Judge Mark E. Windham, Case 22STLC06086 2023-03-21 Tentative Ruling

Judge: Mark E. Windham, Case: 22STLC06086, Date: 2023-03-21 Tentative Ruling

Case Number: 22STLC06086 Hearing Date: March 21, 2023 Dept: 26

Gao, et al. v. Shao, et al.

DEMURRER

(CCP §§ 430.31, et seq.)

TENTATIVE RULING:

Defendants Yafeng Shao and Mengya Ren’s Demurrer to the First Amended Complaint is OVERRULED AS TO THE 1ST AND 2ND CAUSES OF ACTION AND SUSTAINED WITHOUT LEAVE TO AMEND AS TO THE 4TH CAUSE OF ACTION.

ANALYSIS:

Plaintiffs Yuanyuan Gao (“Plaintiff Gao”) and YE Fashion Master, Inc. (“Plaintiff YE Fashion”) filed the instant action against Defendants Yafeng Shao (“Defendant Shao”) and Mengya Ren (“Defendant Ren”). The Complaint alleged causes of action for (1) fraud; (2) conspiracy to defraud; (3) breach of fiduciary duty; and (4) conversion. On December 22, 2022, the Court sustained Defendants’ Demurrer to the Complaint as the first and third causes of action with leave to amend, and overruled the demurrer as to the second and fourth causes of action. (Minute Order, 12/22/22.)

Plaintiffs filed the First Amended Complaint on January 10, 2023, alleging the same four causes of action. Defendants filed the instant Demurrer to the First Amended Complaint on February 1, 2023. Plaintiffs filed an opposition on February 15, 2023 and Defendants replied on February 22, 2023.

Discussion

Defendants demur to the first, second and fourth causes of action of the First Amended Complaint for failure to allege facts sufficient to state a cause of action. (Citing Code Civ. Proc., § 430.10, subd. (e).) The Demurrer is accompanied by a meet and confer declaration demonstrating defense counsel emailed Plaintiffs’ counsel on January 31, 2023. (Motion, Ritholz Decl., Exh. A.)

The allegations in the First Amended Complaint are as follows. Plaintiff Gao has at all times been the 100 percent owner of Plaintiff YE Fashion, which is a California corporation. (FAC, ¶¶1-2.) Plaintiff Ye Fashion was founded on October 7, 2020 and Plaintiff Gao has been the sole shareholder, director and officer at all times. (Id. at ¶10.) Plaintiff Gao met Defendant Ren in 2008. (Id. at ¶11.) In November 2019, Defendant Ren asked for Plaintiff Gao’s help relocating to the United States. (Id. at ¶12.) Defendants moved to the United States on January 29, 2020 and began living at Plaintiff Gao’s house. (Id. at ¶13.) In November 2020, Defendants agreed to help Plaintiff Gao with Plaintiff YE Fashion in exchange for staying at her house. (Id. at ¶15.) Defendant Res agreed to perform bookkeeping, accounting, packaging and making payments; Defendant Shao agreed to perform website publishing and customer data analysis. (Ibid.) Plaintiff Gao authorized Defendants’ use of Plaintiff YE Fashion’s credit card only for business-related expenses and only with Plaintiff Gao’s pre-authorization for each charge. (Id. at ¶16.) Nor were Defendants allowed to touch the physical credit card. (Ibid.) Pursuant to Defendant Ren’s oral request in August 2021, Plaintiff Gao gave Defendants access to Plaintiff YE Fashion’s bank account for their work obligations. (Id. at ¶17.) The access was granted strictly for business purposes. (Ibid.)

Without Plaintiff Gao’s knowledge, Defendants used the credit card for personal expenses in June and July 2022. (Id. at ¶18.) The charges on Amazon, at Costco, and for repairs to Defendants’ motor vehicle amounted to approximately $3,042.83. (Ibid.) Plaintiff Gao did not discover the charges until August 2022 because Defendants controlled Plaintiff YE Fashion’s books and accounting, and used their trusted position to hide the purchases. (Id. at ¶¶19-20.)

In September 2021 and June 2022, Defendants asked Plaintiff Gao about purchasing shares of Plaintiff Fashion YE, which Plaintiff Gao declined in both instances. (Id. at ¶¶21-22.) After this refusal, Defendants forged Plaintiff Gao’s signature on a share transfer agreement, of which Plaintiff Gao was totally unaware. (Id. at ¶¶23-24.) Specifically, on June 21, 2022, Defendants presented Plaintiff Gao with a stack of papers to sign, within which they included a Letter of Ownership Transfer to acquire 33 percent ownership interest in Plaintiff YE Fashion. (Id. at ¶33.) Plaintiff Gao reasonably relied on Defendants’ representation that this was just another accounting document and signed the transfer agreement. (Ibid.) Defendants then conspired to submit a forged Statement of Information to the California Secretary of State, naming Defendant Shao as the sole officer and director of Plaintiff Fashion YE. (Id. at ¶25.) As a result, Plaintiff Gao suffered the loss of one-third of her shares in Plaintiff YE Fashion. (Id. at ¶38.) Defendants also used the forged Statement of Information to have bank officials change the login and contact information for Plaintiff Fashion YE’s bank account to Defendants’ information. (Id. at ¶26.) Plaintiff Gao learned about Defendants’ embezzlement of money from Plaintiff YE Fashion’s bank account and stealing of funds from YE Fashion’s brokerage account in July and August 2020. (Id. at ¶¶27-29.) When Plaintiff Gao informed the bank, the accounts and credit card were suspended. (Id. at ¶30.)

2nd Cause of Action for Conspiracy

The Court previously overruled Defendants’ Demurrer as to the second cause of action for conspiracy. (See Minute Order, 12/22/22.) In demurring to the First Amended Complaint, Defendants do not identify any difference in the allegations compared to the original Complaint that should result in a different result on the instant Demurrer. The Demurrer to the second cause of action, therefore, is overruled.

1st Cause of Action for Fraud

The elements of fraud are (1) misrepresentation; (2) knowledge of falsity; (3) intent to defraud (induce reliance); (4) justifiable reliance; and (5) resulting damage. (Conroy v. Regents of Univ. of Cal. (2009) 45 Cal. 4th 1244, 1255.) Plaintiffs allege that Defendants induced Plaintiff Gao to sign a fraudulent share transfer agreement with respect to one-third of her shares in Plaintiff YE Fashion, resulting in the loss of those shares. Detailed allegations regarding Defendants’ representations made to Plaintiff Gao on June 21, 2022 are now included in the First Amended Complaint. (FAC, ¶¶25, 33, 38.) Defendants demur on the grounds that Plaintiffs have not alleged justifiable reliance because the attempted transfer was not successful and Plaintiffs suffered no damages. This, however, attempts to contradict the allegations in the First Amended Complaint that Plaintiff Gao signed the share transfer agreement in reliance on the representations and suffered the loss of Plaintiff YE Fashion’s shares as a result. (FAC, ¶¶33-38.) The Court must take the allegations of reliance and damages as true on demurrer and finds they are sufficiently specific to support the fraud cause of action.

The Demurer to the first cause of action for fraud is overruled.

4th Cause of Action for Breach of Fiduciary Duty

Plaintiffs allege that by acting as their CPAs, Defendants owed Plaintiffs a fiduciary duty of care, which they breached by forging documents and using Plaintiffs’ assets for their personal purposes. (Compl., ¶¶57-58.) The First Amended Complaint cites to Stokes v. Dole Nut Co. (1995) 41 Cal.App.4th 285 to contend all employees owe their employer a fiduciary duty. (Id. at ¶57.) This case, however, only stands for the proposition that a corporate officer owes their employer a fiduciary duty. (Stokes v. Dole Nut Co. (1995) 41 Cal.App.4th 285, 294.) While the opposition to the Demurrer argues that Defendants are officers of Plaintiff YE Fashion, this is clearly contradicted by the allegations in the First Amended Complaint that Plaintiff Gao was the sole officer at all times. (FAC, ¶¶10, 25.) In fact, Plaintiffs’ argument that Defendants were officers of Plaintiff YE Fashion is contradictory because it relies on the allegedly fraudulent Statement of Information Defendants filled out. (Opp., p. 8:17-28.) Plaintiffs cannot simultaneously argue that Defendants’ officer status was fraudulent but created a legitimate fiduciary duty. Without sufficient allegations of a fiduciary relationship, the First Amended Complaint does not state a cause of action for breach of fiduciary duty.

The demurrer to the fourth cause of action is sustained.

Leave to Amend

Leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.) Here, Plaintiffs were provided with an opportunity to allege additional facts regarding the existence of a fiduciary duty by Defendants but were unable to do so. Nor does the opposition indicate what other facts might exist to demonstrate that such a duty can be alleged. Therefore, leave to amend is denied.

Conclusion

Moving party to give notice.