In the Iowa Supreme Court
No. 22–1601
Submitted December 18, 2024—Filed February 28, 2025
Hunter Three Farms, LLC,
Appellant,
vs.
Richard Hunter, individually and as a member of Hunter Three Farms,
Appellee.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Greene County, Derek Johnson,
judge.
A member of a limited liability company contends the company lacks
standing to pursue a claim against him without his consent. Decision of Court
of Appeals Vacated; District Court Judgment Reversed and Case Remanded.
McDonald, J., delivered the opinion of the court, in which all participating
justices joined. McDermott and May, JJ., took no part in the consideration or
decision of the case.
Adam J. Babinat (argued) and Bradley M. Strouse of Redfern, Mason,
Larsen & Moore, P.L.C., Cedar Falls, for appellant.
Spencer S. Cady (argued) and Brianna L. Long of Nyemaster Goode, P.C.,
Des Moines, and Justin E. LaVan and Benjamin J. Kenkel of Dickinson,
Bradshaw, Fowler & Hagen, P.C. (until withdrawal), Des Moines, for appellee. 2
McDonald, Justice.
The question presented in this appeal is whether a majority of the voting
members of a limited liability company can authorize the company to file a suit
against another voting member of the company to recover funds the
nonconsenting member allegedly owed the company. For the reasons expressed
below, we conclude that a majority of the voting members can authorize such a
suit in the ordinary course of the activities of the company.
I.
Brothers Robert, Gary, and Richard Hunter are experienced and longtime
farmers and farm operators. They did business together in a general partnership
named Hunter Farms. In March 2017, the brothers converted the general
partnership into a limited partnership for a brief period before converting the
limited partnership into a limited liability company, Hunter Three Farms, LLC
(the LLC). The LLC was member-managed. The brothers each owned twenty
voting units of the LLC,1 and Hunter of Iowa, Inc., owned forty nonvoting units.
The LLC maintained the same tax identification number as the Hunter Farms
general partnership.
The LLC was formed without an operating agreement. However, shortly
after the LLC was formed, it filed a short statement of authority with the Iowa
Secretary of State. The statement of authority described certain real property
owned by the LLC in Grimes, established certain restrictions on the sale or
encumbrance of that property, and provided the mailing and principal address
of the LLC. The filed statement of authority also included a provision stating,
1Robert and Gary transferred their twenty voting units to the Robert P. Hunter Revocable
Trust and Gary G. Hunter Revocable Trust, respectively. For ease of reference, when discussing the LLC’s operations, we will continue to refer to the voting members as Robert and Gary rather than their respective revocable trusts. 3
“A majority of the voting membership interests are authorized to make ordinary
business decisions. All other decisions, including any change to this Statement
of Authority, will require the consent of all members.”
The dispute in this case relates to settlement proceeds allegedly owed to
the LLC. In 2018, Richard submitted a claim to the Syngenta Corn Seed
Settlement Program on behalf of “Hunter Farms.” He did not tell his brothers
that the program existed or that he was making a claim. On the claim form,
Richard listed “Hunter Farms” as the producer entitled to the settlement
proceeds. The form requested the “Tax ID Number for this Producer.” Richard
entered the LLC’s tax identification number as the producer making the claim.
He signed the claim form, stating that he was authorized to file the claim on
behalf of the identified entity:
I declare that I am the Producer (or Representative Claimant) entitled and/or authorized to make claims for the bushels listed in this Claim Form, and that no other person or entity has made claims for my share in the bushels listed in this Claim Form to the best of my knowledge. If the Producer is a business or other legal entity, I certify that I am authorized to act on behalf of the Producer submitting this Claim Form.
Richard received a $62,467.91 settlement payment on behalf of the identified
producer. Richard deposited the payment into a bank account under the name
of “Hunter Iowa Farms, Inc.” The LLC did not have access to that account, nor
did Robert or Gary.
Robert and Gary did not learn of the settlement payment until Syngenta
issued a Form 1099-MISC to the LLC. Syngenta issued a Form 1099-MISC to
the LLC because Richard used the LLC’s tax identification number to identify the
producer on the settlement claim form. After receiving the Form 1099-MISC,
Robert and Gary sent a demand letter to Richard requesting that he distribute
their respective shares of the settlement funds or provide all proceeds from the 4
settlement to the LLC. Richard, through his son Steven, declined. He claimed
that he had only applied for his third of the settlement money and that he was
entitled to the entirety of the funds he received.
Robert and Gary then voted to have the LLC file this direct action against
Richard, without Richard’s consent, to recover the settlement proceeds owed to
the LLC. The petition asserted claims for (1) breach of fiduciary duty, (2) breach
of the duty of good faith and fair dealing, (3) conversion, and (4) unjust
enrichment.
Richard filed a motion for summary judgment. Richard argued that the
LLC lacked standing to sue him. He contended that the statement of authority
was controlling and that it required the consent of all members to take any action
beyond “ordinary business decisions.” In addition, he argued, in the absence of
an operating agreement, the Code requires the consent of all voting members to
undertake any action outside “the ordinary course of the activities of the
company.” Iowa Code § 489.407(2)(d) (2021). Richard then claimed that the
LLC’s decision to file a lawsuit against him was not an ordinary business decision
and was outside the ordinary course of activities for the company. Richard thus
concluded that the LLC was required to obtain the consent of all voting members
before initiating suit, and the failure to do so deprived the LLC of standing to sue
him. In Richard’s view, in the absence of unanimity, the voting members of the
LLC were required to file a derivative suit on behalf of the company to collect the
funds he allegedly owed the company.
The LLC resisted Richard’s motion and filed its own motion for summary
judgment. The LLC rejected that standing was a concern in this case, arguing
instead that this was an issue of authority. The LLC claimed it had the authority
to file suit against Richard based on a majority vote of the members because a 5
lawsuit to recover funds owed to the LLC was within the LLC’s ordinary course
of activities. Additionally, the LLC argued this action was proper because all
disinterested members (Robert and Gary) voted to pursue the litigation. The LLC
argued that because the suit was authorized under either of these theories, it
had standing to initiate this action against Richard to the extent standing was
implicated here. The LLC also sought judgment on the merits of its claims,
arguing that it was entitled to judgment as a matter of law against Richard.
The district court granted Richard’s motion for summary judgment and
dismissed the case. The district court reasoned that this litigation was not within
the scope of the LLC’s ordinary course of business activities and that the decision
to file the action against Richard required the unanimous approval of all voting
members, including Richard. Because Richard did not vote in favor of the LLC
filing suit against him to recover monies owed to the LLC, the decision to file suit
was not proper, and the LLC lacked standing to pursue the claim.
The LLC appealed, and we transferred the case to the court of appeals.
There, a divided panel reversed the district court ruling. The majority concluded
that the district court erred in granting Richard’s motion for summary judgment.
The majority held that “an LLC may sue one of its member-managers under
exceptional circumstances if all disinterested members authorize litigation.”
Here, all disinterested members authorized the litigation against Richard. The
dissenting judge would have affirmed the district court’s dismissal. The dissent
declined to read a “disinterested members” or “exceptional circumstances”
requirement into the relevant provisions of Iowa Code chapter 489 and
concluded that this lawsuit was outside the ordinary course of the LLC’s
activities. The dissent thus maintained that the unanimous consent of all voting
members was required to initiate this action. In the absence of unanimous 6
consent, the dissent noted that the members were free to initiate a derivative suit
on behalf of the LLC.
We granted Richard’s application for further review. Our review of the
district court’s ruling is for the correction of errors at law. Kunde v. Est. of
Bowman, 920 N.W.2d 803, 806 (Iowa 2018).
II.
A.
We first clarify a point of doctrinal confusion. Richard argues, and the
district court concluded, that the LLC lacked standing to sue because this was
a matter outside the ordinary course of activities of the company that required
the consent of all voting members of the LLC. In our caselaw, standing is a term
of art. To have standing to sue, “a complaining party must (1) have a specific
personal or legal interest in the litigation and (2) be injuriously affected.” Iowa
Citizens for Cmty. Improvement v. State, 962 N.W.2d 780, 790 (Iowa 2021)
(quoting Citizens for Responsible Choices v. City of Shenandoah, 686 N.W.2d 470,
475 (Iowa 2004)). “Whether litigants have standing does not depend on the legal
merit of their claims, but rather whether, if the wrong alleged produces a legally
cognizable injury, they are among those who have sustained it.” Citizens for
Responsible Choices, 686 N.W.2d at 475. There is no doubt the wrong alleged in
this case produced an injury. The LLC asserts a specific legal interest in the
settlement funds and asserts it was injured when Richard allegedly converted
the settlement funds and unjustly enriched himself by taking possession of the
settlement funds. This is sufficient to establish standing. See id.
The LLC correctly argues that the real question presented in this case is
one of authority rather than one of standing. “[A] party must have capacity to
sue before the party may commence and maintain a cause of action.” Iowa Coal 7
Mining Co. v. Monroe County, 555 N.W.2d 418, 428 (Iowa 1996). “Capacity relates
to a party’s personal or official right to litigate the issues presented by the
pleadings. Want of capacity to sue has reference . . . to legal disability . . . which
deprives a party of the right to come into court.” Id. (quoting 59 Am. Jur. 2d
Parties § 24, at 410 (1987)). Generally, “a limited liability company has the
capacity to sue and be sued.” Iowa Code § 489.105(1). Whether that capacity
was properly authorized is a question of governance. See, e.g., Iowa Individual
Health Benefit Reins. Ass’n v. State Univ. of Iowa, 876 N.W.2d 800, 806 (Iowa
2016) (stating that the enabling legislation granting a specific nonprofit
corporation the power to “[s]ue or be sued” provided it the “authority” to sue
(quoting 1995 Iowa Acts ch. 5, § 12 (codified at Iowa Code § 513C.10(5)(b)
(1997)))); Berger v. Gen. United Grp., Inc., 268 N.W.2d 630, 635 (Iowa 1978)
(“Authority to sue for corporate injuries ordinarily reposes in corporate
management.”); Lakes Gas Co. v. Terminal Props., Inc., No. 05–1266,
2006 WL 1229934, at *7 n.3 (Iowa Ct. App. Apr. 26, 2006) (“Because Hampton
was managed by its members, authority was to be exercised by all members, and
action could be taken only by a majority of the members, Terminal Properties
did not have the authority to sue in its own right.”).
B.
Having clarified the distinction between standing and authority, we now
address the issue of authority. “[T]he limited liability company is an
unincorporated business association comprised of members who either manage
the limited liability company directly or who delegate that task to managers.”
5 Matthew G. Doré, Iowa Practice Series: Business Organizations § 13:1, at 322
(2024–2025 ed. 2024) [hereinafter Doré, Business Organizations]. Limited
liability companies operate as a hybrid of both corporations and partnerships. 8
See Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 290 (Del. 1999) (“The LLC
is an attractive form of business entity because it combines corporate-type
limited liability with partnership-type flexibility and tax advantages.”); Doré,
Business Organizations § 13:1, at 322–23.
Iowa has adopted the Revised Uniform Limited Liability Company Act to
govern the organization, governance, and operation of limited liability
companies. See Iowa Code § 489.101. Under Iowa law, a limited liability
company is “an entity distinct from its members” with “the capacity to sue and
be sued in its own name and the power to do all things necessary or convenient
to carry on its activities.” Id. §§ 489.104(1), .105(1). Typically, governance and
operation of a limited liability company are controlled by an operating agreement
agreed to by the members. See id. §§ 489.110–.112. If the company has an
operating agreement, it is binding. See id. § 489.111(2); Homeland Energy Sols.,
LLC v. Retterath, 938 N.W.2d 664, 687 (Iowa 2020). If the company does not
adopt an operating agreement, the company is governed by the default provisions
set forth in chapter 489. See Iowa Code § 489.110(2) (“To the extent the operating
agreement does not otherwise provide for a matter described in subsection 1,
this chapter governs the matter.”).
The parties in this case did not adopt an operating agreement. However,
they did adopt a statement of authority which provides that “ordinary business
decisions” can be made by “[a] majority of the voting membership interests,”
while all other decisions “require the consent of all members.” Richard argues
that the statement of authority is, effectively, an operating agreement that
overrides the default statutory provisions in chapter 489. Richard’s argument is
unavailing. “A statement of authority affects only the power of a person to bind
a limited liability company to persons that are not members.” Id. § 489.302(3). 9
The authority to bind the company to persons not members of the LLC is not at
issue here, and the statement of authority is thus immaterial to the resolution
of this appeal.
Due to the lack of an operating agreement governing the LLC, whether
Robert and Gary had the authority to authorize the LLC to recover the settlement
proceeds is governed by the default provisions in the Code. See id. § 489.110(2).
The LLC is a member-managed limited liability company. “The management and
conduct of the company are vested in the members.” Id. § 489.407(2)(a). “Each
member has equal rights in the management and conduct of the company’s
activities.” Id. § 489.407(2)(b). “A difference arising among members as to a
matter in the ordinary course of the activities of the company may be decided by
a majority of the members.” Id. § 489.407(2)(c). “An act outside the ordinary
course of the activities of the company . . . may be undertaken only with the
consent of all members.” Id. § 489.407(2)(d).
We thus must determine whether litigation to recover funds allegedly owed
to the company is a matter or act in the ordinary course of the activities of the
company within the meaning of the statute. The statute does not define what
constitutes matters or acts in the ordinary course of the activities of the
company. This court has not yet opined on the issue. With respect to a similar
term, this court has stated that “ ‘ordinary course of business’ is a widely
understood term” that means “transact[ing] business according to the usages
and customs of the commercial world generally or of the particular community.”
Comm. on Prof’l Ethics & Conduct v. McCullough, 465 N.W.2d 878, 886 (Iowa
1991) (alteration in original) (quoting Ordinary Course of Business, Black’s Law
Dictionary 989 (5th ed. 1979)). Reference materials define the term “course of
business” as “[t]he normal routine in managing a trade or business.” Course of 10
Business, Black’s Law Dictionary (12th ed. 2024). A treatise also explains that
the similar “legal term of art ‘ordinary course’ of business, in a statute governing
the . . . members of a limited liability company . . . is intended to encompass
transactions that are part of the normal or customary routine, even if only
occasional, of the commercial world generally, or of businesses of the same kind.”
54 C.J.S. Limited Liability Companies § 12, at 544 (2020).
In the absence of controlling authority, we have examined the persuasive
precedents, see Iowa Code § 489.1301 (“In applying and construing this chapter,
consideration must be given to the need to promote uniformity of the law with
respect to its subject matter among states that enact it.”), many of which are
thoroughly and helpfully discussed in the parties’ briefing. In the partnership
context, several courts have concluded that a suit against a partner is not a
matter or act in the ordinary course of business of the company. See Vecchitto v.
Vecchitto, No. CV084008482, 2008 WL 4210784, at *1 n.4, *3–4 (Conn. Super.
Ct. Aug. 26, 2008) (holding that a suit against a partner for breach of fiduciary
duty, breach of an obligation of good faith and fair dealing, and conversion was
not within the partnership’s ordinary course of business to sell frozen treats);
Great N. Cap. Mgmt. v. IAI Cap. Mgmt. Corp., No. C0–94–2602, 1995 WL 352857,
at *1, *3 (Minn. Ct. App. June 13, 1995) (holding that a suit for breach of
fiduciary duty against a partner was not an ordinary partnership matter and
distinguishing a case involving a suit to enforce obligations owed the
partnership); Casey Ranch Ltd. P’ship v. Casey, 773 N.W.2d 816, 822, 822 n.4
(S.D. 2009) (stating that the initiation of a lawsuit for debt collection against a
nonpartner is typically within the ordinary course of business but implying in
dicta that such a suit against a partner may not be). Other courts have taken
these concepts from partnership law to reach similar results with respect to 11
limited liability companies. See, e.g., Street Star Designs, LLC v. Gregory,
No. H–11–0915, 2011 WL 3925070, at *1, *3 (S.D. Tex. Sept. 7, 2011) (holding
that half the members of a limited liability company lacked authority to cause
the company to sue the other members because such action was not within the
ordinary course of business); Crouse v. Mineo, 658 S.E.2d 33, 35, 37–38 (N.C.
Ct. App. 2008) (holding that a law firm organized as a limited liability company
whose usual business was the “provision of legal services to clients” was not
“carrying on in the usual way” of the business in suing departing member for
breach of fiduciary duty to recover company assets and for appointment of a
receiver to wind up the affairs of the firm (quoting N.C. Gen. Stat. § 57C–3–23
(2007))).
We give respectful consideration to these decisions, but we do not find
them applicable to this case. While the Code does not enumerate the matters or
acts that fall within the ordinary course of the activities of the company and that
can be approved by majority vote, the Code does identify some of the types of
matters or acts that fall outside the ordinary course of the activities of the
company and that require unanimous consent. Such matters or acts include
“selling, leasing, exchanging, or otherwise disposing of all, or substantially all, of
the company’s property.” Iowa Code § 489.407(2)(d). We can infer from these
examples of the acts or matters that fall outside the ordinary course of activities
the types of matters or acts that fall within the ordinary course of activities. See
Doe v. State, 943 N.W.2d 608, 613 (Iowa 2020) (stating that “[w]e read statutes
as a whole rather than looking at words and phrases in isolation” (quoting Iowa
Ins. Inst. v. Core Grp. of Iowa Ass’n for Just., 867 N.W.2d 58, 72 (Iowa 2015))).
The enumerated examples show that matters or acts outside the ordinary course
of activities of the company and that require unanimity are those material to the 12
ongoing operation of the company and thus material to the members’ respective
interests in the company. See Doré, Business Organizations § 13:18, at 370–71
(stating that “[d]ecisions outside the ordinary course of business” include “a sale
of all or substantially all company assets”).
Our conclusion that the Code’s call for unanimity is to protect the interest
of each of the members with respect to matters or acts material to the operation
of the company is affirmed by other provisions within chapter 489 that require
the unanimous agreement of the members to change the structure and
governance of the company. See, e.g., Iowa Code §§ 489.401(4)(c) (“After
formation of a limited liability company, a person becomes a member . . . [w]ith
the consent of all the members.”), .407(2)(e) (“The operating agreement may be
amended only with the consent of all members.”), .602(4) (“A person is
dissociated as a member from a limited liability company when . . . [t]he person
is expelled as a member by the unanimous consent of the other members [in
certain specified circumstances].”), .701(1)(b) (“A limited liability company is
dissolved, and its activities must be wound up, upon . . . [t]he consent of all the
members.”), .701A(2)(a) (“Rescinding dissolution under this section
requires . . . [t]he affirmative vote or consent of each member.”), .1003(1)
(“Subject to section 489.1014, a plan of merger must be consented to by all the
members of a constituent limited liability company.”), .1007(1) (“Subject to
section 489.1014, a plan of conversion must be consented to by all the members
of a converting limited liability company.”), .1011(1)(a) (“A plan of domestication
must be consented to . . . [b]y all the members . . . if the domesticating company
is a limited liability company.”), .1109 (“Unless the certificate of organization or
an operating agreement otherwise provides, a voluntary assignment requires the
unanimous consent of the members.”). These types of organic transactions 13
require unanimity to protect each member’s respective interests in the company
and thus fall outside the ordinary course of activities. See Doré, Business
Organizations § 13:18, at 370–71 (stating that “[d]ecisions outside the ordinary
course of business” include “amendments to the operating agreement, and
organic transactions (e.g., mergers or conversions)”).
In sum, read as a whole, the default provisions in chapter 489 establish
the types of matters or acts that require unanimous consent of the members of
a limited liability company and the types of matters or acts that do not. Matters
or acts material to ongoing operations of the company, such as the sale of all or
substantially all the company’s assets, that would materially affect each
member’s respective interest in the company require unanimous consent. Iowa
Code § 489.407(2)(d). Acts changing the governance and structure of the limited
liability company that could potentially impair a member’s financial or
governance interest in the company require unanimous consent. See, e.g., id.
§ 489.401(4)(c). These unanimity requirements allow each member to protect his
or her interest in the operations of the company by exercising a veto over
decisions material to the operation and governance of the company and thus
material to the member’s respective interest in the company. Where those types
of material concerns are not implicated—i.e., matters or acts in the ordinary
course of the company’s activities—unanimity, or the veto right, is not necessary.
This suit does not involve a matter or act material to the ongoing
operations of the LLC. This is an ordinary debt collection suit involving only a
relatively small amount at issue compared to the property of the company. The
settlement funds at issue are $ 62,467.91. The record is sparse on the size of the
LLC and its operations, but the statement of authority notes that it takes
seventy-five percent of the voting members to approve the sale or mortgage of the 14
company’s Grimes property at less than eighty percent of the price of
$24,356,000.
Nor does this suit involve organic transactions related to the governance
of, structure of, or interests in the LLC. Instead, this is a suit to collect funds
allegedly owed to the company. If the majority of the voting members could have
authorized the LLC to file a claim for the settlement proceeds in the ordinary
course, which nobody disputes, the same majority of the voting members should
be able to authorize the LLC to recover the same settlement proceeds allegedly
misappropriated from the company. See 6 Doré, Business Organizations § 39.4,
at 651 (“Whether a business organization initiates or defends litigation is a
business decision.”); see also Delbon Radiology v. Turlock Diagnostic Ctr.,
839 F. Supp. 1388, 1392 (E.D. Cal. 1993) (stating that “enforcement of a
partnership’s claim will often be an ordinary matter” (quoting Alan R. Bromberg
& Larry E. Ribstein, Bromberg and Ribstein on Partnership § 5.03(c), at 5:20–21
(1991))); Casey Ranch, 773 N.W.2d at 822 (“[I]nitiating suit to collect a
partnership debt is generally considered to be within the ordinary course of the
business of a partnership. . . . Therefore, commencing a lawsuit on behalf of a
partnership to enforce a partnership claim incurred in the ordinary course of
business is itself a matter in the ordinary course of business.”).
An action to recover money owed to the company is an action in the
ordinary course of activities. The fact that the funds were allegedly
misappropriated by a member of the LLC does not render the suit to collect such
proceeds outside the normal course of activities of the LLC. See Lane v. Krein,
375 S.E.2d 351, 352 (S.C. Ct. App. 1988) (treating suit by one partner for
conversion of partnership property as an ordinary matter connected with the
partnership business subject to majority approval). 15
III.
Because a majority of the members of the LLC could authorize the LLC to
file a suit to recover funds allegedly owed to the LLC, the LLC had the authority
to file this suit. We vacate the decision of the court of appeals and reverse the
judgment of the district court. We remand this matter for further proceedings.
Decision of Court of Appeals Vacated; District Court Judgment
Reversed and Case Remanded.
All justices concur except McDermott and May, JJ., who take no part.