Case Number: BC664733 Hearing Date: March 23, 2018 Dept: 46

Case Number: BC664733
CARLOS MENDIZABAL VS MASTEK INC ET AL

Filing Date: 06/12/2017
Case Type: Prtnrship & Corp Governance Case

03/23/2018

Demurrer & Motion to Strike
Motions by: Miguel Angel Soto, Patricia Soto, and Minh Le.

TENTATIVE RULING

Defendant’s Request for Judicial Notice is DENIED; a notice is not a court order, and the order attached to the notice is the tentative ruling, which was not adopted.

Demurrer to First Amended Complaint is: OVERRULED as to the 5th, 7th, and 8th Causes of Action (“COAs”); SUSTAINED, with 10 days leave to amend as to the 1st-4th COAs; SUSTAINED, without leave as to the 6th COA.

The Motion to Strike is DENIED.

Moving parties to give notice and prepare, lodge, and serve an order of dismissal as to the 6th cause of action.

See discussion.

DISCUSSION

The verified First Amended Complaint (“FAC” was filed on 12/15/2017. It alleges causes of action for: (1) Breach of Contract; (2) Breach of Contract – Bad Faith; (3) Breach of Fiduciary Duty; (4) Fraud; (5) Conversion; (6) Trespass to Chattels; (7) Violation of Bus. & Prof. Code §§17200 et seq. and (8) Involuntary Dissolution against Defendants Mastek, Inc. (hereinafter “Mastek”); Miguel Angel Soto (hereinafter “Miguel”); Patricia Soto (hereinafter “Patricia”); Minh Le (hereinafter “Le”); and DOES 1-10.

1st COA: Breach of Contract

“’A cause of action for damages for breach of contract is comprised of the following elements: (1) the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to plaintiff.’ (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 C.A.3d 1371, 1388).” Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 C.A.4th 221, 228. “Further, the complaint must indicate on its face whether the contract is written, oral, or implied by conduct. (Code Civ.Proc., § 430.10, subd. (g).).” Otworth v. Southern Pac. Transportation Co. (1985) 166 C.A.3d 452, 458-459 (implicitly overruled on other grounds as recognized by Miles v. Deutsche Bank National Trust Company (2015) 236 C.A.4th 394, 401-402).

“’A written contract may be pleaded either by its terms—set out verbatim in the complaint or a copy of the contract attached to the complaint and incorporated therein by reference—or by its legal effect. [Citation.] In order to plead a contract by its legal effect, plaintiff must “allege the substance of its relevant terms. This is more difficult, for it requires a careful analysis of the instrument, comprehensiveness in statement, and avoidance of legal conclusions.” [Citation.]’ (McKell v. Washington Mutual, Inc. (2006) 142 C.A.4th 1457, 1489.).” Heritage Pacific Financial, LLC v. Monroy (2013) 215 C.A.4th 972, 993.

“A written contract which is the foundation of a cause of action may be pleaded in haec verba rather than according to its legal effect, either by setting forth a copy in the body of the pleading or by attaching a copy as an exhibit and incorporating it by reference.” Bates v. Daley’s, Inc. (1935) 5 C.A.2d 95, 101 (Emphasis added). The court in Gilmore v. Lycoming Fire Ins. Co. (1880) 55 C. 123, 124 adds that “[w]here a party relies upon a contract in writing, and it affirmatively appears that all the terms of the contract are not set forth in haec verba, nor stated in their legal effect, but that a portion which may be material has been omitted, the complaint is insufficient.”

Plaintiff alleges in the FAC in relevant part as follows:

“91. Miguel Soto and Patricia Soto were parties, along with the Company, to written agreements (see Exhibits A and B — agreements between Miguel Soto, Patricia Soto, Carlos Mendizabal and Mastek, Inc.) signed by Miguel Soto, Patricia Soto and Carlos Mendizabal; signed and/or recorded by Patricia Soto as the Secretary of the Company; and agreed to by Patricia Soto as a director of the Company, See Exhibits A and B.

92. Mr. Mendizabal has substantially complied with all the agreements evidenced by Exhibits A and B, except to the extent that Mr. Soto and Mrs. Soto have prevented Mr. Mendizabal s from performing under the agreements evidenced by Exhibits A and B.

93. Miguel Soto has breached the agreements evidenced by Exhibits A and B by:

Refusing to ensure that profits due Carlos Mendizabal were distributed as required the terms of Exhibits A and B;

Refusing to ensure that expenses properly allocable as between Miguel Soto and

Carlos Mendizabal were allocated and paid as required the terms of Exhibits A and B.

94. Patricia Soto has breached the agreements evidenced by Exhibits A and B by:

• Refusing to ensure that profits due Carlos Mendizabal were distributed as required the terms of Exhibits A and B;

• Refusing to ensure that expenses properly allocable as between Miguel Soto and Carlos Mendizabal were allocated and paid as required the terms of Exhibits A and B.

95. As a result of Mr. Soto’s and Mrs. Soto’s breaches of agreements evidenced by Exhibits A and B. with Mendizabal as described above, Mendizabal has suffered damages in an amount of at least an estimated $1 million, in a more specific amount according to proof at trial; and is likely to continue to lose substantial amounts in compensation, revenues and lost profits in an amount according to proof at trial as a result of Mr. Soto’s and Mrs. Soto’s continuing bad faith and breaches of the agreements evidenced by Exhibits A and B. with Mendizabal, as described above.” (FAC ¶¶ 91-95).

Exhibits A and B are not contracts in the normal sense of the word. Exhibit B is not a contract in any sense of the word; it is the written minutes from a board meeting of the Mastek directors. One cannot “breach” board minutes, because they are nothing more than a record of events. Exhibit B does reflect that Plaintiff and Defendant Miguel signed some agreement on 1/2/14, but the text of that agreement is not provided.

Exhibit A is much closer; it is a memorandum of understanding between Plaintiff and Defendant Miguel (signed on 1/4/18) regarding the general conduct of their partnership in Mastek. However, on the particular points of profit distribution and allocation of expenses, the memorandum is more of an “agreement to agree” than a firm contract. The point of the memorandum is procedural; Plaintiffs are to review the company’s performance and come up with a total distribution amount. (FAC Exhibit A). Presumably, that amount could be zero; the point of the memorandum is the review. Likewise, expenses are left to the determination of the parties at a later date. (FAC Exhibit A). This does not guarantee any particular level of expenses to either party. The only thing guaranteed by the memorandum is that the parties have a discussion.

Two other things should be noted here as well. First, the only parties to the memorandum are Miguel and Plaintiff. Even if it could be enforced, the memorandum cannot be enforced against any other Defendant. Second, in his opposition Plaintiff argues the existence of “implied in fact or law contracts.” (Opposition p. 3:16). Plaintiff is not permitted to mix a written contract claim with an implied-in-fact contract claim; Plaintiff has to pick one or plead both fully and in the alternative. Otworth v. Southern Pac. Transportation Co. (1985) 166 C.A.3d 452, 458-459 (implicitly overruled on other grounds as recognized by Miles v. Deutsche Bank National Trust Company (2015) 236 C.A.4th 394, 401-402).

The demurrer is therefore SUSTAINED, with 10 days leave to amend, as to this COA.

2nd COA: Breach of the Implied Covenant

“’”The [implied] covenant of good faith and fair dealing[ ][is] implied by law in every contract.”’ (Durell v. Sharp Healthcare (2010) 183 C.A.4th 1350, 1369). The covenant is read into contracts and functions ‘”as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party’s rights to the benefits of the contract.”’ (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 C.A.4th 1026, 1031-1032). The covenant also requires each party to do everything the contract presupposes the party will do to accomplish the agreement’s purposes. (Harm v. Frasher (1960) 181 C.A.2d 405, 417). A breach of the implied covenant of good faith is a breach of the contract (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 C.A.3d 1371, 1393), and ‘breach of a specific provision of the contract is not … necessary’ to a claim for breach of the implied covenant of good faith and fair dealing (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 C.4th 342, 373 & fn. 12).” Thrifty Payless, Inc. v. Americana at Brand, LLC (2013) 218 C.A.4th 1230, 1244.

However, “it is well established that an implied covenant cannot create an obligation inconsistent with an express term of the agreement.” Nein v. HostPro, Inc. (2009) 174 C.A.4th 833, 852. “’The implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract.’ (1 Witkin, Summary of Cal. Law (2003 supp.) Contracts, § 743, p. 449.).” Pasadena Live, LLC v. City of Pasadena (2004) 114 C.A.4th 1089, 1094 (emphasis theirs).

“[N]o reported case…has held the covenant of good faith may be read to prohibit a party from doing that which is expressly permitted by an agreement. On the contrary, as a general matter, implied terms should never be read to vary express terms. (Tanner v. Title Ins. & Trust Co. (1942) 20 C.2d 814, 824; see, Wal-Noon Corp. v. Hill (1975) 45 C.A.3d 605, 613). Carma Developers, supra, 2 C.4th at 374. “[T]he implied covenant will only be recognized to further the contract’s purpose; it will not be read into a contract to prohibit a party from doing that which is expressly permitted by the agreement itself.” Wolf v. Walt Disney Pictures and Television (2008) 162 C.A.4th 1107, 1120.

“If the allegations do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated. Thus, absent those limited cases where a breach of a consensual contract term is not claimed or alleged, the only justification for asserting a separate cause of action for breach of the implied covenant is to obtain a tort recovery.” Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 C.A.3d 1371, 1395.

Under ordinary circumstances, there can be no recovery in tort for breach of the implied covenant outside the insurance context. See Cates Construction, Inc. v. Talbot Partners (1999) 21 C.4th 28, 43. However, where the breach is accompanied by a violation of an independent duty arising from tort law, there may be recovery for tortious breach of the implied covenant. See Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 C.4th 85, 102; Innovative Business Partnerships, Inc. v. Inland Counties Regional Center, Inc. (2011) 194 C.A.4th 623, 631-632. A tortious breach may be found where “(1) the breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion or; (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.” (Freeman & Mills, supra, 11 Cal.4th at p. 105 (conc. and dis. opn. of Mosk, J.).).” Erlich v. Menezes (1999) 21 C.4th 543, 553-554.

This COA is tied to the fate of the previous COA for breach of contract. Because that one fails, this one also fails. The demurrer is therefore sustained, with 10 days leave to amend, as to this cause of action.

3rd COA: Breach of Fiduciary Duty

“The elements of a cause of action for breach of fiduciary duty are: 1) the existence of a fiduciary duty; 2) a breach of the fiduciary duty; and 3) resulting damage. (City of Atascadero v. Merill, Lynch, Pierce, Fenner & Smith, Inc. (1999) 68 C.A.4th 445, 483).” Pellegrini v. Weiss (2008) 165 C.A.4th 515, 524. “The mere placing of a trust in another person does not create a fiduciary relationship. (Ampuero v. Luce (1945) 68 C.A.2d 811, 819).” Zumbrun v. University of Southern California (1972) 25 C.A.3d 1, 13.

“The key factor in the existence of a fiduciary relationship lies in control by a person over the property of another.” Vai v. Bank of America National Trust & Savings Ass’n (1961) 56 C.2d 329, 338.

This COA still suffers from the problem identified in the last round of pleadings: Plaintiff fails to explain what his theory is. Plaintiff may not allege a course of conduct stretching over several years in detail, and then simply state that “there’s a cause of action for breach of fiduciary duty in there somewhere.” The court disagrees. To date, such a cause of action is not shown.

The demurrer to the 3rd Cause of Action is therefore SUSTAINED, with 10 days leave as to this COA.

4th COA: Fraud

The elements of a cause of action for fraud are: (1) a false representation, actual or implied, or concealment of a matter of fact material to the transaction which defendant had a duty to disclose or defendant’s promise made without the intention to perform; (2) defendant’s knowledge of the falsity; (3) defendant’s intent to deceive; (4) plaintiff’s justifiable reliance thereon; and (5) resulting damage to plaintiff. Mosier v. Southern Calif. Physicians Ins. Exchange (1998) 63 C.A.4th 1022, 1045. Fraud must be specifically pled, and the particularity requirement necessitates the pleading of facts that “show how, when, where, to whom, and by what means the representations were tendered.” Stansfield v. Starkey (1990) 220 C.A.3d 59, 73.

Plaintiff has not properly pled this COA with regard to Miguel’s business expenses. His central problem is the issue of reliance. At the same time Plaintiff alleges that he was a constant objector to Miguel’s payments to his alleged mistress (see e.g. FAC ¶ 45) and Plaintiff also alleges that had he known the expenses were illicit, he would have removed himself from the company. (See e.g. FAC ¶ 148). The doctrine of sham pleading is triggered here. See McClain v. Octagon Plaza, LLC (2008) 159 C.A.4th 784, 799. Plaintiff did not rely on Defendant Miguel’s representations.

However, Plaintiff has properly pled reliance on their representations that Defendant Le was a minor consultant and not Plaintiff’s replacement. (See FAC ¶ 155). Defendants ask what Plaintiff’s damages are in this regard. That is a question of fact more appropriate for a summary judgment or trial motion than a demurrer. Any number of things are possible – Plaintiff will have to prove his damages, but he does not have to do it now.

As Plaintiff has properly pleaded this cause of action as to Le, the demurrer is therefore OVERRULED as to him. The demurrer to this cause of action is otherwise sustained with leave to amend as to the Soto defendants.

5th COA: Conversion

“’”Conversion is the wrongful exercise of dominion over the property of another.”’(Farmers Ins. Exchange v. Zerin (1997) 53 C.A.4th 445, 451). The elements of a claim for conversion are (1) ‘the plaintiff’s ownership or right to possession of the property at the time of the conversion,’ (2) ‘the defendant’s conversion by a wrongful act or disposition of property rights,’ and (3) damages. (Ibid.). ‘It is not necessary that there be a manual taking of the property,” only “an assumption of control or ownership over the property, or that the alleged converter has applied the property to his [or her] own use.’ (Id. at pp. 451-452).” Prakashpalan v. Engstrom, Lipscomb and Lack (2014) 223 C.A.4th 1105, 1135.

“’To establish a conversion, plaintiff must establish an actual interference with his ownership or right of possession.’ (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 C.A.3d 593, 610). To do so, the plaintiff must have ‘either ownership and the right of possession or actual possession [of the property] at the time of the alleged conversion thereof.’ (General Motors A. Corp. v. Dallas (1926) 198 Cal. 365, 370). ‘[A] mere contractual right of payment, without more, will not suffice’ to support a claim for conversion. (Farmers Ins. Exchange v. Zerin [(1997)] 53 C.A.4th [445,] at p. 452).” Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 C.A.4th 221, 232-233.

Additionally, “the simple failure to pay money owed does not constitute conversion.” Kim v. Westmoore Partners, Inc. (2011) 201 C.A.4th 267, 284.

“[A] conversion claim does not require that a specific lump sum of money be entrusted to defendant; the plaintiff must merely prove a specific, identifiable sum of money that was taken from it. ‘California cases permitting an action for conversion of money typically involve those who have misappropriated, commingled, or misapplied specific funds held for the benefit of others. [Citations.]’ (PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP [(2007)] 150 C.A.4th [384,] at pp. 396, italics added.).” Welco Electronics, Inc. v. Mora (2014) 223 C.A.4th 202, 216.

Plaintiff alleges in relevant part as follows:

“162. Plaintiff and nominal defendant, the Company, had title, and the right to possession, custody and control of all personal property of the Company business, including but not limited to money, inventory, equipment and other assets (the “Property”).

163. Defendant Mr. Soto, Mrs. Soto and Mr. Le intentionally and substantially interfered with Mendizabal’s and nominal defendant, the Company’s Property by:

• Wrongfully taking possession of the Property;

• Wrongfully preventing Plaintiff and nominal defendant, Mastek from having access to the Property; and

• Refusing to return the Property after Plaintiff demanded its return.

164. Specifically, neither Mendizabal nor nominal defendant, the Company, consented to Mr. Soto, Mrs. Soto, Mr. Le converting the Property by taking the Property, alleged in detailed in this Complaint.

165. The Property that Miguel Soto has specifically converted, for which the Company makes claim, includes but is not limited to $28,000 in car expense and $11,000 in personal expense. See Exhibit O.

166. The Property that Miguel Soto has specifically converted, for which Mr. Mendizabal makes claim, includes but is not limited to $668,489 in Mastek profits for 2014 2017 that should have been distributed to Mendizabal, but which Miguel Soto (with the agreement of Mrs. Soto and Minh Le) refuses to distribute to Mr. Mendizabal despite Mr. Mendizabal’s repeated demands; $15,001 in excess money that Mr. Soto took for himself from the 2016 K-I Distribution referenced in Exhibit N, which sum should have been distributed to Mr. Mendizabal; and 30% of the $28,000 in car expense and $11,000 in personal expense that Mr. Mendizabal has demanded Mr. Soto repay. See Exhibit O.

167. Mr. Mendizabal reserves the right to supplement his allegations regarding money assets converted as more information is developed during discovery.” (FAC ¶¶ 162-167).

Plaintiff has now alleged that specific, identifiable sums were taken.

The demurrer is therefore OVERRULED as to this COA.

6th COA: Trespass to Chattels

“In modern American law generally, ‘[t]respass remains as an occasional remedy for minor interferences, resulting in some damage, but not sufficiently serious or sufficiently important to amount to the greater tort’ of conversion.” (Prosser & Keeton, Torts, supra, § 15, p. 90, italics added.)… “A trespass to a chattel may be committed by intentionally [¶] (a) dispossessing another of the chattel, or [¶] (b) using or intermeddling with a chattel in the possession of another.” The Restatement 2nd Torts, section 221, provides that “A dispossession may be committed by intentionally … barring the possessor’s access to a chattel[.]”” Jamgotchian v. Slender (2009) 170 C.A.4th 1384, 1401.

This COA is an exact duplicate of the COA for conversion. The only thing upon which Defendants are alleged to have trespassed is money. There can be no recovery for the taking of money under this theory. Money is either present or absent, available or spent. There is no “minor interference” with money; you cannot trespass upon it in any meaningful sense. Money itself cannot be “damaged” unless it is destroyed.

The demurrer is therefore SUSTAINED, without leave as to this COA.

7th COA: UCL

“Business and Professions Code section 17200…establishes three varieties of unfair competition-acts or practices which are unlawful, or unfair, or fraudulent.” Podolsky v. First Healthcare Corp. (1996) 50 C.A.4th 632, 647. “The ‘unlawful’ practices prohibited by section 17200 are any practices forbidden by law, be it civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made. (People v. McHale (1979) 25 C.3d 626, 632).” Saunders v. Superior Court (1994) 27 C.A.4th 832, 838-839. If a business practice is alleged to be “unlawful,” then the complaint “must state facts supporting the statutory elements of the alleged violation. (See G.H.I.I. v. MTS (1983) 147 C.A.3d 256 [allegations of secret rebates, locality discrimination, sale below cost, and loss leaders; complaint was sufficient]; Khoury v. Maly’s of Calif. (1993) 14 C.A.4th 612, 619, citing the text [demurrer was properly sustained; complaint identified no particular statutory section that was violated and failed to describe with reasonable particularity facts supporting violation]…” 5 Witkin, Cal. Procedure (5th ed. 2008), Pleading, § 779, p. 196.

Defendants argue that this COA is derivative, and fails because the other COAs fail. Since, as discussed above, not all the other COAs fail, this COA survives.

The demurrer is therefore OVERRULED as to this COA.

8th COA: Involuntary Dissolution

The requirements and grounds for filing an involuntary dissolution action are specified in Corp. Code §1800, which reads in relevant part as follows:

“(a) 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 any of the following persons:

(1) One-half or more of the directors in office.

(2) A shareholder or shareholders who hold shares representing not less than 33 ¿ 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.

(3) Any shareholder if the ground for dissolution is that the period for which the corporation was formed has terminated without extension thereof.

(4) Any other person expressly authorized to do so in the articles.

(b) The grounds for involuntary dissolution are that:

(1) The corporation has abandoned its business for more than one year.

(2) The corporation has an even number of directors who are equally divided and cannot agree as to the management of its affairs, so that its business can no longer be conducted to advantage or so that there is danger that its property and business will be impaired or lost, and the holders of the voting shares of the corporation are so divided into factions that they cannot elect a board consisting of an uneven number.

(3) There is internal dissension and two or more factions of shareholders in the corporation are so deadlocked that its business can no longer be conducted with advantage to its shareholders or the shareholders have failed at two consecutive annual meetings at which all voting power was exercised, to elect successors to directors whose terms have expired or would have expired upon election of their successors.

(4) Those in control of the corporation have been guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers.

(5) In the case of any corporation with 35 or fewer shareholders (determined as provided in Section 605), liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder or shareholders.

(6) The period for which the corporation was formed has terminated without extension of such period.

…

(e) For the purposes of this section, “shareholder” includes a beneficial owner of shares who has entered into an agreement under Section 300 or 706.”

Plaintiff is one of the persons entitled by Subsection (a) to file for involuntary dissolution. Subdivision (a)(2) provides that shareholder(s) may file if they own a third of the total number of outstanding shares, common stock, or equity. Plaintiff only owns 30%. (Complaint ¶ 222). However, Subdivision (a)(2) also provides that if the grounds alleged for dissolution are those stated in Subdivision (b)(4), then the shares of the persons alleged to have participated in the misconduct are discounted from the total. Plaintiff does base his claim on Subdivision (b)(4). (Complaint ¶223). Miguel’s share is thus discounted from the total; Plaintiff appears to own the remainder (Exhibits A-B), so Plaintiff has standing to bring this action.

Defendant then argues that Plaintiff’s theory on this COA is contradictory to his theory on other COAs. That is not precisely true. Plaintiff’s theory of the case is that he was personally responsible for the company’s growth; his fear of mismanagement now that he has been allegedly forced out is therefore entirely consistent. Whether or not there has been persistent and pervasive mismanagement, etc. is a question of fact not proper for decision on demurrer.

The demurrer is therefore OVERRULED as to this COA.

Motion To Strike

Defendants’ motion is TAKEN OFF-CALENDAR as MOOT, given the above ruling.

IT IS SO ORDERED:

___________________________
Frederick C. Shaller, Judge