Glfp, Ltd. v. Cl Management, Ltd.

• Decision Date: 19 April 2007
• Docket Number: No. 20060440-CA.,20060440-CA.
• Citation: 163 P.3d 636,2007 UT App 131
• Parties: GLFP, LTD., Plaintiff and Appellant, v. CL MANAGEMENT, LTD., a Utah limited partnership; Clark Leaming Properties, a Utah limited partnership; and Howard S. Clark and H. Scott Clark, individuals, Defendants and Appellees.
• Court: Utah Court of Appeals

163 P.3d 636

2007 UT App 131

GLFP, LTD., Plaintiff and Appellant, v. CL MANAGEMENT, LTD., a Utah limited partnership; Clark Leaming Properties, a Utah limited partnership; and Howard S. Clark and H. Scott Clark, individuals, Defendants and Appellees.

No. 20060440-CA.

Court of Appeals of Utah.

April 19, 2007.

Rehearing Denied July 9, 2007.

Brent E. Johnson and Katherine Norman, Salt Lake City, and A. Bruce Jones, Denver, Colorado, for Appellant.

Jeffery S. Williams, Salt Lake City, for Appellees.

Before Judges BILLINGS, DAVIS, and McHUGH.

OPINION

McHUGH, Judge:

¶ 1 GLFP Ltd., a limited partnership, appeals the trial court's order granting summary judgment in favor of CL Management, Ltd., Clark Leaming Properties, Howard S. Clark, and H. Scott Clark. GLFP also appeals the trial court's refusal to allow GLFP to amend its complaint. We affirm in part and reverse in part.

BACKGROUND

¶ 2 Merline Leaming and Howard Clark are brother and sister. Leaming is the majority owner of GLFP (the Gerald Leaming Family Partnership).¹ Clark is the majority owner of the Howard Clark Family Partnership. Together, GLFP and the Howard Clark Family Partnership are also limited partners in another business entity called Clark Leaming Properties (CL Properties). As limited partners, GLFP and the Howard Clark Family Partnership each own 45% of CL Properties. The remaining 10% of CL Properties is owned by its general manager, CL Management. CL Management is controlled by Clark and another corporate entity called MB Management Inc.² CL Management's primary business purpose is to manage real estate holdings, including CL Properties's real estate holdings in Arizona and California.

¶ 3 Starting in 1992, family relations between the Leamings and the Clarks began to erode due to disputes with respect to their joint business interests. In particular, the Leamings became unhappy with the management services that CL Management provided to CL Properties. In February 2005, GLFP filed a complaint against Clark and his son H. Scott Clark, CL Management, and CL Properties (collectively, Defendants) alleging that (1) Defendants caused CL Management to charge CL Properties excessive management fees, (2) Defendants caused CL Management to use those fees to manage properties not owned by CL Properties, (3) Defendants caused CL Management to mismanage CL Properties's real estate holdings, and (4) Defendants CL Management and the Clarks breached a fiduciary duty to GLFP. GLFP also sought judicial dissolution of CL Properties and CL Management and an accounting.

¶ 4 Defendants filed a motion for summary judgment claiming that GLFP had improperly asserted derivative claims directly, without having first made demand on CL Properties, contrary to rule 23.1 of the Utah Rules of Civil Procedure. The trial court granted Defendants' request, finding that all of GLFP's claims — including its request for judicial dissolution and an accounting — were based on derivative theories of recovery and, therefore, could not be brought directly without GLFP first making demand on CL Properties. The trial court rejected GLFP's argument that it was exempt from the demand requirement. The trial court also denied GLFP's request to amend its complaint to restate the causes of action as derivative claims, finding the motion to amend "moot." GLFP now appeals.

ISSUES AND STANDARDS OF REVIEW

¶ 5 GLFP argues that the trial court erred by granting Defendant's motion for summary judgment. We affirm summary judgment only when "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Utah R. Civ. P. 56(c). "We grant the trial court's legal conclusions no deference, reviewing them for correctness. Furthermore, in 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." Arnold Indus., Inc. v. Love, 2002 UT 133, ¶ 11, 63 P.3d 721 (citation and quotations omitted). GLFP also argues that the trial court erred in refusing to allow it to amend its complaint. We review a trial court's decision to grant or deny a motion to amend a complaint for abuse of discretion. See R & R Energies v. Mother Earth Indus., Inc., 936 P.2d 1068, 1080 (Utah 1997).

ANALYSIS

¶ 6 GLFP asserts that the trial court erred when it (1) determined that all of GLFP's claims were derivative claims belonging to CL Properties; (2) refused to invoke an exception allowing limited partners to pursue derivative claims directly; and (3) refused to allow GLFP to amend its complaint. We affirm the trial court's determination that GLFP's claims concerning fees, mismanagement, and fiduciary breach are each derivative and therefore belong to CL Properties, but find that the trial court erred in refusing to allow GLFP to seek judicial dissolution and dissolution-related accounting in accordance with Utah Code sections 48-2a-802 and 48-1-40. See Utah Code Ann. §§ 48-2a-802 (2002), 48-1-40 (2002). We also affirm the trial court's refusal to find that, under the close corporation exception, GLFP is exempt from making demand prior to bringing a derivative claim. Finally, we remand to the trial court for reconsideration of GLFP's motion to amend its complaint.

I. Derivative Claims

¶ 7 GLFP claims that as a result of misconduct on the part of Defendants, GLFP received less than its fair share of distributions from CL Properties. GLFP asserts that it suffered direct and distinct harm — separate from any harm suffered by CL Properties — and that its complaint therefore properly alleges a direct action. We disagree.

¶ 8 This court looks to principles of corporate law to distinguish derivative actions from individual actions in the context of limited partnerships. See Arndt v. First Interstate Bank of Utah, 1999 UT 91, ¶ 24, 991 P.2d 584 (concluding that "it is appropriate to apply corporate principles concerning derivative actions to limited partnerships"). Utah law defines derivative suits as

those which seek to enforce any right which belongs to the corporation. Actions alleging mismanagement, breach of fiduciary duties, and appropriation or waste of corporate opportunities and assets generally belong to the corporation, and therefore, a shareholder must bring such actions on its behalf. Moreover, even though wrongdoing or fraud of corporate officers may indirectly injure shareholders, shareholders generally cannot sue directly for those injuries.

Aurora Credit Servs., Inc. v. Liberty W. Dev., Inc., 970 P.2d 1273, 1280 (Utah 1998) (emphasis added) (citations and quotations omitted); see also Warner v. DMG Color, Inc., 2000 UT 102, ¶ 12, 20 P.3d 868 ("Claims of mismanagement, breach of fiduciary duties, and appropriation or waste of corporate opportunities are claims that the corporation has been injured. Accordingly, the cause of action belongs to the corporation and shareholders may sue only on its behalf."). In contrast, a direct claim is one where "`the injury is one to the plaintiff as a stockholder ..., and not to the corporation, as where the action is based on contract to which he is a party, or on a right belonging severally to him, or on a fraud affecting him directly.'" See Aurora Credit, 970 P.2d at 1280 (quoting Richardson v. Arizona Fuels Corp., 614 P.2d 636, 639 (Utah 1980)).

¶ 9 Here, GLFP's claims of fiduciary breach, excessive fees, commingling of fees, and mismanagement of property each fall squarely in the category of claims that Utah law recognizes as classically derivative. See, e.g., Richardson, 614 P.2d at 639 (noting that fiduciary breach claims are derivative because, while "directors and officers [of a corporation] stand in a like relation to the stockholders of the corporation, ... that relation is to the stockholders collectively" and therefore the claim for relief belongs to the corporation (citation omitted)); see also id. at 640 ("The rule in Utah is that mismanagement of the corporation gives rise to a cause of action in the corporation, even if the mismanagement results in damage to stockholders by depreciating the value of the corporation's stock.").

¶ 10 GLFP's sole argument in support of asserting its claims directly instead of derivatively is that GLFP suffered a harm distinct from any harm CL Properties suffered when it received reduced distributions from CL Properties. In essence, GLFP argues that Defendants' conduct financially injured CL Properties in such a way that CL Properties cannot make adequate distributions to GLFP. In other words, GLFP was injured because CL Properties was injured. Because GLFP's injury is necessarily linked to the financial health of CL Properties, however, GLFP's claim lacks "the distinctive qualities necessary to remove [it] from the category of derivative claims." Arndt, 1999 UT 91 at ¶ 22, 991 P.2d 584 (holding that losses suffered by plaintiffs attempting to bring a class action suit were derivative because they were based on the decreased value of the partnership, and therefore plaintiffs suffered an "indirect and contingent" loss); see also Golden Tee, Inc. v. Venture Golf Sch., Inc., 333 Ark. 253, 969 S.W.2d 625, 630 (Ark.1998) (holding that claims were derivative because the "primary injury" alleged by the stockholders was, in fact, only for "indirect damages by way of injury to the partnership"); Litman v. Prudential-Bache Props., Inc., 611 A.2d 12, 16 (Del.Ch.1992) (holding that allegations that a general partner's misconduct directly injured a limited partner's distribution rights is a derivative claim because it is the equivalent of alleging that a general partner injured the partnership); Northern Trust Co. v. VIII S. Mich. Assocs., 276 Ill. App.3d 355, 212 Ill.Dec. 750, 657 N.E.2d 1095, 1101 (1995) ("Limited partners do not have a cause of action for damages to their interest in a limited partnership.").

¶ 11 Accordingly, the trial court correctly identified GLFP's claims for...