a deficit of 

$212.708.88. Birchwood asserted the proceeds of the final sales of Birchwood 

Estate Property lots should be paid out to the members in a manner equalizing 

the capital accounts, providing reimbursement to the Torstensons under the 

 

3 Birchwood was administratively dissolved in 2015.
5

guaranties would result in unjust enrichment, and the Torstensons breached their 

fiduciary duty to Birchwood by attempting to obtain funds from Birchwood without 

satisfying the obligations of TL to Birchwood and CID.

The district court acknowledged under Iowa law a guarantor is entitled to 

reimbursement when the guarantor pays the debt of the principal obligor. See 

Hills Bank & Tr. Co. v. Converse, 772 N.W.2d 764, 772 (Iowa 2009). However, 

the court stated, “the Torstensons’ claim has run aground on contrary authority 

dealing with [the] law on co-guarantors.” The court determined “[t]he member 

paying a lesser contribution is liable for equalization of the burden or payments.” 

Citing Farmers & Merchants Bank v. Gibson, 7 B.R. 437, 411 (Bankr. N.D. Fla. 

1980) and In re Vermont Toy Works, Inc., 82 B.R. 258, 316-17 (Bankr. D. Vt. 

1987), the court determined the “[p]ayments made by the Torstensons, Knapp, 

Koolhof, and Kline, under the guaranties, were more capital 

contribution/payments of expenses than guarantor payments.” The court held:

As a capital contribution/expense, there would be no right to 

exoneration or right to contribution by the guarantor from the 

principal . . . [therefore] the Torstensons would not stand as general 

creditors seeking payment of a debt, but rather as a member 

seeking their fair share of distribution of the company’s assets 

based on their proportionate contributions to Birchwood. 

Citing Iowa Code section 489.403 (2014), the court further held TL was 

responsible for reimbursement or equalization of capital contributions or 

expenses paid by CID and CID’s members and the Torstensons were liable by 

way of piercing the corporate veil. The court reasoned:

By failing to adequately capitalize TL and subsequently 

assist in the adequate capitalization of Birchwood, the Torstensons 

breached their duty of care and failed to exercise care that a person 

in a like position (i.e., Knapp, Koolhof, and Kline as members of 
6

CID) would reasonably exercise under similar circumstances and in 

a manner the member reasonably believes to be in the best 

interests of the company. TL was obligated to continue to make 

equal capital contribution/call payments and is liable for the 

payments made on behalf of CID. The Torstensons simply cannot 

argue that their current demand for reimbursement is in 

Birchwood’s best interests, considering it was their inability [to] 

adequately capitalize TL, which caused TL to be unable to continue 

contributing to the capital calls/contributions for Birchwood, which 

caused Birchwood to ultimately default on the Note.

Simply put, Birchwood is equitably obligated to pay CID, 

which made payments on the Note on its behalf. CID has made 

significant capital contributions over and above those of TL 

($733,090.74 vs. $520,381.86) and attempts by the Torstensons, 

the sole members of TL, to obtain an equal share of any proceeds 

of [Birchwood] would unjustly enrich them. 

The court therefore ordered:

The $114,000[4]held in trust pending this action shall be paid out to 

the debts of Birchwood Estate, L.L.C. as follows:

1. First toward attorneys’ fees incurred in defending 

Birchwood in this action;

2. Second to members [of] CID for amounts expended in 

excess of the amounts expended by TL for expenses/capital 

contributions so as to even out contributions and expenses paid 

($212,708.88); and

3. Finally, any remainder to all members, equally.

The Torstensons now appeal.

II. Standard of Review.

Both parties agree this case was filed and tried at law. We review an 

action at law for correction of errors at law. Van Sloun v. Agans Bros., Inc., 778 

N.W.2d 174, 179 (Iowa 2010). “Under this standard of review, the trial court’s 

findings carry the force of a special verdict and are binding if supported by 

substantial evidence.” Id. However, “the district court’s legal conclusions and 

 

4 As explained at oral argument, the parties agreed to place one half of the assets of 

Birchwood—$114,000—into escrow pending the outcome of the case. The Torstensons 

seek a judgment in the sum of $114,000. 
7

application of legal principles are not binding on the appellate court.” Land O’ 

Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 2000). “If ‘the trial court has 

applied erroneous rules of law [that] materially affected its decision,’ we must 

reverse on appeal.” Id. (alteration in the original) (citation omitted). 

Because unjust enrichment is an equitable remedy, our review of its 

application to these facts is de novo. Iowa Waste Sys., Inc., v. Buchanan Cty., 

617 N.W.2d 23, 30 (Iowa Ct. App. 2000).

III. Analysis.

The Torstensons raise three issues on appeal: (I) whether the district court 

erred in rejecting the Torstensons’ claim for reimbursement from Birchwood for 

their payments under the guaranties; (II) whether the district court erred in 

applying the law regarding contribution among co-guarantors; and (III) whether 

the district court erred in piercing the corporate veil of TL and holding the 

Torstensons responsible for breach of fiduciary duty allegedly owed to 

Birchwood.

(I) Reimbursement. The Torstensons first contend they are entitled under 

Iowa law to reimbursement for payments made on the guaranties executed on 

behalf of Birchwood. 

In Hills Bank & Trust Co., the supreme court adopted the position of 

Restatement (Third) of Suretyship and Guaranty section 22 on the issue of 

reimbursement and held, “Under the Restatement, when a principal obligor has 

notice of the secondary obligation, the principal obligor has the duty to reimburse 

the secondary obligor to the extent the secondary obligor is called upon to 

perform, or if the secondary obligor settles with the obligee.” 772 N.W.2d at 772. 
8

Under these facts, Birchwood is the principal obligor, having executed the 

promissory note, and the Torstensons are secondary obligors, having executed 

personal guaranties to pay when the principal obligor was unable to do so. Thus, 

the Torstensons’ claim for reimbursement is supported by Iowa law. See 

Spreitzer v. Hawkeye State Bank, 779 N.W.2d 726, 743 (Iowa 2009) (“When a 

creditor bypasses the assets of a debtor and collects the debt from a guarantor

under the terms of a personal guaranty, the guarantor may assert rights of 

reimbursement against the debtor to recoup the amount paid on the guaranty.”).

Neither party disputes Iowa law provides a remedy for a guarantor to seek 

reimbursement from the principal obligor when the guarantor pays a debt owed 

by the principal obligor. The Torstensons, as individuals, made payments on 

behalf of Birchwood under their personal guaranties. In the petition, the 

Torstensons, as individuals, sought reimbursement for amounts paid pursuant to 

the guaranties via the settlement agreement. The settlement agreement 

identified Knapp’s claim against the Torstensons was for breach of guaranty and 

required the Torstensons to pay $245,287.05 to Knapp upon execution of the 

settlement agreement.5 The settlement amount was paid to Knapp as assignee 

of the note by the Torstensons under their obligations as guarantors. As such, 

the Torstensons are entitled to reimbursement from the principal obligor, 

Birchwood. 

 

5

To the extent the Torstensons sought reimbursement for money paid to CID for 

contribution to the impairment payment, we note Hills Bank & Trust Co., 772 N.W.2d at 

772, and the Restatement (Third) of Suretyship & Guaranty section 22 does not provide 

for reimbursement.
9

The district court erred in applying Farmers & Merchants Bank, 7 B.R. at 

441, and Vermont Toy Works, Inc., 82 B.R. at 316-17, 329-33, and concluding 

payments made by the Torstensons under the guaranties were actually capital 

contributions or payments of expenses. Both cases dealt specifically with the 

doctrine of marshaling, which relates to secured creditors and is not at issue in 

this case. See Farmers & Merchs. Bank, 7 B.R. at 441 (“[I]n a marshaling 

context, the balance of equities tips in favor of the creditors of the principal as 

against the guaranty claimant with respect to any individually owned property 

which was specifically pledged to secure the guaranty and obtain working 

capital.”(emphasis added)); see also Vt. Toy Works, Inc., 82 B.R. at 319 

(explaining the analysis relates to “the contributions to capital exception to 

marshaling”).

6

 Further, Farmers & Merchants Bank was subsequently vacated

by Peacock v. Gibson, 7 B.R. 437, 443 (Bankr. N.D. Fla. 1980), and Vermont Toy 

Works, Inc., was reversed in In re Vermont Toy Works, Inc., 135 B.R. 762, 773 

(D. Vt. 1991). Thus, there is no support for the district court’s determination that 

the payments made by the Torstensons under the guaranties were actually 

capital contributions or payments of expenses.

 

6 The doctrine of marshaling 

is applied when two or more secured creditors claim against one debtor 

and the senior secured creditor can reach two or more of a debtor’s 

property interests or funds while the junior secured creditor may reach 

only one. By forcing the senior secured creditor to elect the fund which is 

not subject to satisfaction by the junior secured creditor, both the junior 

and senior secured creditors may realize satisfaction of their respective 

claims against the common debtor.

Vt. Toy Works, Inc., 82 B.R. at 290.
10

The payments made by the Torstensons to Knapp under the settlement 

agreement were payments under the Torstensons’ guaranties, and the 

Torstensons are thus entitled to reimbursement.

(II) Contribution. The Torstensons next claim the district court erred in 

considering the law of contribution among co-guarantors in reaching its 

determination in this case. The Torstensons assert application of the law on coguarantor contribution is improper because none of the co-guarantors are parties 

to the lawsuit.7 More importantly, the Torstensons further point out each of the 

co-guarantors released any claims for contribution related to payment of the 

guaranties under the settlement agreement in the previous lawsuit. Thus, the 

Torstensons’ assert there is not, and cannot be, a claim by any of the coguarantors against the Torstensons for contribution and “the law governing 

contribution among co-guarantors simply has no bearing on [their] claim against 

Birchwood.” 

Birchwood argues the district court correctly considered the law on 

contribution among co-guarantors in addition to the law regarding reimbursement 

from the principal obligor. Birchwood also asserts the district court correctly 

found CID was entitled to reimbursement of capital contributions or expense 

payments from Birchwood and TL and, ultimately, from the Torstensons. 

 

7 On September 15, 2015, CID, Knapp, and Koolhof filed a motion to intervene and/or 

join as indispensable parties to the lawsuit. The motion was denied. The district court 

noted that a trial scheduling order filed March 27, 2015, stated “[n]o new parties may be 

added later than 180 days before trial.” The district court denied the motion to intervene 

and/or join because it was filed less than sixty days before trial and was untimely. The 

court stated “the prospective intervenors may have been permitted to intervene under 

[Iowa Rule of Civil Procedure] 1.407(2) if a timely application had been made. The court 

does not find that the prospective intervenors are ‘indispensable parties’ as defined in 

rule 1.234.” 
11

Birchwood contends any other outcome would result in the unjust enrichment of 

the Torstensons.

We find the district court also erred in considering contribution in this case. 

While under Restatement (Third) of Suretyship and Guaranty section 55 “each 

cosurety has the right of contribution against other cosureties,” Hills Bank & Trust 

Co., 772 N.W.2d at 772-73, the Torstensons correctly assert contribution is not at 

issue in this matter. The co-guarantors were not joined as parties to this case, 

and any error in the district court’s ruling on the motion to intervene and/or join 

was not raised on appeal. More importantly, under the settlement agreement, 

Knapp and his wife agreed to

[r]elease, acquit and discharge Tierra Linda, the 

Torstensons, CID, Kline, and Koolhof from any and all Claims that 

Ellyn and Knapp may now or hereafter have against the 

Torstensons, including but not limited to any and all Claims or 

defenses that were brought or could have been brought in the Civil 

Case related to the amounts due and owing under the Note, 

Guarantees and Impairment Payments. 

Koolhof and Kline agreed to identical releases in the agreement.

Despite the fact that CID, Knapp, Koolhof, and Kline were not parties to 

the lawsuit, the district court ultimately awarded the $114,000 at issue to be paid 

to the members of CID to equalize deficient capital accounts. Absent 

intervention or joinder of the co-guarantor parties,

8

or Birchwood’s bringing an 

 

8 The other co-guarantors would also have a right to reimbursement from Birchwood for 

any payments made under their guaranties. However, they did not properly join this 

action. Birchwood remains in possession of approximately an additional $114,000.
12

action for interpleader,

9

the court erred in entering judgment in favor of CID, 

Knapp, Koolhof, and Kline who are not parties to the case.10 

(III) Breach of Fiduciary Duty and Piercing the Corporate Veil. Last, the 

Torstensons contend the district court erred in piercing the corporate veil and 

holding the Torstensons personally responsible for breach of fiduciary duty

allegedly owed to Birchwood. 

A. Breach of Fiduciary Duty. The Torstensons assert this matter involves 

only Birchwood and not the Torstensons in their individual capacity. The 

Torstensons therefore contend they did not individually owe a fiduciary duty to 

Birchwood. 

The district court relied upon Iowa Code sections 489.409 and .403 to hold 

TL’s refusal to continue making capital contribution payments constituted a 

breach of fiduciary duty and the duty of care to Birchwood and CID. Section 

489.409(3) provides, in relevant part,

the duty of care of a member of a member-managed limited liability 

company in the conduct and winding up of the company’s activities 

is to act with the care that a person in a like position would 

 

9

Iowa Rule of Civil Procedure 1.251 provides, “A person who is or may be exposed to 

multiple liability or vexations litigation because of several claims against the person for 

the same thing, may bring an equitable action of interpleader against all such claimants.” 

Iowa Rule of Civil Procedure 1.252 also permits “[a] defendant to an action exposed to 

similar liability or litigation [to] obtain interpleader by counterclaim or cross-petition. Any 

claimant not already before the court may be brought in to maintain or relinquish that 

claim to the subject of the action, . . .” In support of its request that the proceeds of the 

final sales of Birchwood Estate Property lots be paid out to the members in a manner 

equalizing the capital accounts, Birchwood could have brought an action for interpleader 

adding TL, CID, and CID’s members to the case. However, Birchwood did not do so.

10 To render a binding judgment, a court must have both subject matter and personal 

jurisdiction over the case. See Schott v. Schott, 744 N.W.2d 85, 87-88 (Iowa 2008); see 

also Book v. Doublestar Dongfeng Tyre Co., 860 N.W.2d 576, 583-84 (Iowa 2015). “A 

judgment may be considered void where the court acted without or in excess of its 

jurisdiction.” McCourt Mfg. v. Rasmussen, No. 09-1483, 2010 WL 3894485, at *3 (Iowa 

Ct. App. Oct. 6, 2010) (citation omitted).
13

reasonably exercise under similar circumstances and in a manner 

the member reasonably believes to be in the best interests of the 

company.

The district court held:

By failing to adequately capitalize TL and subsequently 

assist in the adequate capitalization of Birchwood, the Torstensons 

breached their duty of care and failed to exercise care that a person 

in a like position (i.e. Knapp, Koolhof, and Kline as members of 

CID) would reasonable exercise under similar circumstances and in 

a manner the member reasonably believes to be in the best interest 

of the company.

The district court also noted Iowa Code section 489.403 relating to a 

member’s liability for contributions provides, “A person’s obligation to make a 

contribution to a limited liability company is not excused by the person’s death, 

disability, or other inability to perform personally.” The district court determined 

“[w]hether the payments were capital contributions or expenses, under Iowa law, 

TL is responsible for reimbursement/equalization of such contribution/expense 

payments and is now liable” under section 489.403.

We conclude the court erred in holding TL, and thereby the Torstensons, 

liable for failing to continue making capital contributions and determining the 

Torstensons, as individuals, owed a fiduciary duty to Birchwood. It is significant 

that the settlement payments were made by the Torstensons as individuals 

pursuant to their individual personal guaranties. As individuals, the Torstensons

had no obligation to make capital contributions to Birchwood because they were 

not members of Birchwood. Rather, the Torstensons were members of TL. Any 

capital contributions were solely the responsibility of TL and CID. The settlement 

agreement does not recite that the guaranty payments shall constitute capital 

contributions on behalf of TL. None of the statutory methods to become a 
14

member of a limited liability company apply to the Torstensons.11 Because the 

Torstensons were not members of Birchwood, they owed no fiduciary duty to 

Birchwood.

Moreover, a member of a limited liability company is not always obligated 

to make contributions. See Iowa Code § 489.401(5) (“A person may become a 

member without . . . being obligated to make a contribution to the limited liability 

company.”). The operating agreement dictates the initial contribution, if any, as 

well as subsequent required contributions. See id. § 489.110(1)(a) (providing the 

operating agreement governs “[r]elations among the members as members and 

between the members and the limited liability company”); see also id. § 

489.111(1) (“A limited liability company is bound by and may enforce the 

operating agreement, . . .”).

Under the terms of Birchwood’s operating agreement, TL was not required 

to continue making capital contributions and was not to be held responsible for 

equalizing the capital accounts. Section 5.01 of Birchwood’s operating 

agreement provides, “The Company’s initial capital shall consist of cash or 

property to be contributed by the initial Members in the amounts indicated on 

Exhibit A. Additional calls for capital may be agreed upon by a majority of the 

Members.” And Section 5.03 provides:

Except as provided in Article IX, a Member is not entitled to 

demand or receive the return of any Capital Contribution prior to the 

Company’s dissolution and winding up. In the event of a 

dissolution and winding-up, no Member shall receive out of the 

Company’s property any part of its Capital Contribution until all 

liabilities of the Company, except liabilities to Members on account 

 

11 See Iowa Code § 489.401(4)(a) (providing a person becomes a member of a limited 

liability company “[a]s provided in the operating agreement”).
15

of their Capital Contributions, have been paid or there remains 

property in the Company sufficient to make such payments.

Further, section 5.04 states, “No Member shall be obligated to satisfy a negative 

Capital Account balance.” Section 9.03 regarding termination and dissolution of 

the company provides:

The Members shall look solely to the assets of the Company 

for the return of their capital contributions, and if the assets of the 

Company remaining after payment or discharge of the debts and 

liabilities of the Company are insufficient to return such capital 

contributions, they shall have no recourse against any other 

Members for such purpose.

And section 3.04 of Birchwood’s operating agreement provides, “No Member 

shall be personally liable for any debts or obligations of the Company unless 

otherwise required by the Act.”

Ted Torstenson testified it was his understanding by agreeing to these 

provisions that TL would not be required to make capital contributions without 

TL’s consent. The district court held that TL and the Torstensons “waived their 

right to later contest the validity of additional capital contributions” by failing to 

attend meetings after they stopped contributing funds to TL to make payments to 

Birchwood in order to satisfy the note. However, section 5.01 expressly states 

capital contributions may be required only as agreed upon by the members, and 

there is no dispute TL remained a member notwithstanding the lack of 

representation at the meetings. Prior to discontinuing payments to Birchwood, 

the Torstensons explained TL could not keep making the payments and no 

longer assented to the capital contributions. TL’s agreement was necessary to 

require further capital contribution payments. The provision of section 5.01 could 

only be amended by “the unanimous approval of the Members to amend the 
16

terms of the operating agreement” pursuant to section 4.07(b)(v). The section 

was not amended. 

Under the terms of the operating agreement, TL was not obligated to 

continue making capital contributions, and TL and the Torstensons’ failure to 

continue making such payments does not constitute a breach of fiduciary duty or 

the duty of care. The Torstensons were not members of Birchwood and owed no 

fiduciary duty to Birchwood. Only the members of Birchwood—TL and CID—

were obligated to comply with the duties created by the operating agreement. 

The operating agreement provides no basis to offset a personal guarantor’s 

reimbursement for payment made under a guaranty by a member’s obligation for 

expenses, costs, damages, or a member’s deficiency in its capital contributions. 

The court erred in holding the Torstensons personally liable for breach of 

fiduciary duty.12

B. Piercing the Corporate Veil. The Torstensons also argue the decision 

to pierce the corporate veil in this case was not supported by substantial 

evidence because TL was properly capitalized at the time of formation and TL 

was handled in a manner consistent with its existence as a separate legal entity.

Birchwood asserts, “The failure of TL to be adequately capitalized, which 

was the fault of the Torstensons’ general practice or otherwise, caused 

Birchwood to default on the note and the Torstensons should not be allowed to 

 

12 We note section 8.05(b)(2) of the operating agreement provides, in part, “The Member 

shall, however, remain liable for any obligation to the Company that existed prior to the 

effective date of the dissociation, including any costs or damages resulting from the 

Member’s breach of this Agreement.” But Birchwood has not alleged this provision is 

applicable to these facts, and TL is not a party to this action.
17

escape their requisite and proportional liability for the outstanding expenses of 

Birchwood.”

The district court determined TL was obligated to continue making equal 

capital contributions and is liable for breach of fiduciary duty and the duty of care 

for failing to do so. The district court then determined it was appropriate to pierce 

the corporate veil and hold the Torstensons personally liable.

The district court found:

The Torstensons formed TL for the purpose of having an 

entity that could be a member of Birchwood. TL did not have its 

own assets and was only able to make payments on the note via 

funds or payments from its individual members—Ted and Toby 

Torstenson. Plaintiffs were the sole owners and provided all capital 

to TL. Regrettably, TL was not adequately capitalized, which 

resulted in Birchwood being inadequately capitalized. Based on the 

testimony of Ted Torstenson, traditional formalities of limited liability 

entities were not followed, nor did the Torstensons maintain 

separate books. Because of this, the “corporate veil” can be 

pierced, and TL can be held liable for the undercapitalization or 

unequal capitalization.

In respect to piercing the corporate veil, the theory underlying the doctrine 

is that a “limited liability company is an entity distinct from its members,” Iowa 

Code § 489.104(1), and the separate limited liability company enables the 

members to limit their personal liability, see Iowa Code § 489.304, but “the 

corporate device cannot in all cases insulate the owners from personal liability.” 

Briggs Transp. Co. v. Starr Sales Co., 262 N.W.2d 805, 809-10 (Iowa 1978). 

“The corporate veil may be pierced under exceptional circumstances, for 

example, where the corporation is a mere shell, serving no legitimate business 

purpose, and used primarily as an intermediary to perpetuate fraud or promote 

injustice.” Id. at 810. “The burden is on the party seeking to pierce the corporate 
18

veil to show the exceptional circumstances required.” In re Marriage of 

Ballstaedt, 606 N.W.2d 345, 349 (Iowa 2000) (citing C. Mac Chambers Co. v. 

Iowa Tae Kwon Do Academy, Inc., 412 N.W.2d 593, 598 (Iowa 1987)).

The factors to be considered when determining whether the corporate veil 

may be pierced and the individuals held personally liable include:

(1) the corporation is undercapitalized; (2) it lacks separate books; 

(3) its finances are not kept separate from individual finances, or 

individual obligations are paid by the corporation; (4) the 

corporation is used to promote fraud or illegality; (5) corporate 

formalities are not followed; and (6) the corporation is a mere sham.

Cemen Tech, Inc. v. Three D Indus., L.L.C., 753 N.W.2d 1, 6 (Iowa 2008)

(citation omitted). 

The problem here is no judgment was awarded against either TL, a 

nonparty, or the Torstensons, and thus no reason exists to pierce the corporate 

veil. The doctrine is an equitable remedy to protect creditors. Minger Const., 

Inc. v. Clark Farms, Ltd., No. 14-1404, 2015 WL 7019046, at *6 (Iowa Ct. App. 

Nov. 12, 2015) (McDonald, J., concurring) (“The decision to impose liability on a 

shareholder for corporate obligations where there is no basis for liability at law, is 

necessarily an equitable remedy . . .” (citation omitted)); see also Boyd v. Boyd & 

Boyd, Inc., 386 N.W.2d 540, 544 (Iowa Ct. App. 1986) (“[O]ne of the 

circumstances which may move a court to disregard corporate entity is where 

limited liability would be inequitable. 6 Hays, Iowa Practice Business 

Organizations § 882 at 298 (1985); Hornstein, Corporation Law and Practice § 

752 at 265 (1959). Hayes further specifies that ‘[t]he corporate veil may be 

disregarded when recognition would work inequitably against one or more groups 

of creditors of the enterprise . . .’ Hayes, § 886 at 308.” (alteration in original)). 
19

The doctrine does not entail the assignment or delegation of a fiduciary duty 

owed by a corporation, or a breach thereof, to its members except as it relates to 

creditors. Birchwood is not alleged to be a creditor needing to pierce the 

corporate veil of TL. In fact, Birchwood is more akin to a disinterested entity 

holding funds that may face multiple claims for the same monies, similar to a

party having the right of interpleader,

13 rather than a party seeking payment for 

some obligation owed to it. See C.F. Sales, Inc. v. Amfert, Inc., 344 N.W.2d 543, 

550 (Iowa 1983) (“Interpleader originated in equity as a means by which a 

disinterested stakeholder of money or property could avoid vexatious litigation 

with multiple claimants by making them defendants and requiring them to 

establish their claims among each other to the fund or res.” (citing 45 Am. Jur. 2d 

Interpleader § 2 (1969); 48 C.J.S. Interpleader § 4 (1981)).) However, Birchwood 

never brought an action or counterclaim of interpleader, and its efforts to join

additional parties, including CID, were denied by the district court. 

Further, piercing the corporate veil was unwarranted in this case based on 

the finding that TL was inadequately capitalized. In determining if the L.L.C. was 

undercapitalized, “[t]he relevant inquiry is the capital structure of the entity at or 

near the time of incorporation.” Minger Const., Inc., 2015 WL 7019046, at *9. At 

the time Birchwood was formed, both parties were required to contribute the 

initial $25,000 capitalization. No other capitalization was expected at that time, 

as it was the intent of both members that Birchwood would be able to cover its 

expenses and debt service with income from the sale of portions of the property. 

When TL and CID were subsequently required to make additional capital 

 

13 See Iowa R. Civ. P. 1.251.
20

contributions, the members of TL paid funds into TL to be paid to Birchwood. 

The record reveals CID made capital contributions to Birchwood in the same 

manner. The fact that the Torstensons at some point in time discontinued 

providing capital to TL so TL could continue providing capital to Birchwood in 

light of the real estate market crash is not significant to the issue of whether TL 

was initially inadequately capitalized. Moreover, if all of TL’s and the 

Torstensons’ payments were treated as capital contributions as urged by 

Birchwood, they paid over $520,000 in total, an amount far in excess of the initial 

expectation that $25,000 was sufficient. 

The district court erred in determining the circumstances warranted 

piercing the corporate veil of TL, a nonparty, and thereby holding the 

Torstensons personally liable. Under these facts, there is no legal ground to 

pierce the corporate veil. 

(IV) Unjust enrichment. Birchwood’s counterclaim also raises the theory 

of unjust enrichment. The district court determined the Torstensons would be 

unjustly enriched in concluding:

Simply put, Birchwood is equitably obligated to pay CID, 

which made payments on the Note on its behalf. CID has made 

significant capital contributions over and above those of TL 

($733,090.74 vs. $520,381.86) and attempts by the Torstensons, 

the sole members of TL, to obtain an equal share of any proceeds 

of the L.L.C. would unjustly enrich them. Individuals Knapp, 

Koolhof, and Kline have made payments by way of capital 

contributions to CID and payments under their own personal 

guarantees resulting in those individuals investing significantly 

more funds into Birchwood than the Torstensons.

In essence, Birchwood’s unjust enrichment argument underlies each of 

the three issues on appeal. We consider it as an independent claim as well 
21

because it was pled as a part of the counterclaim. Unjust enrichment “has not 

only given rise to specific derivative theories, such as contribution and indemnity, 

but can stand on its own as an open-ended, broad theory of restitution.” State 

Dep’t of Human Servs. ex rel Palmer v. Unisys Corp., 637 N.W.2d 142, 150 

(Iowa 2012). Although not raised as a separate issue on appeal, we address it 

because “we may affirm a district court ruling on an alternative ground provided 

the ground was urged in that court.” St. Malachy Roman Catholic Congregation 

of Geneseo v. Ingram, 841 N.W.2d 338, 351 n.9 (Iowa 2013). But we are unable 

to affirm on this theory because the Torstensons are seeking reimbursement for 

their payments made on their personal guaranties and it was TL that was alleged 

to have not paid equal capital contributions to CID. The Torstensons, as 

individuals, have not been unjustly enriched, but rather are entitled to be 

compensated for the monies they expended towards Birchwood’s obligation. 

IV. Conclusion. 

We conclude the Torstensons were entitled to reimbursement from 

Birchwood for the amounts paid under the Torstensons’ personal guaranties. We 

further conclude the district court erred in considering the law of contribution 

among co-guarantors, finding TL breached a fiduciary duty to Birchwood, 

piercing the corporate veil of TL and holding the Torstensons personally liable, 

and awarding some of the funds in dispute to the members of CID, who were not 

parties to the suit. We therefore reverse the district court order and remand for 

entry of judgment in favor of the Torstensons in the sum of $114,000.

REVERSED AND REMANDED WITH INSTRUCTIONS.