Case Number: KC065753    Hearing Date: July 08, 2014    Dept: J

Re: Boahua Zheng v. Rex Spirits, Inc., etc. (KC065753)

DEMURRER TO AMENDED CROSS-COMPLAINT; MOTION TO STRIKE AMENDED CROSS-COMPLAINT

Moving Party: Cross-Defendant Bin Li

Respondent: Cross-Complainant Sal Ortiz

POS: Moving OK; Opposing served by regular mail contrary to CCP § 1005(c); Reply OK

The original Complaint herein alleged that Plaintiff and Defendant entered into an agreement wherein the parties agreed that Plaintiff would loan $1,000,000 to Defendant to use to develop and establish a liquor distribution business in China and give Plaintiff exclusive marketing rights to the liquor business in China, that Defendant would repay Plaintiff the $1,000,000 loan within one year, and that Defendant breached the agreement by failing to repay $700,000 of the outstanding principal balance. The Complaint, filed on 3/4/13, asserted causes of action for:

1. Breach of Contract
2. Breach of Contract
3. Common Counts

The Second Amended Cross-Complaint filed on 1/27/14, against Plaintiff, Bin Li and East West Bank, asserts causes of action for:

1. Negligence
2. Breach of Contract
3. Breach of Fiduciary Duty
4. Fraud
5. Conversion

The First Amended Cross-Complaint by Sal Ortiz against Bin Li and East West Bank filed on 4/29/14 asserts a cause of action for Breach of Fiduciary Duty.

The Case Management Conference/Trial Setting Conference is set for 7/8/14.

JUDICIAL NOTICE:

The court takes judicial notice of the court records in the United States District Court, Case No. CV13-02398 and this action, attached to Cross-Defendant’s request as Exhibits 1-7. (Ev C § 452(d).)

(1) DEMURRER:

Cross-Defendant Bin Li (“Li”) demurs to the First Amended Cross-Complaint (“FAXC”) filed by Cross-Complainant Sal Ortiz (“Ortiz”) on the ground that it fails to allege facts sufficient to state a cause of action. Specifically, Li contends that Ortiz has no standing because he is not the real party in interest and that he does not plead a fiduciary duty.

STANDING:

Generally, the real party in interest is the person who has the right to sue under the substantive law. It is the person who owns or holds title to the claim or property involved, as opposed to others who may be interested or benefited by the litigation. (Gantman v. United Pac. Ins. Co. (1991) 232 Cal.App.3d 1560, 1566.) Claims for injury or damage to a corporation or its property belong to the corporation, not its stockholders. They have no standing to sue for such wrongs even if the value of their stock is diminished. The loss suffered by the stockholder is deemed incidental to the wrong suffered by the corporation. (See Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107.) But if the corporation refuses to enforce a claim against third persons for damage to the corporation (e.g., against directors for breach of fiduciary duty), a stockholder may under certain circumstances maintain a derivative suit on the corporation’s behalf. The corporation is named as a defendant (or involuntary plaintiff) in such actions because of its refusal to sue as plaintiff. Nonetheless, the corporation is the real party in interest in the claim sued upon. (Ibid.)

A complaint filed by someone other than the real party in interest is subject to general demurrer if the defect appears on the face of the complaint or from matters that can be judicially noticed; i.e., it fails to state a cause of action by the plaintiff, because the claim sued upon belongs to somebody else. (Carsten v. Psychology Examining Comm. of Bd. of Med. Qual. Assur. (1980) 27 Cal.3d 793, 796; Qualified Patients Ass’n v. City of Anaheim (2010) 187 Cal.App.4th 734, 752.)

FIDUCIARY DUTY:

To assert a cause of action for breach of fiduciary duty, plaintiff must allege the following elements: (1) the existence of a fiduciary duty; (2) breach of the duty; and (3) damage caused by the breach. (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 182.)

ALLEGATIONS IN THE FAXC:

The FAXC alleges that Li was the attorney for Ortiz prior to being retained for the purposes of being corporate counsel for Rex Spirits, Inc. (“Rex Spirits”). (FAXC ¶4.) On or about November 2, 2011, Ortiz retained Li to represent him personally in connection with Ortiz’s shareholder’s claim for interest in another company. (Ibid.) On or about November 21, 2011, Ortiz retained Li for purpose of acting as corporate counsel for Rex Spirits and also as counsel for Ortiz personally and as an officer and director of Rex Spirits, and for securing funding for Rex Spirits. (Id. ¶ 6, Exh. A – “Retainer Agreement.”)

Ortiz believed when he retained Li under the Retainer Agreement that he was the client and that the services to be provided by Li were for both himself and the corporation. (Id. ¶ 7.) Shortly after entering into the Retainer Agreement Li secured an investor for Rex Spirits. (Id. ¶ 8.)

On or about January 16, 2012, a Loan Agreement was signed between Rex Spirits and the investor. (Id. ¶ 9.) In November of 2011, Li began his duties as a Board Member of Rex Spirits and acted in his capacity as an attorney to advise the Board on contracts and other corporate business. (Id. ¶ 10.)

The funds from the investor were secured by Li on or about January 18, 2012 and deposited into an account with East West Bank. (Id. ¶ 11.) A stipulation between Rex Spirits and the investor was also made part of the agreement with East West Bank, specifically that the “Bank account which the loan amount is deposited in must have both Bin Li and Sal N. Ortiz’s signature before any funds can be released.” (Ibid.)

In December of 2012, the validity of the trademarks which were filed by Li on behalf of Rex Sprits came into question, and a lawsuit for trademark infringement was filed against Rex Spirits. (Id. ¶ 13.)

While Ortiz was concerned with the trademark infringement suit, Li, without the knowledge or consent of Ortiz, submitted a wire transfer request to East West Bank for the amount of $300,000.00 back to the investor before the money was due to the investor. (Id. ¶ 14.)

Once Ortiz learned of the $300,000.00 wire transfer from the account, he contacted East West Bank and learned that the $300,000.00 wire transfer had depleted the bank account and left a balance of zero. (Id. ¶ 16.) At that time Rex Spirit’s operating account had only approximately $4,000.00 and had outstanding amount of approximately $166,000.00 owed to its vendors. (Ibid.) This left Rex Spirits unable to continue to move its product and make sales to bring in profits to repay the loan. (Ibid.)

Li breached his fiduciary duty to Ortiz and Rex Spirit by transferring funds out of the bank account without the approval, consent or knowledge of Ortiz or Rex Spirits and by causing as a result of that withdrawal, the inability of Rex Spirits to continue its business. (Id. ¶ 17.) As a result, Ortiz has been damaged by the loss of his business, and by this lawsuit. (Id. ¶ 19.)

The FAXC fails to adequately allege facts demonstrating that Li owed a fiduciary duty to Ortiz. The Retainer Agreement attached to the FAXC as Exhibit “A” demonstrates that the parties to the agreement are Rex Spirits and Li. (FAXC, Exh. A.) Specifically, the Retainer Agreement’s signature blocks state that the parties to the agreement are Li and Rex Spirits, and the scope of the work set forth in the Retainer Agreement’s “Schedule A” pertains to Li’s representation of Rex Spirits. (Ibid.) Moreover, even if the FAXC had adequately alleged facts demonstrating that Li owed a fiduciary duty to Ortiz under the Retainer Agreement, the FAXC fails to allege facts demonstrating a breach and/or damages incurred by Ortiz personally. The FAXC only alleges harm to Rex Spirits, i.e., Li made an unauthorized wire transfer from Rex Spirits’ bank account and that as a result, Rex Spirits was unable to continue its business. Claims for injury or damage to a corporation belong to the corporation. Thus, the demurrer to the FAXC is sustained.

(2) MOTION TO STRIKE:

Based on the foregoing ruling on the demurrer, the motion to strike is deemed moot.

Should counsel for cross-complainant seek leave to amend, the court will require an offer of proof as to how the defects can be cured.