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Thomas Hubbard v. Phil's Bbq of Point Loma

December 14, 2012

THOMAS HUBBARD,
PLAINTIFF,
v.
PHIL'S BBQ OF POINT LOMA, INC., A CALIFORNIA CORPORATION; PHILLIP C. PACE AND JEFFREY A. LOYA,
DEFENDANTS.



The opinion of the court was delivered by: Honorable Larry Alan Burns United States District Judge

ORDER GRANTING RENEWED MOTION TO FILE DOCUMENTS UNDER SEAL; ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS; AND ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

Defendants Phillip Pace and Jeffrey Loya filed a motion to dismiss Plaintiff Thomas Hubbard's complaint. (Docket no. 127), as did Phil's BBQ of Point Loma, Inc. (Docket no. 128).*fn1 Hubbard in turn filed a motion for summary judgment, which is now fully briefed. Defendants Pace and Loya also renewed their ex parte motion to file the declaration of John Cheng, C.P.A. (accountant for Phil's) under seal.

Hubbard's two remaining claims are that Phil's breached its consulting agreement with him by failing to pay him after 2008 even though he had performed his consulting duties, and that all Defendants breached the shareholder agreement with Hubbard by failing to issue required distributions of corporate profits and distributions to reimburse him for taxes owed.

Sealing

The Court previously denied Pace's and Loya's unopposed application to file documents under seal, noting that it did not address the factors the Court must consider before ordering potentially case-dispositive documents sealed. They then renewed their motion, citing authority and providing reasons. (Docket no. 144.)

The Court begins with the strong presumption that Cheng's declaration should be publicly accessible. See Kamakana v. City and Cnty. of Honolulu, 447 F.3d 1172, 1178 (9th Cir.2006) (quoting Foltz v. State Farm Mut. Auto. Ins. Co., 331 F.3d 1122, 1135 (9th Cir.2003)). As the application points out, however, the document at issue relates to the corporation's finances. The public at large has little interest in the information it contains. As the application points out, however, there is a high probability that disclosure of financial details such as amounts of distributions made to shareholders, would harm the corporation's business relationships and reveals Pace's and Loya's own personal financial information. Disclosure of this information to creditors or others with whom Defendants do business would unfairly burden Defendants and harm their business interests, and would give competitors an unfair advantage. The Court in making its rulings can discuss the information at a high level of generality without harming Defendants' business interests, while at the same time adequately informing the public of the reasons for the Court's rulings. The Court therefore finds the standard for sealing is met here.

Hubbard's Remaining Claims

Shareholder Distributions

Both motions to dismiss argue the shareholder agreement's provision concerning distributions is unenforceable as a matter of law, and that the relief Hubbard seeks was subsumed within the petition for corporate dissolution. Pace and Loya's motion to dismiss also attacks the content of Hubbard's pleading in the complaint. In opposition, Hubbard argues that he can still prevail under a different theory. In essence, his argument is that because Defendants agreed to reimburse him for taxes and failed to do so, they are liable.

Even accepting that Hubbard has not pleaded his claim under the right theory, it is the type of claim countenanced by state law. In essence he is bringing a contract or quasi-contract claim, arguing that he was promised tax reimbursement, that he lived up to his end of the bargain, and that Defendants failed to pay him all they owed. Assuming that is what happened, the Court, sitting in equity, is not prepared to allow Defendants to receive the benefits of the bargain without living up to their obligations; Hubbard would be entitled to relief under some theory.

But Defendants also argue that Hubbard's relief has been subsumed within the relief provided him as a result of the valuation, which occurred earlier in this case. Through that process, Phil's was valued and Hubbard received a cash payment representing his 10% share in the corporation.*fn2 In other words, Hubbard should not recover twice.

This is very likely a good defense, although the information provided is not quite sufficient to support judgment as a matter of law. Accepting Hubbard's version of the facts, see Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337--38 (9th Cir.1996) (when ruling on motion to dismiss, Court accepts all factual allegations as true, and draws all reasonable inferences from them in favor of the non-moving party), Phil's made no distributions for tax reimbursement to any of the shareholders from 2008 onward. This means that, because Hubbard owned 10%, he might have been entitled to reimbursement for his taxes on 10% of the S-corporation's income. Pace and Loya, as the remaining shareholders, would have been entitled to reimbursement for their taxes on the remaining 90% of the income.*fn3

The result of shareholders not getting reimbursed was that Phil's got to keep that money, and Phil's value went up in proportion to the shareholders' forgone reimbursements.*fn4 In this respect the forgone tax reimbursements might be compared to paid-in capital. Hubbard, as a 10% shareholder, would have seen a corresponding rise in the value of his interest in Phil's, and this increase in value would have been pro rata for each of the shareholders. Ultimately, when Hubbard was paid for his interest in Phil's, he realized the gain. Had he and the other shareholders received reimbursements, the value of Phil's would have been lower than it ultimately was at the time of valuation. In short, even assuming Hubbard lost his pro rata share of the tax reimbursements, it would appear he was paid back, pro rata, when his shares in Phil's were cashed out.

This analysis notwithstanding, Hubbard might theoretically be entitled to some reimbursement if he was in a higher tax bracket than Pace and Loya. The pleadings, however, rule out this possibility. First, Hubbard's allegations regarding the profits Phil's made in tax years 2008 through 2010 make clear the attributed profits from Phil's alone were enough to put both Pace and Loya in the top tax bracket for those years. (See, e.g., Mot. for Summ. J. at 17:16--18:1.) Therefore Hubbard was either in the same bracket, or in a lower one, at least for those years, and would not have been entitled to reimbursement at a higher rate than the others. Second, ยง 13.6(e) and (f) of the shareholder agreement provide that ...


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