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Protecting Minority Shareholder Rights in California: What You Need to Know About Shareholder Oppression

Are you a minority shareholder in a California-based corporation facing unequal treatment, exclusion, or downright oppression by the majority shareholders? If so, it’s crucial to understand your rights and the legal recourse available to you. In this comprehensive guide, we will delve into the issue of shareholder oppression in California, the rights you possess as a minority shareholder, and what to do if those rights are being violated.


What is Shareholder Oppression?

Shareholder oppression occurs when the majority or controlling owners of a corporation take actions that unfairly prejudice the minority shareholders. This can also happen in limited liability companies (LLCs) and partnerships. Oppressive conduct can include (but is not limited to) the following:

  • Diverting corporate opportunities
  • Diluting share value
  • Restricting access to crucial business information
  • Discriminatory treatment in profit distribution or employment

Your Rights as a Minority Shareholder in California

California law offers several protective mechanisms for minority shareholders, some of which are:

  • Access to Information

Under California Corporations Code § 1600, you have the right to inspect the accounting books, records, and minutes of proceedings.

  • Fiduciary Duty

Majority shareholders owe a fiduciary duty to minority shareholders. This means they must act in the best interest of the company and all shareholders, not just their own interests. If the controlling shareholders breach their fiduciary duties, the minority owners may seek relief by filing a lawsuit against the controlling owners.

  • Derivative Actions

As a minority shareholder, you have the right to bring a derivative action on behalf of the corporation if the company’s directors or majority shareholders are acting against the company’s best interest or are causing damage to the business.

  • Buyout Rights

In some cases, you may have the right to force the company to buy out your shares at fair market value. Buyout rights are typically governed by the written agreements between the shareholders.

  • Dissolution of Corporation

If the controlling shareholders’ conduct is sufficiently egregious, the courts may order dissolution of the corporation.


Legal Remedies for Shareholder Oppression in California

Every case is different, but these are some of the legal remedies that might be available to minority shareholders who bring a claim for shareholder oppression.

  • Injunctive Relief

In some cases, you may be entitled to an injunction to prevent the majority from making oppressive actions.

  • Damages

If you have suffered financially due to the oppressive conduct, you may be entitled to monetary damages.

  • Inspection of Records

If the majority shareholders are refusing to share corporate records, the court may enter an order requiring that they allow you to inspect these documents.

  • Dissolution

In egregious cases, the court may even order that the corporation be dissolved and its assets be distributed among the shareholders.


How to Get Legal Help

If you believe you are a victim of shareholder oppression in California, it’s essential to seek professional legal advice as soon as possible. In navigating the complex legal landscape surrounding shareholder rights, experienced guidance can make all the difference in securing a favorable outcome.

Are you a minority shareholder facing oppressive conduct in California? Our law firm specializes in representing minority shareholders. Contact us today to schedule a consultation and protect your rights.

Can California Courts Order the Equitable Buyout of a Minority Owner’s LLC Membership Interest?

Yes, according to the Court of Appeal in Reliant Life Shares, LLC v. Cooper, (2023) 90 Cal.App. 5th 14.

The case involved a dispute within a limited liability company which was equally owned by three members: SM, SG, and Cooper. The trouble began when one of the members, Cooper, ceased working at the Reliant offices due to a medical condition. The other two members attempted to oust Cooper from the business and altered the profit sharing to a 50/50 split between them, leaving Cooper with nothing. At the direction of SM and SG, Reliant filed a lawsuit against Cooper seeking a declaratory judgment on his removal from the LLC. Cooper counter-sued, alleging breach of contract, fraud, and breach of duty of loyalty among other claims, and sought damages, an accounting, and the imposition of a constructive trust over funds obtained through violation of fiduciary duties​​.

After trial, the jury found in Cooper’s favor and awarded $6,028,786 in damages. The court also ordered the other two members to buyout Cooper’s interest in the LLC for $4.2 million. On appeal, the other two members and Reliant (the Reliant parties) argued the buyout damages exceeded the court’s equitable jurisdiction and were legally unauthorized because there was no action for dissolution of the LLC. The Court of Appeal rejected these arguments and affirmed the trial court’s buyout order:

First, we reject the Reliant parties’ claim that the court had no jurisdiction to order a buyout in the absence of a dissolution action. They say that under the Revised Uniform Limited Liability Company Act (Act; Corp. Code, § 17701.01 et seq.), a dissolution cause of action is “a mandatory prerequisite to a buyout remedy.” For this they cite Kennedy v. Kennedy (2015) 235 Cal.App.4th 1474, 1485-1487, and the buyout procedure described in Corporations Code section 17707.03, subdivisions (c)(1) through (5). Since none of the pleadings in this case requested a buyout, they say, the trial court could not order one. …

But nothing in Corporations Code section 17707.03, or in the Kennedy case, states or suggests that a court has no equitable power to order buyout damages under other circumstances not involving a member’s decision to seek dissolution. The court did not “disregard the Act’s requirements”; those requirements simply do not apply here because Cooper did not seek a decree of dissolution, and Cooper did not have to seek a decree of dissolution to obtain buyout damages in this case.

The Reliant parties cite Marina Tenants Assn. v. Deauville Marina Development Co. (1986) 181 Cal.App.3d 122, for the proposition the court “did not have the equitable power to disregard the Act’s requirements.” Marina Tenants has nothing to do with LLC’s or buyouts. The court merely stated the general principle that “a court of equity is without power to decree relief which the law denies.” (Id. at p. 134.) Nothing in the law forbids the court’s action here.

(Reliant Life Shares, LLC v. Cooper (2023) 90 Cal.App. 5th 14, 34-35.)

The decision is encouraging because it recognizes an equitable buyout independent and apart from the Limited Liability Act. It remains to be seen, however, what specific circumstances will warrant this equitable remedy.

Shareholder Oppression for Breach of Fiduciary Duties: Direct or Derivative Action?

“[M]ajority shareholders, either singly or acting in concert to accomplish a joint purpose, have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner. Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation’s business.” (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108; accord, Sheley v. Harrop (2017) 9 Cal.App.5th 1147, 1171; see § 17704.09 [describing the fiduciary duties of members and managers of a limited liability company]; Feresi v. The Livery, LLC (2014) 232 Cal.App.4th 419, 425 [same]; Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 424-425 [describing the fiduciary obligations in a partnership].)

A minority shareholder may bring a cause of action for breach of fiduciary duty against majority shareholders either directly as an individual claim or as a derivative claim, depending on the circumstances. A direct claim is appropriate to enforce the individual stockholder’s rights against the majority (or in some cases against the corporation). But where a cause of action seeks to recover for harms to the corporation, the shareholders have no direct cause of action because a corporation exists as a separate legal entity. The shareholders may, however, bring a derivative suit to enforce the corporation’s rights and redress its injuries when the board of directors fails or refuses to do so. When a derivative suit is brought to litigate the rights of the corporation, the corporation is an indispensable party and must be joined as a nominal defendant.

Like many legal rules that seem straightforward, the distinction between direct and derivative actions is not always clear. In Schrage v. Schrage, (2021) 69 Cal.App.5th 126, the appellate court confronted one of these seemingly ambiguous cases.

The plaintiff and one-third shareholder in Schrage brought a direct action against the two other majority shareholders of a corporate car dealership. He alleged they breached their fiduciary duties by 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. Plaintiff alleged these acts “significantly impeded his ability to manage or participate in the affairs of the business,” “caused damage to the business and devalued his interest in turn.”

At trial, plaintiff’s damages expert opined that defendants’ misconduct caused the corporation a $75 million loss in value and that plaintiff’s one-third share of that damage ranged between $18 and $24 million. The trial court agreed and awarded plaintiff $24,418,472 in damages on his direct claim for breach of fiduciary duty. The Court of Appeal reversed on the grounds that plaintiff’s claim should have been brought as a derivative action.

The allegations in Leonard’s first amended complaint, the basis and calculation of Leonard’s damages at trial, and the court’s findings show that the gravamen of Leonard’s action was injury to the Sage Automotive Group and the “whole body of its stock and property” and that Leonard sought to, and ultimately did, recover damages for injuries to the entities. … Indeed, Leonard’s primary complaint was that his brothers’ mismanagement (including by driving him out of the Sage Automotive Group) squandered the Sage Automotive Group’s assets and ultimately led to its demise. That is a derivative claim.

Schrage, supra, 69 Cal.App.5th at pp. 152-153.

The appellate court distinguished plaintiff’s claims from those in Jara v. Suprema Meats, Inc.,(2004) 121 Cal.App.4th 1238, where the minority shareholder of a corporation alleged the two other shareholders breached their fiduciary obligations by paying themselves excessive executive compensation without the plaintiff’s approval and for the purpose of reducing the amount of profit to be shared with the plaintiff.

The court in Jara held that, while “the alleged payment of excessive compensation did have the potential of damaging the business,” the plaintiff stated an individual cause of action against the majority shareholders because he alleged the payment of executive compensation “was a device to distribute a disproportionate share of the profits to the two officer shareholders during a period of business success.” (Jara, supra, 121 Cal.App.4th at p. 1258.) … Unlike the plaintiff in Jara, Leonard did not allege Michael and Joseph retained a disproportionate share of the Sage Automotive Group’s value; he alleged Michael and Joseph destroyed the value of the businesses for all of the shareholders (and members and partners). The court awarded Leonard damages based on the overall diminution in value of the Sage Automotive Group, not the difference in value between Leonard’s shares in the Group and those of Michael and Joseph. (Schrage, supra, 69 Cal.App.5th at pp. 156-156.)

Schrage, supra, 69 Cal.App.5th at pp. 155-156.

The end result was that plaintiff’s claim could only be maintained as a derivative action and since plaintiff did not bring a derivative action, the $24 million damage award was reversed.

Why You Need A Shareholder Buy-Sell Agreement

Whether you own part of a corporation, LLC, or partnership, you should have a shareholder agreement (or operating agreement, partnership agreement, etc.) that sets forth the rights and responsibilities each of the owners has with respect to the company. One of the most important parts of a shareholder agreement is a buy-sell provision.

Buy-Sell agreements typically prohibit an owner from selling or transferring his stake in the company without first offering the other owners the option to purchase their shares on the same terms. This prevents the non-transferring owners from having to accept a new person as a co-owner or partner in the business, by giving them the option to purchase the shares first.

The importance of having these provisions was recently illustrated in Luxury Asset Lending, Inc., v. Philadelphia Television Network, Inc., where one shareholder of a television network attempted to pledge shares of corporate stock as collateral for a personal loan that had nothing to do with the business. This could have seriously jeopardized the corporation were it not for a shareholder agreement that “explicitly restricted the sale, transfer, or pledging of shares without allowing other shareholders a right of first refusal and made any transfer effected in violation of the restriction void.”

If you do not have a shareholder agreement with the owners of your business, contact experienced corporate counsel to prepare an agreement that will protect your investment.

Shareholder Disputes: Finding a Lawyer

Are you searching for an experienced San Diego lawyer to represent you in a shareholder dispute? If you are looking for an attorney who fights for his clients and knows how to win shareholder disputes, you came to the right place. Shareholder disputes often arise when the relationship between co-owners breaks down, and the parties are faced with the prospect of a “business divorce.” Shareholder disputes often arise alongside other corporate issues, including:

Most of these disputes can be resolved quickly without filing lawsuits. However, a small percentage of shareholder disputes cannot be settled and these must be resolved by litigation. In these cases, you want an experienced attorney who knows the law and will not shy away from taking your case to trial. Unlike other firms, I do not pass my clients off to associates or younger attorneys. My clients deal directly with me.

If you need a San Diego lawyer for your shareholder dispute, call me at 858-747-0862 or email me for a free consultation.

Adding Alter Ego Defendants to a Judgment

The alter ego doctrine is one of the few ways to pierce the corporate veil and impose liability against the principles of a corporate entity with limited liability, e.g. corporations, LLCs, LLPs, etc. If proven, an alter ego of a defendant is liable to the same extent as the defendant. In many cases, allegations of alter ego are litigated in the same complaint against the primary defendant. A plaintiff may also obtain a judgment against a defendant, and then later in the same case file a motion under Code of Civil Procedure section 187 to amend the judgment and add the defendant’s alter ego.

In Lopez v. Escamilla, (2020) 48 Cal.App.5th 763, plaintiff obtained a judgment against a corporation and then filed a separate action to amend the judgment to add the corporation’s alter ego. The trial court dismissed the action, believing that adding an alter ego defendant must be done by motion in the original action. The Court of Appeal reversed and found either a motion or a separate action may be serve as the vehicle to add an alter ego defendant.

The court in Jara held that, while “the alleged payment of excessive compensation did have the potential of damaging the business,” the plaintiff stated an individual cause of action against the majority shareholders because he alleged the payment of executive compensation “was a device to distribute a disproportionate share of the profits to the two officer shareholders during a period of business success.” (Jara, supra, 121 Cal.App.4th at p. 1258.) … Unlike the plaintiff in Jara, Leonard did not allege Michael and Joseph retained a disproportionate share of the Sage Automotive Group’s value; he alleged Michael and Joseph destroyed the value of the businesses for all of the shareholders (and members and partners). The court awarded Leonard damages based on the overall diminution in value of the Sage Automotive Group, not the difference in value between Leonard’s shares in the Group and those of Michael and Joseph. (Schrage, supra, 69 Cal.App.5th at pp. 156-156.)

The court further held that a separate action to add a defendant to the judgment was not barred by the statute of limitations on the underlying claim.

The allegations in Leonard’s first amended complaint, the basis and calculation of Leonard’s damages at trial, and the court’s findings show that the gravamen of Leonard’s action was injury to the Sage Automotive Group and the “whole body of its stock and property” and that Leonard sought to, and ultimately did, recover damages for injuries to the entities. … Indeed, Leonard’s primary complaint was that his brothers’ mismanagement (including by driving him out of the Sage Automotive Group) squandered the Sage Automotive Group’s assets and ultimately led to its demise. That is a derivative claim.

If the same objective may be obtained with either a motion or a separate action, which one is better? Proceeding with a Section 187 motion in the same action is likely quicker, avoids further filing fees, and will probably be heard by the same judge already familiar with the case. On the other hand, a separate lawsuit may afford a better opportunity to take discovery and will likely provide more protections against the possibility of a hasty, erroneous decision than in the summary motion proceeding. Further, since a separate complaint to add an alter ego defendant would be an “action at law” on the judgment, the defendant may not be able to assert the same equitable defenses available in Section 187 motions. (See Highland Springs Conference & Training Center v. City of Banning (2016) 244 Cal.App.4th 267, 288 [“An action on a judgment is an action at law, and the defense of laches may not be raised in actions at law, including an action on a judgment.”].)

No Secret Identities

Unlike super heroes, California employers have no right to a secret identity. Labor Code section 226, subdivision (a) requires employers to furnish wage statements which, among other things, identify the legal entity that is the employer. The purpose is to give the employees clear notice who they are working for. Failing to identify the legal entity that is the employer on employee pay stubs is not only against the law and it can also lead to big penalties.

In Noori v. Countrywide Payroll & HR Solutions, Inc., (December 26, 2019), the wage statements identified the employer with the acronym “CSSG.” CSSG stood for “Countrywide Staffing Solutions Group,” which was not a name listed with the California Secretary of state, but was a fictitious business name for defendant Countrywide Payroll & HR Solutions, Inc.

The California Court of Appeal held that use of an acronym for an unregistered fictitious business name violated the disclosure requirements of Labor Code section 226(a):

Here, we have an acronym of an out-of-state fictious business name. While we see no reason why the use of an out-of-state fictitious business name will violate the statute, the use of an unregistered acronym of the fictitious name is another matter. To be sure, the use of an acronymic name that is the registered fictious business name is proper. (See Savea v. YRC Inc., supra, 34 Cal.App.5th 173.) But “CSSG” is not Countrywide’s registered name, nor is it a minor truncation. CSSG is a construct, corresponding to “Countrywide Staffing Solutions Group,” and which may or may not have meaning to Countrywide employees. As the court in Elliot cautioned, “an employer using a shortened name or abbreviation that renders the name confusing or unintelligible may be violating section 226 [subdivision] (a)(8).” (Elliot, supra, 572 F.Supp.2d at p. 1180.)

The lesson for employers is simple: make sure your wage statements correctly identify the legal entity that is the employer.

Court Affirms Neutral Policy Rounding Employee Time to the Nearest 15 Minutes

In California, an employer is entitled to round employee hours if the rounding policy is fair and neutral on its face and “it is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.” (Donohue v. AMN Services, LLC (2018) 29 Cal.App.5th 1068, 1083, quoting See’s Candy Shops, Inc. v. Superior Court (2012) 210 Cal.App.4th 889, 907 (See’s).)

In Ferra v. Loews Hollywood Hotel, LLC, hourly employees challenged the employer’s electronic timekeeping system which automatically rounded time entries either up or down to the nearest quarter-hour. This policy was neutral on its face because it rounded all employee time to the nearest quarter-hour without an eye towards whether the employer or the employee benefits from the rounding.

The plaintiff, however, claimed the rounding policy was not neutral as applied because her time records showed she lost time by rounding in 55.1 percent of her shifts, but only gained hours 22.8 percent of the time. For a sample group of employees, paid time was reduced in 54.6 percent of shifts, but paid time was only added in 26.4 percent of shifts. Despite these differences, the court found that this was not sufficient to show that the rounding policy “systematically undercompensate[s] employees.”

[R]ounding contemplates the possibility that in any given time period, some employees will have net overcompensation and some will have net undercompensation. … We agree with the trial court that Loews’s rounding policy does not systematically undercompensate its employees over time. [A] “fair and neutral” rounding policy does not require that employees be overcompensated, and a system can be fair or neutral even where a small majority loses compensation. Ferra did not demonstrate that Loews’s rounding policy systematically undercompensated employees over time. (Internal citations and quotations omitted)

The court’s decision reaffirms California’s commitment to allowing neutral rounding policies even though such policies may appear to reduce working hours in isolated time periods.

No Waiting Time Penalties for Unpaid Meal and Rest Break Premium Pay

Labor Code section 203 imposes a “waiting time” penalty of one day’s wages for each day that former employees are not paid their final wages due when they stop working. For many years, employment lawyers assumed that any unpaid wages would trigger waiting time penalties, including premium wages for missed meal and rest breaks. But in Naranjo v. Spectrum Security Services (September 26, 2019), the Court of Appeal held otherwise.

In Naranjo, a class of security guards won a judgment for unpaid meal period premium pay under Labor Code section 226.7. The trial court also awarded waiting time penalties since these meal premiums were not paid at the time their employment ended. The defendant appealed the award of waiting time penalties and the appellate court reversed:

By statute, “wages” are defined only in terms of “labor performed by employees.” (§ 200, subd. (a).) “Labor,” in turn, means “labor, work, or service . . . if the labor to be paid for is performed personally by the person demanding payment.” (§ 200, subd. (b).) … Section 203 penalizes an employer that willfully fails “to pay . . . any wages” owed to a fired or voluntarily separating employee. … Read this way, an employer’s failure, however willful, to pay section 226.7 statutory remedies does not trigger section 203’s derivative penalty provisions for untimely wage payments.

In other words, meal period premiums are earned by working without the required break – not by an employee’s labor. Accordingly, they are not “wages” under Labor Code section 203.

This is a fairly recent decision and still might be overruled by the state Supreme Court. But if it stands, it will be interesting to see how the reasoning would apply in other contexts. For example, the Labor Commissioner has traditionally applied Section 203 to unpaid overtime premium wages. For now, it remains to be seen whether waiting time penalties will continue to apply for the failure to pay overtime.

What Are Waiting Time Penalties?

When an employee is fired, all of his earned and unpaid wages must be paid immediately at the time of termination. When an employee quits without notice, his wages are due within 72 hours of quitting. However, if he gives more than 72 hours notice of his departure, his wages are due on the last day of employment.

Failure to pay the full amount of wages due when the employee stops working can give rise to “waiting time” penalties under Labor Code section 203, which provides:

If an employer willfully fails to pay, without abatement or reduction… any wages of an employee who is discharged or who quits, the wages of the employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefor is commenced; but the wages shall not continue for more than 30 days.

This means that the regular daily wage of the former employee shall continue as a waiting-time penalty for up to 30 days when the employer fails to pay all wages due at termination or when the employee quits. For a minimum wage employee who works 8 hour days, the waiting time penalty would be $96 per day ($12/ hr x 8), and the maximum penalty for this employee would be $2,880 ($96/day x 30 days). As the employee’s wage increases so too does the amount of the penalty.

Even a small amount of unpaid wages can trigger the penalty. This includes unpaid vacation wages, overtime pay, and premium wages for missed breaks. Often an employee will only have a few hundred dollars in unpaid wages, but when waiting time penalties are added, the claim can exceed $5,000.

In order to recover waiting time penalties, the employee must prove the employer’s failure to pay the wages was “willful.” This means the employer intentionally failed to pay wages that were due. The term “willfully” does not require a showing that the employer knew of its obligation. An employer may act willfully even if it did not know it was required to pay some category of wages. However, a good faith dispute that the wages are due will preclude a finding of willfulness.

If you are facing a wage claim with waiting time penalties, you should have an experienced lawyer protecting your business. I have successfully defended these claims and I can help you avoid paying more than the law requires.

Did California Make It Illegal For Truck Drivers To Be Independent Contractors?

California’s governor, Gavin Newsom, recently signed into law AB 5 – the bill that would codify the “ABC test” and make most workers employees if they perform the same services for a business that the business provides to its customers. For example, Uber and Lyft drivers perform the transportation services those companies provide to their customers. Under the ABC test, these drivers must be classified as employees. [UPDATE (11/2020): Following passage of Prop 22 drivers for app based driving services, including Uber and Lyft, will be independent contractors]

This is, of course, a major concern for trucking companies that hire owner-operator drivers as independent contractors. If you are a trucking company, the people that drive trucks for you will be your employees under the new law. So does that make the owner-operator model illegal? Not necessarily.

In Alvarez v. XPO Logistics Cartage, (C.D. Cal. Nov. 15, 2018), the defendant challenged the ABC test on the grounds that it was preempted by the Federal Aviation Administration Authorization Act (“FAAAA”). The FAAAA provides that states “may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier.” The Federal District court agreed, and found the ABC test preempted.

Here, the question is not whether the FAAAA preempts California wage orders; rather, it is whether the ABC test—used to interpret the wage orders—is preempted. … [W]hile the Ninth Circuit declined to affirmatively address whether the ABC test was preempted by the FAAAA, it nevertheless distinguished the two standards, noting that “the ABC test may effectively compel a motor carrier to use employees for certain services because, under the ABC test, a worker providing a service within an employer’s usual course of business will never be considered an independent contractor.” The Court agrees with this dicta and finds that the ABC test—as adopted by the California Supreme Court—”relates” to a motor carrier’s services in more than a “tenous” manner and is therefore preempted by the FAAAA.

So does that settle the matter? Unfortunately, no. Other Federal courts have come to the opposite conclusion on the same issue, and it will thus need to be resolved by the Ninth Circuit and possibly the U.S. Supreme Court.

Beware the Prematurely Filed Mechanic’s Lien

Civil Code section 8414 prevents a subcontractor from enforcing a mechanic’s lien unless the subcontractor recorded the lien: (a) after it ceases to provide work, and (b) before the earlier of the following times: (1) 90 days after completion of the work of improvement, or (2) 30 days after the owner records a notice of completion or cessation.

In Precision Framing Systems v. Luzuriaga, (published on August 29, 2019) the Court of Appeal considered when a mechanic’s lien is premature, i.e. when it is recorded before the subcontractor “ceases to provide work.” Precision Framing Systems (Precision) had a subcontract to provide, among other things, trusses for the project. It further subcontracted the design and fabrication of the trusses to Inland Empire Truss (Inland). After Precision installed the trusses and completed the rest of its work, the city signed off on the framing, but issued a corrective notice for a problem with the truss design. Precision considered this to be an issue for Inland. On December 23, the general contractor walked the job and found Precision’s work was complete and fully in compliance with the plans and specifications. Precision recorded a mechanic’s lien 11 days later, on January 2. In the meantime, Inland did not complete the repairs on the defective trusses until February 13.

The trial court found the lien was recorded before Precision ceased work and thus dismissed its foreclosure action. On appeal, the relevant question was “whether the repairs were part of the ‘work’ that Precision was to provide to the ‘work of improvement.’”

The appellate court found the truss repairs Inland performed to correct the design problems were part of Precision’s contract to supply trusses “necessary to complete the project, not merely trusses in conformity with the plans.” It did not matter that Precision accomplished these repairs through a second-tier subcontractor – they were still part of Precision’s scope of work.

Nor did it matter that the general contractor inspected the project and found Precision completed its scope of work. “[B]ecause the scope of work was established by the relevant contracts, this was merely the factually unsupported legal opinion of two lay witnesses.”

Thus, the repair of the trusses was part of Precision’s “work,” and it “does not matter whether Precision actually carried out the repairs itself or merely ‘helped coordinate’ them.” The court also observed that it may seem unfair to find a lien premature if the claimant does not know that it has any work left to do when it records its lien. Nevertheless, the court did not consider the subcontractor’s subjective belief that he “ceased to provide work” to be relevant. Instead, the court observed that “nothing in the Mechanic’s Lien Law prohibited [the subcontractor] from recording its claim again after the repairs were performed.”

The bottom line is a subcontractor has not “ceased to provide work” if its second-tier subcontractors and suppliers are still making repairs or corrections on the project. If there is any doubt about whether subsequent repair work establishes a new timeframe to record a lien, subcontractors should re-record their lien to avoid the having the first lien declared premature.

Dynamex and AB 5: The New ABC Test for Independent Contractor Status

Last year, in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex), the California Supreme Court adopted the “ABC test” to determine whether a worker was an employee or independent contractor. Under the ABC test, a person hired to provide labor or services shall be considered an employee unless the hiring entity demonstrates that all of the following conditions are satisfied:

  • The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, AND
  • The person performs work that is outside the usual course of the hiring entity’s business, AND
  • The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The decision considerably expanded the traditional test, and made it much easier for a worker to claim employment-related protections.

Following the Dynamex ruling, the California Assembly introduced AB 5, which aims to codify the rule in Dynamex. As it stands now, AB 5 has passed the Assembly and will likely pass the Senate this month.

The bill adds Section 2750.3 to the Labor Code, which begins by making the ABC test the default standard. The interesting part of the bill, however, lies in the exemptions to this test. When applicable, these exemptions would still allow a worker to prove employment under the old rules, but exempt workers could not take advantage of the very easy ABC test.

Subdivision (b), for example, exempts most licensed professions, e.g. doctors, dentists, lawyers, accountants, insurance brokers, etc. Not too surprising.

Subdivision (c) exempts contracts for “professional services” if they meet certain conditions. As defined, the term “professional services” includes marketing, human resources administration, travel agent services, graphic design, grant writing, “fine artists,” enrolled agents licensed by the IRS, freelance writers and photographers, and licensed cosmetologists.

It is no surprise that freelance writers and photographers would be exempted from the Dynamex test. It will be interesting to see how the term “fine artist” is applied If this becomes law. Do bands or DJs performing at clubs qualify as “fine artists?” What about magicians or exotic dancers? What exactly is “fine art?”

Another carve out comes in Subdivision (e) which exempts workers in “a bona fide business-to-business contracting relationship, as defined below, under the following conditions:”

(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied…

On its face, this exemption seems directed at business consultants. However, the language is broad enough to exempt a wide range of workers. Strangely, even though it applies to “sole proprietorships,” the exemption “does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business.” Many individual workers are, by definition, also sole proprietors if they have not incorporated their business.

UPDATE: AB 5 has passed the Senate and has been signed into law by the Governor.

UPDATE: New FLSA Overtime Regulations on the Horizon

Under President Obama, the Department of Labor issued new overtime rules in 2016 that changed the minimum salary required for employees to be exempt under the Fair Labor Standards Act (FLSA). But before those rules could take effect, a federal court enjoined the new rule, preventing it from taking effect. While the appeal on that case was pending, the Department of Labor proposed a new rule with a minimum salary requirement from $35,308 ($679 per week) instead of the $47,476 minimum salary ($931 per week) issued under the Obama administration. The new rule has not yet been approved but will likely be approved soon and will probably take effect in 2020. Among other things, the new rule:

  • Increases the minimum salary required for an employee to qualify as FLSA exempt from the currently-enforced level of $455 to $679 per week (equivalent to $35,308 per year).
  • Increases the total annual compensation requirement for “highly compensated employees” (HCE) from the currently-enforced level of $100,000 to $147,414 per year.
  • Does not include automatic adjustments to the salary threshold, but the DOL has given its commitment to periodically review the salary threshold. Any update would continue to require notice-and-comment rulemaking.
  • Allows employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.

Sarkis v. Angels Gun Club: When Should a Court Disqualify Corporate Counsel in Shareholder Derivative Litigation?

When management damages the corporation, minority shareholders may file a derivative action, i.e. an action on behalf of the corporation to address management’s injury to the corporation. In these cases, the plaintiff stands in the shoes of the corporation and seeks compensation for the corporation. Nevertheless, the corporation is still named as a nominal defendant and is represented by counsel. Although the corporation’s lawyers cannot concurrently represent the individual defendants in the derivative lawsuit, plaintiffs are often frustrated to have corporate counsel involved at all since they usually side with management and oppose the plaintiffs suing on the corporation’s behalf.

In Sarkis v. Angels Gun Club, the Court of Appeal acknowledged this tension and held that corporate counsel cannot represent the corporation in the derivative suit while simultaneously representing an individual defendant in a separate lawsuit.

Sarkis field a direct action against Angels Gun Club and one of its directors, David VerHalen. He alleged the club wrongfully expelled him, that the club’s directors violated their fiduciary duties by not investigating his suspension and taking corrective action on his allegations, and that certain directors had a conflict of interest when they considered his expulsion. The club’s corporate counsel jointly represented VerHalen and the club in this case.

Later, Sarkis and additional members filed a derivative action against VerHalen and other directors. The club’s corporate counsel did not represent VerHalen in the derivative lawsuit, but it did appear as counsel for the club. Sarkis sought to disqualify the corporate attorneys from representing the club in the derivative case because of their concurrent representation in the direct action. The Court of Appeal agreed, and upheld the trial court’s disqualification order.

Even though the individual directors are represented by independent counsel, [corporate counsel] has a bias in favor of the individual directors with whom the firm meets to discuss the club’s affairs in the direct action. The firm may also fear that taking aggressive action in the derivative suit against the directors’ interests may impair its future relationship with the club as its client. By representing the club in the derivative action, the firm has an adverse interest against one of its current clients, VerHalen, and it will inevitably favor VerHalen and the other directors at the expense of the duty of loyalty it owes the club. This adverse interest required the trial court to disqualify [corporate counsel] in the derivative action.

Although this case is unpublished, it still represents an important development in the law governing shareholder derivative lawsuits.

Shareholder Oppression and Tom Petty’s Estate

Tom Petty, who tragically passed away in 2017, was one of the greatest American songwriters and the property rights to his music are likely his most valuable asset. His trust divides these artistic property rights between his wife, Dana, and his two daughters (from a previous marriage), Adria and Kim. Perhaps not surprisingly, both Dana and his daughters want control of these assets, and they are now battling each other in court. The litigation raises some interesting legal questions about how Tom intended to dispose of his artistic property and how it should be managed.

Dana is responsible for gathering Tom’s artistic property and applying it as directed by section 5.2 of the trust, which states:

5.2 Creation of the Artistic Property Entity and Allocation of Interests Therein. The Trustee shall first set aside all of the Artistic Property held by the Trust Estate. The Trustee is hereby directed to create a California limited liability company (or such other entity as the Trustee deems appropriate) (“Artistic Property Entity”) to hold the Artistic Property. The membership interests in the Artistic Property Entity shall be held as follows:

(a) If [Dana] survives [Tom], then the Trustee shall allocate an undivided one-third (1/3) membership interest (or other beneficial interest) in the Artistic Property Entity to the Marital Trust to be created pursuant to Paragraph 5.3. …

(b) The Trustee shall allocate an undivided two-thirds (2/3) membership interest (or other beneficial interest) in the Artistic Property Entity to the Issue’s Trust to be created pursuant to Paragraph 5.3. With respect to the creation of the Artistic Property Entity, the Trustee is directed to create the governing documents of the Artistic Property Entity such that those of the Spouse, ADRIA and KIM who are living at the time of creation of the Artistic Property Entity shall be entitled to participate equally in the management of the Artistic Property Entity, even though their respective economic interests in the Artistic Property Entity are not equal.

In sum, this part of his trust says the following:

  • Dana is the trustee and controls all of his property right now.
  • Dana must create a company to hold Tom’s artistic property.
  • Dana (through her Marital Trust) will own one-third of this company.
  • Tom’s daughters, Adria and Kim, (through the Issue’s Trust) will own two-thirds of this company.
  • Dana is directed to create the governing documents of this company.
  • Dana, Adria, and Kim “shall be entitled to participate equally in the management.”

As trustee, Dana formed a company called Petty Unlimited, LLC to hold Tom’s artistic property, and she named herself, Adria, and Kim as the three managers. Before Dana would transfer the artistic property to Petty Unlimited, she requested that Adria and Kim first sign an operating agreement specifying how the company would be managed. This is where the dispute emerges.

What did Tom intend by the phrase “shall be entitled to participate equally in the management?”

Dana’s proposed operating agreement interprets the direction to “participate equally in the management” as merely giving Adria and Kim something akin to an advisory role, but leaving nearly all decisions to the ultimate discretion of a “professional” manager who may only be removed upon unanimous consent of all three owners. As Dana explained in her May 29, 2019 objection to Adria and Kim’s petition:

The Trust says Dana, Adria and [Kim] will have an equal right to participate in management. Equal participation in management can be accomplished by authorizing a professional manager who can make day-to-day business decisions with the requirement that he obtain unanimous approval on major decisions. For example, Adria wanted to authorize Tom’s name and likeness to be used to promote products akin to Paul Newman, whose face adorns bottles of salad dressing and so on. But Tom would never have permitted such a thing; he never “sold out” while he was alive and refused to do any such thing despite numerous opportunities. Dana is certain Tom’s fans would also find it a sad perversion of Tom’s legacy. But each of these women would have the opportunity to participate by seeking-in a respectful manner, one would hope-to persuade the manager one way or the other. That is “participation” in management.

While Dana sees a professional manager protecting Tom’s brand from ill-advised management decisions, Adria and Kim suspect a secret alliance between Dana and the professional manager, and see the proposed operating agreement as a means of shutting them out of management. They refused to accept Dana’s proposal for a professional manager, and instead interpret the phrase “participate equally in management” as providing each of the three women with a vote on management decisions. And in the face of a disagreement, Adria and Kim believe the majority should prevail. Of course, this would give Aria and Kim the power to overrule Dana on all issues, and Dana wants to avoid being the oppressed minority owner.

Whose interpretation wins? That will be for the judge to decide, but in my view, neither Dana’s nor Adria and Kim’s interpretation is correct.

Significantly, the trust provides that Dana, Adria, and Kim “shall be entitled to participate equally in the management of the Artistic Property Entity, even though their respective economic interests in the Artistic Property Entity are not equal.” (Emphasis added) Why would Tom say their respective economic interests were not equal when each of the three owns a one-third membership interest? What inequality is Tom referring to here? It seems clear that once you identify the inequality, it could impact the interpretation of the preceding clause.

The only inequality evident in this part of the trust is Dana owning one-third, and Adria and Kim owning two-thirds of the Artistic Property Entity. If this is the inequality Tom is referring to, it suggests that even though Dana owns one-third and the daughters own two-thirds of the economic interests, Tom wanted Dana, on one hand, and Adria and Kim, on the other hand, to “participate equally in management.” That is, Dana would have a 50 percent vote on all management decisions and Adria and Kim together would have a 50 percent vote on all management decisions, even though their economic interests would be divided one-third to Dana and two-thirds to the daughters. Neither Dana nor the daughters would have a majority and both factions would have to compromise in all managerial decisions.

What happens if there is a deadlock? If managerial decisions require unanimous approval, the failure to obtain unanimity could paralyze operations and threaten the business. Unless the operating agreement requires a higher threshold, 50 percent or greater of the voting interests may dissolve the LLC. (Corp. Code § 17707.01, subd. (b).) Members holding less than 50 percent of the voting interests may also petition the court to dissolve the LLC when “management of the limited liability company is deadlocked or subject to internal dissension.” (Corp. Code § 17707.03, subd. (b)(4).) However, in the latter case the majority may then exercise the right to buy-out the petitioning membership interests at their fair market value.

Dane-Elec Corp. v. Bodokh: Contractual attorney fee clause does not trump Labor Code § 218.5

Dane-Elec Corp sued it’s employee, Bodokh, for money due on a promissory note. Bodokh cross-complained for unpaid wages. The corporation prevailed on all claims and sought attorney fees pursuant to the promissory note agreement. The Court of Appeal reversed an award of fees to the corporation, reasoning that when an employer prevails on a good-faith claim for unpaid wages, Labor Code section 218.5 prohibits the enforcement of a provision for prevailing party attorney fees on an inextricably intertwined contract claim:

Labor Code section 218.5, an attorney fee-shifting statute in actions for nonpayment of wages, prohibits a prevailing party employer from recovering attorney fees unless the trial court finds the employee brought the wage claim in bad faith. This appeal presents an issue regarding the effect of Labor Code section 218.5 on a prevailing party employer’s right to recover contract-based attorney fees from an employee. Specifically, we address whether an employer may recover attorney fees incurred in successfully defending a wage claim, found not to have been brought in bad faith, when the wage claim was inextricably intertwined with a contract claim for which the employer would otherwise be contractually entitled to recover attorney fees. … We hold that unless the trial court finds the wage claim was brought in bad faith, Labor Code section 218.5, subdivision (a) (section 218.5(a)) prohibits, as a matter of law, an award of attorney fees to a nonemployee prevailing party for successfully defending a wage claim that is inextricably intertwined with a claim subject to a contractual prevailing party attorney fees provision. To the extent the wage claim and the contract claim are inextricably intertwined, section 218.5(a)’s prohibition on recovering attorney fees controls over the contractual attorney fees provision.

Full opinion is here.

Han v. Hallberg: Buyout Triggers When a Trust is the Owner

Buy-sell agreements protect each owner from being forced to accept a new co-owner who acquires a share of the business from an original owner, e.g. by purchase, inheritance, divorce, bankruptcy, etc. These buy-sell agreements usually give the original owners the right to buy another owner’s share upon specific triggers, e.g. sale, death, divorce, bankruptcy, etc. When evaluating whether a buyout has been triggered under such an agreement, the precise identity of each owner of the business can be extremely important.

In Han v. Hallberg, the Court of Appeal considered whether the death of one dentist in a four-way partnership triggered a buyout when the deceased dentist’s partnership interest was owned by his trust. Refusing to follow an earlier case which found an original owner continued to be a partner after transferring ownership to his trust, the Hallberg court held the dentist’s death did not trigger the buyout “upon the death of a partner” because the trust, not the deceased dentist, was the partner.

It is quite clear from the language of the 1994 amendment that Dr. Hallberg individually was not a partner when he died. There is simply no way to get around this point. … As a consequence of these points, it is necessarily the case that, because Dr. Hallberg individually was not a partner when he died, his death did not require his estate to make an election to retain his interest, as that interest had long ago been assigned to the trustee of the Hallberg Trust, and did not pass to Dr. Hallberg’s estate. The Hallberg Trust, or its trustee acting as a partner by virtue of being the trustee, continues to be a partner in the SM-Ensley Dental Group along with the estates of Dr. Schrillo and Dr. Loberg.

This ruling is particularly important for buy-sell agreements with triggering events unrelated to a proposed transfer of ownership, e.g. termination of a shareholder’s employment or upon the filing of a lawsuit by the shareholder against the company. If an original owner transfers his share of the company to a trust, Hallberg suggests a mandatory buyout would not be triggered if the now-former shareholder (rather than his trust) experienced a triggering event, e.g. sued the company or was terminated from his employment.

Switzer v. Wood: When Are Officers, Managers, and Controlling Shareholders Liable for Treble Damages?

Typically, plaintiffs with claims for fraud, breach of fiduciary duty, and conversion can only recover the actual damages they sustained. In Switzer v. Wood, (ordered published on May 10, 2019), the California Court of Appeal recognized a statutory right to recover treble damages, i.e. triple the actual damages, in certain civil actions for fraud, breach of fiduciary duty, and conversion. This theft action can even arise in a business dispute between partners. In Switzer, the parties were partners and co-owners of a business selling medical devices:

According to the allegations of the cross-complaint, not long after this business venture got started, Wood deceitfully took possession of, converted, and withheld for himself large sums of money or income belonging to Switzer and/or to [the business], and Wood also converted valuable property items belonging to Switzer (i.e., spinal implant inventory) and, upon selling said property items, kept the profits for himself.

In both his direct and derivative claims under section 496, Switzer’s cross-complaint asserted, based on relevant foundational allegations referred to in the pleading, that “[t]he acts of Mr. Wood constitute a violation of Penal Code § 496(a), thus entitling Mr. Switzer to recover from Mr. Wood treble the amount of actual damages sustained by Mr. Switzer, along with Mr. Switzer’s costs of suit and reasonable attorney’s fees . . . .”

The jury found in favor of Switzer on his civil claim for violation of Penal Code section 496, but the trial court refused to award treble damages. The appellate court reversed and found that section 496 was clear and required treble damages:

The language of section 496(c) is clear and unambiguous. A criminal conviction is not a prerequisite to recovery of treble damages. All that is required for civil liability to attach under section 496(c), including entitlement to treble damages, is that a “violation” of subdivision (a) or (b) of section 496 is found to have occurred. … [T]he elements required to show a violation of section 496(a) are simply that (i) property was stolen or obtained in a manner constituting theft, (ii) the defendant knew the property was so stolen or obtained, and (iii) the defendant received or had possession of the stolen property.

*   *   *

In the present case, it is undisputed that the jury specifically and unequivocally found all the factual elements necessary to establish that Wood and Access Medical had engaged in conduct constituting a violation of section 496(a). … That being the case, under the plain and literal terms of section 496(c), Switzer was entitled to an award of three times his actual damages that were found by the jury on both the direct and derivative section 496 causes of action.

Thus, if an officer, manager or other corporate fiduciary steals, or knowingly possesses stolen property, triple damages apply. Importantly, stolen property also includes “property obtained in a manner constituting theft.” Penal Code section 484(a) describes theft as follows:

Every person who shall feloniously steal, take, carry, lead, or drive away the personal property of another, or who shall fraudulently appropriate property which has been entrusted to him or her, or who shall knowingly and designedly, by any false or fraudulent representation or pretense, defraud any other person of money, labor or real or personal property, … is guilty of theft.

Many actions for fraud, breach of fiduciary duty, and conversion will qualify as theft under section 484(a), and thus expose those defendants to treble damages under section 496(c). Since these claims routinely arise in shareholder disputes, corporate defendants should expect to see more claims for treble damages in the wake of Switzer.

Summers v. Collette: When do Shareholders, Members, and Nonprofit Directors Have Standing to Sue on the Corporation’s Behalf?

Corporations Code sections 800 and 5710 give shareholders and members standing to bring derivative claims, i.e. claims on behalf of the corporation. For example, if the board of directors steals money from the corporation’s bank account, shareholders and members can bring a derivative action on behalf of the corporation to recover the stolen money. However, a shareholder (or member) who files an action under section 800 (or section 5170) will lose standing to maintain the lawsuit if she stops being a shareholder (or member).

Nonprofit corporations, however, do not have shareholders. In some cases, nonprofits have “members” who function like shareholders and elect the directors. But many nonprofits have no members to oversee the board of directors. So who has standing to sue on behalf of the nonprofit when the directors are damaging the corporation? In addition to member derivative actions under section 5170, three sections of the Corporations Code authorize both the attorney general and other directors of the nonprofit to file suit.

First, section 5233, subdivisions (c) and (h), provides that the Attorney General or, if the Attorney General is joined as an indispensable party, a director of a nonprofit corporation “may bring an action” to remedy impermissible self-dealing by another director.

Second, section 5142, subdivision (a)(3), provides that a director of a nonprofit corporation “may bring an action to enjoin, correct, obtain damages for or to otherwise remedy a breach of a charitable trust.”

Finally, section 5223, subdivision (a), authorizes the superior court, “at the suit of a director” of a nonprofit corporation, to remove another director for, among other things, fraudulent or dishonest acts, gross abuse of authority, or breach of duty.

But what happens when the board removes a director after she files an action under these statutes? Does the director lose standing once she is removed (like shareholder standing under Corp. Code, § 800), or do the standing requirements only apply at the time the director files suit?

The Court of Appeal recently considered this question in Summers v. Collette, (2019) 34 Cal.App.4th 361. Summers and Collette were both directors of a nonprofit corporation. Summers accused Collette of breaching her fiduciary duties to the nonprofit, and she sued Collette on behalf of the corporation. After Summer filed her lawsuit, the board removed her as a director and the trial court then dismissed the case, reasoning that Summer lost standing when she was removed. The Court of Appeal considered whether, in a director’s action under sections 5223, 5233, and 5142, removing the director who brought the action deprives her of standing to continue to pursue it.

The court first examined the statutory language and found meaningful differences between the standing requirements for nonprofit directors (Corp. Code, §§ 5223, 5233 & 5142), and the derivative standing required for shareholders (Corp. Code, § 800)  or members of nonprofits (Corp. Code, § 5170). Unlike the statutes for nonprofit directors, sections 800 and 5170 both provide that “[n]o action may be instituted or maintained” if the plaintiff is not a shareholder or member.

Significantly, the “instituted or maintained” language that the Supreme Court concluded suggested a continuous stock ownership requirement in section 800, and which appears in the provision concerning a member’s standing to bring an action on behalf of a nonprofit corporation in section 5710, does not appear in the provision governing a director’s standing to bring an action on behalf of a nonprofit in sections 5233 and 5142. That difference in language suggests a difference in legislative intent. … In particular, the absence of something comparable to the phrase “or maintained” in sections 5233 and 5142 points away from a continuous directorship requirement in the same way that phrase’s presence in section 800 “point[s] to” a continuous stock ownership requirement.

In addition to the statutory text, the court also cited important public policy reasons for conferring standing on nonprofit directors, even if they are removed after they file suit.

As the Supreme Court observed in Holt, a “‘charity’s own representative has at least as much interest in preserving the charitable funds as does the Attorney General who represents the general public.’” Such an individual “‘is also in the best position to learn about breaches of trust and to bring the relevant facts to a court’s attention.’” A director who files an action such as this one will continue to provide the advantages identified in Holt even if later removed from office.

This seems like the right result, but there are still questions that remain unanswered. The court did not directly address whether a nonprofit director would still have standing to sue if the corporation removes her from the board after she complains about wrongful conduct but before she has time to file a lawsuit. If the plaintiff must be a director when the action is filed, every board majority (even those who have done nothing wrong) will have a strong incentive to immediately remove any director who complains before she has a chance to sue.

The Point of No Return in the Section 2000 Buy-Out Process

Corporations Code section 2000, subdivision (c) provides a right to purchase the plaintiff’s shares as an alternative to litigating an involuntary dissolution lawsuit. “Under those circumstances, the purchasing shareholders may avoid the dissolution of the corporation and the appointment of any receiver by buying the plaintiff’s shares. Nothing in section 2000, subdivision (a) provides for a buyout independent of a pending involuntary dissolution suit.” (Kennedy v. Kennedy (2015) 235 Cal.App.4th 1474, 1481.) In short, a party’s right under section 2000 depends entirely on the existence of a cause of action for involuntary dissolution.

Thus, a plaintiff can dismiss the dissolution lawsuit before the section 2000 process begins and avoid the buy-out option. But what if the plaintiff dismisses the suit after the court orders a buy-out following a section 2000 hearing? 

In Ontiveros v. Constable, (2018) 27 Cal. App. 5th 259, an aggrieved minority shareholder filed an action for involuntary dissolution under Corporations Code section 1800. The majority shareholders filed a motion under Section 2000 to buy-out Ontiveros’ shares and stay the action pending the appraisal process. The trial court granted the motion. Ontiveros then dismissed her case and filed a motion to terminate the appraisal and buy-out of her shares. Finding that she had the right to dismiss her case, the trial court granted the motion and terminated the buy-out. The appellate court reversed, finding that once the trial court granted the majority shareholder’s motion to invoke the buy-out option, the minority shareholder could not avoid a buy-out by dismissing her dissolution action.

[W]e determine that the special proceeding under section 2000, once initiated, “supplants” the cause of action for involuntary dissolution. At that point, the parties give up their right to litigate the involuntary dissolution action subject to the special proceeding outlined in section 2000. As such, a plaintiff, like Ontiveros, can no longer dismiss the involuntary dissolution claim under Code of Civil Procedure section 581, subdivision (e). As the superior court relied upon that code section as a mechanism to lift the stay and terminate the section 2000 special proceeding, it misapplied the law, and therefore, abused its discretion.

In short, once the section 2000 motion is granted, the buy-out process begins and the dissolution action may no longer be dismissed.

Why does the World Bank care about minority shareholders?

Minority shareholders are important. Just ask the World Bank.

Every year, the World Bank publishes an “Ease of Doing Business Index” for countries and economies across the world. The index looks at a variety of factors, and one of the most important is each country’s legal framework for protecting minority shareholders. The World Bank considers these protections extremely important for evaluating whether a jurisdiction is a good place to do business.

WHY DO MINORITY INVESTOR PROTECTIONS MATTER?

One of the most important issues in corporate governance is self-dealing—the use of corporate assets by company insiders for personal gain. Related-party transactions are the most common example. High ownership concentration and informal business relations can create the perfect environment for such transactions, which allow controlling shareholders to profit at the expense of the company’s financial health—whether because company assets are sold at an excessively low price, assets are purchased at an inflated price or loans are given by the company to controlling shareholders on terms far better than the market offers.

Empirical research shows that stricter regulation of self-dealing is associated with greater equity investment and lower concentration of ownership. This conclusion is in line with the view that stronger legal protections make minority investors more confident about their investments, reducing the need for concentrated ownership to mitigate weaknesses in corporate governance.

California Needs a Summary Proceeding to Enforce Corporate Advancement Rules

California and Delaware share many of the same rules when it comes to corporations, but they also diverge on some issues. When it comes to advancement of litigation expenses for officers and directors, California and Delaware are both remarkably similar and, at the same time, worlds apart.

Typically, corporations will indemnify their directors and officers who have acted in good faith against the costs of defending lawsuits arising out of their duties. Since indemnification rights usually cannot be established at the outset of the case, corporations will often agree to pay a defendant’s legal expenses in advance of a final judgment. Advancement is an especially important corollary to indemnification as an inducement for attracting capable individuals into corporate service. Advancement provides corporate officials with immediate interim relief from the personal out-of-pocket financial burden of paying the significant on-going expenses inevitably involved with investigations and legal proceedings.

Like Delaware, California provides that “expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of the proceeding.” (Corp. Code, § 317, subd. (f).) How a corporation chooses to provide advancement is left to the discretion of the shareholders and the board of directors. In many cases, the corporation will provide advancement rights in the by-laws. 

Not surprisingly, disputes often arise as to whether (and when) a defendant has a right to advancement. That, in and of itself, is hardly unusual. Disputes regarding the interpretation of corporate bylaws are commonplace. But unlike ordinary disputes, advancement is not an issue that can wait for final judgment after trial, i.e. if a defendant is forced to pay for his own litigation expenses until the end of trial, his advancement rights will be defeated regardless of the judgment. Similarly, if the defendant officers use corporate money to pay their defense costs when no right of advancement has been approved, the corporation could suffer substantial losses if it lacks a remedy to stop the unauthorized advancement prior to trial. 

This is where Delaware and California diverge. Unlike California, Delaware provides a specific summary proceeding to determine a defendant’s advancement rights.

The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.  The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).

Del.Code Ann. tit. 8, § 145(k).

California, unfortunately, provides no specific remedy to enforce advancement rights. In the absence of a summary proceeding, injunctive relief is one option. Courts have granted preliminary injunctive relief to stop a director’s unauthorized or unlawful use of corporate funds to pay personal litigation costs. (Havens v. Attar (Del. Ch. Jan. 30, 1997) 22 Del. J. Corp. L. 1230, 1254-1258, No. 15134, 1997 Del. Ch. LEXIS 12 [enjoining advancement approved in breach of directors’ fiduciary duties before Delaware statutes provided a summary proceeding]; Johnson v. Couturier (9th Cir. 2009) 572 F.3d 1067, 1078-1081 [enjoining corporation from advancing defense costs to corporate directors accused of breaching ERISA fiduciary duties]; Allergia, Inc. v. Bouboulis (S.D.Cal. Jan. 19, 2017) Case No. 14-CV-1566 JLS (RBB) [advancement denied where by-laws incorporated limitations from indemnity clause].) Although injunctive relief is available, it does have its drawbacks. For example, the party requesting an injunction often needs to establish a risk of irreparable harm, which can be difficult on a simple motion hearing. A clear procedural remedy for challenging improper advancement would remove much of the uncertainty and ambiguity inherent in the current law.

UPDATE: What happened to the new minimum salary rule for FLSA overtime exemptions?

Do you remember 2015? Yes, it may seem like the distant past, but in 2015 the Obama administration approved a new rule increasing the minimum salary necessary to qualify as exempt from overtime under the Fair Labor Standards Act (FLSA) from from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). But before these changes could take effect, the U.S. District Court of the Eastern District of Texas enjoined the new rule on December 1, 2016. The court ruled that although the FLSA authorizes the Department of Labor to “delimit” and “define” the scope of the exemption for executive, administrative, and professional employees, the statute does not permit the DOL to limit those exemptions to workers making more than a designated minimum salary.  The court further held the new rule does not reflect a permissible construction of the FLSA, because the significant increase to the salary level creates essentially a de facto salary-only test.

The DOL appealed the ruling, but while that appeal was pending, two things happened: First, Trump’s new Secretary of Labor sought public comments about a new minimum salary for exempt workers. Second, the District Court granted summary judgment against the DOL. On October 30, 2017, the DOL appealed this decision to the U.S. Court of Appeals for the Fifth Circuit. The DOJ lawyers representing the DOL “will file a motion with the Fifth Circuit to hold the appeal in abeyance while the Department of Labor undertakes further rulemaking to determine what the salary level should be.”

So the salary-basis rules proffered by the Obama administration seem destined to be replaced without ever becoming effective. The question now is what the new salary-basis rules will look like. Based on comments made at his confirmation hearing, Labor Secretary Alex Acosta believes the new minimum salary should only be increased to $33,000. Whether the DOL will adopt this number is unknown, but one thing is certain: the new rule will require much less than the $47,476 minimum salary under the prior amendments.

Shareholder Oppression: Minority Squeeze-Outs & Remedies Under California Law

When the majority wants to get rid of minority shareholders but still keep control of the business, they may attempt a squeeze-out acquisition. First, the majority will form a second entity where they are the sole owners. Under their direction, this new company offers to acquire or merge with the target corporation. Using their majority vote in the target corporation, they approve a sale/merger that forces the minority to accept what the new company offers for the purchase of the corporation’s shares. Under this scheme, the minority gets squeezed out and the majority continues to operate the business as the sole owner(s).

Fortunately, California’s Corporations Code provides dissenting minority shareholders with specific remedies for this species of shareholder oppression.

First, dissenting shareholders may “require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder.” (Corp. Code, § 1300, subd. (a).) “The fair market value shall be determined as of the day of, and immediately prior to, the first announcement of the terms of the proposed [acquisition], excluding any appreciation or depreciation in consequence of the proposed reorganization or short-form merger, as adjusted for any stock split, reverse stock split, or share dividend that becomes effective thereafter.” (Corp. Code, § 1300, subd. (a).) This remedy applies to any acquisition, regardless of whether there is common ownership between the corporation and the acquiring entity.

In order to avail themselves of this remedy, dissenting minority shareholders must “make written demand upon the corporation for the purchase of those shares and payment to the shareholder in cash of their fair market value… not later than the date of the shareholders’ meeting to vote upon the [acquisition]” of, if not approved by vote at a shareholders meeting, within 30 days after the date on which the notice of the approval by the outstanding shares is mailed to the shareholder. (Corp. Code, § 1301, subd. (b).) “The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what the shareholder claims to be the fair market value of those shares as determined pursuant to subdivision (a) of Section 1300. The statement of fair market value constitutes an offer by the shareholder to sell the shares at that price.” (Corp. Code, § 1301, subd. (c).)

At this point the corporation can choose to accept the offer, and pay the dissenting shareholder the amount stated in the demand. However, “[i]f the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares …, within six months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (h) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint.” (Corp. Code, § 1304, subd. (a).) In other words, if the corporation rejects the offer, the dissenting shareholder may file an action for an appraisal within six months after the vote, or (if no vote) the date notice of the approval was mailed to the shareholder.

On the trial of the action, the court shall first determine (if disputed) the status of the shares as dissenting shares. “If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares.” (Corp. Code, § 1304, subd. (c).) After deciding the fair market value, “judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share… with interest thereon at the legal rate from the date on which judgment was entered.” (Corp. Code, § 1305, subd. (c).) “The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys’ fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301).” (Corp. Code, § 1305, subd. (e).)

But what if the dissenting minority wants to stop the squeeze-out and does not want cash in exchange for their shares? If the majority and the new company have common ownership, the dissenting shareholder(s) may bring an action to have the acquisition “set aside or rescinded.” (Corp. Code, § 1312, subd. (b).) However, if they elect to pursue this remedy, “the shareholder shall not thereafter have any right to demand payment of cash for the shareholder’s shares.” (Corp. Code, § 1312, subd. (b).) The acquisition may then be set aside “upon 10 days’ prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member.” (Corp. Code, § 1312, subd. (b).) Importantly, when the majority owners of the target corporation also own part of the new company, they “shall have the burden of proving that the transaction is just and reasonable as to the shareholders of the [target] corporation.” (Corp. Code, § 1312, subd. (c).)

In most squeeze-out cases, the dissenting shareholders are limited to the statutory remedies in Corporations Code section 1312. However, in some circumstances, the minority shareholders may also have individual claims for fraud or breach of fiduciary duty against the majority shareholders and derivative claims against the corporation’s officers and directors. If you are a minority owner and you believe the majority are treating you unfairly, contact an experienced attorney to help you protect and defend your investment.

How many days in a row can an employee be required to work?

Labor Code sections 551 and 552 provide that every employee “is entitled to one day’s rest therefrom in seven” and that “no employer of labor shall cause his employees to work more than six days in seven.” Labor Code section 556 provides that “Sections 551 and 552 shall not apply… when the total hours of employment do not exceed 30 hours in any week or six hours in any one day thereof.” In Mendoza v. Nordstrom, Inc., (2017) 2 Cal.5th 1074, the California Supreme Court considered the following questions about these statutes:

1. Is the day of rest required by sections 551 and 552 calculated by the workweek, or does it apply on a rolling basis to any seven-consecutive-day period?

2. Does the section 556 exemption for workers employed six hours or less per day apply so long as an employee works six hours or less on at least one day of the applicable week, or does it apply only when an employee works no more than six hours on each and every day of the week?

3. What does it mean for an employer to ―cause‖ an employee to go without a day of rest (§ 552): force, coerce, pressure, schedule, encourage, reward, permit, or something else?

It answered these questions as follows:

1. A day of rest is guaranteed for each workweek. Periods of more than six consecutive days of work that stretch across more than one workweek are not per se prohibited.

2. The exemption for employees working shifts of six hours or less applies only to those who never exceed six hours of work on any day of the workweek. If on any one day an employee works more than six hours, a day of rest must be provided during that workweek, subject to whatever other exceptions might apply.

3. An employer causes its employee to go without a day of rest when it induces the employee to forgo rest to which he or she is entitled. An employer is not, however, forbidden from permitting or allowing an employee, fully apprised of the entitlement to rest, independently to choose not to take a day of rest.

You can read the full opinion here. I think the court reaches gets the right answer, but I doubt this is the last we will hear about the informed consent requirement the court proposes in response to the third question.

And to answer the question posed by the title, an employee can be required to work no more than six days per workweek. Accordingly, an employee could conceivably be given a day’s rest on the first day of one workweek, work the next six days, work the first six days of the next workweek, and then be given a day’s rest on the last day of the second workweek.  Thus, an employee can be required to work no more than 12 days in a row in California.

UPDATED: New Overtime Regulations Still On Hold

Last year, the Obama administration’s Department of Labor approved a new rule increasing the minimum salary necessary to qualify as exempt from overtime under the Fair Labor Standards Act (FLSA) from from $455 per week ($23,660 annually) to $921 per week ($47,892 annually). However, before these changes could take effect, the U.S. District Court of the Eastern District of Texas enjoined the new rule on December 1, 2016.

The District Court ruled that although the FLSA authorizes the DOL to “delimit” and “define” the scope of the exemption for executive, administrative, and professional employees, the statute does not permit the DOL to delimit the scope with a salary-basis test.  The court further held that the new rule does not reflect a permissible construction of the FLSA, because the significant increase to the salary level creates essentially a de facto salary-only test.

The DOL appealed the ruling but on February 22, 2017, the Court of Appeal granted its request for an extension of time “to allow incoming leadership personnel adequate time to consider the issues.” In other words, the Trump administration will now decide whether to continue defending the new rule or to accept the decision of the District Court.  Should it choose the latter option, that could be the death knell for the new salary-basis test – and it could even put the existing salary-basis test in jeopardy.  The DOL has not announced its decision yet, but per the court’s order, it has until May 1, 2017 to file its reply brief and proceed with the appeal.

What Happens When an Employee Embezzles Money by Forging the Employer’s Signature on Company Checks?

Tell me if this sounds familiar: Jane works as an bookkeeper for Jim’s company. She is not an accountant, but she manages invoices, receipts, and bills for the business. Jane has access to  company checks, but Jim still has to approve and sign every payment. One day, Jim is reviewing his bank statements and notices $130,000 has been deducted from his account for several checks he does not recognize. He discovers that Jane wrote the checks to herself and forged his signature. Jim fires Jane, and learns she has a big gambling problem. The police tell Jim that they do not investigate employee embezzlement cases under $1 million, and suggest that Jim hire an attorney to file a lawsuit. But the money is gone and Jane is broke. Can Jim get his money back?

Yes, from his bank.

It may seem old-fashioned, but your bank has a duty to recognize your signature and only pay checks actually bearing your signature. When Jane deposited the forged checks, Jim’s bank violated its duty to only pay checks that are “properly payable,” i.e. not forged. (Comm. Code, § 4401.) However, if the bank sends out monthly statements, Jim has 30 days to review those statements and report a possible forgery to the bank. (Comm. Code, § 4406, subd. (d)(2).) If Jim reports a forgery within 30 days, the bank must refund his money. 

However, if Jim forgets to review his bank statements and discovers the forgery after 30 days, the bank will only have to pay back the money if it acted negligently. (Espresso Roma Corp. v. Bank of America (2002) 100 Cal.App.4th 525, 528-529.) Proving the bank’s negligence will usually require a lawsuit against the bank. Moreover, Jim must immediately report the forgery and there is a one-year statute of limitations to sue the bank for improperly paying those checks. 

The important thing to remember is this: always review your bank statements and report any suspicious payments right away. But even if you do not report the payments right away, you can still recover from the bank if you can prove it acted negligently. If that’s the case, report the embezzlement to your bank immediately and contact a lawyer. Either way, your claims could be lost if you wait too long, so it is important to act quickly.

Does Enforcing Government Regulations Count As Control Of An Independent Contractor?

We all know the general rule: If the principal has the right to control the manner and means of the work, the worker is an agent or an employee.  If not, the worker is an independent contractor.  But what if the principal’s “control” is limited to enforcing the worker’s compliance with government regulations?

Under one line of case law, “where the method of performing a task is dictated by health and safety regulations imposed by the government, the principal is not exercising the manner and means of control as an employer.”  (Southwest Research Institute v. Unemployment Ins. Appeals Bd. (2000) 81 Cal.App.4th 705, 709, citing Empire Star Mines Co. v. Cal Emp. Com. (1946) 28 Cal.2d 33, 43) The appellate court, however, recently called into question this rule in Secci v. United Indep. Taxi Drivers, Inc. (2017) 8 Cal.App.5th 846.

In Secci, plaintiff sued a taxicab company for injuries sustained in a car accident. The trial court overturned the jury’s verdict on the grounds that the evidence of an agency relationship between the taxi company and the driver was based entirely on controlling the driver’s compliance with local regulations.  The appellate court disagreed and reinstated the jury’s verdict:

The fact that many of the controls imposed by the taxi association on its drivers are based on governmental rules and requirements or operate for the mutual benefit of the taxi company and its drivers does not give courts or factfinders license to ignore those controls in deciding whether a principal-agent relationship exists. Once we have established that the status of the taxi industry as a publicly regulated industry may expose taxi companies to vicarious liability for the negligent acts of drivers who act as the companies’ agents, it would be illogical to exclude from consideration the controls required by such regulations.

Secci v. United Indep. Taxi Drivers, Inc. (2017) 8 Cal.App.5th 846.

So does the rule from Empire Star Mines still survive after Secci? That’s unclear. Secci expressly rejected the rule in cases of vicarious liability for contractors in publicly regulated industries.  At the same time, the Secci court was careful to limit its holding to the agency question.  It did not consider whether government regulations should impact the “control” analysis for workers who claim statutory rights under an employment relationship.

Minority Shareholder Buyouts under Corporations Code section 2000

When faced with an action for involuntary dissolution, California law gives the majority an option to buyout the minority shareholders.  (Go v. Pacific Health Services, Inc. (2009) 179 Cal.App.4th 522, 532.)  Corporations Code section 2000 provides that when a shareholder sues for involuntary dissolution, the corporation, or the holders of 50 percent or more of the voting power of the corporation, may avoid the dissolution by purchasing for cash the shares owned by plaintiffs at their “fair value.”  (§ 2000, subd. (a).)  The statute defines “fair value” as the “liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation.”  (Ibid.)  If the parties cannot agree on a valuation, the trial court shall appoint three disinterested appraisers to appraise the fair value of the shares.  (§ 2000, subd. (c).)  “The order shall prescribe the time and manner of producing evidence, if evidence is required.  The award of the appraisers or of a majority of them, when confirmed by the [trial] court, shall be final and conclusive upon all parties.”  (Ibid.)

In Goles v. Sawhney, (2016) 5 Cal.App.5th 1014 the California Court of Appeal clarified several important aspects of this appraisal process.  In Goles, the minority shareholders sued for involuntary dissolution and the majority owners invoked the Section 2000 appraisal process.  Three different appraisals were obtained, but none of the appraisers could agree on a value.  The trial court overruled minority shareholder objections to the methodologies used and without holding an evidentiary hearing, the trial court simply averaged the three appraisals.

Derivative Claims

On appeal, the minority shareholders argued the appraisals were flawed because they did not take into account the value of their derivative claims on behalf of the corporation. Derivative claims are legal actions shareholders bring for the benefit of the corporation. Minority shareholders often make derivative claims when the people in control of the corporation damage the business or take its property.  In Goles, the minority shareholders claimed the managers took unauthorized loans, employed family members, used corporate funds to pay personal expenses, and purposefully neglected corporate governance.  The Court of Appeal agreed these derivative claims should be included in the corporate valuation.

“A derivative claim (or other claim that may yield a potential recovery for the corporation) is a corporate asset that must be considered when determining ‘fair value.’”  (Friedman et al., Cal. Practice Guide:  Corporations (The Rutter Group 2016) ¶  8:873.6, p. 8-176; see Cotton v. Expo Power Systems, Inc., supra, 170 Cal.App.4th at p. 1380.)  “If successful, a derivative claim will accrue to the direct benefit of the corporation and not to the stockholder who litigated it.  [Citations.]”  (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1114.)

None of the derivative claims were considered by the appraisers or the trial court in determining the fair value of Katana.  This was erroneous.  (See Cotton v. Expo Power Systems, Inc., supra, 170 Cal.App.4th at p. 1374; Kennedy v. Kennedy (2015) 235 Cal.App.4th 1474, 1485 [dismissal of derivative claim requires court approval].)  Where a minority shareholder claims that his shares were undervalued because of self-dealing and misconduct by corporate directors and officers, he should be afforded the opportunity to demonstrate that the alleged misconduct in fact occurred.

Control Discount

The minority shareholders also challenged the use of a “control discount” to reduce the value of the minority shares in two of the appraisals.  A “control discount” reduces the value of a minority share based on the presumption that shares are less valuable when you do not control the company.  The Court of Appeal agreed with the minority shareholders and held it was improper to use a control discount in Section 2000 appraisal proceedings.

Section 2000 does not permit a lack-of-control discount when determining the fair value of a minority shareholder interest.  (Friedman et al., Cal. Practice Guide:  Corporations, supra, ¶  8:876, p. 8-178; Ronald v. 4-C’s Elec. Packaging (1985) 168 Cal.App.3d 290, 298.)  “[T]he rule justifying the devaluation of minority shares in closely held corporations for their lack of control has little validity when the shares are to be purchased by someone who is already in control of the corporation.  In such a situation, it can hardly be said that the shares are worth less to the purchaser because they are noncontrolling.  [Citation.]”  (Brown v. Allied Corrugated Box Co. (1979) 91 Cal.App.3d 477, 486.)  The trial court erroneously did not follow section 2000 because it averaged the three appraisals, two of which used a lack-of-control discount to determine the fair value of appellants’ shareholder interest.

Averaging Method

Although the code allows trial courts to reject the three appraisals and make a new determination, the Court of Appeal reversed the trial court’s decision to average the three appraisals because they were based on flawed methodologies, i.e. no derivative claims and a control discount.

Section 2000, subdivision (c) provides that “[t]he award of the appraisers or of a majority of them, when confirmed by the court, shall be final and conclusive upon all parties.”  (Italics added.)  But such an award requires that at least two of the appraisals reach a consensus on fair value.  (See, e.g., Abrams v. Abrams-Rubaloff & Associates, Inc. (1980) 114 Cal.App.3d 240, 248; Brown v. Allied Corrugated Box Co., supra, 91 Cal.App.3d at pp. 489, 491.)  Here, the trial court confirmed all three appraisal reports even though there was no consensus.  If the trial court intended to determine fair value de novo, it could not do so by “confirming” the appraisals and taking the mathematical average of defective appraisals that use a lack-of-control discount and do not consider the derivative claims. … [T]he trial court could not select among conflicting appraisals or decide the matter de novo unless 1. the derivative claim was considered, and 2. the “lack of control” discount was removed from consideration.

The opinion did not squarely address whether trial courts may still make a de novo determination by averaging three non-defective appraisals that relied on proper criteria.

New Federal Overtime Regulations Coming Soon

In a blog post today, Labor Secretary Tom Perez announced that the DOL had finished drafting updates to Federal overtime regulations.

The rules governing who is eligible for overtime have eroded over the years. As a result, millions of salaried workers have been left without the guarantee of time and a half pay for the extra hours they spend on the job and away from their families.

We’ve worked diligently over the last year to develop a proposed rule that answers the president’s directive and captures input from a diverse range of stakeholders. After extensive research, study and careful analysis, we have submitted the proposed rule to the Office of Management and Budget for review. In the near future, the public will have an opportunity to weigh in and help us craft a final rule.

The proposed regulations have not yet been released, but they are widely expected to include changes to the minimum salary employers must pay to workers properly classified as “exempt” from overtime pay. Currently, Federal law requires eligible employees earn a minimum salary of $455 per week, or $23,660 per year in order to qualify as “exempt” from Federal overtime pay.

Yes, You Can Appeal A CUIAB Decision That Your Independent Contractor Is An Employee

Independent contractors, unlike employees, are not entitled to claim unemployment insurance. But if a worker believes she was wrongfully classified as independent contractor, instead of an employee, she can file a claim for unemployment.

Normally, if an employer disagrees with the decision of the California Unemployment Insurance Appeals Board (CUIAB), it may appeal the decision by filing a writ of mandate. However, if the decision requires the employer to pay a tax, it cannot appeal or challenge the decision until the tax is paid, pursuant to California Constitution, article XIII, section 32.

In West Hollywood v. CUIAB, (2014) 232 Cal.App.4th 12, the Court of Appeal considered whether the hirer may appeal a CUIAB decision that an independent contractor is in fact an employee (and thus owed unemployment benefits). The court rejected CUIAB’s argument the decision could not be appealed pursuant to Section 32 because it required payment of a tax.

This appeal requires us to consider whether an employer may obtain judicial review of a decision from the California Unemployment Insurance Appeals Board (the Board) finding that an applicant for unemployment benefits was an employee, not an independent contractor. The Board argues that decision is not subject to judicial review because both the California Constitution and the Unemployment Insurance Code bar actions whose purpose is to prevent the collection of state taxes. Appellant recognizes that actions seeking to avoid a tax are prohibited, but argues that this case does not challenge the imposition of a tax. We agree with appellant and reverse the judgment.

First, the Board acknowledges that “the charge to Voda Spa’s reserve account resulting from benefits awarded to Serban is not a tax payment within the meaning of article XIII, section 32 or section 1851. The only effect of the charge, is the likelihood that Voda Spa’s future reserve ratio will decrease, resulting in a higher future contribution rate.” … Because there was no assessment in this case, the pay now, litigate later rule, is simply inapplicable.

Peabody v. Time Warner Cable: Commission Wages Cannot Be Averaged To Meet California Minimum Wage Requirements

The California Supreme Court published its opinion this week in Peabody v. Time Warner Cable, (2014) 59 Cal.4th 662, wherein it addressed the following question:

May an employer, consistent with California‟s compensation requirements, allocate an employee’s commission payments to the pay periods for which they were earned?

Peabody worked as a sales person for Time Warner, and claimed she was not paid minimum wages and overtime. Time Warner did not dispute that Peabody regularly worked 45 hours per week and was paid no overtime. It argued that she fell within California’s “commissioned employee” exemption and thus was not entitled to overtime compensation. (Cal. Code Regs., tit. 8, § 11040, subd. 3(D).) The exemption requires, among other things, that an employee’s “earnings exceed one and one-half (1 1/2) times the minimum wage” (ibid.), i.e., $12 per hour. Time Warner acknowledged that most of Peabody’s paychecks included only hourly wages and were for less than that amount. It argued, however, that her commission wages should be averaged across all pay periods to satisfy the $12 per hour requirement – and not simply allocated to the period in which they were actually paid. Time Warner also relied on this argument in defense of Peabody’s minimum wage claims.

The California Supreme Court disagreed.

We next consider Time Warner’s contention that commission wages paid in one biweekly pay period may be attributed to other pay periods to satisfy the exemption’s minimum earnings prong. Specifically, Time Warner argues that Peabody’s commissions, which were always paid on the final biweekly payday of each month, should be attributed to the weeks of the preceding month. For example, it contends the $2,041.33 in commission wages it paid on November 26, 2008, should be attributed to the four workweeks of October 2008. Time Warner’s ability to satisfy the minimum earnings prong hinges on its ability to attribute commissions in this way. We conclude it may not do so. Whether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period. An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall.

The ruling affirms the DLSE enforcement policies on this issue and again rejects deference to the Federal rule allowing wages to be averaged. The court went on to note that reallocating wages to a period when they were not actually paid would be inconsistent with Labor Code section 204 (requiring regular, periodic paydays) and section 226 (requiring wage stubs state the amount of wages earned per pay period).

Notably, the court emphasized the policy reasons behind the minimum wage laws and found that Time Warner’s reallocation practice would undermine those policy objectives:

This interpretation narrowly construes the exemption’s language against the employer with an eye toward protecting employees. (Ramirez v. Yosemite Water Co., supra, 20 Cal.4th at pp. 794-795.) It is also consistent with the purpose of the minimum earnings requirement. Making employers actually pay the required minimum amount of wages in each pay period mitigates the burden imposed by exempting employees from receiving overtime. This purpose would be defeated if an employer could simply pay the minimum wage for all work performed, including excess labor, and then reassign commission wages paid weeks or months later in order to satisfy the exemption’s minimum earnings prong.

Is Paying Wages In Bitcoin Illegal In California?

There was a lot of news last week about Assembly Bill 129, which some described as a bill to “legalize bitcoin in California.” Governor Brown signed AB 129 into law on June 26, 2014. Basically, AB 129 repeals an outdated section of the Corporations Code that prohibited putting any money into circulation other than U.S. dollars.

Although AB 129 is a step in the right direction, there is still a question as to whether bitcoin may be legally used to pay employee wages. Labor Code section 212 states:

(a) No person, or agent or officer thereof, shall issue in payment of wages due, or to become due, or as an advance on wages to be earned:

(1) Any order, check, draft, note, memorandum, or other acknowledgment of indebtedness, unless it is negotiable and payable in cash, on demand, without discount, at some established place of business in the state, the name and address of which must appear on the instrument, and at the time of its issuance and for a reasonable time thereafter, which must be at least 30 days, the maker or drawer has sufficient funds in, or credit, arrangement, or understanding with the drawee for its payment.

The primary issue is whether bitcoin qualifies as an “order, check, draft, note, memorandum, or other acknowledgment of indebtedness.” None of these terms seem to fit the digital currency. Bitcoin might arguably be considered an “other acknowledgement of indebtedness,” insofar as wages are a debt owed to the employee. But the payment of bitcoin would extinguish the debt, leaving nothing left to be acknowledged. Perhaps bitcoin could be construed as a digital “memorandum” or “note.” But that construction fails for the same reason, i.e. bitcoin is not redeemable for money; bitcoin is the money that the parties contractually agreed to pay and accept. Nothing in Labor Code section 212 prohibits the employer and employee from agreeing to payment in Yen or Euros. Nor does the statute prohibit payment of wages in capital assets, e.g. precious metals. Thus, whether bitcoin is considered a currency or a capital asset, it appears that Labor Code section 212 would not prohibit payment of wages in bitcoin.

What Is An “Asset” Under The Uniform Fraudulent Transfer Act?

Occasionally, a debtor will give away all of his assets in an attempt to make himself “judgment proof” thus thwarting the creditor’s recovery. These are called “fraudulent transfers” and they are illegal. In California, fraudulently transferring assets can even be prosecuted as a criminal offense.

The civil remedy against fraudulent transfers is found in each state’s version of the Uniform Fraudulent Transfer Act, aka “UFTA.” UFTA prohibits a debtor from giving away assets if he is insolvent or becomes insolvent as a result of the transfer. UFTA allows courts to “void” fraudulent transfers so creditors can use the transferred asset to satisfy their judgment.

In Hasso v. Hapke, (2014), 227 Cal.App.4th 107, the Court of Appeals considered what is an “asset” and when is it “transferred” for the purposes of UFTA. In Hasso, the plaintiff’s trust invested in a hedge fund (Rockwater) based on some dubious representations. Around the same time, Rockwater gave Charles Fish Investments a 15% stake in the company in exchange for all of CFI’s assets. The acquisition agreement also provided that if certain benchmarks were not met, CFI could “unwind” the deal and take back its assets. Shortly thereafter, the fund was devastated in the market crash in 2008. CFI then got it’s property back per the “unwind” agreement. Hasso sued Rockwater for its losses, and also sued CFI and Rockwater claiming that the return of assets under the “unwind” agreement was a fraudulent transfer under UFTA.

The Court of Appeal disagreed that the unwind agreement was an asset transfer subject to UFTA:

When CFI entered into the transaction with RMA, it contributed its assets in exchange for an ownership interest in RMA coupled with a right to a return of assets if the value of its ownership interest in RMA was compromised. It clearly had a documented right, supported by consideration, to seize those assets, a right that predated both the financial calamity that gave rise to this lawsuit and, indeed, the lawsuit itself. We construe CFI’s right as “an interest in property to secure . . . performance of an obligation,” or a “lien,” within the meaning of Civil Code section 3439.01, subdivision (f).

Because property subject to a valid lien does not constitute an “asset” within the meaning of Civil Code section 3439.01, subdivision (a)(1), and a “transfer” within the meaning of Civil Code section 3439.01, subdivision (i) means the transfer of an “asset,” there was no “transfer” to trigger the application of Civil Code sections 3439.04 and 3439.05. Consequently, there was no evidence to show either that RMA and Williams made a fraudulent transfer of assets within the meaning of the UFTA or that CFI received assets pursuant to such a fraudulent transfer.

Thus, because there was no transferred “asset,” the court threw out plaintiff’s claims of both actual and constructive fraudulent transfer under UFTA.

The court got this one correct. There is no transfer when a party enforces it’s lien, and takes possession of a security interest. It is worth noting, however, that under UFTA a transfer does occur at the time the security interest is created.