Guess v. Significance Foundation
Filed 6/5/13 Guess v. Significance Foundation CA4/1
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
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publication or ordered published for purposes of rule 8.1115
COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
L. DONALD GUESS,
Plaintiff and Respondent,
v.
THE SIGNIFICANCE FOUNDATION,
Defendant and Appellant.
D060100
(Super. Ct.
No.
37-2009-00095286-CU-CO-CTL)
APPEAL from
a judgment of the Superior Court
of
County, William S. Dato, Judge. Affirmed.
Gilbert
Kelly Crowley & Jennett, David G. Molinari and Joy L. Shedlosky for
Defendant and Appellant.
Keith H.
Rutman for Plaintiff and Respondent.
Plaintiff L.
Donald Guess (Guess) incurred substantial attorney fees to two law firms
defending him in a federal court action (the federal civil action). In the federal civil action, the government
sought injunctive relief against Guess
and against a family of entities, including defendant The Significance
Foundation (Foundation), in which Guess had served in numerous capacities,
including an as officer and director of Foundation. After the
favor of the defendants, Guess sought indemnification from Foundation for the
attorney fees he incurred in defending the federal civil action. When Foundation declined to indemnify Guess,
he filed the present action against Foundation.
The dispute was tried to the court, which ruled in favor of Guess's claims
for indemnity.
On appeal,
Foundation asserts the trial court's judgment must be reversed for three
reasons. First, Foundation contends that
as a matter of law the legal expenses incurred by Guess in defending the
federal civil action were not incurred "by reason of [Guess] being or
having been a Director [or] officer" of Foundation, and therefore his legal
expenses fall outside the scope of the indemnity provisions of Foundation's bylaws. Second, Foundation contends that because
Guess paid a substantial portion of the legal fees by obtaining loans from
third parties, and there was no evidence at trial that Guess remained liable to
repay those loans, he did not suffer any "expenses or liabilities"
for which Foundation owed indemnification.
Finally, Foundation argues the trial court improperly admitted into
evidence the legal billings of Guess's attorneys.
I
FACTUAL
AND PROCEDURAL BACKGROUND
name="_ftnref1" title="">[1]
A. The Underlying Context
Guess, who
began his career as a dentist, developed a program for fellow medical
professionals that came to be known as "xélan." The xélan program was part financial
management and planning, part tax planning, and part life philosophy. Over time, Guess set up various entities as
part of the xélan family of companies, nearly all of which were for-profit
companies handling insurance, pension and investment matters, and Guess was
typically an officer and/or director of these entities and generally retained
an ownership interest in these entities.
Foundation
was the one nonprofit exception that played a role in some of the tax planning
aspects of the overall xélan program.
Foundation was formed in the late 1990's as an Oklahoma nonprofit
corporation and, until late 2004, Guess served both as its president and as a
member of its board of directors.
Foundation's bylaws included a provision under which Foundation, to the
extent permitted by the laws of the State of Oklahoma, was to provide
indemnification:
" 'against all reasonable expenses and
liabilities, including counsel fees, necessarily incurred by or imposed upon
[them] in connection with any threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
. . . , to which [they] may be made a party or in which such
person may become involved by reason of being or having been a Director,
officer, [or] employee [of Foundation] if such person acted in good faith and in
a manner such person reasonably believed to be in or not opposed to the best
interests of [Foundation].' "
Shortly
after Foundation's formation, the Internal Revenue Service (IRS) approved
Foundation as a tax-exempt, publically supported charity. However, years of entanglements with the IRS
followed.
B. The Federal Civil Suit
In the
early 2000's, Foundation became aware that it was being audited by the IRS in
connection with its application for permanent tax-exempt status. Sometime after the audit/examination, over
one hundred donors to Foundation received notices their tax returns were under
examination; Foundation believed there had been improper theft of confidential
donor information by the IRS.
In early
November 2004 the federal government executed a
California, headquarters for the various xélan entities and, at the same time,
filed the federal civil suit. That suit
named numerous defendants, including Guess (along with several other
individuals involved in the xélan family of companies), Foundation and numerous
other xélan entities, and asserted claims sounding in fraud. In conjunction with the federal civil suit,
the government sought and obtained an ex parte restraining order freezing the
assets of the xélan entities and appointing a receiver, and setting a hearing
on a preliminary injunction for early December 2004.
The month
between execution of the search warrant and the hearing on the preliminary
injunction was described by the trial court as a "frenetic" period
for the attorneys representing Foundation, Guess and the other involved
defendants. Legal representation was provided
by Chicoine & Hallett (which assumed the supervisory role for the legal
team representing the named defendants, including Foundation) and Mr. Lipman
(who was primarily responsible for overseeing potential criminal issues of the
involved defendants). These sets of
attorneys billed Guess for their services, and it was the fees billed by these
attorneys over the period from November 4 through December 15, 2004 (the date
of the federal court's ruling on the government's request for a preliminary
injunction) that formed the bulk of the fees for which the trial court in the
present case awarded indemnity to Guess.
Guess
sought over $230,000 from Foundation, which apparently represented fees billed
to Guess for the period from November 4, 2004, through October 3, 2006. The trial court separated the fees into three
time frames. In the first time frame
(from November 4 through November 9, 2004), the trial court found that because
the attorneys were the only attorneys effectively representing Foundation and
the other entities during this period, and the attorneys were engaged in "triage/damage-control,"
attempting to determine the nature of the government's case, the services
helped all of the entities (including Foundation) to shape their litigation
strategy, and therefore the billings for all services performed during the
first week (November 4 through November 9, 2004) should be included as fees
incurred by Guess by reason of his being an officer or director of
Foundation. The trial court concluded,
as to the second period (November 10 through December 15, 2004), that because
the Chicoine & Hallett and Lipman bills involved services performed in the
context of a cooperative and unified defense strategy, most of the work inured
to the benefit of all of the entities, including Foundation. However, the court also noted that some of
the work involved issues peculiarly applicable to entities other than
Foundation, and therefore reduced by 35 percent the fees requested for this
period. Finally, for the period after
January 2005, the court awarded only those fees as to which the billing entries
for the rendered services referred to Foundation or persons associated with
Foundation, and rejected Guess's argument that the remaining services performed
after January 2005 were fees incurred "by reason of" Guess having
been an officer or director of Foundation.
In response
to the federal civil action, Foundation's board (along with its attorney, Mr.
Will) convened an emergency meeting on November 9, 2004. Prior to this meeting, Guess and Will
discussed the government's case and Guess's proposal that Guess should resign
to prevent the government from contending that his continued involvement in
Foundation was a reason for closing Foundation.
They also discussed that Guess should be indemnified for fees incurred
to defend actions he took as an officer or director of Foundation, and Will
agreed to place these issues before the Foundation's board. The minutes of the meeting reflected
Foundation's board (1) agreed it was in Foundation's best interests for Guess
to resign, (2) was informed that Foundation's bylaws and applicable law
required Foundation to indemnify its officers and directors, and (3) agreed
Foundation should advance legal expenses to Guess for defense of his actions
taken by him of behalf of Foundation. No
funds were ever advanced so Guess borrowed to pay the bills from Chicoine &
Hallett and from Mr. Lipman, and agreed to repay these loans when he was able
to do so.
Chicoine
& Hallett and Mr. Lipman, supervising a team of separate attorneys retained
by Foundation and other entities in a coordinated effort under a joint defense
agreement, opposed the government's motion and lawsuit. This coordinated effort was successful: the
federal court denied the government's request for a preliminary injunction, in
part because the government had not shown likely success on the merits of the
government's claims. The government then
dismissed the case as to all defendants, including Foundation and Guess, and
Foundation obtained an award of its separate attorney fees from the government
but, based on a strategic decision by the defense team, Guess did not
separately seek any attorney fees award.
C. The Present Lawsuit and Judgment
In the fall
of 2008 Guess demanded Foundation indemnify him for the attorney fees, but
Foundation refused. Guess subsequently
filed the present action and, at trial, sought approximately $85,000 as fees
paid to Chicoine & Hallett and approximately $46,000 as fees paid to Mr.
Lipman's firm.
At trial,
Foundation contended Guess had no right to indemnity for the requested fees
because he could not establish a necessary predicate that he incurred the fees "by
reason of being or having been" an officer or director of Foundation
rather than in relation to other entities in the xélan family of
companies. Foundation also asserted
Guess could not show another necessary predicate, i.e. that he had acted "in
good faith and in a manner [he] reasonably believed to be in or not opposed to
the best interests of [Foundation]."
Foundation also claimed Guess could not establish a right to indemnity
because he could not demonstrate he was legally obligated to repay the loans he
incurred to satisfy the attorney fees.
Foundation also asserted at trial that the evidence would show Guess
waived his right to indemnity, and did not mitigate his damages. The trial court rejected these defenses, and
on appeal Foundation does not challenge these aspects of the judgment.
The trial
court's proposed statement of decision found Guess had acted in good faith and
in a manner he reasonably believed to be in the best interests of
Foundation. The court also concluded
that, under the parties' practical construction of the indemnity clause,
whether Guess had incurred the fees "by reason of" having been an
officer or director of Foundation was essentially a question of allocation: to
what extent were the fees attributable to defending Foundation's interests in
the federal civil suit rather than to defending the interests of other xélan
entities entangled in the federal civil suit.
The court then closely examined the billings and apportioned the fees
between those attributable to defending Foundation's interests in the federal
civil suit and those attributable to defending other xélan entities (or Guess
personally) in the federal civil suit, and awarded Guess indemnity in the
amount of approximately $95,000. After
making additional findings and conclusions in response to Foundation's
objections to the proposed statement of decision,
the court affirmed its statement of decision and entered judgment in favor of
Guess.
II
ANALYSIS
A. The Interpretation Claim
Foundation
argues the court erred when it interpreted the indemnity provision in Foundation's
bylaws as covering the attorney fees sought by Guess.
Legal Standards
The rules governing the role of
the court in interpreting a written instrument are well established. The interpretation of a contract is a
judicial function. (Pacific Gas & Electric Co. v. G.W. Thomas Drayage etc. Co.
(1968) 69 Cal.2d 33, 39-40 (Pacific Gas
& Electric).) In engaging in this function, the trial court
seeks to "give effect to the mutual intention of the parties as it existed"
at the time the contract was executed.
(Civ. Code, § 1636.)
Ordinarily, the objective intent of the contracting parties is a legal
question determined solely by reference to the contract's terms. (Civ. Code, § 1639 ["[w]hen a
contract is reduced to writing, the intention of the parties is to be
ascertained from the writing alone, if possible"]; Civ. Code, § 1638
[the "language of a contract is to govern its interpretation"].)
a court generally may not consider extrinsic evidence varying or contradicting
the clear and unambiguous terms of a
written, integrated contract (cf. Principal
Mutual Life Ins. Co. v. Vars, Pave, McCord & Freedman (1998) 65
Cal.App.4th 1469, 1478), extrinsic evidence is admissible to interpret an
agreement when a material term is ambiguous.
(Pacific Gas & Electric,
supra, 69 Cal.2d at p. 37 [if extrinsic evidence reveals that apparently
clear language in the contract is in fact susceptible to more than one
reasonable interpretation, then extrinsic evidence may be used to determine the
contracting parties' objective intent].)
Thus,
disputed, the trial court engages in a three-step process. First, it
provisionally receives any proffered extrinsic evidence relevant to prove a
meaning to which the language of the instrument is reasonably susceptible. (Ibid.) If, considering the extrinsic evidence, the
language is reasonably susceptible to the interpretation urged, the extrinsic
evidence is then admitted to aid the court in its role in interpreting the
contract. (Id. at pp. 39-40.) One type
of extrinsic evidence that carries particular weight is how the parties
construed the contract before the dispute arose. (Universal Sales Corp. v. Cal. etc. Mfg. Co. (1942) 20 Cal.2d 751, 761 ["when
a contract is ambiguous, a construction given to it by the acts and conduct of
the parties with knowledge of its terms, before any controversy has arisen as
to its meaning, is entitled to great weight, and will, when reasonable, be
adopted and enforced by the court"].)
On appeal, "[o]ur
review of the trial court's interpretation of the agreement is governed by the
settled rule that where extrinsic evidence has been properly admitted as an aid
to the interpretation of a contract and the evidence conflicts, a reasonable
construction of the agreement by the
by substantial evidence will be upheld."
(In re Marriage of Fonstein (1976) 17 Cal.3d 738, 746-747; Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 651.) We defer to the trial court's construction if
it was a reasonable construction of an ambiguous clause, and is supported by
substantial evidence, when the trial court's ruling was based on conflicting
evidence as to the intention of the contracting parties.
Analysis
We conclude substantial evidence supports the
trial court's interpretation that the intent of the indemnity provision in
Foundation's bylaws was that, when an officer or director is required to expend
legal fees to defend actions he or she undertook in his or her capacity as an
officer or director of Foundation, the indemnity clause was triggered as long
as the actions taken by the officer or director were undertaken in good
faith. Certainly, the language of the bylaws
is reasonably susceptible to that interpretation, because the indemnity
provision is triggered when an officer or director is required to defend him-
or herself because ("by reason of") of his or her involvement
with Foundation ("being or having been a Director [or] officer [of
Foundation]") and good faith actions in that capacity ("if such
person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of [the Foundation]").
Moreover, before the dispute arose, Foundation's Board placed the same
gloss on the language of the indemnity clause, because the Board agreed
(shortly after the federal civil suit naming both Foundation and Guess commenced)
Foundation should provide Guess with advances to cover his legal expenses to
defend the actions he took on behalf of Foundation, subject to the condition
that he provide assurances such advances were expended only on
Foundation-related issues.
Foundation's argument on appeal
appears to be that, as a matter of law, the only interpretation to which the
indemnity language is reasonably susceptible is that a director or officer is
entitled to indemnification only where his or her liability is "derivative
and secondary to [Foundation's] liability" and he or she was named as a
defendant in the litigation "solely because he [or she] held a position as
an officer or director," and does not apply if the litigation pleaded that
the officer or director engaged in some affirmative conduct alleged to be
wrongful. We are not persuaded by this
construction. First, Foundation cites no
authority for this stilted construction of the indemnity language. Second, this construction ignores that the
language contemplates indemnity for legal costs will apply even to litigation
pleading that the officer or director had
engaged in some affirmative conduct in his or her capacity as an officer or
director, because the language specifies the officer or director may obtain indemnity
for defense costs as long as his or her affirmative conduct was "in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of [the Foundation.]" Such a "good faith" condition would
be surplusage under Foundation's construction of the language because, under
Foundation's construction, indemnity would be unavailable if the litigation
alleged the officer or director engaged in any
affirmative conduct on which the litigation was based. Finally, this construction is contrary to the
evidence that, before the present controversy arose, Foundation agreed to
advance legal fees to Guess to defend the action even though there were
allegations Guess had engaged in affirmative conduct on behalf of Foundation, which
provides evidence that Foundation understood the language called for indemnity
notwithstanding the allegations that Guess had engaged in affirmative conduct
on behalf of Foundation. (
Genentech, Inc. (2008) 43 Cal.4th 375, 393 ["[a]
party's conduct occurring between execution of the contract and a dispute about
the meaning of the contract's terms may reveal what the parties understood and
intended those terms to mean"].)
We conclude
there was substantial evidence to
support the interpretation that the indemnity clause required Foundation to
indemnify Guess for legal fees (at least to the extent those fees were
attributable to defending Foundation's interests in the federal civil suit
rather than to defending actions taken on behalf other xélan entities enmeshed
in the federal civil suit) even though the federal civil suit alleged, in part,
that Guess's actions in his capacity as an officer or director of Foundation
gave rise to the litigation against Foundation and Guess.
Foundation
also briefly asserts it was error to award indemnity because the focus of the
federal civil suit was Guess's alleged perpetration of a tax fraud, which is
excluded from the indemnity clause because it does not satisfy the good
faith/best interests condition to indemnity.
trial court rejected Foundation's claim Guess had not acted in good faith and
in a manner he reasonably believed to be in the best interests of Foundation,
and Foundation has forfeited any contention that the trial court's finding on
this issue is unsupported by the evidence.
When an appellant challenges a finding for insufficiency of the evidence
to support it, the appellant is required to set forth in the appellant's
opening brief all the material evidence on that issue or finding and not merely
evidence favorable to his or her position.
(Foreman & Clark Corp. v.
Fallon (1971) 3 Cal.3d 875, 881.) "In
furtherance of its burden, the appellant has the duty to fairly summarize all
of the facts in the light most favorable to the judgment. [Citation.] Further, the burden to provide a fair summary
of the evidence 'grows with the complexity of the record. [Citation.]' " (Boeken
v. Philip Morris, Inc. (2005) 127 Cal.App.4th 1640, 1658.)
An
appellant must state fully, with transcript citations, the evidence claimed to
be insufficient to support the trial court's findings. (In re
Marriage of Fink (1979) 25 Cal.3d 877, 887.) Unless this is done, the asserted error is
deemed waived. (Foreman & Clark
Corp. v. Fallon, supra, 3 Cal.3d at p. 881.) "An appellate court will consider the
sufficiency of the evidence to support a given finding only after a party
tenders such an issue together with a fair summary of the evidence bearing on
the challenged finding, particularly including evidence that arguably supports
it." (Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 409-410.) Furthermore, "[a] party who challenges the sufficiency
of the evidence to support a finding must
set forth, discuss, and analyze all the evidence on that point, both
unfavorable" (Doe v. Roman
Catholic Archbishop of Cashel & Emly (2009) 177 Cal.App.4th 209, 218),
and a failure to do so permits a reviewing court to deem waived any
contention. (Ibid.)
Based on our
review of the record on appeal, Foundation has not set forth a sufficient
statement of facts
stating all
of the material evidence, both favorable and unfavorable, on the
issue of whether Guess's actions satisfied the good faith criteria. By way of example only, the trial court cited
evidence that (1) Guess testified he believed his actions on behalf of
Foundation were appropriate, (2) his acts on behalf of Foundation were vetted
by legal counsel for Foundation, and (3) his acts were approved by Foundation's
Board. Moreover, although the federal
civil suit alleged fraud, the federal court denied the government's request for
a preliminary injunction based in part on its conclusion the government could
not show "likely success on the merits" and, after the suit
containing the allegations of fraud was dismissed, the federal court awarded
attorney fees based (in part) on the finding the "government's legal and
factual position on the scope and basis of the pre-trial injunctive relief
. . . was not substantially justified." (U.S.
v. Guess (S.D. Cal. 2005) 390 F.Supp.2d 979, 989.) These facts are relevant to (and supportive
of the finding on) the issue of whether the good faith/best interests condition
was satisfied but are almost entirely ignored in Foundation's opening
brief. Instead, Foundation has cited
only the evidence it contends would support its position that Guess did
indemnity award should be reversed because the good faith/best interests
condition was not satisfied is deemed forfeited.
B. The Loan Claim
Foundation
asserts the judgment must be reversed because there was no evidence Guess was "liable
to pay or repay any attorney fees" to Chicoine & Hallett or to
Mr. Lipman's firm, and therefore the indemnity obligation of Foundation
under the bylaws never arose. However,
the parties did not dispute below that Guess was billed by the attorneys for
services rendered in connection with the federal civil suit, and Guess
testified he paid the bills of those firms and was able to fund those payments
by borrowing money. Because the bylaws
required Foundation to indemnify Guess "against all reasonable expenses
and liabilities, including counsel fees, necessarily incurred" by Guess, there was substantial evidence to support
the conclusion Guess "incurred" (and indeed paid) counsel fees within
the meaning of the bylaws.
Foundation's
argument is that because Guess borrowed
from third parties to fund the payments, Foundation is somehow excused from its
obligations to reimburse Guess for the attorney fees he incurred absent proof
that Guess had repaid (or remained liable to repay) those loans. Foundation cites no pertinent authority for
this contention--i.e. that Foundation was excused from its obligations because
Guess was able to call on collateral sources to help him pay the liabilities
ultimately owed by Foundation--and analogous law undermines Foundation's
argument.
In
v. Wells (1999) 72
Cal.App.4th 1006, a plaintiff was injured by a tortfeasor and one of the
obligations imposed on tortfeasors is to pay the plaintiff any lost earnings
resulting from the injury. However, the
trial court instructed the jury not to award damages for lost earnings because
the plaintiff's employer was a family business run by plaintiff's brother, and
the brother gratuitously continued to pay plaintiff even though plaintiff could
not work. Although the brother "wished"
to be reimbursed, there was no explicit requirement or agreement by plaintiff
to refund the money, and the trial court reasoned that absent proof the
plaintiff was obligated to reimburse his employer, the plaintiff could not
recover lost wages because he had no lost wages. (Id.
at pp. 1008-1009.) The appellate court
reversed, concluding it was error to instruct the jury not to award plaintiff
damages for lost earnings merely because the injured party had collateral
sources willing to assist him through difficult times. The appellate court reasoned the collateral
source rule should be applied equally to charitable giving as to other sources
because, among other reasons, it would encourage charitable giving, it would
preclude the obligor from gaining a windfall and defeating the donor's intended
object of the gift, and because the injured party (if fully compensated) may be
motivated to repay the donor even though under no legal compulsion to do
so. (Id.
at pp. 1012-1014.)
The same
rationale applies here. There is substantial
evidence Guess "incurred" legal fees within the meaning of Foundation's
bylaws, and there is substantial evidence he in fact paid those bills. The mere fact Guess's friends and family
agreed to loan him money to assist him through financially difficult times,
which he agreed to repay "when able," would become a windfall to
Foundation if it could rely on their charity to escape its obligation to
indemnify Guess. Because Foundation
cites no contrary legal authority, we conclude that how Guess funded payment of the legal fees is irrelevant to
Foundation's obligation (under its bylaws) to pay the legal fees he incurred.
C. The Evidentiary Claim
Foundation
asserts the court erred when it overruled Foundation's objection to admission
into evidence of the bills of Chicoine & Hallett. Guess offered the bills as business records
(admissible under the business records exception to the hearsay rule codified
in Evid. Code, § 1271) along with a declaration from a custodian of
records authenticating the bills.
Foundation objected to the bills and asserted the proffered declaration
authenticating the bills was insufficient because she lacked personal knowledge
as to the accuracy of each entry within the bills.
Foundation
asserts on appeal that, before a document may be admitted under the business
record exception to the hearsay rule embodied in Evidence Code section 1271,
the custodian of records must lay the requisite foundation specified in
subdivisions (a) and (b) of that section, that foundation must be provided by
trial, and the requisite foundation may not
be established by declaration because the declaration is itself hearsay for
which no exception exists. Foundation's
argument is meritless. When copies of
business records are produced pursuant to a subpoena duces tecum, the records
are admissible at trial if accompanied by a declaration from the custodian who
avers the same foundational facts (e.g. the foundational facts required by
Evid. Code, § 1271) as the custodian would have been required to establish
by live testimony if called as a witness at trial. (Evid. Code, §§ 1560-1562.) Foundation makes no effort to show the
requisite procedures under Evidence Code section 1560 et seq. were not
followed, or that the contents of the custodian's declaration lacked some
essential foundational fact for admission of the business records if that
custodian testified to the same facts at trial.
We conclude the trial court did not err by admitting the bills of
Chicoine & Hallett into evidence.
DISPOSITION
The
judgment is affirmed. Guess is entitled
to costs on appeal.
McDONALD,
J.
WE CONCUR:
NARES,
Acting P. J.
McINTYRE,
J.
name="_ftn1" title="">[1]
Our factual background is
derived largely from the trial court's statement of decision because neither
party contests the sufficiency of the evidence supporting the trial court's
factual determinations.
name="_ftn2" title="">[2]
Although the government continued looking into matters
surrounding the xélan family of companies and program, as of mid-2007 attorneys
assured Foundation there was no information suggesting Foundation was subject
to an ongoing criminal investigation.
Although Guess was indicted in late 2008 on charges of filing a false
personal income tax return, and was later convicted on that charge, his personal
tax returns were not in issue during the period that the federal civil suit was
pending.
