Pino v. Entity 4812420-0140

2019 UT App 69THE UTAH COURT OF APPEALS
SAM PINO, JEANNE R. THOMAS, TODD PALMER, AND JODIE PALMER,
Appellants,
v.
ENTITY #4812420-0140,
Appellee.
Opinion
No. 20160294-CA
Filed May 2, 2019
Third District Court, Salt Lake Department
The Honorable Robert P. Faust
No. 140903403
Thomas N. Crowther, Bret J. Crowther, Matthew S.
Brahana, and Christopher Bond, Attorneys
for Appellants
J. Craig Smith and Kathryn J. Steffey, Attorneys
for Appellee
JUDGE DAVID N. MORTENSEN authored this Opinion, in which
JUDGES JILL M. POHLMAN and DIANA HAGEN concurred.
MORTENSEN, Judge:
¶1 Rather than drawing from their reservoir of cooperative
experience, the users of a water well dispute how their mutual
association should continue. A nonprofit water corporation
failed to renew its registration and was administratively
dissolved. A group of shareholders (Appellants) contended that,
upon dissolution, the corporation’s articles of incorporation and
bylaws required its assets to be liquidated and the proceeds
distributed to the corporation’s shareholders. Appellants claim
that the trial court erred in granting summary judgment in favor
of the corporation when it determined that the corporation
Pino v. Entity #4812420-0140
properly distributed its assets to a successor corporation. We
affirm.
BACKGROUND
¶2 In 1997, a group of lot owners in the Brighton Estates
Subdivision in Wasatch County entered into an agreement to
drill a well to provide water to the subdivision. In 2000, the
group formed a nonprofit corporation, Entity #4812420-0140,
commonly known as The Well Corporation (TWC 2000), to own,
finance, and oversee the installation of a culinary water
distribution system and thereafter to own and operate the well
and water distribution system. The well was drilled on land
owned by the Ault Family Trust (Trust) and used for the stated
purpose.
¶3 In 2007, Michael Ault, as a representative and agent of the
Trust, was elected to TWC 2000’s board of directors. And in
November 2008, the Trust granted an easement to TWC 2000 to
provide access for the operation and maintenance of the water
well.
¶4 In December 2010, while Ault was still serving on the
board, TWC 2000’s registration with the Utah Division of
Corporations and Commercial Code (Division) expired and was
not renewed. In February 2012, a new board of directors
(Directors) was elected, but it was not aware of TWC 2000’s
expired corporate status. The Directors discovered the expired
status more than two years after TWC 2000’s registration had
expired.
¶5 As a result, in February 2013, the Directors formed
The Well Corporation 2013 (TWC 2013) to function in the
place of TWC 2000 and receive the assets and liabilities of
TWC 2000. In October 2013, TWC 2000 executed an assignment
(2013 Assignment) transferring all of its assets and obligations to
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TWC 2013 so that TWC 2000’s shareholders could continue
to receive water from the well. In May 2014, Appellants,
who consist of a group of dissenting shareholders, commenced
this action against TWC 2000 in the trial court seeking,
among other relief, confirmation of TWC 2000’s dissolution,
liquidation of TWC 2000’s assets, return of such assets to
TWC 2000’s shareholders, and the return of the easement to the
Trust.
¶6 In August 2014, the Division reinstated TWC 2000, and
the two companies rescinded the 2013 Assignment, leaving all
the assets in TWC 2000’s ownership. In September 2014, TWC
2000 held a shareholder meeting, at which a majority of TWC
2000’s shares were represented, and ninety-five percent of those
shares present voted to ratify the Directors’ actions in (1)
forming TWC 2013 to act as a successor corporation and (2)
causing TWC 2000 to be reinstated.
¶7 Appellants then filed an objection with the Division to
TWC 2000’s reinstatement, and in October 2014, the Division
placed TWC 2000 “in pending status awaiting the outcome of the
litigation.” In response, TWC 2000 and TWC 2013 enacted a
conditional recession agreement providing that the 2013
Assignment would remain effective until TWC 2000 was
restored to active status by the Division.
¶8 In the present proceeding, the trial court considered but
rejected Appellants’ arguments, granted TWC 2000’s motion for
summary judgment, and denied Appellants’ cross-motion for
summary judgment, concluding that “Utah law does not require
a post-dissolution distribution to comply with the dissolved
corporation’s Articles of Incorporation and Bylaws,” (Articles)
and, even if the law “did require [TWC 2000] to distribute its
assets after dissolution in accordance with its [Articles], such a
requirement has been satisfied in this case.” Appellants appeal
the judgment of the trial court.
20160294-CA 3 2019 UT App 69Pino v. Entity #4812420-0140
ISSUES AND STANDARDS OF REVIEW
¶9 The first issue on appeal is whether the Utah Revised
Nonprofit Corporation Act (Act), see Utah Code Ann. §§ 16-6a-
102 to -1702, authorized the transfer of TWC 2000’s assets and
liabilities to a successor corporation or whether the assets were
required to be distributed in accord with TWC 2000’s Articles.
The second issue on appeal is whether an administratively
dissolved corporation can be reinstated by the Division even if
the corporation failed to make an application for reinstatement
within two years after its dissolution.
¶10 Both issues involve questions of statutory interpretation
and the standard for granting summary judgment. “We review
questions of statutory interpretation for correctness, affording no
deference to the [trial] court’s legal conclusions.” Grimm v. DxNA
LLC, 2018 UT App 115, ¶ 14, 427 P.3d 571 (cleaned up). And
“[w]e review a [trial] court’s legal conclusions and grant or
denial of summary judgment for correctness, viewing the facts
and all reasonable inferences in the light most favorable to the
nonmoving party.” Rapoport v. Martin, 2018 UT App 163, ¶ 6, 432
P.3d 772.
ANALYSIS
I. Transfer of TWC 2000’s Assets and Liabilities
¶11 The trial court ruled that TWC 2000’s transfer of its assets
and liabilities to TWC 2013 was proper under the Act. The trial
court concluded that “Utah law does not require a
post-dissolution distribution to comply with the dissolved
corporation’s [Articles].” Specifically, the trial court found that
the Utah Code “expressly authorizes a nonprofit corporation to
‘make distributions upon dissolution . . . to another nonprofit
corporation, including a nonprofit corporation organized to
receive the assets of and function in place of the dissolved
20160294-CA 4 2019 UT App 69Pino v. Entity #4812420-0140
nonprofit corporation.’” (Quoting Utah Code Ann. § 16-6a-
1302(2)(c).)
¶12 Appellants argue that the trial court erred by not giving
effect to Article XII of TWC 2000’s Articles, which states: “In the
event of dissolution of [TWC 2000], each shareholder shall
receive its proportionate share of [TWC 2000’s] property and
assets, including gains from the sale of appreciated assets, in
proportion to the number of shares held.” Appellants also note
that the Act provides an alternative to the path taken by the
court. Instead of distribution to a successor nonprofit
corporation, distribution on dissolution of a nonprofit
corporation may also be made “to its members if it is a mutual
benefit corporation.” Utah Code Ann. § 16-6a-1302(2)(b)
(LexisNexis Supp. 2009). 1 Appellants conclude by asserting that
given the choices (namely, distributing the assets to a successor
nonprofit corporation or to the shareholders), the court erred in
choosing the first:
If there is a choice between two equally applicable
contract alternatives,[2] and if one alternative does
1. Appellants rightly point out that TWC 2000 is a “mutual
benefit corporation” because it is a nonprofit corporation “that
issues shares of stock to its members evidencing a right to
receive distribution of water or otherwise representing property
rights.” Utah Code Ann. § 16-6a-102(33)(a) (LexisNexis Supp.
2009).
2. Citing Okelberry v. West Daniels Land Ass’n, Appellants contend
that Utah Code section 16-6a-302 and the Articles are part of the
same contract between TWC 2000 and its shareholders. See 2005
UT App 327, ¶ 14, 120 P.3d 34 (stating that “the bylaws of a
corporation, together with the articles of incorporation, the
statute under which it was incorporated, and the member’s
(continued…)
20160294-CA 5 2019 UT App 69Pino v. Entity #4812420-0140
not give effect to all terms in the contract and
another alternative does so, the alternative giving
effect to all contract terms must govern. The trial
court erred by applying and giving effect to the
statutory alternative allowing transfer of TWC 2000
assets to TWC 2013 in violation of [the Articles]
instead of the alternative directing distribution of
the TWC 2000 assets to its shareholders in
conformity with [the Articles].
¶13 Appellants’ argument fails because it relies on a non-
existent conflict between the Articles and the statutory options
upon dissolution laid out in Utah Code section 16-6a-1302(2). 3
(…continued)
application, constitute a contract between the member and the
corporation” (cleaned up)).
3. We note that “[t]he statutes under which a corporation is
formed constitute the preeminent authority governing the
corporation, making other sources of corporate authority and
governance—e.g., resolutions, bylaws, and declarations—
inferior to and subject to the controlling statutes.” Park West
Condo. Ass’n v. Deppe, 2006 UT App 507, ¶ 20, 153 P.3d 821; see
also Utah Code Ann. § 16-6a-202(1)(g) (LexisNexis Supp. 2012)
(“The articles of incorporation [of a nonprofit corporation] shall
set forth . . . provisions not inconsistent with law regarding the
distribution of assets on dissolution.”). In addition, TWC 2000’s
Articles state that the corporation was organized to “[d]o any
and all acts and things, and to have and exercise all rights and
powers from time to time granted to a corporation by law,
including, without limitation, those powers described in the
Utah Nonprofit Corporation and Cooperative Act, § 16-6-1 et
seq., U.C.A., (1953), as amended.” In 2001, the Act replaced the
Utah Nonprofit Corporation and Cooperative Act. See Bruce L.
(continued…)
20160294-CA 6 2019 UT App 69Pino v. Entity #4812420-0140
Rather, we conclude that the Directors complied with the
statutory scheme and TWC 2000’s Articles. See Olincy v. Merle
Norman Cosmetics, Inc., 19 Cal. Rptr. 387, 394 (Cal. Dist. Ct. App.
1962) (stating that “where a by-law is reasonably susceptible of
different constructions, one in harmony and the other in conflict
with a statute, the former construction will be adopted” (cleaned
up)); see also Kahn v. Bank of St. Joseph, 70 Mo. 262, 270 (Mo. 1879)
(rejecting a construction of a bylaw as “unreasonable” when
such construction is “in conflict with, if not the letter, at least
with the spirit of many of our statutory provisions relative to
this subject”). We now explain how the Directors complied with
both the statutory scheme and the Articles.
¶14 First, the Directors complied with the statutory
requirements. The Act provides that “[a]uthorized distributions
by a dissolved nonprofit corporation may be made by
authorized officers or directors,” Utah Code Ann. § 16-6a-
1302(4), as follows: (1) “to a member that is a domestic or foreign
nonprofit corporation”; (2) “to its members if it is a mutual
benefit corporation”; (3) “to another nonprofit corporation,
including a nonprofit corporation organized to receive the assets
of and function in place of the dissolved nonprofit corporation”;
and (4) “otherwise in conformity to this chapter [i.e., chapter
6a],” id. § 16-6a-1302(2). 4 Under part 14, Dissolution, of chapter
(…continued)
Olson, Utah Revised Nonprofit Corporation Act, 14 Utah B.J. 17, 17
(June/July 2001). Thus, insofar as provisions in TWC 2000’s
Articles regarding the distribution of assets after dissolution
conflict with the Act, the Act governs because it enjoys
preeminent authority under the Utah Code and TWC 2000’s
Articles.
4. Furthermore, the Act states that “[d]issolution of a nonprofit
corporation does not . . . transfer title to the nonprofit
(continued…)
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6a, a dissolved nonprofit corporation may transfer “its assets as
provided in or authorized by its articles of incorporation or
bylaws.” Id. § 16-6a-1405(1)(c). The Directors chose the third
option when they assigned TWC 2000’s assets and liabilities to
TWC 2013.
¶15 Second, the Directors complied with the Articles by
distributing the assets of TWC 2000 after its dissolution. The
Articles specifically provide in Article XII that “[i]n the event of
dissolution of [TWC 2000], each shareholder shall receive its
proportionate share of [TWC 2000’s] property and assets,
including gains from the sale of appreciated assets, in proportion
to the number of shares held.” The Directors observed this
requirement when they assigned the corporation’s assets and
liabilities to the successor corporation. We note that TWC 2013
was “organized to replace and serve as successor-in-interest to
[TWC 2000] for the benefit of all of the shareholders of [TWC
2000].” Furthermore, TWC 2013’s Amended Articles of
Incorporation (Amended Articles) are identical in every material
respect to TWC 2000’s Articles, including all provisions
regarding internal governance processes, voting rights, and
determining shareholders and directors. And TWC 2013’s
Amended Articles provided for TWC 2000’s shareholders to be
(…continued)
corporation’s property including title to water rights, water
conveyance facilities, or other assets of a nonprofit corporation
organized to divert or distribute water to its members.” Utah
Code Ann. § 16-6a-1405(3)(a) (LexisNexis Supp. 2009). Thus, the
plain meaning of the statute is that the assets of a nonprofit
water corporation do not automatically revert to the
shareholders on dissolution. Rather, the Act makes clear that
such assets of a dissolved water corporation are to be distributed
in a deliberate fashion in accord with one of the four options
identified in sections 16-6a-1302(2) and 16-6a-1405(1)(c).
20160294-CA 8 2019 UT App 69Pino v. Entity #4812420-0140
issued shares in TWC 2013 once the new corporation filed its
articles:
To ensure continued water availability and
delivery to the [members holding shares in TWC
2000] in the event the Division ultimately rescinds
[TWC 2000’s] reinstatement, [TWC 2000] has
determined that it is necessary and appropriate for
the Board of Directors of [TWC 2013] to cause these
Articles of Amendment to be filed in order to
ensure that [TWC 2013] conforms in all respects to
the structure and operation of [TWC 2000], such
that, upon any dissolution of [TWC 2000], [TWC
2013] shall be the successor-in-interest to [TWC
2000] and will be legally authorized to continue
operations pursuant to Utah Code Ann. § 16-6a-
1405. Upon the filing of these Amendments,
certificates will be issued for the benefit of all eligible
prospective Members.
(Emphases added.) TWC 2013’s Amended Articles were
subsequently filed on November 19, 2014.
¶16 Appellants contend that after TWC 2000 was dissolved,
“shareholders did not receive the assets,” rather “[t]he assets
were transferred to TWC 2013.” Appellants argue that the only
way to give effect to Article XII is the “distribution of assets to
TWC 2000’s shareholders instead of the alternative of transfer of
the assets to TWC 2013.” But Appellants fail to acknowledge a
key fact: TWC 2013’s Amended Articles provided that TWC
2000’s shareholders be issued shares of TWC 2013. Therefore, in
transferring assets to TWC 2013 and investing TWC 2000’s
shareholders with shares in TWC 2013, the Directors gave
Appellants precisely what they requested, namely, a
proportionate share of TWC 2000’s post-dissolution assets.
Appellants appear to prefer that TWC 2000’s assets be
20160294-CA 9 2019 UT App 69Pino v. Entity #4812420-0140
liquidated, resulting in a monetary distribution. But that is not
what Article XII called for upon dissolution. TWC 2013’s
Amended Articles provided TWC 2000’s shareholders a
proportionate share of the corporation’s assets, albeit in the form
of shares in the successor corporation.
¶17 Thus, we conclude that the Directors complied with the
Act and the Articles when they distributed TWC 2000’s assets in
the form of shares in TWC 2013. 5
5. Appellants also argue that because the proper notice
procedure was not followed, the distribution of assets was
invalid. But this argument is without merit. As the trial court
explained, “[E]ven if Utah Code [section] 16-6a-1302(3) did
require [TWC 2000] to distribute its assets after dissolution in
accordance with its [Articles], such a requirement has been
satisfied in this case.” The court noted that the Directors
delivered written notice, which referred to the legal challenge
faced by TWC 2000, of the shareholders’ meeting. The court
further noted that the notice met the requirements of TWC
2000’s bylaws, which stated that notice be given to shareholders
“either personally, or by mailing a copy of the notice, . . . and by
compliance with all conditions as provided in the Bylaws or
rules and regulations adopted by the Board of Directors.”
Appellants argue that the notice TWC 2000 gave to shareholders
was defective under Utah Code section 16-6a-1202 because it
“did not give notice that ratification of transfer of all of TWC
2000’s assets to TWC 2013 would be submitted to a vote at the
meeting.” But the provisions of section 16-6a-1202 do not apply
here because “[a] transaction that constitutes a distribution is
governed by Part 13” of the Act, which deals with distributions
upon dissolution, and not by section 1202. Utah Code Ann. § 16-
6a-1202(8) (LexisNexis 2009). Because part 13 of the Act has no
notice requirements, see id. §§ 16-6a-1301 to -1302, the Directors
(continued…)
20160294-CA 10 2019 UT App 69Pino v. Entity #4812420-0140
II. Reinstatement of an Administratively Dissolved Corporation
¶18 Appellants contend that an administratively dissolved
corporation cannot be reinstated by the Division if the
corporation fails to make an application for reinstatement within
two years after its dissolution. They argue that “the trial court
should have removed TWC 2000’s pending status and ruled that
it is irrevocably dissolved.”
¶19 We decline to address this issue because Appellants failed
to join the Division as a party to the proceedings below in
accordance with rule 19 of the Utah Rules of Civil Procedure.
Consequently, the trial court had no authority to enter directives
binding on the Division. See Hiltsley v. Ryder, 738 P.2d 1024, 1025
(Utah 1987) (“Courts can generally make a legally binding
adjudication only between the parties actually joined in the
action.”); see also R.M.S. Corp. v. Baldwin, 576 P.2d 881, 883 (Utah
1978) (“[N]o judgment was rendered against the corporation,
and no judgment could have been so entered for the reason that
the corporation was not before the court.”).
¶20 Thus, we decline to address the issue of whether it was
appropriate for the Division to reinstate TWC 2000 more than
two years after its registration expired because the Division is
not a party to this case and such a determination would result in
the issuance of an advisory opinion.
CONCLUSION
¶21 We conclude that the trial court correctly granted
summary judgment when it determined that the Directors
(…continued)
were required to comply only with the notice requirements
found in TWC 2000’s Articles.
20160294-CA 11 2019 UT App 69Pino v. Entity #4812420-0140
properly transferred assets from TWC 2000 to TWC 2013. And
because the Division was not joined as a party to the
proceedings below, we decline to address whether it had the
authority to reinstate TWC 2000 after more than two years had
passed since the corporation’s expiration.
20160294-CA 12 2019 UT App 69