Hills v. Nelson

• Decision Date: 10 February 2022
• Docket Number: 20190182
• Citation: 506 P.3d 552
• Parties: Vicki HILLS, Burke Hills, H&N Holdings, LLC, Appellants, v. Dianne C. NELSON, Appellee and Cross-Appellant.
• Court: Utah Supreme Court

506 P.3d 552

Vicki HILLS, Burke Hills, H&N Holdings, LLC, Appellants,

v.Dianne C. NELSON, Appellee and Cross-Appellant.

No. 20190182

Supreme Court of Utah.

Heard February 8, 2021

Filed February 10, 2022

R. Stephen Marshall, Kevin M. Paulson, Salt Lake City, for appellants Vicki J. Hills and H&N Holdings, LLC

Robert F. Babcock, Andrew L. Berne, Salt Lake City, for appellant Burke A. Hills

Michael D. Stanger, Zachary T. Shields, Scarlet R. Smith, Salt Lake City, for appellee and cross-appellant Dianne Nelson

Michael R. Johnson, Douglas Monson, Brent D. Wride, Salt Lake City, for John H. Curtis, receiver for H&N Holdings, LLC

Justice Himonas authored the opinion of the Court in which Chief Justice Durrant, Associate Chief Justice Lee, Justice Pearce, and Justice Petersen joined.

Justice Himonas, opinion of the Court:

INTRODUCTION

¶1 This case arises from the internal breakdown and subsequent judicial dissolution of H&N Holdings, LLC—a Utah limited liability company owned by Dianne Nelson and Vicki Hills and formerly managed by Vicki's¹ husband, Burke Hills.

¶2 In 2015, Dianne filed a lawsuit seeking (among other claims) the dissolution of H&N and the removal of Burke as manager on the grounds that Burke had acted in an illegal, oppressive, and fraudulent manner. In lieu of dissolution, H&N and Vicki filed elections to purchase Dianne's membership interest in H&N, as provided by Utah Code section 48-2c-1214 (the election statute) (repealed).² The district court, however, read the election statute to grant it broad discretion to deny the elections on equitable grounds. While Dianne's dissolution claim was stayed pending the valuation of the fair market value of her membership interest in H&N, the district court dismissed H&N's and Vicki's elections and ordered, sua sponte , the dissolution of H&N, the removal of Burke as manager, and the appointment of a receiver to liquidate H&N's assets.

¶3 Utah limited liability companies are creatures of statute, and our courts are bound by the laws set forth by the legislature. Utah Code section 48-2c-1214 grants limited liability companies the absolute right to purchase a members' interest in the company in lieu of dissolution when that member petitions for dissolution. District courts are not permitted to dismiss duly-filed elections on equitable grounds. As such, we find that the district court erred when it dismissed H&N's election and ordered the dissolution of the company.

¶4 Moreover, the due process clause of the Utah Constitution affords all parties the right to receive notice and an opportunity to be heard on all claims that adversely affect their property interests. Vicki was a party to the proceedings below, and she is a 50% member of H&N. Nevertheless, the district court ordered the dissolution of H&N and the removal of Burke as manager sua sponte —without providing Vicki adequate notice or an opportunity to present evidence or argument on the issues. Accordingly, we find that the district court erred in its orders to dissolve H&N and remove Burke as manager for the separate reason that the orders violated Vicki's constitutional due process rights.

¶5 For these reasons, and the reasons set forth further below, we reverse the district court's orders and remand this case back to the district court with instructions to continue the valuation and election proceedings in the manner prescribed by the election statute.

BACKGROUND

¶6 Vicki Hills and Dianne Nelson are each 50% members of H&N.³ They formed H&N in 2010 as a manager-managed LLC for the purpose of holding real property. Vicki's husband, Burke Hills, was the manager of H&N, but he was not a member. At the time of H&N's formation, Burke and Dianne's husband (Russell Nelson) co-owned a construction company named Hills Construction, Inc. (HCI).

¶7 In 2014, the Nelsons began to suspect Burke of misappropriating HCI's corporate funds and assets. This led the Nelsons to investigate Burke's management of H&N. The Nelsons brought suit the following year asserting various claims against the Hills, H&N, and HCI. Russell's claims against Burke and HCI were eventually settled, extinguishing Russell's and HCI's interest in this case. Dianne asserted claims of breach of fiduciary duty, fraud, and accounting against Burke and claims of unjust enrichment and conversion against both Vicki and Burke (collectively, the Tort Claims). Dianne also sought the removal of Burke as H&N's manager and the dissolution of H&N under the Utah Revised Limited Liability Company Act. UTAH CODE §§ 48-2c-809, 48-2c-1210.

¶8 In response, H&N filed an election to purchase Dianne's membership interest in lieu of dissolution pursuant to Utah Code section 48-2c-1214. Vicki also filed a "conditional" election in the event the district court determined H&N's election ineffective or invalid. Pursuant to the election statute, the district court stayed the dissolution proceedings to determine the fair market value of Dianne's membership interest. See id. § 48-2c-1214(4).

¶9 Following extensive discovery, the district court held a valuation hearing in 2017 for the sole purpose of determining the fair market value of Dianne's membership interest. Ruling from the bench, and notwithstanding the stay of the dissolution proceedings, the district court found "that the election that has been made by H&N and by the Hills in this case should be set aside in the interest of equity." The court found that dissolution was proper because Burke had committed "multiple acts of fraud and oppression" as manager of H&N. The court ordered the dissolution of H&N, the removal of Burke as manager, and the appointment of a receiver to liquidate H&N's assets.

¶10 The district court located its authority to dismiss H&N's election and order dissolution in subsection 1214(1) of the election statute. That provision states that "[a]n election pursuant to this section is irrevocable unless the court determines that it is equitable to set aside or modify the election." Id. § 48-2c-1214(1). The court interpreted this provision to protect "the moving party so that the nonmoving parties cannot use the right to make an election in a way that is abusive or unfair." The court found that Burke managed H&N fraudulently and oppressively from its inception. Because the Utah Revised Limited Liability Company Act defines "fair market value" to include "all relevant discounts or premiums," id. § 48-2c-904, the court interpreted the election statute to permit H&N "to buy out Dianne at a greatly discounted price" once the marketability and minority discounts were applied.⁴ As such, the district court concluded that dissolution was necessary to ensure that H&N's assets would "be split 50/50 right down the middle."

¶11 Following the district court's ruling, Dianne moved for attorney fees under Utah Code section 48-2c-1214(5)(d), which provides for attorney fees and costs in the case of judicial dissolution under section 1210(2)(b). The district court eventually granted Dianne $191,963.07 in attorney fees, $52,928.35 in expert fees, and $1,446.17 in costs, all to be paid by H&N as part of its liquidation.

¶12 Dianne also sought to amend her initial complaint to assert a claim challenging the legal fees and costs incurred by H&N in the litigation under a theory of breach of fiduciary duty. This claim rested on Dianne's assertion that "[i]n pursuing the purchase of Dianne's interest, which stood solely to benefit Vicki, Burke and Vicki have caused H&N to pay attorney fees, thereby diminishing significantly the assets of H&N, with no benefit to Dianne." The district court raised the "threshold question" of whether Dianne had standing to assert this claim, which, at first glance, the district court considered to belong to H&N. Dianne argued that she had standing under the closely held business exception as articulated in Banyan Investment Co. v. Evans , 2012 UT App 333, 292 P.3d 698, because Burke's "fraud and oppression ... were directed uniquely at Dianne personally." The district court, at first, agreed.

¶13 Meanwhile, Burke responded with a cross-claim against H&N for unjust enrichment based on his years of company management without pay.

¶14 Again ruling from the bench, the district court disposed of all remaining claims. Regarding Dianne's challenge to H&N's costs and fees incurred in the litigation, the court reversed its initial ruling that Dianne had standing under the closely held corporation exception. The court explained that because the receivership gave the receiver "full authority" to manage the legal affairs of H&N, including the right to "litigate or settle" claims against alleged tortfeasors, the exception no longer applied. As for Dianne's remaining Tort Claims, the court granted summary judgment to the Hills. Finally, the court granted Dianne summary judgment on Burke's unjust enrichment claim because "this claim kind of boils down to Mr. Hills claiming that it was unjust that he didn't pay himself."

¶15 The district court entered final judgment on March 5, 2019. The parties now appeal. Vicki appeals the orders dismissing H&N's and Vicki's elections, dissolving H&N, and removing Burke as manager. She also appeals the award of attorney fees to Dianne under Utah Code section 48-2c-1214(5)(d). Burke appeals the summary disposition of his cross-claim against H&N. Dianne appeals the district court's denial of her breach of fiduciary duty claims against Burke.

¶16 We have jurisdiction under Utah Code section 78A-3-102(3)(j).

ANALYSIS

¶17 We begin our analysis with a brief discussion of Vicki's standing to challenge the dissolution of H&N on appeal. We then turn to the merits of the appeal and find that the district court erred in its orders to dismiss H&N's election, remove Burke as manager, and dissolve the company. As such, we reverse the district court's orders and remand this case back to the district court with instructions to continue with the election proceedings in accordance with the election statute. Because...