Archive for March, 2013

Liu v. Sun, Cal: Court of Appeal, 2nd Appellate Dist., 3rd Div. 2013

Posted on March 1, 2013. Filed under: Uncategorized |

In Liu v. Sun, Cal: Court of Appeal, 2nd Appellate Dist., 3rd Div. 2013, the appellate court considered an appeal after a bench trial between two 50 percent shareholders of JSL, a corporation. Since this is an unpublished case, I would ordinarily not blog about it. However, there are so many good issues touched on in the court’s decision, that it deserves consideration.

Sun and Liu were both insurance brokers and decided to do business jointly under JSL Insurance Solutions, Inc. However, the parties agreed that the revenues and clients from their earlier solely owned businesses, would remain with the individual and not be part of JSL. Inevitably, the relationship broke down, and numerous instances of wrongful conduct were alleged. In one instance, Liu took $39,000 from the JSL bank account without Sun’s consent. When Sun found out she was angry but did not demand it back right away, because Liu said he needed it for his family. Sun successfully sued him for conversion, and the Court of Appeal rejected Liu’s argument that Sun had ratified the conversion.

Liu contends that Sun “ratified” his wrongful taking of $39,000 of JSL funds during conversations she had with him shortly after he took the money. The testimony Liu cites, however, does not support his argument. Sun testified that she told Liu he had to “return the money,” but he did not have to do so immediately. This testimony does not show that Sun gave her consent to Liu’s conversion before or after he misappropriated $39,000 from JSL. It merely shows that Sun granted Liu leniency in making amends for his tortious conduct.

A couple things to note about this. First, shareholders need to be aware that if they withdraw large amounts of money from the corporate bank account without express authority or consent from the remaining shareholders, they can be held liable for the tort of conversion. Second, taking money out of a bank account that does not belong to you will support cause of action for conversion – even though its not a tangible chattel. Lastly, this is yet another example of why it is important not to rely on oral agreements for significant transactions.

When there is a dispute between shareholders, one side will often claim the other defrauded them or cheated them by not honoring an oral agreement. Of course, there are frequently cases of actual fraud where this happens. But at least as often (if not more so) what one side believes to be fraud is actually an honest misunderstanding about the terms of the agreement. Unfortunately, when it gets to the trial stage it is difficult for either side to believe their adversary was innocently mistaken. Thus, it bears repeating: put your agreements in writing.

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    Updates on the Law of Shareholder Oppression, Minority Rights, Corporate Dissolution and the Fiduciary Duties of Corporate Officers and Directors from a San Diego Lawyer

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