Workman v. Verde Wellness Center (CA2 10/18/16)

Substantively this is about a corporation’s attempt to deprive a plaintiff of standing by throwing her off its board of directors. Procedurally it concerns a motion to dismiss converting to a motion for summary judgment.

Workman was on the board of Verde, a non-profit that dispenses “wellness” in the form of marijuana. She filed suit for dissolution, alleging various corporate misdeeds; the statute (10-11430) allows a director to do this. So the other members simply removed her from the board (though for them it wasn’t simple since they fouled it up the first time and had to go back and try again) and moved to dismiss, arguing that she had no standing since she was no longer a director. The trial court reviewed the corporate records of the removal and granted – yes, you read that right, granted – the motion. And then it doubled down on dumb by granting Verde Rule 11 sanctions. Workman appealed.

(The Court of Appeals had to kick the case back because the parties forgot to put Rule 54(c) language in the judgment. You can argue about whether we really needed another subdivision to Rule 54 but not that lawyers now have another thing they’ll forget about.)

Verde first argued that Workman should have appealed the order dismissing the case rather than the later judgment, which came a few months later (after the Rule 11 order). An order of dismissal with prejudice is appealable. The court mentions that, while the order didn’t say “with prejudice,” under Rule 41 that’s normally the default.  But dismissals with prejudice can be appealed because they prevent the entry of a judgment. Here, as the court is about to explain, a judgment was entered – a summary judgment.

Many moons ago we opined that how a Rule 12 motion converts to a Rule 56 “isn’t rocket science.” The courts at that time issued a spate of opinions to explain it, after which we said that it “used to be a fairly simple subject until repeated attention from appellate courts turned it into a quagmire, made made worse by the fact that most trial judges have no clue.” In fairness to the Court of Appeals, its still not hard and this opinion explains it; the problem is that too many judges and trial lawyers – who should know it like the backs of their hands – either don’t know how it works or don’t even know that it exists. From the looks of this opinion (which is all we have to go on; one hopes it doesn’t tell the whole story), in the trial court Verde threw corporate records into its Motion to Dismiss and it didn’t occur to anybody that this caused a complication. But those records, and Verde’s argument, dealt with things that happened after Workman filed suit so they were clearly outside the Complaint. Verde argued that they were “immaterial” because Workman admitted that the Board had removed her. But “we see no distinction between the factual allegations raised in Verde’s motion to dismiss and Workman’s admission”; what matters is that the trial court considered facts outside the Complaint. Verde also argued that the records fell within the exception, mentioned in Strategic Development (CA1 2010), for matters “central to the Complaint.”  The court notes that the Supreme Court left that one out when discussing the subject (Coleman 2012) but, in any event, these records were not central to the Complaint. So the motion converted and the trial court’s ruling was on summary judgment.

Workman argued that the facts the trial court considered were the wrong ones, that it should have accepted her Complaint’s allegation that she was a director. But taking as true all facts alleged is the standard for dismissal, not summary judgment. If she wanted to contest the facts she should have provided evidence in her opposition, as under Rule 56, or moved for additional discovery.

The court gives the substantive issue four pages (including a long paragraph explaining that litigants must have standing; for a Bar that doesn’t know how to argue motions or write judgments, maybe that’s necessary) but comes to the conclusion you knew going in: a party “cannot by its own voluntary conduct ‘moot’ a case and deprive a court of jurisdiction.” “Workman’s standing to maintain this action came into question only after she initiated it“ and “it is reasonable to infer that the board removed Workman in response to her claims . . .” The court analogizes to shareholder derivative actions, in which the corporation can’t unilaterally deprive the plaintiff of standing.

The court reverses the trial court’s orders and remands. A very competent civil opinion from CA2.

(Opinion: Workman v. Verde Wellness Center)