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noting that shareholders in a closely-held corporation "have very direct obligations to one another"
Summary of this case from Shepard v. Emp'rs Mut. Cas. Co.Opinion
No. 5-076 / 04-0637
Filed May 25, 2005
Appeal from the Iowa District Court for Pottawattamie County, Gordon C. Abel, Judge.
Plaintiffs appeal the district court's judgment in favor of the defendants. AFFIRMED.
Anthony W. Tauke of Porter, Tauke Ebke, Council Bluffs, for appellants.
W. Curtis Hewett of W. Curtis Hewett, P.C., Council Bluffs, for appellees.
Joseph D. Thornton, Council Bluffs, for intervenor.
Heard by Mahan, P.J., Zimmer, J., and Hendrickson, S.J.
Senior Judge assigned by order pursuant to Iowa Code section 602.9206 (2005).
Joyce and Ricky Redeker appeal the district court's judgment in favor of William and Donna Litt. We affirm.
I. Background Facts Proceedings.
The facts of this case are largely undisputed. The Litts are the sole shareholders of 8029 Limited Corporation (hereinafter "8029 Ltd."). For approximately twenty-two years, 8029 Ltd. has operated a Super 8 Motel located on South 24th Street in Council Bluffs, Iowa (hereinafter "Council Bluffs Super 8 Motel"). Pursuant to the franchise agreement, Super 8 Motels, Inc. granted the Council Bluffs Super 8 Motel a three and one-half mile radius of protected territory in which no other Super 8 Motel could be operated. From May of 1979 until April 3, 1999, Joyce Redeker was employed as the general manager of the Council Bluffs Super 8 Motel. For reasons that cannot be gleaned from the record, Joyce decided to build and obtain an ownership interest in a new Super 8 Motel. Sometime in 1998, she acquired a parcel of real estate in Carter Lake, Iowa for this purpose. However, the parcel she purchased fell within the protected territory of the Council Bluffs Super 8 Motel. As a result, Joyce approached William and asked him to waive the restriction. Although he had no obligation to do so, William waived his rights under the franchise agreement and acquiesced to Joyce's development of a Super 8 Motel in Carter Lake (hereinafter "Carter Lake Super 8 Motel"). However, the protected territory restriction wasn't the only obstacle Joyce faced. In order for her aspirations to fully materialize, she needed a partner to help her organize, finance, and construct the new motel in Carter Lake. She contacted and met with several potential partners for her endeavor, but an agreement never materialized. Sometime after Joyce lost $10,000 to an unnamed potential investor in Tennessee, Joyce and William began to contemplate the possibility of becoming partners. Eventually, the Litts agreed to assist Joyce in the organization and financing of the Carter Lake Super 8 Motel. The parties opted to form a corporate entity named Litdecker, Ltd. (hereinafter "Litdecker").
On April 6, 1998, Joyce and the Litts executed a preincorporation agreement and filed articles of incorporation with the Iowa Secretary of State's office. Under the preincorporation agreement, the Litts were to be the majority shareholders, owning sixty percent of the corporate stock. As the minority shareholder, Joyce was to own the remaining forty percent. The Board of Directors consisted of William, as president; Joyce, as vice-president; and Donna, as secretary and treasurer. The preincorporation agreement also addressed capital contributions. Section 6.2 of the agreement provided as follows:
William was adamant Joyce's son, Ricky, the other plaintiff in this lawsuit, be excluded from the parties' venture. Therefore, Ricky was not a party to the preincorporation agreement.
Cash Contribution.
The corporation agrees to issue to William Litt and Donna Litt a certificate or certificates for 60,000 shares of the $1.00 common stock of the corporation in exchange for their agreement to contribute cash in an amount equal to [the] difference between the cost of all services, franchise, materials, equipment, furniture, furnishings paid or incurred by the corporation for the construction and erection of a sixty-six (66) unit motel on the property described in Exhibit C, necessary or required to open the motel for business and the net amount of the loan obtained by the corporation to construct and furnish said motel, but in no event less than $60,000. The cash shall be paid as and when needed and in no event later than the date the motel opens for business.
The obligations of the parties were made contingent upon receipt by the corporation of a loan approved by William. Specifically, in section ten, the agreement provided as follows:
The obligations of the parties hereto is contingent upon the receipt by the corporation of a loan approved by William H. Litt as the amount, interest rate, term, payment, and other conditions applicable to the loan. The loan will be secured by the property and the furniture, furnishings and equipment of the motel. Each of the parties agree to sign the loan individually and personally.
Although not embodied in the written agreement, the parties understood William's duties were to be more extensive. He was responsible for obtaining the franchise from Super 8 Motels, Inc. He was also obliged to obtain financing for the construction of the motel on behalf of the corporation. He acted as the lead contact with Todd Lehan, a loan officer at U.S. Bank, concerning the construction financing and permanent financing for Litdecker. Without William's participation, Joyce would have been unable to obtain financing for the construction of her motel. Further, but for William's involvement, the city of Carter Lake would not have authorized the tax increment financing for the development of the Carter Lake Super 8 Motel. William also arranged for and supervised the construction of the motel building. He made the contracts for the purchase of the furnishings, fixtures, and decorations for the motel. Without William's assistance, contacts, and financial backing it is improbable the Carter Lake Super 8 Motel would have ever materialized.
The first draws on the construction loan obtained through U.S. Bank were made in November 1998. Thereafter, on December 23, 1998, Litdecker's board of directors authorized the issuance of 40,000 shares of corporate stock to Joyce and 60,000 shares to the Litts. On April 3, 1999, the Carter Lake Super 8 Motel opened for business. At that time, the Litts had contributed a total of $38,500 in cash to the capital of Litdecker. On April 23, 1999, William, Donna, and Joyce executed an amendment to the stock restriction and purchase agreement. The amendment was designed to restrict the ability of any shareholder to compete with the business of Litdecker. Specifically, the amendment stated:
No shareholder of Litdecker Ltd. shall at any time, while a shareholder of Litdecker Ltd., have any ownership, leasehold or other legal or equitable interest, nor any management responsibilities or interest in any motel property now existing or hereafter constructed that is located within five (5) miles of the Super 8 Motel owned by Litdecker Ltd. in Carter Lake, Iowa.
Although the Carter Lake Super 8 Motel opened in April of 1999, the closing of Litdecker's permanent loan did not occur until October 13, 1999. Apparently, U.S. Bank had to time the closing of the term loan with the closing of the takeout funding from Iowa Business Growth Company. Additionally, before the closing of the permanent loan could occur, additional construction draws had to be dispersed and an internal inspection of the property had to be performed. These factors also delayed the closing of Litdecker's permanent financing. Further, as is customary with new construction projects, there were vendors and suppliers who were not ready to timely deliver the necessary goods and services. Importantly, these circumstances were beyond the parties' control. At no time did the Litts attempt to delay or jeopardize the closing of the financing. Contrarily, the record reflects the Litts insisted on getting the permanent financing completed as quickly as possible after the opening of the Carter Lake Super 8 Motel.
As a result of the timing of the closing of the permanent loan with U.S. Bank, the portion of the construction loan reserved by U.S. Bank for the payment of interest was exhausted by September 1999. This potentially could have jeopardized the financing of the project because it was crucial all the interest due on the construction loan be paid current prior to the rollover to permanent financing. Consequently, U.S. Bank requested William personally pay the interest on the loan that accrued during the months of September and October 1999. William acquiesced to the request by U.S. Bank and promptly paid $14,361.01 on September 24, 1999, and $20,483.12 on October 13, 1999. Additionally, William paid a $24,402.65 origination fee to U.S. Bank on October 5, 1999, bringing the Litts' grand total cash contribution to Litdecker to $81,491.78, well in excess of the minimum $60,000 the Litts agreed to pay under the preincorporation agreement. On December 20, 1999, Joyce surrendered her Litdecker stock certificate certifying her ownership of 40,000 shares of the corporation's stock. On January 10, 2000, the board of directors issued a new certificate to Joyce, certifying her ownership of only 20,000 shares of the corporation's stock. On that same day, Ricky Redeker was also issued a stock certificate memorializing his new interest in the corporation and ownership of 20,000 shares of Litdecker's stock.
It appears from the record Litdecker has been financially successful and lucrative to all of the parties involved in this lawsuit. Between the months of June and September 1999, Litdecker distributed a total of $175,000 in profits to the shareholders. However, even though the operation proved profitable, the Redekers began to investigate the Litts' capital contributions to the corporation. After inspecting the requisite corporate records, the Redekers learned the Litts had only contributed $38,500 in cash at the time the motel opened in April of 1999. The Redekers considered this to be a breach of the parties' preincorporation agreement because they felt the Litts were required to contribute the minimum $60,000 to Litdecker's capital by the date the motel opened, regardless of when the permanent financing was finalized. Consequently, the Redekers demanded the Litts transfer the 21,500 shares that had not been paid for by April 3, 1999 back to the corporation. They further demanded the Litts pay $36,300 plus interest for the payment of dividends on the 21,500 shares. Also at this time, the Redekers demanded the Litts cease to operate the Council Bluffs Super 8 Motel because that motel was within the five-mile restricted area surrounding the Carter Lake Super 8 Motel. When the Litts failed to comply with the Redekers' demands, the Redekers filed the present action alleging two counts relevant to this appeal: (1) breach of the preincorporation agreement (Count II) and (2) violation of the stock restriction and purchase agreement, as amended (Count III). In their complaint, the Redekers sought an injunction requiring the Litts to transfer the 21,500 shares of stock back to Litdecker, as well as all the dividends received for those shares. The Redekers further requested the Litts be enjoined from owning and operating the Council Bluffs Super 8 Motel. On April 25, 2001, the district court granted Litdecker's motion for intervention. The parties submitted this matter in equity to the district court on the basis of a written record on December 3, 2002. All of the parties filed separate post-trial briefs. On March 24, 2004, the district issued a judgment in favor of the Litts dismissing the Redekers' petition in its entirety. It is from this judgment the Redekers appeal.
II. Standard of Review.
Our review of actions for injunctive relief is de novo. Owens v. Brownlie, 610 N.W.2d 860, 865 (Iowa 2000). Accordingly, we give weight to the findings of fact made by the trial court, especially with respect to the credibility of witnesses, but are not bound by them. Id. The Redekers assert the trial court's factual findings are not entitled to any weight because the court did not exercise its independent judgment in making these findings. This assertion is based on the trial court's wholesale adoption of the Litts' post-trial brief. We have previously permitted the practice by trial judges of requesting counsel for both parties in a case to submit proposed findings and conclusions following trial, provided counsel are also permitted to comment on the proposal submitted by the other. See Production Credit Ass'n v. Shirley, 485 N.W.2d 469, 475 (Iowa 1992). At the same time, we have cautioned trial courts about the perils associated with the wholesale adoption of one party's proposed facts and conclusions. See Care Initiatives v. Board of Review, 500 N.W.2d 14, 16 (Iowa 1993). However, although we strongly discourage this practice, we recognize the trial court may do so without jeopardizing its independent judgment. See Quality Refrigerated Servs., Inc. v. City of Spencer, 586 N.W.2d 202, 205 (Iowa 1998) (declining to adopt a different standard of review even though trial court adopted verbatim one party's findings of fact and conclusions of law); Care Initiatives, 500 N.W.2d at 16 (same). However, in certain circumstances the customary deference afforded trial court decisions cannot be fairly applied when the court's decision is a verbatim adoption of a party's findings of fact and conclusions of law. See, e.g., Rubes v. Mega Life Health Ins. Co., 642 N.W.2d 263, 266 (Iowa 2002). While we also condemn the practice employed by the district court in this case, our independent review is in accord with the findings relied upon by the district court. Therefore, the customary deference will be afforded to the trial court's decision.
III. Posture of the Redekers' Lawsuit.
The Redekers filed their petition in their individual capacity, asserting two claims relevant to this appeal: (1) breach of the preincorporation agreement and fiduciary duty (Count II) and (2) breach of the covenant not to compete (Count III). With respect to Count II, the Redekers' petition alleged that as of the date the motel opened for business, the Litts "paid only $38,500 for their combined 60,000 shares of capital stock in Litdecker Ltd., in violation of the Pre-Incorporation Agreement and Iowa law." However, in their petition, the Redekers do not assert they suffered any damages directly. Rather, they contend "[t]he failure of the Litts to pay for the capital stock . . . required Litdecker Ltd. to borrow an additional $21,500 for equipment, supplies and labor in order to open the Carter Lake Super 8 Motel on April, 3, 1999." Thus, it appears clear from the wording of the petition the Redekers are not alleging any direct harm to themselves as a result of the alleged wrongful acts. Rather, the Redekers' complaint asserts injury occurred solely to the corporation as a result of the alleged breach of the parties' agreement. Accordingly, any injury experienced by the Redekers was indirect because it flowed through the corporation. This distinction is important because the general rule is that a corporation that suffers damages through wrongs committed by its officers and directors must bring the action itself to recover the losses incurred thereby. See Cunningham v. Kartridg Pak Co., 332 N.W.2d 881, 883 (Iowa 1983) (citations omitted). If the corporation fails to bring the action, an individual stockholder may maintain an action in the context of a derivative action. Id. However, there is an exception to the general rule:
[I]n order to bring an individual cause of action for direct injuries a shareholder must show that the third-party owed him a special duty or that he suffered an injury separate and distinct from that suffered by the other shareholders.
Id. Thus, in order to maintain their suit as individuals, the Redekers must satisfy one of the prongs of the test articulated above. If we were dealing with a typical corporation, we would not hesitate to conclude the Redekers have not done so. The Redekers contend Litdecker's Board of Directors improperly authorized the issuance of stock and dividends to the Litts before the Litts had fully paid for their shares. Consequently, the Redekers aver the corporation's capital account suffered a loss not only as a result of the nonpayment for the shares, but also in the form of dividends paid out on those shares. The alleged wrongful acts depleted corporate assets and thereby injured the Redekers only indirectly, by reason of the prior injury to the corporation. This loss was shared equally among all the shareholders, and the Redekers have not established a separate and distinct injury. See John W. Welch, Shareholder Individual and Derivative Actions: Underlying Rationales and the Closely Held Corporation, 9 J. Corp. L. 147, 157 (1984) (hereinafter Welch) ("[T]he following actions are frequently mentioned as being, by definition, actionable only derivatively: actions for misfeasance or misappropriation of corporate property. . . ."). Further, the record is devoid of any facts sufficient to demonstrate the Litts' owed a special duty to the Redekers.
Other courts have found the existence of a "special duty" in cases where the plaintiff was an intended third-party beneficiary, see, e.g, Sherman v. British Leyland Motors, Inc., 601 F.2d 429, 440 n. 13 (9th Cr. 1979), or a pledgee/pledgor of stock, see, e.g., Empire Life Ins. Co. of Am. V. Valdak Corp., 468 F.2d 330, 335 (5th Cir. 1972); Weiss v. Northwest Acceptance Corp., 546 P.2d 1065, 1069 (1976). The record does not reflect, and the Redekers' petition does not allege, the existence of a similar factual scenario.
However, we note this issue is confounded by the fact this case involves what is known as a "closely held corporation" or a "close corporation." A close corporation is "[a] corporation whose stock is not freely traded and is held by only a few shareholders. . . ." Black's Law Dictionary 365 (8th ed. 2004). If a closely held corporation operates more like a partnership, some jurisdictions allow the shareholders to bring an individual action, even though the cause of action may technically be that of the corporation. See 19 Am. Jur. 2d Corporations § 1941, at 129 (2004). See also Welch, 9 J. Corp. L. at 170. The reasoning behind allowing shareholders in a closely held corporation to bring suit individually stems from the fact the shareholders of this type of corporation have very direct obligations to one another. See Holden v. Construction Mach. Co., 202 N.W.2d 348, 358 (Iowa 1972) ("[O]fficers and directors of a corporate entity, particularly management controlling directors of closely held corporations[,] occupy a fiduciary, or at least a quasi-fiduciary duty as to the corporation and its stockholders."); see also Holi-Rest Inc. v. Treloar, 217 N.W.2d 517, 524 (Iowa 1974). Further, the policy reasons for imposing the institution of a derivative suit in cases involving publicly held corporations tend to be absent in suits involving close corporations due to the close identity between shareholders and managers. See Welch, 9 J. Corp. L. at 170. See generally American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 7.01(d) (1994) (hereinafter ALI, Corporate Governance). Other courts, under the "separate and distinct" injury theory, point out the suing shareholder, usually the minority shareholder, is often the only shareholder injured, and thus permit that shareholder to file individually. See, e.g., In re Estate of Ziehm, 360 N.Y.S.2d 391, 393 (1974). In contrast, other jurisdictions require absolute adherence to the requirement of filing a derivative suit even in cases involving shareholders of a close corporation. 19 Am. Jur. 2d Corporations § 1941, at 129. These courts acknowledge the principles giving rise to the rule requiring derivative actions are sometimes present even in litigation concerning closely held corporations. See Welch, 9 J. Corp. Law at 183 (noting derivative recovery provides protection to creditors of a corporate entity); see also Barth v. Barth, 659 N.E.2d 559, 562 (Ind. 1995). In light of these competing theories, the American Law Institute (ALI) recommends a discretionary approach, allowing trial courts to entertain suits filed by shareholders in their individual capacity only when the policy reasons for imposing the requirement of a derivative action are absent. In its corporate governance publication, the ALI provides as follows:
In the case of a closely held corporation, the court in its discretion may treat an action raising derivative claims as a direct action . . . if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.
ALI, Corporate Governance § 701(d). We note under the facts of this case, the policy reasons behind the requirement of a derivative action in shareholder litigation are absent. This fact, coupled with the unique circumstances presented by this case, compel a decision by this court the Redekers' failure to file a derivative claim will not bar their appeal. Accordingly, we will proceed to address the remaining issues presented by the parties.
There are no other shareholders who could bring duplicate actions, nor would a judicial decision in this case prejudice any creditors of Litdecker.
This case, although filed at law, sounds in equity and was decided by the trial court in equity. "`A court in equity may determine and decree as to the rights of the parties regardless of their positions as plaintiffs or defendants, and in a proper case may adjust rights and award relief as between co-plaintiffs and co-defendants.'"
Holi-Rest, Inc., 217 N.W.2d at 523 (quoting 30A C.J.S. Equity § 6.03, at 680-81). In Holi-Rest, Inc. v. Treloar, the Iowa Supreme Court decided the merits of the lawsuit even though the corporation was named as a plaintiff, and not as a nominal defendant as is required in derivative actions. Id.
IV. Entitlement to Injunctive Relief.
In their petition, the Redekers requested injunctive relief requiring the Litts to transfer 21,500 shares of capital stock to Litdecker and enjoining them from receiving dividends on or voting for the shares of stock that were unpaid for as of April 3, 1999. In essence, the Redekers sought an order requiring the Litts to transfer their controlling interest back to Litdecker. The trial court concluded the Redekers were not entitled to injunctive relief because they failed to show they did not have an adequate at law remedy in the form of monetary damages. We agree.
An injunction is "an extraordinary remedy that is granted with caution and only when required to avoid irreparable damage." Skow v. Goforth, 618 N.W.2d 275, 277-78 (Iowa 2000) (citing Sear v. Clayton County Zoning Bd. of Adjustment, 590 N.W.2d 512, 515 (Iowa 1999)). A party seeking to obtain an injunction must establish (1) an invasion or threatened invasion of a right, (2) substantial injury or damages will result unless an injunction is granted, and (3) no adequate legal remedy is available. In re Estate of Hurt, 681 N.W.2d 591, 595 (Iowa 2004). We conclude, as did the trial court, the Redekers have not sufficiently alleged facts demonstrating they were without an adequate at-law remedy in the form of monetary damages. Assuming arguendo the Litts were improperly issued the shares and corresponding dividends, Litdecker and the Redekers could be fully compensated for any illegally distributed funds by an award of monetary damages equal to the amount of dividends the Litts received for the unpaid shares of stock.
Further, because it is conceded the Litts eventually paid in excess of the minimum amount required to purchase the stock, the Redekers do not allege an ongoing or continuing injury. Rather, they are seeking injunctive relief to remedy an alleged wrong that has already been committed. "Generally, rights already lost and wrongs already committed are not subject to injunctive relief." Engel v. Vernon, 215 N.W.2d 506, 516 (Iowa 1974) (citing Jenkins v. Pedersen, 212 N.W.2d 415, 420 (Iowa 1973); Dobrovolny v. Reinhardt, 173 N.W.2d 837, 841 (Iowa 1970)). Consequently, we conclude, as did the district court, the Redekers are not entitled to injunctive relief. However, because the Redekers also request restitution in the form of a monetary award, we will proceed to address the merits of the Redekers' claims.
V. Breach of the Preincorporation Agreement.
The Redekers assert the Litts breached the preincorporation agreement by failing to pay $60,000 by the time the Carter Lake Super 8 Motel opened for business in April of 1999. In contrast, the Litts assert they fully complied with the preincorporation agreement because section ten functioned as a condition precedent to their obligation to pay the $60,000. In interpreting a contract, we give effect to the language of the entire contract in accordance with its commonly accepted and ordinary meaning. Lange v. Lange, 520 N.W.2d 113, 119 (Iowa 1994). The object of a court in interpreting an agreement is to ascertain the meaning and intention of the parties as expressed in the language used. United Warehousing Corp. v. Interstate Acres Ltd. P'ship, 458 N.W.2d 14, 15 (Iowa Ct.App. 1990). The parties' intent is determined by the language in the contract, unless it is ambiguous. Id. An ambiguity exists when a genuine uncertainty exists over two or more meanings of the terms of the contract. Tom Riley Law Firm, P.C. v. Tang, 521 N.W.2d 758, 759 (Iowa Ct.App. 1994). The test for the presence of an ambiguity is an objective one: "Is the language fairly susceptible to two interpretations?" Iowa Fuel Minerals, Inc. v. Iowa State Bd. of Regents, 471 N.W.2d 859, 863 (Iowa 1991). If the language of a contract is found to be ambiguous, extrinsic evidence is admissible as an aid to interpretation of the contract. Dental Prosthetic Servs., Inc. v. Hurst, 463 N.W.2d 36, 39 (Iowa 1990). Applying these principles to the case before us, we are convinced, as was the district court, the only reasonable interpretation of the contract is that the parties contemplated the closing of the permanent financing would occur simultaneously with the opening of the Carter Lake Super 8 Motel. The amount of capital the Litts were required to contribute could not even be calculated until Litdecker obtained permanent financing. To interpret the contract as is suggested by the Redekers would mean the Litts were required to contribute the minimum of $60,000 at the time the Carter Lake Super 8 Motel opened, regardless of the circumstances. Such an interpretation would have required the Litts to contribute an even greater amount of money to a project for which they had already done substantially all the work and contributed all of the capital. Interpreting the contract to require any further contribution from the Litts, in the opinion of this court, would be unreasonable.
Further, even if the parties' agreement could reasonably be interpreted as the Redekers assert, the contract would then be susceptible to two reasonable interpretations, and an ambiguity would be present. Thus, the parties' intent would have to be ascertained by consideration of extrinsic evidence. See Iowa Fuel Minerals, Inc., 471 N.W.2d at 863; see also Fausel v. JRJ Enters., Inc., 603 N.W.2d 612, 618 (Iowa 1999). However, an examination of the extrinsic evidence in this case leads this court to conclude, as did the district court, the parties intended for the Litts to fulfill their cash contribution to Litdecker's capital at the time the corporation received the permanent loan from U.S. Bank. There is no evidence in the record suggesting the parties understood the language of section 6.2 to have the meaning the Redekers allege. Rather, the extrinsic evidence in the record unequivocally demonstrates each time U.S. Bank requested a payment, the Litts willingly and promptly complied. Further, although the Redekers contend the Litts were required to contribute no less than $60,000 by the time the motel opened for business in April of 1999, the Redekers did not even begin to scrutinize the Litts' capital contributions until approximately four months later in August, after the parties' endeavor proved to be extremely lucrative. The Redekers' post hoc investigation elucidates what is perceived by this court to be an effort to gain a controlling interest in a successful enterprise. Such a result would be inequitable, and this court will not judicially endorse the same. Accordingly, we affirm the trial court's decision with respect to this issue.
In their brief, the Redekers alternatively argue section ten should be interpreted to mean the Litts' monetary contribution was only contingent upon William's approval of the permanent loan. Such an interpretation, however, would fly in the face of the language of the agreement, which specifically requires Litdecker to receive the loan.
VI. Breach of Fiduciary Duties.
The Redekers do not allege with specificity which fiduciary duty the Litts allegedly violated. They further do not specify in what capacity, either as directors or majority shareholders, the Litts allegedly breached their fiduciary duties. Rather, the Redekers generically assert the Litts breached a fiduciary duty because they misappropriated corporate property. However, we do not need to resolve these ambiguities. We have previously determined the Litts did not breach the preincorporation agreement and fulfilled their obligations under the parties' agreement. Consequently, no misappropriation of corporate property occurred, and the Redekers' corresponding allegation of breach of fiduciary duty is without merit.
We take this opportunity to further note nothing in the record even remotely implies the Litts acted without the corporation's best interests in mind. Contrarily, the record repeatedly demonstrates that without the financial backing and managerial support of the Litts, the Carter Lake Super 8 Motel would have never materialized. As we have made previously clear, each time U.S. Bank requested an interest payment, the Litts promptly complied. In addition to all of the additional tasks William performed, the Litts paid over $81,000 in cash contributions to the capital of Litdecker. The record is simply devoid of any evidence whatsoever the Litts acted without the corporation's best interests in mind. Thus, we affirm the decision of the trial court.
VII. Covenant not to Compete.
In their petition and during trial, the Redekers argued the Litts were in violation of the Amendment to the Stock Restriction and Purchase Agreement because the Council Bluffs Super 8 Motel was within five miles of the Carter Lake Super-Motel. The trial court denied relief on this issue. On appeal, the Redekers do not assert the same claim. Rather, they ask this court to void the restrictive covenant entered into by the parties because the parties were under a mutual mistake of fact that the two motels were more than five miles apart. In the alternative, the Redekers argue the covenant should be declared unenforceable because it is unreasonable. It is a cardinal rule of appellate procedure that "[i]ssues must ordinarily be presented to and passed on by the trial court before they may be raised and adjudicated on appeal." Benavides v. J.C. Penney Life Ins. Co., 539 N.W.2d 352, 356 (Iowa 1995). These issues were not presented to or passed on by the trial court. Accordingly, we decline to entertain them on appeal.
VIII. Attorney Fees Punitive Damages.
The Redekers also request an award of attorney fees. However, the Redekers' lawsuit was unsuccessful and provided no benefit to the corporate entity. Consequently, an award of attorney fees is not appropriate in this case. See Holden, 202 N.W.2d at 365 (noting corporation is only liable for reasonable attorney fees where a derivative action produces a benefit to the corporate entity). For these same reasons, an award of punitive damages is also not appropriate. Accordingly, we affirm the decision of the district court in its entirety. The costs of this appeal are taxed to the plaintiffs-appellants.
In their brief, the Litts assert Ricky was not a proper party to the lawsuit because he was neither a shareholder at the time the alleged violations occurred, nor was he a party to the preincorporation agreement. Because the Redekers have not established any entitlement to relief, we do not address this issue.