Opinion
No. 5-310 / 04-0272
Filed May 25, 2005
Appeal from the Iowa District Court for Linn County, L. Vern Robinson, Judge.
Plaintiffs appeal and defendants cross-appeal from the district court's grant of motions for directed verdict. AFFIRMED ON APPEAL AND ON CROSS APPEAL.
Peter Riley of Tom Riley Law Firm, P.L.C., Cedar Rapids, for appellants.
Ronald Wendt of Nazette, Marner, Wendt, Knoll Usher, L.L.C., Cedar Rapids, for appellees.
Heard by Sackett, C.J., and Huitink and Vaitheswaran, JJ.
Plaintiffs Myron and Ellen Kloubec (Kloubec) appeal from the district court's grant of a directed verdict in favor of defendants Dennis Drahos (Drahos), Genesis, Inc. (Genesis) and Bowker Mechanical Contractors, Inc. (Bowker) in their suit claiming breach of fiduciary duty, interference with contractual relationships, indemnification or contribution, and negligence. Defendants Drahos and Genesis cross-appeal from the court's grant of a directed verdict in favor of plaintiffs on all but two of their counterclaims against plaintiffs. We affirm on appeal and on cross appeal.
Background facts.
The Kloubecs have been involved in aquaculture for a number of years, primarily raising a variety of species of fish to stock farm ponds. In the mid-1980s, Kloubec began exploring raising Tilapia, a warm-water food fish, on a commercial basis. He worked with Kirkwood Community College on ways to raise Tilapia indoors, trying to devise ways to heat the water and filter the waste. Kirkwood suggested locating near a power plant and using its hot waste water. Kloubec approached one of his pond fish customers, the head of Iowa Electric (IE). IE agreed to participate in the business, but asked Kloubec to find another partner to help in financing and constructing the business. Kloubec contacted another pond fish customer, Dennis Drahos, president of Bowker Mechanical Contractors.
Kloubec and Drahos formed Kloubec Aqua, Inc. in 1994 to build a test facility. When it proved successful, plans were made to construct a larger facility next to the power station. Kloubec Aqua formed Aqua Ventures, LLC with IE owning thirty-five percent and Kloubec Aqua owning the remaining sixty-five percent. IE provided the land, Bowker did its portion of the construction at cost, and Kloubec was to provide fish. The facility was a concrete and metal building nearly the size of a football field. Although the cost of the building was projected to be 1.6 million dollars, the total cost including equipment and design changes requested by Kloubec was 3.2 million dollars. This was financed by bank loans to Aqua Ventures guaranteed by IE, Kloubec, and Drahos. As it operated, the Cedar Rapids facility experienced some problems with the pumps installed by Bowker. An investigation revealed evidence at least one of the pumps was not installed exactly according to specifications. It was found to be one-sixteenth inch out of level.
Because Kloubec did not have facilities at his farm both to raise Tilapia for the Cedar Rapids facility and to raise pond fish, Kloubec and Drahos formed Aquaculture Enterprises, LTD to lease and operate a fish farm in Missouri. Although the Missouri farm supplied some Tilapia for the Cedar Rapids facility, its primary function was to raise pond fish. Kloubec was in charge of the Missouri farm and had one of his friends manage it.
From their inception through 1997 all three companies, Kloubec Aqua, Aqua Ventures, and Aquaculture Enterprises, lost money. In 1997, IE wanted to merge with Alliant Energy. Therefore, it wanted to discontinue its involvement with Aqua Ventures. IE agreed to pay down the Aqua Ventures debt to 1.6 million dollars, which Kloubec and Drahos refinanced, relieving IE of further financial responsibility. Additional operating capital required by the banks came from a $100,000 loan from Drahos to Kloubec Aqua, a $50,000 loan to the Kloubecs personally, and $50,000 from Drahos personally.
Because of his financial involvement, Drahos wanted a controlling interest in Kloubec Aqua. Kloubec insisted on evenly-split ownership. Drahos consented, but as a condition he told Kloubec he expected all fish operations of the three companies and the Kloubecs' farm would be run through the companies. That is, all the income from fish sales would be company income and the companies would pay the expenses, including salaries for the Kloubecs, employee wages, feed costs, and mortgage payments on their farm. Although Kloubec understood that Drahos thought they agreed the fish were company fish, Kloubec did not agree. He considered the payments on his farm mortgage, the wages paid employees, the feed and supply costs, and the salary he and his wife received to be payments for the fish supplied to Aqua Ventures. Kloubec continued to sell fish to others and to keep the proceeds separate from any of the companies. There is evidence Kloubec also instructed staff at Aquaculture Enterprises not to create a "paper trail" of fish sent to Kloubec's farm or sold. Kloubec created "credit memos" for fish from the Missouri operation sent to the Kloubec farm to offset the amount the Kloubecs thought they were owed for fish they sent from their farm to the Missouri farm. Taking into account the credit memos, nearly $200,000 worth of fish sent to the Kloubecs farm was unaccounted for.
By 1998, Drahos had contributed over $967,000 to the companies and had personally guaranteed loans of about $3,000,000. Drahos met with the Kloubecs' lawyer and attempted to resolve the issues between the parties. When this failed, Drahos stopped funding the companies. The companies went into default on their loans and the banks foreclosed. The banks sold the assets of the companies to Genesis, Inc., a company Drahos started.
The Kloubecs went into default on their personal loans and the bank foreclosed. The Kloubecs eventually filed for bankruptcy under chapter 12. When the banks moved to dismiss the bankruptcy, the trustee moved to convert it to chapter 7. The court found the Kloubecs made misrepresentations to the court and creditors with the intent of improving their financial situation at the expense of creditors. The court found "each act . . . individually and collectively constitutes fraud." Eventually, the bankruptcy court denied discharge.
District court proceedings.
The Kloubecs sued Drahos and Bowker. They alleged (1) breach of fiduciary duty by Drahos to the Kloubecs and interference with the contractual relationship of Kloubec to the companies by Drahos and Bowker, and (2) entitlement to indemnification or contribution from Drahos and Genesis for goods and services ordered by the companies but charged to Kloubec and because the actions of Drahos caused default with the bank and subsequent foreclosure. Drahos, Bowker, and Genesis counterclaimed against Kloubec. Drahos (1) claimed Kloubec misappropriated company funds and assets and breached the fiduciary duty to Drahos, and (2) failed to repay the $50,000 loan Drahos made to Kloubec. Bowker claimed it was not paid for its work on the tilapia facility. Genesis claimed Kloubec (1) illegally stocked the Missouri farm with black carp, which Genesis bore the cost of removing, and (2) removed or sold fish from the Missouri farm for personal profit, breaching the fiduciary duty and the contract between the parties.
After the close of evidence, the court entertained motions for directed verdicts from the parties. The court found the parties' business relationships in the various companies did not give rise to a fiduciary duty. It also found there was no meeting of the minds to form a contract concerning the Kloubec fish as company assets. Consequently, the court granted directed verdicts on all claims except the $50,000 loan from Drahos to Kloubec and Bowker's claim for payment for work performed on the tilapia facility. The jury found for Bowker on its claim for payment. Plaintiffs appeal and defendants cross-appeal the court's grant of directed verdicts.
Scope and standards of review.
We review the trial court's decision to direct a verdict for the correction of errors of law. Determan v. Johnson, 613 N.W.2d 259, 261 (Iowa 2000). We view the evidence in the light most favorable to the non-moving party. See Beitz v. Horak, 271 N.W.2d 755, 757 (Iowa 1978); Iowa R. App. P. 6.14(6)( b). The moving party is considered to have admitted the truth of all evidence offered by the non-moving party and every favorable inference that may be deduced from it. B B Asphalt Co. v. T.S. McShane Co., 242 N.W.2d 279, 284 (Iowa 1976). To overrule the motion and reverse the trial court, this court must find substantial evidence in support of each element of the non-moving party's claim. Beitz, 271 N.W.2d at 757. If reasonable minds could differ, an issue is for the fact finder. Harvey v. Palmer College of Chiropractic, 363 N.W.2d 443, 444 (Iowa Ct.App. 1984). Our role, then, is to determine "whether the trial court correctly determined that there was insufficient evidence to submit the issue . . . to the jury." Hasselman v. Hasselman, 596 N.W.2d 541, 545 (Iowa 1999).
Discussion.
Kloubec claims. A. Breach of fiduciary duty.
Kloubec alleged the actions of Drahos "constitute a breach of fiduciary duty owed by Drahos to Kloubec." A fiduciary relationship exists between two persons "when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation." Kurth v. Van Horn, 380 N.W.2d 693, 695 (Iowa 1986) (quoting Restatement (Second) of Torts § 874 cmt a, at 300 (1979)). Indicia of a fiduciary relationship include: (1) one person acting for another, (2) one person having and exercising influence over another, (3) one person placing confidence in another, (4) one person having dominance over another, (5) the inequality of the parties, (6) and the dependence of one person upon another. Id. at 696.
The district court found neither party had a fiduciary duty to the other. It noted:
Obviously, you all can argue that this 50/50 relationship in corporations there may be some partnership-like relationship. I think after reviewing the factors of what constitutes a fiduciary, it's not here. These two men got into a business relationship, boy, without a lot of certainty as to what they were doing. But there — there's no fiduciary relationship. Both men were strong personalities. Man, they knew what they were doing. I think there has to be some threshold showing that there is a fiduciary relationship. It's not been shown in this case. The court has to find that there's some, some basis to submit that to the jury.
Kloubec distinguishes the facts of the case before us from the cases the district court cited for the indicia of a fiduciary relationship. While we agree the relationship between the parties as co-owners of the various companies differs from the facts in the cases the district court cited, the statement of the law in those cases relating to fiduciary relationships is correct and applies to the circumstances before us. "Because the circumstances giving rise to a fiduciary duty are so diverse, any such relationship must be evaluated on the facts and circumstances of each individual case." Kurth, 380 N.W.2d at 696.
Vos v. Farm Bureau Life Ins. Co., 667 N.W.2d 36 (Iowa 2003); Weltzin v. Cobank, 633 N.W.2d 290 (Iowa 2001); Wilson v. IBP, 558 N.W.2d 132 (Iowa 1996).
Kloubec argues the parties owe fiduciary duties to each other based on their status as officers and directors of the three companies. See Cookies Food Prods., Inc., by Rowedder v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 451 (Iowa 1988). Drahos contends the formal status of the parties as co-owners, officers, and directors of the three companies is insufficient for the district court to declare the existence of a fiduciary relationship without examining the nature of the claim, the actual relationship of the parties, and the facts and circumstances of this case. See Weltzin v. Cobank, 633 N.W.2d 290, 293 (Iowa 2001). Drahos argues his main involvement in the companies was as an investor. He did not act for Kloubec or exercise influence over him. Rather, Drahos claims, Kloubec was in the dominant position and Drahos placed his confidence in Kloubec, believing Kloubec could make the ventures a success. Drahos also asserts he was under no duty to continue funding a failing business. See Irons v. Community State Bank, 461 N.W.2d 849, 852-53 (Iowa Ct.App. 1990) (noting no duty for a bank to continue lending money to a business).
Iowa law provides that corporate directors have a fiduciary duty to the corporation, consisting of a duty of care and a duty of loyalty. See Cookies, 430 N.W.2d at 451. Iowa Code section 490.830 (2003) provides that directors shall act "in good faith" and "in a manner the director reasonably believes to be in the best interests of the corporation." Iowa Code § 490.830(1)(a), (b). However, even though Kloubec now claims Drahos had a fiduciary duty as a corporate director, Kloubec alleged "the acts of Drahos constitute a breach of fiduciary duty owed by Drahos to Kloubec." This claim takes the fiduciary duty out of the corporate context and places it in the context of fiduciary duty between individuals. Hence, the analysis in the cases cited by the district court applies. Our supreme court stated:
Indicia of a fiduciary relationship include the acting of one person for another; the having and the exercising of influence over one person by another; the reposing of confidence by one person in another; the inequality of the parties; and the dependence of one person upon another.
Vos v. Farm Bur. Life Ins. Co., 667 N.W.2d 36, 52 (Iowa 2003) (quoting Kurth v. Van Horn, 380 N.W.2d 693, 695 (Iowa 1986)). Under the facts of the relationship between the parties before us, we conclude the district court did not err in refusing to submit this claim to the jury. We affirm the district court on this issue.
B. Interference with contractual relationships.
Kloubec alleged in his petition that Drahos interfered with Kloubec's relationship with the three companies. Now on appeal, he contends the relationship Drahos interfered with was with the bank that had provided funding for Kloubecs' farm and personal fish farming operation. This is not the same claim raised in the pleadings or at trial. It is not preserved for review. See Meier v. Senecaut, 641 N.W.2d 532, 540 (Iowa 2002) (discussing error preservation principles). We do not address it.
C. Negligence in pump installation.
Kloubec alleged Bowker was negligent in installing pumps in the tilapia facility, causing pump failure and fish death. Bowker and Drahos respond that the evidence reveals one pump was one-sixteenth of an inch out of level and was fixed. They contend the other pump failures were the result of lack of maintenance. Kloubec offered the testimony of Doug Hutcheson, the owner of a company that distributes industrial pumps. Kloubec asserts Hutcheson is an expert and, thus, Kloubec provided expert testimony on the standard of care. Hutcheson was not identified as an expert in pleadings or at trial. Drahos and Bowker assert Kloubec was responsible for maintenance on the pumps and that when the pumps began to spray water out of the top because fasteners had not been tightened when they vibrated loose, employees at the tilapia facility put up plastic to keep from getting wet instead of maintaining the pumps by tightening the fasteners. The district court found "to the extent that there is some question of professional liability of a plumbing outfit, that would require expert opinions relating to violation of standards of care. There have been none." The court also concluded this was a contract case, not a negligence or tort case. See Determan v. Johnson, 613 N.W.2d 259, 262 (Iowa 2000). We agree with the district court there was no expert evidence relating to violation of standards of care. We affirm the court's grant of a directed verdict.
Drahos also questions whether Kloubec individually could sue for damages to company property, not Kloubec's property. Kloubec argues he could sue as a shareholder who suffered a loss separate and distinct from the other shareholder. See Ezzone v. Riccardi, 525 N.W.2d 388, 394-95 (Iowa 1994). Even if Kloubec is correct in his argument, our resolution of the claim above renders this issue moot.
D. Indemnification and contribution.
The Kloubecs allege they are entitled to relief because of "the goods and services charged in the name of Kloubec Fish Farms for the benefit of the" companies. Contrary to his assertion in his brief that "Drahos or persons acting under his behalf" ordered the goods and services, Kloubec testified at trial that he or his employees ordered the goods and services. Sometimes they used Kloubec Fish Farms as the purchaser. Sometimes vendors mistakenly listed Kloubec Fish Farms as the purchaser. After repossession of the companies' assets by the bank, Genesis bought the assets of the companies, including the goods at issue here. Kloubec contends it is not equitable for him to be responsible for the bills yet for Genesis to have the assets. Drahos and Genesis respond that a fundamental requirement of a claim for contribution or indemnity is that both parties must be obligated to the third party. See State ex rel. Palmer v. Unisys Corp., 637 N.W.2d 142, 150 (Iowa 2001). The district court concluded Kloubec's claim for indemnification or contribution failed as a matter of law because there was no joint liability. See id. at 154. We agree and affirm the district court.
Drahos and Genesis claims.
A. Oral contract.
Drahos contends Kloubec allowed Aqua Ventures to pay for goods, services, salaries, and the mortgage on the Kloubec farm, knowing that Drahos believed the parties had agreed that the income from the Kloubec farm operation would go to Aqua Ventures. Kloubec continued to view the Kloubec farm operation as separate and kept the income from the fish farm. Drahos counterclaimed, alleging misappropriation of company funds, conversion of company assets, interference with the operations of the companies, and violation of fiduciary and contractual duties. Some of the misappropriation and conversion claim stems from the removal or sale of fish from the Missouri fish farm. The district court found "there was no contract as a matter of law." The court found:
The parties did nothing but have certain beliefs as to what was going on. They maintained ongoing negotiations. The evidence is clear there never was a resolution as to what they agreed to specifically as to corporate versus Kloubec fish. There was nothing consummated. No writing. And there was no verbal agreement or acceptance of an agreement. There was, as a matter of law, no meeting of the minds.
Drahos argues the district court should have submitted the issue of an implied contract to the jury. See Roger's Backhoe Serv., Inc. v. Nichols, 681 N.W.2d 647, 651-52 (Iowa 2004) (discussing silence or inaction as acceptance of an offer once performance has begun). However, to prove an oral contract, a party must prove there is sufficient specificity as to the duties of the parties, the conditions for performance, and a reasonably certain remedy. See Gallagher, Langlas Gallagher v. Burco, 587 N.W.2d 615, 617 (Iowa Ct.App. 1998). We, like the district court, find no contract — oral, implied, or written — and affirm the district court.
Genesis raises the same claims of misappropriation, conversion, and interference with operations as does Drahos, but based on its acquisition of the assets of the companies, including the companies' claims against the Kloubecs. The discussion above applies equally to Genesis. Having affirmed the district court's grant of a directed verdict on the claims raised by Drahos, we conclude the directed verdict also properly applies to any company claims purchased by Genesis.
Aquaculture Enterprises.
Genesis contends two claims of Aquaculture Enterprises do not depend on the existence of any agreement between Kloubec and Drahos. First, Black carp from Arkansas were stocked in the Missouri fish farm. A federal permit was required. Neither Kloubec nor the manager of the Missouri farm obtained a permit. Kloubec informed authorities Genesis had illegal fish in its Missouri farm. Genesis was required to remove the fish, which cost Genesis a significant amount of money. Kloubec argues the manager, Bob Goetz, was responsible to obtain the permit. Therefore Goetz, not Kloubec, was responsible for the problem. We conclude the district court correctly granted a directed verdict.
The second claim Genesis raises is misappropriation from the sale or removal of fish from the Missouri farm by Kloubec with directions to the staff there not to create a paper trail. Farmers Savings Bank had an accountant prepare a list of transactions from the Missouri farm to determine whether the operation was generating enough business to warrant additional loans from the bank. The accountant found approximately $230,000 more in transactions than appeared in the company records. Genesis offered this document as an exhibit at trial in the instant case to support its claim the Kloubecs, rather than Aquaculture Enterprises received the benefit of these transactions. When questioned at trial, the accountant said the exhibit was not prepared for that purpose. When asked if the exhibit was a basis for claiming the Kloubecs took $230,000 of fish, he responded "no." The district court found evidence of damages was too speculative to send to the jury. We agree. Therefore, the district court was correct in directing a verdict on this claim.
Conclusion.
The district court correctly applied the law to the facts before it in refusing to submit most of the parties' claims to the jury, but rather granting the parties' motions for directed verdict.