DA 07

- 0268 

### IN THE SUPREME COURT OF THE STATE OF MONTANA 2008 MT 155
BRUCE A. JOHNSON, Plaintiff and Appellee,
v. HENRY BOOTH, Defendant and Appellant.

APPEAL FROM: District Court of the Eighth Judicial District,

In and For the County

of Cascade, Cause No. BDV

- 05

- 769 Honorable Julie Macek, Presiding Judge
COUNSEL OF RECORD:

For Appellant: Steven T. Potts , Thom

pson, Potts & Donovan, P.C., Great Falls, M ontana For Appellee : Sara R. Sexe, Marra, Sexe, Evens on & Bell, P.C., Great Falls, Montana
Submitted on Briefs: March 5, 2008 Decided: April 29, 2008 Filed:

__________________________________________ Clerk April 29 20082

Justice W. William Leaphart delivered the Opinion of the Court. ¶1 This case concerns a dispute between the co - owners of two business entities

— Hank’s Fire Service, Inc. (hereinafter “Hank’s”) and Arcane Worldwide Racing, LLC
. (hereinafter “Arcane”)

. Henry Booth appeals from an order o f the District Court for the EighthJudicial District, CascadeC ounty , redesignating a custodian as a receiver with orders to wind upand liquidate Hank’s and Arcane
. B ooth also appeals from a separate District Court order imposing discovery sanctions for Booth ’sf ailure to comply with an
o rder compelling responsest o discovery requests
. W e dismiss with respect to both claims

. ¶2 We restate the issueson appeal as follows: 1. Did the District Court abuse its discretion when it re designated the custodian as a receiver , pursuant to § 35

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- 941( 4), MCA? 2. Did the District Court err when it failed to hold a hearing prior to redesignating the custodian as a receiver ? 3. D id the District Court err by imposing s anctions for failure to comply with an order compelling Booth to respond to discovery requests ?

FACTUAL AND PROCEDURAL BACKGROUND ¶3 Johnson and Booth are equal owners of both Hank’s and Arcane. Hank’s provided fire extinguishers, fire alarms, and fire sprinkler systemsto various businesses

. Johnson and B ooth filed articles of incorporation for Hank’s on April 22, 1993. The articles provided that Booth and Johnson would serve as the two directors and that Booth would be the registered agent. Arcane’s primary business focus was on motorcycles. Johnson3

and Booth filed the articles of organiz ation for Arcane on September 28, 2004. Booth’s residence served as the principal place of business for both entities ; h owever, after this action commenced, Hank’s relocated to another place of business. ¶4 On July 1 , 2005, Johnson filed ac omplaint in whi ch he made numerous allegations, including

that Booth was attempting to “dominate and control the business and affairs of [Hank’s] at the exclusion and to the detriment of Bruce Johnson,” that Booth unilaterally precluded Johnson from Hank’s place of operation by means of police intervention, that Booth diverted a substantial amount of funds from Hank’s for Arcane
or Booth’s personal use without Johnson’s consent, and that Booth “had usurped complete control of corporate holdings” depriving J ohnson from investment income and participation in the management of Hank’s. Johnson’s requested relief included: (1) that Booth be removed as both president and treasurer of Hank’s and as managing me mber of Arcane; (2) an accounting of all business records of both bus inesses; (3) that the District Court appoint a custodian and/or receiver to manage the business and affairs of Hank’s; (4) damages and statutory interest; and (5) either a distribution of, and/or purchase of the shareholder s ’ interest in Hank’s and the mem ber s ’ c apital investment and interest in Arcane or that both businesses be dissolved with the proceeds to be distributed according to the parties’ respective interests. ¶5 Concurrent with the filing of his complaint, Johnsonfiled a Motion for Temporary Res training Order and Preliminary Injunction, Request for Receiver or Custodian, Brief in Support and Request for Hearing. Johnson requested that the District C ourt enjoin Booth from

i nterfering with the operation of Hank’s and Arcane or from transacting4

bus iness without an independent receiver’s oversight. J ohnson also requested that the court prevent Booth from transferring

o r disposing of

any property of either company without Johnson’s consent or a court order. The District Court issued the temporary
re straining order that same day. ¶6 The parties entered into a stipulation on July 12, 2005, in which they agreed to several of the provisions found in the temporary restraining order, including that neither party would : (1) interfere with the reasonable and proper exercise of the other’s activities in relation to Hank’s or Ar cane, (2) transfer property without the other’s consent or a court order, (3) c ause either business to spend more than $500 without providing written notice to the other party, o r (4) disparage the other or imply that the other is without business authority. J ohnson and Booth also agreed that both parties would have full
access to all business, organizational, and financial records of Hank’s and Arcane, and that until further court order, it w ould not be necessary for either entityto appear o r otherwise defend itself

. Upon reviewing the stipulation, the District Court ordered that the parties be bound by its terms until the H ank’s and Arcaneentities and/or the ownership interests separate d. ¶7 Only a little over three month sa fter Johnson and Booth signed the stipulation, Johnson filed a Motion for Order to Show Cause and Renewed Motion for Temporary Restraining Order and Request for Receiver or Custodian. J ohnson alleged that in the time since the parties signed the stipulation, Booth violated numerous provisions of the stipulated order, including continuing to operatethe businesses as if they were Booth’s sole proprietorships and unilaterally deciding to cease Arcane’s operations (the parties5

later agreed to sell Arcane’s motorcycles and other equipment in order to pay the company’s debts)

. After reviewing Johnson’s motion, the District Court issued an order to show cause and set the matter for a hearing. ¶8 The District Court held thre eh earings on Johnson’s renewed motion. B oth Johnson and Booththenf iled proposed findings of fact and conclusions of law, as requested by the court. In its subsequent order, the District Court refused to find Booth in contempt of court due to lack of p ersonal serviceo f the order to show cause . S imilarly, the court also found that it could not appoint a receiver or a conservator due to lack of personal jurisdiction over Hank’s or Arcanebecause Johnson had not served either entity through itsregistere d agent
. H owever, the court did find that Booth had violated a number of the terms of the stipulation and ordered the parties to again abide by its terms. The court also concluded “[a] lthough it is abundantly clear that the parties can no longer successf ully manage the corporation together, and that it would be in the best interest of the corporation to consider dissolving the corporation and/or appointing a receiver/custodian, for the reasons set forth herein, this Court does not have jurisdiction over the businesses to issue such an order.” ¶9 In response to the District Court’s order, Johnson notified the court that he served Booth as the registered agent for Hank’s and Arcane. Johnson later provided an affidavit of service to the court demonstrating th at service was accomplished on May 4, 2006. On subsequent

motion by Johnson, the court entered the default sof Hank’s and Arcane after6

both entitiesfailed to appear. 1 Johnson then filed a Renewed Request for Custodian. The District Court held a hearing o n Johnson’s renewed request and heard arguments from both parties. In its subsequent order , the District Court determined that Hank’s and Arcane needed an independent custodian. Notwithstanding B ooth ’s arguments that a custodian was unnecessary as Hank ’s already had a manager in place, the court concluded that acustodian was necessary as “that manager is subject to the directives of each party and often receives completely conflicting instructions from Booth and Johnson.” ¶10 O n January 29, 2007, Johnsonf iled a Motion for Appointment of New Custodian and for Definitive Instructions to Custodian. In addition to addressing the issue of the appointment of a second custodian (the first custodian appointed b y the District Court resigned earlier that month), Johnson also voiced his c oncerns about the role of the custodian. Johnson stated : [Hank’s] and [A

rcane] have not answered the Complaint, and have been defaulted. The Complaint included a request for dissolution of both [Hank’s] and [A

rcane] to which neither entity has provided a defense. Therefore, these entities should be dissolved and the assets and liabilities of the businesses should be wound up and dealt with b y the custodian in this matter. Johnson requested that the court appoint a new custodian with instructions to orderly dissolve both entities and wind up the business. In response to this motion, Booth filed a
me morandum in opposition, in which he stated that under § 35

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- 941, MCA, a custodian does not have the power to dissolve a business entity. B ooth requested that the court
1 B ooth has filed a motion to set aside the defaults of Hank’s and Arcane; h owever, the District Court has not yet ruled on thismotion.7

defer its decision to grant dissolution of Hank’s and Arcane as a remedy until trial. Prior to the District Court ruling on Booth’s motion, Johnson and Booth agreed on a new custodian and the court appointed the parties’ selection. ¶11 After considering both parties’ arguments , the District Court issued its order regarding Johnson’s Motion for Definitive Instructions to Custodian . Pursuant to § 35

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- 941(4), MCA, the District Court redesignated the recently appointed custodian as a receiver with instructions to wind up and liquidate the business and affairs of Hank’s and Arcane. The court determined that the redesignation was necessary “in the best interests” of both entities, as well as the companies’ shareholders and creditors. This appeal followed. STANDARD OF REVIEW ¶12 We review a district court’s decision to appoint a receiver under the abuse of discretion standard. Crowley v. Valley West Water Co. , 267 Mont. 144, 1 50, 8 82 P.2d 1022 , 1025 (1994). A district court abuses its discretion when it acts arbitrarily, without employment of conscientious judgment, or in excess of the bounds of reason resulting in substantial injustice. Kuhr v. City of Billings , 2007 MT 201 , ¶ 14, 338 Mont. 402, ¶ 1 4, 168 P.3d 615, ¶ 14. ¶13 Our standard of review for discovery sanctions imposed under M. R. Civ. P. 37 , is whether the district court abused its discretion. Murphy Homes, Inc. v. Muller , 2007 MT 140 , ¶ 66, 337 Mont. 411, ¶ 66, 162 P.3d 106, ¶ 66. “In doing so, we generally defer to the district court because it is in the best position to determine both whether the party in questi on has disregarded the opponent’ s rights, and which sanctions are most8

appropriate.” Rothing v. Kallestad, 2007 MT 109 , ¶ 49, 337 Mont. 193, ¶ 4 9, 1 59 P.3 d 222, ¶ 49 (internal quotation marks omitted). DISCUSSION ¶14 Issue One

. Did the District Court abuse it d iscretion when it redesignat ed t he custodian as a receiver

, pursuant to § 35-1 - 941(4), MCA ? ¶15 Booth argues that the District Court abused its discreti onwhen it redesignated the custodian as a receiver. B ooth claims that the appointment of a receiver is “one of the harshest remedies available” and as such, due process requires that the court hold a hearing, absent emergency or extreme necessity. B oothc laims that the defaults entered against Hank’s and Ar canethat led to the redesignationwere improperly entered because the parties’ stipulation stated that the two entities would not have to appear until further order of the court. Booth also arguesth at the defaults make no difference because neither Hank’s nor Arcane had b een dissolved and it w ould be premature to wind up and liquidate either entity. ¶16 Johnson asserts that while the District Court did not abuse its discretion or err in redesignating the custodian as a receiver, Booth does not have standing to seek relief on behalf of the entities Hank’s and Arcane. 2 As such, Johnson claims that a challenge to the appointment or redesignation of the custodian as areceiver can only be raised by

2B ooth contends that Johnson cannot raise the argument that Booth lacks standing to challenge the appointment of the receiver, as “this Court will not address an issue raised for the first time on appeal.” See Jones v. Montana University System , 2007 MT 82 , ¶ 23, 337 Mont. 1, ¶ 23, 155 P.3d 1247, ¶ 23. While this i s generally true , standing is a threshold, jurisdictional requirement of every case and the general rule does not pertain to jurisdi ctional issues. Bryan v. District, 2002 MT 264, ¶ 19, 312 Mont. 257, ¶ 19, 60 P.3d 381, ¶ 19. Accordingly, we will consider Johnson’s arguments regarding standing.9

Hank’s and Arcane (neither of which hasappeared) and as such , Booth does not have standing to assert a claim on their behalf. We agree with Johnson. ¶17 A corporation has a separate and distinct identity from its stockholders. First Sec. Bank of Glendive v. Gary , 245 Mont. 394, 4 02, 7 98 P.2d 523 , 528 (1990). In Richland Nat. Bank & T

rust v. Swenson , 249 Mont. 410, 816 P.2d 1045 ( 1991) , we examined whether the defendants had standing to present claims for wrongs to themselves when those claims were essentially thos eof a corporation of which the defendants were the sole proprietors. Sw

enson , 249 Mont. at 423, 816 P.2d at 1054. W eagreed with the District Court that the claimsbeing asserted were essentially those of the corporation and that the defendants as individual shareholders could not prosecute the claims of the corporation. Sw enson , 249 Mont. at 424, 816 P.2d at 1054. In reaching this conclusion, we stated,

“Montana law is clear that the stockholders and guarantors of a corporation do not have the right to pursue an action on their own behalf when the cause of action accrues to the corporation

. ” Swenson , 249 Mont. at 424, 816 P.2d at 1054; s ee also Gullett v. Van Dyke Const. Co. , 2005 MT 105 , ¶ 14, 327 Mont. 30, ¶ 14, 111 P.3d 220, ¶ 14. ¶18 Furthermore, th e stockholders generally may not defend for a corporation an action brought against the corporation as a defendant. Malcom v. Stondall Land & Inv. Co. , 129 Mont. 142, 146, 284 P.2d 258, 260 (1955). “The corporation itself must in such circumstances appear and plead; or there may be neither suit n or defense for it.” Malcom , 129 Mont. at 146, 284 P.2d at 260. The reasoning of Malcom and Swenson , which both involved corporations wholly owned by the defendants in question, is no less compelling where the de fendant, like Booth, owns 50% of the corporation and limited10

liability companyand is the registered agent for both entities

. There is no need for Hank’s or Arcane to resort to having a stockholder or member defend an actionto protect the entities’ respe ctive interests. ¶19 Likewise, Booth does not have standing to pursue an appeal on behalf of Hank’s or Arcane. “In order to have standing on appeal, a party must be able to show an interest in the subject matter of litigation which has been injuriously affe cted by the judgment or order.” Daniels

- Sheridan v. Bellanger, 2001 MT 235, ¶ 22, 307 Mont. 22, ¶ 22, 36 P.3d 397, ¶ 22. Booth appeals from the District Court’s order redesignating the custodian as a receiver for Hank’s and Arcane. A ny injury or adversee ffect resulting from this order would impact and concern these two entities, not Booth. Accordingly, this claim belongs to Hank’s and Arcane , and Booth cannot defend any claim properly belonging to the two entities or appeal on their behalf. ¶20 Booth claims that he has standingto challenge the appointment of the receiver based on the stipulation that the parties signed. Paragraph 7 of the stipulation states, “Until further order of the Court, it shall not be necessary for [Hank’s] and/or [Arcane] to appear or otherwise defend themselves in this action.” Regardless of whether the stipulation initially controlled which parties needed to appear in this action, the subsequent orders of the District Court clearly demonstrated the need for Hank’s and Arcane to appear

and be parties to the suit . A fter Johnson filed a motion requesting that the District Court appoint a receiver or custodian, Booth, in his M emorandum in Opposition to Request for Summary Ruling stated :11

it is undisputed that [Hank’s] and [A rcane], were never served with orders to show cause and have not appeared. There is no basis whatsoever to grant injunctive relief or a receiver or custodian against either of those entities without service upon them of the order to show cause. S imply stated, without such service there can be no personal jurisdiction over those entities. The District Court agreed and concluded it could not appoint a custodian or receiver for Hank’s or Arcane, as the court lacked jurisdiction over the entities which had not bee n served

. The District Court also noted that Booth’s attorney maintained that he only represented Booth in the matter and not Hank’s or Arcane. 3 ¶21 Whatever the parties may have agreed to in the stipulation, the District Court deemedit necessary that

Hank’s and Arcane be served with process before a custodian or receiver could be appointed. B ooth cannot simply rely on the assertion that the stipulation relieved the entities from any need to appear or defend themselves, especially in light of thelanguage inthe stipulation stating that Hank’s or Arcane need not appear or otherwise defend themselves“ until further order of the Court” (emphasis added) and the ensuing District Court order that both entities needed to be served inthe action. ¶22 The claim that th e District Court abused its discretion in redesignating the custodian as a receiver c oncerns and

b elongs to the corporate entities , not Booth

3 W e note that in regard to Booth’s representation on behalf of Hank’s and Arcane, Booth’sarguments have been highly inconsistent. On one hand, Boothmaintains that his counsel only represents him personally and not Hank’s or Arcane. B ooth stated this in his December 23, 2005 proposed findings of fact and conclusion so f law. After service u pon Booth a s registered agent of Hank’s and Arcane, neither entity appeared and Johnson obtained entries of default against them. While Booth continued to maintain that his counsel does not represent Hank’s or Ar cane, he nonetheless filed a motion to set aside the defaults entered against Hank’s and Arcane. The District Court has yet to rule on this motion.12

individually

. Booth does not have standing to defend any claims properly belonging to Hank’s or Arcane, nor does he have standing to pursue an appeal on behalf of Hank’s or Arcane for claims belonging to the two entities. We hold that Booth does not have standing to challenge the redesignation on behalf of Hank’s and Arcaneand dismiss Booth’s claims for lack of jurisdiction

. ¶23 Issue Two. Did the District Court err when it failed to hold a hearing prior to redesignating the custodian as a receiver ? ¶24 For the same reasonsthat led to our conclusion in Issue Onethat B ooth did not have standing to challenge the redesignationo f the custodian as areceiver, we need not address this issue and dismiss it accordingly for lack of jurisdiction

. ¶25 Issue Three. Did the District Court err by imposing sanctions for failure to comply with an order compelling Booth to respond to d iscovery requests ? ¶26 Booth contendsthat the District Court erred when it imposed discovery sanctions against him

. Prior to analyzing Booth’s contentions, an overview of the f actual background on the parties’ discovery dispute is necessary. ¶27 On June 28, 200 6, Johnson filed a Motion to Compel Answers to Interrogatories and Reponses to Request for Production. J ohnson alleged that Booth had failed to fully and adequately answer Johnson’s first set of discovery requestsin Booth’s November 18, 2005 discovery re sponses . B ooth then filed a me morandum in opposition to Johnson’s motion to compel. The District Court held a hearing on September 12, 2006, at which Johnson withdrew severalbut not all o f his discovery requests. The District Court subsequently issued an order granting Johnson’s mo tion to compel asto the remaining discovery requests. The court concluded that Booth had failed to fully comply with13

M. R. Civ. P. 33(c) and 34(b) in his responsesto several of Johnson’s discovery requests. The court ordered Booth to fully and completely respond to the interrogatories and requests for production at issue. ¶28 Less than two months later, Johnson filed a Motion for Default Judgment. In his motion, Johnson requested that a default judgment be entered against Boothas a sanction for Booth’s failureto produce the documents that the District Court had previously ordered Booth to produce. While the court declined to enter a default judgment , it did impose sanctions by attributing amounts owed on several credit cardsthat were a subject of the discovery requests to Booth himself and the court ordered Booth to pay Johnson’s attorney’s fees and costs associated with the motion for sanctions

. ¶29 While Booth arguesthat he fully responded to Johnson’s discovery requests and that the District Court erred in concluding that Booth’s responses were evasive and that he had possession, custody, or control of the requested documents , we need not address Booth’s arguments as the Montana R ules of A ppellate P roceduredo not authorize this issue to be reviewed

by this Court

at this stage in the proceedings

. ¶30 M. R. App. P. 6(1) provides that “[a] party may appeal from a final judgment in an action or special proceeding and from those final orders specified in sections (2), (3), and (4) of this rule. ” A

f inal judgment is one which “ conclusively determines the rights of the parties and settles all claims in controversy in an action or proceeding, including any necessary determination of the amount of costs and attorney fees awarded or sancti on imposed. ”M. R. App. P. 4(1)a.; see also Matter of Litigation Relating to Riot, 283 Mont. 277, 2 80, 9 39 P.2d 1013 , 1015

- 16 (1997) (“A final judgment is one wherein a final14

determination of the rights of the parties has been made; any decree which leave s matters undetermined is interlocutory in nature and not a final judgment for purposes of appeal. ”). It is clear that the District Court’s order granting sanctions against Booth is not a final judgment as the primary issues of the case remained unresolve d. ¶31 In addition, subsections (2), (3), or (4) of M. R. App. P. 6 , which permit appeal of certain interlocutory orders, do not permit aninterlocutory appeal of discovery sanctions. 4 Moreover , M. R. App. P. 6(5) makes clear that c ertain orders and judgments of the lower court are not appealable. Subsection (5)e. specifically states that “orders granting or denying sanctions” are not appealable, and subsection (5)f. states that interlocutory judgments are not appealable. M. R. App. P. 4(1)b. defines an interlocutory judgment as “an order or decree that determines a preliminary or subordinate question or issue and which enables the court to render a final judgment but does not finally decide the cause.”“ Typically, orders pertaining to discovery are interl ocutory in nature
. . . . ” Hegw ood v. Mont

. Fourth Jud

. Dist. Court, 2003 MT 200 , ¶ 6, 317 Mont. 30, ¶ 6, 75 P.3d 308, ¶ 6. Under the Montana Rules of Appellate Procedure, thei mposition of sanctions for discovery abuse is precisely the type of order that is not subject to appellate review until the judgment is final. ¶32 Accordingly, w e dismiss as premature Booth’sappeal of thediscovery sanctions without prejudiceand remand to the district court for further proceedings.

4In contrast, M. R. App. P. 6( 3 )g. specifically authorizes an appeal from “an order appointing or refusing to appoint a receiver, or giving direction s with respect to a receivership, or refusing to vacate an order appointing or affecting a receiver”p rovided that the order is the lower court’s final decision on the referenced matter. Thus, Booth’s claims under Issue sIand II are properly before the C ourt.1 5 CONCLUSION ¶33 Booth does not have standing o n behalf of the corporate entitiesto challenge the redesignation of the custodian as a receiver and we dismiss his c laims for lack of jurisdiction. B ooth’s appealregarding the imposition of discovery sanctions is interlocutory in nature and cannot be reviewed at this stage of the proceedings. ¶34 Dismissed

. /S/ W. WILLIAM LEAPHART

We concur: /S/ JOHN WARNER /S/ JAMES C. NELSON /S/ PATRICIA COTTER /S/ JIM RICE