Judge: Martha K. Gooding, Case: 2022-01259827, Date: 2022-10-03 Tentative Ruling

1) Motion for a Bond

 

2) Motion to Compel Arbitration

 

 

Motion for Bond

 

 

The Court DENIES the Motion by Nominal Defendant Turbo Ion, Inc. (“TII” or “Nominal Defendant”) for an order directing Plaintiff Julian Rizzuto (Plaintiff”) to post a bond pursuant to Corporations Code §800.

 

A.   Legal Standard

 

A shareholder may bring a derivative suit on the corporation's behalf where management (or any third party) breaches a duty owed to the corporation and the corporation fails to assert its cause of action. The shareholder is merely a nominal plaintiff in such an action. Even though the corporation is joined as a nominal defendant, it is the real party in interest to which any recovery usually belongs. See Grosset v. Wenaas (2008) 42 C4th 1100, 1108; Schuster v. Gardner (2005) 127 CA4th 305, 312; Vega v. Jones, Day, Reavis & Pogue (2004) 121 CA4th 282, 297.)

 

Section 800 of the Corporations Code generally governs shareholders’ derivative actions.  Among other things, section 800 empowers the corporation on whose behalf an action is derivatively brought – or any defendant who is an officer or director of the corporation or was an officer or director at the time of the allegedly wrongful acts – to move the court for an order requiring the plaintiff to furnish a bond. Corp. Code § 800(c).

 

Such a motion must be filed within 30 days after service of the summons, although the time may be extended for an additional period or periods up to 60 days.  Id.  A stipulation of counsel to extend the time to answer, plead, or otherwise respond to a complaint extends the time to move for an order requiring security even without an express stipulation on that point. Consolidated Dock & Storage Co. v. Superior Court (1971) 18 Cal.App.3d 949.

 

The burden of proof is on the party moving for an order requiring security. Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 868; Wood v. Gordon (1952) 112 Cal.App.2d 374, 376.

 

“To compel a plaintiff-shareholder in a derivative lawsuit to furnish a bond securing payment of the defendant's attorney fees, section 800 requires that the defendant ‘establish[ ] a probability,’ based on affidavits or oral testimony, (1) ‘[t]hat there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its shareholders[,] [or] (2) [t]hat the [defendant] moving party, if other than the corporation, did not participate in the transaction complained of in any capacity.’ (§ 800, subds. (c)(2), (d), italics added.) In assessing whether there is no reasonable possibility the action will benefit the corporation, the court ‘must evaluate the possible defenses which the plaintiffs would have to overcome before they could prevail at trial.’” Donner Management Co. v. Schaffer (2006) 142 Cal.App.4th 1296, 1303–1304.

 

A determination as to the furnishing of security for expenses in a stockholder derivative action is not a determination of the merits of any issue in such action.  Ensher v. Ensher, Alexander & Barsoom, Inc. (1960) 187 Cal. App. 2d 407.

 

The filing of the motion stays the action as to all defendants until 10 days after the motion has been resolved.  Corp. Code § 800(f) (“the prosecution of the action shall be stayed until 10 days after the motion has been disposed of.”).

 

Merits

 

The Court finds that Nominal Defendant has not met its burden to show that there is no reasonable possibility that the prosecution of the causes of action asserted derivatively in Plaintiff’s Complaint will benefit TII or its shareholders.

 

Nominal Defendant acknowledges that Plaintiff’s Complaint “purports to assert both individual claims seeking rescission of his agreement to invest in the Corporation . . . while simultaneously seeking to sue derivatively.”  Motion at 8:18-21.  Nominal Defendant then proceeds to identify which of the 14 causes of action asserted by Plaintiff “ostensibly are asserted derivatively on behalf of the Corporation.”   See Motion at 9:2-3.

 

According to Nominal Defendant, “Plaintiff’s first cause of action, for ‘Breach of Fiduciary Duty/Constructive Fraud,’ (seeking rescission of the investment while also alleging mismanagement and self-dealing), third cause of action for ‘Fraud in the Inducement’ (seeking rescission of the investment), sixth cause of action for ‘Money Had and Received,’ eighth cause of action for ‘Unjust Enrichment,’ tenth cause of action for ‘Accounting,’ thirteenth cause of action for ‘Civil Conspiracy/Aiding and Abetting,’ and fourteenth cause of action for ‘Receiver,           Injunctive, and other Equitable Relief,’ (remedies, not claims), all ostensibly are asserted        derivatively on behalf of the Corporation.”  Motion at 8:22-9:3.

 

But that is the extent of Nominal Defendant’s analysis as to the merits of Plaintiff’s derivative claims and the potential for those claims to benefit TII.  Nominal Defendant did not present evidence to the Court showing that “’it is more likely than not that the [derivative] claim[s] will not benefit the corporation or its shareholder.’”  Motion at 7:9-11 (citation omitted). 

 

Nominal Defendant does not address Plaintiff’s claims that the individual defendants used the funds Plaintiffs invested into TII to further their own personal interests and steal from the company and its shareholders.  According to Plaintiff, defendants’ failure to put the interests of TII before their own—to the detriment of TII and its shareholders—is evidenced by:

 

· Overpaying for vendors and manufacturers owned and controlled by Defendant Park (Compl. ¶¶ 37, 39);

· Misleading Plaintiffs, as investors, regarding other investment in Turbo Ion (Compl. ¶ 38);

· Failing to keep adequate or accurate books and records (Compl. ¶ 41);

· Utilizing company funds for personal expenses to the detriment of Turbo Ion’s creditors (Compl. ¶ 42); and

· Alienating vendors and customers while terminating key contractors and employees to the detriment of Turbo Ion and for their own personal benefit. Compl. ¶ 43.

 

Instead of meeting these allegations with evidence, Nominal Defendant focuses primarily on two lines of argument.

 

First, Nominal Defendant devotes much of its moving brief to arguing that Plaintiff lacks standing because he did not make a demand on TII’s board to bring the claims he now asserts derivatively.  Nominal Defendant notes that, under California law, a derivative plaintiff must make a litigation “demand” on a defendant company’s board of directors before instituting suit, so that the Board may consider the demand, unless the plaintiff can establish, by alleging facts with particularity, that his/its demand would have been “futile” because the board could not have objectively considered the demand. Corps. C. § 800(b)(2).

 

Here, Plaintiff has alleged demand futility: “Such a demand [on TII’s Board to file suit] would be futile as the board is dominated by Park, Musolino, Singh or other persons appointed by them.”  Complaint ¶ 48. 

 

The Court agrees that demand futility is an element of the derivative claims that must be proved; it is not a pleading requirement that “drops out of the case once a derivative suit survives a demurrer.”  Oakland Raiders v. National Football League (2001) 93 Cal.App.4th 584-586.  See also Corp.C. § 800(b)(2) (complaint must set forth with particularity efforts to secure action or reasons for not making effort).

 

“The test for proving demand futility is whether the facts show a reasonable doubt that (1) the directors are disinterested and independent, and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. . . . The proof must be of ‘facts specific to each director from which [the trier of fact] can [find a reasonable doubt] that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.’” Oakland Raiders, 93 Cal.App.4th at 587 (internal citations omitted).

 

But the burden on this motion is not on Plaintiff to prove the probable validity of the claims he has asserted derivatively, including the element of demand futility; the burden on this motion is on the Nominal Defendant. See Burt v. Irvine Co., above.  Nominal Defendant did not sustain this burden.

 

Second, Nominal Defendant offers considerable argument and three declarations – from TII’s former bookkeeper Peggy Kua, TII’s founder Tae Jong Park, and TII corporate counsel Elyssia Musolino – that set forth a litany of alleged bad acts and detrimental conduct by Plaintiff.  Perhaps that means TII has claims to assert against Plaintiff.  But Nominal Defendant’s declarations do not address Plaintiff’s allegations that underlie his derivative claims, for example: that defendants caused TII to overpay vendors and manufacturers owned and controlled by defendant Park, used company funds for personal expenses, and alienated vendors and customers while terminating key contractors and employees, all to the detriment of TII and for their own personal benefit.  See Complaint ¶¶ 37-43.

 

The Court concludes Nominal Defendant did not meet its burden.  Motion for bond is denied.

 

Defendant is ordered to give notice.

 

Motion to Compel Arbitration

 

The pending Motion for Bond stays all proceedings in the action until ten days after the motion has been determined.  See Corp. Code § 800(f); Barber v. Lewis & Kaufman, Inc. (1954) 125 Cal.App.2d 95, 98.

 

Accordingly, the hearing on Defendants’ Motion to Compel Arbitration is continued to October 31, 2022 at 1:30 p.m. in Department C31

 

Defendants are ordered to give notice.