James v. Leavitt Group Agency of San Diego CA4/1 ( 2022 )

Filed 1/5/22 James v. Leavitt Group Agency of San Diego 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for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
THOMAS JAMES, D077353
Plaintiff and Respondent,
v. (Super. Ct. No. 37-2015-
00021531-CU-WT-CTL)
LEAVITT GROUP AGENCY OF SAN
DIEGO, INC. et al.,
Defendants and Appellants.
APPEAL from a judgment and orders of the Superior Court of San
Diego County, Judith F. Hayes and Kenneth J. Medel, Judges. Affirmed.
Silverstein & Huston, Steven A. Silverstein, Mark W. Huston and
Robert I. Cohen for Defendants and Appellants.
John J. Freni for Plaintiff and Respondent.
INTRODUCTION
Thomas James, the president and minority shareholder of a local
insurance agency, was terminated pursuant to a written employment
agreement providing he would not be terminated except for good cause. He
later discovered the agency’s corporate parent, Leavitt Group Enterprises,
Inc. (LGE), had negotiated to sell his shares of stock to his replacement at a
higher price than it had previously offered him. He sued the agency, Leavitt
Group Agency of San Diego (the Agency), and LGE (together, Defendants) for
breach of the employment agreement and intentional interference with the
employment agreement. He also asserted claims for breach of fiduciary duty,
reformation of contract, and declaratory relief, based on events relating to
transactions in which LGE had unfairly reduced his ownership interest in the
Agency.
In the first phase of a bifurcated trial, the jury found in favor of James
on his breach of contract cause of action against the Agency and in favor of
LGE on the intentional interference with contract claim. The equitable
claims were then tried in a bench trial before Judge Judith F. Hayes. Judge
Hayes issued a tentative statement of decision in favor of James. However,
after Defendants filed objections to the tentative statement of decision, and
before they were ruled on by Judge Hayes, the case was reassigned to a
different judge, apparently because Judge Hayes retired. Ultimately, the
case was assigned to Judge Kenneth J. Medel.
Defendants filed a motion for partial new trial in which they argued
Judge Hayes’s unavailability to rule on their objections and finalize the
statement of decision mandated a new bench trial. Judge Medel denied this
motion, reasoning that the procedural error was harmless because the
tentative statement of decision fully articulated Judge Hayes’s reasoning and
gave a complete and adequate basis for appellate review. Judge Medel then
entered judgment based on the tentative statement of decision. After
judgment was entered, Defendants filed another motion for new trial as well
as a motion for judgment notwithstanding the verdict (JNOV). Judge Medel
denied these motions as well.
2
On appeal, Defendants claim the jury trial was marred by instructional
error. We conclude the trial court erred by giving a “good cause” instruction
intended for termination decisions made pursuant to implied employment
agreements. However, we also conclude the instructional error was not
prejudicial. Defendants also challenge Judge Medel’s orders denying their
motion for a new bench trial, and again argue that Judge Hayes’s failure to
complete the statement of decision process is a procedural error that entitles
them to a retrial of equitable issues. We conclude that because this
irregularity only necessitates a new trial where it causes prejudice, and
Defendants failed to establish prejudice, Judge Medel did not err by denying
the motion. Finally, Defendants contend that certain findings in the
tentative statement of decision are conflicting or unsupported by substantial
evidence. We reject these challenges as well. Accordingly, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
I.
Factual Summary1
LGE is a privately-owned insurance brokerage firm based in Cedar
City, Utah. It owns insurance agencies throughout the United States and is
1 Our factual summary is derived from evidence presented during the
jury trial. Defendants’ notice of designation designated a number of trial
exhibits for inclusion in the clerk’s transcript. However, the clerk’s transcript
filed with this court on August 31, 2020, did not include trial exhibits. On
June 2, 2021, James lodged three volumes of trial exhibits with this court.
Defendants were notified that their designated trial exhibits were not
included in the clerk’s transcript and they elected not to transmit additional
trial exhibits given the lodgment of trial exhibits by James. Pursuant to
California Rules of Court, rule 8.224(d), we then requested the parties to
transmit additional trial exhibits, which were filed on October 12, 13, and 25,
2021.
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the parent company of each of these agencies, providing them with
operational services and support. LGE’s executive chairman and CEO is Eric
Leavitt.
LGE has a “unique organizational structure” under which it is the
majority shareholder of individual agencies, and the individuals who run the
agencies day-to-day are minority shareholders, whom LGE refers to as “co-
owners.” LGE “vest[s] a lot of autonomy” in those who “run the office day to
day” and “seek[s] to bring them resources that . . . an agency of comparable
size without the support wouldn’t have.”
Leavitt participated in each agency’s decision-making as a member of
its board of directors, but he usually did not communicate with co-owners
directly. Rather, Leavitt would have discussions with LGE employees called
“agency partner[s],” who served as intermediaries who communicated directly
with agency co-owners. Chris Utterback, an LGE employee, was one of the
agency partners who interfaced with co-owners and reported back to Leavitt.
Utterback described himself as a “consultant” who “help[ed] with things that
the local co-owners needed help with.”
LGE made its first investment in the San Diego insurance market in
2006 or 2007, when it acquired the Agency, originally named Muria & Frick
and later renamed Leavitt Group Agency of San Diego, Inc.2 At the time of
this acquisition, the Agency was a “subpar” agency with “a bad reputation in
the San Diego community both for just general representation and
performance.” By 2009, the Agency was losing money. LGE grew dissatisfied
with its management and started looking for a replacement.
2 In their response to the original complaint, Defendants represented
that the Agency’s full name is “Leavitt Group Agency of San Diego Inc., d.b.a.
Leavitt Insurance Agency of San Diego.” (Capitalization omitted.)
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At the time, James was the head of the property and casualty division
of the San Diego office of a large global insurance brokerage. Someone from
LGE reached out to James and asked if he would be interested in taking over
as head of the Agency. James flew to Cedar City to meet with Leavitt, who
offered James the position of president of the Agency. James knew “it was a
struggling place” and “didn’t think there would be much left over after we
cleaned it up going from a small market to a middle market”—that is, from
small accounts to large commercial accounts that generated higher
commissions—and that “it was going to be a long row to hoe . . . to get it
turned around.” However, James accepted the offer because it was a chance
to “get [his] son established” in the insurance business, and because he “was
56 at the time and . . . felt like [he] had one more challenge left in [him].”
James started working at the Agency in November 2009. LGE wanted
James to enter a written employment agreement, but he declined to sign it
because it would have required him to “sign [his] book of business over” and
he was still unsure about the Agency’s prospects.
After he started working at the Agency, James spent his first several
months “get[ting his] arms wrapped” around its business by interviewing
staff and employees, reviewing its contracts, and transferring over his own
book of business. He also “started immediately trying to attract former
employees.” During this initial period, James identified a number of
problems in the Agency’s operations. It had compensation arrangements that
overcompensated some of its sales personnel, or “producers.” It had $700,000
in debt to LGE and was borrowing money to make payroll. It had an
expensive lease in a part of town not known for insurance agencies. Key
insurance carriers were on the brink of ceasing to do business with the
Agency.
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James testified that to address these problems, he recruited his
previous marketing director who had “great company relationships” and who
was able to convince the key insurance carriers to remain. He cut costs by
convincing some producers to “trigger their deferred compensation plan[s].”
He sat down with other producers and “laid out expectations” for closing
discrepancies between their salaries and the amounts they were generating.
He instituted Monday morning sales meetings. He was not able to break the
lease immediately, but when the lease term ended, he moved the Agency to a
more appropriate neighborhood under a less expensive lease. After three
producers with large books of business left the Agency, James recruited two
others who partly made up the loss. James testified he found it challenging
to attract middle-market producers to the Agency because it lacked name
recognition and business expertise.
A. The Kahle Incident
In 2011, the Agency suffered a major setback when a recent hire,
Kristen Kahle, was caught embezzling. Kahle was an employee benefits
producer who sold health insurance to businesses. She was introduced to
LGE by a headhunter and was hired by the Agency in May 2010 after
interviewing with James and Kevin Callister, an LGE agency partner.
After she started, Kahle began working with LGE’s “restaurant group,”
a cross-agency group that sold insurance to restaurant franchisees.
Utterback was the restaurant group’s leader. Kahle “started developing a
benefit program to go in sync with the restaurant program.” She claimed to
be setting up policies through a trust. James’s area of expertise was property
and casualty insurance, and Kahle’s arrangement was unfamiliar to him, so
he asked Utterback to review it. Utterback traveled to San Diego and met
with Kahle, and afterward told James, “everything’s good.”
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Initially, Kahle seemed to have “phenomenal” success. Although James
received monthly production reports, they did not show anything was amiss.
Then, in November 2011, LGE auditors performed a regularly scheduled
audit of the Agency and discovered a $100,000 cash shortfall. The
discrepancy was attributed to Kahle. A group that included Utterback and
LGE accountants traveled to San Diego and met with Kahle. Kahle “very
nicely” and “very convincingly” explained to this group how she had
structured her policies using a third-party administrator. In February 2012,
Utterback reported to Leavitt: “We had to sort through a sticky situation
with [Kahle] and the restaurant trust. All has been sorted out [and] she’s in
compliance.” As it turned out, she was not.
In March 2012, billing for Kahle’s accounts was transferred to LGE’s
accounting center in Cedar City. The cash shortfalls continued. When LGE
tried to investigate, Kahle became uncooperative and “belligerent.” LGE
ultimately learned, despite Kahle’s lack of cooperation, that the purported
third-party administrator was actually a company formed by Kahle (its name
was “Creative Administrators, Inc.”), and Kahle had been embezzling
deposits intended to pay client premiums.
On May 18, 2012, LGE reported Kahle’s apparent crimes to the
California State Department of Insurance. Kahle was terminated, and the
Agency filed a lawsuit against her. Kahle’s theft and the legal fees cost the
Agency roughly a million dollars.
James testified at trial that until he filed the instant wrongful
termination lawsuit, no one at LGE had told him he was to blame for failing
to discover Kahle’s misconduct. Utterback, however, testified he became
dissatisfied with James’s performance as a result of the Kahle incident. He
was critical of James’s “detachment” and “lack of understanding” of how “the
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moneys worked” in relation to Kahle’s program. Leavitt testified he felt
James was “certainly not culpable of the fraud” but was negligent in
overseeing Kahle.
B. The Employment Agreement
In July 2012, more than two and a half years after he began working
for the Agency, LGE and James entered into a written employment
agreement (the Employment Agreement) with an effective date of November
12, 2009.
Section 2.03 of the Employment Agreement, “Duties,” stated that
James’s “precise duties . . . may be altered from time to time by the Board of
Directors of Agency to include those duties that are commensurate with being
the President of a corporation,” and that “the parties anticipate [James’s]
duties will include, but not be limited to, the following: [¶] (1) Producing new
insurance accounts for the Agency; [¶] (2) Servicing insurance accounts for
the Agency; [¶] (3) Developing business for the Agency by establishing,
maintaining, and/or managing relationships with carriers; [¶] (4) Supervising
and managing the Agency’s employees and staff; and [¶] (5) Performing other
tasks which enhance the Agency’s profitability.”
The Employment Agreement provided for termination by death,
disability, detrimental cause, or good cause. Section 5.04, “Termination for
Good Cause,” stated, in relevant part, “The Agency may terminate
Employee’s employment for Good Cause . . . at any time upon forty-five (45)
days advance notice to Employee.” It further provided that “ ‘Good Cause’ is
defined as: (1) Employee’s gross dereliction of duties; or (2) Employee’s
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persistent refusal to follow the instructions of Agency’s President or Chief
Executive Officer, or its Board of Directors.”3
C. The Shareholders’ Agreement
Also in July 2012, James entered into a written agreement titled,
“Close Corporation Stock Subscription and Shareholders’ Agreement” (the
Shareholders’ Agreement) that made him a minority shareholder in the
Agency. Under the Shareholders’ Agreement, James was granted sufficient
shares to make him a 25 percent owner of the Agency; LGE held the
remaining 75 percent of the shares. The Shareholders’ Agreement gave LGE
the option to purchase James’s stock if he was terminated for cause.
Utterback did not object to James becoming a shareholder or receiving
a written employment agreement. He explained at trial: “By and large,
things were going well. . . . [James] had handled a lot of difficult things in
that office when he first got there with different people and so on. The issue
with Kristin Kahle was, in and of itself, not a strong enough issue to be a
concern about his ongoing employment.”
D. The Konecki Agency Acquisition
In late 2012, the Agency acquired a local insurance agency run by John
and Carolyn Konecki. Some individuals involved in discussions about the
acquisition were concerned about whether the Koneckis would be a good fit
for the Agency. At trial, the parties disputed whether James was one of the
dissenting voices during a conference call that Leavitt held on the eve of the
3 The Employment Agreement was signed by Callister as CEO of the
Agency. By February 2014, Utterback had apparently replaced Callister as
the Agency’s CEO. It is not clear from the record when the replacement
occurred. The evidence at trial established that the Agency’s board of
directors was comprised of Leavitt, Utterback, and James.
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acquisition. Ultimately, despite dissent, Leavitt decided to go forward with
the purchase.
Integrating the Konecki Agency into the Agency proved to be extremely
challenging. As it turned out, the Koneckis were difficult people; Utterback
testified they “wreaked havoc.” John was “volatile” and abusive to staff, and
was terminated by James in August 2013 for inappropriate behavior.
Carolyn was “just plain mean” and contributed to creating a “horrible,
horrible environment.” The Konecki Agency’s accounts were “dinky,” so the
Agency’s staff was “deluged with [a] huge amount of small accounts” that
needed immediate attention.
Ultimately, however, financial reports showed the Agency was able to
retain the Koneckis’ business, which “pleasantly surprised” Leavitt.
Utterback, however, testified: “If . . . any of us would have known how [the
Koneckis] were going to behave and what a pain they were, I think all of us
would have nixed the deal.”
E. The Linnert Consultations
Patrick Linnert was an outside business consultant and a friend of
Utterback’s. He was retained by LGE to hold meetings with agency owners
about improving “[s]ales and retention.” The consultations with Linnert were
considered optional.
In October 2012, Linnert met with James, Utterback, and others to
“start to develop a business plan” for the Agency. During the meeting,
Linnert created a list of action items, such as “instituting a . . . fun committee
or culture committee,” putting up a wall chart that depicted race cars to track
employee progress, and talking to co-owners of other agencies to “[l]everage
[their] knowledge base.”
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In April 2013, Linnert had a follow-up meeting with James, Utterback,
and others to discuss James’s progress on the action items. James testified at
trial that he had completed many of the action items by this time, although
he did not put up the wall chart with the race cars because he felt it was
“juvenile” and unnecessary.
Linnert, on the other hand, felt “[t]he great majority of things had not
been accomplished.” It was agreed during the April 2013 meeting that James
would “start executing these things.” Linnert told Utterback he was
“disappointed” but “cautiously optimistic.” After the April 2013 meeting,
James sent Utterback an email stating he was “back and ready to resume his
role as a leader.” James explained at trial that before the second consultation
with Linnert, he had been weary from dealing with challenges like the
Konecki acquisition, but he had been “fired . . . up” by the meeting.
In May 2013, Linnert had a short meeting with James to discuss
“defining [the Agency’s] culture and mission statement and values.”
Afterward, Linnert and James spoke privately, and James told Linnert he
needed to put development of a mission statement “on hold” until the
Koneckis were dealt with, because “[i]t was too combative an environment
within the organization with the Koneckis.” Linnert’s view of this interaction
was that James was communicating that “the things [they] had agreed to and
talked about weren’t going to happen.” Linnert told James he “didn’t want to
work with him anymore and his job was in jeopardy.” Linnert reported the
conversation to Utterback.
F. The Termination Decision
Meanwhile, Utterback and Leavitt were souring on James’s
performance. Utterback held conference calls with middle-market agency co-
owners, including James, during which Utterback told co-owners to conduct
business meetings with their producers on “new and renewal” large accounts.
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Utterback learned later that James was not holding these meetings.
Utterback also noticed that during in-person conferences with agency co-
owners that were intended to allow co-owners to collaborate on ways to
generate business and “develop a mutually agreed-upon culture,” James’s
participation was “nonexistent.”
Utterback was also dissatisfied with the Agency’s financial progress.
He observed a “[l]ack of growth, lack of production by individual producers,
. . . those kind of things.” The Agency suffered a financial loss in 2010. In
2011, it earned profits of $135,000. In 2012, it again suffered a loss. In 2013,
it had net profits of $304,250.87. Utterback considered even the 2013
financial results to be a poor performance. The financial growth the Agency
was generating was attributable to Kahle’s “phantom income” or to
“acquisition growth,” such as the Konecki acquisition, and did not represent
“organic growth.”
Leavitt observed during a cross-agency meeting in Las Vegas that
James seemed resistant to receiving suggestions from others. He concluded
from this observation and from Linnert’s feedback that James had a
“consistent level of . . . inaction and lack of responsiveness,” and that the
Agency would not improve under James’s leadership. Leavitt decided “we
needed to terminate Mr. James eventually.” He did not inform James of his
decision out of concern this might lead to “infidelity.”
LGE personnel identified Ed Nokes as a candidate to replace James
and began efforts to recruit him in August 2013. By November 2013, Leavitt
had decided to hire Nokes and terminate James. On November 15, Leavitt
sent an email to Utterback and another LGE employee asking them to come
up with a “transition plan of leadership” and a “detailed communication plan”
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to James. Utterback ultimately decided to expedite James’s termination
after learning there was about to be an exodus of employees.
Also in November 2013, Mark Crawford, a young producer hired by
James, started working at the Agency. Utterback had agreed with the
decision to hire Crawford on the condition that James would mentor him.
James scheduled appointments for Crawford and explained the process for
transferring accounts over to the Agency. However, Crawford canceled some
appointments and did not seem to be transferring over his clients. After a
short time, James became concerned and talked to Crawford about his lack of
follow-through.
On December 19, 2013, James attended a scheduled budgeting meeting
with Utterback at the Agency’s office. At the start of the meeting, Utterback
told James, “we are heading in a different direction and we are going to be
replacing you as the president of the office.” In response, James
acknowledged he “didn’t like” managing. They discussed the possibility of
James staying on at the Agency as a producer. Utterback asked James to
continue as president until January 3, 2014, when his replacement would
take over.
James testified he was shocked to find out he was being replaced. He
had no warning “this was on the horizon.” Soon after the meeting with
Utterback, James learned that Nokes was his replacement. He met with
Nokes at the end of December 2013. Nokes proposed that James take 90
days off and return to the Agency as a producer. James found the
compensation Nokes was offering to be unacceptably low and concluded it
was not “a sincere offer” and that “[t]hey were trying to get rid of [him].”
James told Nokes he “wasn’t making any commitments at this time” and was
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focusing on “trying to get the value for [his] stock and also [his] employment
contract.”
On January 1, 2014, Utterback emailed himself a list of “[i]ssues that
caused [James] to be terminated for cause.” The items on his list included:
“[p]erpetual disregard to direction of majority owner”; “[c]ontinued poor
financial performance”; “[r]efusal to make adjustments in staff (over staffed)”;
“[o]ngoing complaints from San Diego staff that [James] was removed from
every day management” and placed “divisive” and “poor managers” in charge;
and that James “was told he needed to become a better manager” during the
second meeting with Linnert and had promised to change, but then failed to
make “changes he committed to doing.”
G. The Stock Valuations
After January 3, 2014, James had a series of communications with
Utterback about LGE providing a buy-out offer for his stock. James’s
ownership share in the Agency had by this point been reduced to 14 percent
as the result of two stock issuances.
The first stock issuance occurred in late 2012 in connection with the
financing of the Konecki Agency acquisition. The Agency could not fund the
acquisition on its own, so the acquisition was partly funded through a capital
contribution from shareholders.
Kelly Russell, LGE’s Chief Affiliations Officer and a lifetime LGE
employee, but not a licensed certified public accountant, analyzed the value of
the Agency’s stock in connection with the stock issuance. Russell calculated
that James would need to contribute $202,880 to maintain his 25 percent
ownership interest in the Agency. No one from LGE explained Russell’s
valuation methods to James, and James assumed the calculation was
accurate. James decided not to contribute. Thus, LGE supplied the required
capital and was issued additional shares, and James’s ownership percentage
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was reduced from 25 percent to 20.2 percent. This transaction was
memorialized in a stock issuance agreement between LGE and James with
an effective date of December 1, 2012.
The second stock issuance took place in 2013 as part of a restructure of
the Agency’s debt to LGE. Russell again prepared the business valuation to
determine the value of the Agency’s stock. Based on Russell’s valuation, a
list of contribution amounts was sent to James; each amount was associated
with a different resulting ownership percentage. No one from LGE explained
the valuation methodology to James. James did not consult with an outside
expert because he “didn’t think there was any problem with trusting
partners.” James decided to contribute $205,000, which, pursuant to
Russell’s calculations, caused his ownership interest to be reduced to 14
percent. This transaction was memorialized in a second stock issuance
agreement between LGE and James that was signed in July 2013 but had an
effective date of January 1, 2013.
Thus, when James sought a buyout of his stock from LGE, it was this
14 percent ownership interest he was attempting to liquidate. On January
31, 2014, James was advised that LGE valued his 14 percent interest in the
agency at $358,111. James did not think this valuation was accurate, since
just six months earlier, he had paid $205,000 for “basically 6 percent of the
company.” He figured his stock was worth “a half million dollars if not more.”
It turned out that, unbeknownst to James, LGE was simultaneously
negotiating to sell Nokes the 14 percent ownership interest held by James.
In August 2013, LGE provided Nokes a pro forma valuation (that is, a
valuation based on the company’s estimated future performance) that stated
the 14 percent interest was worth $869,000. Nokes thought this was too
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high. By the time of the jury trial, Nokes and LGE had agreed on a purchase
price of roughly $665,000.
H. The Termination Letter
On February 12, 2014, Utterback sent James a written letter notifying
James of his termination for good cause, effective April 3, 2014. The letter
stated:
“Among the facts and circumstances supporting the conclusion that
good cause exists for the termination of your employment are the
following:
“• You met with other members of the Agency’s management
in strategic planning sessions on April 8 and May 23. In those
meetings, management agreed that you would implement certain
measures designed to enhance the accountability of the Agency’s
producers for their performance, and to improve the Agency’s
financial performance. You have refused and neglected to
implement those measures.
“• You hired Mark Crawford as a new producer for the
Agency, but you have failed to offer him any guidance or
assistance in his transition.
“• Interviews with Agency staff members reveal that you
would typically arrive at the office between 9:30 and 10:00 a.m.,
take a two hour lunch, and then leave the office by 4:00 p.m.
While at the office, you would have your door closed, and would
engage in very minimal interaction with the Agency’s staff.”
James was 61 years old at the time of his separation from the Agency.
At the time of trial in 2018, he was still unemployed. He testified he had
tried to find work but “had a non-compete agreement” with the Agency that
left him with “no book of business,” and “nobody is interested in anybody
without a book of business.”
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II.
Procedural Background
On June 26, 2015, James filed the underlying action against LGE and
the Agency. His original complaint stated causes of action for breach of
contract against the Agency, intentional interference with contract against
LGE, breach of fiduciary duty against LGE, and declaratory relief against
LGE. The case was assigned to Judge Hayes.
James was later granted leave to amend the complaint after allegedly
learning for the first time during discovery about the pro forma valuation
LGE had given Nokes in 2013. James argued this valuation led him to
discover that the Agency’s stock had been undervalued during the two stock
issuances, and as a result, his ownership interest had been unfairly diluted.
On April 24, 2017, James filed the operative amended complaint, which
contained new allegations against LGE in support of the breach of fiduciary
duties cause of action, based on the stock issuances, and added a new cause of
action against LGE and the Agency for reformation of the two stock issuance
agreements.
Defendants filed a general denial to the amended complaint in which
they asserted an affirmative defense based on the running of the statute of
limitations.
A. The Bifurcated Trial
The parties agreed the causes of action for breach of contract and
intentional interference with contract were legal claims that should be tried
to a jury, and that the causes of action for breach of fiduciary duty,
declaratory relief, and reformation of stock agreements were equitable claims
that should be tried to the court.
Although James agreed the trial should be bifurcated, he argued he
should not be limited in the evidence he presented to the jury. He argued the
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facts underlying all of his causes of action were intertwined, as his theory of
wrongful termination was that LGE had manufactured cause to terminate
him as a pretext to reacquire his shares and resell them at a higher price to
Nokes. Thus, he argued, evidence of the stock dilutions and alleged unfair
valuations of the agency should be admissible during the jury trial.
The court granted bifurcation. Over Defendants’ objections, the court
ruled that evidence and expert testimony relating to the valuation of the
Agency in connection with the two stock issuances could be presented to the
jury in the first phase of trial.
1. The Jury Trial
The jury trial was held over the course of 10 days in March and April
2018. James’s trial presentation included testimony from James, Nokes, and
Warren Burkholder, a business appraisal expert.
James testified he performed his duties under section 2.03 of the
Employment Agreement, and although during his tenure as president he had
received suggestions from Linnert and Utterback, no one at LGE had
criticized him or instructed him on what to do. Burkholder testified that
Russell had calculated the Agency’s business value using an EBIDTA
(earnings before interest, taxes, depreciation, and amortization) analysis that
was subjective and arbitrary. He opined that Russell’s analysis understated
the value of the shares at the time of the two stock issuances, and that
James’s ownership interest would have been 17.53 percent, rather than 14
percent, after the two transactions, if the shares had been properly valued
according to their fair market value.
The defense presentation included testimony from Leavitt, Utterback,
Linnert, Russell, and Stephen Zamucen, a business appraisal expert.
Leavitt testified he believed there was good cause for James’s
termination based on “a pattern of inaction to repair, a lack of production to
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. . . stem the tide of losses in the [A]gency, the lack of oversight and
negligence in oversight of the matter with Ms. Kahle, his unwillingness to
engage directly with a peer group and with consultants who were brought in
to assist him.” He testified James was “never defiant” but was “consistent in
his inaction or attention to what [they] suggested.” He admitted, however,
that he never gave James “a direct instruction that he did not follow.”
Utterback’s and Linnert’s testimony was as we previously set forth in the
factual summary.
Russell testified to the methods by which he valued the Agency’s
business in connection with the two stock dilutions, and the subsequent
negotiations with Nokes. He relied on EBITDA to measure the value of
agencies as part of his regular duties. He had presented his valuations of the
Agency to LGE operations personnel and did not know whether anyone had
discussed them with James. Zamucen, relying on an EBIDTA analysis,
opined that the Agency was actually worth less than Russell had calculated,
and that James’s resulting ownership interest should have been 11.3 percent
rather than 14 percent.
After deliberating for a little more than two days, the jury returned a
split verdict. It found in favor of James on his cause of action for breach of
contract against the Agency. In response to a special verdict question that
asked, “Did Thomas James substantially perform his job duties under his
employment agreement with [the Agency]?,” nine jurors answered “Yes,” and
three jurors answered “No.” In response to a special verdict question that
asked, “Did the Agency discharge Thomas James without good cause?,” 10
jurors answered “Yes,” and two jurors answered “No.” The jury awarded
James $1,103,000 in past economic loss and $191,100 in future economic loss
as breach of contract damages.
19
The jury found in favor of LGE on James’s cause of action for
intentional interference with contract, upon concluding that LGE did not
intend to cause the Agency to breach the Employment Agreement with
James.
2. The Bench Trial
A bench trial on the remaining causes of action was held on May 21,
2018, and was completed in less than a day. Most of the evidence had
already been admitted during the jury trial. The only additional evidence
presented during this phase of trial was testimony from James relating to his
delayed discovery of the undervaluing of his stock during the two stock
issuances, to counter Defendants’ statute of limitations defense.
After hearing argument from counsel, the trial court directed the
parties to submit proposed statements of decision. Each side filed its
respective proposed statement of decision on June 12, 2018. On August 7, the
trial court issued a minute order asking the parties to brief a hypothetical
question not relevant to this appeal. One month later, the parties filed the
requested briefs.
On October 17, 2018, rather than adopt either party’s proposed
statement of decision verbatim, the trial court issued its own nine-page
tentative statement of decision. The court found, among other things, that
LGE had breached its fiduciary duties as a majority shareholder in
connection with the two stock issuances, causing James’s ownership
percentage to be unfairly reduced. It granted reformation of the stock
issuance agreements to reflect that James’s ownership in the Agency was
17.53 percent rather than 14 percent. It found that James’s equitable claims
were not time-barred, denied James’s request for punitive damages, and
concluded the issues raised in James’s cause of action for declaratory relief
were “moot.”
20
The last sentence of the tentative statement of decision stated, “Absent
timely query or objection, in 15 court days the Tentative Decision will become
the Court’s final decision in this matter.” Judge Hayes signed and dated the
tentative statement of decision. On November 6, 2018, Defendants timely
filed objections to the tentative statement of decision.
B. The Case Is Reassigned to Judge Medel
On November 7, 2018, Judge Richard S. Whitney issued a minute order
directing James to file a supplemental brief addressing the objections. On
November 10, a notice of case reassignment was issued by the superior court
providing that effective immediately, the case was reassigned to Judge
Whitney, “due to the following reason: Judicial Reassignment.” Documents
filed later in the case indicate counsel were informed Judge Hayes had
retired. On November 26, James’s peremptory challenge to Judge Whitney
was granted,, and the case was reassigned to Judge Medel.
On June 18, 2019, Defendants filed a motion for partial new trial,
arguing Judge Hayes’s unavailability to finalize the statement of decision
mandated a new bench trial. On July 22, Judge Medel denied the motion for
partial new trial.
On September 16, 2019, based on the jury verdict and tentative
statement of decision, Judge Medel entered judgment awarding James
$1,294,100, and requiring LGE to issue James stock sufficient to increase his
ownership interest in the Agency from 14 percent to 17.53 percent.
On November 13, 2019, Defendants filed a motion for new trial
asserting alleged instructional error during the jury trial. Defendants also
filed a motion for partial JNOV in which they argued certain findings in the
tentative statement of decision were “incurably inconsistent,” both internally
and in relation to factual disputes resolved by the jury.
21
On January 23, 2020, the trial court issued a minute order denying
both of these motions. Defendants filed a notice of appeal on February 14,
2020.4
DISCUSSION
I.
The Trial Court Committed Instructional Error, but the Error
Was Not Prejudicial
A. Additional Background
The parties’ joint trial readiness conference report listed Judicial
Council of California Civil Jury Instructions (2020) (CACI) No. 2405 as one of
the pattern instructions requested by James. CACI No. 2405 is titled
“Breach of Implied Employment Contract — Unspecified Term — ‘Good
Cause’ Defined — Misconduct,” and is patterned on the California Supreme
4 Judge Medel’s minute order denying Defendants’ motions noted the
parties’ briefs revealed they were in agreement that the special verdict
exceeded the evidence of damages presented to the jury. Judge Medel thus
ordered the judgment relating to the breach of contract cause of action
reduced to $1,112,952.80, and directed James to submit an amended
judgment. Defendants’ notice of appeal stated that Defendants were
appealing from the judgment entered September 16, 2019, the minute order
entered January 23, 2020, and the “[a]mended [j]udgment” which they stated
was “not yet filed.” The record before us does not include an amended
judgment. However, it was proper for Defendants to take their appeal from
the original judgment and orders denying their posttrial motions, rather than
wait for the amended judgment, since the amendment ordered by the court
only changed the amount of damages, which is not at issue in this appeal.
(See ECC Construction, Inc. v. Oak Park Calabasas Homeowners Assn. (2004)
122 Cal.App.4th 994, 1003, fn. 5 [“[Because] the amendment changed the
amount of damages only and did not otherwise alter the bases for defendant’s
appeal, defendant was required to appeal from the original judgment, not
wait for the amended judgment.”].)
22
Court decision Cotran v. Rollins Hudig Hall Internat., Inc. (1998) 17 Cal.4th
93 (Cotran).5
On the third day of trial, counsel advised the court they had been
unable to agree this instruction should be given. Both sides filed briefs
stating their respective positions on whether CACI No. 2405 applied to
James’s breach of contract cause of action. Before the start of closing
arguments, the trial court heard argument from counsel on the
appropriateness of the instruction. James argued Cotran created procedural
protections for employees that are to be inserted into “all employment
agreements[,] not just implied agreements.” Defendants essentially argued
that Cotran did not apply to an express contract with its own definition of
good cause.
The trial court agreed with James that the instruction should be given.
It reasoned that under Cotran: “[B]efore you fire someone, you at least have
to tell them why, give them a chance to answer” and “[i]f you don’t address
that procedural aspect in the contract with good cause, then that becomes an
5 The CACI No. 2405 pattern instruction states: “[Name of plaintiff]
claims that [name of defendant] did not have good cause to
[discharge/demote] [him/her/nonbinary pronoun] for misconduct. [Name of
defendant] had good cause to [discharge/demote] [name of plaintiff] for
misconduct if [name of defendant], acting in good faith, conducted an
appropriate investigation giving [him/her/nonbinary pronoun/it] reasonable
grounds to believe that [name of plaintiff] engaged in misconduct. [¶] An
appropriate investigation is one that is reasonable under the circumstances
and includes notice to the employee of the claimed misconduct and an
opportunity for the employee to answer the charge of misconduct before the
decision to [discharge/demote] is made. You may find that [name of
defendant] had good cause to [discharge/demote] [name of plaintiff] without
deciding if [name of plaintiff] actually engaged in misconduct.”
23
implied term . . . . Otherwise, an employee who has a good cause contract in
reading it would be left to believe that they have more protection than an at-
will employee. But they don’t.”
The court deleted the word “implied” from the title of the CACI No.
2405 pattern instruction and instructed the jury with the following modified
version:
“Breach of Employment Contract — ‘Good Cause’ Defined —
Misconduct:
“Plaintiff, Thomas James, claims that Defendant [Agency] did not
have good cause to discharge him for misconduct. Defendant
[Agency] had good cause to discharge Plaintiff, Thomas James for
misconduct if Defendant [Agency,] acting in good faith, conducted
an appropriate investigation giving it/them [sic] reasonable
grounds to believe that Plaintiff, Thomas James, engaged in
misconduct. [¶] An appropriate investigation is one that is
reasonable under the circumstances and includes notice to the
employee of the claimed misconduct and an opportunity for the
employee to answer the charge of misconduct before the decision
to discharge is made. You may find that Defendant [Agency] had
good cause to discharge Plaintiff, Thomas James without
deciding if Plaintiff, Thomas James actually engaged in
misconduct. [¶] The terms, ‘Good Cause’/‘Misconduct,’ are
defined as follows: [¶] 1. Gross dereliction of duties; and/or [¶]
2. Persistent refusal to follow instructions.”
The court also gave a separate instruction titled “Definition of Good
Cause,” which stated, “The Employment Agreement between Plaintiff and
Defendant Leavitt Group Agency of S[a]n Diego, Inc., defines ‘Good Cause’ as
follows: [¶]. . .[¶] 1) Employee’s gross dereliction of duties; or, [¶] 2)
Employee’s persistent refusal to follow the instructions of Agency’s President
or Chief Executive Officer, or its Board of Directors.”
B. Analysis
Defendants contend the trial court committed reversible error by
instructing the jury with the modified version of CACI No. 2405 set forth
24
above. They contend that Cotran as well as the CACI No. 2405 pattern
instruction apply to implied employment contracts, not express employment
contracts. They further argue that since James did not allege a cause of
action for breach of implied contract, and the only agreement before the court
was an express contract, it was error for the court to give the instruction. By
doing so, the trial court effectively held them “to procedures [they] neither
agreed to nor understood to exist.”
We agree with Defendants and conclude the trial court erred by giving
the challenged instruction, but upon reviewing the record, we find the error
was not prejudicial.6
1. Standard of Review
Challenges to jury instructions are reviewed de novo, as a matter of
law. (Haytasingh v. City of San Diego (2021) 66 Cal.App.5th 429, 467.) “A
party is entitled to an instruction on each theory of the case that is supported
by the pleadings and substantial evidence if the party requests a proper
instruction.” (Bullock v. Philip Morris USA, Inc. (2008) 159 Cal.App.4th 655,
684 (Bullock); see Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 572
(Soule) [“A party is entitled upon request to correct, nonargumentative
instructions on every theory of the case advanced by him which is supported
by substantial evidence. The trial court may not force the litigant to rely on
abstract generalities, but must instruct in specific terms that relate the
party’s theory to the particular case.”].)
6 Defendants raise the issue of instructional error by way of arguing that
the trial court abused its discretion in denying their second motion for new
trial, which was based, in part, on alleged prejudicial instructional error.
Because we conclude the instructional error was not prejudicial, the trial
court did not err in denying Defendants’ motion for new trial. (See Code Civ.
Proc., § 657 [new trial may be granted only for causes “materially affecting
the substantial rights” of the moving party].)
25
2. The Trial Court Committed Instructional Error
Before discussing Cotran, we set forth certain principles relevant to
employment relationships and their termination. In California, the statutory
presumption is that employment relationships are terminable at will. (Lab.
Code, § 2922.) “Labor Code section 2922 provides that ‘[a]n employment,
having no specified term, may be terminated at the will of either party on
notice to the other.’ An at-will employment may be ended by either party ‘at
any time without cause,’ for any or no reason, and subject to no procedure
except the statutory requirement of notice.” (Guz v. Bechtel National, Inc.
(2000) 24 Cal.4th 317, 335 (Guz), italics added.)
“While the statutory presumption of at-will employment is strong, it is
subject to several limitations. For instance, as [our high court has] observed,
‘the employment relationship is fundamentally contractual.’ [Citation.]
Thus, though Labor Code section 2922 prevails where the employer and
employee have reached no other understanding, it does not overcome their
‘fundamental . . . freedom of contract’ to depart from at-will employment.
[Citation.] The statute does not prevent the parties from agreeing to any
limitation, otherwise lawful, on the employer’s termination rights.” (Guz,
supra, 24 Cal.4th at pp. 335–336.)
“One example of a contractual departure from at-will status is an
agreement that the employee will be terminated only for ‘good cause’
[citation] in the sense of ‘ “ ‘a fair and honest cause or reason, regulated by
good faith . . .’ ” [citation], as opposed to one that is “trivial, capricious,
unrelated to business needs or goals, or pretextual . . . .” [Citations.]’
[Citations.] But the parties are free to define their relationship, including the
terms on which it can be ended, as they wish. The parties may reach any
contrary understanding, otherwise lawful, ‘concerning either the term of
26
employment or the grounds or manner of termination.’ ” (Guz, supra, 24
Cal.4th at p. 336.)
“Thus, the employer and employee may enter ‘ “an agreement . . . that
. . . the employment relationship will continue indefinitely, pending the
occurrence of some event such as the employer’s dissatisfaction with the
employee’s services or the existence of some ‘cause’ for termination.” ’
[Citations.] Among the many available options, the parties may agree that
the employer’s termination rights will vary with the particular
circumstances. The parties may define for themselves what cause or causes
will permit an employee’s termination and may specify the procedures under
which termination shall occur. The agreement may restrict the employer’s
termination rights to a greater degree in some situations, while leaving the
employer freer to act as it sees fit in others.” (Guz, supra, 24 Cal.4th at
p. 336.) “The contractual understanding need not be express, but may be
implied in fact, arising from the parties’ conduct evidencing their actual
mutual intent to create such enforceable limitations.” (Ibid.)
An implied-in-fact employment agreement not to terminate except for
good cause may arise from factors such as “ ‘the personnel policies or
practices of the employer, the employee’s longevity of service, actions or
communications by the employer reflecting assurances of continued
employment, and the practices of the industry in which the employee is
engaged.’ ” (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 680; see
also Pugh v. See’s Candies, Inc. (1981) 116 Cal.App.3d 311, 329, 330 (Pugh).)
In Pugh, the Court of Appeal held that for purposes of an implied
employment agreement, “[t]he terms ‘just cause’ and ‘good cause,’ . . .
[Citation.] . . . connote ‘a fair and honest cause or reason, regulated by good
faith on the part of the party exercising the power.’ ” (Pugh, at p. 330.) And
27
in Scott v. Pacific Gas & Electric Co. (1995) 11 Cal.4th 454 (Scott), our high
court “elaborated on the content of good or just cause by enumerating what it
is not: reasons that are ‘ “trivial, capricious, unrelated to business needs or
goals, or pretextual.” ’ ” (Cotran, supra, 17 Cal.4th at p. 96, quoting Scott, at
p. 467.)
In Cotran, our high court further developed the jurisprudence relating
to implied-in-fact employment agreements by deciding the standard to be
applied by the jury when it reviews a termination decision made pursuant to
an implied-in-fact employment agreement not to terminate except for good
cause, where “ ‘good cause’ ” has the meaning decided in Scott and Pugh,
referred to as the “the Scott-Pugh standard.” (Cotran, supra, 17 Cal.4th at
pp. 95–96.)
The plaintiff in Cotran was the senior vice president of an insurance
brokerage. His implied employment agreement arose from preliminary
negotiations with the employer and from a letter stating if he did not succeed
he would be provided “ ‘other opportunities’ within the organization.”
(Cotran, supra, 17 Cal.4th at p. 96, fn. 1.) After working at the firm for
several years, he was fired after someone reported that he had been sexually
harassing two employees. (Id. at pp. 96–97.) Senior managers interviewed
him about the accusations and explained that an investigation would ensue.
(Id. at p. 97.) An equal employment opportunity manager conducted the
investigation, which entailed interviewing 21 people, including five suggested
by the plaintiff. (Ibid.) The manager concluded that while there was no
definitive evidence of misconduct, the accusers were credible, and it was more
likely than not the harassment had occurred. (Id. at pp. 97–98.)
At trial, the plaintiff denied sexually harassing his accusers. He
claimed his relationships with them, though sexual, had been consensual,
28
that the alleged victims had ulterior motives for accusing him, and that he
had not disclosed these facts when he was interviewed because he “was upset,
‘frightened,’ and felt ‘ambushed.’ ” (Cotran, supra, 17 Cal.4th at p. 98.) The
employer sought to defend its decision to fire plaintiff “on the ground that it
had been reached honestly and in good faith, not that [it] was required to
prove the acts of sexual harassment occurred.” (Cotran, supra, 17 Cal.4th at
p. 99.) The trial court disagreed this was a viable defense, and instructed the
jury that “ ‘[w]hat is at issue is whether the claimed acts took place . . . . The
issue for the jury to determine is whether the acts are in fact true.’ ” (Ibid.)
The jury returned a special verdict for plaintiff based on the finding he had
not “ ‘engaged in any of the behavior’ ” on which the termination decision was
based. (Ibid.)
The Cotran court concluded the jury’s decision was based on an
erroneous standard. It began by observing that under Pugh, “ ‘[t]he terms
“just cause” and “good cause,” . . . connote “a fair and honest cause or reason,
regulated by good faith on the part of the party exercising the power.” ’ ”
(Cotran, supra, 17 Cal.4th at p. 100, quoting Pugh, supra, 116 Cal.App.3d at
p. 330.) It observed that in applying this standard, however, “ ‘[c]are must be
taken . . . not to interfere with the legitimate exercise of managerial
discretion. . . . And where . . . the employee occupies a sensitive managerial
or confidential position, the employer must of necessity be allowed
substantial scope for the exercise of subjective judgment.’ ” (Cotran, at
p. 100.) “ ‘Although the jury must assess the legitimacy of the employer’s
decision to discharge, it should not be thrust into a managerial role.’ ” (Id. at
p. 101, quoting Pugh, at p. 769.)
The Cotran court then canvassed authorities in search of a standard
that would not overly restrict the employer’s exercise of managerial
29
discretion. (Cotran, supra, 17 Cal.4th at pp. 100–107.) It rejected a standard
that would put the jury in the role of conducting a de novo review of the
factual basis for the termination decision. (Id. at pp. 102–103; see id. at
p. 104 [“ ‘[A]llowing a jury to trump the factual findings of an employer’ ”
would turn the jury into an “ ‘ex officio “fact-finding board,” unattuned to the
practical aspects of employee suitability.’ ”].) Instead, it adopted a “middle
ground” standard intended to balance “the employee’s interest in continuing
employment with the employer’s interest in efficient personnel decisions.”
(Id. at p. 103.) Under this standard, the jury “assess[es] the objective
reasonableness of the employer’s factual determination of misconduct.”
(Ibid.)
Our high court stated the governing standard as follows: “We give
operative meaning to the term ‘good cause’ in the context of implied
employment contracts by defining it, under the combined Scott-Pugh
standard . . . as fair and honest reasons, regulated by good faith on the part of
the employer, that are not trivial, arbitrary or capricious, unrelated to
business needs or goals, or pretextual. A reasoned conclusion, in short,
supported by substantial evidence gathered through an adequate
investigation that includes notice of the claimed misconduct and a chance for
the employee to respond.” (Cotran, supra, 17 Cal.4th at pp. 107–108, italics
added.) At the same time, however, the court noted that “[w]rongful
termination claims founded on an explicit promise that termination will not
occur except for just or good cause may call for a different standard,
depending on the precise terms of the contract provision.” (Id. at p. 96, fn. 1.)
For a number of reasons, we conclude the trial court erred in
instructing the jury with the Cotran standard. First, the breach of contract
cause of action in this case arose from an express agreement with an “explicit
30
promise that termination will not occur except for just or good cause.”
(Cotran, supra, 17 Cal.4th at p. 96, fn. 1.) The holding of Cotran applies to
implied-in-fact agreements under which “good cause” for termination is
defined in accordance with Scott and Pugh. Other courts have declined to
apply Cotran in cases involving express employment agreements with
provisions that allow termination on grounds other than those articulated in
Scott and Pugh. (Halvorsen v. Aramark Uniform Services (1998) 65
Cal.App.4th 1383, 1390–1391 [“Cotran . . . expressly applies only to cases in
which an employee is under an ‘implied agreement not to be dismissed except
for “good cause.” ’ ”]; Khajavi v. Feather River Anesthesia Medical Group
(2000) 84 Cal.App.4th 32, 57 (Khajavi) [stating that the analysis of Cotran is
“expressly limit[ed] . . . to implied-employment agreements”].)
Second, the Employment Agreement defined “good cause” in a way that
was more protective of James, and more restrictive of the employer’s right of
termination, than the Scott-Pugh good cause standard. The parties’ decision
to clearly delimit the conduct warranting termination was an indication
termination could not be justified based on an honest but mistaken belief that
such conduct actually occurred. Khajavi helps illustrate this point. In that
case, the plaintiff sued for breach of an oral employment agreement for a
specified term. (Khajavi, supra, 84 Cal.App.4th at p. 55.) Such agreements
are governed by Labor Code section 2924, which provides: “An employment
for a specified term may be terminated at any time by the employer in case of
any willful breach of duty by the employee in the course of his employment, or
in case of his habitual neglect of his duty or continued incapacity to perform
it.” (Italics added; see Khajavi, at p. 57.)
The trial court in Khajavi rejected a jury instruction that would have
allowed the jury to find in favor of the employer if it decided the employer, in
31
terminating the employee, acted “ ‘in good faith on an honest but mistaken
belief’ ” the employee had committed a particular act of misconduct.
(Khajavi, supra, 84 Cal.App.4th at pp. 55–56.) The Court of Appeal affirmed.
It observed that the proposed instruction was intended for wrongful
termination claims based on an implied contract with a good cause standard
“quite different from the standard applicable in determining the propriety of
an employee’s termination under a contract for a specified term. (Cf. Lab.
Code, § 2924.)’ ” (Id. at p. 56, quoting Pugh, supra, 116 Cal.App.3d at p. 330.)
It reasoned Labor Code section 2924 “would not appear to allow termination
for an honest but mistaken belief that discharge was required,” because
“[s]uch a termination would not be based on a willful breach of duty, a
habitual neglect of duty, or a continued incapacity to perform.” (Khajavi, at
p. 57.)
Here, the “ ‘[g]ood cause’ ” provision in the parties’ agreement defined
“ ‘[g]ood cause’ ” for termination as “gross dereliction of duties” or “persistent
refusal to follow . . . instructions,” which are grounds for termination
comparable to the “willful breach of duty” or “habitual neglect of . . . duty” for
which an employee can be terminated under Labor Code section 2924. Thus,
as in Khajavi, the parties’ agreement “would not appear to allow termination
for an honest but mistaken belief that discharge was required” (Khajavi,
supra, 84 Cal.App.4th at p. 57), because such a termination would not be
based on the conduct that the parties explicitly agreed would justify
termination: gross dereliction of duties, or a persistent refusal to follow
instructions.
Nor is it the case, as the trial court reasoned, that failure to apply
Cotran results in James being less protected. In fact, the opposite is true.
Cotran deprives an employee who is innocent of misconduct of recourse where
32
the employer acted under an honest, but mistaken belief the misconduct
occurred. Declining to apply the Cotran standard means the employer bound
by a contract not to terminate except for good cause must prove the factual
accuracy of its termination decision to a jury. Such a standard is more
protective of the employee, not less.
James argues that Justice Mosk’s concurring opinion in Cotran
“establishes that Cotran is not limited to implied employment agreements.”
James’s reliance is misplaced. “ ‘ “[A]ny proposition or principle stated in an
opinion [of the Supreme Court] is not to be taken as the opinion of the court,
unless it is agreed to by at least four of the justices.” ’ ” (Quinn v. U.S. Bank
NA (2011) 196 Cal.App.4th 168, 180, quoting Adoption of Kelsey S. (1992) 1
Cal.4th 816, 829.) A concurrence is not authoritative and cannot establish
the view of the majority. Also, we do not read Justice Mosk’s concurrence as
James does. The concurrence, which at four paragraphs long is relatively
brief, opens by observing “the majority’s standard best approximates . . . the
likely bargain struck . . . in an implied contract not to terminate except for
good cause” and ends by confirming “the majority’s good cause standard does
not extend beyond the context in which it is articulated, i.e., implied contracts
between employers and individual employees.” (Cotran, supra, 17 Cal.4th at
pp. 109, 110 (conc. opn. of Mosk, J.), italics added.) Although James dissects
other parts of the text and finds evidence of a different view, it is plain from
these quotes that Justice Mosk did not regard the majority opinion as
extending beyond implied contracts with implicit good cause provisions.
James also argues that because the Employment Agreement was silent
as to his “due process rights,” he cannot be construed to have waived them.
James’s error is in assuming such due process rights are the rule. As our
high court explained in Guz, however, this is not so: the default employment
33
relationship allows for termination at will, “subject to no procedure except the
statutory requirement of notice.” (Guz, supra, 24 Cal.4th at p. 335, italics
added.)7 Nor did Cotran hold, as the trial court suggested, that “before you
fire someone, you at least have to tell them why, give them a chance to
answer.” (See, e.g., McGrory v. Applied Signal Technology, Inc. (2013) 212
Cal.App.4th 1510, 1524, fn. 10 [explaining that Cotran did not hold that “all
employees are entitled to notice and a fair hearing prior to being terminated
for misconduct”].) Rather, Cotran created a standard for the factfinder to
apply when evaluating a termination decision under an implied employment
agreement not to terminate except for good cause. Evidence of an
appropriate investigation is required when a termination decision is
evaluated under this standard.
Because James’s breach of contract cause of action arose from an
express employment agreement with a good cause provision that restricted
the Agency from terminating James unless he committed the specified acts of
misconduct, the Cotran standard did not apply. Thus, the trial court erred by
giving the challenged instruction. “A party is entitled to an instruction on
each theory of the case that is supported by the pleadings and substantial
evidence if the party requests a proper instruction.” (Bullock, supra, 159
Cal.App.4th at p. 684.) The court was not presented with pleadings or
evidence sufficient to warrant giving the challenged instruction. James’s
complaint alleged breach of the parties’ express employment agreement only.
He did not allege the existence of an implied employment agreement, an
implied contractual term granting him procedural protections in connection
7 Here, the Employment Agreement provided that James could be
terminated “upon forty-five (45) days advance notice.” Utterback’s
termination letter was sent on February 12, 2014, and, citing this notice
provision, stated that James’s termination would be effective April 3.
34
with his termination, nor did he allege breach of the implied covenant of good
faith and fair dealing.8
Nor did James identify evidence that might have supported giving the
instruction. On appeal, James argues that Leavitt’s November 15, 2013
email is evidence that James was “entitled to a level of due process regarding
his employment status.” This argument lacks merit. An implied contract is
one for which the “existence and terms . . . are manifested by conduct.” (Civ.
Code, § 1621.) The November 15 email discussed how James’s removal,
which at that point was a fait accompli, would be carried out. It did not state
the decision to terminate James would or should be reached only after
completion of an investigation in which he would receive notice of his alleged
misconduct and the opportunity to respond. Thus, the email is not evidence
8 At oral argument, James’s counsel asserted for the first time on appeal
that a cause of action for breach of contract necessarily includes breach of the
implied covenant of good faith and fair dealing. We need not and do not
consider this point because it has been forfeited. First, James did not include
this argument in his appellate briefing. (Jones v. Jacobson (2011) 195
Cal.App.4th 1, 19, fn. 12 [“issues and arguments not addressed in the briefs
on appeal are deemed forfeited”].) Second, he did not preserve this issue for
review. James’s operative complaint was devoid of any allegations of breach
of the implied covenant. If, as he seems to contend, his pleading embraced
such a claim despite the lack of any allegations addressing it, then we would
expect it to have been identified in the parties’ joint trial readiness conference
report as a legal issue in dispute, but it was not. When arguing in the trial
court in favor of instructing the jury with the Cotran standard, James did not
inform the court that he was pursuing breach of the implied covenant of good
faith and fair dealing, nor did he assert that such a claim would support
instructing the jury pursuant to Cotran. James’s failure to pursue this
position in the trial court forfeits the matter on appeal. (Premier Medical
Management Systems, Inc. v. California Ins. Guarantee Assn. (2008) 163
Cal.App.4th 550, 564 [“Failure to raise specific challenges in the trial court
forfeits the claim on appeal.”].)
35
of an implied agreement granting James procedural due process rights in the
matter of his termination.
3. The Error Was Not Prejudicial
Civil instructional error is reversible only if “there is a reasonable
probability that in the absence of the error, a result more favorable to the
appealing party would have been reached.” (Soule, supra, 8 Cal.4th at
p. 574.) “A ‘reasonable probability’ in this context ‘does not mean more likely
than not, but merely a reasonable chance, more than an abstract possibility.’ ”
(Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 682.) “The reviewing court
should consider not only the nature of the error, ‘including its natural and
probable effect on a party’s ability to place his full case before the jury,’ but
the likelihood of actual prejudice as reflected in the individual trial record,
taking into account ‘(1) the state of the evidence, (2) the effect of other
instructions, (3) the effect of counsel’s arguments, and (4) any indications by
the jury itself that it was misled.’ ” (Rutherford v. Owens-Illinois, Inc. (1997)
16 Cal.4th 953, 983.)
We have reviewed the record thoroughly and conclude the erroneous
instruction was not prejudicial. The jury received two “good cause”
instructions: the erroneous instruction under Cotran and the instruction that
defined “good cause” in accordance with the parties’ contract. No one
disputes that the latter instruction was correct.
At trial, far more emphasis was placed on the Agency’s substantive
reasons for terminating James as compared with the process by which he was
terminated. The parties’ evidentiary presentations were largely addressed to
James’s performance as president and whether his performance fell short. To
the extent the evidence related to the manner in which James was
terminated, the focus was on whether the lack of communication signaled
that the reasons given for his termination were not sincere but were
36
manufactured so LGE could reacquire his stock, as opposed to the presence or
absence of an investigation of the factual accuracy of the grounds for James’s
termination.
The erroneous instruction received little attention from counsel during
their arguments to the jury. In his opening statement, James’s counsel told
the jury: “The standard for good cause in this case is set by . . . Section 5.04
of Mr. James’[s] employment contract” and “[e]very single thing in this case
that you hear about should relate to this standard.” At the start of his
closing argument, James’s counsel reiterated that this contractual “definition
of good cause” gave “perspective on all of the evidence that has been
presented to [the jurors] in the case,” and then focused on persuading the jury
that James did nothing amounting to a “gross dereliction of duty” or a
“persistent refusal to follow . . . instructions.” When he referred to the
erroneous instruction, he did so briefly and in passing; this part of the
transcription of his closing argument consumed less than half a page of text
out of 24 pages. For his part, defense counsel urged the jury to find James
was a “complete failure and breached his agreement.” He asserted that “if we
didn’t have good cause to fire him . . . they win the case,” and “[i]f we did have
good cause to fire him, this is over, . . . you’re outta here, see you later, bye.”
Thus, the arguments of both attorneys emphasized the contractual definition
of “good cause” and minimized any significance of the erroneous instruction.
The special verdict is itself a telling indication the jury was not misled
by the erroneous instruction. In response to the first special verdict question
relating to breach of contract, which asked, “Did Thomas James substantially
perform his job duties under his employment agreement with [the Agency]?,”
the jury answered “Yes.” Section 2.03 of the Employment Agreement listed
James’s job duties as president of the Agency and provided that his “precise
37
duties” could be “altered from time to time by the Board of Directors.” The
Employment Agreement defined “Good Cause” for termination in terms of
James’s failure to perform these duties (specifically, “gross dereliction of
duties” and “persistent refusal to follow the instructions” of the Agency’s
board of directors). Thus, by finding that James “substantially perform[ed]
his job duties under his employment agreement,” the jury signaled its verdict
in favor of James was based on the determination that his conduct did not
meet the contractual definition of “good cause,” as opposed to a finding his
termination was procedurally inadequate.9 The record thus suggests it is not
reasonably probable a different outcome would have been reached on the
breach of contract cause of action in the absence of the instructional error.
Defendants’ arguments that the verdict was affected by the erroneous
instruction are unpersuasive. They contend the jury’s split verdict is
evidence of its reliance on the erroneous instruction, because, so they claim,
the only way to reconcile the defense verdict on the intentional interference
with contract cause of action with the plaintiff’s verdict on the breach of
contract cause of action is to interpret the latter verdict as having been based
on a finding the agency breached an “investigative duty . . . with an
opportunity to cure,” a contractual duty they contend was embraced by the
breach of contract claim but not the intentional interference claim. We
disagree. Both causes of action required a finding the employment
agreement was breached; the jury was so instructed under CACI Nos. 2200
9 Nine jurors answered yes to this question, whereas 10 jurors answered
yes to the special verdict question asking whether James was discharged
without good cause. Whatever the reason for the one juror’s vote, nine jurors
agreed James substantially performed his job duties, which is a sufficient
majority for a verdict in his favor.
38
and 2401.10 The jury could not, consistent with these instructions, find the
Agency breached its contractual duties for purposes of one cause of action but
not the other. Instead, the logical way to reconcile the two verdicts is based
on the element of intent, which the jury was instructed is required to prove
intentional interference with contract, but not breach of contract. (Imperial
Ice Co. v. Rossier (1941) 18 Cal.2d 33, 37 [“The act of inducing the breach
must be an intentional one. If the actor had no knowledge of the existence of
the contract or his actions were not intended to induce a breach, he cannot be
held liable though an actual breach results from his lawful and proper
acts.”].)
Next, Defendants argue “there was more than substantial evidence of a
persistent failure by Mr. James to abide by the Board of Directors’, Messrs.
Leavitt and Utterback, [sic] instructions.” (Italics added.) We disagree with
Defendants’ characterization of their cited evidence, which is weak at best.
At the outset, we observe that the relevant definition from the parties’
contract required “persistent refusal to follow the instructions of [the]
Agency’s . . . Board of Directors.” (Italics added.) As evidence of an
instruction from the board of directors (i.e., Utterback and Leavitt, since the
third member was James), Defendants cite Utterback’s testimony that after
two conference calls during which Utterback instructed agency co-owners,
including James, to meet with producers about business renewal, Utterback
10 The modified CACI No. 2401 instruction given to the jury informed it
that James claimed the Agency breached the employment contract and set
forth the factual elements James needed to prove to establish this claim. The
modified CACI No. 2200 instruction informed the jury that James claimed
Leavitt intentionally caused the Agency to breach the employment contract,
and stated that James had to prove LGE’s conduct “caused [the Agency] to
breach the contract” in order to establish this claim.
39
learned James was not conducting the meetings. However, Defendants cite
no evidence Utterback was acting on behalf of the Agency’s board of directors
during the calls; moreover, whether James’s inaction after these calls
amounted to a “persistent refusal” to follow the instruction is debatable.
Defendants’ other cited evidence is similarly lacking. They contend
Utterback instructed James to “make the Agency profitable,” but identify no
evidence James refused to do so. They point to Leavitt’s dissatisfaction with
James’s level of participation during certain in-person conferences, and refer
to James’s failure to execute agreed action items from the Linnert meetings,
but they fail to indicate these shortfalls involved a refusal to follow
“instructions.” If anything, Defendants’ effort to demonstrate the strength of
the evidence of good cause for James’s termination only serves to highlight its
weakness.
Defendants’ other arguments are similarly unavailing. They argue the
jury’s vote of 10 to 2 in favor of James on the question whether his discharge
was without good cause was “close enough” to indicate the jury was “misled”
by the erroneous instruction. However, “[e]ven a verdict of 10 to 2 has been
deemed ‘not particularly close’ [citation], and thus not helpful in assessing
the impact of the instructional error.” (Krotin v. Porsche Cars North America,
Inc. (1995) 38 Cal.App.4th 294, 305–306.)
Defendants also argue the jury “deliberated for three days, during
which time they sent eight notes to the court.” This statement is inaccurate.
The jury began deliberating at 2:17 p.m. on April 3, 2018, and returned its
verdict two days later, at 3:47 p.m. on April 5, 2018. During this time, they
sent six notes, not eight; the last note simply informed the court they had
reached a verdict. The jury’s notes indicated much of its time was spent
40
deciding how to answer special verdict question number 13, which related to
the intentional interference claim, not the breach of contract claim.
Defendants argue the trial court created confusion with its response to
a jury note asking for a definition of “good faith,” a phrase that appeared in
the erroneous instruction as well as an instruction the jury received under
CACI No. 2210 relating to the intentional interference with contract claim.11
However, the record reveals defense counsel consented to the court’s
response, which forfeits Defendants’ opposition to it on appeal. (People v.
Rodrigues (1994) 8 Cal.4th 1060, 1193 [“Inasmuch as defendant both
suggested and consented to the responses given by the court, the claim of
error has been waived.”]; People v. Ross (2007) 155 Cal.App.4th 1033, 1048
[“A defendant may forfeit an objection to the court’s response to a jury inquiry
through counsel’s consent, or invitation or tacit approval of, that response.”].)
For all of these reasons, we are not persuaded the instructional error
was prejudicial.
II.
The Trial Court Did Not Err in Denying Defendants’ Motion for
Partial New Trial
A. Additional Background
In their motion for partial new trial, Defendants argued a new bench
trial was required on the equitable portion of the case in light of Judge
Hayes’s unavailability to finalize her tentative statement of decision. Relying
on Mace v. O’Reilley (1886) 70 Cal. 231 (Mace), Swift v. Daniels (1980) 103
11 The court responded to the jury’s inquiry as follows: “Formulation of a
precise definition of good faith, or bona fides, is neither possible nor
practicable. You are to determine the meaning of this term in light of the
evidence, and in light of your life experience.”
41
Cal.App.3d 263 (Swift), Armstrong v. Picquelle (1984) 157 Cal.App.3d 122(Armstrong), and Raville v. Singh (1994) 25 Cal.App.4th 1127 (Raville),
Defendants argued the unavailability of the judge who presided over the trial
to “render her statement of decision” and “enter judgment in accordance
therewith” was an irregularity in the proceedings that mandated a new
bench trial. In their words, Judge Medel “can[not] do anything other than
order a new trial of the equitable issues.”
James opposed the motion. He argued that Judge Hayes’s
unavailability to finalize the statement of decision was of no moment as
neither side had requested a statement of decision so as to trigger the
requirements of Code of Civil Procedure section 632. He argued further that
Leiserson v. City of San Diego (1986) 184 Cal.App.3d 41 (Leiserson) governed
the matter, not the authorities cited by Defendants, and led to the conclusion
judgment could be entered based on the tentative statement of decision. He
also argued that under F.P. v. Monier (2017) 3 Cal.5th 1099 (Monier), any
procedural error arising from Judge Hayes’s unavailability did not require a
new trial unless the error was prejudicial, and there was no such prejudice
because Judge Hayes’s tentative decision provided a complete and adequate
basis for appellate review.
James also presented evidence of a November 26, 2018 email chain
circulated among defense counsel, James’s counsel, and a superior court
clerk. In one of the emails in this chain, the superior court clerk stated, “[t]he
plan is for Judge Hayes to complete the Statement of Decision.” Defense
counsel responded: “It was my understanding that Judge Hayes had retired.
I don’t know how she comes out of retirement to hear a matter other than by
stipulation. Defendants are not stipulating to a retired Judge hearing this
matter. . . . I would like clarification if [the] San Diego Superior Court is
42
allowing a retired Judge to complete the Statement of Decision. If so, we will
be filing an objection to that proceeding.” James argued Defendants could
not claim to be prejudiced by Judge Hayes’ unavailability to complete the
statement of decision process when they had objected to having her return
from retirement to do so.
On July 22, 2019, Judge Medel issued a minute order denying
Defendants’ motion. Citing Leiserson, supra, 184 Cal.App.3d at pages 47−48,
the court reasoned that: “The general rule is the judge who hears the case
must sign a Statement of Decision. In this case, a statement of decision was
rendered. While it was labeled ‘tentative,’ it provided a complete and
adequate basis for appellate review.” The court further observed that “[a]ny
objections are preserved pending any appeal. Judge Hayes’ opinion provides
a complete and adequate basis for appellate review and no violence is done to
the princip[le] that ‘the judge who hears the evidence should be the one to
decide the case.’ ” Judge Medel concluded that “[a]ny failure to properly rule
on objections is, at best, harmless error. The decision of Judge Hayes
articulates findings after trial and can be a proper basis for appeal.”
B. Analysis
Defendants contend the trial court erred by denying their motion for
partial new trial. A trial court’s decision to deny a motion for new trial is
reviewed for an abuse of discretion. (Schelbauer v. Butler Manufacturing Co.
(1984) 35 Cal.3d 442, 452.) An abuse of discretion arises where the trial
court’s action “ ‘transgresses the confines of the applicable principles of law.’ ”
(Sargon Enterprises, Inc. v. University of Southern California (2012) 55
Cal.4th 747, 773.) Defendants fail to establish that the trial court abused its
discretion by declining to order a new bench trial.
The trial court denied Defendants’ motion based on its determination
that any procedural error arising from the irregularity identified by
43
Defendants was harmless. This was the correct standard to apply. Code of
Civil Procedure section 657 provides that a new trial may be granted where
the substantial rights of a party have been materially affected by, among
other causes, an “[i]rregularity in the proceedings of the court.” A new trial
cannot be granted based on error that is not prejudicial. (Cal. Const. Art. VI,
§ 13 [“No judgment shall be set aside, or new trial granted, in any cause, on
the ground of misdirection of the jury, or of the improper admission or
rejection of evidence, or for any error as to any matter of pleading, or for any
error as to any matter of procedure, unless, after an examination of the entire
cause, including the evidence, the court shall be of the opinion that the error
complained of has resulted in a miscarriage of justice.”]; Bristow v. Ferguson
(1981) 121 Cal.App.3d 823, 826 [“ ‘[T]he trial court, no less than the appellate
court, is expressly enjoined by article VI, section 4 1/2 [now § 13], of our
Constitution from granting a new trial for error of law unless such error is
prejudicial.’ ”].)
Further, in Monier, our high court held that where “the correct
procedure was not followed before the court signed and entered the
judgment” because “[d]efendant did not have the requisite time to file
objections to the proposed judgment before the court signed and entered the
judgment,” this was a procedural error “subject to harmless error review.”
(Monier, supra, 3 Cal.5th at p. 1116.) Here, the trial court determined that
Judge Hayes’s failure to finalize the statement of decision was harmless
because the tentative statement of decision “provides a complete and
adequate basis for appellate review.” That determination was within the
bounds of the applicable legal principles. In Monier, the court suggested that
“ ‘a trial court’s failure to issue a statement of decision may at times require
reversal in order for the appellate court to effectively perform a review of the
44
material issues.’ ” (Id. at p. 1116.) It therefore stands to reason that a
tentative statement of decision that does allow an effective “ ‘review of the
material issues’ ” should withstand harmless error review. (Ibid.)
And in Leiserson, which the trial court cited as supporting authority for
its determination that the irregularity was “harmless error” that did not
necessitate a new trial, the Court of Appeal affirmed the trial court’s entry of
judgment based on a statement of decision that was never finalized.
(Leiserson, supra, 184 Cal.App.3d at pp. 47–48.) In that case, the trial judge
who presided over the bench trial filed an “ ‘Intended Decision’ ” in favor of
defendants that set forth his findings and conclusions. (Id. at p. 46.)
Plaintiff filed objections to the “ ‘Intended Decision,’ ” and a hearing on the
objections was commenced but never completed, because the trial judge died.
(Id. at p. 47.) Defendants filed a motion for entry of judgment in which they
represented that during the partially-completed hearing, the trial judge had
indicated “ ‘his decision would remain the same.’ ” (Id. at pp. 47–48.) A
different judge granted the request and entered judgment based on the
“ ‘Intended Decision.’ ” (Id. at p. 48.) The Court of Appeal rejected plaintiff’s
claim that judgment had been improperly entered based on the “ ‘Intended
Decision.’ ” The court reasoned, in part, that the “ ‘Intended Decision’ . . .
provides a complete and adequate basis for appellate review.” (Ibid.)
Although not expressed in terms of harmlessness or lack of prejudice, the
Leiserson court was essentially applying harmless error analysis in rejecting
the plaintiff’s claim of error. The sequence of procedural events in this case
was quite similar to the events that transpired in Leiserson. The trial court’s
harmlessness analysis in this case was thus appropriately premised on the
reasoning in Leiserson.
45
A fatal flaw in Defendants’ arguments, both in the trial court and on
appeal, is their failure to argue or otherwise demonstrate that they were
prejudiced by Judge Hayes’s unavailability to complete the statement of
decision process.12 Relying primarily on Mace, Swift, Armstrong, and
Raville, they argued below and continue to assert on appeal that the wrong
procedures were followed, and a new trial was “mandated.” To begin with,
Defendants’ authorities are distinguishable. As the Leiserson court observed,
“Armstrong and Swift . . . involve the very different situation where, although
a tentative decision was rendered, no statement of decision was ever
prepared or signed by the trial judge.” (Leiserson, supra, 184 Cal.App.3d at
p. 48.) The same can be said of Mace and Raville. (See Mace, supra, 70 Cal.
at p. 232 [order for judgment was entered, “but no findings were filed or
waived” (italics omitted)]; Raville, supra, 25 Cal.App.4th at p. 1129 [trial
judge died after announcing tentative decision in open court].)
More to the point, though, although prejudice is manifestly required to
order a new trial based on a procedural irregularity like the one Defendants
complain of here, Defendants did not tender a prejudice argument in their
opening brief on appeal. In their reply brief, they assert for the first time
12 Another flaw is Defendants’ failure to present argument establishing
that we can overlook the absence of a request for a statement of decision. A
trial judge is not required to follow the statement of decision procedures in
the absence of a proper request. (Code Civ. Proc., § 632.) Here, Judge Hayes
directed the parties to submit proposed statements of decision, but
Defendants do not argue or cite any authority establishing that they were
thereby excused from filing a request identifying the controverted issues they
wanted to be decided. Because we resolve Defendants’ challenge based on the
lack of prejudice arising from Judge Hayes’s failure to complete the
statement of decision process, we need not and do not decide whether
Defendants can insist on its completion despite their failure to initiate it by
timely filing a proper request.
46
that their objections to the tentative statement of decision raised ambiguities
and factual inconsistencies that could only be “explained and/or cured” by
Judge Hayes. To the extent this argument is meant as an assertion of
prejudice, it is forfeited because it is belated and unaccompanied by an
explanation establishing good cause for the delay. (See, e.g., Murray &
Murray v. Raissi Real Estate Development, LLC (2015) 233 Cal.App.4th 379,
388–389.) And even if the argument had not been forfeited, we would reject
it. Defendants asserted below that they intended to object to Judge Hayes
returning from retirement to rule on their objections and finalize the
statement of decision, and can hardly be heard to complain now that this did
not transpire. Also, most of Defendants’ objections to the tentative statement
of decision have reemerged as arguments on appeal that, as we shall discuss,
lack merit. The only objection they have not reasserted on appeal did not
support reversing the tentative statement of decision. Thus, Defendants fail
to establish that their substantial rights were affected by Judge Hayes’
failure to rule on their objections.
Accordingly, we find no abuse of discretion in the trial court’s decision
to deny Defendants’ motion for partial new trial.
III.
The Trial Court Did Not Err in Denying Defendants’
Motion for JNOV
A. Additional Background
The tentative statement of decision found in favor of James on most,
though not all, issues. The trial court ruled that James’s equitable claims
were not time-barred, based on the finding that James “did not actually
discover the facts underlying his equitable claims until sometime in autumn
of 2016, as a result of revelations in discovery, when he found that his 14
percent stock share was marketed for $869,585 to his replacement, Ed
47
Nokes.” The court found the cause of action for declaratory relief was “now
moot.”
The trial court ruled in favor of James on his cause of action for breach
of fiduciary duty, based on the finding LGE breached its fiduciary duty as a
majority shareholder by valuing the shares below their fair market value in
connection with the two stock issuances that resulted in reduction of James’s
percentage ownership of the Agency. The court “adopt[ed] Mr. Burkholder’s
reasoning as expressed in his testimony as establishing the value of [the
Agency].” It found that after the first stock issuance, James’s ownership
interest should have been 21.53 percent (rather than 20.2 percent, as
calculated by Russell), and after the second stock issuance, his ownership
interest should have been 17.53 percent (rather than 14 percent, as
calculated by Russell).
The trial court granted James’s request for reformation of the stock
issuance agreements, and ruled that “Plaintiff recovers a fair, if diluted,
ownership in [the Agency], that is 17.53% ownership interest, for a total stock
holding in the amount of 45,127 shares of stock in [the Agency].” However,
the court declined to award punitive damages, stating it “does not find LGE
acted with fraud, malice or oppression.”
Defendants objected to the tentative statement of decision on the
grounds that certain of the trial court’s findings were internally inconsistent
or conflicted with the jury verdict, or were otherwise unsupported by the
evidence. In the motion for JNOV filed after Judge Medel entered judgment
based on the tentative statement of decision, Defendants raised anew many
of the errors asserted in their objections.
B. Analysis
On appeal, Defendants contend their motion for JNOV was erroneously
denied. “Generally, an appellate court reviews a trial court’s ruling on such a
48
motion for sufficiency of the evidence supporting the verdict. [Citation.]
However, review is de novo ‘[i]f the appeal challenging the denial of the
motion for judgment notwithstanding the verdict raises purely legal
questions.’ ” (Markow v. Rosner (2016) 3 Cal.App.5th 1027, 1045.) For the
reasons we discuss, we reject each of Defendants’ claims of error.
1. The Tentative Statement of Decision Did Not Conflict with the
Jury’s Special Verdict
Defendants contend the trial court’s “finding of a breach of fiduciary
duty is irreconcilably inconsistent with the jury verdict on the intentional
interference with contract cause of action.” (Boldface omitted.) As we
explain, this contention lacks merit.
The section of the tentative statement of decision in which the court
determined that LGE breached its fiduciary duties as a majority shareholder
included a sentence that stated, “LGE’s manipulation of [the Agency’s] stock
price to benefit itself at Plaintiff’s expense, constituted a breach of its
fiduciary duty to Plaintiff.” Defendants seize on this sentence as evidence the
court found the acts that constituted a breach of fiduciary duty were
committed intentionally. They contend the jury reached the opposite
conclusion when it answered “No” to the special verdict question, “Did [LGE]
intend to cause the Agency to breach its employment contract with . . .
James?” They argue the theory of intentional, pretextual misconduct offered
at trial, but rejected by the jury, was the same misconduct the trial court
found was committed intentionally. Thus, they contend, the trial court’s
decision conflicts with the jury’s verdict.
“Issues adjudicated in earlier phases of a bifurcated trial are binding in
later phases of that trial and need not be relitigated.” (Arntz Contracting Co.
v. St. Paul Fire & Marine Ins. Co. (1996) 47 Cal.App.4th 464, 487.) And
“[w]here legal claims are first tried by a jury and equitable claims later tried
49
by a judge, the trial court must follow the jury’s factual determinations on
common issues of fact.” (Hoopes v. Dolan (2008) 168 Cal.App.4th 146, 158.)
However, no error arises where “[t]he court’s determination was founded on
issues of fact distinct from those supporting the jury verdict, and thus was
not bound by that verdict.” (Id. at p. 161.)
Here, there is no conflict, because the jury verdict and trial court
decision were founded on distinct issues of fact. The theory of intentional
interference with contract presented to the jury was that LGE manufactured
grounds for terminating James so it could exercise its option to repurchase
his stock and sell it at a higher price to Nokes. The trial court’s
determination that LGE breached its fiduciary duties was based on the
finding that LGE undervalued the Agency’s stock in connection with the two
stock issuances, which caused James’s percentage ownership in the Agency
being overly reduced to 14 percent when it should have been 17.53 percent.
The termination decision and negotiations with Nokes happened after
James’s ownership interest had already been reduced. Thus, the jury’s
verdict and the trial court’s decision were based on events that were
temporally distinct and involved different transactions.
We also disagree with Defendants’ contention that the trial court’s
decision was based on a finding of intentional misconduct. “ ‘Even though a
finding might have been more clearly phrased, it is sufficient if its language
is clear enough to indicate what the court intended; and if there are findings
sufficient to support the judgment, they are not vitiated by the
unintelligibility of others. Any uncertainty in the findings will be construed
so as to support the judgment rather than to defeat it.’ [Citation.] Even
where findings are to some extent inconsistent a judgment may not be set
aside unless the conflict is clear and material and the findings are incapable
50
of being harmoniously construed.” (Richter v. Walker (1951) 36 Cal.2d 634,
639 (Richter).)
Although the word “manipulation” in the quoted sentence from the trial
court’s decision arguably connotes acts committed with a particular goal or
purpose, it is apparent from the decision as a whole the court did not find the
underlying wrongs were committed intentionally. To begin with, intent is not
an element of a cause of action for breach of fiduciary duties (see Oasis West
Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820 [“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.”]), so the court did not
have to find LGE acted with any intent in order to conclude it had breached
its fiduciary duties.
The trial court, apparently intending to fend off arguments like the one
Defendants now raise, expressly observed that “[w]hile [LGE] was not found
liable for interference with Plaintiff’s employment contract, the elements of a
cause of action for breach of fiduciary duty differ as does the burden of proof.”
(Italics added.) It strains credulity to believe the court, having just
acknowledged the jury verdict on the intentional interference with contract
claim, would go on to render a decision that conflicted with it.
And while James alleged that LGE intentionally undervalued the
agency to deprive him of his rightful ownership interest, the trial court
rejected this theory when it denied his request for punitive damages on the
basis that LGE had not “acted with fraud, malice, or oppression.” (See Civ.
Code, § 3294, subds. (c)(1) [defining “ ‘Malice’ ” to include “conduct which is
intended by the defendant to cause injury to the plaintiff” (italics added)],
(c)(3) [defining “ ‘Fraud’ ” as “an intentional misrepresentation, deceit, or
concealment of a material fact known to the defendant with the intention on
51
the part of the defendant of thereby depriving a person of property or legal
rights or otherwise causing injury” (italics added)].)
Nor do we read the decision as inserting a gratuitous finding of
intentional misconduct. The trial court’s decision that LGE breached its
fiduciary duties in connection with the stock issuances was based entirely on
Russell’s business valuations, which the court found were not “fair market
analyses.” However, the court did not find Russell undervalued the Agency
intentionally. Instead, later in the decision when explaining its reasons for
awarding reformation, it stated that “Mr. Russell made mistakes in his
accounting” and “erred in assigning different valuations for the company
based on his flawed EBITDA analysis.” These descriptions signal the court’s
view that the undervaluing of the stock prices resulted from negligent, not
intentional, misconduct on the part of Russell.
Thus, although the trial court used the word “manipulation” in its
ruling, the rest of its decision makes clear its resolution of the breach of
fiduciary duties cause of action was not based on a finding that LGE
committed intentional acts of misconduct.
2. The Trial Court Did Not Err by Awarding Reformation
Next, Defendants contend that because the trial court found the
misconduct that constituted a breach of LGE’s fiduciary duties was
committed intentionally, the court erred by awarding reformation, which
Defendants argue cannot be granted in a case involving “[a]nything more
than ordinary negligence (such as gross negligence or intentional
misconduct).” Since we have already determined the court did not, in fact,
base its ruling on a finding of intentional misconduct, however, we reject this
argument as well.
52
3. The Trial Court’s Factual Findings Were Not Internally
Conflicting
Next, Defendants claim the trial court’s basis for awarding reformation
conflicted with its ruling that the equitable claims were not time-barred.
The amended complaint sought reformation of the two stock issuance
agreements based on the allegation they were intended to be based on the
stock’s fair market value, but in reality were based on stock valuations that
were below market value. The stock issuance agreements were entered in
evidence during the jury trial. Each agreement recited the number of
additional shares of stock to be issued by the Agency in exchange for each
party’s capital contribution (or, in the case of LGE, forgiveness of the
Agency’s debt). Each agreement stipulated these recitals were “true and
correct.”
The part of the trial court’s decision in which it gave its reasons for
granting reformation began by quoting Civil Code sections 339913 and
3401.14 The court then set forth its ruling on reformation as follows: “In this
case, the parties intended that Plaintiff would suffer two reductions in his
ownership interest in [the Agency], based upon a correct valuation of the
company’s worth. Plaintiff relied on [LGE] to accomplish this purpose. . . .
13 Civil Code section 3399 provides: “When, through fraud or a mutual
mistake of the parties, or a mistake of one party, which the other at the time
knew or suspected, a written contract does not truly express the intention of
the parties, it may be revised on the application of a party aggrieved, so as to
express that intention, so far as it can be done without prejudice to rights
acquired by third persons, in good faith and for value.”
14 Civil Code section 3401 provides: “In revising a written instrument, the
Court may inquire what the instrument was intended to mean, and what
were intended to be its legal consequences, and is not confined to the inquiry
what the language of the instrument was intended to be.”
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LGE’s employee, Mr. Russell[,] made mistakes in his accounting. He erred in
assigning different valuations for the company based on his flawed EBITDA
analysis. . . . Plaintiff recovers a fair, if diluted, ownership in [the agency],
that is 17.53% ownership interest, for a total stock holding in the amount of
45,127 shares of stock in [the Agency].” (Italics added.)
Defendants seize on the word “mistakes” in this passage and contend it
signals the trial court awarded reformation based on Russell’s unilateral
mistake. Next, they reason that under Civil Code section 3399, a unilateral
mistake supporting reformation requires evidence—in Defendants’ words—
“the non-mistake making party ‘knew or suspected’ the mistake of the other
party ‘at the time.’ ” (Boldface omitted.) From this, they conclude the trial
court implicitly found James was “the non-mistake making party,” and that
he therefore “ ‘knew or suspected’ ” at the time Russell performed the stock
valuations that they were wrong. (Boldface omitted.) This leads Defendants
to their conclusion that James’s discovery of the relevant facts relating to the
undervaluation of his stock was not delayed, despite the court’s finding
otherwise when it ruled the statute of limitations had not run. Thus,
Defendants argue, the court’s decision was internally conflicting.
Defendants’ logic falls apart at its first step, because their focus on the
trial court’s observation that Russell “made mistakes in his accounting” is
misplaced. (Italics added.) The relevant mistake for purposes of the remedy
of reformation is the parties’ mistake in making the agreement.
“Reformation may be had for a mutual mistake or for the mistake of one
party which the other knew or suspected, but in either situation the purpose
of the remedy is to make the written contract truly express the intention of
the parties.” (Lemoge Electric v. County of San Mateo (1956) 46 Cal.2d 659,
663; see Rest.2d Contracts, § 155 [“Where a writing that evidences or
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embodies an agreement in whole or in part fails to express the agreement
because of a mistake of both parties as to the contents or effect of the writing,
the court may at the request of a party reform the writing to express the
agreement[.]” (Italics added.)].)
“ ‘Even though a finding might have been more clearly phrased, it is
sufficient if its language is clear enough to indicate what the court
intended.’ ” (Richter, supra, 36 Cal.2d at p. 639.) Russell did not sign the
stock issuance agreements; he merely performed the underlying calculations
and gave the results to other LGE personnel. The accounting mistakes the
trial court attributed to him were not mistakes as to the contents or effect of
the stock issuance agreements. (See Rest.2d Contracts, § 155.)
Though the trial court did not say so explicitly, it is nevertheless clear
from the court’s language that the relevant “mistake” that was the basis for
its grant of reformation was the parties’ mutual, but mistaken, belief (in the
court’s words, “the parties[’] inten[t]”) that the stock issuances were “based
upon a correct valuation of the company’s worth.” The court’s discussion of
Russell’s mistakes in accounting, which were “based on . . . flawed EBITDA
analysis,” conveyed its finding that the business valuations used to calculate
the number of shares of stock issued in each of the two transactions were not
“correct” as the parties intended. It is thus sufficiently clear from the court’s
discussion that its award of reformation was based on a finding of mutual
mistake by “the parties.”
Because the trial court’s decision was not based on a finding of
unilateral mistake, the premise of Defendants’ argument fails, and we need
not and do not address their remaining contentions, including their argument
that the finding of unilateral mistake irreconcilably conflicted with the
court’s ruling denying their statute of limitations defense.
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4. The Decision to Grant Reformation Was Supported by Substantial
Evidence
Next, Defendants contend that this court “cannot affirm” the trial
court’s decision to grant reformation “under that theory [of mutual mistake]”
because substantial evidence does not support this theory. We reject their
claim.
“ ‘[I]n reviewing the sufficiency of the evidence, we must consider all of
the evidence in the light most favorable to the prevailing party, accept as true
all the evidence and reasonable inferences therefrom that tend to establish
the correctness of the trial court’s findings and decision, and resolve every
conflict in favor of the judgment.’ ” (Garlock Sealing Techs., LLC v. NAK
Sealing Techs. Corp. (2007) 148 Cal.App.4th 937, 951 (Garlock).)
Defendants’ first argument is somewhat convoluted, but essentially
they contend there is a lack of substantial evidence the parties agreed to “ ‘a
correct valuation of the company’ ” because the stock issuance agreements did
not set forth any particular methods of valuation. We reject the argument
because the court did not find the parties agreed to any particular valuation
methods. The court only found the parties agreed the valuations
themselves—i.e., the result produced by the method—would be correct. And
although the parties dispute whether extrinsic evidence supported the court’s
finding of mutual intent, they ignore relevant language in the stock issuance
agreements themselves. (See Powerine Oil Co., Inc. v. Superior Court (2005)
37 Cal.4th 377, 396 [“The mutual intention of the parties is to be inferred, if
possible, solely from the written provisions of the contract.”].) Specifically,
the parties stipulated in each stock issuance agreement that the recitals,
which specified, among other things, the number of shares to be issued in
exchange for each capital contribution, were “correct.” This explicit
contractual term necessarily reflected the parties’ understanding (ibid.), and
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it served as substantial evidence supporting the court’s finding of mutual
intent.
Defendants’ second argument is that Russell “was not mistaken in his
actions,” so the trial court erred in granting reformation. Their argument
refers us to earlier sections of their brief in which they describe Russell’s
testimony defending his calculations. But Defendants ignore Burkholder’s
testimony criticizing Russell’s EBIDTA analysis. And because Defendants’
argument is entirely based on evidence favoring their position, it is not an
adequate substantial evidence argument. “The appellant’s brief must set
forth all of the material evidence bearing on the issue, not merely the
evidence favorable to the appellant, and must show how the evidence does
not sustain the challenged finding. [Citations.] If the appellant fails to set
forth all of the material evidence, its claim of insufficiency of the evidence is
forfeited.” (Garlock, supra, 148 Cal.App.4th at p. 951.) The court’s finding
that Russell’s methods were erroneous was explicitly premised on
Burkholder’s testimony and opinions. This was substantial evidence
supporting the court’s decision.
Defendants’ third argument is that because three experts (Russell,
Burkholder, and Zamucen) all “testif[ied] to different valuation methods,”
this proves no “ ‘correct’ valuation method” existed. However, the trial court
concluded otherwise when it adopted Burkholder’s analysis “as establishing
the value of [the Agency].” Again, this finding was supported by substantial
evidence.
5. Defendants Fail to Establish That the Court Committed
Reversible Error in Resolving the Declaratory Relief Claim
James’s cause of action for declaratory relief against LGE sought
judicial declarations of various rights and obligations of the parties under the
Shareholders’ Agreement as to which the parties were allegedly in dispute.
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In its statement of decision, the trial court found the parties “now agree” as to
the interpretation of the Shareholders’ Agreement, and that “this issue is
now moot.”
Defendants quarrel with this reasoning and claim the “cause of action
was not moot” but instead was abandoned by James “at some time after the
trial commenced” and as a result James “did not meet his burden of proof
that declaratory relief was appropriate.” (Boldface omitted.) They argue the
“ruling denying the motion for JNOV on this cause of action must be
reversed.”
Defendants do not demonstrate a basis for reversal. Mootness is a
ground for denying declaratory relief. (See, e.g., Burke v. City etc. of San
Francisco (1968) 258 Cal.App.2d 32, 34 [explaining that declaratory relief
“will not lie to determine a matter which is or has become moot”]; accord
Teachers Management & Inv. Corp. v. City of Santa Cruz (1976) 64
Cal.App.3d 438, 444 [“An action for declaratory relief will be dismissed if it is
shown that the controversy presented is or has become moot.”].) By ruling
the issue moot, the court effectively declined to award declaratory relief.
Although Defendants argue the court should have rejected the claim for a
different reason, Defendants fail to identify an injury flowing from the court’s
alleged error. (See Code Civ. Proc., § 475 [“No judgment, decision, or decree
shall be reversed or affected by reason of any error, ruling, instruction, or
defect, unless it shall appear from the record that such error, ruling,
instruction, or defect was prejudicial, and also that by reason of such error,
ruling, instruction, or defect, the said party complaining or appealing
sustained and suffered substantial injury, and that a different result would
have been probable if such error, ruling, instruction, or defect had not
occurred or existed.”].)
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We decline to reverse the order denying Defendants’ JNOV motion on
this ground.
DISPOSITION
The judgment and orders are affirmed. James is entitled to his costs on
appeal. (Cal. Rules of Court, rule 8.278(a)(1) & (2).)
DO, J.
WE CONCUR:
McCONNELL, P. J.
O'ROURKE, J.
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