Young v. Bush

• Decision Date: 15 March 2012
• Docket Number: No. 11CA0496.,11CA0496.
• Citation: 277 P.3d 916,2012 COA 47
• Parties: Daniel E. YOUNG, individually, and on behalf of himself and other members of Cutthroat Ranch LLC, a Colorado limited liability company; Quebec Plaza LLC, a Colorado limited liability company; University Park Place, LLC, a Colorado limited liability company; and Leetsdale Self Storage, LLC, a Colorado limited liability company, acting on a member derivative basis, Plaintiff–Appellant, v. Eric BUSH; Bush Development, Inc., a Colorado corporation; Cutthroat Ranch LLC, a Colorado limited liability company; Quebec Plaza LLC, a Colorado limited liability company; University Park Place, LLC, a Colorado limited liability company; and Leetsdale Self Storage, LLC, a Colorado limited liability company, Defendants–Appellees.
• Court: Colorado Court of Appeals

277 P.3d 916

2012 COA 47

Daniel E. YOUNG, individually, and on behalf of himself and other members of Cutthroat Ranch LLC, a Colorado limited liability company; Quebec Plaza LLC, a Colorado limited liability company; University Park Place, LLC, a Colorado limited liability company; and Leetsdale Self Storage, LLC, a Colorado limited liability company, acting on a member derivative basis, Plaintiff–Appellant,

v.Eric BUSH; Bush Development, Inc., a Colorado corporation; Cutthroat Ranch LLC, a Colorado limited liability company; Quebec Plaza LLC, a Colorado limited liability company; University Park Place, LLC, a Colorado limited liability company; and Leetsdale Self Storage, LLC, a Colorado limited liability company, Defendants–Appellees.

No. 11CA0496.

Colorado Court of Appeals, Division A.

March 15, 2012.

James E. Freemyer, P.C., James E. Freemyer, Robert K. Reimann, Denver, Colorado, for Plaintiff–Appellant.

Senn Visciano Canges, P.C., Frank W. Visciano, Joel W. Kiesey, Denver, Colorado, for Defendants–Appellees.

Opinion by Judge VOGT.^*

¶ 1 Plaintiff, Daniel E. Young, as an individual and on behalf of Cutthroat Ranch LLC, Quebec Plaza LLC, University Park Place, LLC, and Leetsdale Self Storage, LLC (the LLCs), appeals the trial court's summary judgment dismissing his claims against defendants, Eric Bush, Bush Development, Inc., and the LLCs. We affirm in part, reverse in part, and remand for further proceedings.

I. Background

¶ 2 Eric Bush is the founder and president of Bush Development. Bush was also the founder and sole manager of the LLCs, which were formed to acquire and develop real estate. The LLCs had between four and seven members each, including plaintiff. Bush, plaintiff, and two other members of the LLCs are brothers.

¶ 3 In 2008, plaintiff began questioning Bush's management of the LLCs. Plaintiff and Bush initially discussed a settlement whereby Bush agreed to pay plaintiff a sum of money in exchange for a release, but the settlement was not concluded. Plaintiff next filed an action in district court for access to financial records and an accounting. The parties stipulated to dismissal of that action, and Bush granted plaintiff access to the requested financial records. An accounting firm reviewed the records and found “numerous issues,” which it summarized in a twenty-three-page report.

¶ 4 Plaintiff then filed the action giving rise to this appeal. He asserted thirteen claims “individually, on behalf of himself and other members of the LLCs ... acting on a member derivative basis” against Bush, Bush Development, and the LLCs. Thereafter, the LLC members held a special meeting—attended by plaintiff, other LLC members, and counsel, but not by Bush—to determine whether proceeding with the derivative action was in the LCCs' best interests. All members except plaintiff agreed that it was not.

¶ 5 Defendants then moved for dismissal of the action or for summary judgment, asserting that, pursuant to section 7–80–716, C.R.S.2011, dismissal was required because a majority of the independent members had determined that pursuing the derivative action was not in the LLCs' best interests. Plaintiff responded that genuine issues of material fact existed as to whether the best interests determination had been made by independent members and whether it was based upon an adequate inquiry—both, requirements for dismissal under section 7–80–716. Plaintiff asked that the motion be denied or, in the alternative, that he be allowed further discovery, as described in his attorney's accompanying affidavit, pursuant to C.R.C.P. 56(f). He also asserted that his third claim for relief, for breach of the settlement agreement with Bush, was not a derivative but a direct claim and was therefore not subject to dismissal.

¶ 6 The trial court entered summary judgment for defendants. It concluded that section 7–80–716 “allows the trial court to liberally construe a member's vote and his independent status regarding the derivative proceeding,” and that plaintiff had failed to meet his burden under the statute of proving either lack of independence or inadequacy of the members' inquiry. Subsequently, in response to plaintiff's motion for clarification, the trial court signed an order reinstating the third claim for relief; by the time it did so, however, plaintiff had filed his notice of appeal and the court therefore lacked jurisdiction to enter the order.

II. Standards of Review and of Statutory Construction

¶ 7 The standard of appellate review of orders dismissing derivative claims depends on whether there was an evidentiary hearing. Where, as here, the trial court resolves the motion as a matter of law without an evidentiary hearing, our review is de novo. Day v. Stascavage, 251 P.3d 1225, 1229 (Colo.App.2010); cf. Pierson v. Black Canyon Aggregates, Inc., 48 P.3d 1215, 1218 (Colo.2002) (appellate court reviews de novo a trial court's summary judgment, which may enter only where there is no genuine issue of material fact and moving party is entitled to judgment as a matter of law).

¶ 8 We likewise review de novo the trial court's determination of the proper legal standard to apply to the issue before it, see Thomas v. Rahmani–Azar, 217 P.3d 945, 947 (Colo.App.2009), and its interpretation of a statute, Klinger v. Adams Cnty. Sch. Dist. No. 50, 130 P.3d 1027, 1031 (Colo.2006).

¶ 9 When interpreting statutes, a court's primary task is to ascertain and give effect to the intent of the general assembly. We do this by looking first to the statute's plain language. Where the language is clear and unambiguous, we apply it as written. Id.; Sheffield Servs. Co. v. Trowbridge, 211 P.3d 714, 719 (Colo.App.2009). Where it is ambiguous, we look to other factors, such as the legislative history, the consequences of a given interpretation, or the end to be achieved. Klinger, 130 P.3d at 1031.

III. Analysis

A. Dismissal of Plaintiff's Derivative Claims

¶ 10 Plaintiff contends that the trial court erred in dismissing his derivative claims, because (1) it incorrectly applied a cursory, “liberal” standard in addressing the independence of the members who voted that his action was not in the LLCs' best interests, rather than applying case law applicable to corporate and limited partnership derivative actions; and (2) there was, in any event, a genuine issue of material fact as to the independence of those members and the adequacy of the inquiry on which their determination was based. We agree that the case must be returned to the trial court so that plaintiff may conduct discovery on the issues of independence and adequate inquiry and the court may then assess, under the standards set forth here, whether the derivative claims should be dismissed under section 7–80–716.

1. Derivative actions against LLCs

¶ 11 In the corporate context, a derivative action is a mechanism by which shareholders can sue on behalf of a corporation when those in control of the corporation have opted not to pursue a claim belonging to it. Curtis v. Nevens, 31 P.3d 146, 151 (Colo.2001); Hirsch v. Jones Intercable, Inc., 984 P.2d 629, 633–34 (Colo.1999). Colorado statutes provide for derivative actions against business corporations, see§ 7–107–402, C.R.S.2011, and nonprofit corporations, see§ 7–126–401, C.R.S.2011, and they extend the same remedy to limited partners, whose derivative rights are much like those of shareholders. See§ 7–62–1001, C.R.S.2011; Day, 251 P.3d at 1228;Hirsch, 984 P.2d at 631;see also Kline Hotel Partners v. Aircoa Equity Interests, Inc., 708 F.Supp. 1193, 1195 (D.Colo.1989) (unlike shareholders and limited partners, general partners have no right under Colorado law to bring a derivative action on behalf of a general partnership).

¶ 12 Limited liability companies are a relatively recent innovation in the law governing business entities. They have become popular because they offer members the limited liability protection of a corporation, together with the single-tier tax treatment of a partnership. See Water, Waste & Land, Inc. v. Lanham, 955 P.2d 997, 1000 (Colo.1998); Sheffield, 211 P.3d at 719.

¶ 13 In 1990, the Colorado General Assembly enacted the Colorado Limited Liability Company Act (CLLCA), codified at sections 7–80–101 to –1101, C.R.S.2011, thereby becoming the third state, after Wyoming and Florida, to enact such legislation. See Water, Waste, & Land, 955 P.2d at 1000 (discussing sources and background of CLLCA); Sheffield, 211 P.3d at 719. A synopsis of the proposed legislation provided to the Senate Committee on Business Affairs and Labor on January 22, 1990, pointed out that, while both large and small businesses would find the LLC a useful form of business entity, it was particularly desirable as “a sensible vehicle for family and other closely held businesses” engaged in a variety of activities, including real estate acquisition and development.

¶ 14 As originally enacted, the CLLCA included no provision for derivative actions by members. However, in 2002, as part of a broader overhaul of statutes governing business organizations, the general assembly amended the CLLCA to provide for such actions. See generally Robert R. Keatinge & Anthony Van Westrum, Business Entity Legislation 2002: Filing Procedures and LLC Changes, 31 Colo. Law. 55 (Nov. 2002).

¶ 15 The 2002 amendments, codified at sections 7–80–713 to –719, C.R.S.2011, address the requirements for maintaining a derivative action and include the provision at issue here, regarding dismissal of such actions. Section 7–80–716 states:

(1) A derivative proceeding commenced pursuant to this part 7 shall be dismissed by the court on motion by the limited liability company if any one of the groups specified in subsection (2) of this section has determined in good faith, after conducting an inquiry upon which the determination is based, that the maintenance of the derivative action is not in the best interests of the limited liability company.

(2)(a) Subject to the...