Judge Christopher K. Lui, Case 21STCV40022 2023-05-17 Tentative Ruling

Pursuant to California Rule of Court 3.1308(a)(1), the Court does not desire oral argument on the demurrer addressed herein. Counsel must contact the staff in Department 76 to inform the Court whether they wish to submit on the tentative, or to argue the matter. As required by Rule 3.1308(a)(2), any party seeking oral argument must notify ALL OTHER PARTIES and the staff of Department 76 of their intent to appear and argue.

Notice to Department 76 may be sent by email to smcdept76@lacourt.org or telephonically at 213-830-0776.

Per Rule of Court 3.1308, if notice of intention to appear is not given, the Court may adopt the tentative ruling as the final ruling.

Plaintiffs allege that Defendants have diverted the resources and opportunities of nominal Defendant Infinity Health, LLC, of which Plaintiff and Defendant Avery Williams are each 50% members and co-managers.

Defendants Avery M. Williams and Aric Williams separately demur to the Fourth Amended Complaint.

Defendants Avery M. Williams’ demurrer to the Fourth Amended Complaint is SUSTAINED without leave to amend as to the first, eighth and thirteenth causes of action, and OVERRULED as to the sixth and ninth causes of action.

Defendant Aric Williams’ demurrer to the Fourth Amended Complaint is OVERRULED as to the third, fourth, and eighth causes of action and as to aiding and abetting/conspiracy allegations, and SUSTAINED without leave to amend as to the sixth cause of action.

Both Defendants are ordered to answer the remaining allegations of the Fourth Amended Complaint within 10 days.

The Declaration of Matthew E. Hess reflects that Plaintiff’s counsel did not respond to meet and confer efforts. This satisfies Civ. Proc. Code, § 430.41(a)(3)(B).

Defendant’s request that the Court take judicial notice of the August 18, 2022 Order on Demurrer to the Second Amended Complaint is GRANTED per Evid. Code, § 452(d)(court records).

1. First Cause of Action (Breach of Contract—Plaintiff Zeledon against Defendant Avery Williams).

Defendant argues that Plaintiff pleads the following breaches of sections of the Operating Agreement as a direct claim at ¶¶ 83-88, even though it is a derivative claim because the alleged damage to Plaintiff, is that Avery Williams received a “disproportionate share of Infiniti profits” which is damage to the LLC.

Defendant argues that Corp. Code § 17704.06(a) defines an excessive distribution by a member to himself as a direct claim. § 17704.06(a) provides:

(a) Except as otherwise provided in subdivision (b), if a member of a member-managed limited liability company or manager of a manager-managed limited liability company consents to a distribution made in violation of Section 17704.05, the member or manager is personally liable to the limited liability company for the amount of the distribution that exceeds the amount that could have been distributed without the violation of Section 17704.05.

(a) A limited liability company shall not make a distribution if after the distribution either of the following applies:

(1) The limited liability company would not be able to pay its debts as they become due in the ordinary course of the limited liability company’s activities.

(2) The limited liability company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the limited liability company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.

However, the 4AC does not allege that the distribution to Defendant Avery resulted in the LLC being unable to pay its debts as they become due, nor that total assets would be less than the sum of the LLC’s total liabilities. As such, this argument based on § 17704.06 is not persuasive.

Plaintiff argues that he has been damaged, individually, by Defendant Avery’s conduct.

Here, the first cause of action alleges that, by virtue of Defendant Avery’s breach of the Infiniti Operating Agreement, Plaintiff has been damaged because Defendant has paid himself a disproportionate profit distribution concealed as expenses, but which were for his personal expenses, and caused Infinity to pay for Defendant’s personal legal services by retaining his brother Aric. (4AC, ¶ 86(a), (b).) This injury is derivative in nature because Plaintiff has no ownership interest in the profits of Infinity. “The principles governing derivative actions in the context of corporations apply to limited liability companies and limited partnerships.” (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 150.)

Shareholders own neither the property nor the earnings of the corporation. (Miller v. McColgan (1941) 17 Cal. 2d 432, 436 [110 P.2d 419, 134 A.L.R. 1424].) Shareholders own only stock, from which their income is derived upon the liquidation of assets or the declaration of dividends by the directors. (Id., at pp. 436-437.) Nelson had no ownership interest in the profits of Lonan and cannot have been deprived of them. The nature of Nelson's proof establishes that any injury was to the corporation; and since she neither alleged nor proved the breach of a duty owing to her personally, her emotional distress and the loss of her investment were incidental to the injury to the corporation.

Plaintiff also argues that California law permits individual claims by equity holders in closely held companies based on the issuance of disproportionate distributions they did not enjoy. Plaintiff cites Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, 1258 for this proposition. However, the Second District has recently declined to follow the First District’s decision in Jara, opining that it is contrary to statutory authority:

We acknowledge the policies underlying the derivative action rule do not apply with equal force in actions involving closely held companies. Requiring Leonard to name the entities that comprise the Sage Automotive Group (and the UCNP entities) as nominal defendants in this action will not prevent a multiplicity of lawsuits or assure equal treatment for all aggrieved shareholders. And the objective of encouraging intracorporate resolution of disputes and [*158] protecting managerial freedom has less meaning where Michael, Joseph, and Leonard constitute the board of directors and corporate officers. (See Jara, supra, 121 Cal.App.4th at p. 1259[1].) But the plain language of sections 800, 15910.02, and 17709.02 does not exclude close corporations or small partnerships or companies from the procedural prerequisites before a shareholder, limited partner, or member may file a derivative action. (See Nelson, supra, 72 Cal.App.4th at p. 127.) To allow Leonard to maintain his cause of action for breach of fiduciary duty as an individual action would essentially eliminate the derivative action rule in the context of close corporations and other closely held entities. California law does not support that result.

Likewise, here, the Court declines to eliminate the derivative action rule in the context of a limited liability company with two members, because that would create a statutory exception where the Legislature did not see fit to provide one.

As such, because Plaintiff has continually insisted on bringing this as a direct claim, despite having many opportunities to amend, the demurrer to the first cause of action is SUSTAINED without leave to amend as to Defendant Avery Williams.

Defendant argues that this cause of action is not pled with the reasonable particularity required of statutory claims. “[S]tatutory causes of action must be pleaded with particularity.” (Covenant Care, Inc. v. Superior Court (2004) 32 Cal.4th 771, 790.)

Defendant also argues that Plaintiff has not alleged that the alleged unfair business practices “threatens an incipient violation of an antitrust law, or violates the policy or spirt of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” (Davis v. Ford Motor Credit Co. LLC (2009) 179 Cal.App.4th 581, 594.) Plaintiff argues that this test only applies where a plaintiff claims to have suffered injury from a direct competitor’s unfair act or practice. (Cal-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 187.)

Here, the sixth cause of action is asserted derivatively on behalf of Infinity. In this capacity, Infinity is alleging—at least in part—that Defendant Avery utilized Infinity’s resources to compete with Infinity:

63. For example, Defendant Avery Williams and Defendant Aric Williams developed, in secret, and without full disclosure to Plaintiff Zeledon, an entirely new business of Infiniti referred to generally as “Infiniti Medical Services.” In doing so, Defendant Avery Williams executed agreements purporting to bind Infiniti, without disclosing this to, or seeking approval from, Plaintiff Zeledon. As such, these contracts were executed without the requisite authority, causing damage and injury to Infiniti.

64. Moreover, Defendant Avery Williams caused Infiniti to spend substantial sums towards this Infiniti Medical Services project, without disclosing such expenditures to Plaintiff Zeledon. When asked about specific expenditures related to this, and other projects, Defendant Avery Williams lied to Plaintiff Zeledon and actively concealed such expenditures from Plaintiff Zeledon. Defendant Aric Williams participated in this concealment by also failing to disclose these expenditures to Plaintiff Zeledon and negotiating contracts on behalf of Infiniti knowing that they were being concealed from Plaintiff Zeledon.

118. . . . Defendant Avery Williams used these family member employees and agents to serve his own personal benefit, to the detriment of Infiniti and Plaintiff Zeledon, including, among other things, engaging in the scheme to divert opportunities and funds of Infiniti, . . .

In Cel-Tech, the Supreme Court addressed the term “unfair” in the context of actions between competitors alleging anticompetitive practices, but it broadly criticized previous attempts to define “unfair” as “too amorphous” to provide guidance. (Cel-Tech, supra, 20 Cal.4th at pp. 184–185.) Previously, courts defined “unfair” as a practice that offends public policy or “ ‘is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers’ ” or required courts to “ ‘ “weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim.” ’ ” (Id. at p. 184.)

The Cel-Tech court concluded it must “require that any finding of unfairness to competitors under section 17200 be tethered to some legislatively declared policy or proof of some actual or threatened impact on competition” and, in actions challenging a direct competitor's unfair act, defined the term as “conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” (Cel-Tech, supra, 20 Cal.4th at pp. 186–187.)

(Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 612 [bold emphasis added].)

As noted above, this cause of action is based, at least in part[2], on the allegation that Defendant Avery was using Infinity’s funds to divert opportunities away from Infinity. This is pled with sufficient particularity and satisfies the pleading standard for unfair business practices pled by a competitor.

3. Eighth Cause of Action (Declaratory Relief—Plaintiff Zeledon against Defendants Avery Williams and Aric Williams).

Defendant argues that there are no allegations pertaining to Defendant Avery and this cause of action is moot because the receiver terminated Defendant Aric in March 2022 and hired another law firm to represent Infiniti. (4AC, ¶ 18.)

"The purpose of a judicial declaration of rights in advance of an actual tortious incident is to enable the parties to shape their conduct so as to avoid a breach. '[D]eclaratory procedure operates prospectively, and not merely for the redress of past wrongs. It serves to set controversies at rest before they lead to repudiation of obligations, invasion of rights or commission of wrongs; in short, the remedy is to be used in the interests of preventive justice, to declare rights rather than execute them.' " (Citation omitted.)

As Defendant notes, the 4AC admits that Defendant Aric no longer serves as General Counsel for Infinity. However, the issue of whether outstanding fees charged by Aric must be paid by Infinity is a controversy which remains justiciable. (4AC, ¶¶ 113(c), 144(c).) This is sufficient to support the cause of action as against Aric, but there is no justiciable controversy as against Defendant Avery.

Thus, the demurrer to the eighth cause of action is SUSTAINED without leave to amend as against Defendant Avery Williams.

Defendant argues that this cause of action fails because it only pleads generalized money damages.

This cause of action is based on Defendant Avery authorizing over $1 million of reimbursements payable to himself. (4AC, ¶ 131.)

"Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion are the plaintiff's ownership or right to possession of the property at the time of the conversion; the defendant's conversion by a wrongful act or disposition of property rights; and damages. It is not necessary that there be a manual taking of the property; it is only necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to [*452] his own use. [Citations.]" ( Oakdale Village Group v. Fong (1996) 43 Cal. App. 4th 539, 543-544 [50 Cal. Rptr. 2d 810].) Money can be the subject of an action for conversion if a specific sum capable of identification is involved. (Weiss v. Marcus (1975) 51 Cal. App. 3d 590, 599 [124 Cal. Rptr. 297].)

Neither legal title nor absolute ownership of the property is necessary. ( Messerall v. Fulwider (1988) 199 Cal. App. 3d 1324, 1329 [245 Cal. Rptr. 548].) A party need only allege it is "entitled to immediate possession at the time of conversion. [Citations.]" ( Bastanchury v. Times-Mirror Co. (1945) 68 Cal. App. 2d 217, 236 [156 P.2d 488], italics in original.) However, a mere contractual right of payment, without more, will not suffice.

“Conversion is the wrongful exercise of dominion over the property of another.” (Oakdale Village Group v. Fong (1996) 43 Cal.App.4th 539, 543 [50 Cal. Rptr. 2d 810].) Proof of conversion requires a showing of ownership or right to possession of the property at the time of the conversion, the defendant's conversion by a wrongful act or disposition of property rights, and resulting damages. (Id. at pp. 543–544; Burlesci v. Petersen (1998) 68 Cal.App.4th 1062, 1066 [80 Cal. Rptr. 2d 704].) “Money can be the subject of an action for conversion if a specific sum capable of identification is involved.” (Farmers Ins. Exchange v. Zerin (1997) 53 Cal.App.4th 445, 452 [61 Cal. Rptr. 2d 707].)

(Avidor v. Sutter's Place, Inc. (2013) 212 Cal. App. 4th 1439, 1452 [bold emphasis added].)

While it is true that money cannot be the subject of an action for conversion unless a specific sum capable of identification is involved (Baxter v. King, 81 Cal. App. 192 [253 Pac. 172]), it is not necessary that each coin or bill be earmarked. When an agent is required to turn over to his principal a definite sum received by him on his principal's account, the remedy of conversion is proper. (Salem Light & Traction Co. v. Anson, 41 Ore. 562 [67 Pac. 1015, 69 Pac. 675].)

A ‘generalized claim for money [is] not actionable as conversion.’ (Citations omitted.) [¶] … [¶] California cases permitting an action for conversion of money typically involve those who have misappropriated, commingled, or misapplied specific funds held for the benefit of others. (. . . see also Software Design & Application, Ltd. v. Hoefer & Arnett, Inc., supra, 49 Cal.App.4th at p. 485 [no claim for conversion is stated where money was allegedly misappropriated “over time, in various sums, without any indication that it was held in trust for” plaintiff]; . . .

(Kim v. Westmoore Partners, Inc. (2011) 201 Cal.App.4th 267, 284-85 [bold emphasis added].)

Here, the allegation the Defendant Avery misappropriated at least $1 million of Infiniti’s funds to which he had access but that he did not have the right to possess (4AC, ¶¶ 130, 131) is sufficient to plead a claim for conversion because such sum is capable of identification by resort to corporate records.

Defendant argues that all of the alleged injuries are to the company, not Plaintiff personally. In this regard, ¶ 159 alleges:

159. Defendant Avery Williams breached these fiduciary duties to Infiniti and to Zeledon by taking actions that damaged Plaintiff, directly, including, but not limited to taking disproportionate distributions concealed as expense reimbursements which were, not, in fact, true and correct legitimate business expenses. Defendant Avery’s taking of disproportionate distributions damaged Plaintiff directly, as he, as the sole other equity holder of Infiniti was denied his personal fair share of distributions.

For the reasons discussed above re: the first cause of action, this is a derivative injury, not a direct one.

The demurrer to the thirteenth cause of action is SUSTAINED without leave to amend as to Defendant Avery Willliams.

Defendant Avery Williams is ordered to answer the remaining allegations of the Fourth Amended Complaint within 10 days.

The Declaration of Joseph C. Campo reflects that Plaintiff’s counsel satisfied the meet and confer requirement set forth in Civ. Proc. Code, § 430.41.

Defendant Aric Williams argues that Plaintiff no longer has standing to bring a derivative action on behalf of Infiniti, which has brought its own action against Aric. Defendant argues that a shareholder only has the right to bring a derivative suit when the board of directors fails or refuses to bring a cause of action or right of recovery against those who have harmed it. (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108.) As lnfiniti's direct action against Arie alleges claims arising out of the same common nucleus of operative facts alleged herein, this claim can no longer stand. (Patrickv. Alacer Corp. (2008) 167 Cal.App.4th 995, 1004-1005.)

This argument relies upon matters extrinsic to the 4AC and of which Defendant did not properly request that the Court take judicial notice. This ground for demurrer is not persuasive. Defendant may assert it by way of a motion for judgment on the pleadings with a proper request for judicial notice.

Defendant argues that Plaintiff still has not pled how Defendant Aric’s alleged breach of fiduciary duty cased harm to Plaintiff Zeledon individually. Defendant argues that the allegation that Plaintiff incurred the cost of paying accountants to correct the errors caused by Defendant Arci Williams including services related to amending his tax returns (4AC, ¶ 102) is not pled with sufficient detail.

However, the details which Defendant seeks may be obtained through discovery. Plaintiff sufficiently pleads that, as a result of the breach of fiduciary duty by Defendant Arci owed to Plaintiff as his tax counsel, Plaintiff incurred costs to re-state his personal tax returns—for which he retained Defendant Arci—and has incurred the cost of paying accounts to correct these errors. (4AC, ¶ 104.) This is a direct, not a derivative claims, and is sufficiently pled.

Defendant argues that Plaintiff does not allege this claim with sufficient specificity as against Defendant Aric.

As discussed above re: Defendant Avery’s demurrer, this cause of action is sufficiently pled as against Defendant Avery, but there is no allegation that Defendant Aric engaged in any unfair business practices which caused Plaintiff injury as a competitor under the pleading standard set forth in Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 612.

As such, the demurrer to the sixth cause of action is SUSTAINED without leave to amend as to Defendant Aric Williams.

Defendant did not present any argument in support of the demurrer to this cause of action. In any event, as discussed above re: the demurrer of Avery Williams, this cause of action is sufficiently plead as to Defendant Aric.

Defendant argues that the Court should strike the new allegations concerning aiding and abetting and conspiracy. It goes without saying Defendant should have file a motion to strike in this regard. The demurrer on this ground is OVERRULED.

Defendant Aric Williams is ordered to answer the remaining allegations of the Fourth Amended Complaint within 10 days.

[1] First District Court of Appeal Decision.

[2] A demurrer does not lie to only part of a cause of action or a particular type of damage or remedy. (See Kong v. City of Hawaiian Gardens Redevelopment Agency (2003) 108 Cal.App.4^th 1028, 1046; PH II, Inc. v. Superior Court (Ibershof) (1995) 33 Cal.App.4^th 1680, 1682.) The proper procedure is to bring a motion to strike the substantively defective allegation. (Id. at 1682-83.)