Judge Elaine Lu, Case 19STCV11560 2023-02-03 Tentative Ruling

On April 3, 2019, Plaintiff David Max (“Plaintiff”) filed the instant action against Defendants 8e6 Corp. (“8e6”), George Shih (“Shih”), Frank Wood (“Wood”), Mahendra Vora (“Vora”), Vora Ventures LLC, Secret Communications II LLC, Darwin Group LLC, Log-On Darwin LLC, Darwin Filter (collectively “Defendants”), and Rodney Miller.[1] The complaint asserted three causes of action for (1) Fraud and Breach of Fiduciary Duty, (2) Failure to Produce Books and Records, and (3) Derivative Claim for Breach of Fiduciary Duty. On November 6, 2019, the instant action was deemed related to BC645117 and 19STCV30623. (Minute Order 11/6/19.)

On February 5, 2020, the Court – presided by the Honorable William F. Fahey – concluded that the instant action alleged shareholder derivative claims and granted Defendants’ motion for Plaintiff to post bond under Corporations Code sections 800(b)-(c). (Minute Order 2/5/20.) Plaintiff was ordered to post a security bond of $50,000 by February 21, 2020. (Minute Order 2/5/20.) Plaintiff failed to do so. Rather, on February 13, 2020, Plaintiff purported to dismiss a portion of the first cause of action “[t]o the extent Plaintiff’s First Cause of Action could reasonably be interpreted as including a derivative claim[.]” (Request for Dismissal filed 2/13/20 at Attachment 1.)

On March 16, 2020, Defendants filed a demurrer arguing that Plaintiff failed to post the required bond. In response, on June 17, 2020, Plaintiff filed a first amended complaint and a notice that the demurrer is moot. On June 14, 2020, the Court – presided by the Honorable William F. Fahey – found that the first amended complaint was improperly filed due to the stay in prosecution imposed by Corporations Code section 800(f), sustained the Defendants’ demurrer without leave to amend, and dismissed the action with prejudice. (Order 7/14/20.)

On August 28, 2020, Plaintiff filed a notice of appeal of the Court’s order of dismissal and order for Plaintiff to post bond. On July 28, 2022, the Court of Appeal issued its remittitur affirming the order to post bond and reversing the dismissal. The Court of Appeal ordered the Court to allow Plaintiff to amend the complaint to allege a stand-alone individual fraud claim. (Remittitur Filed 7/28/22.)

On August 3, 2022, Plaintiff filed the operative Second Amended Complaint (“SAC”) against Defendants. The SAC asserts two causes of action for (1) Fraud and (2) Negligent Misrepresentation. On August 12, 2022, due to a preemptory challenge, the instant action was transferred to the instant department. (Minute Order 8/12/22.)

On September 21, 2022, Defendants filed the instant demurrer and motion to strike portions of the SAC. On October 12, 2022, Plaintiff filed oppositions to the demurrer and motion to strike. On October 21, 2022, Defendants filed their replies. On January 27, 2023, Plaintiff filed a response to Defendants’ request for judicial notice.

In July 1995, Defendant Shih and third-party Michael Bradshaw created 8e6. (SAC ¶ 12.) In 1996 and 1997, Shih and third-party Michael Bradshaw sought “Friends and Family” investors for 8e6, and Plaintiff purchased at least $80,000 in common shares. (SAC ¶ 12.) “[I]n 1998, after various venture capital investments did not materialize for one reason or another, the company [8e6] approved the issuance and sale of 484,693 shares of class A preferred stock for $1,900,000.00 to a venture capital group headed by Dr. Ching Min Lee.” (SAC ¶ 13.)

“By early 1999, Bradshaw had been forced out of the company and defendant Shih, along with David Ure and Dr. Ching Min Lee were in control. They approved issuing a new series of class B preferred shares and obtained about $1.5 million by sales of series A and B shares throughout the year from additional venture capital groups headed Dr. Ching Min Lee.” (SAC ¶ 14.) In March 2000, 8e6 approved a new series of preferred class C shares for investors Defendant Wood and his entities Defendant Darwin Group LLC, Darwin Filter, Secrete Communications II, LLC and Log-On Darwin LLC and Defendant Vora and his entity Defendant Vora Ventures LLC. (SAC ¶¶ 4-10, 15.) “At the time of the investment, plaintiff is informed and believes that defendant Frank Wood, on behalf of himself and all other class C shareholders, entered into a shareholder agreement with defendant Shih, which gave the group control of 8e6 Corp.” (SAC ¶ 15.) Accordingly, Defendants Wood, Vora, and Shih and their respective entities – Defendants Vora Ventures LLC, Secret Communications II LLC, Darwin Group LLC, Log-On Darwin LLC, Darwin Filter (collectively “Control Group”)– controlled 8e6. (FAC ¶ 16.)

In 2006, 8e6 did not hold a shareholders meeting but sent a letter drafted by Control Group on February 22, 2007 to Plaintiff and other Friends and Family shareholders representing “2006 as an ‘extraordinary year’ with ‘some of the greatest accomplishments in the history of the company.’ Defendants also represented that ‘virtually every month in 2006 was a record month for sales’ and ‘the company increased its market share by adding 300 new customers and 1.5 million seats.’ Defendants went on to represent that ‘2007 would be an even stronger year of growth and accomplishment and stated 8e6 Corp had retained an investment banking firm to find a sale or recapitalization partner to fund the growth.’” (SAC ¶ 20.) However, these statements were false as 8e6 was in reality struggling and “had accumulated large operating deficits, including a net operating loss of $2,999,000 in 2006 alone.” (SAC ¶ 21.) Defendants failed to disclose that loans were made to defendant Shih and CFO Rodney Miller who were required to forego salary due to 8e6 struggling with operating costs. (SAC ¶ 21.)

“The 2/22/07 letter represented 8e6 Corp had taken out lines of credit with Silicon Valley Bank and Partners for Growth to fund ‘growth,’ but defendants concealed and failed to disclose that 8e6 Corp was overextended on those credit lines. Defendants also concealed and failed to disclose that in December 2006 defendant Wood, through defendant Secret Communications II, LLC, loaned 8e6 Corp $500,000.00 at high interest rates to meet its obligations on the credit lines.” (SAC ¶ 22.)

In 2007, 8e6 again did not hold an annual shareholder meeting. (SAC ¶ 23.) In February 2008, 8e6 sent a letter drafted by Control Group to Plaintiff and other Friends and Family Shareholders representing “that every month in 2007 was a record sales month, and that cash flow went from a negative $3.9 million in 2006 to a positive $3 million.” (SAC ¶ 23.) “The true facts were that in 2007 8e6 Corp struggled to survive and that when the letter was circulated, the Control Group was deep in negotiations to consolidate 8e6 Corp with Marshal Group.” (SAC ¶ 24.) Defendants also failed to disclose to Plaintiff that “Wood and Vora, through defendants Secret Communications II, LLC and Vora Ventures, LLC loaned 8e6 Corp or its subsidiary $2 million at interest rates as high as 15%.” (SAC ¶ 24.)

On October 18, 2008, Plaintiff received various written communications from Defendants advising Plaintiff that “8e6 Corp had found a merger partner, Marshal Group.” (SAC ¶ 25.) The Control Group had approved the agreement but gave minority shareholders such as Plaintiff the right to have 8e6 purchase his shares at fair market value. (SAC ¶ 25.) During these communications, Defendants failed to disclose the true and complete financial condition of 8e6 and failed to disclose to Plaintiff that he and other minority shareholders had the right to require 8e6 to purchase their shares at market price. (SAC ¶ 27.) These October 2008 written communications to Plaintiff and other minority shareholders “represented that by consolidating the assets of 8e6 Corp, Marshal Group and the money of a new investor, Updata Partners, the new company, Marshal8e6 Inc., would have a combined value of $90 million and be in a better position to grow shareholder value. The written communications further represented 8e6’s interest in Marshal 8e6 Corp was worth about $42 million because it was going to be the largest shareholder with a 46% interest. The written communications also represented the new entity would be in a stronger position financially because the existing debt of 8e6 Corp and Marshal Group, including shareholder loans, was being refinanced under terms that would result in the new company carrying $5 million less debt.” (SAC ¶ 28.) However, these misrepresentations were false, as 8e6 was receiving significantly less than a 46% interest in Marshal8e6 Inc. (SAC ¶ 29.) These representations were also false because Marshal8e6 Inc. did not refinance the debt of 8e6. (SAC ¶ 30.) Had Plaintiff known these representations were false he would have demanded that the company repurchase his stock in 8e6. (SAC ¶ 34.)

“In early 2012, defendants Shih, Wood and Vora approved the sale of 8e6 Corp’s stock in Marshall8e6 Inc., then known as M86 Security Systems to a corporation known as Trustwave, for stock in Trustwave. Defendant 8e6 Corp advised plaintiff of this sale by letter dated April 23, 2012.” (SAC ¶ 38.) “Defendants, in the letter, represented plaintiff’s holdings in 8e6 Corp remained unchanged and unaffected, and that no action was required by him or the other common shareholders.” (SAC ¶ 38.) However, this misleading as the value of shares that Plaintiff held in 8e6 had substantially declined. (SAC ¶ 39.) “Defendants concealed and failed to disclose to plaintiff that in the Trustwave transaction 8e6 Corp only received 843,839 shares of Trustwave stock and that defendants Wood and Vora, through defendants Secret Communications II, LLC and Vora Ventures LLC, received 383,259 shares of Trustwave stock.” (SAC ¶ 39.) After this letter, Defendants failed to conduct annual meetings. (SAC ¶ 40.)

“In approximately April 2015, Plaintiff saw a public announcement that Trustwave was being sold to Singapore Telecommunications Limited (Singtel) for about $810 million. Plaintiff requested information from defendants Wood, Vora and Shih about the amount of money 8e6 was due from Singtel and how the receipt of that money would affect his stock in 8e6 Corp. Defendants continued to conceal and fail to disclose material information to plaintiff. They also caused 8e6 Corp to “liquidate” the $13.6 million it received from Singtel to themselves and the preferred shareholders, causing plaintiff’s shares to become worthless.” (SAC ¶ 41.)

With the moving papers, Defendants request that the Court take judicial notice of the following documents:

1. The Second Amended Complaint for LASC Case No. 19STCV11560 (“Max II”) filed by Plaintiff on August 3, 2022

2. Plaintiff’s original complaint filed in LASC Case No. BC645117 (“Max I”), filed on December 28, 2016

3. Plaintiff David Max’s Request for Dismissal of 8e6 Corp from Max I, filed on July 5, 2017

4. Defendants' Demurrer to the original complaint in Max I, filed on or about November 13, 2017

5. The Order to Demurrer to the Original Complaint in Max I filed on March 19, 2018

7. Notice of Ruling regarding Defendants’ Demurrer in Max I to First Amended Complaint with leave to Amend filed on July 27, 2018

9. The Second Appellate District, Division One Court of Appeal Opinion in Max I (Court of Appeal Case No. B301010) issued on November 30, 2020

10. The Second Appellate District, Division One Court of Appeal Opinion in Max II (Court of Appeal Case No. B307406) issued on March 29, 2022

11. The Second Appellate District, Division One Court of Appeal Order Modifying Opinion and Denying Petition for Rehearing (No Change In Judgment) in Max II (Court of Appeal Case No. B307406) issued on April 27, 2022

14. The Court's July 14, 2020 order granting Defendants' Demurrer without leave to amend in Max II

In reply, Defendants request that the Court take judicial notice of the following:

17. 8e6 Corp., George Shih, Frank Wood, Rodney Miller, Mahendra Vora and Vora Ventures, LLC's Respondents' Brief filed in Court of Appeal, Second Appellate District, Case No. B307406 on October 15, 2021

As the Court may take judicial notice of court records and actions of the State, (See Evid. Code, § 452(c)(d)), Defendants’ requests for judicial notice are GRANTED. However, the Court will not take judicial notice of the truth of assertions within the Court records. (See Herrera v. Deutsche Bank National Trust Co. (2011) 196 Cal.App.4th 1366, 1375.)

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack; or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal 3d 311, 318.) No other extrinsic evidence can be considered (i.e., no “speaking demurrers”). (Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881.)

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 “give the complaint a reasonable interpretation, and read it in context.” (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal. App. 4th 968, 994.) “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.” (SKF Farms v. Superior Ct. (1984) 153 Cal. App. 3d 902, 905.) “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.)

Motions to strike are used to reach defects or objections to pleadings that are not challengeable by demurrer (i.e., words, phrases, prayer for damages, etc.). (See CCP §§ 435-437.) A party may file a motion to strike in whole or in part within the time allowed to respond to a pleading. However, if a party serves and files a motion to strike without demurring to the complaint, the time to answer is extended. (CCP §§ 435(b)(1), 435(c).)

A motion to strike lies only where the pleading has irrelevant, false, or improper matter, or has not been drawn or filed in conformity with laws. (CCP § 436.) The grounds for moving to strike must appear on the face of the pleadings or by way of judicial notice. (CCP § 437.)

Code of Civil Procedure § 430.41, subdivision (a) requires that “[b]efore filing a demurrer pursuant to this chapter, the demurring party shall meet and confer¿in person or by telephone¿with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” The parties are to meet and confer at least five days before the date the responsive pleading is due and if they are unable to meet the demurring party shall be granted an automatic 30-day extension. (CCP § 430.41(a)(2).) The demurring party must also file and serve a declaration detailing the meet and confer efforts. (Id.¿at (a)(3).)¿ If an amended pleading is filed, the parties must meet and confer again before a demurrer may be filed to the amended pleading. (Id.¿at (a).) There is a similar meet and confer requirement for motions to strike. (CCP § 435.5.)

Here, Defendants have fulfilled the meet and confer requirements. (Pugh Decl. ¶¶ 2-4, Exhs. 15-16.)

Defendants contend that the first and second causes of action for fraud and negligence misrepresentation (1) fail to adequately allege the elements of reliance causation and harm, and (2) are barred by the statute of limitations.

“The elements of fraud are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.)

“The elements of negligent misrepresentation are similar to intentional fraud except for the requirement of scienter; in a claim for negligent misrepresentation, the plaintiff need not allege that the defendant made an intentionally false statement, but simply one as to which he or she lacked any reasonable ground for believing the statement to be true.” (Bains v. Moores (2009) 172 Cal.App.4th 445, 454 [internal citations omitted].) “Under California law, negligent misrepresentation is a species of actual fraud and a form of deceit.” (Wong v. Stoler (2015) 237 Cal.App.4th 1375, 1388.) Both a claim for intentional misrepresentation and a claim for negligent misrepresentation must be pleaded with specificity rather than with general and conclusory allegations. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.) “Fraud allegations ‘involve a serious attack on character’ and therefore are pleaded with specificity. [Citation.] General and conclusory allegations are insufficient. [Citation.] The particularity requirement demands that a plaintiff plead facts which ‘‘‘show how, when, where, to whom, and by what means the representations were tendered.’’’ [Citation.]” (Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1469.) Moreover, “each element must be pleaded with specificity. [Citations.]” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1166 disapproved of on other grounds by Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905.) Additionally, the rule for fraud by concealment, unlike fraud by an affirmative misrepresentation, must be applied differently in the case of non-disclosure because it is difficult to allege “who” or “how” or “by what means” something was not disclosed or “when” or “where” a statement was not made. (Alfaro v. Community Housing Imp. System & Planning Ass’n, Inc. (2009) 171 Cal.App.4th 1356, 1384.) Because of the nature of such fraud and that such facts supporting concealment are more likely to be known by a defendant, less particularity is required. (Ibid.)

Here, the SAC alleges four affirmative misrepresentations sent to Plaintiff and other minority shareholders. (SAC ¶¶ 19-40.) The first affirmative misrepresentation occurred on February 22, 2007 when Defendants misrepresented the success of 8e6 in 2006 and hid that 8e6 was struggling to continue operation. (SAC ¶¶ 19-22.) The second misrepresentation occurred in February 2008 when Defendants misrepresented the success of 8e6 which was still struggling to survive. (SAC ¶¶ 23-24.) The third alleged misrepresentation occurred on October 18, 2008 when Defendants informed Plaintiff of a merger with Marshal Group as being more favorable than it was and failed to inform Plaintiff of his right to have 8e6 repurchase Plaintiff’s shares at market value. (SAC ¶¶ 25-30.) Finally, on April 23, 2012, Defendants represented that Plaintiff’s holdings in 8e6 had remained unchanged and unaffected when in reality the value of those shares had substantially dropped. (SAC ¶¶ 38-39.)

While there is some specificity in Plaintiff’s allegations, such as the method of how the misrepresentations were made, the content of what was misrepresented, etc., Plaintiff does not allege any reliance as to three of the four misrepresentations. For the first and second misrepresentations, while Defendants misrepresented how 8e6 was doing there is no allegation of how Plaintiff relied on this misrepresentations. There is no allegation of anything Plaintiff specifically did or did not do based on those misrepresentations. Nor is it clear that Plaintiff could have done anything because 8e6 was a private company. (SAC ¶ 18.) Plaintiff’s allegations are insufficient. As the Supreme Court has explained, “[t]he plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.” (Small, supra, 30 Cal.4th at p.184.) Further, as to the first and second claims of misrepresentation, there is no allegation as to how Plaintiff was harmed. Plaintiff fails to allege how or why Defendants’ misrepresentations regarding 8e6’ financial condition caused the purported diminution of value of Plaintiff’s interest in 8e6.

Similarly, the fourth misrepresentation regarding the failure to notify Plaintiff of the change of value of Plaintiff’s stock in 8e6 similarly fails to allege any actions taken or forborne by Plaintiff based on this representation.

However, he third misrepresentation regarding the merger with Marshall Group, coupled with the concealment of 8e6’s financial situation is sufficiently alleged. Plaintiff clearly alleges that he would have had 8e6 repurchase all of his shares at fair market value but for Defendants misrepresentations about the benefits of the merger with Marshall Group and concealment of the 8e6’s financial situation and Plaintiff’s right to sell his shares to 8e6. (SAC ¶ 34.) This is clearly sufficient to allege reliance in a claim for fraud. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184 [“In a holder action, a plaintiff must allege specific reliance on the defendants' representations: for example, that if the plaintiff had read a truthful account of the corporation's financial status the plaintiff would have sold the stock, how many shares the plaintiff would have sold, and when the sale would have taken place.”].) Moreover, Plaintiff presents clear specificity as to these claims, by specifically identifying what benefits to the merger were misrepresented, (SAC ¶¶ 28-29), and clearly identifying the concealment of 8e6’s financial troubles going into the merger, (SAC ¶¶ 19-27). Moreover, the SAC clearly identifies damages caused by such harm – i.e., the value of the shares had substantially declined, (SAC ¶ 39).

Accordingly, the claim for fraud and negligent misrepresentation are sufficiently alleged.

“A demurrer based on a statute of limitations will not lie where the action may be, but is not necessarily, barred. In order for the bar ... to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred.” (Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42, [internal citations omitted].) “An action for relief on the grounds of fraud or mistake must be commenced within three years.” (Kline v. Turner (2001) 87 Cal.App.4th 1369, 1373.)

“The statute of limitations usually commences when a cause of action ‘accrues,’ and it is generally said that ‘an action accrues on the date of injury.’” (Vaca v. Wachovia Mortgage Corp. (2011) 198 Cal.App.4th 737, 743, [internal citations omitted].) “An important exception to the general rule of accrual is the “discovery rule,” which postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807.) “The discovery rule only delays accrual until the plaintiff has, or should have, inquiry notice of the cause of action. The discovery rule does not encourage dilatory tactics because plaintiffs are charged with presumptive knowledge of an injury if they have ‘information of circumstances to put [them] on inquiry’ or if they have ‘the opportunity to obtain knowledge from sources open to [their] investigation.’ [Citation.] In other words, plaintiffs are required to conduct a reasonable investigation after becoming aware of an injury, and are charged with knowledge of the information that would have been revealed by such an investigation.” (Id. at pp.807–808 [internal citations omitted].) However, “[i]n order to rely on the discovery rule for delayed accrual of a cause of action, ‘[a] plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.’ In assessing the sufficiency of the allegations of delayed discovery, the court places the burden on the plaintiff to ‘show diligence’; ‘conclusory allegations will not withstand demurrer.’” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 808 [internal citations omitted].)

Here, the SAC is based on fraud, and thus, the statute of limitations for the first and second causes of action would be three years. (SAC ¶¶ 18-51.) Thus, the claim of fraud on October 18, 2018 would clearly be barred by the statute of limitations unless an exception, such as the discovery rule, applies. Here, Plaintiff sufficiently alleges facts to support application of the discovery rule. The SAC directly alleges that Plaintiff discovered the fraudulent conduct when “defendants Wood, Vora and 8e6 Corp were ordered to appear for deposition in LASC BC645117 and they then testified in August 2018.” (SAC ¶ 35.) In fact, the Court of Appeal expressly noted this on appeal.[2] Nor was there a reason for the discovery earlier as the SAC alleges that Defendants withheld and concealed the truth from Plaintiff for years. (See e.g., SAC ¶¶ 19, 39.)

Accordingly, as the action is not necessarily barred by the statute of limitations, Defendants’ demurrer to the first and second cause of action is OVERRULED.

Defendants move to strike paragraphs 36-43, the prayer for disgorgement of profits, and the prayer for attorneys’ fees.

Here, paragraphs 36-43 involve conduct in 2012 and 2015 after 8e6’s merger with Marshal Group in 2008 and the surrounding fraud allegations. (See SAC ¶¶ 25-30.) Defendants contend that these allegations should be stricken because (1) Plaintiff fails to allege reliance on any post-October 2008 statements, (2) the allegations are beyond the scope of leave to amend granted by the Court of Appeal, and (3) the allegations are barred by res judicata.

As noted above, on April 23, 2012, Defendants represented that Plaintiff’s holdings in 8e6 had remained unchanged and unaffected when in reality the value of those shares had substantially dropped. (SAC ¶¶ 38-39.) However, no actions were allegedly taken based on this misrepresentation. (See SAC ¶¶ 36-43.) Thus, there is no reliance on any post-October 2008 statements. However, these allegations are relevant as to the damages Plaintiff eventually faced – i.e., the complete deterioration of Plaintiff’s stocks due to the merger. Therefore, while these allegations are insufficient to state a claim of fraud on their own, these allegations are still relevant to the fraud allegations.

Here, the Court of Appeal specifically noted that “[t]he judgment of dismissal is reversed and the court is to allow [Plaintiff] to amend his complaint to allege a stand-alone individual fraud claim.” (RJN Exh. 10.) These allegations – (SAC ¶¶ 36-43) – directly relate to damages for the fraud with the 2008 merger. Therefore, these allegations are not beyond the scope of leave to amend.

“‘Res judicata’ describes the preclusive effect of a final judgment on the merits. Res judicata, or claim preclusion, prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them. Collateral estoppel, or issue preclusion, ‘precludes relitigation of issues argued and decided in prior proceedings.’” (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896.) Res Judicata has been used to refer to both claim and issue preclusion. (Ibid., Fn. 7.) The doctrine has two aspects: it applies to both a previously litigated cause of action, referred to as claim preclusion, and to an issue necessarily decided in a prior action, referred to as issue preclusion. (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 828; Teitelbaum Furs, Inc. v. Dominion Ins. Co. (1962) 58 Cal.2d 601, 604.)

This distinction is essential to understanding the analysis below, as courts have oft-noted the “seemingly ineradicable confusion over the distinctions between ‘res judicata’ (claim preclusion) and ‘collateral estoppel’ (issue preclusion).” (Ferraro v. Camarlinghi (2008) 161 Cal.App.4th 509, 541, Fn. 21.)

Issue preclusion applies only to issues that were actually litigated in the earlier matter; whereas claim preclusion extends to all legal theories, proofs, and demands for relief that might have been presented in the first matter, provided both suits assert the same cause of action. (Ibid. citing Landeros v. Pankey (1995) 39 Cal.App.4th 1167, 1171; Gottlieb v. Kest (2006) 141 Cal.App.4th 110, 148; Mycogen Corp. v. Monsanto Corp. (2002) 28 Cal.4th 888, 897; Burdette v. Carrier Corp. (2008) 158 Cal.App.4th 1668, 1687.) “Res judicata [claim preclusion] bars the relitigation not only of claims that were conclusively determined in the first action, but also matter that was within the scope of the action, related to the subject matter, and relevant to the issues so that it could have been raised” and includes ‘matters which were raised or could have been raised, on matters litigated or litigable.’” (Burdette v. Carrier Corp. (2008) 158 Cal.App.4th 1668, 1674-1675; accord Mark v. Spencer (2008) 166 Cal.App.4th 219, 229 [bars claims that parties had a fair opportunity to litigate].) Claim preclusion applies as a bar to splitting a cause of action for partial, later litigation, or relitigation of the same cause of action based upon on another legal theory or associated with different relief, that could have been sought in the prior action. (Noble v. Draper (2008) 160 Cal.App.4th 1, 10; Hamilton v. Asbestos Corp., Ltd. (2000) 22 Cal.4th 1127, 1146.) Its purpose is “to preserve the integrity of the judicial system, promote judicial economy, and protect litigants from harassment by vexatious litigation.” (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 829.)

The prerequisite elements for applying the doctrine to either an entire cause of action or one or more issues are the same: (1) A claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (2) the prior proceeding resulted in a final judgment on the merits; and (3) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding. (Ibid.)

Here, res judicata does not support striking these paragraphs. As noted above, these paragraphs fail to state a cause of action on their own because Plaintiff fails to allege reliance. Claim preclusion could not apply because these allegations do not constitute a cause of action. For a similar reason, issue preclusion is inapplicable. Defendants claim that “[Plaintiff] is collaterally estopped from alleging fraud against Defendants for events occurring in 2012 and thereafter.” (Motion to Strike at p.11:22-23.) However, these allegations are explanation of the damages for the October 2008 claim of fraud.

“Disgorgement as a remedy is broader than restitution or restoration of what the plaintiff lost.” (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1482.) “There are two types of disgorgement: restitutionary disgorgement, which focuses on the plaintiff's loss, and nonrestitutionary disgorgement, which focuses on the defendant's unjust enrichment.” (Ibid.) “Disgorgement of profits is particularly applicable in cases dealing with breach of a fiduciary duty, and is a logical extension of the principle that public officials and other fiduciaries cannot profit by a breach of their duty.” (County of San Bernardino v. Walsh (2007) 158 Cal.App.4th 533, 543.)

However, there is no basis for disgorgement of profits due to a claim of fraud. In general, “[t]he victim of the fraud may elect to undo the transaction in its entirety, restoring both parties to the status quo ante. However, the victim cannot be required to adopt this course; he has the right to “retain the benefits of the contract ..., and make up in damages the loss suffered by the fraud. Hence, he may affirm the contract, and simply sue for damages for the fraud.” (Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 1220.)

Here, Plaintiff seeks in part “disgorgement of all profits defendants made in connection with the fraud and deceit, believed to be at least $6.3 million[.]” (SAC at p.14:17-18.) However, as noted above, nonrestitutionary disgorgement is not a remedy for fraud. Rather, only restitution or damages are available. Disgorgement is an equitable remedy requiring claims such as breach of fiduciary duty in which a variety of equitable remedies are available, which the Court of Appeal expressly noted Plaintiff could not allege in the instant action. (RJN Exh. 10.)

Accordingly, Defendants motion to strike the prayer for disgorgement is GRANTED.

Attorney’s fees shall only be recoverable as provided for by statute, contract or other law. (CCP §§ 1021, 1033.5(a)(10).)

Here, the SAC fails to identify any basis for attorneys’ fees. Rather, in opposition, Plaintiff claims that the doctrine of “tort of another” permits the request for attorneys’ fees in the instant action due to Plaintiff having to file the action in Max I. The Court disagrees.

“The tort of another doctrine holds that ‘[a] person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney's fees, and other expenditures thereby suffered or incurred.’ [Citation.]” (Mega RV Corp. v. HWH Corp. (2014) 225 Cal.App.4th 1318, 1337.) “[H]owever, [] the so-called ‘third party tort exception’ to the rule that parties bear their own attorney fees is not really an ‘exception’ at all but an application of the usual measure of tort damages. The theory of recovery is that the attorney fees are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action. In such cases there is no recovery of attorney fees qua attorney fees.” (Sooy v. Peter (1990) 220 Cal.App.3d 1305, 1310.) “Because the third party tort ‘exception’ is in fact an element of tort damages, nearly all of the cases which have applied the doctrine involve a clear violation of a traditional tort duty between the tortfeasor who is required to pay the attorney fees and the person seeking compensation for those fees.” (Ibid.)

The doctrine of “tort of another” is not a basis for providing attorneys’ fees but rather a way to claim fees that already occurred as damages in a prior action. This doctrine has no application in providing attorneys’ fees for the instant action. Moreover, there is no basis for the tort of another doctrine to apply. For the doctrine to be applicable, there must be an action against or by a third party. As noted in the judicially noticed record, the Max I action was against Defendants -- not some third party as required for the doctrine of tort of another. Moreover, to the extent that attorneys’ fees were permitted from the Max I action, that claim has been conclusively determined against Plaintiff in the Court’s dismissal of that cause of action and the Court of Appeal’s affirmance of that dismissal.

Accordingly, Defendants’ motion to strike the prayer for attorneys’ fees is GRANTED.

Here, there is no basis for the prayer for nonrestitutionary disgorgement nor the prayer for attorneys’ fees. Nor has Plaintiff shown any basis as to how the complaint could be successfully amended to include such prayers. Accordingly, as leave to amend would be futile, leave to amend is DENIED.

Based on the foregoing, Defendant Defendants 8e6 Corp., George Shih, Frank Wood, Mahendra Vora, Vora Ventures LLC, Secret Communications II LLC, Darwin Group LLC, Log-On Darwin LLC, Darwin Filter’s demurrer is OVERRULED.

Defendants’ motion to strike is GRANTED IN PART WITHOUT LEAVE TO AMEND as to the prayer for disgorgement and the prayer for attorneys’ fees.

Defendants are to file an answer to the Second Amended Complaint within twenty (20) days of notice of this order.

[1] On November 26, 2019, Plaintiff dismissed Rodney Miller from the complaint without prejudice.

[2] See Request for Judicial Notice, Exh. 10, [“First, [Defendants] argued below that the applicable three-year statute of limitations bars [Plaintiff]’s proposed individual fraud cause of action. But such a cause of action is ‘not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud.’ ... The complaint alleges that [Plaintiff] was unaware of the alleged fraudulent conduct until August 2018, an allegation we must accept as true at the demurrer stage. (See Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.) [Defendants] do not identify any basis on which we could conclude that [Plaintiff] could or should have made this discovery earlier. (See Fox, supra, 35 Cal.4th at p. 807.)”

Superior Court of California

County of Los Angeles

Department 26