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IN THE COURT OF APPEALS OF IOWA No. 1-752 / 10-1986 Filed December 21, 2011 DONALD G. DEWAAY JR., DANIEL C. MULLAN, and RALPH RUDOLPH, Plaintiffs-Appellants/Cross-Appellees, vs. STEVEN W. DALLENBACH, Defendant-Appellee/Cross-Appellant. ________________________________________________________________ Appeal from the Iowa District Court for Polk County, Artis Reis, Judge.

Plaintiffs appeal from the district court's ruling regarding breach of contract claim and dismissal of future damages claim. AFFIRMED IN PART, REVERSED IN PART.

Margaret C. Callahan of Belin McCormick, P.C., Des Moines, and Kenneth Butters, West Des Moines, for appellants. Jason D. Walke of Gunderson, Sharp & Walke, L.L.P., Des Moines, for appellee.

Heard by Danilson, P.J., and Tabor and Mullins, JJ.

2 TABOR, J. "Losses were not discussed and not assumed." That is how Steven

Dallenbach described the rosy outlook of a four-person Iowa partnership formed to purchase, remodel, and sell an upscale residence on Florida's Gulf Coast. But the "perfect storm"--both figuratively and literally--of a plummeting real estate market and hurricane winds between 2006 and 2008 created unexpected losses for the partnership. Now three partners (Don DeWaay, Daniel Mullan, and Ralph Rudolph) are seeking to recoup capital contributions they paid into the partnership to cover Dallenbach's share of the continuing expenses to maintain the property. Because we find that the partnership agreement did not contemplate such a recovery from the defaulting partner, we affirm the division of the district court's order refusing to assess Dallenbach for the $81,000 in capital calls that the other partners paid on his behalf. We also agree with the district court that Dallenbach has not shown he is entitled to have the plaintiffs pay his attorney fees. But we reverse the portion of the order declining to grant the plaintiffs' motion to voluntarily dismiss the count of their petition alleging future damages from the eventual sale of the Florida property under Iowa Rule of Civil Procedure 1.943. Because Dallenbach did not establish that the separate action would be barred on res judicata grounds, we disagree with the district court's concerns about impermissible claim splitting.

3 I. Background Facts and Proceedings Dallenbach manages a construction company that builds custom homes and remodels distressed properties in the Des Moines area. He also has had experience buying, remodeling, and selling residential properties in Florida. DeWaay resides in West Des Moines and runs a capital management company. DeWaay had a business relationship with Dallenbach and learned of Dallenbach's successful activities in Florida with "purchasing family vacation type homes, renovating those properties and then flipping them for sale." In the fall of 2004, Dallenbach approached DeWaay about forming a partnership to focus on the renovation of one particular waterfront property in Destin, Florida. DeWaay recruited two of his clients, Daniel Mullan and Ralph Rudolph, to join in the partnership. Mullan lives in Buffalo, New York, and operates a private equity firm. Rudolph lives in LaGrange, Illinois, and works as a wholesaler for financial products. In early 2005, these four men signed an agreement to enter a general partnership with its principal place of business as West Des Moines.1 The aim of the partnership was to use Dallenbach as the general contractor for a project to purchase, renovate, and resell a parcel of real estate at 160 Cover on the Bay in Walton County, Florida. DeWaay advanced $50,000 in earnest money, and the partnership purchased the property for approximately $1.6 million. The four

partners each made an initial capital contribution of $100,000 to the partnership and the partnership borrowed the balance of the purchase price from Wells
1

The district court found that all four partners acknowledged signing the agreement, "though a fully executed copy cannot be located now."

4 Fargo Bank. The partnership also established a line of credit at Legacy Bank to fund the remodeling. Under a separate "development agreement" executed by the partners, Dallenbach performed and received payment for all of the general contracting work on the Florida house. Dallenbach described the optimistic outlook of the business venture: We had no experience with losses on anything in Florida up to this time period of the late 2000s. No one was talking about losses; no one was anticipating losses. We were much more concerned on what was the profit going to be, how would that be disbursed. Losses were not discussed and not assumed. We were, we were very enthusiastic. But by 2007, the controller for DeWaay Capital Management realized the four investors were not going to be able to "flip" the house as planned: [A]fter a while . . . things started happening in the marketplace that it became evident to everybody that this wasn't a we're going to sell it today type of deal, this is going to be a long-term hold. . . . [F]or Steve's sake, he was just saying: Look, this, this isn't my game; I didn't plan on this really. Initially, the partnership used the Legacy Bank line of credit to cover mortgage payments and other expenses associated with the remodeling. The partnership increased the line of credit several times, up to the bank's limit of $400,000. Then the partners covered expenses with personal checks, and Starting in 2007, one of

eventually with additional capital contributions.

DeWaay's employees would estimate the partnership's expenses and send a notice to each partner requesting a payment of one-fourth of that amount. On March 30, 2009, an accountant from DeWaay Capital Management emailed Dallenbach, asking him to send in his "2nd Qtr FL payment along with the other payments" he still owed. The email asserted: "As of today, . . . I still

5 show you as partner in Dallenbach Partnerships. $31,156.48." Later that day, the accountant emailed Dallenbach with the following subject line: "Please call Don ASAP." The rest of the message said: "He would like to talk to you about the Florida property." Dallenbach responded: "Just so you know, there has been no change in my situation. None of my properties have sold or any other activity. SD." The next day the DeWaay accountant emailed back: "Steve, You need to let Don know this. You also need to set something up to make payments to the FL property. Dan, Don and Ralph can't afford to continue to pay your portion." On April 15, 2009, Dallenbach sent a letter to DeWaay concerning the Florida property. Dallenbach explained why he was no longer able to contribute cash to the project: The slow economy has severely impacted my construction and development activities. This has lead to partnership failures in many of my real estate ventures and a strain on cash flow. That fact has precluded me from making capital calls for the Florida house. I realize this puts a strain on the other partners. In the letter, Dallenbach declined DeWaay's suggestion that Dallenbach use his retirement fund to "assure the Florida house." Dallenbach offered to "quit claim" his interest in the property if DeWaay so desired. Dallenbach closed the letter by saying: "I see no end in sight to these issues which would allow me to function as a full partner. I hope for better days ahead for all of us in the real estate and investment business." DeWaay testified that he viewed Dallenbach's The total you owe is

6 offer to "quit claim" his interest in the Florida property as an offer to quit the partnership. In May 2009 the partnership applied for a loan from Legacy Bank, listing only DeWaay, Mullan, and Rudolph as partners. Also that spring, those three partners removed Dallenbach's name from the insurance policy on the Florida property. On June 16, 2009, DeWaay wrote to Dallenbach asking him to "collateralize" his obligation to the partnership by giving the partners a first lien on unencumbered property he owned in Chicago. DeWaay explained he was

attempting to "function as a buffer" between Dallenbach and the other two partners who had a "strong preference to take immediate legal action." Dallenbach responded by email on June 22, 2009, saying: "I do understand your bind with the other partners. It turns out that I am the weakest link here and cannot hold up my end as I have stated." Dallenbach repeated his offer to "deed my interest to all of you now." DeWaay, Mullan, and Rudolph (collectively the plaintiffs) filed a petition in Polk County district court on October 15, 2009, alleging four counts: (1) breach of contract under the written partnership agreement, (2) breach of oral contract, (3) promissory estoppel, and (4) breach of an implied covenant of good faith and fair dealing. The plaintiffs sought a judgment against Dallenbach "in an amount to be shown by competent proof at trial, interest, attorney fees, costs of this action and other relief as the Court deems equitable." Dallenbach answered the

7 petition and asserted a counterclaim alleging that he had dissociated himself from the partnership. The parties tried the matter to the bench from September 8 through September 10, 2010. The plaintiffs notified Dallenbach the day before trial that they wished to dismiss counts III and IV of their petition. Dallenbach objected that the dismissal was untimely under Iowa Rule of Civil Procedure 1.943. The plaintiffs explained: "We are making no claim whatsoever for damages for the sale of the property because it hasn't sold." Dallenbach argued dismissal would result in an improper splitting of actions if he was forced to defend against a later claim for damages arising from the dismissed counts. argued before trial: I am as sure as I am sitting here what they are going to try to do is get the first part of their damages now and now that they have realized they can't get them here, come back later and try to do it all over again in a separate law suit and that's not permissible. The district court took the question of dismissal under advisement, waiting to rule until after the trial. On October 29, 2010, the district court issued its ruling. At the outset, the court denied the plaintiff's motion to dismiss counts III and IV. The court also ruled for Dallenbach on the merits of the suit, finding there is nothing in the [partnership] agreement requiring, or even suggesting, that "additional capital contributions" had to be in equal 25% parts from each partner. In fact, the agreement specifically contemplates the possibility that the partners' interest might change over time due to the fact that their "additional capital contributions" might not be in equal 25% parts. Dallenbach's counsel

8 While the district court did not believe Dallenbach's April 15, 2009 letter served as a "written termination notice" under the terms of the partnership agreement, it did view the communication as an offer to quit. The court went on to determine that the plaintiffs "from mid-2009 forward, have acted in such a way as to clearly evidence their acceptance of Mr. Dallenbach's offer to quit the partnership." Accordingly, the district court rejected the plaintiff's claim Dallenbach breached the partnership agreement, given the "de facto termination of the partnership prior to the initiation of the lawsuit." The court denied Dallenbach's request for attorney fees, finding--in the absence of fraud--no basis in the law to order the plaintiffs to pay Dallenbach's attorney fees and costs. The court remarked: "If the parties intended such an award be available, they should have written it into their Partnership Agreement." DeWaay, Mullan, and Rudolph now appeal. They asks us to reverse the district court's decision finding Dallenbach not liable for equal capital contributions under the partnership agreement and declining to dismiss the third and fourth counts of the petition. Dallenbach cross appeals, challenging the

court's refusal to award attorney fees as a damage award. II. Scope and Standards of Review The parties agree that our review of the first issue is for errors at law. See Iowa R. App. P. 6.907; EnviroGas, L.P. v. Cedar Rapids/Linn Cnty. Solid Waste Agency, 641 N.W.2d 776, 780 (Iowa 2002). We are not bound by the district court's legal conclusions and application of legal principles to the facts. See Land O'Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 2000). But we are

9 bound by the district court's factual findings if they are supported by substantial evidence. Id. "Evidence is substantial for purposes of sustaining a finding of fact when a reasonable mind would accept it as adequate to reach a conclusion. " Id. "We view the evidence in a light most favorable to the district court's j udgment." Id. We also review the district court's decision that it was not authorized to award attorney fees for errors at law. FNBC Iowa, Inc. v. Jennessey Group, L.L.C., 759 N.W.2d 808, 810 (Iowa Ct. App. 2008). We review the district court's denial of the plaintiffs' motion to dismiss the promissory estoppel claim for an abuse of discretion. See Lawson v. Kurtzhals, 792 N.W.2d 251, 257 (Iowa 2010) (holding that trial court ruling under second sentence of Iowa Rule of Civil Procedure 1.943 is reviewed for an abuse of discretion). III. Analysis A. Was Dallenbach liable under the partnership agreement for the

additional capital calls paid on his behalf by the other partners? Under Iowa law, the partnership agreement governs the relations among partners and between partners and the partnership. Iowa Code

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