Court Opinion

ID: 2815585
Source: CourtListenerOpinion
Date Created: 2015-07-08 20:03:37.940936+00
Date Added: 2024-06-11T11:30:37.019456
License: Public Domain

FILED
                           NOT FOR PUBLICATION                              JUL 08 2015

                                                                       MOLLY C. DWYER, CLERK
                    UNITED STATES COURT OF APPEALS                       U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

THOMAS HUBBARD,                                  No. 13-55861

              Plaintiff - Appellee,
                                                 MEMORANDUM*
  v.

PHIL’S BBQ OF POINT LOMA, INC., et
al.,

              Defendants - Appellants.

THOMAS HUBBARD,                                  No. 13-56131

              Plaintiff - Appellee,
                                                 MEMORANDUM*
  v.

PHIL’S BBQ OF POINT LOMA, INC., et
al.,

              Defendants - Appellants.

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
                   Appeal from the United States District Court
                      for the Southern District of California
                   Hon. Larry A. Burns, District Judge, Presiding

                         Argued and Submitted June 3, 2015
                               Pasadena, California

Before: THOMAS, Chief Judge, and CALLAHAN, Circuit Judge, and KORMAN,
Senior District Judge.**

      In April 2006, Thomas Hubbard, Phillip Pace, and Jeffrey Loya signed a

shareholders agreement, formed Phil’s BBQ of Point Loma, Inc., and elected “S

corporation” status. In such a corporation shareholders must pay personal income tax

on corporate profits, even if no profits or other income is disbursed to the

shareholders. To ensure that Pace, Loya, and Hubbard could meet this obligation, the

shareholders agreement provided that Phil’s BBQ would issue dividends to

shareholders equal to 25% of Phil’s BBQ’s quarterly profits.

      The parties also entered into a consulting agreement, pursuant to which

Hubbard would perform certain tasks related to the operation of the corporation in

exchange for a specified monthly compensation. The agreement further provided for

attorney’s fees to the “prevailing party” in the event of a dispute “arising under, or in

connection with, the Agreement.”

       **
             The Honorable Edward R. Korman, Senior United States District
Judge for the Eastern District of New York, sitting by designation.
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      Relations between the parties ultimately broke down. When Phil’s BBQ

stopped paying Hubbard in accordance with the consulting agreement, he filed the

instant complaint against Pace, Loya, and Phil’s BBQ. As subsequently amended, the

complaint sought damages for breach of the parties’ consulting agreement and

shareholders agreement. After a bench trial, the district judge awarded Hubbard

damages and attorney’s fees for breach of the consulting agreement. The district

judge also granted Hubbard’s motion for summary judgment, awarding him damages

based on the defendants’ failure to issue dividends in accordance with the

shareholders agreement.

      In holding that Hubbard was entitled to counsel fees because he prevailed on

his claim for breach of the consulting agreement, the judge analyzed applicable

California law and observed that Hubbard won on nearly every issue litigated. See

Hsu v. Abbara, 9 Cal. 4th 863, 873-77 (1995). We do not agree with the defendants

that, under the circumstances here, Hubbard’s award on his claims for breach of the

consulting agreement was insufficient to justify an award of counsel fees. See, e.g.,

Scott Co. of Cal. v. Blount, Inc., 20 Cal. 4th 1103, 1108-09 (1999).

      Nor did the district judge err in awarding damages under the shareholders

agreement. The award of damages represented the amount of taxes that Hubbard paid

on profits earned by Phil’s BBQ. The three defendants challenge the enforcement of

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the provision in the shareholders agreement mandating dividend disbursement to

offset tax liability. They rely on California Corporations Code § 300(b), which

provides that shareholders agreements in “section 158 close corporations” are

permitted to interfere with the powers typically afforded to a board of directors, such

as the board’s power to declare dividends in its discretion. The negative implication,

they suggest, is that shareholders agreements in non “section 158 close corporations”

are not permitted to mandate dividend disbursement. Because Phil’s BBQ was not

technically a “section 158 close corporation,” the defendants argue that the mandatary

provision in the parties’ shareholders agreement violates public policy.

      The defendants cite no case holding that shareholders agreement provisions of

the kind at issue here violate the public policy of California. Indeed, California courts

have historically held, “unless it is entirely plain that a contract is violative of sound

public policy, a court will never so declare. . . . ‘No court ought to refuse its aid to

enforce a contract on doubtful and uncertain terms.’” Moran v. Harris, 131 Cal. App.

3d 913, 919-20 (Cal. Ct. App. 1982) (quoting Stephens v. So. Pac. Co., 109 Cal. 86,

89 (1895)). Even where a contract is plainly illegal, the rule that such a contract is

void “is not an inflexible one to be applied in its fullest rigor under any and all

circumstances. A wide range of exceptions has been recognized.” Asdourian v. Araj,

                                            4
696 P.2d 95, 105 (Cal. 1985), superseded on other grounds Cal. Bus. & Prof. Code

§ 7031.

      Phil’s BBQ was, for practical purposes, a close corporation because it had only

three shareholders as well as severe limitations on the transferability of its shares.

Indeed, as conceded at oral argument, only one formality prevents Phil’s BBQ from

falling squarely within § 158: Phil’s BBQ’s articles of incorporation failed to include

a short statement that the number of shareholders cannot exceed 35 and that “[t]his

corporation is a close corporation.” Cal. Corp. Code § 158. Under all of these

circumstances, we are unable to conclude that the contract would be held

unenforceable as contrary to public policy.

      AFFIRMED.

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