Judge Michael J. Strickroth, Case 2022-01270603 2023-08-14 Tentative Ruling

Judge: Michael J. Strickroth, Case: 2022-01270603, Date: 2023-08-14 Tentative Ruling

Demurrer to Amended Complaint

The Demurrer of Defendants Lei Yu, Virginia Liu, and Skywheel Consulting, LLC is SUSTAINED without leave to amend as to the sixth cause of action of the first amended complaint and OVERRULED as to the remaining causes of action.

“A demurrer tests the sufficiency of a complaint by raising questions of law. In determining the merits of a demurrer, all material facts pleaded in the complaint and those that arise by reasonable implication, but not conclusions of fact or law, are deemed admitted by the demurring party. The complaint must be construed liberally by drawing reasonable inferences from the facts pleaded. [¶] In addition to the facts actually pleaded, the court considers facts of which it may or must take judicial notice. Moreover, a party may not avoid demurrer by omitting facts pleaded in the original complaint or by suppressing facts which prove the pleaded facts false. Inasmuch as the principle is that of truthful pleading, the court also will consider such facts. Rodas v. Spiegel (2001) 87 Cal.App.4th 513, 517.

In the First Amended Complaint (FAC), Plaintiff Pine Tree Home Inc. pleads causes of action for (1) fraud – concealment, (2) fraud – false promise, (3) breach of fiduciary duty – duty of good faith, (4) breach of fiduciary duty – undivided loyalty, (5) conversion, and (6) unjust enrichment. The second cause of action is against Defendant Liu only, and the remaining causes of action are against all Defendants.

Defendants contend, “The court lacks jurisdiction because the only viable Plaintiff, is an indispensable party, Dalian City Ganjingzi District Community Senior Service Center, the ‘Parent Company’, who is not joined in the action.” (Demurrer, 2:7-9.) Defendants contend the assignment of claims from Parent Company to Plaintiff (Exhibit A to the FAC) does not confer standing on Plaintiff under Revenue and Tax Code section 23301, “because the Parent Company has never registered to conduct intrastate business in the State of California.” (Demurrer, 2:14-15.)

At the pleading stage, Plaintiff has adequately pled this Court’s jurisdiction and Plaintiff’s standing to sue. Plaintiff alleges it is a California corporation doing business in Orange County. (FAC, ¶ 1.) Plaintiff is 100% owned by the Parent Company and the Parent Company made the initial capital contribution of $1 million. (FAC ¶¶ 11, 27.) However, Plaintiff alleges a series of acts and omissions by Defendants directed at Plaintiff which are sufficient to allege Defendants’ actions caused harm to Plaintiff, including allegations Defendants wrongfully took funds which belonged to Plaintiff at paragraph 64. (FAC ¶¶ 28-68.)

Defendants also contend Plaintiff fails to state sufficient facts in support of its six causes of action, addressed below:

1st COA: Fraud – Concealment

The elements of fraudulent concealment are (1) concealment or suppression of a material fact; (2) by a defendant with a duty to disclose the fact to the plaintiff; (3) the defendant intended to defraud the plaintiff by intentionally concealing or suppressing the fact; (4) the plaintiff was unaware of the fact and would not have acted as he or she did if he or she had known of the concealed or suppressed fact; and (5) plaintiff sustained damage as a result of the concealment or suppression of the fact. Hambrick v. Healthcare Partners Medical Group, Inc. (2015) 238 Cal.App.4th 124, 162.

Plaintiff has adequately alleged the first cause of action by pleading Defendants wrongfully diverted funds from Plaintiff and concealed the facts surrounding their wrongful diversion of funds, as well as other information regarding the corporation’s funds and operations. (FAC, ¶¶ 64, 72, 79.)

Plaintiff has adequately alleged Defendant Skywheel is the alter ego of Defendants Liu and Yu. (FAC, ¶¶ 70-75.)

The demurrer is overruled as to the first cause of action.

2nd COA: Fraud – False Promise

“Promissory fraud or false promise is a subspecies of the action for fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud.

The elements of promissory fraud ... are: (1) a promise made regarding a material fact without any intention of performing it; (2) the existence of the intent not to perform at the time the promise was made; (3) intent to deceive or induce the promisee to enter into a transaction; (4) reasonable reliance by the promisee; (5) nonperformance by the party making the promise; and (6) resulting damage to the promisee.” Rossberg v. Bank of America, N.A. (2013) 219 Cal.App.4th 1481, 1498.

This cause of action is against Defendant Liu only. Plaintiff alleges Liu promised to serve as Plaintiff’s attorney regarding a visa application for Xue Tan, Plaintiff’s CEO. (FAC, ¶ 86.) Plaintiff relied on the promise and paid $37,000 for the services, but Defendant did not intend to perform and Plaintiff suffered harm due to its reliance on Liu’s promise. (FAC, ¶¶ 87-91.)

At this stage, Plaintiff has adequately pled facts supporting the elements of promissory fraud. Therefore, the demurrer is overruled as to the second cause of action.

3rd COA: Breach of Fiduciary Duty – Duty of Good Faith

The elements of a claim for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) its breach, and (3) damage proximately caused by that breach. O'Neal v. Stanislaus County Employees' Retirement Association (2017) 8 Cal.App.5th 1184, 1215.

“It is without dispute that in California, corporate directors owe a fiduciary duty to the corporation and its shareholders and now as set out by statute, must serve “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders.” Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1037.

Here, Plaintiff has adequately alleged the existence of a fiduciary duty by Liu, Plaintiff’s general counsel and consultant, and by Yu, Plaintiff’s CEO. (FAC, ¶¶ 94, 95.) Plaintiff adequately alleges a breach of Defendants’ fiduciary duties by wrongfully transferring Plaintiff’s funds to Defendants’ accounts and making false statements to Plaintiff. (FAC, ¶ 96.) Therefore, the demurrer to the third cause of action is overruled.

4th COA: Breach of Fiduciary Duty – Undivided Loyalty

The fourth cause of action adequately alleges breach of fiduciary duty based on allegations Defendants knowingly acted against Plaintiff’s interest, including wrongful transfer of corporate funds, failure to disclose financial information, and falsely representing they were the true owners of Plaintiff. (FAC, ¶ 108.) While this cause of action is similar to the third cause of action, the fourth cause of action alleges distinct breaches of duty. Therefore, the demurrer to the fourth cause of action is overruled.

5th COA: Conversion

“Conversion is generally described as the wrongful exercise of dominion over the personal property of another. The basic elements of the tort are (1) the plaintiff's ownership or right to possession of personal property; (2) the defendant's disposition of the property in a manner that is inconsistent with the plaintiff's property rights; and (3) resulting damages. Conversion is a strict liability tort. The foundation of the action rests neither in the knowledge nor the intent of the defendant. Instead, the tort consists in the breach of an absolute duty; the act of conversion itself is tortious. Therefore, questions of the defendant's good faith, lack of knowledge, and motive are ordinarily immaterial. Regent Alliance Ltd. v. Rabizadeh (2014) 231 Cal.App.4th 1177, 1181.

Here, Plaintiff adequately alleges conversion based on Defendants’ wrongful taking of Plaintiff’s corporate funds. (FAC, ¶¶ 113-117.) Therefore, the demurrer to the fifth cause of action is overruled.

6th COA: Unjust Enrichment

There is no cause of action in California for unjust enrichment. Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1370. Therefore, the demurrer to Plaintiff’s sixth cause of action is sustained without leave to amend.

Plaintiff to give notice.

Motion to Strike Portions of Complaint

Defendants’ Motion to Strike Portions of the first amended complaint is DENIED.

Defendants move to strike Plaintiff’s punitive damages claim and references to Defendants’ actions against non-party Xue Tan.

Plaintiff has adequately pled grounds for punitive damages against Defendants based on allegations of fraudulent conduct by Defendants described above, including allegations that Defendants fraudulently transferred Plaintiff’s funds to Defendants’ personal accounts. (See FAC, ¶ 64; Civil Code § 3294(a).) Therefore, the motion is denied as to Plaintiff’s punitive damages allegations.

The motion is also denied as to Plaintiff’s allegations regarding non-party Xue Tan. Tan is allegedly Plaintiff’s CEO, and Plaintiff is entitled to allege background facts in its complaint. Defendants have not shown the allegations are improper at this stage.

Plaintiff to give notice.

Case Management Conference

Regardless whether the parties submit on the tentatives above, counsel for the parties are required to attend the Case Management Conference, either remotely or in person.