ITV Gurney Holdings v. Gurney ( 2017 )

Filed 12/5/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
ITV GURNEY HOLDING INC. et al., B281694
(consolidated w/B283476)
Plaintiffs and Appellants,
(Los Angeles County
v. Super. Ct. No. BC 643237)
SCOTT GURNEY et al.,
Defendants and Respondents.
APPEAL from an order of the Superior Court of
Los Angeles County, Susan Bryant-Deason, Judge. Affirmed in
part and reversed in part.
____________________________
Munger, Tolles & Olson, Fred A. Rowley, Jr., Mark R.
Yohalem, John L. Schwab, Nicholas S. Dufau; Hogan Lovells US,
Paul B. Salvaty, Megan Dixon, Poopak Nourafchan and Laura M.
Groen for Plaintiffs and Appellants.
Kendall Brill & Kelly, Philip M. Kelly, Nicholas F. Daum;
White & Case, Bryan A. Merryman; Lavely & Singer, and
Michael E. Weinstein for Defendants and Respondents.
____________________________
Plaintiffs and appellants ITV Gurney Holding Inc. (ITV)
and Gurney Productions, LLC (the Company) challenge the
trial court’s grant of a preliminary injunction in favor of
defendants and respondents Scott Gurney and Deirdre Gurney
(the Gurneys), and Little Win, LLC. The Gurneys are the
minority owners of the Company and formerly served as its
chief executive officers (CEO’s), pursuant to an employment
agreement. The Company fired the Gurneys as CEO’s and
removed them from managing the day-to-day operations of
the Company. The Gurneys do not challenge the Company’s
right to fire them as CEO’s. Rather, they contend that under
the operating agreement that governs the Company, they could
not be removed from managing its day-to-day operations.
Plaintiffs contend the operating agreement gave the Company,
through its board of managers, the ultimate authority to manage
the Company, and thus permitted the board to remove the
Gurneys as managers of the day-to-day operations. We agree
with plaintiffs and reverse the trial court’s order to the extent
that it reinstated the Gurneys to their positions managing the
day-to-day operations of the Company. The Gurneys continue as
members of the Company’s board of managers, and we affirm the
portion of the preliminary injunction barring the Company from
impinging on their rights as board members.
FACTS AND PROCEEDINGS BELOW
The Gurneys have been producing reality-television
programming since 2005. Their greatest success was the
program Duck Dynasty.
In 2012, the Gurneys agreed to sell 61.5 percent of their
production business to ITV, an affiliate of the British media
company ITV plc. As part of the transaction, the parties signed
two contracts relevant to this appeal: an operating agreement,
which defined the structure of the Company and the terms
under which the owners could buy and sell their stakes, and
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employment agreements, which established the terms of the
Gurneys’ employment as joint CEO’s.
The operating agreement provided for a board of managers
composed of five members, three of whom were to be appointed
by ITV, and two by the Gurneys’ shell company, Little Win, LLC.
The Gurneys themselves were designated as Little Win, LLC’s
representatives on the board. In most instances, the operating
agreement allowed the board to decide matters by majority vote,
but several situations required unanimity. In particular,
unanimous approval was required for “[o]perating the Company
and its [s]ubsidiaries other than as a television production
company in the ordinary course of business consistent with past
practice of the Gurneys, the Company’s five year forecasts and
the [b]udget; except that, without the approval of all [m]anagers,
the Gurneys may [among other powers]: [¶] . . . manage the
day-to-day business and affairs of the Company.”
The operating agreement also provided for specific time
frames within which ITV was entitled to buy out the Gurneys’
ownership interest, and the Gurneys were entitled to sell their
interest to ITV. ITV’s right to “call,” or purchase, the Gurneys’
interest, was to run for 90 days after the Company’s auditor
delivered the audited financial statements for the year 2015.
In addition, if “the Company terminates the employment of
either Gurney with [g]ood [c]ause (as such term is defined in
such Gurney’s [e]mployment [a]greement with the Company) . . .
before the end of fiscal year 2015,” ITV would be entitled to
purchase the Gurneys’ interest on similar terms. If ITV did
not exercise its call rights, the Gurneys were entitled to “put,”
or sell, their stake to ITV at any time after the auditor delivered
the financial statements for 2017. The operating agreement
established the price for the Gurneys’ ownership interest in a put
or call as a multiple of the Company’s average EBITDA (earnings
before interest, taxes, depreciation, and amortization) for the
preceding three years.
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The Gurneys also signed employment agreements to
serve as co-CEO’s of the Company. These agreements required
the Gurneys to devote their “full business time and efforts to
the performance of [their] duties for [the] Company” for the
five-year period ending December 31, 2017, with annual renewals
thereafter at the option of both the Gurneys and ITV. For their
work, the Gurneys were each to receive $500,000 per year.
A majority of the Company’s board could vote to remove the
Gurneys for good cause if, among other reasons, the Gurneys
“willfully engage[d] in any activity that is in direct conflict with
[their] duties and responsibilities” under the agreements, or
“breach[ed their] fiduciary duty to the Company or any affiliated
entity, including acts of self-dealing (whether or not for personal
profit).” The Company was also entitled to terminate the
Gurneys’ employment without cause at any time after the
contract had been in force for three years, that is, after 2015.
In the employment agreements, the Gurneys agreed not to
“engage directly or indirectly in any activity that competes with
the business activities of the Company. The business activities
of the Company are defined as the development, production,
promotion, and marketing of reality-based programs whether for
television, internet or other broadcast, cable, electronic or digital
media.” The Gurneys also agreed that, while they were employed
and for one year afterward, they would “not interfere with,
impair, disrupt or damage [the] Company’s business by soliciting,
encouraging or recruiting any of [the] Company’s employees or
causing others to solicit or encourage any of [the] Company’s
employees to discontinue their employment with [the] Company.”
In the summer of 2016, the Gurneys learned that ITV’s
parent company was pressuring its United States-based
subsidiaries and affiliates, including the Company, to reduce
expenses. Around July 2016, the Gurneys formed a new
television production company called Snake River Productions.
According to the Gurneys, their intention was to produce
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programming other than reality shows, and to have an
alternative source of employment in case ITV elected not to
renew their contracts at the Company. At around the same time,
the Gurneys were attempting, without success, to sell a second
season of a reality program called Sons of Winter to a network for
broadcast. The Discovery Channel had aired the first season of
the program but elected not to renew it. At a September 2016
board meeting, the Gurneys informed the other board members
that they had sold the rights to Sons of Winter for $3.6 million.
When asked who the buyer was, Deirdre Gurney claimed she
could not remember the company’s name, but when Scott
reminded her, she acknowledged that it was Snake River
Productions. Neither of the Gurneys told the board that they
owned Snake River Productions.
Plaintiffs allege that the purpose of Snake River
Productions’ purchase of Sons of Winter was financial
manipulation. They claim that the sale of Sons of Winter was an
attempt by the Gurneys to increase the Company’s EBITDA, and
thus to increase the price at which the Gurneys would be entitled
to sell their stake in the Company to ITV under the terms of the
operating agreement. A witness for the plaintiffs calculated that
the sale of Sons of Winter, if considered in calculating EBITDA,
would increase the potential sale price of the Gurneys’ ownership
interest by approximately $3.71 million. In addition, because
the Gurneys and their holding company owned 38.5 percent
of the Company, they would be entitled to a distribution of
approximately $1.39 million of the price Snake River Productions
had paid for the rights to Sons of Winter. Thus, by buying Sons of
Winter for $3.6 million, the Gurneys could potentially obtain as
much as $5.1 million for themselves, even if Sons of Winter had
no value.
Around the same time, the Gurneys decided to fire two
of the employees on the Company’s development team with the
expectation of rehiring them to work at Snake River Productions.
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Approximately one week after the September board
meeting, the Company’s chief financial officer (CFO), who under
the terms of the operating agreement was appointed by ITV,
informed ITV that the Gurneys owned Snake River Productions.
The CFO also told ITV about other financial irregularities he
perceived in the Gurneys’ management of the Company,
including the payment of a $350,000 advance to the Gurneys that
the CFO believed was improper.
At a board meeting in December 2016, the ITV-appointed
board members—who constituted a majority of the board—voted
to place the Gurneys on a paid leave of absence while the charges
against them were being investigated. A few days later, the same
board members voted to terminate the Gurneys’ employment for
cause, alleging that the Gurneys had violated their duty of
loyalty to the Company by concealing the facts surrounding the
sale of Sons of Winter, along with engaging in other misconduct.
The next day, ITV and the Company filed suit against defendants
and thereafter defendants filed a cross-complaint against
the Company. ITV also attempted to exercise its call rights and
purchase the Gurneys’ share of the Company, and the Gurneys
attempted to exercise their put rights and sell their share of the
Company to ITV. The parties, however, did not consummate a
sale because they could not agree on a price.
On February 1, 2017, the Gurneys filed a motion for a
preliminary injunction, requesting that the court restrain
plaintiffs from breaching the operating agreement. In particular,
the Gurneys asked the court to bar ITV from exercising its call
rights, and to order the Company to restore the Gurneys to the
day-to-day management of the Company.
After a hearing, the trial court issued a preliminary
injunction granting both requests. The trial court found that
ITV was unlikely to succeed in its claim regarding its call rights
because, by the time ITV elected to exercise those rights, those
rights had expired. Under the terms of the operating agreement,
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the period in which ITV was entitled to buy out the Gurneys’
shares ran 90 days from the end of the 2015 fiscal year, but ITV
did not notify the Gurneys of its intent to purchase the shares
until February 2017. The injunction also required that the
Company restore the Gurneys to their positions as day-to-day
managers of the Company.
DISCUSSION
Plaintiffs contend that the trial court abused its discretion
by granting the preliminary injunction. They argue that because
the employment agreement allowed the board to terminate the
Gurneys’ employment with or without cause at any time, it is
irrelevant for purposes of a preliminary injunction whether or not
good cause supported the Gurneys’ termination. Plaintiffs also
argue that the operating agreement does not provide the Gurneys
an independent basis for exercising day-to-day authority over the
Company.
We agree with plaintiffs’ position regarding the
interpretation of the operating agreement and employment
agreements. On this basis, we conclude that the trial court
abused its discretion by granting a preliminary injunction
reinstating the Gurneys to management positions. Because the
interpretation of the contracts is decisive in this case, we need
not and do not reach a determination of the other issues the
parties have raised in their briefs, including the questions of
whether the Gurneys violated their fiduciary duties or otherwise
breached their contracts with the Company, and whether
the trial court erred by sustaining a number of the Gurneys’
objections to plaintiffs’ evidence.1
Although we reverse the trial court’s order restoring the
Gurneys to day-to-day management of the Company, we leave in
1 Defendants filed a motion to strike portions of plaintiffs’
reply brief, and plaintiffs filed a motion to strike portions of the
defendants’ motion. We deny both motions.
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place the other portions of the preliminary injunction. This
includes the portion of the injunction denying ITV’s request
to exercise its call rights to purchase the remainder of the
Company, a ruling which plaintiffs have not challenged on
appeal. It also includes the portion of the injunction barring the
Company from violating the Gurneys’ rights as members of
the board of managers, including their right to vote on matters
requiring unanimous board approval. Those rights belong to the
Gurneys so long as they and their shell company own at least
10 percent of the Company, regardless of whether they continue
to be employed as CEO’s.
A. Standards of Review of a Preliminary
Injunction
Pursuant to longstanding Supreme Court case law, “trial
courts should evaluate two interrelated factors when deciding
whether or not to issue a preliminary injunction. The first is the
likelihood that the plaintiff will prevail on the merits at trial.
The second is the interim harm that the plaintiff is likely to
sustain if the injunction were denied as compared to the harm
that the defendant is likely to suffer if the preliminary injunction
were issued.” (IT Corp. v. County of Imperial (1983) 35 Cal. 3d
63, 69–70.) We review a trial court’s application of these factors
for abuse of discretion. (Oiye v. Fox (2012) 211 Cal. App. 4th
1036, 1047.)
“Notwithstanding the applicability of the abuse of
discretion standard of review, the specific determinations
underlying the superior court’s decision are subject to appellate
scrutiny under the standard of review appropriate to that type
of determination. [Citation.] For instance, the superior court’s
express and implied findings of fact are accepted by appellate
courts if supported by substantial evidence, and the superior
court’s conclusions on issues of pure law are subject to
independent review.” (Smith v. Adventist Health System/West
(2010) 182 Cal. App. 4th 729, 739.) Because this case involves only
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the interpretation of contracts, which is a question of pure law,
our review is de novo. (See Taylor v. Nu Digital Marketing, Inc.
(2016) 245 Cal. App. 4th 283, 288.)
Injunctions may be either mandatory, in that they compel
a party to take an action, or prohibitory, in that they attempt
to maintain the status quo by restraining a party from taking
action. (Oiye v. Fox, supra, 211 Cal.App.4th at p. 1048.)
“ ‘ “ ‘A preliminary mandatory injunction is rarely granted,
and is subject to stricter review on appeal.’ ” ’ ” (Ibid.) In this
case, plaintiffs contend that the preliminary injunction was
mandatory; the Gurneys contend that it was prohibitory.
Because our decision in this case would be the same regardless
of which standard of review applied, we need not resolve this
dispute.
B. The Operating and Employment Agreements
The key question in this case is whether the Gurneys
retained the right, despite their termination from employment
as CEO’s, to continue managing the Company’s day-to-day
operations. Our answer to that question is no. The operating
agreement reserves to the board—by majority, and in some
cases unanimous, vote—the authority to manage the Company’s
affairs. In context, the language in the operating agreement
authorizing the Gurneys to manage the Company without
the approval of the other board members serves as an
accommodation to the Gurneys to exercise authority as CEO’s,
not as an irrevocable grant to continue managing the Company
indefinitely.
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1. Termination Under the Employment
Agreements
Under the terms of the employment agreements, the
Company was entitled to terminate the Gurneys’ employment
at any time for good cause. In addition, the employment
agreements provided that “[t]he Company may terminate
[the Gurneys’] employment without [g]ood [c]ause at any time
after the third anniversary of the date of this [a]greement on
[30] . . . days’ advance written notice.” The board’s decision to
fire the Gurneys occurred in December 2016, almost four years
after the employment agreements were signed. Consequently,
we agree with plaintiffs’ contention that the employment
agreements provide no basis for a preliminary injunction. (In
any case, the Gurneys do not so contend.) Even if the Gurneys
are correct that there was no good cause for their firing, the
only difference between a termination with or without cause is
whether the Gurneys would be entitled to 30 days’ notice before
their termination.
2. The Gurneys’ Rights Under the Operating
Agreement
Our conclusion regarding the employment agreements
is insufficient to decide this case, however. The operating
agreement includes a provision stating that, “without the
approval of all [m]anagers, the Gurneys may [among other
powers]: [¶] . . . manage the day-to-day business and affairs
of the Company consistent with past practice of the Gurneys
(except as otherwise restricted in this [a]greement).” The
Gurneys contend that this provision is a blanket grant of
authority to control the operations of the Company, regardless
of the wishes of the majority owners, regardless of whether or
not the Gurneys continued to be employed under the employment
agreements, and thus, apparently, regardless of whether there
is cause for firing them. We disagree. The Gurneys misinterpret
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the language of the operating agreement itself and its connection
with the Gurneys’ employment agreements.
The provision regarding the management of day-to-day
operations must be understood in the context of the operating
agreement as a whole. (American Alternative Ins. Corp. v.
Superior Court (2006) 135 Cal. App. 4th 1239, 1245 [“We consider
the contract as a whole and interpret the language in context,
rather than interpret a provision in isolation.”]; Civ. Code,
§ 1641.) In this case, the relevant language is found in the
section describing the circumstances in which the board may
make decisions by majority or unanimous vote. The operating
agreement provides that “[a]ll actions by the [b]oard . . . shall
require the affirmative vote of a majority of the [m]anagers,
except for such actions as to which a greater than majority vote
may be required pursuant to the provisions of the [a]ct or this
[a]greement.”
The operating agreement then goes on to list a number
of exceptions for which unanimous approval is required. The
first of these exceptions is for any action involving “[o]perating
the Company and its [s]ubsidiaries other than as a television
production company in the ordinary course of business consistent
with past practice of the Gurneys, the Company’s five[-]year
forecasts and the [b]udget.” In other words, the Company
may not deviate from its prior way of doing business without
unanimous board approval. The same section of the operating
agreement then continues: “except that, without the approval of
all [m]anagers, the Gurneys may:
(i) manage the day-to-day business and affairs of the
Company consistent with past practice of the Gurneys (except as
otherwise restricted in this [a]greement);
(ii) hire and fire employees other than the chief financial
officer;
(iii) decide which productions are sold, to whom, and
upon what terms . . . ;
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(iv) spend up to $500,000 on development in [f]iscal
[p]eriod 2014 and each [f]iscal [p]eriod forward;
(v) introduce new business streams to the Company,
including merchandising and music rights;
(vi) utilize the Company’s resources to maximize profits;
(vii) deploy employees of the Company in their sole
discretion”; along with a few other similar functions.
Thus, in general, the board may make decisions by majority
vote, with the exception that some decisions require unanimity.
The Gurneys’ authority over the day-to-day operations of the
Company is an exception to the exception. It describes instances
in which the Gurneys may operate autonomously. Within the
operating agreement these exceptions serve a clear role: They
relieve the Gurneys, when acting in their role as joint CEO’s of
the Company, from needing to seek the approval of the other
board members for every decision that might represent a
departure in some small way from their prior course of business.
Presumably, neither the Gurneys nor the other members of
the board wished to become bogged down in constant votes over
minor matters.
The exceptions to the exception did not grant the Gurneys
lifetime jobs as managers of the Company. If the Gurneys were
removed as CEO’s, these exceptions would no longer have any
practical effect. At that point, the Gurneys would no longer
be operating the Company, and so they would no longer need
an exemption from the unanimity requirement to perform the
specified job functions.
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3. The Operating Agreement Interpreted
in Broader Context
As we have seen, the operating agreement, even when
interpreted on its own, does not grant the Gurneys authority
to manage the Company’s day-to-day operations indefinitely.
If there could be any doubt about the Gurneys’ rights under
the operating agreement, it is dispelled when the operating
agreement is considered in light of the employment agreements.
The Gurneys signed their employment agreements on the same
day that they signed the operating agreement, and the operating
agreement explicitly refers to the termination provisions of the
employment agreements. Thus, the section of the operating
agreement describing actions that require unanimous board
approval states that unanimity is required for “[f]iring any
senior executive, other than the Gurneys (whose employment
may be terminated in accordance with their [e]mployment
[a]greements).”2
The employment agreements described in detail the
circumstances under which the Gurneys’ employment could be
terminated. In addition to setting out time frames during which
the Gurneys could be terminated with or without cause, the
employment agreements explained exactly what would constitute
good cause. They also spelled out the procedure the board must
follow, including allowing the Gurneys an opportunity to respond
to the evidence against them. It would be unimaginable for
ITV and the Gurneys to go to this much trouble to describe
the procedures surrounding the Gurneys’ termination, if
they intended that the Gurneys would continue to “manage the
day-to-day business and affairs of the Company,” “hire and fire
2 This reference in the operating agreement to the
termination of the Gurneys’ employment shows that it is proper
to interpret the operating agreement in light of the employment
agreements in spite of the integration clause in the operating
agreement.
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employees,” and exercise other functions ordinarily reserved for
CEO’s, even after they were removed from those positions.
Furthermore, the operating agreement must be interpreted
in light of common understandings in corporate law. Although
the Company was established as a limited liability company
rather than as a corporation, we interpret the establishment
of a formal board as a choice by the Company to organize itself
according to the ordinary rules of a board of directors. (See
Friedman et al., Cal. Practice Guide: Corporations (The Rutter
Group 2017) ¶ 2:36.18, p. 2-16.) Ordinarily, a majority
shareholder who has the authority to appoint a majority of
the board of directors may make decisions despite the objection
of a minority shareholder. If the Gurneys’ interpretation were
correct, that rule would be flipped on its head, with essentially
no recourse for the majority to assert its authority. Under
their interpretation, the Gurneys could never be removed from
managing the Company, regardless of any bad behavior on their
part or the terms of their employment. Even if the Gurneys
had already breached their duty of loyalty by entering into a
self-dealing transaction to benefit themselves at the expense of
the Company and ITV, the remaining board members would have
no means of preventing the Gurneys from continuing indefinitely
to operate the Company, except by dissolving the Company.
If the parties intended the operating agreement to
grant the Gurneys, as minority shareholders, this much
control regardless of the wishes of the majority shareholder,
we would expect to find such authority granted prominently and
unequivocally in the text of the document. Instead, the language
that the Gurneys rely on appears as an exception to a rule
requiring unanimous approval of board actions.
Our conclusion that the operating agreement does not
give the Gurneys this unchecked authority does not render
the Gurneys powerless. Although the Gurneys lost the right
to manage the day-to-day operations of the Company when the
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majority of the board voted to remove them as CEO’s, they
retained their rights as board members. This included the ability
to veto proposed actions requiring unanimous board approval.
Furthermore, as board members, the Gurneys retained
the right to visit and inspect the Company’s properties, books,
and records, and to speak with the Company’s officers regarding
the Company’s affairs, finances, and accounts. We perceive no
error in the trial court’s grant of a preliminary injunction in favor
of the Gurneys with respect to these matters.
The trial court’s order granting the injunction depended
on its interpretation of the operating agreement as granting
the Gurneys authority to manage the day-to-day affairs of the
Company regardless of whether they continued to be employed
as CEO’s. Because the trial court erred in its interpretation of a
question of law, its grant of the injunction constituted an abuse
of discretion, and we must reverse.
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DISPOSITION
We reverse the order granting the preliminary injunction
to the extent that the injunction reinstates the Gurneys to
exercise the functions described in section 5.7(a)(i) - (ix) of the
operating agreement, including the day-to-day management
of the Company. In all other respects, the trial court’s order
granting the preliminary injunction is affirmed. Appellants are
awarded their costs on appeal.
CERTIFIED FOR PUBLICATION.
ROTHSCHILD, P. J.
We concur:
JOHNSON, J.
LUI, J.
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