Banyan Investment Company, LLC v. Evans , 292 P.3d 698 ( 2012 )

IN THE UTAH COURT OF APPEALS
‐‐‐‐ooOoo‐‐‐‐
Banyan Investment Company, LLC, ) OPINION
)
Plaintiff and Appellant, ) Case No. 20100899‐CA
)
v. )
) FILED
Steven Evans, Mark Mandel, Mike ) (November 29, 2012)
Riddle, Scott Robbins, and Robert )
McOmber, ) 2012 UT App 333)
Defendants and Appellees. )
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Third District, Salt Lake Department, 100910352
The Honorable Anthony B. Quinn
Attorneys: Richard F. Ensor, Kari A. Tuft, and Melinda A. Morgan, Salt Lake City,
for Appellant
Erik A. Olson and Jason R. Hull, Salt Lake City, for Appellees
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Before Judges Orme, Davis, and Voros.
DAVIS, Judge:
¶1 Banyan Investment Company, LLC (Banyan) appeals the trial court’s dismissal of
its direct claims against Steven Evans, Mark Mandel, Mike Riddle, Scott Robbins, and
Robert McOmber (collectively, Defendants). We reverse and remand for further
proceedings.
BACKGROUND
¶2 Banyan owns a twenty percent membership interest in Aspen Press Company,
LLC (Aspen Press) but is not involved in its management. The other five members of
the company, Defendants, manage and participate in the day‐to‐day operations of
Aspen Press.
¶3 Banyan alleges that “Defendants have and continue to engage in a course of
conduct that uses Aspen Press for their own personal profit to the detriment of Banyan”
and that, “[i]n an effort to conceal their wrongful acts, Defendants are using their power
and position within the company to limit Banyan’s access to documents and records
that evidence Defendants’ wrongful conduct.” Accordingly, Banyan filed a complaint
against Defendants, alleging claims of breach of fiduciary duty and unjust enrichment,
and requesting an accounting.
¶4 Defendants filed a motion to dismiss Banyan’s complaint on the ground that
Banyan’s claims could not be brought directly because they were derivative in nature.
Accordingly, Defendants argued, Banyan was required to file the claims derivatively
and demonstrate that it had complied with rule 23A of the Utah Rules of Civil
Procedure. See generally Utah R. Civ. P. 23A (outlining the procedures, including
demand requirements, that a plaintiff shareholder must comply with in order to
maintain a derivative action against other shareholders or members); Angel Investors,
LLC v. Garrity, 2009 UT 40, ¶ 15 n.4, 216 P.3d 944 (explaining that rule 23A “governs
derivative actions brought on behalf of limited liability companies as well” as
corporations). Banyan responded that its direct claims were permissible under the
closely‐held corporation exception elucidated in Aurora Credit Services, Inc. v. Liberty
West Development, Inc., 970 P.2d 1273 (Utah 1998).
¶5 The trial court granted Defendants’ motion to dismiss because it determined that
the closely‐held corporation exception “hasn’t ever been applied to a limited liability
company” (LLC) and has been limited by a number of cases issued after Aurora.
Nevertheless, the trial court dismissed the case without prejudice and gave Banyan ten
days to amend the complaint to allege derivative causes of action in accordance with
rule 23A. Banyan did so but subsequently filed a petition for interlocutory appeal of the
dismissal, which this court granted.
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ISSUE AND STANDARD OF REVIEW
¶6 Banyan challenges the trial court’s dismissal of its original complaint alleging
direct causes of action, arguing that the trial court erred as a matter of law in concluding
that the closely‐held corporation exception could not be applied to LLCs. A trial court’s
dismissal for failure to state a claim “is a question of law that we review for correctness,
giving no particular deference to the lower court’s determination.” Wright v. University
of Utah, 876 P.2d 380, 382 (Utah Ct. App. 1994).
ANALYSIS
I. Banyan Did Not Waive Its Right to Appeal.
¶7 Before addressing the substance of Banyan’s argument, we must first determine
whether Banyan waived its right to appeal the trial court’s dismissal of its direct action
by filing an amended complaint. This question has not been fully addressed in Utah.
Generally, “[o]nce a party has amended a pleading, the amended pleading supercedes
the original pleading, and the original pleading performs no function in the case.”
Campbell, Maack & Sessions v. Debry, 2001 UT App 397, ¶ 17 n.4, 38 P.3d 984 (citing 6
Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice & Procedure
§ 1476 (1990)). In Kuhre v. Goodfellow, 2003 UT App 85, 69 P.3d 286, we held that a party
who files an amended complaint “waive[s] the right to challenge the dismissal of the
[original] complaint because an amended pleading supercedes the original pleading,
and the original pleading performs no function.” Id. ¶ 13 (citation and internal
quotation marks omitted).1 However, in Kuhre, the trial court had dismissed the earlier
1
The only other Utah cases of which we are aware that discuss the effect of an
amended complaint on an earlier version of the complaint did so in the context of
refusing to consider the contents of the original complaint once it had been superseded
by the amended complaint. See Teamsters, Chauffeurs, Warehousemen & Helpers, Local
Union 222 v. Motor Cargo, 530 P.2d 807, 808–09 (Utah 1974) (holding that an agreement
attached to the original complaint could not be considered as evidence when the
agreement was not included in the amended complaint because “when an amended
complaint, complete in and of itself, is filed, the former complaint is functus officio and
(continued...)
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complaint based on the fact that the “[p]laintiffs’ misrepresentation cause of action
[was] not pled with specificity as required by Rule 9(b), [of the] Utah Rules of Civil
Procedure.” Id. ¶ 3 (third alteration in original) (internal quotation marks omitted). The
situation presented here is distinguishable in that the trial court dismissed Banyan’s
original complaint, in effect, on its merits rather than as a result of technical defects.
Unlike the plaintiffs in Kuhre, who were free to plead the same claim if they did so with
the required specificity, it would have been futile for Banyan to replead its direct claims
against Defendants because the trial court had already determined that a direct claim
was impermissible as a matter of law.
¶8 Some jurisdictions have held that a party absolutely waives the right to appeal
the dismissal of a pleading by filing an amended pleading. See, e.g., Caltabiano v. L & L
Real Estate Holdings II, LLC, 15 A.3d 1163, 1166 (Conn. App. Ct. 2011) (“After a court has
granted a motion to strike, the plaintiff may either amend his pleading or, on the
rendering of judgment, file an appeal . . . . The choices are mutually exclusive [as] [t]he
filing of an amended pleading operates as a waiver of the right to claim that there was
error in the sustaining of the [motion to strike] the original pleading.” (alterations and
omission in original) (citation and internal quotation marks omitted)). Others have held
that such a claim can be preserved only by repleading the claim in the amended
pleading, regardless of futility. See, e.g., Abrams v. Watchtower Bible & Tract Soc’y of New
York, Inc., 715 N.E.2d 798, 803–04 (Ill. App. Ct. 1999) (“A plaintiff desiring to preserve
for appeal the previous dismissal of claims either must stand on the dismissed counts
and challenge the ruling at the appellate level or reallege or incorporate the dismissed
counts in subsequent complaints. A party who files an amended complaint waives any
objection to the circuit court’s ruling on the former complaint.” (citations omitted)).
¶9 However, we find the better rule to be the one adopted by the majority of
jurisdictions, which recognizes an exception to the rule that an amended pleading
1
(...continued)
cannot be used for any purpose”); Campbell, Maack & Sessions v. Debry, 2001 UT App
397, ¶ 17 n.4, 38 P.3d 984 (applying the rule to determine that a verified counterclaim
could not be treated as an affidavit when it had been superseded by an amended
nonverified counterclaim). These cases do not address the question of whether the act of
amending a complaint precludes the filing party from challenging a dismissal of the
original complaint.
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supersedes and replaces the pleading it amends where claims contained in the original
pleading were dismissed on their merits rather than as a result of a technical defect. See,
e.g., Lacey v. Maricopa Cnty., 693 F.3d 896, 927–28 (9th Cir. 2012); United States v.
Pennsylvania Shipbuilding Co., 473 F.3d 506, 516–17 (3d Cir. 2007); Young v. Mount Ranier,
238 F.3d 567, 572–73 (4th Cir. 2001); In re Crysen/Montenay Energy Co., 226 F.3d 160, 162
(2d Cir. 2000); Dunn v. Air Line Pilots Ass’n, 193 F.3d 1185, 1191 n.5 (11th Cir. 1999);
Davis v. TXO Prod. Corp., 929 F.2d 1515, 1518 (10th Cir. 1991); National Union Fire Ins. Co.
of Pittsburgh, PA v. Cambridge Integrated Servs. Grp., Inc., 89 Cal. Rptr. 3d 473, 478–79
(Cal. Ct. App. 2009); Prayson v. Kansas City Power & Light Co., 847 S.W.2d 852, 859–60
(Mo. Ct. App. 1992); Wangler v. Lerol, 2003 ND 164, ¶¶ 26–27, 670 N.W.2d 830; Surgical
Inst. of S.D., PC v. Sorrell, 2012 SD 48, ¶¶ 22–23, 816 N.W.2d 133. “A dismissal is on the
merits when it is with prejudice or based on some legal barrier other than want of
specificity or particularity.” Pennsylvania Shipbuilding, 473 F.3d at 516. Unlike claims
dismissed for “indefiniteness, incompleteness or insufficiency, or more technical defects
in pleadings,” the shortcomings of which can be cured by an amended pleading, see
Davis, 929 F.2d at 1517 (citation and internal quotation marks omitted), claims
dismissed on their merits are futile to replead “because the legal inadequacy cannot be
solved by providing a better factual account of the alleged claim,” Pennsylvania
Shipbuilding, 473 F.3d at 517.
¶10 The merits of this approach were recently discussed by the Ninth Circuit Court
of Appeals in Lacey v. Maricopa County, 693 F.3d 896 (9th Cir. 2012). Although the Ninth
Circuit has long remained “an outlier among the circuits” by subscribing to the more
formalistic rule requiring a plaintiff to choose between appeal and amendment when its
original claim is dismissed, see id. at 926–27; see also Forsyth v. Humana, Inc., 114 F.3d
1467, 1474 (9th Cir. 1997) (citing cases dating back to 1967 in explaining that “[i]t is the
law of [the Ninth C]ircuit that a plaintiff waives all claims alleged in a dismissed
complaint which are not realleged in an amended complaint”), aff’d, 525 U.S. 299 (1998)
(considering the merits of the case without reference to the waiver issue), the Lacey
court overruled this precedent in favor of the majority rule, see Lacey, 693 F.3d at 927–28.
The court explained that the more strict approach
creates a Hobson’s choice [for plaintiffs,] . . . a patently
coercive predicament between amending the
complaint—thereby forgoing the chance to appeal the
dismissal of some claims—and appealing the dismissal of
20100899‐CA 5
the claims in the original complaint—thereby forgoing the
chance to add or replead claims that the plaintiff would
otherwise be allowed to add.
Id. at 927 (omission in original) (citation and internal quotation marks omitted).
Furthermore, counsel is faced with a choice between “failing to preserve issues for
appeal and risking sanctions by realleging dismissed claims”; defendants are faced with
the prospect of “return[ing] to court to answer the same claims again”; and courts are
forced to “wast[e] resources in parsing old claims and reiterating . . . prior rulings.” Id.
at 927–28.
¶11 We agree that “[a] rule that a party waives all objections to the court’s dismissal
if the party elects to amend is too mechanical and seems to be a rigid application of the
concept that [an amended pleading] completely replaces the pleading it amends,” and
that it “is not logical to deny a party the right to appeal simply because the party
decides to abide by the court’s order and amend the pleading rather than allowing an
adverse judgment to be entered and taking an immediate appeal.” 6 Charles Alan
Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice & Procedure § 1476 (3d ed.
2010). Thus, because the trial court’s dismissal of Banyan’s direct claims was on the
merits and it would have been futile for Banyan to reallege them in the amended
complaint, Banyan did not waive its right to challenge the dismissal by filing an
amended complaint or by failing to reallege the claims as direct claims in the amended
complaint.
II. The Closely‐Held Corporation Exception Is Applicable to This Case.
¶12 Banyan maintains that it was entitled to bring a direct action against Defendants
under the closely‐held corporation exception expounded in Aurora Credit Services, Inc. v.
Liberty West Development, Inc., 970 P.2d 1273 (Utah 1998). This exception permits a trial
court, under certain circumstances, to “allow a minority shareholder in a closely held
corporation to proceed directly against corporate officers.” Id. at 1280–81 (discussing the
parameters of the closely‐held corporation exception). Defendants raise two distinct
arguments in support of the trial court’s determination that the exception could not be
applied under the circumstances of this case. First, they assert that the closely‐held
corporation exception does not apply to LLCs. Second, they assert that even if the
exception does apply to LLCs, it does not apply inasmuch as Banyan has failed to allege
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that it suffered injury distinct from that suffered by Aspen Press. We address each
argument in turn.
A. The Closely‐Held Corporation Exception Applies Equally to LLCs and Corporations.
¶13 Banyan challenges the trial court’s determination that the closely‐held
corporation exception does not apply to LLCs. Banyan asserts that the similarities
between corporations and LLCs makes it illogical to limit the exception to corporations.
We agree.
¶14 In Angel Investors, LLC v. Garrity, 2009 UT 40, 216 P.3d 944, the Utah Supreme
Court held that rule 23A of the Utah Rules of Civil Procedure, which “speaks in terms
of derivative actions brought on behalf of corporations and unincorporated
associations, . . . governs derivative actions brought on behalf of limited liability
companies as well.” Id. ¶ 15 n.4; cf. Arndt v. First Interstate Bank of Utah, NA, 1999 UT 91,
¶ 24, 991 P.2d 584 (holding that “it is appropriate to apply corporate principles
concerning derivative actions to limited partnerships”). We see no reason to deny
members of LLCs the opportunity to invoke the closely‐held corporation exception,
where appropriate, while subjecting them to the same requirements as shareholders of
corporations under rule 23A. As the supreme court explained in Angel Investors, closely
held LLCs, like closely held corporations, are particularly “vulnerable to malfeasance.”
Angel Investors, 2009 UT 40, ¶ 21.
[I]n closely held corporations, it becomes easy for the
majority shareholders to identify themselves as the
corporation. These shareholders not only receive the
majority of the profits the corporation generates, but they
often serve on the board and make operating decisions for
the corporation. . . . Majority shareholders of closely held
corporations have increased control over the corporation
because they likely serve on the corporation’s board; their
dual roles can make malfeasance easier to conduct as well as
justify. Likewise, the nature of a closely held corporation,
where there is often a small number of shareholders and
many of those may have close ties to each other, lessens the
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likelihood that a minority shareholder will speak out against
corporate malfeasance.
Id. ¶¶ 21–23 (discussing closely‐held corporations in the context of determining whether
a minority member of an LLC could bring a derivative action on behalf of the LLC “as a
class of one” despite the other members’ lack of support for the action). Given that this
is essentially the same reasoning behind the closely‐held corporation exception, see
Aurora, 970 P.2d at 1280 (“We recognize that the rationale for requiring an action to
proceed derivatively is often absent in a closely held corporation, where it is unlikely
that there is a disinterested board because the majority shareholders are often the
corporation’s managers.”), the supreme court’s discussion in Angel Investors,
undertaken in the context of examining a derivative claim brought by a member of an
LLC, supports our conclusion that the closely‐held corporation exception applies to
LLCs. Thus, we determine that the trial court erred by dismissing Banyan’s direct
claims solely on the basis of its conclusion that the closely‐held corporation exception
does not apply to LLCs.
B. Banyan Is Not Required to Demonstrate That It Suffered Injury Distinct from the
Injury Suffered by Aspen Press in Order to Maintain a Direct Action Under the Closely‐
Held Corporation Exception.
¶15 Next, Defendants assert that Banyan cannot maintain an action under the closely‐
held corporation exception because Banyan cannot demonstrate an injury to itself that is
distinct from any injury to Aspen Press. However, this requirement applies only to
traditional direct actions by shareholders, not actions that would otherwise be
derivative but for the applicability of the closely‐held corporation exception. To impose
this requirement here would be to effectively do away with the closely‐held corporation
exception because proof of an injury to a shareholder distinct from the injury to the
corporation gives rise to a direct cause of action, see id., and makes invocation of the
exception unnecessary. Cf. Torian v. Craig, 2012 UT 63, ¶¶ 26 n.13, 27 & n.15 (explaining
that where a plaintiff alleged an injury to himself that was distinct from the injury
suffered by the corporation, he was entitled to sue the majority shareholders directly
without invoking the closely‐held corporation exception, which is applicable only to
derivative claims allowed to be pursued directly). The injury analysis applicable under
the closely‐held corporation exception requires not a determination that the injury to
the shareholder bringing the action is distinct from any injury to the corporation, but a
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determination that the injury suffered by the shareholder is distinct from that suffered
by other shareholders. See Arndt, 1999 UT 91, ¶¶ 21–22 (distinguishing between injuries
that are unique to a shareholder and injuries that affect shareholders uniformly).
¶16 When a shareholder can “show . . . an injury to him‐ or herself that is distinct
from that suffered by the corporation,” the shareholder may bring a traditional direct
action to recover for that injury. Aurora, 970 P.2d at 1280. On the other hand, “[a]ctions
alleging mismanagement, breach of fiduciary duties, and appropriation or waste of
corporate opportunities and assets generally belong to the corporation, and therefore, a
shareholder must bring such actions on its behalf.” Id. Shareholders cannot generally
recover directly for injuries resulting from such wrongdoing on the part of corporate
officers, and their only remedy is to sue derivatively on behalf of the corporation. See id.
The closely‐held corporation exception applies where a minority shareholder suffers
uniquely as a result of majority shareholders engaging in the type of wrongdoing that
would ordinarily give rise only to a derivative claim. See id. at 1280–81. In such
circumstances, a trial court may, in its discretion, allow the shareholder
to proceed directly with classically derivative claims if the
court finds that to do so will not “(i) unfairly expose the
corporation or the defendants to a multiplicity of actions, (ii)
materially prejudice the interests of creditors of the
corporation, or (iii) interfere with a fair distribution of the
recovery among all interested persons.”
GLFP, Ltd. v. CL Mgmt, Ltd., 2007 UT App 131, ¶ 22, 163 P.3d 636 (quoting American
Law Institute, Principles of Corporate Governance: Analysis & Recommendations § 7.01(d)
(1994)); see also Torian, 2012 UT 63, ¶ 27 n.15; Aurora, 970 P.2d at 1280.
¶17 In determining whether a shareholder’s injury is such that he may proceed
directly with a “classically derivative claim[],” see GLFP, 2007 UT App 131, ¶ 22, the
supreme court’s analysis in Arndt v. First Interstate Bank of Utah, NA, 1999 UT 91, 991
P.2d 584, is instructive. In Arndt, individuals in a class action suit against the general
partners of their respective partnerships attempted to bring derivative claims directly
against the general partner under the closely‐held corporation exception. See id. ¶¶ 5, 7,
16. The Arndt court determined that the claimants’ injuries stemmed from their “non‐
particularized interests in their respective partnerships, which interests ha[d] been
20100899‐CA 9
affected uniformly by the fraudulent activity of the general partner,” in contrast to the
injury “suffered uniquely” by the plaintiff in Aurora, which was “not necessarily . . .
common to all . . . shareholders.” See id. ¶¶ 21–22 (emphasis added). As a result, the
court determined that the closely‐held corporation exception did not apply in that
particular case. See id.
¶18 Here, Banyan alleges that Defendants’ mismanagement of Aspen Press caused
unique injury to Banyan as a minority member, not that it caused an injury common to
all members. Thus, the trial court could permit Banyan to bring its derivative claims
against Defendants directly.
¶19 Nevertheless, Defendants assert that it would have been within the trial court’s
“‘broad discretion’ to refuse to allow [Banyan] to proceed directly” and urge us to
affirm the trial court’s ruling on that basis. See generally GLFP, 2007 UT App 131, ¶ 22.
However, it is clear from the transcript of the hearing on the motion to dismiss that the
only basis for the trial court’s dismissal was its mistaken belief that the closely‐held
corporation exception did not apply to LLCs. In fact, the trial court’s discussion of the
issue strongly suggests that it would not have granted the motion to dismiss if not for
its determination that the closely‐held corporation exception could not apply. The court
explained,
I can see that this is a perfect fit [for the closely‐held
corporation exception]. If you were going to have the
exception and you were going to apply it to a limited
liability company, this is the case where you would apply it
but I’m just not . . . going to be the one to expand it.
Because we determine that the closely‐held corporation exception is applicable to LLCs
and we agree with the trial court that this case “is a perfect fit” for the exception, we
determine that Banyan could bring its derivative claims directly under the closely‐held
corporation exception.
20100899‐CA 10
CONCLUSION
¶20 We determine that Banyan did not waive its right to appeal the dismissal of its
direct claims by complying with the trial court’s directive that it amend its complaint.
Furthermore, we determine that the closely‐held corporation exception is applicable to
LLCs and, in accordance with the trial court’s determination, that the injuries alleged by
Banyan are such that the exception applies in this case. Thus, we reverse the trial court’s
dismissal of Banyan’s direct claims and remand to allow Banyan to proceed on those
claims.
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James Z. Davis, Judge
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¶21 I CONCUR:
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Gregory K. Orme, Judge
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¶22 I CONCUR, EXCEPT THAT AS TO SECTION I, I CONCUR ONLY IN THE
RESULT:
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J. Frederic Voros Jr., Judge
20100899‐CA 11