Herman REEDEKER,
Ruth Reese, Gayle Theurer, Joan Valentine, Robert Valentine, and Tom Plummer,
Plaintiffs and Appellants, 
v.
Norman J. SALISBURY, in his capacity as President of the American Towers
Owners Association; Spencer Kimball, in his capacity as Vice President of the
American Towers Owners Association; Glen Getz; William S. Richards, Joan
Holmes, William T. Matlock, Don Bowne, Victor Romero, and Craig Thorley, in
their capacities as past and present Trustees and Directors of the American
Towers Owners Association; and John Does I through X,
Defendants and Appellees.
952 P.2d 577
Court of Appeals of Utah
January 29, 1998, Filed
DISPOSITION:
Affirmed.
GREENWOOD, Judge:
INTRODUCTION
Herman Reedeker and five other
owners of condominium units in the American Towers building in Salt Lake City 1
(Reedeker), appeal the dismissal of their claims against Norman J. Salisbury
and other past and present trustees and officers (Trustees) of the American
Towers Owners Association (Association) in connection with the Association's
decision to finance a law suit against CCI Mechanical (CCI) with funds
allegedly reserved under the Association's bylaws for structural repairs.
1 These five owners are Ruth Reese, Gayle
Theurer, Joan Valentine, Robert Valentine, and Tom Plummer.
Reedeker's complaint stated
causes of action based in contract, negligence, and corporate law. The Trustees
responded with a motion pursuant to Rule 12(b)(6) of the Utah Rules of Civil Procedure,
to dismiss all causes for failure to state a claim upon which relief may be
granted. The Trustees argued that claims based in contract could not be brought
against the Trustees individually and that the claims based in negligence and
corporate law failed to allege intentional misconduct, as required under the
Utah Nonprofit Corporation and Co-Operative Association Act, Utah Code Ann. §
16-6-18 to -112 (1995 & Supp. 1997) (the Nonprofit Corporation Act).
The trial court granted the
Trustees' motion to dismiss, ruling that the Nonprofit Corporation Act provided
the applicable standard of care required of the Trustees and that Reedeker had
failed to allege intentional misconduct as required under that Act. Although
the trial court granted Reedeker leave to amend his complaint, Reedeker chose
instead to appeal the trial court's dismissal order. We affirm.
BACKGROUND
American Towers (Towers) is a
condominium project in Salt Lake City consisting of both residential and
commercial units. As required under the
Utah Condominium Ownership Act, Utah Code Ann. § 57-8-1 to -36 (1994
& Supp. 1997) (the Condominium Act), 2 a declaration
(Declaration) governing the Towers condominium project was recorded in 1982.
Bylaws (Bylaws), also required under the Condominium Act, were adopted pursuant
to the Nonprofit Corporation Act and identified the Association as a nonprofit
corporation.
2 Because the relevant sections of the
Nonprofit Corporation Act and the Condominium Act have remained substantially
unaltered since commencement of the Trustees' alleged wrongdoing, we cite only
to the most recent versions.
Pursuant to the Declaration, each
condominium owner is a member of the Association. [*580]
Each Association trustee and officer is required to be a condominium
owner and thus also a member of the Association. Under both the Bylaws and the
Condominium Act, owners must strictly comply with the Declaration and Bylaws,
as well as applicable provisions contained in the Condominium Act. In addition,
the Bylaws restrict the general management powers of trustees to those defined
by law, the Declaration and Bylaws, and the Association's Articles of
Incorporation.
Construction on the Towers began
in 1981 and was completed in 1982. CCI was the subcontractor hired to design
and construct the mechanical, plumbing, heating, ventilation, and air
conditioning systems.
Almost immediately after
completion of construction on the Towers, the Association became aware of
possible faulty work by CCI. An October 1984 study commissioned from an
independent management firm recommended that the Association examine possible
remedies against CCI. In 1985, a Trustee, who was also an attorney, suggested
the Association seek legal advice because the applicable statutes of limitations
were running. Despite that advice, it was not until September 1991 that the
Association commenced suit against CCI (the CCI Litigation). The trial court in
that case granted a motion for summary judgment on all claims, in part because
the claims were barred by the statute of limitations. The Association then
filed an appeal of the trial court's CCI decision. 3
3 Subsequent to the commencement of Reedeker's
suit, the Utah Supreme Court affirmed the trial court's summary dismissal of
the CCI lawsuit, on grounds other than statute of limitations. See American
Towers Owners Assoc., Inc. v. CCI Mechanical, Inc., 930 P.2d 1182, 1187-94
(Utah 1996).
The Association financed the CCI
Litigation at least partially from a fund identified in the Declaration as a
Reserve Fund and Working Capital Fund (Reserve Fund). According to the
Declaration, the Association may use the Reserve Fund "to cover the costs
of reasonably predictable and necessary repairs and replacements of the
[Towers] Common Areas . . . and shall cause such reserve to be funded by
regular monthly or other periodic assessments against the Condominiums rather
than by Special Assessments." Because of the expenses of the CCI
Litigation, which totaled approximately $ 750,000, the Reserve Fund lacked
sufficient funds to pay for known and necessary repairs. Nonetheless, the
Trustees believed they had authority for their action based on advice from both
an attorney and an accountant.
The Association never notified
condominium owners of its intent to use funds from the Reserve Fund in this
manner. Even after receiving several complaints from owners in 1993 that such
use was a misappropriation, the Association continued to apply Reserve Fund
money to pay for the CCI Litigation. A March 1994 letter to owners explained
that the Trustees had funded the CCI Litigation from the Reserve Fund
"because the lawsuit is an attempt to collect funds to make repairs to the
building, and any monies recovered will go into the reserve fund." In
February 1995, the Trustees notified owners that the Association would seek an
appeal of the trial court's CCI decision and that, because the plumbing and
mechanical problems continued to increase, the Association would probably need
to increase assessments to the Reserve Fund. Numerous owners again protested.
In a January 1996 letter, Reedeker notified the Trustees of their alleged
breaches of the Articles, Bylaws, and Declaration and demanded that they take
immediate action to recover and replenish the Reserve Fund. Although the
Trustees received the letter, they subsequently voted to continue using the
Reserve Fund to finance the CCI Litigation. They also decided, after failing to
obtain the approval of sixty percent of condominium owners for a special
assessment to pay for needed repairs, to increase the monthly assessment
allocated to the Reserve Fund.
On May 29, 1996, Reedeker filed a
verified complaint for derivative action seeking to hold several past and
present trustees and officers personally liable to replenish the Reserve Fund. The complaint contains seven
substantive claims. Reedeker's contract claims allege breach of contract and
breach [*581] of implied covenant of good faith and fair
dealing. His negligence-based claims allege negligence, gross negligence, and
breach of duty of care. His claims based in corporate law allege breach of
fiduciary duty, and corporate mismanagement and waste of assets.
The trial court dismissed all
claims against the Trustees after determining that the Nonprofit Corporation Act,
incorporated into the Condominium Act by the Association's Declaration and
Bylaws, immunizes the Association's trustees and officers from personal
liability for acts other than those constituting intentional misconduct.
Although the trial court granted Reedeker leave to amend his complaint to
allege intentional misconduct, Reedeker chose instead to pursue this appeal.
ISSUES
AND STANDARD OF REVIEW
Reedeker argues on appeal that
the trial court erred in dismissing his claims. Reedeker argues first that the
trial court erred in deciding that failure to allege intentional misconduct, a
tort-based standard of liability, defeated his contract claims. He argues
second that the trial court erred in deciding that the standard of care found in the Nonprofit
Corporation Act applies to nonprofit condominium corporations established under
the Condominium Act; Reedeker asserts that, because the nature of condominium
associations is so distinct from the nature of traditional nonprofit
corporations, common law standards or those found in the Utah Revised Business
Corporation Act, Utah Code Ann. §§ 16-10a-101 to -1705 (1995 & Supp.
1997), should apply instead. Finally, Reedeker argues that the trial court
inappropriately dismissed his claims of breach of fiduciary duty and
mismanagement of funds where those claims were based on alleged ultra vires
acts of the Trustees.
"Dismissal of a claim under
Rule 12(b)(6) is a severe measure given the liberality of notice pleading, and
must be granted only when it is apparent that under no set of facts proven in
support of the claim as pleaded would a party be entitled to relief." Olson
v. Park-Craig-Olson, Inc., 815 P.2d 1356, 1360 (Utah Ct. App. 1991) (citing
Colman v. Utah State Land Bd., 795 P.2d 622, 624 (Utah 1990)). We begin
with the assumption "that the factual allegations made by the plaintiff
are true." Neel v. State, 854 P.2d 581, 582 (Utah Ct. App. 1993).
"We then review the trial court's ruling to see whether the prevailing
party was nevertheless entitled to dismissal as a matter of law." Id.
"Because we consider only the legal sufficiency of the complaint, we grant
the trial court's ruling no deference and review it for correctness." Educators
Mut. Ins. Ass'n v. Allied Property & Cas. Ins. Co., 890 P.2d 1029, 1030
(Utah 1995).
ANALYSIS
Contract
Claims
Reedeker argues that the trial
court erred when it dismissed his contract claims for failure to allege intentional
misconduct. Reedeker explains that the same factual allegations which support a
tort claim may also support a contract claim and that, in such cases, any deficiency
in the tort claim has no effect on the sufficiency of the contract claim. Thus,
even if the trial court was correct in requiring allegations of intentional
misconduct to support Reedeker's tort-based claims, the trial court was not
correct in dismissing his contract claims on the same ground.
The Trustees counter that
dismissal of the contract claims was appropriate because there exists no enforceable
contract under which the Trustees can be held personally liable. The Trustees
challenge Reedeker's assertion that a contract exists between the individual
Trustees and the Association because each owner, upon purchasing a condominium,
enters into a contract with the Association to strictly comply with the
Association's governing provisions. The Trustees argue that this contract
between each individual owner and the Association does not bind the Trustees
when acting in their distinct capacity as trustees.
Whether individual trustees and officers
of a condominium association are personally liable in contract to either the
condominium association or the owners generally is an issue of first
impression in Utah. However, a review of traditional principles of [*582]
corporate liability, and the reference to these principles in the scant
case law from other jurisdictions addressing this question, convinces us that
such trustees are not personally liable in contract for their decisions while
acting in that capacity unless those individuals enter into a distinct contract
binding them personally.
Generally, unless there is a
material dispute of fact, the existence of a contract is a conclusion of law. See
Wadsworth Const. v. City of St. George, 865 P.2d 1373, 1375 (Utah Ct. App. 1993), aff'd,
898 P.2d 1372 (Utah 1995). Here, the material facts are the identities
of the parties, and these facts are undisputed. Reedeker and his co-plaintiffs
are owners of Towers condominiums and members of the Association; however, when
acting in their capacity as trustees, the Trustees are no longer acting as
owners but rather are serving in the distinct capacity of agents for the
Association. See Baltimore & Ohio R.R. Co. v. Baugh, 149 U.S. 368, 382,
37 L. Ed. 772, 779, 13 S. Ct. 914 (1893) (stating "a corporation only
acts through agents" and "directors are the managing agents"); Davis
v. Payne & Day, Inc., 10 Utah 2d 53, 348 P.2d 337, 339 (1960)
("Corporations can only act through agents, be they officers or
employees."). The issue before us is whether the contract between each individual
owner and the Association is enforceable against the Trustees when acting in
that capacity.
"'It is well established
precedent that the bylaws of a corporation, together with the articles of
incorporation, the statute under which it was incorporated, and the member's
application, constitute a contract between the member and the
corporation.'" Turner v.
Hi-Country Homeowners Ass'n, 910 P.2d 1223, 1225 (Utah 1996) (quoting Appeal
of Two Crow Ranch, Inc., 159 Mont. 16, 494 P.2d 915, 919 (1972)). Failure
of an owner to comply with the terms of the contract exposes that owner to
contract liability. Similarly, "because the Association is a corporation,
it may not act in any way not authorized in its [declaration,] articles of
incorporation or bylaws." S & T Anchorage, Inc. v. Lewis, 575 So.
2d 696, 698 (Fla. Ct. App. 1991). As with the owner-member, failure of an
association to abide by the terms of the contract exposes that association to
contract liability.
However, a contract between a
member and a corporation is not a contract between a member and those individuals
who direct or manage the corporation. "The general rule is that a
corporation is an entity separate and distinct from its officers, shareholders
and directors and that they will not be held personally liable for the corporation's
debts and obligations." Melko v. Dionisio, 219 Ill. App. 3d 1048, 580
N.E.2d 586, 594, 162 Ill. Dec. 623 (Ill. Dist. App. Ct. 1991). Under this
rule, "[a] director is not personally liable for his corporation's
contractual breaches unless he assumed personal liability, acted in bad faith
or committed a tort in connection with the performance of the contract." Mills
v. Polar Molecular Corp., 12 F.3d 1170, 1177 (2d Cir. 1993). This is true
even where "the director, while acting in his official capacity, took
actions that resulted in the breach." Id. at 1177. "'In so
immunizing corporate directors from personal liability the law has proceeded on
the theory that in so acting they are but the agents of the corporation and
that the breach is that of the corporation, and hence it alone is answerable
therefore.'" Maxey v. Citizens Nat'l Bank, 507 S.W.2d 722, 726 (Texas
1974) (citation omitted).
We are unable to find any support
for Reedeker's suggestion that this general rule is somehow inapplicable to
trustees and officers of a condominium corporation. Indeed, a review of case
law from other jurisdictions indicates a retention of general corporate
liability principles within the condominium association context. See, e.g.,
Frances T. v. Village Green Owners Ass'n, 42 Cal. 3d 490, 723 P.2d 573, 586
n.20, 229 Cal. Rptr. 456 (Cal. 1986) (noting only association is liable
where plaintiff made no allegation that board members "entered into a
contract with plaintiff on their own behalf or purported to bind themselves
personally."); Ocean Trail Unit Owners Ass'n v. Mead, 650 So. 2d 4, 7
(Fla. 1994) (stating "if the officers or directors act in an
unauthorized manner, the unit owners should seek a remedy through elections or,
if factually supported, in an action for breach of fiduciary duty.").
[*583] In this case, Reedeker wishes to hold the
Trustees contractually liable for the decisions they made as trustees. However,
the only contract alleged in Reedeker's complaint is the one between each
individual owner and the Association. Under that contract, each individual
trustee or officer is liable, just like any other owner, for his or her
obligations as an owner. That contract, however, does not reach
the conduct of trustees or officers acting in their capacity as agents for the
Association.
Because Reedeker does not allege
the existence of a separate contract under which the Trustees have bound
themselves personally for their actions as trustees, the trial court correctly
dismissed Reedeker's contract claims. 4
4 Before the trial court and on appeal,
Reedeker argued that section 57-8-8 of the Condominium Act, which provides that
"[each] unit owner shall comply strictly with the covenants, conditions
and restrictions as set forth in the declaration . . ., and with the
bylaws," imposes a strict duty on the Trustees to so comply even when
acting in that separate capacity. Because we believe that assertion is defeated
by essentially the same analysis applicable to his contract claims, we do not address
it separately.
Tort
Claims
Reedeker next argues that the
trial court erred in ruling that his failure to allege intentional misconduct defeated
his tort claims of negligence, gross negligence, and breach of duty of care.
Reedeker claims that the provision of the Nonprofit Corporation Act which
requires intentional misconduct in order to hold trustees personally liable is
inapplicable to the acts of nonprofit condominium association trustees. 5
Reedeker asserts that the nature of condominium associations, in particular the
fact that such associations exercise considerable power over the private
property of its members, requires that the acts of trustees be subject to a
more strict standard of care such as is found in the Utah Revised Business Corporation
Act, Utah Code Ann. §§ 16-10a-101 to -1705 (1995 & Supp. 1997)
(Business Corporation Act). 6
5 Because Reedeker conceded at oral argument
that he did not allege intentional misconduct, we do not review the trial
court's ruling on that issue.
6 Section 16-10a-840(4)(b) of the
Business Corporation Act protects a corporate director or officer from personal
liability for corporate decisions unless his or her breach or failure to perform
the duties of the office "constitutes gross negligence, willful
misconduct, or intentional infliction of harm on the corporation or the shareholders."
Utah Code Ann. § 16-10a-840(4)(b) (1995).
The Trustees, in contrast, argue that because
the Condominium Act does not identify the standard of care applicable to
trustees, does not require condominium associations to incorporate as
for-profit corporations, and expressly provides that it displaces other law
only to the extent of conflict, the trial court properly determined that the
standard of care found in the Nonprofit Corporation Act governs the personal
liability of the Trustees of this nonprofit corporation.
The management of condominium
associations in Utah is controlled by the Utah Condominium Ownership Act, Utah
Code Ann. §§ 57-8-1 to -36 (1994 & Supp. 1997). The issue is whether
that Act allows for incorporation of the standard of care found within the
Nonprofit Corporation Act or whether the Condominium Act instead requires
application of a less rigorous standard, such as the one applied to for-profit
corporations, as found in the Business Corporation Act.
Because this is a matter of pure
statutory interpretation, we "review[] a trial court's ruling for
correctness and give[] no deference to its legal conclusions." Stephens
v. Bonneville Travel, Inc., 935 P.2d 518, 519 (Utah 1997). "When faced
with a question of statutory construction, we look first to the plain language
of the statute." Id. at 520. "We assume that 'each term in the
statute was used advisedly; thus the statutory words are read literally, unless
such a reading is unreasonably confused or inoperable.'" Id.
(citation omitted). Finally, "'a statute should be construed so that
effect is given to all its provisions, so that no part will be inoperative or
superfluous, void or insignificant, and so that one section will not destroy
another.'" Brickyard Homeowners' Ass'n v. [*584] Gibbons Realty Co., 668 P.2d 535, 538 (Utah
1983) (citation omitted).
The Utah legislature enacted the
Condominium Act in 1963. 7 The Act applies "to property which .
. . all the owners submit to the provisions of the act by duly executing and
recording a declaration as provided in the act." Utah Code Ann. §
57-8-2. To be subject to the Condominium Act, condominium associations must
prepare and record both a declaration "containing the covenants,
conditions, and restrictions relating to the project," id. §
57-8-10(1), and bylaws, which govern "administration of every
property," id. § 57-8-15.
7 See Condominium Ownership Act, ch.
111, §§ 1-37, 1963 Utah Laws 406, 406-18.
The Condominium Act provides
significant guidance as to the operation of condominium associations. See,
e.g., id. § 57-8-16 (stating bylaws may provide for "the
establishment of a management committee [and] . . . the powers and duties of
the management committee"); id. § 57-8-7(5) (stating
"necessary work of maintenance, repair and replacement of the common areas
and facilities . . . shall be carried out only as provided in this act or in
the declaration or bylaws"); id. § 57-8-8 (stating "each unit
owner shall comply strictly with the covenants, conditions and restrictions as
set forth in the declaration . . ., and with the bylaws"); id. §
57-8-33 (stating "actions may be brought by the manager or management
committee, in either case in the discretion of the management committee, on
behalf of two or more of the unit owners, as their respective interest may
appear, with respect to any cause of action relating to the common areas and
facilities or more than one unit.").
Despite these numerous provisions
addressing the management of condominium associations, the Condominium Act
contains no provision defining the personal liability of condominium
association trustees. It also contains no provision requiring condominium associations
to incorporate as for-profit corporations, nor any provision prohibiting them
from doing so. Consistent with this absence, section 57-8-35(1) of the
Condominium Act provides: "The provisions of this chapter shall be in
addition and supplemental to all other provisions of law, statutory or
judicially declared, provided that wherever the application of the provisions
of this chapter conflict with the application of such other provisions, this
chapter shall prevail." Id. § 57-8-35(1).
Like the Condominium Act, the
current Nonprofit Corporation and Co-Operative Association Act was enacted in
1963. 8 It applies to "all corporations organized under this
chapter." Utah Code Ann. § 16-6-20(1)(a). Any corporation "whose
object is not pecuniary profit may be organized under [the act] for any lawful
purpose or purposes . . . ." Id. § 16-6-21(1). Although the 1963
enactment did not include a provision addressing trustee liability, the Utah
legislature added such a provision in 1987. 9 That provision
provides:
(1) A trustee or
officer of a nonprofit corporation is not personally liable to the corporation
or its members for civil claims arising from acts or omissions made in the
performance of his duties as a trustee or officer, unless the acts or omissions
are the result of his intentional misconduct.
Id. § 16-6-107(1)
(emphasis added). The primary purpose of the amendment was to encourage
competent persons to serve as trustees in nonprofit corporations by limiting
their personal liability for decisions made while serving in those capacities. 10
8 See Utah Non-Profit Corporation
Cooperative Association Act, ch. 17, §§ 1-97, 1963 Utah Laws 27, 27-61.
9 See Liability Limits of Corporate
Directors, ch. 166, § 2, 1987 Utah Laws 1005, 1006.
10 See Recording of Utah House Floor
Debates, 47th Legislature, Regular Session (Feb. 23-24, 1987)(discussing Senate
Bill 47); Recording of Utah Senate Floor Debates, 47th Legislature, Regular
Session (Feb. 2-4, 1987) (same).
The American Towers Declaration
was prepared and recorded so as to subject the condominiums to the Condominium
Act. The American Towers Condominium Association was then incorporated as a nonprofit
corporation and its Bylaws provide that the Association shall be subject to the
Nonprofit Corporation [*585] Act. We are now asked to decide whether,
under these circumstances, the Condominium Act, which constitutes the
controlling statute but contains no provision addressing the personal liability
of condominium association trustees, allows, under section 57-8-35(1),
application of the liability provision of section 16-6-107(1) of the Nonprofit
Corporation Act to the trustees of nonprofit condominium associations.
Reedeker argues that the Condominium
Act governs all his tort claims to the exclusion of any provisions within the
Nonprofit Corporation Act. He further asserts that the primary purpose of the
Condominium Act is to define and protect the rights of individual owners.
Reedeker claims this purpose, which is reflected in the Condominium Act's
numerous provisions dictating how condominium developments should be governed,
is inconsistent with the liability standard found in the Nonprofit Corporation
Act, which holds trustees liable only for intentional misconduct. Reedeker
explains that a condominium association board is "different in scope,
nature, purpose and protections from traditional nonprofit organizations."
Thus, he claims, although "the intentional misconduct makes sense for [trustees]
of traditional nonprofit organizations, because the [trustees'] decisions
cannot affect other members' property," that standard makes no sense where
the acts of condominium trustees directly affect the property rights of other
members. Reedeker concludes that, because condominium associations have
responsibilities more similar to for-profit corporations, the liability
standards contained within the Nonprofit Corporation Act are inapplicable.
While Reedeker's arguments on
this issue have some measure of plausibility, our ability to entertain them is
nonetheless constrained by the rules of statutory construction. Applying these
rules, we conclude that the language of section 57-8-35(1) of the
Condominium Act is clear and unambiguous. The provisions of that Act
"shall be in addition and supplemental to all other provisions of
law." Utah Code Ann. § 57-8-35(1) (emphasis added). The only
exception is where "the application of the provisions of this [Act]
conflict with the application of such other provisions." Id. In
that case, the Condominium Act "shall prevail." Id. Thus, the
Condominium Act specifically allows for application of other law within the
condominium context.
That the Condominium Act contains
provisions designed to protect the interests of owners and lenders in
condominium projects cannot nullify the clear intention expressed in section
57-8-35(1) that other provisions of law govern where the Condominium Act is
silent. Furthermore, the Legislature's decision to not include a liability provision
within the Condominium Act, in combination with its enactment of section
57-8-35(1), undermines Reedeker's suggestion that the Legislature intended
protection of property rights to be the Act's predominant purpose. See
Business Aviation of S. Dakota, Inc. v. Medivest, Inc., 882 P.2d 662, 665 (Utah
1994) ("Because the statute does not indicate that the sole purpose
of the Act is to protect corporations from outside hostile takeovers, we reject
defendants' argument."). "Our '"interpretation [of a challenged
statute] must be based on the language used, and . . . the court has no power
to rewrite a statute to make it conform to an intention not
expressed."'" Id. (citations omitted).
Similarly, differences between
the Condominium Act and the Nonprofit Corporation Act cannot be dispositive. As
provided in section 57-8-35(1), where conflict exists between the two
Acts' provisions, those in the Condominium Act prevail. Reedeker argues,
however, that a conflict between the Condominium Act and the Nonprofit
Corporation Act as to particular provisions creates a conflict between those
Acts as a whole. That interpretation is not only contrary to the plain language
of section 57-8-35(1), which addresses conflicting "provisions"
rather than conflicting statutes as a whole, but is also contrary to that rule
of statutory construction that requires a statute to "'be construed so
that effect is given to all its provisions, so that no part will be inoperative
or superfluous, void or insignificant, and so that one section will not destroy
another.'" Brickyard Homeowners' Ass'n, 668 P.2d at 538. For us to
interpret section 57-8-35(1) to preclude application of any provision of
a [*586] broadly applicable statutory scheme, such as
the Nonprofit Corporation Act, merely because some provisions of the two Acts
conflict, would make the "supplemental" clause of section
57-8-35(1) "inoperative or superfluous, void or insignificant." Id.
This is especially so where the Condominium Act itself does not address the particular
issue in question.
Finally, the fact that section
16-6-107(1) of the Nonprofit Corporation Act was enacted subsequent to the
Condominium Act does not alter our conclusion. We assume
"that
whenever the legislature enacts a provision it has in mind previous statutes
relating to the same subject matter, wherefore it is held that in the absence
of any express repeal or amendment therein, the new provision was enacted in
accord with the legislative policy embodied in those prior statutes, and they
all should be construed together."
Murray City v.
Hall, 663 P.2d 1314, 1318 (Utah 1983) (citation omitted).
Where legislation is clear, we
must "refuse to consider public policy arguments or otherwise attempt to
assess the wisdom of the legislation. Our duty is to implement the law as it
reads unless it results in an absurd outcome." Stephens, 935 P.2d at
522 (citation omitted); see also State ex rel. A.B., 936 P.2d 1091, 1097
(Utah Ct. App. 1997); Bonneville
Int'l Corp. v. State Tax Comm'n, 858 P.2d 1045, 1048 (Utah Ct. App. 1993).
"It is not our prerogative to rewrite [a] section or to question the
wisdom, social desirability, or public policy underlying it." Salt Lake
Child & Family Therapy Clinic v. Frederick, 890 P.2d 1017, 1021 (Utah 1995).
"If a statute is infirm, 'amendments to correct the inequities should be
made by the legislature and not by judicial interpretation.'" Id. at
1021 (citation omitted).
Because the Condominium Act does
not contain any provision addressing the personal liability of trustees and
specifically provides for the application of other non-conflicting law, we hold
that the trustees of a condominium association incorporated as a nonprofit
corporation under the Nonprofit Corporation Act are, pursuant to section
57-8-35(1) of the Condominium Act, subject to the liability provision
contained within the Nonprofit Corporation Act. Because section 16-6-107(1) of
the Nonprofit Corporation Act immunizes trustees from personal liability absent
intentional misconduct, and because Reedeker failed to allege such misconduct,
the trial court properly dismissed Reedeker's tort-based claims.
Corporate
Law Claims
Finally, Reedeker challenges the
trial court's dismissal of his breach of fiduciary duty and mismanagement and
waste of corporate assets claims. Reedeker argues the trial court erred in
deciding that these claims are subject to the intentional misconduct standard
of liability found in section 16-6-107(1) of the Nonprofit Corporation Act. He
argues first that these corporate claims are distinct from tort claims and thus
are not subject to section 16-6-107(1). Alternatively, Reedeker seems to argue
that, because his corporate claims rest upon ultra vires acts, section
16-6-107(1) is inapplicable because claims alleging ultra vires acts are
actionable regardless of the trustees' intent.
The Trustees counter that because
Reedeker's claims essentially assert a breach of the Trustees' duty of care to
the Association, the trial court correctly decided such claims are subject to section
16-6-107 of the Nonprofit Corporation Act. To the extent Reedeker attempts to
convert these claims to claims asserting ultra vires acts, the Trustees respond
that Reedeker has failed to make the necessary allegations.
1.
Application of Section 16-6-107(1) to Corporate Law-based Claims
Having previously decided that
section 16-6-107(1) applies to tort-based actions against nonprofit condominium
association trustees, we must now decide whether that section also applies to
claims against trustees based on their duties under corporate law. An analysis
of the plain language of section 16-6-107(1) indicates that the section applies
equally to such claims.
Section 16-6-107(1) prohibits the
personal liability of a nonprofit corporation trustee "for civil claims
arising from acts or omissions [*587] made in the performance of his duties
as a trustee or officer, unless the acts or omissions are the result of his
intentional misconduct." Utah Code Ann. § 16-6-107(1) (emphasis added).
The plain language of the section in no way distinguishes between the trustees'
duties as defined under traditional corporate law and those duties more
traditionally associated with tort law. Nor does the section make any distinction
based on the nature of the duty--whether the fiduciary duty of care or the
duties to manage a corporation competently and to not waste corporate assets,
if such duties are distinct from the individual's fiduciary duty. 11
11 The Trustees argue that both Reedeker's
breach of fiduciary duty and his mismanagement and waste claims do not exist as
independent claims because mismanagement and waste merely identify ways in
which a trustee may breach his or her fiduciary duty. Because of our
disposition of Reedeker's corporate claims, we need not decide this issue.
Thus, the plain language of
section 16-6-107 requires application of the intentional misconduct standard to
any breach of duty by a trustee to a nonprofit corporation. This conclusion
finds further support in Utah case law recognizing that a corporate mismanagement
claim may be subject to a tort standard of liability. In FMA Acceptance Co.
v. Leatherby Ins. Co., 594 P.2d 1332 (Utah 1979), the Utah Supreme Court
discussed the nature of a claim of negligent mismanagement of a corporation.
Focusing on the then-applicable duty of care owed to a corporation by its
directors and trustees, the court stated:
The rule most in
harmony with the character and well-being of such an institution appears to be
that the directors, in administering its affairs, must exercise ordinary care,
skill, and diligence. Under this rule, it is necessary for them to give the
business[] under their care such attention as an ordinarily discreet business
man would give to his own concerns under similar circumstances . . . . If,
however, directors, acting in good faith, and with reasonable care, skill, and
diligence, nevertheless fall into a mistake, either of law or fact, they will
not be liable for the consequences of such mistake.
Id. at 1334 (citation omitted)
(emphasis omitted); see also Equitable Life & Cas. Ins. Co. v. Inland
Printing Co., 26 Utah 2d 19, 484 P.2d 162, 163 (Utah 1971) (describing
"law relative to mismanagement by, and negligence on the part of, officers
and directors of a corporation" as involving a "legal relationship
which would raise a duty, on the part of directors or officers . . . to
exercise care in the management of the affairs of the corporation."
(Emphasis added)); Resolution Trust Corp. v. Hess, 820 F. Supp. 1359,
1364-65 (D.Utah 1993) (interpreting FMA Acceptance as holding that
director liability in claim for "negligent mismanagement" is
determined by "applicable standard of director liability" in tort).
In light of the plain language of
section 16-6-107(1), which by its terms applies to all duties of nonprofit corporation
trustees, and case law defining corporate mismanagement as a breach of a
trustee's duty of care, we hold that section 16-6-107(1) applies to Reedeker's
breach of fiduciary duty and mismanagement claims. Because Reedeker did not
allege intentional misconduct in connection with these claims, we affirm the
trial court's dismissal of them.
2.
Ultra Vires Acts
Reedeker attempts to avoid this
result by asserting that his corporate claims are not subject to section
16-6-107(1) because the claims are based on ultra vires acts--acts which a
corporation lacks capacity to undertake regardless of the Trustees' intent.
The Trustees argue that Reedeker
fails to allege ultra vires acts where Reedeker does not challenge the Trustees'
authority to institute suit against CCI but merely disagrees with the manner
chosen to finance that suit. The Trustees assert that where neither the
Declaration nor the Bylaws contain a provision specifically prohibiting the
Association from financing the suit out of the Reserve Fund and where the
Trustees relied on the opinions of an attorney and accountant that the Reserve
Fund could be used in this manner, the Trustees' action is, as a matter of law,
not ultra vires. Alternatively, the Trustees
[*588] argue that, even if
funding the CCI Litigation from the Reserve Fund was inappropriate, section
16-6-107 of the Nonprofit Corporations Act still required Reedeker to allege
intentional misconduct before the Trustees could be held personally liable.
We have previously determined that,
under the Condominium Act and the Towers Declaration and Bylaws, section
16-6-107 of the Nonprofit Corporations Act defines the standard of care which
the Trustees must breach before they can be held personally liable for their
decisions as trustees. That section provides:
(1) A trustee or
officer of a nonprofit corporation is not personally liable to the corporation
or its members for civil claims arising from acts or omissions made in the
performance of his duties as a trustee or officer, unless the acts or omissions
are the result of his intentional misconduct.
Utah Code Ann. § 16-6-107(1).
Because the Condominium Act is
silent on liability in connection with ultra vires acts of a condominium association,
we must now consider the effect of section 16-6-107 on another provision of the
Nonprofit Corporations Act, section 16-6-23, which does allude to such trustee
liability. 12 In proceeding, we reiterate that a statute is to
"'be construed so that effect is given to all its provisions, so that no
part will be inoperative or superfluous, void or insignificant, and so that one
section will not destroy another.'" Brickyard Homeowners' Ass'n, 668
P.2d at 538 (citation omitted).
12 Section 16-6-23 is applicable to the Association
and its trustees for the same reasons for which we previously found 16-6-107
applicable. We therefore do not repeat that analysis.
Section 16-6-23 of the Nonprofit
Corporations Act provides:
No act of
nonprofit corporation . . . shall be invalid by reason of the fact that the
corporation was without capacity or power to do such act . . ., but such lack
of capacity or power may be asserted:
(1) In a
proceeding by a member or a trustee against the corporation to enjoin the doing
or continuation of unauthorized acts . . . .
(2) In a
proceeding by the corporation, whether acting directly . . . or through members
in a representative suit against the incumbent or former officers or trustees
of the corporation for exceeding their authority.
Utah Code Ann. § 16-6-23.
The primary purpose of section
16-6-23, as evidenced by the section's plain language, is to eliminate a
corporation's ability to avoid its obligations to third parties by raising a
defense of ultra vires. See also Park v. Alta Ditch & Canal Co., 23 Utah
2d 86, 91, 458 P.2d 625, 628 (1969) ("This provision was undoubtedly
designed to place some limitations on the defense of ultra vires.").
In limiting ultra vires as a
defense, the section makes clear that claims alleging corporate ultra vires
acts may still be maintained against the corporation itself or against
individual trustees who have exceeded their authority. Such actions would most
likely be for declaratory or injunctive relief, not damages. However, nothing
in section 16-6-23 exempts the latter claims from the intentional misconduct
standard for personal liability contained in section 16-6-107. Furthermore,
application of section 16-6-107 to the claim recognized in section 16-6-23 does
not destroy or undermine the primary purpose of section 16-6-23 or make that
section inoperative or superfluous. As indicated above, the main objective of
section 16-6-23 is to eliminate a corporation's ultra vires defense. That
purpose is not defeated by applying the standard of care defined in section
16-6-107 to the types of actions recognized under section 16-6-23 as available
against individual trustees.
Exempting such actions from the
reach of section 16-6-107, however, would destroy--or at least greatly diminish--the
primary objective behind section 16-6-107. As noted above, section 16-6-107 was
enacted to encourage competent persons to serve as nonprofit corporation
officers or trustees by decreasing their exposure to personal liability for
their management decisions. 13 To accomplish [*589]
this objective, section 16-6-107 gives the trustees blanket protection
from personal liability for any acts amounting to less than intentional misconduct.
13 See Recording of Utah House Floor
Debates, 47th Legislature, Regular Session (Feb. 23-24, 1987)(discussing Senate
Bill 47); Recording of Utah Senate Floor Debates, 47th Legislature, Regular
Session (Feb. 2-4, 1987) (same).
"'Unambiguous language in
the statute may not be interpreted to contradict its plain meaning.'" Salt
Lake Child & Family Therapy Clinic, 890 P.2d at 1020 (citation omitted)
(alteration omitted). "When language is clear and unambiguous, it must be
held to mean what it expresses, and no room is left for construction." Id.
(citations omitted). Section 16-6-107 contains no exception and thus, on its
face, applies universally to all claims alleging any type of breach of duty
against nonprofit corporation trustees and seeking damages to be recovered from
those trustees.
Because the language of section
16-6-107 is clear in its intent to apply to all breach of duty actions brought
against nonprofit corporation trustees and because the application of section
16-6-107 to those causes of action recognized under section 16-6-23 does not
defeat the purpose of section 16-6-23, we hold that a plaintiff must allege
intentional misconduct against a nonprofit corporation trustee--even where
alleging that the trustee has exceeded his or her authority--in order to
survive a Rule 12(b)(6) motion. Because Reedeker concedes that he has not
alleged intentional misconduct in connection with his claims against the
Trustees, we hold that, even if Reedeker's claims were founded on ultra vires
corporate acts, the trial court correctly dismissed those claims.
CONCLUSION
We conclude that the trial
court's dismissal of Reedeker's contract claims was proper where Reedeker
failed to allege a contract which is enforceable against the Trustees when
acting in that capacity. We further conclude that, where a condominium association
is incorporated under the Utah Nonprofit Corporation and Co-operative
Association Act, trustees and officers of such association may be held
personally liable for performance of their duties only if their performance
reflects intentional misconduct, as required under section 16-6-107 of that
Act. Because Reedeker failed to allege intentional misconduct in connection
with any of his remaining claims, the trial court correctly dismissed those
claims. 14
14 On appeal, Reedeker also argued that the
trial court had improperly considered unalleged fact scenarios in dismissing
Reedeker's complaint and that Reedeker was entitled to attorney fees and an
incentive fee where pursuit of this action brought a benefit to the
Association. Because of our disposition of this case, we need not address these
issues.
We thus affirm the trial court's
judgment.
Pamela T. Greenwood, Judge
WE CONCUR:
Judith M. Billings, Judge Gregory K. Orme, Judge