Judge: Jon R. Takasugi, Case: 21STCV40055, Date: 2022-08-04 Tentative Ruling

Case Number: 21STCV40055    Hearing Date: August 4, 2022    Dept: 17

Superior Court of California

County of Los Angeles

DEPARTMENT 17

TENTATIVE RULING

Defendants’ motion to stay in DENIED IN PART, GRANTED IN PART, consistent with this ruling.

On 11/1/2021, Plaintiff Xiaolu Zhou (Plaintiff) filed a shareholder derivative complaint for: (1) breach of fiduciary duty; (2) shareholder’s right of inspection and accounting; (3) fraud; (4) unfair business practices; (5) involuntary dissolution of the corporation; (6) failure to pay minimum hourly wages and overtime wages; (7) knowing and intentional failure to comply with accurate itemized employee wage statement provisions; (8) waiting time penalties; (9) civil penalties for Labor Code violations; and (10) breach of contract.

            Now, Defendants Ming Li and Yu Fan (collectively, Defendants) move to stay this entire action except for the Corporations Code section 2000 appraisal as ordered by the Court.

Discussion

            Through this motion, Defendants seek the following:

(1) staying the dissolution of Lab 57 Inc. (“Lab57”), as initiated by Plaintiff Xiaolu Zhou (“Plaintiff”), and all discovery and other proceedings in this action except for the §2000 appraisal as ordered by the Court;

(2) appointing three disinterested appraisers to separately appraise the value of the shares owned by Plaintiff in Lab57; and

(3) referring the matter to the appraisers so appointed for the purpose of separately ascertaining such value for Lab57.

Corporations Code §2000(a) provides, as follows: “Subject to any contrary provision in the articles, in any suit for involuntary dissolution, or in any proceeding for voluntary dissolution initiated by the vote of shareholders representing only 50 percent of the voting power, the corporation or, if it does not elect to purchase, the holders of 50 percent or more of the voting power of the corporation (the "purchasing parties") may avoid the dissolution of the corporation and the appointment of any receiver by purchasing for cash the shares owned by the plaintiffs or by the shareholders so initiating the proceeding (the "moving parties") at their fair value. The fair value shall be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation. In fixing the value, the amount of any damages resulting if the initiation of the dissolution is a breach by any moving party or parties of an agreement with the purchasing party or parties may be deducted from the amount payable to such moving party or parties, unless the ground for dissolution is that specified in paragraph (4) of subdivision (b) of Section 1800. The election of the corporation to purchase may be made by the approval of the outstanding shares (Section 152) excluding shares held by the moving parties.”

Corporations Code §2000(b) provides, as follows: “If the purchasing parties (1) elect to purchase the shares owned by the moving parties, and (2) are unable to agree with the moving parties upon the fair value of such shares, and (3) give bond with sufficient security to pay the estimated reasonable expenses (including attorneys' fees) of the moving parties if such expenses are recoverable under subdivision (c), the court upon application of the purchasing parties, either in the pending action or in a proceeding initiated in the superior court of the proper county by the purchasing parties in the case of a voluntary election to wind up and dissolve, shall stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair value of the shares owned by the moving parties.”

Corporations Code §2000(c) provides, as follows: “The court shall appoint three disinterested appraisers to appraise the fair value of the shares owned by the moving parties, and shall make an order referring the matter to the appraisers so appointed for the purpose of ascertaining such value. The order shall prescribe the time and manner of producing evidence, if evidence is required. The award of the appraisers or of a majority of them, when confirmed by the court, shall be final and conclusive upon all parties. The court shall enter a decree which shall provide in the alternative for winding up and dissolution of the corporation unless payment is made for the shares within the time specified by the decree. If the purchasing parties do not make payment for the shares within the time specified, judgment shall be entered against them and the surety or sureties on the bond for the amount of the expenses (including attorneys' fees) of the moving parties. Any shareholder aggrieved by the action of the court may appeal therefrom.”

Corporations Code §2000(d) provides, as follows: “If the purchasing parties desire to prevent the winding up and dissolution, they shall pay to the moving parties the value of their shares ascertained and decreed within the time specified pursuant to this section, or, in case of an appeal, as fixed on appeal. On receiving such payment or the tender thereof, the moving parties shall transfer their shares to the purchasing parties.”

            In opposition, Plaintiff argues that the invocation of section 2000 stays the dissolution cause of action alone, and not any of the remaining causes of action, and that bifurcation would not serve the interests of judicial economy.  In support, Plaintiff cites Goles v. Sawhney (2016) 5 Cal.App.5th 1014. There, plaintiff asserted causes of action for involuntary dissolution, accounting, injunctive relief, breaches of fiduciary duty, and money owed on a promissory note. In granting a stay, the trial court bifurcated the claims that fell under the scope of the stay: the causes of action for negligent preparation of tax returns and $60,000 due on promissory note were not stayed. Because the breaches of fiduciary duty were not personal claims, it was determined that they should be stayed along with the dissolution action until the appraisals were completed. Later, the trial court entered a judgment based on an average of the three appraisals. The Court of Appeal reversed because the Court, in entering the judgment, had not taken into account the derivative claims: “[A] determination of the fair value of the shares of a corporation under section 2000 includes an assessment of the value, if any, of pending derivative actions and their effect on the fair value of the shares. The trial court's order in this case did not comply with the provisions of section 2000, and therefore, must be reversed.” (Goles, supra, 5 Cal.App.5th at p. 1019.)

            Here, Plaintiff’s claims—with the exception of the first three causes of action—are not “derivative claims” but, rather, personal claims—they seek personal recovery for alleged Labor Code violations and breaches of personal contracts. Were Plaintiff to prevail on those causes of action, the damages would accrue to Plaintiff, personally, not to the corporation. As such, those claims are not derivative claims, and have no bearing on the appraisal process. (“[i]f successful, a derivative claim will accrue to the direct benefit of the corporation and not to the stockholder who litigated it,” (Goles, supra, 5 Cal.App.5th 1014, 1019, emphasis added.) 

            Given that the personal claims are not derivative claims which impact the valuation of the company, those claims are not properly stayed by invocation of section 2000. As such, the only question left is whether or not the first three causes of action (i..e, breach of fiduciary duty, shareholder’s right of inspection and accounting, and fraud) should be impacted by the section 2000 stay. For the reasons set forth in Goles, the Court believes that they should not be impacted.

Plaintiff’s derivative claims are based on allegations that Defendants improperly looted profits from Lab 57 and transferred them to Telebooky Inc. Accordingly, whether or not this conduct took place, and the amount of money that was taken if it did, impacts the true underlying value of the corporation. Plaintiff’s derivative claims may yield a potential recovery for the corporation, and thus are corporate assets which must be considered in determining fair value. (See Goles, supra, 5 Cal.App.5th at 1019. (“A derivative claim (or other claim that may yield a potential recovery for the corporation) is a corporate asset that must be considered when determining ‘fair value.’)

            As such, the Court agrees that the stay should apply only to the dissolution cause of action.

This leaves two remaining arguments raised by Plaintiff in opposition: (1) that Defendants should pay the cost of appraisers; and (2) that the proposed bond is insufficient.

            As for the first contention, Plaintiff does not cite any case law or statutory support to show that he should not be required to split the cost of appraisal. It is Plaintiff who seeks the dissolution of the corporation. Thus, the Court is not persuaded that it would be “manifestly unfair” to require him to split the costs of appraisal with Defendants 50/50. (Opp., 6: 2-4).

As to the second contention, the Court finds a $20,000 bond to be appropriate. Defendants’ proposal of a $10,000 bond is supported only by a single statement that this should be adequate given that there is only one corporation with a short operating history. (Li Decl., ¶ 10). However, the Court similarly finds Defendants’ proposed $50,000 bond unpersuasive given that it is not supported by any evidence. As such, the Court finds that a $20,000 bond is sufficient at this stage to cover the estimated reasonable expenses of appraisal. (Corp. Code §2000(b).)

            Based on the foregoing, Defendants’ motion to stay in denied in part, granted in part, consistent with this ruling.

It is so ordered.

Dated:  August    , 2022

   Hon. Jon R. Takasugi
   Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the court at smcdept17@lacourt.org by 4 p.m. the day prior as directed by the instructions provided on the court website at www.lacourt.org.  If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative.  If all parties to a motion submit, the court will adopt this tentative as the final order.  If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar. 

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