Court Opinion

ID: 7801027
Source: CourtListenerOpinion
Date Created: 2022-08-16 17:02:53.823751+00
Date Added: 2024-06-11T16:29:13.742854
License: Public Domain

Filed 8/16/22 Svensson v. iO73 Investments CA2/6
     NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
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has not been certified for publication or ordered published for purposes of rule 8.1115.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

                         SECOND APPELLATE DISTRICT

                                         DIVISION SIX

JONAS SVENSSON,                                               2d Civil No. B315801
                                                          (Super. Ct. No. 20CV04285)
     Plaintiff and Respondent,                              (Santa Barbara County)

v.

iO73 INVESTMENTS, INC., et
al.,

     Defendants and Appellants.

      Tristan Strauss is the Chief Executive Officer, Secretary,
and a member of the Board of Directors of iO73 Investments, Inc.
(iO73), one of several companies comprising the Headwaters
Group (the Group). The Group is engaged in the business of
cannabis cultivation and distribution. Strauss and iO73 appeal
from a judgment directing the issuance of a writ of mandate. The
writ compels them to allow respondent Jonas Svensson to inspect
and copy specified documents from the books and records of the
“Group and the entities within it.” Respondent is a member of
iO73’s Board of Directors and, according to the trial court, owns
26.5 percent of its outstanding shares. He is the former
Executive Chairman of iO73.
       As authority for the issuance of the writ, respondent relied
on Corporations Code sections 1601 and 1602.1 Section 1601
permits a shareholder to inspect the books and records of the
corporation and its subsidiaries. (Id., subds. (a)(1), (a)(3).)
Section 1602 permits a director to inspect and copy the same
books and records.
       Appellants contend that sections 1601 and 1602 do not
authorize respondent to inspect and copy the books and records of
three companies (the “touching companies”) included within the
Group because they are not subsidiaries of iO73 and respondent
is neither a shareholder nor a director of these companies. We
affirm.
                        Related Pending Action
       Respondent’s petition for a writ of mandate arose out of a
related Santa Barbara County action, Svensson v. iO73
Investments, Inc., et al., No. 20CV01556 (the Related Case). The
same judge presided over the Related Case and the writ
proceeding.
       Respondent alleges that he “filed the ‘Related Case’ for
damages after his termination as the Executive Chairman of
iO73 . . . .” The trial court stated: “The Related
Case . . . contains causes of action against [appellants] for
breaches of an Employment Agreement, Shareholders’
Agreement and Restricted Stock Award Agreement.
[Respondent] also brought a Shareholder Derivative claim for
breach of fiduciary duty.”

      1   All statutory references are to the Corporations Code.

                                   2
        In the Related Case respondent filed a motion to compel
iO73 to produce various records pertaining to the Group. In its
ruling on respondent’s petition for a writ of mandate, the trial
court stated: “The court notes the role that the Related Case has
played in relation to this Writ proceeding. At the time the motion
to compel was litigated in the Related Case, it was argued by
[appellants] that the discovery being sought should be addressed
by a Writ of Mandate. And in this Writ proceeding, it has been
argued [by appellants] that adequate relief exists in the Related
Case[] such that the Writ proceeding should not have been
pursued. [Respondent] correctly commented that these
assertions require a ruling in the Writ proceeding, and the court
agrees.”
       Pursuant to Evidence Code sections 459 and 452,
subdivision (d), respondent requests that we take judicial notice
of his motion to compel and supplemental declaration filed in the
Related Case. We grant the request, which is unopposed.
                                The Group
       iO73’s corporate counsel declared: “Headwaters Group is
not a legal entity. . . . iO73 is one of a group of corporations that
do business under the name of Headwaters. [¶] . . . These
corporations are divided into two general groups – the so-called
‘touching’ companies, and the ‘non-touching’ companies. The
former group engages in the cultivation, harvesting and
distribution of cannabis and its byproducts. The latter group
provides management services to the touching companies and
other companies engaged in the cannabis industry, but they do
not engage in the handling or ‘touching’ of cannabis. [¶] . . . iO73
is the parent company of four subsidiaries that together comprise
the non-touching companies. The touching companies consist of

                                  3
three corporations, which are separate legal entities.
[Respondent] has no shareholder interest in, and does not serve
as a director of, the touching companies.”
       In their opening brief appellants assert, “[T]he separation
between ‘touching’ entities (meaning entities engaged in business
that require licensing for activities involving cannabis) and ‘non-
touching’ entities (meaning those entities that do not require
licensing) is deliberate and designed to comply with California
regulations governing cannabis cultivation and distribution.”
              Appellants’ Opposition in the Trial Court
       In their written opposition to respondent’s petition for a
writ of mandate, appellants argued: “[Respondent] is only a
shareholder of record of . . . iO73 and its so-called ‘non-touching’
companies. He is not a director or shareholder of iO73’s touching
companies. [Record citation.] Accordingly, . . . in the event this
Court is inclined to grant any of [respondent’s] requests, they
should be limited to the records of iO73 and its non-touching
companies.”
       At the hearing on respondent’s petition, appellants’ counsel
stated: “[i]O73 is willing to produce documents relating to [i]O73
and its subsidiaries. [Respondent] has a right to those within the
parameters of the law . . . .”
            Respondent’s Reply to Appellants’ Opposition
       In his written reply to appellants’ opposition, respondent
protested, “The ‘touching companies’ have always been included
in iO73’s accounting.” Respondent summarized “pertinent facts”
concerning the touching companies. These facts were allegedly
“established” by his supplemental declaration in the Related
Case. The facts are: (1) Strauss, the sole owner of the three
touching companies, granted to iO73 an irrevocable option to

                                 4
acquire, without further consideration, all of his shares in the
touching companies. (2) “The Headwaters Group has always
managed its finances on a consolidated basis. That is, while the
finances of each of the separate companies also have been
accounted for, we always consolidated them, as well. When it
came to calculating the EBITDA [Earnings Before Interest,
Taxes, Depreciation, and Amortization] on which bonuses were
based, it was the EBITDA of the entire Headwaters Group.” (3)
“[T]he ‘touching companies’ . . . are the companies within the
Headwaters Group that are involved in the actual growing,
harvesting, etc. of cannabis, which generates the vast majority of
the revenues of the Headwaters Group.”
         At the hearing on the petition, respondent’s counsel argued:
“[A]ll of the companies, including the cannabis touching ones are
. . . [a] single corporate group. . . . [T]hey’ve created a structure
where [i]O73 does not directly own [the touching companies] but
has a free zero-dollar [option] to acquire all of them whenever it
wishes. . . . [I]t’s essentially a . . . legal farce to say that [the
touching companies are] no[t] subsidiaries and there is no
interest that [i]O73 has in the entities when . . . all of the value of
the company is in the cannabis touching entities which [i]O73 can
acquire at any time for nothing.”
                           Trial Court’s Ruling
         The trial court ruled: “The corporate subsidiary
relationships are sufficiently intertwined to permit discovery
relating to the entire Headwaters [G]roup. The court previously
reached this conclusion in the Related Case, and the court refers
the parties to that ruling.” In its ruling on respondent’s motion
to compel in the Related Case, the trial court stated, “The court
will not limit the production to documents related to the non-

                                  5
touching companies. Responsive documents for the entire
Headwaters Group must be produced.”
        The court’s ruling in the writ proceeding did not give
respondent access to all of the Group’s books and records. It
limited the documents subject to inspection and copying to “(1)
documents relating to the issue of addition of new owners to the
Headwaters Group, and (2) a capitalization table and/or
materials related to capitalization calculations.”
                 “Sufficiently Intertwined” Standard
        Appellants contend: “[T]he Superior Court erred in using a
‘sufficiently intertwined’ standard which may arguably be
relevant for purposes of discovery in the [R]elated [C]ase, but not
under California Corporate Code sections 1601 and 1602.
[Whether the trial court applied an incorrect standard] is a
question of law, not involving the resolution of disputed facts,
which is subject to the appellate court’s independent (‘de novo’)
review.”
        Appellants’ claim of error is conclusory. They provide no
meaningful legal analysis, with citation to pertinent authority,
explaining why the trial court’s “sufficiently intertwined”
standard is incorrect as a matter of law. Consequently, the claim
is forfeited. “[A]n appealed judgment is presumed correct . . . .”
(Boyle v. CertainTeed Corp. (2006) 137 Cal.App.4th 645, 649.)
“[I]t is appellant’s burden to affirmatively show error. [Citation.]
To demonstrate error, appellant must present meaningful legal
analysis supported by citations to authority and citations to facts
in the record that support the claim of error. [Citations.] When a
point is asserted without [meaningful] argument and authority
for the proposition, ‘it is deemed to be without foundation and
requires no discussion by the reviewing court.’ [Citations.]

                                 6
Hence, conclusory claims of error will fail.” (In re S.C. (2006) 138
Cal.App.4th 396, 408.)
       In any event, the trial court did not apply the wrong legal
standard. The court in effect found that the entities comprising
the Group are “sufficiently intertwined” to constitute a single
enterprise. Respondent makes the “single enterprise” argument
in his appellate brief: “Appellants ignore the evidence . . . that
supports the Superior Court’s finding that the Headwaters Group
acted as a single enterprise.”
       “‘[U]nder the single-enterprise rule, liability can be found
between sister companies. The theory has been described as
follows: “‘In effect what happens is that the court . . . has
determined that though there are two or more personalities,
there is but one enterprise; and that this enterprise has been so
handled that it should respond, as a whole, for the debts of
certain component elements of it. . . .’”’ [Citation.] The doctrine
applies where one of the corporations ‘“‘is so organized and
controlled, and its affairs are so conducted, as to make it merely
an instrumentality, agency, conduit, or adjunct of another
corporation.’”’” (City of Dana Point v. New Method Wellness, Inc.
(2019) 39 Cal.App.5th 985, 990-991 (City of Dana Point).)
       “‘Under the “single business enterprise” doctrine, separate
corporations may operate with integrated resources in pursuit of
a single business purpose.’” (Toho-Towa Co. v. Morgan Creek
Productions, Inc. (2013) 217 Cal.App.4th 1096, 1107-1108.)
Application of the doctrine is limited to situations where an
inequitable result will occur if the sister companies are treated as
separate entities. (Tran v. Farmers Group, Inc. (2002) 104
Cal.App.4th 1202, 1219.)

                                 7
       The single-enterprise rule has generally been applied to
prevent a corporation from avoiding liability for the debt of a
sister corporation. But there is no reason why the rule should not
also be applied to permit a shareholder or director of a
corporation to inspect records of a sister corporation under
sections 1601 and 1602.
                          Standard of Review
       The parties dispute the correct standard of review.
Appellants claim that we should independently review the trial
court’s issuance of a writ of mandate because it presents a “pure
question[] of law” involving the interpretation of sections 1601
and 1602. Respondent argues that we should apply the
substantial evidence standard of review: “Appellants’ entire
argument depends upon a challenge to the Superior Court’s
factual determination that ‘the corporate subsidiary
relationship[s] are sufficiently intertwined to permit discovery
relating to the entire Headwaters [G]roup.’ [Record citation.]
The Superior Court’s finding necessarily rejected Appellants’
factual assertions that the touching companies were wholly
separate, independent, and divorced from the non-touching
companies.”
       We agree with respondent. (See City of Dana Point, supra,
39 Cal.App.5th at p. 991 [“We review the court’s finding [of a
single enterprise] for substantial evidence”].) “Substantial
evidence . . . is not synonymous with ‘any’ evidence, but is
evidence which is of ponderable legal significance. It must be
‘reasonable in nature, credible, and of solid value; it must
actually be “substantial” proof of the essentials which the law
requires in a particular case.’” (Toyota Motor Sales U.S.A., Inc. v.
Superior Court (1990) 220 Cal.App.3d 864, 871.)

                                 8
       The substantial evidence “standard of review is highly
deferential. It has three pillars. First, we accept all evidence
supporting the trial court’s order. Second, we completely
disregard contrary evidence. Third, we draw all reasonable
inferences to affirm the trial court. . . . We do not reweigh the
evidence. [Citation.] Under this standard of review, parties
challenging a trial court’s factfinding bear an ‘“enormous
burden . . . .”’ [Citation.] [¶] If substantial evidence supports
factual findings, those findings must not be disturbed on appeal.
[Citation.] Inferences favorable to appellants may create conflicts
in the evidence, but that is of no consequence. [Citation.] When
a civil appeal challenges findings of fact, the appellate court’s
power begins and ends with a determination of whether there is
any substantial evidence — contradicted or uncontradicted —to
support the trial court findings. [Citation.] We must therefore
view the evidence in the light most favorable to the prevailing
party, giving it the benefit of every reasonable inference and
resolving all conflicts in its favor.” (Schmidt v. Superior Court
(2020) 44 Cal.App.5th 570, 581-582 (Schmidt).)
                Substantial Evidence Supports the Trial
              Court’s “Sufficiently Intertwined” Finding
       Substantial evidence supports the finding that the Group’s
companies are so intertwined that respondent’s status as a
director and shareholder of iO73 permits him to inspect and copy
the books and records of the three touching companies. (§§ 1601,
1602.) The trial court could reasonably infer that the entities
comprising the Group operate as a single enterprise.
       The touching companies are an integral, necessary part of
the Group’s cannabis business. “[T]he ‘touching companies’ . . .
are involved in the actual growing, harvesting, etc. of cannabis,

                                 9
which generates the vast majority of the revenues of the
Headwaters Group.”
       The touching companies and iO73 share a unity of
management, control, and ownership. Strauss, the sole owner of
the touching companies, is the Chief Executive Officer, Secretary,
and a member of the Board of Directors of iO73. Pursuant to an
agreement entitled “Contribution, Exchange and Option
Agreement,” which was signed by Strauss and other persons in
February 2018 (the February 2018 agreement), Strauss owns
490,000 of iO73’s 700,000 outstanding shares. The trial court
found that Strauss “maintains the books, records and documents
of [the] Headwaters [Group] in Santa Barbara County.”
       It is reasonable to infer that Strauss was the owner in
name only of the touching companies. Strauss contemplated that
iO73 would become the actual owner. In the February 2018
agreement, Strauss granted to iO73 a 10-year option to acquire,
“with no further consideration,” “all of the shares and other
interests he now owns or may own in the future in [the touching
companies].” (Italics added.) Strauss agreed not to “take any
action that would impair or negatively impact [iO73’s] ability to
exercise the Option or to achieve all of the economic benefits of
ownership of all interests in each of the [touching companies]
upon the exercise of such Option.”
       Although the touching companies technically are not
subsidiaries of iO73, the February 2018 agreement referred to
iO73 as the “Parent” of the touching companies. The term
“Parent” is used where there is a parent-subsidiary relationship.
(See Cohen v. TNP 2008 Participating Notes Program, LLC
(2019) 31 Cal.App.5th 840, 861-863.) The February 2018

                               10
agreement appears to recognize that the touching companies
were operating as if they were subsidiaries of iO73.
       Moreover, the February 2018 agreement allowed iO73 to
exercise considerable influence over the touching companies’
internal affairs. Strauss agreed “not to issue . . . any debt or
equity securities without the prior written consent of Parent.” In
addition, he agreed “not to declare any dividend or make any
distribution to any equity holder of any of the [touching
companies] without the prior written consent of Parent.”
       Finally, “[t]he Headwaters Group . . . always managed its
finances on a consolidated basis.” Bonuses were calculated based
on “the EBITDA of the entire Headwaters Group.”
       Viewing the above “evidence in the light most favorable to
[respondent], [and] giving [him] the benefit of every reasonable
inference” (Schmidt, supra, 44 Cal.App.5th at p. 582), we
conclude the trial court could reasonably find there is “‘“such
unity of interest[, management, control,] and ownership . . .”’” of
iO73 and the touching companies that “‘“one is inseparable from
the other . . . .”’” (Hotels Nevada, LLC v. L.A. Pacific Center, Inc.
(2012) 203 Cal.App.4th 336, 358.) Although iO73 and the
touching companies are separate entities in form, it is reasonable
to infer that in substance they are operating as a single
enterprise.
       Thus, “‘the trial court was warranted in concluding . . . that
[the touching companies were] but an instrumentality or conduit
of [iO73] in the prosecution of a single venture namely, the
[commercial cultivation and distribution of cannabis]. . . . There
was such unity of interest and ownership that the separateness of
the [touching companies and iO73] had in effect ceased and an
adherence to the fiction of [their] separate existence . . . would,

                                 11
under the circumstances here present, promote injustice and
make it inequitable . . .’” to deny respondent permission to
inspect the records of the touching companies under sections
1601 and 1602. (Las Palmas Associates v. Las Palmas Center
Associates (1991) 235 Cal.App.3d 1220, 1250.)
          New Theory Asserted in Reply Brief Is Forfeited
       For the first time in their reply brief, appellants argue that
the petition for writ of mandate is “moot.” Appellants’ new
theory is forfeited for two reasons. First, “[f]airness militates
against our consideration of arguments first raised in
a reply brief.” (Employers Mutual Casualty Co. v. Philadelphia
Indemnity Ins. Co. (2008) 169 Cal.App.4th 340, 350.) Second, the
argument is not supported by citations to facts in the record.
“[A]n appellant must not only present an analysis of the facts and
legal authority on each point made, but must also support
arguments with appropriate citations to the material facts in the
record. If he fails to do so, the argument is forfeited.” (Nielsen v.
Gibson (2009) 178 Cal.App.4th 318, 324.)
       Appellants’ only citation to the record is to page 18, lines 1-
2 of the reporter’s transcript of the hearing on the petition.
Appellants cite this portion of the record in support of their claim
that “the parties agreed that all existing documents responsive to
the Writ had been produced.” But the citation does not support
the claim. At page 16, lines 5-7 of the reporter’s transcript,
respondent’s counsel said, “We have still not received the
capitalization table for [i]O73, nor documents relating to bringing
in new owners of the Headwaters Group . . . .”
         Respondent Is Entitled to Appellate Attorney Fees
       Pursuant to section 1604, respondent requests that he be
awarded his appellate attorney fees. Section 1604 provides: “In

                                 12
any action or proceeding under . . . Section 1601, if the court finds
the failure of the corporation to comply with a proper demand
thereunder was without justification, the court may award an
amount sufficient to reimburse the shareholder . . . for the
reasonable expenses incurred by such holder, including attorneys'
fees, in connection with such action or proceeding.”
         A corporation liable for attorney fees under section 1604 “is
. . . liable for the fees the [shareholder] incurred at trial and on
appeal.” (Valtz v. Penta Investment Corp. (1983) 139 Cal.App.3d
803, 811.) We conclude that iO73’s failure to comply with
respondent’s demand to inspect records of the touching
companies was without justification. We therefore order iO73 to
pay the reasonable appellate attorney fees incurred by
respondent.
                                Disposition
         The judgment is affirmed. The matter is remanded to the
trial court with directions to award respondent his reasonable
appellate attorney fees, which shall be payable by iO73 pursuant
to section 1604. Respondent shall recover his costs on appeal
from both appellants. (Cal. Rules of Court, rule 8.278.)
         NOT TO BE PUBLISHED.

                                                               YEGAN, J.

We concur:

               GILBERT, P. J.                                 PERREN, J.*

*Retired Associate Justice of the Court of Appeal, Second Appellate District,
assigned by the Chief Justice pursuant to article VI, section 6 of the California
Constitution.

                                          13
                   Colleen K. Sterne, Judge

           Superior Court County of Santa Barbara

               ______________________________

      Trusted Legal and Naomi R. Dewey, for Defendants and
Appellants.
      Stradling Yocca Carlson & Rauth and Stephen L. Ram,
Nicole L. Carbonel, for Plaintiff and Respondent.