Prehn and Bandak v. Michael L. Hodge, II
161 Idaho 321
| Idaho | 2016Background
- Source 1 (an Idaho LLC) was founded by Hodge and Prehn in 2002; by 2012 membership interests were split among Prehn (≈38%), Hodge (≈40%), Bandak, Brown, and Claiborne. Source 1 dissolved effective April 1, 2012; Hodge was appointed Liquidator.
- Prehn had unpaid salary and loans from Source 1; Source 1 later showed profits in 2012 but was wound up amid competing business activity by Source 2 (owned/managed by Hodge and others).
- During dissolution Hodge ran an asset auction, acquired key lots (including intellectual property and shaker-mold-related assets) for $105,010 after Prehn declined to pay for lots he thought he won; Hodge also transferred software and credits to Source 2 and completed major customer orders through Source 2.
- The district court found Hodge breached fiduciary duties by structuring a misleading auction, failing to minimize Source 1’s dissolution expenses (including excessive compensation and rent), converting a large Bodybuilding.com order to Source 2, and by unjust enrichment of Hodge/Source 2.
- Damages awarded: repayment of Prehn’s loan and back pay, $60,300 (auction shortfall portion), $114,530 (lost profits), various unjust enrichment amounts, and attorney’s fees; defendants appealed.
Issues
| Issue | Plaintiff's Argument (Prehn/Bandak) | Defendant's Argument (Hodge/Source2/etc.) | Held |
|---|---|---|---|
| 1. Timeliness/standing of late-filed Joint Motion to Dismiss derivative claims | Derivative claims were proper; demand futility shown; dismissal motion waived by lateness | Motion to dismiss was timely to challenge standing and derivative status; conflict of interest in representation | Court: district court did not abuse discretion in refusing to consider the late motion; standing/derivative issues could be argued at trial and demand requirement is not a standing bar |
| 2. Breach of fiduciary duty re: asset auction | Hodge manipulated auction labels/bidding to acquire valuable IP at low net recovery to Source 1 | Hodge followed auction procedures and relied on closed bidding; no duty to advise other bidders | Court: affirmed breach — Hodge misleadingly labeled IP, failed to disclose that molds required IP, causing a $165,310 gap; Source 1 entitled to $60,300 (difference allocated) |
| 3. Breach of fiduciary duty re: failure to minimize dissolution expenses and diverted order | Hodge overcompensated himself, increased rent, kept employees working for Source 2, and redirected Bodybuilding.com order to Source 2, causing lost profits | Hodge’s compensation and expense decisions were within managerial discretion; lost-profits calculation speculative | Court: affirmed breach and damages — substantial evidence of inflated G&A, redirected order, and credible lost-profits calculation; awarded $114,530 in lost profits |
| 4. Attorney's fees award and allocation | Fees recoverable under derivative-action statute and commercial-transaction statute; award appropriate and apportionable | Defendants disputed scope/allocation; argued Operating Agreement could shift fees | Court: affirmed fees — $162,500 tied to commercial-transaction recovery against Hodge (I.C. §12-120(3)) and also awarded to derivative plaintiffs from LLC recovery under I.C. §30-25-806; $25,000 for Prehn’s individual claims; appellate fees awarded to respondents |
Key Cases Cited
- Weinstein v. Prudential Prop. & Cas. Ins. Co., 149 Idaho 299 (noting abuse-of-discretion standard for scheduling/order modifications)
- High Valley Concrete, LLC v. Sargent, 149 Idaho 423 (fiduciary-duty elements)
- Tolley v. THI Co., 140 Idaho 253 (fiduciary-duty principles)
- Watkins Co., LLC v. Storms, 152 Idaho 531 (appellate review — factual findings deferential when supported by substantial evidence)
- Panike & Sons Farms, Inc. v. Smith, 147 Idaho 562 (weight given to trial court factual findings)
- Kugler v. Nelson, 160 Idaho 408 (attorney-fees standard and discretion)
- Bushi v. Sage Health Care, PLLC, 146 Idaho 764 (breach-of-fiduciary-duty is generally a question of fact)
- Larson v. Dumke, 900 F.2d 1363 (9th Cir.) (cited by defendants re: economically antagonistic interests in derivative suits)