United States District Court, N.D. California
KELLEEN F. SULLIVAN, et al., Plaintiffs,
STEPHEN A. FINN, et al., Defendants.
ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR
JUDGMENT ON THE PLEADINGS RE: DKT. NO. 70
WILLIAM H. ORRICK UNITED STATES DISTRICT JUDGE
and plaintiffs Kelleen and Ross Sullivan aim to show that
defendant Stephen Finn,  Kelleen's ex-husband, breached his
fiduciary duty as a fellow shareholder in their family
winery, the Sullivan Vineyards Corporation
(“SVC”) and Sullivan Vineyards Partnership
(“SVP”). To pursue their claims, the Sullivans
must allege harm that is more than incidental to the harm
Finn undeniably caused to SVC and SVP, which settled a
bankruptcy case earlier this year. Before me is Finn's
motion for judgment on the pleadings of the first amended
complaint. As set forth below, I conclude that the Sullivans
allege at least some harm that stands apart. Accordingly, I
will grant the motion in part and deny it in part.
Sullivans allege that from 2011 to 2016, Finn took a series
of actions to obtain control over SVC and SVP, drive the
business into debt, and accrue credit in his favor. The first
amended complaint (“FAC”) alleges that while
Kelleen and Finn were engaged, Finn began harassing Kelleen
and Ross's mother Joanna to sell him her interests in SVC
and SVP. FAC ¶ 22. During this time, he convinced Joanna
to stop making payments on SVC's loan from the Bank of
Alameda (“Alameda Bank Note”), and she did so.
Id. ¶ 24. Finn then purchased the Alameda Bank
Note at a discount. Id. While Finn and Kelleen were
on their honeymoon, Joanna informed Finn that she would not
sell him her interests in the companies; Finn's lawyers
then sent Joanna a notice requiring that she pay the
principal and fees on the overdue Alameda Bank Note within
nine days or face foreclosure. Id. ¶ 25. Joanna
then agreed to sell Finn her shares in SVC and SVP, giving
him a 48.57% interest in SVC and a 49.9% interest in
Id. ¶¶ 25-26.
March 2012, Finn secured a loan from Silicon Valley Bank on
behalf of SVC and SVP (“the SVB Note”).
Id. ¶ 29. Finn misrepresented to Kelleen and
Ross that he would personally guarantee the loan, meaning
that they would not be personally liable. Id. ¶
30. Instead, Finn's guarantee meant that after Kelleen
regained control of Finn's shares after their divorce,
she and Ross could not refinance the debt without Finn's
approval. Id. ¶ 30.
March 2012, Ross approved warrants that would allow Finn to
obtain an additional 25% interest in SVP for $200, 000
payable to SVP, and an additional 10% interest in SVC for
$50, 000 payable to SVC. Id. ¶¶ 31, 33.
Finn assured the Sullivans that he had no intention of
exercising the warrants and that they would lapse when the
business's financial health improved. Id. ¶
31. In May 2014, Finn exercised the warrants, which gave him
a majority interest in both SVC and SVP. Id. ¶
35. Because of Finn's exercise of the warrants,
“the interests of Kelly and Ross [in SVC and SVP] were
each decreased by almost 10%.” Id.
¶¶ 36, 37.
17, 2012, SVC and SVP executed a Subordinated Secured Grid
Promissory Note (“the Grid Note”) for Finn's
benefit. Id. ¶ 38. Finn led the Sullivans to
believe that the Grid Note capped loan advances at $500, 000
and that a partner other than Finn would have to approve loan
advances from him. Id. ¶¶ 40, 41. With
these understandings, they approved the Grid Note.
Id. ¶ 44. Instead, the Grid Note had no cap,
and individuals who reported to Finn had the power to
authorize borrowing. Id. ¶ 41. The Sullivans
were not aware that if they wanted to refinance the SVP Note,
they would have to secure Finn's approval as to the Grid
Note. Id. ¶ 42.
used the Grid Note to cause SVC and SVP to become indebted to
him in the amount of $4, 600, 000. Id. ¶ 45.
This action violated the debt limit of the Purchase Agreement
between Joanna and Finn, which capped loans from Finn at
$500, 000. Id. “Finn's actions in
violating the debt limit of the Purchase Agreement
effectively rendered the ownership interests of Plaintiffs
nearly worthless because they were saddled with untenable
debt, while his interest remained intact because the debt was
owed to him.” Id. ¶ 45. No. disinterested
SVP partner approved these advances. Id. ¶ 48.
Kelleen and Ross were not aware of them until after June
under Finn's direction, SVP reported in its 2013 and 2014
tax returns that it had paid interest on the Grid Note.
Id. ¶ 50. He had SVP issue him K-1s to support
deductions on his personal returns. Id. The
Sullivans did not receive the same benefit. Id. In
May 2013, Finn fired Ross as SVC's CEO. Id.
¶ 60. He gave excessive compensation to an unqualified
replacement team. Id. ¶¶ 60-66.
October 7, 2015, the pending divorce between Kelleen and Finn
became final, and the Colorado court awarded Finn's
interests in SVC and SVP to Kelleen. Id. ¶ 70.
The SVC shareholders immediately removed Finn from the board,
along with an individual he had appointed. Id.
Despite losing his interest in the companies, Finn
“continued to participate in management of SVC and SVP
and exercised discretionary authority relating to both,
” meaning he “continued to have fiduciary
duties.” Id. ¶¶ 71, 79. He told one
employee to “‘spend as she wished.'”
Id. ¶ 80. Finn “continued to hold himself
out as holding a fiduciary position, in court and in his
dealings with financial institutions.” Id.
the divorce, several employees Finn had hired quit their
positions within SVC and SVP and then filed wrongful
termination lawsuits against the companies at Finn's
direction. Id. ¶¶ 87-88. Finn paid the
employees' legal expenses for those cases. Id.
¶ 88. The Sullivans and other family members have been
forced to initiate litigation against Finn. Id.
¶ 92 (listing litigation costs for which Kelleen has not
been reimbursed). Kelleen also incurred legal fees defending
against the first suit Finn initiated in this Court.
Id. ¶ 93.
the Sullivans' attempts to renew or refinance the SVB
note, the bank refused, “stating only that Plaintiffs
‘weren't Finn.'” Id. ¶ 89.
In April 2016, Finn convinced SVB to sell the SVB Note to
him. Id. ¶ 90. In the summer of 2016, Finn
initiated foreclosure proceedings against SVC and SVP with
respect to the SVB Note and the Grid Note. Id.
Sullivans initiated this case on October 6, 2017. Dkt. No. 1.
Finn then moved to transfer the case to bankruptcy court,
where the Honorable Roger L. Efremsky was presiding over a
matter involving the same nucleus of facts. Dkt. No. 19. On
March 8, 2018, I issued a short order on Finn's motion to
transfer. 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 with prejudice the
adversary bankruptcy proceeding. RJN Ex. D [Dkt. No. 51-4].
12, 2019, Finn filed a motion for judgment on the pleadings,
arguing that the complaint alleged no harm distinct from the
harm to SVC and SVP. Dkt. No. 50. On September 6, 2019, I
denied that motion but dismissed the complaint with leave to
amend to allege claims that were independent of the
corporations' claims. Dkt. No. 67. The Sullivans filed a
first amended complaint (“FAC”) on September ...