Tuli v. Specialty Surgical Center of Thousand Oaks, LLC ( 2024 )

Filed 10/16/24
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
RANDHIR S. TULI, B321499
Plaintiff and Appellant, Los Angeles County
Super. Ct. No. (BC542350)
v.
SPECIALTY SURGICAL
CENTER OF THOUSAND
OAKS, LLC et al.,
Defendants and
Respondents.
APPEAL from judgment of the Superior Court of
Los Angeles County, Gail Feuer and Robert Draper, Judges.
Affirmed.
Law Office of Bruce Adelstein and Bruce Adelstein for
Plaintiff and Appellant.
Holland and Knight, Jennifer L. Weaver and David I.
Holtzman; the Ruttenberg Law Firm and David I. Ruttenberg for
Defendants and Respondents.
____________________
Randhir Tuli is not a medical doctor, but he helped form a
medical business. For a time, Tuli contributed to the enterprise,
but then he lapsed into inactivity: he did nothing productive. He
did, however, keep taking millions from the enterprise’s profits.
His hardworking surgeon colleagues in this business became
restive and sought to buy him out, but Tuli refused to surrender
his lucrative perch. Then Tuli directed his lawyer to send an
aggressive—and fateful—letter to a wide swath of recipients,
including potential investors in the surgical business. The letter
was professionally designed to be scary. It suggested the specter
of criminal liability for all involved. Tuli had no good faith belief
in the factual or legal basis for his specious claim. In response to
his baseless and damaging letter, others in the limited liability
company warned Tuli they would eject him without
compensation, as was their right, unless he cured the situation
within 30 days. Tuli spurned their offer. The surgeons made
good on their ultimatum: they put Tuli out and paid him
nothing.
Tuli launched a decade-long litigation campaign against his
former business colleagues. The trial court rejected all Tuli’s
claims. We affirm.
I
From 1997 to 2005, Tuli and defendant Dr. Andrew Brooks
worked together to create a group of surgery centers. Tuli was an
experienced and sophisticated entrepreneur whose ventures had
won him millions of dollars. At all relevant times, he was
represented by legal counsel. Brooks was a surgeon, a veteran of
some 15,000 operations.
2
A
Tuli and Brooks located five of their surgery centers
throughout the Los Angeles area. A sixth was in development in
Thousand Oaks. This Thousand Oaks facility is the focus of this
dispute. The entity that owned this business had the full name of
Specialty Surgical Center of Thousand Oaks, LLC. We refer to it
simply as Specialty.
These centers created lower cost alternatives to hospitals:
they eliminated a costly intermediary between surgeon and
patient. For surgeries in hospitals, surgeons receive a fee for
their work, but the hospital also charges—and keeps—a separate
hospital facility fee that it does not share with surgeons. By
contrast, the centers charged facility fees they returned
proportionally to their owners, who were mainly surgeons, but
who also included Tuli. The centers thus allowed doctors to own
the surgery facility and to share in its substantial profits, free of
hospital surcharges.
The corporate form of ownership for each center was a
limited liability company. Specialty was a limited liability
company. An operating agreement governed its activities.
As of July 2005, Tuli and Brooks owned equal interests in
each company that owned each center. At centers besides
Specialty, which then was nascent, other owners were the doctors
Tuli and Brooks had recruited to join the limited liability
companies, to perform surgeries at the centers, and to generate
the centers’ income.
Attracting more successful surgeons was important to the
centers’ profitability. Tuli and Brooks wanted leading surgeons
to join the centers’ limited liability companies and to bring their
3
business to the premises. Tuli and Brooks set the buy-in price to
be low and attractive to the surgeons they were recruiting. The
important thing was to gain their loyalty to—and their business
at—the center. The more intensively the center was in use, the
higher its profitability.
In the doctor-patient relationship, surgeons usually make
the vital business decision about where to operate. The centers
wanted to recruit more successful surgeons, and thus more
surgeries and more revenue.
Between 1999 and 2005, Tuli and Brooks conducted
between 15 and 30 syndications to bring new surgeons into their
companies. Attracting new physician partners was the “lifeblood”
of growing the facility. Brooks explained that “[p]hysicians start
to retire, slow down, others move to a different area. So you want
to always try to attract the best and most talented surgeons to
your facility.”
B
In 2005, a Tennessee entity we will call Symbion paid
Brooks and Tuli over $16 million each to buy their interests in
every center except the Specialty location. Part of this
transaction included Brooks’ and Tuli’s separate medical
management company called Parthenon Management Partners,
LLC, or Parthenon for short. Tuli and Brooks received an
additional $333,333 for Parthenon’s management rights. Tuli
and Brooks also entered into consulting agreements with
Symbion. The consulting agreement fetched Tuli an additional
$500,000 from 2008 to 2012.
The Symbion transaction gave separate treatment to
Specialty, which then was in development. Symbion took a 1%
4
interest in Specialty, with options to increase its share in the
future. Tuli and Brooks collectively owned the other 99%.
Tuli, Brooks, and Symbion set up Specialty to be a pass-
through entity. Specialty did not accumulate retained earnings.
Every month, it distributed to members all the revenue it
collected from recent surgeries. The idea was to convince the
member surgeons that this was an attractive and immediately
profitable place for them to conduct surgeries. As Tuli testified,
“[y]ou want to make them feel like, hey, I’m earning something
valuable here.” As a result, every month Specialty would exhaust
its cash on hand.
Specialty did not own physical assets. Personally and
separate from Specialty, Tuli and Brooks had jointly owned the
physical property, but Tuli sold his half of this asset to Brooks for
$2 million before this dispute arose.
Specialty’s only real asset, then, was its members’
entitlements to get a share of the revenues from future surgeries.
Its one asset was prospective only.
Symbion, Tuli, and Brooks negotiated the original
operating agreement for Specialty. They signed this agreement
in 2005.
There was no publicly traded market in Specialty’s shares.
Tuli and Brooks had designed Specialty to be a closed and
selective organization; they wanted complete control over the
surgeon investors they would solicit and would accept for
membership in their elite and highly profitable firm. It took a lot
more than just money to become a Specialty member. As Brooks
testified, “It’s just like a law firm. Legally, I could probably own
part of a law firm, but I would never do that, never be allowed to
do that. It’s not a marketable security. It’s very limited people
5
who you could sell it to, who would be qualified physician
investors, and every transfer has to be approved by the governing
board.”
The 2005 purchase agreement gave Symbion two options to
buy additional shares in Specialty. Symbion exercised the first
option in February 2009, purchasing membership units from Tuli
and Brooks for $54,265 per unit. Other doctors also had
purchased membership interests in Specialty, and so Symbion’s
option exercise meant Tuli and Brooks then each owned an 11.3%
membership interest in Specialty.
Symbion’s second option had an exercise date in 2011. Had
Symbion exercised that option, it would have taken over all of
Tuli’s and Brooks’ membership interests in Specialty. Symbion
ultimately did not exercise this option.
C
A central feature of each version of Specialty’s operating
agreement was the provision about a “terminating event.”
The terminating event provision was designed to ensure
“bad actors” within the company did not damage it. The founders
sought to prevent an insider from destroying the business.
Experience taught Tuli and Brooks that “bad actors” could
harm their enterprise. One bad episode had been with member
doctors who had proved to be “very difficult.” These “challenging”
physicians had attempted to disrupt the sale to Symbion. They
had behaved opportunistically at the 11th hour of the deal
closing, which risked derailing a “massively beneficial
transaction” for all concerned.
Tuli and Brooks sought to avoid more problems like that.
They “spent a lot of time negotiating” the terminating event
6
provision. They discussed it in detail with each other and with
potential physician members.
Symbion joined Tuli and Brooks in insisting the
terminating provision be part of the deal. As a Tennessee
company entering the California market for the first time,
Symbion wanted the terminating event provision to protect its
$60 million investment in a new and risky market. For Symbion,
this was a deal point: a must-have protection.
Symbion representative George Goodwin conferred with
Tuli about the terminating event provision. “We discussed it on
multiple occasions. We reviewed it together. We worked through
it. We worked through examples.”
Brooks testified that “essentially the [terminating event]
concept was we didn’t want to reward bad behavior.”
A “terminating event” would occur when “[a] Member has
disrupted the affairs of the Company or has acted adversely to
the best interests of the Company, as determined in the
reasonable discretion of the Governing Board, and fails to cure
such conduct within thirty (30) days after receipt of a written
notice of such conduct sent by the Governing Board to such
Member.”
The pertinent consequence of a terminating event was loss
of the offending member’s Specialty shares.
Tuli, Brooks, and Symbion designed a formula that
normally would set the price at zero.
Tuli and Brooks discussed how the operating agreement
formula for calculating payments after a terminating event
“would most likely always come out to zero.”
In other words, if the offender did not cure within 30 days,
Specialty would cut off the offender’s access to the stream of
7
future distributions. Specialty would put that person out in the
cold without current payments or future distributions. The
relationship would be over.
This provision had real teeth. It created a powerful
incentive for good behavior, because it allowed the company to
eject a misbehaving member without paying anything to remove
the bad member’s ownership stake.
Tuli liked and endorsed the terminating event provision.
Tuli told Brooks he wanted to use this provision on one of the
disruptive doctors who had caused problems for the business.
In 2005, Tuli and Brooks sent a letter to other doctors in
Specialty describing the “positive” features of the operating
agreement. These “positive” features included the terminating
event provision.
D
Once it opened for business, Specialty was immediately and
impressively profitable. Tuli shared in the bounty. He
ultimately received a net benefit of $3,034,512 on his investment
of $100,000: more than a thirtyfold return. In 2013 alone, for
instance, Specialty distributed $1,177,563 to Tuli.
Specialty’s operating agreement specified a governing
board would manage the company. In 2013, the six on the
governing board were Brooks, Dr. David Chi, Dr. Glenn Cohen,
Dr. Mark Farnum, George Goodwin, and G. Miles Kennedy.
Goodwin and Kennedy were affiliated with Symbion and were not
doctors. Tuli was not on the board.
E
Friction arose at Specialty when Tuli wandered off the
job—permanently.
8
From 2005 to 2007, Tuli and Brooks worked together
closely. During this time, Tuli was at Specialty’s office on
virtually a daily basis.
In 2005, however, relations began to sour between Tuli, on
one hand, and Brooks and Symbion representative Goodwin, on
the other.
By the end of 2007, Tuli had completely abandoned
Specialty. Brooks testified he called Tuli at least “15 to 20 times
and told him that the doctors are asking me a lot of questions. So
it was creating [lots] of grief for me with the physicians, so I
would call him and say you need to show up and at least show
your face, do something. . . . [Tuli said,] Oh, I’ll come by. I’ll do
this. I’ll do that. But he never showed up.” Brooks testified Tuli
“completely disappeared. . . . He was completely absent.”
Rather, Tuli “went and started a software company, and that was
where his attention was focused.”
Tuli’s inactivity at Specialty caused consternation to its
doctor members. Their work generated all of the revenue. By
contrast, Tuli’s productive effort was zero, but he continued to get
11.3% of the take. At the time of the dispute, for instance,
Specialty was distributing over a million dollars a year to Tuli for
nothing in return.
In 2010 and 2011, Goodwin, on behalf of the physicians at
Specialty, offered to buy Tuli’s interest. Tuli refused, claiming
their offer was an “unfair lowball price.” He wanted more money.
Tuli had a consulting agreement with Symbion that expired
in 2012 by its own terms and that Symbion did not renew. For
the whole time this agreement was in force, Tuli had done
nothing. Yet Symbion had paid him $500,000.
9
In December 2013, Specialty issued a private offering to
potential surgeon investors. The purpose was to seek “new
physician utilizers” to expand Specialty’s business and to
increase revenues. Brooks testified this was “a very important
syndication offering . . . which was very critical” to Specialty.
Specialty was at a “tipping point” because it was attempting a
transition from out-of-network doctors to in-network doctors.
The offering set the price at about $17,000 per unit. This
price was the highest Specialty ever set for a sale of its units.
Nonetheless, Tuli claimed this unit price was too low.
F
On February 13, 2014, Tuli took his fateful action. He
directed his attorney to send a threatening letter. Tuli’s decision
prompted Specialty to oust him from the company.
1
Tuli’s attorney emailed the letter with a cover note (which
the trial court referred to as a facsimile) to 23 people connected in
some way to Specialty. Some were physicians who were members
of Specialty. Others were physicians Specialty was trying to
recruit and who were considering investing in Specialty.
Other recipients were non-managerial employees of
Specialty. When deposed about the Specialty employees who got
the letter, Tuli testified that “I don’t know who these people are. .
. . I don’t know what they do.”
One particular employee got the letter, and Tuli was
deposed about whether she was a secretary or a receptionist.
Tuli testified he had “[n]o idea.”
The letter’s cover note demanded that all these 23
recipients deliver the attached letter to any potential or
prospective investors.
10
With our emphasis, the cover note warned that “[f]ailure to
do so may expose you to individual liability.”
When deposed about how “individual liability” could
possibly arise, Tuli testified that, if the recipient were “somehow
in cahoots, then she should be.” But he added, “I have no idea
who’s in cahoots.” Tuli testified he had “no evidence” that any of
the recipients of the letter were “in cahoots.”
2
The five-page letter amplified the cover note’s threatening
tone.
The letterhead identified a law firm that described itself as
“LITIGATION LAWYERS.” Brooks testified this self-
identification made him conclude the author was “an aggressive
kind of a lawyer.”
The subject line of the letter titled the topic as “cease and
desist” regarding the “statutory violations” and “bad faith”
dilution efforts.
The running header at the top of the pages included, in red
font with red underlining, the words “Cease and Desist Notice.”
The first page “urge[d]” each recipient to retain counsel
“given the seriousness of the illegal conduct at issue.”
The five-page letter explained that Tuli had retained the
law firm identified on the letterhead.
The letter called Specialty’s proposed private placement
offer a “dilution scheme” and proclaimed it was “discriminatory
and illegal.”
“With this notice in hand and in mind, none of you can
claim henceforth you acted without advance knowledge and
intent for purpose of establishing ‘scienter’ ” under a federal
11
criminal statute. If the recipients proceeded as planned, “you
may subject yourself to significant potential liability.”
The letter marshaled what it claimed were “[i]ndicia of
violations of the anti-kickback statute” and charged that the “re-
valuation ruse of Amendment No. 4 will not shield you from
liability.” “None of you should take comfort in the fiduciary duty
and liability limitation provisions of the [Specialty] Operating
Agreement. Liability for illegal conduct cannot be waived by
contract.” “Tuli wishes to avoid litigation and the bad publicity
that it would engender, as well as the cost, distraction, and
annoyance, for all concerned. The business and personal
reputational risk attending such litigation is manifest.” Tuli
claimed to be concerned about the company’s exposure “to
liability for statutory and regulatory violations.”
3
Brooks summarized his perception of the reaction to Tuli’s
letter: everyone “who had received that letter was told that they
were committing a felony and needed to go out and hire a lawyer.
And they were very concerned about these kinds of allegations.
We have nurses who have licenses. You have [licensed vocational
nurses]. . . . And you have a bunch of surgeons who largely spent
a good amount of their life training to do their -- their job and
maintain their licenses. So that is very important to calm the
fears and panic” that the letter ignited.
Brooks thought Tuli’s letter was “bizarre and off base and
such a bunch of lies that threw a bomb” into Specialty’s effort to
grow its business by attracting new investors.
Tuli’s letter harmed Specialty’s business by causing “a
great deal of anxiety” among its physicians, employees, and
12
outside investors. Specialty spent much time and effort to calm
these fears. This evidence was undisputed.
G
Tuli’s saber rattling backfired. Specialty ejected him from
the company without compensation. Tuli responded with this
lawsuit, which is now more than ten years old.
Specialty replied to Tuli’s letter the next day. This reply
notified Tuli he had caused a terminating event and he had 30
days to remedy the situation. The governing board did not hold a
meeting or take a formal vote on this reply to Tuli, but the board
members informally, and unanimously, agreed Tuli’s letter
constituted a terminating event. This point later assumes
significance.
Specialty suggested that, to cure, Tuli should apologize to
those who got Tuli’s letter, should correct his false statements,
and should pay Specialty’s attorney fees. Specialty later
estimated its attorney fees were $4,000 at that point. Specialty
did not include this sum in its communications with Tuli.
Tuli never inquired what Specialty’s attorney fees might
be.
Tuli resolutely refused to cure. To the contrary, he
responded with further aggression, promising that, if Specialty
did not do as Tuli demanded, he would pursue full “redress, in
and outside of the courtroom, in a very vocal and public manner,
against all participants, individually and collectively.”
Specialty ousted Tuli in March 2014. It redeemed Tuli’s
ownership shares for zero dollars and ended his participation in
the company.
The zero dollar valuation of Tuli’s redemption was the
result of the terminating event formula in the operating
13
agreement. Tuli had an adjusted capital contribution in
Specialty of negative $3,034,512. Tuli had already received a net
return on his investment of $3,034,512.
H
In April 2014, Tuli sued Specialty, Symbion, and the
members of Specialty’s governing board. The defendants cross-
complained. Tuli moved unsuccessfully for summary
adjudication in 2015. He amended his complaint, and in 2016
Specialty moved for summary judgment of Tuli’s first amended
complaint.
Judge Feuer granted Specialty’s motion in a 21-page
statement of decision.
The parties agreed to a tolling agreement for Specialty’s
cross-complaint, and Specialty dismissed it without prejudice. In
2018, this court dismissed Tuli’s appeal on the grounds that the
tolled cross-complaint raised issues related to the appeal and that
the judgment was not final and not appealable. The case
returned to the trial court. Tuli amended, and then amended
again. In 2019, he filed his third amended complaint.
In 2021, the parties tried Tuli’s lone remaining claim for
restitution and unjust enrichment before Judge Draper. After a
10-day bench trial, the court rejected Tuli’s claim in a 10-page
statement of decision.
Specialty dismissed its cross-complaint against Tuli with
prejudice. Tuli appealed.
II
Tuli’s appeal raises a multitude of issues. None bears fruit.
We independently review legal questions and defer to trial court
fact finding. (Scott v. Common Council (1996) 44 Cal.App.4th
684, 689.)
14
A
The fundamental principle governing this case is the
business judgment rule.
This rule is a presumption that the directors of a
corporation make business decisions on an informed basis, in
good faith, and in the honest belief that the action taken was in
the best interests of the company. Courts defer to board
judgments that can be attributed to any rational business
purpose. (Katz v. Chevron Corp. (1994) 22 Cal.App.4th 1352,
1366 (Katz).) The parties do not dispute that this rule applies to
limited liability companies as well as to corporations.
The trial court ruled the business judgment rule insulated
Specialty and its decisionmakers from Tuli’s claim they breached
their fiduciary duty to him. The court found Specialty
established this affirmative defense by proving its business
purpose was rational: Specialty sought to continue to use private
offerings to raise capital without baseless allegations of illegality
and impropriety from an existing shareholder. The evidence
supported Specialty’s rational fear that Tuli’s letter would scare
off potential investors, that it was rational to notify Tuli his letter
was a terminating event, and that it was rational to oust him
when he refused to cure within 30 days of Specialty’s notice.
Tuli contends the business judgment rule should not apply
to his case for three reasons: conflict of interest, bad faith, and
improper investigation. We examine each exception in turn.
1
Tuli claims a conflict of interest infected the governing
board’s decisionmaking, which Tuli maintains made it error to
apply the business judgment rule to this case. His logic is that
each person on the governing board owned shares in Specialty,
15
and each would gain a personal advantage by voting Tuli out of
Specialty and redeeming Tuli’s shares for $0, because this
reduction proportionally increased each remaining member’s
ownership interests. Tuli calls this a “paradigmatic case of self-
dealing and conflict of interest.”
The conflict-of-interest exception to the business judgment
rule arises when the interests of the individual decisionmakers
diverge from the interest of the enterprise as a whole. A classic
example is when directors, faced with a merger, adopt defensive
measures but “might be acting to protect their own interests
rather than those of the corporation and shareholders.” (Katz,
supra, 22 Cal.App.4th at p. 1367.) This situation sparks the fear
the individual decisionmakers are not to be trusted, for they
might be serving their self-interest at the expense of the interests
of the entity and its owners, like the shareholders. When the
decisionmakers’ personal interests conflict with the enterprise’s
interests, the business judgment rule does not apply. (Cf. Everest
Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 430
(Everest) [transaction provided benefits to one partner that were
not provided to the limited partners].)
The uncontested evidence in this case, however, was that
Specialty’s decisionmakers worked in the best interest of the
company as a whole. Judge Feuer noted Specialty had submitted
“evidence that there was a benefit to the corporation from
terminating Tuli after he had raised issues of legality and
‘kickbacks’ with respect to the stock offering to potential
investors.” Tuli has not challenged this statement of the
uncontested evidence.
Tuli invokes Everest, but nothing in that case suggested the
transaction was beneficial to the business entity as a whole. (Cf.
16
Everest, supra, 114 Cal.App.4th at pp. 416–432.) Our case thus is
fundamentally different from Everest.
In sum, the conflict-of-interest exception does not apply to
this case because the uncontested evidence showed Specialty’s
decisionmakers had worked in the company’s best interests.
2
Tuli also argues the business judgment rule does not apply
because bad faith and improper motives drove the governing
board to be rid of him.
“Bad faith” is a common law term in corporate law with an
indefinite meaning.
“The black letter requires that officers and directors act in
good faith to receive the protection of the business judgment rule.
The term ‘bad faith’ is used extensively in corporate law, and the
extent to which its meaning varies depending on the context in
which it is used is unclear. . . . Illegal conduct may constitute bad
faith, and courts have generally stated that the business
judgment rule does not apply to knowingly illegal conduct.”
(Rest., Corporate Governance (Tent. Draft No. 1, April 2022) §
4.02, com. o.)
Tuli argues Goodwin, Brooks, and “the other Defendants”
exhibited “extreme animosity against Tuli.” “They had been
‘extremely upset’ with Tuli for a long time, were frustrated that
he was earning high profits without bringing in business or
providing services, and had repeatedly and unsuccessfully tried
to buy his units.” The italics in this quotation of Tuli’s argument
are ours.
It is not bad faith to offer to buy out an unproductive
element, as Tuli conceded. He admitted there was nothing wrong
with offering to buy his shares.
17
Nor is it corporate bad faith for company decisionmakers to
be frustrated with a corporate team member who is earning “high
profits,” as Tuli phrased it, for doing nothing. No case Tuli cites
has such a holding. We see no logic in adopting this position,
which is at odds with the notion that corporate decisionmakers
should be working to maximize enterprise value for the benefit of
corporate owners. (E.g., Rest., Corporate Governance (Tent.
Draft No. 1, April 2022) § 2.01, subd. (a). [objective of a
corporation is to enhance the economic value of the corporation].)
Tuli argues that “Brooks’ personal dislike of Tuli was
shown in the invective in his e-mails.” Tuli cites emails in which
Brooks, after reading Tuli’s aggressive letter, wrote to others and
privately referred to Tuli in insulting terms. For example, about
a month after getting Tuli’s letter, Brooks emailed others in his
circle that “Randhir=Ingrate mudda plucka.”
In any organization, emotions sometimes can run high.
After one business person attacks another before an audience of
associates, without a good faith basis, it would be not unusual for
the victim to scorn the attacker. Tuli supplies no precedent for
extending the concept of bad faith to a situation where a company
decisionmaker, while working in the company’s best interests,
privately disparaged a colleague.
Tuli’s second argument fails.
3
Tuli makes a third argument as to why the business
judgment rule does not apply: Specialty, he claims, did not
properly investigate the charge in his letter that it was engaging
in illegal conduct. Judge Feuer’s analysis of this argument,
however, was exactly right. She cited the undisputed evidence
that Specialty already had investigated this legal issue before
18
Tuli’s letter. She likewise noted Tuli offered no evidence that
additional investigation would have changed anything. The trial
court distinguished this situation from a whistleblower situation
“where a shareholder would alert members of a corporation or
LLC to actual illegal activity, or that the Board was attempting
to take action without any investigation at all into its legality.”
Rather than attempting to rebut the trial court’s perceptive
analysis, Tuli simply ignores it.
Tuli’s third argument does not succeed.
B
Tuli abandoned his claim for declaratory relief and now
may not appeal it.
Tuli sought declaratory relief in his original complaint and
moved for summary adjudication. One ground was Tuli’s
argument that a terminating event properly should have led to a
“purchase” of his shares by a Symbion entity rather than a
“redemption” of his shares by Specialty. The trial court rejected
this argument because Tuli raised it only in his reply brief. In
our court, Specialty notes Tuli’s forfeiture, and adds that the
substance of his argument also fails because the procedures were
proper in any event. Tuli indeed forfeited this point. The trial
court did not abuse its discretion by disregarding a matter raised
only in a reply brief.
In 2015, the trial court denied Tuli’s summary adjudication
motion. Tuli filed a first amended complaint, a second amended
complaint, and a third amended complaint. All of them
abandoned Tuli’s declaratory relief cause of action.
Amended pleadings supersede the original. Amendments
mean the original pleading no longer functions as a pleading, for
19
the writer has written anew. (Foreman & Clark Corp. v. Fallon
(1971) 3 Cal.3d 875, 884 (Foreman).)
Tuli amended his complaint to remove the declaratory
relief claim. The amended pleading extinguished his original
complaint. The declaratory judgment count is not subject to
appellate review.
Tuli offers to distinguish the Foreman decision. That
decision, however, stated a robust principle not tied to specific
facts. Our Supreme Court anchored this governing principle
decades in the past, and for good reason. When a plaintiff
amends a pleading and drops one of the former claims, that claim
is out of the case unless the plaintiff does something to revive
what it has abandoned. On this point, Tuli authored his own
fate.
C
In a cursory argument, Tuli complains about the trial
court’s rejection of his unfair competition claim. The court,
however, ruled correctly.
Tuli’s argument was that Specialty engaged in unfair
competition by labeling his letter a terminating event, declaring
he had disrupted the company, and stripping him of his
ownership share without compensation.
The trial court reasoned the business judgment rule
protected Specialty’s rational action of preventing existing
shareholders from telling prospective investors that new
investment might be a crime.
The trial court was right because, as we have set forth, the
business judgment rule indeed applied, and no exception
annulled its operation. Tuli’s appellate argument cites no logic or
authority to unhorse this result. This argument misfires.
20
D
Tuli ineffectively attacks the trial court’s ruling on his
fiduciary duty claim.
This claim was that Specialty and its members breached
their duties to Tuli by casting him out without payment. The
trial court applied the business judgment rule and deferred to
Specialty’s rational purpose of ejecting a company saboteur.
On appeal, Tuli argues Specialty’s purpose was to fund a
special distribution for existing members rather than to
aggregate new business capital. This argument is unavailing,
because both business purposes are rational. Company owners
rationally want business returns as well as operating capital.
Tuli also argues Specialty did not follow proper company
procedures because the board did not meet and vote before
Specialty notified him of the terminating event. The trial court
ruled this procedural irregularity was substantively irrelevant,
because board members all agreed with Specialty’s action. The
court also noted Tuli cited no cases saying that technical
violations of corporate procedure create an exception to the
business judgment rule.
Tuli cites Scheenstra v. California Dairies, Inc. (2013) 213
Cal.App.4th 370 (Scheenstra). Scheenstra held a dairy
cooperative violated its contractual duty to allocate milk quotas
fairly and uniformly. The cooperative solved an oversupply
problem by penalizing some members but putting others in a
better position than they would have been had there been no
problem. (Id. at p. 395.) Scheenstra ruled this solution was
inequitable and beyond the cooperative’s contractual range of
discretion. (Ibid.) The business judgment rule, the court held,
21
did not trump the limits the contract placed on the cooperative.
(Id. at p. 388.)
Scheenstra does not help Tuli. The contractual breach in
Scheenstra worked serious harm. The contractual breach here
worked Tuli no harm. We explain.
The way in which Specialty breached its contractual
operating procedures was inconsequential. Tuli’s argument was
based on Specialty’s breach of its operating agreement in failing
to have a formal vote of the entire governing board before
declaring the February 2014 letter a terminating event. Instead,
the board acted on the unanimous vote of its quorum. All the
members of the governing board informally agreed to the letter
declaring Tuli’s letter constituted a terminating event. This fact
was undisputed.
Specialty’s procedural failing was immaterial, because all
members of the governing board agreed Tuli’s letter was a
terminating event. The trial court also rightly observed Tuli
offered no evidence this procedural glitch harmed him.
In sum, Scheenstra is not pertinent. It involved a harmful
breach of contract. This case does not.
The same analysis applies to Tuli’s citation of Ekstrom v.
Marquesa at Monarch Beach Homeowners Assn. (2008) 168
Cal.App.4th 1111, 1123 (Ekstrom). A homeowners association
violated its own rules by allowing trees in an oceanside
community to exceed a defined height. Plaintiffs sued to regain
their now-obstructed views. As with Scheenstra, Ekstrom differs
from this case because it involved a harm that was real.
This analysis also disposes of Tuli’s repetitive argument
about Specialty’s breach of the operating agreement.
22
E
Tuli also appeals the trial court’s ruling on a different
contract: a consulting agreement with Symbion that Tuli,
Brooks, and their management company Parthenon entered on
August 1, 2005. The contract specified it would expire on the
latest of three particular events. Tuli now claims Specialty owed
him money under this contract. Yet in the trial court Tuli
admitted the contract had expired by July 2012. A 2012
expiration was the basis for the trial court’s ruling.
Specialty repeatedly pointed out Tuli’s specific admissions
in its respondent’s brief. Tuli omitted responding to this point in
reply and thereby effectively conceded he has no valid response.
Tuli fails to show the trial court result was incorrect.
Separately, Tuli makes a four-sentence argument about his
supposed entitlement to what he calls “deferred payments” under
yet a different contract. His opening brief does not establish Tuli
raised this issue in the trial court. Tuli forfeited this argument.
F
Tuli alleged Brooks personally breached his fiduciary duty
to Tuli by “usurping an opportunity for himself that should have
belonged to Parthenon,” which was the limited liability company
in which Tuli and Brooks were 50/50 owners. The supposedly
usurped opportunity was Brooks’s renewal of a consulting
contract with Symbion that did not include Parthenon or Tuli.
The trial court granted summary judgment for Brooks, reasoning
that Tuli could bring this claim only as a derivative action on
behalf of Parthenon, which Tuli had expressly refused to do. The
trial court was right.
A derivative action is a stockholder’s representative suit
that seeks to redress wrongs to the corporation. Normally the
23
corporation would bring such a suit. If the corporation fails or
refuses to act after proper demand, however, the stockholder’s
ultimate interest in the corporation justifies the bringing of
derivative action to right the wrong. (Klopstock v. Superior Court
(1941) 17 Cal.2d 13, 16.)
American law has recognized derivative suits for more than
a century. (See Dodge v. Woolsey (1856) 59 U.S. 331.)
The theory is that separating ownership from management
can tempt managers to profit personally at the expense of their
trust. Derivative suits are supposed to combat this temptation by
holding corporate decisionmakers accountable to stockholders.
(E.g., Cohen v. Beneficial Indus. Loan Corp. (1949) 337 U.S. 541,
547–548 (Cohen).)
“Equity came to the relief of the stockholder, who had no
standing to bring civil action at law against faithless directors
and managers.” (Cohen, supra, 337 U.S. at p. 548.) Equity
allowed a stockholder “to step into the corporation’s shoes and to
seek in its right the restitution [stockholders] could not demand
in [their] own.” (Ibid.) “This remedy, born of stockholder
helplessness, was long the chief regulator of corporate
management and has afforded no small incentive to avoid at least
grosser forms of betrayal of stockholders’ interests.” (Ibid.)
“Unfortunately, the [derivative lawsuit] remedy itself
provided opportunity for abuse, which was not neglected.
[Stockholder derivative suits] sometimes were brought not to
redress real wrongs, but to realize upon their nuisance value.
They were bought off by secret settlements in which any wrongs
to the general body of share owners were compounded by the
suing stockholder, who was mollified by payments from corporate
assets. These litigations were aptly characterized in professional
24
slang as ‘strike suits.’” (Cohen, supra, 337 U.S. at p. 548, italics
added.)
The strike suit problem was so severe as to prompt states,
including California, to put special safeguards on derivative
shareholder lawsuits. Three special safeguards are the
ownership, bond, and demand requirements.
The ownership requirement today is codified as section 800
of the Corporations Code, which requires plaintiffs filing
stockholder derivative suits to own shares in the corporation at
the time of the contested corporate action. (Hogan v. Ingold
(1952) 38 Cal.2d 802, 805–807 (Hogan); see Corp. Code, § 800,
subd. (b)(1) [contemporaneous ownership].) California law
requires continuous as well as contemporaneous ownership.
(Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1119 (Grosset); Sirott
v. Superior Court (2022) 78 Cal.App.5th 371, 376–377 (Sirott)
[limited liability company].)
The purpose of the ownership requirement is to combat
strike suits. (Grosset, supra, 42 Cal.4th at pp. 1109 & 1114.) The
idea is to stop a litigation-hungry plaintiff unconnected with the
company from swooping in and buying a few shares just to bring
a derivative suit. (Ibid.)
The bond requirement can, under some circumstances,
force plaintiffs to post substantial sums to pursue a derivative
suit. (Hogan, supra, 38 Cal.2d at pp. 805–807; see Corp. Code, §
800, subds. (c) & (d).) The goal is to create a deterrent to
unwarranted shareholder derivative lawsuits by providing a
mechanism for securing some portion of a prevailing defendant’s
expenses. (West Hills Farms, Inc. v. RCO Ag Credit, Inc. (2009)
170 Cal.App.4th 710, 715. )
25
The demand requirement compels plaintiffs to attempt to
persuade corporate managers to do what is fair and right.
(Eggers v. National Radio Co. (1929) 208 Cal. 308, 313; see Corp.
Code, § 800, subd. (b)(2) [description of demand on board must be
pleaded “with particularity”].) In deference to the managerial
role of directors and to curb potential abuse, shareholders
asserting a derivative claim must make a threshold showing they
made a presuit demand on the board to take the desired action.
(Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222, 232.)
The corporate principles governing derivative actions apply
to limited liability companies. (See Corp. Code, § 17709.02;
Sirott, supra, 78 Cal.App.5th at p. 381.)
These special safeguards can burden plaintiffs seeking to
sue about corporate matters.
To avoid the burden, plaintiffs may seek to recharacterize
what is in reality a derivative action as a direct action, thus
circumventing these hurdles.
In an apparent attempt to avoid these hurdles, for example,
Tuli’s complaints specifically alleged he was not pursuing
derivative litigation.
Courts, however, guard against tactical efforts to
recharacterize actions as direct when in reality they are
derivative in character. (E.g., Paclink Communications Internat.,
Inc. v. Superior Court (2001) 90 Cal.App.4th 958, 964–966.)
The trial court in this case performed exactly this service:
it guarded against Tuli’s effort to cast his claim as direct rather
than derivative. The court was right to do so.
Tuli’s complaint–that Brooks misappropriated an
opportunity that properly belonged to the company–is derivative
in character. A corporate opportunity is an asset.
26
Misappropriation of a corporate opportunity is misappropriation
of a corporate asset. An action is deemed derivative if it seeks to
recover assets for the corporation. (Jones v. H. F. Ahmanson &
Co. (1969) 1 Cal.3d 93, 106 (Jones) [action is derivative if the
gravamen of the complaint seeks to recover assets for the
corporation].)
Tuli’s allegation is that Parthenon lost a valuable
opportunity. Parthenon’s loss thus would redound to “the whole
body of its stock.” (Jones, supra, 1 Cal.3d at p. 106.) Redress for
that injury would be derivative in character. (See also Schrage v.
Schrage (2021) 69 Cal.App.5th 126, 153 [it is a derivative claim
when the primary complaint is about squandered corporate
assets]; Nelson v. Anderson (1999) 72 Cal.App.4th 111, 127
(Nelson) [when the corporation lost opportunities, the injury is to
the whole body of stock and the action is derivative].)
Tuli contests this analysis by citing two inapposite cases.
Smith v. Tele-Communication, Inc. (1982) 134 Cal.App.3d
338 (Smith) is not on point because it did not involve an alleged
misappropriation of a corporate opportunity.
John Smith owned 20% of a corporate subsidiary, while a
company called Tele-Communications owned the other 80%.
Smith and Tele-Communications sold the subsidiary at a profit
that generated a total tax liability of $279,013.85. Tele-
Communications and the subsidiary filed a consolidated tax
return, and the subsidiary transferred $279,013.85 to Tele-
Communications. Smith alleged that, if the $279,013.85 had not
been paid to Tele-Communications, Smith’s initial distributive
share would have been increased by 20% or $55,802.77. He
brought a direct action against Tele-Communications and the
subsidiary’s directors for fraud and breach of fiduciary duties,
27
which was held to be direct and not subsidiary in character.
(Smith, supra, 134 Cal.App.3d at pp. 341–343.)
The Smith case is different from Tuli’s situation. Unlike
Tuli, Smith did not seek to recover something that properly
belonged to the corporation in which Smith held shares. Smith
did not contend the diminishment in his portion of the assets
reflects an injury to that subsidiary company. His injury thus
was not a resulting depreciation in the value of its stock. Rather,
the gravamen of Smith’s claim was direct injury to Smith as the
only minority shareholder. Smith therefore suffered sufficient
injury to bring that action in his individual capacity. (Smith,
supra, 134 Cal.App.3d at pp. 342–343.)
By contrast, Tuli described the lost corporate opportunity
as something “that should have belonged to Parthenon.” The
language in Tuli’s pleading suffices to distinguish his case from
Smith.
In passing, Tuli also cites Crain v. Electronic Memories &
Magnetics Corp. (1975) 50 Cal.App.3d 509, 522–523 (Crain). The
Crain case is like Smith. (See Nelson, supra, 72 Cal.App.4th at
pp. 126–127.) In Crain, the defendants deprived plaintiffs of
their ownership interests in an ongoing business without any
compensation and locked the plaintiffs into a shell corporation
that had no real assets and did not engage in any business
activity. Those defendants ensured the minority’s shares would
be valueless and unsalable. (Crain, supra, 50 Cal.App.3d at pp.
520–521.) Actions to redress these injuries were individual in
character and not derivative. (Id. at pp. 521–523.)
Loss of an alleged business opportunity would harm
Parthenon as a company and thus would diminish the value of all
28
shares in equal measure, but it would not selectively destroy a
minority shareholder for the benefit of the majority.
In summary, the trial court correctly granted summary
judgment on Tuli’s fiduciary duty claim against Brooks.
G
The trial court properly granted summary judgment on
Tuli’s claim about good faith and fair dealing.
Tuli alleged Specialty had breached the covenant of good
faith and fair dealing implied in its operating agreement by
ejecting him without payment on the basis of his terminating
event.
As stated, the trial court properly found Specialty had not
breached its operating agreement in a material way. Tuli
concedes his claim for breach of the operating agreement’s
implied covenant of good faith and fair dealing rests on “largely”
the same facts as his breach of contract claim. The claim
apparently rests on exactly the same facts, for Tuli does not
describe what the difference might be.
The law implies a covenant of good faith and fair dealing in
every contract. The covenant prevents one contracting party
from unfairly frustrating the other’s right to the benefits of the
agreement actually made. (Guz v. Bechtel Nat. Inc. (2000) 24
Cal.4th 317, 349.) The covenant cannot impose substantive
rights or duties beyond those incorporated in the specific terms of
the agreement. (Id. at pp. 327, 349–350; see also VFLA Eventco,
LLC v. William Morris Endeavor Entertainment, LLC (2024) 100
Cal.App.5th 287, 312–313 (VFLA).)
In his opening brief on this point, Tuli identifies no
particular ways in which Specialty, in his view, unfairly
frustrated the goals and operation of its operating agreement.
29
Rather, this three-paragraph argument primarily cites and
endorses ULQ, LLC v. Meder (2008) 293 Ga.App. 176, a Georgia
case in which the litigants did not raise, and the court did not
discuss, the business judgment rule, which has been important in
our analysis. Specialty points out the significance of the business
judgment rule in its response to Tuli’s opening brief. Tuli’s reply
on this claim omits to mention this rule.
The trial court’s summary judgment ruling on this claim
was correct.
H
Tuli appeals his loss at trial, which concerned only his
remaining claim for restitution and unjust enrichment.
After a substantial bench trial, the court rejected Tuli’s
claim. Tuli’s theory was that his loss of shares was an unlawful
forfeiture entitling him to restitution. The trial court’s ruling
was entirely correct.
1
After trial, the court made factual findings, as follows.
All versions of Specialty’s operating agreement from 2005
on contained the terminating event provision. Brooks and Tuli
discussed this provision with potential physician members. Tuli
endorsed it in numerous conversations as a way to ensure “bad
actors” would not damage Specialty. With our emphasis, Tuli
understood “that with that formula, with the company that was
distributing all of its profits, nobody was going to get anything
when they committed a terminating event and their shares were
redeemed.”
The court likewise found “there is no question” Tuli’s
failure to work productively for Specialty after 2007 “caused
distress to the doctors who were members of [Specialty].” These
30
doctors were conducting surgeries that provided all of Specialty’s
revenue. “[I]n their view, Mr. Tuli was taking 11.3 percent of the
revenue without making any contribution” to Specialty.
The court found Specialty members offered to purchase
Tuli’s membership interest in Specialty, but “this was not an
indication of any broader conspiracy to deprive [Tuli] of his
ownership interest in [Specialty] whatever the means.” Further,
there was no basis for Tuli’s conclusion that the planned private
offering of membership interests in Specialty in 2013 and 2014
was a part of a conspiracy to force him out.
The court found Tuli authorized his fateful letter of
February 13, 2014. It was his intentional effort to disrupt and
adversely affect the best interests of Specialty. Tuli made no
effort to ameliorate the letter’s effects.
Tuli had no good faith belief that the letter’s statements
had a factual or a legal basis, or that they were in the best
interests of Specialty, its members, or its employees. Tuli did
disrupt the business, and his disruption was intentional.
The trial court made credibility findings about Brooks and
Tuli, who gave sharply conflicting testimony. Brooks testified he
and Tuli had discussed the termination clause at length and that
Tuli favored these provisions. Tuli denied these discussions. The
court credited Brooks and rejected Tuli’s account.
The court ruled Specialty’s ejection of Tuli and its
redemption of his shares for zero dollars was not an illegal
forfeiture. Specialty distributed all available monies to members
on a month-to-month basis. The company had no retained
earnings and no physical assets. Tuli and Brooks once jointly
owned its physical facility, but in 2007 Tuli sold his half of the
building and property interest for two million dollars.
31
Membership in Specialty simply gave members the right to
receive future profits the enterprise would generate.
The ejected member “would forfeit the right to participate
in the future revenues of the business which of necessity would
be generated not by that member, but by the remaining members
who continued to provide services and bring in revenue for
[Specialty].”
In essence, the trial court held the only value of Specialty
membership for a non-surgeon was the right to a share of the
future revenues those surgeons would generate, and there was
nothing unfair, unreasonable, or illegal about cutting off Tuli’s
access to this future money stream after he had deliberately and
in bad faith disrupted the business.
On appeal, Tuli continues to maintain the consequence of
the terminating event was an improper forfeiture.
2
We review the law of forfeiture.
Section 3275 of the Civil Code provides that “[w]henever,
by the terms of an obligation, a party thereto incurs a forfeiture,
or a loss in the nature of a forfeiture, by reason of his failure to
comply with its provisions, he may be relieved therefrom, upon
making full compensation to the other party, except in case of a
grossly negligent, willful, or fraudulent breach of duty.”
Section 3275 does not define the term “forfeiture.”
Common law courts have given that substance to this doctrine.
A forfeiture is the divestiture of property without
compensation or the loss of a right, privilege, or property because
of a crime, breach of obligation, or neglect of duty. (VFLA, supra,
100 Cal.App.5th at p. 308.)
32
It is quite possible for a person or entity to suffer a loss, but
for the loss not to count as a forfeiture, which the law condemns.
A recent example is the VFLA case. The loss there was a
six million dollar deposit. A music festival organizer made this
deposit to secure three artists’ commitment to perform at its
festival. (VFLA, supra, 100 Cal.App.5th at p. 291.) The
organizer’s contract with the artists included a force majeure
provision. When government officials banned the festival due to
the pandemic, the organizer demanded the $6 million back under
the force majeure provision. The artists said the deposit was
theirs. The courts ruled the contract favored the artists. The
organizer protested that “the artists’ interpretation would work
an invalid forfeiture or penalty.” (Id. at p. 308.) This court ruled
this loss of $6 million was not a forfeiture. (Ibid.)
Two factors were significant in VFLA. First, was there a
breach by the forfeiting party? A “breach is not a necessary
element of a forfeiture,” but it is a “hallmark” of the doctrine.
(VFLA, supra, 100 Cal.App.5th at p. 308.) Second, was there a
reasonable relationship between the size of the loss and the range
of harm the parties anticipated at the time of contracting? (Id. at
pp. 308–309.)
3
We apply the law of forfeiture to this case.
This case turns on the second and more decisive element,
which is whether Tuli’s loss bore a reasonable relationship to the
harm the parties anticipated when they originally entered the
contract.
The forfeiture argument failed in the VFLA case because
the relationship there was reasonable.
33
The relationship also was reasonable in this case. The
anticipated range of harm at the time of contracting was $60
million or more. That was the sum Symbion had invested in the
series of surgical centers, which were linked by a common
trademark. As Specialty members testified, the medical
profession runs on trust, and public accusations that doctors in a
particular practice are felons committing crimes could doom the
whole business, especially if the charge is being made by a
presumably knowledgeable insider.
Tuli’s loss bore a reasonable relationship to this $60 million
anticipated range of harm. Tuli put nothing into Specialty that
he did not recover. To the contrary, he gained an eye-popping 30-
to-1 return on his $100,000 investment. He lost only the
opportunity to make even more: a prospective right to share in
future revenues generated entirely by others. Tuli did nothing to
entitle himself equitably to a share of their labors. In fact, for
years Tuli had done nothing. And then he effectively tried to
tank the company.
Tuli’s case is like the VFLA situation in another way as
well. In both cases, all parties were sophisticated and
experienced commercial actors with full access to lawyers and
advisors.
In VFLA, the festival was a multi-million dollar venture.
The festival organizer used a negotiator experienced with dealing
with his counterpart from a large and powerful talent agency.
(See VFLA, supra, 100 Cal.App.5th at p. 293.) Neither side
wanted for resources.
In the same vein, Tuli was an experienced and
sophisticated business executive. He described himself as
“accomplished” in business, noting that he had established,
34
owned, and operated three other successful healthcare businesses
before his surgical center ventures with Brooks. Tuli’s
entrepreneurism won him millions of dollars. Tuli and Brooks
had two law firms representing them during contract
negotiations, and they had spent over a million dollars in legal
fees. They had the time, savvy, and professional assistance to
review their contract in detail, including the terminating event
provision, which Tuli liked and thought was a good thing.
Tuli has not claimed he was the victim of disproportionate
bargaining power when he negotiated and signed the operating
agreement. (Cf. Civ. Code, § 1671, subds. (b)–(d) [rules for
assessing liquidated damages provisions vary, depending on
whether a contracting party is or is not a consumer].)
4
Tuli raises six invalid appellate objections to the trial
court’s rejection of his restitution claim.
a
Tuli cites Freedman v. Rector, Wardens & Vestrymen of St.
Mathias Parish (1951) 37 Cal.2d 16 (Freedman). In Freedman, a
buyer deposited $2,000 towards an $18,000 purchase of real
estate, but then withdrew and asked for his deposit back. The
seller sold the property to someone else for $20,000 but kept the
deposit. The court held the seller, having suffered no damages
from the buyer’s breach, was not entitled to keep the entire
$2,000 deposit. (Id. at pp. 19–23.)
“The purpose of the rule in the Freedman case is to prevent
unconscionable inequities resulting from a forfeiture. But where,
as here, the vendor would have received greater benefit if the
property had remained in his hands than the amount obtained by
35
him because of the forfeiture, there is no inequity.” (Bird v.
Kenworthy (1954) 43 Cal.2d 656, 660, italics added (Bird).)
Specialty quoted the Bird decision in its brief to us. In
reply, Tuli failed to rebut this quotation, or indeed to refer to the
Bird case at all.
Bird, however, is an important and clarifying decision. Its
focus on “unconscionable inequities” identifies the heart of the
forfeiture principle.
The essence of Tuli’s case is that he put $100,000 into a
company with no physical assets, got 30 times that sum in
return, sabotaged the company, and got ejected without access to
the future earnings of the surgeons who remained in the
business. This situation presents no unconscionable inequity.
At oral argument, Tuli defended his inactivity by pointing
out there is nothing illegal about being a passive investor. That
is true, but, as Specialty responded, that is not the issue. Bird
teaches that we must examine the situation to look for
unconscionable inequities. Specialty gained no unjust
enrichment from Tuli. Specialty simply got rid of a bad actor who
had profited handsomely from the work of others. Tuli was not
entitled to restitution. The Freedman holding does not help Tuli.
b
Tuli cites Hill v. Hearron (1952) 113 Cal.App.2d 763 (Hill),
which is a decision of more use to Specialty than to Tuli.
In Hill, the Court of Appeal applied the Freedman rule to a
one-season potato farming partnership between two couples.
Each couple spent about $8,000 to put a potato crop in the ground
during the 1949 crop season. (Hill, supra, 113 Cal.App.2d at pp.
763–764.) The partners named the Hearrons told the other
partners, the Hills, that harvesting costs would be about $12,000
36
and asked the Hills to advance their share. The Hills were
obligated to do this under the partnership agreement, but they
defaulted. The Hearrons paid for the Hills’ share and harvested
the crop. The Hearrons said, however, that the Hills’ default
meant, by contract, the Hills forfeited all that the Hills had
contributed, which now would belong to the Hearrons, minus a
$3,011 sum the Hearrons offered to return to the Hills. (Id. at p.
765.)
The Hill court refused to enforce the contract’s forfeiture
clause and ruled the Hills were “entitled to an accounting of their
interest in the assets of the joint venture at the time of the
termination of the agreement, subject to whatever damage [the
Hearrons] suffered by reason thereof.” (Hill, supra, 113
Cal.App.2d at p. 768.)
The Hill case entitled the defaulting Hills to the return of
the money they had invested in the partnership, minus the
damages the Hearrons suffered from the Hills’ breach.
The parties in this case seem to agree the opinion excluded
from the Hills’ recovery any entitlement to the profits from the
potato crop.
So interpreted, the Hill opinion favors Specialty, not Tuli.
Tuli received his original investment back, thirty times over.
Specialty denied him the right to future return that Specialty
might earn without him, just the way the Hill court did not give
the Hills a share of the potato profits from the harvest they failed
to support.
Alternatively, if we interpret the Hill decision as not
addressing whether the Hearrons were entitled to retain the
1949 harvest profits, then the opinion is of no help to Tuli and his
quest to keep getting a percentage of the surgeons’ revenues.
37
c
Tuli suggests that a “contract providing a single payment
for multiple types of breaches with different expected harms is an
unenforceable penalty.” He cites opinions involving contracts
requiring payment of a fixed sum of monies in the event of
breach. (Harbor Island Holdings v. Kim (2003) 107 Cal.App.4th
790, 797 [payment of $240,912 required if tenant breached lease
in any manner]; Sybron Corp. v. Clark Hospital Supply Corp.
(1978) 76 Cal.App.3d 896, 903 [$28,000 penalty for delay in
payment of $30,000]; Smith v. Royal Manufacturing Co. (1960)
185 Cal.App.2d 315, 318, 324 [$5,100 to be paid whether the
breach occurred after one or 99 machines were taken]; Dollar
Tree Stores Inc. v. Toyama Partners LLC (N.D. Cal. 2012) 875
F.Supp.2d 1058, 1073 [$2,500 per day if delivery conditions not
satisfied].)
These cases are not pertinent. They all involved a
breaching party that had contracted to pay a fixed number of
dollars to the victim of the breach. Here, the situation is
reversed: the victim of the breach, which is Specialty, has paid
Tuli, the breaching party, over three million dollars. The
terminating event provision removed Tuli’s ability to keep getting
money from the work of others after Tuli disrupted their
business. This was not an unenforceable penalty.
d
Tuli claims there was no rational relationship between his
loss of his status as a Specialty member and the harm his fateful
letter caused. He claims his letter had little effect on Specialty.
This claim errs in two ways.
First, it uses the wrong time frame: it fails to focus on “the
actual damages anticipated by the parties when they negotiated
38
the contracts.” (VFLA, supra, 100 Cal.App.5th at pp. 308–309,
italics added.) When Tuli, Brooks, and Symbion signed the
Specialty operating agreement in 2005, the concern was about a
possible loss of a $60 million investment in a new and risky
market. By focusing on the extent of harm to Specialty his letter
caused in 2014, Tuli’s use of 20/20 hindsight is the wrong
temporal perspective.
Second, the undisputed evidence was that the letter did
harm Specialty. Tuli’s letter would, and did, have the impact he
sought. In the trial court, Tuli did not dispute the evidence that
the governing board was concerned about his letter’s impact.
Recall the court also found as a matter of fact that “Tuli’s
disruption of the business of [Specialty] was intentional.” Tuli’s
effort now to minimize the disruptive effect he intended is in vain.
Tuli’s no-rational-relationship argument is unsuccessful.
e
Tuli contends the trial court should have ignored the facts
that (1) no public market existed for Specialty’s shares, and (2)
the value of Specialty shares depended solely on its future
earnings. These contentions are in error.
The fact that Tuli could not sell his Specialty shares in a
public market was germane, and the trial court rightly noted this
fact. When there is and can be no public market, the concept of
fair market value becomes highly theoretical. In this equitable
forfeiture analysis, the trial court was right to anchor its analysis
in the actualities of Specialty’s value, which sprang from the
future revenues the surgeons could generate and not from what a
sale on an open market could achieve.
Tuli also criticizes the trial court’s focus on the fact that the
present value of Specialty shares depended on the future
39
revenues. This focus, however, applied common sense. Specialty
had no physical assets. It had no retained earnings, because it
paid out all monies received on a monthly basis. Yet the business
was highly profitable. Why? Because there would be,
predictably, a high future demand for highly skilled surgeons.
When patients need surgery, they want reputable and
experienced people doing this work on the patients’ own bodies.
Specialty had a team like that. In the future, patients and their
insurance companies predictably would pay sizably for that.
Tuli also argues it was impossible for him to cure his
terminating event. He says the operating agreement did not
spell out details about how to cure, and there was no guarantee
the governing board would have accepted any action he took. But
Tuli did not even try. His opening brief states “Tuli did not
apologize or retract any claim.” Specialty’s lawyer gave him
suggestions about a cure, but Tuli spurned these ideas with an
inflammatory and aggressive response. A good offense
sometimes is the best defense, but the heedless aggression by
Tuli and his attorney was entirely counterproductive. Tuli
cannot complain a cure the company invited him to make was
impossible.
In summary, none of these arguments makes headway
against the trial court’s rejection of Tuli’s restitution claim.
f
Tuli faults the trial court for excluding two exhibits
showing Symbion had valued Specialty in an amount consistent
with estimates at trial by Tuli’s valuation expert. Tuli claims
these exhibits corroborated this financial expert’s similar
valuation and helped establish that his fateful letter of February
2014 made a criminal law accusation that was “true.”
40
The trial court rejected the notion that Tuli’s letter made
statements that were “true.” Specialty had conducted an
“extensive investigation” of the legal claims in Tuli’s letter before
Tuli sent it. Specialty included a “lengthy” legal analysis of these
very claims in its offering memorandum.
Specialty “already thoroughly investigated the legality of
the offering, the applicability of the anti-kickback statute and the
application of the safe harbor provisions, and obtained an
independent valuation of the units.” This fact was undisputed.
Tuli offered no evidence that would prove further
investigation would establish some sort of legal violations of the
type his letter charged. Judge Feuer observed this case was
removed from a whistleblower situation where a shareholder
would alert members of a company to “actual illegal activity.”
At trial, the court listened to Tuli testify at length and
made a credibility finding that Tuli “did not have a good-faith
belief that the statements made in the letter and facsimile had a
factual or legal basis.”
Tuli makes a halfhearted attempt to overturn this
credibility finding by the court after a court trial. This effort
seeks to ascend an overhanging cliff. (E.g., People v. Johnson &
Johnson (2022) 77 Cal.App.5th 295, 335.) Substantial evidence
supports the court’s finding. For instance, Brooks displayed a
detailed recollection of his interactions with Tuli, while Tuli
mostly “did not recall” many portentous events. Other witnesses
corroborated Brooks’s account. None corroborated Tuli.
Tuli’s effort to attack the trial judge’s exclusion of the
valuation exhibits is in vain. The court exercised its discretion
under section 352 of the Evidence Code. As Tuli admits to us,
this evidence was “consistent” with his own expert’s valuation,
41
which already was in evidence. The trial court properly exercised
its discretion in excluding this cumulative evidence. (E.g., Horn
v. General Motors Corp. (1976) 17 Cal.3d 359, 371.)
DISPOSITION
We affirm the judgment and award costs to the
respondents.
WILEY, J.
We concur:
STRATTON, P. J.
GRIMES, J.
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