Cleveland v. Johnson
209 Cal. App. 4th 1315
| Cal. Ct. App. | 2012Background
- Cleveland and Bickley invested $75,000 in ISI's Central Connection, a separate internet venture, under a February 1995 preincorporation agreement.
- The Central Connection operated as a division of ISI with its own setup, offices, and personnel, intended to be separate from ISI's adult entertainment business.
- IS West was formed in 1996 to take over The Central Connection and later became ISI's successor; assets related to Central Connection were transferred to IS West, with ISI carrying a loan to IS West.
- The jury found IS West was the successor and ratified the preincorporation contract; Cleveland was awarded about $3.826 million for breach of contract and punitive damages for fiduciary breach.
- Jury awards included breach of fiduciary duty findings with malice, leading to a punitive damages phase awarding $500,000 against Johnson and $500,000 against IS West, despite zero statutory damages on that count.
- Defendants challenge the sufficiency of evidence for successor liability and ratification, argue damages exceed contract terms, and seek reversal or new trial on instructional and verdict-compatibility grounds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether IS West is liable as successor to ISI for the contract | IS West is a mere continuation of The Central Connection; equity supports successor liability. | No mere continuation; ISI retained identity; asset transfer and continuity do not justify successor liability. | Yes; IS West may be liable as a mere continuation in equity. |
| Whether IS West ratified the preincorporation contract | IS West benefited from the Cleveland investment and knowledge was imputed to IS West; ratification occurred by acceptance of benefits. | Commercial Lumber rule requires actual knowledge of the contract by uninterested directors; not shown here. | Yes; IS West ratified the Cleveland agreement. |
| Whether Johnson and IS West owed a fiduciary duty to Cleveland | Promoter/investor relationship and preincorporation investment create fiduciary duties; disclosure and loyalty owed to investors. | Promoters/investors do not automatically create fiduciary duties to investors; no such duty here. | Yes; Johnson and IS West owed fiduciary duties to Cleveland. |
| Whether punitive damages were properly awarded | Punitive damages supported by breach of fiduciary duty with malice/fraud findings; damages phase properly allowed. | Punitive damages improper due to lack of viable fiduciary damages and potential duplicative damages. | Punitive damages affirmed; adequate evidentiary basis found. |
Key Cases Cited
- Ray v. Alad Corp., 19 Cal.3d 22 (Cal. 1977) (fraudulent transfer to escape liability supports successor liability)
- Blank v. Olcovich Shoe Corp., 20 Cal.App.2d 456 (Cal. App. 2d 1937) (mere continuation doctrine; fraud considerations)
- CenterPoint Energy, Inc. v. Superior Court, 157 Cal.App.4th 1101 (Cal. App. 4th 2007) (equitable analysis of successor liability on unique facts)
- Commercial Lumber Co. v. Ukiah Lumber Mills, 94 Cal.App.2d 215 (Cal. App. 2d 1949) (ratification requires actual knowledge of the specific contract)
- Gordon v. Aztec Brewing Co., 33 Cal.2d 514 (Cal. 1949) (alter ego and continuation principles; equity-based approach)
- Fotouhi (Spallas & Angstadt, LLP v. Fotouhi), 197 Cal.App.4th 1132 (Cal. App. 4th 2011) (successor liability can extend beyond corporations to partnerships)
- City of Hope National Medical Center v. Genentech, Inc., 43 Cal.4th 375 (Cal. 2008) (fiduciary duties depend on relationship imposing legal undertaking)
- Wolf v. Superior Court, 107 Cal.App.4th 25 (Cal. App. 4th 2003) (contingent compensation does not alone create fiduciary duty)
- Pittelman v. Pearce, 6 Cal.App.4th 1436 (Cal. App. 4th 1992) (bondholders are creditors; fiduciary duties not to them absent decision)
- Beatrice Co. v. State Bd. of Equalization, 6 Cal.4th 767 (Cal. 1993) (subsidiary liability when assets transferred; recourse to debtor available with separate identities)
- Zuckerman v. D.N. & E. Walter & Co., 214 Cal. 418 (Cal. 1931) (alter ego/continuation principles in individual-entity contexts)