Judge Jill Feeney, Case Number: 23STCP01552, Date: 2023-10-23 Tentative Ruling

This is a verified petition for an order directing payment out of the Victims of Corporate Fraud Compensation Fund (“VCFCF”). Petitioner Aarus Enterprises obtained a judgment for damages totaling $600,000 against Burgerim Group, USA, Inc. After applying for relief from the VCFCF, the Secretary of State denied Petitioner’s application on the ground that Petitioner is a limited liability company and therefore not a “person” as defined in Corporations Code, Section 18.

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Proc., §§ 430.30, 430.70.) At the pleading stage, a plaintiff need only allege ultimate facts sufficient to apprise the Respondent of the factual basis for the claim against him. (Semole v. Sansoucie (1972) 28 Cal. App. 3d 714, 721.) A “demurrer does not, however, admit contentions, deductions or conclusions of fact or law alleged in the pleading, or the construction of instruments pleaded, or facts impossible in law.” (S. Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732 (internal citations omitted).)

A party filing a demurrer “shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” (Code Civ. Proc., section 430.41(a).) “The parties shall meet and confer at least five days before the date the responsive pleading is due. If the parties are not able to meet and confer at least five days prior to the date the responsive pleading is due, the demurring party shall be granted an automatic 30-day extension of time within which to file a responsive pleading, by filing and serving, on or before the date on which a demurrer would be due, a declaration stating under penalty of perjury that a good faith attempt to meet and confer was made and explaining the reasons why the parties could not meet and confer.” (Code Civ. Proc., section 430.41(a)(2).) A failure to meet and confer does not constitute grounds to sustain or overrule a demurrer. (See Code Civ. Proc., Section 430.41 (a)(4).)

Here, Respondent’s counsel testifies that he met and conferred with Petitioner’s counsel via telephone and the parties could not resolve their dispute over the Petition. Respondent satisfied the meet and confer requirements.

The VCFCF is a fund the California legislature established in 2002 for the purpose of providing restitution to the victims of corporate fraud. (Corp. Code, Section 2280.) When an “aggrieved person obtains a final judgment in a court of competent jurisdiction against a corporation based upon the corporation's fraud…the aggrieved person may, upon the judgment becoming final and after diligent collection efforts are made, file an application with the Secretary of State for payment from the fund.” (Corp. Code, Section 2282, subd. (a).)(bold added)

Respondent contends that the only natural persons and corporations are entitled to collect from the VCFCF. Respondent argues that is the case based upon Corporations Code Section 18, which reads as follows: “‘person’ includes a corporation as well as a natural person.” (bold added)

Respondent argues that because Title 1, Division 1 of the Corporations Code, the division containing the VCFCF statute, contains no other definition of “person,” the definition in Corporations Code, section 18 (adopted in 1947) governs construction of that division.

The touchstone for interpreting statutory language is “to determine the lawmakers’ intent.” (Delaney v. Superior Court (1990) 50 Cal.3d 785, 798.) A court is to look at the plain meaning of the statutory language, then to the legislative history and finally to the reasonableness of the proposed construction.

The words of the statute are to be analyzed and given their usual, ordinary meaning. When the statutory language is clear and unambiguous and thus subject to one reasonable construction, courts typically stop the analysis there. (Rea v. Blue Shield of California (2014) 226 Cal.App.4th 1209, 1224. (citations omitted).)

If the language of a statute may be reasonably interpreted in more than one way and hence is ambiguous, a court must look to the intent of the Legislature with an eye towards promoting the general purpose of the statute and avoiding absurd results. (Id. at 1224-1225 (citations omitted).)

The purpose of the VCFCF as stated by the Legislature is to compensate victims of corporate fraud who have been unable to collect judgments against corporations. The language of the statute includes that purpose, as does the legislative history.

The legislation, passed in 2002, was adopted as part of a corporate reform/accountability package in the wake of the Enron debacle and was meant to protect the public.(AB 55 8/26/2002 Hearing Senate Banking, Commerce and International Trade, Digest: What the Bill Does (“This bill would create the Victims of Corporate Fraud Compensation Fund . . . for the sole purpose of providing restitution to the victims of corporate fraud.”)

Given the purpose of the VCFCF, there is no basis to conclude as Respondent suggests that the Legislature wished to help individuals and corporations, but not limited liability companies. Such an interpretation would not fulfill the purpose of the legislation.

In statutory construction, the use of the word “includes” in a definition is typically a term of enlargement, not limitation. (Ornelas v. Randolph (1993) 4 Cal.4th 1095, 1101; Rea v. Blue Shield of California (2014) 226 Cal.App.4th 1209, 1227.) So, when “include” is used to reference particular items it may be properly read to cover other items in certain circumstances under the principle of ejusdem generis. (Id.)

Here, the circumstances call for an enlarged interpretation as there is no basis for treating limited liability companies differently from corporations or individuals with respect to the VCFCF. The Court notes that this is not a general interpretation of Section 18 that would necessarily apply in other circumstances, but rather an interpretation that harmonizes Section 18 and the VCFCF statute.

In 2004, the Secretary of State adopted regulations governing the VCFCF. Those regulations provided a definition of “person” that included limited liability companies. (Cal.Code. Regs., title 2, former Section 22500, subd.(d).)

Specifically, the bill revised and recast “the provisions governing administration of the Victims of Corporate Fraud Compensation Fund by the Secretary of State by codifying certain existing regulations promulgated by the Secretary of State and adding new statutory language to facilitate the approval of valid claims to the Fund.” (6/22/12 Committee Report for SB 1058, Bill Analysis, Committee on Banking and Finance)

The changes were made to facilitate the processing and approval of valid claims. Indeed, the purpose of the amendments was to address the fact that not many claims were being paid, an issue which had received attention in the Sacramento Bee. (Id.) The sponsor of the bill indicated that the purpose of the 2012 changes was “to ensure that all corporate fraud victims collect the restitution to which they are entitled, without enduring a bureaucratic nightmare.” (Senate Banking & Financial Institutions Committee, Analysis of Sen. Bill 1058 (2011-2012 Reg. Sess.) as amended March 26, 2012.)

Respondent cites a portion of the legislative history which states that under existing law the Corporations Code Section 18 defines person to include a corporation as well as a natural person to support the contention that only corporations and natural persons may apply for compensation. (Senate Judiciary Committee, Analysis of Sen. Bill No. 1058 (2011-2012 Reg. Sess.) as amended April 17, 2012.) However, this citation of existing law with its including language does not evidence any desire by the Legislature to limit the field of those who may apply for compensation to only corporations and natural persons, while excluding limited liability companies. Rather, the clear purpose of the amendments to the bill was to facilitate the processing of valid claims.

Respondents argue that there is a good policy reason to treat limited liabilities companies differently from corporations. The reason is that corporations fund the VCFCF, not limited liability companies and hence “it is not irrational to treat corporations and limited liability companies differently in this context. Corporations fund the program---¬ and enjoy its benefits---limited liability companies do not.” ( Reply at Pg. 5.) Respondent’s argument would make sense if Petitioner was seeking to collect for an unpaid judgment resulting from a fraud perpetrated by a limited liability company. Respondent’s argument holds no water in analyzing who qualifies as a victim who may apply for compensation.

Respondent demurs to the second cause of action for declaratory relief on the grounds that it is wholly derivative of the first cause of action for an order directing payment out of the VCFCF. Therefore, demurrer is overruled as to this cause of action also.