Case Name: Universal Semiconductor, Inc. v. Schaumbond Group, Inc., et al.
Case No.: 16-CV-298820

Defendants Schaumbond Group, Inc. (“SGI”) and Bao Hua Zheng (“Zheng”) (collectively, “Defendants”) demur to the complaint (“Complaint”) filed by plaintiff Universal Semiconductor, Inc. (“Plaintiff” or “USI”).

This action arises out of a contract dispute. According to the allegations of the Complaint, on February 17, 2005, Plaintiff and SGI entered into a Strategic Partnership Agreement (“SP Agreement’) pursuant to which Plaintiff agreed to transfer its patented proprietary technology to SGI and SGI, in turn, agreed to pay Plaintiff the sum of $3 million (though a “Technology Transfer Agreement” (“TTA”)). (Complaint, ¶ 6 and Exhibit A.) The foregoing amount was to be payable in $1.5 million in cash, $1 million in SGI stock, and $500,000 in cash at the end of the transfer. (Id.) The first 10% of the combined consideration was to be paid upon the execution of the TTA. (Id.)

The parties entered into an additional agreement on March 26, 2005 entitled the “Alliance Agreement” pursuant to which Plaintiff and SGI agreed to perform various duties, including Plaintiff’s transfer of proprietary technology to SGI in accordance with the terms of the TTA. (Complaint, ¶ 7.) Plaintiff agreed to be a “strategic partner” with SGI in the promotion of semiconductor business in China and organization to Chinese facilities. (Id., Exhibit B.) Concurrently with the execution of the Alliance Agreement, Plaintiff and SGI entered into the TTA. (Id.) The SP Agreement, the Alliance Agreement and the TTA are collectively referred to as the “2005 Agreements.” (Id.)

Subsequently Zheng, who represented to Plaintiff that he was the President, CEO, and Chairman of SGI, paid Plaintiff $150,000 in cash upon execution of the TTA and the Alliance Agreement. (Complaint, ¶ 9.) Under the terms of the TTA, Plaintiff became a shareholder of SGI in the amount of $100,000 worth of stock. (Id.)

Plaintiff completed all milestones in its control in accordance with the agreements but did not receive any further payments from SGI. Furthermore, contrary to the 2005 Agreements, Plaintiff was never issued the stock to make him a shareholder of SGI. Plaintiff was ready, willing and able to complete its tasks under the TTA but was precluded from doing so because of SGI’s nonperformance. All told, Defendants are indebted to Plaintiff in the amount of $120,000 under the Alliance Agreement and $2,850,000 under the TTA. (Complaint, ¶ 14.)

On December 4, 2015, Vic Hejmadi (“Hejmadi”), Plaintiff’s president, requested that Zheng grant him his shareholder inspection rights to review SGI’s corporate records. (Complaint, ¶ 15 and Exhibit D.) On December 18, 2015, a response was provided in which it was stated that Plaintiff was not believed to be a shareholder of SGI. (Id., ¶ 16.) This directly contradicted the terms of the 2005 Agreements, as well as Zheng’s own conduct, which confirmed that Plaintiff was a shareholder of SGI. (Id., ¶¶ 17-19.) In another letter dated January 20, 2016 to Hejmadi, it was explained that all shares authorized in the SGI Articles of Incorporation were issued to Zheng. (Complaint, ¶ 25 and Exhibit F.) Plaintiff alleges that Defendants violated the 2005 Agreements.

Plaintiff filed its Complaint on August 19, 2016, asserting the following causes of action: (1) alter ego liability; (2) breach of contract- Alliance Agreement; (3) breach of contract- TTA; (4) breach of fiduciary duty- control person; (5) declaratory relief; (6) breach of fiduciary director- director; and (7) accounting.

On April 21, 2017, Defendants filed the instant demurrer to each of the seven causes of action asserted in the Complaint on the ground of failure to state facts sufficient to constitute a cause of action and to the first cause of action on the ground that there is another action pending between the parties on the same cause of action. (Code Civ. Proc., § 430.10, subds. (c) and (e).) Plaintiff opposes the motion.

I. Defendants’ Request for Judicial Notice

In support of their demurrer to the Complaint, Defendants request that the Court take judicial notice of the following items:

(1) Order Re: Defendants’ Demurrer to the Third Amended Complaint and Motion to Strike, filed November 23, 2015, in Universal Semiconductor Inc. v. Universal Semiconductor Technologies, Inc., et al., case no. 2014-1-CV-267721 (Exhibit 1);
(2) USI’s Fourth Amended Complaint filed on December 3, 2015, in Universal Semiconductor Inc. v. Universal Semiconductor Technologies, Inc., et al. (Exhibit 2);
(3) Order Re: Defendant’s Demurrer, Motion to Strike, and Special Motion to Strike to USI’s Fourth Amended Complaint, filed on March 11, 2016, in Universal Semiconductor Inc. v. Universal Semiconductor Technologies, Inc., et al. (Exhibit 3);
(4) Hejmadi’s Second Amended Complaint, filed on April 18, 2016, in Vic Hejmadi v. Universal Semiconductor Technologies, Inc., et al., case no. 2015-1-CV-282216 (Exhibit 4);
(5) USI’s Motion for Leave to File Fifth Amended Complaint filed on May 26, 2016, in Universal Semiconductor Inc. v. Toui Vo, et al., case no. 2014-1-CV-255548 (Exhibit 5);
(6) Order Re: USI’s Motion to File Fifth Amended Complaint, in case no. 2014-1-CV-265548, in Universal Semiconductor Inc. v. Toui Vo, et al (Exhibit 6); and
(7) USI’s Fifth Amended Complaint, filed July 18, 2016, in Universal Semiconductor Inc. v. Toui Vo, et al., case no. 2014-1-CV-255548 (Exhibit 7);
(8) Notice of Limited Scope Representation dated July 29, 2016, in case no. 2015-1-CV-282216 (Exhibit 8);
(9) Order Re: Defendant’s Demurrer and Motion to Strike to Hejmadi’s Second Amended Complaint, filed August 2, 2016 (Exhibit 9); and
(10) Hejmadi’s Third Amended Complaint, filed on August 5, 2016, in Universal Semiconductor Inc. v. Toui Vo, et al., case no. 2014-1-CV-255548 (Exhibit 10).

The foregoing items are all court records and therefore proper subjects of judicial notice pursuant to Evidence Code section 452, subdivision (d). Accordingly, Defendants’ request for judicial notice should be GRANTED.

II. Demurrer

In demurring to each of the seven causes of action asserted in the Complaint, Defendants make the following arguments: (1) Plaintiff’s Complaint is barred by the doctrine of res judicata; (2) Plaintiff fails to plead facts necessary to state each of its causes of action; and (3) the Complaint is barred by the theory of abatement.

A. Res Judicata

Defendants first demur to four of the claims in the Complaint on the ground that they are barred by the doctrine of res judicata. According to Defendants, Plaintiff’s second, third, fourth and sixth causes of action were all dismissed in a consolidated action involving claims arising out of this contractual dispute, and with the instant Complaint, Plaintiff is improperly attempting to re-litigate them.

1. Relevant Procedural Background

The relationship between USI and Defendants, among other parties, have given rise to numerous lawsuits. On May 20, 2014, an action was commenced by USI in this Court entitled Universal Semiconductor Inc. v. Tuoi Vo, case no. 2014-1-CV-265548 (“USI v. Vo”). On July 9, 2014, USI filed another action in this Court entitled Universal Semiconductor, Inc. v. Universal Semiconductor Technologies, Inc., et al., case no. 2014-1-CV-267721 (“USI v. USTI”). On June 23, 2015, a further action was commenced by Vic Hejmadi, President of USI and its sole shareholder, in this Court entitled Hejmadi v. Universal Semiconductor Technologies, Inc., et al., case no. 2015-1-CV-282216 (“Hejmadi v. USTI”). The foregoing actions were ultimately consolidated on April 5, 2016, with USI v. Vo designated as the lead case (the “Consolidated Action”).

Prior to the consolidation, on November 23, 2015, the Court sustained the defendants’ demurrer to USI’s claims for breach of contract- Alliance Agreement and breach of contract- Technology Transfer Agreement as alleged in the third amended complaint in USI v. USTI without leave to amend, reasoning that the dates and facts alleged therein established that the statute of limitations applicable to those claims ran by or before the end of 2009. (See Defendants’ Request for Judicial Notice (“RJN”), Exhibit 1 at 8:27-9: 9:3.) The Court expressly rejected USI’s assertions that the limitations period had yet to accrue due to the rule of delayed discovery or due to prospective promise, whereby a defendant makes an anticipatory breach and the plaintiff may then elect to wait to see if the anticipatory repudiation becomes an actual breach. (Id. at 7:18-8:4.) Leave was otherwise granted with respect to one of the other claims demurred to by the defendants.

On December 3, 2015, USI filed its fourth amended complaint in USI v. USTI and, in spite of Court’s prior order denying leave to amend with respect to the breach of contract claims predicated on the Alliance Agreement and the TTA, re-alleged these causes of action. Consequently, the defendants filed a demurrer and motion to strike with respect those causes of action, the latter of which was granted without leave to amend by the Court on March 10, 2016. (RJN, Exhibit 3.)

On May 26, 2016, USI filed a motion for leave to amend to file a fifth amended complaint against the defendants to request relief to allege claims based on the breach of contract- Alliance Agreement and breach of contract- TTA. (RJN, Exhibit 5.) On July 11, 2016, this motion was granted in part and denied in part, with the Court permitting USI to file a fifth amended complaint without adding the foregoing claims. (Id., Exhibit 6.)

On August 2, 2016, the Court sustained in part the defendants’ demurrer to Hejmadi’s second amended complaint without leave to amend, including with regard to a claim for breach of contract arising out of the 2005 Agreements. (RJN, Exhibit 9.) Shortly thereafter, the defendants removed the consolidated action to federal court. In February 2017, the action was remanded to state court where it is currently pending.

On August 19, 2016, USI filed the instant action against Defendants.

2. Analysis

The doctrine of res judicata, which may be raised on demurrer, has been described thusly:

Res judicata describes the preclusive effect of a final judgment on the merits. Res judicata, or claim preclusion, prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them … [Citation.] Under the doctrine of res judicata, if a plaintiff prevails in an action, the cause is merged into the judgment and may not be asserted in a subsequent lawsuit; a judgment for the defendant serves as a bar to further litigation of the same cause of action. A clear and predictable res judicata doctrine promotes judicial economy. Under this doctrine, all claims based on the same cause of action must be decided in a single suit; if not brought initially, they may not be raised at a later date. Res judicata precludes piecemeal litigation by splitting a single cause of action or relitigation of the same cause of action on a different legal theory or for different relief. [Citation.] A predictable doctrine of res judicata benefits both the parties and the courts because it seeks to curtail multiple litigation causing vexation and expense to the parties and wasted effort and expense in judicial administration.

(Lincoln Property Co. v. Travelers Indemnity Co. (2006) 137 Cal.App.4th 905, 912.)

The elements for applying the doctrine of res judicata to either an entire cause of action or one or more issues are the same: (1) a claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (2) the prior proceeding resulted in a final judgment on the merits; and (3) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding. (Brinton v. Bankers Pension Services, Inc. (1999) 76 Cal.App.4th 550, 556.) Defendants insist that all of the foregoing elements are present here with respect to the second, third, fourth and sixth causes of action given the rulings on demurrers to pleadings in the consolidated action; however, it is clear, given that the consolidated action is still pending, that the requisite final judgment on the merits is missing. Critically, “[a] judgment is not final so long as the action in which it is rendered is pending.” (Estate of Molera (1972) 23 Cal.App.3d 993, 998.) Though the consolidated action appears to have moved beyond the pleadings stage at this time, no trial date is presently set. Thus, because the action in which the court orders relied upon by Defendants in their res judicata argument has yet to be concluded, the doctrine does not apply to the claims in the Complaint at bar.

B. Failure to State Facts

Defendants next argue that Plaintiff’s second, third, fourth, sixth and seventh causes of action are deficient for failure to state facts. With respect to the first two of the aforementioned claims, Defendants assert that these breach of contract causes of action are time-barred.

A demurrer based on the statute of limitations lies where the dates alleged in the complaint shows “clearly and affirmatively” that the action is time-barred; it is not enough that the complaint shows that the action may be barred. (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403; United Western Medical Centers v. Superior Court (1996) 42 Cal.App.4th 500, 505.) The statute of limitations for an action based on a written contract is four years. (Code Civ. Proc., § 337.) “The traditional rule is that a statute of limitations begins to run upon the occurrence of the last element essential to the cause of action, even if the plaintiff is unaware of his cause of action.” (Mangini v. Aerojet-General Corp. (1991) 230 Cal.App.3d 1125, 1149-1150.)

In the Complaint, Plaintiff alleges that the parties entered into the Alliance Agreement and the TTA, the written agreements that are the subject of the second and third causes of action for breach of contract, on March 26, 2005. (Complaint, ¶¶ 6-7 and Exhibits B and C.) These contracts are attached to the Complaint as exhibits and on demurrer, courts “accept as true both facts alleged in the text of the complaint and facts appearing in exhibits attached to it.” (Mead v. Sanwa Bank of Cal. (1998) 61 Cal.App.4th 561, 567.) The Alliance Agreement incorporates the TTA by reference. (Id., Exhibit B at §2.1.)

Per the allegations of the Complaint, the TTA required SGI to pay $3 million for Plaintiff’s technologies, made up of a combination of cash and SGI stock. According to this agreement, this amount “is based on the scope of” the obligations under the TTA” and the Alliance Agreement.” (Complaint, Exhibit C at § 2.1.) The TTA provides that SGI will pay Plaintiff 10% of the contract price- or $300,000- upon “execution of this Agreement and the Alliance Agreement.” (Complaint, Exhibit C at §§ 2.1 & 3.3.1.) Plaintiff alleges that concurrently with the execution of the TTA in March 2005, Zheng gave Plaintiff only $150,000 of the $300,000 under the Alliance Agreement and the TTA Agreement and ultimately failed to pay the remaining $2,850,000 to it. (Id., ¶ 9.) Thus, the face of the Complaint therefore shows that the breach of the Alliance Agreement and the TTA occurred when Defendants failed to make the full initial payment due upon execution of the contracts in March 2005. (Id., Exhibits B and C.)

In opposition, Plaintiff insists that its breach of contract claims are timely due to application of the delayed discovery rule, with it having not discovered the operative breach until December 18, 2015. This assertion is not well taken because it is clearly alleged in the Complaint that Defendants failed to make the first necessary full payment under the Alliance Agreement and the TTA at the time expressly stated in the TTA- namely, its execution. These allegations demonstrate that the causes of action for breach of these two contracts had accrued because Defendants allegedly failed to pay the full amount due on the first due date. (See Romano v. Rockwell International, Inc. (1966) 14 Cal.4th 479, 488.) Having failed to receive the contracted amount at execution, Plaintiff clearly was aware of the breach in March 2005, and therefore the delayed discovery rule does not apply. (See, e.g., Gryczman v. 4550 Pico Partners, Ltd. (2003) 107 Cal.App.4th 1, 6-7 [discussing the delayed discovery rule].) Accordingly the second and third causes of action for breach of contract are time-barred. The Court finds that Plaintiff is not entitled to leave to amend these claims as it fails to demonstrate that amendment could cure the aforementioned defect. (See Camsi IV v. Hunter Technology Corp. (1991) 230 Cal.App.3d 1525, 1538-1539, 1541 [stating that when a demurrer is sustained on the ground that the claims are barred by the statute of limitations, absent a showing by the plaintiff that an amendment would likely cure the defect, a trial court may property sustain the demurrer without leave to amend].)

Defendants similarly argue that Plaintiff’s fifth cause of action for declaratory relief is time-barred because it is premised on the breaches of contract alleged in the second and third causes of action. With this claim, Plaintiff seeks a declaration that it is the owner of SGI as of March 26, 2005, and is therefore entitled to all rights thereunder. The statute of limitations governing a declaratory relief action is one applicable to an action on the underlying claim, i.e., the “period of limitations applicable to ordinary actions at law and suits in equity should be applied in like manner to actions for declaratory relief.” (Maguire v. Hibernia Sav. & Loan Soc. (1944) 23 Cal.2d 719, 734.) Here, the declaratory relief claim is essentially premised on the alleged breaches of the TTA and the Alliance Agreements, thus, the same limitations period applies and this cause of action is similarly time-barred.

Defendants next assert that Plaintiff’s fourth and sixth causes of action for breach of fiduciary duty (relative to Zheng’s duties as a control person and director) fail because while the claims are premised on Plaintiff’s allegation that it is a shareholder of SGI (and thus that a fiduciary duty is owed to it by Zheng as a stockholder), it “fails to provide any allegations that it is in fact a shareholder in the Complaint.” (Defendants’ MPA at 12:7-9.) Defendants note that Plaintiff alleges that it is a shareholder of SGI pursuant to the TTA, but insist that none of the language in that agreement supports that allegation. The TTA, they explain, actually refers to a separate agreement, the Stock Purchase Agreement, that is not attached to the Complaint and the language of the TTA, which states that $1 million of the $3 million contract price will be as an investment in SGI, does not actually state that that USI investment would make it a stockholder.

The foregoing argument by Defendants is unavailing because Plaintiff has made sufficient allegations of its status by pleading that it was given the status of shareholder upon the execution of the TTA and the Alliance Agreement, which provided that a portion of the contract price was for investment, as detailed in the Stock Purchase Agreement. (Complaint, ¶¶ 17, 18.) The reference to a stock purchase in the title of that agreement, even though this agreement is not attached to the operative pleading, and Plaintiff’s allegations that the $100,000 was for the purchase of stock, is sufficient to plead Plaintiff’s status as a stockholder of SGI. For the purposes of demurrer, Plaintiff’s factual allegations are accepted as true. (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213-214.)

Defendants insist these claims are also deficient because they are barred by the applicable statute of limitations, which is two or three years. (Civ. Code, §§ 338(4) and 339; see Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 865.) Although it is true that the allegations in these claims refer to a number of actions that took place in 2005, they are also predicated on events which occurred in the two to three years preceding the filing of Plaintiff’s Complaint, or for which no time period is identified. (See, e.g., Complaint, ¶¶ 63 [“In addition, Zheng has further breached his fiduciary duty to Plaintiff by not even recognizing Plaintiff as a shareholder of [SGI], as evidenced by Perkins [sic] letter of December 18, 2015”]; ¶¶ 77-79, 83-86.) A demurrer does not lie to only part of a cause of action (see Financial Corp. of America v. Wilburn (1987) 189 Cal.App.3d 764, 778); thus, if any part of Plaintiff’s breach of fiduciary claims are predicated on acts that occurred within the statute of limitations, they are not demurrable on the ground that they are time-barred. As such acts have been pleaded, these claims are not time-barred in their entirety.

Defendants counter that the allegation relating to a communication by counsel, Perkins, cannot support a breach of fiduciary duty claim due to the litigation privilege provided by Civil Code section 47. However, the alleged breach is not the conduct of the attorney, but rather Zheng’s alleged failure to recognize Plaintiff as a shareholder. (Complaint, ¶ 63.) The letter by counsel is cited as evidence of the foregoing, and whether or not that evidence is admissible is an entirely separate matter unrelated to whether this claim has been properly pleaded. Thus, Defendants’ argument is without merit.

Defendants also insist that the seventh cause of action for accounting fails because “all the other causes of action fail ….” As this is not the case, this argument is easily disposed of.

Based on the foregoing analysis, the Court finds that Plaintiff’s second and third causes of action for breach of contract and fifth for declaratory relief are time-barred, while the fourth and sixth, which are supported by sufficient facts, are not.

C. Plea in Abatement

Finally, Defendants assert that the first, second, third and fifth causes of action should be dismissed without leave to amend because these exact claims have been previously raised in the Consolidated Action currently pending before the Court. Given that the second, third and fifth causes of action are time-barred, the only claim remaining with respect to this argument is the first.

Code of Civil Procedure section 430.10, subdivision (c), provides that a party against whom a complaint has been filed may demur to the pleading on the ground that there is another action pending between the same parties on the same cause of action in the same court. In deciding whether two lawsuits involve the same cause of action, California courts apply the “primary right” theory. (Pitts v. City of Sacramento (2006) 138 Cal.App.4th 853, 856.) Under this theory, a single injury, or violation of a primary right, gives rise to a single cause of action, even if a particular injury entitles a plaintiff to multiple forms of relief under multiple theories of liability. (Hamilton v. Asbestos Corp. (2000) 22 Cal.4th 1127, 1145; Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co. (1993) 5 Cal.4th 854, 860.) For an action to be abated because of the pendency of another action, issues in the two actions must be substantially the same; and in determining whether such issues are substantially the same, the test applied is whether final judgment in one action could be pleaded as a bar to the second action. (Kamei v. Kumamoto (1967) 256 Cal.App.2d 381; Trickey v. City of Long Beach (1951) 101 Cal.App.2d 871.)

Defendants contend that the foregoing standard is met here, specifically with regard to Plaintiff’s first cause of action for “alter ego liability.” Upon review of the alter ego liability claim alleged in the instant Complaint and the alter ego liability claim asserted in the Consolidated Action (also as the first cause of action), particularly case no. 2014-1-CV-267721, Universal Semiconductor Inc. v. Universal Semiconductor Technologies, Inc., et al. (in which Plaintiffs and Defendants stand in the same relationship to each other), the Court agrees with Defendants that both fundamentally assert the same cause of action based on allegations that Zheng is the alter ego of SGI. Although there are some slight differences, it is clear that any sort of finding in the consolidated action as to whether or not Zheng is in fact the alter ego of SGI would have a preclusive effect in the instant action on that issue/cause of action.

Typically, as a result of this type of finding, the present action would be stayed pending the disposition of the earlier lawsuit. In this instance, however, the Court finds it to be more efficient and a better use of court recourses to consolidate this matter with USI v. Vo, USI v. USTI and Hejmadi v. USTI, i.e., the Consolidated Action, pursuant to its authority under Code of Civil Procedure section 1048, subdivision (a), rather than order it to be stayed. It is so ordered.

In accordance with the foregoing analysis, Defendants’ demurrer is SUSTAINED IN PART and OVERRULED IN PART. The demurrer on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND as to the second, third and fifth causes of action, and OVERRULED as to the fourth, sixth and seventh causes of action. The demurrer to the first cause of action on the ground that there is another action pending between the same parties on the same cause of action is OVERRULED.