Neeley v. Martin

Filed 3/22/07 Neeley v. Martin CA3

NOT TO BE PUBLISHED

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(El Dorado)

Plaintiffs Michael Neeley (Neeley) and Rayla Neeley (collectively plaintiffs) appeal from the judgment in favor of defendants Carl Martin (Martin), Glenn Martin (Glenn), and Sierra Outdoor Resorts, Inc. (SORI) on their complaint, inter alia, for constructive and promissory fraud and wrongful discharge.

This action arose after Neeley and Martin formed a corporation, which purchased and operated a membership resort known as Ghost Mountain Ranch (GMR). Neeley and Martin were the principal shareholders and entered into the joint venture expecting to invest equally and jointly manage the company. Their expectations failed on both counts. Shortly after Neeley began working at GMR, their working relationship deteriorated and Neeley was ousted from his position as sales manager and president of GMR. After his ouster, the board of directors issued a $40,000 convertible promissory note to Martin as compensation for the additional $40,000 in funds he invested to ensure the purchase of GMR. Martin then exercised his rights under the note and acquired a controlling interest in SORI. The trial court found in favor of defendants on all causes of action on their motion for judgment. (Code Civ. Proc., 631.8.)

On appeal, plaintiffs contend the trial court erred by failing to consider defendants fiduciary obligations to minority shareholders. We find no error and shall affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND^[1]

Neeley met Martin in 1980 or 1981 and the two became close friends, living together for a while until Neeley married and Martin moved next door.

In 2001, Martin began working at GMR in Pollock Pines, when he learned it was for sale and considered purchasing it. In September of that year, he spoke to a number of people about the venture. He also spoke to Neeley about the business opportunity because they had been friends for years and Neeley was being laid off from his job and would need employment.

Neeley expressed interest and after much discussion, he contacted the sellers about purchasing the business. Because Martin was an ex-employee of GMR, he and Neeley agreed that purchase of the business would go smoother if it were done in Neeleys name and then transferred to a later formed corporation. Nevertheless, the two men agreed to invest equal amounts and share equal ownership in the business.

On December 24, 2001, an agreement to purchase the property was executed between Neeley and Great Western Resorts, Inc. The contract provided that the $100,000 deposit was non-refundable after 45 days.

Neeley and Martin formed SORI, a California corporation, on January 11, 2002. At that time, the two men were equally invested in the business and each received 40,000 shares in the corporation or 40 percent each, leaving 20 percent of the shares for other investors.

However, sometime in July 2002, when it became apparent additional funds would be necessary to close escrow, Martin put up an additional $40,000 to close the deal. At that time, he told Neeley that if he was going to invest a greater amount of money he wanted to be the general manager and to have a controlling interest in SORI. Neeley agreed.

Following purchase of the property, Neeley was put in charge of membership sales and Martin became the general manager of the facility. However, Neeley continued to work at Intel full-time where he earned $70,000 and received full benefits. He also worked part-time at GMR. After a few months, Martin encouraged Neeley to leave Intel and work full-time at GMR. He agreed and in September he began working full time for GMR where he received a monthly salary of $2,000.

For the first several months, things went smoothly. By late October 2002 however, Neeley and Martin began having disagreements, which escalated in frequency and intensity. In Martins view, Neeley treated him, the employees, and the membership poorly; he lacked management skills; he failed to make any sales, which was supposed to be his first priority; he did not admit his failures and blamed everything on other people, particularly Martin; and the employees repeatedly complained to Martin about Neeleys attitude and the fact he countered many of Martins orders and directives. In February, when Neeley sent Martin a barrage of offensive electronic mail (e-mail), Martin contacted his brother Glenn for advice on how to deal with the situation.

The employees shared Martins view of Neeley. Jodi Nissen, a family friend of the Neeleys who Neeley had hired to work at GMR, testified that by October, it was impossible to work with Neeley and gave myriad examples.^[2] In March 2003, Nissen was at her wits end, so she sent Neeley an e-mail advising him the employees were so miserable and stressed out, they were all considering the possibility of leaving GMR. All of the employees signed a statement that expressed support for Martin and demanded Neeleys resignation and immediate withdrawal from the property. The statement indicated that Neeleys management style, inappropriate and unsafe behaviors, and preoccupation with his own dreams has caused a negative impact on the business.

Meanwhile, Glenn reviewed corporate documents and discussed the matter with all employees to determine whether his brothers complaint was legitimate. He also discussed the matter with several shareholders who told him Neeley had to be removed from office to prevent any further damage to the business. After conducting his review, he concluded his brother was right and decided to help him remove Neeley as president.

After consulting with his family and an attorney, Martin offered to refund Neeleys investment and gave him time to consider the offer, but advised him that if he decided to decline the offer, he should expect a change in management. When Neeley turned down the offer, the decision was made to terminate him from office.

In March, Martin sent a letter to all of the shareholders except Neeley, explaining the dispute between the two men and advising that he would be sending a document for their approval proposing to remove Neeley as president of the corporation. The document, entitled an Action by Written Consent of Shareholders, proposed to amend the bylaws by changing the number of directors from two to three in accordance with California law and to elect Glenn as the third director. The document was circulated and signed by 51 percent of the shareholders who voted in favor of the proposed actions.

On March 27, 2003, Martin served Neeley with notice of a board meeting to be held on March 29th at 11:00 a.m. Neeley responded the same day acknowledging receipt of the notice. The board meeting was held as scheduled and attended by the three directors, Neeley, Martin, and Glenn. Neeley was terminated as president by majority vote.

Notice was subsequently sent of the annual shareholder meeting to be held on May 17, 2003. The notice gave the date and time of the meeting, stated the agenda, which included election of the three members of the board of directors, and listed both Neeleys as candidates. The Neeleys did not appear at the meeting and the shareholders elected Martin, Glenn, and Harry Henderson to the board.

At a special meeting held June 27, 2003, the board of directors addressed the issue of Martins additional investment towards the purchase of GMR. By a 2-0 vote with Martin abstaining, the directors gave him a convertible promissory note, which promised to pay him $40,000 with interest subject to his right to convert the unpaid principal into corporate shares at the rate of $1.30 a share. The directors also approved his exercise of that right by exchanging $10,500 of the unpaid principal on the note for 8,000 shares in SORI. The conversion price of $1.30 per share was the same rate Martin and Neeley paid for their original shares.

The Neeleys filed a complaint against Carl Martin, Glenn, Don Martin, and SORI for damages, declaratory relief, and injunctive relief to cancel Martins stock certificates. They allege nine causes of action for breach of fiduciary duty, constructive and promissory fraud, conspiracy to defraud, wrongful discharge, defamation, and cancellation of stock certificates.

The matter was tried before the court, which granted the Neeleys motion to dismiss Don Martin as a defendant. After hearing the Neeleys case-in-chief, the court granted defendants motion for judgment (Code Civ. Proc., 631.8) as to all causes of action and the Neeleys filed a timely notice of appeal.

DISCUSSION

The Neeleys sole claim on appeal is that the trial court failed to consider defendants fiduciary duties in connection with the election of a third director, issuance of the convertible promissory note, and issue of the additional shares of stock to Martin. They argue that in upholding the propriety of these three transactions, the trial court focused solely on the technical provisions of the bylaws and the Corporations Code and ignored the fiduciary requirements. Defendants contend this claim has no merit and that plaintiffs have failed to address the applicable law governing corporate transactions. We find the record fails to support plaintiffs claim.

We first dispose of plaintiffs assertion that Neeleys 20-year friendship with Martin gave rise to a fiduciary relationship between the two men. The Neeleys cite no authority and make no argument to support this claim.^[3] The existence of a fiduciary relationship turns on the circumstances of each case and is a question of fact to be determined by the trier of fact. (Kudokas v. Balkus (1972) 26 Cal.App.3d 744, 750.) The trial court expressly rejected this claim, finding friendship does not give rise to a separate fiduciary relationship. Because the Neeleys did not object to this finding (Code Civ. Proc., 632, 634; In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133-1135) and do not claim it lacks substantial evidence, they have waived any error relating to this theory of recovery. (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881; Federation of Hillside & Canyon Assns. v. City of Los Angeles (2004) 126 Cal.App.4th 1180, 1206.)

As to the fiduciary duties owed by directors and majority shareholders, there is nothing in the record to show the trial court applied the wrong standard of proof by ignoring the duties owed by directors and majority shareholders to the corporation and minority shareholders. To the contrary, the record shows the trial court was well aware of the Neeleys fiduciary claim and expressly found Martins fiduciary obligations ran to the protection of the interests of the corporation and the shareholders and that he was acting in those interests when he took action to terminate Neeleys employment and membership on the board. As we shall discuss, the courts findings and conclusions are supported by the law and the evidence.

A. Appointment of Third Director

The Corporations Code requires that bylaws set forth the number of directors of the corporation and that the minimum number of directors shall not be less than three although before shares are issued, the number may be one or two, and if the corporation has only two shareholders, the number may be two. (Corp. Code, 212, subd. (a).)^[4]

As originally written, SORI bylaws stated the number of directors shall be not less than two nor more than three and there were more than two shareholders. Amendment of the bylaws to increase the minimum number of directors to three was therefore necessary to bring them into compliance with section 212 and that action was properly carried out by written consent of a majority of the shareholders.

By so amending the bylaws, a vacancy was created that could then be filled at any time by written consent of a majority of the shareholders of record. A majority of the shareholders signed a written consent form appointing Glenn to fill the vacancy for the ensuing year or until his successor is elected.

Notice of the annual shareholder meeting was sent stating the time, place, and agenda, which included election of the three board members. Included in the list of several candidates were both Neeleys who failed to appear at the meeting. There is no claim or evidence that the Neeleys failed to receive adequate notice. A majority of the shareholders elected Martin, Glenn, and Harry Henderson as the new directors. Again, as the trial court found, these actions were carried out in conformance with the bylaws and Corporations Code and the Neeleys do not contend otherwise.

B. Issuance of Promissory Note and Additional Shares of Stock

By law, shares may be issued for such consideration as is determined from time to time by the board . . . consisting of any or all . . . money paid, . . . debts or securities canceled . . . . ( 409, subd. (a)(1).) Additionally, [u]nless otherwise provided in the articles, a corporation may issue its debt securities convertible into other debt securities or into shares of the corporation within such time or upon the happening of one or more specified events and upon such terms and conditions as are fixed by the board. ( 403, subd. (b).) In the absence of fraud in the transaction, the judgment of the directors as to the value of the consideration for shares shall be conclusive. ( 409, subd. (b).)

When a director is interested in a transaction acted upon by the board, section 310, subdivision (a) states that the transaction approved or ratified by the board is not void or voidable because the interested director is present at the board meeting if one of three conditions is met.^[5] The second and third conditions require that the material facts to the transaction and the directors interests in the transaction be fully disclosed or known to the board and that the contract or transaction be just and reasonable to the corporation. The difference between these two conditions is that under the second condition, the board must approve the transaction in good faith and without the vote of the interested director, while under the third condition, the interested director may vote but has the burden of proving the transaction is just and reasonable.

The trial courts findings support the conclusion that issuance of the note and the additional shares was just and fair and satisfies both the second and third conditions in section 310, subdivision (a). In its statement of decision, the court found the stocks were issued at the same share price as both Neeley and Martins original investment, rather than the later stock price. [] The consideration for this issuance cannot be reasonably disputed. The evidence shows that Neeley and Martin stood to lose [their] initial time and effort to obtain GMR as well as a non-refundable $100,000.00 deposit unless the deal closed. . . . that Martin came up with the additional monies to close the deal. . . . [and] that this imbalance was carried on the corporate books for a number of years without being accounted for. [] The court finds no irregularity in the board handling this matter as they chose to do by properly noticed board action. The board issued a convertible promissory note in favor of Martin as a means of handling this debt. The evidence shows that Carl Martin abstained from the vote on this issue, which was proper. The remaining directors voted 2 to 0 in favor of the action. While one of the board members, Glenn Martin, is Carl Martins brother and a defendant in this action, no evidence was presented to show that the remaining board member, Harry Henderson, acted in any way improperly . . . [and] [] [n]o testimony as elicited from any stockholder that testified (other than Neeley) that there was any dissatisfaction with the corporations issuance of the convertible promissory note to Martin as a means [of] handling this debt.

Plaintiffs did not object to these findings and conclusions, they do not challenge the sufficiency of the evidence to support them, nor do they claim full disclosure was not made. Because the convertible promissory note was properly given in accordance with the law and in consideration of the substantial additional funds paid by Martin at the time the business was purchased, and the shares were issued at the same rate paid by Neeley and Martin when the corporation was formed, we also find those two transactions were fair, reasonable, and proper.

C. Fiduciary Duties

Nor did defendants run afoul of their fiduciary obligations by approving these transactions. The fiduciary duties and obligations of officers, directors, and majority shareholders are well established. Their powers must be exercised in good faith and with a view to the best interests of the shareholders as well as the corporation. (Lawrence v. I.N. Parlier Estate Co. (1940) 15 Cal.2d 220, 229.)

Directors and controlling shareholders are fiduciaries and [t]heir dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein . . . The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arms length bargain. If it does not, equity will set it aside. (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108.)

Section 310 requires that transactions by interested directors be taken in good faith ( 310, subd. (a)(2)) and be just and reasonable. (id., subds. (a)(2)(3).) In so doing, the Legislature essentially codified the good faith and inherent fairness rule stated in Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d at page 112. Since we have found appointment of a third director and approval of a promissory note and issuance of additional stock to Martin satisfy section 310, we likewise hold that defendants as directors, did not violate their fiduciary duties to the corporation or the shareholders when they approved these actions.

The fact the board terminated Neeley as president and as an employee does not by itself establish that defendants unfairly exercised their powers at his expense. The trial court found that ousting Neeley from GMR was done for a legitimate business purpose and in the interests of the corporation and the other shareholders. The evidence supports these findings^[6]and the Neeleys do not argue otherwise. Moreover, while Neeley would no longer play any part in the management and day-to-day business of GMR, the value of plaintiffs investment was not diminished. Prior to terminating Neeley, Martin offered plaintiffs the opportunity to recoup their full investment by selling their shares back to the corporation at the same price they paid. They refused that offer but retained their shares at their full value and with full voting rights and their interests and rights as shareholders had not changed. Although their proportionate interest in the corporation decreased after Martin exercised his convertible note, the Neeleys status as minority shareholders remained unchanged since they never owned a controlling interest in the corporation.

The cases relied on by plaintiffs are completely inapposite. Defendants did not decrease the value or marketability of plaintiffs stock (Jones v. H.F. Ahmanson & Co, supra, 1 Cal.3d at pp. 117-118), they did not unlawfully manipulate stock certificates so as to gain personal advantage to the detriment of the corporation, the stockholders, or the owners of the stock (Lawrence v. I.N. Parlier Estate Co., supra, 15 Cal.2d at p. 230), and they did not commit a fraud on fellow directors and shareholders by issuing themselves stock for less than par value (Schwab v. Schwab-Wilson Machine Corp. (1936) 13 Cal.App.2d 1, 4-5.)

The trial court rejected the Neeleys claim of fraud and impliedly found Martin paid a fair and adequate consideration for the additional shares. The primary purpose of the promissory note was to discharge a corporate debt owed by the corporation to Martin for the substantial additional funds he invested in GMR at the time it was purchased. He paid the same price for the additional shares that he and Neeley paid for the original shares and there is no evidence the additional shares were worth more at the time he purchased them. Accordingly, we reject the Neeleys claims.

DISPOSITION

The judgment is affirmed. Defendants are awarded their costs on appeal. (Cal. Rules of Court, rule 8.276.)

BLEASE , Acting P. J.

We concur:

ROBIE , J.

BUTZ , J.

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^[1] On appeal from the granting of a motion for judgment (Code Civ. Proc., 631.8), we present the evidence in the light most favorable to defendants. (Robert H. Jacobs, Inc. v. Westoaks Realtors, Inc. (1984) 159 Cal.App.3d 637, 642.)

^[2] Although Nissen worked mostly with Martin because he was always in the office, when Neeley showed up, he would give her directions that were different from or in conflict with the directions Martin had given her. Neeleys mood would suddenly change and he would become angry with the employees, particularly when they were doing something Martin had asked them to do. At Martins suggestion, she and another employee, Phil Perkins, were assigned to work with Neeley as a sales team. While they had a few meetings, Neeley failed to provide any leadership or engage in any type of a sales program, and when no sales were made, he blamed Perkins and Nissen. There was complete turmoil among the employees when Neeley was present. He did not respect Nissens ideas and made remarks to the employees that were critical of Martins leadership and character. Nissen was confused about who to report to and felt there could not be two leaders who conflicted with each other. In Nissens view, Neeley did not appear to put the business first. He viewed it as his playground where he could do what he wanted.

^[3] The law imposes fiduciary duties in certain technical, legal relationships such as those between partners, joint ventures, husbands and wives, guardians and wards, trustees and beneficiaries, principles and agents, and attorneys and clients. (Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 632.) While a confidential relationship may arise from a friendship when one party gains the confidence of the other and purports to act or advise with the other's interests in mind (Kudokas v. Balkus, supra, 26 Cal.App.3d at p. 750), [t]he mere fact that in the course of their business relationships the parties reposed trust and confidence in each other does not impose any corresponding fiduciary duty in the absence of an act creating or establishing a fiduciary relationship known to law. (Worldvision Enterprises, Inc. v. American Broadcasting Companies, Inc. (1983) 142 Cal.App.3d 589, 595.)

^[4] All further section references are to the Corporations Code unless otherwise specified.

^[5] Section 310 provides in full: (a) No contract or other transaction between a corporation and one or more of its directors, or between a corporation and any corporation, firm or association in which one or more of its directors has a material financial interest, is either void or voidable because such director or directors or such other corporation, firm or association are parties or because such director or directors are present at the meeting of the board or a committee thereof which authorizes, approves or ratifies the contract or transaction, if

(1) The material facts as to the transaction and as to such director's interest are fully disclosed or known to the shareholders and such contract or transaction is approved by the shareholders (Section 153) in good faith, with the shares owned by the interested director or directors not being entitled to vote thereon, or

(2) The material facts as to the transaction and as to such director's interest are fully disclosed or known to the board or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified, or

(3) As to contracts or transactions not approved as provided in paragraph (1) or (2) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.

^[6] The evidence shows that Neeley created a serious management problem with the employees and virtually all of the GMR employees signed a statement indicating he was too difficult to work with and should be terminated. A majority of the shareholders also wanted him out of management. In addition, he failed to provide any leadership to the sales team and failed to make any sales himself.