Title: GOB, LLC, a Wyoming limited liability company V. RAINBOW CANYON, INC., a Wyoming corporation; GARY L. PALMER; WILLIAM IRVINE; and ROBERT E. DELINE

State: wyoming

Issuer: Wyoming Supreme Court

Document:

GOB, LLC, a Wyoming limited liability company V. RAINBOW CANYON, INC., a Wyoming corporation; GARY L. PALMER; WILLIAM IRVINE; and ROBERT E. DELINE2008 WY 157197 P.3d 1269Case Number: S-08-0035Decided: 12/31/2008
OCTOBER 
TERM, A.D. 2008

 
 
GOB, LLC, a 
Wyoming 
limited liability company,

 
 
Appellant

(Plaintiff),

 
 
v.

 
 
RAINBOW CANYON, INC., 
a Wyoming 
corporation; GARY L. PALMER; WILLIAM IRVINE; and ROBERT E. 
DELINE,

 
 
Appellees

(Defendants).

 
 
Appeal from the 
DistrictCourtofCarbonCounty

The Honorable Norman 
E. Young, Judge

 
 
Representing 
Appellant:

Steven 
F. Freudenthal, Freudenthal & Bonds, PC, Cheyenne, Wyoming.

 
 
Representing 
Appellees:

Joel M. Vincent, 
Vincent & Vincent, Riverton, Wyoming.

 
 
Before VOIGT, C.J., 
and GOLDEN, HILL, KITE, and BURKE, JJ.

 
 
BURKE, 
Justice.

GOB, LLC, filed a 
derivative action against Rainbow Canyon, Inc., and three of its shareholders 
and directors, Gary Palmer, William Irvine, and Robert Deline.  GOB asked the district court, inter alia, to void an agreement that 
RainbowCanyon entered into with 
Tridem Minerals, LLC, which is solely owned by Mr. Deline.  GOB alleged that the agreement was a 
conflict of interest transaction because of Mr. Deline's position within 
RainbowCanyon.  The district court determined that no 
conflict of interest transaction occurred, and that GOB did not fairly and 
adequately represent the interests of the shareholders.  It entered judgment in favor of 
Appellees.  GOB appeals.  We hold that GOB may not maintain a 
derivative action challenging the agreement because it did not own RainbowCanyon stock at the time of the 
transaction it complains of and did not acquire its share of stock by operation 
of law.  Accordingly, we 
affirm.

ISSUE

 
 
Appellees raise the 
following issue, which we find dispositive1:

Whether GOB may 
maintain a derivative action on behalf of RainbowCanyon for actions taken by shareholders 
or directors prior to GOB becoming a shareholder?

FACTS

 
 
The essential facts of 
this case are undisputed.  
RainbowCanyon is a corporation 
founded in 1959 by four shareholders.  
Although it is organized as a for-profit corporation, its primary purpose 
has been to hold title to 120 acres of land in Carbon 
County, Wyoming straddling the 
EncampmentRiver.  Forty-four acres of this land lie on the 
west side of the river.  The four 
shareholders operate the corporation as a fishing club.  Any costs incurred by Rainbow Canyon, 
such as taxes and corporate fees, have traditionally been funded by 
contributions to Rainbow Canyon by its shareholders on a pro rata basis.

In 1998, James Hill, 
one of the shareholders, became the subject of an involuntary bankruptcy 
proceeding, and his share of RainbowCanyon stock became part of the bankruptcy 
estate.  RainbowCanyon retained counsel to look after its 
interests in the bankruptcy proceeding and, as a result, incurred approximately 
$22,000 in legal fees.  Mr. Deline, 
a shareholder and director, paid these legal fees.  Rather than repay Mr. Deline 
directly, RainbowCanyon entered into an 
agreement, entitled Memorandum of Mining 
Lease and Option to Purchase, with Tridem Minerals, a company owned by Mr. 
Deline.2  The terms of the agreement provided that 
the $22,000 served as payment for a ten-year mineral lease of the forty-four 
acres on the west side of the river.  
At the expiration of that term, pursuant to the agreement, Tridem had the 
option to purchase the property for an additional $88,000.  The agreement was executed on March 10, 
2000.

On September 19, 2000, 
the RainbowCanyon shareholders held 
their annual meeting.  The attending 
shareholders unanimously voted to ratify all actions of the directors since the 
last meeting.  Later that day, the 
bankruptcy trustee sold Mr. Hill's share of RainbowCanyon at a public sale to GOB.  The bankruptcy court entered an order 
confirming the sale on December 20, 2000.

GOB commenced this 
action on June 27, 2003.  In its 
complaint, GOB alleged several causes of action not relevant to this appeal. 
 It also set forth a cause of action 
in which GOB alleged that the agreement with Tridem Minerals was void as ultra vires because it "was made in 
violation of the conflict of interest provisions of Wyoming corporate 
law."  RainbowCanyon responded to the complaint by 
filing a Motion to Dismiss Pursuant to 
Rule 12(b)(6).  In that motion, 
RainbowCanyon contended that GOB 
could not maintain the ultra vires 
claim because it was derivative in nature and that GOB was not a shareholder at 
the time that the agreement with Tridem was executed.  Additionally, Rainbow Canyon asserted 
that GOB did not make written demand on Rainbow Canyon to take appropriate 
action, as required by Wyo. Stat. Ann. § 17-16-742 (LexisNexis 2007).3  The district court found that the ultra vires claim was derivative in 
nature and dismissed it because "it is more properly brought as a derivative 
claim."  GOB, however, revived this 
claim in its First Amended Complaint 
and Verified Second Amended 
Complaint.4

A trial was held after 
which the district court issued Findings 
of Fact, Conclusions of Law and Judgment.  The court found in favor of Appellees on 
all claims.  Regarding the 
derivative claim, the court determined:

32.       With 
respect to the fairness of the transaction to the corporation, the inquiry must 
begin with an analysis of the reason(s) for entering into the lease.  From an economic standpoint, the 
plaintiff argued and proved that the transaction did not make economic sense and 
was not advantageous to the corporation.  
However, viewed from the standpoint of the shareholders and directors, 
raising money to pay the corporation[']s attorney's fees occasioned by the 
prolonged and sanguinary legal battles . . . without sacrificing the property of 
the corporation or degrading its primary purpose as a fishing club, the 
transaction takes on an entirely different light and the Court cannot and will 
not find it to be unfair to the corporation.

The court also 
determined that GOB did not fairly and adequately represent the interests of any 
of the other RainbowCanyon shareholders.  GOB appeals from the judgment and limits 
its challenge to the denial of its derivative claim.

Standard of 
Review

 
 

The facts in this case 
are undisputed.  "We 
review decisions involving questions of law de novo."  
Wild v. Adrian, 2007 WY 61, ¶ 8, 155 P.3d 1036, 
1038 (Wyo. 2007).

DISCUSSION

 
 
As an initial matter, 
we must address GOB's assertion that Appellees are precluded from raising the 
issue presented because they did not file a cross-appeal pursuant to W.R.A.P. 
2.01(a)(2).  GOB claims that, as a 
result, Appellees waived the right to argue that GOB has not met the statutory 
requirements for bringing a derivative suit.  We disagree.

"The distinction 
between arguing in brief and cross-appealing generally is that a cross-appeal is 
required to win a change in the judgment, while arguments to support the 
judgment can be made without a cross-appeal."  Wright, Miller & Cooper, Federal Practice and Procedure: 
Jurisdiction 2d § 4478.6, at 831 (2002).  A survey of cases before this Court 
involving cross-appeals bears out this distinction.  For example, in Garrison v. CC Builders, Inc., the 
appellees prevailed below, but cross-appealed contending that the damage award 
was incorrect.  2008 WY 34, ¶ 26, 
179 P.3d 867, 875 (Wyo. 2008).  In 
Diamond B Svcs., Inc. v. Rohde, the 
Department of Employment granted a worker's request for unpaid wages but denied 
an award for interest on the unpaid wages, costs, and attorney fees.  2005 WY 130, ¶¶ 1-2, 120 P.3d 1031, 1035 
(Wyo. 2005).  The employer appealed 
the award of unpaid wages, and the worker cross-appealed the denial of interest 
on the unpaid wages, costs, and attorney fees.  Id.  Our history includes many similar 
examples.  E.g., Wells Fargo Bank v. Hodder, 2006 WY 128, 
144 P.3d 401 (Wyo. 2006) (Trust beneficiaries sued Trustee alleging breach of 
fiduciary duty.  Beneficiaries 
prevailed and Trustee appealed.  
Beneficiaries cross-appealed seeking attorney fees and prejudgment 
interest.); Wallop v. Wallop, 2004 WY 
46, 88 P.3d 1022 (Wyo. 2004) (Wife appealed property division in a divorce.  Husband cross-appealed contending that 
the district court made a mathematical error when it calculated the wife's share 
of an annuity benefit.); Warnick v. 
Warnick, 2003 WY 113, 76 P.3d 316 (Wyo. 2003) (Partner sued partnership and 
remaining partners.  Plaintiff 
partner prevailed on summary judgment and was awarded value of the 
partnership.  Defendants appealed 
the summary judgment, and the plaintiff appealed the court's calculation of the 
partnership share value.).

GOB presents no 
authority suggesting that Appellees were required to cross-appeal under the 
circumstances occurring in this case.  
The two decisions of this Court that it cites do not support its 
position.  In Paxton Resources, L.L.C. v. Brannaman, 
we dismissed as untimely both the appeal and cross-appeal.5  2004 WY 93, ¶ 19, 95 P.3d 796, 802 (Wyo. 
2004).  In Nish v. Schaefer, there was no 
cross-appeal.  2006 WY 85, 138 P.3d 1134 (Wyo. 2006).  Rather, the 
losing plaintiff had appealed on the merits and, in a separately docketed case, 
appealed the district court's award of costs to the defendant.  Id., ¶ 22, 138 P.3d  at 1142.  The plaintiff did not 
file a brief in the appeal concerning costs, so we dismissed the appeal for lack 
of prosecution.  Id.  In the appeal on the merits, the 
plaintiff attempted to raise the issue of costs and we declined to address 
it.  Id., ¶¶ 22-24, 
138 P.3d  at 1142-43.  Both Paxton Resources and Nish are 
distinguishable from the current case.

GOB's position is also 
contrary to our clearly established rule that we may affirm the judgment of the 
court below for any reason supported by the record.  E.g., Arnold v. Day, 2007 WY 86, ¶ 14, 158 P.3d 694, 698 (Wyo. 2007); Johnson v. Anderson, 768 P.2d 18, 24 (Wyo. 1989).  GOB's insistence that Appellees are 
precluded from raising an argument in support of the judgment is contrary to 
this rule.  Moreover, W.R.A.P. 7.03 
states: "[T]he reply brief shall precisely and concisely set forth on the first 
page those new issues and arguments 
raised by the brief of the appellee which are addressed in the reply 
brief."  (Emphasis added.)  W.R.A.P. 7.03 plainly contemplates that 
an appellee, in its brief, may raise additional "issues and arguments."  We find no merit in GOB's contention 
that Appellees were required to file a cross-appeal in order to raise the issue 
they now present.

Derivative actions are 
those "by one or more stockholders to enforce a corporate cause of action."  Wright, Miller & Kane, Federal Practice and Procedure: Civil 3d 
§ 1821, at 6 (2007).  In order to 
properly proceed with a derivative action, a shareholder must meet certain 
requirements.  Specifically, 
pursuant to Wyo. Stat. Ann. § 17-16-741:

(a) A shareholder may not commence or maintain a 
derivative proceeding unless the shareholder:

(i)   Was a shareholder of the 
corporation at the time of the act or omission complained of, or became a 
shareholder through transfer by operation of law from one who was a shareholder 
at the time; and

(ii)  Fairly and adequately represents the 
interests of the corporation in enforcing the right of the 
corporation.

Additionally, W.R.C.P. 
23.1 requires that the party bringing a derivative action must allege in the 
complaint that these statutory requirements have been met:

In a derivative action 
brought by one or more shareholders or members to enforce a right of a 
corporation or of an unincorporated association, the corporation or association 
having failed to enforce a right which may properly be asserted by it, the 
complaint shall be verified and shall allege that the plaintiff was a 
shareholder or member at the time of the transaction of which the plaintiff 
complains or that the plaintiff's share or membership thereafter devolved on the 
plaintiff by operation of law. . . .  
The derivative action may not be maintained if it appears that the 
plaintiff does not fairly and adequately represent the interests of the 
shareholders or members similarly situated in enforcing the right of the 
corporation or association.

The contemporaneous 
ownership rule is designed to prevent the "courts from being used to litigate 
purchased grievances."  Wright, 
Miller & Kane, Federal Practice and 
Procedure: Civil 3d § 1828, at 67; see also Kamen v. Kemper Finan. Svcs., 500 U.S. 90, 100 n.6, 111 S. Ct. 1711, 
1718 n.6, 114 L. Ed. 2d 152 (1991).6

GOB alleged in its Verified Second Amended Complaint 
that:

GOB LLC was a 
shareholder at the time of some of the acts complained of herein, and for other 
acts complained of herein became a shareholder through transfer by operation of 
law from the U.S. Bankruptcy trustee who was a shareholder at the time of those 
other acts complained of herein.

The undisputed 
evidence at trial, however, established that GOB was not a shareholder when the 
agreement between RainbowCanyon and Tridem was made.  The transaction it complains ofthe 
agreement with Tridemoccurred on March 10, 2000.  GOB purchased its share of RainbowCanyon from the bankruptcy trustee on 
September 19, 2000, and the bankruptcy court confirmed the sale on December 20, 
2000.

Even if it was not an 
owner at the time the agreement was made, GOB claims to have acquired its share 
of RainbowCanyon stock by operation 
of law.  In the context of 
shareholder derivative suits, "the words operation of law' are used to 
designate any nonconsensual transaction by which plaintiff acquired the 
stock."  Wright, Miller & Kane, 
Federal Practice and Procedure: Civil 
3d § 1828, at 76.  As we understand 
its argument, GOB contends that the purchase from the bankruptcy trustee, and 
confirmation by the bankruptcy court, is a transfer by operation of law.  GOB presents no authority for this 
proposition, and we conclude that it is without merit.  The undisputed facts establish that its 
purchase of the stock from the bankruptcy trustee was a consensual 
transaction.  GOB deliberately 
attended the public sale and bid $76,958.00 for one share of RainbowCanyon stock.  The bankruptcy court confirmed the sale 
at that price.  Moreover, GOB's 
argument would effectively eviscerate the contemporaneous ownership rule in 
cases of purchase from a bankruptcy trustee.  GOB presents no compelling reasonor, 
indeed, any reason at allto do so.  
This deliberate purchase is not a transfer of ownership by operation of 
law. 

Affirmed.

FOOTNOTES

1Appellant 
raises three issues.  In short, they 
are whether the district correctly concluded that (1) GOB does not fairly and 
adequately represent the interests of similarly situated shareholders, (2) the 
shareholders approved of the mineral lease, and (3) the lease did not present a 
conflict of interest.  We decline to 
address these questions in light of our conclusion that GOB may not maintain a 
derivative suit challenging the mineral lease.

2Tridem 
Minerals is a limited liability company, and Mr. Deline is the sole 
member.

 
 

3Wyo. Stat. 
Ann. § 17-16-742 states:

 
 

(a)     
No 
shareholder may commence a derivative proceeding until:

 
 

(i)       
A 
written demand has been made upon the corporation to take suitable action; 
and

 
 

(ii)     
Ninety 
(90) days have expired from the date the demand was made unless the shareholder 
has earlier been notified that the demand has been rejected by the corporation 
or unless irreparable injury to the corporation would result by waiting for the 
expiration of the ninety (90) day period.

 
 

4Neither 
the First Amended Complaint nor the 
Verified Second Amended Complaint 
specifically states that the ultra 
vires claim was being revived as a derivative action.  Rather, they simply include the claim 
that was previously dismissed.  
Appellees do not contend that it was improper to raise the derivative 
claim in this manner.

5Notably, 
the Paxton cross-appeal was an 
attempt to obtain a change in the judgment rather than an affirmance of the 
judgment.  The plaintiffs, who 
prevailed below on their claims of breach of contract and breach of the duty of 
good faith and fair dealing, cross-appealed and contested the dismissal of their 
claims of trespass and punitive damages.  
Id., ¶ 1, 95 P.3d  at 797-98.  

6Because this rule is very similar to 
its federal counterpart, F.R.C.P. 23.1, relevant federal authorities are highly 
persuasive.  Horn v. District Court, Ninth Judicial Dist., 647 P.2d 1368, 1374 n.4 (Wyo. 1982).