Court Opinion

ID: 4567802
Source: CourtListenerOpinion
Date Created: 2020-09-22 20:02:05.851613+00
Date Added: 2024-06-11T13:25:08.318220
License: Public Domain

Filed 9/22/20
                CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                SECOND APPELLATE DISTRICT

                        DIVISION SEVEN

BEHNAM HESHEJIN et al.,             B297037

       Plaintiffs and Appellants,   (Los Angeles County
                                    Super. Ct. No. BC693226)
       v.

RAMI ROSTAMI et al.,

     Defendants and
Respondents.

      APPEAL from a judgment of the Superior Court of Los
Angeles County, Patricia G. Nieto, Judge. Affirmed.
      Gutierrez, Preciado & House and Calvin House for
Plaintiffs and Appellants.
      Novian & Novian, Farhad Novian and Andrew B. Goodman
for Defendants and Respondents.

                    __________________________
       Behnam Heshejin, Eric Anvari, the Hestfam Family Trust,
and trustee David A. Enzmann (plaintiffs) appeal from an order
of dismissal entered as to American Investment Group, LLC
(AIG), Avalon Cold Storage, LLC (Avalon), and AIG’s director and
managing member Rami Rostami (collectively, AIG defendants)
after the trial court sustained without leave to amend the AIG
defendants’ demurrer to plaintiffs’ second amended complaint.
The second amended complaint asserted derivative causes of
action on behalf of American Logistics International, LLC (ALI)
against AIG for conspiracy to commit fraud, fraud by
concealment, breach of fiduciary duty, declaratory relief,
conversion, and accounting.
       The trial court held plaintiffs lacked standing to assert
double derivative claims1 on behalf of ALI based on their
minority ownership interest in ALI’s parent company and sole
owner, Mazkat Ventures, LP (Mazkat); plaintiffs failed to assert
the claims on behalf of ALI in a compulsory cross-complaint
(Code Civ. Proc., § 426.30, subd. (a))2 in American Investment
Group, LLC et al. v. Alireza Mahdavi et al. (Super. Ct. L.A.

1      “A ‘double derivative’ suit has been defined as an action
brought by a shareholder of a holding or parent company, on
behalf of that corporation, to enforce a cause of action in favor of
the subsidiary company. The shareholder is, in effect,
maintaining a derivative action on behalf of the subsidiary, since
the holding or parent company has derivative rights to the cause
of action possessed by the subsidiary.” (Gaillard v. Natomas Co.
(1985) 173 Cal.App.3d 410, 419, fn. 7, disapproved on another
ground by Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1119, fn.
16.)
2    All further undesignated statutory references are to the
Code of Civil Procedure.

                                 2
County, 2020, No. BC662347) (AIG v. Mahdavi); and plaintiffs
failed to state facts sufficient to constitute causes of action
against the AIG defendants. Because ALI (or plaintiffs on behalf
of ALI) failed to file a compulsory cross-complaint in the AIG v.
Mahdavi action, we affirm.3

      FACTUAL AND PROCEDURAL BACKGROUND

A.     Plaintiffs’ Second Amended Complaint
       Plaintiffs initiated this action against the AIG defendants
and others on February 7, 2018. After the trial court sustained
the AIG defendants’ demurrer to the first amended complaint
with leave to amend, plaintiffs filed the operative second
amended complaint on November 1, 2018. The second amended
complaint alleged 12 causes of action, six of which were asserted
as derivative causes of action on behalf of ALI against AIG for
conspiracy to commit fraud (first cause of action); fraud by
concealment (second cause of action); breach of fiduciary duty
(third cause of action); declaratory relief (fifth cause of action);
conversion (sixth cause of action), and accounting (seventh cause
of action).4
       The second amended complaint alleged plaintiffs are
limited partners in Mazkat, with a combined ownership interest
of about 19.5 percent. Mazkat in turn wholly owns ALI.

3     We therefore do not reach whether plaintiffs have standing
to assert double derivative claims on behalf of ALI by virtue of
their minority ownership in Mazkat.
4     Plaintiffs also asserted their first, second, fifth, sixth, and
seventh derivative causes of action against Rostami. Plaintiffs
did not assert any causes of action against Avalon.

                                  3
American Logistics Advisors, LLC (ALA), is a general partner
with a controlling interest in Mazkat. Defendants Ramin
Bagherzadeh and Alireza Mahdavi manage and control ALA.5
The second amended complaint designated ALI and Mazkat as
“nominal defendant[s] for jurisdictional purposes, in a derivative
capacity” under Corporations Code section 17709.02.

B.     The Joint Venture6
       In February 2009 ALI received approval to operate as a
regional center within the immigrant investor pilot program,
known as EB-5. Between February 2009 and November 2018,
ALI received about $25 million in investments from individual
immigrants ($500,000 each from 50 EB-5 investors) seeking to
obtain residence visas for the United States under the program.
       Between 2009 and 2013, Bagherzadeh formed 10 or more
limited partnerships or limited liability companies, including
American Logistics International Warehousing & Distribution,
LLC (ALIWD), in July 2011; American Logistics International
Cold Storage, LLC (which later became Avalon), American
Logistics International Cold Storage, LP (ALI Cold Storage), and
American Logistics International Fulfillment, LLC, in May 2013;
and American Logistics International Fulfillment, LP (ALI
Fulfillment), in July 2013. ALI is the sole owner and general
partner of ALI Cold Storage. Since its creation, Bagherzadeh has
managed ALIWD. From May 2013 until February 2015

5    The second amended complaint also named as defendants
Bagherzadeh, Mahdavi, American Logistics International
Warehousing & Distribution, LLC, and others.
6    The facts concerning the joint venture are taken from the
second amended complaint.

                                4
Bagherzadeh was also chief executive officer of Avalon’s
predecessor company, and he was in charge of operations,
marketing, and accounting.
       In November 2012 Rostami and Bagherzadeh started
discussing a joint venture between ALI and AIG for the creation
of a cold storage and fulfillment business (joint venture). The
facility would be in the name of ALI Cold Storage with a
fulfillment facility under the name of ALI Fulfillment. In May
2013 ALI began to sell partnership interests in ALI Cold Storage
and ALI Fulfillment to EB-5 investors for the creation of a cold
storage business.
       On July 30, 2013 Rostami and Bagherzadeh signed a joint
venture agreement on behalf of AIG and ALI, respectively.7
Under the agreement, AIG was to invest $6 million in the joint
venture. If ALI Cold Storage and ALI Fulfillment failed to
generate enough capital from EB-5 investors, then $4.5 million of
AIG’s investment would be considered a loan to ALI Cold Storage
and ALI Fulfillment. In October 2013 Rostami created an
operating agreement for Avalon, designating ALI Cold Storage as
Avalon’s sole owner.
       Between July 2013 and January 2015, Rostami caused AIG
to invest more than $6 million in the joint venture. In January
2015 Rostami discovered federal immigration authorities had
denied the visa applications of many of the EB-5 investors in ALI
and the related companies, jeopardizing the joint venture’s
success. In response, Rostami (for AIG) and Bagherzadeh (for
ALIWD) secretly executed three documents: a unit purchase

7    Plaintiffs attached the joint venture agreement and the
amended agreement as exhibits to the second amended
complaint.

                                5
agreement that restructured the joint venture and converted
AIG’s investment into “equity purchase of shares into [Avalon],”
giving AIG a 75 percent ownership interest in Avalon; a second
unit purchase agreement under which ALIWD purchased the
remaining 25 percent membership interest in Avalon for $2.5
million; and a new operating agreement for Avalon designating
AIG and ALIWD as Avalon’s only members, in place of ALI Cold
Storage.
       The second amended complaint alleged these actions were
taken by Rostami, Bagherzadeh, AIG, and ALIWD as part of a
conspiracy to divest ALI of its partnership interest and rights in
the joint venture, and they concealed those efforts from the
owners and managers of ALI and Mazkat. Further, Bagherzadeh
acted in the interest of AIG, not ALA, Mazkat, or ALI.

C.    AIG v. Mahdavi8
      On May 22, 2017 AIG, Avalon, and American Logistics
International Fulfillment, LLC, filed the AIG v. Mahdavi action
against Mahdavi, ALI, ALIWD, and others, asserting claims in
connection with the joint venture. AIG asserted a cause of action
against ALI for breach of contract, and Avalon asserted causes of
action against Mahdavi, ALI, and the other defendants for unjust
enrichment, allocation and contribution, equitable indemnity,
and declaratory relief. The complaint alleged Mahdavi induced
AIG to invest in the joint venture, ALI breached the terms of the
July 2013 joint venture agreement between AIG and ALI and
Avalon’s October 2013 operating agreement, and Mahdavi used

8     The facts concerning the AIG v. Mahdavi action are taken
from the second amended complaint and the judicially noticed
complaint and ALI’s answer filed in the AIG v. Mahdavi action.

                                6
his position as de facto manager of Avalon to transfer Avalon’s
assets to himself, ALI, ALIWD, and others.
        ALI and Mahdavi, through their attorney, Martin Jacobs,
filed an answer on August 1, 2017. Mahdavi did not inform
Mazkat or its partners that ALI had been sued. Plaintiffs first
learned of the AIG v. Mahdavi action on January 22, 2018 from
Rostami’s deposition testimony in another lawsuit. On
January 23 Jacobs filed a motion to be relieved as counsel. The
second amended complaint alleged that even if ALI had informed
plaintiffs of the AIG v. Mahdavi action, because of the alleged
misconduct of its managers Bagherzadeh and Mahdavi, plaintiffs
could not have convinced Bagherzadeh and Mahdavi to direct
ALI to file a cross-complaint and any demand would have been
futile.

D.      Defendants’ Demurrer
        The AIG defendants demurred to the first, second, third,
fifth, sixth, and seventh causes of action alleged in the second
amended complaint, arguing plaintiffs lacked standing to bring
derivative claims; plaintiffs’ derivative claims were barred by
ALI’s failure to file a cross-complaint in the AIG v. Mahdavi
action; and the second amended complaint failed to state facts
sufficient to constitute the challenged causes of action. The AIG
defendants requested judicial notice of the May 22, 2017
complaint filed in AIG v. Mahdavi and ALI’s August 1, 2017
answer.
        After a hearing, on December 21, 2018 the trial court
sustained the AIG defendants’ demurrer without leave to amend.
The court also granted the AIG defendants’ request for judicial
notice of the complaint and ALI’s answer filed in AIG v. Mahdavi

                                7
action. In its written ruling, the court found plaintiffs lacked
standing to assert double derivative claims on behalf of ALI as
minority partners of Mazkat; plaintiffs failed adequately to plead
their efforts to secure action from ALI’s managers or the reasons
for not making that effort; plaintiffs’ derivative claims on behalf
of ALI were barred by the compulsory cross-complaint rule
because ALI filed an answer in the AIG v. Mahdavi action; and
plaintiffs’ derivative causes of action were not adequately
pleaded.
      Plaintiffs timely appealed.

                          DISCUSSION

A.     Plaintiffs’ Appeal Is Timely
       On April 15, 2019 plaintiffs filed a notice of appeal
purporting to appeal from the trial court’s December 21, 2018
“judgment of dismissal” sustaining the demurrer. On June 6,
2019 the AIG defendants filed a motion to dismiss the appeal as
untimely, arguing plaintiffs filed their appeal more than 60 days
after the AIG defendants served plaintiffs with notice of the trial
court’s December 21, 2018 order sustaining the demurrer. (See
Cal. Rules of Court, rule 8.104(a)(1)(A), (B) [where a party serves
the notice of entry of judgment, the notice of appeal must be filed
on or before “60 days after the party filing the notice of appeal
serves or is served by a party with a document entitled ‘Notice of
Entry’ of judgment or a filed-endorsed copy of the judgment,
accompanied by proof of service,” unless the superior court clerk
had earlier served a notice of entry of judgment].) In opposition,
plaintiffs argued they electronically filed notices of appeal on

                                 8
February 19, 2019 and March 19, 2019, but both were rejected by
the clerk of the superior court due to missing information.
       On July 17, 2019 this court denied the AIG defendants’
motion to dismiss this appeal as untimely but stated “the appeal
will be dismissed as taken from a non-appealable order unless
[plaintiffs] provide a signed order of dismissal on or before
August 6, 2019.” On July 22, 2019 plaintiffs filed an order of
dismissal entered that day, dismissing plaintiffs’ action as to the
AIG defendants with prejudice and ordering that plaintiffs “take
nothing as against those defendants.”
       In their respondents’ brief, the AIG defendants argue for
dismissal of the appeal, contending the appeal is taken from a
nonappealable order because the underlying action is ongoing as
to the remaining defendants. Alternatively, the AIG defendants
renew their assertion plaintiffs’ appeal is untimely because it was
filed more than 60 days after the AIG defendants served
plaintiffs with a file-stamped order sustaining the demurrer
without leave to amend. Neither contention has merit.
       As to the AIG defendants’ first contention, “it has long been
the settled rule that in a case involving multiple parties, a
judgment is final and appealable when it leaves no issues to be
determined as to one party.” (Dakota Payphone, LLC v. Alcaraz
(2011) 192 Cal.App.4th 493, 506; accord, Justus v. Atchison
(1977) 19 Cal.3d 564, 568 [“the rule requiring dismissal [of an
interlocutory appeal] does not apply when the case involves
multiple parties and a judgment is entered which leaves no issue
to be determined as to one party”], disapproved on another
ground by Ochoa v. Superior Court (1985) 39 Cal.3d 159, 171;
Millsap v. Federal Express Corp. (1991) 227 Cal.App.3d 425, 430.)
Thus, the rule that an appeal may not be taken from

                                 9
interlocutory judgment does not apply in this case where the
July 22, 2019 signed order of dismissal left no issue to be
determined as to the AIG defendants.
      As to the AIG defendants’ second contention, plaintiffs’
April 15, 2019 notice of appeal purported to appeal from the
minute order sustaining the demurrer without leave to amend,
which was not an appealable order. But we treat the notice of
appeal as a premature but valid appeal from the subsequent
order of dismissal, “as filed immediately after entry of
judgment.”9 (Cal. Rules of Court, rule 8.104(d)(2); see Maxwell v.
Dolezal (2014) 231 Cal.App.4th 93, 96, fn. 1; In re Social Services
Payment Cases (2008) 166 Cal.App.4th 1249, 1262, fn. 4.)

B.     Standard of Review
       “In reviewing an order sustaining a demurrer, we examine
the operative complaint de novo to determine whether it alleges
facts sufficient to state a cause of action under any legal theory.
[Citation.] Where the demurrer was sustained without leave to
amend, we consider whether the plaintiff could cure the defect by
an amendment.” (T.H. v. Novartis Pharmaceuticals Corp. (2017)
4 Cal.5th 145, 162; accord, Centinela Freeman Emergency
Medical Associates v. Health Net of California, Inc. (2016)
1 Cal.5th 994, 1010.) When evaluating the complaint, “we
assume the truth of the allegations.” (Lee v. Hanley (2015)
61 Cal.4th 1225, 1230; accord, McCall v. PacifiCare of Cal., Inc.
(2001) 25 Cal.4th 412, 415.) “A judgment of dismissal after a

9     “The order of dismissal, signed by the trial court and
entered by the court clerk, constitutes a judgment under . . .
section 581d.” (Moorer v. Noble L.A. Events, Inc. (2019)
32 Cal.App.5th 736, 741, fn. 3.)

                                10
demurrer has been sustained without leave to amend will be
affirmed if proper on any grounds stated in the demurrer,
whether or not the court acted on that ground.” (Carman v.
Alvord (1982) 31 Cal.3d 318, 324; accord, Summers v. Colette
(2019) 34 Cal.App.5th 361, 367.)
      A trial court abuses its discretion by sustaining a demurrer
without leave to amend where “‘there is a reasonable possibility
that the defect can be cured by amendment.’” (Loeffler v. Target
Corp. (2014) 58 Cal.4th 1081, 1100; accord, City of Dinuba v.
County of Tulare (2007) 41 Cal.4th 859, 865.) “‘The plaintiff has
the burden of proving that [an] amendment would cure the legal
defect, and may [even] meet this burden [for the first time] on
appeal.’” (Sierra Palms Homeowners Assn. v. Metro Gold Line
Foothill Extension Construction Authority (2018) 19 Cal.App.5th
1127, 1132; accord, Aubry v. Tri-City Hospital Dist. (1992)
2 Cal.4th 962, 971.)
      “‘[A] demurrer based on an affirmative defense will be
sustained only where the face of the complaint discloses that the
action is necessarily barred by the defense.’” (Stella v. Asset
Management Consultants, Inc. (2017) 8 Cal.App.5th 181, 191;
accord, Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th
1185, 1191 [application on demurrer of affirmative defense of
statute of limitations based on facts alleged in a complaint is a
legal question subject to de novo review]; Favila v. Katten Muchin
Rosenman LLP (2010) 188 Cal.App.4th 189, 224 [“‘It must appear
clearly and affirmatively that, upon the face of the complaint
[and matters of which the court may properly take judicial
notice], the right of action is necessarily barred.’”].)

                               11
C.     Plaintiffs’ Derivative Claims Are Barred by the Compulsory
       Cross-complaint Rule
       Section 426.30, subdivision (a), provides “if a party against
whom a complaint has been filed and served fails to allege in a
cross-complaint any related cause of action which (at the time of
serving his answer to the complaint) he has against the plaintiff,
such party may not thereafter in any other action assert against
the plaintiff the related cause of action not pleaded.” “Section
426.30 is an affirmative defense that completely disposes of any
cause of action to which it applies.” (Chao Fu, Inc. v. Chen (2012)
206 Cal.App.4th 48, 56; accord, Hulsey v. Koehler (1990)
218 Cal.App.3d 1150, 1153 [“section 426.30 . . . must be specially
pleaded as an affirmative defense”].)
       “The compulsory cross-complaint statute is designed to
prevent ‘piecemeal litigation.’” (Wittenberg v. Bornstein (2020)
51 Cal.App.5th 556, 564; accord, Align Technology, Inc. v. Tran
(2009) 179 Cal.App.4th 949, 959 (Align Technology).) As the
Wittenberg court explained, “‘The law abhors a multiplicity of
actions, and the obvious intent of the Legislature in enacting the
counterclaim statutes [citations] was to provide for the
settlement, in a single action, of all conflicting claims between
the parties arising out of the same transaction. [Citation.] Thus,
a party cannot by negligence or design withhold issues and
litigate them in successive actions; he may not split his demands
or defenses; he may not submit his case in piecemeal fashion.’”
(Wittenberg, at p. 564; accord, Align Technology, at p. 959.) The
statute is to be liberally construed to advance its purpose. (Chao
Fu, Inc. v. Chen, supra, 206 Cal.App.4th at p. 56; accord, Align
Technology, at p. 959.)

                                12
      “The related cause of action must be one that was in
existence at the time of service of the answer (§ 426.30, subd. (a));
otherwise, the failure to assert it in prior litigation is not a bar
under the statute.” (Align Technology, supra, 179 Cal.App.4th at
p. 960.) The phrase “related cause of action” in section 426.30 is
defined as “a cause of action which arises out of the same
transaction, occurrence, or series of transactions or occurrences
as the cause of action which the plaintiff alleges in his
complaint.” (§ 426.10, subd. (c).) “Because of the liberal
construction given to the statute to accomplish its purpose of
avoiding a multiplicity of actions, ‘transaction’ is construed
broadly; it is ‘not confined to a single, isolated act or
occurrence . . . but may embrace a series of acts or occurrences
logically interrelated [citations].’” (Align Technology, at p. 960
[employer’s claims against former employee for misappropriation
of patents were barred by compulsory cross-complaint rule
because employer failed to cross-claim against employee in
response to employee’s prior cross-complaint for wrongful
termination and breach of contract because all claims arose out of
employment relationship]; accord, ZF Micro Devices, Inc. v. TAT
Capital Partners, Ltd. (2016) 5 Cal.App.5th 69, 83-84 [construing
relatedness requirement of § 426.30, subd. (a), “broadly to
effectuate its purpose to avoid a multiplicity of actions,” but
concluding claims against successor company for breach of
contract were not logically related to claims against predecessor
company for breaches of fiduciary duty in earlier time period]; see
Saunders v. New Capital for Small Businesses, Inc. (1964)
231 Cal.App.2d 324, 338 [counterclaim was compulsory because it
arose out of same fiduciary relationship between the parties even
though they involved different transactions].) “In the breach of

                                 13
contract context, the rule means any claims the defendant has
against the plaintiff based on the same contract generally must
be asserted in a cross-complaint, even if the claims are unrelated
to the specific breach or breaches that underlie the plaintiff's
complaint.” (Frog Creek Partners, LLC v. Vance Brown, Inc.
(2012) 206 Cal.App.4th 515, 538.)
      Plaintiffs do not dispute the derivative claims10 they assert
on behalf of ALI existed at the time ALI served and filed its
answer in AIG v. Mahdavi. Nor do plaintiffs dispute their
derivative claims relate to the causes of action AIG alleged
against ALI in the AIG v. Mahdavi complaint, which arose from
the same joint venture. Rather, plaintiffs argue section 426.30
does not apply because they were not parties to the prior action.
Plaintiffs’ argument misreads the statute’s text and purpose.
ALI is “a party against whom a complaint” was filed in AIG v.

10     “Under California law, ‘a shareholder cannot bring a direct
action for damages against management on the theory their
alleged wrongdoing decreased the value of his or her stock (e.g.,
by reducing corporate assets and net worth). The corporation
itself must bring such an action, or a derivative suit may be
brought on the corporation’s behalf.’ [Citations.] A different rule
would ‘authorize multitudinous litigation and ignore the
corporate entity.’” (Schuster v. Gardner (2005) 127 Cal.App.4th
305, 312; accord, Grosset v. Wenaas, supra, 42 Cal.4th at p. 1108
[“An action is deemed derivative ‘“if 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.”’”].)
Plaintiffs do not dispute the second amended complaint’s first,
second, third, fifth, sixth, and seventh cause of action are
derivative, not direct claims.

                                14
Mahdavi. (§ 426.30, subd. (a).) Further, ALI “serv[ed] [its]
answer to the complaint” but “fail[ed] to allege in a cross-
complaint any related cause of action” that ALI then had against
AIG. (Ibid.) Therefore, ALI may not now assert against AIG the
related causes of action not pleaded in the AIG v. Mahdavi
action.
      Because ALI is barred from asserting the related causes of
action against AIG in this action, so are plaintiffs.11 A derivative
cause of action belongs to the corporation, and the corporation is
the true plaintiff. (Beachcomber Management Crystal Cove, LLC
v. Superior Court (2017) 13 Cal.App.5th 1105, 1118
(Beachcomber) [“The shareholder or member bringing the
derivative lawsuit is the plaintiff in name only because the
lawsuit seeks redress for injury the company suffered and any
recovery belongs to the company. Hence, although the company
is named as a nominal defendant based on the insiders’ refusal to
bring the lawsuit on the company’s behalf, the company is the
true plaintiff.”]; Patrick v. Alacer Corp. (2008) 167 Cal.App.4th
995, 1004 (Patrick) [“The corporation must be joined [in a
derivative suit] because ‘its rights, not those of the nominal
plaintiff, are to be litigated . . . .’”]; McDermott, Will & Emery v.
Superior Court (2000) 83 Cal.App.4th 378, 382 [“A derivative

11    Because plaintiffs do not assert any arguments on appeal
specific to Rostami, we do not reach whether plaintiffs’ claims
against Rostami as the managing member of AIG should be
treated differently from those asserted against AIG. (See People
v. Duff (2014) 58 Cal.4th 527, 550, fn. 9 [“the claim is omitted
from the opening brief and thus waived”]; Aptos Council v.
County of Santa Cruz (2017) 10 Cal.App.5th 266, 296, fn. 7
[“Issues not raised in the appellant’s opening brief are deemed
waived or abandoned.”].)

                                 15
action . . . does not transfer the cause of action from the
corporation to the shareholders. Rather, the cause of action in a
shareholder derivative suit belongs to and remains with the
corporation. Such a lawsuit is derivative, i.e., brought in the
‘corporate right,’ to recompense the corporation for injuries done
to it.”]; Scarbourough v. Briggs (1947) 81 Cal.App.2d 161, 166
(Scarbourough) [“The corporation, being the ultimate beneficiary
of such a suit, is the real party plaintiff, and the particular
stockholders who bring the action are mere nominal parties.”].)
Because plaintiffs “‘stand in the shoes’” of ALI in seeking redress
for ALI’s injuries, they are generally subject to the procedural
rules that would apply to ALI as plaintiff in a direct action.
(McDermott, Will & Emery, at p. 383 [“It is the corporation, and
not the shareholder, who is the holder of the [corporation’s
attorney-client] privilege.”].)
        Because the right of action belongs to the corporation, not
its shareholders or members, it may be forfeited, waived, or
adjudicated by the direct actions of the corporation.
Scarbourough, supra, 81 Cal.App.2d 161 is instructive. There,
plaintiffs brought a derivative shareholder action on behalf of the
corporate entity, Security Home Estates, against individual
defendant N.A. Ross, Jr., seeking to declare void the sale of real
property. (Id. at pp. 162-164.) Ross asserted res judicata as an
affirmative defense, and following a trial, the trial court entered
judgment for Ross based on evidence of a consolidated judgment
in two previous actions between Security and Ross adjudicating
the validity of the sale of the same real property. (Id. at pp. 162,
164.) On appeal, plaintiffs contended the previous consolidated
judgment was “not res judicata as to them because the parties in
the within action are not the same as in the two previous cases.”

                                16
(Id. at p. 166.) The Court of Appeal rejected the argument,
reasoning “[t]he present action is concededly brought by
plaintiffs, not individually but as shareholders of Security as a
derivative or representative action against Ross, other
shareholders and the corporation itself. . . . [Citations.] Under
such circumstances plaintiffs herein are brought within the rule
that shareholders of a corporation are in privity with it and, in
the absence of fraud, are bound by all judgments rendered
against the corporation.” (Id. at p. 166.)12
       Section 426.30’s purpose to “avoid[] a multiplicity of
actions” (Align Technology, supra, 179 Cal.App.4th at p. 960) is
also served by this interpretation. We are sympathetic to
plaintiffs’ arguments it is inequitable to find forfeiture where
plaintiffs allege they lacked knowledge of the prior suit until
after ALI filed its answer and the insiders who controlled ALI
would have refused to bring a lawsuit on the company’s behalf
against themselves. But it would also be inequitable to AIG to
allow plaintiffs to assert claims ALI failed to assert by
compulsory cross-complaint in the earlier-filed action, subjecting
AIG to the precise “‘piecemeal litigation’” section 426.30 was
designed to prevent. (Wittenberg v. Bornstein, supra,
51 Cal.App.5th at p. 564.)
       Plaintiffs’ attempts to distinguish the reasoning of Patrick,
supra, 167 Cal.App.4th at page 1004 and Beachcomber,
supra, 13 Cal.App.5th at page 1118 are not persuasive. In
Patrick, the Court of Appeal held a nominal defendant
corporation may not demur to a derivative action filed on its

12    Plaintiffs do not allege AIG’s failure to file a compulsory
cross-complaint in the AIG v. Mahdavi action was itself
fraudulent.

                                 17
behalf “except on limited grounds such as the shareholder
plaintiff’s lack of standing” because “the corporation has no
ground to challenge the merits of a derivative claim filed on its
behalf and from which it stands to benefit.” (Patrick, at pp. 999,
1005.) In Beachcomber, shareholder plaintiffs brought a
derivative action on behalf of a nominal defendant corporation
against its managers. (Beachcomber, at p. 1113.) The trial court
disqualified the attorney for the corporation’s managers based on
a presumption the attorney possessed confidential information
obtained during the attorney’s representation of the corporation
in an earlier action. (Id. at p. 1114.) The Court of Appeal
granted a petition for writ of mandate and directed the trial court
to vacate its disqualification order in light of new authority
supplanting application in a derivative action of a presumption
the attorney possesses confidential information from prior
representation of the corporation, and to determine whether on
the facts of the case the attorney could continue to represent the
managers. (Id. at p. 1124.) Neither case involved the compulsory
counter-complaint rule, but both illustrate, rather than
undermine, that a derivative action belongs to the corporation,
not the shareholder or member. (See Beachcomber, at p. 1118;
Patrick, at p. 1004.)

                                18
                         DISPOSITION

      The judgment is affirmed. The AIG defendants are to
recover their costs on appeal.

                                     FEUER, J.
We concur:

      PERLUSS, P. J.

      DILLON, J.*

*     Judge of the Los Angeles Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.

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