DePatco, Inc. v. Tetn View Golf Estates, LLC and Idaho Development, LLC

¶1 Teton View Golf Estates, LLC, and Idaho Development,

LLC, appeal the trial court's declaratory judgment that, under Utah

law, Teton View must pay non-member creditors in full before

paying member creditors as it winds up its business and settles its

obligations. We affirm.

1. The Honorable Russell W. Bench, Senior Judge, sat by special

assignment as authorized by law. See generally Utah R. Jud. Admin.

11-201(6).

DePatco v. Teton View Golf

¶2 In 2008, Idaho Development and another entity formed

Teton View Golf Estates, a Utah limited liability company.2 Idaho

Development loaned Teton View a substantial sum with which to

purchase and develop some land in Idaho. In return Teton View

gave Idaho Development a promissory note secured by a deed of

trust on the land. Teton View then hired DePatco, Inc., to provide

materials and construction services. Teton View eventually failed,

and Idaho Development brought an action in Idaho against Teton

View and other parties to foreclose its deed of trust. See Idaho Dev.,

LLC v. Teton View Golf Estates, LLC, 272 P.3d 373, 375 (Idaho 2011).

DePatco, which had recorded a materialman's lien against the land

and thus was named as a defendant in the foreclosure action,

moved for summary judgment against Idaho Development.

¶3 The Idaho court granted DePatco's motion because it

determined that the loan from Idaho Development to Teton View

was actually nothing more than a capital contribution made to a

limited liability company by one of its members. Idaho

Development appealed, and the Idaho Supreme Court vacated the

judgment and remanded, holding that factual questions precluded

summary judgment. Id. at 382. On remand, the Idaho trial court

determined that Utah law governed the priority in which Teton

View must pay its creditors. Accordingly, the Idaho trial court

stayed its decision after DePatco brought the current action in Utah

to obtain a definitive answer to the priority question.

¶4 Among other things, DePatco asked the Utah trial court for

a declaratory judgment that, under Utah law, Teton View must use

its assets to pay non-member creditors before paying member

2. When reviewing a trial court's grant of summary judgment, we

recite the facts and all reasonable inferences drawn therefrom in the

light most favorable to the nonmoving party—in this case,

appellants Idaho Development and Teton View Golf Estates. See

Orvis v. Johnson, 2008 UT 2, ¶ 6, 177 P.3d 600.

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DePatco v. Teton View Golf

creditors.3 On that issue, DePatco and Idaho Development filed

cross motions for summary judgment. The Utah trial court granted

summary judgment "in favor of DePatco because Utah Code

section 48-2c-1308 gives non-member creditors priority over

member creditors for the distribution of the dissolved company's

assets during the winding up phase.” Idaho Development and

Teton View appeal that decision.

¶5 Despite the relatively complicated factual and procedural

background of this case, there is effectively only one question

before us now: Did the trial court err in ruling that Teton View

must use its assets to pay DePatco before it pays Idaho

Development? We conclude that the court did not err.

¶6 Idaho Development and Teton View argue on appeal that

the trial court misinterpreted or misapplied the relevant statutes.

"The proper interpretation and application of a statute is a question

of law,” and we afford no deference to the trial court in reviewing

its interpretation of applicable statutes. Gutierrez v. Medley, 972 P.2d

913, 914–15 (Utah 1998). We also review a "trial court's legal

conclusions and ultimate grant or denial of summary judgment for

correctness.” Orvis v. Johnson, 2008 UT 2, ¶ 6, 177 P.3d 600 (citation

and internal quotation marks omitted).

¶7 Idaho Development and Teton View base their arguments

on sections of the Utah Code that are inapplicable or at least

unhelpful. To begin with, they argue that sections 48-2c-1304 and

48-2c-1308 of the Utah Code must be read together to determine

payment priority when a dissolved limited liability company winds

up. This argument does not carry appellants very far.

3. DePatco also asked the trial court to declare Teton View

dissolved, which the trial court refused to do because it concluded

that Teton View was already dissolved, if for no other reason than

it failed to file an annual report in 2010.

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DePatco v. Teton View Golf

¶8 Utah Code section 48-2c-1304 provides that dissolved

limited liability companies, when winding up their affairs, shall

pay all their debts and obligations or make provision for such

payment. It also requires, in general terms, that if the assets are

insufficient to do so, "the claims and obligations shall be paid or

provided for according to their priority under law.” Utah Code

Ann. § 48-2c-1304 (LexisNexis 2010). Section 1308, however, is a

more focused provision describing in detail how a dissolved

limited liability company must distribute its assets in winding up

its business. In general, "a statute dealing specifically with a

particular issue prevails over a more general statute that arguably

also deals with the same issue.” Lyon v. Burton, 2000 UT 19, ¶ 17, 5

P.3d 616. Therefore, an intense examination of the interplay

between sections 1304 and 1308 is of limited value. Instead, we will

recognize, as the trial court correctly did, that the more specific

statute—section 1308—controls in this instance, and we proceed

with our analysis accordingly.4 Subsection 1308(1) provides:

After dissolution, and during winding up, the assets

of the company shall be applied to pay or satisfy: (a)

first, the liabilities to creditors other than members,

in the order of priority as provided by law; (b)

4. The appellants argue that subsection (2) of section 1308 and

subsection (2) of section 1304 apply to the case at hand. These

subsections, however, deal exclusively with assets that remain after

a company that is winding up pays all its debts. See Utah Code

Ann. § 48-2c-1308(2) (LexisNexis 2010) (dealing with "assets

remaining”); id. § 48-2c-1304(2) (dealing with "any remaining

assets”). But this case deals with the sequence in which Teton View

must pay its creditors and has nothing to do with how Teton View

must apportion any remaining assets. Because we conclude that

section 1304 is unhelpful in this context and because we determine

that subsection (2) of section 1304 and subsection (2) of section 1308

are inapplicable, we base our analysis primarily on subsection (1)

of section 1308.

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DePatco v. Teton View Golf

second, the liabilities to members in their capacities

as creditors, in the order of priority as provided by

law; and (c) third, the expenses and cost of winding

up.

Utah Code Ann. § 48-2c-1308(1 (LexisNexis 2010).

¶9 When interpreting a statute, we look first to the plain

meaning of the pertinent language. In re adoption of Baby E.Z., 2011

UT 38, ¶ 15, 266 P.3d 702. Here, the plain meaning of the language

leads us to conclude that Teton View must pay non-member

creditors, like DePatco, before it pays its only member creditor,

Idaho Development.

¶10 The appellants argue that the general language in Utah

Code section 48-2c-1304 requiring that a company pay its debts

according to the "priority under law” should lead to a superior-title

analysis under Utah law governing liens and mortgages, thereby

circumventing section 1308's requirements to pay non-member

creditors first. Section 1308, however, also uses a similar phrase,

"priority as provided by law,” to describe how assets should be

distributed among non-member creditors as a group and then

again to describe how any remaining assets should be distributed

among member creditors as a group. Utah Code Ann. § 48-2c-

1308(1). Reading sections 1304 and 1308 together, the phrase

"priority under law” in section 1304 stands for the general

proposition that a limited liability company must pay its debts in

the order prescribed by law, which necessarily includes section

1308 and other Utah law as it applies within the framework of

section 1308. And subsection 1308(1)'s reference to "in the order of

priority as provided by law” in each of subsections (a) and (b)

confirms that within each of the two broad categories—"creditors

other than members” and "members in their capacities as

creditors”—distribution is to be made in accordance with the

priority scheme provided by law. Thus, a secured non-member

creditor would recover before an unsecured non-member creditor,

and a secured member creditor would recover before an unsecured

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DePatco v. Teton View Golf

member creditor. But because non-member creditors are, by the

express language of subsection 1308(1), paid before member

creditors, even an unsecured non-member creditor would recover

before a secured member creditor.5

¶11 As a further basis on which to resist the conclusion we reach,

Idaho Development and Teton View assert that Teton View's

operating agreement permissibly altered the priority of distribution

prescribed in section 1308 by providing that it would be formed

pursuant to an older version of the law that did not give nonmember

creditors priority. See Utah Code Ann. § 48-2b-138(1)

(Michie 1998). Under some circumstances, Utah law contemplates

that operating agreements may alter various "default” provisions

of the law governing limited liability companies. Subject to some

important limitations, Utah Code section 48-2c-502, in subsection

(1), allows a company, through its operating agreement, to modify

the default rules concerning the management of the company; the

business or purpose of the company; the conduct of the company's

affairs; or the relationship between the members, the managers,

and the company. But the distribution of assets when winding up

the company's business does not fall into one of these categories.

Moreover, subsection 502(2) clarifies that where "the provisions of

an operating agreement conflict with the provisions of this chapter,

the provisions of this chapter shall control.” Id. § 48-2c-502(2)

(LexisNexis 2010).

¶12 Furthermore, subsection 502(1) is expressly limited by

subsection 48-2c-120(1), which states that an "operating agreement

may not . . . restrict rights of, or impose duties on, persons other

than the members, their assignees and transferees, the managers,

and the company, without the consent of those persons.” Id. § 48-

2c-120(1)(h). Section 1308 vests non-member creditors with a right

to be paid first from a dissolved company's assets. Therefore, Teton

5. Such a scheme is unusual, to be sure, and it has been criticized.

It has also been repealed. See infra note 6.

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DePatco v. Teton View Golf

View's operating agreement could not have restricted the rights of

DePatco and other non-member creditors without their consent. See

id. § 48-2c-120(1)(h). Because Idaho Development and Teton View

presented no evidence that DePatco consented to any such

provision in Teton View's operating agreement, the provision

would be invalid under Utah law. It is true that Utah laws

governing limited liability companies should "be interpreted so as

to give the maximum effect to the principle of freedom of contract,”

id. § 48-2c-1901, but this freedom of contract only applies to the

contracting parties. Obviously, the freedom of two parties to

contract with each other, and to do as they please with their rights

inter se, does not permit them to bargain away the rights of a nonconsenting

third party. Therefore, this argument fails.

¶13 Finally, Idaho Development and Teton View argue that

there was a dispute of material fact and that the trial court erred in

granting summary judgment to DePatco. Summary judgment is

appropriate only when "there is no genuine issue as to any material

fact and . . . the moving party is entitled to a judgment as a matter

of law.” Utah R. Civ. P. 56(c). In support of their argument,

appellants list the facts that they contend were both material and

in dispute: Teton View's manager told Idaho Development that it

would get its money back; Teton View told Idaho Development it

would get first priority; Idaho Development would never have

entered into the agreement with Teton View unless it was

guaranteed first priority; Idaho Development had a first-position

deed of trust; Idaho Development never subordinated its deed to

DePatco; and Idaho Development commenced its foreclosure

action before Teton View was officially dissolved. All of these facts,

however, are immaterial to the question before the trial court. In

distinguishing between member creditors and non-member

creditors, the mandate of Utah Code section 48-2c-1308 is not at the

mercy of the intent of the parties or of the facts and circumstances

unique to a case. As a result, all of these facts pressed by Idaho

Development and Teton View, which we assume to be true in the

posture of this case, are immaterial to our resolution of the

dispositive legal issue.

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DePatco v. Teton View Golf

¶14 Because Utah Code section 48-2c-1308 governs, we conclude

that DePatco was entitled to a declaratory judgment that Teton

View must pay its debt to DePatco and other non-member creditors

before it pays its debt to Idaho Development, one of its members.6



* * *



6. The law that requires this result has been criticized. For example,

the authors of a 2009 article in the Utah Bar Journal noted, "This

member-creditor subordination penalty is neither warranted nor

justified solely on the grounds that the creditor is a member. . . .

The Utah LLC Act has the dubious distinction of being the only

LLC statute that creates such an inequitable asset priority

distribution.” Justin J. Atwater & Russell K. Smith, Utah LLCs vs.

Other State LLCs: When Should Attorneys Consider Forming LLCs

Outside Utah?, 22 Utah B.J. 33, 34 (Sept./Oct. 2009). Indeed, the Utah

Legislature has since enacted the Utah Revised Uniform Limited

Liability Company Act, which requires an LLC, in winding up, to

pay "its obligations to creditors, including members that are

creditors.” See Utah Code Ann. § 48-3a-711(1) (LexisNexis Supp.

2013). The new law, however, does not apply to a limited liability

company formed before January 1, 2014, such as Teton View, until

after January 1, 2016. See id. § 48-3a-1405. The result we reach in this

decision, therefore, will only remain a reliable template for

resolving similar disputes until January 1, 2016, when the new law

fully replaces the old.

20130882-CA 8 2014 UT App 266

¶15 Affirmed.