Greenberg v. Arnold

Filed 2/27/07 Greenberg v. Arnold CA2/6

Received for posting 3/1/07

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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

SECOND APPELLATE DISTRICT

DIVISION SIX

Plaintiff, Robert S. Greenberg, and defendant, Oscar O. Arnold, II, were officers and shareholders in a close corporation. After a court trial, the court found that Arnold had breached his fiduciary duties and had committed fraud. The court entered judgment in favor of Greenberg in the amount of $317,919 compensatory damages and $50,000 punitive damages. Arnold contends on appeal the judgment is not supported by substantial evidence, and that the trial court abused its discretion in excluding two witnesses. We affirm.

FACTS

In the Fall of 1997, Oscar Arnold, II, Robert Greenberg, and Jo-Ann Daugherty agreed to buy trust deeds on earthquake-damaged condominiums in Granada Hills. Greenberg and Daugherty were to provide the cash for the purchase of the trust deeds, and would lend cash to the project at nine percent interest to cover operating expenses. Daugherty dropped out of the project, leaving Greenberg and Arnold.

In October of 1997, the parties formed Cannonball Acquisitions, Inc. (hereafter Cannonball, Inc.) Each had a 50 percent interest. Arnold requested a salary of $5,000 per month, but the parties never agreed to pay him a salary.

Arnold provided the money and Cannonball, Inc. purchased trust deeds on 10 units of the Kingsbury Court condominium project. All the trust deeds were in default. The plan was to allow the condominium owners the opportunity to pay off the trust deeds by refinancing. If an owner chose not to refinance, Cannonball, Inc. would obtain title to the condominium either through foreclosure or by accepting a deed in lieu of foreclosure. As an inducement to providing a deed in lieu of foreclosure, Cannonball, Inc. was willing to pay the assessment arrears each owner owed to the condominium's homeowners' association, typically about $5,000. Once the earthquake damage was repaired, Cannonball, Inc. could sell the units on which it took title. When Greenberg was reimbursed for the funds he advanced, the profits would be divided "50-50."

The earthquake damage repairs were completed in March of 1999. Instead of following the parties' business plan, however, Arnold took corporate assets for his own use as follows:

Arnold secretly persuaded the owner of unit 201 to transfer ownership to Arnold personally. Arnold then personally borrowed $96,750, secured by the unit. Arnold rented the unit and kept the rent for himself. Eventually, the unit went into foreclosure because Arnold failed to make payments on his loan.

Arnold induced the owners of units 103, 105, 111 and 214 to deed the units to Arnold personally. Arnold personally collected all the rents. Arnold personally collected all trust deed payments on unit 206.

Cannonball, Inc. initiated foreclosure proceedings on unit 110. Arnold stopped the foreclosure proceedings and offered to reconvey the trust deed to the unit's owner upon payment of $8,000 to Arnold personally.

Arnold sold the trust deed encumbering unit 209 and personally kept the proceeds.

Arnold persuaded the owners of unit 210 to deed the unit to him personally. Arnold then personally borrowed more than $95,000 secured by the unit. Arnold failed to make payments and allowed the unit into foreclosure.

Greenberg did not authorize any of the above transactions, and did not know about them until after they occurred.

DISCUSSION

I

Arnold contends there is no substantial evidence to support the judgment.

"In viewing the evidence, we look only to the evidence supporting the prevailing party. [Citation.] We discard evidence unfavorable to the prevailing party as not having sufficient verity to be accepted by the trier of fact. [Citation.] Where the trial court or jury has drawn reasonable inferences from the evidence, we have no power to draw different inferences, even though different inferences may also be reasonable. [Citation.] The trier of fact is not required to believe even uncontradicted testimony. [Citation.]" (Rodney F. v. Karen M. (1998) 61 Cal.App.4th 233, 241.)

Officers and directors of a corporation owe a fiduciary duty to the corporation and its shareholders. (9 Witkin, Summary of Cal. Law (10th ed. 2005) Corporations,  90, p. 863 & 107, p. 885; Professional Hockey Corp. v. World Hockey Assn. (1983) 143 Cal.App.3d 410, 414.) The fiduciary duty requires officers and directors not to act in their own self-interest when the interest of the corporation will be damaged. (Professional Hockey Corp., supra, at p. 414.)

Here there is more than sufficient evidence to support the trial court's finding that Arnold breached his fiduciary duty. The evidence shows multiple incidents where Arnold had corporate assets transferred to himself personally, and used corporate assets to borrow money and obtain rental payments for his personal account. The court was not required to find credible Arnold's explanation that he was acting to save the corporation from potential liability when he had corporate assets transferred to his name. Nor was the court required to find credible Arnold's explanation that he was reimbursing himself for a promised $5,000 per month salary. The court expressly found there was no promise to pay Arnold a salary. None of the documents required the payment of a salary. That some of the parties' agreements may have been in parol, does not require the court to find a parol agreement to pay a salary.

Nor was the court required to find Arnold's acts were covered by the business judgment rule. Under this rule, a director is not liable for a mistake in business judgment which is made in good faith, in what the director believes is in the best interest of the corporation, and where no conflict of interest exists. (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263.) The court could reasonably find Arnold's actions were not made in good faith, were not made in the belief his actions were in the best interest of the corporation, and were made in the face of a clear conflict of interest.

The evidence also supports the award of punitive damages. Punitive damages are appropriate for a breach of fiduciary duty where the breach is accompanied by malice, fraud or oppression. (See Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1287.) The defendant's acts must be reprehensible. (Ibid.) Punitive damages are appropriate where the defendant's conduct rises to levels of extreme indifference to plaintiff's rights, a level which decent citizens should not have to tolerate. (Ibid.)

Here Arnold's conduct was intentional and showed an extreme indifference to the rights of Greenberg and the corporation. It is the sort of conduct that decent citizens should not have to tolerate.

We need not decide whether Arnold's actions come within the technical definition of fraud. It does not matter whether Arnold's actions are characterized as breach of fiduciary duty, fraud, or simply theft. The evidence is more than sufficient to support the judgment.

II

Arnold contends the award of damages is based on hearsay and is speculative.

Greenberg claims that detailed schedules, declarations and summaries relating to damages were submitted to the trial court after the initial phase of the trial. Arnold concedes there was "apparently something" submitted by Greenberg, but it is not part of the record on appeal.

It is Arnold's burden as appellant to affirmatively show error by producing an adequate record on appeal. (9 Witkin, Cal. Procedure (4th ed. 1997) Appeal,  518, p. 562.) In the absence of an adequate record affirmatively showing error, the presumption that the judgment is correct applies. (Id. at  349, p. 394.) Thus, here we must presume the award of damages is supported by the evidence.

In an apparent attempt to make up for the lack of an adequate record, Arnold made a motion, which he entitles a motion to augment the record on appeal. His motion seeks to add to the record certified copies of grant deeds for three condominiums sold by Cannonball, Inc., and signed by Greenberg. He apparently believes these documents reflect on Greenberg's veracity and will show some error in the trial court's award of damages. Of course, without a complete record we must presume there was no error. The addition of the documents does not complete the record.

Arnold does not claim the grant deeds were ever part of the record in superior court. His attorney claims to have discovered them while preparing the briefs for this appeal. Arnold cites California Rules of Court, former rule 12(a) (now renumbered rule 8.155, and amended, eff. Jan. 1, 2007), as authority for his motion. But subsection (a) (1) (A) of that rule allows augmentation of the record with "any document filed or lodged in the case in superior court . . . ." The documents were not lodged or filed in superior court. The motion is denied.

III

Arnold contends the trial court abused its discretion in excluding two of his witnesses.

The trial court excluded the testimony of two defense witnesses, Alice McCaskill and Bruce Vanderveer. The exclusion was based on Arnold's failure to disclose the witnesses in his response to interrogatories, and his failure to name them on his witness list.

In Thoren v. Johnston & Washer (1972) 29 Cal.App.3d 270, 274, the court upheld an order barring the testimony of a witness whose name was deliberately excluded from an answer to an interrogatory seeking the names of witnesses. Two subsequent cases, Biles v. Exxon Mobil Corp. (2004) 124 Cal.App.4th 1315, 1325, and R & B Auto Center, Inc. v. Farmers Group, Inc. (2006) 140 Cal.App.4th 327, 357, determined that the trial court abused its discretion in ordering the exclusion of witnesses "'. . . based on the mere failure to supplement or amend an interrogatory answer that was truthful when originally served.'" Arnold relies on Biles and R & B Auto Center. He claims his omissions were not willful.

Here the trial court stated it was not finding the omission deliberate. But, unlike Biles and R & B Auto Center, Arnold did more than omit the witnesses' names from his answers to interrogatories, he also omitted them from his witness list. It was not until the parties were in the middle of trial that Greenberg learned of the witnesses. Under the circumstances, exclusion was the most appropriate remedy. Arnold cites Biles for the proposition that Greenberg could have been protected by a continuance. (Biles v. Exxon Mobil Corp., supra, 124 Cal.App.4th at p. 1325, fn. 6.) But in Biles, the witness's statement was excluded in a motion for summary judgment. Here the parties were in the middle of trial. A continuance would not have been appropriate. In fact, Arnold points to no suggestion to the trial court that it employ any remedy as an alternative to exclusion.

Arnold complains that Greenberg showed no prejudice. Arnold cites no authority that a showing of prejudice is required. The prejudice is inherent in the failure to disclose the witnesses' names. It deprived Greenberg of the opportunity to conduct discovery. The trial court did not abuse its discretion in excluding the witnesses.

Moreover, even if the trial court had erred in excluding the witnesses, Arnold must show on appeal that the error was prejudicial. Arnold has the burden of showing a reasonable probability that he would have obtained a more favorable judgment in the absence of the error. (See 9 Witkin, Cal. Procedure (4th ed. 1997) Appeal,  438, p. 484.)

Arnold made no formal offer of proof as to McCaskill's expected testimony. On appeal, Arnold simply states that McCaskill would testify that she was secretary to a board member of the condominium's homeowners association, "and would testify as to communications with Respondent Greenberg, a critical issue in this case." Omitted is what the communications were and how they might be relevant. That is an insufficient showing of prejudice.

Arnold offered to prove Vanderveer would testify he had an option to purchase one of the condominium units, but a lis pendens recorded by Greenberg prevented him from obtaining a loan. Later, however, Arnold's attorney admitted Vanderveer could not testify of his personal knowledge that the lis pendens prevented him from obtaining a loan. Arnold has failed even to show how Vanderveer's testimony, if relevant, could be admitted without a foundation of personal knowledge. Arnold has failed to show prejudice.

The judgment is affirmed. Costs are awarded to respondent.

NOT TO BE PUBLISHED.

GILBERT, P.J.

We concur:

COFFEE, J.

PERREN, J.

Kent M. Kellegrew, Judge

Superior Court County of Ventura

______________________________

Paul L. Giannini for Defendant and Appellant.

Ronald Lewis Gallant for Plaintiff and Respondent.

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