Trunzo v. Herling CA2/2 ( 2015 )

Filed 12/10/15 Trunzo v. Herling CA2/2
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication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 TWO
MICHAEL TRUNZO et al., B260419
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No. KC062480)
v.
WAYNE HERLING et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los Angeles County.
Dan T. Oki, Judge. Affirmed.
David Boros, for Plaintiffs and Appellants.
Kate M. Neiswender, for Defendants and Respondents.
* * * * * *
Two creditors of a corporation sued that corporation and three members of its
board of directors for breaching three promissory notes, and sued the directors for
wrongfully concealing facts when soliciting the loans under one of the notes as well as
for tortiously interfering with the corporation’s obligations under another of the notes.
The individual board members moved for summary judgment, and the trial court granted
their motion and dismissed them from the case. We conclude that there was no error, and
affirm.
FACTS AND PROCEDURAL BACKGROUND
I. Facts
Defendant International Environmental Solutions Corp. (IES) is a corporation
formed in 2000 by Karen Bertram (Bertram), Cameron Cole and Toby Cole. IES was
formed to design, manufacture and sell “pyrolytic” technology—that is, machines that
convert “waste to energy” by generating electricity in the course of compacting waste.
Toward that end, IES eventually came to own seven patents and two patent applications
in the United States and 44 patents or patent applications in other countries. By 2012,
IES had issued 25,000 shares of stock to 87 different shareholders.
Defendants Diana Dimitruk (Dimitruk), John Hardy (Hardy), and Wayne Herling
(Herling) (collectively, individual defendants) served on IES’s board of directors.
Dimitruk and Hardy served on the board from June 2010 until June 2012. Herling
purchased the right to participate on IES’s board in 2004, but only regularly served on the
board from January 2010 through June 2012. Dimitruk owned 92.5 shares of IES stock;
Hardy, 4 shares; and Herling, 3,250 shares. During the individual defendants’ tenure on
IES’s board, IES held regular shareholder and board meetings, and separately maintained
its assets and cash. During that same period, the Board made no distribution to IES
shareholders, no distribution of corporate assets to shareholders, and no loans or
guarantees to any IES director or officer. In November 2011, the board—which at that
time included all three individual defendants—voted to remove Bertram, who had been
serving as its president since its creation, for being uncooperative and for suspected
malfeasance.
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Because the process of developing pyrolytic technology and making it
commercially viable is evidently a long one, IES kept solvent in the meantime by
borrowing money. Dimitruk loaned IES $100,000, Hardy loaned $160,000, and Herling
loaned $610,000.
Plaintiff Ultimate Energy Group, LLC (Ultimate), is a New Zealand company
interested in distributing pyrolytic technology; it made two loans to IES memorialized in
two promissory notes—a $500,000 loan in early 2009, and an $86,000 loan in late 2009.
The $500,000 note granted Ultimate (1) the right to repayment of its loan or (2) the
option, upon payment of an additional $10 million to IES, to acquire an exclusive license
to market IES’s commercially viable machines in 16 states along the eastern seaboard of
the United States.
Plaintiff Michael Trunzo (Trunzo) is one of Ultimate’s shareholders. He
personally loaned IES a total of approximately $368,000 under the terms of a “Master
Promissory Note.” It is unclear whether IES adopted a revised Master Promissory Note.
Trunzo says that Dimitruk and Herling encouraged him to made additional loans,
although they deny ever doing so.
To explore further funding, IES signed a “Heads of Agreement” with a New
Zealand company called Sustainable Equities in May 2011. Under that agreement, IES
and Sustainable Equities gave themselves until June 30, 2011 to conduct due diligence
and, if feasible, to “exercise best endeavors to prepare and enter into legally binding more
detailed documentation” that would form a new corporation that was to (1) be funded by
a $3 million cash infusion from Sustainable Equities and (2) grant Sustainable Equities,
among other things, a nonexclusive license to market IES’s pyrolytic technology in the
United States. By its terms, the Heads of Agreement was an agreement-to-agree, not a
binding contract. IES and Sustainable Equities did not enter into a further contract by the
June 30, 2011 deadline. Trunzo listened in on IES’s board meetings at that time and may
have also served as one of its financial advisors; in either case, Trunzo knew about the
Heads of Agreement.
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IES was nevertheless unable to remain afloat financially. In November 2011, IES
filed for voluntary bankruptcy, but later dismissed its case. In March 2012, Bertram and
others filed an involuntary petition to put IES in bankruptcy. The petition was granted
and, in June 2012, a bankruptcy trustee was appointed to manage IES. The trustee
eventually proposed—and the bankruptcy court eventually approved—a plan by which
IES’s intellectual property would be sold at a foreclosure sale to a newly created
company that would be co-owned by IES and the successful bidder at the sale, and the
new company would license its intellectual property rights to Sustainable Equities.
IES did not repay any of the loans to the individual defendants, to Trunzo or to
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Ultimate.
II. Procedural Background
In the operative second amended complaint (SAC), Trunzo and Ultimate sued IES
and the individual defendants on a variety of contract-based claims. Specifically,
Ultimate sued for breach of the $500,000 note (count 1) and the $86,000 note (count 3),
for common counts as to both notes (count 4), and for breach of the implied covenant of
good faith and fair dealing as to both notes (count 2). Trunzo sued for breach of the
$368,000 note (count 5) and for common counts as to that note (count 6). Trunzo also
sued the individual defendants for concealing the Heads of Agreement while soliciting
him for funds (count 7). And Ultimate sued the individual defendants for interfering with
its right to obtain an exclusive license to market IES’s pyrolytic machines by entering
into the Heads of Agreement (count 8). Among other things, Trunzo and Ultimate sought
repayment of their loans, $5 million for the loss of the marketing option, and $5 million
in punitive damages.
The individual defendants moved for summary judgment on the ground that they
were not personally liable on any of the contract-based claims, and that they neither
concealed nor caused any interference with Ultimate’s licensing rights because the Heads
1 Plaintiffs presented evidence that Herling was repaid $83,000, but the trial court
sustained an objection to this evidence, and plaintiffs have not contested that ruling on
appeal.
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of Agreement was never more than an agreement-to-negotiate. Ultimate and Trunzo
opposed the motion, pointing to various factual disputes and asserting that the individual
defendants engaged in conduct that made them personally liable for the contract and tort
claims. The trial court granted the motion. The court entered judgment for the individual
defendants, and awarded attorney’s fees and costs totaling $21,043.76.
Trunzo and Ultimate filed a timely notice of appeal.
DISCUSSION
A trial court is to grant summary judgment when “all the papers submitted show
that there is no triable issue as to any material fact and that the moving party is entitled to
judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) In reviewing a trial
court’s grant of summary judgment, we consider all of the evidence before the trial court
except evidence to which an objection was made and sustained, liberally construe that
evidence in support of the party opposing summary judgment, and resolve any doubts
concerning that evidence in favor of that party. (Hartford Casualty Ins. Co. v. Swift
Distribution, Inc. (2014) 59 Cal. 4th 277, 286.) Our review is de novo. (Ibid.)
I. Contract-Based Causes of Action (Counts 1-6)
The SAC alleges six different contract-based causes of action (namely, counts 1-6)
on three different theories (namely, breach of contract, common counts, and breach of the
implied covenant of good faith and fair dealing). To establish a breach of contract,
Trunzo and Ultimate (collectively, plaintiffs) must prove (1) a contract, (2) their
performance or an excuse for nonperformance, (3) defendant’s breach, and (4) resulting
damages. (Kumaraperu v. Feldsted (2015) 237 Cal. App. 4th 60, 70.) The two common
counts claims involve the same three promissory notes underlying the three breach-of-
contract claims, so also require proof of a contract and breach thereof. (See McBride v.
Boughton (2004) 123 Cal. App. 4th 379, 394 [noting how a common count claim rises or
falls on viability of breach of contract cause of action based on same facts].) Similarly,
Ultimate’s breach of implied covenant claim necessarily presupposes the existence of a
contract. (Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal. App. 4th
1230, 1244.) Consequently, the propriety of the trial court’s summary judgment ruling
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on all six contract-based causes of action boils down to whether plaintiffs have raised any
triable issues of fact as to whether the individual defendants are liable for the breach of
any of the three promissory notes. Plaintiffs have not done so.
The individual directors are not liable under the plain terms of the promissory
notes. Ultimate’s two breach-of-contract claims spring from the two notes issued in
2009, and it is undisputed that those notes are signed by Ultimate and IES—not any of
the individual defendants. Similarly, Trunzo’s breach-of-contract claim springs from the
Master Promissory Note which, again, is between Trunzo and IES—not any of the
individual defendants. Indeed, the signature for IES on each of the three promissory
notes is Bertram’s, not any of the individual defendant’s.
The individual directors are also not liable on the promissory notes under any
other theory. A corporation’s directors are generally not liable to the corporation’s
creditors. (Cf. Corp. Code, § 316; Berg & Berg Enterprises, LLC v. Boyle (2009) 178
Cal. App. 4th 1020, 1040-1041 (Berg & Berg Enterprises); Frances T. v. Village Green
Owners Assn. (1986) 42 Cal. 3d 490, 505-506 (Frances T.).) There are exceptions to this
rule, but the undisputed facts demonstrate that none of the three exceptions invoked by
Trunzo or Ultimate applies in this case.
A corporate director is jointly and severally liable to a corporation’s creditors if
the director (1) authorized the distribution (such as dividends) to corporate shareholders
while the corporation’s liabilities exceeded its assets, (2) authorized the distribution of
corporate assets to shareholders “after institution of dissolution proceedings of the
corporation” without “providing for all known liabilities of the corporation,” or
(3) authorized the corporation to make loans or guarantees to any corporate director or
officer. (Corp. Code, § 316; see also §§ 315, 500 & 501.) The undisputed facts indicate
that none of the individual defendants, during their tenure on IES’s board, authorized any
distributions to IES shareholders, any distribution of IES assets, or any loan or guaranty
by IES.
A corporate director may also be held personally liable for a corporation’s debts
when the corporation is the director’s “alter ego.” (Hasso v. Hapke (2014) 227
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Cal. App. 4th 107, 155.) However, courts may make a finding of “alter ego” only if
(1) there is a “unity of interest and ownership between the corporation and its equitable
owner [such that] the separate personalities of the corporation and the shareholder do not
in reality exist,” and (2) failure to impose alter ego liability leads to “an inequitable
result.” (Ibid.) Here, it is undisputed that the individual defendants owned less than 14
percent (3,346.5 out of 25,000 shares) of IES’s stock; in no sense did they “own” IES.
What is more, it is undisputed that IES operated as a separate entity, holding shareholders
meetings and keeping separate accounts. In short, there is no evidence of a “unity of
interest and ownership.”
A corporate director may alternatively be personally liable in tort for certain of his
or her actions. As a general matter, a corporate director only owes fiduciary duties to the
corporation and its shareholders. (Berg & Berg Enterprises, supra, 178 Cal.App.4th at
p. 1037.) However, under the “trust fund” doctrine of California law, a corporate director
also owes a fiduciary duty to a corporation’s creditors to avoid “actions that divert,
dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors’
claims” if the corporation is “insolvent” and if the director’s actions fall outside the
“business judgment rule” (that is, the director’s decision is not made in good faith or
while laboring under a conflict of interest). (Id. at pp. 1040, 1045-1047; Corp. Code,
§ 309 [codifying business judgment rule].) A director is also liable to third parties in tort
if he or she “participate[s] in [a tort] or authorize[s] or direct[s] that it be done.” (PMC,
Inc v. Kadisha (2000) 78 Cal. App. 4th 1368, 1379; Frances T., supra, 42 Cal.3d at p. 508
[“a plaintiff must . . . show that the director specifically authorized, directed or
participated in the allegedly tortious conduct”]; Armato v. Baden (1999) 71 Cal. App. 4th
885, 894-895; Michaelis v. Benavides (1998) 61 Cal. App. 4th 681, 686-687.) These
doctrines do not apply here for two reasons. To begin, plaintiffs never pled these
theories. Further, the gravamen of plaintiffs’ claims is that the individual defendants
interfered with Ultimate’s option to acquire IES’s intellectual property by concealing and
entering into the Heads of Agreement, but the undisputed facts show that the Heads of
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Agreement was a nonbinding, agreement-to-agree that never ripened into a contract and
thus never caused any interference with, or disruption of, Ultimate’s option.
Plaintiffs make four further arguments as to why they have shown a triable issue
of material fact that should preclude summary judgment.
First, plaintiffs broadly complain that the individual defendants—and, by
extension, the trial court—erred in focusing on “the minutiae of when each [defendant]
was a director and voted on what.” But under the doctrines creating personal liability to
individual corporate directors, each individual’s status and the corporate actions he or she
authorized are central to the question of liability; under these doctrines, the details matter.
Second, plaintiffs argue that the business judgment rule does not apply (or does
not apply with full force) when corporate directors grant themselves special treatment
(Gaillard v. Natomas Co. (1989) 208 Cal. App. 3d 1250, 1265-1266 [directors voting to
grant themselves special severance packages]) or adopt defensive measures to fend off
hostile action by other corporations and thereby to protect their own jobs (Katz v.
Chevron Corp. (1994) 22 Cal. App. 4th 1352, 1367). The argument does not alter our
analysis because the business judgment rule only comes into play under the tort theories
described above, and those theories were never pled. Moreover, the individual
defendants did not in any event grant themselves special treatment (because they, like the
plaintiffs, are creditors of IES who have collected none of their debt) and did not take any
defensive actions (because the Heads of Agreement was never binding).
Third, plaintiffs point to several factual disputes that they contend preclude
summary judgment. Specifically, they point to conflicts in the evidence regarding
(1) whether Trunzo served as a “financial advisor” to IES or instead just listened in on
IES board meetings, (2) whether the IES board adopted a second, revised master
promissory note without first advising Trunzo, and (3) whether the individual defendants
encouraged Trunzo to loan more money to IES under the master promissory note. None
of these issues, however, is relevant to the analysis set forth above; as a result, they do
not preclude summary judgment. (Christina C. v. County of Orange (2013) 220
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Cal. App. 4th 1371, 1379 [“only material factual disputes bear any relevance: ‘no amount
of factual conflict upon other aspects of the case will preclude summary judgment’”].)
Lastly, plaintiffs note that the plan the bankruptcy trustee proposed and the
bankruptcy court approved to sell IES’s intellectual property to a newly created company
co-owned by IES is strikingly similar to the Heads of Agreement. But what the
bankruptcy trustee chooses to do in his independent judgment (and with a court’s
approval) does not retroactively impose liability on the individual directors for signing a
nonbinding, agreement-to-agree with similar terms. Plaintiffs also cite Davis v. Yageo
Corp. (9th Cir. 2007) 481 F.3d 661, but that decision simply held that the pendency of a
bankruptcy proceeding does not automatically preempt a state claim for the bad faith
invocation of bankruptcy jurisdiction (id. at p. 679); Davis is accordingly irrelevant.
For these reasons, the trial court properly dismissed the individual defendants from
the contract-based claims.
II. Tort-Based Causes of Action (Counts 7 and 8)
A. Concealment (count 7)
Trunzo sued the individual defendants for concealing from him the Heads of
Agreement while soliciting additional funds from him. To prevail on a claim for tortious
concealment, a plaintiff must establish that “‘(1) the defendant . . . concealed or
suppressed a material fact, (2) the defendant [was] under a duty to disclose that fact to the
plaintiff, (3) the defendant . . . intentionally concealed or suppressed the fact with the
intent to defraud the plaintiff, (4) the plaintiff [was] unaware of the fact and would not
have acted as he did if he had known of the concealed or suppressed fact, and (5) as a
result of the concealment or suppression of the fact, the plaintiff must have sustained
damage.’” (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal. App. 4th 1105,
1130, quoting Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal. App. 4th
603, 612-613.) In this case, Trunzo himself admits he was aware of the Heads of
Agreement, which makes it difficult for him to establish that he was “unaware of [that]
fact.” Even if we construe Trunzo’s argument to mean that he was unaware of the Heads
of Agreement at the time he made some of his earlier loans, Trunzo still cannot establish
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that he “sustained damage” “as a result of the concealment.” That is because the
undisputed facts show that the individual defendants only approved the nonbinding
Heads of Agreement; they never authorized any followup contract that actually assigned
IES’s rights to market to anyone else. Trunzo accordingly cannot prove that he was
harmed by the individual defendants’ failure to disclose the Heads of Agreement. (See
Henson v. C. Overaa & Co. (2015) 238 Cal. App. 4th 184, 192 [summary judgment
appropriate where defendant “offer(s) affirmative evidence that negates an essential
element of the plaintiff’s cause of action”].)
B. Intentional interference with a contract (count 8)
Ultimate sued the individual defendants for intentionally interfering with its
$500,000 promissory note with IES because the Heads of Agreement granted to
Sustainable Equities some of the same intellectual property rights that the note had
granted Ultimate the exclusive option to acquire. To prevail under this theory, Ultimate
must show: “‘(1) a valid contract between a plaintiff and a third party; (2) defendant’s
knowledge of th[e] contract; (3) defendant’s intentional acts designed to induce a breach
or disruption of the contractual relationship; (4) actual breach or disruption of the
contractual relationship; and (5) resulting damage.’” (Quelimane Co. v. Stewart Title
Guaranty Co. (1998) 19 Cal. 4th 26, 55, quoting Pacific Gas & Electric Co. v. Bear
Stearns & Co. (1990) 50 Cal. 3d 1118, 1126.) Because, as explained above, the
undisputed facts show that the Heads of Agreement was not binding and that no binding
contract assigning rights to Sustainable Equities was ever signed, Ultimate cannot
establish “actual breach or disruption of the contractual relationship” embodied in the
IES-Ultimate promissory note.
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DISPOSITION
The judgment is affirmed. Defendants are entitled to their costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
_______________________, J.
HOFFSTADT
We concur:
____________________________, Acting P. J.
ASHMANN-GERST
____________________________, J.
CHAVEZ
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