Justia Corporate Compliance Opinion SummariesArticles Posted in California Courts of Appeal
Karton v. Musick, Peeler, Garrett LLP
A client who retained Plaintiff, the Law Corporation, to represent him in a marital dissolution action. The client assigned the judgments to Musick Peeler & Garrett LLC (Musick Peeler). In October 2019, the Law Corporation filed a motion (the setoff motion) in the superior court to set off against its judgment debt to Musick Peeler a debt that Dougherty allegedly owes to the Law Corporation. The client’s alleged tortious actions to hinder, delay, or defraud the Law Corporation in its efforts to collect on a 1999 default judgment prior to our opinion vacating that judgment and declaring it void in 2009. The trial court denied the motion and the Law Corporation appealed. The Second Appellate District affirmed. The court explained that to the extent the Law Corporation incurred any fees or costs in connection with its defense against the collateral attack actions in California, they were incurred in defending actions by the client, not a third person. These actions, therefore, do not support a setoff claim based on the tort of another doctrine. Further, even if the Law Corporation’s motion was procedurally proper, the Law Corporation failed to support its setoff claims with relevant evidence and, therefore, the court did not abuse its discretion in denying the motion. View "Karton v. Musick, Peeler, Garrett LLP" on Justia Law
ZF Micro Solutions, Inc. v. TAT Capital Partners, Ltd.
ZF Micro Solutions, Inc., the successor of now deceased ZF Micro Devices, Inc., alleged TAT Capital Partners, Ltd., murdered its predecessor by inserting a board member who poisoned it. The trial court decided the claim for breach of TAT’s fiduciary duty as a director was equitable rather than legal and, after a court trial, entered judgment for TAT. ZF Micro Solutions argued this was error. The Court of Appeal agreed, holding that while examining the performance of a board member’s fiduciary duties would be required, resolution of this claim did not implicate the powers of equity, and it should have been tried as a matter at law. Judgment was reversed and the matter remanded for further proceedings. View "ZF Micro Solutions, Inc. v. TAT Capital Partners, Ltd." on Justia Law
Crane v. R. R. Crane Investment Corp., Inc.
Plaintiff initiated an action for involuntary dissolution of R. R. Crane Investment Corporation, Inc. (R. R. Crane), a family-owned investment business that he shared with his brother. To avoid corporate dissolution, the brother and R. R. Crane invoked the statutory appraisal and buyout provisions of the Corporations Code.1 In December of 2020, after a prolonged appraisal process, the trial court confirmed the fair value of Plaintiff’s shares at over $6.1 million, valued as of November 13, 2017, the date Plaintiff filed for dissolution. On appeal, Plaintiff contends the trial court erred by failing to award him prejudgment interest on the valuation of his shares. He argues he was entitled to interest at a rate of 10 percent per annum from the date he first sought dissolution until the eventual purchase of his shares more than three years later. The Second Appellate District disagreed and affirmed the trial court’s ruling. The court held that it disagrees that prejudgment interest must be added to the appraised value of Plaintiff’s shares. The court explained that a plaintiff’s entitlement to prejudgment interest pursuant to Civil Code section 3287, subdivision (a), does not apply to a buyout of shares under Corporations Code section 2000. Further, the court wrote that Plaintiff’s alternative contention that he is entitled to prejudgment interest under Civil Code section 3288also fails. The trial court correctly applied the plain language of Civil Code section 3288 and concluded that the valuation award “is not based on the breach of an obligation not arising from contract or a showing of oppression, fraud, or malice.” View "Crane v. R. R. Crane Investment Corp., Inc." on Justia Law
Friend of Camden v. Brandt
Plaintiff, who owned a 1 percent interest in a limited liability company (LLC), filed a lawsuit seeking judicial dissolution of the LLC under Corporations Code section 17707.03. Defendants, other members of the LLC who together held 50 percent of the membership interests, filed a motion to avoid the dissolution by purchasing Plaintiff’s 1 percent interest. Then Plaintiff, together with other members owning 49 percent of the membership interests in the LLC—for a total of 50 percent—voted to dissolve the LLC. The issue on appeal is whether the vote to dissolve the LLC extinguished the right Defendants otherwise would have had to purchase Plaintiff’s 1 percent interest and avoid dissolution of the LLC. The Second Appellate District concluded, in accordance with the plain language of section 17707.01, that the answer is “yes,” and the vote of 50 percent of the LLC membership interests to dissolve the LLC must be given effect. Consequently, the court held that the trial court erred when it issued an order appointing appraisers to determine the price Defendants must pay to purchase Plaintiff’s 1 percent membership interest. The court ordered the trial court to dismiss the buyout proceeding as moot and directed the parties to wind up the activities of the LLC. View "Friend of Camden v. Brandt" on Justia Law
Sirott v. Superior Court of Contra Costa County
EBO filed suit after unsuccessfully seeking to lease a space in a building owned by the Taylor LLC, including derivative claims brought by EBO on behalf of Taylor, alleging that the denial of the lease caused Taylor to suffer economic injury. The defendants argued that EBO lacked standing under Corporations Code section 17709.02 to pursue them because during the litigation it relinquished its interest in and was no longer a member of the Taylor LLC. The court determined that it nonetheless had statutory discretion to allow EBO to maintain the derivative claims.The court of appeal vacated. Section 17709.02 requires a party to maintain continuous membership in a limited liability company to represent it derivatively, just as section 800 requires a party to maintain continuous ownership in a corporation to represent it derivatively. The statutory discretion conferred on trial courts under section 17709.02(a)(1), to permit “[a]ny member [of an LLC] who does not meet these requirements” to maintain a derivative suit does not permit courts to excuse a former member from the continuous membership requirement. While equitable considerations may warrant exceptions to the continuous membership requirement, no such considerations were presented here. View "Sirott v. Superior Court of Contra Costa County" on Justia Law
Grove v. Juul Labs, Inc.
Grove, an employee of Juul, a Delaware corporation that was headquartered in San Francisco, received options to acquire company stock. Grove stopped working for Juul in 2017, then exercised those options. In 2019, Grove sought to inspect the company’s books and records under California Corporations Code section 1601 to determine the value of his stock and to investigate potential breaches of fiduciary duty. Juul sought declaratory and injunctive relief in Delaware. Grove filed a shareholder class action and derivative complaint in California. Juul cited a forum selection clause, requiring that derivative and class claims proceed in Delaware. Grove filed an amended complaint, alleging only violations of section 1601. The California court stayed Grove's action, reasoning that the Agreement Grove signed states that Delaware courts have exclusive jurisdiction to enforce the agreement. The Court of Chancery of Delaware then granted Juul judgment on the pleadings; Grove did not waive inspection rights under California law but “[s]tockholder inspection rights are a core matter of internal corporate affairs,” so Grove’s rights as a stockholder are governed by Delaware law; Grove may litigate his inspection rights only in a Delaware court.The California court of appeal affirmed the stay order. It was reasonable to enforce the forum selection clause as to the class and derivative claims. Grove’s claim to inspect the books and records has already been adjudicated in the Delaware court, whose decision is entitled to full faith and credit. View "Grove v. Juul Labs, Inc." on Justia Law
Tola v. Bryant
In June 2017, Google engineers alerted Intel’s management to security vulnerabilities affecting Intel’s microprocessors. Intel management formed a “Problem Response Team” but made no public disclosures. In January 2018, media reports described the security vulnerabilities. Intel acknowledged the vulnerabilities, and management’s prior knowledge of them. Intel’s stock price dropped. Tola filed a shareholder derivative complaint, alleging that certain Intel officers and directors breached fiduciary duties. After obtaining records from Intel, Tola filed a third amended complaint, alleging that certain officers “knowingly disregarded industry best practices, material risks to the Company’s reputation and customer base, and their fiduciary duties of care and loyalty … the Board of Directors willfully failed to exercise its fundamental authority and duty to govern Company management and establish standards and controls.”The trial court dismissed, concluding that Tola failed to allege, with the requisite particularity, that it was futile to make a pre-suit demand on Intel’s board of directors. The court of appeal affirmed. Tola does not support his conclusory allegations with sufficient particularized facts that support an inference of bad faith. At most, Tola alleged that two directors received a material personal benefit from alleged insider trading, which still leaves an impartial board majority to consider a demand. View "Tola v. Bryant" on Justia Law
Guttman v. Guttman
Bruce, Phillip, and Judith are siblings and co-equal general partners of the Guttman Family Limited Partnership, which owns Los Angeles County real estate. Bruce sued to dissolve the partnership, Corporations Code 15908.02(a). Phillip and Judith initiated a statutory procedure to buy out Bruce’s interest in the partnership. Court-appointed appraisers submitted valuations of the partnership’s properties. One appraiser concluded that the value of the partnership properties was $37,180,000, another appraiser established the value at $38,300,000, and the third at $39,037,000. The court agreed with Bruce that the buyout procedure did not require a consensus among the appraisers, or among two of them.Bruce, believing the appraisals undervalued the properties, dismissed his complaint without prejudice. The court then granted Phillip and Judith’s motion to vacate the dismissal. The court of appeal dismissed Bruce’s petition for review. In addition to the commencement of trial limitation on a plaintiff’s right to dismiss, a plaintiff may not dismiss an action when a defendant seeks affirmative relief in the case. Because Phillip and Judith were pursuing the affirmative relief available under the buyout provision at the time Bruce filed his request to dismiss the action, the entry of dismissal was improper. View "Guttman v. Guttman" on Justia Law
Blizzard Energy, Inc. v. Schaefers
Blizzard invested in a tire pyrolysis project in Kansas and subsequently sued Schaefers. A Kansas jury returned a $3.825 million fraud judgment, which was entered in California. The California court added a judgment debtor (BKS) pursuant to the “outside reverse veil piercing” doctrine, which arises when the request for piercing comes from a third party outside the targeted business entity. The targeted entity was BKS. Schaefers owns a 50 percent interest in that LLC. Schaefers’ wife, Karin, owns the other 50 percent. Neither Karin nor BKS was a defendant in the Kansas action. The California court found that BKS is Schaefers’ alter ego.The court of appeal affirmed in part. The evidence is sufficient to support the finding that BKS is Schaefers’ alter ego. The court remanded for further proceedings so that the trial court may weigh competing equities that bear on the veil-piercing issue. Blizzard is entitled to recover the damages awarded by the Kansas judgment, but Karin may be an innocent third party who would suffer substantial harm if recovery is accomplished through the reverse veil piercing; there is no indication that she was involved in the fraud committed by Schaefers. Karin may not be responsible for debts incurred by Schaefers after their separation in 1996. View "Blizzard Energy, Inc. v. Schaefers" on Justia Law
Ramirez v. Gilead Sciences, Inc.
There were allegations that Gilead intentionally withheld a safer and potentially more effective HIV/AIDS medication in order to extend the sales window for its older, more dangerous treatment. In 2019, Ramirez, a beneficial owner of Gilead shares, demanded that the company permit him to inspect broad categories of documents for the purpose of “obtaining accurate and complete information about his investment in Gilead, and to find out how the mismanagement and breaches of fiduciary duties at Gilead relating to violations of federal and state laws affect that investment..” Gilead rejected the inspection request. Ramirez then filed a petition for writ of mandate, Corporations Code section 1601, in the superior court asserting common law and statutory rights to inspect the documents described in his demand letter.The trial court denied the petition on the ground that Delaware, Gilead’s state of incorporation, was the sole and exclusive forum to litigate Ramirez’s inspection demand. While his appeal was pending, Ramirez litigated his inspection demand to judgment in Delaware. The court of appeal concluded Ramirez lacks standing to pursue his California inspection demand under section 1601 because he is not a holder of record of Gilead stock. View "Ramirez v. Gilead Sciences, Inc." on Justia Law