1. Legal Principles

In their first and dispositive assignment of error, Jara, Jr., and Rodriguez, argue that the trial court erred in finding an enforceable agreement among shareholders to require the approval of all shareholders for an increase in officer compensation. They argue that Jara, Jr.'s promise to this effect in the evening telephone conversation with his father, which was memorialized in note 10 of the 1998 and 1999 financial statements, was a gratuitous promise lacking in consideration.

This assignment of error calls on us to review the doctrine of consideration in California contract law. We begin by noting that, in Bard v. Kent (1942) 19 Cal.2d 449 [122 P.2d 8], the Supreme Court authoritatively adopted the concept of consideration as a bargained-for exchange as formulated in the Restatement of Contracts, section 75, which is now expressed with insignificant changes in language in Restatement Second of Contracts, section 71. This understanding of the doctrine of consideration was reaffirmed in Simmons v. Cal. Institute of Technology (1949) 34 Cal.2d 264, 272 [209 P.2d 581], and continues to guide California courts. (Asmus v. Pacific Bell (2000) 23 Cal.4th 1, 10 [96 Cal.Rptr.2d 179, 999 P.2d 71]; US Ecology, Inc. v. State of California (2001) 92 Cal.App.4th 113, 128-129 [111 Cal.Rptr.2d 689]; Flojo Internat., Inc. v. Lassleben (1992) 4 Cal.App.4th 713, 719 [6 Cal.Rptr.2d 99]; Enslow v. von Guenthner (1961) 193 Cal. App. 2d 318, 322 [14 Cal.Rptr. 231].)

Section 71 of Restatement Second of Contracts states in pertinent part: "(1) To constitute consideration, a performance or a return promise must be bargained for. [¶] (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise." Comment b observes: "In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration."

Farnsworth explains that the courts began to require that consideration be bargained for in the late 19th century. The effect of this development of the doctrine was to direct legal analysis to "the process by which the parties had arrived at that exchange--was it the product of 'bargain?' " (1 Farnsworth on Contracts (3d ed. 2004) § 2.2, p. 79.) In California, the concept is consistent with the early statutory definition of "good consideration" in Civil Code section 1605: "Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promise." (Italics added.) The phrase "as an inducement to the promisor" reflects the requirement, more clearly enunciated in the Restatement, that the consideration be a bargained-for exchange.

[1] In view of the requirement of a bargained-for exchange, California courts have repeatedly refused to enforce gratuitous promises, even if reduced to writing in the form of an agreement. (Simmons v. Cal. Institute of Technology, supra, 34 Cal.2d 264, 269, 272-273 [written agreement to secure approval of research institute for licensing of invention]; Simonian v. Patterson (1994) 27 Cal.App.4th 773, 778, 780 [32 Cal.Rptr.2d 722], [father's promise to persuade his daughter to return property to an ex-boyfriend]; Sparks v. Lauritzen (1967) 248 Cal. App. 2d 269, 273 [56 Cal.Rptr. 370], [decedent's promise to leave estate to appellants who gave him food, shelter, and care]; Enslow v. von Guenthner, supra, 193 Cal. App. 2d 318 [14 Cal. Rptr. 231] [written agreement revising contractor's obligation after performance was rendered and payment due]; Dow v. River Farms Co. (1952) 110 Cal. App. 2d 403, 410-411 [243 P.2d 95] [corporate resolution to pay officer $ 50,000 for past services in the absence of any expectation of payment when services were rendered].)

The decision in Passante v. McWilliam (1997) 53 Cal.App.4th 1240 [62 Cal.Rptr.2d 298] is based on facts closely parallel to the present case. Passante, an attorney for a start-up company, arranged a $ 100,000 loan that allowed for a deposit required by a contract vital to the company's success. The money was wired to an account controlled by a board member before the loan was presented to the board for its approval. In gratitude, the board promised to give Passante a 3 percent stock interest in the company. When the company later reneged on this promise, Passante sued for breach of contract and secured a $ 33 million jury verdict, but the trial court entered a judgment for the defendants notwithstanding the verdict.

Affirming the judgment, the court held: "As a matter of law, any claim by Passante for breach of contract necessarily founders on the rule that consideration must result from a bargain." (Passante v. McWilliam, supra, 53 Cal.App.4th 1240, 1247.) The court found that "the stock had not been bargained for in exchange for arranging the loan; Passante had already arranged the loan (even though the loan had not been formally accepted by the board) before the idea of giving him stock was ever brought up. There is no evidence that Passante had any expectation that he be given stock in return for arranging the $ 100,000 loan. ... '[I]f there was no expectation of payment by either party when the services were rendered, the promise is a mere promise to make a gift and not enforceable.' [Citation.]" (Id. at pp. 1248-1249.)

2. Standard of Review

In applying these principles to the facts, we view the record in the light most favorable to the judgment. It is a familiar principle that " 'every intendment and presumption not contradicted by or inconsistent with the record on appeal must be indulged in favor of the orders and judgments of superior courts.' [Citation.]" (Walling v. Kimball (1941) 17 Cal.2d 364, 373 [110 P.2d 58].)

The relevant evidence on the issue of consideration is found in the testimony of the parties themselves, Jara, Sr., Jara, Jr., and Rodriguez. In this appeal, Jara, Jr., and Rodriguez, seek to minimize issues of fact by predicating their argument solely on the testimony of Jara, Sr., whom the trial court found most credible. We likewise will confine our review to the testimony of Jara, Sr., while indulging in every inference favorable to the judgment in construing his testimony.

3. Absence of Consideration

In our view, the testimony of Jara, Sr., can only be construed as revealing that his son's promise not to increase compensation without unanimous shareholder agreement was unsolicited. The testimony makes clear that Jara, Jr., first raised the idea of unanimous shareholder agreement on executive compensation, without any prompting or solicitation, in an evening telephone conversation. According to Jara, Sr.'s account of this conversation, his son called him for advice on what he and Rodriguez should pay themselves and he responded by suggesting that they pay themselves what they received at their past job, while clearly indicating that they were free to adopt or reject his advice. ("If you want to do that, ... if you think that you work more or you earn more money than the $ 800, why don't you [start with the low salary and take more when appropriate].") When Jara, Jr., called back after consulting Rodriguez, he said they accepted the advice and then volunteered an entirely unsolicited promise "we will make sure all of us agree[] how much money that's going to be." We find nothing in Jara, Sr.'s testimony suggesting that the promise arose from any earlier conversation about shareholder approval or that the promise responded to any suggestion, objection or inducement that Jara, Sr., may have made.

Again, Jara, Sr.'s account of the conversation clearly indicates that his son's promise was gratuitous in the sense of being offered without expectation of any exchange promise or performance. Nothing in the record suggests that Jara, Jr., sought to elicit a similar promise from Jara, Sr., or that he hoped to induce some other kind of performance in exchange for his promise to secure unanimous approval. Jara, Sr., had already given the new company the full extent of his financial support. So far as revealed in the record he did not make any further contribution to the business other than rendering occasional advice, and Jara, Jr., and Rodriguez did not seek any further contribution.

[2] It does not matter whether Jara, Jr.'s promise arose from a feeling of gratitude toward his father or from fear that the father would retract his support for the line of credit the company needed. Again, it is irrelevant that Jara, Jr., may have tried to keep faith with the promise by incorporating it in footnote 10 and by calling the meeting on December 31, 1999, to seek his father's agreement. The existence of consideration does not depend on Jara, Jr.'s subjective state of mind but on whether the objective manifestations of agreement by the parties constituted a bargain. (Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 632 [80 Cal.Rptr.2d 378].) It is relevant only that Jara, Jr.'s promise was unsolicited and gratuitous; it was neither induced by promises or conduct of his father nor given to induce a return promise or performance.

In this appeal, Jara, Sr., now contends that we adopt the trial court's analysis that three shareholders exchanged promises to refrain from voting in favor of an increase in officer compensation without the approval of the other two shareholders. The effect of this agreement, he argues, would be a valid bilateral contract, analogous to a voting trust, to protect each shareholder from a combination of the other two in setting officer compensation. (See Bleecher v. Conte (1981) 29 Cal.3d 345, 350 [213 Cal. Rptr. 852, 698 P.2d 1154] [bilateral contract]; Garratt v. Baker (1936) 5 Cal.2d 745 [56 P.2d 225] [bilateral contract]; Ramos v. Estrada (1992) 8 Cal.App.4th 1070, 1077 [10 Cal.Rptr.2d 833] [voting trust].)

We consider, however, that this analysis has an entirely theoretical character. The record contains nothing suggesting that Jara, Jr., sought a return promise on the part of his father or contemplated anything resembling a voting trust. Jara, Jr., did not condition his promise on receiving a similar commitment from the father or manifest any expectation of securing an exchange promise. It follows that, if Jara. Sr., had responded by promising to abide by a shareholder agreement resembling a voting trust, the promise would not have constituted bargained-for consideration because it would not have been given in response to any inducement of Jara, Jr. But Jara, Sr.'s testimony does not indicate that he in fact tried to seize on this opportunity to bind his son to the kind of bilateral contract he now describes. Instead, the noncommittal response that he recalls giving to his son ("And I said it's okay") evidenced no more than acquiescence in his son's apparent goodwill and cannot be reasonably construed as a bid to enter into a bilateral contract regarding the future exercise of voting rights.

Our conclusion calls for reversal of the judgment awarding damages for breach of contract as well as reversal of the postjudgment order filed December 4, 2003, compelling performance of this judgment, which is the subject of a separate appeal consolidated herewith. (A105119.)

1. Procedural Background

Suprema appeals from the portion of the judgment ordering it to provide Jara, Sr., with "access to monthly financial statements" and awarding attorney fees in an amount to be determined by motion. In a separate and consolidated appeal (A104666), Suprema appeals from a postjudgment order entered September 26, 2003, setting the award of attorney fees at approximately $ 84,300. Jara, Jr., and Rodriguez join in Suprema's appeals.

The procedural history of these appeals involves rights afforded by five sections of the Corporations Code, which should be briefly identified at the outset. Section 1501 concerns the corporation's duty to provide shareholders with annual reports; section 1601 addresses the shareholders' right to inspect corporate records; section 1602 pertains to directors' rights of inspection; section 1603 provides for the enforcement of rights of inspection by court order; and section 1604 authorizes the award of attorney fees expended in enforcing rights to inspection under section 1601.

The original complaint and first amended complaint sought an order pursuant to section 1603 enforcing Jara, Sr.'s right as a director to inspect corporate records as provided by section 1602. The second amended complaint, filed August 16, 2002, again sought an order enforcing a director's right of inspection, but, in addition, it sought an order enforcing a shareholder's right of inspection of corporate records under section 1601 and right to receive "annual and quarterly financial statements" under section 1501, subdivision (c), as well as an award of attorney fees under section 1604.

The statement of decision found no evidence of a violation of section 1501, subdivision (c), and did not address the alleged violation of section 1602 but ruled that Suprema violated its duty of disclosure under section 1601. Specifically, the court found: "It is clear that on numerous occasions commencing in January 2000 plaintiff through his counsel requested monthly financial statements be provided to plaintiff. Except for year end financials these requests were ignored." Defendants "merely ignored [plaintiff's] requests and never offered access to such records and in fact denied the existence of monthly financial reports." The judgment ordered Suprema to "provide plaintiff access to its monthly financial statements upon written request for review and copying" and awarded plaintiff attorney fees "expended to enforce Corporations Code section 1601 in an amount to be determined by noticed motion."

2. Factual Background

The record discloses that plaintiff's attorney, Kenneth Nissly, wrote five letters to Jara, Jr., from January through July 2000, requesting monthly financial information. The first two letters were written in preparation for a meeting at Suprema's office on March 13, 2000. A letter faxed on February 25, 2000, stated: "I look forward to receiving Suprema's latest monthly financial statement" and a letter dated March 2, 2000, made the same request: "please fax me a copy of the most recent monthly financial statement for Suprema Meats, Inc."

Nissly's letter to Jara, Jr., dated April 18, 2000, pursued this request: "So that we may continue our discussions I would appreciate your sending us copies of the monthly financial statements for October 1999 to the most current month." A letter dated May 22, 2000, repeated: "let me request, once again, copies of current financial information for Suprema Meats, Inc... . Please send me ... the monthly financial statements for 2000 fiscal year." Finally, a letter dated July 20, 2000, stated: "Also, once again I request current financial information for Suprema Meats... . Please provide current financial information for Suprema Meats without further delay."

In response to the second of this series of letters, Jara, Jr., called Nissly on March 2, 2000, and left a voice message that was transcribed and introduced at trial as a plaintiff's exhibit. He told Nissly that his controller "would have to do everything by hand" to give him a finalized monthly report and suggested the figures would be "basically the same" as the last fiscal year. He concluded, "Anyway, you can call me tomorrow." On March 13, 2000, Nissly and his accountant, Roberto Maragoni, met with Jara, Jr., and Rodriguez at Suprema's office. Maragoni testified that he did not recall asking for financial documents at the meeting.

The trial court's finding that Suprema ignored requests for financial statements appears to refer to its responses to Nissly's next three letters. The record reveals that negotiations broke down after defendants received the letter dated April 18, 2000, and defendants did ignore Nissly's later requests for information. At trial, the court found: "clearly there were requests for corporate documents. The response was not, 'Come down to the corporate office and we'll give them to you'; the response was, 'We don't have them. They're not--they're corrupted. They're this, they're that.' " The allusion to documents being "corrupted" refers to the term Jara, Jr., used in testifying that the company's software malfunctioned for a period of time.

The practical importance of these requests for disclosure under the Corporations Code came to an end with the commencement of litigation. Jara, Sr., then sought and obtained extensive production of financial documents through discovery proceedings. When the second amended complaint alleging violation of section 1601 was filed, defendants had already produced all the documents requested prior to the litigation. Moreover, as an affirmative defense in their answers filed December 6, 2000, and February 14, 2002, defendants formally stated that accounting books and records were available for inspection at the company offices.

At trial, Suprema's accounts receivable clerk, Salvador Huerta, and its accountant, Barry Goldstein, testified at length concerning available monthly financial information. The company used an accounting program that generated monthly financial statements, including income and expense statements and balance sheets, which were kept in binders in the office. Since the company took inventory only once a year, the computer-generated monthly statements gave an accurate figure for inventory only in the first month of the fiscal year. According to Huerta, the company's computer program experienced problems throughout 2000. Certain items appeared in a suspense account rather than in the correct accounting category in the computer-generated monthly statements.

3. Legal Analysis

The portion of section 1601 relating to a shareholder's right to inspect financial records provides: "(a) The accounting books and records ... of any domestic corporation ... shall be open to inspection upon the written demand on the corporation of any shareholder ... at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder ... . [¶] (b) Such inspection by a shareholder ... may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts."

[5] Section 1601 appears as part of a statutory scheme of corporate disclosure, which also includes sections 1602 and 1501. Section 1602 affords directors a still broader right "at any reasonable time to inspect and copy all books, records and documents of every kind," which may be exercised either in person or by agent. The right of inspection by a director is enforceable only by court order under section 1603 without benefit of recovery of attorney fees under section 1604. In contrast, section 1501, subdivision (a), requires corporations to "cause an annual report," with specified content, "to be sent to the shareholders" within 120 days of the end of the fiscal year. Subdivision (c) of section 1501 provides that, if no annual report "has been sent to shareholders, the corporation" must "deliver or mail" the statement to a person making a written request for it, and subdivision (f) authorizes the court to award attorney fees in a proceeding to enforce shareholder rights under the section.

All defendants argue that the scope of the duty imposed by section 1601 requires no more than that the corporation open financial records for inspection at corporate offices. They note that the five letters that Nissly wrote to Jara, Jr., demanded that monthly financial statements be sent to him. Accordingly, they maintain that the five letters did not constitute a "written demand on the corporation" giving rise to the rights and obligations of section 1601. Jara, Sr., relies on the trial court's findings that defendants "thwarted" his rights of inspection by ignoring his requests for monthly financial statements. He urges that the corporation is obliged to respond to requests for financial records by offering the records for inspection at the company office.

[6] In our view, defendants are unquestionably right in interpreting section 1601 as affording no more than a right to inspect and copy records at the company office. The statutory language requiring that the records "be open to inspection ... at any reasonable time during usual business hours" clearly implies that they may be inspected at the office where the records are kept. This interpretation is consistent with the statutory context. While section 1602 gives directors a similar right to inspect records "at any reasonable time," section 1501 provides that a particular kind of record, the annual financial statement, must be "sent," "delivered," or "mailed" to shareholders. Since the Legislature did not use such expressions in sections 1601 or 1602, it may be inferred that an actual mailing or delivery was not intended. Moreover, the category of "accounting books and records" covered by section 1601 is so broad that it would be unreasonable to construe the statute as requiring the corporation to assemble and deliver voluminous documents upon receipt of a shareholder letter. The potential burden of such an obligation is suggested by the fact that Suprema produced 4,000 pages of financial records during discovery.

[7] On the other hand, we agree with the general point underlying Jara, Sr.'s argument that section 1601 can be violated by corporate action calculated to thwart exercise of the rights it extends to shareholders, i.e., by a failure to respond to a proper request, a communication rendering further requests futile, or an action impeding the process of inspection. The statute should be construed so as " 'to effectuate the purpose of the law.' [Citations.]" (In re J. W. (2002) 29 Cal.4th 200, 209 [126 Cal.Rptr.2d 897, 57 P.3d 363]; Select Base Materials v. Board of Equal. (1959) 51 Cal.2d 640, 645 [335 P.2d 672].)

But the trial court went a step further. The findings in the statement of decision imply that a shareholder's request for financial information creates an affirmative duty to notify the shareholder that the records are open for inspection at the company office, even if the request does not accurately refer to the rights of inspection under section 1601. Any other interpretation, Jara, Sr., now argues, would weaken the statute by conditioning the right of inspection under section 1601 to a technical requirement of submitting a written demand in proper form.

We reject this interpretation of section 1601 as imposing an affirmative duty to respond to a defective written demand. First, on the present record, the defect in the shareholder's written demand was not a technical matter of form but rather an assertion of a right that the statute did not provide--a right to have broadly described financial documentation sent to the shareholder. We are not called upon here to consider the effect of a vague, ambiguous, or inartful request. The three letters at issue were clearly drafted by an attorney; they unmistakably demanded a performance to which a shareholder is not entitled by statute, i.e., to have the current or monthly financial statements assembled and delivered to the shareholder. This right of actual delivery is guaranteed only by section 1501 with respect to the annual report.

Secondly, it is a familiar rule of statutory construction that a statute "must be given a reasonable and common sense interpretation consistent with the apparent purpose and intention of the lawmakers, practical rather than technical in nature, which upon application will result in wise policy rather than mischief or absurdity." (DeYoung v. City of San Diego (1983) 147 Cal. App. 3d 11, 18 [194 Cal.Rptr. 722], disapproved on other grounds in Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 15 [78 Cal.Rptr.2d 1, 960 P.2d 1031]; see also Welch v. Oakland Unified School Dist. (2001) 91 Cal.App.4th 1421, 1428 [111 Cal.Rptr.2d 374]; United Business Com. v. City of San Diego (1979) 91 Cal. App. 3d 156, 170 [154 Cal.Rptr. 263].) Section 1601 appears in a statutory context that allows us to infer that the Legislature was attentive to the practical consequences of authorizing the recovery of attorney fees in enforcement proceedings, i.e., section 1501 affords a similar right to recover attorney fees but section 1602 does not. The interpretation of section 1601, which Jara, Sr., favors, would inevitably result in widespread noncompliance with the statute, which would in turn open the door to litigation over attorney fees. It cannot reasonably be assumed that small closely held corporations will routinely consult counsel upon receiving shareholder correspondence--Suprema was not represented by counsel at the time the three letters were written--and corporate employees may be inclined to discard correspondence that lies outside the normal course of business. If section 1601 is broadly construed to require corporations to respond to shareholder letters that do not request inspection as limited by section 1601, a potentially burdensome response would be required of the corporation that may encourage unnecessary, if not actually predatory, litigation. Upon failing to receive the legally required response, a shareholder would have an incentive to resort to litigation with a hope of recovering attorney fees under section 1604.

[8] We see nothing in the statutory context or public policy that would justify stretching the meaning of the statutory language "shall be open to inspection" in section 1601 so as to impose on the corporation an affirmative duty to respond to written requests for modes of disclosure falling outside the scope of the statute. The statute guarantees a shareholder's right to inspect accounting books and records at the company office at a reasonable time during usual business hours when such inspection is requested by a written demand. The remedies of a court order under section 1603 and award of attorney fees under section 1604 exist only to enforce a written demand for inspection to which the shareholder is entitled under the statute. Jara, Sr., did not make such a written demand but rather demanded that monthly financial reports be sent to him. In the absence of a violation of section 1601, the trial court erred by entering the portions of the judgment ordering Suprema to provide Jara, Sr., with monthly financial statements and awarding attorney fees, as well as by entering the postjudgment order setting the attorney fee award in the amount of $ 84,300.