Opinion
C082786
08-08-2018
ANDY DAUS et al., Plaintiffs and Appellants, v. BRIAN HOWSER et al., Defendants and Respondents.
NOT TO BE PUBLISHED California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. CU12078702)
Plaintiffs Andy and Maryclaire Daus (collectively Daus, except as context otherwise indicates) timely appeal from a judgment following an order granting summary judgment in favor of defendants Vaughn Warriner and Brian and Paula Howser (all collectively Howser, except as context indicates). Daus is a minority shareholder in a close corporation, DC Tech, Inc., and he sued Howser (who holds a majority of shares) on various theories. Generally, Daus alleged that he was frozen out of decision-making and that corporate profits were paid out as excessive compensation to Howser, depriving Daus of what would have been dividend distributions benefitting all shareholders. On appeal he contends triable issues remain, and the trial court improperly denied a discovery motion.
We use singular pronouns to refer collectively to the two sides of this dispute, but often use first names when that makes alleged or admitted facts clearer to the reader.
This is not a suit about mismanagement by the board, such as by paying excessive compensation to Howser or failing to provide Daus timely documents. Those kinds of disputes might well be resolved by the shields provided by the business judgment rule or the advice-of-counsel rule, set forth in the corporate bylaws and discussed further post. This suit instead alleges a secret scheme by Howser to strip Daus of the value of his shares. If proven, such conduct cannot be shielded by the business judgment rule or advice-of-counsel rules, however they are phrased in the bylaws. As we explain, each of those rules presume good faith has been exercised.
Howser's evidence showed the decision not to pay dividends was driven by the corporation's founding principles that assumed shareholders would not act as passive partners. Daus's evidence, if believed, establishes that this major premise was false. Viewing the evidence in the light most favorably to Daus, he showed (1) that shareholders had shared in the profits for several years after corporate formation, (2) there was no agreement that shareholders had to work to share in profits, and (3) amounts that ordinarily would have been declared as profits were instead used to increase compensation to Howser (something Howser in effect conceded), leaving no declared profits for Daus. As we shall explain, under existing California Supreme Court precedent, a minority shareholder who can establish these facts has established a breach of fiduciary duty. There is a material factual conflict as to the breach of fiduciary duty claim that cannot be resolved on this record. Accordingly, we shall reverse with directions to deny Howser's summary judgment motion, but grant summary adjudication of Daus's fraud claim, for which no valid basis has been explained. We shall affirm the order denying Daus's discovery motion, which merely sought information in a different electronic format than that in which the information had already been discovered.
BACKGROUND
Given the irregular record and briefing, we largely "bypass the strict 'three-step paradigm for summary judgments' where, as here, there are no disputes about the record. [Citations.] Further, where the briefing agrees on factual or procedural matters, we may accept those matters as conceded." (Ponte v. County of Calaveras (2017) 14 Cal.App.5th 551, 555.)
The record is irregularly compiled and the briefing is lacking. In particular, our review is hampered by Daus's failure to provide adequate record citations in his statements of the case and facts, and by his unhelpful use of block record citations in the argument section. Daus also fails to clearly explain the contours of the relevant complaint, which outlines the perimeter of materiality. (See FPI Development, Inc. v. Nakashima (1991) 231 Cal.App.3d 367, 381-382.) Howser has also departed from the rules regarding summary judgment appeals.
General Background Facts
In 2004 Daus and Howser formed DC Tech, Inc., a closely held subchapter S corporation. Each of the five individual shareholders was a director and an officer until a March 2011 board meeting. At that meeting, a compensation committee was formed omitting Daus, who was stripped of the status of an officer (although he remained a director and shareholder). The complaint alleges this followed an undefined "personal trauma" experienced by Maryclaire Daus, which required Andy Daus to attend to her needs as of the end of May 2010. Daus claims that corporate profits that ordinarily would have been paid as dividends to both the majority and minority shareholders (according to their holdings) were depleted by increasing salary and bonuses to Howser for the purpose of depriving Daus of the value of his shares.
"Typically, a close corporation is a corporation with relatively few shareholders who wish to treat the corporation as if it were a partnership." (Legis. Com. com., 1 Deering's Ann. Corp. Code (2009 ed.) foll. § 158, p. 56.) Subchapter S status permits passing corporate gains and losses through to the shareholders. (See Financing and Protecting Cal. Businesses (Cont.Ed. Bar 2016) Tax and Accounting Elections, § 15.33.)
Daus's view is that his decision to stop working for the corporation has no relevance to his status as a shareholder. Howser's view is that, acting under the bylaws and advice of attorney Andy Moore (Moore), the compensation committee properly set salaries and bonuses that accounted for Andy's inactivity, a circumstance that ran counter to the collective understanding of all parties at the time the business was formed.
Unfortunately, it appears that the parties did not execute a contemporaneous shareholder agreement setting forth the mutual expectations of the parties regarding compensation, the declaration of profits, and any work requirements.
In a prior unpublished opinion tendered in support of summary judgment, we affirmed a judgment after a demurrer by Moore. (Daus v. Moore (May 1, 2015; C075019) [nonpub. opn.] (Daus I).) We quote a short passage for context:
"Daus alleges he was duped into approving a compensation committee at a board meeting of a corporation which had been treated as a partnership for accounting and tax purposes. That committee promptly awarded Howser substantial compensation and gave nothing to Daus, devaluing Daus's shares. At a later meeting, Howser voted to dissolve the corporation and planned to steer customers to a new corporation in which Daus held no interest. . . .
"[¶] . . . [¶]
". . . . Howser hired [Moore] to find a way to 'diminish or eliminate' Daus's participation in the business and value of his shares, and to transfer the business to a new entity controlled by Howser. Moore then prepared a plan to implement Howser's wishes, by setting a special board meeting to create an internal committee, which ultimately caused Daus financial harm." (Daus I, supra, slip opn. at pp. 1-2.)
The corporation has not been dissolved yet.
The Operative Pleadings in this Appeal
Daus's second amended complaint alleged:
1) Breach of fiduciary duty by the majority shareholders to the minority shareholders by using the compensation committee to characterize profits that otherwise would have been paid to all shareholders in the form of dividends as salaries and bonuses that benefit only majority shareholders.
2) Fraud by the majority shareholders by failing to disclose they consulted counsel before the critical board meeting, and failing to disclose material information about the operations of the corporation thereafter.
3) Conspiracy by the majority shareholders to do the above.
4) Conversion of the proportional amounts paid to the majority as bonuses from 2011 onward that should have been distributed as dividends.
Although Daus pleads such knowledge would have allowed him to take "appropriate measures," he could not have blocked the majority.
The operative complaint also made claims involving Moore, who is no longer a party, and it also sought different remedies for the above alleged wrongs. The complaint sought damages and an injunction, but only to prevent the dissolution of the corporation, not to compel disclosure of corporate records.
The answer alleged the compensation committee set salary and bonuses pursuant to its collective business judgment and with corporate counsel's knowledge, all done consistent with the bylaws, as described in Part II-B & C, post. It also alleged Daus had "open access to the corporate books," but on information and belief alleged Daus had not sought such access, though he had nonetheless received and continued to receive corporate reports, tax documents, and financial statements "on a timely basis as they are completed."
Summary Judgment Motion
Howser moved for summary judgment, arguing that he could establish some good defenses and that he could show Daus lacked evidence to prove his claims.
The key evidence in support of the motion consisted of the declarations by Paula and Brian Howser, and Vaughn Warriner. Paula declared in part:
"It was understood by all of us that in order to be compensated, the owners would put in hard work. . . . The understanding . . . was that the shareholders were required to work in order to get paid. There was no contemplation that shareholders who were not working could sit back and profit from the labor of the remaining owners; the owners . . . never contemplated that income would be separated from labor in that way. The only exception to this was Maryclaire [Daus], who was included as a 20% owner in the hope that she could help the company obtain a favorable minority, woman-owned business designation for purpose of being awarded contracts." (Italics added.)
Paula also declared that after Andy announced that he was moving to Grass Valley and would no longer be working, he told her that "he did not expect to be paid, and that he did not expect a dividend." (Italics added.) She also declared that the salaries, bonuses, and dividends were set in good faith and based upon legal advice, and that the majority had not voted to pay themselves profit in the form of bonuses. She listed the factors used to determine those amounts, including the corporation's past practices, the difficulties caused by Andy's inaction, the extra work performed by working shareholders, and legal advice that this did not result in over-compensation.
Paula also described the corporation's founding vision as providing telecommunication services statewide. Services were split between Southern California jobs that Andy handled, and Northern California jobs that Brian Howser handled. Vaughn Warriner's role was as an engineer who reviewed contracts. Paula's role was to act as the bookkeeper and unofficial comptroller. This "original vision" of the company was maintained from founding in 2004 until May 2010, when Andy stopped working. This required Brian to do Andy's work, although Brian was already underpaid. When Andy told Paula in November 2011 that he would never return to work, and refused what the majority shareholders believed was a fair buy-out offer, Moore was retained to advise the corporation.
Brian declared that the setting of compensation, bonuses, and dividends, was done in good faith, on advice of counsel and in the exercise of "our business judgment in dealing with" Daus. He, too, described the corporation's founding and vision, consistent with Paula's declaration, and described Daus's refusal to accept a reasonable buy-out offer.
Vaughn declared that he, too, had acted in good faith, pursuant to the business judgment rule, and on advice of counsel. He, too, described the corporation's founding and vision, consistent with Paula's declaration.
In our view, these declarations set forth sufficient evidence demonstrating that none of the majority shareholders acted with an improper motive to deprive the minority shareholders of corporate profits, but instead collectively set compensation according to appropriate business guidelines, in light of this particular corporation's history and original purpose, and consistent with the advice of counsel. (See, e.g., 9 Witkin, Sum. of Cal. Law (11th ed. 2017) Corporations, § 112, p. 909 ["Where the act or omission involves a question of policy or business judgment, a director cannot be held liable for an erroneous decision or poor choice in the absence of a showing of fraud, bad faith, or negligence"].)
This shifted the burden to Daus to produce evidence establishing bad faith, i.e., a claim for breach of fiduciary duty by the majority.
Opposition to Summary Judgment
The opposition to summary judgment, while denying there was an agreement that only working shareholders would receive compensation, did not tender any evidence that it would have been improper as a matter of law to limit compensation to workers, or that such a practice would violate the relevant industry standards.
Daus's opposition emphasized that this was a direct suit against Howser for breach of the majority shareholders' fiduciary duty to the minority shareholders not to deprive them of the value of their shares, not a shareholder's derivative action filed on behalf of the corporation. Daus denied there was a common understanding at the time of corporate founding that distribution of profits would be tied to work, in part as evidenced by the fact that Maryclaire was never required to work, and in part as evidenced by declarations we describe immediately post. Daus argued that because the majority had improperly deprived the minority of all profits, neither the business judgment rule, the advice of counsel, nor the bylaws barred this suit. That is, Daus argued none of those partly overlapping defense theories defeated his claim of breach of fiduciary duty.
Andy and Maryclaire each filed declarations denying there was any agreement that shareholders would have to work "to get their pro rata share" of corporate profits, and in part they pointed out that Maryclaire never worked. (But recall that the evidence of Maryclaire's status as a shareholder was conferred in the hope that her gender alone would lead to favorable contracts for the corporation.) Andy also declared: "From the inception of the company in 2004 through 2010, all profits . . . were paid out pro rata based upon percentage of ownership" in the corporation. (Italics added.) He declared this practice was abandoned by Howser and Andy had not received his "rightful pro rata share of company profits" since 2010.
The minutes reflect that the board unanimously approved the compensation already paid during 2010 and "the compensation proposed to be paid to the officers . . . during the remainder of calendar year 2011." This weakens claims by Daus that the approval was limited to payments made through February 2011. The minutes then reflect a motion--passed unanimously--to remove Andy and Maryclaire as directors, reciting that they were not "actively participat[ing] in the Company business (to the same extent as originally contemplated) for an extended period of time." (Italics added.) If shown to accurately reflect the sense of the motion and Daus's acquiescence in the given rationale, this statement in the minutes could contradict Daus's claim about the corporation's founding vision.
Andy testified that employees expected a salary and that he had expected to work full time covering Southern California. Andy conceded the original corporate plan had been for him to cover Southern California and for Brian to cover Northern California. Daus had lived in North Hollywood, but bought a house in Grass Valley in May 2010, when he stopped working. But he also testified there was no "hard line" geographically and "[w]e covered the entire state as needed, when needed." He knew it would be hard on the company for him to leave, and would cause Brian more work, entitling Brian to additional compensation, and Andy had advised the corporation to hire an employee who could be paid part of his (Andy's) prior salary to cover what had been Andy's work.
Andy also testified he had not thought the creation of the compensation committee itself was wrong. But he thought the corporate tax returns falsely or misleadingly reflected salaries and bonuses that should have been treated as dividends, and he believed these false returns threatened the corporation's status. Howser should have disclosed that Moore had been consulted about how to remove "all economic value" from Daus before the critical board meeting when Moore was accepted as the corporation's new attorney, that is, the majority had been plotting to freeze Daus out before the meeting.
Daus tendered as an undisputed fact that Andy did not expect any salary when he was not working and that he recommended Brian be "paid extra salary and/or a bonus" during the time Brian had to cover for Andy. Daus also tendered the fact that since March 22, 2011, the compensation committee had never reported to the board--of which each Daus remained a director--a fact that Howser conceded. Andy declared he had repeatedly asked in writing for corporate information but was not given it until it was turned over during discovery in this lawsuit.
Daus tendered other evidence speaking to the motivation driving the compensation decisions after Daus believed he was wrongly ousted. Paula had testified that she did not want a "silent partner." Vaughn testified about an e-mail to Brian in which he expressed the view that he did not see why Andy should get paid if he was not contributing anything; Vaughn had said the company was "based on a partnership, a small group of people that got together and agreed that we would to this as an income. And one part of it went away. Why should he -- if Brian or I went away, would we still get paid?" Brian answered "No" when asked if there were criteria or a formula used by the compensation committee, and testified that bonuses were paid "to the employees that worked to get that percentage of the company."
In our view, these passages, viewed in the light most favorable to Daus, show that the majority believed money was tied to work and set compensation accordingly.
To show that a mischaracterization of profits occurred, Daus largely relied on the declaration of Kristoffer M. Hall, an employee of Wallace Valuation Advisors, Inc. We describe this evidence in detail in Part II-D, post. Hall's opinion was that corporate profits of approximately $ 143,800 (before interest) had already been used to inflate salary and bonuses, in effect meaning in order to eliminate any profits that could be paid as dividends.
Reply
In reply, Howser submitted additional deposition excerpts that partly confirmed Daus's view of the facts. Brian testified that originally, he, Andy, and Vaughn were paid equally, Paula was paid a half-share, and Maryclaire was paid nothing. When Andy stopped working, Paula and Vaughn decided Brian should be paid more, and this was calculated at the end of the year, by allocating money to working employees. Sometimes there was not enough cash flow to pay salaries as they fell due, but this would be made up at the end of the year when funds were available, and any extra money would be paid via bonuses based "[o]n the amount of money we earned [i.e., through working] throughout the year." In other words, Howser admitted shareholder status was not considered in dividing corporate profits. Brian also testified that Paula told him that Andy had told her that if there was any profit at the end of the year "pay out the money to all the employees that worked." Brian then clarified the majority's intention: "It was very clear. [W]ithout that understanding, I don't think any of us would have gone forward."
Vaughn testified: "The feeling was that since Andy and Maryclaire no longer wanted to work for DC Tech but merely be shareholders, we felt that that was an unfair situation for the people that did want to work for DC Tech to support this trust and partnership that we had agreed upon." (Italics added.)
Although close corporations often may act like partnerships, it rationally can be inferred from the above evidence that the corporate form was not relevant at all to the majority's decision making.
Trial Court Ruling
The trial court ruled summary judgment was proper because of bylaws relating to an advice-of-counsel defense and the business judgment rule as we explain post. Ancillary claims of fraud, conspiracy, and conversion, also failed. Accordingly, the court granted summary judgment. Daus timely appealed from the ensuing judgment.
DISCUSSION
I
Standard of Review
" 'We review the trial court's grant of summary judgment de novo. [Citation.] We consider all the evidence offered in connection with the motion, except that which the trial court properly excluded. [Citation.] In conducting our de novo review, we must view the evidence in a light favorable to plaintiffs, liberally construing their evidentiary submission while strictly scrutinizing defendant's showing, and resolving any evidentiary doubts or ambiguities in plaintiffs' favor.' " (Leber v. DKD of Davis, Inc. (2015) 237 Cal.App.4th 402, 406; see Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.)
II
Breach of Fiduciary Duty
Daus's central claim is that the majority schemed to devalue his shares by inflating compensation based on the false claim that the founding vision of this close corporation was that everybody would have to work in order to sit at the table and eat. Daus presented contrary evidence. If a trier of fact believed him, the majority's financial decisions were based on the improper premise that they were allowed to starve Daus.
In Part II-A, we will describe the general fiduciary duty owed by majority shareholders to minority shareholders. In Part II-B, we explain why the advice-of-counsel defense based on the bylaws does not insulate the majority from liability. In Part II-C, we explain why the business-judgment defense also does not succeed, for similar reasons. In Part II-D, we reject an issue on which we sought supplemental briefing, pertaining to deficiencies in Hall's declaration regarding damages. In Part II-E we address some remaining claims discussed in the briefing regarding summary judgment.
A. Fiduciary Duty of Majority Shareholders to Minority Shareholders
Our Supreme Court has held that majority shareholders of a closely held corporation cannot act so as to strip the minority shareholders of the value of their shares. (See Stephenson v. Drever (1997) 16 Cal.4th 1167, 1176-1179; Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108-109 (Jones); see also Sheley v. Harrop (2017) 9 Cal.App.5th 1147, 1171-1172; Everest Investors 8 v. McNeil (2003) 114 Cal.App.4th 411, 425 ["directors breach their fiduciary duty to minority stockholders by using their control of the company to obtain an advantage not available to all stockholders to the detriment of the minority stockholders and without a compelling business purpose"], italics added (Everest).)
Different schemes have been tried in the past, but in particular, although a corporation can determine what profits are returned to the business (i.e., for infrastructure or expansion, etc.), what profits are used to increase salary or other compensation, and whether to declare a dividend based on some or all of the profits, a controlling majority cannot manipulate salaries and other compensation in order to preclude dividends for the purpose of depriving the minority of the value of their shares. (See Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, 1258-1260 [individual (not derivative) claim stated where sole minority shareholder alleged majority awarded themselves excessive compensation, thereby largely depriving him of dividends]; De Martini v. Scavenger's Protective Assn. (1935) 3 Cal.App.2d 691, 698 [pre-Jones case; "by merely calling the distribution wages, a corporation may not so distribute the profits as to deprive any stockholder of his rights thereto"]; see also Smith v. Tele-Communication, Inc. (1982) 134 Cal.App.3d 338, 344-346 [tax treatment had the effect of reducing minority shareholder's share of the assets]; Low v. Wheeler (1962) 207 Cal.App.2d 477, 481-485 [pre-Jones case; majority arranged sale so that minority's shares were sold for less].)
With this brief outline of the legal standards, we examine the defenses asserted.
At oral argument Howser's counsel asserted that the summary judgment motion not only raised affirmative defenses (based the advice of counsel defense and the business judgment rule, both reflected in the bylaws and discussed post) but also attacked the elements of each of Daus's claims. However, in Howser's appellate brief there is no discussion of how Daus's claim of breach of fiduciary duty is infirm, except for the purported viability of the proffered affirmative defenses. Howser's brief does argue that other claims are deficient (fraud, conversion, conspiracy, the claim for injunctive relief, and the punitive damages claim). The only arguable deficiency in the breach of fiduciary duty claim addressed in the briefing appears in the supplemental briefing we ordered, questioning whether Daus could prove any damages were suffered. We address that claim, post.
B. Advice-of-Counsel Defense
The trial court's primary ruling interpreted the corporate bylaws to insulate Howser from liability for actions taken with the advice of counsel and disclosed to the board, vitiating any conflict of interest. The effect of the trial court's reasoning would be to hold that because Howser blatantly acted to divert profits to the majority--acting openly during a board meeting at which Howser could always outvote Daus--Daus cannot sue Howser for breach of fiduciary duty. That cannot be the law, and indeed, it is not.
Bylaw No. 2.14 provides in relevant part as follows:
"Standards of Conduct for Directors. A Director shall discharge the duties of a Director, including the duties as a member of a committee, in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner the Director reasonably believes to be in the best interest of the Company.
"In discharging the duties of a Director, a Director is entitled to rely on information . . . if prepared or presented by an officer or employee of the Company whom the Director reasonably believes to be reliable and competent in the matters presented; legal counsel, public accountants or other persons as to matters the Director reasonably believes are within the person['s] professional or expert competence[.]
"A Director is not liable for any action taken as a Director, or any failure to take any action, if the Director performed the duties of the Director's office in compliance with these Bylaws." (Italics added.)
Putting aside a conflict-of-interest bylaw, the trial court essentially found that because the evidence showed Howser acted according to Moore's advice as contemplated by the second paragraph, Howser could not be held liable for such actions, because of the third paragraph. But this reasoning disregards the first paragraph of bylaw 2.14, which explicitly acknowledges a director's legal duty to act in good faith. The failure to act in good faith is a failure to act "in compliance with these Bylaws" as provided by the third paragraph. If a director acts other than in good faith--that is, acts in bad faith--such action is not insulated from liability simply because the director has taken the advice of counsel. That defense requires good faith and disclosure of material facts to counsel. (See Bertero v. National General Corp. (1974) 13 Cal.3d 43, 53-54 [malicious prosecution] (Bertero); 2 Schwing, Cal. Affirmative Defenses (2d ed. 2017) § 41.27.)
Bylaw 2.15 addresses actions taken by a director with a conflict of interest, and the trial court found Howser had a conflict of interest. However, the bylaws state a transaction is "not voidable by the Company" if the material facts and conflicting interest were disclosed or known at the time it was approved or ratified, or if the transaction was fair to the company. The trial court found the compensation transactions were disclosed to the board and compensation committee. The transaction may not be voidable by the corporation, but the bylaws cannot insulate a majority bloc otherwise liable for breach of a fiduciary duty to the minority bloc, as we explain.
Our Supreme Court has explained that " 'Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests." (Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 345.) Corporations Code section 309, subdivision (a) provides in part as follows: "A director shall perform the duties of a director . . . in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances." That is consistent with the corporate bylaws as quoted above. Another statute permits a director to vote on interested transactions provided disclosure of the material facts is made (and with limits on which shares may be counted to validate such transactions). (Id., § 310.) Assuming the bylaws permitted conflicted decision making, they cannot insulate decisions made in breach of the fiduciary duty owed to minority shareholders. As explained long ago in a derivative shareholder suit:
"[I]t is argued that if the majority directors and stockholders inform the minority that they are going to mulct the corporation, [former] section 820 of the Corporations Code constitutes an impervious armor against any attack on the transaction short of actual fraud. If this interpretation of the section were sound, it would be a shocking reflection on the law of California. It would completely disregard the first sentence of section 820 setting forth the elementary rule that
'Directors and officers shall exercise their powers in good faith, and with a view to the interests of the corporation,' and would mean that if conniving directors simply disclose their dereliction to the powerless minority, any transaction by which the majority desire to mulct the minority is immune from attack. That is not and cannot be the law." (Remillard Brick Co. v. Remillard-Dandini Co. (1952) 109 Cal.App.2d 405, 417-418 (Remillard).)
The gist of former Corporations Code section 820 is now found in section 310, albeit with some changes. Both statutes address when a transaction is deemed void or voidable if an interested director votes thereon. (See 9 Witkin, supra, Corporations, § 102, pp. 896-897.)
The facts of Remillard are intricate. In brief, a divorce left plaintiff in control of one brick-making corporation, and left her ex-husband's successors (defendants) in control of two others, in which she held minority interests. The defendants then created a fourth company, and made contracts (over plaintiff's ineffective opposition) to bleed off the profits of their two corporations (partly via inflated salaries) and thereby deprive plaintiff of the value of her shares, because neither of those companies declared dividends. (Remillard, supra, 109 Cal.App.2d at pp. 408-413.) The Remillard trial court found this was a scheme whereby the defendants captured profits from the brick sales in a way that was both unfair to the companies and inferentially designed to deprive the plaintiff of what would have been corporate profits, i.e., treated as dividend and paid out proportionally to all shareholders. (Id. at pp. 415-416.) That is akin to Daus's central claim in this suit.
Remillard addressed the claim that an interested transaction may be upheld under the then-relevant statute if certain technical standards are met (e.g., disclosure of the interests of voting directors). However, Remillard held that this "does not operate to limit the fiduciary duties owed by a director to all the stockholders." (Remillard, supra, 109 Cal.App.2d at p. 418.) Further, "It would be a shocking concept of corporate morality to hold that because the majority directors or stockholders disclose their purpose and interest, they may strip a corporation of its assets to their own financial advantage, and that the minority is without legal redress." (Id. at p. 418.) In other words, the fact that minority shareholders may be able to see in detail how their shares were diluted by the majority cannot excuse a breach of fiduciary duty otherwise established.
Remillard has been cited with approval by our Supreme Court several times. (See Tenzer v. Superscope Inc. (1985) 39 Cal.3d 18, 31-32; Southern Cal. First Nat. Bank v. Quincy Cass Associates (1970) 3 Cal.3d 667, 677; Jones, supra, 1 Cal.3d at pp. 108-110.) And although there have been statutory changes since Remillard was decided, and it was a shareholder's derivative action rather than a direct shareholder suit, Remillard's clear wisdom on the subject of fiduciary duty remains sound: A scheme by majority shareholders to channel profits so as to deprive minority shareholders of what would have been their proportionate share in the form of dividends is a breach of fiduciary duty regardless of how the scheme is implemented. As our Supreme Court has stated:
"The Courts of Appeal have often recognized that majority shareholders, either singly or acting in concert to accomplish a joint purpose, have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner. Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation's business. [Citations.]" (Jones, supra, 1 Cal.3d at p. 108, italics added; see Remillard, supra, 109 Cal.App.2d at pp. 417-419.)
Because the evidence, viewed in favor of Daus, shows that a primary factor in determining compensation was to preclude Daus from sharing in profits unless he was working, the conflicting evidence about whether Andy Daus was supposed to work to share in the profits as part of the founding understanding of the corporation precludes summary judgment based on the bylaw provision incorporating the advice-of-counsel defense. If Daus's evidence is believed, the driving force behind the compensation decisions was flawed and was designed to strip him of the value of his shares. Accordingly, this defense does not establish that there is no triable issue of fact.
Our discussion refutes Howser's reliance on another bylaw (No. 12.2), that precludes liability "to the shareholders where legal counsel has been relied on." That must be read to presume good faith and full disclosure to counsel. (See Bertero, supra, 13 Cal.3d at p. 53-54.) And as Daus aptly notes, Moore sent an e-mail before the critical meeting, outlining possible majority actions, but also warning that although Andy and Maryclaire could be removed as officers, "you always have a fiduciary responsibility towards your non-controlling shareholders" and however the majority chose to deal with Daus, the majority had to be "mindful of doing things fairly."
C. Business Judgment Rule
As an alternative holding, the trial court found the business judgment rule also precluded liability. But the business judgment rule cannot shield a bad-faith scheme to devalue minority shares any more than the advice-of-counsel rule can.
"The business judgment rule is ' "a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions." ' [Citations.] The rule is based on the premise that those to whom the management of a business organization has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is helpful to the conduct of the organization's affairs or expedient for the attainment of its purposes. [Citations.] The rule establishes a presumption that directors' decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest." (Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 711, italics added (Lee).)
The rule is prudential, in that it leaves business decisions to businesses, without the fear of judges second-guessing them. The presumption of propriety " 'can be rebutted only by a factual showing of fraud, bad faith or gross overreaching.' [Citation.]" (Ritter & Ritter, Inc. Pension & Profit Plan v. The Churchill Condominium Assn. (2008) 166 Cal.App.4th 103, 123.) But the business judgment rule does not shield actions taken with improper motives or as a result of a conflict of interest. (See Everest, supra, 114 Cal.App.4th at pp. 429-430; Lee, supra, 50 Cal.App.4th at p. 715.)
The trial court sustained the business judgment rule defense based on a mistaken factual predicate, as follows:
"Defendants argue that directors are not liable for actions if they were done in good faith and thought to be in the best interests of the corporation.
"Here, the Court finds no triable issue of material fact as to whether or not such actions relating to the restructuring of income and dividends and individuals' pay was done pursuant to the business judgment rule. Both Plaintiffs' responses to Request for Admissions admit such assertions. [Citations.]"
In support, the trial court cited discovery admissions in which Andy and Maryclaire admitted that the decisions not to pay Andy a salary or bonus for 2011 and 2012 were based on reasonable business judgments. Daus admitted the salary decisions for 2011 did not breach a fiduciary duty, but denied that the bonus decisions did not breach such duty, and denied that Howser had not acted unfairly. Daus did not admit that the claimed recharacterization of corporate profits as compensation paid to Howser reflected a reasonable business judgment. Thus, the evidence cited by the trial court does not support its ruling.
But in reviewing a judgment we do not consider a trial court's reasoning except where a statement of decision--not simply a written ruling--is made. (See Tyler v. Children's Home Society (1994) 29 Cal.App.4th 511, 551-552.) We review the trial court's ruling, not its reasoning. (See generally, Schabarum v. California Legislature (1998) 60 Cal.App.4th 1205, 1216.)
Both under the bylaws (No. 2.14) and by statute (Corp. Code, § 309, subd (a)), Howser had a duty to act in good faith. For the reasons stated in Part II-B, ante, Howser had a fiduciary duty to refrain from actively and unfairly depriving Daus of the value of his minority shares. That does not mean Howser had to run the corporation so as to ensure dividends were paid, far less to maximize them for Daus's benefit. But Howser could not--under the protection of the business judgment rule--structure corporate profits based on invalid reasons.
Generally, a fiduciary bears the burden of establishing the propriety of her or his conduct when it is challenged. (See, e.g., Solon v. Lichtenstein (1952) 39 Cal.2d 75, 81; Everest, supra, 114 Cal.App.4th at p. 424; Oates v. City of Lincoln (2001) 93 Cal.App.4th 25, 35 (Oates); Van de Kamp v. Bank of America (1988) 204 Cal.App.3d 819, 853.) This rule is especially apt when the fiduciary has the best access to the data relevant to the dispute. (See In re Marriage of Prentis-Margulis & Margulis (2011) 198 Cal.App.4th 1252, 1267-1268.) And we must keep in mind that Howser--as the movant on summary judgment--bore the burden to disprove any breach of fiduciary duty.
Whether or not only working shareholders were to benefit from the corporation is disputed, as we have already explained. If Daus's evidence were believed, a tenable claim of breach of fiduciary duty exists, which would mean Howser did not act in good faith. That defeats the defense of the business judgment rule, at least on summary judgment.
D. Damages
A cause of action based on breach of fiduciary duty requires a showing of damages proximately caused by the breach. (See Oates, supra, 93 Cal.App.4th at p. 35; Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1086.) We solicited supplemental briefing regarding the trial court's overruling of Howser's foundational objections to Hall's declaration regarding Daus's claim of damages. We now hold that while the ruling may have been technically in error, it was not prejudicial.
Daus claims Howser did not first show a lack of damages and that there was other, sufficient, evidence of damages. In light of our ultimate conclusion regarding Hall's declaration, we do not address these claims.
1. Hall's Declaration
Hall declared he was a shareholder in a litigation services firm, Wallace Valuation Advisors, Inc. (Wallace), and he had calculated that the corporate net profits that should have been paid as dividends from 2011 to 2015 amounted to about $143,800, based on an analysis of what he called financial statements of the corporation. Hall's declaration does not elaborate on those statements, nor describe his education, training, experience, nor state whether he had ever qualified as an expert. It refers to work done by "Wallace" or "the firm," without explaining who did what.
In one paragraph, Hall declared that he had reviewed the employment records of Tom Kennish, hired by the corporation in July 2011, purporting to show that Kennish was always paid less than Andy Daus had been paid previously. (By inference this information would suggest that the corporation may have actually benefited from Andy's inactivity, because it paid Kennish less than it would have paid Daus to do the same work). The trial court sustained a hearsay objection to this paragraph, and Daus appeared to accept that ruling.
Because Daus does not on appeal challenge the exclusion of that paragraph of Hall's declaration about Kennish, we disregard this paragraph.
Hall then declared his firm's "analysis" (what was analyzed or who performed the analysis is not stated) showed "a substantial increase" in Howser's compensation starting in 2011, which "appears justified for the time period in which he had to cover for the work done previously by Andy Daus. However, after the replacement of Andy Daus with Mr. Kennish in July 2011, the amount of extra salary paid to Brian Howser does not appear justified. The firm included in its analysis an increase for inflation and a cross-check of Brian Howser's salary against industry standards for years 2011 through 2015." (Italics added.) There is no explanation of what criteria were applied to determine what compensation was or was not justified, and no explanation of what was used to ascertain "industry standards." As for the partial reliance in this paragraph on Kennish's salary, the trial court's hearsay ruling striking discussion of that salary at the very least weakened this part of Hall's opinion, if it did not vitiate it entirely.
Hall then declared the "firm" analyzed the compensation paid to Vaughn Warriner and Paula Howser beginning in 2011. This analysis disclosed no "change in work load or change in nature" of their work to justify the increase in compensation, nor did "a comparison with comparable industry compensation" support these increases. The declaration does not explain who did this analysis, how it was done, how the work Warriner and Paula Howser did was quantified, and again does not explain how "comparable industry compensation" standards were determined.
Hall concluded: "Based upon the analysis of the financial information of DC Tech that Wallace has been provided thus far (the complete electronic Quickbooks accounting files for DC Tech have been requested, but not produced), it is our tentative opinion that the cumulative profits that would have been allocated to the combined 40% equity interest held by Andy and Maryclaire Daus from 2011 through 2015 amounted to approximately $143,800 (rounded)." Nowhere does the declaration identify who comprised the "our" that reached that (tentative) opinion. Nor is the method of analysis, or qualifications of whoever undertook that analysis explained. Nor does the declaration detail what financial information had been provided to Hall for review.
Hall's declaration attached a sheet purporting to show yearly profits and losses from 2011 through 2015, but it bears a prominent stamp cautioning: "TENTATIVE AND PRELIMINARY FOR DISCUSSION PURPOSES ONLY." Hall described this attachment as "a preliminary summary analysis" of the relevant numbers.
Howser objected to the bulk of Hall's declaration on the ground that it lacked any expert foundation, but the trial court overruled that objection.
2. Analysis
We have repeatedly emphasized the following general rule about expert opinions:
"The value of opinion evidence rests not in the conclusion reached but in the factors considered and the reasoning employed. [Citations.] Where an expert bases his conclusion upon assumptions which are not supported by the record, upon matters which are not reasonably relied upon by other experts, or upon factors which are speculative, remote or conjectural, then his conclusion has no evidentiary value. [Citations.] In those circumstances the expert's opinion cannot rise to the dignity of substantial evidence. [Citations.] When a trial court has accepted an expert's ultimate conclusion without critical consideration of his reasoning, and it appears the conclusion was based upon improper or unwarranted matters, then the judgment must be reversed for lack of substantial evidence."
(Pacific Gas & Electric Co. v. Zuckerman (1987) 189 Cal.App.3d 1113, 1135-1136 (Zuckerman); see California Chamber of Commerce v. State Air Resources Bd. (2017) 10 Cal.App.5th 604, 640 [legal opinion not in the record, therefore, "because its reasoning is unknown, it lacks any persuasive value"].)
A party cannot tender an expert declaration that merely says, "I am an expert and I believe xyz" to create a triable issue of fact. "The foundation required to establish the expert's qualifications is a showing that the expert has the requisite knowledge of, or was familiar with, or was involved in, a sufficient number of transactions involving the subject matter of the opinion." (Howard Entertainment, Inc. v. Kudrow (2012) 208 Cal.App.4th 1102, 1115; see Kelley v. Trunk (1998) 66 Cal.App.4th 519, 524 ["an opinion unsupported by reasons or explanations does not establish the absence of a material fact . . . as required for summary judgment"].) In this case, Hall never even declared that he was an expert of any kind; he simply declared he had been with the firm since 1997 and was a shareholder since 2012, and that the firm specialized in forensic financial evaluations. The declaration revealed nothing about Hall's abilities.
As Howser points out, for summary judgment purposes an expert declaration must contain evidence that would be admissible at trial. (See Perry v. Bakewell Hawthorne, LLC (2017) 2 Cal.5th 536, 541; Towns v. Davidson (2007) 147 Cal.App.4th 461, 472.) We have followed that standard in other cases. (See Johnson v. Superior Court (2006) 143 Cal.App.4th 297, 307-308; Bushling v. Fremont Medical Center (2004) 117 Cal.App.4th 493, 510.) That standard reflects the application of our observations in Zuckerman, supra, 189 Cal.App.3d 1113, in the summary judgment context. (See also Garibay v. Hemmat (2008) 161 Cal.App.4th 735, 741-743.) That standard is not even arguably met by Hall's declaration in opposition to summary judgment.
In short, a strict exercise of its "gatekeeping" role (see Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4th 747, 769-772) would seem to have compelled the trial court to sustain the objection and disregard Hall's declaration.
But Daus's counsel makes an apt--and persuasive--procedural observation in his supplemental brief. A motion to compel discovery (see Part III, post) was heard just four days before the summary judgment hearing. In support of that motion, Daus had tendered a declaration by Hall that included a detailed curriculum vitae that together amply established Hall's expertise in business valuation, close corporations, and shareholder actions, and showed Hall previously had qualified as an expert witness in both state and federal courts.
It appears the trial court at least impliedly read into Hall's defective second declaration the foundation amply supported by the very recently considered first declaration. If any error did occur through such informality of procedure, we see no prejudice. (Cal. Const., art. VI, § 13; Code Civ. Proc., § 475.) Certainly, the trial court could instead have continued the motion to allow Daus's counsel to fix the technically defective second declaration, but that would have been needlessly time-consuming and inefficient (although perhaps instructive to counsel). Accordingly, we decline to uphold summary judgment based on the ground that Daus lacks any evidence of damages as a result of Howser's claimed defalcations.
E. Other Claims
Daus contends he pleaded fraud by omission, and the trial court misunderstood the elements of such claim, but he concedes that such a claim requires that the victim "would have acted differently" if aware of the information wrongfully concealed. We agree only that Daus's fraud claim hinges on whether he would have acted differently had he known what was purportedly concealed from him. (See Levine v. Blue Shield of California (2010) 189 Cal.App.4th 1117, 1126-1127.) Absent from Daus's brief is any explanation of what he could have done differently. Although Daus faults the trial court for considering Daus I, Daus I simply observed that the majority was going to outvote him.
Daus claims the majority failed to tell him that they had consulted Moore about the internal dispute before Moore was hired as the corporation's attorney, and that had he known Moore's plan of creating a compensation committee would ultimately strip Daus of the value of his shares, he would not have voted to make Moore the new corporate counsel and could have hired counsel to stop the majority. But the majority still had the votes to do what it did. Whether what it did breached a fiduciary duty does not overlap with the fraud claim.
Daus also contests the trial court's ruling that Daus was timely supplied with corporate information, in his capacity as a director as well as a shareholder. Any such lack of disclosure might constitute a breach of the corporation's duty to permit directors and shareholders access to information (see Corp. Code, §§ 1601, 1602), but Daus fails to explain how such lack of disclosure amounts to fraud.
Daus argues that certain corporate tax filings were fraudulent. Like the trial court, we fail to see how this constitutes fraud against Daus, for lack of a coherent claim of reliance or damages. Daus contends those tax documents are incorrect because profits were allegedly paid out as inflated compensation, and also contends that this means he is potentially liable for what he labels fraudulent tax documents. Even if the taxing authorities agreed with him, any harm was to the taxing authorities. Daus cites authority holding that a subchapter S corporation must properly characterize salaries, and holding that the government can pierce erroneous characterizations of dividends and compensation to reflect reality, i.e., it is not bound by a taxpayer's characterization of profits. (See, e.g., David E. Watson, PC v. United States (8th Cir. 2012) 668 F.3d 1008, 1017-1018.) But he never explains how he would be liable for the filing of inaccurate or even fraudulent corporate documents prepared after had been frozen out; indeed, if the government forced the corporation to declare dividends for past years, it would seem that Daus would benefit. "We repeatedly have held that the failure to provide legal authorities to support arguments forfeits contentions of error. [Citations.]" (Ewald v. Nationstar Mortgage, LLC (2017) 13 Cal.App.5th 947, 948.) Conceivably, the filing of improper tax returns may have exposed the corporation to tax liability, perhaps supporting a derivative shareholder claim for mismanagement, but on appeal, as in the trial court, Daus emphasizes that this is not a derivative suit, i.e., a suit that seeks to recapture for the corporation losses caused by mismanagement or malfeasance. (See Everest, supra, 114 Cal.App.4th at pp. 425-427; Pareto v. F.D.I.C. (9th Cir. 1998) 139 F.3d 696, 699-700.) We agree that no derivative action was pleaded. Nor has Daus explained with reference to any authority how the majority's alleged act of filing fraudulent corporate tax returns supports an individual action by him against the majority.
In short, Daus has not explained how he can prevail on a fraud claim. Howser moved in the alternative for summary adjudication and argues on appeal that he is entitled to dismissal of the fraud claim. For the reasons just stated, we agree. We will direct the trial court to grant summary adjudication as to fraud.
Daus broadly structures his briefing to match the four substantive claims outlined in the complaint: (1) breach of fiduciary duty, (2) fraud, (3) conspiracy, and (4) conversion. But because he effectively concedes the latter two claims cannot stand on their own, we need not address them separately: They will stand or fall with the breach of fiduciary duty claim.
III
Discovery Dispute
Daus contends the trial court abused its discretion by denying his motion to compel production of certain documents--documents already obtained by Daus--in a specific electronic format. We find no abuse of discretion.
On appeal from the judgment, a party may seek review of "any intermediate ruling . . . which . . . affects the judgment or order appealed from or which substantially affects the rights of a party." (Code Civ. Proc., § 906; see Jo v. Alameda County Medical Center (2012) 205 Cal.App.4th 521, 531 [discovery order reviewable on appeal from a judgment following an order granting summary judgment].)
As with any other claimed procedural error, Daus must show prejudice. (Cal. Const., art. VI, § 13; Code Civ. Proc., § 475; Waller v. TJD, Inc. (1992) 12 Cal.App.4th 830, 833.) Daus's briefing merely claims "the discovery would greatly facilitate the presentation of evidence for the jury." (Italics added.) For lack of any clear argument or supporting authority showing that the discovery ruling impaired the summary judgment proceedings, we could hold Daus's claim is forfeited. (See, e.g., Paterno v. State of California (1999) 74 Cal.App.4th 68, 105-106.) Moreover, because we are reversing the summary judgment grant, we fail to see prejudice now.
Although Daus wants a jury trial on the issue of the propriety of compensation paid, a "minority shareholder's action for damages for the breach of fiduciary duties of the majority shareholder is one in equity, with no right to a jury trial." (Nelson v. Anderson (1999) 72 Cal.App.4th 111, 122; see Interactive Multimedia Artists, Inc. v. Superior Court (1998) 62 Cal.App.4th 1546, 1555-1556.) To the extent Daus may have pleaded legal claims, the trial court would normally try the equitable claims first, to see if there was then any reason to conduct a jury trial. (See, e.g., Orange County Water Dist. v. Alcoa Global Fasteners, Inc. (2017) 12 Cal.App.5th 252, 354-355; American Motorists Ins. Co. v. Superior Court (1998) 68 Cal.App.4th 864, 871-872.)
In any event, on the merits, Daus does not dispute that he was given the information he sought. As Howser points out, the trial court had declarations showing that the information had already been given to Daus in portable document format or PDF. Daus wanted the information in Quickbooks format, which his expert (Hall) declared was a more convenient format to evaluate. Daus assumes--at least impliedly--that the trial court was required to credit Hall's declaration that it was necessary to have the information in Quickbooks and that the PDF files were insufficient. Daus is mistaken.
"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." (Hicks v. Reis (1943) 21 Cal.2d 654, 659-660.) This rule applies equally to evidence submitted in writing. (See California Correctional Supervisors Organization, Inc. v. Department of Corrections (2002) 96 Cal.App.4th 824, 832.)
Further, by statute, "A party need not produce the same electronically stored information in more than one form." (Code Civ. Proc., § 2031.280, subd. (d)(2).) The trial court ruled that Daus had already received the information in one format, citing this very statute. The court did not abuse its discretion by following the statute, and declining to find that an exception to the "one form" default for electronically stored information was needed in this case. That was a question falling well within the discretion Daus concedes a trial court possesses in ruling on a discovery motion. (See, e.g., Krinsky v. Doe 6 (2008) 159 Cal.App.4th 1154, 1161.)
DISPOSITION
The judgment is reversed with directions to deny the motion for summary judgment but grant summary adjudication as to the fraud claim; the challenged discovery order is affirmed. The parties shall bear their own costs on appeal. (See Cal. Rules of Court, rule 8.278(a)(3).)
/s/_________
Duarte, J. We concur: /s/_________
Hull, Acting P. J. /s/_________
Renner, J.