Case Name: Claras v. Claras
Case No.: 1-14-CV-260398

Defendant John Claras (“Defendant”) demurs to the complaint (“Complaint”) filed by plaintiff Carl Claras (“Plaintiff”).

Plaintiff and Defendant, who are brothers, are 50/50 owners of Applied Interconnect, a company which provides various cable assembly products. (Complaint at ¶ 3.) Plaintiff is the company’s secretary and chief financial officer, while Defendant is the chief executive officer. (Id.)

In 2012, Plaintiff and Defendant began negotiations for the sale of Plaintiff’s 50% ownership interest in Applied Interconnect to Defendant. (Complaint at ¶ 4.) On December 27, 2013, the parties concluded their negotiations and agreed that Defendant would purchase Plaintiff’s interest in the company for $300,000. (Id.) Hours before the written agreement for the sale of Plaintiff’s interest was to be signed, Defendant informed Plaintiff that he would not sign the agreement unless the parties agreed that Plaintiff would not have any involvement in the preparation of Applied Interconnect’s 2013 tax return. (Id. at ¶ 5.) The agreement was ultimately not signed and from that point forward, Defendant’s attorney ceased communications with opposing counsel. (Id.)

On January 13, 2014, Defendant informed Plaintiff in writing that he could no longer continue the business and would be filing an election to dissolve the company with the state Department of Corporations the following week. (Complaint at ¶ 6.) In the weeks that followed, Defendant filed paperwork with the state to dissolve the corporation as well as a petition with the court for the appointment of a provisional director to break the deadlock between the parties. (Id. at ¶¶7-9.)

Plaintiff alleges that Defendant’s election to dissolve the corporation was not motivated by good faith and is designed to procure an unfair advantage over him. (Complaint at ¶ 10.) Plaintiff asserts that while purporting to work for Applied Interconnect, Defendant has been planning to start a new company and transfer to that company Applied Interconnect’s assets, including customer and vendor relationships, trade names, patents, etc. (Id.) Plaintiff further alleges that Defendant directed Applied Interconnect to pay many expenses associated with formation of the new company, directed customers to payment payments to a secret account not disclosed to Plaintiff or Applied Interconnect and performed other acts which were detrimental to the financial survival of the company. (Complaint at ¶¶ 10, 13.) According to Plaintiff’s allegations, Defendant’s actions are aimed at taking full control of the company’s assets without having to fairly compensate him for the right to use them. (Id. at ¶ 11.)

On February 11, 2014, Plaintiff filed the Complaint asserting the following causes of action: (1) Court Supervision of Dissolution- Corp. Code § 1904; (2) Injunctive Relief- Common Law Equitable Obligations of Exercise of Good Faith; (3) Breach of Fiduciary Duties; (4) Conversion; (5) Waste of Corporate Assets; (6) Imposition of Constructive Trust; (7) Removal of Director Under Corp. Code § 304; and (8) Breach of Contract.

On April 4, 2014, Defendant filed the instant demurrer to the first through seventh causes of action in the Complaint on the grounds of failure to state facts sufficient to constitute a cause of action and that there is a defect or misjoinder of parties. (Code Civ. Proc., § 430.10, subds. (d) and (e).)

Defendant asserts that its demurrer should be sustained because with the first seven causes of action in the Complaint, Plaintiff is improperly attempting to assert claims in his individual capacity that belong to the corporation, Applied Interconnect (“Applied”). Defendant argues that these claims assert breaches of duties owed and injuries to the corporation and that where conduct causes damage to the corporation, it is the entity (or its shareholders via a derivative action) that must bring suit and not an individual shareholder..

As a general matter, “an injury to a corporation cannot be maintained in an action brought by an individual shareholder on his own behalf but must be asserted in a derivative action in which the shareholder is ‘a mere nominal plaintiff, the corporation is the real party in interest, and any judgment recovered inures to its benefit.’ [Citations.]” (Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, 1253.) Shareholders may bring a derivative suit to, for example, enjoin or recover damages for breaches of fiduciary duty that directors and officers owe the corporation. An individual cause of action exists only if damages to the shareholders were not incidental to damages to the corporation and operates to enforce a right against the corporation which the stockholder possesses as an individual. (See Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106-107.) 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.

Where the gravamen of a complaint is injury to the corporation, the claim is a derivative action and the individual shareholder lacks standing to pursue it. (See Schuster v. Gardner (2005) 127 Cal.App.4th 305, 315.) Where a plaintiff lacks the right or standing to sue, the complaint is vulnerable to a general demurrer on the ground that it fails to state a cause of action. (See Carsten v. Psychology Examining Committee (1980) 27 Cal.3d 793, 796.) A plaintiff’s lack of standing to sue is also a defect in the parties under Code of Civil Procedure section 430.10, subdivision (d). (See Cloud v. Northrup Grumman Corp. (1998) 67 Cal.App.4th 995, 1004.)

Defendant insists that the gravamen of Plaintiff’s complaint is injury to the corporation based an allegations that he committed acts which deprived the company of revenue owed to it (by directing Applied’s customers to make payments to an account not affiliated with the company), used the company’s assets to pay for his own personal expenses and those of his new business, caused the company to file incorrect tax returns, intentionally ceased pursuing business opportunities for Applied resulting in a sudden decrease in business revenues and made false representations to the public regarding Applied’s success and the number of individuals employed by the company. (See Complaint at ¶¶ 10, 11, 13.)

Conversely, Plaintiff insists that the gravamen of his claims is not injury to the corporation but rather injury to him individually as a result of Defendant’s scheme to avoid buying out his interest in the corporation at an equitable price.

Reviewing the allegations of the Complaint in its entirety, the Court agrees with Defendant’s contention that the gravamen of Plaintiff’s claims is injury to the corporation rather to himself as an individual shareholder. Plaintiff insists that he suffered individual injury because Defendant did not purchase his interest in the corporation, but Defendant was not necessarily obligated to purchase Plaintiff’s ownership interest in the first place. The gravamen of Plaintiff’s complaint is that Defendant is trying to steal the value of the corporation from him by usurping corporate opportunities, diverting corporate funds and resources and deliberately undermining the company’s profitability by ceasing to solicit business. Any resulting injury to Plaintiff is merely incidental to the harm done to the corporation. Consequently, the claims predicated on injuries to Applied must be brought in a shareholder derivative suit and not by Plaintiff directly.

To the extent that Plaintiff relies on Jara v. Suprema Meats, Inc., supra, for the proposition that he may pursue his claims against Defendant directly given the closely held nature of the corporation, his reliance is misplaced. In Jara, where the court held that a minority shareholder had a direct claim for breach of fiduciary duty, the gravamen of the complaint was that the minority shareholder “was deprived of a fair share of the corporation’s profit” because of the defendants’ generous payment of executive compensation to themselves.” (Jara, supra, 121 Cal.App.4th at 1258.) The court did not reject the distinction between direct and derivative claims where there are few shareholders in a closely-held corporation and even acknowledged the case of Nelson v. Anderson (1999) 72 Cal.App.4th 111, in which a minority shareholder was deemed to lack standing to sue the majority shareholder for corporate mismanagement even though the corporation had only two shareholders. (Id. at 1255.) Here, Plaintiff’s core allegations are actions by Defendant which affected the value and viability of Applied and thus are derivative in nature.

The second, fourth, fifth and sixth causes of action for injunctive relief, conversion, waste of corporate assets and imposition of constructive trust, respectively, are clearly claims which belong to Applied as they seek to recover money or property that belonged to the corporation that Defendant allegedly wrongfully converted to his own use. (Complaint at ¶¶ 34, 40, 43 and 44.) Consequently, Defendant’s demurrer to these claims on the grounds of failure to state facts sufficient to constitute a cause of action and defect or misjoinder of parties is SUSTAINED WITHOUT LEAVE TO AMEND.

Plaintiff insists that the third cause of action for breach of fiduciary duty belongs to him (and Applied) because Defendant has breached fiduciary duties owed not only to the corporation by also to him individually as a shareholder based on Defendant’s role as a director and officer in the company. In contrast, while acknowledging that he owes a fiduciary duty to Applied, Defendant argues that no fiduciary duty is owed to his brother as a shareholder in his individual capacity as a director or officer.

Though it is true as a general matter that the directors and officers of a corporation owe fiduciary duties to the corporation and its shareholders (see Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 337, 345), Plaintiff cites no authority for the proposition that an individual shareholder may file suit on his or her own behalf against the director or officer who committed acts which damaged the corporation and consequently, the stockholder. Moreover, as Defendant notes in his reply, Plaintiff’s purported harm arose out of an arms-length transaction between the parties for the purchase of Plaintiff’s ownership interest in Applied. Courts have declined to extend the scope of fiduciary obligations to circumstances such as the one at bar, i.e., an arms-length buyout negotiation for the sale of shares between two equal shareholders of a corporation who are both represented by counsel. (See Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1160-1162.) Thus, Plaintiff fails to establish that Defendant owed him a fiduciary duty independent of the fiduciary duties he owes to the corporation. As Plaintiff cannot individually maintain a breach of fiduciary duty claim which belongs to the Applied, Defendant’s demurrer to the third cause of action on the grounds of failure to state facts sufficient to constitute a cause of action and defect or misjoinder of parties is SUSTAINED WITHOUT LEAVE TO AMEND.

Defendant also asserts, citing to Anmaco, Inc. v. Bohlken (1993) 13 Cal.App.4th 891, 895, fn. 3, that the first (Court Supervision of Dissolution- Corp. Code § 1904) and seventh (Removal of Director Under Corp. Code § 304) causes of action are also subject to demurrer because the relief requested is sought solely as a remedy for the improperly asserted corporate causes of action. This argument is unavailing as a petition for court supervision of the voluntary dissolution of a corporation pursuant to Corporations Code section 1904 may be filed by not only the corporation itself but also any shareholder holding at least 5% of the outstanding shares. Further, shareholders holding at least 10% of the outstanding shares may sue to remove a director from officer. (Corp. Code, § 304.) However, a shareholder cannot be named as a defendant in proceeding pursuant to Corporations Code section 1904 unless the corporation seeks affirmative relief against them; here, Plaintiff has not filed suit on behalf of the corporation. (See In re FairWageLaw (2009) 176 Cal.App.4th 279, 286.) Similarly, a corporation must be made a party to an action for removal of a director under Corporations Code section 304. (Corp. Code, § 304; see also American Ctr. for Educ., Inc. v. Cavnar (1978) 80 Cal.App.3d 476, 496.) Plaintiff concedes that he neglected to name the corporation as a party in this regard. Consequently, Plaintiff’s first and seventh causes of action are not sufficiently pleaded. Therefore, Defendants’ demurrer to the first and seventh causes of action on the grounds of failure to state facts sufficient to constitute a cause of action and defect or misjoinder of parties is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.