Thomas Hubbard v. Phil's Bbq of Point Loma ( 2015 )

FILED
NOT FOR PUBLICATION JUL 08 2015
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
THOMAS HUBBARD, No. 13-55861
Plaintiff - Appellee,
MEMORANDUM*
v.
PHIL’S BBQ OF POINT LOMA, INC., et
al.,
Defendants - Appellants.
THOMAS HUBBARD, No. 13-56131
Plaintiff - Appellee,
MEMORANDUM*
v.
PHIL’S BBQ OF POINT LOMA, INC., et
al.,
Defendants - Appellants.
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
Appeal from the United States District Court
for the Southern District of California
Hon. Larry A. Burns, District Judge, Presiding
Argued and Submitted June 3, 2015
Pasadena, California
Before: THOMAS, Chief Judge, and CALLAHAN, Circuit Judge, and KORMAN,
Senior District Judge.**
In April 2006, Thomas Hubbard, Phillip Pace, and Jeffrey Loya signed a
shareholders agreement, formed Phil’s BBQ of Point Loma, Inc., and elected “S
corporation” status. In such a corporation shareholders must pay personal income tax
on corporate profits, even if no profits or other income is disbursed to the
shareholders. To ensure that Pace, Loya, and Hubbard could meet this obligation, the
shareholders agreement provided that Phil’s BBQ would issue dividends to
shareholders equal to 25% of Phil’s BBQ’s quarterly profits.
The parties also entered into a consulting agreement, pursuant to which
Hubbard would perform certain tasks related to the operation of the corporation in
exchange for a specified monthly compensation. The agreement further provided for
attorney’s fees to the “prevailing party” in the event of a dispute “arising under, or in
connection with, the Agreement.”
**
The Honorable Edward R. Korman, Senior United States District
Judge for the Eastern District of New York, sitting by designation.
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Relations between the parties ultimately broke down. When Phil’s BBQ
stopped paying Hubbard in accordance with the consulting agreement, he filed the
instant complaint against Pace, Loya, and Phil’s BBQ. As subsequently amended, the
complaint sought damages for breach of the parties’ consulting agreement and
shareholders agreement. After a bench trial, the district judge awarded Hubbard
damages and attorney’s fees for breach of the consulting agreement. The district
judge also granted Hubbard’s motion for summary judgment, awarding him damages
based on the defendants’ failure to issue dividends in accordance with the
shareholders agreement.
In holding that Hubbard was entitled to counsel fees because he prevailed on
his claim for breach of the consulting agreement, the judge analyzed applicable
California law and observed that Hubbard won on nearly every issue litigated. See
Hsu v. Abbara, 9 Cal. 4th 863, 873-77 (1995). We do not agree with the defendants
that, under the circumstances here, Hubbard’s award on his claims for breach of the
consulting agreement was insufficient to justify an award of counsel fees. See, e.g.,
Scott Co. of Cal. v. Blount, Inc., 20 Cal. 4th 1103, 1108-09 (1999).
Nor did the district judge err in awarding damages under the shareholders
agreement. The award of damages represented the amount of taxes that Hubbard paid
on profits earned by Phil’s BBQ. The three defendants challenge the enforcement of
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the provision in the shareholders agreement mandating dividend disbursement to
offset tax liability. They rely on California Corporations Code § 300(b), which
provides that shareholders agreements in “section 158 close corporations” are
permitted to interfere with the powers typically afforded to a board of directors, such
as the board’s power to declare dividends in its discretion. The negative implication,
they suggest, is that shareholders agreements in non “section 158 close corporations”
are not permitted to mandate dividend disbursement. Because Phil’s BBQ was not
technically a “section 158 close corporation,” the defendants argue that the mandatary
provision in the parties’ shareholders agreement violates public policy.
The defendants cite no case holding that shareholders agreement provisions of
the kind at issue here violate the public policy of California. Indeed, California courts
have historically held, “unless it is entirely plain that a contract is violative of sound
public policy, a court will never so declare. . . . ‘No court ought to refuse its aid to
enforce a contract on doubtful and uncertain terms.’” Moran v. Harris, 131 Cal. App.
3d 913, 919-20 (Cal. Ct. App. 1982) (quoting Stephens v. So. Pac. Co., 109 Cal. 86,
89 (1895)). Even where a contract is plainly illegal, the rule that such a contract is
void “is not an inflexible one to be applied in its fullest rigor under any and all
circumstances. A wide range of exceptions has been recognized.” Asdourian v. Araj,
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696 P.2d 95, 105 (Cal. 1985), superseded on other grounds Cal. Bus. & Prof. Code
§ 7031.
Phil’s BBQ was, for practical purposes, a close corporation because it had only
three shareholders as well as severe limitations on the transferability of its shares.
Indeed, as conceded at oral argument, only one formality prevents Phil’s BBQ from
falling squarely within § 158: Phil’s BBQ’s articles of incorporation failed to include
a short statement that the number of shareholders cannot exceed 35 and that “[t]his
corporation is a close corporation.” Cal. Corp. Code § 158. Under all of these
circumstances, we are unable to conclude that the contract would be held
unenforceable as contrary to public policy.
AFFIRMED.
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