Ted A. Torstenson, Individually, and Toby T. Torstenson, Individually, plaintiffs/counterclaim v. Birchwood Estate, L.L.C., defendant/counterclaim, 16-0118

Background

Birchwood Estate, L.L.C. (Birchwood) was formed with two members: Central Iowa Developers, L.L.C. (CID) and Tierra Linda, L.L.C. (TL). CID and TL each made $25,000 initial contributions; members expected lot sales to cover future expenses.
A $1.7M promissory note was executed in 2004; CID and TL (through their members) gave personal guaranties in 2007 to extend the note. When sales declined, members made payments to cover the note; TL later stopped contributing and CID continued payments.
Knapp (a CID member) bought the note in 2012 and sued TL and the Torstensons (TL’s sole members) to enforce guaranties; that suit settled: the Torstensons paid and the settlement released various parties.
The Torstensons then sued Birchwood seeking reimbursement from Birchwood for amounts they paid under their personal guaranties (about $245,287 of the settlement obligation). Birchwood counterclaimed, alleging TL failed to capitalize Birchwood, breached fiduciary duties, and seeking to allocate funds to equalize capital accounts.
The district court denied reimbursement, treated guaranty payments as capital contributions, applied co‑guarantor contribution principles, pierced TL’s veil to hold the Torstensons personally liable, and ordered escrowed funds paid to CID members. The Torstensons appealed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
1. Are the Torstensons entitled to reimbursement from Birchwood for payments made under personal guaranties?	Torstensons: Yes — Iowa law permits guarantor reimbursement from principal when guarantor pays debt.	Birchwood: Payments should be treated as capital contributions / expenses; reimbursement would unjustly enrich Torstensons.	Reversed: Torstensons entitled to reimbursement; payments were guaranty payments, not capital contributions.
2. Could the court apply co‑guarantor contribution rules here?	Torstensons: No — co‑guarantors weren’t parties and had released contribution claims in the prior settlement.	Birchwood: Contribution principles and equalization justify denying reimbursement to Torstensons.	Reversed: Court erred to apply co‑guarantor contribution; co‑guarantors not joined and had releases.
3. Did the Torstensons breach fiduciary duties to Birchwood (and is piercing TL’s veil appropriate)?	Torstensons: No — they are not members of Birchwood (only of TL), so owed no fiduciary duty to Birchwood; operating agreement did not require further contributions.	Birchwood: TL (and thus the Torstensons) failed to capitalize Birchwood and breached duties; undercapitalization and commingling warrant veil piercing.	Reversed: Torstensons owed no fiduciary duty to Birchwood; veil piercing inappropriate—no basis to hold them personally liable.
4. Was unjust enrichment a valid independent basis to deny reimbursement?	Torstensons: No — they paid as guarantors and seek reimbursement; they were not unjustly enriched.	Birchwood: Allowing reimbursement would unjustly enrich the Torstensons relative to CID.	Reversed: Unjust enrichment not established as to the Torstensons; reimbursement required.

Key Cases Cited

Hills Bank & Tr. Co. v. Converse, 772 N.W.2d 764 (Iowa 2009) (adopting Restatement (Third) of Suretyship — guarantor entitled to reimbursement by principal when guarantor pays).
Spreitzer v. Hawkeye State Bank, 779 N.W.2d 726 (Iowa 2009) (guarantor who pays may assert reimbursement rights against debtor whose assets were bypassed).
Cemen Tech, Inc. v. Three D Indus., L.L.C., 753 N.W.2d 1 (Iowa 2008) (factors for piercing corporate veil and when limited liability may be disregarded).
Briggs Transp. Co. v. Starr Sales Co., 262 N.W.2d 805 (Iowa 1978) (recognizes limited liability but permits veil piercing in exceptional circumstances).
Van Sloun v. Agans Bros., Inc., 778 N.W.2d 174 (Iowa 2010) (standard of review for actions tried at law).