Southam v. South Despain Ditch Co. , 768 Utah Adv. Rep. 5 ( 2014 )

This opinion is subject to revision before final
publication in the Pacific Reporter.
2014 UT 35IN THE
SUPREME COURT OF THE STATE OF UTAH
———————
PAUL SOUTHAM,
Plaintiff and Appellant,
v.
SOUTH DESPAIN DITCH COMPANY, a Utah
nonprofit mutual irrigation company,
Defendant and Appellee.
———————
No. 20120831
Filed August 29, 2014
———————
Third District, Salt Lake
The Honorable L.A. Dever
No. 080923857
———————
Attorneys:
Phillip E. Lowry, Salt Lake City, for plaintiff
Dale B. Kimsey, Sandy, Dean Smith, Midvale, for defendant
———————
JUSTICE LEE authored the opinion of the Court, in which
CHIEF JUSTICE DURRANT, ASSOCIATE CHIEF JUSTICE NEHRING,
JUSTICE DURHAM, and JUSTICE PARRISH joined.
———————
JUSTICE LEE, opinion of the Court:
¶1 This lawsuit was filed by a predecessor of Paul Southam
against South Despain Ditch Company. Southam acquired shares
in South Despain in contravention of corporate restrictions on
transferability of South Despain shares. When the company
sought to enforce those restrictions against Southam, he chal-
lenged their enforceability and asserted that their enforcement put
South Despain in breach of its obligations in contract, fiduciary
duty, and the Utah Nonprofit Corporation Act.
¶2 The district court granted summary judgment for South
Despain. We affirm. Because the restrictions on the transfer of
South Despain shares are enforceable, Southam acquired no rights
SOUTHAM V. SOUTH DESPAIN DITCH COMPANY
Opinion of the Court
as a shareholder. And for that reason his claims for breach of con-
tract, breach of fiduciary duty, and violation of the Utah Revised
Nonprofit Corporation Act also fail as a matter of law.
I
¶3 South Despain is a nonprofit mutual irrigation company
that manages and maintains the distribution of surplus runoff wa-
ter from Little Cottonwood Creek. It distributes that surplus water
to its shareholders in Sandy, Utah. South Despain’s bylaws in-
clude a series of restrictions on transfer of ownership of shares in
the company: (1) South Despain’s board of directors must ap-
prove and record all transfers of the company’s shares; (2) a pro-
spective shareholder must be able to connect to the company’s
water system; 1 and (3) shares must be sold and purchased at a
fixed dollar amount (currently $1,100 per share).
¶4 In 2005, the Jordan School District sought to sell twenty-
three South Despain shares in a sealed-bid public auction. When
South Despain learned of the impending sale, it sent a letter re-
minding the District of the transfer restrictions and advising that
any sale of South Despain shares not abiding by those restrictions
would not be recognized. Despite the letter, the District sold its
shares to Evan Johnson and James Garside for approximately
$1,945 per share. 2 Garside did not own property in the Granite
community, nor was he otherwise able to connect to South Des-
pain’s water system, and in any event the sale price was nearly
$1,000 above the fixed amount set by South Despain and the
South Despain Board had not approved the transfer of shares to
Garside.
1 Southam characterizes this proviso as requiring that the pro-
spective owner actually own property in the “Granite communi-
ty,” the location of its distribution system in Sandy, Utah. But as
South Despain explains, “[t]he required condition is that the po-
tential shareholder be able to physically connect to the pipe sys-
tem.” The two concepts have occasionally “been used synony-
mously,” however, because “the ability to connect nearly always
arises by virtue of owning or occupying property within or near
the pipe system.”
2Johnson’s interests in the shares were eventually transferred to
Garside. Johnson is not a party to this litigation.
2
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¶5 After the sale, Garside asked South Despain to issue new
share certificates in his name and recognize him as a shareholder.
South Despain refused, claiming that the sale violated the transfer
restrictions and was therefore void.
¶6 Garside and the District then asked to inspect South Des-
pain’s corporate records in accordance with their rights as share-
holders. South Despain granted the District’s request but denied
Garside’s on the ground that his purported shareholder interest
was invalid.
¶7 Garside filed suit for breach of contract, breach of fiduciary
duty, and violation of the Utah Revised Nonprofit Corporation
Act. He also sought to challenge the South Despain transfer re-
strictions as an unlawful restraint on alienation. Both parties
moved for summary judgment. The district court granted South
Despain’s motion and denied Garside’s, upholding the enforcea-
bility of the South Despain transfer restrictions and therefore con-
cluding that Garside’s claims failed as a matter of law.
¶8 Garside died while the case was pending in the district
court. His widow transferred the Garside interest in the South
Despain shares, and in this litigation, to Southam, and Southam
was substituted as plaintiff. Southam now proceeds before us as
the plaintiff-appellant.
¶9 On this appeal by Southam, we review the district court’s
decision on summary judgment for correctness, according no def-
erence to its assessment of the issues. 3 Bahr v. Imus, 2011 UT 19,
¶ 15, 250 P.3d 56.
3 Before oral argument, South Despain filed a motion to strike
Southam’s briefing and seeking attorney fees under Utah Rule of
Appellate Procedure 24(k), asserting that Southam’s briefing con-
tained inaccuracies and misrepresentations. Southam moved to
strike that motion and also sought a fee award of its own. We de-
ferred disposition of these motions and now deny them. Whatever
deficiencies may exist in the briefing or filings of the parties, they
do not warrant sanctions or attorney fees. See, e.g., Nipper v. Doug-
las, 2004 UT App 118, ¶¶ 19–20, 90 P.3d 649 (awarding attorney
fees where briefing was “extraordinarily deficient”); Rosendahl v.
Rosendahl, 876 P.2d 870, 876 n.1 (Utah Ct. App. 1994) (declining to
3
SOUTHAM V. SOUTH DESPAIN DITCH COMPANY
Opinion of the Court
II
¶10 All of Southam’s claims depend on the viability of his sta-
tus as a South Despain shareholder—and thus on the enforceabil-
ity of the corporation’s transfer restrictions. If the transfer re-
strictions are enforceable, then Southam’s shares are invalid. And
if Southam lacked a valid shareholder interest, then he would not
have standing to advance his claims for breach of contract, for
breach of fiduciary duty, or for violation of the Utah Revised
Nonprofit Corporation Act. The issues on appeal are therefore
addressed to the enforceability of South Despain’s transfer re-
strictions, as it is undisputed that the Garside/Southam interest
was acquired in contravention of those restrictions.
¶11 Southam raises two sets of challenges to the enforceability
of the South Despain transfer restrictions. His first set of argu-
ments question the lawfulness of the restrictions. His second ar-
gument asserts that South Despain waived its right to enforce its
transfer restrictions by failing to enforce them against Sandy City.
We reject both sets of arguments and affirm summary judgment
for South Despain.
A
¶12 Our assessment of the enforceability of the South Despain
transfer restrictions begins with the text of the governing statute.
The applicable provision is section 606 of the Revised Nonprofit
Corporation Act. That section is in two parts. Part (1) states that
“[u]nless otherwise provided by the bylaws, a member of a non-
profit corporation may not transfer: (a) a membership; or (b) any
right arising from a membership.” UTAH CODE § 16-6a-606(1). Part
(2) then provides that “[w]here transfer rights have been provid-
ed, a restriction on transfer rights may not be binding with respect
to a member holding a membership issued prior to the adoption
of the restriction, unless the restriction is approved by the affected
member.” Id. § 16-6a-606(2).
¶13 The import of these provisions is straightforward. First,
shares in a nonprofit are presumptively nontransferable—in that
the lack of a bylaw provision for transfer is the equivalent of a
prohibition on transferability. And second, restrictions on transfer
strike brief absent “egregious” noncompliance with rules of appel-
late procedure).
4
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in a nonprofit’s bylaws are subject to a single statutory limita-
tion—that such restrictions are not retroactively binding (absent
consent) on shareholder interests acquired before their adoption.
¶14 Despite these provisions, Southam presses two sets of
common law grounds for challenging the enforceability of the
South Despain transfer restrictions. He argues first that the re-
strictions are incompatible with the “beneficial use” element of
Utah water law, and second that they contravene rules regarding
restrictions on alienability of interests in real property. We reject
both sets of arguments as foreclosed or preempted by the clear,
comprehensive terms of section 606 of the Revised Nonprofit
Corporation Act.
1
¶15 Southam’s first argument is rooted in the water law princi-
ple of beneficial use. Citing an extensive line of our cases,
Southam notes that this court has long identified the “beneficial
use” of water as a fundamental element of Utah water law. 4 And
he asserts that beneficial use is best advanced by preserving flexi-
bility in the development and transfer of water rights. Thus, citing
another line of cases, Southam insists that the public policy em-
bedded in our water law directs a decision here vindicating the
free transferability of shares in South Despain. 5
4 See, e.g., Wayman v. Murray City Corp., 458 P.2d 861, 863 (Utah
1969) (stating that “both our statutory and decisional law have
been fashioned in recognition of the desirability and of the neces-
sity of insuring . . . the most continuous beneficial use of all avail-
able water”); see also UTAH CODE § 73-1-3 (“Beneficial use shall be
the basis, the measure and the limit of all rights to the use of water
in this state.”).
5 See E. Jordan Irrigation Co. v. Morgan, 860 P.2d 310, 313–14 (Utah
1993) (irrigation company, not shareholders, hold “title” to water
right, but company cannot prohibit shareholders from moving
their shares outside distribution area without showing of demon-
strable harm to company); Syrett v. Tropic & E. Fork Irrigation Co.,
89 P.2d 474, 475 (Utah 1939) (shareholder not required to file
change application when diverting water from different point
within system despite company’s opposition); Baird v. Upper Canal
Co., 257 P. 1060, 1065–66 (Utah 1927) (holding that water delivered
5
SOUTHAM V. SOUTH DESPAIN DITCH COMPANY
Opinion of the Court
¶16 Southam’s argument falters on two grounds. First, it is
foreclosed or preempted by the clear, comprehensive terms of the
Revised Nonprofit Corporation Act. The above-quoted terms of
section 606 of that Act speak directly to the transferability of
shares of a nonprofit corporation like South Despain. And they do
so in a comprehensive manner foreclosing any common law limi-
tations on transferability.
¶17 By expressly endorsing a legislative presumption of the gen-
eral nontransferability of nonprofit shares, see UTAH CODE § 16-6a-
606(1), section 606 leaves little room for a judicial determination
that more limited restrictions are void as contrary to public policy.
Any lingering doubt on the matter is eliminated, moreover, by the
legislature’s prescription of a single limitation on the enforceabil-
ity of transfer restrictions. See UTAH CODE § 16-6a-606(2). In con-
text, the express prescription of a sole statutory limitation is an
implied proscription of any other limitations. See Carrier v. Salt
Lake Cnty., 2004 UT 98, ¶ 30, 104 P.3d 1208 (articulating the canon
sometimes known as expressio unius est exclusio alterius—that “the
expression of one should be interpreted as the exclusion of anoth-
er” (internal quotation marks omitted)). Where the legislature
provides only that share transfer restrictions are void only if ap-
plied retroactively, the implication is that prospective restrictions
are permissible.
¶18 It is true, as Southam notes, that the value of the South
Despain shares is in the water rights to which the shares afford
access. But the transaction in question is not the transfer of water
rights per se; it is the transfer of shares in a nonprofit mutual irri-
gation company. And a nonprofit mutual irrigation company is
still a nonprofit company—governed by the Revised Nonprofit
Corporation Act. Thus, the transferability of South Despain’s
shares is regulated specifically and comprehensively by section
606 of that Act, and not by our common law water cases.
into stockholder’s private pipe line by irrigation company be-
comes his personal property with right of disposal); Moyle v. Salt
Lake City, 167 P. 660, 662–63 (Utah 1917) (holding that absent con-
tractual provision to the contrary, petitioner could take water to
which she was entitled from city at point of her choosing unless
city could show prejudice or harm).
6
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¶19 Second, and in any event, the water law principles ad-
vanced by Southam are unavailing. Our cases have never articu-
lated a hierarchy of beneficial uses. They merely establish a pref-
erence for beneficial use over waste. 6 And Southam’s argument fal-
ters because it presupposes a hierarchy of beneficial use.
¶20 No one disputes that the Jordan School District’s use of the
South Despain shares was beneficial—in the sense of a “reasona-
ble and economical use of . . . water in view of other present and
future demands upon the source of supply.” Delta Canal Co. v.
Frank Vincent Family Ranch, LC, 2013 UT 69, ¶ 23, __ P.3d __ (in-
ternal quotation marks omitted)). Instead Southam’s argument is
essentially that his use will be more beneficial, and thus that a poli-
cy of free alienability of South Despain shares is in line with the
above-cited principles of Utah water law. But even assuming for
the sake of argument that this assertion is not foreclosed by sec-
tion 606 of the Revised Nonprofit Corporation Act, it still would
fail. Because our doctrine of beneficial use encompasses no hierar-
chy of beneficial uses, Southam has no viable claim to a preference
for the free alienability of the Jordan School District shares pur-
chased by Garside (and ultimately transferred to Southam).
¶21 Southam’s water law arguments accordingly fail. At bot-
tom, his position questions the wisdom of the policy embedded in
section 606 of the Revised Nonprofit Corporation Act and in
longstanding principles of Utah water law. We see no basis for his
arguments, however, and no room in the statute for a policy
judgment overriding that of our legislature. Cf. McArthur v. State
Farm Mut. Auto. Ins. Co., 2012 UT 22, ¶ 11, 274 P.3d 981 (emphasiz-
ing the role of the court to “advance the public policies enshrined
in Utah statutes,” and “not to advance others that we might find
controlling if we had a policymaking role”).
2
¶22 Southam presses a similar argument under the common
law presumption against rules restricting alienation of real prop-
6 See, e.g., Baird, 257 P. at 1065 (stating that “water, whether used
for irrigation, culinary, or domestic purposes, is too valuable to be
wasted when it can be put to a beneficial use”); Moyle, 167 P. at
662 (stating that “[t]he law will not permit any owner to waste
water,” but instead dictates beneficial use).
7
SOUTHAM V. SOUTH DESPAIN DITCH COMPANY
Opinion of the Court
erty. Because water is a form of real property, and the value of the
South Despain shares is in the value of the water rights to which
the shares afford access, Southam asks us to consider—and to
strike down—South Despain’s transfer restrictions under common
law rules regarding restraints on alienation of real property.
¶23 This argument likewise fails in light of the clear and com-
prehensive terms of the Revised Nonprofit Corporation Act.
Again, the transaction at issue is not the transfer of real property
interests in water; it is the transfer of shares of a nonprofit corpo-
ration.7 And again, the transferability of shares in that company is
regulated specifically and comprehensively by section 606 of the
Revised Nonprofit Corporation Act, and not by common law
property rules. Because the terms of section 606 leave no room for
a limitation on transfer restriction rules based on the law regulat-
7 As Southam notes, we have rejected the argument that an in-
terest in a mutual irrigation company is a “security” governed by
our Investment Securities Act, Utah Code section 70A-8-102(1),
and in so doing have characterized the interest as one involving
real property. See Salt Lake City Corp. v. Cahoon & Maxfield Irriga-
tion Co., 879 P.2d 248 (Utah 1994). But the Cahoon case can hardly
be understood to establish the general applicability of real proper-
ty law in regulating interests in mutual irrigation companies. See
id. at 252 (noting that “the mutual irrigation corporation’s articles
of incorporation, if valid, govern any transaction involving the
stock” (footnote omitted)). And that proposition, moreover, is in-
compatible with the well-settled principle that an interest in a
corporation is distinct from an interest in the assets owned by the
corporation. See Kaiser v. Bowlen, 455 F.3d 1197, 1208 (10th Cir.
2006) (It is “well established as a ‘basic tenet of American corpo-
rate law . . . that the corporation and its shareholders are distinct
entities’ and an ‘individual shareholder . . . does not own the cor-
poration’s assets.’” (alterations in original) (quoting Dole Food Co.
v. Patrickson, 538 U.S. 468, 474, 475 (2003))); Pac. Lumber Co. v. Su-
perior Court, 276 Cal. Rptr. 425, 429 (Cal. Ct. App. 1990) (“[T]he
shareholders of a corporation have no ownership right to the real
property of the corporation but only a right to ownership of the
shares.”); see also Nat’l Am. Life Ins. Co. v. Bainum, 497 P.2d 854, 855
(Utah 1972) (A “corporate entity [is] separate and apart from its
stockholders.”).
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ing the assets owned or encompassed by the corporation in ques-
tion, we view the statute to be the sole source of any legal limita-
tion on rules regarding the transfer of nonprofit shares.
B
¶24 To establish a waiver of South Despain’s share transfer re-
strictions, Southam would have to demonstrate an intentional re-
linquishment of its right to enforce them. See Soter’s, Inc. v. Deseret
Fed. Sav. & Loan Ass’n, 857 P.2d 935, 940 (Utah 1993) (establishing,
as elements of waiver, both knowledge of an existing right and
intention to relinquish it). Southam has cited no evidence of any
expressly stated intent on South Despain’s part. He instead asserts
only that South Despain once failed to enforce its restrictions in
full—in approving Sandy City’s acquisition of shares in 1977, de-
spite Sandy’s lack of ownership of property in the Granite com-
munity.
¶25 We find that isolated instance insufficient to establish
waiver. An intent to relinquish a known right could conceivably
be inferred from a party’s failure to enforce it. But to justify such
an inference, a pattern of inaction would generally be required.
See Meadow Valley Contractors, Inc. v. State Dep’t of Transp., 2011 UT
35, ¶¶ 45, 51–53, 266 P.3d 671 (stating that waiver of a contractual
right can be implied, but requires a course of conduct “incon-
sistent with [the enforcement of] its contractual rights”). An iso-
lated instance of non-enforcement, without more, could indicate
only inattention or negligence. And we see no reason to deem the
Sandy City example as indicating anything more than that, as we
find nothing in the record to suggest that this isolated instance
amounted to an intentional relinquishment.
¶26 In any event, we agree with South Despain that the cited
example does not appear to have contradicted the applicable re-
strictions on share transfer. South Despain’s bylaws do not require
ownership of property in the Granite community as a precondi-
tion to transfer. They merely require an ability to connect to the
South Despain water system 8—a condition that Sandy City ap-
8 We base this conclusion on the only evidence available on the
record regarding the content of the bylaws, which are secondary
sources such as letters and declarations. For reasons unknown, the
bylaws themselves are not available in the record before us.
9
SOUTHAM V. SOUTH DESPAIN DITCH COMPANY
Opinion of the Court
pears to have met.9 We accordingly reject Southam’s waiver claim
as a matter of law.
III
¶27 For the above reasons we affirm summary judgment in fa-
vor of South Despain. We hold that the South Despain transfer
restrictions are enforceable and, thus, that Southam has no viable
shareholder interest in the corporation. And absent such an inter-
est, we conclude that Southam lacks standing to pursue any of his
claims.
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9 As the party asserting a claim of waiver, Southam bore the
burden of producing evidence in support of a course of conduct
establishing waiver. See Cent. Fla. Invs., Inc. v. Parkwest Assocs.,
2002 UT 3, ¶ 24, 40 P.3d 599. Southam failed to carry that burden,
as even he concedes that he established only that Sandy City
owned no “property in the SDDC delivery area,” a fact irrelevant
to the question of whether Sandy City could connect to the South
Despain water system.
10