Opinion
G052262 c/w G052874
05-17-2017
ROMAN ZARETSKY, Plaintiff and Respondent, v. ROBERT YARDLEY et al., Defendants and Appellants.
Snell & Wilmer, Steven T. Graham, Todd E. Lundell, Deborah S. Mallgrave and Jing Hua for Defendants and Appellants. Stradling Yocca Carlson & Rauth, Richard C. Goodman, Marc J. Schneider, Stephen L. Ram and Justin E. Klaeb for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2012-00617002 consol. with 30-2014-00722581) OPINION Appeal from a judgment of the Superior Court of Orange County, Craig L. Griffin, Judge. Affirmed. Snell & Wilmer, Steven T. Graham, Todd E. Lundell, Deborah S. Mallgrave and Jing Hua for Defendants and Appellants. Stradling Yocca Carlson & Rauth, Richard C. Goodman, Marc J. Schneider, Stephen L. Ram and Justin E. Klaeb for Plaintiff and Respondent.
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Appellant Robert Yardley and Respondent Roman Zaretsky each owned 50 percent of the outstanding shares in Yardley-Zaretsky, Inc. (YZI), an engineering and construction firm Zaretsky formed with Yardley's father to perform installation and other work on specialized heating, air conditioning, and ventilation equipment. The products YZI installed were sold by a second company that Yardley's father formed, George Yardley Company (GYC). Zaretsky served as YZI's president and a GYC salesperson. When his father died, Yardley assumed control of GYC while Zaretsky continued to run YZI. Although he held half of its outstanding shares, Yardley had no direct involvement in YZI's business.
As GYC's president, Yardley implemented a variety of actions that negatively affected YZI's business and culminated when he terminated Zaretsky's employment as GYC's top salesperson while Zaretsky was out of the country on vacation. As the trial court noted, Zaretsky's termination had a "dramatic" and negative impact on YZI because installation work on the equipment he sold for GYC was YZI's primary revenue source. Yardley also developed a bad relationship with the two manufacturers that made the vast majority of the equipment GYC sold and YZI installed, leading the manufacturers to tell Zaretsky they no longer wanted to work with any company affiliated with Yardley, including YZI.
Following his termination, Zaretsky told Yardley he no longer could work with him at YZI because he did not trust him. Initially, Zaretsky offered to buy Yardley's interest in YZI and he worked to overcome the obstacles Yardley erected, but Yardley never accepted or countered Zaretsky's offer. Consequently, Zaretsky elected to voluntarily dissolve YZI. He continued working with YZI to complete all of its existing contracts, but did not bid on any new projects or enter into any new contracts for YZI. While winding up YZI's business, Zaretsky formed a new company, Zaretsky Engineering Solutions, Inc. (ZES), and began bidding on new projects under that name. Yardley responded by filing this lawsuit against Zaretsky, asserting a breach of fiduciary duty claim both in his own name and as a derivative lawsuit on YZI's behalf. Yardley alleged Zaretsky dissolved YZI in bad faith and appropriated its business by continuing the same line of work under the name ZES.
The trial court entered judgment in Zaretsky's favor, finding Zaretsky elected to dissolve YZI in good faith and did not breach his fiduciary duties by forming ZES and conducting the same type of business under that new name. Yardley appeals, arguing the trial court applied the wrong legal standard to determine the existence and scope of Zaretsky's fiduciary duties, and whether his actions breached those duties. According to Yardley, even if Zaretsky acted in good faith in electing to dissolve YZI, his fiduciary duties prevented him from continuing the same business at ZES without compensating Yardley for his interest in YZI. We do not find these arguments persuasive.
A shareholder's fiduciary duties prevent the shareholder from using the dissolution process to freeze out another shareholder and obtain an unfair advantage. Those duties, however, do not require a shareholder to compensate another shareholder in every instance in which a corporation is dissolved and a new one is formed to conduct the same type of business. Indeed, a shareholder may take reasonable and good faith steps to protect the shareholder's investment or otherwise cut his or her losses, including dissolving the corporation.
Here, the trial court properly applied these standards and concluded Zaretsky did not breach his duties by failing to compensate Yardley for the purported value of his interest in YZI. The court found Yardley severely damaged YZI by cutting off its principal revenue source and undermining its relationship with the primary manufacturers of the equipment it installed. The court further found YZI could not realize any of the business opportunities ZES obtained without Zaretsky's involvement in YZI, and Zaretsky had no obligation to continue working for YZI. Finally, the court determined Yardley failed to demonstrate YZI had any value other than the goodwill and reputation Zaretsky had in the industry, and Zaretsky had no obligation to continue using that reputation for YZI's benefit based on Yardley's conduct. We therefore affirm the judgment.
I
FACTS AND PROCEDURAL HISTORY
Zaretsky is a mechanical engineer who immigrated to the United States in 1980. Through his work, he met and developed a social and working relationship with Yardley's father, George Yardley (George). George owned GYC, which represented several product manufacturers and sold specialized heating, ventilation, and air conditioning equipment for use in institutional and commercial settings, such as laboratories and health care facilities. In 1994, George recruited Zaretsky to work for GYC as a salesperson.
We refer to George Yardley by his first name to avoid any confusion between him and Yardley based on their shared last name. No disrespect is intended.
Around the same time, the two men formed YZI as an engineering and construction business that performed installations, test and balance work, and system commissioning for the equipment GYC sold. They intended YZI to serve as the "construction arm" of GYC. Using his engineering expertise, Zaretsky worked with project engineers to design systems that incorporated the product lines GYC represented, and then used his familiarity with the projects and the products to bid the installation and other work for YZI. GYC earned commissions for selling its product lines, and YZI earned its money by installing these products. Under this business model, YZI was "heavily dependent" on the products Zaretsky sold for GYC and he was integral to the success of both companies.
Although they worked together to form YZI, George was the company's sole owner. He named Zaretsky as YZI's president and Zaretsky was responsible for the company's day-to-day operations. George also added Zaretsky to GYC's board of directors. The two men negotiated their business arrangement among themselves and sealed it with a handshake. They did not have a written agreement and Zaretsky never signed an employment or noncompetition agreement with either GYC or YZI. Over the years, YZI grew into a profitable enterprise.
In 2002, George rewarded Zaretsky's hard work by issuing him 50 percent of YZI's shares. George issued the other 50 percent to his son, Yardley. In 2003, George stopped working with YZI, and died in 2004. Following George's death, Yardley ran GYC, and Zaretsky continued to run YZI's operations. Although Yardley owned half of YZI, he was not involved in its operations. Zaretsky continued to serve as one of GYC's most successful salespersons while also running YZI.
In 2006, GYC for the first time obtained a contractors license that enabled it to install the products it sold. Previously, YZI performed that installation work under its license, and received a five percent fee for installing GYC's products. After GYC obtained a contractors license, it stopped referring installation work to YZI for products sold by salespersons other than Zaretsky. In 2009, Yardley limited Zaretsky's sales activities for GYC to two public works accounts, the University of California at Irvine (UCI) and the University of California at Riverside. These actions significantly reduced YZI's revenue by limiting it to installation work for GYC projects that Zaretsky sold, and limiting the customers to which Zaretsky could sell GYC's products.
Yardley further hampered YZI's business in early 2012 by failing to cooperate with Zaretsky's efforts to renew YZI's line of credit. In January, Zaretsky made the first of several requests for Yardley to provide YZI's bank with financial information necessary to renew the credit line. Yardley never provided the information because he thought it was unnecessary, and the bank ultimately refused to renew YZI's credit line. Despite the hurdles Yardley erected Zaretsky continued to grow YZI's revenue and profits.
Between 2010 and 2012, the products of just two manufacturers—Phoenix Controls and Aircuity—accounted for nearly three quarters of GYC's sales. Zaretsky specialized in those manufacturers' products, and he was GYC's top salesperson responsible for the vast majority of all equipment sales in the Southern California region. By 2012, Phoenix Controls and Aircuity became dissatisfied with GYC's overall performance because only Zaretsky recorded significant sales of their products in Southern California. These manufacturers approached Zaretsky and asked if YZI would distribute their products, but he told them he preferred to continue running the product lines through GYC. Phoenix Controls and Aircuity therefore continued to work with GYC, but grew increasingly frustrated with Yardley's failure to develop an acceptable plan to increase sales. Based on Yardley's strained relationship with Phoenix Controls and Aircuity, Zaretsky realized GYC could lose those product lines and therefore he prepared for the possibility YZI would become a distributor for Phoenix Control and Aircuity.
During this period, Darin Anderson approached Zaretsky about investing in YZI, and the two began negotiations for Anderson to purchase an equal share of Zaretsky's and Yardley's interests in YZI. In April 2012, Anderson offered to purchase 30 percent of YZI, but Zaretsky thought the proposed purchase price was too low. Zaretsky explained that Anderson's valuation of YZI failed to account for the likelihood YZI would become a distributor for Phoenix Controls and Aircuity, and the significant increase in revenue those distributorships would generate. In May, Anderson responded by significantly increasing his offer. That same month, Zaretsky presented a three-year business plan to Phoenix Controls and Aircuity showing the significant growth in sales and revenue YZI could generate if it became their distributor.
Zaretsky had a long planned European vacation scheduled for late May and early June 2012. Without notifying Zaretsky, Yardley terminated Zaretsky's employment with GYC after he left on vacation. Indeed, on the day Zaretsky left, Yardley transferred a major project Zaretsky had just landed to another GYC salesperson. During Zaretsky's absence, Yardley also scheduled a four-day training session with the manufacturer of a control system that worked with Phoenix Controls and Aircuity products. Zaretsky previously had declined to use that manufacturer's control system with Phoenix Controls and Aircuity products because it directly competed with another control system that YZI distributed for use with those same products. Yardley wrote a memo to Phoenix Controls and Aircuity touting GYC's new relationship with this manufacturer and notifying them Zaretsky no longer worked for GYC. Finally, before Zaretsky returned, Yardley visited one of Zaretsky's biggest accounts, UCI, and notified it that he had fired Zaretsky.
When Zaretsky returned, he did not learn of his termination from Yardley or GYC, but rather from his contacts at UCI and Aircuity. Yardley refused to meet with Zaretsky until five days later. During their brief meeting, Zaretsky asked why Yardley fired him, but Yardley refused to say and simply stated it would be best if they worked separately. Zaretsky responded, "I cannot keep you in my company [YZI] because you betrayed me. You basically stabbed me in the back and you need to get out of my company." Yardley then told Zaretsky to make him an offer for his interest in YZI. A couple weeks later, Zaretsky made a written offer to purchase Yardley's interest, but Yardley never accepted it or made a counterproposal.
Over the next few months, Yardley took a variety of actions that interfered with YZI's business. He attempted to interject himself into a large project YZI had at UCI, withholding files relating to the project and thereby delaying UCI's final payment to YZI. By the end of the project, Yardley's delays prompted UCI's project manager to announce he wanted nothing to do with Yardley. Yardley also denied YZI access to other files it maintained at GYC's warehouse even though YZI paid GYC rent to use the warehouse space. Finally, Yardley issued preliminary bond notices on some of YZI's projects, claiming YZI had failed to pay GYC certain sums it owed relating to those projects.
During this same period, Phoenix Controls and Aircuity repeatedly expressed their frustration about working with Yardley. They made clear to Zaretsky that they did not intend to continue working with any entity, including YZI, if Yardley was involved. Finally, in September and October 2012, Phoenix Controls and Aircuity terminated GYC as their distributor and entered into temporary distributor agreements with YZI based on their relationship with Zaretsky and his assurances Yardley would not be involved. All of these events created significant cash flow problems for YZI, and in November 2012, Zaretsky was forced to loan the company $150,000 so YZI could pay its employees. These events also lead Anderson to drop his efforts to acquire an interest in YZI.
On December 5, 2012, as a 50 percent shareholder in YZI, Zaretsky filed an election with the State of California to voluntarily dissolve YZI under Corporations Code section 1900. The next day, Zaretsky filed this lawsuit seeking judicial supervision of YZI's dissolution and asserting various claims against Yardley and GYC for unpaid wages and commissions. Yardley filed a cross-complaint to challenge the dissolution, and alternatively, requested judicial supervision of the dissolution.
The employment claims relating to wages and commissions were referred to arbitration and are not at issue on this appeal.
Over the next 18 months, Zaretsky continued to work on YZI's other contracts formed before the dissolution and Zaretsky continued to draw his salary from YZI. Eventually, Zaretsky reduced his salary as the jobs began to wind down. He also loaned the company an additional $300,000 to complete its work. After Zaretsky filed for dissolution, YZI did not bid for any new projects or enter into any new contracts. YZI had few physical assets, mainly furniture, office equipment, and vehicles. As YZI's need for these assets ceased, Zaretsky gave Yardley a right of first refusal to purchase the assets. After Yardley declined and no third parties came forward, Zaretsky purchased the physical assets for the price at which they were offered to Yardley. YZI also laid off employees as the company's operations diminished.
On January 29, 2013, Zaretsky filed articles of incorporation to form ZES, which would perform the same work he performed with YZI. Zaretsky held 49 percent of the shares in ZES and his daughter held the other 51 percent. On February 27, 2013, Zaretsky announced ZES's launch by sending a notice to potential customers throughout the industry, including many of YZI's former customers. In March 2013, ZES entered into a temporary distributor agreement authorizing it to sell Phoenix Controls' products, and later Aircuity temporarily authorized ZES to sell its products. Zaretsky started ZES while he was winding down YZI, but he testified he worked on his own time in starting ZES and did none of the work in YZI's offices. Several YZI employees or former employees offered to help Zaretsky get ZES up and running, but they all did so on their own time and after their regular working hours with YZI. Zaretsky never solicited any YZI employees.
ZES did not assume or take over any of YZI's contracts, nor did it pursue any contract on which YZI had bid. ZES obtained all of its work through its own independent bids as a qualified contractor with its own license. It bid on its first project in March 2013, and its second in April 2013. ZES obtained a small business loan to cover its initial startup expenses. Zaretsky provided the new company $130,000 in September 2013, and his daughter provided it an additional $135,000 in December 2013, as the company hired employees and began work on the projects it had successfully bid. ZES did not require an initial capital investment from Zaretsky and his daughter when they started the company because of the significant lag between the time a company submits a bid on a public project and starts to work on the project if its bid is accepted. Preparing the bid does not require the significant capital that performing the project does. When ZES was up and running it hired some former YZI employees.
In May 2014, Yardley filed a separate lawsuit alleging individual and derivative claims against Zaretsky. He alleged Zaretsky breached his fiduciary duties to Yardley and YZI by electing to dissolve YZI in bad faith and forming ZES to compete with YZI. Yardley also alleged YZI failed to repay a loan he made to the corporation before Zaretsky initiated dissolution. The trial court consolidated Yardley's action with Zaretsky's lawsuit.
The trial court conducted a 10-day bench trial on Yardley's breach of fiduciary duty claim and the requests for court supervision of YZI's dissolution. Yardley argued that Zaretsky acted in bad faith by electing to dissolve YZI because YZI remained a highly profitable business with a bright future, despite disagreements between Yardley and Zaretsky. Even if Zaretsky acted in good faith in dissolving YZI, Yardley asserted Zaretsky's fiduciary duties required him to compensate Yardley for his share of YZI's prospective business opportunities if Zaretsky wanted to continue YZI's business for his own benefit. Zaretsky argued he acted properly in dissolving YZI and forming ZES to continue the profession in which he had engaged for more than 20 years. According to Zaretsky, Yardley acted in bad faith by firing him from GYC and interfering in YZI's operations, and therefore Zaretsky was justified in dissolving YZI and forming ZES.
Yardley eventually dropped his opposition to the dissolution and sought only monetary damages.
At trial, Yardley also argued Zaretsky breached his fiduciary duties by concealing the negotiations with Anderson and failing to follow proper dissolution procedures. The trial court rejected these allegations and Yardley does not raise the issue on appeal.
The trial court agreed with Zaretsky and issued a statement of decision finding in Zaretsky's favor on Yardley's claims for breach of fiduciary duty and bad faith dissolution of YZI. The court also granted Zaretsky's petition to dissolve YZI and his request for court supervision. The court found that Yardley's decision to terminate Zaretsky as GYC's salesperson dramatically impacted YZI because it cutoff the vast majority of YZI's business and represented "a clear and unmistakable repudiation of their business relationship." The court further found Yardley had "little, if any," credibility not only in his explanation for firing Zaretsky and his hindrance of YZI's business, but also in his expectation that Zaretsky would continue his efforts to grow YZI for their mutual benefit despite Yardley's conduct. According to the court, "Yardley's continued refusal to frankly communicate with Zaretsky, along with GYC's acts taken in competition with and hindrance of YZI's business, demonstrated Yardley's indifference to his continued business relationship with Zaretsky."
The trial court further found Yardley's conduct provided ample grounds for Zaretsky to terminate their business relationship and dissolve YZI, and the fiduciary duties Zaretsky owed Yardley and YZI did not "extend[] to laboring for years as an indentured servant to rebuild a business for their mutual benefit against his will." The court also rejected Yardley's contention that Zaretsky breached his fiduciary duties or usurped any of YZI's business opportunities by forming ZES and bidding for jobs on its behalf. As the court explained, "Yardley failed to demonstrate YZI could have realized any of these business opportunities without Zaretsky. . . . [T]he business opportunities noted at trial did not involve established customers phoning in orders. For the most part, each job must be sought out and bid individually and competitively. Given Zaretsky was far and away the top salesman at GYC, the court believes YZI would not have been able to take advantage of these opportunities without Zaretsky's direct involvement. Again, Zaretsky's fiduciary obligations to YZI did not extend to indentured servitude."
Noting that "the Phoenix Controls and Aircuity distributorships were of critical importance to YZI's projected future profits," the court also found that "no evidence was introduced that Yardley could have hired anyone else to take Zaretsky's place in landing or keeping these distributorships. Indeed, there could be no dispute that Phoenix Controls and Aircuity were fed up with Yardley and GYC; if Zaretsky were not at YZI, the company would have not become or remained a distributor for these manufacturers." Finally, the court acknowledged that YZI had record sales in 2012, but found "the bulk of these sales came as a result of projects previously obtained by Zaretsky before his termination as a salesperson at GYC."
After the trial court issued its statement of decision, Zaretsky successfully moved for an order that YZI indemnify him for the attorney fees and costs he incurred to defend against the breach of fiduciary duty claim. The court awarded him $625,000 against YZI. The parties then entered into a stipulation to complete YZI's dissolution, distribute its remaining assets, and resolve all remaining claims between them. The court entered judgment and this appeal followed.
II
DISCUSSION
A. Standard of Review
Yardley contends the de novo standard of review governs each of the principal issues he raises on appeal: (1) the existence and scope of Zaretsky's fiduciary duties as a 50 percent shareholder in YZI, and (2) whether Zaretsky breached those duties. We agree the de novo standard applies to the first question, but disagree that it also governs the second.
The existence and scope of a fiduciary duty is a question of law for the trial court to decide, and we independently review the court's resolution of that question. (Green Valley Landowners Assn. v. City of Vallejo (2015) 241 Cal.App.4th 425, 441 (Green Valley); Mt. Holyoke Homes, L.P. v. Jeffer Mangels Butler & Mitchell, LLP (2013) 219 Cal.App.4th 1299, 1308-1309.) Here, Yardley contends the trial court applied the wrong legal standard to define the scope of Zaretsky's fiduciary duties. According to Yardley, the court erred by failing to recognize that Zaretsky's fiduciary duties prohibited him from dissolving YZI, and then continuing the same business under a different name without compensating Yardley for his share of YZI's business. Whether Zaretsky's fiduciary duties prohibited him from dissolving YZI and forming ZES to conduct the same business is a question of law that we review de novo.
Whether a fiduciary breached his or her duties generally is a question of fact that we review under the substantial evidence standard of review. (Green Valley, supra, 241 Cal.App.4th at p. 441.) It becomes a question of law subject to our de novo review when the facts are undisputed because the application of the law to undisputed facts is a legal question. (Le v. Pham (2010) 180 Cal.App.4th 1201, 1206.) Here, Yardley contends the question whether Zaretsky breached his fiduciary duties is a question of law because there were no disputed facts regarding Zaretsky's formation of ZES and its continuation of YZI's business. We disagree for two reasons.
First, whether Zaretsky breached his fiduciary duties is not limited to Zaretsky's conduct alone. Rather, as explained below, Yardley's conduct giving rise to the dissolution and the impact of that conduct on YZI is relevant to determining whether Zaretsky breached his fiduciary duties. Yardley does not contend there is no dispute as to his conduct.
Second, "we do not independently review factual issues unless the facts are undisputed and no conflicting inferences can be drawn from the facts." (Nellie Gail Ranch Owners Assn. v. McMullin (2016) 4 Cal.App.5th 982, 996.) Here, evidence of Zaretsky's and Yardley's conduct presented the trial court with numerous conflicting inferences to resolve. Accordingly, we review the question whether Zaretsky breached his fiduciary duties under the substantial evidence standard of review.
Zaretsky contends the substantial evidence standard governs the issues raised on this appeal because Yardley does not challenge the legal standard the trial court applied, but rather the factual findings the court made in applying the legal standard. Yardley, however, disclaims any challenge to the court's factual findings underlying its decision concerning the existence and scope of Zaretsky's fiduciary duties. We therefore independently review the court's decision regarding the existence and scope of Zaretsky's fiduciary duties based on the facts as the court found them. We apply the substantial evidence standard only to the extent Yardley disputes the factual findings the court made in concluding Zaretsky did not breach his fiduciary duties. B. The Trial Court Applied the Proper Legal Standard in Deciding Yardley's Breach of Fiduciary Duty Claim
Yardley contends the trial court erred as a matter of law in denying his breach of fiduciary duty claim because the court applied the wrong legal standard. Regardless of what he may have done to cause Zaretsky to dissolve YZI, Yardley contends Zaretsky's fiduciary duties prevented him from dissolving the corporation and continuing its business under another name without compensating Yardley for his interest in the corporation. We conclude the court applied the proper standard.
Corporations Code section 1900, subdivision (a), authorizes a corporation to voluntarily wind up and dissolve "by the vote of shareholders holding shares representing 50 percent or more of the voting power." The Supreme Court has held this power is not absolute, and a shareholder's fiduciary duties to the other shareholders require the shareholder to exercise this power in good faith. (In re Security Finance Co. (1957) 49 Cal.2d 370, 376-377 (Security Finance) [construing former Corp. Code § 4600].) "Thus, [a shareholder has] no right to dissolve a corporation to defraud the other shareholders [citation], to 'freeze out' minority shareholders [citation], or to sell the assets of the dissolved corporation at an inadequate price." (Ibid.) These limitations, however, do not prevent a shareholder from exercising this power to protect his or her investment in the corporation as long as the shareholder exercises the power in good faith. (Id. at pp. 378-379.) Moreover, in reviewing a decision to dissolve a corporation, courts must consider the totality of the circumstances, and good faith on the part of the other shareholders is "as essential as good faith on . . . [the] part [of the shareholder] seeking dissolution." (Id. at p. 379.)
In Security Finance, Earl Rouda formed a corporation with Herbert and George Crocker to engage in the business of making personal loans and buying conditional sales contracts. Rouda had considerable experience in the industry and agreed to devote his undivided time and expertise to the corporation's business, which he ran as the corporation's president and general manager. The Crockers agreed to provide capital for the business. Rouda and the Crockers each held 50 percent of the corporation's shares, and the corporation's governing documents limited the shareholders' ability to transfer their shares or take other major actions without the unanimous vote of all shareholders. (Security Finance, supra, 49 Cal.2d at pp. 373-374.)
Over several years, Rouda successfully grew the corporation's business, but Rouda also grew frustrated with the Crockers because they prevented him from receiving a fair return on his investment. Although the corporation continued to prosper based on Rouda's efforts, the Crockers refused to increase his salary or the corporation's dividends, and they insisted on Rouda devoting his full time and energy to the corporation. Rouda also asked the Crockers to buy his shares, sell him their shares, or sell the entire corporation, but they refused unless Rouda agreed to pay them $100,000 to release him from his contractual obligation to devote his full time and energy to the corporation's business. Rouda eventually issued the Crockers an ultimatum that he would dissolve the corporation unless they agreed to buys his share, sell their shares, or sell the entire corporation. When the Crockers refused, Rouda dissolved the corporation under the statutory forerunner to Corporations Code section 1900 and sought judicial supervision for winding up the corporation's business. The trial court granted Rouda's request and the Crockers appealed. (Security Finance, supra, 49 Cal.2d at pp. 374-375, 378.)
The Supreme Court affirmed because the evidence showed Rouda acted in good faith in dissolving the corporation. The court explained "[Rouda's] purpose in dissolving the corporation was to protect his investment. He did not act in bad faith in doing so, for a shareholder representing the requisite voting power may protect his investment by dissolution [citation] when, as in this case, all alternative methods are foreclosed, no advantage is secured over other shareholders, and no rights of third parties will be adversely affected." (Security Finance, supra, 49 Cal.2d at p. 378.) The court further explained any injury to the corporation was immaterial because Rouda acted in good faith based on the Crockers' conduct and obtained no advantage over them through the dissolution. (Id. at p. 379.)
In Page v. Page (1961) 55 Cal.2d 192 (Page), the Supreme Court applied Security Finance in the context of a partnership. A partner at will is not bound to remain in a partnership, and may end the partnership at any time regardless whether the business is profitable or not. As with a corporate shareholder, "[a] partner may not . . . by use of adverse pressure 'freeze out' a copartner and appropriate the business to his own use. A partner may not dissolve a partnership to gain the benefits of the business for himself, unless he fully compensates his copartner for his share of the prospective business opportunity." (Page, at p. 197.) After acknowledging these principles, the Page court remanded the case to the trial court to determine whether the partner challenging the dissolution could prove the dissolving partner was liable for wrongful dissolution because he "acted in bad faith and violated his fiduciary duties by attempting to appropriate to his own use the new prosperity of the partnership without adequate compensation to his copartner." (Id. at pp. 197-198.)
Yardley cites several cases from other jurisdictions that similarly hold a shareholder must exercise the power to dissolve a corporation in good faith and may not do so to freeze out other shareholders and take over the business without compensating those shareholders for the value of their interests. (See, e.g., Grato v. Grato (1994) 272 N.J. Super. 140, 157-159; Noakes v. Schoenborn (1992) 116 Or.App. 464, 472-474; Thibaut v. Thibaut (Ct.App.La. 1992) 607 So.2d 587, 603-604; Callier v. Callier (1978) 61 Ill.App.3d 1011, 1015; Kellogg v. Georgia-Pacific Paper Corp. (W.D.Ark. 1964) 227 F.Supp. 719, 724; Levine v. Styleart Press, Inc. (1961) 31 Misc.2d 106, 107; Weisbecker v. Hosiery Patents (1947) 356 Pa. 244, 251-252; Lebold v. Inland Steel Co. (7th Cir. 1941) 125 F.2d 369, 373-375; Kavanaugh v. Kavanaugh Knitting Co. (1919) 226 N.Y. 185, 196-197.)
Relying on these cases, Yardley contends the trial court erred as a matter of law because it did not require Zaretsky to compensate Yardley for the value of the business Zaretsky appropriated from YZI when he dissolved the corporation and began conducting business under the name ZES. According to Yardley, regardless whether Zaretsky was justified and acted in good faith when he dissolved YZI, the foregoing authorities prohibited him from continuing to conduct the same business at ZES that he conducted at YZI unless he compensated Yardley for his share of YZI's business. We conclude the trial court applied the proper legal standard.
Contrary to Yardley's contention, the formation of ZES and Zaretsky's work on its behalf after dissolving YZI did not inevitably require the trial court to conclude Zaretsky breached his fiduciary duties. Security Finance, Page, and the other cases Yardley cites prevent a shareholder from misusing the power to dissolve a corporation by freezing out other shareholders and appropriating the business for the dissolving shareholder's sole benefit. Those cases do not establish a per se rule of law requiring the dissolving shareholder to compensate the other shareholders in every instance. (See Security Finance, supra, 49 Cal.2d at pp. 376-378; Page, supra, 55 Cal.2d at p. 197.) Rather, they establish an equitable rule that requires the dissolving shareholder to exercise the power to dissolve in good faith and without obtaining an advantage over the other shareholders through the dissolution process. (Security Finance, at p. 377.)
Security Finance also establishes that the good faith of the shareholders challenging the dissolution is equally important as the good faith of the shareholder seeking to dissolve the corporation, and the dissolving shareholder may take any reasonable and good faith steps necessary to protect his or her investment in the corporation. (Security Finance, supra, 49 Cal.2d at pp. 378-379.) Other than Security Finance, none of the cases Yardley cites involved allegations a challenger engaged in bad faith conduct that damaged the corporation and lead to the dissolving shareholder's decision to dissolve the corporation. Although the Security Finance court acknowledged the impact of the challenger's bad faith on the decision to dissolve, it did so in passing because the parties did not raise the compensation issue we face in this case.
Here, the trial court found Zaretsky was justified and acted in good faith by dissolving YZI because Yardley repudiated their business relationship by terminating Zaretsky as GYC's salesperson and taking other actions that hindered YZI's business. According to the court, Yardley's termination of Zaretsky cutoff the majority of YZI's business and Yardley's poor relationship with Phoenix Controls and Aircuity undermined YZI's long-term ability to serve as a distributor for those manufacturers if Yardley remained part of the corporation. The court also explained that Zaretsky made it clear he could no longer work with Yardley after the termination because he no longer trusted Yardley, and Zaretsky attempted to buy Yardley out of YZI before electing to dissolve the corporation, but Yardley never countered Zaretsky's proposal. Moreover, the court found that Zaretsky's efforts to obtain temporary distributor agreements with Phoenix Controls and Aircuity and to reinvent the corporation after Yardley deliberately damaged YZI did not show Zaretsky acted in bad faith by ultimately deciding to dissolve YZI. In reaching this conclusion, the court found Yardley failed to counter Zaretsky's buyout offer and noted the negative effects of Yardley's conduct continued to grow.
After finding Zaretsky acted in good faith, the trial court also found "Zaretsky did not breach his fiduciary duties to YZI or Yardley in electing to dissolve YZI and start [ZES]." The court explained Zaretsky did not usurp any of YZI's business by forming and conducting business as ZES because YZI could not realize any of the identified business opportunities without Zaretsky as part of the corporation, and Zaretsky had no obligation to continue working for YZI after the damage Yardley caused the corporation. The court further found Yardley failed to show YZI had any significant value aside from the goodwill and reputation Zaretsky had established during his many years in the industry. Finally, the court determined Yardley had "little, if any," credibility in explaining his conduct.
The trial court's findings demonstrate it applied the proper legal standard in evaluating Yardley's breach of fiduciary duty and bad faith dissolution claim. Indeed, by finding Zaretsky acted in good faith in dissolving YZI and did not breach his fiduciary duties by forming and conducting business as ZES, the court rejected Yardley's claim he was entitled to compensation even if Zaretsky acted in good faith. Moreover, the court further rejected the claim by finding Yardley failed to show YZI had any specific value other than the goodwill and reputation Zaretsky generated, and Zaretsky had no obligation to stay with YZI after Yardley's conduct. The court's finding that Yardley cutoff YZI's principal revenue source by firing Zaretsky as a GYC salesperson and otherwise hindered YZI business distinguishes this cases from the cases on which Yardley relies.
Yardley emphasizes it was undisputed YZI was highly profitable in 2012 as demonstrated by its record revenue and Anderson's substantial offer to purchase an interest in the corporation. He further argues YZI had a bright and profitable future based on the projections Zaretsky provided Anderson, Phoenix Controls, and Aircuity during 2012, and the temporary distributor agreements with Phoenix Controls and Aircuity that Zaretsky obtained for YZI in late 2012. None of this is relevant to Yardley's contention the trial court applied the wrong legal standard. Rather, Yardley's reliance on this evidence shows his argument is no more than a complaint about the factual findings to which the court applied the legal standard. Yardley, however, disclaims any challenge to the court's factual findings. More importantly, these are not undisputed facts.
As the trial court found, YZI had record sales and profits in 2012 based largely on sales and projects Zaretsky obtained as a GYC salesperson before Yardley terminated him. Similarly, although Anderson made a substantial offer to purchase a portion of YZI, the court found he did so before Yardley terminated Zaretsky and that termination "scared off Anderson." Finally, the court found Phoenix Controls and Aircuity granted YZI temporary distributor agreements based on their relationship with Zaretsky, and they had no interest in dealing with YZI if Zaretsky was not part of the corporation because they "were fed up with Yardley and GYC." We must defer to these factual findings because substantial evidence supports them.
Yardley also contends the trial court erred because it made no findings on whether ZES essentially was a continuation of YZI without Yardley, and whether Zaretsky obtained an advantage over Yardley through YZI's dissolution. Yardley further contends he objected that the court's tentative decision did not include these findings, and therefore we may not infer any findings on these issues to support the court's decision. We disagree and conclude the trial court's statement of decision adequately addressed Yardley's claims.
"'"The [trial] court's statement of decision is sufficient if it fairly discloses the court's determination as to the ultimate facts and material issues in the case."'" (Ermoian v. Desert Hospital (2007) 152 Cal.App.4th 475, 500.) "'[T]he term "ultimate fact" generally refers to a core fact, such as an essential element of a claim. [Citation.] Ultimate facts are distinguished from evidentiary facts and from legal conclusions.'" (Metis Development LLC v. Bohacek (2011) 200 Cal.App.4th 679, 689.) Indeed, "'[a] trial court rendering a statement of decision . . . is required to state only ultimate rather than evidentiary facts because findings of ultimate facts necessarily include findings on all intermediate evidentiary facts necessary to sustain them.'" (Muzquiz v. City of Emeryville (2000) 79 Cal.App.4th 1106, 1125.) The "'court "is not required to make an express finding of fact on every factual matter controverted at trial, where the statement of decision sufficiently disposes of all the basic issues in the case."'" (Ermoian, at p. 500.) Likewise, "a trial court is not required to respond point by point to issues posed in a request for a statement of decision." (Ibid.)
Here, the trial court's statement of decision adequately addressed the issues Yardley raised about whether ZES was a continuation of YZI and whether Zaretsky obtained an advantage over Yardley through the dissolution. The court found Zaretsky acted in good faith, he did not breach his fiduciary duties by dissolving YZI and forming ZES, he did not use ZES to usurp YZI's business, his experience and reputation constituted YZI's principal assets, and he had no obligation to continue working for YZI or Yardley based on Yardley's conduct. Nothing more was required on these issues.
Finally, Yardley contends his predissolution conduct cannot support the judgment because his conduct was irrelevant to whether Zaretsky usurped YZI's business and the trial court failed to make specific findings regarding each act Yardley allegedly committed. We disagree. Yardley's conduct is highly relevant under the foregoing authorities because it shows whether Zaretsky obtained an advantage over Yardley through the dissolution process or merely protected his investment by cutting his losses. As explained above, the court found Yardley's predissolution actions dramatically affected the value of YZI's business because they eliminated YZI's primary revenue source (installation work on the products Zaretsky sold as a GYC salesperson) and undermined YZI's relationship with the manufacturers of the two major product lines YZI installed (Phoenix Controls and Aircuity). Moreover, the court was not required to make specific factual findings on each act Yardley allegedly took that damaged YZI's business. The court's findings that Yardley cutoff YZI's primary revenue source, undermined the corporation's relationship with Phoenix Controls and Aircuity, caused GYC to take actions in competition with YZI, and otherwise hindered YZI's business are sufficient under the foregoing standards regarding statements of decision.
Yardley also challenges the trial court's attorney fee award, but only on the ground that the award may not stand if we reverse the judgment on the merits. As explained above, we affirm the court's judgment, and therefore we also affirm the court's attorney fee award. --------
III
DISPOSITION
The judgment is affirmed. Zaretsky shall recover his costs on appeal.
ARONSON, ACTING P. J. WE CONCUR: FYBEL, J. THOMPSON, J.