Case Name: People of the State of California, ex rel. et al. v. San Jose Yang, LLC, et al.
Case No.: 18CV324074

Defendants San Jose Yang, LLC (the “LLC”) and Shufei Yang (“Yang”) (collectively, “Defendants”) demur to the Second Amended Complaint (“SAC”) fled by plaintiffs the City of San Jose (the “City”) and the People of the State of California, by and through the City Attorney for the City of San Jose (collectively, “Plaintiffs”) and move to strike portions contained therein.

I. Factual and Procedural Background

This is an action for civil penalties and costs arising out of the alleged violation of Title 6 of the San Jose Municipal Code, known more commonly as San Jose’s Massage Ordinance. According to the allegations of the operative SAC, the LLC is the owner of a property (the “Property”) located at 156 South Jackson Street, San Jose; Yang is the LLC’s Chief Executive Office. (SAC, ¶ 10.) On August 22, 2017, City Code Enforcement Inspector William Gerry conducted an inspection of the Property and observed multiple indicia that massage services were being offered onsite. (Id., ¶ 15.) The inspector confirmed that the Property was not licensed as a massage business and that the employees of the business that operated there were not certified by the California Massage Therapy Council to work as massage practitioners. (Id., ¶ 16.) Consequently, he issued compliance orders for violations of various sections of the San Jose Municipal Code. (Id.) However, the business failed to come into compliance and was subsequently cited for further violations of the code relating to the illegal operation of a massage business. (Id.)

Inspector Gerry conducted additional inspections of the Property in September 2017, November 2017, February 2018 and April 23, 2018 and confirmed more of the same violations. (SAC, ¶ 17.) To Plaintiff’s knowledge, Defendants allowed these violations to continue into May 2018. (Id., ¶ 18.)

Based on the foregoing allegations, Plaintiffs initiated the instant action on February 27, 2019 with the filing of the original complaint. On May 14, 2018, the Court issued a Temporary Restraining Order (“TRO”) against Defendants, defendant Hung Q. Nguyen and the subject business, Bebe Spa, based on an ex parte application by Plaintiffs requesting a TRO and order to show cause why a preliminary injunction should not be issued. On June 20, 2018, Plaintiffs requested, and the Court granted, an order to show cause regarding contempt as to Defendants for purported violation of the TRO. A hearing on the preliminary injunction was held on June 22, 2018, with the Court subsequently issuing an order denying Plaintiffs’ request. The TRO dissolved as a result. Beginning on July 16, 2018, the Court held a hearing regarding Plaintiffs’ request for a finding of contempt against Defendants.

On July 27, 2018, Plaintiffs filed the FAC, asserting claims for: (1) action for civil penalties and recovery of costs and fees pursuant to the “Red Light Abatement Law,” Penal Code § 11225, et seq. ((“Nuisance Per Se”) based on prostitution and lewd acts); (2) action for attorney’s fees and costs pursuant to Code of Civil Procedure § 731 and Civil Code §§ 3479, 3480 and 3496 (public nuisance based on prostitution or lewd acts); (3) action for civil penalties and attorney’s fees and costs pursuant to San Jose Municipal Code Title 6 (“Nuisance Per Se” based on Massage Ordinance violations); and (4) action for civil penalties for unfair competition pursuant to Business & Professions Code § 17200, et seq. (unlawful and unfair business practices based on violations of law and acts/omissions contravening public policy: San Jose Municipal Code, Red Light Abatement Law and Business & Professions Code).

On August 20, 2018, the Court issued an order finding Defendants not guilty of contempt pursuant to Code of Civil Procedure section 1209, subdivision (a)(5). Shortly thereafter, Defendants demurred to the FAC and each of the four claims asserted therein and filed a motion to strike the pleading in its entirety. On September 19, 2018, approximately a month prior to the hearing on the foregoing motions, Plaintiffs filed a request for dismissal of the first, second and fourth causes of action in the FAC without prejudice as to Defendants. The dismissals were entered that day, leaving only one cause of action pending against Defendants. The demurrer and motion to strike were ultimately overruled and denied, respectively, by the Court.

On January 23, 2019, Plaintiffs filed the SAC, asserting a single cause of action against Defendants for civil penalties pursuant to San Jose Municipal Code Title 6 (“Nuisance Per Se” based on Massage Ordinance violations). On February 25, 2019, Defendants filed the instant demurrer to the SAC and motion to strike. Plaintiffs oppose both motions.

II. Defendants’ Request for Judicial Notice

In support of their opposition to Defendants’ demurrer, Plaintiffs request that the Court take judicial notice of a variety of materials, including documents filed on behalf of the LLC with the California Secretary of State, the pleadings filed in this action, the Court’s orders on the preceding demurrer, motion for judgment on the pleadings, TRO/preliminary injunction and the OSC re: contempt (Exhibits A through K). As these items are all either court records or facts and propositions that are not reasonably subject to dispute and capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy, they are proper subjects of judicial notice under Evidence Code section 452, subdivisions (d) and (h). Accordingly, Defendants’ request for judicial notice is GRANTED.

III. Defendants’ Demurrer

The thrust of Defendants’ demurrer to the SAC is that Plaintiffs have not sufficiently pleaded alter ego allegations such that they have stated a basis to pierce the corporate veil and impose personal liability against Yang for violations of the San Jose Municipal Code relating to the operation of an illegal massage business on the Property.

Generally speaking, officers do not incur personal liability for the corporation’s torts unless they participate in the wrong or authorize or direct that it be done. (See Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 507.) In certain circumstances, the corporate entity may be disregarded (the corporate veil “pierced”) and the shareholders held personally liable for corporate debts because of the manner in which they have dealt with the corporation. (See Automotriz del Golfo de Calif. S.A. De C.V. Resnick (1957) 47 Cal.2d 792, 796.) Defendants explain that there are no allegations which support the piercing of the corporate veil in this instance so as to reach Yang in her individual capacity.

Plaintiffs respond that they are not required to plead alter ego allegations in the SAC because Yang’s liability is not predicated on that theory but rather the so-called “responsible corporate officer doctrine.” This doctrine was “developed by the United States Supreme Court to hold corporate officers in responsible positions of authority personally liable for violating strict liability statutes protecting the public welfare. It is a common law theory of liability separate from piercing the corporate veil or imposing personal liability for direct participation in tortious conduct.” (People v. Roscoe (2008) 169 Cal.App.4th 829, 831-832 [emphasis added].) “Three essential elements must be satisfied before liability will be imposed upon a corporate officer under the [doctrine]: (1) the individual must be in a position of responsibility which allows the person to influence corporate policies or activities; (2) there must be a nexus between the individual’s position and the violation in question such that the individual could have influenced the corporate actions which constituted the violations; and (3) the individual’s actions or inactions facilitated the violations.” (Id. at 839 [internal citations omitted].)

This Court is not aware of any cases that have applied the responsible corporate officer doctrine to impose liability on a corporate officer for failure to comply with public nuisance ordinances such as those at issue here. However, this is not by itself necessary disqualifying, as the body of case law applying the doctrine is relatively limited. In the primary California authority discussing the doctrine, People v. Roscoe, the court evaluated the language of the statute before it, Health and Safety Code section 25280, which governs the underground storage of hazardous substances, to determine whether the responsible corporate officer doctrine applied so as to impose personal liability against a particular corporate officer. The court noted that the statute was a strict liability statute because it imposed penalties without any mens rea and that the broad language of the statute (i.e., the target of potential liability, an “operator,” was defined as “any person” rather than “the person”) combined with the Legislature’s repeated amendments to tank laws to “cast a broader net of liability by expanding the definition of person and operator” meant that the statute was the type of public welfare law about which the Supreme Court was concerned when it articulated that a corporate officer could be held “responsible” for corporate conduct without “awareness of some wrongdoing.” (People v. Roscoe, 169 Cal.App.4th at 839, citing United States v. Dotterweich (1943) 320 U.S. 277, 280-281.)

The laws at issue here are portions of the San Jose Municipal Code, particularly the Massage Ordinance. Under this law, the operation of an illegal massage business qualifies as a “public nuisance” and is subject to civil penalties. (San Jose Municipal Code (“SJMC”) Section 1.08.010.G.) Plaintiffs are expressly permitted to seek such penalties against “any person who commits, continues, operates, allows or maintains any violation of any provision of [the SJMC].” (SJMC Section 1.08.018.B [emphasis added].) Plaintiffs maintain that Defendants allowed the illegal massage business to continue operating on their Property. (SAC, ¶¶ 13, 18.) “Person,” in turn (unless otherwise specified) is defined to include “any person, firm, association, organization, partnership, business trust, company, corporation, public agency, school district, the state of California, its political subdivisions and/or instrumentalities thereof.” Notably, the SJMC defines “person” to include a corporation, and the scope of those covered by the term is very broad, evidencing the City of San Jose’s intent to establish a wide net of liability similar to the statute at issue in Roscoe. Further, the statutes that Defendants are accused of violating, those relating to the operation of an illegal massage business, involve a public nuisance, which directly relates to the welfare of the public, i.e., the type of law about which the Supreme Court was concerned with when it fashioned the responsible corporate officer doctrine. (See Weis v. Superior Court (1916) 30 Cal.App. 730, 732 [explaining that a public nuisance is an exhibition that “tends to the corruption of morals, to a disturbance of the peace, or the general good order and welfare of society”] [emphasis added.) Thus, there is arguably a sound basis to conclude that the doctrine applies to the portions of the SJMC at issue.

In their reply, Defendants suggest that the doctrine is limited to health and safety laws and regulations after a criminal conviction, and notes that claims by Plaintiffs against Defendants relating to alleged prostitution activity have already been dismissed by them. But they cite to no authority which expressly holds that the doctrine is so limited, nor do they dispute that the operation of an illegal massage business (i.e., one that is not maintained or operated in strict compliance with a valid business permit issued by the chief of police) qualifies as a public nuisance under applicable law. At a bare minimum, the Court is not persuaded at this juncture that the responsible corporate officer doctrine is not applicable to Plaintiffs’ claim against Yang as a matter of law. Thus, Plaintiffs need not plead alter ego allegations in order to state a claim for liability against Yang directly and the SAC is not demurrable on that basis.

Defendants next argue that the SAC is fatally uncertain because there is no way to allege that Yang is personally liable for the actions of her former tenants and Plaintiffs fail to plead which sections of the SJMC that Yang and the LLC each violated. These contentions can easily be dispensed with as the SAC does not qualify as “uncertain” within the meaning of Code of Civil Procedure section 430.10, subdivision (f), i.e., so unintelligible that Defendants cannot reasonably respond to it. (See Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn.2 [stating that “where the complaint contains substantive factual allegations sufficiently apprising defendant of the issues it is being asked to meet, a demurrer for uncertainty should be overruled”]; see also Khoury v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616 [stating that a demurrer should not lie where “even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures”].) The facts alleged in the SAC establish violations of specific provisions of the SJMC as set forth in paragraphs 20 through 33 and to the extent that there is any confusion on the part of Defendants, it can be cleared up in discovery.

In accordance with the foregoing, Defendants’ demurrer to the SAC is OVERRULED.

IV. Defendants’ Motion to Strike

With the instant motion, Defendants move to strike the SAC in its entirety as to defendant Yang on the ground that Plaintiffs have failed to allege any alter ego allegations against her and as to both Defendants on the ground that the matter at issue is now “moot.” Neither of these assertions is well taken.

First, as explained above, Plaintiffs need not plead alter ego allegations in order to state a basis to impose personal liability against Yang for the actions of the LLC. Second, while Plaintiffs have dismissed several of the claims originally asserted against Defendants relating to criminal conduct on the Property, neither these dismissals nor the Court’s preceding orders address the issues asserted in the remaining claim in the SAC. As the Court explained in its order on Defendants’ demurrer and motion to strike the FAC, its orders denying Plaintiffs’ request for injunctive relief and finding Defendants not guilty on a charge of contempt under Code of Civil Procedure section 1209, subdivision (a)(5) involved the issues of perceived future harm to the public and possible willful violations of the TRO between April 14, 2018 and July 13, 2018 (when the TRO expired), respectively. In contrast, the remaining claim in the SAC is predicated, at least in part, on purported wrongful conduct (the operation of an illegal massage business) which took place before the TRO was issued and the nuisance activity inflicted upon the public by Defendants allowing Bebe Day Spa to operate despite information from the City that it was carrying on an illegal massage business. The Court has made no determination at any prior proceeding in this action regarding Defendants’ culpability in connection with the acts alleged to have violated the San Jose Massage Ordinance that took place prior to March 2018. Thus, Defendants’ assertion that the remaining claim in the SAC is somehow moot is unavailing. Therefore, Defendants’ motion to strike is DENIED.