Case Name:    Farzad Gausi dba European Quality Electric v. CD Builders, Inc., et al.

Case No.:        2015-1-CV-280878

Demurrer to Plaintiff Farzad Gausi dba European Quality Electric’s Second Amended Complaint by Defendant Steven Chu

Plaintiff Farzad Gausi dba European Quality Electric (“EQE”) is engaged in the business of electrical contracting. (Second Amended Complaint (“SAC”), ¶1.)  On or about July 5, 2010, plaintiff EQE and defendant CDX Builders, Inc. (“CDX”) entered into a written agreement entitled Construction Subcontract (“Contract”). (FSC, ¶8.)  Pursuant to the Contract, plaintiff EQE agreed to furnish equipment, materials, supplies, service, labor and supervision for the revised sum of $1,825,675.60. (Id.)  Defendant CDX claims it paid plaintiff EQE the sum of $1,758,307.83. (Id.)

According to the allegations of the SAC, defendant CDX breached the contract by failing to pay plaintiff EQE for extra work performed and for damages incurred by plaintiff as a result of CDX’s delay. (SAC, ¶¶9 – 10 and 13.)  In addition, defendant CDX failed to secure the project worksite from theft/ loss of materials and, as a result, plaintiff EQE had to purchase replacement materials. (SAC, ¶11.)

On May 8, 2015, plaintiff EQE filed a complaint against defendant CDX and others.  On December 22, 2015, the court (Hon. Lucas) issued an order granting plaintiff leave to file a FAC.  On January 4, 2016, plaintiff filed the FAC which asserted causes of action for:

  • Breach of Contract
  • Enforcement of Stop Notice Release Bond
  • Violation of the Prompt Payment Statute
  • Payment Bond Action
  • Quantum Meruit
  • Quantum Valebant
  • Account Stated
  • Accounting
  • Alter Ego Liability

On February 8, 2016, defendants CDX and Hartford Fire Insurance Company each separately filed answers to the FAC.  On May 10, 2016, defendant Steven Chu (“Chu”) filed a demurrer to the ninth cause of action of the FAC.  On June 15, 2016, the court (Hon. McGowen) issued an order sustaining defendant Chu’s demurrer to the ninth cause of action with leave to amend.

On June 29, 2016, plaintiff EQE filed the SAC which asserts the same nine causes of action asserted in the FAC.  The ninth cause of action is directed at defendant Chu who is alleged to be the alter ego of CDX. (SAC, ¶3.)  Among other allegations, plaintiff EQE alleges that defendant Chu is the owner of all or a controlling interest of defendant CDX. (SAC, ¶43.)  “There exists, and at all times herein mentioned there existed a unity of interest in ownership between defendants CHU and CDX, such that any individuality and separateness between defendants CHU and CDX have ceased, and defendant CDX is the alter ego of defendant CHU.  Defendant CDX was and at all times herein mentioned is a mere shell, instrumentality and conduit through which defendant CHU carried on his construction business in the corporate name exercising complete control and dominance of such business to such an extent that any individual or separateness of defendants CHU and CDX does not, and at all times herein mentioned, did not exist.  Upon information and belief, CDX has no assets, it is controlled entirety [sic] and exclusively by the CHU.  No person other than CHU had the authority to make any significant decisions with respect to CDX, there was a complete failure to observe any corporate formalities, no management committee was formed, no votes were ever taken on any issues, board of directors meetings were never held, and no minutes were ever taken.” (SAC, ¶44.)

“Upon further information and belief, CHU operated CDX as if CHU and CDX were a single economic entity, i.e., CHU made no distinction between his personal finances and the finances of CDX, one-hundred percent of CDX’s obligations were funded on an as-needed basis solely by CHU from CHU’s personal accounts or using funds pilfered from others, and CHU regularly siphoned company funds for his own personal benefit and used company offices and equipment to conduct his own personal business.” (SAC, ¶45.)

On August 15, 2016, defendant Chu filed this demurrer to the ninth cause of action of the SAC.

  1. Defendant Chu’s demurrer to the ninth cause of action of the SAC is OVERRULED.

“The alter ego doctrine arises when a plaintiff comes into court claiming that an opposing party is using the corporate form unjustly and in derogation of the plaintiff’s interests.” (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300.)  “[T]wo conditions must be met before the alter ego doctrine will be invoked.  First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist.  Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.” (Tucker Land Co. v. State of California (2001) 94 Cal.App.4th 1191, 1202; see also Leek v. Cooper (2011) 194 Cal.App.4th 399.)

In demurring, defendant Chu contends it is impossible for plaintiff to establish the second condition for imposition of the alter ego doctrine in view of plaintiff EQE’s allegations, at paragraphs 25 – 26 of the SAC, that a payment bond exists to provide for the payment of all claims, including plaintiff’s claims.  Defendant Chu argues that an inequitable result will not occur here because the payment bond will make plaintiff whole for any liability that plaintiff can establish against defendant CDX.  Defendant Chu attempts to bolster this argument by submitting extrinsic evidence to show that the payment bond was issued by Hartford Fire Insurance Company which has strong credit ratings.  The court declines to consider this extrinsic evidence.  “In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long settled rules.” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)  “A demurrer tests only the legal sufficiency of the pleading.”  (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213 – 214.)  The extrinsic evidence proffered by defendant Chu is not a proper subject of judicial notice and not contained within the four corners of the SAC.

Consequently, an allegation of the existence of a payment bond does not, as a matter of law, that an inequitable result will not occur here.  Plaintiff EQE has now alleged that “there were insufficient funds available to pay plaintiff and his subcontractors” and “CDX is no longer in operation, its license has expired, and is unable to contract at this time, and has no money or assets available to satisfy any judgment or claim that plaintiff may obtain, all assets of CDX having been diverted at the direction of CHU to himself personally or members of CHU’s immediate family.” (SAC, ¶¶47 and 49.)  These allegations are adequate to allege resulting inequity.

Accordingly, defendant Chu’s demurrer to the ninth cause of action in plaintiff EQE’s SAC on the ground that the pleading does not state facts sufficient to constitute a cause of action [ Code Civ. Proc., §430.10, subd. (e)] for alter ego liability is OVERRULED.