Filed 1/20/21 Duncan v. Duncan Kitchen Grips, Inc. CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for 

publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication

or ordered published for purposes of rule 8.1115. 

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

ROBIN DUNCAN,

 Plaintiff and Respondent,

v.

DUNCAN KITCHEN GRIPS, INC.,

 Defendant and Appellant.

 G058510

 (Super. Ct. No. 30-2014-00757889)

 O P I N I O N

Appeal from a judgment of the Superior Court of Orange County, James L. 

Crandall, Judge. Affirmed in part, reversed in part and remanded.

Fox Rothschild, John Shaeffer and Jeffrey Grant for Defendant and 

Appellant.

Law Office of Martin N. Buchanan and Martin N. Buchanan; Girardi|Keese 

and Christopher T. Aumais; Good Law and Christopher B. Good for Plaintiff and 

Respondent.
2

INTRODUCTION

For legitimate reasons, businesses often adopt a default position of secrecy 

when it comes to producing or handing over their internal corporate data, especially in 

litigation. There is always a quite reasonable concern that valuable information could fall 

into the hands of competitors and weaken or even destroy one’s position in the 

marketplace. But as this case demonstrates, secrecy can sometimes backfire. Here, it 

backfired in dramatic fashion when a corporate defendant’s lack of transparency in its 

contractual dealings with the plaintiff led to litigation. The defendant’s continued 

resistance to sharing information in discovery ultimately diminished its credibility before 

the trial court, resulting in an adverse judgment. Credibility, once lost, cannot be restored 

to a litigant on appeal, and although we reverse and remand the trial court’s damages 

calculation, we largely affirm its judgment.

FACTS

Background

Respondent Robin Duncan started a manufacturing business with her 

husband, David, in the 1990’s. The two initially started out making grips for tool 

handles, but they eventually migrated into the kitchen utensil market, producing neoprene 

oven mitts and hot pads in conjunction with the makers of the famous George Foreman 

grill. One of the Duncans’ customers was a Canadian food services conglomerate, 

Browne & Company (Browne), owned and operated by cousins Michael and Peter 

Browne.1 Browne became a distributor of Duncan products in the 1990’s.

The Duncans’ business grew and prospered until David’s2 unexpected

death in August 2007. While David was alive, he and Robin handled all of the business 

1 To avoid confusion with their company, we will refer to Michael and Peter Browne by their full 

names when we discuss them individually. To the extent we refer to them as a pair, we shall use the designation 

“the Brownes.”

2 We refer to the respondent and her late husband by their first names only to more easily 

differentiate them from one another. We mean no disrespect or familiarity in doing so.
3

operations themselves, from design to sales. They also managed the books themselves. 

Robin was mostly responsible for purchasing and maintaining company insurance, even 

when David was alive. However, after David died, all the work of the business fell on 

her shoulders. 

Sometime in 2008, Robin decided she could no longer manage the business 

on her own. She approached Browne to explore a potential sale. Interested, the Brownes 

tasked their then-chief financial officer, Anthony Carter, with the job of conducting due 

diligence and hammering out a deal with Robin. While Peter Browne may have had 

some initial involvement, the deal was mostly handled by Carter.3 

In reality, “due diligence” seems to have been too ambitious a phrase. To 

hear Robin tell it, she gave Browne access to all her books and records as well as her 

facilities. She says there is nothing she did not give them permission to see. But from 

Carter’s point of view, due diligence consisted of little more than him touring the 

Duncans’ Tustin manufacturing plant. He felt Browne was making an acquisition 

proposal with no historical sales data and little in the way of financial reports from Robin 

aside from her belief that the products had strong sales prospects. 

In the end, Browne agreed to purchase the business by way of a royalty 

arrangement – Robin would get an initial $100,000 payment in exchange for the 

company’s assets, with ongoing “earn-out payments.” This was memorialized in an asset 

purchase agreement dated January 20, 2009. Pursuant to this agreement, Robin would 

sell all the assets of the Duncan businesses, including patents and trademarks for their 

3 There is conflicting evidence in the record on this point. At his deposition, Michael Browne 

professed very little knowledge of the deal; he had not even read the asset purchase agreement, even though his 

approval was required to go through with the acquisition. He did not think anyone at Browne other than Carter was 

involved. However, Peter Browne testified at his deposition that he had some initial involvement, though he did not 

perform any due diligence. And interestingly, his view at the time was that the Duncan business was not going to be 

viable without significant changes, though he did not specify what those changes might be. In any event, it appears 

reasonably clear from the record that Carter was the main player on Browne’s end.
4

products, to an entity created by Browne for the purpose of acquiring the business. This 

entity was appellant Duncan Kitchen Grips, Inc. (DKG). 

In addition to the initial payment and earn-out payments (the intricate 

calculation of which we shall discuss in a moment), DKG had reporting and transparency 

obligations to Robin under the agreement. It had to provide her with quarterly and annual 

reports on important financial data such as net sales and gross profit. If Browne deemed 

it “reasonable,” Robin could request and receive documentation backing up the annual 

numbers. She could request an audit at her own expense of DKG’s records relating to her 

earn-out payments. She would be engaged as a paid consultant for DKG as requested 

between the closing of the agreement and December 31, 2019. If Browne ever decided it 

wanted to stop operating the business or if net sales fell below $1 million, she had the 

right to repurchase it on agreed-upon terms. Each year, she was entitled to a meeting 

with DKG representatives to review results from the previous year and plans for the 

future, (though her opinion on business strategy held no real weight). And she got a

discount on DKG products. 

Presumably due to the murky nature of the business’ finances, the asset 

purchase agreement included a labyrinthine procedure that would determine its final 

purchase price at a later date. Prior to closing, Robin was to deliver to DKG an estimated 

balance sheet reflecting assets and liabilities. At closing, she was to receive the initial 

$100,000. Then, DKG had approximately three months to survey the company’s actual 

assets and liabilities and provide a closing balance sheet to Robin. If the post-closing 

survey revealed assets exceeding liabilities by more than $100,000, Robin would be paid 

the difference. If liabilities exceeded assets, however, the difference would be deducted 

in equal amounts from Robin’s future earn-out payments until DKG recouped the initial 

$100,000. 

The earn-out payments were structured by period. In the three months 

following closing, while DKG was doing its survey, Robin would be paid a uniform 
5

$20,000 per month. These were called initial period earn-out payments. It is undisputed 

that DKG made these payments to Robin. 

From May 2009 onward, however, her earn-out payments were to be based 

on yearly net sales. The payments were calculated as follows: Robin was to receive a 

graduated percentage of net sales as they reached certain threshold amounts – 5 percent 

of all net sales up to $1 million, 7.5 percent of all net sales from $1,000,001 to $1.5 

million and so on. Then, a gross profit percentage amount would be either added to or 

deducted from her percentage of net sales. The gross profit percentage was an 

enumerated formula seemingly designed to adjust the earn-out payment so that it took 

cost of goods sold into account. If the gross profit percentage was below 45 percent for 

any given fiscal year, DKG could reduce Robin’s earn-out payment, and if it was above 

55 percent, DKG could increase her payment. The payments due from May 2009 onward 

were called advanced earn-out payments. 

Ultimately, both the initial period earn-out payments and the advanced 

earn-out payments represented advances from DKG to Robin based on a projection of net 

sales for the year. The advances were then to be offset against the amounts owed once 

actual yearly sales figures were reported. The agreement itself set August 31, 2009 as the 

date the earn-out payments would be initially reconciled against the amounts actually 

earned. If for that time period, the actual amounts owed were more than the advances, 

Robin would be paid the difference by October 31, 2009. If the actual amounts owed 

were less than the advances, the overpayments would be deducted equally from earn-out 

payments to be made between October 2009 and December 2010. But moving forward, 

the reconciliations were to occur within 45 days of the close of the fiscal year. Any 

additional amounts owed to Robin would be paid within 50 days of the close of the fiscal 

year. And any overpayment would be deducted from future advanced earn-out payments 

beginning February 1 of the next fiscal year until fully recouped. 
6

Once the deal closed, Carter had responsibility for DKG’s day-to-day 

operations. He also oversaw earn-out payments to Robin under the asset purchase 

agreement.

Through September 2009, DKG’s records showed that Robin was advanced 

far more than she was actually owed, and as a result, DKG stopped paying her earn-outs 

as of October 1, 2009. No gross profit percentage was ultimately added to or deducted 

from her earn-out payments because the percentage never fell out of the 45-55 percent 

range. 

The cessation of her earn-out payments greatly impacted Robin’s monthly 

cash flow. Around January 2010, she approached Browne about the problem. The 

parties agreed that she would get a $100,000 loan to help her with living expenses. 

However, the loan proceeds were not given to her in a lump sum; instead, they were 

advanced on a monthly basis between January 2010 and the end of June 2014. This 

ended up adding to her overall deficit vis-à-vis her earn-out payments. By July 2014, 

payments to Robin had once again stopped at Carter’s direction. 

To add to her frustrations, Robin claims there was little communication 

from DKG or Carter once the deal closed. She claims they rarely sent her quarterly or 

annual reports as required by the contract, and the sales reports she did get were usually 

only several lines on a sheet of paper with no explanation. She felt she was in the dark 

and was surprised when her earn-out payments ceased.4

The Lawsuit

About four months after her payments stopped, Robin filed suit against 

DKG and Browne, seeking accounting and alleging breach of contract-related claims, as 

4 There is certainly evidence in the record to suggest that Browne and DKG, specifically Carter, did 

not take Robin very seriously. On May 7, 2013, she sent an email to Carter asking to get more information about 

less-than-stellar sales figures for DKG. Carter curtly responded that he had “provided all sales info required per the 

royalty agreement.” The request merited more. After all, the asset purchase agreement gave Robin the right to 

make such requests for back-up documentation of the sales figures, so long as they were reasonable, and we can see 

nothing unreasonable about her request. 
7

well as fraud and unjust enrichment. Rather than proceed with a jury trial, however, 

Robin agreed to forego her other claims in exchange for a complete accounting of the 

monies due to her under the asset purchase agreement. The parties agreed the accounting 

would be done by partners Ken Froese and Cyrus Khory of Froese Forensic Partners Ltd. 

(Froese), a boutique forensic accounting firm in Toronto. 

Specifically, Froese and Khory were charged with “performing an audit to 

determine whether [DKG] accurately reported Net Sales to Robin Duncan for purposes of 

calculating her Earn-Out Payment as both of those terms are defined” in the asset 

purchase agreement. They were to audit “those books and records of DKG and any 

related Browne . . . entities necessary” for them to do this, and any disputes between the 

parties as to the scope of the audit would be resolved by the trial court should the parties 

be unable to do so themselves. The audit was to be conducted according to Generally 

Accepted Audit Standards (GAAS) and applicable professional standards. The partners 

would be jointly responsible for preparing an audit report to be submitted to the court. 

Once the report was submitted, the parties would have an opportunity to 

file briefs addressing the consistency of the audit with GAAS and the other professional 

standards. The trial court would then hold a hearing on the issue, and if it found the audit 

was conducted in accordance with GAAS, judgment would be entered consistent with the 

report. However, if it was “not satisfied with the report,” it could, “in its discretion, . . . 

issue any appropriate order on how the case should proceed that is otherwise consistent” 

with the parties’ stipulation. 

Froese got to work and conducted an audit of records from DKG, Browne, 

and its American subsidiary, Browne USA. On October 25, 2017, they issued a report 

containing several notable findings.
8

Perhaps Froese’s most illuminating finding was that the Duncans’ business 

was in the red when Robin sold it to Browne.5 Given the disorganized nature of the 

Duncan business records, DKG had to cobble together its own valuation of assets versus 

liabilities, which showed the business was actually worth $-40,341.94 at the time of the 

acquisition. As a result, according to Froese, there was a “purchase price deficit” of 

approximately $140,342 (counting the initial $100,000 that Robin had received at 

closing). Because Robin had not challenged DKG’s valuation within the timeframe 

provided in the agreement, it stood. 

Because of initial period earn-out payments and advanced earn-out 

payments made between January and September 2009, by the time the parties entered 

into their loan agreement in January 2010, the deficit totaled $158,264. That is, in effect, 

how much Robin already owed Browne when it extended her the loan for her own 

personal cash flow. 

Given the enormous deficit, Froese found DKG was entitled under the asset 

purchase agreement to stop advancing earn-out payments in order to pay down the 

deficit. It noted DKG had resumed payments to Robin by January 2017 when the deficit 

had been extinguished. 

The second notable finding by Froese seems to have been a bit of a mixed 

bag for everyone. To Robin’s surprise, Froese found DKG had included all sales in her 

earn-out payment calculations. But to DKG’s surprise, Froese found it had used an 

inappropriate methodology called transfer pricing to value a certain portion of those 

sales. Transfer pricing, Froese said, is “[t]he price at which goods are bought and sold 

between wholly-owned entities (or divisions).” Transfer pricing can significantly impact 

5 DKG told Froese that Robin had failed to provide an estimated closing balance sheet as required 

by the asset purchase agreement. Froese included this claim in its report. Robin, of course, disputed this, insisting 

she had provided a valuation of her company’s assets to DKG. 
9

a company’s financials, because the company has much more latitude on where the price 

is set for “intercompany sales” as opposed to sales to external third-party customers. 

After reviewing DKG’s sales data, Froese found that it had included sales 

to external third-party customers, such as retailer chains, as well as sales to Browne 

subsidiaries which then sold the products to third party customers. As the years passed, 

the “intercompany sales,” or sales to Browne’s own subsidiaries, comprised a larger and 

larger percentage of DKG’s annual total gross sales for purposes of Robin’s earn-out 

calculations. At the same time, there was a corresponding decrease in third-party sales as 

these customers’ sales were passed through Browne USA. When Froese replaced 

intercompany sales with third party sales in its calculations, total net sales increased 14 

percent between 2009 and 2016 – which would clearly have translated into more earn-out 

potential for Robin. 

There was one exception to this transfer pricing. In its sales reporting 

between 2012 and 2016, DKG had replaced all intercompany retail sales to Browne USA 

with third-party retail sales. It did not replace any other types of intercompany sales with 

third-party sales. Carter was able to provide an explanation for this peculiarity based on 

past Browne accounting practices6, and Froese noted the asset purchase agreement itself 

was silent on whether it might permit transfer pricing. Froese left it to the court to 

determine the latter issue as a legal matter, but from an accounting perspective, it opined 

that earn-out payments should be based only on third-party sales. If the court were to 

adopt Froese’s view on transfer pricing, the report said, Robin would be owed an 

additional $144,345. 

6 In 2012, Carter apparently instituted a change to the way DKG accounted for sales to third party 

customers. Browne had been a reseller of Duncan products prior to the acquisition. In order to keep the sales 

picture consistent with how it looked at the time of acquisition, Carter instructed the company controller, Laura 

Williams, to “minus out” sales to Browne and add in sales by Browne to the retailers. This change would tend to 

increase the net sales amount. 

But this change was not uniform across all sales and was not in place for the duration of the term during 

which Robin was receiving earn-out payments.
10

Froese made a third interesting observation. In reviewing DKG’s monthly 

sales between January 2009 and June 2017, it found that total reported net sales increased 

during the first three years of the period, but then steadily declined between 2012 and 

2016. Toward the end of this period of time, Browne was undergoing some changes. In 

May 2015, husband-and-wife foreign investors by the name of Dennis Poon and Maggie 

Yau purchased a 60 percent stake in the Browne group of companies and the business 

expanded into Asia. 

Not surprisingly, upon its issuance, the Froese report was met with 

skepticism on both sides. The parties swiftly filed briefs in order to lodge their objections 

to any finding in the report that did not comport with their position. More specifically, 

Robin contended that Froese had failed to thoroughly investigate her belief that DKG was 

funneling sales through numerous other Browne entities so as to keep them off DKG’s 

books, especially since sales and marketing of the products had expanded into Asia. She 

also challenged Froese’s methodology of sampling data rather than undertaking a 

complete forensic audit. And DKG was concerned about Froese’s conclusions as to the 

use of third-party sales in calculating earn-outs. 

Given that both sides objected to the audit report, the trial court decided to 

set the case for trial. DKG was skeptical of this – it wanted the court to excise the portion 

about owing Robin additional earn-out payments and adopt the remainder of the report. 

But the trial court observed that if DKG was, as Robin charged, “cooking the books,” it 

could render the entire report doubtful in its accuracy. It denied DKG’s motion to adopt 

the report and set the matter for trial. 

The Trial

Testimony was taken over three days from four witnesses: Carter, Robin, 

Khory, and David Cohen, a sales manager for the Duncans who had stayed on to become 

general manager of operations with DKG until his departure in 2012. During Khory’s 

testimony on the second day of trial, Robin’s counsel revealed an interesting theory of 
11

her case. Using DKG’s year-end trial balance sheets for the period of 2009 to 2016, 

counsel had Khory confirm that debits for DKG’s prepaid insurance had increased in 

2012. When the deal had first gone through and for the two years following, prepaid 

insurance hovered around $3,000. In 2012, however, the debit for prepaid insurance shot 

up to over $14,000. It increased even further between 2013 and 2015, peaking at nearly 

$20,000. By mid-2016, it had decreased to around $5,000. 

Robin’s counsel asked Khory to opine as to whether the increase in prepaid 

insurance was a “red flag” to him. Khory, perhaps taken somewhat aback, stated he 

could not answer the question because the prepaid insurance was not an item that Froese 

looked at, and he also felt he needed more than just the trial balance sheets to form an 

opinion on that issue. 

Robin testified that when she ran the business and procured the insurance, 

the product liability insurance premiums were the only insurance premiums she prepaid 

at the beginning of the year because they were based on the previous year’s gross sales. 

At year’s end, the insurance company would audit their sales and adjust the premium. 

She claimed product liability insurance usually cost around $3,000 per year, and when 

she owned the business, gross sales topped out at $2 million in one year. The premium 

was thus based on a ratio - $1 of premium would equate to a certain amount in sales –

“for instance,” she said, “a dollar would cover $400 in sales.” 

Upon inspection, none of DKG’s year-end trial balance sheets showed an 

expense account for product liability insurance, although they contained accounts for 

other types of insurance such as workers’ compensation, health insurance, and general 

and business insurance. Khory confirmed that none of the values in those other insurance 

accounts increased to the extent shown in the prepaid insurance account. He was asked 

to assume that the prepaid insurance entries in the trial balance sheets represented product 

liability insurance premiums and that the premiums were based on gross sales. Dividing 

the 2010 gross sales figure of $1,799,820 by the prepaid premium of $3,023.80 showed a 
12

ratio of $1 dollar in premium to approximately $595 in gross sales. Counsel had Khory 

apply that baseline $1-to-$595 ratio to the prepaid insurance premiums listed on 

subsequent year-end trial balance sheets in order to calculate the gross sales for each 

year. They ended up showing significantly higher amounts of gross sales than what was 

reported on DKG’s books. When asked to run the earn-out calculations to see how these 

numbers would impact the amounts owed to Robin, Khory testified that royalties would 

be far higher than the amounts for which DKG had been crediting her. 

Since Robin’s counsel had already run the earn-out calculations using a 

different ratio ($1-to-$433), the parties stipulated that, if that ratio was applied to the 

premiums to calculate actual gross sales, the total amount of earn-out payments due 

Robin under the asset purchase agreement would have been $3,099,357. Of course, DKG 

vehemently disagreed with all of the assumptions necessary to support this theory. 

Nevertheless, it was willing to stipulate – as one must – that math is math. 

Khory reiterated that his calculations were based on the assumption that the 

prepaid insurance entries referred only to yearly products liability insurance premiums. 

Froese did not analyze insurance at all, so he was unable to say for sure what those 

entries were about. Khory also admitted that he had not analyzed the books and records 

of any other Browne entities besides DKG, Browne USA, Browne and a small French 

subsidiary called Berard, although there were numerous other entities in existence. 

DKG claims it was not aware of Robin’s insurance-related theory of 

underreported sales until Khory’s questioning. But it did not seek a continuance in order 

to marshall any documents needed to test the theory.7 On redirect, its counsel explored 

other possible bases for the prepaid premium increase, noting workers’ compensation 

insurance expenses had started rising significantly in 2012. When prompted with this 

7 After hearing the Khory testimony on direct, DKG’s counsel and Carter determined they could not 

obtain copies of the insurance policies from DKG’s broker in time to present them at trial, so they decided Carter 

could testify instead. They apparently did not discuss whether they ought to seek a continuance to get the policies. 
13

new piece of information, Khory concluded the prepaid insurance premiums likely 

increased due to increased expenditures on workers’ compensation insurance. 

DKG then put Carter back on the stand to explain the workers’ 

compensation insurance increase. He claimed DKG’s workers’ compensation premiums 

had gone up by a factor of four or five in the 2011-2012 timeframe. In the beginning, 

DKG’s insurance broker had mis-rated employees in the Tustin manufacturing plant as 

office workers rather than factory workers (who would be subject to higher workplace 

injury risk). In 2011 or 2012, the broker realized that the rating was incorrect and 

recategorized them, resulting in substantially higher premiums. On cross-examination, 

Carter conceded that product liability insurance was usually paid in advance and the 

premiums for it were based on gross sales. 

The trial court issued a tentative statement of decision on May 9, 2019. It 

accepted Robin’s insurance-related theory in large part because DKG had failed to offer 

any business records to refute the theory and also because DKG’s conduct in discovery 

suggested that it had been either hiding documents or manipulating figures.8 However, 

the trial court found Carter’s workers’ compensation explanation for the increase in 

prepaid premiums “plausible” and was not persuaded Robin had proven 100 percent of 

the increase in prepaid premiums was due to increased sales. It concluded only 25 

percent of the increase could be attributed to products liability insurance and 

consequently, DKG had underreported sales by 25 percent. It also concluded DKG owed 

the $144,345 in additional royalties calculated by Froese based on the allegedly improper 

use of transfer pricing. 

Upon receiving the tentative decision, DKG moved to reopen in order to 

introduce previously unseen evidence that there was no increase in product liability 

8 Two facts weighing heavily in the trial court’s mind were (1) not a single current DKG or Browne 

employee came to testify at trial, and (2) Carter and Williams, who had since left DKG’s employ, had been given 

access to company books and records the night before they were to testify as persons most knowledgeable for DKG 

in order to produce records for the depositions. These records had not previously been produced to Robin’s counsel.
14

insurance premiums. The motion was denied essentially on a too-little-too-late basis. 

Because DKG had failed to produce the documents during discovery and before the close 

of evidence at trial, and because of the eleventh-hour nature of the production it did

make, its credibility had been tarnished in the court’s eyes.9 

The court entered its statement of decision on September 3, 2019, which 

provided for a total award to Robin of $1,399,351.97 including prejudgment interest. 

Judgment was entered that same day for that sum plus postjudgment interest. 

DISCUSSION

DKG finds three aspects of the judgment erroneous: (1) the trial court’s 

conclusion that sales were underreported by 25 percent based on increases to prepaid 

insurance and its calculations of additional royalties due based on that conclusion, (2) the 

award of $144,345 based on transfer pricing, and (3) what it believes to be the trial 

court’s refusal to adopt the Froese audit report wholesale. With one small exception, we 

reject these arguments.

I. Standard of Review

DKG’s first two arguments are subject to a substantial evidence standard of 

review. “When a trial court’s factual determination is attacked on the ground that there is 

no substantial evidence to sustain it, the power of an appellate court begins and ends with 

the determination as to whether, on the entire record, there is substantial evidence, 

contradicted or uncontradicted, which will support the determination, and when two or 

more inferences can reasonably be deduced from the facts, a reviewing court is without 

power to substitute its deductions for those of the trial court. If such substantial evidence 

9 The insurance documents DKG submitted with its motion seem to raise more questions than they 

answer. DKG submitted a declaration from its insurance broker, Kevin Loftus, who explained that DKG’s product 

liability insurance was subsumed under the “Products and Completed Operations” coverage in its comprehensive 

general liability insurance. The premium for this coverage was determined by sales. According to the documents 

Loftus provided, the premiums for this coverage did not stray too far from the $11,000-12,000 range until the 

premiums increased slightly in the 2013-2014 policy period and then shot up in the 2014-2015 policy period. To 

further muddy the waters, DKG did not have its own policy. Instead, it was an additional insured on another 

Browne entity policy. 
15

be found, it is of no consequence that the trial court believing other evidence, or drawing 

other reasonable inferences, might have reached a contrary conclusion.” (Bowers v. 

Bernards (1984) 150 Cal.App.3d 870, 873-874 (italics omitted).)

We review DKG’s third argument under an abuse of discretion standard. 

The weight to be given the audit report was a matter left to the trial court’s discretion in 

the stipulated order entered pretrial. Thus, we will not disturb the trial court’s decision 

unless it went outside the bounds of reason or resulted in a miscarriage of justice. (See 

Horsford v. Board of Trustees of California State University (2005) 132 Cal.App.4th 359, 

393-394.)

II. The 25 Percent Underreporting Conclusion

The trial court decided to award Robin $822,053.30 in additional royalties 

based on underreporting of sales as determined through her insurance premium theory. 

DKG finds fault with this for three reasons. First, it contends the 25 percent calculation 

represents an impermissible compromise. Second, it claims the calculation finds no 

support in the evidence. And third, it argues the finding conflicts with the trial court’s 

glowingly positive assessment of Khory’s credibility as an expert witness and its 

conclusion that the Froese report complied with GAAS.

The first two arguments are somewhat related. A compromise verdict 

usually occurs in jury trials when some jurors do not believe the plaintiff has established 

liability, but the panel compromises and awards a small recovery nonetheless. (See 

Lauren H. v. Kannappan (2002) 96 Cal.App.4th 834, 840.) When such a verdict has 

occurred, a new trial is required. (Ibid.) Here, DKG argues the trial court’s award of 25 

percent rather than 100 percent of the purported increase in sales was a compromise to 

plaintiff because there was actually very little in the way of hard evidence to support the 

insurance theory.

We do not think the trial court compromised the liability issue. It found 

DKG liable for underreported sales. In its view, the dramatic rise in prepaid insurance 
16

between 2012 and 2015 was a relevant trend line which had not been adequately 

explained by DKG. While it agreed the larger portion of the increase was plausibly 

explained by the rise in DKG’s workers’ compensation premiums, it did not believe this 

was the only cause of the increase. It found at least some of the increase was attributable

to product liability insurance. 

To compound DKG’s problem, the trial court did not find its business 

records thoroughly credible given the last-minute production of many of them and the 

lack of testimony from any current employee. The court was entitled to resolve any 

doubts or ambiguities concerning the records against DKG. (See Bove v. Beckman

(1965) 236 Cal.App.2d 555, 564 [“‘[t]he acceptance or refusal to accept an inference 

reasonably deducible from the evidence, or the acceptance of one of several conflicting 

inferences reasonably deducible therefrom, is a function committed to the discretion of 

the trier of fact and may not be determined as a matter of law.’ [Citation.]”]; see also 

W.S. v. S.T. (2018) 20 Cal.App.5th 132, 154 [“As the trier of fact, the trial court must 

evaluate the credibility of witnesses and make determinations when conflicting evidence 

is presented.”].) 

There was sufficient evidence to support the trial court’s conclusion about 

insurance. There was no information in the trial balance sheets explaining how product 

liability insurance was expensed – indeed, DKG itself did not seem to know. It put 

Carter on the stand a second time to explain the workers’ compensation premium 

increase, but he did not explain the expensing of product liability insurance on the 

balance sheet. Meanwhile, Robin testified that when she ran the company, such 

insurance was always prepaid. Everyone agreed product liability insurance premiums 

were tied to sales. The Froese audit had not analyzed the finances of all Browne-related 

entities to determine if some Duncan product manufacturing and sales may have been 

moved off the books of the entities it did audit. The trial court appeared to find Carter a 

less-than-authoritative witness on these matters due to his role in the deal and because of 
17

the last-minute production of records. Based on the aforesaid evidence, the trial court 

inferred the existence of additional sales which had been hidden from Robin. Right or 

wrong, this was reasonable; and even if we may have drawn different conclusions, we 

may not substitute our judgment for that of the trial court.

DKG cannot be faulted for wondering at the basis for the trial court’s 

apportionment of 25 percent of the prepaid premium increase to product liability 

insurance. The statement of decision gives no explanation for it. But since the trial court 

had already determined that the prepaid premium increases at least partially reflected an 

increase in sales, it had to come up with a mathematical way to account for them. It did 

not believe DKG had provided it with all information necessary to do that, so it decided 

to use the information it did have.10 

DKG believes Robin unfairly ambushed it with her insurance theory of 

underreported sales on the second day of trial, leaving it no time within which to obtain 

necessary documents to mount a defense. While she generally requested insurancerelated documents in discovery, DKG argues, she never sought to meet and confer or 

compel responses after DKG lodged objections to those requests. Thus, DKG had no 

reason to expect that insurance was important to her. 

We are skeptical. First, this was an argument DKG could and should have 

raised with the trial court before the close of evidence. If indeed DKG had been 

10 To the trial court’s credit, it made efforts to elicit the information it sought. After the attorneys had 

completed their examination of Carter, the trial court questioned him a bit on this topic: 

“THE COURT: But do you have any records that show what percentage of an increase was due to workers’ 

comp as opposed to product liability? 

THE WITNESS: “I don’t have them on me today, but they all exist, yes. 

THE COURT: But can you say today what percentage of the increase was due to which coverage?

THE WITNESS: I think the best thing would be to...actually look at the financial statements and look at 

what was expected...you could then take the expense in the financial statements, tie it back to payroll dollars, and 

then you’d be able to do some calculation. So if you’d like, I could sit down and do all that for you.

THE COURT: We had that accountant in here, our forensic accountant doing that.

THE WITNESS: Okay.” 

There was no objection or request from DKG’s counsel for any clarification of this exchange, and counsel 

never sought a continuance to obtain and produce the documents to which Carter was referring. Nevertheless, it 

seems to us Carter was suggesting the financial statements would have been his starting point in making the 

necessary calculations. And the trial court seems to have followed this suggestion.
18

legitimately unable to mount a defense to this theory earlier, it could have sought a 

continuance in order to obtain the documents necessary to do so before the matter was 

submitted to the trier of fact for decision. 11 In any event, Robin’s request for insurance 

documents in discovery was a clue that she at least found the issue nominally relevant. 

One cannot claim ambush if the “attacker” has been this visible.

As Robin points out in her respondent’s brief, she had been paying about 

$3,000 per year for product liability insurance prior to the acquisition. In 2009, DKG 

spent about $8,438 on workers’ compensation insurance, according to its balance sheet. 

As between those two types of insurance, the trial court could thus have reasonably 

surmised product liability insurance constituted around 36 percent of the expenditures in 

a normal year. It recognized that mis-rating employees for workers compensation 

insurance would likely result in a larger increase in premiums than an increase in sales. It 

therefore settled on 25 percent as the proper approximation of the increase in prepaid 

premiums attributable to product liability insurance. We find nothing unreasonable about 

this deduction, and it does not suggest compromise to us.

DKG also argues the $1-to-$433 premium dollars-to-sales dollars ratio is 

flawed. The $433 multiplier came about by dividing the gross sales from 2009 

($1,415,637) by the prepaid insurance for 2010 ($3,264.07). Since there would have

been no gross sales figures for 2010 at the time the premiums were prepaid at the end of 

2009, this was a reasonable ratio to apply if one assumes the entire prepaid insurance 

amount at that point was attributable to product liability insurance.12

11 DKG did move to reopen the record after the close of evidence to submit documents and 

declarations to counter the new theory. But by this time, the trial court had issued its tentative decision. In his 

declaration supporting the motion to reopen, DKG’s counsel seemed to concede that he did not act earlier because 

he “did not believe that there was any likelihood that the Court would endorse Plaintiff’s new theory of recovery 

since the only evidence she had to support the theory was an increase in prepaid insurance that simply did not tie to 

any insurance expense, other than workers’ compensation.” We cannot save a litigant from the consequences of its 

own faulty predictions.

12 This was a reasonable assumption given that Robin says the only insurance she ever prepaid was 

product liability insurance and 2009 was something of a transition year between her and Browne.
19

DKG argues the lack of a product liability expense account on its trial 

balance sheet proves the increase was wholly attributable to workers’ compensation 

insurance. Pursuant to basic accounting principles, it argues, the prepaid insurance was 

an asset that could only be offset by an expense elsewhere in the balance sheet. The only 

insurance expense account to increase was the workers’ compensation account. Thus, the 

increase must be attributed to workers’ compensation and the lack of an expense account 

for product liability insurance merely shows that product liability insurance was 

subsumed within another insurance expense account. 

To be sure, this is a plausible explanation. 

But there were other inferences equally plausible. One is that product 

liability insurance simply was not captured on the balance sheet. Indeed, despite going 

over insurance entries on the 2015 trial balance sheet at some length at trial, Carter was 

never able to identify a precise account dealing with product liability insurance, even 

though he was the person responsible for creating the document and maintaining its 

accuracy.13 He could only say that the prepaid insurance related to “all insurance,” 

which is hardly precise. Moreover, the trial court clearly suspected Carter of having an 

incentive to manipulate figures or hide information. It did not trust the completeness of 

the records he had prepared. We cannot disturb this credibility determination from our 

distance.

Another question DKG raises is this: if there were unreported sales, why 

didn’t Froese find any corresponding raw materials purchases and manufacturing costs 

necessary to support such sales? A valid point. But here we must remind ourselves that 

Froese did not analyze the books and records of any of the Browne subsidiaries located in 

Asia where it was manufacturing and selling products. The court may have suspected 

that such costs were accounted for in these unaudited records. 

13 He was also the one responsible for purchasing insurance for DKG. 
20

This brings us to DKG’s third argument. The trial court’s overwhelmingly 

positive estimation of Khory as a witness in no way required it to accept each and every 

one of his opinions. It was free to accept some of his testimony and findings and 

disregard others so long as there was a rational basis for doing so. (See Morrison v. 

Housing Authority of the City of Los Angeles Bd. of Comrs. (2003) 107 Cal.App.4th 860, 

868.) Here, the trial court adopted the Froese report insofar as the auditor had conducted 

the necessary investigations. Khory admitted that he had not even thought to analyze the 

reasons behind the increase in prepaid insurance premiums nor the potential correlation 

between those increases and product sales. The trial court was thus entitled to find that 

his opinion on the reasons for the increase in the premiums lacked a valid basis. (See 

Evid. Code, § 801, subd. (b).) Again, we see nothing here to undermine confidence in the 

judgment. 

The problem we must raise with the judgment comes in its calculation of 

damages due under Robin’s insurance theory. The judgment provides a table listing each 

year’s purportedly underreported sales and then earn-out payments and prejudgment 

interest that would flow from those. We find the information in this table difficult to 

square with the evidence.

First, the table begins with the year 2010. This does not comport with the 

evidence presented about insurance. Prepaid premiums skyrocketed beginning with the 

2012 year-end balance sheet, not the 2010 or 2011 balance sheet. The prepaid insurance 

category increased from $3,211.32 at the end of 2011 to $14,650.66 at the end of 2012. 

Prior to 2012, the prepaid premium category held fairly steady around $3,000. Indeed, 

the prepaid insurance number decreased from 2010 to 2011. So under the insurance 

theory, sales began to go underreported in 2011 at the earliest.14 This is corroborated by 

14 Khory testified that premium increases would reflect a previous year’s sales, so we assume 2011 

would be the appropriate starting point for the underreporting of sales. But the trial court must make the ultimate 

determination on remand.
21

the Froese report, which showed DKG’s sales beginning to decline in 2012. One might 

reasonably suspect DKG of fudging numbers if it was reporting declining sales, and not 

so much if sales were reportedly increasing.

Additionally, the trial court had determined product liability insurance was 

responsible for 25 percent of the prepaid premium increase. But its calculations appear 

to have applied the 25 percent apportionment to the total amount of prepaid insurance for 

each year from 2010 through 2016. We cannot agree with this calculation. For instance, 

assuming product liability insurance was responsible for 25 percent of the increase in 

premiums each year, in 2012, product liability insurance would have been responsible for 

$2,859.84 of the $11,439.34 increase that year. Multiplying $2,859.84 by $433 results in 

gross sales of $1,238,308.56 for 2011, which is less than the amounts given in the trial 

court’s calculations. In fact, the trial court’s calculations start to balloon for 2012 

onward, reaching their peak at $8,670,144.41 in underreported sales for 2014. These 

numbers seem to us highly inflated given that prepaid insurance only modestly increased 

year-over-year after the initial spike in 2012.15 

Additionally, it is unclear whether the underreported sales listed in the table 

represent gross or net sales. This is an important distinction. Even though the product 

liability premiums were calculated based on gross sales, Robin’s earn-out payments, 

pursuant to the parties’ agreement, were to be calculated using net sales. The trial court’s 

table has columns for “royalties due” but it is not clear to us whether these figures were 

calculated using gross or net sales. 

Because the trial court’s calculation of underreported sales seems out of 

alignment with its findings regarding increases in prepaid insurance, we reverse that part 

15 Indeed, prepaid insurance decreased in the 2015 year-end trial balance sheet, so presumably, 

under her own theory, Robin would not be owed any earn-out payments for underreported sales in 2014. Again, 

however, this issue must ultimately be resolved by the trial court.
22

of the judgment and remand it to the trial court for further proceedings in order to clarify 

or arrive at an accurate figure based on the evidence in the trial record.

III. The Transfer Pricing Issue

As already discussed, the transfer pricing issue was one originally raised 

not by a party but by Froese in the audit report. Froese was not inclined to make a legal 

determination as to the meaning of the word “Net Sales” in the party’s contract, but it 

could opine from an auditing perspective that transfer pricing is an imperfect and 

inappropriate practice given its unique susceptibility to manipulation. After the close of 

evidence, both sides submitted briefs on the issue of whether the contract permitted 

transfer pricing. DKG argues that the trial court failed to make a finding on this point, 

thus rendering its $144,345 award on this issue wanting. Again, we must disagree.

The trial court did make a finding on this point. It awarded Robin the 

additional royalties recommended by Froese stemming from the use of transfer pricing. 

It may not have provided discussion on that point, but “a trial court rendering a statement 

of decision under Code of Civil Procedure section 632 is required to state only ultimate 

rather than evidentiary facts because findings of ultimate facts necessarily include 

findings on all intermediate evidentiary facts necessary to sustain them.” (In re Cheryl E.

(1984) 161 Cal.App.3d 587, 599.) In order to award Robin that sum, the trial court 

necessarily must have first determined that the parties’ contract did not permit transfer 

pricing. And such an interpretation is reasonable. The asset purchase agreement’s 

definition of the term “Net Sales” is fairly expansive. It includes “all gross invoiced sales 

of any products that are based upon or derivative of” the Duncans’ patents or products 

that they “designed, manufactured or sold . . . prior to the Closing Date during the 

applicable Fiscal Year” less billbacks. The definition does not restrict net sales to those 

made by DKG.

Moreover, neither side put forth evidence at trial regarding their respective 

understandings of transfer pricing, or whether their contract permitted it. In light of 
23

Khory’s expert opinion that such pricing was improper from an accounting perspective, 

the trial court was free to adopt that opinion in the absence of any specific contrary 

language in the asset purchase agreement. We find the trial court did not err in awarding 

damages for DKG’s use of transfer pricing based on the Froese report.

IV. The Audit Report

Finally, DKG argues the trial court abused its discretion in failing to adopt 

the Froese report. It is unclear to us as to whether DKG challenges the trial court’s denial 

of its pretrial motion to adopt the Froese report or whether it challenges the trial court’s 

adoption of parts of the report in the ultimate judgment. DKG did not argue in its brief 

that the pretrial ruling was directly appealable, and even if it were, the appeal from that 

ruling would be untimely. (See Cal. Rules of Court, rule 8.104, subd. (a)(1).) In any 

event, the trial court was within its discretion to adopt the course that it did.

The parties’ stipulation provided that if the trial court found the Froese 

report was consistent with GAAS and other professional standards, judgment “consistent 

with the findings of the report” was to be entered. But if the trial court was “not satisfied 

with the report,” it had the discretion to “issue any appropriate order on how the case 

should proceed that is otherwise consistent with” the stipulation. (Italics added.) The 

trial court was not satisfied with the report when it made its ruling on the pretrial motion,

and it decided to take testimony to help it resolve the parties’ objections before deciding 

how to view the report. There is nothing in the stipulated order prohibiting the trial court 

from doing so.

Further, we cannot help noting the trial court’s ultimate assessment: Khory 

was a highly credible witness and the report he prepared complied with GAAS. His 

finding on transfer pricing required additional royalties to be paid to Robin. Clearly, 

these conclusions indicate that the trial court carefully considered the report’s findings 

and adopted them where appropriate.
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DISPOSITION

The judgment is affirmed in all respects except as to the calculation of 

damages, which is remanded to the trial court for further proceedings consistent with this 

opinion. Costs on appeal shall be split equally between appellant and respondent.

BEDSWORTH, ACTING P. J.

WE CONCUR:

FYBEL, J.

IKOLA, J.