Judge: Armen Tamzarian, Case: 22STCV30669, Date: 2023-01-11 Tentative Ruling

Case Number: 22STCV30669    Hearing Date: January 11, 2023    Dept: 52

Defendant Paul Payne III’s Demurrer to Complaint

            Defendant Paul Payne III demurs to the first, second, and fourth causes of action  in the complaint by plaintiffs Douglas Knight and Vicki Knight.

Summary of Allegations

            Plaintiffs allege they and defendant Robert Rose all own shares in a corporation, Century Rooter and Jetting Service, Inc.  (Comp., ¶¶ 1-3.)  Plaintiffs allege they each own 24.5% of the corporation (¶¶ 1-2), while Rose was “the majority shareholder” (¶ 42).

Defendant Paul Payne III is a certified public accountant.  (Comp., ¶ 4.)  In a scheme to take plaintiffs’ shares in the corporation, Rose hired Payne to falsify the corporation’s 2021 tax return.  (¶¶ 14-17.)  Plaintiffs allege that, based on over a decade of Century Rooter and Jetting Service, Inc.’s prior tax returns, Payne knew they each owned 24.5%.  (¶ 15.)  Payne, however, prepared a tax return stating plaintiffs each owned only 8.75% of the corporation.  (¶ 17.)  The complaint further alleges, “Payne knew that filing a return inconsistent with earlier returns would cause significant injury to Plaintiffs and result in an almost certain audit.  Payne knew that if he were to change the percentage ownership interests, he was obligated to file amended returns for earlier years.”  (¶ 18.)

Plaintiffs also allege that Rose sent fake invoices to the corporation for $5,000 per month to rent office space, but used the money to pay for his own residence.  (Comp., ¶ 20.)  They allege, “Payne included the falsified expenses on the tax return and failed to conduct proper due diligence on the legitimacy of the expense.”  (Ibid.)

1st Cause of Action: Financial Elder Abuse

Plaintiffs fail to allege sufficient facts for this cause of action.  The Welfare and Institutions Code “broadly defines financial abuse of an elder as occurring when a person or entity ‘[t]akes, secretes, appropriates, obtains, or retains real or personal property of an elder’ for ‘a wrongful use or with intent to defraud, or both,’ as well as ‘by undue influence....’ ”  (Paslay v. State Farm General Ins. Co. (2016) 248 Cal.App.4th 639, 656.) 

Plaintiffs do not allege sufficient facts showing Payne either took, appropriated, or retained any of their property.  The only factual allegations against him are that he filed a tax return: (1) misstating their interests in a corporation, and (2) including the false expenses Rose charged the corporation. 

“A tax return is merely a statement of the taxpayer’s claim and does not establish the truth of the matters set forth therein.”  (Gubbini v. C.I.R. (T.C. 1996) 71 T.C.M. (CCH) 2993.)  The tax return was a statement that plaintiffs owned less of the corporation than they really do.  Telling that to the IRS does not make it so. 

Plaintiffs also allege no damages resulting from Payne including falsified expenses in the tax return.  The alleged facts do not support any inference that, because the tax return included false expenses, plaintiffs lost any property.  That doing so will “result in an almost certain audit” (Comp., ¶ 18) is not enough.  That an audit will happen is speculative.  Even if plaintiffs have been audited, that only constitutes “potential liability” which “could not amount to actual harm until the date of the deficiency tax assessment or finality of the audit process.”  (International Engine Parts, Inc. v. Feddersen & Co. (1995) 9 Cal.4th 606, 620.)

2nd Cause of Action: Conversion

            Plaintiffs allege insufficient facts for conversion.  “The basic elements of the tort are (1) the plaintiff’s ownership or right to possession of personal property; (2) the defendant’s disposition of the property in a manner that is inconsistent with the plaintiff’s property rights; and (3) resulting damages.”  (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.) 

            Plaintiffs allege only the first element.  They had a right to possess personal property, their 24.5% shares in the corporation.  Plaintiffs do not, however, allege Payne disposed of that property in any manner.  Payne made statements to the IRS about plaintiffs’ property.  Those statements did not and could not have the legal effect of diminishing plaintiffs’ interest in the corporation. 

For the same reasons as the first cause of action, plaintiffs also fail to allege resulting damages.  They do not allege facts showing that, by filing a tax return including false expenses and misstating plaintiffs’ shares of the corporation, Payne caused any harm to them.   

4th Cause of Action: Aiding and Abetting Breach of Fiduciary Duty

            Plaintiffs fail to allege sufficient facts for this cause of action.  Aiding and abetting breach of fiduciary duty requires: “ ‘(1) a third party’s breach of fiduciary duties owed to plaintiff; (2) defendant’s actual knowledge of that breach of fiduciary duties; (3) substantial assistance or encouragement by defendant to the third party’s breach; and (4) defendant’s conduct was a substantial factor in causing harm to plaintiff.’ ”  (George v. eBay, Inc. (2021) 71 Cal.App.5th 620, 641.)

Even assuming plaintiffs allege sufficient facts to state a cause of action against defendant Robert Rose for breach of fiduciary duty, they do not allege sufficient facts to state a cause of action against Payne for aiding and abetting Rose.  As discussed above, allegations about what Payne stated in the corporation’s tax return fail to show Payne did anything that caused harm to plaintiffs. 

Plaintiffs allege Rose did other things that, for the purposes of this demurrer, the court assumes may have breached Rose’s fiduciary duty and caused harm to plaintiffs.  For example, they allege Rose “made violent physical threats to [plaintiffs] to attempt to intimidate them into giving up their interest in” the corporation.  (Comp., ¶ 19.) 

But plaintiffs rely solely on conclusory allegations that Payne knew of those things and substantially assisted or encouraged them.  They allege, “Rose and Payne schemed to muscle Douglas Knight and Vicki Knight out of” Century Rooter and Jetting Service, Inc.  (Comp., ¶ 19.)  The complaint further alleges, “Payne colluded in or aided and abetted the breach of fiduciaries by Rose, and was an active and knowing participant in Rose's breaches of fiduciary duties owed to Plaintiffs.  Payne directly and indirectly benefitted from Rose's breaches of his fiduciary duties.”  (¶ 55.) 

These allegations generically characterize unspecified conduct by Payne as scheming, colluding, aiding, abetting, and being an active participant.  Those are conclusions, not facts.  They echo the legal and factual conclusions required for aiding and abetting, but they have no supporting factual allegations to stand on.  The complaint does not allege what Payne did to assist Rose, other than filing the tax return—which did not cause any harm to plaintiffs.

Disposition

            Defendant Paul Payne III’s demurrer to the first, second, and fourth causes of action is sustained with 20 days’ leave to amend.