Wednesday, April 26, 2017
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C.A. Upholds Rulings in Dispute Over Sex Toy Companies
By KENNETH OFGANG, Staff Writer
The Court of Appeal for this district yesterday affirmed a judgment in favor of a sex-toy entrepreneur in a dispute with a former business associate.
Div. Two, in an unpublished opinion by Justice Judith Ashmann-Gerst, upheld trial court rulings that Joel Tucker, founder of The Stockroom, Inc., did not violate any fiduciary duties to Michael Herman, the company’s former president, and that separate company run by Herman owed Stockroom more than $330,000.
Los Angeles Superior Court Judge Gregory W. Alarcon ruled for Tucker after a five-day bench trial, upholding his allegation that Herman had essentially used Transcendigital, Inc. to siphon off funds belonging to Stockroom.
Tucker, then a 21-year-old Occidental College student, founded what became Stockroom in 1988, according to online sources. In a 2012 press release, the company described itself as “the world’s largest bondage gear manufacturer.”
In 2007, according to testimony, Tucker wanted to step back from day-to-day operations and hired Herman as company president, while Tucker remained chief executive and 95 percent owner. As part of the agreement, Herman received five percent of the company stock.
The following year, Herman learned that two similar online businesses were for sale. A new company, Transcendigital, or TDI, was formed, with Herman as president and treasurer and 40 percent owner, and Tucker owning the remaining 60 percent.
Tucker later testified that the new company was formed so that Herman could “launch…separate but related business units from within Stockroom” and own a larger stake in those businesses.
Herman managed both companies. Tucker testified that Stockroom would “advance resources to TDI” and would be entitled to repayment.
Sales Tax Problems
Stockroom ran into sales tax problems, and wound up having to agree to a payment plan with the State Board of Equalization. Tucker, however, worried that the SBE’s automated systems might cause a levy on the company’s accounts despite the agreement and agreed to Herman’s suggestion Stockroom have its credit card processor deposit the company’s revenues in TDI’s bank account.
The pair also entered into a one-page agreement called the “Stockroom TDI Engagement,” stating that TDI would employ Stockroom to manage and build new websites for the businesses acquired by TDI, and that Stockroom would “run a tab” so that TDI could pay for those services, plus 3.8 percent interest. The agreement also specified that Stockroom could “run revenue through” TDI “in order to get an accurate audit of its own merchant accounts and billing systems.”
Tucker’s trial evidence showed that more than $3 million in Stockroom money was run through TDI in 2010 and 2011, which Tucker said he learned only after hiring a certified public accountant in late 2012. He also learned that there were no separate records as to the companies’ expenses, because Herman told all of their vendors to invoice Stockroom, and that Herman had purchased hundreds of web domains with Stockroom’s assets.
When Tucker confronted Herman about the finances in June 2013, he said, Herman exploded and resigned from both companies. Tucker and the accountant then went over the books, leading Tucker to conclude that TDI owed Stockroom more than $300,000, for which he prepared an invoice.
Herman filed suit in December of that year, seeking to dissolve TDI, among other things. Tucker then noticed a TDI shareholders’ meeting, voted his majority interest in favor of dissolving the company, and had his attorney demand that Herman deposit his anticipated share of TDI’s litigation expenses.
When Herman refused to make the deposit, Tucker—as a secured creditor—loaned TDI $40,000 for the litigation.
Sham Claimed
When the case went to trial in 2015, Herman contended that the engagement agreement, referred to as the STE contract, was a sham and that TDI owed Stockroom nothing. Tucker insisted the contract was valid and that TDI owed Stockroom $331,825.
Alarcon concluded at the end of the trial that the contract was enforceable. He ordered TDI dissolved and its assets sold to the highest bidder, and that Herman return all web domains plus $24,000 in misappropriated funds to TDI.
The judge also rejected Herman’s breach-of-duty claim, and found TDI liable for the amount of the invoice, the $40,000 that Tucker loaned to pay for legal expenses, and the $75,000 advanced by Stockroom to buy the predecessor businesses.
Ashmann-Gerst, writing for the Court of Appeal, said there was substantial evidence that Herman was responsible for the day-to-day operations of TDI, and responsible for the accounting problems at the company.
She rejected all of Herman’s challenges to the judgment, including his claim that the court did not make a proper accounting because it did not appoint a referee. A judge may make an accounting without a referee’s assistance, the jurist said.
The justice also rejected Herman’s claim that he was entitled to compensation for unpaid labor toward building TDI.
“…[I]n making this argument, Herman points to no place in the record showing there was any employment agreement or other obligation that he be paid for his labor,” she wrote.“ Nor does he point to any timesheets or records indicating his time spent or the amounts owed.”
Ashmann-Gerst also rejected the argument that the judgment violates his due process rights by ordering him to return domain names that he claimed were his personal property, without notifying him in advance that such a remedy might be awarded.
Having brought an action in equity, seeking “such other and further relief as the court may deem proper,” the justice explained, “Herman cannot complain that the court granted it.”
Attorneys on appeal were Steven H. Haney and Gregory L. Young for Herman, Allan B. Gelbard for Transcendigital, and Jeffrey D. Dermer for Tucker.
The case is Herman v. Transcendigital, Inc., B267911.
Copyright 2017, Metropolitan News Company