Rael & Letson v. Clark

RAEL & LETSON, Plaintiff and Appellant, v. MICHAEL CLARK et al., Defendants and Respondents.

A159255

COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION FOUR

April 14, 2021

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(San Mateo County Super. Ct. No. CIV523065)

Rael & Letson (R&L or the company) brought this action against defendants Michael Clark and the Clark Family Partnership (CFP), alleging Clark, the company's chief executive officer (CEO), misappropriated more than $3,000,000 in company funds under the guise of business expenses. Most of the R&L's causes of action were presented to a jury, but the court decided R&L's cause of action for breach of the duty of loyalty. In an earlier appeal, we concluded the trial court had misinterpreted the jury verdict, and additionally directed the court to reconsider the measure of damages for the cause of action for breach of Clark's duty of loyalty to the company. (Rael & Letson v. Clark (Nov. 20, 2018, A150322) [nonpub. opn.] (Rael & Letson I).) In the current appeal, R&L contends the trial court violated our remand instructions and erred in denying certain damages. We agree with R&L in two respects only, and shall modify the amended judgment accordingly.

FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Background

1. Ownership of R&L

We begin by quoting at length from our opinion in Rael & Letson I:¹ "R&L provides actuarial services for public employers and multi-employer trust funds in connection with their pension and health and welfare plans. Clark is an actuary, and he began working for R&L in 1969. He acquired all of the company's stock by 1986, after the retirement of Edward Letson and the death of Juan Rael, two of its founders. He was its sole shareholder until 2003. . . .

"In 2003, Clark sold 75 percent of his shares in R&L to its employees, through a trust (the ESOT, or the trust) for $7,706,250, in what is referred to as the ESOP (employee stock ownership plan) transaction. To finance the purchase, the ESOP entered into a promissory note (the ESOT promissory note), which included interest paid to Clark. Clark remained CEO and director of the company until 2013. Clark's employment with R&L was suspended in April 2013, after the company learned he had misappropriated its funds.

2. The Financial Transactions

"R&L's bookkeeper, Celeste Koski, was responsible for writing checks to pay bills. She reported to Clark and acted at his direction. It was Koski's understanding that Clark was the only person who managed R&L's cashflow. Beginning in 2007, R&L used the QuickBooks accounting program, which prompted Koski to record checks in certain categories, such as office supplies, travel, medical, or entertainment. If Koski was uncertain which category to apply, she would seek guidance from Clark or R&L's chief financial officer, Jim Rhein. Clark would give Koski bills that he wanted her to pay and direct her to write the checks, telling her how he wanted them to be categorized. For instance, on one occasion, Clark asked Koski to write a check for $13,120.68 to Bank of America and charge it to 'travel other.'² At Clark's direction, Koski made payments into Clark's personal Vanguard investment account and that of his family partnership, and paid Clark's personal credit cards bills and charges for his home utilities, airplanes, and car. Koski did not see backup documentation for the expenses Clark submitted for reimbursement, and Clark did not seek approval from anyone else.

"Two new trustees, Paul Graf and Alexandra Willson (the trustees), were appointed in May 2012. They hired a new financial consultant, a firm called Chartwell.

"Chartwell asked for a report showing how much R&L had paid each of its vendors, and R&L's chief operating officer, Heidi Hagler, requested and received such a report. After reviewing it, she became concerned that some of the expenses, such as payments to a country club and to Clark's personal credit card, might not be proper.

"Hagler investigated further and found that Clark had given Koski invoices for different vendors. He directed her to account for them in thecategories of travel, employee benefits, and education conferences, and in some cases the expenses had been deducted from income. She reported the matter to R&L's board of directors (the board), and on April 18, 2013, the board removed Clark as CEO and suspended his employment with pay.

"The board also authorized an independent forensic accounting of R&L's books and records from 2003 to 2013. R&L engaged John Kawamoto, a certified public accountant, for this task in April 2013. He found approximately $900,000 in payments made during 2011 and 2012 that appeared to be questionable or fraudulent. Many of these transactions had little or no supporting documentation and were for large dollar amounts. It appeared to Kawamoto that Clark was using these funds for his personal use. He reported his preliminary findings to the board, which terminated Clark's employment.

"Kawamoto continued his investigation to include the years back to 2004, just after the ESOP bought a share of R&L. For the years 2004 through 2013, he found a total of $3,633,872 in charges that appeared to be used for Michael Clark's personal activities rather than legitimate business expenses (the upper range). He also calculated a lower range, which assumed that some of the charges reflected reasonable business expenses; the total for the lower range was $3,194,129. For the period beginning in 2007, when R&L began using QuickBooks, he calculated the upper range total as $3,178,106 and the lower range total as $2,994,336.

"These charges fell into several categories: aviation expenses; country club dues and related charges; rent overpayments; offset of income; interest overpayments; and a more general category of 'Wine, Food, Gas, Phone, Medical, Furniture, Vacations, Residence, . . . , Cars, etc.' [We summarize here the charges pertinent to the issues in this appeal.]

a. Aviation

"Clark, who had a pilot's license, had owned a Piper Malibu airplane since 1990. He had homes in Woodside, California, and La Quinta, California, and he stored the Piper in [hangars] convenient to R&L's Foster City offices and his Southern California residence. He charged costs related to the Piper to R&L, including fuel, landing and takeoff fees, insurance, and [hangar] costs, as well as his annual training for his pilot's license.

"Clark used the Piper for company travel up and down the West Coast. He testified that when he first got his pilot's license in 1980, Juan Rael suggested to him that he use his license for business purposes. After the ESOP transaction, Clark did not get approval from the board for continuing to charge these expenses to the company; however, everyone in the company knew he had a plane and many employees flew with him to business meetings. He used the Piper to fly from his La Quinta home, where he lived nine months of the year, to the company's office in Foster City and to meet with clients in the Bay Area. Clark testified that flying privately was an efficient use of time; he could get to Sacramento in 18 minutes and to Fresno in 40 minutes. He also testified that he did not use the Piper for personal travel between the time of the ESOP transaction and the termination of his employment.

"Clark owned a 1/16 ownership interest in a second airplane, which he purchased from Avantair in 2007 for $415,000. He also paid a management fee, which included 50 hours of flight time per year; the fee in 2007 was $116,362.56. He directed Koski to pay an amount equivalent to the management fee and—over the course of several years—the cost of acquiring the Avantair airplane to an account owned by CFP. Clark directed Koski topay Avantair directly for fuel-related charges, providing redacted invoices and having the charges categorized as 'travel other,' 'educational expenses,' or 'employee benefits.' No R&L employee other than Clark used the Avantair plane, and he did not disclose to the board that CFP owned the plane and he was having R&L pay for it. R&L paid approximately $801,000, either directly to Avantair or to CFP for charges relating to the Avantair plane.

b. Country Clubs

"R&L paid all or part of Clark's dues and fees for five golf or country clubs, four in the La Quinta area and the Peninsula Golf and Country Club (PGCC) in San Mateo. Clark's membership at the PGCC was a family membership, and he and his wife both incurred expenses there, including locker room charges, food, and drinks, which R&L paid at Clark's direction. The charges at one of the other clubs[, the Hideaway,] included many items for Clark's wife, such as a cooking class, spa treatments, and haircuts. Kawamoto calculated the total club charges that were personal in nature during the post-ESOP period to be $295,745.

"Clark testified that when he joined the PGCC in 1976, Rael told him the company would pay the monthly club fees as long as Clark paid for the membership. After the ESOP transaction, Clark did not disclose to the board that R&L was paying his golf club membership dues and expenses. [¶] . . . [¶]

c. Overpaid Rent

"R&L entered into a ten-year lease on its office in Foster City in April 2006, personally guaranteed by Clark. Rather than having R&L pay the rent directly to the landlord, Clark directed Koski to pay funds for 'rent' into CFP's Vanguard account, and used those funds to pay the rent due to the landlord. Kawamoto's investigation showed that the amount deposited into CFP's account exceeded the amount due under the lease by a total of$632,606. Clark testified that he kept the excess rent because he had negotiated a good deal on the...