Southam v. South Despain Ditch Co.
337 P.3d 236
Utah2014Background
- South Despain Ditch Company (SDDC) is a nonprofit mutual irrigation company whose bylaws restrict share transfers (board approval required, purchaser must be able to connect to the water system, fixed price per share).
- In 2005 the Jordan School District sold 23 SDDC shares at public auction; purchasers paid roughly $1,945 per share (well above SDDC’s fixed price) and some purchasers could not connect to the delivery system.
- SDDC refused to recognize the sale, denied share certificates to the purchaser (Garside), and denied him access to corporate records; the District’s own inspection request was honored.
- Garside sued for breach of contract, breach of fiduciary duty, violation of the Utah Revised Nonprofit Corporation Act, and challenged the transfer restrictions; the district court granted summary judgment for SDDC.
- Garside died; his interest was transferred to Paul Southam, who continued the appeal. The Supreme Court reviews de novo and affirms: transfer restrictions enforceable, so Southam lacked shareholder status and standing to pursue claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SDDC’s transfer restrictions are void as contrary to Utah water law (beneficial use) | Southam: restrictions frustrate beneficial-use policy and free alienability of water-related interests | SDDC: nonprofit shares are governed by the Revised Nonprofit Corporation Act, which allows/bylaws may restrict transfers | Held: Restrictions governed and authorized by Utah Code §16-6a-606; water-law arguments preempted and unavailing |
| Whether common-law rules against restraints on alienation of real property render restrictions unenforceable | Southam: shares have value in water rights (real property) so restraints should be invalid | SDDC: transaction is transfer of corporate shares (not direct transfer of water rights); §16-6a-606 governs transferability | Held: Common-law property rules displaced by the statutory scheme for nonprofit shares; restrictions enforceable |
| Whether SDDC waived enforcement of transfer restrictions by permitting Sandy City to acquire shares previously | Southam: isolated past non-enforcement (Sandy City) shows waiver | SDDC: one isolated instance does not show intentional relinquishment; bylaws require ability to connect and Sandy City met that condition | Held: No waiver—isolated instance insufficient; plaintiff failed to show intentional relinquishment |
| Whether plaintiff has standing to pursue contract, fiduciary, and statutory claims | Southam: asserts shareholder rights derived from the purchased shares | SDDC: shares acquired in contravention of enforceable restrictions, so no valid shareholder status | Held: Southam acquired no valid shareholder interest; lacks standing and claims fail as a matter of law |
Key Cases Cited
- Wayman v. Murray City Corp., 458 P.2d 861 (Utah 1969) (articulates beneficial use principle in Utah water law)
- E. Jordan Irrigation Co. v. Morgan, 860 P.2d 310 (Utah 1993) (treats corporation as holder of water right but limits company’s ability to bar shareholders from moving shares absent harm)
- Syrett v. Tropic & E. Fork Irrigation Co., 89 P.2d 474 (Utah 1939) (shareholder diversion within system without company-imposed change application)
- Baird v. Upper Canal Co., 257 P. 1060 (Utah 1927) (water delivered into shareholder’s private pipeline becomes personal property)
- Moyle v. Salt Lake City, 167 P. 660 (Utah 1917) (water use governed by beneficial-use limitations)
- Carrier v. Salt Lake Cnty., 104 P.3d 1208 (Utah 2004) (application of expressio unius canon in statutory interpretation)
- McArthur v. State Farm Mut. Auto. Ins. Co., 274 P.3d 981 (Utah 2012) (role of courts to apply, not supplant, legislative policy)
- Meadow Valley Contractors, Inc. v. State Dep’t of Transp., 266 P.3d 671 (Utah 2011) (implied waiver requires course of conduct inconsistent with enforcement)
- Salt Lake City Corp. v. Cahoon & Maxfield Irrigation Co., 879 P.2d 248 (Utah 1994) (corporate articles govern transactions involving stock; distinguishes shareholder interest from corporate assets)
- Dole Food Co. v. Patrickson, 538 U.S. 468 (U.S. Supreme Court) (corporation and shareholders are distinct entities)