Judge: Daniel S. Murphy, Case: 24STCV11239, Date: 2024-11-22 Tentative Ruling

Case Number: 24STCV11239    Hearing Date: November 22, 2024    Dept: 32

BACKGROUND

            On May 3, 2024, Plaintiff Justin Mayer filed this action against Defendants Daniel Glassman (Glassman) and Glassman Technology Group, Inc. (GTG), asserting causes of action for (1) breach of fiduciary duty, (2) conversion, (3) common count, and (4) accounting. The complaint arises from the following facts.

            In 2008, Plaintiff and Glassman established a joint business venture, which eventually incorporated as Strata Labs, Inc. (Strata Labs), to develop, market, and sell proprietary software and related services. (Compl. ¶¶ 10-11.) Plaintiff and Glassman were equal shareholders in Strata Labs and had equal ownership of all proprietary software and other intellectual property, though Plaintiff was primarily responsible for developing the proprietary software. (Id., ¶¶ 11-12.)

            In 2018, Glassman expressed a desire to dissolve Strata Labs because he was being hired by the company’s biggest client, Coralisle Group. (Compl. ¶ 14.) Plaintiff agreed on the condition that he would remain an equal partner in the business and continue to receive an equal share of proceeds. (Ibid.) This arrangement worked until 2022, when Glassman expressed a desire to end the business partnership entirely. (Id., ¶¶ 14-15.) Plaintiff was amenable to this, but requested a proper dissolution of the business relationship that would ensure he received his fair share. (Id., ¶ 15.) Glassman never responded to this request and simply stopped paying Plaintiff his share of the company’s proceeds. (Ibid.) Glassman has used his wholly-owned company, GTG, to exploit the software and intellectual property of Strata Labs to service the company’s former clients—including Coralisle Group—without compensating Plaintiff. (Compl. ¶¶ 17-18.)

            On August 2, 2024, the case was removed to federal district court. On October 4, 2024, the district court issued an order declining jurisdiction and remanding the case back to this Court.

On October 18, 2024, Defendants filed the instant demurrer to the complaint. Plaintiff filed his opposition on November 7, 2024. Defendants filed their reply on November 15, 2024.  

LEGAL STANDARD

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Ibid.) The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action. (Hahn, supra, 147 Cal.App.4th at 747.)

MEET AND CONFER

Before filing a demurrer or a motion to strike, the demurring or moving party is required to meet and confer with the party who filed the pleading demurred to or the pleading that is subject to the motion to strike for the purposes of determining whether an agreement can be reached through a filing of an amended pleading that would resolve the objections to be raised in the demurrer. (Code Civ. Proc., §§ 430.41, 435.5.) The Court notes that Defendants have complied with the meet and confer requirement. (See Serova Decl.)

DISCUSSION

I. Jurisdiction

            Defendants first argue that the Court lacks subject matter jurisdiction because Plaintiff’s claims implicate the work-for-hire doctrine of the Copyright Act and must be adjudicated by a federal court. However, a federal district court already rejected Defendants’ arguments and remanded the case back to this Court. Specifically, the district court held that “[w]hen, as here, ownership ‘is the sole question for consideration,’ the case does not implicate the Copyright Act’s work-for-hire doctrine.” (Oct. 11, 2024 Notice of Remand, p. 4.) “Here, neither side claims to have created the copyrighted software. The parties do not dispute that the software was created by software developers, but they disagree as to whether the developers created the software for Strata Labs or GTG.” (Ibid.) “The Court therefore agrees with Plaintiff that this case is a dispute over contractual and fiduciary rights and belongs in state court.” (Ibid.)

            “An order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise.” (28 U.S.C. § 1447(d); see also United Airlines, Inc. v. Superior Court (1991) 234 Cal.App.3d 1085, 1090 [acknowledging “a federal district court's unreviewable power to remand claims to state court”].) Citing Landmark Screens, LLC v. Morgan, Lewis & Bockius, LLP (2010) 183 Cal.App.4th 238, Defendants argue that “[t]he mere fact that federal court has declined jurisdiction does not . . . confer jurisdiction on this Court.” (Dem. 13:11-12.) Landmark Screens does not stand for this proposition because that case was never removed to federal court, and no federal court explicitly declined jurisdiction or expressly found that the case belongs in state court. “A court's opinion is not authority for a proposition not considered in it.” (People v. Anderson (2015) 232 Cal.App.4th 1259, 1275.)

            The plaintiff in Landmark Screens improperly filed a complaint in state court and also failed to file a timely complaint in federal court. The plaintiff argued that the state court’s dismissal for lack of subject matter jurisdiction left it without a remedy. (Landmark Screens, supra, 183 Cal.App.4th at p. 252.) The Court of Appeal rejected this argument, finding that the plaintiff was not prevented from filing a timely federal complaint. (Ibid.) In that specific situation, the fact that a federal remedy was unavailable (by the plaintiff’s own fault) did not entitle the plaintiff to a remedy in state court. This cannot be extended to mean that where a federal court expressly declines jurisdiction, a state court may reverse that holding and find that jurisdiction actually belongs in federal court. Thus, Landmark Screens is inapposite.  

            In reply, Defendants argue that a “federal court’s jurisdictional determinations on remand are not binding on state court.” (Reply 4:9-10.) However, none of the cited caselaw supports the proposition that a state court may find that a matter belongs in federal court after a federal court has expressly declined jurisdiction. In Whitman v. Raley's Inc. (9th Cir. 1989) 886 F.2d 1177, 1180, the court held that “[a] distinction must be drawn between the inquiry the district court faces in considering whether a case was properly removed and the inquiry as to whether a preemption defense exists.” Thus, if a federal court declines subject matter jurisdiction and remands the matter to state court, that ruling “has no preclusive effect on the state court's consideration of the substantive preemption defense.” (Id. at p. 1181.) This does not mean that the state court may challenge the federal court’s jurisdictional ruling; it merely means that the federal court’s jurisdictional ruling has no preclusive effect over the state court’s adjudication of a substantive preemption defense. That preemption defense will still be litigated in state court.  

            The other cases cited by Defendants are consistent with this. (See Nutter v. Monongahela Power Co. (4th Cir. 1993) 4 F.3d 319, 321-22 [district court’s preemption findings for purposes of declining subject matter jurisdiction did not prevent defendant from litigating preemption defense in state court upon remand]; In re Loudermilch (11th Cir. 1998) 158 F.3d 1143, 1146 [“a district court's decision on the motion to remand has no preclusive effect on the state court's resolution of respondents' preemption defense in the same case”].) None of these cases stands for the proposition that a state court may relitigate subject matter jurisdiction after a federal court expressly declines jurisdiction and remands the matter. None of the cases involved challenging the remand itself. The courts merely held that a district court’s findings on remand did not have preclusive effect over a substantive preemption defense to be litigated in state court. Preemption is not at issue here. Again, a federal court’s remand is unreviewable. (28 U.S.C. § 1447(d).)

Because the case has been heard by a federal court and remanded under the express finding that the federal court does not have subject matter jurisdiction, this Court retains subject matter jurisdiction.

II. Sufficiency of the Allegations

            a. Breach of Fiduciary Duty

            “The elements of a claim for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) its breach, and (3) damage proximately caused by that breach.” (O'Neal v. Stanislaus County Employees’ Retirement Assn. (2017) 8 Cal.App.5th 1184, 1215.)

            The complaint alleges that Glassman, as an officer, director, and shareholder of Strata Labs, owed Plaintiff, as a 50% shareholder, fiduciary duties including the duty to act in good faith and with undivided loyalty. (Compl. ¶¶ 21-22.) Glassman allegedly breached his fiduciary duties by misappropriating proceeds from Strata Labs’ software and IP, concealing information about the exploitation of Strata Labs’ software and IP, and converting property developed by Strata Labs, of which Plaintiff has a 50% ownership interest. (Id., ¶ 23.) As a result, Plaintiff has allegedly suffered damages of over $300,000. (Id., ¶ 25.) These facts satisfy the elements for breach of fiduciary duty.

            Defendants argue that equal shareholders, directors, and officers do not owe fiduciary duties to each other. It is true that “after a partnership is incorporated, the rights or obligations which partners can enforce against each other no longer exist.” (Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1159.) Thus, “[i]n the absence of a preincorporation agreement or evidence the corporate form was disregarded, shareholders in a duly formed corporation operating in accordance with legal requirements do not become de facto partners, and thereby acquire fiduciary duties to each other, simply because they earn the same salary and refer to each other for convenience as partners.” (Ibid.) “[C]onsiderable doubt exists that the obligations that flow from a partnership—including fiduciary duties among partners—may be imposed on the shareholders of a corporation duly formed and operated under California statutes.” (Eng v. Brown (2018) 21 Cal.App.5th 675, 695.)

            However, despite the general rule, “[p]artners may, by agreement, continue their relations as copartners in conjunction with their relationship as stockholders of a corporation.” (Persson, supra, 125 Cal.App.4th at p. 1158.) “[T]he existence of a partnership is a question of fact.” (Id. at p. 1157.) Thus, it is a factual issue whether Plaintiff and Glassman owed fiduciary duties to each other as partners despite incorporating as Strata Labs. Moreover, a director owes a duty of care to the corporation and its shareholders. (See Corp. Code, § 309(a).) For pleading purposes, the complaint sufficiently alleges that Glassman, as director, owed fiduciary duties to Plaintiff, as shareholder. (See Compl. ¶¶ 21-22.) 

            Defendants also argue that Glassman could not have owed or breached any fiduciary duties after the dissolution of Strata Labs in 2018. (See Compl. ¶ 14.) However, as discussed above, partners owe fiduciary duties to one another, and the existence of a partnership is a question of fact. Despite the dissolution of the Strata Labs corporation, Plaintiff alleges that the partnership continued, such that Plaintiff and Glassman agreed to be equal partners and share equally in the business proceeds. (Ibid.) Thus, the complaint has sufficiently alleged facts to raise the inference that Glassman owed Plaintiff fiduciary duties.

            The demurrer is OVERRULED as to the first cause of action.

b. Conversion

            The elements of conversion are: (1) the plaintiff’s ownership or right to possession of the personal property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages. (Welco Electronics, Inc. v. Mora (2014) 223 Cal.App.4th 202, 208.)

            Here, the complaint alleges that Defendants without consent took possession of or interfered with Plaintiff’s access to the Strata Labs software and IP, of which Plaintiff has a 50% interest. (Compl. ¶¶ 28-30.) Plaintiff alleges that Defendants failed to compensate Plaintiff for the exploitation of the software and IP. (Id., ¶ 29.) Plaintiff alleges resulting damages of $300,000. (Id., ¶ 31.) These facts satisfy the elements of conversion.

            Defendants argue that conversion does not apply to intangible property unless it is embodied in a tangible medium. However, “the tort of conversion has expanded well beyond its original boundaries.” (Welco, supra, 223 Cal.App.4th at p. 210.) “[U]nauthorized use . . . can take many forms,” and courts have recognized “that the unauthorized taking of an intangible property interest not merged with or reflected in tangible properly can be an actionable conversion.” (Id. at pp. 210-11, citing Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119-25.) “California does not follow the Restatement’s strict requirement that some document must actually represent the owner’s intangible property right. On the contrary, courts routinely apply the tort to intangibles without inquiring whether they are merged in a document.” (Kremen v. Cohen (2003) 337 F.3d 1024, 1033.)

            Defendants further contend that there are no facts demonstrating an actual interference with any property right, only that Defendants failed to compensate Plaintiff for use of the software and IP. However, as discussed above, unauthorized use can take many forms. For pleading purposes, Plaintiff has sufficiently alleged that Defendants exploited the software and IP without his consent and retained the profits for themselves. (See Compl. ¶¶ 28-30.) Moreover, the facts support an inference that Plaintiff held an ownership interest in the profits themselves. This is money in an identifiable sum which may be the subject of conversion. (See Welco, supra, 223 Cal.App.4th at p. 209.) Whether Plaintiff actually owns any of the alleged software, IP, or money is a factual matter beyond the purview of a demurrer. Plaintiff has alleged conversion for pleading purposes.

            The demurrer is OVERRULED as to the second cause of action.

            c. Common Count

“A common count is not a specific cause of action, … rather, it is a simplified form of pleading normally used to aver the existence of various forms of monetary indebtedness, including that arising from an alleged duty to make restitution under an assumpsit theory.” (McBride v. Boughton (2004) 123 Cal.App.4th 379, 394.)

The complaint alleges that Defendants obtained profits from the exploitation of software and IP, which Plaintiff had a 50% interest in, and failed to compensate Plaintiff accordingly. Thus, Plaintiff has pled facts supporting monetary indebtedness justifying restitution. Plaintiff’s failure to plead the elements of fraud is not dispositive, as Plaintiff does not assert a fraud claim and the common count is not solely based on fraud. The common count claim incorporates all previous allegations (Compl. ¶ 34), and those facts support a common count claim apart from fraudulent inducement.

The demurrer is OVERRULED as to the third cause of action.

CONCLUSION

            Defendants’ demurrer is OVERRULED.