Ewer v. Lake Arrowhead Ass'n, Inc.
| Decision Date | 24 May 2012 |
| Docket Number | No. 2011AP113.,2011AP113. |
| Citation | 2012 WI App 64,817 N.W.2d 465,342 Wis.2d 194 |
| Parties | Gilbert EWER, Linda Ewer, Wayne Guenther, and Mae Guenther, Plaintiffs–Appellants, v. LAKE ARROWHEAD ASSOCIATION, INC., Defendant–Respondent. |
| Court | Wisconsin Court of Appeals |
OPINION TEXT STARTS HERE
On behalf of the plaintiffs-appellants, the cause was submitted on the briefs of Michael L. Bertling of McLario, Helm & Bertling, S.C., Menomonee Falls.
On behalf of the defendant-respondent, the cause was submitted on the brief of Stephanie L. Dykeman of Litchfield Cavo, LLP, Brookfield.
Before VERGERONT, SHERMAN and BLANCHARD, JJ.
[342 Wis.2d 198]¶ 1 Four members of Lake Arrowhead Association, Inc., bring this action for a declaratory judgment construing a provision of the Association's bylaws relating to the annual assessments charged to members who, like them, own consolidated sites. The primary issue on appeal is whether these members may bring this claim directly, in their own right, or whether, as the circuit court concluded, the right to bring this claim belongs to the Association and therefore must be brought as a derivative claim under Wis. Stat. §§ 181.0740–181.0742 (2009–10).1
¶ 2 We conclude that the claim asserted by the members is an individual claim belonging to each of the four members. We arrive at this conclusion because the claim is based on a direct injury to a right that is individual to each. Therefore, each may bring this claim on his or her own behalf, as a direct claim, and the circuit court erred in dismissing the action because the members did not bring the claim as a derivative claim.
¶ 3 Our conclusion that the circuit court erred in dismissing the action because the claim was not brought as a derivative claim requires that we reverse the court's denial of the members' motion for a plaintiff class certification pursuant to Wis. Stat. § 803.08.
¶ 4 In addition, for the reasons we explain in the opinion, we reverse the court's ruling that the joinder requirements of the declaratory judgment statute, Wis. Stat. § 806.04(11), require dismissal.
¶ 5 Accordingly, we reverse the court's order dismissing this action and remand for further proceedings consistent with this opinion.
¶ 6 Gilbert and Linda Ewer and Wayne and Mae Guenther (collectively, “the Ewers”) own residential property that is subject to the Covenants for Lake Arrowhead, Town of Rome, Wisconsin, Adams County (the covenants). The Lake Arrowhead Association, Inc. is a Wisconsin non-stock corporation organized under Wis. Stat. ch. 181, and its bylaws incorporate the terms of the covenants. The covenants authorize the Association to charge and collect an annual assessment from the Ewers and other owners of property or lots who are subject to the covenants. The Association has approximately 1602 voting members.
¶ 7 The amount of the assessment that the Association charges its members varies depending upon the type of lot each member owns. The Association charges “nonconsolidated site” owners one assessment each year, and it charges “consolidated site” owners a one and one-quarter assessment each year. 2 It is not disputed that the Ewers are consolidated site owners and have been charged a one and one-quarter annual assessment.
¶ 8 The Ewers disagree that the covenants authorize the Association to charge consolidated site owners a one and one-quarter assessment each year. They filed this action seeking a declaratory judgment whether the covenants authorize the Association to charge consolidated site owners a one and one-quarter annual assessment instead of one annual assessment. The complaint alleges that certification of a plaintiff class of all consolidated site owners is proper. According to the Association's answers to the Ewers' interrogatories, the number of consolidated site owners is approximately 140.
¶ 9 The Association filed a motion for summary judgment contending that the Ewers' claim should be dismissed on two grounds. First, the Association contended, the claim is a “derivative” claim under the definition of Wis. Stat. § 181.0740 and therefore the Ewers had to comply with the requirements of §§ 181.0741–181.0742 for a “derivative proceeding,” which, without dispute, they had not done. Second, the Association contended that the Ewers failed to comply with the joinder requirements of Wis. Stat. § 806.04, the Uniform Declaratory Judgments Act. The Ewers opposed dismissal on both grounds. Also before the court was the Ewers' motion for certification of a plaintiff class. The Association opposed this motion.
¶ 10 The circuit court granted the Association's motion and dismissed the complaint. The court held that the proper construction of the covenants “is a matter of concern to all property owners” and, therefore, the claim is a derivative claim. Because there was no dispute the Ewers had not complied with the requirements of Wis. Stat. §§ 181.0741–181.0742, the court concluded dismissal was required. Based on its ruling that the claim must be filed as a derivative claim, the court denied the request for certification of a plaintiff class. The circuit court also concluded that the complaint failed to meet the joinder requirements of the Declaratory Judgments Act and that this failure was an additional ground for dismissal.
¶ 11 On appeal the Ewers contend the court erred in concluding their claim is a derivative claim, erred in denying their request for class certification, and erred in dismissing their claim because of the joinder requirements of Wis. Stat. § 806.04(11). The Association responds that the circuit court was correct on each issue.
¶ 12 Our review on a motion for summary judgment is de novo, and we use the same methodology as the circuit court. Green Spring Farms v. Kersten, 136 Wis.2d 304, 314–16, 401 N.W.2d 816 (1987). Where, as here, there are no disputed issues of fact, we decide which party is entitled to judgment as a matter of law. SeeWis. Stat. § 802.08(2).3
[342 Wis.2d 202]¶ 13 In the following paragraphs we first discuss the background law on derivative proceedings and then analyze the Ewers' claim. For the reasons we explain, we conclude the circuit court erred in deciding that the Ewers' claim belonged to the Association and must therefore be brought as a derivative claim under Wis. Stat. §§ 181.0740–181.0742. Instead, we conclude that the claim belongs to each of the Ewers as individuals and therefore each may bring it as a direct claim.
¶ 14 As a non-stock corporation, the Association is governed by Wis. Stat. ch. 181. Under Wis. Stat. § 181.0740, a “derivative proceeding” is “a civil suit in the right of a corporation.” Wisconsin Stat. § 181.0741 provides that “[a] derivative proceeding may be brought in the right of a corporation ... to procure a judgment in its favor by one or more members having 5% or more of the voting power or by 50 members, whichever is less, if each of these members meets [certain conditions].” 4 A “right of action” that belongs to a corporation cannot be brought as a direct claim by an individual shareholder or member, but must be brought as a derivative action in compliance with the statutory requirements. See Notz v. Everett Smith Grp., Ltd., 2009 WI 30, ¶ 20, 316 Wis.2d 640, 764 N.W.2d 904.
¶ 15 As already noted, there is no dispute that the Ewers have not complied with the requirements for bringing a derivative claim. Thus, the issue presented is whether the claim for a declaratory judgment construing the disputed provision is a claim based on “the right of” the Association, and, thus, a claim that may be brought by a member or members only as provided in Wis. Stat. §§ 181.0741–181.0742. This appears to be an issue of first impression in Wisconsin.
¶ 16 In the absence of case law interpreting or applying Wis. Stat. § 181.0740, we turn to the case law interpreting the same definition of “derivative proceeding” for business corporations. See§ 180.0740(2). The parties agree this case law is relevant, although they disagree on how it applies to the facts of this case.
¶ 17 The fundamental inquiry in determining whether a claim must be brought as a derivative claim under Wis. Stat. § 180.0740(2) is: “Whose right is sought to be enforced by the ... cause of action?” Rose v. Schantz, 56 Wis.2d 222, 229, 201 N.W.2d 593 (1972). If the only direct injury is to the corporation, then the right to bring the action belongs solely to the corporation. Id. This is true even though the direct injury to the corporation “may have a subsequent impact on the stockholders' shares.” Id. This injury to the stockholders is secondary to the injury to the corporation, which is the primary injury. Id.
¶ 18 Applying this “primary injury” test, courts have concluded that the following claims belong only to the corporation and therefore must be brought as a derivative action under Wis. Stat. § 180.0740(2): a claim for breach of fiduciary duty against officers and directors who allegedly engaged in a plan to deplete the corporation of its cash reserves so that one of them could engage in a competing business, id. at 224, 229, 201 N.W.2d 593; claims of breach of fiduciary duty, judicial dissolution, fraudulent transfer, and conversion based on allegations of a liquidation plan that would transfer all net corporate assets to a charitable foundation, thereby depleting the value of all stock, Borne v. Gonstead Advanced Techniques, Inc., 2003 WI App 135, ¶¶ 14, 16, 266 Wis.2d 253, 667 N.W.2d 709; a claim for breach of fiduciary duty against a majority shareholder alleging that it had rejected the opportunity for the corporation to purchase another company and instead purchased that company itself, Notz, 316 Wis.2d 640, ¶¶ 17, 27, 764 N.W.2d 904; and misappropriation from the corporation, Krier v. Vilione, 2009 WI 45, ¶ 31, 317 Wis.2d 288, 766 N.W.2d 517.
¶ 19 In contrast to a claim that belongs to the corporation, a...
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