Kelly v. Hollander
Filed 3/1/13 Kelly v. Hollander CA2/2
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
TWO
MICHAEL PATRICK KELLY,
Plaintiff and Appellant,
v.
VICTOR A. HOLLANDER,
Defendant and Respondent.
B240829
(Los Angeles
County
Super. Ct.
No. SC112254)
APPEAL from
a judgment and order of the Superior Court
of
County. Craig D. Karlan, Judge. Reversed and remanded.
Michael
Patrick Kelly, in pro. per., for Plaintiff and Appellant.
Munger,
Tolles & Olson, Joseph D. Lee, Leo Goldbard for Defendant and Respondent.
___________________________________________________
Plaintiff Michael Patrick Kelly appeals from a judgment
after a motion for judgment on the pleadings was entered in favor of defendant
Victor A. Hollander. Because we find that
the trial court should have allowed Kelly the opportunity to amend his
complaint, we reverse.
FACTS
name="_ftnref1" title="">[1]
Hollander
is an independent director of Fuqi International, Inc. (Fuqi) and chairman of
its audit committee. Fuqi is a publicly
traded company that designs and sells precious metal jewelry in China. It went public in the United
States in 2007 and had a secondary stock
offering in 2009, raising approximately $150 million.
Kelly is a
shareholder of Fuqi who invested substantial amounts in the company. In 2009 and 2010, he bought over $2 million
of Fuqi shares.
After
numerous quarters reporting stellar growth, Fuqi issued a press release and
filed an 8-K form in March 2010 stating that its prior financial statements
were not reliable. Fuqi indicated that
the statements would be amended and “restatements†would be issued, and that
its 2009 annual report would not be timely filed. Fuqi described the problem with its prior
financial statements as minor and estimated that the restatements would reflect
a rather immaterial net adjustment of less than 20 cents earnings per share.
Over the
next year, neither the restatements nor the 2009 annual report were issued, and
Fuqi provided no explanation for the delay.
The price of the stock declined precipitously from a high of
approximately $32 in September 2009 to approximately $1.50 in November 2011.
Kelly
alleges that, beginning in September 2010, he “set on a course of action to
uncover the truth as to why such an apparently benign accounting issue
could take so long to correct and re-state.
The Plaintiff having already lost a substantial amount of money from the
fall of the stock price was concerned that the entire company could be another
Chinese fraud. The Plaintiff was not
interested in trading the stock, in gathering any insider information, but in
simply learning the truth.â€
Kelly
proceeded to make contact with Hollander.
In October 2010, Kelly had a telephone conversation with Hollander in
which Hollander told him that that there was “no fraud at Fuqi,†that
restatements would be filed within 15 days, and that the cumulative adjustment
would be similar to that indicated in the March 2010 press release. According to the complaint, Hollander knew
that this statement was false when he made it because he knew that over $100
million in cash raised from Fuqi’s stock offering had been embezzled. Hollander knew that a restatement could not
be filed within 15 days and that, if any adjustment were made, it would be much
greater than the amount indicated in the prior press release. Kelly alleges that Hollander was deliberately
attempting to mislead him and that he relied on Hollander’s false
representations and continued to hold stock because of them.
A few days
after the telephone call, Kelly and his son had lunch with Hollander in Beverly
Hills. Hollander again told him that
Fuqi would file restatements within 15 days.
Kelly alleges that Hollander knew this representation was false, but
that Kelly again relied on the representation and continued to hold the stock.
Kelly
further alleges that during the same lunch meeting Hollander told him that Fuqi
would do nearly $1 billion in sales for 2010.
The complaint states that this information “had never been released to
the street and was inside information.
Mr. Hollander broke the law by telling the Plaintiff this
information. In fact the entire business
of Fuqi International Inc. is built on deceit, non-disclosure, embezzlement,
etc. Mr. Hollander intended to induce
the Plaintiff to not only hold the stock he presently owned but in fact to buy
more stock. The Plaintiff did not trade
on this information as that would have been illegal, but continued to hold
stock because of this statement.â€
Following
the lunch meeting, and up through December 2010, Kelly had numerous further
phone conversations with Hollander, along with visits to his office and
home. Hollander never said that his
prior representations were untrue. In
December, Hollander told Kelly about his experience with a NASDAQ panel
relating to Fuqi’s delisting from the stock exchange. Hollander stated: “The meeting went as well as could be
expected. Fuqi was a real company with
cash.†Kelly’s complaint calls this
statement a “damn lie.†On another
occasion, Hollander told Kelly that an independent investigation was conducted
and that no fraud was discovered at Fuqi.
Again, Kelly alleges that Hollander knew this statement to be false when
he made it.
Kelly
alleges that, overall, he engaged in at least 20 phone conversations and talked
with Hollander several times in person.
During each conversation, Hollander assured him that accounting
deficiencies would be resolved and restatements would be filed soon. Kelly relied on these representations, which
Hollander knew to be false.
Kelly
purchased a total of 164,400 shares of Fuqi stock and sold 124,400. He alleges he suffered a net loss of
$425,000.
PROCEDURAL HISTORY
Kelly,
acting in propria persona, filed suit against four independent directors of
Fuqi and other defendants in April 2011.
After suffering defeat on a string of demurrers, Kelly filed a second
amended complaint in November 2011 against only Hollander and Lily Lee Chen,
another Fuqi independent director. The
second amended complaint asserts a single cause of action for fraud.
Chen filed
a demurrer to the second amended complaint, which was sustained. Judgment in her favor was entered on January
24, 2012. No appeal was filed from that
judgment.
Hollander
initially answered the second amended complaint. However, shortly after Chen’s demurrer was
heard, Hollander filed a motion for judgment on the pleadings. The court granted the motion on March 28,
2012, and entered judgment the same day.
Kelly’s appeal from that judgment is timely.
DISCUSSION
I. Standard of Review
A motion for
judgment on the pleadings serves the function of a demurrer, challenging
defects on the face of the complaint. (
67 Cal.App.4th 995, 999.) In reviewing
the sufficiency of a complaint, factual allegations are accepted as true and
given a liberal construction. (
Cal.4th 468, 515-516.) We do not concern
ourselves with whether a plaintiff may have difficulties in proving the claims
made in the complaint. (
Cal.App.4th 1110, 1115.) Rather, we
determine de novo whether the facts as alleged support a valid cause of action
or, if they do not, whether amendment could cure the defect. (Kempton
v. City of Los Angeles (2008) 165 Cal.App.4th 1344, 1347.) “Where a complaint could reasonably be
amended to allege a valid cause of action, we must reverse the judgment.†(Id.
at p. 1348.)
II.
to Amend Should Have Been Allowed
Kelly
contends that he properly pled a fraud cause of action against Hollander. The elements of fraud are: (1) a material misrepresentation (including
false representation, concealment, or nondisclosure); (2) knowledge of its
falsity; (3) intent to induce reliance; (4) justifiable reliance; and (5)
resulting damages. (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979,
990.) Each element of a fraud claim must
be pled with particularity. (
1039, 1059-1060.)
Kelly
alleges that Hollander’s misrepresentations induced him to refrain from selling
his Fuqi stock. Our Supreme Court has
held that a person need not sell or buy shares to state a fraud cause of action
in the context of a stockholder’s action.
(Small v. Fritz Companies, Inc.
(2003) 30 Cal.4th 167, 171 (Small v.
Fritz).) Instead, if a shareholder
is induced to refrain from selling stock by a material misrepresentation and is
damaged as a result, he or she may properly state a fraud cause of action. (Ibid.)
The trial
court recognized the application of Small
v. Fritz to the instant matter in that Kelly could properly state a fraud
claim based upon the holding (rather than buying or selling) of shares. The trial court found, however, that Kelly
was unable to adequately plead that he relied on Hollander’s misrepresentations. When a plaintiff materially alters his or her
legal relations as a result of the defendant’s misrepresentation, actual
reliance is said to occur. (
(1997) 15 Cal.4th 951, 976-977.)
The trial
court found, and Hollander argues in his respondent’s brief, that Kelly was
foreclosed from claiming reliance because he conceded in his complaint that he
never intended to rely on Hollander’s statements. Hollander points to paragraph 17 of the
second amended complaint, in which Kelly alleges that in September 2010 he set
out to investigate Fuqi’s accounting problems and that he “was not interested
in trading the stock . . . but in simply learning the truth.â€
If this
were the only allegation pertaining to reliance, we would agree that Kelly
could not properly state a fraud claim.
But it is not. Kelly alleges that
after he began his investigation he spoke with Hollander both in person and
over the phone. The complaint alleges
that during these conversations, Hollander knowingly made
misrepresentations. With respect to
nearly all of these misrepresentations, Kelly alleges that he “relied on the
representation and continued to hold stock because of this statement.†We must give the allegations a liberal
construction. (Gerawan Farming, Inc. v. Lyons, supra,
trading the stock†when he first began his investigation does not mean that he
could not later his change his mind.
Kelly alleges that Hollander made fraudulent statements to him and that
he held his stock because he relied on the statements. Reading these allegations liberally (as we
must), the necessary conclusion is that, if not for Hollander’s misrepresentations,
Kelly would have sold his stock, despite his initial lack of interest in doing
so.
The trial
court’s second basis for granting the motion for judgment on the pleadings—and
Hollander’s second primary argument—is that Kelly could not possibly show
reliance because, were he to actually sell the stock, he would have been
engaging in illegal insider trading by selling shares based on material,
nonpublic information. This finding also
improperly construes Kelly’s allegations too strictly. In only one paragraph of his second amended
complaint (paragraph 26) does Kelly allege that Hollander disclosed inside
information—that Fuqi “would do nearly $1B in sales for 2010.†None of the other paragraphs alleges that
Hollander revealed material, nonpublic information. Instead, according to the complaint,
Hollander kept repeating that restatements would issue soon, that they would be
of minor importance, and that there was no fraud in the company. Kelly alleges he did not trade because of
misrepresentations that the company was as healthy as previously
portrayed. The potentially inside
information was what was left unsaid—that
(according to the complaint) the company was a sham. We need not at this stage, if ever, decide
the hypothetical implications of Kelly’s trading on unrevealed information.
We do find
Kelly’s second amended complaint lacking in one respect, however. Small
v. Fritz held: “In a holder’s action
a plaintiff must allege specific reliance on the defendants’
representations: for example, that if
the plaintiff had read a truthful account of the corporation’s financial status
the plaintiff would have sold the stock, how
many shares the plaintiff would have sold, and when the sale would have taken
place. The plaintiff must allege
actions, as distinguished from unspoken and unrecorded thoughts and decisions,
that would indicate that the plaintiff actually relied on the
misrepresentations.†(30 Cal. 4th at p.
184, italics added.) Kelly did not allege
how many shares he would have sold and when he would have sold the shares if
not for Hollander’s misrepresentations.
Because it appears that Kelly could reasonably amend his complaint to
specifically allege this information, he should be given the opportunity to do
so. Leave to amend, therefore, should
have been granted.
title="">[4]
III.
of Judicial Misconduct Are Baseless
Rather than
concentrate on the merits of his appeal, Kelly devotes much of his opening
brief to attacking the trial court judge—saying that he dismissed Kelly “like
an ugly stepchild†and claiming that he “blow[s] hot air.â€
actually gives any indication that the trial judge failed to act with
impartiality. Indeed, the reporter’s
transcript shows that the judge was courteous and engaging, and gave Kelly a
generous opportunity to argue his points.
The trial court’s apparent confusion over whether Kelly filed an
opposition to the motion for judgment on the pleadings stemmed not from a lack
of diligence or impartiality, but rather from Kelly’s choice to name his opposition
a “motion to stay proceedings until limited discovery is complete, opposition
to motion for summary judgment.†Kelly
fails to provide any basis for his assertion that the trial court judge was
biased against him.
While we
are mindful that Kelly is representing himself, and may not be aware of many
procedural norms and rules, his status as a plaintiff appearing in propria
persona does not provide him with an excuse to act inappropriately. A party appearing in propria persona “is to
be treated like any other party and is entitled to the same, but no greater
consideration than other litigants and attorneys.†(Barton
v. New United Motor Manufacturing, Inc. (1996) 43 Cal.App.4th 1200,
1210.) Attorneys have the obligation to
demonstrate “civility, professional integrity, personal dignity, candor,
diligence, respect, courtesy, and cooperation, all of which are essential to
the fair administration of justice and conflict resolution.†(See California Attorney Guidelines of
Civility and Professionalism (July 2007), Introduction.) Simply because Kelly is not an attorney does
not give him justification to treat those in the judicial system (or anyone
else) with a lack of courtesy and respect.
If Kelly chooses to continue to represent himself following remand, he
is expected to act in a manner befitting of this right and responsibility.
DISPOSITION
The
judgment and order granting without leave to amend Victor Hollander’s motion
for judgment on the pleadings as to Michael Patrick Kelly’s second amended
complaint are reversed. The matter is
remanded to the trial court with directions to enter a new order granting the
motion for judgment on the pleadings with leave to amend and allowing Kelly to
file his third amended complaint within 30 days. The parties are to bear their own
NOT TO
BE PUBLISHED IN THE OFFICIAL REPORTS.
BOREN,
P.J.
We concur:
ASHMANN-GERST,
J.
CHAVEZ, J.
facts are taken from the allegations in the second amended complaint. On review of a motion for judgment on the
pleadings, we must assume the truth of all material facts that were properly
pleaded. (Gilmer v. Ellington (2008) 159 Cal.App.4th 190, 194, fn. 1;
(1990) 51 Cal.3d 120, 125.)
repeatedly makes reference to Chen in his opening brief, as if we may reverse
the judgment in her favor. Because no
notice of appeal as to Chen was filed, we are without jurisdiction to consider
the judgment in favor of Chen. (Cal.
Rules of Court, rule 8.100; Code Civ. Proc., § 906.)
