Case Name: Axion Holding Cyprus Ltd., et al. v. Actio-Media, Inc., et al.

Case No.: 1-14-CV-265434

 

Defendants Clickberry, Inc. (erroneously sued as “Actio-Media, Inc. dba Clickberry) and Alex Babin (“Babin”) (collectively, “Defendants”) demur to the first amended complaint (“FAC”) filed by plaintiffs Axion Holding Cyprus Limited (“Axion”), Sergey Kondratov (“Kondratov”) and Alexey Girin (“Girin”) (collectively, “Plaintiffs”) and move to strike portions contained therein.

 

This is an action for fraud and conversion.  During the period of July through December 2009, Axion intended to invest approximately $430,000 in a Russian company called Closed Joint Stock Company “Actio” (“Actio Russia”) in exchange for 12% of the shares of the company.  (FAC at ¶ 9.)  Actio developed software for adding interactivity to videos.  (Id.)  On December 28, 2009, in exchange for 10 million Russian rubles, Kondratov acquired 110,000 shares of Actio Russia.  (Id. at ¶ 11.)  In 2009-2010, Girin acquired 200,000 shares of Actio Russia and contributed approximately 800,000 Russian rubles to Actio Russia.  (Id. at ¶ 10.)

 

In December 2011, Babin, who substantially controlled Actio Russia as a member of its Board of Directors and its Chief Technical Officer, took Plaintiffs’ cash investment and converted it to his own possession for his own personal benefit.  (FAC at ¶ 13.)  Babin formed a California Corporation, Actio-Media, Inc. dba Clickberry (“Actio”).  On information and belief, Plaintiffs allege that Babin transferred all of the capital, technological and intellectual property from Actio Russia and has continued the business of Actio Russia as Clickberry, an alter ego.  Id. at ¶ 14.)  Plaintiffs allege that Actio, dba Clickberry, uses the same technology and intellectual property and offers substantially the same services as Actio Russia.  (Id. at ¶ 17.)

 

On September 2, 2014, Plaintiffs filed the FAC asserting the following causes of action: (1) conversion (against Babin); (2) conversion (against all defendants); (3) fraud (against all defendants); (4) restitution (against all defendants); (5) shareholder derivative action- breach of fiduciary duty (against all defendants); (6) shareholder derivative action- gross mismanagement (against all defendants); and (7) shareholder derivative action- corporate waste (against all defendants).

 

On October 7, 2014, Defendants filed the instant demurrer to each of the seven causes of action asserted in the FAC on the ground of failure to state facts sufficient to constitute a cause of action.  (Code Civ. Proc., § 430.10, subd. (e).)  Defendants also filed a motion to strike the first, second, fifth, sixth and seventh causes of action.

 

Defendants’ request for judicial notice is GRANTED.   (Evid. Code, § 452, subds. (d) and (h).)

 

Defendants’ motion to strike is GRANTED as to the fifth, sixth and seventh causes of action and otherwise DENIED.  Defendants’ contention that Plaintiffs’ derivative claims, i.e., the fifth (breach of fiduciary duty), sixth (gross mismanagement) and seventh (corporate waste) causes of action are beyond the scope of permissible amendment is well-taken.  The original complaint did not include claims, asserted derivatively or otherwise, for breach of fiduciary duty, gross mismanagement and corporate waste.  Defendants’ prior demurrer to the original complaint was sustained with leave to amend as to the then-first (conversion), second (fraud), third (unjust enrichment), fourth (common count- money had and received) and fifth (constructive trust) causes of action.  As a general matter, where the court sustains a demurrer to a particular cause of action, “such granting of leave to amend must be construed as permission to the pleader to amend the cause of action which he pleaded in the pleading to which the demurrer has been sustained.”  (People ex rel. Dept. Pub. Wks. V. Clausen (1967) 248 Cal.App.2d 770, 785-786.)  Moreover, the plaintiff “may not amend the complaint to add a new cause of action without having obtained permission to do so, unless the new cause of action is within the scope of the order granting leave to amend. [Citation.]”  (Harris v. Wachovia Mortgage, FSB (2010) 185 Cal.App.4^th 1018, 1023.)  Plaintiffs’ new claims do not fall within the scope of the Court’s prior order on the demurrer to the complaint because they do not “directly[] respond” to the Court’s reasoning for sustaining the demurrer to the first through fifth causes of action in that pleading.  (See Patrick v. Alacer Corp. (2008) 167 Cal.App.4^th 995, 1015.)  These claims are therefore struck from the FAC.

 

Given the foregoing ruling on Defendants’ motion to strike, Defendants’ demurrer to the fifth, sixth and seventh causes of action on the ground of failure to state facts sufficient to constitute a cause of action is MOOT.

 

In previously sustaining Defendants’ demurrer to first cause of action for conversion in Plaintiffs’ original pleading, the Court determined that based on the allegations contained therein, Girin and Axion’s relationships to Actio Russia, the holder of the capital and technological and intellectual property alleged to have been taken, were as shareholders.  Because there were no allegations of individual ownership of the foregoing items, Girin and Axion’s ownership of the purportedly converted materials was predicated on their status as shareholders.  As the essence of the conversion claim was that the assets of Actio Russia were wrongfully transferred and utilized by Defendants without compensation, the resulting injury was to the company itself and not the individual plaintiff shareholders.  The Court therefore concluded that any potential claim for conversion of the subject property belonged to Actio Russia and thus no individual claims for conversion could be stated by shareholders Girin and Axion.

 

In the FAC, Plaintiffs now attempt to assert two separate claims for conversion,  the first of which is against only Babin and is predicated on his alleged conversion of $530,000 of cash that was tendered to him by Plaintiffs “with the expectation that the money would be put to use as an investment in … Actio Russia” (FAC at ¶ 20), while the second is against all defendants and is based on the purported wrongful transfer of Plaintiffs’ “interest in technology and intellectual property” to Actio without the provision of compensation or comparable shares in the California company.  (FAC at ¶ 28.)

 

In an effort to remedy the deficiency previously articulated by the Court, i.e., the Plaintiffs’ lack of standing to pursue individual claims for the conversion of property belonging to Actio Russia, Plaintiffs have added allegations that Babin “took [their] cash investment and converted it to his own possession for his own personal benefit, depriving Plaintiffs of their investment” (FAC at ¶ 13) and that Actio Russia was not a “legitimate” corporation, but rather “simply a vehicle through which Babin fraudulently solicited investments to steal money for his own benefit ….” (Id. at ¶ 29.)  The later allegation is an attempt by Plaintiffs to establish that the circumstances at bar are similar to those in Burnett v. Rowzee (C.D. Cal. 2007) 2007 U.S. Dist. LEXIS 73295.  In Burnett, the plaintiffs alleged that they were fraudulently induced to invest in a limited liability company (“LLC”) that purportedly supplied short-term bridge loans to companies in the process of obtaining equity financing for growth.  The plaintiffs contended that the LLC did not, in fact, provide such loans; instead, the money they invested was used to pay off earlier investors in what amounted to a classic Ponzi scheme.  The plaintiffs asserted a plethora of claims, including one for fraudulent transfer that the defendants attempted to have dismissed based on their contention that the plaintiffs lacked standing to pursue the claim individually because the LLC, not the plaintiffs, invested in the Ponzi scheme and therefore suffered the resulting injury.  The court rejected the defendants’ argument, reasoning that because the LLC never purchased assets and was not a legitimate LLC but rather a vehicle through which investments in the Ponzi scheme were solicited, the value of each plaintiff’s membership interest in the entity was not tied to any assets and thus they were asserting individual claims to recover money lost in a scam and not derivative claims on behalf of the LLC.

 

Plaintiffs’ attempt to align the instant case with Burnett by virtue of a single conclusory allegation that Actio Russia was not a legitimate corporation but simply a vehicle through which Babin fraudulently solicited investments is problematic given the allegations of the original pleading and other allegations in the FAC.  In the original complaint, there were absolutely no allegations that Actio Russia was not a legitimate entity but rather a mere vehicle for fraud.  In fact, Actio Russia was alleged (and is still alleged in the FAC) to have been an entity that “developed software for adding interactivity to videos.”  (FAC at ¶ 9.)  Plaintiffs also currently allege in the FAC that Actio Russia had assets (“technological and intellectual property”), performed services, and that Clickberry/Actio is “a continuation of the business of Actio Russia in the United States.”  (Id. at ¶¶ 14, 17.)  Collectively, these allegations belie Plaintiffs’ general assertion that Actio Russia was not a legitimate entity.  Critically, California courts have adopted the principle that “specific allegations in a complaint control over an inconsistent general allegation. [Citations.]”  (Perez v. Golden Empire Transit Dist. (209 Cal.App.4^th 1228, 1236.)  Applying this principle here, Plaintiffs’ allegations that Actio Russia operated as a business that developed software for adding interactivity to videos control over their conclusory allegation that Actio Russia was not a legitimate entity.  Consequently, the factual circumstances of this case are not similar to Burnett.  Here, the essence of Plaintiffs’ conversion claims is that property (be it intellectual, technological or capital/cash) belonging to Actio Russia was wrongfully transferred and converted to use for Actio by Defendants without compensation.  Because this property belonged to Actio Russia, the resulting injury, i.e., the lack of compensation, was to the company itself and not the individual plaintiff shareholders.  Therefore, any potential conversion claims belong to Actio Russia and no individual claims can be stated by Plaintiffs.

 

The addition of the allegation that Plaintiffs gave Babin $530,000 in cash to be invested in Actio Russia which he converted to his own use also does not alter the foregoing conclusion.  As Defendants contend, the allegations of the original complaint and FAC establish that Plaintiffs received shares in Actio Russia in exchange for their cash investment in the company. Therefore, any interest they maintained in Actio Russia property was as shareholders, including the cash tendered.  Thus, any conversion of that property resulted in a claim for Actio Russia and not the Plaintiffs in their individual capacities.

 

In accordance with the foregoing analysis, Defendants’ demurrer to the first and second causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.  Leave to amend is denied as Plaintiffs have not demonstrated, as is their burden, the manner in which they can amend the FAC to correct the deficiencies articulated by the Court.  (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.)

 

Defendants’ demurrer to the third cause of action (fraud) on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED.  Contrary to Defendants’ assertions, Plaintiffs have pleaded this claim with the requisite specificity in stating where, when, how, to whom and by what means the alleged misrepresentations were tendered.  Further, also contrary to Defendants’ arguments, this claim is properly asserted by Plaintiffs’ in their individual capacities as they allege that but for Defendants’ misrepresentations, they would not have invested in Actio Russia.  (FAC at ¶¶ 37-44.)  Plaintiffs were deprived of their individual property, the funds they invested, based on their reliance on Defendants’ fraudulent representations.  These monies did not yet belong to Actio Russia at the time the misrepresentations were made, thus the claim does not belong to the company and need not be asserted derivatively.

 

Because Plaintiffs have sufficiency stated a claim for fraud, Defendants’ demurrer to the fourth cause of action (restitution) on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED.  (See Durell v. Sharp Healthcare (2010) 183 Cal.App.4^th 1350, 1370 [“[r]estitution may be awarded where the defendant obtained a benefit from the plaintiff by fraud, duress, conversion, or similar conduct”] (emphasis added).)