Filed 10/9/26 Chen v. Lu CA6
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
RAY CHEN, H053356, H054067
(Santa Clara County
Plaintiff and Respondent, Super. Ct. No. 22CV409006)
v.
BING LU et al.,
Defendants and Appellants.
In these appeals from the judgment and a postjudgment order after
bench trial, defendants Bing Lu and David Cai (together, defendants)
challenge plaintiff Ray Chen’s award of monetary damages and entitlement
to attorney fees.
Chen and Cai, longtime friends, decided to open a restaurant together
with the help of Lu, who at the time was in a romantic relationship with Cai.
Lu and Chen formed a corporation, Ray Bing, Inc. (Ray Bing or the
corporation). Each contributed capital and owned 50 percent of Ray Bing’s
shares. They located premises and opened the restaurant. Lu and Cai
worked for Ray Bing. After a dispute arose between the parties in September
2020, Lu and Cai sought to reduce Chen’s ownership portion and stopped
responding to Chen’s requests for financial records.
When Chen’s requests for access to corporate books and records went
unheeded, Chen filed this action against defendants and the corporation.
Chen alleged conversion and sought, inter alia, dissolution of the corporation,
an accounting, declaratory relief, and monetary damages. Cai filed a cross-
complaint against Ray Bing. In a written statement of decision, the trial
court found that defendants misappropriated and mismanaged corporate
funds and concealed from Chen material financial information and business
records. The court ordered the dissolution of Ray Bing pursuant to
Corporations Code1 section 1800, awarded Chen $449,836 in monetary
damages, denied Cai any relief on his cross-complaint, and awarded Chen
costs of suit, including attorney fees under sections 1601 and 1604.
On appeal, defendants assert that, because the converted funds
belonged to the corporation, Chen lacked standing to bring a direct—rather
than a derivative—action and failed to state a cause of action for conversion.
Defendants also challenge Chen’s entitlement to attorney fees, where he did
not bring an action to enforce the right to inspect corporate records under
section 1601.
We conclude the trial court did not err in its determination on standing
but erred in ruling that Chen was entitled to recover attorney fees under
section 1604. We (1) modify the judgment to strike the statement on
entitlement to attorney fees and affirm the judgment as modified, and (2)
modify the postjudgment order granting attorney fees and costs to strike the
award of attorney fees.
1 All further unspecified statutory references are to the Corporations
Code.
2
I. FACTS AND PROCEDURAL BACKGROUND
A. Facts2
In 2016, Chen and Cai (who had been friends since college) discussed
opening a restaurant together. Cai recommended Lu—with whom he was
then in a romantic relationship—as a co-owner. Although the parties
originally contemplated equal (25 percent) ownership among four owners, one
of the prospective partners declined to participate, and Cai asked not to be
listed as a shareholder of record due to concerns that it would negatively
impact his daughter’s college financial aid eligibility. Chen agreed to
increase his ownership interest to 50 percent. Lu held the other 50 percent
record ownership, although, according to Chen (but not Cai or Lu), they orally
agreed that Cai owned 25 percent of Lu’s 50 percent ownership share. Chen
invested in the restaurant venture only because of his trust in and
relationship with Cai.
In 2017, Ray Bing acquired the premises of an existing restaurant and
began doing business as “Bing’s Dumplings” (the restaurant). Chen
contributed the entire $132,000 required to close escrow on the purchase, and
Chen and his wife cosigned the lease for the business premises. Chen left the
daily operations of the restaurant, including the management of personnel
and payroll, to Cai and Lu.
In September 2020, a dispute arose among the parties. Cai and Lu
were dissatisfied with their long work hours and proposed reducing Chen’s
2 The factual background is drawn from the trial court’s written
statement of decision, the certified settled statements summarizing the trial
testimony, and the record on appeal. “We recite the essential relevant facts
‘in the manner most favorable to the judgment, resolving all conflicts and
drawing all inferences in favor of respondent.’ ” (Nwosu v. Uba (2004) 122
Cal.App.4th 1229, 1233, fn. 2.)
3
ownership from 50 percent to 25 or 20 percent. Chen did not agree.
Thereafter, Cai and Lu refused to give Chen access to corporate financial
information and documents. In 2021, Chen arranged for a Chinese-speaking
attorney to contact Lu and try to resolve the dispute. After defendants
refused to communicate with the attorney, Chen retained his present counsel.
In 2022, Chen’s counsel requested copies of the corporation’s financial
books and records. When defendants failed to respond to the request, Chen
filed this action.
B. Procedural History
In December 2022, Chen filed the operative complaint against Cai, Lu,
and Ray Bing asserting a cause of action for the tort of conversion and
alleging a right to declaratory relief, dissolution of Ray Bing, an accounting,
and damages. Chen did not cite any statutes in connection with his
allegations.
In his claim for declaratory relief, Chen alleged that he and Lu co-
owned on a 50-50 basis all the corporate stock of Ray Bing, that he is
informed Lu has obtained “ ‘silent investors’ who . . . contend that they own a
portion” of Lu’s 50 percent interest, and that a dispute has arisen concerning
Chen’s right to access corporate financial books and records. Chen further
alleged that he is entitled to an accounting, to his 50 percent share of
financial distribution of net profits and loan proceeds generated from Ray
Bing’s business operations, and to object to excess payments made to
defendants “whether denominated as salary, bonus, overtime, management
or purported loan payments.” He also alleged that he was entitled to a
dissolution of Ray Bing and reimbursement of all monies, based on an
accounting between the parties, for income that should have been collected
from and/or expenses that should have been paid by defendants. Chen
4
further alleged in his dissolution cause of action that during the past year,
defendants refused to honor the 50-50 stock ownership agreement, refused to
make corporate books and records available and to provide an accounting,
and engaged in conduct that has prejudicially affected the business.
In his causes of action for accounting and monies lent, and for
conversion, Chen demanded an accounting from January 1, 2018, to the
present as to all the income and expenses of the restaurant and alleged the
total money owed to be in excess of $650,000. Chen alleged that defendants
had failed to provide financial records and information to Chen, and on
information and belief, had converted funds for personal use, rather than for
business operations, and had conspired with one another to do so. Chen
alleged that defendants should reimburse the “legal fees incurred” by him to
bring the dissolution action and for “costs of suit incurred herein, including
reasonable attorneys’ fees.”
Cai filed a cross-complaint against Ray Bing for unpaid overtime
wages, failure to maintain employment records, and unfair competition. Ray
Bing did not respond to the complaint or cross-complaint, and an entry of
default was filed in both instances.
In August 2025, the trial court held a three-day bench trial on the
complaint and cross-complaint. Chen testified on his own behalf and
presented and cross-examined witnesses, including Lu and Cai (under
Evidence Code section 776).3 Chen also called Dr. Elizabeth Stephens as an
expert witness in business records analysis and forensic accounting.
After the close of Chen’s case-in-chief, defendants made an oral motion
for nonsuit. They argued that Chen’s claims were derivative in nature
3 Evidence Code section 776 permits a party to call and cross-examine a
party as an adverse witness.
5
because Ray Bing, not Chen, suffered direct harm from the alleged
misconduct, and that case law cited by Chen did not support his right to
bring a direct action. Chen responded, inter alia, that Ray Bing’s corporate
status was not in good standing, corporate formalities had not been
maintained (including annual meetings, minutes, and the separation of
corporate funds from personal funds), defendants themselves had ignored the
corporate entity by making unilateral decisions, and Lu—as president,
secretary, and treasurer of Ray Bing—had elected not to defend against the
cross-complaint brought by Cai. Chen asserted that Lu’s actions
demonstrated her acquiescence in Cai’s conduct even though she claimed to
be responsible for overseeing the corporation. As such, Chen argued that the
corporation should be dissolved and was incapable of initiating legal action.
The trial court took the motion for nonsuit under submission and heard
testimony from third-party witnesses called by Cai to support his prove-up
hearing following the entry of default against Ray Bing. Both witnesses
testified that, during their years of employment at the restaurant, Cai was
always there working, and Cai and Lu were the people who took care of
additional preparatory work for the restaurant outside of business hours.
The trial court orally denied the nonsuit motion. It reasoned that a
derivative action is generally appropriate when a company’s rights are
violated and the company fails to pursue the claim, but, under Jara v.
Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238 (Jara), a plaintiff
shareholder may maintain a direct action when the injury to a shareholder is
personal and not shared by all shareholders. The court distinguished those
cases cited by defendants and concluded that Chen had suffered specific,
personal harm not equally shared by all shareholders. After closing
6
arguments on Chen’s action and on Cai’s cross-complaint prove-up hearing
against Ray Bing, the court took the matter under submission.
In a written statement of decision, the trial court summarized the
evidence adduced at the trial. The court found Chen’s testimony “credible
and convincing” and “consistent with the evidence presented.” By contrast, it
“found the testimony of both the [d]efendants to be lacking in credibility.” It
explained that defendants’ statements “were inconsistent, contradicted by
documentary evidence, [] failed to align with the facts of the case,” and
“lacked sufficient detail and clarity regarding important points, raising
doubts about [their] credibility.” While the court also recognized defendants’
“substantial role in the labor and overall success of the business,” including
“time and work . . . essential to the day-to-day operations and growth of the
[restaurant],” the court concluded that these contributions did not mitigate
the court’s concerns regarding defendants’ “lack of record keeping,” “lack of
verifiable evidence to support their claims,” and poor credibility. The court’s
written order did not address the nonsuit motion.
Based on its factual findings, the trial court granted Chen the relief he
sought. It ordered the dissolution of Ray Bing pursuant to section 1800.4
The court’s findings included that defendants “exercised exclusive control
over the company’s financial affairs, committed acts of misappropriation, and
4 Section 1800, subdivision (b) sets forth grounds for involuntary
dissolution by a corporate shareholder or other authorized person. Such
grounds include: “(4) Those in control of the corporation have been guilty of or
have knowingly countenanced persistent and pervasive fraud,
mismanagement or abuse of authority or persistent unfairness toward any
shareholders or its property is being misapplied or wasted by its directors or
officers”; and “(5) In the case of any corporation with 35 or fewer shareholders
. . . liquidation is reasonably necessary for the protection of the rights or
interests of the complaining shareholder or shareholders.” (Id., subd. (b)(4),
(5).)
7
concealed material financial information,” which actions “effectively excluded
[Chen] from participating in the management and oversight of the
corporation” and resulted in an irreparable breakdown of the shareholder
relationship. The court noted that Lu did not oppose dissolution and had
acknowledged it was appropriate under the circumstances.
The trial court also granted Chen compensatory damages. Relying on
the “detailed and credible testimony of” Dr. Stephens, the court found a
“pattern of financial irregularities and misuse of corporate funds.” The court
identified “$899,672 in non-business expenses identified through a forensic
review”; “Zelle transfers totaling $251,421.14 to [] Cai . . . with no
documented business purpose”; “[c]asino-related expenditures totaling
$21,797.47 between 2017 and 2024, clearly personal in nature”; and multiple
other unexplained expenditures and transfers, including “credit card charges
amounting to $59,544 with no supporting receipts or documentation to
classify them as legitimate business expenses,” “cash deposits into company
bank accounts with unknown sources,” and “$845,647 received in
government-issued loans (including PPP loans), with no evidence provided to
show whether these funds were properly applied.”
Based on this evidence, the trial court found that “a substantial portion
of company funds were diverted for personal use by [] Lu and [] Cai, without
justification or proper documentation.” The court highlighted that Dr.
Stephens’s analysis was “uncontested by any meaningful contradictory
evidence” from defendants and “provide[d] a reliable and persuasive basis for
quantifying [Chen]’s damages.” The court rejected defendants’ claimed
annual salaries of over $250,000 for their roles as “excessive and . . . part of a
broader scheme to extract corporate income for personal use.” It reasoned,
“This conduct has had the effect of artificially reducing reported profits and
8
diminishing [] Chen’s rightful share of business earnings.” The court
concluded that Chen had suffered substantial financial harm as a direct
consequence of the breaches of duty and misconduct. It ordered that Chen
should recover “50 [percent] of the full amount of the misappropriated funds,
totaling $449,836[], for which both [d]efendants are jointly and severally
liable.”
On the cross-complaint, the trial court rejected Cai’s claim that Ray
Bing had underpaid him. The court observed that Cai was “directly
responsible for managing payroll,” his “recorded wages escalated
dramatically” from 2018 to 2021, with Lu receiving “identical compensation
during this period,” and that both defendants “acted in concert” with “full
access to and control over the financial records.” The court decided that
defendants had acted together “to exploit the procedural posture of this case,
including the default judgment, to confer a strategic benefit upon [] Cai” and
that instead of defending the corporation, “Lu has actively supported [] Cai’s
efforts to improperly secure a preferential recovery through his [c]ross-
[c]omplaint.” The court concluded that, despite Chen’s equal ownership
interest, defendants had acted unilaterally to divert business opportunities
and assets for their own personal benefit and adjusted each of their own
reported compensation without providing notice to or obtaining consent from
Chen and “with no corporate authorization or justification.”
In sum, the trial court made six specific findings in the statement of
decision concerning (1) defendants’ wrongful conversion of funds,
(2) defendants’ exclusion of Chen from corporate decisionmaking and
finances, (3) the irreparable harm to the fiduciary relationship caused by
defendants, making continued collaboration between the parties
impracticable and contrary to the interests of the corporation, (4) Chen’s
9
entitlement to legal and equitable relief in the amount of $449,836 as to Lu
and Cai, jointly and severally, (5) the dissolution of the corporation, and (6)
the denial of any relief to Cai in connection with the cross-complaint.
On April 24, 2026,5 the trial court entered final judgment in accordance
with its findings in the statement of decision (judgment). The judgment
ordered the dissolution of Ray Bing pursuant to section 1800 and set forth
the manner of dissolution, ordered compensatory damages to Chen in the
amount of $449,836, jointly and severally as to Lu and Cai, and ordered
nothing paid to Cai on the cross-complaint. The judgment also found that
Chen was excluded from access to financial information and any meaningful
involvement in the governance and financial affairs of the corporation,
warranting an award of attorney fees pursuant to sections 1601 and 1604, in
an amount to be determined pursuant to a memorandum of costs and motion
for an award of attorney fees.
On July 1, after briefing and oral argument, the trial court granted
Chen’s motion for attorney fees and costs. The court found that Chen was the
prevailing party, having obtained a judgment in his favor on the complaint
and damages of more than $449,836. The court observed that pursuant to
sections 1601 and 1604, “shareholders are entitled to inspect corporate books
and records and to recover reasonable expenses, including attorneys’ fees,
incurred in enforcing that right.” The court reiterated its findings based on
the evidence at trial, including that Lu and Cai—in their individual
capacities and as controlling members of Ray Bing—denied Chen access to
the corporate records and thwarted his attempts to obtain information to
which he was entitled as a shareholder, diverted “valuable business
opportunities and assets for their own personal benefit,” diverted company
5 Unless otherwise indicated, all dates were in 2026.
10
funds for personal use, and did not comply with their statutory and fiduciary
duties, necessitating this action. The court further found that defendants
“not only withheld pertinent information about the corporation from [Chen]
prior to the commencement of litigation but continued to do so throughout the
litigation and trial, including by failing to respond to the notice to produce
documents at trial.”
Regarding the imposition of attorney fees against defendants
individually, the trial court reasoned that “because the defendants[]
individually benefited financially by their misconduct, they should not now be
able to deflect financial responsibility to a corporation as that would reward
their efforts in a closely held corporation . . . , where [Chen] is 50 [percent]
owner. [Citation.] In this case, because the individual defendants acted as if
they were the corporate entity, they stood in the shoes of the corporation.”
The trial court found the amount of attorney fees (which according to
Chen’s counsel represented approximately 80 percent of time on the
litigation, corresponding to the cause of action that “permits recovery of
attorney fees under section 1604”), was “reasonable and necessary for the
effective prosecution of this matter, particularly given the multiple efforts
made by counsel to obtain the requested records from the defendants before
initiating this lawsuit.” As authority for the attorney fee award, the court
cited sections 1601 and 1604, Civil Code section 1717, and Code of Civil
Procedure section 1033.5, subdivision (a)(10). Citing California public policy
favoring “transparency and accountability in corporate governance,” the court
ordered defendants to pay Chen $137,184 in reasonable attorney fees, and
$11,908.94 in litigation costs, for a total of $149,092.94.
11
Defendants appeal from both the judgment and the postjudgment fees
and costs order.6
II. DISCUSSION
Defendants raise two principal issues on appeal. First, they contend
that Chen lacked standing to bring a direct suit and, relatedly, failed to state
a cause of action for conversion because he did not own the corporate assets
that he alleged defendants converted for their own use. Second, they
maintain that the judgment authorizing attorney fees must be reversed
because Chen did not bring an enforcement action under section 1601, which
precludes recovery of fees under section 1604. Defendants also assert that a
fee award under section 1604 can only be granted against the corporation.
A. Direct Versus Derivative Action
Defendants advance several arguments in support of their assertion
that the trial court erred in concluding that Chen could bring a direct suit for
conversion. Defendants contend that (1) the conversion claim was not
actionable because the converted assets belonged to the corporation and not
to Chen, (2) Chen has no standing to bring a direct action, (3) to the extent
alter ego may be used to establish standing (arguing “ ‘outside reverse’
6 The appeal in case No. H053356 from the April 24 judgment
challenges Chen’s standing to maintain the direct action for conversion and
Chen’s entitlement to attorney fees. The appeal in case No. H054067
challenges the postjudgment fees and costs order. In a stipulated motion to
consolidate the two appeals, defendants asserted that they had elected to
limit the appeal from the fees and costs order to challenge only Chen’s
entitlement to attorney fees rather than the amount of fees and would base
their argument on the briefs and appendices already filed in case No.
H053356. Defendants have not challenged the trial court’s costs award.
This court deemed the stipulated motion to consolidate as a motion to
consider the appeals together for purposes of record preparation, briefing,
oral argument, and disposition, and so deemed, granted the motion.
12
piercing” and “ ‘inside reverse’ piercing” of the corporate veil), it must be
pleaded in the complaint, and (4) Jara, supra, 121 Cal.App.4th 1238, cited in
the statement of decision, is distinguishable and in conflict with other case
law.
Chen counters that defendants’ arguments are premised on a properly
maintained and functioning separate corporate entity (which did not exist in
this case), and the trial court properly exercised its discretion when it
determined a direct action was appropriate and ordered dissolution of the
corporation. Chen argues that Jara’s holding is applicable here, and
defendants’ claims based on “ ‘outside reverse’ ” and “ ‘inside reverse’ ”
piercing of the corporate veil are misplaced and, to the extent those principles
apply, they support the court’s order.
1. Legal Principles and Standard of Review
Although the principles underlying shareholder direct versus derivative
actions are well-established, case law in this area is highly fact-specific and
sometimes difficult to reconcile.
“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.’ [Citation.] ‘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).’ ” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311–312, italics
omitted (Schuster).)
A direct claim (also sometimes referred to as an individual claim)
“ ‘is a suit to enforce a right against the corporation which the stockholder
13
possesses as an individual.’ ” (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d
93, 107 (Jones).) As explained in Jones, although the plaintiff in a direct
action “does allege that the value of her stock has been diminished by
defendants’ actions, she does not contend that the diminished value reflects
an injury to the corporation and resultant depreciation in the value of the
stock. Thus the gravamen of her cause of action is injury to herself and the
other minority stockholders.” (Ibid., italics added.) “An individual cause of
action exists only if damages to the shareholders were not incidental to
damages to the corporation.” (Schuster, supra, 127 Cal.App.4th at p. 313; see
Jones, at p. 107; Nelson v. Anderson (1999) 72 Cal.App.4th 111, 124 (Nelson);
Bader v. Anderson (2009) 179 Cal.App.4th 775, 793 (Bader).)
By contrast, a derivative claim “seeks to recover for the benefit of the
corporation and its whole body of shareholders when injury is caused to the
corporation that may not otherwise be redressed because of failure of the
corporation to act. Thus, ‘the action 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.’ ” (Jones, supra, 1 Cal.3d at p. 106, italics added.) In a derivative
suit, “the corporation . . . ‘is the ultimate beneficiary’ ” and therefore is “ ‘the
real party plaintiff in the action.’ ” (Patrick v. Alacer Corp. (2008) 167
Cal.App.4th 995, 1003.) “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, supra, 127 Cal.App.4th at p. 312.)
We review de novo the trial court’s ruling that Chen had standing to
maintain a direct, rather than a derivative, action for conversion against
14
defendants. (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 150–151
(Schrage).) We similarly review de novo defendants’ contention that the
complaint does not state a cause of action where the misappropriated assets
belonged to the corporation. (Tarin v. Lind (2020) 47 Cal.App.5th 395, 404.)
2. Analysis
Defendants challenge Chen’s standing only with respect to the claim for
conversion, which served as the basis for the damages award.
“It is fundamental that a corporation is a legal entity that is distinct
from its shareholders.” (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108
(Grosset).) “Shareholders own neither the property nor the earnings of the
corporation” (Nelson, supra, 72 Cal.App.4th at p. 126) and do not have the
authority to manage its business and affairs. That authority, including the
authority to commence and defend actions on behalf of the corporation “is
vested in its board of directors.” (Grosset, at p. 1108.)
“ ‘ “Conversion is the wrongful exercise of dominion over the property of
another. The elements of a conversion are the plaintiff’s ownership or right
to possession of the property at the time of the conversion; the defendant’s
conversion by a wrongful act or disposition of property rights; and
damages.” ’ ” (Plummer v. Day/Eisenberg, LLP (2010) 184 Cal.App.4th 38,
45; see Moore v. Regents of University of California (1990) 51 Cal.3d 120,
136.) A party need not allege legal title or absolute ownership to maintain a
conversion claim, but only that “ ‘it is “entitled to immediate possession at the
time of conversion.” ’ ” (Plummer, at p. 45, italics omitted.)
Defendants argue that Chen’s complaint failed to state a cause of action
for conversion because defendants’ alleged conversion was of company funds
belonging to the corporation, and shareholders do not own the property or
earnings of the corporation. However, defendants misread the complaint.
15
The complaint did not limit the conversion allegations to company funds.
Rather, it alleged that defendants’ conduct was in relation to earnings
distributions to which Chen had a right of possession as a co-owner of the
business.
More specifically, the complaint asserted that Chen must be
compensated his 50 percent share of the financial distribution of the net
profits of the business due to him and his proportionate share of financial
distributions of loan proceeds generated from the business operations. For
example, the complaint alleged, “Defendants wrongfully converted the money
due to [Chen] from the business of [d]efendant Ray Bing for their own use”
and “fail[ed] to distribute profits [from business loans converted for
defendants’ personal use] to the owners of the business, including [Chen].”
(Italics added.) Chen’s allegations that the wrongfully converted funds were
his share of the distribution of net profits and proceeds due to him from the
business suggest that he was entitled to possession of those proceeds at the
time they were diverted. Thus construed, we conclude the pleading
adequately stated a cause of action for conversion against Cai and Lu.
Turning to the question of standing, this case presents a close question
whether Chen had the authority to bring an individual action. Under the
principles governing shareholder litigation, a corporation’s status as a legal
entity, distinct from its shareholders, means that “the shareholders have no
direct cause of action or right of recovery against those who have harmed [the
corporation].” (Grosset, supra, 42 Cal.4th at p. 1108.) Seeking redress for
injury to the corporation falls upon the board of directors, who have “the
authority to commence, defend, and control actions on behalf of the
corporation.” (Ibid.) A shareholder has standing to bring a derivative suit
only “where the directors fail or refuse to act” (Bader, supra, 179 Cal.App.4th
16
at p. 788), provided the shareholder meets the procedural prerequisites of
demand and demand excusal. (Id., at p. 789.)
Defendants contend that Chen lacked standing to pursue his claims
because he did not allege a derivative action on behalf of Ray Bing or attempt
to comply with the statutory requirements for bringing a derivative action
(see § 800). They argue that a direct action is “an exception to the
requirement that a shareholder must bring a derivative action in the name of
the corporation” (PacLink Communications Internat., Inc. v. Superior Court
(2001) 90 Cal.App.4th 958, 964 (PacLink)), applicable only in cases where
“the injury was ‘not incidental to an injury to the corporation’ ” (ibid.).
Defendants maintain that the injury alleged in the complaint, and as
determined at trial, was to the corporation, rather than to Chen’s “personal
property, such as his shares or dividends.”
As we explained ante, the complaint allegations describe harm specific
to Chen, not simply to the corporation. The substantive allegations of the
cause of action for conversion assert that defendants “have failed to provide
financial records and information to [Chen], who is informed and believes
that [d]efendants wrongfully converted the money due to [Chen] from the
business of [d]efendant Ray Bing for their own use,” “converted funds from
one or more loans obtained for their own personal use rather than for
business operations, while at the same time failing to distribute profits to the
owners of the business, including [Chen],” and “conspired with one another to
wrongfully convert money, and did . . . wrongfully convert money from [Chen]
for the use of the remaining individual [d]efendants.” Chen alleged that “[a]s
a direct result” of the alleged conversion, he had suffered damages to be
proved at trial “in excess of $650,000.”
17
Although the trial court ultimately rendered a decision after trial that
found “a substantial portion of company funds were diverted for personal
use,” standing to assert a direct claim is determined based on the pleaded
allegations. (PacLink, supra, 90 Cal.App.4th at p. 965 [“In determining
whether an individual action as opposed to a derivative action lies, a court
looks at ‘the gravamen of the wrong alleged in the pleadings.’ ”]; accord,
Nelson, supra, 72 Cal.App.4th at p. 124.)
We decide that the gravamen of the conversion cause of action as
alleged in the complaint is that defendants wrongfully diverted to themselves
money that was due to Chen based on his proportional restaurant ownership,
did so for non-business uses, and failed to acknowledge Chen’s ownership
and/or provide financial records and information to him. The harm alleged,
therefore, was (at least in part) personal to Chen.
We recognize that the harm to Chen could also be viewed as incidental
to injury to the corporation, where the misappropriation of profits or loan
proceeds pertains to a corporate asset. (See Grosset, supra, 42 Cal.4th at
p. 1108, italics added [defining a derivative action where “ ‘ “the gravamen of
the complaint is injury to the corporation, or to the whole body of its stock
and property without any severance or distribution among individual holders,
or it seeks to recover assets for the corporation or to prevent the dissipation of
its assets” ’ ”]; Schrage, supra, 69 Cal.App.5th at p. 153 [“ ‘The clearest cases
[of derivative actions] are those involving situations where the alleged
wrongful actions of the defendants have reduced the corporate assets and net
worth.’ ”].)
Nevertheless, under the complaint’s allegations, the injury asserted
was also direct as to Chen. The crux of the complaint is that defendants’
conduct effectively reduced the value of Chen’s investment by siphoning his
18
proportionate profit shares and the proceeds due to him while simultaneously
denying him any ability to exercise oversight or his right to collect his equal
(50–50) profits with Lu. (See Jara, supra, 121 Cal.App.4th at pp. 1255–1258
[surveying cases post-Jones that upheld individual shareholder suits].) On
independent examination, we decide Chen’s allegations fit more comfortably
within authorities upholding individual actions, although we acknowledge
that the case law cited by defendants supports a contrary determination.
We take primary guidance from the California Supreme Court’s
decision in Jones, which “offers an authoritative analysis for distinguishing
claims that must be asserted in a derivative action and those that may be
asserted in an individual action.” (Jara, supra, 121 Cal.App.4th at p. 1253.)
Jones involved an action by minority shareholders in a savings and loan
association (association) against majority shareholders who created a holding
company and marketplace for their shares, ultimately limiting the value and
marketability of the association shares. (Jones, supra, 1 Cal.3d at pp. 101–
102.)
The plaintiff (Jones) held 25 shares of capital stock in the association.
A group of shareholders incorporated a holding company (holding company)
and exchanged their association shares for those of the holding company,
making the holding company the majority shareholder of 87 percent of
outstanding association stock. (Jones, supra, 1 Cal.3d at p. 101.) The holding
company created a market for its stock through public offerings and offered to
purchase or exchange association stock for minimal value. The holding
company justified the low valuation of association shares on the ground that
they lacked the marketability of the holding company stock. (Id. at pp. 104–
105.) On behalf of herself and similarly situated minority shareholders,
Jones sued the holding company and prior association shareholders who had
19
transferred the control block to the holding company. (Id. at p. 101.) She
alleged breach of fiduciary duty, contending the majority shareholders acted
“to the detriment of the minority when they created [the holding company],
made a public market for its shares that rendered [a]ssociation stock
unmarketable except to [themselves], and then refused either to purchase
plaintiff’s [a]ssociation stock at a fair price or exchange the stock on the same
basis afforded to the majority.” (Id. at p. 105.)
On appeal from judgment after an order sustaining without leave to
amend the defendants’ demurrer to Jones’s direct action, the question before
the California Supreme Court was whether, “if a cause of action is stated, . . .
it is derivative in nature since any injury suffered is common to all minority
stockholders of the [a]ssociation.” (Jones, supra, 1 Cal.3d at p. 105.) Our
high court held that an action on those facts is not necessarily derivative and
clarified that the relevant inquiry is not whether the injury suffered is
common to all minority shareholders but is as to the nature of the injury. (Id.
at p. 107.)
The Supreme Court reasoned, “The individual wrong necessary to
support a suit by a shareholder need not be unique to that plaintiff. The
same injury may affect a substantial number of shareholders. If the injury is
not incidental to an injury to the corporation, an individual cause of action
exists.” (Jones, supra, 1 Cal.3d at p. 107, fn. omitted.) As applied to the
plaintiff in Jones, the court explained it was “clear from the stipulated facts
and plaintiff’s allegations that she does not seek to recover on behalf of the
corporation for injury done to the corporation by defendants. Although she
does allege that the value of her stock has been diminished by defendants’
actions, she does not contend that the diminished value reflects an injury to
the corporation and resultant depreciation in the value of the stock. Thus the
20
gravamen of her cause of action is injury to herself and the other minority
stockholders.” (Ibid.)
We recognize that Chen’s suit does not involve minority shareholders or
an express cause of action for breach of fiduciary duty. Nevertheless, as in
Jones, Chen’s complaint primarily alleges a monetary loss caused by
defendants’ direct misappropriation of amounts that were due to him, and to
his exclusive detriment, not for diminished value to his stock due to injury to
Ray Bing, or other derivative injury. Because we must construe a plaintiff’s
pleadings liberally “with a view to substantial justice between the parties”
(Code Civ. Proc., § 452), we decide the gravamen of Chen’s cause of action is
injury to Chen. (Jones, supra, 1 Cal.3d at p. 107.)
Other authorities support this interpretation. In Jara, the Court of
Appeal examined whether the plaintiff and minority shareholder (Jara Sr.)
had standing to bring a direct action against the other two shareholders of
the closely held corporation—Jara Sr.’s son and another individual (the
defendants). (Jara, supra, 121 Cal.App.4th at p. 1242.) Jara Sr. filed suit
including claims for breach of fiduciary duty based on the defendants
allegedly “paying themselves excessive compensation and denying [Jara Sr.]
a fair share of the corporate profits.” (Ibid.) However, Jara Sr. was unable to
pursue his breach of fiduciary duty claim after the trial court granted the
defendants’ motion in limine to exclude evidence that the corporation paid
the defendants excessive compensation, because damages for excessive
compensation could be recovered only by the corporation through a derivative
action. (Id. at p. 1243.)
The Court of Appeal reversed and concluded the trial court erred in
excluding evidence on the breach of fiduciary duty cause of action. (Jara,
supra, 121 Cal.App.4th at pp. 1259–1260.) It observed that while the
21
application of shareholder standing principles since Jones had produced
varied results, Jones itself remained authoritative and could be read “as
allowing a minority shareholder to bring a personal action alleging ‘a
majority stockholders’ breach of a fiduciary duty to minority stockholders,
which resulted in the majority stockholders retaining a disproportionate
share of the corporation’s ongoing value.’ ” (Id. at pp. 1257–1258.)
On its facts, the opinion in Jara concluded that the plaintiff’s action
came “within the scope of allowable individual actions under this
interpretation of Jones.” (Jara, supra, 121 Cal.App.4th at p. 1258.) It
reasoned that the case represented “a closer case than Jones with respect to
possible injury to the corporation” in that “the alleged payment of excessive
compensation did have the potential of damaging the business” but
nevertheless concluded that the gravamen of the injury was “that the
payment of generous executive compensation was a device to distribute a
disproportionate share of the profits to the two officer shareholders during a
period of business success.” (Ibid., italics added.) Further, the Court of
Appeal decided that the relevant policy considerations favoring derivative
actions were absent in the context of that case. (Id. at p. 1259.)
Defendants contend that Jara represents a minority view that other
Courts of Appeal have questioned and found unpersuasive. Defendants cite
Schrage, in which the Court of Appeal expressed “some doubt whether Jara
was correctly decided” (Schrage, supra, 69 Cal.App.5th at p. 155) but
reasoned, in any event, that it was distinguishable. (Ibid.) In Schrage, three
brothers each owned one-third interest in a family-owned car dealership
business. (Id. at p. 133.) The plaintiff brother (Leonard) brought suit against
the other brothers and numerous corporate entities comprising the business,
alleging the brothers engaged in self-dealing and mismanaged the business
22
by misappropriating company assets, making business decisions without
Leonard’s consent, and denying him access to corporate books and records.
(Ibid.) Leonard sought dissolution of the business entities (leading to a
separate, stipulated appraisal and buyout proceedings) and, after trial on his
breach of fiduciary duty claim, obtained a judgment in the amount of $31
million in compensatory and punitive damages. (Id. at p. 135.)
On appeal, the Court of Appeal in Schrage agreed with the defendant
brothers that Leonard lacked standing to assert his breach of fiduciary duty
cause of action. (Schrage, supra, 69 Cal.App.5th at p. 158.) The Court of
Appeal noted that Leonard alleged “a wide variety of misdeeds” committed by
his brothers against the corporation, including “ ‘misappropriat[ing] at least
$1.7 million of company funds’ ” to open and operate a separate car
dealership “without Leonard’s consent or participation” and “using
[corporate] assets for personal gain.” (Id. at p. 151.) The Court of Appeal
reasoned that “[t]he allegations in Leonard’s first amended complaint, the
basis and calculation of Leonard’s damages at trial, and the court’s findings
show that the gravamen of Leonard’s action was injury to the [corporation]
and the ‘whole body of its stock and property’ and that Leonard sought to,
and ultimately did, recover damages for injuries to the entities.” (Id. at
p. 152.) It explained that “Leonard’s primary complaint was that his
brothers’ mismanagement . . . squandered [the corporation]’s assets and
ultimately led to its demise. That is a derivative claim.” (Id. at p. 153.) It
rejected Leonard’s argument that he suffered specific injuries that “ ‘hurt
[him] alone’ ” (ibid.) and distinguished Jara based on the nature of the injury
at issue. (Id. at p. 155, citing Jara, supra, 121 Cal.App.4th at pp. 1256–
1257.) The Court of Appeal stated, “Unlike the plaintiff in Jara, Leonard did
not allege [his brothers] retained a disproportionate share of the
23
[corporation]’s value; he alleged [they] destroyed the value of the businesses
for all of the shareholders (and members and partners).” (Schrage, at p. 156.)
We have carefully considered Jara, Schrage, and numerous
representative cases that, post-Jones, have landed on either side of the
dividing line between derivative and direct actions. More commonly, like in
Schrage, the shareholder claim is deemed derivative where the defendant’s
alleged wrongful actions reduce corporate assets by diverting funds or
mismanaging the business and harming the overall value of the corporation.
(See, e.g., PacLink, supra, 90 Cal.App.4th at p. 964 [concluding “the essence
of plaintiffs’ claim” was that business assets were fraudulently transferred
without compensation to the LLC, “constitut[ing] an injury to the company
itself”]; Nelson, supra, 72 Cal.App.4th at p. 125 [explaining that the injurious
acts “amount[ed] to alleged misfeasance or negligence in managing the
corporation’s business, causing the business to be a total failure”]; Avikian v.
WTC Financial Corp. (2002) 98 Cal.App.4th 1108, 1115 [noting the plaintiffs’
“core claim is that defendants mismanaged [the corporation], and entered
into self-serving deals to sell [its] assets to third parties”].)
In other cases, like in Jara, the alleged harm is deemed direct because
it arises from an injury to the minority shareholder(s) that is not incidental to
or derivative of damage to the corporation. (See, e.g., Smith v. Tele-
Communication, Inc. (1982) 134 Cal.App.3d 338, 342, 345 [reversing
judgment of dismissal and upholding plaintiff’s ability to bring a direct action
for fraud and breach of fiduciary duty after majority shareholders applied
taxable gain from sale of subsidiary to offset losses of the parent corporation,
effectively transferring tax savings to the parent and reducing plaintiff’s
distributive shares by approximately $55,000]; Crain v. Electronic Memories
& Magnetics Corp. (1975) 50 Cal.App.3d 509, 522–523 [deciding pleading
24
adequately alleged individual causes of action where majority shareholder
sold the business to a third party for cash and lent the cash back to itself in
return for an unsecured promissory note, effectively leaving minority
shareholder plaintiffs a shell corporation with an unsecured note as its
principal asset].) The common thread in these cases is that the plaintiff’s
injury is particular to the plaintiff and not merely a generalized detriment to
the corporation. In order words, the cases upholding the right to bring an
individual suit involve allegations that the plaintiff has suffered a detriment
because they were specifically deprived a benefit due to them that was “not
incidental to damages to the corporation.” (Schuster, supra, 127 Cal.App.4th
at p. 313.)
Based on the allegations in the pleading of harm to Chen due to
defendants’ conduct in controlling the corporation and misappropriating or
diverting profits and proceeds of Ray Bing that were owed and due to him
personally, we conclude defendants have not shown error in the trial court’s
determination that Chen had standing to bring an individual claim of
conversion against them.7
B. Entitlement To Award of Attorney Fees
Defendants challenge Chen’s entitlement to attorney fees under section
1604 as ordered in the April 24 judgment and in the postjudgment fees and
costs order. They assert that the trial court erred in deciding that Chen was
7 Because we conclude the trial court did not err in ruling that Chen
had standing to bring an individual suit, we decline to address defendants’
arguments on appeal concerning “ ‘inside reverse’ ” and “ ‘outside reverse’
piercing of the corporate veil,” as well as the alter-ego doctrine. Despite
extensively briefing these topics, defendants do not explain how these
theories influenced or governed the court’s determination of standing, and
they similarly are not discussed in case law addressing the issue. We
therefore do not further address them.
25
entitled to attorney fees as costs because (1) Chen’s action is not an
enforcement action under section 1601, and (2) under section 1604, attorney
fees can only be granted against the corporation. Chen responds that the
court properly exercised its discretion in deciding that he was excluded from
meaningful involvement in the governance and financial affairs of the
corporation and entitled to attorney fees under sections 1601 and 1604.
“Under California law, ‘each party to a lawsuit must pay its own
attorney fees unless a contract or statute or other law authorizes a fee
award.’ [Citations.] Thus, unless specifically provided by statute or
agreement, attorney fees are not recoverable.” (K.I. v. Wagner (2014) 225
Cal.App.4th 1412, 1420–1421; see Code Civ. Proc., §§ 1021 [“Except as
attorney’s fees are specifically provided for by statute, the measure and mode
of compensation of attorneys and counselors at law is left to the agreement,
express or implied, of the parties; but parties to actions or proceedings are
entitled to their costs.”], 1033.5, subd. (a)(1) [providing for attorney fees as
allowable costs “when authorized by” contract, statute, or law].)
While courts ordinarily review the award of attorney fees after trial
under the deferential abuse of discretion standard, we apply de novo review
where the propriety of awarding attorney fees presents a question of law or a
matter of statutory interpretation. (Connerly v. State Personnel Bd. (2006) 37
Cal.4th 1169, 1175 (Connerly).) A determination of the legal basis for an
attorney fee award is a question of law. (Carver v. Chevron U.S.A., Inc.
(2002) 97 Cal.App.4th 132, 142.)
Defendants challenge the trial court’s authority to award attorney fees
under sections 1601 and 1604 if the prevailing party has not asserted a claim
or brought an enforcement action or proceeding under the statute.
Defendants also question whether section 1601 and 1604 attorney fees can be
26
imposed against individuals. These issues present questions of statutory
interpretation, subject to our de novo review. (Unzipped Apparel, LLC v.
Bader (2007) 156 Cal.App.4th 123, 129.) In construing a statute, we seek
“ ‘ “to ascertain the intent of the lawmakers so as to effectuate the purpose of
the law. . .. In order to determine this intent, we begin by examining the
language of the statute.” ’ ” (Connerly, supra, 37 Cal.4th at p. 1176.) “ ‘If the
words themselves are not ambiguous, we presume the Legislature meant
what it said, and the statute’s plain meaning governs.’ ” (Even Zohar
Construction & Remodeling, Inc. v. Bellaire Townhouses, LLC (2015) 61
Cal.4th 830, 838 (Even Zohar).)
Section 1601 forms part of the statutory scheme governing corporate
disclosure. (Jara, supra, 121 Cal.App.4th at p. 1263.) It provides the right to
inspect and copy “accounting books, records, and minutes of proceedings of
the shareholders and the board and committees of the board of any domestic
corporation . . ., upon the written demand on the corporation of any
shareholder . . . at any reasonable time . . ., for a purpose reasonably related
to the holder’s interests as a shareholder.” (§ 1601, subd. (a)(1); Singhania v.
Uttarwar (2006) 136 Cal.App.4th 416, 431.) “The statute guarantees a
shareholder’s right to inspect accounting books and records at the company
office at a reasonable time during usual business hours when such inspection
is requested by a written demand.” (Jara, at p. 1265.)
If the corporation refuses a lawful demand for inspection, section 1603
provides the right to bring an enforcement action in the superior court. (Id.,
subd. (a) [“Upon refusal of a lawful demand for inspection, the superior court
. . . may enforce the right of inspection with just and proper conditions or
may, for good cause shown, appoint one or more competent inspectors or
accountants to audit the books and records.”].) Section 1604 further
27
authorizes the court to order reimbursement for failure to comply with an
inspection demand, if the court finds the failure unjustified. It states, “In any
action or proceeding under [s]ection 1600 or [s]ection 1601, if the court finds
the failure of the corporation to comply with a proper demand thereunder
was without justification, the court may award an amount sufficient to
reimburse the shareholder or holder of a voting trust certificate for the
reasonable expenses incurred by such holder, including attorneys’ fees, in
connection with such action or proceeding.” (Ibid.)
Beginning with the language of the statute (Connerly, supra, 37 Cal.4th
at p. 1176), section 1604 “is permissive rather than mandatory.” (Farnum v.
Iris Biotechnologies Inc. (2022) 86 Cal.App.5th 602, 613.) The permissive
language (“may award”) (§ 1604, italics added) affords the trial court
discretion to determine whether it finds that “the failure of the corporation to
comply with a proper demand thereunder was without justification” (ibid.),
warranting reimbursement to the shareholder. Nevertheless, that
discretionary determination is bounded by specific criteria—namely, that the
determination of a fee award occur “[i]n an[] action or proceeding under”
sections 1600 or 1601, and that the fees be awarded based on expenses
incurred “in connection with such action or proceeding.” (§ 1604.)
Where the source of discretion is statutory, we measure the trial court’s
exercise of judicial discretion “against the general rules of law and . . .
against the specific law that grants the discretion.” (Horsford v. Board of
Trustees of California State University (2005) 132 Cal.App.4th 359, 393; see
Wade v. Superior Court (2019) 33 Cal.App.5th 694, 709.) Here, the “specific
law” (Horsford, at p. 393) authorizing fees is in reference to an action under
one of the two cited statutory sections. Because this language is
unambiguous, we apply its plain meaning. (Even Zohar, supra, 61 Cal.4th at
28
p. 838.) By twice referring to the discretionary award of attorney fees in the
context of and in connection with an “action or proceeding” under sections
1600 or 1601, the Legislature explicitly linked the availability of attorney fees
under section 1604 to an action or proceeding under sections 1600 or 1601.
Reading sections 1601, 1603, and 1604 together, these provisions leave
little doubt that the reimbursement provision in section 1604 is tied only to
“any action or proceeding” brought under the specified statutory sections.
(See Jara, supra, 121 Cal.App.4th at p. 1265 [“The remedies of a court order
under section 1603 and award of attorney fees under section 1604 exist only
to enforce a written demand for inspection to which the shareholder is
entitled under the statute.”].)
The legislative committee comment to section 1604, which we may
consider for its persuasive value (McMullen v. Haycock (2007) 147
Cal.App.4th 753, 759), reinforces this understanding. The assembly
committee comment to the 1975 enactment of section 1604 states, “To
discourage a corporation from refusing in bad faith to comply with a
shareholder’s rights of inspection, this section permits the court to award the
shareholder his reasonable expenses (including attorneys’ fees) incurred in
an action to enforce compliance with sections 1600 and 1601 upon a finding
that the corporation’s refusal to comply was not justified.” (Assem. Com.,
Stats. 1975, ch. 682, § 7, italics added.) Like the statutory language, this
comment underscores the necessary link between sections 1600, 1601
and1604.
Chen’s complaint did not assert a cause of action under section 1601,
seek reimbursement under section 1604, or attempt to combine the complaint
for damages with another proceeding (i.e., petition for writ of mandate)
seeking to direct Ray Bing to permit him to inspect and copy all relevant
29
corporate records. (§ 1603; see, e.g., Fowler v. Golden Pacific Bancorp, Inc.
(2022) 80 Cal.App.5th 205, 210 [action to compel an inspection of books and
records pursuant to section 1601 in the form of petition for writ of mandate].)
Although Chen did assert a claim for declaratory relief as to his right to
access the corporation’s financial books and records, we agree with
defendants that declaratory relief is not an action to enforce compliance with
sections 1600 or 1601. “Unlike coercive relief (such as damages, specific
performance, or an injunction) in which a party is ordered by the court to do
or to refrain from doing something, a declaratory judgment merely declares
the legal relationship between the parties.” (Mycogen Corp. v. Monsanto Co.
(2002) 28 Cal.4th 888, 898.)
Chen’s arguments for application of sections 1601 and 1604 are
unpersuasive. He contends that the trial court made express findings about
defendants’ noncompliance with their duty to allow access to corporate
records, including defendants’ failure to respond to a notice to produce
documents at trial. We agree. But while the court’s factual findings on
defendants’ failure to provide Chen access to financial records and
governance information of the corporation are not in dispute, Chen does not
show that those findings qualify his action for damages as an action to
enforce his inspection right under section 1601. Nor does Chen cite to any
authority for the proposition that nonstatutory requests for access to
corporate financial information and records, and any discovery requests
during litigation (whether fulfilled or unfulfilled), came within the purview of
section 1601 and constituted “a proper demand thereunder” (§ 1604). (See
Bezirdjian v. O'Reilly (2010) 183 Cal.App.4th 316, 328 [noting no legal basis
to construe section 1601 as authorizing discovery in litigation].)
30
Chen additionally asserts, citing the statutes that govern generally the
right to recover costs of suit, that, because he was the “ ‘[p]revailing party’ ”
in the action (Code Civ. Proc., § 1032, subd. (a)(4)), the trial court was
authorized to order costs, including attorney fees “authorized by” “[c]ontract,”
“[s]tatute,” or “[l]aw.” (Id., § 1033.5, subd. (a)(10).) Chen points to section
1604 as the relevant statutory provision. However, Chen does not explain
how his legal action for damages, dissolution, and declaratory relief
constitutes “any action or proceeding under [s]ection 1600 or [s]ection 1601”
within the meaning of section 1604. Nor does Chen offer any other basis,
absent the statutory basis of sections 1601 and 1604, that would allow
attorney fees to be ordered as costs in this circumstance.
In sum, Chen’s only asserted basis for recovery of attorney fees and
costs under Code of Civil Procedure section 1033.5, subdivision (a)(10) is
section 1604. Based on the plain language of section 1604 and its related
statutory provisions, we conclude that the reimbursement of attorney fees for
a corporation’s failure to allow inspection of its records pursuant to a proper
request must be tied specifically to an “action or proceeding” brought under
section 1600 or 1601. (§ 1604.) Chen’s complaint cannot reasonably be
construed as an “action or proceeding under [s]ection 1600 or [s]ection 1601.”
(Ibid.) The trial court therefore erred in deciding Chen was entitled to
recover attorney fees under the statute.8
8 In light of our conclusion that the trial court erred in ruling Chen
could be awarded attorney fees under sections 1601 and 1604, we need not
address defendants’ additional claim that the statute does not permit
attorney fees to be awarded against individual shareholders rather than the
corporation. Our determination that Chen is not entitled to attorney fees
also disposes of the appeal from the postjudgment fees and costs order as to
the issue of entitlement to attorney fees.
31
III. DISPOSITION
The judgment is modified to strike the language, set forth in paragraph
5 of the April 24, 2025 order and judgment, entitling plaintiff Chen to an
award of attorney fees, pursuant to Corporations Code sections 1601 and
1604, as part of his costs of suit. As modified, the judgment is affirmed.
The July 1, 2025 postjudgment order granting attorney fees and costs,
is modified to strike the attorney fee award of $137,184.00, leaving
undisturbed the unchallenged award of $11,908.94 in litigation costs. As
modified, the order is affirmed.
In the interests of justice, the parties are to bear their own costs on
appeal. (Cal. Rules of Court, rule 8.278(a)(5).)
32
______________________________________
Danner, J.
WE CONCUR:
____________________________________
Greenwood, P. J.
____________________________________
Grover, J.
H053356, H054067
Chen v. Lu et al.