Judge William A. Crowfoot, Case 22AHCV00317 2023-03-27 Tentative Ruling

Judge: William A. Crowfoot, Case: 22AHCV00317, Date: 2023-03-27 Tentative Ruling

On May 31, 2022, plaintiff Stephen Lu (“Plaintiff”), individually and in his capacity as Trustee of the Lu Family Trust of March 16, 2007 (“Trust”), filed this action against defendants Edward Lo (“Lo”), Chang Huan Hsueh, David Wan, Wilson Ngai, and Julian Fong (collectively, “Defendants”) asserting claims for breach of fiduciary duty, slander, intentional infliction of emotional distress, harassment, and declaratory relief.

On September 29, 2022, the Honorable Colin P. Leis granted in part Defendants’ special motion to strike pursuant to CCP § 425.16. Judge Leis also sustained Defendants’ demurrer to each cause of action and granted Defendants’ motion to strike the prayer for attorney’s fees with leave to amend.

On November 2, 2022, Plaintiff filed the operative First Amended Complaint (“FAC”). The FAC only contains two causes of action, one for breach of fiduciary duty, and the other for declaratory relief.

Plaintiff is a shareholder and former board director of Mega Bank, as well as one of the original founders. (FAC, ¶ 1.) Mega Bank was founded in 2006 by a group of Chinese American investors in the San Gabriel Valley area. (FAC, ¶ 13.) Lo was formerly the president and chief executive officer of Mega Bank and currently serves as the Chairman of the Board for Mega Bank. (FAC, ¶ 2.) The other defendants are board directors and/or officers for Mega Bank. (FAC, ¶¶ 3-6.) Plaintiff alleges that he was wrongfully ousted from the Board of Directors in August 2021 (FAC, ¶ 1) and that Defendants have breached their fiduciary duties to shareholders. (FAC, ¶¶ 31, 34, 36.)

On December 2, 2022, Defendant Lo filed a special motion to strike paragraph 15(j) of the FAC pursuant to CCP § 425.16 (the “anti-SLAPP motion”).

On December 30, 2022, Defendants filed a demurrer to the FAC on grounds that each cause of action fails to state sufficient facts and is uncertain. Defendants also move to strike paragraphs 15, 16(b), 17-18, 21-24, 29, 36(a), 36(b), 36(c), and Items 5(c)-(e) of the prayer for relief.

On January 6, 2023, Plaintiff filed an opposition brief to Lo’s anti-SLAPP motion, and, on March 10, 2023, Plaintiff filed opposition briefs to Defendants’ demurrer and motion to strike. Defendants filed reply briefs on March 20, 2023. Lo also filed evidentiary objections in connection with his reply brief for his anti-SLAPP motion. As discussed below, Plaintiff fails to show that he can overcome the litigation privilege. Accordingly, the evidentiary objections are not material to the disposition of the anti-SLAPP motion.

“Resolution of an anti-SLAPP motion involves two steps. First, the defendant must establish that the challenged claim arises from activity protected by section 425.16. [Citation.] If the defendant makes the required showing, the burden shifts to the plaintiff to demonstrate the merit of the claim by establishing a probability of success.” (Baral v. Schnitt (2016) 1 Cal.5th 376, 384.)

“Thereafter, Lo wrote a letter to the same regulators [FDIC] accusing Nerland, his own handpicked successor, of conducting a fraudulent Chairmanship election, thereby buttressing the concerns of these regulators that something was amiss in Mega [Bank’s] management and direction. This was a contributing factor to the issuance of the MOU.”

By way of background, the MOU is a memorandum of understanding issued in November 2020 by the FDIC which placed Mega Bank under closer oversight and detailed corrective measures to be undertaken. (FAC, ¶ 15(a).) Lo specifies in his declaration that his correspondence was in the form of an email, not a letter. (Motion, Lo Decl., ¶ 4.) To maintain consistency with the FAC, the Court refers to this communication as a letter.

The anti-SLAPP statute expressly protects statements and writings made “in connection with an issue under consideration or review by a legislative, executive or judicial body or any other official proceeding authorized by law.” (Civ. Proc. Code § 425.16, subd. (e)(2).) Lo argues that his letter to the FDIC (“FDIC Letter”) is protected speech because it was a communication meant to inform the FDIC about irregularities in the 2020 Mega Bank board election and to potentially spur an investigation of the election by the FDIC while Mega Bank was under a regulatory audit. (Motion, 5:23-6:4.)

Plaintiff does not dispute that Lo’s letter was protected activity, but instead argues that this motion is procedurally improper because the allegation about the FDIC Letter existed in the original complaint and Lo should have included the allegation in his original anti-SLAPP motion. In the original complaint, Plaintiff alleges that Lo “maligned Nerland and informed the FDIC that Nerland conducted a fraudulent Board election . . .” and “reported to the FDIC the allegation that the election of Bing Yang was conducted by Nerland in a fraudulent manner.” (Compl., ¶¶ 19(c), (f).)

In Newport Harbor Ventures, LLC v. Morris Cerullo World Evangelism (2018) 4 Cal.5th 637, 645, the California Supreme Court held that the anti-SLAPP statute should be interpreted to permit an anti-SLAPP motion against an amended complaint if it could not have been brought earlier, but to prohibit belated motions that could have been brought earlier (subject to the trial court's discretion to permit a late motion). This interpretation maximizes the possibility the anti-SLAPP statute will fulfill its purpose while reducing the potential for abuse.

However, Plaintiff previously did not allege the FDIC Letter as a breach of fiduciary duty. Paragraph 19 of the original complaint only broadly alleges that Lo scapegoated and gossiped about others. In contrast, here, the FDIC Letter is included in a list of Lo’s alleged breaches of fiduciary duty. Therefore, the motion is timely and the burden shifts to Plaintiff to show a probability of success on his claims.

“A plaintiff cannot establish a probability of prevailing if the litigation privilege precludes the defendant’s liability on the claim.” (Laker v. Board of Trustees of California State University (2019) 32 Cal.App.5th 745, 769.) The litigation privilege, codified at Civil Code section 47(b), protects a publication or broadcast made in any legislative proceeding, judicial proceeding, in any other official proceeding authorized by law, or in the initiation or course of any other proceeding authorized by law. (Civ. Code, § 47, subd. (b).) The litigation privilege has also been extended to “a communication intended to prompt an administrative agency charged with enforcing the law to investigate or remedy a wrongdoing.” (Haberg v. California Federal Bank (2004) 32 Cal.4th 350, 362.)

Lo argues that Plaintiff cannot show a probability of prevailing on his claims because Plaintiff’s claims based on the FDIC Letter are barred by the litigation privilege. Plaintiff alleges that Lo wrote the FDIC Letter “in the middle of an on-going regulatory audit” and that the letter was “a contributing factor to the issuance of the MOU” by the FDIC. (FAC, ¶¶ 15(a), 15(i)-(j).) Lo also declares that he wrote the FDIC Letter at the request of the FDIC examiner, Brendan Lin, who requested an explanation for the termination of Nerland’s employment on or around July 28, 2020. (Motion, Lo Decl., ¶ 4.)

In opposition, Plaintiff argues that the litigation privilege is inapplicable because his claims against Lo include other allegations of conduct that is not privileged. Plaintiff cites to Baral v. Schnitt for the proposition that Lo cannot attack the allegation regarding the FDIC Letter because it “merely provide[s] context, without supporting a claim for recovery.” (Baral, supra, 1 Cal.5th at p. 394.) This characterization is belied by the text of the FAC wherein Plaintiff lists the FDIC letter as one of the ways Lo “breached [his fiduciary duty].” (FAC, ¶ 15.) Where, as here, the protected activity gives rise to Plaintiff’s request for relief, Plaintiff has the burden to show that the claim based on protected activity is legally sufficient and factually substantiated. (Baral, supra, 1 Cal.5th at p. 396.) Thus, by sidestepping any discussion of whether the FDIC Letter is shielded by the litigation privilege, Plaintiff fails to show a possibility of prevailing on his claims for breach of fiduciary duty and declaratory relief.

Defendants collectively demur to each cause of action of the FAC on the grounds that they fail to state sufficient facts and are uncertain. Defendants also argue Plaintiff has not revised his allegations to Conform in response to the Court’s prior order sustaining their demurrer to the original Complaint.

In their demurrer and motion to strike, Defendants argue that Plaintiff lacks standing to bring “most of his claims” encompassed in his cause of action for breach of fiduciary duty because they are premised on harm to Mega Bank or Nerland, not himself. An individual cause of action exists only if damages to the shareholders were not incidental to damages to the corporation. (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 313.) In opposition, Plaintiff claims that he has suffered a personal harm because the issuance of an MOU negatively impacts Mega Bank’s shareholders because it cannot issue dividends without regulatory approval. (Opp., 7:1-2.) He also argues that the MOU devalues Mega Bank’s stocks. (Opp., 7:7-8.) Plaintiff argues in this circumstance, he should be allowed to bring a direct action pursuant to Jones v. H.F. Ahmanson & Co. (1985) 168 Cal.App.3d 119. The discussion of standing is superfluous, however, because even if Plaintiff had standing to bring this action, Defendants correctly point out that Plaintiff’s claim is barred by the business judgment rule.

“The business judgment rule sets up a presumption that directors' decisions are made in good faith and are based upon sound and informed business judgment.” (Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 715.) “An exception to this presumption exists in circumstances which inherently raise an inference of conflict of interest. [Citations.] Such circumstances include those in which directors, particularly inside directors, take defensive action against a take-over by another entity, which may be advantageous to the corporation, but threatening to existing corporate officers.” (Ibid.) “[I]n most cases, the presumption created by the business judgment rule can be rebutted only by affirmative allegations of facts which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.” (Ibid.)

To plead an exception to the business judgment rule based on a conflict of interest, a plaintiff must plead more than the failure to conduct an active investigation and include (1) allegations of facts which would reasonably call for such an investigation, or (2) allegations of facts which would have been discovered by a reasonable investigation and would have been material to the questioned exercise of business judgment. (See ibid.)

In a ruling dated September 29, 2022, Judge Leis agreed with Defendants’ contention that Plaintiff’s cause of action for breach of fiduciary duty was barred by the business judgment rule. Judge Leis concluded that Defendants’ alleged conduct fell within the parameters of the “broad discretion” that directors have in making corporate decisions. (9/29/2022 Order, 10:12-11:11.) Judge Leis noted that even though Plaintiff alleged one instance of a conflict of interest when the board appointed themselves as inspectors for the 2021 board election, Plaintiff did not explain how this appointment resulted in decisions that were the result of a conflict of interest. (Id., 10:21-26.) Judge Leis also found that with respect to the claim that Plaintiff was “ousted” as a board member, Plaintiff failed to allege the element of breach because Plaintiff did not allege that he was prevented from nominating himself or that he was prevented from attempting to cast a vote for himself. (Id., 11:1-11.)

Plaintiff has not remedied these earlier-identified defects. The FAC is nearly identical to the original Complaint, save for some reorganizing of allegations. The most substantive change in the FAC is in paragraph 15(a) in which Plaintiff alleges that Lo endangered the value of the investment of shareholders in failing to take the proper advice on several critical issues from Mega Bank’s executive officers including: managing prepayment risk, controlling deposit costs, and retail CD pricing strategy. Plaintiff claims that the inaction of Lo and management contributed to the FDIC’s decision to place the bank under closer oversight through the MOU. But, as Judge Leis previously ruled, these alleged actions fall “within the parameters of the ‘broad discretion’ that corporate directors have in making corporate decisions. (Order, 10:11-17 [citing Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020].) Plaintiff also argues that he has sufficiently alleged self-dealing and bad faith and cites to paragraph 34, but paragraph 34 merely states in a conclusory fashion that Defendants intended to benefit themselves and acted in reckless disregard. (Opp., 9:13-23.) To the extent that Plaintiff relies on his allegations regarding Lo’s purportedly illegal retirement bonus, this argument fails as well because this allegation was already previously considered by Judge Leis and found insufficient to state a claim. (Compare Opp. at 10:12-21 with Order, 10:13-16 [not providing information and obtaining consent for Lo’s retirement bonus falls within parameters of “broad discretion].)

As in the original complaint, Plaintiff’s declaratory relief claim is derivative of his breach of fiduciary claim. Accordingly, the demurrer to the declaratory relief claim is SUSTAINED.

Defendants’ demurrer is SUSTAINED. Because the demurrer is sustained, Defendants’ motion to strike is moot.

Plaintiff is granted leave to file an amended complaint within 30 days of the date of this order. If no amended complaint is filed within 30 days, the Court orders Defendants to file and serve a proposed judgment of demand within 40 days of the date of this order.

Parties who intend to submit on this tentative must send an email to the Court at ALHDEPT3@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org. Please be advised that if you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the matter. Unless you receive a submission from all other parties in the matter, you should assume that others might appear at the hearing to argue. If the Court does not receive emails from the parties indicating submission on this tentative ruling and there are no appearances at the hearing, the Court may, at its discretion, adopt the tentative as the final order or place the motion off calendar.

William A. Crowfoot

Judge of the Superior Court