Homeland Energy Solutions, LLC v. Steven J. Retterath, Jason Retterath and Annie Retterath ( 2020 )

IN THE SUPREME COURT OF IOWA
No. 18–0950
Filed February 7, 2020
HOMELAND ENERGY SOLUTIONS, LLC,
Appellee,
vs.
STEVE J. RETTERATH,
Appellant,
vs.
JASON RETTERATH and ANNIE RETTERATH,
Intervenors-Appellants,
and
PATRICK BOYLE, MAURICE HYDE, CHRISTINE MARCHAND, LESLIE
HANSEN, CHAD KUHLERS, WALTER WENDLAND, MATTHEW DRISCOLL,
EDWARD HATTEN, ROBERT SIERACKI, KEITH EASTMAN, STEPHEN
EASTMAN, BARNEY RETTERATH, RANDY BRUESS, STEVEN CORE, NICK
BOWDISH, and RSM US LLP (f/k/a McGLADREY LLP),
Third-Party Defendants.
Appeal from the Iowa District Court for Polk County, Carla
Schemmel (trial and posttrial motions), Paul D. Scott (motions for
summary judgment), Judges.
A defendant and the intervenors appeal a district court decision
holding the defendant breached a contract. DISTRICT COURT
JUDGMENT AFFIRMED IN PART AND REVERSED IN PART.
2
Jason W. Miller of Patterson Law Firm L.L.P., Des Moines, for
appellants Jason Retterath and Annie Retterath.
William J. Miller and Kirk W. Schuler of Dorsey & Whitney LLP,
Des Moines, David Hirsch of Harding Law Office, Des Moines, Brian J.
Brislen and Adam R. Feeney of Lamson, Dugan & Murray, LLP, Omaha,
Nebraska, and Allen H. Libow, Boca Raton, Florida, for appellant Steve J.
Retterath.
Michael A. Dee and Brant D. Kahler of Brown, Winick, Graves,
Gross, Baskerville & Schoenebaum, P.L.C., Des Moines, for appellee.
3
WIGGINS, Chief Justice.
This is a breach of contract case involving the repurchase of all of a
limited liability company’s (LLC) member’s membership interests (units).
In June 2013, the member and the LLC executed an agreement where the
LLC would buy back all of the member’s units. Four days after the
execution, the LLC’s board approved the agreement. At no time did the
LLC’s membership vote to approve the agreement.
Five days after executing the agreement, the member attempted to
revoke his offer to sell his units. The LLC countered that the member
could not revoke because they had a binding agreement. The agreement
indicated August 1, 2013, as the closing deadline, but the closing did not
happen.
The LLC filed a breach of contract claim. It sought specific
performance as the remedy as well as attorney fees under the breached
contract. The member answered and included a jury demand, which the
district court struck. Two other members of the LLC intervened. All three
parties disputed whether membership approval of the agreement was
required—the member and intervenors argued yes; the LLC argued no.
The district court granted summary judgment in the LLC’s favor on that
issue.
Afterward, the member and the intervenors sought and the court
allowed them to amend their pleadings. However, the district court
bifurcated the trial, ordering that trial on the parties’ original pleadings—
i.e., the LLC’s breach of contract claim and specific performance remedy,
and the member’s affirmative defenses to the agreement—would proceed
as scheduled and postponed a trial on all claims arising from the amended
pleadings.
4
Less than two weeks before trial, the LLC produced evidence that
the member claimed the LLC had available previously and that he had
requested during discovery. He requested the court sanction the LLC by
excluding the documents or order a continuance to allow the member time
to review the documents. The court denied this motion. After the bench
trial, the district court allowed the LLC to supplement the record.
The court issued its ruling several months later, finding there was a
binding agreement, holding the member breached the agreement, rejecting
the member’s affirmative defenses, and ordering the member’s specific
performance under the agreement. Later, it granted the LLC’s request for
attorney fees and denied the member’s request for sanctions under Iowa
Rule of Civil Procedure 1.413.
The member and the intervenors appealed. On appeal, we affirm
the district court’s striking of the jury demand, bifurcation of the issues
for trial, determination that membership approval of the repurchase
agreement is not required, denial of the member’s motion for evidentiary
sanctions or a continuance, determination the repurchases agreement was
valid and binding, determination that the LLC is entitled to specific
performance, and rejection of the member’s affirmative defenses. We
reverse the district court’s award of attorney fees to the LLC, but affirm
the denial of the member’s request for rule 1.413 sanctions.
I. Background Facts and Proceedings.
Homeland Energy Solutions, LLC (HES) is an Iowa limited liability
company formed in 2006. It has approximately 1200 members, and its
principal place of business is in Lawler, Iowa. Its ordinary business
activities are producing and selling ethanol.
Steve Retterath grew up in Iowa but later moved to Florida, where
he ran a successful construction crane business. He is a sophisticated
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businessperson who admits to having spent forty-five years negotiating
and executing multimillion-dollar contracts on tight deadlines.
In the 2000s, he invested several million dollars in three ethanol
plants, one of which was HES. All three of these companies were formed
as Iowa LLCs, and the interests in them were divided into units, which
their members own. Retterath purchased 25,860 HES units for
approximately $26 million during HES’s initial offering of equity securities.
This gave him the right to appoint two members to HES’s board of
directors. Until June 2013, he always occupied one of those seats.
Retterath is HES’s largest unitholder, owning roughly 28% of the units.
The intervenors, Jason and Annie Retterath, are Retterath’s son and
daughter-in-law. They own approximately 4% of HES’s units and were
voting members of HES at all times relevant to this appeal.
In late 2012, Retterath began efforts to liquidate his investments in
the three ethanol companies. He successfully negotiated for the other two
companies to repurchase his membership interests in 2012. In both
instances, the company and Retterath executed member unit repurchase
agreements (MURAs), which are substantially similar to the MURA at issue
in this case.
At the December 19, 2012 HES board meeting, Retterath informed
the board of an offer from Flint Hills Resources to purchase all of his HES
units. He indicated that he wanted HES to have the first shot at buying
his shares. The board, without Retterath, discussed the possible
repurchase and created a buyback committee to negotiate the repurchase
of Retterath’s units.
In early 2013, Retterath offered to sell his units to HES for $2000
per unit. Around that time, the approximate market value of HES units
was $1000 per unit. The buyback committee rejected Retterath’s offer.
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In February 2013, Retterath lowered his asking price to $1400 per
unit. The buyback committee met on February 14 and counteroffered to
repurchase Retterath’s units for $28 million total. Retterath did not accept
this counteroffer or make another counteroffer. Afterward, negotiations
stalled.
Around this time, relations between Retterath, HES employees, and
HES board members broke down. Both Retterath and one of his attorneys
wrote emails and letters to HES management and the board, criticizing the
board’s actions and threatening litigation. Retterath suggested several
individuals who were friendly to his interests to the board’s nominating
committee, which vets possible candidates for election to the board and
then releases a list of candidates for the membership’s vote. And in May
2013, Retterath gave another board member a $100,000 check to entice
him to vote with Retterath on board matters. 1 HES’s board launched a
bribery investigation following Retterath’s conduct.
In early June, Retterath initiated another round of negotiations by
having an intermediary, Ed Hatten, inform several board members that
Retterath would be willing to sell his units for $1100 per unit, payable in
three annual installments. On June 10, the buyback committee agreed to
offer Retterath $1100 per unit, payable in three annual installments, but
noted the offer was subject to board and lender approval. On June 11, Pat
Boyle, who was a member of the buyback committee as well as chairperson
of HES’s board at the time, emailed the offer in the form of a draft MURA
to Retterath with a deadline of noon on June 13, 2013, for Retterath to
sign and return the agreement.
1Retterath disputes this, but we do not find the evidence in his favor credible or
persuasive. Similarly, in its ruling after trial, the district court also appears to have not
found Retterath’s explanation credible.
7
On June 12, Retterath replied to Boyle’s email with two
attachments. The first attachment provided Retterath’s version of events
regarding the alleged bribery. In the second attachment, Retterath
expressed his concern with an installment plan if HES wanted “an
unsecured promissory note which looks like [it] can borrow money while
[it] owe[s Retterath] money” and for Retterath to hold it harmless. Instead,
Retterath offered to agree to holding HES harmless if HES paid him in one
lump sum.
On June 13, at 9:47 a.m., Boyle emailed a revised MURA under
which HES would pay Retterath $1100 per unit (or $28,446,000 total) in
one lump sum due at closing. The email instructed Retterath that, if the
revised MURA was acceptable, to sign and return it by noon that day. At
10:46 a.m., Retterath replied to Boyle’s email with an attached copy of the
revised MURA wherein he had crossed out the $28,446,000 number and
handwritten in “$30,000,000,” initialed the change, initialed each page,
and signed on the signature line.
The buyback committee met at 11:30 a.m. to discuss Retterath’s
counteroffer and agreed to it. The committee authorized Boyle to accept
the counteroffer “of $30 million if he is unsuccessful in negotiating with
[Retterath] to accept a payment of $15 million upon closing and another
$15 million in a year.” But the committee’s meeting minutes indicate the
agreement would still require board and lender approval.
Boyle immediately called Retterath and informed him of the
committee’s preference of the $30 million payment made in two
installments. Retterath agreed. At 12:35 p.m., Boyle emailed Retterath
the new MURA with the $30 million total payment, paid in two
installments, one due at closing and the other by July 1, 2014. Paragraph
1 of the new MURA included in all caps, bold letters a notice that the
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agreement would be null and void and no longer binding if not signed by
Retterath and delivered to HES prior to 2:00 p.m. local time on June 13,
2013. Boyle also signed his name on the signature line on the last page.
Retterath signed the new MURA and emailed it back to Boyle at 1:58 p.m.
At 4:18 p.m. that day, Boyle emailed the board, including Retterath,
to inform them that the committee had come to an agreement to purchase
Retterath’s units “pending final board and bank approval.” He attached a
copy of the fully signed MURA for the board’s review “to be voted on at the
next board meeting.”
Also around that time, Boyle, the board’s chairman, and HES’s
CEO/president made inquiries regarding financing for the buyback from
Home Federal Savings Bank (HFSB), the bank where HES had its revolving
line of credit. On June 17, an officer from HFSB informed them that they
would need to amend HES’s Master Loan Agreement (MLA) to allow for the
buyback and to get bank group approval.
Also on June 17, Retterath emailed Boyle, submitting his immediate
resignation from the board and stating, “I retire from HES board and Ed
Hatten will replace me.” Consistent with this resignation, Hatten attended
and participated in the board meeting on June 19, but Retterath did not.
Retterath has not attended nor attempted to attend any subsequent board
meetings. At the June 19 board meeting, the board approved the MURA
in an 8–3 vote.
On June 18, the day before the board meeting where the board
considered and approved the MURA, Retterath’s attorney contacted HES’s
accountant regarding the tax ramifications of the buyback. In a phone
call on June 20, HES’s accountant informed Retterath’s attorney that
Retterath’s gain from the sale of his units would be taxed as ordinary
9
income, not as capital gains, meaning that income would be taxed at a
much higher rate.
At 6:15 p.m. that day, Retterath’s attorney emailed HES’s attorney,
stating that Retterath’s June 13 offer to sell his units back to HES “will
expire upon delivery of this email ab initio.” Retterath’s attorney requested
HES’s attorney prepare for his review “a complete agreement with available
and achievable terms for negotiation and execution” but stated that,
otherwise, Retterath’s June 13 offer “is hereby revoked.” At 7:41 p.m.,
HES’s attorney replied, stating that they had a signed agreement, not an
offer to sell, and that HES was “clearing its contingencies and expect[ed]
to close by the closing date of August 1st provided it [could] clear or waive
its contingencies.” In a subsequent email from June 21, HES’s attorney
again emphasized that HES and Retterath entered into a binding contract
that was approved by HES’s board and that Retterath was expected to
honor.
On the morning of June 21, Retterath spoke with one of HES’s board
members and expressed his unhappiness regarding the MURA because he
would now have to pay 40% tax. That board member passed along
Retterath’s complaints in an email to HES’s CEO/president sent that same
day. Throughout the summer, Retterath continued to express his opinion
that there was no agreement to sell because he had revoked his offer.
During the summer, HES attempted to comply with its conditions
and obligations under the MURA. On July 9, HES’s attorney emailed
Retterath’s attorney a proposed mutual release, asking if he had any
suggested changes, but neither Retterath nor his attorney responded. On
July 16, 18, 22, 24, and 26, HES’s attorney sent Retterath’s attorney a
series of emails and letters (1) stating HES was ready, willing, and able to
close on the MURA; (2) stating the mutual release agreement needed to be
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completed and requesting proposed revisions; (3) requesting Retterath’s
wiring instructions for the anticipated August 1, 2013 payment; (4)
requesting copies of Retterath’s units certificates and confirmation that
the originals would be provided at closing; and (5) inquiring about the
status of the written resignations of Retterath’s board appointees and
offering to draft them. Retterath never provided any of this information.
HES also secured financing to cover the August 1 installment
payment and lender approval to repurchase the units. As of July 1, 2013,
the bank had prepared all of the loan agreements its attorney believed
necessary to get the approval and proceed with the buyback. HES’s plan
was to use its revolving line of credit to pay Retterath, then HES would
take out an additional term loan to pay off the revolving line of credit. In
a July 12 communication, HFSB offered to lend HES up to $35,000,000—
$15 million in a new term loan and $20 million on HES’s existing revolving
line of credit—which HES accepted.
As part of obtaining lender approval and acting in compliance with
its operating agreement, HES needed to amend its MLA with HFSB
because the MLA did not allow HES to purchase or otherwise acquire any
of its units without prior written consent from HFSB. During this time,
HES took steps to amend the MLA but did not actually do so before the
August 1 closing deadline.
The closing scheduled for August 1 did not happen. On August 14,
HES filed its petition in equity against Retterath. It alleged Retterath
breached the MURA by failing to perform his obligations, and it requested
specific performance as the remedy. It also alleged the MURA’s
indemnification clause allowed for an award of attorney fees and requested
the court order Retterath reimburse HES for the attorney fees and costs
resulting from Retterath’s breach.
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In his answer, Retterath raised several affirmative defenses. He also
included a jury demand for all issues triable by a jury, which HES moved
to strike. On November 13, 2014, the district court granted HES’s motion
to strike Retterath’s jury demand.
On February 18, 2015, HES filed a motion for summary judgment,
asking the court to find that Retterath breached the MURA and to order
him to specifically perform his obligations under the MURA. HES argued
it was entitled to summary judgment because section 5.6(b)(v) of the
operating agreement did not apply to the MURA and, therefore, no
membership vote was required to ratify the MURA. In a March 18 filing,
HES indicated its motion for summary judgment was in actuality a partial
motion for summary judgment and was limited to the issue of “whether
the HES Operating Agreement requires a member vote to approve the
[MURA].”
On March 4, Jason and Annie Retterath moved to intervene, which
the court allowed on April 16. In their “Petition in Intervention,” the
intervenors raised five claims: (1) temporary injunctive relief;
(2) permanent injunctive relief; (3) declaratory relief; (4) conversion; and
(5) breach of contract, i.e., breach of HES’s operating agreement section
5.6.
On June 1, the intervenors filed their motion for partial summary
judgment. They claimed there was no genuine issue of material fact
regarding whether HES violated its operating agreement by its conduct
involving the MURA, and therefore, they were entitled to summary
judgment on their permanent injunction and declaratory relief claims and
on the breach element of their breach of contract claim.
Retterath also filed his motion for summary judgment on June 1.
He claimed the MURA could not be performed because doing so would
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violate the HES members’ voting rights in HES’s operating agreement. He
argued that the MURA is void and unenforceable because it lacked
membership approval and because HES did not have the power or
authority to enter into the transaction with Retterath. He also argued that
HES could not waive compliance with the membership voting requirement
in its operating agreement.
On October 16, the district court granted HES’s motion for summary
judgment and denied Retterath’s and the intervenors’ motions for
summary judgment. Retterath and the intervenors filed separate rule
1.904(2) motions.
The court granted Retterath’s and the intervenors’ rule 1.904
motions on December 8. In that order, it limited its summary judgment
order to the conclusion that the member approval requirement of section
5.6(b)(v) of the operating agreement did not apply to the MURA and,
therefore, no membership vote was required to ratify the MURA. It further
modified its summary judgment ruling to eliminate the conclusion that
HES satisfied all of the elements of its breach of contract claim and the
order of specific performance. It stated the case of HES versus Retterath
would proceed to trial on the remaining issues, i.e., Retterath’s affirmative
defenses, whether HES established its breach of contract claim, and
whether HES was entitled to specific performance.
Additionally, the court clarified that its summary judgment ruling
adjudicated the intervenors’ permanent injunction, declaratory relief, and
breach of contract claims. The court also sua sponte took up the
intervenors’ temporary injunction and conversion claims based on the
intervenors’ rule 1.904 motion and concluded those claims should be
dismissed for the reasons provided in the summary judgment ruling. It
thereby dismissed all five of the intervenors’ claims.
13
On July 21, 2016, Retterath and the intervenors moved for leave to
amend their pleadings. HES filed resistances to both motions on August 3.
In the alternative, HES requested that if the court granted Retterath’s and
the intervenors’ motions, that the court bifurcate the new claims and
parties so trial on HES’s cause of action for specific performance could
proceed as scheduled on January 17, 2017.
On August 4, 2016, the district court granted Retterath’s and the
intervenors’ motions. In its orders, the court stated that the motions were
unresisted, and it, therefore, did not address HES’s alternative request to
bifurcate.
On August 9, Retterath filed his amended answer, counterclaims,
and third-party claims and the intervenors filed their third amended
petition in intervention. Both filings were accompanied by a jury demand
for all issues triable to a jury. In his amended answer, Retterath raised
additional affirmative defenses. He also raised several counterclaims
against HES and third-party claims against the directors of HES, HES’s
CEO/president, and an LLP that provided Retterath and HES with
accounting services. In their newly amended petition in intervention, the
intervenors raised additional claims against HES and new claims against
HES’s directors and CEO/president.
Also on August 9, HES filed a motion to reconsider the order
granting Retterath’s and the intervenors’ motions for leave to amend.
Following a reported hearing, the district court ruled, on November 6, that
the order granting the motions to amend the pleadings would stand.
However, it bifurcated the trial, ruling that trial would proceed as
scheduled on January 17, 2017, but would be limited only to issues raised
in HES’s original petition and in answers thereto. It prohibited any
discovery on the amended portions of Retterath’s and the intervenors’
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pleadings from taking place before the district court’s ruling relating to
HES’s original petition. In relevant part, the court stated that it was its
“intent to try this matter in January, limited to evidence related [to] the
claims raised originally by [HES], in the reasonable hope that this would
provide global resolution.” It further explained,
The court concludes it is in the best interests of judicial
economy, and the parties, to keep all their related claims in
one case. Likewise, it is in the parties’ and the court’s best
interest to try the initial claims first, undelayed by ancillary
discovery and proceedings attributable to the now amended
pleadings of [Retterath] and [the] Intervenor[s], as that trial
may be dispositive of the entire dispute.
On January 10, 2017, Retterath filed a motion for evidentiary
sanctions against HES or, in the alternative, a continuance of trial. He
claimed that HES had untimely produced documents requested in
discovery and, therefore, that HES should be prohibited from using or
eliciting testimony relating to those documents at the upcoming trial.
Alternatively, he claimed that trial should be continued sixty to ninety days
to allow Retterath and his expert witness sufficient time to review and
analyze the documents and that he should have the opportunity to
redepose witnesses regarding the documents.
At the pretrial conference hearing on January 13, the court
addressed Retterath’s motion. During the argument, HES’s counsel
declared that HES did not have any other responsive documents to
produce and conceded that if it did and they showed up now, they would
not come in at trial. The court denied Retterath’s motion in full. It
explained that it did not believe Retterath had made a sufficient showing
of prejudice, that it found the request for production somewhat confusing,
and that, in hindsight, some things were not addressed perhaps as soon
15
as they should have been. It also reasoned that the case had been on the
docket far longer than it was supposed to be and needed to get to trial.
The case proceeded to a bench trial beginning on January 17.
Posttrial, the parties submitted designated depositions and accompanying
exhibits into the record. On February 17, HES moved to supplement the
record with documents from HES’s bank, which corroborated the trial
testimony of HES’s witnesses that HES’s bank had approved and agreed
to finance HES’s payment obligation under the MURA. 2 On March 28, the
district court granted HES’s motion to supplement.
On June 15, the court issued its ruling after trial. It first found “that
the MURA is a clear and unambiguous agreement for Retterath to resell
his units to HES for a set amount on a set date, and that its terms are fair
to both parties involved.” It then addressed and rejected the various
affirmative defenses Retterath raised. It concluded that HES’s request for
enforcement of the MURA should be granted and ordered Retterath to take
2It offered trial exhibit 62, which is an HES request form dated June 17, 2013,
wherein HES sought approval from its bank to amend the MLA to allow for unit
repurchases. In the comment section is a note indicating HES planned “to fund the first
$15 million installment [under the MURA] on the term revolver.” The form is signed by a
loan officer and an approving officer.
It also offered trial exhibit 63, which is a copy of HES’s “Term Revolving Draw
Request (Term Revolving Loan)” dated August 1, 2013, wherein HES requested $8 million
from its revolving loan (i.e., its line of credit) on August 1, 2013. The request was signed
by HES’s chief financial officer, and it contains a handwritten “OK” next to the loan
officer’s signature. There is a partially visible handwritten date next to the “OK” and loan
officer’s signature. HES argued the date is “8-1-13,” but the scanned copy cuts off,
making it look like the first number could be an “8” or a “9” where the vertical line of the
“9” did not come through on the scan.
Third, it offered trial exhibit 64, which is HES’s business checking account
statement for August 2013. The statement indicates that on August 1, 2013, the account
had an “Electronic Credit[]” in the amount of $8 million with the description of “Per Dave:
Term Revolver Adv N-504626 SS.” The statement’s detail summary showed that on
August 1, 2013, HES’s business checking account ranged between $17.4 million and
$20.35 million throughout the day.
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all necessary steps under the MURA to ensure that the MURA closes on or
before August 1, 2017.
On June 30, Retterath filed a rule 1.904 motion regarding the court’s
ruling after trial as well as a motion for new trial in the alternative to his
rule 1.904 motion. On August 7, HES filed its own rule 1.904 motion. It
asked the court to correct certain clerical errors, to make a finding that
HES is entitled to attorney fees pursuant to the MURA, and to make a
finding that Retterath was not a director at the time the HES board voted
to approve the MURA on June 19, 2013.
The court issued its ruling on posttrial motions. It denied
Retterath’s motion. The court granted in part and denied in part HES’s
motion. It granted HES’s request to amend to correct clerical errors and
denied the request that it find Retterath was not a director when the HES
board voted to approve the MURA. Finally, it found that HES was entitled
to attorney fees pursuant to the MURA but declined to determine the
amount until all issues between the parties were resolved.
Retterath and the intervenors appealed. We retained the appeal.
II. Scope and Standards of Review.
Whether a party is entitled to a jury trial is a legal question. See
Hedlund v. State, 930 N.W.2d 707, 718 (Iowa 2019); Weltzin v. Nail, 618
N.W.2d 293, 296 (Iowa 2000) (en banc). Therefore, our review is for
correction of errors at law. See Iowa R. App. P. 6.907; Ramirez v. Iowa
Dep’t of Transp., 546 N.W.2d 629, 631 (Iowa Ct. App. 1996).
Bifurcation of a trial is a discretionary matter, which we review for
an abuse of discretion. See Meyer v. City of Des Moines, 475 N.W.2d 181,
191 (Iowa 1991).
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We review summary judgment rulings for correction of errors at law.
Hedlund, 930 N.W.2d at 715. We review the summary judgment record in
the light most favorable to the nonmoving party, “consider[ing] on behalf
of the nonmoving party every legitimate inference that can be reasonably
deduced from the record.” Phillips v. Covenant Clinic, 625 N.W.2d 714,
717–18 (Iowa 2001) (en banc). Our review is “limited to whether a genuine
issue of material fact exists and whether the district court correctly applied
the law.” Pillsbury Co. v. Wells Dairy, Inc., 752 N.W.2d 430, 434 (Iowa
2008).
Likewise, our review of the district court’s contract interpretation
and construction is at law. See Peak v. Adams, 799 N.W.2d 535, 543 (Iowa
2011). In the contractual context,
[i]nterpretation involves ascertaining the meaning of
contractual words; construction refers to deciding their legal
effect. Interpretation is reviewed as a legal issue unless it
depended at the trial level on extrinsic evidence. Construction
is always reviewed as a law issue.
Id. (quoting Fashion Fabrics of Iowa, Inc. v. Retail Inv’rs Corp., 266 N.W.2d
22, 25 (Iowa 1978)). Here, the district court’s interpretation of HES’s
operating agreement did not depend on extrinsic evidence.
We review rulings on evidentiary matters and evidentiary sanctions
for abuse of discretion. Jensen v. Sattler, 696 N.W.2d 582, 589 (Iowa
2005).
HES’s breach of contract claim and request for specific performance
were tried in equity. Therefore, our standard of review is de novo.
Breitbach v. Christenson, 541 N.W.2d 840, 843 (Iowa 1995) (en banc).
Rulings on motions for continuance and motions to reopen evidence
are discretionary and are, therefore, reviewed for an abuse of discretion.
State v. Teeters, 487 N.W.2d 346, 348 (Iowa 1992) (en banc).
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Review of a district court’s grant of attorney fees is for an abuse of
discretion. NevadaCare, Inc. v. Dep’t of Human Servs., 783 N.W.2d 459,
469 (Iowa 2010). Likewise, we review district court decisions on whether
to impose sanctions under Iowa Rule of Civil Procedure 1.413 for abuse of
discretion. Barnhill v. Iowa Dist. Ct., 765 N.W.2d 267, 272 (Iowa 2009). In
our review, we will correct erroneous applications of law. NevadaCare,
783 N.W.2d at 469; Barnhill, 765 N.W.2d at 272.
III. Issues.
Retterath and the intervenors raise a myriad of issues on appeal.
They are (1) whether the district court erred in striking Retterath’s jury
demand, (2) whether the court erred in bifurcating the issues for trial,
(3) whether membership approval of the MURA was required under HES’s
operating agreement or Iowa law, (4) whether the court erred in denying
Retterath’s motion for evidentiary sanctions or a continuance, (5) whether
the MURA is a valid and binding agreement, (6) whether HES is entitled to
specific performance of the MURA, (7) whether the court erred in rejecting
Retterath’s affirmative defenses to the MURA, and (8) whether the court
erred in awarding HES attorney fees and denying Retterath attorney fees.
IV. Whether the District Court Erred in Striking Retterath’s
Jury Demand.
Retterath claims the district court erred in striking his jury demand
in his original answer to HES’s petition. We disagree.
“Generally, there is no right to a jury trial for cases brought in
equity.” Hedlund, 930 N.W.2d at 718. In determining whether a case is
one in equity or at law, we look at the pleadings, relief sought, and
essential nature of the cause of action. Carstens v. Cent. Nat’l Bank & Tr.
Co., 461 N.W.2d 331, 333 (Iowa 1990). However “the remedy sought is of
minimal importance—it is the nature of the cause of action, i.e., where the
19
case is properly docketed, that is the deciding factor.” Weltzin, 618 N.W.2d
at 297. Further, the commencement of an action in equity does not
automatically deprive a party of the right to a trial by jury on “issues
ordinarily triable to a jury.” Id. (quoting Carstens, 461 N.W.2d at 333).
Here, the essential nature of HES’s cause of action is legal because
it is a breach of contract claim. See Westco Agronomy Co. v. Wollesen, 909
N.W.2d 212, 226 (Iowa 2017) (noting the action had become one at law, in
part, because it was a contract dispute with each party alleging the
existence of different contracts); Van Sloun v. Agans Bros., Inc., 778 N.W.2d
174, 178 (Iowa 2010) (“Generally, an action on contract is treated as one
at law.” (quoting Atlantic Veneer Corp. v. Sears, 232 N.W.2d 499, 502 (Iowa
1975))).
We cannot, however, completely ignore the remedy sought or the
pleadings. See Carstens, 461 N.W.2d at 333. In Van Sloun, we noted that
when “both legal relief and equitable relief are demanded, the action is
ordinarily classified according to what appears to be its primary purpose
or its controlling issue.” 778 N.W.2d at 179 (quoting Mosebach v. Blythe,
282 N.W.2d 755, 758 (Iowa Ct. App. 1979)). Although HES sought only
equitable relief here, we can nevertheless consider the case’s primary
purpose or controlling issue for assistance. See Berryhill v. Hatt, 428
N.W.2d 647, 658 (Iowa 1988) (noting specific performance is an equitable
remedy). Undoubtedly, HES’s primary purpose in filing this breach of
contract claim was to complete the extinguishment of Retterath’s interest
and influence in HES. As we determine below, damages are not an
adequate remedy. And while breach of contract may be the identified
cause of action, the controlling issue in this case is the proper remedy.
The district court correctly determined HES’s claim should be tried
in equity. Retterath “has no right to a trial by jury of law issues raised in
20
the answer to an action properly brought in equity.” In re Marriage of
Stogdill, 428 N.W.2d 667, 670 (Iowa 1988). The court did not err in
striking Retterath’s jury demand or in denying his motion for new trial on
this basis.
V. Whether the District Court Abused Its Discretion in
Bifurcating the Issues for Trial.
After the court allowed Retterath and the intervenors to amend their
pleadings six months before trial, the district court bifurcated trial on the
newly raised issues in the amended pleadings from trial on the issues
raised in HES’s petition and on Retterath’s affirmative defenses thereto.
Retterath and the intervenors both claim this was an abuse of discretion.
We disagree.
Iowa Rule of Civil Procedure 1.914 permits the court to, “for
convenience or to avoid prejudice, order a separate trial of any claim,
counterclaim, cross-claim, cross-petition, or of any separate issue, or any
number of them.” Iowa R. Civ. P. 1.914. The district court bifurcated the
issues to be tried, reasoning resolution of HES’s specific performance claim
and Retterath’s defenses thereto “may well be dispositive of the entire
dispute.” We agree with the court’s reasoning as all of Retterath’s
counterclaims against HES relate to or turn on the enforceability of the
MURA. See Westco Agronomy, 909 N.W.2d at 227 (“We have several times
expressed the view that the case which is most likely to dispose of the
whole controversy should be tried first in order to avoid an unnecessary
second trial.” (quoting Morningstar v. Myers, 255 N.W.2d 159, 161 (Iowa
1977))). The court did not abuse its discretion in bifurcating the issues for
trial.
We also find there is no merit to Retterath’s or the intervenors’
contentions that bifurcation was in error because both would have other
21
claims remaining against third-party defendants, RSM US LLP (f/k/a
McGladrey LLP) and the HES board, and HES, respectively. Under Iowa
Rule of Civil Procedure 1.953, the court is permitted to enter separate
judgment at different times against separate parties. That rule provides,
Where the action involves two or more parties, the court may,
in its discretion, and though it has jurisdiction of them all,
render judgment for or against some of them only, whenever
the prevailing party would have been entitled thereto had the
action involved the prevailing party alone, or whenever a
several judgment is proper; leaving the action to proceed as to
the other parties.
Iowa R. Civ. P. 1.953. Under that rule, the court is allowed to render
judgment against Retterath on HES’s specific performance claim and his
defenses thereto regardless of any related claims Retterath might still have
against RSM or HES’s individual board members and officers (i.e., parties
other than HES) and regardless of any claims the intervenors (i.e., parties
other than HES or Retterath) have against HES. See also id. r. 1.456
(“Where judgment in the original case can be entered without prejudice to
the rights in issue under a cross-petition, cross-claim or counterclaim, it
shall not be delayed thereby.”).
The intervenors cite to In re Marriage of Thatcher, where we appeared
to limit rule 1.953 by stating that the court may not “enter serial final
judgments at different times in a single action between two parties, except
for collateral matters such as cost or fee awards.” 864 N.W.2d 533, 540
(Iowa 2015). Therefore, according to the intervenors, the district court
erred in purporting to enter a final judgment on the specific performance
and affirmative defense parts of the case because it had not resolved the
rest of the case between HES and Retterath.
The intervenors read too much into our statement in Marriage of
Thatcher. Although we used the phrase “single action” in that case,
22
reading that language in context with the rest of that case’s discussion
indicates that phrase really meant “single cause of action.” See id. at 539–
40. Accordingly, our statement in Marriage of Thatcher should be read as
meaning the rules of civil procedure do not allow district courts to enter
serial final judgments at different times in a single cause of action between
two parties. See id. at 540. That understanding of our statement in
Marriage of Thatcher also accords with our caselaw holding
[t]wo final orders are possible in a single case, one putting it
beyond the power of the court to put the parties in their original
positions in relation to a specific issue, and the other
adjudicating remaining issues in the case.
Lyon v. Willie, 288 N.W.2d 884, 887 (Iowa 1980).
In Lyon, the plaintiffs filed for summary judgment on their petition’s
specific performance count and damages count. Id. at 886. The district
court granted summary judgment on the specific performance count,
ordering the defendant to turn over his stock to the plaintiffs so the
plaintiffs could carry out the transfer of that stock to the third-party
purchaser, but reserved the damages count for trial. Id. We held the
partial summary judgment was a final judgment. Id. at 887.
“Ordinarily a final judgment conclusively adjudicates all the rights
of the parties” and “[s]uch an adjudication puts it beyond the power of the
court to place the parties in their original positions.” Id. at 886. But “it is
possible for an order to put it beyond the power of the court to return the
parties to their original positions even though it does not conclusively
adjudicate all the rights of the parties.” Id. The partial summary judgment
order in Lyon was such an order because, if the order were effectuated, the
court would lack the authority, without a new lawsuit, to order the third-
party purchaser to return the stock. Id. at 886–87. We held that in such
23
a situation, the requirement of full adjudication before appeal gave way
and that two final judgments were possible in that single case. Id. at 887.
In contrast, the bifurcated final judgments in Marriage of Thatcher
adjudicated separate parts—(1) whether the marriage was dissolved and
(2) the property distribution—of one cause of action—a petition for
marriage dissolution. 864 N.W.2d at 539–40. Moreover, Marriage of
Thatcher is distinguishable from the instant case because we held in
Marriage of Thatcher that an Iowa Code provision, which requires the
division of property and the decree of dissolution be contemporaneous,
superseded rules 1.914’s and 1.953’s bifurcation and separate judgments
allowances; there is no analogous statute applicable in the instant case.
See id.
The district court did not abuse its discretion in bifurcating the
issues for trial. Nor did the bifurcation lead to a procedural fallacy.
VI. Whether Membership Approval of the MURA Was Required
Under HES’s Operating Agreement or Iowa Law.
A. Whether Membership Approval Is Required Under HES’s
Operating Agreement. Iowa law dictates that an LLC is bound by its
operating agreement. Iowa Code § 489.111(1) (2013). At issue, here, is
whether certain provisions of HES’s operating agreement or public policy
require membership approval of the MURA.
“The cardinal rule of contract interpretation is the determination of
the intent of the parties at the time they entered into the contract.” C & J
Vantage Leasing Co. v. Wolfe, 795 N.W.2d 65, 77 (Iowa 2011). The
language the parties used is the most important evidence of their
intentions, and therefore, we endeavor to give effect to all language of the
contract. Id.; NevadaCare, 783 N.W.2d at 466. But “[w]ords and other
conduct are interpreted in the light of all the circumstances, and if the
24
principal purpose of the parties is ascertainable it is given great weight.”
Fausel v. JRJ Enters., Inc., 603 N.W.2d 612, 618 (Iowa 1999) (quoting
Restatement (Second) of Contracts § 202(1), at 86 (Am. Law Inst. 1981));
accord Pillsbury Co., 752 N.W.2d at 436.
We rely on the general rules of contract interpretation from the
Restatement as guides in the process of interpretation. Pillsbury Co., 752
N.W.2d at 436; see Restatement (Second) of Contracts § 202, at 86
(providing rules in aid of interpretation). “The rules do not depend on a
determination that there is an ambiguity, but we use them to determine
‘what meanings are reasonably possible as well as in choosing among
possible meanings.’ ” Pillsbury Co., 752 N.W.2d at 436 (quoting Fausel,
603 N.W.2d at 618).
Retterath and the intervenors first contend that section 5.6(b)(v)
mandates membership approval of the MURA. Section 5.6 lays out the
restrictions on the authority of HES’s directors. It provides in relevant
part,
(b) The Directors shall not have authority to, and they
covenant and agree that they shall not cause the Company to,
without the consent of a majority of the Membership Voting
Interests:
....
(v) Cause the Company to acquire any equity or debt
securities of any Director or any of its Affiliates, or otherwise
make loans to any Director or any of its Affiliates.
Retterath and the intervenors argue that Retterath’s units are “equity
securities” under section 5.6(b)(v) and that section 5.6(b)(v) requires
membership approval to acquire HES units. We disagree.
Another provision of the operating agreement specifically covers
reacquisition of units. Section 5.16(vii) provides,
25
Board committees may exercise only those aspects of the
Directors’ authority which are expressly conferred by the
Directors by express resolution. Notwithstanding the
foregoing, however, a committee may not, under any
circumstances: . . . (vii) authorize or approve the reacquisition
of Units, except according to a formula or method prescribed
by the Directors . . . .
(Emphasis added.) This provision gives the directors the authority to
authorize and approve reacquisition of member units without membership
approval.
When considering section 5.6(b)(v) and section 5.16(vii) in
conjunction, it does not make sense that the directors could reacquire any
member’s or director’s units without membership approval under section
5.16 but would need membership approval to acquire any of the directors’
HES units—i.e., equity securities in HES—under section 5.6(b)(v). See,
e.g., Iowa Fuel & Minerals, Inc. v. Iowa State Bd. of Regents, 471 N.W.2d
859, 863 (Iowa 1991) (“[W]hile words [of a contract] are to be given their
ordinary meaning, particular words and phrases in a contract are not to
be interpreted in isolation.”). Accordingly, “acquire” as used in section
5.6(b)(v) cannot require membership approval when HES reacquires its
units.
Retterath and the intervenors argue that section 5.16 is a general
provision so it cannot limit section 5.6(b)(v), which is a specific provision.
HES disagrees, arguing that the express and specific language of section
5.16 of the operating agreement grants the board of directors the sole
authority for reacquiring a member’s units.
One principle of contract construction is that “when a contract
contains both general and specific provisions on a particular issue, the
specific provisions are controlling.” Id. at 863. Retterath and the
intervenors contend that section 5.6(b)(v) is a specific provision because
section 5.6(b)(v) is the only provision in the operating agreement that
26
dictates how HES—through its directors—may acquire any equity security
of a director and because section 5.6 is the only provision that specifically
applies to the authority of the directors. In contrast, they argue, section
5.16 is just one of many provisions that apply to members generally. We
do not find these arguments persuasive.
First, other provisions of the operating agreement apply specifically
to the authority of the directors. For example, section 5.4 provides a list
of actions the directors are authorized to perform, section 5.5 allows the
directors to authorize one director to act as the agent of HES, and section
5.16 authorizes the directors to create committees. Moreover, whether
section 5.6(b)(v) is the only provision that specifically applies to the
authority of the directors is not illuminating on whether the actual
language used in section 5.6(b)(v) requires membership approval before
HES may acquire a director’s equity securities.
Second, section 5.6(b)(v) and section 5.16 are both specific and
general in their own right. Section 5.6(b)(v) addresses the directors’
authority to acquire any equity securities of a director—i.e., of a specific
member—and section 5.16 addresses the authority of a committee created
by the directors to reacquire any member’s units—i.e., a specific type of
equity security. Thus under Retterath and the intervenors’ reasoning,
different portions of each provision would control different portions of the
other provision. Such a result does not make sense.
We agree with the district court that section 5.6(b)(v) only applies
when HES is acquiring equity or debt securities other than its own units,
and section 5.16 controls when HES acquires its own units.
Retterath next argues that section 4.1, and impliedly section
5.6(a)(ii), of the operating agreement require membership approval on the
MURA. Section 4.1 authorizes the directors to make distributions “to the
27
Unit Holders in proportion to Units held.” Section 5.6(a)(ii) prohibits the
directors from “[k]nowingly engag[ing] in any act in contravention of this
Agreement . . . , except as otherwise provided in this Agreement” without
unanimous consent of the members.
Retterath argues that the two $15 million payments to him qualify
as “liquidating distributions” and because HES is making a distribution
solely to him and not the other HES members in proportion to units held,
the directors are violating section 4.1. And therefore section 5.6(a)(ii)
requires the directors to have unanimous membership consent in order to
violate section 4.1.
This argument is unpersuasive because liquidating distributions are
not the kind of distributions that section 4.1 contemplates. Section 4.1
specifically authorizes the directors to “make distributions of Net Cash
Flow.” The term “net cash flow” is defined in the operating agreement to
mean
the gross cash proceeds of the Company less the portion
thereof used to pay or establish reserves for Company
expenses, debt payments, capital improvements,
replacements and contingencies, all as reasonably determined
by the Directors. “Net Cash Flow” shall not be reduced by
Depreciation, amortization, cost recovery deductions or
similar allowances, but shall be increased by any reductions
of reserves previously established.
The funds HES was to use to pay Retterath for his units were not a
distribution of HES’s net cash flow.
Moreover, the testimony of attorney Joseph Leo established
“liquidating distribution” is a legal term used in the tax code. Nothing in
section 4.1 of the operating agreement or in any other provision of the
agreement indicates that the term “distribution” as used in section 4.1 is
a technical, legal term or that, even though it is not a technical, legal term,
it includes a specific, technical term used in tax law.
28
B. Whether Membership Approval Is Required Under Iowa Law.
Retterath and the intervenors next claim that membership approval is
required under Iowa common law and Iowa Code chapter 489. Retterath
claims that Iowa Code section 489.407(3)(d)(3) required consent of all
members before HES could approve the MURA because the MURA was
outside HES’s ordinary activities.
1. Membership approval under Iowa Code section 489.407(3)(d)(3).
Section 489.407 provides in relevant part,
3. In a manager-managed limited liability company, all
of the following rules apply:
....
d. The consent of all members is required to do any of
the following:
....
(3) Undertake any other act outside the ordinary course
of the company’s activities.
Iowa Code § 489.407(3)(d)(3). Retterath and the intervenors argue that
HES’s actions regarding the MURA were outside the ordinary course of
HES’s activities. However, neither indicates what the ordinary course of
HES’s activities is nor otherwise provides any argument regarding why
MURA-related actions are outside of the ordinary course of HES’s
activities. Nor does either provide any record or legal citations, indicating
negotiating, preparing, and executing a repurchase agreement is beyond
an LLC’s ordinary course of activities. Based on the lack of argument on
this issue, it is waived on appeal. Iowa R. App. P. 6.903(2)(g).
Nevertheless, even if it has not been waived, the operating agreement
suggests actions related to a repurchase agreement are not outside HES’s
ordinary course of activities. For example, section 1.3 of the operating
29
agreement details the purposes and powers of HES and provides in
relevant part,
The nature of the business and purposes of the Company are
to: . . . (iii) engage in any other business and investment
activity in which an Iowa limited liability company may
lawfully be engaged, as determined by the Directors. The
Company has the power to do any and all acts necessary,
appropriate, proper, advisable, incidental or convenient to,
and in furtherance of, the purposes of the Company . . . .
(Emphasis added.) Repurchasing a member’s units in the LLC is
analogous to engaging in transactions for interest in an LLC, which is an
investment activity in which an Iowa LLC may engage. Section 5.4 of the
operating agreement details ways in which HES directors may engage in
transactions. Section 5.4(a) enumerates actions the directors are
authorized to perform, including conducting HES’s business, carrying on
HES’s operations, and having and exercising the powers granted by Iowa
Code chapter 489 to effect the purposes for which HES is organized.
Section 5.4(b) authorizes directors to “[a]cquire by purchase, lease or
otherwise . . . personal property which may be necessary, convenient, or
incidental to the accomplishment of the purposes of the Company.”
Section 5.4(d) allows directors to execute agreements and contracts in
connection with the management, maintenance, and operation of HES’s
business and affairs. Section 5.4(j) permits directors to carry out contracts
necessary to, incidental to, or connected with the purposes of HES as may
be lawfully performed by an LLC under Iowa law. And section 5.4(k)
authorizes taking or not taking actions “not expressly proscribed or limited
by this Agreement or the Articles” to accomplish HES’s purposes.
2. Membership approval required because only a principal can ratify
the unauthorized act of an agent under Iowa law. Between June 11 and
June 13, 2013, the chairman of HES’s board of directors emailed Retterath
30
three versions of a draft MURA. On June 13, the chairman presigned and
emailed Retterath what would be the final draft of the MURA. Retterath
signed that draft. However, the board had not authorized the chairperson
to sign the MURA at the time he did. On June 19, the board ratified the
MURA and approved the chairman’s signature.
The intervenors argue that the board could not ratify the
unauthorized acts of an agent—the June 11 offer and the chairman’s acts
on June 13—because the board was not the principal but, rather, the
members are the principal. Under Iowa Code section 489.110,
The operating agreement may specify the method by which a
specific act or transaction that would otherwise violate the
duty of loyalty may be authorized or ratified by one or more
disinterested and independent persons after full disclosure of
all material facts.
Iowa Code § 489.110(5). The intervenors argue that the directors causing
HES to acquire a director’s equity securities in HES qualifies as insider or
self-dealing, which Iowa law has indicated violates the duty of loyalty. Cf.
Rowedder ex rel. Cookies Food Prods., Inc. v. Lakes Warehouse Distrib.,
Inc., 430 N.W.2d 447, 452 (Iowa 1988) (“Corporate directors and officers
may under proper circumstances transact business with the corporation
including the purchase or sale of property, but it must be done in the
strictest good faith and with full disclosure of the facts to, and the consent
of, all concerned.” (quoting Des Moines Bank & Tr. Co. v. George M. Bechtel
& Co., 243 Iowa 1007, 1081, 51 N.W.2d 174, 216 (1952))); Harvey v.
Leonard, 268 N.W.2d 504, 512 (Iowa 1978) (noting general rule that
“trustees are prohibited from engaging in self-dealing transactions with
the trust and from obtaining personal advantage from their dealings with
trust property” and holding that trustee breached his duty of loyalty to the
trust when he accepted stock issued to him, knowing that a consequence
31
of such was to reduce the trust’s control of the company that issued the
stock). They contend that section 5.6(b)(v)’s requirement of membership
approval is the operating agreement’s specified method of authorizing or
ratifying the act that would otherwise violate the duty of loyalty. Thus,
they conclude, in this situation, the principal is the membership, not the
board.
The intervenors’ contention is without merit. As discussed above,
the verb “acquire” in section 5.6(b)(v) does not include the verb “reacquire”
and, therefore, section 5.6(b)(v) does not apply to HES’s “reacquisition” of
a director’s or affiliate’s HES units. Accordingly, the board was not acting
as an agent but rather as the principal.
C. Conclusion. Retterath’s and the intervenors’ arguments that
HES’s operating agreement, Iowa common law, and Iowa Code chapter 489
require membership approval of the MURA are not persuasive. We,
therefore, hold that membership approval of the MURA was not required.
The district court did not err in granting summary judgment in favor of
HES on this issue or in rejecting Retterath’s argument on this issue at
trial.
VII. Whether the District Court Erred in Denying Retterath’s
Motion for Evidentiary Sanctions or a Continuance.
Less than two weeks before trial, HES produced roughly 200 pages
of documents that it characterized as bank approvals or waivers from
HFSB regarding HES’s intended buyback of Retterath’s units. 3 Retterath
contends the district court abused its discretion in denying his motion to
3Some
of these documents were offered as exhibits at trial. However, other than
exhibit 32, Retterath provides essentially zero indication on which exhibits these
documents became.
32
exclude those documents or, in the alternative, for a continuance to allow
for further discovery. We find no abuse of discretion.
First, Retterath asserts that he clearly asked for the information in
those documents—namely, proof of bank approval for financing the
MURA—in the February 19, 2016, September 30, 2016, and other
discovery requests he served on HES. A review of the discovery he cites to
in the record reveals otherwise.
In none of the discovery in the record did Retterath specifically and
clearly request documentation or proof that HES received lender approval
and obtained the financing necessary to repurchase his units. In response
to several of Retterath’s requests for admission, HES admitted that it
received approval from its primary lender and obtained the financing
necessary to repurchase his units as contemplated in the MURA. But
Retterath merely asked for all documents that support any denials made
in HES’s responses to his request for admissions.
Indeed, Retterath did not specifically and clearly request
documentation of this nature until less than one month before trial. On
December 20, 2016, he served deposition subpoenas on HES directors who
were being deposed the next two days. Pursuant to the deposition
subpoena, deponents were directed to have with them certain documents,
including,
1. Bank statements for all accounts held by HES reflecting
cash on hand from June 13, 2013, through January 31, 2014.
2. Any Notices to Home Federal Savings Bank between
July 1, 2013, to August 5, 2013, requesting payment or
transfers of funds to Steve Retterath or to accounts owned or
controlled by HES.
3. Documentation relating to any credit facility upon which
HES could borrow funds between July 1, 2013, and August 5,
2013.
33
....
5. Any computations or work papers generated by HES’s CFO
or provided by RSM McGladrey to HES related to minimum
equity and/or minimum tangible net worth requirements or
any other covenants in any loan agreements with HES and
any lender.
6. All documentation exchanged (including correspondence,
emails, work papers, memorandums, etc.), between HES and
Home Federal Savings Bank in generating the proposed loan
commitment dated July 12, 2013 . . . .
Rule of Civil Procedure 1.707(3) allows the notice of deposition to a
party deponent to include a request for the production of documents at
the deposition. Iowa R. Civ. P. 1.707(3). In this case, the directors given
the notice are party deponents. Rule 1.512 governs the procedure of such
requests and the production of the requested documents. In pertinent
part, it allows a party up to thirty days to respond after service of the
request. Id. r. 1.512(2)(b)(1). Accordingly, when the HES directors
produced the documents at issue on January 4 and 6, 2017, they were
well within the thirty-day compliance period.
Retterath cannot claim prejudice from documents produced in
compliance with the rules of procedure and which contain information that
he did not clearly request earlier. Moreover, even though he claims he
could not meaningfully share that information with his expert before trial,
he does not identify any reason why. To be sure, 200 pages of
documentation is not a nominal amount of information. However,
Retterath’s expert had fourteen to sixteen days to review the information
as the expert did not testify at trial until January 20.
Further, as Retterath does not clearly identify which portions of the
record encompass these documents or otherwise provide us with a copy of
the documents at issue, we cannot ascertain whether the information in
the documents would warrant an extension of time for expert
34
consideration or not. The only portion of the record Retterath’s brief
indicates is relevant to this issue is exhibit 32, which is a June 21, 2013
email from the HFSB officer to HES’s CEO and CFO with draft documents
for amending HES’s MLA attached. Although technical, we find nothing
in that exhibit to require more than two weeks of an expert’s time to
understand.
Finally, we note that if Retterath wanted the specific information
contained in the documents sooner, he could have served discovery
requests specifically asking for that information, as he did in the December
20 deposition subpoena. Alternatively, he could have served the
deposition subpoena sooner, especially considering the deposition
deadline was supposed to be November 18, 2016, which the parties agreed
to postpone.
Retterath’s discovery requests do not clearly indicate he is asking
for documentation or information supporting HES’s claim that it received
lender approval and obtained the financing necessary to repurchase
Retterath’s units. The clear request for this information came less than
one month before trial even though Retterath could have made the request
sooner. The information was timely produced within thirty days of service
of the request. See id. And Retterath had two weeks before his expert
testified in which his expert could review the documentation. We do not
think the court abused its discretion in denying Retterath’s motion for
evidentiary sanctions or for a continuance for further discovery.
VIII. Whether the MURA Is a Valid and Binding Agreement.
Retterath contends the MURA is not a valid and binding agreement
because HES had not fully signed or approved it by the MURA’s execution
35
deadline. He relies on section 1 of the MURA in support. Section 1 of the
MURA provides,
Repurchase. At the Closing (as hereinafter defined), the
Company shall repurchase all, but not less than all, of the
Units from Member, free and clear of all liens, security
interests, claims and encumbrances, and Member’s interest
in the Company shall be terminated. Member acknowledges
and agrees that Member shall not be entitled to receive any
distribution of income from the Company or exercise any
rights as a member of the Company following the Closing.
THIS AGREEMENT SHALL NO LONGER BE A BINDING
OFFER AND SHALL BE NULL AND VOID AND OF NO
FURTHER EFFECT IF IT IS NOT FULLY SIGNED BY
MEMBER AND DELIVERED TO THE COMPANY PRIOR TO
2:00 P.M. LOCAL TIME ON THURSDAY, JUNE 13, 2013.
Because of the bolded language in section 1 of the MURA, Retterath claims
the MURA’s execution deadline was June 13, 2013, which meant the
MURA had to be fully signed by both HES and himself on that date.
We find no merit in his argument. The bolded language in section 1
expressly indicates HES’s offer to repurchase Retterath’s units as
conveyed in the MURA would no longer be available if the MURA was not
fully signed by only Retterath and delivered to HES before the deadline.
Nothing in section 1 conditions the effectiveness or availability of the
MURA on HES or its board executing or approving the agreement by
June 13.
IX. Whether HES Is Entitled to Specific Performance of the
MURA.
Retterath next claims that there was insufficient evidence that HES
is entitled to specific performance of the MURA. Specific performance is a
possible equitable remedy for a breach of contract. See Berryhill, 428
N.W.2d at 657. However, it is not granted as a matter of right but is in the
court’s discretion. Breitbach, 541 N.W.2d at 843; Restatement (Second) of
Contracts § 357 cmt. c, at 167–68. The object of this remedy “is to best
36
effectuate the purpose for which a contract is made” and should be granted
upon the terms and conditions justice requires. Lange v. Lange, 520
N.W.2d 113, 118 (Iowa 1994); Berryhill, 428 N.W.2d at 657.
With respect to contracts involving personal property, we have
stated, “Specific performance of contracts in relation to personal property
will not be enforced ordinarily, or in the absence of special circumstances
making the payment of damages inadequate to afford proper relief.”
Gingerich v. Protein Blenders, Inc., 250 Iowa 654, 657, 95 N.W.2d 522, 524
(1959). That rule applies to a membership interest in an LLC, which Iowa
Code section 489.501 indicates is personal property. See Iowa Code
§ 489.501 (“A transferable interest is personal property.”); see also id.
§ 489.102(24) (defining “transferable interest” as “the right, as originally
associated with a person’s capacity as a member, to receive distributions
from a limited liability company in accordance with the operating
agreement, whether or not the person remains a member or continues to
own any part of the right”); cf. Gingerich, 250 Iowa at 657, 95 N.W.2d at
524 (noting corporate stock is personalty and applying the same rules).
The record indicates that the MURA was primarily intended to
facilitate HES’s repurchase and retirement of Retterath’s units. MURA
unnumbered paragraph 2 states “WHEREAS, the Company desires to
repurchase and retire, and Member desires to have the Company
repurchase and retire, the Units pursuant to the terms and conditions set
forth below.” The record also indicates the MURA served other purposes—
namely, extinguishment of Retterath’s board-appointment powers and
removal of Retterath as a member and director of HES. This indication is
clear when one considers section 5.3(f) of the operating agreement, stating
whenever the number of units of a member with director-appointment
power falls below 5000 the member loses that power, with parts of the
37
MURA. In section 1 of the MURA, Retterath acknowledges that he will not
be entitled to any distributions or to exercise any member rights after the
closing on the MURA. Section 5(e) of the MURA provides that a condition
to HES’s performance is that both Retterath and his board appointee,
Stephen Eastman, resign from the board. Together, these provisions
suggest one of HES’s goals for the MURA was to remove Retterath as a
director and to extinguish the exercise of his appointment powers.
Undoubtedly, requiring the parties to the MURA to specifically
perform their obligations under the MURA would effectuate the MURA’s
purposes. But specific performance is not an appropriate remedy under
certain circumstances. Retterath claims those circumstances make
specific performance inappropriate in this case.
A. Adequacy of Remedy at Law. One circumstance precluding
specific performance is “if damages would be adequate to protect the
expectation interest of the injured party.” Restatement (Second) of
Contracts § 359(1), at 169. Thus, unless HES established that legal
damages for Retterath’s breach of the MURA are incomplete and
inadequate, ordering specific performance would be inappropriate. See
Gingerich, 250 Iowa at 657, 95 N.W.2d at 524; 81A C.J.S. Specific
Performance § 62, at 216 (2015).
Courts look to several factors when determining if damages provide
an adequate remedy. These include “the difficulty of proving damages with
reasonable certainty,” “the difficulty of procuring a suitable substitute
performance by means of money awarded as damages,” and “the likelihood
that an award of damages could not be collected.” Restatement (Second)
of Contracts § 360, at 171; see, e.g., Severson v. Elberon Elevator, Inc., 250
N.W.2d 417, 423 (Iowa 1977) (noting that specific performance is available
as a remedy if the property at issue is unique or has special value and that
38
the defendant’s financial situation is a factor to consider in determining
whether damages are an adequate remedy). Retterath claims application
of these factors demonstrate there is an adequate remedy at law and,
therefore, specific performance is inappropriate.
1. HES’s ability to procure a suitable substitute. Damages may not
be an adequate remedy if the party seeking specific performance cannot
“readily procure by the use of money a suitable substitute for the promised
performance.” Restatement (Second) of Contracts § 360 cmt. c, at 172–73.
Another way of characterizing this factor is whether the property at issue
is unique. See id. at 173 (noting “[i]f goods are unique in kind, quality or
personal association,” procuring a suitable substitute may be
impracticable); see, e.g., Berryhill, 428 N.W.2d at 657 (“Specific
performance is available when the contract involves property which is
unique.”). We have not had the occasion to consider whether a
membership interest in an LLC is unique property. However, we have
considered whether corporate stock qualifies as unique property.
In Lyon, we noted that “[a] contract for sale of stock of a closely held
corporation which is not procurable in any market is a proper subject for
specific performance.” 288 N.W.2d at 894. There, the two plaintiffs and
the one individual defendant were the only stockholders in the corporation
at issue and the sale-of-stock contract was a buy-sell agreement between
the two plaintiffs and the individual defendant. Id. at 886. We concluded
specific performance was appropriate. Id. at 894.
In Schmidt v. Pritchard, we adopted the rule that a decree of specific
performance compelling delivery of withheld stock is appropriate when the
stock’s value is not easily ascertainable, when the stock is not readily
obtainable elsewhere, or when there is a particular reason requiring
delivery of the stock. 135 Iowa 240, 248, 112 N.W. 801, 804 (1907). There,
39
we noted that the plaintiff had agreed to pay a certain amount for the stock
and had tendered a check for that amount. Id. at 247, 112 N.W. at 804.
But we also noted that the stock did not have any market value, it could
not be bought in the open market, and the defendants were withholding
the stock in an attempt to take and keep control of the corporation even
though the plaintiff’s faction was in control. Id. at 248, 112 N.W. at 804.
We affirmed the order of specific performance of the delivery of the stock.
Id. at 250, 112 N.W. at 805.
The Restatement is in line with our caselaw. Restatement (Second)
of Contracts § 360 cmt. c, at 173 (providing that if shares of stock of a
corporation are not obtainable elsewhere, damages may not be an
adequate remedy).
HES contends that Retterath’s units are unique because of the unit
certificate numbers, which HES does not duplicate and retires when those
units are redeemed. Nothing in our caselaw indicates that a unique
identification number renders that personal property sufficiently unique
for purposes of specific performance. Moreover, the personal property at
issue is the membership interest in the HES units, not unit certificates
that are merely a physical representation of that interest.
HES also contends Retterath’s units are unique because of the
board appointment powers accompanying them. We agree.
The Restatement provides a helpful illustration for a somewhat
similar situation. Illustration 7 to comment c of section 360 provides,
A contracts to sell to B 1,000 shares of stock in the X
Corporation for $10,000. A repudiates the contract and B
sues for specific performance. Other shares of X Corporation
are not readily obtainable and B will suffer an uncertain loss
as a result of diminished voting power. Specific performance
may properly be granted. If other shares were readily
obtainable, even though at a considerably higher price, specific
performance would be refused.
40
Restatement (Second) of Contracts § 360 cmt. c, illus. 7, at 173 (emphasis
added). Like the illustration, Retterath contracted to sell HES his 25,860
units, he did not perform under the contract, and HES sued for specific
performance. In addition, similar to the illustration, HES claims it will
suffer an uncertain loss because of the appointment powers attached to
Retterath’s units, powers which can affect the board’s personnel and
voting.
There is some merit to that comparison because HES’s board has
diminished director-appointment power if Retterath keeps his units
instead of being ordered to specifically perform. Under section 5.3(f) of the
operating agreement, whenever the number of units of a member with
director-appointment power falls below 5000, the member loses that
director-appointment power, that member’s board appointee’s term
expires, and the board gains the right to appoint the successor to the
board. The record reveals that Retterath’s two board appointees continued
to serve on the board after the scheduled closing date of the MURA,
although there is conflicting evidence of whether those appointees served
at Retterath’s or the board’s pleasure. Nevertheless, under HES’s
operating agreement, Retterath would retain the power to remove either of
those two appointees and appoint someone else, including himself, if he
keeps his units instead of being ordered to specifically perform. Such a
situation is similar to Schmidt, where we ordered specific performance
because, in part, the breaching party was withholding the stock at issue
in an attempt to take and keep control of the corporation even though the
nonbreaching party’s faction was in control. See 135 Iowa at 248–49, 112
N.W. at 804–05.
Additionally, as in the Restatement illustration, Schmidt, and Lyon,
Retterath’s specific units are not available on an open market. See Lyon,
41
288 N.W.2d at 894; Schmidt, 135 Iowa at 247, 112 N.W.2d at 804–05;
Restatement (Second) of Contracts § 360 cmt. c, illus. 7, at 173. There is
a website where interested buyers and sellers can connect to pursue direct
sales of HES units, but nothing in the record indicates Retterath ever used
or intended to use that website to sell his units to HES or any other third
party. HES was not in the market to buy or repurchase HES units,
generally, but sought to buy back only Retterath’s specific units because
of their ownership and accompanying board-appointment powers.
Because of the uniqueness of Retterath’s specific units, HES would
be unable to “readily procure by the use of money a suitable substitute for
the promised performance.” Restatement (Second) of Contracts § 360
cmt. c, at 172–73. This factor augurs in favor of HES’s contention that
damages do not provide an adequate remedy for Retterath’s breach.
2. Difficulty of proving damages. This factor considers whether
“[t]he damage remedy may be inadequate to protect the injured party’s
expectation interest because the loss caused by the breach is too difficult
to estimate with reasonable certainty.” Id. § 360 cmt. b, at 171. HES
claims it expected the MURA to result in the redemption of Retterath’s
units, extinguishment of Retterath’s appointment powers, and Retterath’s
removal from the board and as a member of HES. The loss caused by the
inability to redeem Retterath’s units, to extinguish Retterath’s
appointment powers, and to remove Retterath as a member of HES cannot
be estimated with reasonable certainty. Thus, this factor also supports
HES’s contention that damages do not provide an adequate remedy.
3. Likelihood of collecting an award of damages. HES does not make
any argument that it is unlikely it could collect an award of damages from
Retterath through judgment and execution. And there is nothing in the
record suggesting HES would not be able to collect a damages award from
42
Retterath. See id. § 360 cmt. d, at 174 (providing examples of when the
difficulty of collecting damages renders a damages remedy inadequate,
including being judgment proof, concealment of assets, or public policy
against preferential transfers). Accordingly, this factor augurs in favor of
the adequacy of a damages remedy.
Upon consideration of these factors, we conclude that HES would
not have an adequate remedy at law for Retterath’s breach of the MURA.
The inadequacy of the remedy at law supports specific performance as a
remedy.
B. HES’s Good Faith and Conduct. Another circumstance
precluding specific performance is when the party seeking specific
performance has not acted in good faith or performed its obligations. See,
e.g., Youngblut v. Wilson, 294 N.W.2d 813, 817 (Iowa 1980) (stating the
plaintiff’s inequitable conduct will justify denial of specific performance);
Tschirgi v. Merchants Nat’l Bank of Cedar Rapids, 253 Iowa 682, 686, 689–
90, 113 N.W.2d 226, 228, 230 (1962) (holding that a party in default of
the terms of the contract cannot obtain specific performance unless the
default is cured before trial and that specific performance will not be
ordered if doing so would fulfill the requesting party’s nefarious purpose);
Peterson v. Rankin, 161 Iowa 431, 436, 143 N.W. 418, 420 (1913) (“Plaintiff
must have performed his part of the contract, or tendered performance in
a legal manner, before he would be entitled to insist upon a performance
by the other party to it.”).
Retterath argues this circumstance precludes ordering specific
performance here because HES has not shown that it was ready, willing,
and able to and did perform its obligations under the MURA. HES
counters that Retterath’s repudiation of the MURA excused HES from its
performance obligations; even if Retterath had not repudiated the MURA,
43
he cannot rely on HES’s purported failure to satisfy the conditions to its
obligations as an excuse for his refusal to perform; HES either met or
waived the conditions to its performance; and it tendered payment
multiple times. Upon our review, we conclude that HES was excused from
performance because Retterath repudiated the MURA and that,
regardless, the record reveals HES was ready, willing, and able to perform
its obligations and it attempted to do so. Accordingly, this circumstance
would not preclude specific performance in this case.
1. Whether HES was excused from performance because Retterath
repudiated the MURA. “Where one party to a contract repudiates the
contract before the time for performance has arrived, the other party is
relieved from its performance.” Conrad Bros. v. John Deere Ins., 640
N.W.2d 231, 241 (Iowa 2001). The repudiation of a contract is treated as
having the same effect as a breach by nonperformance. Id.
Typically, “repudiation consists of a statement that the repudiating
party cannot or will not perform.” Id. (quoting II E. Allan Farnsworth,
Farnsworth on Contracts § 8.21, at 535 (2d ed. 1998)); see Restatement
(Second) of Contracts § 250, at 272. The language of the statement “must
be sufficiently positive to be reasonably interpreted to mean that the party
will not or cannot perform.” Restatement (Second) of Contracts § 250
cmt. b, at 273. However, “[l]anguage that is accompanied by a breach by
non-performance may amount to a repudiation even though, standing
alone, it would not be sufficiently positive.” Id.
Beginning on June 20 and continuing through at least July 31,
2013, Retterath communicated to HES, usually through his attorney, his
belief that there was no agreement because he had revoked his June 13
offer before HES could lawfully accept it and that any correspondence
regarding the purported agreement was a form of terms and conditions
44
negotiation, not an attempt to comply with the terms and conditions of a
binding agreement. Although Retterath did not expressly state he
repudiated the agreement—likely because that would require him to
concede there was an agreement—his repeated expressions, including up
to the day before the MURA was scheduled to close, can be reasonably
interpreted to mean that he did not intend to perform. And even if the
language in his communications, standing alone, was not sufficiently
positive, it amounted to a repudiation when Retterath breached the MURA
by nonperformance. Cf. Pavone v. Kirke, 807 N.W.2d 828, 830–31, 833–
34 (Iowa 2011) (finding a letter stating the agreement terminated pursuant
to the agreement’s terms was a repudiation of the agreement); Conrad
Bros., 640 N.W.2d at 242 (finding denial of coverage on an insurance claim
manifested a clear intent not to perform even though the denial was based
on a mistaken interpretation of the insurance contract).
2. Whether HES repudiated the MURA before Retterath did.
Retterath’s nonperformance may be excused if HES repudiated the MURA
before he did. See Restatement (Second) of Contracts § 253(2) & cmt. b,
at 286–87. In response to HES’s argument, Retterath contends HES
anticipatorily repudiated the MURA by stating its intention to refuse to
comply with its operating agreement—namely, refusing to obtain member
approval for the MURA. Retterath notes that one of the conditions of HES’s
obligations under the MURA was board approval of the MURA in
accordance with its operating agreement.
As determined above, membership approval of the MURA is not
required by HES’s operating agreement. Accordingly, HES did not indicate
an intention not to perform its obligations under the MURA by refusing to
obtain membership approval of the MURA. HES did not repudiate the
MURA.
45
3. Whether HES was ready, willing, able to, and did perform.
Retterath argues that HES was not ready, willing, and able to and did not
perform because it did not and could not have had the funds to close on
the MURA, it did not satisfy the conditions precedent, and never tendered
performance. We find that substantial evidence indicates otherwise and
that HES, therefore, was ready, willing, able to, and did perform.
First, HES had the funds available and ready to be able to close on
August 1, 2013. HES was allowed to supplement the record, posttrial,
with documents that clearly show that it had more than $15 million
available in its checking account.
Retterath challenges the admission of this evidence. But even if the
evidence should not have been admitted, the other evidence in the record
reveals HES had obtained the required financing and bank approval—one
of the conditions Retterath argues HES did not meet. 4 The designated trial
testimony from the HFSB officer indicates that as of July 1, 2013, the bank
had prepared all of the loan agreements its attorney believed necessary for
HES to get approval of and proceed with the buyback. The bank officer
explained that HES’s plan was to use its revolving line of credit to pay
Retterath and that HES would take out an additional term loan to pay off
the revolving line of credit. He also explained that the appraisal being done
in mid-August that was referenced in the financing communications was
for the term loan that HES would use to pay off its revolving line of credit.
He further testified that HES had received approval from HFSB, HES’s
primary lender, and had secured financing for the repurchase of
Retterath’s units.
4Because other evidence in the record provides substantial evidence that HES had
the funds available and obtained lender approval to repurchase Retterath’s units, we do
not address Retterath’s evidentiary arguments.
46
In a July 12, 2013 communication, HFSB offered to lend HES up to
$35,000,000—$15 million in a new term loan and $20 million on HES’s
existing revolving line of credit—which HES accepted. By its own terms,
HFSB’s commitment to finance HES’s credit requests would not expire
unless the credit documents were not entered into by September 15, 2013.
Accordingly, the credit documents did not need to be entered into before
the MURA’s August 1 closing date in order for HES to have obtained the
financing necessary for the repurchase agreement.
Second, HES could have had the funds under its MLA with HFSB.
HES acknowledges that its MLA with HFSB did not allow it to purchase or
otherwise acquire any of its units without prior written consent from
HFSB. HES also acknowledges that its MLA was not actually amended to
allow it to repurchase Retterath’s units. Retterath claims that means HES
could not close on the MURA without violating its operating agreement,
which states distributions to members are “[s]ubject to the terms and
conditions of any applicable loan covenants and restrictions.”
This contention is without merit because, as discussed above, the
distributions contemplated in section 4.1 of the operating agreement are
made from HES’s “net cash flow,” which is defined in section 1.10(cc) of
the operating agreement, and the liquidating distribution (as defined
under the tax code) HES would make to Retterath for his units is not such
a distribution. Moreover, the record demonstrates that the reason the MLA
amending documents were not signed was the parties did not close on the
MURA and, had they closed, HFSB and HES would have signed and closed
on the amending documents.
Third, HES was not required to, waived, or did meet the conditions
precedent in the MURA. Retterath asserts HES was not ready, willing, and
able to perform because it did not comply with the conditions precedent in
47
section 5 of the MURA by the closing deadline. Specifically, he contends
that (1) HES did not obtain required financing and bank approval, (2) the
parties did not enter into a mutual release, and (3) Eastman did not resign
from the board.
Under section 5(d) of the MURA, a condition to HES’s obligations is
that it “receives approval from its primary lender to repurchase the Units”
and “secures the financing necessary to repurchase the Units.” As already
discussed, HES did obtain the required financing and lender approval and
thereby satisfied this condition.
However, HES did not satisfy the conditions under section 5(e) and
(f) of the MURA. Under section 5(e), a condition to HES’s obligations is
that Retterath and Eastman each submit a written resignation from HES’s
board. While Retterath submitted his written resignation, Eastman did
not and continued to serve on the board past the August 1 closing date.
Under section 5(f), a condition to HES’s obligations is that Retterath and
HES “enter into a mutual release agreement releasing any and all claims
between the parties.” There is no dispute that the parties did not enter
into such a mutual release.
Retterath contends that HES must have satisfied these conditions
to have been ready, willing, and able to close. He is incorrect.
By the terms of the MURA, the nonsatisfaction of section 5’s
conditions did not prevent HES from closing under the MURA. At the end
of section 5 is a note, stating HES may terminate the MURA in the event
any of the conditions in this section have not been waived by HES or
satisfied by the closing. The use of the permissive may indicates HES
could elect to close under the MURA even if the conditions in section 5(e)
and (f) were not satisfied. That is what HES elected to do.
48
Moreover, HES could waive compliance with the condition in section
5(f).
It is well established that a party may waive a condition
precedent to his own performance of a contractual duty, when
such condition precedent exists for his sole benefit and
protection, and compel performance by the other party who
has no interest in the performance or nonperformance of the
condition.
Rodgers v. Baughman, 342 N.W.2d 801, 806 (Iowa 1983). The record does
not disclose any basis for concluding that Retterath benefitted from
Eastman resigning from the board. Tellingly, Retterath does not even
make this argument in his brief.
Further, the record reveals HES substantially complied with the
condition in section 5(e) but was stymied by Retterath’s lack of response.
On July 9, 2013, HES’s attorney emailed Retterath’s attorney a proposed
mutual release and asked if he had any suggested changes. Neither
Retterath nor his attorney responded. On July 16, 18, 22, 24, and 26,
HES’s attorney sent Retterath’s attorney a series of emails and letters
stating, inter alia, that the mutual release agreement needed to be
completed and requesting proposed revisions. Again, neither Retterath
nor his attorney responded regarding the mutual release. Even though
this condition was not met, it would be inequitable for Retterath to rely on
that to claim HES was not ready, willing, and able to close when his
nonaction is the reason for that unsatisfied condition. See Conrad Bros.,
640 N.W.2d at 240 (“It is widely recognized that ‘a party may not rely on a
condition precedent when by its own conduct it has made compliance with
that condition impossible.’ ” (quoting State Farm Fire & Cas. Ins. v. Miceli,
518 N.E.2d 357, 362 (Ill. App. Ct. 1987)); 17B C.J.S. Contracts § 703, at
149 (2011) (“A party to a contract who prevents performance thereof by
49
the other party, or renders it impossible, may not avail himself or herself
of the wrong, and the other party is excused from performing.”).
Retterath claims substantial performance is not enough to excuse
the nonoccurrence of an express condition precedent. But that is a
misstatement of our caselaw. Rather, our caselaw holds that substantial
performance will not excuse the nonoccurrence of an express condition
precedent necessary to the formation of a contract. SDG Macerich Props.,
L.P. v. Stanek Inc., 648 N.W.2d 581, 585–86 (Iowa 2002) (rejecting the
argument that substantial performance of the notice-of-intent-to-exercise-
the-renewal-option condition should be sufficient to constitute acceptance
of the option offer because the notice of intent to exercise the renewal
option was a condition precedent to the formation of contractual
obligations).
Conversely, “[s]ubstantial compliance with contract terms generally
is sufficient to require that the other party perform . . . .” 17B C.J.S.
Contracts § 800, at 247 (emphasis added). This is because substantial
performance “excuses contractual deviations or deficiencies which do not
severely impair the purpose underlying a contractual provision.” SDG
Macerich Props., 648 N.W.2d at 586. HES’s substantial compliance with
the mutual-release-agreement condition in section 5(f) of the MURA does
not severely impair the purpose underlying that provision.
Finally, Retterath contends HES did not actually perform its
obligations under the MURA because it never tendered performance. Once
again, Retterath’s own actions—or lack thereof—prevented HES from
tendering payment. On July 16, 18, 22, 24, and 26, HES’s attorney sent
Retterath’s attorney a series of emails and letters requesting, inter alia,
Retterath’s wiring instructions for the closing payment. Neither Retterath
nor his attorney provided that information. Retterath’s failure to provide
50
that information to HES is in contravention of section 2 of the MURA,
which provides that “[t]he payments shall be made by check or wire
transfer at the direction of [Retterath].” (Emphasis added.) Retterath
cannot equitably claim that HES’s failure to actually pay him on the
closing date meant HES was not ready, willing, and able or did not
perform.
C. Conclusion. In sum, we hold there is sufficient evidence to
conclude that HES is entitled to specific performance. We find HES does
not have an adequate remedy at law. We also find no merit in Retterath’s
argument that HES is not entitled to specific performance because it did
not act in good faith or otherwise comply with its obligations under the
MURA.
X. Whether the District Court Erred in Rejecting Retterath’s
Affirmative Defenses to the MURA.
Retterath claims the district court erred in denying his affirmative
defenses to the MURA of equitable estoppel, unilateral and mutual
mistake, unclean hands, and procedural and substantive
unconscionability. We disagree.
A. Equitable Estoppel. Retterath first claims the MURA should
not be enforced because of equitable estoppel. The traditional elements of
equitable estoppel are
(1) a false representation or concealment of material facts; (2)
a lack of knowledge of the true facts on the part of the actor;
(3) the intention that it be acted upon; and (4) reliance thereon
by the party to whom made, to his prejudice and injury.
Johnson v. Johnson, 301 N.W.2d 750, 754 (Iowa 1981).
Specifically, Retterath argues that HES always intended to allocate
taxable income to him from the date of the scheduled closing through the
scheduled second installment on July 1, 2014, without providing him any
51
distributions to cover that tax liability. He contends that allocation of
income would be improper under the tax code because there is no
corresponding economic event and that HES never informed him of its
intended allocation plan. Further, he asserts that he could not have
learned of this plan because of its inappropriateness under the tax code
and that he understood he would not be allocated taxable income after
closing.
HES explains that it did not have any intention to implement that
allocation plan until 2014, when it and its accountants began preparing
the tax returns and member K-1 documents for fiscal year 2013. We have
not found anything in the record indicating that HES intended to
implement that tax allocation plan at the time of or before the MURA’s
scheduled closing deadline.
The record citations Retterath provides to the contrary are not
persuasive. One is to a brief HES filed in a parallel federal court case, but
that brief was filed in November 2014. Thus, the positions in the brief do
not discredit HES’s explanation that it did not develop that allocation plan
until 2014. Retterath’s other two record citations merely demonstrate that
one of the board members and Retterath himself believed he would not be
allocated taxable income after closing on the MURA.
Further, to the extent that HES’s allocation plan was unlawful under
the tax code, it does not render the MURA unenforceable. Nothing in the
MURA established what the allocation plan would be.
Lastly, as HES asserts, Retterath had the opportunity to seek tax
advice and determine the tax implications of the MURA before he signed
it. Section 3 of the MURA states,
Member warrants and represents that: . . . (v) In
making the decision regarding the repurchase of the Units,
Member is relying solely upon the Company Information and
52
Member’s legal and financial advisors and independent
investigations and not upon the Company or any of its
members, managers, officers, directors, employees or
representatives with respect to value, tax, business, economic
or other considerations involved in this transaction . . . .
(Emphasis added.) Retterath did not discuss the MURA’s tax
consequences with an expert prior to signing.
The district court properly rejected Retterath’s estoppel defense.
B. Unilateral and Mutual Mistake. Next, Retterath argues the
MURA should not be enforced because of unilateral and mutual mistake.
Specifically, the mistake at issue is how HES would allocate taxable
income to him after the MURA’s closing.
With respect to a unilateral mistake, the Restatement (Second) of
Contracts provides,
Where a mistake of one party at the time a contract was made
as to a basic assumption on which he made the contract has a
material effect on the agreed exchange of performances that is
adverse to him, the contract is voidable by him if he does not
bear the risk of the mistake under the rule stated in § 154,
and
(a) the effect of the mistake is such that enforcement of
the contract would be unconscionable, or
(b) the other party had reason to know of the mistake or
his fault caused the mistake.
Restatement (Second) of Contracts § 153, at 394 (emphasis added). We
have said that a party’s unilateral mistake does not relieve that party of its
obligations under the contract “absent fraud, misrepresentation, or other
misconduct.” State ex rel. Palmer v. Unisys Corp., 637 N.W.2d 142, 150
(Iowa 2001).
Here, Retterath asserts that HES engaged in misrepresentation or
other misconduct by concealing its intent to improperly allocate taxable
income to him after closing. As discussed above, the record does not
support Retterath’s claim that HES intended, at the time the parties
53
entered into the MURA, to allocate taxable income to him at all after
closing. Thus, his unilateral mistake defense fails.
With respect to mutual mistake, the Restatement provides,
(1) Where a mistake of both parties at the time a contract was
made as to a basic assumption on which the contract was
made has a material effect on the agreed exchange of
performances, the contract is voidable by the adversely
affected party unless he bears the risk of the mistake under
the rule stated in § 154.
(2) In determining whether the mistake has a material effect
on the agreed exchange of performances, account is taken of
any relief by way of reformation, restitution, or otherwise.
Restatement (Second) of Contracts § 152, at 385; accord State ex rel.
Palmer, 637 N.W.2d at 150 (“Generally, mutual mistake will render a
contract voidable by the party who is adversely affected by the mistake
when the parties are mistaken on a basic assumption on which the
contract was made, unless the adversely affected party bears the risk of
mistake.”).
Retterath claims the mistake here involved the basic assumption on
which the contract was made—i.e., that he would receive $30 million for
his units. Comment b to section 152 of the Restatement indicates that an
assumption related to a party’s financial situation or market conditions
are generally not “basic assumptions” that would justify avoidance of the
contract. Restatement (Second) of Contracts § 152 cmt. b, at 386; cf. id.
illus. 1–6, at 387. On a spectrum, the resulting allocation of taxable
income from the sale of Retterath’s units is more like an assumption
related to something collateral to the contract than one of the parties’
foundational reasons for entering into the MURA.
Retterath’s unilateral and mutual mistake defenses are without
merit and were properly rejected.
C. Unclean Hands. The equitable defense of unclean hands means
54
that whenever a party who seeks to set the judicial machinery
in motion and obtain some equitable remedy has violated
conscience or good faith, or another equitable principle in
prior conduct with reference to the subject in issue, the doors
of equity will be shut, notwithstanding the defendant’s
conduct has been such that in the absence of circumstances
supporting the application of the maxim, equity might have
awarded relief.
Opperman v. M. & I. Dehy, Inc., 644 N.W.2d 1, 6 (Iowa 2002) (quoting 27A
Am. Jur. 2d Equity § 126, at 605 (1996)).
Retterath claims HES engaged in the following inequitable conduct:
(1) concealing its intent to improperly allocate taxable income to him after
closing on the MURA, (2) determining that it “equitably acquired”
Retterath’s units while still treating him as the “beneficial owner” for tax
allocation purposes but not for distribution, and (3) negotiating and
communicating directly with Retterath after his counsel had instructed
HES to communicate through attorneys.
Procedurally, Retterath has waived these contentions on appeal
under Iowa Rule of Appellate Procedure 6.903(2)(g). He cites no caselaw
or authority suggesting HES’s alleged conduct violated the conscience or
was not done in good faith. Nor does he provide any argument or
reasoning as to why this conduct renders HES’s hands unclean.
Even if these arguments are not waived, they are not meritorious.
First, as discussed above, nothing in the record indicates that HES
concealed its intent (or even had the intent) to allocate taxable income to
Retterath after closing on the MURA.
Second, HES’s “equitable acquisition” of Retterath’s units after the
scheduled closing and its resulting conduct coincide with its belief that
the MURA is a binding agreement and with the effect of the MURA had it
closed as scheduled. Section 1 of the MURA indicates that Retterath would
no longer be entitled to any distributions from HES after the closing.
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Additionally, there is nothing in the MURA regarding ownership for tax
allocation purposes. Further, Retterath does not argue and fails to show
that HES’s allegedly improper tax allocations were done in bad faith.
Third, even though HES was instructed by Retterath’s attorney to
contact Retterath through his attorney only, there is nothing in the record
to indicate that chairman Boyle’s direct communications with Retterath
regarding the MURA were done in bad faith or otherwise violate the
conscience. Retterath’s attorney’s instruction was emailed to HES’s
attorney after HES’s attorney contacted Retterath about being interviewed
as part of the board’s investigation into Retterath’s alleged bribery of
another board member. Nothing in Retterath’s attorney’s email instructs
members of HES’s board to cease direct communication with Retterath
either on the subject of the bribery investigation or other subjects.
Moreover, before June 2013, the communication between HES and
Retterath regarding repurchasing Retterath’s units had been directly
between Retterath and the board. Finally, Retterath acquiesced to direct
contact from HES’s board chairman regarding the June buyback
negotiations by directly responding to the chairman’s communications
instead of passing them along to his attorney. Considering his own
attorney had upbraided HES’s attorney just two weeks earlier for
contacting Retterath directly, presumably Retterath knew not to handle
communications from HES without consulting or involving his attorney.
Retterath’s own acquiescence in the direct communication with HES’s
board chairman and knowledge of his attorney’s communication
instruction undermines his claim that the board chairman’s direct
communications were done in bad faith or violate the conscience.
Retterath’s unclean hands defense lacks merit and was properly
rejected.
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D. Substantive and Procedural Unconscionability. Retterath’s
final affirmative defense is that the MURA is procedurally and
substantively unconscionable.
“A contract is unconscionable where no person in his or her right
senses would make it on the one hand, and no honest and fair person
would accept it on the other hand.” Albaugh v. Reserve, 930 N.W.2d 676,
687 (Iowa 2019) (quoting C & J Vantage Leasing Co., 795 N.W.2d at 80).
This defense includes both procedural and substantive elements. In re
Marriage of Shanks, 758 N.W.2d 506, 515 (Iowa 2008). For an agreement
to be unconscionable, it must be so at the time it was made. Bartlett Grain
Co. v. Sheeder, 829 N.W.2d 18, 27 (Iowa 2013); Restatement (Second) of
Contracts § 208, at 107. When analyzing unconscionability claims, we
consider the factors of “assent, unfair surprise, notice, disparity of
bargaining power, and substantive unfairness.” C & J Vantage Leasing
Co., 795 N.W.2d at 80 (quoting C & J Fertilizer, Inc. v. Allied Mut. Ins., 227
N.W.2d 169, 181 (Iowa 1975) (en banc)).
However, this defense does not exist to rescue a party from an
imprudent bargain or buyer’s remorse:
People should be entitled to contract on their own terms
without the indulgence of paternalism by courts in the
alleviation of one side or another from the effects of a bad
bargain. Also, they should be permitted to enter into
contracts that actually may be unreasonable or which may
lead to hardship on one side. It is only where it turns out that
one side or the other is to be penalized by the enforcement of
the terms of a contract so unconscionable that no decent, fair-
minded person would view the ensuing result without being
possessed of a profound sense of injustice, that equity will
deny the use of its good offices in the enforcement of such
unconscionability.
In re Marriage of Shanks, 758 N.W.2d at 515 (quoting Smith v. Harrison,
325 N.W.2d 92, 94 (Iowa 1982)).
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1. Procedural unconscionability. Retterath argues that the MURA is
procedurally unconscionable because HES negotiated directly with
Retterath; HES demanded Retterath sign the MURA by June 13, 2013, but
did not authorize chairman Boyle’s signature until June 19; HES
presented the MURA as an extortionate way of ending its investigation into
Retterath’s alleged bribery; and HES ignored questions from Retterath’s
attorney about the MURA’s enforceability and assurance that HES could
perform in compliance with its operating agreement.
“Procedural unconscionability involves an advantaged party’s
exploitation of a disadvantaged party’s lack of understanding, unequal
bargaining power between the parties, as well as the use of fine print and
convoluted language.” C & J Vantage Leasing Co., 795 N.W.2d at 81.
Other factors relevant to a procedural unconscionability analysis include
the disadvantaged party’s opportunity to seek independent
counsel, the relative sophistication of the parties in legal and
financial matters, . . . and the use of fraudulent or deceptive
practices to procure the disadvantaged party’s assent to the
agreement.
In re Marriage of Shanks, 758 N.W.2d at 517–18 (citations omitted).
Application of these factors to the case at bar reveals the MURA is
not procedurally unconscionable. HES and Retterath were of generally
equal bargaining power. Both made offers and counteroffers regarding the
buyback of Retterath’s units. Both made adjustments to the terms of the
offers. Indeed, Retterath initiated the June negotiations by offering to sell
for $1100 per unit (or $28,446,000 total) but was able to obtain an
agreement to sell for $30,000,000 total. As illuminated by the
Restatement, it is “gross inequality of bargaining power, together with
terms unreasonably favorable to the stronger party,” that evidences
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unconscionability. Restatement (Second) of Contracts § 208 cmt. d, at
109 (emphasis added). This factor is not present here.
Additionally, both had ready access to and often consulted with their
attorneys. Moreover, Retterath had the opportunity to consult his attorney
about the MURA’s terms before signing and, by signing the MURA,
acknowledged that opportunity.
Retterath was a sophisticated party. He had decades of experience
in negotiating and executing multimillion dollar contracts on tight
deadlines. In December 2012, he had negotiated and executed a buyback
agreement that was substantially similar to the MURA. Notably, the
December 2012 buyback agreement included a provision regarding the
allocation of taxable income. Retterath’s experience in legal and financial
matters, regular contact with counsel, and execution of the December
2012 buyback agreement evidence his understanding and sophistication
and a lack of exploitation on HES’s part.
Moreover, the MURA was a relatively straight-forward agreement. It
was only four pages and substantially similar to at least one other recent
buyback agreement Retterath executed. It included a minimal amount of
fine print, and the information, terms, and conditions of the agreement
were presented in a readable format.
Next, we cannot say HES used fraudulent or deceptive practices to
procure Retterath’s assent. As discussed above, the direct negotiation and
communication between HES’s chairman and Retterath was not done in
bad faith or to otherwise prevent Retterath from consulting with his
attorney.
The imposition of a deadline on the acceptance of an offer is
completely ordinary in the world of contract offers and acceptance.
Nothing in the record indicates either that Retterath assumed chairman
59
Boyle’s signature on the MURA meant the board had already approved the
MURA or that Retterath would not have executed the MURA had he known
the board had not yet approved the MURA.
Likewise, nothing in the record indicates that HES included the
mutual release provision in the MURA specifically as an extortionate way
of ending its bribery investigation in exchange for Retterath’s assent to the
MURA. In support of his argument, Retterath cites to a set of emails from
chairman Boyle to another board member. But these emails are from the
middle of May 2013, before Retterath had reinitiated buyback negotiations
and almost a month before Boyle emailed Retterath the first June buyback
offer on June 11.
Further, the June 11 buyback offer from HES did not include a
mutual release provision. The mutual release provision was not added
until after Retterath rejected the June 11 offer on the grounds that he
could not give HES an “unsecured promissory note” (i.e., an installment
plan) if HES also wanted him to hold it harmless. In his rejection,
Retterath offered to hold HES harmless if HES paid him in one lump sum.
The record indicates the mutual release provision was not HES’s attempt
to extort Retterath’s assent to the MURA in exchange for dropping the
bribery investigation but rather was a result of Retterath’s own
counteroffer.
Finally, Retterath’s argument on the ground that HES ignored his
attorney’s questions regarding the MURA’s enforceability and assurance
that HES could perform lack merit. Any lack of response to these
questions does not make the MURA unconscionable because the questions
were not posed to HES until after HES and Retterath had entered into the
MURA. See, e.g., Bartlett Grain Co., 829 N.W.2d at 27 (noting an
agreement must be unconscionable at the time it was entered into). Nor
60
is the lack of response evidence that HES deceived Retterath into signing
the MURA because Retterath had the opportunity to consult with his
attorney before signing but failed to do so.
The district court properly rejected Retterath’s procedural
unconscionability defense.
2. Substantive unconscionability. Retterath argues the MURA is
substantively unconscionable because HES deceitfully intended to
improperly allocate him taxable income; section 5 of the MURA would allow
HES to waive its release of Retterath from liability while it was investigating
him for bribery; section 5 would allow HES to waive the condition of
financing, which would leave Retterath as an unsecured creditor of HES
with respect to the second $15 million payment; and section 5 would allow
HES to waive the condition of bank approval, which would expose
Retterath to potential disgorgement and other actions by HES members
because HES’s payment to Retterath would be in violation of its loan
covenants and operating agreement.
“A substantive unconscionability analysis focuses on the ‘harsh,
oppressive, and one-sided terms’ of a contract.” In re Marriage of Shanks,
758 N.W.2d at 515 (quoting Rite Color Chem. Co v. Velvet Textile Co., 411
S.E.2d 645, 648 (N.C. Ct. App. 1992)). We do not find that Retterath’s
contentions prove the MURA was substantively unconscionable.
As discussed above, the record does not support Retterath’s claim
that HES always intended to improperly allocate him taxable income and
entered into the MURA with that intention. Rather, the record shows that
HES did not make any decisions regarding tax allocations until several
months after the MURA was scheduled to close.
Also as discussed above, the mutual release provision in the MURA
was not related to HES’s bribery investigation. Moreover, section 5 of the
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MURA conditions HES’s performance on HES and Retterath entering into
a mutual release. Provisions that are mutual in scope augur against
substantive unconscionability. See id. at 516 (holding a premarital
agreement was not substantively unconscionable because, in part, the
agreement’s provisions were mutual in scope). And, to reiterate, Retterath
had the opportunity to consult counsel regarding the terms of the MURA,
and he had the bargaining power to modify the terms of the MURA such
that HES would not be able to waive the mutual release condition. That
was not a harsh, oppressive, or one-sided term.
Likewise, HES’s ability to waive the condition of financing under
section 5 is not harsh, oppressive, or one-sided because it would leave
Retterath as an unsecured creditor. Retterath had the opportunity and
ability to reject or modify that term of the agreement as demonstrated by
his previous rejection and counteroffer to the first June draft MURA. He
acquiesced to that term without exercising that opportunity or ability.
Such a term that is readily open to negotiation cannot be said to be harsh,
oppressive, or one-sided. For similar reasons, HES’s ability to waive the
condition of bank approval under section 5 does not render the MURA
substantively unconscionable.
Finally, Retterath was getting $30 million for his units. HES was
required to pay him $15 million immediately. He only paid $26 million for
his shares. Thus, he made a profit of $4 million on his investment.
The district court properly rejected Retterath’s substantive
unconscionability defense.
XI. Whether the District Court Erred in Awarding HES Attorney
Fees and Denying Retterath Attorney Fees.
Retterath contends the district court abused its discretion in
awarding HES attorney fees based on the MURA. He also contends the
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court abused its discretion in denying his motion for sanctions regarding
HES’s attorney fees motion. We address each argument in turn.
A. Attorney Fees Under the MURA. Ordinarily, an award of
attorney fees is not allowed unless authorized by statute or contract.
Colwell v. Iowa Dep’t of Human Servs., 923 N.W.2d 225, 237 (Iowa 2019).
Under Iowa Code section 625.22, “[w]hen judgment is recovered upon a
written contract containing an agreement to pay an attorney fee, the court
shall allow and tax as a part of the costs a reasonable attorney fee to be
determined by the court.” Iowa Code § 625.22. The agreement to pay
attorney fees and litigation expenses must be an express provision in the
contract. NevadaCare, 783 N.W.2d at 470.
Retterath and HES dispute whether section 4 of the MURA is “an
agreement to pay an attorney fee.” Iowa Code § 625.22. Section 4 is an
indemnification provision and provides,
Member agrees to indemnify, defend and hold harmless the
Company and its members, managers, officers, directors,
employees and representatives from and against any and all
claims, suits, losses, liabilities, costs, damages, expenses,
including reasonable attorneys’ fees and costs, arising,
directly or indirectly, out of or resulting from: (i) any breach
or material inaccuracy of any representation or warranty by
Member contained in this Agreement; or (ii) failure by Member
to perform his obligation under this Agreement.
HES claims section 4 allows it to recover attorney fees resulting from
Retterath’s breach of the MURA—i.e., his failure to perform his obligation
under the MURA. Retterath disagrees.
We have held that indemnification clauses that use the terms
“indemnify” and “hold harmless” evidence the parties’ intent to protect a
party from claims brought by third parties. Estate of Pearson ex rel. Latta
v. Interstate Power & Light Co., 700 N.W.2d 333, 344–45 (Iowa 2005).
Accordingly, an indemnity clause in a contract cannot be used to shift
63
attorney fees between the parties “unless the language of the clause shows
an intent to clearly and unambiguously shift the fees.” NevadaCare, 783
N.W.2d at 471.
In NevadaCare, we addressed a contract with an indemnity
provision similar to section 4 of the MURA. See id. at 470. In that case,
NevadaCare agreed to indemnify and hold harmless the other party to the
contract (the Iowa Department of Human Services) from any costs and
expenses, including attorney fees, related to, among other things, “[a]ny
breach of this Contract.” Id. (emphasis omitted). We found that language
did not clearly and unambiguously show the parties’ intent to shift the
attorney fees the department incurred in its breach of contract action
against NevadaCare. Id. at 471.
In reaching our holding, we looked at the contract as a whole,
especially the practical realities of the contract. See id. at 471–72. The
contract between NevadaCare and the department required NevadaCare to
contract with physicians to provide Medicaid services on behalf of the
department. Id. Thus, there was a clear possibility of a third-party—a
contracted physician—suing the department if NevadaCare breached its
contract with the department and thereby caused the department to
breach a duty to the physician. See id. at 471–72. We indicated that the
purpose of the indemnity provision—including its shifting of attorney
fees—was to protect the department in such a breach of contract situation.
See id.
We also identified an example of language in an indemnity provision
that clearly and unambiguously showed the parties’ intent to shift attorney
fees incurred in breach of contract actions. Id. at 472. Subsequent
contracts between NevadaCare and the department included substantially
similar indemnification provisions as the prior contract. Id. But the
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subsequent contracts also included an explicit fee-shifting provision,
which provided,
In the event the [department] should prevail in any legal action
arising out of the performance or non-performance of the
contract, [NevadaCare] shall pay, in addition to any damages,
all expenses of such action including reasonable attorney’s
fees and costs. The term “legal action” shall be deemed to
include any administrative proceedings, as well as all actions
at law or equity.
Id. at 472.
We find the indemnification provision in section 4 of the MURA does
not clearly and unambiguously express Retterath and HES’s intent to shift
the attorney fees HES incurred in this breach of contract action. HES
seeks to distinguish this case from NevadaCare on the ground that there
are not plausible scenarios where a third-party would bring an action
against HES if Retterath breached the MURA. But that contention is inapt.
For example, the MURA’s indemnity clause applies to claims
resulting from “any breach or material inaccuracy of any representation or
warranty by [Retterath] contained in this Agreement.” One such warranty
and representation Retterath makes in section 3(vi) of the MURA is that
“no authorization, consent or approval of any other party is necessary to
the validity of the transaction contemplated by the Agreement or to permit
the consummation of the transaction contemplated herein.” If Retterath
had used the units as collateral in a transaction with a third party, agreed
to not sell the units without the third party’s consent, allowed HES to
repurchase the units without the third party’s consent, and then defaulted
on the transaction with the third party such that the third party sought to
repossess the units, the third party could bring a claim against HES to
recover the units. In that scenario, Retterath’s breach of the MURA could
65
result in a third-party action against HES, which would be covered by the
MURA’s indemnification provision.
Moreover, similar to the contract in NevadaCare, the MURA
contemplates HES contracting with a third party for the financing
necessary to repurchase the units. If HES contracted for such financing
but then breached that contract as a result of Retterath’s failure to perform
his obligations under the MURA, the third-party financer could sue HES.
In that scenario, Retterath’s breach of the MURA could result in a third-
party action against HES, which would also be covered by the MURA’s
indemnification provision.
Finally, we note that the MURA does not contain any other provision
or language like the explicit fee-shifting provision found in the subsequent
contracts between NevadaCare and the department of human services.
See NevadaCare, 783 N.W.2d at 472. There is, of course, no mandate that
a fee-shifting provision in a contract must be substantially similar to the
one quoted in NevadaCare. But the lack of anything remotely similar in
the MURA—a contract that was drafted after our NevadaCare opinion—
and HES’s counsel’s involvement in the NevadaCare case undercuts HES’s
argument that section 4 of the MURA should be construed to include such
language.
Neither section 4 nor any other language in the MURA clearly and
unambiguously demonstrates Retterath and HES’s intent to shift attorney
fees in non-third-party cases resulting from Retterath’s breach of the
MURA. We reverse the district court’s award of attorney fees to HES.
B. Sanctions. Retterath also challenges the district court’s denial
of his motion for sanctions under Iowa Rule of Civil Procedure 1.413.
Under rule 1.413, motions must be signed or will be stricken from the
66
record. Iowa R. Civ. P. 1.413(1). Counsel’s signature on any motion
certifies, inter alia,
that to the best of counsel’s knowledge, information, and
belief, formed after reasonable inquiry, [the motion] is well
grounded in fact and is warranted by existing law or a good
faith argument for the extension, modification, or reversal of
existing law.
Id. If a motion is signed in violation of rule 1.413, the court shall impose
sanctions, “which may include an order to pay the other party or parties
the amount of the reasonable expenses incurred because of the filing of
the motion, . . . including a reasonable attorney fee.” Id.
Compliance with the rule is determined at the time the motion is
filed. Barnhill, 765 N.W.2d at 272. We consider counsel’s conduct under
an objective standard of reasonableness under the circumstances—“that
of a reasonably competent attorney admitted to practice before the district
court.” Id. (quoting Weigel v. Weigel, 467 N.W.2d 277, 281 (Iowa 1991)).
Ignorance of the law or legal procedure is not an excuse because rule 1.413
“was designed to prevent abuse caused not only by bad faith but by
negligence and, to some extent, professional incompetence.” Id. at 273
(quoting Perkins v. Gen. Motors Corp., 129 F.R.D. 655, 658 (W.D. Mo.
1990)).
We consider a variety of factors when evaluating the reasonableness
of the signer’s inquiry into the facts and law. Id. These factors include
(a) the amount of time available to the signer to investigate the
facts and research and analyze the relevant legal issues;
(b) the complexity of the factual and legal issues in question;
(c) the extent to which pre-signing investigation was feasible;
(d) the extent to which pertinent facts were in the possession
of the opponent or third parties or otherwise not readily
available to the signer; (e) the clarity or ambiguity of existing
law; (f) the plausibility of the legal positions asserted; (g) the
knowledge of the signer; (h) whether the signer is an attorney
or pro se litigant; (i) the extent to which counsel relied upon
his or her client for the facts underlying the pleading, motion,
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or other paper; (j) the extent to which counsel had to rely upon
his or her client for facts underlying the pleading, motion, or
other paper; and (k) the resources available to devote to the
inquiries.
Id.
Application of these factors, here, reveals the district court should
not have granted Retterath’s motion for rule 1.413 sanctions. The
arguments made by HES convinced the district court to award attorney
fees. Although we discounted HES’s arguments on appeal, they were made
in good faith. Even though NevadaCare was decided prior to the ruling in
this case, HES’s argument that the indemnity provision under these facts
was an attorney fee provision had some basis in fact. Accordingly,
Retterath is not entitled to sanctions.
XII. Disposition.
We affirm the district court’s striking of Retterath’s jury demand,
bifurcation of the issues for trial, determination that membership approval
of the MURA is not required under either HES’s operating agreement or
under Iowa law, denial of Retterath’s motion for evidentiary sanctions or a
continuance, determination that the MURA is a valid and binding
agreement, determination that HES is entitled to specific performance as
the remedy for Retterath’s breach of the MURA, and rejection of Retterath’s
affirmative defenses. We reverse the district court’s award of attorney fees
to HES pursuant to section 4 of the MURA. We also find the district court’s
denial of Retterath’s motion for sanctions under rule 1.413 was proper and
determine that monetary sanctions are inappropriate.
We instruct the appellate clerk of court’s office to tax fees and costs
as follows: 80% to Steve Retterath, 10% to the intervenors (Jason and
Annie Retterath), and 10% percent to HES.
DISTRICT COURT JUDGMENT AFFIRMED IN PART AND
REVERSED IN PART.