Patrick v. Alacer Corp.

• Decision Date: 22 October 2008
• Docket Number: No. G037261.,G037261.
• Citation: 167 Cal.App.4th 995,84 Cal. Rptr. 3d 642
• Court: California Court of Appeals Court of Appeals
• Parties: YMELDA T. PATRICK, Plaintiff and Appellant, v. ALACER CORPORATION, Defendant and Respondent.

167 Cal.App.4th 995

84 Cal. Rptr. 3d 642

YMELDA T. PATRICK, Plaintiff and Appellant, v. ALACER CORPORATION, Defendant and Respondent.

No. G037261.

Court of Appeals of California, Fourth District, Division Three.

October 22, 2008.

Hess-Verdon & Associates, Jillyn Hess-Verdon, Edward L. Laird and Michael E. Reznick for Plaintiff and Appellant.

Anderholt & Turner, J. John Anderholt; Allan B. Weiss & Associates and Allen L. Thomas for Defendant and Respondent.

OPINION

IKOLA, J.

Plaintiff Ymelda T. Patrick appeals from a judgment of dismissal entered after the court sustained defendant Alacer Corporation's (Alacer) demurrer to her third amended complaint without leave to amend. Plaintiff asserted shareholder derivative and direct causes of action against Alacer and three individuals who sit on its board of directors and serve as trustees of the trust that is its sole record shareholder.¹

The court erred in sustaining Alacer's demurrer to the derivative causes of action. Alacer is the real party in interest, and only a nominal defendant. It cannot demur to a derivative complaint filed on its behalf, except on limited grounds such as the shareholder plaintiff's lack of standing. And here, plaintiff has standing to assert the derivative claims. She alleges a community property interest in Alacer stock, which, if true, renders her a beneficial shareholder of Alacer.

But the court correctly sustained the demurrer to plaintiff's direct cause of action for fraud. Plaintiff alleged she voted for certain Alacer board members in reliance on their misrepresentations. But plaintiff fails to allege causation, as her vote was unnecessary to the directors' election. We affirm in part, reverse in part, and remand.

FACTS

The following facts are alleged or implied by the third amended complaint (complaint). (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081 [6 Cal.Rptr.3d 457, 79 P.3d 569] [on demurrer, "courts must assume the truth of the complaint's properly pleaded or implied factual allegations"].)

The Director Defendants Allegedly Take Control of Alacer and Loot It

Plaintiff and her late husband, James Patrick, founded Alacer in the mid-1970's to manufacture vitamin supplements. Together, they created the vitamin supplement formulas, served as corporate officers, and financially supported Alacer during their marriage. Alacer flourished under their care, partly due to the popularity of its "Emergen-C" vitamin C supplement, attaining a market value of $70 million or more. Plaintiff alleges the increased value of Alacer, over a fair return on her husband's original investment, is community property.

Plaintiff's husband, the sole record owner of Alacer stock, transferred all of the shares to the James W. Patrick Revocable Trust (the Trust) in 2000. The Trust is Alacer's only shareholder of record. The Trust documents direct the trustees to distribute up to 46 percent of the Trust's Alacer stock to plaintiff upon her husband's death to satisfy any community property interest she may have in Alacer.

The Trust's trustees held a meeting in February 2003, while plaintiff's 90-year-old husband was deathly ill. There were five trustees at that time: plaintiff, defendant Ronald J. Patrick, defendant James Turner, defendant Thaddeus Smith (the Director defendants) and Vern Peck. The Director defendants sought to place themselves on Alacer's board of directors. The Director defendants asked plaintiff to support their plan. They represented to plaintiff that they would only serve as interim directors, until they retained new management. They further represented to plaintiff they would accept compensation of only $1,000 per meeting. In reliance on the Director defendants' representations, plaintiff voted to elect them to Alacer's board. The new board immediately elected themselves as corporate officers. Plaintiff, who had already been serving as a corporate officer, was named vice-president of sales and marketing.

Plaintiff's husband died three weeks later. The Trust continued to hold all of the Alacer shares, without distributing any to plaintiff.

A month later, the Director defendants called a board meeting. They ousted plaintiff from the meeting and voted to remove all of Alacer's officers, including plaintiff. The Director defendants then reappointed themselves as corporate officers.

After firing plaintiff as an Alacer vice-president, the Director defendants terminated her salary and health insurance. They seized her furniture and personal possessions from her office. They cancelled her corporate credit cards and confiscated her company car. They also attempted to remove plaintiff from Alacer's board.

Plaintiff alleges that once the Director defendants assumed control of Alacer, they began looting it. They stole money from it, took bloated salaries, sold corporate assets below market value for personal gain, failed to record transactions properly or at all, added friends and family to the company payroll and forgave loans they owed to Alacer, rejected bona fide arm's-length offers to buy Alacer in favor of pursuing secret sale discussions, and disclosed Alacer's trade secrets to an entity owned by defendant Patrick. The board allegedly ignored plaintiff's repeated demands to investigate the misconduct and pursue litigation.

Plaintiff's Complaint and Alacer's Demurrer

Plaintiff alleges six causes of action in the complaint. The first cause of action is styled, "CONSPIRACY TO DEFRAUD AGAINST ALL DEFENDANTS," and is labeled a "DIRECT CLAIM." Plaintiff alleges she approved reconstituting the board due to Director defendants' misrepresentations about their intent to serve on an interim basis and accept a $1,000 per meeting salary.

The second cause of action is styled, "BREACH OF FIDUCIARY DUTIES AGAINST ALL DEFENDANTS," and is labeled "DERIVATIVE CLAIMS." Plaintiff alleges the Director defendants breached their fiduciary duties as Alacer directors by mismanaging and basically looting Alacer.

The third cause of action is styled, "IMPOSITION OF A CONSTRUCTIVE TRUST FOR EMBEZZLEMENT AGAINST ALL DEFENDANTS." Plaintiff seeks 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 Director defendants.

The fourth cause of action is styled, "INJUNCTIVE RELIEF AGAINST ALL DEFENDANTS." Plaintiff seeks to enjoin 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 Director defendants' attorney 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 is styled, "UNFAIR BUSINESS PRACTICES (UNFAIR COMPETITION)," and is asserted against the Director defendants. Plaintiff alleges the Director defendants sold Alacer assets below cost, offered improper discounts by forgiving loans, and misappropriated Alacer trade secrets. Plaintiff seeks disgorgement of funds they wrongfully acquired.

The sixth cause of action is styled, "DECLARATORY RELIEF AGAINST ALL DEFENDANTS." Plaintiff seeks a declaration that she has a community property interest in Alacer.

Alacer demurred to the complaint. In an overarching contention, Alacer claimed plaintiff lacked standing to assert shareholder derivative causes of action. It also challenged the specific causes of action. It contended the conspiracy to defraud cause of action failed because plaintiff failed to allege causation or damages and had not clarified whether it was a direct or derivative claim. It also claimed it could not be held liable for conspiracy due to the agent's immunity rule. Alacer contended the constructive trust cause of action failed because it is a claim for relief, not a cause of action; moreover, plaintiff did not specifically identify any wrongfully obtained funds in Alacer's possession. It claimed the injunctive relief cause of action failed because it too is a claim for relief; also, courts cannot enjoin corporate officers from lawfully exercising their powers. Alacer contended the unlawful business practices cause of action failed because plaintiff had not sufficiently pleaded the underlying business practices, alleged the loss of money or property, or identified the misappropriated trade secret. Finally, it claimed the declaratory relief cause of action exceeded the scope of plaintiff's leave to amend the prior complaint and failed to join indispensable parties.

The court sustained the demurrer to all causes of action 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 amendment permitted by the court's prior orders.² 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 section] 1008."

DISCUSSION

"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...