Judge: Cynthia A Freeland, Case: 37-2022-00030298-CU-BC-NC, Date: 2023-08-18 Tentative Ruling

SUPERIOR COURT OF CALIFORNIA,

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SOUTH BUILDING TENTATIVE RULINGS - August 17, 2023

08/18/2023  01:30:00 PM  N-27 COUNTY OF SAN DIEGO

JUDICIAL OFFICER:Cynthia A. Freeland

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Civil - Unlimited  Breach of Contract/Warranty Demurrer / Motion to Strike 37-2022-00030298-CU-BC-NC ZAYAT VS. HOROZ [IMAGED] CAUSAL DOCUMENT/DATE FILED: Demurrer, 05/30/2023

Defendant Tolga Horoz ('Defendant')'s demurrer to Plaintiffs Kamel Zayat and Rana Zayat (collectively, 'Plaintiffs')'s First Amended Complaint (the 'FAC') is sustained in part and overruled in part.

Defendant's request for judicial notice is granted.

A demurrer tests the legal sufficiency of a pleading. See McKell v. Washington Mutual, Inc. (2006) 142 Cal. App. 4th 1457, 1469. When reviewing a demurrer, the court 'give[s] the complaint a reasonable interpretation, reading it as a whole and its parts in their context.' Blank v. Kirwan (1985) 39 Cal. 3d 311, 318. The court 'treats the demurrer as admitting all material facts properly pleaded. The court does not, however, assume the truth of contentions, deductions or conclusions of law.' Durell v. Sharp Healthcare (2010) 183 Cal. App. 4th 1350, 1358. The court's analysis is limited to the complaint, exhibits attached to the complaint and incorporated by reference, and matters properly subject to judicial notice. See Performance Plastering v. Richmond American Homes of California, Inc. (2007) 153 Cal. App. 4th 659, 665; Thorburn v. Department of Corrections (1998) 66 Cal. App. 4th 1284, 1287-1288; Donabedian v. Mercury Ins. Co. (2004) 116 Cal. App. 4th 968, 994. '[D]emurrers for uncertainty are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.' Lickiss v. Financial Industry Regulatory Authority (2012) 208 Cal. App. 4th 1125, 1135. Such demurrers are strictly construed since ambiguities can be clarified during discovery. See Khoury v. Maly's of California, Inc. (1993) 14 Cal. App. 4th 612, 616.

The demurrer to the first cause of action for breach of contract is overruled. 'To prevail on a cause of action for breach of contract, the plaintiff must prove (1) the contract, (2) the plaintiff's performance of the contract or excuse for nonperformance, (3) the defendant's breach, and (4) the resulting damage to the plaintiff.' Richman v. Hartley (2014) 224 Cal. App. 4th 1182, 1186.

The court finds that the FAC states facts sufficient to constitute a breach of contract claim. Initially, the court notes that '[e]xhibits attached to the complaint take precedence to the extent they contradict allegations in the complaint.' Bank of New York Mellon v. Citibank, N.A. (2017) 8 Cal. App. 5th 935, 943.

That being said, the FAC alleges that Plaintiffs each own a 25% membership interest in Paradise Senior Apartment Complex, LLC ('Paradise LLC') with Defendant owning the other 50%. See FAC, ¶ 6, Ex. A.

The purpose of Paradise LLC was to own, develop, and construct the Senior Apartment Complex located at 625 South V Avenue, National City, CA 91950, previously with an address of 2238 E 6th Street, National City, CA 91950 (the 'Project'). Ibid., ¶ 8, Ex. A. As part of the Project, Mr. Zayat and Defendant jointly formed Steelbuilt Framing Technologies Company, Inc. ('Steelbuilt') to serve as the general contractor for the project. Ibid., 9, Ex. A. Mr. Zayat and Defendant each own a 50% membership Calendar No.: Event ID:  TENTATIVE RULINGS

2986962 CASE NUMBER: CASE TITLE:  ZAYAT VS. HOROZ [IMAGED]  37-2022-00030298-CU-BC-NC interest in Steelbuilt. Ibid., ¶ 7, Ex. A. In or about September 2019, Paradise LLC obtained a construction loan from Parkview Financial REIT, LP ('Parkview') in the amount of $28,000,000.00 (the 'Parkview Loan'). Ibid., ¶ 10. Mr. Zayat and Defendant each executed a guaranty for the Parkview Loan. Ibid.

On April 1, 2022, Plaintiffs and Defendant entered into a Paradise/Steelbuilt Buy-Out Agreement (the 'Buy-Out Agreement') under which Defendant agreed to purchase Plaintiffs' respective membership interests in Paradise LLC for $3,100,000.00 ($1,550,000.00 to each Plaintiff). Ibid., ¶ 11, Ex. A. Under the Buy-Out Agreement, Mr. Zayat agreed to transfer all of his interests in Steelbuilt to Defendant and resign as an officer/director of Steelbuilt effective April 1, 2022. See Buy-Out Agreement, ¶ 1.5.

Defendant, for his part, would open escrow no later than April 4, 2022. Ibid., ¶ 2.2. Defendant was also required to deposit $3,100,000.00 into escrow no later than April 15, 2022. Ibid. Escrow would then disburse $1,550,000.00 to each Plaintiff. Ibid. The Buy-Out Agreement would be deemed null and void if Defendant did not deposit the $3,100,000.00 into escrow by April 15, 2022. Ibid. Additionally, after opening escrow, Defendant needed to cause Parkview to release Mr. Zayat as a guarantor on the Parkview Loan. Ibid., ¶ 2.3. On April 15, 2022, the parties entered into a First Amendment to Paradise/Steelbuilt Buy-out Agreement (the 'Amended Buy-Out Agreement'). See FAC, Ex. A. The Amended Buy-Out Agreement amends ¶¶ 2.2 and 2.3 of the Buy-Out Agreement to reflect that: (1) Defendant opened escrow with Stewart Title on April 4, 2022; (2) Defendant shall deposit $600,000.00 into escrow no later than April 22, 2022; (3) escrow shall then release those funds to Plaintiffs (with each receiving $300,000.00); (4) escrow will remain open until Defendant deposits an additional $2,500,000.00 into escrow, which must take place no later than the date when the City of National City issues a Certificate of Occupancy on the Project; (5) after the $2,500,000.00 is deposited into escrow, escrow shall disburse $1,250,000.00 to each Plaintiff; and (6) Defendant must cause Parkview to release Mr. Zayat as a guarantor on the Parkview Loan by April 22, 2022. Ibid., ¶ 12, Ex. A. On April 15, 2022, Defendant executed a Promissory Note (the 'Note') in Plaintiffs' favor which provided, in relevant part, that Defendant would pay each Plaintiff $375,000.00 by June 27, 2022, to be credited against the amount Defendant owes under the Amended Buy-Out Agreement. Starting on April 22, 2022, the remaining balance of $2,500,000.00 would accrue interest at the rate of 7%. Defendant agreed to pay the accrued interest at the close of escrow as set forth in the Buy-Out and Amended Buy-Out Agreements. Ibid., ¶ 13, Ex. B. The FAC alleges that Defendant breached the Buy-Out/Amended Buy-Out Agreement and the Note by failing to: (1) pay Plaintiffs the amount owed, and (2) cause Parkview to release Mr. Zayat as a guarantor under the Parkview Loan. Ibid., ¶ 16.

The foregoing is sufficient to survive the pleading stage. To start, the court must respectfully disagree with Defendant that the Buy-Out/Amended Buy-Out Agreements and the Note are not valid contracts. As Defendant correctly notes, a contract requires: '1. Parties capable of contracting; 2. Their consent; 3. A lawful object; and, 4. A sufficient cause or consideration.' Cal. Civ. Code § 1550. Each element is present in this instance. The court disagrees with Defendant that there was not '[a] sufficient cause or consideration.' Good consideration for a promise is '[a]ny benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor[.]' Cal. Civ. Code § 1605. In this case, the subject agreements are supported by adequate consideration, i.e., Defendant agreed to purchase Plaintiffs' respective membership interests in Paradise LLC for $3,100,000.00. As further consideration for the payment, Mr. Zayat agreed to resign as an officer/director of Steelbuilt and transfer all of his interests in Steelbuilt to Defendant effective April 1, 2022. As part of the transaction, Defendant agreed to open escrow and cause Parkview to release Mr. Zayat as a guarantor on the Parkview Loan. The foregoing constitutes good consideration. It appears that Defendant is conflating a lack of consideration with a failure to perform under the subject agreements.

Defendant alleges that it was Mr. Zayat who breached the Buy-Out/Amended Buy-Out Agreements by not transferring his interests in Steelbuilt by April 1, 2022 as required under ¶ 1.5 of the Buy-Out Agreement. This, Defendant contends, belies the FAC's allegation that Plaintiffs fully performed under the subject contracts. That being said, Defendant concedes on Page 2, ll. 26-27 of his demurrer that '[t]he parties are in dispute as to whether the contract was consummated or that either party's failure to Calendar No.: Event ID:  TENTATIVE RULINGS

2986962 CASE NUMBER: CASE TITLE:  ZAYAT VS. HOROZ [IMAGED]  37-2022-00030298-CU-BC-NC perform, was excused.' By Defendant's own admission, there is presently a factual dispute as to whether: (1) either side failed to perform, and (2) Plaintiffs and/or Defendant were prevented or excused from such performance, or if a waiver occurred. See Fremont Indemnity Co. v. Fremont General Corp.

(2007) 148 Cal. App. 4th 97, 113-114 ('A demurrer is simply not the appropriate procedure for determining the truth of disputed facts.').

Accordingly, the court overrules the demurrer to the first cause of action.

The demurrer to the second cause of action for breach of fiduciary duty is sustained. 'A fiduciary or confidential relationship can arise when confidence is reposed by persons in the integrity of others, and if the latter voluntarily accepts or assumes to accept the confidence, he or she may not act so as to take advantage of the other's interest without that person's knowledge or consent.' Pierce v. Lyman (1991) 1 Cal. App. 4th 1093, 1101-1102. To state a cause of action for breach of fiduciary duty, a plaintiff must plead: (1) the existence of a fiduciary relationship; (2) its breach; and (3) damage proximately caused by that breach. Ibid., at 1101. The absence of any of these elements is fatal to the cause of action. Ibid., at p. 1101.

The court finds that the FAC, as presently pled, fails to state facts sufficient to constitute a cause of action for breach of fiduciary duty. The FAC alleges that Defendant, as a member of Paradise LLC, owed Plaintiffs a fiduciary duty. See FAC, ¶ 20. Defendant breached his fiduciary duty by, inter alia: (1) using Paradise LLC's capital and loan proceeds to fund his own projects; (2) taking away subcontractors for the Project to have them work on his own projects; and (3) neglecting the Project in favor of his own projects. Ibid., ¶ 21. The foregoing is insufficient to survive the pleading stage. More specifically, the court finds that the FAC fails to plead facts demonstrating the existence of a fiduciary relationship between Plaintiffs and Defendant. Under California law, '[t]he fiduciary duties that a member owes to a member-managed limited liability company and the other members of the limited liability company are the duties of loyalty and care under subdivisions (b) and (c).' Cal. Corp. Code § 17704.09(a). Generally, however, 'a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.' Cal. Corp. Code § 17704.09(f)(3). Moreover, the fiduciary duties set forth in California Corporations Code § 17704.09(a)-(c) and (e) are inapplicable to members in a manager-managed limited liability company. See Cal. Corp. Code § 17704.09(f)(1). In this case, insufficient facts are pled demonstrating that Paradise LLC is, in fact, a member-managed limited liability company such that Defendant would have owed Plaintiffs certain fiduciary obligations. Plaintiffs have not attached as an exhibit to the FAC a copy of the Paradise LLC Operating Agreement or Articles of Incorporation, or pled verbatim the relevant terms of such agreement(s) establishing the type of limited liability company that Paradise LLC is.

Accordingly, the court sustains the demurrer to the second cause of action with leave to amend as Plaintiffs have demonstrated a reasonable possibility that the foregoing deficiencies can be cured by amendment. See Aubry v. Tri-City Hospital Dist. (1992) 2 Cal. 4th 962, 967.

The demurrer to the third cause of action for breach of the implied covenant of good faith and fair dealing is sustained. A covenant of good faith and fair dealing is implicit in every contract. See Foley v. Interactive Data Corp. (1988) 47 Cal. 3d 654, 683. 'The essence of the implied covenant is that neither party to a contract will do anything to injure the right of the other to receive the benefits of the contract.' Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal. 4th 28, 43. The Second District Court of Appeal has explained: 'The [implied] covenant of good faith and fair dealing [is] implied by law in every contract.' ' (Durell v. Sharp Healthcare (2010) 183 Cal. App. 4th 1350, 1369, [108 Cal.Rptr.3d 682].) The covenant is read into contracts and functions ' 'as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party's rights to the benefits of the contract.' ' (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031-1032, [14 Cal.Rptr.2d 335].) The covenant also requires each party to do everything the contract presupposed the party will do to Calendar No.: Event ID:  TENTATIVE RULINGS

2986962 CASE NUMBER: CASE TITLE:  ZAYAT VS. HOROZ [IMAGED]  37-2022-00030298-CU-BC-NC accomplish the agreement's purposes. (Harm v. Frasher (1960) 181 Cal.App.2d 405, 417, [5 Cal.Rptr. 367].) A breach of the implied covenant of good faith is a breach of the contract (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1393, [272 Cal.Rptr. 387]), and 'breach of a specific provision of the contract is not ... necessary' to claim for breach of the implied covenant of good faith and fair dealing (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 373 & fn. 12, [6 Cal.Rptr.2d 467, 826 P.2d 710]).

Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal. App. 4th 1230, 1244. '[B]reach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself.' Tilbury Constructors, Inc. v. State Comp. Ins. Fund (2006) 137 Cal. App. 4th 466, 474. See also Love v. Fire Ins. Exchange (1990) 221 Cal. App. 3d 1136, 1153 ('In essence, the covenant is implied as a supplement to the express contractual covenants[.]'). However, '[s]ince the good faith covenant is an implied term of a contract, the existence of a contractual relationship is thus a prerequisite for any action for breach of the covenant.' Kim v. Regents of University of California (2000) 80 Cal. App. 4th 160, 164. A party violates the covenant of good faith and fair dealing if either: (1) they subjectively lack belief in the validity of their acts, or (2) their conduct is objectively unreasonable regardless of their motive. See Aljabban v. Fontana Indoor Swap Meet, Inc. (2020) 54 Cal. App. 5th 482; Moore v. Wells Fargo Bank, N.A. (2019) 39 Cal. App. 5th 280.

The court finds that the FAC is, at best, uncertain as to upon what contract Plaintiffs base their third cause of action. The FAC incorporates by reference into the third cause of action all preceding paragraphs, which discuss the Buy-Out/Amended Buy-Out Agreements and the Note, while vaguely referencing Paradise LLC's operating agreement. See FAC, ¶¶ 1-24. Plaintiffs then allege that Defendant breached the implied covenant of good faith and fair dealing by engaging in the same conduct that forms the basis of Plaintiffs' breach of fiduciary duty claim, thus suggesting that the third cause of action is predicated upon Paradise LLC's governing documents. So far as that is accurate, the demurrer must be sustained because Plaintiffs have not attached Paradise LLC's governing documents as exhibits to the FAC. Nor have they pled verbatim the relevant portions of those documents.

Accordingly, the court sustains the demurrer to the third cause of action with leave to amend as Plaintiffs have demonstrated a reasonable possibility that the foregoing deficiencies can be cured by amendment.

See Aubry, 2 Cal. 4th at 967.

The demurrer to the fourth cause of action for an accounting is overruled. 'An action for an accounting has two elements: (1) that a relationship exists between the plaintiff and defendant that requires an accounting and (2) that some balance is due the plaintiff that can only be ascertained by an accounting.' Sass v. Cohen (2020) 10 Cal. 5th 861, 842.

The court finds that the FAC states facts sufficient to constitute a cause of action for an accounting.

More specifically, the FAC alleges the existence of a relationship between the parties, i.e., Plaintiffs each own a 25% membership interest in Paradise LLC with Defendant owning the other 50%. Plaintiffs and Defendant are also parties to the Buy-Out/Amended Buy-Out Agreements as well as the Note. The FAC further alleges that Defendant improperly used Paradise LLC's capital and loan proceeds to fund his own projects. See FAC, ¶¶ 21, 25, 28. While Plaintiffs estimate that the amount owed exceeds $1,000,000.00, the FAC indicates that the actual amount is unknown and cannot be ascertained with an account of Paradise LLC's revenues and expenses. Ibid., ¶ 30. The foregoing is sufficient to survive the pleading stage.

Accordingly, the court overrules the demurrer to the fourth cause of action.

In light of the foregoing, the court: (1) sustains the demurrer to the second and third causes of action with leave to amend, and (2) overrules the demurrer to the first and fourth causes of action. Plaintiffs shall file and serve a second amended complaint within ten (10) days of this hearing. See Cal. R. Ct.

3.1320(g).

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2986962 CASE NUMBER: CASE TITLE:  ZAYAT VS. HOROZ [IMAGED]  37-2022-00030298-CU-BC-NC This is the tentative ruling for the hearing at 1:30 p.m. on Friday, August 18, 2023. If no party appears at the hearing, this tentative ruling will become the order of the court as of August 18, 2023. If the parties are satisfied with the court's tentative ruling or do not otherwise wish to argue the motion, they are encouraged to give notice to the court and each other of their intention not to appear, though this notice is not required.

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