Court Opinion

ID: 4118332
Source: CourtListenerOpinion
Date Created: 2017-01-25 16:07:41.042829+00
Date Added: 2024-06-11T09:20:52.736188
License: Public Domain

IN THE COURT OF APPEALS OF IOWA

                                   No. 15-2015
                             Filed January 25, 2017

URBANDALE BEST, LLC and URBANDALE WEST, LLC,
    Plaintiffs-Appellants/Cross-Appellees,

vs.

R&R REALTY GROUP, LLC, R&R REAL ESTATE INVESTORS, LLC, and
PMR REALTY GROUP, LLC,
     Defendants-Appellees/Cross-Appellants.
________________________________________________________________

      Appeal from the Iowa District Court for Polk County, Karen A. Romano,

Judge.

      A member of multiple LLCs appeals the verdicts in a bench trial involving

the managing member of the LLCs, and the managing member cross-appeals.

AFFIRMED IN PART, REVERSED IN PART ON APPEAL; AFFIRMED ON

CROSS-APPEAL.

      Michael A. Dee and Haley R. Van Loon of Brown, Winick, Graves, Cross,

Baskerville & Schoenebaum, P.L.C., Des Moines, for appellant.

      George A. LaMarca and Ryan C. Nixon of LaMarca Law Group, P.C., Des

Moines, for appellee.

      Heard by Vogel, P.J., Vaitheswaran, J., and Mahan, S.J.*

      *Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2017).
                                          2

VOGEL, Presiding Judge.

       Urbandale Best, LLC and Urbandale West, LLC (collectively the

Urbandale entities) appeal the district court’s verdicts in a bench trial involving

R&R Realty Group, LLC (R&R), R&R Real Estate Investors, LLC (REI), and PMR

Realty Group, LLC (PMR) (collectively the R&R entities).          Specifically, the

Urbandale entities claim the district court erred in: (1) failing to remove REI as a

managing member of Paragon West for a breach of fiduciary duty involving

personal profit; (2) failing to remove REI as a managing member of Paragon

West for failing to make reasonable efforts to correct its breach of the operating

agreement; (3) concluding residential apartment development was within the

ordinary course of business of Paragon Best; and (4) failing to award Urbandale

West attorney fees.        The R&R entities cross-appeal the district court’s

determinations that REI breached its fiduciary duty and that Urbandale West did

not breach its fiduciary duty or duty of good faith and fair dealing by failing to

cooperate with the financing of a retail office building.

       I.     Background Facts and Proceedings

       Since approximately 2006, the Urbandale entities1 have been joint owners

of various real estate development companies with the R&R entities. Two jointly-

owned entities are relevant to this matter: Paragon West, LLC and Paragon Best,

LLC. Paragon West, formed in 2006, is jointly-owned by Urbandale West and

REI with REI serving as the managing member. Paragon Best was also formed

1
  The Urbandale entities are wholly-owned by Kansas City Life Insurance Company
(KCL). Tracy Knapp is President of Urbandale West and Urbandale Best, as well as
Senior Vice President and Chief Financial Officer of KCL.
                                            3

in 2006 and is jointly-owned by Urbandale Best and R&R with R&R serving as

the managing member.

        Paragon West owns real property at the corner of 128th Street and

Meredith Drive in Urbandale. The land is divided into multiple parcels. Paragon

West’s predecessor, 128th Street LLC, sold a portion of one of the parcels,

known as the “Dahl’s Property” to Foods Inc., prior to the formation of Paragon

West.    Foods’s purchase of the Dahl’s Property was subject to a developer

agreement that required the parcel to be developed as a grocery and

convenience store and included a right of Paragon West to repurchase if Foods

failed to do so. Urbandale West was aware of this agreement when it formed

Paragon West with REI.2

        In 2012, Foods informed REI that it was not going to develop the land as a

grocery and convenience store, and REI relayed the information to Urbandale

West. Thereafter, Paragon West’s potential repurchase of the Dahl’s Property

was discussed in Paragon West’s quarterly meetings and listed in Paragon

West’s monthly marketing reports.          In April 2014, Foods informed REI they

needed to sell the Dahl’s Property within the next thirty days. By this time, the

relationship between the Urbandale entities and the R&R entities had

deteriorated to the point the R&R entities no longer wanted to acquire land with

the Urbandale entities unless they were legally required to.

2
  In 2009, Foods and Paragon West performed a land swap, in which Foods exchanged
one portion of the parcel for another. The swap included the same development
restriction and right to repurchase as the original sale, with Paragon West substituted for
128th Street LLC.
                                        4

      In May 2014, PMR, an affiliate of REI, made an offer to Foods to purchase

the Dahl’s Property. PMR and Foods negotiated over the next couple of months,

and in June 2014, Foods sold the Dahl’s property to PMR.           Along with a

purchase agreement, the sale included a release, which relieved Foods and its

successors and assigns, including PMR, from any obligation to provide Paragon

West with a right to repurchase the Dahl’s Property.

      Prior to making the offer, Steve Gaer, General Counsel and Chief

Operating Officer of REI, examined the Paragon West operating agreement and

the development agreement with Foods and determined an R&R entity could

purchase the Dahl’s Property without including Urbandale West in the purchase

and Paragon West did not have a right to repurchase.        Gaer sought out an

opinion from William Bartine, outside legal counsel for Paragon West, as well as

for REI, R&R, and PMR. Bartine testified that he “was asked not to bend over

backwards but was asked to be fair” in his analysis. Ultimately, Bartine reached

the same conclusion as Gaer.      At no point prior to the sale did REI inform

Urbandale West that another R&R affiliate was in negotiations to purchase the

Dahl’s Property. In the May and June 2014 monthly reports for Paragon West,

REI included the potential Dahl’s Property repurchase on the agenda. REI did

not disclose that the property had been sold until the July monthly report and

meeting, which was the first monthly report and meeting post-closing.

      On July 24, 2014, Urbandale West sent a letter to REI alleging REI had

violated the Paragon West operating agreement and usurped a corporate

opportunity that belonged to Paragon West in selling the property. REI followed

with a letter denying Urbandale West’s allegations and claiming REI was
                                              5

authorized to execute the release.3 On July 18, 2014, the Urbandale entities filed

a petition, which they followed with an amended petition on August 15, seeking a

declaratory judgment that REI violated the Paragon West operating agreement

and requesting REI be removed as managing member of Paragon West for

cause. After this suit was filed, REI sent Urbandale West a letter on August 27,

which offered them the opportunity to purchase a fifty-percent stake in the Dahl’s

Property and provided the property would be transferred to Paragon West at

closing.

          Another dispute between the Urbandale entities and the R&R entities was

occurring simultaneous to the above-described dispute. This second dispute

involved Paragon Best, an entity jointly-owned by Urbandale Best and R&R. As

the managing member, R&R is responsible for the day-to-day operations of

Paragon Best. However, the Paragon Best operating agreement also contains a

section that describes “major decisions” that require unanimous approval.

Section 4.4(a)(13) of the Paragon Best operating agreement requires unanimous

approval of the members for “[a]ny transaction not in the ordinary course of

business or affairs of the Company.”

          Paragon Best owns real property in Urbandale within an area known as

the Highland Pointe Office Park. On June 26, 2014, R&R, as a member of

Paragon Best, submitted a proposal to Urbandale Best to build a multi-family

apartment and commercial unit on part of the property. Urbandale Best did not

wish to participate in the proposal. R&R then expressed its intent to purchase

3
    This letter was the first time Urbandale West was told about the release.
                                        6

the land from Paragon Best, which it believed it was entitled to do under section

4.6 of operating agreement:

      In the event that a Member desires to have the Company construct
      a new project on land owned by the Company, such Member shall
      submit a written proposal to the other Member and that Member
      shall have twenty-one (21) days to approve or reject said proposal.
      In the event that R&R and KCL disagree respecting any new
      construction project upon any unimproved land owned by the
      Company, the party wishing to undertake such new construction
      shall have the right to purchase such unimproved land from the
      Company at FMV, for cash, within one hundred twenty (120) days
      of such disagreement . . . .

In its amended petition filed on August 15, Urbandale Best sought a declaratory

judgment that section 4.6 did not apply because R&R’s proposal fell outside the

ordinary course of business of Paragon Best and therefore required unanimous

approval from both members of Paragon Best.

      The R&R entities filed counterclaims, which injected another dispute into

the litigation. The R&R entities alleged Urbandale West breached its duty of

good faith and fair dealing in rejecting a financing proposal submitted by REI

related to a retail office building in a parcel owned by Paragon West. In 2008,

REI submitted a project proposal, which Urbandale West accepted, that

contained the following language regarding financing:

      The budget includes a 6-month construction period plus a 12-month
      lease up period. We will plan to seek project specific long-term
      financing at a fixed rate upon stabilization, depending on the capital
      markets at that time. Due to the nature of the project, consideration
      may need to be given to both recourse and non-recourse options.

In 2014, REI submitted a long-term financing proposal to Urbandale West, which

included the possibility of recourse financing and a prepayment penalty.

Urbandale West rejected the proposal, citing concerns about the possibility of the
                                              7

loan requiring riskier personal guarantees, trouble attracting tenants to the space,

and the interest rate.

         Following a three-day bench trial in May 2015, the district court issued a

written ruling containing its detailed findings of fact and conclusions of law on

September 3, 2015.           Regarding the Dahl’s Property, the court concluded

Paragon West had the right to repurchase the property and the opportunity to do

so was a corporate opportunity for Paragon West.                 Accordingly, the court

concluded REI breached its fiduciary duty by usurping a corporate opportunity of

Paragon West. However, the court refused to remove REI as managing member

of Paragon West because it concluded REI’s breach did not “involve personal

profit.” It further concluded REI made a reasonable effort to correct its breach by

sending the August 27 letter offering Urbandale West a chance to buy into the

Dahl’s Property.4

         Regarding R&R’s apartment proposal for Paragon Best, the court

determined the operating agreement neither specifically permitted nor prohibited

proposals to develop residential projects. The court noted there was evidence

Urbandale Best was not interested in developing residential projects and likely

would not have joined Paragon Best had it known residential development was a

possibility.    However, there was also evidence R&R would not have joined

Paragon Best had it known residential development was not an option.

Ultimately, the court held the unspoken intent of the parties did not override the

express language of the contract or lack thereof and that the ordinary course of

business for Paragon Best was “to develop the property and maximize the return

4
    The district court’s ruling was supplemented by a 1.904(2) ruling on October 26, 2015.
                                        8

on the investment.” Therefore, the district court found the apartment proposal

was in the ordinary course of business for Paragon Best and R&R had the option

to purchase the property from Paragon Best when Urbandale Best refused to

consent to the project.

       Regarding REI’s counterclaims involving the financing proposal for the

retail building in Paragon West, the district court found financing proposals were

a “major decision” under the agreement, which required unanimous consent and

Urbandale West had valid business reasons for rejecting the proposal, including

concerns about incurring further debt. Both parties appeal.

       II.     Standard of Review

       We review bench trials involving breach-of-contract claims for errors at

law. NevadaCare, Inc. v. Dep’t of Human Servs., 783 N.W.2d 459, 465 (Iowa

2010). The district court’s factual findings are treated as a special verdict and

are binding on us so long as they are supported by substantial evidence. Id. We

are not bound by the district court’s legal conclusions and application of the law,

and we will reverse if the court applied erroneous rules of law, which materially

affected its decision. Id.

       Generally, both contract interpretation and construction are legal issues.

Pillsbury Co., Inc. v. Wells Dairy, Inc., 752 N.W.2d 430, 436 (Iowa 2008). “The

cardinal rule of contract interpretation is to determine what the intent of the

parties was at the time they entered into the contract.” Id. “Words and other

conduct are interpreted in the light of all the circumstances, and if the principal

purpose of the parties is ascertainable it is given great weight.” Fausel v. JRJ

Enters., Inc., 603 N.W.2d 612, 618 (Iowa 1999). “These rules of interpretation
                                        9

are general in character and only serve as guides in the process of

interpretation.” Pillsbury Co., 752 N.W.2d at 436.

      We review a district court’s decision regarding attorney fees for abuse of

discretion. NevadaCare, Inc., 783 N.W.2d at 469.

      III.    Dahl’s Property—REI Breach of Fiduciary Duty and Removal as

      Managing Member

      Urbandale West claims the district court correctly determined REI violated

its fiduciary duty in allowing PMR to purchase the Dahl’s Property without notice

to Urbandale West but argue the court erred in failing to remove REI as a

managing member of Paragon West. Specifically, Urbandale West asserts REI’s

breach of fiduciary duty was one “involving personal profit” under the operating

agreement, thereby justifying REI’s removal. REI takes the opposite position on

both issues, claiming the district court erred in determining REI violated its

fiduciary duty but was correct in refusing to remove REI as the managing

member of Paragon West. Specifically, REI asserts: (1) the plain language of the

agreement did not require it to notify Urbandale West of the sale; (2) Paragon

West’s right to repurchase was not triggered; (3) its duties were reasonably

restricted under the agreement; and (4) it acted in good faith and reasonably

relied on outside counsel’s advice.

      Generally, “[a] fiduciary relation exists between two persons when one of

them is under a duty to act for or to give advice for the benefit of another upon

matters within the scope of the relation.” Kurth v. Van Horn, 380 N.W.2d 693,

695 (Iowa 1986).     Iowa Code section 489.409(8)(a) (2014) provides that a

manager in a manager-managed LLC owes the company and the members the
                                        10

fiduciary duties of loyalty and care. The duty of loyalty includes protecting the

LLC from the appropriation of a company opportunity.                   Iowa Code

§ 489.409(2)(a)(3).

       Neither party disputes that a fiduciary relationship existed between them,

though REI claims the duty was limited and that it acted in good faith. Section

7.5 of the Paragon West operating agreement specifies an aspect of that

relationship, in providing:

       The Members agree that in the event a Member (“Opportunity
       Member”) or any of its Affiliates has an opportunity to acquire other
       real property in the Exclusive Area (defined below), such
       Opportunity Member shall give the other Member (“Receiving
       Member”) the first right before any other person or entity (“Right of
       Opportunity”) to join with such Opportunity Member in said
       acquisition opportunity . . . .

The district court analyzed section 7.5, along with the development agreement,

and concluded REI violated its fiduciary duty to Urbandale West in proceeding

with the sale of the Dahl’s property to PMR. In doing so, the court rejected REI’s

claims that the plain language of section 7.5 did not require it to notify Urbandale

West, that Paragon West’s right to repurchase had not been triggered, and that

its duties were limited under the operating agreement. The court stated:

       REI used its affiliate PMR to purchase the Dahl’s Property when the
       availability of that land was an opportunity for Paragon West and
       where Paragon West had a right to repurchase. The acquisition of
       property and its development is the heart of the business of
       Paragon West, and Paragon West was clearly financially able to
       undertake the acquisition.

       We agree with the district court.     Initially, we reject REI’s claim that

Paragon West’s right to repurchase the Dahl’s property had not been triggered.

As the district court noted:
                                          11

              The Amended and Restated Development Agreement
       (Exhibit 19) grants Paragon West rights of repurchase and first
       refusal regarding the Dahl’s Property. Paragon West’s rights are
       contingent upon an “Event of Repurchase” occurring. The clear
       meaning of the “Event of Repurchase” definitions is the failure of
       Dahl’s to construct a grocery and/or convenience store, or, if
       constructed, the cessation of use of the property for those
       purposes, triggers Paragon West’s rights to repurchase that
       property.

Foods’s notice to REI, in its capacity as the managing member of Paragon West,

which REI then passed along to Urbandale West, that it did not intend to build a

grocery store on the property and wished to sell, effectively ended any chance

that a Dahl’s grocery and convenience store would be built on the property and

triggered Paragon West’s right of repurchase. This conclusion is grounded in the

plain language of the development agreement, as well as the actions of

Urbandale West and REI over the next several months in discussing potential

future development of the Dahl’s Property in their capacities as members of

Paragon West. These actions indicate both parties believed Paragon West held

the right to repurchase and are evidence of the intent of the right to repurchase

section of the development agreement. Further, REI’s interpretation of the right

to repurchase section is incongruous with both the plain language of the specific

clause at issue here and the general purpose of such clauses.

       We also agree that REI’s actions fell within the scope of section 7.5 and

that it violated its fiduciary duty of loyalty in appropriating a corporate opportunity

of Paragon West by facilitating the purchase of the Dahl’s property by PMR.

Again, we find REI’s argument that section 7.5 only applies if an R&R entity

seeks a partner in purchasing property incongruous with the plain language of

the section, and we strain to see why a sophisticated commercial entity such as
                                         12

Urbandale West would agree to a section that was to be interpreted in such a

way.

       As we agree with the district court that REI breached its fiduciary duty of

loyalty, we next turn to Urbandale West’s claim that the district court erred in

failing to remove REI as the managing member of Paragon West. Urbandale

West asserts REI should have been removed for cause because it committed a

breach of fiduciary duty “involving personal profit.”

       Section 4.1 of the operating agreement allows the managing member to

be removed for cause. The agreement defines cause, in part, as “a breach of

fiduciary duty involving personal profit.” The district court determined REI had

not gained a profit from the purchase of the Dahl’s Property and refused to

remove them as managing member.               Following Urbandale West’s 1.904(2)

motion, the court agreed that the appropriate question was whether the breach

“involved” personal profit, not whether REI “gained” a profit. Ultimately, the court

concluded that the distinction did not make a difference and again refused to

remove REI as a managing member.

       We agree that the crucial question is whether REI’s breach “involved”

personal profit. Neither party offered a definition of “involved” or “involving” from

Iowa courts. Urbandale West combines multiple cases from other jurisdictions

and proposes a definition of “involving” that includes: “actions related to,

accompanied by, connected with, having an effect on, having the natural or

logical consequence of, implying, or broadly applying to personal profit.” We are

persuaded by the United States Court of Appeals for the Eighth Circuit’s analysis

in Wintermute v. Kansas Bankers Surety Co., 630 F.3d 1063, 1072-73 (8th Cir.
                                              13

2011), which noted that “involving” was a broader term compared to “in fact.”

Consequently, we believe “closely related” is an appropriately plain and

adequately broad definition of “involving.”          Involve, Webster’s Third New Int’l

Dictionary (3rd ed. 2003).

        Here, REI breached its fiduciary duty by failing to protect a company

opportunity that belonged to Paragon West and steering that opportunity toward

an entity it was affiliated with. REI’s officers testified that the ultimate goal of

acquiring the Dahl’s Property was to earn a profit.5 Accordingly, REI’s breach

was “closely related” to personal profit and “involved” personal profit.                  We

conclude, under Section 4.1 of the operating agreement, the district court should

have removed REI as a managing member of Paragon West for cause, and we

reverse as to this issue.6

        IV.    Apartment Proposal–Paragon Best

        Urbandale Best argues the district court erred in concluding residential

apartment construction fell within the ordinary course of business of Paragon

Best.    Specifically, Urbandale Best asserts the operating agreement only

specifically references office, flex, retail, and industrial fees and expenses and

they have never developed residential projects in their joint ventures with the

R&R entities. R&R argues the agreement did not restrict the possibility of a

5
  We note that while almost every action of a for-profit entity has a goal of making a
profit, it does not necessarily follow that every breach of a fiduciary duty will be related to
a goal of earning a profit. For example, had REI simply failed to protect Paragon West’s
right to repurchase and allowed Foods to sell the Dahl’s Property to an unrelated third-
party, REI still may have breached its fiduciary duty, but it would not have done so
“closely related” to or “involving” personal profit.
6
  As we conclude REI should have been removed for a breach of fiduciary duty involving
personal profit, we need not address Urbandale West’s claim the district court erred in
refusing to remove REI as a managing member because of an uncured material breach.
                                         14

residential project and a mixed-use project best served the purpose of Paragon

Best.

        Section 2.3 of Paragon Best’s operating agreement provides:

        The purpose and character of the business of the Company shall
        be to (a) invest in and own the Projects, (b) acquire, own, sell,
        exchange and dispose of, or otherwise deal with the Projects, (c)
        borrow funds required by the ownership of the Projects and
        mortgage, pledge or otherwise encumber any and all Company
        property in connection with any such borrowings of funds, (d) do all
        things necessary or appropriate to effect any part or all of the
        foregoing, (e) maximize the return on the capital invested in the
        Company by the Members, consistent with the foregoing, and (f)
        engage in such other activities and businesses as all of the
        Members may from time to time Approve.

Generally, this clause makes plain the purpose of Paragon Best was to invest in

real estate, develop real estate, and maximize return on its investments. Section

4.3 of the agreement incorporates a fee schedule that established property

management and development fees for office, retail, flex, and industrial.

Urbandale Best claims this fee schedule restricted residential developments

because it did not contain a fee for residential development. The language of the

operating agreement is silent on residential development.

        Our review of the operating agreement and the incorporated exhibits leads

us to the same conclusion the district court reached.         The language of the

operating agreement neither expressly permits nor prohibits the development of

a residential project. The district court generally found both parties credible—

Urbandale Best never intended to permit residential projects and R&R never

intended to restrict them—and we find no reason to differ with the court’s

perception of the parties’ intent. Yet, neither party articulated their intent to the

other nor specifically memorialized it in the operating agreement. Absent such
                                        15

clarity, the parties’ unspoken and inconsistent intent is not sufficient to outweigh

the words and purpose of the agreement.         See Fausel, 603 N.W.2d at 618

(“Words and other conduct are interpreted in the light of all the circumstances,

and if the principal purpose of the parties is ascertainable it is given great

weight.”). Based on section 2.3, we conclude the general purpose of Paragon

Best was to invest in real estate, develop real estate, and maximize return on its

investments. It is plausible that a residential or mixed-use development could

very well serve that purpose, and absent a specific limitation, we cannot

conclude that such a development is outside the ordinary course of business of

Paragon Best. We affirm the district court.

      V.     The Financing Proposal—Paragon West

      REI argues Urbandale West breached its fiduciary duties and acted in bad

faith by rejecting the long-term financing proposal for the Paragon West office

building. Urbandale West asserts it had valid business reasons for rejecting the

proposal.

      Iowa Code section 489.409(4) outlines the duty of good faith and fair

dealing a member of an LLC owes: “A member in a member-managed limited

liability company or a manager-managed limited liability company shall discharge

the duties under this chapter or under the operating agreement and exercise any

rights consistently with the contractual obligation of good faith and fair dealing.”

Despite the acrimonious relationship that existed between the parties at the time,

the record does not indicate any bad faith on the part of Urbandale West in

rejecting the financing proposal, and the concerns it cited—namely, the method

of financing, the interest rate, and further debt-incursion when the space was
                                              16

struggling to attract tenants—are valid business concerns related to a specific

proposal.7 We affirm.

          VI.     Attorney Fees

          Urbandale West argues the district court erred in denying their request for

attorney fees because REI’s breach forced them to seek counsel and protect

their legal rights. REI claims Urbandale West was not entitled to attorney fees.

          Generally, attorney fees are not awarded in contract cases unless

specifically authorized by the contract. NevadaCare, Inc., 783 N.W.2d at 469–

70. Iowa Code section 625.22 provides: “When judgment is recovered upon a

written contract containing an agreement to pay an attorney fee, the court shall

allow and tax as a part of the costs a reasonable attorney fee to be determined

by the court.” The Paragon West agreement did not contain a provision for the

award of attorney fees. Therefore, we find the district court did not abuse its

discretion in refusing to award them.

          VII.   Conclusion

          Because we conclude REI breached a fiduciary duty involving a personal

profit, we reverse the district court’s decision refusing to remove it as a managing

member of Paragon West.

          Because we conclude the apartment proposal was part of the ordinary

course of business of Paragon Best, Urbandale West’s rejection of the financing

7
    As the district court noted, those concerns may not apply to every financing option.
                                          17

proposal was not in violation of its fiduciary duties, and Urbandale West was not

entitled to attorney fees, we affirm the district court on all other counts.

       AFFIRMED IN PART, REVERSED IN PART ON APPEAL; AFFIRMED

ON CROSS-APPEAL