Judge: Mark H. Epstein, Case: SC127692, Date: 2023-08-30 Tentative Ruling

Case Number: SC127692    Hearing Date: February 5, 2024    Dept: I

The matter is here for cross-motions for a new trial.  The motion filed by respondents (Pimi and Pilar—the court uses first names to avoid confusion) is fully briefed.  The motion filed by petitioner (Michele) is a bit unclear.  The court has received the motion and the reply but not the opposition.

This is part of a long running dispute between family members over the family business.  In a quick nutshell, Michele and Pilar are sisters.  Pimi is an LLC in which both held a 50% interest, although Pilar managed the business.  Pimi was, generally, in the business of managing real estate.  Over the years, disputes between the sisters developed and ultimately Michele brought a derivative action against Pilar (who brought one back) and also sought to dissolve the entity.  Pilar (and Pimi) elected to seek relief under Corporations Code section 2000.  That statute allows the entity to be appraised and gives the respondent the opportunity to buy the other side’s interest at the appraised price.  The process thus requires first the appraisal and a then judicial determination as to the definitive price as of a particular day.  The respondent must then make an election whether to buy the other side out for the appraised price or not.  If the respondent elects to exercise the buy out option, the dissolution becomes moot, as do the disputes (at least derivative ones) between the parties that gave rise to it.  If respondent elects not to buy out the other party, then the dissolution and related litigation goes forward.

Ultimately, appraisers were retained to value Pimi.  They issued a report to which there were objections.  Ultimately, the court resolved those objections and articulated the definitive appraised value.  Pimi elected to buy out Michele for that price.  But there were a few issues.  First, much of Pimi’s value was in property.  Second, there was a significant dispute as to the proper appraisal date.  That was resolved.  Third, by the time Pimi elected to exercise the buy out option, time had elapsed since the valuation date.  That is, Pimi’s value at the moment of buy-out was different that its value at the valuation date.  The court resolved that problem by stating that during that interim period, Michele was to get 50% of Pimi’s profits.  The court’s reasoning was that Michele was a 50% owner and any profits Pimi enjoyed after the appraisal date would not be reflected in the buy-out price.  It would, therefore, be inequitable for Michele to lose out on that amount.  The court found, on the flip side, that Michele was not entitled to prejudgment interest during that period—allowing both prejudgment interest and profits would be double-dipping in the court’s view.  Fourth, Pimi was not in a position to buy Michele out in cash right away.  Rather, Pimi needed time to raise the money necessary to pay the price.  The court allowed Pimi to take that time, but required that in the interim Michele would remain a 50% owner and have certain rights (in case Pimi did not follow through).  During that period, though, Michele was not allowed to participate in the profits that Pimi enjoyed.  In other words, the buy-out was in some ways effective when the election was made, but Michele would not lose all of her rights until the buy out was completed.  Because Michele was technically a 50% owner, though, there was a concern that the taxing authorities might impute 50% of Pimi’s profits to Michele, even though she was not going to get those profits distributed to her.  Pimi was to reimburse Michele for any taxes she incurred as a result.  That is not as one-sided as it first appears.  After all, Pilar would be taxed only on 50% of the profits even though she was enjoying all of the ultimate benefit from them.  So, as a practical matter, requiring her to pay 100% of the tax is consistent with her getting (in reality) 100% of the profit.  There were other wrinkles.  Pilar claimed that Michele had a debt owing to the company, and that debt was valued as part of the appraised value.  Given that, it would not be appropriate to forgive the loan—Pilar (through Pimi) was paying the value of the debt as part of the purchase price.  Accordingly, the court allowed Pimi to credit the amount owing from the final payment under the buy-out.  As to interest on that debt, the court directed that the interest be the same as was charged pre-dispute.

There were other wrinkles.  But the bottom line was that rather than have further hearings, the court referred the matter to a referee for a true-up and other things.  There was some ambiguity as to whether the referee’s decision was to be binding or only a recommendation.  The order (which the parties drafted and the court signed) was ambiguous, referring to CCP section 639 (suggesting a recommendation) and also language expressly stating that the referee’s decision was to be binding.  In an earlier motion, the court decided that the intent was that the referee’s decision be binding, and that this was the parties’ actual agreement as reflected in the order they presented to the court for signature.

Frankly, the court thought it was done with this matter.  The referee, Mr. Chernick, is a very well respected referee and neutral for whom the court has great respect.  After a number of hearings, including evidentiary hearings with live witnesses, the referee issued his decision.  But nothing is simple in this case.  Both parties had problems with the referee’s decision, although Pilar had more dispute than did Michele.  That led to an earlier hearing in which those disputes were presented to the court.  At that hearing, the court concluded that the referee’s decision was intended to be binding.  The court also issued a tentative ruling resolving the various disputes.  However, at that hearing, one of the parties (the court thinks it was Michele) suggested that the court was taking the wrong procedural approach.  Rather, it was suggested that because the referee’s decision was binding, judgment should be entered thereon as would be the case in a normal binding reference.  The referee’s decision could then be attacked by way of post judgment motions, most notably motions for a new trial.  The court adopted that procedure, and a judgment was duly entered based on the referee’s conclusions.  Both parties filed new trial motions.  That is what is now before the court.

A word on the standard of review.  The referee’s decision is treated like a jury’s decision.  That is, the court will review the judgment as if it were a judgment resulting from a jury trial.  In deciding the new trial motion, then, the same standards apply, but with one practical exception.  In a regular jury trial, the court would typically hear the evidence and see the witnesses.  Here, the court had no such opportunity.  Thus, the referee’s credibility decisions and determinations, and his weighing of the evidence, is given a significant amount of deference by the court—perhaps even more than would normally be the case at least as a practical matter.  Second, there is an issue as to whether the referee decided things beyond the matters referred to him.  The court reviews that de novo.  There are two sources of the referee’s power.  One is the order of reference the court earlier signed.  The other is any issue that the parties knowingly and voluntarily put before him.  The court will not allow a party to agree that the referee can decide an issue and then seek to undo that decision in court on the theory that, in hindsight, that party wishes that the referee had not taken up the issue.  If the referee went beyond his charter, a timely objection to that effect should have been made or, at a minimum, the now-objecting party should not have taken action leading the other side and the referee to believe the matter was properly being discussed.  That is important not just because it is fair, but also because an earlier objection could have been resolved.  The referee could have sought clarification from this court, for example.  Similarly, a party could have sought that clarification.  It is too late to bring the objection in hindsight, keeping it in reserve until one sees whether the referee rules in that party’s favor or not.

Pilar and Pimi raise a number of issues.  First, there is the question of the correct interest rate on the loan that Michele owed Pimi.  Pimi claims that interest accrued at 10% until paid, and that any monies or distributions to Michele should go first to that accruing interest and then to reduce principal.  The referee disagreed, finding that interest had not historically been charged and therefore no interest accrued.  Second, the referee found that Pilar had improperly taken money from Pimi in the guise of a fee or salary that was really a profit distribution.  The referee therefore ordered that an equal amount of money be paid to Michele or that the money be repaid by Pilar.  Third, the court ordered Michele to reimburse Pimi for her share of the appraisers’ fee (with one exception, for which Michele was to pay in full).  The referee found that Pimi had paid the appraisers, and therefore Michele (as a 50% owner and entitled to 50% of the profits) had already contributed her share.  Fourth, Pimi contends that the referee over-awarded Michele for the tax liability because Michele had not presented good evidence for the actual amount of added tax she had to pay for the phantom profits.  Fifth, Pimi claims that the referee improperly found that Pilar had obtained her attorneys’ fees (or some of them) from Pimi, which the referee directed be repaid or for which Michele should be given credit.  Pilar claims that this is outside the reference.  Sixth, there is a question whether Pimi is entitled to fees for defending Michele’s derivative case, which was dismissed as part of the section 2000 process.

Michele’s new trial motion seeks an additur.  According to Michele, the referee did not award Michele her share of profits based on the sale of real estate by Pimi between 2017 and 2021.  Those profits were, according to Michele, undistributed but they were profits nonetheless.  The referee thus purportedly did not give Michele the benefit of those profits, she claims.  Accordingly, Michele asserts that the court should add $693,040.65 to the judgment (or, more specifically, condition denial of a new trial on that issue on Pimi’s agreement to add that to the judgment).

For purposes of today’s hearing, the court will go no further.  It does, however, for ease of reference, include its tentative ruling at the prior hearing other than the binding/advisory dispute.

PRIOR TENTATIVE

All of that said, and in an abundance of caution, the court has reviewed the referee’s order and, if the court did have jurisdiction to review it, the court would arrive at the same conclusions as did the referee.  As to the first claimed error, Pilar asserts that the referee erred by concluding that certain fees paid to Pilar were in fact disguised disbursements as well as in the calculation thereof.  But the court agrees that the specific monies at issue were beyond the traditional fee that Pilar had historically been paid for her work managing Pimi.  Nor did the appraisal panel make a binding determination as to this.  First, that panel’s decision could not be res judicata.  Second, the panel well understood that it was not to make legal determinations.  The referee committed no error here.

The second claimed error is the interest on Michele’s loan.  Pimi used an interest rate, but the referee said that the loan was to accrue no interest.  The referee correctly interpreted the court’s prior comments.  The court made no finding that interest had or had not been charged on Michele’s loan.  The court speculated that the interest rate might be zero, but the court never so held.  What the court did hold was that whatever the historic interest rate was that was charged before the dispute began would be the proper rate after the dispute began.  The referee held that there was no evidence that interest of any amount had been charged before there was a dispute, and therefore no interest could be charged after the dispute.  Accordingly, Pilar (or Pimi) had to repay interest deducted from the final payment.  The court would agree.  The matter is not free from doubt, but the court ultimately would agree with the referee were it for the court to weigh in.

The third error is the amount of tax liability Pimi had to repay to Michele.  The court’s order stated that until the buy-out was complete, Michele retained an ownership interest in Pimi.  The point of it was to ensure that no mischief was done until Michele was paid the sum that was owed to her.  However, during the payout period, Michele was not really to obtain 50% of the profits.  That led to a potential tax problem.  As an owner, profits could be attributed to Michele that she never received.  Moreover, those profits would result in lower taxes owed by Pilar even though Pilar did get the actual profit dollars.  To resolve this problem, Pimi was to pay Michele the tax liability Michele otherwise owed due to this distortion.  Pilar states that Michele did not produce appropriate evidence as to the amount of the tax and that Michele did not produce appropriate documents in discovery.  The referee saw it differently, and believed that Michele had sufficiently established the amount.  The evidence is not the best the court has ever seen, and plainly producing the tax returns would have been a better way to translate the profits attributable to Michele into the additional taxes Michele had to pay.  But the evidence was sufficient, and the state of the discovery is what it is.  There is enough here to justify the referee’s conclusion.

The fourth error concerns the appraisal fees (other than Michele or Pilar’s appraiser).  The court ordered those fees to be split.  The referee concluded that Michele had already paid her share by way of Pimi’s payment at a time when Pimi’s profits were being divided equally and requiring Michele to pay more would be to double pay.  The court agrees that the referee’s decision is correct.  The point is that to the extent Pimi paid the appraisal fees during the sharing period (where Michele and Pilar shared the profits), then the costs were borne equally.  The court agrees that if Michele has to pay in addition to that, she will bear over 50% of the fees.

The fifth and final error goes to attorneys’ fees related to the derivative action.  The derivative action was ultimately dismissed when the parties went forward with the section 2000 buyout.  Pilar claims that Pimi should recover the attorneys’ fees it expended on the derivative claim because of that dismissal.  But that was not a merits dismissal; it was a dismissal because the parties elected to go forward with a buyout.  Had the buyout not been successful, the derivative action would have gone forward and Michele would have won or Michele would have lost.  Under these circumstances, the court agrees that each side must bear its own costs.  Fees related to the derivative action probably were beyond the reference’s scope, but the court nonetheless agrees with the referee’s conclusion.  To the extent that there are fee issues other than the derivative case, the court believes that the referee’s decision is the correct one.