ISAKA INVESTMENTS LTD v. RESERVA LLC (2010)

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

INTRODUCTION

Plaintiffs Isaka Investments, Ltd. (Isaka) and Sand Hill Capital International, Inc. (Sand Hill), alleged creditors of Xino Corporation (Xino), and Richbourg Financial, Ltd. (Richbourg), an alleged shareholder of Xino, appeal from the grant of summary adjudication in favor of defendants Reserva, LLC (Reserva), Hythiam, Inc. (Hythiam), and Terren S. Peizer (Peizer) of plaintiffs' claims for fraudulent conveyance, conversion, and breach of contract.   We find that plaintiffs created triable issues of fact whether the debtor (Xino) had actual intent to hinder, delay, or defraud creditors, which requires reversal of summary adjudication of the fraudulent conveyance claim.   Because plaintiffs provided evidence creating a triable issue of fact as to the validity of a Consent to Foreclosure and General Release, the sale of Xino's collateral, if unauthorized, was a conversion and summary adjudication as to the conversion cause of action should be reversed.   In plaintiffs' breach of contract cause of action, plaintiffs which were creditors cannot sue for breach of contract because they were not parties to that contract.   Plaintiffs which were shareholders,¹ however, can sue for breach of contract as a derivative action on behalf of Xino, and we find that triable issues of fact require reversal of summary adjudication for breach of contract.   We find that the trial court has discretion on remand to rule on a renewed motion by plaintiffs for leave to amend their complaint.   We reverse summary adjudication on the causes of action for fraudulent conveyance, conversion, and for breach of contract.

FACTUAL AND PROCEDURAL HISTORY

Complaint :  In the operative complaint, the second amended complaint filed on July 19, 2007, plaintiffs Isaka, Sand Hill, and Richbourg alleged causes of action for an order setting aside fraudulent conveyance and conversion against Reserva, Hythiam, and Peizer.   The second amended complaint also alleged a cause of action for breach of contract against Reserva.

The operative complaint identified Joseph Dunn as previously an officer of Xino, a successor to CITA Biomedical (CITA) and a member of its board of directors, who was presently an employee of Hythiam.   The complaint identified Michael Hinton as a member of the board of directors of Xino. The operative complaint also alleged causes of action for an accounting against Xino, Michael Hinton, and Joseph Dunn;  and causes of action for a judicial declaration of terms of loans and investments, breach of fiduciary duty, and fraud against Hinton and Dunn. Plaintiffs allege that after the trial court denied the summary judgment motion of CITA, Hinton, and Dunn, these defendants settled with plaintiffs.   Claims against these defendants are not at issue in this appeal.

Motion for Summary Judgment or Summary Adjudication:  On June 19, 2008, Reserva, Hythiam, and Peizer filed a motion for summary judgment or alternatively summary adjudication of issues.   The motion and opposition alleged the following facts, which are undisputed except where noted.

CITA Biomedical was incorporated in 1981 as “Blue Grass Breeders, Inc.” The company was dormant from May 1989 through 1997.   On December 15, 1997, Dunn and Hinton were elected to serve as directors.   Dunn was designated Chairman and CEO;  Hinton was designated Secretary.   On August 12, 1998, CITA purchased CITA Americas, Inc. As of 2001, CITA Americas operated as a wholly-owned subsidiary of CITA Biomedical in the business of providing technology, information, and administrative services for treatment and rapid detoxification of persons addicted to heroin, methadone, and other opiate-based drugs.

In late 2001, CITA S.L., a Spanish corporation owned and operated by Dr. Juan Jose Legarda Ibanez (Legarda), licensed technology, patents pending, and related intellectual property with respect to an alcohol and cocaine detoxification and neuron adaption process to CITA Biomedical (CITA;  later known as Xino).   Pursuant to the license agreement, CITA S.L. gave CITA the right to use its technology to treat cocaine and alcohol addiction.   This “Detoxification and NeuroAdaption” technology, known as the DNA technology, is designed to reset the nervous system of a person addicted to alcohol or cocaine to its state before the addiction.

CITA Biomedical failed to pay minimum royalties of $250,000 to CITA S.L. due on July 10, 2002, pursuant to the license agreement.   On September 24, 2002, CITA S.L. advised CITA Biomedical that the license agreement was terminated.

During late 2002, CITA attempted to renegotiate its license from CITA S.L. On November 8, 2002, CITA and Terren Peizer of Reserva entered into a letter agreement in which Peizer agreed to introduce CITA to his contacts and relationships and to negotiate for Reserva's acquisition of an equity position in CITA.² Peizer, however, did not introduce CITA to any of his contacts or relationships, and made no equity investment in CITA. Instead, Peizer formed Hythiam, Inc., a New York corporation, and negotiated an agreement directly with Legarda to acquire the DNA technology from CITA S.L. in March 2003.   Reserva, Peizer's wholly owned investment vehicle, was the sole shareholder in Hythiam at the time of the agreement with CITA S.L. Peizer, Reserva, and Hythiam did not advise CITA of Hythiam's agreement with CITA S.L. to acquire the DNA technology before that agreement was consummated.

On March 3, 2003, Reserva loaned $300,000 to Xino (formerly known as CITA Biomedical, Inc.).   Xino planned to use the money for continuing operations, to advertise for patients for the treatment process, and to build a revenue stream that would allow CITA to pay back the loan.   The loan agreement consisted of a Promissory Note, Guaranty, and a Security Agreement.   Pursuant to the Promissory Note, Xino promised to pay $300,000 plus interest within 100 days from March 3, 2003.   The Security Agreement secured the Note and granted Reserva a continuing lien on CITA's assets, including its patents, licenses, trademarks and other intellectual property, and contracts with service providers, which property CITA pledged as collateral.   The Security Agreement provided for a series of remedies should CITA default.   One such remedy was that “[i]f Secured Party [Reserva] sells or makes any type of transfer of all or substantially all of the Collateral to a newly-formed public corporation, [Reserva] will cause such corporation to agree to grant to CITA three percent (3%) of its common stock, subject to any agreement by which other shareholders are bound.   Upon the issuance of such shares, any and all payment obligations under this Section shall immediately terminate.”   Gary Zinn, then a member of CITA's Board of Directors, testified that the Board approved the Reserva loan, over his dissenting vote.³

At this time Xino needed revenue.   Its outside accountants had issued a qualified opinion stating it was questionable whether Xino would survive.   Defendant Michael Hinton, a director and the CEO of Xino, stated in a declaration that Xino's assets had no significant value at the time of the Reserva loan.   A balance sheet for CITA as of December 31, 2002, showed assets of $156,425.00 and liabilities of $3,335,396.28.   In the operative complaint, plaintiffs alleged that Xino was insolvent at the time it entered into the Reserva loan.   CITA's December 2002 Business Plan projected substantial losses for each of the first six months of 2003, totaling more than $1 million.   CITA's bank records show that as of March 18, 2003, CITA had consumed virtually all of its cash on hand.   By April 2003, proceeds of the Reserva loan were substantially exhausted.

CITA defaulted on the Reserva loan.   Reserva sent Xino a Notice of Default and a Notice of Disposition of Collateral to be sold at a public auction.   The Notice of Default stated that CITA was in default on the Reserva Loan and that Reserva intended to exercise its rights to the collateral unless the default was cured in 30 days.   The Notice of Disposition of Collateral advised CITA that on August 20, 2003, Reserva intended to conduct a foreclosure sale of the collateral, identified as the UROD (Ultra Rapid Opiate Detoxification) patent and method of treatment, the license agreement with CITA S.L., trademarks and trade names, internet sites, a telephone number, CITA's agreements with Centinela Hospital and Freedom Vision Centers, and all other personal property.   On August 17, 2003, Reserva advertised a sale of Xino's assets.

On August 20, 2003, Reserva foreclosed on its security interest in accordance with the Promissory Note, Guarantee, and Security Agreement.   Xino's collateral consisted of all of its assets.   Xino's assets were sold to the high bidders at a public auction.   Some items, including computer systems and a printer, were sold to Norbert Bodner.   Hythiam was the high bidder for the remaining items.   In the foreclosure sale Reserva conducted on August 20, 2003, Xino transferred to Hythiam all intellectual property Xino owned.

Xino consented to the foreclosure in a Consent to Foreclosure and General Release (Consent) on August 20, 2003.   Xino acknowledged, inter alia, that the public auction of its assets occurred after proper notice and public advertising and was held in a commercially reasonable manner.   Xino also acknowledged that upon completion of the sale, it had no further right, title, or interest in or to any of the collateral.   Plaintiffs cite evidence in the record that the Consent to Foreclosure and General Release was executed after August 20, 2003, citing a revised Consent to Foreclosure and General Release document which was dated August 25, 2003.   Plaintiffs also allege that the Consent to Foreclosure and General Release was not executed by any authorized officer or director of Xino in that the signatory, Joseph Dunn, the president of CITA/Xino, had resigned his position with Xino on August 22, 2003, before execution of the Consent.

As reflected in the Consent to Foreclosure and General Release, Reserva caused Hythiam to agree to grant Xino 360,000 shares of Hythiam common stock.   Attached to the Consent is a list of Xino's creditors.   The list does not include plaintiffs Isaka Investments, Ltd., Sand Hill Capital International, Inc, or Richbourg Financial, Ltd.

In the Consent to Foreclosure and General Release, Xino agreed to obtain releases from all, or substantially all, creditors.   In the Consent, Xino agreed to “fully, completely, absolutely and unconditionally release, discharge and [hold] harmless Reserva, Hythiam and any successor to Hythiam, and each of their past and present managers, members, officers, directors, shareholders, employees, agents, attorneys, affiliates and assigns, whether acting in their representative or individual capacities, from any and all claims, causes of action, rights and actions of any kind or nature whatsoever, either at law or in equity, including without limitation all claims in any way arising out of or relating to the Collateral or the Sale.”

Plaintiffs dispute these facts with regard to the Consent.   They allege that there was no covenant in any agreement obligating Xino to obtain releases for the benefit of defendants, that the Consent was executed after August 20, 2003, and was therefore not executed by any authorized officer of director of Xino because Joseph Dunn resigned his positions with Xino before any execution of the Consent.   Plaintiffs also allege that no shareholder or creditor approval of the Consent or of the transfer of Xino's assets was sought or obtained, and that Xino directors were not disinterested.   Dunn was in the process of transitioning his employment to Hythiam and to the extent Hinton was granted shares in Xino as part of the transaction, he was an interested party.   These facts, plaintiffs allege, make the Consent of no force or effect.

Hythiam, Inc. became a public company in September 2003, with Legarda as one of its board members.   Dunn became a full-time employee of Hythiam in September 2003, continued as a full-time employee of Hythiam until 2007, and was a part-time employee of Hythiam until May 2008.   His base salary in September 2003 was $200,000 per year, plus a target bonus and stock options.   He received 300,000 stock options in the initial grant.   After completion of Hythiam's private placements in 2003, its stock traded between $6.70 and $7.50 per share.   Dunn's sister-in-law Lori Pineda and Dunn's father-in-law purchased Hythiam at $2.50 per share in the 2003 placements, as did Ina Kagel, the wife of CITA's attorney David Kagel.

On August 8, 2007, Hythiam and Xino entered into a Settlement Agreement, in which Hythiam acknowledged that it continued to hold 110,000 shares of the 360,000 supposedly issued to Xino;  the parties agreed to cancel 50,000 of those shares held by Hythiam, which would deliver the remaining 60,000 shares to Xino;  the parties exchanged general releases;  and the parties, with Hinton, Xino's president, agreed to cooperate in the defense of claims against Hythiam.

Terry Marsh was president and chief operating officer of Richbourg, Sand Hill, and Isaka, which acted as a conduit for Marsh's consulting services.   While he was involved with these entities, their only client was Xino. Marsh testified that Richbourg received CITA shares in return for services Marsh rendered to CITA Biomedical.   Plaintiffs provided evidence of 2.1 million shares of CITA common stock issued to Richbourg in 1998, 600,000 shares of CITA stock issued to Richbourg on February 18, 2002, and 1 million shares of CITA stock issued to Richbourg on March 12, 2002.   Plaintiffs provided a schedule received from Xino of Major shareholders as of December 31, 2002, identifying Richbourg as CITA's largest shareholder with 2,867,142 shares.   The only certificate for shares in Xino or CITA that Marsh possessed was in Richbourg's name.   Marsh testified that he assigned those shares to Isaka in 2006.

In its Form 10-Q for the quarter ended September 30, 2007, filed with the Securities and Exchange Commission, Hythiam stated that in December 2005 it determined that the patent for treatment of opiate addiction acquired from Xino at the foreclosure sale would not be utilized in its business plan.   Hythiam recorded an impairment loss of $272,000 to write off the unamortized balance of capitalized costs of intellectual property relating to the opiate patent.

With regard to plaintiffs' cause of action for breach of contract, the operative complaint alleged that Reserva breached the Consent in two ways.   First, after Xino complied with its obligations under the Consent and transferred its assets to Hythiam, Xino was supposed to receive 360,000 shares of Hythiam stock.   The complaint alleges that after execution of the Consent, Hythiam's stock was split, and the shares Xino was entitled to after the stock-split should have been adjusted for this transaction.   Second, the complaint alleges that although Reserva caused Hythiam to grant Xino 100,000 shares of restricted Hythiam Stock, Reserva and Hythiam refused to release the balance of the shares unless Xino's creditors provided releases for Peizer and other individuals, despite the fact that the Consent included no such condition before release of the Hythiam shares.

Defendants disputed these allegations in the complaint.   Defendants cited evidence that Chuck Timpe, the Chief Financial Officer of Hythiam, stated in a declaration that on July 2, 2003, before the August 20, 2003, Consent to Foreclosure and General Release, Hythiam effected a stock split of 100 to 1 to increase its shares.   On September 29, 2003, immediately before Hythiam merged with Alaska Freightways, Inc., Alaska Freightways effected a stock split of 2 to 1. Timpe stated that because the Alaska Freightways stock split was not a split of Hythiam's shares, it had no impact on the 360,000 Hythiam shares issued to Xino. It is undisputed that Hythiam never delivered 360,000 shares of its stock to CITA.

Motion to Amend the Complaint:  On August 25, 2008, plaintiffs filed a motion for an order permitting the filing of a third amended complaint.   The trial court denied the motion on September 11, 2008.

Ruling on Motion for Summary Judgment or Summary Adjudication :  In an order filed January 15, 2009, the trial court granted summary adjudication for defendants on plaintiffs' cause of action for fraudulent conveyance, finding that the action failed as a matter of law because Xino signed the Consent to Foreclosure and General Release, releasing defendants from all claims arising from the foreclosure of Xino's assets.   The trial court rejected plaintiffs' arguments challenging the effectiveness of the Consent and found that Consent binding.   For this reason the trial court also granted summary adjudication for defendants on the cause of action for conversion, and because there was insufficient evidence to raise a triable issue of fact as to whether defendants wrongfully converted Xino's assets, which were sold at an advertised public foreclosure sale.   The trial court also granted summary adjudication on plaintiffs' breach of contract action.

Judgment and Appeal :  Judgment was entered on April 27, 2009.   Plaintiffs filed a timely notice of appeal on June 17, 2009.

ISSUES

The issue is whether summary adjudication was properly granted for defendants on the causes of action for fraudulent conveyance, conversion, and breach of contract.

DISCUSSION

1. Fraudulent Conveyance

A. The Fraudulent Conveyance Cause of Action

The Uniform Fraudulent Transfer Act (UFTA), codified in Civil Code section 3439 et seq.,⁴ sets forth the fraudulent conveyance claim.   A fraudulent conveyance occurs when a debtor transfers property to a third person with the intent to prevent a creditor from reaching that property to satisfy its claim.  (Kirkeby v. Superior Court (2004) 33 Cal.4th 642, 648 (Kirkeby ).)   A creditor ⁵ may bring an action for relief from a fraudulent transfer ⁶ or obligation. (§ 3439.07, subd. (a);  Mejia v. Reed (2003) 31 Cal.4th 657, 663.)   Among other available forms of relief, in this action the creditor may obtain avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim. (§ 3439.07, subd. (a)(1).)

A transfer of assets made by a debtor is fraudulent as to a creditor if:

(1) the debtor made the transfer with actual intent to hinder, delay, or defraud any creditor, or

(2) the debtor made the transfer without receiving reasonably equivalent value in return, and either (a) the debtor was engaged in or about to engage in a business or transaction for which the debtor's assets were unreasonably small or (b) the debtor intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.  (Kirkeby, supra, 33 Cal.4th at p. 648;  § 3439.04, subd. (a).)

B. Who Can Sue Debtors and Third-Party Transferees for Fraudulent Transfer

Sections 3439 through 3440.5 give creditors an action to sue debtors and third-party transferees directly for fraudulent conveyance.   Plaintiffs concede that a creditor cannot bring a derivative action on behalf of the debtor corporation for fraudulent transfer.   Plaintiffs have not provided any authority that a shareholder of a debtor corporation can sue debtors and third-party transferees for fraudulent transfer either directly or derivatively.

The operative complaint states that plaintiffs bring their action to set aside fraudulent conveyance derivatively on behalf of Xino, but this cause of action also incorporates a general allegation that plaintiffs also bring their action individually.   We find this is sufficient to allege individual, direct claims for fraudulent conveyance by those plaintiffs which are creditors of Xino/CITA.

C. Plaintiffs Created a Triable Issue of Fact Whether the Debtor Had Actual

Intent to Defraud Creditors

“Whether a conveyance was made with fraudulent intent is a question of fact, and proof often consists of inferences from the circumstances surrounding the transfer.”  (Filip v. Bucurenciu (2005) 129 Cal.App.4th 825, 834.)   Section 3439.04, subdivision (b) codifies the “badges of fraud,” or factors used to determine whether a debtor had actual intent to hinder, delay, or defraud a creditor.  “There is no minimum number of factors that must be present before the scales tip in favor of finding ․ actual intent to defraud.   This list of factors is meant to provide guidance to the trial court, not to compel a finding one way or the other.”  (Filip v. Bucurenciu, supra, at p. 834.)

i. Plaintiffs Have Created a Triable Issue of Fact That the Transfer Was of

Substantially All of the Debtor's Assets

Section 3439.04, subdivision (b)(5) states the factor of “[w]hether the transfer was of substantially all the debtor's assets.”   Reserva's $300,000 loan to Xino/CITA Biomedical was pursuant to a loan agreement that consisted of a Promissory Note, Guaranty, and Security Agreement.   The Security Agreement secured the Note and granted Reserva a continuing lien on all of CITA's assets.   Thus it was a “transfer,” defined as the creation of a lien or other encumbrance (§ 3439.01, subd. (i)).

Similarly, when CITA defaulted on the Reserva loan, on August 20, 2003, Reserva foreclosed on its security interest in accordance with the Promissory Note, Guarantee, and Security Agreement.   Xino's collateral consisted of all of its assets.   Xino's assets were sold to the high bidders at a public auction, and Xino transferred to Hythiam all intellectual property Xino owned.   The sale of Xino's assets at the foreclosure sale was a “transfer,” defined to include every mode of disposing of or parting with an asset or an interest in an asset (§ 3439.01, subd. (i)).

Thus plaintiffs created a triable issue of fact as to the factor that the transfer was of substantially all the debtor's assets.

ii. Plaintiffs Have Created a Triable Issue of Fact That the Debtor Was Insolvent

or Became Insolvent Shortly After the Transfer Was Made or the Obligation

Was Incurred

Section 3439.04, subdivision (b)(9) states the factor of “[w]hether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.”  “A debtor is insolvent if, at fair valuations, the sum of the debtor's debts is greater than all of the debtor's assets.” (§ 3439.02, subd. (a).)  Moreover, “[a] debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.”  (Id. at subd. (c).)  When the $300,000 loan was made on March 2, 2003, Xino/CITA needed revenue, and its outside accountants had issued a qualified opinion stating it was questionable whether Xino would survive.   Defendant Hinton, CEO and a director of Xino, stated in a declaration that Xino's assets had no significant value at the time of the Reserva loan.   A balance sheet for CITA Biomedical as of December 31, 2002, showed assets of $156,425 and liabilities of $3,335,396.28.   CITA's December 2002 Business Plan projected substantial losses for each of the first six months of 2003, totaling more than $1 million.   CITA's bank records showed that as of March 18, 2003, CITA had consumed virtually all of its cash on hand.   Thus plaintiff has shown a triable issue of fact that the debtor was insolvent when the transfer was made and when the obligation was incurred.

iii. Xino Could Not Release Claims Which Plaintiffs Brought Directly on Their

Own Behalf

Defendants claim that by entering into the Consent to Foreclosure and General Release on August 20, 2003, Xino also released any claims which plaintiffs have brought on behalf of Xino.⁷ Although Xino could release its own claims, Xino lacked the capacity to release the claims of plaintiffs brought directly on their own behalf.   Xino-the debtor and transferor-had no claim against itself for fraudulent conveyance.   That cause of action belongs to creditors of Xino, and to shareholders of Xino (Kirkeby, supra, 33 Cal.4th at pp. 645-646).

D. Conclusion

Plaintiffs have created a triable issue of fact as two “badges of fraud” or factors which tend to show that the debtor made the transfer or incurred the obligation with actual intent to defraud creditors of the debtor.   Therefore summary adjudication of the cause of action for fraudulent conveyance should be reversed.

2. Conversion

A. The Cause of Action for Conversion

“ ‘Conversion is the wrongful exercise of dominion over the property of another.   The elements of a conversion claim are:  (1) the plaintiff's ownership or right to possession of the property;  (2) the defendant's conversion by a wrongful act or disposition of property rights;  and (3) damages.’  “ (Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1404-1405.)  “ ‘It is not necessary that there be a manual taking of the property;  it is only necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to his own use.’  “ (Spates v. Dameron Hospital Assn. (2003) 114 Cal.App.4th 208, 221.)

B. Who Can Sue Third Parties For Conversion

In the operative complaint, plaintiffs brought their cause of action for conversion derivatively on behalf of Xino against all defendants except Xino. The operative complaint alleged that defendants benefited from and culpably participated in the misappropriation of the Xino assets to Reserva and/or Hythiam.   The complaint further alleged that Xino failed to demand return of its assets because Xino was at all times under the control of Dunn or Hinton, and absent such control would have made such demands and be entitled to recovery.

Plaintiffs do not contend that, as creditors or shareholders, they have any direct action against defendants for conversion of the assets of Xino Corporation.   They do contend that Xino's creditors can bring a derivative action for conversion of Xino's assets.   Neither of the cases plaintiff cite, however, supports this contention.⁸  Moreover, plaintiffs which are creditors of Xino/CITA have neither alleged nor proven that they had ownership or a right to possession of Xino's assets.   When a plaintiff does not have title to or possession of the property allegedly converted, plaintiff cannot maintain an action for conversion.  (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 136.)

Plaintiffs which are shareholders can bring a derivative action ⁹ on behalf of Xino Corporation against third-party defendants for conversion of the assets of Xino Corporation.  “The derivative form of action permits an individual shareholder to bring ‘suit to enforce a corporate cause of action against officers, directors, and third parties.’  “ (Kamen v. Kemper Financial Services, Inc. (1991) 500 U.S. 90, 95, italics omitted.)  “ ‘A stockholder's derivative suit is brought to enforce a cause of action which the corporation itself possesses against some third party, a suit to recompense the corporation for injuries which it has suffered as a result of the acts of third parties.’  “ (Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d at p. 107;  see also McDermott, Will & Emery v. Superior Court (2000) 83 Cal.App.4th 378, 382 and Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282, 297.)

C. Because a Triable Issue of Fact Exists as to the Validity of the Consent to

Foreclosure and General Release, Sale of Xino's Collateral, If Unauthorized,

Was a Conversion

Defendants assert that a shareholder plaintiff's derivative claim on behalf of Xino cannot assert a property interest in the collateral-Xino's assets sold at the August 20, 2003, foreclosure sale-because Xino signed the Consent to Foreclosure and General Release, which stated that Xino had no further right to or title or interest in the collateral.   We find, however, that plaintiffs' evidence creates a triable issue of fact as to the validity of the Consent to Foreclosure and General Release, and that if unauthorized, sale of Xino's collateral was a conversion.

Plaintiffs provide evidence that on August 25, 2003, Kirkland (attorney for Reserva) e-mailed “copies of a revised (and hopefully final) draft of the Consent to Foreclosure and General Release” to his client and to Kagel (attorney for Xino/CITA).   This contradicts the statement in the Consent to Foreclosure and General Release that it was entered into as of August 20, 2003.   On the Consent to Foreclosure and General Release, the signatures of representatives of Xino/CITA and of Reserva are undated.   Thus plaintiffs allege that the Consent to Foreclosure and General Release was executed after August 20, 2003;  and that it was not executed by any authorized officer of director of Xino/CITA, because Dunn, who signed the Consent to Foreclosure and General Release on behalf of Xino/CITA, had resigned his positions with Xino on August 22, 2003.   Thus plaintiffs' evidence created a triable issue of fact as to whether the Consent to Foreclosure and General Release was executed by an officer of Xino/CITA, whether the Consent to Foreclosure and General release was valid, and whether the Consent to Foreclosure and General Release could release the claims of Xino, or the claims of shareholder plaintiffs suing derivatively on behalf of Xino, against defendants.

Plaintiffs' evidence creates a triable issue of fact as to the validity of Consent to Foreclosure and General Release.   The invalidity of the Consent to Foreclosure and General release would make the sale of Xino's assets an unauthorized sale.   An unauthorized sale or other transfer of property is a conversion.  (Cerra v. Blackstone (1985) 172 Cal.App.3d 604, 610.)   Therefore summary adjudication of the conversion claim is reversed.

3. Breach of Contract

A. The Breach of Contract Claim

To prevail on a breach of contract cause of action, plaintiff must prove:  (1) the contract;  (2) plaintiff's performance or excuse for nonperformance;  (3) defendant's breach;  and (4) resulting damages to plaintiff.  (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1388.)

In the operative complaint, plaintiffs alleged a cause of action for breach of contract as an alternative to the fraudulent conveyance claim.   That is, if the sale of Xino's assets was not found to be fraudulent, Xino was entitled to have that sale set aside because Hythiam failed to deliver a material portion of the shares it was obligated to deliver to Xino pursuant to the Consent to Foreclosure and General Release.

In the Consent to Foreclosure and General Release, the parties agreed:  “Reserva shall cause Hythiam to agree to grant to CITA Three Hundred Sixty Thousand (360,000) shares of Hythiam common stock, $.001 par value, or an equal number of shares of any successor corporation to Hythiam (the “Shares”), subject to (a) the provisions of Sections 2 above and Section 4 below, and (b) all other representations, warranties, covenants and restrictions by which Investors in Hythiam common stock are bound, as set forth in the confidential Private Placement Memorandum attached hereto as Exhibit ‘G’.” Section 4, “Satisfaction of Creditors,” stated:  “Debtors represent and warrant that (a) a full and complete list of all or substantially all of their creditors (the ‘Creditors') is attached hereto as Exhibit ‘H’, (b) Debtors know of no other persons to whom either Debtor owes any debt, liability or obligation, or who has made any claim against Debtor or any of the Collateral, and (c) no such person holds any security interest or other rights in or to any of the Collateral.   There shall be no obligation to grant any Shares to CITA, unless and until ․ full and complete releases as to Debtors, Reserva, Hythiam[,] any successor to Hythiam, and the Collateral have been obtained from all or substantially all of the Creditors.   Reserva may, in its sole and absolute discretion agree or cause Hythiam to agree to grant a portion of the Shares before all Creditors have granted releases, if CITA obtains releases from a substantial portion of significant Creditors.”

The complaint alleged that after execution of the Consent, Hythiam's stock was split;  no Hythiam stock was delivered to Xino before the stock was split;  and the number of shares to which Xino was entitled after the split had to be adjusted for that transaction.   The complaint alleged that Reserva and Hythiam took the position that the split of Hythiam stock, which diluted the value of Xino's rights under the Consent, had no impact on the number of shares of Hythiam stock to be delivered to Xino, and by failing and refusing to cause Hythiam to deliver at least a material portion of shares it was obligated to transfer to Xino, Reserva breached its obligations under the Consent.

The complaint further alleged that Reserva did cause Hythiam to grant Xino 100,000 shares of restricted Hythiam stock, but failed and refused to cause Hythiam to release the balance of the shares unless Xino's creditor's provided releases for Peizer and other individuals, even though the Consent to Foreclosure and General Release included no such condition to the release of Hythiam shares.

B. Plaintiffs' Standing to Bring an Action for Breach of Contract

Plaintiffs which are creditors were not parties to the contract (the Consent to Foreclosure and General Release) between Xino/CITA and Reserva, and were not third-party beneficiaries of that contract (§ 1559).   Consequently these plaintiffs, as non-parties, lack standing to bring an action to enforce the contract.  (Windham at Carmel Mountain Ranch Assn. v. Superior Court (2003) 109 Cal.App.4th 1162, 1173.)

Plaintiffs which are shareholders of Xino were not a party to the contract either.   Thus a shareholder has no direct cause of action or right of recovery against those which have harmed Xino Corporation.   Shareholders can, however, bring a derivative suit to enforce the rights of the corporation and redress injuries to it by third parties when its board of directors fails to do so.   When a derivative action succeeds, only the corporation benefits from any recovery.   Shareholders derive no benefits except the indirect benefit that results from realization upon the assets of the corporation.  (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108.)   Thus a plaintiff which is a shareholder can maintain a derivative action for breach of contract on behalf of Xino. (See Melancon v. Superior Court (1954) 42 Cal.2d 698, 702.)

C. Triable Issues of Fact Require Reversal of Summary Adjudication as to the

Breach of Contract Cause of Action

i. Plaintiffs Did Not Create a Triable Issue of Fact Regarding Hythiam's

Demand of Releases of Peizer from Xino's Creditors

The operative complaint alleged that Hythiam granted Xino 100,000 shares of stock but would not release remaining shares unless Xino's creditors provided releases for Peizer and others, and that the Consent did not require Xino's creditors to release Peizer and others.   There is no evidence, however, that Hythiam made a demand that Xino's creditors release Peizer and others.   Allegations in the complaint are not evidence (Kurokawa v. Blum (1988) 199 Cal.App.3d 976, 988-989) and are not sufficient to create a triable issue of fact (Lyons v. Security Pacific Nat. Bank (1995) 40 Cal.App.4th 1001, 1014).

ii. A Triable Issue of Fact Existed as to Whether Releases Were Obtained from

Creditors of CITA/Xino

The trial court found that Reserva did not breach the Consent by failing to issue 360,000 shares of Hythiam stock to Xino, because plaintiffs, and Gary Zinn, refused to sign releases.

It is undisputed that Hythiam never delivered 360,000 of its shares to Xino. The Consent states that notwithstanding Reserva's obligation to cause Hythiam to agree to grant 360,000 shares of Hythiam common stock to Xino/CITA, “[t]here shall be no obligation to grant any Shares to CITA, unless and until ․ full and complete releases as to Debtors, Reserva, Hythiam[,] any successor to Hythiam, and the Collateral have been obtained from all or substantially all of the Creditors.”   The Consent states that a list of all or substantially all of CITA's creditors was attached to the Consent as Exhibit H. Therefore the obligation to grant shares to CITA did not arise until releases were obtained from all or substantially all of the creditors listed on Exhibit H. Plaintiffs are not listed on Exhibit H. Thus plaintiffs' execution of releases was not a condition precedent to the obligation to issue Hythiam shares to CITA/Xino.   Summary adjudication was improperly issued on that ground.

iii. A Triable Issue of Fact Exists as to Whether Releases Were Obtained From

All or Substantially all of Xino's Creditors

As the moving party, defendants were required to provide evidence that releases from all or substantially all creditors listed on Exhibit H were not obtained.   A release from all or substantially all creditors was a condition precedent to the issuance of Hythiam shares to CITA/Xino.   Defendants did not provide evidence that releases were not obtained from all or substantially all Exhibit H creditors.   Therefore a triable issue of fact exists whether defendants should have issued the Hythiam shares to CITA/Xino.

4. The Trial Court Retains Discretion to Rule on Any Renewed Motion by

Plaintiffs to Amend their Complaint

Plaintiffs claim that the trial court abused its discretion by denying plaintiffs' motion for leave to amend their complaint.   Given the reversal of the summary adjudication of the fraudulent conveyance and conversion claims, the trial court retains discretion to rule on any renewed motion by plaintiffs for leave to amend their complaint.

DISPOSITION

The summary adjudication of the causes of action for fraudulent conveyance, conversion, and breach of contract are reversed.   Costs on appeal are awarded to plaintiffs Isaka Investments, Ltd., Sand Hill Capital International, Inc., and Richbourg Financial, Ltd.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

We concur:

KLEIN, P. J

FOOTNOTES

FN1. There are triable issues of fact as to which plaintiffs are creditors and which are shareholders.   We express no opinion on the outcome of trial on these issues..  FN1. There are triable issues of fact as to which plaintiffs are creditors and which are shareholders.   We express no opinion on the outcome of trial on these issues.

FN2. As reflected in a letter dated November 8, 2002, Reserva and Xino entered into an agreement in which Terren S. Peizer of Reserva stated:  “because I believe in building value through my efforts for all stakeholders, I only become actively involved with companies in which I have a substantial equity stake.  [¶] We have begun to negotiate such an interest and I am continuing with my due diligence in good faith.   However, I realize that you need immediate assistance, including through introductions to certain of my contacts and relationships.   I am willing to begin to facilitate such introductions․”.  FN2. As reflected in a letter dated November 8, 2002, Reserva and Xino entered into an agreement in which Terren S. Peizer of Reserva stated:  “because I believe in building value through my efforts for all stakeholders, I only become actively involved with companies in which I have a substantial equity stake.  [¶] We have begun to negotiate such an interest and I am continuing with my due diligence in good faith.   However, I realize that you need immediate assistance, including through introductions to certain of my contacts and relationships.   I am willing to begin to facilitate such introductions․”

FN3. Plaintiffs allege that CITA did not obtain shareholder approval for encumbering its assets in favor of Reserva, but defendants allege that plaintiffs provide no authority that shareholder approval was required.   Plaintiffs allege that Joseph Dunn, the president of CITA/Xino, received proceeds of the Reserva loan, but provide no evidence for this allegation..  FN3. Plaintiffs allege that CITA did not obtain shareholder approval for encumbering its assets in favor of Reserva, but defendants allege that plaintiffs provide no authority that shareholder approval was required.   Plaintiffs allege that Joseph Dunn, the president of CITA/Xino, received proceeds of the Reserva loan, but provide no evidence for this allegation.

FN4. Unless otherwise specified, statutes in this opinion will refer to the Civil Code..  FN4. Unless otherwise specified, statutes in this opinion will refer to the Civil Code.

FN5. “ ‘Creditor’ means a person who has a claim[.]” (§ 3439.01, subd. (c).)  “ ‘Claim’ means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”  (Id. at subd. (b).).  FN5. “ ‘Creditor’ means a person who has a claim[.]” (§ 3439.01, subd. (c).)  “ ‘Claim’ means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”  (Id. at subd. (b).)

FN6. “ ‘Transfer’ means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in any asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” (§ 3439.01, subd. (i).)  “ ‘Lien’ means a charge against or an interest in property to secure payment of a debt or performance of an obligation, and includes a security interest created by agreement, a judicial lien obtained by legal or equitable process or proceedings, a common-law lien, or a statutory lien.”  (Id. at subd. (f).).  FN6. “ ‘Transfer’ means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in any asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” (§ 3439.01, subd. (i).)  “ ‘Lien’ means a charge against or an interest in property to secure payment of a debt or performance of an obligation, and includes a security interest created by agreement, a judicial lien obtained by legal or equitable process or proceedings, a common-law lien, or a statutory lien.”  (Id. at subd. (f).)

FN7. In the Consent, Xino agreed to “fully, completely, absolutely and unconditionally release, discharge and [hold] harmless Reserva, Hythiam and any successor to Hythiam, and each of their past and present managers, members, officers, directors, shareholders, employees, agents, attorneys, affiliates and assigns, whether acting in their representative or individual capacities, from any and all claims, causes of action, rights and actions of any kind or nature whatsoever, either at law or in equity, including without limitation all claims in any way arising out of or relating to the Collateral or the Sale.” Xino also agreed to “settle, release and resolve all claims, regardless of whether known or unknown, foreseen or unforeseen, suspected or unsuspected, vested or contingent, accrued or unaccrued.”.  FN7. In the Consent, Xino agreed to “fully, completely, absolutely and unconditionally release, discharge and [hold] harmless Reserva, Hythiam and any successor to Hythiam, and each of their past and present managers, members, officers, directors, shareholders, employees, agents, attorneys, affiliates and assigns, whether acting in their representative or individual capacities, from any and all claims, causes of action, rights and actions of any kind or nature whatsoever, either at law or in equity, including without limitation all claims in any way arising out of or relating to the Collateral or the Sale.” Xino also agreed to “settle, release and resolve all claims, regardless of whether known or unknown, foreseen or unforeseen, suspected or unsuspected, vested or contingent, accrued or unaccrued.”

FN8. Production Resources v. NCT Group (Del.2004) 863 A.2d 772 concerned a judgment creditors' suit for the appointment of a receiver and for breach of fiduciary duty against a corporate debtor, its chief executive officer, president, directors, and chief financial officer.   NACEPF v. Gheewalla (Del.2007) 930 A.2d 91 involved plaintiffs who were putative creditors of Clearwire Holdings, Inc., and who alleged that defendant directors of Clearwire breached their fiduciary duty to Clearwire and fraudulently induced plaintiffs to enter into a contract with Clearwire and tortiously interfered with plaintiff's business opportunities.   Neither case involved a creditor's suit for conversion against third-party defendants..  FN8. Production Resources v. NCT Group (Del.2004) 863 A.2d 772 concerned a judgment creditors' suit for the appointment of a receiver and for breach of fiduciary duty against a corporate debtor, its chief executive officer, president, directors, and chief financial officer.   NACEPF v. Gheewalla (Del.2007) 930 A.2d 91 involved plaintiffs who were putative creditors of Clearwire Holdings, Inc., and who alleged that defendant directors of Clearwire breached their fiduciary duty to Clearwire and fraudulently induced plaintiffs to enter into a contract with Clearwire and tortiously interfered with plaintiff's business opportunities.   Neither case involved a creditor's suit for conversion against third-party defendants.

FN9. An action “ ‘is derivative, i.e., in the corporate right, 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.’  “ (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106.).  FN9. An action “ ‘is derivative, i.e., in the corporate right, 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.’  “ (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106.)

ALDRICH, J.