Judge Lynette Gridiron Winston, Case Number: 23PSCV00450, Date: 2023-10-10 Tentative Ruling

Judge: Lynette Gridiron Winston, Case: 23PSCV00450, Date: 2023-10-10 Tentative Ruling

Demurrer of Defendant Rui Chen to the Complaint

TENTATIVE RULING
Chen’s demurrer is OVERRULED in its entirety.

Chen is ordered to file an answer to the complaint within 10 days of the date of this order.

BACKGROUND
On February 14, 2023, Plaintiff Martin Zheng (“Plaintiff”) filed this action against Defendants Magni Industry (“Magni”) and Rui Chen (“Chen”), alleging causes of action for breach of contract, fraud, and breach of fiduciary duty.[1]

On June 12, 2023, Chen filed a demurrer to Plaintiff’s complaint. On July 28, 2023, Plaintiff opposed the demurrer. On August 3, 2023, Chen replied.

MEET AND CONFER
Plaintiff contends that Chen did not adequately meet and confer before filing this demurrer. (Code Civ. Proc., § 430.41.) However, inadequately meeting and conferring cannot be a basis for overruling a demurrer. (Id., § 430.41, subd. (a)(4).) Accordingly, the Court finds that Chen’s meet and confer efforts are sufficient and will consider the demurrer. (Yao Decl., ¶ 2.)

LEGAL STANDARD
A demurrer is a pleading used to test the legal sufficiency of other pleadings. It raises issues of law, not fact, regarding the form or content of the opposing party's pleading (complaint, answer or cross-complaint). (Code Civ. Proc., § 422.10; see Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) It is not the function of the demurrer to challenge the truthfulness of the complaint; and for purposes of ruling on the demurrer, all facts pleaded in the complaint are assumed to be true. (Donabedian, supra, 116 Cal.App.4th at p. 994.)

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack; or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318; Donabedian, supra, 116 Cal.App.4th at p. 994.) No other extrinsic evidence can be considered. (Ion Equip. Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881 [error for court to consider facts asserted in memorandum supporting demurrer]; see also Afuso v. United States Fid. & Guar. Co. (1985) 169 Cal.App.3d 859, 862 [disapproved on other grounds in Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287] [error to consider contents of release not part of court record].)

A demurrer can be utilized where the “face of the complaint” itself is incomplete or discloses some defense that would bar recovery. (Guardian North Bay, Inc. v. Superior Court (2001) 94 Cal.App.4th 963, 971-972.) The “face of the complaint” includes material contained in attached exhibits that are incorporated by reference into the complaint; or in a superseded complaint in the same action. (Frantz v. Blackwell (1987) 189 Cal.App.3d 91, 94; see also Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505 [“[W]e rely on and accept as true the contents of the exhibits and treat as surplusage the pleader’s allegations as to the legal effect of the exhibits.”]).

A demurrer can only be sustained when it disposes of an entire cause of action. (Poizner v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119; Kong v. City of Hawaiian Gardens Redev. Agency (2003) 108 Cal.App.4th 1028, 1046.)

DISCUSSION
Procedural Issues

Although not raised in Plaintiff’s opposition, the Court notes multiple procedural issues that render Chen’s demurrer defective and therefore subject to being overruled. First, neither Chen nor Chen’s counsel signed the notice or the memorandum of points and authorities in support of the demurrer. (See generally, Notice and Memorandum of Points and Authorities (7/12/23).) This alone renders Chen’s demurrer defective. Code of Civil Procedure section 128.7(a) provides that, “[e]very pleading, petition, written notice of motion, or other similar paper shall be signed by at least one attorney of record in the attorney's individual name, or, if the party is not represented by an attorney, shall be signed by the party… An unsigned paper shall be stricken unless omission of the signature is corrected promptly after being called to the attention of the attorney or party.” (Code Civ. Proc., § 128.7(a)) [emphasis added]. Nothing in the Court’s file indicates that Plaintiff apprised Chen of this defect or that Chen corrected the issue promptly thereafter.

Second, Chen has not actually provided a demurrer. What Chen has instead provided is a notice of demurrer and a memorandum of points and authorities in support of a demurrer. (See A. Demurrers, Cal. Prac. Guide Civ. Pro. Before Trial Ch. 7(I)-A [“The demurring party must file with the court, and serve on the other party, the following: • Demurrer; • Notice of Hearing (see ¶ 7:110 ff.); • Memorandum of Points and Authorities; [CRC 3.1112(a)] • Proof of service. [CCP § 1005(b); CRC 3.1300(c)].” [emphasis added].) The demurrer is separate from the notice and the memorandum of points and authorities. (See Id.)

Third, Chen’s demurrer fails to comply with Code of Civil Procedure section 430.60, which provides that, “[a] demurrer shall distinctly specify the grounds upon which any of the objections to the complaint, cross-complaint, or answer are taken. Unless it does so, it may be disregarded.” (Code Civ. Proc., § 430.60) [emphasis added]. Chen fails to specify each ground upon which Chen demurs to Plaintiff’s complaint. It is not enough that Chen mentions the grounds for the demurrer in the memorandum of points and authorities. (See Id.)

Finally, Chen was required to specify in a separate paragraph each ground for demurrer to the complaint and the causes of action contained therein. (Cal. Rules of Court, rule 3.1320, subd. (a) [“[e]ach ground of demurrer must be in a separate paragraph and must state whether it applies to the entire complaint, cross-complaint, or answer, or to specified causes of action or defenses.”]) Chen’s demurrer fails to comply with these requirements.

In addition to the procedural deficiencies noted above, Chen’s demurrer also fails on substantive grounds.

First Cause of Action – Breach of Contract
“A cause of action for breach of contract requires pleading of a contract, plaintiff's performance or excuse for failure to perform, defendant's breach and damage to plaintiff resulting therefrom. (4 Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 476, p. 570.) A written contract may be pleaded either by its terms—set out verbatim in the complaint or a copy of the contract attached to the complaint and incorporated therein by reference—or by its legal effect. (Id., §§ 479, 480, pp. 572–573.)” (McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1489.)

The Court finds that Chen’s demurrer for failure to state a cause of action as to the first cause of action for breach of contract is unavailing. The Complaint has a signed copy of the share transfer agreement (the “Agreement”) attached to it as Exhibit 3, plus text message communications between the parties regarding the Agreement. (Compl., Exs. 3, 4.) The issue regarding the date of August 17, 2022 being alleged in paragraph 20 in the Complaint appears simply to be a typo, as other parts of the Complaint allege that Plaintiff signed the Agreement on August 17, 2021. (Compl., ¶ 12.) While there are some discrepancies in the Complaint,[2] the Court finds it alleges sufficient facts to apprise Chen of what is at stake in this action, namely that Plaintiff invested $100,000 with Defendants but that Plaintiff has not received any dividends or a full refund per the terms of the Agreement. (Compl., ¶¶ 12, 14-16.) Additionally, the Court finds unpersuasive Chen’s contention that the Complaint contains conclusory allegations regarding the lack of shareholder meetings. It is unclear how else Plaintiff would allege the absence of a condition occurring or otherwise prove a negative at the pleading stage. The Court finds that the Complaint pleads sufficient facts alleging the existence of a contract, plaintiff's performance, defendant's breach and damage to plaintiff resulting therefrom.

Accordingly, the Court OVERRULES the demurrer as to the first cause of action for breach of contract.

Second Cause of Action – Fraud
To plead a cause of action for fraud, Plaintiff must allege facts showing: “‘(1) the defendant represented to the plaintiff that an important fact was true; (2) that representation was false; (3) the defendant knew that the representation was false when the defendant made it, or the defendant made the representation recklessly and without regard for its truth; (4) the defendant intended that the plaintiff rely on the representation; (5) the plaintiff reasonably relied on the representation; (6) the plaintiff was harmed; and (7) the plaintiff's reliance on the defendant's representation was a substantial factor in causing that harm to the plaintiff.’” (Graham v. Bank of Am., N.A. (2014) 226 Cal.App.4th 594, 605-606) [internal citation omitted].

“In California, fraud must be pled specifically; general and conclusory allegations do not suffice. [Citations.] ‘Thus ‘ “the policy of liberal construction of the pleadings ... will not ordinarily be invoked to sustain a pleading defective in any material respect.’ ” [Citation.] [¶] This particularity requirement necessitates pleading facts which show how, when, where, to whom, and by what means the representations were tendered.’ [Citation]. A plaintiff's burden in asserting a fraud claim against a corporate employer is even greater. In such a case, the plaintiff must ‘allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.’ [Citation]. (Lazar v. Superior Ct. (1996) 12 Cal.4th 631, 645.)

The Court finds Plaintiff has alleged fraud with sufficient specificity here. Plaintiff alleged the false representations. (Compl. ¶ 28.) Plaintiff attached a copy of the allegedly fake bank records Plaintiff received from Chen and upon which Plaintiff allegedly relied before proceeding with the investment. (Compl., ¶¶ 30-33, Exs. 2, 5.) The Court also notes that the various text message communications between Plaintiff and Chen are dated and clearly identify who the parties are and who made what representations regarding the investment. (Compl., Ex. 2.)

Therefore, the Court OVERRULES the demurrer as to the second cause of action for fraud.

Third Cause of Action – Breach of Fiduciary Duty
“The elements of a claim for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) its breach, and (3) damage proximately caused by that breach.” (O'Neal v. Stanislaus Cnty. Employees' Ret. Assn. (2017) 8 Cal.App.5th 1184, 1215) [internal citation omitted]. “Officers and directors owe a fiduciary duty to stockholders.” (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 179.)

The Court finds Chen’s demurrer as to the third cause of action for breach of fiduciary duty also to be unavailing. Chen argues in a conclusory fashion that the allegations do not state a cause of action for breach of fiduciary duty. Chen makes other arguments that are directly contradicted by the allegations of the Complaint or are not supported by the law. With respect to obtaining a personal advantage, Plaintiff alleges Chen took Plaintiff’s investment money and transferred it to Chen’s own personal account. (Compl., ¶ 37.) As to whether Chen knowingly engaged in misconduct or that he undertook to act on behalf of and for the benefit of another, those allegations may support a claim for breach of fiduciary duty, but they are not necessary to state such a claim. (See O’Neal, supra, 8 Cal.App.5th at p. 1215; see Small, supra, 30 Cal.4th at p. 179 [failing to comply with annual report requirements under Corp. Code § 1501(a) constitutes breach of fiduciary duty].) With respect to entering into a fiduciary relationship, Plaintiff correctly notes in the opposition that the Complaint alleges Chen is the CEO of Magni, which renders Chen an officer of Magni who owes a fiduciary duty to Plaintiff as a shareholder. (Small, supra, 30 Cal.4th at p. 179; Compl., ¶ 7, Ex. 1.) Plaintiff also alleges Chen failed to let Plaintiff inspect Magni’s financial documents or conduct shareholder meetings, among other things, in breach of his fiduciary duty. (Compl., ¶¶ 14, 37.) Finally, Plaintiff alleges that he suffered damage no less than $70,000. (Compl., ¶ 38.)

Accordingly, the Court OVERRULES the demurrer as to the third cause of action for breach of fiduciary duty.

Alter Ego
“A claim against a defendant, based on the alter ego theory, is not itself a claim for substantive relief, e.g., breach of contract or to set aside a fraudulent conveyance, but rather, procedural, i.e., to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice.” (Hennessey's Tavern, Inc. v. Am. Air Filter Co. (1988) 204 Cal.App. 3d 1351, 1359) [internal citation omitted].

Although not addressed by the parties’ respective briefings, the Court notes that alter ego liability is not a separate cause of action. (See Id.). The Court also notes that, while the Caption Page of the Complaint appears to list a fourth cause of action for alter ego, the body of the Complaint only contains a heading entitled “Alter Egos of MAGNI and RUI”, (Compl., 8:14), whereas the first three causes of action specifically identify themselves as causes of action, (Compl., 5:14-15, 6:15-16, and 7:19-20). The Court construes this to mean that Plaintiff is not alleging a fourth cause of action for alter ego liability, but rather only a means of imposing liability on Chen. (See Hennessy’s Tavern, Inc., supra, 204 Cal.App.3d at p. 1359.) Thus, since it is not a cause of action, there is nothing to demur to on the basis for failure to state a cause of action. (See Code Civ. Proc., § 430.10, subd. (e); see also Poizner, supra, 148 Cal.App.4th at p. 119 [demurrer can only be sustained when it disposes of entire cause of action].)

Moreover, even substantively speaking, the Court finds the Complaint sufficiently alleges facts to support an alter ego theory of liability between the Defendants. For example, as Plaintiff notes in the opposition, the Complaint alleges facts showing that Chen commingled corporate funds of Magni with Chen’s own personal funds. (Compl., ¶ 40, Ex. 9; see also Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 838) [internal citations omitted].

Therefore, the Court OVERRULES the demurrer regarding alter ego liability.

CONCLUSION

Chen’s demurrer is OVERRULED in its entirety.

Chen is ordered to file an answer to the complaint within 10 days of the date of this order.

[1] The Caption Page of the Complaint also includes what appear to be a fourth cause of action for alter ego and a fifth cause of action for damage, but the body of the Complaint does not allege alter ego as a separate cause of action, nor is there any separate fifth cause of action for damage. The first three causes of action are the only causes of action alleged in the Complaint.

[2] E.g., the Agreement appears as though it was executed on August 1, 2021 rather than August 17, 2021 as Plaintiff alleges. (Compl., Ex. 3; see also Moran v. Prime Healthcare Mgmt., Inc. (2016) 3 Cal. App. 5th 1131, 1145-1146) [“While the ‘allegations [of a complaint] must be accepted as true for purposes of demurrer,’ the ‘facts appearing in exhibits attached to the complaint will also be accepted as true and, if contrary to the allegations in the pleading, will be given precedence.’”] [internal citation omitted]. However, this discrepancy does not constitute failure to state a cause of action.