Lehman v. Superior Court

• Decision Date: 28 November 2006
• Docket Number: No. B193165.,B193165.
• Citation: 145 Cal.App.4th 109,51 Cal.Rptr.3d 411
• Court: California Court of Appeals Court of Appeals
• Parties: Stephen C. LEHMAN et al., Petitioners, v. The SUPERIOR COURT of Los Angeles. County, Respondent; Nancy Hoffmeier Zamora, Real Party in Interest.

51 Cal.Rptr.3d 411

145 Cal.App.4th 109

Stephen C. LEHMAN et al., Petitioners, v. The SUPERIOR COURT of Los Angeles. County, Respondent Nancy Hoffmeier Zamora, Real Party in Interest.

No. B193165.

Court of Appeal, Second District, Division 1.

November 28, 2006.

Rutter Hobbs & Davidoff and Frank D. Hobbs, Los Angeles, for Petitioners.

No appearance for Respondent.

The Ford Law Firm, William H. Ford III, Claudia J. Serviss, Los Angeles, and Guenther A. Richter for Real Party in Interest.

MALLANO, Acting P.J.

This original proceeding raises the question of whether the statute of limitations for a liability "created by law" (Code Civ. Proc., § 359 (section 359)) applies to a claim alleging a breach of fiduciary duty by the directors of a corporation.

We conclude that section 359 governs a fiduciary duty claim where the basis of the directors' liability was first authorized by a statute or the Constitution. If the basis of liability existed at common law, it was not "created by law" within the meaning of section 359, even if the common law theory of liability has since been codified.

I BACKGROUND

The first amended complaint (complaint) alleges as follows. A corporation, e4L Inc., did business in Los Angeles County and had its principal place of business there. e4L was a direct marketing company that promoted a wide variety of products on television, radio, and the Internet. Each week, it broadcast more than 3,000 half-hour television programs, commonly known as infomercials, throughout the world. e4L's customers used credit cards to pay for purchases.

Stephen Lehman, Eric Weiss, and Daniel Yukelson were directors of e4L (directors). The directors controlled and dominated e4L for their own personal benefit by issuing misleading press releases announcing that e4L (1) had raised $22 million "when the money was in fact required to repay investments" and (2) had retained Donaldson, Luftkin & Jennerette as financial consultants. The directors also caused or allowed e4L to engage in improper billing procedures. They did not disclose any of these acts.

The directors caused one of e4L's subsidiaries to enter into a loan and security agreement under which the subsidiary obtained a $20 million "credit facility" in exchange for a promise to maintain a minimum net worth of $11.7 million. The directors caused or permitted the subsidiary's net worth to fall below $11.7 million. As a result, the subsidiary defaulted under the agreement.

e4L acquired a 50 percent interest in BuyItNow.com (BuyItNow), a leading Internet retailer featuring a large selection of brand name products and specialty items. The directors transferred more than $6.5 million from BuyItNow to e4L "with no invoices [or] management committee consent," commingled the two companies' funds, failed to hold proper board meetings, "[f]ail[ed] to obtain unanimous board consent on several corporate transactions including stock issuances," advertised products for BuyItNow "as seen on TV" when e4L could not fulfill the orders in a timely manner, caused e4L to show a $1.1 million accounts receivable from BuyItNow without providing any accounting or billing information to BuyItNow, and improperly billed BuyItNow "to manipulate e4L's EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)." These actions diminished e4L's investment in BuyItNow, exposed e4L to substantial liability, and harmed its reputation and creditworthiness.

The directors caused or permitted e4L and its subsidiaries to inflate e4L's earnings and net worth artificially by charging customers' credit cards multiple times for a single purchase and by charging customers' credit cards for merchandise e4L did not have in stock. In so doing, the directors violated the "chargeback" limits of the credit card company. e4L attempted to sell its Asian subsidiaries but that effort failed when the directors allowed the subsidiaries to fall significantly off their operating budgets.

Eventually, e4L lost its ability to fill and ship orders. The directors caused or permitted e4L to sell and transfer its computers to employees for nominal sums.

On or about March 5, 2001, e4L filed for chapter 11 protection under the bankruptcy code (11 U.S.C. § 1101 et seq.). The chapter 11 proceeding was subsequently converted to a chapter 7 case (11 U.S.C. § 701 et seq.).

The directors concealed their wrongful acts and omissions. e4L did not discover the acts and omissions until November 22, 2002.

On December 19, 2005, the chapter 7 trustee, Nancy Zamora (plaintiff), filed the action below, alleging the foregoing facts and a cause of action for breach of fiduciary duty against the directors. An amended pleading was later filed. Defendants Lehman and Weiss demurred to the complaint on the ground that the action was barred by the statute of limitations, specifically section 359, which applies a three-year limitations period to an action against corporate directors based on "a liability created by law." They argued that their alleged liability was "created by law," namely, Corporations Code section 309, which sets forth a director's standard of care in performing his or her duties. Plaintiff filed opposition, arguing for application of section 343 of the Code of Civil Procedure, which states that "[a]n action for relief not hereinbefore provided for must be commenced within four years after the cause of action shall have accrued."

The trial court overruled the demurrer but requested interlocutory review of whether section 359 applied to plaintiffs claim, noting that there was a split of authority on the issue. (Compare Smith v. Superior Court (1990) 217 Cal.App.3d 950, 266 Cal.Rptr. 253 (Smith) with Briano v. Rubio (1996) 46 Cal.App.4th 1167, 54 Cal. Rptr.2d 408 (Briano); see Code Civ. Proc., § 166.1 [trial court may request interlocutory resolution of controlling question of law as to which there are substantial grounds for difference of opinion].)

Lehman and Weiss filed a petition for writ of mandate with this court, arguing that section 359 applied. We issued an order to show cause, established a briefing schedule, and set the matter for oral argument. Having considered the written and oral arguments of the parties, we conclude that section 359 is not applicable because petitioners have not shown that their alleged liability was first authorized by a statute or the Constitution. We therefore deny the petition.

II DISCUSSION

In reviewing the ruling on a demurrer, "we are guided by long-settled rules. *We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.... We also consider matters which may be judicially noticed.' ... When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action.... And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal. Rptr. 718, 703 P.2d 58, citations omitted; accord, Code Civ. Proc., § 452.) A complaint fails to state a cause of action where the dates alleged therein establish that the claim is barred by the statute of limitations. (Anderson v. McNally (1957) 150 Cal.App.2d 778, 783-784, 310 P.2d 975.)

A. Interpretation of Section 359

The petition presents a question of statutory interpretation. We follow "`[t]he fundamental rule ... that the court should ascertain the intent of the Legislature so as to effectuate the purpose of the law....' .... In determining that intent, we first examine the words of the statute itself.... Under the so-called `plain meaning' rule, courts seek to give the words employed by the Legislature their usual and ordinary meaning.... However, the `plain meaning' rule does not prohibit a court from determining whether the literal meaning of a statute comports with its purpose.... If the terms of the statute provide no definitive answer, then courts may resort to extrinsic sources, including the ostensible objects to be achieved and the legislative history." (Bodell Construction Co. v. Trustees of Cal. State University (1998) 62 Cal.App.4th 1508, 1515-1516, 73 Cal.Rptr.2d 450, citations omitted.)

Section 359 states: "This title[, which governs the time for commencing civil actions,] does not affect actions against directors, shareholders, or members of a corporation, to recover a penalty or forfeiture imposed, or to enforce a liability created by law; but such actions must be brought within three years after the discovery by the, aggrieved party of the facts upon which the penalty or forfeiture attached, or the' liability was created." (Italics added.) Our inquiry focuses on the meaning of a liability "created by law" and whether Corporations Code section 309— which requires that directors perform their duties in good faith—gives rise to such liability.

Two Courts of Appeal have previously addressed this issue, reaching different conclusions. In Smith, supra, 217 Cal. App.3d 950, 266 Cal.Rptr. 253, the court held that section 359 applies to claims based on Corporations Code section 309. In Briano, supra, 46 Cal.App.4th 1167, 54 Cal.Rptr.2d 408, the court expressly disagreed with Smith, concluding that section 359 does not apply where the basis of liability existed at common law and that Corporations Code section 309 codified the common law. As we explain, Smith is inconsistent with the principles announced by our Supreme Court, the Courts of Appeal, and the courts of other jurisdictions. We therefore conclude that Briano properly interpreted section 359 and follow Briano.

Smith and Briano agreed that the term "law," as used in section 359, refers to a statute or constitutional provision. (See Smith, supra, 217 Cal.App.3d at p. 953, 266...