Ute Indian Tribe of the Uintah & Ouray Reservation v. Ute Distribution Corp.

UNITED STATES COURT OF APPEALS
FILED
TENTH CIRCUIT United States Court of Appeals
Tenth Circuit

UTE INDIAN TRIBE OF THE UINTAH January 5, 2012
AND OURAY RESERVATION,
Elisabeth A. Shumaker
Clerk of Court
Plaintiff - Appellant,

No. 10-4213
v.
(D.C. No. 2:06-CV-00557-CW)
(D. Utah)
UTE DISTRIBUTION CORPORATION;
LOIS LAROSE; CHARLES DENVER;
LYNN MCLURE; PALA NELSON;
REBECCA CURRY,

Defendants - Appellees.

ORDER AND JUDGMENT*

Before KELLY, O’BRIEN, and MATHESON, Circuit Judges.

MATHESON, Circuit Judge.

In this case the Ute Indian Tribe challenges three amendments (“the

Amendments”) to the Articles of Incorporation of the Ute Distribution Corporation

*This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. It may be cited, however, for its
persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
(“UDC”). The UDC represents former members of the Tribe known as “mixed-bloods”

and jointly manages assets with the Tribe’s “full-blood” leadership.1 Perceiving a

takeover threat from the Tribe, the UDC board of directors proposed and the UDC

shareholders adopted the Amendments, one of which prohibits persons affiliated with the

Tribe from serving on the board of directors. The Tribe sued the UDC, arguing that the

Amendments violated Utah corporate law. The district court granted summary judgment

for the UDC. We affirm.

I. BACKGROUND

A. The Relationship between the Tribe and the UDC

In 1954, Congress passed the Ute Termination Act, 25 U.S.C. § 677 et seq., which

the parties refer to as the Partition Act. The Partition Act divided the assets of the Ute

Tribe between the “full-blood” members of the Tribe and the former members known as

“mixed-bloods.” See 25 U.S.C. § 677i. Some of the assets, such as oil, gas, mineral,

hunting, and fishing rights, were not susceptible to distribution. Under the Partition Act,

these assets are jointly managed by the Tribe and a representative of the mixed-bloods.

The Partition Act provides: “The mixed-blood members of the [T]ribe . . . shall

have the right to organize for their common welfare, and may adopt an appropriate

constitution and bylaws. . . .” 25 U.S.C. § 677e. It continues: “Such constitution may

1
As we said in a previous case, “The legislation at issue, the parties, and the court
below used the terms ‘mixed blood’ and ‘full blood.’ We repeat those terms solely for
consistency.” Ute Distrib. Corp. v. Sec. of Interior, 584 F.3d 1275, 1276 n.1 (10th Cir.
2009).

2
provide for the selection of authorized representatives who shall have power to take any

action that is required by this subchapter to be taken by the mixed-blood members as a

group. . . .” Id.

In 1958, the mixed-bloods organized the Ute Distribution Corporation, a nonprofit

Utah corporation, as their representative.2 When it was created, the UDC was divided

into 4,900 shares, 10 of which were given to each of the 490 original mixed-bloods.

Initially, the shares could not be transferred unless first offered to a full-blood, but now

the shares may be freely transferred. The Ute Tribe currently holds approximately 20%

of the UDC’s shares. The Tribe and the UDC dispute whether any individual full-blood

tribal member—as opposed to the Tribe itself—holds UDC shares. Tribal member Kirby

Arrive claims he holds UDC shares, but the UDC claims he holds them “in name only.”

Joint App. Vol. I at 163.

The Tribe and the UDC also contest the history of their relationship. The UDC

characterizes this history as one of continued conflict over the jointly managed assets and

accuses the Tribe of repeatedly attempting to diminish the power and property of the

mixed-bloods. The Tribe says that the joint management of the assets has been largely

harmonious, but concedes that “[i]n recent years . . . preceding the adoption of the

2
The Supreme Court has stated: “Clearly, it is [the] UDC . . . that is entitled to
manage the oil, gas, and mineral rights with the committee of the full-bloods.” Affiliated
Ute Citizens of Utah v. United States, 406 U.S. 128, 144 (1972).

3
amendments, there had been several points of friction between the Tribe and the UDC.”

Aplt. Br. at 10.

B. The Amendments

In 2006, the UDC board of directors proposed three amendments to the UDC’s

Articles of Incorporation. It also oversaw a shareholder vote adopting them after this

litigation commenced. We will refer to the Amendments as the Qualification

Amendment, the Power Amendment, and the Cause Amendment.3

The Qualification Amendment modified the qualifications required for service on

the UDC board of directors. Before the Qualification Amendment, the Articles required

that directors be United States citizens, over the age of 21, and UDC shareholders. The

Qualification Amendment added the following:

Because the primary purpose of this corporation is to jointly manage certain assets
with the Tribal Business Committee of the Ute Indian Tribe of the Uintah and Ouray
Reservation, it is critical for all members of the Board of Directors to remain
independent from the Ute Indian Tribe and free to vote on all matters in the best
interest of this corporation and its shareholders. As a result, (i) no enrolled member
of the Ute Indian Tribe, (ii) no person employed in a full-time or part-time capacity,
with or without compensation, by the Ute Indian Tribe, and (iii) no person serving in
a consulting or advisory capacity, whether directly or indirectly, paid or unpaid, on a
full or part-time basis to the Ute Indian Tribe shall be nominated, voted upon, or
eligible to serve as a member of the Board of Directors.

3
The parties and the district court refer to the Amendments by number, but use
different numbering schemes. We use this shorthand to avoid confusion.

4
Joint App. Vol. I at 88.4 The Qualification Amendment also specified that any current

UDC director who assumed one of the prohibited relationships with the Tribe would be

removed from his or her position.

The Power Amendment specifies who may exercise the UDC’s corporate powers.

Before the Power Amendment, the relevant provision in the Articles stated: “[T]he

Board of Directors shall exercise the corporate powers of the corporation.” Id. at 75.

The Power Amendment modified that provision. It now states: “The exercise of

corporate powers of this corporation shall be vested exclusively in its duly elected Board

of Directors. The stockholders shall not exercise any corporate power unless requested to

do so in a written resolution adopted by the Board of Directors and submitted to the

stockholders for approval.” Id. at 89-90.

The Cause Amendment states that shareholders may only remove a director upon a

showing of cause. It defines “cause” to include missing three or more board meetings in

a year, being convicted of a felony, or being declared incompetent by a court. A director

may also be removed for cause if, 30 days after receiving written notification, the director

“continue[s] to fail to meet any condition of eligibility for service as a member of the

Board of Directors as such qualifications are described in the Articles or Bylaws.” Id. at

89.

4
We use the phrase “Tribe affiliate” to refer to a person who is a full-blood
member of the Tribe or has any other relationship with the Tribe that makes the person
ineligible to serve as a UDC director because of the Qualification Amendment.

5
C. Procedural History

On July 7, 2006, the Ute Tribe sued the UDC and its board of directors in the

Eighth Judicial District Court for the State of Utah. The Tribe sought to enjoin the vote

on the proposed Amendments, claiming that it could not lobby against the Amendments

because it did not receive proper notice and a list of shareholders to contact. The Tribe

also claimed that the Amendments violated Utah corporate law. The complaint further

alleged that the Amendments racially discriminated against the Tribe in violation of the

Civil Rights Act, 42 U.S.C. § 1981.

The UDC removed the suit to federal court.5 The UDC’s notice of removal

offered three grounds for federal jurisdiction. First, the Tribe’s complaint had alleged a

violation of the Partition Act. Second, the Tribe had alleged a violation of the Civil

Rights Act. Third, because Congress had appointed the UDC as a representative of the

mixed-bloods, the case could also have been removed under 28 U.S.C. § 1442.

On July 14, 2006, the federal district court granted a preliminary injunction and

ordered that the vote on the Amendments not occur until after August, 25, 2006, to allow

the Tribe the opportunity to persuade shareholders to vote against the Amendments,

thereby resolving the notice claim. The shareholders voted on the Amendments on

October 7, 2006. Each of the Amendments passed, with approximately 69% of the

5
The UDC offered 28 U.S.C. § 1441 and § 1442 as statutory bases for removal.
We explain below that the only proper basis for subject matter jurisdiction was federal
question jurisdiction based on the Civil Rights Act claim. Therefore, the suit was
properly removed pursuant to 28 U.S.C. § 1441(b).

6
shareholders voting in favor of them.

The Tribe voluntarily moved to withdraw its Civil Rights Act claim, and on

December 12, 2007, the court granted the withdrawal.

On November 21, 2008, the Tribe moved for summary judgment on its remaining

claims, which all sounded in Utah corporate law. The Tribe claimed that the

Qualification Amendment created a new class of shares and that its adoption thereby

violated Utah Code § 16-6a-1004, which provides that any amendment that creates a new

class of shares must be adopted separately by each of the classes it creates. The Tribe

also claimed that the Amendments were unreasonable as a matter of law because they

impinged on the Tribe’s voting rights, unlawfully entrenched the board of directors, and,

in particular, the Qualification Amendment was arbitrary and overbroad. The Tribe

further claimed that, by adopting the Amendments, the UDC directors violated the

covenant of good faith and fair dealing with the Tribe.

The UDC filed its own motion for summary judgment on the same day, addressing

the same issues that the Tribe raised in its motion. The district court ruled on the motions

on March 12, 2010.

The court started by reviewing the history of the parties’ relationship and found

that “the Ute Tribe and the UDC have on-going and serious conflicting interests.” Ute

Indian Tribe v. Ute Distrib. Corp., No. 2:06-cv-557 CW, 2010 WL 956905 at *3 (D.

Utah March 12, 2010) (unpublished). The court also stated that it was “evident from the

7
record that the potential for such conflicts is inherent in the different interests of the

shareholders of the UDC and the Ute Tribe.” Id. at *6.

The district court held that (1) the Qualification Amendment was a reasonable

means to ensure the corporate loyalty of UDC directors given the conflict of interest

between the Tribe and the UDC, see id.; (2) the Qualification Amendment did not create

a new class of shares because it applied to every shareholder and did not affect the

Tribe’s voting rights, see id. at *7; (3) the Power Amendment and the Cause Amendment

were reasonable, see id. at *7-8; and, (4) the business judgment rule shielded the UDC

directors from the Tribe’s good faith and fair dealing claim, see id. at *8.

The court granted the UDC’s motion for summary judgment and denied the

Tribe’s motion. See id. at *9. The Tribe moved for reconsideration, arguing that the

district court had improperly applied the standard for summary judgment by relying on

disputed facts and misapplying state law. On November 4, 2010, the district court denied

the motion to reconsider.

The Tribe filed a timely appeal of the district court’s ruling. After oral argument,

we ordered supplemental briefing on the issue of subject matter jurisdiction.

II. DISCUSSION

We begin by addressing the threshold question of whether the district court had

jurisdiction over the case. After discussing the standard of review, we turn to the

Qualification Amendment and the Tribe’s arguments that it created a new class of shares

and that it was unreasonable as a matter of law. We then analyze the reasonableness of
8
the other Amendments and the Tribe’s good faith and fair dealing claim. We conclude by

responding to the Tribe’s argument that the district court improperly relied on disputed

facts.

A. Jurisdiction

We address three potential bases for the district court’s subject matter jurisdiction:

(1) federal question jurisdiction based on the Partition Act, (2) removal jurisdiction under

28 U.S.C. § 1442, and (3) supplemental jurisdiction based on the Tribe’s subsequently

withdrawn Civil Rights Act claim. We reject the first two bases for jurisdiction, but

conclude that the district court had discretion to exercise supplemental jurisdiction over

the Tribe’s state law claims because it had original jurisdiction over the Civil Rights Act

claim.

In its supplemental briefing, the UDC argued that the Tribe lacked Article III

standing on the ground that “the Tribe failed to show an injury in fact since the Tribe

itself was not harmed because the Tribe itself could never be a director.” Aple. Supp. Br.

at 9. We disagree and hold that the Tribe has standing to raise its claims.

1. No Federal Question Jurisdiction Based on the Partition Act

Congress has provided that federal “district courts shall have original jurisdiction

of all civil actions arising under the Constitution, laws, or treaties of the United States.”

28 U.S.C. § 1331. The Supreme Court recently reiterated that “a suit ‘arises under’

federal law only when the plaintiff’s statement of his own cause of action shows that it is

9
based upon federal law.” Vaden v. Discover Bank, 556 U.S. 49, —, 129 S. Ct. 1262,

1272 (2009) (quotations omitted).

For a plaintiff’s claim to “arise under” federal law, “[t]he plaintiff’s well-pleaded

complaint must establish either that federal . . . law creates the cause of action or that the

plaintiff’s right to relief necessarily depends on resolution of a substantial question of

federal . . . law.” Holmes Grp. v. Vornado Air Circulation Sys., 535 U.S. 826, 830 (2002)

(quotations omitted).

In the initial round of briefing on appeal, the Tribe contended that the claims in

this case “arise under” the Partition Act. In its notice of removal, the UDC stated that

“[t]he relationship of the parties is governed by the Ute Partition Act” and the complaint

therefore “alleges a violation of that federal statute.” Joint App. Vol. I at 18.

Leaving aside for the moment the Civil Rights Act claim, the Tribe’s claims do

not “arise under” federal law. The Partition Act does not create the cause of action for

the Tribe’s claims. The complaint alleged three claims. First, the Qualification

Amendment was adopted in violation of Utah Code § 16-6a-1004. Second, all three

Amendments were unreasonable as a matter of Utah law. Third, the UDC directors

violated the duty of good faith and fair dealing under Utah law. Utah law, not federal

law, creates the cause of action for each of these claims.

The Tribe’s right to relief on these claims does not depend on resolving a

substantial question of federal law. The Partition Act helps to explain the relationship

between the Tribe and the UDC and their joint management of the indivisible assets, but
10
the Tribe does not rely on the Partition Act to prevail on its state law claims. The UDC

defends the Qualification Amendment in part on the ground that it was reasonable to

protect corporate loyalty given the inherent conflict between the Tribe and the UDC that

the Partition Act creates. But a federal statute that provides an explanation for a defense

is not part of a plaintiff’s well-pleaded complaint, and we have not been asked to resolve

a substantial question of federal law.

We hold that the district court did not have federal question jurisdiction over the

Tribe’s state law claims based on the Partition Act.

2. No Removal Jurisdiction under 28 U.S.C. § 1442

In its notice of removal, the UDC offered an alternative basis for jurisdiction:

“[T]he UDC has been appointed by the United States as the representative of the Mixed-

Blood Group of the Ute Indian Tribe in all matters relating to undistributed Tribal assets,

and hence, this action may be removed to this Court pursuant to 28 U.S.C. §§ 1442(a)(1),

1442(b)(2).” Joint App. Vol. I at 18.

Title 28 U.S.C. § 1442(a)(1) provides that removal is proper when a suit is filed

against “[t]he United States or any agency thereof or any officer . . . thereof . . . for any

act under color of such office or on account of any right . . . claimed under any Act of

Congress.” The UDC is not an agency or an officer of the United States. The Partition

Act provides for “authorized representatives who shall have power to take any action that

is required by this subchapter to be taken by the mixed-blood members as a group.” 25

U.S.C. § 677e. The UDC is a representative of the mixed-bloods, not of the United
11
States.

The Tribe’s removal order also referred to 28 U.S.C. § 1442(b)(2). No such

subsection exists. See 28 U.S.C. § 1442(b). The Tribe likely meant to refer to 28 U.S.C.

§ 1442(a)(2), which provides for removal jurisdiction when a suit is filed against “[a]

property holder whose title is derived from any such officer, where such action or

prosecution affects the validity of any law of the United States.” The UDC jointly holds

title to assets with the Tribe, and that title is derived from a federal officer, the Secretary

of the Interior. See 25 U.S.C. § 677h. But the Tribe’s state law claims do not affect “the

validity of any law of the United States.” As we explained above, one of the UDC’s

defenses might at most implicate the interpretation of a federal statute, not its validity.

The existence of the property rights shared between the Tribe and the UDC is not at issue

in this case.

We hold that 28 U.S.C. § 1442 did not create removal jurisdiction over the Tribe’s

state law claims.

3. Supplemental Jurisdiction Based on the Civil Rights Act Claim

When this case was removed to federal court, the Tribe’s complaint included a

claim that the UDC had discriminated against full-blood Utes on the basis of race in

violation of the Civil Rights Act, 42 U.S.C. § 1981. The UDC stated in its notice of

removal that the Civil Rights Act claim gave the district court subject matter jurisdiction

over the case. In their supplemental briefing, both parties now argue that the district

12
court had supplemental jurisdiction over the Tribe’s state law claims because it had

original jurisdiction over the Civil Rights Act claim. We agree.

Federal district courts have “supplemental jurisdiction over all other claims that

are so related to claims in the action within such original jurisdiction that they form part

of the same case or controversy.” 28 U.S.C. § 1367(a). The Civil Rights Act claim

formed part of the same case or controversy as the Tribe’s Utah corporate law claims.6

The Tribe voluntarily withdrew the Civil Rights Act claim during the discovery

phase of the litigation. Under 28 U.S.C. § 1367(c), “district courts may decline to

exercise supplemental jurisdiction over a claim . . . if . . . the district court has dismissed

all claims over which it has original jurisdiction.” The Supreme Court has stated that “[a]

district court’s decision whether to exercise [supplemental] jurisdiction after dismissing

every claim over which it had original jurisdiction is purely discretionary.” Carlsbad

Tech., Inc. v. HIF Bio, Inc., 556 U.S. 635, —, 129 S. Ct. 1862, 1866 (2009). “[T]he

district court’s exercise of its discretion under § 1367(c) is not a jurisdictional matter.

6
We recognize that, “if a federal claim is too insubstantial to invoke federal
question jurisdiction for the underlying case, . . . there can be no supplemental
jurisdiction of other claims.” 13D Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 3567. The Tribe’s Civil Rights Act claim overcomes that
hurdle. Even if pretrial discovery raised doubt about the Civil Rights Act claim, when
the pleadings were filed and the case was removed the claim was not so “‘wholly
insubstantial and frivolous’” that it failed to invoke the jurisdiction of the district court.
See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998) (quoting Bell v. Hood,
327 U.S. 678, 682-83 (1946)).

13
Thus, the court’s determination may be reviewed for abuse of discretion, but may not be

raised at any time as a jurisdictional defect.” Id. at 1867 (quotations omitted).

Neither party challenges the district court’s implicit decision to retain jurisdiction

over the Tribe’s Utah corporate law claims. We therefore hold that the district court

properly exercised supplemental jurisdiction over the Tribe’s claims.

4. The Tribe Has Article III Standing to Raise its Claims

The UDC argues that the Tribe lacks Article III standing to raise its claims. To

establish Article III standing, a plaintiff must establish (1) that he or she has “suffered an

injury in fact;” (2) that the injury is “‘fairly traceable to the challenged action of the

defendant;” and, (3) that it is “likely” that “the injury will be redressed by a favorable

decision.” Ariz. Christian Sch. Tuition Org. v. Winn, 131 S. Ct. 1436, 1442 (2011)

(quotations omitted); see also Jordan v. Sosa, 654 F.3d 1012, 1019 (10th Cir. 2011).

The UDC disputes whether the Tribe has met the first element, injury in fact. An

injury in fact is “an invasion of a legally protected interest which is (a) concrete and

particularized, and (b) actual or imminent, not conjectural or hypothetical.” See Winn,

131 S. Ct. at 1442 (quotations omitted). The UDC claims that “the Tribe failed to show

an injury in fact since the Tribe itself was not harmed because the Tribe itself could never

be a director.” Aple. Supp. Br. at 9.

The UDC’s argument speaks more to the merits rather than standing. As we have

said, “[w]e do not address the merits of plaintiff's claims in our determination of standing

because the fundamental aspect of standing is that it focuses on the party seeking to get
14
his complaint before a federal court and not on the issues he wishes to have adjudicated.”

Buchwald v. Univ. of New Mexico Sch. of Med., 159 F.3d 487, 493 (10th Cir. 1998)

(quotations omitted). Each of the Tribe’s claims satisfies the injury-in-fact requirement.

We address them in turn.

The Tribe’s first claim is that the Qualification Amendment was adopted in

violation of Utah Code § 16-6a-1004, which provides that an amendment which creates a

new class of shares entitles the shareholders in each class to vote on that amendment as a

separate voting group. The Tribe contends that the Qualification Amendment put it into a

new class of shares and that it was injured by being deprived of its right under Utah law

to vote on that amendment as a separate voting group.

The Tribe’s second claim is that all three Amendments were unreasonable as a

matter of Utah law. The Tribe contends that it was injured because the Amendments

diminished its shareholder power.

The Tribe’s third claim is that the UDC directors violated the duty of good faith

and fair dealing under Utah law. As a shareholder, the Tribe had a contract with the

UDC, see Workman v. Brighton Prop., Inc., 976 P.2d 1209, 1212 (Utah 1999), which

created a covenant of good faith and fair dealing between the UDC and the Tribe. The

Tribe contends that the UDC directors proposed the Amendments with intent to cause the

Tribe to “lose [its] voting rights.” Joint App. Vol. I at 30. The Tribe’s alleged injury was

deprivation of voting rights and diminishment of shareholder power.

15
 The alleged Article III injuries under each claim were sufficient to confer

standing. Whether the Tribe’s claims were meritorious is a separate issue that we turn to

next.7

***

Because the district court had jurisdiction over the Tribe’s claims, we have

jurisdiction to review the court’s final judgment under 28 U.S.C § 1291.

B. Standard of Review

This appeal reviews the district court’s denial of the Tribe’s motion for summary

judgment and the court’s grant of the UDC’s motion. “We review summary judgment

decisions de novo, applying the same legal standard as the district court.” Tuckel v.

Grover, 660 F.3d 1249, 1251 (10th Cir. 2011) (quotations omitted).

Summary judgment is granted “if the movant shows that there is no genuine

dispute as to any material fact and the movant is entitled to judgment as a matter of law.”

Fed. R. Civ. P. 56(a). In reviewing a district court’s ruling on a motion for summary

judgment, “we must view evidence in the light most favorable to the non-moving party.”

Tuckel, 660 F.3d at 1251.

7
Courts have reached the merits of shareholder claims that an amendment created
a new class, see, e.g., Lake Arrowhead Chalets Timeshare Owners Ass’n v. Lake
Arrowhead Chalets Owners Ass’n, 59 Cal. Rptr. 2d 875, 876-77 (Cal. Ct. App. 1996), or
was unreasonable as a matter of law, see, e.g., Dozier v. Auto. Club of Michigan, 244
N.W. 2d 376, 384 (Mich. App. 1976); McKee & Co. v. First Nat. Bank of San Diego, 265
F. Supp. 1, 3-4 (S.D. Cal. 1967).

16
C. Qualification Amendment

The Tribe’s main challenge is to the Qualification Amendment. It contends that

the Qualification Amendment created a new class of shares, thus triggering the

requirement under Utah law that each class of shares vote separately on an amendment.

It also argues that the Qualification Amendment was unreasonable as a matter of law.

1. No Creation of a New Class

Utah’s Nonprofit Corporation Act provides that

the members of a class who are entitled to vote are entitled to vote as a separate
voting group on an amendment to the articles of incorporation if the amendment
would: (a) affect the rights, privileges, preferences, restrictions, or conditions of
that class as to voting, dissolution, redemption, or transfer of memberships in a
manner different than the amendment would affect another class . . . or (f)
authorize a new class of memberships.

Utah Code Ann. § 16-6a-1004(1). It also provides that: “If a class is to be divided into

two or more classes as a result of an amendment to the articles of incorporation, the

amendment shall be approved by the members of each class that would be created by the

amendment.” Id. § 16-6a-1004(2).

The Tribe contends that the Qualification Amendment, by prohibiting Tribe

affiliates from being nominated for or serving on the board of directors, created a new

class of shares, which triggered the separate voting group requirement.

The UDC has never had more than one class of shares. The Qualification

Amendment makes no reference to classes of shares. The Tribe’s claim appears to be

17
that the Amendment created a new implicit or de facto class of shares.8

The Qualification Amendment did not create an explicit class. Utah Code § 16-

6a-1004 does not contemplate implicit classes. Section 16-6a-1004(1) refers not only to

explicit classes, but to preexisting, explicit classes. Its prefatory clause speaks of “the

members of a class who are entitled to vote.” See id. Therefore, each of § 16-6a-

1004(1)’s subsections—including subsection (a), which refers to amendments that would

“affect . . . the rights . . . of that class as to voting”—applies to preexisting, explicit

classes. See Utah Code Ann. § 16-6a-1004(1)(a).

Moreover, the purpose of separate voting group requirements is to protect explicit

classes. As one leading treatise explains, “[t]he right to vote as a separate voting group is

a prime protection for classes or series of shares with preferential rights or classes or

series of limited or nonvoting shares against amendments that are detrimental to that

class.” 7A William Meade Fletcher, Cyclopedia of the Law of Corporations § 3719.20.

We doubt that § 16-6a-1004(2)’s reference to a class “created by the amendment”

contemplates implicit classes, but we need not decide this issue. Even if we were to

accept the Tribe’s theory of implicit classes, we would still need to be persuaded that the

8
The Tribe cites Howe v. Washington Land Yacht Harbor, Inc., 459 P.2d 798
(Wash. 1969), which provides a useful contrast to this case. In Howe, the Washington
State Supreme Court held that an amendment to a nonprofit corporation’s bylaws that
explicitly created a class of membership that was not eligible to vote on certain issues
violated a state statute prohibiting members of nonprofit corporations from acquiring
more voting power than other members. Id. at 806. The Qualification Amendment does
not create an explicit class and does not restrict Tribe-affiliated shareholders from voting
on any issue.

18
Qualification Amendment created a new implicit class. The Tribe argues that the

Amendment created such a class because it affected the voting rights of Tribe-affiliated

shareholders. We are not persuaded. Section 16-6a-1004’s sole reference to amendments

that “affect . . . the rights . . . of that class as to voting” § 16-6a-1004(1)(a), applies to

preexisting classes, and the Qualification Amendment does not prevent any UDC

shareholders from voting for qualified director candidates.

The Tribe offers two arguments for its position. First, it claims the Qualification

Amendment created a class of shares belonging to shareholders who may not serve, or be

nominated to serve, as directors. Second, it claims the Amendment created a class of

shares belonging to shareholders who may not “nominate a candidate of [their] choice” to

the board of directors. Aplt. Br. at 26. We disagree with both arguments.

a. No Class Based on Ineligibility to Serve as a Director

The Tribe’s first argument would render the separate voting group requirement,

Utah Code § 16-6a-1004, inconsistent with Utah Code § 16-6a-802, which provides that

corporations “may prescribe other qualifications for directors in addition to the

requirements” in the statute that directors be natural persons and at least 18 years old.

The Utah Supreme Court has said that, under its “rules of statutory construction,

we must give effect to every provision of a statute and avoid an interpretation that will

render portions of a statute inoperative. To achieve this goal, we construe the provision

at issue with every other part or section so as to produce a harmonious whole.” Warne v.

Warne, — P.3d —, 2011 WL 5155648 at *8 (Utah 2011) (quotation and citations
19
omitted).

Under the Tribe’s reasoning, any time a corporation seeks to add a director

qualification, the group of shareholders who would become disqualified from serving as

directors would need to vote on the qualification requirement as a separate voting group.

They would almost certainly vote against an amendment preventing them from serving as

directors, causing the amendment to fail. See Utah Code Ann. § 16-6a-1004(2) (requiring

that, when the separate voting group provision is triggered, “the amendment shall be

approved by the members of each class that would be created by the amendment.”). The

Tribe’s argument, therefore, would undermine Utah Code § 16-6a-802’s provision that

corporations may prescribe additional qualifications for director because in most

instances it would be difficult if not impossible to alter the qualifications for board

membership.

Thus, we must reject the Tribe’s argument that the Qualification Amendment

created a new class of shares because certain shareholders have become ineligible to

serve as UDC directors.

b. No Class Based on Inability to Nominate Tribe Affiliates

The Tribe’s second argument also fails. The Tribe claims that the Qualification

Amendment created a new class of shares belonging to shareholders who may not

“nominate a candidate of [their] choice” to the board of directors. Aplt. Br. at 26. But

the Qualification Amendment does not prevent only the Tribe from nominating Tribe

affiliates to be directors. It prevents every UDC shareholder from nominating Tribe
20
affiliates to be directors. Each shareholder remains on equal footing to nominate anyone

who meets the qualifications to be a director. Accordingly, there is no separate class of

shares.

Furthermore, the group of UDC shareholders who might want to nominate a

Tribe-affiliated candidate for a director position is not a definable class. As the district

court reasoned, “a particular mixed-blood shareholder, for example, may believe a

member of the Ute Tribe would best represent his or her interests on the board. The

amendments preclude such a shareholder from nominating that person just as it does the

Ute Tribe.” Ute Indian Tribe, 2010 WL 956905 at *7. Conversely, the Tribe might want

to nominate someone who was not affiliated with the Tribe. The Tribe cannot point to a

discrete group of shareholders whom the Qualification Amendment deprives of the right

to nominate a candidate of their choice.

There are, of course, limits on what qualifications corporations may require to be a

director, but that is a separate issue from whether the Qualification Amendment creates a

new class of shares.

We reject the Tribe’s argument that the Qualification Amendment created a new

class of shares by preventing shareholders from nominating Tribe-affiliated directors.

***

The Tribe also draws our attention to Lake Arrowhead. In that case, a

condominium association adopted a bylaw amendment providing that timeshare owners

could only vote for three seats on the board of directors, while condominium owners
21
could vote for four seats. 59 Cal. Rptr. 2d at 877. The California Court of Appeals held

that the amendment triggered the California Corporate Code’s provision that required

each class to vote on an amendment that created a new class and therefore was invalidly

adopted. Id. at 877-78.

Lake Arrowhead demonstrates that, even if we were to accept the Tribe’s implicit

class theory, the Tribe would be unable to establish that the Qualification Amendment

created a new class. The amendment in Lake Arrowhead identified a discrete group of

shares—shares held by timeshare owners—and restricted the voting rights of those

shares. Id. at 877. The Qualification Amendment, unlike the bylaw amendment in Lake

Arrowhead, does not identify a discrete group and does not affect voting rights.

We hold that the Qualification Amendment did not create a new class of shares

and, therefore, did not trigger the separate voting group requirement under Utah Code

§ 16-6a-1004. It was therefore adopted in compliance with this statute.

2. Reasonableness

The Tribe also challenges the Qualification Amendment as unreasonable.9

We agree with the parties that reasonableness is a question of law. In reviewing a

bylaw that required that directors of a bank have no affiliation with other banks, a federal

9
Many courts reviewing qualification requirements for directors are presented
bylaws rather than articles of incorporation. See, e.g., McKee, 265 F. Supp. at 3; Durkin
v. Nat’l Bank of Olyphant, 772 F.2d 55, 60 (3d Cir. 1985). We see no relevant difference
in where the qualifications are listed because “[i]t is undoubtedly within the power of a
corporation to prescribe by bylaw or the articles of incorporation the qualifications of its
directors.” 2 Fletcher, Cyclopedia § 298.

22
district court explained that the issue was “purely a question of law.” McKee, 265 F.

Supp. at 4. A leading treatise agrees that, “[g]enerally speaking, whether a particular

bylaw is invalid because it is unreasonable presents a question of law for the court.” 8

Fletcher, Cyclopedia § 4191.

A bylaw or article of incorporation is not unreasonable simply because a court

disagrees with it. “Where the reasonableness of a by-law is a mere matter of judgment,

and one upon which reasonable minds must necessarily differ, a court would not be

warranted in substituting its judgment instead of the judgment of those who are

authorized to make by-laws and who have exercised their authority.” McKee, 265 F.

Supp. at 4 (quotations omitted); see also 8 Fletcher, Cyclopedia § 4191.

In this case, the district court held that the Qualification Amendment was

reasonable to ensure the corporate loyalty of UDC directors. On appeal, the Tribe

contests the corporate loyalty rationale because the district court could only reach this

conclusion by relying on the UDC’s factual claim—which the Tribe disputes—that the

UDC and the Tribe are embroiled in serious and ongoing conflicts.

The UDC does not need to prove its view of the facts for us to hold that the

Qualification Amendment was reasonable. Director qualification requirements may be

based on the potential for a conflict of corporate loyalty. See, e.g., McKee, 265 F. Supp.

at 7. The Tribe concedes that before the adoption of the Amendments, “there had been

several points of friction between the Tribe and the UDC.” Aplt. Br. at 10. It cannot

23
credibly maintain that there is no potential for future conflict between the Tribe and the

UDC.

A long history of cases holds that corporations can require that directors be free of

any potential conflict of interest. Two of the famous early cases are Cross v. West

Virginia. Cent. & Pittsburgh Ry. Co., 16 S.E. 587, 588 (W.Va. 1892), which upheld a

requirement that a director could not be an attorney in a suit against the corporation, and

People ex rel. Wildi v. Ittner, 165 Ill. App. 360, 369 (1911), which upheld a requirement

that a director could not “be an officer, agent, employee, attorney or trustee in any other

firm” in the industry. Id. at 362.

We find McKee to be particularly instructive. In McKee, the court upheld a

requirement that “no director should be an attorney for, or connected with other banking

institutions.” 265 F. Supp. at 3. The McKee court upheld the qualification requirement

even though “[t]here [wa]s lack of any showing that . . . [the] plaintiff’s nominees . . .

would not have been loyal directors.” Id. at 4.

The Tribe attempts to distinguish McKee because the First National Bank was

trying to protect against directors working for competing businesses whereas the Tribe

and the UDC are “joint owners,” not competing businesses. Aplt. Br. at 37.10 But the

10
The Tribe also points to Dozier, in which the Michigan Court of Appeals held
unreasonable a bylaw that non-management candidates for the board of directors, but not
management candidates, needed to secure the signatures of one-half of one percent of the
club’s members to qualify. 244 N.W. 2d at 381-82, 385. Unlike the bylaw in Dozier, the
Qualification Amendment does not affect the process of election and does not give any
Continued . . .
24
Tribe and the UDC need not be competing businesses to have the potential for conflicts

of interest. The Partition Act anticipates the potential that the Tribe might not represent

the interests of mixed-bloods by providing that the mixed-bloods may “organize for their

common welfare.” 25 U.S.C. § 677e. The Partition Act also recognizes the potential for

conflict by including a provision for handling disputes between the two groups titled

“Procedure by Secretary upon non-agreement between mixed-blood and full-blood

groups.” 25 U.S.C. § 677aa.

The Tribe relies primarily on two cases for its position that the Qualification

Amendment was an unreasonable restriction on what the Tribe calls its right to nominate

a candidate of its choice to be a UDC director. It first cites to Durkin, which undercuts,

rather than supports, the Tribe’s position. In Durkin, the court held that “the voting rights

[that the National Bank Act of 1864, 12 U.S.C. § 61,] guarantees include the right to

nominate candidates for directorships.” 772 F.2d at 58. But in the same opinion, the

court upheld “a by-law prohibiting shareholders whose spouses are affiliated with another

bank from serving as directors” of a bank. Id. at 60. Accordingly, Durkin supports our

conclusion that corporations may limit a shareholder’s choice of director nominees to

those candidates who meet the relevant qualifications, which may include requirements

that protect corporate loyalty.
______________________________________
Cont.

advantage to the candidates of any particular group. It only requires that candidates not
be Tribe affiliates.

25
 Another case on which the Tribe relies, AHI Metnall, L.P. v. J.C. Nichols Co., 891

F. Supp. 1352 (W.D. Mo. 1995), stands for the same limited proposition as Durkin. In

Metnall, a federal district court granted a preliminary injunction stating that “the rights to

nominate director candidates and propose business are integral components of a

shareholder's right to vote” and invalidated a requirement that only shareholders

possessing 20% or more of the shares could nominate director candidates. Id. at 1356-58.

The Metnall Court explained that “these bylaw amendments effectively preclude Plaintiff

or any other shareholder from nominating a director or proposing any business at

shareholder meetings.” Id. at 1356. As we explained above, the Qualification

Amendment does not preclude the Tribe from nominating UDC directors. It precludes all

shareholders only from nominating Tribe affiliates to be directors.

The Tribe also argues that the Qualification Amendment is overbroad. The

Qualification Amendment excludes from the UDC board of directors individuals who are

“employed in a full-time or part-time capacity, with or without compensation” by the

Tribe or “serving [the Tribe] in a consulting or advisory capacity, whether directly or

indirectly, paid or unpaid, on a full or part-time basis.” Joint App. Vol. I at 88.

The question before us is not whether the Qualification Amendment was narrowly

tailored to the UDC’s purpose. All we need to decide is whether the Amendment was

reasonable. It is not unreasonable for the UDC to be concerned about divided loyalty as

to all Tribe affiliates. For example, as the district court noted, a broad requirement that

directors not be affiliated with an organization that could create a conflict of interest
26
helps to protect confidential information. See Ute Indian Tribe, 2010 WL 956905 at *6.

In McKee, “in addition to the direct conflict or potential conflict of interest, there [wa]s

also the danger of inadvertent leakage of confidential information through casual office

discussions or accessibility of files.” 265 F. Supp. at 7. The McKee court held that the

directors reasonably “determined that [the organization’s] welfare was best protected if

this opportunity for conflicting loyalties and potential misuse and leakage of confidential

information was foreclosed.” Id.

In a more recent case, eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del.

ch. 2010), the Delaware Court of Chancery relied on reasoning similar to the McKee

court. In response to perceived competition from eBay, the directors and controlling

shareholders of Craigslist adopted a series of amendments to its corporate charter and

bylaws that staggered board elections to cut off eBay, a Craigslist shareholder, from

unilaterally placing a director on Craigslist’s board. Id. at 22-23. The Court of Chancery

held that “[p]reventing a competitor that is also a minority stockholder from unilaterally

placing a director on the board so that confidential corporate information will not be

freely shared with that competitor is a legitimate and rational business purpose.” Id. at

40-41.

The Tribe responds to the UDC’s information leakage argument by asserting that

“as joint manager of the indivisible assets, [it] already has access to confidential business

information regarding the joint assets.” Aplt. Br. at 39. But to the extent that the UDC

disagrees with the Tribe about the joint management and wishes to have internal strategy
27
discussions about how to advance its interests, the UDC has a reasonable concern that

Tribe-affiliated directors would intentionally or even inadvertently disclose confidential

information from those discussions to the Tribe. This court may not “substitut[e] its

judgment” for the judgment of the UDC shareholders in determining that the

Qualification Amendment was a reasonable means to protect the UDC board’s

confidentiality. See McKee, 265 F. Supp. at 4 (quotations omitted).

We hold that the Qualification Amendment is a reasonable means to ensure that

UDC directors will not have a potential conflict of interest or disclose any confidential

information by virtue of their affiliation with the Tribe.

D. Other Amendments

The Tribe also challenges the reasonableness of the Power and Cause

Amendments as a matter of law.

1. Reasonableness of the Power Amendment

The Power Amendment modified the provision in the Articles of Incorporation

governing who could exercise the UDC’s corporate powers. Before the Amendment, the

Articles stated: “The Board of Directors shall exercise the corporate powers of the

corporation.” Joint App. Vol. I at 75. The new version states: “The exercise of the

corporate powers of this corporation shall be vested exclusively in its duly elected Board

of Directors. The stockholders shall not exercise any corporate power unless requested to

do so in a written resolution adopted by the Board of Directors and submitted to the

stockholders for approval.” Id. at 89-90.
28
 The Tribe claims that the Power Amendment diminishes shareholder power. But

as the district court correctly concluded, the Power Amendment expands rather than

diminishes the power of shareholders. See Ute Indian Tribe, 2010 WL 956905 at *7.

Before the Power Amendment, the UDC Articles did not allow for anyone but the board

to exercise corporate powers. As Utah courts have held, “‘[s]hall’ is generally presumed

to indicate a mandatory requirement.” Southwick v. Southwick, 259 P.3d 1071, 1074

(Utah 2011) (quotations omitted). If the board must exercise the UDC’s corporate

powers, no other entity may exercise them. Utah courts also apply the expressio unius est

exclusio alterius canon, the rule that when the law “expressly provides the manner of

doing a thing, it impliedly forbids it being done in a substantially different manner.” Salt

Lake City v. Ohms, 881 P.2d 844, 856 (Utah 1994).

Before the Power Amendment, the UDC board of directors had no choice but to

exercise corporate powers itself. The Power Amendment’s addition of “exclusively” was

simply a clarification. The only meaningful change the Power Amendment made was to

allow the board to delegate the exercise of corporate powers with a written resolution.

On appeal, the Tribe claims that the Power Amendment, “in a backdoor fashion so

slick it escaped the notice of the district court . . . prevent[ed] shareholders from

proposing any corporate action without prior Board consent,” thereby “silenc[ing] the

voices” of UDC shareholders. Aplt. Br. at 34. But the Power Amendment only states

that the shareholders shall not “exercise” any corporate power without a written

29
resolution from the board. The Power Amendment places no limitation on what

shareholders may propose. It does not, as the Tribe claims, silence shareholders.

We hold that the Power Amendment is reasonable as a matter of law.

2. Reasonableness of the Cause Amendment

The Cause Amendment states that UDC shareholders may remove a director only

upon a showing of cause and then defines what constitutes cause. Utah Code § 16-6a-

808(1)(a) permits such a requirement by providing that nonprofit corporations may

“provide that directors may be removed only for cause.”

The Tribe concedes that “such a clause may be permissible under Utah Code Ann.

§ 16-6a-808(1)(a) if properly adopted.” Aplt. Br. at 34. But the Tribe then offers the

quixotic argument that the Cause Amendment, “considered conjunctively with [the

Power Amendment], prevents UDC shareholders from seeking the removal of individual

directors for cause without first obtaining the Board’s prior written approval.” Id.

(emphasis in original).

Even if the Tribe’s argument were correct, its argument would be against the

Power Amendment, not the Cause Amendment. The argument also misunderstands the

Amendments. The Power Amendment only requires prior written approval for

shareholders to exercise the UDC’s corporate powers. Removing a UDC director is not

an exercise of corporate power. The Cause Amendment expressly provides that

“Removal of a member of the Board of Directors for cause shall require a two-thirds

(2/3) vote of the stock represented at any annual meeting of the stockholders or at any
30
special meeting thereof called for that purpose.” Joint App. Vol. I at 89. There is no

requirement that the shareholders obtain written approval from the board.

We hold that the Cause Amendment is reasonable as a matter of law.

E. Good Faith and Fair Dealing Claim

In addition to its claim that the Amendments were unreasonable and adopted in

violation of Utah law, the Tribe claims that the individual UDC directors violated the

covenant of good faith and fair dealing.

Utah law allows shareholders to sue for violation of the covenant of good faith and

fair dealing. The Utah Supreme Court explained, “[i]t is well established precedent that

the bylaws of a corporation, together with the articles of incorporation, the statute under

which it was incorporated, and the [shareholder’s] application, constitute a contract

between the [shareholder] and the corporation.” Workman, 976 P.2d at 1212 (quotation

omitted).

A covenant of good faith and fair dealing exists between UDC shareholders and

the UDC. The Utah Supreme Court has held that “[a]n implied covenant of good faith

and fair dealing inheres in every contract.” Eggett v. Wasatch Energy Corp., 94 P.3d

193, 197 (Utah 2004). “Under the covenant of good faith and fair dealing, both parties to

a contract impliedly promise not to intentionally do anything to injure the other party’s

right to receive the benefits of the contract.” Id.

The Tribe’s claim is against the UDC’s individual directors. A claim against

individual directors is generally barred in Utah because “a contract between a member
31
and a corporation is not a contract between a member and those individuals who direct or

manage the corporation.” Reedeker v. Salisbury, 952 P.2d 577, 582 (Utah App. 1998).

In Utah, “[t]he general rule is that a corporation is an entity separate and distinct from its

officers, shareholders and directors and that they will not be held personally liable for the

corporation’s debts and obligations.” Id. (quotations omitted).

But when a director acts in bad faith, the director can become liable for a

corporation’s breach of contract. See id. (“[A] director is not personally liable for his

corporation’s contractual breaches unless he assumed personal liability, acted in bad faith

or committed a tort in connection with the performance of the contract.” (quotations

omitted)).

The Tribe claims that the UDC board of directors intentionally violated its right to

benefit from its shareholder contract by proposing and overseeing the adoption of the

Amendments.

The district court analyzed this issue by applying the venerable business judgment

rule, which creates a presumption that directors will not be held liable for their actions as

directors. See Ute Indian Tribe, 2010 WL 956905 at *8; see also Aronson v. Lewis, 473

A.2d 805 (Del. 1984) (explaining the business judgment rule), overruled on other

grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000); 3A Fletcher, Cyclopedia § 1036.

The Tribe contends that the business judgment rule does not apply to this case. We need

not resolve this issue because whether the business judgment rule applies makes no

32
difference to the question before us.11 The Delaware Court of Chancery has explained

that a “plaintiff can rebut the business judgment presumption . . . by showing that the

majority of directors who approved the action . . . did not act in good faith in approving

the action.” eBay, 16 A.3d at 36. So regardless of whether the business judgment rule

applies, the Tribe’s claim hinges on whether the UDC directors acted in bad faith.

Our earlier holdings in this case preclude the Tribe’s claim. We have held that the

Amendments were legally adopted and that each Amendment was reasonable as a matter

of law. The Tribe cannot prove that the UDC board of directors acted in bad faith when

the directors proposed reasonable amendments and oversaw a shareholder vote that

adopted amendments in compliance with Utah law. The Amendments did not deprive the

Tribe of the benefits of the shareholder contract.

We hold that the district court did not err in granting summary judgment to the

UDC on the Tribe’s good faith and fair dealing claim.

F. No Reliance on Disputed Facts

The Tribe argues that the district court, in its summary judgment ruling,

improperly relied on disputed facts. In particular, the Tribe points to the court’s

statement that the UDC had presented “‘substantial evidence supporting a rational

concern that there have been and continue to be conflicts of interest between the Ute

11
“[W]e are free to affirm a district court decision on any grounds for which there
is a record sufficient to permit conclusions of law, even grounds not relied upon by the
district court.” Harman v. Pollock, 586 F.3d 1254, 1259 (10th Cir. 2009) (quotations
omitted).

33
Tribe and the UDC.’” Aplt. Br. at 49 (quoting Ute Indian Tribe, 2010 WL 956905 at *6).

But the district court emphasized that its ruling was based on its legal conclusion

that “the potential for such conflicts is inherent in the different interests of the

shareholders of the UDC and the Ute Tribe.” Ute Indian Tribe, 2010 WL 956905 at *6.

The potential for conflicts between the Tribe and the UDC does not hinge on facts about

particular past or present conflicts between them. The potential for conflict is evident in

the UDC’s purpose as explained in its Articles of Incorporation and in the Partition Act.

Moreover, as we explained above, the Tribe’s concession that “there had been several

points of friction between the Tribe and the UDC” undercuts the Tribe’s ability to

contend that there is no potential for conflict. See Aplt. Br. at 10.

We hold that the district court did not improperly rely on disputed facts in granting

summary judgment for the UDC.

III. CONCLUSION

We hold that the Amendments to the UDC Articles of Incorporation did not create

a new class of shares and were reasonable as a matter of law. We also hold that the UDC

board of directors did not violate the covenant of good faith and fair dealing and that the

district court did not rely on any disputed material facts. We affirm the district court’s

grant of the UDC’s motion for summary judgment and its denial of the Tribe’s motion for

summary judgment.

The Tribe moved to strike the UDC’s Supplemental Appendix and portions of the

UDC’s Answer Brief on the ground that material in the Supplemental Appendix on which
34
the UDC relied in its Answer Brief was never made part of the record before the district

court. The Tribe also requested sanctions and attorney fees. We do not understand the

legal issues before us to require us to resolve any factual dispute and therefore we need

not consider the Supplemental Appendix. We therefore dismiss the Tribe’s motion to

strike as moot. We accordingly dismiss the motion for sanctions and attorney fees.

After filing its Supplemental Brief on jurisdiction, the Tribe moved to file a

Supplemental Appendix of its own to support some of the factual claims in its

Supplemental Brief. Because the jurisdictional issue in this case does not require us to

resolve any factual questions, we dismiss the Tribe’s motion to file a Supplemental

Appendix as moot.

35