Case Name: TX Trading v. Jack Xu, et al.
Case No.: 2016-CV-295764

Demurrer and Motion to Strike to the Second Amended Cross-Complaint by cross-defendants Edadoc USA, Inc., Hansheng Ke and Danning Jiang

Factual and Procedural Background

This is an action for fraud and breach of contract. Cross-Complainants Jack Xu (“Xu”) and Susan Teng (“Teng”) were principals of Chuangjia International Co., dba TX Trading & TX Solution (“TX Trading”), a company engaged in semiconductor PCB (printed circuit board) design with a principal place of business in Fremont, California. (See Second Amended Cross-Complaint [“SACC”] at ¶ 18.) TX Trading used to contract out design services to cross-defendant Shenzhen Co., a company located in Shenzhen, China. (Id. at ¶ 19.) Since 2011, Shenzhen Co. had been trying to develop its own business and market share in the United States. (Id. at ¶ 20.) Thus, Shenzhen Co. set up a subsidiary in California and was sending its Chinese employees to work in the United States on B1/B2 visas (visitor for business and tourist visas) without proper visas. (Ibid.)

After cross-defendant Hansheng Ke (“Ke”) received an L-1 visa, he approached Xu to discuss closer cooperation to set up a joint venture with TX Trading so both sides could secure better business. (See SACC at ¶ 23.) As a result, Xu, Teng, and Shenzhen Co. decided to form a joint venture, cross-defendant Edadoc USA, Inc. (“EUSA”). (Id. at ¶ 24.) On October 11, 2013, TX Trading and Shenzhen Co. signed a cooperation agreement (N. TX-EDACOC-001) in Chinese (“JV Agreement One”). (See SACC at ¶ 25, Exhibit A.) Under JV Agreement One, Shenzhen Co. would own 60% of EUSA and TX Trading would own 40%. (Id. at ¶ 26.)

On January 1, 2014, with the intent to defraud Xu and Teng and take control of EUSA, Shenzhen Co. engaged attorney and cross-defendant Danning Jiang (“Jiang”) to prepare a new joint venture agreement to replace JV Agreement One. (See SACC at ¶ 28.) During a meeting in January 2014, Jiang provided a Joint Venture Agreement (“JV Agreement Two”) to Xu and Teng. (Id. at ¶ 29.) Jiang represented that even though JV Agreement Two was written in English, the content of it was exactly the same as JV Agreement One, except that the signing party TX Trading was replaced by Xu and Teng personally. (Id. at ¶ 30.) However, Jiang did not disclose to Xu or Teng that he was not acting as their counsel and did not tell them to seek their own counsel before signing JV Agreement Two. (Id. at ¶ 31.) Relying on Jiang’s representation, Xu and Teng signed JV Agreement Two. (Id. at ¶ 33.) JV Agreement Two stipulated that there would be three shareholders of EUSA: Xu, Teng, and Shenzhen Co. (Id. at ¶ 34.)

On March 31, 2016, Shenzhen Co., through its CEO Changmao Tang (“Tang”), demanded early termination of the joint venture relationship between Shenzhen Co., Xu and Teng, without complying with the 90 day written notice requirement of JV Agreement Two. (See SACC at ¶ 44.) Shenzhen Co., through the advice of Jiang, demanded that Xu and Teng leave EUSA because Tang is the sole board director of EUSA and had absolute control over the corporation. (Id. at ¶ 45.) As a result, Shenzhen Co. refused to pay Xu and Teng the fair market value of their 40% ownership in EUSA and refused to return their original investment of $66,667. (Id. at ¶ 46.)

On March 31, 2016, TX Trading signed another Joint Venture Agreement in Chinese (“JV Agreement Three”), stipulating that TX Trading should withdraw from EUSA and be operated solely by Xu and Teng. (See SACC at ¶ 49, Exhibit D.) JV Agreement Three did not eliminate the ownership of Xu and Teng in EUSA or modify, amend or waive any provision of JV Agreement Two. (Id. at ¶ 50.) Therefore, JV Agreement Two remains a valid and binding contract between Xu, Teng, and Shenzhen Co. (Ibid.) As a result of cross-defendants’ misconduct, Xu and Teng have been wrongfully ousted from EUSA and have lost all the value of their investment in EUSA. (Id. at ¶ 51.)

On August 31, 2016, cross-complainants Xu, Teng, and TX Trading (collectively, “Cross-Complainants”) filed the operative SACC setting forth causes of action for: (1) breach of contract [against Shenzhen Co., Tang, and Ke]; (2) breach of fiduciary duty [against Shenzhen Co., Tang, and Ke]; (3) misrepresentation [against Shenzhen Co., Tang, Ke, and Jiang]; (4) dissolution of joint venture [against EUSA and Shenzhen Co.]; (5) declaratory relief [against Shenzhen Co.]; (6) accounting [against Shenzhen Co.]; and (7) unfair competition in violation of California Business and Professions Code Section 17200 [against Shenzhen Co., EUSA, Tang, Ke, and Jiang].

Currently before the Court is the demurrer and motion to strike to the SACC by cross-defendants EUSA, Ke, and Jiang (collectively, “Cross-Defendants”). Cross-Complainants filed written opposition to the demurrer. Cross-Defendants filed reply papers to both motions.

Demurrer to the SACC

Cross-Defendants argue that the first, second, third, and seventh causes of action fail to state a claim against Ke. (Code Civ. Proc., § 430.10, subd. (e).) Cross-Defendants also contend that the third and seventh causes of action fail to state a claim against Jiang.

Legal Standard

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. We also consider matters which may be judicially noticed.’” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

“The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. The court does not, however, assume the truth of contentions, deductions or conclusions of law. … [I]t is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 850.)

First Cause of Action: Breach of Contract (against cross-defendant Ke)

“To state a cause of action for breach of contract, a party must plead the existence of a contract, his or her performance of the contract or excuse for nonperformance, the defendant’s breach and resulting damage. [Citation.] If the action is based on alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written agreement must be attached and incorporated by reference. [Citation.]” (Harris v. Rudin, Richman & Appel, (1999) 74 Cal. App. 4th 299, 307.)

The first cause of action appears to be a breach of contract claim with respect to JV Agreement Two which was executed by the parties in January 2014. (See SACC at ¶¶ 29, 53.) Cross-Defendants argue that the breach of contract claim fails against cross-defendant Ke as he was not a party to the subject agreement. (See Clemens v. American Warranty Corp. (1987) 193 Cal.App.3d 444, 452 [“Under California law, only a signatory to a contract may be liable for any breach.”].) According to the SACC, Xu, Teng, and cross-defendant Shenzhen Co. were parties to the JV Agreement. (See SACC at ¶ 53.) However, Cross-Complainants attempt to bind Ke to the contract on an alter ego theory of liability as provided in paragraph 55 of the SACC. Cross-Defendants fail to challenge the adequacy of the alter-ego allegations with respect to Ke in support of the motion. In any event, the Court finds that Cross-Complainants have provided sufficient alter ego allegations to state a breach of contract claim against cross-defendant Ke. (Id. at ¶¶ 10-16; see Sonora Diamond Corp. v. Super. Ct. (2000) 83 Cal.App.4th 523, 538-539 [elements for alter ego liability].)

Accordingly, the demurrer to the first cause of action against cross-defendant Ke on the ground that it fails to state a claim is OVERRULED.

Second Cause of Action: Breach of Fiduciary Duty (against cross-defendant Ke)

“The elements of a cause of action for breach of fiduciary duty are; (1) existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage proximately caused by the breach.” (Gutierrez v. Giradi (2011) 194 Cal.App.4th 925, 932.)
Cross-Defendants correctly point out that the second cause of action fails to allege the existence of a fiduciary duty on the part of cross-defendant Ke. Cross-Complainants attempt to hold Ke liable for breach of fiduciary on an alter ego theory of liability for acts committed by Shenzhen Co. (See SACC at ¶ 59.) However, there are no facts to establish the existence of a fiduciary duty on the part of Shenzhen Co. Instead, the second cause of action only vaguely asserts that “[i]n a closely held company and as joint venture partners, the majority shareholder owes a fiduciary duty to the minority shareholder.” (Id. at ¶ 58.) This allegation is insufficient to demonstrate the existence of a fiduciary duty either on the part of Shenzhen Co. or cross-defendant Ke. To the extent that any such fiduciary duty exists on the part of cross-defendant Ke, Cross-Complainants should clarify in an amended pleading.

Therefore, the demurrer to the second cause of action against cross-defendant Ke on the ground that it fails to state a claim is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

Third Cause of Action: Misrepresentation (against cross-defendant Ke)

“The elements of fraud are (1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages.” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792 [citation omitted].)

“Fraud must be pleaded with specificity rather than with general and conclusory allegations. The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made.” (West v. JPMorgan Chase Bank, N.A., supra, 214 Cal.App.4th at p. 793 [citation and quotation marks omitted].)

Here, Cross-Complainants allege misrepresentations by cross-defendants Jiang and Tang on behalf of Shenzhen Co. (See SACC at ¶¶ 64-65.) Cross-Defendants correctly point out that there are no misrepresentations by cross-defendant Ke to support a fraud claim. Cross-Complainants concede this point in opposition and will be given an opportunity to amend. (See OPP at p. 4:1-2; see also Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 [it is an abuse of discretion to sustain a demurrer without leave to amend if there is any reasonable possibility that the defect can be cured by amendment].)

Therefore, the demurrer to the third cause of action against cross-defendant Ke on the ground that it fails to state a claim is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.
Seventh Cause of Action: Unfair Competition in Violation of California Business & Professions Code Section 17200 (against cross-defendant Ke)

“The UCL prohibits, and provides civil remedies for, unfair competition, which it defines as ‘any unlawful, unfair or fraudulent business act or practice.’ [Citation.] Its purpose ‘is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services.’ [Citations.]” (Kwikset Corp. v. Super. Court (2011) 51 Cal.4th 310, 320.)

According to the SACC, Cross-Complainants allege that cross-defendant Ke and others violated Corporations Code Section 212 by appointing only director as opposed to three directors which is required by statute. (See SACC at ¶¶ 83-84.) Cross-Complainants allege that this constitutes an unfair business practice in violation of section 17200. (Id. at ¶ 85.) Cross-Defendants dispute whether this violation under the Corporations Code constitutes an unfair business practice. This argument lacks merit as the unfair competition law’s scope is broad and its coverage is “sweeping, embracing anything that can be properly be called a business practice and that at the same time is forbidden by law.” (See Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.) Finally, to the extent that Cross-Defendants dispute the prayer for monetary damages in the UCL claim, such an argument is procedurally improper as it must be addressed by motion to strike, not demurrer. (See Caliber Bodyworks, Inc. v. Super Ct. (2005) 134 Cal.App.4th 365, 385 [“The appropriate procedural device for challenging a portion of a cause of action seeking an improper remedy is a motion to strike.”].)

Accordingly, the demurrer to the seventh cause of action against cross-defendant Ke on the ground that it fails to state a claim is OVERRULED.

Third Cause of Action: Misrepresentation (against cross-defendant Jiang)

With respect to the third cause of action, Cross-Defendants argue that there is no claim for misrepresentation against cross-defendant Jiang as Cross-Complainants fail to allege actual reliance on any of Jiang’s misrepresentations or that such representations were a substantial factor in causing harm to them. These arguments lack merit as Cross-Complainants allege that Xu and Teng reasonably relied such representations as Jiang was a licensed attorney believed to be competent, honest, and ethical and thereafter were damaged in amount of at least $2 million dollars. (See SACC at ¶¶ 67-68.) Moreover, reasonable reliance is generally a factual issue that cannot be resolved on demurrer. (See Thrifty Payless, Inc. v. Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1239 [“Except in the rare case where the undisputed facts leave no room for reasonable difference of opinion, the question of whether a plaintiff’s reliance is reasonable is a question of fact.”].) Also, the fact that Cross-Defendants find the fraud allegations against Jiang to be unlikely or improbable do not provide a basis for demurrer. (See Kerivan v. Title Ins. & Trust Co. (1983) 147 Cal.App.3d 225, 229 [“No matter how unlikely or improbable, plaintiff’s allegations must be accepted as true for the purpose of ruling on the demurrer.”].) Finally, Cross-Defendants refer to the management power given under JV Agreement Two and the number of officer titles. Neither argument appears to adequately challenge the fraud claim for purposes of demurrer.

Accordingly, the demurrer to the seventh cause of action against cross-defendant Jiang on the ground that it fails to state a claim is OVERRULED.

Seventh Cause of Action: Unfair Competition in Violation of California Business & Professions Code Section 17200 (against cross-defendant Jiang)

Cross-Defendants incorporate the same arguments that were raised on demurrer to the seventh cause of action with respect to cross-defendant Ke. For the reasons stated above, the demurrer to the seventh cause of action against cross-defendant Jiang on the ground that it fails to state a claim is OVERRULED.

Motion to Strike Portions of the SACC

Cross-Defendants move to strike the following allegations from the SACC: (1) “As a direct consequence, Xu and Teng have been damaged in an amount of at least $2 million. The exact amount shall be determined according to proof at trial.” (SACC at ¶ 66); (2) “Attorney’s fees” (SACC at p. 16:8); and (3) Exhibits A and D attached to the SACC. No opposition was filed to the motion which appears to be well taken.

Therefore, the motion to strike portions of the SACC is GRANTED WITHOUT LEAVE TO AMEND.