Judge: Martha K. Gooding, Case: 2022-01245812, Date: 2022-09-12 Tentative Ruling
Demurrer to Amended Complaint
Before the Court is the Demurrer by Defendant Ernest Schroeder (“Defendant”) to the First Amended Complaint (“FAC”) filed on April 15, 2022 by Plaintiff Paul Schroeder, who brings the action both as an individual and as Trustee of the Paul and Cathy Schroeder Family Trust (“Plaintiffs”).
For the reasons set forth below, the Demurrer is sustained in part and overruled in part.
The Demurrer is SUSTAINED, with 15 days leave to amend, as to the First and Tenth Causes of Action.
The Demurrer is SUSTAINED as to the Fourth through Ninth Causes of Action and the Eleventh Causes of Action; the Court is inclined to sustain without leave to amend but will hear from Plaintiff on that issue at the hearing, including whether Plaintiff seeks leave to amend and, if so, specifically what facts Plaintiff proposes allege to cure the defects in these causes of action.
Finally, the Demurrer is OVERRULED as to the Second and Third Causes of Action.
First Cause of Action – Breach of Fiduciary Duty
With respect to the First Cause of Action for Breach of Fiduciary Duty, the Court finds the FAC is ambiguous and uncertain, as it is unclear whether Plaintiff is attempting to assert a direct or a derivative claim. (C.C.P. §430.10(f)).
In responding to the Demurrer, Plaintiff asserts that only a direct claim is being pursued; however, Plaintiff notes that all prior allegations were incorporated into the First Cause of Action and thereafter cites paragraphs 7 through 70 as support for the claim. (Opposition: 2: 8-28). Included within these allegations are references to the alleged misuse of corporate assets, which suggest only damage to SMC. (FAC ¶¶7 and 77). Additionally, the claim specifically references fiduciary duties owed to both Plaintiff and SMC. (Id. ¶76).
Plaintiff concedes the First Cause of Action relies on paragraphs 43 through 63, in which Plaintiff alleges Defendant “began moving SMC client money out of SMC Real Estate Broker Trust Accounts…” (FAC ¶43). Indeed, the FAC alleges “Ernest’s moving of the Funds was certainly disloyal to SMC” and “[n]o person loyal to SMC would transfer the funds SMC was charged to manage to accounts outside the control of SMC and regulation of the DRE.” (Id. ¶¶50, 62). The FAC further alleges “that Ernest is enacting plans to open a competing Property Management Business…” (Id.). Additionally, the FAC alleges Defendant moved money from the “SMC General Account.” (Id. ¶¶52-55).
“[A]n action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.” (Bader v. Anderson (2009) 179 Cal.App.4th 776, 793).
Although Plaintiff alleges that half of the funds in the General Account were owned by the Paul and Cathy Schroeder Family Trust (FAC ¶54) and the FAC contains some allegations that are specific to Plaintiff (See id. ¶¶24, 26 and 36), it remains the case that Plaintiff’s intentions are unclear. Plaintiff does not identify these discrete allegations as the basis for the claim.
Likewise, although the FAC includes allegations Defendant improperly attempted to oust Plaintiff from SMC (FAC ¶¶10-12, 14-15 and 17-24), it also alleges these efforts were unsuccessful and, in fact, that Plaintiff successfully removed Defendant. (Id. ¶¶21, 38). Consequently, although the First Cause of Action alleges that Plaintiff has suffered damages as a result of Defendant’s breaches of his fiduciary duties, the nature of any such damages is unclear. (Id. ¶78).
As Defendant notes, “[t]he two actions are mutually exclusive: i.e., the right of action and recovery belongs either to the shareholders (direct action) or to the corporation (derivative action).” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311-312). Plaintiff should clearly specify the nature of the action and, to the extent the claim is intended to be direct, the FAC should clearly and specifically identify the allegations relied on.
Tenth Cause of Action
Similarly, the Demurrer to the Tenth Cause of Action is SUSTAINED, with 15 days leave to amend. Defendant demurs on the ground that Plaintiff improperly joined multiple claims, for Defamation, Publication of Private Facts, and False Light. (Demurrer: 6:3-12). Pursuant to CRC 2.112, causes of action should be separately stated. If Plaintiff intends to allege all three causes of action in his individual capacity, he must separately allege each claim.
Fourth through Eighth Causes of Action
The Demurrer to the Fourth through Eighth Causes of Action is SUSTAINED because Defendant cannot be held individually liable for wrongful termination or the alleged FEHA violations. The Court is inclined to sustain without leave to amend but will hear from Plaintiffs on the issue at the hearing.
In Reno v. Baird, the California Supreme Court held that individual supervisors are not subject to liability for discrimination under FEHA. (Reno v. Baird (1998) 18 Cal.4th 640, 643: “We must decide whether persons claiming discrimination may sue their supervisors individually and hold them liable for damages if they prove their allegations. We conclude that the FEHA, like similar federal statutes, allows persons to sue and hold liable their employers, but not individuals.”) This conclusion also applies to common law actions for wrongful discharge. (Id.).
Similarly, in Jones v. Lodge at Torrey Pines P’ship (2008) 42 Cal.4th 1158, the California Supreme Court held that non-employer individuals cannot be personally held liable for retaliation. (Id. at 1173).
Here, Plaintiff’s Fourth and Fifth Causes of Action both appear to allege disability discrimination pursuant to Government Code §12940(a). (FAC ¶¶89, 104). Additionally, Plaintiff’s Sixth Cause of Action alleges a failure to accommodate in violation of Government Code §12940(m). (Id. ¶112). The Seventh Cause of Action alleges a failure to engage in a good faith interactive process, as required by Government Code §12940(n). (Id. ¶120).
Each of the stated provisions of Government Code §12940 establishes liability only against employers. (Gov’t Code §12940(a), (m) and (n)). Additionally, as noted above, Reno held that individual supervisors are not liable for discrimination. (Reno v. Baird (1998) 18 Cal.4th 640, 643). Further, persuasive authority has extended the holding in Reno to violations of Government Code §12940(m). (Minor v. Fedex Office & Print Services, Inc. (N.D. Cal. 2016) 182 F.Supp.3d 966, 987: “Two district courts in this circuit have applied the reasoning of Reno to conclude that FEHA §12940(m) does not permit individual liability for failure to accommodate…The Court agrees.”).
Here, the FAC alleges Defendant is an individual who was Plaintiff’s “supervisor” within the meaning of FEHA. (FAC ¶73). Consequently, liability for the above claims does not attach.
Similarly, Plaintiff’s Eighth Cause of Action for Wrongful Termination fails to state a claim against Defendant. (Reno v. Baird (1998) 18 Cal.4th 640, 643).
Although it is true that individual liability can be stated for harassment (see Government Code §12940(j)(3)), the FAC does not allege a claim under this statute. Indeed, although the FAC briefly references harassment in the Fourth, Fifth, Seventh and Eighth Causes of Actions (FAC ¶¶89, 105, 121 and 128), the FAC does not cite Government Code section 12940(j) and, instead, expressly cites different sections of Government Code section 12940, applicable only against employers. Moreover, the allegations currently set forth in the FAC do not sufficiently allege a claim for harassment.
Ninth and Eleventh Causes of Action
The Demurrer to the Ninth and Eleventh Causes of Action is SUSTAINED based on Plaintiff’s concession that the claims fail. (Opposition: 1: 16-25).
Second Cause of Action
The Demurrer to the Second Cause of Action is OVERRULED. Defendant demurs to the Second Cause of Action on the ground that the claim arises from alleged harm to SMC and, consequently, should be derivative. Additionally, Defendant asserts a failure to comply with Corporations Code §800(b)(2).
The Second Cause of Action seeks relief pursuant to Corporations Code §304. Pursuant to that statute, “[t]he superior court of the proper county may, at the suit of shareholders holding at least 10 percent of the number of outstanding shares of any class, remove from office any director in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation and may bar from reelection any director so removed for a period prescribed by the court.”
In support of his argument that this claim is derivative, Defendant cites Starbird v. Lane (1962) 203 Cal.App.2d 247. However, the Starbird court appears to have relied on the plaintiffs’ own characterization of the claim: “Plaintiffs characterize their action as derivative in that they assert that its purpose is to seek redress for wrongs alleged to have been perpetrated against the corporation and its stockholders by certain former directors and by the individual defendants who are alleged to be acting in concert.” (Id. at 251). Although the Starbird court then proceeded to define a derivative action (id. at 254-255), it does not appear to have relied on the alleged derivative nature in its analysis.
In contrast, as argued by Plaintiff, the Court in Haah v. Kim (2009) 175 Cal.App.4th 45, referred to a claim brought pursuant to Corporations Code §304 as direct. (Id. at 51: “Although most of the claims Haah alleged were derivative claims on behalf of GPI, the original cross-complaint also alleged claims for removal of directors under Corporations Code sections 304…”; see also IP Telesis, Inc. v. Velocity Networks, Inc. (C.D. Cal. 2012) 2012 WL 12886966 at 3 [treating Corporations Code §304 claim as an individual rather than derivative claim]).
Based on the above, it does not appear that a claim under Corporations Code §304 is, or is required to be, derivative. Consequently, the demurrer to this cause of action is OVERRULED.
Third Cause of Action
With respect to the Third Cause of Action, Defendant demurs for uncertainty on the ground that the claim ambiguously refers to “Plaintiffs,” in the plural. (Demurrer: 5:4-8). The Third Cause of Action alleges: “An actual controversy has arisen and now exists between Plaintiffs and ERNEST W. SCHROEDER concerning their respective ownership, rights, and obligations concerning SMC. Among the issues in dispute are ERNEST W. SCHROEDER’s authority to exercise management over SMC given his actions.” (FAC ¶86 [emphasis added]).
The allegation may be interpreted as a reference to Plaintiff Paul Schroeder, both in his individual capacity and in his capacity as Trustee of the Paul and Cathy Schroeder Family Trust dated May 30, 1991.
The Court finds the above is not so ambiguous as to prevent a response. (A.J. Fistes Corp. v. GDL Best Contractors, Inc. (2019) 38 Cal.App.5th 677, 695).
Defendant also demurs to the Third Cause of Action on the ground that Plaintiff has not alleged compliance with Corporations Code §800; however, the Third Cause of Action does not appear to be brought derivatively, so as to require the same.
The demurrer to this cause of action is OVERRULED.
Request for Judicial Notice
Defendant’s unopposed Request for Judicial Notice is granted in part and denied in part, as follows:
The Court can take judicial notice of the existence of the Declaration of Paul Schroeder filed on April 6, 2022 in Ernest Schroeder v. Paul Schroeder, Case No. 2022-1246955, but cannot take judicial notice of the truth of the matters asserted therein.
The contents of the SMC website are not properly subject to judicial notice.
Defendant is ordered to give notice.