2013-00155458-CU-BC

Guangyu He vs. Dalin Zhang

Nature of Proceeding: Hearing on Demurrer to Complaint

Filed By: Macy, James B.

**If any party requests oral argument, then at the time the request is made, the
requesting party must inform the court and opposing counsel of the specific
issue(s) on which oral argument is sought.**

The demurrer of Defendant L.Z. Brother, Inc. (“LZBI”) to Plaintiff Guangyu He’s (“HE”) complaint is OVERRULED.

Overview

This action is part corporate dispute, part employment dispute. HE allegedly was an
employee and minority shareholder of LZBI. HE alleges that the majority shareholder
deprived him of his shareholder rights and ultimately terminated him from his position
as LZBI’s manager. Pertinent to the instant demurrer is HE’s allegation that, contrary
to the applicable shareholder agreement, the defendants did not make regular
distributions of corporate profits on a pro rata basis.

HE has pleaded 10 causes of action in all. LZBI now demurs to the first, second and
tenth causes of action for breach of shareholder agreement, breach of the implied
covenant of good faith and fair dealing, and conversion. LZBI demurs on grounds that
the allegations fail to state facts sufficient to state a valid cause of action.

Discussion

Preliminarily, LZBI is admonished for failing to comply with CRC 3.1320(a). Future
failures to comply with Rules of Court or procedural statutes may result in the court
striking the non-conforming pleadings.

The First and Second Causes of Action for Breach of the Shareholder
Agreement and Breach of the Implied Covenant of Good Faith and Fair Dealing

The demurrers are OVERRULED.

LZBI argues that the court should sustain the demurrers to the first and second causes
of action for two reasons. First, it argues that HE alleges an agreement to make
corporate distributions in a manner that is inconsistent with Corporations Code § 500.
According to LZBI, that section requires corporate boards of directors to authorize
distributions after certain prerequisites are met. Assuming that HE’s allegations are
incompatible with Corporation Code § 500, and that LZBI’s argument in this regard
otherwise has merit (it does not for reasons discussed below), the argument does not
require the court to sustain the demurrers because HE posits other contractual
breaches that do not involve distributions. (See Compl., ¶ 18(b), (d).) The court is
required to overrule a demurrer if the allegations state a cause of action on any theory.
th
(See Charpentier v. Los Angeles Rams Football Co. (1999) 75 Cal.App.4 301, 307.)
Because LZBI has not demonstrated that all of the breaches HE alleges are
insufficient as a matter of law, the emphasis it places on the allegations regarding
corporate distributions is unavailing.

Next, LZBI argues that the demurrers should be sustained because there is no
express allegation that LZBI as a party to the agreement. The court rejects this
argument as well because HE has alleges that LZBI is the alter ego of others who are
expressly alleged to be parties to the agreement. Having failed to address the
sufficiency of these alter ego allegations, LZBI has failed to persuade the court that the
demurrers should be sustained.

The Tenth Cause of Action for Conversion

The demurrer is OVERRULED. LZBI relies again on Corporations Code § 500. As LZBI observes, that section
conditions shareholder distributions upon the directors’ determinations that the
corporation is solvent and that sufficient retained earnings are in place. LZBI argues
that, by alleging a shareholder agreement that calls for regular, pro rate distributions
without reference to Corporations Code § 500, HE has failed to allege that he is
entitled to any specific property, which is an essential element of conversion. (See,
e.g., Shopoff & Cavallo LLP v. Hyon (2008) 167 Cal.App.4th 1489, 1507.)

HE counters that the agreement need not be construed to violate Corporations Code §
500, and thus does not require distributions under circumstances other than those
enumerated in that section.

The shareholder agreement is not attached to the complaint. As a result, the court
cannot currently parse the agreement’s terms to assess its compatibility with the
Corporations Code. Hence, at this juncture, the court cannot say that the agreement
violates § 500 such that the demurrer must be sustained. (See Kruss v. Booth (2010)
185 Cal.App.4th 699, 727 [on demurrer, the court must draw all inferences in favor of
the complaint.)

Conclusion

The demurrer is overruled.

LZBI has already filed an answer. It must serve the same no later than June 23, 2014
if it has not already done so.

The minute order is effective immediately. No formal order pursuant to CRC 3.1312 or
further notice is required.