Judge: Barbara M. Scheper, Case: 23STCP03986, Date: 2024-04-09 Tentative Ruling
Case Number: 23STCP03986 Hearing Date: April 9, 2024 Dept: 30
Calendar No.
Welk Jr. v. Fredricks,
et al., Case No.
23STCP03986
Tentative Ruling
re: Defendant’s Demurrer to Complaint
Nominal Defendant The Welk Group demurs to the first three causes of
action in Plaintiff’s Complaint. The
demurrer is overruled.
In reviewing the legal sufficiency of a complaint against a demurrer, a
court will treat the demurrer as admitting all material facts properly pleaded,
but not contentions, deductions, or conclusions of law. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 (Blank); C & H Foods Co.
v. Hartford Ins. Co. (1984) 163 Cal.App.3d 1055, 1062.) It is well settled
that a “demurrer lies only for defects appearing on the face of the
complaint[.]” (Stevens v. Superior Court
(1999) 75 Cal.App.4th 594, 601.) “The rules by which the sufficiency of a
complaint is tested against a general demurrer are well settled. We not only
treat the demurrer as admitting all material facts properly pleaded, but also
give the complaint a reasonable interpretation, reading it as a whole and its
parts in their context.” (Guclimane Co.
v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38 (internal quotes
omitted).) For purposes of ruling on a demurrer, the complaint must be
construed liberally by drawing reasonable inferences from the facts pleaded. (Wilner v. Sunset Life Ins. Co. (2000) 78
Cal.App.4th 952, 958.)
When ruling on a demurrer, the Court may only consider the complaint’s allegations
or matters which may be judicially noticed. (Blank, supra, 39 Cal.3d at p. 318.) The Court may not consider any
other extrinsic evidence or judge the credibility of the allegations plead or
the difficulty a plaintiff may have in proving his allegations. (Ion Equip. Corp. v. Nelson (1980) 110
Cal.App.3d 868, 881.) A demurrer is properly sustained only when the complaint,
liberally construed, fails to state facts sufficient to constitute any cause of
action. (Kramer v. Intuit Inc. (2004)
121 Cal.App.4th 574, 578.)
Whether Plaintiff
has Standing to Bring a Derivative Lawsuit
The Welk Group demurs to the complaint on the ground that Plaintiff lacks
standing to bring a derivative action because the complaint fails to
sufficiently allege compliance with the statutory pre-suit demand requirement
of Corporations Code 800(b), and it fails to allege particularized facts to
show that a demand pursuant to Section 800(b) would have been futile. (Demurrer
at pp. 5-13.)
“Shareholders may bring two types of actions, ‘a direct action filed by
the shareholder individually (or on behalf of a class of shareholders to which
he or she belongs) for injury to his or her interest as a shareholder,’ or a
‘derivative action filed on behalf of the corporation for injury to the
corporation for which it has failed or refused to sue.’ [Citation.] ‘The two
actions are mutually exclusive: i.e., the right of action and recovery belongs
either to the shareholders (direct action) or to the corporation (derivative
action).” [Citation.] When the claim is derivative, the ‘shareholder is merely
a nominal plaintiff.... Even though the corporation is joined as a nominal
defendant ..., it is the real party in interest to which any recovery usually
belongs.’ [Citation.]” (Schuster v. Gardner (2005) 127 Cal.App.4th
305, 311–312.) “Thus, ‘the action is derivative, i.e., in the corporate
right, if the gravamen of the complaint is injury to the corporation, or to the
whole body of its stock or property without any severance or distribution among
individual holders, or if it seeks to recover assets for the corporation or to
prevent the dissipation of its assets.’” (Jones v. H. F. Ahmanson & Co.¿(1969)
1 Cal.3d 93, 106.) However, “[a] single cause of action by a shareholder
can give rise to derivative claims, individual claims, or both.” (Goles
v. Sawhney¿(2016) 5 Cal.App.5th 1014, 1019 Fn.3.) Further, there is
no requirement that the alleged wrong be unique to that plaintiff and can
affect any number of shareholders, rather “[i]f the injury is not incidental
[sic] to an injury to the corporation, an individual cause of action
exists.” (Jones, supra, 1 Cal.3d at 107.)
A derivative action requires that the plaintiff comply with Cal. Corp.
Code § 800, which states in relevant part that:
“[n]o action may be instituted or
maintained . . . [unless] the plaintiff alleges in the complaint with
particularity Plaintiff’s efforts to secure from the board such action as
plaintiff desires, or the reasons for not making such an effort, and alleges
further that plaintiff has either informed the corporation or the board in
writing of the ultimate facts of each cause of action against each defendant or
delivered to the corporation or the board a true copy of the complaint which
plaintiff proposes to file.”(Corp. Code § 800(b)(2).)
“Alternatively, the plaintiff may demonstrate that such a demand on the
board would have been futile.” (Shields v. Singleton (1993) 15 Cal.
App.4th 1611, 1618.) “If the plaintiff fails to comply with the requirements of
either subdivision (b)(1) or (b)(2), the complaint is subject to demurrer.” (Id.) “Failure
to comply with the requirements of the statute deprives a litigant of
standing.” (Nelson v. Anderson¿(1999) 72 Cal.App.4th 111, 127.)
First, with regard to the argument
that the complaint does not sufficiently comply with the pre-suit demand
requirement of Corporation Code § 800(b) (Demurrer at pp. 4-5), this argument
is persuasive. Upon review of the
complaint, Plaintiff alleges that he made an oral motion to conduct a financial
audit on November 18, 2022, and afterwards on April 25, 2023, he sent a written
demand to inspect the books and records of the Welk Group’s subsidiaries, which
led to the filing of a petition for writ of mandamus on July 5, 2023. (Compl.
¶¶ 18, 38, 43.) However, none of these allegations establish that Plaintiff “has
either informed the [Welk Group] or the board in writing of the ultimate facts
of each cause of action against each defendant or delivered to the corporation
or the board a true copy of the complaint which plaintiff proposes to file.”
(Corp. Code § 800(b)(2).) The instant complaint consists of claims for breach
of fiduciary duty, unjust enrichment, and injunctive relief. (See generally
Compl.) Notably, there is no claim for accounting. Even if such a claim had
been raised, Plaintiff’s oral and written demands do not inform the Welk Group
of all of the causes of action that are now asserted in the complaint.
Second, while the complaint has
failed to allege sufficient facts to establish compliance with Section 800(b)’s
pre-suit demand requirement, this does not automatically mean that Plaintiff
lacks standing to bring a derivative suit. Alternatively, Plaintiff “may
demonstrate that such a demand on the board would have been futile.” (Shields,
supra, 15 Cal. App.4th at 1618.) In determining whether futility has been
sufficiently alleged “California courts commonly look to two tests enunciated
by the Delaware Supreme Court. . . . Where a decision of the board of directors
is challenged in the derivative suit, the Aronson test asks ‘whether, under the
particularized facts alleged, a reasonable doubt is created that: (1) the
directors are disinterested and independent [or] (2) the challenged transaction
was otherwise the product of a valid exercise of business judgment.’” (Apple
Inc. v. Superior Court (2017) 18 Cal.App.5th 222, 233 (quoting Aronson
v. Lewis (Del. 1984) 473 A.2d 805, 814, overruled on other grounds by Brehm
v. Eisner (Del. 2000) 46 A.2d 244.)
The Welk Group refers to these two
separate tests as prongs, suggesting that each must be satisfied in order to
establish Plaintiff’s standing. (See Demurrer at pp. 6, 11.) However, the Court
should not adopt this interpretation because the Court of Appeal in Apple
Inc. expressly referred to these as two separate tests. Thus, the pleadings
need only satisfy one of the two tests.
Upon review of the complaint, the Court finds that the pleadings
sufficiently establish a reasonable doubt that the board of directors are
disinterested and independent. The complaint alleges that a majority of the
Welk Group’s board is conflicted. (Compl. ¶ 56.) The current board consists of
defendants Kevin Welk, Jonathan Fredricks, Stephen Baron, and David Mack.
(Compl. ¶ 15.) The allegations directed at defendant Kevin Welk establish that
he has used corporate funds and assets for his own financial gain, and whenever
Plaintiff has attempted to examine the Welk Group’s financial records, he has
refused to allow such an examination to occur. (Id. at ¶¶ 4, 17, 24-35,
38-44, 56.) As to defendant Jonathan Fredricks, the complaint alleges that he
stood to benefit from Plaintiff’s removal by being appointed as president of
the Welk Group and has taken steps to reduce the board’s oversight of the
company’s financial affairs. (Id. at ¶¶ 4, 8, 17-21, 51-55, 58.) With
regard to defendant Stephen Baron, the complaint alleges that he is beholden to
defendants Kevin Welk and Jonathan Fredricks and aided and abetted their scheme
to remove Plaintiff as CEO and director in order to maintain his position as
outside counsel. (Id. at ¶ 10, 17, 20-21, 59.) Lastly, with regard to
defendant David Mack, the complaint alleges that he is the first cousin of
defendants Kevin Welk and Jonathon Fredricks, and in his capacity as CFO, he
has failed to take any steps to investigate defendant Kevin Welk’s
misappropriation of corporate funds. (Id. at ¶¶ 11, 30, 36, 60.) Taking
these allegations together and because the Defendants makeup a majority of the
board, it is evident that the complaint sufficiently alleges with particularity
demand futility. Because this first test has been met, it is unnecessary to
analyze whether the complaint alleges sufficiently facts regarding the second
test espoused in Aronson.