A.C. & C.E. Invs., Inc. v. Eagle Creek Irrigation Co.

540 P.3d 349

A.C. & C.E. INVESTMENTS, INC., a California corporation, Plaintiff-Appellant-Cross Respondent,

v.EAGLE CREEK IRRIGATION COMPANY, an Idaho corporation, Defendant-Respondent-Cross Appellant.

Docket No. 49237

Supreme Court of Idaho, Twin Falls, August 2023 Term.

Opinion Filed: December 19, 2023

Kahle Becker, Attorney at Law, Boise, for Appellant-Cross Respondent, A.C. & C.E. Investments, Inc. J. Kahle Becker argued.

Lawson Laski Clark, PLLC, Ketchum, for Respondent-Cross Appellant, Eagle Creek Irrigation Company. Edward Lawson argued.

MOELLER, Justice.

This case arises out of Eagle Creek Irrigation Company's ("Eagle Creek") amendments to its bylaws and articles of incorporation. Eagle Creek is a nonprofit mutual irrigation corporation that owns a water right. It delivers water to its shareholders who own land within its service area on a pro rata basis based on the number of shares each shareholder owns. A.C. & C.E. Investments, Inc. ("AC&CE"), is a shareholder of Eagle Creek, owning 15 capital shares.

Eagle Creek's original governing documents limited the total number of capital shares it could issue and provided that Eagle Creek would hold all the water rights it acquired "in trust" for the benefit of its shareholders. By majority vote of the shareholders, Eagle Creek amended and restated its governing documents in 2015. The updated governing documents included an increase in the number of capital shares the corporation was authorized to issue but did not include the former trust language.

After Eagle Creek shareholders voted to approve the amendments, AC&CE brought suit challenging the shareholders' actions. Before the district court, AC&CE argued that Eagle Creek breached its fiduciary duty and sought a judgment declaring that the proposed amendments were void. Additionally, AC&CE requested that the district court reinstate the trust and decree that Eagle Creek is still the trustee. The district court ultimately granted summary judgment to Eagle Creek, concluding that (1) the complaint did not properly plead a derivative action, (2) AC&CE lacked standing to bring a direct claim because it had not suffered harm distinct from other shareholders, and (3) the amendments were validly adopted by a majority shareholder vote. Eagle Creek was awarded its costs, but the court denied its request for attorney fees.

AC&CE appealed the district court's decision granting summary judgment. Eagle Creek cross-appealed on the court's denial of its requested attorney fees. For the reasons stated below, we affirm the district court's result.

I. FACTUAL AND PROCEDURAL BACKGROUND

Eagle Creek is a nonprofit mutual irrigation corporation organized pursuant to the Idaho Nonprofit Corporation Act. I.C. §§ 30-30-101 to -1204. Eagle Creek owns Water Right No. 37-863E, by which it provides irrigation water to the shareholder landowners in its service area, known as the Eagle Creek Subdivision, in Blaine County, Idaho. AC&CE is a California corporation owning 15 acres of property within the Eagle Creek service area. It holds 15 shares of capital stock in Eagle Creek, which amounts to roughly 7.46 percent of Eagle Creek's total issued stock.

This is the second lawsuit between Eagle Creek and AC&CE to find its way to this Court. See Eagle Creek Irrigation Co. v. A.C. & C.E. Invs., Inc. , 165 Idaho 467, 447 P.3d 915 (2019) (" Eagle Creek I "). In the first action, the dispute centered on whether AC&CE's real property interest, which was obtained through a foreclosure sale, included the 15 shares of stock in Eagle Creek as appurtenant to the land. Eagle Creek I , 165 Idaho at 469, 447 P.3d at 917. After a comprehensive review of the "[h]istorical and legal background on water-delivery organizations and the Carey Act," id. at 474–76, 447 P.3d at 922–24, we concluded that "to determine the appurtenancy of a share in a mutual irrigation company, the [trial] court must consider the company's governing documents and how it acquired the water rights." Eagle Creek I , 165 Idaho at 478, 447 P.3d at 926. Therefore, in Eagle Creek I , we ultimately concluded that "the district court erred in granting summary judgment to [AC&CE] because the district court did not look to Eagle Creek's governing documents." Eagle Creek I , 165 Idaho at 482, 447 P.3d at 930. Accordingly, we vacated "the portion of the district court's final judgment which states that the 15 shares of the Eagle Creek stock were appurtenant to the Property." Id.

In December 2015, during the litigation that precipitated Eagle Creek I , but four years prior to this Court's decision, Eagle Creek amended its bylaws and articles of incorporation through a majority vote at a shareholder meeting. The amendments passed by a vote of 142 to 10—well over the majority vote required in the original articles of incorporation.¹

The amendments changed the governing documents in two ways relevant to this appeal. First, the amendments doubled the number of authorized shares of capital stock from 207 to 414.² Second, the amendments eliminated a provision from the articles of incorporation that stated Eagle Creek would "hold all water rights acquired in Trust[.]" After Eagle Creek amended its governing documents, AC&CE moved to amend its complaint in the original action that precipitated Eagle Creek I . However, the district court did not permit AC&CE to add such claims at that stage in the litigation. Thus, AC&CE pursued its claims by filing a separate action.

In the complaint precipitating this appeal, AC&CE alleged that Eagle Creek breached its fiduciary duties to the shareholders by amending the bylaws in a way that terminated the trust. AC&CE also claimed that the way Eagle Creek amended the articles of incorporation and bylaws violated the terms of the trust. AC&CE sought a declaratory judgment, an injunction, appointment of a receiver, and "at least" $10,000 in damages. AC&CE later amended its complaint and removed the demand for monetary damages. AC&CE also sought to enjoin Eagle Creek's board of directors from further acts that might violate the terms of the trust. The litigation was hotly contested and featured four successive motions for summary judgment, resulting in four memorandum decisions and orders from the district court.

In November 2019, the district court issued a memorandum decision and order ("MDO I") granting partial summary judgment in favor of AC&CE. The district court concluded that "the undisputed record establishes that the Original Articles expressly form a trust, that AC&CE is a beneficiary of that trust and that Water Right 37-863E is the corpus of the trust." Accordingly, the district court granted AC&CE's motion for partial summary judgment.

After months of additional discovery, in June 2020, Eagle Creek moved for summary judgment again, this time alleging that AC&CE "lacked standing" to pursue derivative claims because it failed to comply with the pleading requirements. Additionally, Eagle Creek asserted that AC&CE's claims—based on alleged diminution in property value due to the termination of the trust—failed as direct claims because the alleged diminution in property value affected all shareholders; therefore, it must be addressed in a derivative action. The district court issued a second memorandum decision ("MDO II") on Eagle Creek's motion for summary judgment and AC&CE's motion to continue, granting the motion to continue because AC&CE had difficulty conducting depositions due to the COVID-19 pandemic. Accordingly, the district court deferred ruling on Eagle Creek's motion for summary judgment.

Shortly thereafter, the parties stipulated to allow AC&CE to file an amended complaint. In December 2020, AC&CE filed its first amended complaint, which did not include either a separate derivative claim against Eagle Creek or any amendments that would have made the existing claims compliant with Idaho Rule of Civil Procedure 78, which governs derivative actions. After Eagle Creek again filed a motion for summary judgment, the district court issued its third memorandum decision and order ("MDO III") in January 2021, where it concluded:

[T]he original Articles of Incorporation were properly amended to eliminate a trust provision and to increase the number of authorized shares and [ ] the Board of Directors of [Eagle Creek] did not breach any fiduciary duty when it recommended amendment of those portions of the original Articles of Incorporation. However, the Court [found] there is a genuine dispute of material fact whether the elimination of language in the original Articles of Incorporation allowing for delivery of all or part of Water Right 37-863E outside of [Eagle Creek's] service area creates a reasonable rule or regulation and whether the board of directors' recommendation to eliminate such language is consistent with the applicable fiduciary standards for directors, thereby precluding summary judgment.

The district court also addressed Eagle Creek's argument that AC&CE's claims must be dismissed for lack of standing because its claims are derivative in nature, and the claims do not comply with the pleading requirements laid out in Rule 78 of the Idaho Rules of Civil Procedure or Idaho Code section 30-30-411. The district court agreed; however, the district court noted that notwithstanding AC&CE's assertion that it was not pursuing a derivative claim, there remained "a genuine dispute of material fact whether AC&CE [was] pursuing a direct action."

A few months later, AC&CE again moved for summary judgment, this time seeking, among other relief, a judgment in its favor on its claims and a declaration that the "Stevens[es'] Mitigation Agreement" was "ultra vires and void." The latter request concerned an agreement by Robert and Carol Stevens to mitigate their personal water use when they applied for a permit from the Idaho Department of Water Resources ("IDWR").³ When IDWR later granted the Stevenses a license, it included a requirement that the Stevenses' portion of water...