Talece Inc. v. Zhang

Background

Talece, described as an online construction and material distribution company, alleged that Zheng Zhang refused to provide information about Talece’s finances, submitted incorrect financial reports, transferred money from Talece’s business accounts to his personal accounts, and stole Talece’s intellectual property for use in a new company. Talece asserted claims for breach of fiduciary duty, unjust enrichment, conversion, and an accounting.

After the court denied Zhang’s second motion to dismiss, Zhang filed an answer with 31 affirmative defenses and asserted counterclaims against Talece. He alleged that Ming Zhang and Lanhai Su failed to keep promises to fund Talece and later sought to fraudulently apply for federal small-business and Payroll Protection Program loans. Zhang alleged that he was fired after threatening to report them. He asserted counterclaims for retaliation under 31 U.S.C. § 3730 and breach of fiduciary duty. He also filed a third-party complaint against Su asserting those claims and a conversion claim.

Talece’s Motion to Dismiss

Talece moved to dismiss both of Zhang’s counterclaims. It argued that Zhang had not alleged enough affirmative action to support retaliation under the False Claims Act, such as filing a report with a federal authority. The court rejected that argument. It held that Zhang needed to allege protected activity and discrimination because of that activity, but no specific report was required. Accepting the allegations as true, the court found that Zhang’s investigation could reasonably have led to a False Claims Act case if it revealed false applications for federal loans.

Talece also argued that Zhang lacked standing to bring the fiduciary-duty claim because he had not paid the required consideration to become a minority shareholder. The court rejected the argument at the motion-to-dismiss stage because Zhang alleged that he was a minority shareholder. The court stated that it could not consider documents outside the pleadings to disprove that allegation, and that this ruling was without prejudice to a proper later motion challenging standing. The court therefore denied Talece’s motion to dismiss.

Talece’s Motion to Strike

Talece moved to strike five affirmative defenses and references to an alleged romantic relationship between Ming Zhang and Su. The court declined to strike affirmative defenses 1, 22, and 28, finding them too closely tied to the merits to remove at that stage of the case.

The court found affirmative defense 9, laches, insufficiently pleaded because Zhang identified no allegations supporting it. It struck that defense but gave Zhang leave to amend. The court also found affirmative defense 21, based on California Business and Professions Code § 16600, insufficiently pleaded because Zhang did not identify the specific content of the agreement that allegedly restrained competition. It struck that defense and gave Zhang leave to amend.

The court declined to strike the allegations about the alleged relationship between Ming Zhang and Su. Although the allegations were unflattering, the court could not conclude that they were entirely immaterial because, if true, they could relate to Talece’s reasons for allegedly retaliating against Zhang and breaching fiduciary duties.

Su’s Motion to Dismiss

Su moved to dismiss all claims in Zhang’s third-party complaint. The court rejected her argument that Zhang had not alleged enough affirmative investigation to support his retaliation claim. But the court agreed with Su that a retaliation claim under § 3730(h) cannot be brought against individual defendants. It dismissed the retaliation claim against Su without leave to amend because amendment would be futile.

The court denied Su’s standing challenge to the breach-of-fiduciary-duty claim for the same reasons it rejected Talece’s challenge.

As to conversion, the court rejected Su’s argument that Zhang lacked standing but agreed that Zhang had not alleged that Su converted any of Zhang’s personal property. Zhang alleged that Su misappropriated Talece’s funds, but he did not provide authority showing that this could support a traditional conversion claim based on a shareholder’s personal property. The court dismissed the conversion claim with leave to amend.

Order

Judge Beth Labson Freeman ordered that Talece’s motion to dismiss was denied. Talece’s motion to strike was granted in part as to affirmative defenses 9 and 21 and denied in all other respects. Su’s motion to dismiss was granted in part as to the retaliation and conversion claims and denied in all other respects.

The dismissals were with leave to amend except for Zhang’s retaliation claim against Su, which was dismissed without leave to amend. Zhang was ordered to file amended counterclaims and an amended third-party complaint within 21 days. The order stated that failure to meet the deadline or cure the identified deficiencies would result in dismissal of the specified defenses and third-party claims with prejudice without further notice.