Case Name: Jein Shyue v. John P. Traub, Sr., et al.
Case No.: 19-CV-343305
Currently before the Court is the demurrer by defendants John P. Traub, Sr. (“John Traub”), Carolina Traub, and John Traub II (collectively, “Defendants”) to the second amended complaint (“SAC”) of plaintiff Jein Shyue (“Plaintiff”).
Factual and Procedural Background
This is an action for fraud, breach of contract, and breach of fiduciary duty, arising out of a business dispute. According to the allegations of the operative SAC, John Traub formed a corporation, Nanolab Technologies, Inc. (“NTI”), in 2005. (SAC, ¶ 10.) John Traub was the chief executive officer and majority shareholder of NTI, as well as a director. (Id. at ¶¶ 2 & 11.) His wife, Carolina Traub, and their son, John Traub II, were also directors of NTI. (Id. at ¶¶ 3 & 11.) NTI was a shell company formed for the purpose of acquiring another company, but it failed to do so. (Id. at ¶ 10.)
Between May 4 and June 1, 2007, Plaintiff, nonparty Xiuhong Han (“Han”), and John Traub entered into an oral contract “to carry on a service laboratory business … as a partnership.” (SAC, ¶ 8.) Under the terms of the agreement, Plaintiff, Han, and John Traub would each be responsible for certain aspects of the business operation. (Id. at ¶ 9.) Plaintiff, Han, and John Traub would receive salaries for their work. (Ibid.) Plaintiff, Han, and John Traub would “share profits and losses at a fixed ratio, when fully vested after 5 years, of 24.5 [percent], 24.5 [percent] and 51 [percent] among the three respectively.” (Ibid.) John Traub would provide the working capital for the business “in exchange for 51 [percent] of the company’s stock, which equaled 1,000,000 shares.” (Ibid.) Plaintiff and Han “would each be each granted 100,000 founder shares … at one cent per share in the beginning and were to acquire more shares via stock-option at one cent per share over 5 years in order to achieve the agreed ratio.” (Ibid.) “[I]n the event of any dilution of shares by accepting outside investment or otherwise by issuing additional shares, Plaintiff and [Han] would be offered the same terms to purchase shares in order to maintain the agreed ratio among the three co-founders.” (Ibid.)
This business “was to operate under the name of [NTI].” (SAC, ¶ 10.) John Traub “advised that NTI was a … dormant corporate entity that was ready for use.” (Ibid.) “NTI’s bylaws … were not changed when [John Traub] used this dormant entity for the new business.” (Id. at ¶ 11.) “The information regarding the identities of the members of the Board of Directors and the corporation’s officers was not disclosed to either Plaintiff or [Han] during any part of the negotiations / discussions which resulted in the parties’ agreement to work ….” (Id. at ¶ 12.)
On June 1, 2007, John Traub put his son on NTI’s payroll even though John Traub II did not have “any clearly defined job duties or responsibilities” and had misused a proprietary database, triggering litigation. (SAC, ¶ 21.) Shortly thereafter, Plaintiff joined NTI as “vice president, co-founder and sole [Transmission Electron Microscopy (‘TEM’)] department head, operator and employee.” (SAC, ¶ 15.)
A few years later, “NTI had outgrown the space where it was conducting its business operations.” (SAC, ¶ 16.) Plaintiff, Han, and John Traub began looking for a commercial building that NTI could purchase or rent. (Ibid.) They eventually decided to purchase real property located at 1708 McCarthy Boulevard, Milpitas, California (“Property”). (Id. at ¶ 18.)
John Traub then proceeded to form a member managed limited liability company, Nanotechnology Partners 1, LLC (“NP1”). (SAC, ¶ 19.) Plaintiff was never advised of NP1’s existence and its creation was kept secret from him. (Ibid.) NP1 purchased the Property for $4,262,750 on August 30, 2011. (SAC, ¶ 20.) NP1 obtained a commercial loan and construction loan for the purchase by leveraging a 10-year lease agreement with NTI and offering outside investors a 50 percent interest in the Property. (Ibid.) Through those investors, NP1 raised approximately $1,400,000 as a down payment for the Property. (Ibid.) John Traub “invested a symbolic amount of money” for the remaining 50 percent interest. (Id. at ¶ 19.)
After the purchase of the Property, John Traub significantly increased the monthly rent for the Property to the disadvantage of NTI. (SAC, ¶ 20.) Additionally, the construction loan was used, in part, for the improvement of John Traub’s personal home. (Ibid.)
In early 2012, Carolina Traub started to draw a salary and benefits even though she did not perform any work beneficial to NTI. (SAC, ¶ 22.) Over the years, Carolina Traub received excessive pay increases without contributing in any meaningful manner. (Ibid.) After Plaintiff and Han complained, Carolina Traub “stopped going to her ‘office’ in NTI … and Plaintiff was misled to believe that [she] was no longer on the payroll.” (Ibid.)
In 2014, NTI bought the outside investors’ 50 percent interest in NP1. (SAC, ¶¶ 19 & 20.) The Property was eventually sold for $11,841,000. (Id. at ¶ 20.) John Traub later dissolved NP1. (Ibid.)
On March 24, 2015, John Traub formed a new limited liability company, Nanotechnology Leasing (“NTL”), and was its sole manager. (SAC, ¶ 22.) He then “enacted a unanimous written consent for NTI authorizing [him] to lease equipment for NTI from NTL at an above market rate.” (Ibid.) John Traub did not tell Plaintiff and Han that he was going to form a limited liability company to lease the equipment; rather, he told them he was going to lease the equipment in his name. (Ibid.) John Traub “did not advise about the creation and operation of [NTL] nor about the above market rate that he was going to charge to lease the equipment.” (Ibid.)
In late 2016, NTI waived its right of first refusal to buy back shares from an NTI employee. (SAC, ¶ 23.) Plaintiff did not receive notice of the waiver, which deprived him of the opportunity to purchase the shares and allowed John Traub and Carolina Traub to acquire the employee’s shares, through their trust, at a bargain price. (Ibid.)
Beginning in 2018, John Traub negotiated the terms of sale of NTI to its competitor, EAG. (SAC, ¶¶ 24-26.) John Traub was appointed the representative of the majority shareholders of NTI for purposes of negotiating the sale with EAG. (Id. at ¶ 26.)
In the spring of 2018, John Traub informed Plaintiff of a deal to sell NTI to EAG for $75,000,000. (SAC, ¶ 27.) John Traub told Plaintiff that he negotiated the deal on behalf of NTI and the majority shareholders, including Plaintiff and Han. (Ibid.) “When Plaintiff inquired about the specific terms besides the pricing, [John Traub] told him there was going to be a payment schedule and that there were no other important terms concerning Plaintiff except” one term that called for Plaintiff pay to Han $67,000 from the proceeds of the sale. (Id. at ¶ 28.)
On August 17, 2018, the chief financial officer of NTI “showed up with a thick stack of papers with one page in the middle flagged with a color sticker ‘Sign Here.’ ” (SAC, ¶ 32.) “Plaintiff asked whether he needed to read it first, he was told there was no time” and “there was nothing controversial to start with, except for the gift payment to Han which had been voided.” (Ibid.) “Thus, Plaintiff signed the Stock Purchase Agreement (the ‘SPA’) without ever reading any part of it.” (Ibid.) “Plaintiff never received a copy of the SPA before he was asked to sign it.” (Ibid.) He “received a partial copy of the SPA … after the closing of the acquisition deal.” (Ibid.)
The section 6.11 of the SPA contains a release by “Securityholders,” such as Plaintiff. The clause states that:
Effective upon the Closing, each Securityholder … irrevocably and unconditionally, fully and forever acquits, releases, covenants not to sue and discharges and agrees to hold harmless the Company, Buyer and their respective Affiliates, Representatives, predecessors, successors and assigns (collectively, the ‘Securityholder Releasees’) from any and all Actions, Losses, causes of action, debts, contracts, torts, covenants, fiduciary duties, responsibilities, suits and judgments, at law or in equity, of every nature and kind that such Securityholder or any of the other Securityholder Releasing Parties have, may have had or may have in the future against the Securityholder Releasees, whether known or unknown, for all matters relating to, arising out of or in connection with the status of Securityholder as a shareholder, employee, officer and/or director of the Company from the beginning of time through the Closing Date, except obligations arising pursuant to this Agreement and any related agreements. … With regard to the release set forth in this Section 6.11, each Securityholder knowingly and voluntarily waives any and all rights or benefits that such Securityholder may now have, or in the future might have, under the provisions of California Civil Code Section 1542, which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.
(SAC, ¶¶ 34-35.) Plaintiff alleges the release clause “is an internal contract between the Traub Family and [him] under which [he] was to release all claims against the Traub Family (the ‘Internal Contract’) whether [he] knew or not.” (Id. at ¶ 38.) “Plaintiff signed the SPA without knowing the existence of the Internal Contract”; if he had known of its existence, “he would never have agreed to the Internal Contract.” (Id. at ¶ 40.)
“Months after signing the SPA, Plaintiff … learned the wrongdoings by [John Traub] and his family when he reviewed a ledger binder of the company at the CFO’s office.” (SAC, ¶ 33.) After filing his original complaint against Defendants, Plaintiff became aware of the existence of the release clause in the SPA. (Ibid.)
Based on the foregoing allegations, Plaintiff filed the SAC against John Traub and Carolina Traub, as individuals and co-trustees of the 1994 Inter Vivos Trust, and John Traub II, alleging causes of action for: (1) fraud; (2) breach of fiduciary duty; (3) constructive fraud; (4) declaratory relief; (5) breach of fiduciary duty; (6) breach of fiduciary duty; (7) breach of contract; (8) repudiation of contract and conversion; (9) breach of contract; (10) intentional misrepresentation; (11) constructive fraud; (12) conspiracy; (13) unjust enrichment; and (14) imposition of constructive trust.
On January 7, 2020, Defendants filed the instant demurrer to the SAC. Plaintiff filed papers in opposition to the demurrer on January 16, 2020. On January 22, 2020, Defendants filed a reply.
Discussion
Defendants demur to the SAC, and each and every cause of action alleged therein, on the ground of failure to allege facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)
I. Legal Standard
The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “ ‘[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice’ [citation].” (Hilltop Properties, Inc. v. State (1965) 233 Cal.App.2d 349, 353 (Hilltop); Code Civ. Proc., § 430.30, subd. (a).) “ ‘It is not the ordinary function of a demurrer to test the truth of the … allegations [in the challenged pleading] or the accuracy with which [the plaintiff] describes the defendant’s conduct. … .’ [Citation.] Thus, … ‘the facts alleged in the pleading are deemed to be true, however improbable they may be. [Citation.]’ [Citations.]” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958.)
II. General Argument Regarding Release of Claims
As a preliminary matter, Defendants argue that all of Plaintiff’s claims are barred by the release set forth in section 6.11 of the SPA. Defendants acknowledge that Plaintiff alleges the release was procured by fraud and is, therefore, void. Defendants contend Plaintiff fails to allege sufficient facts supporting his claim that the release is void. Specifically, Defendants assert that Plaintiff does not allege any misrepresentation of fact, there are no allegations that the misrepresentations made by the CFO are attributable to Defendants, the alleged misrepresentations made by the CFO are too vague to be actionable, there is no allegation that any nondisclosure prevented Plaintiff from becoming aware of the release, and Plaintiff does not allege facts showing that they prevented him from learning about his claims against them.
A releasor may be allowed to avoid a release if the releasor was induced to enter the agreement because of fraud practiced by the releasee. (San Diego Hospice v. County of San Diego (1995) 31 Cal.App.4th 1048, 1054-1055.) “The elements of fraud are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage. [Citations.] Fraud in the inducement is a subset of the tort of fraud. It ‘occurs when “ ‘the promisor knows what he is signing but his consent is induced by fraud, mutual assent is present and a contract is formed, which, by reason of the fraud, is voidable.’ ” ’ [Citations.]” (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294–295 (Hinesley).)
It is well settled that “ ‘[a] party to a contract who has been guilty of fraud in its inducement cannot absolve himself or herself from the effects of his or her fraud by any stipulation in the contract, either that no representations have been made, or that any right that might be grounded upon them is waived. Such a stipulation or waiver will be ignored, and parol evidence of misrepresentations will be admitted, for the reason that fraud renders the whole agreement voidable, including the waiver provision. [Citations.]’ ” (Manderville v. PCG&S Group, Inc. (2007) 146 Cal.App.4th 1486, 1500–1503; see 1 Witkin, Summary of Cal. Law (11th ed. 2018) Contracts, § 305; see also Hinesley, supra, 135 Cal.App.4th at pp. 300-301 [“Fraud in the inducement renders the entire contract voidable, including any provision in the contract providing the written contract is, for example, the sole agreement of the parties, that it contains their entire agreement and that there are no oral representations (integration/no oral representations clause).”].)
Here, Defendants’ arguments regarding the release are not well-taken. Plaintiff alleges that he asked John Traub about the terms of the SPA in June 2018. (SAC, ¶ 45.) John Traub allegedly told Plaintiff about the purchase price and the payment schedule. (Ibid.) He further told Plaintiff that other than the purchase price, the only term in the SPA that concerned Plaintiff was the term requiring him to gift $67,000 to Han. (Id. at ¶¶ 45 & 47.) John Traub’s representation was false because the release clause in the SPA is “a term that concerns Plaintiff.” (Id. at ¶ 45.) The affirmative misrepresentation allegedly made by John Traub—that the SPA did not contain any terms concerning Plaintiff other than the sale price and the gift to Han—is a statement of existing fact, not opinion. Thus, Defendants’ assertion that Plaintiff does not allege any misrepresentation of fact lacks merit.
Because John Traub’s false statement of fact can support an action for fraud, Defendants’ contentions regarding statements made by the CFO and alleged nondisclosures are immaterial.
Finally, Defendants do not present reasoned argument or legal authority, and the Court is aware of none, showing that Plaintiff must allege John Traub’s affirmative misrepresentation prevented him from learning about his claims against Defendants in order to adequately plead that the release is void due to fraud. Consequently, Defendants’ contention is deemed to be without foundation and requires no further discussion. (See Badie v. Bank of America (1998) 67 Cal.App.4th 779, 784-785 (Badie) [“When [a party] fails to raise a point, or asserts it but fails to support it with reasoned argument and citations to authority, we treat the point as waived.”]; see also Schaeffer Land Trust v. San Jose City Council (1989) 215 Cal.App.3d 612, 619, fn. 2 (Schaeffer) [“[A] point which is merely suggested by a party’s counsel, with no supporting argument or authority, is deemed to be without foundation and requires no discussion.”].)
III. First, Second, and Third Causes of Action
Specifically with respect to the first cause of action for fraud, the second cause of action for breach of fiduciary duty, and the third cause of action for constructive fraud, Defendants argue that Plaintiff fails to state a claim because Plaintiff does not allege an actionable misrepresentation of fact. Defendants also assert the first, second, and third causes of action fail because Plaintiff does not allege facts showing that John Traub prevented Plaintiff from reading the SPA. Next, Defendants contend Plaintiff fails to plead the element of damages because Plaintiff will not have damages if the release is ultimately set aside. Finally, Defendants argue the claims fail to the extent they are premised on John Traub’s alleged promise to represent Plaintiff’s interests because Plaintiff was not aware John Traub had been appointed as his representative and, therefore, Plaintiff could not have relied on John Traub’s promise.
As explained above, to plead a claim for fraud, a plaintiff must allege: “(a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Hinesley, supra, 135 Cal.App.4th at pp. 294-295.)
To plead a claim for breach of fiduciary duty, a plaintiff must allege “(1) the existence of a fiduciary relationship, (2) its breach, and (3) damage proximately caused by that breach.” (Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1405 (Mendoza).)
Lastly, to plead a claim for constructive fraud, a plaintiff must allege: “(1) [a] fiduciary relationship; (2) nondisclosure (breach of fiduciary duty); (3) intent to deceive, and (4) reliance and resulting injury (causation).” (Younan v. Equifax Inc. (1980) 111 Cal.App.3d 498, 517, fn. 14.)
Here, Defendants’ initial argument lacks merit for two reasons. First, John Traub’s false statement of fact—that the SPA did not contain any terms concerning Plaintiff other than the sale price and the gift to Han—is an actionable misrepresentation. Thus, John Traub’s false statement of fact can support the claims for fraud. Second, an actionable statement of material fact is not an element of a claim for breach of fiduciary duty. (See Mendoza, supra, 140 Cal.App.4th at p. 1405 [setting forth the elements of a claim for breach of fiduciary duty].) Defendants do not present reasoned argument or legal authority establishing that Plaintiff must plead an actionable misrepresentation of fact in order to state a claim for breach of fiduciary duty. Consequently, Defendants’ contention that the claim for breach of fiduciary duty fails absent an actionable misrepresentation is deemed to be without foundation and requires no further discussion. (See Badie, supra, 67 Cal.App.4th at pp. 784-785 [failure to support a point with reasoned argument and citations to authority results in waiver of the point]; see also Schaeffer, supra, 215 Cal.App.3d at p. 619, fn. 2 [same].)
Defendants’ second argument—that Plaintiff must plead facts showing that John Traub prevented him from reading the SPA in order to establish the element of justifiable reliance—is not well-taken. Although it is generally not reasonable to fail to read a contract, the general rule presumes that the parties were dealing at arm’s length. (Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 958–959.) “When the parties are in a fiduciary relationship, the same degree of diligence is not required of the non-fiduciary party. [Citation.] If the defendant is in a fiduciary relationship with the plaintiff which requires the defendant to explain the terms of a contract between them, the plaintiff’s failure to read the contract would be reasonable.” Plaintiff expressly alleges that John Traub acted as his agent in negotiating the SPA with EAG. (SAC, ¶ 53.) “An agent bears a fiduciary relationship to his or her principal which requires, among other things, disclosure of all information in the agent’s possession relevant to the subject matter of the agency.” (Sierra Pacific Industries v. Carter (1980) 104 Cal.App.3d 579, 581.) Given the allegation of a fiduciary relationship between John Traub and Plaintiff, it cannot be said at this point in time that Plaintiff’s failure to read the SPA was unreasonable.
Next, Plaintiff expressly alleges that he suffered damages as a result of being fraudulently induced to agree to the release clause in the SPA. (SAC, ¶¶ 50, 56, & 61.) Notwithstanding this allegation, Defendants contend Plaintiff will not suffer damages if the release is deemed void. However, Defendants fail to explain why, and it does not otherwise appear to the Court that, Plaintiff will not suffer any damages if the release is ultimately found to be void. Consequently, Defendants’ contention is deemed to be without foundation and requires no further discussion. (See Badie, supra, 67 Cal.App.4th at pp. 784-785 [failure to support a point with reasoned argument and citations to authority results in waiver of the point]; see also Schaeffer, supra, 215 Cal.App.3d at p. 619, fn. 2 [same].)
Defendants’ final argument is not well-taken. Initially, the second and third causes of action, as alleged, do not appear to be premised on John Traub’s alleged promise to represent Plaintiff’s interests. Rather, those claims are predicated on John Traub’s alleged failure to inform Plaintiff about the release clause in the SPA. (SAC, ¶¶ 54 & 59.) Moreover, Defendants fail to explain why, and it does not otherwise appear to the Court that, Plaintiff’s purported lack of awareness that John Traub was appointed as his representative precludes Plaintiff from relying on promises made by John Traub. Consequently, Defendants’ argument is deemed to be without foundation and requires no further discussion. (See Badie, supra, 67 Cal.App.4th at pp. 784-785 [failure to support a point with reasoned argument and citations to authority results in waiver of the point]; see also Schaeffer, supra, 215 Cal.App.3d at p. 619, fn. 2 [same].)
For these reasons, Defendants’ demurrer to the first, second, and third causes of action is OVERRULED.
IV. Fourth Cause of Action
Defendants assert the fourth cause of action for declaratory relief fails to state a claim because it merely seeks redress for past wrongs, the parties’ relationship terminated upon the sale of NTI to EAG, and there is no surviving relationship between the parties.
An action for declaratory relief is codified in Code of Civil Procedure section 1060. A party must plead “two essential elements: ‘(1) a proper subject of declaratory relief, and (2) an actual controversy involving justiciable questions relating to the rights or obligations of a party.’ [Citation.]” (Lee v. Silveira (2016) 6 Cal.App.5th 527, 546.)
Here, Plaintiff seeks a judicial declaration that the release clause in the SPA was procured by fraud and is, therefore, invalid and unenforceable. (SAC, ¶¶ 63-64.) This is a proper subject of declaratory relief. “Any person interested … under a contract … may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action … for … a determination of any question of construction or validity arising under the … contract.” (Code Civ. Proc., § 1060.) The sought-after declaration does not merely seek redress for past wrongs. Rather, the requested determination goes to whether Plaintiff can maintain his current action against Defendants.
Accordingly, Defendants’ demurrer to the fourth cause of action is OVERRULED.
V. Fifth Cause of Action
Defendants assert the fifth cause of action for breach of fiduciary duty is subject to demurrer because it must be pleaded as a derivative action and Plaintiff failed to do so.
In opposition, Plaintiff states that he does not oppose the demurrer to the fifth cause of action. Additionally, Plaintiff does not request leave to amend the claim.
For this reason, Defendants’ demurrer to the fifth cause of action is SUSTAINED, without leave to amend.
VI. Sixth Cause of Action
Defendants argue the sixth cause of action for breach of fiduciary duty fails to state a claim because it must be pleaded as a derivative action and Plaintiff failed to do so. Defendants further contend that the derivative claim cannot proceed because NTI is an indispensable party and Plaintiff has not named NTI as a party.
Preliminarily, Defendants’ attempt to demurrer to the sixth cause of action on the ground of defect of misjoinder of parties is procedurally defective. A party must separately identify each ground for demurrer and the cause of action to which the specified ground applies. (Code Civ. Proc., § 430.60; see also Cal. Rules of Ct., rule 3.1320(a).) A demurrer may be disregarded if the defendant fails to specify the grounds upon which it is based. (Code Civ. Proc., § 430.60.) Here, Defendants did not identify defect or misjoinder of parties as a ground for demurrer in its notice of demurrer or demurrer. (See Code Civ. Proc., § 430.10, subd. (d) [a party may demur to a pleading on the ground “[t]here is a defect or misjoinder of parties”].) Thus, the attempt to demurrer to the sixth cause of action on the ground of defect of misjoinder of parties is disregarded.
Regarding Defendants’ first argument, “[s]hareholders may bring two types of actions, a direct action filed by the shareholder individually … for injury to his or her interest as a shareholder, or a derivative action filed on behalf of the corporation for injury to the corporation for which it has failed or refused to sue.” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311-312, internal quotations omitted.)
An action is 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 holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’ ” [Citation.] Shareholders may bring a derivative suit to, for example, enjoin or recover damages for breaches of fiduciary duty directors and officers owe the corporation. (Friedman, Cal. Practice Guide: Corporations, supra, ¶ 6:604, p. 6-128.2.) An individual cause of action exists only if damages to the shareholders were not incidental to damages to the corporation. [Citation.] 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. [Citation.]
(Schuster v. Gardner (2005) 127 Cal.App.4th 305, 313.)
“ ‘It is a general rule that a corporation which suffers damages through wrongdoing by its officers and directors must itself bring the action to recover the losses thereby occasioned, or if the corporation fails to bring the action, suit may be filed by a stockholder acting derivatively on behalf of the corporation. An individual [stockholder] may not maintain an action in his own right against the directors for destruction of or diminution in the value of the stock ….’ ” [Citation.]
Nelson contends that she suffered injury as an individual, and even if there were injury to the corporation, a derivative action was not her exclusive remedy. She points out that the same facts might give rise to two causes of action, one in favor of the corporation, another in favor of one or more individual shareholders. [Citation.] Her cause of action was individual, she argues, because she suffered injury to her reputation and emotional distress, and lost her out-of pocket expenses, as well as other employment opportunities. [Footnote.]
The test is not whether Nelson’s damages were unique, as Nelson’s argument suggests; an individual cause of action exists only if the damages were not incidental to an injury to the corporation. [Citation.] The cause of action is individual, not derivative, only “ ‘where it appears that the injury resulted from the violation of some special duty owed the stockholder by the wrongdoer and having its origin in circumstances independent of the plaintif’s status as a shareholder.’ ” [Citation.]
In other words, it is the gravamen of the wrong alleged in the pleadings, not simply the resulting injury, which determines whether an individual action lies.
(Nelson v. Anderson (1999) 72 Cal.App.4th 111, 124; see Bader v. Anderson (2009) 179 Cal.App.4th 775, 793 [“ ‘the two actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) or to the corporation (derivative action)’ ”].)
In this Court’s reading of the allegations of the sixth cause of action, the gravamen of the injury is to Plaintiff, not to NTI as a whole. In the body of the complaint, Plaintiff alleges John Traub engaged in self-dealing and obtained for himself, and his family, personal financial benefits not shared equally by Plaintiff or other minority shareholders. (SAC, ¶¶ 82-83.) The cause of action also alleges John Traub disadvantaged minority shareholders by: failing to send notices of shareholder meetings, board of director meetings, or annual meetings to the minority shareholders; refusing to allow Plaintiff to inspect the corporation’s books and records; failing to hold annual shareholders meetings for board of director elections; and filing false tax returns inflating the amount of money paid to Plaintiff. (Id. at ¶ 82.) Consequently, the sixth cause of action is properly alleged as a direct action.
Accordingly, Defendants’ demurrer to the sixth cause of action is OVERRULED.
VII. Seventh and Eighth Causes of Action
Defendants assert the seventh cause of action for breach of contract and the eighth cause of action for repudiation of contract and conversion fail to state a claim because those causes of action allege breaches of a partnership agreement and the alleged partnership was extinguished when NTI was formed.
In opposition, Plaintiff does not dispute Defendants’ assertion that the seventh and eighth causes of action are based on alleged breaches of a partnership agreement. Additionally, Plaintiff does not dispute that a partnership can be merged into a corporation and that a partnership does not continue to exist after the formation of a corporation. (See Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1157 [“in the usual case …, a partnership does not continue to exist after the formation of a corporation”].) Plaintiff contends that “the partnership at issue here is not the partnership that eventually became NTI. Instead the partnership at issue is the oral partnership agreement among [John Traub], Plaintiff and Han to purchase a workshop property as partners and rent the property to NTI.” (Oppn., p. 11.) In support of this contention, Plaintiff cites paragraphs 17 and 18 of the SAC.
But paragraphs 17 and 18 of the SAC do not allege the existence of a separate partnership agreement between Plaintiff, Han, and John Traub to purchase a workshop property. Those paragraphs merely state that Plaintiff, Han, and John Traub “targeted commercial properties” with certain characteristics, “visited and evaluated” potential properties, and “identified” the Property as a prime location for NTI. (SAC, ¶¶ 17-18.) The only partnership agreement alleged in the SAC is found in paragraphs 8 and 9. In those paragraphs, Plaintiff alleges that Plaintiff, Han, and John Traub entered into an oral contract and formed a partnership to carry on a service laboratory business. (SAC, ¶¶ 8-9.) Thus, Plaintiff’s position is not supported by the allegations of the SAC.
Accordingly, Defendants’ demurrer to the seventh and eighth causes of action is SUSTAINED, with 10 days’ leave to amend.
VIII. Ninth Cause of Action
Defendants initially argue the ninth cause of action for breach of contract fails to state a claim because the cause of action alleges breaches of a partnership agreement and the alleged partnership was extinguished when NTI was formed.
This argument is not well-taken. The ninth cause of action is not predicated on the alleged partnership agreement between Plaintiff, Han, and John Traub. As Plaintiff points out, the ninth cause of action alleges that a separate oral or implied contract existed between Plaintiff, Han, and John Traub “regarding each party’s raising 1/3 of the necessary down payment for the purchase of the property.” (SAC, ¶ 103.) Thus, the ninth cause of action, as alleged, is based on the breach of a contract other than the partnership agreement.
Defendant also asserts that Plaintiff fails to plead sufficient facts establish the existence of the alleged oral or implied contract or breach.
“A cause of action for breach of contract requires pleading of a contract, plaintiff’s performance or excuse for failure to perform, defendant’s breach and damage to plaintiff resulting therefrom.” (McKell v. Washington Mut., Inc. (2006) 142 Cal.App.4th 1457, 1489.)
“Under California law, a contract will be enforced if it is sufficiently definite (and this is a question of law) for the court to ascertain the parties’ obligations and to determine whether those obligations have been performed or breached.” [Citation.] “To be enforceable, a promise must be definite enough that a court can determine the scope of the duty[,] and the limits of performance must be sufficiently defined to provide a rational basis for the assessment of damages.” [Citations.] “Where a contract is so uncertain and indefinite that the intention of the parties in material particulars cannot be ascertained, the contract is void and unenforceable.” [Citations.] “The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.” [Citations.] But “[i]f … a supposed ‘contract’ does not provide a basis for determining what obligations the parties have agreed to, and hence does not make possible a determination of whether those agreed obligations have been breached, there is no contract.” [Citation.]
(Bustamante v. Intuit, Inc. (2006) 141 Cal.App.4th 199, 209.)
Here, as Defendants persuasively argue, the material terms of the alleged oral or implied contract are not sufficiently definite. Plaintiff simply alleges, “[b]y virtue of the discussions, beliefs, and actions of Plaintiff, Han, and [John Traub] a contract or quasi contract implied in law came into existence at the time of the discussions regarding each party’s raising 1/3 of the necessary down payment for the purchase of the property because (1) [John Traub] has been enriched at the expense of the Plaintiff; (2) the enrichment was and is unjust (3) Plaintiffs [sic] own conduct has not been inequitable; and (4) it is otherwise reasonable for the court to do so in light of the relationship between the parties and the circumstances of the case.” (SAC, ¶ 103.) This allegation does not identify the parties’ obligations under the alleged contract and there is no way for the Court to determine whether the agreed to obligations have been breached. Thus, Plaintiff fails to allege sufficient facts to establish a claim for breach of contract.
Accordingly, Defendants’ demurrer to the ninth cause of action is SUSTAINED, with 10 days’ leave to amend.
IX. Tenth Cause of Action
Defendants contend the tenth cause of action for intentional misrepresentation fails because it is not pleaded with the requisite specificity.
The essential elements of a fraud claim based on an intentional misrepresentation are: “(1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages.” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792, citing Lazar v. Super. Ct. (1996) 12 Cal.4th 631, 638 (Lazar).) These elements must be pleaded with particularity. (Lazar, supra, 12 Cal.4th at pp. 644-645.) For example, a plaintiff must plead facts “which show how, when, where, to whom, and by what means the representations were tendered.” (Id. at p. 645, internal quotation marks and citation omitted.) “[G]eneral and conclusory allegations do not suffice.” (Id. at pp.644-645.)
The Court agrees that the tenth cause of action for intentional misrepresentation is not pleaded with the requisite specificity. The claim contains only contains general and conclusory allegations of fact and law. (SAC, ¶¶ 109-114.) Moreover, the fact that the cause of action incorporates all preceding allegations does not save the claim. Although it is generally permissible to incorporate allegations by reference, the Court does not endorse chain-letter pleading “wherein each claim for relief incorporates by reference all preceding paragraphs.” (Internat. Billing Services v. Emigh (2000) 84 Cal.App.4th 1175, 1179, italics added; see also Sanowicz v. Bacal (2015) 234 Cal.App.4th 1027, 1041, fn. 14.) Because the tenth cause of action incorporates all preceding allegations, it is not reasonably possible for Defendants, and the Court, to identify the specific misrepresentations that form the basis of the claim. (See Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73 [“[T]he facts constituting the fraud must be alleged with sufficient specificity to allow defendant to understand fully the nature of the charge made.”].)
Accordingly, Defendants’ demurrer to the tenth cause of action is SUSTAINED, with 10 days’ leave to amend.
X. Eleventh Cause of Action
Preliminarily with respect to the eleventh cause of action for constructive fraud, Defendants’ memorandum of points and authorities includes a heading, which states that Plaintiff was required to plead the eleventh cause of action as a derivative action.
However, the discussion and argument provided under that heading does not address the allegations of the eleventh cause of action. Instead, it only addresses the allegations of the fifth and sixth causes of action. Because Defendants did not provide any reasoned argument demonstrating that Plaintiff was required to plead the eleventh cause of action as a derivative action, the point is waived. (See Badie, supra, 67 Cal.App.4th at pp. 784-785 [failure to support a point with reasoned argument and citations to authority results in waiver of the point]; see also Schaeffer, supra, 215 Cal.App.3d at p. 619, fn. 2 [same].)
Next, Defendants argue the eleventh cause of action fails to state a claim because the alleged breach of fiduciary duty is premised on the existence of a partnership and the alleged partnership was extinguished when NTI was formed.
Plaintiff does not address this argument in his opposition papers and, thus, implicitly concedes Defendants’ argument has merit.
For this reasons, Defendants’ demurrer to the eleventh cause of action is SUSTAINED, with 10 days’ leave to amend.
XI. Twelfth Cause of Action
Defendants assert the twelfth cause of action for conspiracy no cause of action for conspiracy fails to state a claim because the averments forming the basis of this claim are conclusory.
A claim for conspiracy must be properly pleaded and conclusory allegations of conspiracy will not withstand demurrer. (See Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1173.) To allege a conspiracy, a plaintiff must plead “(1) the formation and operation of the conspiracy; (2) the wrongful act or acts done pursuant thereto; and (3) the damage resulting.” (Mosier v. Southern California Physicians Insurance Exchange (1998) 63 Cal.App.4th 1022, 1048.) A plaintiff must also aver a defendant had “actual knowledge that a tort [wa]s planned and concur[red] in the tortious scheme with knowledge of its unlawful purpose.” (Kidron v. Movie Acquisition Corp. (1995) 40 Cal. App. 4th 1571, 1582.)
Here, the twelfth cause of action consists solely of general and conclusory allegations of fact and law. There are no factual allegations demonstrating the formation and operation of the alleged conspiracy, identifying the wrongful acts done pursuant to the conspiracy, or showing that Defendants had actual knowledge that a tort was planned.
Accordingly, Defendants’ demurrer to the twelfth cause of action is SUSTAINED, with 10 days’ leave to amend.
XII. Thirteenth Cause of Action
Defendants argue the thirteenth cause of action for unjust enrichment fails because it is derivative of Plaintiff’s other claims and those claims fail.
This argument is not well-taken. Defendants do not identify for the Court the specific causes of action upon which the thirteenth cause of action is based. Thus, there is no way for the Court to determine whether those claims and, by extension, the thirteenth cause of action survive demurrer.
For this reason, Defendants’ demurrer to the thirteenth cause of action is OVERRULED.
XIII. Fourteenth Cause of Action
Defendants contend the fourteenth cause of action for imposition of constructive trust fails to state a claim it is derivative of Plaintiff’s other claims and those claims fail.
Although a constructive trust is an equitable remedy, not a cause of action in and of itself, a claim seeking to impose a constructive trust may be brought imposed against one who wrongfully detains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act. (See Civ. Code, §§ 2223 and 2224; see also Habitat Trust for Wildlife, Inc. v. City of Rancho Cucamonga (2009) 175 Cal.App.4th 1306, 1332; PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 398; Meister v. Mensinger (2014) 230 Cal.App.4th 381, 399.) A cause of action seeking to impose a constructive trust will generally be allowed so long as it is predicated upon an underlying claim of fraud, breach of fiduciary duty, or other wrongful act entitling the plaintiff to some relief. (See Ehret v. Ichioka (1967) 247 Cal.App.2d 637, 642; see also Michaelian v. State Comp. Ins. Fund (1996) 50 Cal.App.4th 1093, 1114 [“A cause of action for constructive trust is not based on the establishment of a trust, but consists of fraud, breach of fiduciary duty or other act which entitles the plaintiff to some relief. Relief, in a proper case, may be to make the defendant a constructive trustee with a duty to transfer to the plaintiff. [Citation.] Pleading requirements are: (1) facts constituting the underlying cause of action, and (2) specific identifiable property to which defendant has title.”].)
Defendants’ contention is not well-taken because Defendants do not identify the specific causes of action upon which the fourteenth cause of action is based. Thus, there is no way for the Court to determine whether those claims and, by extension, the fourteenth cause of action survive demurrer.
For this reason, Defendants’ demurrer to the fourteenth cause of action is OVERRULED.