Judge Thomas Falls, Case 20PSCV00692 2022-10-31 Tentative Ruling

(1) DEFENDANT BEST LIVING INTL INC.’S DEMURRER TO PLAINTIFF’S SECOND AMENDED COMPLAINT

(2) DEFENDANTS JIAN ZHANG’S AND WENJIE KUANG’S DEMURRER TO PLAINTIFF’S SECOND AMENDED COMPLAINT

(1) DEFENDANT BEST LIVING INTL INC.’S DEMURRER TO PLAINTIFF’S SECOND AMENDED COMPLAINT is SUSTAINED with leave to amend.

(2) DEFENDANTS JIAN ZHANG’S AND WENJIE KUANG’S DEMURRER TO PLAINTIFF’S SECOND AMENDED COMPLAINT is SUSTAINED in part and OVERRULED in part. Please see ‘Conclusion’ section for discussion on leave to amend.

This case arises from partnership disagreements. Plaintiff Giggs Liang Lei (“Plaintiff”) alleges that Defendant Wenjie Kuang aka Garry Kuang (‘Defendant Kuang”) reached out to Plaintiff in the hopes of doing business together. Defendant Kuang and his friend, Defendant Zhang, sought to become business partners with Plaintiff and asked Plaintiff to help them develop a U.S. market for the goods (furniture manufactured in China). The parties reached an oral agreement that Plaintiff would be given 20% ownership of the Company and each Defendant would be given 40% ownership, although “Plaintiff was not told the exact percentage of ownership held by Defendants Zhang and Kuang, respectively.[1] After months of negotiations, on January 1, 2017, the Parties entered into a Sales Partnership Agreement ("Agreement"). Defendants Kuang and Zhang signed the agreement on behalf of Best Living. Even though the Agreement states the Company’s earnings are calculated each calendar year, during the time relevant to this action, for more than two and a half years, “Plaintiff never had access to the Company’s annual earnings calculations; Plaintiff did not receive any dividends corresponding to this 20% interest in the Company.”. In April 2019, however, Plaintiff was given $20,000 ($10,000 distribution for years of 2017 and 2018).

In or around March 2019, Defendant Kuang told Plaintiff he would no longer oversee the business as he wanted to endeavor into the marijuana business.

In 2019, Defendants had a potential buyer for the Company and Plaintiff told Defendants he would purchase the Company for the same price.

However, Defendants sold the Company to somebody else. Post-sale, Plaintiff was paid $29,960 ($20,000 for his share and $10,000 for the 2019 distribution). Later, Plaintiff noticed on the Secretary of State website that Defendant Zhang was still CEO, Secretary, CFO, and Director of the Company. Based on said information, Plaintiff claims that the company was not sold at all and that the Defendants still owned the company and that “selling the company was an excuse for the Defendants to kick the Plaintiff out of the company and make him lose his ownership in the company.”

On November 19, 2020, Plaintiff filed suit against Defendants Best Living Intl Inc. (“Defendant Best Living”), Wenjie Kuang aka Garry Kuang, Jian Zhang, and Does 1 through 20 for:

On November 18, 2021, Defendants Jian Zhang and Wenjie Kuang filed a motion for Judgment on the Pleadings.[2]

On January 7, 2022, the court granted Defendants’ Jian Zhang’s and Wenjie Kuang’s Motion for Judgment on the Pleadings with leave to amend.[3]

On January 25, 2022, Plaintiff filed a First Amended Complaint realleging the same causes of action against the same Defendants.

On August 3, 2022, sustained in part and overruled in part the Defendants’ demurrers, with leave to amend.

On August 29, 2022, Plaintiff filed her Second Amended Complaint (“SAC”) for:

On September 26, 2022, Defendants filed the instant Demurrers and motions to strike.

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (CCP §§ 430.30, 430.70.) At the pleading stage, a plaintiff need only allege ultimate facts sufficient to apprise the defendant of the factual basis for the claim against him. (Semole v. Sansoucie (1972) 28 Cal. App. 3d 714, 721.) A “demurrer does not, however, admit contentions, deductions or conclusions of fact or law alleged in the pleading, or the construction of instruments pleaded, or facts impossible in law.” (S. Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732 [internal citations omitted].)

The individual defendants demur to all four causes of action and the corporate defendant only demurs to the fourth cause of action (unjust enrichment).

As a prefatory matter, the court notes that the allegations from the SAC do not largely differ from the FAC. Therefore, much of the court’s analysis will remain identical.

Moreover, Plaintiff’s opposition takes issue with the fact that Defendants are re-arguing causes of action that the court previously overruled. For its proposition that Defendants are permitted to do so, Defendants cite to Pacific States Enterprises, Inc. v. City of Coachella (1993) 13 Cal.App.4th 1414. (Opp. p. 7.) The case observed the following in an analogous situation:

Although it is not a significant issue on appeal, we note the following concerning the fact that the City and Nelson demurred to the third cause of action of the first amended complaint notwithstanding that their demurrers to an essentially identical third cause of action of the original complaint (based on several largely identical grounds) had been overruled: “The interests of all parties are advanced by avoiding a trial and reversal for defect in pleadings. The objecting party is acting properly in raising the point at his first opportunity, by general demurrer. If the demurrer is erroneously overruled, he is acting properly in raising the point again, at his next opportunity. If the trial judge made the former ruling himself, he is not bound by it. [Citation.] And, if the demurrer was overruled by a different judge, the trial judge is equally free to reexamine the sufficiency of the pleading. [Citations.]” (Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 877, 168 Cal.Rptr. 361—discussing the analogous situation of granting a motion for judgment on the pleadings following a prior overruling of a demurrer with respect to the same pleading; see Weil & Brown, Cal.Practice Guide: Civ.Pro. Before Trial (The Rutter Group 1992) § 7:140, at p. 7–37.) Thus, the City and Nelson were entirely within their rights to demur to the third cause of action of the first amended complaint notwithstanding their prior unsuccessful efforts to demur to the third cause of action of the original complaint.

Therefore, even though the court overruled the demurrer as to two of the causes of action subject to this demurrer (breach of fiduciary duty and unjust enrichment), the court agrees that Defendants are within their right to demur again.

The standard elements of a claim for breach of contract are: ‘(1) the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) damage to plaintiff therefrom.’” (Wall Street Network, Ltd. v. New York Times Co. (2008) 164 Cal.App.4th 1171, 1178.)

Plaintiff appears to assert the breach of contract claim against the individual defendants for their alleged failure to give notice to attend shareholder meetings.

However, the complaint itself concedes that “Plaintiff and Defendant Best Living entered into a written contract.” (SAC ¶ 26, emphasis added). Accordingly, Plaintiff’s attempt to hold the individual defendants’ liable fails as a matter of law because it is well established that [d]irectors and officers are not personally liable on contracts signed by them for and on behalf of the corporation unless they purport to bind themselves individually.” (United States Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal. 3d 586, 594-595.)

In opposition, Plaintiff avers that while agents and employees of a corporation are generally shielded from liability for breach of contract by the corporation, this rule can be disregarded when the plaintiff is able to show a unity of interest and ownership between the corporation and its equitable owner.

Here, however, the court is uncertain how alter ego allegations would be relevant in a breach of contract cause of action when the allegations against the individual defendants appears to be based in breach of bylaws, bylaws which Plaintiff alleges did not even exist.

Therefore, as there appears to be incongruity between the contract that Plaintiff claims was breached and the allegations it uses against the individual defendants, the court SUSTAINS the demurrer.

Note on leave to amend: As this would be Plaintiff’s third amended complaint, the court requests Plaintiff to present legal authority and the proposed factual allegations at the hearing. If the court finds that the allegations would be sufficient as a matter of law, the court will grant leave to amend.

Defendants aver that “it is well-established under California law that the alter ego doctrine is only a means of imposing liability for an underlying cause of action, not an independent/stand-alone cause of action.” (Motion p. 6.) Indeed, alter Ego is not a separate cause of action, it is just allegations to be include in the complaint.

“A claim against a defendant, based on the alter ego theory, is not itself a claim for substantive relief, . . . but rather, procedural, i.e., to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice.” (Hennessey’s Tavern, Inc. v. American Air Filter Co. (1988) 204 Cal.App.3d 1351, 1359.)

Therefore, the court SUSTAINS the demurrer as to the 2^nd cause of action for alter ego WITHOUT LEAVE TO AMEND.

The elements for a breach of fiduciary duty cause of action are “the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach.” (Thomson v. Canyon (2011) 198 Cal.App.4th 594, 604.) “‘[B]efore a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.’” (Hasso v. Hapke (2014) 227 Cal.App.4th 107, 140 (quoting Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 221).) “A fiduciary duty under common law may arise ‘when one person enters into a confidential relationship with another.’” (Id.)

In its previous tentative, the court overruled the demurrer as to this cause of action. The court in its tentative stated the following:

Defendant argues that Plaintiff does not provide facts but mere conclusions to support this cause of action. (Demurrer p. 10.) The court is not persuaded by this argument. It would have been conclusory for Plaintiff to state that Defendants breached their fiduciary duty. That, however, Plaintiff did not do. Rather, Plaintiff supported the conclusion by presenting facts, facts that Defendants “denied Plaintiff’s right to vote in the shareholder’s meetings and his access to the Company’s financial records, and deprive him of his right to the dividends he was entitled to.” (FAC ¶51.) Accordingly, as officers of the corporation, the individual Defendants owed a fiduciary duty to the corporation and Plaintiff, a minority shareholder. (See Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 345). Moreover, Defendant Zhang as a majority shareholders (FAC ¶12), owed a fiduciary duty to Plaintiff, a minority shareholder, by using his ability to control a corporation in fair, just, and equitable manner. (See Jara v. Supreme Meats, Inc. (2004) 121 Cal.App.4th 1238, 1253; Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108-112.) But here, as Plaintiff argues, the company was deceptively sold, depriving Plaintiff of his ownership interest in the company. (FAC ¶51.)

Now, Defendants argue that this third cause of action is duplicative of the breach of contract action, and thus are properly subject to a demurrer. (Motion p. 7.)

While it is true that a demurrer may be sustained when a cause of action is duplicative of another cause of action and “thus adds nothing to the complaint by way of fact or theory of recovery,” this rule is not universally accepted. There is a split among the courts as to whether redundancy of a cause of action is a ground on which a demurrer may be sustained. (Compare Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858 [holding redundancy is not a proper ground for demurrer] to Rodrigues v. Campbell Industries (1978) 87 Cal.App.3d 494, 501 [holding demurrer may be sustained on grounds of redundancy].) Moreover, the cases that Defendants cite do not involve breach of contract cause of action and a breach of fiduciary cause of action.

Therefore, the court adheres to its analysis in the previous tentative by OVERRULING the demurrer as to the 3^rd cause of action.

Though the court previously ruled on this cause of action, the court agrees with Defendants that Plaintiff’s use of the word “Defendants” makes the pleading uncertain because it is unclear as to which Defendants is this cause of action directed. (Demurrer p. 8.)

Therefore, the court SUSTAINS the demurrer as to the unjust enrichment cause of action WITH LEAVE TO AMEND.

1^st cause of action for Breach of Contract: SUSTAINED. The court will hear from Plaintiff as to whether leave to amend is appropriate. In doing so, Plaintiff is to present legal authority and the proposed amendments at the hearing;

4^th Cause of action for unjust enrichment (pertinent to both demurrers): SUSTAINED with leave to amend.

[1] Plaintiff was not entitled to a base salary and any social security benefit or insurance, instead he would receive 20% ownership. Moreover, Plaintiff’s job title was Vice-General Manager of sales, wherein he was responsible for devising and implementing policies and strategies related to personnel; market management; account settlements and marketing in the sales department and others.

[2] Moving Defendants are Best Living’s corporate agents and/or employees. Plaintiff’s Complaint does not indicate Plaintiff’s specific title or role in the company other than that Defendants “offered Plaintiff a part time job position . . . and that when Plaintiff transitioned to a full-time position at the current company, his position would be adjusted to General Manager of Sales and he would then be entitled to 28% ownership of the company.” (Complaint ¶7.)

[3] The court did so as Plaintiff’s main qualm seemed to be that he was stripped of his ownership interest by way of Defendants’ purported wrongful conduct, conduct which Plaintiff did not offer sufficient facts to substantiate.

[4] Striking second cause of action for alter ego is renders the motion to strike said cause of action moot and the court allowed for leave to amend as to the fourth cause of action for unjust enrichment.