Banyan Inv. Co. v. Evans

• Decision Date: 29 November 2012
• Docket Number: No. 20100899–CA.,20100899–CA.
• Citation: 292 P.3d 698,722 Utah Adv. Rep. 14
• Parties: BANYAN INVESTMENT COMPANY, LLC, Plaintiff and Appellant, v. Steven EVANS, Mark Mandel, Mike Riddle, Scott Robbins, and Robert McOmber, Defendants and Appellees.
• Court: Utah Court of Appeals

292 P.3d 698

722 Utah Adv. Rep. 14

BANYAN INVESTMENT COMPANY, LLC, Plaintiff and Appellant,

v.Steven EVANS, Mark Mandel, Mike Riddle, Scott Robbins, and Robert McOmber, Defendants and Appellees.

No. 20100899–CA.

Court of Appeals of Utah.

Nov. 29, 2012.

Richard F. Ensor, Kari A. Tuft, and Melinda A. Morgan, Salt Lake City, for Appellant.

Erik A. Olson and Jason R. Hull, Salt Lake City, for Appellees.

Before Judges ORME, DAVIS, and VOROS.

OPINION

DAVIS, Judge:

¶ 1 Banyan Investment Company, LLC (Banyan) appeals the trial court's dismissal of its direct claims against Steven Evans, Mark Mandel, Mike Riddle, Scott Robbins, and Robert McOmber (collectively, Defendants). We reverse and remand for further proceedings.

BACKGROUND

¶ 2 Banyan owns a twenty percent membership interest in Aspen Press Company, LLC (Aspen Press) but is not involved in its management. The other five members of the company, Defendants, manage and participate in the day-to-day operations of Aspen Press.

¶ 3 Banyan alleges that “Defendants have and continue to engage in a course of conduct that uses Aspen Press for their own personal profit to the detriment of Banyan” and that, “[i]n an effort to conceal their wrongful acts, Defendants are using their power and position within the company to limit Banyan's access to documents and records that evidence Defendants' wrongful conduct.” Accordingly, Banyan filed a complaint against Defendants, alleging claims of breach of fiduciary duty and unjust enrichment, and requesting an accounting.

¶ 4 Defendants filed a motion to dismiss Banyan's complaint on the ground that Banyan's claims could not be brought directly because they were derivative in nature. Accordingly, Defendants argued, Banyan was required to file the claims derivatively and demonstrate that it had complied with rule 23A of the Utah Rules of Civil Procedure. See generallyUtah R. Civ. P. 23A (outlining the procedures, including demand requirements, that a plaintiff shareholder must comply with in order to maintain a derivative action against other shareholders or members); Angel Investors, LLC v. Garrity, 2009 UT 40, ¶ 15 n. 4, 216 P.3d 944 (explaining that rule 23A “governs derivative actions brought on behalf of limited liability companies as well” as corporations). Banyan responded that its direct claims were permissible under the closely-held corporation exception elucidated in Aurora Credit Services, Inc. v. Liberty West Development, Inc., 970 P.2d 1273 (Utah 1998).

¶ 5 The trial court granted Defendants' motion to dismiss because it determined that the closely-held corporation exception “hasn't ever been applied to a limited liability company” (LLC) and has been limited by a number of cases issued after Aurora. Nevertheless, the trial court dismissed the case without prejudice and gave Banyan ten days to amend the complaint to allege derivative causes of action in accordance with rule 23A. Banyan did so but subsequently filed a petition for interlocutory appeal of the dismissal, which this court granted.

ISSUE AND STANDARD OF REVIEW

¶ 6 Banyan challenges the trial court's dismissal of its original complaint alleging direct causes of action, arguing that the trial court erred as a matter of law in concluding that the closely-held corporation exception could not be applied to LLCs. A trial court's dismissal for failure to state a claim “is a question of law that we review for correctness, giving no particular deference to the lower court's determination.” Wright v. University of Utah, 876 P.2d 380, 382 (Utah Ct.App.1994).

ANALYSIS

I. Banyan Did Not Waive Its Right to Appeal.

¶ 7 Before addressing the substance of Banyan's argument, we must first determine whether Banyan waived its right to appeal the trial court's dismissal of its direct action by filing an amended complaint. This question has not been fully addressed in Utah. Generally, “[o]nce a party has amended a pleading, the amended pleading supercedes the original pleading, and the original pleading performs no function in the case.” Campbell, Maack & Sessions v. Debry, 2001 UT App 397, ¶ 17 n. 4, 38 P.3d 984 (citing 6 Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice & Procedure § 1476 (1990)). In Kuhre v. Goodfellow, 2003 UT App 85, 69 P.3d 286, we held that a party who files an amended complaint “waive[s] the right to challenge the dismissal of the [original] complaint because an amended pleading supercedes the original pleading, and the original pleading performs no function.” Id. ¶ 13 (citation and internal quotation marks omitted). ¹ However, in Kuhre, the trial court had dismissed the earlier complaint based on the fact that the “[p]laintiffs' misrepresentation cause of action [was] not pled with specificity as required by Rule 9(b), [of the] Utah Rules of Civil Procedure.” Id. ¶ 3 (third alteration in original) (internal quotation marks omitted). The situation presented here is distinguishable in that the trial court dismissed Banyan's original complaint, in effect, on its merits rather than as a result of technical defects. Unlike the plaintiffs in Kuhre, who were free to plead the same claim if they did so with the required specificity, it would have been futile for Banyan to replead its direct claims against Defendants because the trial court had already determined that a direct claim was impermissible as a matter of law.

¶ 8 Some jurisdictions have held that a party absolutely waives the right to appeal the dismissal of a pleading by filing an amended pleading. See, e.g., Caltabiano v. L & L Real Estate Holdings II, LLC, 128 Conn.App. 84, 15 A.3d 1163, 1166 (2011) (“After a court has granted a motion to strike, the plaintiff may either amend his pleading or, on the rendering of judgment, file an appeal.... The choices are mutually exclusive [as] [t]he filing of an amended pleading operates as a waiver of the right to claim that there was error in the sustaining of the [motion to strike] the original pleading.” (alterations and omission in original) (citation and internal quotation marks omitted)). Others have held that such a claim can be preserved only by repleading the claim in the amended pleading, regardless of futility. See, e.g., Abrams v. Watchtower Bible & Tract Soc'y of New York, Inc., 306 Ill.App.3d 1006, 240 Ill.Dec. 111, 715 N.E.2d 798, 803–04 (1999) (“A plaintiff desiring to preserve for appeal the previous dismissal of claims either must stand on the dismissed counts and challenge the ruling at the appellate level or reallege or incorporate the dismissed counts in subsequent complaints. A party who files an amended complaint waives any objection to the circuit court's ruling on the former complaint.” (citations omitted)).

¶ 9 However, we find the better rule to be the one adopted by the majority of jurisdictions, which recognizes an exception to the rule that an amended pleading supersedes and replaces the pleading it amends where claims contained in the original pleading were dismissed on their merits rather than as a result of a technical defect. See, e.g., Lacey v. Maricopa Cnty., 693 F.3d 896, 927–28 (9th Cir.2012); United States v. Pennsylvania Shipbuilding Co., 473 F.3d 506, 516–17 (3d Cir.2007); Young v. Mount Ranier, 238 F.3d 567, 572–73 (4th Cir.2001); In re Crysen/Montenay Energy Co., 226 F.3d 160, 162 (2d Cir.2000); Dunn v. Air Line Pilots Ass'n, 193 F.3d 1185, 1191 n. 5 (11th Cir.1999); Davis v. TXO Prod. Corp., 929 F.2d 1515, 1518 (10th Cir.1991); National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Servs. Grp., Inc., 171 Cal.App.4th 35, 89 Cal.Rptr.3d 473, 478–79 (2009); Prayson v. Kansas City Power & Light Co., 847 S.W.2d 852, 859–60 (Mo.Ct.App.1992); Wangler v. Lerol, 2003 ND 164, ¶¶ 26–27, 670 N.W.2d 830;Surgical Inst. of S.D., PC v. Sorrell, 2012 SD 48, ¶¶ 22–23, 816 N.W.2d 133. “A dismissal is on the merits when it is with prejudice or based on some legal barrier other than want of specificity or particularity.” Pennsylvania Shipbuilding, 473 F.3d at 516. Unlike claims dismissed for “indefiniteness, incompleteness or insufficiency, or more technical defects in pleadings,” the shortcomings of which can be cured by an amended pleading, see Davis, 929 F.2d at 1517 (citation and internal quotation marks omitted), claims dismissed on their merits are futile to replead “because the legal inadequacy cannot be solved by providing a better factual account of the alleged claim,” Pennsylvania Shipbuilding, 473 F.3d at 517.

¶ 10 The merits of this approach were recently discussed by the Ninth Circuit Court of Appeals in Lacey v. Maricopa County, 693 F.3d 896 (9th Cir.2012). Although the Ninth Circuit has long remained “an outlier among the circuits” by subscribing to the more formalistic rule requiring a plaintiff to choose between appeal and amendment when its original claim is dismissed, see id. at 926–27;see also Forsyth v. Humana, Inc., 114 F.3d 1467, 1474 (9th Cir.1997) (citing cases dating back to 1967 in explaining that “[i]t is the law of [the Ninth C]ircuit that a plaintiff waives all claims alleged in a dismissed complaint which are not realleged in an amended complaint”), aff'd,525 U.S. 299, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999) (considering the merits of the case without reference to the waiver issue), the Lacey court overruled this precedent in favor of the majority rule, see Lacey, 693 F.3d at 927–28. The court explained that the more strict approach

creates a Hobson's choice [for plaintiffs,] ... a patently coercive predicament between amending the complaint—thereby forgoing the chance to appeal the dismissal of some claims—and appealing the dismissal of the claims in the original complaint—thereby forgoing the chance to add or replead claims that the plaintiff would otherwise be allowed to add.

Id. at 927 (omission in original) (citation and internal quotation marks omitted). Furthermore, counsel is faced with a choice between “failing to preserve issues for appeal and...