Reedeker v. SalisburyReedeker v. Salisbury
OPINION
INTRODUCTION
Hеrman 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.
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,
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 Condominiurii Ownership Act,
Pursuant to the Declaration, each condominium owner is a member of the Associa
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 ease granted a motion for summary judgment on all claims, in part bеcause the claims were barred by the statute of limitations. The Association then filed an appeal of the trial court’s CCI decision. 3
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 reрairs. 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
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. Ree-deker 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 distinсt from the nature of traditional nonprofit ■ corporations, common law standards or those found in the Utah Revised Business Corporation Act,
“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.,
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 Réedeker’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 Háble. 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 оf first impression in Utah. However, a review of traditional principles of
Generally, unless there is a material disputé of fact, the existence of a contract is a conclusion of law.
See Wadsworth Const, v. City of St. George,
“‘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,
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,
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 оther 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,
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
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 tо 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,
■ The Trustees, m 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,
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.,
The Utah legislature enacted the Condominium Act in 1963.
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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.”
The Condominium Aсt provides significant guidance as to the operation of condominium associations.
See, e.g.,
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.”
(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.
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 Cor
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 “[tjhe 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. Ree-deker 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, wé conclude that the language of section 57-8-35(1) of the Condominium Aсt is clear and unambiguous. The provisions of that Act “shall be
in addition and supplemental to
all other provisions of law.”
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
Similarly, differences between the Condominium Act and the Nonprofit Corporation Act cannot be dispositive. As provided in
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,
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,
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
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 Ree-deker’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 sеction 16-6-107 of the Nonprofit Corporation Act. To the extent Ree-deker 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 аcts or omis
Thus, the plain language of
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.,
In light of the plain language of
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 Trust
We have previously determined that, under the Condominium Act and the Towers Declaration and Bylaws,
(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 trusteе or officer, unless the acts or omissions are the result of his intentional misconduct.
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 16-6-23 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 а proceeding by a member or a trustee against the corporation to enjoin the doing or continuation of unauthorized acts
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(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. . ■
The primary purpose of
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
Exempting such actions from the reach of
“ ‘Unambiguous language in the statute may not be interpreted to contradict its plain meaning.’”
Salt Lake Child & Family Therapy Clinic,
Because the language of
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, trusteеs and officers of such association may be held personally liable for performance of théir duties only if their performance reflects intentional misconduct, as required under
, We thus affirm the trial court’s judgment.
BILLINGS and ORME, JJ., concur.
Notes
. These five owners are Ruth Reese, Gayle Theurer, Joan Valentine, Robert Valentine, and Tom Plummer.
. 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.
. - 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.,
. 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.
. 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.
. 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.”
. See Condominium Ownership Act, ch. Ill, §§ 1-37, 1963 Utah Laws 406, 406-18.
. See Utah Non-Profit Corporation Cooperative Association Act, ch. 17, §§ 1-97, 1963 Utah Laws 27, 27-61.
.See Liability Limits of Corporate Directors, ch. 166, § 2, 1987 Utah Laws 1005, 1006.
. 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 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.
.
. ■
See
Recording of Utah House Floor Debates,
. 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.