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Handlos v. Intercreditor Committee

Court of Appeal of Iowa

August 21, 2013

LAWRENCE HANDLOS and DORIS HANDLOS, Plaintiffs-Appellants,
v.
INTERCREDITOR COMMITTEE, Defendant-Appellee.

Appeal from the Iowa District Court for Polk County, Douglas F. Staskal, Judge.

Partners and creditors of a limited liability partnership appeal a district court's order dismissing their petition seeking declaratory judgment and equitable relief.

Jason Casini of Whitfield & Eddy, P.L.C., Des Moines, for appellants.

Rebecca Ann Brommel, Des Moines, for appellee.

Considered by Eisenhauer, C.J., and Potterfield and Tabor, JJ.

TABOR, J.

Lawrence and Doris Handlos, partners and creditors of Natural Pork Production II, L.L.P. (NPP), appeal a district court's order dismissing their petition seeking a declaratory judgment and equitable relief against the Intercreditor Committee (ICC).[1] A few hours before the Handloses filed suit, the NPP filed a separate action against the ICC, requesting declaratory judgment on the same issues listed in the first division of the Handloses' petition. The ICC moved to dismiss the Handloses' petition for failure to state a claim under Iowa Rule of Civil Procedure 1.421(1)(f), or in the alternative to consolidate the actions.

The district court dismissed the Handloses' petition, finding the couple could seek declaratory relief by joining the earlier-filed suit. The court also dismissed their claims for unjust enrichment and restitution.

Our rules of civil procedure imbue district courts with discretion to refuse to render a declaratory judgment under certain conditions. Because the Handloses may pursue their claims for declaratory judgment and general equitable relief by seeking to intervene in the already-filed case, the district court acted within its discretion by dismissing the first and third counts in their petition. As to the petition's second count, we agree the Handloses did not state a claim upon which any relief can be granted. Because neither the multi-million-dollar payout nor the terms of the SIA contract can be considered benefits conferred on the ICC, the ICC was not unjustly enriched by the disbursement.

I. Background Facts and Proceedings

NPP is a limited liability partnership engaged in the business of farrowing and raising hogs. Created in 2002, NPP operates under its limited liability partnership agreement, which incorporates by reference a buy-sell agreement that provides the manner in which partnership units may be transferred.

When Lawrence and Doris Handlos purchased their seventy-five percent partnership interest in NPP, they also acquired subordinate debt from the partnership, a common requirement in NPP's various equity offerings. At the time this suit was filed, the couple held approximately $3.8 million in subordinate debt.

Five years after the company's inception, NPP began experiencing severe financial difficulties, caused in part by escalating input costs for raising hogs. On March 28, 2008, partners Craton Capital, L.P. and Kruse Investment Co. delivered notices of dissociation to NPP. One week later, NPP's managing partners declared an "impairment circumstance." Defined in Article VII[2] of the buy-sell agreement, an impairment circumstance prohibits or restricts NPP's obligation to purchase partnership units and make payment for units when managing partners determine "that any such purchase or payment would materially impair or otherwise adversely affect the working capital, cash flow or other financial means, condition or operation of the Partnership." The partners then adopted a resolution to approve "one or more restructuring transactions" for the company.

In an April 14, 2008 letter from NPP to its partners, former managing partner Gary Weihls explained partnership payouts would occur in the following order: "Secured creditors, as their collateral is sold; 'senior liabilities, ' including trade payables; subordinate debt; payments to dissociated partners for their partnership units, pursuant to the Buy Sell Agreement; and partnership units."

On May 28, 2008, the partnership agreement was amended to permit dissociated partners to continue to vote on partnership matters and serve as managing partners. After this amendment, the majority of the remaining partners sent dissociation notices to NPP, including managing partners Ron Beach, Steve Schmitz, and Wendell Burge. On May 19, 2009, the three circulated a "priority schedule" for the company's debt payout, ordered as "Senior secured liabilities; trade payables; 'senior unsecured'; subordinate debt, including subordinate debt held by partners; and 'dissociated obligation, ' for payments to dissociated partners for their partnership units, pursuant to the Buy Sell Agreement."

Craton Capital and Kruse Investment filed suit against NPP in September 2009, seeking a declaratory judgment (1) on whether NPP must purchase partnership units of those dissociated partners who sent notices of dissociation before the partners declared the impairment circumstance; and (2) to determine the priority of debts. The district court ruled against the partners, holding NPP was not obligated to purchase their units. On interlocutory appeal, our court reversed the district court's ruling and remanded the case for entry of partial summary judgment in favor of Craton Capital and Kruse Investment.[3] We did not address debt priorities. The district court entered an order that although NPP was obligated to purchase the partnership units, payment obligations would remain suspended until NPP lifted the impairment circumstance.

On November 30, 2011, managing partner Beach signed a "Settlement and Intercreditor Agreement" (SIA) with Craton Capital and Kruse Investment. The SIA delegates to non-partners control over NPP management decisions. The agreement was executed without notifying partners or providing them an opportunity to vote. The following day, all other dissociated partners received a letter proposing to extend the SIA terms to all other dissociated partners, even if they had already provided NPP with their notices to dissociate. Most partners took up this invitation to become "SIA parties." Once again, no notice was provided to other NPP partners, nor was there a partner vote. The SIA parties established the Intercreditor Committee or ICC to represent their legal interests.

On January 27, 2012, NPP distributed about $10.5 million in payments to dissociated partners, including Beach, Schmitz, and Burge, who continued to act as managing partners.[4] The NPP partners held a special meeting on April 3, 2012, in which they voided the May 2008 provisions that allowed dissociated partners to vote on partnership matters and serve as managing partners. The partners then elected Lawrence Handlos as managing partner.

On April 20, 2012, NPP and the Handloses filed separate actions for declaratory judgment. At 11:12 am, NPP filed a petition for declaratory judgment against ICC (NPP petition) to determine the rights and obligations of NPP, partners, and ...


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