Holladay v. Storey

• Decision Date: 11 September 2013
• Docket Number: No. 20090824–CA.,20090824–CA.
• Citation: 737 Utah Adv. Rep. 15,307 P.3d 584
• Court: Utah Court of Appeals
• Parties: Beverly HOLLADAY, Plaintiff, v. David A. STOREY, Defendant, Third-party Plaintiff, Appellant, and Cross-appellee, v. Richard B. Holladay and Jack M. Woodcock, Third-party Defendants, Appellees, and Cross-appellants.

307 P.3d 584

737 Utah Adv. Rep. 15

Beverly HOLLADAY, Plaintiff,

v.David A. STOREY, Defendant, Third-party Plaintiff, Appellant, and Cross-appellee,

v.Richard B. Holladay and Jack M. Woodcock, Third-party Defendants, Appellees, and Cross-appellants.

No. 20090824–CA.

Court of Appeals of Utah.

June 20, 2013.

Rehearing Denied Sept. 11, 2013.

Craig C. Halls, Attorney for Appellant and Cross-appellee.

C. Val Morley and Ryan A. Morley, Attorneys for Appellees and Cross-appellants.

Judge MICHELE M. CHRISTIANSEN authored this Opinion, in which Judge JAMES Z. DAVIS concurred. JUDGE CAROLYN B. McHUGH concurred in the result.

CHRISTIANSEN, Judge:

¶ 1 This appeal and cross-appeal arise from a bench trial ruling that removed David A. Storey as manager of Castlerock Inn, LLC (the Company), expelled him as a member of the Company, and backdated his expulsion from and the valuation of his interest in the Company. We affirm in part, reverse in part, and remand for further proceedings.

BACKGROUND ¹

¶ 2 In April 2000, Storey, together with Richard B. Holladay and Jack M. Woodcock (Appellees) and several other individuals, formed the Company to construct and operate an inn in Moab, Utah. The members executed an Operating Agreement for the Company by which Storey was appointed as the manager of the Company. After two of the members voluntarily withdrew from the Company, the lending bank required the Company to amend the Operating Agreement. Accordingly, in February 2003, the parties executed an Amended Operating Agreement (the AOA). Pursuant to the AOA, Storey remained the Company's manager,and Storey and the Appellees each held a one-third interest in the Company.

¶ 3 Sometime around June 2003, Appellees took over Storey's management duties. In September 2003, Beverly Holladay filed a complaint against Storey, asserting claims unrelated to the present appeals. Storey filed counterclaims against Beverly Holladay and a third-party complaint against Appellees, Shawn Morley, and others.² Storey asserted, among other things, derivative claims on behalf of the Company alleging conversion and unjust enrichment against Appellees and others and a demand for a judicial accounting. Storey also sought dissolution of the Company and payment of proceeds based on his percentage of ownership pursuant to section 48–2c–1213 of the Revised Limited Liability Company Act (the Act) or, in lieu of dissolution, that the Company purchase his one-third interest in the Company pursuant to section 48–2c–1214 of the Act. SeeUtah Code Ann. §§ 48–2c–1213, –1214 (LexisNexis 2010). ³ In turn, Appellees filed counterclaims against Storey, alleging breach of fiduciary duty, conversion, unjust enrichment, and defamation and demanded Storey's expulsion as a member of the Company, Storey's removal as a manager of the Company, and a judicial accounting and dissolution of the Company pursuant to section 48–2c–1210 of the Act. See id. § 48–2c–1210.

¶ 4 Specifically, Appellees sought “to invoke the authority of the [Act] and, pursuant to Utah Code [section] 48–2c–710(3), obtain a judicial expulsion of Storey as both a member of and the sole manager of the Company.” Storey subsequently filed a motion for partial summary judgment seeking a declaration that he had the right to manage the Company under the AOA. The trial court granted Storey's motion after determining that the AOA clearly provides “that Storey may be removed as a manager only if he so chooses. No other grounds for his removal are even suggested in the Agreement.” In its order granting partial summary judgment to Storey, the trial court noted that Appellees were not left without remedy under the Act, specifically pursuant to section 48–2c–809, but because they had never “expressly invoked” that section “and sought an order of this court removing Storey as manager,” the trial court was unable to deny the relief Storey sought. However, the trial court stayed the implementation of the judgment pending, among other things, Appellees' request for an injunction removing Storey as a manager. Appellees thereafter filed a motion for a preliminary injunction requesting removal of Storey as a manager pursuant to Utah Code section 48–2c–809. In October 2005, the trial court issued the injunction.

¶ 5 As a result of a stipulation among the parties, in December 2003, the trial court permitted Appellees to enter into a franchise agreement for the sale of the inn. After that, Appellees contributed additional capital to the Company.

¶ 6 Following the conclusion of a ten-day bench trial in the spring and summer of 2009, the trial court entered findings of fact, conclusions of law, and an order removing Storey as the manager of the Company, expelling Storey as a member of the Company effective December 31, 2005, and valuing Storey's interest in the Company as of December 31, 2005. The trial court ordered Storey's removal as manager based on its findings of numerous instances of Storey's mismanagement and misconduct, including depositing a Company check and an IRS check into his personal account without adequate explanation and altering invoices for his personal gain. The trial court found that Storey's

removal as manager was ... necessary for the success of the enterprise[, and t]hat even though there was an underlying problem of lack of money, [Storey] was not dealing, in a productive fashion, with the partners, the suppliers, the vendors and employees and was not staying on top of the issues that arose.

The trial court ordered Storey's expulsion as a member for the same reasons as his removal as a manager, as well as for his “unlawful conduct that adversely and materially affect[ed] the Company's business, or ... conduct relating to the Company's business which makes it not reasonably practical to carry out business with the members.” Finally, the trial court found that “Storey breached his fiduciary duty to the other Members of the Company.”

¶ 7 The trial court set the effective expulsion and valuation date to December 31, 2005, based on the parties' conduct. It found that this date was appropriate due to Storey's mismanagement, misconduct, dishonesty, breach of fiduciary duty, and lack of success as a manager as of that date. The trial court also justified the valuation date based on Appellees' failure to adhere to the AOA and on their failure to “timely access the Court to implement their decisions as their agreement required and as the law requires.” The trial court explained that it was not until approximately 2005 that Appellees started to “seriously” follow the AOA and statutes. The trial court also found that Appellees' “decision ... to convert to a franchise[ ] was a substantial reason for the success of the Company and ... the inn during and after year 2005.”

¶ 8 Storey appeals the ruling, raising numerous issues on appeal. Appellees raise four issues in their cross-appeal.

ISSUES AND STANDARDS OF REVIEW

¶ 9 Storey first argues that the trial court erroneously based its conclusion that he breached a fiduciary duty owed to Appellees, which justified his removal and expulsion from the Company, upon conduct that took place prior to the adoption of the AOA and that Appellees thus “forgave” any misconduct. As a result, Storey argues that Appellees failed to state a claim for breach of fiduciary duty. We decline to consider this issue because Storey failed to preserve it before the trial court. “To preserve an issue for appellate review, a party must first raise the issue in the trial court, giving that court an opportunity to rule on the issue.” Weiser v. Union Pac. R.R. Co., 2010 UT 4, ¶ 14, 247 P.3d 357 (citation and internal quotation marks omitted). The preservation rule applies even to an issue of a party's failure to state a claim. See Mack v. Utah State Dep't of Commerce, Div. of Sec., 2009 UT 47, ¶ 14, 221 P.3d 194 (“[I]ssues brought under the exception of Rule 12(h) may be raised before or during trial. However, Rule 12(h) certainly does not mean that failure to state a claim can be raised for the first time on appeal.” (citation and internal quotation marks omitted)). Therefore we decline to address this issue.

¶ 10 Next, Storey contends that the trial court erroneously backdated his expulsion from the Company to December 31, 2005. In a related claim, Storey contends that the trial court erroneously backdated the valuation of his interest in the Company to the same date. According to Storey, the Act does not grant the trial court such authority. “The proper interpretation and application of a statute is a question of law which we review for correctness, affording no deference to the district court's legal conclusion.” OLP, LLC v. Burningham, 2008 UT App 173, ¶ 10, 185 P.3d 1138 (citation and internal quotation marks omitted).

¶ 11 Storey asserts several other claims of error. First, he argues that the trial court erroneously created nonexistent provisions in the AOA, which placed Appellees in a more favorable position than the parties originally contracted for, thereby violating Storey's right to contract. Next, Storey maintains that the trial court erred when it adopted the parties' interim mediation agreement, resulting in manifest injustice to him. Finally, Storey asserts that the trial court improperly failed to provide for prejudgment interest on the value of his equity in the Company during the pendency of the expulsion proceedings. The interpretation of the AOA and mediation agreement is a “ ‘[q]uestion[ ] of contract interpretation ... confined to the language of the contract itself [and is a] question [ ] of law, which we review for correctness.’ ” KeyBank Nat'l Ass'n v. Systems W. Computer Res., Inc., 2011 UT App 441, ¶ 13, 265 P.3d 107 (quoting Mellor v. Wasatch Crest Mut. Ins. Co., 2009 UT 5, ¶ 7, 201 P.3d 1004). With regard to Storey's prejudgment interest claim, “[t]he trial court's award of prejudgment interest, and the amount thereof, present[ ] a question of law which we review...