Judge: Barbara M. Scheper, Case: 21STCV11537, Date: 2022-07-26 Tentative Ruling

Case Number: 21STCV11537    Hearing Date: July 26, 2022    Dept: 30

Dept. 30

Calendar No.

Camden Systems, LLC vs. 409 North Camden, LLC, et. al., Case No. 21STCV11537

Tentative Ruling re:  Defendants’ Motion for Summary Judgment, or in the alternative, Summary Adjudication of Issues

Defendants move for summary judgment, or in the alternative, summary adjudication against derivative plaintiff Camden Systems, LLC (Plaintiff) on the fourth, fifth, sixth, and supplemental causes of action for declaratory relief in Plaintiff’s Third Amended Complaint (TAC). Summary adjudication is granted in favor of Defendants on the fourth, sixth, and supplemental causes of action. Summary adjudication is denied on the fifth cause of action.

The function of a motion for summary judgment or adjudication is to allow a determination as to whether an opposing party can show evidentiary support for a pleading or claim and if not to enable an order of summary dismissal without the need for trial. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843 (Atlantic Richfield).) Code of Civil Procedure Section 437c, subdivision (c) “requires the trial judge to grant summary judgment if all the evidence submitted, and ‘all inferences reasonably deducible from the evidence’ and uncontradicted by other inferences or evidence, show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1119.)

Once the moving party has met that burden, the burden shifts to the opposing party to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. To establish a triable issue of material fact, the party opposing the motion must produce substantial responsive evidence. (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 166.)

Defendants are members of nominal Defendant 409 North Camden, LLC (409), which was formed in 2016 to own and manage an office building in Beverly Hills. (Defendants’ UMF (DUMF) 3-4.) Plaintiff first obtained a 12.5% membership interest in 409 in July 2020. (DUMF 39.) Plaintiff later acquired additional interests in October 2020, and now possesses a 22.5% interest in the company. (DUMF 42.) Plaintiff brings the current suit derivatively on behalf of 409 in its capacity as a member.

Fourth Cause of Action

            Plaintiff’s fourth cause of action seeks declaratory relief as to whether, under its Operating Agreement (OA), 409 must obtain the unanimous approval of all its members for acts including distributing Available Cash. Plaintiff concedes that Defendants have met their burden on the fourth cause of action. Accordingly, summary adjudication on the fourth cause of action is granted in favor of Defendants.

Fifth Cause of Action

            Plaintiff’s fifth cause of action seeks a judicial declaration as to the validity of proposals approved by Defendants at a February 20, 2021 meeting of members. (TAC ¶ 105.) At that meeting, the members passed a motion to elect Jeffery Young as manager, voted to withhold the distribution of Available Cash, authorized payment for certain renovations, and authorized payment of a management assistance fee to Kenny Young. (DUMF 59-62; Defendants’ Exhibits (DE), Ex. 24.)

            Corporations Code § 17704.07, subd. (h), provides that “[w]henever members are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 days nor more than 60 days before the date of the meeting to each member entitled to vote at the meeting.” The notice must state the place, date, and time of the meeting, as well as “the general nature of the business to be transacted. No other business may be transacted at that meeting.” (Corp. Code, § 17704.07, subd. (h)(1).)

            It is undisputed that notice of the February 20, 2021 meeting was first given on January 11, 2021. (Defendants’ UMF 54; DE Ex. 22.) This notice, sent via email from Jeffrey Young, stated the date, time, and place of the meeting (over Zoom), but did not contain any agenda for the meeting. On February 11, 2021, nine days before the meeting, Young sent another email to the members with the agenda attached. (Defendants’ UMF 55; DE Ex. 23.) Accordingly, the undisputed facts show that the notice for this meeting was defective under Section 17704.07, subd. (h) because it was not sent 10 or more days before the date of the meeting.

            Defendants argue that the defective notice for this meeting is irrelevant because the members later ratified those actions during the February 19, 2022 members meeting, pursuant to Section 7.4 of the OA. That section provides, “without the written consent or ratification of a majority of the Members, the Manager shall have no authority to expend or use Company money or property other than on the account and for the benefit of the Company or to pledge any of the Company’s credit or property for other than Company purposes.” (TAC, Ex. A, p. 9.)

            Some of the actions taken at the February 20 meeting may be ratified under this provision, given that under the OA distributions of Available Cash are to be “determined by the Manager, subject to the approval of the Members,” (Section 6.1), and the Manager is given the “right, authority, and responsibility to maintain, repair and renovate the Property” with expenditures in excess of $10,000 subject to member approval (Section 7.2(a)(ii).)]

            However, it does not appear that Section 7.4 allows the members to ratify their election of Jeffrey Young as manager. The election of Young as manager was not an instance in which the manager was to “expend or use Company money or property.” Given this, Defendants have not met their burden to show a complete defense to this cause of action based on the February 2022 ratification, and so a triable issue exists as to the validity of the proposals approved of at the February 20, 2021 members meeting.

            Accordingly, summary adjudication is denied as to the fifth cause of action.

Sixth Cause of Action

            Plaintiff’s sixth cause of action for money had and received alleges that Defendants are indebted to 409 for money received by the Defendants from 409 as distributions of Available Cash. The distributions at issue were approved at meetings taking place from February 2017 through June 2020. (Plaintiff’s UMF 163-172.) Plaintiff was admitted as a member of 409 in July 2020. (DUMF 41.)

            Under Corporations Code § 17709.02, subd. (a)(1), no derivative action on behalf of an LLC may be maintained by a member unless “[t]he plaintiff alleges in the complaint that the plaintiff was a member of record . . . at the time of the transaction or any part of the transaction of which the plaintiff complains, or that the plaintiff's interest later devolved upon the plaintiff by operation of law from a member who was a member at the time of the transaction or any part of the transaction complained of.”  (See Pacific Lumber Co. v. Superior Court (1990) 226 Cal.App.3d 371, 376 [holding that a plaintiff could not maintain a derivative suit because he “did not own any shares at the time of the transaction of which he complains”].)  

            Plaintiff lacks standing to bring this cause of action because it is undisputed that the transactions in question took place prior to the time that Plaintiff became a member of 409 LLC.  Furthermore, Plaintiff has failed to present evidence showing a triable issue as to whether standing exists under the continuing wrongs doctrine.

Corporations Code § 800, the equivalent of Section 17709.02 for derivative corporation actions, “embodies what is often called the contemporaneous ownership rule, which can be reduced to this sentence: A plaintiff must be a shareholder in the corporation on whose behalf the plaintiff has brought the derivative suit, and have been a shareholder at the time the corporation's claim arose.” (Kruss v. Booth (2010) 185 Cal.App.4th 699, 724.) “[S]ection 800 is also home to an exception to the contemporaneous ownership rule, which allows a plaintiff to bring a derivative action where the previous misconduct and its bad effects continue over into the period after the plaintiff acquired the stock.” (Ibid.) “The continuing wrong exception of section 800 requires a hearing, with evidence, and the actual application of the exception is left to the court's discretion. (Ibid.)

The equivalent section under Section 17709.02 reads, “Any member who does not meet these requirements may nevertheless be allowed in the discretion of the court to maintain the action on a preliminary showing to and determination by the court, by motion and after a hearing at which the court shall consider any evidence, by affidavit or testimony, as it deems material, of all of the following . . .” (Corp. Code § 17709.02, subd. (a)(1).)

Here, as in Kruss, Plaintiff has not sought a hearing under Section 17709.02, and so Plaintiff cannot assert an exception to the contemporaneous ownership rule. The undisputed evidence therefore shows that Plaintiff lacks standing to bring this cause of action. Summary adjudication is granted in favor of Defendants on the sixth cause of action.

Supplemental Cause of Action

            Finally, Plaintiff has asserted a “supplemental” cause of action seeking declaratory relief as to the validity of a resolution adopted by Defendants on May 3, 2021, authorizing and directing 409 to indemnify and hold them harmless against this suit, and to advance them costs and expenses in defending it. (TAC ¶ 113.) Plaintiff alleges that this act was not authorized under statute or the OA. (TAC ¶ 115.)

            Under Section 7.2 of the OA, the Manager of 409, subject to the approval of at least 65% of membership interests, shall “have the absolute power to . . . pledge . . . or otherwise deal in or with any and all of the assets; [and to] cause the Company to issue any guarantees.” (TAC Ex. A, p. 8.) Under Section 7.4, “without the written consent or ratification of a majority of the Members, the Manager shall have no authority to expend or use Company money or property other than on the account and for the benefit of the Company or to pledge any of the Company’s credit or property for other than Company purposes.” (TAC, Ex. A, p. 9.)

            It is undisputed that the May 3 resolution was approved of by 77.5% of 409’s membership interests. (DUMF 146-148.) That action was plainly authorized under Sections 7.2 and 7.4.

            Plaintiff argues that this act required the unanimous approval of members pursuant to Corp. Code § 17704.07, subd. (c)(4)(B), which requires unanimous consent for acts “outside the ordinary course of the limited liability company's activities.” However, as Defendants point out, this requirement is overridden by Section 7.4, which permits a majority of members to consent to or ratify the manger’s use of or pledge of any company money or property “for other than Company purposes.” (TAC Ex. A, p. 9.)

            Accordingly, summary adjudication is granted in favor of Defendants on the supplemental cause of action.