Fowler v. Golden Pac. Bancorp, Inc.

• Decision Date: 23 June 2022
• Docket Number: C092179
• Citation: 80 Cal.App.5th 205,295 Cal.Rptr.3d 501
• Parties: Rick FOWLER, Plaintiff and Respondent, v. GOLDEN PACIFIC BANCORP, INC., Defendant and Appellant.
• Court: California Court of Appeals Court of Appeals

80 Cal.App.5th 205

295 Cal.Rptr.3d 501

Rick FOWLER, Plaintiff and Respondent,

v.GOLDEN PACIFIC BANCORP, INC., Defendant and Appellant.

C092179

Court of Appeal, Third District, California.

Filed June 23, 2022

Law Office of Stephanie J. Finelli and Stephanie J. Finelli, Sacramento, for Defendant and Appellant.

Tisdale & Nicholson and Michael D. Stein, Los Angeles, for Plaintiff and Respondent.

KRAUSE, J.

This is an action to compel an inspection of books and records pursuant to Corporations Code section 1600 et seq.¹ Plaintiff Rick Fowler (Fowler) sought a writ of mandate against defendant Golden Pacific Bancorp, Inc. (Bancorp), to enforce his statutory rights as a director and majority shareholder to inspect corporate books and records. Bancorp opposed the petition, arguing that the trial court should curtail Fowler's inspection rights because he is involved in ongoing litigation with Bancorp and could use the information to undermine Bancorp's position in the lawsuit. Unpersuaded that Bancorp met the heavy burden necessary to curtail Fowler's inspection rights, the trial court granted Fowler's writ petition.

Bancorp appealed, contending that the trial court erred by (1) allowing Fowler to submit additional evidence on reply without permitting Bancorp an adequate opportunity to respond; and (2) granting the writ petition and permitting Fowler to have unfettered access to Bancorp's corporate books and records.

After we issued an oral argument waiver notice, Bancorp moved to dismiss the appeal as moot. Bancorp asserted that due to the recent acquisition of Bancorp by Social Finance, Inc., Fowler is no longer a Bancorp board member, and therefore it is impossible for this court to grant effective relief. Fowler requested oral argument. We deferred ruling on the motion until after oral argument.

We shall conclude that the primary issue raised in this appeal is moot because Fowler is no longer a member of Bancorp's board of directors and therefore has no director's inspection rights. Nevertheless, we exercise our discretion to reach the merits because it presents an issue of substantial and continuing public interest: whether a director's "absolute" right of inspection under section 1602 may be curtailed because the director and corporation are involved in litigation and there is a possibility the documents could be used to harm the corporation.

We shall conclude the mere possibility that information could be used adversely to the corporation is not by itself sufficient to defeat a director's inspection rights. Rather, any exception to the general rule favoring unfettered access must be limited to extreme cases, where enforcing an "absolute" right of inspection would produce an absurd result, such as when the evidence establishes the director's clear intent to use the information to breach fiduciary duties or otherwise commit a tort against the corporation.

We decline to reach the other question referenced in the parties’ briefs concerning Fowler's inspection rights as a shareholder, because that issue was not resolved by the trial court and the record is insufficiently developed for us to determine whether it is moot. Thus, we shall remand this matter for the trial court to consider whether that issue is moot and, if not, to resolve any remaining disputes in the first instance.

FACTUAL AND PROCEDURAL BACKGROUND

Bancorp was a bank holding company conducting business through its wholly owned subsidiary, Golden Pacific Bank, N.A. Fowler was a member of Bancorp's board of directors and its largest individual shareholder, holding over 19 percent of the outstanding stock. Fowler also is the chief operating officer of a law firm, Kronick, Moskovitz, Tiedemann & Girard (KMTG).

In July 2018, Bancorp filed a lawsuit in the Sacramento County Superior Court (case No. 34-2018-00236905) against KMTG, an individual attorney at KMTG, and Fowler (the malpractice lawsuit). The lawsuit arose out of KMTG's representation of Bancorp in prior litigation against a company called BillFloat, Inc. (the BillFloat litigation). Bancorp's amended complaint alleges claims against KMTG and its attorney for breach of contract, breach of professional duties, professional negligence, and breach of fiduciary duties in connection with the prosecution and eventual settlement of the BillFloat litigation. Among other things, the complaint alleges that KMTG and the attorney overbilled for services, negligently failed to evaluate and prepare the case for trial, and caused Bancorp to accept a grossly inadequate settlement amount.

The complaint also alleges claims against Fowler for negligence, breach of fiduciary duty, concealment, and fraud based on his actions as a Bancorp director. Specifically, it asserts that Fowler breached his fiduciary duties by persuading Bancorp to hire KMTG for the BillFloat litigation despite knowing that KMTG was not competent to handle the litigation. It further alleges that Fowler used his position as director to persuade Bancorp to settle the BillFloat litigation for a grossly inadequate amount because Fowler knew KMTG had failed to conduct sufficient discovery and investigation to prepare the case for trial.

In September 2018, two months after Bancorp filed the malpractice lawsuit, Fowler delivered to Bancorp a written demand to inspect and copy the following books and records pursuant to section 1600 et seq. :

1. A list of the names, addresses, e-mail addresses, and holdings of all Bancorp shareholders;

2. A breakdown of the expense and income balance sheet items labeled "Other" for Bancorp and its wholly owned subsidiary bank;

3. A breakdown of where on the 2017 and 2018 consolidated financial statements the BillFloat settlement payment was booked, and where KMTG's legal fees for 2016, 2017, and 2018 were booked;

4. Any change in control/severance/golden parachute agreements for Bancorp-affiliated parties;

5. Any resolutions approving change in control agreements or an increase in director fees and/or bonuses for 2016, 2017, and 2018;

6. Any documents evidencing payment of the personal legal fees of Bancorp president and chief executive officer, Virginia Varela, in 2016, 2017, and 2018;

7. The loan file pertaining to the Axis Energy SBA loan; and

8. The bank's accounting books and records, and meeting minutes for its board and committees from September 2017 through the date of the request.

Fowler asserted that, as a director, he had an "absolute right" to inspect the records under section 1602. Bancorp, however, refused to permit inspection, citing conflicts of interest and concerns that Fowler was seeking the records for an improper purpose, namely, to undermine Bancorp's position in the malpractice lawsuit.

Fowler did not immediately seek a peremptory writ to enforce his statutory inspection right. Instead, in November 2018, Fowler served Bancorp with a request for production of documents in the malpractice lawsuit seeking records substantially similar to those sought in his inspection demand letter.

When Bancorp refused to produce the requested documents, Fowler filed a motion to compel. In support of his motion, Fowler argued that the requested documents were relevant to Bancorp's claims and his defenses in the malpractice lawsuit. Bancorp opposed the motion, asserting, inter alia, that most of the records Fowler requested were irrelevant to the lawsuit and would only be of interest in his capacity as a "disgruntled shareholder/director." The court agreed with Bancorp. It denied the motion to compel, concluding that the document requests were overbroad, invaded third party privacy rights, and sought information that was not relevant.

Shortly thereafter, Fowler filed this action for a peremptory writ of mandate to enforce his statutory right to inspect Bancorp's books and records. His amended petition alleges that he has an "absolute right" as a director and shareholder to inspect and copy the records pursuant to sections 1600 and 1602. In a supporting declaration, Fowler stated that he requested the inspection to protect his interests as Bancorp's single largest shareholder and to fulfill his fiduciary duty as a director to stay informed about Bancorp's financial condition and operations.

Bancorp opposed the writ petition, asserting that inspection should be denied because Fowler is not a disinterested director and his only motive in requesting the records is to "dismantle and undermine" Bancorp's lawsuit against him and the law firm for which he works. Bancorp characterized the petition as an attempted "end-run" around the adverse discovery ruling in the malpractice lawsuit.

To support its claim that Fowler was requesting the documents for an improper purpose, Bancorp submitted a declaration from Bancorp board member David Roche.² Roche declared, inter alia, that (1) Fowler is a party to ongoing litigation with Bancorp in which it is alleged Fowler breached his fiduciary duties; (2) Fowler repeatedly stated his desire to have the litigation dismissed; (3) Bancorp's board believes that allowing Fowler to inspect and copy the requested records would "severely undermine" its position in the litigation; (4) Fowler previously sought to compel discovery of the same records in the lawsuit, but his request was denied; (5) it was only after the adverse discovery ruling that Fowler filed the writ petition; and (6) Fowler never previously made a demand to inspect Bancorp's corporate records.

In reply, Fowler filed a supplemental declaration responding to the factual assertions made in Bancorp's opposition papers. Fowler declared, "Contrary to [Bancorp's] supposition about my purpose in filing the Petition, I want to inspect the subject corporate records, especially the financial statements and working papers for these records, among other things, to learn how certain expenses and income items were calculated and what certain large numbers consist of, as well as how the compensation for [Bancorp's] Chief Executive Officer and its directors is being...