Opinion
A147128
06-21-2017
DAVID G. CUNNINGHAM, Plaintiff and Appellant, v. NORTHERN CALIFORNIA REGION, LLC, Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Alameda County Super. Ct. No. RG15754368)
Appellant David Cunningham is a minority shareholder of JR Group, Inc. (JR Group), which is a franchise of Keller Williams Realty Inc. (Keller Williams), a real estate brokerage. Among other claims against other parties, he brought a cause of action on behalf of JR Group under a shareholder-derivative theory against Northern California Region, LLC (NCR), a company that contracted with Keller Williams to manage aspects of its relationship with JR Group. Cunningham alleged that NCR wrongfully failed to disclose to JR Group's management team the fact that the person who was JR Group's majority shareholder and controlling principal, Richard Geha, had been discharged from a teaching position at Keller Williams University for sexually harassing a student. According to Cunningham, had this information been disclosed, JR Group could have avoided liability exposure and a reduction in the value of its shares when Geha engaged in subsequent acts of harassment of women who worked for JR Group.
Cunningham challenges the trial court's order sustaining NCR's demurrer to this derivative cause of action and denying him the opportunity to amend. He fails to persuade us that NCR owed a duty to JR Group's management team under the circumstances alleged, and he fails to demonstrate a reasonable probability that he could amend the complaint to cure this deficiency. We therefore affirm.
I.
FACTUAL AND PROCEDURAL
BACKGROUND
The following facts come from Cunningham's second amended complaint, which was the operative complaint. When reviewing a dismissal after a demurrer is sustained, we accept as true "all facts . . . properly pleaded by [the] appellant" and "all facts which may logically be inferred from the facts alleged in the complaint." (Branson v. Martin (1997) 56 Cal.App.4th 300, 302.)
The franchise arrangement between Keller Williams and JR Group was established in 2003, and it was renewed in 2008 through a "Master License Center Agreement" (the license agreement). The license agreement required JR Group to have a single person with operational control, an "Operating Principal" with "majority ownership voting authority." This person was Geha.
Keller Williams contracted with NCR for NCR to be Keller Williams's regional representative. This contract was entered into under a provision of the license agreement that allowed Keller Williams to "authorize a Regional Representative to perform any of [Keller Williams's] duties . . . specified by this Agreement." A copy of the contract between Keller Williams and NCR is not part of our appellate record, but according to the complaint, NCR assumed Keller Williams's responsibilities under the licensing agreement and was specifically responsible for evaluating the "ongoing suitability of [JR Group's] Operating Principal on an annual basis."
In addition to having operational control of JR Group, Geha was an instructor at Keller Williams University, a division of Keller Williams that provided training for franchisee personnel. He was discharged as an instructor in 2011, a decision made in consultation with two NCR principals, after an investigation revealed that he had sexually harassed a student earlier that year. The complaint alleged that even though NCR knew of this information and had the power to terminate Geha for sexual harassment, it did not do so. Nor did it disclose the information to JR Group or JR Group's "day-to-day management team," exposing JR Group to a foreseeable "risk of serious harm, reputational damage[,] and legal liability."
A few years later, Geha sexually harassed two other women, both of whom worked for JR Group. This came to Cunningham's attention in mid-2014 after one of the victims "threatened to take legal action." According to the complaint, Geha refused to take any action when Cunningham confronted him, and Cunningham was forced to "resign[] from all positions with JR Group . . . and announce[] that his shares were for sale."
Cunningham brought only one cause of action against NCR. In his first amended complaint, he brought the claim in his individual capacity. The trial court sustained NCR's demurrer to that claim but granted Cunningham leave to amend. Rather than appealing from that order, Cunningham filed his second amended complaint, which included the claim against NCR as the fourth cause of action, for "Nondisclosure / Breach of the Covenant of Good Faith." This time, the cause was asserted as a shareholder-derivative claim. The court sustained NCR's demurrer to the fourth cause of action on a variety of bases, and it then entered judgment in favor of NCR.
As part of the claim, Cunningham alleged that NCR breached the duty of good faith and fair dealing by not only failing to disclose Geha's history of sexual harassment but also not removing Geha as Operating Principal. On appeal, Cunningham does not contend that the demurrer was improperly sustained as to the failure-to-remove portion of the claim.
II.
DISCUSSION
A. The Standards of Review.
We begin by discussing the applicable standards of review. We review de novo a trial court's order sustaining of a demurrer. "Our task in reviewing a judgment of dismissal following the sustaining of a demurrer is to determine whether the complaint states a cause of action." (Coast Plaza Doctors Hospital v. Blue Cross of California (2009) 173 Cal.App.4th 1179, 1185-1186.)
"We assume the truth of the properly pleaded factual allegations . . . [and] facts that reasonably can be inferred from those expressly pleaded," and "[w]e liberally construe the pleading with a view to substantial justice between the parties." (Tepper v. Wilkins (2017) 10 Cal.App.5th 1198, 1203.) Because a demurrer tests only the legal sufficiency of the pleading, we accept as true even the most improbable alleged facts, and we do not concern ourselves with the plaintiff's ability to prove the complaint's actual allegations. (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958.) " 'Facts appearing in exhibits attached to the . . . complaint also are accepted as true and are given precedence, to the extent they contradict the allegations.' " (Nolte v. Cedars-Sinai Medical Center (2015) 236 Cal.App.4th 1401, 1406.) On the other hand, we need not accept contentions, deductions, or conclusions of fact or law. (Align Technology, at p. 958.)
We review the trial court's denial of leave to amend for an abuse of discretion. "If it is reasonably possible the pleading can be cured by amendment, the trial court abuses its discretion by not granting leave to amend. [Citation.] The plaintiff has the burden of proving the possibility of cure by amendment." (Grinzi v. San Diego Hospice Corp. (2004) 120 Cal.App.4th 72, 78.)
In evaluating whether the trial court properly sustained the demurrer here, we must determine whether Cunningham has pleaded, or could plead, sufficient facts to show that he has standing to assert his claim against NCR under a shareholder-derivative theory and that NCR breached a duty to disclose Geha's history of sexual harassment to JR Group and/or JR Group's management team.
B. Cunningham Sufficiently Alleged Standing to Bring His Shareholder-derivative Claim Against NCR.
We begin by considering whether Cunningham sufficiently alleged standing to bring his shareholder-derivative claim against NCR. A shareholder-derivative suit " 'is brought to enforce a cause of action which the corporation itself possesses against some third party, a suit to recompense the corporation for injuries which it has suffered as a result of the acts of third parties.' " (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107.) "A derivative claim is a property right that belongs to the corporation." (Cotton v. Expo Power Systems, Inc. (2009) 170 Cal.App.4th 1371, 1380.) This means that Cunningham's fourth cause of action was brought on behalf of JR Group, not on behalf of Cunningham individually or on behalf of the other minority shareholders. To have standing to bring such a claim, Cunningham must allege both that he notified JR Group's directors before he brought his suit and that he owns shares of JR Group, or alternatively that he was excused from these requirements. We therefore turn to discuss both of these requirements.
1. Cunningham sufficiently alleged that it would have been futile to demand that JR Group's directors pursue an action against NCR.
Corporations Code section 800 sets forth the procedural prerequisites for bringing a shareholder-derivative action. The plaintiff must be a shareholder or hold a voting-trust certificate. (Corp. Code, § 800, subd. (b)(1).) Before filing suit, the plaintiff must, unless doing so would be "useless" or "futile," inform the directors of the corporation about the action and make a reasonable effort to induce them to take action. (Corp. Code, § 800, subd. (b)(2); Friedman, Cal. Practice Guide: Corporations (The Rutter Group 2005) ¶ 6:622, pp. 6-138.2-138.3.)
The trial court concluded that Cunningham failed to satisfy this requirement. It determined that although he alleged "that it would have been futile to demand that JR Group bring action against Geha," Cunningham did "not allege that he demanded that JR Group take action against NCR or that it would be futile to demand that JR Group bring a lawsuit against NCR."
In his briefing in this court, Cunningham does not address the trial court's actual ruling and omits its key point. First, he mischaracterizes the court's ruling as being that he "failed to allege a demand upon JR Group to act, or to provide an explanation for why such a request would have been futile." (Italics added.) In fact, the trial court determined that he failed to allege that he had made a demand upon JR Group to bring an action against NCR. Second, he quotes at length "the actual allegations of futility that are prominent in the Second Amended Complaint," but these allegations largely assert that it would have been futile for him to have demanded that JR Group pursue an action against Geha, not NCR.
Nonetheless, liberally construing the complaint's allegations, as we must, we conclude that Cunningham has sufficiently alleged futility. Although the allegations focus on the futility of demanding that JR Group pursue an action against Geha, the complaint also asserts that it "would have been futile to make a demand upon JR Group to pursue the relief sought in this lawsuit." (Italics added.) Since the fourth cause of action seeks relief against NCR, we construe the complaint as asserting that it would have been futile for Cunningham to have demanded that JR Group pursue a claim against NCR.
2. Cunningham sufficiently alleged that he is a current shareholder of JR Group.
California law also requires a plaintiff in a shareholder-derivative suit to own and maintain stock in the represented entity. (See Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1119.) The complaint alleged that Cunningham "requested the sale of his ownership shares" and that JR Group wrongfully "converted [his] ownership shares to itself." Because it was unclear to us whether Cunningham currently owns any shares of JR Group, we directed the parties to submit supplemental briefing on whether he sufficiently alleged standing on this basis.
In its supplemental briefing, NCR maintained that the complaint "unequivocally allege[d] that [Cunningham's] shares in JR Group . . . were converted." But in his supplemental briefing, Cunningham claimed otherwise by pointing out that he alleged a " 'purported conversion' " and that he remains "a 15% shareholder." (Italics added.) Our subsequent review of the complaint shows us Cunningham alleged that JR Group both converted his shares and attempted to convert his shares. We accordingly conclude that Cunningham has sufficiently alleged stock ownership, and thus standing, to survive a demurrer on this ground.
We therefore need not resolve whether principles of equity would allow Cunningham to pursue his claim even if he is no longer a shareholder. (See Grosset v. Wenaas, supra, 42 Cal.4th at p. 1119.)
C. Cunningham Did Not Sufficiently Allege that NCR Breached Its Duty of Disclosure to JR Group.
We next consider whether Cunningham adequately alleged that NCR breached a duty to disclose Geha's history of sexual harassment to JR Group. In doing so, we assume, without deciding, that Cunningham alleged a principal-agent relationship between NCR and JR Group giving rise to a duty to disclose such information. We nonetheless conclude that the complaint did not sufficiently allege that NCR breached that duty, because Geha, JR Group's majority shareholder and operating principal, was fully aware of his own history.
It is unclear whether NCR could even legally disclose such sensitive personnel information, but neither party has raised the issue and we need not address it. --------
"A principal has a duty to deal with the agent fairly and in good faith, including a duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent's work but unknown to the agent." (Rest.3d Agency, § 8.15 (2006).) "While the duty to make full disclosure as between principal and agent is more often emphasized with respect to the conduct of the agent, the doctrine is by no means one-sided." (Walter v. Libby (1945) 72 Cal.App.2d 138, 144.)
Cunningham claims that, contrary to the trial court's ruling otherwise, Geha's knowledge of his own wrongdoing cannot be imputed to JR Group. " 'It is settled California law that "[k]nowledge of an officer of a corporation within the scope of his duties is imputed to the corporation." ' " (Uecker v. Zentil (2016) 244 Cal.App.4th 789, 797-798.) Relying exclusively on Sands v. Eagle Oil & Refining Co. (1948) 83 Cal.App.2d 312, Cunningham argues that an exception to this principle exists here because NCR knew that Geha would not disclose his misconduct. The question in Sands was whether a sham lease between a company and a third party, negotiated by the company's agent who was in collusion with the third party, could be enforced against the company on the grounds that one of the company's employees knew the lease was a sham and the employee's knowledge would normally be imputed to the company. (Id. at pp. 315, 319.) This District held that, regardless of whether the company's agent and the company's employee actually colluded with each other, the employee's knowledge was not imputed to the company because the company's agent knew that the employee would not disclose the situation to the company. (Id. at pp. 319-320.)
We agree with the trial court that Sands is not analogous to this case. In his reply brief, Cunningham states that his "takeaway from [Sands is] that a party guilty of non[]disclosure [cannot] escape liability by noting that an insider at the victim also knew of the nondisclosure." In Sands, however, the question was whether a wrongdoing agent could impute, to his benefit, information known by an employee about the agent's wrongdoing to the agent's principal, which was the employee's employer. Here, in contrast, NCR, the principal, seeks to impute Geha's knowledge of his wrongdoing, not NCR's, to NCR's agent, JR Group. And as alleged in the complaint, Geha and JR Group, unlike a corporation and its employee, are not distinct in any meaningful way because Geha is JR Group's majority shareholder and controlling principal. While we can envision that some parties, such as minority shareholders, might be able to state a claim against Geha, the majority shareholder, or JR Group itself for not being notified of material information, we cannot conclude that JR Group itself can state such a claim against NCR, just as we could not conclude that Geha himself has any such claim. The inescapable conclusion of Cunningham's allegations that Keller Williams, NCR, and Geha had comprehensive control of JR Group is that JR Group as an entity was aware of Geha's history of sexual harassment. Thus, Cunningham fails to convince us there was a breach of any duty on NCR's part to notify JR Group of this information.
D. Cunningham Fails to Establish that NCR's Duty of Disclosure Extended to JR Group's Management Team.
Having concluded that Cunningham did not sufficiently allege that NCR breached a duty to notify JR Group of Geha's history of sexual harassment, we turn to the final question of whether, as Cunningham claims, NCR had a separate duty "to warn [JR Group's] management team [other than Geha] of Mr. Geha's history of sexual harassment." Cunningham has failed to persuade us that NCR had such a duty. He has provided no authority establishing a duty of a principal to notify not only its corporate agent but also its agent's management team of potential risks of pecuniary loss, and we decline Cunningham's invitation to create such a duty under the circumstances presented here.
The trial court ruled that there was no such duty after pointing to the undisputed allegations that only the principal (Keller Williams through NCR), and not JR Group's management team, had control over Geha and the power to replace him as the operating principal. "Keller Williams retained the right to determine the suitability of the Operating Principal; it was not obligated to provide information to others working at JR Group to enable them to impede the continued . . . performance of the Operating Principal selected by Keller Williams." The court thus found that "the allegations do not support the conclusion the NCR had a duty to make disclosures to other members of JR Group about personal malfeasance by its own Operating Principal."
In arguing for recognition of such a duty, Cunningham seems to forget that his fourth cause of action was brought against NCR under a shareholder-derivative theory on behalf of JR Group, not on behalf of himself or other minority shareholders. Thus, whether he or minority shareholders could assert a claim against Geha, JR Group, or NCR is not at issue. (See, e.g., Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d at p. 112 [majority shareholders have duty of "good faith and inherent fairness" to minority shareholders].) What is at issue is whether JR Group can assert a claim for NCR's alleged failure to disclose Geha's history of sexual harassment to the members of its management team other than Geha.
Cunningham does not provide any helpful authority in support of his argument. He primarily, and insistently, relies on Patterson v. Domino's Pizza, LLC (2014) 60 Cal.4th 474, but the case is not on point. In Patterson, a third party, a franchisee's employee, sought to hold the franchisor vicariously liable for wrongdoing by the franchisee. (Id. at p. 477.) Our case, however, does not involve a third party victim or an issue of vicarious liability. There is no third party because Cunningham brought the fourth cause of action on behalf of JR Group; it is a claim by JR Group directly against NCR for NCR's alleged wrongdoing. And there is no issue of vicarious liability because Cunningham seeks to hold JR Group's franchisor (NCR, as the assignee of Keller Williams) liable to JR Group for NCR's own alleged wrongdoing—i.e., its alleged failure to disclose Geha's history of sexual harassment. The relevant issue here is whether NCR had a duty of disclosure that extended to the entire management team of its corporate agent, JR Group. This question has nothing to do with Patterson's holding, which would be relevant to the entirely different question of whether NCR might be vicariously liable to a third party for the wrongdoing of Geha or JR Group.
Cunningham presents no other authority for his proposition that NCR had a duty to notify JR Group's management team of Geha's history of sexual harassment. Nor does he identify any parameters that might apply to such a proposed duty, which would otherwise seem to require principals to notify, without limitation, every member of their corporate agents' management teams of every known wrong committed by any corporate officer. Because Cunningham has not proposed any way in which he could sufficiently amend the complaint to allege a breach of any duty by NCR, he has failed to persuade us that the trial court erred by sustaining the demurrer without leave to amend.
III.
DISPOSITION
The judgment is affirmed. Respondent is awarded its costs on appeal.
/s/_________
Humes, P.J. We concur: /s/_________
Dondero, J. /s/_________
Banke, J.