Opinion
B200990
8-7-2008
MANOUHER NARAGHI, Plaintiff and Appellant, v. RESEARCH AND DEVELOPMENT LABORATORIES et al., Defendants and Respondents.
The Kiken Group and Dale A. Kiken for Plaintiff and Appellant. Loeb & Loeb, Mark D. Campbell and Michael Black for Defendants and Respondents.
Not to be Published
Manouher Naraghi, a minority shareholder, brought this derivative and direct action against Research Development Laboratories (RDL) and its majority shareholder Birendra Dutt for breach of fiduciary duty, conversion, and breach of contract. The trial court sustained a demurrer in favor of defendants on all causes of action without leave to amend. We affirm and reverse in part.
FACTS AND PROCEEDINGS BELOW
We accept as true the following allegations of the first amended complaint, the operative complaint. (See Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
Research and Development Laboratories (RDL) is a government contractor that develops, perfects, and markets various technologies intended for the defense and commercial markets, including advanced space-based radar and imaging technologies. Birendra Dutt is an officer, director, and majority shareholder of RDL. RDL employed Manouher Naraghi as an electrical engineer from January 1984 to March 2002. At one point during Naraghis employment, he was elected President of RDL and became a member of the Board of Directors.
In 1996, RDL leased a building in Culver City and paid $170,000 for the option to purchase the building at the end of the lease term. While a tenant, RDL made significant improvements, such as constructing a laboratory, a specialized containment area for government work, and additional offices. Shortly before the lease came to an end (and was up for renewal), Dutt assumed the lease and purchased the building for himself.
The complaint does not allege when Dutt purchased the building. At most, we know that it occurred sometime after 1996.
From 1996 through 2004, Dutt misappropriated various trade secrets and economic opportunities developed, produced, and marketed by RDL by transferring them to APIC Corporation, a shell corporation that served as Dutts alter ego, without adequate compensation to RDL.
Naraghis complaint does not specify in what year this misappropriation occurred. It simply alleges it occurred "between 1996 and 2004."
At unspecified times, Dutt also committed the following acts of misappropriation: Dutt caused RDL to incur financial liabilities for several of his failed personal ventures; Dutt "borrow[ed]" $ 1,000,000 from RDL without adequate compensation; Dutt withdrew funds from RDLs accounts for his personal use, such as financing his "lifestyle" and several failed commercial ventures; and Dutt directed RDL to submit fraudulent reimbursement vouchers for nonexistent expenditures.
In November 2001, a whistleblower (not Naraghi) brought an action under the False Claims Act (31 U.S.C. § 3729 et seq.), which caused RDL to forfeit lucrative government contracts. The false claims action was settled for almost $5 million, including attorney fees.
We take judicial notice of the complaint filed in federal district court against RDL, Dutt, and other entities alleging a violation of the False Claims Act (31 U.S.C. § 3729 et seq.). (Evid. Code, § 452, subd. (d) ["Judicial notice may be taken of . . . [r]ecords of . . . any court of record of the United States or of any state of the United States"].)
In December 2001, Naraghi resigned from RDL. In February 2002, RDL sent Naraghi an outprocessing memorandum detailing exit procedures. In this memorandum, RDL agreed to pay Naraghi $20,447 in past compensation.
In July 2005, Naraghi demanded that RDLs Board of Directors bring suit against Dutt. The Board refused.
In January 2006, Naraghi filed a derivative and direct action against RDL, APIC, and Dutt for declaratory and injunctive relief, accounting, breach of fiduciary duty, misappropriation of invention/intellectual property, breach of contract, alter ego, and civil RICO. Naraghi amended his complaint in March 2007 and narrowed his claims to the following: (1) a derivative claim against Dutt for breach of fiduciary duty under corporate usurpation and misappropriation theories; (2) a derivative claim against Dutt and APIC for conversion; and (3) a direct claim against Dutt and RDL for breach of contract.
Naraghi amended his complaint numerous times to add additional individual defendants, whom he subsequently dismissed.
The trial court sustained defendants demurrer to the first amended complaint without leave to amend on the following grounds: (1) the statute of limitations barred Naraghis claim for breach of fiduciary duty; (2) the tort of conversion did not cover the intangible property interests misappropriated by Dutt; and (3) the outprocessing memorandum, which formed the basis of Naraghis breach of contract claim, is not a legally enforceable contract.
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. [Citation.] We also consider matters which may be judicially noticed." (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.) "[O]ur inquiry ends and reversal is required once we determine a complaint has stated a cause of action under any legal theory." (Genesis Environmental Services v. San Joaquin Valley Unified Air Pollution Control Dist. (2003) 113 Cal.App.4th 597, 603.)
Where, as here, the trial court sustains a demurrer without leave to amend, the plaintiff has the burden of demonstrating either he stated a cause of action, or the trial court abused its discretion by showing how the complaint can be amended to state a cause of action. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) Although a plaintiff may request to amend his complaint on appeal (Code Civ. Proc., § 472c, subd. (a)), he must show "in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading" (Palm Springs Tennis Club v. Rangel (1999) 73 Cal.App.4th 1, 8; italics added).
A. Breach of fiduciary duty under theories of corporate usurpation and misappropriation.
1. The usurpation of corporate opportunity theory.
"The law has long recognized the doctrine of corporate opportunity which prohibits one who occupies a fiduciary relationship to a corporation from acquiring, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence." (Kelegian v. Mgrdichian (1995) 33 Cal.App.4th 982, 988 (Kelegian); see also Daniel Orifice Fitting Co. v. Whalen (1962) 198 Cal.App.2d 791, 800 ["a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director"].)
In determining whether a corporate opportunity exists, we look to whether the "proposed activity is reasonably incident to the corporations present or prospective business and is one in which the corporation has the capacity to engage." (Kelegian, supra, 33 Cal.App.4th at pp. 988-989.) This inquiry "is primarily a factual question" (ibid.), and the "decision in each case depends on its particular facts and citation of examples is not useful." (New v. New (1957) 148 Cal.App.2d 372, 385 [citing several leading treatises on usurpation of corporate opportunity].) Moreover, "the basis of the doctrine must be found `in the unfairness on the particular facts of a fiduciary taking advantage of an opportunity when the interests of the corporation justly call for protection." (Id. at pp. 384-385.)
Here, Naraghi alleges that in 1996, RDL entered into a lease for a building in Culver City and deposited $170,000 for an option to buy that building at the end of the lease term. While it was a tenant, RDL made significant improvements to the property, including the installation of a laboratory facility, an auditorium, a specialized security containment area for government security work, and extra offices. Before the time came for RDL to exercise its option to buy the property, Dutt assumed the lease in his individual capacity, purchased the property for himself, and caused RDL to pay him rent as a subtenant. As a result, RDL suffered loss of rental income, property value appreciation, and other monetary losses.
According to defendants, Naraghis failure to allege that RDL was in the business of buying or leasing property, and that RDL had the financial wherewithal to take advantage of the opportunity, is fatal to his claim. We decline to read the complaint so narrowly. (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403 [reviewing court accepts as true all facts that may be implied or inferred from those expressly alleged].)
To state a claim for the usurpation of corporate opportunity, a plaintiff must show the usurped opportunity was "in the companys line of activities which the company has an interest and prior claim to obtain" (Industrial Indem. Co. v. Golden State Co. (1953) 117 Cal.App.2d 519, 533), and that the "corporation [was] financially able to undertake" it (MacIsaac v. Pozzo (1947) 81 Cal.App.2d 278, 284). Here, the very fact that RDL negotiated to include an option to buy in the lease and, indeed, paid handsomely for it, shows that purchase of the property was in RDLs line of business; its business included owning the very property on which it conducted its business and on which it had made a substantial financial investment in significant tenant improvements including a laboratory, a secure containment area, and extra offices. Although Naraghi did not specifically allege that RDL was financially able to undertake the opportunity, he did allege that Dutts actions rendered RDL insolvent and unable to meet its financial obligations. Liberally construed, this allegation supports the reasonable inference that if Dutt had not breached his fiduciary duty, RDL would have had the ability to take advantage of the option.
For these reasons, we reverse the demurrer sustained against Naraghis breach of fiduciary duty claim as to the usurpation of corporate opportunity and remand with the following directions: The trial court shall permit Naraghi to amend his complaint to specifically allege that RDL would have had the financial ability to purchase the building but for Dutts actions. If Naraghi is unable to amend his complaint accordingly, the trial court shall sustain the demurrer on this claim and theory without leave to amend.
2. The misappropriation theory.
As set forth in greater detail in the preceding section, Naraghi alleges Dutt misappropriated trade secrets, economic opportunities, funds, and assets belonging to RDL. The complaint does not specify in which year the various acts of misappropriation occurred, nor does it specify whether such acts occurred before or after November 2001, when a whistleblower filed a false claims action against Dutt and RDL. The complaint simply alleges that some acts occurred "between 1996 through 2004," while other acts occurred at unspecified times. These allegations form the basis of Naraghis claim for breach of fiduciary duty under a misappropriation theory.
Naraghis opening brief includes a short legal discussion on corporate looting without any citation to the record. We need not consider whether this is a third theory of breach of fiduciary duty because there is no allegation that Dutt, as the majority shareholder, ever passed control of RDL to a potential buyer. (DeBaun v. First Western Bank & Trust Co. (1975) 46 Cal.App.3d 686, 696-697 [majority shareholder has a duty to investigate a potential buyer of controlling shares if the shareholder knows facts that would lead a prudent person to suspect the buyer will loot the corporation].)
Generally, the statute of limitations on a cause of action begins to accrue on the date of the plaintiffs injury. (Bernson v. Browning-Ferris Industries (1994) 7 Cal.4th 926, 931.) Under the common law "discovery rule," the accrual date may be "delayed until the plaintiff is aware of her injury and its negligent cause." (Jolly v. Eli Lilly & Co. (1988) 44 Cal.3d 1103, 1109.) "When a complaint shows on its face or on the basis of judicially noticeable facts that the cause of action is barred by the applicable statute of limitations, the plaintiff must plead facts which show an excuse, tolling, or some other basis for avoiding the statutory bar." (Ponderosa Homes, Inc. v. City of San Ramon (1994) 23 Cal.App.4th 1761, 1768.)
Defendants argue that Naraghis breach of fiduciary duty claim is time barred because all the events giving rise to the claim occurred before November 2001. Thus, according to defendants, Naraghi should have filed his complaint by November 2004, or alleged why the statute of limitations was tolled (e.g., by the discovery rule) during the period leading up to the filing of his complaint in January 2006. Naraghi counters with the argument that "regardless of the time of discovery of Dutts wrongful behavior," the mere fact that Dutt was in control of RDL during the time of his malfeasance tolled the statute of limitations. We conclude both arguments are unpersuasive.
We turn to Naraghis argument first: Naraghi stands on the legal proposition that regardless of when he discovered or reasonably could have discovered Dutts wrongdoing, as long as Dutt was in control of RDL, the statute of limitations was tolled. Naraghi relies primarily on San Leandro Canning Co. v. Perillo (1931) 211 Cal. 482 (San Leandro) to support his argument. We believe Naraghi misreads San Leandro.
In addition to San Leandro, Naraghi cites to two other cases that are wholly inapposite. Gurkewitz v. Haberman (1982) 137 Cal.App.3d 328, 332 deals with a statutory tolling provision for malpractice actions and Tzolov v. International Jet Leasing, Inc. (1991) 232 Cal.App.3d 117, 120 deals with the rights of an incompetent minor to sue once she becomes of age.
In San Leandro, the Supreme Court reversed a demurrer sustained in favor of former directors who misappropriated funds from the plaintiff corporations treasury. The Court held the corporations suit was not time barred because "the statute of limitations does not commence to run against unlawful acts and expenditures made by or under the direction of the directors of the corporation while they were in full control of its affairs and of the expenditure of its funds." (San Leandro, supra, 211 Cal. at p. 487.) Naraghi seizes on this language as support for his argument that control by a fiduciary, in and of itself, sufficiently tolls the statute of limitations regardless of discovery. A thorough reading of San Leandro, however, shows that Naraghi is wrong.
In San Leandro, the Court relied on two prior cases: City of Oakland v. Carpentier (1859) 13 Cal. 540 (Oakland) and Whitten v. Dabney (1915) 171 Cal. 621 (Whitten). Both Oakland and Whitten make clear that the statute of limitations does not begin to run on a claim by a plaintiff who has no reasonable suspicion or knowledge of a defendants wrongdoing. (Oakland, supra, 13 Cal. at p. 552 [statute of limitations is tolled only if no "innocent agents" could "look into and ascertain the true state of things," while the fiduciary is in power]; Whitten, supra, 171 Cal. at p. 628 [statute of limitations does not begin to run as long as "the plaintiffs had no knowledge or suspicion of . . . any such wrongdoing upon the part of the defendants." (Italics added.)].) Under Oakland and Whitten, the issue of control simply goes to whether the defendant controlled the corporation in a way that made it unreasonably difficult for the plaintiff to learn of the underlying facts of the wrongdoing.
Thus, contrary to Naraghis position, control, in and of itself, does not toll the statute of limitations. (See Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 867 ["it is generally held that an action for fraud committed against a corporation is tolled for the period that those responsible for the fraud remain in control of the corporation. [Citations.] The principle does not apply after discovery of the fraud by a protesting stockholder . . . ." (Italics added.)]; see also Sanchez v. South Hoover Hospital (1976) 18 Cal.3d 93, 101 [breach of fiduciary duty claim is based on concealment of facts, and the statute begins to run when plaintiffs discovered, or in the exercise of reasonable diligence could have discovered, that facts had been concealed].)
We now turn to defendants argument, which fares no better. Defendants argue that the complaint alleges all the acts of misappropriation took place between 1996 and 2004, and that all acts of misappropriation were the subject of the false claims action. Defendants further argue that because we can take judicial notice that the false claims action was filed in 2001, and Naraghi knew of the action in 2001, his complaint filed in January 2006 is beyond the limitations period.
Only two of defendants assertions are correct: that the false claims action was filed in 2001, and that Naraghi was apparently aware of it. But a close reading of the complaint shows that the other assertions are incorrect. Only one category of claimed wrongs in the first cause of action even refers to the 1996 through 2004 dates (paragraph 18(c)(i)), or the false claims action (paragraph 18(c)(ii)). Accordingly, the allegations that some of the misappropriation occurred between 1996 through 2004, and that some of the misappropriation was the subject of the false claims action in 2001, at most are only a potential bar to the misappropriation alleged in paragraph 18(c) of the first amended complaint. Read liberally, however, as we must, even paragraph 18(c)(iii) does not allege that all the acts of misappropriation alleged in 18(c)(i) were the subject of the false claims action. In any event, nothing in the complaint implies or alleges that the misappropriation ever ended.
For these reasons, we conclude Naraghis claim for breach of fiduciary duty under a misappropriation theory is not time barred at this pleading stage and we reverse the trial courts sustaining of the demurrer on this ground.
B. Conversion.
Naraghi supports his conversion claim with the following allegation: "between 1996 and 2004, Defendant Dutt caused Defendant RDL to transfer its trade secrets and economic opportunities without adequate compensation to Defendant Dutt and/or APIC . . ." For the reasons discussed above, we reject defendants argument that the three-year statute of limitations on conversion claims bars Naraghis claim.
We further reject defendants argument that Naraghis complaint fails to adequately allege a claim for conversion. According to defendants, Naraghis failure to allege that the misappropriated trade secrets and economic opportunities (both intangible property) were reflected in something tangible that could be physically taken is fatal to his conversion claim. We need not decide the issue of whether a plaintiff must allege that misappropriated intangible property is reflected in or merged with tangible property to adequately plead a conversion claim.
During the hearing on the demurrer Naraghis counsel specifically stated that if given the opportunity, he would conduct discovery and attempt to amend the complaint to allege that the "trade secrets" and "economic opportunities" misappropriated by Dutt were "manifested" in "proto-types" that are "tangible physical items." Defendants do not dispute these proto-types are physical items. Given counsels representation, the trial court should have permitted Naraghi to amend his complaint accordingly. (Bassett v. Lakeside Inn, Inc. (2006) 140 Cal.App.4th 863, 870 ["in considering whether there is a reasonable probability a defect in the complaint could be cured by amendment, courts may consider counsels statements at oral argument].)
C. Breach of contract.
In his first amended complaint, Naraghi alleges the parties entered into a written contract (which he attached to his complaint as an exhibit) whereby RDL agreed to pay Naraghi $33,858.40 in "outstanding indebtedness." According to Naraghi, RDL breached the contract when it failed to pay him this amount.
The purported contract is a memorandum sent by Denise Lortie, an RDL officer, to Naraghi in response to his resignation. In this memorandum, Lortie discussed a number of matters related to Naraghis "outprocessing." For instance, she directed him to return all company owned property including office and file keys. She also explained the conditions under which RDL would continue to pay Naraghis health insurance and the cessation of Naraghis 401(K) retirement contributions. Under a section of the memorandum entitled "Payroll, etc.," Lortie acknowledged that Naraghi was seeking $33,858.40 in past due compensation that accumulated from 1999 through 2001. She stated that because Naraghi failed to live up to his expectations of generating business and moving RDL forward, RDL would pay a reduced amount of $20,447.20.
The "terms proposed in an offer must be met exactly, precisely and unequivocally for its acceptance to result in the formation of a binding contract [citations]; and a qualified acceptance amounts to a new proposal or counteroffer putting an end to the original offer." (Panagotacos v. Bank of America (1998) 60 Cal.App.4th 851, 855-856.) If the original offeror does not accept the new proposal or counteroffer, there is no contract. (Ajax Holding Co. v. Heinsbergen (1944) 64 Cal.App.2d 665, 669-670 ["counteroffer containing a condition different from that in the original offer is a new proposal and, if not accepted by the original offeror, amounts to nothing"]; see also Civ. Code, § 1580 [mutual consent is a necessary element of an enforceable contract].) Here, Naraghi sought $ 33,858.40 in past compensation from RDL. RDL made a counteroffer of $20,447.20. The first amended complaint contains no allegation that Naraghi accepted this counteroffer, or that the parties mutually agreed to another amount owed to Naraghi. Although Naraghi alleges that "RDL promised to pay the acknowledged outstanding indebtedness of $33,858.40," this allegation is in direct conflict with the explicit terms of the outprocessing memorandum. We thus disregard it. (Mead v. Sanwa Bank California (1998) 61 Cal.App.4th 561, 567-568 ["[f]or purposes of a demurrer, we accept as true both facts alleged in the text of the complaint and facts appearing in exhibits attached to it. If the facts appearing in the attached exhibit contradict those expressly pleaded, those in the exhibit are given precedence"].)
Additionally, Naraghi has not sought leave from this Court to amend his complaint to include such an allegation.
Because we conclude that Naraghi failed to establish the existence of a contract as a matter of law, we need not reach defendants argument that the statute of limitations bars his breach of contract claim or Naraghis counter argument that defendants are estopped from asserting the statute of limitations defense.
DISPOSITION
The judgment is reversed as to plaintiffs claims for breach of fiduciary duty and conversion, and remanded for further proceedings to permit plaintiff to amend his complaint according to the directions specified in this decision. The judgment is affirmed as to plaintiffs claim for breach of contract. Each side shall bear its own costs on appeal.
We concur:
MALLANO, P. J.
ROTHSCHILD, J.