DePatco, Inc. v. Teton View Golf Estates, LLC , 2014 Utah App. LEXIS 274 ( 2014 )

2014 UT App 266_________________________________________________________
THE UTAH COURT OF APPEALS
DEPATCO, INC.,
Plaintiff and Appellee,
v.
TETON VIEW GOLF ESTATES, LLC AND IDAHO DEVELOPMENT, LLC,
Defendants and Appellants.
Memorandum Decision
No. 20130882-CA
Filed November 14, 2014
Third District Court, Salt Lake Department
The Honorable Kate A. Toomey
No. 120905582
Michael R. Carlston, John E. Gates, and Adam M.
Pace, Attorneys for Appellants
P. Matthew Muir, Attorney for Appellee
JUDGE GREGORY K. ORME authored this Memorandum Decision,
in which JUDGE J. FREDERIC VOROS JR. and SENIOR JUDGE RUSSELL
W. BENCH concurred.1
ORME, Judge:
¶1 Teton View Golf Estates, LLC, and Idaho Development,
LLC, appeal the trial court’s declaratory judgment that, under Utah
law, Teton View must pay non-member creditors in full before
paying member creditors as it winds up its business and settles its
obligations. We affirm.
1. The Honorable Russell W. Bench, Senior Judge, sat by special
assignment as authorized by law. See generally Utah R. Jud. Admin.
11-201(6).
DePatco v. Teton View Golf
¶2 In 2008, Idaho Development and another entity formed
Teton View Golf Estates, a Utah limited liability company.2 Idaho
Development loaned Teton View a substantial sum with which to
purchase and develop some land in Idaho. In return Teton View
gave Idaho Development a promissory note secured by a deed of
trust on the land. Teton View then hired DePatco, Inc., to provide
materials and construction services. Teton View eventually failed,
and Idaho Development brought an action in Idaho against Teton
View and other parties to foreclose its deed of trust. See Idaho Dev.,
LLC v. Teton View Golf Estates, LLC, 272 P.3d 373, 375 (Idaho 2011).
DePatco, which had recorded a materialman’s lien against the land
and thus was named as a defendant in the foreclosure action,
moved for summary judgment against Idaho Development.
¶3 The Idaho court granted DePatco’s motion because it
determined that the loan from Idaho Development to Teton View
was actually nothing more than a capital contribution made to a
limited liability company by one of its members. Idaho
Development appealed, and the Idaho Supreme Court vacated the
judgment and remanded, holding that factual questions precluded
summary judgment. Id. at 382. On remand, the Idaho trial court
determined that Utah law governed the priority in which Teton
View must pay its creditors. Accordingly, the Idaho trial court
stayed its decision after DePatco brought the current action in Utah
to obtain a definitive answer to the priority question.
¶4 Among other things, DePatco asked the Utah trial court for
a declaratory judgment that, under Utah law, Teton View must use
its assets to pay non-member creditors before paying member
2. When reviewing a trial court’s grant of summary judgment, we
recite the facts and all reasonable inferences drawn therefrom in the
light most favorable to the nonmoving party—in this case,
appellants Idaho Development and Teton View Golf Estates. See
Orvis v. Johnson, 2008 UT 2, ¶ 6, 177 P.3d 600.
20130882-CA 2 2014 UT App 266DePatco v. Teton View Golf
creditors.3 On that issue, DePatco and Idaho Development filed
cross motions for summary judgment. The Utah trial court granted
summary judgment “in favor of DePatco because Utah Code
section 48-2c-1308 gives non-member creditors priority over
member creditors for the distribution of the dissolved company’s
assets during the winding up phase.” Idaho Development and
Teton View appeal that decision.
¶5 Despite the relatively complicated factual and procedural
background of this case, there is effectively only one question
before us now: Did the trial court err in ruling that Teton View
must use its assets to pay DePatco before it pays Idaho
Development? We conclude that the court did not err.
¶6 Idaho Development and Teton View argue on appeal that
the trial court misinterpreted or misapplied the relevant statutes.
“The proper interpretation and application of a statute is a question
of law,” and we afford no deference to the trial court in reviewing
its interpretation of applicable statutes. Gutierrez v. Medley, 972 P.2d
913, 914–15 (Utah 1998). We also review a “trial court’s legal
conclusions and ultimate grant or denial of summary judgment for
correctness.” Orvis v. Johnson, 2008 UT 2, ¶ 6, 177 P.3d 600 (citation
and internal quotation marks omitted).
¶7 Idaho Development and Teton View base their arguments
on sections of the Utah Code that are inapplicable or at least
unhelpful. To begin with, they argue that sections 48-2c-1304 and
48-2c-1308 of the Utah Code must be read together to determine
payment priority when a dissolved limited liability company winds
up. This argument does not carry appellants very far.
3. DePatco also asked the trial court to declare Teton View
dissolved, which the trial court refused to do because it concluded
that Teton View was already dissolved, if for no other reason than
it failed to file an annual report in 2010.
20130882-CA 3 2014 UT App 266DePatco v. Teton View Golf
¶8 Utah Code section 48-2c-1304 provides that dissolved
limited liability companies, when winding up their affairs, shall
pay all their debts and obligations or make provision for such
payment. It also requires, in general terms, that if the assets are
insufficient to do so, “the claims and obligations shall be paid or
provided for according to their priority under law.” Utah Code
Ann. § 48-2c-1304 (LexisNexis 2010). Section 1308, however, is a
more focused provision describing in detail how a dissolved
limited liability company must distribute its assets in winding up
its business. In general, “a statute dealing specifically with a
particular issue prevails over a more general statute that arguably
also deals with the same issue.” Lyon v. Burton, 2000 UT 19, ¶ 17, 5
P.3d 616. Therefore, an intense examination of the interplay
between sections 1304 and 1308 is of limited value. Instead, we will
recognize, as the trial court correctly did, that the more specific
statute—section 1308—controls in this instance, and we proceed
with our analysis accordingly.4 Subsection 1308(1) provides:
After dissolution, and during winding up, the assets
of the company shall be applied to pay or satisfy: (a)
first, the liabilities to creditors other than members,
in the order of priority as provided by law; (b)
4. The appellants argue that subsection (2) of section 1308 and
subsection (2) of section 1304 apply to the case at hand. These
subsections, however, deal exclusively with assets that remain after
a company that is winding up pays all its debts. See Utah Code
Ann. § 48-2c-1308(2) (LexisNexis 2010) (dealing with “assets
remaining”); id. § 48-2c-1304(2) (dealing with “any remaining
assets”). But this case deals with the sequence in which Teton View
must pay its creditors and has nothing to do with how Teton View
must apportion any remaining assets. Because we conclude that
section 1304 is unhelpful in this context and because we determine
that subsection (2) of section 1304 and subsection (2) of section 1308
are inapplicable, we base our analysis primarily on subsection (1)
of section 1308.
20130882-CA 4 2014 UT App 266DePatco v. Teton View Golf
second, the liabilities to members in their capacities
as creditors, in the order of priority as provided by
law; and (c) third, the expenses and cost of winding
up.
Utah Code Ann. § 48-2c-1308(1 (LexisNexis 2010).
¶9 When interpreting a statute, we look first to the plain
meaning of the pertinent language. In re adoption of Baby E.Z., 2011
UT 38, ¶ 15, 266 P.3d 702. Here, the plain meaning of the language
leads us to conclude that Teton View must pay non-member
creditors, like DePatco, before it pays its only member creditor,
Idaho Development.
¶10 The appellants argue that the general language in Utah
Code section 48-2c-1304 requiring that a company pay its debts
according to the “priority under law” should lead to a superior-title
analysis under Utah law governing liens and mortgages, thereby
circumventing section 1308’s requirements to pay non-member
creditors first. Section 1308, however, also uses a similar phrase,
“priority as provided by law,” to describe how assets should be
distributed among non-member creditors as a group and then
again to describe how any remaining assets should be distributed
among member creditors as a group. Utah Code Ann. § 48-2c-
1308(1). Reading sections 1304 and 1308 together, the phrase
“priority under law” in section 1304 stands for the general
proposition that a limited liability company must pay its debts in
the order prescribed by law, which necessarily includes section
1308 and other Utah law as it applies within the framework of
section 1308. And subsection 1308(1)’s reference to “in the order of
priority as provided by law” in each of subsections (a) and (b)
confirms that within each of the two broad categories—“creditors
other than members” and “members in their capacities as
creditors”—distribution is to be made in accordance with the
priority scheme provided by law. Thus, a secured non-member
creditor would recover before an unsecured non-member creditor,
and a secured member creditor would recover before an unsecured
20130882-CA 5 2014 UT App 266DePatco v. Teton View Golf
member creditor. But because non-member creditors are, by the
express language of subsection 1308(1), paid before member
creditors, even an unsecured non-member creditor would recover
before a secured member creditor.5
¶11 As a further basis on which to resist the conclusion we reach,
Idaho Development and Teton View assert that Teton View’s
operating agreement permissibly altered the priority of distribution
prescribed in section 1308 by providing that it would be formed
pursuant to an older version of the law that did not give non-
member creditors priority. See Utah Code Ann. § 48-2b-138(1)
(Michie 1998). Under some circumstances, Utah law contemplates
that operating agreements may alter various “default” provisions
of the law governing limited liability companies. Subject to some
important limitations, Utah Code section 48-2c-502, in subsection
(1), allows a company, through its operating agreement, to modify
the default rules concerning the management of the company; the
business or purpose of the company; the conduct of the company’s
affairs; or the relationship between the members, the managers,
and the company. But the distribution of assets when winding up
the company’s business does not fall into one of these categories.
Moreover, subsection 502(2) clarifies that where “the provisions of
an operating agreement conflict with the provisions of this chapter,
the provisions of this chapter shall control.” Id. § 48-2c-502(2)
(LexisNexis 2010).
¶12 Furthermore, subsection 502(1) is expressly limited by
subsection 48-2c-120(1), which states that an “operating agreement
may not . . . restrict rights of, or impose duties on, persons other
than the members, their assignees and transferees, the managers,
and the company, without the consent of those persons.” Id. § 48-
2c-120(1)(h). Section 1308 vests non-member creditors with a right
to be paid first from a dissolved company’s assets. Therefore, Teton
5. Such a scheme is unusual, to be sure, and it has been criticized.
It has also been repealed. See infra note 6.
20130882-CA 6 2014 UT App 266DePatco v. Teton View Golf
View’s operating agreement could not have restricted the rights of
DePatco and other non-member creditors without their consent. See
id. § 48-2c-120(1)(h). Because Idaho Development and Teton View
presented no evidence that DePatco consented to any such
provision in Teton View’s operating agreement, the provision
would be invalid under Utah law. It is true that Utah laws
governing limited liability companies should “be interpreted so as
to give the maximum effect to the principle of freedom of contract,”
id. § 48-2c-1901, but this freedom of contract only applies to the
contracting parties. Obviously, the freedom of two parties to
contract with each other, and to do as they please with their rights
inter se, does not permit them to bargain away the rights of a non-
consenting third party. Therefore, this argument fails.
¶13 Finally, Idaho Development and Teton View argue that
there was a dispute of material fact and that the trial court erred in
granting summary judgment to DePatco. Summary judgment is
appropriate only when “there is no genuine issue as to any material
fact and . . . the moving party is entitled to a judgment as a matter
of law.” Utah R. Civ. P. 56(c). In support of their argument,
appellants list the facts that they contend were both material and
in dispute: Teton View’s manager told Idaho Development that it
would get its money back; Teton View told Idaho Development it
would get first priority; Idaho Development would never have
entered into the agreement with Teton View unless it was
guaranteed first priority; Idaho Development had a first-position
deed of trust; Idaho Development never subordinated its deed to
DePatco; and Idaho Development commenced its foreclosure
action before Teton View was officially dissolved. All of these facts,
however, are immaterial to the question before the trial court. In
distinguishing between member creditors and non-member
creditors, the mandate of Utah Code section 48-2c-1308 is not at the
mercy of the intent of the parties or of the facts and circumstances
unique to a case. As a result, all of these facts pressed by Idaho
Development and Teton View, which we assume to be true in the
posture of this case, are immaterial to our resolution of the
dispositive legal issue.
20130882-CA 7 2014 UT App 266DePatco v. Teton View Golf
¶14 Because Utah Code section 48-2c-1308 governs, we conclude
that DePatco was entitled to a declaratory judgment that Teton
View must pay its debt to DePatco and other non-member creditors
before it pays its debt to Idaho Development, one of its members.6
¶15 Affirmed.
6. The law that requires this result has been criticized. For example,
the authors of a 2009 article in the Utah Bar Journal noted, “This
member-creditor subordination penalty is neither warranted nor
justified solely on the grounds that the creditor is a member. . . .
The Utah LLC Act has the dubious distinction of being the only
LLC statute that creates such an inequitable asset priority
distribution.” Justin J. Atwater & Russell K. Smith, Utah LLCs vs.
Other State LLCs: When Should Attorneys Consider Forming LLCs
Outside Utah?, 22 Utah B.J. 33, 34 (Sept./Oct. 2009). Indeed, the Utah
Legislature has since enacted the Utah Revised Uniform Limited
Liability Company Act, which requires an LLC, in winding up, to
pay “its obligations to creditors, including members that are
creditors.” See Utah Code Ann. § 48-3a-711(1) (LexisNexis Supp.
2013). The new law, however, does not apply to a limited liability
company formed before January 1, 2014, such as Teton View, until
after January 1, 2016. See id. § 48-3a-1405. The result we reach in this
decision, therefore, will only remain a reliable template for
resolving similar disputes until January 1, 2016, when the new law
fully replaces the old.
20130882-CA 8 2014 UT App 266