Case Name: Polanco, et al. v. Polanco, et al.
Case No.: 17-CV-312451

Plaintiffs David M. Polanco Sr. (“Senior”) and Carol Evans (“Evans”) initiated this action against defendants David Polanco Jr. (“Junior”), Krista Polanco (“Krista”) , and Polanco Enterprises, Inc. (“PEI”) to determine the validity of an election of PEI’s directors.

According to the allegations of the complaint (“Complaint”), Senior founded PEI, a successful multimillion-dollar company, with his former wife in 1979. (Complaint, ¶ 9.) Since then, several disputes regarding the control and ownership of PEI have arisen. Senior and Evans (collectively “Plaintiffs”) consider themselves the rightful directors of PEI, whereas Junior and Krista hold themselves out as directors. (Id. at ¶ 5.) There is also a dispute as to “which share certificates are operative and which are not.” (Id. at ¶ 10.) While Senior was previously under the mistaken belief there were only 20,000 authorized PEI shares, he now thinks there are 100,000 shares. (Id. at ¶ 13.)

In October 2015, Senior called a shareholder and board of directors meeting. (Complaint, ¶ 14.) Legal counsel for Junior and Krista refused to attend on their behalf. (Ibid.) As a result, the meeting could not convene and Senior and Evans were denied the right to vote. (Ibid.) Instead of attending that meeting, Junior called for a shareholder and board of directors meeting in December 2015 and failed to properly notify Plaintiffs that it would happen. (Id. at ¶ 15.) Despite the improper notification, Plaintiffs attended to preserve their rights. (Ibid.) At the December meeting, the parties disagreed about who owns PEI. (Id. at ¶ 16.) Even though the parties could not agree as to the issue of ownership, there were several motions for removal of directors. (Ibid.) Senior moved to remove Junior and Krista as directors of PEI. (Id. at ¶ 17.) Plaintiffs voted in favor of that motion and Junior voted against it. (Ibid.) Junior also moved to remove Senior and Evans as directors, which they voted against. (Ibid.)

Senior subsequently called another special meeting. (Complaint, ¶ 18.) In response, Junior sent a letter to Plaintiffs, claiming Evans is not a director and Senior was removed as director by vote during the December meeting. (Id. at ¶ 19.) Contrary to Junior’s assertions, “[a]s owners of all or of the majority of outstanding shares of PEI, [Plaintiffs] would have had to remove themselves as directors of PEI.” (Id. at ¶ 20.) They did not do so, and are thus being denied the right to vote and hold shareholder and board of director meetings. (Ibid.) Presently, Junior is wrongfully acting as director of PEI to the exclusion of Plaintiffs. (Id. at ¶ 23.)

Plaintiffs filed the Complaint pursuant to Corporations Code section 709 (“Section 709”), which enables a person who claims to have been denied the right to vote in a corporate election to file an action to determine the validity of the election of any corporate director. The Complaint seeks an order stating Plaintiffs own at least a majority of PEI’s shares, determining the validity of the issuance of PEI shares, and resolving the validity of the election of directors at the December meeting, among other things. (Complaint, prayer for relief, ¶¶ 1-4.) Junior and Krista (collectively “Defendants”) presently demur to the Complaint.

I. Preliminary Matters

A. Meet and Confer

In opposition, Plaintiffs argue the demurrer should be overruled because Defendants failed to meet and confer prior to filing it. Plaintiffs insist Defendants’ lack of meet and confer efforts is evidenced by their failure to file a meet and confer declaration.
Pursuant to Code of Civil Procedure section 430.41, subdivision (a), prior to filing a demurrer, “the demurring party shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” To adequately meet and confer, the demurring party “shall identify all of the specific causes of action that it believes are subject to demurrer and identify with legal support the basis of the deficiencies.” (Code Civ. Proc., § 430.41, subd. (a)(1).)

Defendants neglected to file a meet and confer declaration in support of the demurrer. On reply, Defendants’ counsel filed a declaration in which he insists that he adequately met and conferred with Plaintiffs’ counsel prior to filing the demurrer. Defendants’ counsel states that at a trial setting conference for this case, the Court inquired as to whether he intended to respond to the Complaint and he replied that he intended to file a demurrer. (Rovella Decl., ¶¶ 2-3.) Defendants assert Plaintiffs’ counsel was at the hearing and could have asked to speak further about the matter if so inclined. Defendants insist Plaintiffs were already aware of the basis for the demurrer because they raised the same arguments in connection with a separate lawsuit filed between the parties. (Id. at ¶ 7.)

Here, the record reflects Defendants failed to adequately meet and confer. Defendants’ counsel admits he did not actually attempt to talk the matter over with Plaintiffs’ counsel or determine whether an agreement could be reached. Rather, he states Plaintiffs’ counsel could have contacted him. However, it is the demurring party’s burden to initiate the meet and confer process. (Code Civ. Proc., § 430.41, subd. (a).) The fact that the parties already discussed the validity of an action brought under Section 709 in connection with a separate lawsuit did not relieve Defendants of the duty to meet and confer. The prior communications do not satisfy the meet and confer requirements here. With that said, a demurrer may not be overruled for a lack of meet and confer efforts. (Code Civ. Proc., § 430.41, subd. (a)(4).) As such, the Court will reach the demurrer on its merits. Defendants are admonished to comply with the meet and confer requirements in the future.

B. Request for Judicial Notice

In support of their demurrer, Defendants request judicial notice of the Complaint. While court records are proper subjects for judicial notice pursuant to Evidence Code section 452, subdivision (d), it is unnecessary to take judicial notice of the pleading under review on demurrer. (See Paul v. Patton (2015) 235 Cal.App.4th 1088, 1091, fn. 1.) Accordingly, the request for judicial notice is DENIED.

II. Merits of the Demurrer

Defendants demur on the grounds of lack of capacity to sue and failure to state sufficient facts to constitute a cause of action. Defendants advance the same argument relative to both grounds. More particularly, they assert Plaintiffs’ claim is deficient because they allegedly properly voted in the election and Section 709 only allows a shareholder to challenge an election on the basis of having been denied the right to vote.

As stated above, Section 709 authorizes a shareholder who was denied the right to vote to initiate an action to challenge the validity of a corporate election. While a plaintiff must have been denied the right to vote to assert such a claim, the question of whether an individual is denied the right to vote is not limited to procedural issues, such as the adequacy of notice, the presence of a quorum, or the validity of voting agreements. (Morrical, supra, 220 Cal.App.4th at pp. 450, 452.) Section 709 is broadly construed to reach all issues regarding the validity of a corporate election as the statute itself does not contain any restrictive language. (Id. at pp. 451-452.) Under Section 709, a plaintiff may bring an action to determine the validity of a corporate election where he or she actually voted, but contests the defendant’s amount of shares and status as majority shareholder. (Columbia Engineering Co. v. Joiner (1965) 231 Cal.App.2d 837, 849 (“Columbia”). )

To the extent the demurrer is brought on the ground of lack of capacity to sue, it is misguided because Defendants’ argument is not properly addressed on that ground. Legal capacity to sue refers to the right to come into court, and usually means that the party is a minor, is deceased, or lacks decision-making capacity. (Friendly Village Community Assn., Inc. v. Silva & Hill Construction Co. (1973) 31 Cal.App.3d 220, 224.) Here, it is unclear why Defendants consider lack of capacity to be the appropriate ground. Defendants do not contend Plaintiffs are minors, deceased, or lacking decision-making capacity. Their arguments in support do not clarify the matter. Defendants only cite the ground of lack of capacity to sue and a case discussing Section 709 which did not involve a demurrer on this ground. Defendants’ argument is otherwise brief and undeveloped; they simply state Plaintiffs allege they attended the December meeting and voted, and conclude the demurrer is sustainable on that basis. A memorandum “must contain . . . arguments relied on, and a discussion of the statutes, cases, and textbooks cited in support of the position advanced.” (Cal. Rules of Court, Rule 3.113(b).) Defendants fail to adhere to this standard as they do not cite any legal authority establishing that lack of capacity is an appropriate ground upon which to bring the demurrer. Consequently, the demurrer is not substantiated to the extent it is brought on the ground of lack of capacity to sue.

To the extent the demurrer is brought on the ground of failure to state sufficient facts, it is not well-taken because, contrary to Defendants’ assertion, Plaintiffs do not allege they were able to properly vote in the election. Rather, Plaintiffs plead Junior improperly considers himself to be the majority shareholder due to a disagreement over operative shareholder certificates and wrongfully attempted to oust them. Thus, the pleading reflects Plaintiffs and Defendants disagree as to who the majority shareholders are, which parties prevailed in the election held at the December meeting, and whether Plaintiffs’ shares were properly counted in the vote. It is evident from the arguments advanced in reply that Defendants simply misconstrue the allegations set forth in the Complaint. For example, Defendants insist the Complaint alleges Plaintiffs acknowledge they were rightfully voted off of the board of directors by the holder of the majority of the shares, and now are simply initiating this action because they lost the election. However, Plaintiffs do not allege as much. The pleading clearly demonstrates Plaintiffs consider themselves to be the directors and majority shareholders of PEI and, as such, that they were denied the right to vote in the December election. (See Complaint, ¶¶ 20, 22.)
As aptly argued by Plaintiffs in opposition, Section 709 governs all disputes affecting the validity of corporate elections when a shareholder is denied the right to vote, including disputes regarding the issuance of shares. (See Columbia, supra, 231 Cal.App.2d at p. 849; see also Morrical, supra, 220 Cal.App.4th at p. 464.) The Complaint alleges there is a dispute regarding the issuance of shares, which, in turn, affects the validity of the corporate election held in the December meeting. As such, Defendants fail to raise any defect in the pleading.

Accordingly, the demurrer to the Complaint on the grounds of lack of capacity to sue and failure to state sufficient facts to constitute a cause of action is OVERRULED.

In light of the December 11, 2017 trial date, the Court encourages Defendants to file their answer immediately, or risk that any affirmative defenses will not be considered at the time of trial.

The Court shall prepare the Order.