597 F.2d 1273 (9th Cir. 1979), 76-3688, Kidwell ex rel. Penfold v. Meikle
|Docket Nº:||76-3688, 77-1253.|
|Citation:||597 F.2d 1273|
|Party Name:||Wayne L. KIDWELL, Attorney General of the State of Idaho, ex relation of Don V. PENFOLD and Kenneth M. Cooper, suing in the name of the State of Idaho to protect and enforce the rights of the charitable, recreational and educational beneficiaries of Grand Targhee Resort, Inc., Boyd Moulton and Milton Butler, members of the board of directors of Gra|
|Case Date:||June 01, 1979|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
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Ronald J. Jarman, Pocatello, Idaho, Blaine S. Butler, Los Angeles, Cal., for appellants.
Sidney E. Smith, U. S. Atty., Boise, Idaho, Gordon S. Thatcher, Rexburg, Idaho, Terry L. Crapo, Idaho Falls, Idaho, Warren S. Derbidge, Asst. U. S. Attys., Boise, Idaho, for appellees.
Appeal from the United States District Court for the District of idaho.
Before VAN DUSEN [*], WRIGHT and GOODWIN, Circuit Judges.
GOODWIN, Circuit Judge:
Plaintiffs appeal from a summary judgment for all defendants. The complaint charged violations of the federal securities laws, advanced several pendent and diversity claims, and sought mandamus against federal officials.
The relevant facts, gleaned from a lengthy record and cast in the light most favorable to the plaintiffs, are as follows:
Grand Targhee Resort, Inc. (Targhee) was organized in 1967 as an Idaho nonprofit cooperative membership corporation. Its purpose was to operate for its members a ski resort on lands leased from the United States Forest Service west of the Grand Tetons, near the Idaho border, in Wyoming. Membership shares were purchased for between $100 and $1,000 each. The total cash investment by members came to about $547,000.
Targhee's bylaws provided for no dividends; members hoped to receive the return of their original cash contribution upon dissolution, but there was no guarantee. Any surplus on dissolution was to be donated to nonprofit charitable, recreational, or educational organizations. The primary benefit of the resort to most of its members was to be the expected stimulation of the local economy as Targhee attracted skiers and other vacationers.
A 15-member board of directors was empaneled from among the members. The articles of incorporation required that at least two thirds of the directors be "farmers or rural residents" of five named counties in Idaho or of one county in Wyoming. Two thirds of the members of Targhee also had to be residents of these six counties.
To finance the construction of ski lifts and other facilities, Targhee borrowed $600,000 from the Farmers Home Administration (FHA). This federal agency oversaw the organization and early operation of Targhee to protect the government's loan. Later, the Idaho Investment Board (IIB) purchased Targhee's obligation from the FHA with state funds, and the FHA continued to insure the loan.
Targhee opened during the Christmas season in 1969. After its first season, Targhee hired a consulting firm to examine its operation. The consultants recommended that additional housing be built near the ski hill so that visitors could spend the night at the resort.
Steve Meikle, Jr., a founder and member and the executive vice president of Targhee, was chairman of the IIB and president and part owner of Valley Bank, a local bank in nearby Rexburg, Idaho. Meikle suggested to the board a housing plan that led to the formation of the Sioux Corporation (Sioux).
Unlike Targhee, Sioux was incorporated for profit. Sioux shareholders were 32 Targhee members selected by Meikle and others. Shares in Sioux entitled their owners to preferential occupancy rights in and an opportunity to profit from a new lodge to be built at the Targhee resort. Sioux stock was not offered to the public, nor to all members of Targhee. The selection of Sioux shareholders was accomplished without consultation with the Targhee membership or directors. Among those finally chosen for Sioux ownership were Meikle; Kent Jolley, Targhee's attorney; and some members of the Targhee board of directors. Sioux shares were sold to these stockholders at a nominal price, and the 32 shareholders then purchased long-term debentures from Targhee, subordinated to all of Targhee's other creditors, in the total amount of about $50,000.
Targhee then borrowed additional sums, in excess of $340,000, from the Small Business Administration (SBA), and built Sioux Lodge at the resort site. Under a complex agreement, Sioux leased the building from Targhee for about 25 years; Sioux agreed to pay the SBA mortgage out of its sublease receipts and shareholder assessments; and Targhee agreed to manage and maintain the lodge for Sioux on a year-round basis. Sioux had a right of first refusal if Targhee decided to sell the lodge. Jolley served as counsel to both Sioux and Targhee throughout the negotiation of the lodge deal.
There was evidence that the management contract, which forced Targhee to remain in operation the year around, was highly unfavorable to Targhee, and that the design of the Sioux units was disadvantageous to Targhee's food and beverage operation. All 32 Sioux living units had kitchen facilities, enabling Sioux occupants to prepare their meals without patronizing the resort restaurant.
Sioux shareholders subleased the 32 units at the lodge from Sioux, the primary lessee, for 25 years each. Under these agreements, the Sioux shareholders enjoyed some preferential occupancy rights, but had to relinquish their apartments to the public for part of the year to raise funds to pay the rent to Targhee, and hence Targhee's mortgage to the SBA. If public rental of the apartment units at the lodge did not satisfy Sioux's obligation to Targhee, Sioux members would be assessed, after the first two years of lodge operation, to amortize the principal on the mortgage.
In the meantime, the FHA advanced Targhee about $140,000 more in loans, and the IIB ultimately agreed to purchase the $340,000 SBA-guaranteed mortgage on the Sioux Lodge in addition to the $600,000 obligation that the FHA had already insured.
The Sioux transaction provoked immediate dissent from members of Targhee who were not invited to participate. Some saw the lodge as an exclusive "condominium" project whose relationship with Targhee was unfair; they also complained that the lodge project was a Fait accompli before it was revealed to them. The rift within Targhee gradually widened. One of the most vocal anti-Sioux members, Don Penfold, was threatened with expulsion from Targhee. Soon thereafter, Kitchener Head, a Targhee director, sold his interest in Sioux amid charges that its ownership conflicted with his duties to Targhee. In 1971, the Targhee board resolved to merge with Sioux and dissolve the contracts between the two corporations. Sioux, however, refused to merge.
While the merger controversy was heating up, another controversy arose about the management of the resort, which, from the beginning went steadily downhill. Robert Blank, president and general manager of Targhee, was a Sioux shareholder. Blank's management came under fire from a group of Targhee directors who were not Sioux members. After three seasons, by June 28, 1972, Targhee (whose membership now totaled more than 950) was told by its auditor that it was "about out of business". Targhee was in default on past obligations and had no capital with which to fund any expansion.
Different directors and membership factions proposed their own solutions to the financial crisis. One group urged a shakeup in management with stricter control by the board of directors over business policy decisions, plus a one-time assessment of Targhee members to tide the operation over a cash shortage. Others urged more borrowing, from outside sources (if possible), or, more likely, a sale to an outside party with sufficient capital to turn the resort around. Several takeover and financing proposals were examined.
An important factor in these deliberations was the possibility that the federal government might ease its restrictions on condominium development by forest-land permit holders such as Targhee. Meikle told the Targhee board at its July 6, 1972, meeting that it was possible that Congress might lift the Forest Service's moratorium on condominiums early in 1973, but that this relief could not be predicted with certainty.
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