Opinion
B226382
10-24-2011
CULVER HOSPITAL HOLDINGS, Plaintiff and Respondent, v. PROSPECT MEDICAL HOLDINGS, INC. et al., Defendants and Appellants.
Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Licenberg, Thomas R. Freeman, Ekwan E. Rhow, Marc E. Masters and Michelle C. Tam for Defendants and Appellants. Quinn Emanuel Urquhart & Sullivan, Christopher Tayback and Michael L. Fazio for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Los Angeles County Super. Ct. No. BC428716)
APPEAL from a judgment of the Superior Court of Los Angeles County, Teresa Sanchez-Gordon, Judge. Reversed.
Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Licenberg, Thomas R. Freeman, Ekwan E. Rhow, Marc E. Masters and Michelle C. Tam for Defendants and Appellants.
Quinn Emanuel Urquhart & Sullivan, Christopher Tayback and Michael L. Fazio for Plaintiff and Respondent.
I. INTRODUCTION
Defendants, Prospect Medical Holdings, Inc., Prospect Hospital Advisory Services, Inc. and Samuel S. Lee, appeal from a June 25, 2010 preliminary injunction. Defendants argue the preliminary injunction cannot stand because plaintiff, Culver Hospital Holdings, L.P., which is a shareholder of a codefendant, Brotman Medical Center, Inc., lacks standing to bring its direct claims, which are derivative in nature. We agree and reverse the preliminary injunction.
II. BACKGROUND
A. Brotman Medical Center, Inc. Bankruptcy
Brotman Medical Center, Inc. is a California corporation that owns and operates a hospital in Culver City. In August 2005, Prospect Medical Holdings, Inc., through its wholly owned subsidiary Prospect Hospital Advisory Services, Inc., acquired a 33 percent ownership stake in Brotman Medical Center, Inc. Prospect Medical Holdings, Inc. also began providing managed care consulting services to Brotman Medical Center, Inc. for $20,000 per month. The consulting services were provided by Prospect Hospital Advisory Services, Inc. to Brotman Medical Center, Inc. Brotman Medical Center, Inc.'s financial condition continued to deteriorate after Prospect Medical Holdings, Inc.'s August 2005 investment. On October 25, 2007, Brotman Medical Center, Inc. filed for chapter 11 bankruptcy. In August 2007, prior to the filing of the bankruptcy petition, Prospect Medical Holdings, Inc. merged with Alta Healthcare Systems, Inc. which owned four community hospitals. The president and primary shareholder of Alta Healthcare Systems, Inc. was Mr. Lee. Mr. Lee successfully "turned around" Alta Healthcare Systems, Inc. By March 2008, while Brotman Medical Center, Inc. was in bankruptcy, Mr. Lee became the chief executive officer of Prospect Medical Holdings, Inc. In April 2008, Mr. Lee became chair of the directors' board of Brotman Medical Center, Inc. Mr. Lee later became chair of Prospect Medical Holdings, Inc.'s director's board in May 2008. Under Mr. Lee's direction, Prospect Medical Holdings, Inc. through Prospect Hospital Advisory Services, Inc. began to provide Brotman Medical Center, Inc. with more extensive consulting services. On October 25, 2007, the consulting services agreement was amended to reflect these increased responsibilities provided by Prospect Hospital Advisory Services, Inc. The amended consulting services agreement was entered into on the same day Brotman Medical Center, Inc. filed for bankruptcy. Prospect Hospital Advisory Services, Inc.'s monthly compensation increased from $20,000 to $100,000. The bankruptcy court later approved the amended consulting services agreement.
Brotman Medical Center, Inc. emerged from bankruptcy on April 14, 2009. This occurred when the bankruptcy court approved a reorganization plan. As part of the reorganization plan, Prospect Medical Holdings, Inc., through Prospect Hospital Advisory Services, Inc., increased its ownership interest to 72 percent. Plaintiff owns 27 percent of Brotman Medical Center, Inc.'s outstanding common stock. The remaining 1 percent is owned by three other shareholders, each owning equal shares.
B. Plaintiff's Shareholder Inspection Demands And Lawsuit
In July 2009, plaintiff served Brotman Medical Center, Inc. with shareholder inspection demands. Brotman Medical Center, Inc. refused to respond to the demands, arguing that plaintiff's counsel had a conflict of interest. On July 14, 2009, plaintiff filed a mandate petition seeking to compel Brotman Medical Center, Inc. to produce the documents. On August 25, 2009, the trial court denied Brotman Medical Center, Inc.'s motion to disqualify plaintiff's counsel. The trial court entered judgment against Brotman Medical Center, Inc. on December 1, 2009. Brotman Medical Center, Inc. was ordered to produce most of the disputed documents and to hold an annual shareholder meeting on December 22, 2009. At that meeting, Nathan Hevrony, plaintiff's representative, received a seat on Brotman Medical Center, Inc.'s directors' board.
C. Brotman Medical Center, Inc.'s Offer to Sell Convertible Subordinated Promissory
Notes
On December 16, 2009, Mr. Lee sent a letter to plaintiff regarding Brotman Medical Center, Inc.'s financial condition. Mr. Lee wrote that Prospect Hospital Advisory Services, Inc. had lent $2 million in cash and services to Brotman Medical Center, Inc. The loan was made because of Brotman Medical Center, Inc.'s liquidity crisis. In addition, Brotman Medical Center, Inc. faced $3 million in "401K liability," which needed to be funded in January, and $500,000 in related employment benefit plan liabilities, fees, expenses and costs. Mr. Lee wrote, "After much consideration, the Brotman [Medical Center, Inc.] Board of Directors has determined that it is in the best interest of Brotman [Medical Center, Inc.] and its shareholders to offer each shareholder the right to purchase, in aggregate, $5.5 million convertible subordinated promissory notes of Brotman [Medical Center, Inc.] in proportion to their respective current ownership of the Company." Mr. Lee notified plaintiff of its right to purchase its proportionate share of the notes equal to its common stock percentage ownership. In addition, plaintiff had a pro rata right to subscribe to an oversubscription privilege, which allowed it to buy additional notes not purchased by other shareholders. Mr. Lee further notified plaintiff of Prospect Hospital Advisory Services, Inc.'s intent to exercise its proportionate share and oversubscription privilege in full.
On December 16, 2009, a codefendant, Von Crockett, Brotman Medical Center, Inc.'s chief executive officer, also sent a letter to plaintiff. The letter notified plaintiff of Brotman Medical Center, Inc.'s December 16, 2009 offer to shareholders to purchase convertible subordinated promissory notes. Mr. Crockett wrote: "We require an immediate infusion of $5,500,000 to provide funds that will be available for the following uses: [¶] to pay up to $3,000,000 for liabilities in connection with unfunded company matching contributions under our 401(k) Plan for years 2006 through 2008; [¶] to repay $1,965,949 for amounts accrued under the subordinated reimbursement agreement between Brotman Medical Center, Inc. and our majority shareholder, Prospect Hospital Advisory Services, Inc. . . . ; [¶] to augment our working capital; and [¶] to pay transaction costs for the rights offering and additional costs in connection with our 401(k) Plan and related short-term ERISA issues." Mr. Crockett's letter also described the offer to sell the convertible subordinated promissory notes: "In the rights offering, you will be entitled to purchase your proportionate share of the $5,500,000 of Brotman [Medical Center, Inc.] notes offered. Your "proportionate share" equals your percentage ownership of the 748,625 shares of common stock of Brotman [Medical Center, Inc.] currently outstanding. . . . [¶] Our new convertible subordinated promissory notes will bear interest at the rate of 15% per year, and the principal amount and all accrued interest will be due and payable in a lump-sum in 2012, three years from the date of issuance." Mr. Crockett's letter notified plaintiff of the intent of Prospect Hospital Advisory Services, Inc. "to purchase its proportionate share of notes" of the convertible subordinated promissory notes. Further, Mr. Crockett explained: Prospect Hospital Advisory Services, Inc. intended to "oversubscribe" and buy any notes offered that were not purchased by other shareholders; Brotman Medical Center, Inc.'s offer to sell its shareholders convertible subordinated promissory notes would expire on December 30, 2009; and the terms of the offer to the shareholders were summarized in a "rights offering circular" consisting of 40 pages plus an annex.
The rights offer circular that accompanied Mr. Crockett's letter described the December 16, 2009 offer to sell convertible subordinated promissory notes in more detail. In particular, the offering circular states, "The principal amount of and any accrued and unpaid interest under the convertible subordinated promissory notes are convertible at any time at the option of the holder into shares of our common stock at a price of $3.34 per share." The rights offering circular described how the Brotman Medical Center, Inc. directors' board arrived at the $3.34 conversion price. The rights offering circular states, "In determining the price at which the notes may be converted into shares of our common stock, our board of directors considered several factors, including a recent valuation report from the valuation consulting firm of Marshall & Stevens Incorporated which determined that the value of the common stock of the Company (on a nonmarketable, minority interest basis) is $3.34 per share." The rights offering circular also stated that Brotman Medical Center, Inc.'s directors' board determined the terms of the convertible subordinated promissory notes offering "based on several factors, including what would be acceptable" to Prospect Hospital Advisory Services, Inc. and an unspecified senior lender.
D. Plaintiff's Lawsuit And The Parties' Stipulation Concerning The Offer To Sell
Convertible Subordinated Promissory Notes
On December 24, 2009, plaintiff sued defendants alleging claims for fiduciary duty breach, minority shareholder oppression, unjust enrichment and injunctive relief. On December 31, 2009, plaintiff entered into a stipulation with Prospect Medical Holdings, Inc., Prospect Hospital Advisory Services, Inc. and Mr. Lee. Plaintiff agreed to forego filing an ex parte temporary restraining order application and allowed Prospect Hospital Advisory Services, Inc. to purchase $3.5 million of the convertible subordinated promissory notes. In return, Prospect Hospital Advisory Services, Inc. agreed it would not purchase plaintiff's proportionate shares of the convertible subordinated promissory notes. Prospect Medical Hospital Advisory Services, Inc. further agreed not to convert its portion of notes into shares of Brotman Medical Center, Inc. common stock until the earlier of July 1, 2010 or the trial court's ruling on plaintiff's preliminary injunction motion. In addition, the parties agreed that the proceeds from the rights offering would not be used to repay the almost $2 million that Prospect Hospital Advisory Services, Inc. asserted was due under the subordinated reimbursement agreement until the earlier of July 1, 2010 or the trial court's ruling on plaintiff's preliminary injunction motion. The parties agreed Brotman Medical Center, Inc. would not close the convertible subordinated promissory notes offering until January 7, 2010. The parties also agreed that defendants would give plaintiff access to documents. The access was provided pursuant to plaintiff's inspection rights as a Brotman Medical Center, Inc. director and consistent with the Code of Civil Procedure.
The pertinent portions of the parties' understanding are as follows: "Now, therefore, in consideration of the foregoing and other good and valuable consideration, the parties agree and stipulate as follows: [¶] "1. Brotman shall postpone and hold in abeyance the Rights Offering with respect to [plaintiff's] proportionate share of the Notes, meaning, among other things, that Brotman shall not permit Prospect, and Prospect shall not purport, to subscribe to purchase any portion of [plaintiff's] proportionate share of the Notes until the earliest to occur (the 'Event Date') of (i) July 1. 2010, (ii) the date on which the Court rules upon [plaintiff's] motion for preliminary injunction, or (iii) the date on which [plaintiff] decides not to file its motion for preliminary injunction. [¶] 2. Until the Event Date, Prospect shall not convert into shares of Brotman common stock any portion of the Notes purchased by it in the Rights Offering (or any other convertible promissory notes it obtains). [¶] 3. Until the Event Date, Brotman shall postpone and hold in abeyance the Rights Offering with respect to [plaintiff's] proportionate share of approximately $2 million principal amount of the Notes corresponding to amounts that Prospect asserts are due and owing under the subordinated reimbursement between Brotman and Prospect Medical Holdings, Inc. For clarity, Prospect shall be entitled to exercise its subscription rights to purchase in the Rights Offering the Notes other than as provided in paragraph 1, above, and in this paragraph 3. To further clarify, Prospect will not use the proceeds from the Rights Offering to repay the almost $2 million that Prospect asserts is due and owing under the subordinated reimbursement agreement until the Event Date. [¶] 4. Brotman may close the Rights Offering on or after 5:00 p.m. Pacific time on January 7, 2010. Except as stated herein, all terms and conditions of the Rights Offering shall be valid and remain in full force and effect."
On January 8, 2010, Prospect Hospital Advisory Services, Inc. wired $3.5 million to Brotman Medical Center, Inc. As noted, one of the Brotman Medical Center, Inc. financial problems was its failure to provide matching funds for employees' retirement accounts. Prior chief executive officers had promised to match employee contributions. Due to cash constraints, Brotman Medical Center, Inc. had not made the required 2006, 2007, and 2008 retirement plan matching contributions, which totaled approximately $3 million. At the November 2, 2009 board meeting, because of an absence of cash, the directors decided to suspend any payments into the employees' retirement accounts. $2.2 million was paid into the retirement plan in January 2010. The remaining amounts were placed in segregated accounts to pay down the remaining matching retirement plan contributions due in July 2010. In addition, the segregated accounts were to pay professional fees and provide related working capital.
E. Prospect Hospital Advisory Services, Inc.'s Amended And Restated Consulting
Services Agreement With Brotman Medical Center, Inc.
On February 1, 2010, Brotman Medical Center, Inc. entered into an amended and restated consulting services agreement with Prospect Hospital Advisory Services, Inc. Brotman Medical Center, Inc. agreed to pay a monthly consulting fee equal to 4.5 percent of its net operating revenue for each monthly period retroactive to April 14, 2009. Prospect Hospital Advisory Services, Inc. was entitled to a minimum $100,000 monthly fee payable in cash. The February 1, 2010 agreement further provides, "To the extent . . . agreements prohibit additional cash payments from [Brotman Medical Center, Inc.] to [Prospect Hospital Advisory Services, Inc.], or in the event [Brotman Medical Center, Inc.] does not have sufficient cash to make such cash payments, then [Prospect Hospital Advisory Services, Inc.] shall be entitled to receive shares of common stock of [Brotman Medical Center, Inc.] with an agreed upon value of $3.34 per share in payment of any accrued Consulting Fee."
F. Plaintiff's First Amended Complaint
On May 5, 2010, plaintiff filed a first amended complaint against Brotman Medical Center, Inc., Prospect Medical Holdings, Inc., Prospect Hospital Advisory Services, Inc., Mr. Lee, Mr. Crockett, Brian Wynn, Andrew Brooks and Robert Rose. Mr. Wynn, Mr. Brooks and Mr. Rose were members of Brotman Medical Center, Inc.'s directors' board. The first amended complaint alleges on information and belief, "Prospect Hospital Advisory Services, Inc. has been and is a mere shell, instrumentality and conduit through which Prospect Medical Holdings, Inc. has been and is conducting the activities herein alleged." Thereafter, the first amended complaint confusingly refers to Prospect Hospital Medical Advisory Services, Inc. and Prospect Medical Holdings, Inc. merely as "Prospect." For clarity purposes, we will identify both entities when allegations appear in the first amended complaint as to either.
Plaintiff alleges the December 16, 2009 offer to sell convertible subordinated promissory notes was undertaken to dilute its ownership interest in Brotman Medical Center, Inc. Further, the December 16, 2009 offer was designed to insure that Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. would gain control of all six Brotman Medical Center, Inc. directors' board seats at the next shareholder meeting in 2010. Plaintiff further alleges: the stated reasons for the $5.5 million convertible subordinated promissory notes offering were false; Brotman Medical Center, Inc. did not face a liquidity crisis; Brotman Medical Center, Inc.'s purported employment liability did not need to be funded in January; and there were no "immediate needs" that required Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. to extend nearly $2 million to Brotman Medical Center, Inc. Plaintiff alleges, "The illiquidity of [Brotman Medical Center, Inc.'s] common stock and [Brotman Medical Center, Inc.'s] inability to guarantee payment of its convertible promissory notes demonstrate that the $1.48 million that Brotman Medical Center, Inc.'s Board of Directors and [Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc.] seek from [plaintiff] is merely a monetary sum that Defendants seek to extort from [plaintiff] as payment for [plaintiff] retaining its present proportionate ownership interest in [Brotman Medical Center, Inc.]." According to the first amended complaint, defendants could have allegedly avoided diluting plaintiff's ownership interest in Brotman Medical Center, Inc. by obtaining the requisite funds from outside sources. And Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. had secured funding from outside sources with its July 2009 senior secured notes offering.
Plaintiffs also allege that the October 1, 2009 amendment to the administrative services agreement between Brotman Medical Center, Inc. on one hand, and Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. on the other, increased the administrative fees from 2.5 to 10 percent. This occurred even though Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. allegedly provided no additional administrative services to Brotman Medical Center, Inc. Plaintiffs further allege the February 1, 2010 amendment to the consulting services agreement, which allowed Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. to be paid a monthly fee of 4.5 percent of Brotman Medical Center, Inc.'s net monthly operating revenue, increased the consulting monthly cost from $100,000 to $300,000.
Moreover, the February 1, 2010 amendment to the consulting services agreement permitted Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. to convert the accrued consulting fees into Brotman Medical Center, Inc. common stock at $3.34 per share under the following convoluted circumstances: "[T]he Amended and Restated Consulting Services Agreement provides that to the extent cash payments by Brotman [Medical Center, Inc.] to Prospect [Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc.] are prohibited by other agreements or, in the event Brotman [Medical Center, Inc.] does not have sufficient cash to make payments for amounts purportedly owed by Brotman [Medical Center, Inc.] to Prospect [Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc.] under the agreement, 'then [Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc.] shall be entitled to receive shares of common stock of [Brotman Medical Center, Inc.] with an agreed upon value of $3.34 per share in payment of any accrued Consulting Fee."' Plaintiff alleges, "[Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. intend] to and will convert amounts that [they assert] are owed to [them] by [Brotman Medical Center, Inc.] under the Amended and Restated Consulting Services Agreement into to shares of [Brotman Medical Center, Inc.] common stock. [The] conversion of debt into [Brotman Medical Center, Inc.] common stock will have the effect of further diluting [plaintiff's] ownership interest in [Brotman Medical Center, Inc.]." The $3.34 price per share was derived from a report by Marshall & Stevens, Inc., a valuation and consulting firm, that was allegedly prepared for a purpose wholly unrelated to the appropriate conversion rate of debt into Brotman Medical Center, Inc. common stock under the February 1, 2010 consulting services agreement. According to the first amended complaint, Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. allegedly manipulated the valuation report by controlling and limiting information provided to Marshall & Stevens regarding Brotman Medical Center, Inc.
Plaintiff alleges Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. failed to provide "supplies, inventory, pharmaceutical [or] provision of staff to Brotman Medical Center, Inc. under the October 2, 2009 subordinated reimbursement agreement. And the value of any services that were provided were a small fraction of the nearly $2 million they asserted is due and owning under the agreement. The first amended complaint alleges that Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc. attempted to improperly use the October 2, 2009 subordinated reimbursement agreement to recover amounts they separately claim and were attempting to secure under the February 1, 2010 amended and restated consulting services agreement. This attempted double billing was improper under the terms of the October 2, 2009 subordinated reimbursement agreement.
Plaintiff also alleges Mr. Lee failed to provide its representative, Mr. Hevrony, with notice of the February 1, 2010 Brotman Medical Center, Inc. board meeting until January 22, 2010. Although the board meeting was scheduled to begin at 4 p.m., Mr. Hevrony was denied access to the boardroom and all the other directors met from 4 to 5 p.m. During this one-hour period, two armed guards allegedly were stationed at the board room entry to prevent Mr. Hevrony from entering. Mr. Hevrony was not permitted to enter the board room until 5 p.m. Mr. Hevrony attempted to raise various issues including the convertible promissory notes offering. Mr. Lee allegedly threatened to have the two guards forcefully remove Mr. Hevrony from the meeting for violating the meeting agenda. Mr. Hevrony did not receive the agenda until the day of the board meeting. The Brotman Medical Center, Inc. directors' board allegedly conducted other meetings without providing notice to plaintiff or an opportunity to attend.
Plaintiff alleges Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc., as the majority shareholder, breached their fiduciary duty to plaintiff, a minority shareholder. According to the first amended complaint: "[Prospect Medical Holdings, Inc. and Prospect Hospital Advisory Services, Inc.] breached [their] fiduciary duty owed to [plaintiff] through the [following] actions: (a) causing [Brotman Medical Center, Inc.] to issue its convertible subordinated promissory notes offering for the sole improper purpose of substantially increasing [Prospect Medical Holdings Inc.'s and Prospect Hospital Advisory Services, Inc.'s] ownership interest in [Brotman Medical Center, Inc.] while diluting [plaintiff's] ownership interest and control over [Brotman Medical Center, Inc.'s] affairs; [¶] (b) causing [Brotman Medical Center, Inc.] to issue materially false and misleading representations to [plaintiff] regarding the purposes and justifications underlying [Brotman Medical Center, Inc.'s] convertible subordinated promissory notes offering: [¶] (c) using its ability to control [Brotman Medical Center, Inc.] to deprive [plaintiff] of information that [plaintiff] is entitled to view, both as a minority shareholder and a director of [Brotman Medical Center, Inc.], regarding [Brotman Medical Center, Inc.'s] affairs, including [Prospect Medical Holdings Inc.'s and Prospect Hospital Advisory Services, Inc.'s] manipulation of [Brotman Medical Center, Inc.] and its Board of Directors to complete [Brotman Medical Center, Inc.'s] financial audit prior to its annual shareholder meeting for the sole improper purpose of denying [plaintiff] participation in the audit; and [¶] (d) engaging in self-dealing transactions with [Brotman Medical Center, Inc.], including but not limited to [Brotman Medical Center, Inc.'s] convertible subordinated promissory notes offering, the Amendment to the Administrative Services Agreement, the Amended and Restated Consulting Services Agreement and Subordinated Reimbursement Agreement, for the benefit of [Prospect Medical Holdings Inc. and Prospect Hospital Advisory Services, Inc.] and to [plaintiff's] detriment." Plaintiff also asserts claims for: fiduciary duty breach against Brotman Medical Center, Inc.'s directors' board, Mr. Lee, Mr. Wynn, Mr. Brooks, Mr. Rose and Mr. Crockett; conspiracy against all defendants; oppression of minority shareholder against all defendants; unjust enrichment against defendants and Mr. Lee; injunctive relief against all defendants; and involuntary dissolution of the corporation against Brotman Medical Center, Inc. under Corporation Code section 1800 et seq.
G. Preliminary Injunction Ruling
On June 25, 2010, the trial court granted plaintiff's preliminary injunction motion. The trial court entered a minute order granting the preliminary injunction on the same day. The trial court vaguely found plaintiff's claims against one or both of the Prospect entities were direct and not derivative claims. The preliminary injunction does not identify which one of the Prospect entities is subject to its terms. The trial court stated: "The gravamen of the complaint is that the actions of Prospect as majority shareholder, using its influence with the board of directors, has engaged in actions to benefit itself to the detriment of the minority shareholders. Those actions consist of loaning money to Brotman in exchange for stock. Issuance of that stock dilutes the holdings of the minority shareholders and in the case of plaintiff, considerably diminishes its input and control of the corporation. Plaintiff would lose its board member, its voice in managing the corporation, and its access to corporate documents. [¶] Plaintiff has provided evidence supporting its position that Prospect is attempting to enlarge its shares of Brotman, that Prospect has significant influence over the board of directors, that agreements regarding moneys owed to Prospect from Brotman which could be repaid in shares were made without notice to the bankruptcy court, that information was withheld or incorrectly given to the auditors and in support of the promissory note offering, and that the timing of these agreements which would include Prospect's holdings were made at the time Brotman was ordered to produce documents and hold a shareholder's meeting. [¶] Plaintiff has established a probability of prevailing on the merits."
Prospect Medical Holdings, Inc., Prospect Hospital Advisory Services, Inc. and Mr. Lee filed a timely notice of appeal on August 5, 2010.
III. DISCUSSION
A. Plaintiff's Motion to Dismiss or Stay Appeal
Plaintiff contends the appeal should be dismissed or stayed because defendants violated the June 25, 2010 preliminary injunction. According to plaintiff, defendants improperly restructured the December 16, 2009 convertible subordinated promissory notes offering. Plaintiff asserts the restructuring reduced the aggregate amount of the notes available in the notes offering from $5.5 to $3.5 million. On December 13, 2010, the Brotman Medical Center, Inc. directors' board approved a resolution reducing the December 16, 2009 convertible subordinated promissory notes offering from $5.5 to $3.5 million. The Brotman Medical Center, Inc. board authorized and empowered the chief executive officer and the interim chief financial officer to execute and deliver all documents to reduce the amount of the December 16, 2009 convertible subordinated promissory notes offering to $3.5 million. According to the dismissal motion, the December 13, 2010 restructuring violates the June 25, 2010 injunction order which enjoined one of the Prospect entities from "acquiring plaintiff's share of the original subordinate convertible promissory note offering . . . ."
On March 3, 2011, the trial court granted plaintiff's motion for issuance of an order to show cause re contempt. An order to show cause re contempt was issued as to Prospect Medical Holdings, Inc. and Brotman Medical Center, Inc. Plaintiff's dismissal motion omits all of the relevant pleadings concerning the order to show cause. As for willful disobedience, the trial court ruled, "There is a sufficient basis to find defendants did not comply with a court order for purposes of setting the [order to show cause regarding] contempt hearing." The trial court scheduled the contempt hearing for April 20, 2011.
In opposition, defendants argue the motion is premature because the trial court has not found that Prospect Medical Holdings, Inc. is in contempt of the June 25, 2010 preliminary injunction. They argue the burden of proof to convince the court to set a contempt hearing is sufficiency of the evidence. And they contend this is a lower standard of proof than the "beyond a reasonable doubt" burden of proof required for a contempt adjudication. Defendants also contend there is no basis for a contempt finding because Brotman Medical Center, Inc.'s chief executive officer and interim chief financial officer did not effectuate the restructuring of the convertible subordinated promissory notes offering. And even if the restructuring had taken place, Prospect Hospital Advisory Services, Inc. never acquired plaintiff's pro rata portion of the notes. In addition, defendants argue: dismissal of the appeal would validate the very order they are appealing from; any contempt finding would apply only to Prospect Medical Holdings, Inc. and not to Mr. Lee and Prospect Hospital Advisory Services, Inc.; and defendants should be permitted to a file a supplemental response after the trial court rules on the contempt order to show cause.
The contempt hearing was initially schedule for April 20, 2011 but was later rescheduled for November 1, 2011. Thus, the trial court has not made any finding concerning Prospect Medical Holdings, Inc.'s alleged contempt of the preliminary injunction order. None of the evidence propounded in the trial court by plaintiff in connection with the post-judgment contempt hearing has been presented to us. Plaintiff has failed to sustain its burden of showing a violation of the injunction. Plaintiff has not established defendants violated the preliminary injunction. Further, the trial court has made no contempt findings. Plaintiff's motion to dismiss or stay the appeal is denied.
B. Standard Of Review
We apply the following standard of review: "In determining whether to issue a preliminary injunction, the trial court considers two related factors: (1) the likelihood that the plaintiff will prevail on the merits of its case at trial, and (2) the interim harm that the plaintiff is likely to sustain if the injunction is denied as compared to the harm that the defendant is likely to suffer if the court grants a preliminary injunction." (Millennium Rock Mortgage, Inc. v. T.D. Service Co. (2009) 179 Cal.App.4th 804, 808; O'Connell v. Superior Court (2006) 141 Cal.App.4th 1452, 1463.) A ruling on an application for preliminary injunction is generally reviewed for an abuse of discretion. (People ex rel. Gallo v. Acuna (1997) 14 Cal.4th 1090, 1109; Cohen v. Board of Supervisors (1985) 40 Cal.3d 277, 286; Smith v. Adventist Health System/West (2010) 182 Cal.App.4th 729, 738-739.) The party challenging the granting of a preliminary injunction has the burden of making a clear showing of an abuse of discretion as to one of the two aforementioned preliminary injunction factors. (Smith v. Adventist Health System/West, supra, 182 Cal.App.4th at pp. 739, 749; Teachers Ins. & Annuity Assn. v. Furlotti (1999) 70 Cal.App.4th 1487, 1493.) An abuse of discretion will be found only where the trial court's decision exceeds the "bonds of reason or contravenes" uncontradicted evidence. (Jay Bharat Developers, Inc. v. Minidis (2008) 167 Cal.App.4th 437, 443; Smith v. Adventist Health System/West, supra, 182 Cal.App.4th at p 739.) But the trial court's expressed and implied findings of fact are examined under the substantial evidence standard while its conclusions on issues of pure law are reviewed de novo. (Smith v. Adventist Health System/West, supra, 182 Cal.App.4th at p. 739; Millennium Rock Mortgage, Inc. v. T.D. Service Co., supra, 179 Cal.App.4th at pp. 808-809; 14859 Moorpark Homeowner's Assn. v. VRT Corp. (1998) 63 Cal.App.4th 1396, 1403 ["[T]o the extent that the determination on the likelihood of a party's success rests on an issue of pure law not presenting factual issues to be resolved at trial, we review the determination de novo"].)
C. Likelihood Of Success—Nature Of Plaintiff's Claims
Defendants contend the trial court erred in granting the preliminary injunction. They argue plaintiff is not likely to succeed on the merits because it lacks standing to bring its direct claims, which are derivative in nature. Defendants argue plaintiff's claims are derivative because its core allegation that its ownership interest will be diluted by the convertible subordinated promissory notes offering is merely an incidental consequence of the harm to Brotman Medical Center, Inc. Defendants contend all Brotman Medical Center, Inc. shareholders were offered an equal opportunity to maintain their proportionate percentage ownership stake in the convertible subordinated promissory notes offering. Thus, defendants reason any injury from the allegedly improper stock offering is suffered by Brotman Medical Center, Inc. as a whole. And any injury is suffered only incidentally by shareholders who chose not to participate in the convertible subordinated promissory notes offering. Defendants also argue plaintiff's allegations of self-dealing resulting in overpayments are derivative in nature and unsupported by the evidence.
In response, plaintiff argues its claims are direct because it seeks to recover for injuries to itself, not to Brotman Medical Center, Inc., as minority shareholder. Plaintiff also contends its claims are not derivative because they are not based upon conduct causing an across-the-board impairment of stock value. Rather, plaintiff claims it suffered injury as a minority shareholder through the dilution of its ownership interest in Brotman Medical Center, Inc. In addition, plaintiff argues it has not alleged claims for mismanagement or corporate waste. Also, plaintiff argues the reasons asserted for the convertible subordinated promissory notes offering is false and pretextual. Further, plaintiff contends the amended and restated consulting service agreement will be used by defendants to dilute plaintiff's ownership interest because it permits Prospect Hospital Advisory Services, Inc. debt to be converted to common stock.
Our Supreme Court has held: "A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of the failure of the corporation to act. Thus, 'the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or it seeks to prevent the dissipation of its assets.'" (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106-107; accord Schuster v. Gardner (2005) 127 Cal.App.4th 305, 313; Avikian v. WTC Financial Corp. (2002) 98 Cal.App.4th 1108, 1115.) A direct claim, in contrast, asserts a right against the corporation which a shareholder possesses as an individual separate from the corporate entity. (Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d at p. 107; Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 1222.) Our Supreme Court has explained, "If the injury is not incident to an injury to the corporation, an individual cause of action exists." (Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d at p. 107; accord Schuster v. Gardner, supra, 127 Cal.App.4th at p. 313; Denevi v. LGCC, LLC, supra, 121 Cal.App.4th at p. 1222.) The Court of Appeal has held, "Whether there is one minority shareholder or many, an action is individual only if the stock of the individual plaintiff or plaintiffs is the only stock affected adversely." (Nelson v. Anderson (1999) 72 Cal.App.4th 111, 127; see Crain v. Electronic Memories & Magnetics Corp. (1975) 50 Cal.App.3d 509, 520-522.)
The Court of Appeal also has held, '""It is a general rule that a corporation which suffers damages through wrongdoing by its officers and directors must itself bring the action to recover the losses thereby occasioned, or if the corporation fails to bring an action, suit may be filed by a stockholder acting derivatively on behalf of the corporation. An individual [stockholder] may not maintain an action in his own right . . . for destruction of or diminution in the value of the stock . . . . '"" (PacLink Communications Internal, Inc. v. Superior Court (2001) 90 Cal.App.4th 958, 965 quoting Rankin v. Frebank Co. (1975) 47 Cal.App.3d 75, 95.) Claims relating to mismanagement of corporate assets and self-serving deals damage the corporation generally; the loss in value of an individual shareholder's investment in the corporation is merely incidental to the alleged harm inflicted upon the corporation and all of its stockholders. (Bader v. Anderson (2009) 179 Cal.App.4th 775, 801 [alleged reduction in stock value caused by depletion of corporate funds from unauthorized bonus payments to executives and absence of tax deductions harms corporation and thus is derivative]; Avikian v. WTC Financial Corp., supra, 98 Cal.App.4th at pp. 1115-1116; PacLink Communications Internal, Inc. v. Superior Court, supra, 90 Cal.App.4th at p. 964 [fraudulent transfer of corporate assets injures corporation; any injury to individual shareholder is incidental].) Harm to individual shareholders through the diminution in stock value and dilution of their ownership interest through the issuance of new shares is incidental to the injury to the corporation. (Schuster v. Gardner, supra, 127 Cal.App.4th at p. 313; accord May v. Coffey (Conn. 2009) 291 Conn. 106, 115 [stock offering at below market value harmed corporation and thus is derivative]; In re Nuveen Fund Litigation (N.D. IL. 1994) 855 F. Supp. 950, 955 [claims are derivative where shareholders' proportionate voting rights changed because some shareholders exercised their rights to purchase new shares and others did not].)
Plaintiff's claims for fiduciary duty breach, conspiracy, minority shareholder oppression, and unjust enrichment are derivative in nature. The gravamen of the first amended complaint is that defendants seek to dilute plaintiff's ownership interest in Brotman Medical Center, Inc. through the convertible subordinated promissory notes offering and other actions. Plaintiff was offered the right to purchase the notes in proportion to its respective current ownership of Brotman Medical Center, Inc. Plaintiff can avoid the dilution of its ownership interest, along with the prospective loss of its directors' board seat, by exercising its right to purchase $1.4 million in convertible subordinated promissory notes to maintain its 27 percent share of Brotman Medical Center, Inc.'s common stock. The $5.5 million convertible subordinated promissory notes offering, if the notes are converted to Brotman Medical Center, Inc. stock, impairs the stock value on a per share basis. This harms the corporation and all of its shareholders. Any injury suffered by plaintiff was incidental to the harm suffered by the corporation as a result of the allegedly improper convertible subordinated promissory notes offering.
In addition, plaintiff alleges defendants engaged in self-dealing transactions with Brotman Medical Center, Inc. The extent of the self-dealing transactions include: the convertible subordinated promissory notes offering; the amendment to the administrative services agreement; the amended and restated consulting services agreement; and the subordinated reimbursement agreement. The alleged overpayment by Brotman Medical Center, Inc. amounts to misfeasance or mismanagement of corporate assets and self-dealing; any obligations that were violated were duties owed directly to the corporation. (See Avikian v. WTC Financial Corp., supra, 98 Cal.App.4th at pp. 1115-1116; Nelson v. Anderson, supra, 72 Cal.App.4th at p. 125.)
Plaintiff argues even if its injuries are incidental to Brotman Medical Center, Inc.'s injuries, the distinction between direct and derivative claims is meaningless with so few shareholders. Plaintiff contends the Court of Appeal rejected the distinction between direct and derivative claims in the close-corporation setting in Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, 1252-1260. Plaintiff's reliance on Jara is misplaced. In Jara, the Court of Appeal held the minority shareholder had a direct claim for fiduciary duty breach. In Jara, the gravamen of the complaint was that the minority shareholder "was deprived of a fair share of the corporation's profit" because of the defendants' generous payment of executive compensation to themselves. (Id. at p. 1258.) Contrary to plaintiff's assertion, the Jara court did not reject the distinction between direct and derivative claims where there are few shareholders in a closely-held corporation. Indeed, the Jara court acknowledged that in Nelson v. Anderson, supra, 72 Cal.App.4th 111, the minority shareholder lacked standing to sue the majority stockholder for mismanagement of the corporation. This was even though the corporation had only two shareholders. (Id. at p. 1255.) In Jara, the plaintiff was injured because he did not receive his proper share of the corporate profits as a result of the excessive executive compensation paid to the majority shareholders. (Id. at p. 1255.) Here, plaintiff's core allegations are the improper offer of convertible subordinated promissory notes and the mismanagement of corporate assets. These two allegations that underlie plaintiff's claims are derivative in nature as discussed above. Accordingly, plaintiff lacks standing to bring its direct claims. Since plaintiff has no standing to bring its direct claims, the preliminary injunction is reversed.
IV. DISPOSITION
The June 25, 2010 order granting the preliminary injunction is reversed. Defendants, Prospect Medical Holdings, Inc., Prospect Hospital Advisory Services, Inc. and Samuel S. Lee, are to recover their appeal costs from plaintiff, Culver Hospital Holdings, L.P.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
TURNER, P. J.
We concur:
ARMSTRONG, J.
MOSK, J.