United States District Court, N.D. California
KELLEEN F. SULLIVAN, et al., Plaintiffs,
STEPHEN A. FINN, et al., Defendants.
ORDER DISMISSING COMPLAINT WITH LEAVE TO AMEND RE:
DKT. NO. 50
William H. Orrick United States District Judge.
and plaintiffs Kelleen and Ross Sullivan bring claims against
Kelleen's ex-husband Stephen Finn,  alleging that he
squeezed them out of ownership and operational control of
their family winery, the Sullivan Vineyards Corporation
(“SVC”) and Sullivan Vineyards Partnership
(“SVP”). SVC and SVP's bankruptcy case
recently settled, and as part of the settlement agreement the
Trustee released all claims on behalf of the Estates.
Finn's pending motion for judgment on the pleadings
requires me to decide whether the Sullivans have individual
claims against Finn, namely whether they allege harm that is
not incidental to the harm suffered by SVC and SVP. As
pleaded, the complaint fails to allege individual claims, but
the Sullivans are entitled to an opportunity to amend.
Accordingly, I will deny the motion for judgment on the
pleadings without prejudice and dismiss the complaint with
leave to amend.
March 8, 2018 Short Order on Defendants' Motion to
Transfer lays out the factual background of this case; I
incorporate it by reference here. Order on Mot. to Transfer
[Dkt. No. 41]. After issuing that Order, I referred the case
to the Hon. Dennis Montali for settlement. Dkt. No. 42. The
parties were not able to reach a global settlement, but
eventually Chapter 11 Trustee Timothy Hoffman
“negotiated a compromise involving all principal
parties in the Bankruptcy Cases save for the
Sullivans.” Request for Judicial Notice
(“RJN”) Ex. B [Dkt. No. 51-2], Declaration of
Aron Oliner (“Oliner Decl.”) ¶ 18. On April
3, 2019, Hoffman filed an application for an order
authorizing him to enter into that compromise on behalf of
SVC and SVP. RJN Ex. A [Dkt. No. 51-1]. Bankruptcy Judge
Roger L. Efremsky issued such authorization on May 20, 2019.
RJN Ex. C [Dkt. No. 51-3].
settlement, the Trustee, acting on behalf of SVC and SVP,
released all claims that were within his power to release:
“For the avoidance of doubt, the Trustee is providing
the Settling Creditors with the broadest possible release he
may provide on behalf of the Estates . . . .” RJN Ex.
ECF p.9-17 (“Settlement Agreement” or
“Agreement”) 4. The Agreement went on to note,
“The Trustee is not releasing any Claims held directly
and exclusively by Ross Sullivan or Kelleen Sullivan as
individuals but the Trustee is releasing Claims of the Estate
that could discharge derivative or indirect claims by Ross
Sullivan or Kelleen Sullivan . . . .” Id. The
parties then stipulated to dismiss the adversary bankruptcy
proceeding with prejudice. RJN Ex. D [Dkt. No. 51-4].
12, 2019, Finn filed the instant motion for judgment on the
pleadings. Motion (“Mot.”) [Dkt. No. 50]. I heard
argument on August 21, 2019. Dkt. No. 64.
motion for judgment on the pleadings under Federal Rule of
Civil Procedure 12(c) utilizes the same standard as a motion
to dismiss for failure to state a claim under Federal Rule of
Civil Procedure 12(b)(6). Cafasso, United States ex rel.
v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 n.4
(9th Cir. 2011). Under both provisions, the court must accept
the facts alleged in the complaint as true and determine
whether they entitle the plaintiff to a legal remedy.
Chavez v. United States, 683 F.3d 1102, 1108 (9th
Cir. 2012) (citation omitted). Either motion may be granted
only when it is clear that “no relief could be granted
under any set of facts that could be proven consistent with
the allegations.” McGlinchy v. Shull Chem.
Co., 845 F.2d 802, 810 (9th Cir. 1988) (citations
omitted). Dismissal may be based on the absence of a
cognizable legal theory or the absence of sufficient facts
alleged under a cognizable legal theory. Robertson v.
Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir.
plaintiff's complaint must allege facts to state a claim
for relief that is plausible on its face. See Ashcroft v.
Iqbal, 556 U.S. 662, 677 (2009). A claim has
“facial plausibility” when the party seeking
relief “pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Id. Although the
court must accept as true the well-pleaded facts in a
complaint, conclusory allegations of law and unwarranted
inferences will not defeat an otherwise proper motion.
See Sprewell v. Golden State Warriors, 266 F.3d 979,
988 (9th Cir. 2001). “[A] plaintiff's obligation to
provide the ‘grounds' of his ‘entitle[ment]
to relief' requires more than labels and conclusions, and
a formulaic recitation of the elements of a cause of action
will not do. Factual allegations must be enough to raise a
right to relief above the speculative level.” See
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)
(citations and footnote omitted).
parties agree on two key facts underlying the instant motion.
First, the Settlement Agreement resolved all claims for
damage to SVC and SVP. See Mot. 11; Oppo. 7; Reply
6. Second, the Settlement Agreement expressly did not release
the Sullivans' individual claims, to the extent they
exist. See Oppo. 7; Reply 6. Accordingly, the
question is whether the Sullivans have plausibly pleaded
individual claims that stand separate and apart from the
damages Finn's actions caused to SVP and SVC.
shareholder may bring an individual rather than derivative
action “only if the damages were not
incidental to an injury to the corporation.”
Nelson v. Anderson, 72 Cal.App.4th 111, 124 (1999),
as modified on denial of reh'g (June 14,
1999). A personal claim “originate[s] in
circumstances independent of [the plaintiff's] status as
a shareholder.” Hilliard v. Harbour, 12
Cal.App. 5th 1006, 1015 (Ct. App. 2017), review
denied (Sept. 13, 2017) (citing Nelson, 72
Cal.App.4th at 124). By contrast, an action is derivative
“if the gravamen of the complaint is injury to the
corporation, or to the whole body of its stock and property
without any severance or distribution among individual
holders, or it seeks to recover assets for the corporation or
to prevent the dissipation of its assets.” Jones v.
H. F. Ahmanson & Co., 1 Cal.3d 93, 106 (1969)
(internal quotation marks and citation omitted). “[T]he
pivotal question is whether the injury is incidental to or an
indirect result of a direct injury to the corporation or to
the whole body of its stock or property.” Pareto v.
F.D.I.C., 139 F.3d 696, 699 (9th Cir. 1998). In one
case, a court allowed individual claims to proceed where the
plaintiff alleged “that he was deprived of a fair share
of the corporation's profits as a result of
defendants' generous payment of excessive compensation to
themselves.” Jara v. Suprema Meats, Inc., 121
Cal.App.4th 1238, 1258 (2004) (noting that the defendants
admitted on cross-examination that the bonuses were designed
to reduce the profits that had to be shared with the
Sullivans set forth five theories of injury that they assert
are not incidental to injuries to SVC and SVP. Oppo. 9.
First, Finn “[froze] out the other owners” by
convincing the Sullivans to allow him to personally guarantee
the SVB Note. Id. Second, Finn diluted the
Sullivans' investment by convincing them to allow him to
acquire 10% additional interest in SVC. Id. For
these two theories, Finn argues that the Sullivans were not
harmed because Kelleen was awarded all of Finn's
ownership interest in the winery after the divorce. Reply 3.
Third, the Sullivans assert that Ross experienced an
individual injury when Finn fired him as SVC's CEO. Oppo.
9. For this theory, Finn argues that Ross fails to allege any
economic injury, that a wrongful termination claim would have
to proceed against SVC, and that any such claim is time
barred. Reply 4. Fourth, the Sullivans assert that Finn
caused them to incur costs and legal fees to defend his suit
against the minority shareholders. Oppo. 9. Fifth, Finn
caused the Sullivans to incur costs and legal fees by filing
litigation to distract the winery's owners. Id.
Finn argues these theories fail because the Sullivans have
not alleged that they personally paid the litigation fees,
and most of the litigation took place after the divorce when
Finn was no longer a shareholder who owed fiduciary duties.
complaint does not clearly plead individual claims. For the
first two theories, whether or not Finn increased his
position of power over the winery, the Sullivans do not plead
an injury because all of Finn's shares reverted back to
Kelleen after their divorce.See Complaint
(“Compl.”) [Dkt. No. 1] ¶ 84. If Ross
intends to bring a claim based on damages associated with his
own decreased ownership interest, he should clearly plead the
theory for such a claim. For the wrongful termination theory,
it is unclear why that claim could be brought against Finn as
a fiduciary rather than SVC and SVP as an employer. In
addition, any injury Ross suffered is incidental to those SVC
and SVP suffered because by firing Ross and installing an
unqualified replacement, Finn hurt the business itself.
See Nelson, 72 Cal.App.4th at 125 (finding that
obligations violated by limiting plaintiff's role were
owed to the corporation because the decisions
“amount[ed] to alleged misfeasance or negligence in
managing the corporation's business, causing the business
to be a total failure”). Finally, the complaint
insufficiently pleads claims based on litigation costs.
See Compl. ¶ 71 (“The legal expenses
incurred by SVP, SVC and the Sullivan family members in
litigation with Finn through September 2017 are at least $1,
545, 000.”). The Sullivans need to explain when these
expenses were incurred and what specific amounts they paid