Judge: Curtis A. Kin, Case: 22STCV30612, Date: 2023-03-07 Tentative Ruling

Case Number: 22STCV30612    Hearing Date: March 7, 2023    Dept: 72

DEMURRER

Date:         3/7/23 (9:30 AM)                   

Case:        Jay L. Novak v. Frank A. Novak et al. (22STCV30612)

TENTATIVE RULING:

Defendant Frank A. Novak’s Demurrer to Complaint is SUSTAINED WITH LEAVE TO AMEND.

Defendant Frank A. Novak demurs to the fourth cause of action for breach of fiduciary duty. “A minority shareholder may bring a cause of action for breach of fiduciary duty against majority shareholders as an individual claim or as a derivative claim, depending on the circumstances.” (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 149.) The parties dispute whether the fourth cause of action is an individual claim or a derivative claim. Defendant maintains the fourth cause of action is a derivative claim, which is subject to pre-suit requirements. (Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1004-05 [“[F]or a plaintiff to have standing to file a derivative action, it must allege the corporation knew about the claim and was urged to pursue it to no avail or, in any event, the corporation would not have pursued the claim”].)

A claim is derivative “‘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.’ [Citations.]” (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106.) Here, plaintiff alleges that defendant misappropriated funds belonging to Modernica Inc. (“Modernica”), the company which they both own (Compl. ¶¶ 12, 25); disregarded the advice of Modernica’s counsel to the legal detriment of Modernica (Compl. ¶ 22); and allowed Elizabeth Burhop to mismanage the operations of Modernica (Compl. ¶¶ 18, 20, 23). A breach of fiduciary duty cause of action based on mismanagement of the corporation resulting in the diminution of value of the corporation is a derivative claim. (Schrage, 69 Cal.App.5th at 155-56.) Based on the alleged harms to Modernica, plaintiff was required to satisfy the pre-suit requirements set forth in Corporations Code § 800(b)(2). Accordingly, the Demurrer to the fourth cause of action is SUSTAINED. 

The Court GRANTS plaintiff’s request for leave to amend.  As argued in opposition, “there could be no more idle act that [sic] requiring a demand that Frank take action against himself.”  (Opp. at 4.)  Plaintiff has sufficiently suggested a means by which he might reasonably attempt to cure the defect identified in the pleading.  (See Patrick, 167 Cal.App.4th at 1004 [“Demand on the board will be excused only when plaintiff sufficiently alleges the demand would have been futile”]; Reed v. Norman (1957) 152 Cal.App.2d 892, 898 [“While it is the general rule that in a derivative action the plaintiff must plead a demand upon and refusal by the directors to act, it is equally well settled that such demand and refusal need not be alleged if the facts pleaded demonstrate such a demand would have been futile”].)   Ten (10) days leave to amend.