Torian ex rel. Environmax, Inc. v. Robert Craig, Genowefa Craig, Charles Meredith, Individuals, Environmax, Inc.

• Decision Date: 28 September 2012
• Docket Number: No. 20100919.,20100919.
• Citation: 34 IER Cases 733,289 P.3d 479,718 Utah Adv. Rep. 111,2012 UT 63
• Parties: Doug TORIAN, directly and derivatively on behalf of EnvironMax, Inc., a Utah corporation, Plaintiff and Appellant, v. Robert CRAIG, Genowefa Craig, Charles Meredith, individuals, EnvironMax, Inc., and Does 1–20, whose true identities are not known, Defendants and Appellees.
• Court: Utah Supreme Court

289 P.3d 479

34 IER Cases 733

718 Utah Adv. Rep. 111

2012 UT 63

Doug TORIAN, directly and derivatively on behalf of EnvironMax, Inc., a Utah corporation, Plaintiff and Appellant,

v.Robert CRAIG, Genowefa Craig, Charles Meredith, individuals, EnvironMax, Inc., and Does 1–20, whose true identities are not known, Defendants and Appellees.

No. 20100919.

Supreme Court of Utah.

Sept. 28, 2012.

Victor A. Sipos, South Jordan, for appellant.

John W. Mackay, Salt Lake City, for appellees.

Justice LEE, opinion of the Court:

¶ 1 Doug Torian brought suit against his former employer (EnvironMax) and its directors to recover the value of shares he received to offset wages owed to him by the company—shares he claimed were diluted by corporate misdeeds. The district court dismissed Torian's suit on summary judgment, concluding that the claim was derivative in nature and that Torian lacked standing to assert it directly. In so ruling, the court concluded that EvironMax was not a “closely held corporation” subject to an exception to the general rule requiring shareholder suits to be filed derivatively and that Torian's direct claims were otherwise foreclosed by his failure to utilize the Utah dissenters' rights statute.

¶ 2 We reverse. Because Torian's alleged injury is an individual and not a collective one in common with all shareholders, we conclude that he is entitled to sue individually and not required to pursue his claim derivatively. We also hold that the dissenters' rights statute does not preempt direct actions rooted in breach of fiduciary duty, such as the one brought by Torian. For these reasons, we reverse and remand for further proceedings on Torian's claim.

I

[1] ¶ 3 Husband and wife Robert and Genowefa Craig founded EnvironMax in 2000.^FN1 The company was a licensee that commercially marketed software developed by Robert's company, EnMax, to track hazardous materials. Doug Torian began his employment at EnvironMax as a sales manager. He also served on the company's board of directors.

¶ 4 Business was brisk for EnvironMax in the beginning. But by December 2004 the company was hit hard when the “dot-com bubble” burst. It ended up owing a total debt of $1.25 million to three employees (whose salaries sometimes went unpaid during the bust and who were offered equity in the company as an offset) and EnMax. Specifically, EnvironMax owed some $380,000 to Torian and $396,000 to EnMax.

¶ 5 In April 2005, Torian became a minority shareholder of the company at a time when it had approximately 15 million shares owned by 60 shareholders. By May, EnvironMax's board of directors decided to issue 600,000 new common shares to satisfy the debt owed its employees—with 200,000 of those shares going to Torian—and to issue six million preferred shares to EnMax for the same purpose. Enmax's preferred shares were later converted to common shares. ^FN2

¶ 6 Thus, although EnvironMax's debts to Torian and EnMax were approximately equal, EnvironMax issued thirty times more shares to EnMax than it did to Torian. According to Torian, the shares issued to him would have to have been valued at approximately $1.90 each in order to satisfy his debt. But due to the simultaneous issuance of six million shares to EnMax (at a value of $0.07 per share relative to the debt owed by EnvironMax), the share pool was sharply diluted, resulting in an overall actual value of only about $0.19 per share. ^FN3 Torian ultimately refused to accept the shares as compensation for his reduced salary.

¶ 7 Torian was removed from the EnvironMax board of directors in early 2005, and in early 2006 his employment with EnvironMax ended. In June 2006, he filed a lawsuit in federal court in New York for back wages and damages. Over a year later in July 2007, the parties agreed to arbitrate “any” dispute between them in a Utah forum, wherein Torian expressed concerns with valuation, dilution, and fiduciary duty issues arising from EnvironMax's issuance of shares in April 2005.^FN4

¶ 8 Meanwhile in September 2007, another company, IHS Inc., entered a cash-out merger agreement to acquire all 25,211,660 shares of EnvironMax at $.80 per share.^FN5 Some weeks later, in November, Torian cashed out his shares for approximately $322,000. In doing so, he specifically declined to dispute the merger or the valuation of his shares under the dissenting shareholder statute— Utah Code sections 16–10a–1301 to –1331—citing purportedly unfavorable standards in dissenting shareholder cases in Utah as his reason for doing so.^FN6

¶ 9 Torian ultimately prevailed in the arbitration and was awarded approximately $386,000 in back wages; this amount was offset, however, by the value of Torian's already liquidated shares. Following the arbitration, the parties entered into settlement discussions on other postlitigation matters, including the issue of interest. At the end of the day, Torian netted a total of $292,500—an amount that includes both the arbitration award and the subsequent settlement amount.^FN7

¶ 10 This case ensued. On February 25, 2009, Torian filed a Verified Complaint alleging direct and derivative claims against the appellees, former directors, officers, and controlling shareholders of EnvironMax. Torian alleged, among other things, that the appellees “engaged in various self-dealing transactions to benefit themselves at the expense of certain minority shareholders and that he only discovered the wrongful acts after he and other minority shareholders parted with their shares.” He later filed an Amended Complaint further asserting class-action claims under rule 23 of the Utah Rules of Civil Procedure.

¶ 11 In March 2010, the named defendants (collectively referred to as “the Craigs”) filed a Motion for Summary Judgment, insisting that Torian's claims were, at best, derivative. The district court ultimately granted the Craigs' motion, ruling that the claims alleged by Torian “belong to the corporation” and noting that “shareholders generally cannot sue directly for those injuries.” In reaching this conclusion, the court determined that no exceptions applied to Torian, hanging its hat on a purportedly “dispositive issue”—that “EnvironMax was not a closely held corporation” and “therefore, the closely held corporation exception does not apply.” The court also ruled that Torian was foreclosed from bringing direct claims against EnvironMax because he failed to assert his rights under Utah's dissenters' rights statute. In the court's view, Torian “knew of his dissenters' rights and chose not to act upon his rights under the statute.” “To permit him to do so [later],” in the district court's view, “would nullify the statute.”

¶ 12 Because it granted the Craigs' motion for summary judgment on those issues, the court concluded that the question whether Torian could file a Second Amended Complaint or certify or maintain his proposed class was moot. Torian appealed.

[2] [3] ¶ 13 We review the district court's grant of summary judgment for correctness. Stern v. Metro. Water Dist., 2012 UT 16, ¶ 20, 274 P.3d 935. Summary judgment is appropriate only where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Utah R. Civ. P. 56(c). We accord no deference to the district court's conclusions of law, including its interpretation of precedent and statute as applied to Torian. See Grappendorf v. Pleasant Grove City, 2007 UT 84, ¶ 5, 173 P.3d 166. For the reasons below, we reverse and remand.

II

¶ 14 In its grant of summary judgment, the district court made two conclusions that in its view foreclosed Torian's claim: (A) because Torian's claims were derivative in nature and because Torian could not satisfy the closely-held-corporation exception—an exception recognized in the caselaw permitting him to sue directly for derivative injury to the corporation—Torian was not permitted to sue directly to vindicate the injury he alleged, and (B) Torian could not assert a direct claim as a former shareholder because he failed to follow the terms of Utah's dissenters' rights statute. Torian challenges that decision on the ground that he is not required to proceed derivatively and is entitled to sue individually to vindicate a cognizable, individualized injury.

¶ 15 We agree with Torian. We hold that the district court erred in concluding that the closely-held-corporation exception was the sole ground for Torian to bring his claims directly and that the dissenters' rights statute also foreclosed Torian's direct recovery.

A

[4] ¶ 16 We have long acknowledged the right of shareholders to sue individually to remedy individual injuries.^FN8 To qualify to sue on these grounds, a “shareholder need show only an injury to him- or herself that is distinct from that suffered by the corporation.” Aurora Credit Servs., Inc. v. Liberty W. Dev., Inc., 970 P.2d 1273, 1280 (Utah 1998).

¶ 17 Torian has asserted a claim on such an individual injury. In his amended complaint, Torian alleged that “more than 10 million shares were issued after [he] became a shareholder” and that of those shares, “more than 9.7 million shares went to [the appellees] and their family members.” Torian further claimed that the devaluation of his shares by the majority shareholder appellees “harmed the interests of EnvironMax and its minority shareholders, including Mr. Torian.”

¶ 18 The Craigs' principal response to Torian's individual injury theory is to challenge it as unpreserved and thus not properly before us on appeal. While conceding that Torian adverted generally to the individual injury theory in the district court, the Craigs nonetheless contend that Torian failed to sufficiently elaborate on the theory's application in this case and, most pointedly, that he failed to cite the individual injury standards he relies on in his briefs on appeal. Specifically, the Craigs challenge as unpreserved Torian's citation to standards set forth in authorities such as Gentile v. Rossette, 906 A.2d 91 (Del.2006), and Fletcher, ...