Aurora Credit Services, Inc. v. Liberty West Development, Inc.

• Decision Date: 24 November 1998
• Docket Number: No. 970154,970154
• Citation: 970 P.2d 1273
• Parties: 357 Utah Adv. Rep. 3 AURORA CREDIT SERVICES, INC., a Minnesota corporation, Plaintiff and Appellant, v. LIBERTY WEST DEVELOPMENT, INC., a Utah corporation, XM International, a Utah limited liability company, and Dennis W. Gay, an individual, Defendants and Appellees.
• Court: Utah Supreme Court

Page 1273

970 P.2d 1273

357 Utah Adv. Rep. 3

AURORA CREDIT SERVICES, INC., a Minnesota corporation Plaintiff and Appellant, v. LIBERTY WEST DEVELOPMENT, INC., a Utah corporation, XM International, a Utah limited liability company and Dennis W. Gay, an individual Defendants and Appellees.

No. 970154.

Supreme Court of Utah.

Nov. 24, 1998.

Eric P. Hartman, Salt Lake City, for plaintiff

John E. Swallow, Steven B. Smith, Kami L. Peterson, Salt Lake City, for defendants

ZIMMERMAN, Justice:

Aurora Credit Services, Inc., appeals the trial court's grant of partial summary judgment on its derivative claims and dismissal of its direct claims against Liberty West Development, Inc., XM International, and Dennis Gay. Aurora also appeals the trial court's denial of its motion to amend its complaint. We reverse.

In 1986, Dennis W. Gay, James Hogle, Jr., and two other individuals formed Liberty West Development, Inc. ("LWD"). LWD borrowed money to develop an office complex on property located in Ogden, Utah ("the property" or "the Ogden property"), and used the property to secure the loan. Ultimately, the Internal Revenue Service leased the office complex. Both Gay and Hogle occupied positions as corporate officers of LWD: Gay was CEO from 1990 until its dissolution, and Hogle was president from 1986 to 1991.

By 1990, LWD was in financial trouble. LWD owed on the loan used to purchase the property and on other obligations, and there were numerous liens against the property. Around this time, Union National Bank of Chicago sued Hogle for an unrelated debt and obtained a money judgment against him. Union National Bank subsequently failed, and the Federal Deposit Insurance Corporation ("FDIC") took over its assets, including the judgment against Hogle. On February 20, 1991, Hogle executed a security agreement in favor of the FDIC in which he pledged his 2,500 shares of LWD stock as collateral for the judgment. In connection with this pledge, Hogle gave the FDIC a financial statement which valued the pledged LWD stock at $200,000. When Hogle pledged his stock, he was still president of LWD.

In November of 1991, Aurora Credit Services, Inc. ("Aurora"), purchased a package of assets from the FDIC at a judgment auction. This package included the judgment against Hogle. In December of 1991, Aurora contacted Hogle and offered to accept $87,500 to satisfy the entire judgment against him, which was approximately $125,000 at that point. Hogle, however, made neither an indication of acceptance nor any payments to Aurora. On January 8, 1992, the FDIC executed a formal assignment to Aurora of its interest in the Hogle judgment, including its security interest in Hogle's LWD stock. Aurora notified LWD and Gay of its acquisition of the security interest on January 20, 1992. Aurora foreclosed on the security in the Hogle stock in April of 1993.

From the time the FDIC acquired the interest in the Hogle judgment and through early July of 1993, after it had been assigned to Aurora, LWD represented first to the FDIC and then to Aurora that it owned and was trying to sell the Ogden property. LWD represented that it expected to recover $800,000 to $1,000,000 of equity in the property. However, after May of 1991, these and other statements made to Aurora were no longer true. This is because in early 1991, Restaurant Store & Equipment Supply Company, Inc. ("Restaurant Co."), sued and obtained a judgment against LWD for nonpayment on a contract. Restaurant Co. then obtained a writ of execution, and on April 24, 1991, the Weber County Sheriff recorded a levy on the property with the Weber County Recorder's Office. On May 15, 1991, a sheriff's sale was held and the property sold to Restaurant Co. The sheriff issued Restaurant Co. a certificate of sale giving notice of LWD's statutory right of redemption. The sheriff recorded the certificate of sale on May 16, 1991. Less than a week after Restaurant Co. purchased the property at the sheriff's sale, Restaurant Co. sold the property to XM International ("XM"), a general partnership owned jointly by Gay and a George Bybee. LWD never exercised its right of redemption and therefore lost all interest in the property on November 15, 1991, at the expiration of the six-month redemption period.

On July 7, 1993, Gay informed Aurora that LWD no longer owned the property. After learning that XM owned the Ogden property, Aurora demanded that Gay and XM return it to LWD. XM did not return the property to LWD, and Aurora filed a complaint in the district court on August 5, 1994. Aurora filed an amended complaint on October 17, 1994, asserting both derivative and direct claims alleging that Gay negligently and intentionally mismanaged LWD, breached his fiduciary duties, and wasted corporate assets. Aurora sought issuance of stock certificates in its name, requested to review corporate books, and alleged personal and corporate losses. LWD moved to dismiss Aurora's direct claims, which the court did on December 12, 1994. ¹ Aurora thereafter asked for leave to amend the judgment dismissing its direct claims or to allow Aurora to amend its amended complaint. The trial court denied both requests on March 20, 1995.

LWD then moved the court for summary judgment dismissing Aurora's derivative claims, arguing that Aurora did not have standing to sue LWD because Aurora was not a shareholder of LWD when the alleged injury occurred. Essentially, LWD argued that under the contemporaneous ownership rule, Aurora lacked standing to bring a derivative claim. On December 20, 1995, the trial court granted LWD's motion for partial summary judgment. ² Aurora again moved the court to amend its judgment or to permit it to amend its amended complaint. The court denied both motions, and Aurora now appeals.

Before this court, Aurora argues that the trial court erred in granting partial summary judgment on its derivative claims, in dismissing its direct claims, and in denying its motion to amend. We first review the trial court's grant of partial summary judgment.

"Summary judgment is appropriate only when no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law." K & T, Inc. v. Koroulis, 888 P.2d 623, 626-27 (Utah 1994) (citing Utah R. Civ. P. 56(c)). Because a summary judgment challenge presents only legal issues, we review the grant of summary judgment for correctness. See Drysdale v. Ford Motor Co., 947 P.2d 678, 680 (Utah 1997). We consider only whether the trial court correctly applied the law and correctly concluded that no disputed issues of material fact existed. See Koroulis, 888 P.2d at 627. "[I]n reviewing a grant of summary judgment, we view the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party." Higgins v. Salt Lake County, 855 P.2d 231, 233 (Utah 1993).

The trial court granted summary judgment in LWD's favor on Aurora's derivative claims because it found that rule 23.1 of the Utah Rules of Civil Procedure barred Aurora from bringing a derivative action since Aurora was not a shareholder at the time of the alleged injury. Rule 23.1 requires:

In a derivative action brought by one or more shareholders ..., the complaint shall be verified and shall allege ... [i] that the plaintiff was a shareholder or member at the time of the transaction of which he complains or [ii] that his share or membership thereafter devolved on him by operation of law....

Utah R. Civ. P. 23.1. Under rule 23.1, Aurora has two alternatives for demonstrating that it has standing to bring a derivative action against LWD. First, Aurora must show that it was a shareholder at the time the Ogden property was sold--this requirement is commonly known as the contemporaneous ownership doctrine. Second, and alternatively, if Aurora was not a shareholder at the time of the sale, Aurora must show that it obtained the stock by "operation of law." We address each possibility in turn.

Because Aurora was not a shareholder at the time of the allegedly wrongful transaction, it does not have standing under the first rule 23.1 alternative. Aurora obtained its interest in the LWD stock in November of 1991, after the Ogden property was sold and after XM acquired its interest. Restaurant Co. purchased the Ogden property at a sheriff's sale on May 15, 1991. Restaurant Co. then transferred its interest in the property to XM on May 20, 1991. The six-month period available for LWD to redeem the property expired on November 15, 1991. Aurora purchased the Hogle judgment on November 21, 1991. Thus, the earliest time that Aurora could claim any interest in Hogle's LWD stock was six days after the expiration of the redemption period. This does not suffice.

Furthermore, because Aurora cannot show that it obtained its shares by "operation of law," it does not have standing under the second rule 23.1 alternative. " 'Operation of law' means that the shares come to the transferee without any act or cooperation on [its] part." South End Improvement Group, Inc. v. Mulliken, 602 So.2d 1327, 1331 (Fla.Dist.Ct.App.1992); see also Black's Law Dictionary 1092 (6th ed.1990) (defining "operation of law" as transfer that occurs "by the mere application to the particular transaction of the established rules of law, without the act or co-operation of the party [it]self"); Dawson v. Dawson, 645 S.W.2d 120, 126 (Mo.Ct.App.1982). For example, the "operation of law" concept has frequently applied in "situations where a plaintiff has acquired title as a result of rights obtained through a will." Kaplus v. First Continental Corp., 711 So.2d 108, 111 (Fla.Dist.Ct.App.1998). In this case, Aurora obtained its interest in the stock after it purchased Hogle's judgment from the FDIC. Because the purchase was an affirmative action, requiring Aurora's cooperation and participation, Aurora did not obtain its interest in the shares by operation of law.

Nonetheless, Aurora argues that it has standing...