Filed 6/24/14 Billuni v. Myers CA4/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
RICHARD BILLUNI et al.,
Plaintiffs and Appellants, G048130
v. (Super. Ct. No. 30-2011-00465035)
GARY MYERS et al., OPINION
Defendants and Respondents.
Appeal from a judgment of the Superior Court of Orange County, Richard
Luesebrink, Judge. Affirmed in part and reversed in part.
Bishton Gubernick, Norris J. Bishton, Jr., and Jeffrey S. Gubernick for
Plaintiffs and Appellants.
Vogt Resnick & Sherak, Jack Smart and Barnet Resnick for Defendants and
Respondents.
* * *
Following an arbitration, majority shareholder Gary Myers paid minority
shareholder Richard Billuni $4.8 million for all of Billuni’s shares in a closely held
1
corporation. Nonetheless, Billuni persisted with a separate legal action, in which he
sought damages for alleged breaches of fiduciary duty by Myers and another minority
shareholder, Dennis Barker. Billuni and Toyescorp Co., Ltd. (Toyescorp) also sued
Myers on the theory that Myers had diverted business from Toyescorp, an entity equally
2
owned by Billuni and Myers. The trial court entered a defense judgment on all counts.
We affirm with regard to the causes of action implicated by the arbitration and reverse
with regard to the Toyescorp causes of action.
FACTS
Although the court entered judgment after a bench trial, the resolution of
the pertinent issues was not based on factual determinations going to the merits of
plaintiffs’ allegations. Thus, our statement of facts is primarily concerned with
undisputed background material (the parties helpfully stipulated to many of these facts
before trial), the allegations made by plaintiffs in their operative pleading, and the
procedural history of both this case and the arbitration between the parties. We will
describe additional evidentiary material in the discussion section as necessary to resolve
specific issues.
1
Actually, the parties’ shares were owned by family trusts for which the
parties served as trustees, but for the sake of simplicity we ignore this inconsequential
aspect of the case.
2
There were other defendants and causes of action, but plaintiffs appeal only
aspects of the judgment pertaining to Myers and Barker.
2
The Dealership
Garrick Motors, Inc., is a franchised Toyota and Scion dealership doing
business as Toyota of Escondido (the Dealership). Billuni ascended to general manager
of the Dealership in 1991 and filled this position until his resignation on October 8, 2010;
Billuni also served as a director, secretary, and chief financial officer of the Dealership.
At all relevant times, Myers was president and Barker was vice-president of the
Dealership; both men also served as directors of the Dealership. Prior to April 26, 2012,
the shares in the Dealership were owned as follows: (1) Myers — 68.67 percent; (2)
Billuni — 29.93 percent; (3) Barker — 1.17 percent; and (4) Scott and Patty
Whitehead — .23 percent. Myers now owns 98.6 percent of the shares since buying out
Billuni.
Beginning in 2008, the Dealership suffered a double stroke of bad fortune.
First, the economic downturn negatively affected industry-wide automobile and truck
sales. Second, Toyota experienced highly publicized quality and safety issues. Both
revenues and profits plummeted. The Dealership responded by cutting personnel and
reducing salaries. Billuni saw his personal income on an annual basis drop from over
$1.1 million to $400,000. The Dealership’s banker demanded that an independent
accounting firm review the Dealership’s financial information.
Perhaps triggered by these trying times, the working relationship of the
Dealership’s principals fell apart. Billuni accused Myers of borrowing Dealership funds
at unfairly low interest rates, as well as using Dealership funds to bankroll personal
pursuits (e.g., a racing team, a yacht). Billuni claimed these practices caused financial
difficulties at the Dealership. Myers denied wrongdoing and claimed it was Billuni who
was at fault for the Dealership’s difficulties.
3
Toyescorp
Toyescorp is a Seychelles corporation formed in 1998. Both Billuni and
Myers own 50 percent of the shares of Toyescorp. Myers is president and a director of
Toyescorp. Billuni is the chief financial officer and a director of Toyescorp.
Toyescorp reinsures policies written by Portfolio General Management
Group (Portfolio), a company that provides extended warranty insurance and GAP
(Guaranteed Auto Protection) insurance to customers purchasing automobiles at the
Dealership. These policies were sold at the Dealership since the formation of Toyescorp
in 1998 and until October 2010. The Dealership also sold similar insurance offered by
Toyota Financial Services. However, until October 2010, the majority of these insurance
policies sold by the Dealership were obtained from Portfolio and reinsured by Toyescorp.
Arbitration Pursuant to the Buy/Sell Agreement
Billuni, Myers, and Barker all signed a buy/sell agreement in 1999. The
buy/sell agreement states, “Within a period commencing with the termination of Billuni’s
employment with the [Dealership], and ending ninety (90) days following such date of
termination of employment, the remaining Shareholders shall have the option to
purchase, and Billuni . . . shall, if such option is exercised, sell to the remaining
Shareholders all Billuni[’s] Shares of the [Dealership’s] stock, at the price and on the
terms and conditions set forth” in the agreement. Another section of the buy/sell
agreement provides, “Any actions, controversies, claims, disputes and/or other factual or
legal matters in question arising out of or relating to this Agreement, or the alleged
breach thereof, shall be settled by arbitration conducted in accordance with the California
Arbitration Act [citation] as then in effect except as provided herein.”
4
Billuni resigned from his employment with the Dealership in October 2010.
In November 2010, Myers exercised his option to acquire Billuni’s shareholder interest.
Because the parties could not agree on the proper application of the buy/sell agreement,
Billuni filed a demand for arbitration between himself and Myers in March 2011. A
JAMS arbitration ensued before a panel of three arbitrators. Among the issues raised by
Billuni in this JAMS arbitration was: “How to determine the purchase price.” The
arbitration panel ordered that the purchase price be determined pursuant to a process
utilizing three independent appraisers. The panel oversaw that the process was fully and
properly carried out. On April 26, 2012, the 12,789 shares of the Dealership held by
Billuni were purchased by Myers for the price of $4.8 million, the amount agreed to by
the three appraisers.
Importantly, in supervising the appraisal process, the arbitrators ruled that
the appraisers could take into account the derivative claims being pressed by Billuni on
behalf of the Dealership against Myers: “The shareholder agreement specifically directs
consideration of the minority status of the shares in the valuation, and the appraisers shall
comply with this direction. Further, [Billuni] assert[s] that the appraisers should consider
the derivative claims [he has] filed in Orange County Superior Court as part of their
valuation. The appraisers shall give this matter such consideration, if any, as is
3
appropriate in the exercise of their professional judgment.”
3
This ruling was arguably inconsistent with an earlier ruling of the
arbitrators, in which they denied Billuni’s request to abate the arbitration until the
completion of the civil action that is the basis of this appeal. The arbitrators explained:
“The first threshold issue is whether the arbitration should be abated pending conclusion
of the derivative suit. Billuni argues that the claims in the derivative suit may affect
valuation of the stock, and that accordingly the arbitration should be stayed pending
outcome of the suit. [¶] The Panel respectfully disagrees. The agreement requires
exercise of the option within 90 days after retirement, and provides that time is of the
essence. The derivative suit was only recently filed, and it may be years before it is
resolved. It is uncertain whether the results of that suit will have any impact on the
proper valuation of the shares. [¶] The request to abate is denied. If [Billuni is] entitled
5
In the March 2012 appraisal report unanimously agreed to by the three
appraisers, the valuation analysis added (at least some of) Myers’s contested spending
back into the “pre-tax income” used to value the Dealership. Categories of contested
spending included racing team expenditures, the boat captain’s salary, Myers’s salary, the
Myers children’s salaries, and travel and entertainment expenses exceeding a
“normalized” amount.
Pleadings
Billuni and Toyescorp filed their initial complaint in April 2011 and
amended with the operative complaint in December 2011. Plaintiffs restrict this appeal to
four of the eleven causes of action, and we limit our description of the operative
complaint accordingly. We note, however, that the first three causes of action in the
operative complaint were styled as shareholder’s derivative actions on behalf of the
Dealership. These causes of action were dismissed by Billuni prior to trial, which
commenced in September 2012.
In the fifth cause of action, Billuni alleges Myers and Barker breached their
fiduciary duties to Billuni. Myers took interest free loans and loaned the Dealership
money at usurious rates. Myers charged personal expenses to the Dealership, including
his car racing hobby, his personal yacht, the salary of the yacht’s captain, personal legal
fees, and his children’s personal automobile expenses. Myers personally performed
accounting and tax services for the Dealership without a license and billed the Dealership
for those services. This and other misconduct led to working capital problems at the
Dealership and to the Dealership’s default on bank loans. Billuni made numerous efforts
to some relief as a result of the derivative suit, [he] remain[s] free to seek [relief] from the
court, or to commence a new arbitration.”
6
to address these problems (including the delivery of a letter directly to Barker), but no
4
one else (including Barker and Myers) was willing to act.
In the eleventh cause of action, Billuni petitioned for a writ of mandate,
civil penalty, and attorney fees pursuant to the Corporations Code, based on Myers’ and
Barker’s alleged failure to provide Billuni with his right to access and copy corporate
records as a shareholder of the Dealership. In March 2011, Billuni demanded an
inspection of the records and the Dealership rejected this demand. The rejection letter,
appended to the operative complaint, was signed by Myers on behalf of the Dealership.
The rejection letter cites the alleged noncompliance of the inspection demand with the
Corporations Code. This cause of action does not identify the Dealership as the party
against which Billuni was seeking mandamus relief, and the Dealership is not a
respondent to this appeal.
The ninth and tenth causes of action consist of breach of fiduciary duty
claims by Billuni and Toyescorp against Myers. Myers “breached his fiduciary duties of
good faith, fair dealing, loyalty and due care by causing [the Dealership] to cease all
purchases of service contracts and GAP insurance from Toyescorp.” “Myers’s failure to
cause [the Dealership] to purchase service contracts and GAP insurance from Toyescorp
constitutes a wrongful diversion of Toyescorp corporate opportunities.”
Ruling and Judgment
The court did not reach the merits of plaintiffs’ claims. Responding to an
oral motion during trial, the court referred the breach of fiduciary duty case regarding the
Dealership “back to the arbitration panel to decide what additional damages, if any,
should be recovered by” Billuni.
4
The derivative causes of action were based on the same alleged misconduct
that served as the basis for the fifth cause of action. The fifth cause of action merely
incorporates the same factual allegations that supported the derivative causes of action.
7
The court issued a statement of decision in January 2013. The court
concluded the arbitration clause was “sufficiently broad to encompass all claims set forth
in [the] Fifth and Eleventh Causes of Action. The Court makes no judgment on whether
the previous awards and/or rulings of the panel of three arbitrators in the parties’ JAMS
arbitration are res judicata. Rather, the Court merely finds that . . . Billuni expressly
waived his right to litigate the claims set forth in his Fifth and Eleventh Causes of Action
in this forum, as he expressly agreed to be bound by the binding arbitration provision in
the Buy/Sell Agreement. [¶] Upon further reflection, it is the Court’s decision that a
remand . . . is inappropriate and if the parties choose to stipulate to a remand, they of
[course] are free to do so, but the Court will not order it.”
As to the ninth and tenth causes of action, the court ruled that Toyescorp
did not possess a necessary certificate of qualification from the Secretary of State of
California. (Corp. Code, §§ 2105, 2203.) Moreover, Billuni had not alleged any
individual damages beyond those alleged on behalf of Toyescorp in the derivative action
and the derivative claims could only be brought with a certificate of qualification. The
court then entered judgment for defendants.
DISCUSSION
Although the parties frame the issues differently, we find it most productive
to separate this appeal into three discrete issues.
Billuni’s Breach of Fiduciary Duty Claim Against Myers and Barker
The primary question presented is whether Billuni’s breach of fiduciary
duty claims against Myers and Barker arise out of or relate to the buy/sell agreement and
8
5
are therefore subject to arbitration. We review this question de novo. (Greenspan v.
LADT, LLC (2010) 185 Cal.App.4th 1413, 1435-1437.) We summarily reject defendants’
argument that this issue is not appealable. The court entered judgment against Billuni on
all causes of action, including those the court deemed to be subsumed within the
arbitration of the sale of Billuni’s shares. (Code Civ. Proc., § 904.1, subd. (a)(1).)
The buy/sell agreement explicitly references the signatories’ (as well as the
Dealership’s) rights and obligations with regard to the buying and selling of shares of
stock in the Dealership upon various triggering events (e.g., the death of a shareholder,
the bankruptcy of a shareholder, the termination of employment of Billuni at the
Dealership). The buy/sell agreement also limits the signatories’ rights to transfer shares
of stock. In addition, the buy/sell agreement features non-compete and non-solicitation
provisions with regard to shareholders opting to transfer their shares. The buy/sell
agreement does not mention disputes regarding the corporate governance of the
Dealership or breach of fiduciary duty claims against corporate insiders.
But in contrast to the apparent narrowness of the subject matter of the
buy/sell agreement is the breadth of the arbitration clause. Certainly, derivative claims
alleged on behalf of a corporation against its majority shareholder relate to the valuation
of a minority shareholder’s stock. The success of derivative claims may significantly
affect the value of a company. (See Cotton v. Expo Power Systems, Inc. (2009) 170
Cal.App.4th 1371, 1374, 1380-1383 (Cotton) [in Corp. Code, § 2000 proceedings to buy
out disgruntled minority shareholder, court erred by confirming appraisers’ report fixing
fair market value of shares without taking into account the effect of a derivative action on
5
As noted above, section 37 of the buy/sell agreement provides, “Any
actions, controversies, claims, disputes and/or other factual or legal matters in question
arising out of or relating to this Agreement, or the alleged breach thereof, shall be settled
by arbitration conducted in accordance with the California Arbitration Act [citation] as
then in effect except as provided herein.” The arbitration clause “‘is very broad.’”
(Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 553, fn. 1.)
9
value of shares].) Moreover, Billuni’s purported individual claims are based on the same
conduct as the derivative claims (i.e., Myers’s allegedly improper removal of Dealership
assets). Thus, without considering the actual procedural history of this case, one might
ask what all the fuss is about. Billuni’s breach of fiduciary duty claims against Myers
and Barker are “actions, controversies, claims, disputes and/or other factual or legal
matters in question arising out of or relating to” the buy/sell agreement. The breach of
fiduciary duty claims against Myers and Barker (whether derivative or otherwise) should
have been arbitrated.
The fuss, of course, is that none of the individual parties (Myers, Billuni, or
Barker) initially attempted to arbitrate any of Billuni’s breach of fiduciary duty causes of
action. Billuni filed a demand for arbitration and lawsuit (almost) simultaneously, then
sought to abate the arbitration until his breach of fiduciary duty claims had been resolved
in court. Neither Billuni nor Barker moved to compel arbitration upon the filing of the
initial (or amended) complaint. Indeed, once Billuni took the position that the appraisers
should consider the derivative claims, Myers actively fought to keep all consideration of
the derivative claims out of the arbitration. One can certainly imagine a tenable scenario
in which an arbitration and appraisal could have occurred without reference to any of the
accusations of wrongdoing leveled by Billuni. The appraisers and arbitrators could have
valued the Dealership on the assumption that nothing untoward occurred, reserving the
breach of fiduciary duty claims for the courts; this may have been what the arbitrators
initially intended when they denied Billuni’s motion to abate the arbitration until the
completion of the civil action. (But see Cotton, supra, 170 Cal.App.4th at p. 1382
[noting that a sale of shares would eliminate standing of former shareholder to bring
derivative action, absent the creation of an equitable exception to this rule].)
Alternatively, the civil action could have proceeded with the arbitration held in abeyance;
10
the appraisers then could have considered the results of the litigation in their valuation of
6
Billuni’s shares.
The arbitrators, however, did not maintain strict separation of the fiduciary
duty claims from the valuation of Billuni’s shares. After denying the motion to abate the
arbitration, the arbitrators subsequently ruled (at the request of Billuni and over the
objection of Myers) that the appraisers could consider the derivative claims being made
by Billuni on behalf of the Dealership. The appraisal added Myers’s contested spending
back into the “pre-tax income” used to value the Dealership. Thus, for purposes of
valuing the Dealership, the appraisal essentially assumed that Billuni was right (at least in
part) on the merits of his breach of fiduciary duty claims. The $4.8 million received by
Billuni for his shares in the Dealership was inflated over what it would have been had the
appraisers assumed the propriety of all Myers’ expenditures of Dealership funds.
According to defendants and the trial court, it is now untenable for a court to try to decide
whether Billuni is entitled to additional damages above and beyond the credit he received
in the appraisal for Myers’s controversial spending habits. The fiduciary duty claims,
which fall within the scope of the arbitration agreement, were actually submitted to
arbitration (at least with regard to the derivative claims).
Billuni characterizes his fifth cause of action as an individual claim against
defendants, which can be distinguished from the derivative claims (on behalf of the
Dealership) that were considered (at least in part) by the appraisers. (See, e.g., Jones v.
H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107-112 [majority shareholders owe fiduciary
6
We cannot (and have not been asked to) review the arbitrator’s decision to
allow valuation of the Dealership to proceed before the resolution of the breach of
fiduciary duty claims. This is not an action to confirm, vacate, or correct the arbitral
award. Even if it were, “an arbitrator’s decision is not generally reviewable for errors of
fact or law, whether or not such error appears on the face of the award and causes
substantial injustice to the parties.” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 6.)
There is no indication in the record that Billuni petitioned the court to stay the arbitration
while the civil action proceeded.
11
duty to minority shareholders]; Jara v. Suprema Meats, Inc. (2004) 121
Cal.App.4th 1238, 1258-1260 (Jara) [passive minority shareholder may bring individual
action against other owners who allegedly disguised dividends as excessive executive
compensation].) Billuni claims he is not double dipping, but rather seeking damages
uniquely accruing to him as a result of his position as both the general manager of the
Dealership and a minority shareholder in the Dealership. Billuni’s expert was prepared to
testify that Billuni suffered lost compensation ($402,093) based on lower Dealership
profitability (allegedly caused by the removal of a working capital cushion by Myers) and
lost dividends (approximately $1.5 million) as a result of the money that was removed
7
from the Dealership by Myers that could have been paid as dividends. In short, Billuni
contends that because the appraisal did not address the categories of damage now
asserted, the issues decided at arbitration are separate from those to be decided in this
case.
7
Another category of damages sought by Billuni is the devaluation of his
stock by Myers’ alleged corporate looting. Billuni’s expert intended to testify about
additional amounts extracted from the company by Myers that were not identified until
after the arbitration concluded. Billuni’s counsel noted that his expert (who was one of
the three appraisers at the arbitration) “is going to testify . . . that these additional items
resulted in lost stock value.” “[P]art of his report does indeed address the lost value of
the stock.” “There is a pending claim for breach of fiduciary duty against Gary Myers.
And as part of the breach of fiduciary duty claim, one of the items of damages that we are
claiming because of his breaches is that the value of Mr. Billuni’s stock that he received
pursuant to the buy/sell agreement was diminished.” This category of asserted damages
undermines Billuni’s assertion that the fifth cause of action is not a derivative claim.
(See Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312 [“Under California law, ‘a
shareholder cannot bring a direct action for damages against management on the theory
their alleged wrongdoing decreased the value of his or her stock (e.g., by reducing
corporate assets and net worth)’”].)
12
We agree with the trial court’s determination that Billuni may not seek
relief for his breach of fiduciary duty claims in court. Billuni successfully and properly
submitted the derivative claims to the arbitrators and appraisers. The appraisers clawed
back the money allegedly misappropriated by Myers for purposes of valuing Billuni’s
shares. Myers’s improper use of Dealership funds was the allegation at the very heart of
Billuni’s breach of fiduciary duty causes of action, whether categorized as derivative or
individual. That Billuni now seeks additional damages based on these same alleged
8
breaches of fiduciary duty is irrelevant. These additional damages needed to be
addressed in arbitration.
Billuni cannot be allowed to eat his cake and have it too by partially
submitting the derivative claims to arbitration and reserving the individual breach of
fiduciary duty claims for the lawsuit. Without reviewing the merits of the appraisal, it is
impossible for the trial court or this court to fairly assess the proper compensation to
Billuni (assuming the merits of his claims that Myers improperly removed Dealership
assets). Essentially, Billuni wants to argue with the conclusions of the appraisal by
inserting new evidence bearing on the value of the Dealership. Billuni also wants the
trial court to consider whether the Dealership would have been more profitable (thereby
resulting in higher compensation for Billuni) had Myers never improperly removed
Dealership assets. Arguably, Billuni also wants to double count Myers’s allegedly
improper spending by allowing the money to come back into the Dealership for purposes
of the appraisal but then to go back out to Billuni as dividends that should have been
8
Although arguably not on point because of Billuni’s insistence that the fifth
cause of action is an individual rather than derivative claim, we note that a plaintiff is not
entitled to split a cause of action into multiple lawsuits or, as relevant here, into one
lawsuit and one arbitration. (See Cuevas v. Truline Corp. (2004) 118 Cal.App.4th 56, 61-
62 [holding plaintiff did not improperly split cause of action into two lawsuits because
arbitration concerned different parties than court case]; cf. Harper v. Ultimo (2003) 113
Cal.App.4th 1402, 1411-1412 [proper to refuse split of interconnected substantive claims
between arbitration and superior court].)
13
awarded to Billuni. The merits of Billuni’s breach of fiduciary duty claims are now
necessarily part of the arbitration. (Cf. Thibodeau v. Crum (1992) 4 Cal.App.4th 749,
755 [“arbitrating parties are obliged . . . to place before their arbitrator all matters within
the scope of the arbitration, related to the subject matter, and relevant to the issues”].)
Like the trial court, we decline to address whether the arbitration award
precludes additional recovery by Billuni in arbitration; this is a question that can only be
answered in arbitration. Similarly, we decline to wade into the controversy over whether
Billuni’s fifth cause of action is properly characterized as an individual or derivative
claim.
Finally, we reject Billuni’s assertions that defendants waived or forfeited
their right to arbitrate Billuni’s breach of fiduciary duty claims. It is true defendants did
not move to compel arbitration until trial had commenced and, even then, defendants did
so orally rather than by a written demand for arbitration as contemplated by the buy/sell
agreement. But it must be recalled that it was not obvious at the outset of the case that
the arbitration would include consideration of the fiduciary duty claims. And it must
further be recalled that Billuni successfully advocated for the inclusion of the derivative
claims within the scope of the arbitration for purposes of valuing his shares. Myers
opposed expansion of the arbitration to include consideration of the derivative claims by
the appraisers. He lost this fight when the arbitration award issued in March 2012. Trial
commenced and quickly concluded in September 2012, six months later. Although not a
motion to compel arbitration, the issue of the scope of arbitration was raised in a pretrial
motion in limine to exclude evidence of damages to Billuni as a shareholder, a motion
that was ultimately granted. As the issues became clearer to the court as the trial
progressed, defendants explicitly asked the court to “order the parties to resolve these
disputes to the degree that they feel they must by way of the arbitration process.” This
was not unreasonable delay as a matter of law under the unusual circumstances of this
case. (See St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187,
14
1195 [strong policy in favor of arbitration; “waivers are not to be lightly inferred and the
party seeking to establish a waiver bears a heavy burden of proof”]; Sobremonte v.
Superior Court (1998) 61 Cal.App.4th 980, 991 [“Whether a party to an arbitration
agreement has waived the right to arbitrate is a question of fact, and a trial court’s
determination on that matter will not be disturbed on appeal if supported by substantial
evidence”].)
Billuni’s Petition for Writ of Mandate to Inspect Corporate Records
We agree with Billuni that the eleventh cause of action does not arise out of
or relate to the buy/sell agreement. Well after the parties had begun their dispute (and
just before the filing of the initial complaint), Billuni sought to exercise his right as a
shareholder to inspect corporate records. This cause of action should not be arbitrated.
Defendants do not mount a serious defense of the court’s ruling on this point.
But there are three obvious problems with Billuni’s request for mandamus
relief. First, he is no longer a shareholder of the Dealership and his request for
mandamus relief is therefore moot. (Cf. Chantiles v. Lake Forest II Master Homeowners
Assn. (1995) 37 Cal.App.4th 914, 920-922 [former director’s petition for writ of mandate
to inspect records was moot because she was no longer a director, but court exercised
discretion to review issue anyway].) Second, Billuni did not seek this relief against the
Dealership, the party that denied his request and the proper target of a petition for writ of
mandate to inspect corporate records. (Corp. Code, §§ 1600, 1601; see Corp. Code,
§ 1604 [“In any action or proceeding under Section 1600 or 1601, if the court finds the
failure of the corporation to comply with a proper demand thereunder was without
justification, the court may award an amount sufficient to reimburse the
shareholder . . . for the reasonable expenses incurred by such holder, including attorneys’
fees, in connection with such action or proceedings”].) Third, Billuni’s request
“demanded a performance to which a shareholder is not entitled by statute, i.e., to have
15
the current or monthly financial statements assembled and delivered to the shareholder.
This right of actual delivery is guaranteed only by section 1501 with respect to the annual
9
report.” (Jara, supra, 121 Cal.App.4th at p. 1264.) Corporations Code section 1601
affords “no more than a right to inspect and copy records at the company office.” (Id. at
p. 1263.) The corporation has no “affirmative duty to respond to a defective written
demand.” (Id. at p. 1264.)
Not much attention was paid to this cause of action below. The court swept
this cause of action in with the breach of fiduciary duty cause of action in its analysis.
But we reject Billuni’s contention that the shortcomings in the eleventh cause of action
should be ignored because they were not the focus of the court’s analysis below. Billuni
has no hope of succeeding with his request for mandamus relief in the courts.
Breach of Fiduciary Duty Claims Against Myers Regarding Toyescorp
As previously explained, Toyescorp is a corporation owned equally by
Billuni and Myers, which sold reinsurance protection to Portfolio, the favored warranty
and GAP insurer at the Dealership. The operative complaint alleged that Myers diverted
Toyescorp’s business after the fallout between Billuni and Myers, thereby breaching his
fiduciary duties to Toyescorp and Billuni.
The court dismissed the breach of fiduciary duty claims (whether brought
directly by Toyescorp or brought as a derivative action on behalf of Toyescorp by
Billuni) based on Toyescorp’s failure to obtain a certificate of qualification from the
California Secretary of State. “A foreign corporation shall not transact intrastate business
without having first obtained from the Secretary of State a certificate of qualification.”
9
Billuni’s letter demanded “copies of all the monthly statements . . . for the
years 2010 and 2011. To avoid having to prepare a new request each and every month,
[Billuni proposed] that [the Dealership] agree to provide [Billuni] with each monthly
statement until such time as [he is] no longer a shareholder.”
16
(Corp. Code, § 2105, subd. (a).) “‘[T]ransact intrastate business’ means entering into
repeated and successive transactions of its business in this state, other than interstate or
foreign commerce.” (Corp. Code, § 191, subd. (a).) A corporation that fails to obtain a
certificate of qualification “shall not maintain any action or proceeding upon any
intrastate business so transacted in any court of this state . . . .” (Corp. Code, § 2203,
subd. (c).)
“The failure of a foreign corporation to qualify to transact business prior to
commencing an action is a matter of abatement of the action. [Citation.] Once a
nonqualified foreign corporation commences an action regarding intrastate business, the
defendant may assert by demurrer or as an affirmative defense in the answer the lack of
capacity to maintain an action arising out of intrastate business. [Citation.] . . . The
defendant bears the burden of proving: (1) the action arises out of the transaction of
intrastate business by a foreign corporation; and (2) the action was commenced by the
foreign corporation prior to qualifying to transact intrastate business. [Citation.] If the
defendant establishes the bar of the statute, then the foreign corporation plaintiff must
comply with section 2203, subdivision (c). Ordinarily, the matter should be stayed to
permit the foreign corporation to comply. If the foreign corporation plaintiff
complies . . . by qualifying and paying fees, penalties and taxes, it may maintain the
action. If the foreign corporation fails to comply, the matter should be dismissed without
prejudice.” (United Medical Management Ltd. v. Gatto (1996) 49 Cal.App.4th 1732,
1740.)
Toyescorp concedes it is a foreign corporation. Billuni did not know if
Toyescorp was registered with the California Secretary of State to do business in
California, but agreed with the following question: “Isn’t it true . . . that [Toyescorp]
specifically [does not] want to be listed with the Secretary of State because [it does not]
want to come under the auspices of the California Insurance Commissioner?” We
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conclude there is substantial evidence for the conclusion that Toyescorp does not have a
certificate of qualification.
The crux of the dispute is whether this is an action or proceeding “upon any
intrastate business” (Corp. Code, § 2203, subd. (c)). In concluding this action was upon
intrastate business, the court reasoned that all the insurance transactions with customers
occurred at the Dealership in California, Portfolio had a California agent responsible for
this line of business, and Billuni and Myers (who ultimately benefited from the sale of
Portfolio insurance at the Dealership through their ownership interests in Toyescorp)
were also California residents. While acknowledging these facts, Toyescorp counters
that this is a corporate law dispute between corporate insiders, not one relating to the
business of reinsuring Portfolio’s policies. (See United Systems of Arkansas, Inc. v.
Stamison (1998) 63 Cal.App.4th 1001, 1007 [holding transactions at issue did not amount
to intrastate business and plaintiff therefore did not require certificate of qualification to
maintain action].) The parties’ briefing and our research do not disclose a clear answer as
to which approach to this question is correct.
We conclude the court erred in dismissing Toyescorp’s claims on an
alternative ground. The certificate of qualification affirmative defense is a plea in
abatement, subject to waiver for failure to raise it at the earliest opportunity. (See 5
Witkin, Cal. Procedure (5th ed. 2008) Pleading, §§ 1129-1131, 1134, pp. 556-560; see
Washington Mutual Bank v. Blechman (2007) 157 Cal.App.4th 662, 669-670 [lack of
capacity of corporation to sue “is a plea in abatement that ‘“must be raised by defendant
at the earliest opportunity or it is waived”’”].) Myers did not raise this defense in a
demurrer or in his answers to the two complaints filed by plaintiffs. Instead, Myers first
raised this defense in a motion in limine, which was opposed in part by Toyescorp on the
ground that the issue had not been raised in a timely fashion. Toyescorp raised this
ground for reversal in its opening brief. Myers provides no authority for the claim that
this ground for dismissal (or abatement) may be raised at trial.
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DISPOSITION
The judgment is reversed with regard to the dismissal of the ninth and tenth
causes of action brought by plaintiffs against Myers. The judgment is otherwise
affirmed. The parties shall bear their own costs on appeal.
IKOLA, J.
WE CONCUR:
O’LEARY, P. J.
THOMPSON, J.
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