Holladay v. Storey ( 2013 )

2013 UT App 158_________________________________________________________
THE UTAH COURT OF APPEALS
BEVERLY HOLLADAY
Plaintiff,
v.
DAVID A. STOREY,
Defendant, Third‐party Plaintiff, Appellant,
and Cross‐appellee,
v.
RICHARD B. HOLLADAY AND JACK M. WOODCOCK,
Third‐party Defendants, Appellees, and Cross‐appellants.
Opinion
No. 20090824‐CA
Filed June 20, 2013
Seventh District, Moab Department
The Honorable Lyle R. Anderson
No. 030700194
Craig C. Halls, Attorney for Appellant and Cross‐
appellee
C. Val Morley and Ryan A. Morley, Attorneys for
Appellees and Cross‐appellants
JUDGE MICHELE M. CHRISTIANSEN authored this Opinion,
in which JUDGE JAMES Z. DAVIS concurred. JUDGE
CAROLYN B. MCHUGH concurred in the result.
CHRISTIANSEN, Judge:
¶1 This appeal and cross‐appeal arise from a bench trial ruling
that removed David A. Storey as manager of Castlerock Inn, LLC
(the Company), expelled him as a member of the Company, and
backdated his expulsion from and the valuation of his interest in
Holladay v. Storey
the Company. We affirm in part, reverse in part, and remand for
further proceedings.
BACKGROUND1
¶2 In April 2000, Storey, together with Richard B. Holladay and
Jack M. Woodcock (Appellees) and several other individuals,
formed the Company to construct and operate an inn in Moab,
Utah. The members executed an Operating Agreement for the
Company by which Storey was appointed as the manager of the
Company. After two of the members voluntarily withdrew from
the Company, the lending bank required the Company to amend
the Operating Agreement. Accordingly, in February 2003, the
parties executed an Amended Operating Agreement (the AOA).
Pursuant to the AOA, Storey remained the Company’s manager,
and Storey and the Appellees each held a one‐third interest in the
Company.
1
We limit our discussion to only those background facts
necessary to resolve the issues on appeal. Both parties have
unnecessarily complicated the factual and legal issues below and
on appeal by adding irrelevant material. We remind counsel that
appellate briefs “must be concise . . . and free from burdensome,
irrelevant, [and] immaterial . . . matters.” See Utah R. App. P.
24(k) (“Briefs which are not in compliance may be disregarded
or stricken, on motion or sua sponte by the court, and the court
may assess attorney fees against the offending lawyer.”). Coun‐
sel should keep in mind that, aside from violating the rules, the
addition of irrelevant facts detracts from rather than adds to the
value of an argument. Given the numerous and overly compli‐
cated facts and claims, we commend the trial court for making
clearly‐articulated findings of facts and conclusions of law.
20090824‐CA 2 2013 UT App 158Holladay v. Storey
¶3 Sometime around June 2003, Appellees took over Storey’s
management duties. In September 2003, Beverly Holladay filed a
complaint against Storey, asserting claims unrelated to the present
appeals. Storey filed counterclaims against Beverly Holladay and
a third‐party complaint against Appellees, Shawn Morley, and
others.2 Storey asserted, among other things, derivative claims on
behalf of the Company alleging conversion and unjust enrichment
against Appellees and others and a demand for a judicial
accounting. Storey also sought dissolution of the Company and
payment of proceeds based on his percentage of ownership
pursuant to section 48‐2c‐1213 of the Revised Limited Liability
Company Act (the Act) or, in lieu of dissolution, that the Company
purchase his one‐third interest in the Company pursuant to section
48‐2c‐1214 of the Act. See Utah Code Ann. §§ 48‐2c‐1213, ‐1214
(LexisNexis 2010).3 In turn, Appellees filed counterclaims against
Storey, alleging breach of fiduciary duty, conversion, unjust
enrichment, and defamation and demanded Storey’s expulsion as
a member of the Company, Storey’s removal as a manager of the
Company, and a judicial accounting and dissolution of the
2
The trial court later dismissed the claims and counter‐
claims between Beverly Holladay and Storey pursuant to a
mediation agreement. The trial court also dismissed Storey’s
claim against Morley pursuant to the same mediation agree‐
ment.
3
Utah’s Revised Limited Liability Company Act, see
generally Utah Code Ann. §§ 48‐2c‐101 to ‐1902 (LexisNexis 2010),
was repealed effective July 1, 2013, and replaced with Utah’s
Revised Uniform Limited Liability Company Act, see generally id.
§§ 48‐3‐101 to ‐1405 (LexisNexis Supp. 2012), effective the same
date. Because the Revised Limited Liability Company Act was in
effect at all times relevant to this appeal, we refer to that act
throughout this opinion.
20090824‐CA 3 2013 UT App 158Holladay v. Storey
Company pursuant to section 48‐2c‐1210 of the Act. See id. § 48‐2c‐
1210.
¶4 Specifically, Appellees sought “to invoke the authority of the
[Act] and, pursuant to Utah Code [section] 48‐2c‐710(3), obtain a
judicial expulsion of Storey as both a member of and the sole
manager of the Company.” Storey subsequently filed a motion for
partial summary judgment seeking a declaration that he had the
right to manage the Company under the AOA. The trial court
granted Storey’s motion after determining that the AOA clearly
provides “that Storey may be removed as a manager only if he so
chooses. No other grounds for his removal are even suggested in
the Agreement.” In its order granting partial summary judgment
to Storey, the trial court noted that Appellees were not left without
remedy under the Act, specifically pursuant to section 48‐2c‐809,
but because they had never “expressly invoked” that section “and
sought an order of this court removing Storey as manager,” the
trial court was unable to deny the relief Storey sought. However,
the trial court stayed the implementation of the judgment pending,
among other things, Appellees’ request for an injunction removing
Storey as a manager. Appellees thereafter filed a motion for a
preliminary injunction requesting removal of Storey as a manager
pursuant to Utah Code section 48‐2c‐809. In October 2005, the trial
court issued the injunction.
¶5 As a result of a stipulation among the parties, in December
2003, the trial court permitted Appellees to enter into a franchise
agreement for the sale of the inn. After that, Appellees contributed
additional capital to the Company.
¶6 Following the conclusion of a ten‐day bench trial in the
spring and summer of 2009, the trial court entered findings of fact,
conclusions of law, and an order removing Storey as the manager
of the Company, expelling Storey as a member of the Company
effective December 31, 2005, and valuing Storey’s interest in the
20090824‐CA 4 2013 UT App 158Holladay v. Storey
Company as of December 31, 2005. The trial court ordered Storey’s
removal as manager based on its findings of numerous instances
of Storey’s mismanagement and misconduct, including depositing
a Company check and an IRS check into his personal account
without adequate explanation and altering invoices for his personal
gain. The trial court found that Storey’s
removal as manager was . . . necessary for the success
of the enterprise[, and t]hat even though there was
an underlying problem of lack of money, [Storey]
was not dealing, in a productive fashion, with the
partners, the suppliers, the vendors and employees
and was not staying on top of the issues that arose.
The trial court ordered Storey’s expulsion as a member for the
same reasons as his removal as a manager, as well as for his
“unlawful conduct that adversely and materially affect[ed] the
Company’s business, or . . . conduct relating to the Company’s
business which makes it not reasonably practical to carry out
business with the members.” Finally, the trial court found that
“Storey breached his fiduciary duty to the other Members of the
Company.”
¶7 The trial court set the effective expulsion and valuation date
to December 31, 2005, based on the parties’ conduct. It found that
this date was appropriate due to Storey’s mismanagement,
misconduct, dishonesty, breach of fiduciary duty, and lack of
success as a manager as of that date. The trial court also justified
the valuation date based on Appellees’ failure to adhere to the
AOA and on their failure to “timely access the Court to implement
their decisions as their agreement required and as the law
requires.” The trial court explained that it was not until
approximately 2005 that Appellees started to “seriously” follow the
AOA and statutes. The trial court also found that Appellees’
20090824‐CA 5 2013 UT App 158Holladay v. Storey
“decision . . . to convert to a franchise[] was a substantial reason for
the success of the Company and . . . the inn during and after year
2005.”
¶8 Storey appeals the ruling, raising numerous issues on
appeal. Appellees raise four issues in their cross‐appeal.
ISSUES AND STANDARDS OF REVIEW
¶9 Storey first argues that the trial court erroneously based its
conclusion that he breached a fiduciary duty owed to Appellees,
which justified his removal and expulsion from the Company,
upon conduct that took place prior to the adoption of the AOA and
that Appellees thus “forgave” any misconduct. As a result, Storey
argues that Appellees failed to state a claim for breach of fiduciary
duty. We decline to consider this issue because Storey failed to
preserve it before the trial court. “To preserve an issue for appellate
review, a party must first raise the issue in the trial court, giving
that court an opportunity to rule on the issue.” Weiser v. Union Pac.
R.R. Co., 2010 UT 4, ¶ 14, 247 P.3d 357 (citation and internal
quotation marks omitted). The preservation rule applies even to an
issue of a party’s failure to state a claim. See Mack v. Utah State Dep’t
of Commerce, Div. of Sec., 2009 UT 47, ¶ 14, 221 P.3d 194 (“[I]ssues
brought under the exception of Rule 12(h) may be raised before or
during trial. However, Rule 12(h) certainly does not mean that
failure to state a claim can be raised for the first time on appeal.”
(citation and internal quotation marks omitted)). Therefore we
decline to address this issue.
¶10 Next, Storey contends that the trial court erroneously
backdated his expulsion from the Company to December 31, 2005.
In a related claim, Storey contends that the trial court erroneously
backdated the valuation of his interest in the Company to the same
20090824‐CA 6 2013 UT App 158Holladay v. Storey
date. According to Storey, the Act does not grant the trial court
such authority. “The proper interpretation and application of a
statute is a question of law which we review for correctness,
affording no deference to the district court’s legal conclusion.”
OLP, LLC v. Burningham, 2008 UT App 173, ¶ 10, 185 P.3d 1138(citation and internal quotation marks omitted).
¶11 Storey asserts several other claims of error. First, he argues
that the trial court erroneously created nonexistent provisions in
the AOA, which placed Appellees in a more favorable position
than the parties originally contracted for, thereby violating Storey’s
right to contract. Next, Storey maintains that the trial court erred
when it adopted the parties’ interim mediation agreement,
resulting in manifest injustice to him. Finally, Storey asserts that the
trial court improperly failed to provide for prejudgment interest on
the value of his equity in the Company during the pendency of the
expulsion proceedings. The interpretation of the AOA and
mediation agreement is a “‘[q]uestion[] of contract interpretation
. . . confined to the language of the contract itself [and is a]
question[] of law, which we review for correctness.’” KeyBank Nat’l
Ass’n v. Systems W. Computer Res., Inc., 2011 UT App 441, ¶ 13, 265
P.3d 107 (quoting Mellor v. Wasatch Crest Mut. Ins. Co., 2009 UT 5,
¶ 7, 201 P.3d 1004). With regard to Storey’s prejudgment interest
claim, “[t]he trial court’s award of prejudgment interest, and the
amount thereof, present[] a question of law which we review for
correctness.” Peterson v. Jackson, 2011 UT App 113, ¶ 15, 253 P.3d
1096 (alterations in original) (citation and internal quotation marks
omitted).4
4
Appellees filed an objection to Storey’s Brief of Cross‐
Appellee and Reply Brief of Appellant because it introduced
matters that were not in reply to Appellees’ response or in re‐
sponse to their cross‐appeal issues. See Utah R. App. P. 24(g)(3)
(continued...)
20090824‐CA 7 2013 UT App 158Holladay v. Storey
¶12 On cross‐appeal, Appellees argue that the trial court
erroneously valued Storey’s interest as of December 31, 2005, rather
than as of November 2003. We consider Appellees’ date‐of‐
valuation issue with Storey’s and review the trial court’s
interpretation and application of the Act for correctness. See OLP,
LLC, 2008 UT App 173, ¶ 10.
¶13 Appellees also challenge the trial court’s denial of their
request for punitive damages because the trial court found that
Storey’s conduct was egregious and that Storey had breached his
fiduciary duty to the other members of the Company. “Whether
punitive damages [should be] awarded is generally a question of
4
(...continued)
(“The appellant shall then file one brief, entitled Reply Brief of
Appellant and Brief of Cross‐Appellee, which shall reply to the
Brief of Appellee and respond to the Brief of Cross‐Appellant.”).
We agree and accordingly decline to consider the matters of
Storey’s claim of fraudulent inducement to enter into the media‐
tion stipulation and the application of section 6.1 of the AOA to
the issues before us.
Appellees also correctly point out that Storey failed to cite
to the record demonstrating that the issues he argues on appeal
were preserved. See id. R. 24(a)(5)(A) (stating that the appellant’s
brief must include “citation to the record showing that the issue
was preserved in the trial court; or . . . a statement of grounds for
seeking review of an issue not preserved in the trial court”).
However, the parties have addressed the issues as if they were
preserved, and except where otherwise noted, we have exercised
our discretion to independently review the record and determine
whether Storey preserved his claims below. Where we are satis‐
fied that Storey’s claims were adequately preserved, we address
the merits of those claims despite Storey’s failure to comply with
rule 24.
20090824‐CA 8 2013 UT App 158Holladay v. Storey
fact within the sound discretion of the [fact finder], and will not be
disturbed absent an abuse of discretion.” Bennett v. Huish, 2007 UT
App 19, ¶ 11, 155 P.3d 917 (alterations in original) (citation and
internal quotation marks omitted).
¶14 Finally, Appellees contend that the trial court erred by
failing to grant their request for attorney fees on their breach of
fiduciary duty claim. “We review the denial of an award of
attorney fees as a matter of law for correctness.” PC Crane Serv.,
LLC v. McQueen Masonry, Inc., 2012 UT App 61, ¶ 6, 273 P.3d 396.
ANALYSIS
I. Effective Date of Storey’s Expulsion and Valuation
¶15 The primary issue on appeal is whether the trial court erred
in setting the effective date for Storey’s expulsion from the
Company and for the valuation of Storey’s interest in the Company
as December 31, 2005. Storey argues that the effective date for both
expulsion and valuation should be the date of the trial court’s
determination at trial. Appellees argue that the effective date for
the valuation of Storey’s interest should be no later than November
2003, when Appellees filed a counterclaim against Storey in which
they sought Storey’s expulsion as a member. “[B]ecause the parties
do not challenge the trial court’s lengthy findings of fact, we accept
these findings as true in our analysis on appeal.” See d’Elia v. Rice
Dev., Inc., 2006 UT App 416, ¶ 24, 147 P.3d 515.
A. Storey’s Expulsion
¶16 In reaching its conclusion that it could retroactively
determine both the effective date of Storey’s expulsion and the date
for valuing his interest in the Company, the trial court relied on the
20090824‐CA 9 2013 UT App 158Holladay v. Storey
Utah Supreme Court’s decision in CCD, LC v. Millsap, 2005 UT 42,
116 P.3d 366. In particular, the trial court ruled,
[It] is not clear from the law that [the trial court] has
the authority to value a member’s interest at a time
other [than] that [of] the present and the Court finds
that the Utah cases are not exactly on point;
however[,] Millsap suggests that a party can be
expelled and his or her interest may be valued
retroactively. Accordingly, the Court finds that it has
the authority, the responsibility and that the equities
require, in determining the expulsion date, that the
expulsion date should have some connection with
the conduct of the parties.
Thus, despite the lack of explicit authority in the Act or the AOA,
the trial court applied the reasoning of Millsap to determine that it
had authority to set both the expulsion date and the valuation date
“as early as 2003, perhaps even earlier, or perhaps even as late as
the date of [trial].” The trial court ruled that evidence of Storey’s
misconduct and mismanagement supported his expulsion based on
an earlier date. The trial court also ruled that it could set a later
date based on evidence that Appellees’ “decision . . . to convert to
a franchise[] was a substantial reason for the success of the
Company and the inn during and after year 2005” and that
Appellees did not “follow their own Operating Agreement” or
“start[] to look to the statutes and to follow [them] seriously” “until
approximately 2005.” The trial court ultimately found it
appropriate to set the expulsion and valuation date to December
31, 2005.
¶17 Storey argues that the trial court erred by retroactively
setting the effective date of his expulsion because, pursuant to Utah
Code section 48‐2c‐710, the date of expulsion must be the same as
the date of judicial determination of expulsion. He also argues that
20090824‐CA 10 2013 UT App 158Holladay v. Storey
the trial court erroneously consolidated the issue of the date of
Storey’s expulsion with the issue of the valuation of his interest.
¶18 Although the parties suggest that the Company was
dissolved,5 we do not see any indication in the trial court’s August
31, 2009 order, or in any order entered thereafter, that it ever
ordered the dissolution of the Company pursuant to Utah Code
section 48‐2c‐1213. See Utah Code Ann. § 48‐2c‐1213 (LexisNexis
2010) (explaining that, upon “determin[ing] that one or more
grounds for judicial dissolution described in Section 48‐2c‐1210
exist, [the court] may enter a decree dissolving the company and
specifying the effective date of the dissolution”). Rather, the trial
court ruled that
it is not required to determine the allocation of the
split of the Company’s equity between [the
Appellees] and [the trial court] will only make
findings with respect to . . . Storey’s portion of the
Company’s equity. However, for purposes of
determining . . . Storey’s share, the Court must
determine each Member’s capital contribution as of
December 31, 2005. The court finds it appropriate to
determine each Member’s capital contribution as of
the valuation date of December 31, 2005, based upon
5
In his third‐party complaint, Storey sought judicial
dissolution of the Company, as did Appellees in their counter‐
claim. In his opening brief, Storey argues that valuation occurs
on the date of the dissolution of the Company, which he sug‐
gests is the same as the date of the judicial determination of
expulsion. However, in his reply brief, Storey has had a change
of heart and asserts that the Company has never been dissolved.
Appellees contend that although the Company was never for‐
mally dissolved, it was de facto dissolved effective December 31,
2005.
20090824‐CA 11 2013 UT App 158Holladay v. Storey
the contributions (or capital account balances) the
auditor has allocated to each Member as of said date.
In its orders, the trial court stated that it “has not been asked by . . .
Holladay or . . . Woodcock, and does not issue[] any order
allocating . . . Holladay’s and . . . Woodcock’s respective share of
the balance of the Company’s equity.” Thus, because the trial court
did not order dissolution, we do not consider whether it correctly
dissolved the Company as of December 31, 2005.
¶19 The Act does not explicitly provide a method for a judicial
determination of the date of an expulsion. Nor has the legislature
specifically addressed whether a court may retroactively apply an
expulsion date. The provision that provides the most guidance in
determining whether the trial court was correct in retroactively
affixing the date for Storey’s expulsion from the Company is Utah
Code section 48‐2c‐710, which states,
A member of a company may be expelled:
(1) as provided in the company’s operating
agreement;
(2) by unanimous vote of the other members
if it is unlawful to carry on the company’s business
with the member; or
(3) on application by the company or another
member, by judicial determination that the member:
(a) has engaged in wrongful conduct
that adversely and materially affected the
company’s business;
(b) has willfully or persistently
committed a material breach of the articles of
organization or operating agreement or of a
duty owed to the company or to the other
members under Section 48‐2c‐807; or
20090824‐CA 12 2013 UT App 158Holladay v. Storey
(c) has engaged in conduct relating to
the company’s business which makes it not
reasonably practicable to carry on the
business with the member.
Id. § 48‐2c‐710.
¶20 We agree that Millsap is instructive to our analysis of
whether the trial court correctly determined that it had the
authority to make retroactive the effective date of Storey’s
expulsion from the Company. There, Millsap, a member of a
limited liability company called CCD, misappropriated certain
company funds. CCD, LC v. Millsap, 2005 UT 42, ¶ 16, 116 P.3d 366.
Millsap admitted to the misappropriation but claimed that he had
thereafter complied with an amended operating agreement, which
allowed him to be reinstated as a member, which in turn allowed
him to retire with all of the rights due to a retiring member. Id.
¶¶ 8–10. The other members disagreed and sought a judicial
determination of expulsion under the Act. See id. ¶ 8. Millsap
argued that he was no longer a member of the company once he
announced his intent to retire from CCD because the operating
agreement provided that a member could withdraw from the
company by retiring. Id. ¶ 18. Relying on section 48‐2c‐709, he
further reasoned that, because he was no longer a member, he
could not be expelled and was entitled to his retirement benefits.
Id.; see also Utah Code Ann. § 48‐2c‐709 (“A member may withdraw
from a company at the time or upon the happening of events
specified in and in accordance with the articles of organization or
operating agreement.”); Utah Code Ann. § 48‐2c‐710 (providing
conditions of a member’s expulsion).
¶21 The Utah Supreme Court concluded that the Act authorized
the judicial determination of Millsap’s expulsion even though
Millsap’s retirement announcement preceded such determination.
20090824‐CA 13 2013 UT App 158Holladay v. Storey
See Millsap, 2005 UT 42, ¶¶ 28–29. The court explained that the
legislature had designed the Act to “expressly bar[] members from
bargaining for expulsion rules that varied from those set out in
section 710.” Id. ¶ 23; see also Utah Code Ann. § 48‐2c‐120(1) (“A
company’s articles of organization or operating agreement may
not: . . . vary the right to expel a member based on any event
specified in Subsection 48‐2c‐710(3).”). Thus, “despite
acknowledging the power of limited liability company members to
govern their affairs by contract,” the policy behind these statutes
ensures that any member, or the company itself, may expel a
member whose conduct makes him eligible for expulsion. Millsap,
2005 UT 42, ¶¶ 23–29; see Utah Code Ann. § 48‐2c‐710(3) (providing
for expulsion of a member who has “has engaged in wrongful
conduct that adversely and materially affected the company’s
business,” who “has willfully or persistently committed a material
breach of the articles of organization or operating agreement or of
a duty owed to the company or to the other members under Section
48‐2c‐807,” or who “has engaged in conduct relating to the
company’s business which makes it not reasonably practicable to
carry on the business with the member.”); see generally Utah Code
Ann. § 48‐2c‐807 (explaining the duties of managers and members).
The court emphasized that this policy objective overrode the
considerations of timing relied on by Millsap. See Millsap, 2005 UT
42, ¶ 28 (“The proper focus of inquiry should be on the merits of
claims concerning a limited liability company member[]‘s conduct
and not on reviewing the results of photo finishes to the courthouse
door.”). The supreme court then affirmed the trial court’s
conclusion that sufficient grounds existed to expel Millsap as a
member of CCD. Id. ¶ 29.
¶22 Here, Storey does not challenge the trial court’s findings of
fact concerning its justification for ordering his expulsion. The trial
court found that Storey should be expelled as a member for
numerous occurrences of mismanagement and misconduct,
20090824‐CA 14 2013 UT App 158Holladay v. Storey
“unlawful conduct that adversely and materially affect[ed] the
Company’s business, or . . . conduct relating to the Company’s
business which makes it not reasonably practical to carry out
business with the members.” The trial court also found that “Storey
breached his fiduciary duty to the other Members of the
Company.”
¶23 As Millsap instructs, although subsection 48‐2c‐710(3)
“provides sparse procedural direction,” it is significant not in
providing for when an expulsion occurs but rather how it occurs. See
id. ¶¶ 21–22. To understand how an expulsion occurs, one must
understand the purpose of the Act, which is not “to define and
regulate membership” or “fix boundaries between the tenure of a
member and the right to expel a member,” but instead to
“regulat[e] the formation and operation of limited liability
companies,” including a limited liability company’s authority to
expel a member for his or her wrongful acts. See id. ¶¶ 22–23.
¶24 The policy expressed in Millsap is exactly the policy on
which the trial court relied when it backdated Storey’s expulsion
to December 31, 2005, based in part on its findings that Storey
engaged in mismanagement, misconduct, and dishonesty;
breached his fiduciary duty; and lacked success as a manager as of
that date. In choosing the date of its judicial determination for
Storey’s expulsion and backdating the expulsion to December 31,
2005, the trial court focused on Storey’s conduct that prompted the
expulsion. As the supreme court indicated in Millsap, if the
legislature had deemed the timing considerations of voluntary
secession or expulsion important enough, it would have set
parameters for this in the Act. See id. ¶ 25. Instead, the objective of
the Act is to allow members to seek judicial determination for an
expulsion based on another member’s wrongful acts.
20090824‐CA 15 2013 UT App 158Holladay v. Storey
¶25 For that reason, the trial court did not err in backdating
Storey’s expulsion. In fact, it could have backdated Storey’s
expulsion as early as 2003 based on his misconduct. Yet, the trial
court also found that Appellees did not conduct themselves
according to the AOA or the Act, or seek to remove Storey as a
member before 2005, when they first requested a preliminary
injunction. We see nothing in the AOA or the Act that precluded
the trial court from backdating Storey’s expulsion; the case law
supports the trial court’s discretion to do so, and the trial court’s
findings support the December 31, 2005 date. We therefore affirm
the trial court’s date of expulsion.
B. Valuation of Storey’s Interest
¶26 Storey argues that the trial court erred in setting the
valuation of his interest in the Company as of December 31, 2005,
because valuation had to occur as of the time of the judicial
determination of expulsion. Storey contends that even as an
expelled member, he was an assignee, and, as such, retained his
interest in the Company until it was dissolved by the entry of the
judicial determination at trial in 2009.
¶27 In contrast, Appellees point out that there is no particular
statute or precedent that prohibited the trial court from setting the
date of valuation to the date of expulsion. In their cross‐appeal,
they argue that the trial court erroneously valued Storey’s interest
as of December 31, 2005, rather than November 2003,
approximately when Appellees filed their counterclaim in response
to Storey’s misconduct and mismanagement.
¶28 Similar to its silence concerning the date of expulsion, the
Act does not outline a method for determining the date of
valuation of a member’s share in a limited liability company.
However, section 48‐2c‐708 provides,
20090824‐CA 16 2013 UT App 158Holladay v. Storey
A person who is a member of a company ceases to be
a member of the company and the person or the
person’s successor in interest attains the status of an
assignee as set forth in Section 48‐2c‐1102, upon the
occurrence of one or more of the following events: . . .
(e) the member is expelled as a member
pursuant to Section 48‐2c‐710 . . . .
Utah Code Ann. § 48‐2c‐708(1)(e) (LexisNexis 2010). Pursuant to
section 48‐2c‐1102, “An assignment only entitles the assignee to
receive, to the extent assigned, any share of profits and losses and
distributions to which the assignor would be entitled.” Id. § 48‐2c‐
1102.
¶29 We agree with Storey that upon his expulsion he became an
assignee of future distributions or contributions pursuant to Utah
Code section 48‐2c‐708. See id. § 48‐2c‐708(1)(e). However, nothing
in the Act, including section 48‐2c‐1102, dictates when an assignee’s
partnership interest can or must be valued. See id. § 48‐2c‐1102. We
do not believe that sections 48‐2c‐708(1)(e) and 48‐2c‐1102 support
Storey’s contention that, because he became an assignee after being
expelled, his interest should necessarily be valued up until the time
of the judicial determination or judicial dissolution.
¶30 If the court were precluded from valuing an expelled
member’s interest as of a particular date based on that member’s
misconduct, it would undermine the effectiveness of the right to
judicially expel a member pursuant to subsection 48‐2c‐710(3). See
id. § 48‐2c‐710(3) (“A member of a company may be expelled . . . by
judicial determination that the member . . . has engaged in
wrongful conduct that adversely and materially affected the
company’s business.”). If the court is not permitted to set the date
for the valuation of the expelled member’s interest in the company
20090824‐CA 17 2013 UT App 158Holladay v. Storey
to the time of the commission of misconduct that led to expulsion,
then that interest could not be valued until the company is
dissolved. This would mean that the expelled member would
continue to benefit from profits or, likewise, to suffer any losses of
the company until such time as the company dissolves. It is far
more logical that the legislature intended for the expelled member
to be deemed an assignee only until the court determines the
amount to be paid for the expelled member’s interest in the
company, because it would be pointless for that expelled member
to continue as an assignee once the value of the interest is fixed. We
thus reconcile sections 48‐2c‐708(1)(e) and 48‐2c‐1102 with 48‐2c‐
710(3) by concluding that a member becomes an assignee pursuant
to section 48‐2c‐708(1)(e) upon expulsion but that this assignee
status continues only until valuation and does not preclude the
retroactive valuation of the expelled member’s interest when
appropriate.
¶31 Millsap is again instructive. As in this case, a membership
interest was at stake in Millsap. See CCD, LC v. Millsap, 2005 UT 42,
¶¶ 8–10, 116 P.3d 366. According to that operating agreement,
Millsap was slated to receive his benefits as a retiring member,
including the sale of his interest to either the company or its
members. Id. ¶ 8. CCD pursued Millsap’s expulsion in order to
avoid providing him the benefits, including his interest, as a
retiring member. Id. Although the valuation of Millsap’s interest
was not challenged per se, the chronology of his retirement and
expulsion placed his membership interest at the heart of the issue.
See id. ¶¶ 18–19. Despite Millsap’s prior announcement of his intent
to retire, the supreme court affirmed the judicial determination of
Millsap’s expulsion, which made Millsap ineligible to take
advantage of the retirement provisions of the CCD’s operating
agreement. Id. CCD’s successful expulsion of Millsap precluded
him from receiving retirement benefits and thus reaping a profit,
20090824‐CA 18 2013 UT App 158Holladay v. Storey
despite having engaged in the wrongful misappropriation that had
led to his expulsion. See id. ¶ 8, 35.
¶32 Here, by backdating Storey’s expulsion and the valuation of
his interest to December 31, 2005, the trial court prevented Storey
from reaping the benefits of the increased profits the Company
enjoyed after his wrongful acts were discovered and stopped but
before judicial expulsion could be accomplished. Accordingly, the
trial court denied Storey the windfall he would have obtained had
his interest been valued as of the date of the trial court’s
determination of expulsion in 2009.6
¶33 In their cross‐appeal, Appellees argue that the trial court had
discretion to set this date “where equities warrant,” which should
have been November 2003, when Appellees filed their
counterclaim against Storey as a result of his misconduct. As the
trial court indicated, it had the discretion to affix the valuation to
6
It is also significant that, based on his counterclaim filed
in October 2003, Storey sought judicial dissolution of the Com‐
pany and payment of proceeds at that time based on his percent‐
age of ownership pursuant to Utah Code section 48‐2c‐1213, or
in lieu of dissolution, that the Company purchase his one‐third
interest in the Company pursuant to section 48‐2c‐1214. See Utah
Code Ann. § 48‐2c‐1213 (LexisNexis 2010) (providing the proce‐
dure for the court to enter a decree of dissolution); id. § 48‐2c‐
1214 (providing the procedure for the company or a member to
purchase the interest in the company of the member who peti‐
tioned the court for dissolution). Although the trial court did not
dissolve the Company, it allowed Storey to receive his share of
the Company’s valuation as of 2005. If the trial court had instead
valued Storey’s interest as of the date of trial in 2009, Storey
would have received profits well beyond the date when he
requested valuation.
20090824‐CA 19 2013 UT App 158Holladay v. Storey
this date based on its determination that Storey engaged in
misconduct. In addition, the trial court also had discretion to affix
the date based on its findings of Appellees’ conduct. The trial court
entered specific factual findings that Appellees did not act
pursuant to the terms of the Act or the AOA to remove Storey as a
member of the Company until 2005. We agree that the trial court
correctly determined that it had discretion to set the valuation date
based on the equities in the case. Because the trial court’s findings
support the December 31, 2005 date, we further conclude that the
trial court did not exceed that discretion in determining the
valuation date on this basis, and we affirm the trial court’s date for
valuation of Storey’s interest.
¶34 Finally, Storey challenges the trial court’s failure to account
for disbursements of income in its award to Storey for 2003 through
2005. Storey fails to demonstrate where he preserved this issue, as
he is required to do. See Utah R. App. P. 24(a)(5)(A) (stating that the
appellant’s brief must include “citation to the record showing that
the issue was preserved in the trial court; or . . . a statement of
grounds for seeking review of an issue not preserved in the trial
court”). Particularly in a case such as this, with a voluminous
record and numerous issues, it is not the appellate court’s burden
to comb through the record to verify whether, and where, Storey
preserved this issue, and we therefore decline to address it. See
Florez v. Schindler Elevator Corp., 2010 UT App 254, ¶ 32, 240 P.3d
107 (declining to consider an issue because appellant “failed to
establish that [it] was preserved”).
II. Interpretation of the AOA
¶35 Storey argues that the trial court erroneously interpreted the
AOA by creating nonexistent provisions that placed Appellees in
better positions and Storey in a worse position, thereby violating
Storey’s right to freely contract. Storey’s principal complaint is that
20090824‐CA 20 2013 UT App 158Holladay v. Storey
the AOA vests Storey with a one‐third interest in the Company, yet
he was ultimately awarded only 6.39% of the Company’s value.
Storey explains that because the AOA is silent as to the interest a
member retains upon voluntary withdrawal or expulsion, the trial
court’s determination should have been dictated by section 48‐2c‐
708 of the Act, which provides for his assignee status and allows
his interest to continue to accrue. Appellees agree that the Act
governs here but argue that section 48‐2c‐708 applies only in the
absence of expulsion or dissolution.
¶36 Storey’s argument is dependent upon our acceptance of the
position that he continued to be entitled to assignee status beyond
the trial court’s valuation date. As we explained above, we agree
that Storey became an assignee upon his expulsion, see Utah Code
Ann. § 48‐2c‐708(1)(e) (LexisNexis 2010), but that assignee status
did not preclude the trial court from affixing a certain date as of
which to value Storey’s interest in the Company. Once that value
was set, Storey was no longer entitled to share in the Company’s
profits. Because we affirm the trial court’s setting of the date of
valuation, we affirm the trial court’s calculation of the value of
Storey’s assignee interest as of that date.
III. Interim Mediation Agreement
¶37 The parties signed a mediation agreement in February 2009
in which they agreed to the value of certain property that Richard
B. Holladay had contributed to the Company. It was not until after
the trial had begun that Storey challenged the enforceability of the
mediation agreement, arguing that he had not believed the
mediation was binding. The trial court rejected Storey’s argument
and enforced the parties’ mediated agreement, incorporating the
parties’ mediated property valuation into its ultimate calculation.
Storey argues that the trial court’s adoption of the mediation
agreement resulted in a manifest injustice to him.
20090824‐CA 21 2013 UT App 158Holladay v. Storey
¶38 We determine that the trial court correctly enforced the
mediation agreement because by the time of trial, Appellees had
prepared to present evidence based only on the agreement.
Furthermore, on appeal, Storey argues only that the trial court
should have relieved him from the agreement to prevent an
injustice. However, Storey has not demonstrated that binding him
to the stipulation would be a manifest injustice, particularly in light
of the prejudice Appellees would suffer as a result of Storey’s late
challenge to the stipulation on the first day of trial. This is
insufficient cause to overcome the principle that “[o]rdinarily,
courts are bound by stipulations between parties.” Yeargin, Inc. v.
Auditing Div. of the Utah State Tax Comm’n, 2001 UT 11, ¶ 19, 20 P.3d
287 (alteration in original) (citation and internal quotation marks
omitted).
¶39 Storey also contends that the trial court miscalculated
various aspects of his interest. Storey argues that the trial court
failed to accurately incorporate its oral factual findings into its
written findings, and as a result, the trial court’s findings of fact are
inadequate. However, Storey failed to preserve this issue for appeal
because he did not notify the trial court of these alleged
inaccuracies. Accordingly, we do not review this issue. See 438
Main St. v. Easy Heat, Inc., 2004 UT 72, ¶ 56, 99 P.3d 801 (holding
that the plaintiff waived its argument regarding inadequate
findings of fact because it failed to raise the issue “in such a way as
to afford [the court] an opportunity to correct the alleged error”).
¶40 To the extent that Storey also challenges the trial court’s
calculations based on the trial court’s alleged inadequate findings
of fact, he has failed to demonstrate that he preserved the issue by
raising it to the trial court. See Utah R. App. P. 24(a)(5)(A) (stating
that the appellant’s brief must include “citation to the record
showing that the issue was preserved in the trial court; or . . . a
20090824‐CA 22 2013 UT App 158Holladay v. Storey
statement of grounds for seeking review of an issue not preserved
in the trial court”). We therefore do not address this argument.
IV. Prejudgment Interest
¶41 Storey’s final claim is that the trial court erred in failing to
award him prejudgment interest on the value of his interest in the
Company. Again, as Appellees point out, Storey fails to indicate
where in the record he preserved his claim. Storey argues that he
was not required to preserve this issue because “‘the interest issue
is injected by law into every action for the payment of past due
money.’” See Crowley v. Black, 2007 UT App 245, ¶ 10, 167 P.3d 1087(quoting Fitzgerald v. Critchfield, 744 P.2d 301, 304 (Utah Ct. App.
1987)). We disagree.
¶42 Storey relies on cases in which the trial court included
prejudgment interest without a specific request from the prevailing
party. See, e.g., Kimball v. Kimball, 2009 UT App 233, ¶¶ 10, 43, 217
P.3d 733 (affirming the trial court’s inclusion of prejudgment
interest in the judgment “even absent a specific request by [the
plaintiff]”); Fitzgerald, 744 P.2d at 304 (affirming the trial court’s
inclusion of prejudgment interest in the judgment and explaining
that “[the plaintiff’s] failure to specifically plead a request for
prejudgment interest is of no consequence because ‘the interest
issue is injected by law into every action for the payment of past
due money’” (quoting Lignell v. Berg, 593 P.2d 800, 809 (Utah
1979))). In Crowley v. Black, 2007 UT App 245, 167 P.3d 1087 , the
trial court denied the plaintiff’s request for prejudgment interest.
Id. ¶ 4. The plaintiff appealed, and the defendant argued that the
plaintiff’s request for prejudgment interest was untimely. Id. ¶ 10.
This court rejected the defendant’s argument, stating, “The failure
to request prejudgment interest prior to judgment is not fatal
because ‘the interest issue is injected by law into every action for
20090824‐CA 23 2013 UT App 158Holladay v. Storey
the payment of past due money.’” Id. (quoting Fitzgerald, 744 P.2d
at 304).
¶43 However, none of the cases relied on by Storey involved a
new claim for prejudgment interest on appeal. Storey never
requested that the trial court award him prejudgment interest, nor
did the trial court award prejudgment interest sua sponte. In order
to preserve his issue for appeal, Storey should have requested
prejudgment interest below or otherwise brought the issue to the
trial court’s attention. Because Storey did not preserve this issue,
we do not address it. See 438 Main St., 2004 UT 72, ¶ 56.
V. Punitive Damages
¶44 Appellees claim that the trial court erroneously failed to
grant their request for punitive damages where the trial court
found that Storey’s conduct was egregious and that Storey had
breached his fiduciary duty to other members of the Company. The
trial court denied Appellees’ claim for punitive damages, stating
that, if awarded, they would serve as a “double punishment”
because the trial court had already retroactively set the date for
expulsion and valuation of Storey’s interest. Appellees argue that
this reasoning is flawed because the retroactive valuation
constituted compensatory damages that were intended to make
Appellees whole.
¶45 We previously explained that the trial court properly
weighed the parties’ respective conduct when retroactively
assigning the expulsion date; however, we agree with Appellees
that the trial court’s retroactive valuation of Storey’s interest served
the purpose of compensating Appellees. Additionally, “a claim for
breach of fiduciary duty is an independent tort . . . and can serve as
the basis for punitive damages.” Norman v. Arnold, 2002 UT 81,
¶ 35, 57 P.3d 997. The trial court therefore exceeded its discretion
20090824‐CA 24 2013 UT App 158Holladay v. Storey
by denying punitive damages on this basis. We thus reverse the
trial court’s denial of punitive damages and remand for the trial
court to evaluate whether to award punitive damages. See Utah
Code Ann. § 78B‐8‐201(1)(a) (LexisNexis 2012) (“Except as
otherwise provided by statute, punitive damages may be awarded
only if compensatory or general damages are awarded and it is
established by clear and convincing evidence that the acts or
omissions of the tortfeasor are the result of willful and malicious or
intentionally fraudulent conduct, or conduct that manifests a
knowing and reckless indifference toward, and a disregard of, the
rights of others.”).
VI. Attorney Fees
¶46 Appellees claim that the trial court erroneously failed to
grant a request for attorney fees at the conclusion of the trial. The
trial court previously awarded attorney fees paid for by the
Company, excluding those for Appellees’ breach of fiduciary duty
claim. With regard to Appellees’ breach of fiduciary duty claim, the
trial court denied attorney fees “as a matter of law because this is
not a tort action.” Nonetheless the trial court stated that, “if they
were available . . . they would be limited to the amount applicable
to the efforts to remove Mr. Storey in his role as a manager and not
all of the attorney[] fees expended in this action.”
¶47 Appellees do not assert that either a statute or the AOA
provide for attorney fees. See generally Kealamakia, Inc. v. Kealamakia,
2009 UT App 148, ¶ 7, 213 P.3d 13 (“The general rule in Utah, and
. . . the traditional American rule, subject to certain exceptions, is
that attorney fees cannot be recovered by a prevailing party unless
a statute or contract authorizes such an award.” (citation and
internal quotation marks omitted)). Instead, Appellees argue that
they are entitled to attorney fees because they successfully proved
that Storey breached his fiduciary duty. They rely on the principle
20090824‐CA 25 2013 UT App 158Holladay v. Storey
that “breach of a fiduciary obligation is a well‐established
exception to the American rule precluding attorney fees in tort
cases generally.” Id.
¶48 We agree with Appellees that their fiduciary duty claim
sounded in tort, that they prevailed, and that attorney fees were
thus available as a matter of law. See id. Here, Storey’s fiduciary
duties arose not only out of the AOA but also out of independent
duties as a limited liability company manager. See Stevensen 3rd E.,
LC v. Watts, 2009 UT App 137, ¶ 32, 210 P.3d 977 (“‘In Utah, a claim
for breach of fiduciary duty is an independent tort that, on
occasion, arises from a contractual duty.’ Like the fiduciary duties
of general partners or corporate officers, a limited liability
company managerʹs fiduciary duty arises from the corporate
relationship itself, independent of any contractual duties.” (citation
omitted) (quoting Norman v. Arnold, 2002 UT 81, ¶ 35, 57 P.3d 997)).
We reverse the trial court’s denial of attorney fees for the fiduciary
duty claim and remand for a determination of attorney fees and
costs, aside from those previously determined in this case. We
caution the trial court that the attorney fees shall be awarded only
to the extent that Appellees are able to prove that they have
damages other than merely the costs incurred in bringing their
counterclaims. See Neff v. Neff, 2011 UT 6, ¶¶ 88–89, 247 P.3d 380(holding that “even if attorney fees ought to be available as
consequential damages in all claims for breach of fiduciary duty,
we decline the invitation to adopt such a rule where the party has
failed to prove any damages resulting from the breach” apart from
“the harm incurred in bringing a successful claim for breach of
fiduciary duty”).
¶49 Finally, inasmuch as we affirm the trial court on the issues
of backdating Storey’s effective expulsion date and the date of the
valuation, and reverse the denial of punitive damages and attorney
fees, Appellees have prevailed on appeal. Accordingly, Appellees
are entitled to their appellate attorney fees, and we remand to the
20090824‐CA 26 2013 UT App 158Holladay v. Storey
trial court to determine the appropriate amount of fees incurred on
appeal.
CONCLUSION
¶50 The trial court correctly determined that it was authorized
to backdate the date for expulsion and valuation. The trial court
also correctly affixed December 31, 2005, as the effective date,
based upon the parties’ conduct. The trial court exceeded its
discretion in determining that it had already awarded punitive
damages, and we therefore reverse and remand for the trial court
to evaluate whether to award punitive damages. We also reverse
the trial court’s denial of Appellees’ attorney fees and remand for
a determination of their reasonable attorney fees at trial and on
appeal consistent with this opinion.
20090824‐CA 27 2013 UT App 158