Van Loon v. Winchester-Wesselink

Filed 10/18/06 Van Loon v. Winchester-Wesselink CA4/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION TWO

APPEAL from the Superior Court of Riverside County. Thomas H. Cahraman, Judge. Affirmed.

Dabney B. Finch, Attorney for Plaintiffs and Appellants.

Robert H. Reeder, Attorney for Defendants and Respondents.

Richard Van Loon and Diane Van Loon (Appellants) appeal from the trial court’s order denying their request for a preliminary injunction. They argue that “the only issue this Court need consider . . . is whether the trial court misinterpreted the [operating] [a]greement [for Winchester Cheese Company], upon which it based its ruling that [Appellants] would not prevail at trial on the merits.”

PROCEDURAL BACKGROUND AND FACTS

In the mid-1990s, Jules Wesselink, Sr. (Jules) formed Winchester-Wesselink, LLC, a California limited liability company doing business as Winchester Cheese Company (the Company). The Company is “a family owned business primarily engaged in the making and marketing of hand crafted, farm style, gourmet Gouda Cheese.” There are 12 members in the Company. They include Appellants (1 &2), Leo Wesselink (3), Betty Wesselink^[1] (4), David Thornton^[2] (5) and Pauline Thornton (6) (these four collectively referred to as Defendants), Cornelia Wesselink (7), Valarie Thomas (8), David Thomas (9), Joseph E. Legler (10), Maria Legler (11), and Defendants’ father/father-in-law, Jules (12).

In 2001, the Company’s operating agreement (the Agreement) was amended and restated in its entirety. Shortly thereafter, Appellants owned 8.74 percent of the membership interest of the Company. Jules and Cornelia Wesselink owned 28.84 percent, and Defendants owned 51.93 percent.^[3] From 2003 through 2005, transactions occurred among the members of the Company that changed the ownership interest of Appellants, Defendants, and Jules. Generally, such transactions increased Appellants’ and Defendants’ interests and decreased Jules’s interest. Defendants’ interest has at all times relevant hereunder exceeded 50 percent of all of the Company’s membership interests.

In December 2004, following a verbal announcement, Jules transferred to Defendants a 2.3 percent membership interest in the Company. Appellants knew about the intended transfer, but waited until after the transaction to complain.^[4]

On March 22, 2005, Appellants initiated this action wherein they alleged causes of action for breach of contract, declaratory relief and injunctive relief. Appellants complained that they had not received written notice of Jules’s intent to transfer part of his membership interest at least 30 days in advance of the proposed transfer. They further complained that they had not been given an option of an additional 30 days to purchase the interest transferred after Defendants’ right expired. According to Appellants, Defendants were in violation of Article 6 of the Agreement because it did not authorize the transfer of any membership interest unless notice and the right of first refusal were given to the Company and other members of the Company. Appellants further contend that as a result of Defendants’ violation of the Agreement, they “have lost all rights except economic rights.”

On May 4, 2005, Appellants moved for a temporary restraining order (TRO) and a preliminary injunction. The trial court granted the TRO and ordered Defendants not to vote the 2.32 percent membership interest transferred to them in December 2004.

Subsequently, on June 10, 2005, the trial court vacated the TRO and denied Appellants’ request for a preliminary injunction. In support of its ruling, the court stated: “The court finds that no sufficient showing has been made that an injunction is necessary in order to prevent waste, or great or irreparable injury. The court finds that no sufficient showing has been made that a party is doing or threatening an act in violation of the rights of another party and tending to render the judgment ineffectual. The court finds that the moving party is not likely to prevail on the merits. Among other reasons, the court finds that the operating [A]greement for the [Company] is most accurately read as requiring the thirty-day right of first refusal to be offered only in connection with a proposed sale of a membership interest to a non-member of the [Company].” (Bold and italics added.) In reaching its decision, the trial court found that Jules’s son-in-law and daughter-in-law were affiliates of Jules. Because the right of first refusal only applies upon the transfer of a membership interest to non-affiliates, the court concluded that there was no violation of the Agreement. Appellants disagree and appeal.

STANDARD OF REVIEW

“At this initial stage in the proceeding, the scope of our inquiry is narrow. We review an order granting a preliminary injunction under an abuse of discretion standard. [Citations.] Review is confined, in other words, to a consideration whether the trial court abused its discretion in ‘”evaluat[ing] two interrelated factors when deciding whether or not to issue a preliminary injunction. The first is the likelihood that the plaintiff will prevail on the merits at trial. The second is the interim harm that the plaintiff is likely to sustain if the injunction were denied as compared to the harm the defendant is likely to suffer if the preliminary injunction were issued.”’ [Citation.] And although we will not ordinarily disturb the trial court’s ruling absent a showing of abuse, an order granting or denying interlocutory relief reflects nothing more than the superior court’s evaluation of the controversy on the record before it at the time of its ruling; it is not an adjudication of the ultimate merits of the dispute. [Citations.]” (People ex rel. Gallo v. Acuna (1997) 14 Cal.4th 1090, 1109.)

Notwithstanding the above, Appellants contend that because the facts were undisputed, the sole issue on appeal is the interpretation of the Agreement. Appellants argue that the evidence before the trial court on the application for preliminary injunction was essentially undisputed. Thus, they submit that our review should focus on whether or not the trial court properly interpreted the word “affiliate“ as used in the Agreement. (cf. Hart v. Cult Awareness Network (1993) 13 Cal.App.4th 777, 785.)

INTERPRETATION OF THE AGREEMENT

Appellants challenge the trial court’s order denying their request for a preliminary injunction. More specifically, they contend that the court’s decision was based on “a strained and incorrect definition of ‘affiliate.’” According to Appellants, the trial court erred in relying on the Internal Revenue Code’s definition of affiliate which includes children. Appellants argue that the “definition of ‘affiliate’ in the Corporations Code governs LLCs, not that in the Internal Revenue Code.” Moreover, they note, “the Agreement itself defines ‘affiliates’ and the definition clarifies that the term does not include the adult children of members.” Finally, they contend that “the Agreement must logically be read not as giving an exception to the notice requirements where the offeree is an affiliate, but rather that the offer does not qualify as ‘bona fide’ if the offeree is an affiliate of the selling member.” We reject Appellants’ claims and affirm.

Article 6 of the Agreement governs the transfer and assignment of interests in the Company. Section 6.1, in relevant part, provides: “[Except for intervivos gift or by testamentary transfer to any spouse, parent, sibling, in-law, child, or grandchild of the member,] no member shall transfer, assign, or convey the Member’s Membership Interest, or portion thereof, without offering the Company, and then the Remaining Members the right of first refusal to purchase the Membership Interest, or portion thereof to be transferred, assigned, or conveyed. In such case, the provisions of 6.3 and 7.5 shall apply.”^[5] (Bold and italics added.)

Section 6.3 outlines the procedures in offering the first right of refusal: “If a Member wishes to transfer any or all of the Member’s Membership Interest in the Company pursuant to a bona fide offer (as defined below), the Member shall give a written notice (‘Option Notice’) to the Company and all other Members at least thirty (30) days in advance of the proposed sale or transfer, indicating the terms of the bona fide offer and the identity of the offeror. The Company and other Members shall have the option to purchase the Membership Interest proposed to be transferred at the price and on the terms provided in the Option Notice. . . . For purposes of this Agreement, ‘bona fide offer’ means an offering in writing setting forth all relevant terms and conditions of purchase from an offeror who is ready, willing, and able to consummate the purchase and who is not an affiliate of the selling Member. For thirty (30) days after the Option Notice is given, the Company shall have the first right to purchase the Membership Interest offered, upon the price and terms of payment stated in the Option Notice. If the Company does not exercise the right to purchase any or all of the Membership Interest, then, with respect to the portion of the Membership Interest that the Company does not elect to purchase, that right shall be given to other Members for an additional 30-day period, beginning on the day that the Company’s right to purchase expires. . . .”^[6] (Bold and italics added.)

Based on the above, the trial court found that “the [Agreement] . . . is most accurately read as requiring the thirty-day right of first refusal to be offered only in connection with a proposed sale of a membership interest to a non-member of the [Company].” We agree. To begin with, we note that the Company is a family-owned business. With the exception of two members, the rest are family members. The language in the Agreement clearly demonstrates the intent of the members to restrict the ability of any one member from transferring an interest in the Company to a nonmember, or to someone who is not affiliated with a member. However, there is no similar restriction on the transfer of an interest between members or affiliates of members. According to the terms of the Agreement, the members include Jules, Appellants, and Defendants.

Section 6.3 only applies in the event that a non-affiliate has made an offer to purchase a membership interest, i.e., “‘[B]ona fide offer’ means an offering in writing setting forth all relevant terms and conditions of purchasing from an offeror who is ready, willing, and able to consummate the purchase and who is not an affiliate of the selling Member.” (Bold and italics added.) As Appellants point out, section 3.2 defines affiliate: “Except as specified in this Agreement . . . no Member or person or entity controlled by, controlling or under common control with the Member (each such person or entity is defined as an ‘Affiliate’), is entitled to remuneration for services rendered or goods provided to the Company.” (Bold and italics added.) By this very definition, i.e., person controlled by, controlling, or under common control with the member, an affiliate contemplates members’ spouses, or more specifically, Jules’s son-in-law or daughter-in-law. Nonetheless, Webster’s defines an affiliated person as someone who is brought or received “into close connection.” (Webster’s 3d New Internat. Dict. (1993) p. 35.) Clearly, an affiliate includes a person who is the spouse of a member, or a child-in-law of a member.

As Defendants point out, and the trial court acknowledged, children are considered the affiliates of a person under Section 318 of the Internal Revenue Code, which is entitled “Constructive ownership of stock.”^[7] Although Appellants argue that the definition of “affiliate” as used in Corporations Code section 150 applies, we disagree. The Corporations Code definition provides: “A corporation is an ‘affiliate’ of, or a corporation is ‘affiliated’ with, another specified corporation if it directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the other specified corporation.” (Corp. Code, § 150.) This section defines when a corporation, not a person, is considered an affiliate. As such, we find the definition inapplicable.

Finally, we reject Appellants claim that “the Agreement must logically be read not as giving an exception to the notice requirements where the offeree is an affiliate, but rather that the offer does not qualify as ‘bona fide’ if the offeree is an affiliate of the selling member.” The language in the Agreement is clear; the notice requirements apply only when the offeror (the person seeking to purchase an interest) is not an affiliate.

Based on the above, we conclude that an affiliate is defined as including Jules’s children and his children-in-law. Accordingly, we find no error in the trial court’s decision denying Appellants’ request for a preliminary injunction.

DISPOSITION

The order denying the preliminary injunction is affirmed. Defendants are awarded their costs on appeal.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

HOLLENHORST

J.

We concur:

RAMIREZ

P.J.

MILLER

J.

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^[1] Betty is Jules’s daughter-in-law.

^[2] David is Jules’s son-in-law.

^[3] The membership interests were as follows: Jules and Cornelia Wesselink - 28.84 percent; Pauline and David Thornton - 28.15 percent; Leo and Betty Wesselink - 23.78 percent; Valarie and David Thomas - 1.75 percent; Joseph and Maria Legler - 8.74 percent; and Appellants - 8.74 percent.

^[4] According to the record before this court, Appellants disagree with Defendants regarding the future use of the land owned by the Company.

^[5] The bracketed language was added after the Agreement had been initially prepared.

^[6] Section 6.4 explains the rights of the transferee who receives a transfer in violation of the Agreement: “Upon a transfer in violation of this Article 6, the transferee shall have no right to vote or participate in the management of the Company or to exercise any rights of a Member. Such transferee shall only be entitled to receive the share of the Company’s Net Profits, Net Losses and distributions of the Company’s assets to which the transfer would otherwise be entitled.”

^[7] “For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable-- . . . Members of family.-- . . . An individual shall be considered as owning the stock owned, directly or indirectly, by or for-- . . . his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and . . . his children, grandchildren, and parents.” (26 U.S.C.A § 318, sub. (a), bold and italics added.)