Applied Med. Corp. v. Thomas

• Decision Date: 12 April 2017
• Docket Number: A145867
• Citation: 217 Cal.Rptr.3d 169
• Court: California Court of Appeals Court of Appeals
• Parties: APPLIED MEDICAL CORPORATION, Plaintiff and Appellant, v. T. Peter THOMAS et al., Defendants and Respondents.

217 Cal.Rptr.3d 169

APPLIED MEDICAL CORPORATION, Plaintiff and Appellant,

v.T. Peter THOMAS et al., Defendants and Respondents.

A145867

Court of Appeal, First District, Division 5, California.

Filed April 12, 2017

As Modified on Denial of Rehearing May 10, 2017

Certified for Partial Publication.^*

Jones Day, Nathaniel P. Garrett, San Francisco, Richard J. Grabowski, Irvine, and Meredith L. Williams, for Plaintiff and Appellant.

Keker & Van Ness, Susan J. Harriman, Matthew Werdegar, Kate E. Lazarus, Sophie Hood, San Francisco, for Defendants and Respondents.

SIMONS, J.

After defendant and respondent T. Peter Thomas ("Thomas"), a member of the Board of Directors of plaintiff and appellant Applied Medical Corporation ("Applied"), was removed from the Board, Applied exercised its right to repurchase shares of its stock issued to Thomas as part of certain stock incentive plans.

Thomas objected to the repurchase price, and in August 2012 Applied filed the instant lawsuit. In June, 2015, the trial court granted summary judgment against Applied, which timely appealed. We affirm as to Applied's fraud-based claims, but reverse as to Applied's claims based on breach of contract and conversion. In the published portion of this opinion we address two issues. First, the trial court erred in determining Applied's conversion claim failed. We conclude such a claim may be based on either ownership or the right to possession at the time of conversion. Second, we conclude the trial court correctly ruled Applied's fraud claims were barred by the applicable statute of limitations. We reject Applied's argument that those claims, first alleged in 2014, were timely under either the discovery rule or the relation back doctrine.

FACTUAL AND PROCEDURAL BACKGROUND ¹

Applied is a provider of specialty medical products for surgical and minimally invasive procedures

. Defendants and respondents Reid W. Dennis ("Dennis") and Thomas are general partners of Institutional Venture Management IV, L. P. ("IVM"). IVM is the general partner of defendant and respondent Institutional Venture Partners IV, L.P. ("IVP"), a venture-capital investment limited partnership. From 1988 to 1992, IVP made substantial financial investments in Applied. In 1988, Thomas joined Applied's Board of Directors ("Board").

In 1998 the Board approved Applied's 1998 Stock Incentive Plan (the "1998 Plan") regarding stock option awards. In 2003, the Board approved a stock option program proposed by Thomas for individuals serving as outside directors on the Board. Between 2003 and 2008, Thomas received five stock option grants pursuant to the 1998 Plan, and between 2009 and 2010, he received two stock option grants pursuant to Applied's Amended and Restated 2008 Stock Incentive Plan (the "2008 Plan").

The 1998 Plan included a provision giving Applied the unilateral right to repurchase shares upon termination of a director's service. The agreements corresponding to Thomas's grants under the 1998 Plan stated Applied would "have the right (but not the obligation) to repurchase ... any or all of the Shares acquired pursuant to the exercise" of the stock option upon termination of the optionee's service. Thomas acknowledged he, upon exercise of the repurchase right, "shall be obligated to sell his ... Shares to the Company." Thomas also represented the options were "being acquired ... for [his] personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof."

The 2008 Plan also gave Applied the right to repurchase shares from Thomas, and, in accepting stock option grants under the 2008 Plan, Thomas again acknowledged his obligation to sell his shares to Applied upon exercise of the company's repurchase right. Thomas also represented any shares would be acquired with his "own funds for investment for an indefinite period for your account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof," and that he had no "contract, understanding or agreement with any person to sell, transfer, or grant participation" to his options.

The IVM partners had an oral agreement regarding stock options obtained due to a partner's service on the board of directors of a company in which IVP had invested, like Applied. Under that agreement, the IVM partners provide the funds to purchase stock and, when the stock is sold, the proceeds are shared among the partners.²

According to Applied, Thomas did not disclose the stock-sharing agreement. Applied CEO Said Hilal ("Hilal") learned of the possibility that Thomas would share stock proceeds for the first time shortly before a Board meeting on or around February 24, 2011.³ Thomas said he "might share" the proceeds of the stock options awarded to him with his partners at IVP. Hilal was "surprised" by Thomas's suggestion because he considered it "completely contrary to the reason that the Company adopted a stock option program for directors in the first place—to compensate directors for their individual service." Thomas told Hilal he had "misunderstood;" Thomas said he was only "thinking about sharing his stock options" and he had not actually decided to do so. Thomas averred in his declaration that he "voluntarily disclosed the proceeds-sharing arrangement" to Hilal at the February 2011 Board meeting.

Applied raised concerns about the stock-sharing agreement in a December 1, 2011 e-mail from Applied's general counsel to Thomas. He wrote, "Said [Hilal] mentioned a discussion during the Applied Board meeting in February [2011], regarding the Applied stock options granted to you over the years. Our understanding is that you have an arrangement with IVP by which your Applied stock options are shared with your partners. You will recall that Said was surprised to learn of the arrangement, which was not known to Applied or the board. We believe the arrangement is inconsistent with the purpose of Applied's outside Director option program—to provide a form of compensation and incentive to the directors—for their service as directors. During that discussion with Said, you agreed to the cancellation of the options." Thomas replied that same day, stating "The stock options that I've earned over the years are not inconsistent with what your purpose [is.] It is to reward me. I own the shares and the shares are never going to be in any name but my name. Whether I share some of the proceeds of the sale in the future is my business and my sharing of the information with Said that I would probably share the benefits is for information only. I have no intention of ever putting any of those shares in the name of anybody but me. [¶] I also NEVER told Said that it was okay to cancel any of my shares and definitely am not willing to have those shares cancelled."

In January 2012, Thomas was voted off the Applied Board, apparently due to an alleged conflict of interest relating to IVP's efforts to compel Applied into an initial public offering in mid-2011.

On February 1, 2012, Thomas exercised his stock options and purchased 37,950 shares of Applied stock. On February 16, Applied confirmed the purchase and issued a stock certificate in Thomas's name. At the same time, Applied notified Thomas it was exercising its rights under the stock-option agreements to repurchase the shares. Applied stated the "Fair Market Value" of the shares was $13.05 each, and the company made available a check in the amount of $495,247.50. The 1998 and 2008 Plans set the repurchase price as the "Fair Market Value" of the shares, as determined "in good faith" by the Applied Board's Compensation Committee. Both plans state the determination "shall be conclusive and binding." The $13.05 purchase price for Thomas's shares was based on a valuation from a third-party firm that had performed valuations of Applied's stock since 2004.

On March 6, 2012, an attorney for IVP responded on behalf of Thomas to Applied's repurchase notification. The letter stated that Thomas "disputes Applied's fair market value determination of $13.05," explaining the amount was far less than a binding third party offer for the stock and a third party valuation obtained by IVP. The letter requested that Applied "either rescind [the] offer to repurchase Mr. Thomas' option shares and deliver the shares to him, or, in light of the third party offer received by Mr. Thomas and the independent valuations outlined above, make an offer at a price reflecting an actual good faith fair market value."

Outside counsel for Applied responded by letter on April 20, 2012, stating, among other things, that the stock option agreements "contemplate that fair market value is determined through Applied's usual valuation process." The letter enclosed a check for $495,247.50 and warned that if Thomas did not return his "duly executed stock powers by April 27," Applied would consider him "to be in breach of his obligations under the stock option agreements." Applied's general counsel wrote to Thomas's counsel on June 27 warning that Thomas "remains in breach of his obligations" under the stock option agreements.

Applied filed the present lawsuit against Thomas and IVP on August 31, 2012. Applied asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, conversion, aiding and abetting conversion, and declaratory relief. Broadly speaking, the claims were based on Thomas's alleged refusal to transfer his shares to Applied after the company exercised its repurchase rights.

On or about September 6, 2012, Thomas cashed Applied's check for $495,247.50 and deposited the proceeds into his personal checking account. On September 10, an attorney for Thomas sent Applied an executed stock-assignment form for Thomas's 37,950 shares, signed by Thomas on September 5, while reserving the right to continue to dispute the valuation.

On June 24, 2014, Applied moved for leave to file a Second Amended Complaint ("SAC"). The SAC was filed on August 15. The...