Turner v. Pacifica Foundation CA2/7 ( 2023 )

Filed 2/14/23 Turner v. Pacifica Foundation CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
ANDREA TURNER et al., B314537
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No.
v. 20STCV46681)
PACIFICA FOUNDATION, INC.
et al.,
Defendants and Respondents.
APPEAL from an order of the Superior Court of
Los Angeles County, Michael L. Stern, Judge. Reversed and
remanded with directions.
Alexander Morrison + Fehr, Tracy L. Fehr; The Jaffe Law
Firm and Stephen R. Jaffe for Plaintiffs and Appellants Andrea
Turner, Christina Huggins and Donald Goldmacher.
Grant | Shenon and Adam Grant for Defendant and
Respondent Pacifica Foundation, Inc.
Eisenberg & Associates and Mark S. Eisenberg for
Defendants and Respondents Grace Aaron and Alex Steinberg.
_________________________
Andrea Turner, Christina Huggins and Donald Goldmacher
(collectively Turner parties), members of Pacifica
Foundation, Inc. who serve on Pacifica’s national board of
directors or the board of a local Pacifica radio station,1 filed this
derivative lawsuit on behalf of Pacifica (named as a nominal
defendant) against Grace Aaron and Alex Steinberg, members of
Pacifica’s national board of directors or officers of the corporation,
alleging Aaron and Steinberg breached fiduciary duties owed to
Pacifica and engaged in misfeasance and malfeasance injuring
the corporation. The trial court sustained without leave to
amend Aaron and Steinberg’s demurrer to the third amended
complaint and dismissed the action, ruling the Turner parties
had failed to make the required prelitigation demand on the
corporation or to adequately allege demand futility and, in any
event, Aaron’s and Steinberg’s alleged misconduct was protected
from liability by the business judgment rule. We reverse and
remand with directions to sustain the demurrer with leave to
amend the allegations purporting to satisfy the prelitigation
demand requirement of Corporations Code section 5710,
subdivision (b).
1 The Turner parties alleged that Turner was a member of
Pacifica’s national board of directors and the local station board
of KPFA-FM, Pacifica’s Berkeley-based radio station, and that
Huggins was chair and Goldmacher a member of the KPFA-FM
local station board.
2
FACTUAL AND PROCEDURAL BACKGROUND
1. The Turner Parties’ Allegations of Misconduct by Aaron
and Steinberg
The Turner parties filed their original complaint on
December 8, 2020, a first amended complaint on December 11,
2020 and, pursuant to court order, a second amended complaint
on February 22, 2021. After the court sustained Aaron and
Steinberg’s demurrer to the second amended complaint with
leave to amend (discussed in the following section), the Turner
parties on May 17, 2021 filed the operative third amended
complaint.
The third amended complaint alleged Steinberg was the
current chair of Pacifica’s national board of directors and that
Aaron and Steinberg at all relevant times served as members of
the Pacifica board or officers of the corporation “and/or in another
formal or de facto affiliation with Pacifica enabling each of them,
individually or collectively, to exercise influence and control over
the management and business affairs of Pacifica.”2
Paragraph 12, with numerous lettered subparts, alleged (in
language apparently identical to that in paragraph 12 of the
second amended complaint),3 that prior to commencing the
lawsuit, the Turner parties and “others affiliated and aligned
with” them continually demanded that Aaron and Steinberg
cease the actions alleged to constitute “misfeasance, malfeasance,
[and] breaches of fiduciary duties” (a phrase repeated throughout
the pleading, which we shorten to “misconduct”). Included in the
2 Our quotations from the parties’ papers omit unnecessary
capitalization and their use of bold and italics font.
3 The second amended complaint is not included in the
record on appeal.
3
paragraph were allegations concerning warnings and
recommendations from the California Attorney General’s
charitable trust section regarding issues of corporation
management that had been ignored by Pacifica’s board and
unsuccessful attempts by the Turner parties to mediate their
disputes. The paragraph specifically alleged all attempts to
resolve the issues “have been, would have been and continue to
be completely futile.”
The Turner parties alleged specific acts and omissions
constituting actionable misconduct, including interference with
Pacifica’s professional staff, causing the corporation’s failure to
comply with Federal Communications Commission (FCC),
Internal Revenue Service (IRS), and other federal and state
regulatory requirements; promoting and causing Pacifica to
obtain a $3.2 million loan, secured by corporate assets, without
an identifiable source of funds for repayment of its principal or
interest; causing the corporation to revise its contribution
formula, resulting in KPFA-FM, the only station not losing
money, to fund the vast majority of the costs of national
operations; interfering in several specific ways with the ability of
Pacifica to receive grants from the Corporation for Public
Broadcasting (CPB); and facilitating a $500,000 loan to Pacifica
from Pacifica Supporters Loan LLC (PSLL), notwithstanding the
wife of one of the owners of the lending entity was a member of
the Pacifica national board and the other owner was closely
involved with Aaron’s separate nonprofit corporation. Other acts
of purported misconduct, including retaliatory firings, failure to
conform to the advice of corporate counsel and alienating
listeners by bizarre programming, were also alleged.
4
Aaron’s and Steinberg’s misconduct, the Turner parties
alleged, damaged Pacifica in the form of loss of donor and listener
financial support and the loss, or imminent loss, of substantially
all its assets, creating a risk of insolvency. The pleading labels
its single cause of action as one for reimbursement of corporate
loss and waste and prays for a judgment requiring Steinberg and
Aaron to reimburse Pacifica for the damages and loss of assets
and revenue caused by their misconduct.
2. Pacifica’s Demurrer to the Second Amended Complaint
Pacifica—the nominal defendant—demurred to the Turner
parties’ second amended complaint, arguing they had failed to
properly make a prelitigation demand before filing the derivative
lawsuit, as required by Corporations Code section 5710,
subdivision (b). Aaron and Steinberg filed joinders in the
demurrer.
The Turner parties argued the allegations in paragraph 12
of the pleading established they had satisfied the demand
requirement. In addition, at the hearing on the demurrer,
counsel for the Turner parties represented that the then-current
iteration of the complaint had been sent to Pacifica’s counsel
before it was filed. “That’s the definition of submitting a claim
beforehand,” counsel argued. Counsel also addressed demand
futility and asserted Pacifica’s repeated refusal to mediate the
dispute with the Turner parties constituted adequate proof of
demand futility.
Responding to the demurrer as filed, the court stated, “I
agree with the plaintiffs’ side that paragraph 12 fully put the
defendants on notice. That issue is easily disposed of.” The court
then proceeded to address “problems with this complaint, which
aren’t even discussed by either side.” The court indicated the
5
allegations describing Aaron’s and Steinberg’s alleged breaches of
fiduciary duty, misfeasance and malfeasance were ambiguous
and lacked specificity and suggested further amendment was
appropriate.4 At this point, counsel for Pacifica, who had earlier
submitted on his papers on the issue of prelitigation demand,
argued the allegations in paragraph 12 did not satisfy the
requirements of Corporations Code, section 5710, subdivision (b),
and urged the court not to grant leave to amend. The court,
without further comment on the demand requirement, ruled,
“The demurrer is sustained with leave to amend to file a third
amended complaint.”
3. Aaron and Steinberg’s Demurrer to the Operative Third
Amended Complaint
After the Turner parties filed their third amended
complaint, expanding somewhat the allegations of misconduct
against Aaron and Steinberg, Pacifica answered, asserting as
affirmative defenses the failure to make a prelitigation demand
or to adequately detail why such a demand would be futile.
Aaron and Steinberg demurred, arguing the action was time-
barred, citing the three-year limitation period in Code of Civil
Procedure section 359; the pleading was unintelligible and failed
to state facts sufficient to constitute any cause of action; and
certain defenses (specifically, that board members of a nonprofit
4 The court commented, for example, “[F]iduciary duty is
mentioned. There’s no misfeasance or malfeasance that’s spelled
out. And I don’t know what the negligence is in this prayer for
relief. . . . [W]here’s the duty and all of the rest of that? That’s,
you know, that’s first-year Torts 101.” The court then asked
counsel for the Turner parties, “Do you want to respond to that,
Mr. Jaffe, or do you just want to try to draft another complaint
with leave to amend?”
6
corporation are protected from personal liability by provisions of
the Corporations Code, as well as by the common law business
judgment rule) appeared on the face of the complaint.5
With the demurrer counsel for Aaron and Steinberg
provided a declaration stating he had attempted to informally
resolve the issues raised by the third amended complaint’s
perceived pleading deficiencies by advising counsel for the Turner
parties that the new complaint was virtually identical to the
second amended complaint and “fails to allege specific facts that
connect any of the instances of misconduct alleged in
paragraph 16 to my clients or to the alleged resulting harm. In
each instance, the [third amended complaint] merely alleges my
clients ‘caused’ the stated problem without saying how they did
so. In many of those same instances, the [pleading] fails to
separate the acts of my clients from the official acts of the
Pacifica board acting as a whole.” Neither the demurrer nor
Aaron and Steinberg’s meet-and-confer communications with the
Turner parties challenged the adequacy of their prelitigation
demand.
In their opposition papers the Turner parties referred to
their lawsuit as a properly pleaded “members’ derivative action”
as defined by the Corporations Code when discussing the
sufficiency of their allegations of misconduct by Aaron and
Steinberg, but did not again address the prelitigation demand
requirement. In their reply memorandum, however, Aaron and
Steinberg argued the Turner parties had not made the necessary
5 The demurrer also challenged what it described as the
first cause of action for breach of contract for failure to state
sufficient facts and as uncertain. The third amended complaint
contained no cause of action for breach of contract.
7
demand for action on the Pacifica board before filing the lawsuit
or adequately pleaded demand futility.6
At the hearing on the demurrer on July 23, 2021, according
to the parties’ agreed statement, the court raised the
Corporations Code’s requirement “to plead with particularity the
individual plaintiffs’ efforts to convince Pacifica’s board to take
their desired action, or why such efforts would be futile.”7 In
response, “[p]laintiffs’ counsel stated that, on April 20, 2021
[during the hearing on Pacifica’s demurrer to the second
amended complaint], the court previously ruled the notice given
to Pacifica Foundation in this action was legally sufficient.” The
parties agree that “[n]othing further was said during the hearing
regarding the notice issue.”
The parties then addressed whether the third amended
complaint adequately responded to the court’s concerns, as
expressed at the prior demurrer hearing, regarding the
6 The Turner parties in their opposition memorandum and
Aaron and Steinberg in their reply papers cited Corporations
Code section 7110, which applies to nonprofit mutual benefit
corporations, rather than Corporations Code section 5710,
applicable to nonprofit public benefit corporations such as
Pacifica. The substance of the demand/futility requirement in
the two provisions is the same.
7 At the hearing on the demurrer and in its subsequent order
sustaining the demurrer without leave to amend, the court cited
the prelitigation demand requirement of Corporations Code
section 800, subdivision (b)(2), which applies to general
corporations, rather than Corporations Code section 5710,
subdivision (b), applicable to nonprofit public benefit
corporations. The substance of the demand/futility requirement
in these two provisions (and, as noted, in Corporations Code
section 7110) is the same.
8
complaint’s lack of specificity as to the individual defendants’
misconduct. The court asked counsel for the Turner parties,
“[C]an you name one instance outside of the business judgment
rule that harmed Pacifica? Start with Grace Aaron, the one you
said was behind all of this, can you name just one thing she did to
harm the corporation?” According to the agreed statement,
“Plaintiffs’ counsel began to read the allegations of Paragraph 16
aloud into the record. He had completed reading two of the
sixteen subparagraphs of substantive allegations in
Paragraph 16, when the court stated, ‘I’ve heard enough.’
Defendants’ counsel requested the opportunity to respond, but
the court did not recognize or respond to him. The court then
electronically disconnected and ended the hearing without ruling
on the demurrer or indicating what the ruling would be.”
In an order filed July 30, 2021 the court sustained the
demurrer without leave to amend and dismissed the action. The
court ruled the Turner parties had failed to satisfy the
Corporation Code’s prelitigation demand or demand futility
requirement and sustained the demurrer on that ground.8 In
addition, the court ruled the pleading, “on its face, indicates that
the individual defendants are protected from liability by the
business judgment rule.” Explaining this aspect of its ruling, the
court stated, in part, rejection of the advice from the California
Attorney General’s charitable trust section to implement a
particular financial plan “concern[ed] an operational business
8 The court in the opening paragraph of its ruling stated,
“[t]here was a demurrer to the Second Amended Complaint on
the grounds that a corporate demand was never made. The
demurrer on that ground was sustained with leave to amend.
This issue is revisited by this demurrer . . . .”
9
decision within the board’s power.” Further, the court wrote,
“While there are many alleged bad business decisions by the
Pacifica board alleged in the complaint, only two individual
defendants from the many board members are singled out
separately. They are not alleged as dominate [sic] members of
the board, control the votes of other board members or had power
over the other members of the board in decision-making. [¶] . . .
The defendants’ actions must be presumed to have been made in
good faith unless facts to the contrary are alleged. That is not
the pleaded situation here.”
The Turner parties filed a timely notice of appeal from the
order dismissing their action and a second notice of appeal from
the judgment entered after the court awarded costs to Aaron and
Steinberg. We ordered the two appeals consolidated.
DISCUSSION
1. Standard of Review
A demurrer tests the legal sufficiency of the factual
allegations in a complaint. We independently review the trial
court’s ruling on a demurrer and determine de novo whether the
complaint alleges facts sufficient to state a cause of action or
discloses a complete defense. (Mathews v. Becerra (2019)
8 Cal.5th 756, 768; T.H. v. Novartis Pharmaceuticals Corp. (2017)
4 Cal.5th 145, 162.) We assume the truth of the properly pleaded
factual allegations, facts that reasonably can be inferred from
those expressly pleaded and matters of which judicial notice has
been taken. (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 20;
accord, Centinela Freeman Emergency Medical Associates v.
Health Net of California, Inc. (2016) 1 Cal.5th 994, 1010;
Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.)
10
A demurrer based on an affirmative defense is properly
sustained when the face of the complaint and matters judicially
noticed clearly disclose the defense or bar to recovery. (Silva v.
Langford (2022) 79 Cal.App.5th 710, 716; Favila v. Katten
Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 224.) If “‘the
complaint’s allegations or judicially noticeable facts reveal the
existence of an affirmative defense, the “plaintiff must ‘plead
around’ the defense, by alleging specific facts that would avoid
the apparent defense. Absent such allegations, the complaint is
subject to demurrer for failure to state a cause of action.”’”
(Esparza v. County of Los Angeles (2014) 224 Cal.App.4th 452,
459.)
We affirm the judgment if it is correct on any ground stated
in the demurrer, regardless of the trial court’s stated reasons
(Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967;
Las Lomas Land Co., LLC v. City of Los Angeles (2009)
177 Cal.App.4th 837, 848), but liberally construe the pleading
with a view to substantial justice between the parties. (Code Civ.
Proc., § 452; Ivanoff v. Bank of America, N.A. (2017)
9 Cal.App.5th 719, 726; see Schifando v. City of Los Angeles,
supra, 31 Cal.4th at p. 1081.)
“‘Where the complaint is defective, “[i]n the furtherance of
justice great liberality should be exercised in permitting a
plaintiff to amend his [or her] complaint.”’” (Aubry v. Tri-City
Hospital Dist., supra, 2 Cal.4th at p. 970.) A plaintiff may
demonstrate for the first time to the reviewing court how a
complaint can be amended to cure the defect. (Code Civ. Proc.,
§ 472c, subd. (a) [“[w]hen any court makes an order sustaining a
demurrer without leave to amend the question as to whether or
not such court abused its discretion in making such an order is
11
open on appeal even though no request to amend such pleading
was made”]; see Sierra Palms Homeowners Assn. v. Metro Gold
Line Foothill Extension Construction Authority (2018)
19 Cal.App.5th 1127, 1132 [plaintiff may carry burden of proving
an amendment would cure a legal defect for the first time on
appeal]; Rubenstein v. The Gap, Inc. (2017) 14 Cal.App.5th 870,
881 [“‘[w]hile such a showing can be made for the first time to the
reviewing court [citation], it must be made’”].)
2. Governing Law: The Demand Requirement and the
Business Judgment Rule
Corporations Code section 5710, subdivision (b), part of
California’s Nonprofit Corporation Law (Corp. Code, § 5000
et seq.), provides with respect to a nonprofit public benefit
corporation such as Pacifica, “No action may be instituted or
maintained in the right of any corporation by any member of such
corporation unless both of the following conditions exist: [¶]
(1) The plaintiff alleges in the complaint that plaintiff was a
member at the time of the transaction or any part thereof of
which plaintiff complains; and [¶] (2) The plaintiff alleges in the
complaint with particularity plaintiff’s efforts to secure from the
board such action as plaintiff desires, or the reasons for not
making such effort, and alleges further that plaintiff has either
informed the corporation or the board in writing of the ultimate
facts of each cause of action against each defendant or delivered
to the corporation or the board a true copy of the complaint which
plaintiff proposes to file.”
Functionally the same as the obligation to make a
prelitigation demand on the board of a general corporation or
allege facts sufficient to excuse the demand before filing a
derivative action specified in Corporations Code section 800,
12
“‘[t]he purpose of this requirement is to encourage intracorporate
resolution of disputes and to protect the managerial freedom of
those to whom the responsibility of running the business is
delegated.’” (Shields v. Singleton (1993) 15 Cal.App.4th 1611,
1619; see Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222,
231-232 [“As a general rule, ‘[m]anagement of a corporation,
including decisions concerning the prosecution of actions, is
vested in its board of directors. When the board refuses to
enforce corporate claims, however, the shareholder derivative
suit provides a limited exception to the rule that the corporation
is the proper party plaintiff. In deference to the managerial role
of directors and in order to curb potential abuse, the shareholder
asserting a derivative claim must make a threshold showing that
he or she made a presuit demand on the board to take the desired
action’”].)
“Because the role of managing the business of the
corporation is vested in its board of directors, not its shareholders
[citation], a shareholder seeking redress on behalf of the
corporation for alleged mismanagement by corporate officers
‘“must make an earnest, not a simulated effort, with the
managing body of the corporation, to induce remedial action on
their part, and this must be apparent to the court.”’” (Apple Inc.
v. Superior Court, supra, 18 Cal.App.5th at p. 232.) In the
derivative complaint the plaintiff “‘must plead “with
particularity” the attempts that were made to secure board action
before bringing suit, or, alternatively, the factual basis upon
which the plaintiff believes that a demand on the board was
unnecessary, i.e., that a demand would have been futile.’” (Id. at
p. 231; accord, Bader v. Anderson (2009) 179 Cal.App.4th 775,
782.) A derivative complaint that fails to adequately allege
13
compliance with the demand requirement is subject to demurrer.
(Shields v. Singleton, supra, 15 Cal.App.4th at p. 1619.)
The prelitigation demand requirement “‘is merely an
extension of the business judgment rule, which dictates that
judicial interference with corporate decision-making should be
limited.’” (Shields v. Singleton, supra, 15 Cal.App.4th at p. 1619.)
“‘The common law business judgment has two components—one
which immunizes [corporate] directors from personal liability if
they act in accordance with its requirements, and another which
insulates from court intervention those management decisions
which are made by directors in good faith in what the directors
believe is the organization’s best interest.’ [Citations.] A
hallmark of the business judgment rule is that, when the rule’s
requirements are met, a court will not substitute its judgment for
that of the corporation’s board of directors.” (Lamden v. La Jolla
Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249,
257; accord, Coley v. Eskaton (2020) 51 Cal.App.5th 943, 953;
Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th
1020, 1045.)
The aspect of the common law rule relating to the personal
liability of directors of a nonprofit public benefit corporation is
now defined by Corporations Code sections 5231 and 5233. Those
provisions immunize directors for their corporate decisions that
are made “in good faith, in a manner that director believes to be
in the best interests of the corporation and with such care,
including reasonable inquiry, as an ordinarily prudent person in
a like position would use under similar circumstances” (Corp.
Code, § 5231, subds. (a) & (c)), except if an interested director
engages in a self-dealing transaction with the corporation. (Corp.
Code, § 5233.) A director, however, cannot obtain the benefit of
14
the business judgment rule when acting under a material conflict
of interest. (Coley v. Eskaton, supra, 51 Cal.App.5th at p. 953;
Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th
411, 430; Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250,
1263.) “Deference under the business judgment rule is premised
on the notion that corporate directors are best able to judge
whether a particular transaction will further the company’s best
interests. [Citation.] But that premise is undermined when
directors approve corporate transactions in which they have a
material personal interest unrelated to the business’s own
interest.” (Coley, at p. 953.)
3. The Trial Court Improperly Sustained the Demurrer
Without Leave To Amend for Failure To Comply with the
Prelitigation Demand Requirement
a. The trial court ruled on the prelitigation demand
issue without adequate notice to the Turner parties
The trial court’s handling of the question whether the
Turner parties satisfied the prelitigation demand requirement for
derivative lawsuit is difficult to fathom. As discussed, the
demurrer to the second amended complaint, filed by nominal
defendant Pacifica, raised only that issue. Following brief
comments from counsel for the Turner parties focusing on
demand futility and Pacifica’s counsel’s statement he did not
need to add anything to the argument in the corporation’s reply
memorandum, the court stated it “agree[d] with the plaintiffs’
side that paragraph 12 fully put the defendants on notice.”9 The
court then addressed deficiencies it perceived in the second
amended complaint that were not discussed in the papers and
9 It appears from the reporter’s transcript that the court had
not provided a tentative ruling to the parties.
15
invited the Turner parties to attempt to cure those deficiencies
through amendment. The court thereafter sustained the
demurrer with leave to amend, but did not explain what it meant.
Was it sustaining Pacifica’s demurrer, which properly raised only
the adequacy of the prelitigation demand?10 Or the phantom
demurrer never filed by Aaron and Steinberg that the court
apparently believed should have been filed?
The parties obviously believed it was the latter. The
Turner parties’ third amended complaint did not modify the
allegations in paragraph 12, which the court had already stated
gave the requisite notice. Neither Aaron and Steinberg’s meet-
and-confer letter following the filing of the third amended
complaint nor the demurrer they subsequently filed challenged
the adequacy of the Turner parties’ prelitigation demand. For its
part, Pacifica, while preserving the issue by pleading affirmative
defenses, answered the third amended complaint, rather than
again demurring, even though the language relating to the
demand and demand futility remained the same. Nonetheless, in
their reply memorandum Aaron and Steinberg attacked
paragraph 12 and argued the Turner parties had failed to comply
with the prelitigation demand requirement for a derivative action
filed by a member of a nonprofit corporation.11
10 Pacifica could not assert in its demurrer the issues raised
sua sponte by the court. (See Apple Inc. v. Superior Court, supra,
18 Cal.App.5th at p. 239 [“while the corporation cannot ‘challenge
the merits of a derivative claim filed on its behalf and from which
it stands to benefit,’ it ‘may assert defenses contesting the
plaintiff’s right or decision to bring suit, such as asserting the
shareholder plaintiff’s lack of standing’”].)
11 In their respondents’ brief Aaron and Steinberg state,
“Appellants raised the pre-litigation notification requirements of
16
At the hearing on the demurrer to the third amended
complaint, when the court raised the issue, counsel for the
Turner parties explained the court had previously ruled the
notice given Pacifica was legally sufficient. As the parties recite
in their agreed statement, “Nothing further was said during the
hearing regarding the notice issue.” Yet in its ruling on the
demurrer, the court first said it had sustained the demurrer to
the second amended complaint on that ground—when it certainly
appears it did not—and then said the issue was being revisited by
the current demurrer—even though the issue was not included in
the demurrer and was only raised for the first time in the reply
memorandum. Thereafter, notwithstanding its assessment on
April 20, 2021 that Pacifica’s challenge to the adequacy of the
allegations of demand and demand futility in paragraph 12 was
“easily disposed of,” on July 30, 2021, addressing the identical
allegations, the court ruled those allegations were insufficient
and denied the Turner parties any opportunity to amend the
pleading. The Turner parties’ objection to the fairness of this
process is well-taken.
b. The issue of the adequacy of the prelitigation demand
has not been forfeited
Notwithstanding our serious concern about Aaron and
Steinberg’s failure to properly identify the adequacy of the
Corp. Code § 7710 in their opposition to the demurrer [AA 349],
thereby requiring defendants to address it on reply.” While the
Turner parties in their opposition to the demurrer did on the page
cited refer, in general, to member derivative actions under
Corporations Code section 7710, nowhere on that page—or
anywhere else in the opposition papers—did they discuss the
prelitigation demand requirement.
17
prelitigation demand in their demurrer to the third amended
complaint and the trial court’s reversal of its determination that
the requirement had been satisfied without adequate notice to
the Turner parties, Aaron and Steinberg have not forfeited the
issue, as the Turner parties contend. Adequately alleging a
prelitigation demand or that such a demand would be futile is a
required element of a derivative plaintiff’s standing to file suit on
behalf of the corporation. (Apple Inc. v. Superior Court, supra,
18 Cal.App.5th at p. 248; Bader v. Anderson, supra,
179 Cal.App.4th at p. 793.) “[C]ontentions based on a lack of
standing involve jurisdictional challenges and may be raised at
any time in the proceedings.” (Zolly v. City of Oakland (2022)
13 Cal.5th 780, 789 [internal quotation marks omitted]; accord,
Common Cause v. Board of Supervisors (1989) 49 Cal.3d 432,
438.) Accordingly, a lack of standing may be claimed for the first
time on appeal. (Wanke, Industrial, Commercial, Residential,
Inc. v. AV Builder Corp (2020) 45 Cal.App.5th 466, 474;
Washington Mutual Bank v. Blechman (2007) 157 Cal.App.4th
662, 669.) The issue has been fully briefed and is now properly
before us.
c. The Turner parties’ allegations of prelitigation
demand and demand futility are insufficient; leave to
amend must be granted
To reiterate, Corporations Code section 5710,
subdivision (b)(2), requires a derivative plaintiff to allege the
plaintiff’s efforts to secure from the board the action the plaintiff
desires or the reasons for not making such effort.12 The action
12 Corporations Code section 5710, subdivision (b)(1), also
requires the plaintiff to allege he or she was a member of the
corporation at the time of the transactions complained of.
18
the Turner parties seek in their derivative complaint is recovery
of money damages from Aaron and Steinberg for corporate waste
and breaches of fiduciary duty. Nowhere in the third amended
complaint is there an allegation that the Turner parties asked
the Pacifica board to attempt to obtain that relief.
Recommendations by the Attorney General’s charitable trust
section that the board resolve various operational issues,
discussions by the Turner parties with Aaron, Steinberg and the
board concerning amendments to the corporation’s bylaws, and
efforts to mediate the ongoing disputes do not constitute a
demand the board take action against Aaron and Steinberg.
However, at the hearing on the demurrer to the
second amended complaint, counsel for the Turner parties
advised the court he had provided a copy of that iteration of the
complaint to the corporation’s counsel before it was filed.
Depending on the circumstances under which that occurred and
any discussion that may have accompanied it, that action may
satisfy the requirements of Corporations Code section 5710,
subdivision (b)(2). The Turner parties are entitled to leave to
amend to include this information in support of their standing as
derivative plaintiffs, as well as to supplement paragraph 12 with
any other material responsive to this issue. (Recall, the Turner
parties have not previously had a reason to expand their
prelitigation demand allegations because the trial court seemed
to overrule the only prior demurrer addressed to that issue.)
As for demand futility, the Turner parties point to their
allegations that Aaron, Steinberg and the entire Pacifica board
Paragraph 2 of the third amended complaint does just that,
alleging that each of the Turner parties was a member of Pacifica
“[a]t all times mentioned herein.”
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repeatedly disregarded warnings about financial and operational
misconduct raised by the Attorney General’s office and corporate
counsel and for years failed to comply with applicable laws and
regulations issued by the FCC, IRS and state regulators.
Necessarily, they argue, any request for reform from plaintiffs
would have been equally unavailing.
While perhaps a reasonable worldview, this analysis does
not comply with the requirements for pleading demand futility as
articulated in case law. When, as is generally the case here, the
derivative claim stems from conduct that did not involve a
decision of the board, plaintiffs are “‘required to allege facts “with
particularity” [citation] sufficient to “create a reasonable doubt
that, as of the time the complaint is filed, the board of directors
could have properly exercised its independent and disinterested
business judgment in responding to a demand.”’ . . . Hence, ‘the
court must be apprised of facts specific to each director from
which it can conclude that that particular director could or could
not be expected to fairly evaluate the claims of the shareholder
plaintiff.’” (Apple Inc. v. Superior Court, supra, 18 Cal.App.5th at
p. 253; accord, Shields v. Singleton, supra, 15 Cal.App.4th at
p. 1622.)
The third amended complaint contains no factual
allegations of any sort regarding nondefendant directors of
Pacifica other than the board member whose spouse was involved
with the PSLL loan, let alone specific facts permitting the
conclusion a majority of the directors could not fairly evaluate
claims that Aaron and Steinberg had breached fiduciary duties,
causing significant financial injury to the corporation. In sum,
the trial court correctly ruled, as pleaded, the allegations of
demand futility were insufficient. Again, however, given the lack
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of notice to the Turner parties, if good faith amendments are
possible that would satisfy the requirements for establishing
demand futility, they are entitled to make a final attempt to
do so.
4. The Trial Court Improperly Sustained the Demurrer on
the Ground the Directors Were Protected from Liability
by the Business Judgment Rule
“‘Notwithstanding the deference to a director’s business
judgment, the [business judgment] rule does not immunize a
director from liability in the case of his or her abdication of
corporate responsibilities . . . .’ [Citation.] . . . ‘“When courts say
that they will not interfere in matters of business judgment, it is
presupposed that judgment— reasonable diligence—has in fact
been exercised. A director cannot close his eyes to what is going
on about him in the conduct of the business of the corporation
and have it said that he is exercising business judgment.”’
[Citations.] [¶] Put differently, whether a director exercised
reasonable diligence is one of the ‘factual prerequisites’ to
application of the business judgment rule.” (Palm Springs
Villas II Homeowners Assn., Inc. v. Parth (2016) 248 Cal.App.4th
268, 279-280; see Affan v. Portofino Cove Homeowners Assn.
(2010) 189 Cal.App.4th 930, 941, 943 [finding homeowners
association “failed to establish the factual prerequisites for
applying the rule of judicial deference” at trial, where “there was
no evidence the board engaged in ‘reasonable investigation’
[citation] before choosing to continue its ‘piecemeal’ approach to
sewage backups”]; Burt v. Irvine Co. (1965) 237 Cal.App.2d 828,
852 [“‘The rule exempting officers of corporations from liability
for mere mistakes and errors of judgment does not apply where
the loss is the result of failure to exercise proper care, skill and
diligence. “Directors are not merely bound to be honest; they
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must also be diligent and careful in performing the duties they
have undertaken. They cannot excuse imprudence on the ground
of their ignorance or inexperience, or the honesty of their
intentions; and, if they commit an error of judgment through
mere recklessness, or want of ordinary prudence and skill, the
corporation may hold them responsible for the consequences”’”].)
Because application of the business judgment rule “‘raises
various issues of fact,’ including whether ‘a director acted as an
ordinarily prudent person under similar circumstances’ and
‘made a reasonable inquiry as indicated by the circumstances’”
(Palm Springs Villas II Homeowners Assn., Inc. v. Parth, supra,
248 Cal.App.4th at p. 280), “‘[s]uch questions generally should be
left to a trier of fact.’” (Ibid.; accord, Gaillard v. Natomas Co.,
supra, 208 Cal.App.3d at p. 1267.) However, as the trial court
ruled, the business judgment rule creates a rebuttable
presumption a director’s decisions were made in good faith and
upon the exercise of informed judgment resulting from
reasonable inquiry as to facts material to determining what
action is in the best interests of the corporation. (Lee v.
Interinsurance Exchange (1996) 50 Cal.App.4th 694, 711, 715.)
The presumption attaches only in the absence of bad faith or a
conflict of interest and may be rebutted by showing the director
acted without reasonable inquiry when such inquiry would
otherwise be required. (Everest Investors 8 v. McNeil Partners,
supra, 114 Cal.App.4th at p. 431.)
The third amended complaint generally alleged Aaron and
Steinberg knew their conduct was unlawful and failed to use
reasonable business judgment when undertaking various actions
causing harm to Pacifica, including preventing the timely
completion of annual audits necessary to qualify for federal
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grants and interfering with professional staff’s ability to comply
with FCC and IRS requirements, risking loss of Pacifica’s tax-
exempt status. In addition, the Turner parties specifically
alleged Aaron improperly acted as a director in approving the
$500,000 loan from PSLL to Pacifica in March 2018
notwithstanding a disqualifying conflict of interest—a conflict
highlighted in a warning letter from Pacifica’s corporate counsel
attached as an exhibit to the pleading. They further alleged that
Aaron and Steinberg in 2021 refused to allow the national board
of directors to consider a proposal to purchase the broadcast
license of New York City station WBAI-FM, which would have
ameliorated the corporation’s dire financial situation, not because
they believed in good faith the sale was not in the corporation’s
best interests but based on their personal ideological beliefs. Also
alleged was Aaron and Steinberg’s unlawful use of corporate
funds to pay their attorney fees in defense of the Turner parties’
lawsuit.
Although the general allegations that Aaron and Steinberg
acted without reasonable care to protect the interests of the
corporation, without more, might be insufficient to rebut the
presumption of good faith, at the pleading stage the Turner
parties’ additional, specific allegations of bad faith in connection
with the PSLL loan, the proposed sale of the WBAI-FM license
and use of corporate funds to pay their own attorney fees
adequately pleaded conduct outside the protection of the business
judgment rule and were sufficient to survive demurrer. (See
Everest Investors 8 v. McNeil Partners, supra, 114 Cal.App.4th at
p. 430 [“[t]he business judgment rule does not shield actions
taken without reasonable inquiry, with improper motives, or as a
result of a conflict of interest”]; Lee v. Interinsurance Exchange,
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supra, 50 Cal.App.4th at p. 715 [presumption created by the
business judgment rule can be rebutted by affirmative allegations
of facts that, if proved, “would establish fraud, bad faith,
overreaching or an unreasonable failure to investigate material
facts”].)13 The trial court erred in sustaining the demurrer on
this ground.
DISPOSITION
The order of dismissal is reversed and the cause remanded
with instruction to the trial court to vacate its order sustaining
Aaron and Steinberg’s demurrer without leave to amend and to
enter a new order sustaining the demurrer with leave to amend.
The Turner parties are to recover their costs on appeal.
PERLUSS, P. J.
We concur:
SEGAL, J.
FEUER, J.
13 These allegations of misconduct were also sufficiently
specific to defeat Aaron and Steinberg’s arguments, not
addressed by the trial court when sustaining the demurrer, that
the pleading was uncertain, failed to state facts sufficient to
constitute a cause of action and did not identify any wrongful
conduct that occurred within three years of the filing of the
complaint (on December 8, 2020).
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