author: SABERS, Justice GILBERTSON, Justice

text:
    2001 SD 11
    Kim TSCHETTER, Marvis Tschetter, a/k/a Marvie Tschetter, Clarence Tschetter and Goldie Tschetter, Plaintiffs and Appellants, v. James L. BERVEN, William J. Folkerts, and Venerts Investment, Inc., a South Dakota Corporation, Defendants and Appellees.
    Nos. 21474, 21500.
    Supreme Court of South Dakota.
    Argued Nov. 29, 2000.
    Decided Jan. 17, 2001.

      Lee Schoenbeck, John W. Burke, Scho-enbeck Law Office, Watertown, SD, Attorneys for plaintiffs and appellants.
    Thomas K. Wilka of Hagen, Wilka & Archer, Sioux Falls, SD, Attorneys for defendants and appellees.
   SABERS, Justice

[¶ 1.] Marvie and Kim Tschetter, Clarence and Goldie Tschetter (Tschetters) purchased units from Venerts Investment, Inc., James Berven, and William Folkerts (Venerts) in Huron Kitchen LLC, a limited liability company, (Huron LLC) the entity which would construct and own a Country Kitchen restaurant. Tschetters claimed that: 1.) these units constitute securities under South Dakota law, and that: 2.) Venerts breached their duty in failing to assess the suitability of Tschetters for investment in Huron LLC. The trial court denied Tschetters’ motions for summary judgment and granted judgment to Ve-nerts by dismissing Tschetters’ claims as a matter of law. We affirm.

FACTS

[¶2.] In 1994, Venerts entered into an agreement with Country Hospitality Corporation (CHC) to develop several Country Kitchen restaurants over a period of years. Venerts contacted Marvie and Kim Tschet-ter after learning from the architect retained by Country Kitchen that Tschetters were interested in the investment. Ve-nerts contacted Clarence and Goldie, Mar-vie’s parents, after learning from Marvie that they were also interested. Venerts met with Tschetters and provided them a business plan which described the project.

[¶ 3.] After additional meetings with Ve-nerts, Tschetters eventually invested in Huron LLC. Marvie and Kim purchased 6.750 units for $83,750.00, representing one ownership share of a total of eleven in Huron LLC. Clarence and Goldie purchased 13.5 units for $67,500, making them owners of two shares in Huron LLC. An operating agreement was entered into on April 4, 1995 and the Country Kitchen in Huron was opened in the fall of 1995.

[¶ 4.] Several months later, financing difficulties caused Tschetters and others to personally guarantee loans from First Madison Bank to Huron LLC. Nevertheless, the Country Kitchen continued to experience financial difficulties and closed November 1996. After the restaurant closed, First Madison Bank commenced an action against the personal guarantors, including Tschetters, to recover the monies loaned. Tschetters responded with cross-claims against Venerts for negligence and breach of South Dakota’s Uniform Securities Act.

[¶ 5.] Tschetters moved for summary judgment asserting that: 1.) the units in the Huron LLC are “securities” under SDCL 47-31A-401(m); and 2.) Venerts owed a duty to determine the suitability of Tschetters to invest in Huron LLC. The trial court denied both motions. Tschetters appeal. Venerts filed a notice of review of: 3.) the trial court’s decision denying the admissibility of evidence concerning settlement negotiations to prove Tschetters’ role in Huron LLC.

STANDARD OF REVIEW

[¶ 6.] Our standard of review for summary judgment is well-established:

In reviewing a grant or denial of a summary judgment under SDCL 15-6-56, we must determine whether the moving party demonstrated the absence of any genuine issue of material fact and showed entitlement to judgment on the merits as a matter of law.

Kern v. City of Sioux Falls, 1997 SD 19, ¶ 4, 560 N.W.2d 236, 237. “The determination of whether a duty exists is a question of law for the court.” Gilbert v. United Nat. Bank, 436 N.W.2d 23, 27 (S.D.1989). Similarly, “the construction of a statute and its application to the case at hand presents a question of law.” Shevling v. Butte County Bd. of Comm’rs, 1999 SD 88, ¶ 12, 596 N.W.2d 728, 730. “Whether an instrument is a security is a question of law.” Nutek Information Systems, Inc., v. Arizona Corporation Commission, 194 Ariz. 104, 977 P.2d 826, 829 (Ct.App.1998); see also Securities Exchange Commission v. W.J. Howey, Co., 328 U.S. 293, 297, 66 S.Ct. 1100, 90 L.Ed. 1244, 1249 (1946). “We review questions of law de novo.” Hamerly v. City of Lennox Bd. of Adj., 1998 SD 43, ¶ 10, 578 N.W.2d 566, 568.

[¶ 7.] 1. WHETHER THESE UNITS IN HURON LLC ARE SECURITIES UNDER SOUTH DAKOTA’S UNIFORM SECURITIES ACT.

[¶ 8.] This case presents a question of first impression in South Dakota. “We start with the proposition that statutes governing the registration and sale of securities are remedial in nature and are designed to protect the unwary buyer and thus should be liberally construed.” Hofer v. General Discount Corp., 86 S.D. 133, 192 N.W.2d 718, 722 (1971). However, to receive this liberal construction Tschetters must establish that the units they purchased are securities.

[¶ 9.] In South Dakota, “security” is defined as:

any note; stock; treasury stock; bonds; debentures; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral-trust certificates; preorganization certificate or subscription; transferable shares; investment contracts; voting-trust certificates; certificate of deposit for a security; certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under such a title or lease; viatical settlement; or, in general, any interests or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Security does not include any insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed sum of money either in a lump sum or periodically for life or some other specified period.

SDCL 47-31A-401. Tschetters contend that the units they purchased in Huron LLC are “investment contracts” and therefore “securities” under SDCL 47-31A 401. South Dakota’s definition of “security” is substantially similar to the definition of “security” in the Securities Act of 1938 and the Securities Exchange Act of 1934. See Securities Act of 1933, 15 USCA 77(b)(1) (1997); Securities Exchange Act of 1934, 15 USCA 78(c)(a)(10) 1997. Therefore, we look to courts interpreting similar provisions for guidance.

[¶ 10.] “We must therefore begin where all analyses of investment contracts start, with Securities & Exchange Commission v. W.J., Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946).” Williamson v. Tucker, 645 F.2d 404, 417 (5th Cir.1981) cert denied 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981). LLC membership interests constitute “securities” if they fulfill the criteria established by the United States Supreme Court in Howey. Keith v. Black Diamond Advisors, Inc., 48 FSupp 2d 326 (S.D.N.Y.1999); KFC Ventures, LLC v. Metaire Medical Equipment Leasing Corp., 2000 WL 726877, *2 (E.D.La.2000). The United States Supreme Court has stated that an “investment contract” is a “ ‘security’ when a person 1.) invests money 2.) in a ‘common enterprise’ and 3.) is led to expect profits solely from the efforts of the pro-motor or a third party.” Nutek, 977 P.2d at 830 (citing Howey, 328 U.S. at 301, 66 S.Ct. at 1100, 90 L.Ed. at 1244.)

[¶ 11.] The critical inquiry is the third prong of the Howey test-whether Tsehet-ters were led to expect profits solely from the efforts of the promotor or a third party. We acknowledge, as other courts have done, that the use of the term “solely” is “not to be taken literally.” Id. “Rather, the third prong is satisfied if ‘the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which effect the failure or success of the enterprise.’ ” Nutek, 977 P.2d at 830; citing SEC v. Glenn W. Turner Enters. Inc., 474 F.2d 476, 482 (9thCir.1973). The United States Supreme Court has also noted the definition of a security “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others in the promise of profits.” Howey, 328 U.S. at 299, 66 S.Ct. at 1103, 90 L.Ed. at 1250.

[¶ 12.] The leading case interpreting the third prong of the Howey test is Williamson v. Tucker, 645 F.2d at 404. Williamson approaches this inquiry by recognizing that substance should take precedence over form. Id. at 422-23. The Williamson court set forth three factors to aid in this determination:

1. an agreement among the parties leaves so little power in the hands of " the partner or venturer that the arrangement in fact distributes power as would a limited partnership; or
2. the partner or venturer is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers; or
3. the partner or venturer is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager or the enterprise or otherwise exercise méaningful partnership or venture powers.

Id. at 424. These factors are not all-inclusive, and other considerations may come into play in each case. Id. at n. 5. In addition, we do not isolate these factors but consider them as a whole. Koch v. Hankins, 928 F.2d 1471, 1476-78 (9thCir.1991); Nutek, 977 P.2d at 831.

[¶ 13.] Based on the evidence in the record and South Dakota law, Tschet-ters had substantial rights and powers. South Dakota law vests the members of an LLC with management powers in proportion to their contribution of capital. SDCL 47-34-16. The members have the power to elect the managers of the LLC and set their responsibilities.

[¶ 14.] In addition, the Operating Agreement vested management powers of the Huron LLC in its members, which included Tschetters. These members were given notice of meetings and any member could call a meeting. The day-today decisions were made by two managers who were required to be members of the Huron LLC, and selected by the other members. The Huron LLC maintained and provided access to all records of actions taken by its members. Members could authorize loans on behalf of the company by agreement. The members had the authority to select an attorney to review the legal affairs of the Huron LLC. The members had the right to receive profits and distributions when warranted. The members could authorize incidental expenses within an aggregate of $12,500. The members were empowered to make any other routine actions incidental to the day-to-day activity of Huron LLC. The members were allowed to select officers for the Huron LLC and could remove the accountant with or without cause.

[¶ 15.] The Huron LLC’s operating agreement establishes that substantial power and responsibility was vested in its members. The record also establishes that Mande, acting for all the Tschetters, exercised substantial control over the affairs of Huron LLC. Apparently, Clarence and Goldie acquiesced in relying on Marvie and Kim for information and action. The minutes kept by the Huron LLC show that Tschetters were informed and active in this entity. Tschetters actions on behalf of Huron LLC after the restaurant began to fail shows they were aware of and capable of exercising the powers which they held as members.

[¶ 16.] Tschetters stress the fact that Huron LLC entered into a management agreement with CHC to establish their dependence on the efforts of others. However, our inquiry is the Tschetters role in the Huron LLC. The fact that Huron LLC acquiesced in management powers to CHC is not determinative. The Huron LLC retained the ability to terminate the management contract if the manager failed to perform “any material covenant, agreement, term or provision ... for a period of thirty days.” Apparently, here, the failure to perform exceeded a period of thirty days several times over. The management agreement required CHC to “direct, supervise, manage, and operate the [restaurant in an efficient and economical manner,” “execute a marketing plan to attract guests,” “determine and arrange to contract for all advertising and promotion [ ] deem[ed] necessary and appropriate for the operation of the [r]estaurant.” Apparently, the failure to perform as required caused CHC’s termination. The management agreement does not divest all power from Huron LLC but, instead, provides Tschetters and other members of Huron LLC substantial power and ability to conduct the necessary oversight of the restaurant’s operation.

[¶ 17.] The record fails to establish that this was a situation where the managers were so dominant that the members would be lost without them. See Nutek, 977 P.2d at 833. “The mere choice by a partner to remain passive is not sufficient to create a security interest.” Rivanna Trawlers Unlimited v. Thompson Trawlers, Inc., 840 F.2d 236, 240-41 (4thCir.1988). This determination “does not and should not hinge on the particular degree of responsibility assume[d] within the firm, nor does the delegation of membership responsibilities, or the failure to exercise membership powers, ‘diminish the investor’s legal right to a voice in partnership or company matters.’” Keith, 48 FSupp.2d at 334 (quoting Hirsch v. duPont, 396 F.Supp. 1214 (S.D.N.Y.1975)). We acknowledge that the investor asserting that an “investment contract” constitutes a “security” has a “difficult burden to overcome.” Nutek, 977 P.2d at 831.

[¶ 18.] Tschetters have the burden of establishing that their expectation of profits was based on the entrepreneurial efforts of others to establish an “investment contract.” As indicated in one treatise, only in unusual circumstances would a member-managed LLC “be able to argue that they must rely on the entrepreneurial efforts of others rather than on their own management skills.” Carol Goforth, Why Limited Liability Company Membership Interests Should Not Be Treated As Securities and Possible Steps to Encourage This Result, 45 Hasting L.J. 1223, 1275 (1994). This may be especially true when, as here, the investment related to a restaurant, rather than complicated communications systems, as in Nutek. In such an entity, the members retain substantial power over the LLC. Id. “The general framework is essentially antithetical to the notion of member passivity.”

[¶ 19.] We hold that the third prong of the Howey test, as interpreted by Williamson, has not been met. In other words:

1. This agreement did not leave so little power in the hands of the partner as a limited partnership would;
2. The partner or venturer was not so inexperienced and unknowledgeable in the business affairs as to be incapable of intelligently exercising his partnership or venture powers; or
3. The partner was not so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace [him] or otherwise exercise meaningful partnership or venture powers.

[¶ 20.] If an interest in a limited liability company constitutes a “security,” then that entity must comply with our securities law or exempt themselves from the application of those laws. This question can only be addressed on a case-by-case basis. Here, Tschetters did not sustain their burden. These “units” were not “securities” under this law and we affirm issue 1.

[¶ 21.] 2. WHETHER VENERTS HAD A DUTY TO ASSESS THE SUITABILITY OF TSCHETTERS FOR INVESTMENT IN HURON LLC.

[¶ 22.] “[I]t is generally recognized that one who undertakes to provide professional services has a duty to the person for whom the services are performed to use such skill and care ordinarily exercised by others in the same profession.” Limpert v. Bail, 447 N.W.2d 48, 51 (S.D.1989). Tschetters assert that such a duty was created when they filled out a “suitability agreement” which was reviewed by Venerts. If this is the law in this case, the Venerts would be required to “exercise due care in the performance of [their] assumed obligation.” Id.

[¶ 23.] Whether Venerts assumed a duty of care is a question of law. See Tipton v. Town of Tabor, 538 N.W.2d 783, 785 (S.D.1995). This duty “may be defined as an obligation [ ] which the law will give recognition and effect.” Hoekman, v. Nelson, 2000 SD 99, ¶ 8, 614 N.W.2d 821, 823. Tschetters have the burden to prove that such a duty existed. Id. at ¶ 12.

[¶ 24.] The only evidence Tschet-ters offer to support their contention that a duty existed is the “suitability agreement” itself. Examining this document, we find that it did not create a legal duty. This is not a situation where Venerts undertook to perform a contractual duty. See Mark, Inc. v. Maguire Ins. Agency, Inc., 518 N.W.2d 227, 231 (S.D.1994) (Sabers, J., dissenting). It is apparent from examining the “suitability agreement” that it was not a task assigned to Venerts, but, instead, a device to benefit Tschetters by forcing them to think about their investment and at the same time providing assurance to Venerts of their investors’ financial position. This benefit does not alone create a legal duty.

[¶ 25.] The form was completed by Tschetters and individually signed by each. It provided a brief statement of the financial security of Tschetters, and indicated that Tschetters “to the extent [deemed] necessary, [obtained] personal and professional advice from a financial advisor with respect to the risks inherent in this investment.”

[¶ 26.] This “suitability agreement” does not create a legal duty for Venerts. Instead, it focuses responsibility on Tschetters. The best description for this instrument would be a “wake up call” for Tschetters to further consider their investment decision. This instrument did not create a legal duty for Venerts to advise Tschetters about potential risk.

[¶ 27.] We affirm issue 2.

[¶ 28.] We conclude that the trial court correctly granted summary judgment in favor of Venerts. Therefore, it is not necessary to address issue 3.

[¶ 29.] KONENKAMP and AMUNDSON, Justices, concur.

[¶ 30.] MILLER, Chief Justice, and GILBERTSON, Justice, concur in part and dissent in part.

GILBERTSON, Justice

(dissenting in part and concurring in part).

[¶ 31.] I respectfully dissent as to Issue One. I would hold there is a question of fact as to whether the investment made by the Tschetters constituted a security under SDCL 47-31A-401. I would reverse and remand for trial on this cause of action.

[¶ 32.] I initially part company with the Court on its treatment of the standard of review. Although the trial court granted summary judgment in favor of Venerts, this Court would treat the issue as a question of law. Its authority for that position, S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) and Nutek Info. Sys., Inc. v. Arizona Corp. Comm’n, 194 Ariz. 104, 977 P.2d 826, 829 (Ct.App. 1998) were appellate reviews of a completed bench trial. The parties already had their day in court and the appeal was based on the full record of the trial court’s decision on the merits.

[¶ 33.] Federal and state appellate courts that have addressed the issue of the appropriate standard of review of a grant or denial of summary judgment in securities cases have applied the normal summary judgment standard of review. Smith v. Gross, 604 F.2d 639, 641 (9th Cir.1979); Great Western Bank v. Kotz, 532 F.2d 1252, 1254 (9th Cir.1976); Marx v. Computer Sciences Corp., 507 F.2d 485, 487 (9th Cir.1974); South Western Oklahoma Develop. Auth. v. Sullivan Engine Works, Inc., 910 P.2d 1052, 1059 (Okla.1996); Feninger v. Capital Accumulations Services, Inc., 439 Pa.Super. 366, 654 A.2d 560, 561-62 (1994). There is no basis to depart from our settled standard of review of the granting of a motion for summary judgment. When reviewing a trial court’s decision to grant summary judgment, we will affirm only if all legal questions have been decided correctly and there are no genuine issues of material fact. Holzer v. Dakota Speedway, 2000 SD 65 ¶ 8, 610 N.W.2d 787, 791 (citations omitted). The nonmoving party will receive the benefit of all reasonable inferences that can be drawn from the facts. Id. The Court puts the burden on the wrong party when it concludes, “[h]ere, Tschetters did not sustain their burden.” Because the trial court granted summary judgment in favor of Venerts, the burden should have been placed on Venerts as the moving party, not the Tschetters.

[¶ 34.] I agree with the Court that the criteria set forth in Howey provides the applicable standard to address the issue. However, the form of the investment (an LLC) is not the exclusive factor. Williamson v. Tucker, 645 F.2d 404, 423 (5th Cir.1981). Each case is to be judged on its own facts and not upon the designated label attached to the investment. Howey, 328 U.S. at 298, 66 S.Ct. at 1102, 90 L.Ed. at 1249; Nutek, 977 P.2d at 836. The determinative issue is whether there is a question of fact that Tschetters would obtain profits from the entrepreneurial and managerial efforts of others.

[¶ 35.] The timeline of the events involved in this case is critical when examining the rights held by Tschetters in Huron LLC. Articles of Organization of Huron Kitchen, LLC, as a limited liability company, were signed by Folkerts and Berven on March 29, 1995. While the Tschetters were considering this investment, they were provided with a Business Plan for Huron LLC dated March 16,1995 in which Berven and Folkerts as owners of Venerts, set forth their expertise at “areas of business development.” In the Business Plan, Berven and Folkerts designated themselves as the “Project Development Team,” and informed the Tschetters that the “Management Team” of the Huron Country Kitchen would be as follows:

Country Kitchen International by Carlson Hospitality will be the managers of the Country Kitchen. The management contract with Huron Kitchen, L.L.C. will be for 15 years and it has renewable options, (emphasis added).

That management agreement was reached in July of 1995 between Venerts and Country Kitchen binding Huron LLC to a 15 year management contract. The agreement was formally executed on August 28, 1995. Tschetters did not receive then-shares, which entitled them to the rights and privileges of investors, until September 6, 1995, when the LLC conducted its organizational meeting. By the time the Tschetters received their interests in Huron LLC, their hands had effectively been tied by Venerts through the management agreement with CKI. The situation Tschet-ters were placed in is similar to the investors in Nutek, where “the members had little or no input in deciding to enter into these agreements because the agreements were already in place before [the] members were recruited to invest... .’’ Nutek, 977 P.2d at 832.

[¶ 36.] While Huron LLC was a separate legal entity, the sole asset of the LLC was the restaurant, which was subject to the management agreement negotiated by Venerts. The United States Supreme Court has repeatedly noted that when examining securities law issues, the economic reality of a situation, rather than the form, will control. Reves v. Ernst & Young, 494 U.S. 56, 61, 110 S.Ct. 945, 949, 108 L.Ed.2d 47 (1990); Int’l. Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of America v. Daniel, 439 U.S. 551, 558, 99 S.Ct. 790, 796, 58 L.Ed.2d 808 (1979); United Hous. Found., Inc. v. Forman, 421 U.S. 837, 848, 95 S.Ct. 2051, 2058, 44 L.Ed.2d 621 (1975). The economic realities of this situation suggest that the restaurant and Huron LLC were one investment. Without the restaurant, Tschetters would not have invested in Huron LLC. Therefore, I disagree with the Court’s assertion that our inquiry is limited to Tschetters’ role in Huron LLC. While the terms of the LLC agreement on paper would indicate that Tschetters, as members, were given an opportunity to participate in management decisions, in reality, they were already locked out by the previously signed 15-year management agreement with CKI at the time of their investment. The terms of the agreement gave “exclusive supervision and control” of the restaurant to CKI as manager. The agreement further stated that the “[m]anager shall have discretion and control, free from interference, interruption, or disturbance, in all matters relating to the management and operation of the Restaurant subject only to those specific approvals of Owner as set forth herein.” Thus, Tschetters were denied control from the outset by the CKI management contract.

[¶ 37.] Furthermore, the applicable test is “whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” Williamson, 645 F.2d at 418 (quoting S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.1973)). Under the terms of the management contract, Tschetters were precluded from exercising any managerial efforts over the enterprise, namely the restaurant.

When the owners of a limited liability company are not expected to exercise control over the day-to-day business operations ... interests in limited liability companies should be classified as investment contracts, except in those instances in which the investor will be playing a substantial role in the management of the business.

Thomas Lee Hazen, The Law of Securities Regulation § 1.5, at 60 (3d ed. 1995). See Lino v. City Investing Co., 487 F.2d 689, 692 (3rd Cir.1973) (stating that “an investment contract can exist where the investor is required to perform some duties, as long as they are nominal or limited and would have ‘little direct effect upon receipt by the participant of the benefits promised by the promoters.’ ”). In addition, when determining the degree of control an investor holds, we should look to the “practical as well as legal ability to control” the enterprise. Hocking v. Dubois, 885 F.2d 1449, 1460 (9th Cir.1989); Nutek, 977 P.2d at 831. Clearly, any rights exercisable by Tschetters would have had little effect on the management of the restaurant. At the very least, there is a question of fact as to their authority exercisable over the enterprise.

[¶ 38.] The Court also misconstrues the authority of the LLC to terminate the management contract with CKI. Neither the LLC nor Tschetters could do so at their option or at their discretion as owners. The contract could only be terminated by the LLC upon the following applicable grounds:

If Manager fails to keep, observe or perform any material convenant, agreement, term or provision of this Agreement and such default shall continue for a period of thirty (30) days after written notice thereof by Owner to Manager.

Thus, if the LLC terminated the management agreement for what it perceived to be “for cause,” it faced a potential suit by CKI for breach of contract if the LLC could not prove a violation of the above provision. Given the fact there were fourteen years left to run on the management contact and the already precarious financial state of the LLC, damages for wrongful breach by the LLC would have been catastrophic. The LLC could not simply cancel this agreement with impunity as the Court suggests.

[¶ 39.] Beyond that, the LLC entered into the franchise investment because of its reliance upon CKI to provide franchise management. The Country Kitchen franchise agreement was still in effect even if the CKI management contract had been cancelled. Examination of the management agreement shows the LLC to be a substantially different business venture for an investor as opposed to the outright purchase of a local “mom and pop” restaurant. Where in the Huron, South Dakota area was the LLC to obtain a qualified replacement manager with the necessary franchise expertise if it dismissed CKI’s management? As was observed in Williamson:

A genuine dependence on others might also exist where the partners are forced to rely on some particular non-replaceable expertise on the part of a promoter or manager. Even the most knowledgeable partner may be left with no meaningful option when there is no reasonable replacement for the investment’s manger.... [T]he partners may have the legal right to replace the manager, but they could do so only by forfeiting the management ability on which the success of the venture is dependent. Or investors may purchase joint venture interests in an operating business in reliance on the managing partner’s unusual experience and ability in running that particular business; again, a legal right of control would have little value if the partners were forced to rely on the manager’s unique abilities.

Williamson, 645 F.2d at 423. “Thus, the investors, not only had ‘no reasonable replacement’ for their manager, they in effect had. no replacement.” Nutek, 977 P.2d at 834 (emphasis in original). See, Koch v. Hankins, 928 F.2d 1471, 1480 (9th Cir.1991) (stating that “the ready availability of alternative jojoba farm managers is [sufficiently] questionable” to create a question of fact.).

[¶ 40.] If Tschetters can show that CKI “was uniquely capable of such [managerial] tasks or that the [members] were incapable, within reasonable limits, of finding a replacement manager” they can satisfy the third prong of the Howey test. Williamson, 645 F.2d at 425. Here, unlike in Williamson, there is a question of fact as to whether the management contract “create[d] the sort of dependence implicit in an investment contract.” Id. See Koch, 928 F.2d at 1481 (stating that “even if a general partner vigorously exercised his or her rights under the partnership agreement, he or she arguably could have no impact on the investment”).

[¶ 41.] The Court views the conduct of Tschetters, particularly Marvie Tschetter, as exercising “substantial control” over the LLC. However, as is argued by Tschet-ters, their actions are in the nature of “somebody on the outside beating on the window trying to get in. Instead of making management decisions, they are left— as a result of the Restaurant Management Agreement — with only the ability to write letters complaining about how the investment is being managed.” Further, a substantial portion of the actions by Tschet-ters were taken after the restaurant had undergone significant financial losses and its ability to survive under any circumstances was at best, very questionable.

[¶ 42.] Finally, I disagree with the Court’s assertion that a member of an LLC has a “difficult burden to overcome” to show that his or her investment constitutes a security. The support for this assertion comes from Williamson, where that court noted .that “an investor who claims his general partnership or joint venture interest is an investment contract has a difficult burden to overcome.” Williamson, 645 F.2d at 424 (emphasis added). While there are similarities between an LLC and a general partnership, there are sufficient differences that justify different treatment. See Nutek, 977 P.2d at 833. The personal liability of a general partner provides an incentive to be highly involved in the enterprise, while at the same time discouraging unsophisticated investors. Id. at 833-34. Because a member in an LLC is shielded from personal liability, there is “less incentive to be informed about, or take an active role in, the business.” Id. at 834. Therefore, we should not apply a strong presumption against an LLC interest being a security.

[¶ 43.] For all of the above reasons, I conclude a question of fact exists as to whether this investment by the Tschetters constituted a security under South Dakota law. As such, I would reverse and remand for trial on this issue.

[¶ 44.] I agree with the Court on Issue Two.

[¶ 45.] I would not reach the notice of review issue raised by Venerts, as it was never certified by the trial court per SDCL 15 — 6—54(b) as part of this appeal.

[¶ 46.] MILLER, Chief Justice, joins this special writing.

      . In addition to asserting that the "units” constitute an "investment contract” Tschet-ters also argue that the "units are commonly known as securities” and, therefore, meet the definition of 47-31A-401. However, as recognized by the United States Supreme Court:
      We perceive no distinction for present purposes, between an 'investment contract’ and an ‘instrument commonly known as a security.’ In either case, the basic test for distinguishing the transaction from other commercial dealings is ‘whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.’

        United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621, 632 (1975).

      . Tschetters suggest the use of three other tests to make this determination, however, Howey’s common enterprise test is the majority rule and we find it persuasive, especially as interpreted in Williamson. See infra for discussion.

      . South Dakota’s Uniform Securities Act does not apply as we hold the "units” did not constitute "securities” as defined therein.

      . Further examples of the misapplication of the standard of review and how it affected the Court’s erroneous outcome are: "However, to receive this liberal construction Tschetters must establish that the units they purchased are securities.” "Tschetters have the burden of establishing that their expectation of profits was based on the entrepreneurial efforts of others to establish an ‘investment contract.' ” Under the proper standard of review, the burden is on the defendants to show that the units in Huron LLC were not securities and that the Tschetter’s expectation of profits were not based on the efforts of others.

      . The complete text of Folkerts' and Bervin’s self-stated qualifications in the Business Plan is as follows:
      [William (Bill) J. Folkerts] graduated from Mitchell High School and went on to South Dakota State University where he received both B.S. and M.S. degrees in Agriculture and Economics. After more then [sic] 25 years working in the areas of business development, loan packaging, business counseling, loan servicing and technical assistance to local unit(s) units [sic] of government. His specialty was community economic development projects in the east-central part of the State. He provided direct management assistance for more than 9 years to many business and industrial clients.
      Folkerts and his wife have been active in the residential rental business for over 18 years. Their holdings include single family houses up to multi-family units. In addition to these projects, Folkerts was instrumental in forming limited partnerships and "S” Corporations that own real estate.

      He serves on numerous Corporate Boards of Directors and he along with his partner has developed c-store [sic], apartments, motels and restaurants. Some of these projects include: Governor's Inn Pierre; Comfort Inns [sic] in Vermillion; Comfort Inn Watertown; Sleep Inn Sioux Falls, Country Inn and Suites Sioux Falls; Country Kitchen Sioux Falls; Country Kitchen-Water-town; Country Inn and Suites Dakota Dunes; Country Kitchen-Dakota Dunes and Pump N’ Pak-Watertown.

        Venerts owned by Folkerts and Jim Berven is afsic] investment development and management company that has management contract [sic] with the motels.

      [James (Jim) L. Berven] graduated from Augustana College in 1961 with a Bachelor of Science in Business Administration.

      Berven received the designation of Certified Residential Specialist (CRS) and the coveted Certified Real Estate Brokerage Manager (CRB). He was selected as REALTOR of the year by the Watertown Board of Realtors in 1977 and 1981 and was also REALTOR of the Year for the South Dakota Association of REALTORS in 1981.

      Presently, Berven is President of Berven Realty, Inc. a real estate brokerage and investment company, and serves as Chief Operating Officer of BFR Properties, Inc. a general construction company specializing in custom quality residential and commercial building projects.

      He serves on numerous Corporate Boards of Directors and he along with his partner has developed c-store, [sic] apartments, motels and restaurants. Some of these projects include: Governor’s Inn-Pierre; Comfort Inns [sic] in Vermillion; Comfort Inn-Watertown; Sleep Inn Sioux Falls, Country Inn and Suites Sioux Falls; Country Kitchen-Sioux Falls; Country Kitchen-Water-town; Country Inn and Suites-Dakota Dunes; Country Kitchen Dakota Dunes and Pump N’ Pak Watertown, (emphasis added).

      . The Court emphasizes that the Operating Agreement of Huron LLC signed by Berven and Folkerts on April 4, 1995, declared that the business and direction of the LLC were to be under the authority of two managers who shall be elected annually and must be investor members of the LLC, thereby giving the Tschetters “substantial control over the affairs of Huron LLC.” However, prior to the time the Tschetters made their investment, the exclusive management of the sole asset of the LLC, the restaurant, had been handed over to CKI per the 15 year management agreement.

      . The following text from the Management Agreement are examples of the total authority contracted away by Venerts, on behalf of the LLC, to CKI:
      2.2 Delegation of Authority. Operation of the Restaurant shall he under the exclusive supervision and control of the Manager which shall he responsible for the proper and efficient operation of the Restaurant. Manager shall have discretion and control, free from interference, interruption, or disturbance, in all matters relating to management and operation of the Restaurant subject only to those specific approvals of Owner as set forth herein. Such authority of Manager shall include, but is not limited to, promotion and publicity programs, credit policies, employment and hiring policies, personal wage and compensation policies, receipt, holding and disbursement of funds, maintenance of bank accounts, procurement of inventories, supplies and services, and generally, all activities necessary for and incidental to the operation of the Restaurant.
      * * ⅜
      6.1 Standards of Operation. On and after the Opening Date, the Manager shall have the exclusive right and duty to direct, supervise, manage, and operate the Restaurant in an efficient and economical manner in accordance with the standards and procedures as is customary and usual in the operation of a Country Kitchen® Restaurant and in accordance with the standard Country Kitchen® License Agreement, and determine the programs and policies to be followed in connection therewith, all in accordance with the provisions of this Agreement. However, Manager agrees to consult with and obtain the approval of the Owner on all major programs and policy matters which could substantially affect the type and character of the Restaurant. In order for the Manager to comply with the standards and procedures, the Owner hereby agrees that Manager shall have uninterrupted control and operation of the Restaurant during the term of this Agreement. The owner will not interfere or involve itself with the day-to-day operations of the Restaurant, and Manager may operate the Restaurant free from interference by the Owner or representative of the Owner, (emphasis added).

      . The “basic management fee” to CKI was three percent of the gross sales for the full term of the fifteen-year agreement. Other financial obligations incurred by the LLC per the agreement which may or may not be claimed as damages by CKI in event of a breach of contract include a monthly advertising fee payable to Manger equal to two per cent of the gross sales. Manger also had authority to bind the LLC to a "national and regional advertising fund” not to exceed four per cent of the monthly gross sales. A reserve fund fee of two per cent of gross sales was also required. Although not applicable here because of chronic losses, the agreement also called upon the LLC to pay an "incentive fee” of ten percent of the net operating income minus debts.
      Lest there be any doubts of CKI's position in event of a breach of contract by the LLC, the contract declared that CKI could "exercise any other remedy such party may have at law or in equity upon the default of the other party.'... ”
      The management agreement was finally cancelled by LLC in November of 1996, not coincidentally the same month the restaurant closed due to the financial losses.

      . The Management agreement drafted by CKI stated its requirements for management of this type of franchise enterprise of which it found itself capable:
      Manager has developed a business system for providing the public with food and restaurant services of a distinctive character under the name "Country Kitchen” ("the Business System”) and has publicized the name "Country Kitchen” and other trademarks, trade names, service marks, logos, and commercial symbols to the public as an organization operating under the Country Kitchen Business System.

      . The LLC had previously filed litigation against CKI. Apparently the parties settled this litigation.


source: Caselaw Access Project

author: LAVORATO, Chief Justice.

license: Public Domain

text:
    Lee GIBSON and Corrine Gibson, Appellants, v. ITT HARTFORD INSURANCE COMPANY, Appellee.
    No. 99-0386.
    Supreme Court of Iowa.
    Jan. 18, 2001.

      W. Curtis Hewitt of W. Curtis Hewitt, P.C., Council Bluffs, for appellants.
    Philip Willson of Willson & Pechacek, P.L.C., Council Bluffs, for appellee.
   LAVORATO, Chief Justice.

Lee Gibson filed this action against ITT Hartford Insurance Company (ITT) alleging multiple theories of recovery and punitive damages arising out of ITT’s handling of Gibson’s claim for workers’ compensation benefits. Before submitting the case to the jury, the district court granted ITT’s motion for directed verdict on several of the liability theories and on punitive damages. The court then submitted the balance of the liability theories to the jury, which returned a verdict on each of them. Later, the court granted ITT’s motion for judgment notwithstanding the verdict on all but two of the theories.

Gibson appealed, challenging the ruling on the motion for directed verdict only as to punitive damages and challenging the district court’s ruling sustaining the motion for judgment notwithstanding the verdict. ITT has not appealed. We reverse the directed verdict ruling on punitive damages and affirm the ruling on ITT’s motion for judgment notwithstanding the verdict.

I. Scope of Review.

Our review of rulings granting motions for directed verdict is for correction of errors at law. Iowa R.App. P. 4; Balmer v. Hawkeye Steel, 604 N.W.2d 639, 640 (Iowa 2000). In our review, “we view the evidence in the same light as the district court to determine whether the evidence generated a jury question.” Id. at 640-41. We therefore view the evidence in the light most favorable to the party opposing the motion, who in this case is Gibson. See Iowa R.App. P. 14(f)(2); Econ. Roofing & Insulating v. Zumaris, 538 N.W.2d 641, 649 (Iowa 1995). If reasonable minds could differ on an issue of fact, the issue is for the jury. Id.

In ruling on such motions, the district court must decide whether the nonmoving party has presented substantial evidence on each element of the claim. Balmer, 604 N.W.2d at 641. “Evidence is substantial if a jury could reasonably infer a fact from the evidence.” Id. A directed verdict is appropriate if the evidence is not substantial. Id.

We likewise review a district court ruling on a motion for judgment notwithstanding the verdict for correction of errors at law. Iowa R.App. P. 4; Midwest Home Distrib., Inc. v. Domco Indus. Ltd., 585 N.W.2d 735, 738 (Iowa 1998). We inquire whether substantial evidence exists to support each element of the plaintiffs claim, justifying submission of the case to the jury. See Midwest, 585 N.W.2d at 738. In making this determination, we view the evidence in the light most favorable to the nonmoving party. Iowa R.App. P. 14(f)(2); Midwest, 585 N.W.2d at 738.

II. Facts.

Viewing the evidence in the light most favorable to Gibson, we think the evidence supports the following facts. In November 1990, Gibson, while employed by a Nebraska employer, sustained a work-related injury to his lower back. Dr. Patrick Bowman, after performing five surgeries on Gibson, rated him as having a twenty-two percent permanent partial impairment.

In May 1992, Gibson began working for The Garden Café as a line cook and later as a prep-cook. In March 1993, he sustained a temporary aggravation to his preexisting low back condition when his vehicle was struck from the rear by another vehicle. Dr. Bowman diagnosed and treated Gibson for “posttraumatie cervical and lumbar strain with a history of inter-body fusion” of vertebrae.

Following the accident, Gibson missed several weeks of work. Dr. Bowman allowed him to return to light-duty work at The Garden Café. On May 6, 1993, Dr. Bowman released Gibson to return to full-duty work at The Garden Café. The following day, Gibson slipped and fell while removing food from one of the restaurant coolers. He was hospitalized for a week. At the hospital, Dr. John Marshall treated Gibson’s injury, which he diagnosed as “back pain related to musculoskeletal strain of the lumbosacral region aggravated by-trauma.”

Gibson filed a claim for workers’ compensation benefits. ITT was the workers’ compensation carrier for The Garden Café. ITT assigned Gibson’s claim to Darlene Haverstock, a claims representative for ITT. Haverstock investigated the incident and determined Gibson had in fact suffered an injury arising out of and in the course of his employment on May 7, 1993. On May 18, ITT began making weekly benefit payments to Gibson and began paying Gibson’s medical expenses, including those related to his hospitalization. ITT did not file with the Iowa Industrial Commissioner a Commissioner’s Form 2 denying liability on Gibson’s claim. See Iowa Admin. Code r. 876 — 3.1(2) (1998). Nor did ITT advise Gibson that it denied he had suffered a work-related injury.

After his release from the hospital, Gibson returned to Dr. Bowman’s care. Dr. Bowman diagnosed Gibson’s condition as “an aggravation of a preexisting condition.” The doctor prescribed medication and directed Gibson to begin physical therapy and restricted him from working.

Sometime in May, Haverstock obtained a neurological consultation report from Dr. Behrouz Rassekh concerning Gibson’s May 7 injury. At the time of the consultation, Gibson was complaining of severe back pain, had difficulty standing in an upright position, and could not extend his spine because of “the recent fall.”

On July 12, Haverstock submitted her “Initial Report” to ITT and reported her conclusion that Gibson’s injury was com-pensable as an aggravation of his preexisting lumbar spine condition.

In the same month, Dr. Bowman prescribed a myelogram, a diagnostic procedure. Following ITT’s refusal to pay for the procedure, Gibson filed an application for alternate care in September. See Iowa Code § 85.27 (1993) (“If the employer and employee cannot agree on such alternate care, the commissioner may, upon application and reasonable proofs of the necessity therefor, allow and order other care.”); see also Iowa Admin. Code r. 876 — 4.48 (1998). At the hearing on the application, Haver-stock told the presiding deputy commissioner that Gibson had suffered a compen-sable injury arising out of and in the course of his employment on May 7, 1993, and that ITT was liable on his claim for compensation benefits. Following a hearing, the Iowa Industrial Commissioner issued an alternate care decision on October 6.

The deputy commissioner who handled the application concluded that Dr. Bowman was an authorized treating physician in this matter and that ITT had acquiesced in Gibson’s care since the May 7 injury. The deputy commissioner further concluded that (1) Dr. Bowman had recommended the myelogram to assess Gibson’s condition and to determine a future course of treatment; (2) Gibson was entitled to reasonable care, which included care necessary to diagnose the condition; (3) Gibson had not yet received all of the care that Dr. Bowman had recommended; (4) ITT was not entitled to interpose its judgment in contravention of Dr. Bowman’s recommendation; and (5) ITT’s failure to follow the recommendations constituted a failure to provide reasonable treatment. See Iowa Code § 85.27 (providing that “the employer is obliged to furnish reasonable services and supplies to treat an injured employee” and that “treatment must be offered promptly and be reasonably suited to treat the injury”). The deputy commissioner ordered ITT to provide Gibson with a diagnostic myelogram and follow-up care as Dr. Bowman had recommended.

Dr. Bowman apparently concluded that a myelogram was not needed. Instead, he did an MRI, which showed no encroachment into the neural canal at any level and a solid fusion from the surgeries performed in connection with the prior 1990 Nebraska accident. ITT paid for the MRI procedure.

In November, Dr. Bowman referred Gibson to Dr. John Stark, a psychologist, for an evaluation and short-term psychotherapy. In a report to Dr. Bowman, Dr. Stark stated that Gibson was depressed and that he needed a “few sessions to help him deal with his chronic pain syndrome.” ITT received a copy of this report in February 1994.

In February 1994, ITT hired Lee McMullen, a nurse who is a rehabilitation and vocational specialist, to work on Gibson’s claim. Later that month, McMullen met with employees of The Garden Café. Together they crafted a “job analysis” of a light-duty job the employees told McMul-len was then available to Gibson.

On March 14, McMullen met with Gibson and Dr. Bowman to discuss the light-duty job at The Garden Café. Dr. Bowman told McMullen he wanted a functional capacities evaluation conducted before he would release Gibson for work. About a month later, Dr. Bowman wrote McMullen that he had reviewed the results of the functional capacity assessment, which indicated that Gibson’s medical condition was “generally compatible with the job” that The Garden Café had offered him.

On May 18, McMullen wrote Dr. Bowman requesting a rating of Gibson’s disability from his May 7, 1993 work injury. A week later, Dr. Bowman informed McMullen that Gibson was at maximum medical improvement and had a twenty-eight percent impairment of the body as a whole. However, the doctor assigned only two percent of that total impairment to the May 7 injury. On that day, Dr. Bowman released Gibson to return to work.

At some point before May 18, McMullen had learned that The Garden Café was not going to allow Gibson to return to work. McMullen did not inform Dr. Bowman of this development when she requested the disability rating. Gibson was unable to find another job until February 1996.

As early as the middle of July 1994, ITT knew that Gibson’s impairment rating from his 1990 injury was twenty-two percent and his total impairment after the May 7, 1993 injury was twenty-eight percent. Therefore, his impairment from the May 7, 1993 injury was six percent, rather than two percent, as Dr. Bowman had erroneously reported. Nevertheless, ITT terminated Gibson’s benefits on August 18, 1994, as it had previously said it would do in a June 22,1994 letter to him.

When it terminated Gibson’s benefits on August 18, ITT had paid Gibson ten weeks of benefits for permanent partial disability. ITT paid the ten weeks based on the erroneous two percent disability rating from Dr. Bowman, knowing full well that it really owed Gibson twenty additional weeks of benefits based on his true impairment of six percent. ITT was aware that a workers’ compensation insurance carrier was legally required to pay the functional impairment rating in a case of admitted com-pensability.

On August 1, 1994, Dr. Bowman referred Gibson to Dr. Bruce Gutnik, a psychiatrist. Dr. Gutnik treated Gibson on fourteen separate occasions, starting on August 23. Dr. Gutnik opined that Gibson was suffering from major depression. He found that “Gibson’s present psychiatric conditions [were] a direct result [of] and causally connected to his injury on the job, which occurred in May 1993.” Gutnik further opined that Gibson’s depression, “along with his anxiety, [was] a direct result of Mr. Gibson’s pain, inability to work, attendant financial worries, and inability to do things that he used to do.”

On August 16, Gibson filed an original notice and petition with the Iowa Industrial Commissioner, seeking additional weekly benefits and medical care regarding the May 7, 1993 injury. The following day, Haverstock sent a copy of the petition to ITT’s attorney, Joseph Andres, requesting that he answer the petition. Haverstock sent along with these documents ITT’s entire claims file as it existed on that date, including her “Activity Log,” Dr. Stark’s November 23, 1993 report, and the October 6,1993 alternate medical care decision. Andres filed an answer to the petition, denying that a work-related injury had occurred on May 7,1993.

When Haverstock sent Gibson’s petition to Andres, she still believed Gibson had suffered a work-related injury on May 7, 1993. Andres filed the answer denying that Gibson’s injury was work related without discussing with Haverstock whether he should or should not admit or deny the injury was work related. Haverstock did not learn until November 15,1994, that Andres had denied the occurrence of a compensable injury that she had always admitted. Yet she never asked Andres to withdraw the answer denying Gibson’s injury was compensable, ie., work related.

On September 2, 1994, Gibson’s attorney, Curtis Hewett, wrote to Andres. Hewett told Andres that Dr. Bowman had referred Gibson to Dr. Gutnik. Hewett also asked that Gibson’s benefits be reinstated and that arrearages “from when benefits terminated be brought current.” ITT refused to pay for Dr. Gutnik’s psychiatric treatment of Gibson and did not reinstate Gibson’s benefits.

On November 15, Gibson filed an application for alternate medical care with the Iowa Industrial Commissioner to compel coverage of Dr. Gutnik’s treatment. See Iowa Code § 85.27; Iowa Admin. Code r. 876 — 4.48. A deputy industrial commissioner dismissed the application on November 29 because ITT had answered the application by denying liability for Gibson’s injury. See Iowa Admin. Code r. 876 — 4.48(7) (“If an application [for alternate medical care] is filed where the liability of the employer is an issue, the application will be dismissed without prejudice.”). The deputy’s order explained the dismissal by noting that, “[bjefore any benefits can be ordered, including medical benefits, com-pensability of the claim must be established, either by admission of liability or by adjudication.” ITT knew that when it denied liability for Gibson’s injury, the denial would prevent Gibson from having a hearing on his November 15 alternate medical care application.

On December 1, Hewett notified Andres that Dr. Bowman had made a mathematical error in assigning a two percent impairment of the body as a whole to the May 7, 1993 injury. Hewett pointed out that in 1992 Dr. Bowman stated in a report that Gibson had sustained a twenty-two percent impairment as result of the 1990 injury and that Dr. Bowman was now opining that Gibson had a twenty-eight percent impairment. This meant that instead of a two percent impairment, Gibson had actually suffered a six percent impairment resulting from the May 7,1993 injury. Hew-ett demanded an additional twenty weeks of benefits called for by the difference of a six percent and two percent rating.

ITT refused to pay the additional twenty weeks in light of its previous answer to Gibson’s petition for additional benefits in which ITT denied liability for Gibson’s May 7, 1993 injury. ITT knew that, but for this denial of liability it had previously admitted, it was legally required to pay Gibson the additional twenty weeks of benefits.

III. Present Proceedings.

On January 12, 1995, Gibson filed suit against ITT. He alleged bad faith, abuse of process, intentional interference with a contract, misrepresentation, breach of fiduciary duty, and intentional infliction of severe emotional distress. In addition to compensatory damages, Gibson sought punitive damages as to each claim. Gibson’s wife, Corrine Gibson, joined the suit, seeking spousal consortium.

On October 15, 1997, the district court ruled on Gibson’s application for adjudication of law points. Gibson filed the application, seeking issue preclusion in his bad-faith claim based on a February 22, 1997 ruling by a deputy industrial commissioner on Gibson’s August 16, 1994 petition filed with the industrial commissioner. The deputy found that Gibson had sustained a work-related injury that had caused an aggravation of his low back condition and a psychiatric condition of major depressive disorder. The deputy ordered ITT to pay Gibson 212.5 weeks of permanent partial disability benefits and fifty-five weeks of healing-period benefits.

The deputy also found that ITT had “no reasonable excuse for [its] failure to pay [Gibson]” the additional twenty weeks of requested benefits earlier mentioned. The deputy ordered ITT to pay Gibson a penalty equal to ten weeks worth of benefits. See Iowa Code § 86.13 (providing that “[i]f a delay in commencement or termination of benefits occurs without reasonable or probable cause or excuse, the industrial commissioner shall award” additional benefits “up to fifty percent of the amount of benefits that were unreasonably delayed or denied”).

In ruling on Gibson’s application for adjudication of law points, the district court first noted that Gibson had alleged a first-party bad-faith claim, and that in the context of this case, there were two elements to the claim that had to be satisfied. Those elements included (1) an absence of a reasonable basis for denying benefits under ITT’s workers’ compensation policy, and (2) proof of ITT’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.

The court additionally noted that the first element mirrors the requirement for imposition of penalties under Iowa Code section 86.13. For this reason, the court concluded that it should give the deputy’s findings preclusive effect as to the first element of Gibson’s first-party bad-faith claim.

The parties tried the case to a jury. At the close of Gibson’s case, the district court granted ITT’s motion for directed verdict as to Gibson’s claims for punitive damages.

Following the close of all the evidence, the district court sustained ITT’s motion for directed verdict as to the claims of intentional infliction of emotional distress and breach of fiduciary duty. The court denied ITT’s motion as to the remaining claims.

The district court submitted to the jury Gibson’s claims of bad faith, abuse of process, intentional • interference with a contract, negligent misrepresentation, fraudulent misrepresentation, fraudulent concealment, and his wife’s claim for loss of spousal consortium.

The jury returned a verdict in favor of Gibson on all the claims submitted. After eliminating duplicative damages, the district court entered judgment for Gibson in the amount of $17,183 plus interest and costs and judgment for his wife in the amount of $7000.

Later, the district court granted ITT’s motion for judgment notwithstanding the verdict on all of the claims submitted to the jury except two: bad faith and abuse of process. Gibson appealed; ITT did not.

IV. Issues.

Gibson presents three main issues on appeal. First, he contends the district court erred in granting ITT’s motion for directed verdict as to his claims for punitive damages regarding his bad-faith and abuse-of-process claims. Second, he contends the district court erred in granting ITT’s motion for judgment notwithstanding the verdict on his claim of intentional interference with a contract. Last, he contends the district court erred in granting ITT’s motion for judgment notwithstanding the verdict on his claim of fraudulent misrepresentation.

V. Motion for Directed Verdict Ruling.

Gibson first contends that the district court erred in directing a verdict in favor of ITT on his claims for punitive damages.

A. Legal background. Iowa Code section 668A.1 sets the standard for awarding punitive damages:

Whether, by a preponderance of clear, convincing, and satisfactory evidence, the conduct of the defendant from which the claim arose constituted willful and wanton disregard for the rights or safety of another.

Iowa Code § 668A.l(a).

We have defined “willful and wanton” in the context of this statute to mean that

“the actor has intentionally done an act of unreasonable character in disregard of a known or obvious risk that was so great as to make it highly probable that harm would follow, and which thus is usually accompanied by a conscious indifference to the consequences.”

McClure v. Walgreen Co., 613 N.W.2d 225, 230 (Iowa 2000) (quoting Fell v. Kewanee Farm Equip. Co., 457 N.W.2d 911, 919 (Iowa 1990)).

To establish the requirement of “willful and wanton disregard for the rights or safety of another,” a plaintiff must show that the defendant’s conduct constituted actual or legal malice. Id. at 231. “Actual malice is characterized by such factors as personal spite, hatred, or ill will.” Id. “Legal malice is shown by wrongful conduct committed or continued with a willful or reckless disregard for another’s rights.” Id. Necessarily, then, a claim for punitive damages must be supported by something more than merely negligent conduct. Id. at 230.

B. Procedural background. In sustaining ITT’s motion for directed verdict, the district court recognized that, based on issue preclusion, there was no dispute ITT had committed an intentional act in its failure to pay the additional twenty weeks that Gibson had requested. However, the court went on to explain:

If we go as [plaintiff] suggests simply on the unreasonable basis, unreasonable character of the act, then I think we still have to find its highly probable that harm will follow. The harm of failure to pay 20 weeks is not the kind of harm the court believes is contemplated by the [Iowa Supreme] Court in talking about punitive damages. [Whether] [h]arm will follow by not paying psychiatrist’s bill[s] or furnishing psychiatric services is maybe a little more close question....
As we’ve indicated earlier, the acts of the defendant in this case just simply apparently two acts — maybe three. We’re talking about the myelogram, the failure to provide, furnish psychiatric care, to pay for Dr. Gutnik’s services, and the failure to pay the 20 weeks. Those acts are clearly intentional, and the consequences of those acts are certainly known to a certain degree....
But my — the Court’s problem here is that under 668A, there must be a showing of willful and wanton disregard for the rights of the plaintiff.... There isn’t actual malice here.... I think what we’re dealing with is legal malice....
The Court recognizes ... issue preclusion indicates ... [t]he actions were unreasonable.... [B]ut the co'urt simply does not find there is sufficient evidence for a rational trier of fact to find by clear, convincing and satisfactory evidence that the conduct committed by the defendant was done with willful, wanton or reckless disregard for the rights or safety of the plaintiff or there was a high probability that harm would follow the acts that were taken.

C. Analysis. Gibson disagrees with the district court’s reasoning. He argues that the evidence in this case that supports the judgment against ITT for bad faith and abuse of process is enough to justify submission of the punitive-damages claim to the jury. The issue, then, narrows to whether the evidence in this case that warranted submission of the bad-faith and abuse-of-process claims also warrants submission of the punitive-damages claim.

1. Bad faith. To establish a first-party bad-faith claim, “ ‘a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.’ ” Dolan v. Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988) (quoting Anderson v. Continental Ins. Co., 85 Wis.2d 675, 690, 271 N.W.2d 368, 376 (1978)). A reasonable basis exists for denying insurance benefits if the claim is “fairly debatable” as to either matters of fact or law. Id.

In Boylan v. American Motorists Insurance Co., we extended this common-law tort theory to workers’ compensation. See 489 N.W.2d 742, 744 (Iowa 1992). We concluded that the relationship between an injured employee and the employer’s workers’ compensation carrier is analogous to those first-party insurance claims for which this court in Dolan recognized tort liability for bad faith. See id. at 743.

We also rejected a district court holding that Iowa Code section 86.13 provided a statutory remedy for unreasonably delayed or withheld workers’ compensation benefits thereby providing an exclusive remedy and precluding a common-law bad-faith claim. See id. at 742; see also Iowa Code § 86.13 (providing that the industrial commissioner may award penalty benefits “[i]f a delay in commencement or termination of benefits occurs without reasonable or probable cause or excuse”). In doing so, we said that “it is unlikely that the legislature intended the penalty provision in section 86.13 to be the sole remedy for all types of wrongful conduct by carriers with respect to the administration of workers’ compensation benefits.” Id. at 744.

Finally, we held that section 86.13 recognizes an affirmative duty “on the part of the employer and insurance carrier to act reasonably in the absence of specific direction by the commissioner.” Id. at 743.

Borrowing from our bad-faith decisions, we held in Coma v. Robinson that, in the workers! compensation context, a reasonable excuse exists if the claim for benefits is “fairly debatable.” 507 N.W.2d 411, 416 (Iowa 1993). In Christensen v. Snap On-Tools Corp., we said that for purposes of Iowa Code section 86.13,

[a] reasonable cause or excuse exists if either (1) the delay was necessary for the insurer to investigate the claim or (2) the employer had a reasonable basis to contest the employee’s entitlement to benefits. A “reasonable basis” for denial of the claim exists if the claim is “fairly debatable.”

554 N.W.2d 254, 260 (Iowa 1996).

In sum, when a workers’ compensation carrier has no reasonable cause or excuse for “a delay in commencement or termination of benefits,” such a failure establishes the first prong of a bad-faith claim. However, the “[u]se of the bad faith ‘fairly debatable’ standard does not require that we also use the second element of the bad-faith claim: the insurer’s ‘knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.’ ” Id. (quoting Dolan, 431 N.W.2d at 794). In short, “[s]ection 86.13 does not require that the lack of a reasonable excuse be due to any particular type of conduct by the insurer, whether negligent, reckless or intentional.” Id.

As to Gibson’s bad-faith claim, the district court instructed the jury that Gibson had to prove the following:

1. [ITT] denied [Gibson’s] claim: (a) for a specific twenty weeks of workers’ compensation benefits; or (b) for psychiatric treatment furnished by [ITT],
2. There was no reasonable basis for denying [Gibson’s] claim.
3. [ITT] knew or had reason to know that there was no reasonable basis for denying the claim.
4. The denial was a proximate cause of damage to [Gibson].
5. The nature and extent of damage.

The district court further instructed the jury that a previous determination had already been made that ITT had no reasonable basis for its refusal to pay the twenty weeks of workers’ compensation benefits. ITT does not contend that these instructions were erroneous. Nor does it contend that there was insufficient evidence to submit them. In addition, our previous recitation of the facts clearly establishes there was sufficient evidence on each element of the bad-faith claim for the district court to submit it to the jury.

The question narrows to whether the evidence that was sufficient to submit the bad-faith claim was also sufficient to submit the punitive-damages claim. For reasons that follow, we think that it was.

As mentioned, to prove “willful and wanton disregard for the rights and safety of another,” Gibson had to prove actual or legal malice. We agree with the district court that what is at issue here is legal malice. As we said, legal malice is shown by wrongful conduct committed or continued with a willful or reckless disregard for another’s rights. Our cases are clear that willful and wanton disregard for the rights of another can be shown by the defendant’s intentional violation of a statutory right. See, e.g., Lara v. Thomas, 512 N.W.2d 777, 782-83 (Iowa 1994).

Here, there was a conclusive finding that ITT had no reasonable basis for its refusal to pay the twenty weeks of workers’ compensation benefits to which Gibson was statutorily entitled under Iowa Code section 85.34(2)(u). Additionally, the evidence supports a finding that, as early as July 1994, ITT knew Gibson was entitled to the additional twenty weeks. Nevertheless, ITT terminated his benefits one month later. The evidence also supports a finding that ITT knew Gibson was statutorily entitled to psychiatric treatments pursuant to Iowa Code section 85.27 and had no reasonable basis to refuse payment but nevertheless chose not to pay for those treatments. We conclude the evidence was sufficient to establish legal malice, i.e., that ITT acted with willful and wanton disregard for Gibson’s rights.

Contrary to the district court, we conclude the evidence in this case was sufficient to show that it was “highly probable” harm would follow from ITT’s decision not to pay the twenty weeks and not to pay for the psychiatric treatments. Loss of function of the mind and mental pain and suffering accounted for a substantial part of the compensatory damages that the jury awarded for the bad-faith claim. Additionally, the jury awarded Gibson damages for penalties he incurred in withdrawing money early from an IRA account after ITT stopped paying benefits. The IRA money was needed to pay bills because ITT was no longer paying Gibson benefits. A jury, using its common sense and experience, could reasonably infer that, as a workers’ compensation carrier, ITT was in a position to know there was a high probability its wrongful conduct would result in the kind of harm Gibson suffered.

2. Abuse of process. Abuse of process is “the use of legal process, whether criminal or civil, against another primarily to accomplish a purpose for which it was not designed.” Fuller v. Local Union No. 106, 567 N.W.2d 419, 421 (Iowa 1997). An abuse-of-process claim has three elements: (1) the use of a legal process (2) in an improper or unauthorized manner (3) that causes the plaintiff to suffer damages as a result of that abuse. Id.

“The first element can generally be shown by the use of a legal process against the plaintiff.” Wilson v. Hayes, 464 N.W.2d 250, 266 (Iowa 1990). As to the second element, “[t]he plaintiff must prove that the defendant used the legal process 'primarily for an impermissible or illegal motive.” Id.

The district court instructed the jury that, as to his abuse-of-process claim, Gibson had to prove the following: (1) ITT intentionally used an answer to Gibson’s petition before the Iowa Industrial Commissioner for workers’ compensation benefits; (2) ITT used the legal process primarily to prevent Gibson from obtaining psychiatric care at ITT’s expense and to prevent Gibson from obtaining a hearing before the Industrial Commissioner on his application for alternate medical care and not for the legal process’s (i.e., the answer’s) intended use; (3) ITT’s use of the legal process for the improper purpose was a proximate cause of Gibson’s damage; and (4) the amount of damage.

ITT challenges various aspects of the abuse-of-process claim. For example, it argues that (1) the answer was not filed (or not withdrawn) in order to refuse to pay for psychiatric care, (2) this action was not unreasonable, and (3) Gibson cannot show damage from ITT’s failure to pay the psychiatric bills.

Because ITT has not appealed from the judgment in favor of Gibson on this claim, it cannot now challenge the judgment. See Johnson Equip. Corp. v. Indus. Indem., 489 N.W.2d 13, 17 (Iowa 1992) (holding that a party need not cross-appeal a trial court’s rejection of a ground urged in the trial court to preserve error on a claim decided in the party’s favor but must still cross-appeal to preserve an issue on a claim decided adversely to the party). We reject ITT’s contention that it was a successful party on the abuse-of-process claim because the damages for that claim were duplicative of damages for other claims. Under Johnson, ITT was the unsuccessful party on the abuse-of-process claim and therefore, had to cross-appeal from the judgment on that claim to preserve error. For this reason, ITT cannot now claim there was insufficient evidence to support submission to the jury of the abuse-of-process claim.

Iowa Code section 85.27 imposes an affirmative duty on the part of the employer and the workers’ compensation carrier to furnish reasonable and necessary medical care to an injured employee. See Iowa Code § 85.27; Boylan, 489 N.W.2d at 743. By its verdict, the jury found that ITT intentionally denied compensability in its answer to Gibson’s petition for benefits for the primary purpose of preventing Gibson from obtaining statutory benefits, ie., psychiatric treatment at ITT’s expense for his work-related depression. ITT’s other purpose was to prevent Gibson from having a hearing — a statutory right under Iowa Code sections 17A.12 and 85.27 — on his application for alternate medical care before the industrial commissioner. The evidence that allowed the jury to make this finding was sufficient to establish that ITT intentionally violated Gibson’s statutory rights. Such conduct, as we earlier noted, is sufficient to constitute willful and wanton conduct, ie., legal malice, for punitive damages purposes.

The jury allowed compensatory damages for loss of function of the mind and mental pain and suffering on the abuse-of-process claim. Dr. Gutnik was treating Gibson for major depression that was work related. The evidence shows that ITT knew this. From this, the jury could reasonably infer that ITT knew it was highly probable that its conduct could aggravate Gibson’s depression and delay improvement of his condition.

For all these reasons, we conclude the district court erred in sustaining ITT’s motion for directed verdict as to Gibson’s claim for punitive damages. By our discussion we do not mean to imply that in every case evidence sufficient to submit a bad-faith claim or an abuse-of-process claim will be sufficient to support submission of a punitive-damages claim. We must make that determination on a case-by-case basis.

VI. Motion for Judgment Notwithstanding the Verdict.

Gibson next contends that there was sufficient evidence to submit his claims for intentional interference with a contract and fraudulent misrepresentation. He therefore asserts the district court erred in sustaining ITT’s motion for judgment notwithstanding the verdict on these two claims.

A. Intentional interference with a contract. The elements of this tort include the following: “ ‘(1) plaintiff had a contract with a third-party; (2) defendant knew of the contract; (3) defendant intentionally and improperly interfered with the contract; (4) the interference caused the third-party not to perform, or made performance more burdensome or expensive; and (5) damage to the plaintiff resulted.’ ” Jones v. Lake Park Care Ctr., Inc., 569 N.W.2d 369, 377 (Iowa 1997) (quoting Nesler v. Fisher & Co., 452 N.W.2d 191, 198 (Iowa 1990)).

The district court submitted two items of interference with the contract between Gibson and Dr. Bowman: (1) refusing to pay for the myelogram prescribed by Dr. Bowman and (2) representing to Dr. Bowman that The Garden Café would return Gibson to work in a “light duty” job when ITT knew this representation was false. (ITT does not dispute that an implied contract existed between Gibson and Dr. Bowman. We make no ruling with respect to this issue and simply assume, without deciding, that such a contract did exist.)

Our review of the evidence convinces us that there was insufficient evidence that ITT’s actions regarding the myelogram caused Dr. Bowman not to perform his contract with Gibson. Dr. Bowman apparently had decided on his own that a myelo-gram was not appropriate. Additionally, even after the deputy commissioner had ordered ITT to pay for the myelogram, Dr. Bowman only conducted an MRI, a diagnostic test for which ITT paid.

We likewise conclude the evidence was insufficient to show that ITT had anything to do with influencing Dr. Bowman to release Gibson to work. The evidence shows that Dr. Bowman was independent in his treatment of Gibson. While Dr. Bowman may have been pleased to learn that a light-duty job was allegedly available for Gibson at The Garden Café, the existence of that job was not the reason why Dr. Bowman released Gibson to work.

The evidence only supports a finding that Dr. Bowman released Gibson for light-duty work because the doctor believed that Gibson had received a sufficiently favorable functional-capacity evaluation to enable Gibson to return to work. In other words, Dr. Bowman’s decision to release Gibson was premised on his conclusion that Gibson was fit to work light-duty jobs of the type supposedly available at The Garden Café. We are not convinced the evidence supports the conclusion that Dr. Bowman would not have released Gibson had Dr. Bowman known a light-duty job was not available at The Garden Café.

We conclude the district court correctly granted ITT’s motion for judgment notwithstanding the verdict on this claim.

B. Fraudulent misrepresentation. To establish a claim of fraudulent misrepresentation, a plaintiff must prove (1) defendant made a representation to the plaintiff, (2) the representation was false, (3) the representation was material, (4) the defendant knew the representation was false, (5) the defendant intended to deceive the plaintiff, (6) the plaintiff acted in reliance on the truth of the representation and was justified in relying on the representation, (7) the representation was a proximate cause of plaintiffs damages, and (8) the amount of damages. See Midwest, 585 N.W.2d at 738.

The district court instructed the jury that to recover on this claim Gibson had to prove all of the following: ITT, through McMullen, made a representation to Dr. Bowman that The Garden Café would return Gibson to work in a “light duty” job; that the representation was false; that the representation was material; that ITT knew the representation was false; that ITT intended to deceive Dr. Bowman; that Dr. Bowman acted in reliance on the truth of the representation and was justified in relying on the representation; and that the representation was a proximate cause of Gibson’s damage.

ITT makes no contention that the evidence was insufficient to support this claim because the representation was not made to Gibson. ITT also makes no contention that there was insufficient evidence that Gibson relied on the representation. We therefore pass on these issues.

ITT, however, did assert in its motion for directed verdict and in its motion for judgment notwithstanding the verdict that there was no evidence Dr. Bowman relied on McMullen’s statements. We agree with the district court’s response to this assertion in its ruling on the motion for judgment notwithstanding the verdict:

There is insufficient evidence in the record that Dr. Bowman acted in reliance upon the truth of the information in making his evaluation. Bowman did receive information as to the availability of the light duty job from Lee McMullen. However, it is clear that his release of the plaintiff was based upon his evakuation of the plaintiffs physical condition rather than the availability of the work for the plaintiff.

(Emphasis added.)

We conclude the district court correctly granted ITT’s motion for judgment notwithstanding the verdict on this claim.

VII. Disposition.

Because there was sufficient evidence to submit Gibson’s claim for punitive damages to the jury, we conclude the district court erred in sustaining ITT’s motion for directed verdict on this issue. We therefore reverse and remand for new trial.

The district court, however, correctly sustained ITT’s motion for judgment notwithstanding the verdict as to Gibson’s claims for intentional interference with a contract and fraudulent misrepresentation. We therefore affirm on these issues.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.