Opinion ID: 1825740
Heading Depth: 1
Heading Rank: 11

Heading: Relief Granted by Trial Court Decree.

Text: We now reach the equally disputed issues arising from the relief granted by the trial court. They may be listed in the following categories: (1) Appointment of Special Master. (2) Transfer of all corporate stock of Alesch, Inc. from Iowa Mutual to Le Mars. (3) Separation of Iowa Mutual and Le Mars with court appointment of interim directors for Le Mars and court supervision of election of new Board of Directors. (4) Court appointment of interim directors for Alesch, Inc. and supervision of election of new Board. (5) Various areas of damage assessment. Before discussing them individually, we point out some general principles applicable to our consideration. Defendants object that much of the relief granted is unwarranted and without precedent. However, we have recently been willing in several cases to adopt extraordinary measures to meet extraordinary circumstances. Holi-Rest, Inc. v. Treloar, 217 N.W.2d at 526-27; Holden v. Construction Machinery Co., 202 N.W.2d at 363-64. We mention parenthetically that a money award in a derivative suit is more appropriately referred to as a judgment for restitution rather than as one for damages. Holden v. Construction Machinery Co., 202 N.W.2d at 358. However, the cases do not always recognize this distinction, and neither did the trial court in the present case. In this opinion we use the terms interchangeably. In discussing the power of an equity court to tailor relief to fit the case, we said in Holden, 202 N.W.2d at 363-64: In resisting this decree defendants assert there is no precedent for [the relief granted]. We find that argument nonpersuasive. Wherever a situation exists which is contrary to the principles of equity and which can be redressed within the scope of judicial action, a court of equity will devise a remedy to meet the situation, though no similar relief has been given before. McClintock on Equity, § 29 at 76 (2d ed. 1948). See also State ex rel. Weede v. Bechtel, 239 Iowa 1298, 1313, 31 N.W.2d 853 (1948); Whitaker & Co. v. Sewer Improvement District No. 1, 229 Ark. 697, 318 S.W.2d 831, 835 (1958); Tull v. Turek, 38 Del.Ch. 182, 147 A.2d 658, 664 (1958); Patton v. Nicholas, 154 Tex. 385, 279 S.W.2d 848, 857 (1955); Southwest Virginia Hospitals, Inc. v. Lipps, 193 Va. 191, 68 S.E.2d 82, 94 (1951); 1959 Duke L.J. 436, 441. This applies particularly to the appointment of a special master under rules 207-214, Iowa R.Civ.P. Defendants vigorously oppose the appointment of a special master and claim that course is unnecessary. They point outcorrectlythat the trial court announced prior to trial it expected proceedings to be final and plenary to avoid any occasion for re-trial of this troublesome and expensive litigation. Several things must be remembered in this connection. This appeal is interlocutory and the case is not yet completely closed. Furthermore, the most laudable judicial objectives are sometimes unattainable. This is an instance in which the case did not lend itself to a complete determination of all evidentiary matters. We approve the appointment of a special master as permitted by rule 207. In the absence of such a provision, it is not unlikely we would have ordered a similar procedure on remand. We discuss later the expanded powers which we delegate to the special master. We also uphold the trial court's exercise of jurisdiction over the interim appointment of directors and its supervision, later, of the election of a new board of directors. This applies to both Le Mars and Alesch, Inc. Courts traditionally adopt a hands-off policy in regard to the conduct of corporate affairs. Des Moines Bank & Trust Co. v. Bechtel & Co., 243 Iowa at 1067, 51 N.W.2d at 208-09. However, when an equitable result can be obtained in no other way, this rule must give way. Holi-Rest, Inc. v. Treloar, 217 N.W.2d at 526-27; Holden v. Construction Machinery Co., 202 N.W.2d at 363-64. In considering the relief granted, the overriding principle is that the rules applied are equitable in nature, that no one of them is inflexible, and that the issues must be decided on a case-by-case basis. In both Holi-Rest and Holden we held equity would fashion unusual relief to meet unusual circumstances. Other decisions reaching similar results include Richardson v. Blue Grass Mining Co., 29 F.Supp. 658, 670 (E.D.Ky.1939), aff'd. 127 F.2d 291 (6th Cir.), cert. denied 317 U.S. 639, 63 S.Ct. 30, 87 L.Ed. 515 (1942); Ohio Drill & Tool Co. v. Johnson, 498 F.2d 186, 191 (6th Cir. 1974); American Timber & Trading Co. v. Niedermeyer, 276 Or. 1135, 558 P.2d 1211, 1233 (1976); Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 20 N.E.2d 482, 486 (1939). We believe this case calls for fashioning the remedy to fit the facts. The absolute control of all three involved corporationsLe Mars, Iowa Mutual, and Alesch, Inc.by the same persons who have been found liable for the dealings which made such control possible make it mandatory to establish procedures by which Le Mars and Alesch, Inc. may be governed by independent boards properly chosen. We affirm that part of the decree ordering the separation of Iowa Mutual and Le Mars and providing for the appointment of interim directors until the election of directors under supervision of the trial court. The trial court decree calls for repayment to Le Mars of management fees and expenses paid by Le Mars to Iowa Mutual or Alesch Agency since April 1970 and for gross receipts of Alesch Agency since April 1970. We disagree with both these findings. Restitution is an equitable doctrine and is to be applied according to the facts of each case. We agree all profits must be accounted for and all benefit to the individuals must be returned. But there is nothing equitable about denying defendants the benefit of the actual and reasonable cost of producing that profit. In regard to this provision, the trial court added the following comment: It is true that the return of [some of] these amounts to Le Mars Mutual will constitute a windfall to the extent that management services were actually received or more than customary profit is generated thereby. On the other hand, Iowa Mutual and the defendants will certainly benefit to the extent that any funds from Le Mars Mutual or Alesch Agency are retained, whether such funds represent profit or cost. This Court resolves the issue in favor of the victim and not the wrongdoer. Management charges to Le Mars Mutual and gross receipts of Alesch Agency after April 21, 1970 are returnable to Le Mars Mutual without inquiry as to fairness or reasonableness. The trial court thus applied the no inquiry rule to all payments made after April, 1970, no matter what their purpose without regard to either the necessity of the services or the reasonableness of the amount charged. Plaintiffs urge us to adopt this same rule. We decline to do so. The no-inquiry rule is ordinarily applied to the transaction itself where there has been a breach of fiduciary duty. It provides the illegal sale or contract is unenforceable, without regard to fairness or reasonableness. It also deprives the wrongdoer of all benefit or profit from the transaction. However, there is no persuasive authority which denies him, too, reimbursement for legitimate expenses incurred. We find the result reached unduly harsh and singularly inequitable in favor of plaintiffs, who have been most insistent on fairness and equity when seeking relief for themselves. Those same standards should be applied for defendants as well as against them. A number of cases have considered similar problems. Our own case of Des Moines Bank & Trust Co. v. Bechtel & Co., 243 Iowa at 1049, 51 N.W.2d at 199, holds the net profits must be accounted for. The Ohio Drill case (498 F.2d at 190) requires that all profits be disgorged but notes that there must first be profits. In American Timber (558 P.2d at 1223) the court pointed out the doctrine of restitution is an equitable one and that, far from being inflexible, it must be applied as the particular facts dictate. The same view was announced in Lawson v. Baltimore Paint & Chemical Corp., 347 F.Supp. 967, 977 (D.Md.1972), where the court said that a director who had breached his fiduciary duty may nevertheless sometimes be entitled to salary or other compensation. Even Borden v. Sinskey, 530 F.2d 478, 497-98 (3d Cir. 1976), the case plaintiffs characterize as the most important single case [in this area] in decades does not go as far as the trial court did. Borden denied all profit and benefit to the individual wrongdoers but it permitted credit for $430,000.00 of expenses. We have not overlooked the fact that the trial court disallowed such items on two groundsfirst, the philosophical one we have just rejected and, second, because of defendants' failure to demonstrate the cost and profit components of the charges made to Le Mars Mutual for Management Services. We doubt the record bears this out; but we do not base our decision on any such close call as to burden of proof. We prefer, rather, to accord defendants the same privilege which has been given plaintiffs to supplement their proof as to management fees and expenses paid by Le Mars to Iowa Mutual or to Alesch Agency since 1970 and to make findings also concerning the net as well as the gross receipts of Alesch Agency since April, 1970, so that the trial court, when such findings are submitted together with the special master's recommendations, may determine the true amount to be reimbursed for these items.