Judge James C. Chalfant, Case Number: 24STCV02973, Date: 2024-04-09 Tentative Ruling

Chester P. Kim, et al. v. Alex Myung Cha, et al., 24STCV02973

Tentative decision on demurrer: overruled

Defendant Alex Myung Cha (“Cha”) demurs to the first cause of action of the First Amended Complaint (“FAC”) filed by Plaintiffs Chester P. Kim (“Kim”), Howard Park (“Park”), and Al Ilsoon Choe (“Choe”).

The court has read and considered the moving papers, opposition, and reply, and renders the following tentative decision.

Plaintiffs filed the Complaint on February 5, 2024. On February 7, 2024, Plaintiffs filed the FAC, which is the operative pleading. The FAC is made against Defendants Cha, Young Nae Lee, aka Brandon Lee (“Lee”), Benedict J. Pak (“Pak”), and Los Angeles Korean Festival Foundation (“Foundation”), a California corporation, as a nominal Defendant. Plaintiffs moved for declaratory and injunctive relief for violations of Corporations Code section 5527 for (1) the election of Cha, Lee, and Pak as directors, (2) the election of Cha as Chairperson of the Board, and (3) the expulsion of Kim, Park, and Choe as directors.

The Foundation is a California, non-profit public benefit corporation which was founded in 1974 and later incorporated under the name LAHKFF CORP on August 13, 1999. FAC, ¶1. On February 20, 2008, its name was changed to its current title of “Los Angeles Korean Festival Foundation”. Id. The Foundation works year-round in organizing a four-day festival (“Festival”) that carries out the mission of providing the community with a festival that is an instrument of inclusivity, advocating cultural diversity by celebrating not only Korean cultural heritage but also that of numerous ethnic groups residing in Los Angeles. FAC ¶ 10.

On March 23, 2021, the Foundation’s Board of Directors (“Board”) consisted of Moo Han Bae (“Bae”), Kim, Park, and Choe. FAC, ¶22. The Foundation has no members outside of its directors. Id. On March 23, 2021, the Board amended and adopted the current Bylaws(“Bylaws”) that governed the events giving rise to the Complaint. Id.

The Festival of 2022 was held in September of 2022. FAC, ¶26. Pursuant to Article 5, Section 17 and the power it vested in the Board to deliberate finances, the report of the Festival’s finances was typically made at the regular Board meeting in December of each year. FAC, ¶¶25-26. Hence, the financial report, along with the CPA’s report, was supposed to be made at the December 2022 Board meeting. FAC, ¶26. In 2022, Bae was chairperson and Kim was auditor. FAC, ¶26. Prior to the December 2022 Board meeting, Plaintiffs demanded that Bae produce the financial reports. FAC, ¶26. Bae never produced the requested financial documents concerning the 49th Festival. Id. Plaintiffs subsequently continued to request the financial reports. FAC, ¶27.

During the Board meeting on January 23, 2023, Bae suggested making three individuals (Defendants) additional directors on the Board. FAC, ¶29. One of the qualifications necessary to be elected as a director on the Board was “a person who has paid $10,000 in director fees to the Foundation. Id. At said Board meeting, Bae, Kim, and Choe were present, but Park was absent due to a scheduling conflict. FAC, ¶30. During the discussions about electing Defendants to the Board, Bae represented to Plaintiffs that each individual Defendant had fulfilled the prerequisite $10,000 director fee payment to the Foundation. FAC, ¶30. In reliance on Bae’s misrepresentation, Kim and Choe voted for the election of Defendants to the Board. Id.

On July 25, 2023, the Board learned that Defendants had not made their prerequisite payments. FAC, ¶31. Bae explained to the Board that he had “generously allowed” Defendants to pay an initial $5000 and then the remaining $5,000 would be paid in full before the upcoming September 2023 festival. Id. Yet, pursuant to Article 5, Section 13 (Qualification of Directors), Bae did not have the authority to override the Bylaws’ qualification of directors. FAC, ¶32. Thus, Defendants’ election to the Board was both fraudulent and invalid. Id.

On September 18, 2023, Plaintiffs, as directors of the Foundation, filed a complaint with the California Attorney General against Bae. FAC, ¶33. This complaint was filed in response to Bae’s continued refusal to produce financial documents relating to the 49th festival in violation of Article 7 (Financial Discal Year), Section 21 (Fiscal Year) of the Bylaws. FAC, ¶33. On September 25, 2023, Plaintiffs received written acknowledgment of the complaint from the Department of Justice. FAC, ¶34.

At an October 19, 2023 Board meeting, Plaintiffs demanded the financial documents for the 50th Festival which had taken place earlier that month. FAC, ¶¶36-37. Plaintiffs objected to the validity of Defendants as directors and questioned if they had paid the remaining $5,000 prior to the October 2023 festival, as Bae previously had represented they would. FAC, ¶38. In response, each Defendant wrote a $5,000 check during the meeting. Id. Tension at the Board meeting escalated as Plaintiffs maintained the invalidity of Defendants’ election as directors. Id.

The October 2023 Board meeting adjourned and was reconvened on December 20, 2023. FAC, ¶41. At this meeting, Plaintiffs maintained their position about Defendants’ director status and Bae questioned Plaintiffs why the September 2023 Attorney General complaint was filed against him. FAC, ¶42.

The December 2023 Board meeting adjourned and was subsequently reconvened on January 3, 2023. FAC, ¶44. There were four written items on agenda (1) the 2023 festival settlement audit; (2) preparation for the 2024 festival; (3) election of the Board chairperson; and (4) explanation of JoonAng Ilbo newspaper articles relating to the Attorney General complaint.

When it came time to elect a new chairperson, Defendants elected Cha. FAC, ¶47. Plaintiffs voted against the election of Cha and subsequently maintained that his election as chairperson was invalid. FAC, ¶48.

Following the election of Cha, Defendants then moved for the expulsion of Plaintiffs Kim, Park, and Al from their respective positions and status as directors. FAC, ¶50. The Bylaws have no provision excluding Board members from voting on the expulsion of a director. FAC, ¶51.

On January 12, 2024, just over a week after the January 2, 2024 Board meeting, an updated Statement of Information of the Foundation was filed, declaring Cha as the chief executive officer, Brandon as the secretary, Benedict as the chief financial officer, and Bae as a Board member. FAC, ¶56.

The FAC alleges three causes of action under Section 5527, seeking a judicial determination as to (1) the validity of the election or appointment of Defendants Cha, Lee, and Pak as directors of the Foundation; (2) the validity of the election of Defendant Cha as the chairperson of the Board at the January 3, 2024 board meeting; and (3) the validity of the expulsion and removal of Plaintiffs as directors at the January 3, 2023 boarding meeting.

Demurrers are permitted in administrative mandate proceedings. CCP §§1108, 1109. A demurrer tests the legal sufficiency of the pleading alone and will be sustained where the pleading is defective on its face.

Where pleadings are defective, a party may raise the defect by way of a demurrer or motion to strike or by motion for judgment on the pleadings. CCP §430.30(a); Coyne v. Krempels, (1950) 36 Cal.2d 257. The party against whom a complaint or cross-complaint has been filed may object by demurrer or answer to the pleading. CCP §430.10. A demurrer is timely filed within the 30-day period after service of the complaint. CCP § 430.40; Skrbina v. Fleming Companies, (1996) 45 Cal.App.4th 1353, 1364.

A demurrer may be asserted on any one or more of the following grounds: (a) The court has no jurisdiction of the subject of the cause of action alleged in the pleading; (b) The person who filed the pleading does not have legal capacity to sue; (c) There is another action pending between the same parties on the same cause of action; (d) There is a defect or misjoinder of parties; (e) The pleading does not state facts sufficient to constitute a cause of action; (f) The pleading is uncertain (“uncertain” includes ambiguous and unintelligible); (g) In an action founded upon a contract, it cannot be ascertained from the pleading whether the contract is written, is oral, or is implied by conduct; (h) No certificate was filed as required by CCP §411.35 or (i) by §411.36. CCP §430.10. Accordingly, 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. The face of the pleading includes attachments and incorporations by reference (Frantz v. Blackwell, (1987) 189 Cal.App.3d 91, 94); it does not include inadmissible hearsay. Day v. Sharp, (1975) 50 Cal.App.3d 904, 914.

The sole issue on demurrer for failure to state a cause of action is whether the facts pleaded, if true, would entitle the plaintiff to relief. Garcetti v. Superior Court, (1996) 49 Cal.App.4th 1533, 1547; Limandri v. Judkins, (1997) 52 Cal.App.4th 326, 339. The question of plaintiff’s ability to prove the allegations of the complaint or the possible difficulty in making such proof does not concern the reviewing court. Quelimane Co. v. Stewart Title Guaranty Co., (1998) 19 Cal.4th 26, 47. The ultimate facts alleged in the complaint must be deemed true, as well as all facts that may be implied or inferred from those expressly alleged. Marshall v. Gibson, Dunn & Crutcher, (1995) 37 Cal.App.4th 1397, 1403. Nevertheless, this rule does not apply to allegations expressing mere conclusions of law, or allegations contradicted by the exhibits to the complaint or by matters of which judicial notice may be taken. Vance v. Villa Park Mobilehome Estates, (1995) 36 Cal.App.4th 698, 709.

For all demurrers filed after January 1, 2016, the demurring party must meet and confer in person or by telephone with the party who filed the pleading for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer. CCP §430.31(a). As part of the meet and confer process, the demurring party must identify all of the specific causes of action that it believes are subject to demurrer and provide legal support for the claimed deficiencies. CCP §430.31(a)(1). The party who filed the pleading must in turn provide legal support for its position that the pleading is legally sufficient or, in the alternative, how the complaint, cross-complaint, or answer could be amended to cure any legal insufficiency. Id. The demurring party is responsible for filing and serving a declaration that the meet and confer requirement has been met. CCP §430.31(a)(3).

Defendant Cha demurs to the FAP’s first cause of action on two separate grounds: (1) the FAC is barred by the nine-month statute of limitations set forth in Corporations Code section 5527 (“section 5527”) and (2) the cause of action is uncertain, pursuant to Code of Civil Procedure section 430.010(f). He contends that the fraud exception in section 5527 is inapplicable because Plaintiffs did not allege fraud with sufficient particularity. Dem. at 3.

Cha does not demur to the FAC’s remaining causes of action, and no other Defendant joins his demurrer.[1]

On February 22, 2024, Defendant Cha emailed Plaintiffs’ counsel of record inviting him to telephonically meet and confer regarding Plaintiff’s FAC. Dem., Ex. A. Cha stated his intention to file a demurrer with respect to the first cause of action for the lack of specificity as pled with the allegations of fraud connected to the validity of the election. Id. Cha and Plaintiffs’ counsel exchanged email correspondence until Friday, February 23, 2024 when it became clear no agreement would be reached. Id.

Under Corporations Code Section 5527, an action challenging the validity of an election, appointment, or removal of a director or directors must be commended within nine months after the election, appointment, or removal. If no such action is commenced, in the absence of fraud, any election, appointment, or removal of a director is conclusively presumed valid nine months thereafter. Corp. Code, § 5527.

Defendant Cha’s argument that the first cause of action is time-barred against him relies on an argument that Plaintiffs have not sufficiently pled a claim for fraud that exempts them from the nine-month statute of limitations. Dem. at 5-6. Cha reasons that Plaintiffs cannot rely on the fraud exception because they have not, and cannot, allege fraud with the requisite facts. Dem. at 6. Cha sets forth the elements of a fraud claim and cites to the California Supreme Court on the need to plead fraud with specificity: “Accordingly, the rule is everywhere followed that fraud must be specifically pleaded . . . the policy of liberal construction of the pleadings . . . will not be ordinarily invoked to sustain a pleading defective any material respect.” Committee on Children’s Television, Inc. v. General Foods Corp., (1983) 35 Cal. 3d 197, 216.

As Plaintiffs respond, they are not alleging a fraud cause of action. Opp. at 5-6. Instead, Plaintiffs are claiming that the statutory assumption in section 5527 that the election of Defendants as directors is presumed valid does not apply because they have alleged fraud in the election itself. Id.

Cha cites no authority that the elements of a fraud cause of action must be pled to qualify for section 5527’s fraud exception. Nevertheless, although Cha argues otherwise (Reply at 3), Plaintiffs have specifically alleged fraud resulting in the election of Defendants. The FAP alleges that that Bae misrepresented at a special board meeting on January 23, 2023 that Defendants each had made the prerequisite payment of the $10,000 director fee to the Foundation. Plaintiffs relied on this misrepresentation in voting to appoint Defendants as directors and did not discover that a misrepresentation had been made until the July 25, 2023 Board meeting. These allegations are sufficient to show that section 5527’s fraud exception applies.

Cha points out that Plaintiffs fail to allege any misrepresentation made by him. Reply at 3. The answer is that section 5527’s fraud exception does not require fraud by the prospective director; it only requires fraud in the election of directors, regardless of who made the misrepresentation.[2]

Cha argues that Plaintiffs cannot rely on the discovery rule because the FAC discloses sufficient facts for them to be suspicious of Bae’s handling of the Foundation’s finances as early as December 2022 when he refused multiple requests to disclose the Foundation’s financial report for the previous Festival. FAC ¶¶ 26-27. Under the delayed discovery rule, Plaintiffs had a duty to investigate. Doe v. Roman Catholic Bishop of Sacramento, (2010) 189 Cal.App.4^th 1423, 1432. Reply at 4-5.

The problem with Cha’s argument is that there is no direct connection between Bae’s representation that Defendants had paid $10,000 to the Foundation and his refusal to provide the Foundation’s financial report for the previous Festival. There is no reason to believe that the financial report for the Festival would have disclosed Defendants’ failure to pay the Foundation $10,000 each. Bae’s refusal to provide the report at the December 2022 Board meeting does not necessarily create a suspicion about his representation about Cha’s payment.

The demurrer to the Petition is overruled. Defendant Cha has ten days to answer only.

[1] Plaintiffs present declarations from Kim, Park, and Choe in support of their opposition, but the court cannot consider extrinsic evidence on demurrer. See Blank v. Kirwan , supra, 39 Cal.3d at 318.

[2] Finally, Plaintiffs argue that they were not required to bring an action immediately after they discovered the fraud, and they had nine months to do so as a result of equitable tolling. Opp. at 8. Cha does not argue otherwise and the court need not decide whether equitable tolling applies.