Filed 1/29/18 Andrade v. Morrissey CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment of the Superior Court of San Diego County, Timothy M. Casserly, Judge. Reversed and remanded with directions.

Ecoff Campain & Tilles and Lawrence Craig Ecoff, Kevin T. Kay for Plaintiff and Appellant.

Walker Law Office and Charles F. Walker for Defendants and Respondents.

Plaintiff and appellant Francisco Andrade appeals from a judgment of dismissal in favor of defendants and respondents Thomas Morrissey individually and as trustee of the Morrissey Family Trust, Laurie Morrissey, AM Contracting, Inc. and T. Morrissey Corporation (TMC), after the trial court sustained without leave to amend defendants' demurrer to Andrade's January 2016 complaint and ordered that complaint stricken on grounds Andrade had another action pending against the same defendants based on the same primary rights. Andrade contends the trial court erred in its ruling, as his two actions are based on distinct claims with differing primary rights: the first action asserting individual claims and the other asserting derivative claims seeking to recover on behalf of and for the benefit of TMC. Andrade further argues that if this court finds the claims to be identical, the proper order is not to sustain the demurrer without leave to amend, but to abate the second action until final judgment is entered in the first action. We uphold the court's order sustaining the demurrer on grounds of another action pending, but we reverse the judgment of dismissal and direct the court to order that the present action be stayed pending termination of the first action.

FACTUAL AND PROCEDURAL BACKGROUND

In setting out the facts, we accept as true the well-pleaded and material allegations of Andrade's pleadings, reasonable inferences that may be drawn from their allegations, and facts that may properly be judicially noticed. (Williams & Fickett v. County of Fresno (2017) 2 Cal.5th 1258, 1264; Coker v. JPMorgan Chase Bank, N.O.A. (2016) 62 Cal.4th 667, 671; In re Insurance Installment Fee Cases (2012) 211 Cal.App.4th 1395, 1402.)

In January 2014, TMC sued Andrade and other individuals and entities in a complaint (and later, a second amended complaint) containing numerous causes of action based on allegations that Andrade, who was employed by Morrissey Construction Company in various capacities, conspired in various ways with other defendants to defraud Morrissey Construction Company of hundreds of thousands of dollars on its construction projects (case No. 37-2014-00081874-CU-FR-NC).

In February 2014, Andrade cross-complained against TMC and Thomas Morrissey alleging causes of action for breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, fraud, conversion, and rescission. Andrade alleged he and Morrissey were the only two known shareholders of TMC;[1] that he, Morrissey and TMC entered into an equity sale agreement by which Andrade would purchase TMC stock for $500,000, receive the right to purchase additional shares, and be elected both vice president and a director of TMC, among other things. Andrade alleged he paid $200,000, but TMC and Morrissey breached the written equity sale agreement and later oral modifications, including by failing to give him documentation of his ownership interest or appointment as a vice president and director, refusing to return Andrade's investment, concealing distributions to TMC and Morrissey, and issuing a form K-1 to Andrade without ever actually paying him a distribution.

In his cross-complaint, Andrade alleged a seventh cause of action against Morrissey alone and "Roes 1-50," entitled "Share Holder's Derivative Action [sic]." In that claim, he alleged Morrissey authorized distributions of money ($83,000, then an additional $300,000) to himself as a loan or as a de facto or disguised distribution, and reported a distribution to Andrade via a tax form that was never given to Andrade. Andrade alleged the unauthorized loans/distributions decreased TMC's retained earnings and its working capital, increased its debt, and caused TMC to violate generally accepted accounting principles, causing TMC injury and potentially subjecting it and its shareholders to fines, penalties or late fees by state and federal tax authorities. Andrade further alleged that as a result of Morrissey's dominance and control of TMC, TMC's corporate books and records were not made available to Andrade, he had not been given documents confirming his interests in TMC, TMC's books and records were inaccurate, TMC failed to properly issue shareholder certificates to its shareholders, and TMC failed to follow proper corporate formalities thus exposing its shareholders to personal liability for its acts and omissions. Andrade alleged that any demand on TMC's board to take corrective action would be futile given Morrissey's status as TMC's president, dominating board member and controlling shareholder, and in view of Morrissey's fraud and violations of fiduciary duty. Andrade alleged: "If the Cross-Complainant is successful in the action, the recovery will be of substantial benefit to all shareholders of the corporation, and such action is necessary and proper to protect the interests of the corporation and its shareholders." In his claim for relief, Andrade sought an order that Morrissey restore to TMC all distributions and all personal loans made to him, an audit of TMC's books and records as well as production and correction of those books and records to reflect Andrade's interests, and issuance of shareholder certificates to all shareholders, including Andrade.

In January 2016, Andrade filed a new complaint—the present action—against Morrissey individually and as trustee of the Morrissey family trust, Laurie Morrissey, AM Contracting, Inc. and TMC, alleging causes of action for conversion, conspiracy to convert and breach of fiduciary duty (case No. 37-2016-00000878-CU-BT-NC). Andrade additionally sought an accounting and included another cause of action labelled "Shareholder's Derivative Action." All five causes of action were asserted "derivatively" against some or all of the defendants. Andrade generally alleged that Morrissey approached him about providing some capital for TMC's operation and persuaded him to enter into a written contract concerning a sale of a shareholder interest in TMC for $500,000.[2] He alleged he paid an initial $200,000 then an additional $100,000, but after a dispute developed, he declined to pay the balance, and defendants never refunded him his investment money. Andrade alleged his shareholder interest in TMC vested in October 2012 and equaled an 11 percent interest. Andrade alleged Morrissey owed him a fiduciary duty to act in good faith, deal fairly and not usurp corporate opportunities owed to TMC, but breached those duties by (1) overcharging customers with respect to insurance bonds, and retaining the excess premium for his own personal use and benefit; (2) using TMC and its monies like a personal bank account, making personal loans to himself and his family trust; (3) making improper salary payments to his wife Laurie Morrissey though she did not perform officer duties to TMC or provide services to it; (4) using AM Contracting, Inc. as a subcontractor to submit inflated bids to defraud TMC's clients; and (5) submitting fraudulent or inflated bids, proposals and invoices on some jobs to recoup losses on other jobs. According to Andrade, all of that conduct "resulted in damage to [TMC], and therefore a loss to Andrade as a shareholder of [TMC]," as he was entitled to distributions from TMC but did not receive them due to defendants' conduct. These allegations were the basis for Andrade's first and second causes of action for conversion and conspiracy to convert, which were alleged against Morrissey, Laurie Morrissey and AM Contracting, Inc., as well as his third cause of action for breach of fiduciary duty, which was alleged against Morrissey alone. He alleged the defendants in doing the above referenced actions converted, embezzled or stole hundreds of thousands of dollars belonging to TMC and its shareholders.

Andrade's shareholder derivative cause of action, alleged against Morrissey alone, also incorporated all of the general allegations, and alleged further that Morrissey as a TMC officer and director owed Andrade a duty of good faith and fair dealing, loyalty, and fairness in connection with TMC's operation, but breached those duties by "embezzling and converting, for his own personal use and enjoyment, monies of [TMC] which would have been distributed to the shareholders . . . ." Andrade alleged that Morrissey also converted and took monies belonging to TMC and its shareholders, and directed work to his other construction company. Andrade alleged that "[a]s a result, [Andrade] bring [sic] this shareholder's derivative action to redress the wrongs and improprieties caused by [Morrissey's] wrongdoing" and if successful, "a substantial benefit will result to [TMC], on whose behalf this action is prosecuted . . . ."

Defendants demurred to Andrade's January 2016 complaint on various grounds, including that there was another action pending between the parties on the same cause of action, Andrade was attempting to divide a primary right and enforce it in two different suits, and the 2016 complaint was the same as his 2014 lawsuit and should be abated.[3] Defendants also demurred on grounds the January 2016 complaint was a "disguised motion to amend [Andrade's] currently pending cross-complaint" in the prior action filed in violation of Code of Civil Procedure sections 426.30, subdivision (a), 426.5, and 428.50.

Andrade opposed the motion, arguing that the court's only procedural option was to abate the action, but that abatement was not proper because the claims in the 2014 and 2016 action were different and brought "in effect" by different parties. Specifically, he argued his cross-complaint in the 2014 action asserted "individual claims"—claims seeking recovery for harms personal to him—while his January 2016 complaint asserted "derivative claims" on behalf of TMC, of which he was a shareholder. With respect to the cross-complaint's seventh cause of action labelled a "derivative" claim, Andrade argued its allegations showed it was "merely a claim by a shareholder (1) to obtain return of his $300,000 and (2) to the corporation for failure to turn over and make available corporate records." Andrade pointed out the January 2016 action sought damages on TMC's behalf against new parties: AM Contracting, Inc. and Laurie Morrissey.

The trial court sustained the demurrer without leave to amend, and ordered the complaint stricken. It found the allegations of both Andrade's cross-complaint in the prior action and the January 2016 complaint "are essentially the same and almost identical in substance . . . . Specifically, the allegations demonstrate that in 2014 Andrade sued Thomas P. Morrissey, [TMC] and ROE shareholders of TMC. . . . In 2016, Andrade sued Thomas P. Morrissey, [TMC] and now-named ROE defendants—Laurie Morrissey and AM Contracting, Inc. . . . The ROE defendants in the 2014 suit are the same defendants in the 2016 suit." The court ruled the two complaints "allege the same primary cause of action and the defendants are the same, even though some of the defendants were identified as ROES in the first lawsuit. Consequently, the complaint and cross-complaint arise from the same claims or primary right and constitute improper claim splitting as argued by . . . Morrissey in its demurrers." The court additionally agreed that the January 2016 complaint was a disguised motion to amend the currently pending cross-complaint in the earlier action.

Andrade appeals from the ensuing judgment of dismissal.

DISCUSSION

I. Standard of Review

On defendants' demurrer, our review standard is settled. We assess the allegations of the operative complaint de novo, and may consider matters that have been judicially noticed. (Apple Inc. v. Superior Court (2013) 56 Cal.4th 128, 156; Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42.) "We give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as admitting all material facts properly pleaded, but do not assume the truth of contentions, deductions or conclusions of law." (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865.)

We review the propriety of the court's ruling, not the validity of its legal reasoning (Staniforth v. Judges' Retirement System (2016) 245 Cal.App.4th 1442, 1449; Bains v. Moores (2009) 172 Cal.App.4th 445, 478), and will affirm the judgment if it is correct on any theory upon which it was based. (Hendy v. Losse (1991) 54 Cal.3d 723, 742; Staniforth, at p. 1449; Franchise Tax Board v. Firestone Tire & Rubber Co. (1978) 87 Cal.App.3d 878, 883.)

II. Legal Principles

A plaintiff may not split a cause of action by filing multiple lawsuits based on the violation of the same primary right. (Crowley v. Katleman (1994) 8 Cal.4th 666, 681-682.) When a plaintiff attempts to divide a primary right and enforce it in two pending lawsuits, a defendant may respond by pleading that fact in abatement. (Hamilton v. Asbestos Corp. (2000) 22 Cal.4th 1127, 1146.) " 'A plea in abatement is essentially a request—not that an action be terminated—but that it be continued until such time as there has been a disposition of the first action.' " (Lawyers Title Ins. Corp. v. Superior Court (1984) 151 Cal.App.3d 455, 459.)

Code of Civil Procedure section 430.10, subdivision (c), authorizing a demurrer or answer on grounds "[t]here is another action pending between the same parties on the same cause of action," codifies the common law plea in abatement. (See People ex rel. Garamendi v. American Autoplan, Inc. (1993) 20 Cal.App.4th 760, 770.) "Under the statutory plea in abatement, '[t]he pendency of another earlier action growing out of the same transaction and between the same parties is a ground for abatement of the second action.' [Citation.] A statutory plea in abatement requires that the prior pending action be 'between the same parties on the same cause of action.' " (Ibid.) The demurrer may be sustained on this ground where "the complaint shows on its face that the cause of action and the issues in the two actions are substantially the same and that the parties are identical; it must also appear that the parties in both actions stand in the same relative position as plaintiff and defendant." (Franchise Tax Board v. Firestone Tire & Rubber Co., supra, 87 Cal.App.3d at p. 883.)

In determining whether the causes of action are the same for purposes of pleas in abatement, the rule is that such a plea may be maintained only where a judgment in the first action could be pleaded as a bar to the second action. (Lord v. Garland (1946) 27 Cal.2d 840, 848.) " 'California law approaches the issue by focusing on the "primary right" at stake: if two actions involve the same injury to the plaintiff and the same wrong by the defendant then the same primary right is at stake even if in the second suit the plaintiff pleads different theories of recovery, seeks different forms of relief and/or adds new facts supporting recovery.' [Citation.] [¶] Under the 'primary rights' theory . . . there is only a single cause of action for the invasion of one primary right and the harm suffered is the significant factor. [Citation.] A primary right is the right to be free of a particular injury. [Citation.] 'The cause of action is the right to obtain redress for a harm suffered, regardless of the specific remedy sought or the legal theory (common law or statutory) advanced.' " (Cal Sierra Development, Inc. v. George Reed, Inc. (2017) 14 Cal.App.5th 663, 675-676; see also Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 798; Silverado Modjeska Recreation and Park Dist. v. County of Orange (2011) 197 Cal.App.4th 282, 297-298.) " 'An injury is defined in part by reference to the set of facts, or transaction, from which the injury arose.' " (Silverado, at p. 298.)

III. Andrade's 2014 Cross-Complaint and His 2016 Complaint Seek to Enforce the Same Primary Right

As he did below, Andrade argues that his actions are based on "distinct claims"; that the "primary right violated by TMC in the [2014 cross-complaint] is different than the primary right violated by TMC in the [January 2016 action]." Despite the fact he labelled his 2014 cross-complaint's seventh cause of action a shareholder's derivative claim and pleaded injuries suffered by TMC, Andrade characterizes that pleading throughout as containing only "individual" claims seeking to redress issues related to him personally—specifically, "recover[y of] the $300,000 he invested in TMC and the benefit he should have received as a result of the investment." He characterizes his 2016 action as having only shareholder derivative claims seeking damages on behalf of TMC, namely, "funds either wrongly paid to Morrissey, Laurie [Morrissey] and AM [Contracting, Inc.], or funds that were wrongly diverted from the company for the benefit of Defendants." According to Andrade, the fact the lawsuits share some of the same causes of action is immaterial.

"Shareholders may bring two types of actions, 'a direct action filed by the shareholder individually (or on behalf of a class of shareholders to which he or she belongs) for injury to his or her interest as a shareholder,' or a 'derivative action filed on behalf of the corporation for injury to the corporation for which it has failed or refused to sue.' " (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311-312.) The California Supreme Court explained the distinction between these two types of claims in Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93 as follows: A claim is derivative " 'if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets.' . . . 'The stockholder's individual suit, on the other hand, is a suit to enforce a right against the corporation which the stockholder possesses as an individual.' " (Id. at pp. 106-107.)

" 'The two actions are mutually exclusive: i.e., the right of action and recovery belongs either to the shareholders (direct action) or to the corporation (derivative action).' [Citation.] When the claim is derivative, the 'shareholder is merely a nominal plaintiff.

. . . Even though the corporation is joined as a nominal defendant . . . , it is the real party in interest to which any recovery usually belongs.' " (Schuster v. Gardner, at p. 312; Jones, at p. 107 ["although the corporation is made a defendant in a derivative suit, the corporation nevertheless is the real plaintiff and it alone benefits from the decree; the stockholders derive no benefit therefrom except the indirect benefit resulting from a realization upon the corporation's assets"]; see also Thomson v. Mortgage Investment Co. (1929) 99 Cal.App. 205, 212.)
We have no quarrel with the proposition that an individual stockholder's claim and a derivative claim by that same individual brought on a corporation's behalf to redress wrongs against the corporation can involve different primary rights. (See, e.g., Favila v. Katten Muchin Roseman LLP (2010) 188 Cal.App.4th 189, 222-223.) But in deciding whether Andrade asserts the same primary right in both the 2014 cross-complaint and the 2016 complaint, we cannot ignore the fact that in addition to the causes of action seeking to recover his personal investment in TMC, Andrade pleaded a derivative claim on TMC's behalf in the 2014 cross-complaint. That claim—brought by TMC as the real party plaintiff (id. at p. 222; Schuster v. Gardner, supra, 127 Cal.App.4th at p. 312)—seeks to recover for injuries to TMC caused by Morrissey's diversion of TMC's money in the form of unauthorized distributions or personal loans to himself, just as the 2016 complaint asserts derivative claims on TMC's behalf to recover for injuries to TMC caused by Morrissey's improper diversion of money to others that either should have been received by TMC (payments to AM Contracting, Inc.) or were not owed by TMC (unauthorized payments to Morrissey and his wife).

It is of no moment that Andrade expanded on the facts or asserted different legal theories within his 2016 complaint. (Cal Sierra Development, Inc. v. George Reed, Inc., supra, 14 Cal.App.5th at pp. 675-676; Alpha Mechanical, Heating & Air Conditioning, Inc. v. Travelers Cas. & Sur. Co. of America (2005) 133 Cal.App.4th 1319, 1332 [where two actions involve the same injury to the plaintiff and same wrong by the defendant, the same primary right is at stake even if plaintiff pleads different theories of recovery, seeks different forms of relief, and/or adds new facts supporting recovery].) Thus, we reject Andrade's argument that "identical facts" must be alleged to successfully assert a plea in abatement. In both cases, he asserted claims by TMC as the real party for harms suffered by TMC arising out of Morrissey's mismanagement and wrongdoing, and the specific factual and legal theory does not determine whether the two proceedings involve identical causes of action. (Boeken v. Philip Morris USA, Inc., supra, 48 Cal.4th at p. 798 [the cause of action is based on the harm suffered as opposed to the particular theory asserted by the litigant].) " 'Even where there are multiple legal theories upon which recovery might be predicated, one injury gives rise to only one claim for relief. . . .' Thus, under the primary rights theory, the determinative factor is the harm suffered. When two actions involving the same parties seek compensation for the same harm, they generally involve the same primary right." (Ibid.; Hayes v. County of San Diego (2013) 57 Cal.4th 622, 631; Crowley v. Katleman, supra, 8 Cal.4th at pp. 681-682.) Both suits involve TMC's primary corporate right to redress injuries suffered by it, as well as Morrissey's primary duty to not control TMC's activities to benefit himself or in a manner otherwise detrimental to the shareholders. (Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d at

p. 108; see also Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282, 297 [derivative suits brought on behalf of a corporation often assert breaches of fiduciary duty, mismanagement or other wrongdoing by corporate officers or directors, or wrongs against the corporation by third parties].)
In deciding Andrade had improperly split his cause of action, the trial court ruled that the "ROE defendants in the 2014 suit are the same defendants in the 2016 suit." On appeal, Andrade does not challenge that aspect of the trial court's order. Applying the presumption of correctness to the court's rulings (Sharabianlou v. Karp (2010) 181 Cal.App.4th 1133, 1150 [absent argument that the trial court's conclusion was erroneous, appellate court will not reverse on the point]; Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 631-632 [trial court's ruling is presumed correct and burden is on appellant to demonstrate error]), we do not disturb the conclusion that the same parties were involved in Andrade's 2014 cross-complaint's derivative claim and the 2016 complaint.

IV. The Proper Order is Not to Dismiss but to Abate the January 2016 Lawsuit

Andrade contends that in the event we conclude the two complaints are based on the same cause of action and involve the same parties, the proper ruling is to order the latter action abated until a final judgment in the prior action. We agree.

"Where a demurrer is sustained on the ground of another action pending, the proper order is not a dismissal, but abatement of further proceedings pending termination of the first action." (Plant Insulation Co. v. Fibreboard Corp. (1990) 224 Cal.App.3d 781, 787-788; see also Lord v. Garland, supra, 27 Cal.2d at p. 850; Shuffer v. Board of Trustees (1977) 67 Cal.App.3d 208, 217.) Thus, though Andrade impermissibly sought recovery for the same primary right in two separate actions, the trial court erred in striking and dismissing the 2016 action in its entirety for impermissible splitting of a cause.
The trial court purported to strike the pleading under Code of Civil Procedure section 436, under which "the court 'may . . . at any time in its discretion, and upon terms it deems proper: [¶] . . . [¶] (b) Strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.' " (Cal–Western Business Services, Inc. v. Corning Capital Group (2013) 221 Cal.App.4th 304, 309.) The court concluded the 2016 complaint was a disguised motion to amend the currently pending cross-complaint in the earlier action filed in violation of Code of Civil Procedure sections 426.30, subdivision (a), 426.50, and 428.50. We generally review a ruling striking a pleading for abuse of discretion, but where the matter presents a question of statutory interpretation applied to undisputed facts, we review the issue de novo as a question of law. (Cal–Western Business Services, Inc. v. Corning Capital Group, at

p. 309.)

Here, there was no basis for the court to strike Andrade's 2016 cross-complaint as filed in violation of the above-referenced statutes. Subdivision (a) of Code of Civil Procedure section 426.30 in pertinent part provides: "f a party against whom

a complaint has been filed and served fails to allege in a cross-complaint any related cause of action which (at the time of serving his answer to the complaint) he has [i]against the plaintiff, such party may not thereafter in any other action assert it against the

plaintiff . . . ." (Italics added.) The other statutes give the court discretion to permit a party who fails to file a cross-complaint leave to amend (Code Civ. Proc., § 426.50) and set out the timing for filing a cross-complaint "against any of the parties who filed the complaint . . . ." (Code Civ. Proc., § 428.50.) Here, Andrade did in fact file a compulsory cross-complaint against plaintiffs Morrissey and TMC—his 2014 action. And Andrade's 2016 action asserted claims against defendants Laurie Morrissey and AM Contracting, Inc. The claims against those parties were not required to be asserted in a compulsory cross-complaint. (See Russo v. Scrambler Motorcycles (1976) 56 Cal.App.3d 112, 118; Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2017) ¶ 6:524, p. 6-157 ["There are no compulsory cross-complaints against parties other than plaintiff"].) With respect to the claims against TMC and Morrissey in the 2016 cross-complaint, as we have held, the proper disposition is abatement.[4]

DISPOSITION

The judgment of dismissal is reversed. The matter is remanded and the trial court directed to stay this action pending termination of case No. 37-2014-00081874-CU-FR-NC.

O'ROURKE, J.

WE CONCUR:

McCONNELL, P. J.

HALLER, J.