The Utah Court of Appeals recently issued its decision in the case of Black Diamond Financial LLC v. Big Cottonwood Pine Tree Water Company. The case focused on a water company's liability for a share transfer that was in violation of its Bylaws.
Big Cottonwood Pine Tree Water Company serves water to a cabin subdivision in Big Cottonwood Canyon in Salt Lake County. The Company's Bylaws provide that each lot owner was a member of the Company and was entitled to one Company water share that was only transferable with the lot. The Bylaws provided that the shares could not be transferred to other lots and could not be transferred separate from the lot. But as a matter of practice, the Company did not ensure that share transfers were performed according to these Bylaws.
Steven Rollins owned Lot 25 in the subdivision and owned one share that was associated with his lot. He was in a relationship with Vicki Kincaid, who loaned him money to remodel the property. When Rollins was unable to repay Kincaid, he agreed to transfer his water share to Kincaid as repayment. Both parties were unaware that the Bylaws prohibited the share transfer separate from the lot. Kincaid took the endorsed share to the Company, who issued a new share certificate to Kincaid. Later, Rollins' lender foreclosed on the lot. The lender found out that the lot had no water service because Kincaid owned the water share. Black Diamond Financial LLC purchased the lot from the lender at a discounted price due to the lack of water service. Black Diamond thought it would be able to resolve the water service issue, but was unable to reach an agreeable price to purchase the share from Kincaid or find water service in some other way. Black Diamond then filed suit against Kincaid and the Company.
Kincaid moved for summary judgment and asserted that she was a protected purchaser of the share under the Utah Uniform Commercial Code. Black Diamond and the Company also filed motions for summary judgment on breach of contract issues. The district court concluded that Kincaid was a protected purchaser, and was therefore entitled to retain the share. The district court also concluded that the Company was in breach due to its failure to follow the share transfer provision in its Bylaws. (Utah courts have long held that the Articles and Bylaws of a water company form a contract or agreement between the company and its shareholders.) But the district court determined that Black Diamond was not damaged by the breach because Black Diamond purchased the lot at a discounted price because of the water share issue. The district court required the Company to pay $1.00 in nominal damages to Black Diamond. Black Diamond then appealed to the Utah Court of Appeals.
The Court of Appeals first analyzed if Kincaid was a protected purchaser of the water share under the UCC. The Court reviewed the elements of a protected purchaser in Utah Code section 70A-8-3, and concluded that Kincaid met all of these elements. The Court therefore upheld the determination that Kincaid was entitled to retain ownership of the share.
The Court next examined Black Diamond's assertion that it was entitled to more than just nominal damages. The Court determined that even though the Company had breached its obligations under the Bylaws, Black Diamond was not injured by the breach because Black Diamond had purchased the lot at a discounted price due to the fact (and with full knowledge) that the lot lacked water service due to Kincaid's ownership of the water share. The Court noted that Black Diamond would receive a windfall if it was able to purchase the property at a discount and get damages based on property devaluation due to the lack of a water share. Based on these determinations, the Court of Appeals upheld the district court's decision.
It is important to note that the Court clarified that the result could have been very different if Black Diamond had acquired the lot without knowledge of the share issue. In such a circumstance, the Company would have been required to pay damages to Black Diamond due to the Company's failure to follow the share transfer provisions contained in its Bylaws. Water companies should, therefore, take heed to follow the share transfer provisions in its Articles and Bylaws (or, alternatively, amend its Articles and Bylaws to conform the share transfer provisions to match the Company's actual share transfer practices). Failure to do so could result in significant liability and monetary damage claims for the Company.
To read the full text of the opinion, click here.
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