Judge Gail Killefer, Case Number: 22STCV32363, Date: 2023-10-09 Tentative Ruling

OPPOSING PARTY: Plaintiffs/Cross-Defendants Boyle Flats Food & Beverage, Inc. and Ted Yenawine

TENTATIVE: Defendant Daleyn’s demurrer to the FAC is sustained with 10 days leave to amend. A Non-Appearance OSC Re: Amended Complaint is set for March 22, 2024, at 8:30 a.m. Defendant Daleyn to give notice.

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

On November 29, 2022, Defendant Koons filed a Cross-Complaint (“CC”) against the Plaintiffs. On February 09, 2023, the court sustained the demurrer to the CC with leave to amend. On April 24, 2023, the Defendant filed an Amended Cross-Complaint but withdrew it on May 17, 2023, and was granted leave to file an amended complaint.

The Second Amended Cross-Complaint (“SACC”) 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.

On October 9, 2023, Plaintiffs/Cross-Defendants’ demurrer to the first, second, and third causes of action was overruled and sustained as to the fourth cause of action with leave to amend. Plaintiffs/Cross-Defendants motion to strike was granted as to Paragraph 9, with leave to amend.

On October 23, 2023, Defendant/Cross-Complainant filed the operative Third Amended Cross-Complaint (“TACC”) alleging the same cause of action as the SACC.

On October 5, 2023, Plaintiff filed the operative First Amended Complaint (“FAC”) alleging four causes of action for (1) breach of contract, (2) conversion, (3) fraud, and (4) breach of fiduciary duty.

On December 20, 2023, Defendant Daleyn Accountancy, Inc. (“Defendant” or “Daleyn”) filed a demurrer to the FAC. Plaintiff opposes the demurrer. The matter is now before the court.

A court may take judicial notice of the contents of its own records. (Dwan v. Dixon (1963) 216 Cal.App.2d 260, 265; Foster v. Gray (1962) 203 Cal.App.2d 434, 439.) “Courts may not take judicial notice of allegations in affidavits, declarations and probation reports in court records because such matters are reasonably subject to dispute and therefore require formal proof.” (Lockley v. Law Office of Cantrell, Green, Pekich, Cruz & McCort (2001) 91 Cal.App.4th 875, 882.)

1) Exhibit A — Tad Yenawine’s Declaration Submitted on Behalf of Plaintiffs in Support of their Opposition to Defendant Koons Reply to Motion to Disqualify Counsel.

2) Exhibit B, Document 1 — BFFB’s Corporate Bylaws as filed by Defendant Koons in his April 6, 2023, Declaration and on July 17, 2023, by Plaintiff’s BFFB and Yenawine.

The court denies Defendant Daleyn’s request for judicial notice of Exhibit A because it is disputed as to whether Yenawine validly removed Koons as a corporate officer, a fact Koons disputes and is at the heart of this very action. As the facts in the Yenawine declaration are reasonably subject to dispute, the court denies the request for judicial notice as to Exhibit A.

Defendant Daleyn points out that the court granted judicial notice of BFFB’s bylaws at the October 9, 2023, hearing. As BFFB’s bylaws are not in dispute, the court grants judicial notice of Exhibit B.

Discussion

Where pleadings are defective, a party may raise the defect by way of a demurrer. (Coyne v. Krempels (1950) 36 Cal.2d 257, 262.) A demurrer tests the sufficiency of a pleading, and the grounds for a demurrer must appear on the face of the pleading or from judicially noticeable matters.¿ (CCP, § 430.30(a); Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) In evaluating a demurrer, the court accepts the complainant’s properly pled facts as true and ignores contentions, deductions, and conclusory statements. (Daar v. Yellow Cab Co. (1976) 67 Cal.2d 695, 713; Serrano v. Priest (1971) 5 Cal.3d 584, 591.) Moreover, the court does not consider whether a plaintiff will be able to prove the allegations or the possible difficulty in making such proof. (Fisher v. San Pedro Peninsula Hospital (1989) 214 Cal.App.3d 590, 604.)

Leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.)¿ The burden is on the complainant to show the Court that a pleading can be amended successfully. (Ibid.)

Defendant Daleyn demurs to the entire FAC on the basis that when a corporation is deadlocked between shareholders/directors, the corporation has no standing to pursue litigation if the bylaws do not give the director/shareholder the authority to unilaterally pursue litigation but instead reserves such corporate power for the directors. (Anmaco, Inc. v. Bohlken (1993) 13 Cal. App. 4th 891, 898 (Anmaco).)

In Anmaco, the appellate court found because a corporate president has no greater power than any other director, the president had no power to initiate a lawsuit in the name of the corporation against a co-director and equal shareholder.(Anmaco, supra, 13 Cal.App.4th at p. 900.)

Pressing the corporation into litigation as a plaintiff is inappropriate where the other shareholder-director could claim equal authority to bring suit in the corporate name. This is particularly obvious in the instant case where Bohlken is not only an equal director and shareholder, but is also Chief Executive Officer of the company. The proper vehicle for such a suit, when the gravamen of the complaint is injury to the corporation, is a shareholders' derivative action.

Specifically, the Anmaco court found that under the corporate bylaws, although the Anmaco president had “ ‘general supervision, direct and control of the business and officers of the corporation’ ” “[t]he bylaws also provide that the president's exercise of his office is ‘subject to the control of the Board of Directors....’” and “[t]he bylaws further state: ‘The business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of its Board of Directors.” (Anmaco, supra, 13 Cal.App.4th at p. 898.) Therefore, “[t]he president does not have the power to enter into contracts or execute other instruments or render the corporation ‘liable for any purposes or any amount’ without Board authorization” including the “power to institute litigation in the corporate name against the other 50 percent shareholder.” (Id. at p. 898.)

The Anmaco court expressed “no view on the president's power to institute or defend litigation in an emergency or involving an outsider or where the bylaws may grant the power to do so.” (Anmaco, supra, 13 Cal.App.4th at 900, fn. 2.) However, other courts have taken the approach that if a president lacks power to instigate ligation, the corporation itself lacks the power to litigate, even against third parties who are not directors or shareholders of the corporation.

In Icon Internet Media, Inc. v. Johnson (C.D. Cal., Oct. 22, 2021, No. 819CV01579FLADFMX), the district court found the following:

The court, however, does not read the California precedent so narrowly to forbid a president from filing a suit in the name of the corporation against its directors and shareholders, but permit the suit to proceed against non-directors and shareholders. Instead, it appears the relevant inquiry is whether the president has authority to initiate any suit on behalf of the corporation when the directors are deadlocked.

(Id. at p. *4 [underline original].) The federal district court in Icon Internet Media, Inc. held that the plaintiff could not maintain an action against the other defendants despite the other defendants not being co-directors or fifty percent shareholders because the president lacked apparent authority to file suit. (Ibid.) The federal district court granted the motion for judgment on the pleadings and gave the plaintiff 30 days’ leave to amend so that plaintiff could substitute in and assert claims on behalf of a proper plaintiff.

Similarly, in Verma v. Okev (E.D. Cal., Dec. 31, 2013, No. 2:13-CV-00865-MCE) 2013 WL 6887532, the federal district court stated:

[B]ecause there is no mention in the Complaint, motions or briefs as to what the corporate by-laws say on the matter of presidential duties and powers. Since the bylaws will ultimately govern, some mention must be made of them before relying on some sort of inherent power that may or may not have been trumped by the corporation's formative documents. [Citations.] Therefore, to the extent Plaintiff Zentek depends on the president's power to bring this suit, the Complaint is dismissed with leave to amend.

Accordingly, under the broader interpretation of Anmaco, Plaintiffs lack standing to bring this lawsuit unless they obtained permission from the board of directors to initiate this action.

The Complaint alleges that Yenawine is a 50% holder of Boyle Flats Food & Beverage, Inc. (“BFFB”) and has standing to bring this action under Corp. Code section 316(c). (FAC ¶¶ 1, 2.)

a) Subject to the provisions of Section 309, directors of a corporation who approve any of the following corporate actions shall be jointly and severally liable to the corporation for the benefit of all of the creditors or shareholders entitled to institute an action under subdivision (c):

(1) The making of any distribution to its shareholders to the extent that it is contrary to the provisions of Sections 500 to 503, inclusive.

(2) The distribution of assets to shareholders after institution of dissolution proceedings of the corporation, without paying or adequately providing for all known liabilities of the corporation, excluding any claims not filed by creditors within the time limit set by the court in a notice given to creditors under Chapters 18 (commencing with Section 1800), 19 (commencing with Section 1900) and 20 (commencing with Section 2000).

(b) A director who is present at a meeting of the board, or any committee thereof, at which action specified in subdivision (a) is taken and who abstains from voting shall be considered to have approved the action

(c) Suit may be brought in the name of the corporation to enforce the liability (1) under paragraph (1) of subdivision (a) against any or all directors liable by the persons entitled to sue under subdivision (b) of Section 506, (2) under paragraph (2) or (3) of subdivision (a) against any or all directors liable by any one or more creditors of the corporation whose debts or claims arose prior to the time of any of the corporate actions specified in paragraph (2) or (3) of subdivision (a) and who have not consented to the corporate action, whether or not they have reduced their claims to judgment, or (3) under paragraph (3) of subdivision (a) against any or all directors liable by any one or more holders of shares outstanding at the time of any corporate action specified in paragraph (3) of subdivision (a) who have not consented to the corporate action, without regard to the provisions of Section 800.

The language above provides that a suit under section 316 requires the “directors of the corporation” to “approve any of the following corporate actions[.]” (Corp. Code, § 316(a).) There is no language in the FAC reflecting that Yenawine had the authority to initiate this action.

In opposition, Plaintiff argues that because Defendant/Cross-Complainant Koons as secretary, treasurer, and general manager of BFFB had looted the corporation, under Corp. Code § 310(a) and (b), a director is not permitted to vote on matters that implicate a director’s material financial interest. Accordingly, only Director/Plaintiff Yenawine’s vote was needed. The court need not decide if Plaintiff Yenawine had the authority to bring this action under Corp. Code § 310 because the FAC is devoid of any such allegation and there are no facts to indicate that Plaintiff Yenawine was permitted to vote and retain an attorney and bring this action without the approval of Co-Director/Defendant Koons. Facts not alleged in the FACC are presumed not to exist. (Schick v. Lerner (1987) 193 Cal.App.3d 1321, 1327.)

The court also notes that in the hearing to disqualify Plaintiffs’ counsel, Yenawine argued that “under Corporation Code § 307, Yenawine had the authority to constitute a quorum in hiring Hall ‘as the sole remaining director authorized to act to protect BFFB’s interests’ after Koons’ alleged taking of BFFB funds. (Opp., 6.)” (Order of 04/24/23.)

Thus, Plaintiffs have articulated three possible bases that grant Yenawine authority to initiate this lawsuit under Corp. Code §§ 307, 310(a) and (b), and 316(c). However, the FAC is devoid of any facts that would permit the court to find that Yenawine has alleged sufficient facts to permit the finding that he had the authority to bring this action, including against a non-director and non-shareholder party like Defendant Daleyn. More importantly, Plaintiffs did not cite what bylaws permitted Yenawine to remove Koons as a director due to the suspicion that Koons had looted or misappropriated BFFB’s assets and allowed Yenawine to act as a sole director and owner of BFFB and bring this action against Defendants.

As the FAC is devoid of facts to show standing, Defendant Daleyn’s demurrer to the entire FAC is granted with leave to amend. The court now addresses Daleyn’s demurrer to the three specific causes of action alleged against it.[2]

The elements of a claim for breach of contract are: "(1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to the plaintiff." (Oasis West Realty, LLC v. Goldman (2011) 51 Cal. 4th 811, 821.) In addition, the complaint must demonstrate damages proximately caused by the breach. (St. Paul Ins. v. American Dynasty (2002) 101 Cal.App.4th 1038, 1060.) Furthermore, “the complaint must [also] indicate on its face whether the contract is written, oral, or implied by conduct.” (Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal.App.3d 452. at 458-59 citing CCP, § 430.10(g).) “If the action is based on an alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written instrument must be attached and incorporated by reference.” (Id. at p. 459 [internal citations omitted].)

Defendant Daleyn demurs to the breach of contract cause of action on the basis that Plaintiff fails to articulate what contract Daleyn breached.

In opposition, Plaintiffs allege that discovery has produced written contracts between Daleyn and BFFB. The FAC fails to state the specific provisions of these contracts breached by Daleyn. Moreover, there are no allegations that Daleyn had contracts with Yenawine.

Accordingly, the demurrer to the breach of contract claim is sustained with leave to amend.

To plead a cause of action for conversion, one must allege (1) the plaintiff’s ownership or right to possession of personal property; (2) defendant’s disposition of the property inconsistent with plaintiff’s rights; and (3) resulting damages. (Fremont Indemnity Co. v. Fremont General Corp.(2007) 148 Cal.App.4th 97, 119.) “Money may be the subject of conversion if the claim involves a specific, identifiable sum . . . .” (WelcoElectronics, Inc. v. Mora(2014) 223 Cal.App.4th 202, 209.)

Defendant Daleyn demurs to the conversion cause of action on the basis that Plaintiff fails to allege a fixed sum. Plaintiff does not dispute that no specific sum is alleged and instead asserts that Plaintiffs can amend the Complaint to allege the most current amount discovered to have been converted.

The demurrer to the cause of action for conversion is granted with leave to amend.

"The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach.” (Meister v. Mensinger (2014) 230 Cal.App.4th 381, 395.) A fiduciary relationship is “any relation existing between parties to a transaction wherein one of the parties is duty bound to act with the utmost good faith for the benefit of the other party.” (Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1338.) “Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another.” (Ibid.) “[B]efore a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.” (Ibid.)

Defendant Daleyn demurs to the breach of fiduciary duty cause of action on the basis that Plaintiff fails to allege that Daleyn owed a fiduciary duty to Plaintiffs.

Plaintiffs allege that the breach of fiduciary duty cause of action is sufficiently pled because Plaintiff alleges Daleyn through its contracts with BFFB and by exercising access to BFFB’s private financial information, including tax information, used such information to convince Yenawine to grantee leases, approve loans and documents that were contrary to BFFB’s and Yenawine’s interests. (FAC ¶¶ 14-15, 18, 42.)

Plaintiffs must show what specific provisions of the contract between BFFB and Daleyn show that Daleyn understood and accepted to act as a financial fiduciary to Plaintiff BFFB and Yenawine. (See City of Hope National Medical Center v. Genentech, Inc. (2008) 43 Cal.4th 375, 386 [“These contractual provisions indicate that the parties's common goal was to achieve a mutually beneficial arrangement, not that Genentech had undertaken a fiduciary obligation ‘to act on behalf of and for the benefit of another.’”].) The conclusory allegation that Daleyn “undertook fiduciary duties to BFFB to protect and not misuse its information” is conclusory and insufficient to support a claim for breach of fiduciary duty. (FAC ¶ 14.)

Therefore, the demurrer to the breach of fiduciary duty cause of action is granted with leave to amend.

Defendant Daleyn’s demurrer to the FAC is sustained with 10 days leave to amend. A Non-

Appearance OSC Re: Amended Complaint is set for March 22, 2024, at 8:30 a.m. Defendant

[1] Pursuant to CCP § 430.41, the meet and confer requirement has been met. (Russell Decl. ¶ 2.)

[2] The court notes that the third cause of action for fraud is not alleged against Defendant Daleyn.