Everest Properties v. Prometheus Dev. Co.

Filed 9/27/07 Everest Properties v. Prometheus Dev. Co. CA1/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION ONE

The trial court found that appellants breached fiduciary duties to respondents in connection with a merger transaction and liquidation of a partnership. Compensatory damages were awarded to respondents, along with prejudgment interest, and equitable relief was granted in the form of a constructive trust and equitable lien on the partnership units. In this appeal, appellants complain of the trial courts evidentiary rulings, challenge the evidence to support the judgment, assert they were improperly denied a new trial before a jury to assert the defense of collateral estoppel, and contest various aspects of the relief granted to respondents by the trial court. We conclude that the imposition of a constructive trust and equitable lien must be reversed, and the award of prejudgment interest must be modified. We further conclude that no other prejudicial errors occurred and the evidence supports both the finding of breach of fiduciary duties and the compensatory damages awarded to respondents. We therefore affirm the judgment in all other respects.

STATEMENT OF FACTS

Prometheus Income Partners (PIP) was a limited partnership created pursuant to a partnership agreement in 1985 to own, construct, and ultimately sell two apartment buildings located in Santa Clara, California, known as the Alderwood and Timberleaf apartments. Defendant and appellant Prometheus Development Co., Inc. (PDC), a California corporation, was the sole corporate general partner of PIP; defendant and appellant Sanford N. Diller (Diller) was an officer, director and, through family trusts, the sole shareholder of PDC.[1] PIP issued nearly 19,000 limited partnership interest units at a cost of $1,000 per unit to finance the development of the Alderwood and Timberleaf apartments.

In June of 1996, construction defects were discovered in the hardboard siding, flashing, and to a lesser extent the roofing installed in both the Alderwood and Timberleaf apartment buildings. Investigation revealed that necessary remedial measures would include removal and restoration of the skin of the building in each complex, along with replacement of the defective waterproofing and repair of structural damages. Estimates were received for the cost of the repairs. PIP also created a reserve account as required by the lender to cover the estimated cost of repair of the construction defects. The reserve was supplemented with an additional amount that in the business judgment of PIP management was necessary to cover contingencies that may occur with the repairs. The cash flow from the projects was used to fund the reserve accounts, so quarterly distributions to the limited partners were suspended between 1996 and 2002. By the end of March 2002, the total amount in the reserve accounts was around $10.2 million. PIP also filed two construction defects lawsuits against the general contractor and several subcontractors.

As estimates and plans for repairs of the properties proceeded, respondent Everest Properties II LLC, a company which invests in real estate limited partnerships, and its affiliate Everest Management, LLC (collectively Everest or respondents), undertook an analysis of the PIP limited partnership interest units. According to an internal tender offer analysis dated June of 2000, Everest placed a liquidation value on the PIP partnership units of at least $1200 per unit, based on conservative estimates which included the repair costs. Everest then began to acquire PIP units through tender offers to existing limited partners at $650 to $800 per unit.

By 2000, the limited partners increasingly complained about the impact of the construction defects and litigation, the lack of distributions, the failure of the properties to appreciate, and the illiquidity of the market for the units. PDC explored options for achieving liquidity for the limited partners. PDC decided not to place the Alderwood and Timberleaf apartments for sale on the open market without completion of repairs. PDC management determined that the known defects in construction made marketing the property problematic due to the uncertainties of the cost of repair which would result in fewer potential buyers and sale of the property at less than an optimum price. The alternative of repairing the construction defects first, then selling the properties and distributing the proceeds upon liquidation of the partnership, was also considered but rejected in favor of a merger transaction with an affiliate organized by Diller which was willing to purchase the properties with known defects. PDC was aware that structuring the transaction as a merger rather than a sale would result in a tax advantage to Diller and his affiliates although not to the unaffiliated limited partners.

In January of 2000, PDC investigated and then proposed a merger whereby PIP Acquisition, LLC, would purchase essentially all of the outstanding shares of PIP from the existing unaffiliated limited partners, then merge into PDC. PIP Partners  General LLC (PIP Partners) owned PIP Acquisition LLC, and also then owned approximately 18 percent of the units of the limited partnership. Ninety-nine percent of the interests in PIP Partners was owned by Diller and managed by an entity controlled by appellants. Thus after the merger, entities controlled by Diller would own essentially the entire partnership, and the unaffiliated partners would no longer have any interest in the partnership units. In May of 2000, a merger value of $1,200 was fixed for each unit to be offered to the limited partners, based upon the estimated market value of the partnership properties of approximately $55.1 million and the potential financial impact of the still-pending construction defects litigation.

PDC was aware that the proposed merger was an affiliate transaction rather than an arms length transaction with an independent third party. Thus, PDC, as an entity with public reporting responsibilities, filed a preliminary proxy statement and related disclosure materials on the transaction with the SEC in June and September of 2000 that placed a value of $1,200 on each of the units. The same amount per unit was paid by PDC for the acquisition of some partnership units in June of 2000. The SEC responded with comments, which in turn resulted in proxy statement amendments filed by PDC.

In October of 2000, Everest prepared a further analysis of the PIP units that took into account the proxy statement filed by appellants and the pending litigation over the construction defects in the apartment buildings. A value of $1,355 to $1,359 was placed on the units in Everests analysis.

After PDC reviewed the partnerships most recent favorable financial performance in October 2000, and received an independent appraisal that placed an increased value on the properties of $68.9 million in December 2000, the proposed merger transaction was reevaluated. The proxy solicitation was then modified to provide for the consideration to be based on liquidation value of the property of a minimum of $1,200 per unit, plus a contingent payment dependent upon the recovery in the construction defect litigation, less the cost of repairs. Shortly thereafter Everest expressed to PDC an interest in submitting a competitive bid on the partnership properties, but no offer was made.

The SEC declined to grant approval of the proposed merger transaction with the contingent payment as described in the preliminary proxy solicitation. By its terms, the revised merger proposal terminated without clearance from the SEC at the end of August 2001.

In September of 2001, while PDC continued to evaluate a restructuring of the merger transaction, an independent appraisal placed a reduced market value of $53.2 million on the Alderwood and Timberleaf apartments. The lower appraised value was due primarily to a decline in net operating income from the apartments caused by a deflated rental market. The appraisal also subtracted the amount of the deferred maintenance costs for the repair of the roof and siding on the buildings, stated by PDC as $3,079,654. Everest, which by that time owned a total of just under 5 percent of the outstanding PIP units, did not have an objection to the merger proposal as it was then constituted with payments of $1,200 per unit plus additional compensation dependent upon the outcome of the construction defects dispute, and so advised its source of financing, Blackacre.

In October of 2001, final settlement of the construction litigation resulted in a net recovery by PIP of $10.8 million, after deduction of expenses and legal fees.[2] PIP also retained the amount of $10.2 million previously accumulated in the reserve account to fund the repairs. The estimate given by PIP of the cost to accomplish the repairs was between $12.5 and $14.6 million.

Soon after settlement of the construction litigation, PDC decided to proceed with a revised version of the proposed merger, and so notified the limited partners by letter. Based upon the most recent property appraisal and the cash assets held by the limited partnership as of December 31, 2001, PDC set the merger consideration at $1,714 per unit.

As advised by counsel, in October of 2001 PIP engaged the investment banking firm of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. (Houlihan) to prepare a fairness opinion on the proposed merger as amended.[3] In the opinion dated March 6, 2002, Houlihan found that given the decline in real estate values, the appraisal of September of 2001 remained a reasonable substitute for the enterprise value of the partnership, specified to be in the range of $53.4 to $56.2 million. Based upon the financial statements, forecasts and other information supplied by PIP, Houlihan stated that it is our opinion that the consideration [of $1,714 per share] to be received by the Limited Partners, other than PIP General and its affiliates, in connection with the Transaction is fair from a financial point of view.

As PDC proceeded to complete a final proxy statement for the merger, Everest sought to obtain a competitive bid to purchase the Alderwood and Timberleaf apartments. Everest was concerned that the merger transaction proposed by PIP was essentially a deal by Diller with himself, and the offered price was quite low. Everest wanted to obtain a higher price for the properties that would benefit all of the limited partners. Aspen Square Management (Aspen), a real estate investment company with a focus on apartments, was contacted by Everest to direct its attention to the Prometheus opportunity.

In May of 2002, PDC filed a final proxy statement with the SEC, which was also sent to the limited partners on July 4, 2002. The expected cost of repairs to the Alderwood and Timberleaf apartments was specified in the proxy statement to be in excess of $12.5 million, and perhaps as high as $14 million or more. The proxy statement noted that the partnership received aggregate net recoveries of approximately $10.8 million from settlement of the construction litigation. In light of the slight decrease in the mortgage balance on the Alderwood and Timberleaf apartments and an increase in cash held by the partnership, the stated consideration to be paid to the limited partners was increased to $1,736 per share. The calculation of the consideration payable to the limited partners was based upon the September 2001 appraisal of $53.2 million, less a two percent sales commission and a one percent disposition fee, along with the projected cost of repairs and deferred maintenance. In an updated opinion letter on May 22, 2002, Houlihan reiterated that the consideration to the limited partners as specified in the final proxy statement was fair. According to the proxy statement, PDC and the other entities controlled by Diller each concluded that the proposed merger was substantively and procedurally fair to the limited partners despite the lack of an unaffiliated purchaser of the units, and recommended approval. The limited partners were also notified of a meeting scheduled for July 24, 2002, to vote on the proposed merger.

On June 13, and July 8, 2002, PIP entered into fixed-price agreements with a general contractor to repair the Alderwood and Timberleaf Apartments. The contracts were in existence before the scheduled partnership meeting and vote. The cost of repairs stated in the contracts was considerably less than the amount estimated in the final proxy statement, but the limited partners were not advised of the contractual repair costs.

Meanwhile, Everest remained opposed to the merger. Everest sent a letter to the limited partners expressing concern with the proposal, and continued to lobby Aspen to make an offer to purchase the properties. In June of 2002, Everest offered to sell its shares of the limited partnership to PDC for $2,300 per unit and go away; PDC rejected the offer.

Aspen expressed interest in the properties, and prepared a draft proposal of an offer which was sent to Everest for review on June 16, 2002. PIP received a nonbinding offer or letter of interest from Aspen on June 25, 2002, which stated a price for the properties that exceeded the proposed merger price, but was contingent upon completion of due diligence by Aspen through examination of the properties, and was subject to negotiation of a mutually acceptable purchase and sale agreement. PDC evaluated the letter and conducted a financial investigation of Aspen. When Aspens financial resources to complete the proposed transaction were verified, negotiations ensued. PDC asked Aspen if the price initially stated was the final best offer, but did not make a counteroffer or state a higher sale price that would be accepted. Nor did PDC increase the offer of consideration specified in the merger proposal. PDC also demanded an additional $1.5 million for its general partnership interest as a condition of completing the transaction with Aspen.

As the July 24, 2002 date of the scheduled partnership meeting and vote on the proposed merger neared, PIP[4] imposed a deadline upon Aspen to submit a binding offer or letter of intent; the deadline was ultimately extended to the end of July 19, 2002. PIP sent Aspen requested information, such as insurance, loan documents, bond documents and regulatory agreements. In the event Aspen presented a binding, acceptable offer, PIP also drafted a letter to be sent to the limited partners to advise them of cancellation of the scheduled partnership meeting. Aspen requested a further extension of the deadline to noon on Saturday, July 20, and PIP agreed by fax sent to Aspen after close of business hours on Friday the 19th.[5] PIP received a letter of intent from Aspen the morning of July 22, but despite Aspens protests rejected it as untimely.

Even as PDCs negotiations with Aspen continued, Everest expressed further opposition to the proposed merger by letter sent to PDC and the PIP limited partners. Everest also filed proxy solicitation materials with the SEC on July 16, 2002, which recommended a vote against the merger proposal. PDC countered with a final letter sent to the limited partners on July 22, 2002, that referred to persistent concerns expressed by experts with economic conditions and existing capital markets which posed risks to the limited partners, and counseled that the merger transaction represented an attractive liquidity opportunity to avoid those risks.

The meeting of the limited partners took place as scheduled on July 24, 2002. Approval of the proposed merger required at least a majority vote of the total of 18,995 limited partnership units entitled to vote, and 3,457 of those units were owned or controlled by PDC. The final vote tally was 9,630.73 in favor of the merger, 3,300.35 opposed, and a total of 431.42 abstentions.[6] Under the terms of the merger proposal, PDC voted its 3,457 shares in the same proportion as the unaffiliated partners who actually voted. The merger was thus narrowly approved by a vote of 50.7 percent.

Thereafter, the limited partners received consideration for their units, less a $3,389,000 loan prepayment penalty incurred when loans were refinanced to fund the merger payment. Everest, like the remaining limited partners, transferred their PIP ownership interests in exchange for the merger consideration of $1,736 per partnership unit, but retained its right to pursue any claims against PDC. Everest felt that it had not received a fair price for its units. In the three years after the merger transaction, the market value of apartment complexes in the Santa Clara area increased by 15 to 20 percent due to a decline in capitalization and interest rates and stabilization of rents.

Following the merger PDC made repairs to the Alderwood and Timberleaf apartments. The total cost of the repair contracts, including additional improvements in the roofing and new signage, internet wiring and unit numbers, was $10,317,579; the total cost associated with the remediation of the properties, including lost rents, was $11.7 million. The settlement recovery of $10.8 million was applied to the cost of repairs.

The present action for breach of fiduciary duty was filed by Everest in August of 2003. The case proceeded to trial before the court on the fourth amended complaint filed in April of 2005,[7] and included the interests of other former limited partners assigned to Everest before trial. Following the presentation of evidence and argument, the trial court found that PDC breached its fiduciary duties to Everest in connection with the merger transaction by specified misrepresentations and nondisclosures which deceived the limited partners. The court also specifically found that the proxy statement was materially inaccurate and incomplete. Damages were awarded in the total amount of $22,958,789 for all of the limited partners, of which Everest received $3,834,874 as its proportionate share, including assigned claims.[8] Prejudgment interest was awarded for Everests proportionate share of the amount ($19,160,000) unfairly liquidated by appellants at the time of the merger rather than distributed to the limited partners, calculated at 10 percent from the date of the merger, the last week of July 2002. Based on a finding that money damages are not likely to make Everest whole, the court imposed the further remedy of a constructive trust on the partnership units and an equitable lien on the past, current and future monies generated by the partnership. This appeal followed the denial of appellants motion for a new trial.[9]

DISCUSSION

I. The Exclusion of Unclean Hands Evidence.

Appellants have presented a myriad of issues to be considered in this appeal. We first confront their claim that the trial court erred by granting respondents motion in limine to exclude evidence in support of appellants affirmative defense of unclean hands. Appellants asserted the affirmative defense of unclean hands, based in part upon evidence of written tender offers by Everest to limited partners to purchase units without proper disclosure. In their opposition to Everests motion to exclude the proffered unclean hands evidence appellants made an offer of proof that in June of 2000, PIP negotiated with Liquidity Financial, a PIP limited partner, to purchase its existing limited partnership units at exactly $1,200 per unit; the negotiations were non-public information. The opposition further asserted that Everest had ongoing business relationships with Liquidity Financial, and was concomitantly conducting an internal analysis of PIP as a prelude to its own purchase of partnership units from other existing unaffiliated partners, which indicated a valuation of $1,113 to $1,291 on a per unit basis. Despite the internal valuation, Everest selected a valuation in the exact amount of $1,200 per unit when recommending the tender offer investment to its source of capital, Blackacre. Thereafter, Everest made tender offers of $650 per unit in June of 2000 and $800 per unit in March of 2001, but did not disclose to the selling limited partners the significant non-public information that it had apparently obtained from Liquidity Financial.

As additional evidence of unclean hands appellants proposed to demonstrate that in September of 2001 Everest stated to its financier Blackacre that the proposed merger was not that bad, and subsequently offered to withdraw objections to the merger if PDC purchased Everests interest in the partnership at a premium price of $2,300 per unit. Finally, appellants cited as unclean hands Everests dealings and connections with Aspen, particularly its request for a finders fee as a broker of the proposed transaction between Aspen and PDC.

Respondents moved to exclude all evidence and testimony regarding alleged unclean hands of Everest. Although the trial court granted in limine motion No. 2 to exclude all unclean hands evidence, only the evidence of the inside information Everest actually received when making its tender offers to other limited partners in June of 2000, was not received in support of appellants unclean hands defense. The remaining proffered evidence of unclean hands was ultimately admitted at trial, without objection, and argued by appellants as part of proof of unclean hands. Appellants now argue that the trial courts evidentiary ruling deprived it of its unclean hands defense, and requires reversal of the judgment.[10]

We commence our analysis with the settled proposition that, Only relevant evidence is admissible (Evid. Code, 210, 350), and all relevant evidence is admissible unless excluded under the federal or California Constitution[s] or by statute. (Evid. Code, 351; see also Cal. Const., art. I, 28, subd. (d).) [Citation.] (People v. Harris (2005) 37 Cal.4th 310, 337; see also People v. Vieira (2005) 35 Cal.4th 264, 293; Solin v. OMelveny & Myers (2001) 89 Cal.App.4th 451, 462463.)   Relevant evidence means evidence . . . having any tendency in reason to prove or disprove any disputed fact that is of consequence to the determination of the action. (Evid. Code, 210.) (Firestone v. Hoffman (2006) 140 Cal.App.4th 1408, 1418.) We review for abuse of discretion a trial courts rulings on the admissibility of evidence. (People v. Harris, supra, at p. 337; Firestone v. Hoffman, supra, at p. 1418; City of Ripon v. Sweetin (2002) 100 Cal.App.4th 887, 900.)

We agree with appellants that unclean hands was a defense generally available to PDC in the present action for breach of fiduciary duty. The [unclean hands] doctrine demands that a plaintiff act fairly in the matter for which he seeks a remedy. He must come into court with clean hands, and keep them clean, or he will be denied relief, regardless of the merits of his claim. [Citation.] (Yu v. Signet Bank/Virginia (2002) 103 Cal.App.4th 298, 322.) Unclean hands requires inequitable conduct by the plaintiff in connection with the matter in controversy and provides a complete defense to the plaintiffs action. (Dickson, Carlson & Campillo v. Pole (2000) 83 Cal.App.4th 436, 446.) The defense is available in legal as well as equitable actions. (Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 978.) Whether the defense applies in particular circumstances depends on the analogous case law, the nature of the misconduct, and the relationship of the misconduct to the claimed injuries. [Citation.] The decision of whether to apply the defense based on the facts is a matter within the trial courts discretion. (Dickson, Carlson & Campillo v. Pole, supra, at p. 447; see also CrossTalk Productions, Inc. v. Jacobson (1998) 65 Cal.App.4th 631, 641.)

Respondents action for breach of fiduciary duties brought into play equitable principles and rights between partners that justified assertion of an unclean hands defense by appellants. (See Interactive Multimedia Artists, Inc. v. Superior Court (1998) 62 Cal.App.4th 1546, 15531556; Wallner v. Parry Professional Bldg., Ltd. (1994) 22 Cal.App.4th 1446, 1454.) A partners actions in bad faith are relevant to that partners rights against other partners. (OFlaherty v. Belgum (2004) 115 Cal.App.4th 1044, 1099.)  We deal here with . . . an equitable proceeding [citation], to which equitable doctrines are applicable. [Citation.] One of these is the rule that he who comes into equity must come with clean hands. [Citation.] . . . [Citation.] (Ibid.) Unclean hands is an equitable rationale for refusing a plaintiff relief where principles of fairness dictate that the plaintiff should not recover, regardless of the merits of his claim. It is available to protect the court from having its powers used to bring about an inequitable result in the litigation before it. (Kendall-Jackson Winery, Ltd. v. Superior Court, supra, 76 Cal.App.4th 970, 985.) The issue before us, then, is whether the excluded evidence was probative on the issue of Everests unclean hands.

The fact that Everest may have improperly acquired inside information prior to its acquisition of PIP units from unaffiliated partners in 2000 does not establish unclean hands associated with the subsequent merger transaction.   [R]elief is not denied because the plaintiff may have acted improperly in the past or because such prior misconduct may indirectly affect the problem before the court. [Citation.] [Citation.] (Murillo v. Rite Stuff Foods, Inc. (1998) 65 Cal.App.4th 833, 844845.) The unclean hands rule does not call for denial of relief to a plaintiff guilty of any past improper conduct; it is only misconduct in the particular transaction or connected with the subject matter of the litigation which is a defense. (Wilson v. S.L. Rey, Inc. (1993) 17 Cal.App.4th 234, 244.)

Past improper conduct or prior misconduct that only indirectly affects the problem before the court does not suffice. The determination of the unclean hands defense cannot be distorted into a proceeding to try the general morals of the parties. [Citation.] Courts have expressed this relationship requirement in various ways. The misconduct must relate directly to the transaction concerning which the complaint is made, i.e., it must pertain to the very subject matter involved and affect the equitable relations between the litigants. [Citation.] [T]here must be a direct relationship between the misconduct and the claimed injuries . . .  so that it would be inequitable to grant [the requested] relief.   [Citation.] The issue is not that the plaintiffs hands are dirty, but rather   that the manner of dirtying renders inequitable the assertion of such rights against the defendant.    [Citation.] The misconduct must   prejudicially affect . . . the rights of the person against whom the relief is sought so that it would be inequitable to grant such relief.   [Citation.] (Kendall-Jackson Winery, Ltd. v. Superior Court, supra, 76 Cal.App.4th 970, 979.) However, any evidence of a plaintiffs unclean hands in relation to the transaction before the court or which affects the equitable relations between the litigants in the matter before the court should be available to enable the court to effect a fair result in the litigation. (Id. at p. 985.) The question is whether the unclean conduct relates directly to the transaction concerning which the complaint is made, i.e., to the subject matter involved [citation], and not whether it is part of the basis upon which liability is being asserted. (Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP (2005) 133 Cal.App.4th 658, 681.)

Further, the doctrine of unclean hands does not automatically bar equitable relief where the parties are not equally at fault. (Warren v. Merrill (2006) 143 Cal.App.4th 96, 115.)  The defense of unclean hands does not apply in every instance where the plaintiff has committed some misconduct in connection with the matter in controversy, but applies only where it would be inequitable to grant the plaintiff any relief. [Citation.] (OFlaherty v. Belgum, supra, 115 Cal.App.4th 1044, 1099.)

We find no abuse of discretion in the trial courts determination that evidence of Everests prior disputed acquisition of partnership units does not have the requisite direct relationship to the propriety of the merger transaction. (Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061, 1086.) Past use of inside information by Everest if, indeed that occurred to set its offering price for partnership units had no bearing on the structure of the merger transaction proposed by appellants, the disclosures in the proxy statement, or the nature of the negotiations by appellants with Aspen. The manner in which Everest acquired its partnership units did not in any way impact or influence the merger transaction. Everests entirely separate, prior dealings with other limited partners did not affect the equitable relations between the litigants in the matter of the proposed merger before the court. It was not the type of conduct that was directly related to the merger transaction. (Kendall-Jackson Winery, Ltd. v. Superior Court, supra, 76 Cal.App.4th 970, 984; see also Unilogic, Inc. v. Burroughs Corp. (1992) 10 Cal.App.4th 612, 621.) We therefore conclude that the trial court properly excluded for lack of relevance the inside information evidence offered by appellants in support of the unclean hands defense. (People v. Stitely (2005) 35 Cal.4th 514, 549550; Warren v. Merrill, supra, 143 Cal.App.4th 96, 114115; Wilson v. S.L. Rey, Inc., supra, 17 Cal.App.4th 234, 244.) We also agree with the trial courts finding that appellants did not prove the affirmative defense of unclean hands on the part of Everest, even if we consider the admitted evidence of Everests dealings with Aspen and the statement to its lender in September of 2001 that the proposed merger transaction was not that bad.

II. The Admission and Exclusion of Expert Testimony.

We turn to appellants complaint that the trial court committed error in its rulings on the admissibility of expert testimony on the fairness of the merger transaction. The claim of error is two-pronged: First, that the testimony of Everests general counsel Christopher Davis, who was never qualified as an expert on the fairness of merger transactions and not identified as an expert witness on any issue, was improperly admitted; and second, that the court erred by inconsistently refusing to admit testimony offered by appellants from their designated expert, retired California Supreme Court Justice Cruz Reynoso, on essentially the same subject of the legal, equitable and ethical issues involving the conduct of Everest, and Aspen and defendants response thereto. While the proffered testimony of Justice Reynoso was excluded by the trial court as not appropriate, over appellants objection Davis was allowed to recite a litany of the bases along with underlying explanations supporting Everests claim that the merger transaction was unfair and essentially violated the general partners duty of good faith and fair dealing.[11]

We assess the trial courts rulings on the admissibility of expert opinion testimony with established rules in mind. Opinion testimony is generally inadmissible at trial. [Citations.] Two exceptions to this rule exist. First, a properly qualified expert, with special knowledge, skill, experience, training [or] education may provide an opinion. [Citation.] The subject matter of such an opinion is limited to a subject that is sufficiently beyond common experience that [it] would assist the trier of fact. [Citation.] Expert opinion is not admissible if it consists of inferences and conclusions which can be drawn as easily and intelligently by the trier of fact as by the witness. [Citation.] [Citation.] [T]he decisive consideration in determining the admissibility of expert opinion evidence is whether the subject of inquiry is one of such common knowledge that men of ordinary education could reach a conclusion as intelligently as the witness or whether, on the other hand, the matter is sufficiently beyond common experience that the opinion of an expert would assist the trier of fact. [Citation.] Thus, the purpose of expert testimony, to provide an opinion beyond common experience, dictates that the witness possess uncommon, specialized knowledge. (People v. Chapple (2006) 138 Cal.App.4th 540, 546547.)

Evidence Code section 805 provides that [t]estimony in the form of an opinion that is otherwise admissible is not objectionable because it embraces the ultimate issue to be decided by the trier of fact. It is neither unusual nor impermissible for an expert to testify to an ultimate issue, and such opinions are expressly contemplated by Evidence Code section 805. (People v.Doss (1992) 4 Cal.App.4th 1585, 1596.) However, the admissibility of opinion evidence that embraces an ultimate issue in a case does not bestow upon an expert carte blanche to express any opinion he or she wishes. (Summers v. A. L. Gilbert Co. (1999) 69 Cal.App.4th 1155, 1178.) There are limits to expert testimony, not the least of which is the prohibition against admission of an experts opinion on a question of law. (Ibid.) The rule admitting expert testimony on the ultimate issue in a case does not  authorize an expert to testify to legal conclusions in the guise of expert opinion. Such legal conclusions do not constitute substantial evidence. [Citation.] The manner in which the law should apply to particular facts is a legal question and is not subject to expert opinion. [Citation.] [Citation.]  (Id., at p. 1179, quoting Downer v. Bramet (1984) 152 Cal.App.3d 837, 841842.)

Further, expert opinion testimony, even if it does not embrace an issue of law, is not admissible if it invades the province of the jury to decide a case.  Undoubtedly there is a kind of statement by the witness which amounts to no more than an expression of his general belief as to how the case should be decided . . . . There is no necessity for this kind of evidence; to receive it would tend to suggest that the judge and jury may shift responsibility for decision to the witnesses; and in any event it is wholly without value to the trier of fact in reaching a decision.  [Citations.] (Piscitelli v. Friedenberg (2001) 87 Cal.App.4th 953, 972.) Notwithstanding Evidence Code section 805, an expert must not usurp the function of the jury . . . .  (Summers v. A. L. Gilbert Co., supra, 69 Cal.App.4th 1155, 1183, quoting People v. Humphrey (1996) 13 Cal.4th 1073, 1099.)

A bright line cannot be drawn to determine when opinions that encompass the ultimate fact in the case are or are not admissible. The issue has long been a subject of debate. [Citations.] In People v. Wilson (1944) 25 Cal.2d 341, 349 [153 P.2d 720] the Supreme Court said: There is no hard and fast rule that the expert cannot be asked a question that coincides with the ultimate issue in the case. We think the true rule is that admissibility depends on the nature of the issue and the circumstances of the case, there being a large element of judicial discretion involved. . . . Oftentimes an opinion may be received on a simple ultimate issue, even when it is the sole one, as for example where the issue is the value of an article, or the sanity of a person; because it cannot be further simplified and cannot be fully tried without hearing opinions from those in better position to form them than the jury can be placed in. [Citations.]  (People v. Killebrew (2002) 103 Cal.App.4th 644, 651652.)

In our review of the rulings, we apply an abuse of discretion standard. [Citation.] A trial court enjoys broad discretion in ruling on foundational matters on which expert testimony is to be based. [Citations.] However, the discretion to admit or exclude evidence is not unlimited. The discretion of a trial judge is not a whimsical, uncontrolled power, but a legal discretion, which is subject to the limitations of legal principles governing the subject of its action, and to reversal on appeal where no reasonable basis for the action is shown. [Citation.] [Citations.] (Korsak v. Atlas Hotels, Inc. (1992) 2 Cal.App.4th 1516, 15221523.)

Despite the fact that in the present case the court rather than a jury was the trier of fact, we conclude that the matters at issue in the present case were sufficiently beyond common experience that the opinions of experts would assist the trier of fact. Appellants proposed to offer expert testimony on how the duties of care, loyalty, good faith and fair dealing apply in this fairly complicated situation, and whether or not under these particular facts the Defendants breached any of those duties. The nature and scope of fiduciary duties between a general and limited partners in a complex merger transaction with an affiliated party, the associated disclosure obligations, appellants dealings with Aspen, and the ultimate fairness of the transaction in light of all of the provisions of the merger, required uncommon, specialized knowledge of experts in the field.

We also find that the proposed expert testimony of former Justice Reynoso was not inadmissible in its entirety. Certainly any opinion on the pure question of law offered by an expert witness that under the facts presented appellants breached fiduciary duties to the limited partners was beyond the permissible scope of expert testimony. (See Piscitelli v. Friedenberg, supra, 87 Cal.App.4th 953, 973974; Howard Jarvis Taxpayers Assn. v. City of Riverside (1999) 73 Cal.App.4th 679, 689; Cooper Companies v. Transcontinental Ins. Co. (1995) 31 Cal.App.4th 1094, 1100; Klein v. Oakland Raiders, Ltd. (1989) 211 Cal.App.3d 67, 74; Williams v. Coombs (1986) 179 Cal.App.3d 626, 638, disapproved on other grounds in Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 885; Downer v. Bramet, supra, 152 Cal.App.3d 837, 841842.) The dispositive issue of the nature of the fiduciary duty owed by appellants to the limited partners and any breach of that duty was one of law to be decided by the trial court. (See Knight v. Jewett (1992) 3 Cal.4th 296, 313; Pittelman v. Pearce (1992) 6 Cal.App.4th 1436, 1441.)  [T]he calling of lawyers as expert witnesses to give opinions as to the application of the law to particular facts  usurps the function of the trier of facts,  and results in no more than a modern day trial by oath in which the side producing the greater number of lawyers able to opine in their favor wins. [Citation.] [Citation.] (Summers v. A. L. Gilbert Co., supra, 69 Cal.App.4th 1155, 1179.) The trial court thus properly excluded any evidence from the defense that offered an opinion on the precise application of the law to particular facts in the case: that is, the precise fiduciary duties associated with the merger transaction, and whether those duties were breached. (See People v. Frederick (2006) 142 Cal.App.4th 400, 412; Piscitelli v. Friedenberg, supra, 87 Cal.App.4th 953, 974; Summers v. A. L. Gilbert Co., supra, at pp. 11791180.)

We perceive of no reason, however, for the trial court to preclude presentation of expert testimony on the customary practices, ethical obligations, and the nature of disclosure necessary to accomplish fairness in an esoteric and specialized area of the law that did not encompass any legal conclusions or opinions on how the ultimate issue of breach of fiduciary duty should be decided. (Kahn v. East Side Union High School Dist. (2003) 31 Cal.4th 990, 10171018; People v. Frederick, supra, 142 Cal.App.4th 400, 412; Huffman v. City of Poway (2000) 84 Cal.App.4th 975, 995, fn. 23; American Golf Corp. v. Superior Court (2000) 79 Cal.App.4th 30, 37; Staten v. Superior Court (1996) 45 Cal.App.4th 1628, 16351636.) Expert testimony is admissible to establish the elements of a cause of action for breach of fiduciary duty where, as here, the conduct of the defendant is a matter beyond common knowledge. (See Kotla v. Regents of University of California (2004) 115 Cal.App.4th 283, 294; Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 10861087; David Welch Co. v. Erskine & Tulley (1988) 203 Cal.App.3d 884, 892893; Day v. Rosenthal (1985) 170 Cal.App.3d 1125, 11461147.) Thus, it would have been proper for the trial court to consider the opinions of experts to the extent they described factual principles related to the fairness of the proposed merger transaction and the necessary disclosures, but not to the extent that they contained opinions as to whether PDC committed a breach of duty. (Kahn v. East Side Union High School Dist., supra, at p. 1018.) Any part of the expert opinion testimony that avoided conclusions as to the precise fiduciary duties owed by appellants and whether a breach occurred was admissible.

In its evidentiary ruling, however, the trial court did not make any distinction, but instead excluded the entirety of the proffered expert testimony. We recognize that appellants offer of proof as to former Justice Reynosos testimony was quite vague.[12] Only the expected general substance of the testimony was stated by PDC: the legal, equitable and ethical issues related to the conduct of the parties. Still, at least part of the contemplated testimony of former Justice Reynoso on the nature of fiduciary obligations associated with the merger transaction was admissible. We thus conclude that by expansively and categorically curtailing appellants right to produce expert testimony, the trial court abused its discretion, particularly where respondent was permitted to offer testimony from Davis that touched upon the same subject while delineating the grounds for Everests claims of breach of fiduciary duty.

We turn to the issue of prejudice. Appellants have the burden of affirmatively demonstrating prejudice, that is, that the errors have resulted in a miscarriage of justice. (Cal. Const., art. VI, 13; Code Civ. Proc., 475;[13]Cucinella v. Weston Biscuit Co. (1954) 42 Cal.2d 71, 82; Paterno v. State of California (1999) 74 Cal.App.4th 68, 105.) [E]rrors in civil trials require that we examine each individual case to determine whether prejudice actually occurred in light of the entire record.  (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 801802, quoting Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 580.) The governing standard is whether it is reasonably probable that a result more favorable to appellants would have been reached in the absence of the error. (Seamans Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 770, overruled on another ground in Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 8788; Kotla v. Regents of University of California, supra, 115 Cal.App.4th 283, 294.)

We conclude that under the circumstances presented the error was not prejudicial. The court did not admit the testimony of Davis to establish the governing legal standards or breach of fiduciary duties in the case, but rather only to recite Everests claims that the transaction was unfair. We must assume the court followed its own directive and considered the testimony for only that limited purpose. (See People v. Jablonski (2006) 37 Cal.4th 774, 834; People v. Maury (2003) 30 Cal.4th 342, 439440.) The permissible scope of former Justice Reynosos testimony was also quite limited. As we have observed, he would have been only authorized to touch upon the fairness concerns of the proposed merger transaction; he would not have been able to give any opinions on the precise nature of the fiduciary duties imposed upon appellants or whether those duties had been breached. A multitude of additional evidence on essentially the same subject was presented and argued by the parties. Thus, the admitted testimony of Davis and the excluded testimony of former Justice Reynoso were cumulative of other evidence considered by the court. As we read the record, even apart from the testimony of Davis the trial court had before it extensive evidence upon which to base an assessment of the fairness of the transaction and the fiduciary duties imposed upon appellants. We find that the evidentiary rulings did not render the proceedings unfair, nor would a more favorable verdict for appellants have been reached if the erroneously excluded testimony had been admitted. Therefore, the error was harmless. (People v. Romero (1999) 69 Cal.App.4th 846, 856857; People v. Vu (1991) 227 Cal.App.3d 810, 815.)

III. The Evidence to Support the Finding of Breach of Fiduciary Duties.

Appellants present a multi-faceted challenge to the trial courts ultimate finding that a breach of fiduciary duties occurred. Appellants complain that the trial court followed erroneous standards in finding that they breached fiduciary duties to the limited partners. They also argue that the proposed merger transaction was fair, and the proxy statement was complete and accurate. Appellants position is that approval of the merger by the limited partners following disclosure in the proxy statement insulates the general partner from liability for an alleged breach of duty of loyalty.

A. The Duty Imposed on General Partners in a Transaction with Limited Partners.

Appellants first complaint is that the trial court mistakenly imposed upon them the same duties as those of a trustee in the proposed merger transaction with the limited partners, including Everest. The gist of appellants contention is that under current California law found in the Revised Uniform Partnership Act or RUPA, specifically Corporations Code section 16404, general partners, unlike trustees, do not violate fiduciary duties to limited partners merely by furthering their own interests in a transaction. Rather, appellants argue, a general partner is not held to the same standards as a trustee, and may profit from a transaction with limited partners as long as there has been a full and complete disclosure of the material facts and approval is obtained. (Skone v. Quanco Farms (1968) 261 Cal.App.2d 237, 241.) We conduct an independent, de novo review of this issue of law concerning the scope of the fiduciary duties imposed on partners. (Enea v. Superior Court (2005) 132 Cal.App.4th 1559, 1563.)

An examination of the statement of decision does not indicate to us that the trial court imposed upon appellants the fiduciary duties they object to in this appeal. The court found that Prometheus, as the general partner, owed to each limited partner a fiduciary duty, including the duty of loyalty. This duty required Prometheus to act with honesty and loyalty in the best interest of the Partnership and the limited partners. The court added that Prometheus, as part of its duty to treat the limited partners fairly, was required to disclose not only that there was a conflict with the acquiring entity, but also all facts relevant to the transaction so the limited partners could make an informed decision on whether to approve the Merger. The court then enumerated the numerous breaches of fiduciary duty by appellants associated with the merger transaction, and found that the materially inaccurate, and incomplete proxy statement deceived the limited partners and vitiated the approval of the unfair transaction. The court explained: A general partner must act as a fiduciary and cannot proceed with a transaction that is unfair to the limited partners, even if the limited partners vote to approve the transaction. Thus, the court did not find that appellants breached their fiduciary duties to Everest by merely profiting from the merger transaction, but rather that the absence of full and complete disclosure of the material facts to the limited partners tainted the approval of the merger.

The standards followed by the trial court are consistent with California law.[14] Upon forming a partnership, the partners obligate themselves to share risks and benefits and to carry out the enterprise with the highest good faith toward one anotherin short, with the loyalty and care of a fiduciary. Partnership is a fiduciary relationship, and partners are held to the standards and duties of a trustee in their dealings with each other.   [I]n all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind. [Citations.]   [Citations.] Or to put the point more succinctly, Partnership is a fiduciary relationship, and partners may not take advantages for themselves at the expense of the partnership. [Citations.] (Enea v. Superior Court, supra, 132 Cal.App.4th 1559, 1564, italics added; see also Page v. Page (1961) 55 Cal.2d 192, 197; Jones v. Wells Fargo Bank (2003) 112 Cal.App.4th 1527, 1540; BT-I v. Equitable Life Assurance Society (1999) 75 Cal.App.4th 1406, 1410.)

A general partner of a limited partnership is subject to the same restrictions, and has the same liabilities to the partnership and to the other partners as in a general partnership. (Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 424.) In a limited partnership the general partner manages and controls the partnership business. [Citation.] In exercising his management functions the general partner comes under a fiduciary duty of good faith and fair dealing toward other members of the partnership. (Wyler v. Feuer (1978) 85 Cal.App.3d 392, 402.)

 Moreover, this duty extends to all aspects of the relationship and all transactions between the partners.  Each [partner] occupie[s] the position of a trustee to the other with regard to all the partnership transactions, including the transactions contemplated by the firm and constituting the object or purpose for which the partnership was formed.  [Citation.] [Citations.]   A partner has no right to deal with partnership property other than for the sole benefit of the partnership [citation].   [Citations.] (Bardis v. Oates (2004) 119 Cal.App.4th 1, 12.)  There is an obvious and essential unfairness in one partners attempted exploitation of a partnership opportunity for his own personal benefit and to the resulting detriment of his copartners. [Citation.] Thus, a partner who seeks a business advantage over another partner bears the burden of showing complete good faith and fairness to the other (Everest Investors 8 v. McNeil Partners, supra, 114 Cal.App.4th 411, 424.)

The partners fiduciary duties to each other, however are not unlimited. (Crouse v. Brobeck, Phleger & Harrison (1998) 67 Cal.App.4th 1509, 1551.) [T]here is no breach of a fiduciary duty if there has been a full and complete disclosure, if the partner who deals with partnership property first discloses all of the facts surrounding the transaction to the other partners and secures their approval and consent [citation]. (Skone v. Quanco Farms, supra, 261 Cal.App.2d 237, 241.)

Corporations Code section 16404 (section 16404), which codifies the fiduciary duties of a partner under California law and provides   a comprehensive, but not exhaustive, definition of partnership fiduciary duties,   specifies that,  A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partners conduct furthers the partners own interest. The apparent purpose of this provision, which is drawn verbatim from RUPA section 404(e), is to excuse partners from accounting for incidental benefits obtained in the course of partnership activities without detriment to the partnership. (Enea v. Superior Court, supra, 132 Cal.App.4th 1559, 1564, 1565, 1566, italics omitted.)[15] The statute does not authorize the kind of conduct that deprives the partnership of assets or results in exclusive benefit realized by the general partner at partnership expense. (Id., at p. 1566.) Under section 16404,   A partner owes at least two duties to other partners and the partnership: a duty of loyalty and a duty of care. In addition, an obligation of good faith and fair dealing is imposed on partners. . . . [Citation.] (Id., at p. 1565, italics omitted.)

While we agree with appellants that the duties of a trustee and a partner may not in all respects and in all transactions be identical, and a general partner is not in all instances precluded from dealing with the partnership, nothing in the record demonstrates that the trial court applied the wrong legal standard to resolve the present case. The trial court did not find breach of fiduciary duties based on self-dealing or accrual of personal benefit to appellants alone. The court focused upon the lack of complete disclosure and fairness to the limited partners to find that despite their approval of the proposed merger transaction, a violation of appellants fiduciary duties occurred.

B. The Approval of the Proposed Merger by the Limited Partners as a Defense.

Appellants make the related argument that PDC, as general partner, fulfilled its fiduciary duty by obtaining approval from the unaffiliated limited partners. They maintain that because a majority of unaffiliated limited partners approved the merger transaction, under California law, PDC did not breach any fiduciary duty to the limited partners, and the judgment must be reversed. Appellants also make the converse argument that in light of the approval by the limited partners, the court was not entitled to undertake an inquiry into whether the proposed transaction was fair. This follows from the fact that there is no breach of fiduciary duty if the requisite partner approval is obtained.

We do not agree with appellants characterization of the duties imposed on partners by California law. Appellants rely on the decision in Skone v. Quanco Farms, supra, 261 Cal.App.2d 237 (Skone), to claim that approval of a proposed transaction by limited partners satisfies the general partners fiduciary duties, but Skone is not authority for that proposition. In Skone, appellant claimed that respondent, who was vested with exclusive responsibility to undertake marketing for a partnership, violated his fiduciary duties by dealing with the joint-venture property for his own benefit at appellants expense. (Id., at p. 240.) The court stated that, The fiduciary duty between partners and joint adventurers is a rule of ethics and fairness and is essentially similar to the duty owed by an agent to his principal or by a trustee to his cestui que trust. . . . In fact, it would be incongruous to hold that a partner who consented to a partnership transaction, with full knowledge of all of the facts, may later complain and seek damages against the other partner simply because he benefited by the transaction. (Id., at p. 241, second italics added.) Although respondent was in an advantageous position when he committed the joint-venture potatoes to his potato-processing contracts without assigning these contracts to the joint venture, the court nevertheless concluded that there was substantial evidence for the court to find that respondent did not breach his fiduciary duty to appellant. There was substantial evidence for the court to find that respondent fully and fairly disclosed his plans to appellants officers, . . . and secured their approval and consent. (Ibid., italics added.)

The crux of the holding in Skone is not that mere approval and consent of limited partners renders a self-dealing transaction fair and valid. A prerequisite to valid approval, the court emphasized, is full and fair disclosure of all material facts. (Skone, supra, 261 Cal.App.2d 237, 240241.) Even the sligh