Opinion
A150322
11-20-2018
RAEL & LETSON, Plaintiff and Appellant, v. MICHAEL CLARK et al., Defendant and Respondent.
ORDER MODIFYING OPINION AND DENYING REQUEST FOR REHEARING [NO CHANGE IN JUDGMENT]
THE COURT:
Appellant's request for rehearing, filed December 5, 2018, is denied. It is ordered that the opinion filed on November 20, 2018, is modified as follows:
On page 21, in the final paragraph of Part II, the last two sentences shall read: "If, on remand, the trial court's total award is less than the amount of the jury verdict, R&L shall recover $2,939,974. If it is greater, R&L shall recover the amount the trial court awards."
On page 21, Part III, shall read: "The judgment is reversed. On remand, the trial court is directed, consistent with the views expressed in this opinion, to (1) recalculate damages for the breach of Clark's duty of loyalty, (2) recalculate prejudgment interest on that award, and (3) modify the judgment to reflect either a jury verdict making a damage award of $2,939,974 against Clark, with CFP jointly
and severally liable for $1,267,129 of that amount, or a larger total award from the trial court. Respondents shall pay costs on appeal."The modification effects no change in the judgment. Date:__________
/s/_________Acting P.J.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (San Mateo County Super. Ct. No. CIV523065)
Rael & Letson (R&L, or the company) brought this action against defendants Michael Clark and the Clark Family Partnership (CFP), alleging Clark, the company's Chief Executive Officer (CEO), misappropriated more than $3,000,000 in company funds under the guise of business expenses. The trial court entered judgment for R&L. R&L appeals, contending the judgment does not accurately reflect the jury verdict, that it was entitled to additional prejudgment interest, and that it was entitled to additional damages. We interpret the jury verdict to reflect a total damage award of $2,939,974, with CFP jointly and severally liable for $1,267,129 of that amount, and shall order the trial court to modify the judgment accordingly. We shall also order the trial court, on remand, to recalculate prejudgment interest and damages for breach of the duty of loyalty.
I. BACKGROUND
A. Factual Background
1. Ownership of R&L
R&L provides actuarial services for public employers and multi-employer trust funds in connection with their pension and health and welfare plans. Clark is an actuary, and he began working for R&L in 1969. He acquired all of the company's stock by 1986, after the retirement of Edward Letson and the death of Juan Rael, two of its founders. He was its sole shareholder until 2003. In 1986, the company had about 10 or 12 employees. By 2012, it had almost 60 employees, with approximately $13,000,000 in annual revenues.
In 2003, Clark sold 75 percent of his shares in R&L to its employees, through a trust (the ESOT, or the trust) for $7,706,250, in what is referred to as the ESOP (employee stock ownership plan) transaction. To finance the purchase, the ESOP entered into a promissory note (the ESOT promissory note), which included interest paid to Clark. Clark remained CEO and director of the company until 2013. Clark's employment with R&L was suspended in April 2013, after the company learned he had misappropriated its funds.
2. The Financial Transactions
R&L's bookkeeper, Celeste Koski, was responsible for writing checks to pay bills. She reported to Clark and acted at his direction. It was Koski's understanding that Clark was the only person who managed R&L's cash flow. Beginning in 2007, R&L used the QuickBooks accounting program, which prompted Koski to record checks in certain categories, such as office supplies, travel, medical, or entertainment. If Koski was uncertain which category to apply, she would seek guidance from Clark or R&L's chief financial officer, Jim Rhein. Clark would give Koski bills that he wanted her to pay and direct her to write the checks, telling her how he wanted them to be categorized. For instance, on one occasion, Clark asked Koski to write a check for $13,120.68 to Bank of America and charge it to "travel other." At Clark's direction, Koski made payments into Clark's personal Vanguard investment account and that of his family partnership, and paid Clark's personal credit cards bills and charges for his home utilities, airplanes, and car. Koski did not see backup documentation for the expenses Clark submitted for reimbursement, and Clark did not seek approval from anyone else.
R&L's 2012 balance sheet had multiple subcategories for individual employees' travel, including "Travel - Clark, Mike," as well as a final, apparently catch-all, category of "Travel - Other." As will be discussed, Clark directed some of the payments at issue in this case to be categorized as "Travel - Other."
Two new trustees, Paul Graf and Alexandra Willson (the trustees), were appointed in May 2012. They hired a new financial consultant, a firm called Chartwell.
Chartwell asked for a report showing how much R&L had paid each of its vendors, and R&L's chief operating officer, Heidi Hagler, requested and received such a report. After reviewing it, she became concerned that some of the expenses, such as payments to a country club and to Clark's personal credit card, might not be proper.
Hagler investigated further and found that Clark had given Koski invoices for different vendors. He directed her to account for them in the categories of travel, employee benefits, and education conferences, and in some cases the expenses had been deducted from income. She reported the matter to R&L's board of directors (the board), and on April 18, 2013, the board removed Clark as CEO and suspended his employment with pay.
The board also authorized an independent forensic accounting of R&L's books and records from 2003 to 2013. R&L engaged John Kawamoto, a certified public accountant, for this task in April 2013. He found approximately $900,000 in payments made during 2011 and 2012 that appeared to be questionable or fraudulent. Many of these transactions had little or no supporting documentation and were for large dollar amounts. It appeared to Kawamoto that Clark was using these funds for his personal use. He reported his preliminary findings to the board, which terminated Clark's employment.
Kawamoto continued his investigation to include the years back to 2004, just after the ESOP bought a share of R&L. For the years 2004 through 2013, he found a total of $3,633,872 in charges that appeared to be used for Michael Clark's personal activities rather than legitimate business expenses (the upper range). He also calculated a lower range, which assumed that some of the charges reflected reasonable business expenses; the total for the lower range was $3,194,129. For the period beginning in 2007, when R&L began using QuickBooks, he calculated the upper range total as $3,178,106 and the lower range total as $2,994,336.
These charges fell into several categories: aviation expenses; country club dues and related charges; rent overpayments; offset of income; interest overpayments; and a more general category of "Wine, Food, Gas, Phone, Medical, Furniture, Vacations, Residence, . . . , Cars, etc."
a. Aviation
Clark, who had a pilot's license, had owned a Piper Malibu airplane since 1990. He had homes in Woodside, California, and La Quinta, California, and he stored the Piper in hangers convenient to R&L's Foster City offices and his Southern California residence. He charged costs related to the Piper to R&L, including fuel, landing and takeoff fees, insurance, and hanger costs, as well as his annual training for his pilot's license.
Clark used the Piper for company travel up and down the West Coast. He testified that when he first got his pilot's license in 1980, Juan Rael suggested to him that he use his license for business purposes. After the ESOP transaction, Clark did not get approval from the board for continuing to charge these expenses to the company; however, everyone in the company knew he had a plane and many employees flew with him to business meetings. He used the Piper to fly from his La Quinta home, where he lived nine months of the year, to the company's office in Foster City and to meet with clients in the Bay Area. Clark testified that flying privately was an efficient use of time; he could get to Sacramento in 18 minutes and to Fresno in 40 minutes. He also testified that he did not use the Piper for personal travel between the time of the ESOP transaction and the termination of his employment.
Clark owned a 1/16 ownership interest in a second airplane, which he purchased from Avantair in 2007 for $415,000. He also paid a management fee, which included 50 hours of flight time per year; the fee in 2007 was $116,362.56. He directed Koski to pay an amount equivalent to the management fee and—over the course of several years—the cost of acquiring the Avantair airplane to an account owned by CFP. Clark directed Koski to pay Avantair directly for fuel-related charges, providing redacted invoices and having the charges categorized as "travel other," "educational expenses," or "employee benefits." No R&L employee other than Clark used the Avantair plane, and he did not disclose to the board that CFP owned the plane and he was having R&L pay for it. R&L paid approximately $801,000, either directly to Avantair or to CFP for charges relating to the Avantair plane.
b. Country Clubs
R&L paid all or part of Clark's dues and fees for five golf or country clubs, four in the La Quinta area and the Peninsula Golf and Country Club (PGCC) in San Mateo. Clark's membership at the PGCC was a family membership, and he and his wife both incurred expenses there, including locker room charges, food, and drinks, which R&L paid at Clark's direction. The charges at one of the other clubs included many items for Clark's wife, such as a cooking class, spa treatments, and haircuts. Kawamoto calculated the total club charges that were personal in nature during the post-ESOP period to be $295,745.
Clark testified that when he joined the PGCC in 1976, Rael told him the company would pay the monthly club fees as long as Clark paid for the membership. After the ESOP transaction, Clark did not disclose to the board that R&L was paying his golf club membership dues and expenses.
When asked why it was reasonable for R&L to pay for multiple memberships in the same area, Clark explained that guests at one of the clubs, which was a resort, had priority, so it was not always possible to use the golf course for business purposes, and another club limited the number of guests a member could bring.
c. Overpaid Rent
R&L entered into a ten-year lease on its office in Foster City in April 2006, personally guaranteed by Clark. Rather than having R&L pay the rent directly to the landlord, Clark directed Koski to pay funds for "rent" into CFP's Vanguard account, and used those funds to pay the rent due to the landlord. Kawamoto's investigation showed that the amount deposited into CFP's account exceeded the amount due under the lease by a total of $632,606. Clark testified that he kept the excess rent because he had negotiated a good deal on the property, and because he "thought [h]e should get something" to compensate him for the personal guarantee. He did not disclose to the board that he was collecting more for rent than was due to the landlord.
d. Reductions to Revenue
During the years 2010 and 2011, R&L paid $65,000 to Clark's personal Vanguard account. Kawamoto testified these transactions were recorded as "reductions to revenue," and there was no supporting documentation to indicate the basis for the payments.
e. Interest Overpayments
R&L made the installment payments on the ESOT promissory note directly into Clark's personal Vanguard account. Between 2007 and 2011, R&L paid Clark $136,243 more than was due undue the note. There was no indication anyone other than Clark directed the overpayments.
f. Other Charges
Kawamoto also identified a series of other improper or questionable expenditures.
At Clark's direction, R&L paid his personal credit card bills in full. The credit card bills included charges for items such as dry cleaning, gasoline, grocery stores, department stores, wine transactions of hundreds of dollars each, television service, cable, appliances, medical services, prescription drugs, a jewelry store, termite and pest services, a pool and patio vendor, pizza, a hardware store, and a garage door vendor.
Clark had some of the wine purchases categorized as "office supplies." He testified that it was his practice to give bottles of wine as gifts to clients, but he acknowledged that he might have used some of the wine personally.
Clark had R&L to pay thousands of dollars for medical services, including concierge medical services for himself and his wife, that were not covered by the company's medical insurance plan. He testified that R&L had a longstanding policy of paying uninsured medical expenses, but he did not disclose to the board that he continued to charge medical expenses to the company after the ESOP transaction. Trustee Willson denied that R&L had such a policy.
At Clark's direction, R&L paid for Clark, his wife, his son, his daughter-in-law, and his granddaughter to travel to Hawaii and stay at a resort for a week, at a total cost of almost $20,000. Clark and his son met with two prospective clients while he was in Hawaii. He testified he brought his family with him because he thought the prospective clients were also bringing their families and he expected to socialize with them, but their families did not accompany them. Also, Clark's son, an architect, had previously worked with the prospective clients. Clark did not tell anyone on R&L's board that he was bringing his family on the trip.
Clark went to London to play in a golf tournament. He did not recall whether he disclosed to anyone on the board that R&L would be paying for the trip. He testified that he participated at the invitation of a Canadian prospective client, and he thought of the trip as a business opportunity.
Clark had R&L pay the lease payments for his cars, as well as $28,011 for the purchase price of a BMW at the end of a lease.
R&L also paid various other personal expenses for Clark, including residential water services, utilities, phone service, and window washing.
Kawamoto calculated that R&L paid $1,127,823 for the category "Wine, Food, Gas, Phone, Medical, Furniture, Vacations, Residence, . . . , Cars, Etc." His "lower range" estimate was $810,174.
B. Procedural History
R&L brought this action against Clark, his wife Susan Clark, and CFP, alleging several causes of action. By the time of trial, R&L had dismissed its causes of action against Susan Clark. Causes of action for breach of fiduciary duty and breach of the duty of loyalty against Clark, and for fraudulent concealment, fraudulent misrepresentation, and money had and received against Clark and CFP, proceeded to trial. The cause of action for breach of the duty of loyalty was tried to the court, and all other causes of action received a simultaneous jury trial.
The jury found in favor of R&L on all causes of action. It awarded damages of $1,672,845 against Clark and $1,267,129 against CFP. The court interpreted the verdict to reflect a total award of $1,672,845 against both defendants, rather than separate awards against them for a total of $2,939,974.
The trial court issued a statement of decision regarding the cause of action against Clark for breach of the duty of loyalty. The court found he had breached the duty in only two respects: the charges for the purchase and use of the Avantair private jet, and excess rent on R&L's office building. The court characterized the remaining expenses as "luxurious 'old school' business practices," and concluded Clark did not breach his duty of loyalty in incurring them. The court stated its award of $1,433,646 was "concurrent, duplicative, and less than the monetary damages awarded by the jury verdicts on the identical evidence, and is not in addition to those amounts."
It is not clear why this cause of action was tried to the court rather than the jury, but the parties do not challenge the court's decision to do so on appeal.
The court therefore entered judgment against Clark and CFP for $1,267,129 jointly and severally, and in the additional amount of $405,716 against Clark only. The court awarded prejudgment interest only for the period after the verdict.
R&L asks us to take judicial notice of pleadings in two other actions. One of them, Clark v. Rael & Letson, A149421, is currently before us on appeal, and we take judicial notice of the appellate briefs. The other is a shareholder's derivative action brought by Clark in 2014, alleging R&L and its directors violated their fiduciary duty to the company by agreeing to pay additional taxes to the Internal Revenue Service, based on his improper business expenses, without an adequate investigation. (Clark v. Hagler et al., San Mateo County Case No. CIV530637.) We decline to take judicial notice of the order sustaining the defendants' demurrer without leave to amend in Clark v. Hagler.
II. DISCUSSION
A. Interpretation of Jury Verdict
R&L contends the trial court erred in interpreting the jury's verdict to reflect a total award of $1,672,845, rather than separate awards against Clark and CFP for a total of $2,939,974.
1. Background
During his closing argument, counsel for R&L asked the jury to award $5,488,828.67 against Clark and $2,165,433 against CFP. These amounts were derived from Kawamoto's calculations of the total improper charges—which included excess rent and Avantair charges paid directly into CFP's Vanguard account—and prejudgment interest compounded annually. Kawamoto had calculated the "upper range" of the improper charges as $3,633,872, and the total prejudgment interest on that amount of $1,854,956.67. Counsel also asked the jury to award $2,165,433 against CFP, based on the amount of payments made directly to CFP's Vanguard account. He went on: "And you should be aware that even though you may be awarding some of the same damages against both Mr. Clark and The Clark Family Partnership, this will not result in a double recovery of damages. And there's a jury instruction on that as well."
The jury was instructed that if R&L had proved its claims against Clark or CFP, it "also must decide how much money will reasonably compensate Rael & Letson for the harm. . . . The amount of damages must include an award for each item of harm that was caused by each defendant's wrongful conduct . . ." The instruction on "Damages on Multiple Legal Theories" (CACI No. 3934) stated: "Rael & Letson seeks damages from defendants under more than one legal theory. However, each item of damages may be awarded only once, regardless of the number of legal theories alleged."
The instruction on "Damages from Multiple Defendants" (CACI No. 3933) told the jury that R&L sought damages from more than one defendant and the jury "must determine the liability of each defendant to Rael & Letson separately." However, this instruction omitted the portion of the pattern instruction that would have instructed the jury, "In deciding on the amount of damages, consider only [name of plaintiff]'s claimed losses. Do not attempt to divide the damages [between/among] the defendants. The allocation of responsibility for payment of damages among multiple defendants is to be done by the court after you reach your verdict." (CACI No. 3933.)
The verdict form required the jury first to find whether Clark and CFP were liable to R&L on each of the legal theories alleged against them. The verdict form then asked the jury to award damages "[i]f you find in favor of Rael & Letson on any claim against Michael Clark," and then to award damages "[i]f you find in favor of Rael & Letson on any claim against Clark Family Partnership." The jury awarded $1,672,845 against Clark and $1,267,129 against CFP.
After the jury was dismissed, the following colloquy took place: "[Defense counsel]: Your Honor, with respect to the verdict, it occurs to me now, the question that I should have asked and that is whether those damages coincide at the amount that is awarded against The Clark Family Partnership or whether they are to be two separate amounts to be collected therefore totaling -- [¶] The Court: I heard the plaintiff say in closing argument that the jury need not be concerned that it would be a doubling, that it was basically that they were coextensive with each other and would not be added together -- [¶] . . . [¶] -- and that was what I heard and so that's what I was going to proceed with on the form of judgment. [¶] [Defense counsel]: That was my understanding too, Your Honor, but I wanted to be sure that my understanding was clear to everyone else."
R&L then submitted a brief arguing the verdict should be interpreted to award total damages of $2,939,974, accompanied by declarations from nine of the jurors. The declarations stated that the jurors decided to use as their starting point Kawamoto's lower range of damages; that as to CFP, they used as their guide the money R&L paid to CFP's Vanguard account; that during deliberations they agreed to award separate damages against Clark and CFP, without duplication; that the total damages they awarded was $2,939,974; and that they followed the jury instructions. The trial court rejected this argument and entered judgment for Clark and CFP in the amount of $1,267,129 jointly and severally, and an additional $405,716 against Clark only. R&L contends the court should have interpreted the jury verdict to award a total of 2,939,974.
2. Waiver
Defendants argue that by failing to seek clarification of the verdict before the jury was discharged, R&L forfeited its challenge to the trial court's interpretation. We reject this contention. Although "failure to object to the form of a verdict before the jury is discharged" may waive the defect, "[w]aiver is not found where the record indicates that the failure to object was not the result of a desire to reap a 'technical advantage' or engage in a 'litigious strategy.' " (Woodcock v. Fontana Scaffolding & Equip. Co. (1968) 69 Cal.2d 452, 456, fn. 2 (Woodcock); see Keener v. Jeld-Wen, Inc. (2009) 46 Cal.4th 247, 270 [discussing "Woodcock's articulated exception to the waiver (forfeiture) rule for ambiguous verdicts"].) Nothing suggests any party was engaging in gamesmanship in failing to seek clarification of the verdict before the jury was dismissed.
At oral argument, defendants also suggested that R&L may not challenge the trial court's interpretation of the jury verdict because it did not provide the court with an unambiguous proposed verdict form of its own. We ordinarily do not consider arguments made for the first time at oral argument. (Haight Ashbury Free Clinics, Inc. v. Happening House Ventures (2010) 184 Cal.App.4th 1539, 1554, fn. 9.) In any case, we are unpersuaded. Defendants submitted a proposed special verdict form that asked the jury to assess damages separately against each defendant for each cause of action and, for each cause of action except breach of fiduciary duty, asked what amount of the damages was awarded in other sections of the verdict form. This verdict form would have avoided confusion as to whether any damages were duplicative, and R&L indicated it was willing to use defendants' proposed verdict form. But for reasons of its own, the trial court rejected defendants' proposed verdict form and instead prepared a general verdict form for the jury. On this record, we cannot conclude R&L bears responsibility for any ambiguity in the verdict form.
3. Juror Declarations
We must next decide whether the jurors' declarations may properly be used to interpret the verdict. "[T]he rule is well settled in California that affidavits of jurors may not be used to impeach or to interpret the verdict, except to show that it was arrived at by chance." (Fernandez v. Consolidated Fisheries, Inc. (1953) 117 Cal.App.2d 254, 262-263 [trial court properly refused to consider affidavits to decide whether award of $50,000 in favor of plaintiff and $8,813.87 in favor of plaintiff in intervention should be treated as a total award of $50,000 or $58,813.87]; accord Telles v. Title Ins. & Trust Co. (1969) 3 Cal.App.3d 179, 187.)
R&L argues this rule does not apply because the declarations show the jurors' objective acts, in the form of their statements during deliberation, not simply the mental processes of the jurors. Statements made in a jury room have been held admissible to impeach a verdict by showing, for instance, juror misconduct. (People v. Steele (2002) 27 Cal.4th 1230, 1265; Krouse v. Graham (1977) 19 Cal.3d 59, 80-81 [evidence that jurors improperly agreed to include attorney fees in verdict admissible to impeach verdict]; Evid. Code, § 1150 ["Upon an inquiry as to the validity of a verdict, any otherwise admissible evidence may be received as to statements made . . . either within or without the jury room, of such a character as is likely to have influenced the verdict improperly."].) However, they are not admissible where, as here, a party seeks to show how a jury calculated its award. (See Mesecher v. County of San Diego (1992) 9 Cal.App.4th 1677, 1683 ["evidence about a jury's 'subjective collective mental processes purporting to show how the verdict was reached' is inadmissible to impeach a jury verdict"]; Maxwell v. Powers (1994) 22 Cal.App.4th 1596, 1604-1605 & fn. 3 [applying rule of Mesecher to find inadmissible affidavits showing how jury calculated damage award].)
R&L relies on Drust v. Drust (1980) 113 Cal.App.3d 1, 9 (Drust), in which a divided court held that declarations were admissible to show how a jury reached a damage award. The reasoning of Drust has been questioned by at least two later cases. (Ferreira v. Quik Stop Markets, Inc. (1983) 141 Cal.App.3d 1023, 1034 ["Drust appears to be an anomaly and is inconsistent with the clear language of Evidence Code section 1150, subdivision (a)"]; Ford v. Bennacka (1990) 226 Cal.App.3d 330, 336.) And the result may have been driven by the anomalous circumstance that in Drust it was the opposing party that procured and presented the declarations. (Drust, 113 Cal.App.3d at pp. 8, 9.) In any case, Drust is distinguishable on the ground that the affidavits there were offered to impeach the verdict by showing the jury included inconsistent elements of damages. (Id. at p. 11.) The declarations here were offered to interpret, rather than impeach, the jury's award, and fall squarely within the general rule of inadmissibility.
4. The Verdict Reflected Awards for Separate Items of Damages
Even in the absence of the declarations, we conclude the trial court erred in its interpretation of the verdicts. Where a party does not object to an ambiguous verdict before the jury is discharged, "it falls to 'the trial judge to interpret the verdict from its language considered in connection with the pleadings, evidence and instructions.' [Citations.] Where the trial judge does not interpret the verdict or interprets it erroneously, an appellate court will interpret the verdict if it is possible to give a correct interpretation. [Citations.] If the verdict is hopelessly ambiguous, a reversal is required, although retrial may be limited to the issue of damages." Woodcock, supra, 69 Cal.2d at pp. 456-457; accord, OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 881.)
Absent a contrary indication in the record, we presume the jury follows the instructions. (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 803-804.) R&L argues that, based on the instructions, we should conclude the jury intended the awards against Clark and CFP to reflect separate items of damages. A close examination of the instructions persuades us R&L is correct.
The jury was told to decide the case against each defendant as if it were a separate lawsuit, and that it should determine the liability of each defendant to R&L separately. The jury was also instructed that although R&L "seeks damages from defendants under more than one legal theory . . . each item of damages may be awarded only once . . . ." (Italics added.) Immediately before the damages instructions, the jury was instructed, consistent with R&L's cause of action for money had and received, as follows: "Rael & Letson claims that Defendant Michael Clark owes it money. To establish this claim, Rael & Letson must prove . . . Michael Clark received money that was intended to be used for the benefit of Rael & Letson," did not use it for that purpose, and did not give it to R&L. Also, "Rael & Letson claims that The Clark Family Partnership owes it money. To establish this claim, Rael & Letson must prove . . . The Clark Family Partnership received money that was intended to be used for the benefit of Rael & Letson," did not use it for that purpose, and did not give it to R&L. (Italics added.) Consistent with the italicized language in this instruction, the jury would have figured out how much money each of the parties owed R&L based on who—Clark or CFP—"received money" that should have been given to, or used for the benefit of, R&L. It would not have attributed to Clark money that CFP, rather than Clark, received. And the verdict form contained separate lines asking the jury to award damages against Clark and against CFP. The most natural reading of the award is that the two awards were intended to compensate R&L for different items of damages.
Defendants point out that the instruction that "each item of damages may be awarded only once" was part of an instruction on how to award "[d]amages on [m]ultiple [l]egal [t]heories," not how to award damages against multiple defendants who both bore responsibility for the same loss. If the jury had been given fuller instructions on how to award damages against multiple defendants in a case such as this—where all actions on behalf of CFP were performed by Clark—that point might carry more weight. But the jury was not instructed on principles of joint and several liability or vicarious liability; it was not instructed that Clark was personally liable for his wrongdoing on behalf of CFP; it was not instructed that both Clark and CFP could be liable for the same loss; and it was not instructed not to divide the damages between defendants if both were liable. (See CACI No. 3933.) The instructions actually before the jury indicate the awards were for distinct damages.
We recognize that R&L's counsel told the jury that, "even though you may be awarding some of the same damages against both Mr. Clark and The Clark Family Partnership, this will not result in a double recovery of damages." He immediately went on to say, "And there's a jury instruction on that as well." But the trial court did not give the portion of CACI No. 3933 that would have told the jury not to divide the damages between defendants. The jury did not fill out the verdict form with the amounts R&L's counsel requested. And in any event, the court instructed the jury that it "must follow the law exactly as I give it to you" and "if the attorneys have said anything different . . . about what the law means" the jury must follow the court's instructions. The verdict, read in light of the instructions and the evidence, indicates R&L may recover both the $1,672,845 awarded against Clark and the $1,267,129 awarded against CFP.
Defendants' reliance on Oakes v. McCarthy Co. (1968) 267 Cal.App.2d 231 (Oakes), does not assist them. The plaintiff there sought damages resulting from earth movement under their house, and the jury made identical damage awards of $14,825 against two defendants. (Id. at p. 238.) The appellate court concluded a single joint and several judgment for compensatory damages of $14,825 should have been entered. (Id. at pp. 267-268.) However, unlike the jury here, the jury in Oakes was correctly instructed not to allocate damages between the defendants, but to deliver a verdict in a single sum against all liable defendants. (Id. at pp. 258, 260.)
We shall order the trial court to modify the judgment to reflect a damage award of $1,267,129 against CFP and an additional $1,672,845 against Clark. And, as defendants recognize, the record shows unambiguously that CFP acted through Clark with respect to all of the transactions at issue. As a matter of law, although the jury was not instructed on this point, he is jointly and severally liable for the damages awarded against CFP. (See Oakes, supra, 267 Cal.App.2d at p. 259 ["It is established that where the negligence between two or more defendants is incapable of logical segregation or apportionment each tortfeasor is liable jointly and severally with the others for the total amount of compensatory damages."]; see Aitken v. White (1949) 93 Cal.App.2d 134, 144-145 [appellate court may correct apportionment of damages between joint tortfeasors].)
B. Prejudgment Interest
The trial court awarded prejudgment interest only for the period after the jury verdict. R&L argues it is entitled to prejudgment interest from the time of each misappropriation.
Kawamoto calculated the interest on the various items of damages based on the year of each misappropriation. For the upper range of the damages, he calculated interest as $1,854,956.67, and for the lower range as $1,588,982.47. The jury was instructed that if it awarded damages against either defendant, it could, but was not required to, award interest on the damages. The verdict form did not ask the jury to state whether its award included prejudgment interest. In a motion for new trial, R&L sought mandatory prejudgment interest on the award. (Civ. Code, § 3287, subd. (a).)
When the trial court rendered its decision on the cause of action for breach of the duty of loyalty, it concluded prejudgment interest was not mandatory (Civ. Code, § 3287, subd. (a)), and declined to exercise its discretionary authority to award such interest (id., § 3288) on the ground that R&L's other officers and board members had been "asleep at the wheel" and did nothing to monitor or control expenses.
"Civil Code section 3287, subdivision (a) provides that a party is entitled to recover prejudgment interest on an amount awarded as damages from the date that the amount was both (1) due and owing and (2) certain or capable of being made certain by calculation." (Uzyel v. Kadisha (2010) 188 Cal.App.4th 866, 919.) Damages are certain or ascertainable "if the defendant actually knows the amount of damages or could compute that amount from information reasonably available to the defendant. . . . In contrast, damages that must be judicially determined based on conflicting evidence are not ascertainable. [Citations.] A legal dispute concerning the defendant's liability or uncertainty concerning the measure of damages does not render damages unascertainable." (Ibid.) "Thus, where the amount of damages cannot be resolved except by verdict or judgment, prejudgment interest is not appropriate." (Wisper Corp. v. California Commerce Bank (1996) 49 Cal.App.4th 948, 960.) On appeal, we determine independently whether damages are ascertainable. (Uzyel, 188 Cal.App.4th at p. 919.)
We conclude the trial court properly denied R&L's request for prejudgment interest on the jury award for any period before the jury's verdict. The jury was instructed that it could, but need not, award interest on a damage award. The verdict does not show whether the jury included interest in its award. If it did, any further award of prejudgment interest would, in effect, be an award of interest upon interest.
As we have already decided, the juror declarations are inadmissible to interpret the verdict.
We reach a different conclusion as to the trial court's award of damages for breach of the duty of loyalty, based upon the amounts deposited in CFP's Vanguard account and the excess rent and the amounts deposited and paid for the Avantair charges. " 'Damages are deemed certain or capable of being made certain within the provisions of subdivision (a) of [Civil Code] section 3287 where there is essentially no dispute between the parties concerning the basis of computation of damages if any are recoverable but where their dispute centers on the issue of liability giving rise to damage.' " (Wisper, supra, 49 Cal.App.4th at p. 958; accord Leff v. Gunter (1983) 33 Cal.3d 508, 520 [prejudgment interest appropriate where amount of damages was calculable "mechanically, on the basis of uncontested evidence"].) The only dispute as to the excess rent and Avantair payments was whether Clark and CFP were liable for them, not their amount. And the trial court accepted Kawamoto's separate calculations of the amounts misappropriated during each year virtually to the penny. As to these items, there was no dispute regarding the basis of computation of damages.
Defendants try to avoid this conclusion by pointing to cases ruling that, " 'where an accounting is required in order to arrive at a sum justly due, interest is not allowed.' " (Chesapeake Industries, Inc. v. Togova Enterprises, Inc. (1983) 149 Cal.App.3d 901, 908 (Chesapeake), citing Stockton Theatres, Inc. v. Palermo (1953) 121 Cal.App.2d 616, 632 (Stockton Theatres).) These cases are inapposite. Stockton Theatres did not consider Civil Code section 3287, instead ruling that the trial court did not abuse its discretion in refusing to allow prejudgment interest where it would be necessary to carry out a detailed accounting of a business to determine its profits. (Stockton Theatres, 121 Cal.App.2d at pp. 631-632.) In Chesapeake, the plaintiff tenant sought an accounting under a lease agreement after it vacated the premises before the end of the lease. The plaintiff was liable for deficiencies in the rent collected when the rent was relet, the costs of reletting and repairs, and any other indebtedness to the landlord. (Chesapeake, 149 Cal.App.3d at p. 904.) The appellate court reversed an award of prejudgment interest, noting that the plaintiff was only liable for interest on the net sum due under the lease "if it knew or could have calculated the amount of the deficit." (Id. at p. 907.) Both parties had asserted in their cross-claims that they did not know and could not calculate the amount of the plaintiff's liability under the lease agreement; this strongly suggested that any deficiency was not certain. (Id. at p. 908) Here, in contrast, defendants had only to look to the payments made to CFP's Vanguard account and to Avantair to calculate the amount due. These damages, all identified by year in the trial court's statement of decision, are certain or ascertainable for purposes of Civil Code section 3287, subdivision (a), and R&L is entitled to prejudgment interest on them. On remand, the trial court shall calculate and award that interest.
C. Scope of Trial Court's Damage Award
R&L contends that, in ruling on the cause of action for breach of the duty of loyalty, the trial court erred in limiting its damage award to overpaid rent and Avantair charges and declining to award damages for other improper expenses. These expenses include interest overpayments on the ESOT promissory note, the costs of operating Clark's Piper airplane, the dues and charges at his country clubs, and a miscellaneous category that included dry cleaning, groceries, wine, cable and telephone service, medical services, termite and pest services, utilities, window washing, vacations, lease payments on his cars, and so on. The court did not consider any of these expenses individually, instead characterizing them collectively as "luxurious 'old school' business practices." The court reasoned, "Upon selling a majority interest in R&L, Clark continued with his prior practice of incurring and expensing the same lavish business expenses—as to which R&L engaged in no real oversight or objection. The court finds that such expensing by Clark, over the course of many years from 2003 to 2013—for which Plaintiff R&L belatedly objects and seeks to now demand reimbursement—does not constitute a breach of the duty of loyalty owed by Clark as an officer and director of the corporation," and the expenses did not constitute "secret profit[s]."
A director of a corporation owes a fiduciary duty to the corporation and its shareholders and . . . "must serve 'in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders.' (Corp. Code, § 309, subd. (a).) This duty—generally to act with honesty, loyalty, and good faith—derived from the common law." (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1037.) "It is a cardinal principle of corporate law that a director cannot, at the expense of the corporation, make an unfair profit from his position. He is precluded from receiving any personal advantage without fullest disclosure to and consent of all those affected." (Remillard Brick Co. v. Remillard-Dandini (1952) 109 Cal.App.2d 405, 419 (Remillard), italics added.) The duty of loyalty means that " ' "[c]orporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. . . . A public policy, existing throughout the years, derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director . . . the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation . . ." ' " (Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 509 (Angelica Textile); accord, Professional Hockey Corp. v. World Hockey Assn. (1983) 143 Cal.App.3d 410, 415 ["there is a duty of loyalty which requires directors-trustees not to act in their own self-interest when the interests of the corporation will be damaged thereby."].)
"Whether a fiduciary duty exists is generally a question of law. [Citation.] Whether the defendant breached that duty towards the plaintiff is a question of fact." (Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1599.)
Defendants do not dispute that a director may breach his duty of loyalty to a corporation by using his position of trust to have it pay his purely personal expenses and funnel corporate money into his investment account without disclosure. Such transactions fall within the scope of " ' "us[ing] [a] position of trust and confidence to further [the director's] private interests.' " " (Angelica Textile, supra, 220 Cal.App.4th at p. 509.) Rather, defendants argue that substantial evidence supports the trial court's finding that Clark did not breach his duty of loyalty. They point to the evidence that R&L was profitable and ask us to infer that, because of Clark's success running the company, R&L's officers and directors chose not to monitor his expenses more carefully. They also point to evidence that the board allowed Clark to set his own salary; that he reduced his salary after the ESOP transaction and lent the company money; that the company grew significantly under his leadership; that his efforts led to R&L gaining several new accounts and were helped along by taking prospective clients to lunch, dinner, or drinks; that flying in the Piper airplane was an efficient way to make certain business trips; that other members of the board knew he used the Piper airplane for business and before the ESOP transaction Rael had suggested he use his pilot's license for business purposes; that golf was a good way for him to interact with prospective clients and Juan Rael once told him that the company would pay his reasonable monthly golf club fees; and that he brought wine to client dinners and gave bottles of wine as gifts.
This evidence might show that not all of the expenses R&L challenges furthered Clark's private interests at the expense of the company. But defendants do not even try to show that this is true for other expenses, such as the $136,243 in ESOT note overpayments; personal charges for dry cleaning, groceries, medical services, spa treatments and haircuts for Clark's wife, home utilities, and other home services; and the leasing and purchase of Clark's cars. We are aware of nothing in the record suggesting Clark did not act in his own self-interest by causing R&L to make those expenditures, and we find no substantial evidence to support a conclusion that R&L ever knew about or authorized Clark's practice of charging R&L for ever more lavish personal expenses. Rael may have once authorized expensing Clark's membership for a single golf club or charging certain expenses associated with Clark's first airplane, but he did not allow Clark to charge the company for his personal expenses.
Defendants acknowledge Clark made some "mistakes," such as using one of the golf clubs for personal use, using wine for personal use, and having R&L pay for his granddaughter's trip to Hawaii.
Defendants argue, however, that substantial evidence supports the trial court's finding that the board implicitly authorized the "old school" expenses because it did not adopt a written expense reimbursement policy, more detailed financial reports, or audited financial statements, and did not ask Clark to hire a controller or tell them what benefits or compensation he would receive. We disagree. A director may not receive any personal advantage "without fullest disclosure to and consent of all those affected." (Remillard, supra, 109 Cal.App.2d at p. 419.) There is no evidence Clark disclosed that he was having R&L pay his personal expenses or obtained consent. Instead, the record shows he actively concealed some of the expenses, by such practices as having his extensive wine purchases recorded as "office supplies," and his credit card bills as "travel other."
Because Clark did not disclose his practices to R&L and obtain its consent, we shall remand the matter for the trial court to make findings as to which of the challenged expenses were incurred in violation of Clark's duty of loyalty and award appropriate damages. The court shall also determine whether those damages were sufficiently ascertainable to support an award of prejudgment interest.
We make one additional comment regarding damages on remand. R&L argues that the trial court based its award on Kawamoto's upper range of damages for the Avantair and excess rent schemes. It also argues that the jury's total damage award of $2,939,974 was so close to Kawamoto's total for the lower range of damages for the years 2007 through 2013—$2,944,336—that the jury must have based its award on the lower range. According to R&L's calculations, the jury awarded $45,790 less than the court for these items. R&L therefore asks us to order that the judgment include a compensatory damage award of $2,985,764 (larger than the jury verdict of $2,939,974).
R&L provides no authority for combining the two awards in this manner and we reject as speculative any effort to "reverse engineer" the jury verdict in this way. The verdict provides no calculations, and as we have already noted, it may include some portion of prejudgment interest. If, on remand, the trial court's award is less than the amount of the jury verdict, R&L shall recover $2,939,974. If it is greater, R&L shall recover the amount the trial court awards.
III. DISPOSITION
The judgment is reversed. On remand, the trial court is directed, consistent with the views expressed in this opinion, to (1) recalculate damages for the breach of Clark's duty of loyalty, (2) recalculate prejudgment interest on that award, and (3) modify the judgment to reflect either a jury verdict making a total damage award of $2,939,974 against Clark, with CFP jointly and severally liable for $1,267,129 of that amount, or a larger award from the trial court. Respondents shall pay costs on appeal.
/s/_________
Tucher, J. We concur: /s/_________
Streeter, Acting P.J. /s/_________
Lee, J.
Judge of the Superior Court of California, City and County of San Mateo, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.