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MCG Southern LLC v. Veracity Networks LLC

Court of Appeals of Utah

February 23, 2018

MCG Southern LLC, Appellee and Cross-appellant,
v.
Veracity Networks LLC, Appellant and Cross-appellee,
v.
Stephen T. Christensen, Appellee,

         Third District Court, Salt Lake Department The Honorable Robert P. Faust No. 130903953

          Richard D. Burbidge, Jefferson W. Gross, S. Ian Hiatt, and Carolyn J. LeDuc, Attorneys for Appellant and Cross-appellee

          Brennan H. Moss and Jedediah G. Brinton, Attorneys for Appellees and Cross-appellant

          Judge Diana Hagen authored this Opinion, in which Judges Kate A. Toomey and David N. Mortensen concurred.

          OPINION

          Diana Hagen, Judge

         ¶1 MCG Southern LLC (MCG) sued Veracity Networks LLC (Veracity) for breach of a lease agreement. In response, Veracity asserted that the lease was voidable due to an alleged breach of fiduciary duty by the principal who negotiated and executed the lease. On summary judgment, the district court ruled that Veracity did not have standing to assert the breach of fiduciary duty claim and that MCG was entitled to judgment as a matter of law. Veracity appeals the grant of summary judgment, and MCG cross-appeals the district court's calculation of damages. Because we reverse the grant of summary judgment and vacate the district court's subsequent decisions, we do not reach the issue of damages.

         BACKGROUND

         ¶2 In 2001, Christensen formed Broadweave Networks of St. George LLC and Broadweave Networks, Inc. (collectively, Broadweave), which provided telephone and internet services to a master-planned community in Washington County, Utah. Christensen served as Broadweave's CEO, president, and chairman of the board of directors (the Board) until 2009.

         ¶3 Broadweave leased a building on property owned by the State of Utah. In November 2007, Christensen proposed to the Board that he form a new company (later organized as MCG) "to lease the Real Property from [the State of Utah], purchase the Building, and then lease the Building to Broadweave."

         ¶4 In October 2007, Christensen provided the Board with written disclosures concerning this proposal. In part, the disclosures explained that "the new company would lease the building to Broadweave at a monthly rate of 1.2 times the amount of the new company's loan payment, taxes and insurance in order to qualify for a commercial mortgage and which would be a loan requirement." This multiplier is known as a Debt Service Coverage Ratio or DSCR. These disclosures were memorialized in a resolution approved by the Board.

         ¶5 Christensen subsequently formed MCG and obtained a loan from Far West bank, which required a DSCR multiplier of 1.3-a higher rate than the 1.2 offered by the lender that Christensen initially proposed to the Board. On August 1, 2008, Christensen, acting on behalf of both MCG and Broadweave, executed a written lease agreement in which MCG leased the building to Broadweave at the 1.3 rate.

          ¶6 In 2009, Veracity Communications and Broadweave combined "their respective business activities, " which were "controlled and owned by [Veracity]." Following the acquisition, Veracity assumed Broadweave's lease payments to MCG.

         ¶7 In May 2013, MCG filed a complaint against Veracity for breach of lease (failure to pay rent), unlawful detainer, and waste with regard to the building. In response to the complaint, Veracity filed an answer and counterclaims and asserted a third party complaint against Christensen for, among other things, breach of fiduciary duty. Specifically, Veracity alleged that Christensen breached his duty to Broadweave when he entered into a lease that set the monthly building rent above the amount approved by the Board and that the lease was therefore voidable. As the successors to Broadweave's claims and interests, Veracity argued that it was entitled to assert this breach of fiduciary duty as a counterclaim and defense.

         ¶8 Both parties moved for summary judgment. At the heart of the dispute was whether the lease agreement was valid, or whether it was voidable because of Christensen's alleged breach of fiduciary duty. MCG filed a supplemental brief in support of its motion for summary judgment, arguing that Veracity "lacks standing to challenge the lease entered into by [MCG] and Broadweave." During oral argument on the motions, the district court questioned whether Veracity had "standing" to assert its breach of fiduciary duty claims. The court asked Veracity to submit "a supplemental filing to specifically cite to the exact provisions or paragraphs in the documents consisting of the Broadweave/Veracity transactions (300 plus pages) by which [Veracity] claims standing or the right to bring a cause of action for breach of a fiduciary duty owed to Broadweave." At oral argument and in a supplemental filing, Veracity pointed ...


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