Judge: Lynette Gridiron Winston, Case: 23PSCV00731, Date: 2023-10-11 Tentative Ruling

Case Number: 23PSCV00731    Hearing Date: January 31, 2024    Dept: 6

CASE NAME:  Bin Xu, et al. v. TMD Shops LLC, et al. 

Defendants TMD Shops LLC, Yuan Zhou and Xiaoyu Li’s Demurrer to First Amended Complaint 

TENTATIVE RULING

The Court SUSTAINS the demurrer to the First and Second Causes of Action. The Court will allow Plaintiffs to make an offer of proof to determine whether leave to amend should be granted here. 

Moving Parties are ordered to give notice of the Court’s ruling within five days of this order. 

BACKGROUND

This is a business dispute. On March 13, 2023, Plaintiffs Bin Xu (Xu), individually and derivatively on behalf of X-Planet LLC, and Shenzhen Famo Technology Co., Ltd (Famo) (collectively, Plaintiffs) filed this action against Defendants TMD Shops LLC (TMD), Yuan Zhou (Zhou), Xiaoyu Li (Li) (collectively, Moving Parties), X-Planet LLC (X-Planet), and Does 1 through 25. On November 9, 2023, the operative First Amended Complaint (FAC) was filed, alleging causes of action for misappropriation of funds and embezzlement (derivative), breach of fiduciary duties (direct), breach of fiduciary duties (derivative), member’s right of inspection & accounting (direct), fraud – intentional misrepresentations (direct), fraud – negligent misrepresentations (direct), common law trademark infringement, declaratory relief, accounting (derivative), and breach of contract. 

On December 12, 2023, Moving Parties filed the instant demurrer to the FAC. On January 18, 2024, Plaintiffs filed an opposition. On January 24, 2024 Moving Parties replied. 

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. (Id.)  

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

Meet and Confer

Per Code of Civil Procedure section 430.41, subdivision (a), Moving Parties were required to meet and confer before bringing this demurrer. (Code Civ. Proc., § 430.41, subd. (a).) The Court finds Moving Parties’ efforts to meet and confer to be sufficient. (Goerlinger Decl., ¶ 2.)           

First Cause of Action – Misappropriation of Funds and Embezzlement

“The nature and character of a pleading is to be determined from the facts alleged, not the name given by the pleader to the cause of action. [Citation.]” (Ananda Church of Self-Realization v. Massachusetts Bay Ins. Co. (2002) 95 Cal.App.4th 1273, 1281, italics in original.) Embezzlement is a criminal act, not a civil one. (See Pen. Code § 503.) A claim for conversion requires pleading “‘(a) plaintiff's ownership or right to possession of personal property, (b) defendant's disposition of property in a manner inconsistent with plaintiff's property rights, and (c) resulting damages.’” (Foster v. Sexton (2021) 61 Cal.App.5th 998, 1020-1021.) A conversion claim for money must specify a specific sum at issue. (Haigler v. Donnelly (1941) 18 Cal.2d 674, 681.) 

Moving Parties contend the First Cause of Action for misappropriation of funds and embezzlement fails to state a cause of action because embezzlement is not a civil cause of action under California law. They contend the First Cause of Action is really just a reiteration of Plaintiff’s prior claim for conversion only with a different label this time around. The Court agrees. 

Embezzlement is not a civil cause of action in California. (See Pen. Code § 503; Mohebbi v. Khazaen (N.D. Cal. 2014) 50 F.Supp.3d 1234, 1257.) The civil equivalent of embezzlement is conversion. (See Ferrick v. Santa Clara University (2014) 231 Cal.App.4th 1337, 1347, brackets in original [“Embezzlement requires conversion of trusted funds [or property] coupled with intent to defraud…”]) Thus, the Court construes Plaintiff’s First Cause of Action as one for conversion. (See Ananda, supra, 95 Cal.App.4th 1273, 1281.) 

The Court again finds the FAC fails to allege sufficient facts to constitute a cause of action for conversion. As stated previously, a generalized claim for money is not a proper subject for conversion. (See Voris v. Lampert (2019) 7 Cal.5th 1141, 1150.) “’[M]oney cannot be the subject of an action for conversion unless a specific sum capable of identification is involved.’ [Citations.] ‘[W]here the money or fund is not identified as a specific thing the action is to be considered as one upon contract or for debt’—or perhaps upon some other appropriate theory—but ‘not for conversion.’” (Id. at p. 1151.) “’[A] cause of action for conversion of money can be stated only where a defendant interferes with the plaintiff's possessory interest in a specific, identifiable sum’; ‘the simple failure to pay money owed does not constitute conversion.’” (Id., italics in original.) Here, Plaintiff Xu’s incorporated specific sum of money allegations are nothing more than a failure to pay money owed for goods sold. (See, e.g., FAC, ¶¶ 23, 45-46.) 

Moreover, the “at least $8,048,960.40” Plaintiff Xu complains of is based on the allegation that X-Planet would earn that as revenue if it sold all of the products received from FAMO. (FAC, ¶ 46.) However, until that money materializes, this allegation is purely speculative. “[I]t is fundamental that ‘damages which are speculative, remote, imaginary, contingent, or merely possible cannot serve as a legal basis for recovery.’ ” (Regalado v. Callaghan (2016) 3 Cal.App.5th 582, 602.) It is impossible for unearned money to be in anyone’s possession or to be a specific identifiable sum for purposes of conversion. 

Further, Plaintiff Xu still alleges that X-Planet has not paid FAMO $2,557,213.42 for products sold. (FAC, ¶ 23.) Based on these allegations, the injured party would be FAMO, not X-Planet. However, FAMO is not the party bringing the conversion claim here. Rather, Plaintiff Xu is bringing this claim derivatively on behalf of X-Planet. 

Therefore, the Court SUSTAINS the demurrer as to the First Cause of Action. The Court will allow Plaintiffs to make an offer of proof to determine whether leave to amend should be granted here. 

Second Cause of Action – Breach of Fiduciary Duty

To plead a cause of action for breach of fiduciary duty, the plaintiff must allege facts demonstrating the existence of a fiduciary relationship, its breach, and damages caused by the breach. (Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1405.) 

In a member-managed LLC, each member owes a duty of loyalty and a duty of care to the LLC and to the other members. [Corps.C. § 17704.09(a); see Sandy v. McClure (ND CA 2009) 676 F.Supp.2d 866, 883 (applying Calif. law); see also American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 CA4th 1451, 1480, 171 CR3d 548, 571 & fns. 18 & 19 (decided under prior law)] 

In a manager-managed LLC, each manager owes a duty of loyalty and a duty of care to the LLC and the members. Members who are not managers are relieved of the duties of loyalty and care. [Corps.C. § 17704.09(f)(1), (3); see Feresi v. The Livery, LLC (2015) 232 CA4th 419, 425-426, 182 CR3d 169, 174 (decided under prior law)]” 

(D. Management, Cal. Prac. Guide Pass--Through Entities Ch. 6-D, italics in original.) 

            Moving Parties contend the Complaint fails to state a cause of action for breach of fiduciary duty on the grounds that the alleged injury constitutes an injury to the company itself, citing PacLink Commc’ns Int’l., Inc. v. Superior Court. (2001) 90 Cal.App.4th 958. Moving Parties contend the gravamen of the FAC is harms against X-Planet, not Plaintiff Xu. The Court agrees. 

            “Because members of the LLC hold no direct ownership interest in the company's assets [citation], the members cannot be directly injured when the company is improperly deprived of those assets.” (PacLink Commc'ns Int'l, Inc., supra, 90 Cal.App.4th at p. 964.) “It is a general rule that a corporation which suffers damages through wrongdoing by its officers and directors must itself bring the action to recover the losses thereby occasioned, or if the corporation fails to bring an action, suit may be filed by a stockholder acting derivatively on behalf of the corporation. An individual [stockholder] may not maintain an action in his own right ... for destruction of or diminution in the value of the stock.... [Citation.]” (Id. at p. 965, ellipses in original and internal quotation marks omitted.) 

The Court agrees that Plaintiff Xu only alleges harm to X-Planet but still fails to allege facts showing damages to Xu personally. The allegations here are largely the same as before, alleging that Xu was deprived of the right to inspect the company’s books and records regarding distributions he would supposedly receive. (FAC, ¶ 55.) The FAC also again makes conclusory allegations of conversion of X-Planet’s assets and alleges that the formation of TMD as a competing business to X-Planet resulted in diminution of X-Planet’s distributions to Xu. (FAC, ¶ 55.) The Court finds these allegations to demonstrate an injury to X-Planet itself. Any diminution in the value of Plaintiff Xu’s interest would be incidental and not a basis for an individual claim by Plaintiff Xu. (See PacLink Commc'ns Int'l, Inc., supra, 90 Cal.App.4th at pp. 964-965; "'An individual may not maintain an action in his own right against the directors for destruction of or diminution in the value of the stock. . . .'" (Rankin v. Frebank Co. (1975) 47 Cal.App.3d 75, 95.) 

Additionally, it is unclear how Defendant Zhou’s alleged refusal to allow Plaintiff Xu to inspect X-Planet’s books and records caused injury to Plaintiff Xu for purposes of a breach of fiduciary duty claim. At most, Plaintiff Xu alleges that it deprived him of the possibility of learning what distributions he might have received. This is speculative. (Regalado, supra, 3 Cal.App.5th at p. 602 [speculative damages are no basis for legal recovery].) 

Based on the foregoing, the Court SUSTAINS the demurrer as to the Second Cause of Action. The Court will allow Plaintiffs to make an offer of proof to determine whether leave to amend should be granted here. 

CONCLUSION

The Court SUSTAINS the demurrer to the First and Second Causes of Action. The Court will allow Plaintiffs to make an offer of proof to determine whether leave to amend should be granted here. 

Moving Parties are ordered to give notice of the Court’s ruling within five days of this order.