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Thai Chili, Inc. v. Bennett

Court of Appeals of Columbia District

September 26, 2013

THAI CHILI, INC., et al., Appellants,
Prapeesuk BENNETT, et al., Appellees.

Argued Feb. 16, 2012.

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Ronald K. Henry, Washington, DC, with whom Gregory T. Jaeger, North Brunswick, NJ, was on the brief, for the appellants.

Geoffrey Greeves, with whom Tab R. Turano, Washington, DC, was on the brief, for the appellees.

Before FISHER and BECKWITH, Associate Judges, and KING, Senior Judge.

BECKWITH, Associate Judge:

This case arises from a dispute over the ownership and control of two restaurants— Thai Chili and Sushi Go Round— located in Gallery Place in the District of Columbia's Chinatown neighborhood. Appellants Somchai Phongsvirajati and Chaveevarn Kawano (the Managers) are the former managers of the two restaurants. Appellees Neiyana Chotikul, Jeffrey Chotikul, Atit Phutilikit, Joanne Duangmanee, and Thanakorn Duangmanee (the Shareholders) [1] are investors in the closely held corporations controlling the restaurants, which operate as a single business venture but are separately incorporated as Thai Chili, Inc., and Miso Hungry, Inc. Not long after the restaurants opened for business in the summer of 2005, the Managers filed this lawsuit, alleging a hostile takeover by the Shareholders. The Shareholders

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brought various counterclaims alleging a breach of fiduciary duty and seeking a determination of corporate ownership. After five years of combative litigation, Superior Court Judge Robert Richter ruled that the Shareholders held a majority interest in the companies by a slim margin.

On appeal, the Managers primarily contend that in reaching that decision, the court failed to conduct a proper de novo review, under Super. Ct. Civ. R. 53, of a lengthy Auditor-Master's report containing numerous evidentiary findings and conclusions of law that the trial court ultimately adopted. They also challenge the trial court's view of the facts on several central questions. We conclude that the trial court's review complied with Rule 53 and its factual findings were not clearly erroneous. We affirm the judgment of the Superior Court.

I. Background

In the spring of 2004, Mr. Phongsvirajati and Ms. Kawano settled upon Gallery Place as a location for two new restaurants and filed articles of incorporation for the restaurants, naming Mr. Phongsvirajati as the sole director of each corporation and authorizing the issuance of 1000 shares of common stock, valued at one dollar per share.[2] Before the leases on the restaurant spaces were signed,[3] the Managers, who anticipated a $288,000 payment from the landlord to improve the rented space and who intended to invest $400,000 themselves ($300,000 from Mr. Phongsvirajati and $100,000 from Ms. Kawano), reached out to potential investors among their family, friends, and acquaintances and initially secured an additional $300,000 in pledged investments from Neiyana Chotikul and Atit Phutilikit, who each pledged $50,000, and Paipan Asawareongchai and Prapeesuk Bennett, who each pledged $100,000.

The prospective total investment capital (not including the landlords construction allowance) was subsequently increased from $700,000 to $900,000 when in March of 2005, Ms. Kawano reported that an additional $200,000 was needed to allow the restaurants to open, and Neiyana Chotikul's children, Jeffrey Chotikul and Joanne Duangmanee, agreed to invest $50,000 and $100,000, respectively. Mr. Phongsvirajati also contacted his niece, Siriphen Thamvichai, who agreed to invest $50,000— money that eventually was invested in Ms. Thamvichai's name by Somchai Phongsvirajati's spouse.

Thai Chili opened for business on May 8, 2005. Later that month, Neiyana Chotikul, who had been named the restaurants' treasurer two weeks earlier at a shareholder meeting, gained access to the restaurants' bank statements, at which time she discovered that the Managers had yet to deposit their full capital contributions in the corporation bank accounts.[4] The following week, the Managers determined, after meeting with the contractor, that more money was needed in order to open Sushi Go Round. Neiyana Chotikul, who suspected that the unexpected deficit was attributable to the Managers' failure to make their lump sum payments, testified that " if you have $900,000 at April 23rd,

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the restaurant doesn't have [a] problem." Joanne Duangmanee agreed to deposit an additional $50,000 on July 22, 2005, raising the total invested and anticipated capital to $950,000.[5] The crisis was averted and Sushi Go Round opened for business on August 8, 2005.

Not long thereafter, things went very wrong. In October of 2005, some of the Shareholders, frustrated with the failure of the Managers to issue shares and with perceived improprieties in the management of the businesses, took steps to gain more control over the day-to-day operation of the restaurants. The Managers challenged these actions by filing a lawsuit, and though the Shareholders quickly relinquished their temporary control of the restaurants, they filed a counterclaim seeking a determination of the ownership percentage in the restaurant corporations to which each party was entitled.[6] On July 26, 2007, Superior Court Judge Judith Retchin referred the matter to an Auditor-Master for an accounting of the parties' capitalization and of the restaurants' income and expenses. Between June 2008 and January 2009, the master held twenty-three days of evidentiary hearings, taking testimony— much of it translated from Thai— from the Managers, the Shareholders, and accountants hired by both sides to examine the restaurants' financial records.

The heart of the Managers' claims before the master was that Somchai Phongsvirajati and Chaveevarn Kawano together had acquired a majority interest in the restaurants through a combination of directly deposited investment capital and numerous cash and credit purchases they made to get the restaurants up and running. They contended that there was no limit on the capital contributions Mr. Phongsvirajati could claim, and that between his cash deposits and purchases and the value of certain liabilities he had incurred, he had invested substantially more than the $300,000 he had pledged. The Managers also contended, somewhat contradictorily, that Ms. Kawano had a subscription-for-shares agreement, such that $20,000 she deposited into the corporate account on December 12, 2005, well after the start of litigation in this case, should still count toward her capital credit.

The Shareholders countered that the parties had agreed that the total capital contribution by all parties was limited to $950,000, which they believed was the approximate cost of opening the restaurants for business. In the Shareholders' view, the Managers could contribute no more than the $400,000 they had pledged, or 42.1 percent of the investment capital, and in any event they had not even contributed that much, as Mr. Phongsvirajati had only deposited $260,000 of his pledged $300,000 and Ms. Kawano had only deposited $80,000 of her pledged $100,000 for a total of $340,000. The Shareholders also claimed that the Managers had misappropriated corporate revenues for personal purposes and to fund other business ventures.

The master's task was thus to determine whether there was a binding agreement among the parties to invest in the restaurants and issue shares, what its terms were, what actual contributions were made by Mr. Phongsvirajati and Ms. Kawano,

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and how shares were to be apportioned among the parties given their respective contributions. In trying to resolve this dispute, the master sifted through a heap of documents, heard testimony over several months, and made dozens of findings in a fifty-six page report. We highlight here the findings most central to his resolution of this case— findings that focused heavily upon two meetings of the shareholders on April 23 and October 16, 2005, and upon various writings produced by the parties.

With respect to the first official shareholder meeting on April 23, 2005, the master found that all of the investors present— which was everyone except Jeffrey Chotikul and Joanne Duangmanee— recounted their respective anticipated contributions to what was at that point a $900,000 capitalization fund, while Ms. Kawano wrote down this accounting. The document listed Mr. Phongsvirajati's contribution as $300,000 and Ms. Kawano's as $100,000, though unlike the Shareholders, neither of the Managers had actually contributed the amounts written next to their names. Paipan Asawareongchai also created a document verifying that the parties elected Mr. Phongsvirajati as president and chairman of the two corporations, Ms. Kawano as vice-chairperson, and Neiyana Chotikul as treasurer, and that they had agreed that each investor would have the chance to purchase any shares offered for sale before they could be sold to an outsider. This document also indicated the parties' agreement that when the landlord paid the construction allowance, $100,000 would be available as shares for the employees and $50,000 would be available for the manager or " right-hand man." The master further found that Mr. Phongsvirajati did not mention that he had already issued shares to himself and Ms. Kawano, and that when the Shareholders inquired at this meeting as to when shares would be distributed, he responded that no shares would issue until he had added up all of his receipts. Though the Managers contend this meant the Shareholders agreed he could contribute more than his pledged $300,000, the master found that there was " abundant evidence to support the finding that the addition of his receipts was needed to confirm the $300,000 pledge."

The master found that weeks later, in a July 11, 2005, email to Paipan Asawareongchai, Neiyana Chotikul described the Managers' anger when she urged them to register the investors' names in the corporation promptly, rather than after construction was completed, noting " I have explained to them so many times that capital investment is still the same $900,000. If we have to increase the capital we should notify all shareholders."

The master also made findings based upon testimony he heard regarding a final shareholder meeting on October 16, 2005, after both restaurants were open. As will be discussed infra, although the participants taped the meeting, which was conducted in Thai, the master made these findings without the benefit of the translated transcript that the parties later produced. With the exception of Paipan Asawareongchai and Prapeesuk Bennett, who authorized Neiyana Chotikul to act on their behalf, the Managers and Shareholders all attended. The master found that everyone present helped prepare a document that they understood was intended to confirm each investor's contribution. At this time, the Shareholders had all deposited capital contributions in the precise amounts listed on the sheet, while the Managers had not. The master found that at this meeting, the Shareholders repeated their demands that shares be issued, that Mr. Phongsvirajati told them that he would deliver the list to the restaurant's attorney so shares could issue, but that Mr. Phongsvirajati again said no stocks

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would issue until he added up all of his receipts.

Finally, the master made several findings regarding a January 5, 2006, letter the Managers' attorney sent to the Shareholders after the start of litigation, purporting to issue shares to each of them. The letter indicated that the initial shares issued to Somchai Phongsvirajati and Chaveevarn Kawano had been cancelled and that shares had been reapportioned as follows: 4 percent to those who invested $50,000; 8 percent to those who invested $100,000; 12 percent to Chaveevarn Kawano, reflecting a capital investment of $150,000; and 44 percent to Somchai Phongsvirajati, based on a capital investment of $558,631.88. Mr. Phongsvirajati and Ms. Kawano's investment capital included $100,000 credits to each of them that they claimed the Shareholders had agreed to give them based on compensation for tasks performed and liabilities incurred in starting the restaurants.[7] The letter stated that the Shareholders could immediately claim their shares if they agreed to the percentage ownership breakdown put forth by the Managers. The Shareholders did not accept this arrangement, the Managers abandoned their specific claims to the $100,000 capital credits, and the litigation in this case continued.

A. The Auditor-Master's Conclusions

A year after presiding over the final hearing, the master produced his report containing these findings, concluding primarily that 1) there was a binding and enforceable subscription-for-shares agreement among the parties to contribute a total capitalization investment of $950,000 to the restaurants— a figure roughly equal to what it cost to get both restaurants open for business when supplemented by the landlord's construction allowance; 2) the parties agreed that each investor was to receive a number of shares proportionate to their percentage contribution to the capital investment; 3) given this agreement and the actual ...

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