Judge Margaret L. Oldendorf, Case Number: 23AHCV02935, Date: 2024-05-07 Tentative Ruling

Judge: Margaret L. Oldendorf, Case: 23AHCV02935, Date: 2024-05-07 Tentative Ruling

This is a dispute involving three brothers. Plaintiffs Yu Li (Yu) and Yong Li (Yong) allege that Yu and Yong’s older brother, Defendant Ji Li (Ji) defrauded them. The two Plaintiff brothers formed Plaintiff JWY Group Inc. (JWY) and appointed Ji secretary because Ji lived in the United States while Yu and Yong resided in China. The complaint alleges that the brothers signed a construction agreement in January 2013 for Ji to construct 4 condominiums, which were to be owned by JWY and paid for by the individual Plaintiffs. The Complaint alleges that the four condos, 6210, 6212, 6216 and 6218 Rosemead Blvd., Temple City, CA 91780 were subsequently constructed.

Plaintiff Yu moved into 6216 Rosemead Blvd. in 2022. Plaintiffs allege that Defendant Ji refused to provide the books and records of JWY; rented out the other three condos and collected rent for himself; and, unbeknownst to the Plaintiffs, obtained loans from Defendant HG Realty (HG) totaling $3,000,000, secured by deeds of trust against the condos.

The Complaint alleges that after the Plaintiffs did a cost accounting, Ji signed two promissory notes to his two younger brothers, agreeing to pay off the allegedly unauthorized loan. It appears that Ji has since defaulted on the loan, and Defendant HG Realty is threatening to foreclose on the four condos.

The Complaint alleges seven causes of action: (1) Cancellation of Written Instruments, (2) Fraud, (3) Intentional Concealment, (4) Breach of Fiduciary Duty,

Plaintiffs filed an ex parte application for the issuance of a TRO and an OSC re preliminary injunction on February 21, 2024. The Court denied the request for a Temporary Restraining Order but set a hearing on the motion for a preliminary injunction (See Minute Order dated 2/23/24). The Court deemed the TRO application to be Plaintiffs’ moving papers for a preliminary injunction motion. HG filed an opposition to the preliminary injunction on March 19, 2024. Plaintiffs filed a reply on March 25, 2024, including additional declarations.

The Court then continued the hearing on this motion from March 27, 2024, to May 7, 2024, to allow for additional briefing from both sides on agency law. Plaintiffs filed their requested brief on April 15, 2024. HG filed their requested brief on April 24, 2024.

Plaintiffs seek an injunction prohibiting HG and Ji from proceeding with the foreclosure of the four condos, or otherwise taking possession of the condos; as well as an injunction prohibiting Ji from destroying any of JWY’s books or records.

Plaintiffs also seek a mandatory injunction requiring Ji to turn over JWY’s books and records to Plaintiffs.

Code Civ. Proc. §526 (a) sets forth the bases upon which an injunction may issue:

(1) When it appears by the complaint that the plaintiff is entitled to the relief demanded, and the relief, or any part thereof, consists in restraining the commission or continuance of the act complained of, either for a limited period or perpetually.

(2) When it appears by the complaint or affidavits that the commission or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action.

(3) When it appears, during the litigation, that a party to the action is doing, or threatens, or is about to do, or is procuring or suffering to be done, some act in violation of the rights of another party to the action respecting the subject of the action, and tending to render the judgment ineffectual.

(5) Where it would be extremely difficult to ascertain the amount of compensation which would afford adequate relief.

(6) Where the restraint is necessary to prevent a multiplicity of judicial proceedings.

“ ‘[A] preliminary injunction is an order that is sought by a plaintiff prior to a full adjudication of the merits of its claim.’ (White v. Davis (2003) 30 Cal.4th 528, 554, 133 Cal.Rptr.2d 648, 68 P.3d 74, italics omitted.) ‘To obtain a preliminary injunction, a plaintiff ordinarily is required to present evidence of the irreparable injury or interim harm that it will suffer if an injunction is not issued pending an adjudication of the merits.’ (Ibid.)

“Trial courts ‘ “ ‘evaluate two interrelated factors when deciding whether or not to issue a preliminary injunction. The first is the likelihood that the plaintiff will prevail on the merits at trial. The second is the interim harm that the plaintiff is likely to sustain if the injunction were denied as compared to the harm that the defendant is likely to suffer if the preliminary injunction were issued.’ ” ’ (ITV Gurney Holding Inc. v. Gurney (2017) 18 Cal.App.5th 22, 28–29.)” Amgen, Inc. v. Health Care Services (2020) 47 Cal.App.5th 716, 731.)

Plaintiffs offer the declaration of Jia Wang, CFO of JWY and Yu’s wife. (Wang Decl. ¶¶ 3,4.) She declares that she now lives at one of the condos, 6216 Rosemead Blvd., with her husband and child. (Wang Decl. ¶¶ 6-7.) Wang declares that Ji “never told me that he signed Deed(s) of Trust encumbering the Temple City Property[.]” (Wang Decl. ¶ 8.)

Wang declares that she first discovered the deeds of trust on December 9, 2022, through a realtor. (Wang Decl. ¶ 9.) She declares that on October 31, 2023, she contacted the company that made the loan, Defendant HG Realty, and that at that time HG provided her with a notice of default on the loan. (Wang Decl. ¶ 10.) Wang declares that Ji had initially agreed to pay off the loans himself; but that she discovered a judgment entered against Ji in the amount of $7.7 million in another case, which had been recorded as a judgment lien on another one of Ji’s properties. (Wang Decl. ¶ 11.)

As to HG, Wang declares that HG’s officer/agent, Wei Zang, has contacted her multiple times, claiming that they could sell the condos at any time. Wang declares that these calls sometimes took place at midnight. (Wang Decl. ¶¶ 12,13.) Wang declares that the condos were bought and paid for using her and her husband’s life savings, and the threats to foreclose are very worrisome. (Wang Decl. ¶ 14-15.) Wang also declares that Ji produced JWY’s corporate records to HG’s agent Wei Zang “in the past few weeks.” (Wang Decl. ¶ 16.)

Plaintiffs also offer the declaration of their attorney, Aijun Zhang. Zhang declares that he emailed the Defendants notice of the ex parte application (Zhang Decl. ¶2) and received no response. (Zhang Decl. ¶ 3.) He declares that he received a Notice of Default and Demand for Loan Payoffs in Full, signed by counsel for Defendant HG Realty, on February 19, 2024. (Zhang Decl. ¶ 4, see Exh. B.)

Plaintiffs also offer the declaration of Plaintiff Yu Li, the sole shareholder of Plaintiff JWY. (Yu Declaration.) Yu declares that JWY was incorporated in April of 2012, and that he has been the 100% shareholder since its incorporation. He declares that Ji has never invested any money in JWY. (Yu Decl. ¶ 5, see Exh. 1: Certificate of Shares.) Yu declares that for business purposes, Ji was appointed the Secretary of JWY in April of 2012, as Yu still resided in China. (Yu Decl. ¶ 9, see Exh. 2.) He declares that Ji owned and operated another business, US Longton Inc., which Yu believed to be engaged in the construction business. Yu provides the construction license number of US Longton in his Declaration. (Yu Decl. ¶ 11.)

Yu declares that he was approached by Ji to develop real estate and that subsequently, Plaintiffs and Ji entered into an agreement for the construction of the four condos. (Yu Decl. ¶¶ 13-15, see Exh. 3- Grant Deed to JWY for the land where the condos sit.) He declares that he and his other brother Yong wired money to Ji for the construction loan to facilitate construction of the condos. (Yu Decl. ¶¶ 16-18.) Yu declares that in total, he and Yong wired $4,071,107.61 to Ji. (Yu Decl. ¶ 18.)

Yu further declares he was not informed when the condos were completed. (Yu Decl. ¶ 21.) He declares that after he moved into 6216 Rosemead, he asked for the accounting records for JWY, but Ji refused. (Yu Decl. ¶¶ 25-27.) He declares that he started to do a cost accounting of the condos, and consulted real estate agents in the process. (Yu Decl. ¶ 28.)

Yu declares that on November 9, 2022, Ji was fired as the secretary of JWY. Yu attaches the minutes of that shareholder meeting. (See Exh. 6.) Yu declares that he discovered the deeds of trust held by HG for the first time on December 9, 2022. (Yu Decl. ¶¶ 30-32.)

He declares that JWY owns the condos, and that the fair market value is 3.8 million. (Yu Decl. ¶ 35.) He declares that although Ji signed the deeds of trust on behalf of JWY, Ji was not authorized to. (Id.) He declares that he entered into an agreement with Ji and Yong for Ji to pay back the unauthorized loan, and the amounts Ji’s younger brothers (individual Plaintiffs) had wired to Ji. (Yu Decl. ¶ 36, see Exh 12: Cost Accounting Agreement.)

Yu declares that he believes that Ji has actual custody and control of JWY’s books and records and refuses to turn them over. (Yu Decl. ¶¶ 37-38, 40, 47.)

As to HG, Yu declares that Plaintiffs demanded that the deeds of trust be cancelled but that HG refused to do so. (Yu Decl. ¶ 39.) He declares that HG is threatening to proceed with foreclosure on the four condos. (Yu Decl. ¶¶ 41-46.)

Yu attaches certificates of occupancy for each condo showing that JWY owns the condos. (Exh. 5.) He also attaches tax returns from JWY showing he is the 100% shareholder of JWY. (Exh. 4.) He also attaches copies of the deeds of trust on the four condos. (Exhs. 7-11.)

Wei Zang declares that she is the general manager of HG. (Zang Decl. ¶ 2.) She declares that in early 2019, she was approached by Ji, an old friend, to secure a loan on the Temple City condos, as Ji had defaulted on the prior construction loan. (Zang Decl. ¶ 3.) This initial loan was for $1.5 million. (Zang Decl. ¶ 3.) Zang declares that HG lent money to JWY Group three times after that. (Zang Decl. ¶ 4.)

She declares that she believed that Ji was authorized to sign the loans on behalf of JWY Group. Therefore, she made the loans on behalf of HG to Ji. (Zang Decl. ¶ 5.) Zang declares she would not have made the loans if she had known that Ji was not an authorized signer. (Zang Decl. ¶ 5.)

Zang attaches copies of the promissory notes, deeds of trust and cashier’s checks associated with each loan. (Exhs. 1-12 to Zang Decl.) In total, HG loaned $1.5 million on March 15, 2019; $700,000 on June 26, 2019; $500,000 on July 9, 2019; and $300,000 on November 1, 2022.

Zang declares that the Plaintiffs participated in three separate meetings with her and Ji to discuss the repayment of the four loans. (Zang Decl. ¶ 12.) She declares that in these meetings, Plaintiffs never asserted that Ji was not authorized to sign on behalf of JWY. (Zang Decl. ¶ 12.) She declares that the talks broke down after they could not work out a solution. This case was filed after that. (Zang Decl. ¶ 12.)

Lastly, Zang declares that Plaintiffs have not made a definitive offer to her to repay the four loans. (Zang Decl. ¶ 13.)

A prohibitory injunction requests the Court intervene to maintain the status quo. Here, Plaintiffs are requesting a prohibitory injunction preventing HG from foreclosing on the condos or otherwise taking possession of them; as well as a prohibitory injunction preventing Defendant Ji from destroying JWY’s books and records.

The burden is slightly higher with respect to a mandatory injunction, because the moving party is asking the Court to disturb the status quo. (See Shoemaker v. County of Los Angeles (1995) 37 Cal.App.4th 618, 625.) Here, Plaintiffs are also requesting a mandatory injunction requiring Ji to turn over JWY’s books and records.

Plaintiffs urge that they are likely to prevail on the merits of this claim, as they did not authorize Ji to sign the deeds of trust on behalf of the corporation. (Ex Parte Application p. 14: 3.) In support, Plaintiffs cite Civil Code Sections 2313 and 2306 regarding agent-principal relationships and unauthorized acts. (CC §§ 2313 and 2306.) Plaintiffs refer to their Exhibits identifying the officers of JWY, and the deeds of trust signed by Defendant Ji. (Exhs 2, 7-11.)

Plaintiffs also cite provisions of the Corporations Code for the proposition that if the board ratifies an action, the corporation is bound by that ratification. (Corporations Code § 208(b).) Plaintiff Yu and declarant Wang aver that they did not know of the existence of the deeds of trust prior to December 9, 2022, after the deeds were executed. As Yu and Wang are both on JWY’s board, Plaintiffs urge that the board did not ratify the deeds of trust.

Plaintiffs also cite Corporations Code Section 313, which provides that any note, mortgage, or evidence of indebtedness between any corporation and any other person must be signed “by the chairman of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation” to be valid. (CC § 313 (emphasis added).) However, here, only Ji signed the deeds of trust. As a result, Plaintiffs urge that HG was not justified in relying on Ji’s representations and his signature. (Ex Parte Application p. 15: 18-25.)

In opposition, HG Realty urges that JWY Group benefitted from the four loans, as the loaned money was deposited in JWY accounts. (See HG Response p. 7: 1-3.) HG Realty urges that any malfeasance by one of JWY’s then-officers is not its fault, as it is a third party that upheld its end of the bargain, namely, depositing loan funds into JWY accounts. (See Zang Decl. ¶¶ 6-10.) HG urges that Plaintiffs are estopped from raising Ji’s lack of written authority to sign for JWY, as JWY retained the benefit of the bargain. HG argues that JWY was aware Ji was acting as its representative and did not otherwise object or inform HG of Ji Li’s limited scope. (See Miller & Starr, CAL. REAL ESTATE (4th ed.), § 1:93 Execution By a Corporation.)

Alternatively, HG urges that Ji had implied or actual authority to bind JWY Group to contracts, as he was the secretary and sole American officer of JWY Group. (See HG Response p. 8: 13-15.) HG urges that Ji’s position as the secretary of JWY, or in his capacity as the general on-site American manager of JWY, he had authority to bind JWY. (See Monteleone v. Southern California Vending Corp. (1968) 264 Cal.App.2d 798, 806; Memorial Hospital Ass'n of Stanislaus County v. Pacific Grape Products Co. (1955) 45 Cal.2d 634, 637.) HG asserts that Ji had implied or actual authority to execute the loans and that its belief in Ji’s authority was reasonable. (Zang Decl. ¶ 5, Yu Decl. ¶ 9; see also Baxter v. State Teachers' Retirement System (2017) 18 Cal.App.5th 340, 365.)

HG further argues that Plaintiff Yu Li was responsible for creating this reasonable belief, as Yu appointed Ji the secretary of the corporation and designated Ji in charge of daily operations in the US. HG claims that it was not negligent in holding this belief, as “[g]iven the nature of its business, borrowing development money and granting encumbrances that would be needed to secure them would be a natural incident of a commission to operate JWY GROUP’s day-to-day affairs.” (See HG Response p. 10: 12-14.)

In their supplemental brief, Plaintiffs argue that the deeds of trust did not bind JWY. Citing Snukal v. Flightways Mfg., Inc. (2000) 23 Cal.4th 754, 778, Plaintiffs urge that Corporate Code Section 313 only applies when a corporate officer from the first category (operational) and a corporate officer from the second category (financial) sign the instrument. (CC § 313, Snukal v. Flightways Mfg., Inc. (2000) 23 Cal.4th 754, 781.) Here, only Ji Li, JWY’s secretary, signed the deeds of trust. (Yu Li Decl. Exhs. 7-11.) There is no signature by a qualifying operational corporate officer, such as the chairman of the board, the president, or any vice president. Under Corporations Code Section 313, the instruments are not valid.

Alternatively, Plaintiffs argue that if section 313’s requirements are not met, Defendants must demonstrate Ji had either express or implied authority. These common law theories involve a higher standard of proof. (Snukal v. Flightways Mfg., Inc. (2000) 23 Cal.4th 754, 783-784.) Plaintiffs argue that Ji did not have actual authority to sign the deeds of trust. (See Yu Li Decl. ¶ 35, Yu Li Decl. Exh. 2: JWY Statement of Information, Wang Decl. ¶ 8.) Plaintiffs also urge that Ji did not have apparent authority, as executing a deed of trust was not in the ordinary course of business for JWY. (See Meyer v. Glenmoor Homes Inc. (1966) 246 Cal.App.2d 242, 253, 258.) Plaintiffs cite Wei Zang’s declaration and the lack of discussion into JWY’s business and actions in the ordinary course of business, as well as the lack of discussion of inquiry into Ji’s authority before making the loans. (Zang Decl. ¶ 3, see also Yu Li Decl. ¶¶ 12-15, Yu Li Decl. Exh. 2: JWY Statement of Information [providing that JWY’s business was “Engineering Construction].)[1]

In its supplemental brief, HG clarifies that Corporations Code Section 313 is merely an alternative means to bind a corporation to its officers’ agreements and that common law principles of agency, such as implied or actual authority still function to bind a corporation to agreements made by its officers. (See HG Brief p. 10: 11-16.)

The undisputed fact is that the deeds of trust and promissory notes were only signed by Ji. As such, the “safe harbor” set forth in Corporations Code Section 313 does not apply. Nor do common law principles of actual agency, as Plaintiffs have submitted unrebutted evidence that Ji did not have actual authority to execute deeds of trust or accept loans on behalf of JWY. The crucial question then is whether common law principles of ostensible agency support HG’s position. In this Court’s view, for purposes of this motion, they do not. Plaintiffs have submitted evidence that loans were not in the ordinary course of JWY’s business and executing a deed of trust was not within the scope of Ji’s duties as secretary. HG argues that its’ belief in Ji’s authority was reasonable and cites Baxter v. State Teachers' Retirement System (2017) 18 Cal.App.5th 340, 365 in support.

In her declaration, Zang, HG’s general manager and incorporator, states that she knew Ji from their careers in the television industry and that they had grown up in the same town in China. (Zang Decl. ¶ 3.) Ji told her that a construction loan from First General Bank was in default and JWY needed a loan to repay it. (Id.) Zang states that she went to First General Bank with Ji and confirmed the payoff amount on the loan. (Id.) She then looked at the value of the four Temple City condos on Zillow and “was satisfied that once the First General Bank loan was paid off there would be enough value in them to secure the $1,500.000 loan.” (Id.) She did not verify what kind of business JWY was in nor make inquiries as to whether a loan was in the normal course of JWY’s business. (Id.) She did not verify whether Ji was authorized to obtain the loan she was now repaying. According to Yu, Zang reviewed no JWY documents before making these loans. (Yu Decl. ¶ 31.) Yu further indicates that JWY received no money or benefit from these loans. (Yu Decl. ¶ 38.)

Zang then discusses a second loan of $700,000, which was purportedly to pay off a second lender on the Temple City condos, Hengda USA Education. (Zang Decl. ¶ 7.) However, unlike the first loan, Zang fails to state whether she confirmed this debt with the lender as she had for the previous loan nor indeed what the Hengda loan was for. (Id.) These loans were followed by two more loans, totaling an additional $800,000. Significantly, nowhere in Zang’s declaration does she discuss the purpose of these loans or how they related in any way to JWY’s business. (Zang Decl. ¶¶ 8, 9.) More significantly, Ji signed the third promissory note for a $500,000 loan, dated July 9, 2019, in both his capacity as secretary of JWY and in his individual capacity. (Zang Decl. Exh. 8.) To the casual observer, this might raise some red flags. However, the reasons for Ji signing only the third promissory note in this fashion are left unanswered by Zang in her declaration.

As noted by the court in Baxter, “ostensible agency cannot be based solely upon representations or conduct of the purported agent; rather, the statements or acts causing the belief in the existence of such agency are generally those of the principal.” Id. The ostensible agency HG claims was based solely on the representations of the purported agent, Defendant Ji. At no time did Zang confirm with anyone at JWY, including its founder and sole shareholder Yu, or his brother Yong, that Ji had the authority to borrow $3,000,000 on behalf of JWY. (Zang Decl. ¶¶ 3-9.) There is no evidence in the record that Yu or Yong did or said anything (beyond merely appointing Ji secretary of JWY and having him serve as manager of the company in the U.S.) that would justify Zang’s belief that Ji had the authority to borrow $3,000,000 on behalf of JWY.

In addition, HG has failed to satisfy the three requirements for ostensible agency set forth in Baxter. The Court draws the parties’ attention particularly to the third Baxter requirement that the party, in this case HG, must not have been negligent in holding its belief that the agent had ostensible authority to act. As discussed above, Zang did not conduct due diligence[2] before loaning $3,000,000. She contacted no one from JWY. She reviewed one document relating to the loan from First General Bank prior to extending the first loan for $1,500,000. She reviewed no additional JWY corporate records. She relied solely on the representations of her old friend, Ji. (Zang Decl. ¶¶ 3-9.) She fails to explain or even discuss Ji’s signing the third promissory note in his individual and corporate capacities. She fails to establish that she knew or ever inquired into what the last two loans were for. Given the substantial amount of money loaned, these actions, or inactions, appear to be negligent.

As a result, the Court determines that Plaintiffs have demonstrated a likelihood of prevailing on the merits as to all Defendants on the First Cause of Action for Cancellation, and the Seventh Cause of Action for Injunction.

Plaintiffs urge, in summary fashion, that “Plaintiffs are also likely to prevail on the remaining causes of action such as fraud and breach of fiduciary duty, breach of contract.” (Ex Parte Application p. 16: 13-14.) These claims are asserted only against Ji, who has not responded to Plaintiffs’ motion for a preliminary injunction. HG raises no arguments as to these causes of action.

The Court declines to address the remaining claims in the Second through Sixth Causes of Action against Ji in this motion for preliminary injunction.

Plaintiffs urge that irreparable harm will occur if the preliminary injunction is not issued, as HG is threatening to proceed with a foreclosure sale of the properties. (Ex Parte Application p. 17: 10-13.) As noted above, Yu lives in one of the condos with his family.

Plaintiffs argue that HG will not suffer any prejudice if a preliminary injunction is issued prohibiting foreclosure pending further proceedings in this case.

Plaintiffs also urge that courts may consider if a defendant is able to pay a future judgment in assessing the risk of irreparable harm. Citing West Coast, Plaintiffs urge that Ji Li is unable to pay as there is a pending judgment against him for $7.7 million dollars in another construction lien case. (West Coast Constr. Co. v. Oceano Sanitary Dist. (1971) 17 Cal.App.3d 693, 700; Wang Decl. ¶ 11.) West Coast provides “asserted insolvency of the defendant is a proper matter for the court's consideration [on preliminary injunction].” (See West Coast, supra, at 700.)

Plaintiffs also urge that Ji would suffer no prejudice if he was ordered to hand over JWY’s books, as he has no ownership interest in the corporation.

HG claims that Plaintiffs would not suffer irreparable harm, as the only potential harm is monetary. (See HG Response p. 10: 20-22.)

The Court disagrees. HG is threatening to foreclose on the deeds of trust, which would likely result in the loss of the Plaintiffs’ real estate assets -- one of which is being used as the personal residence of Yu and his family.

HG has argued that if the preliminary injunction is issued, the Court should require Plaintiffs to post an undertaking in the amount of $544,319. HG calculates this based upon a figure of $994.19 in daily interest on the deeds of trust, multiplied by 18 months.

Plaintiffs, on the other hand, argue in their reply that the undertaking should be approximately $3,000, which represents the estimated amount of attorney’s fees HG might incur in seeking to dissolve the injunction at some later date.

The Court finds that both of these proposed sums are based upon troubling assumptions. In assessing the possible risk of harm to HG if the injunction dissolved at some later date, the Court must endeavor to make a reasonable assessment of the Defendant’s possible harm. Considering the time to litigate the case to a final judgment; the risk of market changes; and the possible loss of some of HG’s funds, the Court fixes the undertaking Plaintiffs are required to deposit in the sum of $100,000.00.

Plaintiffs may satisfy this requirement by posting a bond or making a deposit into court. (See CCP §§ 995.210(b), 995.710.)

Plaintiffs’ motion for a preliminary injunction is granted. Defendants HG Realty and Ji Li are enjoined from proceeding with a foreclosure sale or otherwise taking possession of the Temple City condos.

Defendant Ji Li is further ordered to return all books and records of JWY and any copies to Plaintiffs within ten (10) days of today’s date.

Plaintiffs are ordered to post an undertaking of $100,000.00 within twenty (20) days of today’s date.

[1] The Court requested additional briefing on the question of Corporate Code Section 313 and the interrelationship between it and common law principles of agency, if any. “Only legal briefs on these issues are permitted[.]” (3/27/24 Minute Order.) The Court only considers arguments within the 3/27 Minute Order’s scope.

[2] The Court uses this term in the generic sense and not as a legal term of art.