Opinion
67939-2-I
02-11-2013
MICHAEL YERKOVICH, in a derivative capacity and individually, Respondent, v. PINNACLE PROCESSING GROUP, INC., a Washington corporation, Defendant, SCOTT BANCHERO, an individual, Appellant.
UNPUBLISHED OPINION
Verellen, J.
Scott Banchero and Michael Yerkovich each owned 50 percent of the shares of Pinnacle Processing Group, Inc. (PPG). In 2006, they entered into a shareholder agreement to split the corporation's profits equally. In 2007 and 2008, Banchero distributed to himself more than his equal share of the corporation's earnings. Yerkovich sued Banchero, alleging claims in both an individual and derivative capacity, including an individual claim for breach of the 2006 agreement.
After a bench trial, the court concluded Banchero had breached the 2006 agreement, entitling Yerkovich, rather than the corporation, to damages. The trial court awarded damages to Yerkovich, effectively redistributing PPG's profits equally between the two shareholders. Banchero appeals, arguing the trial court erred in awarding judgment to Yerkovich individually instead of to the corporation, and contending the court should not have awarded Yerkovich 50 percent of the corporation's net profits from 2007 and 2008 because Yerkovich did not work for the business throughout that time.
Because Yerkovich prevailed on his breach of contract claim, an individual rather than derivative cause of action, the court did not err in awarding judgment to Yerkovich. Nor did the court err in entering judgment that gave effect to the terms of the parties' agreement to split net profits equally. We affirm.
FACTS
Michael Yerkovich founded and incorporated PPG in May 2002. PPG processes credit card transactions between merchants and financial institutions. As the founder, Yerkovich held 100 percent of the corporation's stock and bore the financial burden and risk of the new start-up. Scott Banchero, Yerkovich's cousin, began working for the company in 2002. In September 2003, in recognition of Banchero's increasing efforts on behalf of PPG and his willingness to assume joint liability with Yerkovich on the corporate line of credit, Banchero became a shareholder.
The parties entered into the "Pinnacle Processing Group Shares Allocation Contract" (2003 Contract) to memorialize Yerkovich's start-up efforts. The 2003 Contract allocated 50 percent ownership in PPG to Banchero, set Banchero's salary at $1,000 a week as a full-time employee, and set Yerkovich's salary at $1,000 per month as a part-time employee. Future salary increases were to be by mutual agreement, or an automatic increase of five percent would take effect as of May 1 each year. Yerkovich remained the corporation's president and sole director.
In late 2003, after the parties executed the 2003 Contract, Yerkovich was placed in police custody in Mexico and detained for 15 months. Yerkovich signed a power of attorney authorizing Banchero to take action on his behalf so PPG could continue to operate. The power of attorney expired on December 31, 2004. During 2004, Banchero acted unilaterally to make himself a majority shareholder, resulting in a 51/49 stock ownership split, and to appoint himself as chairman of the board of directors, supplanting Yerkovich's authority as the sole director. Banchero failed to give Yerkovich proper notice of the special meetings during which Banchero took these actions.
In 2006, after Yerkovich had been released from police custody in Mexico and returned to work at PPG, the two shareholders entered into a share allocation agreement entitled the "Master Operational Agreement and Pinnacle Processing Group Shares Allocation Contract First Amendment" (2006 Contract). The 2006 Contract eliminated the salary provisions in the 2003 Contract and mandated the corporation's profits be split 50/50 between the two shareholders.
In December 2007, Banchero held a special meeting of the board of directors without notice to Yerkovich. Banchero eliminated Yerkovich's access to PPG's books and records. Banchero then refused to honor Yerkovich's request to review corporate tax returns and other financial records.
In May 2008, Banchero held another special meeting of the board of directors, during which he purported both to remove Yerkovich as president of the board and to appoint himself as interim president. On August 5, 2008, Yerkovich stopped going into PPG's office, and soon ceased to work on behalf of the business. Yerkovich ultimately sought other employment.
Yerkovich attended PPG's annual shareholder meeting in January 2009. Yerkovich asked to review all of PPG's 2008 financial reports, but Banchero provided only some of the documents. Yerkovich retained counsel and served PPG and Banchero with a request to review accounting records pursuant to RCW 23B.16.020. Upon Yerkovich's review of PPG's tax returns for 2006, 2007 and 2008, Yerkovich learned Banchero had increased his own compensation, contrary to the 2006 agreement to share the profits equally. The parties had never discussed the amount or distribution of the 2007 and 2008 profits.
The parties do not dispute the distribution of profits from 2006.
Yerkovich discovered Banchero set his own salary at $300,000 for 2007 and $450,000 for 2008, while setting Yerkovich's salary at $100,000 in 2007 and $275,000 in 2008. In 2007, the profits totaled $640,291.18, of which Banchero received $347,657.24 ($300,000 as salary and the remainder as a loan), and Yerkovich received $292,633.94 ($100,000 as salary and the remainder as a loan). In 2008, the profits totaled $578,432.40, of which Banchero received $450,000 (all of which was classified as salary), and Yerkovich received $128,432.40.
In May 2009, after Banchero refused to honor Yerkovich's second records request, Yerkovich filed suit against Banchero on behalf of both himself and PPG. Yerkovich alleged Banchero breached the 2006 Contract. Yerkovich also requested removal of Banchero as director under RCW 23B.08.090.
Yerkovich alleged other causes of action, including unjust enrichment, a request for creation of a constructive trust for all monies due and owing PPG, conversion and disgorgement, breach of fiduciary duty and self-dealing, a request for accounting, and a request for a declaration of his rights under the noncompetition clause in the 2006 Contract. Only the breach of contract and removal actions appear to have gone to trial.
After a bench trial, the court found Banchero had "acted inconsistently with and in defiance of the 2006 Contract which clearly manifested the intention to split profits equally." The court further found the "2006 Contract was effectively eviscerated by Banchero's actions in using salary distributions to get himself the lion's share of what would otherwise be distributed as net profits." Finally, the court determined:
Clerk's Papers at 135 (Finding of Fact 15).
Id.
Banchero's decisions about how much to set salaries, how to avoid a fair split of the profit, how and when to characterize PPG loans, and when to have PPG cover his tax liabilities were grossly self serving and not based on any reasonable formula, and that is why he resisted giving his business partner access to the books.
Clerk's Papers at 138 (Finding of Fact 25).
The court concluded Banchero had breached the 2006 Contract, entitling Yerkovich to an award of damages. The court enforced the 2006 Contract as written, as the parties could "determine if they wanted to set their financial awards by the value of their labor or by the value of their equity stakes, " and they had unambiguously chosen the latter.
Clerk's Papers at 140 (Conclusion of Law at 6).
Because the language of the 2006 Contract stated the parties would share profits equally, the court took the total profits for 2007 and 2008, divided that amount in half, and awarded to Yerkovich the difference between the distributions Yerkovich received and the 50 percent he was owed. The court also awarded prejudgment interest.
The court found it unnecessary to remove Banchero as a director because the actions Banchero had taken to remove Yerkovich and appoint himself were "illegal and invalid." Because Banchero's actions were ultra vires, Yerkovich "remains as PPG's sole Board member and it is unnecessary to consider removing Banchero because it has been determined he is not on PPG's Board of Directors as a matter of law."
Clerk's Papers at 143 (Conclusion of Law 10).
Id.
Banchero appealed.
DISCUSSION
Our review of a bench trial is a two-step process. We review findings of fact to determine whether they are supported by substantial evidence and, if so, whether the findings support the conclusions of law. Substantial evidence is the quantum of evidence sufficient to persuade a rational, fair-minded person that the premise is true.We review conclusions of law de novo. Banchero's failure to assign error to the court's findings of fact and conclusions of law significantly limits the scope of our review because the unchallenged findings of fact are verities on appeal.
Hegwine v. Longview Fibre Co., 132 Wn.App. 546, 555, 132 P.3d 789 (2006).
Id. at 555-56.
Id. at 556.
Robel v. Roundup Corp., 148 Wn.2d 35, 42, 59 P.3d 611 (2002). Further, to the extent Banchero addresses arguments and authority for the first time in his reply brief, they do not warrant consideration. Cowiche Canyon Conservancy v. Bosley, 118 Wn.2d 801, 809, 828 P.2d 549 (1992).
Relief to Yerkovich Individually
In a shareholder derivative action to enforce a corporate cause of action, the judgment belongs to the corporation rather than to the individual shareholders. It is "well settled" in corporate law that the test used to distinguish between derivative and individual harm is whether the plaintiff suffered special injury. A plaintiff suffers a special injury if the plaintiff suffers a wrong not suffered by all shareholders generally or where the wrong involves a contractual right of the shareholders. Under Washington law, even in a derivative setting, a direct recovery to a shareholder is permissible if awarding recovery to the corporation would result in other shareholders receiving a portion of the recovery to which they are not entitled. A court may then look beyond the corporation and award the recovery to the individual shareholder so entitled.
Interlake Porsche & Audi v. Bucholz, 45 Wn.App. 502, 519, 728 P.2d 597 (1986).
In re Tri-Star Pictures, Inc., Litigation, 634 A.2d 319, 330 (Del. 1993).
Id.
Bucholz, 45 Wn.App. at 519-20.
Id. at 520.
Banchero contends the court erred by awarding judgment in favor of Yerkovich individually because Yerkovich brought the action in a derivative capacity. Banchero's argument ignores the breach of contract action Yerkovich brought in his individual capacity. Yerkovich alleged Banchero had breached the 2006 Contract by drawing high salaries in 2007 and 2008, and as a direct and proximate result of the breach, "Yerkovich as PPG's sole minority shareholder has been damaged in an amount to be proven at the time of trial." Yerkovich also requested a declaration of his rights under the 2006 Contract to determine the amount of PPG's net profits due and owing to him individually, rather than to PPG.
Clerk's Papers at 7.
The uncontroverted findings of fact reflect Yerkovich was entitled to, but did not receive, an equal share of PPG's profits. The 2006 Contract mandated that Banchero and Yerkovich split the proceeds, but Banchero breached that contract by setting a higher salary for himself than for Yerkovich in 2007 and 2008. The court found that "[t]he 2006 Contract did not permit Banchero to unilaterally set salaries or to set salaries more favorable to him than to Yerkovich." To remedy the breach, the court concluded "Yerkovich is entitled to an award of damages."
Clerk's Papers at 140 (Conclusion of Law 3).
Clerk's Papers at 140 (Conclusion of Law 4).
Additionally, Yerkovich's breach of contract claim is based on his assertion that he suffered special injury which Banchero, the only other shareholder, did not. The 2006 Contract entitled Yerkovich to directly recover his equal share of the net profits. The court properly entered judgment in favor of Yerkovich individually, rather than in favor of PPG.
The Judgment Amount
Banchero contests, on numerous unconvincing grounds, the amount of the judgment the court awarded to Yerkovich. Each of Banchero's arguments is ultimately controlled by the court's application of the unambiguous provision of the 2006 Contract mandating an equal division of net profits.
Banchero first contends that, notwithstanding the 2006 Contract provision for equal distribution of the profits, he had authority under the bylaws to set his and Yerkovich's salaries. This argument disregards the court's uncontroverted findings that Banchero's actions to amend the bylaws, appoint himself chairman of the board, and transfer shares to give himself a majority interest were all ultra vires. It further disregards the court's determination that the 2006 Contract itself "did not permit Banchero to unilaterally set salaries or to set salaries more favorable to him than to Yerkovich."
Clerk's Papers at 140 (Conclusion of Law 3).
Banchero also argues the court's interpretation of the 2006 Contract disregarded his 51 percent stock ownership, which entitled him to more than an equal share of the profits. The court found Banchero's first attempt in 2004 to become the majority shareholder to be ultra vires. While the 2006 Contract does provide for a transfer of one percent of Yerkovich's stock to Banchero, the same contract reflects the parties' unequivocal agreement to split profits equally, without regard to the two percent difference in equity stake.
Banchero next attempts to circumvent the court's interpretation of the 2006 Contract by arguing that although the parties did away with salaries when PPG converted to an S corporation, they did not intend either party to work for the corporation without compensation. Banchero contends he did not receive enough compensation for running the business while Yerkovich was phasing out. Banchero also argues the flip side of the coin; specifically, that Yerkovich was not entitled to an equal share of the profits as his employment terminated on August 8, 2008, but he received profits for all of 2008.
The court rejected Banchero's "sweat equity" arguments, stating in its unchallenged conclusion of law, "If the parties had conferred upon the issue of the salaries, and made some adjustment to recognize the greater value of Banchero's labors, the court could certainly enforce such a modification." No such modification existed. The effort and time that either party devoted to PPG as an employee is immaterial because the 2006 Contract directed that profits be divided equally between both shareholders.
Clerk's Papers at 140 (Conclusion of Law 6).
Finally, Banchero argues the large salary distributions he took in 2007 and 2008 were based on the advice of PPG's accountant, Robert Christopfel. Banchero relies on Christopfel's testimony that Christopfel advised Banchero to consider the services rendered to the corporation when allocating salaries for the year. Because Banchero had provided more extensive services to PPG than Yerkovich from 2006 to 2008, Christopfel advised Banchero to draw a salary commensurate with those services, i.e., if Banchero's salary was too low (or roughly equal to Yerkovich's, who was not providing services), the Internal Revenue Service might become suspicious that Banchero was attempting to evade payroll tax by taking earnings predominately through profit distributions.
Banchero's argument fails. The agreement in the 2006 Contract to divide net profits equally did not prevent Banchero from heeding the advice of his accountant and making a proper allocation between salary and profit distributions of his half of the corporation's total earnings. Banchero was not at liberty to allocate to himself more than 50 percent of the profits, regardless of how he classified them for tax purposes.
Banchero's attempts to challenge the amount of the judgment are unpersuasive and inconsistent with the court's findings and conclusions. We affirm the trial court's award of 50 percent of PPG's profits for 2007 and 2008 to Yerkovich in accordance with the 2006 Contract.