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NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 opinio n

has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF AP PEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SEVEN

ANDREA TURNER et al.

,

Plaintiff s and Appellant s

,

v.

PACIFICA FOU NDATION, INC.

et al.

,

Defendant s and Respondent s

. B314537

(Los Angeles County

Super. Ct. No.

20STCV46681)

APPEAL from an order of the Superior Court of

Los Angeles County, Michael L. Ste rn

, Judge

. R eversed an d

remanded wit h directions.

Alexander Morrison + Fehr

, Tracy L. Fehr; The Jaffe Law

Firm and Stephen R. Jaffe f or Plaintiffs and Appellants Andrea

Turner, Chris tina Huggins and Donald Goldmacher.2 Grant | Shenon and Adam Grant for Defendant and

Resp onde nt Pacifica Fo undation, Inc.

Eisenberg & Associates and Mark S. Eisenberg for

Defendants and Re spon dents Grace Aaron and Alex Steinberg.

_________________________ Andrea Turner, Chr i stina Huggins and Donald Gol d macher

(colle ctively T urner parties) , member s of Pacifica

Foundation, Inc. who serve on Pacifica ’ s national board of

directors or the board of a local Pacific a radio station

, 1 filed this

derivative law suit on b ehalf of Pac ific a (named as a nominal

defendant) against Grace A a ron and Alex Steinberg, m embe rs of

Paci fica ’ s national board of directors or officers of the corporation

, alleging Aaron and Steinberg breached fi duciary duties owed to

Pacific a and engaged i n misf easance and malfeasance injuring

the corporation. The trial court sustained without leave to

amen d Aaron and Steinberg ’ s demurrer to the third amended

complaint and dismissed the acti on, ruling the Turner parties

had failed to make the require d pr e l itigation demand on the

corporation or to adequately allege demand futility and , in any

ev ent, Aaron ’ s a nd Steinberg ’ s alleged misconduct was protected

from liability by the business jud gmen t rule. We reverse and

remand with directions to sustain the de murrer with leave to

amend the allegations purporting to satisfy the prelitigation

demand re quirement of C o rporations Code section 5710,

subdivision (b)

.

1 The T urner parties allege d that Turner was a member of

P acifica ’ s natio nal board o f directors and the local s tation board

of KPFA

- F M, Pacifi ca ’ s Berkel e y

- ba sed ra dio sta tion

, and that

Hugg ins was chair and Goldmacher a member of the KPFA

- FM

local station board

.3 FACTUAL AND PROCEDURAL BACKGROUN D

1. The Turner Parties ’ Allegations of Misconduct by Aaron

and Ste inberg

The Turner parties filed their original complaint on

December 8, 2020 , a fir s t amende d complaint o n December 11,

2020 and , pursuant to court order, a second amended complaint

o n Feb ruar y 22, 2021. After the court sustained Aaron and

Steinberg ’ s dem urrer to the second amended complaint with

leave to amend (discussed in the following sectio n)

, the Turner

parties on May 17, 2021 filed the operative third amended

complaint.

Th e third am ende d com plaint alleged Steinberg was the

current chair of Pacifica ’ s national board of directors and that

Aaron and Steinberg at all re lev ant times served as m embers of

the Pacifica board or officers of the corp oration “ and/or in another

forma l or de fact o af

fi lia tion with Pacifica enabl ing each of them,

in divid ually or c ollectively, to exercise influence and control over

the management and bus iness affairs of P acifica. ” 2

Pa ragraph 12 , with num erous l ettered subpart s, alleged (in

language appa rent ly id entical to that in paragraph 12 of the

second amended compl aint)

, 3 that prior to commencing the

lawsu i t, the Turner parties and “ others affiliated and al ig ned

with ” them continu ally de manded that Aaron and Steinberg

cease the actions alleged to co nsti tute “ misfeasance, malfeasance

, [ and ] breaches of fiduciary dut ies ” ( a phrase repeated throughout

the pleading, which we shorten to “ misconduct ” )

. I n cluded in the

2 Our quotation s from the parties ’ pa pers omit unn e cessary

cap italization and the ir use of bold and italic s font

.

3 The seco nd am ended compl aint i s not included in t he

record on a ppeal.4

para gr aph were all egations concerning warnings and

recommendations from the California Attor n e y Genera l ’ s

charitable trust section regarding issu es of corporatio n

mana gement that had been ignored by Pacifica ’ s board and

unsuccessful attempts by the Turner part ie s to mediate thei r

disputes. The par agraph specifically alleged all a t tempts t o

resolve the issues “ have been, would have been a nd conti nue to

be comp letely futi le. ”

The Turner parties alleged specific acts and omissions

con stituting actionable mis co nduct, includi ng interference with

Pacifica ’ s professional s ta ff, cau sing the corporation ’ s failure to

compl y with Federal Commu nications Commission (FCC)

,

I n ternal Revenue Service (IRS)

, and other federal and state

regulatory req uirements; pr omoting and c ausing Pacific a to

obtain a $3.2 million loan, s ec ured by corporate assets, without

an identifiable source of funds f or repayment of its principal or

interest ; causing the corporation to revise its con tribution

formul a, resulti ng in K PFA

- FM, the only stat ion not losing

money, to fund th e vast maj ority of the costs of national

operations; in t erfer ing in sever al specific ways with the ability of

P acifica to receive grants from the Corporation for Public

Broadcasting (CPB) ; and facilitating a $500 ,000 loan to Pacif ic a

fr om P acifica Support er s 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 othe r owner was closely

involved with Aar on ’ s separ ate nonprofit co rporation

. Othe r ac ts

of purp orted misconduct, including retaliatory firings

, failure to

conform to the advice of corporate counsel and alien ating

liste ners by bizarre programmi ng, we re also alleged.5 Aaron ’ s and Steinberg ’ s misconduct , the Turner parties

alleged, d amage d Pac ifica in t he form of loss of donor and listener

financial s upport and the loss

, or immi nent loss

, of substantially

all its a sse ts, creating a risk of insolven cy. The pleading labels

its single cause of action as one for reimburseme nt of corpor ate

loss and waste and prays for a judgment re q u iring Steinberg and

Aaron to reimburse Pacifica for the damages and los s of assets

and revenue cau sed by their mi sconduct.

2. Pacifica ’

s Demurrer to the Second Amended Comp la int

Pacifica

— the nominal defendant

— demu rre d to the Tu rner

p art ies ’ s econd amended complaint

, arguing the y had failed to

properly make a prelitigation demand before fili ng the derivative

lawsuit , as required by Corp orations Code section 5710,

subdivision (b )

. Aaron and Steinberg filed joinders i n the

demu rre r.

The Turner parties argued the allegations in paragraph 12

of the pleading esta blished the y had satisfied the demand

re quirement . I n addition, at the hearing o n t h e d e m u r r e r

,

couns el for the Turner parties represented that the t hen

- cu rrent

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 deman d

futility and asserted Pacific a ’ s repeated refusal to media te the

dis pute with t he Turner par ties constituted adequate proof of

demand futility.

Responding to t he demurrer as filed, the court stated, “ I

agree with the plaintiff s ’ side that p aragr ap h 12 fully put t he

defendants on notice. That issue is ea sily dispo sed o f. ” The cour t

then proceeded to address “ problems with th is complaint

, which

aren ’ t ev en disc ussed by either side. ” The court indicated the6

allegat ions describing A a ron ’ s and Steinberg ’ s alleged breaches of

fiduciary duty, misfeasanc e and malfeasance w er e amb iguous

an d lacked specificity and suggested further amen dment w as

appropr iate. 4 A t this point, counsel for Pacifica, who had earlier

submitted on his papers o n t he issue of prelitigation demand,

argued the allegations i n paragrap h 12 did not satisfy the

requiremen ts of Corporations Code, section 5710, subd ivisi on (b)

,

and urge d the court not to grant leave to amend. The court

,

withou t further comme nt on the demand requirement, ruled,

“ The de murrer is sustain ed with le ave to amen d to file a third

amen ded complaint. ”

3. Aaron and Steinberg ’ s Demurrer to the Operative Third

Amended Complaint

After t he Turner parties filed the ir third amended

complaint

, expand ing somewhat the alleg ation s of misco nduct

against Aaron and Steinberg, Pacific a answer ed

, ass erting as

affi rmative defenses the failure to make a prelitigation dema nd

or to adequately d etail why such a demand would be fu t il e

. Aaron and Steinberg demurre d, arguing the act ion was time

barred, citing the three

- year limitation perio d in Code of Civ il

Procedure sec tion 359; the pl e ading was unintelligible and failed

to state facts sufficient to constitute any caus e o f action ; and

certain de f

ense s (specifically, that board memb ers of a nonprofit

4 T he court commented, for exampl e, “ [ F ] id uciary duty is

mentioned. There ’ s no misfeasance or malfeasance that ’ s spell ed

out. An d I don ’ t know what the negligence is in this pra yer fo r

relief

. . . . [W]here ’ s the du ty and all of th e rest of that ? That ’ s,

you know, that ’ s first

- year To rts 101. ” Th e court then asked

counsel for the Turner parties, “ Do you wan t to respon d to t hat,

Mr. Jaf fe, or do you just want to try to d raf t anoth er compl aint

with l eave t o amend? ”7

corporation are protected from personal liability by pro vi sions of

the C orporations Code

, as well as by the common law business

judgment rule) appeared on the face of the com pl a in t. 5

With the demurrer counsel for Aaron a nd Stein berg

provided a declaration stating he had attempte d to informally

resolve the issues r aised by the third amended complaint ’ s

perceived plea ding defic iencies by advising counsel for the T u rn er

parties that the new complaint was virtually identical to the

s econd amended complaint and “ f ails to allege specif

ic facts that

co nnect any of the i nstances of mi s conduct alleged in

paragraph 16 to my clients or to the alleged r esulting harm. In

e ac h i nstance, the [third amended complaint] mer ely alleges my

c lients ‘ caused ’ the stated problem without saying how they did

so. In many of those same ins tances, the [p l eading] fails to

separate the acts of my clients from the official acts of the

Pacifi ca b o ard ac ting as a whole. ” Neither the demu rr er nor

Aaron and Steinberg ’ s me et

- and

- confer communicatio ns with the

Turn er parties challenged the adequa c y of the ir preli tigation

demand.

In their opposition papers the Turner parties refer r ed to

their lawsuit as a properly pleaded “ members ’ derivative action ”

as defined by the Corporations Code when discussing the

sufficiency of their allegations of miscond u ct by Aaron and

Steinberg, but d id not again address the prelitigation dema nd

require me n t. In their reply memorandum, however, Aaron an d

Steinb erg argued the Turner parties had not made the nece ssary

5 The demurrer also challenge d what it describe d as the

first cause of action for breach of contract for failure to state

sufficient facts and a s uncertain

. The third amended compla in t

c ontaine d no caus e of action for b reach of contract.8

demand for action on the Pacifica board be f ore filing the lawsuit

or ad equately pleaded demand fu tility

. 6

At the hearing on the de m urrer on July 2 3, 2021, according

to the parties ’ agreed sta tement, the court raised the

Corporations Code ’ s requ iremen t “ to plead with particularity the

individual pl a intiffs ’ effor ts to con vince P acifica ’ s board to take

the ir desired action

, or why su ch efforts wou ld be futile. ” 7 In

response, “ [p]l a intiffs ’ counsel st ated that, on April 20, 2021

[during the hearing on Pacifica ’ s demurrer to the second

amended complai n t] , the court previousl y rul ed the not ice given

to Pac ifica Foundation in this action w as legally s ufficient. ” The

par ties agree that “ [n] othing further was said duri ng the hearing

regarding the notice issue. ”

The parti es then addressed whe t her the third amended

comp laint adequa te ly responded t o the court ’ s concerns, as

expr es sed at the p rior demurrer hearing

, regarding the

6 The Turner parties in their o pposition memo randum and

Aaron and Steinberg in their reply papers cite d Corporation s

Code section 7110, w hich applie s to nonprofit mutual benefit

c orporations, rather t h an Corpora ti ons Code section 5710,

applicable to nonprofit public benefit corporation s such as

Pacif ica

. The substance of the dem and/futility requirement in

the two provisions is the same.

7 At the hea ring on the demurrer and in its subsequent order

sus t aining the d emurrer without l eave to amend, the cour t cited

the prelitigation demand r equirement of Corpor ations Code

section 800, subdivi sion (b)(2), which a pplies to general

corporations , ra ther than C orporations Code section 5710,

subdivision (b), appl i cable to n on profit public ben efit

corporation s . The substance of the demand/futility require ment

in the se two provisions (and , as noted, in Corporations Code

section 7110) i s the same.9

complai nt ’ s lack of specificity as to th e individual defendants ’

misconduct. The cour t asked counsel for t h e Turner partie s

,

“ [ C ] an you name one instance outsi de of the business judgment

rule th at harm ed Pa cifica? 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? ” Ac c ording to the agreed statement,

“ Plaint iff

s ’ counsel b e gan to read t h e allegations of P ara graph 16

aloud into the record. He had completed reading two of the

sixteen subpa ragraphs of substantive allegations in

Paragraph 16, when the c ourt stated, ‘ I ’ ve h e ard enough. ’

Defendants ’ counsel reque sted the opportu nity to respo n d, bu t

the cou rt did no t recogni z e or respond to him. The court then

electronically disconnected and e n ded the hearing without ruling

on the demurrer or indicating w hat the ruling would be. ”

In an order filed July 3 0, 2021 the co urt sust ained the

dem u rrer withou t leave to a mend a nd dismissed the action

. The

court ruled the Tur ner parties had failed to satisfy the

Corporation Code ’ s prelit igat ion demand or de m and futility

requiremen t and sustained the demurrer on that ground. 8 In

additio n, the court r uled the pleading

, “ on its face, indicates that

th e individual de f

endants are protected from liability by the

business judgment r ule. ” E x plaining this aspect of its ruling, the

court stated, in pa rt, rejection of the advic e from the Californ ia

Attorney G e ner al ’ s charitable trust section to i mplement a

partic ular financial plan “ concern[ed] an operational business

8 T he court in the opening paragraph of its ruling stated,

“ [ t ] here w as a dem urrer to the Second A m e nded Complaint on

the grounds that a corporate demand w a s never mad e. Th e

demurrer on that ground was sustained with leave to amend.

This issue is r evisited by t his dem urrer .

. . . ”10

decisi on wi thin the board ’ s power. ” Further, the court w rote,

“ While there a re many alleged bad busine ss deci sions by the

Pa cifica board allege d in the complaint, only two individual

defend a n ts from the many board members are singled out

separately. T hey a re not alleged a s domi nate [ sic ] members of

the board, c ontro l the votes of other board members or ha d power

over the other me mbe rs of the boa r d in decisi on

- making. [¶]

. . .

The defendants ’ ac tions must be presumed to have been made in

good faith unless f

a cts to the co n trary are alleged. That is not

the pleaded s ituation here. ”

The Turner parties filed a timely no tice of appeal from the

orde r dismissing their action an d a second notice of appeal from

the j udgment entered after the court awarded costs to Aaron and

Steinberg

. We ordered the two ap p eals consolidated.

D ISC USSION

1. Standard of Review

A demurrer tests the legal suff i ciency of th e fa ct ual

allega t io ns in a complaint. We independently review the tri al

court’ s ruling on a d emurrer an d determine de novo wheth er the

com pla int alleges facts sufficient to st ate a caus e o f a ction or

dis c loses a c omplete defense. ( Mathews v. Becerra (201 9 )

8 C al.5th 756

, 7 68 ; T.H. v. Novartis Pharmaceuticals Corp . (201 7)

4 Cal.5th 145, 162.) We assume the truth of th e properly pl eaded

fact ual allegations, fac ts that reasonabl y c a n be i nfe rre d from

th ose express ly pleaded and mat ters of which judicial not i c e ha s

been tak e n. ( Evans v. City of Berkeley (2006) 38 Cal.4th 1, 2 0;

accord

, Centinela Fr e eman Emerg e ncy Medical Associates v

.

Health N

et of California, In c. (2016) 1 Cal.5 th 9 94

, 10 10 ;

Sc hifando v . C i ty of L os Angeles (2003) 31 Cal.4th 10 7 4, 1081.)11 A de mu rre r based on a n affirmative defense is properly

sustained w he n the face of the complai n t and matt e rs judicial ly

noticed cl early disc los e the defense or bar to recovery. ( S i lva v.

Langf ord (2022) 7 9 Cal.App.5th 710, 716; Favi la v. Katte n

Mu chi n Rose n m an LLP (2010) 188 Cal.App.4th 18 9, 224 .) If “ ‘t he

c omp laint ’ s alle gat i ons or ju dicially no t iceable facts reve al the

exi sten ce o f an affirm at iv e defense, the “plaintiff must ‘pl ead

around’ t he defense, by alleging specific fac t s that woul d a void

the a ppa r ent de fen se. A bsent such allegations, the comp la int is

subject to d emu r rer for f ailure to s t ate a cause of act ion. ”’”

( Espa rz a v . County o f Lo s Angeles (201 4) 224 Cal.App.4th 4 52,

459.)

W e af

f irm the j udgment if it is correct on any g rou nd stated

in t he demurr er, regar dless of the trial court’s s tate d reas ons

( Aubry v. T

ri

- C ity Hos

pi tal Dist . ( 1 992) 2 Cal.4th 962 , 967;

Las Lom as L an d Co., LL C v. City of Los A ngeles (2009)

177 Ca l.A pp. 4th 8 3 7

, 8 48), but liberally construe the p l eading

w ith a view to su b st a ntial jus tice b etween the parties. ( Code Civ.

Proc., § 452; Iva no ff v. B ank of A meri ca, N.A

. (2 017)

9 Cal.App.5th 719, 7 26; se e Sc hifando v

. Ci t y of Lo s Ange les

,

s upra , 31 Ca l.4 th at p. 10 8 1 .)

“‘Where t he complaint is defective, “[i]n the fu rt h erance of

j ustice great li berality should be exercised in permitting a

plai nt iff to amend his [o r h e r] c omp laint.”’” ( Aubry v. Tri

- City

Ho spital Dist., su

pr a

, 2 Cal.4th at p. 970.) A plai ntiff may

dem onstrate for the first time to the reviewing court ho w a

complai n t can be amende d to cur e the defect. ( C ode Civ. Proc.,

§ 472c, subd. (a) [“[w]he n any cou rt makes an ord e r susta ining a

demurrer without leave t o amend the q ues ti on as to whethe r or

not such court abuse d its discretion in making such a n orde r is12

open on a ppeal even thou gh no request to amend su ch pleading

was made”]; see Sierra Palms Ho meowner s A ssn. v. M etr o G old

L ine Foothill Extension Construct ion Authority (2 01 8)

19 C al.App.5 th 1127, 1132 [plaintiff may carry burden of proving

an am endmen t would cure a lega l defect f or the first time on

appe al]; Rubenstein v. The Gap, Inc. (2017) 1 4 Cal.App .5 t h 870,

88 1 [ “ ‘[ w]hil e such a showing can be made for the first ti me to th e

reviewing court [citati on], it must be made’”]

. )

2. Governing Law: T h e D emand R equire m ent and the

Bus in ess Judgment Rule

Corpo rations Code section 5710, subdivision (b), part of

C alifornia ’ s Nonprofit Corporation Law (Corp. Code, § 5000

et seq. ), provides with res pect to a non profit publi c benefit

corporation such as Pac ifica, “ No action m a y be instituted o r

maintained in the rig ht of any corporation by any member of such

corporat i on unless both of the following conditions exist: [¶]

( 1) The pl ain tiff alleges in t he compla int that plainti ff was a

member at the time of th e tran saction or an y part thereof o f

which plaintiff complai ns; and [¶] (2) The plaintiff alleges in th e

complai n t with particularity plaintiff ’ s efforts to secure from the

board su ch action as plai ntiff desires

, or the rea sons for not

making such effort, and al leges further that plaintiff ha s either

informed the c orporation or the board in writing of the u ltimate

f a cts of each cause of action against each defendant or delivered

t o t he corporation or the board a true copy of the complaint which

plaintiff pr oposes to file. ”

Fu n ctional l y the s am e as th e obligation to mak e a

prelitigation demand on the board of a genera l corporation or

allege facts sufficient to excuse the demand befo re filing a

derivati ve action spe cified in Co rporations Code section 800,13

“ ‘ [t ] he pu rpose of this requirement is to encourage intracorpora te

resolution of disputes and to protect th e manager i al freedom of

those to whom the responsibility of running the bus ine ss is

delegated. ’ ” ( Shields v . S ingleton (1993) 15 Cal.App. 4 th 1611,

1619 ; see A

pple Inc. v. S uperior Court (2 017) 18 Cal.App.5th 222

,

231

- 232 [ “

As a general rule, ‘ [m]anag emen t of a cor p oration,

including decisions concerning the prosecution of actio ns, is

vested in its board of dire ctors. Whe n the board refuses to

enforce co rporate claims, howe v er, the shareh ol der derivative

suit pro vides a limit ed exception to the rule that the corpor a tion

is the proper party plaintiff. In deference to the manager ial role

of directors and in order to curb po tential abuse, the shareholder

as serting a derivative claim must mak e a threshold showing tha t

he or she ma de a presuit demand on the bo ard to tak e the desired

action ’ ” ]

. )

“ Because the role of managing the busin ess of the

corporatio n is vested i n its board of directors, not its shareholde rs

[cit ation], a sha r eholder seekin g redress on behalf of th e

corporation for alleged mismanagement by corporate o fficers

‘ “ must make an earnest, not a simulated effort, with the

ma naging body of the corporation, to induce remedial action on

their part, an d this must be appar e nt to the cour t. ” ’ ” ( Apple Inc.

v. Sup erior Court

, supra

, 18 Cal.App.5th at p. 23 2 .) In th e

derivative complaint the plaintiff “ ‘ must plead “ with

particula rit y ” the attempts th at were made to secure b oard action

be fore bringing suit, or, al ternatively, t he factual bas is upon

which the plainti ff believes that a demand on the board was

unnecessar y , i.e., that a demand would have been futile. ’ ” ( Id. at

p. 231; ac cord, Bader v. And erson (2009) 179 Cal.App .4th 775,

782.) A derivative com plaint that fails to a d equately all eg e14

compliance with the d emand requirement is subject to demurrer.

( Shields v

. Singleton

, supra

, 1 5 Cal.App.4th at p. 1619 .)

The prelitigation de mand requirement “ ‘ is merely an

extension of the business judgment rule, wh ich dic tates that

ju d icial interfer en ce with corporate decis ion

- making should be

limited. ’ ” ( Shields v . Singleto n

, supra , 15 Cal.App.4th at p. 1619.)

“ ‘ The common law business jud gment has two comp onents

— one

wh ich immuniz es [corporate] directors from per sonal l iability if

t h ey act in acco rd ance with its requireme nts, and another which

insulates from court intervent i on those management decisions

w hich are made by directors in goo d f aith in what the d irectors

beli eve is the org anization ’ s best interest. ’ [ Citatio ns. ] A

hallm a rk of the busi ne ss judgment rule is tha t, when the rule ’ s

requirements are met, a court will not substitute its judgment for

that of the corporation ’ s board of directors. ” ( Lamd en v. La Joll a

Shores C lubdominium Homeowners Assn. (199 9) 21 Ca l.4th 249,

25 7 ; accord, Col ey v. Eskaton (2020) 51 C al.App.5th 943, 953 ;

Berg & Berg Enterprise s, LLC v. B o yle (2009) 178 Cal.App.4th

1020, 1045 .)

T he aspect of the commo n l aw rule relating to the personal

liability of directors of a non profit publ ic benef it corporatio n is

now defin ed by Corporations Code s ections 5231 and 5233. Those

provisions im munize dire c tor s for their corporate decisions that

are made “ in good faith , i n a manner that dir ector believe s to be

in the best interests of the corpor ation an d with such c a re,

including r easonable inquiry, as a n ordinarily prudent person in

a like posit ion w ould u s e under similar circumstances ” (Corp.

Code, § 5 231, sub ds. (a) & ( c)), except if an i nterested dir ect or

enga ges in a self

- dealing transaction with th e corporation

. (Corp.

Code

, § 5 233.) A director, however, cannot obtain the benefit of15

the b usiness judg m ent rule when acting under a material conflict

of interest. ( Col ey v. Eskaton

, supra

, 51 C al.App. 5th at p. 953;

Ev erest Investors 8 v. McNe il Partne rs (2003) 114 Cal.App.4t h

411, 430 ; Gaillard v. Natomas Co. ( 1989) 208 Cal.App.3d 12 50,

1263 .) “ Deference under the business j udgment rule is premised

on the notion that corporate directors a re best ab le to judge

whether a particular transaction will furt her the compa n y ’ s best

i nterests. [Citation.] But that pr em ise is undermined when

directors approve corp o rate transactions in which they have a

material personal interest unrelated to the bu siness ’ s o wn

interest. ” ( Coley

, at p. 953.)

3. The Tri al Court Improperly Su stained the Demurrer

Without Leave To Amend fo r Failure To Comply with the

Prelitigation Dema n d R e quirement

a. The trial court ruled on the prelitigation demand

issue without ad e quate noti ce to the Turner parties

The trial court ’ s ha ndling o f the question whether the

Turner parties satis fied the prel itigation demand requirem ent for

derivative law s uit is difficult to fathom. As discussed, the

demurrer to the second amend ed complai nt, filed by nominal

defend ant Pacifica, raised only th at issue

. Following b rief

comments from counsel for the Turner part ies focusing on

demand futility and Pacifica ’ s c ounsel ’ s st atement he did not

need to a dd anything to the argum e nt in the corporation ’ s reply

m emo randum, the court stated it “ agree[d] with the pla intiffs ’

side that paragraph 12 fully put the de fendants on notice. ” 9 The

court the n addressed d ef i ciencies it perceived in the second

amended complaint that were not discussed in the papers and

9 I t appears from the re p orter ’s transcript that the c ourt had

not provided a tentative ruling to the parties

.16

in vited the Turner parties to attempt to cur e those deficien cies

through a mendment

. The court thereafter sustai ned the

demurrer with lea ve to amend, but did n o t e xplain what it meant.

Was it sustaining Pac ifica ’ s demurrer, which properly raise d only

the ad equacy of the prelitigation demand? 10 Or t he pha ntom

demur rer never file d by Aaron and Steinberg that the cour t

apparently beli eved should have been fi led?

T h e parties obviously believed it was the latter. The

Turner parties ’ third amended co mplaint di d n ot modify the

allegations in paragraph 12, which the court had already s t ated

gave the re quisite notice. Neit her Aaron and Stei nberg ’ s me et

and

- confer lette r following the filing of the third amended

complaint nor the demurrer they subsequent ly filed c hal lenged

the adequacy of the Turner parties ’ prelitigation d emand. For it s

part, Pac ifica, while preservin g the issue by plea di ng affirmative

defenses

, answer e d the th ird amend ed complaint, rather than

again demurring

, even though the language r elating to th e

demand and demand futility remained the same. Nonethel ess, in

their reply memorandum Aaron and Steinberg at tac ked

paragraph 12 and argued the Turner parti es had fa iled to comply

with the prelitigation demand r equirement for a derivative act ion

filed by a member of a nonprofit corporation. 11

10 Pacific a could not as sert in its demurrer the issues raised

sua sponte by the court. (See Apple Inc. v. Superio r Court

, supra

, 1 8 Cal.App.5th at p. 239 [ “while t he c o rporatio n cannot ‘ chall enge

t he merits of a derivative claim filed on its behalf and from which

it stand s to b enefit, ’ it ‘ may asse rt defenses contesting the

plaintiff ’ s right or decision to bring suit , such as asserting the

shareholder plaintiff

’ s l ack of standin g ’ ”].)

11 In the ir res pon dents ’ brief Aaron and Steinberg state

,

“ Appellants raised the pre

- liti gation n otification requi rements of17 At the hearing on the demurrer to the th ird amended

compla int, when the court raised the issue, counsel f or the

Turner parties explained the court had previously ruled the

notice given Pacifi c a was leg all y sufficient. As the parties recite

in their agreed statement, “ Not h ing further wa s said during t he

hearing rega rding the notice issue. ” Yet in its ruling on the

demurrer, the court first said it had sustained the demur rer to

th e se cond amended complaint on that ground

— when it certainly

appears it did not

— and then said t he issue was b ein g r evisited by

the current demurrer

— even though th e issue was not included in

the demurrer and was only raised for the first time in the reply

me mora ndum. Thereafter, n otwithstanding its a ss essment on

April 20, 2021 that Pacifica ’ s ch alle nge to the ade quacy of the

allegations of demand and demand futilit y in paragraph 12 w a s

“ easily disposed of, ” on July 30, 2021, addressing the identical

allegati ons, th e court ruled those allegations were in sufficient

and denied the Turner parties any opp ortunity to am end th e

plea ding

. The Turner parties ’ object ion to t he fairness of this

process is well

- taken.

b. The issue of the adequacy of the prelit igation d eman d

has not be en forfeited

Notwiths tanding o ur serious concern about Aaron and

Steinberg ’ s f

ailure to prop erly identify the adequacy of the

Corp. Code § 7710 in their opposition to the demur rer [AA 349 ],

thereby requir ing defendants to address it on repl y

. ” While the

Turner parties in their opposition to the demurrer did o n the page

cited refer, in general, to me mber der ivative act ion s under

Corporations Code section 7710, nowh ere on th at pa ge

— or

any wh ere else in the opposition papers

— did they discuss th e

prelitig ation demand r equire ment

.18

prelitigation deman d in their demurrer to the third amend ed

complaint and th e trial court ’ s reve rsal of its determina tion th at

t h e requirement had been satisfied w ithout adequate notice to

th e Turner p arties, A aron and Ste inberg have not forfeited the

issu e

, as the Turner pa rties contend. Adequately alleging a

prelitigati on demand o r that such a demand would be futile is a

required element of a derivative plaintiff ’ s standing to file suit on

beha lf of the cor po rati on. ( Ap ple Inc. v. Superior Court

, supra

,

18 Cal.App.5th at p. 2 48 ; Bader v. Anderson

, supra

,

1 79 Cal.App.4th at p

. 793 .) “ [C] ontentions based on a lack of

st anding involve jurisdictional challenges and may be raised at

any time in the p roce edings. ” ( Zo lly v. C ity of Oakland (2022)

13 Cal.5th 7 80, 789 [internal q uotation marks omitted] ; accor d,

Common Cause v. Board of Super visors (1989) 49 Cal.3d 432,

438. ) According ly

, a lack of standing may be claimed for the first

time on appeal

. ( Wa nk e, Indu stri al

, Commer cial, Residential,

Inc. v. AV Buil der Corp (2020) 45 Cal.App.5th 466, 474 ;

Washington Mutual Bank v. B lechman (2007) 157 Cal.App.4th

662, 669 .) The issue has been fully briefed and is now properly

before us.

c. The Turner parties ’ allegat ions o f prelit igation

demand and demand futility are insufficient; leave to

amend must be granted

To reiterate, Cor porations Code section 5710,

subdivision (b)(2)

, requires a derivative plaintiff to allege the

plai ntiff ’ s efforts to secure from t he board the ac tion the plaintiff

desires or the reasons for not making such effort. 12 The action

12 Corporations Cod e section 5710, subdivision (b)(1), also

re quires the pla intiff t o allege he o r she was a member of the

corporation at the time of the transact ion s complained o f.19

the Turner par t ies seek in their derivative complaint is recovery

of money damages from Aaron and Steinberg for corporate w aste

and breaches of fiduciary duty

. Nowher e in t he third amended

complaint is there an all egation that the Tu rner parties asked

the Pacifica board to attempt to obtain that relief.

R ecommendations by the Attorney General ’ s charitable trust

section that the board resolve various operation al issues

,

di sc ussions by the Tu rner parties with Aaron, Steinberg and the

b oard concerning amendments to the corporation ’ s b ylaws

, and

efforts to mediate the ongoing dispu te s do not con stitute a

demand the b oard take action against Aaron and Steinberg

.

Ho wever, at t he hearing on the demurrer to the

second ame nded complaint, cou nsel for the Turner parties

advised the court he had provided a copy of th at iteration of the

co mplaint to the corpor ation ’ s counsel b efor e it was filed.

De pending on the circumst an ces und er w hi ch that occurred and

any discussion that m ay have accompanied it, that action may

satisfy the requirements of Corporati ons Code section 5710,

subdivision (b) (2). The Turner parties are entitled to l eave to

amend to include this information in suppor t of t heir s ta nding as

derivative plaintiffs

, as well as to supplem ent paragraph 12 with

any other materia l responsi ve to this issue

. ( Recall, t he Turner

parties ha ve not previously had a reason to expand their

prelitigation demand alleg atio ns be ca use the tri al court s eemed

to overrule the only prior d emurrer addressed t o that issue.)

As for demand futility, the Turne r parties point to their

allegations that Aaron

, Steinberg and the entire Pacifica boar d

Paragra ph 2 of the third amended complaint does just that,

a l leg ing that each of the Turner p arties was a member of Pacifica

“ [a]t all times mentione d herein

. ”20

repeatedly disregarded warnings about fina nc ial and ope ra tional

m isconduct raised by t he Attorney G eneral ’ s office and corporate

counsel and for years failed to comply with applicable laws and

regulations is sued by the FCC, IRS and state regulators

. Necessarily, they argue, any req uest for refo rm f rom pla inti ff

s

would have been equally unavailing.

Whil e perhaps a rea sona ble worldview, this an a l ysis does

not comply with the requirements for pleading demand futility as

articulated in case law. Whe n

, as is generally the case here, the

derivative c laim stems from c onduct t hat did not involve a

decision of the board, plaintif fs are “ ‘ required to allege facts “ with

particula rity ” [citation] sufficient to “ create a reason able doubt

that, as of the time the complaint is filed, the board of directors

cou ld h ave pro perl y exercise d its independent and disintereste d

busine ss judgment in responding to a demand. ” ’

. . . Hence, ‘ the

c ourt must be apprised of facts specific to each director from

which it can conclude that that particular director could or could

not be exp ected t o fairl y evaluate the claims of the shareh older

plaintiff. ’ ” (

Apple Inc. v. Superior Court

, supra

, 18 Cal.App .5th at

p. 253; accord, Shields v . Singleton

, s upra , 15 Cal.App.4th at

p. 162 2 .)

The third amended complaint cont ains no factua l

al legati ons o f any sor t regarding nondefendant director s of

Pacifica other t han the board member whose spouse wa s invo lved

wi th the PSLL loan, let alone specific facts p e r m itting the

conc lu s ion a majority of the director s could not fairly eva luate

claims tha t Aaro n and S teinber g had breached fi duciary duties

,

ca using significant f

inancial injury to the corporation. In sum,

t he trial court correctly ruled, as pleaded, the al l egation s of

demand futility w ere insufficient

. Again, however, g iven the lack21

of not ice to the Tu rner pa rties

, if good faith amendments are

possible that w oul d sat isfy the requirements for establishing

deman d f

utility, the y are entitled to make a final a ttempt to

do so.

4. The Trial Court I m properly Sustained the Demurrer on

the Grou nd the Di recto rs W e re P rotected from Liability

by the Busi ness Judgment Rule

“ ‘ Notwithstanding the deference to a director ’ s b usiness

judgment, the [business judgment] rule does not immunize a

director from liability in the case of his or her ab dication of

co rporat e res po nsibili ties

. . . . ’ [Ci tation.]

. . . ‘ “ When courts say

th at they will not interfere in matte rs of business judgment, it is

presupposed that judgmen t

— rea sonable diligence

— has in fact

been exercised. A director cannot close h is eyes to wha t is g oing

on about him in the conduct of the business of the corporation

and have it said that he is exercisin g business j udgment. ” ’

[Ci t ations.] [¶] Pu t differ ently, whether a director exercised

reasonable diligence is one of the ‘ factua l prerequis it e s ’ to

appli ca tion of the business judgment rule. ” ( P alm Springs

Villas II Homeowners Assn., Inc. v. Part h (2016) 248 Cal .App.4th

268, 279

- 280 ; see Affan v. Porto fino Cov e Homeowners Assn.

(2010) 189 Cal.App.4th 930, 941

, 943 [finding homeo wners

assoc iatio n “fai led to establi sh the factual prerequi sites for

applying the rule of judicial deference” at trial, where “there was

no evidence the board engaged in ‘reasona ble inve stigation’

[citation] before choosing to continue its ‘piecemeal’ appr oach to

sew age b ackups ”] ; Bur t v. Ir vine Co. (1965) 237 Cal.App.2d 82 8,

852 [ “ ‘The rule ex empting officers of corporations from liability

for mere mistakes and errors of judgment does no t apply where

the loss is the result of failure to exercise proper car e, skill an d

dil igen ce

. “ Dir ectors are not merely bound to be honest ; they22

must also be d iligent and careful in performing the duties th ey

have undertaken. They cannot excuse i mprudenc e on the ground

of their ignorance or inexperience, or the honesty of their

inten tions ; and, if the y commi t an error of judgment through

me re recklessness, or w ant of ordinary prudence and skill, the

corpora tion may hold them responsible for the co nsequenc es ” ’ ”].)

Because application of the business judgment rule “ ‘ raises

va rious issue s of fact, ’ in clud ing whe ther ‘ a director acted as an

ordi narily prudent person under similar circumstances ’ and

‘ made a reaso nable inquiry as indicated by the circums tances ’ ”

( Palm Springs Villas II Homeowners Assn., Inc. v. Parth

, supra

,

248 C al.App.4th at p. 280), “ ‘ [s]u ch ques tions generally should be

left to a trier of fact. ’ ” ( Ibid .; accord, Gaillard v. Natomas Co.

,

supra

, 208 Cal.App.3d at p. 1267.) However, a s the tri al court

ruled, the business judgment rule creates a rebuttable

p resump tion a dire ctor ’ s dec isi on s w ere ma de in good faith and

upon the exe rcise of informed jud gment resulting from

reasonable inquiry as to f acts material to determining what

action i s in th e best interests of the corpor ation. ( Lee v.

Interinsurance Exchange ( 1996) 50 Ca l.Ap p.4th 694

, 71 1, 715. )

The presumption attaches only in the absence of ba d faith or a

conflict of interest and may be reb utted by showing the director

acted withou t reaso nable inquiry when such inquiry would

otherwise be required. ( Everest Investors 8 v. McNeil Pa rtne rs

,

sup ra

, 114 Cal.App.4th at p. 431 .)

T he third amended comp laint generally alleg ed Aaron and

Steinberg kne w their con duct was unlawful and failed to u se

re asonable business judgment when undertaking var ious actions

causing harm to Pacifica

, includ ing pre venting the timely

c ompletion of annual audits necessary to q ualify f or federal23

grant s and interfering with professional staff ’ s ability to comply

with FCC a nd IRS requirements, ri sking loss of Pacifica ’ s tax

exempt status

. In a ddition, the Turn er parties specif ically

alleged Aaron i mprop erly acted as a director in approving the

$500, 000 loan from P SLL to Pacifica in March 2018

notw ithstanding a disq u alifying conflict of int erest

— a conflict

highlighted in a warning l etter fro m Pa cifica ’ s corporate c ounsel

attache d as a n exhibit to the plea ding. They further allege d that

Aaron and Steinberg in 2021 refused t o all ow the national board

of directors to consi der a proposal to purchase the broadcast

li cense of New Y o rk City station WBAI

- FM

, which would h a ve

ameliorated the c orporation ’ s dire financial situation

, not beca use

they believed in good faith the sale was not in the corporation ’ s

best interests but based on their personal i deological beliefs

. Also

alleged was Aaron and S teinberg ’ s unlawful u se of cor porate

fun ds to pay their attorney fee s in defense of the Turner parties ’

lawsuit.

Although the general allegations that Aaro n and Steinberg

act ed without reas onable care to protect the interests of the

corporation , with out more, might be insuff i cient to rebut the

pr esumption of good faith, at the pleading sta ge th e Turner

parties ’ additional

, specific allegations of bad faith i n connection

with t he PSLL loa n, t he proposed sale of the WBAI

- FM license

and use of corporate funds to pay their own att orney fees

ade quately pleaded conduct outside the protection of t he bu siness

judgment rule and were sufficient to survive demurrer

. ( See

Everest Investor s 8 v. McNe il P artners

, supra

, 114 Cal.App.4th at

p. 43 0 [ “ [t]he business ju dgment rule does not shiel d actio ns

take n without reason able inquiry, with improper motives, or as a

result of a conflict of interest ”]; Lee v. Interinsurance Exchange

,24

supra , 50 Cal .App.4t h at p . 71 5 [ presumption created by the

business judgme nt rule can be rebutted by affirmative allegations

o f facts that , if prove d

, “ would establish fraud, bad fai th,

overreaching or an unreasonable failure to investigate material

facts ”]. ) 13 The tr ial cou rt err ed in sustaining the demurrer on

this groun d

.

DIS POSITION

The order of dismissal is re v erse d and the cause rem anded

w ith instruction to the tri al court to va c ate its order sustaining

Aaron a nd Steinberg ’ s d emurrer without leave to amend and to

enter a new order sust ai ning the demurrer with leave to amend

.

Th e Turne r parties are to recover t heir costs on appeal

.

PERLUSS, P. J.

We concur:

SEGAL , J.

FEUER , J.

13 The se allegations of misconduct w ere also suff iciently

spec ific to def

e at Aaron and Steinberg ’ s argument s , not

addressed by the trial court when sustaining the demurrer, that

the pleading was uncertain , failed to state facts su ff icient to

co nstit u te a ca use of action and did not identify any wrongful

conduct that occurred wi t hin three yea rs of the filing of the

complaint (on D e cem ber 8, 2020).