Group ex rel. Hi-Country Estates Homeowners Ass'n v. Emmer
| Decision Date | 07 June 2013 |
| Docket Number | No. 20120202.,20120202. |
| Citation | 304 P.3d 851,736 Utah Adv. Rep. 30 |
| Parties | HI–COUNTRY PROPERTY RIGHTS GROUP, Lindsay Atwood, Jerry Gilmore, and Brandon Frank, individually and for and on behalf of Hi–Country Estates Homeowners Association, Phase II, a Utah non-profit corporation, Plaintiffs and Appellants, v. Keith EMMER, Tom Williams, Anthony Sarra, Arlene Johnson, Carol Dean, Hi–Country Estates Homeowners Association, Phase II, a Utah non-profit corporation; and Does 1–100, Defendants and Appellees. |
| Court | Utah Supreme Court |
OPINION TEXT STARTS HERE
Troy L. Booher, Clemens A. Landau, Wade R. Budge, Michael J. Thomas, Salt Lake City, for appellants.
Glenn C. Hanni, Stuart H. Schultz, Salt Lake City, for appellees.
¶ 1 This is an appeal from the dismissal of a derivative suit against the directors of a homeowners association. The derivative plaintiffs are disgruntled property owners who allege that the directors favored their own properties in allocating limited road construction and maintenance funds.
¶ 2 Instead of defending on the merits, the directors sought to avail themselves of the procedure set forth in Utah Code section 16–6a–612(4)—a provision allowing the board to appoint an independent committee to evaluate whether maintenance of a derivative suit is in the best interest of the nonprofit corporation. The committee appointed by the directors consisted of two current members and one former member of the board. All owned property allegedly receiving preferential treatment. Following an investigation, the committee issued a detailed report. Based on this report, the board sought to have the suit dismissed under section 612(4)(a). The district court dismissed the suit and the plaintiffs appealed, asserting that the district court erred in concluding that the members of the committee were “independent” under section 612(4).
¶ 3 We agree and now reverse. We find error in the standard of “independence” applied in the court below, and take this opportunity to clarify the standard that governs under section 612(4). And under that standard, we conclude that unresolved factual issues relating to the independence of the committee members make it impossible for us to make this mixed-question determination in the first instance on appeal. We accordingly remand for further proceedings not inconsistent with this opinion.
¶ 4 Hi–Country Estates Homeowners Association (HOA) is a nonprofit corporation that provides road maintenance and other services to the Hi–Country Estates Phase II development near Herriman. The HOA funds its activities by levying annual assessments on all development property owners, and a high percentage of these assessment proceeds are used for road construction and maintenance. A five-person board of directors controls the allocation of these funds.
¶ 5 Several property owners brought a derivative suit on behalf of the HOA against the board's five directors—Keith Emmer, Tom Williams, Anthony Sarra, Arlene Johnson, and Carol Dean. These plaintiff property owners—who owned property in Area D, which was only accessible by foot, horseback, or ATV—alleged in a verified complaint that the directors had breached their fiduciary duties by selectively choosing to construct and maintain roads to benefit their own properties, thus disadvantaging the plaintiffs.
¶ 6 Pursuant to Utah Code section 16–6a–612(4), the directors responded by appointing a special committee to investigate the plaintiffs' claims. This provision allows a corporation to appoint a “committee consisting of two or more independent directors” to determine whether the derivative suit is in the “best interest of the nonprofit corporation.” If an independent committee determines that such a suit is “not in the best interest of the nonprofit corporation,” then the statute provides that the “derivative proceeding shall be dismissed by the court on motion by the corporation.” Utah Code § 16–6a–612(4).
¶ 7 The special committee appointed by the HOA consisted of two current directors, Arlene Johnson and Anthony Sarra, and one former director, Kim Wilson (who had served on the board from 1994 to 1999). Both Johnson and Sarra had been involved in making the road maintenance and construction decisions that the plaintiffs sought to challenge. Wilson too had been involved in making similar decisions during his time serving on the board. All three of the members of the special committee also owned lots that were alleged by the plaintiffs to have received preferential treatment.1 In addition, Wilson had some level of social engagement with members of the board and had previously worked for Sunrise Engineering, Inc., one of the companies used by the HOA for its road maintenance projects.
¶ 8 Together, the committee completed an investigation into the derivative complaint and authored a report. Mr. Emmer, the board's president, read the report and recommended to the other board members that the suit be dismissed. The board voted to recommend dismissal to the district court. Sarra and Johnson abstained from this vote.
¶ 9 The property owners opposed the motion and requested time to conduct additional discovery under rule 56(f) of the Utah Rules of Civil Procedure. The district court granted this motion, and after further discovery, the board renewed its motion to dismiss, asserting that the “undisputed material facts show that the board members acted in good faith, with the care of ordinarily prudent persons, and in a manner reasonably believed to be in the best interests of the nonprofit corporation.”
¶ 10 The district court granted the directors' motion. That motion had urged the court to treat the motion to dismiss as “one for summary judgment” since it “present[ed] matters outside the pleadings.” And the district court did so, applying a summary judgmentstandard in determining that “[t]here are no genuine issues of material fact with respect to the independence of the members of the SLC.” The court concluded that “board membership” and “being named as a director defendant” were insufficient to call into question the independence of Arlene Johnson and Anthony Sarra. And it further determined that Wilson's independence was not called into question by the “casual social relationship” and “business relationship” he had with other members of the board, since both were “limited in nature.”
¶ 11 The district court accordingly held that the committee had “made a determination in good faith, conducted a reasonable inquiry upon which its decision was based,” and that there was a “reasonable basis for the [committee's] conclusion that the derivative proceeding [was] not in the best interest of the [HOA].” The plaintiff property owners appealed.
¶ 12 The appellant property owners 2 challenge the dismissal of their suit on several grounds. Their principal contention, however, is that the special committee appointed by Hi–Country's board was not independent within the meaning of Utah Code section 16–6a–612(4).3 We find error in the standard of “independence” applied by the district court, and reverse on that basis.
¶ 13 We do so under a standard of review that affords some deference to the district court's ultimate determination of independence (but not to the legal standard forming the premise of its decision). As explained in greater detail below, the decision to dismiss a derivative suit under Utah Code section 16–6a–612(4)(a) involves several mixed determinations, see Manzanares v. Byington (In re Adoption of Baby B.), 2012 UT 35, ¶ 40, 2012 WL 4486225—including an assessment of whether special litigation committee members are “independent” within the meaning of Utah Code section 16–6a–612(4)(b). And because, as clarified below, “independence” determinations depend on the “particular facts and circumstances” of each case, these assessments would generally be entitled to some measure of deference. Seeid. ¶ 43.
¶ 14 In this case, however, the district court exceeded whatever breathing room this deferential review standard generally affords. It did so by committing two legal errors.4 First, the court misapprehended the meaning of “independence” under section 612(4)(b)—and thus applied the wrong legal standard in assessing the committee's independence. The court also committed a second error by invoking an improper procedural mechanism (summary judgment) in ruling on the corporation's motion to dismiss—a mechanism we find incompatible with section 612(4)(a). And because the court left unresolved a number of factual issues relevant to the independence inquiry in applying this summary judgment standard, we cannot make that assessment in the first instance on appeal. We accordingly remand so the district court can do so. Because we remand, we also reach another of the property owners' arguments—and clarify that the special committee, not the board of directors, was required to independently recommend dismissal of the derivative suit.
¶ 15 Utah Code section 16–6a–612(4) prescribes mechanisms that boards of nonprofit corporations may employ to avoid merits litigation of derivative suits. Subsection (4)(a) provides that a derivative proceeding “shall be dismissed by the court on motion by the corporation if a person or group specified in Subsection (4)(b) ... determines in good faith, after conducting a reasonable inquiry upon which the person's or group's conclusions are based, that the maintenance of the derivative proceeding is not in the best interest of the nonprofit corporation.” Subsection (4)(b)(ii), in turn, states that the determination may be made by “a majority vote of a committee consisting of two or more independent directors appointed by a majority vote of independent directors present at a meeting of the board of directors, whether or not the independent directors appointing the committee constituted a quorum.” (Emphasis added.) 5
¶ 16 The district court determined that all the requirements of subsection (4)—including the independence...
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