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Maureen Correia Maughan, Individually and As Trustee, Etc. v. Maurice P. Correia

October 24, 2012


APPEAL from a judgment of the Superior Court of San Diego County, Judith F. Hayes, Judge. (Super. Ct. No. 37-2008-00081474- CU-FR-CTL)

The opinion of the court was delivered by: Benke, J.


Affirmed as modified.


This is a dispute between a sister and brother over their respective holdings in a family run corporation. Royal Hospitality, Inc. (RHI), is an S corporation owned entirely by six siblings of the Correia family.*fn2 RHI's sole business is the operation of a hotel in San Diego that had been previously owned and operated by plaintiff Maureen Correia Maughan (Maureen), her former husband Ben Maughan (Ben) and her parents Mary and Maurice F. Correia (the Correias).

Defendant Maurice P. Correia (Maurice), Maureen's brother, formed RHI for the specific purpose of purchasing the hotel after the Maughans and the Correias became delinquent on their loan payments and the bank foreclosed. After that purchase, Maureen and Maurice became enmeshed in a dispute regarding how ownership of RHI ultimately would be apportioned among them, their parents and their other siblings. Maurice maintained that he was initially, and for a period of several years would continue to be, the sole owner of RHI, but that after a certain period of time, Maureen and the other family members would be able to exchange the value of their capital contributions to RHI for equity in the company. Maureen insisted that she and Ben, Maurice and the Correias had agreed that each would be one-third owners of RHI, without regard to the amount of their respective capital contributions, that Maurice would be president and the sole owner "on title" after the purchase of RHI, and that shares of RHI would later be distributed to the Maughans and the Correias according to their one-third shares.

This lawsuit arose out of an agreement Maureen alleged she and Maurice entered into for the purpose of resolving their differences regarding the ownership of RHI. Maureen alleged that she and Maurice entered into an oral agreement (the stock option agreement) whereby Maurice promised to allow Maureen to exercise an option to purchase up to a one-third share of RHI, in exchange for Maureen's promise to relinquish any claim she might have to a different allocation of RHI shares. When Maureen tried to exercise that option, Maurice refused to allow her to do so. Maurice disputed that the stock option agreement existed.

In 2008, Maureen sued Maurice, seeking, among other things, to enforce the stock option agreement. After a bench trial, the trial court issued a statement of decision in which it concluded that the oral stock option agreement was valid and binding, and that Maurice had breached that agreement when he refused to allow Maureen to exercise her option to purchase an additional minority interest in RHI. The trial court awarded Maureen $1,320,959 in damages, representing the difference between the value of the minority interest Maureen would have acquired absent Maurice's breach, and the purchase price for that interest specified in the stock option agreement.

On appeal, Maurice contends that the trial court's decision is unsupported by substantial evidence. He also argues that Maureen failed to prove that he (as opposed to RHI) was a party to the stock option agreement, and, further, that Maureen should have been judicially estopped from enforcing the stock option agreement, because the existence of that agreement is fundamentally inconsistent with Maureen's prior litigation position regarding her alleged one-third ownership of RHI. Alternatively, Maurice contends that Maureen's damages should be reduced due to the trial court's legal error in calculating the value of the minority interest Maureen was entitled to acquire under the stock option agreement.

We conclude that substantial evidence supports the trial court's finding that the parties entered into a valid and binding oral agreement. Because Maurice failed to raise his other challenges to the enforceability of the stock option agreement in the trial court, we hold they are not properly raised on appeal for the first time, although we believe those arguments to be without merit in any event. We agree with Maurice, however, that the trial court incorrectly calculated Maureen's minority interest in RHI for purposes of determining her damages, and therefore we reduce the total damages award to $1,126,159. We affirm the judgment as so modified.


A. The Origins of the Parties' Dispute over Ownership of RHI

In 1988, the Correias, Maureen and Ben purchased a hotel in San Diego formerly known as the Sands Hotel, which was later converted to a Ramada Inn. By mid-1982, the hotel was encumbered with three loans, the first provided by Girard Savings Bank, the second by Peninsula Bank and the third by an individual named Albert R. LeGaye. The business was not profitable, and the Maughans and Correias fell behind on their payments to Girard Savings Bank. That bank foreclosed on the property in December 1992, and Peninsula Bank purchased it at the foreclosure sale. The sale included only the real estate; Peninsula Bank did not obtain title to the personal property located at the hotel, which remained under the ownership of the Maughans and the Correias. Notwithstanding the foreclosure, the Maughans and the Correias continued to operate the hotel under an agreement with Peninsula Bank.

Maureen and Maurice approached Peninsula Bank for the purpose of discussing how the Correia family could repurchase the hotel. The bank made it clear that it could not sell the hotel to the same persons who had defaulted on the prior loan. However, the bank indicated that it would be willing to sell the hotel to Maurice, who had not been involved with the prior operation of the hotel, or to a corporation. Accordingly, with the family's agreement, Maurice, who is an accountant, formed RHI and handled the purchase of the hotel in December 1992.

Maureen alleged that at the time of RHI's purchase, she, Ben, her parents and Maurice had agreed that the hotel would be jointly owned by Maurice, the Maughans and the Correias, with each holding a one-third interest in the business, regardless of the amount of money each of them had personally invested in the hotel (the one-third ownership agreement). It was agreed, Maureen testified, that Maurice would be president of RHI and would initially be the "title" owner, and that stock would issue to the rest of the family at some point in the future. She thought she and the others would be put on title later. Throughout the period of time leading up to the stock option agreement, Maureen continued to believe that she was rightfully entitled to a one-third share of RHI without having to pay for it, pursuant to the one-third ownership agreement. Maurice denied any such agreement had been reached. He testified that he had been the sole shareholder from 1992 to 1997, and had told Maureen and the other family members that their personal monetary contributions to the hotel would be considered loans, and that after a period of five years from the purchase date, they could exchange that debt for a proportional ownership share in the hotel, up to one-third.

B. The LeGaye Litigation

In 1994 and 1995, the Correias, RHI, the Maughans and Peninsula Bank were involved in litigation against Sands Hotel Associates and LeGaye, the former owners of the hotel (the LeGaye litigation). In that lawsuit, LeGaye filed a cross-complaint alleging that the 1992 foreclosure sale was a sham designed to extinguish his junior lien on the property, and that the Maughans and the Correias were still owners of the hotel after the foreclosure. In connection with summary judgment proceedings in that case, Maureen and Mary submitted declarations under oath in which they denied holding any ownership interest in the hotel or RHI after the foreclosure. Based on these declarations, the court granted summary judgment in favor of the Maughans and the Correias, finding that they had not defrauded LeGaye and did not retain any ownership interest in the property.

Maureen testified at trial that Maurice had asked her to sign the declaration so the family could keep the hotel, and despite the one-third ownership agreement, she believed those declarations to be true as she had not yet received any stock in RHI and never entered into any agreement with Peninsula Bank to have the hotel transferred back to her or Ben. According to testimony Maurice presented at trial, Maureen never mentioned the alleged one-third ownership agreement to the attorney who represented her in the LeGaye litigation and who prepared her declaration.

C. The Stock Option Agreement

After the Correias passed away, Maurice informed his siblings in early 1997 that he planned to issue RHI stock to each of them according to schedules he had prepared purporting to calculate each family member's "cash" contributions to RHI since 1992. According to these calculations, Maurice would own approximately 74 percent of RHI, the Maughans 7 percent, and the other siblings--Mark, Michelle, Mardel and Martin--together would acquire approximately 19 percent as heirs of the Correias.

The Maughans disputed these allocations. In particular, Maureen raised with the Maurice the following issues: (1) whether the allocation should instead be based on the one-third ownership agreement; and (2) whether, if the allocation should be based on personal contributions, Maurice should take into account, among other things, the value of the personal property that the Correias and the Maughans had purchased for the hotel, the value of the Ramada franchise Maureen had helped to secure, and the fact that Maureen had worked as general manager for the hotel, frequently for no salary or below-market compensation. Maurice insisted, however, that he would not issue stock based on "intangibles"--which, according to Maurice, included the value of the personal property and Maureen's "sweat equity," but also included his own efforts in keeping the hotel afloat during lean years, and the fact that he personally guaranteed loans to the hotel. For almost a year, the parties continued to discuss these issues.

Finally, in October 1997, Maurice made a proposal to Maureen in an effort to resolve this dispute. "[T]he best thing for everyone," he stated, was to "pay me [Maurice] off . . . to reduce my ownership percentage." Specifically, he proposed alternative means by which Maureen could acquire up to a one-third interest in the hotel. Maurice provided Maureen in late 2007 with schedules and ownership percentages, demonstrating how her purchase of a total one-third share would decrease both Maurice's cash contributions, or "loans," to the hotel, and his corresponding interest in RHI. Maureen understood that under these proposals she would be paying Maurice for her interest and obtaining the stock from him.

By early 1998, the parties entered orally into the stock option agreement. Maurice prepared a document memorializing that pursuant to this agreement, the Maughans had 10 years to exercise their option to purchase up to a one-third interest in RHI, at the price of $262,800 plus two points over the prime interest rate. In exchange, the Maughans understood that they were relinquishing any claim they might have had that the shares of RHI should be differently allocated--specifically, according to the one-third arrangement they believed Maurice had agreed to after the purchase of the hotel in 1992.

The document setting forth these terms stated that it was an agreement "between Ben & Maureen A. Maughan (Maughan) and Royal Hospitality Inc. (The Corporation) which gives Maureen the option to purchase up to 33.33% of the stock in the Corporation." Nevertheless, Maureen testified that her agreement was with Maurice. The document then recited the "events leading up to the stock option," including that Maurice "owned 100% of the Corporation" from its inception, and that the Maughans made loans to RHI thereafter. It further stated that the Maughans, Maurice and the estate of the Correias had made loans to RHI, which under the stock option agreement would be exchanged for shares in the corporation. Maureen testified that by paying Maurice the option price, she understood that she effectively was reimbursing him for the "loans" he had made to RHI, and obtaining the stock from him. Ben also testified at his deposition that he understood the agreement involved paying Maurice to buy a portion of his stock. Their understanding was consistent with schedules Maurice had prepared in February 1998, showing that if Maureen had exercised the option at that time for $267,200, that sum would have been treated as a deduction from Maurice's contributions to the hotel and added to the Maughans' contributions, adjusting their respective RHI ownership percentages accordingly.

After detailing the option period and the price, the document memorializing the stock option agreement provided signature lines for Maurice, Maureen and Ben, under the statement "By signing below I certify that, to the best of my knowledge and belief, . . . the information set forth in this statement is true, complete and correct." The parties, however, never signed the document. According to Maureen, she and her husband orally agreed to the stock option agreement, but she did not sign the written document because the stock option agreement was one between family members, she and Maurice had been "very close," and Maurice did not ask her to sign it. Ben similarly testified that "[n]o one asked us to sign it." Both Maureen and Ben testified that they did not agree with the recitals of the history of the parties' respective ownership positions. Nevertheless, they orally agreed to the stock purchase option arrangement in order to put to rest their dispute with Maurice regarding ownership of RHI.

For his part, Maurice testified at trial that he thought there was no agreement because Maureen had told him she would never have the money to purchase the additional shares. For that reason, Maurice testified, he believed the stock option agreement was "a dead issue." Maureen, however, testified that her inability to pay for the entire one-third interest at that time explained why the agreement gave her 10 years to exercise the option.

D. The Parties' Subsequent Conduct and Maurice's Breach of the Stock Option Agreement

Subsequent to entering into the oral stock option agreement, the parties conducted themselves in a manner the trial court found to be consistent with the existence of that agreement. For example, Maureen no longer contested Maurice's stock allocations. Maureen never spoke to Maurice about the stock option agreement after 1998 until 2005. In 1998, Maurice issued stock to each member of the family in accordance with the allocations he had developed in connection with the stock option agreement. Distributions of profits were made to all the siblings according to the allocations Maurice had calculated in connection with the stock option agreement, and Maureen did not contest those distributions. Additionally, Maurice explained to Maureen how incremental purchases of stock under the agreement could be treated as a gift for tax purposes. Finally, tax returns and K-1 schedules were prepared according to those same ownership allocations.

Two issues left unresolved by the stock option agreement concerned the personal property at the hotel and the value of Maureen's "sweat equity" contributions to the hotel. Maurice testified that the stock option agreement did not give credit for anything but a cash payment. In June 1998, Maureen told Maurice that she had been looking into how she and the Correias estate could obtain some tax benefit from their investment in the personal property of the hotel, since no credit for that property was given in Maurice's allocation of stock in RHI. Maureen also spoke with another accountant about possible tax benefits to be realized from ownership of the personal property. Maureen testified that these discussions had nothing to do with the stock option agreement or the allocations of RHI stock thereunder. Maurice testified that he had no personal interest in this matter, since he did not own the personal property and the Maughans and heirs of the Correias could do whatever they deemed appropriate in that regard.

Additionally, in June 1998, Maurice negotiated with Maureen a bonus program to recognize the personal services she provided the hotel as general manager. The bonus was based on her future performance, and did not include compensation prior to 1998 or relate to the stock option agreement.

Finally, in 1999, Maurice proposed to Maureen a deferred compensation plan pursuant to which Maureen could acquire a percentage of the equity in RHI that would be realized upon a future sale of the hotel. Maureen testified that Maurice told her he was concerned she would never have the money to purchase her one-third interest, and "it would be a shame that [Maureen did] not get anything." The proposed plan, according to Maureen, would "reward[] [her] for [her] efforts." Maurice testified that the proposed plan was meant to be in lieu of, not in addition to, the stock option agreement. For example, Maurice sent Maureen an e-mail in 2006 stating that the deferred compensation plan had always been intended "to replace any option to purchase stock because you and Ben did not have the money to buy your interest." Maurice testified that he could not responsibly do both the stock option agreement and the deferred compensation agreement. In contrast, Maureen testified that Maurice never told her at the time that the proposed deferred compensation agreement would supplant the stock option agreement.

The draft deferred compensation agreement stated that it was intended in part to resolve any outstanding claims Maureen might have regarding her compensation as general manager of the hotel, as well as remaining claims she might have as to ownership of RHI. Maurice testified that by the latter, he was referring to the unresolved personal property ...

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