Opinion
B297863 B301614
07-27-2021
MICHAEL BERNSTEIN, Plaintiff and Appellant, v. BOX-N-GO, LLC, et al., Defendants and Appellants.
Jamie R. Schloss for Plaintiff and Appellant. Beitchman & Zekian, David P. Beitchman and Paul Tokar for Defendants and Appellants.
NOT TO BE PUBLISHED
APPEAL from a judgment and order of the Superior Court of Los Angeles County, No. BC614727Mel Red Recana, Judge.
Jamie R. Schloss for Plaintiff and Appellant.
Beitchman & Zekian, David P. Beitchman and Paul Tokar for Defendants and Appellants.
EGERTON, J.
Plaintiff Michael Bernstein is a former member of defendant Box-N-Go, LLC (BNG). He sued the company and its current members, defendants Stan Trakhtenberg and Stan Krakovsky, after the individual defendants removed him from BNG's management board. Ultimately, the individual defendants cancelled Bernstein's membership interest and expelled him from the company. Bernstein asserted claims for breach of contract and breach of fiduciary duty, alleging defendants failed to compensate him for his membership interest and violated his rights as a member. He also asserted claims for wrongful termination and employment discrimination under the Fair Employment and Housing Act (FEHA). After a bench trial, the court entered a judgment in favor of Bernstein and against all defendants on the breach of contract claim, and in favor of defendants on the breach of fiduciary duty and employment claims. The trial court also denied defendants' motion for attorney fees under FEHA.
Defendants Trakhtenberg and Krakovsky appeal the judgment against them on the breach of contract claim. They contend the contractual obligation to compensate Bernstein for his membership interest rests solely with BNG under the company's operating agreement and, absent a finding of alter ego liability that the trial court did not make, they cannot be held liable for breach of contract. Defendants also insist the court erred in imposing prejudgment interest at the legal rate, as opposed to the interest rate stipulated in the operating agreement. And defendants appeal the order denying their motion for attorney fees under FEHA, arguing the evidence compelled a finding that Bernstein's employment claims were frivolous.
We conclude prejudgment interest must be calculated at the rate specified in the operating agreement, and we agree with Trakhtenberg and Krakovsky with respect to their individual liability for breach of contract. We therefore reverse the judgment to the extent it holds the individual defendants personally liable, and we direct the trial court to recalculate prejudgment interest in accordance with BNG's operating agreement. As for the order denying attorney fees, we find no abuse of discretion.
Bernstein cross-appeals the judgment with respect to the breach of contract and breach of fiduciary duty claims. Regarding his contract claim, Bernstein contends the trial court misinterpreted BNG's operating agreement in limiting his recovery to the value of his capital account. As for his breach of fiduciary duty claim, Bernstein maintains the evidence compelled a judgment in his favor. We find no error in either respect.
FACTS AND PROCEDURAL BACKGROUND
Consistent with our standard of review, we state the facts in the light most favorable to the trial court's factual findings set forth in its statement of decision, resolving any conflict in the evidence and drawing all reasonable inferences from the evidence in support of the trial court's decision. (In re Marriage of Hoffmeister (1987) 191 Cal.App.3d 351, 358 (Marriage of Hoffmeister).)
In April 2006, Trakhtenberg, Krakovsky, and Bernstein formed BNG. BNG is a storage service company. Under the company's operating agreement, each founding member held an equal one-third interest in BNG. Each member also belonged to the company's management board and received compensation in the form of “guaranteed payments” for services performed on the company's behalf. Trakhtenberg managed the company's operations, Krakovsky managed its information technology and human resources, and Bernstein, who had been an auditor, managed the company's finances.
On June 30, 2015, Trakhtenberg and Krakovsky informed Bernstein they had decided to “no longer continue” as his partners. Based on an “independent appraisal” valuing the company at $1.2 million, the men wrote they had “decided to make an offer based on a simple one-third of the company's value (i.e. $400,000)” to buy out Bernstein's shares. While Trakhtenberg and Krakovsky noted Bernstein's interest was likely “worth less than a simple one-third of the company's value, because [a factional interest] does not entail control” and there were “several sizeable liabilities looming ahead for the company, ” they said they wanted to offer a “reasonable buyout option, ” despite these considerations, to avoid “further arguments.” The $400,000 offer was set to expire on July 2, 2015. Bernstein did not respond to the offer by the stated expiration date.
On July 2, 2015, BNG held a management board meeting to consider a motion to reconstitute the board. Bernstein did not attend the meeting. As a result of Trakhtenberg's and Krakovsky's majority vote, Bernstein was “terminated” as one of BNG's managers, he was “relieved of all his duties, ” and Bernstein's “compensation for work as a manager” ceased. Trakhtenberg and Krakovsky assumed all the day to day management duties, while Bernstein retained his “annual inspection and audit rights” as a BNG member. Bernstein also retained his right to receive his share of the company's “Available Net Cash Flow.”
On February 12, 2016, BNG held a member meeting “to discuss the company['s] financial situation” and “upcoming capital needs for the immediate few months and the rest of... 2016, ” and to consider a “cash call” as provided under the operating agreement. Bernstein received notice, but did not attend the meeting. By a majority vote, Trakhtenberg and Krakovsky approved an additional capital contribution of $30,000 from each member to be made on or before February 26, 2016. Trakhtenberg and Krakovsky made the capital contribution; Bernstein did not.
On March 5, 2016, BNG sent a letter to Bernstein extending his deadline to make the capital contribution to March 11, 2016. Bernstein did not make the capital contribution by the extended deadline.
On March 24, 2016, Bernstein sued BNG, Trakhtenberg, and Krakovsky for wrongful termination and discrimination based on age and religion. On June 15, 2016, Bernstein filed a related action adding claims for breach of contract and breach of fiduciary duty. The trial court consolidated the cases and ordered Bernstein to file a consolidated amended complaint.
On October 6, 2016, BNG gave written notice to Bernstein that, due to his failure to make the required capital contribution, the company's remaining members, Trakhtenberg and Krakovsky, had voted to cancel his membership in BNG and to expel him from the company. The expulsion constituted a “Dissolution Event” under the operating agreement, triggering a vote by the remaining members to continue the company's business and to force a buyout of Bernstein's cancelled membership interest. Under the relevant operating agreement provisions, BNG would purchase Bernstein's membership interest for the value of his capital account. According to the notice, Bernstein's capital account value as of the expulsion was $69,456.71. In accordance with another provision of the operating agreement, BNG elected to pay the purchase price in 10 equal quarterly installments at the Applicable Federal Rate of interest.
Bernstein tried his claims to the court in a bench trial. At the close of his presentation of evidence, defendants moved for judgment under Code of Civil Procedure section 631.8. The trial court granted the motion as to all of the employment claims, and denied it with respect to the breach of contract and breach of fiduciary duty claims. After the parties submitted briefs on the defendants' case, the trial court issued a tentative decision in favor of Bernstein on the breach of contract claim “in the amount of $69,456.71 plus 10% accrued interest” and in favor of defendants on the breach of fiduciary duty claim.
Code of Civil Procedure section 631.8, subdivision (a) provides: “After a party has completed his presentation of evidence in a trial by the court, the other party, without waiving his right to offer evidence in support of his defense or in rebuttal in the event the motion is not granted, may move for a judgment. The court as trier of the facts shall weigh the evidence and may render a judgment in favor of the moving party, in which case the court shall make a statement of decision as provided in Sections 632 and 634, or may decline to render any judgment until the close of all the evidence.”
Defendants objected to the proposed statement of decision to the extent it granted judgment against all “Defendants” on the breach of contract claim and awarded prejudgment interest at the legal rate of 10 percent per annum. They argued the operating agreement imposed the obligation to pay Bernstein for his membership interest on BNG alone and there was no evidence to support a finding that either Trakhtenberg or Krakovsky was the company's alter ego. They also argued the operating agreement required interest to be calculated at the Applicable Federal Rate. Bernstein did not file objections. The trial court overruled defendants' objections and adopted the proposed statement as its final statement of decision.
After the court entered judgment, defendants moved for FEHA attorney fees under Government Code section 12965, subdivision (b). The trial court denied the motion, concluding defendants had failed to establish Bernstein's FEHA causes of action were frivolous, unreasonable, or groundless.
DISCUSSION
1. Standard of Review after a Bench Trial
Code of Civil Procedure section 632 directs the trial court, upon the trial of a question of fact, to “ ‘issue a statement of decision explaining the factual and legal basis for its decision as to each of the principal controverted issues at trial upon the request of any party appearing at the trial.' ” This requirement “ ‘is for the benefit of the court and the parties.' ” (Whittington v. McKinney (1991) 234 Cal.App.3d 123, 126.) “ ‘To the court it gives an opportunity to place upon [the] record, in definite written form, its view of the facts and the law of the case, and to make the case easily reviewable on appeal by exhibiting the exact grounds upon which judgment rests. To the parties, it furnishes the means, in many instances, of having their cause reviewed without great expense.' ” (Id. at pp. 126-127.)
Because the statement of decision reflects the trial court's resolution of disputed factual issues, it necessarily affects the scope of appellate review. (See Wegner et al., Cal. Practice Guide: Civil Trials and Evidence (The Rutter Group 2020) ¶¶ 16:197 to 16:216.5.) “Where [the] statement of decision sets forth the factual and legal basis for the decision, any conflict in the evidence or reasonable inferences to be drawn from the facts will be resolved in support of the determination of the trial court decision.” (Marriage of Hoffmeister, supra, 191 Cal.App.3d at p. 358.) But “[w]hen a statement of decision does not resolve a controverted issue, or if the statement is ambiguous and the record shows that the omission or ambiguity was brought to the attention of the trial court..., it shall not be inferred on appeal... that the trial court decided in favor of the prevailing party as to those facts or on that issue.” (Code Civ. Proc., § 634.) Under this mandate, a proper objection to a proposed statement of decision avoids the doctrine of implied findings, and we will not presume that the trial court made a factual finding necessary to sustain the judgment unless the finding was explicitly stated. (See Culbertson v. Cizek (1964) 225 Cal.App.2d 451, 465-466 (Culbertson); see also In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133 (Marriage of Arceneaux) [“if omissions or ambiguities in the statement are timely brought to the trial court's attention, the appellate court will not imply findings in favor of the prevailing party”].)
Thus, “[w]ritten findings are required on all material issues raised by the pleadings and evidence, unless they are waived, and if the trial court renders judgment without making findings on all material issues, the case must be reversed on appeal. [Citations.] Reversal is compelled if there was evidence introduced on such issues and this evidence was sufficient to have sustained [a] finding in favor of the party complaining.” (Duff v. Duff (1967) 256 Cal.App.2d 781, 785 (Duff).)
A party is not required to object to legal errors appearing on the face of the statement of decision, as such errors are not waived. (United Services Auto. Assn. v. Dalrymple (1991) 232 Cal.App.3d 182, 186.) And, where a statement of decision clearly expresses the legal and factual basis for the trial court's resolution of controverted issues, we will not imply findings that the trial court did not make. (See Paterno v. State of California (2003) 113 Cal.App.4th 998, 1015 [“ ‘When the record clearly demonstrates what the trial court did, we will not presume it did something different' ”].)
2. The Contractual Obligation to Compensate Bernstein for His Membership Interest Rests Solely with BNG; the Individual Defendants Cannot Be Held Personally Liable for Breach of Contract
It is a fundamental principle of contract law that the performance of a contractual obligation is due from “the party whose duty it is to perform it.” (Civ. Code, § 1473; Waxman v. Citizens Nat. Trust & Savings Bank (1954) 123 Cal.App.2d 145, 149 [“[A] cause of action for breach of contract accrues on the failure of the promisor to do the thing contracted for at the time and in the manner contracted.” (Italics added.)].) Under the California Revised Uniform Limited Liability Company Act (CRULLCA), a limited liability company has all the powers of a natural person in carrying out its business activities, including the power to “[m]ake contracts and guarantees.” (Corp. Code, § 17701.05, subd. (d).) As with the interpretation of contract provisions in general, we determine the party that is bound to perform a contractual obligation in accordance with the mutual intention of the parties, which we infer, if possible, solely from the text of the contract. (Thompson v. Miller (2003) 112 Cal.App.4th 327, 335.)
With respect to a member of BNG, article 1, paragraph (p) of the company's operating agreement defines a “Dissolution Event” as the occurrence of either the “death, insanity, bankruptcy, retirement, resignation, or expulsion” of the member. (Italics added.) The trial court found Bernstein “was expelled” from BNG and this constituted a Dissolution Event under the operating agreement. Section 10.1 of the operating agreement states that upon a “Dissolution Event, the Company shall dissolve unless at least a majority of the votes of the remaining Members... vote to continue the business of the Company.” The trial court found Trakhtenberg and Krakovsky, whose votes constituted a majority of the votes of the remaining members, voted to continue BNG in accordance with this provision. In the event the remaining members vote to continue the company's business, section 10.1 provides “the Company shall continue in accordance with the terms of this Agreement, and the Company shall purchase from the Member whose actions or conduct resulted in the Dissolution Event... [that] Member's Interest” at the purchase price determined under other provisions of the operating agreement. (Italics added.) The operating agreement defines BNG as the “Company.”
Defendants objected to the proposed statement of decision to the extent it found all “Defendants, ” including Trakhtenberg and Krakovsky, breached the operating agreement by failing to pay Bernstein the purchase price for his membership interest upon his expulsion from the company. They argued section 10.1 plainly imposed the purchase obligation on “the Company” alone and “[p]laintiff failed to present any evidence and/or [to] establish at trial that [the individual defendants] are/were the alter ego of BNG.” Thus, defendants objected Trakhtenberg and Krakovsky could not be held liable for failing to make the purchase payment under the operating agreement and they argued judgment on the breach of contract claim should be rendered solely against BNG. The trial court overruled the objection and adopted the proposed statement as its final statement of decision. On appeal, defendants make the same objection in challenging the judgment against Trakhtenberg and Krakovsky.
Bernstein contends defendants' objection was insufficiently specific to alert the trial court to the deficiency in the proposed statement of decision regarding the imposition of liability against the individual defendants. His argument appears to be that defendants did not specifically identify the omission of an alter ego finding because their objection focused on the lack of “evidence” establishing the individual defendants “are/were the alter ego of BNG.” The argument misapprehends the applicable authorities.
Code of Civil Procedure section 634 “does not specify the particular means that the party may use to direct the court's attention to the claimed defects in the statement [of decision].” (Marriage of Arceneaux, supra, 51 Cal.3d at p. 1134.) Nonetheless, when read together with rule 3.1590 of the California Rules of Court, the statute “clearly contemplate[s] any defects in the trial court's statement of decision must be brought to the court's attention through specific objections to the statement itself, not through a proposed alternative statement of decision served prior to the court's issuance of its own statement.” (Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1380 (Golden Eagle); see also Marriage of Arceneaux, at p. 1138 [a party may not “avoid the presumption [of correctness] merely by asking for findings on an issue without challenging the findings when actually made”].) Beyond this directive, the objecting party needs only to identify the alleged omission or ambiguity “with sufficient particularity to allow the trial court to correct the defect.” (Ermoian v. Desert Hospital (2007) 152 Cal.App.4th 475, 498 (Ermoian); Golden Eagle, at p. 1380 [an objection is sufficient if it “allows the court to focus on the facts or issues the party contends were not resolved or whose resolution is ambiguous”]; cf. Marriage of Arceneaux, at p. 1138 [“it would be unfair to allow counsel to lull the trial court and opposing counsel into believing the statement of decision was acceptable, and thereafter to take advantage of an error on appeal although it could have been corrected at trial”].)
Rule 3.1590(g) states: “Any party may, within 15 days after the proposed statement of decision and judgment have been served, serve and file objections to the proposed statement of decision or judgment.” (Italics added.)
Here, defendants did not request findings, nor did they serve a proposed alternative statement of decision before the court issued its own. (Cf. Marriage of Arceneaux, supra, 51 Cal.3d at p. 1138; Golden Eagle, supra, 20 Cal.App.4th at p. 1380.) Rather, they specifically objected to the ruling in the court's proposed statement of decision that held “Defendants breached the Agreement.” (Italics added.) Their objection specified that the “judgment should only be awarded against BNG and not the individual defendants” because there was no basis in the operating agreement to hold the individual defendants liable for the breach and there was no basis in the evidence to find the individual defendants were the “alter ego of BNG.” This objection did not express a generalized disagreement with the proposed statement of decision; it specifically identified the imposition of liability against the individual defendants as the alleged deficiency and discussed two possible, albeit unexpressed, bases that the trial court may have had for the challenged ruling. (Cf. Ermoian, supra, 152 Cal.App.4th at p. 498 [objections inadequate where they expressed “a generalized disagreement with the whole of the proposed statement of decision” and did “not focus the court on any particular omission or ambiguity in the statement and provide[d] the court with no meaningful guidance as to how to correct any particular defect”].) The objection was sufficient to alert the trial court that it failed to specify the factual basis for its imposition of liability against the individual defendants and to allow the court to correct the defect by either addressing the contract interpretation issue or finding the individual defendants were the company's alter ego. The trial court did neither; it overruled the objection and adopted the proposed statement as the final statement of decision without addressing the alleged deficiency.
Bernstein contends the judgment properly holds the individual defendants jointly and severally liable with BNG for the purchase payment because there was substantial evidence to support a finding that Trakhtenberg and Krakovsky were the company's alter ego. (See, e.g., Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 837 (Associated Vendors) [when “ ‘ “facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice, ”' ” a “corporation's acts and obligations can be legally recognized as those of a particular person, and vice versa”].) Whether there was in fact sufficient evidence to support such a finding is immaterial to our review of the judgment. Under the rules governing our standard of review, we cannot infer that the trial court intended to make an alter ego finding when the record shows the court declined to do so after defendants objected to the proposed statement of decision on that specific ground. (Code Civ. Proc., § 634; Culbertson, supra, 225 Cal.App.2d at pp. 465-466; Marriage of Arceneaux, supra, 51 Cal.3d at pp. 1133-1134.)
In any event, we also cannot imply an alter ego finding because the record is devoid of substantial evidence to support it. Under California law, an individual will be treated as the alter ego of a corporation upon proof “ ‘(1) that there [exists] such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.' ” (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300; Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) Among the factors to be considered in applying the doctrine are inadequate capitalization, commingling of funds, disregard of corporate formalities, and lack of segregation of corporate records. (Sonora Diamond, at pp. 538-539; Associated Vendors, supra, 210 Cal.App.2d at pp. 838-839.) “No one characteristic governs, [and] the courts must look at all the circumstances to determine whether the doctrine should be applied. [Citation.] Alter ego is an extreme remedy, sparingly used.” (Sonora Diamond, at p. 539.)
Bernstein argues there was “a complete unity and interest of ownership” between BNG and the individual defendants after his removal, when Trakhtenberg and Krakovsky became the company's only two members. However, proof that “a person owns all of the corporate stock and makes all of the management decisions is [alone] insufficient to cause the court to disregard the corporate entity.” (Leek v. Cooper (2011) 194 Cal.App.4th 399, 415.) He also emphasizes the individual defendants initially offered to purchase his membership interest in their personal capacities, which he claims indicates “the personal nature of all decisions.” But the undisputed evidence established this offer, which preceded Bernstein's expulsion, was not made on behalf of the company or under any provision of BNG's operating agreement. Thus, far from establishing a unity of interest, this evidence proves just the opposite-namely, that the individual defendants maintained their separate identity from the company when not acting on its behalf. (Cf. Stark v. Coker (1942) 20 Cal.2d 839, 848 [alter ego doctrine invoked where owners indicated they were personally liable for company's debts].)
Nor was there evidence of injustice flowing from the recognition of BNG's separate corporate identity. Bernstein argues the individual defendants must be held jointly and severally liable with BNG because the company is undercapitalized, as he claims defendants admitted “[b]y making their ‘cash call.' ” But the undisputed evidence established Trakhtenberg and Krakovsky paid the entire cash call amount needed to meet BNG's financial obligations, including the portion that Bernstein failed to pay. There was no evidence that the company was undercapitalized then or at any time up to and including the time of trial.
“Alternatively, ” Bernstein argues, if BNG was “actually capitalized, then defendants concealed financial information which may support alter ego findings.” But the absence of proof is not proof of concealment. In its statement of decision with respect to the breach of fiduciary duty claim, the trial court expressly found Trakhtenberg and Krakovsky “followed precisely all controlling provisions of the BNG Operating Agreement” in their dealings with Bernstein and the company's assets. In the face of this express finding, we cannot infer from Bernstein's failure to present evidence on BNG's financial condition that defendants concealed the proof he needed to establish alter ego liability.
Because the plain text of the operating agreement imposes the obligation to purchase an expelled member's shares solely on “the Company, ” and because there was insufficient evidence to sustain a finding that Trakhtenberg and Krakovsky were BNG's alter ego, we must reverse the judgment to the extent it imposes liability on the individual defendants for breach of “the Company['s]” contractual obligation to purchase an expelled member's interest.
3. The Operating Agreement Specifies the Interest Rate that Applies to the Delinquent Purchase Payment; the Trial Court Erred in Imposing Prejudgment Interest at the Legal Rate
Civil Code section 3287 entitles a plaintiff to recover prejudgment interest when the amount of the plaintiff's damages is certain, or capable of being made certain by calculation, and the right to recover those damages is vested in the plaintiff upon a particular date. (Civ. Code, § 3287, subd. (a); see Tenzera, Inc. v. Osterman (2012) 205 Cal.App.4th 16, 21 (Tenzera).) Prejudgment interest is not available under the statute if the plaintiff prevented the defendant from paying the debt. (Civ. Code, § 3287, subd. (a).) “If the statutory conditions are satisfied, the court must award prejudgment interest.” (Tenzera, at p. 21.)
Defendants contend the trial court erred by awarding prejudgment interest on the breach of contract damages and by calculating it at the 10 percent legal rate. With respect to the award of prejudgment interest, defendants argue the amount of contract damages was not certain because Bernstein took the position in litigation that his membership interest should have been valued according to the appraisal defendants obtained in connection with their buyout offer, as opposed to the value dictated under section 10.2 of the operating agreement. They also argue Bernstein prevented BNG from paying the purchase price for his membership interest and this disqualified Bernstein from entitlement to prejudgment interest under Civil Code section 3287. As for the interest rate, defendants insist controlling statutory law required prejudgment interest to be calculated at the rate set forth in the applicable provision of the operating agreement. Defendants' contentions with respect to the imposition of prejudgment interest have no merit; however, we agree with defendants regarding the applicable interest rate.
Under Civil Code section 3287, “prejudgment interest runs from the date when the [plaintiff's] damages are of a nature to be certain or capable of being made certain by calculation and when the exact sum due to the plaintiff is made known to the defendant.” (Levy-Zentner Co. v. Southern Pac. Transportation Co. (1977) 74 Cal.App.3d 762, 798 (Levy-Zentner).) “The fact that the amount of the damages is in dispute is relevant only insofar as the dispute produces conflicting evidence from which the amount of damages cannot be ascertained with certainty.” (Id. at pp. 798-799.) However, “if the defendant admits to the amount of damages [owed to] the plaintiff, the damages are... certain as to defendant for the purpose of section 3287, subdivision (a), and interest will be granted from the date of admission or stipulation.” (Id. at p. 799.)
Since issuing the notice of expulsion to Bernstein on October 6, 2016, defendants consistently maintained and admitted BNG owed Bernstein $69,456.71-the value of his capital account as of the end of the quarter immediately preceding his expulsion-as the purchase price for his cancelled membership interest under section 10.2 of the operating agreement. Consistent with that admission, the trial court found Bernstein was owed the amount stated in the notice of expulsion and he was entitled to prejudgment interest from the date of the notice. The court correctly concluded the notice made the amount of Bernstein's contract damages certain as to BNG. (Levy-Zentner, supra, 74 Cal.App.3d at p. 799.)
As for the contention that Bernstein is not entitled to prejudgment interest because he prevented BNG from making the purchase payments, the record does not compel a finding that Bernstein “intentionally did not accept” BNG's payments, as defendants contend. Moreover, defendants did not object to the proposed statement of decision to the extent it made no finding on this controverted issue. During the trial, Trakhtenberg testified that BNG sent checks to Bernstein's last known address in accordance with the installment schedule attached to the notice of expulsion. Bernstein testified he did not receive the checks and Trakhtenberg admitted the purported checks were never cashed. Based on Bernstein's testimony, the trial court could reasonably find BNG did not make the payments or Bernstein simply did not receive them. Either way, the evidence did not compel a finding that Bernstein prevented BNG from making the payments so as to disqualify him from entitlement to prejudgment interest under Civil Code section 3287. (See Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 61 [absent a proper objection advising the trial judge of omissions or ambiguities in the statement of decision, the “doctrine of implied findings” requires inference that trial court “made every factual finding necessary to support its decision”].)
Defendants contend copies of the checks, which defendants attempted to introduce as impeachment evidence during Bernstein's cross-examination, should have been admitted into evidence. We need not resolve the issue. Even if the copies were in evidence, they would not compel a finding that Bernstein in fact received the checks and refused to cash them.
We do, however, agree with defendants that the trial court erred in calculating prejudgment interest at the legal rate of 10 percent per annum (see, e.g., Civ. Proc. Code, § 685.010) when the operating agreement specified the rate of interest to be applied to outstanding payments for BNG's purchase of an expelled member's interest. (Cf. Civ. Code, § 3289, subd. (b) [“If a contract entered into after January 1, 1986, does not stipulate a legal rate of interest, the obligation shall bear interest at a rate of 10 percent per annum after a breach.” (Italics added.)].)
With respect to prejudgment interest, Civil Code section 3289, subdivision (a) provides: “Any legal rate of interest stipulated by a contract remains chargeable after a breach thereof, as before, until the contract is superseded by a verdict or other new obligation.” Under section 10.1 of BNG's operating agreement, upon expulsion of a member and the remaining members' vote to continue the company's business, “the Company shall purchase [the expelled member's membership interest]... at the purchase price determined under Section 10.2, payable and in the manner set forth in Section 10.3.” (Italics added.) Section 10.3 stipulates “interest [on the purchase price], commencing to accrue from the date of closing, at the then current AFR [Applicable Federal Rate] for the month in which the first payment is made.” Because the Applicable Federal Rate is a legal rate of interest (see 26 U.S.C. § 1274(b)(2)(B) & (d)), Civil Code section 3289, subdivision (a) mandated prejudgment interest to be charged at this rate, as “stipulated by [the] contract.”
We grant defendants' request to take judicial notice of the Applicable Federal Rates for October 2016. (Evid. Code, § 452, subd. (h) [judicial notice may be taken of “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy”].) However, because the trial court found BNG has yet to pay Bernstein the purchase price, the matter must be remanded for the court to set the prejudgment interest rate stipulated in section 10.3 of the operating agreement as of the date of the verdict.
Bernstein contends the judgment is consistent with Civil Code section 3289 because the trial court's verdict “ ‘superseded' ” the rate stipulated in BNG's operating agreement. The argument misunderstands the concept of prejudgment interest and ignores the relevant statutory text, which directs that the interest rate “stipulated by [the] contract remains chargeable after a breach thereof, as before, until the contract is superseded by a verdict or other new obligation.” (Civ. Code, § 3289, subd. (a), italics added.) Bernstein also contends the judgment was proper under Corporations Code section 17711.07, subdivision (c). However, that statute applies only to the purchase of a “dissenting interest” from a “dissenting member, ” as those terms are defined in Corporations Code section 17711.02. The dissenting member may invoke the statute when the approval of outstanding membership interests is required for a limited liability company to participate in a reorganization and the dissenting member chooses to require the company to purchase the member's interest for cash by complying with the provisions of Corporations Code section 17711.01 et seq. (See 9 Witkin, Summary of Cal. Law (11th ed. 2021) Partnership, § 200.) Bernstein's expulsion did not result in a reorganization of BNG and Bernstein was not a “dissenting member” under the statutes. Corporations Code section 17711.07 is inapplicable.
Civil Code section 3289, subdivision (a) mandated prejudgment interest to be charged at the Applicable Federal Rate, as stipulated in the operating agreement for the company's purchase of an expelled member's interest. The trial court erred in calculating prejudgment interest at the legal rate.
4. The Trial Court Correctly Interpreted the Operating Agreement Provisions Regarding Cancellation of a Member's Interest and Substantial Evidence Supports the Damages Award on the Breach of Contract Claim
Bernstein's cross-appeal challenges the amount of damages awarded on his breach of contract claim. He contends the CRULLCA and BNG's operating agreement required that he receive compensation equivalent to one-third of the company's fair market value upon cancellation of his membership interest, and he maintains the appraisal defendants obtained in connection with their June 30, 2015 buyout offer established the company was worth at least $1.2 million. Thus, Bernstein argues he should have been awarded at least $400,000 for his breach of contract claim. We disagree.
With respect to the CRULLCA, Bernstein argues Corporations Code section 17711.07 mandated that he was to receive an amount equal to the fair market value of his interest in BNG. As we have discussed, that statute applies only to the purchase of a “dissenting interest” from a “dissenting member” when the outstanding membership interests of a limited liability company elect to participate in a reorganization. (See 9 Witkin, Summary of Cal. Law, supra, Partnership, § 200.) Because Bernstein's expulsion did not result in a reorganization of BNG, and Bernstein was not a “dissenting member” under the CRULLCA, Corporations Code section 17711.07 is inapplicable.
Moreover, the CRULLCA expressly provides that a limited liability company's “operating agreement governs, ” among other things, “[r]elations among the members as members and between the members and the limited liability company.” (Corp. Code, § 17701.10, subd. (a)(1); see also id. § 17701.10, subd. (b) [providing the CRULLCA governs “[t]o the extent the operating agreement does not otherwise provide for a matter described in subdivision (a)”].) Because BNG's operating agreement specifies the manner in which the company is to compensate an expelled member for the member's cancelled interest, the operating agreement controls over any contrary provision in the CRULLCA.
As for the operating agreement, Bernstein argues the trial court should have determined his contract damages in accordance with section 6.10, paragraphs (d) and (e). Those paragraphs provide that “Capital Accounts shall be adjusted to reflect fair market value of all properties in the event of the acquisition of an Interest by an existing or new Member” (paragraph (d)) and that “Capital Accounts also shall be adjusted upon constructive termination of the Company under [26 U.S.] Code Section 708 in accordance with [26 Code of Federal] Regulations Section 1.704-1(b)(2)(iv)(d), (e) and (1)” (paragraph (e)).
As we have discussed, section 1, paragraph (p) and section 10.1 of the operating agreement specifically define the “expulsion” of a member as a “Dissolution Event”-not a constructive termination of the company. A constructive termination, in contrast, generally occurs when a partnership or company is unable to continue its operations and no part of any business, financial operation, or venture of the company continues to be carried on by any of its members. (See 26 U.S.C. § 708(b) [“a partnership shall be considered as terminated only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership”].) Because Bernstein's expulsion did not constitute a constructive termination, section 6.10, paragraph (e) does not apply.
Section 6.10, paragraph (d) does not apply either. As we have discussed, under section 10.1 of the operating agreement, upon the occurrence of a “Dissolution Event, ” if the remaining members vote to continue the company's business, “the Company shall purchase from the Member whose actions or conduct resulted in the Dissolution Event... [that] Member's Interest at the purchase price determined under Section 10.2.” (Italics added.) Because BNG-not “an existing or new Member”-was obligated to purchase Bernstein's cancelled membership interest upon his expulsion, section 6.10, paragraph (d) does not apply.
In awarding plaintiff damages in the amount of $69,456.71 on his contract claim, the trial court followed sections 10.1 and 10.2 of the operating agreement. Those sections provide that the “purchase price for a Dissolution Event Member's Interest shall be the Dissolution Event Member's Capital Account as of the end of the quarter immediately preceding the event giving rise to the purchase.” Bernstein contends the award failed to account for section 6.9, which states that “the Capital Account of a Member shall be determined in accordance with the rules set forth in [26 Code of Federal] Regulation Section 1.704-1(b)(2)(iv) [(Regulation 1.704-1)].” Bernstein contends Regulation 1.704-1 requires “a step up in value to the Fair Market Value whenever there is a ‘substantial economic effect' [citation] so that the partnership allocations follow the partners' true economic arrangement.”
Bernstein does not cite any provision of Regulation 1.704-1 that requires a purported “step up in value, ” nor does he explain what he means by “ ‘substantial economic effect' ” or how the phrase relates to BNG's purchase of his cancelled membership interest. As the Treasury Department explained in a Notice of Proposed Rule Making published with respect to the regulation, Regulation 1.704-1 implements the capital account maintenance rules set forth in section 704(b) of the Internal Revenue Code (26 U.S.C. § 704(b)). (68 Fed.Reg. 39498-02 (July 2, 2003).) The federal statute provides, with respect to limited liability companies, that a member's distributive share of income, gain, loss, deduction, or credit is to be determined in accordance with the member's interest in the company if the company's operating agreement does not provide for the member's distributive shares of these items, “or the allocation to a [member] of these items under the agreement does not have substantial economic effect.” (68 Fed.Reg. 39498-02, italics added.) The “requirement for finding substantial economic effect is that the [company] maintains [members'] capital accounts in accordance with certain rules” in Regulation 1.704-1, and “[c]ompliance with these capital account maintenance rules, and other related rules, provides taxpayers a safe harbor under which the IRS will respect [an operating] agreement's allocations.” (68 Fed.Reg. 39498-02.) Bernstein presented no evidence to prove BNG failed to comply with these capital account maintenance rules, and he has not offered a coherent argument to explain why Regulation 1.704-1 required his capital account to be valued at $400,000 on the date of his expulsion.
The evidence established the value of Bernstein's capital account as of his expulsion was $69,456.71, and this was the mandated purchase price for his cancelled membership interest under sections 10.1 and 10.2 of BNG's operating agreement. The trial court did not err in awarding him this amount as damages for his contract claim.
5. The Evidence Did Not Compel Judgment for Bernstein on His Breach of Fiduciary Duty Claim
Bernstein also challenges the judgment in favor of defendants on his breach of fiduciary duty claim. According to Bernstein, the individual defendants breached the duty they owed him as a member of BNG by demanding a capital contribution while he was under “threat and duress” and while “concealing material facts” relevant to the capital call. (Boldface omitted.) The trial court found Bernstein failed to establish the elements of his breach of fiduciary duty claim and defendants complied with all controlling provisions of the operating agreement. The record supports the trial court's findings.
To establish a cause of action for breach of fiduciary duty, the plaintiff must prove “the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach; the absence of any one of these elements is fatal to the cause of action.” (LaMonte v. Sanwa Bank California (1996) 45 Cal.App.4th 509, 517 (LaMonte).) If the plaintiff succeeds in proving the existence of a fiduciary duty and the fiduciary's failure to perform it, then the burden shifts to the fiduciary to justify its actions. (Ibid.)
Consistent with the normal rules governing the substantial evidence standard of review, when the “statement of decision sets forth the factual and legal basis for the decision, any conflict in the evidence or reasonable inferences to be drawn from the facts will be resolved in support of the determination of the trial court decision.” (Marriage of Hoffmeister, supra, 191 Cal.App.3d at p. 358.) This formulation is typically implicated when a defendant contends the plaintiff succeeded at trial despite insufficient evidence. (Sonic Manufacturing Technologies, Inc. v. AAE Systems, Inc. (2011) 196 Cal.App.4th 456, 465 (Sonic).) But a different formulation is implicated when, as here, the party with the burden of proof-Bernstein-challenges the trial court's factual determination that he failed to prove an element of his claim. (See LaMonte, supra, 45 Cal.App.4th at p. 517 [plaintiff must prove fiduciary's failure to perform duty before burden shifts to fiduciary to justify its actions].) “ ‘[W]here the trier of fact has expressly or implicitly concluded that the party with the burden of proof did not carry the burden and that party appeals, it is misleading to characterize the failure-of-proof issue as whether substantial evidence supports the judgment.' ” (Sonic, at p. 465.) This follows because such a characterization inappropriately “ ‘allows an attack on (1) the evidence supporting the party who had no burden of proof, and (2) the trier of fact's unassailable conclusion that the party with the burden did not prove one or more elements of the case.' ” (Ibid.; see Hicks v. Reis (1943) 21 Cal.2d 654, 659-660 (Hicks) [“Provided the trier of the facts does not act arbitrarily, he may reject in toto the testimony of a witness, even though the witness is uncontradicted.”].)
When an appeal turns on the appellant's failure of proof, “ ‘the question for a reviewing court becomes whether the evidence compels a finding in favor of the appellant as a matter of law. [Citations.] Specifically, the question becomes whether the appellant's evidence was (1) “uncontradicted and unimpeached” and (2) “of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a finding.”' ” (Sonic, supra, 196 Cal.App.4th at p. 466, italics added [plaintiff could not establish reversible error where he had burden of proof and trial court discounted the testimony of his expert].)
A limited liability company's managers owe the company's members duties of loyalty and good faith equivalent to those owed among partners in a partnership. (Feresi v. The Livery, LLC (2014) 232 Cal.App.4th 419, 425.) These duties prohibit the manager from obtaining an advantage over the company's members “by even the slightest misrepresentation or concealment.” (Ibid.) Bernstein contends Trakhtenberg and Krakovsky breached these duties when they approved the mandatory capital contribution while concealing they had voted to pay themselves higher management fees. Specifically, Bernstein relies on testimony he contends proves the individual defendants voted to pay themselves greater management fees after he and his attorney were forced to leave a December 2015 member meeting.
Contrary to Bernstein's contention, the evidence did not compel a finding that Trakhtenberg and Krakovsky concealed material facts relevant to the capital call. While Krakovsky acknowledged Bernstein was not present to vote on the new management fees, he also testified the fees had no impact on the company's capital needs. Consistent with that testimony, the evidence showed the company was paying less in guaranteed payments since Bernstein had ceased receiving management fees several months before the new fees were approved, and the increased fees were justified because, as Bernstein knew, Krakovsky and Trakhtenberg were required to do more work for the company after Bernstein was relieved of his managerial duties. More to the point, the evidence showed, and the trial court found, Bernstein received notice of the critical meeting “to discuss the company['s] financial situation” and “upcoming capital needs for the immediate few months and the rest of... 2016, ” but he chose not to attend. The notice specifically advised that “[a] cash call may be proposed and voted on during this meeting.” Given this record, Krakovsky's purported admission did not compel a finding that he and Trakhtenberg concealed material facts relevant to the capital call from Bernstein.
Although Bernstein testified he did not recall receiving notice of the rescheduled member meeting, the trial court could reasonably infer that he did receive notice from the fact that BNG sent notices to his last known address.
Nor does Bernstein's contention that the individual defendants demanded a capital contribution while he was under “threat and duress” compel a finding that they breached a fiduciary duty. The evidence showed that although the individual defendants approved the capital call in February 2016, they took no action to expel Bernstein from BNG until October 2016-seven months after Bernstein's capital contribution was due and four months after Bernstein sued them for breach of fiduciary duty. The trial court found defendants “followed precisely” all controlling provisions of BNG's operating agreement. Substantial evidence supports the finding. Regardless of the supposed threats and duress that Bernstein believed he faced, this record does not compel a finding that defendants breached their fiduciary duty.
6. The Evidence Did Not Compel a Finding that Bernstein's Employment Claims Were Frivolous; the Trial Court Did Not Abuse Its Discretion in Denying FEHA Attorney Fees
Defendants contend Bernstein's employment claims were frivolous as a matter of law and the trial court erred in denying their motion for attorney fees under FEHA. The record does not support the contention.
In a civil action brought under FEHA, the trial court, “in its discretion, may award to the prevailing party... reasonable attorney's fees and costs, including expert witness fees, except that... a prevailing defendant shall not be awarded fees and costs unless the court finds the action was frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.” (Gov. Code, § 12965, subd. (b).) Under this standard, a prevailing defendant is not entitled to a fee award “unless the court finds the action was objectively without foundation when brought, or the plaintiff continued to litigate after it clearly became so.” (Williams v. Chino Valley Independent Fire Dist. (2015) 61 Cal.4th 97, 115.) To support a finding of frivolousness, there must be substantial evidence that the plaintiff's claims were “ ‘obviously contrary to undisputed facts or well established legal principles specifically precluding recovery for the type of injury alleged.' ” (Rosenman v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro (2001) 91 Cal.App.4th 859, 869, quoting Cummings v. Benco Building Services (1992) 11 Cal.App.4th 1383, 1390.) The defendant moving for FEHA attorney fees bears the burden of demonstrating the plaintiff's employment claims were frivolous. (See Lopez v. Routt (2017) 17 Cal.App.5th 1006, 1009 & fn. 3 (Lopez).)
The trial court determined defendants failed to meet their burden to establish Bernstein's FEHA claims were frivolous, unreasonable, or groundless. We can reverse this ruling only if the record compels a finding of frivolousness as a matter of law-that is, only if the “ ‘evidence was (1) “uncontradicted and unimpeached” and (2) “of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a finding”' ” of frivolousness. (Sonic, supra, 196 Cal.App.4th at p. 466; Lopez, supra, 17 Cal.App.5th at p. 1009 & fn. 3.)
Defendants contend Bernstein's age and religious discrimination claims were necessarily frivolous because he “was around the same age” as Trakhtenberg and Krakovsky and all three men were “of the Jewish faith.” The trial court rejected this contention, emphasizing there was evidence that defendants forced Bernstein to work on Yom Kippur and Hanukkah, despite his request for time off to observe Jewish holidays. The court also recognized, as a matter of logic and law, that members of the same protected class can and do discriminate against one another. (See, e.g., Bakke v. Regents of University of California (1978) 18 Cal.3d 34, 51, fn. 18 [“We find wholly unacceptable the notion that racial discrimination may be more readily justified because the persons who make the decision to discriminate belong to the same racial group as the person discriminated against.”].) Despite defendants' significant burden as appellants, their appellate briefs entirely ignore the trial court's sound bases for rejecting their argument. (See Lopez, supra, 17 Cal.App.5th at p. 1009 & fn. 3; Sonic, supra, 196 Cal.App.4th at p. 466; Gunderson v. Wall (2011) 196 Cal.App.4th 1060, 1065 [“It is appellants' burden to demonstrate that the court's ‘discretion was so abused that it resulted in a manifest miscarriage of justice.' ”].)
Defendants also argue Bernstein's employment claims were frivolous because the evidence overwhelming proved he did not have an employment agreement with BNG. The trial court rejected this argument, citing evidence that Bernstein performed managerial and accounting services for the company by “mutual agreement” with Trakhtenberg and Krakovsky, and the court found this was sufficient to make a “colorable claim” that Bernstein was “effectively in an employment relationship with Defendants.” On appeal, defendants argue the court's finding was based entirely upon Bernstein's “self-serving testimony, ” which they contend is legally insufficient to support an employment claim. No applicable authority is cited for this assertion, and the assertion is contrary to the settled rule that “[t]he testimony of one witness, even that of a party, may constitute substantial evidence.” (In re Marriage of Fregoso & Hernandez (2016) 5 Cal.App.5th 698, 703, italics added.) While the trial court ultimately concluded Bernstein was not BNG's employee, the record did not compel the court to find his FEHA claims were frivolous as a matter of law. (See Baker v. Mulholland Security & Patrol, Inc. (2012) 204 Cal.App.4th 776, 784 [“An action is not frivolous simply because the plaintiff's FEHA claim failed.”].)
After defendants completed their briefing in this appeal, Bernstein filed a motion for appellate sanctions under Code of Civil Procedure section 907. He contends defendants' consolidated appeal is frivolous and was taken solely to delay his efforts to enforce the judgment and to use the judgment for collateral estoppel in a pending arbitration. As we have reversed the portions of the judgment imposing personal liability against the individual defendants and awarding prejudgment interest at the legal rate, Bernstein's contentions regarding those aspects of the appeal are “obviously untenable.” (In re Marriage of Koester (1999) 73 Cal.App.4th 1032, 1041; Bono v. Clark (2002) 103 Cal.App.4th 1409, 1434.) As for his contention that the appeal from the order denying FEHA attorney fees is frivolous, given the trial court's finding that Bernstein was not BNG's employee, we cannot say every “reasonable attorney would agree that the appeal is totally and completely without merit.” (In re Marriage of Flaherty (1982) 31 Cal.3d 637, 650.) Bernstein's motion for sanctions is denied.
DISPOSITION
The judgment is reversed with respect to the breach of contract claim and affirmed in all other respects. On remand, the trial court is directed to modify the judgment to impose liability against Box-N-Go, LLC alone on the breach of contract claim and to calculate prejudgment interest at the rate stipulated in section 10.3 of the operating agreement as of the date of the verdict. The order denying defendants' motion for attorney fees is affirmed. The parties shall bear their own costs.
We concur: EDMON, P.J., LAVIN, J.