Case Name: Tae Han v. Chattingcat, Inc., et al.
Case No.: 16-CV-297865

Currently before the Court is the demurrer by defendants Chattingcat, Inc. (“Chattingcat”) and Yong Kyung Kim (“Kim”) (collectively, “Defendants”) to the first amended complaint (“FAC”) of plaintiff Tae Han (“Plaintiff”).

Factual and Procedural Background

This action arises out of agreements to purchase shares of stock in in Chattingcat. Kim is the chief executive officer and president and sole director of Chattingcat. (FAC, ¶ 3.) Chattingcat is allegedly Kim’s alter ego. (Id. at ¶¶ 4-5.)

“From or about April 30, 2015 to or about August 30, 2015, [Chattingcat] participated in an entrepreneurship program offered by 500 Startup in Mountain View, Santa Clara County, California. During said period, [Kim] represented [Chattingcat] and participated in said program.” (FAC, ¶ 10.)

“On or about July 30, 2015[,] defendant made the following representations to
Plaintiff: (1) [Kim] represented to Plaintiff that there were a number of U.S. based investors who had committed to invest into [Chattingcat] at a pre—money valuation of
$5,000,000 which roughly translated to per-share price of $0.1382 and also said that if [Chattingcat] declined U.S. funding activities, 20% of [Chattingcat] would be valued at
$2,000,000, implying that [Chattingcat] would be valued at $10,000,000. (2) [Kim] also made representations that [Chattingcat’s] month to month revenue growth was 20%.” (FAC, ¶¶ 12 and 52.) These representations were false and made with the intent to defraud Plaintiff. (Id. at ¶¶ 53-54.)

“On or about August 2, 2015, Defendants, while attending the 500 Startup program, contacted, and offered to sell 991,835 shares 6f common stock (the “Shares”) of [Chattingcat] to, Plaintiff. Defendants made the offer and solicited investment by means of email and Facebook Messenger to Plaintiff.” (FAC, ¶ 11.) The email “included the following three terms: 1) offer to sell 326,488 shares of stock of [Chattingcat] at the aggregate purchase price of $45,120.64; 2) with the conditions of ‘4 year (48 month) Vesting’ and ‘1 year cliff’[;] and 3) vesting starts from the date of the completion of official purchase agreement legal document.” (Id. at ¶ 13.) Kim “premised the foregoing offer with a statement that ‘please reply with confirm [because] email is effective in the U.S.’ Plaintiff then replied … ‘confirm’, thereby forming a contract (the ‘First Contract’).” (Ibid.) On or about August 4, 2015, Plaintiff wired $45,120 as consideration for “326,488 shares of the Shares.” (Id. at ¶ 14.)

On September 17, 2015, Chattingcat made another offer to sell additional shares by email. (FAC, ¶ 15.) “Accepting the terms, Plaintiff then de1ivered additional payment of $91,951 on or about September 24, 2015 (the ‘Second Contract’).” (Ibid.)

“Through [the] First and Second Contracts, Plaintiff ended up paying for the Shares (i.e., 991,835 shares of the common stock) by paying the total aggregate amount of $137,071 (the ‘Purchase Price’).” (FAC, ¶ 15.)

“Thereafter, [Chattingcat] requested Plaintiff to sign a Restricted Stock Purchase Agreement (‘RSPA’), representing that RSPA was nothing more than a simple contract memorializing both First and Second Contract.” (FAC, ¶ 15.)

In or about April 2016, Plaintiff “requested that the Shares be repurchased by [Chattingcat].” (FAC, ¶ 17.) “In response, on May 5, 2016, … Defendants sent [an] email to Plaintiff[’]s wife stating … that she agreed that $137,000 was a big sum of moneys and she would love to return the Purchase Price and that because neither [Kim] nor [Chattingcat] had such sum of extra cash, she had sought repayment until the end of 2016, concluding the email with the confirming statement …, ‘Please rest assured for I would repurchase the Shares even if it means I have to borrow loans as I had told’ Plaintiff.” (Ibid.) “However, … [Chattingcat] subsequently only sent a portion of the Purchase Price and refused and is still refusing to return the remainder of the Purchase Price. Worse still, Defendants still have not yet issued or delivered to Plaintiff a stock certificate representing the Shares in Plaintiff s name.” (Id. at ¶ 18.)

Based on the foregoing allegations, Plaintiff filed the operative FAC against Defendants, alleging causes of action for: (1) rescission of void contract under 15 U.S.C. section 78cc; (2) declaratory relief for voiding illegal contract; (3) Corporations Code section 25501; (4) Corporations Code section 25503; (5) Corporations Code section 25504; (6) 15 U.S.C, section 77l; (7) 15 U.S.C, section 77o; (8) fraud; (9) conversion; (10) constructive trust; and (11) personal guarantee.

Shortly thereafter, Plaintiff filed a request for dismissal, without prejudice, of the first, sixth, and seventh causes of action of the FAC. On April 25, 2018, the court clerk entered the dismissal as requested.

On May 11, 2018, Defendants filed the instant demurrer to the FAC. Plaintiff filed an opposition to the demurrer on September 7, 2018. On September 11, 2018, Defendants filed a reply.

Discussion

Defendants demur to the second cause of action of the FAC on the ground that the court has no jurisdiction of the subject of the cause of action. (See Code Civ. Proc., § 430.10, subd. (a).) Defendants also demur to the third through fifth and eighth through eleventh causes of action on the ground of failure to allege facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

I. Procedural Issue

As a preliminary matter, Defendants and Plaintiff frequently refer to the terms of the RSPA in their papers even though the RSPA is not attached to the FAC and the parties did not request judicial notice of that document.

Because the RSPA is referred to in the FAC and by both parties in their papers, the Court, on its own motion, takes judicial notice of the existence of the RSPA. (See StorMedia Inc. v. Super. Ct. (1999) 20 Cal.4th 449, 457, fn. 9 [indicating that a document referenced in a pleading under review is judicially noticeable, but the truthfulness and proper interpretation of the document are disputable]; see also Salvaty v. Falcon Cable TV (1985) 165 Cal.App.3d 798, 800, fn. 1; Ingram v. Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3 [taking judicial notice of a letter and media release that formed the basis of the allegations in the complaint].)

II. Legal Standard

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice.” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732, internal citations and quotations omitted; see also Code Civ. Proc., § 430.30, subd. (a).) “It is not the ordinary function of a demurrer to test the truth of the [ ] allegations [in the challenged pleading] or the accuracy with which [the plaintiff] describes the defendant’s conduct. [ ] Thus, [ ] the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.)

III. Second Cause of Action

Defendants argue that the second cause of action for declaratory relief for voiding illegal contract fails because the Court has no jurisdiction of the subject of the cause of action. Defendants contend that the claim is predicated on a violation of the
Securities Exchange Act of 1934, codified at 15 U.S.C. section 78a et seq., and, consequently, the claim is subject to exclusive jurisdiction in the federal courts.

In opposition, Plaintiff asserts that the second cause of action alleges a state law claim that seeks to void the alleged illegal contract. Plaintiff states that even though the claim mentions the Securities Exchange Act of 1934 the remedy sought—voiding the contract—is a state law remedy.

Here, the second cause of action attempts to state a claim for declaratory relief. Specifically, Plaintiff alleges “[a]n actual and present controversy exists between the parties because [Chattingcat] is presently refusing to return the Purchase Price, citing the [First Contract, Second Contract, and RSPA (collectively, ‘Investment Contract’)], notwithstanding its being void under federal securities law.” (FAC, ¶ 31.) Plaintiff alleges that subject matter of the Investment Contract violates several provisions of the Securities Act of 1933, codified at 15 U.S.C. section 77a et seq. (Id. at ¶¶ 21-24 and 28.) Plaintiff alleges that the subject transaction is void under the Securities Exchange Act of 1934, specifically 15 U.S.C. section 78cc, because it failed to comply with the Securities Act of 1933. (Id. at ¶¶ 25-26, 28.) Plaintiff further alleges that the subject matter of the Investment Contract violated the California Corporate Securities Law of 1968 and is, therefore, illegal and contrary to public policy. (Id. at ¶ 28.)

It is well-established that claims asserted under the Securities Exchange Act of 1934 are subject to exclusive federal jurisdiction pursuant to 15 U.S.C. section 78aa such that the state courts lack jurisdiction over said claims. (Emrich v. Touche Ross & Co. (9th Cir. 1988) 846 F.2d 1190, 1197.) In characterizing a cause of action for jurisdictional purposes, it is the gravamen of the underlying transaction which must be considered, and not the remedy asserted. (Kinsey v. Nestor Exploration Ltd. – 1981A (E.D. Wash. 1985) 604 F.Supp. 1365, 1368 (Kinsey) declined to follow on other grounds in Lou v. Belzberg (9th Cir. 1987) 834 F.2d 730, 738; Guinasso v. Pacific First Fed. Sav. & Loan Ass’n (9th Cir.1981) 656 F.2d 1364.) A suit may arise under federal law, even though a federal remedy is not sought, if the plaintiff’s claim relies substantially on propositions that define federal rights, duties, or relationships. (Kinsey, supra, 604 F.Supp. at p. 1368.) Thus, even though a plaintiff seeks remedies provided under state law, courts are required to go further, and to ask what the alleged wrong is, what duty was breached, and from what source that duty arose. (Ibid.; Turbeville v. Financial Industry Regulatory Authority (11th Cir. 2017) 874 F.3d 1268, 1273-74 [even though claims invoked state tort law as the basis for relief, the claims could not be decided without resolving a federal question].)
Hibbard Brown & Co., Inc. v. National Ass’n of Securities Dealers, Inc. (D. Del., Oct. 6, 1994, No. CIV. A. 94-285-SLR) 1994 WL 827778 (Hibbard) is instructive in this case. In Hibbard, the plaintiff filed an action for declaratory and injunctive relief. (Hibbard, supra, 1994 WL 827778, at *1.) The plaintiff sought a finding that a “Notice to Members” was “without legal force and effect” because it was issued by the defendant before the defendant fulfilled its obligations under the Securities Exchange Act of 1934. (Id. at *1-2.) The court found that the plaintiff’s claims were subject to the exclusive jurisdiction of federal courts because the claims were based on the defendant’s failure to fulfill its obligations under the Securities Exchange Act of 1934 and the reviewing court, in ruling on the merits of the complaint, was required to interpret and apply the Securities Exchange Act of 1934. (Ibid.)
The second cause of action of the FAC is similar to the claims alleged in Hibbard.
Although the complaint is framed as a state law claim for declaratory relief, it is premised on an alleged violation of the Securities Exchange Act of 1934. Ruling on the merits of the claims will necessarily involve the interpretation and application of the Securities Exchange Act of 1934. Thus, the claim is subject to exclusive jurisdiction in the federal courts to the extent it is predicated on a violation of the Securities Exchange Act of 1934.

However, the second cause of action is also based on an alleged violation of the California Corporate Securities Law of 1968, i.e., Corporations Code section 25701. (Id. at ¶ 28.) Defendants’ argument does not address this basis for the claim. Consequently, Defendant fails to dispose of the cause of action in its entirety and the demurrer is not sustainable. (See PHII, Inc. v. Super. Ct. (1995) 33 Cal.App.4th 1680, 1682 [a demurrer does not lie to only a portion of a claim].)

Accordingly, the demurrer to the second cause of action is OVERRULED.

IV. Third Through Fifth Causes of Action

Defendants argue that “[t]he Court does not have jurisdiction over” the third, fourth, and fifth causes of action for violation of Corporations Code sections 25501, 25503, and 25504 because “Section 10.A of the parties’ Restricted Stock Purchase Agreement provides that ‘This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware …’.” (Ds’ Mem. Ps. & As., pp. 3:26-4:3.) Defendants assert that “[t]his choice-of-law clause precludes causes of action brought under California law.” (Id. at p. 4:3-4.)

In opposition, Plaintiff alleges that the choice of law provision in the RSPA is void and unenforceable because under Corporations Code section 25701. Plaintiff further alleges that the clause is unenforceable because the contract was procured by fraud.

Defendants’ argument in support of their demurrer is wholly conclusory. Defendants fail to cite any legal authority whatsoever in support of their premise that the subject choice of law provision is enforceable. Choice of law provisions are not always enforceable, and similar choice of law provisions have been rejected in the past. (See Hall v. Super. Ct. (1983) 150 CA3d 41 l, 418 [refusing to enforce the Nevada Choice of Law clause because the negotiations and offer of securities happened in California].) Notably, Plaintiff asserts that the choice of law provision is unenforceable. Legal analysis is required to determine whether a choice of law provision is enforceable and Defendants neither identify an applicable test for determining whether the provision is enforceable nor demonstrate that the subject provision is enforceable under the applicable test. (See Nedlloyd Lines B.V. v. Super. Ct. (1992) 3 Cal.4th 459 [stating a test for choice of law provisions].) Thus, Defendants’ argument on this topic does not adequately support their demurrer.

Accordingly, the demurrer to the third through fifth causes of action is OVERRULED.

V. Eighth Cause of Action

Defendants argue that the eighth cause of action for fraud fails to state a claim because Plaintiff cannot “plausibly” plead reliance on the alleged misrepresentations. (Ds’ Mem. Ps. & As., p. 4:9-12.) Defendants state that “Plaintiff cannot show that he relied on these alleged misrepresentations as he represented in Section 10.L of the
Restricted Stock Purchase Agreement that he was ‘relying solely on his … own counsel and advisors and not on any statements or representations of the Company or its agents for legal other advise with respect to the investment or transactions contemplated by this Agreement.’ ” (Id. at p. 4:19-23.) In support of its argument, Defendants cite various Delaware cases that purportedly provide that Delaware law enforces clauses that identify the specific information on which a party has relied and which foreclose reliance on other information.

Defendants’ argument is not well-taken. Defendants’ position—that the language of the RSPA precludes Plaintiff from alleging justifiable reliance on the alleged misrepresentations—is supported only by citation to Delaware case law. As stated above, Defendants fail to establish that Delaware law governs Plaintiff’s claims. Thus, Defendants have not shown that the language of the RSPA precludes Plaintiff from alleging justifiable reliance on the alleged misrepresentations.

Moreover, the issue of reliance is generally a question of fact resolved at trial. (See Elkind v. Woodward (1957) 152 Cal.App.2d 170, 179 [“Reliance is a question of fact.”].) “ ‘Except in the rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether a plaintiff’s reliance is reasonable is a question of fact.’ [Citations.]” (OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 864–65.) Here, Defendants have not demonstrated that the undisputed facts leave no room for a reasonable difference of opinion as to the question of Plaintiff’s reliance.

Accordingly, the demurrer to the eighth cause of action is OVERRULED.

VI. Ninth Cause of Action

Defendants argue that the ninth cause of action for conversion fails to state a claim because “generally money cannot be the subject of a conversion claim.” (Ds’ Mem. Ps. & As., p. 5:9-17.)

Defendants’ argument mischaracterizes the law. It is not the case that money cannot be the subject of a conversion claim. Instead, money may in fact be the subject of a conversion claim so long there is a specific, identifiable sum involved as opposed to a generalized claim of money. (See PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395; see also Vu v. California Commerce Club, Inc. (1997) 58 Cal.App.4th 229, 235.)

Here, Defendants do not attempt to show that the money that is the subject of the conversion claim is not a specific, identifiable sum. Notably, Plaintiff’s conversion claim specifically alleges that Plaintiff “only received a portion of his money and has yet to receive approximately $97,536.” (FAC, ¶ 62.) Defendants do not address this allegation.

Accordingly, the demurrer to the ninth cause of action is OVERRULED.

VII. Tenth Cause of Action

Defendants argue that the tenth cause of action for constructive trust fails to state a claim because a constructive trust is a remedy, not a cause of action.

Although a constructive trust is an equitable remedy, not a cause of action in and of itself, a claim seeking to impose a constructive trust may be brought imposed against one who wrongfully detains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act. (See Civ. Code, §§ 2223 and 2224; see also Habitat Trust for Wildlife, Inc. v. City of Rancho Cucamonga (2009) 175 Cal.App.4th 1306, 1332; PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 398; Meister v. Mensinger (2014) 230 Cal.App.4th 381, 399.) A cause of action seeking to impose a constructive trust will generally be allowed so long as it is predicated upon an underlying claim of fraud, breach of fiduciary duty, or other wrongful act entitling the plaintiff to some relief. (See Ehret v. Ichioka (1967) 247 Cal.App.2d 637, 642; see also Michaelian v. State Comp. Ins. Fund (1996) 50 Cal.App.4th 1093, 1114 [“A cause of action for constructive trust is not based on the establishment of a trust, but consists of fraud, breach of fiduciary duty or other act which entitles the plaintiff to some relief. Relief, in a proper case, may be to make the defendant a constructive trustee with a duty to transfer to the plaintiff. [Citation.] Pleading requirements are: (1) facts constituting the underlying cause of action, and (2) specific identifiable property to which defendant has title.”].)

Here, the eighth cause of action alleges a claim for fraud, which may properly constitute the underlying cause of action necessary to impose a constructive trust. Furthermore, the claim alleges that “[t]he res of the constructive trust is the portion of the purchase price Plaintiff has paid to Defendants but has not been returned,” i.e., “[t]he monies to be returned to Plaintiff is approximately $97,536.” (FAC, ¶ 64.) These allegations, when taken together, may support cause of action seeking to impose a constructive trust.

Accordingly, the demurrer to the tenth cause of action is OVERRULED.

VIII. Eleventh Cause of Action

Defendants argue that the eleventh cause of action for personal guarantee fails to state a claim because Plaintiff’s purchase of the Shares occurred in 2015; there are no allegations of consideration distinct from that of the original obligation; and, therefore, there was no consideration for the guarantee that was allegedly made at the end of 2016.

Civil Code section 2792 states, “Where a suretyship obligation is entered into at the same time with the original obligation, or with the acceptance of the latter by the creditor, and forms with that obligation a part of the consideration to him, no other consideration need exist. In all other cases there must be a consideration distinct from that of the original obligation.”

Here, the original obligation—the First Contract, the Second Contract, and the RSPA—was entered into in 2015. (See FAC, ¶¶ 11-15; see also RSPA, p. 1.) The alleged personal guarantee was allegedly entered into in May 2016. (Id. at ¶ 17.) Thus, the personal guarantee was not entered into at the same time as the original obligation. Consequently, there must generally be consideration distinct from that of the original obligation.

In the FAC, Plaintiff alleges that the alleged personal guarantee is written. (FAC, ¶¶ 17 and 68.) To the extent the alleged agreement is written, Plaintiff does not need to plead consideration. (See Civ. Code, § 1614 [“A written instrument is presumptive evidence of a consideration.”]; see also 4 Witkin, California Procedure (5th ed. 2008) Pleading, § 521 [“ ‘A written instrument is presumptive evidence of a consideration.’ (C.C. 1614.) The California courts have given this statute the effect of excusing the pleading of consideration for a written contract, whether it is set out verbatim or pleaded according to its legal effect. [Citations.] The rule applies even though the complaint does allege the consideration, i.e., the averment as to its existence and nature is surplusage and the complaint cannot be attacked on general demurrer for insufficiency of the consideration pleaded. [Citation.] The result is that the defense of lack of consideration for a written contract must be specially pleaded in the answer. [Citation.]”].)

Accordingly, the demurrer to the eleventh cause of action is OVERRULED.