Opinion
22-1274
10-25-2023
SCOTT ROLENC, Individually, and as a Shareholder of RED OAK DIESEL CLINIC, INC., Plaintiff-Appellant/Cross-Appellant, v. JUDITH C. ROLENC, Individually, and as Successor Trustee of THE RONALD C. ROLENC REVOCABLE TRUST, and as Trustee of THE JUDITH C. ROLENC REVOCABLE TRUST; STANFORD R. ROLENC, Defendants-Appellees, and RED OAK DIESEL CLINC, INC., Defendant-Appellee/Cross-Appellant. AQUA PALACE, INC., an Iowa Limited Liability Company, d/b/a AQUA PALACE SPA & POOL, and SCOTT ROLENC, Plaintiffs-Appellants/Cross-Appellees, v. RED OAK DIESEL CLINIC, INC., Defendant-Appellee/Cross-Appellant.
Keith A. Harvat of Houghton Bradford Whitted PC, LLO, Omaha, Nebraska, for appellants. Theodore T. Appel and Adam Feeney of Lamson Dugan &Murray LLP, West Des Moines, for appellees.
Appeal from the Iowa District Court for Montgomery County, Craig M. Dreismeier, Judge.
Partially unsuccessful parties appeal and cross-appeal the district court's order in these consolidated derivative and replevin actions.
Keith A. Harvat of Houghton Bradford Whitted PC, LLO, Omaha, Nebraska, for appellants.
Theodore T. Appel and Adam Feeney of Lamson Dugan &Murray LLP, West Des Moines, for appellees.
Heard by Bower, C.J.; Schumacher, Ahlers, Chicchelly, Buller, and Langholz, JJ.; and Danilson, S.J.
Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2023).
BOWER, CHIEF JUDGE.
Scott Rolenc and Aqua Palace, Inc. appeal the district court's ruling in these consolidated derivative and replevin actions, claiming Aqua Palace is entitled to immediate possession of Red Oak Diesel Clinic (RODC) inventory, despite a "lack of paperwork" and "lack of a binding contract"; challenging whether personal property, equipment, and tools in the possession of RODC were "a capital contribution" by Scott; and claiming Aqua Palace should be paid for remodeling and construction work performed at RODC. On cross-appeal, RODC challenges the court's dismissal of breach-of-fiduciary-duty and fraud claims against Scott and denial of its request for attorney fees.
We note Iowa Code section 643.2 (2017) prohibits the joinder of causes of action and counterclaims to an action of replevin. See Iowa Code § 643.2 (noting in a replevin action "there shall be no joinder of any cause of action not of the same kind, nor shall there be allowed any counterclaim"). Here, the district court's hesitation to join these actions was well-founded. Although the parties did not object to consolidation of the actions, "in doing so the issues have become unnecessarily muddied and intermingled. We discourage this practice." See Bartels v. State Cent. Bank, No. 08-1712, 2009 WL 3337250, at *1 n.2 (Iowa Ct. App. Oct. 7, 2009).
For clarity, we will refer to the Rolenc family members in this opinion by their first names.
I. Background Facts and Proceedings
The district court succinctly set forth the factual background involving the parties as follows:
Brothers Stan Rolenc and Scott Rolenc had been taking over management of [RODC] together since 2015 when their parents, Ron and Judy Rolenc, began to step away from the company due to their impending retirement. RODC is a company specializing in diagnosing and repairing diesel engines. Scott and his wife Cindy own the business Aqua Palace, which specializes in the sales and installation of swimming pools and spas. In addition, Scott and Cindy were also deeply involved with the management of RODC, with the books and financials in particular. Both Stan and Scott had been
discussing the need to update and remodel RODC as soon as they realized Ron would be stepping away from the decision-making. RODC was also in severe financial trouble as evidenced by the fact that Ron and Judy often did not cash their paychecks due to the lack of funds. In an effort to put the company in a better financial position, Scott had a conversation with his parents where they agreed he would input $250,000 into the company. There was a meeting held with Scott's financial consultants, Hamilton and Associates, in Council Bluffs to determine how to characterize money Scott was planning to put into the business. A check was ultimately issued in the amount of $250,000 on December 31, 2015. The money was immediately deposited and put to use thereafter to pay bills, purchase equipment, and begin the remodel process.
As was noted on the board meeting minutes, a board meeting was held on March 31, 2016 where Stan was officially made acting President of RODC, but Ron and Judy would still continue to help with the business as needed. Ron passed away on November 19, 2016. Scott or Cindy deposited another check for $250,000 into the RODC account on December 31, 2016. In the weeks that followed, Scott attempted to recharacterize this latest deposit as an asset purchase and attempted to get either Stan or Judy to sign the purchase agreement. No purchase agreement was ever signed. Scott and Cindy continued to manage the books until they were terminated from employment by Stan acting as President in July 2017. At the time of termination, Scott and Cindy withdrew $330,000 from the RODC account, in sums of $250,000, $70,000, and $10,000 in checks made out to Aqua Palace from RODC signed by Cindy.
A few months after Scott's termination from RODC, Scott and Aqua Palace filed three lawsuits in Montgomery County. In CVCV021654, Scott sought specific performance of a stock purchase agreement, claiming in part he was entitled to purchase his parents' shares of RODC. Following trial, the district court determined specific performance was "the most appropriate remedy" given the circumstances and "the uniqueness of a closely held corporation." The court further found upon Scott's termination, Judy was the "sole shareholder of RODC"; Judy was required to purchase Scott's shares; and the stock purchase agreement was "effectively terminated." The court ordered Scott to be "compensated for the shares he owned at the time his employment with RODC was terminated," totaling $97,786.64. This court affirmed the district court's order. See Rolenc v. Rolenc, No. 19-0902, 2020 WL 5229183, at *2 (Iowa Ct. App. Sept. 2, 2020). This court also rejected Scott's claims regarding his entitlement to all of Judy's shares of RODC when a limited guardianship and conservatorship was appointed for her in 2018, the validity of Stan's authority to terminate him from RODC, and his parents' alleged violation of the stock purchase agreement. See id. at *2-3. The supreme court denied Scott's application for further review, and procedendo issued in late 2020.
The court also found prior to Scott's termination, the stock purchase agreement required him and Judy to purchase Ron's shares upon Ron's death in a proportionate amount to their shares (i.e., Scott had to purchase 22% (250 shares) and Judy had to purchase 78% (886 shares) of Ron's shares).
Meanwhile, in a separate case, Scott filed a derivative suit against Judy, Stan, and RODC. "As a shareholder" of RODC, Scott claimed the defendants had "directly harmed" RODC "by their acts and omissions such that [RODC] has suffered a loss." Scott further claimed the defendants were "mismanaging and depleting the assets" of RODC, and he requested injunctive relief to "maintain the status quo of the parties prior to final judgment and to protect the subject of the litigation." RODC filed a counterclaim against Scott, claiming his acts "violate[d] his fiduciary duty to RODC and also constitute[d] fraud" and his "gross disregard of the rights of RODC" "justif[ied] the imposition of punitive damages." Judy also filed a counterclaim against Scott, raising the same contentions she had in the first case.
RODC also filed a petition naming Aqua Palace, LLC, a third-party defendant, claiming Aqua Palace conspired with Scott "to fraudulently obtain equipment and inventory of [RODC]" and seeking actual and punitive damages. Although the third-party petition is mentioned in subsequent pleadings, it was "stricken" by a court order entered on July 18, 2018, in which the court noted in part:
After reviewing the file and hearing argument from counsel the court finds the third party petition filed by nominal defendant [RODC] against third party defendant Aqua Palace, LLC is not an appropriate third party action. Rowen v. Le Mars Mut. Ins. Co. of Iowa, 282 N.W.2d 639, 645 (Iowa 1979). As a nominal defendant, Red Oak Diesel Clinic has a duty to remain neutral in this derivative action by and between shareholders and officers of the corporation.... [T]he third party petition is stricken.In a resistance filed in April 2021, RODC "concede[d] that its Third-Party Claim against Aqua Palace was stricken by the Court's July 18, 2018 order."
Judy's counterclaim was subsequently dismissed.
Judy filed a motion to dismiss Scott's petition-which was joined by the other defendants-claiming Scott "does not have standing to litigate his derivative action and petition for injunctive relief as he is not a shareholder" of RODC. The parties agreed to allow the first case "to work its way through the appellate process" before the court would hear the defendants' motion to dismiss in the second. In February 2021, following this court's opinion in Rolenc, 2020 WL 5229183, at *2-3, the district court granted the defendants' motion to dismiss Scott's action. The district court noted this court had affirmed its finding in the first case and Scott "was no longer considered a shareholder after July 28, 2017." The court therefore concluded because Scott "was not a shareholder at the time this litigation even commenced," "[t]he code simply does not recognize his right to continue this action." See Iowa Code § 490.741 (providing "[a] shareholder shall not commence or maintain a derivative proceeding unless the shareholder . . . [w]as a shareholder of the corporation at the time of the act or omission complained of"). The court found, however, RODC's counterclaim "remain[ed] unaffected" by its dismissal of Scott's claims.
The district court further found, "As to the injunctive relief requested, . . . this relief is a product of the derivative action, and as such, the same should also be dismissed."
Finally, in yet a third case filed simultaneously with the other two cases discussed above, Scott and Aqua Palace raised claims of replevin against RODC. Specifically, Aqua Palace claimed it was entitled to "immediate possession" of RODC's "inventory," which it had purchased for $250,000 "based upon an agreement between Scott and his parents." Scott and Aqua Palace also claimed it was entitled to return of "equipment, tools, and personal property of Scott, Deepwoods Enterprises, Scondy, and Aqua Palace" still on the RODC premises. Aqua Palace further claimed RODC owed $49,339.16 for "remodeling and construction work" it had performed at RODC between 2015 and 2017.
Scott testified, "Deep Woods Enterprises would have been the first company that my wife and I created back in the early '80's"; "Scondy is a property holding company that Cindy and I [still] utilize."
The district court entered an order consolidating the second and third cases, and trial took place over three days in June 2021 and April 2022. Following trial, the district court denied Aqua Palace's replevin claim with regard to its alleged purchase of RODC inventory. The court ordered the return of specific tools and equipment of Scott's being stored at RODC but it denied Scott's replevin claim with regard to other items Scott had not proved were his. And the court denied Aqua Palace's claim with regard to unpaid expenses for remodeling work it had completed for RODC. Finally, the court rejected RODC's counterclaims against Scott for breach of fiduciary duty and fraud. Scott and Aqua Palace appealed,and RODC cross-appealed. Additional facts will be set forth below as relevant to the issues raised.
We refer to the appellants collectively as Scott, unless separately noted.
II. Standards of Review
We review the district court's order for corrections of errors of law. See Prenger v. Baker, 542 N.W.2d 805, 807 (Iowa 1995) (reviewing replevin action); Morrissey v. Watts, No. 19-0404, 2020 WL 3264375, at *1 (Iowa Ct. App. June 17, 2020) (reviewing case involving claims of fraud and breach of fiduciary duty). The district court's findings are binding upon us if supported by substantial evidence. See Iowa R. App. P. 6.907. "Substantial evidence supports a factual finding when the finding 'may be reasonably inferred from the evidence presented.'" Hutchison v. Shull, 878 N.W.2d 221, 229-30 (Iowa 2016) (citation omitted). We review the district court's decision regarding the imposition of sanctions under rule 1.413 for abuse of discretion. See In re Est. of Bisignano, 991 N.W.2d 135, 142 (Iowa 2023).
III. Issues on Appeal
A. Replevin
In a replevin action, the court must determine which party is entitled to possession of property. See Iowa Code § 643.17. "Replevin is a specialized statutory remedy with a narrow purpose designed to restore possession of property to the party entitled to possession." Roush v. Mahaska State Bank, 605 N.W.2d 6, 9 (Iowa 2000). Scott challenges the district court's denial of his claims of entitlement to RODC inventory, RODC tools and equipment, and certain items of Scott's personal property.
1. Inventory Purchase
Scott claims ownership of RODC's inventory, based on Aqua Palace's alleged purchase of the inventory for $250,000 on December 31, 2015. At trial, Scott testified RODC's financial condition had "been declining for the last number of years" and in 2014, it was "basically almost out of funds." At that time, Ron and Judy "were ready to retire out of" the business. As Scott testified, Ron and Judy "were really kind of expecting just for me to come through and offer up enough money to clean up the debt so that they can pass the business clean to us debt free." Scott stated he believed "doing a $250,000 purchase of all the inventory at that time would be a big benefit for everybody involved." The check was deposited into a new RODC bank account, so they didn't "get confused." Scott acknowledged there were no "documents signed by [RODC shareholders] about this inventory purchase." He also agreed there were no board minutes "approving this transaction." He explained they'd always "done business in the past [like] that" and in any event, "the inventory really hadn't been completed." Scott acknowledged the $250,000 was classified as a "loan" "on the tax returns." Scott also agreed he had loaned money to RODC previously, for which no agreements were signed.
Scott's wife Cindy completed a "partial inventory" "within the year" of the alleged purchase, valuing RODC inventory "in the $400,000 range." Stan testified the inventory included only "[a]bout 10 percent," a "[v]ery small percentage," of RODC's total inventory.
Despite the discrepancy with the 2015 payment, Aqua Palace submitted another check for $250,000 to RODC in December 2016, with a memo line stating "asset purchase." Scott testified, "[W]e had crafted I thought a fairly good plan that everyone was on the same page with, and that was to take everything off the books of [RODC] in one purchase since we already paid 250 for the inventory that had been misclassified as a loan." Scott acknowledged neither Judy nor Stan signed the asset purchase agreement, but the check was deposited into RODC's account. According to Scott, eventually, "[t]here was a point in time when we just couldn't seem to get together on the asset purchase that I was asked to withdraw that" by Stan. In mid-2017, Scott withdrew $250,000, $10,000, and $70,000 from RODC.Although Scott agreed at one point "[t]he $250,000 that was advanced in December 2015 was eventually paid back to Aqua Palace," he testified at trial, "We were paid back a 250 but at the time that it was paid back, the 250 that was returned was not necessarily for the 250 inventory purchase."
Scott explained, "There was only going to be one 250 purchase made. And after the meeting we decided that the 150,000 that was left in the books after the 250 was withdrawn would be adequate financing for that, and so it was no longer needed on the books." Scott stated the $10,000 covered "just the principal" of a 2012 loan to RODC. The $70,000 payment was described by Scott's financial consultant as a "sell-back" of inventory to RODC. In contrast, Scott testified the $70,000 was for a "type of a lease payment to repay me for the usage of my equipment.... $6,000 a month would have been 72,000." Scott agreed, however, "there was never a written lease agreement entered into between [RODC] and Aqua Palace." Indeed, the third Rolenc brother, Steve, recalled Scott requesting that he-as Judy's conservator-make lease payments to Aqua Palace: "[A] lease agreement was not entered into as far as I know. I've seen no proof of that. I mean, as conservator, Scott has sent me those bills from Aqua Palace for- 217,000 is one of them. Another one was, I don't know, a hundred seventy-some thousand." Steve didn't pay Scott because he was unable "to verify those obligations."
Meanwhile, Stan testified "[t]here was never an agreement" for Aqua Palace to purchase RODC's assets or inventory. RODC sold inventory after December 2015, RODC "retained those funds," and Scott did not "prevent" RODC from selling inventory. Stan testified he didn't ask questions about the deposits because he "trusted" Scott "to manage the business properly." Stan disputed directing Scott to withdraw funds from RODC. Stan described the "final straw" of Scott's involvement with RODC-the 2016 tax return. Stan didn't sign the return "that had been filed by Scott [because it] was completely inaccurate." Scott's financial consultant, Hamilton, who had prepared the tax return, testified, "[W]e received the data from Scott, and we believe it to be accurate in nature." Hamilton described the return as "putting money into one company that needed the money and receiving in and depreciating assets and/or taking it as an inventory is making sure it's reported on the books in the company." RODC's accountant Steven Hays questioned the "sale of [the inventory] because it hadn't been okayed by [RODC] and Stan." Hays then prepared an amended tax return characterizing the 2015 deposit "as a loan," which was filed. Thereafter, RODC made a payment to Aqua Palace of $70,000, which was treated as a "sell-back." Specifically, Hamilton testified "from a tax perspective," "whatever Aqua Palace purchased with the first December 15 $250,000 check" was "treated as a sale" back to RODC for $70,000.
Hamilton conceded, "Would I make the investment? I don't know that I would, [but i]f it was my accounting firm to which I'm an owner in with my father, I probably would make that investment even though it was-because I have the personal ties to it." Hamilton further testified he brought up his "concern" about knowing "it was going to make it very thin for the business to operate and they would have to operate in a very profitable manner."
Hamilton explained, "They had a $70,000 payment, I do believe, in June to Aqua Palace or [Scott]; and we treated that as a sell-back due to the falling out in the situation, and the sum of returning it would be uncertain at that period of time; that [Scott] or Aqua Place would receive back either the assets or the money; and, therefore, from a tax perspective we treat it as a sell."
In addressing Scott's claim, the district court found:
Plaintiffs' petition here asks the court to recognize that Aqua Palace purchased the inventory of Red Oak Diesel Clinic for a sum of $250,000 on December 31, 2015, and therefore, Aqua Palace, and by extension Scott Rolenc, are entitled to the inventory that remains on the premises of the RODC. The Plaintiffs provided evidence of the check in the sum made out to RODC and the bank statements that the sum was indeed deposited and utilized by RODC. However, what is notably absent from Plaintiffs' evidence is a signed purchase agreement between Aqua Palace and RODC that proves the purchase did in fact take place. Plaintiffs point to RODC's history as a closely-held family corporation that did not adhere to corporate formalities and rarely memorialized business transactions between family members that a lack of paperwork does not prove an agreement did not exist. Yet, without some formal written agreement, the Plaintiffs cannot meet the burden that they are entitled to immediate possession, especially in the face of contrary evidence that the $250,000 deposit would be more accurately characterized as a capital contribution made by Scott in an effort to save RODC from going under.
.... It is the testimony of Scott's witness, Consultant Eric Hamilton, who assisted with the discussions between the family members in regard to how to proceed with getting Scott's money into RODC, that provides some clarity as to the true intent of those funds. Hamilton stated:
"Ultimately we decided that if [Scott] wanted to invest those monies into Red Oak Diesel Clinic, then we would wanted to make sure that he had some sort of, I guess, security with respect to it.... We did not give options, like, let the clinic go and go bankrupt because it was in that kind of financial dire straits at that point in time. But based upon our conversation of our client, we decided that we wanted to try to do whatever we possibly could to make sure his desires and needs were taken care of.... We had meetings in our conference room with respect to it with Mr. Hays, the
Rolencs, my father and myself talking about the need to infuse capital and Scott's desire to not let the company go under because it had not been performing from a financial perspective and also finding a way that they could do something to make sure that Scott had some skin in the game and retain some sort of security, and that's the solution that we had come up with."
Even though Hamilton and Scott sought to "secure" Scott's money into RODC by calling it a purchase, they took no additional steps to in fact secure it-at minimum, by memorializing the agreement to purchase. There is no evidence that it was a loan nor were there any attempts to repay the money. There is no evidence of UCC filings to protect Scott's or Aqua Palace's interests in the inventory against other creditors in regard to the inventory. Additionally, as the Defendants point out, Aqua Palace had already claimed the inventory as a loss on their taxes. After Scott and Cindy Rolenc took $330,000 out of RODC after Scott's termination, Aqua Palace showed it resold $70,000 of inventory back to RODC at a loss. Thus, in light of the evidence presented, Scott and Aqua Palace cannot meet the burden of proving that the inventory belongs in the possession of Aqua Palace.
Upon our review, we conclude substantial evidence supports the district court's findings. Specifically, we find the record does not support a finding there was a "shareholder agreement" for the alleged inventory purchase or that RODC "ratified the transaction." See Iowa Code § 490.1202(1) ("A sale, lease, exchange, or other disposition of assets . . . requires approval of the corporation's shareholders if the disposition would leave the corporation without a significant continuing business activity."); GreatAmerica Fin. Servs. Corp. v. Natalya Rodionova Med. Care, P. C., 956 N.W.2d 148, 154-55 (Iowa 2021) ("For ratification to occur, the principal must, with full knowledge of the act, manifest an intent to abide and be bound by the transaction." (citation omitted)). Rather, a finding Scott made a payment as an "investment" to RODC, as characterized by his financial consultant, can be "reasonably inferred from the evidence presented." See Bartels, 2009 WL 3337250, at *1 (noting the "standard of review dictates the result in this [replevin] case"). Accordingly, Scott's claim for replevin fails. We affirm on this issue.
In reaching this conclusion, we have not relied on RODC's claim of tax estoppel, which Scott challenges as not preserved for review.
2. Tools, Equipment, and Personal Property
Scott claims Aqua Palace owns "tools and equipment used in RODC's course of business." Scott challenges the court's denial of the claim "due to the lack of a binding contract." He points to "a list of property that he accumulated over the course of 40 years at RODC," which he alleges to be the property of Aqua Palace. Scott relies on "testimony and insurance policies, dating back 20 years ago, indicating that Scott and his business, Deepwoods Enterprises, insured various items of equipment and property located at RODC." Scott also claims ownership of "personal equipment" he accumulated over just as many years that "have not been returned by RODC."
Scott points to several exhibits to support his claim. Exhibit 39 contains copies of several insurance policy declarations. Several pages show a policy effective between April 1, 2000 to April 1, 2001, listing coverage for a "1989 M&W Lawn Clipper"; "1992 M&W Mower"; "1994 Dewezz Mower"; "1995 G2000 Grazer Lawn Mower"; and "1988 Grazer Lawn Mower." Another policy, effective April 1, 2008, to April 1, 2009, lists coverage for a "2 Yale forklift." A policy effective April 10, 2015, to April 10, 2016, provides no specific descriptions of equipment or tools covered. Exhibit 5 lists fifty-three line items under the heading "Deepwoods tooling and equipment"; twelve line items and corresponding prices under the heading "Deepwoods lawn care"; and eighteen line items and corresponding prices under the heading "Scotts personal assets." The record also includes various receipts over the course of decades. Scott also submitted photographs of several pieces of equipment bearing his initials and identification.
Scott also testified to his involvement in RODC from "the inception in 1976" to mid-2017. He described a "bonus program" RODC used in the 1980s. Rather than take a bonus check, Scott would "keep it there" "to help increase tooling and other things at the shop." He explained, "Most of the time I was just repurchasing or purchasing more tools of my craft." Scott claimed "some" of that property and equipment was "still present at [RODC]," because that's where his "home base was." Scott acknowledged he "never did pay any rent" to RODC "for use of that facility." And Scott agreed he had no documentation or invoices for the equipment and tools he claimed were his. However, Scott testified, "Steve was involved in that [bonus program] when he came in" and "Stan would have maybe been involved." But when asked, Stan testified he had never "hear[d] anything about a bonus system." Steve testified similarly, stating the bonus program "never happened."
Steve further stated, "Scott has never owned anything [at RODC]." Discussing claims for equipment Scott made to Steve in his capacity as conservator over the past few years, Steve testified, "[H]e hasn't been able to prove . . . anything that he claims of. He has no check for it. There's no way I can pay out any of those obligations [of RODC]." Steve also recalled when he was working for RODC decades ago and was "told eventually" by his parents he did not own his equipment: "I was definitely under the assumption I was working my own machines, which I found out later that that wasn't true." According to Steve, "I left all the machines there. I was not allowed to take any of them." Scott acknowledged since his employment was terminated in July 2017, he hadn't been allowed on RODC to retrieve his property. Scott stated he had spent "in the $55,000, $60,000 range" to "purchase replacement equipment."
On this claim, the district court found:
The next issue of replevin is in regard to the equipment, tools, and personal property of Scott Rolenc, Deepwoods Enterprises, Scondy, and Aqua Palace existing on [RODC] premises. Again, Plaintiffs argue that the lack of formal agreements and paperwork to back up their claims represent the course of history between family members and their respective businesses. However, it is this lack of formalities that ultimately cause an action like replevin to fail especially in light of Scott's position as shareholder as those items were acquired over the years. Accordingly, due to the lack of a binding contract, Aqua Palace has no claim of ownership of tools and equipment used in RODC's course of business ....
As to Scott's personal claims, the Court was provided with testimony and photographs depicting: various items of equipment and property with Scott's initials ("SSR") and the last four digits of his Social Security Number . . . stamped into them, various items of equipment and property with Scott's name written on them, tools and tool boxes that Scott still has keys to. Scott testified about the bonus and incentive program at RODC that was indicated occasionally in the RODC corporate books since 1983. Though Scott was undisputedly present at RODC for decades and may have thought he owned the machines in question, the issue of replevin is one that decides who has a right to possess at the time of the petition. Simply carving one's name into an item is not sufficient to claim sole ownership, especially when done inconspicuously as seen in these photographs. In addition, RODC provided documentation that proved RODC, and not Scott, had purchased many of the items Scott claimed he owned. As to the existence of the RODC bonus and incentive program, the Court is not persuaded that this program asserts Scott's sole ownership of the items in question given that the program was not credibly articulated and anything earned through the program would need to be claimed on individual tax returns as compensation in order to provide proof over the years. Additionally, the third brother, Steve Rolenc, testified that the program did not exist when he was working at RODC during the 1990s. In fact, Steve testified he made a similar claim over various pieces of equipment he used and believed he owned but when Steve left the company, their father told him that this equipment was owned by RODC and
would stay at RODC. The Court does find that Scott in fact did make many expensive equipment purchases-for example the test benches in 2015-but again, in light of Scott's belief that he would one day own RODC, these purchases are also akin to a capital contribution. Scott testified that the benches were purchased in order to keep contracts RODC had with other companies, and because his father Ron was not in a position to purchase them. Scott was making an investment into RODC's future when it was struggling financially; but like all capital investments, there is no guarantee of return. Plaintiffs do not meet their burden to show that they are entitled to possession of any tools and equipment listed that are used in RODC course of business; as such, those claims are dismissed.
However, there are many items Scott has listed that clearly cannot belong to RODC as they are not used in RODC's course of business in the diagnosis and repair of diesel engines. These items have ended up at the RODC location given Scott's management of RODC, and his use of the premises for the development of his other companies, namely Deepwoods and Aqua Palace. Because RODC did not propose evidence that would overcome the presumption that RODC has any claim to the tools and equipment being stored on the RODC premises that are NOT used in the RODC course of business, those items are to be returned to Scott and Aqua Palace. This would include the items listed on Exhibit 5 that clearly cannot be used in the course of diagnosing and repairing diesel engines, including but not limited to mowing equipment, pool/spa equipment, and any personal item not used in RODC daily course of business. Arrangements shall be made for the return of these items within sixty days of the entry of this order.
We conclude the district court's findings are supported by substantial evidence. As the court aptly noted, although Scott was "undisputedly present at RODC for decades and may have thought he owned the machines in question, the issue of replevin is one that decides who has a right to possess at the time of the petition." We start with the basic premise "[r]eplevin is an action to recover specific personal property that has been wrongfully taken or wrongfully detained." Flickinger v. Mark IV Apartments, Ass'n, 315 N.W.2d 794, 796 (Iowa 1982). Even more fundamental-and ultimately fatal-to the bulk of Scott's claim is showing the property was his. See McBeth v. McBeth, No. 19-0600, 2020 WL 5224465, at *4 (Iowa Ct. App. Sept. 2, 2020) ("The only evidence Carolyn introduced as to ownership of the farm equipment was the inventory of Stephen's estate. But the inventory is not evidence of ownership."); Alexander Techs. Eur., Ltd. v. MacDonald Letter Serv., Inc., No. 05-2023, 2007 WL 1827472, at *5 (Iowa Ct. App. June 27, 2007) ("'The fact of ownership draws with it the right of possession. If nothing further appears, the law raises the presumption the owner is entitled' to possession." (quoting Varvaris v. Varvaris, 124 N.W.2d 163, 165 (Iowa 1963))). With the exception of the listed items "not used in RODC daily course of business" as set forth by the district court, we conclude Scott has failed to sustain that burden. We affirm on this issue.
B. Remodeling and Construction Work
Scott challenges the court's denial of Aqua Palace's claim for unpaid remodeling and construction work at the RODC facility. According to Scott, "RODC owes $49,339.16 for the remodeling work, interest at a rate of 1.5% per month since July 28, 2017, and attorney's fees." The following facts are relevant to this issue.
The RODC facility was constructed in 1976. Scott, who was in grade school at the time, recalled working alongside Ron with "the construction crews." The facility has undergone renovations "multiple times" over the years, and Scott was "involved with all of those different construction remodels." In the 1980s, a warehouse was added. Scott explained, "[W]e built a new 40 by 60 warehouse in the back that I built, designed, and constructed myself." In the 1990s, an addition for the main building was constructed. Scott stated, "The main addition was 5500 square foot and then it's got an upstairs floor to it, so roughly we got about another 7000 square foot. Basically doubled the size of the building." Scott "designed it" and "wound up taking the lead on that. We had a few estimates that came in at that time in the two to $300,000 range, and it was just beyond our means to do that. I was already doing general contracting at the time." With the main addition, the RODC facility was "new and upgraded" and in the "current configuration" it is "today." Scott testified there were no written agreements for the construction work he completed over the years; he was "just paid for the materials." Scott explained, "[S]ince I was the general contractor, [RODC] got passed on all my discounts, so it was net zero for me."
Fast forward to 2013 or 2014. One of RODC's "highest priorities" was to "attract a top level technician." To do so, Stan and Scott agreed the facility needed a partial remodel to "the drive-in part of the shop." They agreed to "redo the floor," "brighten up the walls," "replace[] [the] main door," and "add a second garage door." They also agreed "it would be beneficial to [RODC] to replace the light bulbs with a more energy-efficient light bulb." Ron and Judy "were all on board with whatever remodeling had to be done there," and Scott's 2015 deposit made it possible "to go forward with the remodel." The parties acknowledged there was no contract or written agreement. Scott explained, "We never have. When Mom and Dad want something done, it's just-that's the way the family's always been."
"At the time there was a rebate program through" the electrical utility company; Scott "estimated that to replace these light bulbs was going to cost approximately $7500 and that we would get $6000 of that back in a rebate, so the actual cost to [RODC] would be approximately $1500."
As he had in the past, Scott "generaled" the remodel project. He began in "[t]he winter of 2015, 2016" and "the light bulbs were done . . . the following winter." But as tensions surfaced between Scott and the Rolenc family in light of the topics discussed above, the remodeling project was abandoned in the winter of 2016-2017. Stan estimated Scott had completed "[a]pproximately 25 percent of what we originally discussed." Stan also stated he and his children "had to go back and redo some of that work." Scott was subsequently terminated from RODC in July 2017. Around that time, Scott submitted two Aqua Palace invoices to RODC, in the amounts of $15,072.19 (light bulbs) and $34,266.97 (partial shop remodel), which have remained unpaid.
After Scott replaced the light bulbs, he realized they "were not compatible with the ballasts in one-third of the light fixtures in the shop," so he completed ballast repair work as well.
In denying the claim for unpaid remodeling and construction work, the district court found as follows:
Plaintiff's last claim for the unpaid remodeling and construction work done by Aqua Palace fails for reasons that echo the rest of the claims-the lack of any formal agreement or contract to evidence a meeting of the minds. Scott testified that he, Stan, Ron and Judy, all agreed that the remodeling work needed to be done back in 2015, and that the work began shortly thereafter. The Court has heard evidence that Scott used to run RODC expenses through Aqua Palace in order to get them cheaper. Scott also testified that he was in charge of the remodel projects done to RODC in the 1990s, but there was no evidence that Aqua Palace or Scott ever invoiced and were paid on these projects when they were completed. Similarly, there is no evidence that Scott or Aqua Palace ever planned to request payment for the remodeling work until after Scott was terminated in August of 2017. As shown in the photographs entered into evidence, all of the work is not yet complete and there are stacks of construction materials still sitting at RODC nearly five years later. The invoices for work completed and the interest therein are not sufficient to bind RODC to pay for the work completed because they lack a meeting of the minds between Aqua Palace and RODC. Instead, it would follow the previous explanations that Scott had the remodeling work done in anticipation of one day owning RODC, and that this investment would be akin to his other capital contributions to the company while he was a shareholder. As such,
any capital investment Scott has made has already been settled in his buyout as a shareholder. Therefore, RODC is not obligated to pay on the remodeling work done by Aqua Palace. However, the Court will reiterate that any tools and equipment belonging to Aqua Palace, and obviously not used in RODC's course of business will be returned.
Upon our review of the facts and circumstances presented here, we concur in the court's ruling. We have considered Scott's claims that "Aqua Palace was never a shareholder of RODC," "Aqua Palace never made any capital contribution to RODC," and "any capital investment [by] Scott . . . does not affect the claim by Aqua Palace." However, implicit in the district court's decision was a factual finding Scott was acting in his individual capacity as a shareholder of RODC when he undertook and completed the remodeling and construction work at the RODC facility. In other words, despite the fact Scott subsequently sent invoices from Aqua Palace, the court determined his services were completed as a shareholder of RODC acting in that capacity for RODC as he always had. We conclude the court's finding can be reasonably inferred from the evidence presented, and we affirm on this issue.
Even when asked at trial "who was doing th[e] work" for the remodel, Scott responded, "[p]rimarily I was," although he later changed his answer, saying it was "more of the Aqua Palace."
We further observe this is not a claim for breach of written or oral contract, a mechanic's lien foreclosure action, or a claim of unjust enrichment (i.e., potential causes of action for Aqua Palaces to pursue payment for unpaid work on a project). None of those claims were raised before, or decided by, the district court.
IV. Issues on Cross-Appeal
A. Breach of Fiduciary Duty and Fraud
RODC challenges the district court's dismissal of its claims of breach of fiduciary duty and fraud against Scott. RODC's breach-of-fiduciary-duty claim is premised on Scott's alleged "misrepresent[ions of] his attempted self-dealing or the capital contribution in order to set up a later claim against RODC" and his "fil[ing of] RODC's tax return, without authorization, to reflect the inventory purchase from the 2016 check deposit as well as incorrect sales, profit, and loss figures." And RODC's fraud claim is based on Scott's "misrepresent[ion] and/or recharacteriz[ation of] his self-dealing regarding the 2015 deposit."
The elements of a breach-of-fiduciary-duty claim are: "(1) a fiduciary duty existed between [Scott and RODC], (2) [Scott] breached the fiduciary duty, (3) [Scott]'s breach caused damage to [RODC], and (4) the amount of damages [RODC] sustained due to the breach." See Manatt's Inc. v. Tanam Real Est., LLC, No. 19-0156, 2020 WL 5229173, at *2 (Iowa Ct. App. Sept. 2, 2020). The elements of a fraud claim are: "(1) representation, (2) falsity, (3) materiality, (4) scienter, (5) intent to deceive, (6) reliance, (7) resulting injury and damage." Phoenix v. Stevens, 127 N.W.2d 640, 642 (Iowa 1964). RODC had the burden to establish each of these elements before it was entitled to recover. See id.
The district court determined, "Given the court's previous conclusions in the replevin case that Scott was making capital contributions instead of attempting to purchase the assets, there is not enough evidence to find that Scott was acting improperly to support either claim nor are there damages to sustain either claim." The court further found:
[Regarding RODC's breach-of-fiduciary-duty claim,] [g]iven that any attempt to purchase assets or inventory was ultimately unsuccessful and would more accurately be characterized as a capital contribution given the facts reviewed in the replevin action, there is no evidence to support Scott's breach of duty. Furthermore, any money Scott moved in and out of RODC was his money, and the only damages Defendants can point to are the costs associated with amending and
refiling tax returns. However, those expenses do not directly result from Scott's behavior and are resultant of Stan's choice, as a business decision, to amend and refile after the fact. Other asserted damages are not directly related either to the infusion of Scott's money.
.... [Regarding RODC's fraud claim,] [g]iven the fact that Scott made more than one capital infusion, and had been regularly involved in keeping RODC afloat for many years, there is not enough evidence to prove that his attempts to infuse capital was done with an intent to deceive. Scott had been delegated the duty to manage the financials of the business at that point, and the choices he made in that regard were similar to those historically made by the Rolencs in the past. More importantly, Defendants have not shown that they relied upon Scott's attempt to purchase because the purchase agreement was never signed and never finalized. Defendants are not "out" anything for Scott moving money in and out of RODC. Therefore, all Defendants' claims against Scott are dismissed.
On appeal, RODC claims "[t]his tax return cost around $3,760 to prepare." To support this claim, RODC points to invoices from Hamilton relating in part to "preparation of income tax returns for the year end[ing] March 31, 2017" and "tax work," as well as the following testimony from Stan: "Direct cost from the Hays Accounting, I could not tell you an exact number but several thousand dollars. Indirect cost of labor that had to be paid for and inputted by myself and mostly by my wife to help put the correct numbers in, there again, several thousand dollars." We find this evidence insufficient to support RODC's request for damages concerning the filing of the amended tax return.
Upon our review, we agree. Although there was testimony indicating Scott made questionable choices in moving assets between companies, there was no evidence he intentionally acted to the detriment of RODC. Nor would he, because he was, during the time relevant to these claims, contributing to RODC's capital with the intent to grow the business with Stan. Indeed, according to Stan, he and Scott discussed "the needs of this business moving forward as him and I were taking over the management of the company," and they agreed on the path ahead for RODC, until Scott's termination in mid-2017. We affirm on these issues.
For example, RODC presented testimony from Rolenc family members Scott "benefited" from RODC on his "taxes for about $600,000 of tax credits over three years." But RODC presented no other evidence to support that claim. See Phoenix, 127 N.W.2d at 643 ("Here plaintiffs' difficulty is the lack of evidence.").
B. Attorney Fees
In a posttrial brief, RODC claimed it was "entitled to a sanction in the amount of its fees and costs in defending against this lawsuit, which was proven at trial to be frivolous because Aqua Palace reported a position on its 2017 tax return that is completely inconsistent with its position in this litigation." RODC requested attorney fees "pursuant to Iowa R. Civ. P. 1.413(1)." That rule provides, in relevant part:
Specifically, RODC claimed:
According to Aqua Palace's tax return for 2017, signed under penalty of perjury by Scott Rolenc, it sold all of the assets it alleges it purchased from RODC back to RODC that year for $70,000. This is directly inconsistent with the premise of claims 1 and 3 in this lawsuit-that Aqua Palace is entitled to take possession the assets of RODC because it purchased them and that the $70,000 RODC paid to Aqua Palace constituted "lease" payments evidencing the existence of a lease agreement.
Counsel's signature to every motion, pleading, or other paper shall be deemed a certificate that: counsel has read the motion, pleading, or other paper; that to the best of counsel's knowledge, information, and belief, formed after reasonable inquiry, it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass or cause an unnecessary delay or needless increase in the cost of litigation.... If a motion, pleading, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay the other party or parties the amount of the reasonable expenses incurred because of the filing of the motion, pleading, or other paper, including a reasonable attorney fee....
Iowa R. Civ. P. 1.413(1). "The rule is intended to discourage parties and counsel from filing frivolous suits and otherwise deter misuse of pleadings, motions, or other papers." Barnhill v. Iowa Dist. Ct., 765 N.W.2d 267, 273 (Iowa 2009); see Rowedder v. Anderson, 814 N.W.2d 585, 589 (Iowa 2012) ("The primary purpose of sanctions under rule 1.413(1) is deterrence, not compensation.").
Here, the district court found "the causes of action were not so unfounded as to be considered frivolous, and so the request for attorney's fees is denied." In evaluating RODC's claim on cross-appeal, we observe the district court had the opportunity to consider the parties' numerous claims and voluminous records in three cases over the course of nearly five years. The court presided over six days of trial, during which it heard "extensive testimony" about the parties' involvement in RODC. Further, as this court previously observed, "The district court found the company's recordkeeping was deficient because there 'clearly has been more going on in the company than what is reflected in the minutes, etc. of the corporation. Some of the dealings in the business by both Scott and Stan are questionable ....'" Rolenc, 2020 WL 5229183, at *3. Under these circumstances, we decline to find the court abused its discretion in denying RODC's request for attorney fees. See Bisignano, 991 N.W.2d at 142 ("Arguments 'made in good faith' weigh against a sanction.... Exile, in the probate court's view, had a reasonable basis for the arguments it presented, and we agree. Exile engaged in no misconduct warranting a sanction ....").
The court also took judicial notice of several other causes of actions involving these parties.
V. Conclusion
Upon consideration of the issues raised on appeal and cross-appeal, we affirm the district court's order.
AFFIRMED ON APPEAL; AFFIRMED ON CROSS-APPEAL.