Successor Liability in Iowa
The Legal Mulligan You May Not Want to Take
While mulligans are commonplace on the golf course, they can spell trouble for business owners in the business world. In particular, business owners who believe they can “start over” and avoid liability or debt held in their first company by “taking a mulligan” and starting a second company – which provides the same product or service as the first – are often setting themselves up for not only a penalty, but perhaps years of costly litigation. A legal doctrine known as “successor liability,” allows Iowa courts to find a successor company (Second Co.) liable for the debts of a predecessor company (First Co.) in several circumstances. Many successor liability cases involve business owners giving up on their first company and trying to “take another swing” by starting the business over with a second company (because of too much debt or other liabilities in First Co.) – the proverbial legal mulligan. On November 6, 2013, the Iowa Court of Appeals published an opinion (here) addressing this legal mulligan – successor liability in Iowa.
In the November 2013 opinion, Continue reading
Posted in Business Owner, Litigation, Member, Partners
Tagged Business Litigation, Corporate Disputes, Iowa Business Dispute, Iowa Corporate Law, Iowa Lawsuits, Mere Continuation, Starting Over, Successor Liablity
“The Way to Get Started is to Quit Talking and Begin Doing” – Walt Disney
Whether you are looking to start an Iowa corporation (“Inc.”), an Iowa limited liability company (“L.L.C.”), or an Iowa limited liability partnership (“L.L.P.”), starting on the right foot and complying with Iowa’s legal requirements is a good first step. Not surprisingly, complying with Iowa’s legal requirements can not only help reduce future legal disputes, but it can also trigger several corporate liability protections. This short post addresses two Iowa legal requirements that should be addressed when starting a new Iowa limited liability company (L.L.C).
What’s In a Name? Selecting a business name is a logical starting point for those seeking to form an Iowa business. Careful consideration should be given to your business name, not only for marketing and branding purposes, but also for important legal reasons. For instance, legal disputes can (and do) arise if the business name you choose is the same or too similar to the business name of another business or entity operating in your market. Such disputes frequently include unwanted consumer confusion in the marketplace (mistaking your good/service for that of another), which may lead to among other things, an infringement lawsuit against your new business. To reduce the likelihood of a future legal dispute related to your business’ name, you can begin by searching the Iowa secretary of state’s online business entity database (here) as well as the federal trademark office listings (here) to determine if someone has already claimed rights in the name. If your desired business name does not appear to be used by another business, you are one step closer to potentially securing the name for your business and you may want to consider “reserving” the name in Iowa, which can be done with this Iowa form (here). It is important to point out that as with so many areas of the law, even the most basic issue, such as choosing a name for an L.L.C., can be complicated by several legal requirements. Click here for an example of a few of Iowa’s many naming requirements. A licensed attorney in your jurisdiction that works with business owners and entrepreneurs can assist in navigating this legal terrain and help ensure that the name you choose will not create problems for you and your business down the road.
Iowa L.L.C. Creation After carefully navigating Iowa’s naming requirements and settling on your new business’ name, you may begin the legal process of formally creating a legal entity. In Iowa, you may act as an organizer to form a limited liability company by signing and delivering to Iowa’s secretary of state a “certificate of organization.” According to Iowa law, a certificate of organization must include at least the following information: Continue reading
Member Protections Under Iowa’s LLC Umbrella
Just as shareholders in Iowa corporations are, by default, generally not liable for the debts and liabilities of their corporation, members (a.k.a. owners) in Iowa limited liability companies are also generally not liable for the debts and liabilities of their companies (see this article for more information about protections provided to shareholders in Iowa corporations). Put another way, the “limited,” in limited liability company (L.L.C.) actually means something and conveys just what Iowa law provides: limited liability for members.
Iowa black letter law provides that members in an Iowa limited liability company enjoy limited liability and, by default, are generally not liable for the debts, obligations, or other liabilities of an Iowa LLC: Continue reading
Posted in Business Owner, Intra-corporate dispute, Litigation, Manager, Member
Tagged corporate dispute, Corporate protections, Iowa Attorney, Iowa Business Dispute, Iowa Business Law, Iowa Business Owner, Iowa Code Section 489.304, Iowa Corporate Law, Iowa LLC, Liability Protection, Limited Liability Company, Piercing the Corporate Veil
Iowa Business Divorce
Unfortunately, like some marriages, the exciting and passionate fire that burns between business owners and drives them to come together to do amazing work is replaced by a dull flame, bickering, money problems, and a deep yearning to part ways – the business divorce. In Iowa, business owners in limited liability companies (LLCs), partnerships, and corporations often consider divorcing – booting a fellow owner or find themselves on the other end of an effort to remove them as an owner. As a result, it is often asked, how does Iowa law address business divorce?
This post identifies three (3) instances in which an Iowa court may divorce business owners by kicking out (i.e. expelling) an owner in an Iowa limited liability company. Iowa law expressly permits Iowa courts to legally separate business owners in Iowa limited liability companies under certain, specified circumstances, including the following: Continue reading
Posted in Business Owner, Litigation, Manager, Member, Partners, Partnership, Shareholder
Tagged Business Divorce, Business Law, Corporate Law, Expelling a Member, Fighting Business Owners, Iowa Attorey, Iowa Business Dispute, Iowa Business Divorce, Iowa Business Owner, Iowa Code Section 489.602, Iowa Company, Iowa Law
Regardless of whether your family business may be considering taking on debt for a much-needed expansion or whether it is facing liability from a lawsuit or other matter, one question frequently arises: As a shareholder in an Iowa corporation, can I be held personally liable for my business’ debts, liabilities, or actions? In Iowa, the “default rule” rule is stated as follows:
A purchaser from a corporation of its own shares is not liable to the corporation or its creditors with respect to the shares…
Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation.
Iowa Code § 490.622 (2013) (emphasis added). As set forth above, unless your family business corporation – incorporated in Iowa – has otherwise agreed, the default rule in Iowa is that shareholders are generally not personally liable for the corporation’s acts or debts. This “shield of liability” or “corporate veil,” as it is often called, is generally the fundamental reason that entrepreneurs and business owners alike decide to incorporate in the first place – to create liability protection, the “shield of liability.” While the provision reproduced above certainly creates legal protections and will provide comfort to many shareholders, it should be noted that as with many legal principles, instances exist in which courts will recognize the “shield of liability,” but nonetheless “pierce the corporate veil” and hold directors, officers, and others liable. To read more about piercing the corporate veil, click here.
If you have questions about whether you or someone you know may be personally liable or potentially liable for the acts, debts or other liabilities of a business, you should consider contacting a corporate dispute attorney.
Posted in Business Owner, Litigation, Manager, Member, Shareholder
Tagged Corporate Debt, Corporate liability, director liability, Iowa Corporate Law, Iowa litigation, Iowa Manager, Iowa Member, Iowa Personal Liability, Iowa Shareholder, Piercing the Corporate Veil, Shareholder Liability
It’s often said that “it’s a cut-throat world,” “life is not fair,” and that in order to survive you must hustle. While there is certainly truth to these concepts, taking your actions to the extreme, however, and proceeding with reckless abandon may result in liability for you and/or your company.
Iowa law protects Iowa businesses from people improperly interfering with contracts. For example, let’s say you own or work for ABC Corp. and you have successfully secured a supply contract with Supply Co. Supply Co. supplies widgets to your company that are essential for your business. One day, your competitor, Interference Corp., learns of your contract with Supply Co. and decides to contact Supply Co. in an effort to cut off or otherwise interfere with your contract (perhaps by impacting your supply of widgets or pricing). Interference Corp. may have asked Supply Co. to stop supplying you with widgets or may have offered to enter into an exclusive relationship whereby Supply Co. would only supply widgets to Interference Corp. but not a single widget to you. Either way, as a result of Interference Corp.’s actions, Supply Co. terminates its contract with you, refuses to supply you with widgets or otherwise increases your pricing for the same widget. Consequently, you are now unable to fulfill orders and your business tanks. Do you have a right to relief? Continue reading
On October 18, 2013, the Iowa Supreme Court published its opinion in Life Investors Insurance Company of America vs. Estate of John M. Carrado and Federal City Region, Inc., No. 13-0102 (October 18, 2013) and found that you may be bound to a written agreement / contract you did not sign, but where your signature somehow appears – an outcome that likely sounds crazy at first blush. Moreover, and perhaps even more eye-opening, the court further concluded that you may be bound to the agreement / contract even if you do not know who signed your name to the agreement / contract or whether the signature was even authorized. Continue reading
Posted in Business Owner, Director, Litigation, Manager, Officer, Partners, Partnership
Tagged Business Agent, Corporate Agent, Iowa Agreement, Iowa Business Law, Iowa Contract
So you’re suffering from shareholder oppression and you’re hoping relief is available; what relief may you seek in Iowa?
Shareholder oppression may be difficult to “diagnose” (read more here), but once diagnosed and similar to any other ailment, the next logical question is, what relief is available? Fortunately, for business owners suffering from shareholder oppression, Iowa’s courts have recognized several forms of relief that may be granted. The following is a non-exclusive list of remedies that a court may fashion upon a finding that you have been oppressed as a shareholder:
- Dissolve the Iowa corporation (Iowa Code Section 490.1430);
- Appoint a receiver to wind up and liquidate the business (Iowa Code Section 490.1432);
- Appoint one or more custodians to manage the business and affairs of the corporation (Iowa Code Section 490.1432);
- Shareholders may elect, in lieu of dissolution, to purchase shares at fair value (Iowa Code Section 490.1434(1)-(3));
- The court may stay proceedings and order purchase of shares at fair value upon application of any party (Iowa Code Section 490.1432(4)-(5));
- The court may order payment of increased compensation to a plaintiff that he/she would have received had he/she not been denied promised employment (Holden v. Constr. Mach. Co., 202 N.W. 2d 348, 363-64 (Iowa 1972));
- The court may enter an order requiring majority shareholders to purchase minority shares at fair market value despite lower share value set by corporate bylaws (Maschmeier v. Southside Press, Ltd., 435 N.W. 2d 377, 382 (Iowa Ct. App. 1988)); and
- The court may enter an order requiring dissolution of the corporation at a specified future date, to become effective only in the event the stockholders fail to resolve their differences prior to the date (Baker v. Commercial Body Builders, Inc., 264 Or. 614, 507 P.2d 387,395-96 (1973)).
Notably, the Iowa Supreme Court recognized that Continue reading
Posted in Business Owner, Director, Intra-corporate dispute, Litigation, Manager, Member, Shareholder
Tagged Corporate Dissolution, Corporate Receiver, Iowa Business Dispute, Iowa Business Law, Iowa Corporate Law, Majority Shareholder, Minority Shareholder, Minority Shareholder Oppression, Minority Shareholder Rights, Purchase Stock at Fair Value, Shareholder Oppression
As discussed in several previous posts (here and here), Iowa law recognizes the existence of fiduciary duties between majority and minority shareholders in Iowa corporations. See Linge v. Ralston Purina Co., 293 N.W.2d 191, 194 (Iowa 1980); see also Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 451 (Iowa 1988). Often, however, the question is not whether a fiduciary duty exists, but rather, what does the majority-minority fiduciary duty require? In other words, what action(s) or inaction(s) amount to a violation of the majority-minority fiduciary duty?
On September 3, 2013, the United States Court of Appeals for the Eighth Circuit applied Iowa law to address one unique scenario and answer the following fiduciary-duty question: When a majority shareholder sells all of his/her ownership interests in a corporation, is the majority shareholder required – in discharging his/her fiduciary duties – to notify the minority shareholder of his/her intent to sell the majority interest? Continue reading
Posted in Business Owner, Director, Intra-corporate dispute, Litigation, Manager, Member, Shareholder
Tagged Breach of Fiduciary Duties, corporate dispute, Fiduciary Duties, Intra-corporate dispute, Iowa Business Law, Iowa Corporate Law, Majority Owner, Majority Shareholder, Majority-minority fiduciary duty, Minority Owner, Minority Shareholder
Will your minority ownership interest in an Iowa business be discounted when determining fair value?
As described in detail here, on June 14, 2013, the Iowa Supreme Court issued an opinion that clarifies the definition of minority shareholder oppression in Iowa. The opinion, however, also touches upon several other important legal issues that often arise in corporate disputes. One of those issues relates to whether, when valuing a minority shareholder’s interest in a corporation (or a member’s ownership interest in a limited liability company), a minority discount (a.k.a. a “lack of control” discount) applies when establishing the fair market value of the ownership interest at issue. Continue reading
Posted in Business Owner, Director, Intra-corporate dispute, Litigation, Member, Partnership, Shareholder
Tagged Corporate Dissolution, Fair Market Value, Fair Value Discount, Lack of Control Discount, Majority Price, Minority Discount, Minority Member, Minority Shareholder, Ownership Discount, Shareholder Concerns