30-13-670034
Demurrer to FAC

This is a business dispute in which plaintiffs contend that defendant breached contractual, and fiduciary, obligations owed to the co-owned debt collection company. Plaintiffs – the business LLC and one of its member owners – previously (and unsuccessfully) attempted to oust defense counsel. Plaintiffs’ counsel is now seeking to be relieved as counsel, but not before this pending demurrer is resolved.

Breach of Fiduciary Duty

The elements of a cause of action for breach of fiduciary duty are:
(1) the existence of a fiduciary duty;
(2) a breach of the fiduciary duty; and
(3) damage proximately caused by the breach.

Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820; Pellegrini v. Weiss (2008) 165 Cal.App.4th 515, 524; Mendoza v. Rast Produce Co., Inc. (2006) 140 Cal.App.4th 1395, 1405.

A fiduciary or confidential relationship can arise when confidence is reposed by persons in the integrity of others, and if the latter voluntarily accepts or assumes to accept the confidence, he or she may not act so as to take advantage of the other’s interest without that person’s knowledge or consent. Slovensky v. Friedman (2006) 142 Cal.App.4th 1518, 1534; Pierce v. Lyman (1991) 1 Cal.App.4th 1093, 1101–1102. Significantly, “the essence of a fiduciary or confidential relationship is that the parties do not deal on equal terms because the person in whom trust and confidence is reposed and who accepts that trust and confidence is in a superior position to exert unique influence over the dependent party.” Brown v. Wells Fargo Bank, NA (2008) 168 Cal.App.4th 938, 960. The essential elements have been distilled as follows: 1) The vulnerability of one party to the other which 2) results in the empowerment of the stronger party by the weaker which 3) empowerment has been solicited or accepted by the stronger party and 4) prevents the weaker party from effectively protecting itself. In short, vulnerability is the necessary predicate of a confidential relation, and the law treats it as absolutely essential. Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1161; in accord, Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 31.

Here, the relationship alleged between plaintiffs and defendant is one which can support a fiduciary duty. While it does seem to ring of employer-employee now that defendant is no longer alleged to be a true member, the nature of his role in the company is sufficient for pleading purposes.

Breach of Contract

The elements for breach of contract are (1) parties capable of contacting, (2) their consent, (3) a lawful object, (4) sufficient cause or consideration, (5) plaintiff’s performance or excuse for failure to perform, (6) defendant’s breach, and (7) damage. Civil Code §§ 1550, 1605; CDF Firefighters v. Maldonado (2008) 158 Cal.App.4th 1226, 1239. A contract may be pleaded either by its terms—set out verbatim in the complaint or a copy of the contract attached to the complaint and incorporated therein by reference—or by its legal effect. Holcomb v. Wells Fargo Bank, NA (2007) 155 Cal.App.4th 490, 501. In order to plead a contract by its legal effect, plaintiff must “allege the substance of its relevant terms.” McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1489. Plaintiff must also make clear whether the contract is oral, written or implied. CCP § 430.10(g).

In the original complaint, plaintiffs alleged breach of a written Operating Agreement – but failed to incorporate any of its terms. In the FAC, plaintiffs allege breach of an oral agreement to act as president and managing partner, and to conform such conduct to the best interest of the company (see FAC ¶ 15-18). There are not enough facts offered to determine whether the oral agreement is subject to the statute of limitations or frauds, and so on its face the cause of action is adequately pled. Defendant’s concern about the shift in theory is something to delve into in discovery, but no so incompatible here as to trigger the “sham pleading” doctrine. There is an issue as to who the contracting parties actually are (it seems that defendant would only have contracted with the entity and not the individual member), but that too can be addressed in discovery.

Accounting

Accounting is an equitable action with nothing more than remedial teeth. See Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 713; Van de Kamp v. Bank of America (1988) 204 Cal.App.3d 819, 863-865. A fiduciary relationship between the parties is not required to state a cause of action for accounting. All that is required is that some relationship exists that requires an accounting. See Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179-180. When parties enter into an agreement that accords one party exclusive access and control over property, the implied covenant accords the other party the right to an accounting. McClain v. Octagon Plaza, LLC (2008) 159 Cal.App.4th 784, 806.

There is nothing wrong with this cause of action as pled, and defendant does not point out any shortcoming with the allegations. The premise that since the oral contract cause of action fails, so too must this – is wrong.

Misappropriation of Trade Secrets

Misappropriation of a trade secret occurs when the person in possession of a trade secret actually misuses, or threatens (with an imminent potential) to misuse that information. Mere possession of trade secrets, coupled with suspicions or apprehension of misuse, is not enough. The plaintiff must prove the following essential elements: (1) the plaintiff owned a trade secret; (2) the defendant knowingly acquired, disclosed, or used the plaintiff’s trade secret through improper means; and (3) the defendant’s actions damaged the plaintiff. A “trade secret” is information which (1) derives independent economic value (2) due in large part because it is unknown to others and (3) which the owner has taken reasonable steps to maintain its secrecy. “Improper means” is defined as “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” See Civil Code §3426.1(a); Silvado Data Systems v. Intel Corp. (2010) 184 Cal.App.4th 210, 222-225; FLIR Systems, Inc. v. Parrish (2009) 174 Cal.App.4th 1270, 1279-1280; Citizens of Humanity, LLC v. Costco Wholesale Corp. (2009) 171 Cal.App.4th 1, 13-14; Cytodyn, Inc. v. Amerimmune Pharmaceuticals, Inc. (2008) 160 Cal.App.4th 288, 297; Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 863–864.

Although the allegations do not automatically support the existence of a trade secret here, for purposes of pleading they are sufficient.

Declaratory Relief

The essential elements of a declaratory relief cause of action are (1) an actual controversy between the parties regarding contractual or property rights (2) involving continuing acts/omissions or future consequences, (3) which has sufficiently ripened to permit judicial intervention and resolution, but (4) which has not yet blossomed into an actual cause of action. See Osseous Technologies of America, Inc. v. Discoveryortho Parnters LLC (2010) 191 Cal.App.4th 357, 366-369 (and cases cited therein). Pleading a declaratory relief claim is relatively easy: if a complaint for declaratory relief demonstrates an actual controversy relating to the legal rights and duties of the parties, the claim has been stated and the court should declare the rights of the parties – whether or not the facts alleged establish that the plaintiff is entitled to favorable declaration. Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 807-808.

Of course, as with other equitable actions, the trial court has discretion not to act where the court feels it is neither necessary nor proper to do so. CCP §1061. For example, if there exists a straightforward civil remedy for the alleged wrong, declaratory relief is generally not warranted. See Filarsky v. Superior Court (2002) 28 Cal.4th 419, 433; DeLaura v. Beckett (2006) 137 Cal.App.4th 542, 546–547.

Here, plaintiffs seek a declaration regarding defendant’s standing with the company – is he a member with ownership interest, or merely a hired officer. The question would seem to be answered within the other causes of action, but upon further reflection there is indeed a gap between the compensatory claims asserted and this particular issue.

Derivative Standing

Defendant generally demurs to the operative pleading as a whole based on plaintiffs’ failure to allege facts showing refusal or futility before asserting a personal interest in derivative claims.

Pursuant to Corp. Code §17709.02, no action may be maintained by a member on behalf of a limited liability company unless:

(1) The plaintiff was a member of record, or beneficiary, at the time of the alleged wrongdoing;
(2) The plaintiff first informs the managers in writing of the ultimate facts of each cause of action, and alleges with particularity efforts to convince (unless futile) the members to act in the LLC’s capacity.

There are no allegations in the FAC demonstrating with particularity the prerequisite effort by plaintiff Gordon to proceed with claims which – on their face – appear to belong to the LLC. Plaintiff Gordon must either demonstrate compliance or pled facts showing an independent right of action. This shortcoming applies to ALL five causes of action (even though defendant thinks the 1st cause of action is immune from such scrutiny).

Conclusion

Although the individual causes of action are themselves adequately pled, the demurrer to entire FAC is sustained with 10 days leave to amend to shore-up the derivative standing issue.