Case Name: HongYing Dong v. Shanko Wang, et al.
Case No.: 18CV332558

This is a fraud action brought by HongYing Dong (“Plaintiff”) against Shanko Wang (“Defendant Shanko”) and Kristine Wang (“Defendant Kristine”) (collectively “Defendants”).
According to the allegations of the complaint, Plaintiff’s husband, JinPing Wang (“JinPing”), and Defendants agreed to be business partners in a newly created company, American Huanjia Group, Inc. (“AHG”). Defendant Shanko would be the president and chief executive officer while Defendant Kristine would be the chief financial officer and secretary. They agreed Defendants would contribute $1,000,000 in exchange for 49% of AHG shares and JinPing would contribute $1,000,000 for the remaining 51%. None of the shareholders would be paid a working salary.

AHG was thereafter incorporated and registered in California. JinPing contributed $1,000,000 as agreed into a business account that Defendants had exclusive control over. Defendants did not make their contribution, but promised to contribute in the future as needed. Based on this promise, JinPing recognized them as shareholders despite their lack of contribution.

JinPing and Defendants appointed themselves as directors of AHG. In August 2013, they held a board meeting in which they appointed two additional directors, Plaintiff and Patrick Kwok, and ratified the opening of a new company account (“Designated Account”) under Plaintiff’s control.

Within the first few years of operation, Defendants assured Plaintiff and JinPing that AHG did not need any additional capital and continued to promise they would make their $1,000,000 contribution as needed. But Defendants never did so.

In December 2016, Plaintiff noticed the balance of the Designated Account was reduced by $45,000. She attempted to contact Defendant Shanko to inquire about the account, but could not reach him. Then, in February 2017, JinPing, Patrick, and Plaintiff attended a duly noticed board meeting to remove Defendants as officers and directors and appoint Li Hao (“Hao”) to replace them.
Hao thereafter gained access to AHG’s records and made several discoveries regarding how Defendants mismanaged AHG while it was under their control.

According to these records, Defendant Shanko began paying himself a salary in 2011. Beginning in 2012, Defendant Kristine made numerous withdrawals from AHG’s bank accounts totaling $147,000. In 2014, Defendants set up electronic withdrawals from AHG bank accounts to pay a mortgage, loan, and credit card unrelated to AHG. Defendants also obtained a $60,000 loan in AHG’s name, which was never deposited in the company’s bank account. At the end of the 2015 fiscal year, AHG had account receivables of $366,748 that was taken by other entities owned by Defendants. By April 2016, Defendants had completely depleted all of AHG’s bank accounts.

The records also indicated Defendants had deposited AHG’s revenues by cashier check into other accounts not owned by AHG and only partially funded AHG to keep it in existence until they could shift all of its business, revenues, and profits to other entities. Furthermore, the records revealed that Defendant Shanko secretly initiated two court proceedings against AHG to steal money from the Designated Account. In the first action Defendant Shanko alleged Wells Fargo wrongly used his personal account to repay AHG’s loan, and in the second action he alleged he was an employee of AHG and was owed wages and overtime. Although AHG was notified through its registered agent of the proceedings, Defendant Shanko kept them secret and obtained default judgments awarding significant sums that depleted AHG’s remaining funds.

Other records showed that while AHG was under Defendants’ control, it was suspended by the California Secretary of State for not filing tax returns in 2016. JinPing demanded records from Defendants to file AHG’s tax return so its suspension could be lifted, but Defendants failed to respond.

It was also discovered that, in 2011, Defendants registered “AHG Recycling” as a fictitious business name for AHG. Later, however, Defendants caused AHG to abandon the name so they could thereafter register it under another entity owned by them. Defendants used this and other similar names in an apparent effort to misappropriate AHG’s name, business opportunities, and revenues.
Defendants’ scheme to defraud JinPing through deceit, false promises, and misrepresentations caused him to suffer damages.

Plaintiff asserts the following causes of action against Defendants: (1) fraudulent misrepresentation; (2) fraudulent concealment; (3) breach of fiduciary duty; and (4) conversion. She alleges she is fully authorized to bring this action on behalf of JinPing in her own name.

Defendants presently demur to the complaint and Plaintiff opposes.

I. Merits of Demurrer

Defendants demur to each cause of action on the ground of failure to state sufficient facts to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

Defendants advance two arguments as to all causes of action: (1) Plaintiff lacks standing to maintain this action; and (2) these claims cannot be pursued because they are derivative.

A. Standing

Defendants argue the complaint does not sufficiently allege Plaintiff has standing to bring this action.

“Every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute.” (Code Civ. Proc., § 367.) “The purpose of the real party in interest requirement is to assure that any judgment rendered will bar the owner of the claim sued upon against relitigating. It is to save a defendant, against whom a judgment may be obtained, against further harassment or vexation at the hands of some other claimant to the same demand.” (O’Flaherty v. Belgum (2004) 115 Cal.App.4th 1044, 1094.) Where the plaintiff lacks standing to sue, the complaint is subject to a general demurrer for failure to state facts sufficient to state a cause of action. (Cloud v. Northrop Grumman Corp. (1998) 67 Cal.App.4th 995, 1002.)

Here, Plaintiff attempts to establish her standing to bring this action by alleging she is JinPing’s “wife and is fully authorized by her husband, JinPing Wang, to sue on his behalf in her own name.” (Compl., ¶ 3.) Defendants argue this allegation is insufficient. In contrast, Plaintiff contends the allegation is sufficient and must be accepted as true for purposes of a demurrer. She asserts Defendants do not articulate any basis for challenging the allegation or provide any authority suggesting more than this “allegation of an assignment” is necessary at the pleading stage. (Opp., p. 6:27.)

An assignment is a common method for transferring a cause of action. (California Ins. Guarantee Ass’n v. WCAB (2012) 203 Cal.App.4th 1328, 1335; see also Arabia v. BAC Home Loans Servicing, L.P. (2012) 208 Cal.App.4th 462, 472 [legal concept of assignment refers to transferability of all types of property, including causes of action].) An owner of a cause of action may assign it if it arises out of a legal obligation or a violation of a property right. (Code Civ. Proc., § 954.) Once an assignment is made, the assignee becomes the real party in interest and has standing to sue on the claim. (Purcell v. Colonial Ins. Co. (1971) 20 Cal.App.3d 807, 814.)

Although Plaintiff characterizes her “authority” as an “assignment allegation,” she does not affirmatively plead in the complaint that the claims were in fact assigned to her. Plaintiff does not articulate the basis for her purported authority to maintain this action or the manner in which it was acquired. Although the demurrer admits the truth of all material facts properly pleaded (Aubry v. Tri-City Hosp. Dist. (1992) 2 Cal.4th 962, 966-967), the complaint fails to adequately allege the basis for Plaintiff’s standing.

For this reason, Defendants’ demurrer is sustainable.

B. Derivative Claim

Defendants contend Plaintiff cannot bring a direct action for damages against AHG because the harm was to the corporation itself.

“Shareholders may bring two types of actions, a direct action filed by the shareholder individually . . . for injury to his or her interest as a shareholder, or a derivative action filed on behalf of the corporation for injury to the corporation for which it has failed or refused to sue.” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311–12, internal quotations omitted.) “An 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 of distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’ ” (Id. at 313, quoting Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106–107.) A direct 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.) Where an action is brought directly, but should have been filed as a derivative claim, the complaint is subject to a general demurrer for failure to state facts sufficient to state a cause of action. (Ibid; Bader v. Anderson (2009) 179 Cal.App.4th 775, 784.)

Defendants argue Plaintiff cannot bring a direct action because the alleged injury was incurred by AHG and JinPing’s damages are merely incidental. They contend that because the gravamen of the complaint is injury to the corporation seeking to recover assets and prevent dissipation of assets, the claims can only be pursued by means of a derivative action. Plaintiff argues the injury alleged is not incidental to that suffered by AHG because JinPing was the only remaining shareholder who was injured. She concludes the gravamen of the complaint is harm to JinPing individually.
Relative to closely held corporations, “harmful acts by one officer/shareholder may directly impact the other shareholders, and hence courts are more willing to allow direct actions.” (Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, 1253–1254.) AHG is a closely held corporation with three shareholders, particularly Defendants and JinPing. It is clear from the complaint that Defendants’ harmful acts directly impacted JinPing, the only other shareholder. The complaint alleges Defendants made false promises to JinPing regarding their intent to contribute to AHG; intentionally failed to disclose certain facts to him; breached their fiduciary duty to him as a shareholder of AHG; and interfered with his capital contribution, and right to revenues and profits. Thus, the gravamen of the claims is injury to JinPing individually, rather than that suffered by AHG. Accordingly, Plaintiff’s claims do not need to be pursued by means of a derivative action.
Therefore, Defendants’ demurrer is not sustainable on the basis that Plaintiff’s claims cannot be pursued by a direct action.

C. Conclusion

The demurrer to the complaint on the ground of failure to state sufficient facts is SUSTAINED with 10 days’ leave to amend on the sole basis that Plaintiff failed to adequately allege standing to maintain this action.

The Court will prepare the order.