Judge Kerry Bensinger, Case Number: 24STCV00908, Date: 2024-09-25 Tentative Ruling

This action arises from a shareholder derivative dispute. The Crème Shop, Inc. (the Company or Defendant) is a cosmetics and skincare brand and manufacturer which was founded in South Korea. Plaintiff Sunna Kim (Kim or Plaintiff) and her family were the sole owners of the company. In 1988, the Company relocated to Los Angeles. Thereafter, Kim and her mother, Christina Kim, became the sole owners of the Company’s stock. In 2022, Kim and her mother sold a majority interest in the Company to LG H&H Co. Ltd. (LG). In exchange, Kim served as co-CEO of the Company with Young Chul Lee (Lee). Kim also served on the board of directors with Lee, Hye Young Moon, and Hong Gi Kim (collectively, Majority Director Defendants). As reflected in an employment agreement between Kim and LG, Kim had a “put option” whereby Kim and her mother could compel LG to purchase their minority interest in the Company at any time provided Kim resigned from her position as co-CEO with good reason or was terminated by the Company or LG without cause.

Conflict arose between Kim and Lee. On July 1, 2023, Kim submitted a notice of resignation with good reason. The resignation was to take effect on October 6, 2023. The notice triggered Kim’s put option. Days before the effective resignation date, on September 27, 2023, the Company purported to notify Kim she would be terminated for cause without ability or opportunity to cure. LG, Kim, and Kim’s mother are currently in arbitration in the International Chamber of Commerce concerning whether Kim resigned or was terminated for cause. Kim also alleges that Majority Director Defendants used the Company as an instrumentality to engage in a wasteful and tortious campaign of harassment against Kim and others, in breach of the fiduciary duties of loyalty and care owed by the Majority Director Defendants to the Company.

On January 12, 2024, Kim commenced this action individually and derivatively on behalf of the Company. On May 10, 2024, Kim filed the operative First Amended Complaint (FAC). In the FAC, Plaintiff asserts (1) a derivative action for breach of fiduciary duty against Majority Director Defendants, and (2) an accounting cause of action against the Company.

On July 12, 2024, the Company filed a Demurrer to the Second Cause of Action for Accounting in the FAC.

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, accepting the alleged facts as true.¿ (Nolte v. Cedars-Sinai Medical Center (2015) 236 Cal.App.4th 1401, 1406.)¿ “Because a demurrer challenges defects on the face of the complaint, it can only refer to matters outside the pleading that are subject to judicial notice.”¿ (Arce ex rel. Arce v. Kaiser Found. Health Plan, Inc. (2010) 181 Cal.App.4th 471, 556.)

Defendant argues the second cause of action for accounting fails for two reasons: (1) Plaintiff admits there is no amount that Defendant owes to Plaintiff, and (2) there is no explanation why Plaintiff cannot obtain the information she seeks through third-party discovery.

“An action for an accounting has two elements: (1) that a relationship exists between the plaintiff and defendant that requires an accounting and (2) that some balance is due the plaintiff that can only be ascertained by an accounting. (Sass v. Cohen (2020) 10 Cal.5th 861, 869 (cleaned up).) ‘An action for accounting is not available where the plaintiff alleges the right to recover a sum certain or a sum that can be made certain by calculation.’” (Fleet v. Bank of America N.A. (2014) 229 Cal.App.4th 1403, 1413 (quoting Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179).) “Generally, an underlying fiduciary relationship, such as a partnership, will support an accounting, but the action does not lie merely because the books and records are complex. [Citations.] Some underlying misconduct on the part of the defendant must be shown to invoke the right to this equitable remedy.” (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105, 1137 (Prakashpalan) [citing Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 594 (Union Bank)].)

The court finds Plaintiff’s accounting cause of action is defective. As alleged here, Plaintiff alleges wrongdoing on the part of Majority Director Defendants only. The FAC alleges, “Majority Director Defendants owe the Company and its shareholders fiduciary duties. [¶] Majority Director Defendants have abused the process that they were given to the company’s accounts be engaging in wasteful and conflicted transactions which were not for the benefit of the Company. [¶] The amount of money due from Majority Director Defendants to Company is presently unknown and cannot be ascertained without an accounting of the receipts and disbursements of the aforementioned transactions.” (FAC, ¶¶ 57-59.) There are no allegations the Company engaged in any wrongdoing.

Plaintiff attempts to avoid demurrer by raising two points: (1) the FAC alleges the Majority Director Defendants used the Company as its instrumentality for wrongful conduct, and (2) the authority upon which the Company relies for the proposition some wrongful conduct must be alleged against the defendant to support an accounting claim is distinguishable.

Plaintiff’s arguments do not persuade the court. The analysis begins and ends with inquiry whether an accounting cause of action can lie against a defendant for whom no wrongful conduct is alleged. The answer is no. The Company correctly cited Union Bank, supra, in support of this proposition. Plaintiff argues Union Bank does not apply here because that case arose from the granting of summary judgment in favor of the defendant on an accounting cause of action, among others, where there was no evidence (such as factually deficient discovery responses) to create a triable issue of fact. In other words, Plaintiff attempts to distinguish the procedural posture of this case. Although a court does not consider extrinsic matters when ruling on a demurrer, Plaintiff fails to contend with the general proposition that, even on demurrer, wrongful conduct must be alleged against the defendant to support an accounting cause of action. (See, e.g., Prakashpalan, 223 Cal.App.4th at. p 1137 (reversing trial court’s order sustaining a demurrer without leave to amend to an accounting cause of action because there were allegations of a wrongdoing by the defendant against whom the plaintiff sought an accounting).)

This result makes sense. After all, an accounting claim is a derivative claim. “A right to an accounting is derivative; it must be based on other claims.” (Janis v. California State Lottery Com. (1998) 68 Cal.App.4th 824, 833.) Here, Plaintiff’s accounting claim is derivative of her breach of fiduciary duty claim. That claim is asserted against Majority Director Defendants only. If an accounting claim exists, Plaintiff must assert it against Majority Director Defendants.

Plaintiff is ordered to file and serve her Second Amended Complaint within 15 days of the date of this order.

Kerry Bensinger

Judge of the Superior Court