Cupps v. Mendelson, No. D052869 (Cal. App. 4/7/2010)
| Decision Date | 07 April 2010 |
| Docket Number | No. D052869.,D052869. |
| Parties | TIMOTHY CUPPS, Plaintiff and Appellant, v. PAUL DOUGLAS MENDELSON, Defendant and Appellant. |
| Court | California Court of Appeals Court of Appeals |
Appeals from a judgment of the Superior Court of San Diego County, No. GIC857992, John S. Meyer, Judge. Affirmed.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
Timothy Cupps and Paul Mendelson formed a small corporation, and agreed Mendelson would hold a 60 percent ownership interest and Cupps would hold a 40 percent ownership interest in the corporation. Several years later, Cupps sued Mendelson asserting numerous claims arising from Mendelson's refusal to recognize Cupps's interest in the corporation and pay him his share of the corporate profits.
In the first phase of the bifurcated trial, the jury found the parties had "enter[ed] into an oral contract for Cupps to be a 40 percent shareholder" of the corporation. In the second phase, a different jury found Cupps proved his promissory fraud claim against Mendelson, but did not prove his breach of contract or breach of fiduciary duty claims. On the fraud claim, the jury awarded Cupps $155,000 in past economic damages, $ 233,000 in future economic loss, and $160,000 in punitive damages. The court thereafter granted Mendelson's motion for judgment notwithstanding the verdict (JNOV) with respect to the future damages and punitive damages awards, and agreed to strike those amounts from the verdict.
Both parties appeal. Mendelson contends the court erred in instructing the jury on "benefit of the bargain" damages. Cupps contends the court erred in granting Mendelson's JNOV motion on punitive damages. We reject each party's contention, and affirm the judgment.
We summarize the relevant facts in the light most favorable to the jury's findings. Because the parties designated only portions of the reporter's transcript of the trial, our factual summary is necessarily limited to the facts contained in this abbreviated appellate record.
In early 2000, Mendelson worked for a construction company that performed facility maintenance at Abercrombie & Fitch stores. After he left the company, Mendelson was asked to perform the same maintenance work on an independent contractor basis, and he decided to form a corporation to provide these services.
Mendelson then asked Cupps, a friend and neighbor, to assist him with this venture. Because Mendelson was having financial problems with a prior business entity he had formed, the parties agreed they would form a new corporation with Mendelson owning 60 percent and Cupps owning 40 percent of the corporation. This ownership interest was important to Cupps because he wanted to "make enough money to buy an apartment building and retire." Cupps trusted Mendelson because he had known him for about 8 to 10 months, and Mendelson "came on like he was a friend."
In September 2001, Mendelson formed J&J Retail Services, Inc. (J&J).1 Based on Mendelson's agreement that Cupps was a 40 percent owner in the business, Cupps left his job and began working full time for J&J, and was paid $52,000 annually. Mendelson served as chief executive officer and Cupps was the chief financial officer. Cupps initially supplied much of the office equipment and funds for the business expenses, but was fully reimbursed for all of these costs. Cupps primarily worked on organizational aspects of the business, and Mendelson handled client matters.
During the next two years, the business did well, and Mendelson hired several additional employees, including a woman who later became Mendelson's wife and then took over many of Cupps's tasks. During this time, Cupps repeatedly asked Mendelson for a written agreement evidencing Cupps's 40 percent interest in the business, and Mendelson would tell him "it's in work" or "it was not done yet" and that Mendelson's father was in the process of preparing it. Mendelson essentially acted as the sole owner and shareholder of the corporation.
In April 2003, Mendelson issued 10,000 shares of J&J stock to Cupps, and paid Cupps a monthly bonus of $133, which Mendelson said was 10 percent of the corporate profits. But Mendelson was taking out a much larger portion of the profits from the corporation for his personal use, without accounting to Cupps for these distributions. In about April 2004, Mendelson terminated Cupps's employment, and refused to recognize Cupps's 40 percent interest in the company.
In November 2005, Cupps sued Mendelson and J&J, alleging that Mendelson's failure to recognize his 40 percent ownership interest constituted a breach of an oral agreement, promissory fraud, breach of fiduciary duty, and conversion. Cupps also sued in his capacity of a shareholder of J&J, alleging mismanagement and excessive compensation and that Mendelson was the alter ego of the corporation, and seeking numerous forms of shareholder relief, including an accounting, access to records, and involuntary dissolution. In defense, Mendelson claimed he never agreed to make Cupps a shareholder and that his issuance of 10,000 shares of stock to Cupps was an inadvertent mistake. Mendelson later transferred all of J&J's assets into his newly formed corporation, known as American Commercial Construction, Inc. (ACC).
Pursuant to Mendelson's request, the court bifurcated the trial to first resolve the issue of whether Cupps was a shareholder of J&J and therefore had standing to assert shareholder claims. At the conclusion of the first phase trial, the jury made two special findings: (1) the parties "enter[ed] into an oral contract for Cupps to be a 40% shareholder of J&J . . ."; and (2) Mendelson's issuance of 10,000 shares of stock to Cupps was not a "mistake."
In response to the verdict, Mendelson voluntarily issued stock to Cupps, reflecting that Cupps owned 40 percent of the stock in J&J/ACC. The parties thereafter stipulated that ACC would be named as a Doe defendant; ACC was a successor in interest to J&J and Cupps was a 40 percent owner in J&J and ACC.
The court then empanelled a second jury to consider Cupps's remaining legal claims. After the presentation of the evidence, three causes of action against Mendelson (in his individual capacity) remained for the jury's determination: (1) breach of contract, (2) promissory fraud, and (3) breach of fiduciary duty. On the promissory fraud cause of action, Mendelson argued that Cupps could not recover as a matter of law because he did not present evidence that he suffered any out-of-pocket losses. Cupps acknowledged that he was not claiming any out-of-pocket losses, but argued he was entitled to recover "benefit of the bargain" damages on his fraud claim. The court agreed with Cupps, and, over Mendelson's objections, gave the jury an instruction on damages that permitted the jury to award benefit-of-the-bargain damages on the promissory fraud claim.2
In its special verdicts, the jury found Cupps proved his promissory fraud claim. Specifically, the jury found: (1) Mendelson promised to make Cupps a 40 percent shareholder of J&J (2) Mendelson did not intend to perform this promise; (3) Mendelson intended that Cupps would rely on this promise; (4) Cupps reasonably relied on Mendelson's promise; (5) Mendelson did not perform the promise; and (6) Cupps's reliance on Mendelson's promise was a substantial factor in causing damage to Cupps. With respect to damages, the jury found Cupps suffered $155,000 in past economic damages and $233,000 in future economic loss. The jury also found that Cupps proved "by clear and convincing evidence that Mendelson is guilty of intentional fraud, oppression, or malice" and awarded Cupps $160,000 in punitive damages.
But the jury found Cupps did not prove each element of his breach of contract or breach of fiduciary duty claims. On the contract claim, the jury found the parties entered into an oral agreement for Cupps to be a 40 percent shareholder of J&J, but the conditions did not "occur that were required for Mendelson's performance of the oral agreement." On the breach of fiduciary duty claim, the jury found that "Mendelson, as the controlling shareholder of J&J and ACC, knowingly act[ed] against Cupps' interest as a minority shareholder," but that Cupps gave "informed consent to Mendelson's conduct."3
As to Cupps's equitable causes of action, the court found Cupps was not entitled to any additional relief because Cupps did not prove the equitable claim and/or the claim was moot or subsumed by the jury verdict. On the alter ego allegation, the court found Mendelson was the alter ego of J&J and ACC, but Cupps failed to produce any evidence "to show that he was damaged by J&J or ACC's conduct, or that J&J and ACC owe Cupps any money." The court stated:
After the court entered judgment on the jury verdicts and the equitable claims, Mendelson moved for a JNOV, arguing: (1) Cupps could not recover on his fraud claim because he did not prove any out-of-pocket losses; (2) the future damages award was speculative and was duplicative of Cupps's continued status as a shareholder entitled to future profits; and (3) the punitive damages award was unsupported because Cupps failed to produce evidence of Mendelson's net worth or financial condition.
At the JNOV hearing, the court stated it could not recall any evidence being presented on Mendelson's net worth or ability to pay a punitive damages award, and that Cupps's briefing was unhelpful on these issues. Cupps responded that Mendelson's net worth was "about a million dollars," composed primarily of Mendelson's 60 percent interest in the corporate entity (J&J and/or ACC). Cupps argued the value of this business asset was presented to the jury through the testimony of...
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