Judge: Gail Killefer, Case: 23STCV14660, Date: 2024-01-16 Tentative Ruling
Case Number: 23STCV14660 Hearing Date: February 9, 2024 Dept: 37
HEARING DATE: Friday, February 9, 2024
CASE NUMBER: 23STCV14660
CASE NAME: Patrick Muh-En Lu v. Lootably, Inc.
MOVING PARTY: Plaintiff/Cross-Defendant
Patrick Muh-En Lu
OPPOSING PARTY: Defendant/Cross-Complainant
Lootably, Inc.
TRIAL DATE: Not Set
PROOF
OF SERVICE: OK
PROCEEDING: Demurrer to
Cross-Complaint
OPPOSITION: 29 November 2023
SUPP.
OPPOSITION: 24 January 2024
REPLY: 6 December
2023
SUPP.
REPLY: 31 January
2024
TENTATIVE: The court finds that Delaware law applies to the Employment
Agreement and the Stock Restriction Agreement as well as any other dispute
arising from said agreements. The court also sustains the
Plaintiff/Cross-Defendant’s demurrer to the Cross-Complaint with 10 days leave
to amend. The Non-Appearance OSC re Amended Complaint
is set for February 23, 2024, at 8:30 a.m.
Plaintiff/Cross-Complainant to give notice.
Background
on
June 23, 2023, Patrick Muh-En Lu (“Plaintiff”) filed a Complaint against
Lootably, Inc. (“Defendant” or “Lootably”) and Does 1 to 10. Plaintiff seeks
declaratory relief regarding whether his shares in Defendant have vested making
him a 25% owner.
On August 18, 2023, Defendant
filed a Cross-Complaint against Plaintiff and Roes 1 to 50. The Cross-Complaint
alleges six causes of action: (1) Recission of Employment Agreement, (2)
Recission of Stock Restriction Agreement, (3) Intentional Misrepresentation,
(4) Negligent Misrepresentation, (5) Breach of Fiduciary Duty, and (6) Breach
of Contract.
On September 18, 2023, Plaintiff/Cross-Defendant
filed a demurrer to the Cross-Complaint. Defendant/Cross-Complainant opposes
the demurrer. At the January 16, 2024, hearing, the matter was continued to
allow the parties to submit supplemental briefs as to whether Delaware law
should be used to interpret the Employment Agreement and Stock Restriction
Agreement, and whether Delaware law applies to the entire action.
I. Legal
Standard
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. (Id.)
III. Request for
Judicial Notice
The Court may take judicial notice of records of any court of
record of the United States. (Evid. Code, § 452(d)(2).) However, the court may
only judicially notice the existence of the record, not that its contents are
the truth. (Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1565.)
Defendant Lootably requests judicial notice of the following:
Request for Judicial Notice No.
1. Complaint filed June 23, 2023, Case No. 23STCV14660, in the Los Angeles
County Superior Court captioned Lu v. Lootably, Inc.
Request for Judicial Notice No.
2. Cross-Complaint filed August 18, 2023, Case No. 23STCV14660, in the Los
Angeles County Superior Court captioned Lootably, Inv. V. Lu.
Defendant’s request for judicial
notice is granted.
III. Demurrer[1]
The Cross-Complaint alleges
that in July 2022, Defendant’s Chief Executive Office wanted to purchase the
domain name “Playfull.com” from its owner Patrick Muh-En Lu (“Plaintiff” or
“Lu”). (CC ¶ 7.) During discussions, it became clear that Plaintiff was not
interested in selling the domain name but because Plaintiff and Defendant had
similar business models, the discussion shifted to Plaintiff joining Defendant
based on Plaintiff’s representation that through his business contacts, he
could grow Defendant’s business. (CC ¶¶ 7, 8.) Specifically, on or about March
20, 2023, Plaintiff represented to Ethan Grezi (“Grezi), Chief Executive Office
of Lootably, and Joshua Verdehem (“Verdehem”), Lootably’s Chief Technology
Officer, that Plaintiff knew people “at some of the largest
marketing/advertising/esports companies, and that he would use his ‘contacts’
to drive substantial business to LOOTABLY.” (CC ¶¶ 9, 10.)
Based on Plaintiff’s
representations, Lootably offered Plaintiff employment, and an employment
agreement (the “Employment Agreement”) was signed on April 21, 2023. (CC ¶ 11.)
Plaintiff was hired to serve as Lootably’s President and Chief Operating Officer
(“COO”), which required Plaintiff to report directly to Lootably’s Chief
Executive Officer, Geczi, and devote his full business time and attention to
furthering Lootably’s business interests. (CC ¶ 11, Ex. A [Employment
Agreement].)
The Employment Agreement,
subject to Lootably’s Board approval, granted Lu a restricted stock grant (the
“Stock Grant”) of One Million shares of the Company’s Common Stock (the
“Shares”) at a price per Share equal to the fair market value of the Company’s
Common Stock as determined by the Board on the date of grant, pursuant to the
terms of a written stock restriction agreement (“Equity Agreement”). (CC ¶ 12.)
Under the Employment Agreement, Lu was entitled to equity compensation unless
he was terminated for cause as determined by the Board. (CC ¶ 12.) The
Cross-Complaint further alleges that Plaintiff’s employment with Lootably was
“at-will, in that Lootably may terminate Lu’s employment and all related
compensation and other rights and benefits at any time and for any reason.” (CC
¶ 13.) Lootably, also “reserved the right, in its sole and absolute discretion,
to prospectively modify or rescind any of the terms set forth in the employment
agreement at any time during Lu’s employment.” (CC ¶ 13.)
On April 21, 2023, Lootably and
Plaintiff entered into a Stock Restriction Agreement, wherein all vesting of
stock was dependent on Plaintiff’s employment with Lootably and Plaintiff’s
right to equity would be null and void if he was terminated for cause or if
Lootably, in its sole discretion, modified or rescinded any of the terms set
forth in the Employment Agreement. (CC ¶ 14, Ex. B [Stock Restriction
Agreement].)
The Cross-Complaint alleges
that Plaintiff’s representation about his ability to grow Lootably’s business was
false, that Plaintiff misappropriated Lootably’s assets by engaging in
self-entertainment and self-promotion rather than Lootably’s business
development, and that Plaintiff neglected his duties as President and COO, thus
breaching his fiduciary duties to Lootably and its stockholders. (CC ¶ 16.) The
Cross-Complaint alleges that during Plaintiff’s employment, Plaintiff only
generated $500.00 in revenue and due to the above, Plaintiff materially
breached the Employment Agreement and related agreements. (CC ¶ 16.) On June
12, 2023, Lootably informed Plaintiff that his employment was terminated, and
he was removed as a Director, President, and Chief Operating Officer of
Lootably.
After Plaintiff filed suit
against Lootably, Defendant Lootably filed a Cross-Complaint. Plaintiff demurs
to the first, second, third, fourth, and fifth causes of action in the
Cross-Complaint on the basis that the Cross-Complaint fails to state facts sufficient
to constitute a cause of action.
A. Delaware Choice of Law Provision
Plaintiff argues that the laws
of the State of Delaware govern the Employment Agreement and the Stock
Restriction Agreement at issue.
Paragraph 8 of the Employment
Agreement states:
This Offer Letter shall be governed by the laws of the State
of Delaware without regard to conflict-of-law principles.
(CC Ex. A at p. 4, ¶ 8.)
Section (e) of Paragraph 12 of
the Stock Restriction Agreement states:
Governing Law. This agreement and actions
taken thereunder shall be governed by and construed in accordance with, the
laws of the State of Delaware, applied without regard to conflict of law
principles.
(CC Ex. B at p. 8, ¶ 12(e)
[underline original].)
Plaintiff’s demurrer is based
on the fact that the causes of action pled in the Cross-Complaint are barred
under Delaware law. In opposition, Defendant/Cross-Complainant does not dispute
that Delaware law applies to the agreements at issue but asserts that
California law applies to the demurrer because Plaintiff did not request
judicial notice of the Delaware authority cited and did not supply Defendant
with copies of the Delaware cases cited.
“If the proponent of the choice of law clause
demonstrates that the chosen state has a substantial relationship to the
parties or their transaction, or that a reasonable basis otherwise exists for
the choice of law, the parties' choice will generally be enforced unless the
other side can establish both that the chosen
law is contrary to a fundamental policy of California and that California has a
materially greater interest in the determination of the particular issue.”
(Gramercy Investment Trust v. Lakemont Homes Nevada, Inc. (2011) 198 Cal.App.4th 903, 909 (Gramercy Investment).)
Defendant/Cross-Complainant Lootably
admits that the state of Delaware is Lootably’s place of incorporation and that
this is sufficient to meet the rational basis test for applying Delaware law to
agreements at issue. (Supp. Opp. at pp. 2:26-3:6.) “[T]he mere fact that one of
the parties to the contract is incorporated in the chosen state is sufficient
to support a finding of ‘substantial relationship,’” or a rational basis for
choosing that state “for the parties' choice of law.” (“Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 899; see also Maxim Crane Works, L.P. v. Tilbury Constructors (2012)
208 Cal.App.4th 286, 292.)
Therefore, Plaintiff has met his burden
for showing why Delaware law should apply to the interpretation of the
agreements and the entire action because all the causes of action pled in the
Cross-Complaint arise out of the contracts and the parties’ relationship to
such contracts. (Supp. Reply at p. 2, fn. 1.) Defendant’s opposition and
supplemental brief fail to challenge this contention. Instead, Defendant
asserts that Delaware law does not apply because Delaware law is contrary to a
fundamental policy of California and California has a material greater interest
in the determination of this issue. (Gramercy Investment, supra, 198 Cal.App.4th at p. 909)
Accordingly,
if the proponent of the clause (here, [Plaintiff]) demonstrates that the chosen
state has a substantial relationship to the parties or their transaction, or
that a reasonable basis otherwise exists for the choice of law, the parties'
choice generally will be enforced unless the other side can establish both that
the chosen law is contrary to a fundamental policy of California and that
California has a materially greater interest in the determination of the
particular issue.
(Washington Mutual Bank, FA v.
Superior Court (2001) 24 Cal.4th 906, 917.)
Defendant argues that Delaware law is
contrary to a fundamental California policy because CCP § 427.10 permits a
party to unite a cause of action with any other cause of action against the
opposing party in an action. (See also Solomon v. Walton
(1952) 109 Cal.App.2d 381, 387 [“It is well settled that a plaintiff may plead
and proceed to trial upon inconsistent causes of action when each arises out of
the same transaction and when the proofs and remedies available in each are
substantially the same”].)
In applying Delaware law, Defendant asserts
that its breach of fiduciary duty claim would be barred under Delaware law if
the claim is premised on the same facts as the breach of contract claim. (See Blue
Chip Capital Fund II Ltd. Partnership v. Tubergen (Del. Ch. 2006) 906 A.2d 827, 833 [If
the breach of fiduciary duty “dispute relates to rights and obligations
expressly provided by contract, the fiduciary duty claims would be
‘superfluous’”]; Nemec v. Shrader (Del. 2010) 991
A.2d 1120, 1129 [accord].)
Defendant asserts that because Plaintiff “cited
Delaware authority prohibiting dual causes of action based on the same
underlying facts flies in the face of California's codified fundamental public
policy permitting just that. (i.e., the chosen law is contrary to California's
fundamental policy. Prong 1 of the Washington Mutual Bank rule is met.).”
(Supp. Opp. at p. 4:15-18.) However,
CCP § 427.10 is a procedural law, not a substantive law that reflects a fundamental policy of California. The
fact that Defendant may be able to plead alternative causes of action does not
mean it can prevail under those causes of action if California law were to be
applied.
That Defendant’s breach of fiduciary duty
claims would be subsumed under its breach of contract claims if the offending
conduct is premised on the same facts as the breach of contract claims under
Delaware law, is not indicative that such application of the law is contrary to
a fundamental California policy.
“California courts will refuse to defer to the selected forum if to do so would
substantially diminish the rights of California residents in a way that
violates our state's public policy.” (America Online, Inc. v.
Superior Court (2001) 90 Cal.App.4th 1, 12 (America Online).) In America Online,
the appellate court found that the remedies provided by California’s Consumer
Legal Remedies Act (CLRA) contained an anti-waiver provision and the law signaled
its remedial purposes and importance of protecting consumers. The Court found that the remedies provided by
the CLRA were superior to the ones provided by the Virginia Consumer Protection
Act of 1977 (VCPA). (Id. at pp. 15-16.) Similarly in Hall v. Superior
Court (1983) 150 Cal.App.3d 411, the appellate court determined
that if Nevada Law were applied to a securities litigation, the plaintiff would
lose the benefit of the California's Corporate Securities Law of 1968, which
would otherwise govern the transaction in question. (Id. at . 417.)
CCP § 427.10 is a procedural law that can be
waived by parties via contractual agreement and is not a substantive law like
the CLRA or the Corporate Securities Law of 1968. Moreover, Defendant fails to
cite cases showing that California courts have recognized that California
procedural laws reflect a fundamental California policy to the same extent as
California substantive laws and policy. Here, Defendant can plead around the holding in Nemec v. Shrader (Del. 2010) and Blue Chip Capital Fund II Ltd. Partnership v. Tubergen
(Del. Ch. 2006) by alleging facts showing that its breach of fiduciary duty claims
arise from different obligations or facts that are separate from the
obligations outlined in the agreements at issue. Thus, Defendant is not being deprived of the
right to bring a breach of fiduciary cause of action under Delaware law.
“A bedrock principle of contract law in
California has always been that competent parties should have ‘the utmost
liberty of contract’ ‘to arrange their affairs according to their own judgment
so long as they do not contravene positive law or public policy.’ [Citations.]”
(Series AGI West Linn of Appian Group Investors DE, LLC v. Eves
(2013) 217 Cal.App.4th 156, 164 [internal quotations omitted].) Therefore,
it would be in favor of California policy to apply Delaware law when the
parties agreed to a specific contract provision and it does not violate a
fundamental policy of California.
Lastly,
Defendant fails to show that California has a materially greater interest in
the determination of the particular action because Defendant is a Delaware
corporation. The parties expressly
agreed that the Delaware law should govern any disputes related to the
agreements at issue. Moreover, despite Plaintiff being a California resident
and the Defendant in the Cross-Complaint, by seeking to enforce the Delaware
law choice-of-law provision, Plaintiff has waived the right to assert that
California law should apply to this agreement. (Supp. Reply at p. 2, fn. 1.)
Based on the above, the court finds that
Delaware law applies to the parties' dispute and all claims arising from the
breach of the Employment Agreement and the Stock Agreement.
B. Demurrer
to First, Second, Third, and Fourth Causes of Action for Recission of
Employment Agreement, Stock Restriction Agreement, Intentional Misrepresenting,
and Negligent Misrepresentation.
The first through fourth causes of action
are premised on the fact that Lu stated he had many “contacts” that “could
substantially grow” Defendant’s business, and that he “would use” said contacts
to “substantially increase [Defendant’s] business and that Defendant relied on
Plaintiff’s 23STCV14660 “ability to substantially increase”
Defendant’s business in offering him the agreements. (CC ¶¶ 7, 9, 10, 19, 28,
37, 43.)
“But these sorts of statements are the softest of information, and very
difficult to base a fraud claim on for good reason. They are simply statements of expectation or
opinion about the future of the company and the hoped for results of business
strategies. Such opinions and predictions are
generally not actionable under Delaware
law.” (Trenwick America Litigation Trust v. Ernst & Young, L.L.P. (Del. Ch. 2006) 906 A.2d 168, 209, aff'd sub nom. Trenwick America Litigation
Trust v. Billett (Del. 2007) 931 A.2d 438.)
The court agrees that Plaintiff’s
predictions about making Defendant’s business grow are opinions and predictions
that cannot be relied upon to support the first through fourth causes of
action. Had Defendant alleged that Plaintiff has no such contacts, then that
would be a misrepresentation of a past or present existing fact sufficient to
sustain the claims. However, the first through fourth causes of action are
premised on Plaintiff’s “lack of ability to substantially increase Lootably’s
business” and not the fact that he lacked contacts that would have helped
increase Defendant’s business. (CC ¶ 21.)
Accordingly, the demurrer to the first
through fourth causes of action is sustained with leave to amend.
C. Fifth Cause of Action for Breach of
Fiduciary Duty
Plaintiff asserts that because the fifth
cause of action for breach of fiduciary duty is premised on the same facts as
the breach of contract claim, the breach of fiduciary duty is barred under
Delaware law. (Nemec v. Shrader
(Del. Ch. 2010) 991 A.2d 1120, 1129; Blue Chip Capital Fund II, L.P. v.
Tubergen (Del. Ch. 2006) 906 A.2d 827, 833.)
The fifth cause of action alleges that
due to Defendant’s relationship with Plaintiff and Plaintiff’s duties as
President and Chief Operating Officer, Plaintiff breached his fiduciary duties.
(CC ¶¶ 48 - 50.) The breach of contract claim is premised on the fact that
Plaintiff was President and Chief Operating Officer of Defendant pursuant to
the Employment Agreement, and he failed to perform his duties by incurring extensive
expenses for self-entertainment and self-promotion that were not for the
benefit of Defendant. (CC ¶¶ 53, 55, Ex. A.) “During Lu's employment
he neglected his duties as President and Chief Operating Officer and, in so
doing, breached the fiduciary duties he owed to LOOT ABLY and its
stockholders.” (CC ¶ 55.)
Because
Defendant seeks to enforce obligations that arose out of the Employment
Agreement and that appear to be addressed by said agreement, the breach of
fiduciary claims appears to be barred because the Cross-Complaint fails to show
that the breach of fiduciary duties were not “superseded and negated any distinct fiduciary duties
arising out of the same conduct that constituted the contractual
breach.” (Nemec v. Shrader (Del. 2010) 991
A.2d 1120, 1129.)
Therefore, the demurrer to the fifth
cause of action is sustained with leave to amend.
Conclusion
The court finds that Delaware law applies to the Employment
Agreement and the Stock Restriction Agreement as well as any other dispute
arising from these agreements. The court also sustains the
Plaintiff/Cross-Defendant’s demurrer to the Cross-Complaint with 10 days leave
to amend. The Non-Appearance OSC re Amended Complaint is set for February
23, 2024, at 8:30 a.m.
Plaintiff/Cross-Complainant to give notice.