Campbell v. Davidson

537 P.3d 734

Barbara CAMPBELL and William Loveland, on behalf of themselves and as representatives of a class of similarly situated persons, Appellants (Plaintiffs),

v.Chris DAVIDSON; Tri County Telephone Association, Inc., a Wyoming corporation; Dalin Winters; Clifford Alexander ; J.O. Sutherland; Daniel Greet; John K. Johnson; Neil Schlenker; BHT Investments, LLC, a Wyoming Limited Liability Company; BHT Holdings, Inc., a Wyoming corporation; BHT Merger Corporation, a Wyoming corporation; and Steve Harper, Appellees (Defendants).

S-22-0303

Supreme Court of Wyoming.

October 24, 2023

Representing Appellants: Drake D. Hill, Hill Law Firm, LLC, Cheyenne, Wyoming; Jonathan O. Hafen, Robert S. Clark, Gregory M. Hess, Matthew J. Ball, Parr Brown Gee & Loveless, P.C., Salt Lake City, Utah. Argument by Mr. Hill and Mr. Clark.

Representing Appellees Tri County Telephone Association, Inc., Neil Schlenker, BHT Investments, LLC, BHT Holdings, Inc., and BHT Merger Corporation: David M. Clark, Ragain & Clark, P.C., Worland, Wyoming. Argument by Mr. Clark.

Representing Appellees Dalin Winters, Clifford Alexander, J.O. Sutherland, Daniel Greet, and John K. Johnson: Robert C. Jarosh, Hirst Applegate, Cheyenne, Wyoming. Argument by Mr. Jarosh.

Representing Appellees Chris Davidson and Steve Harper : Russel D. Yerger, Yerger Law Firm, P.C. Billings, Montana; Jon M. Moyers, Moyers Law P.C., Billings, Montana.

Before FOX, C.J., and KAUTZ, GRAY, FENN, JJ, and ROBINSON, D.J.

KAUTZ, Justice.

[¶1] Tri County Telephone Association, Inc. (Cooperative) was a Wyoming cooperative utility organized to provide telecommunication services to its members on a non-profit basis. It also invested in for-profit ventures through four subsidiaries. In December 2014, over 2/3 of the Cooperative's members voted to sell the Cooperative, including its for-profit subsidiaries, to entities owned and controlled by Neil Schlenker. Mr. Schlenker, in turn, converted the Cooperative into a for-profit corporation under the same name, which we will refer to as TCT to distinguish it from the Cooperative. After the sale, R. Joseph Campbell, Barbara Campbell, and William Loveland (Class Representatives) filed a class action lawsuit, ostensibly on behalf of themselves and all members of the Cooperative at the time of its sale, against TCT, Mr. Schlenker and his entities (the BHT entities), two of the Cooperative's officers, and five former directors of the Cooperative's Board of Directors (collectively Defendants). The lawsuit alleged, inter alia , claims for fraud, constructive fraud, breach of fiduciary duty, conversion, and civil conspiracy. In essence, the Class Representatives claimed Defendants duped the Cooperative's members into selling what they allege was a $105 million Cooperative for a mere $29 million. The district court granted summary judgment in favor of Defendants and denied the Class Representatives’ motions for partial summary judgment. The Class Representatives appealed. We affirm.

ISSUES

[¶2] The parties present numerous issues on appeal, but the following issues are dispositive:

1. Did the district court err by granting summary judgment in favor of Defendants on the Class Representatives’ fraud, constructive fraud, and aiding and abetting fraud claims because they could not demonstrate the existence of a genuine issue of material fact with respect to the element of reliance?

2. Did the district court err by granting summary judgment to Defendants on the Class Representatives’ claim that TCT, with the help of Mr. Schlenker and the BHT entities, converted the Cooperative members’ capital credits and on their claim that the Cooperative's officers and directors breached their fiduciary duties by failing to ensure the members were paid the full amount of their capital credits?

3. Did the district court err by dismissing the Class Representatives’ claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty because they were not brought as derivative claims?

4. Did the Class Representatives properly make and preserve a claim for monetary damages based on Defendants’ alleged violation of Wyo. Stat. Ann. § 17-19-1807(a)(iv) ?

5. Did the district court err by granting summary judgment in favor of Defendants on the Class Representatives’ civil conspiracy claim?

FACTS

[¶3] The record in this matter is voluminous. We recite only those facts necessary to our resolution of this appeal.

The Cooperative

[¶4] In the early 1950s, the Cooperative was organized under Wyoming law as a cooperative utility to provide telecommunication services on a non-profit basis to its members in the Big Horn Basin. As the Cooperative grew, it was divided into four geographical service areas/exchanges: (1) Burlington, (2) Ten Sleep, (3) Hyattville, and (4) Hamilton Dome. The Cooperative was managed by a five-person Board of Directors (who were also members of the Cooperative), with one director elected from each service area and one elected by the Cooperative's membership at large. The Board appointed a Chief Executive Officer (CEO) and Chief Financial Officer (CFO) to oversee the day-to-day business activities of the Cooperative. At all relevant times, Chris Davidson and Steve Harper served as CEO and CFO, respectively.

[¶5] As a condition of membership in the Cooperative, each member was required to purchase telecommunication services from the Cooperative. Members paid the Cooperative monthly for their selected telecommunication services, and the Cooperative applied the funds to the operating costs and expenses it incurred to furnish services to the members. If the amount received from the members exceeded the Cooperative's operating costs and expenses, the Board credited the excess to the members’ "capital credit accounts" in proportion to each member's patronage. The amount credited to a member's capital credit account remained there until the Board allowed a "retirement" of capital. Before the sale of the Cooperative in December 2014, the Board had not retired any capital credits for over fourteen (14) years. However, members received a monthly discount (approximately $15 per month) on their bills; this amount was deducted from their capital credit accounts.

The Cooperative's For-Profit Subsidiaries

[¶6] Over the years, the Cooperative created four subsidiaries for the purpose of carrying on for-profit activities unrelated to providing telecommunication services to its members: (1) TCT West, Inc., (2) TCT Investments Cellular, LLC, (3) TCT Investments ESL, LLC, and (4) TCT Investments, LLC. Through TCT West, the Cooperative purchased five rural telecommunication exchanges from U.S. West Communications and acquired thousands of customers who were not members of the Cooperative. TCT West provided telecommunication services to these customers on a for-profit basis. The Cooperative formed TCT Investments Cellular to hold a 34% limited partnership interest in Wyoming 1-Park Limited Partnership. The general partner was Verizon Wireless and the purpose of the partnership (hereinafter Verizon Partnership) was to provide cellular telephone services in various areas in northern Wyoming. TCT Investments ESL owned 568,590 shares of Class D common stock issued by Eleutian Technologies, Inc., a company involved in long-distance language education, and TCT Investments held a 51% interest in Best of the West, LLC, a manufacturer of sporting firearms and related media.

[¶7] The Cooperative received considerable profits from these investments, primarily from TCT West's for-profit activities and the Verizon Partnership.¹ As a non-profit cooperative, there was no ready method for the Cooperative to distribute those profits to its members. It tracked the profits by "assigning" them to its members’ capital credit accounts in proportion to their patronage, but this action did not increase the capital accounts.

The Sale of the Cooperative and Its Subsidiaries

[¶8] In the Spring of 2009, Mr. Schlenker offered to purchase the Cooperative for $11 million and 50% of the Cooperative's net profits for the three years immediately following the sale. In June 2009, the Board unanimously rejected the offer because it found the offer to be "totally unacceptable and far below value."

[¶9] Four years later, in July 2013, Mr. Schlenker returned with a new offer to purchase the Cooperative for $40 million less net liabilities, which were defined as total liabilities minus cash and marketable securities. Over the next fourteen months, the Board negotiated with Mr. Schlenker on the price and other terms of the sale. The negotiations ultimately led the Board, with the exception of Mr. Campbell, to agree, subject to approval of 2/3 of the Cooperative's members, to sell the Cooperative's LLC subsidiaries for $19,302,000 and the Cooperative (including TCT West) for $26.7 million. To accomplish the Cooperative portion of the sale, BHT Merger Corporation, a subsidiary of BHT Holdings, Inc. (a company associated with Mr. Schlenker), would merge with and into the Cooperative and the Cooperative would be the surviving corporation.

[¶10] On September 19, 2014, the Board sent a letter to the Cooperative's members notifying them of the proposed sale and inviting them to vote on the sale with an enclosed ballot. The letter informed the members that the sale proceeds would be divided among the membership and advised each member of his approximate amount. It provided a summary of the sale documents and told the members the instruments were available at the Cooperative's offices in Basin and Cody. Enclosed with the letter were three pages of anticipated "Questions and Answers" concerning the sale. The letter informed the members that a meeting of members would be held on December 20, 2014, at the Cooperative's office in Basin "to count the ballots and announce the results of the vote." The enclosed ballot advised the members they could mail their ballots or bring them to the December 20, 2014, meeting or one of the three...