Case Name: Lin Guo, et al. v. Jonathan Chang, et al.
Case No.: 1-14-CV-273600

Currently before the Court is defendants Jonathan Chang (“Chang”), Weilin Chang (“Weilin”), the Jonathan & Weilin Chang Trust (“Chang Trust”), HOC Associates, LLC (“HOCA, LLC”), HOC Associates, Inc. (“HOCA, Inc.”), and The Home of Christ Christian Center’s (“HOCCC”) (collectively, “Defendants”) demurrer to the complaint of plaintiffs Lin Guo and James Cai (collectively, “Plaintiffs”).

This is a derivative action filed on behalf of a nonprofit religious corporation, the Home of Christ Church (“HOC4”), to recover church donations purportedly embezzled by Chang. In 1999, Chang became an Elder and a member of HOC4’s board of directors. (See Compl., ¶ 11.) At that time, the board designated him as the sole Elder in charge of HOC4’s finances. (See Compl., ¶ 16.)

In September 2002, Cher Wang (“Wang”), a wealthy philanthropist, decided to make a large donation to HOC4 via her foundation, the Faith Hope Love Foundation (“FHL”). (Compl., ¶ 17.) The donation consisted of a commitment to make a $20,000 monthly gift and a $2 million lump sum gift. (See Compl., ¶ 18.) Rather than deposit these gifts in HOC4’s account, Chang secretly directed the monthly donation and the $2 million gift to HOCA, LLC, an entity under his control and unaffiliated with HOC4. (See Compl., ¶¶ 22, 27.) In addition, on October 5, 2004, in order to provide financing for the construction of a new church building, Wang, via a corporation under her control, S3 Graphics, Inc. (“S3”), provided HOC4 with a $3 million low-interest loan. (See Compl.,  ¶ 30.) Chang signed the promissory note on behalf of HOCA, LLC, while misrepresenting to S3 that he was acting on behalf of HOC4. (See Compl., ¶ 30.) After discovering that a limited liability company could not apply for tax exempt status, Chang and his wife, Weilin, created HOCA, Inc. on October 26, 2004. (See Compl., ¶ 31.) A few months later, HOCA, LLC transferred the $2 million gift and the $3 million in loan proceeds to HOCA, Inc. (See Compl., ¶ 31.)

Meanwhile, on October 19, 2004, Chang filed a trademark registration application with the United States Patent and Trademark Office, claiming that he was the owner of the “Home of Christ” trademark. (See Compl., ¶ 32.) Once registration was complete, he issued tax receipts to FHL for the $20,000 monthly donations using the trademark. (See Compl., ¶ 34.) In this manner, the receipts misled FHL into believing that the donation was received by HOC4 rather than HOCA, Inc. (See Compl., ¶ 34.)

In January 2005, HOC4 purchased a piece of real property (the “Lomita Property”) for the construction of a new church building for $3.9 million. (See Compl.,  ¶ 35.) Unaware that Wang had already provided the $2 million gift and $3 million loan for this purpose, HOC4 financed the purchase with bridge loans by members who would be repaid after the sale of the old church property (the “Janary Property”). (See Compl.,  ¶ 35.) After HOC4 experienced difficulties in selling the Janary Property, Chang proposed that HOCA, Inc. purchase the Lomita Property and lease it back to HOC4 rent-free for 10 years. (See Compl., ¶ 36.) In exchange, HOC4 would lease the Janary Property to HOCA, Inc. rent-free for 10 years. (See Compl., ¶ 36.) Chang concealed that the funds HOCA, Inc. would use to purchase the property were those donated by Wang for the benefit of HOC4. (See Compl., ¶ 36.) In July 2005, HOC4 approved the transaction. (See Compl., ¶ 37.) Since 2004, Chang has used the accumulated monthly donations and the remainder of the $2 million gift and $3 million loan to make a series of investments in real property on behalf of HOCA, Inc., HOCA, LLC, and the Trust. (See Compl., ¶ 42.) In addition, he transferred some of these funds to HOCCC, another entity under his control. (See Compl., ¶ 44.)

In April 2010, HOCA, Inc. stopped making interest payments on the $3 million loan. (See Compl., ¶ 47.) A year later, on August 9, 2011, Wang discovered that her donations were being funneled into HOCA, Inc., not HOC4, and suggested that Chang transfer the donations and the Lomita Property back to HOC4. (See Compl., ¶ 51.) Around this time, S3 assigned its interest in the $3 million loan to HOC4. (See Compl.,  ¶ 47.) After receiving no payments on the loan for several years, in September 2014, HOC4 demanded a repayment schedule for the loan. (See Compl., ¶ 52.) When HOCA, Inc. refused to make any payments, HOC4 commenced an investigation and discovered the full extent of the fraud. (See Compl., ¶ 52.) On November 2014, Plaintiffs, members of the church since the late 1990s, made a demand on HOC4’s board of directors to initiate litigation and enclosing a copy of the complaint. (See Compl., ¶ 54.) After the board of directors did not act on the demand, Plaintiffs filed their complaint against Defendants and HOC4 (as a nominal defendant), asserting eight causes of action for: (1) fraud; (2) breach of fiduciary duty; (3) breach of contract; (4) unfair competition; (5) civil racketeering; (6) conversion; (7) common law trademark infringement; and (8) quiet title.

A. Requests for Judicial Notice

In support of their demurrer, Defendants ask the Court to take judicial notice of the minutes of the August 29, 2014 and November 14, 2014 board meetings pursuant to Evidence Code section 452, subdivision (h). The request for judicial notice is DENIED. (See Gould v. Maryland Sound Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145 [judicial notice pursuant to section 452, subdivision (h) intended for facts widely accepted as established such as those found in encyclopedias or facts commonly known in the community].)

In opposition to the demurrer, Plaintiffs ask the Court to take judicial notice of HOC4’s answer. The request is GRANTED. (See Evid. Code, § 452, subd. (d) [courts may take judicial notice of court records].)

B. Demurrer to the Complaint

Defendants demur to the first through eighth causes of action in the complaint on the ground that Plaintiffs fail to allege facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).) In particular, they demur on the basis that the business judgment rule bars the action, many of Plaintiffs’ claims are time-barred, and Plaintiffs’ lack standing to sue on behalf of HOC4.

1. Business Judgment Rule

Defendants contend that the action is barred by the business judgment rule. They reason that the board of directors affirmatively decided not to pursue a legal action against Defendants and the Court should defer to this judgment. (See Findley v. Garrett (1952) 109 Cal.App.2d 166, 174 [“Where a board of directors, in refusing to commence an action to redress an alleged wrong against a corporation, acts in good faith within the scope of its discretionary power and reasonably believes its refusal to commence the action is good business judgment in the best interest of the corporation, a stockholder is not authorized to interfere with such discretion by commencing the action.”].) Plaintiffs persuasively argue that such a decision by the board of directors does not appear on the face of the complaint or from facts subject to judicial notice. (See Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994 [in ruling on a demurrer, court cannot consider matter not subject to judicial notice].) Accordingly, the complaint is not subject to demurrer on this basis.

2. Statute of Limitations

Defendants argue that Plaintiffs’ first, second, fourth, fifth, sixth, and eighth causes of action for fraud, breach of fiduciary duty, unfair competition, civil racketeering, conversion, and quiet title, respectively, are time-barred. They reason that these causes of action accrued in 2004 when the diversion of funds to HOCA, LLC and HOCA, Inc. took place and the longest statute of limitations for these causes of action is four years. (See Code Civ. Proc., § 338, subds. (c), (d) [three-year statute of limitations for fraud and conversion]; American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1479 [three-year statute of limitations for fraudulent breach of fiduciary duty]; Bus. & Prof. Code, § 17208 [four-year statute of limitations for unfair competition]; Agency Holding Corp. v. Malley-Duff & Associates, Inc. (1987) 483 U.S. 143, 156 [four-year statute of limitations for civil racketeering]; Ankoanda v. Walker-Smith (1996) 44 Cal.App.4th 610, 615 [three-year statute of limitations for quiet title where theory of relief is fraud or mistake].)

In opposition, Plaintiffs claim that the action is timely pursuant to the discovery rule. “‘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 the discovery and (2) the inability to have made earlier discovery despite reasonable diligence….’ [Citation.]” (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1317.) Here, Plaintiffs allege that they did not discover the fraud until 2014 when HOCA Inc. refused to provide a repayment schedule for the $3 million loan. (See Compl., ¶ 52.) They further allege that they did not discover the fraud at an earlier time because Chang was the sole Elder in charge of HOC4’s finances and he concealed the diversion of funds from the board and other church members. (See Compl., ¶¶ 12, 16.) While Defendants contend that the withdrawal of funds from HOC4’s accounts between 2003-2006 (see Compl., Ex. G) and the assignment of the loan in 2011 should have put them on notice of the fraud, HOC4 was entitled to rely upon the assumption that Chang, as a fiduciary, was acting on its behalf until it actually became aware of the misconduct. (See Hobbs v. Bateman Eichler, Hill Richards (1985) 164 Cal.App.3d 174, 202 [duty to investigate only arises once a plaintiff actually becomes aware of facts that would make a reasonably prudent person suspicious].) Accordingly, Plaintiffs allege sufficient facts to plead delayed discovery and therefore the first, second, fourth, fifth, sixth, and eighth causes of action are not subject to demurrer on this basis.

3. Lack of Standing

Defendants contend that Plaintiffs lack standing to bring the present derivative action on behalf of a non-profit religious corporation. While the Corporations Code contains express provisions for general derivative actions against for-profit corporations, non-profit public benefit corporations, non-profit mutual benefit corporations, and consumer cooperative corporations (see Corp. Code, §§ 800, 5710, 7710, 12490), no comparable provisions apply to non-profit religious corporations. The Corporations Code does not contemplate general derivative lawsuits on behalf of non-profit religious corporations. Accordingly, only HOC4 itself has standing to pursue the eight causes of action alleged in the Complaint. (See Cloud v. Northrop Grumman Corp. (1998) 67 Cal.App.4th 995, 1004 [party lacking standing fails to state a cause of action by the named plaintiffs, inasmuch as the claim belongs to somebody else].)

Nevertheless, the Corporations Code does explicitly permit derivative actions to enforce specific statutory violations. As relevant here, limitations on the activities of religious corporations and their officers and directors may be raised in the following proceedings: (1) an action against a director who engages in a self-dealing transaction (see Corp. Code, § 9243, subds. (c), (h)); and (2) an action to remedy the improper use of property contributed by an affiliated person to the religious corporation for a specific purpose that is used in a manner contrary to that purpose (Corp. Code, § 9143, subd. (a)).

Here, while Plaintiffs do not assert a cause of action pursuant to either of these sections, they contend that they can amend the complaint to expressly meet the requirements of these sections. Consequently, Defendants’ demurrer to each cause of action in the complaint is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND to afford Plaintiffs the opportunity to allege causes of action pursuant to Corporations Code sections 9143 and/or 9243.

The Court will prepare the order.