Saini v. Gillon, 29150-2-III

CourtCourt of Appeals of Washington
Writing for the CourtKorsmo, J.
Docket Number29150-2-III
PartiesBHISHAM SAINI and NEENA SAINI, Husband and Wife, and the Marital Community Comprised Thereof; PNS PROPERTIES, INC., a Washington corporation, Appellants, v. PARMINDER SINGH GILLON and BHUPINDER GILLON, As Individuals together with the Marital Community Composed Thereof, Respondents.
Decision Date07 February 2012

BHISHAM SAINI and NEENA SAINI, Husband and Wife, and the Marital Community Comprised Thereof; PNS PROPERTIES, INC., a Washington corporation, Appellants,
v.

PARMINDER SINGH GILLON and BHUPINDER GILLON, As Individuals together with the Marital Community Composed Thereof, Respondents.

No. 29150-2-III

Court of Appeals of Washington, Division 3

February 7, 2012


UNPUBLISHED OPINION

Korsmo, J.

Korsmo, J. - The primary issues in this appeal involve the dismissal of the appellants' individual claims against the respondents and whether the trial judge should have recused himself. Finding no error, we affirm.

FACTS

In 2006, Neena Saini and Parminder Gillon formed a corporation, PNS Properties, Inc. (PNS), for the purpose of running a gas station, convenience store, and bulk fuel sales operation in Cle Elum. Mr. Gillon and Ms. Saini were the sole officers and intended shareholders of PNS. However, no shares of stock were ever issued. Prior to forming PNS, the parties entered into an oral agreement that Mr. Gillon would manage the day-to-day operations of PNS.[1] PNS generated a profit during 2007, but in August 2007, Ms. Saini and her husband filed suit against Mr. Gillon and his wife claiming misconduct by Mr. Gillon in his role as director and president of PNS.

After PNS's financial status began to decline in 2008, Ms. Saini hired a forensic accountant, Tiffany Couch, to investigate the corporate funds and financial assets of PNS. After receiving Ms. Couch's report, which concluded that Mr. Gillon was self-dealing, Ms. Saini assumed sole control and ownership of PNS on August 12, 2008 pursuant to a memorandum of agreement (MOA) with the Gillons. On March 20, 2009, the Sainis filed a second amended complaint in which both the Sainis and PNS brought concurrent claims against the Gillons. On April 24, 2009, the trial court granted the Gillons' motion for partial summary judgment as to the Sainis' five individual causes of action.[2]

The case proceeded to trial on PNS's claims for breach of fiduciary duty and wrongful diversion/conversion of corporate assets as well as the Gillons' counterclaims for specific performance of contract, constructive trust, and request for injunctive relief. The trial took place in two parts. It began with three days of trial on August 20, 21, and 25, 2009, and resumed after a continuance on March 9-12, and 16-17, 2010. At trial, both parties relied heavily on the testimony of accountants, with Genine Pratt serving as the Gillons' expert and Ms. Couch serving as the expert for the Sainis.

Ms. Couch was a certified public accountant who had 13 years experience, but testified that she had no prior experience doing any accounting for a convenience store or fuel station. Ms. Pratt served as PNS's accountant during the time that Mr. Gillon was the director, and she also had experience working as an accountant for several other gas station operations. On March 11, just before Ms. Pratt testified for the defense, the trial judge disclosed to the parties that the accountant he used for his personal taxes worked at the same accounting firm as Ms. Pratt. Neither party objected or requested that the judge recuse himself and the trial continued.

The trial court found for the Gillons. On May 24, 2010, the court entered findings of fact and conclusions of law, and entered judgment for the Gillons. The Sainis timely appealed to this court.

ANALYSIS

This appeal raises four issues, which we will address in the order they were presented. The Sainis initially attack the trial court's summary judgment dismissal of their individual claims against the Gillons. They also allege that the trial judge should have recused himself and that he improperly discounted their claims in the factual findings. Additionally, both parties request attorney fees.

Summary Judgment. The Sainis contend that the trial court erred in dismissing their individual claims against the Gillons on summary judgment.[3] The Sainis argue that the claims were wrongfully dismissed because there were genuine issues of material fact relating to each claim. They also contend that as minority shareholders they had the right to bring a claim of breach of shareholder's fiduciary duty against Mr. Gillon, and that the breach of contract claim was not a derivative claim because the parties entered into the agreement before the formation of PNS.

This court reviews summary judgments de novo. Hisle v. Todd Pac. Shipyards Corp., 151 Wn.2d 853, 860, 93 P.3d 108 (2004). Summary judgment is appropriate if "there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." CR 56(c). "A material fact is one that affects the outcome of litigation." Owen v. Burlington N. Santa Fe R.R. Co., 153 Wn.2d 780, 789, 108 P.3d 1220 (2005). When considering a summary judgment motion, the court must construe all facts and reasonable inferences in the light most favorable to the nonmoving party. Lybbert v. Grant County, 141 Wn.2d 29, 34, 1 P.3d 1124 (2000). Once a moving party has made a showing that no material facts are in dispute, the party opposing summary judgment must come forward with specific facts in dispute; it cannot rely on conclusory statements or speculation to defeat summary judgment. Ranger Ins. Co. v. Pierce County, 164 Wn.2d 545, 552, 192 P.3d 886 (2008).

A fundamental rule of corporate law is that when a third party harms a corporation, if the corporation does not bring an action for compensation, a shareholder may not proceed by way of a direct action to seek recovery. Gustafson v. Gustafson, 47 Wn.App. 272, 276-277, 734 P.2d 949 (1987). Instead, the shareholder must bring a derivative action, acting on behalf of the corporation. Id. A shareholder may only bring a derivative action if he can show that he has exhausted his means to obtain corporate action and the officers and directors have failed to assert the corporation's rights or have done so improperly. In re F5 Networks, Inc., Derivative Litig., 166 Wn.2d 229, 236, 207 P.3d 433 (2009). Although a stockholder may maintain an action in his own right against a third party when the injury to the individual resulted from the violation of some special duty owed to the stockholder, he may do so "only when that special duty had its origin in circumstances independent of the stockholder's status as a stockholder." Hunter v. Knight, Vail & Gregory, 18 Wn.App. 640, 646, 571 P.2d 212 (1977), review denied, 89 Wn.2d 1021 (1978)). "As a general rule, a plaintiff cannot join in the same suit a claim on behalf of the corporation and an individual, personal claim against the defendants." 3A Karl B. Tegland, Washington Practice: Rules Practice CR 23.1 author's cmts., at 518 (5th ed. 2006) (citing Hames v. Spokane-Benton County Nat. Gas Co., 118 Wash. 156, 203 P. 18 (1922)).

We initially consider the Sainis' claims for breach of director's and officer's duty of good faith and loyalty, wrongful diversion of corporate assets, and conversion, which are all claims that arise from alleged harms to PNS. None of these claims arise from any special duty that Mr. Gillon owed the Sainis apart from their status as shareholders of PNS. Therefore, the Sainis could only bring these claims as derivative actions on behalf of PNS. However, a shareholder may only bring a derivative suit when he establishes that he made efforts to compel the corporation to file suit, and the corporation failed to take action. Here, PNS was already bringing claims of breach of fiduciary duty, conversion, and wrongful diversion against Mr. Gillon. Therefore, the trial court properly dismissed these three individual claims.

The Sainis also contend that they could bring an individual claim against the Gillons for breach of fiduciary duty between shareholders because they are minority shareholders in a closely-held corporation, citing Interlake Porsche + Audi, Inc. v. Bucholz, 45 Wn.App. 502, 728 P.2d 597 (1986), review denied, 107 Wn.2d 1022 (1987). In Interlake, the court allowed a minority shareholder of a closely-held corporation to bring an individual action against the majority shareholder for injunctive and declaratory relief as well as a shareholder's derivative action on behalf of the corporation for breach of fiduciary duty. Id. at 504-506. The Sainis argue that Interlake establishes that shareholders in closely-held corporations owe each other fiduciary duties, that it allows them to bring a claim of breach of fiduciary duty individually rather than derivatively on behalf of the corporation, and that the court should have allowed this claim.

In Washington, a minority shareholder of a closely-held corporation may bring a direct action against the majority shareholder for breach of fiduciary duty and also bring a derivative suit on behalf of the corporation. Id. at 504-506, 519-520. Washington courts have allowed direct recovery for minority shareholders against the corporation's officers when a derivative claim would result in the majority shareholders receiving an award to which they were not entitled. LaHue v. Keystone Inv. Co., 6 Wn.App. 765, 496 P.2d 343, review denied, 81 Wn.2d 1003 (1972). For purposes of a stockholder derivative suit, a person may be considered a stockholder if he holds a mere equitable interest in the stock, even if the stock was never issued. Id. at 776.

The Sainis maintain that Mr. Gillon acted as the majority shareholder from the time of PNS's incorporation until August 12, 2008, and that they were minority shareholders during that time. However, no shares of PNS stock were ever issued. The record shows that the Sainis invested $320, 000 in exchange for shareholder status and an equity interest in PNS. The Sainis allege that Mr. Gillon agreed to match their investment, but that he never actually did so. The record also shows that when Mr. Gillon was the president and manager of PNS, Ms. Saini was a director and...

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