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Felt v. Felt

Court of Appeals of Iowa

June 5, 2019

DANIEL FELT and SUSAN KERN, Plaintiffs-Appellants,
DAVID FELT and FELT FARMS LLC, Defendants-Appellees.

          Appeal from the Iowa District Court for Dallas County, Bradley McCall, Judge.

         Plaintiffs challenge whether Felt Farms LLC had any members within ninety days after Richard Felt's death. REVERSED AND REMANDED.

          Richard McConville and Michael J. Carroll of Coppola, McConville, Carroll, Hockenberg & Flynn, P.C., West Des Moines, for appellants.

          Lylea Dodson Critelli and Nicholas Critelli of Critelli Law, P.C., Des Moines, for appellees.

          Heard by Vogel, C.J., and Mullins and Bower, JJ.

          BOWER, JUDGE

         Daniel Felt and Susan Kern (née Felt) appeal the district court ruling, finding a limited liability company (LLC) formed by their father, Richard Felt, did not dissolve following his death. We find the contractual requirements for membership were not met within ninety days of Richard's death, and the LLC dissolved as a matter of law.

         I. Background Facts & Proceedings

         Richard Felt was a third-generation Dallas County farmer. Richard farmed with his brother and their father after returning from the Korean War in the 1950s until their father's retirement, then the brothers continued farming with each other. When Richard's brother retired in the late 1980s, they divided their real estate and farming property. Richard's property included approximately one hundred acres west of Waukee that held the house he grew up in and where he and his wife Patricia lived. In 1988, Richard and Patricia executed wills leaving all their property to each other, and then equally to their children upon death of the second spouse.

         Richard and Patricia were the parents of three children: Susan, David, and Daniel. In 1990, David joined Richard in a joint farming operation. Richard and Patricia purchased an additional 156-acre farm between Waukee and Adel, which included a house for David's family to live in.[1] As part of their oral farming operation agreement, David purchased any new equipment needed and paid for repairs for the farms and the homes. Approximately ten years after David joined the farming operation, Daniel asked to join the family business; David told Daniel the farms could not support another family at that time. Richard and David continued to farm together, and Daniel did not ask again to join.

         In the mid-2000s, when Richard mostly retired from farming, Richard and David entered into an oral lease where David paid cash rent and paid a number of Richard and Patricia's bills. Patricia died in 2013. Soon after, Richard was diagnosed with cancer and underwent treatment from late 2013 until shortly before his death on November 4, 2015.

         In early 2015, Richard began discussing the creation of a limited liability company (LLC) with his attorney, Sam Braland. Richard was interested in potential tax benefits and wanted to keep the farms in the family. Braland had not previously formed a LLC, so he studied the Iowa LLC statutes and obtained a template of a farm LLC from the Iowa State Bar Association. He did not consult with an attorney with more LLC experience. Braland drew up a certificate of organization and an operating agreement. On August 28, Richard signed the organizational documents and operating agreement for a manager-managed LLC named Felt Farms LLC. Richard transferred all his real property to the LLC in exchange for ownership of 100 Class A Units (income units) and 900 Class B Units (ownership and voting units).[2] Richard and David were appointed and signed the agreement as managers of the LLC, and Richard signed separately as its only member.[3]Richard did not change his will, which continued to leave his property in equal shares to his children. Richard did not tell Daniel or Susan anything about the LLC.

         Braland also prepared power-of-attorney documents granting David the authority to make decisions on behalf of Richard. In the months prior to Richard's death, David took action as financial power-of-attorney to change several of Richard's investments to payable-on-death accounts evenly split among himself and his siblings. He also transferred some deposits to the LLC to fund its operation. Richard died on November 4. After Richard's death, David used Richard's remaining funds to pay funeral and other outstanding expenses, then split the remainder evenly among himself and his siblings. Richard's will was not admitted to probate until September 2017.

         Following Richard's death, David informed Daniel and Susan the family properties were in an LLC. In December 2015, Braland wrote to the siblings to provide them documents relating to Richard's estate. The letter informed the siblings,

With regard to the limited liability company, the three of you have succeeded in equal shares to all ownership units of the company. I believe it would be prudent for all of us to meet in January for the purpose of issuing certificates of ownership to each of you, and to briefly discuss the operation of the company, and to answer questions you might have.

         The parties did not meet with Braland in January. Effective January 14, 2016, David obtained liability insurance for Felt Farms LLC, which he verified covered him and his siblings as members on May 4, 2016. The named insured parties for the farms' property insurance was changed to Felt Farms LLC and David superseded Richard effective November 5, 2015. Susan and Daniel consulted with their own attorney regarding the LLC and its implications during this period.

         In September 2016, Braland consulted with another attorney with more experience in LLCs. After learning of the distinction between transferees and members, David issued equal interests to himself, Susan, and Daniel. On October 18, Daniel and Susan proposed a member-managed LLC or partition of the land. David did not agree to the proposed changes.

         In December 2016, David wrote checks to himself and his siblings from the Felt Farms LLC checking account. David termed the payments as 2016 distributions which consisted of cash rent David had paid the LLC and money in the account prior to Richard's death. All three siblings cashed their checks.[4] The LLC provided K-1s to each of the siblings for tax purposes.[5] In March 2017, David unilaterally under his authority as manager arranged for a letter of credit for the LLC, and signed the documents under his authority as manager of the LLC.

         On February 21, 2017, Daniel and Susan filed suit challenging the creation of the LLC and some of Richard's inter vivos transfers under several theories- including three types of tortious interference and elder abuse-and requesting declaratory judgment on the status of the LLC. They alleged David exercised undue influence on Richard and questioned Richard's mental competence. In September, Daniel and Susan filed a motion for summary judgment, in part alleging the LLC had no members within ninety days of Richard's death. The court ruled "in the light most favorable to the Defendants," the LLC had a member, David, within the ninety day period.

         From February 19 through 23, 2018, the Daniel and Susan's claims were tried to the bench with numerous witnesses from each side. In its ruling, the court dismissed all counts against David and Felt Farms LLC. The court specifically found David became a Class A member within ninety days of Richard's death. On appeal, Daniel and Susan challenge the district court's interpretation and construction of the LLC operating agreement and the determination of David's membership in the LLC following Richard's death.

         II. Standard of Review

         "We generally review the construction and interpretation of a contract as a matter of law. Thus, we are not bound by the construction or interpretation made by the trial court." Hartig Drug Co. v. Hartig, 602 N.W.2d 794, 797 (Iowa 1999). "Contract '[i]nterpretation involves ascertaining the meaning of contractual words; construction refers to deciding their legal effect.'" Payton v. DiGiacomo, 874 N.W.2d 673, 677 (Iowa Ct. App. 2015). The construction of a contract is reviewed as a question of law for the court. RPC Liquidation v. Iowa Dep't of Transp., 717 N.W.2d 317, 321 (Iowa 2006). The construction of a contract is controlled by intent of the parties, which we determine by the language of the contract itself. Iowa R. App. P. 6.904(3)(n); see Hartig Drug Co., 602 N.W.2d at 797.

         III. ...

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