Court Opinion

ID: 9783561
Source: CourtListenerOpinion
Date Created: 2023-08-30 19:49:13.698879+00
Date Added: 2024-06-11T07:35:25.535733
License: Public Domain

JACKSON, Judge
(dissenting):
¶ 28 I write separately a different analysis and disposition than my colleagues.
BACKGROUND
¶ 29 Jean and Rebecca LeVanger are homeowners. They were twenty-year members of the Highland Estates Property Owners Association (the Association), a Utah nonprofit corporation, when they filed this suit. In 1993 and 1994 the Highland Estates Board of Trustees (the Board) concluded that in order to improve the Association’s productivity and efficiency, the Association’s originally recorded restrictive covenants (hereinafter CC & Rs) should be amended. Soon after, an amended version of the CC & Rs was drafted and put to a homeowners vote at the Association’s annual homeowner meeting held in June of 1994. The LeVangers were not present at that meeting. All of the Association members who did attend, more than forty in number, unanimously voted to adopt the amended CC & Rs. However, because there were not enough members present to constitute a quorum, the Board, as well as the members in attendance, concluded that the most effective way to maximize member participation in the vote was by mail-in ballots.
¶ 30 Letters were sent to all of the Association’s members notifying them that the amended CC & Rs had been approved by the Board of Trustees and had received unanimous ratification by the members who attended the June 1994 homeowners’ meeting. A copy of the amended CC & Rs was included with the letter of notification as well as an instruction that the mail-in ballots be returned no later than November 30, 1994. The Board hand-delivered to the LeVangers their mail-in ballot and a copy of the proposed CC & Rs. The LeVangers did not express any objection to the amended CC & Rs, either by voicing disapproval at any of the Association’s meetings, or by simply mailing in their ballot indicating their opposition.
¶ 31 On September 28, 1995, Highland Estates held its annual homeowner meeting where they announced that the amended CC & Rs had been approved by a super-majority of members. Again, the LeVangers did not attend in person or by representation. No explanation was presented as to why the LeVangers failed to attend both the 1994 and 1995 homeowner meetings where the amended CC & Rs were first presented, and then later adopted. However, the record does show that the LeVangers were not in good standing with the Association. They owed the Association past due annual assessment fees that had begun accruing in 1991, the year they first refused to pay them. Consequently, the Association filed a lawful lien against the LeVangers’ property in an at*578tempt to collect the monies due and owing. The LeVangers took no action whatsoever regarding the amended CC & Rs until after they had been ratified and officially recorded.
¶ 32 On January 21, 1997, the LeVangers filed a derivative action against Highland Estates and members of its Board of Trustees pursuant to rule 23.1 of the Utah Rules of Civil Procedure. They alleged in them complaint that the Board had breached its fiduciary duty to Highland Estates and its members by using improper voting procedures to amend and adopt the new CC & Rs. The LeVangers sued for damages, attorney fees, and rescission of the amended CC & Rs.
ISSUE AND STANDARD OF REVIEW
¶ 33 Highland Estates seeks review of rulings on standing by two different trial court judges. The first ruling followed a hearing on Highland Estates’s motion for summary judgment. The trial judge ruled that “based upon the record before the court, there are insufficient facts and insufficient grounds to, as a matter of law, determine that Plaintiffs are inappropriate parties to bring this action.” Later, before another trial judge, Highland Estates presented additional evidence regarding standing. The LeVangers did not submit any evidence. Rather, they elected to rely on their theory that Highland Estates had waived the issue of standing. Highland Estates renewed its motion and the trial judge ruled that the LeVangers’ standing under Utah Rule of Civil Procedure 23.1 was effectively, if not expressly, decided by the earlier ruling.
¶ 34 In short, the first judge found there was no genuine issue as to any material fact regarding standing and granted standing to the LeVangers as a matter of law. The second judge heard Highland Estates’s additional evidence and then adopted the first judge’s decision. Thus, we can review their in tandem legal conclusions regarding standing for correctness on the undisputed material facts in the record. See Winegar v. Froerer Corp., 813 P.2d 104, 107 (Utah 1991) (“In reviewing the trial court’s ruling, we accept the facts and inferences in the light most favorable to the losing party. Because summary judgment is granted as a matter of law, we may reconsider the trial court’s legal conclusions.”); Barber v. Farmers Ins. Exch., 751 P.2d 248, 251 (Utah Ct.App.1988) (“Since a summary judgment is granted as a matter of law rather than fact, this court is of course free to reappraise the trial court’s legal conclusions.”).
[T]he question of whether a given individual or association has standing to request a particular relief is primarily a question of law, although there may be factual findings that bear on the issue. We will review such factual determinations made by a trial court with deference. Because of the important policy considerations involved in granting or denying standing, we will closely review trial court determinations ofiohether a given set of facts fits the legal requirements for standing, granting minimal discretion to the trial court.
Kearns-Tribune Corp. v. Wilkinson, 946 P.2d 372, 373-74 (Utah 1997) (citing State v. Pena, 869 P.2d 932, 935-36, 938-39 (Utah 1994)) (emphasis added).
¶ 35 Accordingly, the issue before us is Highland Estates’s challenge to the trial court’s legal conclusions that the undisputed facts of this ease “fit[] the legal requirements [of Utah Rule of Civil Procedure 23.1] for standing,” and that the LeVangers were thus proper derivative plaintiffs. Id.
ANALYSIS
¶ 36 The plain language of Utah Rule of Civil Procedure 23.1 states that a “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.” Utah R. Civ. P. 23.1. My colleagues have reversed the trial court’s determination that the LeVangers had standing as derivative plaintiffs, and remanded the case for further proceedings on this issue.6 I cannot concur because, when the *579legal standards for standing contained in rule 23.1 are applied to the undisputed evidence, the LeVangers do not qualify to represent the interests of the Association or its members. Thus, the LeVangers are precluded from pursuing a derivative action against Highland Estates.
¶ 37 I emphasize that the scope of the issue to be decided herein does not extend to whether the LeVangers are entitled to bring a direct action against Highland Estates or members of its Board of Directors. Nor does it extend to whether a substantial benefit was conferred upon the Association. The sole issue to be decided is whether the Le-Vangers fairly and adequately represent other similarly situated members of the Association and are thus qualified to be derivative plaintiffs pursuant to the legal requirements of rule 23.1.7
A. Fiduciary Nature of Derivative Actions
¶ 38 The United States Supreme Court has held that in a derivative action the plaintiff acts as a fiduciary for the remaining shareholders. See Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 549, 69 S.Ct. 1221, 1227, 93 L.Ed. 1528 (1949). In bringing a derivative action, the plaintiff sues not only for himself, but on behalf of the best interests of the owner of the cause of action — the corporation. See Pacemaker Plastics Co., Inc. v. AFM Corp., 139 F.Supp.2d 851, 855 (N.D.Ohio 2001). Courts have recognized that the derivative plaintiff is often a self-chosen representative who takes into his own hands the responsibility of redressing the wrongs done against the corporation or association. See Cohen, 337 U.S. at 549-50, 69 S.Ct. at 1227. Since a derivative action is brought by such a self-appointed plaintiff, the Supreme Court has held that a state may impose certain “standards of responsibility, liability and accountability which it considers will protect the interests” the proposed derivative plaintiff seeks to represent. Id. Thus, safeguards have been established to ensure that the action brought against the corporation is truly within the best interests of the class the plaintiff claims to represent. See Pacemaker Plastics Co., Inc., 139 F.Supp.2d at 855.
¶ 39 Under the Utah Rules of Civil Procedure, those safeguards are found in rule 23.1, wherein derivative actions are limited to only those shareholders who “fairly and adequately represent the interests of the shareholders or members similarly situated.” Utah R. Civ. P. 23.1. As courts have recognized the fiduciary nature of a derivative action, they have rejected prospective derivative plaintiffs with interests that are not in accord with their fellow shareholders or association members. See generally Davis v. Comed, Inc., 619 F.2d 588, 593-94 (6th Cir.1980). Stockholders and association members may possess freedom in choosing the directors of their board, but they enjoy no such liberties as to the derivative plaintiff who steps forward to represent them. See Cohen, 337 U.S. at 549, 69 S.Ct. at 1227. Principles of equity, therefore, dictate that if a self-appointed “champion” purports to initiate litigation on behalf of the association to which he belongs, such a plaintiff must fairly and adequately represent the interests of the members of the corporation or association.
¶40 The LeVangers do not satisfy this statutory safeguard. Based on the uncontested evidence submitted by the defendant, Highland Estates, I conclude that the Le-Vangers do not fairly and adequately represent the interests of similarly situated members of the Highland Estates Homeowners Association. As the court in Pacemaker Plastics Co., Inc. pointed out, because a derivative plaintiff acts as a fiduciary for other members, courts must “carefully enforce” this limitation. Pacemaker Plastics Co., Inc., 139 F.Supp.2d at 855. Here the trial *580court failed to “carefully enforce” this important limitation, and committed reversible error in doing so. Id.
B. Factors to be Applied in Determining Fair and Adequate Representation in This Case
¶ 41 The question of whether a derivative plaintiff fairly and adequately represents the interests of similarly situated members requires application of the legal requirements of rule 23.1 to the particular facts of a case. Courts have identified a number of factors whose existence will disqualify certain parties as derivative plaintiffs.8 However, courts should focus on only those factors which are materially relevant in the particular setting of the dispute. Here, Highland Estates presented two reasons or factors that they argued would disqualify the LeVangers as fair and adequate representatives under the standards of rule 23.1. First, they argued that the LeVangers were in an antagonistic or vindictive position vis-a-vis Highland Estates. Second, they argued that the LeVangers were without any support by those they were attempting to represent. See Norris v. Weir, 35 Ohio App.3d 110, 114-15, 520 N.E.2d 10, (1987) (holding that the fair and adequate representation requirement was not satisfied because of litigation between plaintiff and defendant, the antagonism between the parties, and the lack of support plaintiff garnered in its claim), overruled on other grounds by Perry v. Eagle-Picher Indus., Inc., 52 Ohio St.3d 168, 556 N.E.2d 484, 489 (1990); see also Blum v. Morgan Guar. Trust Co. of N.Y., 539 F.2d 1388, 1390 (5th Cir.1976) (taking into account outside entanglements that i*endered it likely that derivative plaintiff would disregard interests of other class members); Newell Co. v. Vermont Am. Corp., 725 F.Supp. 351, 368-69 (N.D.Ill.1989) (holding that the most important consideration should be the existence of an antagonistic economic interest). Application of these factors leads to the conclusion that the LeVangers are not qualified as derivative plaintiffs.
1. Economic Antagonism Between the LeVangers and the Other Members of the Association
¶ 42 Courts have recognized that economic antagonism between the derivative plaintiff and the other association members is typically fatal to a shareholder derivative suit. See Pacemaker Plastics Co., Inc. v. AFM Corp., 139 F.Supp.2d 851, 855 (N.D.Ohio 2001). In Owen v. Modern Diversified Industries, Inc., 643 F.2d 441 (6th Cir.1981), the court held that the derivative plaintiff failed to fairly and adequately represent the interests of the other shareholders when, inter alia, he maintained a de minimis equity investment as well as a substantial debt investment acquired in the defendant corporation. See id. at 443-44.
¶43 While the LeVangers have not incurred a substantial debt investment in Highland Estates, the undisputed evidence manifests an inherent economic antagonism between the LeVangers and the other members of the Association. Highland Estates presented evidence that beginning in 1991 the LeVangers had not only failed, but in fact refused, to pay the Association’s annual assessment fees. At the time the LeVangers filed this lawsuit, their long-standing assessment fees were still unpaid. The LeVangers’ staunch refusal to pay the annual assessments placed them in direct economic antagonism with the class of Association members they purported to represent: members who, unlike the LeVangers, had dutifully and faithfully paid their annual assessments.
¶ 44 Moreover, Highland Estates presented evidence that, because of the LeVangers’ refusal to pay their assessment fees, a lien had been placed on their property. The Board placed the lien on the property in an *581attempt to expedite payment of years of unpaid assessment fees.
¶ 45 In bringing their derivative action, the LeVangers not only hold themselves out as representatives of members who pay their assessment fees, but also claim to represent members whose property was free of any sort of Association imposed encumbrance. The LeVangers do not fall into either of those two groups.
¶ 46 Further, the LeVangers’ derivative action acts as a tool of leverage that aids their personal interests. In Roberts v. Alabama Power Co., 404 So.2d 629 (Ala.1981), the derivative plaintiffs complaint was disqualified for lack of fair and adequate representation. See id. at 636. The court concluded its opinion stating that part of the derivative plaintiffs purpose in bringing the derivative action was to obtain leverage against the defendant corporation in a matter of personal litigation the plaintiff was pursuing. See id. at 636-37.
¶ 47 While Highland Estates has not filed a complaint against the LeVangers, the lien placed on their property is an action with legal significance, one typically preparatory to suit. Thus, the LeVangers’ initiation of this suit, while in their adverse legal posture with Highland Estates, creates an inherent conflict between the LeVangers’ personal interests and those of other Association members.
¶48 Although the LeVangers had many opportunities to register an objection or complaint, they did neither. They did not attend the 1994 annual meeting where the amendments to the CC <& Rs were on agenda for action. They did not voice their disapproval of the amended CC & Rs when their mail-in ballot was presented to them. And they did not attend the 1995 annual meeting where the Board announced the adoption of the CC & Rs based on the results of the mail-in balloting. In contrast, members of the Association voiced their approval of the amended CC & Rs by submitting their ballots at the annual meeting, as well as by mail. Then, sixteen months expired before the LeVan-gers filed their derivative action. During the same time period, no member of the Association stepped forward to voice any disapproval of the Association’s actions, or to pursue a derivative action on their own.
¶ 49 Finally, the timing of the LeVangers’ derivative action coincided with the filing of the lien on their property. These undisputed facts demonstrate an inherent economic antagonism between the LeVangers and the other members of the Association.
2. Degree of Support the LeVangers Received from Members of the Association
¶ 50 The lack of demonstrated support from other members of the Association is also a material factor in this case. See Norris v. Weir, 35 Ohio App.3d 110, 115-16, 520 N.E.2d 10 (1987). Here, the undisputed facts support the conclusion that the LeVan-gers did not receive any member support in their determination to pursue their litigation.
¶ 51 In Norris, the court pointed out that the derivative plaintiff had failed to garner the support of any fellow shareholders and, combining that factor with others the court found relevant, dismissed the plaintiffs derivative action for failure to meet the fair and adequate representation standard. See id. at 115, 520 N.E.2d 10.
¶ 52 Highland Estates presented undisputed evidence that the LeVangers garnered no demonstrated support for their derivative action from the other members of the Association. The LeVangers proffered nothing more than affidavits from other members of the Association; however, while these affidavits showed a few other members may have sympathized with the LeVangers’ plight, nevertheless the affidavits did not evince member support for the derivative action. Highland Estates submitted the undisputed testimony of its former president, Lance Swedish. He testified that the LeVangers’ suit had very little, if any, support among the members of the Association. He testified that the LeVangers’ derivative action had substantially and adversely impacted the interests of the individual members of the Association, and that even after the commencement of the LeVangers’ derivative action, the LeVangers had threatened the Board of *582Trustees and members of the Association with additional legal action.
¶ 53 At the Association’s 1994 annual meeting, the approximately forty homeowners present voted unanimously to adopt the new CC & Rs. However, in an effort to maximize the voting participation of its members, the Board distributed copies of the amended CC & Rs with a mail-in ballot for each homeowner. The results of the Association’s mail-in balloting showed that nearly two-thirds of the Association’s members favored the amended CC & Rs. While some members may have been opposed to the procedures the Board took in conducting the mail-in vote, and even though twenty-six members did not approve the amended CC & Rs, not a single member demonstrated any support for the LeVangers’ derivative suit. These undisputed facts demonstrate that the LeVangers did not have any member support for their suit. Due to the existence of economic antagonism and the non-existence of support, I conclude that the LeVangers do not fairly and adequately represent the interests of the other members of the Association.
CONCLUSION
¶ 54 Utah Rule of Civil Procedure 23.1 requires derivative plaintiffs to fairly and adequately represent the interests of those shareholders or association members similarly situated, in order to maintain such an action. Courts have explicitly stated that the fair and adequate representation standard should be carefully enforced. I conclude, based on undisputed material facts in the record, that as a matter of law, the LeVan-gers do not satisfy this appropriately stringent legal standard, and should not have been allowed to maintain their derivative action.
¶ 55 Accordingly, this appeal should be dismissed because the derivative plaintiffs do not have standing. Moreover, this court’s decision in LeVanger I should be vacated because the LeVangers were not entitled to that decision in the first place.

. The majority remands the case to the trial court to determine whether the defendant has satisfied its burden of proof by demonstrating that the Levangers' representation will be made-*579quate. See Lewis v. Curtis, 671 F.2d 779, 788 (3d Cir.1982); Smallwood v. Pearl Brewing Co., 489 F.2d 579, 592 (5th Cir.1974); Abeloff v. Barth, 119 F.R.D. 332, 335 (D.Mass.1988); Guenther v. Pacific Telecom, Inc., 123 F.R.D. 341, 344 (D.Or.1987). I agree with the principle that the burden falls on the defendant to prove the inadequacy of the plaintiff in maintaining a derivative action, and conclude that Highland Estates satisfied this burden.

. The standing requirements in a derivative action under Utah Rule of Civil Procedure 23.1 are different than those in our conventional standing analysis. See Kearns-Tribune Corp. v. Wilkinson, 946 P.2d 372, 375 (Utah 1997).

. Factors that courts have identified as material include: (1) the economic antagonisms between the representative and the class of shareholders represented; (2) the remedy sought by the derivative plaintiff; (3) indications that the plaintiff is not the driving force behind the litigation; (4) the plaintiff's unfamiliarity with the litigation; (5) other litigation pending between the plaintiff and the defendant; (6) the relative magnitude of the plaintiff’s personal interests as compared to his interest in the derivative action itself; (7) the plaintiff’s vindictiveness toward the defendant; and (8) the degree of support the plaintiff is receiving from the shareholders he purports to represent. See Davis v. Comed, Inc., 619 F.2d 588, 593-94 (6th Cir.1980).