Wilson v. Interinsurance Exchange of the Automobile Club CA4/1 ( 2024 )

Filed 9/13/24 Wilson v. Interinsurance Exchange of the Automobile Club CA4/1
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
SEAN WILSON et al., D081856
Plaintiffs and Appellants,
v. (Super. Ct. No. 37-2018-
00006964-CU-FR-NC)
INTERINSURANCE EXCHANGE OF
THE AUTOMOBILE CLUB et al.,
Defendants and Respondents.
APPEAL from judgments of the Superior Court of San Diego County,
Robert P. Dahlquist, Judge. Affirmed.
Quade & Associates, Michael W. Quade and Cheryl L. Gustafson for
Plaintiffs and Appellants.
Sheppard, Mullin, Richter & Hampton, John T. Brooks, Joseph E. Foss,
Thomas R. Proctor, and Matthew G. Halgren for Defendants and
Respondents.
I. INTRODUCTION
Sean Wilson and Chet Johnston1 (collectively Appellants) appeal from
judgments of dismissal of their individual claims entered after the trial court
granted motions for summary judgment brought by respondents
Interinsurance Exchange of the Automobile Club, Auto Club Enterprises, and
Automobile Club of Southern California (Auto Club). The trial court
concluded Appellants lacked standing because their personal claims and
damages were incidental to injuries suffered by corporate plaintiffs, which
they owned: S&J Builders and Restoration Services, Inc. (S&J), a California
corporation, and The Home Improvement Company, Inc. (THIC), a dissolved
California corporation. Further, Auto Club did not owe a duty to Appellants
independent of their status as shareholders of their companies.
According to Appellants, the trial court erred because Auto Club failed
to establish that Appellants lacked standing to pursue their individual claims
in the operative complaint for three reasons: (1) Appellants seek to recover
for injuries separate from the injury to the value of the corporate stock; (2) as
closely held corporations, case law permits Appellants to retain their own
personal causes of action against Auto Club; and (3) Appellants retain their
rights to pursue individual damages under the maxim “for every wrong there
is a remedy.”
We conclude the trial court properly granted the motions for summary
judgment and affirm.
1 Mr. Chet Johnston died during the pendency of this action, his son and
successor-in-interest, is prosecuting this matter on Mr. Johnston’s behalf.
2
II. FACTUAL AND PROCEDURAL BACKGROUND
A. The Parties
S&J and THIC were contracting businesses which worked for many
years with Auto Club, acting as preferred vendors for homeowners who
suffered property losses while insured by Auto Club. The companies provided
repair services to houses damaged in events covered by Auto Club insurance
policies.
Wilson is the vice president, responsible managing officer, and a
49 percent shareholder of S&J, and his wife is a 51 percent shareholder and
the president of S&J. From 1998 to 2015, Wilson, through S&J, worked with
Auto Club as a preferred vendor.
Johnston was the 100 percent owner of THIC, which did business as
“ESN.”2 THIC was part of a general partnership formed in January 2012, by
Johnston and his business partner, Chuck Bellows. Mr. Bellows owned a
company called CSRM, Inc. The general partnership was split 72 percent to
THIC and 28 percent to CSRM. From 1997 to 2015, THIC also worked with
Auto Club as a preferred vendor. Wilson, S&J, Johnston, and THIC contend
they consistently provided superior service for Auto Club and its insured
homeowners throughout their long-term business partnerships.
B. Auto Club’s Homeowners Repair Programs
As a service to its customers, Auto Club developed a preferred home
repair provider program. As will be detailed, over the years the program
would evolve and go through different iterations. S&J and THIC participated
in all the program versions, except the last.
2 Since THIC, not ESN, is a named plaintiff in this action, we refer to
Johnston’s business as THIC.
3
In February 2013, Auto Club asked Wilson, on behalf of S&J, and
Johnston, on behalf of THIC, if they were interested in participating in Auto
Club’s newest preferred vendor concept called Members Preferred Repair
program (MPR). Auto Club’s new program asked home repair business
participants to bid on various geographic areas and provide discounted
services to homeowners in exchange for a certain volume of referrals in those
areas. Selected contractors were required to have the ability to scale
operations up for the work required, provide minimum service levels, and
give competitive discounts for zones in which they bid.
Wilson, on behalf of S&J, and Johnston, on behalf of THIC, responded
to Auto Club’s request for proposal to participate in the MPR program, and
Auto Club accepted those proposals in August 2013 via an email containing
the subject line “MPR RFP-Contract Award.” In the contract award emails,
Auto Club stated: “We have received approval on the MPR proposed network
in the last few weeks. I’m happy to inform you, your company was included
in our recommendation and we will be moving forward in executing a two
year agreement for the below volumes and discounts for emergency and
restoration/large loss referrals.”
In September 2013, Auto Club sent a draft MPR program contract to
Johnston,3 but never circulated a finalized MPR program contract for all
vendors’ signatures. The parties to the proposed MPR program contract were
Auto Club and the contracted company. Although S&J, THIC, and Auto
Club never signed an MPR program contract, all parties moved forward with
the new home repair program in September 2013. Based on the express
representations and promises for inclusion in the MPR program, and
promised referral volumes, Appellants took steps to ensure their companies
3 Auto Club did not send a draft MPR program contract to Wilson.
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could meet equipment, personnel, office and other business demands to
execute their obligations under the agreed arrangement.
C. Auto Club Replaces the Member Preferred Repairs Program with a Pilot
Program
In February 2014, Auto Club started looking at a new pilot program to
replace the MPR, and in May 2014, stopped tracking the referral
commitment with their MPR vendors.
Additionally, in May 2015, Auto Club sent letters to the MPR
participating companies, including S&J and THIC, announcing the new pilot
program starting June 1, 2015, that would result in the MPR vendors
experiencing a decrease or no referrals in territories where the pilot program
was being introduced. Wilson, S&J, Johnston, and THIC contend Auto Club
started this new program with the intention of firing all or most of the MPR
vendors and beginning fresh with new contractors.
D. Auto Club Terminates its Relationship with THIC
In September 2014, Johnston and Mr. Bellows sold the ESN
partnership to Response Team 1. The parties dispute whether prior to the
sale Johnston disclosed to Auto Club that he was selling THIC but would run
the new operation for at least five years under his employment agreement.
In October 2014, despite THIC’s positive performance, Auto Club
suspended THIC. Although Johnston tried to resolve the issue, Auto Club
terminated THIC from the MPR program in November 2014 and upheld their
decision in February 2015 after Johnston appealed Auto Club’s decision
internally.
E. Auto Club Terminates its Relationship with S&J
In June 2015, Auto Club emailed Wilson, raising issues with nine of
S&J’s estimates and that Auto Club planned to discuss those with its
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oversight committee. S&J responded to this audit, explaining its position. In
July 2015, Auto Club informed Wilson that the oversight committee voted not
to include S&J in the pilot program Auto Club debuted the previous month.
F. Wilson, S&J, Johnston, and THIC’s Litigation Against Auto Club
In February 2018, Wilson, S&J, Johnston, and THIC filed a complaint
against Auto Club. The operative complaint is the first amended complaint
(FAC) filed in July 2021. The FAC alleges that, in ending S&J and THIC’s
participation in the MPR program, Auto Club breached their agreement
while concealing and misrepresenting certain information. The FAC alleges
nine causes of action on behalf of all four plaintiffs, including claims for
fraud, promissory estoppel, breach of fiduciary duty, and breach of contract.
In the FAC, Appellants allege Auto Club’s conduct caused them to
suffer economic damages and emotional distress. Specifically, Wilson seeks
damages for (a) loss of salary in excess of $200,000 for him and his wife, who
assigned her salary claims to Wilson, and (b) emotional distress. Johnston
seeks (a) individual damages related to the employment agreement he
executed with the company that purchased THIC’s assets, Response Team 1,
including the loss of $240,000 a year in salary, and (b) emotional distress
damages.
Auto Club filed four summary judgment motions (one against each
plaintiff) attacking the FAC. The trial court granted the motions as to
Appellants, but denied the motions as to S&J and THIC.
In granting the summary judgment motion against Wilson, the trial
court found that Wilson’s purported damages for lost wages and emotional
distress were incidental to the injury caused by Auto Club severing its
business relationship with S&J. Additionally, the trial court found the
gravamen of the wrongs alleged in all the causes of action in the FAC relate
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to the business relationship between Auto Club and S&J, not a particular
wrong Auto Club did to Wilson. Finally, the trial court determined Wilson’s
allegations in the FAC did not establish that Auto Club owed Wilson a special
duty independent of Wilson’s status as an S&J shareholder. Therefore, the
trial court concluded Wilson did not have standing to bring the claims he
asserted. On August 26, 2022, the trial court entered judgment dismissing
Wilson.
With respect to Johnston, the trial court took the matter under
submission after hearing oral argument, and subsequently granted Auto
Club’s summary judgment motion for the same reasons articulated in its
ruling against Wilson. On September 22, 2022, the trial court entered
judgment dismissing Johnston’s claims.
In February 2023, Wilson and Johnston appealed the judgments of
dismissal.
III. DISCUSSION
A. Standard of Review
We review a summary judgment ruling de novo, applying the same
standards as the trial court. (Birschtein v. New United Motor Manufacturing,
Inc. (2001) 92 Cal.App.4th 994, 999.) “In reviewing a motion for summary
judgment, we accept as undisputed fact only those portions of the moving
party’s evidence that are uncontradicted by the opposing party. In other
words, the facts alleged in the evidence of the party opposing summary
judgment and the reasonable inferences that can be drawn therefrom are
accepted as true.” (Hersant v. Department of Social Services (1997) 57
Cal.App.4th 997, 1001.)
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B. Appellants’ Claims are Derivative, Not Individual
On appeal, Appellants argue Auto Club is not entitled to summary
judgment because Appellants do not seek to recover for injuries to the
corporate stock or harm suffered by all shareholders, but rather, the harm
they directly and individually suffered. They contend the trial court erred in
finding their claims were derivative because a shareholder “may sue as an
individual where he [or she] is directly and individually injured although the
corporation may also have a cause of action for the same wrong.” (Sutter v.
General Petroleum Corp. (1946) 28 Cal.2d 525, 530 (Sutter).)
We find that while courts have generally recognized that individual
and derivative claims may coexist in the same action, here Appellants’
allegations support only derivative claims. That conclusion, not any per se
bar against concurrent derivative and individual claims, justified eliminating
Appellants’ individual claims.
1. The Distinction Between Shareholder Individual and Derivative
Actions
“Shareholders may bring two types of actions, ‘a direct action filed by
the shareholder individually . . . for injury to his or her interest as a
shareholder,’ or a ‘derivative action filed on behalf of the corporation for
injury to the corporation for which it has failed or refused to sue.’ [Citation.]
‘The two actions are mutually exclusive: i.e., the right of action and recovery
belongs either to the shareholders (direct action) or to the corporation
(derivative action).’ ” (Schuster v. Gardner (2005) 127 Cal.App.4th 305,
311–312, italics omitted (Schuster).)
An “ ‘action is derivative, i.e., in the corporate right, if the gravamen of
the complaint is injury to the corporation, or to the whole body of its stock
and property without any severance or distribution among individual holders,
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or it seeks to recover assets for the corporation or to prevent the dissipation of
its assets.’ ” (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d. 93, 106 (Jones).)
On the other hand, an individual action “ ‘is a suit to enforce a right against
the corporation which the stockholder possesses as an individual.’ ” (Id. at
p. 107.) “If the injury is not incidental to an injury to the corporation, an
individual cause of action exists.” (Ibid.) “Examples of direct shareholder
actions include suits brought to compel the declaration of a dividend, or the
payment of lawfully declared or mandatory dividends, or to enjoin a
threatened ultra vires act or enforce shareholder voting rights.” (Schuster,
supra, 127 Cal.App.4th at p. 313; accord, Sutter, supra, 28 Cal.2d at p. 530
[“ ‘If the injury is one to the plaintiff as a stockholder and to him individually,
and not to the corporation, as where the action is based on a contract to
which he [or she] is a party, or on a right belonging severally to him [or her],
or on a fraud affecting him [or her] directly, it is an individual action.’ ”].)
2. Analysis
Appellants suggest that because they are not seeking recovery for an
injury to the value of corporate stock, their claims are individual. But the
court in Nelson v. Anderson (1999) 72 Cal.App.4th 111 (Nelson) specifically
rejected this argument. In Nelson, the court concluded plaintiff did not have
standing to pursue an individual claim for breach of fiduciary duty against
her business partner. (Id. at pp. 125–126.) The court determined
the plaintiff’s complaint alleged misfeasance or negligence in managing
the corporation’s business, causing injury to the business itself. (Ibid.)
Plaintiff argued “that because she did not expressly allege that the value of
her stock was diminished as the result of an injury to the corporation, she has
successfully alleged an individual injury. [The plaintiff’s] economic damages
were lost capital investment, lost earnings, and lost opportunities.” (Id. at
9
p. 126.) The Nelson court disagreed, stating “[s]hareholders own neither the
property nor the earnings of the corporation. . . . [The plaintiff] had no
ownership interest in the profits of [the corporation] and cannot have been
deprived of them.” (Ibid., citations omitted.) Accordingly, we disagree that a
shareholder automatically has an individual cause of action if they are not
seeking injury to the value of corporate stock.
Instead, to determine whether Appellants have standing to assert their
individual claims, we rely on Jones. (Auto Equity Sales, Inc. v. Superior
Court of Santa Clara County (1962) 57 Cal.2d 450, 455 [“The decisions of [the
California Supreme Court] are binding upon and must be followed by all the
state courts of California.”].) We therefore examine whether Appellants’
alleged injuries are incidental to the injuries S&J and THIC suffered. (See
Jones, supra, 1 Cal.3d. at pp. 106–108.)
First, the FAC’s core allegation is Auto Club unreasonably and without
justification terminated S&J and THIC from the MPR program and did not
honor the promises made with respect to that program. The FAC details,
among other wrongs, that Auto Club did not provide the promised specific
percentage referral volume, failed to keep the program estimates to the
appropriate pricing, failed to provide a written contract, and prematurely
terminated their business partnership with S&J and THIC. Accordingly, the
claims alleged in the FAC are Auto Club’s breach of the MPR program
contract and wrongful termination of its business relationship with S&J and
THIC, not a particular wrong done to Appellants.
There is substantial evidence in the record to support this conclusion.
First, S&J and THIC, not Appellants, contracted with Auto Club to
participate in the MPR program. In the contract award emails, Auto Club
informed Appellants that their companies were included in the MPR
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program. Also, the parties to the proposed MPR program contract are Auto
Club and S&J or THIC, i.e., the contracted company, not the individual
shareholders of that company.
The FAC also alleges it is because Auto Club breached the MPR
program contract and terminated its relationship with S&J and THIC that
the corporations lost a significant amount of business resulting in Appellants
suffering significant income loss and emotional distress. In discovery, Wilson
stated at the time Auto Club terminated its relationship with S&J, the work
Auto Club assigned to S&J comprised an estimated 90 percent of S&J’s
revenue. Thus, the emotional distress and lost wage damages Appellants
pursue directly result from Auto Club breaching the contract with their
companies, not a specific injury to themselves that exist outside of the injury
to the corporation.
Further, despite Appellants’ claim they are not seeking to recover
corporate assets, their lost income is a corporate asset so it may only be
pursued in a derivative action. (See Nelson, supra, 72 Cal.App.4th at p. 126;
Miller v. McColgan (1941) 17 Cal.2d 432, 436.)
Whether a party has standing in a given legal dispute is a matter we
review de novo. (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 150–151
(Schrage).) “We review any factual findings underlying a trial court’s ruling
on standing for substantial evidence.” (Citizens for Amending Proposition L
v. City of Pomona (2018) 28 Cal.App.5th 1159, 1174.) Here, substantial
evidence supports the trial court’s finding that Appellants lack standing to
pursue their individual causes of action against Auto Club. Appellants’
purported damages of lost salary and emotional distress are incidental to the
injuries S&J and THIC suffered.
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C. Appellants Do Not Retain Individual Causes of Action
Appellants’ second argument on appeal is that case law provides that
shareholders of closely held corporations retain their own personal causes of
action. They rely on Tan Jay Internat., Ltd. v. Canadian Indemnity Co.
(1988) 198 Cal.App.3d 695 (Tan Jay) for the proposition that a shareholder in
a closely held corporation can sue for injuries to himself or herself, such as
emotional distress damages. Tan Jay is factually distinguishable from this
case.
In Tan Jay, a woman’s sportswear corporation and its majority
shareholder sued for damages, breach of contract, emotional distress, and
declaratory relief against an insurer, alleging bad faith refusal to defend and
indemnify them in a third-party action. (Tan Jay, supra, 198 Cal.App.3d at
pp. 699–700.) The court concluded the majority shareholder had standing to
sue for his own emotional distress damages because he was a named insured
on the coverage policy at issue in the case. (Id. at p. 707 [“where
‘shareholders of a closely held corporation are joint insureds with it, the
insurers’ implied covenant of good faith and fair dealing runs to the
shareholders as well as to the corporation and the shareholders may pursue a
cause of action for its breach’ ”.) Unlike in Tan Jay Appellants in this matter
do not have an independent contract (like an insurance policy) with Auto
Club on which to base their individual claims. We therefore reject this
argument.
D. Remedy for Every Wrong
Appellants’ final argument on appeal is that they retain their rights to
pursue individual damages under the maxim for every wrong there is a
remedy. Under these circumstances, we disagree.
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Civil Code section 3523 provides: “For every wrong there is a remedy.”
“But this statute does not create substantive rights or an unbounded
right to damages. [Citation.] Instead, ‘[this] wholesome maxim of
jurisprudence . . . can obviously have no application to any but legal wrongs
or those wrongs for which the law authorizes or sanctions redress.’
[Citations.] ‘A tort . . . involves a violation of a legal duty, imposed by statute,
contract, or otherwise, owed by the defendant to the person injured. Without
such a duty, any injury is ‘damnum absque injuria’—injury without wrong.’
[Citations.] The proposition that courts should strain to provide remedies for
every ‘wrong’ in the moral sense flies directly in the face of this longstanding
authority that only legal wrongs must be redressed.” (The MEGA Life &
Health Ins. Co. v. Superior Court (2009) 172 Cal.App.4th 1522, 1526–1527,
italics omitted (MEGA Life); accord, County of San Luis Obispo v. Abalone
Alliance (1986) 178 Cal.App.3d 848, 864–865.) “Instead, whether to recognize
a new ‘legal wrong’ or ‘tort’ is often governed by policy factors. [Citation.] In
making these determinations, both the courts and the Legislature must
weigh concepts of ‘public policy,’ as well as problems inherent in measuring
loss, and ‘floodgates’ concerns, in addition to the traditional element of
foreseeability.” (MEGA Life, at p. 1527.)
Consequently, Civil Code section 3523 does not allow Appellants to
recover for their lost wages and emotional distress damages unless existing
law allows the recovery, or public policy supports recognition of such a right.
(MEGA Life, supra, 172 Cal. App. 4th at p. 1528.) As discussed, we find no
legal support for Appellants’ causes of action, so we turn to whether public
policy supports Appellants’ individual damage claims.
Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238 identified
three primary policy justifications for requiring derivative actions:
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(1) preventing a multiplicity of lawsuits and ensuring equal treatment for
all aggrieved shareholders; (2) protecting the rights of creditors; and
(3) encouraging resolution within the corporation and promoting managerial
freedom.4 (Jara, at pp. 1258–1259.) Our Supreme Court in Jones, however,
did not rely upon such policy considerations in distinguishing individual and
derivative actions. (Jones, supra, 1 Cal.3d at pp. 106–108.) While Jara’s
policy justifications are typically attenuated in closely held companies like
S&J and THIC, that fact does not authorize us to disregard the Jones
framework. (See Schrage, supra, 69 Cal.App.5th at p. 158.) To allow
Appellants to maintain their individual causes of action based on such policy
considerations “would essentially eliminate the derivative action rule in the
context of close corporations and other closely held entities. California law
does not support that result.” (Ibid.) We therefore reject Appellants’ final
argument.
4 Another policy justification for derivative actions is to prevent “the risk
of double recovery—once to the shareholder and once to the corporation.”
(Vinci v. Waste Management, Inc. (1995) 36 Cal.App.4th 1811, 1815.)
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IV. DISPOSITION
The trial court’s August 26, 2022 and September 22, 2022 judgments of
dismissal are affirmed. Auto Club to recover their costs on appeal.
RUBIN, J.
WE CONCUR:
KELETY, Acting P. J.
CASTILLO, J.
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