Case Name: Finclusion Labs, Inc. dba WeTrust v. Ron Merom, et al.

Case No.: 18CV323768

Motion to Compel the Deposition of Helen Quinn and the Production of Documents at Her Deposition

Factual and Procedural Background

Second Amended Complaint

Founded in January 2017 by George Li (“Li”), Patrick Long (“Long”), Hoang Nguyen (“Nguyen”) and defendant Ron Merom (“Merom”), plaintiff Finclusion Labs, Inc. dba WeTrust (“Finclusion”) creates decentralized, peer-to-peer financial solutions that promote financial inclusion. (Second Amended Complaint (“SAC”), ¶¶1, 7, and 10.) In February 2017, soon after Finclusion’s inception, defendant Merom emailed co-founders Li and Long stating his intent to step down. (SAC, ¶12.)

For a brief time thereafter, defendant Merom appeared to have recommitted to Finclusion. (SAC, ¶13.) During that time between March and May 2017, the co-founders expressed an intent and agreement to subject their shares of Finclusion stock to vesting over a four-year period to protect the company, specifically to avoid a founder walking away with 25% of the company shortly after it raises capital. (Id.) The co-founders also expressed an intent and agreement to subject their shares to a one-year cliff provision. (Id.) The parties agreed to formalize these restrictions in a vesting agreement at a later time when legal and accounting professionals could prepare such an agreement. (Id.)

In May 2017, the co-founders signed a Restricted Stock Purchase Agreement (“RSPA”) effective January 2017 which provided each co-founder with a 25% ownership interest in Finclusion stock. (SAC, ¶14.) Finclusion, Li, Long, and Nguyen took action after signing the RSPA to memorialize the parties’ agreement to subject the founder shares to cliff and vesting restrictions, but defendant Merom denies agreeing to any conditions or restrictions not memorialized in the RSPA. (Id.)

In or around June 2017, only weeks after signing the RSPA and having worked but a few full months, defendant Merom began seeking a multi-million dollar buyout of his interest in Finclusion which he claimed was a fully vested 25% of company shares, and an exit from the company. (SAC, ¶15.) Beginning July 2017, Finclusion and Merom began negotiating a separation agreement. (SAC, ¶16.) At this time, Merom ceased meaningful work for the company and no longer worked out of the company’s offices. (Id.)

Finclusion and Merom contemplated Merom’s separation agreement would include a severance payment to Merom. (SAC, ¶17.) In October 2017, Merom requested an advance of $62,500 of the expected severance. (Id.) Finclusion agreed to the requested advance with the expectation that Merom would continue to negotiate the separation agreement in good faith, the separation agreement would be finalized, and the advance would be credited toward the severance payment. (Id.)

In September 2017, Finclusion and Merom discussed reimbursement of Merom’s attorney’s fees incurred in connection with the separation negotiation. (SAC, ¶18.) Instead of waiting to be reimbursed until after execution of the separation agreement, Merom improperly and without authorization charged approximately $35,082.98 of his personal attorney’s fees to Finclusion’s credit card and bank account. (Id.) On January 3, 2018, Finclusion provided written notice to Merom that he was not authorized to charge his legal fees to the company. (SAC, ¶19.) Despite this clear instruction, Merom charged an additional $900 in personal legal fees to the company’s bank account. (Id.)

Rather than engage in good faith negotiations of the separation agreement, Merom repeatedly increased his demands and on January 16, 2018, Merom notified Finclusion that he was suspending efforts to finalize the separation agreement with the company. (SAC, ¶20.) Finclusion sent a formal termination letter to Merom on January 17, 2018. (SAC, ¶21.) After severance negotiations failed, and despite multiple demands, Merom refused and continues to refuse to return the $62,500 advance severance or refund the approximate $35,082.98 in personal legal fees charged to the company. (SAC, ¶22.)

In addition to the RSPA, Merom entered into an At-Will Service and Confidential Information and Invention Assignment Agreement (“CIIAA”) with Finclusion effective January 25, 2017 that set out a number of obligations including the process for returning company-issued materials upon separation. (SAC, ¶23.) Finclusion began removing Merom’s administrative privileges from, and limiting his access to, various company databases containing proprietary and/or confidential data and information after Merom notified Finclusion of his intent to separate and because Merom stopped performing any meaningful work. (SAC, ¶26.)

Shortly thereafter, on or around October 2017, amidst then ongoing severance negotiations and without company knowledge, Merom copied and/or downloaded the entire contents of email folders within the company-owned email domain which constitutes company property as defined by the CIIAA. (SAC, ¶26.)

On or around December 18, 2017, Merom contacted a Finclusion employee and requested access to his company-issued laptop which Merom previously relinquished to the company so that he could remove his personal info. (SAC, ¶28.) In reliance on Merom’s representation that he would only remove personal info from the device, the Finclusion employee provided Merom with access to the laptop. (Id.) Within a few hours after Merom regained possession of the laptop, the same Finclusion employee left a voicemail for Merom instructing him not to delete any information and to return it to the company immediately. (SAC, ¶29.) Merom called the Finclusion employee and agreed he would not delete any company information and stated he would return the laptop either the same day or the following day. (Id.) Merom returned the laptop the next day, but refused to confirm or deny whether he deleted any information forcing Finclusion to retain the services of a computer forensics consultant. (SAC, ¶30.) The consultant concluded Merom deleted data from the laptop including company (non-personal) data. (Id.) Despite repeated demands, Merom also refused to return company emails and other data in his possession, including privileged materials. (SAC, ¶31.)

On February 21, 2018, Finclusion filed a complaint against defendant Merom. On April 25, 2018, Finclusion filed the FAC against defendant Merom asserting causes of action for:

(1) Fraud
(2) Fraudulent Inducement
(3) Intentional Misrepresentation
(4) Civil Theft and Conversion of Company Assets
(5) Civil Theft and Conversion of Improperly Charged Legal Fees
(6) Unjust Enrichment (Advanced Severance)
(7) Unjust Enrichment (Advanced Legal Fees)
(8) Breach of Contract
(9) Violation of Cal. Penal Code §502(c)(4)
(10) Declaratory Relief

On May 30, 2018, defendant Merom filed a demurrer to the first three causes of action of the FAC. On August 16, 2018, the court sustained defendant Merom’s demurrer without leave to amend. On October 9, 2018, defendant Merom filed a general denial to the FAC.

On April 5, 2019, the court issued an order allowing Finclusion leave to file an amended pleading. On April 12, 2019, Finclusion filed the operative SAC against defendant Merom which now asserts causes of action for:

(1) Civil Theft and Conversion of Improperly Charged Legal Fees
(2) Unjust Enrichment (Advanced Severance)
(3) Unjust Enrichment (Advanced Legal Fees)
(4) Breach of Contract
(5) Violation of Cal. Penal Code §502(c)(4)
(6) Breach of Duty of Loyalty

On May 8, 2019, defendant Merom filed an answer to plaintiff Finclusion’s SAC.

Cross-Complaint

On July 20, 2018, defendant Merom filed a cross-complaint against Finclusion, George Li (“Li”), Hoang Nguyen (“Nguyen”), and Patrick Long (“Long”) (Li, Nguyen, and Long are collectively referred to as “Individual Cross-Defendants”). The cross-complaint alleges Merom and the Individual Cross-Defendants are co-founders of Finclusion. (Cross-Complaint, ¶11.) Finclusion was formed in January 2017 and financed by an Initial Coin Offering in which Finclusion offered to sell and sold a form of cryptocurrency (i.e., TrustCoins or TRST) to the public. (Cross-Complaint, ¶13.) Finclusion raised 1,048 BTC (bitcoin) and 80,092 ETH (Ethereum) by selling TrustCoin tokens to the public who, in return for their payment, received a proportionate number of TrustCoin tokens. (Cross-Complaint, ¶14.)

Finclusion originally had three stockholders: Merom, Li, and Long. (Cross-Complaint, ¶15.) Merom originally owned 7 million shares of fully vested Finclusion common stock. (Id.) Finclusion subsequently added Nguyen as a stockholder with the three original stockholders transferring 1.75 million shares of their respective Finclusion common stock to Nguyen, after which each of the four owned 5.25 million shares or 25% of Finclusion common stock on a fully vested basis. (Cross-Complaint, ¶16.)

In May 2017, Li executed a Board Resolution effective January 25, 2017 in which Finclusion’s founders each purportedly purchased and were issued 5.25 million shares of common stock, equal to 25% of Finclusion’s issued and outstanding common stock. (Cross-Complaint, ¶¶17 – 18.) Pursuant to the Board Resolution, the shares were fully vested and offered and sold under the terms of Restricted Stock Purchase Agreements (“RSPA”). (Cross-Complaint, ¶19.) Each of the founders signed the RSPA in May 2017. (Cross-Complaint, ¶¶20 – 21.) The RSPA contains an integration clause and cannot be amended except by written document. (Cross-Complaint, ¶¶24 – 25.) The RSPA has never been amended. (Cross-Complaint, ¶26.)

Finclusion and the TrustCoins have continued to decrease in value due to mismanagement and conflicts of interest on the part of the Individual Cross-Defendants. (Cross-Complaint, ¶30.) On or about June 8, 2018, Bittrex, a leading cryptocurrency exchange, delisted Finclusion’s TrustCoins. (Cross-Complaint, ¶31.) Between January and July 2018, TrustCoins plummeted in valued from $1.34 to $0.04 each. (Cross-Complaint, ¶32.)

Finclusion CEO, cross-defendant Li, was involved in a bitterly contested divorce. (Cross-Complaint, ¶33.) Li personally benefitted from a decrease in the value of Finclusion stock in which his wife claimed a 50% community interest. (Cross-Complaint, ¶34.) Li, without objection by Nguyen or Long, actively sought to decrease the value of Finclusion stock. (Cross-Complaint, ¶¶35 – 37.) Merom notified the other board members of Li’s conflict of interest, but they took no formal action. (Cross-Complaint, ¶¶59 – 60.)

Merom sought access to Finclusion documents in order to sell his common stock to a third party. (Cross-Complaint, ¶38.) Finclusion initially agreed to provide Merom with access to the documents he requested, but later refused despite Merom signing a Non-Disclosure Agreement. (Cross-Complaint, ¶¶39 – 42 and 68 – 71.)

The Individual Cross-Defendants converted Finclusion assets for their personal benefit. (Cross-Complaint, ¶¶43 and 66.) Li engaged in self-dealing by having Finclusion sponsor a conference organized by an individual who loaned money to Li, essentially a kickback to Li. (Cross-Complaint, ¶¶44 – 50.)

The Individual Cross-Defendants excluded Merom from Finclusion decision and conspired to force Merom’s resignation. (Cross-Complaint, ¶64.) After obtaining Merom’s reputation and technical expertise, Finclusion asked Merom not to come to the company’s offices and later revoked Merom’s administrative privileges for accessing Finclusion data. (Cross-Complaint, ¶65.)

On January 17, 2018, Finclusion formally terminated Merom without cause in order to fabricate a reason to deny Merom access to Finclusion documents. (Cross-Complaint, ¶73.) The Individual Cross-Defendants also engineered a reverse stock split without notifying Merom. (Cross-Complaint, ¶80.) Li arranged a November 2017 meeting with Merom and brought an attorney under false pretenses who attempted to coerce Merom into agreeing to severance terms and a vesting agreement. (Cross-Complaint, ¶86.) Merom did not agree to subject his stock to vesting or repurchase. (Cross-Complaint, ¶¶88 – 89.) Notwithstanding any lack of agreement, Finclusion purported to repurchase Merom’s common stock. (Cross-Complaint, ¶90.)

Merom’s cross-complaint asserts the following causes of action:

(1) Breach of Contract
(2) Breach of the Covenant of Good Faith and Fair Dealing
(3) Breach of Fiduciary Duty
(4) Conversion of Personal Property
(5) Violation of California Labor Code
(6) Declaration of Stock Ownership
(7) Removal of Directors for Fraud and Dishonesty
(8) Wrongful Termination in Violation of Public Policy
(9) Violation of Cal. Labor Code §2802 and Cal. Corporations Code §317

On August 21, 2018, cross-defendants filed (1) a demurrer to the third, fifth, seventh, eighth, and ninth causes of action of the cross-complaint; and (2) a motion to strike portions of the cross-complaint. On November 8, 2018, the court issued an order overruling cross-defendants’ demurrer to the cross-complaint except as to the eighth cause of action which the court sustained without leave to amend. The court denied the motion to strike portions of the cross-complaint.

On December 5, 2018, the cross-defendants filed an answer to the cross-complaint.

Discovery Dispute

On July 30, 2019, Merom’s counsel held a conference call with Helen Quinn’s (“Quinn”) counsel to discuss the scheduling and service of a subpoena for Quinn’s deposition. Quinn is plaintiff/cross-defendant Finclusion’s former counsel. Merom’s counsel and Quinn’s counsel agreed to schedule Quinn’s deposition for August 22, 2019 knowing Quinn would not appear because Finclusion’s counsel had already told Quinn’s counsel that Finclusion would be filing a motion to quash the deposition.

On August 1, 2019, Merom served, by Federal Express, a Deposition Subpoena for Personal Appearance and Production of Documents and Things (“Deposition Subpoena”), to Quinn’s counsel who agreed to accept service of the Deposition Subpoena.

On August 19, 2019, plaintiff Finclusion filed a motion to quash, for stay, and for protective order seeking to preclude and/or limit Merom from taking Quinn’s deposition.

On August 21, 2019, Quinn served Merom with “Helen Quinn’s Objection to Ron Merom’s Deposition Subpoena to Helen Quinn.”

On September 26, 2019, Merom filed the instant motion to compel the deposition of Quinn and the production of documents at her deposition.

I. Request for judicial notice.

In support of the motion to compel, Merom requests judicial notice of the writ of mandamus filed May 31, 2018 in this action. Evidence Code section 452, subdivision (d) states that the court may take judicial notice of “[r]ecords of any court of this state.” This section of the statute has been interpreted to mean that the trial court may take judicial notice of the existence of the court’s own records. Evidence Code section 452 and 453 permit the trial court to “take judicial notice of the existence of judicial opinions and court documents, along with the truth of the results reached—in the documents such as orders, statements of decision, and judgments—but [the court] cannot take judicial notice of the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact.” (People v. Woodell (1998) 17 Cal.4th 448, 455.) Accordingly, Merom’s request for judicial notice is GRANTED. The court takes judicial notice of the existence of the court record, not necessarily the truth of any matters asserted therein.

II. Merom’s motion to compel the deposition of Helen Quinn and the production of documents at her deposition is GRANTED.

A. Legal standard.

If a subpoena requires the attendance of a witness or the production of books, documents, electronically stored information, or other things … at the taking of a deposition, the court, upon motion reasonably made by any person described in subdivision (b), or upon the court’s own motion after giving counsel notice and an opportunity to be heard, may make an order … directing compliance with [the subpoena] upon those terms or conditions as the court shall declare, including protective orders.

(Code Civ. Proc., § 1987.1, subd. (a).)

“If a deponent fails to answer any question or to produce any document, electronically stored information, or tangible thing under the deponent’s control that is specified in the deposition notice of a deposition subpoena, the party seeking discovery may move the court for an order compelling that answer or production.” (Code Civ. Proc., §2025.480, subd. (a).)

Merom’s motion is brought “upon the assumption that Finclusion’s motion to quash has been denied.” On October 31, 2019, the court heard and denied Finclusion’s motion to quash, stay, and for protective order. In that ruling, the court declined to issue the blanket protective order that Finclusion sought, but indicated that the correct procedure to address the assertion of attorney-client and attorney work product protection is to raise those objections to specific questions raised at Quinn’s deposition and in a privilege log with regard to the request for production of documents. The court cannot pre-determine the merits of the objection or arguments against (i.e., waiver) without more information about the specific question or document.

Accordingly, Merom’s motion to compel the deposition of Helen Quinn and the production of documents at her deposition is GRANTED. Helen Quinn shall appear for deposition at a mutually convenient date, time, and location within 30 calendar days from notice of entry of this order. Helen Quinn shall produce the documents requested in Attachment 3 to the Deposition Subpoena. Helen Quinn may object, as she deems necessary, to any question asked at deposition on the basis of attorney-client or attorney work product protection. To the extent Helen Quinn objects to the production of any document on the basis of attorney-client or attorney work product protection, Helen Quinn shall prepare and produce a privilege log. (See Catalina Island Yacht Club v. Superior Court (2015) 242 Cal.App.4th 1116, 1130.)