Scheenstra v. Cal. Dairies, Inc.

213 Cal.App.4th 370

153 Cal.Rptr.3d 21

John SCHEENSTRA, Plaintiff and Appellant,

v.CALIFORNIA DAIRIES, INC., Defendant and Appellant.

F062768

Court of Appeal, Fifth District, California.

Filed January 30, 2013

Review Denied April 17, 2013

Affirmed.

See 9 Witkin, Summary of Cal. Law (10th ed. 2005) Corporations, § 284.

APPEAL from a judgment of the Superior Court of Tulare County. Lloyd L. Hicks, Judge. (Super.Ct. No. VCU231235)

Fulbright & Jaworski, Robert W. Fischer, Jr., Los Angeles, Andrea M. Valdez, for Defendant and Appellant.

Law Offices of Brian C. Leighton and Brian C. Leighton, Clovis, for Plaintiff and Appellant.

Franson, J.

OPINION

INTRODUCTION

Plaintiff John Scheenstra was a member of defendant California Dairies, Inc. (Cal Dairies), a member-owned milk marketing and processing cooperative. After Cal Dairies instituted internal production quotas for its members and reduced payments for milk deliveries in excess of the quotas, Scheenstra sued for breach of contract claiming his quota was too low. The contract provision in question obligated Cal Dairies to accept all of the milk of its members, “subject to the right of the Board, in its discretion, upon written notice to the membership ... to allocate equitably among the members on a uniform basis ... the quantity ... of milk to be received by the Association.” (Italics added.)

The trial court concluded that, under the circumstances represented, the business judgment rule did not shield Cal Dairies from liability for breach of contract. The court found that the quota system adopted by Cal Dairies was not equitable or uniform and therefore breached the contract. Among other things, the quota system required dairies with increasing production to bear the entire brunt of the oversupply. More remarkably, the quota system responded to the oversupply problem by placing some members in a better position than they would have occupied without the oversupply problem. Specifically, members with declining production were given the right to sell their excess quota.

Cal Dairies appealed, contending the trial court erred by (1) failing to apply the business judgment rule and give deference to its board of directors' choice of terms for the production quota system, (2) calculating Scheenstra's damages using a production quota that was contrary to the express terms of the contract, and (3) awarding damages that were not supported by substantial evidence. Scheenstra cross-appealed, contending the trial court should have awarded him the profits he would have earned if his dairy had been brought into full production.

We conclude that the primary question whether Cal Dairies' board acted within the scope of its discretionary authority involves a contractual analysis that (1) determines the objective meaning of the contract and (2) applies that meaning to the facts of this case. The contract allowed the board to adopt an internal production quota system that was equitable and uniform. We conclude that the quota system adopted by the board was not equitable and uniform and, therefore, was outside the scope of discretionary authority granted by the contract. Furthermore, on the question of damages, we conclude that the trial court's calculation of what Scheenstra's quota should have been under an equitable and uniform system was consistent with the terms of the contract and the damages awarded were supported by substantial evidence.

We therefore affirm the judgment.

FACTS

The facts set forth below are taken primarily from the trial court's statement of decision, which incorporates nearly all of the trial court's tentative decision.

Background

Scheenstra is a third generation dairy operator. Cal Dairies is a California agricultural cooperative organized as a nonprofit cooperative association, without capital stock, pursuant to chapter 1, division 20, of the Food and Agricultural Code. Cal Dairies' articles of incorporation also state that it “is a membership corporation....” Cal Dairies was formed in 1999 by the merger of three predecessor agricultural cooperatives. Three generations of Scheenstra's family were members of Cal Dairies or its predecessors.

The purpose of Cal Dairies is to market members' milk to the best advantage of the members. Cal Dairies has an 18–member board of directors. All directors are dairy owner-members of Cal Dairies. The board exercises its powers as set forth in Cal Dairies' bylaws (Bylaws).

A person or business that wishes to become a member of Cal Dairies submits an application, which the board accepts or rejects. In the application, the member agrees to be bound by the Bylaws as they exist and as they may be amended. Cal Dairies and Scheenstra agree that the Bylaws constitute the contract between them, which contract sometimes is referred to as the member agreement.

In 2001, Scheenstra was a member of Cal Dairies with a dairy in Tipton. He was considering expansion, which he could have done at the Tipton dairy without a new application and without the consent of, or advanced notice to, Cal Dairies.

Scheenstra Expansion

In 2002, Scheenstra purchased approximately 600 acres in Wasco as a potential site for a new dairy. Shortly thereafter, Scheenstra talked about his plans for a new dairy with Lynn McPhetridge, his field man and Cal Dairies' designated link to Scheenstra. Scheenstra told McPhetridge that (1) he planned a 4,100 cow dairy, milking three times a day; (2) the dairy would be stocked with fresh heifers ¹ and would not reach full milk production until about two years after milking started; and (3) he expected to start production in 2005.

Scheenstra told McPhetridge that he was seeking financing for the anticipated $30 million development cost, and that he wanted to be sure he had a “home” for the milk before he committed to the investment. McPhetridge told Scheenstra that “it would not be a problem.”

On October 5, 2004, Scheenstra submitted his application to Cal Dairies for membership for the Wasco dairy. Later that month, the board approved the membership, stating it would become effective on September 1, 2005, and including the note: “Plus 150,000 lbs.” The note, which came from McPhetridge's supervisor, was intended to indicate anticipated production level for informational purposes and was not a production limit.

Scheenstra had problems obtaining governmental clearances and permits for the new dairy and its completion was delayed. Scheenstra kept McPhetridge advised at all times of the status of the dairy development.

Eventually, Scheenstra's new dairy was built in two phases, with two milking parlors. Production on the first phase began in December 2006, with fresh heifers. The minutes of the December 19, 2006, Cal Dairies board meeting noted for informational purposes only that Scheenstra's new dairy would start operations on December 19, 2006, and further noted “Plus 290,000 lbs.”

In June 2007, the second parlor was completed and it was stocked with fresh heifers in November 2007. By the time of trial in January 2010, these cows had reached full production.

Oversupply of Milk

In the fall of 2007, the board began considering the need to reduce milk production by its members. The board had anticipated that its new Visalia plant would be in operation by then, but it did not start until February 2008. Also, some large customers had reduced their purchases from Cal Dairies and some members, using gains from high milk prices in 2007, had expanded their herds and production.

At its November 27, 2007, meeting, the board approved two new members with production totaling over 36,000 pounds and then placed a 90–day moratorium on accepting new dairies. In addition, the board directed staff both to (1) review recently approved members and compare their actual production with the member indicated and approved anticipated full production and (2) survey long standing members to see what expansion they already had in process (for which no board approval was required).

The staff review resulted in a finding that there was an increase of 1.5 million pounds from the previously stated anticipated production to the actual production for the relatively new members, and an additional 2.0 million pounds for established dairies in the process of expanding. These additional 3.5 million pounds would put Cal Dairies well above its handling capacity.

The board also was aware that there was an industry-wide oversupply of milk and other cooperatives had adopted programs to reduce member production.

Adoption of Quota System

The board decided to exercise its discretionary authority granted in section 7.3 of the Bylaws and institute a program to restrict supply and keep deliveries within Cal Dairies' capacity to handle. Cal Dairies' decision to adopt an internal production quota system is not challenged in this lawsuit.

To implement such a system under the Bylaws, the board is required to assign an internal production quota (i.e., a base) to each member and to treat milk delivered by the member in excess of that quota as having a lesser value.

The board considered setting the base at the February 2008 production and at the highest 2007 production, but rejected both because those amounts exceeded Cal Dairies' capacity. At its February 26, 2008, meeting, the board voted against a motion to set the base at December 2007 production plus five percent, an amount which also appears to have been in excess of Cal Dairies' capacity. Eric Erba, Cal Dairies' senior vice president of government and producer relations, and senior staff prepared a proposed “Supply Management Program” for presentation to the board. This proposal set the base at the 2007 average daily production. Later at that meeting, the board passed a motion to approve a program that (1) used the average daily production for 2007 as the base, (2) allowed members to apply for adjustments because of hardship and, (3) established a hardship committee to review requested...