Olp, LLC v. Burningham

• Decision Date: 15 May 2008
• Docket Number: No. 20060178-CA.,20060178-CA.
• Parties: OLP, LLC, a limited liability company; and Richard Wilson, an individual, Plaintiffs, Appellees, and Cross-appellants, v. Wayne BURNINGHAM, an individual; and Optical Lens Products Management, Inc. dba Intermountain Antireflective Coatings, a Utah corporation, Defendants, Appellants, and Cross-appellees.
• Court: Utah Court of Appeals

185 P.3d 1138

2008 UT App 173

OLP, LLC, a limited liability company; and Richard Wilson, an individual, Plaintiffs, Appellees, and Cross-appellants, v. Wayne BURNINGHAM, an individual; and Optical Lens Products Management, Inc. dba Intermountain Antireflective Coatings, a Utah corporation, Defendants, Appellants, and Cross-appellees.

No. 20060178-CA.

Court of Appeals of Utah.

May 15, 2008.

Stephen K. Christiansen and Lisa B. Bohman, Salt Lake City, for Appellants and Cross-appellees.

Brent O. Hatch, Parker Douglas, and Phillip J. Russell, Salt Lake City, for Appellees and Cross-appellants.

Before GREENWOOD, P.J., THORNE, Associate P.J., and DAVIS, J.

OPINION

THORNE, Associate Presiding Judge:

¶ 1 Wayne Burningham and Optical Lens Products Management, Inc. dba Intermountain Antireflective Coatings (IARC), appeal from a judgment in favor of Richard Wilson.¹ We affirm.

BACKGROUND

¶ 2 Since 1998, Burningham and Wilson were the sole owners of OLP, LLC (OLP), a limited liability company (LLC) in the business of putting antireflective coatings on eyeglass lenses. By 2001, an ongoing dispute between the two owners over management and profit sharing resulted in this litigation. We briefly review OLP's formation and business structure as it relates to this matter.

¶ 3 Burningham had been in the lens coating business since 1988, when he formed IARC as a sole corporation. Since its inception, IARC has had as its principal customer Cole Vision (Cole). In 1993, IARC purchased a lens coating machine (Satis 1) that it used to service Cole along with its other, smaller customers.

¶ 4 Burningham hired Wilson as an IARC employee in 1995. In 1998, Burningham and Wilson formed OLP as a separate lens coating business that was intended to complement IARC. OLP purchased a second lens coating machine (Satis 2) and entered into an operating agreement with IARC whereby both companies would use the Satis 2 and share its operating expenses on a per lens basis. OLP obtained a $573,000 loan to purchase the Satis 2, and both Burningham and Wilson personally guaranteed the loan. Although the two companies each had their own customers, all customers interacted only with, and made payments solely to, IARC. IARC's alleged mishandling of funds attributable to OLP's customers would become a major point of contention between Burningham and Wilson.

¶ 5 When Burningham and Wilson formed OLP, both parties contributed an initial capital investment of $5000, with Burningham's contribution coming in the form of a check from IARC. Per an oral agreement, both parties were to share equal ownership and control of the company, continue to contribute matching capital investments, and equally split profits and losses. No agreement was contemplated or reached as to what would happen if one party contributed greater capital investments than the other.

¶ 6 From 1998 to mid-1999, Wilson contributed an additional $18,500, for a total capital investment in OLP of $23,500. Wilson did not believe that additional capital investment was necessary after that time. From the time of OLP's formation until 2001, IARC transferred approximately $340,000 into OLP's account. These transfers were originally characterized as loans or advances to OLP, but Burningham later characterized them as his capital investments in OLP. The actual nature of the IARC transfers and the effect of the transfers on OLP's ownership and control were disputed between the parties.

¶ 7 During the 1998-2001 time period, differences arose between Burningham and Wilson in their conceptions of how OLP was supposed to function, and did in fact function, in relation to IARC. One particular dispute was whether "new" business from Cole, attributable to the additional capacity of the Satis 2, was to be credited to IARC or to OLP. Wilson became convinced that Burningham was attempting to freeze him out of the business, using the Satis 2 primarily for IARC's use, terminating OLP's accounts, and retaining OLP's profits for himself and IARC. In light of these concerns, Wilson sought an accounting of OLP's business. Burningham and Wilson met in January 2001 to discuss a formal LLC accounting, but no such accounting ever occurred.

¶ 8 Further negotiations between Burningham and Wilson, and their respective accountants, failed to resolve the dispute, and Wilson filed suit in district court in August 2001. Wilson's original complaint, filed on behalf of himself and OLP, alleged various causes of action against Burningham and IARC, including repudiation, breach of contract, breach of fiduciary duty, and breach of the covenant of good faith and fair dealing.² Wilson sought damages, declaratory relief establishing his rights in OLP, and a formal accounting of OLP's business.³ Burningham asserted various affirmative defenses and counterclaimed seeking declaratory relief, damages for breach of contract, and dissolution of OLP pursuant to Utah's Revised Limited Liability Company Act (the LLC Act), see Utah Code Ann. §§ 48-2c-101 to — 1902 (2007). Wilson subsequently amended his complaint to add a claim for tortious interference with prospective economic advantage. See generally Anderson Dev. Co. v. Tobias, 2005 UT 36, ¶ 20, 116 P.3d 323 (outlining tort of intentional interference with economic relations).

¶ 9 Throughout the course of the litigation, Burningham attempted to have the dispute resolved through application of the LLC Act and sought a judicial dissolution, accounting, and winding up of OLP's business pursuant to the LLC Act. The district court eventually agreed that OLP had been effectively dissolved through the parties' inability to cooperate in the management and operation of the company. The district court determined the date of this dissolution to be no later than August 31, 2001, the date of Burningham's answer to Wilson's complaint. However, rather than proceed with dissolution proceedings under the LLC Act, the district court determined that there was an initial factual question as to whether Burningham owed Wilson damages for repudiating the parties' agreement. Characterizing the issue as one of wrongful dissolution,⁴ the district court stated:

I'm determining that it's a jury question whether there was a wrongful dissolution chargeable to Mr. Burningham and that the elements that have to be set forth and addressed in the verdict form are exclusion, repudiation and conversion of the assets of [OLP] and the determination of the damages will be dictated to a large extent by what the jury determines. If they determine a wrongful dissolution, they can address full expectation including lost profit clear through trial. If they do not determine wrongful dissolution, lost profits are cut off as of August 31, 2001 and you need to put that in specifically and we reserve the remaining issues for the Court thereafter.

The special verdict form given to the jury asked whether "Burningham wrongfully dissolved [OLP] by repudiating his agreement with Wilson regarding the operation of [OLP] and by converting the assets of [OLP] for Burningham's own benefit and use and to the exclusion of Wilson." The jury answered this question in the affirmative and awarded damages in excess of $1,200,000. Burningham appeals.⁵

ISSUES AND STANDARDS OF REVIEW

¶ 10 Burningham first argues that the district court failed to properly apply various provisions of the LLC Act to Wilson's claims. "`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.'" Ellison v. Stam, 2006 UT App 150, ¶ 16, 136 P.3d 1242 (quoting Gutierrez v. Medley, 972 P.2d 913, 914-15 (Utah 1998)).

¶ 11 Burningham next asserts that the district court denied him the right to assert various equitable defenses. "[W]e review [the] use of equitable remedies under an abuse of discretion standard." Myrah v. Campbell, 2007 UT App 168, ¶ 25, 163 P.3d 679. However, to the extent that Burningham's arguments present questions of law, we review the district court's actions for correctness. See Mardanlou v. Ghaffarian, 2006 UT App 165, ¶¶ 8-9, 135 P.3d 904, cert. denied, 150 P.3d 58 (Utah 2006).

¶ 12 Finally, Burningham raises various challenges to the district court's presentation of the case to the jury, including an assertion that no action for wrongful dissolution will lie when the existence of an LLC is not in dispute; challenges to the district court's jury instructions; and an assertion of error that the district court allowed OLP to be presented as a "going concern" at trial. These issues present questions of law that we review for correctness. See id.

ANALYSIS

¶ 13 Burningham raises various issues on appeal, the bulk of which directly or indirectly challenge the district court's decision allowing Wilson's claim for repudiation damages to proceed outside the strictures of the LLC Act. We determine that a cause of action for money damages for repudiation of an LLC does exist independently from the LLC Act and analyze Burningham's arguments accordingly.

I. The District Court Properly Applied the LLC Act

¶ 14 The central focus of Burningham's appeal is that the district court erred in allowing Wilson to pursue a claim for repudiation of an LLC agreement despite the enactment of the LLC Act. Burningham argues that the LLC Act is a comprehensive act governing all aspects of LLC formation, existence, and dissolution, and that as such it abrogates any preexisting common law action for repudiation. Accordingly, Burningham argues, the trial court erred when it failed to follow various provisions of the LLC Act. The district court's alleged errors include failing to calculate the members' capital accounts, see Utah Code Ann. §§ 48-2c-102(3), -903, -906, -1003, -1308 (2007); allowing Wilson's repudiation claim to proceed despite the district court's proper judicial dissolution of OLP under the LLC Act, see id. §§ 48-2c-1201, -1213; and declining to...