Warner v. DMG Color, Inc., 990455.

• Decision Date: 29 December 2000
• Docket Number: No. 990455.,990455.
• Citation: 2000 UT 102,20 P.3d 868
• Parties: Rick H. WARNER, Plaintiff and Appellant, v. DMG COLOR, INC., a Utah corporation, Dick M.G. Warner, Vicki Lynn Warner, Digital Media Group, L.C., a limited liability company, Defendants and Appellees.
• Court: Utah Supreme Court

20 P.3d 868

2000 UT 102

Rick H. WARNER, Plaintiff and Appellant, v. DMG COLOR, INC., a Utah corporation, Dick M.G. Warner, Vicki Lynn Warner, Digital Media Group, L.C., a limited liability company, Defendants and Appellees.

No. 990455.

Supreme Court of Utah.

December 29, 2000.

James G. Swensen, Jr., Salt Lake City, for plaintiff.

Herschel J. Saperstein, Steven W. Call, Melissa H. Bailey, Salt Lake City, for defendants.

DURHAM, Justice:

INTRODUCTION

¶ 1 Rick H. Warner ("plaintiff") appeals from the trial court's order granting a motion to dismiss presented by defendants Dick M.G. Warner, Vicki Lynn Warner, and Digital Media Group, L.C. ("Digital"). In his complaint, plaintiff raised three causes of action, all of which he asserted were both direct and derivative claims. Here, plaintiff challenges the trial court's dismissal, arguing that his right to derivatively assert the claims he pled survived the sale of such claims by the bankruptcy trustee, or alternatively, that he can directly assert such claims against Dick Warner, Vicki Warner, and Digital because he was a minority shareholder in a closely held corporation. Plaintiff also challenges the trial court's award of attorney fees. Additionally, Dick Warner, Vicki Warner, and Digital request reasonable attorney fees and costs related to this appeal.

BACKGROUND

¶ 2 Plaintiff and Dick Warner formed DMG Color, Inc. ("DMG"), with each being a director and a fifty percent shareholder. Thereafter, DMG redeemed all of its shares of capital stock owned by plaintiff in exchange for cash and an installment note. Ultimately, DMG defaulted and plaintiff brought suit to collect on the note. Plaintiff received a judgment for $200,588.51 plus interest and costs and was subsequently granted all of the rights of a shareholder in DMG, except voting rights, until the judgment was paid in full.

¶ 3 Approximately one year later, plaintiff attempted to collect the judgment. On July 27, 1994, DMG filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, which was later converted to a Chapter 7 liquidation. When plaintiff offered to purchase all claims and potential causes of action of DMG, including those against Dick Warner, from the bankruptcy estate, the trustee filed a motion for approval of the sale of such items. Notice of the trustee's intent to sell these items and of a hearing on the trustee's motion for an order approving the sale was served upon all interested parties, including plaintiff. Following this, the trustee conducted an auction which plaintiff and Dick Warner attended. Ultimately, Dick Warner was the highest bidder.

¶ 4 On January 13, 1998, the bankruptcy court entered an order authorizing the trustee to sell the claims and potential causes of action of DMG to Dick Warner for $4500. On January 27, 1998, the trustee transferred these items to Digital, a company formed by Dick Warner, Vicki Warner, and a designee of Dick Warner.

¶ 5 On November 17, 1998, plaintiff instituted this suit in state court against defendants alleging, both derivatively and directly: (1) conversion of corporate assets; (2) misappropriation of corporate opportunity; and (3) fraudulent transfer and conveyance of corporate assets. Dick Warner, Vicki Warner, and Digital moved to dismiss plaintiff's action. The trial court granted this motion, reasoning that "[a]s a result of the sale ordered by the United States Bankruptcy Court, the claims against the Defendants do not belong to the Plaintiff." Moreover, the trial court found that

[t]he Defendants should be awarded reasonable attorneys fees pursuant to Utah Code Ann. § 78-27-56 because plaintiff's alleged claims were without merit and not asserted in good faith based upon the undisputed facts that the claims had been sold by the bankruptcy trustee to the Defendants in compliance with the order of the United States Bankruptcy Court.

This appeal followed.

STANDARD OF REVIEW

¶ 6 The trial court in the instant case did not specifically state the grounds upon which it granted the motion to dismiss made by Dick Warner, Vicki Warner, and Digital. However, after a full recitation of all the previous proceedings in the bankruptcy court, the trial court stated, "As a result of the sale ordered by the United States Bankruptcy Court, the claims against the defendants do not belong to the Plaintiff." The logical inference from this statement is that the court was dismissing the complaint for failure to state a claim upon which relief could be granted. Because the propriety of a dismissal under Utah Rule of Civil Procedure 12(b)(6) is a question of law, we give the trial court's ruling no deference and review it under a correctness standard. See Whipple v. Am. Fork Irrigation Co., 910 P.2d 1218, 1220 (Utah 1996).

ANALYSIS

I. APPROPRIATENESS OF STATE PROCEEDING

A. Bankruptcy Scheme

¶ 7 To place plaintiff's challenges in the appropriate context, we first provide a general summary of the relevant bankruptcy procedures and principles. Pursuant to 28 U.S.C. § 1334, "the [federal] district court shall have original and exclusive jurisdiction of all cases under title 11," of the Bankruptcy Code. 28 U.S.C. § 1334(a) (1993). Additionally, that court "shall have exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate." Id. § 1334(e) (Supp.2000). "Property of the estate includes causes of action held by the debtor against third parties as of case commencement." 9A Am.Jur.2d Bankruptcy § 1107 (1999) (footnote omitted).

¶ 8 Once a bankruptcy petition is filed, the property of the estate becomes "subject to the control and administration of the trustee." Id. § 1087. When administering the estate, "[o]ne of the principal duties of a Chapter 7 trustee is to collect the property of the estate and reduce it to money, and to close the estate as expeditiously as is compatible with the best interests of the parties in interest." 9 Am.Jur.2d Bankruptcy § 317 (1999). One method to accomplish this duty is to sell the property in the estate. See 9B Am.Jur.2d Bankruptcy § 1518 (1999). "The trustee . . . is granted broad powers. . . with respect to the . . . sale . . . of property of the estate . . . . Generally, transactions outside the ordinary course of business require notice and an opportunity for a hearing if there are any objections." Id. (footnotes omitted); see also Fed. R. Bankr.P. 6004(a), (e). Objections to a proposed sale "shall be filed and served not less than five days before the date set for the proposed action or within the time fixed by the court." Id. 6004(b). "Failure to timely file an objection. . . can result in a waiver of the objection." 9B Am.Jur.2d Bankruptcy § 1534.

¶ 9 Upon completion of the sale, the regular practice of bankruptcy courts is to issue an order confirming the sale. See id. § 1554. Such orders constitute final orders. See 9E Am.Jur.2d Bankruptcy § 3495 (2000). Thus, the appropriate method to challenge such a sale is by appeal, not collateral attack.

¶ 10 The principles that underlie bankruptcy law are relevant to its application. In particular, "[a] principal function of bankruptcy law is to determine and implement in a single collective proceeding the entitlements of all concerned." 9 Am. Jur.2d Bankruptcy § 2. Bankruptcy law thus "contemplates participation [in a bankruptcy proceeding] by any party having an interest in any issue relating to the debtor." Id. § 1. Stated differently, "[a] bankruptcy case operates as a collective execution on behalf of creditors on all the assets of the debtor . . . [that] replaces individual collection remedies." Id. § 2. This collective execution increases "the aggregate pool of assets [available to satisfy the creditor's claims] by prohibiting a disadvantageous, piecemeal liquidation of the debtor's assets," id., and "prevents the inequity of one creditor recovering more on its debt than the remaining similarly situated creditors can recover on theirs," Delgado Oil Co. v. Torres, 785 F.2d 857, 861 (10th Cir.1986). In sum, bankruptcy law seeks to accomplish three goals: (1) "equitable distribution of the debtor's assets among his or her creditors"; (2) "relieving the honest debtor from the weight of oppressive indebtedness to permit the debtor to start afresh"; and (3) "expeditious and economic administration of cases under the Bankruptcy Code." 9 Am. Jur.2d Bankruptcy § 5.

B. Substantive Claims

¶ 11 Plaintiff's theory depends on the notion that the proceeding in the bankruptcy court, including the sale of DMG's claims by the trustee, did not include the claims he asserted in the trial court in the instant action. As to plaintiff's conversion and misappropriation of corporate assets claims, we do not agree; regarding the fraudulent transfer claim, we find that the statute of limitations ran before plaintiff's state court action was filed.

1. Derivative and Direct Claims

¶ 12 Derivative actions attempt to enforce rights belonging to a corporation. See Aurora Credit Servs., Inc. v. Liberty W. Dev., Inc., 970 P.2d 1273, 1280 (Utah 1998). Claims of mismanagement, breach of fiduciary duties, and appropriation or waste of corporate opportunities are claims that the corporation has been injured. Accordingly, the cause of action belongs to the corporation and shareholders may sue only on its behalf. See id. (quoting Richardson v. Arizona Fuels Corp., 614 P.2d 636, 639 (Utah 1980)). Even though shareholders may suffer indirect injuries due to fraudulent acts on the part of corporate officers, they generally do not have a direct cause of action for such injuries. See id.; Richardson, 614 P.2d at 639-40.

¶ 13 Direct actions, by contrast, require a shareholder to show that he or she was injured in a manner distinct from the corporation. See Aurora, 970 P.2d at 1280. In Richardson, the court defined a direct action, noting that a plaintiff as a stockholder and an individual...