Angel Inv. v. Garrity

2009 UT 40
AMENDED OPINION*
This opinion is subject to revision before final
publication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
----oo0oo----
Angel Investors, LLC, a Utah 	No. 20080111
limited liability company,
suing derivatively on behalf
of XanGo, LLC,
Plaintiffs and Appellants,
v.
Aaron Garrity, Bryan Davis,
Gary Hollister, Gordon Morton, 	F I L E D
Joseph Morton, and Kent Wood,
Defendants and Appellees. 	July 21, 2009
---
Fourth District, Provo Dep’t
The Honorable Fred D. Howard
No. 070401904
Attorneys: 	Mary Anne Q. Wood, Richard J. Armstrong, Salt Lake
City, for plaintiffs
Mark F. James, Phillip J. Russell, Salt Lake City,
for defendants
---
DURRANT, Associate Chief Justice:
INTRODUCTION
¶1 	In the district court, Angel Investors, LLC, brought a
derivative suit on behalf of XanGo, LLC, against Aaron Garrity,
Bryan Davis, Gary Hollister, Gordon Morton, Joseph Morton, and
Kent Wood, who are the managing members and majority owners of
XanGo (collectively, the “Majority Owners”). 	Prior to initiating
the derivative suit, Angel Investors brought a direct suit
against XanGo, seeking the dissolution of the company, among
other relief. 	In the derivative suit, the district court ruled
that Angel Investors lacked standing to bring the action because
_________________________________________________________________
*The Court has rewritten paragraph numbers 9, 10, 23.

1 Utah Rule of Civil Procedure 23A was amended and
renumbered effective November 1, 2007. 	Previously, it was
identified as rule 23.1. 	Rule 23A is substantively identical to
the original rule 23.1. 	Throughout this opinion, we cite to the
current version of the Utah rule.
No. 20080111 	2
Angel Investors could not “fairly and adequately represent the
interests of the shareholders or members similarly situated in
enforcing” XanGo’s rights, as required by Utah Rule of Civil
Procedure 23A. 1 	The district court reached this conclusion after
finding that (1) Angel Investors is similarly situated to other
minority shareholders and (2) Angel Investors cannot fairly and
adequately represent the interests of those similarly situated
shareholders because (A) the shareholders each indicated that
they do not support Angel Investors as a derivative plaintiff and
(B) Angel Investors’ direct suit causes a conflict of interest.
¶2 	Angel Investors requested time to conduct discovery in
order to demonstrate that it is not similarly situated to any
other XanGo shareholder. 	The district court denied Angel
Investors’ request.
¶3 	Angel Investors now challenges the district court’s
rulings on appeal, arguing that it should be allowed to proceed
with the derivative action as a class of one and that the
district court erred in denying its request to conduct discovery.
¶4 	The Majority Owners argue that we should affirm the
district court, if not on the original grounds then on the
alternative grounds that Angel Investors cannot be a fair and
adequate representative because it never signed the operating
agreement or because Angel Investors stands to gain relatively
little from the derivative suit given its small, one percent,
interest in XanGo. 	We find the Majority Owners’ arguments
unpersuasive.
¶5 	Particularly, we hold that (1) Angel Investors is not
similarly situated to any other XanGo shareholders and,
therefore, qualifies as a class of one; and (2) the Majority
Owners have not met their burden of proving that Angel Investors
is an inadequate representative under rule 23A. 	We address the
Majority Owners’ fair and adequate representation arguments as
follows. 	We first determine that the dissent of dissimilar
shareholders is not relevant to the fair and adequate
representation inquiry when a derivative plaintiff qualifies as a
class of one. 	We next determine that Angel Investors’ direct and
derivative suits are not in actual conflict and, therefore, the
direct suit does not disqualify Angel Investors as a derivative

3 	No. 20080111
plaintiff. 	Finally, we decline to address the Majority Owners’
alternative grounds for affirming the district court’s
determination because they were not preserved in the district
court. 	We also do not address the district court’s ruling on
Angel Investors’ discovery request because our standing
determination grants Angel Investors all of the relief it seeks
in this appeal.
BACKGROUND
¶6 	Angel Investors is a limited liability company that
owns one percent of XanGo, which is also a limited liability
company. 	The Majority Owners own eighty-six percent of XanGo.
In addition to Angel Investors, there are nineteen individual
entities that have an ownership interest in XanGo.
¶7 	Prior to initiating a derivative suit on behalf of
XanGo, Angel Investors brought a direct suit against XanGo. 	In
the direct suit, Angel Investors alleged that (1) XanGo loaned
funds to the Majority Owners so that they could personally
acquire minority interests in XanGo and (2) XanGo denied Angel
Investors the right to inspect XanGo’s financial records. 	In the
direct action, Angel Investors sought both monetary damages from
XanGo and the dissolution of XanGo.
¶8 	While the direct suit was pending, Angel Investors
initiated a derivative suit against the Majority Owners. 	The
derivative suit is the subject of this appeal. 	In the derivative
suit, Angel Investors alleged that the Majority Owners had taken
millions of dollars in personal loans from XanGo; purchased
minority interests in XanGo with the loaned funds, thus
appropriating to themselves opportunities belonging to XanGo and
all of its shareholders; and paid themselves excessive
compensation while wasting corporate assets.
¶9 	The Majority Owners responded to Angel Investors’
complaint by filing a motion to dismiss pursuant to Utah Rule of
Civil Procedure 12(b)(1). 	In their motion to dismiss, the
Majority Owners argued that Angel Investors lacked standing to
bring a derivative suit. 	To support their argument, the Majority
Owners attached affidavits from each of XanGo’s minority
shareholders, other than Angel Investors. 	All of the affiants
stated that they did not support Angel Investors as a
representative of XanGo in the derivative suit.
¶10 	Angel Investors, in opposition to the motion to
dismiss, requested time to conduct discovery and argued that it
met the standing requirements of Utah Rule of Civil Procedure

No. 20080111 	4
23A. 	Angel Investors contended that through discovery it could
prove that it was not similarly situated to any other XanGo
shareholder. 	Specifically, Angel Investors alleged that it is
the only minority owner “‘which is not in a position to be
coerced or bribed by [the Majority Owners].’”
¶11 	The district court heard oral argument on the motion to
dismiss. 	Two months later, the court issued its ruling, wherein
the court granted the motion to dismiss, stating first that Angel
Investors is not a class of one because there are other XanGo
owners that are similarly situated. 	Describing the situation of
the remaining nineteen XanGo owners, the court stated:
[S]ix of the nineteen [owners] are the
Defendants and two have a family relationship
with a Defendant. . . . 	Seven other [owners]
are employees of XanGo. 	Only four of the
[owners] do not have an employee or family
relationship to the Defendants or the company
of which the Defendants are the majority
owners. 	While Defendants, their family
members, and the XanGo employees may not be
similarly situated to [Angel Investors], the
Court finds that the four remaining [owners]
are similarly situated . . . .
The four remaining owners that the court found to be similarly
situated to Angel Investors were among the affiants declaring
their opposition to the derivative suit.
¶12 	The court further stated that Angel Investors cannot
fairly and adequately represent the interests of these similarly
situated XanGo owners because “there may be some actual conflict
between [Angel Investors’ interests] in the Direct Lawsuit and
its representation in the derivative suit” and because the other
XanGo owners have asserted by affidavit that they oppose the
derivative suit. 	The court observed that the minority
shareholders “are independent actors and have the ability and
right to take a position that may be against their best
interests.” 	Accordingly, the district court concluded that Angel
Investors “would not be a fair and adequate representative of the
non-defendant owners in the derivative suit.”
¶13 	We now review the district court’s standing rulings on
appeal. 	We have jurisdiction pursuant to Utah Code section
78A-3-102(3)(j) (2008).

2 LeVanger v. Highland Estates Props. Owners Ass’n, 2003 UT
App 377, ¶ 8, 80 P.3d 569 (quoting Kearns-Tribune Corp. v.
Wilkinson, 946 P.2d 372, 373-74 (Utah 1997)).
3 See id.
4 Although rule 23A speaks in terms of derivative actions
brought on behalf of corporations and unincorporated
associations, the rule governs derivative actions brought on
behalf of limited liability companies as well. 	See GLFP, Ltd. v.
CL Mgmt., Ltd., 2007 UT App 131, ¶ 2 n.1, 163 P.3d 636 (applying
rule 23A to a limited partnership that became a limited liability
company after the derivative suit was filed).
5 See LeVanger, 2003 UT App 377, ¶ 18.
6 Id.
5 	No. 20080111
STANDARD OF REVIEW
¶14 	A standing determination “‘is primarily a question of
law, although there may be factual findings that bear on the
issue.’” 2 	Therefore, we review the district court’s legal
determinations for correctness but review its factual
determinations with some deference to its findings. 3
ANALYSIS
¶15 	Utah Rule of Civil Procedure 23A(a) permits “a
derivative action [to be] brought by one or more shareholders or
members to enforce a right of a corporation or of an
unincorporated association.” 4 	But rule 23A(b) prevents the
maintenance of a derivative action “if it appears that the
plaintiff does not fairly and adequately represent the interests
of the shareholders or members similarly situated in enforcing
the right of the corporation or association.” 	Rule 23A further
requires a court to dismiss a derivative action if the defendant
demonstrates that the plaintiff does not meet the rule’s
requirements. 5
¶16 	If, as in this case, the plaintiff’s pleadings allege
that the plaintiff fairly and adequately represents the interests
of similarly situated shareholders, then “the burden is on the
defendant to show that the plaintiff is an inadequate
representative under rule 23.1 . . . and, therefore, does not
have standing.” 6 	We reverse the district court’s determination
that the Majority Owners met their burden. 	Specifically, we hold
that (1) Angel Investors is not similarly situated to any other

7 Nolen v. Shaw-Walker Co., 449 F.2d 506, 508 n.4 (6th Cir.
1971) (stating that shareholders are not similarly situated if
they are “(1) the defendants; (2) employees of the Company; [or]
(3) the . . . defendant’s” family members).
8 Larson v. Dumke, 900 F.2d 1363, 1368 (9th Cir. 1990).
9 Id.
While in this case we are analyzing Utah Rule of Civil
Procedure 23A, this rule is “substantively identical” to its
federal counterpart. 	LeVanger, 2003 UT App 377, ¶ 17.
Accordingly, we “‘freely refer to authorities which have
interpreted the federal rule.’” 	Id. (quoting Gold Standard, Inc.
(continued...)
No. 20080111 	6
XanGo owner and may proceed as a class of one, and (2) the
Majority Owners have not met their burden of proving that Angel
Investors is an inadequate representative under rule 23A.
I. 	ANGEL INVESTORS QUALIFIES AS A CLASS OF ONE
¶17 	The district court found that there are other XanGo
shareholders who are similarly situated to Angel Investors. 	The
court, relying in part on a Sixth Circuit decision, 7 considered
the following factors in determining that Angel Investors is
similarly situated to other shareholders: 	the benefit that the
suit could confer, familial relationships between the defendants
and minority shareholders, and employer/employee relationships
between the defendants and the minority shareholders. 	After
considering these factors, the court determined that the “four
remaining [minority shareholders] are similarly situated to
[Angel Investors].”
¶18 	Angel Investors contends that the court should have
included in its analysis one other pertinent factor--the
shareholders’ motivations for opposing the derivative suit.
Angel Investors argues that if the court had considered and
applied this factor, it would have found that Angel Investors is
not similarly situated to any other XanGo shareholder.
Specifically, Angel Investors alleges that all XanGo shareholders
except for itself oppose the derivative suit because the
shareholders are “motivated by individual interests, rather than
the good of the corporation.” 8
¶19 	To support its contention that the district court
should have considered in its analysis the shareholders’
motivations for opposing the derivative suit, Angel Investors
cites Larson v. Dumke. 9 	In Larson, the Ninth Circuit concluded

9 (...continued)
v. Am. Barrick Res. Corp., 805 P.2d 164, 168 (Utah 1990)).
10 900 F.2d at 1368.
11 Id.
12 796 S.W.2d 160, 161-63 (Tex. 1990).
13 Id. at 163.
14 Id. at 161.
15 Id. at 162-63.
16 Id. at 163.
17 See, e.g., Jordan v. Bowman Apple Prods. Co., 728 F.
Supp. 409, 413 (W.D. Va. 1990) (allowing a derivative action
after finding that the plaintiff was not similarly situated to
any other shareholder); Halsted Video, Inc. v. Guttillo, 115
F.R.D. 177, 179-80 (N.D. Ill. 1987) (holding that a plaintiff who
(continued...)
7 	No. 20080111
that a plaintiff may proceed with a derivative suit as a class of
one where every other “non-defendant shareholder has an economic
interest in supporting the current management.” 10 	In Larson, all
of the non-defendant shareholders except for the plaintiff
benefitted from the alleged corporate misfeasance. 11
¶20 	Angel Investors also cites Eye Site, Inc. v. Blackburn,
a Texas Supreme Court decision, for the proposition that a
minority shareholder in a closely held corporation can qualify as
a class of one. 12 	In Eye Site, a sole dissenting shareholder
brought a derivative action against all other shareholders of the
corporation. 13 	The defendants argued that derivative plaintiffs
cannot proceed without representing similarly situated
shareholders. 14 	The Texas Supreme Court reasoned that the
requirement for a plaintiff in a derivative suit to adequately
represent similarly situated shareholders “does not place any
minimum numerical limits on the number of shareholders who must
be ‘similarly situated.’ 	It follows that if the plaintiff is the
only shareholder ‘similarly situated,’ he is in compliance with
both the letter and the purpose of the rule.” 15 	The court
further reasoned that any other interpretation of the requirement
“could deprive the corporation of any remedy it might have as the
result of wrongs done it by the major shareholders.” 16 	Both
federal and state courts have subscribed to this view. 17

17 (...continued)
brought a derivative action against all other shareholders
constituted a legitimate class of one); Clemons v. Wallace, 592
P.2d 14, 15-16 (Colo. Ct. App. 1978) (also holding that a
plaintiff who brought a derivative action against all other
shareholders may constitute a legitimate class of one); Brandon
v. Brandon Constr. Co., 776 S.W.2d 349, 351-54 (Ark. 1989)
(holding that the plaintiff shareholder could bring a derivative
action as a “class of one,” although the other minority
shareholders stated that plaintiff did not represent their
interests).
18 See Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 373-74
(1966) (“We cannot construe Rule 23 or any other one of the
Federal Rules as compelling courts to summarily dismiss, without
any answer or argument at all, cases like this where grave
charges of fraud are shown by the record to be based on
reasonable beliefs growing out of careful investigation. 	The
basic purpose of the Federal Rules is to administer justice
through fair trials, not through summary dismissals as necessary
as they may be on occasion. 	These rules were designed in large
part to get away from some of the old procedural booby traps
which common-law pleaders could set to prevent unsophisticated
litigants from ever having their day in court. 	If rules of
procedure work as they should in an honest and fair judicial
system, they not only permit, but should as nearly as possible
guarantee that bona fide complaints be carried to an adjudication
on the merits. 	Rule 23(b), like the other civil rules, was
written to further, not defeat the ends of justice. 	The serious
fraud charged here, which of course has not been proven, is
clearly in that class of deceitful conduct which the federal
securities laws were largely passed to prohibit and protect
against.”); see also GLFP, Ltd. v. CL Mgmt., Ltd., 2007 UT App
131, ¶ 8, 163 P.3d 636.
19 Aurora Credit Servs., Inc. v. Liberty W. Dev., Inc., 970
(continued...)
No. 20080111 	8
¶21 	We begin our analysis by recognizing that the purpose
of a derivative suit is to advance the interests of the
corporation, 18 which is an entity distinct from its individual
shareholders. 	Despite this distinction, we recognize that in
closely held corporations, it becomes easy for the majority
shareholders to identify themselves as the corporation. 	These
shareholders not only receive the majority of the profits the
corporation generates, but they often serve on the board and make
operating decisions for the corporation. 19 	We have previously

19 (...continued)
P.2d 1273, 1280 (Utah 1998).
20 Dansie v. City of Herriman, 2006 UT 23, ¶ 17, 134 P.3d
1139 (quoting Fletcher Cyclopedia of the Law of Private
Corporations § 70.10 (2002)).
9 	No. 20080111
described the characteristics of closely held corporations as:
“‘(1) a small number of shareholders; (2) no ready market for
corporate stock; and (3) active shareholder participation in the
business.’” 20 	Considering these characteristics, we recognize
that closely held corporations may be more vulnerable to
malfeasance. 	Majority shareholders of closely held corporations
have increased control over the corporation because they likely
serve on the corporation’s board; their dual roles can make
malfeasance easier to conduct as well as justify. 	Likewise, the
nature of a closely held corporation, where there is often a
small number of shareholders and many of those may have close
ties to each other, lessens the likelihood that a minority
shareholder will speak out against corporate malfeasance.
¶22 	In light of the greater vulnerability to malfeasance
that is present in closely held corporations, we hold that a sole
dissenting shareholder in a closely held corporation qualifies as
a class of one for purposes of derivative standing when that
shareholder (1) seeks by its pleading to enforce a right of the
corporation and (2) does not appear to be similarly situated to
any other shareholder. 	Further, we hold that shareholders’
motivation for opposing the derivative action is relevant to
determining the question of whether any shareholder is similarly
situated to the derivative plaintiff. 	To conclude otherwise
would be to permit corporate looting and malfeasance in
circumstances where all but one shareholder benefit personally
from the illegality or are at risk of personal detriment were the
malfeasance brought to light.
¶23 	Angel Investors, as a sole dissenting shareholder in a
closely held corporation, has brought a derivative suit alleging
corporate malfeasance by the Majority Owners. 	Angel Investors
has also alleged that all XanGo shareholders other than itself
stand to gain from the Majority Owners’ continued corporate
malfeasance. 	The Majority Owners have not refuted this
allegation. 	Accordingly, Angel Investors, as a sole dissenting
shareholder of a closely held corporation, having pled corporate
malfeasance, and having alleged that all other minority
shareholders stand to gain from continued malfeasance, qualifies
as a class of one.

21 Utah R. Civ. P. 23A(b) (2008).
22 Compare Utah R. Civ. P. 23A (“The derivative action may
not be maintained if it appears that the plaintiff does not
fairly and adequately represent the interests of the shareholders
or members similarly situated in enforcing the right of the
corporation or association.”) with Fed. R. Civ. P. 23.1 (“The
derivative action may not be maintained if it appears that the
plaintiff does not fairly and adequately represent the interests
of shareholders or members who are similarly situated in
enforcing the right of the corporation or association.”).
23 Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 532 n.7
(1984) (emphasis added).
No. 20080111 	10
II. 	THE MAJORITY OWNERS HAVE NOT MET THEIR BURDEN OF PROVING
THAT ANGEL INVESTORS IS AN INADEQUATE REPRESENTATIVE OF XANGO
¶24 	Having determined that Angel Investors qualifies as a
class of one, we need not determine whether Angel Investors can
“fairly and adequately represent the interests of the
shareholders or members similarly situated” 21 because by
definition a class of one is not similarly situated to any other
shareholders or members. 	Instead, we must determine what, if
any, requirements remain with respect to the adequacy of Angel
Investors’ representation and whether the Majority Owners have
met their burden of proving that Angel Investors is inadequate to
achieve standing as a derivative plaintiff.
A. 	A Derivative Plaintiff Must Fairly and Adequately Represent
the Interests of the Corporation
¶25 	Although rule 23A does not explicitly state that a
derivative plaintiff must be able to fairly and adequately
represent the corporation, this requirement is inherent in the
nature of the derivative action. 	When bringing a derivative
action, a derivative plaintiff stands in the stead of the
corporation, which is the real party in interest. 	Accordingly,
the derivative plaintiff must be able to fairly and adequately
represent the real party’s interests, otherwise the plaintiff is
acting on its own behalf and not that of the corporation. 	The
United States Supreme Court, interpreting the federal rule, which
is virtually identical to our rule, 22 stated that the purpose of
rule 23.1 is “to prevent shareholders from suing in place of the
corporation in circumstances where the action would disserve the
legitimate interests of the company or its shareholders.” 23
Accordingly, lower federal courts have interpreted rule 23.1 to

24 See, e.g., Pisnoy v. Ahmed, 499 F.3d 47, 64 (1st Cir.
2007) (stating that “the [derivative] shareholder must fairly and
adequately represent the corporation”); Owen v. Modern
Diversified Indus., Inc., 643 F.2d 441, 443 (6th Cir. 1981)
(stating that under rule 23.1 a derivative shareholder must be
able to fairly and adequately represent both the corporation as
well as similarly situated shareholders); Halsted Video, Inc. v.
Guttillo, 115 F.R.D. 177, 179 (N.D. Ill. 1987) (“The burden is on
the defendants to show that the plaintiff will not fairly and
adequately represent the corporation and its shareholders.”
(emphasis added)); Lee v. Andersen, No. 4-72 Civil 388, 1975 U.S.
Dist. LEXIS 12035, at *10-12 (D. Minn. 1975) (“The representative
plaintiff must pursue the action in the interest of and solely
for the benefit of the corporation; plaintiff’s honesty,
integrity, conscientiousness, skill and competent counsel are
also to be considered as relevant components of adequate
representation, and one of the most important factors to consider
in making the determination as to who is or is not a proper party
to fairly and adequately represent the corporation is to
determine whether in fact the representative plaintiff’s
interests are the same as the corporation’s and whether or not
the representative plaintiff or his counsel have other interests
conflicting with the interest of the corporation.”); see also
Ferer v. Erickson & Sederstrom, P.C., 718 N.W.2d 501, 507 (Neb.
2006) (“A shareholder may not commence or maintain a derivative
proceeding unless the shareholder adequately represents the
interests of the corporation in enforcing the right of the
corporation.”); McLeod v. Albanese, 815 So. 2d 472, 476 (Miss.
Ct. App. 2002) (stating that a shareholder’s ability to proceed
with a derivative action “turn[s] on whether he could ‘fairly and
adequately’ represent the company’s interest in the suit”).
11 	No. 20080111
include the requirement that a derivative plaintiff fairly and
adequately represent the corporation. 24 	We do likewise.
¶26 	To be a fair and adequate representative of the
corporation, a derivative plaintiff must not have a personal
interest that competes with the interests of the corporation or
prevents the plaintiff from acting in the corporation’s best
interest. 	Determining whether a derivative plaintiff fairly and
adequately represents the corporation is a fact-intensive
inquiry.
¶27 	The Majority Owners argue that the following facts
demonstrate that Angel Investors cannot be a fair and adequate
representative: 	(1) Angel Investors has a conflict of interest
with XanGo due to Angel Investors’ direct suit against XanGo; (2)
Angel Investors did not sign XanGo’s operating agreement; and (3)

25 Aurora Credit Servs., Inc. v. Liberty W. Dev., Inc., 970
P.2d 1273, 1282 (Utah 1998) (overturning a district court
decision that granted summary judgment in favor of the defendant
as to the plaintiff’s derivative claim and dismissed the
plaintiff’s direct claim).
Other jurisdictions agree that simultaneous direct and
derivative actions are not per se barred. 	See, e.g., Rothenberg
v. Sec. Mgmt. Co., 667 F.2d 958, 961 (11th Cir. 1982); Davis v.
Comed, Inc., 619 F.2d 588, 594 (6th Cir. 1980) (noting that
“other litigation pending between the plaintiff and defendants”
is only a factor to be considered in determining whether a
derivative plaintiff is a fair and adequate representative);
Bertozzi v. King Louie Int’l, Inc., 420 F. Supp. 1166, 1180 (D.
R.I. 1976) (recognizing that a court may take into account the
possibility that other litigation or outside entanglements may,
but does not necessarily, render a derivative plaintiff an
inadequate representative); see also 19 Am. Jur. 2d Corporations
§ 1934 (“[A] shareholder may bring a derivative action and an
individual claim at the same time if he or she has suffered a
different injury than the other shareholders.”). 	But see Ryan v.
Aetna Life Ins. Co., 765 F. Supp. 133, 136 (S.D.N.Y. 1991)
(Although “it was not yet clear whether any actual conflict would
(continued...)
No. 20080111 	12
Angel Investors stands to gain a relatively small amount of
damages due to its minimal ownership interest in XanGo. 	We
consider the Majority Owners’ arguments in light of our
conclusions that Angel Investors is a class of one and must, as a
derivative plaintiff, fairly and adequately represent XanGo’s
interests.
1. 	Angel Investors’ Direct Suit Does Not Create a Conflict of
Interest Such That Angel Investors Cannot Fairly and Adequately
Represent XanGo’s Interests
¶28 	In this case, the Majority Owners argue that Angel
Investors is not a fair and adequate representative of XanGo
because Angel Investors has a direct action pending against
XanGo. 	Particularly, the Majority Owners argue that the relief
Angel Investors seeks in its direct action is incompatible with
the relief it seeks in its derivative action. 	We disagree.
¶29 	Although we have not squarely decided the issue of
whether a plaintiff’s direct action against a corporation
disqualifies that plaintiff from bringing a derivative action on
behalf of the corporation, our case law demonstrates that Utah
does not have a per se rule barring simultaneous direct and
derivative actions. 25 	Rather, we have stated that “a court may

25 (...continued)
arise” between the direct and derivative suits, the court found
“early intervention to be the more prudent, and, ultimately, the
more efficient course” and concluded that the plaintiff “must
elect a single representative role.”).
26 Aurora Credit Servs., Inc., 970 P.2d at 1281.
27 See 13 Fletcher Cyclopedia of the Law of Private
Corporations § 5981.42 (2004) (stating that a conflict of
interest that bars a plaintiff from bringing a derivative suit is
a conflict wherein the plaintiff “cannot be expected to act in
the interests of others because doing so would harm the
derivative plaintiff’s other interests”).
28 The district court explained its finding as follows,
It is possible that the Direct Lawsuit will
not decrease Plaintiff’s interest in pursuing
the derivative claims for the benefit of all
non-defendant XanGo owners, because any
distribution to Plaintiff upon dissolution
would be increased if Plaintiff is successful
in the derivative suit. 	However, the
interests of Plaintiff and the other non-
defendant owners are not aligned regarding
the Direct Lawsuit. 	The Court finds that
there may be some actual conflict between
Plaintiff’s interest in the Direct Lawsuit
and its representation in the derivative
suit.
13 	No. 20080111
allow a minority shareholder in a closely held corporation to
proceed directly against corporate officers,” and that same
minority shareholder is not per se barred from bringing a
derivative action on behalf of that same corporation. 26 	To
determine whether a direct and derivative suit may be brought by
the same shareholder, a court must determine if the two actions
create a conflict of interest such that the shareholder cannot
act in the best interest of the corporation or similarly situated
shareholders. 27 	A possible conflict, as the district court found
in this case, is insufficient to disqualify a derivative
plaintiff. 28 	The conflict must be actual.
¶30 	An actual conflict of interest exists, for example,
when the relief sought in the direct action is “incompatible”

29 See Ryan, 765 F. Supp. at 135-37 (finding incompatibility
between relief sought in a derivative suit and that sought in a
direct suit where in the derivative suit the plaintiff sought
additional payments for the sale of a portion of a company and in
the direct suit sought punitive damages and the imposition of a
constructive trust on the funds received for the sale of a
portion of the company).
We do not foreclose the possibility that other facts may
exist to demonstrate a conflict of interest between a direct and
a derivative suit. 	In this case, however, the Majority Owners
only argue a conflict based upon the incompatibility of the
relief sought.
30 Bertozzi, 420 F. Supp. at 1180.
No. 20080111 	14
with the relief sought in the derivative action. 29 	When,
however, both suits are contingent “upon the proof of the same
nucleus of facts,” then it is presumed that the plaintiff will
advance both actions with the same vigor. 30 	In such a case, the
plaintiff presumably will fairly and adequately represent the
interests of the corporation and any similarly situated
shareholders in the derivative action because doing so would
serve the plaintiff’s interests in the direct action. 	In the
case now before us, we hold that the Majority Owners have failed
to meet their burden of proving the existence of an actual
conflict of interest that would prevent Angel Investors from
fairly and adequately representing XanGo in a derivative action
against the Majority Owners because (1) the relief Angel
Investors seeks from its direct action is not incompatible with
the relief it seeks in the derivative action and (2) Angel
Investors must prove the same nucleus of facts to prevail in both
actions.
¶31 	The relief Angel Investors seeks from its separate
actions is not necessarily incompatible. 	In the direct suit,
Angel Investors seeks monetary damages and the dissolution of
XanGo. 	In the derivative suit, Angel Investors seeks to
represent XanGo in recovering for the Majority Owners’
malfeasance. 	If Angel Investors prevails in both actions, then
the damages that the individual Majority Owners would pay as a
result of the derivative action would be paid out to all XanGo
shareholders in the winding up after dissolution, as sought for
in the direct action. 	Further, in a situation of corporate
looting from a closely held corporation, as Angel Investors
alleges has been taking place here, dissolution of the
corporation is not necessarily against the corporation’s best
interest. 	Dissolution would not only stop the looting but would

15 	No. 20080111
also allow for a reorganization of the enterprise, such that all
shareholders could receive a fairer return on their investment.
¶32 	Further, Angel Investors is presumed to fairly and
adequately represent XanGo in the derivative action because Angel
Investors must prove the same nucleus of facts to prevail in the
derivative action that it must prove in order to prevail in the
direct action. 	In the direct action, Angel Investors alleges, in
part, that XanGo loaned funds to the Majority Owners so that they
could personally acquire minority interests in XanGo. 	In the
derivative action, Angel Investors, on behalf of XanGo, makes, in
part, the following allegations: 	that the Majority Owners have
taken personal loans from XanGo, aggregating millions of dollars;
purchased minority interests in XanGo with the loaned funds, thus
appropriating to themselves opportunities belonging to XanGo and
all of its shareholders; and paid themselves excessive
compensation while wasting corporate assets. 	We see no
allegations in the direct action that would prevent Angel
Investors from vigorously pursuing the allegations in the
derivative action. 	Rather, proof of the facts alleged in the
direct action, namely that XanGo loaned funds to the Majority
Owners to enable them to acquire minority interests in XanGo,
would only aid Angel Investors in prevailing in the derivative
action.
¶33 	Accordingly, we conclude that Angel Investors’ direct
action does not create a personal interest such that Angel
Investors’ pursuit of that interest would prevent Angel Investors
from acting in the best interest of XanGo in the derivative
action. 	Rather, the remedies sought in the two actions are
compatible, and Angel Investors must prove the same nucleus of
facts to succeed in both cases.
2. 	Because It Is Inadequately Briefed, We Decline to Address the
Issue of Whether Angel Investors’ Refusal to Sign the Operating
Agreement Prevents Angel Investors From Fairly and Adequately
Representing XanGo’s Interests
¶34 	The following statement constitutes the entirety of the
Majority Owners’ argument that Angel Investors’ failure to sign
the operating agreement precludes Angel Investors from fairly and
adequately representing XanGo in a derivative suit:
[Angel Investors’] refusal to sign an
operating agreement with XanGo is a factor to
be considered in this Court’s determination
of whether [Angel Investors] can fairly and
adequately represent XanGo’s other owners.

31 See, e.g., Loveland v. Orem City Corp., 746 P.2d 763, 770
(Utah 1987).
32 Allen v. Friel, 2008 UT 56, ¶ 9, 194 P.3d 903.
33 Id. (quoting Treff v. Hinckley, 2001 UT 50, ¶ 11, 26 P.3d
212).
34 Id. ¶ 10.
35 Utah R. App. P. 24(a)(11)(C).
No. 20080111 	16
In their affidavits opposing [Angel
Investors] as their representative in this
case, all but one XanGo owner cited the fact
that [Angel Investors] had not signed an
operating agreement with XanGo as
demonstrating [Angel Investors’] inadequacy
as a representative.
This argument lacks the detail and citations to the record that
are necessary before we will consider an argument on appeal.
¶35 	We have long held that we have discretion to not
address an inadequately briefed argument. 31 	Rather, a party
“must plead his claims with sufficient specificity for this court
to make a ruling on the merits.” 32 	“[W]e will not assume [a
party’s] ‘burden of argument and research.’” 33 	In addition to
sufficient development of the argument and citation to legal
authority, a party must also “provide the appellate court with
the parts of the record that are central to the determination of”
the issue. 34 	Relevant parts of the record may include “findings
of fact and conclusions of law [or] the transcript of the court’s
oral decision.” 35
¶36 	The argument that Angel Investors is not a fair and
adequate representative because it failed to sign the operating
agreement is asserted without the support of legal reasoning or
authority. 	Further, the Majority Owners fail to provide any
record citations to demonstrate preservation of the argument and

36 The Majority Owners do provide a record cite to the
argument that because Angel Investors failed to sign the
operating agreement it lacks the ownership interest necessary to
bring a derivative suit. 	But the Majority Owners do not directly
raise this argument on appeal. 	As to this argument, the district
court ruled that factual issues remain as to whether Angel
Investors is a member of XanGo; therefore, the court did not
grant the Majority Owners’ motion to dismiss based upon this
argument. 	We do not disturb the district court’s determination
as to this issue.
37 Utah R. App. P. 24(a)(5)(A) (requiring that parties
demonstrate preservation of an issue by providing a citation to
the record showing that the issue was presented to the district
court).
38 Bailey v. Bayles, 2002 UT 58, ¶ 20, 52 P.3d 1158.
39 Id.
17 	No. 20080111
the district court’s determination of the issue. 36 	For these
reasons, we do not address this issue on appeal.
3. 	We Decline to Address Whether the Relatively Small Benefit
That Angel Investors Stands to Gain From the Derivative Action
Impacts Angel Investors’ Ability to Represent XanGo’s Best
Interest
¶37 	The Majority Owners argue on appeal that because Angel
Investors stands to gain relatively little from any recovery in
the derivative action Angel Investors cannot be considered a fair
and adequate representative under rule 23A. 	While the Majority
Owners do develop this argument and provide legal authority for
their position, they fail to demonstrate preservation of the
argument in the district court. 37
¶38 	We may affirm a judgment on an unpreserved alternate
ground “where the alternate ground is apparent on the record” and
when “the facts as found by the trial court are sufficient to
sustain the decision of the trial court on the alternate
ground.” 38 	On appeal, we are “limited to the findings of fact
made by the trial court and may not find new facts or reweigh the
evidence in light of [a] new legal theory or alternate ground.” 39
¶39 	In this case, the findings of the district court are
insufficient for us to affirm the district court’s decision that
Angel Investors is not a fair and adequate representative on the
alternate ground that Angel Investors stands to recover so little

No. 20080111 	18
that it cannot be a fair and adequate representative of XanGo.
The Majority Owners contend that because Angel Investors owns
just one percent of XanGo and that therefore only $1 million is
at stake in this case, Angel Investors stands to gain too little
to be considered a fair and adequate representative. 	However,
the district court made no findings regarding the potential
recovery in this case. 	Angel Investors’ counsel asserted to the
court that “even on first blush” the recovery if Angel Investors
prevails is “more than $1,000,000, and probably substantially
more than that.” 	Further, the district court made no specific
finding regarding Angel Investors’ ownership interest. 	Rather,
the court stated, “Defendants assert that . . . Plaintiff owns 1%
of XanGo . . . .” 	Stating the Majority Owners’ assertion without
ruling on the validity of the assertion does not constitute a
finding of fact. 	Accordingly, we decline to consider this
alternate ground because the district court’s findings of fact
are insufficient to sustain a decision regarding the theory.
CONCLUSION
¶40 	We hold that Angel Investors is not similarly situated
to any other XanGo shareholder and, accordingly, qualifies as a
class of one. 	We further hold that the Majority Owners have
failed to meet their burden of proving the existence of an actual
conflict of interest that would prevent Angel Investors from
fairly and adequately representing XanGo in a derivative action
against the Majority Owners. 	We therefore remand this case to
the district court for further proceedings consistent with this
opinion.
---
¶41 	Chief Justice Durham, Justice Wilkins, Justice Parrish,
and Justice Nehring concur in Associate Chief Justice Durrant’s
opinion.