Judge: Christian R. Gullon, Case: 24PSCV00381, Date: 2024-05-08 Tentative Ruling

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Case Number: 24PSCV00381    Hearing Date: May 8, 2024    Dept: O

Tentative Ruling

MOTION TO STAY PROCEEDINGS AND APPOINT APPRAISERS TO BUY OUT PLAINTIFF KAREN HOLTON’S MEMBERSHIP INTERESTS IN VAMPYRE COSMETICS, LLC is GRANTED, as prescribed by Section 17707.03(c)(6). The entire action is stayed.[1] Defendant is to post an undertaking in an amount TBD at the hearing.

Background

This case arises from a business partnership dispute(s). Plaintiff Karen Holton alleges the following against Defendants Vampyre Cosmetics, LLC (the “Company”); Rachel Boese aka Rachel Clinesmith (“Defendant” or “Boese”); and Lisa Malcolm (“Malcolm”):[2] Plaintiff, the COO, and Defendant, founder, have a 37.5% interest in the Company and Malcolm (now resigned) has a 25% interest in the Company. Since joining in 2022, Plaintiff, amongst other actions and responsibilities, made personal loans to the Company, created products, and allowed Defendants to use Plaintiff’s credit to access capital. However, starting around June 25, 2023, Defendants froze Plaintiff out of the Company by removing her access to the business checking accounts, revoking her access to viewing the Company’s financial date, cutting her access to the Company’s email and chat, have refused to provide Plaintiff access to the Company books and financial records, and have engaged in gross mismanagement and fraud. Examples of the alleged fraud include: (i) stealing Plaintiff’s personal information to take out new loans, (ii) stealing Plaintiff’s intellectual property to manufacture new products and increase product sales; (iii) Boese has diverted funds and loans to Boese’s other business, Undead Magazine.

On February 6, 2024, Plaintiff filed suit.

On February 16, 2024, Plaintiff filed a Motion For Appointment Of Receiver For Vampyre Cosmetics, Llc.

On March 29, 2024, Malcolm filed a joinder to the receiver motion. (In the joinder, Malcolm indicates that she has irrevocably granted Plaintiff all rights and powers to exercise all voting rights in accordance with Malcolm’s membership interest. Copies of the ‘Proxy Voting Agreement’ and the ‘Irrevocable Proxy to Vote Membership Interest Vampyre Cosmetics’ have been provided.)

On April 2, 2024, Boese filed a Verified FAC asserting the following fourteen (14) causes of action (COAs) against Defendants:

On April 10, 2024, Plaintiff filed two doe amendments naming Joseph Keens as Doe 1 and Phoenix Rising Cosmetics, LLC as Doe 2.

On April 11, 2024, Defendant filed the instant MOTION TO STAY PROCEEDINGS AND APPOINT APPRAISERS TO BUY OUT PLAINTIFF KAREN HOLTON’S MEMBERSHIP INTERESTS IN VAMPYRE COSMETICS, LLC.

On April 15, 2024, the court conducted the hearing on the receiver motion and continued the matter as the motion appeared moot in light of Plaintiff’s majority voting interest in the company. According to Defense Counsel Yu, on 3/30/24, Plaintiff and Malcolm entered into a settlement whereby Malcolm would provide Plaintiff with an irrevocable proxy and join in this Motion in exchange for a dismissal from this action.

On April 19, 2024, Plaintiff dismissed Lisa Malcolm on all COAs except the involuntary dissolution COA.

On April 25, 2024, Plaintiff dismissed the 14^th COA for involuntary dissolution. That same day, Plaintiff filed her opposition to Defendant’s motion.

On May 1, 2024, Defendant filed her reply.

On May 3, 2024, Defendant filed a ‘declaration of demurring or moving party in support of automatic extension.’ According to the filing, Defendant intends to file a demurrer and motion to strike to Plaintiff’s FAC.

Legal Standard

Defendant brings forth the instant motion pursuant to California Corporations Code section 17707.03 to stay this litigation and appoint appraisers so that Boese can purchase all of the membership interests held by Plaintiff in Vampyre Cosmetics, LLC.[3] In turn, Section 17707.03, subdivision (c)(1), states, “In any suit for judicial dissolution, the other members may avoid the dissolution of the limited liability company by purchasing for cash the membership interest owned by the members so initiating the proceeding, the ‘moving parties,’ at their fair market value.”

“If the purchasing parties elect to purchase the membership interests owned by the moving parties, are unable to agree with the moving parties upon the fair market value of the membership interests, and give bond[4] with sufficient security to pay the estimated reasonable expenses, including attorney’s fees, of the moving parties if the expenses are recoverable under paragraph (3), the court, upon application of the purchasing parties, either in the pending action or in a proceeding initiated in the superior court of the proper county by the purchasing parties, shall stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair market value of the membership interests owned by the moving parties.” (Corp. Code § 17707.03(c)(2).)

Discussion

As a member with 37.5% interest in the company and in action wherein Plaintiff seeks to dissolve the company, Defendant is electing to invoke her right under Corporations Code section 17707.03, subdivision (c) to buy out Plaintiff’s interest and have the court appoint appraisers to determine the fair market value of Plaintiff’s interest. (Motion p. 4.) Even if Plaintiff dismisses the dissolution COA, the dismissal does not affect Defendant’s rights to avoid dissolution because Vampyre Cosmetics is a limited liability company and not a corporation, and this Motion is governed by Corporations Code section 17707.03(c)(6). (Motion p. 4.) In opposition, amongst other points, Plaintiff’s chief argument is that that the motion is moot because the right to dismiss the cause of action only goes away after the court has ruled on the motion and the buyout appraisal proceeding has commenced but here, no order for dissolution has been entered nor commenced.[5]

Effectively, the issue presented is whether dismissal of the dissolution COA vitiates relief under Section 17077.03. For reasons to be discussed below, the court determines that Section 17707.03 subdivision (c)(6) provides that the buy-out procedure is not affected by the dismissal. As both parties heavily rely upon Ontiveros v. Constable (2018) 27 Cal.App.5th 259, the court will begin its analysis there.

In Ontiveros v. Constable (2018) 27 Cal.App.5th 259, the plaintiff/minority shareholder sued the majority shareholder of a corporation. In response to the plaintiff’s involuntary dissolution COA, the defendants filed a motion to stay proceedings and appoint appraisers under section 2000.[6] After the trial court granted the motion (staying the action), the plaintiff tried to dismiss the dissolution COA via a motion for leave to file a dismissal with prejudice (CCP section 581(e)), which the court granted; thus, effectively terminating the procedure under section 2000. (Id. at p. 263.) The appellate court determined that the trial court misapplied the law because “a special proceeding under section 2000 once initiated, ‘supplants’ a cause of action for involuntary dissolution.” (Id. at p. 264.) Alternatively stated, “a party's right under section 2000 depends entirely on the existence of a cause of action for involuntary dissolution of a corporation. Without such a cause of action, a party could not bring a motion pursuant to section 2000.” (Id., at p. 271, citing Kennedy v. Kennedy (2015) 235 Cal. App. 4th 1474, 1481.)[7] The defendants, however, claimed that Section 2000 does not give the party seeking involuntary dissolution of a corporation the right to avoid the statutory election to purchase after the election process has been commenced by order of the court, and in making such argument, the defendants focused not on section 2000 but on section 17707.03. (Ontiveros, supra, 27 Cal.App.5th at p. 272.) 

In turn,  Section 17707.03 applies to limited liability companies. Notably, as relevant here, Section 17707.03 subdivision (c)(6) states: “A dismissal of any suit for judicial dissolution by a manager, member, or members SHALL not affect the other members' rights to avoid dissolution pursuant to this section.” (emphasis and capitalization added.)[8] Accordingly, similar to the argument raised by the defendants/appellants in Ontiveros, here, Defendant Boese claims that  section 17707.03, subdivision (c)(6) prevents Plaintiff from dismissing her involuntary dissolution COA to avoid the appraisal and buyout procedures. (Id. at p. 273.) However, while in Ontiveros the appellate court was not persuaded by the argument because the business entity at issue was a corporation not a LLC (“Appellants, undaunted by this distinction…” (ibid), the court was not silent on the issue. (Opp. p. 3:25-26.)  

As observed by the Ontiveros court, “there is no analogous provision in section 2000 comparable to section 17707.03, subdivision (c)(6).” (Ibid.) Indeed, a comparison of the two sections (2000 an 17707.3) shows largely similar identical language—e.g., “in any suit for judicial dissolution” member/shareholder “may avoid the dissolution” by “purchasing for cash” either the interest (for LLC) or the shares (for corporation) at their “fair value” which can be determined by “three disinterested appraisers.” Effectively, the fundamental difference between the two is section 17707.03’s addition of the provision that regardless of the dismissal of the dissolution COA, the right to a buy-out is UNAFFECTED. Accordingly, whereas the Ontiveros court declined to insert words into Section 2000 (id. at p. 274 [“Here, Appellants essentially ask us to add that subdivision to section 2000 although the Legislature did not do so. This is not our role.”]) considering the recognition that the “[e]ach statute governs a different legal entity (id. at p. 274), here, this court would be usurping legislative intent by not adhering to the plain language of subdivision (c)(6) of section 17707.03.

Thus, as the plain meaning of Section 17707.03 (c)(6) grants Defendant a mandatory right to proceed with a buyout regardless of Plaintiff’s dismissal of her claims, then Defendant’s relief is proper.

To the extent another argument is raised in opposition, Plaintiff argues that in the “unlikely event that the Court were to order a buy-out and appraisal process given that Plaintiff has dismissed the dissolution cause of action, it does not necessarily entail a stay of the entire litigation” because “Defendant has made no offer to purchase Plaintiff’s membership interests in Vampyre Cosmetics or communicated the fair market value of Plaintiff’s interest.” (Opp. p. 5.) That appears disputed as Defendant in Reply attaches a declaration wherein she attests otherwise. (Reply p. 11 of 16 of PDF, See Boese Declaration, ¶5 [“Starting in 2023, I have made repeated offers to Plaintiff to buy out her ownership interests in Vampyre Cosmetics. These offers to Plaintiff have been made both by me personally and through my counsels of record at the time through informal negotiations and even mediations facilitated by third parties. The most recent offer was made on January 16, 2024. Plaintiff has not accepted any of the offers to date.”].) Indeed, a review of an email sent from Defendant’s prior counsel to Plaintiff’s counsel is time stamped to January 2024, corroborating the fact that an offer to purchase was made prior to filing the motion.

To the extent that Plaintiff argues that a stay of the entire of the proceedings would be prejudicial (Opp. p. 7), the court is not persuaded for a few reasons.

First, dissolving the company (which was Plaintiff’s intended desired relief) is arguably the most prejudicial outcome as there would be no company. Defendant’s option, however, allows for the company to remain in force and effect. Thus, staying the proceedings is not as prejudicial as dissolving the company.  

Second, in Plaintiff’s FAC for involuntary dissolution, she “pray[ed] for a decree that Vampyre be wound up and dissolved in the manner provided by law, and for such ancillary orders and decrees as may be just and necessary to effectuate the winding up and dissolution of Vampyre.” (FAC P125.) Consequently, as a matter of law, to effectuate the winding up and dissolution of the company, the court “shall stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair market value of the membership interests owned by the moving parties.” (Corp. Code § 17707.03(c)(2), emphasis added.) Thus, the court must stay the dissolution proceedings; this is not a matter of discretion.[9]

Third, to the extent that Plaintiff does not dispute that the dissolution proceeding should not be stayed, she does not advance a convincing argument as to how, practically speaking, the litigation would proceed.

Fourth, on a related noted about judicial economy, staying the dissolution proceeding, valuing the company, and ordering Defendant to pay the designated amount would inherently resolve the dispute which has to do with harm to the company. After all, Corporations Code § 17707.03(b)(5) expressly contemplates that “persistent and pervasive fraud, mismanagement, or abuse of authority” could be among the issues appraised, along with similar wrongdoing itemized in id. § (b)(1)-(4), as part of the buyout proceeding under subdivision (c).” (Reply p. 7.)

Thus, the matter is stayed.

Conclusion

Based on the foregoing—namely that the appraisal and buy-out process is unaffected by Plaintiff’s dismissal of the dissolution COA before any formal order on the dissolution COA—the motion is GRANTED, and the matters are stayed.