Kp3 Endeavors Inc vs Pancheri

Demurrer

Cal. Super. - 4th Dist.October 24, 2017

AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH STRADLING YOCCA CARLSON & RAUTH, P.C. Marc J. Schneider (SBN 214609) mschneider @sycr.com Justin Owens (SBN 254733) jowens@sycr.com Sheila Mojtehedi (SBN 313002) smojtehedi @sycr.com 660 Newport Center Drive, Suite 1600 Newport Beach, CA 92660-6422 Telephone: (949) 725-4000 Facsimile: (949) 725-4100 Attorneys for Plaintiff/Cross-Defendant KP3 ENDEAVORS, INC., and Cross-Defendants ROBERT KARR, JOHN PANCHERI ELECTRONICALLY FILED Superior Court of California, County of San Diego 0816/2018 at 04:26:00 PM Clerk of the Superior Court By Richard Day, Deputy Clerk SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO - CENTRAL DIVISION, HALL OF JUSTICE KP3 ENDEAVORS, INC., a California Corporation, Plaintiff, VS. RYAN PANCHERLI, an Individual; and ERIK PANCHERI, an Individual; and DOES 1 through 10, inclusive, Defendants. RYAN PANCHERI, an Individual; ERIK PANCHERI, an Individual; and REPS & COMPANY, INC., a California corporation, Cross-Complainants, vs. KP3 ENDEAVORS, INC. a California Corporation; ROBERT KARR, an Individual; JOHN PANCHERI, an Individual; and ROES 1 through 10, inclusive, Cross-Defendants. -1- Case No. 37-2018-00021989-CU-BT-CTL Judge John S. Meyer Dept. C-64 CROSS-DEFENDANTS KP3 ENDEAVORS, INC., ROBERT KARR, AND JOHN PANCHERTI’S DEMURRER TO CROSS-COMPLAINT [Filed concurrently with Declaration of Justin Owens; and [Proposed] Order] Hearing: Date: October 26, 2018 Time: 10:30 a.m. Location: Dept. C-64 Complaint Filed: October 24, 2017 Trial Date: None Set NOTICE OF DEMURRER & DEMURRER TO CROSS-COMPLAINT LITIOC/2189772v7/105045-0002 AN Ln W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH NOTICE OF DEMURRER TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD: PLEASE TAKE NOTICE that on October 26, 2018 at 10:30 a.m. or as soon thereafter as the matter may be heard, in Department C-64 of the above-entitled Court, located at 330 West Broadway, San Diego, CA 92101, Cross-Defendants KP3 Endeavors, Inc., Robert Karr, and John Pancheri (“Cross-Defendants’) will and hereby do demur to the Cross-Complaint filed by Erik Pancheri, Ryan Pancheri, and REPS & Company, Inc. (“Cross-Complainants’) on the grounds that the Cross-Complaint fails to state facts sufficient to constitute a cause of action under Section 430.10(e) of the California Code of Civil Procedure, and is uncertain under Section 430.10(f) of the Code of Civil Procedure. This Demurrer will be and is based on the grounds stated in this Notice of Demurrer, the attached Demurrer and Memorandum of Points and Authorities in support thereof, the concurrently filed Declaration of Justin Owens, the Court’s records in this action, and all such other matters as may be presented at or prior to the hearing on this demurrer or of which this Court shall or may take judicial notice. DATED: August 16, 2018 STRADLING YOCCA CARLSON & RAUTH, P.C. ACen Marc J. Schneider Justin N. Owens Sheila Mojtehedi Attorneys for Plaintiff/Cross-Defendant KP3 ENDEAVORS, INC., and Cross-Defendants ROBERT KARR, JOHN PANCHERI 3, NOTICE OF DEMURRER TO CROSS-COMPLAINT LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH DEMURRER Cross-Defendants KP3 Endeavors, Inc., Robert Karr, and John Pancheri demur to the Cross-Complaint as follows: Demurrer to the First Cause of Action (Breach of Contract) Cross-Defendants demur to the First Cause of Action on the ground that it fails to state facts sufficient to constitute a cause of action under § 430.10(e) of the Code of Civil Procedure. The First Cause of Action also must be dismissed because it is uncertain under § 430.10(f) of the Code of Civil Procedure. Demurrer to the Second Cause of Action (Unpaid Wages) Cross-Defendants demur to the Second Cause of Action on the ground that it fails to state facts sufficient to constitute a cause of action under § 430.10(e) of the Code of Civil Procedure. The Second Cause of Action also must be dismissed because it is uncertain under § 430.10(f) of the Code of Civil Procedure for failure to identify the wages purportedly owed or any method for calculating those wages. Demurrer to the Third Cause of Action (Wrongful Termination) Cross-Defendants demur to the Third Cause of Action on the ground that it fails to state facts sufficient to constitute a cause of action under § 430.10(e) of the Code of Civil Procedure. Demurrer to the Fourth Cause of Action (Involuntary Dissolution) Cross-Defendants demur to the Fourth Cause of Action on the ground that it fails to state facts sufficient to constitute a cause of action under § 430.10(e). Demurrer to the Fifth Cause of Action (Breach of Fiduciary Duty) Cross-Defendants demur to the Fifth Cause of Action on the ground that it fails to state facts sufficient to constitute a cause of action under § 430.10(e) of the Code of Civil Procedure. Demurrer to the Sixth Cause of Action (Interference With Prospective Economic Advantage) Cross-Defendants demur to the Sixth Cause of Action on the ground that it fails to state facts sufficient to constitute a cause of action under § 430.10(e) of the Code of Civil Procedure. -3- DEMURRER TO CROSS-COMPLAINT LITIOC/2189772v7/105045-0002 1 Demurrer to the Seventh Cause of Action (Unfair Competition Law, § 17200) Cross-Defendants demur to the Seventh Cause of Action on the ground that it fails to state facts sufficient to constitute a cause of action under § 430.10(e) of the Code of Civil Procedure. The Seventh Cause of Action also must be dismissed because it is uncertain under AN Ln W N § 430.10(f) of the Code of Civil Procedure. The Seventh Cause of Action is uncertain because 7 ||it fails to identify the supposedly wrongful conduct in support of any of the three prongs of the 8 || claim for violation of Business & Professions Code Section 17200. 10 ||DATED: August 16, 2018 STRADLING YOCCA CARLSON & RAUTH, P.C. 11 / Ay 12 By: JA Cn Marc J. Schneider 13 “Tustin N. Owens Sheila Mojtehedi 14 Attorneys for Plaintiff/Cross-Defendant KP3 ENDEAVORS, INC., and Cross-Defendants 15 ROBERT KARR, JOHN PANCHERI 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA -4- CARLSON & RAUTH Newronr Busch DEMURRER TO CROSS-COMPLAINT LITIOC/2189772v7/105045-0002 TABLE OF CONTENTS 1 Page 2 3 LL. INTRODUCTION .....iiiiiiiieeie cece sects essere eects sees sane cease ee sree sabe eaie enna 9 ) II. BACKGROUND ii sczinan sn sma swans os sis visas 5 5685530 0550555 585554555 54555575 56 R455 35585 45.00 SASH 48 SEF #03 10 5 A. KP3 And The ESOP TTUSL. ..covoiiiiiiiiicieiiieie eects se rs eee eee 10 6 B. The Complaint and Cross-Complaint. .........ccoccceveeeieeiveinieennienie cec 10 ; II. LEGAL STANDARD. ....oottiitie ects eects sae seers sree sere ee 11 g IV. ARGUMENT comms sms sons ovum so cass sss a5 00206555 0085505550555 45551545 2655548 055555 38 545540 a0 3 11 5 A. FIRST CAUSE OF ACTION: BREACH OF ORAL AGREEMENT ............... 11 {0 I. The Oral Agreement Claim Is Uncertain And Not Cognizable.............. 11 ii 2. The Alleged Oral Agreement Must Be Disregarded...........cccooveeuneennee. 12 19 3. The Alleged Oral Agreement Is Illegal And Unenforceable. ................. 13 B. FIRST CAUSE OF ACTION: BREACH OF EMPLOYMENT 13 AGREEMENTS.......coovtimiiiiieiieiiee ieee esses s ss es 15 14 C. SECOND AND THIRD CAUSES OF ACTION: UNPAID WAGES AND {8 WRONGFUL TERMINATION ......oooiiiiiiniiiiectenee seers eneeene 16 1 D. FOURTH CAUSE OF ACTION: INVOLUNTARY DISSOLUTION.............. 17 7 FIFTH CAUSE OF ACTION: BREACH OF FIDUCIARY DUTY. .................. 18 Eb SIXTH CAUSE OF ACTION: INTERFERENCE WITH PROSPECTIVE 18 ECONOMIC ADVANTAGE ......ccoomiiimriinreierieneeenesise esses iis s esssss sesso 19 19 1. The Interference Claim Fails Because It Arises From Contract. ............ 19 20 2. The Claim Does Not Allege An Independently Wrongful Act............... 20 21 3 The Sixth Cause Of Action Fails As Against John and Bobby. ............. 21 22 G. SEVENTH CAUSE OF ACTION: UNFAIR COMPETITION (§ 17200) ........ 22 23 ||V. CONCLUSION.....ccomtriimrimmeesmmemissesitsesissssssssesesss nesses assesses sess sessse nesses ssssssesssee sions 23 24 25 26 27 28 STRADLING YOCCA -5- CARLO tr TH TABLE OF CONTENTS NEWPORT BEACH LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH TABLE OF AUTHORITIES Page(s) Cases Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503 (1994)... eects ee sb teeabe eee ete sabessbe estes bee saae ens 20 Asahi Kasei Pharma Corp. v. Actelion Ltd., 222 Cal. APP. 4th 945 (2013) c.eeeeeieeeeee ieee eee ee eee eee sete sateen 22 Blank v. Kirwan, B39 Call. 30 FLT CLIBEY sci nsso ssis mss nisi ssi 5 os 58 08058548 F555 S355 AA 35 11, 12 Charnay v. Cobert, 145 Cal. App.4th 170 (2000) .....eeeeieiieeiie eters eee tees sete estes sate eabe eee enseesaae ees 18 Comm’ee on Children’s Television, Inc. v. General Foods Corp., 35 Cal. 3d 197 (1983) cetera st teeta e atest ee eae sabe enne eet ee ents enbe anne 22 Davis v. Yageo Corp., AZ| Pad OBI (Oth, Cir: 2007 womans sommes sss ons ois snes sms oases sms sss 17 Dawe v. Corr. USA, 2007 U.S. Dist. LEXIS 81883 (E.D. Cal. Oct. 24, 2007) ...ccueeeiuiiiiieiieeie eters eves 16 Della Penna v. Toyota Motor Sales, L1 Cal. 4th 376 (1995) cee t ee sbee sabe ane ee tee este sabe anes 21 EPA Real Estate P’ship v. Kang, 12 Cal. App. 4th 171 (1992) cence eee siete sate eater e ete saae ee 13 Farmers Ins. Exchange v. Superior Court, 2 Cal. 4th 377 (1992) «eects eee teers sates este e bee sa be eabe eee b ee ebae enna enns 22 Foley v. Interactive Data Corp., AT Cal. 36 654 (Cal 1 DBE) uususunasavsssmmsnsumassnsonmnsnsmnssssssssesssns aoe sem 5 n Sms usm 19 FPI Development, Inc. v. Nakashima, 231 Cal. APP. 3A 3607 (1991) cnet seater sabes seas 13 Graham v. Bank of America, N.A., 226 Cal. APP. 4th 594 (2014) eee eee eects ete sate eaters t ee eaae saben 22 JRS Products, Inc. v. Matsushita Electric Corp. of America, 115 Cal. App. 4th 168 (2004) ....eeiuiieiie eit eee ste sete ste sate este e ees nteesaae ens 21 Kasparian v. County of Los Angeles, 38 Cal. App. 4th 242 (1995) co.cc sate eters sbeebs 20 -6- TABLE OF AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH Kline Hawkes California SBIC v. Superior Court, 117 Cal. App. 4th 183 (2004) ...eeiiieiieeiie ters sete eebe sees e abe eebe eee enbee sree ees 17 Korea Supply Co. v. Lockheed Martin Corp., 29 Call, Ath. 1130. (HOODY. minsiv moss sissvssi sissies sisi siis 1955555 4555555005 3555555 2555555 SHAS AAS Hi HT 20 Lazar v. Hertz Corp., 69 Cal. App. 4th 1494 (1999) «cei ete eee eee seas sabes 23 Miles, Inc. v. Scripps Clinic & Research Found., 810 F. Supp. 1091 (S.D. Cal. 1993)... eee eters seas sees 18 Neisendorf v. Levi Strauss & Co., 145 Cal. Ap. 20. S09 {ZIG cxsomssiansenssssussans comaommsnenoesssioes oss es ssi Ah S55 HSE AHORA 15 Oasis W. Realty, LLC v. Goldman, ST Cal. 4th 811 (2011) weeeeeiiiieiieeeeeie eects eee errs estes taser ae eases eases esas ae snnsaessnsaessneaeas 11 Oppenheimer v. Robinson, 150 Cal. APP. 2d 420 (1957) weeueeeeieeee ects eee eeseae eevee eases 16, 17 Oracle USA, Inc. v. XL Global Servs., 2009 U.S. Dist. LEXIS 59999 (N.D. Cal. 2009) .....ccouveeiiieeiieeeee cease cies e v e 19, 20 Persson v. Smart Inventions, Inc., 125 Cal. App. 4th T141 (2005) ..eeoueieeieeiie ete eects estes eesti esate eevee eee seesbae ees 18 Ross v. Creel Printing and Publ’g Co., 100 Cal. Appi. AH. 736 (OOD) conn sosumans snnsn on sumssnss somnssn oss 555550 555555.58 555555 E5055 5518 SH55558 S0R052 11 Schachter v. Citigroup, Inc., 47 Cal. 4th 610 (2009) «eee eters eters estas setae sera aera ena e etree ear ae eran ae eaaes 15 Silicon Knights, Inc. v. Crystal Dynamics, Inc., 983 F. Supp. 1303 (N.D. Cal. 1997) ...ooiiiiieee eee 23 Stevenson Real Estate Services, Inc. v. CB Richard Ellis, 138 Cal. App. 0. 121.3 CLONE): cosusanscnsessesusmsons coma sssianssossssoans ess a ts sss amon 20, 21 United States Liability Ins. Co. v. Haidinger-Hayes, Inc., 1 Cal. 3d 586 (1970) cuvette eects cette eerste sree sree ease esate ae eata ee sane ee sare ee ssseeessreeas 22 Wong v. Tenneco, 39 Cal. 3d 126 (1985) .eeiieieeeiie eee eee eee etter eee seas etree erases sate aeeabe ae eate ae eaae ee eaae ae eaaeeas 14 Yoo v. Jho, 147 Cal. App. 4th 1249 (2007) «eeeeeeeiieeeie eee eects sites estes seas eevee nee eees 13, 14 -7- TABLE OF AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH Statutes 26 U.S.C. S501) tveeureieenieeiieetie steers cece sate sacs st este sabe sate ste eb esate este shee sees nein 14 260 USC § A0L(A) eevee eters eee eect ee sree ease eases eae sees sree eases seen saen 14 Cal. Corp. Code § 185... ieee eee eects sees eaeeeebeeesabeee sabe e esa esses eanes 17,18 Code Civ. Prot: § 1856(0Y ss suwrsssss nmr snmmsssssnsio sums sss os mess oss 5 7555s 00 5955555 550555 06 5855555 59 12,13 Corp. Code § 1800(2)(2)-(3) ceeuveeerureerriieeeeiieeeeiie eerie erie estes sete et sit s sites s tes santas sab eeeabe ee sabeeas 17 Corporations Cote § 18D) smusmasessssssssnsusasassssmmssn sms s n mss sss e568 6 ass eme 17,18 Other Authorities CHRISTIAN & GRANT, SUBCHAPTER S TAXATION {8.05A (Thomson Reuters/Tax & Accounting, 4th Ed. 1998 & Supp: 2018-2) sssessussresnsssmssssnssnssnsmnssssmnsssssusssnsssss se maaesnn ns 14 -8- TABLE OF AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION This action arises from the conduct of Defendants and Cross-Complainants Erik and Ryan Pancheri in breaching the duties they owed as employees, officers and directors of KP3 Endeavors, Inc. (“KP3”). KP3 filed its complaint against Erik and Ryan' in October 2017. Erik and Ryan responded in June 2018 by filing the Cross-Complaint. As described herein, the Cross-Complaint is fatally flawed, and each cause of action therein must be dismissed. First, the allegation that KP3 breached a purported verbal agreement to allocate 50% of the company’s stock to Erik and Ryan fails to allege a viable claim, and contradicts the contemporaneous written agreements stating the parties’ intention that an Employee Stock Ownership Plan (“ESOP”) Trust would own KP3’s stock. (Sec. IV.A.2.) But even if the alleged verbal agreement was not contradicted by contemporaneous writings, such a pact would be an illegal and unenforceable contract to evade taxes. (Sec. [IV.A.3.) Moreover, without a viable claim to ownership of KP3 stock, Erik and Ryan lack standing to assert their claims for involuntary dissolution (Sec. IV.D), and breach of fiduciary duties (Sec. IV.E). The fiduciary breach claim fails for the additional reason that-as conceded in the Cross- Complaint-there is no “majority” stockholder who owes fiduciary duties to Erik and Ryan. Next, the Cross-Complaint comes up short in alleging that the Employment Agreements entitle Erik and Ryan to additional bonus compensation. (Sec. IV. B.) Without a legal basis for the compensation claim, the “unpaid wage” and “wrongful termination” claims also fail. (Sec. IV.C.) The unpaid wage claim also fails for lack of specificity. Finally, the unfair competition and “intentional interference” claims asserted against KP3 are improper attempts to convert KP3’s alleged breaches of contracts with third parties into tort causes of action. (Sec. IV.F-G.) California law rejects the imposition of tort liability for breaches of contract, regardless of the alleged “bad motive” of the breaching party. These claims-and all others in the Cross-Complaint-should be dismissed. " The parties are referred to by their first names because many share the surname Pancheri. 9- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH IL. BACKGROUND A. KP3 And The ESOP Trust. KP3 is a California corporation formed in January 2017 for the purpose of purchasing and selling event tickets. (Cross-Cmplt. {4, 11.) From January through late October 2017, KP3’s officers and directors consisted of Erik and Ryan, their cousin John Pancheri (“John”) and Robert Karr (“Bobby”). Critically, the Cross-Complaint concedes that 100% of KP3 stock is owned by an employee stock ownership plan trust (the “KP3 ESOP Trust”). (Id. at 12-13.) The Trust’s ownership of KP3 is confirmed by the Employment Agreements that Erik and Ryan have attached as exhibits to their Cross-Complaint. (Cross-Cmplt. Exs. 1, 2.) The Employment Agreements were signed by Erik and Ryan, acknowledge the Trust’s ownership of KP3 stock, and provide that Erik and Ryan will have the opportunity to become “a shareholder of [KP3] through the KP3 Endeavors, Inc. Employee Stock Ownership Plan as a participant thereunder.” (Id. at 4.6; see also JT 4.3, 4.4, 4.5 (discussing the KP3 ESOP plan).) This fact has also been previously admitted in court filings by REPS Investments, Inc. (“REPS I”), an entity which the Cross-Complaint admits is operated by Erik and Ryan. (Id. at 11.) In the bankruptcy action referenced in the Cross-Complaint (id. at 59), REPS I made the following unqualified representation to the court: “The parties do not dispute that KP3 is 100% owned by an Employee Stock Ownership Plan Trust that is managed by two trustees...” B. The Complaint and Cross-Complaint. In late October 2017, KP3 terminated Erik and Ryan upon learning that they were actively breaching their fiduciary duties to the company. As alleged in KP3’s First Amended Complaint, Erik and Ryan were engaged in the following unlawful conduct during the time they were still serving as officers, directors and employees of KP3: e They started a “competing event-ticketing company” using KP3’s corporate resources (KP3 First Am. Cmplt. (filed Nov. 14, 2017) at | 14); e They covertly “instructed KP3’s employees to spend their time during KP3 business hours on tasks for the benefit of Defendants’ competing company” (id. at q 18); -10- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH e They “made a concerted effort to bypass favorable purchasing opportunities that were available to KP3...so that these tickets could instead be purchased by [their] competing company” (id. at 15-16); e They “actively solicited KP3’s current employees to join [their] competing company...with the objective of decimating KP3’s workforce” (id. at 17). Erik and Ryan answered KP3’s complaint on June 5, 2018. Also on June 5, 2018, Erik, Ryan and their new competing company, REPS & Company, Inc. (“REPS II”), filed the Cross- Complaint that is the subject of this demurrer. III. LEGAL STANDARD If the defendant negates any element of a cause of action, a demurrer is properly sustained. Ross v. Creel Printing and Publ’g Co., 100 Cal. App. 4th 736, 748 (2002). In reviewing the allegations of the complaint, the Court is not required to accept “contentions, deductions, or conclusions of fact or law.” Blank v. Kirwan, 39 Cal. 3d 311, 318 (1985). Where amendment would be futile, demurrer should be sustained without leave to amend. Id. IV. ARGUMENT A. FIRST CAUSE OF ACTION: BREACH OF ORAL AGREEMENT The First Cause of Action appears to allege breaches of two distinct agreements. First, it alleges breach of an oral agreement that Erik, Ryan, Bobby and John would each “receive 25% of the ownership of KP3.” (Cross-Cmplt. at JJ[25-27.) Second, it alleges breach of Erik’s and Ryan’s Employment Agreements. (/d.) The alleged oral agreement is addressed in this Section IV.A, and the Employment Agreements are addressed in Section IV.B, below. 1. The Oral Agreement Claim Is Uncertain And Not Cognizable. Cross-Complainants allege that KP3 breached an oral agreement that Erik and Ryan would each “receive 25% ownership in KP3.” (Cross-Cmplt. 25-27.) Under California law, a claim for breach of contract must allege "(1) the existence of the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to the plaintiff." Oasis W. Realty, LLC v. Goldman, 51 Cal. 4th 811, 821 (2011). The Cross-Complaint does not coherently allege facts sufficient to establish the elements of a breach of contract and must be dismissed. -11- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH Here, the entirety of the Cross-Complaint’s factual allegations in support of the supposed breach is that KP3 is “refusing to provide or honor and repudiating the agreement among the four owners that they would each be 25% owners of KP3.” (Cross-Cmplt. 27.) Nowhere does the Cross-Complaint allege that Erik and Ryan have themselves performed under the alleged oral agreement, or been excused from performance. (Cross-Cmplt. 26 (silent as to Erik and Ryan’s performance under the alleged oral agreement).) More importantly, the Cross-Complaint does not allege any facts that could establish action-or a failure to act-by KP3 in breach of the oral agreement: the claim that KP3 was “refusing to provide or honor and repudiating the agreement” is purely conclusory and need not by accepted by the Court. See Blank, 39 Cal. 3d at 318 (a court is not required to accept “contentions, deductions, or conclusions of fact or law.”). For example, there is no allegation that KP3 was somehow obligated to effectuate a transfer of the company’s stock from the ESOP Trust to Erik and Ryan, or that it failed to do so. Finally, the Cross-Complaint contains no factual allegations indicating that Erik and Ryan were damaged by KP3’s conduct (or lack thereof). Indeed, given that the Cross- Complaint concedes 100% of KP3’s stock was held by the ESOP Trust, the effect of KP3’s “repudiation” of Erik and Ryan’s alleged 25% stock ownership is uncertain: there is no allegation in the Cross-Complaint that “but for” KP3’s repudiation of the oral agreement the ESOP Trust would have delivered KP3 stock to Erik and Ryan, or that KP3 even has the legal authority to require such a transfer to occur. Because the Cross-Complaint does not plead facts sufficient to establish the elements of a claim for breach of contract, the claim must fail. 2. The Alleged Oral Agreement Must Be Disregarded. Besides failing to plead facts sufficient to state a claim for breach of the oral agreement to allocate KP3’s stock, the alleged oral agreement itself must be disregarded because it contradicts the parties’ contemporaneous written agreements. “Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement.” Code Civ. Proc. § 1856(a). “A contradiction is a -12- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH juxtaposition of two statements that cannot be reconciled as a semantically permissible use of language, i.e., a proffered oral agreement that does not satisfactorily account for the language used in the writing.” FPI Development, Inc. v. Nakashima, 231 Cal. App. 3d 367, 395 (1991). The Cross-Complaint alleges that “on or about January 18, 2017,” Erik, Ryan, John and Bobby orally agreed that they would each “receive 25% of the ownership in KP3.” (Cross- Cmplt. 25.) But this alleged oral agreement contradicts the parties’ written Employment Agreements of the same date. (Cross-Cmplt. Exs. 1, 2 (with effective date January 18, 2017).) Erik and Ryan’s Employment Agreements with KP3 acknowledge that the KP3 ESOP Trust owns KP3’s stock, and that both Erik and Ryan would have the opportunity in the future to become “a shareholder of [KP3] through the KP3 Endeavors, Inc. Employee Stock Ownership Plan as a participant thereunder.” (Id. at (4.6; see also id. at 4.3, 4.4, 4.5.) These provisions of the Employment Agreements “cannot be reconciled” with the allegation of a contemporaneous oral agreement that allocates 100% of KP3’s stock to Erik, Ryan, John and Bobby. FPI Development, Inc., 231 Cal. App. 3d at 395. If 100% of KP3’s stock was allocated to Erik, Ryan, John and Bobby by an oral agreement, then the KP3 ESOP Trust could not own any stock in KP3. The alleged oral agreement must be rejected as an attempt to contradict the terms of the parties’ contemporaneous written agreements. Code Civ. Proc. § 1856(a); EPA Real Estate P’ship v. Kang, 12 Cal. App. 4th 171, 175 (1992). 3. The Alleged Oral Agreement Is Illegal And Unenforceable. Even assuming the oral agreement alleged in the Cross-Complaint did not contradict contemporaneous written agreements (and it does), the agreement is unenforceable because it would constitute an illegal scheme to use a sham ESOP structure to evade taxation. “No principle of law is better settled than that a party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out.” Yoo v. Jho, 147 Cal. App. 4th 1249, 1255 (2007). “Knowing that they will receive no help from the courts and must trust completely to each other's good faith, the parties are less likely to enter an illegal arrangement in the first place.” Id. (citing Lewis & Queen v. N. M. Ball Sons, 48 Cal. 2d 141, 150 (1975)). -15- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH The Cross-Complaint states that “[f]or tax planning purposes...a Trust was established to serve on paper as the custodian of the stock in KP3, and thus held 100% of KP3 for the benefit of the four individuals.” (Cross-Cmplt. J 12) The tax benefit acknowledged in the Cross-Complaint results from the fact that the profits of an S-corporation are exempt from income taxes to the extent they flow through the corporation and into an ESOP trust. See 26 U.S.C. §501(a) (establishing tax exemption for entities qualified under 26 USC § 401(a), which is the Internal Revenue Code provision governing ESOPs). Because KP3 was organized as an S-Corp with its stock owned by the KP3 ESOP Trust (Cross-Cmplt. 4, 12), KP3’s profits are tax exempt. See {8.05A, CHRISTIAN & GRANT, SUBCHAPTER S TAXATION (Thomson Reuters/Tax & Accounting, 4th Ed. 1998 & Supp. 2018-2) (describing tax benefits from the use of “S corporation ESOPs” including that, “[aJn ESOP owning 100 percent of the stock of an S corporation would actually eliminate the need to distribute cash to shareholders for the purpose of allowing them to make payment of their income tax liabilities.”) If true, the Cross-Complainant’s allegation of an oral agreement by which the KP3 ESOP Trust’s ownership interest exists only “on paper,” would constitute an illegal scheme to hold KP3 out as a tax-exempt entity while secretly violating a statutory requirement for tax exemption: the KP3 ESOP Trust’s ownership of KP3 stock. Such an agreement would constitute tax fraud and cannot be enforced. Yoo, 147 Cal. App. 4th at 1255. This is not a situation where the “illegality” of the alleged agreement involves a mere technicality unrelated to the parties’ dispute. Instead, the allegation of Erik and Ryan’s “de facto ownership” of KP3 is the core of their contract claim, and they cannot establish their case without it. See Wong v. Tenneco, 39 Cal. 3d 126, 135 (1985) (the test for an unenforceable agreement is “whether the plaintiff can establish his case otherwise than through the medium of an illegal transaction”). For all these reasons, the Cross-Complaint is both uncertain and fails to allege a legally cognizable theory for breach of a purported oral agreement to allocate KP3’s stock. -14- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH B. FIRST CAUSE OF ACTION: BREACH OF EMPLOYMENT AGREEMENTS In addition to alleging breach of an oral agreement to allocate ownership of KP3 stock, the First Cause of Action alleges breach of Erik and Ryan’s Employment Agreements. The Cross-Complaint acknowledges that the Employment Agreements set Erik and Ryan’s “initial salaries. ..at $200,000 annually.” (Cross-Cmplt. 14.) The Cross-Complaint goes on to allege that Erik and Ryan were owed additional “total combined compensation” equal to the “reasonable value of their services,” and that Erik and Ryan “calculated the amount they were entitled to receive under their Employment Agreements” and made a demand for this additional amount, which KP3 rejected. (/d. at {{ 16, 19.) The additional compensation sought by Erik and Ryan is considered “incentive compensation” under California law, and is often referred to as a bonus. See Schachter v. Citigroup, Inc., 47 Cal. 4th 610, 620 (2009). Eligibility for incentive compensation “is properly determined by the ... plans’ specific terms and general contract principles.” Id. at 621 (citing Neisendorf v. Levi Strauss & Co., 143 Cal. App. 4th 509, 523 (2006)). Where the express conditions to receiving additional incentive compensation have not been satisfied, there is “nothing in the public policy of California concerning wages that transforms an employee’s contingent expectation of receiving [incentive compensation] into an entitlement.” Neisendorf, 143 Cal. App. 4th at 523. For example, in Beckman v. Umpqua Bank, the court held that the plaintiff employee was not entitled to receive a bonus where the bonus “was determined at the sole discretion of [the employer] based on a variety of factors,” including that the employee was “employed on the date of the bonus payout for that period.” 2007 U.S. Dist. LEXIS 62685, *8-9 (E.D. Cal. Aug. 24, 2007). Applying this law, Cross-Complainant’s claim for breach of the Employment Agreements fails to allege a viable cause of action because it is incompatible with the terms of ? Notably, the Cross-Complaint does not claim that KP3 has breached its obligation to pay these “initial salaries.” (E.g., Cross-Cmplt. at 21.) MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH the Employment Agreements. The Employment Agreements specify the conditions for payment of any “additional W-2 compensation” beyond Erik and Ryan’s $200,000 salaries: The Employee shall also be entitled to receive additional W-2 compensation if authorized by the Employer from time to time on an annual basis in relation to the value of the Employee’s individual productivity and services to, and longevity with, the Employer. (Cross-Cmplt. Exs. 1-2, at Sec. 4.2 (emphasis added).) The plain terms of the Employment Agreements thus require that any “additional W-2 compensation” be both (i) “authorized by” KP3, and (ii) paid “on an annual basis.” The allegations of the Cross-Complaint concede that neither of these criteria were met. First, the Cross-Complaint concedes that KP3 never “authorized” additional payment to Erik and Ryan, but instead “refused” their demands for payment beyond the initial $200,000 salaries. (Cross- Cmplt. 21.) Second, the following allegations from the Cross-Complaint preclude the possibility that additional W-2 compensation had come due to Erik and Ryan “on an annual basis”: KP3 was “established in January 2017” ({ 11); Erik and Ryan demanded additional compensation in “early October 2017” (19); and Erik and Ryan received termination notices “[o]n October 25, 2017” (21). KP3 had been in existence for ten months as of October 2017, and could not possibly have breached an obligation to pay compensation “on an annual basis.” The Cross-Complaint does not allege a viable theory for breach of the Employment Agreements, and the First Cause of Action fails as a matter of law. C. SECOND AND THIRD CAUSES OF ACTION: UNPAID WAGES AND WRONGFUL TERMINATION The Second and Third Causes of Action for Unpaid Wages and Wrongful Termination must be dismissed because the Cross-Complaint does not identify a cogent basis for any allegedly unpaid wages. “The issues involved in a statutory action for the nonpayment of wages are (1) whether the employer failed to pay a wage which had accrued at the time the employer-employee relationship terminated and (ii) the amount of the accrued wages.” Oppenheimer v. Robinson,150 Cal. App. 2d 420, 422 (1957); see also Dawe v. Corr. USA, 2007 U.S. Dist. LEXIS 81883, #9-10 (E.D. Cal. Oct. 24, 2007) (citing Oppenheimer with -16- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH approval). In Oppenheimer, the plaintiff did not allege “either the amount of wages accrued and unpaid at the time of his discharge, the rate of his compensation, or the number of working days for which he [had] not been paid,” and the court found that there were insufficient facts to state a cause of action against the employer. Oppenheimer, 150 Cal. App. 2d at 422. The Cross-Complaint here is just as barren as the complaint in Oppenheimer. It concludes that “[o]n Cross-Complainants’ terminations, they were entitled to receive all earned and unpaid wages due” (Cross-Cmplt. 30), but never alleges what unpaid wages were due or the specific amounts. (Id. at 19.) Cross-Complainants’ failure to plead the amount of wages owed, or even how that amount can be calculated, is fatal to their claim.’ Oppenheimer, 150 Cal. App. 2d at 422. Likewise, because Cross-Complainants have not cogently alleged the basis for their unpaid wages or the nature of the unpaid wages they were owed, there can be no wrongful termination relating to Erik and Ryan’s alleged “complaints concerning unpaid wages and other compensation due.” (Cross-Cmplt. 38.) D. FOURTH CAUSE OF ACTION: INVOLUNTARY DISSOLUTION The Fourth Cause of Action for involuntary dissolution of KP3 (Cross-Cmplt. 42-45) must be dismissed because Erik and Ryan are not shareholders for purposes of Corporations Code § 1800, and thus lack standing to bring the claim. Corp. Code § 1800(a)(2)-(3) (enumerating the requirements for a “shareholder” to bring a dissolution action). As discussed in Section IV.A, supra, the Cross-Complaint does not allege a cognizable theory in support of Erik and Ryan’s claim that they are each 25% “de facto” owners of KP3. But even accepting as true the assertion that Erik and Ryan are “de facto” shareholders of KP3, the dissolution action must still fail. This is because § 1800 requires that dissolution actions be brought by a “shareholder,” which the Corporations Code defines as “one who is a holder of record of shares.” Cal. Corp. Code § 185; Davis v. Yageo Corp., 481 F.3d 661, 675 n. 9 (9th Cir. 2007) (“Under California law, shareholder status is based on record ownership of shares.”); see also Kline Hawkes California SBIC v. Superior Court, 117 Cal. App. 4th 183, ? As discussed, the Cross-Complaint also does not adequately allege an obligation by KP3 to pay “additional compensation” to Erik and Ryan. (See Sec. IV.B.) MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH 190 (2004) (applying § 185 in standing analysis for involuntary dissolution). Yet the Cross- Complaint admits that 100% of KP3 stock is in fact held by the KP3 ESOP Trust. (Cross- Cmplt. | 12-13 (“the Trust is identified on paper as the 100% shareholder of KP3”). Accordingly, and assuming the truth of allegations in the Cross-Complaint, Erik and Ryan are not the “holder[s] of record of shares” of KP3 and they lack standing to bring an involuntary dissolution action under Corporations Code § 1800. E. FIFTH CAUSE OF ACTION: BREACH OF FIDUCIARY DUTY The premise of the Fifth Cause of Action for breach of fiduciaries is that Erik and Ryan are owed fiduciary duties as “de facto 25% shareholders in KP3.” (Cross-Cmplt. { 47-48). Because the Cross-Complaint does not allege a viable theory for this de facto ownership interest, Erik and Ryan lack standing to bring a claim for breach of fiduciary duty. Even accepting Erik and Ryan’s de facto shareholder claim, the Fifth Cause of Action further fails because it does not allege that Cross-Defendants John Pancheri and Bobby Karr are majority shareholders such that they owe fiduciary duties to Erik and Ryan. "To establish a cause of action for breach of fiduciary duty, a plaintiff must demonstrate the existence of a fiduciary relationship, breach of that duty and damages." Charnay v. Cobert, 145 Cal.App.4th 170, 182 (2006). The Cross-Complaint apparently seeks to establish that John and Bobby owe fiduciary duties as majority shareholders of KP3. (Cross-Cmplt. 47-50.) Yet the Cross- Complaint also alleges that Erik, Ryan, John and Bobby are each 25% shareholders of KP3. (E.g., Cross-Cmplt. { 12, 16) Even combining John and Bobby's alleged ownership, this is not a “majority” and no fiduciary duties are owed: The general rule of limited liability of corporations is that shareholders do not owe each other a fiduciary duty. See Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93 [1 (1969). The Jones case did give the narrow circumstance in which a fiduciary duty may be imposed... Here, the exception is inapposite. Neither party is a majority shareholder so the Jones exception does not apply. Miles, Inc. v. Scripps Clinic & Research Found., 810 F. Supp. 1091, 1099 (S.D. Cal. 1993) (refusing to find fiduciary obligations between “equal shareholders”); see also Persson v. Smart Inventions, Inc., 125 Cal. App. 4th 1141, 1157 (2005) (“[C]onsiderable doubt exists that the obligations that flow from a partnership-including fiduciary duties among partners-may -18- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH be imposed on the shareholders of a corporation duly formed and operated under California statutes.”). Because the Cross-Complaint alleges an “equal shareholder” scenario in which no fiduciary duties are owed, the Fifth Cause of Action fails to allege the “existence of a fiduciary relationship” and the demurrer should be sustained. F. SIXTH CAUSE OF ACTION: INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGE 1. The Interference Claim Fails Because It Arises From Contract. Assuming all facts in the Cross-Complaint as true, the Sixth Cause of Action violates California’s “fundamental rule. ..that no tort cause of action will lie where the breach of duty is nothing more than a violation of a promise which undermines the expectations of the parties to an agreement.” Oracle USA, Inc. v. XL Global Servs., 2009 U.S. Dist. LEXIS 59999, *12-13 (N.D. Cal. 2009) (citing, e.g., Erlich v. Menezes, 21 Cal. 4th 543, 551-52 (Cal. 1999)); see also Foley v. Interactive Data Corp., 47 Cal. 3d 654, 699-700 (Cal. 1988) (“The distinction between tort and contract is well grounded in common law.”). This “fundamental rule” is fatal to the interference claim, which arises from the Cross- Defendants’ alleged wrongful conduct in “not paying [] debts to REPS I and Bonnie Pancheri.” (Cross-Complaint 61.) While acknowledging that the contractual payments at issue were owed to third parties, and not to any of the three Cross-Complainants, the Cross-Complaint alleges that Cross-Defendants somehow anticipated that the obligees under the contracts- REPS I and Bonnie Pancheri-planned to lend some portion of the owed amounts to Erik and Ryan as “working capital” for their new competing venture, REPS II. (/d. at { 61-65.) According to the Cross-Complaint, the alleged breaches of KP3’s contractual obligations to REPS I and Bonnie Pancheri support tort liability because they were carried out under “pretext” while the “real motivation was wrongful and unlawful.” (Cross-Cmplt. {{[55, 57, 58, 67 ( “Cross-Defendants stated grounds for not paying REPS I and Bonnie Pancheri were false and pretextual and that [sic] their real motivation was wrongful and unlawful.”).) But “the law does not distinguish between good and bad motives for breaching a 9 cc contract,” and the Cross-Defendants’ “real motivation” for non-payment to REPS I and Bonnie -19- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH Pancheri is irrelevant. Oracle USA, 2009 U.S. Dist. LEXIS 59999 at *12. Applying these principles, the California Supreme Court has rejected similar efforts to convert the breach of a party’s own contractual obligations into a tort: A party may breach a contract...because of personal, racial, or ethnic animus, or for other nefarious or unethical reasons. In contrast, a breach may be the product of naive or innocent misunderstanding or misperception created by the aggressive solicitation of an outsider. In any case, motivation is irrelevant. Regardless of the presence or absence of third party involvement, the contracting party has done nothing more socially opprobrious than to fall short in meeting a contractual commitment. Only contract damages are due. Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 516-17 (1994) (emphasis added); Kasparian v. County of Los Angeles, 38 Cal. App. 4th 242, 265 (1995) (contractual parties “owe[] no duty in tort not to breach the contract or interfere with its performance”). The Sixth Cause of Action is explicitly premised on Cross-Defendants’ alleged breaches of contractual obligations to third parties, and its allegations “collapse the carefully-guarded distinction between contract and tort law.” Oracle, 2009 U.S. Dist. LEXIS 59999, at *21. 2. The Claim Does Not Allege An Independently Wrongful Act. Because “the law does not distinguish between good and bad motives for breaching a contract,” the Cross-Complainants also cannot establish an essential element to their claim for interference with prospective economic relationship: that the conduct was “wrongful by some legal measure, rather than merely a product of an improper, but lawful, purpose or motive.” Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1159 n. 11 (2003) (emphasis added); Stevenson Real Estate Services, Inc. v. CB Richard Ellis, 138 Cal. App. 4th 1215, 1223-1224 (2006) (“[A] plaintiff must plead and prove that the conduct alleged to constitute the interference was independently wrongful, i.e., unlawful for reasons other than that it interfered with a prospective economic advantage.”). Because California law holds that a defendant’s “motivation is irrelevant” in a breach of contract (Applied Equipment Corp., 7 Cal. 4th at 516-17), the Cross-Complaint does not allege any conduct that is “unlawful for reasons other than that it interfered with a prospective economic advantage.” Indeed, there is nothing in the Cross-Complaint to indicate that Cross- -20- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH Defendants’ conduct was “independently actionable,” i.e., that the legal standards “provide for, or give rise to, a sanction or means of enforcement for a violation of the particular rule or standard that allegedly makes the defendant's conduct wrongful.” Stevenson Real Estate Services, 138 Cal. App. 4th at 1223.* Applying these principles in a case involving allegations similar to those in the Cross- Complaint, the court in JRS Products, Inc. v. Matsushita Electric Corp. of America, 115 Cal. App. 4th 168 (2004) rejected a claim for intentional interference with prospective economic advantage. The plaintiff in JRS Products, like the Cross-Complainants here, alleged that 9 cc defendants’ “purpose for terminating the [contract] was wrongful, in order to reduce competition for accounts which it wishes to pursue...and to injur[e] plaintiff [] as a competitor.” Id. at 182-83. The Court found that these allegations did not state a cause of action for intentional interference with prospective economic advantage because “motive, regardless of how malevolent, remains irrelevant to a breach of contract claim and does not convert a contract action into a tort claim exposing the breaching party to liability for punitive damages.” Id. at 182 (emphasis added). 9 Cc In sum, even assuming that Cross-Defendants’ “real motivation” for breaching KP3’s contractual obligations was to harm Erik, Ryan, and REPS II (and it was not), this cannot state a claim for intentional interference with prospective economic advantage. 3. The Sixth Cause Of Action Fails As Against John and Bobby. The interference with prospective economic advantage claim is further flawed as applied to John and Bobby. The Cross-Complaint concedes that the contractual obligations to REPS I and Bonnie Pancheri were the obligations of KP3, not of John or Bobby personally. (Cross-Cmplt. 55-58.) The Cross-Complaint does not allege any facts from which it can be * While the Cross-Complaint does not assert a cause of action for negligent interference with prospective economic advantage, such a claim is governed by the same essential elements and would also fail. See Della Penna v. Toyota Motor Sales, 11 Cal. 4th 376, 392-93 (1995). Moreover, a claim for negligent interference requires pleading of a “special relationship” or other facts sufficient to establish Cross-Defendants owed a duty of care. See LiMandri, 52 Cal. App. 4th at 348 (negligent interference requires that “defendant owes the plaintiff a duty of care.”). 21- MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH inferred that John or Bobby can be held personally liable on those contracts. See United States Liability Ins. Co. v. Haidinger-Hayes, Inc., 1 Cal. 3d 586, (1970). Beyond alleging that the contracts were breached with an improper motivation, Cross- Complainants allege no specific conduct by John or Bobby in connection with the Sixth Cause of Action. The allegations are thus insufficient to establish personal liability because it is “settled that corporate agents and employees acting for and on behalf of a corporation cannot be held liable for inducing a breach of the corporation’s contract.” Asahi Kasei Pharma Corp. v. Actelion Ltd., 222 Cal. App. 4th 945, 967 (2013); see also United States Liability., 1 Cal. 3d at 595 (officers and directors’ duty of care to third parties is “quite limited”). G. SEVENTH CAUSE OF ACTION: UNFAIR COMPETITION (§ 17200) The Seventh Cause of Action fails because it is uncertain and lacks allegations sufficient to state a cause of action. Baldly asserting claims under each of the “unlawful,” “fraudulent,” and “unfair” prongs of § 17200, the unfair competition claim does not identify any specific conduct whatsoever, much less identify conduct supporting each of these three prongs. Indeed, a UCL action “is not an all-purpose substitute for a tort or contract action.” Graham v. Bank of America, N.A., 226 Cal. App. 4th 594, 609 (2014). A claim based on a "fraudulent" business practice must allege that "members of the public are likely to be deceived" by the defendant’s conduct. Comm’ee on Children's Television, Inc. v. General Foods Corp., 35 Cal. 3d 197, 214 (1983). A claim under the “unlawful” prong must allege that defendant’s conduct was “forbidden by law.” Farmers Ins. Exchange v. Superior Court, 2 Cal. 4th 377, 383 (1992). And a claim founded on an “unfair” business practice “must show the defendant’s conduct is tethered to an underlying constitutional, statutory, or regulatory provision” or that it violates antitrust law. Graham, 226 Cal. App. 4th at 612. Here, the Cross-Complaint does not even attempt to identify a fraudulent business practice, nor the ways in which that business practice has deceived the public. The Cross- Complaint does not cogently plead a statutory violation under the Labor Code, as there are no allegations concerning the amount of wages that were owed to Erik and Ryan. (See Sec. IV.C.) Cross-Defendants are left to guess at which-if any-of the other causes of action are alleged 9 MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH as a predicate for a claim under the “unlawful” prong. To the extent the unfair competition claim is based on the conduct alleged in the Sixth Cause of Action for interference with prospective economic advantage, it fails for the reasons described in Section IV(F). See, e.g., Lazar v. Hertz Corp., 69 Cal. App. 4th 1494, 1505 (1999) (dismissing § 17200 “unlawful” claim where predicate causes of action failed to state claim); see also Silicon Knights, Inc. v. Crystal Dynamics, Inc., 983 F. Supp. 1303, 1316 (N.D. Cal. 1997) (survival of “unfairness” claim depends on adequacy of the underlying cause of action). V. CONCLUSION For the foregoing reasons, Cross-Defendants respectfully request that the Court sustain this Demurrer and dismiss all causes of action in the Cross-Complaint with prejudice. DATED: August 16, 2018 STRADLING YOCCA CARLSON & RAUTH, P.C. By: 7H Marc J. Schneider Justin N. Owens Sheila Mojtehedi Attorneys for Plaintiff/Cross-Defendant KP3 ENDEAVORS, INC., and Cross-Defendants ROBERT KARR, JOHN PANCHERI 95 MEMORANDUM OF POINTS AND AUTHORITIES LITIOC/2189772v7/105045-0002 AN Ln Bk W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT BEACH PROOF OF SERVICE I am employed by Stradling Yocca Carlson & Rauth in the County of Orange, State of California. Iam over the age of 18 and not a party to the within action. My business address is: 660 Newport Center Drive, Suite 1600, Newport Beach, CA 92660-6422. On August 16, 2018, I served the within document(s): CROSS-DEFENDANTS KP3 ENDEAVORS, INC. ROBERT KARR, AND JOHN PANCHERI’S DEMURRER TO CROSS-COMPLAINT By electronic service. Based on a court order, an agreement of the parties to accept X service by electronic transmission and/or pursuant to CRC 2.251(b)(1)(B), I caused the above-referenced document(s) to be sent to the person(s) at the electronic address(es) listed below. Charles T. Hoge, Esq. Attorneys for Defendants/Cross- HOGE LAW FIRM Complainants RYAN PANCHERI, ERIK 888 Prospect Street, Suite 200 PANCHERI and Cross-Complainant La Jolla, CA 92037 REPS & COMPANY, INC. Telephone: 858.263.2754 Cellular: 619-823-2600 choge @hogelaw.com office @hogelaw.com I declare that I am employed in the office of a member of the bar of this court whose direction the service was made. I declare under penalty of perjury under the laws of the State of California that the above is true and correct. Executed on August 16, 2018, at Newport Beach, California. Jojo Graziano ya PROOF OF SERVICE LITIOC/2189772v7/105045-0002