Prows v. State

• Decision Date: 05 December 1991
• Docket Number: No. 890161,890161
• Parties: Richard S. PROWS and Robert W. Wood, individuals, and Foothill Federated Corporation, a Utah corporation, Plaintiffs and Appellants, v. The STATE of Utah, the Department of Financial Institutions of the State of Utah, and Industrial Loan Guaranty Corporation, Defendants and Appellees.
• Court: Utah Supreme Court

Page 764

822 P.2d 764

Richard S. PROWS and Robert W. Wood, individuals, and Foothill Federated Corporation, a Utah corporation, Plaintiffs and Appellants, v. The STATE of Utah, the Department of Financial Institutions of the State of Utah, and Industrial Loan Guaranty Corporation, Defendants and Appellees.

No. 890161.

Supreme Court of Utah.

Dec. 5, 1991.

Rehearing Denied Dec. 5, 1991.

Dennis K. Poole, Duane R. Smith, J. Frederic Voros, Jr., Salt Lake City, for plaintiffs and appellants.

R. Paul Van Dam, Stephen J. Sorenson, Bryce H. Pettey, Ray R. Christensen, Jay E. Jensen, Salt Lake City, for the State of Utah and the Dept. of Financial Institutions.

P. Keith Nelson, David L. Barclay, Salt Lake City, for Indus. Loan Guar.

DURHAM, Justice:

Richard S. Prows, Robert W. Wood, and Foothill Federated Corporation (collectively "Foothill Federated" or "plaintiffs") appeal from the trial court's order dismissing their amended complaint as to defendants Utah Department of Financial Institutions ("DFI") and the State of Utah (collectively "the State"). ¹ The amended complaint sought recovery from the State for losses plaintiffs suffered when Foothill Federated Corporation was unable to continue operating as a financial institution. We affirm the trial court's dismissal of the amended complaint.

In its present form, the Industrial Loan Corporation Guaranty Act, Utah Code Ann. §§ 7-8a-1 to -22, creates the Industrial Loan Guaranty Corporation ("ILGC"), a private nonprofit corporation intended to guarantee thrift deposits until those deposits become federally insured. Utah Code Ann. § 7-8a-2. Pursuant to that Act, all industrial loan corporations which are not insured by the federal government and have outstanding thrift certificates of deposit or thrift savings accounts are members of the ILGC. Utah Code Ann. § 7-8a-6. Those members must participate in the ILGC by paying assessments in amounts the statute specifies. Utah Code Ann. § 7-8a-10. The statute limits the maximum amount of funds guaranteed per depositor to $15,000. Utah Code Ann. § 7-8a-8.

Plaintiffs Prows and Wood, acting as Foothill Federated Corporation, acquired Foothill Thrift and Loan, a Utah industrial loan corporation, on December 29, 1985, after Elaine Weis, acting in her capacity as the commissioner of financial institutions, entered an order approving their application. Plaintiffs changed the name of the institution to Foothill Financial and recapitalized it in the approximate amount of $5 million.

The DFI granted plaintiffs a state charter when they acquired Foothill Financial. The institution was not federally insured. As a result, plaintiffs became statutorily obligated to participate in the ILGC by paying the required assessments. In July of 1986, Weis and the DFI declared the ILGC insolvent and, after declaring numerous Utah thrifts insolvent, seized those thrifts' assets. On April 3 and 4, 1987, Foothill Financial suffered a run on its deposits, forcing it to close its doors. The run was allegedly started by a television news report that Foothill Financial deposits were without any state or federal deposit insurance. ²

On April 4, 1987, Weis and the DFI seized Foothill Financial. Thereafter, Zions First National Bank acquired the assets of Foothill Financial and Foothill Federated, conditioned on an agreement by Prows and Wood (and other entities they owned) to indemnify Zions against potential losses and refrain from participating in any profits generated by the assets. At the time of the transaction, Foothill Financial deposits totalled approximately $27 million. Due to the loss of Foothill Financial and the indemnification granted to Zions, Prows and Wood now claim that they sustained a loss of approximately $9 million.

Plaintiffs sued the ILGC, the DFI, and the State of Utah for these losses, claiming breach of contract, statutory entitlement, and promissory estoppel. Essentially, plaintiffs argue that the ILGC promised to guarantee Foothill Financial deposits, the ILGC breached its promise by failing to perform on the guaranties, the State was the ILGC's alter ego (because of the relationship of Elaine Weis and the DFI with the ILGC), and thus the State is answerable for the ILGC's breach. In addition, plaintiffs seek to estop the State from denying representations and promises that led plaintiffs to believe that the obligations of the ILGC were guaranteed by the State.

The district court granted defendants' motion to dismiss, citing the following grounds: (1) defendants are immune from suit under subsections 63-30-10(1)(a), (c), (d), and (f) of the Utah Governmental Immunity Act; (2) defendants have no duty of care toward plaintiffs upon which tort liability could be predicated; (3) based upon the allegations set forth in the amended complaint, the State is not the alter ego of the ILGC; and (4) defendants are immune from suit under section 7-8a-20(3) of the ILGC Act. Although none of these grounds directly address plaintiffs' contract claims, we affirm the trial court's dismissal of the complaint.

Three issues are before us on appeal: first, whether the trial court properly ruled as a matter of law that the State could not be the alter ego of the ILGC; second, whether it is clear that plaintiffs are not entitled to relief on their breach of contract, statutory entitlement, and promissory estoppel claims; and third, whether the State is immune from these claims under the Governmental Immunity Act or under section 7-8a-20(3) of the ILGC Act. Because of the nature of our resolution of plaintiffs' alter ego, statutory entitlement, breach of contract, and promissory estoppel claims, we need not address the State's governmental immunity defenses.

I. STANDARD OF REVIEW

This case comes to us as an appeal from a dismissal under Utah Rule of Civil Procedure 12(b)(6). A motion to dismiss is appropriate only where it clearly appears that the plaintiff or plaintiffs would not be entitled to relief under the facts alleged or under any state of facts they could prove to support their claim. Colman v. Utah State Land Bd., 795 P.2d 622, 624 (Utah 1990). In determining whether the trial court properly granted the motion, we must accept the factual allegations in the complaint as true and consider all reasonable inferences to be drawn from those facts in a light most favorable to the plaintiff. St. Benedict's Dev. Co. v. St. Benedict's Hospital, 811 P.2d 194 (Utah 1991).

II. ALTER EGO

Plaintiffs assert breach of contract, statutory entitlement, and promissory estoppel claims in their amended complaint. Recovery on the breach of contract and statutory entitlement claims depends on a favorable resolution of the alter ego claim. Under the latter, plaintiffs assert that the ILGC entered into a contract with Foothill Financial and Foothill Financial's depositors, that the contract was subsequently breached, and that because the State was the alter ego of the ILGC, the State and the ILGC are both liable for the breach.

There are two requirements for proof of alter ego. First, " 'there must be such a unity of interest and ownership that the separate personalities of the corporation[s] ... no longer exist.' " Municipal Bldg. Auth. of Iron County v. Lowder, 711 P.2d 273, 278 (Utah 1985) (quoting Norman v. Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979)). Second, the court's observance of the corporate form must " 'sanction a fraud, promote injustice, or [cause] an inequitable result....' " Id.

The amended complaint alleges, "Although the ILGC was created by statute as a private nonprofit corporation, by 1985 the DFI and Elaine Weis ... so dominated and controlled the ILGC that it no longer had any separate existence but had become the alter ego of the State of Utah." The complaint also alleges that it would be inequitable to allow the State of Utah, after dominating and controlling the ILGC, to be protected from suit by considering the State and the ILGC as separate entities. The complaint does not include detailed factual allegations supporting plaintiffs' alter ego theory, but under Utah's notice pleading requirements, the foregoing adequately asserts a claim and puts the State on notice of that claim. See generally Utah R.Civ.P. 8; Union Bank v. Swenson, 707 P.2d 663, 668-69 (Utah 1985).

Plaintiffs apparently are relying on an alter ego theory as a means of achieving a greater recovery from the State than that available from the ILGC. There is a fundamental flaw, however, in this reliance. Even if we allow application of an alter ego theory in this instance, and even if plaintiffs could prove this theory at trial, as the alter ego of the ILGC, the State would be liable only to the same extent that the ILGC is liable. While section 7-8a-8 limits liability to $15,000 for each depositor, section 7-8a-13(1) places a limit on the liability of the ILGC. The latter section provides in part, "If the total funds available from the guaranty corporation at that time are insufficient to pay in full the amounts provided by § 7-8a-8, the amount paid to each account holder shall be ratably reduced in proportion to the amount by which the fund is deficient." Plaintiffs allege in their amended complaint that they entered into a contract with the ILGC in which the ILGC agreed "to guarantee Foothill's deposits at statutorily mandated levels." (Emphasis added.) Because the terms of such a contract would necessarily include the limitation of liability imposed by the statute, plaintiffs cannot place themselves in a better position by attempting to hold the State, as the ILGC's alter ego, liable under the same contract.

III. BREACH OF CONTRACT, STATUTORY ENTITLEMENT, AND PROMISSORY ESTOPPEL CLAIMS

In the order dismissing plaintiffs' complaint, the court found that (1) defendants are immune from suit under the Utah Governmental Immunity Act, Utah Code Ann. § 63-30-10(1)(a), (c), (d), and (f); (2) defendants owe no duty of care toward plaintif...