CROSKEY, J.
Plaintiff State Fish Company, Inc. (State Fish) is a family-owned fish business owned and operated by the DeLuca family. In 1991, John,
After a bench trial, the trial court found in favor of State Fish, concluding that John violated the corporate opportunity doctrine by obtaining title to Plant 2 without first obtaining approval of the disinterested directors of State Fish. The trial court ordered John to convey Plant 2 to State Fish. John appeals.
The trial court also concluded that John breached his fiduciary duty to State Fish by soliciting State Fish employees to join his competing business, but State Fish suffered no damages because the employees rejected John's offers. State Fish cross-appeals, seeking nominal damages and punitive damages for John's misconduct. State Fish also argues that the trial court erred in not awarding it damages for the fifteen years of rent it paid John.
We reverse the judgment in favor in State Fish. The trial court misconstrued the law of the corporate opportunity doctrine, which, when properly considered, does not support the judgment in this case. Additionally, the undisputed facts establish the affirmative defense of laches as a matter of law. As to State Fish's cross-appeal, the trial court did not err in refusing to award damages for the breach of fiduciary duty, and State Fish has no legal basis on which to obtain reimbursement for the rent it legitimately paid John.
The patriarch of the DeLuca family was Sam. Sam died in 2002; his death will be a key factor in our laches analysis. Sam began working at State Fish, a company started by his older brother, when he was eight years old. Beginning in 1946, Sam started running State Fish on a day-to-day basis, and was in charge of the operations of State Fish until he suffered a stroke in 1996.
Sam married Rose in 1948. They had four children: John, Vanessa, Roseann, and Janet. All four worked for State Fish. In 1984, Sam and Rose bought out Sam's nephews, so that Sam and Rose became the sole shareholders of State Fish. The purchase cost $15 million. In 1985, Sam and Rose began giving State Fish stock to their children and grandchildren, although they retained majority ownership.
At this point, State Fish operated out of what is now called "Plant 1," a fish processing facility that can process 170 tons of seafood each day. State Fish was beginning to outgrow Plant 1 and needed extra capacity. In 1986, Sam and Rose purchased Plant 2, a plant thrice the size of Plant 1. Plant 2 can process 300 tons of seafood each day, and has space to store approximately 5 million pounds of fish. Combining blast freezing, processing, packing, and storage facilities just a few miles from the dock, the four-acre plant is a unique facility which gives State Fish a competitive edge. By the time of trial, State Fish processed two-thirds of its wet fish
It is not clear from the record, however, exactly when Plant 2 became necessary to State Fish's business.
In 1991, Rose decided that she and Sam should give the $30,000 per month income stream to John. Rose and Sam gave gifts of real property to their children, but had not given any real property to John. Rose was concerned that John's marriage was falling apart, and she wanted to guarantee that John's children had some income if there were to be a divorce. Rose testified, repeatedly, that her intent had been to give John the income from Plant 2, not Plant 2 itself.
Rose's brother, Fred DiBernardo, was an attorney who handled legal matters for State Fish and the DeLuca family members. Rose contacted DiBernardo and told him that she wanted to give the income stream to John, and asked him to arrange it. DiBernardo arranged the transaction, for tax purposes, as an exchange of real property. John traded two pieces of property with Sam and Rose in exchange for Plant 2. In order to equalize the exchange, John also gave Sam and Rose a note for $305,000, which he ultimately paid off. The testimony at trial, however, indicated that, at the time of the exchange, Plant 2 was worth $4,525,000 and John's exchanged properties were worth only $457,500. Thus, even with the $305,000 note, John exchanged only $762,500
Sam and Rose executed a grant deed conveying Plant 2 to John as his separate property.
That John took title to Plant 2 by this transaction was no secret to State Fish. Indeed, Sam and Rose, who signed the grant deed, were the majority stockholders in State Fish. Moreover, Sam was still running State Fish's operations, even though John became President in 1992. Once John took title to Plant 2, State Fish began paying $30,000 per month to John. From 1991 onward, there is an unbroken documentary record of these payments being considered rent and John being understood to be the owner of Plant 2. The $30,000 monthly checks from State Fish to John were identified on their stubs as being for "rent." State Fish issued annual 1099 forms to John, indicating that they had paid him $360,000
John took over operation of the company when Sam suffered his stroke in 1996, and continued in that role through Sam's death in 2002. It is impossible to determine exactly what event precipitated the rift in the family, but a dispute ultimately arose between John, on one side, and his mother and sisters on the other.
In 2003, Plant 2 required repairs. State Fish refused to pay for the repairs, so John, as the owner of Plant 2, spent $250,000 of his own money on the repairs. In 2004, if not earlier, State Fish considered entering into a long term lease with John for Plant 2; John refused.
In 2004, John contacted an appraiser
A meeting was held. On December 29, 2004, Rose wrote John another letter, on State Fish letterhead, stating, "I believe the 50 percent rent increase on the referenced property is unjustified and unwarranted. State Fish Company's conclusions are that the comparable[s in the appraisal obtained by John] were incomplete, in that [the appraisal] does not state whether the comparables include property tax, utilities, insurance, maintenance, and the length of lease. [¶] Until the above are addressed, State Fish Company will take no future action. [¶] On a personal note, John, I am very disappointed that if your concern is indeed one of under-market income, you did not discuss this in advance in order to reach an amicable solution, and thus avoid the hostility created by this entire incident." Again, Rose's letter did not state that John was not the owner of Plant 2 or lacked the authority to raise the rent.
Rose would later take the position at trial that, in July 2005, she consulted DiBernardo, her brother and attorney, for advice on the rent dispute. DiBernardo told her that State Fish had a month-to-month lease with John and that John had the authority to raise the rent. Rose testified that July 2005 was the first time DiBernardo informed her that State Fish had an oral month-to-month lease with John, and that any subsequent acknowledgements of such a month-to-month lease were based on her reliance on the advice of DiBernardo.
In August 2005, John wrote Janet indicating that it had been nine months since he had given notice of his intent to raise the rent. He stated that "a decision needs to be made" at the next monthly owners' meeting.
The handwritten notes from the September 2005 monthly owners' meeting indicate that State Fish "made our landlord, John DeLuca a counter offer for rent increase at [Plant] 2. The offer of [$0.]65 [per square foot] was rejected."
At the October 2005 monthly meeting, John told his sisters and mother that he was tired of "going in circles" over the issue of rent and it was time for him to leave State Fish. John gave notice of his decision to resign as President and director. On October 31, 2005, John gave State Fish written notice that it must vacate Plant 2 by the end of the year.
John contacted DiBernardo to assist him in setting up his own fish company. DiBernardo had a corporation in existence which was not being used. On November 7, 2005, DiBernardo changed the name of that corporation to "J. DeLuca Fish Company, Inc." in preparation to sell it to John.
On December 16, 2005, Rose and Vanessa wrote a letter to John (which they each signed as "Director"). In their letter, they acknowledged that State Fish "currently has a verbal month-to-month lease with you." They indicated that State Fish "is now seeking to relocate replacement facilities and to remove its inventory from Plant 2 by the deadline that you have set," but that relocation "may simply not be possible by the end of the year" and any loss of use of Plant 2 before relocation "will cause harm to the business operations and financial condition" of State Fish. They therefore sought a "reasonable and realistic period of time to relocate in accordance with good business practices."
Rose testified that, although John had originally indicated his resignation was effective at the end of the year, she requested that he stay on through the busy "squid season."
On January 29, 2006, Rose wrote John a handwritten letter, on her own behalf and not necessarily that of State Fish. Her letter stated, "Now you have four grown sons whom you hope will help you in the start of a new business. It is the right thing to do, and I wish all much good health and success in your new venture. I had hoped that you would purchase State Fish Co. We as a family made numerous offers but nothing worked out for you. You in turn never made an offer or tr[i]ed to compromise some kind of offer." The letter went on to state that John would not be leaving State Fish empty-handed, as he still possessed stock in State Fish. Moreover, the letter stated, "Through the sacrifices and generosity of your parents, you will be leaving with a $10,000,000 cold storage freezer plant plus net rent revenue of $5,970,000. — which gave you the ability to buy multiple pieces of property."
In May 2006, if not before, John solicited several high-ranking employees of State Fish to leave and join him at the J. DeLuca Fish Company. John believed that the bulk of the employees would leave with him, and follow him down the street from State Fish to his new business. He said that it would "almost break" State Fish.
However, the employees did not leave with John. While there was some evidence that one or more former State Fish employees were, by the time of trial, working for John, there was no evidence that they left State Fish in order to follow John.
Similarly, John asked the State Fish employees to bring him customer lists and vendor lists that he could use in his own business. The employees did not give these lists to John. There was no evidence that John or his company caused any harm or loss of business to State Fish.
On May 1, 2006, John served State Fish with a 30-day notice to quit, terminating its tenancy at Plant 2. A 3-day notice to quit followed on May 26, 2006. On June 2, 2006, when State Fish had not vacated the premises, John filed an unlawful detainer action, seeking possession of Plant 2 and fair rental value from June 1, 2006, as long as State Fish remained in possession.
On June 9, 2006, State Fish filed its answer, denying that John is the owner of Plant 2 and denying that the $30,000 it paid John monthly was rent. State Fish asserted that it "is entitled to use and occupy the premises as long as it wishes to do so and cannot be evicted by [John]."
On August 2, 2006, State Fish filed a multi-count complaint against John.
Ultimately, State Fish would withdraw the unfair competition and misappropriation of trade secrets causes of action and dismiss without prejudice the cause of action for breach of implied contract. Thus, disposition of this action would turn on the causes of action for rescission, reformation, breach of fiduciary duty, constructive trust, and corporate opportunity. With respect to these causes of action, State Fish alleged that, although Sam and Rose had deeded Plant 2 to John, the true intent of the parties was that State Fish would always have exclusive use of Plant 2 in return for a reasonable monthly payment of $30,000. State Fish also alleged that John usurped from State Fish "the opportunity for State Fish to acquire" Plant 2. State Fish alleged that John additionally breached his fiduciary duties to State Fish by attempting to steal its employees and trade secrets for his own business.
John answered the first amended complaint,
When the trial began, State Fish's causes of action for breach of contract and misappropriation of trade secrets, which clearly sounded in law rather than equity, were still at issue. Thus, a jury was empanelled. The trial court planned to simultaneously instruct the jury on State Fish's causes of action and John's unlawful detainer complaint, resolving the equitable causes of action itself.
As discussed above, State Fish's theory at trial was that Sam and Rose had never intended to give John anything more than nominal title to Plant 2. State Fish argued in its trial brief that John violated the corporate opportunity doctrine because he did not obtain approval of the disinterested shareholders of State Fish for either his taking title to Plant 2 or his collecting rent for it. As a result, State Fish argued not only for title to Plant 2, but disgorgement of all of the rent it had paid John.
In contrast, John relied on his own testimony at trial to establish that, to the extent the amount he exchanged for Plant 2 was not equivalent to the value of Plant 2, the plant was a gift. John also relied on Rose's testimony at deposition where, in contrast to her trial testimony, Rose testified that she understood, when signing the grant deed, that she transferred title to Plant 2 to John. John also relied on Rose's deposition testimony that John had the right to raise the rent on Plant 2 if he wished. John intended to elicit testimony that Sam had wanted him to own Plant 2, on the basis that it was his inheritance and that he would always have the plant in the event he wanted to start his own business. Initially, the trial court barred this testimony as hearsay. Ultimately, the court allowed John and DiBernardo to testify to Sam's purported statements along these lines. However, the trial court disbelieved this testimony. Indeed, the trial court concluded that John and DiBernardo were "strangers to the truth."
At the close of the evidence, while discussing jury instructions, State Fish decided that it wished to waive jury and/or proceed solely on causes of action in equity. For this reason, it dismissed its misappropriation of trade secrets and breach of implied contract causes of action (the latter without prejudice). The trial court then severed and declared a mistrial in John's unlawful detainer action. As only equitable causes of action remained, the trial court excused the jury.
On May 14, 2009, the trial court issued its tentative statement of decision. Under Evidence Code section 662, the owner of legal title is presumed to be the owner of full beneficial title; this presumption may only be rebutted by clear and convincing proof. The trial court concluded that State Fish had met this burden. Specifically, the court concluded that the opportunity to obtain title to Plant 2 in 1991 was a corporate opportunity, and that John violated the corporate opportunity doctrine. As to its conclusion that Plant 2 was a corporate opportunity, the court discussed the importance of Plant 2 to State Fish's continued vitality, and stated, "If State Fish had acquired Plant 2 in 1991, then this lawsuit would not have arisen and State Fish would not be involved in a lawsuit that threatens its survival. It is difficult to imagine a more clear example of corporate opportunity."
The court then concluded that the corporate opportunity doctrine was violated by John's acquisition of title because, as the trial court reasoned, Corporations Code section 310 "is the codification of the corporate opportunity doctrine in California," and John did not comply with the requirements of that statute, which require approval by disinterested shareholders. An alternative under Corporations Code section 310 is to establish that the transaction was just and reasonable to the corporation; the trial court concluded that John failed to establish that the transaction was fair because, accepting the values of State Fish's expert, John transferred property (and a note) worth less than $800,000 for a $4.5 million plant.
Having therefore concluded that John violated the corporate opportunity doctrine when he took title to Plant 2, the court determined the proper remedy to be rescission. The court ordered that John transfer Plant 2 to State Fish. In return, State Fish was to repay John the consideration he gave for Plant 2, plus the value of the repairs he made to the plant ($250,000). However, the trial court offset against these payments the $30,000 monthly payments State Fish had made during the pendency of the action (from the date the unlawful detainer was filed). The court stated, with little analysis, "The court finds John will be permitted to keep the $30,000 per month payments that have been made to him from July 2, 1991, to the date [he filed the unlawful detainer action]." The net result was that John was required to pay State Fish $48,000 and convey Plant 2 to it.
As to State Fish's remaining claims of breach of fiduciary duty, relating to John's solicitation of State Fish's employees for his competing business, the trial court concluded that John did solicit the employees, but that State Fish suffered no detriment as a result of these solicitations.
The trial court also addressed John's laches defense. The court concluded that John suffered no prejudice from State Fish's delay in bringing its action, because, although Sam was deceased by the time of trial, "John and [DiBernardo] testified as to the purported intent of Sam in the exchange." This was true even though the trial court concluded earlier that John and Fred's testimony in this regard was "not credible." The court also concluded that, in any event, State Fish did not unreasonably delay in bringing this action, as the action was filed promptly after "State Fish [became] aware of John's efforts to evict [it] from Plant 2."
John filed objections to the statement of decision, challenging the trial court's application of the corporate opportunity doctrine. The court rejected the objections, and signed the proposed statement of decision. That same day, John filed additional objections, including the specific objection that Corporations Code section 310 is not the codification of the corporate opportunity doctrine. The trial court then issued its judgment, relying on the same statement of decision.
John filed a motion for new trial, arguing that the statement of decision was against the law and not supported by the evidence. Among other things, John specifically argued that the opportunity to acquire title to Plant 2 was not a corporate opportunity as a matter of law. He also argued that the evidence at trial established the defense of laches. The trial court denied the motion.
John filed a timely notice of appeal. State Fish filed a timely notice of cross-appeal.
In John's appeal, he contends: (1) the trial court misconstrued and misapplied the law of the corporate opportunity doctrine; and (2) he established the defense of laches as a matter of law.
John contends the trial court erred as a matter of law when it concluded he violated the corporate opportunity doctrine by not complying with Corporations Code section 310 when he acquired title to Plant 2. This contention raises an issue of statutory interpretation which we consider de novo. (Womack v. San Francisco Community College Dist. (2007) 147 Cal.App.4th 854, 858.) It also raises a pure question of law on undisputed facts, which we similarly review de novo. (Cedars-Sinai Medical Center v. Shewry (2006) 137 Cal.App.4th 964, 976.)
First, the trial court erred in its interpretation of Corporations Code section 310. The plain language of this statute makes it clear that it is not the codification of the corporate opportunity doctrine in California. The corporate opportunity doctrine "prohibits one who occupies a fiduciary relationship to a corporation from acquiring, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence." (Kelegian v. Mgrdichian (1995) 33 Cal.App.4th 982, 988.) Corporations Code section 310, in contrast, governs, as its plain language states, contracts "between a corporation and one or more of its directors"
Second, the trial court erred as a matter of law in concluding that the opportunity to acquire Plant 2 was a corporate opportunity
John argues that he established the defense of laches as a matter of law. While laches is ordinarily a question of fact, a de novo standard applies when the facts are undisputed. (Cedars-Sinai Medical Center v. Shewry, supra, 137 Cal.App.4th 964, 976.) "Laches may bar relief in equity to those who neglect their rights, where such neglect operates to the detriment of others." (Bono v. Clark (2002) 103 Cal.App.4th 1409, 1417.) "The defense of laches has nothing to do with the merits of the cause against which it is asserted." (Johnson v. City of Loma Linda (2000) 24 Cal.4th 61, 77.) It requires a finding of unreasonable delay, plus either the plaintiff's acquiescence in the act about which it complains, or prejudice to the defendant arising from the delay. (Womack v. San Francisco Community College Dist. (2007) 147 Cal.App.4th 854, 865.) As to the delay, "`[l]aches implies that the plaintiff should have done something earlier.' [Citation.] Whether the plaintiff should have acted sooner depends on the circumstances of the particular case." (Bono v. Clark, supra, 103 Cal.App.4th at p. 1418.) As to prejudice, it "`is never presumed; rather it must be affirmatively demonstrated by the defendant in order to sustain his burdens of proof and the production of evidence on the issue.' [Citations.]" (Id. at p. 1420.) The death of an important witness may constitute prejudice. (Ibid.; Stafford v. Ballinger (1962) 199 Cal.App.2d 289, 296.) This is true even if the defendant does not establish that the deceased witness would have given testimony favorable to him. (Gerhard v. Stephens (1968) 68 Cal.2d 864, 904, fn. 44.)
In this case, the trial court concluded that John failed to establish delay because the action was filed promptly after "State Fish [became] aware of John's efforts to evict [it] from Plant 2." This conclusion is legally erroneous. The trial court did not conclude that John violated the corporate opportunity doctrine by attempting to evict State Fish from Plant 2. Instead, the trial court's judgment in favor of State Fish was based on its conclusion that John usurped a corporate opportunity when he acquired Plant 2 in 1991 without offering it to State Fish. Thus, the issue is not whether State Fish brought suit promptly after it became aware of John's attempt to evict it, but whether it brought suit promptly after it became aware of John's acquisition of Plant 2 in 1991 without offering it to State Fish. Clearly, it did not. State Fish was necessarily aware that John obtained the plant in 1991 without offering it to State Fish; no secret was made of John's acquisition of the plant, and State Fish immediately began paying rent to John.
As to prejudice, Sam's stroke in 1996 and death in 2002 necessarily establish prejudice. State Fish paid John rent for five years with no complaint while Sam was in control of the day-to-day operations of State Fish. That State Fish did not bring its complaint for usurpation of corporate opportunity until after Sam had passed away and was therefore unable to testify as to his understanding of the transaction was necessarily prejudicial. The trial court argued that there was no prejudice because "John and [DiBernardo] testified as to the purported intent of Sam in the exchange." The conclusion does not follow. That John and DiBernardo were permitted to give testimony the trial court rejected as wholly incredible in no way ameliorated the harm to John caused by the fact that Sam was no longer able to testify to his intent. Rejected testimony is akin to no testimony at all; there is certainly no suggestion that if Sam had testified in line with John's testimony that the court would not have found it persuasive. Sam was the most important individual in this transaction — the grantor who was operating State Fish at the time. Without his testimony, John's defense was necessarily prejudiced.
Our resolution of the first two issues disposes of State Fish's contention that it was entitled to disgorgement of all the rent it paid John. John did not usurp a corporate opportunity in obtaining title to Plant 2; and State Fish's claim to repayment of rent is barred by laches.
State Fish argues that the court erred in not awarding it nominal damages for John's breaches of fiduciary duty related to his attempts to solicit State Fish employees and obtain State Fish's customer and vendor lists. The trial court concluded John breached his duties, but State Fish was not harmed by these activities.
"The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, breach of fiduciary duty, and damages." (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.) The trial court found that no damages were established, and State Fish has not shown that this finding was not supported by the evidence.
State Fish argues, however, that it nonetheless had a right to nominal damages. Civil Code section 3360 provides, "[w]hen a breach of duty has caused no appreciable detriment to the party affected, he may yet recover nominal damages." John responds that this statute is not applicable to the tort of breach of fiduciary duty which, as noted above, requires a finding of damages. We need not reach John's argument, however, because "the general rule is that the failure to award nominal damages is not alone ground for reversal of a judgment." (Sweet v. Johnson (1959) 169 Cal.App.2d 630, 633.) Exceptions apply, such as if an award of nominal damages would entitle the plaintiff to an award of costs. (Ibid.) State Fish does not argue that the award of nominal damages would entitle it to costs. Instead, State Fish argues that an award of nominal damages would justify an award of punitive damages.
An award of "nominal damages" can mean two different things: "a trifling or token allowance for mere technical invasion of a right, without actual damages; and the very different allowance made when actual damages are substantial, but their extent and amount are difficult of precise proof." (Kluge v. O'Gara (1964) 227 Cal.App.2d 207, 209-210.) Only the second can provide a basis for an award of punitive damages. (Id. at p. 210.) Punitive damages cannot be awarded in the absence of actual damages. (Id. at p. 209.) The type of nominal damages to which State Fish would conceivably be entitled is the type of nominal damages which do not imply the existence of actual damages and therefore do not justify an award of punitive damages.
As the nominal damages sought by State Fish would not permit an award of punitive damages, the failure to award nominal damages is not a sufficient basis for reversal. We therefore need not consider whether a breach of fiduciary duty which did not cause actual damages justifies an award of nominal damages.
The judgment is reversed. The matter is remanded to the trial court with directions to conduct a retrial on John's mistried complaint for unlawful detainer. John shall recover his costs on appeal from State Fish.
WE CONCUR:
KLEIN, P. J.
ALDRICH, J.
