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Heartland Co-Op v. Nelson

Court of Appeals of Iowa

July 24, 2019

HEARTLAND CO-OP, Plaintiff-Appellee,
RONALD NELSON, Defendant-Appellant,

          Appeal from the Iowa District Court for Crawford County, Tod Deck, Judge.

         The defendant appeals from judgment entered following a jury verdict determining he has successor liability for a judgment previously entered against his farming corporation.

          Peter C. Riley of Tom Riley Law Firm, P.L.C., Cedar Rapids, for appellant.

          Benjamin P. Roach and Thomas C. Goodhue of Nyemaster Goode, P.C., Des Moines, for appellee.

          Considered by Potterfield, P.J., and Tabor and Bower, JJ.


         Ronald Nelson appeals from the judgment entered against him following a jury trial, where the jury determined he was the successor-in-interest and mere continuation of Broken Wing Farms, Inc., against which Heartland Co-op had obtained a judgment in 2014 for $810, 021.95 with 3.25% interest.

         On appeal, Nelson[1] argues he was wrongly prevented from challenging Broken Wing's debt to Heartland and the district court erred by allowing the arbitration award against Broken Wing to have preclusive effect on the successor-liability claim against him personally. He also disputes the district court's rulings on two jury instructions and maintains the court should have granted his motion for directed verdict because there was insufficient evidence to submit the question of his successor liability to the jury.

         I. Background Facts and Procedure.

         Heartland is a farmer-owned Iowa cooperative, which entered into twenty contracts[2] with Broken Wing, a now defunct corporation that was owned solely by Ronald Nelson. The contracts required Broken Wing to deliver 650, 000 bushels of grain to Heartland. Broken Wing failed to deliver the required amount of grain-delivering only 45, 000 of 50, 000 bushels required by one of the twenty contracts-and then sent Heartland a letter indicating it was cancelling the twenty contracts. Pursuant to the contracts, Heartland submitted an arbitration demand to the National Grain and Feed Association. The tribunal found Broken Wing in breach of contract and awarded Heartland damages in the amount $810, 021.95 with interest of 3.25% from the date of the decision, August 15, 2013, until satisfaction of the award.

         Heartland filed an application to confirm the arbitration award in the district court, which Broken Wing resisted. The district court noted that each of the twenty contracts included a provision, stating:

The parties agree that the sole remedy for resolution of all disputes arising under this contract will be through arbitration proceedings before the National Grain and Feed Association (NGFA) under the NGFA arbitration rules. The decision and award determination through this arbitration will be final and binding on both parties and may be enforced by any court having jurisdiction.

         The court concluded that each of the contracts were signed and valid and that the dispute was "one that is arbitrable under the contract and that it is within the scope of the arbiter's authority to determine the dispute between the parties." In March 2014, the district court confirmed the arbitration award and entered judgment against Broken Wing accordingly.

         By this point, Broken Wing was defunct, and the judgment went unsatisfied.

         In 2016, Heartland filed a lawsuit, suing Ronald Nelson; his wife, Karen; his son, Aaron; the Nelsons' new partnership, 3N Partnership; and the alleged unnamed partnership that included Broken Wing, Karen, and Aaron. Heartland argued the various named parties were liable for Broken Wing's debt under two theories: partner liability and successor-in-interest liability. Regarding partner liability, Heartland alleged Broken Wing acted as the agent of the alleged unnamed partnership, which resulted in Aaron and Karen having partner liability for Broken Wing's breach of the contracts with Heartland. As for successor liability, Heartland alleged 3N Partnership was a successor or mere continuation of Broken Wing and that Ronald, Karen, and Aaron, as the three partners of 3N Partnership, were jointly and severally liable for the judgment entered against Broken Wing.

         The defendants filed a motion for partial summary judgment, asking the court to determine as a matter of law that the confirmed arbitration award and judgment against Broken Wing was not binding on them. They also asked the court to find the confirmed arbitration award was not admissible to prove any indebtedness of Broken Wing to Heartland or as a basis for establishing liability of the defendants for Heartland's indebtedness. Heartland resisted.

         Following a hearing, the court originally ruled that the prior arbitration award was not admissible for any purpose at the jury trial.

         The court reconsidered the motion during the pre-trial hearing, again ruling evidence of the arbitration award was inadmissible. The court concluded the award did not have any preclusive effect as it related to Heartland's claim for partner liability. In other words, Heartland had to establish breach of contract and damages-on top of the existence of the partnership-in order to succeed on its partnership liability claim. However, the court concluded it "c[ould] and w[ould] find as a matter of law that any party that the jury finds is successor in interest [to Broken Wing] under the law of the state of Iowa as it relates to the liability for the predecessor's debts is liable for that debt." The court reiterated that the arbitration award did not need to be discussed in front of the jury for the court to draw the legal conclusion later if warranted.

         The jury trial took place over three days in late February and early March 2018. Heartland called as a witness Kent Jessen, its director of grain merchandising, who is in charge of buying grain from famers and then overseeing the risk management, sale, and logistics of the purchased grain. Jessen testified the twenty contracts at issue between Heartland and Broken Wing required Broken Wing to deliver 650, 000 bushels of grain to Heartland at various times. On January 30, 2012, Broken Wing delivered 45, 000 bushels for a contract that required the delivery of 50, 000 bushels. Ronald Nelson called Heartland on February 14, indicating Broken Wing was done delivering and wanted what it was owed for the partial delivery. Heartland cut the check on February 16 but did not send it; instead, Jessen called Nelson a few times, asking if they could meet in order for him to give Nelson the check and also to work out a plan regarding Broken Wing's fulfillment of the rest of its contracts. Nelson did not respond, and the two did not meet. On March 4, Broken Wing sent a letter to Heartland, stating it was concerned about Heartland's payment policy on partial deliveries as it had not yet received payment for the January delivery and declaring it would not deliver any more grain until it received the payment. Heartland did not respond in writing to the letter, but Jessen continued trying to reach Nelson by way of phone call. Then, Broken Wing sent Heartland a letter on April 11 stating it was "canceling our contractual relationships." Nelson spoke with Jessen on the phone on April 12 and reiterated that he, as president of Broken Wing, was cancelling all twenty of the contracts. Because Heartland had already contracted to sell the 605, 000 bushels of grain it expected to receive from Broken Wing, it had to buy back those sales as part of the cancellation. The price of grain had increased since the parties contracted; the difference in the prices plus the interest incurred in hedging totaled $810, 021.95, which Heartland asked for in damages.

         Ronald Nelson testified he was the sole owner of the stock for the Broken Wing corporation. Broken Wing grew crops in 2012 but not 2013. In early 2013, Nelson formed Nelron, LLC. Nelron, an LLC owned by Aaron, and an LLC owned by Karen made up 3N Partnership[3]-each with one-third interest. Beginning in 2013, 3N began growing crops. According to Nelson's testimony, 3N farmed "basically all the same farmland" Broken Wing, Aaron, and Karen had farmed in 2012. 3N bought inputs, chemicals, and supplies from the same suppliers Broken Wing purchased supplies, simply taking over Broken Wing's accounts in some instances. 3N also, as Broken Wing had, leased grain bins and equipment from Nelson. Once Nelron was formed, it took over Broken Wing's bank account and Broken Wing's loan obligations to the local bank. Additionally, Nelson deposited checks written to Broken Wing in the account Nelron took over. According to Nelson, the family formed 3N in order to remain eligible for Farm Service Agency (FSA) loans and subsidies because Karen, who worked a full-time job outside of farming, was not providing enough hours of labor to otherwise be eligible.

         According to the Certified Public Accountant (CPA) who helped prepare the taxes and provide bookkeeping services for the individual members of the Nelson family and their various companies, some dividends issues to Broken Wing in 2013 were ultimately claimed on the taxes of 3N. Additionally, the CPA testified that grain owned by Broken Wing was contributed to 3N at its formation; Broken Wing was never paid for the grain.

         By way of a special verdict, the jury found Broken Wing breached its contracts with Heartland and Heartland suffered $810, 021.95 as a result. However, the jury found Broken Wing was not a partner in a farming business with Aaron or Karen Nelson and that 3N Partnership was not a successor or mere continuation of Broken Wing. As a result, the district court dismissed all claims against defendants Aaron Nelson; Karen Nelson; 3N Partnership; and the alleged unnamed partnership of Broken Wing, Aaron, and Karen. The jury concluded Ronald Nelson was a successor and mere continuation of Broken Wing. ...

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