Demurrer to First Amended Complaint; Motion to Strike Portions Of First Amended Complaint
to provide the public entity sufficient information to enable it to adequately investigate claims and to settle them, if appropriate, without the expense of litigation ... [citations][,] ... [i]t is well-settled that claims statutes must be satisfied even in face of the public entity's actual knowledge of the circumstances surrounding the claim. Such knowledge— standing alone—constitutes neither substantial compliance nor basis for estoppel.’ (Id. at p. 455[115 Cal.Rptr. 797, 525 P.2d 701].)” (California Restaurant Management Systems v. City of San Diego (2011) 195 Cal.App.4th 1581, 1591–1592, 126 Cal.Rptr.3d 160.) (J.J. v. County of San Diego (2014) 223 Cal.App.4th 1214, 1219.)
Here, the proposed First Amended Complaint seeks to asserts causes of action for negligence, battery, and violation of Civil Rights, and alleges that Plaintiff suffered physical, emotional, and property damages arising from Plaintiff arrest on April 22, 2025, when Plaintiff was a passenger on a public bus in Fullerton and requested assistance and asked the driver to contact law enforcement. Importantly, the proposed First Amended Complaint alleges that the subject incident occurred on or around April 22, 2025, and that Plaintiff filed a government claim on March 16, 2026.
Thus, the allegations in the proposed First Amended Complaint indicate that Plaintiff failed to timely present a claim such that Plaintiff’s proposed claims would be barred. Additionally, there are no allegations that support an excuse for noncompliance. There is no indication that this deficiency could be cured by further amendment. Based on the foregoing, Plaintiff’s motion for leave to file a First Amended Complaint is DENIED.
The Court GRANTS Defendant’s request for judicial notice as to Exhibits 1 through 3 pursuant to Evidence Code section 452(d) as court records but declines to take judicial notice of the truth of hearsay statements therein.
The City to give notice.
103 Olive vs. Harcrow 1. Demurrer to First Amended Complaint
2. Motion to Strike Portions Of First Amended Complaint
The Court finds that, as alleged, the first cause of action for breach of fiduciary duty is alleged as a derivative cause of action. “A minority shareholder may bring a cause of action for breach of fiduciary duty against majority shareholders as an individual claim or as a derivative claim, depending on the circumstances.” (
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3. Order to Show Cause re: Sanctions for Failure to Follow a Court Order
Defendant Scott Harcrow (“Defendant”) demurs to all causes of action on the grounds that Plaintiff lacks standing to sue and, alternatively, demurs to the third cause of action for breach of contract and fifth cause of action for fraud because Plaintiff does not state facts sufficient to constitute these causes of action.
The First Amended Complaint contains the following causes of action: (1) breach of fiduciary duty, (2) access to books and records pursuant to Corporations Code sections 1601 and 1063, (3) breach of contract, (4) conversion, (5) fraud – concealment, (6) declaratory relief, and (7) accounting. (ROA 16.)
First, Defendant argues that Plaintiff lacks standing because he filed the Complaint individually, rather than derivatively. Defendant argues that the damages alleged are nor individual damages but rather are damages to the corporation, K&S Excavating, Inc. Moreover, Defendant also argues that Plaintiff has not alleged the requisite procedural hurdles under California Corporations Code §800 that permit him to bring a derivative action on behalf of the corporation.
In opposition, Plaintiff argues that K&S Excavating, Inc. is a closely held corporation with only Plaintiff and Defendant as its shareholders, each of who hold a 50% stake in the corporation. Plaintiff relies on the holding in Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, 1243 for his contention that he has standing to bring the action as alleged.
Defendant did not file a reply.
“[A] derivative suit is one in which the shareholder seeks redress of the wrong to the corporation.” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 793.) “Thus, an 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 and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 793 [citing Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106].)
“On the other hand, a direct or individual suit by a stockholder ‘is a suit to enforce a [] right against the corporation which the stockholder possesses as an individual.’” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 793 [citing Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107].) “For example, [i]f the injury is one to the plaintiff as a stockholder and to him individually, and not to the corporation, as where the action is based on a contract to which he is a party, or on a right belonging severally to him, or on a fraud affecting him directly, it is an individual action.” (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 150.)
“As a precondition for bringing a derivative action on behalf of the corporation, the shareholder should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within the corporation itself, the redress of his grievances, or action in conformity with his wishes.” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 789.) “The failure to comply with this requirement under section 800(b)(2) leaves a shareholder/plaintiff without standing to bring a derivative claim on behalf of the corporation.” (Id. at 793.)
The “requirement that a shareholder establish that he or she made a suitable demand, unless excused by extraordinary conditions is to encourage intracorporate resolution of disputes and to protect the managerial freedom of those to whom the responsibility of running the business is delegated.” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 789-790.) “The demand requirement is also intended to prevent the abuse of the derivative suit remedy.” (Id. 790.)
“Demand typically is deemed futile when a majority of the directors have participated in or approved the alleged wrongdoing, [citation], or are otherwise financially interested in the challenged transactions.” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 790.)
Importantly, however, “it is settled that one who has suffered injury both as an individual owner of a corporate entity and in an individual capacity is entitled to pursue remedies in both capacities.” (Holistic Supplements, L.L.C. v. Stark (2021) 61 Cal.App.5th 530, 542.) Holistic Supplements, L.L.C. v. Stark (2021) 61 Cal.App.5th 530, 542 further states:
“The line between personal and derivative claims is drawn according to the injury inflicted: “The claims are derivative where the injury alleged is one inflicted on the corporate entity or on the ‘whole body of its stock.’ [Citation.] A personal claim, in contrast, asserts a right against the corporation which the shareholder possesses as an individual apart from the corporate entity: ‘If the injury is not incidental to an injury to the corporation, an individual cause of action exists.’ ” (Id. at p. 1222, 18 Cal.Rptr.3d 276.) “In determining whether an individual action as opposed to a derivative action lies, a court looks at ‘the gravamen of the wrong alleged in the pleadings.’” (PacLink Communications Internat., Inc. v. Superior Court (2001) 90 Cal.App.4th 958, 965, 109 Cal.Rptr.2d 436 (PacLink).).”
Here, the First Amended Complaint contains the following causes of action: (1) breach of fiduciary duty, (2) access to books and records pursuant to Corporations Code sections 1601 and 1603, (3) breach of contract, (4) conversion, (5) fraud – concealment, (6) declaratory relief, and (7) accounting. (ROA 16.)
The Court finds that, as alleged, the first cause of action for breach of fiduciary duty is alleged as a derivative cause of action. “A minority shareholder may bring a cause of action for breach of fiduciary duty against majority shareholders as an individual claim or as a derivative claim, depending on the circumstances.” (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 149 [emphasis added].) Importantly, however, “where conduct, including mismanagement by corporate officers, causes damage to the corporation, it is the entity that must bring suit; the individual shareholder may not bring an action for indirect personal losses (i.e., decrease in stock value) sustained as a result of the overall harm to the entity.” (Ibid.) The Demurrer is SUSTAINED WITH LEAVE TO AMEND as to the first cause of action for breach of fiduciary duty.
The Court finds that Plaintiff’s second cause of action for access to books and records pursuant to Corporations Code section 1601 and 1603 impacts his individual right to access the corporation’s books and records as a shareholder in the company. The Court finds that, as alleged, the second cause of action is alleged as an individual claim. Defendant’s standing argument fails as to the second cause of action. The Demurrer is OVERRULED as to the second cause of action for access to books and records pursuant to Corporations Code section 1601 and 1603.
The Court finds the Complaint uncertain as to the third cause of action. It is unclear whether the contract was executed between Defendant and the corporation or Defendant and Plaintiff. As a result, the Court is unable to determine whether Defendant breached obligations agreed upon and owed to Plaintiff or agreed upon and owed to the corporation. The Court further finds that the terms of the contract that were allegedly breach are generally uncertain. (Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal.App.3d 452, 458– 459 [“If the action is based on an alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written instrument must be attached and incorporated by reference.”].)
The Demurrer is SUSTAINED WITH LEAVE TO AMEND as to the third cause of action for breach of contract on the grounds that Plaintiff’s standing is uncertain and the terms of the contract at issue are uncertain as well.
The Court finds that the fourth cause of action for conversion, fifth cause of action for fraud - concealment, and seventh cause of action for accounting are also derivative actions as alleged. Plaintiff alleges that Defendant knowingly used corporation funds for Defendant own personal use. As discussed under the breach of fiduciary cause of action, such mismanagement of corporate funds are corporate injuries and therefore derivative causes of action. (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 153 [citing Heshejin v.
Rostami (2020) 54 Cal.App.5th 984, 994, fn. 10, 268 Cal.Rptr.3d 836 [“ ‘ “a shareholder cannot bring a direct action for damages against management on the theory their alleged wrongdoing decreased the value of his or her stock (e.g., by reducing corporate assets and net worth)” ’ ”; instead, the “ ‘ “corporation itself must bring such an action, or a derivative suit may be brought on the corporation's behalf” ’ ”]; Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 651, 32 Cal.Rptr.3d 266 [plaintiff's breach of fiduciary duty claim for corporate mismanagement and diverting corporate assets was derivative]; PacLink Communications Internat., Inc. v.
Superior Court (2001) 90 Cal.App.4th 958, 964, 109 Cal.Rptr.2d 436 [minority members’ fraudulent transfer claim was derivative where the “injury was essentially a diminution in the value of their membership interest in the [limited liability company] occasioned by the loss of the company's assets”]; Nelson, supra, 72 Cal.App.4th at pp. 125-126, 84 Cal.Rptr.2d 753 [minority shareholder's breach of fiduciary duty claim alleging the other shareholder of the corporation negligently managed the business was derivative]; Marsh et al., Marsh's Cal.
Corporation Law (2021 supp.) Derivative Action, § 15.11[A][1] [“The clearest cases [of derivative actions] are those involving situations where the alleged wrongful actions of the defendants have reduced the corporate assets and net worth.”].) The Demurrer is SUSTAINED WITH LEAVE TO AMEND as to the fourth cause of action for conversion, fifth cause of action for fraud - concealment, and seventh cause of action for accounting.
Given the above, the sixth cause of action for declaratory relief is OVERRULED as to Plaintiff’s inspection claim but SUSTAINED WITH LEAVE TO AMEND as to the relief sought in relation to the contract and Defendant’s personal use of corporate funds.
Plaintiff is GRANTED 20 days leave to amend.
Defendant Scott Harcrow (“Defendant”) moves to strike the allegations related to Plaintiff’s claim for punitive damages. The Motion to Strike is MOOT given the Court’s ruling on the Demurrer.
Defendant to give notice
4. Case Management Conference