Hellum v. Breyer
123 Cal. Rptr. 3d 803
Cal. Ct. App.2011Background
- Hellum and Booth filed a class action alleging California and federal securities-law violations by Prosper and its officers, including outside directors Breyer, Cheng, and Kagle.
- The outside directors demurred, arguing plaintiffs failed to plead facts showing they controlled Prosper, the primary violator.
- The SAC asserted three liability theories against the outside directors under Cal. Corp. Code §25504 and Title 15 of the Securities Act; the trial court sustained the demurrer based on lack of control.
- Section 25504 provides broad collateral liability for certain categories (e.g., principals, directors) of persons involved in selling unqualified securities, with an affirmative defense if knowledge or reasonable belief in the facts is shown.
- The Court of Appeal reversed, holding that §25504’s officers/directors clause imposes presumptive liability without requiring control, while control-based theories (Title 15 and another §25504 clause) require pleading sufficient control evidence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §25504 imposes presumptive liability on outside directors without showing control | Hellum/Booth contend §25504’s officers/directors clause makes them liable by status. | Outside directors argue liability requires actual control over Prosper. | Yes; statute imposes presumptive liability on directors without control proof. |
| Whether third and seventh causes of action require pleading control and are adequately pled | SAC shows directors’ power to influence Prosper’s policies. | Demurrer contends no control facts to support control-person liability. | Pleadings sufficiently allege control; demurrer reversed as to these claims. |
| Application of Openwave/Court-era interpretations to §25504 and control | California statute broad enough to extend to directors without day-to-day control. | Federal control-person concepts apply; require control. | Court rejected the need for day-to-day control; relied on California text to find broader liability. |
Key Cases Cited
- Courtney v. Waring, 191 Cal.App.3d 1434 (Cal. Ct. App. 1987) (Court interpreted similar Franchise Investment Law language as imposing broad liability on officers/directors)
- Apollo Capital Fund LLC v. Roth Capital Partners, LLC, 158 Cal.App.4th 226 (Cal. Ct. App. 2007) (California statute’s structure supports separate categories of liable persons)
- Murphy v. Kenneth Cole Productions, Inc., 40 Cal.4th 1094 (Cal. 2007) (Plain-language rule: when no ambiguity, plain meaning governs statute)