Susan A. Guge and Peggy McDonald v. Kassel Enterprises, Inc., 19-2151

Background

Kassel Enterprises, a family farming corporation, was owned 52.5% by Craig Kassel and 23.75% each by sisters Susan Guge and Peggy McDonald; the sisters sued seeking judicial dissolution for alleged illegal/oppressive conduct and waste.
Kassel Enterprises elected to purchase the sisters’ shares under Iowa Code §490.1434 (purchase-in-lieu-of-dissolution); parties could not agree on fair value and the court held a valuation hearing.
The district court used a net-asset (asset-based) valuation, starting from agreed aggregate asset values ($5,804,403) minus liabilities to reach shareholder equity and per-share fair value; it did not deduct transaction costs or built-in-gain tax, nor add amounts for alleged waste.
The district court awarded the sisters $93,620.74 in attorney fees and $6,540 in expert fees under §490.1434(5), finding probable grounds for relief based on misapplication of corporate assets, and directed installment purchase of the stock.
On appeal the parties contested: (1) whether liquidation/transaction costs and built-in capital-gain tax should reduce net-asset fair value; (2) whether alleged waste/misapplication should increase fair value; and (3) the propriety/amount of the fee award.

Issues

Issue	Plaintiff's Argument (Guge & McDonald)	Defendant's Argument (Kassel / Kassel Enters.)	Held
Whether to deduct transaction costs in net-asset fair-value calculation	Some deduction appropriate (plaintiffs’ expert used ~3%) but district court erred by applying none	Deduction required and at a higher rate (defendant’s expert ~8%); omission undercounts liquidation costs	Court: Deduction for hypothetical transaction costs is part of net-asset methodology; district court erred by applying none and remanded to determine appropriate amount
Whether to deduct built-in capital-gains tax from asset value	No deduction; as an S corporation tax flows to shareholders, and no contemplated liquidation, deduction would double-tax and is speculative	Deduction required to reflect tax burden on appreciated assets (defendant sought ~30.8% effective tax)	Court: Declined to deduct built-in-gain tax—no imminent liquidation and S-corp pass-through makes such a deduction speculative and potentially unfair; affirmed no tax deduction
Whether to add value for alleged waste/misapplication by majority (i.e., treat claims as corporate assets)	Add amounts to reflect diminution or misapplied assets caused by Craig	Opposed: claims were pleaded and pursued as individual claims; not corporate assets; thus should not increase corporate asset valuation	Court: Issue preserved, but district court properly refused additions because plaintiffs had framed fiduciary-derivative matters as individual claims; corporate asset valuation need not include those asserted individual claims
Award of attorney and expert fees under §490.1434(5) (probable grounds and against corporation)	Fees appropriate because probable grounds existed under §490.1430(1)(b)(4) (misapplication/waste)	Fees improper: plaintiffs’ other claims were dismissed and corporation (rather than Craig personally) should not bear fees	Court: Affirmed fee award—found probable grounds for relief as to misapplication, fee award against corporation permissible, and amount not an abuse of discretion

Key Cases Cited

Baur v. Baur Farms, Inc., 832 N.W.2d 663 (Iowa 2013) (courts must avoid relief that gives minority a foothold oppressive to majority)
Nw. Inv. Corp. v. Wallace, 741 N.W.2d 782 (Iowa 2007) (fair value methods and legislature’s prohibition on discounts for minority/marketability)
Sec. State Bank v. Ziegeldorf, 554 N.W.2d 884 (Iowa 1996) (net-asset valuation appropriate where asset value outweighs going-concern earnings)
Woodward v. Quigley, 133 N.W.2d 38 (Iowa 1965) (discussing net-asset valuation and hypothetical liquidation rationale)
Paskill Corp. v. Alcoma Corp., 747 A.2d 549 (Del. 2000) (tax consequences in fair-value determinations considered only in limited circumstances)
Brown v. Arp & Hammond Hardware Co., 141 P.3d 673 (Wyo. 2006) (declining tax deduction absent evidence of contemplated sale)
Matthew G. Norton Co. v. Smyth, 51 P.3d 159 (Wash. Ct. App. 2002) (S-corp pass-through limits appropriation of entity-level built-in gain discount)
Bogosian v. Woloohojian, 158 F.3d 1 (1st Cir. 1998) (no deduction for potential capital gains taxes where no plans to sell properties)
Daniels v. Holtz, 794 N.W.2d 813 (Iowa 2010) (asset-based methodologies can include discounting capital gains tax liability)