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Applied Medical Corp. v. Thomas

California Court of Appeals, First District, Fifth Division

April 12, 2017

T. PETER THOMAS et al., Defendants and Respondents.


         Superior Court of San Mateo County, No. CIV519758, Hon. Elizabeth Lee, Judge.

          Jones Day, Nathaniel P. Garrett, Richard J. Grabowski, and Meredith L. Williams, for Plaintiff and Appellant.

          Keker & Van Ness, Susan J. Harriman, Matthew Werdegar, Kate E. Lazarus, Sophie Hood, for Defendants and Respondents.

          SIMONS, J.

         After defendant and respondent T. Peter Thomas (Thomas”), a member of the Board of Directors of plaintiff and appellant Applied Medical Corporation (“Applied”), was removed from the Board, Applied exercised its right to repurchase shares of its stock issued to Thomas as part of certain stock incentive plans. Thomas objected to the repurchase price, and in August 2012 Applied filed the instant lawsuit. In June, 2015, the trial court granted summary judgment against Applied, which timely appealed. We affirm as to Applied's fraud-based claims, but reverse as to Applied's claims based on breach of contract and conversion. In the published portion of this opinion we address two issues. First, the trial court erred in determining Applied's conversion claim failed. We conclude such a claim may be based on either ownership or the right topossession at the time of conversion. Second, we conclude the trial court correctly ruled Applied's fraud claims were barred by the applicable statute of limitations. We reject Applied's argument that those claims, first alleged in 2014, were timely under either the discovery rule or the relation back doctrine.

         Factual and Procedural Background[1]

         Applied is a provider of specialty medical products for surgical and minimally invasive procedures. Defendants and respondents Reid W. Dennis (“Dennis”) and Thomas are general partners of Institutional Venture Management IV, L. P. (“IVM”). IVM is the general partner of defendant and respondent Institutional Venture Partners IV, L.P. (“IVP”), a venture-capital investment limited partnership. From 1988 to 1992, IVP made substantial financial investments in Applied. In 1988, Thomas joined Applied's Board of Directors (“Board”).

         In 1998 the Board approved Applied's 1998 Stock Incentive Plan (the “1998 Plan”) regarding stock option awards. In 2003, the Board approved a stock option program proposed by Thomas for individuals serving as outside directors on the Board. Between 2003 and 2008, Thomas received five stock option grants pursuant to the 1998 Plan, and between 2009 and 2010, he received two stock option grants pursuant to Applied's Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”).

         The 1998 Plan included a provision giving Applied the unilateral right to repurchase shares upon termination of a director's service. The agreements corresponding to Thomas's grants under the 1998 Plan stated Applied would “have the right (but not the obligation) to repurchase... any or all of the Shares acquired pursuant to the exercise” of the stock option upon termination of the optionee's service. Thomas acknowledged he, upon exercise of the repurchase right, “shall be obligated to sell his... Shares to the Company.” Thomas also represented the options were “being acquired... for [his] personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof.”

         The 2008 Plan also gave Applied the right to repurchase shares from Thomas, and, in accepting stock option grants under the 2008 Plan, Thomas again acknowledged his obligation to sell his shares to Applied upon exercise of the company's repurchase right. Thomas also represented any shares would be acquired with his “own funds for investment for an indefinite period for your account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, ” and that he had no “contract, understanding or agreement with any person to sell, transfer, or grant participation” to his options.

         The IVM partners had an oral agreement regarding stock options obtained due to a partner's service on the board of directors of a company in which IVP had invested, like Applied. Under that agreement, the IVM partners provide the funds to purchase stock and, when the stock is sold, the proceeds are shared among the partners.[2]

         According to Applied, Thomas did not disclose the stock-sharing agreement. Applied CEO Said Hilal (“Hilal”) learned of the possibility that Thomas would share stock proceeds for the first time shortly before a Board meeting on or around February 24, 2011.[3] Thomas said he “might share” the proceeds of the stock options awarded to him with his partners at IVP. Hilal was “surprised” by Thomas's suggestion because he considered it “completely contrary to the reason that the Company adopted a stock option program for directors in the first place - to compensate directors for their individual service.” Thomas told Hilal he had “misunderstood;” Thomas said he was only “thinking about sharing his stock options” and he had not actually decided to do so. Thomas averred in his declaration that he “voluntarily disclosed the proceeds-sharing arrangement” to Hilal at the February 2011 Board meeting.

         Applied raised concerns about the stock-sharing agreement in a December 1, 2011 e-mail from Applied's general counsel to Thomas. He wrote, “Said [Hilal] mentioned a discussion during the Applied Board meeting in February [2011], regarding the Applied stock options granted to you over the years. Our understanding is that you have an arrangement with IVP by which your Applied stock options are shared with your partners. You will recall that Said was surprised to learn of the arrangement, which was not known to Applied or the board. We believe the arrangement is inconsistent with the purpose of Applied's outside Director option program - to provide a form of compensation and incentive to the directors - for their service as directors. During that discussion with Said, you agreed to the cancellation of the options.” Thomas replied that same day, stating “The stock options that I've earned over the years are not inconsistent with what your purpose [is.] It is to reward me. I own the shares and the shares are never going to be in any name but my name. Whether I share some of the proceeds of the sale in the future is my business and my sharing of the information with Said that I would probably share the benefits is for information only. I have no intention of ever putting any of those shares in the name of anybody but me. [¶] I also NEVER told Said that it was okay to cancel any of my shares and definitely am not willing to have those shares cancelled.”

         In January 2012, Thomas was voted off the Applied Board, apparently due to an alleged conflict of interest relating to IVP's efforts to compel Applied into an initial public offering in mid-2011.

         On February 1, 2012, Thomas exercised his stock options and purchased 37, 950 shares of Applied stock. On February 16, Applied confirmed the purchase and issued a stock certificate in Thomas's name. At the same time, Applied notified Thomas it was exercising its rights under the stock-option agreements to repurchase the shares. Applied stated the “Fair Market Value” of the shares was $13.05 each, and the company made available a check in the amount of $495, 247.50. The 1998 and 2008 Plans set the repurchase price as the “Fair Market Value” of the shares, as determined “in good faith” by the Applied Board's Compensation Committee. Both plans state the determination “shall be conclusive and binding.” The $13.05 purchase price for Thomas's shares was based on a valuation from a third-party firm that had performed valuations of Applied's stock since 2004.

         On March 6, 2012, an attorney for IVP responded on behalf of Thomas to Applied's repurchase notification. The letter stated that Thomas “disputes Applied's fair market value determination of $13.05, ” explaining the amount was far less than a binding third party offer for the stock and a third party valuation obtained by IVP. The letter requested that Applied “either rescind [the] offer to repurchase Mr. Thomas' option shares and deliver the shares to him, or, in light of the third party offer received by Mr. Thomas and the independent valuations outlined above, make an offer at a price reflecting an actual good faith fair market value.”

         Outside counsel for Applied responded by letter on April 20, 2012, stating, among other things, that the stock option agreements “contemplate that fair market value is determined through Applied's usual valuation process.” The letter enclosed a check for $495, 247.50 and warned that if Thomas did not return his “duly executed stock powers by April 27, ” Applied would consider him “to be in breach of his obligations under the stock option agreements.” Applied's general counsel wrote to Thomas's counsel on June 27 warning that Thomas “remains in breach of his obligations” under the stock option agreements.

         Applied filed the present lawsuit against Thomas and IVP on August 31, 2012. Applied asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, conversion, aiding and abetting conversion, and declaratory relief. Broadly speaking, the claims were based on Thomas's alleged refusal to transfer his shares to Applied after the company exercised its repurchase rights.

         On or about September 6, 2012, Thomas cashed Applied's check for $495, 247.50 and deposited the proceeds into his personal checking account. On September 10, an attorney for Thomas sent Applied an executed stock-assignment form for Thomas's 37, 950 shares, signed by Thomas on September 5, while reserving the right to continue to dispute the valuation.

         On June 24, 2014, Applied moved for leave to file a Second Amended Complaint (“SAC”). The SAC was filed on August 15. The claims in the SAC, the operative complaint in the present case, are as follows: breach of contract (first cause of action; against Thomas); breach of the implied covenant of good faith and fair dealing (second cause of action; against Thomas);[4] conversion (third cause of action; against Thomas and IVP); aiding and abetting conversion (fourth cause of action; against IVP); fraudulent concealment (fifth cause of action; against Thomas and IVP); aiding and abetting fraudulent concealment (sixth cause of action; against Dennis); breach of fiduciary duty (seventh cause of action; against Thomas); and declaratory relief (eighth cause of action; against Thomas). Broadly speaking, the fraud-based claims are based on Thomas's failure to disclose the stock-sharing agreement.

         In December 2014, respondents filed a motion for summary judgment or, in the alternative, summary adjudication. In April 2015, Applied moved for leave to file a Third Amended Complaint (“TAC”) adding, among other things, new theories of liability based on the language of an IVM partnership agreement obtained in discovery. The trial court continued the hearing on the motion for leave to file the TAC until after the hearing on the motion for summary judgment.

         On June 5, 2015, the trial court granted respondents' motion for summary judgment. The motion for leave to file the TAC was denied “in light of” the ruling on the summary judgment motion. This appeal followed.


         The trial court granted summary judgment to respondents on all of Applied's causes of action. We conclude the court erred as to the breach of contract, conversion, and aiding and abetting conversion causes of action, but the court properly granted summary judgment as to Applied's fraud-based causes of action (fraudulent concealment, aiding and abetting fraudulent concealment, and breach of fiduciary duty) on statute of limitations grounds.[5]

         “A trial court properly grants a motion for summary judgment only if no issues of triable fact appear and the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c); see also id., § 437c, subd. (f) [summary adjudication of issues].) The moving party bears the burden of showing the court that the plaintiff ‘has not established, and cannot reasonably expect to establish, a prima facie case....' [Citation.] On appeal from the granting of a motion for summary judgment, we examine the record de novo, liberally construing the evidence in support of the party opposing summary judgment and resolving doubts concerning the evidence in favor of that party.” (Miller, supra, 36 Cal.4th at p. 460.) “We can find a triable issue of material fact ‘if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.' ” (King v. United Parcel Service, Inc. (2007) 152 Cal.App.4th 426, 433.)

         I. Applied's Breach of Contract Claim

         Applied's first cause of action for breach of contract is based on Thomas's alleged delay in returning an executed stock-assignment form transferring his shares of stock back to Applied.[6] The claim is based on provisions in his stock option agreements giving Applied the right to repurchase his shares and obligating Thomas to “sell his... Shares to the Company” upon such repurchase. The trial court concluded respondents were entitled to summary adjudication of the claim because Thomas did not breach his stock option agreements and Applied suffered no cognizable harm due to any breach. The court erred.

         A. There is a Disputed Issue of Fact Whether Thomas Breached an Implied Reasonableness Requirement in the Contract

         In concluding Applied's breach of contract claim fails as a matter of law, the trial court reasoned that Thomas's stock option agreements “did not impose any deadline on Thomas'[s] return of paperwork transferring ownership of the shares” to Applied. However, as Applied points out, section 1657 of the Civil Code provides that if a contract does not specify the time by which an act is “required to be performed, a reasonable time is allowed.” (See also Kotler v. PacifiCare of California (2005) 126 Cal.App.4th 950, 956 [“The obligations of a contract... must be performed either at a time the contract specifies or within a reasonable time.”]; Palmquist v. Palmquist (1963) 212 Cal.App.2d 322, 331 [where a contract is “silent as to the time of delivery a reasonable time for performance must be implied”].) The section also provides, “[i]f the act is in its nature capable of being done instantly--as, for example, if it consists in the payment of money only--it must be performed immediately upon the thing to be done being exactly ascertained.” (Civ. Code § 1657.)

         Respondents argue the trial court correctly concluded the stock option agreements set no deadline for returning stock transfer paperwork. They point to deposition testimony of Applied's Chief Accounting Officer, who was designated by Applied as the person most qualified to testify regarding Applied's “understanding of the terms and conditions of” and “management or administration of the 1998 Stock Plan, the 2008 Stock Plan, and the Thomas stock option agreements.” She acknowledged, “the company's repurchase right imposes certain time constraints on the company, but it does not impose any time constraints on the optionee.” However, that testimony does not unequivocally disclaim the implied requirement of reasonableness in Civil Code section 1657; the testimony may mean only that the agreements do not expressly specify a time for performance.[7] Moreover, respondents cite no authority such testimony takes precedence over “the general principle of contract law articulated in Civil Code section 1657.” (Wagner Construction Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 30 (Wagner).)

         Respondents also argue Applied forfeited any argument based on the “reasonable time” provision in Civil Code section 1657, because Applied argued to the trial court that the section required Thomas to deliver the form “immediately” after receiving notice of Applied's exercise of its repurchase right. It is true that Applied cited Civil Code section 1657 and argued below, “[b]ecause Thomas could have instantly returned title of his shares to Applied Medical by signing the stock power sent along with the repurchase price, his obligation to perform was immediate.” But Applied's argument continued, “Whether a promisor's performance is sufficiently ‘immediate'-let alone ‘reasonable'-is a ‘question of fact to be determined by the trier of fact.' [Citation.] In the seven-month period between February 16, 2012, when Applied Medical exercised its undisputed repurchase right, and September 10, 2012, when Thomas finally returned the stock power requested by the Company subject to a wholesale reservation of rights, Thomas failed to respond to two separate demand letters from the Company insisting that he return the shares. [Citation.] Thomas knew that Applied Medical had a contractual right to repurchase his shares. [Citation.] Yet Defendants have no explanation for why they waited seven months to return the stock powers. [Citation.] Defendants do not even attempt to argue that that delay was sufficiently immediate or even reasonable, thereby waiving the argument. [Citation.] Accordingly, summary judgment is likewise foreclosed on this ground.” Applied also argued Thomas's delay was “not reasonable” at the hearing on the summary judgment motion. Thus, Applied did argue below that Thomas failed to comply in a reasonable time.

         On the merits, respondents do not contend the seven-month period between Applied's repurchase and Thomas's return of an executed stock assignment form was reasonable. But they do contend the period for return commenced “when Thomas accepted Applied's repurchase payment” as opposed to “when Applied notified Thomas that it was exercising its repurchase right.” That distinction does not aid respondents' cause. If Thomas had a reasonable time to comply with his obligations after Applied exercised its right to repurchase the stock, that timeline also applied to Thomas's acceptance of Applied's payment. If seven months was an unreasonable time to wait before returning the stock assignment form, it likely was also an unreasonable time for Thomas to wait before accepting Applied's payment. In any event, the contract language is not susceptible to respondents' interpretation. The agreements state, “Upon exercise of the Repurchase Right, the Optionee shall be obligated to sell his or her Shares to the Company....” or “Upon exercise of the Repurchase Right, you shall be obligated to sell your Shares to the Company....” Thus, Thomas's obligations were triggered by Applied's exercise of its rights, not when Thomas decided to accept Applied's payment.

         We conclude whether Thomas complied with his contractual obligations is a disputed question of fact. (Wagner, supra, 41 Cal.4th at p. 30 [“ ‘[W]hat constitutes a reasonable time is a question of fact, depending upon the situation of the parties, the nature of the transaction, and the facts of the particular case.' [Citation.]”]; accord TheMcCaffrey Group, Inc. v. Superior Court (2014) 224 Cal.App.4th ...

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