A. J. Industries, Inc. v. Ver Halen

• Decision Date: 09 December 1977
• Citation: 142 Cal.Rptr. 383,75 Cal.App.3d 751
• Court: California Court of Appeals Court of Appeals
• Parties: A. J. INDUSTRIES, INC., Plaintiff, Cross-Defendant and Appellant, v. Charles VER HALEN, Jr., and the National State Bank, a National Banking Association, Defendants, Cross-Complainants and Respondents. Civ. 50375.

Page 383

142 Cal.Rptr. 383

75 Cal.App.3d 751

A. J. INDUSTRIES, INC., Plaintiff, Cross-Defendant and Appellant, v. Charles VER HALEN, Jr., and the National State Bank, a National Banking Association, Defendants, Cross-Complainants and Respondents.

Civ. 50375.

Court of Appeal, Second District, Division 2, California.

Dec. 9, 1977.

Hearing Denied Feb. 1, 1978.

Hill, Farrer & Burrill, Carl A. Stutsman, Jr., Jack R. White and Rex W. Kellough, Los Angeles, for plaintiff, cross-defendant and appellant.

Marcus Crahan, Jr., Los Angeles, Peter C. Ver Halen, Hollywood, for defendant, cross-complainant and respondent Charles Ver Halen, Jr.

Roberts, Carmack, Johnson, Poulson & Harmer, Los Angeles, for defendant cross-complainant and respondent The National State Bank.

COMPTON, Associate Justice.

On November 9, 1970, A. J. Industries, Inc. (A. J.) entered into a compromise and settlement agreement (hereafter "settlement agreement") with its then president and chairman of the board Charles Ver Halen. The settlement agreement was to replace an existing employment contract between A. J. and Ver Halen. Ver Halen assigned his rights in the settlement agreement to the National State Bank (the Bank). Subsequently A. J. paid out a sum of money under the settlement agreement.

On August 30, 1971, A. J. commenced an action against Ver Halen and the Bank seeking to invalidate the settlement agreement and to recover the money paid pursuant thereto. Ver Halen and the Bank cross-complained against A. J. but Ver Halen dismissed his cross-complaint during trial.

The judgment below was in favor of Ver Halen and the Bank. A. J. was directed to pay to Ver Halen and the Bank certain sums including costs and attorney's fees. A. J. has appealed. We affirm.

Since 1956, A. J. has conducted a number of diversified business enterprises from its headquarters in Los Angeles. Ver Halen, one of A. J.'s largest stockholders, served variously as president, director and chairman of the board from 1956 until November 9, 1970.

Commencing in 1958, Ver Halen performed under the terms of an employment agreement which was amended several times, with its latest amendment effective January 1, 1970. Over the years his salary rose to $100,000 annually plus 4% of the net pre-tax profits of the corporation in excess of $125,000 per quarter. Additional emoluments and perquisites provided for in the contract included a separate office, secretarial staff, an automobile and life and medical insurance coverage.

During the Spring of 1970, a struggle for control of the corporation ensued. In May 1970, at a meeting of the corporate directors, an abortive attempt was made to terminate Ver Halen's employment. Certain directors filed written complaints that Ver Halen had used the leverage of the deposit of corporate funds to obtain personal bank loans, that he had effected a loan of corporate funds to a company in which he had an undisclosed financial interest, and that he had on other specified occasions used corporate funds for his own benefit. Ver Halen, by written response, denied any wrongdoing.

The conflict within the corporation continued unabated until November of 1970 when the dissident directors achieved their goal of Ver Halen's departure through resignation. They were aided in this by pressure from certain of A. J.'s creditors.

Recognizing, but yet uncertain of the effect of the employment agreement with its attendant benefits, the directors, acting for the corporation, entered into the settlement agreement with Ver Halen.

The settlement agreement itself recites that the corporation had grown and developed substantially under Ver Halen's leadership but notwithstanding that fact and because of the belief among certain corporate officials that his continuing to occupy a leadership role would engender disunity, it was in the best interests of the company that Ver Halen resign.

The settlement agreement contains the following recitation.

"WHEREAS, Ver Halen presently holds a binding employment contract with the Company (the 'Employment Agreement') providing, among other things, for his employment through August 8, 1978; at compensation of $100,000 per year plus 4% of the pre-tax profits of the Company to the extent such profits exceed $125,000 in any fiscal quarter; and

"WHEREAS, Ver Halen has agreed to resign as the Chairman of the Board of Directors of the Company and has agreed to resign as an employee of the Company at this time, and has agreed to relinquish the benefits accruing to him under said Employment Agreement, provided that the Company enters into the agreement set forth herein; and

"WHEREAS, the Company deems it to be in its best interests to accept Ver Halen's resignation as aforesaid and to make the payments to Ver Halen set forth herein; . . ."

Finally the settlement agreement contained a release (with certain exceptions not important here) of all claims, liabilities and demands of any kind, known or unknown, which A. J. had against Ver Halen.

A. J.'s claim that the settlement agreement is invalid is grounded on the theory that at the time of executing that agreement, the employment agreement, which was thereby terminated, was in fact voidable and not binding because of Ver Halen's breach of his fiduciary duty to the corporation. The argument goes that the dereliction of Ver Halen gave rise to a legal right to terminate Ver Halen without any need to settle with him and had the directors of the corporation known of this right they would not have agreed to the settlement.

A. J. attempted to show, through the testimony of the directors, that they believed that Ver Halen had a binding employment agreement which compelled A. J. to compensate him for his resignation and that had they known of certain alleged past conduct by Ver Halen, they would not have voted for the agreement. The trial court, however, prevented A. J. from producing proof that Ver Halen was in fact guilty of the conduct that was alleged. Limited evidence on the issue was permitted as it related to the issues of mistake or lack of consideration.

Although A. J., in its briefs, does not specifically assign as a grounds for reversal the trial judge's refusal to permit detailed proof of Ver Halen's alleged misfeasance, it does assert that the trial judge had an overall misconception of the law as it relates to A. J.'s position.

This misconception, according to A. J., spawned findings of fact which are themselves either erroneous conclusions of law, are unsupported by the evidence or are deficient in their failure to address certain issues. The latter claim of deficiency lies in the judge's failure to make findings concerning the allegations that Ver Halen was guilty of certain breaches of his fiduciary duty. Because we have concluded that A. J. did not make out its case for rescission, as will be discussed infra, that failure was not error. In reality, A. J.'s appeal is little more than an invitation to us to reweigh the evidence.

The critical findings of the trial judge are summarized as follows: (1) The consideration for the settlement agreement was adequate and sufficient in that Ver Halen suffered substantial detriment in relinquishing his right to participate in the day-to-day management of his stock and in relinquishing life, health and other insurance benefits.

(2) Substantial benefits flowed to A. J. in quelling internal dissension among its division managers and other officers; the avoidance of litigation and the securing of waivers of defaults in its long term loans, which defaults if not waived and which loans if called, would have rendered A. J. insolvent.

(3) The settlement agreement was not entered into in the mistaken belief that Ver Halen's Employment Agreement was valid, binding, or not subject to lawful termination.

(4) If there was any mistake as to whether the employment agreement was binding it was not material.

(5) Ver Halen did not make any misrepresentations in connection with the execution of the settlement agreement and he made no representation with respect to the legality of the employment agreement.

(6) A. J.'s board of directors authorized, approved and adopted the settlement agreement without regard to whether the employment agreement was legally binding;

(7) A. J. entered into the settlement agreement in order to compromise and settle disputes between itself and Ver Halen; to avoid litigation over the employment agreement; and in the belief that by doing so it would secure internal harmony within its management and greater cooperation from its long term lenders including, particularly, the waiver of then existing defaults in its long term loans.

(8) At the time it entered into the settlement agreement, A. J. had actual and constructive knowledge of substantially all facts, matters and grounds which it asserted in this litigation as cause for the termination of the employment agreement.

(9) In entering into the settlement agreement, A. J. did not rely upon any representation of Ver Halen made in connection with any asserted breach of the employment agreement or made in connection with any asserted breach of his fiduciary duties to A. J.

(10) In entering into the settlement agreement with the actual and constructive knowledge of substantially all of the facts, matters and grounds which A. J. now asserts as the basis for termination of the employment agreement and inducing Ver Halen to resign as an officer and employee thus relinquishing the benefits of the employment agreement, and by Ver Halen's performance of all of the obligations required of him under the settlement agreement, A. J. has waived and is estopped to assert any breach of the employment agreement or breach of fiduciary duty by Ver Halen in attempting to rescind the settlement agreement.

A. J. posits that Ver Halen's denial of the charges leveled during the May, 1970 meeting itself constituted a breach of his fiduciary duty as an officer of the corporation to...