Judge Mitchell L. Beckloff, Case Number: 23STCP00064, Date: 2023-05-24 Tentative Ruling

Judge: Mitchell L. Beckloff, Case: 23STCP00064, Date: 2023-05-24 Tentative Ruling

Defendants, KRG Holding, LLC and Cabinets Outlet, LP, move for an order requiring Plaintiff, Wenzhou Qinghan Ceramsite Light Weight Building Materials Co., Ltd., to post a bond/undertaking pursuant to Code of Civil Procedure section 1030 (Section 1030). Plaintiff opposes the motion. The motion is granted.

Defendants also demurrer to the first amended complaint (FAC). Plaintiff opposes the demurrer. The demurrer is sustained as to the first cause of action brought under Corporations Code section 15903.04. As to the second cause of action for breach of contract (a non-writ claim), the demurrer is stayed pending assignment to an independent calendar court.

Cross-Complainant, KRG Holding, LLC, moves for judgment on the pleadings on its first (rescission) and third (declaratory relief) causes of action in its cross-complaint against Cross-Defendant, Wenzhou Qinghan Ceramsite Light Weight Building Materials Co., Ltd.. Cross-Defendant opposes the motion. The court notes all of Cross-Complainant’s claims are non-writ claims. The motion is stayed pending assignment to an independent calendar court.

A demurrer tests the sufficiency of a pleading, and the grounds for a demurrer must appear on the face of the pleading or from judicially noticeable matters. (Code Civil Proc., § 430.30, subd. (a); Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “We assume the truth of the allegations in the complaint, but do not assume the truth of contentions, deductions, or conclusions of law.” (California Logistics, Inc. v. State (2008) 161 Cal.App.4th 242, 247.)

A demurrer may be sustained without leave to amend when there is no reasonable possibility the defect can be cured by amendment. (Blank v. Kirwan, supra, 39 Cal.3d at 318.) Indeed, where the facts are not in dispute and the nature of the plaintiff's claim is clear, but no liability exists under substantive law and no amendment would change the result, sustaining a demurrer without leave to amend is proper. (City of Ceres v. City of Modesto (1969) 274 Cal. App.2d 545, 554.) The burden is on the plaintiff to show how the complaint might be amended to cure the defect. (Association of Community Organizations for Reform Now v. Department of Industrial Relations (1995) 41 Cal.App.4th 298, 302.)

Defendants move for an order requiring Plaintiff to post a bond/undertaking in the amount of $66,300 (or in any amount deemed appropriate by the court) pursuant to Section 1030.

“(a) When the plaintiff in an action or special proceeding resides out of the state, or is a foreign corporation, the defendant may at any time apply to the court by noticed motion for an order requiring the plaintiff to file an undertaking to secure an award of costs and attorney's fees which may be awarded in the action or special proceeding. For the purposes of this section, ‘attorney's fees’ means reasonable attorney's fees a party may be authorized to recover by a statute apart from this section or by contract.

(b) The motion shall be made on the grounds that the plaintiff resides out of the state or is a foreign corporation and that there is a reasonable possibility that the moving defendant will obtain judgment in the action or special proceeding.”

For purposes of Section 1030, subdivision (b), the “reasonable possibility” standard is not onerous. (See Baltayan v. Estate of Getemyan (2001) 90 Cal.App.4th 1427, 1431. [“Respondents were not required to show that there was no possibility that appellant could win at trial, but only that it was reasonably possible that respondents would win.”])

Plaintiff’s complaint admits it is a foreign corporation organized in the People's Republic of China. (Compl., ¶ 1.)

Plaintiff argues Defendants have not shown they are entitled to attorney’s fees under either a statute or a contract. As Plaintiff notes, the only contractual provision for attorney fees is in the context of the arbitration.[1] Moreover, Plaintiff advises the $60,000 estimate for attorney’s fees appears to arise predominately from the prosecution of the Cross-Complaint and not Defendants’ defense against claims alleged in Plaintiff’s FAC. Finally, Plaintiff argues Defendants cannot show a reasonable possibility of prevailing.

The court finds Defendants have demonstrated a reasonable possibility of prevailing in this litigation. The substantive defense against Plaintiff’s claim is for rescission based on fraud in the inducement. The court finds the evidence in support of the defenses (which are also the affirmative alleged in the Cross-Complaint) to be largely unpersuasive and inadequate; the evidence is vague and conclusory. (Goren Decl., ¶¶ 3-11.)

Nonetheless, based on the discussion herein on Defendants’ demurrer, the court finds there is reasonable possibility Defendants will prevail on its claim Plaintiff cannot maintain this lawsuit as a non-qualified foreign corporation. Defendants must show Plaintiff transacts intrastate business through its control and management of Defendant Cabinets Outlet LP.[2]

The court does agree with Plaintiff, however, that Defendants have not demonstrated entitlement to recovery of attorney fees arising from Plaintiff’s litigation—access to accounting books and records.

“ . . . all disputes, controversies or claims arising out of or relating to this Agreement will be resolved through mandatory binding arbitration . . . . The Arbitrator’s fees will be shared equally by the Parties, and each Party will initially bear its own costs and attorney’s fees, but the prevailing Party shall be reimbursed by the other Party for all attorney fees, witness fees and arbitration costs.”

Plaintiff’s claims in the complaint arguably arise from the purchase and sale agreement—its ownership interest provides it with a right of access. Therefore, recoverable attorney fees are limited by terms of the contract.

Civil Code section 1717 requires the court to consider whether the purchase and sale contract language puts the parties on notice the clause could result in a fee award. (See Rideau v. Stewart Title of California, Inc. (2015) 235 Cal.App.4th 1286, 1297.) Indeed, “ ‘[o]ne purpose of section 1717 is to avoid uncertainty and clarify the issue of [attorney] fees, so both sides can make rational evaluations about the case, including prospects of settlement and so forth.’ ” (Paul v. Schoellkopf (2005) 128 Cal.App.4th 147, 152.)

Given that this particular fee-shifting provision appears in the section pertaining to arbitration (as well as within a sentence discussing arbitration), it seems unlikely Defendants could believe the attorney’s fees provision applied in Plaintiff’s litigation to obtain access to Defendant Cabinets Outlet LP’s accounting books and records.

Defendants suggest they can recover attorney’s fees from an arbitration provision, citing Ajida Technologies, Inc. v. Roos Instruments, Inc. (2001) 87 Cal.App.4th 534. Notably, fees were awarded there after arbitration, the trial court’s confirmation of the arbitration award and resolution of the appeal on the arbitration award. (Ajida Technologies, Inc. v. Roos Instruments, Inc. (2001) 87 Cal.App.4th 534, 551.) This case is clearly distinguishable.

The court therefore finds the arbitration provision does not support a fee award on the claims alleged in the complaint.[3] Defendants have also not identified any other applicable contractual (or statutory) provision entitling them to attorney’s fees. Thus, Defendants are entitled only to a bond in the amount of reasonable estimated costs only: $6,300. (Feldman Decl., ¶ 8.)

Plaintiff’s first amended complaint alleges two causes of action—violation of Corporations Code section 15903.04 and breach of contract. The court considers Plaintiff’s Corporations Code claim only. (The demurrer to the non-writ claim is stayed pending assignment to an independent calendar court.)

The FAC alleges Defendant Cabinets Outlet LP is a limited partnership organized under the laws of this state. (FAC ¶ 2.) Plaintiff acquired an 80 percent partnership interest in Defendant Cabinets Outlet LP. (FAC ¶ 5.)

On December 5, 2022, Plaintiff demanded Defendant Cabinets Outlet LP to produce the following records pursuant to Corporations Code section 15903.04:

A. a current list showing the full name and last known street and mailing address of each partner, separately identifying the general partners, in alphabetical order, and the limited partners, in alphabetical order;

B. a copy of the initial certificate of limited partnership and all amendments to and restatements of the certificate, together with signed copies of any powers of attorney under which any certificate, amendment, or restatement has been signed;

D. a copy of the limited partnership’s federal, state, and local income tax returns and reports, if any, for the six most recent years;

E. a copy of any partnership agreement made in a record and any amendment made in a record to any partnership agreement;

F. a copy of any financial statement of the limited partnership for the six most recent years; and

G. a copy of any record made by the limited partnership during the past three years of any consent given by or vote taken of any partner pursuant to this chapter or the partnership agreement. (FAC ¶¶ 16-17.)

Relying upon Corporations Code sections 2203 and 2105, Defendants argue Plaintiff—as a non-qualified foreign corporation transacting business in California—lacks legal standing and capacity to maintain its legal action against Defendants. Defendants note Plaintiff admits it did not and does not transact intrastate business within the meaning of Corporations Code section 191, but such a conclusion is not binding on demurrer. (FAC ¶ 21.)

Pursuant to Corporations Code section 2105, subdivision (a), “[a] foreign corporation shall not transact intrastate business without having first obtained from the Secretary of State a certificate of qualification.” (See also Corp. Code, § 191, subds. (a) [defining phrase “transact intrastate business”]; see also Corp. Code, § 171 [defining “foreign corporation”].) To obtain such a certificate, the foreign corporation must file the prescribed form signed by a corporate officer and include required information. (Corp. Code, § 2105, subd. (a).)

“A foreign corporation subject to the provisions of Chapter 21 (commencing with Section 2100) which transacts intrastate business without complying with Section 2105 shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state, commenced prior to compliance with Section 2105, until it has complied with the provisions thereof and has paid to the Secretary of State a [$250] penalty . . . in addition to the fees due for filing the statement and designation required by Section 2105 and has filed with the clerk of the court in which the action is pending receipts showing the payment of the fees and penalty and all franchise taxes and any other taxes on business or property in this state that should have been paid for the period during which it transacted intrastate business.” [Emphasis added.]

“The failure of a foreign corporation to qualify to transact business prior to commencing an action is a matter of abatement of the action. [Citation.] Once a nonqualified foreign corporation commences an action regarding intrastate business, the defendant may assert by demurrer or as an affirmative defense in the answer the lack of capacity to maintain an action arising out of intrastate business. [Citation.] This abatement procedure enables the foreign corporation to obtain a judicial determination as to whether it is in fact transacting intrastate business. The defendant bears the burden of proving: (1) the action arises out of the transaction of intrastate business by a foreign corporation; and (2) the action was commenced by the foreign corporation prior to qualifying to transact intrastate business. [Citation.] If the defendant establishes the bar of the statute, then the foreign corporation plaintiff must comply with section 2203, subdivision (c).” (United Medical Management Ltd. v. Gatto (1996) 49 Cal.App.4th 1732, 1740.)

To prevail on their demurrer, the court is required to find Plaintiff transacts intrastate business (as defined by Corporations Code section 191) as a matter of law.

While Plaintiff alleges it does not transact business within California, as noted, the court is not required to accept the allegation as true, even on demurrer, in the face of conflicting factual allegations.

The court “ ‘must “give[ ] the complaint a reasonable interpretation, and treat[ ] the demurrer as admitting all material facts properly pleaded.” [Citation.] Because only factual allegations are considered on demurrer, we must disregard any “contentions, deductions or conclusions of fact or law alleged . . . .” ’ [Citation.]” (WA Southwest 2, LLC v. First American Title Ins. Co. (2015) 240 Cal.App.4th 148, 151.)

“ ‘[T]ransact[ing] intrastate business’ means entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.” (Corp. Code, § 191, subd. (a).) The definition entails “substantial[ ]” and “continuing” activities within the state. (Beirut Universal Bank v. Superior Court (1969) 268 Cal.App.2d 832, 841; accord, Detsch & Co. v. Calbar, Inc. (1964) 228 Cal.App.2d 556, 567 [foreign corporation's activities need not be “entirely” intrastate, only “substantial[ly]” intrastate].)

Whether a corporation's activities satisfy this standard typically hinges upon the particular facts of each case. (West Publishing Co. v. Superior Court (1942) 20 Cal.2d 720, 727.)

The FAC alleges Plaintiff is foreign corporation organized in the People's Republic of China. (FAC ¶ 1.) Plaintiff also alleges it owns 80 percent of Defendant Cabinets Outlet, LP. (FAC ¶ 5.) As part of the transaction when Plaintiff purchased its interest in Defendant Cabinets Outlet, Plaintiff was permitted appoint a “representative” as the Chief Executive Officer (CEO). (FAC ¶ 6.) Plaintiff’s “representative” could set policies, marketing strategies and manage department supervisors. (FAC ¶ 6.)

Plaintiff appointed Zhongehe Li as the CEO for Defendant Cabinets Outlet, LP. (FAC ¶ 7.) Mr. Li worked from April 2021 to January 7, 2022 as CEO for Defendant Cabinets Outlet, LP. (FAC ¶ 11.)

Yaron Goren served as manager of Defendant KRG Holding, LLC, the general partner of Defendant Cabinets Outlet, LP while Mr. Li served as CEO. (FAC ¶ 13.)

Corporations Code section 191, subdivision (b)(3) specifies: “A foreign corporation shall not be considered to be transacting intrastate business merely because its subsidiary transacts intrastate business or merely because of its status as . . . (3) A limited partner of a domestic limited partnership.”

The facts alleged are insufficient for this court to determine as a matter of law that Plaintiff is transacting intrastate business. The court cannot determine on the allegations pled the nature and quality of the relationship between Plaintiff and Mr. Li. While the FAC alleges Mr. Li is Plaintiff’s representative, the term is susceptible to different meanings. To the extent Mr. Li is acting in a day-to-day capacity for Defendant Cabinets Outlet, LP, it appears (based on the allegations) he is doing so for a domestic limited partnership, not Plaintiff. Defendants appear to conflate Plaintiff and Defendant Cabinets Outlet, LP. That Plaintiff owns an 80 percent interest in Defendant Cabinets Outlet LP and appointed the CEO does not equate to transacting intrastate business. The court disagrees Defendant has cited any “highly analogous authorities” or that Plaintiff’s selection of Mr. Li constitutes a physical presence in the state. (Reply 2:1, 2:11-12.)[4]

Accordingly, for purposes of demurrer, the court cannot find Plaintiff lacks the legal authority to maintain this lawsuit.

Cross-Complainant, KRG Holding, LLC, alleges four cases of action in its cross-complaint—recission, fraud, declaratory relief and unjust enrichment.

Cross-Complainant moves for judgment on the pleadings on its claim for rescission and declaratory relief against Cross-Defendant, Wenzhou Qinghan Ceramsite Light Weight Building Materials Co., Ltd.

The claims are non-writ claims and are not properly heard in this court. Accordingly, Cross-Complainant’s motion for judgment on the pleadings is stayed pending reassignment to an independent calendar court at the conclusion of these proceedings.

Based on the foregoing, the court will grant the motion for an undertaking in the amount of $6,300. The court will also overruled the demurrer to the first cause of action and stay Plaintiff’s claim on the second cause of action. Finally, the court will stay the motion for judgment on the pleadings (and the proceedings) on KRG Holding, LLC’s Cross-Complaint.

[1] Plaintiff argues: “Although Plaintiff filed an amended complaint later and alleged an additional cause of action, (Breach of Contract), the amended complaint was filed after the filing of this CCP Section 1030 Motion, therefore it should not be relevant for the adjudication of this Motion.” (Opposition 5.) The court agrees the motion must proceed on the claims alleged at the time Defendants filed the motion as their moving papers control.

[2] The court notes the facts surrounding Plaintiff’s possession of Defendant Cabinets Outlet LP’s accounting books and records suggests some involvement by Plaintiff in Defendant Cabinets Outlet LP’s intrastate business.

[3] The court expresses no opinion whether some other provision in the purchase and sale agreement related to Plaintiff’s breach of contract action might support Defendants’ claim they are entitled to attorney’s fees.

[4] One defendant in Le Vecke v. Griesedieck Wester Brewery Co. (1956) 233 F.2d 772, 777 was a foreign corporation that admitted it maintained an office in California, had an employee who served as the foreign corporation’s west coast regional representative with six field representatives, four of whom spent “substantial amounts of their time in the interests of [the foreign corporation] within the State of California.” The FAC’s allegations do not provide similar facts. The court notes the other foreign corporate defendant in Le Vecke v. Griesedieck Wester Brewery Co. did not transact intrastate business as it did not maintain a place of business in California, did not own or lease real property here, did not have inventory in the state, had no salespersons here and did not advertise in the state. (Id. at 774.) Neogard Corp. v. Malott & Peterson-Grundy (1980) 106 Cal.App.3d 213 (Neogard Corp.) is similar to Le Vecke v. Griesedieck Wester Brewery Co., supra, 233 F.2d at 772. In Neogard Corp., there was a direct and substantial relationship between the foreign corporation and marketing efforts in the state on its behalf. Again, the facts are insufficiently developed in the FAC to allow the court to make finding requested by Defendants as a matter of law.