Court Opinion

ID: 6320126
Source: CourtListenerOpinion
Date Created: 2022-03-04 15:03:12.664438+00
Date Added: 2024-06-11T09:02:34.041514
License: Public Domain

IN THE SUPREME COURT OF IOWA

                                 No. 20–0817

              Submitted January 20, 2022—Filed March 4, 2022

JOSEPH GOCHE,

      Appellant,

vs.

WMG, L.C.,

      Appellee.

      On review from the Iowa Court of Appeals.

      Appeal from the Iowa District Court for Kossuth County, David A. Lester,

Judge.

      Limited liability company seeks further review of court of appeals decision

awarding attorney fees (including “fees on fees”) to a former manager under Iowa

Code section 489.408(1). DECISION OF COURT OF APPEALS VACATED;

DISTRICT COURT JUDGMENT REVERSED.

      Waterman, J., delivered the opinion of the court, in which all justices

joined.
                                      2

      Philip J. Kaplan of Anthony Ostlund Baer & Louwagie, P.A., Minneapolis,

Minnesota, and Joseph G. Gamble and Wesley T. Graham of Duncan Green,

P.C., Des Moines, for appellant.

      Thomas W. Lipps of Peterson & Lipps, Algona, for appellee.
                                       3

WATERMAN, Justice.

      This appeal presents a question of first impression: whether Iowa Code

section 489.408(1) (2020) allows a manager of an Iowa limited liability company

(LLC) to recover from the LLC the attorney fees incurred litigating against the

LLC, and if so, whether the manager can also recover “fees on fees,” or the

additional fees incurred enforcing the statutory fee claim. The statute requires

the LLC to indemnify a manager for any debt incurred “in the course of the

member’s or manager’s activities on behalf of the company.” Id. (emphasis added).

A member-manager had a falling out with the other members (his siblings) who

had removed him as manager. Multiple lawsuits were filed in which the

now-former manager prevailed on the merits. His fees at issue were incurred

litigating against the LLC.

      The district court ordered the LLC to pay its former manager his fees

pursuant to section 489.408(1) but declined to award him fees on fees. He

appealed and the LLC cross-appealed. We transferred the case to the court of

appeals. A two-judge majority determined the LLC must pay its former manager

the fees awarded by the district court and his fees incurred seeking those fees.

The dissenting judge concluded section 489.408(1) limits reimbursement or

indemnity to “activities on behalf of the company” which cannot include fees

incurred litigating against the LLC. We granted the LLC’s application for further

review.

      On our review, we agree with the dissent. Under the plain language of

section 489.408(1), a manager or former manager cannot recover from the LLC
                                        4

fees incurred litigating against the company, much less fees incurred seeking

such fees. We therefore vacate the decision of the court of appeals and reverse

the district court’s fee award.

      I. Background Facts and Proceedings.

      WMG, L.C. is an Iowa Limited Liability Company whose members are

Joseph Goche, his brother Michael Goche, and their sisters Jeanne

Goche-Horihan and Renee Afshar. Joseph served as a manager from 2010 to

early 2017. WMG owned 600 acres of farmland in Kossuth County. Beginning

in 2012, WMG leased the farmland to NCJC, Inc., an Iowa corporation owned

solely by Joseph. The lease gave NCJC a right of first refusal to purchase the

land. The lease provided for annual cash rent of $136,449.70 and automatically

renewed each February absent written notice of termination. The lease further

provided that if it is not renewed, WMG would reimburse NCJC for the remaining

benefits of fertilizer NCJC had previously applied to the land.

      Relationships soured, and in 2014 Renee sued WMG and its other

members in federal court. At that time Michael and Jeanne were also managers

of WMG. That suit was dismissed for lack of subject matter jurisdiction. Renee

refiled her lawsuit a year later in the Iowa District Court for Kossuth County,

and Jeanne filed a cross-claim against Joseph. The sisters alleged Joseph

breached his fiduciary duties owed to WMG. Renee requested appointment of a

receiver. NCJC intervened in the lawsuit against WMG, seeking money damages

for improvements to the leased property and to enforce its right of first refusal.

Joseph personally asserted claims against WMG, including for indemnification,
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and WMG counterclaimed against Joseph, alleging he breached fiduciary duties

he owed WMG.

       In a special meeting in February 2017, Joseph was removed from his

position as a manager of WMG. By majority vote, the managers agreed to the

appointment of a receiver, who prosecuted WMG’s claims against Joseph and

defended WMG against the claims by Joseph and NCJC. In March, WMG

terminated its lease with NCJC, and distributed the farmland to the members

of WMG. NCJC sued WMG for breach of contract in a separate action, seeking

the cost of fertilizer that NCJC had applied to the farmland. The WMG–NCJC

contract provided, “If either party files suit to enforce any of the terms of this

lease, the prevailing party shall be entitled to recover court costs and reasonable

attorney’s fees.” NCJC ultimately prevailed in that litigation, and after litigating

through an appeal to our court, recovered fees it incurred before WMG offered

to confess judgment in that case. NCJC, Inc. v. WMG, L.C., 960 N.W.2d 58, 67–

68 (Iowa 2021). Those fees are not at issue in this appeal.

       Meanwhile, the litigation continued between Joseph, WMG, and the other

members. Joseph incurred attorney fees prosecuting his claims against WMG

and his siblings and defending their claims against him. He sought

indemnification for his attorney fees, relying exclusively on Iowa Code section

489.408(1).1 After Renee and Jeanne voluntarily dismissed their claims against

       1WMG’s governing documents neither require, nor prohibit, indemnification. The WMG

operating agreement provides, “The Managers shall be indemnified by the Company to the extent
provided in the Company’s Articles of Organization.” The articles of organization are silent as to
indemnification and contain no provision for reimbursing attorney fees.
                                            6

Joseph in 2016, he sought to recover from WMG his litigation expenses. The

district court ruled WMG must indemnify Joseph for his fees resulting from

Renee and Jeanne’s claims against him, and calculated that amount as

$51,455. The court denied the receiver’s motion to strike that award, and WMG

paid that amount. Those fees are not at issue in this appeal.

       The litigation between Joseph and WMG continued. The district court

granted summary judgment in favor of Joseph, dismissing WMG’s breach of

fiduciary duty claims against him. The district court subsequently granted his

motion for partial summary judgment against WMG. The court ruled that WMG

was “liable to Joseph for indemnification of attorney fees and expenses he

incurred to defend himself against the claims brought against him by WMG for

alleged breach of his duties as a manager of WMG.” The case proceeded to a

bench trial in January 2020 to determine the amount of the award. Joseph

sought $141,451 in attorney fees and litigation expenses,2 which included

$95,231 incurred defending WMG’s breach of fiduciary duty claims and $46,238

incurred prosecuting his indemnification claims against WMG (the fees on fees).

The district court reduced the hourly rate of his lead Minneapolis attorney from

$560 to $300 and lowered that firm’s paralegal hourly rate to $100. The court

then ordered WMG to pay Joseph $68,831 in fees he incurred defending against

its claims. The court declined to award Joseph any amount for fees on fees.

WMG moved under Iowa Rule of Civil Procedure 1.904(2) to further reduce the

       2Thatamount is on top of the $51,455 WMG already paid Joseph for defending claims by
Renee and Jeanne.
                                        7

hourly rates. The court denied that motion. Joseph appealed seeking fees on

fees and WMG cross-appealed. We transferred the case to the court of appeals.

     A divided court of appeals interpreted Iowa Code section 489.408(1) to

allow recovery of attorney fees as “debt,” including fees on fees incurred to

enforce the statutory right. The majority affirmed the district court’s award of

fees Joseph incurred defending WMG’s breach of fiduciary duty claims against

him and remanded the case for the district court to award the fees incurred

enforcing his indemnification claim under that Code provision. A dissenting

judge interpreted the statute to only allow fees incurred on behalf of WMG, not

fees Joseph “incurred while suing WMG” or “defending himself against WMG.”

We granted WMG’s application for further review.

     II. Standard of Review.

     The fighting issue on appeal is the interpretation of Iowa Code section

489.408(1). We review rulings on statutory construction for correction of errors

at law. NCJC, Inc., 960 N.W.2d at 62.

     III. Analysis.

     The fees the district court and court of appeals awarded were incurred by

Goche litigating against WMG. “Iowa follows the American rule: ‘the losing

litigant does not normally pay the victor’s attorney’s fees.’ ” Id. (quoting

Guardianship & Conservatorship of Radda v. Wash. State Bank, 955 N.W.2d

203, 214 (Iowa 2021)). “Generally, attorney fees are recoverable only by statute

or under a contract.” Id. (quoting Radda, 955 N.W.2d at 214). The sole basis for

Goche’s fee claim in this appeal is Iowa Code section 489.408(1). We have not
                                               8

previously construed this statute, which is in the Revised Uniform Limited

Liability Company Act enacted in 2008. 2008 Iowa Acts ch. 1162, §§ 1–115

(codified at Iowa Code §§ 489.101–.1304 (2009)) (adopting verbatim section 408

of the 2006 uniform act). We begin with its text:

       A limited liability company shall reimburse for any payment made
       and indemnify for any debt, obligation, or other liability incurred by
       a member of a member-managed company or the manager of a
       manager-managed company in the course of the member’s or
       manager’s activities on behalf of the company, if, in making the
       payment or incurring the debt, obligation, or other liability, the
       member or manager complied with the duties stated in sections
       489.405 and 489.409.

Iowa Code § 489.408(1) (emphasis added).3 Notably, the statute does not

mention attorney fees. We assume without deciding that “debt, obligation, or

other liability” can include attorney fees incurred in “activities on behalf of the

company.” We must decide whether section 489.408 compels WMG to reimburse

Goche for fees he incurred litigating against the company.

       The plain meaning of the statute limits WMG’s reimbursement obligation

to Goche’s debts incurred in the course of activities on behalf of the company.

We agree with the dissenting opinion on the court of appeals that litigation

against the company does not constitute an activity on behalf of the company.

Just the opposite. This statute would entitle a manager to recoup expenses

incurred defending the company or prosecuting claims on behalf of the company

       3Section 489.405 restricts distributions when the company is insolvent or near insolvency

and that provision is not at issue. Section 489.409 codifies the fiduciary duties of loyalty and
care. Goche argues he satisfies this requirement for indemnification because he won a summary
judgment ruling dismissing WMG’s claims that he breached his fiduciary duties. In our view,
that adjudication does not establish the fees at issue were incurred “on behalf of” WMG, the
opposing party.
                                             9

against a third party. But not expenses incurred suing the company or

defending claims brought by the company against the manager.

     Goche was suing WMG to get money for himself. He was not bringing

derivative claims against third parties for the benefit of the company, with WMG

merely a nominal defendant. See id. § 489.906(2) (expressly allowing awards of

“reasonable attorney fees and costs” to successful plaintiffs in derivative actions

on behalf of LLCs). To the contrary, as the dissent noted, “All of those fees were

incurred while Goche litigated on his own behalf as WMG’s adversary. . . .

Indeed, isn’t litigation against a company the opposite of ‘activit[y] on behalf of

the company’?” (Alteration in original.)

     Goche argues the litigation arose from his activities as a manager on behalf

of WMG, but it is undisputed that he incurred the fees at issue litigating against

WMG. His attorney fee claim is foreclosed by the plain language of section

489.408(1) because the fees were not incurred in activities “on behalf of” WMG.

LLCs under section 489.408(2) can provide liability insurance to protect

managers more broadly against liability claims arising from their status as

managers, without the limitation that their actions giving rise to the liability

claim be on behalf of the company.4 Goche makes no claim that WMG should

     4Iowa   Code section 489.408(2) provides:
     A limited liability company may purchase and maintain insurance on behalf of a
     member or manager of the company against liability asserted against or incurred
     by the member or manager in that capacity or arising from that status even if,
     under section 489.110, subsection 7, the operating agreement could not eliminate
     or limit the person’s liability to the company for the conduct giving rise to the
     liability.
                                               10

have provided him with liability insurance to pay the fees at issue. Reading these

subsections together confirms that the company’s indemnity obligation is

limited to activities on behalf of the company.

       The legislature knows how to require an LLC to pay attorney fees to a

prevailing party. It did so with express language in section 489.906(2).5 Such

language is missing from section 489.408(1). That omission is fatal to Goche’s

fee-shifting claim. See Radda, 955 N.W.2d at 209–10 (concluding the

legislature’s selective placement of phrases in one section but not another is

presumed intentional).

       We interpret section 489.408(1) against the backdrop of Iowa’s adherence

to the American rule and our precedent requiring clear and unequivocal

language in the statute or contract to force one party to a business arrangement

to indemnify or pay the other party’s attorney fees in litigation between them.

See, e.g., Homeland Energy Sols., LLC v. Retterath, 938 N.W.2d 664, 708 (Iowa

2020) (“We have held that indemnification clauses that use the term ‘indemnify’

and ‘hold harmless’ evidence the parties’ intent to protect a party from claims

brought by third parties. Accordingly, an indemnity clause in a contract cannot

be used to shift attorney fees between the parties ‘unless the language of the

“This subsection’s language is very broad and authorizes an LLC to purchase insurance to cover,
e.g., a manager’s intentional misconduct.” Revised Unif. Ltd. Liab. Co. Act § 408 cmt. subsec. (b)
(Unif. L. Comm’n 2006).
       5Iowa   Code section 489.906(2) provides:
       If a derivative action under section 489.902 is successful in whole or in part, the
       court may award the plaintiff reasonable expenses, including reasonable attorney
       fees and costs, from the recovery of the limited liability company.
                                       11

clause shows an intent to clearly and unambiguously shift the fees.’ ” (citation

omitted) (quoting NevadaCare, Inc. v. Dep’t of Hum. Servs., 783 N.W.2d 459, 471

(Iowa 2010))); Branstad v. State ex rel. Nat. Res. Comm’n, 871 N.W.2d 291, 294

(Iowa 2015) (“The statutory authorization [to recover attorney fees] must be

express and ‘must come clearly within the terms of the statute.’ ” (quoting

Botsko v. Davenport C.R. Comm’n, 774 N.W.2d 841, 845 (Iowa 2009))). “Our

demanding approach is consistent with cases in other jurisdictions which reject

awarding statutory attorneys’ fees by implication and require express language.”

Seeberger v. Davenport C.R. Comm’n, 923 N.W.2d 564, 569 (Iowa 2019) (quoting

Botsko, 774 N.W.2d at 845). These cases foreclose Goche’s expansive reading of

section 489.408(1) to imply fee-shifting on successful litigation against the

company.

     Goche relies on caselaw decided under Iowa Code section 490.852, the

indemnity provision in the Iowa Business Corporations Act: In re Internet

Navigator, Inc., 293 B.R. 198, 208–09 (Bankr. N.D. Iowa 2003), and Holden v.

Construction Machinery Co., 202 N.W.2d 348, 367 (Iowa 1972) (en banc). In both

cases the attorney fees at issue were incurred defending the corporation or in

litigation between shareholders or directors; the party was not seeking

reimbursement for fees incurred litigating against the corporation. In re Internet

Navigator, Inc., 293 B.R. at 201 (noting fees were incurred defending corporation

and several directors); Holden, 202 N.W.2d at 351, 367 (involving litigation

between shareholders in which the corporation “CMC is unquestionably a

nominal or passive, though real, party defendant and as such it was required to
                                               12

adopt a neutral position with regard to this litigation”). By contrast, Goche

incurred the fees at issue litigating against WMG. Moreover, unlike section

489.408(1), section 490.852 does not expressly limit indemnification to

“activities on behalf of the company.”6 Those cases do not help Goche.

      Goche could potentially fare better under the 2013 amendment to section

408 of the Uniform Limited Liability Company Act, which omits the “on behalf

of the company” limitation and expressly mentions attorney fees. The amended

section provides:

             (b) A limited liability company shall indemnify and hold
      harmless a person with respect to any claim or demand against the
      person and any debt, obligation, or other liability incurred by the
      person by reason of the person’s former or present capacity as a
      member or manager, if the claim, demand, debt, obligation, or other
      liability does not arise from the person’s breach of Section 405, 407,
      or 409.

             (c) In the ordinary course of its activities and affairs, a limited
      liability company may advance reasonable expenses, including
      attorney’s fees and costs, incurred by a person in connection with a
      claim or demand against the person by reason of the person’s former
      or present capacity as a member or manager, if the person promises
      to repay the company if the person ultimately is determined not to
      be entitled to be indemnified under subsection (b).

Unif. Ltd. Liab. Co. Act § 408(b)–(c) (Unif. L. Comm’n amended 2013). But Iowa

has not enacted that provision, and it is not our role to rewrite the Iowa statute

in the guise of interpretation. See Radda, 955 N.W.2d at 214 (“Policy arguments

      6Iowa   Code section 490.852 provides:
             A corporation shall indemnify a director who was wholly successful, on the
      merits or otherwise, in the defense of any proceeding to which the director was a
      party because the director is or was a director of the corporation against expenses
      incurred by the director in connection with the proceeding.
                                              13

to amend the statute should be directed to the legislature.” (quoting In re Est. of

Whalen, 827 N.W.2d 184, 194 (Iowa 2013))).

      We hold that because the fees and expenses at issue were not incurred on

behalf of WMG, Goche cannot recover them from WMG under section

489.408(1). The district court and court of appeals erred by requiring WMG to

pay Goche’s fees he incurred litigating against the company. Based on our

construction of section 489.408(1), we need not decide today whether fees on

fees could be awarded to enforce indemnification under this statute for attorney

fees incurred on the company’s behalf.7

      IV. Conclusion.

      For those reasons, we vacate the decision of the court of appeals and

reverse the judgment of the district court awarding Goche attorney fees and

litigation expenses incurred litigating against WMG.

      DECISION OF COURT OF APPEALS VACATED; DISTRICT COURT

JUDGMENT REVERSED.

      7See   generally In re Est. of Bockwoldt, 814 N.W.2d 215, 225–26 (Iowa 2012) (allowing fees
incurred defending application for extraordinary fees under Probate Code); Lynch v. City of
Des Moines, 464 N.W.2d 236, 240–41 (Iowa 1990) (en banc) (allowing recovery of fees incurred
litigating the fee award under the fee-shifting provision of the Iowa Civil Rights Act); see also
Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 560–62 (Del. 2002) (allowing “fees on fees” in action
to enforce indemnity provision in corporate bylaws).