Opinion
NOT TO BE PUBLISHED
Super. Ct. No. CV026757
DAVIS, Acting P.J.
This action involves the control of a closely held corporation and related partnership. One set of shareholders has accused another set of shareholders of improperly obtaining control of the corporation and the partnership and placing these two entities into bankruptcy to the detriment of the accusing shareholders.
The trial court sustained demurrers without leave to amend against the accusing shareholders and entered judgments of dismissal against them, finding their accusations barred by the doctrines of res judicata and collateral estoppel and by a failure to allege a shareholder derivative action.
We disagree with these two findings of the trial court and reverse. In doing so, we conclude that a court of competent jurisdiction has yet to finally determine the issue of whether the nonaccusing shareholders improperly obtained control of the corporation and partnership (and the accompanying power to file bankruptcy proceedings for those two entities). We also conclude that the plaintiffs have alleged an individual action as minority shareholders.
Background
In reviewing a general demurrer sustained without leave to amend, we must determine whether--assuming the facts alleged in the complaint are true--a cause of action has been or can be stated. (Rogoff v. Grabowski (1988) 200 Cal.App.3d 624, 628.) We may also consider matters that may be judicially noticed. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The pertinent facts alleged in the complaint, and those we may judicially notice (Evid. Code, § 452, subd. (d) [court records]), are as follows.
Creekside Vineyards, Inc. (Creekside Inc.) is a California corporation that has issued 300 shares. Plaintiffs David and Donald Hirsch, as trustees of their respective individual trusts (collectively referred to as the Hirsches), each own 50 shares. Defendant Kathleen Lagorio Janssen (Janssen) owns individually, or as a trustee, 90 shares, and her son, defendant Chris Lagorio (Lagorio), owns or controls 10 shares. The remaining 100 shares were issued to Patrick N. McCarty (McCarty).
McCarty acquired his 100 shares by giving Creekside Inc. a $500,000 promissory note with the shares as collateral. Shortly thereafter, this note and collateral pledge of stock were assigned to Creekside Vineyards, LP (Creekside LP). Creekside LP is a California limited partnership in which Creekside Inc. is the general partner and 75 percent owner, and R & J Dondero, Inc. (R&J Inc.) is the limited partner and 25 percent owner. R&J Inc.’s principal shareholder is defendant Joseph Dondero (Dondero).
The primary assets of the Creekside entities consisted of long-term agricultural leases of approximately 1,300 acres of grape vineyards, and contracts for the sale of grapes to wineries.
At all pertinent times, defendants Janssen, Lagorio and Dondero (collectively, defendants) have claimed to be the duly elected majority of the five-member board of directors of Creekside Inc., and as such have controlled both Creekside entities, with defendant Janssen as president and chair of the board of directors of Creekside Inc.
In April 2001, defendants, through the Creekside entities, filed an action in San Joaquin Superior Court (case No. CV013505) in which they sought a judicial determination that McCarty had defaulted on his note payments and that defendant Janssen (as the president and chair of Creekside Inc.) was entitled to vote McCarty’s 100 shares. Without obtaining such a determination, defendants, at an August 2001 shareholder meeting, simply declared that McCarty was in default and that defendant Janssen, on behalf of Creekside Inc.--the general partner of Creekside LP, pledge holder of the McCarty shares--was entitled to vote those shares.
In June 2002, defendants “manufactured” a financial crisis regarding the Creekside entities to further their control to the detriment of the Hirsches. This conduct enabled defendants to obtain a preliminary injunction from Judge Platt of the San Joaquin Superior Court (in case No. CV013505) that authorized defendant Janssen’s management of the Creekside entities and prohibited McCarty’s. This conduct also enabled defendants to authorize Janssen to file bankruptcy proceedings for Creekside Inc. and Creekside LP, should that be deemed necessary. This conduct occurred notwithstanding that the Creekside entities had been and continued to be enormously profitable, generating huge profits, cash flow and distributions to the Creekside shareholders (annual distributions to shareholders had been in the approximate range of $200,000 to $400,000).
On September 20, 2002, just before Judge Saiers of the San Joaquin Superior Court (in case No. CV013505) indicated his opinion that McCarty had cured any alleged default and should be entitled to vote his stock, defendants filed bankruptcy proceedings on behalf of Creekside Inc. and Creekside LP.
McCarty and the Hirsches twice unsuccessfully moved the bankruptcy court to dismiss the bankruptcy proceedings for lack of jurisdiction, alleging that defendant Janssen was not legally authorized to file bankruptcy proceedings on behalf of the Creekside entities. The movants argued that defendants had unlawfully obtained control of the Creekside entities based on McCarty’s purported default, and therefore defendants had improperly authorized defendant Janssen to file the bankruptcy proceedings. McCarty apparently appealed the first of these denials to the federal district court (David Hirsch appealed too, but voluntarily dismissed his appeal). The district court rejected McCarty’s appeal, characterizing it as an appeal from an interlocutory order for which the required leave to appeal had not been sought, and as premature, given that a similar motion to dismiss was filed after the appeal.
While the Creekside entities were in bankruptcy, defendants paid the landlord of the Creekside leases $500,000 to amend the leases to prohibit anyone from farming the leased land without the defendants’ consent. Defendants then sold the leases at a single-bidder auction in August 2003 to an entity they controlled, J&D Vineyards LLC, for an amount the Hirsches claim was approximately one-third the true value of the leases. The bankruptcy court apparently approved these activities.
In January 2006, after letting the bankruptcy proceedings languish to the point that the bankruptcy court insisted that something be done, defendants voluntarily dismissed the bankruptcy proceedings on behalf of the Creekside entities.
The Hirsches filed their complaint against defendants in June 2005 in San Joaquin Superior Court, while the bankruptcy proceedings were still pending. The Hirsches allege five causes of action: breach of fiduciary duty; conspiracy to commit breach of fiduciary duty and contract; intentional infliction of emotional distress; breach of Corporations Code section 309 (corporate director’s duty concerning the best interests of the corporation and its shareholders); and breach of title 18 United States Code section 154 (defendants, as bankruptcy agents, could not purchase any bankruptcy estate property). The Hirsches sought general and punitive damages, alleging an injury unique to themselves and distinct from the corporation in that they lost their Creekside share value, their annual income distributions as shareholders, and the assets of Creekside Inc. which defendants essentially sold to themselves.
The trial court sustained without leave to amend defendant Dondero’s demurrer, as well as defendant Janssen-Lagorio’s demurrer, to these five causes of action. The court found that the causes of action had been litigated and decided in prior court proceedings and were therefore barred by the doctrines of res judicata and collateral estoppel. The trial court also found, regarding the Janssen-Lagorio demurrer, that the Hirsches’ complaint appeared to constitute a derivative action but failed to state the factual requirements for such an action.
Discussion
1. Res Judicata and Collateral Estoppel
The doctrine of res judicata precludes parties or their privies from relitigating a cause of action--and its companion doctrine, collateral estoppel, precludes parties or privies from relitigating an issue--“‘that has been finally determined by a court of competent jurisdiction.’” (Nathanson v. Hecker (2002) 99 Cal.App.4th 1158, 1162 (Nathanson), quoting Levy v. Cohen (1977) 19 Cal.3d 165, 171; see 7 Witkin, Cal. Procedure (4th ed. 1997) Judgment, § 354, p. 915.)
In their complaint, the Hirsches allege that the defendants improperly obtained control of the Creekside entities by simply declaring, on their own, that McCarty was in default and then having defendant Janssen vote McCarty’s shares, and therefore defendants could not authorize under California law the filing of bankruptcy petitions on behalf of the Creekside entities. The Hirsches argue that the bankruptcy court was not a court of competent jurisdiction for res judicata and collateral estoppel purposes. The defendants counter that a court of competent jurisdiction was involved, when one considers the judicially noticeable actions of the San Joaquin County Superior Court, the bankruptcy court and the district court.
We conclude that, in light of the allegations in the Hirsches’ complaint and the matters we may judicially notice (Evid. Code, § 452, subd. (d) [court records]), the threshold issue of whether the defendants improperly obtained control of the Creekside entities by declaring McCarty in default and having defendant Janssen vote McCarty’s shares (and thereby improperly authorized bankruptcy proceedings for those entities), is an issue that has not been finally determined by a court of competent jurisdiction. Consequently, defendants may not invoke the doctrines of res judicata or collateral estoppel on this threshold issue.
The purported resolution of this threshold issue took place in the bankruptcy court with help from the San Joaquin Superior Court and the district court. The facts are as follows.
The pivotal court proceeding is the January 3, 2003, hearing in the bankruptcy court regarding the first motion to dismiss the bankruptcy proceedings for lack of jurisdiction made by McCarty and the Hirsches. At that hearing, the bankruptcy court referred to the injunction issued by Judge Platt of the San Joaquin Superior Court on June 4, 2002, and to a subsequent remark by Judge Saiers of the San Joaquin court that the critical issue was whether there had been a default on the McCarty note. The bankruptcy court then stated that, under the note, when there was a corporate distribution, the distribution was to be used as a payment on the note, and substantial evidence showed such payments were not made, “which would appear to indicate that there in fact had been a default.” The bankruptcy court continued: “According to the written agreement [regarding the note] and California law, once the note was in default[,] the limited partnership [Creekside LP, which held the note] could vote the shares, which is what in fact happened.” The bankruptcy court added that the June 4, 2002, injunction from the San Joaquin Superior Court had put defendant Janssen in charge of managing Creekside Inc., and that at a board of directors meeting on June 18, 2002, defendant Janssen “was authorized on behalf of [Creekside Inc.], which in turn is the general partner of [Creekside LP], to explore the possibility, and ultimately as appropriate, file [] bankruptcy petition[s] on behalf of both of those entities.” Consequently, the bankruptcy court determined that defendant Janssen was authorized to file the bankruptcy petitions on behalf of the Creekside entities.
Based on these findings, the bankruptcy court denied without prejudice McCarty’s and the Hirsches’ first motion to dismiss for lack of jurisdiction. The bankruptcy court denied a subsequent similar motion to dismiss by the Hirsches on this basis as well. McCarty and plaintiff David Hirsch appealed the denial of the first motion to dismiss to the district court (Hirsch voluntarily dismissed his appeal). The district court rejected McCarty’s appeal, characterizing it as being an appeal from an interlocutory order for which the required leave to appeal was not sought, and as a premature appeal given that a similar motion to dismiss was filed after the appeal.
As we shall explain, none of these three courts--the San Joaquin Superior Court, the bankruptcy court or the district court, individually or collectively--was a court of competent jurisdiction that finally determined the issue of whether the defendants improperly obtained control of the Creekside entities by declaring McCarty in default and having defendant Janssen vote McCarty’s shares. (Nathanson, supra, 99 Cal.App.4th at p. 1162.) Therefore, defendants may not invoke the doctrines of res judicata or collateral estoppel on this issue.
We start with the San Joaquin Superior Court. The injunction from that court that the bankruptcy court noted was a preliminary injunction obtained by the Creekside entities in case No. CV013505 (the Hirsches allege in their complaint here that this was the case in which the defendants, through the Creekside entities, sought a judicial determination that the defendants were entitled to possess and vote the McCarty shares). A ruling granting a preliminary injunction is not an adjudication of the ultimate rights in controversy; it merely represents the trial court’s discretionary decision whether a party should be restrained from exercising a claimed right pending trial. (Cohen v. Board of Supervisors (1985) 40 Cal.3d 277, 286.) The San Joaquin Superior Court never made a final determination in case No. CV013505, given the intervention of the Creekside bankruptcy filings and the automatic bankruptcy stay (the San Joaquin court also required Creekside, as a condition of the preliminary injunction, to file a bond in the event “the court finally decides that [the Creekside entities] are not entitled to” the preliminary injunction). The Hirsches allege in their present complaint that the defendants authorized the filing of the Creekside bankruptcy petitions to preclude any adverse final rulings from the San Joaquin Superior Court. For these reasons, we conclude the San Joaquin Superior Court did not “‘finally determine[]’”--for res judicata or collateral estoppel purposes--the issue of McCarty’s default and the voting of his shares by defendant Janssen. (Nathanson, supra, 99 Cal.App.4th at p. 1162.)
That brings us to the bankruptcy court. For this part of the discussion, we must first set forth some rather extensive law governing the jurisdictional reach of bankruptcy courts. That reach implicates a constitutional tension between Congress’ plenary power under article I “[t]o establish . . . uniform laws on the subject of bankruptcies throughout the United States” and the judicial power established under article III. (U.S. Const., art. I, § 8, cl. 4; art. III; see In re Gruntz (9th Cir. 2000) 202 F.3d 1074, 1080 (Gruntz).) As a constitutional formality, bankruptcy jurisdiction is actually placed initially in the district courts, and those courts refer that jurisdiction to bankruptcy courts as units of the district courts. (28 U.S.C.§§ 1334, 157(a) & 151; see 1 Collier Bankruptcy Manual (3d ed. rev. 1999) ¶ 3.01[1], pp. 3-3 to 3-4.)
In 1982, the United States Supreme Court, in Northern Pipeline Co. v. Marathon Pipe Line Co. (1982) 458 U.S. 50 [73 L.Ed.2d 598] (Marathon), wrestled with this tension between articles I and III. Marathon concluded, under the doctrine of separation of powers, that Congress could not vest in the non-article III bankruptcy court the power to adjudicate, render final judgment, and issue binding orders in a traditional state-law contract action filed by a debtor in a bankruptcy case that was subject only to ordinary appellate review, without consent of the litigants. (Marathon, supra, 458 U.S. at pp. 84-87; Thomas v. Union Carbide Agric. Prods. Co. (1985) 473 U.S. 568, 584 [87 L.Ed.2d 409].) Marathon distinguished between the “restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power,” and “the adjudication of state-created private rights.” (Marathon, supra, 458 U.S. at p. 71; Gruntz, supra, 202 F.3d at p. 1080.) As to such state-law adjudication, the Gruntz court characterized Marathon as holding “that Congress [does] not have the power to grant [adjudicative] jurisdiction to the Article I bankruptcy courts over proceedings related to a bankruptcy case involving rights ‘created by state law’ and ‘independent of and antecedent to the [bankruptcy] reorganization petition that confer[s] jurisdiction upon the [b]ankruptcy [c]ourt.’” (Gruntz, supra, 202 F.3d at pp. 1080-1081, quoting Marathon, supra, 458 U.S. at p. 84.)
In light of Marathon, Congress in 1984 enacted the current jurisdictional statute for bankruptcy courts, section 157 of title 28 of the United States Code (section 157). Section 157 provides as pertinent:
“(a) Each district court may provide that any or all cases under title 11 [title 11 governs bankruptcy] and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
“(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to [traditional appellate] review under section 158 [‘Core proceedings’ are defined in section 157(b)(2) as including those matters involving bankruptcy restructuring of debtor-creditor relations or integrally involving bankruptcy cases (e.g., bankruptcy estate administration, claim allowance)] . . . . [¶] . . . [¶]
“(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
“[(c)](2) Notwithstanding the provisions of paragraph (1) of this subsection, the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to [traditional] review under section 158 of this title.” (Italics added.)
In addition to Marathon and the 1984 jurisdictional statute (section 157), there is one more legal principle in the jurisdictional equation here for bankruptcy courts, a principle that applies to the filing of bankruptcy petitions by corporations. This principle was enunciated in Price v. Gurney (1945) 324 U.S. 100 [89 L.Ed. 776] (Price), which still stands, as a recent case has attested, “for the proposition that where a voluntary petition for bankruptcy is filed in behalf of a corporation, the bankruptcy court does not acquire jurisdiction unless those purporting to act for the corporation have authority under local law ‘to institute the proceedings.’” (Hager v. Gibson (4th Cir. 1997) 108 F.3d 35, 39, quoting Price, supra, 324 U.S. at p. 106.) And Price notes that it is the district court, not the bankruptcy court, that determines whether those purporting to act for the corporation have authority under local law “to institute the proceedings.” (Price, supra, 324 U.S. at p. 106; see id. at pp. 106-107.) As Price explains: “The District Court in passing on petitions filed by corporations under [the bankruptcy law then in effect] must of course determine whether they are filed by those who have authority so to act. In absence of Federal incorporation, that authority finds its source in local law. If the District Court finds that those who purport to act on behalf of the corporation have not been granted authority by local law to institute the [bankruptcy] proceedings, it has no alternative but to dismiss the petition. . . . The District Court in the exercise of its diversity jurisdiction would of course have the power to enforce derivative actions, to make faithless directors account, and the like, where local law permits. But under the Bankruptcy Act [then in effect] the power of the [bankruptcy] court to shift the management of a corporation from one group to another, to settle intracorporate disputes, and to adjust intracorporate claims is strictly limited to those situations where a petition has been approved.” (Price, supra, 324 U.S. at p. 106, fn. omitted.)
Although it is not entirely clear whether the bankruptcy court here actually determined that defendants properly obtained control of the Creekside entities (including the power to authorize those entities’ bankruptcies) by declaring McCarty in default and having defendant Janssen vote McCarty’s shares, we conclude the bankruptcy court was not a court of competent jurisdiction to make this final determination in any event. Section 157, Marathon and Price tell us so.
Under section 157(b), the issue of McCarty’s default and defendant Janssen’s vote of McCarty’s shares and the ensuing corporate/partnership power play (including the power to file the bankruptcy petitions) does not encompass a “‘core proceeding’” which a bankruptcy court may “determine” (core proceedings, for example, include the restructuring of debtor-creditor relations or those matters integrally involving bankruptcy cases such as the administration of the bankruptcy estate). (§ 157(b)(1), (b)(2), italics added; see Marathon, supra, 458 U.S. at p. 71.)
Instead, under Marathon and section 157(c), the issue of McCarty’s default, Janssen’s vote and corporate/partnership control is a noncore-related matter involving “the adjudication of state-created private rights” that are “independent of and antecedent to the [bankruptcy] reorganization petition that conferred jurisdiction upon the Bankruptcy Court.” (Marathon, supra, 458 U.S. at pp. 71, 84; see also Gruntz, supra, 202 F.3d at pp. 1080-1081.) A bankruptcy court may not “determine”--i.e., enter final orders or judgments on--a noncore-related matter unless the district court, with the consent of all the parties to the matter, refers it to the bankruptcy court to do so; in noncore related matters, a bankruptcy court acts as an adjunct to the district court, in a fashion similar to that of a magistrate or special master. (§ 157(c)(1), (c)(2); In re Castlerock Properties (9th Cir. 1986) 781 F.2d 159, 161.) Given the Hirsches’ repeated motions in the bankruptcy court to dismiss the Creekside bankruptcy proceedings for lack of jurisdiction, the Hirsches certainly did not consent to having that court decide this noncore issue; nor did the district court refer this noncore related matter to the bankruptcy court for determination.
And when we read Price in light of section 157, subdivision (c), the issue of whether those who purport to act on behalf of a corporation have been granted authority by local law to institute bankruptcy proceedings is an issue for the district court to finally determine, not the bankruptcy court, unless the district court has referred the issue to the bankruptcy court with the consent of all the parties to the issue. (Price, supra, 324 U.S. at p. 106.)
Rather, section 157(c)(1) governed the bankruptcy court’s jurisdiction over this noncore-related matter. Section 157(c)(1) states:
“(c)(1) A bankruptcy judge may hear [not ‘hear and determine’] a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.” (§ 157(c)(1), italics added; compare § 157(b)(1) [bankruptcy court may “‘hear and determine’” core proceedings]; § 157(c)(2) [bankruptcy court may “‘hear and determine’” noncore-related matter if district court, with consent of all parties, refers matter for determination].)
Nothing in the bankruptcy court records that defendants ask us to judicially notice shows that the bankruptcy court submitted proposed findings of fact and conclusions of law to the district court on the issue of whether or not the defendants improperly obtained control of the Creekside entities (including the power to authorize those entities’ bankruptcies) by declaring McCarty in default and having defendant Janssen vote McCarty’s shares. (This hole in the bankruptcy court records also encompasses any issue involving any noncore-related matter in that court regarding California Corporations Code section 709, which provides a summary procedure for determining whether a corporate board was properly elected where a shareholder claims he was improperly denied the right to vote.)
That leaves the district court as the final prong in the defendants’ alleged competent court triad of the San Joaquin Superior Court, the bankruptcy court and the district court. Again, though, nothing in the district court records that defendants ask us to judicially notice shows that the district court entered any final order or judgment that determined the issue of whether or not the defendants improperly obtained control of the Creekside entities by declaring McCarty in default and having defendant Janssen vote McCarty’s shares. Nor is there any problem with any lack of appeal by the Hirsches. There was no final order or judgment on this issue to appeal. (See Nathanson, supra, 99 Cal.App.4th at pp. 1164-1165; § 157(c)(1), (c)(2).)
We conclude that a court of competent jurisdiction has yet to finally determine the threshold issue of whether defendants improperly obtained control of the Creekside entities (including the power to authorize their bankruptcies) by declaring McCarty in default and having defendant Janssen vote McCarty’s shares. Consequently, defendants may not invoke, as to this issue, the doctrines of res judicata and collateral estoppel to demur to the Hirsches’ complaint. (Nathanson, supra, 99 Cal.App.4th at p. 1162.)
2. Derivative Action
As to the Janssen-Lagorio demurrer, the trial court also ruled that the Hirsches had failed to allege in their complaint a shareholder derivative action.
The problem with this ruling is that, while their complaint may contain some derivative phrasing (along with individual claims), the Hirsches on appeal confine their complaint to alleging individual claims and not shareholder derivative claims. A shareholder’s suit is derivative if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets. (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106 (Jones).) A shareholder’s suit is individual if it seeks to enforce, against a corporation, a right that the shareholder possesses as an individual, but the injury necessary to support the suit need not be unique to that shareholder; it may affect a substantial number of shareholders. (Id. at p. 107.)
The Hirsches’ complaint is based on the following legal principles. A corporate director, as well as a dominant or controlling shareholder or group of shareholders, are fiduciaries, and their powers are powers in trust. Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority shareholders, “particularly . . . [minority shareholders] in closely held corporations [such as here] whose disadvantageous and often precarious position renders them particularly vulnerable to the vagaries of the majority.” (Jones, supra, 1 Cal.3d at p. 111; see id. at p. 108 [majority shareholders’ fiduciary responsibility].) In short, it has been said that a corporation and its majority shareholders both owe a fiduciary duty to minority shareholders. (Pittelman v. Pearce (1992) 6 Cal.App.4th 1436, 1442 [characterizing Jones].) The gravamen of the Hirsches’ complaint is the defendants’ alleged breach of this fiduciary duty by usurping majority control and “selling out” the Hirsches; this may serve as the basis for an individual suit for damages on behalf of the Hirsches as minority shareholders. (Jones, supra, 1 Cal.3dat pp. 106-113.)
Disposition
The judgment is reversed. The Hirsches are awarded their costs on appeal.
We concur: NICHOLSON, J., BUTZ, J.