Arndt, et al v. First Interstate Bank of Utah, et a
Annotate this Casepublication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
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Jerome Arndt, Anson Cone,
John Donohue, Merlyn E. Eckelberg,
Charles Felger, Kermit Fox, Robert Fulmer,
William Greenough, Victor Li-Peleaz,
John Richardson, Robert L. Rock,
Plaintiffs and Appellants,
v.
First Interstate Bank of Utah, N.A.,
and John Does 1 through 500,
Defendants and Appellees.
No. 980080
F I L E D
September 24, 1999
1999 UT 91
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Third District, Salt Lake County
The Honorable Frank G. Noel
Attorneys:
James E. Morton, Jacquelyn D. Carmichael,
Jeffrey Robinson, E. Jay Sheen, Salt Lake City, for plaintiffs
David J. Brown, Dana P. Veeder, Leslie C. McKnew, San
Francisco, Andrew Stone, Salt Lake City, for defendants
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DURHAM, Associate Chief Justice:
¶1
Jerome Arndt and the other plaintiffs below (collectively
"the plaintiffs") appeal an order and judgment granting the defendants'
(collectively "First Interstate Bank of Utah, N.A." or the "Bank") motion
for judgment on the pleadings. The trial court held that the plaintiffs'
claims were derivative in nature and that the plaintiffs could not pursue
such claims in their individual capacities. We affirm.
¶2
When reviewing a grant of a motion for judgment on the
pleadings, this court accepts the factual allegations in the complaint
as true; we then consider such allegations "and all reasonable inferences
drawn therefrom in a light most favorable to the plaintiff." Golding
v. Ashley Cent. Irr. Co., 793 P.2d 897, 898 (Utah 1990). "[W]e affirm
the grant of such motion only if, as a matter of law, the plaintiff could
not recover under the facts alleged." Id.
FACTS
¶3
Beginning in 1975, Spence Clark and Clark Financial Group
(collectively "Clark") began soliciting investments in multiple limited
partnerships in which Clark was the general partner. The private offering
memoranda and partnership agreements ("POMs") connected with these partnerships
indicated that each partnership was related to a specific real estate project
and that, upon the sale of the real property, the partnership involved
would immediately dissolve and liquidation would take place. The accounts
for all the partnerships were controlled by Clark and were maintained at
the Bank. However, Clark also maintained a "Pooled Income Fund" account
(the "Fund") with the Bank, through which Clark diverted funds from the
dissolved limited partnerships to subsidize less prosperous ventures.
¶4
Although some of the POMs discussed the Fund, they did
not fully disclose the nature and purpose of the Fund or that it would
be used to aggregate the various limited partnerships' sales proceeds.
Although many of the involved properties were sold, none of the plaintiffs
received their full distributions from the sales because Clark had diverted
the proceeds using the Fund.
¶5
The plaintiffs brought this action against the Bank,
claiming that it knowingly or negligently allowed Clark to divert partnership
proceeds to the Fund. The first amended complaint stated causes of action
against the Bank for negligence, breach of fiduciary duty, and breach of
covenant of good faith and fair dealing, and a cause of action for damages
to plaintiffs as third-party beneficiaries of the agreements between the
Bank and the general partner. The Bank moved to dismiss the complaint,
and although the trial court initially denied that motion, it later amended
its ruling and gave the plaintiffs "twenty days to amend their amended
complaint to plead a derivative claim in conformity with the Utah rules."
The plaintiffs filed a second amended complaint, maintaining that their
claims "are not derivative in nature, inasmuch as the limited partnerships
in question have been dissolved" and "[e]ach individual plaintiff has been
personally damaged as a result of the defendants' conduct."
¶6
The Bank subsequently filed a motion for judgment on
the pleadings, arguing that because the partnerships involved had not yet
been terminated, any cause of action for damages in connection with the
mismanagement of the partnerships belongs to the partnerships and not to
the limited partners individually. The district court agreed and dismissed
the plaintiffs' complaint with prejudice.
¶7
On appeal, plaintiffs assert two claims of error. First,
plaintiffs argue that this court's rationale in Aurora Credit Services,
Inc. v. Liberty West Development, Inc., 970 P.2d 1273 (Utah 1998),
provides for individual causes of action under the facts of this case.
Second, plaintiffs contend that because the partnerships here automatically
dissolved upon sale of the real estate assets, there remain no partnerships
on whose behalf the appellants may derivatively sue the wrongdoers. We
address these arguments in reverse order.
ANALYSIS
I. DISSOLUTION VERSUS TERMINATION OF LIMITED PARTNERSHIP
¶8
Plaintiffs argue that even if the causes of action set
forth in their petition are derivative in nature, they should be able to
pursue the claims in their individual capacities because the partnerships
involved were dissolved immediately upon sale of each partnership's real
estate, and therefore none of the partnerships continue to exist as entities
capable of bringing suit. We disagree.
¶9
Utah law provides that the parties to a partnership may,
through agreement, designate those events upon which dissolution or termination
shall occur. There is no dispute here that under the POMs, the dissolution
of each partnership was to occur immediately upon the sale of that partnership's
real estate, and that liquidation of the partnership would then follow.
The question is whether a dissolved partnership, prior to the completion
of liquidation, remains an entity capable of bringing suit. The partnership
agreements in this case apparently do not address this question, and we
look therefore to statutory law.
¶10
The Utah Revised Uniform Limited Partnership Act (the
"URULPA"), Utah Code Ann. §§ 48-2a-101 to -1107 (1998), sets
forth the provisions governing limited partnerships in Utah. In reviewing
the URULPA, we apply the traditional rules of statutory construction. "A
fundamental rule of statutory construction is that statutes are to be construed
according to their plain language." O'Keefe v. Utah State Retirement
Bd., 956 P.2d 279, 281 (Utah 1998). "Only if the language of a statute
is ambiguous do we resort to other modes of construction." Id. One
such mode is reading the statute "in harmony with other statutes under
the same and related chapters" and "rely[ing] on the plain language of
[those related] statutes [in which] no ambiguity exists." Bonham v.
Morgan, 788 P.2d 497, 500 (Utah 1989); see also Roberts v.
Erickson, 851 P.2d 643, 644 (Utah 1993); Provo City Corp. v. State,
795 P.2d 1120, 1123 (Utah 1990).
¶11
We begin with section 48-2a-801, which provides, in relevant
part, that "[a] limited partnership is dissolved and its affairs
shall be wound up upon the happening of the first to occur of the
following: . . . (2) upon the happening of events specified in writing
in the partnership agreement . . . ." Utah Code Ann. § 48-2a-801 (emphasis
added). The language of this statute--the verb tenses used, in particular--indicate
that dissolution of a partnership is an event distinct and separate from
its winding up, with the winding up process taking place subsequent to
dissolution.
¶12
The URULPA does not itself define "dissolution" or "winding
up." See id. §§ 48-2a-101 to -1107. The Uniform Partnership
Act (the "UPA"), however, provides some guidance. See id. §
48-2a-1105 (providing that, "[i]n any case not provided for in this chapter
the provisions of Title 48, Chapter 1, Uniform Partnership Act, govern");
see also id. § 48-1-3(3) (1998) ("This chapter shall
apply to limited partnerships except in so far as the statutes relating
to such partnerships are inconsistent herewith."). The UPA defines "dissolution"
as "the change in the relation of the partners caused by any partner ceasing
to be associated in the carrying on, as distinguished from the winding
up, of the business." Id. § 48-1-26. Section 48-1-27 provides
that "[o]n dissolution a partnership is not terminated, but continues
until the winding up of partnership affairs is completed." Id. §
48-1-27 (emphasis added).
¶13
Unfortunately, "winding up" is not defined in either
the URULPA or the UPA. See id. §§ 48-1-1 to 48-2a-1105.
However, we believe it is appropriate to examine related statutes--such
as the Revised Business Corporation Act (the "RBCA")--for further guidance.
See, e.g., Bonham, 788 P.2d at 500; Roberts, 851 P.2d
at 644; Provo City Corp., 795 P.2d at 1123. Section 16-10a-1405
of the RBCA, provides, in relevant part:
(1) A dissolved corporation continues its corporate
existence but may not carry on any business except that appropriate to
wind up and liquidate its business and affairs, including:
collecting its assets;
(b) disposing of its properties that will not be distributed
in kind to its shareholders;
. . .
(e) doing every other act necessary to wind up and liquidate
its business and affairs.
(2) Dissolution of a corporation does not:
. . .
(e) prevent commencement of a proceeding by or against
the corporation in its corporate name.
Utah Code Ann. § 16-10a-1405 (1995).
¶14
In this case, each of the partnerships dissolved upon
the sale of its respective real estate. However, as section 48-2a-801 contemplates,
the partnerships continued in existence after dissolution for the purpose
of winding up their business. See id. § 48-2a-801 (stating
that "[a] limited partnership is dissolved and its affairs shall
be wound up upon the happening of the first to occur of the following
. . ." (emphasis added)); see also id. § 48-1-27 ("On
dissolution a partnership is not terminated, but continues until the winding
up of partnership affairs is completed."). Cf. Cheves v. Williams,
No. 950404, slip op. at ¶¶ 27-29 (Utah, Sept. 10, 1999). Because
we see no reason why corporate principles related to "winding down" are
not appropriate in the limited partnership context, and because the RBCA
specifically provides that dissolution of a corporation does not "prevent
commencement of a proceeding by or against the corporation in its corporate
name," id. § 16-10a-1405(2)(e), we hold that, to the extent
necessary during the winding up process, a partnership retains the ability
to sue and be sued. See alsoGrossman v. Davis, 34 Cal. Rptr. 2d 355, 357 (Ct. App. 1994) ("The idea that winding up a legal partnership's
unfinished business may require the filing of new litigation is not a novelty.");
Baker v. Rushing, 409 S.E.2d 108, 113 (N.C. Ct. App. 1991) ("A partnership's
legal existence continues during the winding up of its affairs, and the
partnership and partners can sue and be sued for the enforcement of the
partnership's rights and obligations.").
¶15
Thus, we reject the plaintiffs' argument that they should
be able to pursue their claims individually against the Bank solely because
the partnerships involved were dissolved prior to commencement of this
suit.
II. DERIVATIVE VERSUS INDIVIDUAL CAUSES OF ACTION
¶16
Plaintiffs also argue that the rationale of our recent
decision in Aurora Credit Services, Inc. v. Liberty West Development,
Inc., 970 P.2d 1273 (Utah 1998), in which we recognized that shareholders
in a closely-held corporation may have individual causes of action against
other shareholders and/or corporate officers under certain circumstances,
applies to the limited partners under the facts of this case. The Bank,
however, contends that Aurora Credit is not applicable and that
the traditional rules concerning derivative actions in the corporate context
apply equally to limited partnerships.
¶17
Whether principles of corporate law distinguishing derivative
actions from individual actions apply to limited partnerships is a question
of first impression in Utah. If Aurora Credit is not determinative,
we must examine Utah statutory law and the case law from other jurisdictions
for guidance.
¶18
In Aurora Credit, a minority shareholder of LWD,
a closely-held corporation with four shareholders, brought both derivative
and direct claims against the corporation and its majority shareholder,
alleging negligent and intentional mismanagement of the corporation, breach
of fiduciary duties, and waste of corporate assets. Aurora Credit had acquired
its status as a minority shareholder after purchasing an assignment of
a judgment against one of the shareholders, James Hogle, Jr., as security
for which Hogle had pledged his shares of the LWD stock. Both prior to
the assignment and thereafter, LWD represented to Aurora Credit that it
owned and was trying to sell certain property located in Ogden, Utah. Aurora
Credit was never notified that the property was subsequently levied on
by a third party to satisfy a judgment against LWD for nonpayment on a
contract, or that the property was sold at a sheriff's sale to the same
third party and then almost immediately resold to XM International (a general
partnership owned jointly by LWD's majority shareholder and another party).
Still, it was not until approximately two years later that the majority
shareholder informed Aurora Credit that LWD no longer owned the property.
¶19
In holding that Aurora Credit could pursue its direct
claims against LWD and the majority shareholder, this court reiterated
that "[a]ctions alleging mismanagement, breach of fiduciary duties, and
appropriation or waste of corporate opportunities and assets generally
belong to the corporation," and that shareholders bringing such actions
must do so derivatively. Id. at 1280. In contrast, "in a direct
action, the plaintiff can prevail without showing an injury to the corporation--the
shareholder need show only an injury to him- or herself that is distinct
from that suffered by the corporation." Id.
¶20
We also noted, however, that "[t]here is a growing trend
to allow minority shareholders of a closely held corporation to proceed
directly against majority shareholders" because "'the concept of a corporate
injury that is distinct from any injury to the shareholders approaches
the fictional in the case of a firm with only a handful of shareholders.'"
Id. at 1280-81 (quoting Principles of Corporate Governance: Analysis
and Recommendations, American Law Institute, § 7.01(d) cmt. e).
However, we also held that such direct action may be appropriate only if
the deciding court determines that allowance of the direct action will
not
"(I) unfairly expose the corporation or 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."
Id. at 1280 (quoting Principles of Corporate Governance
at § 7.01(d) cmt. e).
¶21
In applying these principles in Aurora Credit,
we noted that the plaintiff there was not necessarily alleging an injury
common to all LWD shareholders. Rather, Aurora Credit's claims rested ultimately
on LWD's and the majority shareholder's misrepresentations to Aurora Credit
concerning the status of the property held by LWD and the majority shareholder's
apparent manipulation of the property's transfer so as to retain the value
of the property while extinguishing Aurora Credit's interest in it. The
injury alleged in Aurora Credit was suffered uniquely by Aurora
Credit and therefore was much more direct than is a typical derivative
claim. Cf. Hames v. Cravens, 966 S.W.2d 244, 248 (Ark. 1998)
(discussing direct claims of shareholders of closely held corporations
and noting that "exceptions" to derivative action requirements "are actually
independent actions to redress injuries suffered primarily by the shareholder
and secondarily, if at all, by the corporation"); Landstrom v. Shaver,
561 N.W.2d 1, 13 (S.D. 1997).
¶22
Applying the Aurora Credit analysis to the claims
in this action, we conclude that they lack the distinctive qualities necessary
to remove them from the category of derivative claims. The very fact that
plaintiffs are pursuing their claims in a class action suggests that the
injuries suffered stem only from the claimants' non-particularized interests
in their respective partnerships, which interests have been affected uniformly
by the fraudulent activity of the general partner, which in turn has led
to the decreased value of each of the partnerships and ultimately to the
decreased value of each partner's share. Clearly, then, it is each individual
partnership that has experienced the direct injury; the individual's losses
are indirect and contingent.
¶23
Furthermore, we cannot agree with plaintiffs that pursuit
of their claims individually will not (1) unfairly expose the Bank to a
multiplicity of actions, (2) materially prejudice the interests of other
potential partnership creditors, or (3) interfere with a fair distribution
of the recovery among all interested persons. See Aurora Credit,
970 P.2d at 1280.
¶24
Having concluded that Aurora Credit's analysis
does not resolve this case, we move to the question of whether it is appropriate
to apply corporate principles concerning derivative actions to limited
partnerships. We conclude that it is.
¶25
The URULPA itself recognizes the existence of derivative
causes of action in the limited partnership context. Section 48-2a-1001
of the URULPA specifically provides that "[a] limited partner may bring
an action in the right of a limited partnership. Utah Code Ann.
§ 48-2a-1001 (emphasis added); see also R.S. Ellsworth,
Inc. v. Amfac Fin. Corp., 652 P.2d 1114, 1116-17 (Haw. 1982) (discussing
history of limited partnership derivative action under Uniform Limited
Partnership Act). This language is almost identical to the language used
to identify derivative actions in the corporate context. See Utah
Code Ann. § 16-10a-740 (defining action as one "brought in the right
of a corporation"). It seems reasonable, then, to infer that the same principles
apply to define derivative actions in the limited partnership context as
in the corporate. See 7547 Corp. v. Parker & Parsley Dev.
Partners, 38 F.3d 211, 221 (5th Cir. 1994) (noting fact that Texas
has statute expressly allowing limited partners to sue derivatively on
behalf of the partnership--"thus making their status more equivalent to
that of a shareholder--leads us to believe that a Texas court would likely
be hesitant to allow a limited partner . . . to sue directly for wrongs
suffered in reality by the partnership").
¶26
Other jurisdictions have reached the same conclusion.
See, e.g., Golden Tee v. Venture Golf Sch., 969 S.W.2d 625,
629 (Ark. 1998) ("In ascertaining whether a cause of action [involving
a limited partnership] is derivative, it is appropriate to look to corporate
law for guidance."); Caley Inv. I v. Walters, 754 P.2d 793, 796
(Colo. Ct. App. 1988) (discussing pleading requirements for derivative
actions against corporations and holding that pleading requirements for
derivative actions against limited partnerships serve the same purpose);
Litman v. Prudential-Bache Properties, Inc., 611 A.2d 12, 15 (Del.
Ch. 1992) (stating that "determination of whether a fiduciary duty lawsuit
is derivative or direct in nature is substantially the same for corporate
cases as it is for limited partnership cases"); Northern Trust v. VIII
South Mich. Assoc., 657 N.E.2d 1095, 1101 (Ill. App. Ct. 1995) (discussing
conditions under which shareholder must proceed by means of derivative
suit and stating that "[l]imited partners are in the same position as shareholders");
Strain v. Seven Hills Associates, 429 N.Y.S.2d 424, 431 (App. Div.
1980) ("In determining whether a cause of action is derivative in nature
regarding limited partnership law, the case law relevant to corporation
law may be looked to for guidance."); Caplener v. United States Nat'l
Bank, 857 P.2d 830, 836 (Or. 1993) (stating that "key issue is not
whether the claim is by a corporation, a shareholder, or a partner, but
whether the claimed damages were derivative of, rather than distinct from,
a breach of the agreement with the borrowing corporation or partnership");
Mallia v. Painewebber, Inc., 889 F. Supp. 277, 282 (S.D. Tex. 1995).
Cf. Larson v. First Interstate Bank, 786 P.2d 1176, 1179-81
(Mont. 1990).
¶27
Plaintiffs argue, however, that, even if such a rule
is appropriate in most cases, this court should fashion an exception to
the rule when, as here, the partnerships involved automatically dissolved
upon the sale of the partnerships' assets. Plaintiffs rely particularly
on the cases of Whalen v. Carter, 954 F.2d 1087 (5th Cir. 1992),
and Gagan v. American Cablevision, Inc., 77 F.3d 951 (7th Cir. 1996),
to support their argument. However, we conclude that neither of those cases
is persuasive or applicable here.
¶28
In Whalen, the United States Court of Appeals
for the Fifth Circuit concluded that, under Louisiana law, limited partners
could bring a claim under the Racketeer Influenced and Corrupt Organizations
Act ("RICO"), 18 U.S.C. §§ 1961-68 (1988), directly against certain
other partners and their alleged co-conspirators, despite the fact that
"the defendants' racketeering activity was directed against the partnership,
. . . and that the plaintiffs' injuries derived from injuries to the partnership."
See 954 F.2d at 1093-94. The court noted that the general rule in
Louisiana is "that as long as a partnership exists and has not been dissolved
or liquidated, the partnership itself is the proper party to maintain an
action for damages to the partnership." Id. at 1093. However, the
court also noted that Louisiana has recognized several exceptions to that
rule, including an exception providing that "when the injury to the partnership
is caused by a partner, the disaffected partners can sue the partner
that caused the injury." Id. We conclude that adoption of such a
rule in Utah would virtually dissolve any distinction between derivative
and direct actions based on breach of fiduciary duty, mismanagement, etc.,
in the limited partnership context, despite the fact that these are the
very actions traditionally defined as actions that must be brought derivatively.
See Richardson v. Arizona Fuels Corp., 614 P.2d 636, 639
(Utah 1980). We also conclude that the blanket adoption of such a rule
would ignore the concerns justifying derivative actions that we addressed
in Aurora Credit--that direct suits could expose defendants to a
multiplicity of actions, that direct suits could materially prejudice the
interests of other potential partnership creditors, and that direct suits
could interfere with a fair distribution of the recovery among all interested
persons.
¶29
Gagan also involved a RICO claim. In deciding
that a limited partner had standing to bring such a claim against other
partners, the United States Court of Appeals for the Seventh Circuit concluded
(1) that "cases dealing with RICO claims brought by shareholders are inapposite";
(2) that the partnership had been dissolved at the time of the suit; and
(3) that Arizona law provided "no basis for Gagan to bring suit on behalf
of a dissolved limited partnership." Gagan 77 F.3d at 959. We need
not address the Seventh Circuit's conclusion that RICO claims brought by
shareholders are inapposite in determining whether a limited partner has
the right to bring a direct claim against other partners. We also need
not determine whether the Seventh Circuit correctly interpreted Arizona
law in concluding that Arizona law provided no basis for Gagan to bring
a derivative suit on behalf of the dissolved partnership. We have concluded
above that, under Utah law, a dissolved partnership retains the right to
sue and that rules concerning derivative versus direct actions remain applicable
to limited partnerships at least until the winding up process for the partnerships
is completed. Thus, unlike under Arizona law, as interpreted by the Seventh
Circuit, derivative claims remain viable in Utah even after the partnership
has been dissolved. Therefore, Gagan does not help the appellants
to establish their standing to pursue their claims directly against the
Bank here.
¶30
We conclude that the partnerships in question in this
lawsuit continued to exist for winding up purposes after the automatic
dissolution triggered by the sale of their assets. We also conclude that
the same principles used to define derivative actions for corporations
are applicable to limited partnerships. The plaintiffs were therefore required
to pursue the partnership claims in derivative proceedings.
¶31
Affirmed.
---
¶32
Chief Justice Howe, Justice Stewart, Justice Zimmerman,
and Justice Russon concur in Associate Chief Justice Durham's opinion.
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