Winslow v. Alliance Industrial Refrigeration etc. CA2/4

Filed 1/14/22 Winslow v. Alliance Industrial Refrigeration etc. CA2/4
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
KATHY WINSLOW et al., B307788
Petitioners and Appellants, (Los Angeles County
Super. Ct. No. 19STCP02810)
v.
ALLIANCE INDUSTRIAL
REFRIGERATION SERVICES,
INC., et al.,
Respondents.
APPEAL from an order of the Superior Court for Los Angeles
County, James Chalfant, Judge. Affirmed.
California Land Law and Richard J. Cowles for Petitioners and
Appellants.
Wilcox Dunakin Chrisopoulos and Chad C. Wilcox for
Respondents.
INTRODUCTION
Kathy Lohr and Kathy Winslow (petitioners), shareholders of
Alliance Industrial Refrigeration Services, Inc. (Alliance), made a
written demand for inspection of various records pursuant to
Corporations Code section 1601.1 After Alliance allegedly failed to
comply with the inspection demand, petitioners sought court
intervention and filed a petition for writ of mandate against
respondents Alliance and its directors Grant Golding, Daniel Jordan,
and Richard Dones. (§ 1603; Code Civ. Proc., § 1085.) Prior to the trial
court ruling on the merits, respondents fully complied with the
inspection demand. Petitioners thereafter sought attorney fees, arguing
that Alliance’s refusal to comply with the inspection demand absent
court intervention was without justification. (See § 1604.) Specifically,
petitioners contended Alliance refused to provide a declaration
regarding the nonexistence of certain corporation documents as well as
a settlement agreement with a former employee. The trial court denied
the motion for attorney fees.
On appeal, petitioners argue the trial court erred in ruling: (1) a
declaration of inability to comply with an inspection demand is not
required by section 1601; and (2) respondents’ failure to provide the
settlement agreement was justified. We disagree with petitioners and
affirm the trial court’s order denying attorney fees.
1 All further statutory references are to the Corporations Code, unless
otherwise stated.
2
FACTUAL AND PROCEDURAL HISTORY
Petitioners each own 1,000 shares of capital stock of Alliance,
which constitutes at least five percent of the issued and outstanding
shares of Alliance.
On July 25, 2018, petitioners, through counsel, made a written
demand to Grant Golding, Chief Executive Officer of Alliance, to make
available certain books and records of the corporation for inspection and
copying pursuant to section 1601. The inspection demand was based on
Alliance’s allegation that Eric Merrell, a former officer and director of
Alliance, had embezzled $5 million from the corporation. Counsel for
Alliance indicated a willingness to cooperate with the inspection
demand and produced over 7,000 pages of documents to petitioners.
During the production process, counsel for Alliance notified
petitioners’ counsel that many of the documents requested do not exist.
On several occasions, petitioners’ counsel asked for a declaration from
Alliance regarding the nonexistence of certain requested categories or
documents. Counsel for Alliance uniformly responded that the
applicable statute does not require Alliance to provide a declaration.
Then, after Alliance had settled a lawsuit against Merrell for allegedly
embezzling corporate funds, counsel for petitioners requested the
settlement agreement. In response, counsel for Alliance stated he was
waiting on litigation counsel’s recommendation regarding the disclosure
of the settlement agreement. In the interim, he provided the board’s
minutes discussing the terms of the agreement.
On July 3, 2019, petitioners sought a writ of mandate based on
respondents’ alleged refusal to fully comply with the inspection demand.
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(§§ 1601, 1603; Code Civ. Proc., § 1085.) Petitioners contended the
inspection demand was reasonably related to their interests as
shareholders based on an alleged embezzlement of $5 million in
Alliance funds by Merrell. Petitioners also sought attorney fees in
connection with the writ proceeding. (§ 1604.)
At the trial setting conference on October 10, 2019, respondents
indicated they were willing to comply with the record inspection and the
court ordered the parties to meet and confer to discuss and resolve all
outstanding issues.
At the further trial setting conference on December 12, 2019,
respondents told the court that they believed they had complied with
the inspection demand but were also open to anything additional that
petitioners are seeking, within reason, to resolve the dispute.
Respondents also stated the only issues outstanding were (1) a copy of
the settlement agreement with Merrell and (2) a declaration from
Alliance’s CEO (Golding) attesting that the corporation had provided all
the documents in their possession. Respondents emphasized that
disclosure of the settlement agreement required a court order or
permission from Merrell. Petitioners indicated that they had not
received all documents but were willing to accept a declaration from
Golding attesting that those documents, in fact, did not exist. In
addition, counsel argued that petitioners as shareholders were entitled
to the settlement agreement. The court responded that under the
Corporations Code, a shareholder is not entitled to such a declaration or
a settlement agreement absent notice to the third party. The court then
directed respondents to give notice to Merrell that the court is
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tentatively ordering disclosure of the settlement agreement by January
23, 2020, to petitioners only. Unless Merrell objects to disclosure on an
ex parte basis, respondents are to disclose the agreement.
Furthermore, respondents were directed to provide the requested
declaration. After the hearing, respondents produced the settlement
agreement as well as Golding’s declaration regarding compliance with
the inspection demand. On February 18, 2020, petitioners indicated
that attorney fees and costs were the only outstanding issue in the
matter, and the court directed the parties to meet and confer prior to
filing a motion.
On August 18, 2020, petitioners filed a motion for attorney fees in
the amount of $21,366.22 based on respondents’ alleged refusal to
comply with their inspection demand. As relevant here, petitioners
contended that respondents refused to turn over the settlement
agreement until the trial court intervened and ordered the agreement
produced. In addition, respondents only fully complied with the
inspection demand when petitioners were provided with the Golding
declaration, confirming the remainder of Alliance’s financial documents
demanded by petitioners were nonexistent.
Respondents opposed the request for attorney fees, arguing they
never refused to produce any document required by the Corporations
Code. Contrary to petitioners’ contention, the Golding declaration was
not a corporate record under section 1601. Moreover, respondents
contended that Alliance’s settlement agreement with Merrell was
confidential and therefore required written permission by Merrell or a
court order to disclose. Respondents even attempted to obtain written
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authorization from Merrell, but they were unsuccessful.2 Therefore,
petitioners have failed to establish that respondents failed to comply
with a lawful inspection demand without justification.
At the hearing, the court found that the settlement agreement
“could not be produced without a court order” and “[t]he declaration of
Grant Golding is not a record to which petitioner[s] [were] entitled but,
rather, it is a statement of compliance or inability to comply, more
accurately. Therefore, it cannot support an award of attorney’s fees.”
The court also found “the respondent[s] [have] been completely
cooperative both before and after the petition was filed, and that there
was no basis for award of attorney’s fees.” The court stated its tentative
was to deny the motion for attorney fees. After argument from the
parties, the court adopted its tentative and denied the motion.
Petitioners filed a timely notice of appeal from the order denying
attorney fees.
DISCUSSION
On appeal, petitioners contend they are entitled to attorney fees
because: (1) a declaration attesting to inability to comply with a lawful
inspection demand is required under section 1601; and (2) respondents’
failure to provide this declaration as well as the settlement agreement
with Merrell was without justification.
Upon the written demand, any shareholder of a corporation has
the right to inspect and copy “[t]he accounting books, records, and
2 Petitioner Lohr, Merrell’s mother-in-law, was also unable to secure
written authorization from Merrell.
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minutes of proceedings of the shareholders and the board and
committees of the board of any . . . corporation . . . for a purpose
reasonably related to the holder’s interests as a shareholder.” (§ 1601,
subd. (a)(1).) Although shareholders have some rights to corporate
information which are not enjoyed by the general public, shareholder
status does not in and of itself entitle a shareholder to unfettered access
to corporate confidences and secrets. (National Football League
Properties, Inc. v. Superior Court (1998) 65 Cal.App.4th 100, 107;
Thomas v. Gordon (2000) 85 Cal.App.4th 113, 122 [“a shareholder has
only a limited right to access to corporate financial records”].) The trial
court may enforce the right of inspection if a corporation refuses a
lawful demand. (§ 1603, subd. (a).) The court is empowered to award
reasonable expenses, including attorney fees, to a shareholder whose
demand for inspection was refused without justification. (§ 1604.)
Petitioners sought attorney fees under this provision, arguing that
respondents’ refusal to fully comply was “without justification.”
First, petitioners contend that a declaration of inability to comply
with a lawful inspection demand is required under section 1601. “The
statute guarantees a shareholder’s right to inspect accounting books
and records at the [corporate] office at a reasonable time during usual
business hours when such inspection is requested by a written
demand.” (Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238,
1265; see § 1601.) The scope of the duty imposed by section 1601
requires no more than the corporation open financial records for
inspection at corporate offices. (Id. at p. 1263; Singhania v. Uttarwar
(2006) 136 Cal.App.4th 416, 431.) Petitioners have not cited any
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authority establishing that shareholders have extended rights to
demand, and corporations have a corresponding affirmative duty to
provide, a declaration of inability to comply with an inspection demand.
Such an obligation is not only beyond the plain language of section
1601, but it would also create an unnecessary burden on the corporation
to provide a declaration for every inspection demand regarding the
completeness of corporate books and records. (See Jara v. Suprema
Meats, Inc., supra, at p. 1265.)
Petitioners then contend respondents’ production of the Golding
declaration and settlement agreement after intervention by the trial
court was without justification. As previously discussed, a declaration
of inability to comply with an inspection demand is not required under
section 1601. Thus, the declaration cannot be subject to a motion for
attorney fees under section 1604. As to the settlement agreement, we
agree with the trial court that withholding the agreement was justified.
Respondents could not produce the settlement agreement as it was
confidential, and Alliance was contractually obligated not to disclose it
without written permission from Merrell or court order. (See National
Football League Properties, Inc. v. Superior Court, supra, 65
Cal.App.4th at p. 107.) Respondents were unable to secure permission
from Merrell but readily produced the agreement after receiving a court
order.
We conclude a declaration of inability to comply with a lawful
inspection demand is not required under section 1601. We further
conclude that respondents’ failure to provide the settlement agreement
prior to court intervention was not without justification. Therefore, the
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trial court did not abuse its discretion in denying petitioners’ motion for
attorney fees.
DISPOSITION
The order denying attorney fees is affirmed. Respondents shall
recover their costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
WILLHITE, Acting P. J.
We concur:
CURREY, J.
MICON, J.*
*Judge of the Los Angeles County Superior Court, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.
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