Judge: Elaine Lu, Case: 19STCV46270, Date: 2023-04-03 Tentative Ruling

Case Number: 19STCV46270    Hearing Date: April 3, 2023    Dept: 26

Superior Court of California

County of Los Angeles

Department 26

Procedural Background

            On December 26, 2019, Plaintiffs Andy Chong and Grant Neilan (jointly “Plaintiffs”) filed the instant action against Defendants Marc Shelton (“Shelton”) and Lock & Key Social Drinkery LLC.  The complaint asserts five causes of action for (1) Breach of Fiduciary Duty, (2) Declaratory Relief, (3) Dissolution of Lock & Key based on Marc Shelton’s Pervasive and Persistent Fraud, (4) Accounting, and (5) Fraud.  On June 2, 2020, Plaintiffs named Drink Eat Social, Inc. (“DES”) and Shelton Food & Beverage, Inc. as Does 1 and 2.  On June 11, 2020, the Court entered default as to Lock & Key Social Drinkery LLC.  On October 4, 2022, after a jury trial as to the fraud and breach of fiduciary claims against Defendants Shelton, DES, and Shelton Food & Beverage, Inc., a verdict was entered in favor of Plaintiffs. 

            On January 13, 2023, the Court required Plaintiffs to elect between alternative remedies, namely either fraud damages against all defendants or breach of fiduciary duty damages against all defendants.  On January 23, 2023, Plaintiffs elected to have judgment entered in favor of the breach of fiduciary claim, and the court entered judgment in favor of Plaintiff Andy Chong on his breach of fiduciary duty claim against Defendant Shelton for $1,054,046 and in favor Plaintiff Grant Neilan on his breach of fiduciary duty claim against Defendant Shelton for $287,800.00.  (Judgment 1/23/23.)

            On February 7, 2023, Defendants Shelton and DES each filed a motion for judgment notwithstanding the verdict.  On March 2, 2023, Plaintiffs filed a consolidated opposition.  On March 9, 2023, Defendants Shelton and DES filed a consolidated reply.  On March 28, 2023, the Court ordered the parties to file the evidence upon which they relied for the moving and opposition papers.  (Minute Order 3/28/23.)  On March 28, 2023, Defendants Shelton and DES filed their compendium of evidence.  On March 29, 2023, Plaintiffs filed their compendium of evidence.

Legal Standard

            The Court “shall render judgment in favor of the aggrieved party notwithstanding the verdict whenever a motion for a directed verdict for the aggrieved party should have been granted had a previous motion been made.” (CCP § 629(a).) “A JNOV motion challenges the legal sufficiency of the opposing party's evidence (‘a demurrer to the evidence’). i.e., it challenges whether that evidence was sufficient to prove the claims or defenses asserted by the opposing party and now embodied in the jury's verdict.” (Wegner, et al., Civ. Trials and Evid. (The Rutter Group 2016) ¶ 18:4.) “Thus, for purposes of a JNOV motion, all evidence supporting the verdict is presumed true. The issue is whether these facts constitute a prima facie case or defense as a matter of law.” (Id., ¶ 18:54.) The Court does not weigh evidence or credibility of witnesses. (Id., ¶ 18:55.)

A judgment notwithstanding the verdict in favor of defendant is proper only where no evidence of “sufficient substantiality” supports the verdict in plaintiff’s favor. This is determined by disregarding evidence on defendant’s behalf, giving plaintiff’s evidence all the value to which it is legally entitled, and indulging in every legitimate inference that may be drawn from that evidence. (Reynolds v. Wilson (1958) 51 Cal. 2d 94, 99.) “A trial court is governed by well settled standards in determining whether to grant a motion for judgment notwithstanding the verdict (JNOV). ‘The trial court's power to grant a motion for JNOV is the same as its power to grant a directed verdict. (Code Civ. Proc., § 629.) The court must accept as true the evidence supporting the jury's verdict, disregarding all conflicting evidence and indulging in every legitimate inference that may be drawn in support of the judgment. The court may grant the motion only if there is no substantial evidence to support the verdict.’” (Jones & Matson v. Hall (2007) 155 Cal. App. 4th 1596, 1607.)

Discussion

            Defendant Shelton seeks a judgment notwithstanding the verdict setting aside the judgment on the grounds that Plaintiffs failed to establish that Defendant Shelton owed them any fiduciary duty. Defendant Shelton and DES also seek a judgment notwithstanding the verdict as to the punitive damages award against DES.

Sufficiency of Evidence

            Defendant Shelton claims that Plaintiffs’ breach of fiduciary duty claims fail because there was no substantial evidence that Plaintiffs were partners with Defendant Shelton.

            “‘The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) the breach of that duty; and (3) damage proximately caused by that breach.’ [Citation.]”  (IIG Wireless, Inc. v. Yi (2018) 22 Cal.App.5th 630, 646.) 

            Here, Defendant Shelton claims, and Plaintiffs do not dispute, that “[t]he fiduciary relationship asserted in this case was based on a partnership.” (Shelton Motion at p.4:22.)  A “[p]artnership is a fiduciary relationship, and partners may not take advantages for themselves at the expense of the partnership.”  (Jones v. Wells Fargo Bank (2003) 112 Cal.App.4th 1527, 1540.)  “The defining characteristic of a partnership is the combination of two or more persons to jointly conduct business.”  (Enea v. Superior Court (2005) 132 Cal.App.4th 1559, 1564.)  “An essential element of a partnership or joint venture is the right of joint participation in the management and control of the business. [Citation.] Absent such right, the mere fact that one party is to receive benefits in consideration of services rendered or for capital contribution does not, as a matter of law, make him a partner or joint venturer.”  (Bank of California v. Connolly (1973) 36 Cal.App.3d 350, 364, [italics added].)  “Whether a partnership or joint venture exists is primarily a factual question to be determined by the trier of fact from the evidence and inferences to be drawn therefrom.”  (Ibid.) 

            Defendant Shelton contends that Plaintiffs failed to present any evidence of joint ownership or control and thus no evidence of a partnership.  The Court disagrees.  First, Plaintiffs are not required to show that they actually exerted control.  It is sufficient for Plaintiffs to demonstrate that they had a right to control the business.  Second, the evidence Defendant Shelton cites clearly shows the existence of a right to control and ownership.  For example, Plaintiff Grant Neilan testified at trial that he reached an agreement with Defendant Shelton for a six percent ownership of the business in return for investment and that any extra profit would be shared with Plaintiffs and Defendant Shelton.  (Hardacre Decl. ¶ 4, Exh. A at pp.139:26-140:5.)  Similarly, Plaintiff Andy Chong testified that he and Defendant Shelton agreed that in return for a $150,000.00 investment in the business, Plaintiff Andy Chong would receive a fifteen percent ownership interest in the business.  (Hardacre Decl. ¶ 5, Exh. B at pp.94:4-95:12.)  Moreover, Plaintiff Andy Chong also testified that he signed contracts on behalf of the business as an owner.  (Hardacre Decl. ¶ 5, Exh. B at pp. 122:22-123:13.)  This is clear evidence of ownership and by logical inference a right to joint control.  (Castro v. State of California (1981) 114 Cal.App.3d 503, 507 [on a motion for judgment notwithstanding the verdict, a “plaintiff is entitled to the benefit of every favorable inference which may reasonably be drawn from the evidence and to have all conflicts in the evidence resolved in his favor.”].) 

            The existence of some inconsistent evidence as to whether there was a partnership, such as evidence of Plaintiffs’ participation in competing businesses and not being signers on the business’s bank account, (Hardacre Decl., Exh. A at pp.15:13-24, 16:6-15; Exh. B at pp.24:5-20, 26:19-21), does not warrant a judgment notwithstanding the verdict.  The Court may not weigh evidence or the credibility of such evidence on a motion for judgment notwithstanding the verdict -- even with inconsistent testimony in the same witness’ testimony.  (See e.g., Meyser v. American Bldg. Maintenance, Inc. (1978) 85 Cal.App.3d 933, 940.)

            Defendant Shelton also claims that “even if the Court were to find that Plaintiffs presented evidence of an agreement to become partners, the jury found that Defendant never performed the promised act. If Defendant never performed, then as a matter of law, there was no partnership and thus no fiduciary relationship to be breached.”  (Shelton Motion at p.5:19-22.)  This claim is unexplained as to what promised act Defendant Shelton is referring to and is illogical.  As noted in the testimony at trial, the parties reached an agreement whereby Defendant offered – in an exchange for a monetary investment in the business – ownership interest in the business.  (Hardacre Decl., Exh. A at pp.139:26-140:5; Exh. B at pp.94:4-95:12.)  Plaintiffs provided the monetary investment called for in the parties’ agreements – the only obligation due from them to gain their ownership interest and become partners.  There was no other condition precedent or required act from Defendant Shelton for Plaintiffs to become partners in the business.

            Accordingly, the Court finds that substantial evidence and reasonable inferences support the verdict as to Plaintiffs’ claims for breach of fiduciary duty.  The instant motion – as to the breach of fiduciary claim – must be denied.

Punitive Damages

            Defendants Shelton and DES contend that the court must enter a judgment notwithstanding the verdict as to the prayer for punitive damages because Plaintiffs failed to present evidence of Defendant DES’ financial condition at the time of trial. 

            “An award of punitive damages hinges on three factors: the reprehensibility of the defendant's conduct; the reasonableness of the relationship between the award and the plaintiff's harm; and, in view of the defendant's financial condition, the amount necessary to punish him or her and discourage future wrongful conduct.”  (Kelly v. Haag (2006) 145 Cal.App.4th 910, 914.)  “Evidence of a defendant's financial condition is a legal precondition to the award of punitive damages.”  (Soto v. BorgWarner Morse TEC Inc. (2015) 239 Cal.App.4th 165, 195.)  Moreover, “[t]he evidence should reflect the named defendant's financial condition at the time of trial.”  (Ibid.)  If a plaintiff has failed to introduce substantial evidence of the defendant's financial condition at the time of trial, “and if the plaintiffs had a full and fair opportunity to make the requisite showing, the proper remedy is to reverse the award.”  (Ibid.)

            Defendants Shelton and DES assert that the only evidence that Plaintiffs provided regarding Defendant DES’s financial condition was the general ledger, which covers the period from 2015 through December 31, 2019, and DES’ profit and loss statements from January 2016 through December 31, 2019.  (Defendants Compendium of Evidence, Exhs. 2-3.)  In opposition and upon request of the Court to cite financial information from the trial record, Plaintiffs cite additional evidence of DES’s financial condition including, DES’ bank statements from 2013-2020 and DES’ point of sale information for 2020.  (Plaintiffs’ Compendium of Evidence Exhs. 201, 205, 251.)  However, notably Plaintiffs fail to cite any evidence of DES’s financial condition at the time of trial in 2022.  While the evidence provided does provide an indication of what DES financial could have been or likely may have been in 2022, as extrapolated from previous years, there is no evidence that DES’s financial condition remained the same from 2020 through 2022.  The Court and jury would thus have to speculate as to what Defendant DES’s ability to pay punitive damages would have been at the time of trial in 2022.

            Plaintiffs also contend in opposition that Defendants waived this argument by not raising it at trial.  The Court disagrees.  As noted above, a defendant’s current financial condition is a legal precondition to an award of punitive damages and was thus Plaintiffs’ burden at trial to prove.  Accordingly, any judgment for punitive damages entered against DES would have to be reversed. 

            However, the discussion above regarding the absence of substantial evidence of DES’s financial condition is inapposite because there is no judgment including punitive damages against DES to vacate.  As a result of Plaintiffs’ election between alternative remedies, there is no monetary judgment against DES at all.  The judgment entered on January 23, 2023 is only against Marc Shelton and provides in relevant part:

Plaintiff Andy Chong elects to have judgment in his favor on his breach of fiduciary duty claim in the alternative to his fraud claim against Defendants Marc Shelton, Drink, Eat, Social Inc. and Shelton Food and Beverage, Inc. Accordingly, Judgment shall be entered in favor of Plaintiff Andy Chong on his breach of fiduciary duty claim against Defendant Marc Shelton for $1,054,046; and

Plaintiff Grant Neilan elects to have judgment in his favor on his breach of fiduciary duty claim in the alternative to his fraud claim against Defendants Marc Shelton, Drink, Eat, Social Inc. and Shelton Food & Beverage, Inc. Accordingly, Judgment shall be entered in favor of Plaintiff Grant Neilan on his breach of fiduciary duty claim against Defendant Marc Shelton for $287,800.00.

(Judgment Entered 1/23/23.)

            Due to Plaintiffs’ election of remedies for their breach of fiduciary duty claim against Defendant Shelton, which results in no recovery at all against DES, there is no judgment – including punitive damages or otherwise – against DES.  Thus, there is no punitive damage judgment against DES to reverse because the Court has never entered any such judgment.  To the extent that Plaintiffs would have elected the alternative remedy for fraud instead of the verdict for breach of fiduciary duty, the Court would have been required to vacate any judgment including punitive damages against DES.

            Part of Defendant DES’s confusion in bringing the instant motion is that the judgment does not include DES or Lock & Key Social Drinkery LLC.  So that the record is clear, Plaintiffs must file and serve a new proposed judgment within 10 days that reflects that as a result of their election between alternative remedies, judgment is entered in favor of Plaintiffs and against Defendants DES and Lock & Key Social Drinkery LLC in the amount of $0, and Plaintiffs are to recover no amount from Defendants DES and Lock & Key Social Drinkery LLC.

CONCLUSION AND ORDER

Based on the forgoing, Defendant Marc Shelton’s motion for judgment notwithstanding the verdict is DENIED.

Defendant Drink Eat Social, Inc.’s motion for judgment notwithstanding the verdict is DENIED on the ground that the Court has not entered any judgment including any amount of punitive damages against Drink Eat Social, Inc.

Plaintiffs must file and serve a new proposed judgment within 10 days that reflects that as a result of their election between alternative remedies, judgment is entered in favor of Plaintiffs and against Defendants DES and Lock & Key Social Drinkery LLC in the amount of $0, and Plaintiffs are to recover no amount from Defendants DES and Lock & Key Social Drinkery LLC.

Moving Parties are to give notice and file proof of service of such.

DATED: April 3, 2023                                                           ___________________________

                                                                                          Elaine Lu

                                                                                          Judge of the Superior Court