Schrage v. Schrage

• Citation: 69 Cal.App.5th 126,284 Cal.Rptr.3d 279
• Decision Date: 02 September 2021
• Docket Number: B298119
• Parties: Leonard SCHRAGE, Plaintiff and Respondent, v. Michael SCHRAGE et al., Defendants and Appellants.
• Court: California Court of Appeals

69 Cal.App.5th 126
284 Cal.Rptr.3d 279

Leonard SCHRAGE, Plaintiff and Respondent,
v.
Michael SCHRAGE et al., Defendants and Appellants.

B298119

Court of Appeal, Second District, Division 7, California.

Filed September 2, 2021

Randall S. Waier for Defendants and Appellants.

Manatt, Phelps & Phillips, Benjamin G. Shatz, Kishan H. Barot, Los Angeles; Markun Zusman Freniere Compton and Steven M. Goldberg, Santa Rosa, for Plaintiff and Respondent.

SEGAL, J.

INTRODUCTION

Michael and Joseph Schrage appeal from the judgment and several orders entered in an action filed by their brother, Leonard Schrage, for involuntary dissolution of the family business and breach of fiduciary duty. After Michael and Joseph invoked their statutory right under the Corporations Code to buy Leonard's interests in the business pursuant to a court-ordered appraisal, the parties stipulated to add five limited liability companies to the eight limited liability companies, five corporations, and one limited partnership that were already subject to the appraisal and buyout proceeding. The trial court confirmed a valuation of Leonard's interests determined by appraisers and a court-appointed referee. The court also issued an alternative decree ordering that Michael and Joseph had to pay the appraised amount by a certain date and that, if they did not, the entities would be wound up and dissolved. Michael and Joseph appealed from that order, but voluntarily dismissed

284 Cal.Rptr.3d 285

the appeal. They did not pay the buyout amount, and the court proceeded to wind up and dissolve the family business, including the five additional limited liability companies.

Meanwhile, Leonard proceeded on his cause of action for breach of fiduciary duty against Michael and Joseph. Following a court trial, the court found in favor of Leonard on that cause of action, awarded Leonard compensatory and punitive damages, and entered judgment in favor of Leonard and against Michael and Joseph. The court also denied various postjudgment motions.

Michael and Joseph argue the alternative decree to wind up and dissolve the family business and the "follow-up judgments and orders" are void as a matter of law because the trial court lacked jurisdiction to dissolve the five limited liability companies the parties stipulated to include in the appraisal and buyout proceeding. We reject this argument because the trial court had fundamental jurisdiction and Michael and Joseph are estopped from collaterally attacking the alternative decree. Michael and Joseph also argue Leonard lacked standing to assert his cause of action for breach of fiduciary duty. We agree with this argument because Leonard's cause of action was derivative, not individual. Therefore, we affirm the order of dissolution (with a modification), reverse the award of damages for breach of fiduciary duty, and dismiss the appeals from nonappealable orders.

FACTUAL AND PROCEDURAL BACKGROUND

A. Leonard Sues His Brothers To Dissolve the Family Business and for Breach of Fiduciary Duty

We pick up with the story in this (the parties’ third) appeal where we left off following Michael and Joseph's appeal from an order awarding Leonard fees and expenses he incurred in a court-ordered appraisal under Corporations Code section 1800.¹ (See Schrage v. Schrage (Aug. 19, 2020, B288478) 2020 WL 4812677 [nonpub. opn.] ( Schrage I ); see also Schrage v. Schrage (May 14, 2021, B307539) 2021 WL 1939836 [nonpub. opn.] ( Schrage II ).) But first we repeat some of the basic facts of the case summarized in Schrage I .

Leonard, Michael, and Joseph each owned a one-third interest in the Sage Automotive Group, a family-owned car dealership business founded by their father. In April 2015 Leonard filed this action against Michael, Joseph, and 14 corporate entities in the Sage Automotive Group to dissolve and wind up those entities. Leonard alleged Michael and Joseph engaged in a pattern of self-dealing and mismanaged the business by, among other things, misappropriating company assets to fund a separately owned car dealership and to pay for lavish personal expenses, making business decisions without Leonard's consent, and denying Leonard access to corporate books and records. Leonard sought to dissolve five corporations under section 1800, eight limited liability companies under section 17707.03, and one limited partnership under section 15908.02. Leonard also sought compensatory and punitive damages against Michael and Joseph for breach of fiduciary duty. ( Schrage I , supra , B288478.)

In June 2016 Michael and Joseph filed a motion under sections 2000, 15908.02, and 17707.03 (collectively, the buyout statutes) to stay the dissolution causes of action and determine the value of Leonard's interest in the entity defendants. On August 23, 2016 the trial court stayed Leonard's three

284 Cal.Rptr.3d 286

dissolution causes of action (one for each legal form of business entity) to allow Michael and Joseph to proceed on their election to purchase Leonard's interests in the business. The court did not stay Leonard's breach of fiduciary duty cause of action or Michael and Joseph's causes of action in their cross-complaint for breach of fiduciary duty, conversion, and recording confidential communications in violation of Penal Code sections 630 and 632. ( Schrage I , supra , B288478.) The trial court also denied Michael and Joseph's motion for judgment on the pleadings on Leonard's cause of action for breach of fiduciary duty, ruling Leonard had alleged an individual cause of action against his brothers, not a derivative cause of action on behalf of the entities in the Sage Automotive Group.

On September 19, 2016 the parties entered into a stipulation, approved by the court, to appoint retired judge Louis M. Meisinger as the referee to oversee and adjudicate all aspects of the appraisal process, including selecting the appraisers, determining the buyout price, and setting a deadline for Michael and Joseph to pay the buyout price. The order stated that "Judge Meisinger's determinations in this regard will be final, and all parties expressly waive any right to contest, challenge, or object to such rulings ...."

The parties entered into another stipulated order on January 5, 2017 to govern the appraisal and buyout proceeding. That order provided, among other things, the appraisal and buyout process would include the 14 entity defendants named in the first amended complaint, plus five additional limited liability companies (collectively, the buyout entities). The five limited liability companies that were not named defendants in any of the three causes of action for involuntary dissolution, but that were subject to the appraisal and buyout process by stipulation, were UCNP 3, UCNP 4, UCNP 5, UCNP 6, and UCNP 8 (collectively, the UCNP entities). To allow the appraisers to value each entity, the order required the parties to give the appraisers a variety of information, including organizational agreements, historical and projected financial data, and real estate holdings. The stipulation provided that, after the appraisers submitted their written reports to the parties and Judge Meisinger, the parties would meet and confer to try to reach agreement on the valuation assigned to each entity and the overall value of Leonard's one-third interest in the buyout entities, "which shall constitute the buy-out price to be paid by Michael and Joseph to Leonard." If the parties were unable to agree on a buyout price, Judge Meisinger would set the price following a hearing.

On July 25, 2017, following a contested appraisal process, Judge Meisinger submitted a recommendation and proposed order confirming the value of Leonard's interests in the buyout entities was $40,237,000 and stating that, if Michael and Joseph did not pay Leonard that amount by September 11, 2017, the buyout entities (including the UCNP entities) would be wound up and dissolved. Judge Meisinger's recommendation also stated that, under the September 19, 2016 stipulation and order, his findings were " ‘final’ and ‘all parties expressly waive any right to contest, challenge, or object to such rulings before’ " the court. On July 28, 2017 the trial court approved the referee's recommendation and entered it as the court's order and alternative decree.

Michael and Joseph did not pay Leonard by September 11, 2017, but they did file a notice of appeal from the July 28, 2017 order and alternative decree. Michael and Joseph subsequently filed requests to dismiss that appeal, and on May 31, 2018 this court granted those requests and dismissed

284 Cal.Rptr.3d 287

the appeal.² Meanwhile, on September 27, 2017 the trial court appointed a receiver to wind up and dissolve the buyout entities. In Schrage I we modified and affirmed an order granting Leonard's motion for attorneys’ fees and other expenses incurred in the appraisal process and in obtaining certain injunctive relief during that process. ( Schrage I , supra , B288478.)

B. The Trial Court Enters a Net Judgment of Approximately $31 Million in Favor of Leonard and Against Michael and Joseph

A bifurcated court trial began in April 2018 on Leonard's cause of action for breach of fiduciary duty and on Michael and Joseph's cross-complaint. Following almost two months of testimony, the court on October 12, 2018 issued a tentative decision finding Michael and Joseph breached their fiduciary duties to Leonard, awarding Leonard compensatory damages offset by an amount for Leonard's unclean hands, finding Michael and Joseph acted with malice, oppression, and fraud, and ruling against Michael and Joseph on their cross-complaint. The court began the punitive damages phase of the trial on November 26, 2018.

On March 12, 2019 the court entered judgment in favor of Leonard and against Michael and Joseph in the amount of approximately $31 million. The judgment consisted of $962,903.13 on the first, second, and third causes of action for involuntary dissolution,³ $24,418,473 in compensatory damages...