Unpublished Disposition, 875 F.2d 871 (9th Cir. 1989)

MEMORANDUM^* 

Harold and Craig Taines appeal the district court's judgment in favor of defendants following a bench trial. We affirm.

* FACTS AND PROCEEDINGS

In 1980 three sets of fathers and sons, Harold and Craig Taines, Gene and Michael Barry, and Michael and Philip Rafton, after a series of discussions in California, decided to enter the nascent one-hour photo processing business. Later that year, they formed Gene Barry One-Hour Photo Processing, Inc. (the "Corporation") under New York law. Stock in the Corporation was held in equal shares by the three fathers, who each invested $15,000. Each father also made several loans to the Corporation. None of the sons held stock in the Corporation. The sons were, however, made directors, officers and employees of the Corporation.

In early 1981, the Corporation began operations in New York City. Its first store opened in April. By June a second store had been opened in Forest Hills, New York. By that time all three sons, as well as Harold Taines, had moved to New York. During these early months relations between the Taineses and the other two families deteriorated considerably, spurred by disagreements concerning the operation of the business. At one point, Harold Taines, who was Chairman of the Board, sought to fire Michael Barry. Beginning in early August 1981, the Taineses were "frozen" or "squeezed" out of control of the Corporation. Both Harold and Craig Taines were fired as officers of the Corporation, and Craig Taines was fired as an employee. Later that same month, the majority shareholders, Michael Rafton and Gene Barry, reduced the size of the board of directors from six to four members and did not reelect the Taineses to the board.

Harold Taines subsequently brought a judicial dissolution action in New York court pursuant to section 1104-a of New York's Business Corporation Law ("BCL"). Section 1104-a provides relief to a holder of 20% or more of the shares of a close corporation who has been the victim of, among other things, "oppressive actions" by majority shareholders. See In re Gene Barry One Hour Photo Process, Inc., 444 N.Y.S.2d 540 (1981) (Gene Barry I) . Taines also sued to recover the loans he had made to the Corporation. These New York actions were consolidated and Taines prevailed; rather than dissolve, the Corporation elected to pay Taines the "fair value" of his shares as allowed by New York BCL Sec. 1118; it also repaid his loans. See Taines v. Gene Barry One Hour Photo Process, Inc., 474 N.Y.S.2d 362 (1983), aff'd 486 N.Y.S.2d 699 (1985), appeal dismissed, 497 N.Y.S.2d 367 (Gene Barry II) . As a result of this litigation in New York, Harold Taines received, in January 1986, $670,961.85, which represented the fair value of his shares as determined by the New York court ($237,000), plus $215,000 for loans to the Corporation, along with accrued interest.

Meanwhile, after commencing the New York cases, but prior to their final resolution, the Taineses brought the present action. They asserted a claim based on breach of fiduciary duty by Michael Rafton and Gene Barry as majority shareholders for excluding the Taineses from the Corporation; breach of contract and fraud claims against Michael Rafton for allegedly promising to provide all the financing to be required by the Corporation and then failing to do so; breach of contract and fraud claims against Gene Barry for allegedly promising to provide promotional services for the Corporation and then allegedly failing to do so; and a general fraud claim. In addition, they brought several "joint venture" claims.

After a trial on liability issues, the district court rejected each claim asserted by the Taineses. The district court concluded that New York law applied to all substantive issues in the case. All of the joint venture claims were dismissed. The court further held that the only fiduciary duty breached by Rafton and Barry was that owed by majority shareholders to a minority shareholder, as determined by the New York court in Gene Barry I. The district court also held that the payment of "fair value" by the Corporation to Harold Taines pursuant to the New York litigation constituted full compensation for this breach of duty, and that consequential and punitive damages were not now also available. The district court found that Michael Rafton and Gene Barry had not breached any contract with the Taineses, nor had they breached any other fiduciary duty to the Taineses, or defrauded the Taineses. After the district court denied their motion for a new trial, the Taineses brought this appeal.

Jurisdiction in the district court was based on the parties' diversity of citizenship and the amount in controversy, which is in excess of $10,000. 28 U.S.C. § 1332 (1982). This court has jurisdiction of the appeal pursuant to 28 U.S.C. § 1291. Notice of appeal was timely filed. Fed. R. App. P. 4(a) (1).

II

ANALYSIS

The Taineses contend that the district court should have applied California, not New York, law to resolve this dispute. The district court correctly recognized that a federal court sitting in diversity must apply the conflict of law rules of the forum. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941). This case comes from the United States District Court for the Central District of California; therefore, California's conflict of law rules apply to determine whether California or New York law should properly control this case. California utilizes the "governmental interest" analysis in deciding conflicts of law. See Liew v. Official Receiver and Liquidator, 685 F.2d 1192, 1195-96 (9th Cir. 1982).

This court recently outlined California's governmental interest test in a case that similarly involved both New York and California law as follows:

The application of California's governmental interest analysis requires three steps. First, the substantive law of each state must be examined to assure that the laws differ as applied to this transaction. Second, if the laws do differ, the court must determine whether a "true conflict" exists in that both New York and California have an interest in having its law applied. Finally, if a true conflict exists the court must determine which state's interest would be more impaired if its policy were subordinated to the policy of the other. The conflict is resolved by applying the law of the state whose interest would be most impaired if its law were not applied.

Rosenthal v. Fonda, 862 F.2d 1398, 1400 (9th Cir. 1988) (citations omitted).

Under this test, the district court correctly concluded that New York law should apply to all substantive issues in this case. The parties agree that the laws of California and New York differ as applied to the relevant transactions. The Taineses contend that although both New York and California have an interest in having their law applied, California has the "superior interest." We disagree.

We assume, without deciding, that a "true conflict" exists between California and New York law in this case. We therefore must determine "which state's interest would be more impaired if its policy were subordinated to the policy of the other." All counts of the Taineses' complaint, except two which were based on alleged fraudulent misrepresentations made in California, involved New York plaintiffs, a New York corporation which conducted its business exclusively in New York, and allegedly wrongful conduct which occurred in New York. New York's interests are thus more likely to be impaired.

As to the counts involving representations made in California, we agree with the district court that while California has an interest in preventing misrepresentations from being made within its boundaries, New York has a greater interest in misrepresentations that are relied on by New York citizens in New York and that affect business affairs conducted in New York.

Because the district court was correct in applying New York law in this case, its decision to dismiss the Taineses' joint venture claims is affirmed. The Taineses do not dispute that these joint venture claims, while available under California law, are not available under New York law. Under New York law, when a joint venture is incorporated, the joint venture ceases to exist and merges into the corporation. See Weisman v. Awnair Corp. of America, 3 N.Y.2d 444, 449, 165 N.Y.S.2d 745, 749-750 (1957). Thus, where joint venturers form a corporation to carry on their business, they are prohibited from seeking relief against one another on the basis of the former joint venture relationship.

The district court found no credible evidence of fraud or breach of contract by the defendants. It also found no credible evidence of any breach of fiduciary duty other than the limited breach discussed in section "C" below. The Taineses urge that these findings are clearly erroneous. We have examined the record, and conclude that no clear error occurred. The district court's conclusions are largely based upon testimony by the parties. A district court's conclusions based on witness credibility are given great deference by a reviewing court. See Anderson v. Bessemer City, 470 U.S. 564, 573-75 (1985).

C. Availability of Compensatory and Punitive Damages for "Oppressive Acts" (Breach of Fiduciary Duty)

The district court held that defendants, as majority shareholders, had breached their fiduciary duty to Harold Taines as a minority shareholder. Because the actions involving these parties in the New York courts (Gene Barry I and Gene Barry II) were res judicata as to the existence of "oppressive conduct," which is equivalent to a finding of "breach of fiduciary duty" in New York, the district court was compelled to reach this conclusion. However, as noted above, the district court also concluded that there was simply no credible evidence presented by the Taineses of any other wrongful conduct by the defendants. Thus the "oppressive" conduct found by the district court included only the act of removing Harold Taines from his positions as officer and director of the Corporation, contrary to his legitimate expectation of continuing to participate in the active operation of the Corporation. See Gene Barry I at 544.

The Taineses argue that under New York law, the district court erred in concluding that they could not recover additional compensatory and punitive damages based on this same claim for breach of fiduciary duty. The New York courts held that this "freeze-out" of Harold Taines entitled him to the dissolution remedy found in BCL Sec. 1104-a. The Corporation, however, was equally entitled to avoid dissolution by buying out Mr. Taines pursuant to BCL Sec. 1118. The New York court was called upon to determine the fair value of Mr. Taines' interest in the Corporation when the parties could not agree on its value. This was done. See generally Gene Barry II. Now Mr. Taines claims that under New York law he is entitled to sue for additional damages--compensatory and punitive--based on this identical act of removing him from office.

We need not decide whether New York law ever permits a party who has received fair value under section 1118 to sue separately for further damages based on "oppressive actions." The district court found that Mr. Taines had already been fully compensated by the New York courts for the defendants' breach of fiduciary duty, and that any complaint about the amount he received for this conduct should have been directed to the New York courts. We agree. Mr. Taines received fair value for his shares. He has suffered no other harm which is compensable in this litigation.

AFFIRMED.