Judge: Curtis A. Kin, Case: 21STCV29695, Date: 2023-05-11 Tentative Ruling

Case Number: 21STCV29695    Hearing Date: May 11, 2023    Dept: 72

DEMURRER

MOTION TO STRIKE PORTIONS OF SECOND AMENDED COMPLAINT

Date:                                                                                       5/11/23 (8:30 AM)                 

Case:                                                                                                   Jonathan Dortch et al. v. Joshua Golsen et al. (21STCV29695)

TENTATIVE RULING:

Defendants Joshua Golsen, Barry Golsen, Rebel Bass, LLC, and GOL Capital, LLC’s Demurrer to Second Amended Complaint is OVERRULED.

Defendant Part Four, LLC’s Motion to Strike Portions of Second Amended Complaint is GRANTED IN PART.

I.                   GOLSEN DEFENDANTS’ DEMURRER TO SECOND AMENDED COMPLAINT BY GOLSEN DEFENDANTS

A.                First Cause of Action: Fraud (Intentional Misrepresentation and Concealment)

In the first cause of action, plaintiff Sly Spectrum LLC (“Sly”) alleges that Joshua Golsen (“Joshua”) and Barry Golsen (“Barry”) failed to disclose that Barry and Jack Golsen (“Jack”), Joshua’s grandfather, were named as defendants in a federal securities fraud class action lawsuit and that Barry and Jack were removed from the Board of Directors from their business. (SAC ¶¶ 48-50, 112, 113.) Had Joshua and Barry made these necessary disclosures, Sly maintains that it would not have entered into the Operating Agreement for Part Four, LLC. (SAC ¶¶ 51, 116.)

Defendants Joshua and Barry demur to the first cause of action on the ground that Sly purportedly fails to plead detrimental reliance. (See CACI 1901(4), (6).) More specifically, Joshua and Barry argue that Jonathan Dortch, the sole member and manager of Sly, agreed to Part Four’s ownership split in March 2014. (SAC ¶¶ 2, 30, 31.) However, the lawsuit was filed against Barry and Jack on September 25, 2015, and Barry and Jack were removed from the Board of Directors on September 3, 2015—dates falling after March 2014 (SAC ¶¶ 48 49.)

Defendants’ argument misapprehends what the SAC actually alleges with respect to the first cause of action for fraud.  Sly alleges that it would not have entered into the Operating Agreement had Joshua and Barry disclosed the existence of the federal lawsuit, which resulted in harm. (SAC ¶¶ 116-117.) Dortch, on behalf of Sly, executed the Operating Agreement on February 23, 2016, which was after the removal of Barry and Jack from the Board of Directors and after commencement of the federal action. (SAC ¶ 52.) The SAC thus adequately alleges detrimental reliance (entering the Operating Agreement) purportedly resulting from the alleged fraudulent concealment.  Defendants’ attempt to conflate some other March 2014 agreement with the Operating Agreement is unavailing.

In the reply, Joshua and Barry argue that, if Sly revoked the March 2014 oral agreement, Sly would have claim to nothing and would not have suffered harm. Failure to plead harm adequately was not the basis for the demurrer to the first cause of action. (See Demurrer at 9:1-10:7.) Simply put, by pointing out that Sly executed the Operating Agreement after the filing of the federal lawsuit, Sly adequately refutes Joshua and Barry’s actual contention on Demurrer regarding detrimental reliance.

The demurrer to the first cause of action is OVERRULED.

B.                 Second Cause of Action: Rescission of Operating Agreement

As a basis for rescission, Sly alleges that it would not have entered into the Operating Agreement had defendants not concealed that Barry and Jack were removed from the Board of Directors and that Barry was named as a defendant in a lawsuit. (SAC ¶¶ 122-126.)  

Joshua, Rebel Bass, LLC, and GOL Capital, LLC contend that Sly has no basis for rescission without a valid fraud claim. (Demurrer at 10:9-15; see Civ. Code § 1689(b)(1) [party may rescind contract if party’s consent was obtained through fraud].) For the reasons stated above, the first cause of action for fraud survives demurrer. Whether Sly fails to sufficiently plead the other bases for rescission is of no moment (see SAC ¶¶ 127-135), as a demurrer only lies as to an entire cause of action. (Fremont Indemnity Co. v. Fremont Gen. Corp. (2007) 148 Cal.App.4th 97, 119.) Because the fraud cause of action remains, the demurrer to the second cause of action is OVERRULED.

Ten (10) days to answer.

II.                DEFENDANT PART FOUR, LLC’S MOTION TO STRIKE PORTIONS OF SECOND AMENDED COMPLAINT

A.    Timeliness

Plaintiffs Jonathan Dortch and Sly Spectrum, LLC (“Sly”) contend that the motion to strike is untimely because it should have filed in connection with the prior Complaint or First Amended Complaint. However, CCP § 435(b)(1) allows defendants to serve and file a motion to strike “within the time allowed to respond to a pleading.” On October 7, 2022, the Court ordered responsive pleadings to be filed within 30 days thereof. This motion to strike was filed on November 7, 2022, the next court day after 30 days. (See CCP § 12a(a) [deadline falling on Sunday extended to next court day].) Plaintiffs do not cite any authority indicating that failing to move to strike allegations in prior iterations of a complaint is grounds for denial of the instant motion. The motion to strike is timely filed.

B.                 Paragraphs 18, 19, 28, 33, 37, 41, 55, 56, 59, 62, 66, 68, 69, and 71

Defendant Part Four, LLC (“Part Four”) moves to strikes various allegations on the ground that they are gratuitous and irrelevant. Under CCP § 436, the Court has discretion to strike irrelevant, false, or improper matter in a pleading, or parts of a pleading that do not conform with the laws of California. (CCP § 436 [“The court may, upon a motion made pursuant to Section 435, or at any time in its discretion, and upon terms it deems proper . . . .”].) Here, the Court exercises this discretion and declines to strike the paragraphs characterized by Part Four as gratuitous and irrelevant. The paragraphs state relevant background information potentially supporting plaintiffs’ claims for fraud, rescission, wrongful discharge, breach of fiduciary duty, and punitive damages. The motion to strike with respect to paragraphs 18, 19, 28, 33, 37, 41, 55, 56, 59, 62, 66, 68, 69, and 71 is DENIED.

C.                Paragraphs 142(a) and 142(e)

With respect to paragraph 142(a), Part Four argues that Sly cannot base the third cause of action for breach of operating agreement on Dortch’s termination without cause because Dortch was an at-will employee under the Operating Agreement, as the Court previously found with respect to Part Four’s demurrer to the First Amended Complaint. (See SAC Ex. A at §§ 7.3, 17.3 [“Nothing in this Agreement shall require the Company or the Manager, on behalf of the Company, to employ, or to continue the employment of, J.D., and J.D. agrees and acknowledges that his employment with the Company, if any, is and shall be on the basis of an employment at will”].) “An at-will employment may be ended by either party ‘at any time without cause,’ for any or no reason, and subject to no procedure except the statutory requirement of notice.” (Guz v. Bechtel Nat. Inc. (2000) 24 Cal.4th 317, 335.) Sly is a party to the Operating Agreement which contains the at-will employment provision with respect to Dortch. (SAC Ex. A at 1.) Accordingly, Sly cannot base the breach of operating agreement cause of action on the alleged lack of cause for Dortch’s termination. The motion to strike with respect to paragraph 142(a) is GRANTED.

With respect to paragraph 142(e), Part Four argues that Sly cannot base the third cause of action for breach of operating agreement on Part Four’s failure to make distributions because the Operating Agreement gives the Manager the sole discretion to determine whether to make distributions. (See SAC Ex. A at § 11.3.) However, while the Manager may be vested with discreution, such discretion must be exercised in good faith. (See Locke v. Warner Bros, Inc. (1997) 57 Cal.App.4th 354, 365, 367 [finding that discretion granted in contract must be exercised honestly and in good faith under implied covenant of good faith and fair dealing].) The implied covenant of good faith and fair dealing is implied in all contracts, including the Operating Agreement. (Id. at 363.) Accordingly, paragraph 142(e) is not necessarily irrelevant, false, or improper. The motion to strike with respect to paragraph 142(e) is DENIED.

D.                Paragraph 146, Subparagraphs (b), (c), (d), (e), (f), (g), (h), (i), (j), (k) (l), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (aa), (bb), (cc), (dd), and (ee)

Part Four alleges that Sly does not have standing to assert breaches of fiduciary duty against defendant Joshua Golsen (“Joshua”) because Part Four is the injured party. Perhaps that is true, but paragraph 146 and its subparagraphs are contained in the fourth cause of action for breach of fiduciary duty, which is asserted only against Joshua and not Part Four. (SAC at 35:3.) Part Four thus lacks standing to move to strike paragraph 146 or its subparagraphs.

The motion to strike with respect to the subparagraphs of paragraph 146 is DENIED.

E.     Paragraph 183(b)

Part Four argues that Sly does not allege that it had a right to possession of a PPP loan obtained by Part Four. (CACI 2100(1).) However, Sly alleges that the amount of the PPP loan was reimbursed from Part Four’s profit. When read in conjunction with the allegation that Part Four and Joshua converted Sly’s membership interest (SAC ¶ 185), Sly sufficiently alleges that a portion of the value of the PPP loan that was forgiven should have been disbursed to Sly.

The motion to strike with respect to paragraph 183(b) is DENIED.

F.     Conclusion

The motion to strike is GRANTED IN PART. Paragraph 142(a) is STRICKEN. The motion is otherwise DENIED. 

Before deciding whether to allow leave to amend, the Court inquires whether plaintiff Sly Spectrum, LLC can amend paragraph 142(a) to address the defect set forth above.