Judge: Alison Mackenzie, Case: 22SMCV01121, Date: 2023-05-18 Tentative Ruling
Case Number: 22SMCV01121 Hearing Date: May 18, 2023 Dept: 207
Background
Plaintiffs Brittany Perrineau and Harold Perrineau
(collectively “the Perrineaus”), along with Plaintiff Joon Productions, Inc.
(“Joon” or collectively with the Perrineaus, “Plaintiffs”) bring this action to recover sums owed on two fixed
rate promissory notes made by Defendant Palisades Capital Fund 7, LLC (“PCF7”)
and $5,000 in accrued interest allegedly due on a third promissory note.
Plaintiffs also seek to recover sums alleged due under an agreement with Defendant
Palisades Capital Management LLC (“PCM”) for the purchase of 8.33% of the
profits received by PCM from the sale of a property located at 1362 Bella
Oceana Vista in Pacific Palisades, which the parties call the “Pratt” property.
Defendants’ previously brought a demurrer to Plaintiffs’
original Complaint, which the Court sustained in part and overruled in part,
granting Plaintiffs leave to amend. Plaintiffs subsequently filed a First
Amended Complaint, followed by an errata correcting errors in that First
Amended Complaint. To avoid confusion, the parties stipulated to allow
Plaintiffs to file a Second Amended Complaint, which corrected the errors
identified in Plaintiffs’ prior errata. Plaintiffs’ operative Second Amended Complaint
(“SAC”), filed on February 10, 2023, asserts causes of action for (1) material
misrepresentations in violation of Corporations Code §§ 25401 and 25501; (2)
sale of unqualified securities; (3) violation of Corporations Code § 25504; (4)
violation of Corporations Code § 25504.1; (5) breach of fiduciary duty; (6)
violation of Business & Professions Code § 17200; (7) constructive fraud; (8)
breach of contract; (9) breach of contract; (10) common counts; and (11)
declaratory relief.
Defendants PCF7 and PCM, together with Defendants Patrick
McKenna (“McKenna”); Leslie Gornik; John Gornik; Palisades Funding, Inc. (“PF”);
Palisades Development Company, Inc. (“PDC”); Pali Cap Management 9, LLC
(“PCM9”); Palisades Capital Fund 4, LLC (“PCF4”); and Palisades Capital Fund 8,
LLC (“PCF8”) (collectively “Defendants”) bring this demurrer to each cause of
action except the sixth cause of action, arguing each fails to state sufficient
facts to constitute a cause of action against them under Code Civ. Proc. §
430.10(e) and is uncertain under Code Civ. Proc. § 430.10(f).
Demurrer Standard
When considering demurrers, courts read the allegations
liberally and in context. (Wilson v. Transit Authority of City of Sacramento
(1962) 199 Cal.App.2d 716, 720-21.) In a demurrer proceeding, the defects must
be apparent on the face of the pleading or via proper judicial notice. (Donabedian
v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) “A demurrer tests the
pleading alone, and not on the evidence or facts alleged.” (E-Fab, Inc. v.
Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) As such,
the court assumes the truth of the complaint’s properly pleaded or implied
factual allegations. (Id.) However, it does not accept as true
deductions, contentions, or conclusions of law or fact. (Stonehouse Homes
LLC v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 538.)
A special demurrer
for uncertainty under Section 430.10(f) is disfavored and will only be
sustained where the pleading is so unintelligible that a defendant cannot
reasonably respond—i.e., cannot reasonably determine what issues must be
admitted or denied, or what counts or claims are directed against him/her. (Khoury
v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616.) Moreover, even
if the pleading is somewhat vague, “ambiguities can be clarified under modern
discovery procedures.” (Id.)
Analysis
1. Meet
and Confer Requirement
The Court
finds Defendants have complied with the meet and confer requirements set forth
under Code of Civil Procedure § 430.41. (Kaltgrad Decl. at ¶2.)
2. First and Second Causes of Action
Plaintiffs’ first and second causes of action concern
Defendants’ alleged sale of unqualified securities. Defendants previously
demurred to both causes of action. In that prior demurrer, Defendants only
challenged the sufficiency of the allegations of the first and second causes of
action as asserted against specific Defendants who were not alleged to have
directly participated in the alleged sale. The Court sustained Defendants’
demurrer to those causes of action, finding as a matter of law Plaintiffs could
not hold non-seller parties vicariously liable for the alleged sale of
unqualified securities by others.
Defendants again demurrer to the first and second causes of
action, now arguing the SAC fails to state sufficient facts to constitute a
cause of action against all Defendants named in those two claims. Under Code
Civ. Proc. § 430.41(b) “A party demurring to a pleading that has been amended
after a demurrer to an earlier version of the pleading was sustained shall not
demur to any portion of the amended complaint, cross-complaint, or answer on
grounds that could have been raised by demurrer to the earlier version of the
complaint, cross-complaint, or answer.” Accordingly, Defendants may not
demurrer to the SAC on grounds which could have—but were not—asserted in their
demurrer to the original Complaint.
As part of their demurrer, Defendants argue the notes which
form the basis of these two causes of action do not meet the definition of
“securities” under applicable law. Defendants could have raised this argument
in their original demurrer, but expressly declined to do so at that time,
stating “for purposes of this Demurrer only, Defendants accept as true the
allegation that Plaintiffs invested in ‘fractionalized interests’ which are
securities under the Corporations Code.” (8/18/22 Demurrer at 14, fn. 2.) As a
result, Defendants are barred from asserting this argument for the first time
in attacking the SAC.
Plaintiffs argue the same result follows with respect to
Defendants’ claim that these causes of action have not been pled with the
requisite level of specificity. Defendants argue the instant demurrer is permissible
because it is based on changes made to the SAC and thus they could not have
raised this argument when bringing their original demurrer. The Court finds
Defendants have failed to show they could not have raised this ground in their
prior demurrer. In bringing their demurrer to the SAC, Defendants attack the
sufficiency of the allegations set forth at paragraphs 27, 28, 30, and 41.
(Demurrer at 13-15.) Paragraphs 27, 28, and 30 of the SAC are verbatim copies
of those same paragraphs in the original Complaint. Paragraph 41 has been
slightly edited to include an allegation that Defendants’ misrepresented and
concealed information “with an intent to deceive” and to induce Plaintiffs
whereas the original Complaint omitted reference to any intent to deceive. It
is unclear how the addition of this allegation would render these causes of
action insufficiently pled.
It was only after Plaintiffs cited section 430.41(b) in
their opposition that Defendants for the first time asserted their demurrer was
based on changes made between the original Complaint and the SAC. However, the
only substantive change identified by Defendants is the assertion that “the SAC
deletes specific allegations that John Gornik had knowledge of material facts
and misrepresented such facts to investors.” (Reply at 4.) Defendants offer no
explanation as to why the removal of these allegations regarding Gornik for the
first time rendered these causes of action deficient as to Defendants McKenna,
PF, PCM, or PCF7. The Court finds Defendants have failed to show that they
could not have raised their arguments regarding the sufficiency of the first
and second causes of action when bringing their demurrer to the original
Complaint. Under Code Civ. Proc. § 430.41(b), Defendants are barred from asserting
such argument for the first time in their demurrer to the SAC, and their
demurrer to these causes of action is OVERRULED.
3. Third Cause of Action
Plaintiffs’ third cause of action seeks to impose vicarious
liability on Defendants for the alleged violations of Corporations Code §§
25401 and 25110 asserted in their first and second causes of action. Defendants
argue Plaintiffs’ third cause of action must necessarily fail if the Court
sustains their demurrer to the first and second causes of action. As the Court
has overruled the demurrer to the first two causes of action, the same result
follows with respect to their demurrer to the third cause of action.
Defendants’ demurrer to the third cause of action is OVERRULED.
4. Fourth Cause of Action
Plaintiffs’ fourth cause of action also concerns the alleged
sale of unqualified securities but seeks to impose vicarious liability over
non-selling Defendants pursuant to Corporations Code § 25504.1. The Court
sustained Defendants’ previous demurrer to this cause of action on the basis
that Plaintiffs had failed to adequately plead the requisite intent to deceive
required to state a cause of action under section 25504.1. The Court noted the
allegations of the original Complaint offered only generalized allegations as
to groups of Defendants, which fell short of the specific factual allegations
required. The Court directed Plaintiffs to Moss v. Kroner
(2011) 197 Cal.App.4th 860 as an example of the specificity required to plead
intent to deceive under section 25504.1. In that case, the plaintiff’s
allegations were held to sufficiently state a claim under section 25504.1 where
they contained factual assertions as to what the defendants were aware of,
when, and how:
Here, Moss's allegations add up to a claim that perhaps as early as 2007
and certainly by April of 2008, the Kroner defendants were aware that
investments in DLG were illegal securities—and, as of April 2008, they knew
that the notes program was likely subject to an immediate shutdown. Based on this
information, Kroner contacted Plamondon and urged him to sell as many of these
unregistered securities as possible before sales were discontinued due to
noncompliance with registration requirements. As of the time of Moss's
investment, he has alleged, the Kroner defendants knew not only that they were
unregistered securities but also that the investment was not a risk-free
proposition with a guaranteed return; that the DLG 9 percent reinsured notes
were not fully insured and that only 10 percent of an investor's DLG investment
was secured; that there were issues with DLG's financial records and reports,
and that DLG's claims of property ownership and value were not supported; and
that DLG's president's “background was an issue”; but they continued to play their
part in the sales transactions, including Moss's. These allegations are
sufficient to state a claim that the Kroner defendants materially assisted in
the sale of unregistered securities in violation of section 25110 with the
intent to deceive or defraud.
(Id. at 872.)
The SAC offers no similar specificity and again simply
repeats the same sort of generalized and conclusory statements which the Court
previously held insufficient when alleged in the original Complaint. Plaintiffs
acknowledge they do not currently have such information with regard to any
Defendant, stating “Plaintiffs do not know the identity of those persons who
acted in concert with, and in support of McKenna and Gornik in their enterprise
and specifically their violations of the securities laws. Therefore, these
potential defendants cannot be specifically identified, nor can their specific
conduct be alleged.” (Opposition at 12.) As Plaintiffs have effectively
conceded they do not have sufficient knowledge to plead a cause of action under
section 25504.1 at this time, the Court SUSTAINS Defendants’ demurrer to this
cause of action without leave to amend. If Plaintiffs later acquire sufficient
information to state a cause of action under this section, they are free to
seek leave to amend their pleading to add such a cause of action.
5. Fifth and Seventh Causes of Action
Defendants argue Plaintiffs’ fifth
cause of action for breach of fiduciary duty and seventh cause of action for
constructive trust fail as to Defendants PCM, PCF4, PCF7, PCF8, PCM9, PDC, and
PF. Defendants previously demurred to these causes of action and the Court
sustained that demurrer in part and overruled it in part, noting the Complaint
had sufficiently alleged alter ego liability as to certain of these entities.
The same is true with regard to the SAC, which at paragraph 20 contains alter
ego allegations as to PF, PMC, and PDC. (SAC at ¶20.) This leaves PCF4, PCF7, PCF8,
and PCM9. The SAC seeks to hold these remaining entities vicariously liable under
the single business enterprise doctrine. (SAC at ¶19.) The single business
enterprise doctrine is an offshoot of alter ego liability:
A court may also
disregard the corporate form in order to hold one corporation liable for the debts
of another affiliated corporation when the latter “‘“is so organized and controlled,
and its affairs are so conducted, as to make it merely an instrumentality, agency,
conduit, or adjunct of another corporation.”’” [Citation.] Thus, where there is
“such domination of finances, policies and practices that the controlled corporation
has, so to speak, no separate mind, will or existence of its own and is but a business
conduit for its principal” [Citation], the affiliated corporations may be deemed
to be a single business enterprise, and the corporate veil pierced. “Under the ‘single
business enterprise’ doctrine, separate corporations may operate with integrated
resources in pursuit of a single business purpose.” (Ibid.) “The ‘single-business-enterprise’
theory is an equitable doctrine applied to reflect partnership-type liability principles
when corporations integrate their resources and operations to achieve a common business
purpose.” [Citations.]
(Toho-Towa Co., Ltd. v. Morgan Creek
Productions, Inc. (2013) 217 Cal.App.4th 1096, 1107-1108.) Whether the
imposition of liability under a theory of a single business enterprise is
appropriate will depend on the specific facts of the case, although generally
the Court considers factors such as the commingling of funds and assets of the
two entities, identical equitable ownership in the two entities, use of the
same offices and employees, disregard of corporate formalities, identical
directors and officers, and use of one as a mere shell or conduit for the
affairs of the other. (Id. at 1108-1109.)
The SAC makes the following
allegations regarding PCF4, PCF7, PCF8, and PCM9:
PCF4, PCF7,
PCF 8, and PCM9 were falsely set up to appear as distinct single purpose
entities, whose finances were represented to be separate, when in fact, they
were part of a single organized and structured business enterprise which was
owned and controlled by McKenna whose team included Leslie, all of which
jointly undertook to sell or cause investment in the fractionalized interests
which the Plaintiffs and many other individuals and entities provided “risk
capital” and investments to the Defendants. Plaintiffs further allege that the
individual Defendants named herein were at all times integrally involved in the
operation of this single “business enterprise” and that Defendant PDC is merely
a continuation of the business activities of the other Defendants named herein.
(SAC at ¶19.) The Court finds
these allegations are sufficient to establish a basis for vicarious liability
against these entities under the single business enterprise theory at the
pleading stage. In reaching this conclusion, the Court offers no opinion as to
whether Plaintiffs will ultimately be able to establish such vicarious
liability is warranted on the specific facts of this case, only that these
allegations are sufficient to survive the pleading stage of this action.
For these reasons, the Court
OVERRULES Defendants’ demurrer to the fifth and seventh causes of action for
breach of fiduciary duty and constructive trust.
6. Eighth
and Ninth Causes of Action
Defendants demurrer to the eighth
and ninth causes of action for breach of contract, alleging they can only
properly be asserted by PCF7 and PCM, respectively. Defendants’ argument is
premised on the fact that those entities were the only parties to the alleged
contracts, pointing to the exhibits attached to the SAC. Those same causes of
action were alleged in the original Complaint, which also attached the same
alleged contract documents. Defendant thus could have raised this argument in
its prior demurrer to the original Complaint. As they chose not to raise this
issue in their original demurrer, they are prohibited from raising it for the
first time now. (C.C.P. § 430.41(b).) Defendants’ demurrer to these causes of
action is OVERRULED.
7. Tenth and
Eleventh Causes of Action
Defendants’
demurrer to the tenth cause of action for common counts and eleventh cause of
action for declaratory relief is based on the assertion that the SAC fails to
sufficiently establish a basis of vicarious liability for the non-contracting
Defendants. As set forth above, the Court has found the SAC sufficiently
alleges vicarious liability over the non-contracting Defendants. The Court
rejects these arguments with regard to the tenth and eleventh causes of action
for the same reasons.
Defendants also
demurrer to Plaintiffs’ eleventh cause of action for declaratory relief on the
basis that, while the SAC alleges an actual controversy relating to the rights
and duties stemming from the written instruments attached to the SAC, this
controversy is “adequately addressed in Plaintiffs [sic] legal claims.”
(Demurrer at 23.) Defendants offer no authority for this proposition, and the
Court does not find the cause of action for declaratory relief is impermissibly
duplicative of Plaintiffs’ other causes of action. The SAC sufficiently alleges
the existence of an actual controversy between the parties concerning their
respective rights and obligations stemming from the written agreements. This is
sufficient to plead a cause of action for declaratory relief under Code Civ.
Proc. § 1060.
For these
reasons, the Court OVERRULES Defendants’ demurrer to the tenth and eleventh causes
of action.
Conclusion
Defendants’ demurrer to the fourth cause of action for joint
and several liability under Corporations Code § 25504.1 is SUSTAINED without
leave to amend. In all other respects, Defendants’ demurrer is OVERRULED.