Judge: Glenn R. Salter, Case: 23-1306989, Date: 2023-08-17 Tentative Ruling
Defendants Aviation Consultants, Inc., and William Borgsmiller each filed a demurrer to the First Amended Complaint. Aviation Consultants filed a demurrer to the First and Second Cause of Action. Bogsmiller filed a demurrer only as to the First Cause of Action.
The demurrers are OVERRULED with 20 days to answer.
First Cause of Action—Breach of Fiduciary Duty
Aviation Consultants argues plaintiff has not pled a cause of action for breach of fiduciary duty because the alleged breaches of fiduciary duty are little more than allegations of breach of contract.
Plaintiff alleges Aviation Consultants stopped making cash distributions while it continued to allocate profits to him, and this was done so as to pressure plaintiff (and other minority shareholders) to sell their shares. Plaintiff alleges he was damaged because he incurred tax liability without having the corresponding cash distribution with which to pay the liability.
It is well settled that majority shareholders owe a fiduciary duty to minority shareholders to control the corporation in a manner that is fair, just, and equitable. They may not use their power to benefit themselves alone, or adversely affect the interests of the minority shareholders. (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108.)
If these allegations are proven true, the trier of fact could conclude that Aviation Consultants not only breached the contract but did so in a manner that breached its fiduciary duty to plaintiff.
Aviation Consultants relies on Applied Equipment Corp. v. Litton Saudi Arabia, Ltd. (1994) 7 Cal.4th 503 for the proposition that “[c]onduct amounting to a breach of contract becomes tortious only when it also violates an independent duty arising from principles of tort law.” But Applied Equipment involved a contract between a general contractor and a subcontractor and a claim for tortious interference with contract. Unlike here, the law does not impose a special duty between a general contractor and subcontractor.
Aviation Consultants also contends that plaintiff’s claims are derivative and should have been brought on behalf of the company rather than as an individual claim. But nothing in the first amended complaint suggests the plaintiff is seeking to recover anything for the benefit of the corporation. To the contrary, the allegations here are specific to the plaintiff as an individual. He contends that cash distributions were withheld for the purpose of creating pressure on him to sell his interest.
Further, plaintiff alleges Aviation Consultants concealed that it was selling shares of the company to Freeman Holdings Group. He was harmed because he lost out on the right to purchase shares in the company. Freeman Holdings now owns a controlling stake in Aviation Consultants. The loss of the opportunity to purchase a greater interest in the company (thereby preventing a change in control) could also be found by the trier of fact to constitute a breach of fiduciary duty. Again, this is an individual, not a derivative claim.
Borgsmiller’s demurrer essentially argues that a cause of action cannot be stated against him for aiding and abetting because no cause of action for breach of fiduciary duty has been pled against Aviation Consultants. However, as noted above, a claim for breach of fiduciary duty has been pled against Aviation Consultants.
Second Cause of Action—Breach of Contract
This claim for breach of contract is based on the same factual allegations as the claim for breach of fiduciary duty in the first cause of action.
The first issue appears to be a dispute about what is the correct operating agreement. The Third Cause of Action for Declaratory Relief focuses on that issue and plaintiff’s belief that the defendants have improperly changed and/or modified it.
The second issue is whether the operating agreement can be construed as a matter of law at the demurrer stage to demonstrate that the gloss put on it by plaintiff is simply a misreading of what is allowed under it.
Paragraph 47 of the First Amended Complaint alleges that Aviation Consultants “breached its obligations under the Operating Agreement, including its duty of good faith and fair dealing.” The facts underlying that claim—if proved true—state a cause of action. Whether that claim will survive challenges by summary judgment or trial is another matter.
Notice
The plaintiff shall give notice.