Ward on Iowa Limited Liability Company Law

Was Time or Price Really "Of the Essence"?

Forgive me for being cynical, but in the case that follows it seems to me that price was the issue, not timely performance.

In High Development Corp. v. Star of the West Company, 2009 Iowa App. LEXIS 561 (June 17, 2009) the Iowa Court of Appeals held that "time is of the essence" provisions in real estate contracts must be read literally and restrictively.  High Development agreed to buy from Star of the West property located at 1101 Old Marion Road in Cedar Rapids.  The closing was scheduled for August 30.  High Development was not able to close on the 30th, but did tender payment the following day.  Star of the West refused to close on the 31st and kept the $5,000 down payment.  Within two weeks it had entered into another contract to sell the property to someone else.

High Development sued for specific performance and attorney fees.  The real estate contract provided that if the buyer failed to perform the seller may forfeit the contract under Iowa Code Chapter 656 or proceed by an action at law or equity.  Star of the West did neither.

The trial court concluded that the forfeiture clause in the contract was controlling and the sole remedy of the seller.  Because the buyer tendered the consideration the next day the ability of the seller to forfeit the contract was cut off.  The lower court granted the request for specific performance and awarded attorney fees to the buyer.  The court of appeals reversed.

The appellate court first concluded that Iowa Code Section 656.1 does not mean what it says when it states that the buyer's rights under a real estate contract if it fails to perform shall "not be forfeited or canceled except as provided in this chapter."  Statutory forfeiture is not the only remedy available to the seller.  The court interpreted Chapter 656 to apply to real estate installment contracts where the buyer has an equitable interest in the property as a result of having made several installment payments. In the case of a "one-time closing," according to the court of appeals, Chapter 656 is just one of several remedies available to a seller notwithstanding the language of 656.1.  The court fails to explain the difference between several installment payments and one down payment. 

In support of this conclusion the appellate court cites just one Iowa Supreme Court case.  However, in Passehl Estate v. Passehl, 712 NW 2d 408, 414 (Iowa 2006) the supreme court referred to Chapter 656 as "irrelevant" to the case and in the related footnote said the forfeiture provision "is inapplicable because the arguments in this case do not center on this provision and do not call for a forfeiture of the subject property."  To cite this case as authority for the proposition that statutory real estate foreclosure is just one of several remedies available to a seller in the event the buyer fails to perform is just simply wrong.

After interpreting one provision of the contract and the related Iowa Code provision loosely, the court of appeals shifts gears and interprets "time is of the essence" strictly and narrowly.  The closing date was August 30.  Period.  If buyer missed the date by even a day, which it did, the contract was breached because time was of the essence.  Recall that payment was tendered the very next day.  Seller refused and a couple of weeks later sold to someone else.  If time really was "of the essence" wouldn't seller have taken the money the very next day?  Or did it get wind of a better offer and was happy to "forfeit" the contract on a technical breach?  "Essence" according to my well-worn American Heritage dictionary means "the intrinsic or indispensable properties that identify something."  Subsequent events seem to prove that time was neither intrinsic nor indispensable to this deal.

The trial court should have been affirmed.

-Marc Ward

Attorney-Client Privilege and the Independent Contractor

In a case more interesting for its facts than the law, the US District Court for the Middle District of  Alabama recently considered whether the attorney-client privilege extended to an independent contractor of the client.  Hope for Families v. Warren, 2009 US Dist. LEXIS 46009 (April 21, 2009).  It's a good refresher and relies particularly on an Eight Circuit case for its ruling.  In re Bieter Co., 16 F.3d 929 (8th Cir. 1994).  The general answer is yes it can.

Now for the facts.  The independent contractor was a former state senator and lieutenant governor hired by a bingo parlor to (1) secure a document signed by the county sheriff authorizing Lukcy Palace to operate a bingo parlor (2) find an opponent to run against the sheriff and (3) run the campaign.  Apparently the lawsuit involved claims that the sheriff was conspiring with others to create a bingo monopoly in the county.  Think big Macon.  Sheriff Warren was re-elected.

-Marc Ward

A Pint is a Pound the World Around...

... and so is a deal.  That old saw was taught to me by a client years ago.  I haven't forgotten it, but sometimes businesspersons do.  If you ever have a client that feels he or she has been slighted by another party when the apparent "gentlemen's agreement" turns to nothing does your client have legal recourse?  In Iowa, maybe not.  But in Maryland, yes.

Take the case of Giant Food, Inc. v. Ice King,Inc., 536 A. 2d 1182 (Md. App. 1988).  The court held that despite the lack of a contract between the parties Ice King could recover damages for negligent misrepresentation by Giant Food.  For several months Ice King and Giant Food discussed the possibility of Ice King supplying ice to Giant Food.  All along, unbeknownst to Ice King, Giant Food was planning to build its own ice plant.  Ice Food believed it had a commitment to supply ice based on 30 or 40 communications between the parties, including authorization by Giant for Ice King to inform its bank of their "deal."

The court concluded that in light of the more than casual response of Giant Food "a businessman in [the Ice King representative's] shoes might have reasonably relied on the informal 'deal or gentlemen's agreement.'" In fact, Ice King had "the right to rely upon Giant, and Giant owed a duty to give the correct information."  When Ice King learned about the possibility of a new Giant ice plant and attempted to learn the truth the court held that it was incumbent on Giant to provide the "true facts."  When instead the Giant representative said "everything was all right" the assurance "was, at the very minimum, negligent."

So the next time a client believes he had a deal and was double-crossed, remember this case and supporting cases from New York and Prosser and Keeton on the Law of Torts, Section 107 (1984) and the Restatement (Second) of Torts, Section 552 (1977).*

-Marc Ward

*The research of Allison Miller, a second year law student at the University of Iowa and Dickinson summer associate, is the source of this case and analysis.

Members of 490A LLCs May Owe Fiduciary Duties to Each Other

In Bushi v. Sage Healthcare PLLC, 203 P. 3rd 694 (Idaho 2009), the Idaho Supreme Court held that members of Idaho LLCs owe one another fiduciary duties.  The court reached this conclusion even though the applicable Idaho LLC Act was silent on the issue (like Iowa, Idaho is transitioning from an original LLC statute to a new one, the latter providing that members do owe each other the fiduciary duties of care and loyalty).

These fiduciary duties can be breached even if the members act within the letter of the operating agreement.  In Bushi, the majority of the members, all save Bushi himself, amended the operating agreement to allow a member to be dissociated by majority vote and then promptly removed Bushi by a similar vote.  They contended that they had good reason to dissociate him because he was dating an employee and had used a company line of credit to pay personal expenses.  Bushi argued that he was dissociated in order to advance their personal financial interests.  Because taking an action that improperly advances their financial interests can be a breach of a fiduciary duty even if technically allowed by the operating agreement, the court concluded that a material factual issue remained that negated the entry of summary judgment.

The case also mentions a provision in the operating agreement that lawyers should consider inserting into their forms.  The operating agreement stated that "no Member shall have any vested rights in the [operating agreement] which may be modified through an amendment to the [operating agreement]."  This provision negated Bushi's assertion that he was denied the benefits of the original operating agreement.  In its original form the operating agreement did not permit the members to essentially expel another member.

-Marc Ward

Reverse Piercing Used to Defeat Fraud Claim

In a relatively novel approach, defendants in a bankruptcy proceeding asserted reverse piercing as a defense to a claim of fraudulent conveyance brought by the bankruptcy trustee.  The trustee was attempting to cause a third-party to pay $450,000 to the estate. In re Freelander Capital Management Corp., 2009 Bankr. LEXIS 1195 (US Bkrptcy. Ct., SD Fla, April 29, 2009).

The relevant facts are these.  On March 14, 2001 the debtor corporation loaned Designs, Inc. $500,000.  The debtor corporation was wholly-owned by Burton Freelander.  The sole shareholder of Designs was the debtor's second ex-wife.  On April 11, 2001 the ex-wife withdrew $500,000 from a Designs account and deposited the money in a joint account owned by Burton and this ex-wife.  A short time later Burton transferred $50,000 to the debtor's account.  In a nice twist, Burton used $375,000 of the money to pay off a judgment involving his first ex-wife.  All parties agreed that the second ex-wife thought the loan was from Burton and repaid to Burton.

The debtor filed Chapter 7 bankruptcy in 2003.  All involved agree that the second ex-wife never withdrew funds from the joint account, never deposited any more funds into the account, and believed the payment of the $500,000 was a repayment of the loan.  Nevertheless, the trustee asserted that the payment was a fraudulent conveyance and the second ex owed $450,000 to the debtor corporation.

The defendants, the second ex-wife and her corporation, Designs, Inc., asserted the doctrine of reverse veil piercing as their defense, claiming that the payment to the individual joint account was payment to the debtor corporation.  The bankruptcy court agreed.

Applying Connecticut law because the debtor was a Connecticut corporation, the court found that there was such a unity of interest between Burton and the debtor and dominance by Burton over the corporation that the independence of the corporation had ceased to exist.  The court further found that applying the doctrine of reverse piercing would achieve an equitable result and avoid unfair prejudice to the second ex-wife.  The point being that she had already made the payment, she would not be retaining anything of value, and the loss to the creditors (who had already received restitution or had weak claims) was outweighed by the hardship to her if she had to make a second payment of $450,000.

Key to the court's decision, it appears, is the fact that the trustee had little use for the money given the status of the creditors' claims.  Had there been substantial creditors with strong claims for the funds, the equities of the case might have caused a different result.

This as another example of the willingness of the courts to ignore the corporate form when it suits the equities of the situation.  Is that what the law is supposed to be about?

- Marc Ward