Judge: Anne Richardson, Case: 21STCP01431, Date: 2023-09-07 Tentative Ruling

DEPARTMENT 40 - JUDGE ANNE RICHARDSON - LAW AND MOTION RULINGS
The Court issues tentative rulings on certain motions.The tentative ruling will not become the final ruling until the hearing [see CRC 3.1308(a)(2)]. If the parties wish to submit on the tentative ruling and avoid a court appearance, all counsel must agree and choose which counsel will give notice. That counsel must 1) email Dept 40 by 8:30 a.m. on the day of the hearing (smcdept40@lacourt.org) with a copy to the other party(ies) and state that all parties will submit on the tentative ruling, and 2) serve notice of the ruling on all parties. If any party declines to submit on the tentative ruling, then no email is necessary and all parties should appear at the hearing in person or by Court Call. 

Case Number: 21STCP01431    Hearing Date: September 7, 2023    Dept: 40

Superior Court of California

County of Los Angeles

Department 40

Background

Pleadings Framing Motion

This action involves cross complaints by the owners of Empire Property LLC (Empire) (which, in turn, owns Marquez Terrace LLC, hereafter, Marquez), who claim that the other’s conduct amounts to breach of fiduciary duties, as well as other harms, based on the following allegations.

Phillip Conway-Burt owns 50% of Empire, with Laura Lenee and Regan Patno (artists investing in real property) owning the other half of Empire. The purpose of Empire was to form subsidiary limited liability companies (LLCs) to purchase and flip homes for profit. Due to various problems, Empire was not able to obtain a construction loan to flip its first acquisition, 16655 Marquez Terrace, Los Angeles, CA 90272 (Property), which Empire acquired through subsidiary Marquez. This in turn led to financial difficulties for all parties, including the need for Lenee and Patno to cover the loan on the Property and other expenses. The Property was then put up for short-term rental to offset loan costs and other costs. Lenee and Patno eventually assumed control of Marquez (in a way Conway-Burt asserts was not lawful) and transferred the Property to themselves in their personal capacity in order to obtain a new loan on more favorable terms.

The parties now dispute, among other things, the profits from the rental of the Property and the propriety of the refinancing of the loan on the Property through transfer of the Property to Lenee and Patno personally.

The June 6, 2022 Second Amended Complaint (SAC) by Plaintiff/Cross-Defendant Phillip Conway-Burt (Plaintiff) pleads: (1) Breach of Duty of Loyalty (Cal. Corp. Code § 17704.09(b)); (2) Breach of Duty of Care (Cal. Corp. Code § 17704.09(c)); (3) Breach of Operating Agreement (Cal. Corp. Code § 17704.09(d)); (4) Corporate Waste; (5) Mismanagement; (6) Unjust Enrichment; (7) Constructive Fraud; (8) Appointment of Receiver (CCP § 564); (9) Removal of Managers; (10) Injunctive Relief (CCP §§ 526, 527(a),(h)); (11) Constructive Trust and Accounting; (12) Cancellation of Transaction; (13) Quiet Title (CCP § 760.020); and (14) Economic Damages (Lost Profits).

The September 28, 2022 Second Amended Cross-Complaint (SAXC) by Defendants/Cross-Complainants Laura Lenee and Regan Patno (Defendants) pleads derivative claims of: (1) Breach of Fiduciary Duty; (2) Gross Mismanagement; (3) Waste of Corporate Asset; (4) Breach of Contract; (5) Conversion; and (6) Fraud in the Inducement.

Motion Before Court

On May 24, 2023, Plaintiff Conway-Burt moved for summary judgment or adjudication of the SAC’s first, second, fourth and thirteenth causes of action and of the SAXC’s first, second, third, and sixth causes of action.

On August 24, 2023, Defendants Lenee and Patno opposed Plaintiff’s motion.

On August 30, 2023, Plaintiff Conway-Burt replied to the opposition.

On August 31, 2023, Defendants Lenee and Patno dismissed their third and sixth causes of action from the SAXC, without prejudice.

That same day, Defendants Lenee and Patno made responses to the evidentiary objections raised by Plaintiff Conway-Burt in Plaintiff’s reply.

Plaintiff Conway-Burt’s motion is now before the Court.

Request for Judicial Notice

The Court TAKES Judicial Notice of the eleven exhibits advanced for notice by Plaintiff Conway-Burt, which include corporate documents and filings for relevant entities, as well as papers filed by the parties with the Court. (Mot., RJN; see Evid. Code, §§ 452, 453.)

Evidentiary Objections

In granting or denying a motion for summary judgment or summary adjudication, the court need rule only on those objections to evidence that it deems material to its disposition of the motion. (Code Civ. Proc., § 437c, subd. (q).)

Reply Evidentiary Objections

Objection Nos. 1, 5, 8, 9, 14: SUSTAINED [Hearsay re: Nov. 1, 2020 Email].

Remaining Objections: Not ruled on as not dispositive of the motion.

Motion for Summary Judgment or Adjudication

Page-Limit Objection

In his reply, Plaintiff Conway-Burt objects to the opposition containing a 24-page memorandum of points and authorities in violation of California Rules of Court, rule 3.1113, subdivision (d). The Court recognizes that the memorandum is overly long and admonishes Defendants Lenee and Patno for not remaining within the 20-page limit. Contrary to their opposition argument, they did not have 40 pages to oppose Plaintiff’s motion. Plaintiff made a single motion addressing claims from two pleadings.

Nevertheless, the Court DECLINES to deem the opposition a late filed paper or otherwise restrict the analysis of the opposition, largely because the reply argues the merits of the opposition’s points and has not shown prejudice.

Legal Standard

A motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact for trial or that the moving party is entitled to a judgment as a matter of law. (Code of Civ. Proc., § 437c, subd. (c).) A party may also seek summary adjudication of select causes of action, affirmative defenses, claims for damages, or issues of duty, which may be made by a standalone motion or as an alternative to a motion for summary judgment and proceeds in all procedural respects like a motion for summary judgment. (Code Civ. Proc., § 437c, subds. (f)(1)-(2), (t); see Lilienthal & Fowler v. Superior Court (1993) 12 Cal.App.4th 1848, 1854-1855, questioned by dictum in Bagley v. TRW, Inc. (1999) 73 Cal.App.4th 1092, 1094, fn. 2 [finding that summary adjudication may be granted as to separate factual grounds supporting a claim stated as a single count because the separate grounds state a separate cause of action].) The moving party bears the initial burden of production to make prima facie showing no triable material fact issues. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) This burden on summary judgment or adjudication “is more properly one of persuasion rather than proof, since he must persuade the court that there is no material fact for a reasonable trier of fact to find, and not to prove any such fact to the satisfaction of the court itself as though it were sitting as the trier of fact.” (Id. at p. 850, fn. 11.) If the moving party meets this burden, the burden shifts to the opposing party to make a rebuttal prima facie showing that a triable issue of material fact exists. (Id. at p. 849.) “[I]n ruling on motions for summary judgment courts are to ‘“liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.”’ [Citations].” (Cheal v. El Camino Hospital (2014) 223 Cal.App.4th 736, 760.)

SAC, First, Second, Fourth, and Thirteenth Causes of Action: GRANTED, in Part.

The SAC’s first, second, fourth, and thirteenth causes of action respectively allege Breach of Duty of Loyalty (Cal. Corp. Code § 17704.09(B)), Breach of Duty of Care (Cal. Corp. Code § 17704.09(C)), Corporate Waste, and Quiet Title CCP § 760.020.

In support of summary adjudication of the first three of these claims, Plaintiff Conway-Burt argues that Defendants Lenee and Patno breached duties of loyalty and care to Empire and committed corporate waste by transferring the Property from Marquez to themselves, without the consent of all of Empire’s members (i.e., without Plaintiff’s approval), and in return for no consideration. Plaintiff also argues that title over the Property should be quieted in favor of Marquez because the transfer of the Property from Marquez to Defendants Lenee and Patno personally was not approved by all of Empire’s members, thus meriting a cancellation of the December 28, 2020 grant deed conveying the Property to Defendants. (Mot., pp. 4-12.)

For evidentiary support, Plaintiff Conway-Burt offers a variety of documents. Plaintiff offers Empire’s Articles of Organization (Empire’s Articles), Empire’s first Statement of Information showing membership, Marquez’s Articles of Organization (Marquez Articles), proof of Empire’s ownership of Marquez, Marquez’s deed for the purchase of the Property, the deed transferring the Property from Marquez to Defendants Lenee and Patno, and a declaration from Plaintiff to show that he never, as a member of Empire, voted for Marquez’s transfer of the Property from Marquez to Defendants Lenee and Patno, and that Plaintiff never received notice of the transfer prior to its occurrence or an opportunity to vote against the transfer. (Mot., Separate Statement (Sep. St.), Issue No. 1, Undisputed Material Facts (UMF) Nos. 1-9, 12-14.)

A review of these UMFs confirms Plaintiff’s position through evidence making a prima facie showing that, without participation from Plaintiff, Defendants Lenee and Patno transferred the Property to themselves as a gift. (See Mot., Compendium of Evidence (Comp. Evid.), Exs. 1 [Empire Articles], 2 [Empire’s first Statement of Information showing Conway-Burt, Lenee, and Patno were Empire’s members], 3 [Marquez Articles], 4 [copy of SAC], 5, ¶ 39[SAXC admitting to Empire 100% owning Marquez], 6, ¶ 2 [Defendants’ Answer to SAC admitting same through admission of allegations in SAC, ¶ 3], 8 [deed for Marquez’s purchase of the Property], 9 [deed transferring Property from Marquez to Defendants as a bona fide gift, i.e., for no consideration]; Mot., Conway-Burt Decl., ¶¶ 27, 31 [Plaintiff did not vote for transfer to Defendants, was not given prior notice for transfer, and was not given opportunity to vote for or against transfer].)

Plaintiff Conway-Burt also refers to the Corporations Code for the proposition that “[t]he consent of all members of the limited liability company is required to … (A) [s]ell, lease, exchange, or otherwise dispose of all, or substantially all, of the limited liability company’s property, with or without the goodwill, outside the ordinary course of the limited liability company’s activities.” (Corp. Code, § 17704.07, subd. (c)(4)(A).)

Last, in support of summary adjudication of the quiet title claim, Plaintiff Conway-Burt points out that the SAC’s allegations satisfy Code of Civil Procedure section 761.020. (Mot., p. 10 [referencing Mot., Sep. St., Issue No. 5, UMF Nos. 1, 3-8, citing to Mot., Comp. Evid., Ex. 4, SAC, ¶¶ 12, 14-15, 40-59, 71-73].)

The Court finds that this evidence carries Plaintiff Conway-Burt’s burden on summary adjudication of the SAC’s first, second, fourth, and thirteenth causes of action. If all the parties were members of Empire, if Empire owned Marquez and Marquez owned the Property, and if Lenee and Patno caused the Property to be transferred from Marquez to themselves without prior consent from Plaintiff Conway-Burt and without consideration, then there is a prima facie case for breaches of loyalty and care and corporate waste, as well as a basis for quieting title in favor of Marquez.

In opposition, Defendants Lenee and Patno argue that the transfer of the Property was properly effected because, at the time of the transfers—December 2020—Lenee and Patno were the only active members of Empire given that Plaintiff Conway-Burt had professionally disassociated from Defendants and the business of Empire and Marquez. (Opp’n, pp. 16-20.) If supported by evidence, there would be triable issues of material fact as to whether (1) the transfer was improper based on Plaintiff’s lack of consent to the transfer and (2) though not discussed in these terms by the parties’ papers, whether Plaintiff can assert his causes of action after having disassociated with Empire and Marquez.

For legal support, Plaintiffs refer to the Corporations Code, which provides that a member in a LLC disassociates from the LLC when the LLC “has notice of the person’s express will to withdraw as a member.” (Corp. Code, § 17706.02, subd. (a); see Opp’n, p. 17.)

For evidentiary support, Defendants cite two pieces of direct evidence (as opposed to evidence showing express will by implication). Defendants first refer to a November 1, 2020 email from Plaintiff Conway-Burt’s wife—non-party Ruthie Conway-Burt—to Defendant Lenee in which Mrs. Conway-Burt expresses that Plaintiff Conway-Burt and Mrs. Conway-Burt “no longer wish[ed] to associate” with Lenee and Patno “professionally or otherwise unless” Lene and Patno paid Mrs. Conway-Burt for her efforts in readying the Property for short-term rentals. (Opp’n, pp. 14-15, 18-19 [referencing Opp’n, Lenee Decl., Ex. K].) Defendants also refer to a February 23, 2021 email from Plaintiff Conway-Burt to the effect that he “wish[ed] to protect [his] investment and want[ed] [Marquez] to be a success,” for which reason, among other things, Plaintiff demanded that “[a]n operating agreement … cover[ing] th[e] new business model … be drawn up immediately.” (Opp’n, p. 19 [referencing Opp’n, Comp. Evid., Ex. M.].)

The Court has sustained an objection to Exhibit K, for which reason that piece of evidence cannot carry Defendants’ burden. The email was drafted by Mrs. Conway-Burt, not her husband, Plaintiff Conway-Burt, for which reason no hearsay exception applies to this email, offered by Defendants for the truth of the matter asserted (express disassociation). In no way does the opposition argue or show evidence to support the position that Mrs. Conway-Burt acted as Plaintiff’s agent or representative in making her emailed statements.

The email in Exhibit M also fails to carry Defendants’ burden as to disassociation because the February 23, 2021 email contained in that exhibit does not expressly show that Plaintiff Conway-Burt had disassociated from Empire prior to December 28, 2020—when the Property was transferred to Defendants. The email appears only to discuss drawing up an operating agreement that covers the use of the Property as a short-term rental, not prior disassociation from Empire. (See Opp’n, Lenee Decl., Ex. M.) At most, there may be some implication that Plaintiff disassociated from Empire at some prior point in time, but implied evidence of disassociation is not the same thing as evidence of an express will to disassociate. Moreover, Exhibit M is not referred to in the separate statement, which violates the rule that “if it is not set forth in the separate statement, it does not exist.” (Los Angeles Unified School District v. Torres Construction Corp. (2020) 57 Cal.App.4th 480, 492 (citations, quotations, and italics omitted)].)

The Court also declines to consider other evidence cited by Defendants for the purpose of showing that Plaintiff’s failure to engage in Empire or Marquez’s business, or to proceed with the flip of the Property, show an express will to disassociate because such evidence, at most, implies the will to disassociate rather than shows an express will to disassociate. (See Opp’n, pp. 18-19.)

Defendants also argue that Plaintiff Conway-Burt suffered no damages as a result of the Property transfer. (Opp’n, p. 20.) However, as argued in the reply by Plaintiff, the SAC was brought derivatively on behalf of Empire, where Empire has lost its sole asset (through Marquez) and where the transfer has diminished the value of Plaintiff’s interest in Empire. (Reply, pp. 5-6; see SAC, ¶ 2, First Cause of Action, ¶¶ 6-7, Second Cause of Action, ¶¶ 14-15, Fourth Cause of Action, ¶¶ 29-30.)

The Court thus finds that Defendants fail to carry their burden of showing an express disassociation by Plaintiff Conway-Burt from Empire or lack of damages, for which reason Defendants fail to carry their burden on summary adjudication of these claims.

Summary adjudication is GRANTED in Plaintiff’s favor as to the SAC’s first, second, fourth, and thirteenth causes of action.

However, because the SAC’s prayer does not request disassociation of Defendants Lenee and Patno from Empire or Marquez, the Court DENIES such relief on summary adjudication. (See SAC, ¶¶ 1-7; see also Mot., pp. 11-12; Canales v. Wells Fargo Bank, N.A. (2018) 23 Cal.App.5th 1262, 1268-1269 [A summary judgment motion is directed to the issues framed by the pleadings].)

Only the relief quieting title in favor of Marquez is GRANTED. (See SAC, Prayer, ¶ 12; see also Mot., p. 12.) The Court CONFIRMS the August 25, 2021 Interlocutory Judgment providing that the Commerce Home Mortgage deed of trust “is a valid encumbrance against the Property as of the date of its recording whether a judgment is entered in favor of Plaintiff or any other person or entity deemed to be the legal owner(s) of the Property pursuant to this Action. (See Mot., p. 12; see also 8/25/21 Interlocutory Judgment, Order, p. 1.)

II.

SAXC, First Cause of Action, Members’ Derivative Action for Breach of Fiduciary Duty: DENIED.

In support of summary adjudication of the SAXC’s first cause of action for breach of fiduciary duty to Empire and Marquez, Plaintiff Conway-Burt argues that the alleged bases for this claim—Plaintiff’s failure to timely obtain building permits, concealment of loan defaults and bad credit, and focus on other projects beyond the work on the Property—are not duties owed under the operating agreements, and that Plaintiff Conway-Burt did not compete with Empire or Marquez, for which reasons the claims must fail. (Mot., pp. 12-15.)

However, the SAXC pleads, at the least, that a failure to obtain building permits was a breach of good faith to Empire and Marquez. (SAC, ¶ 42; see also Corp. Code, § 17704.09, subd. (d) [“A member shall discharge the duties to a limited liability company and the other members under this title or under the operating agreement and exercise any rights consistent with the obligation of good faith and fair dealing”]; Mot. p. 13 [citing to this statute].)

The motion does not address this issue, for which reason Plaintiff Conway-Burt fails to carry his burden on this claim. (Canales v. Wells Fargo Bank, N.A., supra, 23 Cal.App.5th at pp. 1268-1269.)

Summary adjudication of the SAXC’s first cause of action is thus DENIED.

III.

SAXC, Second Cause of Action, Members’ Derivative Action for Gross Mismanagement: DENIED.

In support of summary adjudication of the SAXC’s second cause of action for gross mismanagement of Empire and Marquez, Plaintiff Conway-Burt argues that he took no individual decision in the management of the LLCs and that the SAXC makes no allegations that Plaintiff made any management decisions to the detriment of Empire and Marquez. (Mot., pp. 15-16.)

To define gross mismanagement, Plaintiff Conway-Burt cites Buss v. J.O. Martin Co. (1966) 241 Cal.App.2d 123, 134. Plaintiff also cites the duty of care standard in Corporations Code section 17704.09, subdivision (c). (Mot., p. 16.)

For evidentiary support, Plaintiff Conway-Burt provides his declaration, which states that he never took individual management decisions on behalf of Empire or Marquez. (Mot., Sep. St., Issue No. 2, UMF No. 5 [citing to Mot., Conway-Burt Decl., ¶ 35].)

The Court first notes that Buss is not the correct standard for “gross mismanagement.” The “persistent” mismanagement standard of Buss arose within the context of the predecessor of Corporations Code section 1800, subdivision (b)(4). (See Bauer v. Bauer (1996) 46 Cal.App.4th 1106, 1114.) That subdivision states that a corporation may be dissolved where “[t]hose in control of the corporation have been guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers.” The equivalent provision for LLCs is Corporations Code section 17703.03, subdivision (b)(5), which provides that an LLC may be involuntarily dissolved where “[t]hose in control of the limited liability company have been guilty of, or have knowingly countenanced, persistent and pervasive fraud, mismanagement, or abuse of authority.” This, however, is not an involuntary dissolution claim.

Instead, the Corporations Code appears to include mismanagement as part of its duty of care definition. (Corp. Code, § 17704.09, subd. (c) [“A member’s duty of care to a limited liability company and the other members in the conduct and winding up of the activities of the limited liability company is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law”].)

Within the context of Corporations Code section 17704.09, the Court finds that Plaintiff fails to carry his burden on summary adjudication for the same reasons as those discussed in relation to the SAXC’s first cause of action, i.e., the papers do not explain whether Plaintiff’s omissions amounted to a gross mismanagement of Empire or Marquez through a lack of good faith in conducting the operations of Empire and Marquez, such as through failure to timely obtain building permits.

Summary adjudication of the SAXC’s second cause of action is thus DENIED.

IV.

SAXC, Third and Sixth Causes of Action, Members’ Derivative Action for Waste of Corporate Asset and Fraud in the Inducement: MOOT.

Plaintiff Conway Burt’s motion is MOOT as to the SAXC’s third and sixth causes of action because Defendants Lenee and Patno dismissed these claims on August 31, 2023. 

Conclusion

Plaintiff/Cross Defendant Phillip Conway-Burt’s Motion for Summary Judgment or, in the Alternative, Summary Adjudication is GRANTED, DENIED, and MOOT, in Part, as follows:

(1) GRANTED as to the SAC’s first, second, fourth, and thirteenth causes of action, with relief DENIED as to disassociation of Defendants Lenee and Patno from Empire or Marquez but GRANTED as to quiet title in favor of Marquez and confirmation of the August 25, 2021 Interlocutory Judgment;

(2) DENIED as to the SAXC’s first and second causes of action; and

(3) MOOT as to the SAXC’s third and sixth causes of action.