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Meister v. Mensinger

California Court of Appeals, Sixth District

October 6, 2014

ROBERT MEISTER et al., Plaintiffs and Appellants,
DUANE MENSINGER et al., Defendants and Respondents.

Santa Cruz County Superior Court Superior Court No. CIS-CV160779, Hon. Timothy R. Volkmann

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Baker & McKenzie, Tod L. Gamlen, Brian K. Tomkiel and Michael N. Westheimer for Plaintiffs and Appellants.

Sheppard, Mullin, Richter & Hampton Robert J. Stumpf, Jr., and Steven H. Winick for Defendants and Respondents.


Premo, J.

Appellants Robert Meister, Janice Meister and Kathryn Meister (hereafter collectively the Meisters) were preferred shareholders in Sesame Technologies, Inc. (Sesame), a now-dissolved software company. Respondent Duane Mensinger (Mensinger) was Sesame’s chief financial officer and respondent Carl Koppel (Koppel) was its chief executive officer. Sesame experienced financial difficulties, and its assets were sold to a company, respondent ExtraView Corporation (ExtraView), [1] formed and owned by Mensinger. Sesame then dissolved, rendering the Meisters’ preferred shares valueless.

The Meisters brought a civil action against respondents, alleging Mensinger and Koppel colluded to secure a preferential sale of Sesame’s assets and business to ExtraView, thus violating their fiduciary duties to the Meisters. After a lengthy bench trial, the court issued a statement of decision

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in which it found that Mensinger and Koppel had breached their fiduciary duties to the Meisters, but that the Meisters had failed to prove damages. The court subsequently entered judgment in favor of respondents.

On appeal, the Meisters argue: (1) the trial court erred in refusing to frame an appropriate remedy; (2) the trial court erred in conducting an in camera posttrial review of ExtraView’s electronic financial records, rather than ordering an accounting of ExtraView’s net worth and profit/loss status; and (3) during discovery and at the beginning of trial, the trial court abused its discretion by refusing to order production of ExtraView’s electronic financial records in their native format.

We agree the trial court erred in failing to craft a remedy, as well as in conducting its own in camera review of financial documents. We will reverse and remand for a new trial limited to the issue of remedies.

I. Factual and Procedural Background

We recite the facts in the manner most favorable to the judgment and resolve all conflicts and draw all inferences in favor of respondents. (SCI California Funeral Services, Inc. v. Five Bridges Foundation (2012) 203 Cal.App.4th 549, 552-553 [137 Cal.Rptr.3d 693].) Conflicts in the evidence are noted only where pertinent to the issues on appeal. (Id. at p. 553.)

A. Sesames formation and capitalization by the Meisters

Sesame was formed by Koppel and Rick Banister (Banister) in 1999. Koppel and Banister served on Sesame’s board of directors, with Koppel also serving as president and chief executive officer, while Banister was Sesame’s chief financial officer, chief technical officer as well as its corporate secretary until he left the company in September 2002. Banister subsequently resigned from Sesame’s board in October 2002 and Koppel acquired the right to vote his shares. From February 2003 until July 2004, Koppel was Sesame’s sole Board member.

From sometime in 2000 through August 2002, the Meisters invested a total of more than $2.1 million in Sesame. In exchange for these investments, the Meisters received preferred shares, ultimately gaining an ownership interest of approximately 38 percent of the company. The Meisters’ preferred shares gave them no voting rights or role in managing Sesame.

Sesame struggled financially throughout most of its existence. The company was not paying its employees and most other creditors in a consistent manner and owed approximately $485, 000 to the IRS in back payroll taxes

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(including interest and penalties) dating from late 2001. Sesame was not earning enough to meet its monthly expenses, and further reductions in operating expenses were not possible.

The Meisters testified Koppel solicited further investments from them in August 2002 to pay off Sesame’s liabilities, including the back payroll taxes. Koppel advised the Meisters that Sesame was experiencing severe financial problems and that their investment might not be sufficient to satisfy the company’s debts. However, based on Koppel’s representations that their investment would help the company attract more outside financing by reducing its outstanding debt, the Meisters gave Sesame an additional $600, 000.

In conjunction with their final investment in August 2002, the Meisters entered into separate but identical agreements with Sesame setting forth their rights as preferred shareholders. Among other things, the agreements gave the Meisters a right of first refusal, a liquidation preference and a dividend preference.

Upon learning that Sesame was still struggling financially after making this investment in August 2002, the Meisters were upset with Koppel, believing they had been fraudulently induced to make that investment. Accordingly, the Meisters advised Koppel they would not consider further investments without full due diligence, adding, there was “no point in throwing good money after bad.”

B. Mensinger hired as CFO and Sesames continuing financial troubles

In December 2002, Koppel hired Mensinger as Sesame’s chief financial officer. Mensinger became a stockholder in Sesame the following month.

Sesame’s financial problems continued and by February 2003, the company lacked cash to pay various liabilities due by the end of the month, including payroll, payroll taxes, various insurance premiums, rent, etc. Mensinger offered to provide Sesame a $125, 000 loan to pay these expenses in exchange for a promissory note. Koppel was receptive to Mensinger’s offer and testified he hoped Mensinger’s demonstrated willingness to invest in Sesame would reassure the Meisters, possibly persuading them to make a further investment as well.

Throughout February 2003, Koppel contacted Robert Meister (Robert) multiple times regarding Mensinger’s offer, seeking further investment from the Meisters and offering participation in a promissory note on the same

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terms. Robert responded by asking for more information regarding the loan, as well as for more time to consult with an attorney before deciding whether to participate or make further investments.

Robert testified respondents never discussed with him the full amount of the investment they were seeking from him and his family, nor was he ever provided with a copy of the promissory note Sesame actually issued to Mensinger. Instead, he was sent a different draft document on February 7, 2003, but that draft note did not include the terms under which Mensinger’s note would be secured by Sesame’s assets.

In later February 2003, Mensinger loaned Sesame $125, 000 in exchange for a promissory note secured by Sesame’s assets.

C. Negotiations with the IRS

In March 2003, the IRS advised Mensinger it would file a lien on Sesame’s assets unless the back payroll taxes were paid within one month. Within a few days of his meeting with the IRS, Mensinger filed a Uniform Commercial Code statement, perfecting his secured interest (via the promissory note) in Sesame’s assets. In May 2003, Sesame and the IRS agreed to a repayment plan in which Sesame would make monthly payments over the next five years. In exchange, the IRS agreed to not file a lien on Sesame’s assets.

At the time Mensinger made his loan to Sesame, his security interest in the company was subordinate only to a secured loan held by Coast Commercial Bank (Coast). In August 2003, Mensinger began using Sesame’s available cash to pay off Coast’s senior secured loan, rather than paying Sesame’s other obligations, including the interest due on his promissory note. Koppel testified Coast’s loan was repaid because it was threatening to declare a default otherwise. Once the loan was fully repaid by March 2004, Coact released its security interest in Sesame’s assets. As a consequence, Mensinger became Sesame’s senior secured creditor. By the end of April 2004, Mensinger declared his note in default.

D. Sesames continuing efforts to obtain additional funding (2001-2004)

In 2001, Sesame first hired SiVal Advisors (SiVal), an investment banking firm, to help it raise venture capital. In late 2002, SiVal identified several obstacles to Sesame’s ability to attract funding: Sesame’s management problems, its outstanding debt, and the contentious relationship between ...

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