June 7, 2013, Utah Supreme Court Case Summaries

Utah Supreme Court Case Summaries

June 7, 2013

Hi-Country Property Rights Group v. Emmer, 2013 UT 33, No. 20120202 (June 7, 2013)

ISSUE: The standard of “Independence” as applied to a Utah Code Section 16-6a-612(4) special committee when evaluating a derivative suit.

This is an appeal from the dismissal of a derivative suit against the directors of a homeowners association. The derivative plaintiffs are disgruntled property owners who allege that the directors favored their own properties in allocating limited road construction and maintenance funds.

Instead of defending on the merits, the directors sought to avail themselves of the procedure set forth in Utah Code section 16-6a-612(4)—a provision allowing the board to appoint an independent committee to evaluate whether maintenance of a derivative suit is in the best interest of the nonprofit corporation. The committee appointed by the directors consisted of two current members and one former member of the board. All owned property allegedly receiving preferential treatment. Following an investigation, the committee issued a detailed report. Based on this report, the board sought to have the suit dismissed under section 612(4)(a). The district court dismissed the suit and the plaintiffs appealed, asserting that the district court erred in concluding that the members of the committee were “independent” under section 612(4).

We agree and now reverse. We find error in the standard of “independence” applied in the court below, and take this opportunity to clarify the standard that governs under section 612(4). And under that standard, we conclude that unresolved factual is-sues relating to the independence of the committee members make it impossible for us to make this mixed-question determination in the first instance on appeal. We accordingly remand for further proceedings not inconsistent with this opinion.

At ¶¶ 1-3.

In this case, . . .  the district court . . . commit[ed] two legal errors. First, the court misapprehended the meaning of “independence” under section 612(4)(b)—and thus applied the wrong legal standard in assessing the committee’s independence. The court also committed a second error by invoking an improper procedural mechanism (summary judgment) in ruling on the corporation’s motion to dismiss—a mechanism we find incompatible with section 612(4)(a). And because the court left unresolved a number of factual issues relevant to the independence inquiry in applying this summary judgment standard, we cannot make that assessment in the first instance on appeal. We accordingly remand so the district court can do so. Because we remand, we also reach another of the property owners’ arguments—and clarify that the special committee, not the board of directors, was required to independently recommend dismissal of the derivative suit.

At ¶ 14.

Although the Nonprofit Corporation Act does not define the term “independent,” see UTAH CODE § 16-6a-612(4)(b), we discern an operative standard from dictionary definitions of the term and from other textual and contextual cues within the statute: Special committees are independent only if there is a reasonable likelihood that they are able to “base[]” their decision regarding a derivative suit “upon” a “reasonable inquiry” designed to assess whether that suit is in “the best interest of the nonprofit corporation,” UTAH CODE § 16-6a-612(4)(a), and not on self-interest, pressure from an outside source, or some other motivation. And under this notion of “independence,” the plaintiff homeowners’ allegations at least call into question the independence of the special committee members—although unresolved factual issues stemming from the district court’s application of the summary judgment standard prevent us from making this independence assessment in the first instance on appeal.

At ¶ 17.

Dictionary definitions of “independent” share a core concept. The consistent thread in the dictionaries we have consulted is a lack of “influence, guidance, or control of another or others,” or a state of not being “determined or influenced by someone or something else.” AMERICAN HERITAGE DICTIONARY 892 (5th ed. 2011). Independence, in other words, conveys the idea of not being “subject to the control or influence of another,” or of not being “dependent or contingent on something else.” BLACK’S LAW DICTIONARY 838 (9th ed. 2009).

The key determinant of “independence” under these definitions is the absence of factors or interests that might influence or control a decision or outcome. Yet this dictionary conception leaves unanswered two crucial considerations: what amounts to an external or outside influence, and how much such influence is sufficient to compromise one’s independence. The former consideration obviously depends on the nature of the decision and the qualities expected of the decisionmaker. See id. at 838–39 (defining “independent advice” as “[c]ounsel that is impartial and not given to further the interests of the person giving it”). And the latter question is also open to context-driven debate, as the cited definitions themselves indicate.

At ¶¶ 20-21.

The Court reviews the language of the Nonprofit Corporation Act and determines that

the structure and context of the Nonprofit Corporation Act make clear what is otherwise missing from the dictionary definition of “independent”: The influences that may deprive a committee member of the independence required by statute are the self-interests and personal relationships that have a tendency to undermine the statutory focus on the best interest of the corporation.

At ¶ 28.

That leaves the question of how much outside influence is sufficient to compromise a committee member’s independence. A threshold answer to that question is also implicit in the language and structure of section (4)(c).

As noted above, that provision sets forth three considerations that are relevant to independence assessments, supra ¶¶ 24–25 (explaining how the presumption against surplusage makes the factors in (4)(c) relevant), but emphasizes that these factors are in-sufficient, standing alone, to “cause[] a director to be considered not independent.” In doing so, the provision indicates that independence does not require a complete absence of any self-interest or personal connection

At ¶¶ 29-30.

Thus, the Nonprofit Corporation Act does not require special committee members to be completely free from influence, guidance, or control in order to qualify as independent. Instead, we read the statute simply to identify the kinds of considerations that might undermine a committee member’s independence, and to leave for case-by-case evaluation the question whether the committee member is reasonably likely to be able to base her decision on the best interest of the nonprofit corporation, and not on some external consideration rooted in self-interest or motivated by a personal relationship.

At ¶ 32.

In assessing the special litigation committee’s independence, the district court applied a standard that diverged from the one set forth herein. It identified some external “self-interest” and “personal relationship” considerations—“board membership” and “being named as a director defendant” for Arlene Johnson and Anthony Sarra, and a “casual social relationship” and “business relationship with director defendants” for Kim Wilson. But it did not address whether or to what extent these considerations were likely to affect the committee members’ decision.

More significantly, the court ignored the property owners’ assertion that each of the committee members personally benefit-ed from the allocation decisions challenged in the underlying suit due to their ownership of property situated on roads that allegedly have received preferential treatment. Receipt of such a “personal benefit” could jeopardize the independence of a special committee member under the statute. See UTAH CODE § 16-6a-612(4)(c)(iii).

The district court accordingly erred. The statutory standard as clarified above is a fact-intensive one, not susceptible to the categorical analysis it was given below.

At ¶¶ 34-36.

The Proper Procedural Analysis

We likewise find error in the summary judgment mechanism employed in the disposition of the case. Summary judgment allows disposition before trial on issues on which there is no genuine issue of material fact. See UTAH R. CIV. P. 56(c). In cases where the evidence yields only one reasonable assessment of questions of fact, summary judgment avoids the cost and time of trial upon a determination that the moving party is entitled to judgment as a matter of law.

This mechanism is incompatible with the procedure for dismissal envisioned by section 612(4). The questions implicated on a statutory motion to dismiss by a special litigation committee do not lend themselves naturally to summary resolution. They are, as noted, inherently fact-intensive. And thus they typically would not be susceptible to disposition on the basis of a lack of any “genuine issue” of material fact. More often, the question of a special committee’s independence would implicate disputed issues of fact on which reasonable minds could differ.

That eventuality, under a summary judgment model, would require denial of the motion and deferral of the matter for trial. See UTAH R. CIV. P. 56. But such deferral is not tenable under the procedure envisioned by section 612(4). The statutory mechanism of dismissal is a basis for a threshold avoidance of discovery and trial on the merits. That mechanism cannot be folded into a trial on the merits without undermining its raison d‘etre.

Thus, although the statute contemplates a pretrial motion, that motion cannot properly be shoehorned into rule 56. It must instead be viewed as a sui generis statutory proceeding—one requiring resolution of disputed questions of fact of relevance to the statutory motion.

At ¶¶ 37-40.

Because we remand, we also briefly address another issue that may arise on remand. The property owners assert that where a nonprofit corporation elects to use a special committee in determining whether a derivative suit should be dismissed, the special committee, and not the tainted board, must determine whether the maintenance of the derivative suit is or is not in the best interest of the corporation. We agree. Utah Code section 16-6a-612(4)(a) clearly states that it is the special committee (and not the board) that must make this determination and recommendation—although the statute does not foreclose the possibility that the special committee might recommend such a course of action and the board might then simply implement it. Whether the committee actually did recommend dismissal in this case appears to be a disputed issue on the record before us. Thus, on remand, if the directors continue to press their independence challenge, and if the court ultimately determines that the committee was independent, the court must also determine that the committee—not the board—recommended dismissal of the suit in order for the court to accept its recommendation.

At ¶ 47.