Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-01114/USCOURTS-caed-1_05-cv-01114-1/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 28:1332 Diversity-(Citizenship)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

JAMES K. WICKERSHAM,

Plaintiff,

v.

HILARY W. CLARK, CHRISTOPHER W.

CLARK, CHARLES K. CLARK, HADLEY

E. CLARK and EDWARD HUFF,

Interim Trustee of the GT

Turnbow Trust,

Defendants.

________________________________

AND RELATED COUNTERCLAIMS

 

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1:05-cv-01114 OWW LJO

ORDER AFTER SCHEDULING

CONFERENCE 

Defendants’ Opposition to

SJ and any Motion for

Abstention: 1/31/06

Plaintiff’s Reply re SJ &

Opposition re Abstention:

2/13/06

Defendants’ Reply re

Abstention: 2/20/06

Hearing on all Motions:

2/27/06 9:00 Ctrm. 3 (7th

Floor)

I. Date of Scheduling Conference.

January 5, 2006.

II. Appearances Of Counsel.

Jones Vargas by John Desmond, Esq., and Kimble, MacMichael &

Upton by Douglas Tucker, Esq., appeared on behalf of Plaintiff. 

 Dean A. Morehous, Esq., appeared on behalf of the Clark

Defendants. 

Paul Hastings LLP by Kevin C. McCann, Esq., appeared on

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behalf of Edwin D. Huff, Interim Trustee of the Grover D. Turnbow

Trust.

III. Summary of Pleadings. 

1. Plaintiff: Plaintiff contends that he has an

unrestricted right to sell, exchange or otherwise dispose of his

shares of stock in a California corporation known as Triangle T

Ranch, Inc. (“Triangle T”). Plaintiff’s position is more fully

set out in his motion for summary judgment currently on file with

this Court. Triangle T is a Subchapter S corporation for federal

income tax purposes. The shareholders of Triangle T unanimously

elected Subchapter S status in or about December 1986. Plaintiff

wishes to sell or exchange a portion of his shares for an

interest in a Nevada limited partnership known as Glenbrook

Capital Limited Partnership (“Glenbrook”). There is no dispute

that a sale or exchange of plaintiff’s shares would change

Triangle T’s federal income tax status to that of a C

corporation. Plaintiff contends that there is no valid express

or implied shareholder agreement which prevents or restricts him

from selling or exchanging his shares with Glenbrook. Plaintiff

further contends that there is no fiduciary duty or other

restriction owed under California law prohibiting him from

engaging in a transaction with Glenbrook. Plaintiff seeks a

declaration from this Court that (a) Triangle T common shares are

unrestricted; (b) the Triangle T shareholders do not have

fiduciary duty to one another to refrain from transferring

Triangle T stock to an entity that is not a Subchapter S eligible

shareholder; and (c) transfer of Triangle T shares to a

Subchapter S ineligible purchaser will not cause the transferring

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shareholder to incur liability to the shareholders of Triangle T. 

Plaintiff filed this action for declaratory relief to go forward

with a sale because of threats by Defendants that they would file

suit if the transaction was consummated.

2. Defendants contend that California law prohibits

Plaintiff from unilaterally entering into a transaction that

would cause Triangle T to convert from a Subchapter S corporation

to a C corporation. Defendants contend California law imposes a

fiduciary duty on plaintiff preventing him from exercising

unilateral “control” over the corporation’s tax destiny

irrespective of his status as a minority shareholder in Triangle

T. Defendants further contend that:

• there is an agreement or understanding among Triangle T

shareholders that unless and until the shareholders of

Triangle T decide to dispose of the corporation, shares

of Triangle T should be held only by family members;

• there is an agreement or understanding among Triangle T

shareholders to restrict Triangle T share ownership to

members of the Wickersham family, unless and until the

shareholders of Triangle T decide to dispose of the

corporation;

• an agreement or understanding was made among Triangle T

shareholders at or about the time the shareholders

(including Plaintiff) unanimously elected that Triangle

T would become an S corporation for federal income tax

purposes and that such status would be retained

indefinitely and no shareholder acting unilaterally or

in combination with less than all the shareholders

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would take any action to change Triangle T’s Subchapter

S tax status;

• the loss of Subchapter S tax status that would occur by

virtue of plaintiff’s proposed sale or exchange of his

Triangle T shares to Glenbrook would cause substantial

financial harm to all Defendants, including the Turnbow

Trust and the minor children of Plaintiff and Grover T.

Turnbow;

• Plaintiff’s proposed transaction with Glenbrook is not

being undertaken for a bona fide business purpose, but

is instead in furtherance of an attempt to control

Triangle T by Plaintiff and his brother Grover T.

Wickersham.

IV. Orders Re Amendments To Pleadings.

1. The parties do not anticipate filing any amendments to

the pleadings at this time. 

V. Factual Summary.

A. Admitted Facts Which Are Deemed Proven Without Further

Proceedings. 

1. Triangle T and its shareholders unanimously

elected to become a Subchapter S corporation in or about December

1986. 

2. All Triangle T shareholders agreed to a plan of

recapitalization and approved resolutions and consents for the

purpose of securing the benefits of Subchapter S status in or

about December 1986.

3. Plaintiff’s proposed sale or exchange of his

Triangle T shares as alleged in his complaint would cause

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Triangle T to lose its Subchapter S tax status.

4. Plaintiff’s attorney’s fees and litigation

expenses in this matter are being borne in whole or in part by

Glenbrook Capital LP.

5. The Triangle T Articles of Incorporation do not

expressly recite any restriction on the transferability of

shares.

B. Contested Facts.

1. There is neither an agreement or understanding

among the Triangle T shareholders in existence currently which

restricts the sale of Triangle T stock nor has there ever been

such an agreement or understanding.

2. The shareholders of Triangle T have agreed or have

an understanding that no shareholder acting unilaterally or in

combination with less than all the shareholders would take any

action that would cause Triangle T to lose its Subchapter S

status.

3. Loss of Triangle T’s Subchapter S status would

cause substantial financial harm to the Triangle T shareholders,

including all defendants and the Turnbow Trust.

4. Plaintiff’s proposed transaction with Glenbrook

has “economic substance” as alleged in plaintiff’s complaint.

5. Glenbrook is a bona fide “legitimate third party

purchaser” of Triangle T’s shares as alleged in plaintiff’s

complaint.

6. Plaintiff has “at all times acted in good faith”

in securing a buyer for his shares as alleged in his complaint.

7. Plaintiff exercises “control” over Triangle T’s

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tax status within the meaning of California Corporations Code

section 160(a) with respect to any sale, transfer, or exchange of

Triangle T shares with Glenbrook as proposed in his complaint.

8. Grover T. Wickersham was previously party to a

buyback agreement or restriction designed to prevent his Triangle

T stock from being acquired by a person or entity other than a

member of the Wickersham family.

9. Grover T. Wickersham’s shares in Triangle T were

subject to buyback restrictions designed to keep Triangle T from

being acquired by persons or entities outside of the Wickersham

family.

10. The Triangle T board of directors approved the

buyback restrictions applicable to Grover T. Wickersham’s

Triangle T shares.

11. The California Superior Court for the County of

Alameda has assumed control over the property at issue in this

case and the broader issues implicated by any disposition or sale

of Triangle T stock by any party to this action.

12. Glenbrook is controlled by plaintiff’s brother,

Grover T. Wickersham or an entity under his control. 

VI. Legal Issues.

A. Uncontested.

1. Although the parties agree that if this

case should be heard and the court should not discretionarily

abstain from the case, that diversity jurisdiction exists in the

court, the defendants believe that this case is one that is

appropriate for discretionary abstention and they intend to bring

this issue before the court. Defendants further contend that

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plaintiff’s action in this court is designed to preempt and usurp

proceedings in the probate department of the California Superior

Court for the County of Alameda. Defendants therefore contend

that this Court’s exercise of jurisdiction in this diversity case

would improperly interfere with the jurisdiction of the Superior

Court.

2. All of the parties before this Court are Triangle

T shareholders and each of those persons are already subject to

the jurisdiction of the Superior Court, including those persons

identified as “non-participating shareholders” in plaintiff’s

complaint over whom this Court has no jurisdiction whatsoever. 

In addition, the Superior Court already has assumed control and

jurisdiction over the single largest block of Triangle T stock

(i.e., 42%) and made an order which expressly addresses that

stock. The relief sought by the plaintiff in this case would

indisputably have an impact on the value and tax status of an

asset already properly within the control and jurisdiction of the

probate department of the Superior Court.

3. Defendants contend that this case should be

dismissed for lack of subject matter jurisdiction or

alternatively that the Court should abstain from exercising its

jurisdiction in deference to the Superior Court or stay this

action until such time as proceedings in the Superior Court which

will invariably affect the stock of Triangle T and its

shareholders have been concluded. Dismissal, abstention or a

stay are warranted under the “probate exception” to diversity

jurisdiction recognized by the United States Supreme Court in

Markman v. Allen, 326 U.S. 490, 493-95, 66 S.Ct. 296 (1945). 

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Permitting this case to proceed to judgment poses a substantial

danger of interference with the jurisdiction of the Superior

Court over the parties presently before this Court and the value

of property which is expressly subject to the Superior Court’s

ongoing administration.

4. On August 29, 2005, prior to the commencement of

this action, the Superior Court entered an order directing the

Trustee defendant, Edwin Huff, to submit a verified report to the

Superior Court analyzing the propriety of the Turnbow Trust’s

continued holding of Triangle T shares under state law. The

Trustee defendant has now submitted his declaration to the

Superior Court and recommended that the Turnbow Trust and its

beneficiaries would be benefitted by a diversification process

achieved through a sale of Triangle T’s assets (or by a sale

Triangle T as a going concern) pursuant to a plan of liquidation

that would capture the benefits of Subchapter S of the Internal

Revenue Code. Plaintiff’s action, because it seeks approval for

a transaction that would indisputably change the tax status of

Triangle T, necessarily interferes with the Trustee defendant’s

recommendations undertaken at the express direction of the

Superior Court. Defendants therefore contend that the Court

should either dismiss this action outright or abstain from

exercising its diversity jurisdiction because the relief sought

by plaintiff would interfere with prior and ongoing proceedings

in the Superior Court.

5. Defendants contend that the exercise of

jurisdiction in this case would, among other things, interfere

with:

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• property over which the Superior Court has already

assumed jurisdiction;

• the Superior Court’s order of August 29, 2005, and

the appropriate manner of diversifying the

holdings of the Turnbow Trust which include the

single largest block of Triangle T shares;

• the lawful exercise of the Trustee defendant’s

discretion as a fiduciary for all beneficiaries of

the Turnbow Trust, all of whom are also Triangle T

shareholders;

• the report of the Trustee defendant which has been

filed in the Superior Court which directly

concerns the Turnbow Trust and its shares in

Triangle T; and 

• proceedings in the Superior Court by posing the

danger of a verdict herein which would

substantially erode and injure the value of

property over which the Superior Court has already

asserted its lawful jurisdiction.

6. If jurisdiction exists in the Federal Court, there

is no dispute that the Eastern District of California as the

proper venue for the case.

B. Contested. 

1. The parties disagree as to the existence of a

fiduciary duty under California law concerning the ability of a

shareholder of a closely held Subchapter S corporation, to take

an action or engage in a transaction that would change the tax

status of a corporation from a Subchapter S corporation to a C

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corporation. The parties agree that there is no California

Supreme Court authority squarely addressing this issue. 

Plaintiff contends that under California law, restrictions on the

transferability of shares are required to appear conspicuously on

the stock certificates. Defendants dispute that restrictions on

the transferability of shares must appear conspicuously on the

stock certificates. In any event, defendants contend that the

absence of such a legend cannot relieve a shareholder of a

fiduciary duty not to unilaterally destroy Subchapter S status

enjoyed by the corporation and all of its shareholders.

2. All remaining legal issues are disputed.

VII. Consent to Magistrate Judge Jurisdiction.

1. The parties have not consented to transfer the 

case to the Magistrate Judge for all purposes, including trial.

VIII. Corporate Identification Statement.

1. Any nongovernmental corporate party to any action in

this court shall file a statement identifying all its parent

corporations and listing any entity that owns 10% or more of the

party's equity securities. A party shall file the statement with

its initial pleading filed in this court and shall supplement the

statement within a reasonable time of any change in the

information. 

IX. Discovery Plan and Cut-Off Date.

1. In view of the dispute over whether or not abstention

for lack of subject matter jurisdiction applies in this case, the

following schedule for the hearing of motions directed to the

issue of abstention and the summary judgment currently filed by

plaintiff is amended as follows:

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a. Defendants’ opposition and any motion for

abstention to be filed by January 31, 2006.

b. Plaintiff’s reply to defendants’ opposition to

summary judgment and opposition to motion for abstention to be

filed on or before February 13, 2006. 

c. Defendants’ reply to any motion for abstention,

only, shall be filed on or before February 20, 2006.

d. All motions shall be heard on February 27, 2006,

at the hour of 9:00 a.m. in Courtroom 3, Seventh Floor, of the

new United States Courthouse located at 2500 Tulare Street,

Fresno, California.

e. Following hearing and decision on the motions, a

further scheduling conference in this case shall be held. 

SO ORDERED.

DATED: January 5, 2006.

/s/ OLIVER W. WANGER

 

 Oliver W. Wanger

UNITED STATES DISTRICT JUDGE

dlp/wickersham v. clark sch con

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