Summary
In Patrick v. Turner (Oct. 22, 2008, G037607), a non published opinion, we affirmed plaintiff’s removal as trustee of trust holding Alacer stock, but reversed dismissal of her shareholder derivative action against other trustees.
Summary of this case from In re James W. Patrick TrustOpinion
NOT TO BE PUBLISHED
Appeals from a judgment of the Superior Court of Orange County Nos. 03CC14826; A228275, David A. Thompson, Judge.
Hess-Verdon & Associates, Jillyn Hess-Verdon, Michael E. Reznick and Edward L. Laird for Plaintiff and Appellant.
McDermott Will & Emery, Eric Landau, Shawn Harpen, Travis Biffar; Hinojosa & Wallet, Jeffrey Forer; Jones Day and Eric Landau for Defendant and Respondent Thaddeus Smith.
Lewis Brisbois Bisgaard & Smith and Gary M. Lape for Defendant and Appellant James Turner.
Rutan & Tucker and Theodore I. Wallace, Jr., for Defendant and Respondent Ronald Patrick.
OPINION
IKOLA, JUDGE
This case involves Alacer Corporation (Alacer), maker of the popular “Emer’gen-C” brand of vitamin supplements. A trust established by James W. “Jay” Patrick currently holds all shares of Alacer stock. The trustees included plaintiff Ymelda Patrick and defendants Ronald Patrick, Thaddeus Smith, and James Turner.
To avoid confusion, we will refer to Ymelda Patrick as “plaintiff,” to Ronald Patrick by his surname, “Patrick,” and to the late James W. Patrick by his nickname, “Jay.” Other individual defendants are referred to by their surname or collectively as “defendants.”
Disputes among the trustees led to three probate petitions and one shareholder derivative action, which were consolidated below. As for the probate petitions, the court (1) removed plaintiff as a trustee, (2) denied plaintiff’s petition to remove the other trustees, and (3) denied plaintiff’s petition for instructions. As for the derivative action, the court dismissed it as after sustaining demurrers, granting judgment on the pleadings, and granting summary judgment for the defendants.
We affirm in part and reverse in part the judgment of dismissal entered for Alacer after the court sustained its demurrer to the derivative complaint in Patrick v. Alacer (2008) ___ Cal.App.4th ___.
We affirm the judgment on the probate petitions. The court did not abuse its discretion by removing plaintiff as a trustee. She breached her fiduciary duties and impaired trust administration by suing to dissolve Alacer. Plaintiff’s removal deprives her of standing to pursue the other petitions because she is no longer a cotrustee and was never a trust beneficiary.
We affirm in part and reverse in part the judgment on the derivative action. We affirm insofar as the court correctly granted summary judgment and judgment on the pleadings to the defendants on the fraud cause of action. We reverse it insofar as the court wrongly sustained demurrers without leave to amend to the remaining causes of action. Plaintiff sufficiently alleged she is a beneficial shareholder of Alacer with standing to pursue derivative claims. She stated causes of action for breach of fiduciary duty, “constructive trust,” “injunction,” and unfair business practices. And she should be granted leave to amend her declaratory relief cause of action.
To recap and clarify concepts too often conflated in this case: plaintiff adequately alleged she is a beneficial shareholder of Alacer, but failed to show she is a beneficiary of the trust. She alleges beneficial shareholder status because she alleges a community property interest in the Alacer stock held by the trust. She is not a trust beneficiary because the trust makes no donative transfer of trust assets to her. Instead, the trust purports to limit the trustees’ ability to satisfy her community property interest with Alacer stock.
Turner filed a protective cross-appeal, contending the court had earlier wrongly denied summary judgment on the derivative claims alleged in a former version of the complaint. The summary judgment motion was based on defendants’ assertion that a special litigation committee (SLC) had investigated the derivative claims and recommended they be dismissed. But Turner did not move for summary judgment. Smith did. Only aggrieved parties may appeal. Accordingly, we dismiss Turner’s cross appeal. Smith raised the same arguments in his respondent’s brief, however, and we may consider those arguments as an alternate reason to affirm the judgment. Thus, we consider the argument on its merits and conclude the court correctly found triable issues existed as to the independence and good faith of a special litigation committee that recommended dismissal of the derivative action.
FACTS
Alacer and the Trust
Jay was the president of Alacer, which made Emer’gen-C and other vitamin supplements. Jay married plaintiff in 1989. Jay transferred all Alacer shares to the James W. Patrick Revocable Trust in 2000. The trust named as trustees Jay, plaintiff, Patrick, Smith, Turner, and Vernon G. Peck. Mr. Peck has since died.
Jay amended the trust’s “Distribution upon Death” provision in January 2001. The amendment provided: “(1) Because of the pending dissolution of marriage from my wife, Ymelda, her claims of a community property interest in my Alacer stock, and my desire that she not obtain or have control of a majority of the shareholder interest of Alacer, because of her inability to properly run the business, I direct that upon my death, if I am still married to Ymelda and she has at the time of my death a community property interest in the stock of Alacer, that the trustees distribute not more than 46% of the shares now held in my name to Ymelda, as her community share of my entire estate and that the balance of any community property interest that she may have in the Alacer stock or the community property owned by us be distributed to her from my estate as probated by the court and that it not be Alacer stock. It is my intention that of my entire estate she receive nothing of my separate property and only receive her community share of our community property, if any. [¶] (2) I direct the trustees to distribute 25% of my Alacer stock to my son, Ronald J. Patrick. [¶] (3) I direct the trustees to distribute 4% of my Alacer stock to my daughter, Alice, and (4) I direct the trustees to hold the remainder of my Alacer stock to be distributed, 21 years after the death of my youngest living grandchild, equally to my then living lineal issue.”
Jay also amended the trust’s no-contest clause to provide, “Should my wife, Ymelda contest any provision of this trust or my will for any reason whatsoever, or seek to obtain more than 46% of the stock of Alacer now in the name of this trust, by whatever means including seeking the order of any court to determine her community property interest or confirm as community property to her a shareholder interest greater than that I have provided, I direct that she shall receive nothing.”
The trustees held a meeting in February 2003. They elected themselves to Alacer’s board of directors. Jay died soon after.
The Civil Action Including Shareholder Derivative Claims
About nine months later, plaintiff filed a shareholder derivative action against the other trustees and Alacer (Patrick v. Patrick (Super. Ct. Orange County) No. 03CC13335). The case was removed to federal court, then voluntarily dismissed.
Plaintiff filed a new shareholder derivative action in December 2003 (Patrick v. Patrick (Super. Ct. Orange County) No. 03CC14826). She later filed a first amended complaint. She alleged the trustees had breached fiduciary duties, defrauded her, and committed unfair business practices. She sought damages, a constructive trust, an injunction, and the involuntary dissolution of Alacer.
Smith moved for summary judgment or adjudication. He contended a special litigation committee (SLC) had investigated the derivative claims and recommended they be dismissed. The court denied summary judgment, finding triable issues existed as to the SLC’s independence and good faith. It construed the motion for summary adjudication on the fraud cause of action as a motion for judgment on the pleadings, and granted it on the grounds of uncertainty. The court granted plaintiff leave to amend to clarify whether the fraud cause of action was a direct or derivative claim.
The court granted summary adjudication to defendants on the involuntary dissolution cause of action. Plaintiff does not challenge this ruling on appeal.
Accordingly, plaintiff filed a second-amended complaint with similar allegations. The court sustained the defendants’ demurrers to it. It found plaintiff lacked standing to pursue the derivative claims because she was not a record or beneficial shareholder of Alacer stock. It further found plaintiff failed to clarify whether the fraud cause of action was direct or derivative, but had failed to state a cause of action in either case.
Finally, plaintiff filed the operative third amended complaint (complaint). The named defendants were Smith, Turner, Patrick, and Alacer. Plaintiff alleged she helped Jay build Alacer, before and during their marriage. Together, she alleged, they created vitamin supplement formulas, served as corporate officers, and financially supported Alacer during their marriage. Plaintiff further alleged Alacer flourished under their joint care, attaining a market value of $70 million or more. She maintained she had a community property interest in Alacer. Plaintiff asserted six causes of action in the complaint.
The first cause of action was styled, “CONSPIRACY TO DEFRAUD AGAINST ALL DEFENDANTS,” and labeled a “DIRECT CLAIM.” In it, plaintiff alleged she voted to reconstitute the board in reliance on the other trustees’ misrepresentations about their intent to serve on an interim basis and accept only a $1,000 per meeting salary.
The second cause of action was styled, “BREACH OF FIDUCIARY DUTIES AGAINST ALL DEFENDANTS, and labeled “DERIVATIVE CLAIMS.” Plaintiff alleged the other trustees breached their fiduciary duties, as Alacer directors, by mismanaging and basically looting Alacer.
The third cause of action was styled, “IMPOSITION OF A CONSTRUCTIVE TRUST FOR EMBEZZLEMENT AGAINST ALL DEFENDANTS.” Plaintiff sought to impose a constructive trust in favor of Alacer on any revenue generated by the improper sale of corporate assets, as well as a reasonable rate of return on Alacer assets improperly used by the trustees.
The fourth cause of action was styled, “INJUNCTIVE RELIEF AGAINST ALL DEFENDANTS.” Plaintiff sought to enjoin the defendants and their agents from (a) approving salary increases for Alacer’s officers, directors, or employees without court approval, (b) selling corporate assets outside the ordinary course of business without plaintiff’s consent, (c) hiring additional officers or consultants, (d) denying plaintiff access to corporate books and records, (e) using corporate funds to pay the trustees’ attorneys fees, (f) “looting the corporation,” (g) ignoring bona fide offers to buy Alacer, and (h) taking any action impairing Alacer’s property and business.
The fifth cause of action was styled, “UNFAIR BUSINESS PRACTICES (UNFAIR COMPETITION).” In it, plaintiff alleged the trustees sold Alacer assets below cost, offered improper discounts by forgiving loans, and misappropriated Alacer’s trade secrets. Plaintiff sought disgorgement of funds wrongfully acquired by the trustees.
The sixth cause of action was styled, “DECLARATORY RELIEF AGAINST ALL DEFENDANTS.” In it, plaintiff sought a declaration that she has a community property interest in Alacer, due to her and Jay’s contributions to Alacer during their marriage.
The court sustained Alacer’s demurrer to the complaint without leave to amend. It held plaintiff failed to state any of the purported causes of action. It further held all the causes of action except that for conspiracy to defraud violated the scope of permitted amendment. The order stated, “To the extent plaintiff . . . is again implicitly requesting the Court to reconsider its previous rulings on the derivative standing issues . . . that request is again denied for failure to satisfy any of the requirements of [Code of Civil Procedure] § 1008.” Plaintiff separately appealed from the subsequent dismissal of Alacer. We consider her appeal in a companion case (Patrick v. Alacer, supra, ___Cal.App.4th___.)
The court also sustained the other defendants’ demurrers to all causes of action — except the conspiracy to defraud claim — without leave to amend. It found plaintiff had failed to state any cause of action, exceeded the scope of permitted amendment, and failed to join indispensible parties to the declaratory relief cause of action.
The remaining cause of action for conspiracy to defraud was handled before trial. First, the court granted summary judgment to Smith. Plaintiff separately appealed from the subsequent judgment for Smith.
Second, the court granted judgment on the pleadings to Turner and Patrick on this cause of action. In this regard, the court considered whether the trustees were estopped from asserting the so-called Edwards issue: i.e., whether the trustees’ alleged misrepresentations to plaintiff to induce her approval of the new board caused any damage, given that the trustees did not need plaintiff’s vote to act. (See Edwards v. Edwards (1998) 61 Cal.App.4th 599, 602-603 (Edwards) [voting of shares held by trust is governed by a majority vote of trustees].) The court found the trustees were not estopped.
Accordingly, the court entered judgment for Turner and Patrick in a written judgment that also referenced the probate petitions discussed below. Plaintiff separately appealed from this judgment. These judgments for Smith, Turner, and Patrick — along with the rulings on the probate petitions discussed below — are the subject of this case.
The Probate Petitions
The parties filed numerous probate petitions. Three are relevant here.
Plaintiff filed a petition to remove the other trustees (Patrick v. Patrick (Super Ct. Orange County) No. A228941) in December 2004. She alleged the trustees refused to distribute Alacer stock to trust beneficiaries (including plaintiff), exhibited hostility towards a cotrustee (plaintiff, namely) and hid trust-related information from her, engaged in self-dealing and had conflicts of interest, encumbered the trust with excessive debt and wasted trust assets, and otherwise breached the trust.
Turner filed a petition to remove plaintiff as a trustee (Turner v. Patrick (Super. Ct. Orange County) No. A228275) in January 2005. He alleged plaintiff was hostile to her cotrustees, filed baseless lawsuits against the cotrustees (including the derivative action and the petition to remove the trustees), failed to cooperate in administering the trust, and abdicated her trustee duties to her counsel. The two probate actions were consolidated.
Turner filed the petition to remove plaintiff in an already pending action (case No. A228275), which had commenced before plaintiff filed the petitions to remove the other trustees (case No. A228941).
Plaintiff also filed a petition for instructions in the now-consolidated probate action in April 2005. She alleged the trust failed to specify who constituted Jay’s “living lineal issue,” who should represent them, and how the trustees should manage their Alacer stock before distribution. She further alleged the trustees filed a tax return for Alacer that understated the corporation’s value by $40 million, due to the erroneous inclusion of an adverse judgment against Alacer in that amount (plaintiff alleged Alacer had been sued in New Jersey, but the case had been dismissed with no judgment entered against the corporation). She asked the court to determine the lineal issue, issue instructions concerning their representation and the management of their Alacer stock, and authorize the trustees to retain an accountant to file an amended tax return.
In a minute order dated August 31, 2006, the court granted Turner’s petition to remove plaintiff, denied plaintiff’s petition to remove the other trustees, and denied her petition for instructions. The minute order stated, “James Turner shall prepare any formal orders and judgments necessary to effectuate this decision.” Turner served plaintiff with a “Notice of Entry of Orders” attaching a copy of the minute order on September 20, 2006.
The court later issued a statement of decision. The statement refers to plaintiff’s request for a statement of decision, but no written request appears in the record. It addressed the grounds for denying plaintiff’s petition to remove the trustees and the Edwards issue, while repeatedly stating it was omitting discussion of any issues not specified in plaintiff’s request. No mention was made of the reasons for granting the petition to remove plaintiff, other than noting her removal does not itself constitute a ground for removing the other trustees.
The court entered judgment on November 17, 2006. The judgment stated the court granted Turner’s petition, denied plaintiff’s petitions, granted judgment on the pleadings to Turner and Patrick, found Turner and Patrick were not estopped from raising the Edwards issue, and held the August 31, 2006 minute order deciding the probate petitions “effectively disposed” of the conspiracy to defraud cause of action in the civil suit. Plaintiff filed a notice of appeal from the judgment on November 29, 2006.
DISCUSSION
The Court Did Not Abuse Its Discretion by Removing Plaintiff as a Trustee
Plaintiff challenges her removal as a trustee, noting the high standard for removing a named trustee. “[T]he court will not ordinarily remove a trustee appointed by the creator of the trust.” (Estate of Bixby (1961) 55 Cal.2d 819, 826.) “‘When the settlor of a trust has named a trustee, fully aware of possible conflicts inherent in his appointment, only rarely will the court remove that trustee, and it will never remove him for potential conflict of interest but only for demonstrated abuse of power detrimental to the trust. . . . . [T]he settlor’s named trustee will be removed only for extreme grounds, such as incapacity, dishonesty, or lack of the qualifications necessary to administer the trust.’” (Copley v. Copley (1981) 126 Cal.App.3d 248, 286-287 (Copley).) When the choice of trustees shows the settlor “contemplated at least the potential of hostility, antagonism and conflict in the trust administration,” a named trustee should not be removed upon mere “friction” among the trustees, but only when the hostility “impair[s] the proper administration of the trust as [the settlor] contemplated it would be carried out.” (Id. at p. 289; see Prob. Code, § 15642, subd. (b)(3) [trustee may be removed “[w]here hostility or lack of cooperation among cotrustees impairs the administration of the trust”].)
Plaintiff rightly criticizes the court’s reasoning in the minute order removing her. The court based plaintiff’s removal on “breach of trust,” “hostility towards and lack of cooperation with her co-trustees which has impaired the administration of the trust,” “failing and declining to act,” and “other good cause, including but not limited to, breach of fiduciary duty.” It explained, “The foregoing grounds for removal are primarily derived from and motivated by fundamental and irreconcilable conflicts between (a) the inchoate and indeterminate nature and extent of [plaintiff’s] claimed community property interest in the Trust, if any, and (b) the fixed and determined or determinable nature of Ronald Patrick, Alice Nigl and the other lineal descendents’ express beneficial interests in the Trust.”
But Jay contemplated this conflict. He anticipated plaintiff would claim a community property interest in Alacer, as shown in the trust amendment instructing the trustees how to satisfy her interest. And still Jay named plaintiff a trustee. Plaintiff’s claimed community property interest in the trust’s Alacer stock and any ensuing (and entirely foreseeable) hostility among the trustees, without more, provides no ground for removing plaintiff as a trustee. (Copley, supra, 126 Cal.App.3d at pp. 287-289.)
But the court noted additional grounds for removing plaintiff in its statement of decision, although plaintiff did not request findings on the removal order. In explaining its denial of plaintiff’s petition to remove the other trustees, the court noted, “[Plaintiff], herself a co-trustee, committed the first of numerous breaches of trust warranting her removal by asserting that she was a ‘shareholder of 46% of the company’ . . . no later than April 1, 2003, and then later that year in two different actions seeking, inter alia, to dissolve and liquidate Alacer . . . .” The first purported breach of trust is no such thing. The trust amendment contemplates plaintiff may have a community property interest in Alacer and directs the trustees to satisfy it by “distribut[ing] not more than 46% of the shares now held in my name to [plaintiff],” and satisfying any remaining interest with assets from his estate. Plaintiff did not breach the trust by asserting she owned Alacer stock that the trust authorizes the trustees to distribute to her.
Plaintiff’s November 29, 2006 notice of appeal timely challenged her removal as a trustee. The court entered the August 31, 2006 minute order after a trial, making it a nonbinding tentative decision. (Former Cal. Rules of Court, rule 232; see also Cal. Rules of Court, rule 3.1590 (a), (b).) The court entered an appealable judgment removing plaintiff as a trustee on November 17, 2006. As plaintiff timely appealed from this judgment, Turner’s motion to dismiss the “untimely” appeal is denied.
Plaintiff’s attempts to dissolve Alacer are not easily overlooked. Plaintiff asserted a claim for involuntary dissolution in her initial shareholder derivative action (Patrick v. Patrick (Super. Ct. Orange County) No. 03CC13335). She alleged, there is and has been “internal dissention and two factions of shareholders in the corporation are so deadlocked that [Alacer’s] business can no longer be conducted with advantage to its shareholders.” She sought the dissolution and liquidation of Alacer to “protect[] the rights and interest of the complaining shareholder[] in that the value of her shares is being dramatically reduced as the looting and mismanagement of ALACER CORP. continue.” Plaintiff made substantially similar allegations in this action, where she again sought to involuntarily dissolve Alacer “on behalf of plaintiff, a shareholder of Alacer, for the protection of the rights or interests of plaintiff as a complaining shareholder.” The court dismissed this involuntary dissolution cause of action after granting summary judgment to defendants.
Defendants seize on the dissolution attempts as the basis for removing plaintiff. They assert plaintiff has “never explained how her repeated efforts to dissolve Alacer comport with her fiduciary duty to [the] Trust beneficiaries.” Plaintiff responds she “really never pursued” the dissolution cause of action, which did not “imply any harm toward the company” in any event. If anything, she asserts, dissolution would have furthered the trust by requiring it to determine the beneficiaries and make distributions. And at any rate, plaintiff notes defendants could have foreclosed dissolution by purchasing her shareholder interest. (Corp. Code, § 2000, subd. (a).)
Plaintiff’s defense of her dissolution attempts fails. Her dissolution attempts cannot comport with her fiduciary duties “not to use or deal with trust property for the trustee’s own profit . . . nor to take part in any transaction in which the trustee has an interest adverse to the beneficiary.” (Prob. Code, § 16004, subd. (a).) And dissolution likewise violates plaintiff’s duties “to take and keep control of and to preserve the trust property.” (Prob. Code, § 16006.) Moreover, plaintiff’s efforts to dissolve Alacer show the hostility among the trustees has risen above mere “friction” and reached the level where it “impair[s] the proper administration of the trust as [Jay] contemplated it would be carried out.” (Copley, supra, 126 Cal.App.3d at p. 289.) “The removal . . . of a trustee is largely within the discretion of the trial court,” and the court did not abuse its discretion by removing plaintiff for trying to dissolve and liquidate Alacer, the trust’s only asset. (Estate of Gilmaker (1962) 57 Cal.2d 627, 633.)
Plaintiff Lacks Standing to Challenge the Rulings on the Other Two Probate Petitions
Defendants contend plaintiff — now no longer a trustee — has lost standing to pursue her probate petitions and challenge the orders and judgment denying them. “Lack of standing may be raised at any time in the proceeding, including at trial or in an appeal. [Citations.] We may decide a standing issue even if the trial court did not rule on the issue.” (Blumhorst v. Jewish Family Services of Los Angeles (2005) 126 Cal.App.4th 993, 1000 (Blumhorst).) “[S]tanding requires a plaintiff to allege that he or she was personally damaged.” (Id. at p. 1002; accord Code Civ. Proc., § 367 [“Every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute”].)
The Probate Code limits those who have standing to file petitions concerning trusts. “A trustee may be removed in accordance with the trust instrument, by the court on its own motion, or on petition of a settlor, cotrustee, or beneficiary under Section 17200.” (Prob. Code, § 15642, subd. (a).) The trust instrument does not give plaintiff any special right to remove a trustee. Plaintiff was not the trust’s settlor; Jay was. And plaintiff is no longer a cotrustee. Thus, plaintiff must be a beneficiary of the trust to have standing to pursue her petition to remove the other trustees. Similarly, only “a trustee or beneficiary of a trust may petition the court under this chapter concerning the internal affairs of a trust,” including petitions for the purposes of “[a]scertaining beneficiaries” and “[i]nstructing the trustee.” (Prob. Code, § 17200, subds. (a), (b)(4), (6).) Plaintiff, no longer a trustee, must be a trust beneficiary to have standing to pursue her appeal on the petition for instructions.
Plaintiff does not specifically respond to defendant’s standing argument in her reply brief, even though defendants raised it in their respondent’s brief. We need no further briefing on this specific issue. (Gov. Code, § 68081 [parties entitled to file supplemental brief only when court decides issue “not proposed or briefed by any party” to an appeal].)
But plaintiff nevertheless contends on appeal she is a trust beneficiary in support of her claims that the trustees should be removed for violating various duties they owed to her as a beneficiary. The court rejected her claim below, finding plaintiff “did not establish that she was a beneficiary of the Trust.”
Plaintiff is not a trust beneficiary. A beneficiary is “a person to whom a donative transfer of property is made . . ., and: [¶] . . . [¶] [a]s it relates to a trust, means a person who has any present or future interest, vested or contingent.” (Prob. Code, § 24.) Plaintiff claims she has a community property interest in trust assets, the Alacer stock, and that the trust directs the trustees to distribute no more than 46 percent of the Alacer shares to her to satisfy any community property interest she may have in the stock. This alleged interest might satisfy the requirement that she have a “present or future interest, vested or contingent.” (Ibid.)
But plaintiff’s alleged community property interest does not satisfy the requirement for a “donative transfer of property.” (Prob. Code, § 24, subd. (c).) “The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing, and equal interests.” (Fam. Code, § 751.) If plaintiff has a community property interest in the trust’s Alacer stock, then Jay, by directing the trustees to issue Alacer shares to plaintiff to satisfy her community property interest (if any), would not be giving plaintiff anything she does not already own. Any community property interest she has in the Alacer stock is already “present” and “existing,” regardless of the trust’s distribution provision.
The plain language of the trust amendment shows a restriction on the trustees’ ability to transfer Alacer stock to plaintiff, not a donative transfer. The amendment notes Jay’s “pending dissolution of marriage from my wife, Ymelda,” his “desire that [plaintiff] not obtain or have control of a majority of the shareholder interest of Alacer, because of her inability to properly run the business,” and his “intention that of my entire estate [plaintiff] receive nothing of my separate property and only receive her community share of our community property, if any.” It directs the trustees to “distribute not more than 46% of the shares now held in my name to Ymelda, as her community share of my entire estate,” but only if “at the time of my death [she has] a community property interest in the stock of Alacer.” And it directs the trustees to satisfy any remaining community property interest plaintiff may have with assets “from my estate as probated by the court and that it not be Alacer stock.” Jay thereby limited the trustees to satisfying plaintiff’s community property interest with no more than 46 percent of the Alacer stock. He did not make a gift of his separate property to plaintiff. There was no donative transfer of property to plaintiff.
We express no opinion regarding the validity of the trust’s restriction in the event plaintiff’s community property interest exceeds 46 percent.
Thus, plaintiff is not a trust beneficiary and lacks standing to pursue her probate petitions. (Prob. Code, §§ 24, subd. (c), 15642, subd. (a), 17200, subds. (a), (b)(4), (6); see also Blumhorst, supra,126 Cal.App.4th at pp. 1000-1001.) Accordingly, we affirm the orders and judgment denying her petition to remove the trustees and her petition for instructions. Plaintiff’s lack of standing also moots her claims that the court erred by (1) excluding evidence of the trustees’ hostility towards her, (2) consolidating the probate petitions with the derivative action, or (3) quashing a subpoena to a corporate valuation appraiser.
The Court Properly Dismissed the Fraud Cause of Action in the Civil Action
We turn to the civil action, starting with the “conspiracy to defraud” cause of action. The court granted summary judgment to Smith and judgment on the pleadings to Turner and Patrick on this cause of action. The court based its rulings on the so-called Edwards issue and plaintiff’s inability to plead or prove causation — because Smith, Patrick, and Turner constituted three-fifths of the board of trustees, they did not need plaintiff’s (allegedly) fraudulently induced vote to act. (Edwards, supra,61 Cal.App.4th at pp. 602-603.)
Plaintiff mislabeled the cause of action. Conspiracy is a theory of vicarious liability. (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-511.) The actual cause of action here is for fraud.
“‘Misrepresentation, even maliciously committed, does not support a cause of action unless the plaintiff suffered consequential damages.’” (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 202.) Even “[a]t the pleading stage, the complaint ‘must show a cause and effect relationship between the fraud and damages sought; otherwise no cause of action is stated.’” (Ibid.) “‘Assuming . . . a claimant’s reliance on the actionable misrepresentation, no liability attaches if the damages sustained were otherwise inevitable or due to unrelated causes.’” (Goehring v. Chapman University (2004) 121 Cal.App.4th 353, 365, (Goehring) italics omitted [former student’s damages caused by dismissal from law school, not the misrepresentations that induced him to enroll]; Gagne v. Bertran (1954) 43 Cal.2d 481, 491-492 (Gagne) [property owner’s damages caused by soil conditions, not misrepresentations that induced him to buy property].)
The court properly found plaintiff cannot plead or prove a causal connection between the trustees’ alleged misrepresentations and her damages. Plaintiff alleged Smith, Turner, and Patrick misrepresented their intentions to serve as directors on an interim basis and for limited compensation, that she relied upon the misrepresentations in voting them onto Alacer’s board of directors, and that Smith, Patrick, and Turner then voted to fire her and cease various benefits she received from Alacer. But plaintiff also alleged, and the evidence on summary judgment showed, that Smith, Turner, and Patrick comprised three of the five trustees. They therefore controlled the voting power of the trust, and could have installed themselves as Alacer directors by majority vote — the trust document has no language to the contrary. (Edwards, supra,61 Cal.App.4th at 602-603; Corp. Code, § 704.) Smith, Turner, and Patrick did not need plaintiff’s vote. Plaintiff’s alleged injury thus was not caused by the alleged misrepresentations that induced her to vote with the other trustees, but by actions they could have taken anyway. (See Goehring, supra, 121 Cal.App.4th at p. 365; Gagne, supra,43 Cal.2d at pp. 491-492.)
Accordingly, this is a direct claim. The gravamen of her complaint is injury to her, not to the corporation or its shareholders as a group. (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107 (Jones).) Her extraneous allegations about the trustees’ conflicts of interest and excessive spending do not make this a derivative claim.
Plaintiff deems this analysis speculative. Not so. What is speculative is any causal connection between the trustees’ alleged misrepresentations and plaintiff’s alleged damages, as her vote was superfluous.
Plaintiff is a Beneficial Shareholder With Standing to Assert the Derivative Claims
We now address the remaining causes of action in the civil action, to which the court sustained defendants’ demurrers without leave to amend. “On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, the standard of review is well settled. The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. [Citations.] The court does not, however, assume the truth of contentions, deductions or conclusions of law. [Citation.] The judgment must be affirmed ‘if any one of the several grounds of demurrer is well taken. [Citations.]’ [Citation.] However, it is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. [Citation.] And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967 (Aubry).)
The complaint’s causes of action for breach of fiduciary duty, “constructive trust,” “injunction,” and unfair business practices assert shareholder derivative claims. “‘The management [of a corporation] owes to the stockholders a duty to take proper steps to enforce all claims which the corporation may have. When it fails to perform this duty, the stockholders have a right to do so.’” (Jones, supra, 1 Cal.3d at p. 107.) “[A]lthough the corporation is made a defendant in a derivative suit, the corporation nevertheless is the real plaintiff . . . .” (Ibid.) “‘[T]he action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’” (Id. at p. 106.)
The parties agree the complaint purports to state shareholder derivative claims based on the defendants’ alleged misconduct as Alacer directors. But the court found plaintiff lacked standing to assert these causes of action.
Plaintiff must satisfy two conditions to have standing to assert derivative claims. First, plaintiff must allege she “was a shareholder, of record or beneficially . . . at the time of the [relevant] transaction.” (Corp. Code, § 800, subd. (b)(1).) Second, plaintiff must allege efforts taken to secure the desired action from the board or a reason for not doing so, as well as delivery of the complaint or a similar writing to the board. (Corp. Code, § 800, subd. (b)(2).)
Plaintiff satisfied the first condition by alleging her community property interest in Alacer. She alleged she and her husband Jay both devoted substantial time and effort during their marriage to creating Alacer’s vitamin supplements and developing its business. “[L]ong ago our courts recognized that, since income arising from [a spouse’s] skill, efforts and industry is community property, the community should receive a fair share of the profits which derive from the [spouse’s] devotion of more than minimal time and effort to the handling of [his or her] separate property.” (Beam v. Bank of America (1971) 6 Cal.3d 12, 17.) “The community is entitled to the increase in profits attributable to community endeavor,” regardless of which spouse’s efforts and separate property are involved. (In re Marriage of Dekker (1993) 17 Cal.App.4th 842, 851-852 [community entitled to increased profits generated by husband’s efforts for wife’s separate property company].) Thus, even if Alacer was initially her husband’s separate property, plaintiff may have acquired a community property interest in it through their alleged devotion of time and effort to it during their marriage. (Beam, supra,6 Cal.3d at p. 17; Dekker, supra, 17 Cal.App.4th at p. 852.) Plaintiff alleges the increase in value of the Alacer stock, in excess of that attributed to a fair return on Jay’s original investment, is community property.
For purposes of demurrer, assuming as we must the truth of the allegations, plaintiff’s alleged community property interest in Alacer potentially renders her a beneficial shareholder. “[C]ourts in California have historically given derivative suit standing requirements a liberal construction.” (Pearce v. Superior Court (1983) 149 Cal.App.3d 1058, 1066.) The Legislature extended standing from record owners to beneficial owners as part of “the 1975 liberalization of the standing requirements,” designed to bring California in line with the majority rule that “‘it is sufficient that the plaintiff be an equitable shareholder or unregistered owner of shares.’” (Id. at p. 1065; accord Daly v. Yessne (2005) 131 Cal.App.4th 52, 61 (Daly) [“equitable ownership may confer standing upon a plaintiff to sue derivatively”].) While the trust may be the only record shareholder, plaintiff’s alleged community property interest in Alacer essentially makes her an unregistered Alacer shareholder. Plaintiff’s community property interest in Alacer satisfies the “liberal” standing requirement of beneficial ownership. (Pearce, supra, 149 Cal.App.3d at p. 1066.)
Defendants wrongly contend plaintiff lacks beneficial ownership because no court has yet adjudicated her community property claim. They liken her interest in Alacer to an unexercised stock option or undistributed inheritance. (See Daly, supra, 131 Cal.App.4th at p. 61 [stock option holder “‘is not an equitable shareholder of the corporation’”]; Klopstock v. Superior Court (1941) 17 Cal.2d 13, 17 [legatee of shares lacks derivative standing; applying stricter, pre-1975 standing requirement].) Not so. “The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing, and equal interests.” (Fam. Code, § 751, italics added; cf. D’Elia v. D’Elia (1997) 58 Cal.App.4th 415, 427 (D’Elia) [spouses had equal interest in community property stock by “operation of California’s community property laws”].) Plaintiff’s alleged community property interest was created during their marriage. She allegedly has present and existing ownership of Alacer stock already — she does not need to do anything to trigger her interest. And while a court may confirm her community property interest, it does not create it. At any rate, plaintiff seeks such confirmation here in her declaratory relief cause of action.
Patrick’s counsel aptly noted at oral argument plaintiff could have asserted her community property interest by filing a petition as an “interested person” asserting a claim to trust property. (Prob. Code, § 850, subd. (a)(3).) But he offered no authority holding such a petition is plaintiff’s sole avenue for relief. Indeed, the remedy provided by Probate Code section 850 is not exclusive. (See Henderson v. Fisher (1965) 236 Cal.App.2d 468, 480 [construing former Prob. Code, § 850]; O’Donnell v. Lutter (1945) 68 Cal.App.2d 376, 385 [same].)
Defendants misplace their reliance on the terms of the trust. They contend plaintiff is not a beneficial shareholder of Alacer because the trust does not make her a beneficiary. They are correct that plaintiff is not a trust beneficiary, as shown above. But defendants confuse being a trust beneficiary with being a beneficial shareholder. Plaintiff is a beneficial shareholder of Alacer because she alleges a community property interest in the Alacer stock held by the trust. Through her alleged community property interest, plaintiff already owns some of the Alacer stock held in the trust’s name. (Fam. Code, § 751; D’Elia, supra,58 Cal.App.4th at p. 427.) Although the trust contains no donative transfer of property to plaintiff, and in fact restricts the trustees’ ability to transfer Alacer stock to plaintiff to satisfy her community property interest, the trust does not and cannot defeat her alleged beneficial ownership.
The court took judicial notice of the trust, which plaintiff had attached to her initial complaint — the one that was removed and dismissed.
Plaintiff did not waive her standing as a beneficial shareholder by asserting her standing claim in amended complaints. The court had rejected plaintiff’s beneficial shareholder claim in sustaining demurrers to the second amended complaint. Plaintiff responded by filing the third amended complaint in which she continued to assert beneficial shareholder standing, but added allegations purporting to grant her standing as a trustee and Alacer director. Defendants contend plaintiff conceded the demurrers’ merits — i.e., that her beneficial shareholder claim lacked merit — by amending her complaint to allege new standing theories. (Sheehy v. Roman Catholic Archbishop of San Francisco (1942) 49 Cal.App.2d 537, 540-541 [“When [the plaintiff] amended his complaint after the general demurrer was sustained he in effect admitted that the demurrer was good and that his complaint was insufficient to state a cause of action”].) We doubt the rule applies here, because plaintiff did not abandon her beneficial shareholder claim in response to the sustained demurrer. She stood by her claim, merely bolstering it by asserting two additional theories. And even if the rule does apply, we exercise our discretion to reach the issue. (Connerly v. Schwarzenegger (2007) 146 Cal.App.4th 739, 749, fn. 4 [reaching standing issue rejected by trial court on demurrer and reasserted in amended complaint]; Sommer v. Gabor (1995) 40 Cal.App.4th 1455, 1468 [court has discretion to reach legal issue waived below].)
Because plaintiff satisfied the first condition of standing by alleging she is a beneficial shareholder, we turn to the second condition: demand on the board. (Corp. Code, § 800, subd. (b)(2).) Plaintiff satisfied this condition by alleging, “in November 2003, [she] delivered to the Board of Directors a true copy of the Complaint which Plaintiff proposed to file and demanded that the Board take such actions necessary for the corporation to prosecute the cause of action against the [Trustee] Defendants.” Plaintiff makes this allegation with sufficient particularity. (Corp. Code, § 800, subd. (b)(2); Oakland Raiders v. National Football League (2001) 93 Cal.App.4th 572, 587.) Defendants contend this allegation is insufficient to give her standing as a trustee because plaintiff did not make her demand on behalf of the trust. But because plaintiff has standing as a beneficial shareholder, not a trustee, she had no need to make the demand on behalf of the trust.
Thus, plaintiff has standing as an alleged beneficial Alacer shareholder to assert derivative claims. The court erred by sustaining the demurrers for lack of standing.
Because plaintiff adequately alleged standing as a beneficial shareholder, she had no need to seek court permission to file the complaint. (Corp. Code, § 800, subd. (b) (1) [allowing shareholder “who does not meet these requirements” to file derivative action with court permission].)
Plaintiff Sufficiently Stated the Other Causes of Action in the Civil Action
We now address whether plaintiff otherwise stated, or should have leave to amend to state, the individual causes of actions (except for fraud) asserted in the complaint. We apply the familiar standard of review (Aubry, supra,2 Cal.4th at pp. 966-967) to plaintiff’s causes of action for (1) breach of fiduciary duty, (2) “constructive trust,” (3) “injunction,” (4) unfair business practices, and (5) declaratory relief.
(1) Breach of Fiduciary Duty.
Smith demurred to the breach of fiduciary duty cause of action on the ground the alleged breaches were protected by the business judgment rule. Defendants repeat this contention on appeal.
“The business judgment rule is ‘“a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions.”’” (Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 711 (Lee).) It “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.” (Ibid.)
But bare invocation of the business judgment rule does not shield directors from all scrutiny. “An exception to this presumption exists in circumstances which inherently raise an inference of conflict of interest. [Citation.] Such circumstances include those in which directors, particularly inside directors, take defensive action against a take-over by another entity, which may be advantageous to the corporation, but threatening to existing corporate officers. [Citation.] Similarly, a conflict of interest is inferable where the directors of a corporation which is being taken over approve generous termination agreements — ‘golden parachutes’ — for existing inside directors. [Citation.] In situations of this kind, directors may reasonably be allocated the burden of showing good faith and reasonable investigation. [Citations.] But in most cases, the presumption created by the business judgment rule can be rebutted only by affirmative allegations of facts which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.” (Lee, supra, 50 Cal.App.4th at p. 715.)
Plaintiff sufficiently pleaded “conflicts of interest” and “bad faith” that rebut the presumption the defendants reasonably exercised their business judgment. (Lee, supra, 50 Cal.App.4th at p. 715.) Plaintiff alleged defendants wronged Alacer by “hiring friends and family members solely for the purpose of draining corporate assets,” “increasing their salaries as officers to amounts that are so outrageous that it constitutes waste,” “not investigating potential abuses by fellow directors or officers,” “forgiving loans that are owed to the corporation improperly made to benefit friends and/or family members, at the expense of ALACER,” and “ignoring bona fide offers from third parties to purchase the company.” She also alleged, “PATRICK has been negotiating with Chinese business entities since Jay’s illness and subsequent death to steal or convert Alacer’s trade secrets for manufacture and sale in China under a different entity owned solely by PATRICK,” while Turner and Smith have “failed to meet their duty to investigate” this potential wrongdoing. Plaintiff further alleged defendants “have continued to use their position as Trustees of the TRUST to maintain control of ALACER’s Board of Directors for the improper and wrongful purpose of looting ALACER before the distribution by the Trust of Alacer’s shares to the beneficiaries of the Trust.” These allegations — that the directors have engaged in self-dealing, squandered Alacer’s assets on friends and family, and used their director positions to pay themselves inflated officer salaries and “loot” Alacer before the trust distributes its stock — adequately set forth conflicts of interest and bad faith that, if true, preclude application of the business judgment rule.
(2) Constructive Trust.
Defendants contend plaintiff failed to state the constructive trust cause of action because a constructive trust is a claim for relief, not a cause of action. True. (Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 76 [constructive trust is a remedy, not a cause of action].) But courts look at alleged facts on demurrer, not captions. We will not foreclose a plaintiff from pursuing a viable remedy because the plaintiff imprecisely pleaded the remedy as a cause of action. “If the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated, that aspect of the complaint is good against a demurrer.” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38 (Quelimane), italics added; accord Aubry, supra, 2 Cal.4th at p. 967 [demurrer overruled if complaint states cause of action on any legal theory].) Plaintiff’s constructive trust cause of action incorporates by reference the allegations supporting her viable breach of fiduciary duty cause of action. Despite the technicality, we will determine whether the complaint alleges an entitlement to a constructive trust. (Douglas v. Superior Court (1989) 215 Cal.App.3d 155, 160 (Douglas) [reversing order sustaining demurrer to constructive trust cause of action because “the trial court should be allowed the opportunity to explore this remedy at trial”].)
“A constructive trust is an involuntary equitable trust created by operation of law as a remedy to compel the transfer of property from the person wrongfully holding it to the rightful owner.” (Communist Party v. 522 Valencia, Inc. (1995) 35 Cal.App.4th 980, 990 (Communist Party).) “One who gains a thing by fraud . . . the violation of a trust, or other wrongful act, is . . . an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it.” (Civ. Code, § 2224.) “[A] constructive trust may be imposed in practically any case where there is a wrongful acquisition or detention of property to which another is entitled.” (Weiss v. Marcus (1975) 51 Cal.App.3d 590, 600.) “[A] constructive trust may only be imposed where the following three conditions are satisfied: (1) the existence of a res (property or some interest in property); (2) the right of a complaining party to that res; and (3) some wrongful acquisition or detention of the res by another party who is not entitled to it.” (Communist Party, supra, 35 Cal.App.4th at p. 990.)
Plaintiff adequately alleges these elements. She alleges the trustee defendants wrongfully sold corporate assets without recording the sales or depositing the proceeds in corporate accounts. Plaintiff thereby alleged a res (improper sale proceeds), Alacer’s right to the res, and the Trustee defendants’ wrongful acquisition of the res. (Communist Party, supra, 35 Cal.App.4th at p. 990; Civ. Code, § 2224.)
Contrary to defendants’ claim, plaintiff need not allege the precise wrongfully acquired funds with any greater particularity. True, “a constructive trust requires ‘money . . . [which can] clearly be traced to particular funds or property in the defendant’s possession.’” (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1150.) But given defendants’ alleged misconduct — ousting plaintiff from Alacer’s management, not reporting the improper sales — plaintiff has alleged the wrongfully acquired sales proceeds with as much particularity as can be expected before discovery. (Dabney v. Philleo (1951) 38 Cal.2d 60, 67 [the defendant’s alleged exclusive possession of documents reflecting unrecorded transactions “excuse and explain the want of allegations describing with more particularity” the plaintiff’s property interests]; Douglas, supra,215 Cal.App.3d at p.160 [the plaintiff sufficiently alleged the “specific categories of property” the defendant wrongfully acquired].) The court erred in sustaining the demurrer to this “cause of action.”
(3) Injunction.
Defendants again call plaintiff to task for taking a claim for relief and denominating it a cause of action. “‘Injunctive relief is a remedy and not, in itself, a cause of action . . . .’” (McDowell v. Watson (1997) 59 Cal.App.4th 1155, 1159.) But we will overlook plaintiff’s lax pleading, determining whether plaintiff has pleaded facts entitling it to an injunction. (Quelimane, supra,19 Cal.4th at p. 39 [demurrer tests allegations, not titles]; cf. Douglas, supra,215 Cal.App.3d at p. 160.) Plaintiff has done so, adequately alleging defendants’ misconduct and the irreparable injury caused thereby.
Defendants contend the desired injunction would violate a statutory bar against enjoining corporate officers and directors. They rely upon Code of Civil Procedure section 526, subdivision (b)(6), which prevents courts from granting injunctions “[t]o prevent the exercise of a public or private office, in a lawful manner, by the person in possession.”
This statute is inapt. It bars only those injunctions that would enjoin corporate officers and directors from exercising their office at all, in the first instance. It prohibits persons from challenging elections by enjoining the elected officeholders, instead requiring challengers to file an action in quo warranto. (6 Witkin, Civil Procedure (4th ed. 1997) Provisional Remedies, § 339, pp. 271-272; see also 8 Witkin, supra, Extraordinary Writs, § 7, pp. 787-788; Code Civ. Proc., § 803 et seq.) Even defendants’ own cited case makes this clear: “‘officers of a corporation will not be enjoined from acting as such . . . for the reason that there is an adequate remedy at law by quo warranto. It is not the province of equity to decide the right to an office.’” (Somo v. Superior Court (1933) 135 Cal.App.584, 586-587.)
And the statute certainly does not bar a court from enjoining corporate officers and directors from breaching their fiduciary duties to the corporation. These types of injunctions are commonly sought and granted in shareholder derivative actions. “Shareholders may bring a derivative suit to, for example, enjoin or recover damages for breaches of fiduciary duty directors and officers owe the corporation.” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 313; cf. Corp. Code, § 208, subd. (a) [shareholders may seek to enjoin corporation or its officers from committing ultra vires acts].)
The desired injunction would not improperly bar defendants’ from holding office; it would merely enjoin them from continuing the alleged breaches of their fiduciary duties to Alacer. The injunctive relief cause of action thus survives defendants’ challenge to it, and the court erred in sustaining the demurrer to it.
(4) Unfair Business Practices.
Plaintiff sufficiently stated a cause of action for violation of Business and Professions Code section 17200 (section 17200), which prohibits unfair, unlawful, or fraudulent business practices. Plaintiff alleged the defendants violated section 17200 by misappropriating and selling Alacer’s trade secret vitamin supplement formulas, selling Alacer’s vitamin products below cost, and offering “unearned discounts” to friends and family by forgiving their loans. By alleging trade secret misappropriation, plaintiff sufficiently stated a cause of action for unfair business practices. (Ibid.; Readylink Healthcare v. Cotton (2005) 126 Cal.App.4th 1006, 1018, 1020-1021 [§ 17200 prohibits trade secret misappropriation].)
Defendants contend plaintiff lacks standing to assert the unfair business practices cause of action because she failed to allege actual injury. Standing to assert a cause of action pursuant to section 17200 is limited to plaintiffs “who [have] suffered injury in fact and [have] lost money or property as a result of unfair competition.” (Californians for Disability Rights v. Mervyn’s LLC (2006) 39 Cal.4th 223, 228 [discussing Proposition 64’s amendment to Bus. & Prof. Code, § 17204].) But in a shareholder derivative action, the corporation “is the real plaintiff . . . .” (Jones, supra,1 Cal.3d at p. 107.) The alleged injury in a shareholder derivative action is suffered by the corporation or “‘the whole body of its stock or property without any severance or distribution among individual holders.’” (Id. at p. 106.) All Alacer shareholders, including plaintiff as a beneficial shareholder, lost money and property from the alleged trade secret misappropriation — an indivisible injury suffered by all shareholders is the essence of a shareholder derivative action. (Ibid.) Plaintiff alleged actual injury and property loss sufficiently to have standing to assert the unfair business practices cause of action.
Defendants further contend plaintiff lacks standing because unfair business practices benefit shareholders. Its sole support for this proposition is a 17-year-old federal district court decision from Missouri that no California court has embraced. (Burt on behalf of McDonnell Douglas Corp. v. Danforth (E.D. Mo. 1990) 742 F.Supp. 1043, 1053 [“as a shareholder of McDonnell Douglas, plaintiff would normally benefit from any business advantage that the corporation gained through ‘unfair competition’”].) We will not be the first to endorse its cynicism.
Defendants also contend plaintiff failed to adequately identify the misappropriated trade secret. A plaintiff alleging trade secret misappropriation “must ‘describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.’” (Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1453.) Plaintiff identified the trade secret here as “the formulas for ‘Emergen-C’ vitamin packets” and “other ALACER formulas.” While the second set of trade secrets is woefully vague, the first trade secret — the “Emergen-C” formula — is described with sufficient particularity to set it apart from commonly known matters and allow defendant to ascertain the trade secret’s boundaries. (Ibid.)
“A demurrer does not lie to a portion of a cause of action.” (PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682 [reversing demurrer sustained to legal malpractice cause of action because plaintiff alleged at least one negligent act].) Because plaintiff sufficiently described at least one misappropriated trade secret, the unfair business practices cause of action should have survived demurrer. (Ibid.) For the same reason, we need not reach the viability of plaintiff’s allegations regarding below-cost sales and unearned discounts.
(5) Declaratory Relief.
Plaintiff added one entirely new cause of action in the third amended complaint — the sixth cause of action for declaratory relief. Plaintiff sought a declaration that plaintiff has a community property interest in Alacer shares. Defendants challenge this cause of action on two grounds. While the second ground has merit, plaintiff should have leave to amend to remedy the error.
First, defendants contend plaintiff could not add a new cause of action to the third amended complaint. They claim the order sustaining the demurrer to the prior complaint with leave to amend granted plaintiff leave to amend only the causes of action asserted in the prior complaint, not leave to add entirely new causes of action. (People v. Ex rel. Dept. Pub. Wks. (1967) 248 Cal.App.2d 770, 785 [“such granting of leave to amend [in an order sustaining a demurrer] must be construed as permission to the pleader to amend the cause of action which he pleaded in the pleading to which the demurrer has been sustained”].)
This rule is inapplicable here because the new cause of action directly responds to the court’s reason for sustaining the earlier demurrer. The court found plaintiff failed to allege she had standing as a beneficial shareholder of Alacer to bring shareholder derivative claims. The new declaratory relief cause of action supports her standing claim by seeking a declaration that she has a community property interest in Alacer — i.e., that she is a beneficial shareholder of Alacer. Plaintiff may not have been free to add any cause of action under the sun to her complaint, but the court should have allowed her to add this cause of action to establish her standing.
Second, defendants contend plaintiff failed to join indispensable parties to the declaratory relief cause of action. “Where a number of persons have undetermined interests in a trust fund and one of them, acting adversely to the others, seeks to recover the whole, to fix his share, or recover a portion claimed by him, the other persons are indispensable parties.” (Hebbard v. Colgrove (1972) 28 Cal.App.3d 1017, 1026 (Hebbard); accord Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2006) ¶ 2:165, p. 2-44.1.) The trust directs the trustees to distribute Alacer shares to plaintiff, defendant Ronald J. Patrick, Alice Patrick Nigl (the daughter of plaintiff’s husband), and to either “the issue of [plaintiff’s husband] and [plaintiff]” (as alleged in the complaint) or plaintiff’s husband’s “lineal issue” (as set forth in the trust, of which the court took judicial notice).
The court correctly sustained the demurrer for plaintiff’s failure to join indispensable parties: namely, Alice Patrick Nigl and Jay’s lineal issue. (Code Civ. Proc., § 430.10, subd. (d) [defendant may demur for defect in parties]; see also Hebbard, supra, 28 Cal.App.3d at p. 1026.) But it erred by denying leave to amend. Nothing in the record suggests plaintiff will be unable to name the indispensable parties as defendants in an amended complaint. She should have leave to name them in this action.
The Court Correctly Denied Summary Judgment on the SLC Defense
Turner filed a cross-appeal, contending the court should have granted summary judgment on the derivative claims in an earlier version of the complaint, pursuant to the SLC’s recommendation. He claims the court wrongly found triable issues existed as to the SLC’s independence and good faith.
Turner, however, did not move for summary judgment. Smith did. Only aggrieved parties may appeal. (Code Civ. Proc., § 902.) “We are here to provide relief for appellants who have been wronged by trial court error. Our resources are limited and thus are not brought to bear when appellants have suffered no wrong but instead seek to advance the interests of others who have not themselves complained. The guiding principle is one often encountered in daily life: no harm, no foul.” (Rebney v. Wells Fargo Bank (1990) 220 Cal.App.3d 1117, 1132.) Turner’s cross-appeal is dismissed on our own motion for lack of standing. (Ibid.; see also Blumhorst, supra,126 Cal.App.4th at pp. 1000-1001; Decker v. U.D. Registry, Inc. (2003) 105 Cal.App.4th 1382, 1391 [appeal dismissed where non-aggrieved party lacked standing].)
Smith raises the same issue in his respondent’s brief, though he did not cross-appeal. “As a general matter, ‘a respondent who has not appealed from the judgment may not urge error on appeal.’” (Estate of Powell (2000) 83 Cal.App.4th 1434, 1439.) But “Code of Civil Procedure section 906 provides a limited exception ‘to allow a respondent to assert a legal theory which may result in affirmance of the judgment.’” (Ibid.) “The respondent . . . may, without appealing from such judgment, request the reviewing court to and it may review any [ruling or order] for the purpose of determining whether or not the appellant was prejudiced by the error or errors upon which he relies for reversal . . . .” (Code Civ. Proc., § 906.) If Smith is entitled to summary judgment on the derivative claims, then plaintiff would not have been prejudiced by the order sustaining demurrers to those claims. (Cal. Const., art. VI, § 13 [no reversal absent a miscarriage of justice].) Thus, we may reach his contention without any cross-appeal.
The SLC defense “arises out of the interplay between the business judgment rule and the requirement in a stockholder’s derivative action that the plaintiff must have made a demand on the board of directors to have the corporation pursue the action. [Citation.] Thus, it has been held that, once a duly appointed committee of disinterested directors reasonably determines that it is not in the best interests of the corporation to pursue the claims asserted in the derivative action, that decision is protected by the business judgment rule.” (Finley v. Superior Court (2000) 80 Cal.App.4th 1152, 1158 (Finley).) But “the board cannot avail itself of the protection of the [business judgment] rule if a majority of the board has a personal interest in the outcome. [Citation.] Therefore, when the shareholder alleges wrongdoing on the part of a majority of directors . . . the common practice is for the board to appoint a special litigation committee of independent directors to investigate the challenged transaction.” (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 184-185 (Desaigoudar).)
“When the special litigation committee defense reaches the trial court on summary judgment, traditional summary judgment rules apply.” (Desaigoudar, supra, 108 Cal.App.4th at p. 189.) “Therefore, if a trial court detects a factual dispute concerning the independence of the special litigation committee or the adequacy of its investigation, the case may not be dismissed short of trial.” (Id. at p. 190; accord Finley, supra, 80 Cal.App.4th at p. 1161 [“the court decides only whether the committee was disinterested, acted in good faith, and investigated adequately”].)
To obtain summary judgment, Smith must show plaintiff cannot establish an element of her cause of action, or show a complete defense thereto. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) He bears the burden to “make a prima facie showing of the nonexistence of any triable issue of material fact.” (Ibid.) If Smith makes this showing, plaintiff bears the burden to “set forth the specific facts showing that a triable issue of material fact exists. . . .” (Code Civ. Proc., § 437c, subd. (p)(2).)
Here, the court correctly found triable issues as the SLC’s independence and good faith precluded summary judgment. The SLC committee consisted of Smith and an outside director, and was advised by the law firm of McDermott, Will, and Emery. Plaintiff presented evidence showing Alacer paid Smith $75,000 during his investigation as to whether defendants were drawing bloated salaries from Alacer. She also presented evidence that Alacer was paying McDermott, Will, and Emery to represent Smith in litigation against plaintiff at the same time it advised the SLC on its investigation of plaintiff’s allegations. Finally, she presented evidence that the board of directors disregarded many of the SLC’s recommendations and failed to complete a forensic accounting report. This evidence raises triable issues as to the SLC’s independence and good faith.
Defendants wrongly contend plaintiff waived any challenge to the SLC’s independence and good faith by voting as an Alacer director to approve the SLC’s members and counsel before the investigation. But plaintiff submitted a declaration in which stated she did not know these facts when she approved the SLC. Moreover, she attested, she expressly conditioned her vote on the completion of the financial report, which did not occur.
Plaintiff thus raised a triable issue as to whether her purported waiver was knowing and informed. “‘Waiver is the intentional relinquishment of a known right after knowledge of the facts.’ [Citations.] The burden, moreover, is on the party claiming a waiver of a right to prove it by clear and convincing evidence that does not leave the matter to speculation, and ‘doubtful cases will be decided against a waiver.’” (Grubb & Ellis Co. v. Bello (1993) 19 Cal.App.4th 231, 236.) When considering whether a waiver is effective, “[t]he final question is whether [the party], signing it under all the circumstances, executed an ‘intentional relinquishment of a known right after knowledge of the facts’ [citations], which is a question of fact alone.” (Bohlert v. Spartan Ins. Co. (1969) 3 Cal.App.3d 113, 119-120; accord Neubauer v. Goldfarb (2003) 108 Cal.App.4th 47, 57 [“A triable issue of fact exists as to whether [the plaintiff’s] purported waiver was fully informed. . . . If it turned out the [defendant] withheld material information a trier of fact could find [the plaintiff’s] purported waiver was not fully informed”].)
Due the triable issues as to the SLC’s independence and good faith, and as to plaintiff’s knowledge and purported waiver, the court correctly denied summary judgment on the SLC defense.
Plaintiff’s motion for judicial notice (filed February 25, 2008), and defendants’ motion for judicial notice (filed November 15, 2007) are denied.
DISPOSITION
The judgment on the probate petitions is affirmed.
The judgment on the civil action is affirmed as to the third amended complaint’s first cause of action for conspiracy to defraud. The judgment is reversed as to the third amended complaint’s other causes of action.
Turner’s cross-appeal is dismissed.
The case is remanded to the court with directions to vacate its orders sustaining Smith and Turner’s demurrers to the third amended complaint. The court is further directed to enter an new order: (1) overruling the demurrers to the causes of action for breach of fiduciary duties, constructive trust, injunctive relief, and unfair business practices, and directing Smith, Patrick, and Turner to answer these causes of action; and (2) sustaining the demurrer to the declaratory relief cause of action, but granting leave to amend this cause of action to join any indispensable parties.
In the interests of justice, the parties shall each bear their own costs on appeal.
WE CONCUR: SILLS, P. J., O’LEARY, J.