Judge Gail Killefer, Case 22STCV32363 2023-02-09 Tentative Ruling

MOTION: Demurrer to the Cross-Complaint; Motion to Strike Portions of Cross-Complaint

MOVING PARTIES: Cross-Defendants, Boyle Flats Food & Beverage, Inc., and Tad Yenawine

TENTATIVE: Cross-Defendants’ demurrer is sustained. Cross-Complainant is granted 30 days leave to amend. Cross-Defendants are to give notice.

This is an action arising out of the formation by Tad Yenawine (“Plaintiff” or “Cross-Defen-dant”) and Alex Koons (“Defendant” or “Cross-Complainant”) of a California entity, Boyle Flats Food and Beverage, Inc dba Purgatory Pizza (“Plaintiff BFFB” or “Cross-Defendant BFFB”). Plaintiffs and Defendant operated a restaurant business called “Purgatory Pizza.” The Complaint alleges Defendant took monies from Plaintiff BFFB’s bank accounts for expenses to open his own pizza restaurant in 2020. The Complaint alleges Defendant applied and received an Emergency Incident Disaster Loan (“EIDL”) in BFFB’s name which were transferred to Defendant’s own account and no payments were made by Defendant to the EIDL afterwards. The Complaint also alleges Defendant abandoned his duties as manager of Purgatory Pizza and continued to pay himself his salary.

Plaintiffs’ Complaint alleges four causes of action: (1) breach of contract; (2) conversion; (3) fraud; and (4) breach of fiduciary duty.

On June 23, 2021, Petitioner filed a Request for Dismissal without prejudice as to his claim for writ of mandate.

On November 29, 2022, Defendant filed the operative Cross-Complaint against Plaintiffs. The Cross-Complaint alleges four causes of action: (1) dissolution of corporation; (2) derivative claim for breach of fiduciary duty; (3) individual claim for breach of fiduciary duty against Cross-Defendant Yenawine; and (4) reimbursement of business expenses.

Cross-Defendants now demur to the entirety of the Cross-Complaint and move to strike portions of the Cross-Complaint. Cross-Complainant opposes both motions.

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (CCP § 430.30(a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) The court “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. . . .” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525.) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (CCP § 452; see also Stevens v. Sup. Ct. (1999) 75 Cal.App.4th 594, 601.) “When a court evaluates a complaint, the plaintiff is entitled to reasonable inferences from the facts pled.” (Duval v. Board of Trustees (2001) 93 Cal.App.4th 902, 906.)

The general rule is that the plaintiff need only allege ultimate facts, not evidentiary facts. (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.) “All that is required of a plaintiff, as a matter of pleading, even as against a special demurrer, is that his complaint set forth the essential facts of the case with reasonable precision and with sufficient particularity to acquaint the defendant with the nature, source and extent of his cause of action.” (Rannard v. Lockheed Aircraft Corp. (1945) 26 Cal.2d 149, 156-157.) “[D]emurrers for uncertainty are disfavored and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th 841, 848, fn. 3, citing Lickiss v. Fin. Indus. Regulatory Auth. (2012) 208 Cal.App.4th 1125, 1135.) In addition, even where a complaint is in some respects uncertain, courts strictly construe a demurrer for uncertainty “because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.)

Demurrers do not lie as to only parts of causes of action where some valid claim is alleged but “must dispose of an entire cause of action to be sustained.” (Poizner v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.) “Generally it is an abuse of discretion to sustain a demurrer without leave to amend if there is any reasonable possibility that the defect can be cured by amendment.” (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.)

To state a claim for dissolution, a plaintiff must be (1) one-half or more of the directors in office, (2) a shareholder holding shares which represent no less than 33 and 1/3 percent of the total number of outstanding shares, common, shares, or equity of the corporation, or any shareholder of a close corporation, (3) a shareholder if the ground for dissolution is that the period for which the corporation was formed has terminated without extension, or (4) any other person authorized in the articles.¿ (Corp. Code¿§¿1800(a)(1)-(4).)

The grounds for involuntary dissolution are (1) the corporation has abandoned its business for over one year, (2) the corporation has an even number of shareholders who are equally divided and cannot agree as to the management of affairs such that the business can no longer be conducted to advantage or there is danger that the property or business will be impaired or lost and the holders of the voting shares are so divided they cannot elect a board with an uneven number, (3) there is internal dissention and two or more factions of shareholders so deadlocked the corporation cannot conduct its business to the advantage of the shareholders or the shareholders fail at two consecutive meetings at which all voting power is exercised to elect successors to directors whose terms have expired or would expire upon election of successors, (4) those in control of the corporation are guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement, or abuse of authority or persistent unfairness toward any shareholder or the corporation’s property is being misapplied or wasted by the directors or officers, (5) a corporation with 35 or fewer shareholders when liquidation is reasonably necessary to protect the rights or interests of the complaining shareholder, or (6) the period for which the corporation was formed has terminated without extension.¿(Corp. Code¿§¿1800(b)(1)-(6).)

Cross-Defendants contend the Cross-Complaint fails to state “any facts to support allegations of ‘wrongful’ or ‘illegal’ conduct.” (Dem., 3-4.) They contend the first cause of action is insufficiently pled because “Koons does not identity any conduct which was wrongful or mismanagement or fraud, or self-dealing, etc., but simply states those legal conclusions.” (Dem., 5.) Cross-Defendants further argue any allegations regarding Plaintiffs’ actions were done with the intent of stopping “Koons’ looting of the corporation to fund a competing business,” and the Cross-Complaint “simply dismisses” these actions “as somehow violations of both California statutes and of the BFFB corporate bylaws without reference to any specific statute or bylaw.” (Dem., 6.) “Plaintiffs cannot be required to guess at what statutes or sections of corporate documents Koons might mean in his Cross-Complaint.” (Dem., 6.)

As a preliminary matter, Defendant contends the demurrer is untimely as Cross-Defendants’ proof of service indicates counsel “instructed the filing service for the LASC mandatory e-filing system” to serve the filed documents onto Defendant, even though the LASC makes clear that the e-filing system will not electronically serve other parties. (Opp., 7.) In reply, Cross-Defendants further explain that Defendant was served with the two instant motions on January 13, 2023. (Reply, 2.) The court does not delve further into the timeliness of this demurrer, as Cross-Defendants would have the right to file a motion for judgment on the pleadings raising the same issues as in this demurrer in the event this demurrer is untimely. Therefore, the court continues with its analysis.

In opposition, Defendant contends the Cross-Complaint alleges sufficient factual allegations to show grounds pursuant to Corp. Code § 1800(b), ¶ 4. (Opp., 8-9.) Defendant contends “the Cross-Complaint contains ample allegations demonstrating Yenawine’s pervasive and persistent mismanagement of BFFG.” (Id.) In reply, Cross-Defendants contend “[n]ot a single allegation of facts constituting ‘fraud’ or ‘mismanagement’ ‘self-dealing’ or any other legal misconduct are offered.” (Reply, 4.)

“Pursuant to Corporations Code section 212 and the governing documents of Purgatory Pizza, a single director is not authorized to act on behalf of the company. Thus, Tad is acting in direct violation of California law and also Purgatory Pizza's corporate documents.

Alex is informed and believes, and thereon alleges that the above-described knowingly wrongful conduct, mismanagement, abuse of authority, and the pervasive and persistent fraud, unfairness, self-dealing, and misapplication and/or waste of corporate property by Tad, who purports to control the Board of Directors of Purgatory Pizza, requires dissolution of Purgatory Pizza. There is currently and will continue to be internal dissension amongst Alex and Tad with respect to Purgatory Pizza such that business can no longer be conducted with advantage to its shareholders. Liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder or shareholders.” (Cross-Complaint ¶¶ 17, 26.)

Liberally construing the allegations of the Cross-Complaint in favor of Cross-Complainant, the court finds the first cause of action to be insufficiently pled. While Cross-Complainant makes several conclusory claims regarding the alleged mismanagement of the business by Plaintiff, the Cross-Complaint fails to allege sufficient factual claims to establish “persistent and pervasive fraud, mismanagement, or abuse of authority or persistent unfairness toward any shareholder or the corporation’s property is being misapplied or wasted by the directors or officers.” (Corp. Code¿§¿1800(b)(4).) Although Defendant alleges Plaintiffs have taken control of books and records and are “freezing Alex out of the company’s business operations,” this contention fails as it does not include sufficient factual allegations to show mismanagement or fraud or waste or abuse of authority as necessary under Corp. Code § 1800.

For these reasons, Cross-Defendants’ demurrer to this cause of action is sustained.

B. Second & Third Causes of Action: Derivative & Individual Claims for Breach of Fiduciary Duty

“The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage proximately caused by the breach.” (Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1086.) (“[B]ecause every contract to some extent requires each party to repose trust and confidence in the other, one party’s right to contingent compensation, standing alone, does not give rise to a fiduciary duty.” ( City of Hope Nat'l Med. Ctr. v. Genentech, Inc. (2008), 43 Cal. 4th 375, 391 (City of Hope).)

Cross-Defendants again contend the second and third causes of action are similarly insufficiently pled as the Cross-Complaint does not specify “any specific Bylaw or California statute.” (Dem., 7-8.) “Koons alleges, without citation to any Bylaw or statute that corporate CEO Yenawine did not have authority to take actions to stop Koons’ looting of the corporation. ... Yenawine cannot be required to guess what documents or statutes Koons is alleging were violated.” (Id.) They allege the Cross-Complaint does not “provide any ... specificity about any facts of Mr. Yenawine’s alleged breaches of fiduciary duty, nor any fact that would make [Plaintiff Yenawine] personally liable for his acts as corporate director and officer.” (Id.)

In opposition, Defendant contends that as Defendant “learned of the actions constituting Yenawine’s breach of fiduciary duties through the declarations of others, it is appropriate that” the allegations of the Cross-Complaint are made on information and belief. (Opp., 11.) Further, Defendant contends that as the derivative claim is brought for the benefit of BFFB, BFFB is the real Plaintiff here and these claims are made “because the gravamen of the injury” is to BFFB. (Id.) Further, Defendant contends paragraphs 35 and 36 of the Cross-Complaint allege sufficient facts to establish claims for the second and third causes of action. (Opp., 11-12.)

In reply, Cross-Defendants first reiterate “[t]he Cross-complaint does not allege any facts of misconduct by Cross-defendants. The specific allegations that Koons was dismissed from his position, and that the corporation hired an attorney to bring an action to protect itself from Koon’s looting are allegations that Cross-defendants were acting within their fiduciary duties to protect the corporation. This does not constitute facts sufficient to state a cause of action against Cross-defendants.” (Reply, 7-8.) They further contend “The Cross-complaint does not allege any action taken by Mr. Yenawine which are not in Mr. Yenawine’s ‘good faith...belief to be in the best interests of the corporation and its shareholders.’ Koons alleges that he has been deprived of ‘control over Purgatory Pizza's finances, including its bank account.’ ... This is a standard, good faith action by any corporation dismissing an employee for theft from its bank account.” (Id.)

Here, the Cross-Complaint alleges “[i]n breach of his fiduciary duties, [Plaintiff Yenawine] has used his position as a Director and Officer of the company to terminate [Defendant's] employment at Purgatory Pizza. He has also frozen [Defendant] out of Purgatory Pizza's operations, has no access to the company’s books and records, is being denied meaningful participation in business decisions, has been refused his salary and benefits, and is essentially realizing no benefit from his 50% interest in Purgatory Pizza. Alex has no control over Purgatory Pizza's finances, including its bank account. Rather, [Yenawine] appears to have seized control over the company, again, doing so illegally as the purported sole Director. He has also slandered Alex, telling restaurant staff that he has stolen from the company.” (Cross-Complaint ¶35.)

Liberally construing the allegations of the Cross-Complaint in favor of Defendant, the court finds the second and third causes of action insufficiently pled. Similar to the first cause of action, the second and third causes of action also fail to point to specific statutes or bylaws of the corporation to show that the factual allegations, if taken to be true, can show a breach of a fiduciary duty to the corporation and to Defendant as a shareholder. While Defendant alleges several conclusory claims regarding conduct he believes to be a breach, the Cross-Complaint fails to allege sufficient facts, or point to sufficient authorities, to show how any of Cross-Defendants’ conduct was a breach of their fiduciary duties to the corporation.

For these reasons, Cross-Defendants’ demurrer to this cause of action is sustained.

Pursuant to Labor Code § 2802(a): “[a]n employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.”

Here, the Cross-Complaint alleges that “acting on the direct instruction of Cross-Defendants and discharging his duties for the Company, [Cross-Complainant] incurred work-related expenses, including but not limited to inventory and supplies, in the amount of $22,461.20.” (Cross-Complaint ¶ 43.)

Cross-Defendants here again contend the Cross-Complaint “alleges no specific instruction or provide any exhibit showing any instruction or expense,” to identify any expenses or to show that such expenses were necessary. (Dem., 8-9.) “Cross-defendants cannot be required to guess at what [Defendant] may be referring to as ‘instructions’ or ‘expenses.’” (Id.)

In opposition, Cross-Complaint contends the expenses were necessary given Defendant’s role as general manager of the day-to-day operations of the business and that “[b]ased on Cross-Defendants’ presumptive knowledge about the restaurant industry, they are undoubtedly aware that replenishing inventory and supplies are necessary expenditures to ensure the restaurant remains operational.” (Opp., 13-14.) In reply, Cross-Defendants contend the opposition only “reasserts the Cross-complaint’s allegation.” (Reply, 9.)

“Because the Cross-complaint is devoid of any allegation of what the ‘instructions’ were, it is impossible to know what Koons is actually alleging. Similarly, Koons alleges that he incurred the precise amount of $22,461.20 in expenses, but aside from alleging that such expenses ‘incurred work-related expenses, including but not limited to inventory and supplies’ there isn’t a single fact allegation of what expenses there were that he was ‘instructed’ to incur beyond his own role as general manager of the business. This underscores the contradictions in the Cross-complaint which make it impossible to understand, without guessing.” (Id.)

Liberally construing the allegations of the SAC in favor of Plaintiff, the court agrees and finds the fourth cause of action is insufficiently pled. Cross-Complainant cannot merely conclude that expenses incurred were at the direction of management and were further necessary, without identifying and alleging sufficient facts to show why these expenses were necessary and how they were incurred at the direction of management, especially when Defendant has himself alleged he was designated at the manager of day-to-day operations of the pizza business. Therefore, Cross-Complainant fails to identify and state a claim for reimbursement of expenses as alleged.

For these reasons, Cross-Defendants’ demurrer to this cause of action is sustained.

Cross-Defendants’ demurrer is sustained. Cross-Complainant is granted 30 days leave to amend. Cross-Defendants are to give notice.

As Cross-Defendants’ demurrer to the Cross-Complaint is sustained, their motion is now moot.

[1] Cross-Defendants submit the declaration of their counsel, Thomas M. Hall (“Hall”), to demonstrate compliance with statutory meet and confer requirements. Hall attests that on December 16, 2022, he emailed Defendant’s counsel a meet and confer letter outlining the alleged deficiencies in the Cross-Complaint. (Hall Decl. ¶2.) Hall attests he attempted to telephone counsel on December 22, 2022, and did not receive a call afterwards; Defendant’s counsel only responded by letter to state “she did not consider [Hall] qualified to represent Plaintiffs” and “asking [Hall] to cease representing either Plaintiff.” (Hall Decl. ¶ 5.) The Hall Declaration is insufficient for purposes of CCP §§ 430.41 and 435.5 as it makes clear that the parties have failed to meet and confer. However, failure to meet and confer is not grounds for overruling a demurrer, and thus, the court continues to the merits of the papers.