Case Number: BC599722??? Hearing Date: May 27, 2016??? Dept: 78
Superior Court of California
County of Los Angeles
Department 78
JADE CHARM GROUP LIMITED, et al.;
Plaintiffs,
vs.
MICHAEL YU;
Defendants. Case No.: BC599722
Hearing Date: May 27, 2016
[TENTATIVE] RULING RE:DEFENDANT MICHAEL YU?S DEMURRER TO AND MOTION TO STRIKE PLAINTIFFS? FIRST AMENDED COMPLAINT.
Defendant Michael Yu?s Demurrer to Plaintiffs? First Amended Complaint is SUSTAINED without leave to amend as to the Third Cause of Action and OVERRULED as to all other causes of action.
Defendant Michael Yu?s Motion to Strike Plaintiffs? First Amended Complaint is GRANTED as to the portion of paragraph 6 that alleges, ?[i]n a prior unrelated litigation, the plaintiff accused Defendant Yu of ?fabricating key pieces of evidence, making false representations to the Court and opposing counsel, and deliberately destroying relevant evidence to prevent its discovery.? See Hallmark Hardwoods, Inc. v. Omni Wood Product, LLC, Case No. 2:10-CV05896-SJO-JCG (C.D. Cal.) (Docket Entry 304),? and DENIED as to the prayer for punitive damages.
FACTUAL BACKGROUND
This is a fraud case. The First Amended Complaint (?FAC?) alleges as follows. From May 21, 2013 to September 20, 2015, defendant Michael Yu (?Yu?) was CEO of plaintiff Homefloormax. (FAC ? 14.) Plaintiff Jade Charm Group Limited is the majority shareholder of Plaintiff Mico; Plaintiff Mico is the sole shareholder of Homefloormax. From September 20, 2015 to October 24, 2015, Yu was Homefloormax?s Vice President, Secretary, CFO/Treasurer, and one of its two directors. (Ibid.)
The FAC alleges that Yu defrauded Homefloormax by selling goods to certain shell companies that he owned at lower than usual gross margins. (FAC ? 15.) These companies are alleged to include New Harbors America Inc., DFUD, Inc., Lego Construction Inc., and Oldmaster Wood Products Inc. (?Oldmaster?). (FAC ? 15.) Yu is also alleged to have directly embezzled funds, $1.5 million worth of inventory, and cash from cash-only sales. (FAC ? 16.) Yu is alleges to have transferred this money to family members. (FAC ? 17.)
On August 10, 2015, Yu advised Homefloormax that he intended to resign. On August 28, 2015, Yu?s resignation was accepted, effective on September 20, 2015. (FAC ? 19.) However, Yu continued to control Homefloormax?s operations and refused to let the interim CEO run the business. (Id. ? 20.) On October 24, 2015, Homefloormax removed Yu as a director and appointed new directors. (Id. ? 20.) On October 26, 2015, Yu was advised that he was removed as director, but he refused to relinquish control or leave the offices. (Id. ? 21.) Thereafter, on October 28, 2015, Yu allegedly sent an email advising he decided to make a ?Halloween Clearance Tent Sale? and would ?not refuse any reasonable offers by customers, but cash payment only.? (Id. ? 21.) Yu did not agree until November 2, 2015 to remove his personal belonging from Homefloormax?s office and stop working there. (Id. ? 23.)
PROCEDURAL HISTORY
The original Complaint was filed on November 2, 2015. The FAC was filed on December 15, 2015, alleging eleven causes of action:
1. FRAUD
2. AIDING AND ABETTING FRAUD
3. CONSPIRACY
4. CONVERSION
5. AIDING AND ABETTING CONVERSION
6. BREACH OF FIDUCIARY DUTIES
7. AIDING AND ABETTING BREACH OF FIDUCIARY DUTIES
8. UNJUST ENRICHMENT
9. UNFAIR COMPETITION
10. DECLARATORY RELIEF
11. TRESPASS
Yu filed his Demurrer and Motion to Strike on January 2, 2016. Plaintiffs filed their Opposition on February 16, 2016. Yu filed his Replies on February 22, 2016.
The court continued this motion so Yu could file the required meet and confer declaration. Yu filed this declaration on May 13, 2016.
DISCUSSION
I. DEMURRER
A demurrer should be sustained only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Pro., ?? 430.30.) As the Supreme Court held in Blank v. Kirwan (1985) Cal.3d 311: ?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. Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.? (Id. at p. 318; see also Hahn. v. Mirda (2007) 147 Cal.App.4th 740, 747 [?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. [Citation.]?) ? ?[A] complaint otherwise good on its face is subject to demurrer when facts judicially noticed render it defective.? [Citation.]? (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6 [quoting Joslin v. H.A.S. Ins. Brokerage (1986) 184 Cal.App.3d 369, 374].) ?In determining whether the complaint is sufficient as against the demurrer ? if on consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated.? (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)
A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment. (Schifando v. City of Los Angeles, supra, 31 Cal.4th at p. 1081.) The demurrer also may be sustained without leave to amend where the nature of the defects and previous unsuccessful attempts to plead render it probable plaintiff cannot state a cause of action. (Krawitz v. Rusch (1989) 209 Cal.App.3d 957, 967.)
A. FIRST CAUSE OF ACTION ? FRAUD
?The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ?scienter?); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.? (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.)
?Fraud causes of actions must be pled with specificity in order to give notice to the defendant and to furnish him or her with definite charges.? (Gil. v. Bank of Am., supra, 138 Cal.App.4th at p. 1381; see also Blickman Turkus, LP v. MF Downtown Sunnyvale LLC (2008) 162 Cal.App.4th 858, 878.) ?Fraud allegations must be pled with more detail than other causes of action.? (Apollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 240 (?Apollo?).)
General and conclusory allegations do not suffice, and the policy of liberal construction of the pleadings will not ordinarily be invoked to sustain a pleading defective in any material respect. (Gil v. Bank of America, supra, 138 Cal.App.4th at p. 1381.) The requirement of particularity in the pleadings for fraud necessitates pleading facts that show how, when, where, to whom, and by what means the representations were tendered. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.)
Yu argues that the fraud cause of action fails for lack of specificity. (Demurrer at p. 2) Specifically, Yu argues that the FAC does not allege to whom the representations were made, when, where, or by what means.
Homefloormax argues that its fraud cause of action is for concealment and not an active misrepresentation. (Opposition at pp. 4?6.) ?[T]he necessary elements of a concealment/suppression claim consist of ??(1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage.? [Citations.]? [Citations.] ?Active concealment or suppression of facts by a nonfiduciary ?is the equivalent of a false representation, i.e., actual fraud.? [Citation.]? [Citation.] A fraud claim based upon the suppression or concealment of a material fact must involve a defendant who had a legal duty to disclose the fact.? (Hoffman v. 162 North Wolfe LLC (2014) 228 Cal.App.4th 1178, 1185?86.)
The FAC alleges that Yu represented that ?he would carry out his responsibilities faithfully? and ?hid his misappropriation of company goods and funds . . . until October 2014.? (FAC ? 25.) As discussed in more detail below, Yu owed a fiduciary duty to Homefloormax, and his alleged concealment of sales to his own subsidiaries at reduced prices and misappropriation of inventory is sufficient to support a fraud cause of action. The Demurrer to the First Cause of Action is OVERRULED.
B. THIRD CAUSE OF ACTION ? CONSPIRACY
???Conspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration.?? [Citation.]? (I-CA Enterprises, Inc. v. Palram Americas, Inc. (2015) 235 Cal.App.4th 257, 271.)
???A conspiracy cannot be alleged as a tort separate from the underlying wrong it is organized to achieve.? ? [Citation.] Therefore, ?conspiracy to commit a tort is not a separate cause of action from the tort itself . . . .? [Citation.]?
(ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 1015.)
The FAC alleges that ?Defendant Yu and Does 1 through 25 knowingly and willfully conspired and agreed among themselves and entered into a scheme whereby Defendant Yu would, and did, misappropriate goods and funds from Hornefloormax and transferred them to Does 1 through 25 without regard to the rights of Plaintiffs.? (FAC ? 35.) Homefloormax argues only that it adequately alleges conspiracy because ?at this stage of the proceedings, the intricacies of Defendant Yu?s conspiracy are known only to him and his co-conspirators.? (Opposition at p. 8.) However, as explained above, Yu is alleged to have committed all of the torts himself. While the third cause of action for conspiracy could be viable against the Doe defendants, a conspiracy cause of action is inapplicable to Yu himself.
Because the FAC alleges that Yu himself was the perpetrator of the torts alleged in the complaint, the Conspiracy cause of action against Yu fails. The Demurrer to the Third Cause of Action is SUSTAINED. Homefloormax does not state how it could amend the complaint to allege a conspiracy cause of action against Yu. Leave to Amend is DENIED.
C. FOURTH CAUSE OF ACTION ? CONVERSION
????Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages . . . .??? [Citation.]? (Lee v. Hanley (2015) 61 Cal.4th 1225, 1240.) Money cannot be the subject of conversion unless a specific, identifiable sum is involved. (McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1491.)
Yu argues that the conversion cause of action fails because the FAC does not identify the specific funds or goods that were converted. (Demurrer at pp. 5?6.)
The FAC alleges that Yu converted over $1.5 million in Homefloormax inventory, as well as collecting money for himself from cash-only sales of Homefloormax?s flooring. (FAC ? 16.) The FAC adequately alleges that Yu converted identifiable goods (the inventory). This is sufficient to allege a conversion cause of action. The Demurrer to the Fourth Cause of Action is OVERRULED.
D. SIXTH CAUSE OF ACTION ? BREACH OF FIDUCIARY
DUTY
?The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, breach of fiduciary duty, and damages.? (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.)
Yu concedes that the FAC adequately pleads that he owed a duty to Homefloormax. (Demurrer at p. 6.) However, Yu argues that the FAC does not plead facts to support its claim that Yu breached those duties. (Demurrer at pp. 6?7.)
The FAC alleges that Yu, as Homefloormax?s CEO, President, Vice President, Secretary, Chief Financial Officer, Treasurer, and one of its two directors, sold Homefloormax?s goods to shell companies with whom he was personally affiliated at substantially lower than usual gross margins, stole inventory, and ?pocketed? cash sales. (FAC ? 15, 16.) These allegation are sufficient to allege that Yu breached his fiduciary duties to Homefloormax. The Demurrer to the Sixth Cause of Action is OVERRULED.
E. EIGHTH CAUSE OF ACTION ? UNJUST ENRICHMENT
Some courts have held that there is no separate cause of action for unjust enrichment in California. (Melchior v. New Line Prod., Inc. (2003) 106 Cal.App.4th 779, 793.) The Court of Appeal in Melchior held that ?there is no cause of action in California for unjust enrichment. ?The phrase ‘Unjust Enrichment’ does not describe a theory of recovery, but an effect: the result of a failure to make restitution under circumstances where it is equitable to do so.? [Citation.] Unjust enrichment is ??a general principle, underlying various legal doctrines and remedies,’? rather than a remedy itself. [Citation.] It is synonymous with restitution.? (Ibid.) The court in Melchior, however, found that the plaintiff did not state a claim for unjust enrichment because his ?cause of action for unjust enrichment has the same basis as his cause of action for conversion, the Copyright Act also preempts it.? (Id. at p. 793.)
However, other courts have allowed a cause of action for unjust enrichment. As the Court of Appeal held in Lectrodryer v. SeoulBank (2000) 77 Cal.App.4th 723: ?Evidence also supported the conclusion that Lectrodryer satisfied the elements for a claim of unjust enrichment: receipt of a benefit and unjust retention of the benefit at the expense of another.? (Id. at p. 726; see also Peterson v. Cellco Partnership (2008) 164 Cal.App.4th 1583, 1593 [A cause of action for ?quasi-contract-unjust enrichment? requires ?the ?receipt of a benefit and [the] unjust retention of the benefit at the expense of another.? [Citation.]?].)
Other courts have used the term ?unjust enrichment? interchangeably with ?restitution.? As the court held in Hill v. Roll Intern. Corp. (2011) 195 Cal.App.4th 1295: ?Unjust enrichment is not a cause of action, just a restitution claim. [Citations.]? (Id. at p. 1307.)
The FAC adequately alleges that Yu received benefits during his time at Homefloormax, including the cash from cash-only sales of its inventory, which he unjustly retained to the expense of Homefloormax. (FAC ?? 15, 16.) Unlike in Melchior, Homefloormax?s underlying basis for the unjust enrichment claim is not preempted or otherwise deficient. The unjust enrichment claim is predicated on the properly pleaded fraud and conversion causes of action.
Whether the cause of action is a separate claim for unjust enrichment or alleges a claim for restitution based on the causes of action for fraud and conversion, the court finds that the claim is properly pleaded. The Demurrer to the Eighth Cause of Action for Unjust Enrichment is OVERRULED.
F. NINTH CAUSE OF ACTION ? UNFAIR COMPETITION LAW (?UCL?)
California Business and Professions Code section 17200 et seq (the ?UCL?) creates ??three varieties of unfair competition?acts or practices which are unlawful, or unfair, or fraudulent.? [Citation.]? (Jenkins v. JP Morgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, 520.) The UCL’s unlawful prong ?borrows? violations of other laws and treats them as unlawful practices’ that the unfair competition law makes independently actionable. (Id.)
Yu argues that the UCL ?cannot be used to recover for simple business torts, nor for acts that do not either threaten to deceive the public or undermine the public policy against monopolies.? (Demurrer at p. 8.)
The cases Yu cites for this proposition, however, do not address the ?unlawful? prong of the UCL, which is the prong under which Homefloormax is suing. The portion of Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 179 cited by Yu addresses the Unfair Practices Act, and also notes that ?[t]he unfair competition law is independent of the Unfair Practices Act and other laws. Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1150 addresses only whether a plaintiff could seek ?nonrestitutionary disgorgement,? finding that such prayer would enable the plaintiff ?to obtain tort damages while bypassing the burden of proving the elements of liability under its traditional tort claim for intentional interference with prospective economic advantage.?
Here, Homefloormax is not seeking nonrestitutionary disgorgement, but only disgorgement of the inventory and funds that Yu embezzled. (FAC ? 51.) The UCL claim is properly predicated on unlawful conduct (embezzlement) and seeks an allowable, restitutionary remedy. The FAC therefore alleges a proper cause of action against Yu under the UCL. The Demurrer to the Ninth Cause of Action is OVERRULED.
G. TENTH CAUSE OF ACTION ? DECLARATORY RELIEF
??To qualify for declaratory relief, [a party] would have to demonstrate its action presented two essential elements: ?(1) a proper subject of declaratory relief, and (2) an actual controversy involving justiciable questions relating to [the party’s] rights or obligations.?? [Citation.]? (Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 909.)
The FAC seeks a declaration that Yu has been removed from all officer and director positions at Homefloormax pursuant to the corporate governance actions alleged in the complaint as Exhibits A, B, and C. (FAC ? 58.) Yu argues that there is no dispute on this issue because the FAC affirmatively alleges that Yu sent an email on November 1, 2015 accepting his removal by the board. (Demurrer at pp. 8?9; FAC ? 23.)
Homefloormax states that at the time the FAC was filed, it was unclear whether Yu actually agreed to abandon any corporate responsibilities at Homefloormax, and that had Yu engaged in a meet and confer on this issue prior to the demurrer, they may have agreed to dismiss this cause of action. (Opposition at pp. 11?12.) The Yu meet and confer declaration does not state that Yu has agreed to stipulate to the declaratory relief sought in the FAC.
Moreover, the FAC does not clearly state that Yu accepted his removal by the Board. Rather, the FAC alleges that ?in light of a ?resolution? removing Defendant from any and all positions with Mico, Defendant intended to take the following actions on November 2, 2015,? including removing all his personal belongings, notifying the parties, vendors and clients of ?the remove without cause? resolution, and to ?stop working, holding none responsibility in Homefloormax,? but also alleges that Yu in the email represented himself in the signature line as the ?President of Homefloormax.? (FAC ? 23; Ex. E to FAC.) Therefore, on the face of the complaint, there remains a controversy between Homefloomax and Yu to which declaratory relief is appropriate. The Demurrer to the Tenth Cause of Action is OVERRULED.
H. ELEVENTH CAUSE OF ACTION ? TRESPASS
?Trespass is an unlawful interference with possession of property. [Citation.] . . . Liability for trespass may be imposed for conduct which is intentional, reckless, negligent or the result of an extrahazardous activity. [Citations.] . . . [A]n action for trespass will support an award of nominal damages where actual damages are not shown.? (Staples v. Hoefke (1987) 189 Cal.App.3d 1397, 1406.)
The FAC alleges that Yu intentionally and unlawfully entered and remained on Homefloormax property without its consent after he was removed from all officer and director positions, and that this entry injured Homefloormax by depriving them of possession and use of the premises and inventory. (FAC ? 61.)
Yu argues that the FAC fails to allege that he actually remained on the property after he was informed that he was being removed from all Homefloormax positions. (Demurrer at p. 10.) However, the FAC alleges that Yu was informed he would be removed effective September 20, 2015 (FAC ? 19) and that a representative of plaintiff Mico informed him in person at 11:00 a.m. on October 26, 2015 that he had been removed, but Yu refused to leave the office, turn over his key or allow new officers to enter the offices and access Homefloormax?s inventory. (FAC ? 21.) The FAC adequately alleges a cause of action for trespass. The Demurrer to the Eleventh Cause of Action is OVERRULED.
I. ?AIDING AND ABETTING? CAUSES OF ACTION
Yu argues the second, fifth, and seventh causes of action for ?aiding and abetting? fraud, conversion, and breach of fiduciary duties, respectively, against only the Doe defendants fail because the FAC doesn?t allege any facts suggesting that the Doe defendants provided ?substantial assistance of encouragement? to Yu. (Demurrer at pp. 10?11.)
However, these causes of action are not asserted against Yu, and he may not demur to them on behalf of the Doe defendants. The Demurrer to the Second, Fifth, and Seventh Causes of Action is OVERRULED.
II. MOTION TO STRIKE
Any party, within the time allowed to respond to a pleading, may serve and file a notice of motion to strike the whole or any part thereof. (Code Civ. Proc., ? 435(b)(1)). The notice of motion to strike a portion of a pleading shall quote in full the portions sought to be stricken except where the motion is to strike an entire paragraph, cause of action, count or defense. (California Rules of Court Rule 3.1322.)
The grounds for a motion to strike shall appear on the face of the challenged pleading or from any matter of which the court is required to take judicial notice. (Code Civ. Proc., ? 437(a).) The court then may strike out any irrelevant, false, or improper matter inserted in any pleading and strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (Code Civ. Proc., ? 436.) When the defect which justifies striking a complaint is capable of cure, the court should allow leave to amend. (Perlman v. Municipal Court (1979) 99 Cal.App.3d 568, 575).
A. PUNITIVE DAMAGES
Punitive damages are allowed in non-contract cases when a defendant is guilty of ?oppression, fraud, or malice . . . .? (Civ. Code ? 3294.) The terms are defined as:
1. ?Malice? means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.
2. ?Oppression? means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.
3. ?Fraud? means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.
Something more than the mere commission of a tort is always required for punitive damages. (Taylor v. Superior Court (1979) 24 Cal.3d 890, 894.) Proof of negligence, gross negligence, or recklessness is insufficient to warrant an award of punitive damages. (Dawes v. Sup.Ct. (Mardian) (1980) 111 Cal.App.3d 82, 88?89.)
Yu moves to strike the prayer for punitive damages, arguing that the FAC does not plead any malicious, oppressive, or fraudulent conduct. (Motion to Strike at pp. 2?4.) However, as shown above, the FAC adequately pleads both fraud and breach of fiduciary duty causes of action, which provide valid bases for punitive damages. The Motion to Strike the prayer for punitive damages is DENIED.
B. IRRELEVANT ALLEGATIONS
Yu moves to strike the following portion of the FAC
as irrelevant and improper: ?In a prior unrelated litigation, the plaintiff accused Defendant Yu of ?fabricating key pieces of evidence, making false representations to the Court and opposing counsel, and deliberately destroying relevant evidence to prevent its discovery.? See Hallmark Hardwoods, Inc. v. Omni Wood Product, LLC, Case No. 2:10-CV05896-SJO-JCG (C.D. Cal.) (Docket Entry 304).? (FAC ? 6.)
Homefloormax argues that this allegation is relevant to the later allegation that Yu fabricated a Trademark Agreement with a third party. (Opposition at pp. 4?5; FAC ? 18.) However, Homefloormax may allege that this Agreement was fabricated without referring to admittedly ?unrelated? litigation. The Motion to Strike the portion of paragraph 6 stating ?In a prior unrelated litigation, the plaintiff accused Defendant Yu of ?fabricating key pieces of evidence, making false representations to the Court and opposing counsel, and deliberately destroying relevant evidence to prevent its discovery.? See Hallmark Hardwoods, Inc. v. Omni Wood Product, LLC, Case No. 2:10-CV05896-SJO-JCG (C.D. Cal.) (Docket Entry 304).? is GRANTED.
Defendant to give notice.
DATED: May 27, 2016 ________________________________
Hon. Gail Ruderman Feuer
Judge of the Superior Court