Pastor v. Kennedy CA4/1

• Court: California Court of Appeal
• Decided: March 4, 2013
• Docket: D059462
• Status: Unpublished

Opinion

Filed 3/4/13 Pastor v. Kennedy CA4/1 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

ROBERT PASTOR, D059462

Plaintiff and Appellant,

v. (Super. Ct. No. 37-2008-00085624- CU-CO-CTL) JOHN KENNEDY,

Defendant and Respondent.

APPEAL from a judgment of the Superior Court of San Diego County,

Richard E. L. Strauss, Judge. Affirmed.

INTRODUCTION

A former member of a limited liability company appeals from a judgment on the

pleadings in a damages action after the trial court granted motions in limine excluding

evidence of liability and damages because the member sold his interest in the company in

a separate, related dissolution action. We conclude the trial court properly determined

the final resolution of the dissolution action deprived the member of standing to maintain any derivative claims and the doctrine of election of remedies barred the member from

maintaining any individual claims in the damages action. We, therefore, affirm the

judgment.

BACKGROUND

Damages Action

In June 2008 Robert Pastor filed a lawsuit against John Kennedy seeking damages

and injunctive relief. The operative second amended complaint (complaint) asserted

causes of action for fraud and deceit, breach of fiduciary duties, breach of contract, and

intentional interference with prospective economic advantage.

General Allegations

The complaint generally alleged, in 2005 and January 2006, Pastor worked for

J. Kelly Construction Supply (J. Kelly), a business of Kennedy's that imported and

distributed stone and stone products. In February 2006 Pastor, Kennedy, and Raymond

Shao formed a new company, East West Stone, LLC (East West Stone), to import and

distribute stone and stone products from China. Kennedy contributed $240,000 to the

company giving him a 60 percent ownership interest, Shao contributed $120,000 giving

him a 30 percent ownership interest, and Kennedy contributed another $40,000 on

Pastor's behalf giving Pastor a 10 percent ownership interest.

Kennedy was responsible for managing the company's finance, accounting, and

recordkeeping functions, Shao was responsible for procuring and transporting stone

products from China to the United States, and Pastor was responsible for overseeing the

company's sales and marketing functions as well as managing the sales, office, and

2 warehouse staff. For these services, Kennedy was paid a monthly salary of $3,000, Shao

was paid a monthly salary of $3,500, and Pastor was paid a monthly salary of $5,000.

Shortly after East West Stone's formation, Pastor discovered Kennedy was

diverting East West Stone's sales revenue to J. Kelly's bank account. Between February

and approximately June 2006, Kennedy diverted approximately $1 million.

Additionally, in November 2005, before East West Stone's formation, Kennedy

purchased a new pickup truck for Pastor's use and registered it in the name of Kennedy

Masonry, one of Kennedy's other companies. Once formed, East West Stone started

making the payments for the truck; however, Kennedy never transferred the truck to East

West Stone even though the company's operating agreement required all of its assets to

be held in its name.

Around June 2007 without calling for a vote of the company's members, Kennedy

replaced an information technology employee Pastor had hired. Kennedy had the new

employee change the company's computer system and administrative passwords.

Kennedy directed the new employee not to provide Pastor with the new passwords, so

Pastor no longer had access to the system or the company's financial records contained in

it. Kennedy then altered the company's financial records to cheat and defraud Pastor of

his share of the company's profits.

Around June 2007 Pastor told Shao of his concerns about Kennedy's financial

management practices. Around July 2007 Shao informed Kennedy of Pastor's concerns

about Kennedy's accounting practices, his failure to take a vote before making decisions,

and his acting adversely to the company's interests. The same month, Kennedy falsely

3 told Pastor that, as an owner of the company, Pastor could not be an employee and could

no longer receive a salary. Instead, Kennedy told Pastor he could only receive a

disbursement of profits from which he would have to pay his own taxes.

Around the same time, Kennedy fired the office manager Pastor had hired. The

following month Kennedy fired another office worker Pastor had hired. Kennedy took

both actions without calling for a vote of the company's members.

In February 2008 Kennedy told Shao and Pastor that East West Stone had earned a

net profit of more than $600,000 for 2007. The same month, Pastor informed Shao of a

$100,000 discrepancy he noticed in the company's financial records and Shao relayed the

information to Kennedy.1 Around the same time, Kennedy cancelled Pastor's cell phone

and provided him with a new one. The new phone was registered in Kennedy's name,

rather than in East West Stone's name.

In March 2008 Kennedy confronted Pastor regarding his remarks to Shao about

the $100,000 discrepancy in the financial records. Kennedy denied any financial

wrongdoing.

In early April 2008 Kennedy demanded Pastor to change the registration for East

West Stone's website from Pastor's name to East West Stone's name. A few days later,

Kennedy had the website passwords changed and refused to provide the new passwords

1 In one paragraph, the complaint indicates Pastor directly informed Kennedy of the discrepancy. In another paragraph, the complaint indicates Pastor informed Shao of the discrepancy and Shao then informed Kennedy of it. The latter paragraph is more consistent with the other allegations in the complaint.

4 to Pastor. At the end of the month, Kennedy had the password for Pastor's e-mail

account changed, precluding him from accessing his e-mails and the information stored

in his e-mail account.

At the beginning of May 2008, Kennedy had Pastor's cell phone turned off and

Pastor was unable to have it restored because it was in Kennedy's name. Around the

same time, Kennedy notified Pastor in writing he was no longer a working partner of East

West Stone, he must return the cell phone and the pickup truck, which was his only form

of transportation, and he would no longer receive a salary. Over the next approximately

two weeks, Kennedy contacted East West Stone's customers and vendors and advised

them Pastor no longer had authority to speak for or make decisions for East West Stone.

The same month, Pastor reviewed East West Stone's financial records. The

records showed a net profit of $80,000 for 2007, instead of $600,000 as Kennedy

previously indicated. The records also showed nonexistent and exaggerated expenses. In

addition, the records showed Pastor had approximately $130 in his capital account rather

than the $40,000 Kennedy was supposed to have contributed on his behalf. Pastor

believed Kennedy had the financial records altered to cheat Pastor out of company profits

and the capital contribution.

Claim-Specific Allegations

Pastor's first cause of action for fraud and deceit specifically alleged Kennedy

defrauded Pastor by falsely representing: (1) Pastor would own 10 percent of East West

Stone and be entitled to 10 percent of its profits, (2) Kennedy would make Pastor's

$40,000 capital contribution, (3) Pastor would receive a monthly salary of $5,000, (4)

5 Pastor could not receive a salary because he was an owner of the company, and (5)

Pastor, Kennedy, and Shao would manage East West Stone together and would vote on

all management decisions. The first cause of action further alleged Kennedy's fraud

damaged the business, damaged Pastor's reputation, and caused Pastor to spend two years

trying to make the business successful without receiving a salary or profits.

Pastor's second cause of action for breach of fiduciary duties specifically alleged

Kennedy, as the company's financial manager, had a fiduciary duty to pay Pastor a

$5,000 monthly salary as required by the operating agreement. Kennedy breached his

fiduciary duty when he refused to pay Pastor's salary.

Pastor's third cause of action for breach of contract specifically alleged Kennedy

breached East West Stone's operating agreement by making management decisions

without conducting a vote of the company's members, by refusing to pay Pastor's salary,

by failing to register the pickup truck in East West Stone's name, by depositing East West

Stone's sales receipts into J. Kelly's bank account, and by ousting Pastor. The third cause

of action further alleged Kennedy's actions irreparably injured Pastor as Kennedy might

attempt to run the company into the ground and continue converting the company's assets

to Kennedy's benefit against Pastor's interests.

Pastor's fourth cause of action for intentional interference with prospective

economic advantage specifically alleged Kennedy intentionally disrupted Pastor's

business relationship with East West Stone by terminating Pastor's management position,

terminating his compensation for providing management services, and barring Pastor

from the company's premises. The cause of action further alleged Kennedy's actions

6 resulted in Pastor's loss of compensation, benefits, and bonuses and diminished the value

of Pastor's equity interest in the company.

Dissolution Action

A little over a year after Pastor filed his lawsuit seeking damages from Kennedy,

he filed a second lawsuit seeking dissolution of East West Stone under Corporations

Code2 section 17351. Pastor based his dissolution action on substantially the same

general allegations as his damages action. The parties finally resolved the dissolution

action on December 10, 2010, by Kennedy purchasing Pastor's 10 percent interest in East

West Stone for 10 percent of the company's value as of April 30, 2008, less certain

appraisal expenses.

Motions in Limine in Damages Action

Shortly after final resolution of the dissolution action, Kennedy filed two motions

in limine. Each motion sought to exclude all evidence of liability and damages and

obtain judgment on the pleadings in the damages action.

The first motion asserted Pastor's acceptance of a buyout in the dissolution action

was an election of remedies foreclosing his subsequent recovery for any individual claims

in the damages action. The second motion asserted Pastor's acceptance of the buyout

dispossessed him of any standing to maintain any derivative claims in the damages

action. The trial court agreed with Kennedy's arguments and authorities, granted both

motions, and entered judgment on the pleadings in Kennedy's favor.

2 Further statutory references are also to the Corporations Code unless otherwise stated. 7 DISCUSSION

Pastor contends the trial court erred in granting the motions in limine and entering

judgment on the pleadings because he is not asserting any derivative claims. He further

contends the doctrine of election of remedies does not preclude his individual recovery in

the damages action for damages not compensated for in the dissolution action.

"In an appeal from a motion granting judgment on the pleadings, we accept as true

the facts alleged in the complaint and review the legal issues de novo. 'A motion for

judgment on the pleadings, like a general demurrer, tests the allegations of the complaint

or cross-complaint, supplemented by any matter of which the trial court takes judicial

notice, to determine whether plaintiff or cross-complainant has stated a cause of action.

[Citation.] Because the trial court's determination is made as a matter of law, we review

the ruling de novo, assuming the truth of all material facts properly pled.' " (Angelucci v.

Century Supper Club (2007) 41 Cal.4th 160, 166.)

I

Existence of and Standing To Maintain Derivative Claims

A claim is derivative if its gravamen " 'is injury to the corporation, or to the whole

body of its stock and property without any severance or distribution among individual

holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its

assets.' " (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal. 3d 93, 106-107.) Derivative

claims include claims of company mismanagement and improper selling and purchasing

of company assets. (Avikian v. WTC Financial Corp. (2002) 98 Cal.App.4th 1108, 1115-

1116.) Derivative claims also include claims for the fraudulent transfer of company

8 assets without compensation to the company. (PacLink Communications Internat., Inc. v.

Superior Court (2001) 90 Cal. App. 4th 958, 964.) These claims are derivative because

members of a limited liability company have no direct ownership interest in the

company's assets. The members, therefore, cannot be directly injured when the company

is deprived of assets. Instead, their injury is essentially a diminution in the value of their

interest in the company due to the company's loss of assets and is incidental to the injury

suffered by the company. (Ibid.)

Several of the claims in Pastor's complaint involve allegations of mismanagement

of East West Stone and mishandling of its assets. As the above authorities indicate, these

claims are derivative in nature. To have standing to maintain these claims, Pastor must

have an ongoing interest in the company. "Because a derivative claim does not belong to

the stockholder asserting it, standing to maintain such a claim is justified only by the

stockholder relationship and the indirect benefits made possible thereby, which furnish

the stockholder with an interest and incentive to seek redress for injury to the corporation.

[Citations.] Once this relationship ceases to exist, the derivative plaintiff lacks standing

because he or she 'no longer has a financial interest in any recovery pursued for the

benefit of the corporation.' [Citations.] As one court put it, allowing a plaintiff to retain

standing despite the loss of stock ownership would produce 'the anomalous result that a

plaintiff with absolutely no "dog in the hunt" is permitted to pursue a right of action that

belongs solely to the corporation.' " (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1114.)

Once Pastor sold his interest in East West Stone as part of the dissolution action,

he lost standing to pursue any derivative claims in the damages action. Accordingly, the

9 trial court properly granted Kennedy's motion in limine to exclude any evidence of

liability and damages related to these claims.

II

Application of Doctrine of Election of Remedies to Individual Claims

Pastor's remaining individual tort and contract claims relate to Kennedy's failure to

fulfill certain promises to Pastor reflected in the East West Stone's operating agreement.

Whether the doctrine of election of remedies applies to bar these claims depends on

whether the remedies for these claims are inconsistent with the remedies Pastor obtained

in the dissolution action. "Broadly speaking, election of remedies is the act of choosing

between two or more concurrent but inconsistent remedies based upon the same state of

facts. Ordinarily a plaintiff need not elect, and cannot be compelled to elect, between

inconsistent remedies during the course of trial prior to judgment. [Citations.] However,

if a plaintiff has unequivocally and knowledgeably elected to proceed on one of the

remedies he is pursuing, he may be barred recourse to the other. [Citation.] It is to such

a situation that the doctrine of election of remedies pertains." (Roam v. Koop (1974) 41

Cal.App.3d 1035, 1039-1040; accord, California Golf, L.L.C. v. Cooper (2008) 163 Cal.

App. 4th 1053, 1065; Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 1218

(Denevi).)

Pastor's dissolution action sought a judicial decree dissolving East West Stone,

winding up its business, liquidating its assets, and distributing the proceeds to members

according to their membership interests. To avoid the dissolution, Kennedy purchased

Pastor's interest in the company. Thus, the dissolution action and the remedy Pastor

10 received from it amounted to a termination of East West Stone's operating agreement, at

least as to Pastor.

Pastor's damages action, on the other hand, sought damages for Kennedy's failure

to fulfill certain promises reflected in the terms of the operating agreement. Obtaining

such damages assumes the contract is still effective as to Pastor. Consequently, Pastor's

damages action and the remedies sought in it are necessarily inconsistent with Pastor's

dissolution action and the remedy he received from it. " 'Upon the breach of a contract a

party thereto may treat it as rescinded, and if he has advanced money on it, bring an

action for its recovery; or he may treat the contract as still in force and maintain an action

for damages for the breach, but he cannot pursue both courses. If the facts exist which

justify a rescission by one party, and he exercises his right and declares a rescission in

some effectual manner, he terminates the contract, and it cannot thereafter be made the

basis of an action for damages caused by breach of the covenants.' " (Karapetian v.

Carolan (1948) 83 Cal. App. 2d 344, 347; see also Akin v. Certain Underwriters at

Lloyd's of London (2006) 140 Cal.App.4th 291, 296 [recovery in an action based on

disaffirmation of a contract bars recovery in an action based on affirmation of the

contract].)

In analogous business contexts, courts have recognized persons in positions

similar to Pastor's may elect between a dissolution remedy or a damages remedy. (See

Gherman v. Colburn (1977) 72 Cal.App.3d 544, 564-565; Navarro v. Perron (2004) 122

Cal.App.4th 797, 802.) Implicitly, such person may not obtain both remedies.

11 Denevi, supra, 121 Cal.App.4th 1211, upon which Pastor relies, is distinguishable

on this point. In Denevi, plaintiff held a personal contractual right to purchase certain

real property. He and others formed a limited liability company to purchase and develop

the property. Plaintiff contributed his purchase rights to the venture. The venture was

not successful and the seller sold the property to another. (Id. at p. 1215.)

Plaintiff subsequently brought a derivative action on behalf of the company

against some of the other investors for breach of fiduciary duty. He eventually obtained a

$10 million judgment in the company's favor. (Denevi, supra, 121 Cal.App.4th at

pp. 1215-1216.) Plaintiff also brought a damages action against some of the other

investors alleging, among other claims that they fraudulently induced him to transfer his

purchase rights to the venture. (Id. at p. 1215.) The defendants later obtained summary

judgment in the damages action after the trial court apparently determined the action was

barred by the doctrine of election of remedies. (Id. at pp. 1217-1218.)

The appellate court, however, concluded plaintiff's claims for fraudulent

inducement were not barred by the doctrine of election of remedies for two reasons.

First, the court concluded the fraudulent inducement claims were not based on the same

facts as the derivative claims because the fraudulent inducement claims arose before

plaintiff and the other investors actually formed the company. Second, the court

concluded the remedies sought in the damages and derivative actions were not

necessarily inconsistent with one another because they were sought on behalf of two

distinct persons, plaintiff and the company, respectively. (Denevi, supra, 121

Cal.App.4th at pp. 1218-1219.)

12 In contrast, Pastor's dissolution and damages action are unquestionably based on

the same operative facts. As Kennedy points out, the pleadings are nearly identical. In

addition, except as discussed and addressed in part I, ante, the remedies sought in the

dissolution action and in the damages actions are for Pastor's benefit. Accordingly,

Denevi does not support a conclusion the doctrine of election of remedies is inapplicable

to Pastor's individual claims in this case.

Since the remedies sought in the dissolution action are necessarily inconsistent

with the remedies sought for Pastor's individual claims in the damages action, we

conclude the trial court properly granted Kennedy's motion in limine to exclude evidence

of liability and damages related to these claims. Given this conclusion and our

conclusion in part I, ante, we further conclude the trial court properly entered judgment

on the pleadings in Kennedy's favor.

DISPOSITION

The judgment is affirmed. Respondent is awarded costs on appeal.

MCCONNELL, P. J.

WE CONCUR:

NARES, J.

HALLER, J.