MCG S. LLC v. Veracity Networks LLC , 415 P.3d 1174 ( 2018 )

2018 UT App 33THE UTAH COURT OF APPEALS
MCG SOUTHERN LLC,
Appellee and Cross-appellant,
v.
VERACITY NETWORKS LLC,
Appellant and Cross-appellee,
v.
STEPHEN T. CHRISTENSEN,
Appellee,
Opinion
No. 20160431-CA
Filed February 23, 2018
Third District Court, Salt Lake Department
The Honorable Robert P. Faust
No. 130903953
Richard D. Burbidge, Jefferson W. Gross, S. Ian Hiatt,
and Carolyn J. LeDuc, Attorneys for Appellant
and Cross-appellee
Brennan H. Moss and Jedediah G. Brinton, Attorneys
for Appellees and Cross-appellant
JUDGE DIANA HAGEN authored this Opinion, in which JUDGES
KATE A. TOOMEY and DAVID N. MORTENSEN concurred.
HAGEN, Judge:
¶1 MCG Southern LLC (MCG) sued Veracity Networks LLC
(Veracity) for breach of a lease agreement. In response, Veracity
asserted that the lease was voidable due to an alleged breach of
fiduciary duty by the principal who negotiated and executed the
lease. On summary judgment, the district court ruled that
Veracity did not have standing to assert the breach of fiduciary
duty claim and that MCG was entitled to judgment as a matter
of law. Veracity appeals the grant of summary judgment, and
MCG Southern v. Veracity Networks
MCG cross-appeals the district court’s calculation of damages.
Because we reverse the grant of summary judgment and vacate
the district court’s subsequent decisions, we do not reach the
issue of damages.
BACKGROUND
¶2 In 2001, Christensen formed Broadweave Networks of
St. George LLC and Broadweave Networks, Inc. (collectively,
Broadweave), which provided telephone and internet services to
a master-planned community in Washington County, Utah.
Christensen served as Broadweave’s CEO, president, and
chairman of the board of directors (the Board) until 2009.
¶3 Broadweave leased a building on property owned by the
State of Utah. In November 2007, Christensen proposed to the
Board that he form a new company (later organized as MCG) “to
lease the Real Property from [the State of Utah], purchase the
Building, and then lease the Building to Broadweave.”
¶4 In October 2007, Christensen provided the Board with
written disclosures concerning this proposal. In part, the
disclosures explained that “the new company would lease the
building to Broadweave at a monthly rate of 1.2 times the
amount of the new company’s loan payment, taxes and
insurance in order to qualify for a commercial mortgage and
which would be a loan requirement.” This multiplier is known
as a Debt Service Coverage Ratio or DSCR. These disclosures
were memorialized in a resolution approved by the Board.
¶5 Christensen subsequently formed MCG and obtained a
loan from Far West bank, which required a DSCR multiplier of
1.3—a higher rate than the 1.2 offered by the lender that
Christensen initially proposed to the Board. On August 1, 2008,
Christensen, acting on behalf of both MCG and Broadweave,
executed a written lease agreement in which MCG leased the
building to Broadweave at the 1.3 rate.
20160431-CA 2 2018 UT App 33MCG Southern v. Veracity Networks
¶6 In 2009, Veracity Communications and Broadweave
combined “their respective business activities,” which were
“controlled and owned by [Veracity].” Following the acquisition,
Veracity assumed Broadweave’s lease payments to MCG.
¶7 In May 2013, MCG filed a complaint against Veracity for
breach of lease (failure to pay rent), unlawful detainer, and
waste with regard to the building. In response to the complaint,
Veracity filed an answer and counterclaims and asserted a third
party complaint against Christensen for, among other things,
breach of fiduciary duty. Specifically, Veracity alleged that
Christensen breached his duty to Broadweave when he entered
into a lease that set the monthly building rent above the amount
approved by the Board and that the lease was therefore
voidable. As the successors to Broadweave’s claims and
interests, Veracity argued that it was entitled to assert this
breach of fiduciary duty as a counterclaim and defense.
¶8 Both parties moved for summary judgment. At the heart
of the dispute was whether the lease agreement was valid, or
whether it was voidable because of Christensen’s alleged breach
of fiduciary duty. MCG filed a supplemental brief in support of
its motion for summary judgment, arguing that Veracity “lacks
standing to challenge the lease entered into by [MCG] and
Broadweave.” During oral argument on the motions, the district
court questioned whether Veracity had “standing” to assert its
breach of fiduciary duty claims. The court asked Veracity to
submit “a supplemental filing to specifically cite to the exact
provisions or paragraphs in the documents consisting of the
Broadweave/Veracity transactions (300 plus pages) by which
[Veracity] claims standing or the right to bring a cause of action
for breach of a fiduciary duty owed to Broadweave.” At oral
argument and in a supplemental filing, Veracity pointed to the
initial contribution agreement between Broadweave and
Veracity that transferred “all of Broadweave’s Assets,” other
than a discrete list of excluded assets not relevant to the issues
on appeal.
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¶9 The district court granted MCG’s motion for summary
judgment. Among other things, the court ruled that “Veracity
does not have standing to assert breaches of fiduciary duty not
owed to them.” The court determined that “[t]he claim for
violation of a fiduciary duty owed by Mr. Christensen to
Broadweave belongs to Broadweave, because the fiduciary
relationship existed between them, and not with Defendant
Veracity.” The court then concluded that Veracity did not have
the right to assert this claim, because there was “no specific
document making an assignment of a claim for any supposed
breach of fiduciary duties” from Broadweave to Veracity. In
addition, the court reasoned that the mere receipt of some assets
and contractual obligations from Broadweave does not grant
Veracity “standing” to assert the claim. Having concluded that
Veracity could not maintain its defense or counterclaims based
on a breach of fiduciary duty, the court ruled that MCG was
entitled to summary judgment as a matter of law and dismissed
Veracity’s counterclaims against MCG and its third party
complaint against Christensen. In subsequent written orders, the
court awarded MCG damages and attorney fees.
¶10 Veracity appealed the grant of summary judgment and
MCG cross-appealed the court’s calculation of damages.
Veracity contends that the district court erred by ruling that
Veracity lacked standing to challenge the validity of the lease
based on Christensen’s alleged breach of his fiduciary duty to
Broadweave. Because the court’s ruling on standing drove its
subsequent analysis, Veracity argues that the court’s order
granting summary judgment in favor of MCG and dismissing
Veracity’s counterclaims and third party complaint must be
reversed.
ISSUE AND STANDARD OF REVIEW
¶11 Veracity contends that the district court erred when it
ruled that MCG was entitled to summary judgment as a matter
of law because Veracity did not have standing to challenge the
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validity of the lease based on Christensen’s alleged breach of his
fiduciary duty to Broadweave.
¶12 A district court’s grant or denial of a motion for summary
judgment is reviewed for correctness, viewing “the facts and all
reasonable inferences drawn therefrom in the light most
favorable to the nonmoving party.” Orvis v. Johnson, 2008 UT 2,
¶ 6, 177 P.3d 600 (citation and internal quotation marks omitted).
“The court shall grant summary judgment if the moving party
shows that there is no genuine dispute as to any material fact
and the moving party is entitled to judgment as a matter of law.”
Utah R. Civ. P. 56(a).
¶13 Because we reverse the district court’s grant of summary
judgment and vacate its subsequent decisions, we do not reach
the remaining issues.
ANALYSIS
¶14 Veracity appeals the district court’s grant of summary
judgment in favor of MCG and dismissal of Veracity’s
counterclaims and third party complaint against Christensen.
The court’s ruling turned on whether Veracity could assert that
Christensen breached his fiduciary duty to Broadweave in
negotiating the lease, thereby rendering the lease voidable.
Veracity asserted this argument both as a defense against MCG’s
claims that Veracity violated the lease and as the basis for
Veracity’s counterclaims against MCG and third party complaint
against Christensen. Because the fiduciary duty existed between
Christensen and Broadweave, the court ruled that Veracity did
“not have standing to assert breaches of fiduciary duty not owed
to [it].” Having foreclosed Veracity’s only defense to the validity
of the lease, the court concluded that there were no genuine
disputes as to any material fact and that MCG was entitled to
summary judgment as a matter of law.
¶15 Veracity’s ability to assert a breach of fiduciary duty claim
is a question of assignability, not standing. “In Utah, standing is
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generally conferred upon a party who has ‘a personal stake in
the outcome of the dispute.’” Victor Plastering, Inc. v. Swanson
Bldg. Materials, Inc., 2008 UT App 474, ¶ 9, 200 P.3d 657 (quoting
Washington County Water Conservancy Dist. v. Morgan, 2003 UT
58, ¶ 20, 82 P.3d 1125). Not surprisingly, “[t]he vast majority of
Utah standing law has developed in the context of evaluating a
plaintiff’s ability to prosecute a claim, not a defendant’s ability to
defend against it.” Id. As this court has previously recognized, a
defendant will necessarily have a personal stake in the outcome
of litigation solely by virtue of being named as a party
defendant. Id. In fact, even where the defendant disclaims any
interest in the subject of the litigation, the defendant still has
standing to defend itself against the plaintiff’s suit. Id.
¶16 In this case, there is no question that Veracity has a
personal stake in the outcome of this litigation. MCG sued
Veracity for breach of the lease agreement entered into by
Broadweave. The lawsuit is predicated on the undisputed fact
that Veracity assumed legal responsibility for the lease
agreement along with Broadweave’s other assets and liabilities.
Veracity will suffer a distinct and palpable injury if the contract
is enforced and MCG is awarded damages. As a result, Veracity
clearly has standing to defend itself against MCG’s lawsuit by
contesting the enforceability of the contract.
¶17 The real question is whether Broadweave’s potential
breach of fiduciary duty claim was assigned to Veracity along
with its liability for the lease. The answer is dictated by the
parties’ allegations and admissions in the pleadings. In
Veracity’s answer, counterclaim, and third party complaint
against Christensen, it alleges that “Veracity was formed in
October of 2009 and acquired certain assets and liabilities of
Broadweave . . . . Pursuant to the acquisition, Veracity is the
successor to Broadweave’s claims and interests in this case.”
(Emphasis added.) The MCG Parties address this specific
allegation in their amended answer by “admit[ting] that Veracity
is the successor to Broadweave’s claims and interest.”
20160431-CA 6 2018 UT App 33MCG Southern v. Veracity Networks
¶18 ”If the defendant admits any fact or facts in its answer, it
thereby waives proof of all facts thus admitted, and the issue to
which such admissions relate must be determined in accordance
with such admissions.” Garland v. Fleischmann, 831 P.2d 107, 111
(Utah 1992) (citation and internal quotation marks omitted).
Furthermore, such an admission “precludes the pleader from
denying obligations implied by law from such admitted facts.”
Id. Because Veracity alleged and MCG admitted that Veracity is
“the successor to Broadweave’s claims and interests in this case,”
this fact was deemed admitted for the purposes of summary
judgment.
¶19 “Unless withdrawn or amended, admissions have the
effect of withdrawing a fact from issue and dispensing wholly
with the need for proof of the fact.” Roberts v. Roberts, 2014 UT
App 211, ¶ 41, 335 P.3d 378 (citation and internal quotation
marks omitted). Here, MCG never moved to withdraw or amend
its answer admitting that Veracity was “the successor to
Broadweave’s claims and interests in this case.” As a result,
Veracity was relieved of its obligation to prove that
Broadweave’s potential breach of fiduciary duty claim had been
assigned to Veracity as part of the acquisition. But instead of
accepting the parties’ admissions, the district court found that
“there is no specific document making an assignment of a claim
for any supposed breach of fiduciary duties from Broadweave to
Defendant Veracity in the transactional documents between
Broadweave and Defendant Veracity.” The court’s finding was
in direct contradiction to what was alleged and admitted by the
parties. Therefore, the district court erred in ruling that Veracity
could not challenge the validity of the lease based on
Christensen’s alleged breach of fiduciary duty to Broadweave.
¶20 The district court’s ruling that MCG was entitled to
judgment as a matter of law was based on the mistaken premise
that Veracity could not defend this lawsuit by contesting the
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validity of the lease. Having determined otherwise, we vacate
the district court’s ruling in its entirety.1
CONCLUSION
¶21 Because the parties admitted that “Veracity is the
successor to Broadweave’s claims and interest in this case,” the
district court erred in ruling that Veracity could not challenge
the validity of the lease based on an alleged breach of fiduciary
duty owed to Broadweave. As a result, MCG was not entitled to
judgment as a matter of law. We reverse the grant of summary
judgment, vacate the district court’s subsequent decisions, and
remand for further proceedings.2
1. Although the district court did not reach the merits of whether
a breach of fiduciary duty rendered the lease voidable, MCG
urges us to consider the merits as an alternative ground for
affirmance. However, there are genuine disputes of material fact
that would preclude summary judgment on this basis, including
a factual dispute over whether Christensen fully disclosed
material information to the Board and obtained its approval to
enter into a lease with a higher rent payment than he initially
proposed.
2. Veracity has requested attorney fees incurred in pursuing this
appeal and in opposing MCG’s related writ petition, which this
court previously denied. The Lease provides for an award of
reasonable attorney fees to the prevailing party in any action “to
recover any rent or other amount under this Lease because of
any default under this Lease, to enforce or interpret any of the
provisions of this Lease, or for recovery of possession of the
Premises.” Because the entitlement to attorney fees turns on who
is the prevailing party, we deny the request without prejudice,
and remand the issue of attorney fees, including those associated
with this appeal and the related writ, to be determined by the
district court after further proceedings on the merits.
20160431-CA 8 2018 UT App 33