Jara v. Suprema Meats, Inc.

121 Cal.App.4th 1238 (2004)

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Nature of the Case

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Facts

Jr and Rodriguez formed plans to launch their own wholesale meat distribution business to serve Hispanic restaurants. Rodriguez contributed $20,000 but Jara, Jr., had no funds of his own. Jr., approached his father, P, for financial backing. P agreed to obtain a $150,000 line of credit in return for a 20 percent stock interest in the new company. P secured a line of credit for $250,000 and made the full amount available to the business. P helped negotiate leases on refrigerated trucks and paid first and last months' lease payments amounting to a total of $12,000, and he paid $3,000 to lease some forklifts and $2,000 in legal fees for the incorporation of the business. P cosigned a warehouse lease and claimed at trial to have made payments on the lease. Jr. and Rodriguez give P, another 10 percent ownership interest in the business. Jr and Rodriguez were each issued 35,000 shares of stock and P, was issued 30,000 shares. Jr. was president and treasurer; Rodriguez was vice-president and secretary; and P, was vice-president. All three were members of the board of directors. Jr. often called his father for business advice. Jr. and P came to an understanding regarding the payment of salaries and to which Gonzalo agreed. The deal was that whenever they were going to pull the money out, all of them were to agree how much money that's going to be. The accountant even drafted a footnote to the annual financial statement to memorialize the understanding. The business experienced rapid growth. By 1999, net income was $959,600. The company began to secure credit terms from major meat suppliers. This relieved dependence on the line of credit with Bank of the West, which it initially used to offer suppliers letters of credit guaranteeing payment of their orders. Jr. and Rodriguez, still got annual salaries of $43,367, or $800 per week, throughout the first three and a half years of operation. A Board meeting was held to increase salaries. Jr. and Gonzalez each wanted 25 percent of the 'profits.' Votes were not unanimous. Eventually, Rodriguez announced that it was decided by a two-to-one vote. Jr. suggested that they hire an expert to determine what the compensation would be. P retained an attorney, Nissly, to assist him in negotiating a shareholder agreement. A financial analysis of a retained accountant indicated that $135,000 was 'likely to be a good number for executive compensation.' They increased their weekly draw from $800 to $2,000 per week. Suprema stopped making meat deliveries to P's restaurants. A new board meeting was conducted, and P was not notified of the meeting and did not attend. They voted themselves bonuses of $220,000 and $180,000, respectively. P attended one more meeting and was formally removed from the board and Suprema established a two-person board of directors. By 2002 it had revenues of $44,349,977 and gross margin of $4,944,482. P was 'happy' with the way Jr. and Rodriguez ran the company, but he objected to the payment of executive compensation without his consent or approval. In July 2002, Suprema for the first time paid him a dividend of $129,000. P sued for breach of fiduciary duty and breach of contract. P prevailed, and D’s appealed. Ds, argue that the trial court erred in finding an enforceable agreement among shareholders to require the approval of all shareholders for an increase in officer compensation.