Schrage v. Schrage - Case Brief

Schrage v. Schrage - Case Brief

Schrage v. Schrage

Case Number: B298119

Court: Cal. Ct. App.

Date Filed: 2021-09-22

Case Brief – Schrage v. Schrage

Court: COURT OF APPEAL OF THE STATE OF CALIFORNIA
Date: 2025‑09‑03
Case Number: B298119
Disposition: The Court affirmed the trial court’s order of dissolution (with a modification) and reversed the judgment awarding compensatory and punitive damages for breach of fiduciary duty; the appeals from non‑appealable orders were dismissed.

Holding

The court held that the Superior Court possessed fundamental subject‑matter jurisdiction over the buy‑out proceeding and the alternative decree ordering dissolution of the five additional limited‑liability companies, rendering the decree voidable—not void—and that Michael and Joseph Schrage are estopped from collaterally attacking it. Conversely, the court held that Leonard Schrage lacked standing to pursue his breach‑of‑fiduciary‑duty claim as an individual because the alleged breaches were directed at the entities, rendering the claim derivative; consequently, the award of compensatory and punitive damages was reversed.

Narrative

Lead:
In a protracted intra‑family dispute over the Sage Automotive Group, the California Court of Appeal resolved two intertwined controversies: whether a trial court could lawfully order the dissolution of five limited‑liability companies that were added by stipulation to a statutory buy‑out proceeding, and whether a brother‑to‑brother breach‑of‑fiduciary‑duty claim could survive as an individual cause of action. The appellate decision affirmed the dissolution order while striking the $31 million damages award, underscoring the limits of jurisdiction and the doctrine of standing in corporate buy‑out contexts.

Procedural History:
Leonard Schrage, owning one‑third of Sage Automotive Group, sued his brothers Michael and Joseph and the fourteen entities comprising the business for involuntary dissolution under Corporations Code §§ 2000, 17707.03, and 15908.02, and for breach of fiduciary duty. Michael and Joseph invoked the statutory “buy‑out” right, prompting the trial court to stay the dissolution causes and order an appraisal of Leonard’s interest. The parties later stipulated—via a court‑approved order on Jan. 5, 2017—to include five additional limited‑liability companies (the UCNP entities) in the appraisal and buy‑out proceeding, although those entities were not named in the original dissolution complaints.

Retired Judge Louis M. Meisinger, appointed referee, recommended a buy‑out price of $40,237,000. The trial court entered an alternative decree on July 28, 2017: payment of the buy‑out price by Sept. 11, 2017, or, failing that, winding up and dissolving all fourteen original entities plus the five UCNP entities. Michael and Joseph missed the deadline, dismissed their appeal of the decree, and the court appointed a receiver to dissolve the entities.

Separately, the bench tried Leonard’s breach‑of‑fiduciary‑duty claim. After a two‑month trial, the court entered a judgment on March 12, 2019 awarding Leonard roughly $31 million—$24.4 million in compensatory damages (offset by $3.5 million for unclean hands), $5 million each in punitive damages, and modest fees. Michael and Joseph appealed the judgment and post‑judgment orders, asserting (1) lack of jurisdiction over the UCNP entities, (2) that the alternative decree was void, (3) that Leonard lacked standing on the fiduciary claim, and (4) that the “one‑judgment rule” barred the damages claim.

Issues Presented:

  1. Jurisdiction over the UCNP entities: Did the trial court lack subject‑matter jurisdiction to order appraisal, buy‑out, and, alternatively, dissolution of the five limited‑liability companies that were not originally parties to the involuntary‑dissolution actions?

  2. Collateral attack on the alternative decree: Assuming the decree was merely voidable, could Michael and Joseph attack it after having dismissed their earlier appeal?

  3. Standing on the breach‑of‑fiduciary‑duty claim: Did Leonard have a personal cause of action, or was the claim derivative—i.e., belonging to the entities—thereby precluding individual recovery?

  4. Effect of the “one‑judgment rule” and claim preclusion: Should the breach‑of‑fiduciary‑duty claim have been barred because the appraisal proceeding was intended to resolve all financial disputes?

Court’s Analysis:

  1. Subject‑Matter Jurisdiction and the Buy‑out Statutes
    The appellate court began by distinguishing “fundamental” from “excess” jurisdiction. Fundamental jurisdiction requires the court’s power over the subject matter; excess jurisdiction arises when a court, though fundamentally competent, exceeds the statutory scope of its authority. The California Constitution (Art. VI, § 10) and Code Civ. Proc. § 410.10 confer broad original jurisdiction on superior courts, subject only to statutory limits.

The buy‑out provisions—Corporations Code §§ 2000 (corporations), 17707.03 (LLCs), and 15908.02 (LPs)—explicitly empower a court, in an involuntary‑dissolution suit, to stay the dissolution, appoint appraisers, fix a fair value, and issue an alternative decree ordering dissolution if payment is not made. The statutes do not require that every entity to be dissolved be a named plaintiff or defendant; they merely require a pending dissolution cause to trigger the buy‑out mechanism.

Here, the dissolution causes were pending for the fourteen original entities when the parties stipulated to add the UCNP entities to the appraisal. The trial court therefore retained subject‑matter jurisdiction over the expanded buy‑out proceeding. The court cited precedent (e.g., Serrano v. Stefan Merli Plastering Co., 162 Cal.App.4th 1014 (2008); Lovett v. Carrasco, 63 Cal.App.4th 48 (1998)) affirming that a superior court may adjudicate matters involving non‑parties when the dispute arises from a right created by the court’s own proceeding.

Accordingly, the court concluded that the inclusion of the UCNP entities did not divest the trial court of jurisdiction. At most, the court’s order was an act in excess of its statutory authority—voidable, not void.

  1. Estoppel and the Impossibility of Collateral Attack
    Even assuming the alternative decree was merely voidable, the appellate court emphasized the doctrine of estoppel. Michael and Joseph voluntarily entered into the stipulation that bound them to the appraisal and buy‑out process, expressly waiving any right to contest the referee’s determinations. They later dismissed their appeal of the July 28, 2017 decree, thereby accepting its finality.

California law (e.g., Mt. Holyoke Homes, LP v. California Coastal Comm., 167 Cal.App.4th 830 (2008); Garibotti v. Hinkle, 243 Cal.App.4th 470 (2015)) holds that a party who consents to a proceeding beyond the court’s jurisdiction may be estopped from later attacking that proceeding, especially when the party has benefited from the judgment for an extended period. The appellate court found no “unusual circumstances” that would excuse Michael and Joseph’s failure to raise the jurisdictional objection earlier. Their belated collateral attack was barred.

  1. Standing on the Fiduciary‑Duty Claim
    The crux of the damages reversal lay in the standing analysis. The trial court had previously denied Michael and Joseph’s motion for judgment on the pleadings, finding Leonard’s breach‑of‑fiduciary‑duty claim to be individual, not derivative. On appeal, the Court of Appeal reversed that determination.

Under California corporate law, a breach of fiduciary duty by a shareholder‑director is generally a derivative claim—recovery belongs to the corporation (or partnership) because the injury is to the entity, not the individual shareholder. Klein v. City of Santa Monica (1995) 12 Cal.App.4th 1155, and Klein v. City of Santa Monica (1995) 12 Cal.App.4th 1155, illustrate that a shareholder may only sue on a derivative basis unless the fiduciary breach caused a personal injury distinct from the entity’s harm.

The appellate court concluded that Leonard’s allegations—misappropriation of assets, exclusion from books, and self‑dealing—were directed at the corporate entities themselves. Leonard suffered no personal injury separate from the loss of value in his one‑third interest, which was already addressed by the buy‑out proceeding. Consequently, his claim was derivative, and as a non‑entity, he lacked standing to recover individually. The court vacated the $24.4 million compensatory award and the $10 million in punitive damages.

  1. One‑Judgment Rule and Claim Preclusion
    The appellants also argued that the “one‑judgment rule” barred the fiduciary‑duty claim because the appraisal proceeding should have incorporated all financial consequences. While the court acknowledged the rule’s relevance, it held that the rule applies only when the same cause of action is litigated in multiple proceedings. Here, the breach‑of‑fiduciary‑duty claim was a distinct cause of action—derivative versus the buy‑out claim—so the rule did not preclude it. However, because Leonard lacked standing, the claim could not proceed, rendering the rule’s analysis moot.

Disposition:

  • Affirmed the trial court’s alternative decree ordering dissolution of the UCNP entities, modifying it only to the extent necessary to reflect the court’s findings on jurisdiction (i.e., confirming the decree’s validity).
  • Reversed the judgment awarding compensatory and punitive damages for breach of fiduciary duty, vacating the $31 million net award.
  • Dismissed the appeals from the non‑appealable post‑judgment orders, noting that Michael and Joseph’s earlier dismissal of the appeal barred further attack.

Closing Analysis:
Schrage v. Schrage clarifies two pivotal points for California probate and corporate practitioners. First, the statutory buy‑out mechanism under §§ 2000, 17707.03, and 15908.02 confers broad subject‑matter jurisdiction that can encompass additional entities added by stipulation, even if those entities were not originally named in dissolution complaints. Courts may order appraisal and, alternatively, dissolution of such entities without forfeiting jurisdiction, though any overreach is merely voidable and subject to estoppel if parties have consented and benefited from the judgment.

Second, the decision reinforces the derivative nature of fiduciary‑duty claims in closely‑held family businesses. Shareholders cannot sidestep the derivative framework by asserting personal injury where the alleged breach harms only the corporation. Practitioners must therefore evaluate standing early and, when appropriate, bring derivative actions on behalf of the entity, securing appropriate court‑appointed representation and adhering to the procedural safeguards of derivative litigation.

Unresolved issues linger, notably the precise limits of a court’s authority to bind non‑parties in a buy‑out proceeding and the interplay between the “one‑judgment rule” and derivative claims when the same financial loss is addressed in multiple forums. Future litigation will likely test the boundaries of estoppel when parties negotiate complex stipulations that blend appraisal, buy‑out, and dissolution mechanisms. For now, Schrage offers a robust precedent that both protects the integrity of statutory buy‑out proceedings and curtails overreaching individual claims against corporate fiduciaries.

Referenced Statutes and Doctrines

  • Corporations Code §§ 2000, 17707.03, 15908.02 – statutory buy‑out provisions for corporations, LLCs, and limited partnerships.
  • Code Civ. Proc. §§ 410.10, 473(d) – general jurisdiction of superior courts; relief from void judgments.
  • California Constitution, Art. VI, § 10 – superior courts’ original jurisdiction.
  • Doctrine of Estoppel (collateral attack) – Mt. Holyoke Homes, LP v. California Coastal Comm., 167 Cal.App.4th 830 (2008); Garibotti v. Hinkle, 243 Cal.App.4th 470 (2015).
  • Derivative Claim Standing – Klein v. City of Santa Monica (1995) 12 Cal.App.4th 1155; People ex rel. Becerra v. Superior Court (2018) 29 Cal.App.5th 486.
  • One‑Judgment Rule / Claim Preclusion – People v. American Contractors Indemnity Co. (2004) 33 Cal.4th 653; Adoption of Myah M. (2011) 201 Cal.App.4th 1518.
  • Jurisdictional Distinctions (fundamental vs. excess) – American Contractors (2004) 33 Cal.4th 653; In re Marriage of Goddard (2004) 33 Cal.4th 49.

Last updated September 05, 2025.