2015-00187051-CU-BC

Harry D. McGovern vs. Jim Carter

Nature of Proceeding: Hearing on Demurrer to the 1st Amended Cross-Complaint (Joey and

Filed By: Fredkin, Mark B.

Cross-defendant Harry D. McGovern’s Demurrer to the 1st Amended Cross-Complaint of Joey and Jeff Carter (“Jeff and Joe”) is ruled on as follows:

McGovern’s Request for Judicial Notice is granted as to Ex. 1. The motion is granted as to Ex. 2 as to the date of the letter and its existence but is denied as to the truth of the contents. Although the demand for action to the board is referenced in the FACC,

the letter itself is subject to differing interpretations as to who was responsible for the actions taken in directing the payments for estimated tax liabilities. A matter ordinarily is subject to judicial notice only if the matter is reasonably beyond dispute. (Post v.

Prati (1979) 90 Cal.App.3d 626, 633.) Although the existence of a document may be judicially noticeable, the truth of statements contained in the document and its proper interpretation are not subject to judicial notice if those matters are reasonably disputable. (StorMedia, Inc. v. Super. Ct. (1999) 20 Cal.4th 449, 457, fn. 9.) Here, whether the actions were orchestrated by McGovern and Coppini by the accountant are subject to a factual dispute.

This action arises from disputes between the shareholders and directors of M.C.M. Construction, Inc. (“MCM”) a privately-held construction company formed in 1973. The five shareholders are James and Judith Carter, Joey Carter, Jeffrey Carter, Harry McGovern, and James Coppini. Jeff and Joey became shareholders of MCM in 2011. (FACC ¶2)

The Court sustained with leave to amend the demurrer to the original cross complaint as to the Corporations Code section 316 and the conversion causes of action. The court ruled that no cause of action was stated under Corporations Code Section 316 because that section applies only to corporate actions and the cross-complaint alleged that the payments were approved by McGovern and Coppini without securing the approval of either the Board of Directors or cross-complainants. The demurrer to the conversion claim was sustained on the basis that a delay in paying a debt owed does not amount to conversion as a matter of law. The Court previously overruled the demurrer to the causes of action for breach of fiduciary duty and accounting. (See ruling on demurrer to the Cross-complaint, Minute order September 19, 2018.)

The FACC alleges two corporate derivative claims on behalf of MCM : A statutory claim under Corporations Code § 316 (1st cause of action) and a derivative claim for breach of fiduciary duty. (4th cause of action)). The direct claims are breach of fiduciary, conversion, and accounting. (2nd, 3rd and 5th causes of action.)

Specifically, they allege McGovern and Coppini have caused and/or approved MCM … to make payments from funds held by MCM … for McGovern and Coppini’s estimated tax liabilit[ies] derived from their income from MCM, and other sources unrelated to MCM.” (FACC ¶ 9) The estimated tax payments were allegedly made “without securing the formal approval by resolution of… the Board of Directors of MCM ….” (FACC ¶ 9) McGovern and Coppini did not “properly characteriz[e] the

payments as loan transactions” and they paid no interest to MCM on the distributions received. (FACC ¶9) McGovern and Coppini also caused MCM “to make a series of what have been characterized as purported ‘equalizing’ distributions of income to the other stockholders of MCM

… based on the aforementioned [tax] payments … (FACC ¶ 11) The tax payments and
equalizing distributions “diminished” the funds “that would have otherwise been
available to MCM … for its operational needs (FACC ¶ 12) The “withdrawal from
MCM … accounts to make estimated tax liability payments for McGovern and

Coppini … were without consideration” and amounted to “illegal distributions.” (FACC ¶

23) McGovern and Coppini are also alleged to have intentionally and maliciously orchestrated a secret unwarranted, unnecessary, substantial and material delay of “a sum certain of funds” owed to Joey and Jeff by MCM. (FACC ¶¶13, 14) The “collective actions” of McGovern and Coppini were “conceal[ed] … from other shareholders of MCM (FACC ¶ 19)

The original CC specifically alleged that these transactions were undertaken “without securing the approval of… the Board of Directors of MCM.” (CC 18) The FACC modifies this language by stating that the transactions were not “formally” approved by “resolution.” (FACC ¶19) However, it is alleged that since McGovern and Coppini were two of the three board members, their actions were corporate acts.

The FACC also alleges that on September 27, 2018, Cross-complainants informed the Board of Directors of MCM Corporation in writing of the ultimate facts of this cause of action for breach of fiduciary duty and requested that the Board of Directors take such action that is necessary for the corporation to prosecute the cause of action against Cross-defendants. The Request for Judicial Notice contains a letter dated September 27, 2018 from Jeff and Joey, joining in and attaching the letter dated September 26, 2018 from their parents Jim and Judith to the Board of Directors of MCM. Jeff and Joey allege that as of the filing of this First Amended Cross-Complaint (October 1, 2018) the Board of Directors has not taken action to prosecute this matter. (FACC ¶ 43)

Pleadings in California are construed liberally. The only issue that can be raised by

demurrer is whether the facts, as pled, state a valid cause of action – not whether the
allegations are true. (Serrano v. Priest (1971) 5 Cal.3d 584, 591.) “A demurrer tests
the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies
only where the defects appear on the face of the pleading or are judicially
noticed.” (Code Civ. Proc, §§ 430.30, 430.70.) The only issue involved in a demurrer

hearing is whether the complaint, as it stands, unconnected with extraneous matters,
states a cause of action.” (McKenney v. Purepac Pharm. Co. (2008) 162 Cal.App.4th
72, 79; Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) A judge must overrule a
demurrer if the allegations of the complaint adequately state a cause of action under
any legal theory. (Cellular Plus v. Superior Court (1979) 14 Cal.App.4th 1224,1231.)
Thus, a complaint survives a demurrer if it states facts disclosing some right to relief. (
Longshore v. County of Ventura (1979) 25 Cal.3d 14, 22; Parada v. City of Colton
(1994) 24 Cal.App.4th 356, 362.) In testing a pleading against a demurrer the facts
alleged in the pleading are deemed to be true, however improbable they may be. (Del
E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604.)

Statutory causes of action such as the claim under the corporations require greater specificity in pleading. Like claims for fraud, “statutory causes of action must be pleaded with particularity.” Covenant Care, Inc. v Superior Court (2004) 32 Cal.4th 771,

790. This rule requires the pleader to “set forth facts in his complaint sufficiently detailed and specific to support an inference that each of the statutory elements of liability is satisfied. General allegations are regarded as inadequate.” Mittenhuber v City of Redondo Beach (1983) 142 Cal.App.3d 1, 5.

1st cause of action Violation of Corporations Code 315, 316, 316(c)

The demurrer is sustained without leave to amend for failure to state facts sufficient to constitute a cause of action. Despite leave to amend, this claim is now more confusing and contradictory than before.

Section 316 of the Corporations Code provides that “subject to Section 309” (the business judgment rule), “directors of a corporation who approve any of the following corporate actions shall be jointly and severally liable to the corporation 316(a).

(1) the making of any distribution to its shareholders to the extent that it is contrary to the provisions of Sections 500 to 503, inclusive;

(2) The distribution of assets to shareholders after dissolution proceedings … without paying or adequately providing for … liabilities …;
(3) The making of any loan or guaranty contrary to Section 315.”

Section 316(c) authorizes a shareholder to file suit on behalf of the corporation to challenge the above types of “corporate action” without having to satisfy the demand requirements of Section 800. (Corp. Code § 316(c)

Jeff and Joey contend that their allegations support a cause of action under subdivision (3) above, that cross-defendants made a loan or guaranty contrary to section 315. “A loan … is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount “with or without an additional sum agreed upon for its use.” (Milana v. Credit Discount Co. (1945) 27 Cal.2d 335, 339. Despite the earlier ruling emphasizing the necessity of pleading a statutory claim with specificity, the FACC does not allege facts to support the conclusion that the transaction was a loan. It does not allege how the estimated tax payments and the corresponding equalizing distributions were “illegal distributions” (FACC ¶23) nor how they could qualify as “loans” when they were made “without consideration” (Ibid.). If the payments were loans they would not be made without consideration.

Other allegations that negate a “loan” transaction are that equalizing distributions that were “owed by MCM” to the Carter Sons were triggered as a result of estimated tax payments. (FACC ¶13, 14) Equalizing distributions to other shareholders are required only if the estimated tax payments are themselves are shareholder distributions. If they were loans, there would be no “equalizing distributions” or other debts owed to other shareholders. Jeff and Joey have failed to plead facts that the estimated tax payments were made as a loan in order to come within the requirements of CCP 315 and 316.

The FACC’s allegations regarding whether the transactions qualified as “corporate action” within the meaning of Section 316 are also deficient. The prior cross-complaint specifically alleged that these transactions were undertaken “without securing the approval of … the Board of Directors of MCM” (CC 18), which allegations prompted the Court to sustain the demurrer for lack of “corporate action.” The FACC, without explanation, changes these allegations by stating that the transactions were undertaken “without securing the formal approval by resolution of… the Board of Directors of MCM.” (FACC 19) The allegation that the transactions were “not formally approved” is not sufficient to allege that they were approved as a corporate action. All unauthorized transactions are “not formally approved.” Thus, the change does not allege “corporate action,” particularly under the heightened pleading requirements applicable to a claim under Section 316.

Moreover, Corp Code 316(g) provides: “For the purposes of subdivisions (a) and (c), “approval by a majority of the shareholders entitled to act” means either (1) written consent of a majority of the outstanding shares without counting as outstanding or as consenting any shares owned by any officer or director eligible to participate in the plan or transaction that is subject to this approval, (2) the affirmative vote of a majority of the shares present and voting at a duly held meeting at which a quorum is otherwise present, without counting for purposes of the vote as either present or voting any shares owned by any officer or director eligible to participate in the

plan or transaction that is subject to the approval, or (3) the unanimous vote or written consent of the shareholders.” Thus Jeff and Joe cannot rely on the votes of McGovern and Coppini to make their actions “a corporate act” because their votes cannot be counted. Their unilateral actions allegedly done without knowledge of the rest of the shareholders could not have constituted an approved by a majority of the shareholders entitled to act thereon because they were not entitled to act thereon.

Therefore, the allegation that the transaction was approved and that it was a “loan” are disregarded as conclusionary. On demurrer, a complaint’s factual allegations are deemed true, but a “court does not however, assume the truth of contentions, deductions, or conclusions of law.” Aubry v Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967. The Court disregards inconsistent pleadings in the absence of a reasonable explanation. Failure to provide such an explanation of the inconsistent “not approved” and later language intended to infer “approval” results in the court disregarding the inconsistent allegations and to read into the amended complaint the allegations of the superseded complaint.” (Tindell v. Murphy (2018) 22 Cal.App.5th 1239, 1248; Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 425) .

2nd cause of action Breach of Fiduciary Duty (direct cause of action)

The demurrer is overruled. The Court previously overruled the demurrer to this cause of action in the original Cross-Complaint. In any event, Cross-defendants contend the business judgment rule precludes this cause of action. Section 309, the business judgment rule, “establishes a presumption that directors’ decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest.” (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1045) The rule “protect[s] well -meaning directors who are misinformed, misguided, and honestly mistaken.” (FDIC v. Castetter (1999) 184 F.3d 1040, 1046). However, as in this case, this defense is rarely apparent on the face of a pleading and is not a basis for demurrer given the allegations of the FACC and the factual disputes arising therefrom.

3rd cause of action Conversion (direct)

The demurrer is overruled. The Court has now determined, after having previously sustained the demurrer to this cause of action, that a cause of action is stated based on the interference with the right to possess the distributions.

Conversion is the wrongful exercise of dominion over the personal property of another. (Fremont Indem. Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.) “The basic elements of the tort are (1) the plaintiffs ownership or right to possession of personal property; (2) the defendant’s disposition of the property in a manner that is inconsistent with the plaintiffs property rights; and (3) resulting damages.” (Ibid.) “To establish a conversion, plaintiff must establish an actual interference with his ownership or right of possession. (Citation) To do so, the plaintiff must have “either ownership and the right of possession or actual possession [of the property] at the time of the alleged conversion thereof” (Citation.) “[A] mere contractual right of payment, without more, will not suffice” to support a claim for conversion.” (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 232-233. The foundation for a conversion claim “ ‘rests upon the unwarranted interference by defendant with the dominion over the property of the plaintiff from which injury to the latter results.’ ” Burlesci v. Petersen, (1998) 68 Cal. App. 4th 1062, 1066.

The moving papers contend that delayed payment of the equalizing payments owed by

MCM cannot form the basis of the conversion claim. In opposition, Jeff and Joe
contend that McGovern’s “orchestration” of the delay in payment of the “sum
certain” [equalizing payments] is a different act separate and apart from the equalizing
distributions. However, they later state that the sums certain were the distributions that
were eventually paid. McGovern is alleged to have intentionally caused or authorized
MCM Construction to unnecessarily, substantially, and materially delay the payment or
distribution of the “sum certain,” substantially interfering with they right to use and
possession of these funds. (FACC 35)

Cross-defendants contend there can be no conversion by McGovern and Coppini of money owed by MCM. They contend an unpaid “debt” cannot serve as the basis for a conversion. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 232-233)

In opposition, Jeff and Joey contend it is sufficient to allege that McGovern substantially interfered with Jeff and Joey’s possession of and right to use the funds which would have been distributed earlier but for McGovern’s interference. Upon liberal reading, this is not a “debt.” They allege that McGovern did not actually convert the money owed by MCM but that McGovern’s actions as alleged, caused delay of the distributions that were eventually paid to them. “Money may be the subject of conversion if the claim involves a specific, identifiable sum; it is not necessary that each coin or bill be earmarked.” (Welco Electronics, Inc. v. Mora (2014) 223 Cal.App.4th 202, 209.)

The Reply does not address the arguments made in the opposition. The Court finds that for pleading purposes Jeff and Joe have adequately alleged an interference by McGovern to their right to possess the funds at an earlier time, resulting in ascertainable damages from failure to timely receive the distributions.

4th cause of action Breach of Fiduciary Duty (derivative)

The demurrer is sustained with leave to amend for failure to state facts sufficient to constitute a cause of action.

Cross-defendants allegedly breached their fiduciary duty owed to MCM and Cross-complainants by authorizing distributions to pay cross-defendants’ tax liability for both MCM Construction and non MCM Construction related income. These distributions in turn led to equalizing distributions to the other shareholders, damaging MCM.

“[I]n order for a shareholder to bring a derivative suit on behalf of the corporation, he must allege ‘with particularity’ either (1) that he made a demand on the board of directors, which the board wrongfully refused, or (2) that such a demand would have been futile.” (Shields v. Singleton, supra, 15 Cal.App.4th at 1616-1617; Corp. Code, § 800(b)) A shareholder who fails to comply with Section 800 lacks standing to pursue the derivative claim. (Nelson v. Anderson (1999) 72 Cal.App.4th 111, 127; Bader v. Anderson (2009) 179 Cal.App.4th 775, 793)

Cross-defendants contend Jeff and Joey’s derivative claim fails for lack of any allegation showing compliance with the demand requirement of Section 800 of the Corporation Code. The FACC alleges that the Carter Sons made a board demand on

September 27, 2018 and the demand has not yet been acted upon as of October 1, 2018 when the FACC was filed. (FACC ¶43) The fact that the Board had not acted on the demand within three days of making it is insufficient to allege refusal or futility of the demand.

However, the court rejects the argument that no wrongdoing is alleged. The fact that other shareholders received equalizing distributions after cross-defendants received estimated tax payments from MCM on their non-MCM income does not render the transactions legal.

5th cause of action Accounting (derivative)

The demurrer is sustained with leave to amend.

Jeff and Joey’s derivative accounting claim fails for lack of any allegation showing compliance with the demand requirement of Section 800 of the Corporation Code. The FACC alleges that Jeff and Joey made a board demand on September 27, 2018 and the demand has not yet been acted upon at the time the FACC was filed three days later. (FACC ¶43) The fact that the Board had not acted on the demand within three days of making it is insufficient. There is no allegation that the demand was “wrongfully refused” – a basic requirement for derivative standing under Section 800, or that such demand would be futile. (Shields v. Singleton (1993) 15 Cal.App.4th 1611, 1616-1617)

Where leave to amend is granted, cross-complainants may file and serve a 2nd amended cross-complaint within 30 days. Response to be filed and served within 30 days of service of the Second Amended Cross-complaint, 35 days if served by mail.

The minute order is effective immediately. No formal order pursuant to CRC Rule 3.1312 or further notice is required.

Item 4 2015-00187051-CU-BC

Harry D. McGovern vs. Jim Carter

Nature of Proceeding: Hearing on Demurrer to the 4th Amended Complaint (James and Judith

Filed By: Fredkin, Mark B.

Cross-defendant Harry D. McGovern’s Demurrer to the 4th Amended Cross-Complaint (“4ACC”) of James and Judith Carter (“the Carters”) is ruled on as follows:

McGovern’s Request for Judicial Notice is granted.

The Court sustained the demurrer to the 2nd amended cross complaint on September 19, 2018. Thereafter, the Carters filed a 3rd amended cross-complaint and later an Amendment thereto. By stipulation of the parties, the 4ACC was filed to combine the two pleadings.

The Carters alleged in the SACC that, between 2007 and 2016, McGovern and James Coppini “diverted” money from MCM by allegedly causing MCM, without authorization, to pay estimated taxes on income they received from sources outside of MCM (the “Tax Diversion Claims”) The Court sustained the demurrer to the 2nd amended cross-

complaint Tax Diversion Claims finding (1) the Carters lacked standing because they failed to comply with the demand requirement under Corporations Code § 800; (2) the allegation that the estimated tax payments were “unauthorized” meant that there was no “corporate action” and therefore no claim under Section 316 of the Corporations Code; and (3) the Carters did not plead a Section 316 claim with particularly as required for statutory causes of action. (See, Ex. A, Court’s Order on demurrer to the

SACC
[“Order”] pp. 2-4)

Pleadings in California are construed liberally. The only issue that can be raised by

demurrer is whether the facts, as pled, state a valid cause of action – not whether the
allegations are true. (Serrano v. Priest (1971) 5 Cal.3d 584, 591.) “A demurrer tests
the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies

only where the defects appear on the face of the pleading or are judicially
noticed.” (Code Civ. Proc, §§ 430.30, 430.70.) The only issue involved in a demurrer
hearing is whether the complaint, as it stands, unconnected with extraneous matters,
states a cause of action.” (McKenney v. Purepac Pharm. Co. (2008) 162 Cal.App.4th
72, 79; Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) A judge must overrule a

demurrer if the allegations of the complaint adequately state a cause of action under
any legal theory. (Cellular Plus v. Superior Court (1979) 14 Cal.App.4th 1224,1231.)
Thus, a complaint survives a demurrer if it states facts disclosing some right to relief. (
Longshore v. County of Ventura (1979) 25 Cal.3d 14,22; Parada v. City of Colton
(1994) 24 Cal.App.4th 356, 362.) In testing a pleading against a demurrer the facts
alleged in the pleading are deemed to be true, however improbable they may be. (Del

E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604.)

However, statutory causes of action such as the claim under the corporations require greater specificity in pleading. Like claims for fraud, “statutory causes of action must be pleaded with particularity.” Covenant Care, Inc. v Superior Court (2004) 32 Cal.4th 771, 790. This rule requires the pleader to “set forth facts in his complaint sufficiently detailed and specific to support an inference that each of the statutory elements of liability is satisfied. General allegations are regarded as inadequate.” Mittenhuber v City of Redondo Beach (1983) 142 Cal.App.3d 1, 5.

The 4ACC alleges in pertinent part as follows:

“Since at least 2007, it has been MCM’s policy and practice to distribute to its shareholders amounts sufficient to pay the shareholders’ tax liability on the Company’s taxable income.” (4ACC ¶8) This policy was implemented by MCM’s outside accountants, Gallina, and MCM’s corporate controllers, Troy Peake and later Al Anderson. (Id. ¶¶ 39, 43.3) The MCM Controllers provided Gallina with information about MCM’s estimated income (Id. ¶43.1) for which the shareholders were directly taxed due to MCM’s status as an S Corporation. (Id. ¶8)
Gallina, which also prepared personal tax returns for the MCM shareholders (including the Carters before 2007), had or obtained from McGovern and Coppini information about their income outside of MCM. (Id. ¶43.2) Gallina would then determine the estimated quarterly tax liabilities of McGovern and Coppini based on all sources of their income and submit a request for payment to MCM’s Controllers. (Id. ¶¶43.2, 43.3, 43.4) MCM’s Controllers then “caused the payment to be made as requested without any review by, or interaction with, any other member of the Board, other officer or other member of management.” (Id. ¶43.5)

The 4ACC specifically alleges that these payments were made “without obtaining approval of such disbursements by the Board as authorized distributions or dividends (Id. ¶¶41; 43.6 [“the estimated tax liability payments … were made … without the knowledge or approval of MCM or its Board.”)

The 4ACC alleges that “[b]ecause allocations and distributions of MCM income: must be in direct proportion to the shareholders[‘] respective ownership interests … each estimated tax liability payment … triggered a so-called ‘equalizing distribution’ to each MCM shareholder proportionate to his/her respective shares of ownership.” (4ACC ¶44) “The ‘equalizing distribution’ payments were made automatically by MCM’s accounting forces” (Gallina and MCM’s Controllers) and “without any Board meeting.” (Id. ¶44.1) Every time MCM made an estimated tax payment to McGovern and Coppini, MCM also distributed cash to the Carters. According to the 4ACC, the Carters received more than $14.5 million in equalizing distributions in response to the estimated tax payments on non-MCM income to McGovern and Coppini. (Id. ¶44.3; Ex. B to Ex. 11) The 4ACC states that these $14.5 million in payments to the Carters were made “unwittingly” (Id. ¶44.1), even though they were made at the direction of MCM’s Controllers and paid directly to the Carters. The 4ACC asserts that these payments injured MCM (Id. ¶44.1)

1st cause of action Declaratory Relief

The demurrer is overruled.

Cross-defendants contend that this cause of action fails to state facts sufficient to constitute a cause of action and fails to name indispensable parties. They further allege this claim was included without leave of court.

The Court previously sustained the demurrer to the 13th cause of action for Declaratory Relief with leave to amend. Paragraph 32 of the SACC had outlined many alleged wrongdoings of McGovern followed by an allegation that the Carters stated that only the diversion claims were the basis of liability against McGovern. . This “disavowal” langaguge, as characterized by McGovern, was in response to a pending anti-SLAPP motion contending litigation activity was protected. The current Declaratory Relief is not based on alleged wrongs of McGovern, and no monetary relief is sought in this cause of action. Rather it seeks determination of the validity of validity of various corporate actions that have taken place over the years. The Carters allege they have nominally named all shareholders and the corporation to this cause of action which seeks a declaration as to ownership interests and the validity of a number of elections and sales of shares.

The Court finds that the current cause of action is within the scope of the previous leave to amend. The Carters are entitled to seek a declaration of their rights as majority shareholders of MCM.

2nd cause of action Corporations Code section 315

The demurrer is sustained without leave to amend for failure to state facts sufficient to constitute a cause of action.

Cross-defendants contend this cause of action is not pled with the requisite specificity, that it fails to overcome the presumption of the business judgment rule, fails to identify

whether the loan contract or contracts upon which the cross-complaint is based are oral, written or implied, and fails to attach the purported loan contracts and fails to allege their terms.

Section 316 of the Corporations Code provides that “subject to Section 309” (the business judgment rule), “directors of a corporation who approve any of the following corporate actions shall be jointly and severally liable to the corporation 316(a).

(1) the making of any distribution to its shareholders to the extent that it is contrary to the provisions of Sections 500 to 503, inclusive;

(2) The distribution of assets to shareholders after dissolution proceedings … without paying or adequately providing for … liabilities …;

(3) The making of any loan or guaranty contrary to Section 315.”

Section 316(c) authorizes a shareholder to file suit on behalf of the corporation to challenge the above types of “corporate action” without having to satisfy the demand requirements of Section 800. (Corp. Code § 316(c)

McGovern contends, and the Court agrees, agrees, that the Carters have not alleged any of the three predicate acts under Section 316 with the required specificity for a statutory cause of action, despite having the opportunity to amend.

“A loan … is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount “with or without an additional sum agreed upon for its use.” (Milana v. Credit Discount Co. (1945) 27 Cal.2d 335, 339. Despite the earlier ruling emphasizing the necessity of pleading a statutory claim with specificity, the 4ACC does not allege that the transaction was a loan, given the contradictory allegations. It does not allege the terms of the loan, nor whether it was written, oral or implied in conduct. A loan is inconsistent with a transaction that was made “without consideration” as is alleged. If the payments were loans they would not be made without consideration. Other allegations that negate a “loan” transaction are that equalizing distributions that were “owed by MCM” to the other shareholders were triggered as a result of estimated tax payments. If the payments were loans, there would be no “equalizing distributions” or other debts owed to other shareholders. Thus, the Carters have failed to plead facts that the estimated tax payments were constituted any of the three types of corporate acts enumerated in CCP 315 and 316.

It appears that the Carters are relying on an alleged violation of Corporations Code sections 500-503 in the making of illegal distributions to allege liability under the corporations code. However, no facts are alleged to support the claim that the estimated tax payments and equalizing distributions were in violation of Sections 500 to 503.

The 4ACC’s allegations regarding whether the transactions qualified as “corporate action” within the meaning of Section 315 are also deficient.

The 4ACC specifically alleges that these payments were made “without obtaining approval of such disbursements by the Board as authorized distributions or dividends (Id. ¶¶41; 43.6 [“the estimated tax liability payments … were made … without the knowledge or approval of MCM or its Board.”) Therefore, they have not alleged the required corporate action.

Therefore, the allegation are insufficient to bring the alleged conduct of cross-defendants within the parameters of Corporations Code 316. On demurrer, a complaint’s factual allegations are deemed true, but a “court does not however, assume the truth of contentions, deductions, or conclusions of law.” Aubry v Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967. The Court disregards inconsistent pleadings in the absence of a reasonable explanation. Failure to provide such an explanation of the inconsistent “not approved” and later language intended to infer “approval” results in the court disregarding the inconsistent allegations and to read into the amended complaint the allegations of the superseded complaint.” (Tindell v. Murphy (2018) 22 Cal.App.5th 1239, 1248; Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 425) .

As the Carters have failed to plead the requisite facts to allege a statutory violation, the Court need not reach the arguments that MCM was not harmed or that the Carters are not fair and adequate representatives of MCM.

The court overrules the demurrer on the ground of the statute of limitations as it does not entirely dispose of the cause of action based on more recent years.

3rd cause of action – 10th cause of action Derivative causes of action for breach of fiduciary duty, unjust enrichment, constructive fraud, concealment, entitlement to constructive trust, entitlement to accounting, entitlement to declaratory relief, entitlement to injunction)

The demurrer is sustained with leave to amend for failure to state facts sufficient to constitute a cause of action.

A shareholder who fails to comply with section 800 lacks standing to pursue a derivative claim. Nelson v Anderson (1999) 72 Cal.App.4th 111, 127.

The 4ACC alleges that MCM and the Carters made a board demand on September 26, 2018 and the demand has not yet been acted upon at the time the Third Amended Cross Complaint was filed on October 1, 2018. “Pursuant to the terms of section 800, in order for a shareholder to bring a derivative suit

on behalf of the corporation, he must allege with particularity either (1) that he made a demand on the board of directors, which the board wrongfully refused, or (2) that such a demand would have been futile.” (Shields v. Singleton (1993) 15 Cal.App.4th 1611, 1616-1617) In Shields, the plaintiff made a demand on a corporate board. The board asked for information, the plaintiff did not respond and the board failed to take any action. The plaintiff then filed the action “without any further communication with the board.” (Id. at 1617) The court held that this did not comply with Section 800 because the plaintiff had not alleged a “wrongful refusal” or demand “futility.” The court finds that the mere failure to respond by the time of the 2nd amended Cross-complaint or even by the filing of the 4ACC is insufficient to allege that the demand was “wrongfully refused” or that such demand would be futile.

Where leave to amend is granted , cross-complainants may file and serve a 5th amended cross-complaint within 30 days. Response to be filed and served within 30 days of service of the Second Amended Cross-complaint, 35 days if served by mail.

The minute order is effective immediately. No formal order pursuant to CRC Rule 3.1312 or further notice is required.