Judge: Michael Small, Case: 24STCV12162, Date: 2024-10-03 Tentative Ruling
Case Number: 24STCV12162 Hearing Date: October 3, 2024 Dept: 57
Plaintiff Mengyuan Liu (“Liu”) sued Defendant Lin Yun Xiang (“Xiang”) over
an allegedly fraudulent investment scheme. Pending before the Court are the
demurrer of Xiang to Liu’s operative First Amended Complaint (“the FAC”) and
Xiang’s motion to strike the prayers for
punitive and treble damages in the FAC.
The Court is overruling the demurrer and denying the motion to strike.
THE ALLEGATIONS
IN THE FAC
Liu alleges in the FAC that Xiang marketed fraudulent investment schemes
related to entities called Blockchain Alliance and East West Investment Capital
Co (“East West”) to Liu by representing that both entities were in good
standing in California and that their securities could be publicly traded in
the United States. (FAC ¶¶ 9, 11.) Xiang did not disclose, however, that he was
not licensed to market these or any other securities. (Id., ¶ 16.) The FAC
alleges that Xiang fraudulently induced Liu to invest, and that Liu did invest,
in three transactions, an amount totaling $528,000, through Xiang, in
Blockchain Alliance in May 2018 and in East West between January and February
2019. (Id., ¶ 14.) Liu invested
additional funds that Xiang deposited to personal accounts. (Ibid.) Xiang
specifically represented to Liu that she would receive documents including
share certificates confirming her equity interest in each venture. (Ibid.)
Xiang never sent Liu any of the promised shares in
East West, which has been suspended by the California Secretary of State. (Id.,
¶ 17.) Further, Liu alleges that in November 2020, she discovered that
Blockchain Alliance was a massive fraud. (Id., ¶ 19.) Finally, in 2021, Xiang informed
Liu that her money was gone and represented that he would “make good” on her
losses but failed to do so. (Ibid.) In or about December 2021, Liu discovered
that PEChain and Index Bank, which were affiliated with Blockchain Alliance,
did not exist and at this time discovered the full scope of Xiang’s fraudulent
scheme. (Id., ¶ 20.) At bottom, Liu says
in the FAC, Blockchain Alliance and East West. were sham corporations that operated
as the alter egos of Xiang to carry out his scheme. (Id. ¶
10.)
A. Demurrer
Nonjoinder of a Necessary or Indispensable Party
Xiang contends that the FAC is defective because East West is a necessary
or indispensable party to the action that Liu needed to sue but failed to do so. (Xiang does not make the same contention
about Blockchain Alliance). According to
Xiang, East West is a necessary or indispensable party because the funds Liu
invested went to East West.
Beyond that
bald assertion, however, Xiang does not offer any analysis under the doctrine governing
the joinder of necessary or indispensable parties as to why that doctrine
applies here. More fundamentally, Xiang’s
contention overlooks the allegations in the FAC that East West was a phony
shell company (and that it is now suspended) that was an alter ego of Xiang,
which he employed to carry out his scheme to defraud Liu. Xiang fails to demonstrate that, under the
circumstances alleged, it was necessary for Liu to have sued East West.
The Court overrules the demurrer on the ground of nonjoinder of a necessary
or indispensable party.
First Cause of Action for Promissory Fraud
Promissory
fraud is a species of fraud. “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.” (Engalla v. Permanente Med. Group,
Inc. (1997) 15 Cal.4th 951, 973.) A
claim for promissory fraud must be pled with specificity, just like any fraud
claim. (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1060.)
Xiang contends that the FAC fails to
plead promissory fraud with the requisite specificity. Xiang is mistaken. The following allegations in the FAC satisfy
the specificity requirement. On numerous
occasions in 2018 and 2019, Xiang represented to Liu “that her investments
would be ‘safe,’ ‘reliable,’ ‘can’t lose,’ ‘get in on the ground floor,’ ‘you
will lose money by not investing with me now,’ ‘Trust me,’ etc.” (Id., ¶ 12.) Xiang
further stated that these investments would go ‘through the roof' because it
was based [on] a special trading algorithm he developed called ‘GCAI’ that
could earn profits by buying a cryptocurrency on one exchange and selling it at
a higher price on another.” (Ibid.) In “May 2018, Xiang represented to Liu that
she could successfully obtain a significant return at a very low ‘investment’
and financial risk by investing into” Blockchain Alliance. (Id., ¶ 10.) Xiang further
misrepresented to Liu that East West was backed by a Time Chain Group Co.,
Ltd., a major financial player in Thailand, that East West would be going
public soon in December 2018 and that the shares would double in value in three
months. (Id., ¶ 13.) On January 2, 2019, during a conference call, Xiang
guaranteed that Liu’s investment in East West, which Xiang registered on
December 31, 2018, would double. (Id., ¶ 10.) At all relevant times, Liu relied on Xiang’s
representations. (Id., ¶ 11.) Xiang, however, had no intention of
performing these promises at the time he made them to Liu. (Id., ¶ 22.) Xiang
never sent Liu any of the promised shares in East West. (Id., ¶ 17.) On July
16, 2021, in a California Secretary of State filing, Xiang admitted that
Millennial Kingdom, formerly known as Blockchain Alliance, had no outstanding
shares, confirming that he never issued Liu any shares. (Id., ¶ 15.)
All told, the Court concludes FAC
sufficiently alleges a claim for promissory fraud and the demurrer to that
claim is thus overruled.
Second Cause of Action for Conversion
The elements for a claim of conversion are: “(1)
the plaintiff's ownership or right to possession of the property; (2) the
defendant's conversion by a wrongful act or disposition of property right; and
(3) damages.” (IIG Wireless, Inc. v. Yi (2018) 22 Cal.App.5th 630,
650.) Money can be converted if the amount converted “is
a specific, identifiable sum . . . .” (PCO, Inc. v. Christensen, Miller, Fink, Jacobs,
Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395.)
Xiang contends that the FAC fails to plead the element of a wrongful
act. That is incorrect. The FAC pleads
that Xiang misappropriated all of Liu’s $528,000 investment and used the funds
for his own benefit and use. (FAC, ¶¶ 8, 26, 28.) If true, that is a wrongful act
that can support a claim for conversion.
For that reason, the demurrer to the conversion claim is overruled.
Third Cause of Action for Violation of Penal Code Section
496(c)
Penal Code section 496(a) makes it a
crime to receive or withhold from the owner “property that has been . . .
obtained in any manner constituting theft.” (Pen. Code, § 496(a).) Under California law, “theft” includes theft
by false pretense, or the consensual but fraudulent acquisition of property, including
money, from its owner. (Id., § 484(a); Bell v. Feibush (2013) 212 Cal.App.4th
1041, 1049.) Section 496(c) authorizes a
civil action for a violation of Section 496(a).
Xiang contends that the FAC fails to
allege facts demonstrating that Xiang received any property stolen from Liu. Xiang
is wrong. The FAC alleges that Xiang
misappropriated Liu’s investment funds for his own use and actively concealed
the theft. (FAC, ¶ 33.) It also alleges that Liu made the investments
“through Xiang” and invested additional funds that “Xiang deposited to personal
accounts.” (Id., ¶ 14.) This is the
stuff of a Section 496(c) civil action for theft. The demurrer to the Section 496(c) claim is thus
overruled.
Fourth Cause of Action for Breach of Fiduciary Duty
Xiang contends that the FAC’s allegations that Xiang “recommended” investments
to Liu does not establish that Xiang
owed a fiduciary duty to Liu (Demurrer, p. 7.) Here, Xiang overlooks that the FAC alleges
that a fiduciary relationship arose from, inter alia, (1) Xiang’s status as
Liu’s agent in “establishing her ‘investments’ and “control[ing] Plaintiff’s
$528,000,” (FAC, ¶¶ 35-36), and (2) Xiang ‘s actions in holding himself out as a “financial expert” who marketed the investment
schemes to Liu and through whom Liu made investments . (Id., ¶¶ 9, 14.) These allegation are sufficient to establish that
Xiang owed a fiduciary duty to Liu. The
demurrer to the claim for breach of fiduciary duty is overruled.
B. Motion to Strike
Xiang moves to strike the prayers for punitive and treble damages from
the FAC. Liu seeks punitive damages in connection with her promissory fraud,
conversion, and breach of fiduciary duty claims. She seeks treble damages in connection with
her theft claim under Penal Code section 496. A
plaintiff is entitled to punitive damages on claims for promissory fraud,
conversion, and breach of fiduciary if the plaintiff proves by clear and convincing
evidence that the defendant committed any of those torts with malice,
oppression, or fraudulent intent. In the
Court’s view, the allegations in the FAC, if true, would support an award of
punitive damages for Liu on those claims. Treble damages is authorized under Section 496. Because the FAC sufficiently alleges a
Section 496 claim, the propriety of the prayer for treble damages follows from
that.
For these reasons, the motion to strike is denied.