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Sullivan v. Finn

United States District Court, N.D. California

December 4, 2019

KELLEEN F. SULLIVAN, et al., Plaintiffs,
STEPHEN A. FINN, et al., Defendants.



         Siblings and plaintiffs Kelleen and Ross Sullivan aim to show that defendant Stephen Finn, [1] 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.



         The 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 SVP.[2] Id. ¶¶ 25-26.

         In 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.

         Also in 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.

         On May 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.

         Finn 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 2015. Id.

         Also 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.

         On 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. ¶ 83.

         After 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.

         Despite 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. ¶ 91.


         The 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[3] (“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].

         In the 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. B[4] 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].

         On June 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 ...

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