Messy legalities (Part 1)

By Leisa Boley Hellwarth     

Families are messy. Farming is messy. Litigation is messy. And on April 19, 2024, the Iowa Supreme Court issued a ruling in a shareholder derivative action that involved all of the above. A shareholder derivative case is a lawsuit brought by a shareholder or group of shareholders on behalf of the corporation against the corporations’ directors, officers and other third parties who breach their duties. In this matter, two brothers sued their father and brother. Let’s take a look at the decision in Hora v. Hora.

The facts section actually begins with the Hora family tree. George and Marie Hora, of Washington County, Iowa, had three children, Keith, born in 1938, and his two siblings, Kathy and Kevin. Keith married Celeste in 1959, and from 1960 to 1968, they had six children, Gregg, Brian, Dana, Kurt, Daren and Heidi.

Upon Celeste’s death in 1989, the Celeste N. Hora Trust, a testamentary trust, was created. (A testamentary trust is a trust created by the Grantor’s will.) Keith has been the Trust’s sole trustee since its creation. Keith and Celeste’s six children are the Trust’s beneficiaries, with each child to receive an equal share of trust property, per stirpes, upon Keith’s death. (Per stirpes is a legal term that describes how your assets are divided and distributed. In Latin, per stirpes simply means by branch. If you choose to distribute assets to your children first, but then to their children should they pass away before you do, you have set up your will or trust per stirpes.)

HFI was incorporated in Iowa in 1974, with George and Keith Hora serving as the initial directors. HFI owns 1,075 acres of land in or near Washington County, and it grew corn and soybeans at all times relevant to the litigation. At the time of trial HFI had 1200 Class A voting shares: Keith owns 501 shares; the Trust owns 303 shares; and Kathy and Kevin each own 198 shares. HFI also had 3600 Class B non-voting shares: Keith owns 868 shares; the Trust owns 867 shares; and Kathy and Kevin each own 548 shares; and Keith and Celeste’s six children each own 128 or 129 shares.

Kurt and his wife, Heather, formed HK Farms, Inc. They grow crops and feed swine from weaning to finishing. Brian and his wife formed Precision Partners Corporation which conducts farm activities.

Gregg worked for HFI from 1982 to 1985. He then left HFI and Washington County to farm with his inlaws. Brian began working for HFI in 1985. Kurt began working for HFI in 1988. Brian supervised Kurt and HFI’s operations during this time. Kurt testified that Brian was “extremely difficult to work with.” Imagine brothers not getting along?

In the fall of 2000, an argument on the farm erupted between Keith, Brian and Kurt. Kurt quit HFI, and Brian was fired. Brian has since done a little farm work for HFI but has had no involvement with managing the company. HFI rehired Kurt in 2001 in a managerial role, and he continued to serve as operations manager through the trial at the district court in 2020. When Kurt returned to HFI, he received hourly pay, bonuses based on production, and reimbursement for certain expenses. Kurt also claims he took part of his compensation in corn (commodity transfer) used for feed in his swine operation. In 2003 or 2004, Kurt and Keith agreed to estimate Kurt’s use of corn at nine bushels per hog Kurt sold.

In March 2015, Gregg and Brian began raising concerns to Keith and Kurt about HFI’s financial situation, specifically HFI’s negative cash flow and corn that could not be found and was not sold. In August of that year, Gregg was elected to replace his grandmother Marie as director alongside Keith. Gregg resigned less than one year later, stating Keith and Kurt were preventing HFI from adopting changes needed to reverse HFI’s trend of accumulating more debt. Darren was elected as a director in 2017, and he and Keith continued to serve as directors at the time of the trial.

On August 18, 2017, Brian, Gregg, and Precision Partners (essentially two brothers) filed their petition against Keith, Kurt, Heather and HK Farms (essentially their father and their brother). The plaintiffs advanced four counts: (1) Keith and Kurt breached their fiduciary duties (to manage the corporation’s money and property for its benefit) to HFI through mismanagement, self-dealing and other actions; (2) Keith and Kurt committed fraud, fraudulent concealment and fraudulent misrepresentation; (3) a custodian should be appointed for HFI; and (4) Keith should be removed as trustee of the Trust.   

Next month, I’ll let you know how it all worked out. Here’s a hint, it’s messy.

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