Opinion
G043639 Super. Ct. No. 07CC04970
08-23-2011
DONALD L. HENRY, Plaintiff and Appellant, v. NANCY EDGELL et al., Defendants and Respondents.
Richard V. McMillan for Plaintiff and Appellant. John M. Adsit for Defendant and Respondent Nancy Edgell. Joseph H. Dawson, in pro. per., for Defendant and Respondent. Steve Rogala, in pro. per., for Defendant and Respondent. Kasem, Ko & Ahmed and Ahmed Kasem for Defendant and Respondent Samir Shakfeh. Michael Puniak, in pro. per., for Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
OPINION
Appeal from judgments of the Superior Court of Orange County, Sheila Fell and David T. McEachen, Judges, and Janet C. Peak, Temporary Judge (pursuant to Cal. Const., art. VI, § 21). Affirmed in part and reversed in part. Appeal dismissed as to Defendant and Respondent Michael Puniak. Motion for sanctions. Denied.
Richard V. McMillan for Plaintiff and Appellant.
John M. Adsit for Defendant and Respondent Nancy Edgell.
Joseph H. Dawson, in pro. per., for Defendant and Respondent.
Steve Rogala, in pro. per., for Defendant and Respondent.
Kasem, Ko & Ahmed and Ahmed Kasem for Defendant and Respondent Samir Shakfeh.
Michael Puniak, in pro. per., for Defendant and Respondent.
* * *
INTRODUCTION
Plaintiff Donald L. Henry filed a notice of appeal after the trial court sustained demurrers without leave to amend in favor of defendants Nancy Edgell, Joseph Dawson, Steve Rogala, Samir Shakfeh, and Michael Puniak (collectively, defendants). Plaintiff, in his capacity as a creditor of CATS Communication, Inc. (CATS), sued defendants in their capacities as directors of CATS. He alleged they breached their fiduciary duties to him by failing to prevent another director and sometimes president of CATS, Russell McCullough, from misappropriating assets and causing it to become insolvent. Plaintiff further alleged Dawson, Rogala, Shakfeh, and Puniak breached their fiduciary duties to him by entering into an executive termination agreement with McCullough, releasing him from all liability to CATS, in exchange for his "surrender" of CATS's "shell company" and "last major asset" to Dawson, Rogala, Shakfeh, and Puniak as individuals.
We affirm in part and reverse in part. Although "there is no broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation's creditors solely because of a state of insolvency," a corporate director owes a limited duty to the insolvent corporation's creditors to avoid "actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims." (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1041 (Berg), italics omitted.) We affirm the judgment in favor of Edgell because plaintiff did not allege she engaged in conduct that diverted, dissipated, or unduly risked insolvent CATS's assets. We reverse, however, the judgments entered in favor of Dawson, Rogala, and Shakfeh because the third amended complaint did allege they engaged in such conduct.
We dismiss the appeal as to Puniak for lack of appellate jurisdiction. Plaintiff's appeal as to Puniak has not been taken from a judgment or an appealable order.
SUMMARY OF ALLEGATIONS UNDERLYING PLAINTIFF'S BREACH OF
FIDUCIARY DUTY CLAIM
In this appeal, we must assume the truth of the allegations of the third amended complaint. (American Airlines, Inc. v. County of San Mateo (1996) 12 Cal.4th 1110, 1118.) We summarize those allegations as follows.
CATS is a Nevada corporation that was formed on May 3, 2004. From May 3 through September 2005, McCullough was CATS's president, sole director, and majority shareholder. Plaintiff became a CATS director in September 2005 and served in that capacity through early 2007; he also worked part time at CATS during that time period in an unspecified capacity. Plaintiff was also a CATS shareholder, owning 400,000 shares of CATS common stock, and a creditor, having loaned CATS $315,000 since May 2006.
CATS's financial records from August 2005 through February 2006 showed (1) CATS's average monthly sales were only $5,846.66; (2) CATS's average monthly investment income was $202,706.28; (3) McCullough's average monthly income was $23,923.70; (4) CATS's monthly average credit card expenses were $17,328.21; (5) CATS's average monthly travel and entertainment expenses were $4,666.27; and (6) CATS paid $26,561.18 for corporate housing.
Plaintiff became aware that McCullough, without the board of directors' knowledge or approval, took in excess of $2 million of CATS's funds and used them to purchase three cars held in his name, pay his gambling debts in excess of $1 million, pay for his living expenses in addition to the money he was paid as salary or received in loans, and sent his mother at least $22,000.
In late 2006 and early 2007, plaintiff had "numerous discussions" with McCullough during which he demanded that McCullough "account for the monies he was misappropriating from CATS" and cease taking the funds of CATS. McCullough refused to provide plaintiff an accounting and denied any wrongdoing. On February 17, 2007, McCullough appointed Mike Harrell as a director of CATS, without informing plaintiff.
On April 16, 2007, plaintiff filed a complaint against CATS and McCullough, seeking a temporary restraining order, a preliminary and permanent injunction, and relief under Corporations Code section 800 et seq., and asserting claims for breach of contract and fraud. (All further statutory references are to the Corporations Code.) Plaintiff further alleged: "Plaintiff did not make an effort to secure action from the 2007 Board of Directors to prosecute this action because such effort would have been futile for at the time the complaint was filed Defendant McCullough and Plaintiff were the only known members of the CATS Board of Directors and Defendant McCullough refused to provide an account to Plaintiff when confronted." (Plaintiff did not know Mike Harrell had been appointed to the board by McCullough at the time the complaint was filed.)
At an "unnoticed/unofficial meeting" held on April 23, 2007, McCullough appointed Scott MacKay, Chris Houchin, and Edgell as additional members of the CATS board of directors; each accepted the appointment. Later, during that same meeting, plaintiff discussed with MacKay, Houchin, and Edgell the lawsuit he had filed and "explained the facts upon which the suit was based."
On April 24, 2007, "the first noticed meeting" of the CATS board of directors was held, at which time McCullough tendered his resignation as president of CATS and the board accepted his resignation. Before that meeting, CATS had not held shareholders' meetings, board of directors' meetings, or elections for the board of directors. Houchin was appointed as the new president. McCullough, Harrell, MacKay, Edgell, and Houchin were informed by CATS's legal counsel of plaintiff's lawsuit and of McCullough's alleged misappropriation of CATS's assets. At that same meeting, the board of directors voted to form a committee to investigate plaintiff's claims; that special committee never met to investigate plaintiff's allegations of wrongdoing by McCullough.
In July 2007, Houchin resigned as president of CATS and McCullough took over the day-to-day operations without having been appointed by the board of directors. The board of directors failed to stop McCullough from continuing to misappropriate CATS's assets.
In June 2008, a new board of directors of CATS was duly elected. It was comprised of McCullough, Harrell, Edgell, Dawson, Rogala, Shakfeh, and Puniak; Dawson was the chairman of the board. The board formed a committee to investigate plaintiff's claims (the 2008 special committee) consisting of Dawson, Rogala, Shakfeh, and Puniak. Dawson fully participated in the investigation of McCullough but did not disclose his past relationship with McCullough, which involved McCullough sending large sums of CATS's money to Dawson, McCullough's participation with Dawson and Jonathan Kudla in a Florida corporation named Child Protection Coalition, Inc., in 2006, and Dawson and McCullough's attempt (with Shakfeh) to bring CATS public.
Between June 22, 2007 and December 30, 2008, the governing boards of directors allowed McCullough to (1) sell CATS's assets outside the ordinary course of business without a prior court order; (2) take salary payments without board approval; and (3) continue to dissipate CATS's funds to the detriment of the corporation, its shareholders, and creditors. "Due to . . . McCullough having taken CATS's funds and misappropriated those funds to his own personal use, and Defendants Harrell, MacKay, Houchin having allowed Defendant McCullough to continue to provide day-to-day management, to continue to misappropriate CATS assets and to violate the terms of the Preliminary Injunction, CATS was rendered insolvent and no longer has sufficient funds to meet its obligations as they come due."
After completing its investigation of McCullough and finding he had misappropriated over $1 million from CATS's accounts for his personal use, which caused CATS to become insolvent, on December 30, 2008, Dawson, Rogala, Shakfeh, and Puniak agreed, on behalf of CATS, to enter into a written executive termination agreement with McCullough (the agreement); plaintiff did not know about or consent to the agreement. The agreement provided that CATS would not pursue (1) criminal litigation or take any direct or indirect action to cause criminal charges or litigation to be brought against McCullough; (2) civil litigation against him; or (3) shareholder derivative litigation against him. In exchange, McCullough agreed, inter alia, to resign from his employment with CATS, to surrender his shares of CATS to the board of directors, and to surrender CATS's "shell company," CATS's "last major asset," to Dawson, Rogala, Shakfeh, and Puniak personally.
Although the third amended complaint does not specifically allege the date CATS became insolvent, a fair reading of the third amended complaint shows CATS had become insolvent prior to the execution of the agreement.
Plaintiff alleged: "In entering into this 'Agreement' Defendants Dawson, Rogala, Shakfeh and Puniak failed and refused to th[o]roughly investigate Defendant McCullough's assets to determine his ability to re-pay CATS or to investigate what had become of the $1,000,000.00 McCullough had taken, all for the purpose of . . . personally benefitting themselves to the detriment of CATS, its shareholders and creditors and in doing so violated their fiduciary duty to the shareholders of CATS [and] its creditors . . . due to their acts/omissions and self-dealing."
On January 25, 2009, the 2008 special committee issued a written report stating its finding that McCullough "systematically siphon[ed] over $1,000,000.00 from CATS accounts improperly to enrich himself." CATS went out of business.
PROCEDURAL HISTORY
I.
ORIGINAL COMPLAINT
In April 2007, plaintiff filed a complaint against CATS and McCullough, seeking a temporary restraining order, a preliminary and permanent injunction, and relief under section 800 et seq., and asserting claims for breach of contract and fraud. On May 3, 2007, the trial court issued a temporary protective order and order to show cause why a preliminary injunction should not issue. The temporary restraining order prohibited McCullough from, inter alia, selling or transferring any of CATS's assets "except in the ordinary course of business."
In June 2007, plaintiff amended the complaint by adding as Doe defendants Kudla and Gloria McCullough. In May 2008, plaintiff filed an amendment to the complaint designating Edgell, Harrell, and Houchin as Doe defendants.
II.
FIRST AMENDED COMPLAINT
In March 2009, plaintiff filed a first amended complaint in which he named CATS, McCullough, Harrell, Edgell, Houchin, MacKay, Dawson, Rogala, Shakfeh, and Puniak as defendants. The first amended complaint sought a temporary restraining order, a preliminary and a permanent injunction, and relief under section 800 et seq., and asserted claims for breach of contract and fraud.
CATS demurred to the first cause of action of the first amended complaint on the grounds it failed to allege sufficient facts to state a cause of action, plaintiff lacked standing to sue, and the pleading was uncertain.
In a minute order dated May 13, 2009, the trial court sustained the demurrer with leave to amend, concluding plaintiff had not alleged sufficient facts to establish futility to overcome the presentation requirement of section 800, subdivision (b). The order also stated, "[g]ravamen of Plaintiff's action is injury to himself as an individual shareholder rather than injury to the corporation or to the shareholders as a whole to state a derivative."
III.
SECOND AMENDED COMPLAINT
In June 2009, plaintiff filed a second amended complaint alleging "Relief under Corporations Code § 800 et seq." against CATS, McCullough, Kudla, Edgell, Harrell, Houchin, MacKay, Dawson, Rogala, Shakfeh, and Puniak. The second amended complaint also alleged a claim for breach of contract against CATS and McCullough and a fraud claim against McCullough and Kudla. Dawson, Rogala, Shakfeh, and Puniak answered the second amended complaint.
Dawson filed a motion to dismiss the second amended complaint on the grounds, inter alia, that the first cause of action failed to plead sufficient facts, plaintiff lacked standing to sue, the pleading was uncertain, and plaintiff failed to comply with the demand requirement under section 800, subdivision (b)(2). Edgell filed a demurrer to the first cause of action of the second amended complaint on the ground it failed to state facts sufficient to constitute a cause of action against her. Rogala filed a "[j]oinder" in the demurrer of Edgell.
The trial court sustained Edgell's demurrer, stating: "Plaintiff has not alleged facts sufficient to establish futility as to Defendant Edgell, and the other later board members per Corporations Code [section] 800[, subdivision ](b)(2). Ten days leave is granted for Plaintiff to amend the Complaint one additional time to articulate facts that Edgell and/or Rogala had some participation in the alleged fraud." The court treated Dawson's motion to dismiss as a general demurrer, which the court sustained. The court stated: "[T]he allegations do not state facts with particularity as required, in reference to Defendant Dawson to establish futility. Ten days leave is granted for Plaintiff to amend the Complaint one additional time to articulate facts that Dawson had some participation in the alleged fraud."
IV.
THIRD AMENDED COMPLAINT
In September 2009, plaintiff filed a third amended complaint seeking "[r]elief under Corporations Code, § 800 et seq." against CATS, McCullough, Harrell, Houchin, and MacKay; and alleging claims for (1) breach of contract against CATS and McCullough; (2) fraud and misrepresentation against McCullough and Kudla; and (3) breach of fiduciary duty (citing sections 316, 1507, and 2116) against Harrell, Houchin, MacKay, Edgell, Shakfeh, Dawson, Rogala, and Puniak.
Edgell filed a demurrer to the breach of fiduciary duty claim on the ground it failed to state sufficient facts to constitute a cause of action against her. Shakfeh also filed a demurrer to the breach of fiduciary duty claim on the grounds plaintiff lacked the legal capacity to sue him, plaintiff failed to allege sufficient facts to state such a claim, and the pleading was uncertain. In his memorandum of points and authorities, Shakfeh argued that he did not owe a fiduciary duty to plaintiff.
Dawson filed a demurrer, in propria persona, which appeared to challenge all causes of action of the third amended complaint (including nonexistent fifth, sixth, seventh, and eighth causes of action) even though he was only named as a defendant in the breach of fiduciary duty cause of action. It is not clear from Dawson's demurrer on what basis he challenged the breach of fiduciary duty claim. In his memorandum of points of authorities, Dawson argued, inter alia, that plaintiff "engaged in pettifoggery and again ignored the evidence submitted to the Court on ownership of the Swiss shell corporation allegedly stolen from CATS. It must be noted in the Introduction that the Plaintiff and his attorney haven't produced a scintilla of evidence and engaged in subterfuge or fraud in all their complaints."
Rogala, in propria persona, filed a document entitled "JOINDER IN DEMURRER THIRD AMENDED COMPLAINT," which stated in its entirety: "Defendant, Steve Rogala, joins in the demurrer to the Third Amended Complaint heretofore filed by defendant Joseph H. Dawson." Also acting in propria persona, Puniak similarly filed a document entitled "JOINDER IN DEMURRER THIRD AMENDED COMPLAINT," which stated in its entirety: "Defendant, Dr. Puniak, joins in the demurrer to the Third Amended Complaint heretofore filed by defendant Joseph H. Dawson.
Plaintiff has not challenged the sufficiency of Rogala's and Puniak's joinders in Dawson's demurrer. In light of plaintiff's failure to raise this issue, coupled with the disposition of this opinion reversing the judgments entered after the trial court sustained Dawson's demurrer for the reasons explained post, we do not address this issue further.
The trial court sustained Edgell's demurrer without leave to amend. The court's minute order stated: "Directors do not owe a fiduciary duty to a corporation's creditors; Corp Code 316 does not provide for an individual cause of action; Sustain without leave to amend; No delineated violations of Corp Code 1507." Judgment was thereafter entered in Edgell's favor.
The court also sustained Shakfeh's demurrer without leave to amend and judgment was entered in his favor.
The trial court sustained Dawson's demurrer without leave to amend and "sustained the Joinder in Demurrer of Defendant Steve Rogala without leave to amend" on the ground "there's no way directors owe a fiduciary duty to corporate creditors and the Corporations Code [section] 316 does not provide for an individual cause of action"; judgment was entered in Dawson's and Rogala's favor. The record contains a notice of ruling prepared by Dawson, in propria persona, stating that Puniak's joinder was sustained without leave to amend. The record does not show judgment was entered as to Puniak.
Plaintiff appealed.
DISCUSSION
I.
THE APPEAL IS DISMISSED AS TO PUNIAK FOR LACK OF APPELLATE JURISDICTION.
Plaintiff's appeal as it pertains to Puniak challenges an order sustaining without leave to amend the demurrer brought by Dawson, in which Puniak joined. The appellate record does not contain any judgment or appealable order that pertains to Puniak. "An order sustaining a demurrer without leave to amend is not an appealable order; only a judgment entered on such an order can be appealed." (I. J. Weinrot & Son, Inc. v. Jackson (1985) 40 Cal.3d 327, 331; see Code Civ. Proc., § 904.1.) An unsigned minute order cannot be treated as a judgment under Code of Civil Procedure section 581d. (Powell v. County of Orange (Aug. 8, 2011, G044150) ___ Cal.App.4th ___, ___ [2011 Cal.App. Lexis 1024, *1]; Brehm v. 21st Century Ins. Co. (2008) 166 Cal.App.4th 1225, 1233-1234.)
Although the record contains a judgment entered in Dawson's favor, it does not contain any such judgment or appealable order as to Puniak. We therefore have no jurisdiction to consider plaintiff's appeal as it pertains to Puniak and must dismiss it. (See Walker v. Los Angeles County Metropolitan Transportation Authority (2005) 35 Cal.4th 15, 21.)
II.
STANDARD OF REVIEW
A judgment following the sustaining of a demurrer is reviewed de novo. (Boccato v. City of Hermosa Beach (1994) 29 Cal.App.4th 1797, 1803-1804.) We treat the properly pleaded allegations of a challenged complaint as true, and liberally construe them to achieve "'"substantial justice"'" among the parties. (American Airlines, Inc. v. County of San Mateo, supra, 12 Cal.4th at p. 1118.) We consider only the allegations of a challenged complaint and matters subject to judicial notice to determine whether the facts alleged state a cause of action under any theory. (Ibid.)"'Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.]'" (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.)
III.
THE THIRD AMENDED COMPLAINT DOES NOT ALLEGE SUFFICIENT FACTS
TO STATE A CLAIM FOR BREACH OF FIDUCIARY DUTY AGAINST EDGELL,
BUT IT DOES ALLEGE SUFFICIENT FACTS TO STATE SUCH A CLAIM
AGAINST DAWSON, ROGALA, AND SHAKFEH.
"'The elements of a cause of action for breach of fiduciary duty are: (1) existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage proximately caused by the breach. [Citation.]'" (Slovensky v. Friedman (2006) 142 Cal.App.4th 1518, 1534.) In support of the breach of fiduciary duty claim, plaintiff expressly alleged he was suing defendants on his own behalf as a creditor: "Plaintiff is a creditor of CATS having loaned CATS the sum of $315,000.00 between May, 2006 and the present, was a creditor at the time of the omissions and transactions complained of and brings this action on his own behalf as a creditor of CATS."
The viability of plaintiff's breach of fiduciary duty claim therefore depends on whether directors of a corporation owe the corporation's creditors a fiduciary duty. This issue was addressed in Berg, supra, 178 Cal.App.4th 1020. In Berg, the appellate court stated: "It is without dispute that in California, corporate directors owe a fiduciary duty to the corporation and its shareholders and now as set out by statute, must serve 'in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders.' [Citation.] . . . [¶] There is no analogous statutory authority in California establishing or recognizing that upon a corporation's insolvency, or more vaguely when it enters into a 'zone of insolvency,' directors instead or also owe a duty to the corporation's creditors. And it is easy to see that especially when a corporation is in financial distress, the interests of the shareholders and the corporation itself may inherently collide with those of the creditors, making any respective duties owed by directors to each constituency potentially in conflict and making the scope of each respective duty elusive and difficult to ascertain." (Id. at pp. 1037-1038, fn. omitted.)
The Berg court explained: "[T]he rationale for the general rule of no duty owed to creditors is that it is the shareholders who own a corporation, which is managed by the directors. In an economic sense, when a corporation is solvent, it is the shareholders who are the residual claimants of the corporation's assets and who are the residual risk bearers. As long as the corporation remains solvent, the business decisions made by management directly affect the shareholders' income; management accordingly owes fiduciary duties to those shareholders as well as to the corporation. The corporation's creditors, on the other hand, are free to protect their interests by contract. As long as the corporation is solvent, no matter how badly managed it might be, it is able to satisfy its contractual obligations to creditors who are therefore unaffected by management's business decisions. But when insolvency arises, the value of creditors' contract claims may be affected by management's business decisions in a way it was not before insolvency. At the same time, as long as insolvency persists, shareholder value is essentially worthless and shareholders no longer occupy the position of residual claimants. Because insolvency shifts the residual risk of management decisions from shareholders to creditors, at least some of the duties formerly owed by directors only to shareholders are owed also to creditors upon that circumstance, or so the theory goes." (Berg, supra, 178 Cal.App.4th at p. 1039.)
The Berg court analyzed the case law touching upon this issue, including cases that have applied the so-called "trust fund doctrine" which stands for the principle that "'"all of the assets of a corporation, immediately on its becoming insolvent, become a trust fund for the benefit of all of its creditors"' in order to satisfy their claims." (Berg, supra, 178 Cal.App.4th at p. 1040.) The court concluded: "[U]nder the current state of California law, there is no broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation's creditors solely because of a state of insolvency . . . . And we decline to create any such duty, which would conflict with and dilute the statutory and common law duties that directors already owe to shareholders and the corporation. We also perceive practical problems with creating such a duty, among them a director's ability to objectively and concretely determine when a state of insolvency actually exists such that his or her duties to creditors have been triggered. We accordingly hold that the scope of any extracontractual duty owed by corporate directors to the insolvent corporation's creditors is limited in California, consistent with the trust fund doctrine, to the avoidance of actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims. This would include acts that involve self-dealing or the preferential treatment of creditors. Further, because all the California cases applying the trust fund doctrine appear to have dealt with actually insolvent entities, and because the existence of a zone or vicinity of insolvency is even less objectively determinable than actual insolvency, we hold that there is no fiduciary duty prescribed under California law that is owed to creditors by directors of a corporation solely by virtue of its operating in the 'zone' or 'vicinity' of insolvency." (Id. at p. 1041; some italics added, fn. omitted.)
Here, plaintiff alleged that he had been a creditor of CATS since May 2006, having loaned $315,000 to CATS over that time period. He further alleged he "was a creditor at the time of the omissions and transactions complained of." Plaintiff also alleged that as a result of McCullough's misappropriation of CATS's assets, "CATS was rendered insolvent and no longer has sufficient funds to meet its obligations as they come due."
"There are multiple definitions of insolvency. Corporations Code section 501 provides, for example, that a corporation is insolvent, if, as a result of a prohibited distribution, it would 'likely . . . be unable to meet its liabilities . . . as they mature.' But there is also insolvency in the balance sheet sense in which the value of liabilities exceeds the value of assets." (Berg, supra, 178 Cal.App.4th at p. 1042, fn. 23.)
We next ask whether, in light of CATS's insolvency, the third amended complaint alleged defendants engaged in actions that "divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims." (Berg, supra, 178 Cal.App.4th at p. 1041, italics omitted.) For the reasons discussed post, the answer to this question is "no" as to Edgell, but "yes" as to Dawson, Rogala, and Shakfeh.
A.
Edgell's Demurrer Was Properly Sustained Without Leave to Amend.
In support of the breach of fiduciary duty claim as pleaded against Edgell, the third amended complaint alleged Edgell, as a director, allowed McCullough to run the day-to-day operations of CATS, continue to misappropriate CATS's assets, and failed and refused to act to protect CATS and its creditors from McCullough. But the third amended complaint did not allege she took any action that involved the diversion or dissipation of corporate assets or placing such assets needlessly at risk. Therefore, plaintiff failed to allege sufficient facts stating a claim of breach of fiduciary duty by Edgell, as a director, against plaintiff, as a creditor of CATS.
The third amended complaint cited sections 316 and 1507 in support of the breach of fiduciary duty claim without any explanation as to their applicability to this case. Indeed, neither statute applies.
Plaintiff also cited section 2116 in support of his breach of fiduciary duty claim. Section 2116 "'codifies the modern view of the common law doctrine, whereby a court will entertain an action involving the internal affairs of a foreign corporation. With certain exceptions, the law of the state of incorporation applies.'" (Kruss v. Booth (2010) 185 Cal.App.4th 699, 715.) In the opening brief, plaintiff argues the applicability of Nevada law in determining whether he stated a cause of action for breach of fiduciary duty. In the reply brief, plaintiff jettisons this argument, stating: "In the Trial Court proceedings [plaintiff] mistakenly argued that under the facts of this action Corporations Code, § 2115 required that the law of the State of Nevada be applied to determine director's duty under the internal affairs doctrine. [¶] After having reviewed the guidance provided by this Honorable Court in Kruss v. Booth, (2010) 185 Cal.App.4th 699 [plaintiff] believes that the issue of a Director['s] duty to CATS, its shareholders and creditors should be determined under California law." In light of plaintiff's abandonment of this issue, we do not address it further.
1. Section 316 is inapplicable.
Section 316, subdivision (a) provides: "Subject to the provisions of Section 309, directors of a corporation who approve any of the following corporate actions shall be jointly and severally liable to the corporation for the benefit of all of the creditors or shareholders entitled to institute an action under subdivision (c): [¶] (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 institution of dissolution proceedings of the corporation, without paying or adequately providing for all known liabilities of the corporation, excluding any claims not filed by creditors within the time limit set by the court in a notice given to creditors under Chapters 18 (commencing with Section 1800), 19 (commencing with Section 1900) and 20 (commencing with Section 2000). [¶] (3) The making of any loan or guaranty contrary to Section 315." (Italics added.) Plaintiff does not allege that Edgell approved any of the actions enumerated in section 316, subdivision (a).
Section 316, subdivision (c) provides: "Suit may be brought in the name of the corporation to enforce the liability (1) under paragraph (1) of subdivision (a) against any or all directors liable by the persons entitled to sue under subdivision (b) of Section 506, (2) under paragraph (2) or (3) of subdivision (a) against any or all directors liable by any one or more creditors of the corporation whose debts or claims arose prior to the time of any of the corporate actions specified in paragraph (2) or (3) of subdivision (a) and who have not consented to the corporate action, whether or not they have reduced their claims to judgment, or (3) under paragraph (3) of subdivision (a) against any or all directors liable by any one or more holders of shares outstanding at the time of any corporate action specified in paragraph (3) of subdivision (a) who have not consented to the corporate action, without regard to the provisions of Section 800." (Italics added.) Plaintiff expressly alleged he brought the breach of fiduciary duty claim on his own behalf as a creditor of CATS; he did not bring his claim on behalf of CATS itself. Section 316 is therefore inapplicable.
2. Section 1507 is inapplicable.
Section 1507 provides: "Any officers, directors, employees or agents of a corporation who do any of the following are liable jointly and severally for all the damages resulting therefrom to the corporation or any person injured thereby who relied thereon or to both: [¶] (a) Make, issue, deliver or publish any prospectus, report, circular, certificate, financial statement, balance sheet, public notice or document respecting the corporation or its shares, assets, liabilities, capital, dividends, business, earnings or accounts which is false in any material respect, knowing it to be false, or participate in the making, issuance, delivery or publication thereof with knowledge that the same is false in a material respect. [¶] (b) Make or cause to be made in the books, minutes, records or accounts of a corporation any entry which is false in any material particular knowing such entry is false. [¶] (c) Remove, erase, alter or cancel any entry in any books or records of the corporation, with intent to deceive."
The third amended complaint did not include any allegation Edgell made any false statement or "[r]emove[d], erase[d], alter[ed] or cancel[ed] any entry in any books or records of the corporation." (§ 1507, subd. (c).) Like section 316, section 1507 does not support plaintiff's breach of fiduciary duty claim against Edgell.
In light of the foregoing analysis, Edgell's demurrer was properly sustained without leave to amend.
B.
The Trial Court Erred by Sustaining the Demurrers of
Dawson, Rogala, and Shakfeh.
The third amended complaint alleged in support of the breach of fiduciary duty claim that Dawson, Rogala, Shakfeh, and Puniak, while acting as directors of CATS, diverted and dissipated CATS's assets that might otherwise have been used to pay creditors' claims. Paragraph 41 of the third amended complaint alleged: "After having completed their investigation of Defendant McCullough, and having found that McCullough '. . . systematically siphon[ed] over $1,000,000.00 from CATS accounts improperly to enrich himself . . .' on December 30, 2008, Defendants Dawson, Rogala, Shakfeh, and Puniak, all agreed to CATS entering into a written 'Executive Termination Agreement[,'] a true and correct copy of which is attached hereto as Exhibit 1. With actual knowledge of Defendant McCullough's theft of CATS assets, the 2008 Board of Directors, Dawson, Rogala, Shakfeh and Puniak, for the purpose of personally enriching themselves to the detriment of other CATS Shareholders, and creditors each agreed in writing to: '. . . not pursue criminal litigation or take any direct or indirect action to cause criminal charges or litigation to be brought against Russell McCullough . . . ' to '. . . not pursue civil litigation against Russell McCullough . . .' and to '. . . not pursue the shareholder derivative litigation against Russell McCullough . . .' and in exchange for this waiver, Defendant McCullough agreed to surrender his shares of CATS and to transfer CATS '. . . shell company . . .', a CATS asset, to those Directors personally. In entering into this 'Agreement' Defendants Dawson, Rogala, Shakfeh and Puniak failed and refused to th[o]roughly investigate Defendant McCullough's assets to determine his ability to re-pay CATS or to investigate what had become of the $1,000,000.00 McCullough had taken, all for the purpose of to personally benefitting themselves to the detriment of CATS, its shareholders and creditors and in doing so violated their fiduciary duty to the shareholders of CATS, it[s] creditors and caused damages to CATS, its shareholders and creditors due to their acts/omissions and self-dealing." (Original ellipses.) The third amended complaint further alleged: "[T]he transfer of the 'shell' corporation from McCullough and CATS to Defendants Dawson, Rogala, Shakfeh and Puniak personally, removed the last major asset of CATS, all to the detriment of Plaintiff and all other creditors of CATS."
The copy of the agreement attached to the third amended complaint stated in relevant part: "Russell McCullough agrees to surrender the shell company to Joseph H. Dawson[,] Dr. Samir Shakfeh, Steve Rogala, and Dr. Mike Puniak." Other portions of the agreement provide that McCullough agreed to surrender various CATS documents, benefits, and stock to "the Board of Directors." Edgell is not mentioned by name in the agreement and there is no allegation she approved the agreement.
The third amended complaint therefore alleged Dawson, Rogala, and Shakfeh agreed to release McCullough from all liability to CATS, notwithstanding their knowledge he had misappropriated $1 million from CATS, causing CATS's insolvency, in exchange for, inter alia, his agreement to surrender CATS's shell corporation which was CATS's "last major asset" directly to them. Such allegations are sufficient to state a cause of action for breach of fiduciary duty against them.
We do not separately address the allegations against Puniak solely because there is no judgment in his favor to appeal from. Accordingly, the case will proceed against him in the trial court in a manner consistent with this opinion.
Shakfeh argues in his respondent's brief that "[t]he business judgment rule applies to [plaintiff]'s claim and [plaintiff] has failed to overcome the presumption that [defendants] acted in good faith because [plaintiff] could not allege facts that amount to fraud, bad faith, overreaching or an unreasonable failure to investigate." In Berg, supra, 178 Cal.App.4th at page 1044, like a director's duty of care to the shareholders of a corporation, a director's extracontractual duty to an insolvent corporation's creditors is protected by the business judgment rule. Directors will not be liable to creditors for management decisions that are made in good faith, following a reasonable inquiry and without a conflict of interest. (Id. at p. 1045; see Friedman, Cal. Practice Guide: Corporations (The Rutter Group 2011) ¶ 6:249.2, p. 6-54.2 (rev. #1, 2010) ["Directors will not be liable to creditors under corporate common law for acts that arguably diminished the creditors' recovery so long as the directors were personally disinterested and their acts were performed in good faith and following reasonable investigation" (italics added)].)
As discussed ante, the third amended complaint alleged Shakfeh, along with Dawson and Rogala, decided to release McCullough from all liability to CATS notwithstanding their knowledge he had siphoned off $1 million from CATS. In exchange, McCullough agreed, inter alia, to surrender the CATS shell corporation directly to them as individuals. Such allegations undermine the application of the business judgment rule as they suggest the directors were not personally disinterested and their acts were not performed in good faith following a reasonable investigation.
Shakfeh asserts the agreement's provision regarding the surrender of the shell corporation was merely "poorly worded." In his respondent's brief, Dawson argues that plaintiff's third amended complaint included misrepresentations of the facts and explains the circumstances surrounding the execution of the agreement and the reasons the breach of fiduciary duty claim is without merit. It might very well be the case that the breach of fiduciary duty claim lacks merit. We are limited, however, at this stage in the litigation to assume the truth of the facts pleaded and determine whether they are sufficient to state a cause of action; our role at this juncture is not to determine ultimate liability. As we discussed ante, sufficient facts have been alleged to state a breach of fiduciary duty claim against Dawson, Rogala, and Shakfeh.
MOTION FOR SANCTIONS
Dawson filed a motion for sanctions against plaintiff in this court on the ground plaintiff's appeal is frivolous. In light of our holding reversing the judgment in favor of Dawson, we deny Dawson's motion.
DISPOSITION
The judgment in favor of Edgell is affirmed. The judgments in favor of Dawson, Rogala, and Shakfeh are reversed. The appeal as it pertains to Puniak is dismissed. Edgell shall recover costs on appeal from Appellant. Appellant shall recover his costs on appeal from Dawson, Rogala, and Shakfeh. As between Appellant and Puniak, each shall bear his own costs.
FYBEL, J. WE CONCUR: O'LEARY, ACTING P. J. MOORE, J.