Judge Curtis A. Kin, Case 22STCV09769 2022-08-16 Tentative Ruling

Judge: Curtis A. Kin, Case: 22STCV09769, Date: 2022-08-16 Tentative Ruling

Case Number: 22STCV09769 Hearing Date: August 16, 2022 Dept: 72

MOTIONS FOR ORDER REQUIRING

POSTING OF BOND (2)

Date: 8/16/22 (9:30 AM)

Case: MJW Media, Inc. v. SMC Specialty Finance, LLC et al. (22STCV09769)

TENTATIVE RULING:

Defendant SMC Specialty Finance, LLC’s Motion for Order Requiring Plaintiff MJW Media, Inc. to Post a Bond and for Stay of Action is GRANTED IN PART.

Defendant Jonah Loop’s Motion for Order Requiring Plaintiff MJW Media, Inc. to Post a Bond and for Stay of Action is GRANTED IN PART.

I. DEFENDANT SMC SPECIALTY FINANCE, LLC’S MOTION FOR ORDER REQUIRING PLAINTIFF MJW MEDIA, INC. TO POST A BOND AND FOR STAY OF ACTION

Defendant SMC Specialty Finance, LLC’s requests for judicial notice are DENIED in their entirety as “unnecessary to the resolution of the appellate issues before” the Court. (Martinez v. San Diego County Credit Union (2020) 50 Cal.App.5th 1048, 1075.)

Defendant SMC Specialty Finance, LLC (“SMC”) moves for an order requiring plaintiff MJM Media, Inc. to post a bond under CCP § 1030 and Corporations Code § 17709.02.

Pursuant to CCP § 1030(b) and (c), the Court shall require a plaintiff residing outside the State of California to file an undertaking if there is a reasonable possibility that the moving defendant will obtain judgment in this action.

With respect to whether plaintiff resides outside of California, plaintiff admits that its primary place of business is in Arizona. (Compl. ¶ 1.) Plaintiff does not dispute that it resides out of state.

With respect to whether there is a reasonable possibility defendant will obtain a judgment in this action, plaintiff asserts three causes of action against SMC: (1) breach of the implied covenant of good faith and fair dealing; (2) breach of fiduciary duty; and (3) unfair business practices. All three causes of action are on a derivative basis.

With respect to the first cause of action for breach of the implied covenant of good faith and fair dealing, “[i]f there exists a contractual relationship between the parties . . . the implied covenant is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated in the contract.” (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1032.) Plaintiff alleges that SMC impliedly agreed to act in good faith to effectuate the successful production of the subject movie, “Stones,” and allow nominal defendants The Manuscript Productions, LLC and Manuscript Movie, LLC (collectively, “Manuscript Parties”) to repay the loan funded by SMC. (Compl. ¶ 36.) However, the Loan Agreement between the Manuscript Parties and SMC required repayment of the loan irrespective of whether production of the subject movie “Stones” was completed. (Burlingham Decl. ¶ 6 & Ex. 1 [“Loan Agreement”] at ¶ 5.1 [“The Borrower agrees to repay the Debt . . . in full without set off or deduction . . . on or before the earlier of (i) the Advance Maturity Date or (ii) the closing of the permanent financing for the Film or (iii) any earlier date on which the Borrower elects to fully and indefeasibly repay the Debt”].)

Moreover, as a condition of the loan, the Manuscript Parties executed an Amended and Restated Security Agreement, pursuant to which the Manuscript Parties granted SMC a first-priority security interest in the Manuscript Parties’ collateral, which includes the right to produce the subject picture in the event of default of the loan. (Burlingham Decl. ¶ 7 & Ex. 3 [“Security Agreement”] at ¶¶ 1, 7.1 & Ex. A at ¶¶ 4, 12.) Plaintiff admits it defaulted on the loan. (Compl. ¶¶ 9, 10; see also Burlingham Decl. ¶ 11 & Ex. 9 [Notice of Default sent by SMC to Manuscript Parties].) Further, in the Security Agreement, the Manuscript Parties expressly waived their rights to assert any claims of offset of SMC’s security interest. (Burlingham Decl. ¶ 7 & Ex. 3 [“Security Agreement”] at ¶ 9 [“Debtor expressly waives and agrees not to assert any claim, defense and/or excuse, and expressly waives and agrees not to assert any right or claim of offset, setoff, reduction, modification or exoneration of or against the Security Interest . . . .”].)

For the foregoing reasons, SMC demonstrates a reasonable possibility of prevailing on the first cause of action based on a finding that it did not interfere with the Manuscript Parties’ right to receive the benefits of the Loan Agreement, i.e., the financing loaned to the Manuscript Parties. (Burlingham Decl. ¶ 10.) Rather, SMC shows that the Manuscript Parties defaulted under the Loan Agreement, thereby triggering SMC’s rights under the Security Agreement to take over production of the subject movie.

With respect to the second cause of action for breach of fiduciary duty, plaintiff alleges that fiduciary duties arose from SMC’s (and co-defendant Jonah Loop’s) control over the Manuscript Parties. (Compl. ¶¶ 42-49.) “The relationship between a lending institution and its borrower-client is not fiduciary in nature.” (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1093.” Arguably, a lender could be liable to the borrower for negligence if it actively participated in the borrower’s enterprise beyond the role of a money lender. (Id. at 57.) However, “[i]t is simply not tortious for a commercial lender to lend money, take collateral, or to foreclose on collateral when a debt is not paid.” (Sierra-Bay Fed. Land Bank Assn. v. Superior Court (1991) 227 Cal.App.3d 318, 334.) “A commercial lender is privileged to pursue its own economic interests and may properly assert its contractual rights.” (Id. at 334-35.)

Here, the Security Agreement allowed for SMC to take over production of the subject movie. Further, the Manuscript Parties expressly waived the right to assert any offset against SMC for their inability to pay the loan. Plaintiff did not address how the law cited by SMC is inapplicable. Accordingly, SMC demonstrates a reasonable possibility of prevailing on the second cause of action based on a finding that SMC’s conduct concerning the production of the subject movie was contractually permissible.

With respect to the third cause of action for unlawful business practices, plaintiff bases this cause of action on SMC and Loop’s one-day film shoot, which was purportedly orchestrated to defraud the State of Louisiana into paying a tax credit. (Compl. ¶ 54.) “Virtually any law can serve as the predicate for a section 17200 action.” (Klein v. Earth Elements, Inc. (1997) 59 Cal.App.4th 965, 969.) However, plaintiff does not allege, nor did plaintiff state in its opposition, how a one-day film shoot violates any law. Moreover, plaintiff does not allege how it “lost money or property as a result of the unfair competition.” (See Bus. & Prof. Code § 17204 [standing requirements under Unfair Competition Law].) Because plaintiff’s third cause of action is not adequately stated, SMC demonstrates a reasonable possibility that it will prevail on the third cause of action.

In addition to CCP § 1030, SMC seeks a bond order based on Corporations Code § 17709.02(b). As a preliminary matter, SMC’s contention that plaintiff did not comply with the requirements of Corp. Code § 17709.02(a) is well taken.

With respect to Corp. Code § 17709.02(a)(1), plaintiff alleges that it is the sole member of each of the Manuscript Parties. (Compl. ¶¶ 4, 5.) With respect to Corp. Code § 17709.02(a)(2), plaintiff alleges that it demanded from Loop, the manager of the Manuscript Parties, permission to bring this action, but Loop denied plaintiff’s request. (Compl. ¶¶ 25, 26; Mekhael Decl. ¶ 10 & Exs. 17, 18 [state corporation documents indicating Loop is manager of each of the Manuscript Parties].) Even if this allegation is not without the requisite particularity, plaintiff alleges that demand would have been futile because SMC and Loop are the Manuscript Parties’ controlling managers whose conduct alleged in the Complaint was done out of self-interest and harmed the Manuscript Parties. (Compl. ¶¶ 28-32.)

However, plaintiff did not allege that it “either informed the limited liability company or the managers in writing of the ultimate facts of each cause of action against each defendant or delivered to the limited liability company or the managers a true copy of the complaint that the plaintiff proposes to file,” as required by Corp. Code § 17709.02(a)(2). Moreover, even if plaintiff satisfied all the pleading requirements of Corp. Code § 17709.02(a), SMC demonstrates that “there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the limited liability company or its members,” as set forth in Corp. Code § 17709.02(b)(1) because the Manuscript Parties, the limited liability companies on whose interest plaintiff is attempting to vindicate, waived the right to claim any offset based on SMC or Loop’s conduct.

Having found that plaintiff resides out of state and that defendant SMC has established a reasonable possibility it will obtain judgment in its favor, the Court will require plaintiff MJW Media, Inc. to post an undertaking.

SMC requests a bond of $150,000. While Corp. Code § 17709.02(c)(2) caps the amount of a bond at $50,000, CCP § 1030 contains no cap. Because SMC prevails on this motion under CCP § 1030, the full request shall be considered.

Based on the declaration of defense counsel, the Court finds that an undertaking of $88,135.00 shall provide sufficient security for an award of costs and fees in favor of defendant.

SMC’s claimed costs of $18,135 appears reasonable. The attorney fee claim of $133,500 appears overstated, especially in light of the claimed hourly rates of $500 to $650, which indicate that legal work should be performed efficiently. (Mekhael Decl. ¶ 13.) Moreover, SMC assumes that $17,000 in fees for discovery motions will be required when the parties might be able to meet and confer and resolve at least some of the disputes. Further, while SMC contends that it will need to take four to five depositions, SMC gives no indication of whom it would seek to depose, the purpose for any such deposition, how long each deposition would take, or how much preparation time is needed such that $25,000 in fees would be required. For these reasons, the attorney fees are reduced to $100,000.

Pursuant to CCP § 1030(d), defendant SMC Specialty Finance, LLC is ordered to serve notice of this order on plaintiff MJW Media, Inc., who shall have the time allowed under CCP § 1030(d) to post the $118,135 bond.

Based on the foregoing, pursuant to CCP § 1030 and Corp. Code § 17709.02, the motion is GRANTED IN PART. Pursuant to CCP § 1030(e), proceedings in this matter shall be stayed against defendant SMC Specialty Finance, LLC until ten (10) days after plaintiff MJW Media, Inc. has filed the required undertaking and served a copy upon defendant SMC.

II. DEFENDANT JONAH LOOP’S MOTION FOR ORDER REQUIRING PLAINTIFF MJW MEDIA, INC. TO POST A BOND AND FOR STAY OF ACTION

Defendant Jonah Loop moves for an order requiring plaintiff MJM Media, Inc. to post a bond under CCP § 1030 and Corporations Code § 17709.02.

With respect to whether there is a reasonable possibility defendant will obtain a judgment in this action, plaintiff asserts six causes of action against defendant Jonah Loop: breach of fiduciary duty (second cause of action), unlawful business practices (third cause of action), breach of contract based on the Manuscript Productions operating agreement (fourth cause of action), violation of Arizona Revised Statutes Section 29-3410 (fifth cause of action), breach of contract based on the Manuscript Movie operating agreement (sixth cause of action), and violation of Louisiana Statutes Annotate section 12:1319 (seventh cause of action).

With respect to the second cause of action for breach of fiduciary duty, plaintiff asserts this cause of action against Loop based on the following: “bringing in [Karina] Miller as the ‘de facto producer’ of the Picture, terminating [Robert] Paris as producer, and engaging in a sham one-day shoot.” (Compl. ¶ 45.)

With respect to installation of Miller as the producer of the subject movie, plaintiff alleges that co-defendant SMC installed Miller as producer. (Compl. ¶ 11.) Loop’s involvement with the movie started after Miller’s work on the movie. (Compl. ¶¶ 16, 17.) Based on plaintiff’s allegations, which constitute judicial admissions, Loop did not bring in Miller to produce the movie. (Bucur v. Ahmad (2016) 244 Cal.App.4th 175, 187 [“The admission of fact in a pleading is a judicial admission. A judicial admission in a pleading is not merely evidence of a fact; it is a conclusive concession of the truth of the matter”].)

With respect to the termination of Paris as producer, Loop avers that Paris was never terminated as producer from the movie. (Loop Decl. ¶ 16.) As evidence, Loop presents an email sent by Paris on February 8, 2021 regarding an amended option agreement. (Loop Decl. ¶ 14 & Ex. 4.)

With respect to the one-day shoot, Loop explains that, because the Manuscript Parties had already spent more than the minimum $300,000 required, Loop confirmed with Louisiana authorities that the Manuscript Parties only needed to roll cameras to qualify for the tax credit. (Loop Decl. ¶ 18.) The averment of John Glassgow, plaintiff’s CEO, that the one-day shoot was a sham with the purpose to defraud is merely conclusory and insufficient to negate the reasonable possibility of prevailing on this cause of action that Loop demonstrates in making his averment. (Glassgow Decl. ¶ 4.)

Plaintiff also alleges that Loop allowed the potential tax credit to lapse. (Compl. ¶ 47.) Under the business judgment rule, invoked by Loop and not disputed by plaintiff, director liability is based on gross negligence. (Katz v. Chevron Corp. (1994) 22 Cal.App.4th 1352, 1366.) However, Loop declares that the movie’s local accountant died before sending in the necessary paperwork. (Loop Decl. ¶ 19.) Loop presents a reasonable possibility of demonstrating that he did not act with gross negligence in connection with the lapse of the tax credit.

Plaintiff also alleges that Loop ignored an arbitration demand from the Directors Guild of America (“DGA”) and instead entered into a stipulated arbitration award on behalf of Manuscript Movie in the amount of $119,771. (Compl. ¶ 49.) However, Loop declares that Paris, not he, managed the DGA arbitration and that he signed the stipulated settlement at the request of Paris and Mike Witherill. (Loop Decl. ¶ 21.) Even if Witherill never requested that Loop sign the settlement agreement (Witherill Decl. ¶ 2), this does not negate Loop’s averment that Loop was not in charge of the DGA Arbitration.

For the foregoing reasons, Loop demonstrates a reasonable possibility of demonstrating that he will obtain judgment in his favor upon showing that plaintiff’s bases for asserting a breach of fiduciary duty do not serve as a basis for liability.

With respect to the fourth through seventh causes of action, plaintiff bases these causes of action on Loop’s purported failure to allow plaintiff to inspect the Manuscript Parties’ books and records. (Compl. ¶¶ 61, 64, 72, 75.) Loop avers that he never refused to provide the requested information about the Manuscript Parties. (Loop Decl. ¶ 22.) Loop presents emails evidencing his coordination with an assistant to retrieve financial information. (Loop Decl. ¶ 23 & Ex. 7.) Glassgow declares that Loop did not respond to one request for an accounting (Glassgow Decl. ¶ 2), but this does not negate Loop’s averment that he never refused, as opposed to negligently failing to respond to, any request for records.

For the foregoing reasons, Loop satisfied his burden to demonstrate a reasonable possibility of prevailing on each cause of action asserted against him. (Baltayan v. Estate of Getemyan (2001) 90 Cal.App.4th 1427, 1432.)

With respect to Loop’s invocation of Corporations Code § 17709.02, plaintiff attempts to demonstrate that Loop did not provide requested records and did not pay credit card bills for the Manuscript Parties. (Glassgow Decl. ¶¶ 2, 3 & Ex. 2.) Arguably, plaintiff demonstrates there is “reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the limited liability company or its members,” in the form of damages for Loop’s breach of fiduciary duties. Nevertheless, the Court does not reach this question as defendant Loop is entitled to the posting of a bond under CCP § 1030.

Having found that plaintiff resides out of state and that defendant Jonah Loop has established a reasonable possibility he will obtain judgment in its favor, the Court will require plaintiff MJW Media, Inc. to post an undertaking.

Loop requests a bond of $100,000. Based on the declaration of defense counsel, the Court finds that an undertaking of $68,135 shall provide sufficient security for an award of costs and fees in favor of defendant.

The costs of $18,135 claimed by Loop appears to be reasonable. (Kelley Decl. ¶ 8, citing Mekhael Decl. ¶ 13.) As for the $81,000 requested in attorney fees, defense counsel cannot aver to a 40% reduction of the fees claimed by co-defendant SCE based solely on a lower hourly rate (Kelley Decl. ¶ 4) because this does not account for the possibility that depositions and discovery will be duplicative, such that Loop can use discovery and deposition testimony obtained by SCE. Attorney fees are reduced from $81,000 to $50,000.

Pursuant to CCP § 1030(d), defendant Jonah Loop is ordered to serve notice of this order on plaintiff MJW Media, Inc., who shall have the time allowed under CCP § 1030(d) to post the $68,135 bond.

Based on the foregoing, pursuant to CCP § 1030, the motion is GRANTED IN PART. Pursuant to CCP § 1030(e), proceedings in this matter shall be stayed against defendant Jonah Loop until ten (10) days after plaintiff MJW Media, Inc. has filed the required undertaking and served a copy upon defendant Loop.