Judge William A. Crowfoot, Case Number: 23AHCP00291, Date: 2023-08-11 Tentative Ruling

Judge: William A. Crowfoot, Case: 23AHCP00291, Date: 2023-08-11 Tentative Ruling

On July 7, 2023, Robert Kasprzak (“Kasprzak”) filed this petition for a writ of mandate directing respondent Pasaca Capital, Inc. (“PCI”) to allow the inspection of accounting, records, and minutes pursuant to California Corporations Code section 1601 et seq.

As stated in the Petition and its attached exhibits, on May 24, 2023, Kasprzak served a demand to inspect PCI’s books and records. The demand stated:

We write to formally request access to certain books and records of [PCI] to investigate possible breaches of fiduciary duty by members of [PCI]’s Board of Directors (the “Board”) and officers in connection with, among other things, (i) using [PCI] assets to, including, but not limited to, purchase real estate and private jets, (ii) transferring [PCI] assets to Charles Huang (“Huang”) or Huang’s family, friends, or associates, (iii) investing or otherwise transferring [PCI] assets to companies, businesses, or entities owned by or affiliated with Huang or Huang’s family, friends, or associates without Board approval or due diligence.

1. All accounting books and records of PCI, including but not limited to, profit and loss statements, balance sheets, accounts payable and accounts receivable subledgers, statements of equity, statements of cash flow, debt schedules, and PCI’s general ledger.

2. All accounting books and records of any and all of PCI’s subsidiaries including but not limited to, profit and loss statements, balance sheets, accounts payable and accounts receivable subledgers, statements of equity, statements of cash flow, debt schedules, and each subsidiary’s general ledger;

3. The minutes of proceedings of the shareholders, the board and committees of the Board;

4. PCI’s articles of incorporation, certified by the Secretary of State, and all amendments thereto;

5. PCI’s bylaws, certified by an officer of PCI, and all amendments thereto; and

6. PCI’s stock ledger containing the names, alphabetically arranged, of all persons who are stockholders of the corporation, showing their places of residence, if known, and the number of shares held by them respectively or, in lieu of the stock ledger or duplicate stock ledger, a statement by PCI setting out the name of the custodian of the stock ledger or duplicate stock ledger, and the present and complete mailing or street address where the stock ledger or duplicate stock ledger specified is kept.

On June 7, 2023, PCI refused Kasprzak’s books and records requests, claiming that (1) Nevada law is controlling, (2) Kasprzak’s stated purposes were improper because Kasprzak has a pending lawsuit against Huang and PCI arising from the same alleged misconduct, and (3) there is no credible basis to infer wrongdoing by PCI. (Petition, Ex. 3.)

On August 11, 2023, the Court continued this hearing to allow for supplemental briefing. Kasprzak filed a supplemental brief on August 18, 2023. PCI filed a supplemental opposition brief on August 25, 2023.

Corporations Code Section 1601 provides in relevant part: “The accounting books,¿records,¿and minutes of proceedings of the shareholders and the board and committees of the board of any domestic corporation, and of any foreign corporation keeping any¿records in this state or having its principal executive office in this state …¿shall be open to inspection¿at the corporation's principal office in this state …¿upon the written demand on the corporation of any shareholder … at any reasonable time during usual business hours, for a purpose reasonably related to¿the¿holder's interests as a shareholder ….” (§ 1601(a)(1).) “Upon refusal of a lawful demand for inspection, the superior court of the proper county, may enforce the right of inspection with just and proper conditions ….” (§ 1603.)

PCI denied Kasprzak’s request to inspect its books and records on three grounds: (1) that Nevada law is controlling, (2) that Kasprzak’s stated purposes were improper because Kasprzak has a pending lawsuit against Huang and PCI arising from the same alleged misconduct, and (3) there is no credible basis to infer wrongdoing by PCI. (Petition, Ex. 3.)

In its letter to Kasprzak’s counsel denying the demand for inspection, PCI argues that shareholder inspection demands are its “internal affairs” and it is not subject to the requirements of California Corporations Code section 1601 because it was incorporated in Nevada. PCI also argues that Corporations Code section 1601 is not applicable because PCI’s bylaws explicitly state that its books and records shall be conducted “in the manner provided under the provisions of the Nevada Revised Statements.” (Petition, Ex. 3, p. 1.)

“The internal affairs doctrine is a conflict of laws principle which recognizes that only one [s]tate should have the authority to regulate a corporation’s internal affairs – matters peculiar to the relationships among or between the corporation and its current officers, directors, ad shareholders – because otherwise a corporation could be faced with conflicting demands.” (Lidow v. Superior Court (2012) 206 Cal.App.4th 351, 358-359.) Matters of internal corporate governance include the shareholders’ rights to examine corporate records. (Id. at p. 359 [citing Rst.2d Conf. of Laws, § 302, com. a, p. 307 and State Farm Mutual Automobile Insurance Co. v. Superior Court (2003) 114 Cal.App.4th 434, 442].) The internal affairs doctrine is necessary because “[a]pplying local law to the internal affairs of a foreign corporation produces inequalities, intolerable confusion, and uncertainty, and intrudes into the domain of other states that have a superior claim to regulate the same subject matter.” (Id. at p. 359 [citing State Farm, supra, 114 Cal.App.4th at p. 444].) The Lidow court continued: “The local law of the state of incorporation will be applied to determine the right of a shareholder to participate in the administration of the affairs of the corporation, in the division of profits and in the distribution of assets on dissolution and his rights on the issuance of new shares, except in the unusual case where, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the shareholder and the corporation, in which event the local law of the other state will be applied.” (Lidow, supra, 206 Cal.App.4th at p. 359 [citing Rest. 2d Conf. of Laws, § 304].

Kasprzak argues that PCI is subject to California’s shareholder inspection laws and highlights the fact that he cannot obtain relief under Nevada’s analogous statute, NRS 78.257. Under NR 78.257, in order to inspect and copy corporate records, a shareholder must own “not less than 15 percent of all the issued and outstanding shares of the stock of such corporation.” In contrast, California does not impose a minimum ownership threshold; Delaware is the same. Kasprzak contends that California’s Legislature has unambiguously allowed shareholders to make books and records demands on foreign corporations under California Corporations Code section 2115(b) by stating that the Corporation Code’s section on rights of inspection “shall apply to a foreign corporation . . . (to the exclusion of the law of the jurisdiction in which it is incorporated).

The Court agrees. PCI relies on Grove v. Juul Labs, Inc. (2022) 77 Cal.App.5th 1081, 1096-1099 for the proposition that California public policy does not require a books and records inspection to go forward if a court of the state of incorporation has held that its corporations are not subject to section 1601. However, the court of appeals stated that “the question whether shareholder inspection rights are governed by the internal affairs doctrine” was not properly before it because the issue had already been litigated in Delaware; instead, the court analyzed whether there was a “public interest exception” to circumvent the collateral estoppel doctrine. (Id., p. 1098-1099.) The court specifically couched its analysis in “afford[ing] the judgments of a sister state full faith and credit” and cited multiple cases holding that “California must, regardless of policy objections, recognize the judgment of another state as res judicata.” Therefore, Grove is inapposite.

Another case cited by PCI, Boschetti v. Pacific Bay Investments Inc. (2019) 32 Cal.App.5th 1059, 1067, is also inapposite. In Boschetti, the court concluded that the internal affairs doctrine precluded the application of California laws involving dissolution after rejecting the plaintiff’s argument that California had a more significant relationship with the foreign entities or that California had a “vital interest” in applying laws “pertaining to dissolution and buyout to foreign LP’s and LLC’s.” (Id. at pp. 1068-1069.)

Here, it is clear that California has a more significant relationship with PCI than Nevada does. It is undisputed that PCI’s headquarters and principal place of business is in Pasadena, California, PCI owns 3 other real estate properties in California, and PCI’s employees work at its headquarters in California and are paid in California; therefore, PCI “does business” in California. Also, it is undisputed that more than one-half of the outstanding voting securities are held by persons having addresses in California. The California Legislature has explicitly declared that California has an interest in applying laws regarding inspection rights to foreign corporations who meet certain requirements, as PCI does.

PCI argues that Kasprzak cannot invoke any right to inspect its books and records because he is not a record shareholder of PCI. (Supp. Opp., p. 5.) However, PCI’s only evidence is a stock ledger improperly authenticated by counsel, who has not shown that he has personal knowledge sufficient to lay a foundation for the document. Further, the stock ledger only states that Kasprzak’s shares are “void/voidable due to fraudulent inducement”, which is too ambiguous for the Court to conclude that Kasprzak’s shares have been voided. Further, PCI has not submitted any other internal records showing when and by what means these shares were voided.

The burden of proving a proper purpose is on the shareholder seeking inspection. (Schnabel v. Superior Court (1993) 5 Cal.4th 704, 715-23.) The California Supreme Court has acknowledged “that a stockholder has an interest in the assets and business of the corporation and that such inspection of the books of the corporation may be necessary or proper for the protection of his interest or for his information as to the condition of the corporation and the value of his interests therein.” (Id., pp. 715-716.)

Here, Kasprzak states his purpose for inspection is to investigate the financial health of PCI as well as Huang’s conduct because he is concerned that Huang’s spending of PCI funds constitutes breaches of duties and will drive PCI into insolvency. (Petition, ¶ 16.) Kasprzak only needs to have one sufficient basis for demanding the inspection of corporate records that is reasonably related to his interest as a shareholder; ascertaining the value of the shareholder’s stock is reasonable related to such interest. (See Homestake Mining Co. v. Superior Court of City & County of San Francisco (1936) 11 Cal.App.2d 488, 469-497; Schnabel, supra, 5 Cal.4th at 715.)

Under Corporations Code section 1601, a shareholder is entitled to inspect the accounting books and records and minutes of proceedings of the shareholders and the board and committees of the board of a corporation. Under Corp C § 1601, the scope of the inspection right held by a shareholder is broad, including the accounting books, records, and minutes of proceedings of the shareholders, board, and committees of the board of any domestic corporation, and of any foreign corporation keeping any such records in California, or having its principal executive office in this State.

PCI argues, without much detail, how Kasprzak’s demand is impermissibly broad. Instead, PCI argues that Kasprzak’s petition cannot be used to “burden PCI” and compel production of documents in response to discovery requests propounded in his plenary action. Without specifically challenging any particular aspect of Kasprzak’s demand, the Court cannot agree with PCI’s general assertion that the demand is impermissibly broad.

Last, PCI argues that this writ petition is improper under Code of Civil Procedure section 1096 because Corporations Code section 1603 provides an “adequate alternative remedy.” However, section 1603 only states, in relevant part, that “upon refusal of a lawful demand for inspection, the superior court of the proper county, may enforce the right of inspection with just and proper conditions.” (Corp. Code, § 1603, subd. (a).)

William A. Crowfoot

Judge of the Superior Court

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.