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Torstenson v. Birchwood Estate, L.L.C.

Court of Appeals of Iowa

March 22, 2017

TED A. TORSTENSON, Individually, and TOBY T. TORSTENSON, Individually, Plaintiffs/Counterclaim Defendants-Appellants,
BIRCHWOOD ESTATE, L.L.C., Defendant/Counterclaim Plaintiff-Appellee.

         Appeal from the Iowa District Court for Polk County, David M. Porter, Judge.

         Ted and Toby Torstenson appeal from the district court's ruling on their claim for reimbursement against Birchwood Estate, L.L.C.


          David Swinton, Steven P. Wandro, and Brian J. Lalor of Wandro & Associates, P.C., Des Moines, for appellants.

          Allison M. Steuterman and Douglas A. Fulton of Brick Gentry, P.C., Des Moines, for appellee.

          Heard by Danilson, C.J., and Vogel and Vaitheswaran, JJ.

          DANILSON, Chief Judge.

         Ted and Toby Torstenson appeal from the district court's ruling on their claim for reimbursement against Birchwood Estate, L.L.C. (Birchwood) for payments made by the Torstensons on behalf of Birchwood under personal guaranties. We conclude the Torstensons were entitled to reimbursement from Birchwood for the amounts paid under the Torstensons' personal guaranties. We further conclude the district court erred in considering the law of contribution among co-guarantors, finding Tierra Linda, L.L.C. (TL) breached a fiduciary duty to Birchwood, piercing the corporate veil of TL and holding the Torstensons personally liable, and awarding the money in dispute to the members of Central Iowa Developers, L.L.C. (CID), who were not parties to the suit. We therefore reverse the ruling of the district court and remand for entry of judgment in favor of the Torstensons.[1]

         I. Background Facts & Proceedings.

         Birchwood is a limited liability company established in 2004 for the purpose of purchasing and developing the Birchwood Estate Property in Winterset. Birchwood consists of two members: CID and TL.[2] CID is a limited liability company with three members: Michael Knapp, James Koolhof, and William Kline. TL is also a limited liability company and has two members: Ted and Toby Torstenson.

         In March 2004, Birchwood executed a promissory note in the amount of $1, 700, 000 secured by a mortgage on the Birchwood Estate Property and by unconditional guaranties signed by CID and TL. CID and TL each made a capital contribution of $25, 000 to Birchwood. Ted Torstenson testified it was his belief at the outset of the business endeavor that after the original capital contributions Birchwood would be able to cover its own debt service and expenses from money earned selling lots on the property. Koolhof testified there was no expectation CID or TL would have assets beyond the $25, 000 capital contributions and it was also the intent for CID to be able to "cash flow to the greatest degree possible from loans from the bank and sales from the property."

         From 2004 to 2006, the proceeds from lot sales covered Birchwood's payments on the promissory note and expenses as expected. However, in 2006, the real estate market collapsed and lot sales slowed. Because Birchwood had no assets other than the property, it could not pay the amounts due on the promissory note. CID and TL began making payments to Birchwood on an alternating basis to make the requisite payments on the note. This arrangement continued until mid-2010 when TL stopped making payments to Birchwood. CID continued making payments to Birchwood and, in April 2011, paid an impairment payment to the bank in the amount of $387, 107.09 to extend the note. However, according to Birchwood's exhibit, "Birchwood Estates Capital Contributions, " CID also eventually stopped capitalizing Birchwood in November 2014. In 2012, in order to prevent the note from going into default, Knapp and his wife purchased the note for the outstanding principal balance of $426, 615.53 plus interest.

         In order to effectuate an extension of the note in 2007, the members of CID and TL-Knapp, Koolhof, Kline, and each of the Torstensons-had made personal guaranties securing the note. After Birchwood became unable to continue making payments on the note, Knapp and his wife brought suit in August 2013 against TL and each of the Torstensons individually to enforce the guaranties. In a September 30, 2014 settlement agreement reached by the parties to the action, TL and the Torstensons agreed to pay $245, 287.05 to Knapp and his wife pursuant to their obligation as guarantors and $189, 440.95 to CID for a portion of the impairment payment.[3]

         Subsequently, on December 3, 2014, the Torstensons filed this action against Birchwood for reimbursement of money paid to Knapp and his wife on the guaranties. On March 29, 2015, Birchwood filed an answer and counterclaim against the Torstensons alleging the Torstensons caused Birchwood to default on the loan by failing to capitalize TL in order to continue making payments to Birchwood. Birchwood noted CID had made payments to Birchwood amounting to $733, 090.74, while TL had only contributed $520, 381.86, leaving a deficit of $212.708.88. Birchwood asserted the proceeds of the final sales of Birchwood Estate Property lots should be paid out to the members in a manner equalizing the capital accounts, providing reimbursement to the Torstensons under the guaranties would result in unjust enrichment, and the Torstensons breached their fiduciary duty to Birchwood by attempting to obtain funds from Birchwood without satisfying the obligations of TL to Birchwood and CID.

         The district court acknowledged under Iowa law a guarantor is entitled to reimbursement when the guarantor pays the debt of the principal obligor. See Hills Bank & Tr. Co. v. Converse, 772 N.W.2d 764, 772 (Iowa 2009). However, the court stated, "the Torstensons' claim has run aground on contrary authority dealing with [the] law on co-guarantors." The court determined "[t]he member paying a lesser contribution is liable for equalization of the burden or payments." Citing Farmers & Merchants Bank v. Gibson, 7 B.R. 437, 411 (Bankr. N.D. Fla. 1980) and In re Vermont Toy Works, Inc., 82 B.R. 258, 316-17 (Bankr. D. Vt. 1987), the court determined the "[p]ayments made by the Torstensons, Knapp, Koolhof, and Kline, under the guaranties, were more capital contribution/payments of expenses than guarantor payments." The court held:

As a capital contribution/expense, there would be no right to exoneration or right to contribution by the guarantor from the principal . . . [therefore] the Torstensons would not stand as general creditors seeking payment of a debt, but rather as a member seeking their fair share of distribution of the company's assets based on their proportionate contributions to Birchwood.

Citing Iowa Code section 489.403 (2014), the court further held TL was responsible for reimbursement or equalization of capital contributions or expenses paid by CID and CID's members and the Torstensons were liable by way of piercing the corporate veil. The court reasoned:

By failing to adequately capitalize TL and subsequently assist in the adequate capitalization of Birchwood, the Torstensons breached their duty of care and failed to exercise care that a person in a like position (i.e., Knapp, Koolhof, and Kline as members of

CID) would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company. TL was obligated to continue to make equal capital contribution/call payments and is liable for the payments made on behalf of CID. The Torstensons simply cannot argue that their current demand for reimbursement is in Birchwood's best interests, considering it was their inability [to] adequately capitalize TL, which caused TL to be unable to continue contributing to the capital calls/contributions for Birchwood, which caused Birchwood to ultimately default on the Note.

Simply put, Birchwood is equitably obligated to pay CID, which made payments on the Note on its behalf. CID has made significant capital contributions over and above those of TL ($733, 090.74 vs. $520, 381.86) and attempts by the Torstensons, the sole members of TL, to obtain an equal share of any proceeds of [Birchwood] would unjustly enrich them.
The court therefore ordered:
The $114, 000[4] held in trust pending this action shall be paid out to the debts of Birchwood Estate, L.L.C. as follows:
1. First toward attorneys' fees incurred in defending Birchwood in this action;
2. Second to members [of] CID for amounts expended in excess of the amounts expended by TL for expenses/capital contributions so as to even out contributions and expenses paid ($212, 708.88); and
3.Finally, any remainder to all members, equally.

         The Torstensons now appeal.

         II. Standard of Review.

         Both parties agree this case was filed and tried at law. We review an action at law for correction of errors at law. Van Sloun v. Agans Bros., Inc., 778 N.W.2d 174, 179 (Iowa 2010). "Under this standard of review, the trial court's findings carry the force of a special verdict and are binding if supported by substantial evidence." Id. However, "the district court's legal conclusions and application of legal principles are not binding on the appellate court." Land O' Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 2000). "If 'the trial court has applied erroneous rules of ...

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