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Van Horn v. R.H. Van Horn Farms, Inc.

Court of Appeals of Iowa

June 20, 2018

WILLIAM VAN HORN and JUNE LINDNER, Plaintiffs-Appellants,

          Appeal from the Iowa District Court for Carroll County, Michael D. Huppert, Judge.

         Two sibling shareholders in a closely held farm corporation appeal the business specialty court's rejection of their claim of minority-shareholder oppression.

          Thomas D. Hanson and Theodore W. Craig of Dickinson, Mackaman, Tyler & Hagen, P.C., Des Moines, for appellants.

          David L. Charles of Crowley Fleck P.L.L.P., Des Moines, and Matthew C. McDermott of Belin McCormick, P.C., Des Moines, for appellees.

          Heard by Vogel, P.J., Tabor, J., and Carr, S.J. [*]

          TABOR, JUDGE.

         Siblings William Van Horn and June Linder appeal the district court's ruling in their legal actions against their brother, John Van Horn; their father, Robert Van Horn; and R.H. Van Horn Farms, Inc., (Van Horn Farms) a closely held corporation in which each family member holds shares. In particular, the siblings challenge (1) the court's determination the farm corporation shares are not all voting shares, (2) its application of the five-year statute of limitations, and (3) its conclusion that they did not suffer minority-shareholder oppression. Because corporate formalities dictated maintaining the distinction between voting and non-voting stock, we agree with the denial of declaratory relief on that claim. On the statute-of-limitation issue, we agree with the district court's rejection of the continuing-wrong exception. And on the primary issue of minority-shareholder oppression, we find the siblings' reasonable expectations have not been frustrated by the actions of the controlling shareholders. Accordingly, we affirm.

         I. Facts and Prior Proceedings

         Robert (R.H.) and Phyllis Van Horn raised their four children, William, June, John, and Jane[1] near Glidden, Iowa. In the 1950s, the family moved to the country and began to buy nearby parcels of land. In 1977, the Van Horns formed a family farm corporation (Van Horn Farms)[2] and transferred their land and equipment to that entity. The articles of incorporation designated two types of stock-voting and non-voting-and named R.H., Phyllis, William, June, John, and Jane as members of the board of directors. At the first directors' meeting, the board decided the corporate president and farm manager, then R.H., should be required to live on the property to quickly address any business issues. The bylaws reiterated the delineation of stock as voting and non-voting and set the minimum number of directors at three or more. The bylaws also limited stock transfers to direct descendants of R.H. and Phyllis. The beginning balance sheet showed the following issuance of shares to the family-member shareholders:

Class A (Voting) Shares

Class B (Non-Voting) Shares



















         In addition to Van Horn Farms, the family owned a local bank, First Bank & Trust, where R.H. served as president. The family formed a bank holding company in 1979, and family members exchanged bank stock for shares of the holding company.[3] As time passed, R.H. and Phyllis transferred Van Horn Farm shares to their children in increments small enough to avoid tax liabilities. R.H. served as president and farm manager, maintaining a stock cow herd, while tenant farmers worked the land through share-cropping arrangements.

         After their respective high-school graduations, William and June entered the Air Force, and John attended college in Oklahoma. Van Horn Farms operated without any major discord among shareholders for several years under the share-cropping agreements. Records of shareholder meetings reveal all shareholders would vote their stocks, though the minutes do not show if all shares were voted or just those entitled to vote.

         In 1986, R.H. and Phyllis divorced. John served as his mother's advocate and negotiated the terms of his parents' dissolution stipulation. In the stipulation, R.H. and Phyllis agreed "[a]ll stock in R.H. Farms, Inc. is to be made voting on or prior to December 31, 1986." But no corporate records reflect a change in voting rights, and the articles of incorporation were never amended. R.H. married his second wife Marcella (Sally) in 1987. The next year, R.H. and Phyllis amended their stipulation; the amendment did not refer to the voting rights provision in the original stipulation but did require Phyllis to sell or gift her stocks to either her children or grandchildren. John then purchased his mother's stocks and evenly distributed them among himself, June, and William. As a show of appreciation to R.H. for loaning money to Van Horn Farms, the board of directors granted Sally a life estate to portions of land in 1989.

         When their tenant farmer died suddenly in 1990, John returned to Glidden to help with the farming operation. By 1995, John was farming all of Van Horn Farms property as an employee of the corporation rather than as a tenant. As compensation, John received a salary of $21, 000 and free housing on the farmstead. A record of the 1995 directors' meeting memorialized Van Horn Farms's decision to borrow just under one million dollars from R.H. The minutes concluded Van Horn Farms would repay the debt after other outstanding debts but before issuing any dividends. The 1996 minutes showed Van Horn Farms then owed R.H. almost $1.12 million and reiterated no dividends would be paid until the debt was retired.

         By 1998 only R.H., William, June, and John retained shares in Van Horn Farms. The minutes reflect each stockholder held 170 shares. Van Horn Farms purchased six parcels of land between 1998 and 2000. The farm corporation also paid around $165, 000 for the addition of a trophy room at the house where R.H. liked to display mounted animals from the family's big-game hunting trips. At the beginning of 2000, John sent William and June a letter detailing the financial health of Van Horn Farms through corresponding tax filings. The letter also discussed the bank holding company, stating:

(1) the Bank will pay a large dividend to the Holding Company; (2) the Holding Company will pay a sizable distribution to us; (3) we will use a bunch of this to pay our 1999 taxes; (4) we will transfer some more to the Farm Corp to make our assorted farmland payments; (5) we will (hopefully) have a bit ($10, 000) left over for our personal use.

         A record of their cash contributions passing through the holding company were as follows: $300, 811.58 from William, $287, 613.00 from June, $333, 705.00 from John; and $197, 900 by R.H. In 2001, R.H. divorced Sally, but she retained her life estate in portions of land held by Van Horn Farms.

         Animosity bubbled up among the family members over issues related to the bank holding company during this time frame and spilled into the 2002 meetings of Van Horn Farms. At the January 12, 2002 board of directors' meeting, June and William suggested Van Horn Farms pay Phyllis for the stocks she transferred to John after her divorce from R.H. "During discussion of this issue, the meeting collapsed into total disarray and broke up." Minutes for the corresponding shareholders' meeting show the stock distribution and specify voting and non-voting shares. At the December 17 shareholder meeting, the roll call of stocks differentiated between voting and non-voting shares over objections by William and June. The bylaws were then amended to reduce the number of directors to two or more; R.H. and John were elected as directors.

         Negative feelings continued when R.H. tried to block the sale of the bank holding company in federal court. But after the federal court ruled in favor of William and June, they voted to sell the holding company. Van Horn Farms also bought R.H.'s insurance agency around this time and then sold it back to the agency's employees.

         William and June participated in the 2004 shareholders' meeting by telephone and moved to increase the number of directors to four. The motion passed and William and June rejoined the board. John bought out Sally's life estate and sold it back to Van Horn Farms in July 2006 for $290, 000. Due to the tension among the shareholders, John offered to buy out William and June for $100, 000 each in December 2006-but neither responded to the offer. And at the following shareholder meeting, John proposed Van Horn Farms convert from an "S" corporation to a "C" corporation. But because the change required a majority vote by all shares, regardless of voting status, the proposal failed based on opposition from William and June. John repeated his offer ...

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