Case Name: Epic Communications, Inc., et al. v. Pao, et al.
Case No.: 1-13-CV-251544

Defendants Yi-Ching Pao (“Pao”) and OEpic Semiconductors, Inc. (“OSI”) (collectively, “Defendants”) demur to the first amended complaint (“FAC”) filed by plaintiffs Epic Communications, Inc. (“Epic”) and EpicCom, Inc. (“EpicCom”) (collectively, “Plaintiffs”).

This action arises out of Pao’s alleged history of misappropriating assets belonging to Epic and EpicCom for his own personal benefit through improper deferred salary arrangements and short term loans, among other acts, and concealing such conduct from the shareholders and board members of both companies. At all relevant times, Pao was an interested director, officer and shareholder of both EpicCom and OSI. Epic, which is the sole shareholder of EpicCom, and OSI both trace their origins to OEpic, Inc. (“OEpic”), which was in the business of developing and marketing high speed and optical communication semiconductor devices and integrated circuits. Epic was formed out of OEpic’s Taiwan subsidiary and is in the business of the design, development and testing of power amplifiers, front-end modules and other electronic components for mobile wireless. OSI is a foundry service for optoelectronic components.

On March 3, 2014, Plaintiffs filed the FAC asserting the following causes of action: (1) Violation of Corp. Code § 310 : The Development Agreement; (2) Violation of Corp. Code § 310: The Addendum and Transfer Agreement; (3) Intentional Interference with Contractual Relations; (4) Violation of Corp. Code § 310: The Manufacturing Agreement; (5) Violation of Corp. Code § 310: Salary Deferment Agreement and Pao’s Unauthorized Compensation; (6) Violation of Corp. Code § 310: Unauthorized Short Term Loans; (7) Declaratory Relief: The “Rent Defer Agreement”; (8) Declaratory Relief Regarding Disputed Ownership over Personal Property; (9) Breach of Fiduciary Duty; (10) Unjust Enrichment; (11) Fraud; (12) Negligent Misrepresentation; (13) Conversion; (14) Unfair Competition (Bus. & Prof. § 17200); and (15) Accounting.

On April 7, 2014, Defendants filed the instant demurrer to the FAC and each of the fifteen causes of action therein on the ground of failure to state facts sufficient to constitute a cause of action and that Epic lacks the capacity to sue and maintain an action in a California Court. (Code Civ. Proc., § 430.10, subds. (b) and (e).) Defendants also demur to the first through eighth, ninth, eleventh, twelfth and fourteenth causes of action on the ground of uncertainty. (Code Civ. Proc., § 430.10, subd. (f).)

Defendants’ request for judicial notice is GRANTED. (See Evid. Code, § 452, subds. (c) and (h); see also Gigax v. Ralston Purina Co. (1982) 136 Cal.App.3d 591, 602, fn. 6 [a court may take judicial notice of the acts and records of the Secretary of State].) However, the Court does not accept as true the contents of Exhibits B and C, which appear to be printouts from Epic’s website.

Defendants’ demurrer to the first through eighth, ninth, eleventh, twelfth and fourteenth causes of action on the ground of uncertainty is OVERRULED. A demurrer for uncertainty is disfavored and will be sustained only where the allegations of the complaint are so unintelligible that the defendant cannot reasonably respond to them. (See Khoury v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616.) Defendants fail to articulate how the foregoing claims qualify as such.

As an initial matter, Defendants assert that Epic lacks the capacity to sue because it is not qualified to do business in California. A party may bring a special demurrer based on the lack of legal capacity to sue on the part of the person who filed suit, though this ground rarely appears on the face of the pleading itself. (See Code Civ. Proc., § 430.10, subd. (d).) After reviewing the allegations of the FAC, the Court finds that that is the case here.

Under Corporations Code section 2105, subdivision (a), “[a] foreign corporation shall not transact intrastate business without having first obtained from the Secretary of State a certificate of qualification.” Any corporation that fails to obtain such a certificate of qualification “shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state.” (Corp. Code, § 2203, subd. (c).) Defendants appear to be insisting that it is clear that Plaintiffs’ claims are based on intrastate business that they have conducted, despite Plaintiffs’ allegations in the FAC that Epic has only conducted interstate business since it surrendered its right to conduct intrastate commerce in November 2004.

Defendants’ contention is unavailing. It cannot be said at this juncture, merely from the allegations of the FAC and Exhibits attached thereto, that Defendants have been conducting intrastate business and that the instant claims arise out of such conduct, especially in light of Plaintiffs’ allegation that Epic has only been engaged in interstate commerce while the events of the FAC took place, an allegation which the Court must accept as true on demurrer. (See Curtis T. v. County of Los Angeles (2004) 123 Cal.App.4th 1405, 1411, fn. 3.)

Consequently, Defendants’ demurrer to each of the claims asserted in the FAC on the ground that Epic lacks the capacity to sue is OVERRULED.

Defendants next assert that Plaintiffs fail to plead fraud, i.e., the eleventh and twelfth causes of action, with the requisite specificity and instead rely only on legal conclusions rather than facts. These claims are pleaded against both Pao and OSI. As a general matter, it is well-settled that fraud claims must be pleaded with particularity; this usually necessitates pleading facts showing how, when, where, to whom and by what means the alleged misrepresentations were tendered. (See Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) In the FAC, Plaintiffs’ fraud claims are predicated primarily on Pao’s concealment of his purported misappropriation of Epic’s assets and failure to disclose the true nature of many of the transactions he compelled the company to take part in. Not every fraud arises from an affirmative misstatement of material fact; “the principle is fundamental that [deceit] may be negative as well as affirmative; it may consist of suppression of that which is one’s duty to declare as well as of the declaration of that which is false.” (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735.) Liability can be imposed for concealment where the defendant is in a fiduciary or other confidential relationship that imposes a duty of disclosure. (Civil Code, § 1710, subd. (3) [“suppression of a fact, by one who is bound to disclose it”]; see e.g., Hobart v. Hobart Estate Co. (1945) 26 Cal.2d 412, 433.) In the FAC, Pao is alleged to have been a fiduciary of EpicCom as a shareholder, officer and director.

The elements of an action for fraud and deceit based on concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant was under a duty to disclose the fact to the plaintiff, (3) the defendant intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of it, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage. (See Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal.App.4th 603, 612-613.)

Construing the FAC liberally, as is required on demurrer (see Code Civ. Proc., § 452), the Court finds that all of the foregoing elements are present, at least with respect to Pao. For example, with regard to the Salary Deferment Agreement, Pao did not disclose the agreement to the Board of Directors and actively concealed its improper nature by back-dating and falsifying meeting minutes relating to its approval, or lack thereof. (FAC at ¶¶ 30, 31.) Pao also did not disclose his material financial interest in that agreement as well as the short-term loans he obtained from the company. (Id. at ¶¶ 42, 57.) Pao further concealed the true nature of various unfavorable transactions that he involved the company with, including the Manufacturing Services Agreement, the Design and Development Services Agreement and the “Rent Defer [sic] Agreement.” (Id. at ¶¶ 67, 79, 96.)

However, as Defendants contend, there are no specific allegations of concealment or nondisclosure on the part of OSI. Plaintiffs do not dispute this contention in their opposition and thus impliedly concede its merit. Accordingly, Defendants’ demurrer to the eleventh and twelfth causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND as to OSI only.

Defendants next insist that the ninth and fourteenth causes of action for breach of fiduciary duty and unfair competition, respectively, are deficient because they are predicated on a written agreement, a 2007 lease, which has neither been attached or its essential terms recited in the FAC. This contention is without merit. As Plaintiffs note, the ninth and tenth causes of action are not predicated on the 2007 lease agreement but rather the Rent Defer Agreement. Further, even if the lease agreement was a stated basis for these claims, they are also predicated on Pao’s conduct relative to numerous other agreements and transactions, including the Manufacturing Services Agreement, the Addendum to the RDA Agreement and the Development Agreement. As a demurrer does not lie to only a portion of a cause of action (see PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682), Defendants’ argument does not provide a basis upon which to sustain the demurrer to these claims.

Defendants also argue that Plaintiffs’ claims that are predicated on the Salary Deferral Agreement, the various loans, the Development Agreement and the Rent Defer Agreement, i.e., the first, fifth, sixth, seventh, ninth, tenth, thirteenth, fourteenth and fifteenth causes of action, fail because they were signed by a disinterested director, Cindy Yuen (“Yuen”), and therefore their execution did not violate Corporations Code section 310.

Corporations Code section 310 governs the validity of a transaction between a director and the corporation, or another corporation in which the director has a “material financial interest.” As long as specified requirements are met, that agreement is “neither void not voidable” merely because of the director’s interest therein. These requirements include approval by a disinterested majority of the board of directors if all material facts have been disclosed to them. (Corp. Code, § 310, subd. (a)(2).) Though Defendants insist that Yuen was a disinterested director, Plaintiff alleges that she was not, at least with respect to the Salary Deferral Agreement. (FAC at ¶ 24.) This allegation must be accepted as true for the purposes of demurrer. (See Curtis T., supra, 123 Cal.App.4th at 1411, fn. 3.) Further, while Yuen is not alleged to have been an interested director with regard to the remaining agreements, Plaintiffs allege that Corporations Code section 310 was nevertheless violated because Pao did not disclose all material facts to the disinterested board, i.e., Yuen. (FAC at ¶¶ 42, 44, 67, 68, 96, 97.) All material facts regarding the particular director’s interest, and the contract itself, must be disclosed or known to the board before acting on the matter. (Corp. Code, § 310, subd. (a)(2).) Consequently, Yuen’s lack of interest in the subject agreements does not necessarily render Plaintiffs’ claims deficient.

Defendants also contend that the foregoing claims, i.e., the first, fifth, sixth, seventh, ninth, tenth, thirteenth and fourteenth, are time-barred and that Plaintiffs’ assertion that they discovered facts relating to Defendants’ misdeeds “no earlier than October 2012” are contradicted by the agreements signed by Yuen. They insist that Plaintiffs’ allegations that Pao “fraudulently concealed facts” until 2012 are mere conclusions of law that must be disregarded.

As a general matter, California courts have often stated the maxim that “[i]n ordinary tort and contract actions, the statute of limitations … begins to run upon the occurrence of the last element essential to the cause of action.” (Neel v. Magana, Olney, Levy, Cathcart & Gelffand (1971) 6 Cal.3d 176, 187.) Here, the acts upon which the aforementioned causes of action are predicated occurred at various times between August 2005 and January 2013. With a limitations period of four years at most (see Code Civ. Proc., § 337) and an initial filing date of August 2013, claims which are based solely on conduct which took place prior to August 2009 would appear to be time-barred. Plaintiffs insist, however, that the discovery rule operates to delay the accrual of their claims, rendering all of these claims timely.

The discovery rule is an exception to the general rule defining accrual of a cause of action and postpones said accrual until “the plaintiff discovers, or has reason to discover, the cause of action.” (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1318.) The discovery rule ameliorates the harshness of general accrual principles where “it is manifestly unjust to deprive plaintiffs of a cause of action before they are aware that they have been injured. [Citation.]” (April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 826.)

“A plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence. The burden is on the plaintiff to show diligence, and conclusory allegations will not withstand demurrer.” (E-Fab, Inc., supra, 153 Cal.App.4th at 1319, emphasis in original.) Here, while Plaintiffs have pleaded the time at which they discovered Defendants’ purported wrongful conduct, namely October 2012, they have not pleaded the manner in which they made that discovery. Plaintiffs have sufficiently pleaded the second pleading requirement in setting forth several of the actions that Pao committed in order to conceal his self-dealing from Defendants. Of the claims highlighted by Defendants, only one, the fifth, is predicated solely on conduct which clearly took place prior to August 2009. Accordingly, only this claim is time-barred as currently pleaded. Defendants’ additional contention that Yuen’s signature on the agreements defeats Plaintiffs’ allegations of discovery of their conduct in October 2012 is unavailing; Plaintiffs have pleaded that Yuen, despite her signature, was not aware of all material facts due to Pao’s nondisclosure/concealment.

Accordingly, Defendants’ demurrer to the fifth cause of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

Defendants’ next contention that Pao did not sign the Rent Defer Agreement and thus is not the proper subject of claims based on that agreement is without merit. Plaintiffs’ allege that Pao devised those agreements and/or compelled Plaintiffs to enter into them for his own personal, undisclosed benefit.

Next, citing to Oakland Raiders v. Oakland-Alameda County Coliseum, Inc. (2006) 144 Cal.App.4th 1175, 1185, Defendants argue that Plaintiffs waived any right to rescind or sue for fraud under the 2009 Manufacturing Agreement by entering into the 2013 Manufacturing Subcontract.

In Oakland Raiders, the court noted the long-standing rule that “a plaintiff claiming to have been induced into signing a contract by fraud or deceit is deemed to have waived a claim of damages arising therefrom if, after discovery of the alleged fraud, he enters into a new contract with the defendant regarding the same subject matter that supersedes the former agreement and confers upon him significant benefits.” (Oakland Raiders, 144 Cal.App.4th at 1185.) Here, as Plaintiffs assert in their opposition, the subsequent agreements were not between all of the same parties or involved the same subject matter. Consequently, it cannot be said, at least at this juncture, that Plaintiffs impliedly waived their claims relating to the 2009 agreement as a matter of law.

Lastly, Defendants insist that declaratory relief, as requested by Plaintiffs in connection with their first through eighth causes of action, is improper because the parties’ relations have ended and a cause of action at law exists. This final argument is also without merit. First, the third cause of action does not seek declaratory relief and thus Defendants’ argument is inapplicable. Second, the first, second, fourth, fifth and sixth causes of action are not solely claims for declaratory relief; they also seek restitution and damages for Defendants’ alleged violations of Corporations Code section 310. As articulated above, a demurrer does not lie to only part of a cause of action. (See PH II, Inc., supra, 33 Cal.App.4th 1680, 1682.) To the extent that Defendants believe that Plaintiffs are requesting something that they are not entitled to or that is improper, a motion to strike, rather than a demurrer, is the appropriate instrument. Third, with respect to the seventh cause of action, it is not clearly solely from the pleadings that the parties’ relationship has concluded with respect to the 2013 Rent Defer Agreement such that there is no basis for declaratory relief. Finally, with respect to the eighth cause of action, Plaintiffs have sufficiently pleaded the existence of an actual controversy between the parties regarding the ownership of the specific property set forth therein. (FAC at ¶ 175.)

In accordance with the foregoing analysis, Defendants’ demurrer to the first, second, third, fourth, sixth, seventh, eighth, ninth, tenth, thirteenth, fourteenth and fifteenth causes of action on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED. Defendants’ demurrer to the eleventh and twelfth causes of action on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED as to Pao only.