Ponzo v. Miller

• Decision Date: 19 November 2018
• Docket Number: C080405
• Parties: JERRY PONZO et al., Plaintiffs, Cross-defendants and Appellants, v. RONALD D. MILLER et al., Defendants, Cross-complainants and Respondents.
• Court: California Court of Appeals

JERRY PONZO et al., Plaintiffs, Cross-defendants and Appellants, v. RONALD D. MILLER et al., Defendants, Cross-complainants and Respondents.

C080405

COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Placer)

November 19, 2018

NOT TO BE PUBLISHED

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Super. Ct. No. S-CV-0029600)

After Jerry Ponzo allegedly failed to disclose material facts and engaged in damaging conduct, Ronald Miller and Brenda Crum attempted to negotiate the dissolution of Enviro-Building Systems, Inc. (EBS), a corporation they owned with Ponzo and his wife, Tracy Dillon. Ponzo responded with demands for cash and concessions, and litigation ensued. Among the various claims and cross-claims, Miller and Crum sued Ponzo, Dillon and their corporation Ivy Screen, Inc. doing business as Back Yard Dream (Ivy Screen) for fraud.

Following a bench trial, the trial court found in favor of Miller and Crum on their fraud causes of action, but against the parties on their remaining causes of action. The trial court awarded Miller and Crum $723,225.59 in compensatory damages and $170,000 in punitive damages.

Ponzo, Dillon and Ivy Screen now assert errors in the trial proceedings and admission of certain evidence. They challenge the judgment as to their breach of fiduciary duty causes of action and Miller and Crum's fraud causes of action on various other grounds. Additionally, they challenge the compensatory and punitive damages awards. We will affirm the judgment.

BACKGROUND

The facts are drawn from the statement of decision.

Ponzo had an idea called Ivy Screens which he attempted to patent. The idea was described at trial as a galvanized wire product and a process using that wire product. The galvanized wire product was essentially the same as a product registered by Greenscreen. Ponzo represented that he invented the galvanized wire product, but he did not; in fact, the process using the wire product was a common one. Moreover, Ponzo shared his idea with others without a nondisclosure agreement, and thus his idea was "unprotected and out in the public" before Miller and Crum invested in EBS.

Over a year before the formation of EBS, Ponzo sought investors for his idea and entered into a business relationship with Frank Beninsig. Beninsig was to help Ponzo with a pending patent application and with obtaining investors, but their business relationship deteriorated. Ponzo contacted law enforcement and later bragged about having Beninsig arrested for stealing his patent, even though Ponzo did not have a patent.

Ponzo's patent application had been denied before Miller expressed interest in Ponzo's idea. Nevertheless, Ponzo testified inconsistently at trial that he had a patent for the process, that all he had to do was go to the United States Supreme Court and a patent would be issued to him, and that he had a trade secret and not a patent. Ponzo used theterms "patented product," "patent," "patent pending" and "patented process" interchangeably. Miller and Crum did not know Ponzo failed at his attempt to secure a patent before they entered into a business relationship with him. Ponzo and Dillon did not disclose Beninsig's involvement to Miller and Crum prior to the creation of EBS.

Ponzo testified at a deposition that his alleged patent was worthless, but at trial he valued his alleged patent at hundreds of thousands of dollars if not millions. Ponzo and Dillon did not disclose to Miller and Crum that the patent was worthless before the creation of EBS.

Moreover, Ponzo and Dillon did not disclose Ponzo's partnerships in Southern California and Minnesota or his prior failed attempts to secure venture capitalists, funding and partners. Those undisclosed efforts and actual partnerships were for the same business operation as what became EBS. Instead, prior to the formation of EBS, Ponzo told Miller and Crum that "a lot of people want to be involved with our product over the years and for one reason or another I did not go forward with them . . . . The difference here is the two of you are our kind of people, what the two of you bring to the table is what I have been very patient waiting for to grow our company and become a distributor."

In addition, Ponzo and Dillon did not disclose to Miller and Crum that on March 25, 2009, about six months prior to the formation of EBS, Ponzo and Dillon filed a Chapter 7 petition for bankruptcy. Ponzo and Dillon declared in their bankruptcy petition that they did not own any patents or intellectual property. Ponzo and Dillon did not disclose the disavowal of ownership of intellectual property to Miller and Crum.

Ponzo, Dillon, Miller and Crum formed EBS as a corporation in September 2009. The four were the only shareholders and directors of the corporation. Dillon, Miller and Crum served as the Secretary/Treasurer, President and Vice President, respectively. Ponzo and Dillon owned a one-half interest in the corporation, while Miller and Crum owned the other half.

Miller and Crum provided the working capital for EBS, whereas Ponzo and Dillon did not contribute any money to EBS. Miller and Crum took significant financial risk in making EBS a success; Ponzo and Dillon took little financial risk in the venture.

Within a few months after the formation of EBS, Ponzo and Dillon engaged in conduct that "set EBS on a path to failure." Among other things, Ponzo sexually assaulted two EBS workers and "verbally assaulted" Dillon during a trade show.

When Miller and Crum attempted to negotiate a dissolution of EBS with Ponzo and Dillon, Ponzo responded with demands for cash and concessions. He threatened litigation and threatened to compete against EBS and to remove Miller and Crum from EBS. Both sides took steps to secure competing businesses.

Following a bench trial, the trial court issued a tentative decision finding against Ponzo, Dillon, Ivy Screen and EBS on all their causes of action against Miller, Crum and Galvacore, Inc. Galvacore, Inc. was incorporated in Nevada in October 2010 and was associated with Miller and Crum. The trial court found against Miller, Crum and Galvacore, Inc. on all their causes of action against Ponzo, Dillon and Ivy Screen, except for the fraud claims by Miller and Crum. The trial court awarded Miller and Crum damages in the amount of $723,225.59, calculated as follows: $546,740.04 (the amount Miller and Crum initially invested in EBS), plus $160,000 (for the purchase of an additional 5 percent interest in EBS), plus $16,485.55 (the amount paid to EBS creditors). The trial court found Ponzo's conduct reprehensible and concluded that punitive damages were warranted against Ponzo, Dillon and Ivy Screen.

Ponzo, Dillon and Ivy Screen objected to the tentative decision and requested specific findings. The trial court overruled the objections and adopted its tentative decision as its statement of decision. The trial court clarified that with respect to the breach of fiduciary duty claims, neither side sustained their respective burdens of proof and that Ponzo, Dillon, Ivy Screen and EBS did not sustain their burden of proof on their fraud claims.

The issue of the financial worth of Ponzo, Dillon and Ivy Screen for purposes of punitive damages was bifurcated. The trial court awarded Miller and Crum $10,000 each in punitive damages against Ivy Screen, $25,000 each in punitive damages against Dillon, and $50,000 each in punitive damages against Ponzo. Judgment was entered in favor of Miller and Crum and against Ponzo, Dillon and Ivy Screen.

DISCUSSION

I

Ponzo, Dillon and Ivy Screen assert the trial court improperly relied on the business judgment rule in connection with their breach of fiduciary duty causes of action. They argue the business judgment rule does not apply because Miller and Crum had a clear conflict of interest.

The elements of a cause of action for breach of fiduciary duty are as follows: the existence of a fiduciary duty, its breach, and damage caused by that breach. (Meister v. Mensinger (2014) 230 Cal.App.4th 381, 395 (Meister).) Majority shareholders and directors and officers owe a fiduciary duty to the corporation and its shareholders. (Corp. Code, § 309, subd. (a); Sheley v. Harrop (2017) 9 Cal.App.5th 1147, 1171-1172; Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 345.)

The business judgment rule, codified at Corporations Code section 309, protects from liability a corporate director who performs his or her duties as director "in good faith, in a manner [he or she] believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances." (Corp. Code § 309, subds. (a), (c); see Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1045.) The rule establishes a presumption that directors' decisions are based on sound business judgment. (Berg, at p. 1045.) Among other things, the presumption can be rebutted by a factual showing that the actions were taken as a result of a conflict ofinterest. (Ibid.; Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 432 (Everest Investors); Eldridge v. Tymshare, Inc. (1986) 186 Cal.App.3d 767, 776.)

The statement of decision correctly sets forth the elements of a cause of action for breach of fiduciary duty, the presumption arising from the business judgment rule, and the exception to the rule when circumstances inherently raise an inference of conflict of interest. Ponzo, Dillon and Ivy Screen bore the burden of establishing a breach of a fiduciary duty. (Evid. Code, § 500; see LaMonte v. Sanwa Bank California (1996) 45 Cal.App.4th 509, 517.) While courts have placed the...