Judge Gail Killefer, Case 22STCV33976 2023-02-22 Tentative Ruling

CASE NAME: Century Rooter and Jetting Service, Inc., et al. v. Douglas Knight, et al.

OPPOSING PARTIES: Plaintiffs, Century Rooter and Jetting Service, Inc., Robert Rose Sr., Robert Rose, Jr., and Michael Rose

TENTATIVE: Defendants’ demurrer to the Complaint is sustained. Century only is granted 30 days leave to amend the first cause of action; Plaintiffs are granted 30 days leave to amend the remaining causes of action. Defendants are to give notice.

This action arises out of the shares held in Plaintiff Century Rooter and Jetting Service, Inc. (“Century”). Plaintiff Robert Rose, Sr. (“Rose Sr.”) holds 55 shares; Plaintiff Robert Rose, Jr. (“Rose Jr.”) holds 15 shares; and Plaintiff Michael Rose (“Plaintiff Michael”) holds 5 shares. Defendants Douglas Knight (“Douglas”) and Vicki Knight (“Vicki”) own the remaining 25 shares, for a total of 100 shares of Century. Defendant James Knight (“James”), son of Douglas and Vicki, is also a plumber who worked for Century. Rose Sr., Rose Jr., Michael, and Douglas are all plumbers who worked for Century. Vicki worked in Century’s offices and handled Century’s finances. The Complaint alleges Vicki was terminated from her position with Century for “financial mismanagement.” The Complaint further alleges Douglas, Vicki, and James, used their positions as minority shareholders to enrich themselves and to dilute Plaintiffs’ stake in Century.

Plaintiffs’ Complaint alleges the following causes of action: (1) breach of fiduciary duty against Douglas and Vicki, (2) conversion—Century against all Defendants, (3) misappropriation of trade secrets—Century against all Defendants, (4) intentional interference with contractual relations—Century against all Defendants, (5) intentional interference with prospective economic advantage—Century against all Defendants.

Defendants now demur to the entirety of the Complaint. Plaintiffs oppose the motion

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.)

“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).)

Defendants contend the first cause of action fails “because there was no fiduciary relationship.” (Demurrer, 6-7.) Defendants argue that the mere act of being a shareholder in Century “does not result in owing a fiduciary duty.” (Id.) “Plaintiffs plead no facts to support the alleged existence of a fiduciary duty owed by Douglas and Vicki Knight, either to the corporation or to the majority shareholders. Instead, they merely state in conclusory fashion that such duty was owed. Douglas and Vicki Knight were minority shareholders. There is no allegation that they were officers or directors.” (Id.)

Defendants further argue that the first cause of action operates as both a direct action by the corporation, and as a derivative action by the majority shareholders on behalf of the Century corporation. (Dem., 7.) Defendants contend the first cause of action is ripe for demurrer as there is a misjoinder of claims since direct and derivative actions are “mutually exclusive.” (Id.; citing Schuster v. Gardner, (2005) 127 Cal.App.4th 305, 311-12; Bader v. Anderson, (2009) 179 Cal.App-4th 775,793.) Defendants therefore contend the “gravamen of claims of [Rose Sr.] and his sons is injury to the Corporation—they are alleging that corporate funds were diverted. California courts have repeatedly held that similar claims are derivative.” (Dem., 7-8; citing Avikian v. WTC Fin. Corp., (2002) 98 Cal.App.4th 1108.) Defendants also contend that as the first cause of action is derivative in nature, it must comply with Corp. Code § 800(b) and show “with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort,” as well as provide sufficient notice to the corporation of the complaint. (Dem., 8-9.)

“Here, Century is a party to the case as a plaintiff and is specifically alleging claims on its own. There is no reason for the individual plaintiffs to allege breach of fiduciary duty claim on behalf of the corporation. Moreover, the individual plaintiffs ignored Section 800 and instead filed suit, (1) with only conclusory allegations, (2) no specific allegations of futility and (3) without compliance with the Advance Notice Requirement prior to suit, for what appears to be an effort to gain leverage against the in-laws in the lawsuit recently filed by the Knights. Thus, the standing of individual plaintiffs to prosecute this derivative suit is non-existent.” (Id.)

In opposition, Plaintiffs first request leave to amend the complaint to “properly” plead that Defendants Vicki and Douglas “were also officers and directors” of Century. (Opposition, 4.) “There is no point conducting an extensive legal analysis of fiduciary duties until these allegations are properly before the Court, and plaintiffs request leave to do so.” (Id.) Plaintiffs also reallege some specific details of the alleged “scam” they contend Defendants partook in taking funds from Century and used such monies for personal expenses. (Opp., 2-4.) However, Plaintiffs do not dispute the distinction between direct and derivative actions, and Defendants’ contention that the individual Plaintiffs’ claims are derivative in nature.

In reply, Defendants again assert that the individual Plaintiffs lack standing to bring their derivative claim for breach of fiduciary duty on behalf of the corporation, as it creates a misjoinder of claims as “the corporation and the individual plaintiffs are alleging breach of fiduciary duty on identical facts.” (Reply, 2-5.) The court agrees.

Liberally construing the allegations of the Complaint in favor of Plaintiffs, the court finds the first cause of action as currently pled creates a misjoinder of claims because it brings together direct and derivative claims which shall remain mutually exclusive. Further, as individual Plaintiffs allege these claims on behalf of the corporation and by resting on the same set of general facts, their derivative claim fails to comply with the standards set forth by Corp. Code § 800. As Plaintiffs have requested leave to amend to allege further details regarding the fiduciary duties of the Defendants to the corporation, the court finds such leave to be reasonable in order to facilitate a more factually specific pleading.

For these reasons, Defendants’ demurrer to this cause of action is sustained as to both the Century’s direct claim for lack of sufficient facts to show a fiduciary duty, and as to the individual Plaintiffs’ derivative claim for lack of standing and misjoinder. Century alone is granted leave to amend the first cause of action.

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; it is not necessary that each coin or bill be earmarked.” (Welco Electronics, Inc. v. Mora (2014) 223 Cal.App.4th 202, 209.)

Defendants contend the second cause of action fails because it alleges “that some unspecified ‘funds’ were taken,” which is insufficient to state a claim for conversion. (Demurrer, 9-10.)

In opposition, Plaintiffs contend that the second cause of action is sufficiently pled because “Century demands the return of all property wrongfully taken by defendants,” which is sufficient to support a claim for conversion. (Opposition, 5.) In reply, Defendants contend that the Complaint does not in fact allege a specific sum of money, as the Complaint does not state a specific sum owed and the referenced invoices of the Complaint do not “reflect the only payments in dispute.” (Reply, 6-7.)

Here, the Complaint alleges that defendants stole the monies owned by Century “through the scams” as described by the Complaint and “demands the return of all property wrongfully taken by defendants.” (Complaint ¶¶ 24,26.)

The court agrees with Defendants that the second cause of action is insufficiently pled because the Complaint does not allege that Plaintiff Century was owed a specific, identifiable sum.

The California Uniform Trade Secrets Act (“CUTSA”) is codified in Civil Code §§ 3426 through 3426.11 and occupies common law trade secret misappropriation claims. (See K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc. (2009) 171 Cal.App.4th 939, 954.) Civil Code section 3426.7 concerns displacement and provides that CUTSA “does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret, (2) other civil remedies that are not based upon misappropriation of a trade secret, or (3) criminal remedies, whether or not based upon misappropriation of a trade secret.” (Civ. Code, § 3426.7(b).) CUTSA thus displaces claims based on the same nucleus of facts as trade secret misappropriation. (See Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4th 210, 232; K.C. Multimedia, Inc., supra, 171 Cal.App.4th at 962.) CUTSA “does not displace noncontract claims that, although related to a trade secret misappropriation, are independent and based on facts distinct from the facts that support the misappropriation claim.” (Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 506.)¿¿

“[T]he determination of whether a claim is based on trade secret misappropriation is largely factual.” (Id. at 505.)¿¿

Under CUTSA, a trade secret has four elements: (1) it must be comprised of “information”; (2) it must not be “generally known”; (3) it must derive “independent economic value” from the fact that it is a secret; and (4) it must be the subject of “reasonable” efforts to “maintain its secrecy.” (Cal. Civ. Code § 3426.1(d); see Gemini Aluminum Corp. v. California Custom Shapes, Inc. (2002) 95 Cal.App.4th 1249, 1263.) A misappropriation includes disclosure or use of a trade secret of another without consent. (See Civ. Code, § 3426.1(b).)¿¿

Thus, the Complaint must state facts constituting claims that are independent and distinct from those supporting a trade misappropriation claim. (See Angelica Textile Services, Inc., supra, 220 Cal.App.4th at 506; Silvaco Data Systems, supra, 184 Cal.App.4th at 232; K.C. Multimedia, Inc., supra, 171 Cal.App.4th at 962.)¿

Defendants contend the third cause of action fails because “the Complaint alleges no ultimate facts demonstrating the existence of a trade secret, and fails to describe the trade secret...” (Dem., 10.) Further, Defendants contend the items listed in the third cause of action “are not trade secrets, and are not described with sufficient particularity to separate them from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade.” (Id.)

In opposition, Plaintiffs contend Defendants “are continuing to take protected trade secrets of Century including but not limited to Century’s customer lists, customer identification, and financial information,” as is alleged in the Complaint. (Opp., 5.)

In reply, Defendants contend the Complaint fails to include specific factual allegations to show what trade secrets have been allegedly taken, and further argues that a former employee has the right to compete with a former employer for the business of the customers of his former employer. (Reply, 7; citing Cal Francisco Inv. Corp. v. Vrionis, (1971) 14 Cal.App.3d 318, 323.)

Liberally construing the allegations of the Complaint in favor of Plaintiffs, the court finds the third cause of action is insufficiently pled. The Complaint fails to plead specific allegations to show what was allegedly taken to be trade secrets, and further fails to allege with sufficient specificity how such trade secrets were allegedly misappropriated.

Similarly, as stated above, Defendants further contend that the fourth and fifth causes of action “are based on the same nucleus of facts as the misappropriation of trade secrets claim for relief, and are therefore preempted by the [CUTSA].” (Dem., 11-12.)

Here, a review of the Complaint shows the fourth and fifth causes of action rely on the same set of facts as the third cause of action, stating “defendants knew of these contracts, and intended to disrupt the performance of these contracts by taking the customers using protected trade secrets of Century.” (Complaint ¶¶35-40.)

The court agrees with Defendants that the fourth and fifth causes of action are merely duplicative of the third cause of action, and are preempted by CUTSA. (Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4th 210, 232.) Specifically, both causes of action again rely on Defendants’ alleged taking of trade secrets to show an interference in both contractual relations and prospective economic advantage. Therefore, the fourth and fifth causes of action are insufficiently pled.

For these reasons, Defendants’ demurrer to the fourth and fifth causes of action is sustained.

Defendants’ demurrer to the Complaint is sustained. Century only is granted 30 days leave to amend the first cause of action; Plaintiffs are granted 30 days leave to amend the remaining causes of action. Defendants are to give notice.

[1] Defendants submit the declaration of their counsel, John A. Belcher (“Belcher”) to demonstrate compliance with statutory meet and confer requirements. Belcher attests that on December 14, 2022, he sent Plaintiff’s counsel a meet and confer letter outlining the alleged deficiencies in the Complaint. (Belcher Decl. ¶ 3.) The parties were able to meet and confer telephonically on “multiple” occasions but did not reach an agreement. (Belcher Decl. ¶4.) The Belcher Declaration is sufficient for purposes of CCP § 430.41 and 435.5.