Court Opinion

ID: 4696891
Source: CourtListenerOpinion
Date Created: 2021-06-18 14:03:32.331476+00
Date Added: 2024-06-11T08:05:42.991011
License: Public Domain

IN THE SUPREME COURT OF IOWA
                               No. 19–2151

          Submitted December 16, 2020—Filed June 18, 2021

SUSAN A. GUGE and PEGGY MCDONALD,

      Appellees,

vs.

KASSEL ENTERPRISES, INC.,

      Appellant,

CRAIG L. KASSEL, DEBORAH M. KASSEL, KASSEL FARMS, INC., and
GREAT OAKS FARMS, INC.,

      Defendants.

      Appeal from the Iowa District Court for Palo Alto County, Charles K.

Borth, Judge.

      The parties appeal the district court’s “fair value” determination of

the plaintiffs’ shares in an election-to-purchase-in-lieu-of-dissolution

proceeding, and the defendant also appeals an award of fees and expenses
in the plaintiffs’ favor. AFFIRMED IN PART, REVERSED IN PART, AND

REMANDED.

      McDermott, J., delivered the opinion of the court, in which

Christensen, C.J., and Appel, Waterman, and Mansfield, JJ., joined, and

in which McDonald and Oxley, JJ., joined except for division III.B. Oxley,

J., filed a special concurrence, in which McDonald, J., joined.
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      Thomas D. Hanson (argued) and Emily A. Staudacher of Dickinson,

Mackaman, Tyler & Hagen P.C., Des Moines, for appellant.

      Seth R. Delutri (argued), Mark C. Feldmann, and Justin E. LaVan of

Bradshaw, Fowler, Proctor & Fairgrave, P.C., Des Moines, for appellees.
                                      3

McDERMOTT, Justice.

      Shareholders in Iowa corporations may sue to dissolve a corporation

when those in control have engaged in oppressive conduct. But in lieu of

defending a dissolution proceeding, the law allows the corporation to force

the complaining shareholders to sell their stock for the “fair value” of their

shares. This statutory buyout right provides a chance for those in control

to avoid both the tribulations that come with defending against the

misconduct claims and, presumably, the future grief that comes with

trying to run a business with antagonistic shareholders. Because filing
for dissolution could result in the forced sale of the filer’s own stock, this

buyout right also helps deter shareholders from strategic abuse of

dissolution petitions.

      If the parties can’t agree to a stock valuation on their own, the “fair

value” determination rests with the court. In this appeal, the parties ask

us for the first time to address a “fair value” determination under Iowa’s

election-to-purchase-in-lieu-of-dissolution statute. In particular, we must

decide what adjustments should be made in this case to the corporation’s

asset values to set the “fair value” of the plaintiffs’ shares and whether the

petitioning shareholders established that probable grounds of oppression

existed to permit the district court’s award of their fees and expenses.

      I. Factual and Procedural Background.

      Lawrence and Georgia Kassel owned a family farming operation that

they incorporated in 1977 under the name Kassel Enterprises, Inc. They

had three children: Susan Guge, Peggy McDonald, and Craig Kassel.

Lawrence passed away in 2005; Georgia in 2017. Through a series of gifts

of stock during their lives, bequests in their wills after their deaths, and
Craig’s purchase of additional shares from his mother after his father’s

death, Lawrence and Georgia ultimately transferred all of the corporation’s
                                     4

stock to their children. At the time this lawsuit arose, Susan and Peggy

each owned 23.75% of the corporation’s shares and Craig the remaining

52.5%.

      After Georgia’s death, Susan and Peggy filed a lawsuit against Craig,

Craig’s wife, two of Craig’s separately-owned corporations, and Kassel

Enterprises. Count I of the lawsuit sought judicial dissolution of Kassel

Enterprises under Iowa Code section 490.1430(1)(b)(2) (2018) (for “illegal,

oppressive, or fraudulent” conduct) and section 490.1430(1)(b)(4) (for

waste or misapplication of corporate assets).       Five additional claims,
counts II through VI, sought money damages based on claims for breach

of fiduciary duty, fraud, breach of contract, third-party beneficiary rights,

and civil conspiracy. The defendants denied the claims and added three

counterclaims against Susan and Peggy.

      Kassel Enterprises invoked Iowa Code section 490.1434, electing to

purchase Susan and Peggy’s shares for fair value in lieu of a judicial

dissolution of the corporation. Because the parties failed to reach their

own agreement on the fair value of the shares within sixty days, the district

court set the matter for a hearing to determine the fair value of Susan and

Peggy’s shares for the buyout. See Iowa Code § 490.1434(4) (requiring the

district court, upon application of any party, to determine the fair value of

the petitioner’s shares if the parties are unable to reach an agreement

within sixty days).

      In the interim, the parties filed motions for summary judgment on

the other claims in the case.     Before the summary judgment hearing,

Susan and Peggy voluntarily dismissed all of their claims against the

defendants in counts II through VI except for part of their breach of
fiduciary duty claim in count II against Craig and his wife. Craig and his

wife likewise dismissed one of their counterclaims.
                                     5

      The district court used an asset-based method to calculate the fair

value of the shares. It started with the parties’ agreed valuation of the

corporation’s total assets ($5,804,403), then subtracted the corporation’s

total liabilities ($22,046), to arrive at a total shareholder equity of

$5,782,357. Dividing the total shareholder equity amount by the number

of outstanding shares (847), the district court determined that the fair

value of each share was $6826.87. Susan and Peggy each owned 201.165

shares, so their respective shareholdings totaled $1,373,327. The district

court didn’t apply any discounts urged by Craig for transaction costs or
tax liabilities for built-in gains associated with a hypothetical sale of

corporate assets, and it didn’t apply any additions as urged by Susan and

Peggy based on Craig’s alleged waste and misapplication of corporate

assets. The district court granted Susan and Peggy’s request for an award

of reasonable fees and expenses of their attorneys and expert witnesses

under Iowa Code section 490.1434(5) of $93,620.74 and $6540,

respectively. The district court directed the purchase of Susan and Peggy’s

stock through an installment plan payable over five years and secured by

personal guarantees from Craig and his wife and the shares of stock. See

Iowa Code § 490.1434(5) (authorizing the court to order payment in

installments and to provide for security to assure payment).

      In its ruling on the motions for summary judgment, the district court

ruled in Craig’s favor on count II, finding that the claims of wrongdoing by

Craig and his wife required a finding of injury to Kassel Enterprises as a

corporate entity, not injury to Susan and Peggy as individual shareholders,

and thus were “derivative” claims. Determining that the substantive and

procedural requirements for bringing derivative claims had not been met,
the district court dismissed count II. The district court ruled in Susan and
                                      6

Peggy’s favor on Craig’s counterclaims for equitable setoff and unjust

enrichment.

      No party appeals any summary judgment ruling, but both sides

appeal the district court’s determination of fair value. Craig argues the

district court erred in determining the fair value of Susan and Peggy’s

shares without any discount for transaction costs or built-in gain taxes,

and in awarding their attorney fees and expert expenses against the

corporation. In a cross-appeal, Susan and Peggy argue that the district

court erred in failing to increase the fair value of their shares based on
Craig’s alleged waste and misapplication of Kassel Enterprises’ assets.

      II. Standard of Review.

      Corporate dissolution actions are equitable in nature, so our review

is de novo. See Baur v. Baur Farms, Inc., 832 N.W.2d 663, 668 (Iowa 2013).

In equity cases, we aren’t bound by the district court’s factual findings,

but we generally give them weight, particularly as to witness credibility

determinations. Soults Farms, Inc. v. Schafer, 797 N.W.2d 92, 97 (Iowa

2011).

      We review a district court’s application of a statutory fee-shifting

provision for correction of legal error. See Seeberger v. Davenport C.R.

Comm’n, 923 N.W.2d 564, 568 (Iowa 2019). We review an attorney fee

award for an abuse of the district court’s discretion. Smith v. Iowa State

Univ. of Sci. & Tech., 885 N.W.2d 620, 624 (Iowa 2016) (per curiam).

      III. Determination of Fair Value.

      Iowa Code chapter 490 (the Iowa Business Corporation Act) grants

the court authority to dissolve a corporation in shareholder proceedings

where “[t]he directors or those in control of the corporation have acted, are
acting, or will act in a manner that is illegal, oppressive, or fraudulent” or

where “corporate assets are being misapplied or wasted.”          Iowa Code
                                     7

§ 490.1430(1)(b)(2), (4) (2018). But the corporation (or, if the corporation

fails to exercise the right, other shareholders) may avoid dissolution

proceedings with an irrevocable election “to purchase all shares owned by

the petitioning shareholder at the fair value of the shares.”            Id.

§ 490.1434(1).       An order directing the purchase of a petitioning

shareholder’s shares requires the court to dismiss the dissolution claim

and extinguishes all the petitioning shareholder’s rights as a shareholder.

Id. § 490.1434(6).

      Section 490.1434 doesn’t define “fair value,” but appraisal rights
provisions in the same chapter of the Code state that fair value is

determined “[u]sing customary and current valuation concepts and

techniques generally employed for similar businesses in the context of the

transaction requiring appraisal” and “[w]ithout discounting for lack of

marketability or minority status.” Id. § 490.1301(4)(b)–(c); see also Baur,

832 N.W.2d at 669 n.5 (“Our legislature made a policy decision when it

adopted the current definition of ‘fair value.’ By not allowing a discount

for lack of marketability or minority status, the legislature implicitly

required shares to be valued on a marketable, control interest basis.”

(quoting Nw. Inv. Corp. v. Wallace, 741 N.W.2d 782, 787–88 (Iowa 2007))).

      Fair value represents a shareholder’s pro rata share of the value of

the corporation as a going concern. See Nw. Inv. Corp., 741 N.W.2d at

787; Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1144 (Del. 1989). We’ve

long discussed the challenges in ascertaining the fair value of stock in a

closely-held, operating business. See Sieg Co. v. Kelly, 512 N.W.2d 275,

279–80 (Iowa 1994). For starters, shares of most closely-held businesses

have no established market, so we must first determine which of several
different appraisal methodologies might best befit “the particular

circumstances of the corporation involved.” Richardson v. Palmer Broad.
                                     8

Co., 353 N.W.2d 374, 376–77 (Iowa 1984) (quoting 13 William M. Fletcher,

Fletcher Cyclopedia of the Law of Private Corporations, § 5906.12, at 286

(rev. perm. ed. 1980)).    We’ve discussed three of the more common

appraisal methods—market value, investment value, and net asset value—

in our caselaw. See Davis–Eisenhart Mktg. Co. v. Baysden, 539 N.W.2d

140, 142 (Iowa 1995).

      The experts for both sides in this case agreed on a net asset value

approach. They independently deemed this methodology best suited for

Kassel Enterprises’ fair-value determination because an overwhelming
proportion of the entity’s value rested in its farmland holdings as opposed

to income generated in ongoing operations.         See Sec. State Bank v.

Ziegeldorf, 554 N.W.2d 884, 891–92 (Iowa 1996) (explaining that net asset

value “offered ‘protection to the minority stockholder in a corporation with

a poor earnings record’ where the value of the corporation as a going

concern might be less than its liquidation value” (quoting Woodward v.

Quigley, 257 Iowa 1077, 1083, 133 N.W.2d 38, 41 (1965), modified on

reh’g, 257 Iowa 1077, 136 N.W.2d 280 (1965))).               The value of the

corporation’s farmland assets totaled $5,616,667, with the remainder in

accounts receivable, cash and cash equivalents, and other property and

equipment. Using the asset-based approach, the parties’ experts started

by calculating the aggregated appraised market values of the corporation’s

assets ($5,804,403) and subtracted its liabilities ($22,046). The district

court stopped here and used this number—$5,782,357—as the numerator

in calculating the fair value of the corporation’s shares.

      Craig contends that the fair value of his sisters’ shares must include

deductions for (1) theoretical transaction costs in a potential sale of the
assets, and (2) potential capital gains tax liability on the corporation’s

assets. With these proposed deductions—$449,733 in transaction costs
                                      9

and $1,458,500 in capital gains tax—Craig argues that the total

shareholder equity for purposes of determining the fair value of his sisters’

shares (the numerator) is actually $3,874,100.       Craig asserts that the

district court’s failure to apply these deductions risks allowing the minority

to oppress the majority. See Baur, 832 N.W.2d at 678 (stating that “courts

must be careful when determining relief to avoid giving the minority a

foothold that is oppressive to the majority”).

      A. Deduction of Transaction Costs.             Having decided on a

valuation method, we must first resolve whether the district court correctly
held that no transaction costs from a hypothetical sale of the assets should

be included in the valuation. The district court reasoned that, in a fair-

value determination, transaction costs in a liquidation aren’t components

of a corporation’s value as a going concern without some evidence that the

liquidation is contemplated in the corporation’s ongoing operation. The

district court found no evidence of a contemplated liquidation of any of

Kassel Enterprises’ assets and, thus, held that no transaction costs of a

purely hypothetical liquidation should be imposed in the determination of

fair value.

      Yet in this case, both parties’ experts agreed that a deduction for

transaction costs    based on a hypothetical liquidation of Kassel

Enterprises’ assets should have been included; they simply disagreed on

the amount.     Craig’s expert opined that the transaction costs for a

hypothetical sale of Kassel Enterprises’ assets would fall in a range

between 6% and 10%, and he ultimately chose the midpoint, an 8%

discount (equating to $449,733). Susan and Peggy’s expert also deducted

for hypothetical transaction costs in his calculation, but at the lower rate
of 3% (equating to $173,471).          The difference largely reflected a

disagreement about a hypothetical commission rate for the sale of the
                                      10

farmland. Craig’s expert testified to having contacted two independent

farm property sales companies who estimated sales-related costs between

6% and 10% depending on a number of factors. Susan and Peggy’s expert

based the rate on auctioneer fees of 2% ($115,647) and then added 1%

($57,824) to cover any remaining closing costs, advertising costs,

abstracting costs, legal fees for conveyance documents, and closing agent’s

fees.

        Persuaded as we are in this case by the parties’ experts, both of

whom included transaction costs in their valuations under a net asset
approach, we find that the district court’s failure to reduce the asset values

to account for the costs to liquidate Kassel Enterprises’ assets warrants

reversal. The district court, having determined that no transaction costs

should be included in calculating the value of corporate assets, stopped

short of making any finding about the deduction that we’ve now

determined must be applied. We find the record lacking in sufficient detail

for us to make this important determination.            “[W]hen essential to

effectuate justice, an equity case may be remanded for such further

proceedings as the circumstances may require.” Dee v. Collins, 235 Iowa

22, 28, 15 N.W.2d 883, 887 (1944). We thus remand for the district court

to determine and apply the appropriate deduction of transaction costs to

the value of the corporation’s assets in setting the fair value of Susan and

Peggy’s shares.

        B. Deduction of Built-In Gain Tax. Craig argues that the district

court also erred in failing to deduct the tax consequences of built-in gains

on the corporation’s assets and that, as a result, Susan and Peggy will

escape paying taxes on the corporation’s appreciated assets that he solely
(and unfairly) will now bear alone. Applying a 30.8% effective tax rate to

calculate the built-in tax, Craig’s expert calculated a potential tax liability
                                     11

of $1,458,500. Craig urges that the district court erred in failing to deduct

this tax liability in determining the value of the corporation’s net assets.

      A “built-in gain” tax refers to the tax on an asset’s appreciation from

its adjusted tax basis. See 26 U.S.C. § 1374(d)(1) (2018). The built-in gain

for an asset in an IRS subchapter S corporation that has converted from

a subchapter C corporation (as Kassel Enterprises did in 2007) calculates

the appreciation looking at the asset’s value at two points in time: the

asset’s current fair market value and the asset’s adjusted basis at the time

of the conversion.    See id.   The assets Kassel Enterprises holds (in
particular, its farmland) have increased in value since the corporation

converted to an S corporation in 2007.

      The district court keyed in on the corporation’s status as an IRS

subchapter S corporation, as opposed to a subchapter C corporation, in

ruling that no built-in gain deduction applied. With a C corporation, a

sale of assets triggers income tax on capital gains at the entity level (with

the corporation obligated to pay the tax), arguably making the remaining

shareholders responsible for the tax without any contribution from the

departed shareholders. But this doesn’t hold true for the same asset sale

by an S corporation because an S corporation pays no income tax at the

entity level. Rather, tax is paid at the individual shareholder level, with

taxable gain passed onto the departing shareholder. See id. § 1363(a).

Because of this difference in tax treatment, Susan and Peggy in selling

their stock will be assessed the tax liability resulting from appreciation of

their stock. To apply a tax deduction in the district court’s determination

of fair value on top of the tax consequences Susan and Peggy individually

already face through the S corporation’s pass-through of taxes would (as
Craig’s expert conceded) impose a double tax of sorts on Susan and Peggy.

See Matthew G. Norton Co. v. Smyth, 51 P.3d 159, 169 (Wash. Ct. App.
                                     12

2002) (holding that because S corporations usually avoid double taxation,

a discount would not be appropriate unless the record showed dissenting

shareholders had not paid built-in gains tax); James S. Eustice & Joel D.

Kuntz, Federal Income Taxation of S Corporations § 7.1 (4th ed. 2013).

      Craig concedes it’s possible that he could altogether avoid the

potential taxes on gains associated with Kassel Enterprises’ assets that he

seeks to deduct from the fair-value calculation.     If, for instance, Craig

doesn’t direct the corporation to sell the assets and transfers his stock to

his children at his death, his children would enjoy a step-up in basis at
the time of the transfer without any unfavorable tax consequences.

Indeed, Craig testified to his intention that the corporation not sell any of

its farmland.

      Craig cites no cases, and we can find none, for the proposition that

a fair-value determination for departing shareholders must include a

deduction for built-in tax gains where no sale of assets is contemplated.

The weight of authority on the issue of tax deductions in fair-value

determinations angles sharply the other direction: that courts should not

discount for tax consequences where no liquidation triggering those tax

consequences was contemplated. See, e.g., Paskill Corp. v. Alcoma Corp.,

747 A.2d 549, 554 (Del. 2000); Hansen v. 75 Ranch Co., 957 P.2d 32, 42–

43 (Mont. 1998); In re 75,629 Shares of Common Stock of Trapp Fam.

Lodge, Inc., 725 A.2d 927, 934 (Vt. 1999); Matthew G. Norton Co., 51 P.3d

at 168; Brown v. Arp & Hammond Hardware Co., 141 P.3d 673, 688 (Wyo.

2006). When valuing a corporation’s assets in a fair-value determination,

tax consequences should be considered “only in the most limited

circumstances,” which in most cases means “only when a sale of those
assets is imminent and unrelated to the transaction” that triggered the

petitioning shareholders’ action.   Brown, 141 P.3d at 688–89 (quoting
                                     13

Cecile C. Edwards, Dissenters’ Rights: The Effect of Tax Liabilities on the

Fair Value of Stock, 6 DePaul Bus. L.J. 77, 99 (1993)); see also Matthew G.

Norton Co., 51 P.3d at 168–69.

      The record in this case lacks evidence of any actual or contemplated

liquidation of assets associated with Craig’s election to purchase Susan

and Peggy’s shares in lieu of dissolution that would create any tax

consequences impacting the corporation’s value as a going concern. “In

the absence of specific facts about a prospective sale, ‘[i]t would be the

basest form of speculation to attempt to determine tax consequences of a
voluntary liquidation of assets at an unknown future time.’ ” Brown, 141

P.3d at 689 (quoting Hall v. Hall, 125 P.3d 284, 289 (Wyo. 2005)); see also

Bogosian v. Woloohojian, 158 F.3d 1, 6 (1st Cir. 1998) (stating that no

potential capital gains taxes should be deducted from the valuation of real

property “if there were no plans to sell any of the properties at any time in

the foreseeable future, because none of the liabilities would be incurred

unless the properties were sold”).        Deducting for hypothetical tax

consequences that an entity might well minimize or evade altogether

through strategic action would be inappropriate in determining fair value

under section 490.1434. We thus decline to adjust for the built-in tax

consequences urged by Craig in determining the fair value of Susan and

Peggy’s shares in this case.

      The hypothetical tax ramifications that Craig asks us to apply differ

from the assumed liquidation costs we applied above. Again, the parties’

experts agreed that liquidation costs are components of the net asset

methodology. But they clashed on the tax ramification issue. Permitting

deductions for uncontemplated and avoidable tax ramifications in
determining fair value might invite abuse through the purchase-in-lieu-of-

dissolution process.     Consider a situation in which a controlling
                                     14

shareholder oppresses a minority shareholder and instigates a petition for

judicial dissolution under section 490.1430(1)(b)(2).        The controlling

shareholder could then elect to compel the sale of the petitioning

shareholder’s stock in lieu of dissolution under section 490.1434(1). If no

actions triggering the tax had been contemplated before the dissolution

filing—and may well never occur—then the court’s application of a 30%

discount for a hypothetical tax would permit the oppressive shareholder

to reap the benefit of a buyout at a 30% discount while retaining all the

corporate assets and never paying the tax himself. Under these facts,
applying the discount would create a perverse incentive for the controlling

shareholder and provide payment far short of “fair value” for the oppressed

shareholder’s shares.

      C. Addition of Wasted or Misapplied Corporate Assets. Susan

and Peggy argue that the district court erred in failing to increase the fair

value of their shares to account for Craig’s alleged waste and

misapplication of corporate assets. Their briefing on appeal largely points

to two other rulings by the district court that they believe support

increasing the fair-value determination in this way: the ruling granting

their attorney fee claim against Craig under section 490.1434(5) and the

ruling dismissing their direct fiduciary duty claims in count II as a

derivative claim belonging to the corporation.

      Craig argues that error wasn’t preserved for appeal on this issue.

The district court’s written ruling that detailed its fair-value determination

doesn’t mention Susan and Peggy’s request for an increase in the

corporation’s value based on Craig’s alleged waste and misapplication of

corporate assets. Yet the record shows Susan and Peggy requested these
additions orally during the fair-value hearing. In response, the district

court stated that it wouldn’t consider these grounds as part of its fair-
                                    15

value determination because the evidence instead bore on Susan and

Peggy’s breach of fiduciary duty claims in count II. The transcript of the

fair-value hearing shows that Susan and Peggy raised the issue and that

the district court orally ruled on it, thus preserving the issue for appeal.

See Fenceroy v. Gelita USA, Inc., 908 N.W.2d 235, 248 (Iowa 2018).

      Craig argues—consistent with the thrust of the district court’s

succinct oral ruling—that Susan and Peggy’s arguments seeking to add

amounts for misapplication and waste to the fair-value determination in

count I directly contradict their fiduciary duty claims in count II. Susan
and Peggy asserted under count II that Craig and his wife’s breaches of

fiduciary duty in misapplying and wasting assets gave them a claim for

damages—not that the corporation had a claim for damages. And if the

corporation didn’t have a claim, then the claim shouldn’t be included in

an appraisal of the corporation’s assets.

      Shareholders generally don’t possess a claim against third parties

for injuries to the corporation unless the claim is brought in a derivative

action. Cunningham v. Kartridg Pak Co., 332 N.W.2d 881, 883 (Iowa 1983).

In a derivative action, a shareholder asserts on the corporation’s behalf a

claim against a third party (the “third party” often being one of the

corporation’s own corporate officers) when the corporation itself fails to

take action against the third party.        See id.; see also Iowa Code

§ 490.740(1) (defining “derivative proceeding”).    In a direct action, by

comparison, a shareholder pursues a claim to remedy her own injuries

separate from harm that arises simply from being a shareholder.

Engstrand v. W. Des Moines State Bank, 516 N.W.2d 797, 799 (Iowa 1994).

      When the corporation suffers the injury, the damage to the
shareholder “is normally reflected only in the decreased value of [the

shareholder’s] stock.” Id. (quoting Nicholson v. Ash, 800 P.2d 1352, 1356
                                      16

(Colo. App. 1990)).   Requiring that individuals pursue these claims on

behalf of the corporation—and for the corporation’s benefit—prevents

multiple suits against the corporation by individual stockholders on the

same subject.      See id.    The derivative suit is maintained for the

corporation’s benefit, and success in the derivative suit results in damages

payable to the corporation. Smithberg v. Smithberg, 931 N.W.2d 211, 217

(N.D. 2019), reh’g denied Aug. 22, 2019. The district court held that Susan

and Peggy’s direct claims against Craig and his wife required dismissal

because the claims alleged harm to the corporation, not to Susan and
Peggy individually, and thus were derivative rather than direct claims. As

a result, Susan and Peggy failed to complete the statutory and other

requirements for bringing a derivative action. See Iowa Code § 490.742;

Iowa R. Civ. P. 1.279.

      A corporation’s assets generally include legal claims it possesses

against others. See In re Marriage of Keener, 728 N.W.2d 188, 194 (Iowa

2007). And in this case, the district court (urged by both parties) used an

asset-based approach in which the competing experts submitted identical

valuations of the total amount of assets to determine the fair value of

Kassel Enterprises’ assets. Yet Susan and Peggy’s expert didn’t include

any legal claims the corporation might possess against Craig among the

list of the corporation’s assets in his expert report.

      As the district court found, Susan and Peggy alleged in their petition

that Craig’s breaches of fiduciary duty caused damages to them

individually. And if the fiduciary duty claims belonged to Susan and Peggy

individually, then those claims were not assets of the corporation. We can

hardly criticize the district court for not considering the misapplication
and waste claims to be assets of Kassel Enterprises when it would have

run counter to the manner in which Susan and Peggy themselves pleaded
                                    17

and pursued them in count II. Thus, the district court thus didn’t err in

its fair-value determination by accepting Susan and Peggy’s strategic

choice to pursue the fiduciary duty claims as their own individual assets

and not as assets of the corporation.

      IV. Award of Attorney and Expert Fees and Expenses.

      Craig complains that imposing fees against the corporation makes

no sense considering Susan and Peggy filed a lawsuit asserting five

independent theories of misconduct that, by the end of the case, had all

been dismissed—four voluntarily and one by the district court on
summary judgment. The only other claim, the petition for dissolution, was

resolved through Craig’s election to purchase in lieu of dissolution.

Viewing the overall result as something of a shutout in his favor, Craig

argues that the district court erred in requiring the corporation to pay

Susan and Peggy’s fees and expenses.

      Attorney fees generally aren’t recoverable in Iowa in the absence of

a statute or a contractual provision that permits their recovery.      See

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

2015). But in this case, Iowa Code section 490.1434(5) gives the district

court discretion to award petitioning shareholders their fees and expenses

of counsel and expert witnesses. To do so, the district court must first

find that the petitioning shareholders have “probable grounds for relief”

under section 490.1430(1)(b)(2) (dissolution for “illegal, oppressive, or

fraudulent” conduct) or subsection (1)(b)(4) (dissolution for corporate

assets “being misapplied or wasted”).    The statute focuses on whether

“probable grounds” support the dissolution claim and not any other

separately-pleaded counts of misconduct in the petition.
      With its fee-award provision, section 490.1434 avoids making an

election to purchase in lieu of dissolution a penalty-free escape hatch for
                                      18

misbehaving shareholders controlling the corporation. Iowa Code section

490.1434(5) injects a potential deterrent on controlling shareholders by

providing that, even if they elect to compel a purchase in lieu of defending

a dissolution proceeding, they may still be held liable to some extent for

the petitioning shareholders’ attorney and expert fees and expenses in the

case.    Controlling shareholders can’t engage in “illegal, oppressive, or

fraudulent” conduct or “misapply[y] or waste[]” corporate assets and

expect to bail themselves out with a compelled purchase while avoiding

liability for the petitioning shareholders’ fees and expenses in the buyout
process.

        The district court found no “probable grounds for relief” under

section 490.1430(1)(b)(2) but did find probable grounds for relief under

subsection (1)(b)(4). Craig disputes the accuracy of certain factual findings

that the district court cited in holding that he misapplied corporate assets,

and on those actions he doesn’t dispute occurred, he asserts that no harm

to the corporation resulted. But the statute speaks in terms of both waste

and misapplication of corporate assets, so even a finding that no “waste”

of corporate assets took place doesn’t bar a finding that “misapplication”

of corporate assets occurred.         See Iowa Code § 490.1430(1)(b)(4)

(referencing “corporate assets . . . being misapplied or wasted” (emphasis

added)).

        The district court found Craig misapplied corporate assets to benefit

himself by renting Kassel Enterprises’ farmland to his self-owned entities

for below the land’s fair market value. Craig paid “bonuses” to Susan and

Peggy to make up for the favorable arrangement he’d cut for himself, but

these “bonuses” didn’t make up the difference and, in any event, didn’t
change the fact that he misapplied corporate assets. The district court

also found that Craig arranged for Kassel Enterprises to take out a number
                                     19

of loans and to distribute loaned funds totaling over $900,000 to one of

his personal entities. Although all of the loans were ultimately repaid, the

district court deemed the loans further evidence of misapplication. The

district court further found that in 2016 Craig traded Kassel Enterprises’

farmland with one of his own entities, flipping eighty-nine acres from

Kassel Enterprises to his personal entity and a different ninety-five acres

from his personal entity to Kassel Enterprises. Craig testified that his goal

in the swap was to complete a building project for his own entity. The

district court again found that Kassel Enterprises’ assets might not
necessarily have been wasted in this transaction but were nonetheless

misapplied for Craig’s personal benefit.

      Setting aside the how and what of the district court’s fee award,

Craig also disputes the who, arguing that section 490.1434(5) doesn’t

permit an award of fees against the corporation itself because the

corporation is merely a passive defendant in a dissolution and all of the

alleged bad acts were performed by Craig.          But Iowa Code section

490.1431(2) specifies that petitioning shareholders need not make any

shareholders parties to a dissolution proceeding.     That leaves only the

corporation, by necessity, the party hit with any fee and expense awards

under section 490.1434. Imposing fee awards against the corporation fits,

in any event, because dissolution actions almost invariably involve (as in

this case) controlling shareholders acting through and on behalf of the

corporation in committing the misconduct triggering the fee award. We

review a district court’s applications of the law in awarding fees and

expenses for correction of legal error. See NevadaCare, Inc. v. Dep’t of

Human Servs., 783 N.W.2d 459, 469 (Iowa 2010). We hold that the district
court properly applied section 490.1434(5).
                                     20

      An award of fees and expenses under Iowa Code section 490.1434(5)

is discretionary (using the word “may”), not mandatory.          We review

challenges to exercises of such discretion for abuse of discretion, which is

the same standard we use for the district court’s determination of the

amount of fees awarded. See Smith, 885 N.W.2d at 624. The district court

reviewed Susan and Peggy’s attorney fee charges in detail and eliminated

fees for services that weren’t attributable to the dissolution claim and

associated purchase-in-lieu-of-dissolution proceedings (count I) for which

fees were recoverable under section 490.1434(5). Next, having found some
fees potentially associated with both litigating count I and litigating the

other unsuccessful counts, the district court awarded only 40% of those

mixed fees. The district court added this 40% portion of the mixed fees to

the count I fees in arriving at the total attorney fee award of $93,620.74.

The district court awarded all of Susan and Peggy’s appraiser’s fee of

$6540.

      A fee award will be reversed only on “grounds that are clearly

unreasonable or untenable.” NevadaCare, Inc., 783 N.W.2d at 469. In our

review of the record, we find nothing unreasonable or untenable in the

district court’s award of attorney and expert fees and expenses in this case.

      V. Disposition.

      We reverse the district court’s ruling as to the transaction costs and

remand for the district court to determine and apply a discount to the

value of Kassel Enterprises’ assets as part of the fair-value determination

of Susan and Peggy’s shares.      We otherwise affirm the district court’s

rulings in all respects.

      AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
                                    21

      Christensen, C.J., and Appel, Waterman, and Mansfield, JJ., join

this opinion, and McDonald and Oxley, JJ., join except for division III.B.

Oxley, J., files a special concurrence, in which McDonald, J., joins.
                                     22

                                          #19–2151, Guge v. Kassel Enters.

OXLEY, Justice (concurring specially).

      The majority correctly concludes that under a net asset valuation

methodology    the entity-level   transaction    costs   associated   with   a

hypothetical sale of the farmland are deducted but any shareholder-level

capital-gains taxes are not. With respect to the capital gains taxes, the

majority reaches the right result but for the wrong reason.           For that

reason, I join all divisions of the majority opinion except division III.B. On

the issue of the capital gains deduction, I respectfully concur only in the
judgment.

      Iowa Code section 490.1434 requires a corporation electing to

purchase a petitioning shareholder’s shares to pay “the fair value of the

shares.” Iowa Code § 490.1434(1) (2018). The majority starts with the

correct premise that fair value should be calculated “[u]sing customary

and current valuation concepts and techniques generally employed for

similar businesses in the context of the transaction requiring appraisal”

and “[w]ithout discounting for lack of marketability or minority status.”

Id. § 490.1301(4). Thus, fair value requires application of a customary

business valuation methodology but without any shareholder-level

adjustments. See Baur v. Baur Farms, Inc., 832 N.W.2d 663, 669 n.5 (Iowa

2013).

      “We have recognized three popular approaches to appraising stock:

market value, investment value, and net asset value.” Nw. Inv. Corp. v.

Wallace, 741 N.W.2d 782, 786 (Iowa 2007). Critically, the methodologies

are independent, as each “is ‘designed to independently produce the full

measure of the fair value of the stock rather than a component of fair
value.’ ” Id. (emphasis added) (quoting Richardson v. Palmer Broad. Co.,

353 N.W.2d 374, 378–79 (Iowa 1984)).         Fair value is premised on the
                                        23

minority’s proportionate share of the value of the entity, so that only entity-

level adjustments are generally allowed for fair-value valuations. See, e.g.,

id. at 787–88 (recognizing policy decision made by legislature in adopting

“fair value” definition that did not allow a discount for lack of marketability

or minority status); Shawnee Telecom Res., Inc. v. Brown, 354 S.W.3d 542,

557 (Ky. 2011) (discussing the history of dissenters’ appraisal rights and

recognizing lack of control or marketability discounts as shareholder-level,

rather than entity-level, discounts).

      “Net asset value is the share the stock represents in the value of the
net assets of the corporation.” Sec. State Bank v. Ziegeldorf, 554 N.W.2d

884, 891 (Iowa 1996) (emphasis added) (quoting 12B Charles R.P. Keating

& Jim Perkowitz-Solheim, Fletcher Cyclopedia of the Law of Private

Corporations § 5906.140, at 454 (perm. ed. rev. vol. 1993) [hereinafter

Fletcher]); see also James J. Reto, Are S Corporations Entitled to Valuation

Discounts for Embedded Capital Gains?, 3 Valuation Strategies 6, 9 (2000)

(“This potential difference in stock value is exactly what the courts have

finally recognized.”). The net asset methodology is necessarily “based on

a hypothetical dissolution and distribution of the corporate assets.” Sec.

State Bank, 554 N.W.2d at 891 (quoting Fletcher § 5906.140, at 455); see

also Est. of Dunn v. Comm’r, 301 F.3d 339, 353 (5th Cir. 2002) (“Under the

factual totality of this case, the hypothetical assumption that the assets

will be sold is a foregone conclusion—a given—for purposes of the asset-

based test. The process of determining the value of the assets for this facet

of the asset-based valuation methodology must start with the basic

assumption that all assets will be sold, either by Dunn Equipment to the

willing buyer or by the willing buyer of the Decedent’s block of stock after
he acquires her stock.” (footnote omitted)). Thus, a necessary component
                                           24

of valuing an entity using the net asset method is considering the entity-

level adjustments accompanying the hypothetical dissolution.

       We explained the use of a hypothetical liquidation long ago in

distinguishing between an earnings-based approach and the net asset

value approach:

       Net asset value should not be influenced by earnings. We
       therefore prefer the Fletcher method of determining net asset
       value by valuing the assets as such. This offers protection to
       the minority stockholder in a corporation with a poor earnings
       record. In such instance the value as a going concern might
       be less than the dissolution value of the assets. It would not
       be fair to limit the minority interest to a value influenced by
       poor earnings, when the minority might prefer to liquidate and
       convert the assets into cash, and at the same time place the
       majority in a position where it could later liquidate and receive
       the entire benefit of the greater liquidation value. Net asset
       value will, in most instances, be of far less importance than
       the investment value of the stock, because the real value of
       the stock is still to be determined as in a going concern.
       However, net asset value as defined by Fletcher is a factor to
       be considered. The weight to be given this factor will depend
       upon the facts in each case.

Woodward v. Quigley, 257 Iowa 1077, 1083, 133 N.W.2d 38, 41 (1965).

Here, the parties chose to rely exclusively on the net asset valuation, which

protected the minority shareholders by pulling the total valuation of the

entity up to a more realistic, and fair, valuation.1 If the net asset valuation

method is used, all of its parameters must be used—including the premise

       1Some    courts have said that a net-asset valuation cannot be the sole basis for
valuing an entity as a going concern for purposes of determining a minority shareholder’s
pro rata interest in the entity. See Paskill Corp. v. Alcoma Corp., 747 A.2d 549, 554–57
(Del. 2000) (valuing an investment holding company); Shawnee Telecom Res., Inc., 354
S.W.3d at 561–62, 562 n.8 (holding that net asset valuation may be a proper method for
calculating dissenters’ rights valuations but cautioning that “to the extent that the asset
approach cannot yield a going concern value, we agree with the Court of Appeals that it
should be given no weight”). Here, the value of Kassel Enterprises’ assets depends largely
on the appraisal of the farmland, which included considerations of income and market
values. But if we agreed with these courts, we would also have to require the parties to
use a different methodology altogether—one that would have produced a lower valuation.
Given the parties’ agreement that the net-asset valuation is the proper methodology, we
need not address the concerns raised by these cases.
                                            25

that the entity would be liquidated.             Thus, all hypothetical entity-level

adjustments, including any consequences associated with selling the

assets, must be included in the valuation.                 See Sec. State Bank, 554

N.W.2d at 891–92.

       The parties disputed two components of the net asset valuation: the

amount of transaction costs associated with a hypothetical sale of the

farmland and whether a capital gains tax deduction should be considered

in valuing the shareholders’ interest in the entity.                Critically, both the

transaction costs and the capital gains taxes stemmed from the
hypothetical sale of the exact same asset—the farmland.

       As the majority notes, the tax consequences of capital gains are

borne by the entity for a C corporation but are generally passed through

to the shareholders for an S corporation. It is this distinction between

entity-level and shareholder-level treatment that determines whether the

capital gains taxes should be taken into account in valuing a dissenting

shareholder’s interest using the net asset valuation method.                       In that

respect, the capital gains taxes are no different than the transaction costs

associated with a hypothetical sale of the assets—costs the majority agrees

should have been considered in the valuation. If Kassel Enterprises had

been a C corporation, or if it still had built-in gains to recognize at the

entity level, those entity-level tax consequences should be considered as

part of a hypothetical sale, irrespective of whether an actual sale was

contemplated.2

       2As explained by the majority, an S corporation that converts from a C corporation
may be subject to entity-level built-in capital gains taxes based on the value of its capital
property at the time of the conversion. See I.R.C. § 1374(d)(8). But if it holds the capital
property beyond the recognition period, as Kassel Enterprises did here, the S corporation
is not subject to tax on the built-in gain. Id. at § 1374(d)(3), (8). Thus, one example
where an imminent sale could make a difference at the entity level might be an
S corporation that is still in the recognition period for built-in gains at the time of the
valuation. But Kassel is past that period here. In any event, there is no basis for the
                                         26

       But rather than stop there, the majority makes the mistake of then

considering whether a sale was actually contemplated as part of

determining whether the capital gains tax should be considered. Whether

a sale is contemplated is simply irrelevant in a net asset valuation since

the valuation is necessarily premised on a hypothetical sale. See Daniels

v. Holtz, 794 N.W.2d 813, 819 (Iowa 2010) (“Discounting capital gains tax

liability is an accepted part of an asset-based methodology for valuation

and has been approved by numerous federal courts. Daniels’s argument

that it was improper to consider the tax liability because there was no
evidence of an impending sale of the land does not change our

conclusion.”).

       The determining factor is whether the                 consequences of a

hypothetical sale would be recognized at the entity level, not whether a

sale is contemplated or imminent, as discussed by the majority.                  The

majority’s error is seen most plainly where it agrees with the experts that

transaction costs for a hypothetical sale should have been deducted but

then applies a different analysis to the capital gains taxes. The experts

agreed some amount of transaction costs associated with a hypothetical

sale should be deducted, disagreeing only as to the amount. With respect

to capital gains taxes from the hypothetical sale, the experts’ disagreement

turned on Kassel Enterprises’ status as an S corporation, not whether a

sale was contemplated.        In fact they both agreed capital gains would

properly be deducted if Kassel Enterprises had been a C corporation, but

as the plaintiffs’ expert explained, “To assume a liquidation tax discount

at the corporate level for the sale of these assets would not be warranted

for an S Corporation.” (Emphasis added.) If the majority agrees with the

majority to address whether Craig might realize capital gains at the shareholder level
based on a contemplated sale.
                                     27

experts that hypothetical liquidation transaction costs should be deducted

because those are entity-level deductions under a net asset valuation, it

should have applied that same analysis to the capital gains issue and

affirmed on the basis that any capital gains taxes would not be at the entity

level, stopping its analysis of the capital gains issue at page 11.

      McDonald, J., joins this concurrence.