Judge: Barbara M. Scheper, Case: 23STCV20885, Date: 2024-12-24 Tentative Ruling
Case Number: 23STCV20885 Hearing Date: December 24, 2024 Dept: 30
Dept.
30
Calendar
No.8
Washington vs. Stewart Manhattan Investments Inc.,
et. al., Case
No. 23STCV20885
Tentative Ruling re:
Cross-Defendants’ Demurrer to Cross-Complaint; Motion to Strike
Michael E.
Washington and Cato Hospitality Group, LLC (Cross-Defendants) demur to all causes of action in Simeon
Rainier Stewart II’s (Cross-Plaintiff) amended cross-complaint (ACC) regarding Cross-Defendants’
alleged conduct injurious to Stewart Manhattan Investments Inc. (SMI). Cross-Defendants
also move to strike Cross-Plaintiff’s requests for punitive damages and
attorney’s fees. Cross-Defendants’ demurrer is sustained as to Cross-Plaintiff’s
second, third, and fifth causes of action and the motion to strike is denied. Cross-Plaintiff
is granted ten (10) days leave to amend his cross-complaint with respect to the
third cause of action only.
A demurrer is
sustained where “[t]he pleading does not state facts sufficient to constitute a
cause of action.” (Code Civ. Proc., 430.10, subd. (e).) “A demurrer tests the
legal sufficiency of the factual allegations in a complaint.” (Yalung v.
State (2023) 98 Cal.App.5th 71, 80.) In reviewing a complaint’s legal
sufficiency, a court will treat the demurrer as admitting all material facts
properly pleaded, but not contentions, deductions or conclusions of law. (Esparza
v. Kaweah Delta Dist. Hospital (2016) 3 Cal.App.5th 547, 552.) 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.) “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 Tit. Guaranty Co.
(1998) 19 Cal.4th 26, 38.) 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, a court may only consider the complaint’s allegations or matters
which may be judicially noticed. (Blank
v. Kirwan (1985) 39 Cal.3d 311,
318.) The Court may not consider any other extrinsic evidence or judge the
credibility of the allegations pleaded or the difficulty a plaintiff may have
in proving his allegations. (Ion Equipment
Corporation 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.)
The Court
may, upon a motion, or at any time in its discretion, and upon terms it deems
proper, strike any irrelevant, false, or improper matter inserted in any
pleading. (Code Civ. Proc., § 436, subd. (a).) The Court may also strike all or
any part of any pleading not drawn or filed in conformity with the laws of this
state, a court rule, or an order of the Court. (Id., § 436, subd. (b).)
The grounds for a motion to strike are that the pleading has irrelevant, false
or improper matter, or has not been drawn or filed in conformity with laws. (Id.,
§ 436.) The grounds for moving to strike must appear on the face of the
pleading or by way of judicial notice. (Id., § 437.)
When a
demurrer is sustained, the Court determines whether there is a reasonable
possibility that the defect can be cured by amendment. (Blank, supra,
39 Cal.3d at p. 318). When a plaintiff “has pleaded the general set of
facts upon which his cause of action is based,” the court should give the
plaintiff an opportunity to amend his complaint, since plaintiff should not “be
deprived of his right to maintain his action on the ground that his pleadings
were defective for lack of particulars.” (Reed v. Norman (1957) 152
Cal.App.2d 892, 900.)
Cross-Defendants demur to each cause of
action on the basis that Cross-Plaintiff has failed to plead facts sufficient
to constitute causes of action for breach of fiduciary duty, breach of
contract, injunctive relief, violations of Business and Professions Code
section 17200, or declaratory relief. (Code Civ. Proc., § 430.10, subd. (e).) Cross-Defendants
also argue that all pled causes of action are uncertain. (Id., § 430.10,
subd. (f).) Cross-Defendants move to strike Cross-Plaintiff’s requests for
punitive damages and attorney’s fees. (Id., § 436, subd. (a).) The Court
will address each argument in turn.
The business judgment rule does not bar
Cross-Plaintiff’s claims.
Cross-Defendants argue that
Cross-Plaintiff’s causes of action all fail as a matter of law under the
business judgment rule. The common law business judgment rule immunizes
corporate directors from personal liability if they act according to its
requirements and insulates decisions from court intervention if they are made
by directors in good faith and in what they believe to be the organization’s
best interest. (Lauckhart v. El Macero Homeowners Assn. (2023) 92
Cal.App.5th 889, 906 (Lauckhart).) “The rule establishes a presumption
that directors’ decisions are based on sound business judgment, and it
prohibits courts from interfering in business decisions made by the directors
in good faith and in the absence of a conflict of interest.” (Ibid.) However,
the rule does not shield actions taken without reasonable inquiry, with
improper motives, or because of a conflict of interest. (Ibid.) “[F]ailure
to sufficiently plead facts to rebut the business judgment rule or establish
its exceptions may be raised on demurrer.” (Ibid.)
Here, Cross-Plaintiff alleges that Cross-Defendants
have attempted to usurp business opportunities from SMI and not acted with the
best interests of the company in mind. (ACC ¶ 7(a).) Further allegations
include self-dealing activities (id. ¶ 7(b)), failing to participate
effectively in management of SMI (id. ¶ 7(c)), and improperly charging
personal expenses (id. ¶ 7(d)). These allegations are incorporated
within each cause of action and constitute actions taken without reasonable
inquiry or with improper motives. Such actions are not protected under the
business judgment rule. (Lauckhart, supra, 92 Cal.App.5th at p.
906.) Thus, Cross-Defendants’ demurrer is not sustained on this basis.
The Court did not grant Cross-Plaintiff
leave to add a new cause of action.
Cross-Defendants demur to
Cross-Plaintiff’s second cause of action for breach of contract on the basis
that the Court did not grant leave to add a new cause of action. When a trial
court sustains a demurrer with leave to amend, the scope of leave is limited by
default. (Community Water Coalition v. Santa Cruz County Local Agency
Formation Com. (2019) 200 Cal.App.4th 1317, 1329.) Specifically, “[t]he
plaintiff may not amend the complaint to add a new cause of action without
having obtained permission to do so, unless the new cause of action is within
the scope of the order granting leave to amend.” (Ibid.)
Here, the Court sustained
Cross-Defendants’ demurrer “with leave to amend.” The Court did not grant Cross-Plaintiff
specific leave to add an additional cause of action to the ACC. Accordingly,
Cross-Defendants’ demurrer to the second cause of action is sustained on this
ground.
The verbal corporate resolution alleged
by Cross-Plaintiff is invalid.
Cross-Defendants argue that a demurrer for
uncertainty is appropriate because the ACC references a corporate resolution that
is not attached or sufficiently described. “An act or decision done or made by
a majority of the directors present at a meeting duly held at which a quorum is
present is the act of the board.” (Corp. Code, § 307, subd. (a)(8).) Actions
may also be taken without a meeting, “if all members of the board shall
individually or collectively consent in writing to that action and if the
number of members of the board serving at the time constitutes a quorum.” (Id.,
§ 307, subd. (b).)
Here, Cross-Plaintiff alleges that he
and Cross-Defendant “verbally resolved in 2011,
without a formal written resolution and without noticing (or conducting)
a formal meeting of SMI’s board of directors, that they would split between
themselves roughly evenly the management, business development and
administrative duties involved in operating and promoting SMI’s business and
that, provided that they performed their duties in accord with that agreement, [they]
would both receive equal salaries and reimbursement stipends from SMI in
amounts to be agreed to by both parties from time to time.” (ACC ¶ 4.) Because
this action was taken without a meeting, all board members were required to
consent in writing to the action. Thus, this verbal resolution is not valid
under section 307.
Cross-Plaintiff’s fifth cause of action
seeks a declaration of the Court that Cross-Defendant failed to abide by the
resolution. (Id. ¶ 38.) Because the pled verbal resolution is not valid
under section 307, Cross-Plaintiff’s request for declaratory relief fails as a
matter of law. Accordingly, Cross-Defendants’ demurrer is sustained as to the
fifth cause of action. The Court need not reach Cross-Defendant’s argument that
the fifth cause of action is improperly premised on past acts.
Only Cross-Plaintiff’s fourth cause of
action also relies on the resolution in part. The conduct allegedly in
violation of Business and Professions Code section 17200 includes “breaches of
fiduciary duty, self-dealing and failure to abide by the aforesaid Directors’
Resolution.” (Id. ¶ 33.) Thus, Cross-Plaintiff’s fourth cause of action
is not wholly reliant on the invalid resolution to where it fails as a matter
of law. Accordingly, Cross-Defendants’ demurrer is not sustained as to the
fourth cause of action on this ground.
Cross-Plaintiff pleads facts sufficient
to constitute a cause of action for breach of fiduciary duty.
Cross-Defendants demur to
Cross-Plaintiff’s first cause of action on the basis that he has not pled
sufficient facts to constitute breach of fiduciary duty. “The elements of a
cause of action for breach of fiduciary duty are: (1) existence of a fiduciary
duty; (2) breach of the fiduciary duty; and (3) damage proximately caused by
the breach.” (Tribeca Companies, LLC v. First American Title Ins. Co.
(2015) 239 Cal.App.4th 1088, 1114.) Cross-Defendants argue that Cross-Plaintiff
does not meet the first element, failing to allege the existence of a fiduciary
relationship.
First, Cross-Defendant argues that he
is only a nominal officer of SMI and thus owes no fiduciary duty. However,
Cross-Plaintiff alleges that Cross-Defendant is a corporate director and
officer as the corporate secretary of SMI. (ACC ¶ 3.) Assuming the truth of
facts pled as required when ruling on a demurrer, Cross-Plaintiff has properly
alleged the existence of a fiduciary duty owed by Cross-Defendant as a
corporate director and officer of SMI.
Second, Cross-Defendants assert that Cross-Plaintiff
lacks standing to bring this cause of action derivatively on behalf of SMI. Shareholders
may bring a derivative suit to enforce a corporation’s rights and redress its
injuries when the board of directors fails or refuses to do so. (Ontiveros
v. Constable (2016) 245 Cal.App.4th 686, 692 n. 2.) Generally, derivative
suits are only allowed where a plaintiff alleges with particularity their
efforts to secure action from the board. (Charter Township of Clinton Police
& Fire Retirement System v. Martin (2013) 219 Cal.App.4th 924, 934.) However,
“[w]hen it is clear that making a demand upon the company’s board of directors
would be futile, the demand requirement may be excused.” (Ibid.) The
demand requirement is excused upon a showing of reasonable doubt that (1) the
directors were disinterested or independent or (2) that the challenged
transaction was a valid exercise of business judgment. (Id. at p. 935.)
Here, as discussed ante, Cross-Plaintiff
has alleged that Cross-Defendant’s actions are not protected under the business
judgment rule. As a shareholder, Cross-Plaintiff is entitled to bring the
present action on behalf of SMI, knowing that any demands of the board would be
futile, since the board consists of himself and Cross-Defendant.
Cross-Defendant’s argument that futility did not exist because Cross-Plaintiff
could have removed him as a director as a 51% shareholder is tenuous and
implies a nonexistent duty to remove directors when the opportunity presents
itself. Accordingly, Cross-Defendants’ demurrer is not sustained as to the
first cause of action.
Cross-Plaintiff has not properly pled a
request for injunctive relief.
Cross-Defendants demur to Cross-Plaintiff’s
third cause of action for injunctive relief on the basis that it is not a cause
of action. Indeed, “[i]njunctive relief is a remedy, not a cause of action.” (Guessous
v. Chrome Hearts, LLC (2009) 179 Cal.App.4th 1177, 1187.) Here, Cross-Plaintiff
requests the remedy of injunctive relief regarding his first cause of action
for breach of fiduciary duty. (ACC ¶ 28.) He further alleges that there is no
adequate remedy at law for the alleged breach. (Id. ¶ 31.) Yet
Cross-Plaintiff confusingly labels this request for injunctive relief as a
third cause of action, rather than including the request for relief under the
first cause of action. Cross-Defendants’ demurrer is sustained as to the third
cause of action due to uncertainty, but the Court grants leave to amend consistent
with this ruling.
Cross-Plaintiff has properly pled a
cause of action for unfair competition under Business and Professions Code
section 17200 et seq.
Cross-Defendants argue that Cross-Plaintiff
has not pled sufficient facts to support a cause of action for unfair
competition. Unfair competition includes “any unlawful, unfair or fraudulent
business act or practice and unfair, deceptive, untrue or misleading
advertising.” (Bus. & Prof. Code, § 17200.) A court may issue injunctive
relief to “restore to any person in interest any money or property, real or
personal, which may have been acquired by means of such unfair competition.” (Id.,
§ 17203.) A party alleging unfair competition under section 17200 must “state
with reasonable particularity the facts supporting the statutory elements of
the violation.” (Khoury v. Maly’s of California, Inc. (1993) 14
Cal.App.4th 612, 619 (Khoury).)
A business practice may be unfair in
violation of the unfair competition law even if the practice does not violate
any law. (Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 827.) “The
test of whether a business practice is unfair ‘involves an examination of [its]
impact on its alleged victim, balanced against the reasons, justifications and
motives of the alleged wrongdoer. In brief, the court must weigh the utility of
the defendant’s conduct against the gravity of the harm to the alleged victim.”
(Candelore v. Tinder, Inc. (2018) 19 Cal.App.5th 1138, 1155.)
Here, Cross-Plaintiff alleges that
Cross-Defendants have engaged in “a concerted effort to usurp SMI’s business
opportunities, and to destroy SMI’s standing in the airport concessions
industry, in an effort to disable SMI as a competitor and to position
Washington to compete against SMI (through Cato) once the Corp. Code Section
2000 buy-out process in this case is completed.” (ACC ¶ 33.) Such alleged actions
provide no utility aside from raising one competitor over another and come at
great cost to Cross-Plaintiff. Thus, Cross-Plaintiff has pled facts alleging
specific unfair business practices on the part of Cross-Defendants.
Further, contrary to Cross-Defendants’
assertion, an unfair competition claim need not implicate the public interest. Its
purpose “is to protect both consumers and competitors by promoting fair
competition in commercial markets.” (Villanueva v. Fidelity National Title
Co. (2018) 26 Cal.App.5th 1092, 1112.) The unfair competition law’s
substantive provisions are broad and sweeping. (Ibid.) Accordingly,
Cross-Defendants’ demurrer is not sustained as to the fourth cause of action.
Motion
to Strike
Cross-Defendants move to strike Cross-Plaintiff’s
prayer for punitive damages and all paragraphs referencing punitive damages in
the complaint. A plaintiff may recover punitive damages where it is proven by
clear and convincing evidence that the defendant has been guilty of oppression,
fraud, or malice. (Civ. Code, § 3294, subd. (a).) Malice is defined as conduct
intended to injure the plaintiff or despicable conduct by a defendant acting
with a willful and conscious disregard of the rights and safety of others. (Id.,
§ 3294, subd. (c)(1).) Oppression means despicable conduct subjecting a person
to cruel and unjust hardship in conscious disregard of their rights. (Id.,
§ 3294, subd. (c)(2).) And fraud refers to intentional misrepresentations or
concealment of a material fact known to the defendant. (Id., § 3294,
subd. (c)(3).)
Here, Cross-Plaintiff pleads facts
justifying punitive damages. The ACC includes allegations of intentional
conduct meant to cause Cross-Plaintiff injury in conscious disregard of his
rights. (ACC ¶¶ 22.) The Court must take the facts pleaded as true, and such
alleged conduct could constitute malice under section 3294. Thus, Cross-Plaintiff
has properly pleaded a request for punitive damages.
Cross-Defendants also argue that the
Court should strike Cross-Plaintiff’s request for attorney’s fees. “[I]f a
judgment confers a substantial benefit on a defendant, such as in a corporate
derivative action, the defendant may be required to pay the attorney fees
incurred by the plaintiff.” (Cziraki v. Thunder Cats, Inc. (2003) 111
Cal.App.4th 552, 558.) Here, Cross-Plaintiff brings a derivative action on
behalf of SMI, a named Cross-Defendant. He alleges that if successful in this
action “a substantial benefit will result to SMI.” (ACC ¶ 11.) This entitles
Cross-Plaintiff to attorney’s fees if successful. Cross-Defendants’ other
requests to strike certain causes of action were addressed on demurrer. Accordingly,
Cross-Defendants’ motion to strike is denied.