Case Number: 19TRCV00201 Hearing Date: September 24, 2019 Dept: A

# 10. Aleksandr Levertov v. Reza Nasrollahy, et al.

Case No.: 19TRCV00201

Matter on calendar for: Motion to dismiss, or, alternatively, require a bond (x2)

Tentative ruling:

I. Background

Plaintiff Aleksandr Levertov brings this suit on behalf of Global Paratransit, Inc. (“Global”) and All Yellow Taxi, Inc. (“AYT”). He alleges Defendants Reza Nasrollahy, Ali Akbar Nasrollahi, and Semyon Grinberg used their positions within the corporations to enrich themselves. Global and AYT are joined as nominal Defendants. AYT is a taxi logistics business that provides services for 61 taxi cabs, as well as support for Global, which provides disabled individuals with paratransit services under a government contract.

The relationship between the parties began to deteriorate in 2017. On June 5, 2018, Levertov’s accountant visited Global and AYT to view their books. He conducted a limited and supervised review that raised concerns. Levertov presented his proposed Complaint to the boards of both entities on January 8, 2019. At the board meetings, Neil Evans became a director for Global and Brandon Evans became a director for AYT. The proposed Complaint was delegated to the new directors to determine if pursuing the action was in the best interest of the companies. Neil and Brandon Evans determined it was not.

Levertov then filed this action. The First Amended Complaint (“FAC”) alleges:

(1) Breach of fiduciary duty;

(2) Accounting;

(3) Abuse of control;

(4) Declaratory relief—constructive trust and

(5) Declaratory relief—removal of corporate insiders from positions of control

Defendants Global and AYT now move separately for the action to be dismissed, or, alternatively, for a bond to be posted under Corporations Code § 800. The motions are opposed.

For the reasons set forth below, the Court denies the motions to dismiss.

II. Standard

Corporations Code § 800 governs a shareholder’s standing to bring a derivative suit. Subsection (b) outlines standing requirements, subsection (c) authorizes a motion to require a bond, and subsection (d) governs the hearing on the bond. Challenges based on Corporations Code § 800 have taken the form of demurrers or motions to dismiss: both are acceptable, though demurrers are most common and the analysis resembles that of a demurrer. (Corp. Code, § 800(b); See Grosset v. Wenaas (2008) 42 Cal.4th 1100 [California Supreme Court granting motion to dismiss].)

III. Analysis

A. Corporations Code § 800(b)

Corporations Code § 800(b) governs standing requirements for derivative suits. “It is fundamental that a corporation is a legal entity that is distinct from its shareholders. [Citation.] The authority to manage the business and affairs of a corporation is vested in its board of directors, not in its shareholders. [Citations.] This includes the authority to commence, defend, and control actions on behalf of the corporation. [Citations.]” (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108.) Shareholders do not have a direct cause of action against those who have harmed the corporation, but they may “bring a derivative suit to enforce the corporation’s rights and redress its injuries when the board of directors fails or refuses to do so.” (Ibid.) “An actions is deemed 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 ticket holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.” ’ [Citation.]” (Ibid.)

1. Continuous Stock Ownership

Corporations Code § 800(b) has two requirements: (1) stock ownership at the time of the complained of transaction that remains current, and (2) a demand for action upon the board. (Corp. Code, § 800(b)(1–2).) To meet the first requirement, the Complaint must allege plaintiff “was a shareholder, of record or beneficially . . . at the time of the transaction or any part thereof of which plaintiff complains or that plaintiff’s shares . . . thereafter devolved upon plaintiff by operation of law from a holder who was a holder at the time of the transaction or any part thereof . . . .” (Corp. Code, § 800(b)(1).) A failure to properly allege continuous ownership can be cured by a motion and preliminary evidentiary hearing where the court determines “(i) there is a strong prima facie case in favor of the claim asserted on behalf of the corporation, (ii) no other similar action has been or is likely to be instituted, (iii) the plaintiff acquired the shares before there was disclosure to the public or to the plaintiff of the wrongdoing of which plaintiff complains, (iv) unless the action can be maintained the defendant may retain a gain derived from defendant’s willful breach of a fiduciary duty, and (v) the requested relief will not result in unjust enrichment of the corporation or any shareholder of the corporation.” (Corp. Code § 800(b)(1).)

2. Demand on Board of Directors

The demand requirement upon the board of directors is codified in Corporations Code § 800(b)(2). (Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222, 232.) “ ‘Under section 800(b)(2), a plaintiff must plead “with particularity” the attempts that were made to secure board action before bringing suit, or, alternatively, the factual basis upon which the plaintiff believes that a demand on the board was unnecessary, i.e., that a demand would have been futile.’ [Citation.]” (Ibid.) As to futility, ‘with particularity’ means that “ ‘general averments that the directors were involved in a conspiracy or aided and abetted the wrongful acts complained of will not suffice . . . . [Citation.]’ [Citation.]” (Id. at 233.) Instead, “ ‘ “the court must be apprised of facts specific to each director from which it can conclude that the particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.” ’ [Citation.]” (Ibid.)

B. AYT and Continuous Ownership

The Court has previous ruled that Levertov has standing to pursue its claims and, as to AYT specifically, may only assert his claims for alleged wrongdoing after June 5, 2018.

C. Demand on Board of Directors

The Court has already ruled that the Complaint, now the FAC, adequately alleged presentation to the board. (Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1014.) The success of Defendants’ previous motions turned on the special litigation committee defense/an uninterested board defense; which that are derived from the business judgment rule.

1. Disinterested Director and the Special Litigation Committee Defense

Both Global and AYT assert a variation of the special litigation committee (“SLC”) defense—that Neil and Brandon Evans were disinterested directors who properly rejected the Complaint— which is founded on the business judgment rule. (Finley v. Superior Court (2000) 80 Cal.App.4th 1152, 1163.) “The corporation in a derivative action may ‘appoint a special litigation committee of independent directors to investigate the challenged transaction.’ [Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 185.] If the SLC ‘reasonably determines that it is not in the best interest of the corporation to pursue the claims asserted in the derivative action, that decision is protected by the business judgment rule.’ [Citation.] If the court then determines ‘ “as a matter of fact . . . the committee members were disinterested and . . . they conducted an adequate investigation . . . it must dismiss the derivative action.” ’ [Desaigoudar, supra, 108 Cal.App.4th at 185–188 [court reviews committee’s independence and the investigation’s adequacy, but does not review reasonableness of the SLC’s decision].]” (Patrick, supra, Cal.App.4th at 1005.)

Here, Global and AYT argue Neil Evans for Global and Brandon Evans for AYT acted as disinterested directors of their respective entities and that their determinations not to pursue Levertov’s claims should be accorded deference under the business judgment rule. This is an issue that can be properly raised on this motion. (Bezirdjian v. O’Reilly (2010) 183 Cal.App.4th 316, 322; Desaigoudar, supra, 108 Cal.App.4th at 185, citing Findley v. Garrett (1952) 109 Cal.App.2d 166, 1161, wherein the court sustained a demurrer based on the business judgment rule].) The business judgment rule presumption can be rebutted by specific allegations. (Bezirdijian, supra, 183 Cal.App.4th at 325; Findley, supra, 109 Cal.App.2d at 176.)

Defendants insist their arguments are not based on the SLC defense and rely upon Finley in doing so. This argument leaves their motions in limbo. Finley involved a disinterested majority of the board determining not to pursue a lawsuit. “[T]he board cannot avail itself of the protection of the rule if a majority of the board has a personal interest in the outcome. [Citation.]” (Desaigoudar, supra, 108 Cal.App.4th at 184.) In these circumstances, a SLC can be formed to make the determination. (Ibid.) If Defendants did not form an SLC, then giving the Complaint to individual board members is insufficient to raise the business judgment rule presumption because a disinterested majority of the board did not reach a determination. Accordingly, Plaintiff need not add specific allegations to rebut the rule.

The motions to dismiss are denied. The Court must now address whether a bond must be posted.

D. Bond hearing under Corp. Code § 800(c) & (d)

If standing is adequately pled, a motion for a bond under section 800(c) may be based on two grounds: (1) “[t]hat there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its shareholders [¶] (2) That the moving party, if other than the corporation, did not participate in the transaction complained of in any capacity.” It is an evidentiary hearing where either written or oral evidence may be submitted as to the grounds of the motion and to the determination of probable reasonable expenses. (Corp. Code, § 800(d).) If the Court finds a probability in support of the grounds of the motion, the Court must fix a bond amount for reasonable expenses not exceeding $50,000. (Corp. Code, § 800(d).)

Defendants’ arguments as to the bond rest on their disinterested director arguments that were discussed above. Because this was inadequate, the Court denies the motions to post bonds.

IV. Ruling

The motions are denied.