Court Opinion

ID: 9369354
Source: CourtListenerOpinion
Date Created: 2023-02-08 16:05:45.535884+00
Date Added: 2024-06-11T17:16:14.345760
License: Public Domain

IN THE COURT OF APPEALS OF IOWA

                                   No. 22-0259
                              Filed February 8, 2023

BRIAN HORA and GREGG HORA, Individually and on behalf of HORA
FARMS, INC., and PRECISION PARTNERS CORP.,
     Plaintiffs-Appellants/Cross-Appellees,

vs.

KEITH HORA and KURT HORA, Individually and in their capacity as
Shareholders, Directors, Officers, Managers, and Employees of HORA
FARMS, INC., HEATHER HORA, and HK FARMS, INC.,
     Defendants-Appellees/Cross-Appellants.
________________________________________________________________

       Appeal   from    the   Iowa   District   Court   for   Washington    County,

Sean W. McPartland, Judge.

       The plaintiffs appeal, and the defendants cross-appeal, from the ruling

denying the plaintiffs’ shareholder derivative claims and the plaintiffs’ request to

remove a trustee.       AFFIRMED IN PART, REVERSED IN PART, AND

REMANDED WITH DIRECTIONS.

       John F. Lorentzen of Nyemaster Goode, PC, Des Moines, and Sarah J.

Gayer of Nyemaster Goode, PC, Cedar Rapids, for appellants/cross-appellees.

       Stephen J. Holtman and Abram V. Carls of Simmons, Perrine, Moyer,

Bergman, PLC, Cedar Rapids, for appellee/cross-appellant Keith Hora.

       Joseph W. Younker and Matthew G. Brand of Bradley & Riley, PC, Iowa

City, for appellees/cross-appellants Kurt Hora, Heather Hora, and HK Farms, Inc.

       Heard by Bower, C.J., and Badding and Buller, JJ.
                                           2

BULLER, Judge.

       This dispute centers on the management of Hora Farms, Inc. (HFI).

Brothers Brian and Gregg Hora filed this shareholder derivative lawsuit on behalf

of HFI, claiming breach of fiduciary duty and fraud, seeking appointment of a

custodian for HFI, and requesting removal of the trustee of a shareholder trust.

After an eleven-day trial, the district court dismissed Brian and Gregg’s claims, and

they appeal. The defendants cross-appeal, reasserting their defenses below and

requesting appellate attorney fees. We affirm in part and reverse in part, finding

the district court erred in its application of the law regarding self-dealing and breach

of fiduciary duty. We find Defendants Keith Hora and Kurt Hora breached their

duties, and we remand for further proceedings consistent with this opinion,

including a determination of damages and ruling on indemnification. We also

vacate the ruling on appointment of a custodian and removal of the trustees, and

we remand for the district court to decide that question in light of this opinion.

Finally, we deny all requests for appellate attorney fees.

       I. Background Facts and Proceedings

          A. The Hora Family and Relevant Entities

       Keith Hora was born on an Iowa farm in 1938 to George and Marie Hora.

He has two younger siblings: Kathy and Kevin. Keith married Celeste in 1959, and

together they had six children between 1960 and 1968: Gregg, Brian, Dana, Kurt,

Darren, and Heidi. Kurt is married to Heather.

       The Celeste N. Hora Trust (“the Trust”) is a testamentary trust, created upon

Celeste’s death in 1989. Keith has been the Trust’s sole trustee since its creation.
                                          3

Keith and Celeste’s six children are the Trust’s beneficiaries, with each child to

receive an equal share of trust property, per stirpes, upon Keith’s death.

         HFI was incorporated in Iowa in 1974, with George and Keith serving as the

initial directors. HFI owns 1075 acres of land in or near Washington County, and

it grew corn and soybeans at all times relevant here. At the time of trial, HFI had

1200 Class A voting shares: Keith owns 501 shares, the Trust owns 303 shares,

and Kathy and Kevin each own 198 shares. HFI also had 3600 Class B non-voting

shares: Keith owns 868 shares, the Trust owns 867 shares, Kathy and Kevin each

own 548 shares, and Keith and Celeste’s six children each own 128 or 129 shares.

         Kurt and Heather formed HK Farms, Inc., through which Kurt grows crops

and feeds swine from wean to finish. Brian and his wife formed Precision Partners

Corp., through which Brian conducts farm activities.

            B. Pre-Litigation Facts

         Gregg worked for HFI from 1982 to 1985; he then left HFI and the area and

had no further involvement in HFI’s daily operations. Brian began working for HFI

in 1985. Kurt began working for HFI in 1988. Brian supervised Kurt and HFI’s

operations during this time, and Kurt testified Brian was “extremely difficult to work

with.”

         George died in 1995. Marie soon replaced George as a director of HFI

alongside Keith. Keith has served as HFI’s president since George’s death, while

Marie has never held an officer position.

         In fall 2000, an argument on the farm erupted between Keith, Brian, and

Kurt. Kurt ended up quitting HFI, and Brian was fired. Brian has since done a little

farm work for HFI but has had no involvement with managing the company. HFI
                                         4

rehired Kurt in 2001 in a managerial role, and he continued to serve as operations

manager through trial.    When Kurt returned to HFI, he received hourly pay,

bonuses based on production, and reimbursement for certain expenses. Kurt also

claims he took part of his compensation in corn used for feed in his swine

operation. In 2003 or 2004, Kurt and Keith agreed to estimate Kurt’s use of corn

at nine bushels per hog Kurt sold.

       Marie continued as a director until her death in March 2015 at the age of

ninety-nine. Soon after her death, Gregg and Brian began raising concerns to

Keith and Kurt about HFI’s financial situation, specifically HFI’s negative cash flow

and corn that could not be found and was not sold. In August, Gregg was elected

to replace Marie as director alongside Keith. Gregg resigned less than one year

later, stating Keith and Kurt were preventing HFI from adopting changes needed

to reverse HFI’s trend of accumulating more debt. Darren was elected as a director

in 2017, and he and Keith continued to serve as directors at the time of trial.

       On August 18, 2017, Brian, Gregg, and Precision Partners (plaintiffs) filed

their petition against Keith, Kurt, Heather, and HK Farms1 (defendants). The

plaintiffs eventually amended their petition and advanced five counts: (1) Keith and

Kurt breached their fiduciary duties to HFI through mismanagement, self-dealing,

and other actions; (2) Keith and Kurt committed fraud, fraudulent concealment, and

fraudulent misrepresentation; (3) a custodian should be appointed for HFI; (4)

Keith should be removed as trustee of the Trust; and (5) Keith interfered with the

business relations of Precision Partners.     On the plaintiffs’ motion, the court

1 The petition also included claims against Keith’s current wife. The court denied
those claims, and the plaintiffs do not pursue those claims on appeal.
                                          5

severed Count 5 for a separate trial on the interference-with-business-relations

count.     The court later granted the defendants’ partial motion for summary

judgment, finding the five-year statute of limitations barred the plaintiffs’ claims

arising before August 18, 2012.

         The facts developed at trial established multiple family members, including

Keith, expressed concern about the significant discrepancy between the amount

of corn produced by HFI and the amount of corn actually sold. By some estimates,

as much as nearly one third of the corn produced each year was missing. Related

concerns were expressed about HFI’s lack of profitability and increasing debt when

the market for corn and soybeans was quite good. At the same time the business

was losing money, Kurt and his farming operation had an increased net worth of

nearly $1.5 million. Keith’s net worth also increased during the same time period,

though perhaps not to the same extent as Kurt’s. When minutes were circulated

after a meeting, Heather (Kurt’s wife) e-mailed the family reminding everyone that

they had discussed “Keith[’]s personal net worth & debt” because “this may be

important in finding the holes in the dam or however it was put.”

         Kurt obfuscated and offered shifting stories to explain what happened to the

missing corn.     At one point, Kurt claimed that all of the missing corn was

explainable due to damage or shrink during processing. But evidence in the record

undermines that claim. For example, Kurt claimed a monitoring-equipment failure

to the tune of 3.3% for eight years, yet such a malfunction was never reported to

the crop insurer. At another point, Kurt claimed to have loaned a nebulous “corn

tab” in excess of 85,000 bushels to HFI through his company, HK Farms. Yet

Kurt’s own settlement sheets indicate he sold or used HK Farms’s entire corn
                                          6

production in the relevant years, and no documentation of the loan appears in tax

forms or business records for either entity. Kurt also claimed that the missing corn

could be explained by the cleaning process, but for that explanation to work,

hundreds of semi-trailers worth of debris would have been removed from the farm,

and there is no evidence that ever happened.

       Faced with significant evidence that he used HFI corn as feed in his swine

operation, Kurt eventually admitted to taking at least 85,000 bushels of corn, but

he claimed he was entitled to the corn as compensation or backpay.                 No

corroboration for the backpay was submitted at trial, and it is undisputed that Kurt

did not report use of the corn taken from HFI on either his personal tax returns or

HK Farms’s tax returns. A conservative valuation of corn taken by Kurt is roughly

$450,000 for 85,000 bushels, and a more-aggressive valuation is more than $1

million for at least 200,000 bushels. The more-aggressive valuation, from the

plaintiffs’ expert, is generally consistent with Keith’s own estimates of missing corn.

The more-aggressive valuation is also corroborated by Keith reporting to the family

that HFI’s long-time banker repeatedly asked Keith why HFI’s records show it sells

all the soybeans produced “but never come[s] close to selling and accounting for

the bushels of corn that were produced.” In any event, the amount of backpay Kurt

claimed was $179,000, and he took at least $250,000 more in corn than he was

he was allegedly owed, even if his version of events was true.

       Given the abysmal record-keeping, all parties admit some difficulty in

determining the exact amount of corn taken by Kurt. Kurt claimed to have originally

estimated what he took based on an Iowa State University formula, but this could

not be reconciled with other record evidence regarding the amount of corn missing
                                         7

from HFI each year during the relevant periods. Kurt admitted at trial that his

estimate system was not accurate, and he conceded that he should have switched

to a computerized system at least ten years sooner. In 2015, Keith sent a message

to the family members observing that, if all of the missing corn was used by Kurt

to feed his swine, “then I AM a terrible manager and will seek outside help” to

manage the farms and resolve the issue. Keith also remarked to family members

that Kurt “had too good of a deal,” at the expense of the company. Consistent with

these remarks, HFI’s paid consultant described Kurt’s deal with Keith as “too

sweet.”

       Trial evidence also established, with little dispute, that Keith used HFI

resources to pay personal expenses for himself and his wife without any legitimate

business purpose.     The expert testimony valued these personal expenses at

$193,223. The $193,233 includes football tickets that were falsely accounted for

as crop expenses or building-repair costs, as well as department-store purchases,

travel lodging or time-share purchases, and groceries from a variety of locations in

and outside of Iowa. Keith did not deny the expenses, but he claimed they were

part of his compensation. No documentation corroborated this claim or established

that HFI paying thousands of dollars in personal expenses was compensation for

any of Keith’s roles. Keith also failed to report the income to taxing authorities as

compensation or pay appropriate tax on it. In addition, HFI double-compensated

Keith for his vehicle, paying both mileage and all of the operating expenses (fuel,

service, maintenance, license, and insurance) for the same vehicle. In other

words, Keith double-dipped his vehicle reimbursement.
                                          8

       Following an eleven-day trial in July and August 2020, the district court

rejected the plaintiffs’ claims and dismissed Counts 1 through 4. The plaintiffs

voluntarily dismissed Count 5. The plaintiffs filed a motion to reconsider, which the

court denied in full other than nonsubstantive corrections to the facts.         The

defendants also filed an application for costs and fees, which the court denied.

       The plaintiffs appeal the dismissal of Counts 1 through 4 and seek appellate

attorney fees. The defendants cross-appeal, also seeking appellate attorney fees.

       II. Standard of Review

       The parties agree the claims below were tried in equity, implicating our de

novo review. Iowa R. App. P. 6.907. We give weight to the fact findings of the

district court, especially with regard to witness credibility, but we are not bound by

them. Iowa R. App. P. 6.904(3)(g).

       III. Defendants’ Preliminary Defenses

       We first address the various preliminary defenses asserted by the

defendants, including statutory claims based on standing and the statute of

limitations, as well as equitable claims based on the doctrines of estoppel, laches,

and unclean hands.       The district court partially agreed with the defendants

regarding the statute of limitations but otherwise rejected all preliminary defenses.

We do the same on appeal, with a modification regarding the statute of limitations

due to our subsequent holding regarding breach of fiduciary duties.

          A. Standing

       The defendants below asserted that the plaintiffs lacked standing under the

Iowa Business Corporation Act. See Iowa Code ch. 490 (2017). The district court
                                           9

found standing during the summary-judgment proceedings and re-affirmed that

finding following the lengthy bench trial. We affirm these rulings.

       Iowa law generally bars derivative actions unless the plaintiffs are (1)

shareholders (2) who fairly and adequately represent the interests of the

corporation. Id. § 490.741. The district court correctly noted that no Iowa case

law speaks to how the burden is allocated under this section, but we agree with

the district court that the text of the statute allocates the burden of proving standing

to the plaintiffs. Id. (prohibiting suit “unless the shareholder satisfies” the statutory

requirements).

       It is undisputed that Brian and Gregg were shareholders of HFI at all

relevant times.    We also have little difficulty concluding that they fairly and

adequately represent the interests of the corporation. The remedies they seek are

not for their individual profit, but instead to benefit all shareholders and to further

the corporation’s interests. We also affirmatively find that the plaintiffs did not

initiate this derivative action for any improper purpose. The plaintiffs have carried

their burden to prove standing.

       The only substantial case law marshaled by the defendants is a Wisconsin

case, Read v. Read, 556 N.W.2d 768 (Wis. Ct. App. 1996). But we find Read

easily distinguished, and we share the district court’s observation that the

defendants’ reliance on Read is “misplaced if not misleading.” The procedural

posture of Read involved the plaintiffs seeking to amend a suit to allege a closely

held corporation more than two years after the suit was filed and less than two

weeks before trial. See 556 N.W.2d at 563–74. Here, the petition always alleged

a closely held corporation. As a result, this case does not involve the issue at the
                                          10

heart of Read, which concerns available remedies for bringing suit against a

closely held corporation (which may operate more like a partnership) as compared

to a traditional corporation. See, e.g., Redeker v. Litt, No. 04-0637, 2005 WL

1224697, at *4 (Iowa Ct. App. May 25, 2005) (noting a distinction in available

remedies). Read does not alter our analysis, and the district court did not err in

finding standing.

       Last, we reject the claim made in Keith’s appellate brief that seeking to

appoint a custodian or guardian for the corporation necessarily obviates standing

due to the original purpose of HFI’s incorporation. It is not improper for concerned

shareholders to request this equitable remedy when the allegations concern

corrupt management and self-dealing, as the plaintiffs allege here.

          B. Statute of Limitations

       The district court twice partially granted and partially denied the statute-of-

limitations claim below, first at the summary-judgment stage and again following

trial. In short, the court limited the evidence to claims based on conduct that arose

on or after August 18, 2012, based on the five-year statute of limitations. See Iowa

Code § 614.1(4).

       Now on appeal, both parties seek to relitigate the statute of limitations. We

affirm the district court. Given our ruling later in this opinion, however, we clarify

application of the statute of limitations as it relates to the conduct we find breached

an essential duty.

       First, we reject Kurt’s claim on appeal that the misappropriated-corn claim

is barred by the statute of limitations. Kurt admitted at trial that he took at least

30,000 bushels in 2015, and he failed to prove that any portion of the
                                          11

misappropriated corn was taken before August 2012. Under these circumstances,

we find that all damages related to misappropriated corn are recoverable by the

plaintiffs, and we direct the district court to abide by this ruling when evaluating

damages consistent with the balance of this opinion. See Earl v. Clark, 219

N.W.2d 487, 491 (Iowa 1974) (“If the [statute of limitations] defense is partial only,

barring only a part of the damage, defendant has the burden of proving what part

of the damage occurred before the running of the limitation period.” (citation

omitted)). Second, to the extent our directions on remand implicate a similar

question concerning Keith’s personal expenses, the district court shall determine

damages consistent with this opinion. Finally, to the extent any dicta in the district

court’s ruling is inconsistent with these directions, the dicta is vacated.

          C. Estoppel and Laches

       On appeal, the defendants reiterate their equitable defenses, arguing equity

principles should have been a complete bar to litigation. While the defendants

concede the district court “properly articulated” the law regarding laches and

estoppel, they claim the district court improperly melded the statute of limitations

and these equitable defenses. We affirm.

       Estoppel by acquiescence occurs when “a person knows or ought to know

that she is entitled to enforce her right or to impeach a transaction and neglects to

do so for such a time as would imply that she intended to waive or abandon her

right.” Davidson v. Van Lengen, 266 N.W.2d 436, 438 (Iowa 1978). Similarly, but

not identically, “[l]aches is an equitable doctrine premised on unreasonable delay

in asserting a right, which causes disadvantage or prejudice to another.” State ex

rel. Holleman v. Stafford, 584 N.W.2d 242, 245 (Iowa 1998). A party alleging
                                          12

laches has the burden to prove its application by clear, convincing, and satisfactory

evidence—including “a showing of substantial prejudice.” Id. at 245–46.

       We start with the laches claim and the heavy burden it imposes on the

defendants. See id. We affirm the district court’s rejection of the claim, and we

independently conclude that the defendants did not meet their burden by clear,

convincing, and satisfactory evidence. We find the defendants have not proven

prejudice, let alone substantial prejudice, that would impair their defense of any

claims at issue in this appeal or otherwise harm their interests. We also note that

laches is generally unavailable for any claim brought within the statute of limitations

period, though we find it unnecessary to rest our decision on this ground. See Life

Invs. Ins. Co. of Am. v. Est. of Corrado, 838 N.W.2d 640, 645 (Iowa 2013)

(“Ordinarily the doctrine of laches does not apply within the statute of limitations

unless there is a showing of a special detriment to another.”).

       While the estoppel-by-acquiescence claim does not require the same proof

of prejudice, see Davidson, 266 N.W.2d at 439, we find the defendants have not

properly invoked this equitable doctrine either.        Even without the prejudice

requirement, the burden to prove estoppel is borne by the party invoking the

doctrine and requires proof “by clear and convincing evidence.” ABC Disposal

Sys., Inc. v. Dep’t of Nat. Res., 681 N.W.2d 596, 606 (Iowa 2004). The defendants

did not carry their burden on this claim, as the record evidence is insufficient to

prove that the plaintiffs intended to waive or abandon any rights related to the

claims at issue in this appeal. To the contrary, the record shows affirmative

investigation and other acts that tend to show objection to Keith’s and Kurt’s

misconduct,    rather   than    acquiescence—particularly      as   relates   to   the
                                            13

misappropriated-corn and personal-expenses claims that we find meritorious

elsewhere in this opinion.

       Last, having affirmed the district court’s rejection of the equitable defenses

based on the defendants not carrying their initial burden, we find it unnecessary to

reach the plaintiffs’ claim that the defendants’ “misleading tactics and

concealments” would independently bar the equitable doctrines. See Holden v.

Constr. Mach. Co., 202 N.W.2d 348, 356 (Iowa 1972) (refusing to apply “estoppel

and laches upon the basis of [the defendants’] own concealments, misleading

tactics and misrepresentations”).

           D. Unclean Hands

       The defendants also sought to invoke below, and reiterate on appeal, a

claim that the plaintiffs’ “unclean hands” barred the suit outright. We affirm the

district court’s rejection of this claim.

       This doctrine, sometimes referred to as the “clean hands” doctrine, “is not a

favored doctrine of the courts and should not be invoked when the only loser would

be the public.” Cedar Mem’l Park Cemetery Ass’n v. Pers. Assocs., Inc., 178

N.W.2d 343, 353 (Iowa 1970). When properly invoked, the unclean-hands doctrine

requires proof that the plaintiff “dirtied [his hands] in acquiring the rights he now

asserts.” Anita Valley, Inc. v. Bingley, 279 N.W.2d 37, 41 (Iowa 1979) (citation

omitted). The doctrine exists “to protect the integrity of the court where granting

affirmative equitable relief would run contrary to public policy or lend the court’s

aid to fraudulent, illegal or unconscionable conduct.” Myers v. Smith, 208 N.W.2d

919, 921 (Iowa 1973).
                                            14

       As a threshold matter, we note the plaintiffs are likely correct in their claim

that the unclean-hands doctrine applies only to equitable claims, rather than law

claims grounded in statute for damages. See Opperman v. M. & I. Dehy, Inc., 644

N.W.2d 1, 6 (Iowa 2002) (noting the doctrine’s application to “granting affirmative

equitable relief”); In re Est. of Herm, 284 N.W.2d 191, 196–97 (Iowa 1979)

(similar). We elect to address the merits of the defendants’ argument, rather than

parse out its application to different aspects of the suit.

       On the merits, we reject application of the unclean-hands doctrine to Brian

and Gregg. While the record includes some evidence of less-than-ideal business

practices by the two during their own involvement with HFI preceding this lawsuit,

we agree with the district court that this conduct was generally not during the same

time period as the claims giving rise to the lawsuit (some was more than thirty

years prior) and that the claims (even if proven) fall short of the misconduct

necessary to invoke the doctrine. We also independently conclude that, even if

we were more troubled by the plaintiffs’ conduct, and even if it were more

contemporaneous, the rights the plaintiffs seek to vindicate in this suit were not

obtained through the alleged misconduct.            In other words, no hands were

“dirtied . . . in acquiring the rights [the plaintiff] now asserts,” which bars application

of the doctrine. See Anita Valley, 279 N.W.2d at 41. Finally, we are not persuaded

by the defendants’ reliance on Tope ex rel. Peripheral Solutions, Inc. v. Greiner,

No. 15-1571, 2017 WL 6033871, at *4 (Iowa Ct. App. Dec. 6, 2017). There, the

nominal plaintiff stole from the corporation, unlawfully converted some $40,000 in

assets to his personal use, and forwarded mail to a location inaccessible to the

business and in hinderance of the corporate interests. Tope, 2017 WL 6033871,
                                           15

at *4. The record does not contain evidence of comparable conduct by these

plaintiffs, and Tope does not undermine the district court’s ruling.

       IV. Plaintiffs’ Claims

       Having affirmed rejection of all preliminary defenses put forward by the

defendants, we move to the plaintiffs’ claims. They assert (1) breach of fiduciary

duty, (2) fraud, (3) appointment of a custodian for HFI, and (4) removal of Keith as

trustee of the Trust. As discussed below, we affirm the district court in part on

these issues, reverse in part, and remand for further proceedings consistent with

our opinion, including a determination of damages and a ruling on indemnification.

           A. Breach of Fiduciary Duties

       By statute, corporate officers and directors have a duty of care, which

imposes “the duty to act in conformity with . . . the care that a person in a like

position would reasonably exercise under similar circumstances.” Iowa Code

§ 490.842(1)(b). Officers and directors also have a duty of loyalty, which imposes

the duty to act “[i]n good faith” and “[i]n a manner [the officer or director] reasonably

believes to be in the best interests of the corporation.” Iowa Code §§ 490.830(1);

490.842(1).

       Most analysis of corporate decision making is guided by the business-

judgment rule. “The ‘heart of the business judgment rule’ is ‘judicial deference to

business decisions by corporate directors.’” Oberbillig v. W. Grand Towers Condo.

Ass’n, 807 N.W.2d 143, 154 (Iowa 2011) (citation omitted).              However, “the

business judgment rule governs only where a director is shown not to have a self

interest in the transaction at issue.” Cookies Food Prods., Inc., by Rowedder v.

Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 453 (Iowa 1988).
                                         16

       The law affords special regulation to self-dealing and transactions that

involve a conflict of interest.   Historically, the Iowa Supreme Court required

“directors who engage in self-dealing to establish the additional element that they

have acted in good faith, honesty, and fairness,” in addition to the informed consent

of shareholders or disinterested directors.2 Id. The modern statute appears to

make the requirement disjunctive. See Iowa Code § 490.861(2). Because the

defendants did not plead any affirmative defense under section 490.861(2)(a) or

(b), any defense of a self-dealing claim requires the director or officer to

affirmatively prove that “[t]he transaction, judged according to the circumstances

at the relevant time, is established to have been fair to the corporation.” Iowa Code

§ 490.861(2)(c). “Fair to the corporation” means

       that the transaction as a whole was beneficial to the corporation,
       taking into appropriate account whether it was all of the following:
                     a. Fair in terms of the director’s dealings with the
              corporation.
                     b. Comparable to what might have been obtainable in
              an arm’s length transaction, given the consideration paid or
              received by the corporation.

Iowa Code § 490.860(3).

       The law also prohibits application of the business judgment rule when a

director lacks

       objectivity due to the director’s familial, financial, or business
       relationship with, or a lack of independence due to the director’s
       domination or control by, another person having a material interest

2 We are mindful that the General Assembly has adopted statutory amendments
since Cookies, but we agree with the commentary that Cookies is still largely good
law and the modern statute should be interpreted similarly or identically. See
Matthew Doré, Iowa Practice Series: Business Organizations § 28:11 (West Oct.
2022 update) [hereinafter Iowa Practice Series]. In any event, no party urges that
the relevant principles have changed since Cookies.
                                            17

       in the challenged conduct, which also meets both of the following
       criteria:
               (a) Which relationship or which domination or control could
       reasonably be expected to have affected the director’s judgment
       respecting the challenged conduct in a manner adverse to the
       corporation.
               (b) After a reasonable expectation to such effect has been
       established, the director shall not have established that the
       challenged conduct was reasonably believed by the director to be in
       the best interests of the corporation.

Iowa Code § 490.831(1)(b)(3). As a commentator explains,

              Courts . . . refuse to apply the business judgment rule where
       the director’s conduct advances the director’s own self-interest or the
       interests of any party other than the corporation. Such situations
       involve a potential violation of the director’s duty of loyalty, so that
       review of the director’s conduct under deferential business judgment
       rule standards is inappropriate.

Iowa Practice Series § 28:6 (internal footnote omitted) (also collecting cases).

       With this backdrop, we review the district court’s analysis of the plaintiffs’

numerous claims of misconduct by the defendants.

              1. Keith     Engaged     in    Self-Dealing   Concerning      Personal

                 Expenses and Double-Dipping Mileage Reimbursements

       The plaintiffs contend that Keith engaged in self-dealing by paying personal

expenses with corporate assets. The undisputed record evidence is that Keith and

his wife paid nearly $200,000 in personal expenses from the corporate checking

account without reimbursing the company and without documented authorization.

The record discloses no legitimate business purpose for these expenses. Despite

these facts, the district court found that Keith did not engage in self-dealing.

       We discern two errors in the district court’s ruling. First, because Keith

engaged in self-dealing, the district court erred in assigning the burden regarding

fairness to the plaintiffs rather than Keith. See Cookies, 430 N.W.2d at 453.
                                         18

Second, the district court erred in finding that Keith’s conduct was excused

because Keith’s self-dealing reflected “consistent practices of all Hora family

members who were employed by and/or involved in the operation of Hora Farms

over the years.” While it may be true that other family members also behaved

poorly, a breach-of-fiduciary-duty claim focuses on the action of the fiduciary. See

Iowa Code § 490.842; Cookies, 430 N.W.2d 453–54. If anything, evidence that

others also engaged in misconduct tends to support the plaintiffs’ claims that Keith

breached fiduciary duties by mismanaging HFI.

         Because our review is de novo, we resolve the merits of this claim. We find

Keith engaged in self-dealing and that these transactions are not shielded by the

business-judgment rule. See Iowa Code § 490.860(3). We also find that Keith did

not carry his burden to prove that this transaction was fair to the corporation and

comparable to an arms-length transaction. While there is some record evidence

suggesting that the total compensation Keith received could have been

appropriate, an arms-length transaction would not include athletic tickets and

personal shopping paid for with crop and infrastructure accounts or the double-

dipping vehicle reimbursements.         We also find independent harm to the

corporation through the false or incomplete business tax returns and other records

filed under Keith’s management, as the records failed to adequately document or

authorize payment of the personal expenses as compensation, which impacted

available deductions and tax owed by HFI and exposed the corporation to legal

liability.
                                          19

       We reverse the district court on this personal-expenses self-dealing claim,

and we remand for the district court to enter judgment in favor of the plaintiffs and

determine damages.

               2. Keith Allowed Kurt to Misappropriate HFI Corn

       The plaintiffs also contend that Keith breached his duty because he knew

Kurt was feeding HFI corn to Kurt’s swine and relatedly knew that HFI was not

selling a substantial portion of the produced corn. The district court found that this

conduct, as it relates to Keith, did not involve self-dealing. We disagree. The

beneficiary of Keith failing to monitor the corn taken by Kurt was Kurt, who is Keith’s

son. We have little trouble concluding that this qualifies as a self-dealing or

conflicted transaction. See Iowa Code §§ 490.860(2)(c) (regulating transactions

when “the director knew that a related person was a party or had a material

financial interest”), (5)(b) (defining “related person” to include “[a] child”);

490.831(1)(b)(3) (noting the lack of protection for directors who lack objectivity due

to familial relationships).

       Again, because our review is de novo, we now determine whether Keith met

his burden to affirmatively prove fairness to the corporation. See Iowa Code

§ 490.860(3). We find that Keith has not carried his burden. At core, what Keith

enabled was civil conversion or criminal theft of HFI corn by his son Kurt. While

perhaps there is some debate as to the extent Keith knew about the conversion or

theft, there is no question he knew it was happening. Keith’s own words from the

2015 message to his family are damning, given his admission that allowing Kurt to

convert or steal a large quantity of corn reflected on “terrible” management and

weighed in favor of seeking “outside help.” So too for Keith’s moment of honesty
                                         20

in disclosing that Kurt had “too good of a deal” at the expense of the company,

which was consistent with HFI’s expert describing the deal as “too sweet.” Yet

Keith continued to engage in his own self-dealing, enabled Kurt to do the same,

and did not ask any disinterested party to review the arrangements.

       We find the conduct related to misappropriated corn was not fair to the

corporation and was not the equivalent of an arms-length transaction. In addition,

we find this breach harmed the corporation not only through monetary loss, but

also due to its broader impact on HFI’s financials and legal liabilities: because the

payment-by-commodity arrangement (if that is truly what occurred) was not

properly reported, HFI was unable to take advantage of all relevant tax deductions,

failed to pay applicable employment taxes, and may now face significant tax

difficulties (if not severe liability and penalties). Cf. Seraph Garrison, LLC ex rel.

Garrison Enters., Inc. v. Garrison, 787 S.E.2d 398, 406 (N.C. Ct. App. 2016)

(finding an officer breached his fiduciary duty through “indifference to the payroll

tax,” which “presented the corporation with a myriad of legal problems”). We also

find harm to HFI because the abject lack of documentation (no W-2s, 1099s, or

other papers) for the bushels misappropriated by Kurt may lead to criminal liability

for aiding and abetting Kurt in the commission of state and federal tax fraud or

evasion. Finally, we find harm to HFI in its lending process because, as the

certified   fraud   examiner   explained,     Keith   allowing   or   facilitating   the

misappropriation of corn resulted in HFI providing “materially incomplete” records

to its lenders, which likely impacted financial decision making or loan availability.

       We reverse the district court on this self-dealing claim, and we remand for

the district court to enter judgment in favor of the plaintiffs and determine damages.
                                           21

We do not opine as to whether damages on this count are joint and several with

Kurt or any other defendant.

               3. Other Claims Keith Breached Duties

       The plaintiffs below and on appeal also make a variety of other allegations

that Keith breached his duties. To summarize, the plaintiffs claim Keith essentially

diminished the value of shares in the corporation through poor record-keeping and

bad management. Keith disputes error preservation, but we bypass the error-

preservation concern given our resolution of the issue on the merits. See State v.

Taylor, 596 N.W.2d 55, 56 (Iowa 1999) (bypassing error-preservation concern and

proceeding to the merits).

       The remaining allegations (other than the personal-expenses and

misappropriated-corn claims) do not involve self-dealing or unjust enrichment of

Keith or his immediate family members—at least not to the same extent as the

personal-expenses and misappropriated-corn claims. We find the remainder of

claims against Keith are either shielded by the business-judgment rule or are not

supported by sufficient record evidence that would allow us to find bad faith,

dishonesty, intention to harm, or unfairness to the corporate interest. We therefore

affirm the district court’s finding that the additional allegations do not warrant relief.

               4. Kurt Misappropriated Corn

       The district court did not address any alleged breaches of duty by Kurt,

reasoning in a footnote that claims of breach and self-dealing were limited to

corporate directors or officers. Kurt’s appellate brief defends the suit on the merits,

rather than by relying on the footnote. On de novo review, we find the district court

erred in not analyzing whether Kurt breached the duties he owed to HFI.
                                          22

       At minimum, Kurt owed HFI the common law duty of loyalty all agents owe

to a principal. E.g., Condon Auto Sales & Serv., Inc. v. Crick, 604 N.W.2d 587,

598–99 (Iowa 1999).      Kurt conceded this in his pleadings below and at oral

argument, and his trusted position as operations manager of HFI justifies the

imposition of fiduciary duties. See id. at 599 (recognizing fiduciary duties arise

when an employee or agent has “greater authority to act for the principal”). It is

well-established that an agent or employee breaches this duty through

misappropriation of the employer’s property. See id. at 600.

       On this issue, we note the debate between the parties about who bears the

burden. We ultimately find it unnecessary to resolve this question, as the evidence

convinces us the plaintiffs proved breach. We find Kurt’s repeat misappropriation

of HFI corn for his personal use without reimbursement (which could likely be

termed civil conversion or criminal theft) breached his duty. This misappropriation

was not a mere accounting error but a deliberate and repeat series of choices that

involved taking the corn, making false estimates of the amount taken, and

inaccurately recording the taking to such a degree that precise accounting was

made difficult or nearly impossible. We also reject Kurt’s claim that the corn was

permissible compensation, as Kurt never claimed it as income on his tax filings

and HFI never reported the transactions in its filings. Last, we observe that Kurt’s

shifting stories (all of which conflict, to varying degrees, with more credible

evidence) provide substantive proof of his culpability. Cf. State v. Cox, 500 N.W.2d

23, 25 (Iowa 1993) (“A false story told by a defendant to explain or deny a material

fact against him is by itself an indication of guilt and the false story is relevant to

show that the defendant fabricated evidence to aid his defense.”).
                                           23

       We reverse the portion of the district court’s order finding Kurt did not breach

a duty, direct the district court to enter judgment for the plaintiffs on this claim, and

remand for the district court to determine damages. We again decline to opine on

whether these damages are joint and several with Keith or any other defendant.

                5. Other Alleged Breaches of Duty by Kurt

       The plaintiffs also make a variety of other claims of misconduct against Kurt,

alleging improper payments to HK Farms for crop inputs and overcharging HFI for

labor. We find that the district court should have addressed these claims, based

on our conclusion regarding the duty Kurt owed to HFI farms. However, although

we are hindered by the lack of fact-finding on this claim, we are convinced on de

novo review that the plaintiffs did not carry their burden. Our review has been

informed, but not bound by, the district court’s conclusion that the plaintiffs’ expert

testimony (the sole basis of these claims) was “less credible than other testimony

in the case.”

       As to the crop inputs, we find the deeply conflicting evidence in the record

is not sufficient for the plaintiffs to prove by a preponderance of evidence that any

overpayment was sufficient to violate the agent–principal duty Kurt owed to HFI.

Unlike the misappropriated-corn claim, Kurt has plausible explanations and did not

engage in deceptive conduct regarding the crop inputs.

       As to the labor billing, we find Kurt’s record-keeping was sloppy and

incomplete, but did not rise to the level of violating a duty to HFI. While we are

hesitant to reward Kurt’s bad record-keeping by finding his poor accounting

prevented the plaintiffs from meeting their burden, we are persuaded that we must

do so here because these records were essentially the sole basis for the expert’s
                                          24

conclusions regarding labor billing. Cf. N. Skunk River Greenbelt Ass’n, Inc. v.

Allen, No. 18-0842, 2019 WL 6358298, at *7 (Iowa Ct. App. Nov. 27, 2019) (finding

plaintiffs failed to carry burden in part due to “abysmal” recordkeeping and financial

books that were a “nightmare”). Like the crop-inputs claim, Kurt has plausible

explanations, and this claim also lacks the deceptive conduct that convinces us

Kurt breached a duty with regard to the misappropriated corn.

       We deny the plaintiffs’ claims with regard to any additional misconduct

committed by Kurt, though we reiterate our condemnation of both his conduct and

poor record-keeping.

            B. Fraud

       Although there is some overlap in the claims of fraud and breach of fiduciary

duty, the elements are different enough that outcomes may be different in

litigation—as is the case here. To the extent the plaintiffs independently pursue a

fraud theory, we agree with the district court that Keith’s and Kurt’s conduct, while

dishonest and contrary to HFI’s interests, does not rise to the level of fraud,

fraudulent concealment, or fraudulent misrepresentation. See Phoenix v. Stevens,

127 N.W.2d 640, 642 (Iowa 1964) (summarizing the specific elements necessary

to demonstrate actionable fraud). We are persuaded of this in part because the

corporate records, while sloppy, contained sufficient information to allow this

derivative suit to go forward and provided the basis for us to grant relief on at least

some of the relevant claims. We recognize more or better claims may have been

possible with better record-keeping, but the burden for fraud is high and must be

borne by the plaintiffs. See id. We therefore affirm the district court on the fraud

analysis.
                                          25

          C. Custodian and Removal of a Trustee

       In Count III of their petition, the plaintiffs requested appointment of an

independent custodian due to the claimed egregiousness of the defendants’

violations. Because we have reversed and vacated three underlying breach-of-

duty claims that impacted the district court’s analysis of this issue, we vacate and

remand for the district court to decide the question with the correct legal footing on

the underlying claims.

       We order the same remedy for the claim made in Count 4 of the petition,

concerning the trust. This claim should also be decided anew on remand with the

benefit of our opinion.

       We note that, given the equitable nature of the remedies, the district court

may consider whether any further deficiencies have been remedied or discovered

in the course of litigation. As our supreme court has said, in crafting an equitable

remedy, the district court “has considerable flexibility in resolving the dispute.” See

Baur v. Baur Farms, Inc., 832 N.W.2d 663, 677 (Iowa 2013).

          D. Heather and HK Farms

       The plaintiffs on appeal challenge the district court’s findings that Heather

and HK Farms also had liability for breach of fiduciary duty or fraud. Here, we

agree with the district court that the plaintiffs did not carry their burden to prove

that Heather or HK Farms facilitated the conduct at issue or acted as co-

conspirators. The best evidence the plaintiffs point to is Heather’s signature on

tax forms, but there is little or no credible evidence she knew of the fiduciary

breaches when signing the documents. We affirm the district court’s conclusion

that neither Heather or HK Farms have any liability in this action.
                                         26

           E. Fees, Costs, and Indemnification

       The district court determined that the plaintiffs raised sufficient concerns

that an award of fees and costs to the defendants was not appropriate. See Iowa

Code § 490.746 (allowing the district court to award a party’s expenses incurred in

a derivative suit). We agree. See Vaughan v. Must, Inc., 542 N.W.2d 533, 540

(Iowa 1996) (where an award of attorney fees is authorized by statute, we review

such a decision for abuse of discretion). However, because we have reversed

some (but not all) of the claims decided by the district court, we direct that the

district court can revisit the question of the plaintiffs’ trial fees and costs if our

opinion would have affected its analysis in the first instance.

       The plaintiffs and defendants each seek appellate attorney fees and costs.

See Bankers Tr. Co. v. Woltz, 326 N.W.2d 274, 278 (Iowa 1982) (holding a statute

allowing an award of attorney fees includes an award of appellate attorney fees).

When available, appellate attorney fees are a matter of this court’s discretion. See

Christy v. Lenz, 878 N.W.2d 461, 469 (Iowa Ct. App. 2016). Both parties have

prevailed on some issues and been defeated on others. We deny the request for

attorney fees on appeal and direct that the parties pay their own costs. We also

affirmatively reject the defendants’ claim that the plaintiffs commenced the suit for

improper purposes. And we note that, although we have affirmed that neither

Heather or HK Farms have liability, the questions presented by the suit and

addressed in the brief jointly filed by Kurt, Heather, and HK Farms are sufficiently

grounded in fact that we find an award of fees to any individual entity who shared

in the briefing is not appropriate.
                                          27

       Finally, the plaintiffs contest whether Keith was properly indemnified for his

legal fees. By statute, corporate officers are indemnified in suits brought when the

director “was wholly successful, on the merits or otherwise.” Iowa Code § 490.852.

This provision is intended to mandate indemnification when “the proceeding is

disposed of on a basis which does not involve a finding of liability.” Allen, 2019

6358298, at *6 (quoting Iowa Practice Series § 28:16). Regardless of the statute,

articles of incorporation may restrict indemnification. See Iowa Code § 490.858.

       Article III, section 14 of HFI’s Articles of Incorporation provides that

indemnification is not available if the director or officer has been found “liable for

negligence or misconduct in the performance of duty.” The district court did not

address this issue, presumably because it found no breach of duty. Because we

found breaches of duty and reversed on the personal-expenses and

misappropriated-corn issues related to Keith, we direct the district court to decide

indemnification on remand. We find no basis for permissive indemnification under

section 490.851, given the evidence and arguments made below. If the district

court finds that Keith engaged in “negligence or misconduct in the performance of

duty” as those terms are used in Article III, section 14, the district court shall order

Keith to repay HFI the sum of any erroneous indemnification and make all

necessary fact-findings to effectuate such an order.

           F. Disposition

       As to Keith, we reverse the district court on the personal-expenses and

misappropriated-corn claims, and we remand for the district court to enter

judgment against Keith and determine damages. The district court must also
                                         28

determine the applicability of the indemnification clause and order repayment to

HFI if appropriate.

       As to Kurt, we reverse the district court on the misappropriated-corn claim

and direct the district court to determine damages.

       As to the appointment of a custodian and removal of the trustee, we vacate

and remand for the district court to determine these issues in light of our ruling on

the breach-of-duty claims.

       We affirm on all other grounds presented by the parties, whether addressed

in this opinion explicitly or implicitly. The parties shall pay their own costs on

appeal.

       AFFIRMED IN PART, REVERSED IN PART, AND REMANDED WITH

DIRECTIONS.