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Wolf v. CDS Devco

June 17, 2010

WALTER E. WOLF, PLAINTIFF AND APPELLANT,
v.
CDS DEVCO ET AL., DEFENDANTS AND RESPONDENTS.



APPEAL from a judgment of the Superior Court of San Diego County, Timothy B. Taylor, Judge. Affirmed, request for judicial notice denied. (Super. Ct. No. 37-2008-00091299-CU-BT-CTL).

The opinion of the court was delivered by: Huffman, Acting P. J.

CERTIFIED FOR PUBLICATION

Plaintiff and appellant Walter E. Wolf, who formerly served as a corporate director of San Elijo Ranch, Inc. (SERI), brought this action against SERI and related parties, to seek enforcement of the "absolute" rights of a director to inspect SERI's corporate records. (Corp. Code,*fn1 § 1602.) Wolf is also a 20 percent shareholder of CDS Devco (Devco; a California real estate development corporation), which is the parent corporation of SERI. Wolf does not own shares in SERI itself.

Although Wolf was not reelected to the SERI board of directors, in his first amended petition for writ of mandate (the FAP), he continues to assert the rights of a director, as against three defendants and respondents: (1) SERI; (2) HomeFedCorp., the parent corporation of Devco, owning 80 percent of its shares; and (3) Paul J. Borden, who is the president of both Devco and SERI, as well as an officer of HomeFedCorp. (sometimes collectively defendants). (Code Civ. Proc., § 1085.)*fn2

In his FAP, Wolf alleges that he has a right and SERI and its controlling shareholders and officers, HomeFedCorp. and Borden, have a mandatory duty to allow him to pursue a complete inspection of SERI financial records. He had continually been requesting such documents for a period of almost a year, before he received notification he would not be nominated for re-election to the SERI board. Wolf contends that his removal from the SERI board was unlawful, and such removal should not affect his inspection rights nor deprive him of standing to pursue this action as a former director.

In opposition to the petition, defendants filed demurrers, pointing out that Wolf's petition admits he is no longer a director of SERI. Based on fairly recent case law, defendants argue this statutory scheme does not permit a person who is not currently serving as a director any further entitlement to inspect its records. (§§ 1602, 1603; Chantiles v. Lake Forest II Master Homeowners Assn. (1995) 37 Cal.App.4th 914 (Chantiles).) Defendants also argued that Wolf had not pled any sufficient basis for a judicial extension of the statutory scheme, nor any other qualified equitable right to inspect SERI records for any valid purpose, in the capacity of a director or former director.

The superior court ruled that the demurrers must be sustained without leave to amend, because Wolf had no statutory standing as a director to pursue his demands for inspection of SERI records, nor had he presented any sufficient basis to create any exceptions to the rule. Wolf appeals, contending the trial court erred and abused its discretion when it sustained the demurrers without leave to amend, because he sufficiently pled his entitlement to an exception to the standing requirements of section 1602. Wolf claims that he was unlawfully removed as a director, such that his rights to sue in that capacity, to protect minority shareholders or his own interests, had become fixed at the time he filed the original complaint (one day before the annual meeting at which he was not reelected).

The issues before us are narrow, and we decide only that Wolf's statutory arguments of ongoing entitlement to inspect corporate records in a director's capacity are without merit. (§ 1602.) He lacks the required status and standing to assert inspection rights that are properly due to a corporate director. Nor can he allege any realistic possibility of amendment, on a non-statutory or equitable basis, to allege successfully on these facts that he is entitled to such continued director's inspection rights.

Other forms of action exist in which a corporation's rights may be enforced and its injuries redressed, if the corporate board will not take appropriate action. (See, e.g., Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108 [shareholder derivative suit].) Here, however, the trial court's analysis of the relevant legal and policy considerations, as applied to the pleaded facts, was correct as a matter of law. We affirm the judgment of dismissal.

FACTUAL AND PROCEDURAL BACKGROUND

A. Petition and Demurrer

For purposes of analyzing the demurrer ruling, we take the facts properly pleaded to assess whether they may state a cause of action as a matter of law. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Originally, Wolf brought not only a complaint but also two petitions for relief in mandamus, in his capacity as a director of SERI who was entitled to inspection of corporate records, and also as a 20 percent shareholder of Devco, who was entitled to shareholder rights. Pursuant to the parties' stipulation, the FAP amended and consolidated all prior pleadings in the action and effectively became the operative pleading in the action, superseding the complaint filed on September 9, 2008 and the two petitions filed on October 17, 2008. The parties further agreed that the FAP, as the operative pleading, would relate back to the date the initial complaint was filed on September 9, 2008.

In the FAP, Wolf pleads as general background that SERI is governed by a board of directors, four of whom are nominated by majority shareholder Devco (85 percent owner). (Art. III, §§ 2-4.) The other director is nominated by the minority shareholders (15 percent owner), and elections are held at annual meetings or by written consent. Wolf was nominated to the SERI board by Devco and was elected for 13 terms of one year. During his latter term, he began to believe that corporate mismanagement had occurred between SERI and its parent corporations, and that his efforts to investigate them were being met with resistance by SERI and the parent corporations, Devco and HomeFedCorp.

Beginning in October 2007, Wolf began to make document requests to SERI, Devco, and HomeFedCorp. The various responses he received from SERI, Devco and Borden were in the nature of summaries that he considered to be inadequate. The parties also disagreed over the terms of a nondisclosure agreement that SERI was requesting. After about eight months, some records were provided but not enough to satisfy Wolf.

In August 2008, SERI management sent Wolf a written consent action form to call the annual meeting for September 10, 2008, listing Wolf as a candidate for director. Wolf signed and returned it. Unfortunately, Wolf also inadvertently transmitted to defendant Borden a copy of a draft complaint that Wolf was preparing in order to compel SERI, Devco and others to provide more complete responses to the October 2007 request for information.

Upon receiving the draft complaint, Borden inquired what was going on, and in a letter dated September 5, 2008, he advised Wolf that SERI and Devco management had decided to replace him on the SERI board of directors, and would not be renominating him for election at the September 10 meeting.

Wolf filed his original pleading on September 9, 2008, alleging, among other things, that he had been removed because of his disclosure requests, and that mandamus should issue to allow him, as a director of SERI, to assert his ongoing inspection rights.*fn3 Wolf sought a temporary restraining order (TRO) to postpone the annual meeting, once he learned he would not be renominated. At that hearing, Judge Steven Denton discussed Wolf's theory that the filing of his complaint served to fix his rights as of that time. The TRO was denied and the FAP was filed. (The record is unclear whether and when Wolf has been replaced as a director.)

In defendants' demurrer, they chiefly argued the pleading was defective on its face, because a statutorily required element to establish standing to bring an inspection petition was lacking, in that Wolf admitted he was no longer a director, and he therefore had no current duties to perform in that capacity. (§§ 1602, 1603.) Defendants also argued that the only proper respondent was the corporation whose conduct was sought to be compelled, SERI, so that HomeFedCorp. and Borden should be dismissed, for lack of binding allegations against them.

Opposition and reply papers were filed, disputing whether adequate facts were pled and proper parties named.

B. Ruling

After oral argument on December 19, 2008, the trial court sustained the demurrer without leave to amend on all of the allegations concerning a director's right to inspect SERI records. The court first took judicial notice, as requested by Wolf, of the reporter's transcript of the TRO request by Wolf to postpone the annual meeting, at which he was not being renominated to serve as a director. (Evid. Code, § 452.) The court also granted the request by SERI et al. to take judicial notice of Wolf's verification in support of his original petition, which had originally been set for a November 14 hearing. That scheduled hearing apparently went off calendar when Wolf filed his FAP on November 10, 2008. The parties stipulated that the FAP was the operative pleading.*fn4

On the merits, the court expressed its view that the case presents a close call: "However, the court believes the better interpretation of Corp. Code section 1602 is that it required that petitioner plead and prove that he is a current director, both at the time the action is commenced and at the time of the activities proposed to be the subject of a writ of mandamus. Because it is undisputed that Wolf is no longer a director of SERI (Am. Pet. at paragraph 2), the demurrer must be sustained without leave to amend. And, because Wolf has no standing to demand inspection from SERI, it is appropriate to sustain the demurrer as to all defendants . . . ."

In explaining its reasoning that a "bright line" rule of entitlement to inspection rights should be adhered to, the superior court set forth these observations: "First, directors on both sides of similar disputes will know exactly where they stand. Far from 'clogging the courts' as supposed by petitioner [citation], this rule will insure that controversies over inspection rights are brought to the tribunal in a timely fashion. The court notes there was a delay of a year in this case, and the deferral has not been beneficial to either party . . . ."

The superior court then explained its view that the issue of standing is critical in assessing a director's statutory request to review corporate records. The court declined "to defer the standing issue while the parties litigate over whether Wolf was improperly denied re-election to the SERI board. [Citation.] This strikes the court as putting the cart before the horse. If, as respondents assert, it turns out that there was no impropriety in the decision not to re-elect Wolf, it will be clear he has no inspection rights -- but in the meanwhile, both parties will be put to substantial time, energy, effort and expense. Given that it is petitioner's obligation to establish standing [Californians for Disability Rights v. Mervyn's, LLC ...


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