Dansie v. Herriman City

2006 UT 23
This opinion is subject to revision before final
publication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
----oo0oo----
J. Rodney Dansie, Almon P. 	No. 20050024
Butterfield, Robert Ernest,
James E. Miller, Loriann
Warner, Diane Harward, Cloyd
James ("C.J.") Butterfield,
Shane T. Butterfield, Herbert T.
Butterfield, Everett T.
Parry, Michael Sweat, Sherwood
Butterfield, Donna A. Eastman,
Herriman Pipeline Development
Company, Clyde W. Butterfield,
David S. Bastian, Clinton S.
Butterfield, Lorraine Alires, and
Mary E. Cordova,
Plaintiffs and Appellants,
v.
City of Herriman, Lynn Egbert,
Eric May, James Newman, Lynn Carne,
John Doe individuals 1-100,
Doe corporations 1-100, 	F I L E D
Doe governmental entities 1-100,
Defendants and Appellees. 	April 18, 2006
---
Third District, Salt Lake
The Honorable Denise P. Lindberg
No. 020904440
Attorneys: 	Michael M. Later, Las Vegas, Nevada, for appellants
John N. Brems, R. Willis Orton, Christopher S. Hill,
Salt Lake City, for appellee City of Herriman
Peter Stirba, Gary R. Guelker, Salt Lake City, for
appellees Egbert, May, Newman, and Carne
---
NEHRING, Justice:

No. 20050024 	2
INTRODUCTION
¶1 	The City of Herriman was added to the roster of Utah
cities in 1999. 	Soon thereafter, Herriman decided that it would
provide water to its residents through a municipal water system.
At the time, Herriman owned no water, no wells, nor any delivery
infrastructure, but the Herriman Pipeline and Development Co.
(“Company”) did. 	The City set about to acquire the Company’s
assets. 	It succeeded, much to the distress of a number of the
Company’s shareholders, who sued the City and certain directors
of the Company. 	Defendants filed a succession of summary
judgment motions that resulted in the dismissal of Plaintiffs’
claims. 	This appeal followed.
¶2 	We affirm the district court on each of the four issues
before us for review. 	First, we conclude that the district court
correctly ruled that Plaintiffs’ ownership of shares in the
Company entitled them to use Company water but gave them no
ownership interest in Company assets. 	Next, we affirm the
district court’s dismissal of several of Plaintiffs’ individual
claims because they were derivative claims that must be properly
advanced in the name of the Company. 	Third, we sustain the
district court’s dismissal of the derivative claims that
Plaintiffs did assert on behalf of the Company because Plaintiffs
failed to make the requisite demand on the Company to remedy the
alleged objectionable conduct. 	Finally, we turn back Plaintiffs’
claim for relief under the Utah Control Shares Acquisition Act,
Utah Code Ann. §§ 61-6-1 to -12 (2000), because such a claim was
not preserved below. 	We now explain how we reached these
conclusions.
ANALYSIS
I. 	PLAINTIFFS HAVE NO VESTED PROPERTY RIGHTS IN COMPANY ASSETS
¶3 	Plaintiffs maintain that under the terms of the
Company’s articles of incorporation, shareholders, like
themselves, own an interest in Company assets. 	If they are
right, they likely suffered injury when Company assets were
transferred to the City. 	The district court ruled that
Plaintiffs did not own Company assets. 	We conclude that the
district court was correct. 	Our reasoning centers on
interpretations of relevant statutes and the Company’s articles
of incorporation.
¶4 	Under the Utah Revised Nonprofit Corporation Act,
effective as of 2001, “[a] member does not have a vested property

3 	No. 20050024
right resulting from any provision in the articles of
incorporation or the bylaws.” 	Utah Code Ann. § 16-6a-611 (2001).
The Company is a nonprofit corporation. 	Were this statutory
provision to apply to the Company, our analytical task would be
at an end; however, it does not apply. 	The most recent iteration
of the Company’s articles of incorporation was put into place in
1986. 	This matters because the 2001 Act includes an expansive
savings clause. 	It states that “the repeal of any statute by
this act does not affect . . . any ratification, right, remedy,
privilege, obligation, or liability acquired, accrued, or
incurred under the [prior nonprofit corporation] statute before
its repeal.” 	Id. § 16-6a-1704(1)(a)(ii). 	The statute that the
2001 Act repealed permitted a corporation’s stock to “evidenc[e]
. . . interests in water or other property rights.” 	Id. § 16-6-
42 (1999) (repealed 2001). 	Thus, the savings clause in the 2001
Act would recognize and preserve property rights that
shareholders of the Company may have acquired under provisions of
its articles of incorporation.
¶5 	Plaintiffs claim that Article 5 of the Company’s
articles of incorporation conferred upon them ownership rights to
Company assets. 	The relevant text states that the Company’s
stock “shall evidence the interests of the stockholders in
corporate assets, including water rights, pipelines, water
control facilities, and other property. 	The owner of each share
of stock shall be entitled to participate on an equal basis in
the use of water, pipelines, and other corporate assets.”
¶6 	We assay this language for meaning using the same
approach that we apply to the interpretation of contracts
generally. 	We conclude that the unambiguous meaning of Article 5
may be extracted from the plain language of its text. 	That
meaning does not conform to Plaintiffs’ preferred interpretation.
The meaning of the word “interests” is key to our interpretive
effort. 	To confer the rights claimed by Plaintiffs, the word
“interests” must be read to grant shareholders something akin to
fee simple ownership. 	This is certainly not the sole, inevitable
connotation of the word. 	Indeed, as used in Article 5,
“interests” tells us little more than that whatever a
shareholder’s “interests” might be, the stock certificate is
proof that he has them. 	If the articles of incorporation said
nothing more about the relationship between Company shareholders
and Company assets, there could be little question that Article
5’s use of “interests” would be ambiguous. 	The obvious question,
“just what ‘interests’ are evidenced by shares of Company stock?”
would remain unanswered.

No. 20050024 	4
¶7 	Black’s Law Dictionary has defined “interest” as “[t]he
most general term that can be employed to denote a right, claim,
title, or legal share in something.” 	Black’s Law Dictionary 812
(6th ed. 1990). 	As the “most general” term in the property
lexicon, “interest,” standing alone, means both everything and
nothing. 	It is a word that leans heavily on other words for
support.
¶8 	That support appears in the second sentence of Article
5. 	Its text provides that the interest possessed by the members
is the right “to participate on an equal basis in the use of
water, pipelines, and other corporate assets.” 	Shareholders are
promised equal participation, not in the ownership, but rather in
the use of Company assets. 	This is the interest that stock
ownership evidences. 	It is not the interest that Plaintiffs
insist that their shares guaranteed, but it is an interest that
survived intact the transfer of Company assets to the City.
Thus, the plain language of the Articles defeats Plaintiffs’
claim to asset ownership.
II. 	THE DISTRICT COURT PROPERLY DISMISSED PLAINTIFFS’ CLAIMS
BECAUSE THE CLAIMS WERE DERIVATIVE AND NOT INDIVIDUAL
¶9 	A shareholder must bring an action to enforce a right
of the corporation as a derivative action. 	Utah R. Civ. P. 23.1.
The district court dismissed eight of Plaintiffs’ claims because
it found them to be corporate and not individual claims. 	These
included claims for the following: 	(1) breach of fiduciary duty
by the directors for selling Company assets, (2) breach of
fiduciary duty by certain directors for providing insufficient
notice of a meeting, (3) breach of fiduciary duty by the
directors for allowing the purchase of stock in violation of
Company bylaws, (4) self-dealing by certain directors,
(5) tortious interference with economic relations,
(6) declaratory relief, (7) unjust enrichment, and (8) injunctive
relief to bar the transfer agreement and the City’s stock
purchases. 	Plaintiffs challenge these rulings.
¶10 	Not every grievance held by a shareholder arising from
actions by a corporation, its officers, or its directors must be
brought through a derivative action. 	A shareholder may sue in
his individual capacity in a direct action when he can “show that
he . . . was injured in a manner distinct from the corporation.”
Warner v. DMG Color, Inc., 2000 UT 102, ¶ 13, 20 P.3d 868.
Plaintiffs insist that their claims arise from individual and not
corporate injuries and that they need not assert them in the name
of the Company. 	We think otherwise.

5 	No. 20050024
¶11 	Plaintiffs’ core complaint is that the City used its
voting control of the Company to approve an agreement that
transferred Company assets to itself. 	According to Plaintiffs,
this act of self-dealing enriched one class of shareholders, the
City, at the expense of another class, the Plaintiffs. 	Because
this case comes to us after a grant of summary judgment, we
indulge Plaintiffs, as the nonmoving party, all reasonable
inferences that may be derived from the factual record.
Hermansen v. Tasulis, 2002 UT 52, ¶ 10, 48 P.3d 235.
¶12 	We are unable to uncover any behavior by Defendants
that was animated by a desire to injure Plaintiffs in their
individual capacities. 	To the contrary, the City acquired and
voted Company shares for the sole purpose of acquiring a
“turnkey” water system for Herriman. 	Indeed, Herriman appears to
be wholly unapologetic about its intentions. 	However sinister
one may view Herriman’s designs, the transfer of Company assets
to a majority shareholder does not of itself endow dissenting
shareholders with individual claims.
¶13 	To think otherwise is to misunderstand the distinction
between individual and corporate injury. 	A shareholder does not
sustain an individual injury because a corporate act results in
disparate treatment among shareholders. 	Rather, the shareholder
must examine his injury in relation to the corporation and
demonstrate that the injury was visited upon him and not the
corporation. 	Arndt v. First Interstate Bank of Utah, N.A., 1999
UT 91, ¶¶ 21-22, 991 P.2d 584. 	Here, Plaintiffs’ claims are
classically derivative: 	the value of the Company, and by
extension Plaintiffs’ shares in it, was diminished by the
transfer of the Company’s assets to the City. 	Plaintiffs were
injured because the Company was injured.
¶14 	Viewing the asset transfer from a second perspective,
that of Herriman as a shareholder, reinforces the correctness of
the district court’s ruling that Plaintiffs’ claims were
derivative. 	While it is clear that Herriman’s interests in
creating a municipal water system were advanced by its
acquisition of Company assets, the effect of the transfer on the
City’s shares in the Company was the same as the consequences,
whatever they may have been, that befell Plaintiff shareholders
as a result of the asset transfer. 	We therefore affirm the
district court’s dismissal of claims that should have been
brought derivatively.
III. 	PLAINTIFFS’ CLAIMS ARE NOT ELIGIBLE FOR APPLICATION OF
EXCEPTIONS TO THE DERIVATIVE ACTION REQUIREMENTS

No. 20050024 	6
¶15 	We have acknowledged that circumstances may exist under
which a shareholder may prosecute a claim that would normally
belong to a corporation. 	We ratified one such exception to the
derivative action rule in Aurora Credit Services, Inc. v. Liberty
West Development, Inc., 970 P.2d 1273, 1280 (Utah 1998). 	There,
we permitted a shareholder that had acquired its shares by
foreclosing its security interest in them to bring a direct
action against a closely held corporation with a limited number
of principals, four original shareholders, and a CEO. 	The
plaintiff shareholder claimed that the corporation and CEO had
unlawfully transferred an office building, the sole asset of the
corporation, to a partnership in which the CEO had an interest.
We recognized in Aurora that
the rationale for requiring an action to
proceed derivatively is often absent in a
closely held corporation, where it is
unlikely that there is a disinterested board
because the majority shareholders are often
the corporation’s managers. 	As well, the
concept of a corporate injury that is
distinct from any injury to the shareholders
approaches the fictional in the case of a
firm with only a handful of shareholders.
Id. at 1280-81 (citations omitted).
¶16 	We justified our holding in part by aligning it with “a
growing trend to allow minority shareholders of a closely held
corporation to proceed directly against majority shareholders.”
Id. at 1280. 	Spotting trends in the law is an inexact science.
A phenomenon that has the hallmarks of a trend may prove to be
nothing more than an aggregation of ad hoc events. 	Nor is it
unusual for the momentum of a proven trend to overstretch its
logical and conceptual capabilities, stopping the trend in its
tracks or causing it to retreat. 	From our vantage point eight
years after Aurora, we can see that our proclamation of a
“growing trend” in recognizing an exception to the derivative
action rule for closely held corporations may have overstated
matters. 	Some jurisdictions have rejected the closely held
corporation exception or severely limited it. 	Peter H.
Donaldson, Breathing Life Into Aurora Credit Services, Inc. v.
Liberty West Development, Inc., 2002 Utah L. Rev. 519, 532-33.
Since Aurora, we have not had the opportunity to fully delineate
the bounds of the exception in Utah. 	However, such a task must
wait for another day because the Company in this case is not a
closely held corporation, nor is its cast of shareholders and
principals as small as that present in Aurora.

7 	No. 20050024
¶17 	Although various statutes and courts have defined
closely held corporations differently, Carol A. Jones & Britta M.
Larsen, Fletcher Cyclopedia of Private Corporations § 70.10
(perm. ed. 2002), “[c]ourts generally identify common law close
corporations by three characteristics: 	(1) a small number of
shareholders; (2) no ready market for corporate stock; and
(3) active shareholder participation in the business.” 	Id.
Today, we need only examine the first characteristic, the number
of shareholders. 	According to its records, the Company had over
120 shareholders. 	This substantially exceeds the number of
shareholders other jurisdictions permit in close corporations.
Id. 	The number of shareholders is essential to evaluating the
merits of the close corporation exception to the derivative
action rule because of the risk that direct suits can work an
injustice on other shareholders. 	Damages recovered by an
individual shareholder from a corporation or in its stead leave
uncompensated all other similarly injured shareholders and the
value of the corporation potentially diluted. 	As we noted in
Aurora, direct actions should not be allowed if doing so would
“expose the corporation . . . to a multiplicity of actions.” 	970
P.2d at 1280. 	While outlined in Aurora as a limitation to the
availability of direct actions for closely held corporations, it
also explains a primary reason why corporations with more than a
handful of shareholders are disqualified as closely held
corporations in the first place. 	While we decline to set an
arbitrary ceiling on the number of shareholders that a
corporation may have before it becomes ineligible for treatment
as a closely held corporation, we hold that the Company’s
complement of shareholders well exceeded it.
IV. 	THE DISTRICT COURT PROPERLY DISMISSED PLAINTIFFS’ DERIVATIVE
CLAIMS BECAUSE DEMAND ON THE COMPANY WAS REQUIRED
¶18 	Although the trial court dismissed their individual
claims, Plaintiffs were granted leave to refile them as
derivative claims on behalf of the Company. 	However, the
district court turned back the refiled derivative claims because
Plaintiffs failed to make proper demand on the Company to correct
their alleged misdeeds before filing suit, a condition precedent
to bringing a derivative claim.
¶19 	Both the Utah Rules of Civil Procedure and the Revised
Nonprofit Corporation Act require that a derivative action must
“allege with particularity” that demand was made on the directors
and why the directors failed to act or why demand was not made.
Utah Code Ann. § 16-6a-612(3) (2001); Utah R. Civ. P. 23.1. 	We
note that a literal reading of the text of these provisions

No. 20050024 	8
imposes a heightened degree of attention to detail in the
pleading of demands upon a corporation. 	The language implies
that to satisfy the statute, a demand must be sufficiently
comprehensive in articulating the shareholder grievance and
pointed in its expectation for corrective corporate action to be
capable of being “particularized.” 	Both the rule and the statute
include, albeit by implication, substantive requirements for
shareholder demands. 	The district court found that Plaintiffs’
demands did not meet these requirements, and we agree.
¶20 	The second amended complaint, where Plaintiffs first
brought their derivative claims, does not allege that any demand
was made or that the demand requirement was waived. 	In their
briefs to this court, Plaintiffs now claim that, notwithstanding
the deficiencies in their pleadings, they in fact made adequate
demand or, in the alternative, demand was not required. 	We
disagree.
A. 	Demand Was Not Made
¶21 	This court has articulated the requirement that a party
make a demand on the corporation. 	“The stockholder must show
. . . that a demand upon the board of directors or other managing
body, to have an action brought and prosecuted in the name of the
corporation to redress the grievances complained of, has been
made and refused.” 	Tripp v. Dist. Ct., 56 P.2d 1355, 1359 (Utah
1936). 	Plaintiffs list several interactions between themselves
and the Company which they claim satisfy this requirement. 	The
questions before us are, then, what are the essential
characteristics of a demand and are they present in Plaintiffs’
communications with the Company?
¶22 	Plaintiffs claim that our case law offers ambiguous
direction concerning the necessary features of a demand. 	We
disagree. 	To the contrary, Tripp is quite explicit on this
point. 	As noted, the demand must be “to have an action brought
and prosecuted in the name of the corporation to redress the
grievances complained of.” 	Id. 	Therefore, the demand must not
merely remonstrate against a certain corporate policy. 	Rather,
the communication must articulate legal claims that the
corporation holds and insist that the corporation pursue them.
¶23 	None of the communications from Plaintiffs to the
Company meet these standards. 	Several of them voice opposition
to the proposed asset transfer, communicated both orally at
Company meetings and in letters demanding certain analyses of
corporate assets be undertaken prior to the transfer. 	Such
expressions of disagreement fall short of the demand requirement

9 	No. 20050024
because none of them insist that the corporation seek legal
remedies. 	The interaction that comes closest to meeting the
requirement occurred prior to the transfer of assets at a meeting
of the board of directors at which Plaintiffs informed Company
directors that they would pursue legal action if the corporation
followed through with the asset transfer. 	However, this
communication was inadequate for two reasons. 	First, it did not
demand that the corporation pursue legal action. 	Second, it
failed to outline the specific legal claims that Plaintiffs
wanted rectified.
B. 	The Demand Requirement Was Not Waived by the Futility
Exception
¶24 	Both the Revised Nonprofit Corporation Act and the Utah
Rules of Civil Procedure allow the demand requirement to be
waived if a plaintiff alleges with particularity why demand was
not made. 	Utah Code Ann. § 16-6a-612(3)(a)(ii) (2001); Utah R.
Civ. P. 23.1. 	This court has held that for that exception to be
satisfied, “the circumstances [must be] such that such a demand
would be futile and unavailing.” 	Tripp, 56 P.2d at 1359.
Therefore, we must examine first whether Plaintiffs did allege
with particularity why demand would be futile and whether that
allegation establishes that demand would have been futile and
unavailing.
¶25 	Before us, Plaintiffs allege that the continued
antagonistic relationship between Plaintiffs and Herriman, as
evidenced by this litigation, demonstrates that a perfectly
crafted demand would have been futile. 	However, this is the
first instance where they present such a claim. 	The second
amended complaint, in which Plaintiffs brought their derivative
claims, makes no mention of the futility exception and fails to
address why demand would have been futile. 	This fact alone would
be a sufficient basis for turning away Plaintiffs’ futility
claims; however, even had Plaintiffs properly preserved their
futility claims, a close analysis shows that they are
insufficient to satisfy the exception and waive the demand
requirement.
¶26 	It is axiomatic that the right to seek the redress of
corporate grievances belongs to the corporation to be exercised
by corporate management. 	See, e.g., In re Kauffman Mut. Fund
Actions, 479 F.2d 257 (1st Cir. 1973). 	Utah Rule of Civil
Procedure 23.1 provides an exception to this general rule by
allowing members or shareholders to bring derivative actions, but
this exception must be carefully applied in order to protect the
right of corporations to govern their own affairs. 	In re

No. 20050024 	10
Kauffman, 479 F.2d at 263-64. 	Therefore, we must exercise
considerable caution before using futility to relieve a
shareholder of his obligation to make the statutorily-required
demand.
¶27 	This presumption is further strengthened by the
relative ease with which demand can be made. 	A potential
litigant would, of necessity, have prepared and outlined the
legal claims upon which his lawsuit will be based. 	The marginal
cost for presenting these claims to corporate management and
demanding that they take them up is so insignificant that to
strip the corporation of its rights based solely on conjecture or
a post hoc judicial determination would be unreasonable in most
instances. 	Courts must not leave such determinations of futility
to the subjective determination of the party upon which the law
requires action; to do so unnecessarily risks stripping the
corporation of its rights. 	In fact, it will generally require
less effort for the plaintiff to make a demand on the corporation
than to satisfy rule 23.1’s stringent pleading requirements. 	For
this reason, application of rule 23.1’s futility exception
requires close scrutiny.
¶28 	We can conceive of two instances in which the futility
exception would be met. 	For the first, we borrow logic from
Jenkins v. Equipment Center, Inc., 869 P.2d 1000 (Utah Ct. App.
1994), a case dealing with a futility exception to the
requirement that an obligor tender payment as a condition to
being excused from performance. 	In Jenkins, we stated that
tender is “excused where the lienor states that he or she does
not intend to accept payment.” 	Id. at 1003. 	Likewise, in the
corporate setting, demand would be futile if the corporation had
specifically and explicitly stated that it would not pursue the
claims brought in the derivative action. 	The futility exception
could also excuse a shareholder from making a demand when doing
so would be substantively detrimental. 	Such a circumstance could
arise if the demand would risk further injury to the corporation
by, for example, permitting the alleged perpetrator to cover up
his misdeeds or to cause further harm to the corporation because
he had been alerted that his unlawful conduct had been uncovered.
¶29 	Neither instance is applicable in this case. 	The
Company never explicitly stated that it would not pursue the
specific claims raised in this derivative action. 	Nor would
there have been a detriment to Plaintiffs in making a demand.
Herriman already knew that it was embroiled in litigation and
presumably acted accordingly. 	Therefore, a demand prior to the
filing of Plaintiffs’ second amended complaint would not have
affected the Company’s behavior to Plaintiffs’ detriment.

11 	No. 20050024
V. 	THE UTAH CONTROL SHARES ACQUISITIONS ACT IS INAPPLICABLE
BECAUSE IT WAS NOT RAISED AT THE DISTRICT COURT
¶30 	Plaintiffs failed to raise claims based on the Control
Shares Act, Utah Code Ann. §§ 61-6-1 to -12 (2000), at any stage
of the proceedings prior to their appeal to this court. 	They
claim that they should be permitted to inject claims based on
alleged violations of the Act now because they “specifically
argued the illegality of [Herriman]’s acquisition and voting of
its stock and the improper refusal of the Company and [Herriman]
to pay the [Plaintiffs] the fair value of their stock.”
Plaintiffs appear to rely on the principle of appellate review
that “[a] matter is sufficiently raised if it has been submitted
to the trial court and the trial court has had the opportunity to
make findings of fact or law.” 	James v. Preston, 746 P.2d 799,
801 (Utah Ct. App. 1987). 	To accept Plaintiffs’ interpretation
of our preservation standard would require us to distort it
beyond recognition. 	Their position--that once a plaintiff brands
conduct “illegal,” he has preserved for appeal all potential
theories--swallows whole the doctrine of preservation. 	Instead,
“[o]rderly procedure . . . requires that a party must present his
entire case and his theory or theories of recovery to the trial
court.” 	Simpson v. Gen. Motors Corp., 470 P.2d 399, 401 (Utah
1970). 	By failing to mention the Control Shares Act, or even so
much as the legal theory upon which the Act is based, Plaintiffs
have forfeited the opportunity to seek relief under the Act
before this court. 	This rule makes sense and is necessary; if
the trial court was not even made aware of the legal theory
underlying the claim, then there is no way it could have ruled on
the claim.
CONCLUSION
¶31 	We affirm the district court on its conclusions that
Plaintiffs had no vested property rights, that Plaintiffs’
original claims properly belonged to the corporation, that
Plaintiffs failed to make proper demand on the corporation prior
to bringing a derivative lawsuit, and that demand was not excused
through the futility exception. 	Furthermore, we need not rule on
Plaintiffs’ claim based on the Control Shares Act because such a
claim was not raised below.
---
¶32 	Associate Chief Justice Wilkins, Justice Durrant,
Justice Parrish, and Judge Hadfield concur in Justice Nehring’s
opinion.

No. 20050024 	12
¶33 	Having disqualified herself, Chief Justice Durham does
not participate herein; District Judge Ben H. Hadfield sat.