A Reminder: Time is Money
In Crane v. R.R. Crane,[1] two brothers were at loggerheads over a family business. Under California law, when there is a deadlock between two shareholders who each own half of the company, a shareholder is permitted to file a petition for dissolution of the company under Cal. Corp. Code § 1800. The second shareholder, however, is permitted to avoid the dissolution if it invokes the procedure pursuant to Cal. Corp. Code § 2000.
In Crane v. R.R. Crane, the first shareholder filed a petition for dissolution under Cal. Corp. Code § 1800 on November 13, 2017. The second shareholder filed a notice to avoid the dissolution pursuant to Cal. Corp. Code § 2000. The procedure under Cal. Corp. Code § 2000 is detailed but let’s over-simplify it for this blog as a three-step: 1) the parties try to work it out amongst themselves for a period; 2) if they fail, the court can appoint three disinterested appraisers who set the value; and 3) once the value is set the second shareholder has the option to purchase from the first shareholder at the set value or to consent to the dissolution.
Incredibly, that three step process lasted three years in Los Angeles Superior Court. The final order affixing value of $6.1 million was issued December 21, 2020. That order included a deadline for the second shareholder to purchase the shares from the first shareholder by January 15, 2021.
The problem arose due to the length of time in the case because the valuation is set on the date of the initial petition for dissolution. Thus, here the first shareholder appealed claiming that judgment interest should be awarded. The appellate decision here is not a terribly interesting appellate decision. It essentially invoked statutory analysis and caselaw regarding the award of prejudgment interest. The appellate court then came to the conclusion that the amount awarded was not “damages” as that is defined under the statute because the second shareholder has the right to purchase the shares but is not obligated to do so.
The court noted in theory that as long as the proceedings are pending, the shareholder has a right to receive distributions, but in Crane v. R.R. Crane the first shareholder alleged he was not receiving distributions. Allegedly the second shareholder had effectively taken control of the company. My own view here is that the court was a little tone deaf to what often happens in these nasty family squabbles.
The practice tip here is easy to recognize but a sticky wicket in practice. If, as a shareholder, you knew you would the selling shareholder, then in the operating agreement or bylaws you might place an interest clause with interest accruing at the date of filing the petition or the date of request for buyout et cetera. But what if the other shareholder files the petition and you end up as the buying shareholder? More broadly speaking, as we are entering into what appears to be a higher interest rate era, a higher awareness of the time value of funds should be considered during the drafting of your business agreements.
Your Minutes do Matter
Here we speak of minutes not in relation to time, but as the written document of formal corporate meetings. Instructing small and medium sized enterprises to keep minutes, particularly in the instance of a sole shareholder, can sometimes feel like suggesting to people that they need sunscreen at night. Why does one need a meeting with themselves?
3 G.I. Corp. v. Sheen,[2] an unpublished California Appellate Opinion, shows why. Last quarter I discussed a case where a judgment against a corporation was amended to include the owner and, unfortunately, we have another such case here.
In 3 G.I. Corp. v. Sheen, Itamar Gelbman was hired for Charlie Sheen by Sheen’s counsel. In the meeting to hire Gelbman, Sheen’s counsel stated that all contracts for Sheen were “at-will” and must be made with Sheen’s counsel because “Sheen was in a state of chronic inebriation” and “would not be able to understand or agree to any contract.” Gelbman signed the “at-will” individual agreement in the meeting with Sheen’s counsel (the “First Agreement”).
About five days later, Gelbman presented a new agreement directly to Charlie Sheen. The new agreement, rather than being at-will and with Gelbman in his individual capacity, was a one-year agreement with a security company that was solely owned by Gelbman. Sheen signed the new agreement (the “Second Agreement”).
The security relationship lasted for about three months. Gelbman was terminated. A lawsuit ensued where the security company essentially sued Sheen for the nine months remaining on the Second Agreement. Sheen prevailed at trial and the court found that the only valid agreement was the First Agreement. The court awarded Sheen $9,022.20 in costs and $119,690 in attorney’s fees.
Soon after the judgment was made for Sheen, Gelbman dissolved the security company to thwart Sheen’s collection of the judgment. Sheen then made a motion to amend the judgment to include Gelbman, who owned 100% of the security company, based on an alter ego theory.
The court granted the motion to amend the judgment to include Gelbman in his individual capacity because it found the security company to be a small “one-man corporation” and that Gelbman served as its Chief Executive Officer, Secretary, Chief Financial Officer, and President. The trial court also reasoned that an inequitable result would follow because of the dissolution of the company would deprive Sheen of the recovery. Therefore, the trial court amended the judgment to include Gelbman individually.
Gelbman appealed the judgment, essentially arguing that the basis for alter ego was not strong enough because the record merely showed that Gelbman was the sole officer, shareholder, and director and that he dissolved the company. The appellate court disagreed pointing out that Gelbman was also the sole employee, that there appeared to be no minutes of the company and that his intention had to been to use the corporation merely as a shield against personal liability.
For any owner of a small to medium sized company, the above reasoning is probably terrifying. Often owners serve in multiple capacities and frequently hold multiple officer positions. And, frankly a lot of companies do not keep minutes as often as they should. Insofar as the 3 G.I. Corp. v. Sheen case serves as a reminder to follow those formalities, that fear should rightfully instruct owners to reconsider their efforts in this regard.
But do not panic either. I suspect this is an unpublished opinion because it is an edge case. There was no evidence of the most egregious of alter ego sins (e.g., commingling of funds), but it might have been another case where bad facts made bad law. One wonders, for example, how the case may have turned out if 3 G.I. had made partial payments on the judgment for a period before dissolving? And how much was the court subliminally swayed by Sheen’s public reputation?
9th Circuit Affirms Finding of Independent Contractor Status in 7-Eleven Case
Victories in the employer-employee realm seem so rare in California that any win must be celebrated, even if it does not clarify much in the real world. That’s the case with Haitayan v. 7-Eleven, Inc.,[3] where the 9th Circuit recently affirmed a district court bench trial. Franchisees of 7-Eleven had claimed that they were improperly classified as independent contractors.
At the outset, of course, this seems like an obvious outcome, especially considering the extensive regulation of franchises. However, on review of the district court’s Findings of Fact and Conclusions of Law After Court Trial, I concede the facts demonstrate how these issues can become a scrambled mess.
For instance, the franchisees attend the same training that managers of 7-Eleven owned locations must attend. 7-Eleven places cameras in the stores that franchisees cannot remove. Technically, 7-Eleven requires uniforms to be worn. 7-Eleven controls the temperature inside the stores remotely. The company also sends weekly “field consultants” into the stores to monitor the retail locations. The business licenses for the store location are obtained by 7-Eleven and the company also provides the equipment for the store. Franchisees were required to use the company’s proprietary 7-Eleven computer system and were required to carry certain proprietary 7-Evelen products at their stores. There was also a 900-page operations manual. All funds must be deposited in a store bank account and 7-Eleven controls the bank account.
For anyone in the franchising world, none of the foregoing requirements will sound shocking. But placed together one must admit it’s hardly the freedom that one imagines in owning your own business—perhaps these franchisees were employees?
Alas, the district court also reviewed facts suggesting control was not so complete. It seemed the plaintiffs did not in actuality wear uniforms. None of the plaintiffs had read the 900-page operations manual. The field consultants provided “recommendations” and the proprietary 7-Eleven computer system only recommended prices, which franchisees were free to follow or not. The franchisees can enter into agreements with vendors directly and one of the plaintiffs carried craft beers and “designer waters.” Franchisees did not have to follow the suggested promotions and were not required to be in their stores on a specific schedule or for set hours. Franchisees had sole control on hiring, firing, wages, staffing, scheduling, and discipline of employees. Several of the plaintiff franchisees had other businesses.
The case is of limited utility of several reasons. First, the case was filed before the Dynamex[4] decision and before the enactment of AB 5. Accordingly, the court applied the Borello[5] test. To the extent Dynamex codified by AB 5 is more restrictive, then even a good outcome here is of limited value. That’s especially true considering that it’s an unpublished opinion. However, the appellate opinion cites Vazquez v. Jan-Pro Franchising Int’l, Inc.[6] for the proposition that the three elements of the ABC test are prominent factors already listed in Borello to rebut franchisees’ argument portions of their claims would have accrued after the enactment of the AB 5. Given the accretive nature of the common law system, is this possibly a bridge where after years of banging the table it turns out that AB 5 was just parts of Borello? One can hope.
The second reason it’s of limited utility is that this area simply continues to have a lot of grey and not a lot of black and white. Unless it’s one of the exempted professions codified in AB 5, California businesses are just one bad contractor away from a problem here. And the district court opinion, though long, practically could be re-written as law school exam: visit all of the factors, and throw a dart on the wall.
The only practice tip here is that it seems that both the district court and the appellate court gave great weight to the other businesses owned by franchisees. For small and medium enterprise businesses there is something here: better to be the second (or third, or fourth, etc.) client of a contractor and not the first.
[1] Crane v. R.R. Crane Investment Corp., 82 Cal. App. 5th 748, 298 Cal. Rptr. 3d 759 (Ct. App. 2022). [2] 3 G.I. Corp. v. Sheen, No. B314734 (Cal. Ct. App. Oct. 18, 2022). [3] Haitayan v. 7-Eleven, Inc., Nos. 21-56144, 21-56145 (9th Cir. Dec. 9, 2022) affirming Haitayan v. 7-Eleven, Inc., CV 17-7454 DSF (ASx) (C.D. Cal. Sep. 8, 2021). [4] Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, 4 Cal. 5th 903 (2018). [5] S.G. Borello & Sons, Inc. v. Dep’t of Indus. Rels., 48 Cal. 3d 341 (1989). [6] 923 F.3d 575, 599 (9th Cir. 2019), reh’g granted, opinion withdrawn, 930 F.3d 1107 (9th Cir. 2019), and on reh’g, 939 F.3d 1045 (9th Cir. 2019), certified question answered, 10 Cal. 5th 944, 478 P.3d 1207 (2021), and opinion reinstated in part on reh’g, 939 F.3d 1050 (9th Cir. 2019).