TERMINAL PROPERTIES, INC., Member - Manager of Hampton Propane Terminal, L.C. , P laintiff - Appell ant , vs. H AM PTON PROPANE TERMINAL, L .C., an Iowa limited liability company, Defen dant , and LAKES GAS COMPANY, a Minnesota Corporation, Defendant - Appell ee .
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IN THE COURT OF APPEALS OF IOWA
No. 8-1022 / 07-2155
Filed March 26, 2009
TERMINAL PROPERTIES, INC.,
Member-Manager of Hampton
Propane Terminal, L.C.,
Plaintiff-Appellant,
vs.
HAMPTON PROPANE TERMINAL,
L.C., an Iowa limited liability company,
Defendant,
and
LAKES GAS COMPANY,
a Minnesota Corporation,
Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Franklin County, John S. Mackey,
Judge.
Terminal Properties appeals from the decision of the district court
declaring Lakes Gas, purchaser of Hampton Propane Company, is entitled to a
$260,000 credit for its purchase of a security agreement from Gulf Coast
Petroleum. AFFIRMED.
Thomas J. Houser and Christopher P. Jannes of Davis, Brown, Koehn,
Shors & Roberts, P.C., Des Moines, for appellant.
Jim D. DeKoster and Mark F. Conway of Swisher & Cohrt, P.L.C.,
Waterloo, for appellee.
Heard by Mahan, P.J., and Miller and Doyle, JJ.
2
MAHAN, P.J.
Terminal Properties appeals from the decision of the district court
declaring Lakes Gas, purchaser of Hampton Propane Company, is entitled to a
$260,000 credit for its purchase of a security agreement from Gulf Coast
Petroleum. For the reasons to be discussed, we affirm.
I. Background Facts and Proceedings.
Hampton Propane Company, L.C. (Hampton) executed an open-end real
estate mortgage in June 1995 in favor of First National Bank of Hampton (First
National) securing credit in the amount of $415,000. Hampton was organized as
a limited liability company in July 1995. At the times material to this appeal,
Hampton had four members: Ray Energy, which held a 42.95% interest; Ken
Fencl, who held a 24.06% interest; Terminal Properties, which held a 24%
interest; and Dennis Ribbentrop, who held an 8.99% interest.
In September
1998 Ken Fencl, Dennis Rippentrop, Dave Stevenson of Ray Energy, and Ted
Vosburg of Terminal Properties each executed an individual guaranty with
respect to the real estate mortgage.
Hampton was initially in the business of buying and selling propane, which
it did from a facility in Hampton, Iowa. Hampton subsequently disengaged from
that business and leased the facility to Ray Energy.
Ray Energy purchased
propane from several suppliers, including Gulf Coast Petroleum, Inc. (Gulf
Coast), and re-distributed the propane to its customers.
Ray Energy purchased propane from Gulf Coast pursuant to a line of
credit. By October 2000 Ray Energy’s debt to Gulf Coast was such that Gulf
Coast required Ray Energy to execute a $1 million promissory note. By October
3
2001 Ray Energy’s debt to Gulf Coast had increased to approximately $1.6
million. Gulf Coast informed Ray Energy that it would not extend the line of credit
any further unless Ray Energy executed a second promissory note and provided
collateral in the form of a security interest in Hampton’s assets.
On October 20, 2001, Ray Energy, by its president David Stevenson,
executed a second $1 million promissory note.
The note memorialized Ray
Energy’s existing debt and extended its line of credit.
That same date,
October 20, 2001, Stevenson entered into a commercial security agreement on
behalf of Hampton pledging certain assets of Hampton as collateral to secure the
two $1 million promissory notes executed by Ray Energy.
On December 28, 2001, Ray Energy, Fencl, and Rippentropp voted to
ratify Stevenson’s execution of the October 20, 2001 security agreement.
Terminal Properties opposed ratification because it believed Hampton’s assets
should not be pledged to secure Ray Energy’s debt. In this appeal, Terminal
Properties challenges this ratification as ineffective, claiming it was precluded by
conflicts of interest.
Ray Energy went out of business in April 2003. Ray Energy defaulted on
its obligations to Gulf Coast. In May 2003 First National notified Hampton that it
was in default under the real estate mortgage.
Lakes Gas initiated efforts to acquire Hampton’s facilities in June 2003.
Lakes Gas subleased the Hampton facilities from Ray Energy in July 2003.
Effective December 1, 2003, Lakes Gas leased the Hampton facilities directly
from Hampton. The lease was ratified by the same voting block that ratified the
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security agreement—Ray Energy, Fencl, and Rippentropp.
Again, Terminal
Properties objected.
In October 2003 Gulf Coast filed suit against Ray Energy and Hampton
seeking to foreclose on the security agreement.1 Gulf Coast alleged that as of
October 3, 2003, the principal amount of $1 million was due, owing, and unpaid
under the 2001 promissory note. It sought both a personal judgment against Ray
Energy for $1 million, and a judgment in rem against the collateral secured by the
security agreement.
In November 2003 Hampton held two special meetings to address the
Gulf Coast foreclosure action. Also in November 2003, Lakes Gas purchased
First National’s mortgage for $318,000, along with the individual guarantees; the
sum was to be credited against Lakes Gas’s purchase price that it would pay for
Hampton.
On December 11, 2003, Terminal Properties filed this action to dissolve
Hampton, enter an injunction to preserve its assets, and to appoint a receiver for
Hampton.2
Hampton moved to dismiss the suit, and Fencl and Rippentropp
joined the motion. Ray Energy filed its own motion to dismiss claiming that as a
member, Terminal was not a proper party. Hearing on the request for injunctive
relief was set for March 15, 2004.
On January 9, 2004, Hampton completed execution of a contract for deed,
effective December 1, 2003, under which Lakes Gas would purchase all of
Hampton’s assets for $730,000 payable as follows:
1
2
We will refer to this suit as the foreclosure action.
We refer to this action filed by Terminal Properties as the dissolution action.
5
a. $35,000 immediately upon execution of this agreement.
b. Commencing on the first day of January, 2004, and on the
same day of each month thereafter, the amount of $100 shall be
paid.
c. All amounts owing hereunder shall, if not earlier due,
become payable on January 1, 2006.
d. All amounts owing hereunder shall, if not earlier due,
become payable 30 days after the Seller has delivered to Buyer a
[sic] evidence in a form satisfactory to Buyer that Seller holds good,
marketable title to the property, as such title is defined by Iowa
Statute and by the title standards . . ., subject only to the lien of any
prior mortgage against such property which has been purchased by
the Buyer, and further, that Seller is able to convey title to all assets
purchased hereunder without lien or encumbrance.
In January 2004, in the foreclosure action, Gulf Coast filed a motion for
summary judgment. Among the undisputed facts it cited were that the 2001
promissory note was matured, due, and payable; Ray Energy had failed to pay
the note when due; the note and security agreement were in default; “there is
now due, owing and unpaid as of October 3, 2003, the principal sum of
$1,000,000.00”; and Ray Energy had admitted $1 million was due, owing, and
unpaid under the 2001 note.
In February 2004 Gulf Coast sold and assigned all its rights, title, and
interest in the promissory notes and the security agreement to Lakes Gas in
exchange for $260,000. Before Lakes Gas purchased the security agreement
from Gulf Coast, Terminal Properties also engaged in negotiations with Gulf
Coast in an attempt to purchase the security agreement for itself—without notice
to other Hampton members. After selling its interest to Lakes Gas, Gulf Coast
filed a notice in the foreclosure action that it had transferred its interest in the
case to Lakes Gas.
Lakes Gas was substituted as plaintiff, and Terminal
Properties moved to intervene, asserting that if intervention was denied and
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Lakes Gas prevailed, membership shares in Hampton would be “ultimately
extinguished through judgment and judicial sale without the payment of fair
value,” and Hampton’s assets would be lost.
On March 3, 2004, a special meeting of the members of Hampton was
held.
A resolution confirming and ratifying the contract for deed and lease
agreement with Lakes Gas was approved by the voting block of Rippentropp,
Fencl, and Ray Energy; Terminal Properties objected.
There was also
discussion about Lakes Gas’s acquisition of Gulf Coast’s lien and the fact the
contract for deed required good title. Further discussion concerning Hampton’s
possible defenses to Gulf Coast’s lien occurred.
Following discussion, the
following resolution was approved: “That Lakes Gas receive a $260,000 credit
against the purchase of assets of Hampton Propane Terminal by Lakes Gas
Company provided it is confirmed that the $260,000 was in fact paid by Lakes
Gas Company to Gulf Coast Petroleum.” Rippentropp, Fencl, and Ray Energy
voted in favor, Terminal Properties opposed.
In March 2004 Terminal Properties filed an amended petition in the
dissolution action seeking judicial dissolution, an injunction to preserve the
assets of Hampton, and appointment of a receiver. In May 2004 the court in the
dissolution action entered a ruling enjoining Hampton “from disposing,
transferring or in any manner conveying, pledging or encumbering any of its
assets until further order of the court.” The pending motions to dismiss were
denied, and a receiver was to be appointed.
With respect to the foreclosure action, following a hearing on the motion to
intervene and Lakes Gas’s motion for summary judgment, the district court
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entered personal judgment against Ray Energy.
Terminal Properties was
allowed to intervene. The matter proceeded to trial in April 2005, and at the
close of Lakes Gas’s evidence the district court granted Terminal Properties’
motion for a directed verdict.
On May 30, 2005, the receiver filed a final report in the dissolution action
noting the receiver had been unable to find an interested purchaser for the
Hampton facilities.
On June 6, 2005, a hearing was held in the dissolution
action.
On July 22, 2005, the dissolution court entered an order stating in part:
In open court, the parties acknowledged their agreement to the sale
of the assets of Hampton Propane Terminal, L.C., to Lakes Gas
Company pursuant to the existing Contract for Deed, continued
involvement by the Receiver to facilitate said sale, removal of the
Receiver’s bond after sale, deposit of the net sale proceeds in an
interest bearing bank account, requirement of signatories from
Plaintiff and Defendant Hampton Propane in order to disburse
funds from said account; and a continuance of the hearing
scheduled for June 15, 2005 to a later, but undetermined date.
The dissolution court ordered trial continued “until all matters relevant to the
foreclosure case, LACV 003603, are resolved and all appeals are complete”;
postponed action on the receiver’s report until the sale was complete; dissolved
the temporary injunctive relief “by agreement of the parties”; and ordered the
parties to “proceed to sell the assets under the existing Contract for Deed.”
On January 24, 2006, Lakes Gas sent Terminal Properties a draft closing
statement pursuant to the contract for deed reflecting a $260,000 credit for its
cost to acquire the Golf Coast lien and a $318,000 credit for its cost to acquire
the real estate mortgage. Terminal Properties objected to the $260,000 credit to
Lakes Gas for its cost to acquire the Gulf Coast lien. On March 6, 2006, in the
8
dissolution action, Terminal Properties filed a motion to compel the sale of
Hampton’s assets without the allowance of the $260,000 credit, and on April 14
Terminal Properties filed a motion to enjoin the sale to Lakes Gas with the credit.
On April 17, 2006, the dissolution court entered an order denying the
motion to compel sale, noting “all parties wish to close the sale, but the main
difference of opinion revolves around the payment by Lakes Gas of $260,000.00
for the former Gulf Coast lien.” The court wrote that “it appears a declaratory
judgment is sought with respect to the fulfillment of the performance of the
contract.”
By separate order entered the same date, the court also denied
Terminal Properties’ motion to enjoin the sale of Hampton’s assets to Lakes Gas,
stating:
With respect to [Terminal Properties’] motion to enjoin action, it is to
be noted that the temporary injunctive relief previously granted by
the court has been dissolved. All parties sought and received court
approval for sale of Hampton Propane’s assets in accordance with
the previous executory contract for deed following the lack of any
bona fide offer to purchase being presented to the receiver. The
receiver’s bond has been exonerated and he stands merely in a
nominal capacity to facilitate the consummation of the agreement
already reached between the parties. The order of approval of the
sale is not a decree of dissolution pursuant to Section 409A.1302; it
only confirms the agreement for sale. The parties, therefore, stand
in the same position with respect to their own individual capacity to
negotiate and finally conclude a sale of the assets of Hampton
Propane, as they did prior to the issuance of temporary injunction,
which relief [Terminal Properties] has abandoned.
On April 21, 2006, Hampton held a special meeting to address the sale of
its facilities and Lakes Gas’s purchase of the Gulf Coast security agreement.
On April 26, 2006, this court reversed the decision of the district court in
the foreclosure action. Lakes Gas Co. v. Terminal Prop., Inc., No. 05-1266 (Iowa
9
Ct. App. Apr. 26, 2006). This court concluded the district court erred in granting
Terminal Properties’ motion for a directed verdict, finding
a reasonable fact finder could determine, after viewing the evidence
in the light most favorable to Lakes Gas and drawing all reasonable
inferences, that there was at least $1 million due and owing from
Ray Energy under the 2001 promissory note.
Id. The case was remanded for further proceedings. Procedendo issued on
June 5, 2006.
On June 23, 2006, a settlement agreement was executed on behalf of
Hampton and Lakes Gas that authorized a credit to Lakes Gas for the $260,000
paid to Gulf Coast. Terminal Properties objected to the settlement agreement.
On July 11, 2006, Hampton executed a warranty deed and bill of sale conveying
its assets to Lakes Gas.
Lakes Gas moved to voluntarily dismiss the foreclosure action without
prejudice on August 2, 2006. Terminal Properties filed a resistance to the motion
to dismiss. On December 27, 2006, the foreclosure court allowed the voluntary
dismissal noting, “resolution of the lien action does not seem as if it will solve the
reimbursement issue”; and “Lakes Gas would like to dismiss the action in order
to avoid foreclosing on property that it has purchased.” The court concluded the
foreclosure action “became moot when Lakes Gas acquired the pledged
collateral” and “a decision on the lien action, while tempting, is pointless
considering that Lakes Gas does not want to foreclose on its own property.”
On April 13, 2007, the dissolution court entered a case management order
in which Terminal Properties was ordered to “file an ancillary declaratory
judgment petition framing the issues herein.” Terminal Properties filed a third
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amended petition on May 1, 2007, requesting judicial dissolution and declaratory
relief with respect to the validity of the prior security agreement entered into
between Hampton and Gulf Coast and with respect to the agreement between
Hampton and Lakes Gas for reimbursement of the $260,000 credit given by
Hampton to Lakes Gas in consideration of the amount Lakes Gas paid to acquire
Gulf Coast’s interest in the security agreement.
Lakes Gas and Hampton
answered. On August 31, 2007, Lakes Gas moved for summary judgment.
The dissolution court granted the summary judgment motion “with respect
to any issues involving the validity of the Gulf Coast security agreement as the
same is now moot due to the acquisition by Lakes Gas of its own collateral.” The
court denied the remainder of the motion, but limited the issue at trial to the
“reimbursement issue with respect to both defendants.”
At trial Ted Vosburg testified Terminal Properties was organized with the
sole reason being to own membership in Hampton Propane. He stated that in
2001 Hampton was operating at a significant loss and all the members decided
Hampton should be sold. Vosburg further testified that he disagreed with the
other members that “to keep propane flowing through Hampton Propane
Terminal would make it look like a going business and thereby make it more
attractive to prospective buyers.”
He acknowledged, however, that had Ray
Energy not been able to keep propane going through Hampton, operation of the
facility would have halted and the members would have been solely responsible
for the mortgage, taxes, and operating expenses of Hampton. Vosburg also
acknowledged he had offered to purchase the Gulf Coast security agreement for
himself—without informing the other members of Hampton—and, had that
11
occurred, he would have asserted his rights as a lien holder against the assets of
Hampton. He did not dispute the price paid for Gulf Coast’s interest ($260,000)
was a fair price.
David Busch testified on behalf of Lakes Gas about the history of its
acquisition of Hampton. He testified that in negotiating the purchase of Hampton,
“the only agreement we reached was that there appeared to be nothing that all
four members of the Hampton Propane could agree upon no matter what it was.”
Busch testified that Terminal Properties would not consent to any sale that
resulted in Terminal receiving less than $250,000, which was the amount it had
invested in the project. He further testified that Lakes Gas purchased the bank
mortgage and Gulf Coast’s interest in the security agreement in an effort to
acquire Hampton free of liens.
On November 26, 2007, the district court found the settlement of the Gulf
Coast lien for $260,000 was in the best interests of Hampton. The court also
found Terminal Properties’ claims of conflict of interest with respect to the other
member-managers of Hampton was “like the frog calling the garter snake green”
in light of Vosburg’s attempt to purchase the Gulf Coast lien position without
disclosure to the other member-managers. The court declared the March 3,
2004 approval of $260,000 credit to Lakes Gas was legal, valid, and binding;
Hampton was to wind up is affairs in accordance with the settlement agreement
reached with Lakes Gas in June 2006 and a final report by Hampton was to be
filed, after which the court would issue a final decree of dissolution.
Terminal Properties appeals. In essence, Terminal Properties contends
conflicts of interest precluded the ratification of the security agreement with Gulf
12
Coast and the later actions by Hampton members could not cure the invalidity of
the pledge of Hampton’s assets for Ray Energy’s obligations.
II. Scope and Standard of Review.
How the parties tried this declaratory judgment action in the district court
governs this court’s scope of review. Smith v. Bertram, 603 N.W.2d 568, 570
(Iowa 1999). Terminal Properties argues the case was tried in equity and our
review is therefore de novo. However, at trial the court ruled on objections as
they were made, which is “the hallmark of a law trial, not an equitable
proceeding.” Sille v. Shaffer, 297 N.W.2d 379, 381 (Iowa 1980). We agree with
Lakes Gas that our review is for correction of errors of law. See Iowa R. App. P.
6.4.
In a law action the district court’s findings of fact have the effect of a
special verdict and are binding on us if supported by substantial evidence. Iowa
R. App. P. 6.14(6)(a). This court, however, is not bound by the district court’s
conclusions of law, and we may inquire into whether the district court’s ultimate
conclusions were materially affected by improper conclusions of law. Smith, 603
N.W.2d at 570.
III. Discussion.
Iowa Code chapter 490A (2001) governs the conduct of limited liability
companies. Section 490A.706 sets forth the general standards of conduct for
managers of a limited liability company and requires a manager to discharge the
duties as a manager in “good faith” and “in a manner the manager believes to be
in the best interests of the limited liability company.” Iowa Code § 490A.706(1).
These obligations are identical to the obligations owed by corporate officers and
13
directors to the company’s shareholders. See generally Cookies Food Prods.,
Inc. v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 451-53 (Iowa 1988)
(discussing duties of care and loyalty to shareholders and noting that when there
is self-dealing by a majority stockholder which is challenged, the majority
stockholder has the burden to establish that they have acted in good faith,
honesty and fairness).
Generally, the decisions of corporate directors are
presumed to be informed, made in good faith, and made in the best interests of
the company. Id. at 453. By analogy, the decisions of limited liability membermanagers are entitled to the same presumptions. The purpose of this business
judgment rule “is to severely limit second-guessing of business decisions which
have been made by those whom the corporation has chosen to make them.”
Hanrahan v. Kruidenier, 473 N.W.2d 184, 186 (Iowa 1991).
Section 490A.708 provides, in part:
1. A conflict of interest transaction is a transaction with the
limited liability company in which a manager of the limited liability
company has a direct or indirect interest. A conflict of interest
transaction is not voidable by the limited liability company solely
because of the manager’s interest in the transaction if any one of
the following is true:
a. The material facts of the transaction and the manager’s
interest were disclosed or known to the managers or a committee
of managers and the managers or a committee of managers
authorized, approved, or ratified the transaction.
b. The material facts of the transaction and the manager’s
interest were disclosed or known to the members entitled to vote
and they authorized, approved, or ratified the transaction.
c. The transaction was fair to the limited liability company.
....
4. For purposes of subsection 1, paragraph “b”, a conflict of
interest transaction is authorized, approved, or ratified if it receives
the vote of a majority of the members entitled to vote under this
subsection. Interests owned by or voted under the control of a
manager who has a direct or indirect interest in the transaction, and
interests owned by or voted under the control of an entity described
14
in subsection 2, paragraph “a”, shall not be counted in a vote of
members to determine whether to authorize, approve, or ratify a
conflict of interest transaction under subsection 1, paragraph “b”.
The vote of those members, however, is counted in determining
whether the transaction is approved under other sections of this
chapter. Members, whether or not present, that are entitled to be
counted in a vote on the transaction under this subsection
constitute a quorum for the purpose of taking action under this
section.
Terminal Properties argues the December 2001 vote to ratify the Gulf
Coast security agreement was not proper because it was based on the votes of
interested members who were not entitled to vote. Terminal Properties contends
Ray Energy and Ken Fencl had direct interests requiring they recuse themselves
from the vote to ratify the security agreement.
Lakes Gas contends this issue is not properly before us as it was ruled
moot by the district court.
reimbursement
issue.
Lake Gas asserts the sole issue tried was the
In
response,
Terminal
Properties
argues
the
reimbursement issue is “inescapably tied to the origin and effectiveness of the
lien.” We disagree.
Because the members of Hampton on July 22, 2005, acknowledged in
open court that they wished to proceed with the sale of Hampton to Lakes Gas
pursuant to the contract for deed, we conclude the focus of this appeal is limited
to—as it was in the district court—the issue of reimbursement for Lakes Gas’s
purchase of Gulf Coast’s lien interest.
See Grinnell College v. Osborn, 751
N.W.2d 396, 404 (Iowa 2008) (noting that appellate review is ordinarily limited to
issues raised and decided by the district court).
Hampton Propane was not a profitable business. As early as 2001 the
members of Hampton agreed it should be sold.
Terminal Properties did not
15
agree with the other three members, however, in their conclusion that Hampton
was worth more as an operating terminal than an idle one. Nonetheless, the
majority of member-managers determined maintaining the flow of propane
through the Hampton terminal was desirable, and this ultimately resulted in the
security agreement with Gulf Coast.
The contract for deed required Hampton to provide clear title to Lakes
Gas. Ted Vosburg of Terminal Properties acknowledged the contract for deed so
required. There is no dispute the security agreement held by Gulf Coast was a
lien against Hampton assets. There is also no dispute Lakes Gas paid Gulf
Coast $260,000 to settle Gulf Coast’s lien against Hampton. Finally, there is no
dispute $260,000 was a fair price for the settlement of the lien.
The district court found:
It is true that at the inception of the case the court found, at
least from the information known at that time, that possible conflicts
of interest existed with respect to encumbering Hampton Propane’s
personal property by Ray Energy sufficient to support the issuance
of a temporary injunction. Such temporary injunction, however,
was dissolved when Terminal Properties agreed to the original sale
to Lakes Gas. Here, the action by Hampton Propane in granting a
$260,000 credit to Lakes Gas for its purchase of the Gulf Coast
security interest was approved by a majority of its members in view
of the pending Gulf Coast litigation at the time of the March 3, 2004,
member meeting, and confirmed again by the majority at a special
members meeting held April 21, 2006, authorizing the most recent
settlement agreement between Hampton Propane and Lakes Gas.
The evidence quite clearly establishes that the settlement of the
Gulf Coast lien for $260,000 was in the best interests of the
company given the extreme uncertainty over the nature, validity,
and extent of the security interest held by Gulf Coast, and the
enforceability of the same against Hampton Propane’s major
assets, i.e. fixtures being the liquid propane storage tanks.
16
The district court further found the action approving the $260,000 credit did not
entail any alleged conflicts of interest.
These findings are supported by
substantial evidence and are thus binding upon us.
Given that the member action to approve the credit to Lakes Gas was in
the best interests of Hampton and was approved by a majority of Hampton’s
members, this court will not interfere. The district court did not err in concluding
the action was legal, valid and binding. We affirm.
AFFIRMED.
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