BREWSTER v. BREWSTER

• Decision Date: 23 September 2010
• Docket Number: No. 20090368-CA.,20090368-CA.
• Citation: 241 P.3d 357,2010 UT App 260
• Parties: Dana BREWSTER, Plaintiff and Appellee, v. D. Steven BREWSTER; Gary B. Brewster; Millcreek Coffee Airport, LLC; and Millcreek Coffee Roasters Corp., Defendants and Appellants.
• Court: Utah Court of Appeals

241 P.3d 357

2010 UT App 260

Dana BREWSTER, Plaintiff and Appellee,

v.D. Steven BREWSTER; Gary B. Brewster; Millcreek Coffee Airport, LLC; and Millcreek Coffee Roasters Corp., Defendants and Appellants.

No. 20090368-CA.

Court of Appeals of Utah.

Sept. 23, 2010.

F. Kevin Bond and Budge W. Call, Salt Lake City, for Appellants.

Gerry B. Holman, Salt Lake City, for Appellee.

Before Judges McHUGH, VOROS, and ROTH.

OPINION

McHUGH, Associate Presiding Judge:

¶ 1 Defendants D. Steven Brewster (Steven), Gary B. Brewster (Gary), and Millcreek Coffee Airport, LLC (the Airport LLC) seek interlocutory review of the trial court's denial of Millcreek Coffee Roasters Corporation's (Roasters) motion to dismiss the derivative action brought by Plaintiff Dana Brewster (Dana). We reverse.

BACKGROUND

¶ 2 Roasters was formed in 1996 by Steven and Dana Brewster, who were married at the time. Roasters' primary business includes coffee roasting and importing, as well as retail and wholesale coffee sales. Steven and Dana divorced shortly after forming the corporation, but continued their business relationship as equal shareholders in Roasters. ¹ Since the parties' divorce, Steven has been solely responsible for managing Roasters.

¶ 3 In the fall of 2005, Host International (Host) approached Steven about an opportunity to open two retail outlets at the Salt Lake City Airport. Because Host would either select or reject Roasters' proposal within thirty days, “time was of the essence” in determining whether to proceed. Steven calculated “that $200,000 operating capital would be required to fund the venture” and informed Dana of the opportunity, including the funding requirements. Steven proposed that they each contribute $100,000 toward the funding, which would result in Steven and Dana each owning fifty percent of the new stores. After asking “for a ‘business plan’ and additional information,” Dana agreed to contribute her share.

¶ 4 To protect Roasters' assets, Steven formed the Airport LLC as a separate legal entity that would manage the new stores. Steven subsequently contributed $100,000 to the Airport LLC, but Dana did not contribute her share. Consequently, Steven used $100,000 from Roasters' cash reserves to fund the remaining amount needed to launch the Airport LLC, with Roasters receiving fifty percent ownership of the Airport LLC in return and Steven owning the other fifty percent. ²

¶ 5 Both parties agree that at the time Roasters entered into the agreement with Host, the corporation did not have sufficient cash reserves to fund the full $200,000. However, after the Airport LLC realized significant profits, Dana asserted that Roasters should have fully funded the Airport LLC, either by obtaining a loan or by using savings from Roasters' other operations. On October 31, 2006, Dana brought a derivative suit against Steven; Gary, a director; the Airport LLC; and Roasters; alleging that Steven “usurped a corporate opportunity by retaining 50% of the [A]irport [LLC] for his own personal benefit as opposed to allowing Roasters to own the entire ... opportunity.”

¶ 6 The trial court appointed counsel for Roasters and, pursuant to the relevant section of the Revised Business Corporation Act (the RBCA), see Utah Code Ann. § 16-10a-740(4) (2009), counsel retained an accountant, Brad Townsend, ³ as an “independent person[ ]” to determine whether it would be in Roasters' best interests to maintain the derivative suit, see id. § 16-10a-740(4)(a), (f). Steven and Dana stipulated to Townsend's being appointed to conduct this inquiry and agreed to waive any objections to his appointment. Specifically, Roasters' counsel asked Townsend to address six issues, including whether it would be in Roasters' best interests to maintain the derivative suit.

¶ 7 On July 7, 2008, after he and his staff spent approximately eighty hours meeting with the parties and reviewing Roasters', Steven's, and Dana's files, Townsend submitted his findings to Roasters' counsel in a report (the Report). The Report indicated that Townsend had verified the accuracy of statements made by Steven and Dana, found no improprieties in Roasters' records, and concluded that Roasters could not have funded the entire $200,000 for the Airport LLC without taking out a loan or altering the shareholders' distributions, which would have required deviating from the business principles and practices that Roasters generally followed.

¶ 8 Regarding Roasters' counsel's question whether it would be in the corporation's best interests to dismiss the derivative suit, the Report stated that “[t]he answer to this question is complex and appears to be more a question of fact than of expert opinion,” and that the “allegations and causes of action” contained in the complaint “are far beyond the scope of [the] financial and accounting analyses” that Townsend was retained to perform. Nevertheless, the Report listed nine factors that, according to Townsend, “should be considered” in determining whether to dismiss the suit: (1) the profitability of the Airport LLC; (2) the increased profits Roasters received as a result of selling products to the Airport LLC; (3) Dana's apparent inability to fund her share of the Airport LLC and Roasters' inability to fund the Airport LLC fully without incurring additional debt; (4) the sound business practices of operating Roasters debt-free and using different entities to develop new business opportunities; (5) the fact that the decision to have Roasters fund one-half of the Airport LLC was “within the realm of reasonable business judgment,” even though “there may have been other options available” for funding; (6) the potential cost of litigation; (7) the fact that Roasters was not damaged by funding the Airport LLC but instead profited from doing so; (8) Steven and Dana's unwillingness to personally guarantee a loan for the balance of the investment, which would have been required; and (9) the fact that the profits received by Steven and Roasters were proportional to the risk that each assumed in funding the Airport LLC.

¶ 9 After receiving the Report, Dana provided Townsend with additional information regarding her finances and suggested alternative ways that, in hindsight, Roasters might have fully funded the Airport LLC. In an affidavit filed with the trial court on October 9, 2008 (the First Affidavit), Townsend stated that the additional information and suggestions provided by Dana did not change Townsend's conclusion that Roasters “did not have the ability to independently fund” the Airport LLC. Townsend further stated that it was his “understanding that the derivative claims center around the usurpation of a corporate opportunity from Roasters to one of its principals,” and that a corporate opportunity cannot be usurped where the corporation is unable to fund the project. Based on that fact and the factors listed in the Report, Townsend concluded “that from an accounting and financial perspective[,] the maintenance of the derivative [suit] is not in the best interest of [Roasters]” ⁴ because “any harm that may have occurred would have occurred on a personal level and not to the corporation.”

¶ 10 In conjunction with the First Affidavit filed on October 9, 2008, Roasters also filed a motion to dismiss the derivative claims pursuant to the RBCA, see Utah Code Ann. § 16-10a-740(4)(a) (stating that the trial court shall dismiss a derivative proceeding where a designated person “determines in good faith after conducting a reasonable inquiry” that it would be in a corporation's best interests to dismiss the suit). At the hearing on Roasters' motion, the trial court indicated that it had questions regarding how Townsend arrived at his conclusions. Therefore, the trial court scheduled an evidentiary hearing to allow Townsend to testify regarding the conclusions contained in the Report and the First Affidavit.

¶ 11 During that hearing, Townsend responded negatively to the trial court's inquiry into whether he had considered, in his analysis of whether the corporation could have provided all of the funding for the Airport LLC without incurring debt, the possibility of factoring Roasters' accounts receivables. ⁵ Townsend also clarified that his research of Roasters' business practices extended back to 2002, rather than to 1996 when Roasters was formed. In addition, Dana's counsel referred the trial court to portions of Townsend's deposition, which was taken after the First Affidavit, in which counsel proposed that Roasters might have completely funded the Airport LLC using the $100,000 in cash reserves and the initial profits earned by the new stores. Townsend acknowledged that, in hindsight, that type of financing might have been “possible,” given the demonstrated profitability of the Airport LLC, but that it would take him another ten hours of analysis to determine whether it would have been feasible at the time Steven and Roasters funded the Airport LLC. Despite these points, Townsend continued to assert that dismissal of the derivative suit was in Roasters' best interests.

¶ 12 Ten days later, in response to Roasters' request that Townsend research the issues raised at the evidentiary hearing, Townsend submitted a second affidavit (the Second Affidavit). Townsend stated in the Second Affidavit that any decision to factor the accounts receivables would not be “sound business judgment” because of the high discount rate associated with doing so, and because, even with the money generated from factoring the receivables, payment of the entire $200,000 would have “created very tight financial demands and likely would have jeopardized Roasters' ability to meet ongoing operational cash flow needs and/or shareholder distributions.” Townsend noted that the $100,000 cash on hand at the time of the airport opportunity in 2006 had taken Roasters over ten years to accumulate. The Second Affidavit also reported Townsend's expanded examination...