Case Name: James J. M’Guinness v. Steven Johnson, et al.

Case No.: 2013-1-CV-239996

(1) Motion for Sanctions by Plaintiff/Cross-Defendant James J. M’Guinness, Cross-Defendant/ Cross-Complainant Scott Stuart, and Defendant/Cross-Defendant/Cross-Complainant Think It, Love It, Construct It, Inc.
(2) Motion for Judgment on the Pleadings as to Complaint of James J. M’Guinness by Defendant Steven Johnson
(3) Motion for Judgment on the Pleadings as to Cross-Complaint of Scott Stuart by Cross-Defendant Steven Johnson

Plaintiff James J. M’Guinness (“M’Guinness”) alleges defendant Steven Johnson (“Johnson”) engaged in self-dealing and concealment in the operation of a small residential construction company, defendant Think It, Love It, Construct It, Inc. dba TLC Builders, Inc. (“TLC”), in which Johnson and M’Guinness are officers, directors, and one-third shareholders. (Complaint, ¶1.) Plaintiff M’Guinness alleges defendant Johnson has, among other things, taken complete control of TLC’s operations, will not meaningfully communicate with other shareholders, locked plaintiff M’Guinness out of the TLC office, misapplied/wasted TLC property, caused TLC to enter into multiple contracts in which defendant Johnson had a financial interest without disclosure, and unilaterally blocked TLC’s delivery of plans to a customer. (Complaint, ¶¶11 and 14.)

On January 23, 2013, plaintiff M’Guinness filed a complaint against defendants Johnson and TLC asserting causes of action for:

(1) Involuntary Corporate Dissolution
(2) Breach of Fiduciary Duties
(3) Fraudulent Concealment
(4) Unjust Enrichment
(5) Appointment of Receiver and/or Preliminary Injunction

On February 28, 2013, defendant Johnson filed an answer to the complaint and also filed a cross-complaint against the other shareholders of TLC, M’Guinness and Scott Stuart (“Stuart”). Johnson’s cross-complaint asserts causes of action for:

(1) Breach of Fiduciary Duties
(2) Conversion
(3) Breach of Contract
(4) Accounting

On April 4, 2013, plaintiff/cross-defendant M’Guinness filed a demurrer to Johnson’s cross-complaint, joined in by cross-defendant Stuart on April 18, 2013. On April 19, 2013, Johnson filed a first amended cross-complaint adding TLC as a cross-defendant and including an additional fifth cause of action for common count – money had and received.

On May 21, 2013, defendant/ cross-defendant TLC filed an answer to Johnson’s cross-complaint and also filed its own cross-complaint against M’Guinness, Stuart, and Johnson seeking declaratory relief.

On May 24, 2013, cross-defendant Stuart and plaintiff/cross-defendant M’Guinness separately filed answers to Johnson’s first amended cross-complaint. Stuart also filed his own cross-complaint against Johnson and TLC asserting causes of action for:

(1) Involuntary Corporate Dissolution
(2) Breach of Fiduciary Duties
(3) Fraud
(4) Unjust Enrichment
(5) Preliminary Injunction

On May 31, 2013, M’Guinness, Stuart, and TLC filed a joint motion to disqualify Johnson’s counsel.

On June 14, 2013, TLC filed its answer to plaintiff M’Guinness’s complaint and Stuart’s cross-complaint. On the same date, M’Guinness filed an answer to TLC’s cross-complaint. On June 19, 2013, Stuart filed an answer to TLC’s cross-complaint. On July 1, 2013, Johnson filed an answer to Stuart’s cross-complaint. On July 15, 2013, Johnson filed an answer to TLC’s cross-complaint.

On September 20, 2013, the court (Hon. Kirwan) issued an order denying the joint motion to disqualify Johnson’s counsel. On January 14, 2014, M’Guinness, Stuart, and TLC filed a notice of appeal of the court ruling denying the motion to disqualify Johnson’s counsel.

On September 23, 2015, Johnson filed a motion for summary judgment. On October 13, 2015, M’Guinness filed a notice of an order from the Sixth District Court of Appeal staying the action during the pendency of writ and appellate proceedings.

On December 30, 2015, the Sixth District Court of Appeal, in a published opinion, reversed this court’s ruling denying the motion to disqualify Johnson’s counsel. On March 1, 2016, the Sixth District Court of Appeal issued a remittitur.

On April 20, 2016, the court (Hon. McGowen) issued an order granting the joint motion to disqualify Johnson’s counsel.

On April 29, 2016, M’Guinness, Stuart, and TLC jointly filed the first of three motions now before the court, a motion for sanctions against defendant/cross-complainant/ cross-defendant Johnson.

On May 13, 2016, defendant/cross-defendant Johnson filed the second and third motions now before the court, motions for judgment on the pleadings as to M’Guinness’s complaint and Stuart’s cross-complaint.

II. M’Guinness, Stuart, and TLC’s motion for sanctions is DENIED.

In Stephen Slesinger, Inc. v. Walt Disney Co. (2007) 155 Cal.App.4th 736, 740, 764 (Slesinger), the court held that “when a plaintiff’s deliberate and egregious misconduct makes any sanction other than dismissal inadequate to ensure a fair trial, the trial court has inherent power to impose a terminating sanction.” “The decision whether to exercise the inherent power to dismiss requires consideration of all relevant circumstances, including the nature of the misconduct (which must be deliberate and egregious, but may or may not violate a prior court order), the strong preference for adjudicating claims on the merits, the integrity of the court as an institution of justice, the effect of the misconduct on a fair resolution of the case, and the availability of other sanctions to cure the harm.” (Slesinger, supra, 155 Cal.App.4th at p. 764.)

Relying principally on Slesinger, the moving parties here ask the court to sanction defendant/cross-complainant/ cross-defendant Johnson by prohibiting him from “pursu[ing] any of his claims and defenses in this action and that all issues except the amount of damages be resolved against him, or for such lesser sanctions as the Court determines are just including but not limited to issue sanctions and/or evidence sanctions.”

The moving parties begin by recounting the history of this case and proffering evidence of Johnson’s conduct which gives rise to the claims and cross-claims being asserted in this action. Moving parties also recount and proffer evidence concerning Johnson’s prior counsel’s (the law firm of Casas, Riley, and Simonian, LLP; hereafter “CRS”) conduct leading up to the motion for disqualification and the subsequent reversal of the trial court’s decision denying the motion.

It is the moving parties’ contention that as a result of CRS’s conduct, CRS attorneys have become material witnesses in this action, but will be unable to testify without violating their ethical obligation to keep inviolate the confidences of their clients. The moving parties argue they will be prejudiced by the CRS attorneys’ anticipated inability to testify. However, moving parties have not substantiated any prejudice. Moving parties state, in conclusory fashion, that they will not be able to have a fair trial as a result. On the contrary, some of the evidence submitted by moving parties in support of their motion bolsters their allegations (e.g., allegations that Johnson refused to grant access to corporate records). It is this court’s opinion that the moving parties’ ability to establish their claims is not wholly or even largely dependent upon being able to question the CRS attorneys on confidential matters. The court also finds unsubstantiated and/or speculative the moving parties’ assertion that Johnson has improperly obtained and/or retained information through prior counsel. Moving parties’ assertion that Johnson has withheld and/or potentially compromised evidence is again speculative and more properly addressed through discovery procedures.

For the above stated reasons, the motion for sanctions by plaintiff/ cross-complainants/ cross-defendants M’Guinness, Stuart, and TLC is DENIED.

III. Johnson’s motions for judgment on the pleadings are DENIED.

Johnson moves for judgment on the pleadings as to M’Guinness’s complaint and Stuart’s nearly identical cross-complaint on the ground that M’Guinness and Johnson’s pleadings assert shareholder derivative claims and cannot be pursued as such without overcoming certain procedural hurdles specific to derivative actions apply. In moving for judgment on the pleadings, Johnson explains the distinction between shareholder derivative actions and direct shareholder actions.

An action is derivative if “ ‘the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’ ” (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106 [81 Cal. Rptr. 592, 460 P.2d 464].) Shareholders may bring a derivative suit to, for example, enjoin or recover damages for breaches of fiduciary duty directors and officers owe the corporation. (Friedman, Cal. Practice Guide: Corporations, supra, ¶ 6:604, p. 6-128.2.) An individual cause of action exists only if damages to the shareholders were not incidental to damages to the corporation. (Jones v. H. F. Ahmanson & Co., supra, at p. 107.) Examples of direct shareholder actions include suits brought to compel the declaration of a dividend, or the payment of lawfully declared or mandatory dividends, or to enjoin a threatened ultra vires act or enforce shareholder voting rights. (Friedman, supra, ¶ 6:601, p. 6-128.)

(Schuster v. Gardner (2005) 127 Cal.App.4th 305, 313.)

“[A]n action is ‘derivative’ if ‘the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’” (Friedman, CAL. PRAC. GUIDE: CORPORATIONS (The Rutter Group 2007) ¶6:603, pp. 6-130 to 6-131 citing Vega, supra, 121 Cal.App.4th at p. 297; Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106 – 107.)

A motion for judgment on the pleadings is functionally equivalent to a general demurrer, but can be made after the time for an initial response has passed. Here, Johnson is challenging the entirety of M’Guinness’s complaint and Stuart’s cross-complaint. A general demurrer or motion for judgment on the pleadings will be upheld “only if the complaint fails to state a cause of action under any possible legal theory.” (Sheehan v. San Francisco 49ers, Ltd. (2009) 45 Cal.4th 992, 998; see also Weil & Brown, et al., CAL. PRAC. GUIDE: CIV. PRO. BEFORE TRIAL (The Rutter Group 2015) ¶7:41, p. 7(I)-21.)

Johnson is essentially challenging M’Guinness and Stuart’s right to bring direct individual actions. Yet, the very first cause of action asserted by both M’Guinness and Stuart for involuntary corporate dissolution is specifically authorized by Corporations Code section 1800, subdivision (a)(3) which states, in relevant part, “A verified complaint for involuntary dissolution of a corporation on any one or more of the grounds specified in subdivision (b) may be filed in the superior court of the proper county by … A shareholder or shareholders who hold shares representing not less than 33 ⅓ percent of (i) the total number of outstanding shares (assuming conversion of any preferred shares convertible into common shares) or (ii) the outstanding common shares or (iii) the equity of the corporation, exclusive in each case of shares owned by persons who have personally participated in any of the transactions enumerated in paragraph (4) of subdivision (b), or any shareholder or shareholders of a close corporation.”

For this reason alone, defendant/ cross-defendant Johnson’s motion for judgment on the pleadings as to the complaint of James J. M’Guinness and motion for judgment on the pleadings as to the cross-complaint of Scott Stuart is DENIED.