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Mitchell B. Sayegh v. Two Rivers

April 25, 2011

MITCHELL B. SAYEGH, CROSS-COMPLAINANT AND APPELLANT,
v.
TWO RIVERS, ET AL., CROSS-DEFENDANTS AND RESPONDENTS.



(Super. Ct. No. 72934)

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

Sayegh v. Two Rivers CA3

NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

This appeal centers on the actions of shareholders and directors in a small incorporated printing business, Digital Direct, Inc. (DDI). In response to a lawsuit seeking to collect payment of a promissory note, appellant Mitchell B. Sayegh cross-complained against three other shareholders and directors of DDI (respondents Steven Spiller, David Scinto, and Kenneth Meyers) alleging their breach of fiduciary duties. Sayegh appeals the portion of the judgment denying him any relief, claiming (1) the trial court applied the incorrect standard of proof, and (2) the evidence shows a breach of fiduciary duties. We shall affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

In accord with the usual rules on appeal, we state the facts in the manner most favorable to respondents. (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 787.)

Sayegh and his wife Barbara Sayegh started a business known as Information Systems to provide building permit information services. The business later expanded into printing services, including direct mail services done with digital printing. In 1998, the business was incorporated as DDI. The Sayeghs owned shares in the new corporation amounting to over 91 percent of the issued shares. The other issued shares were owned by family members and friends, including Meyers, whose profession is portfolio management. Sayegh was president and chief executive officer (CEO) of DDI. Sayegh was, and continues to be, a member of DDI's board of directors.

In 2001, DDI retained the services of the law firm Spiller·McProud and David Scinto, a certified public accountant, to assist DDI as its business grew. As DDI did not have cash to pay for these services, Spiller·McProud and Scinto agreed to take stock in exchange for their services.

Between 2001 and March of 2003, Scinto and Spiller·McProud received DDI stock for the work they performed on DDI's behalf pursuant to their fee agreements. From the record before us, it appears Sayegh, Spiller, Meyers, and Scinto were all members of DDI's board of directors at least from August 2003.

As of August 2004, Spiller·McProud had 6,000 shares, Scinto had 5,372 shares, and Meyers had 3,928 shares. At the same time, having divorced, Sayegh owned 46,415 shares and Barbara Sayegh owned 46,415 shares. Together, the Sayeghs still owned over 80 percent of DDI's issued and outstanding shares, but individually they each owned less than a majority interest. Barbara Sayegh stopped working for DDI because of her divorce from Sayegh.

In 2004, the business was growing and Sayegh wanted help in running the company. The Sayeghs agreed to sell approximately 29,000 of their shares of stock to Todd Humphrey and Sayegh insisted DDI employ Humphrey to work alongside Sayegh. It was Sayegh's management decision to bring Humphrey into the company to manage DDI as managing director and chairman of the board. Spiller, Meyers, and Scinto had nothing to do with the decision and were only notified after the fact. Humphrey loaned DDI $50,000.

According to Sayegh, Humphrey was more work than help. Humphrey demanded some kind of payoff to leave the company and insisted DDI purchase his stock back. Neither DDI nor Sayegh had the cash to buy Humphrey's shares back. In 2005, Sayegh requested and entered into an agreement with Spiller, Meyers and Scinto whereby the latter agreed to increase their investment in DDI by purchasing Humphrey's stock. In exchange for their agreement to buy Humphrey's stock, Sayegh agreed to enter into a stock voting trust agreement granting Meyers, as trustee, the right to vote Sayegh's stock for two years. As the result of the Humphrey buy-out, Spiller·McProud, Scinto and Meyers owned approximately 38 percent of DDI's issued stock.*fn1

DDI leased a building in Marysville for the conduct of its printing operations. The lease included an option to purchase the building and property, which expired unless it was exercised before September 2005. The board of directors of DDI determined the corporation was not in a financial position to exercise the option for the building and that, in any case, it was not a good business decision for DDI to own the real property. However, rather than let the option expire, Spiller, Meyers, Scinto and Sayegh exercised the option on their own and then offered to let all other shareholders of DDI participate in the purchase in a percentage equal to their ownership of DDI stock. No other shareholder chose to participate. Two Rivers, LLC (Two Rivers) was formed to hold the legal title to the property. Two Rivers is owned by Spiller, Meyers, Scinto and Sayegh, each owning 25 percent. Sayegh executed a promissory note to Spiller·McProud, Meyers and Scinto for $12,500 as part of this transaction. Eventually this note was assigned to Two Rivers.

In March 2006, DDI had cash flow problems and needed additional capitalization. The board of directors met and discussed the matter. Spiller, Meyers, and Scinto agreed to invest an additional $30,000 in exchange for stock at $1 per share. It was further agreed that existing corporate debt owed to Meyers, Spiller·McProud, Scinto, and Sayegh would be converted to shares at $1 per share. This would remove debt from DDI's balance sheet. Sayegh agreed to convert an account receivable owing to him in an amount necessary to permit him to maintain his same percentage of ownership. The percentage of ownership of Spiller·McProud, Meyers, and Scinto increased as a result of these transactions. Combined, they ended up holding a majority interest of 53.29 percent, according to their records. According to Sayegh's records, their combined interest at this point amounted to 45.69 percent.

One of the cash flow problems addressed by the board of directors at its March 2006 meeting was a corporate car that had been provided to Barbara Sayegh when she worked for DDI. She refused to return the car and DDI was forced to continue paying the financing payments, registration and insurance. At the March meeting, the board directed Spiller to take legal action if necessary to recover the vehicle so that it could be sold to reduce ongoing corporate expenditures. At the April 2006 meeting of DDI's board of directors, Barbara Sayegh offered to transfer all of her stock to the corporation in exchange for DDI's conveyance of the car to her free from all liens. The board accepted her offer. Barbara Sayegh returned 31,932.5 shares of stock to the corporation in exchange for the car. All of the remaining shareholders' percentage of ownership of DDI increased as a result of the transaction. Sayegh's interest increased to somewhere in the range of 32 to 39 percent. After the transaction, Spiller·McProud, Meyers, and Scinto separately owned stock interests of between 13 and 22 percent. Together, however, they clearly held a majority interest in DDI.

During 2006 and into 2007, Sayegh pursued the possible sale of DDI to a company called Rapid Solutions Group without obtaining prior authorization from DDI's board of directors. The board was upset and directed Sayegh not to do it again. At some point later, Meyers learned Sayegh had entered into negotiations for the sale of DDI to a company called Metro Mailing Service (also referred to as Metro Print and Mail, hereafter Metro) without prior knowledge of the other board members.

In June 2007, Spiller, Meyers, and Scinto met with Steve Giardina to discuss his possible employment by DDI. The board of directors met to discuss the hiring of Giardina and the terms of his employment at a meeting in August 2007. Sayegh attended the meeting and was the only board member who voted against hiring Giardina. Under the terms of Giardina's employment, he would be president/CEO of DDI and Sayegh would work under his supervision.

Sayegh refused to work under the direction of Giardina and resigned his DDI employee position in August 2007. Sayegh remained a shareholder and a member of DDI's board of directors. After he left DDI's employment, but while he was still a director, Sayegh emailed one of DDI's newspaper customers and told the customer that he could call and educate them on new opportunities. Shortly thereafter, the customer dropped a portion of its business with DDI and signed up with Sayegh's new employer - Metro. Sayegh failed to give DDI an opportunity to expand its business with the customer and as a result of his actions, DDI lost profits in excess of $35,000.

Two Rivers filed a complaint against Sayegh for failing to pay the $12,500 promissory note. Sayegh cross-complained against Two Rivers, DDI, Spiller, Meyers, and Scinto. In his cross-complaint, he alleged that Spiller, Meyers, and Scinto committed fraud and breached their fiduciary duties with regard to their alleged roles with DDI. Sayegh complained that their actions diluted his shareholder interest in DDI and eventually forced him out of the business. The cross-complaint contained causes of action for (1) breach of fiduciary duty/constructive fraud as a shareholder derivative suit, (2) breach of fiduciary duty/constructive fraud as Sayegh's individual action, (3) conspiracy to defraud, (4) cancellation of stock certificates, and (5) declaratory relief. DDI then cross-complained against Sayegh for breach of his fiduciary duties and his failure to pay under another promissory note. The latter claim was subsequently severed.

After a court trial, judgment in the amount of $16,880.54 was entered in favor of Two Rivers and against Sayegh on the complaint. The judgment directed that Sayegh take nothing on his cross-complaint. Judgment in the amount of $35,379.21 was ...


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