LeVanger v. HIGHLAND ESTATES PROPERTIES OWNERS ASSOCIATION

2003 UT App 377, 80 P.3d 569, 486 Utah Adv. Rep. 20, 2003 Utah App. LEXIS 108, 2003 WL 22508914

• Court: Court of Appeals of Utah
• Decided: November 6, 2003
• Docket: 20020090-CA
• Status: Published

Opinions

OPINION

DAVIS, Judge:

¶ 1 Highland Estates Properties Owners Association, Inc. (Highland Estates) appeals a trial court order granting Jean and Rebecca LeVanger (the LeVangers) attorney fees and costs. We reverse and remand.

BACKGROUND

¶ 2 The LeVangers are homeowners and members of Highland Estates. On January 21, 1997, the LeVangers filed a derivative action under rule 23.1 of the Utah Rules of Civil Procedure against Highland Estates and members of its Board of Trustees. The LeVangers’ verified complaint alleged that the Board of Trustees had breached its fiduciary duty to Highland Estates and the members of Highland Estates by improperly amending Highland Estates’s covenants, conditions, and restrictions (CC & Rs). The LeVangers’ action sought damages, attorney fees, and rescission of the improper amendments to Highland Estates’s CC & Rs.

¶ 3 Prior to the scheduled trial date, Highland Estates filed a motion for summary judgment on several grounds. The trial court held a hearing on this motion and made its ruling from the bench. On May 28, 1998, the trial court entered a written order, memorializing this ruling. The court granted the motion on the issue of the voting and approval process used in amending Highland Estates’s CC & Rs, concluding that the actions taken by the Board of Trustees in amending the CC & Rs were “proper” and that the mail-in ballot voting procedure “substantially complied with [Highland Estates’s] Bylaws and [CC & Rs] in place.” The trial court denied the motion on the other grounds, including the LeVangers’ lack of standing under rule 23.1.¹ After making its ruling from the bench at the summary judgment hearing, the trial court and the parties discussed the LeVangers’ intention to seek certification of the trial court’s decision as final and appealable under rule 54(b) of the Utah Rules of Civil Procedure.²

¶ 4 On March 3, 1999, the trial court entered an order and rule 54(b) certification. Although most of the order focused on a motion to reconsider filed by the LeVangers, it also contained the rule 54(b) certification, which stated that the trial court’s May 28, 1998 order was certified as final and appeal-able under rule 54(b).

¶ 5 Pursuant to the trial court’s rule 54(b) certification, the LeVangers filed a notice of appeal. This court considered the LeVan-gers’ appeal and issued a written opinion on April 13, 2000. See Levanger v. Vincent, 2000 UT App 103, 3 P.3d 187 (LeVanger I). In LeVanger I, we held that the actions taken by the Board of Trustees in amending Highland Estates’s CC & Rs, including the use of mail-in ballots, were improper. See id. at ¶¶ 12-19. Accordingly, we reversed the trial court’s grant of Highland Estates’s motion for summary judgment on the issue of the voting and approval process used in amending Highland Estates’s CC & Rs. See id. at ¶ 23.

¶ 6 Based upon this court’s decision in LeVanger I, the LeVangers filed a motion for summary judgment on remand. Among other things, this motion sought an award of attorney fees and costs incurred by the Le-Vangers in bringing the derivative action. Highland Estates then filed a motion for an evidentiary hearing on several issues, including: (1) whether the LeVangers had standing under rule 23.1; (2) whether the LeVangers’ derivative action had conferred a substantial benefit upon Highland Estates; and (3) whether the LeVangers’ attorney fees were reasonable.³ The trial court conducted a hearing on both motions on June 26, 2001. After this hearing, a trial was scheduled for September 19, 2001, to address the unresolved issues in the case. At trial, both parties presented evidence to the trial court and, at the conclusion of trial, were instructed by the trial court to submit written closing arguments.

¶ 7 In a written ruling dated November 27, 2001, and an order entered on December 10, 2001, the trial court ruled on the unresolved issues in the case. The trial court determined that the LeVangers had standing as derivative plaintiffs under rule 23.1 because: (1) the issue of the LeVangers’ standing “was effectively, if not expressly, decided by” an earlier trial court order which denied Highland Estates’s motion for summary judgment on that issue; (2) Highland Estates did not raise and the LeVanger I court did not address the issue in LeVanger I, and when the LeVanger I court reached the merits of the appeal, its “acceptance of [the LeVangers’] standing to bring the action [was] implicit in” its decision; and (3) Highland Estates did not “raise the issue at the Court of Appeals, or ... file an appropriate motion on remand, both [of which] support a conclusion that [Highland Estates] did, in fact, waive the standing issue.” The trial court also determined that the LeVangers’ derivative action conferred a substantial benefit upon Highland Estates and, therefore, that the LeVan-gers were entitled to $41,327.15 in attorney fees and costs to be paid by Highland Estates. Highland Estates appeals.

ISSUES AND STANDARDS OF REVIEW

¶ 8 First, Highland Estates argues that the trial court erred in concluding that the LeVangers had standing as derivative plaintiffs under rule 23.1 of the Utah Rules of Civil Procedure.

[T]he question of whether a given individual or association has standing to request a particular relief is primarily a question of law, although there may be factual findings that bear on the issue. We will review such factual determinations made by a trial court with deference. State v. Pena, 869 P.2d 932, 935-36 (Utah 1994). Because of the important policy considerations involved in granting or denying standing, we will closely review trial court determinations of whether a given set of facts fits the legal requirements for standing, granting minimal discretion to the trial court. Id. at 938, 939.

Kearns-Tribune Corp. v. Wilkinson, 946 P.2d 372, 373-74 (Utah 1997).

¶ 9 Second, Highland Estates argues that the trial court erred in concluding that the LeVangers’ derivative action conferred a substantial benefit on similarly situated members of Highland Estates. The trial court’s conclusion on this issue was the basis for its award of attorney fees and costs to the LeVangers. The determination of whether a substantial benefit is conferred in the context of a derivative action is a mixed question of law and fact, which requires a trial court to determine “whether a given set of facts comes within the reach of a given rule of law.” State v. Pena, 869 P.2d 932, 936 (Utah 1994). “Although we review legal questions for correctness, we may still grant a trial court discretion in its application of the law to a given fact situation.” Jeffs v. Stubbs, 970 P.2d 1234, 1244 (Utah 1998).

ANALYSIS

I. Standing

¶ 10 Highland Estates argues that the trial court erred in concluding that the LeVangers had standing as derivative plaintiffs under rule 23.1 of the Utah Rules of Civil Procedure. Rule 23.1 provides, in relevant part, that a “derivative action may not be maintained if it appeal's that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association.” Utah R. Civ. P. 23.1. The trial court made several rulings in support of its determination that the LeVangers had standing under rule 23.1.

¶ 11 First, the trial court determined that the issue of the LeVangers’ standing under rule 23.1 “was effectively, if not expressly, decided by” an earlier trial court order which denied Highland Estates’s motion for summary judgment on this issue. In that order, the trial court ruled that “[biased upon the record before the [c]ourt, there are insufficient facts and insufficient grounds to, as a matter of law, determine that plaintiffs are inappropriate parties to bring this action.”

¶ 12 Summary judgment is appropriate only when “there is no genuine issue as to any material fact and [when] the moving party is entitled to judgment as a matter of law.” Utah R. Civ. P. 56(c). This standard is set out, in identical form, in rule 56(c) of both the Utah Rules of Civil Procedure and Federal Rules of Civil Procedure. See Fed. R.Civ.P. 56(c); Utah R. Civ. P. 56(c). Accordingly, “we freely refer to authorities which have interpreted the federal rule.” Gold Standard, Inc. v. American Barrick Res. Corp., 805 P.2d 164, 168 (Utah 1990); see Tucker v. State Farm Mut. Auto. Ins. Co., 2002 UT 54,¶ 7 n. 2, 53 P.3d 947 (“Interpretations of the Federal Rules of Civil Procedure are persuasive where the Utah Rules of Civil Procedure are ‘substantially similar’ to the federal rules.” (citations omitted)).

¶ 13 The denial of a motion for summary judgment on an issue is not a final decision on the merits of that issue. See Switzerland Cheese Ass’n v. E. Horne’s Mkt., Inc., 385 U.S. 23, 25, 87 S.Ct. 193, 195, 17 L.Ed.2d 23 (1966) (“[T]he denial of a motion for a summary judgment because of unresolved issues of fact does not settle or even tentatively decide anything about the merits of the claim. It is strictly a pretrial order that decides only one thing — that the case should go to trial.”); 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2712 (3d ed. 1998 & Supp.2003) (“[A] denial of summary judgment is not a decision on the merits; it simply is a decision that there is a material factual issue to be tried.”). Therefore, we conclude that the trial court erred in determining that the order denying Highland Estates’s motion for summary judgment was a decision on the merits of the issue of the LeVangers’ standing under rule 23.1.

¶ 14 Second, the trial court determined that Highland Estates should have raised the issue of the LeVangers’ standing under rule 23.1 before this court in LeVanger I. The trial court further determined that because our decision in LeVanger I did not address the LeVangers’ standing, and because we reached the merits of the appeal, our “acceptance of [the LeVangers’] standing to bring the action is implicit in” our decision in LeVanger I. We disagree. The prior trial judge’s March 3, 1999 “Order and Rule 54(b) Certification” was not a model of clarity in designating the claims certified to this court under rule 54(b) of the Utah Rules of Civil Procedure for purposes of LeVanger I. However, after reviewing this rule 54(b) certification and the record, we conclude that the trial court and the parties certified only the issue of the voting and approval process used in amending Highland Estates’s CC & Rs.⁴ Because we conclude that the trial court’s denial of Highland Estates’s motion for summary judgment on the issue of the LeVan-gers’ standing under rule 23.1 was not part of the rule 54(b) certification, Highland Estates was not required to address that issue in LeVanger I. Therefore, we conclude that the trial court erred when it determined that Highland Estates was required to raise the issue of the LeVangers’ standing under rule 23.1 before this court in LeVanger I. It follows that the trial court also erred when it determined that this court’s decision in Le-Vanger I implicitly granted the LeVangers standing under rule 23.1.

¶ 15 Third, although the trial court stated that it “believe[d]” its reasoning up to this point was “dispositive of the standing issue,” it went on to determine that Highland Estates’s “failure to raise the issue at the Court of Appeals, or to file an appropriate motion on remand, both support a conclusion that [Highland Estates] did, in fact, waive the standing issue.” Again, we disagree. As we noted earlier, Highland Estates was not required to address the issue of the LeVan-gers’ standing in LeVanger I. Further, the record shows that on remand after LeVanger I, Highland Estates filed both a motion for an evidentiary hearing and a motion for directed verdict based on several grounds, including the issue of the LeVangers’ standing under rule 23.1. Finally, there is nothing in the record that suggests Highland Estates ever waived the issue of standing. Accordingly, we conclude that the trial court erred in determining that Highland Estates waived the issue of the LeVangers’ standing under rule 23.1.

¶ 16 For the foregoing reasons, we hold that the trial court erred in concluding that the LeVangers had standing as derivative plaintiffs under rule 23.1 and remand the case with directions that the trial court conduct further proceedings on this issue.⁵ To assist the trial court and the parties on remand, we provide the following guidance under rule 23.1. See Williamson v. Williamson, 1999 UT App 219,¶ 12, 983 P.2d 1103 (providing guidance to trial court on remand).

¶ 17 Although rule 23.1 requires that the plaintiff “fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association,” Utah R. Civ. P. 23.1, it does not address the burden of proof. Utah cases have not addressed this specific issue under rule 23.1. However, because rule 23.1 of both the Utah Rules of Civil Procedure and Federal Rules of Civil Procedure are substantively identical, see Utah R. Civ. P. 23.1 Compiler’s Notes (“This rule is identical in substance to Rule 23.1, [Federal Rules of Civil Procedure].”), we again “freely refer to authorities which have interpreted the federal rule.” Gold Standard, Inc. v. American Barrick Res. Corp., 805 P.2d 164, 168 (Utah 1990); see Barton v. Utah Transit Auth., 872 P.2d 1036, 1039 n. 5 (Utah 1994) (“This court recognizes the persuasiveness of federal interpretations when the state and federal rules are similar and few Utah cases deal with the rule in question.”).

¶ 18 The Court of Appeals for the Fifth Circuit addressed the burden of proof issue under rule 23.1 of the Federal Rules of Civil Procedure in Smallwood v. Pearl Brewing Co., 489 F.2d 579 (5th Cir.1974). After quoting the relevant text of this rule, the Small-wood court stated:

Although the district court is thus empowered to dismiss a derivative action should it appear that the plaintiff does not adequately represent the shareholders in enforcing the rights of the corporation, a finding in the alternative is not required before a derivative action may go forward. The burden is on the defendants to obtain a finding of inadequate representation....

Id. at 592-93 n. 15 (citation omitted). Other federal courts have consistently followed the proposition set forth in Smallwood that the burden is on the defendant to show that the plaintiff is an inadequate representative under rule 23.1 of the Federal Rules of Civil Procedure, and, therefore, does not have standing. See Lewis v. Curtis, 671 F.2d 779, 788 (3d Cir.1982) (“The burden is on the defendant to demonstrate that the representation will be inadequate.” (citing Smallwood, 489 F.2d at 592 n. 15)); Abeloff v. Barth, 119 F.R.D. 332, 335 (D.Mass.1988) (noting that the requirement of a verified complaint under rule 23.1 of the Federal Rules of Civil Procedure does not require plaintiffs to “allege or demonstrate” that they are adequate representatives; rather, the burden is on defendants to prove that plaintiffs are inadequate representatives); Guenther v. Pacific Telecom, Inc., 123 F.R.D. 341, 344 (D.Or.1987) (“The burden is on the defendants to show that [plaintiff] is an inadequate representative.” (citing Smallwood, 489 F.2d at 592 n. 15)).

¶ 19 We believe that where, as here, the plaintiffs have filed a verified complaint containing the proper allegations as required by rule 23.1 of the Utah Rules of Civil Procedure, the analysis under the federal rule is appropriate, and herewith adopt the same.

II. Substantial Benefit

¶ 20 Highland Estates argues that the trial court erred in concluding that the LeVangers’ derivative action conferred a substantial benefit on similarly situated members of Highland Estates. The trial court’s conclusion on this issue was the basis for its award of attorney fees and costs to the LeVangers. “The general rule in Utah ... is that attorney fees cannot be recovered by a prevailing party unless a statute or contract authorizes such an award.” Stewart v. Utah Pub. Serv. Comm’n, 885 P.2d 759, 782 (Utah 1994). “However, in the absence of a statutory or contractual authorization, a court has inherent equitable power to award reasonable attorney fees when it deems it appropriate in the interest of justice and equity.” Id. One of the recognized situations in which a court may award attorney fees under this equitable power is “when a plaintiffs litigation confers a substantial benefit on the members of an ascertainable class.” Id. at 782-83 n. 18 (quotations and citations omitted). “[T]he substantial benefit exception ... permits the award of [attorney] fees when the litigant, proceeding in a representative capacity, obtains a decision resulting in the conferral of a substantial benefit of a pecuniary or nonpecuniary nature” upon the members of the ascertainable class or group. Id. (quotations and citations omitted).

¶21 The substantial benefit doctrine is well recognized in Utah and we are persuaded that it is appropriate in the context of a derivative action under rule 23.1 of the Utah Rules of Civil Procedure. We look again to federal court decisions interpreting the substantial benefit doctrine in the context of derivative actions brought under rule 23.1 of the Federal Rules of Civil Procedure. See Tucker v. State Farm Mut. Auto. Ins. Co., 2002 UT 54,¶ 7 n. 2, 53 P.3d 947 (“Interpretations of the Federal Rules of Civil Procedure are persuasive where the Utah Rules of Civil Procedure are ‘substantially similar’ to the federal rules.” (citations omitted)); Barton v. Utah Transit Auth., 872 P.2d 1036, 1039 n. 5 (Utah 1994) (“This court recognizes the persuasiveness of federal interpretations when the state and federal rules are similar and few Utah eases deal with the rule in question.”).

¶ 22 Federal courts have applied the substantial benefit doctrine as a way of awarding attorney fees and costs to plaintiffs in derivative suits brought under rule 23.1 of the Federal Rules of Civil Procedure. See Zucker v. Westinghouse Elec. Corp., 265 F.3d 171, 175-76 (3d Cir.2001); Kaplan v. Rand, 192 F.3d 60, 69 (2d Cir.1999).

¶ 23 Federal courts have also recognized that an award of attorney fees and costs to a derivative plaintiff is justified “where the derivative action results in a substantial non-monetary benefit to a corporation.” Kaplan, 192 F.3d at 69; see Zucker, 265 F.3d at 176 (quoting same language from Kaplan, 192 F.3d at 69). In a context similar to a derivative action, federal courts have held that the promotion and vindication of shareholders’ voting rights is a substantial benefit to the corporation. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 396-97, 90 S.Ct. 616, 627-28, 24 L.Ed.2d 593 (1970) (holding, in suit brought by shareholders against corporation under federal securities laws, that plaintiffs conferred substantial benefit upon corporation by vindicating statutory policy stressing “the importance of fair and informed corporate suffrage”); Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores, 54 F.3d 69, 71-72 (holding, in suit brought by shareholders against corporation under federal securities laws, “that the promotion of corporate suffrage regarding a significant policy issue confers a substantial benefit regardless of the percentage of votes cast for or against the proposal at issue”). However, a

substantial benefit must be something more than'technical in its consequence and be one that accomplishes a result which corrects or prevents an abuse which would be prejudicial to the rights and interests of the corporation or affect the enjoyment or protection of an essential right to the stockholder’s interest.

Mills, 396 U.S. at 396, 90 S.Ct. at 627 (quotations and citation omitted).

¶ 24 We agree with the holdings of these cases and conclude that a non-monetary benefit, including the promotion and vindication of shareholders’ voting rights, can be a substantial benefit in the context of a derivative action brought under rule 23.1 of the Utah Rules of Civil Procedure. We also agree with the trial court’s observation that it would have been inappropriate to attempt to offset the non-monetary benefit conferred upon Highland Estates against the LeVan-gers’ attorney fees. As noted by the trial court, if courts were to engage in this process, it would discourage derivative plaintiffs from bringing actions to confer a substantial, non-monetary benefit upon a corporation or association because of the possibility that they would be required to bear the burden of all or part of the attorney fees incurred in bringing the action.

¶ 25 In this case, the court determined that the non-monetary benefit conferred upon Highland Estates by the Le-Vangers’ derivative action was a substantial benefit, thereby justifying its award of attorney fees and costs to the LeVangers. Because non-monetary benefits may satisfy the benefit requirement under the substantial benefit doctrine, see Zucker, 265 F.3d at 176; Kaplan, 192 F.3d at 69; Stewart v. Utah Pub. Serv. Comm’n, 885 P.2d 759, 782 (Utah 1994), the only remaining issue for us to consider is whether the benefit conferred was substantial. In LeVanger I, this court concluded that Highland Estates and its Board of Trustees were required to use the proper voting procedures to amend its CC & Rs, and that requiring them to do so “protected] the interests of the members of [Highland Estates].” Levanger v. Vincent, 2000 UT App 103,¶ 23, 3 P.3d 187. This result of the LeVangers’ derivative action conferred a benefit upon Highland Estates and its members that is “more than technical in its consequence and ... that accomplishes a result which corrects or prevents an abuse which would be prejudicial to the rights and interests of the corporation or affect the enjoyment or protection of an essential right to the stockholder’s interest.” Mills, 396 U.S. at 396, 90 S.Ct. at 627 (quotations and citation omitted). This benefit conferred upon Highland Estates by the Le-Vangers’ derivative action is also consistent with the federal cases holding, in a similar context, that the promotion and vindication of shareholders’ voting rights is a substantial benefit to the corporation. See id., 396 U.S. at 396-97, 90 S.Ct. at 627-28; Amalgamated Clothing, 54 F.3d at 71-72. Therefore, we conclude that the trial court properly determined that the LeVangers’ derivative action conferred a substantial benefit upon Highland Estates.

CONCLUSION

¶ 26 We reverse the trial court’s determination that the LeVangers had standing as derivative plaintiffs under rule 23.1 of the Utah Rules of Civil Procedure and remand for further proceedings on that issue, consistent with this opinion. If the LeVangers have standing under rule 23.1, the trial court’s determination that the LeVangers’ derivative action conferred a substantial benefit upon Highland Estates is sustainable.

¶ 27 I CONCUR: RUSSELL W. BENCH, Judge.

1 . On the issue of the LeVangers’ standing under rule 23.1 of the Utah Rules of Civil Procedure, the trial court ruled: "Based upon the record before the [c]ourt, there are insufficient facts and insufficient grounds to, as a matter of law, determine that the plaintiffs are inappropriate parties to bring this action."

2 . The discussion focused on the trial court’s decision on the issue of the voting and approval process used in amending Highland Estates's CC & Rs.

3 . Highland Estates is not arguing the reasonableness of the LeVangers' attorney fees as part of this appeal.

4 . The record reveals that during the January 9, 1998 summary judgment hearing, the trial court and the parties discussed the LeVangers’ intention to file a motion to certify the trial court’s May 28, 1998 order as final and appealable under rule 54(b) of the Utah Rules of Civil Procedure. The parties and the trial court specifically discussed certifying the trial court’s grant of Highland Estates’s motion for summary judgment on the issue of the voting and approval process used in amending Highland Estates’s CC & Rs; however, they did not discuss certifying the trial court's denial of Highland Eslates's motion for summary judgment on the issue of the LeVangers' standing under rule 23.1.

5 . In our colleague's dissent, he first equates a trial judge’s inability to resolve an issue on summary judgment as a resolution of that issue. We believe this is inappropriate. See Switzerland Cheese Ass’n v. E. Horne’s Mkt., Inc., 385 U.S. 23, 25, 87 S.Ct. 193, 195, 17 L.Ed.2d 23 (1966) ("[T]he denial of a motion for a summary judgment because of unresolved issues of fact does not settle or even tentatively decide anything about the merits of the claim. It is strictly a pretrial order that decides only one thing — that the case should go to trial.”).

He then concludes that when the legal standards of rule 23.1 are applied to the "undisputed evidence” in this case, the LeVangers do not have standing under rule 23.1. We believe this analysis is inappropriate since the trial court's ruling was grounded in law and procedure, not fact. Although evidence on both sides of the issue of standing was before the trial court, its ruling not only made no findings thereon, but also made no reference thereto. Consequently, we believe that our colleague’s desire to consider and weigh the evidence presented at trial on the standing issue is inappropriate. See Bailey v. Boyles, 2002 UT 58,¶ 20, 52 P3d 1158 ("The court of appeals is limited to the findings of fact made by the trial court and may not find new facts or reweigh the evidence in light of [a] new legal theory or alternate ground.”); American Fork City v. Singleton, 2002 UT App 331,¶ 5, 57 P.3d 1124 (stating that "[tjrial courts are given primary responsibility for making determinations of fact," and that "[i]t is inappropriate for an appellate court ... to ... weigh[ ] evidence and mak[e] its own findings of fact” (second, third, and sixth alterations in original) (quotations and citations omitted)).