Judge Daniel M. Crowley, Case 22SMCV01275 2023-03-27 Tentative Ruling

Judge: Daniel M. Crowley, Case: 22SMCV01275, Date: 2023-03-27 Tentative Ruling

Case Number: 22SMCV01275 Hearing Date: March 27, 2023 Dept: 207

Background

This action arises from a dispute regarding the operation and management of the company Pali Cap Management 9, LLC (“the Company” or “PCM 9”) which was the owner and developer of real estate located in Pacific Palisades. Plaintiff was a member of the Company and brings this case against Defendants Patrick McKenna (“McKenna”), Palisades Capital Management LLC, Palisades Capital Growth Fund, LLC, and Palisades Development Company, Inc. (collectively with McKenna, “Defendants”), alleging McKenna, as the founder, manager, and operating director of the Company improperly settled a claim raised by a buyer of real property sold by the Company without first obtaining Plaintiff’s consent. This real property is located at 1362 Bella Oceana Vista in Pacific Palisades, California.

Plaintiff’s operative pleading is the First Amended Complaint (“FAC”), filed November 21, 2022, and asserting four causes of action for breach of contract, breach of fiduciary duty, breach of duty of loyalty, and accounting. Defendants bring this demurrer to Plaintiff’s first three causes of action, arguing each fails to state sufficient facts to constitute a cause of action against them under Code Civ. Proc. § 430.10(e).

Request for Judicial Notice

Plaintiff requests the Court take judicial notice of documents filed with the California Secretary of State or appearing on its website, as well as documents from the Office of the Los Angeles Recorder, documents filed in other litigation, documents appearing on the Department of Real Estate’s website, and documents appearing on the Multistate Licensing System/Nationwide Mortgage Licensing System and Registry website. Plaintiff’s request is unopposed.

Judicial notice may not be taken of any matter, unless authorized or required by law. (Evid. Code, § 450.) Matters that are subject to judicial notice are listed in Evidence Code §§ 451 and 452. Although the existence of a document may be judicially noticeable, the truth of statements contained in the document and its proper interpretation are not subject to judicial notice if those matters are reasonably disputable. (StorMedia Inc. v. Superior Court (1999) 20 Cal. 4th 449, 457, fn. 9.) Taking judicial notice of a document is not, therefore, the same as the court accepting the truth of the document’s contents or accepting a particular interpretation of its meaning. (See Middlebrook-Anderson Co. v. Southwest Sav. & Loan Assn. (1971) 18 Cal. App. 3d 1023, 1038.) Here, for example, Plaintiff requests the Court accept the truth of Exhibits A and D to its request for judicial notice to establish PCM 9 was a member-managed limited liability company and not a manager-managed limited liability company. However, this factual assertion appears to be reasonably disputable as it is contracted by the express allegations of the FAC and by Exhibits B and C to Plaintiff’s request for judicial notice. The Court thus can take judicial notice of the existence of such documents but not the truth of their content. Subject to these limitations, Plaintiff’s request is GRANTED.

Legal Standard

When considering demurrers, courts read the allegations liberally and in context. (Wilson v. Transit Authority of City of Sacramento (1962) 199 Cal.App.2d 716, 720-21.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) “A demurrer tests the pleading alone, and not on the evidence or facts alleged.” (E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) As such, the court assumes the truth of the complaint’s properly pleaded or implied factual allegations. (Id.) However, it does not accept as true deductions, contentions, or conclusions of law or fact. (Stonehouse Homes LLC v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 538.)

The general rule is that the plaintiff need only allege ultimate facts, not evidentiary facts. (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.) “All that is required of a plaintiff, as a matter of pleading, even as against a special demurrer, is that his complaint set forth the essential facts of the case with reasonable precision and with sufficient particularity to acquaint the defendant with the nature, source and extent of his cause of action.” (Rannard v. Lockheed Aircraft Corp. (1945) 26 Cal.2d 149, 156-157.)

Analysis

1. Meet and Confer Requirement

The Court finds Defendants have complied with the meet and confer requirements set forth under Code of Civil Procedure § 430.41. (Kaltgrad Decl. at 2.)

2. Alter Ego

To establish an alter ego theory at the pleading stage, sufficient facts need to be alleged, and these facts must show both a “unity of interest and ownership” and an unjust result if the corporate entity is treated as a sole actor. (Leek v. Cooper (2011) 194 Cal. App. 4th 399, 417.) Ownership is just one of many factors that can be considered. (Id. at 417-418.) “No single factor is determinative, and the result depends on the circumstance of each case.” (Id. at 418.) Additionally, evidentiary facts are not required to support an alter ego theory. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 236.)

In sustaining Defendants’ prior demurrer, the Court found Plaintiff had sufficiently alleged a theory of alter ego liability as to Palisades Development but had not raised sufficient alter ego allegations as to Palisades Capital Management or Palisades Capital Growth Fund. The same result follows here. As to Palisades Development, the FAC mirrors the allegations of the original Complaint which the Court determined were sufficient to allege alter ego. (FAC at ¶6.) However, as to Palisades Capital Management and Palisades Capital Growth Fund, the FAC merely alleges in conclusory fashion that these companies have “been owned and operated by McKenna, as his alter ego” with no factual allegations showing a unity of interest or unjust result. (FAC at ¶¶4-5.)

Because Plaintiff has not sufficiently pled alter ego as to Palisades Capital Management and Palisades Capital Growth Fund, the Court must evaluate whether the first, second, or third causes of action sufficiently state a claim for direct liability of these entities. In sustaining Defendants’ prior demurrer, the Court found Plaintiff’s Complaint insufficiently asserted generalized allegations as to all Defendants:

Defendants also challenge each cause of action raised in the Complaint, arguing it fails to include factual allegations as to each Defendant showing how they can be held liable for the causes of action asserted therein. In his opposition, Plaintiff argues he is relying on alter ego theories of liability, particularly as to Palisades Development Company, Inc., Palisades Capital Management, LLC, and Palisades Capital Grown Fund LLC. However, the Complaint itself does not draw the distinction made in Plaintiff’s opposition and instead asserts general allegations against all Defendants without making clear the alleged basis for liability as to each. For example, Plaintiff states “Defendants breached” the operating agreement, suggest[ing] each of the Defendants took some action in violation of the operating agreement. However, from Plaintiff’s opposition it appears Plaintiff is alleging McKenna breached the operating agreement and the remaining defendants can be held liable for this breach as the alter egos of McKenna. If this is indeed Plaintiff’s theory of liability, it should be stated in the Complaint.

(Order at 6.) The same generalized allegations appear in the FAC. (FAC at ¶23 [“Defendants breached…”]; ¶28 [“Defendants breached that fiduciary duty…”]; ¶33 [“Defendants breached that duty…”].) The FAC adds paragraphs to the first and second causes of action stating Defendants McKenna, Palisades Capital Management and Palisades Capital Growth Fund “all directly participated in, and are directly liable for” the breaches alleged in those causes of action. (FAC at ¶¶24, 34.) These statements are mere legal conclusions without any factual allegations as to how those entities breached the Operating Agreement or the duty of loyalty. The Court thus SUSTAINS the demurrer as to Defendants Palisades Capital Management and Palisades Capital Growth Fund. Plaintiff has previously been given leave to amend to assert viable bases for direct or vicarious liability against these corporate entities and has failed to cure the defects identified in the original Complaint. However it appears these deficiencies could be cured with additional factual allegations or alternative allegations regarding a theory of vicarious liability under agency law, and accordingly the Court will sustain the demurrer as to these Defendants with leave to amend.

3. Breach of Contract Against McKenna

Defendants argue McKenna cannot be held liable for a breach of the Operating Agreement because he is not a party to it. The FAC identifies the parties to the Operating Agreement as Plaintiff, Rick Lombardo, Palisades Capital Management, and Palisades Capital Growth Fund. (FAC at ¶¶20-21.) The FAC also alleges “Defendant McKenna was a third party beneficiary of the Agreement.” (Id. at ¶21.) In his opposition, Plaintiff argues McKenna can be held liable for the breach of that agreement as the alter ego of Palisades Capital Management and Palisades Capital Growth Fund. However, as set forth above, Plaintiff has not sufficiently alleged McKenna is the alter ego of either entity. Plaintiff also argues McKenna can be held directly liable as the owner of Palisades Capital Management. Plaintiff cites to no authority which permits the Court to completely disregard the corporate veil and impose liability directly on owners simply by virtue of their ownership. (See Dos Pueblos Ranch & Imp. Co. v. Ellis (1937) 8 Cal.2d 617, 621; 1 Fletcher Cyclopedia of the Law of Corporations (2006 rev.) § 41.35, pp. 237-238, fns. omitted ["Allegations that the defendant was the sole or primary shareholder are inadequate as a matter of law to pierce the corporate veil. Even if the sole shareholder is entitled to all of the corporation's profits and dominated and controlled the corporation, those facts alone are insufficient to make the shareholder personally liable"].)

The Court finds the FAC fails to assert a basis for direct liability against McKenna for breaching a contract he was not a party to and therefore SUSTAINS McKenna’s demurrer to the first cause of action. As Plaintiff has not argued any cognizable basis to impose direct liability against him for breaching the Operating Agreement, the Court sustains McKenna’s demurrer to the first cause of action without leave to amend.

4. Palisades Development

Defendants also demurrer to each cause of action asserted against Palisades Development, arguing the FAC fails to assert any individualized allegations as to this entity and fails to sufficiently plead alter ego. A review of the FAC indicates Plaintiff is seeking to hold Palisades Development vicariously liable for the first and third causes of action as the alter ego of McKenna and/or the successor in interest of McKenna, Palisades Capital Management, and/or Palisades Capital Growth Fund. (FAC at ¶¶24, 34.) While no such allegations appear in the second cause of action, it appears Plaintiff is seeking to hold Palisades Development vicariously liable for McKenna’s breach. (Id. at ¶27 [“McKenna, as the manager and controlling party on behalf of the other named Defendants, and as a director and/or office of Pali Cap 9, owned the other members of Pali Cap 9, including Plaintiff Greenfeld, a fiduciary duty”].)

As set forth above, the Court has found Plaintiff’s alter ego allegations sufficient as to Palisades Development, and thus the Court finds Plaintiff has sufficiently alleged a basis for alter ego liability against Palisades Development on the second and third causes of action. However, as the Court has sustained Defendants’ demurrer to the first cause of action as to Defendants McKenna, Palisades Capital Management, and Palisades Capital Growth Fund, Plaintiff’s allegations that Palisades Development was liable as the successor or alter ego of these parties is insufficient to provide a basis for liability against Palisades Development on that claim. As the Court sustained the demurrers of Palisades Capital Management, and Palisades Capital Growth Fund with leave to amend, the same result follows with respect to Palisades Development. The Court thus SUSTAINS Palisades Development’s demurrer as to the first cause of action with leave to amend and OVERRULES the demurrer as to the second and third causes of action.

5. Limitation on Liability

Defendants also argue the Operating Agreement insulates Palisades Capital Management, and Palisades Capital Growth Fund from any liability to Plaintiff. Defendants’ reply acknowledges this argument turns in part on whether PCM 9 was a member-managed or manager-managed corporation. Defendants argue Plaintiff’s theory that PCM was member-managed would contradict Plaintiff’s theory of liability against McKenna. However, [M]odern rules of pleading generally permit plaintiffs to ‘set forth alternative theories in varied and inconsistent counts.’” (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1388 [quoting Rader Co. v. Stone (1986) 178 Cal.App.3d 10, 29]; Mendoza v. Continental Sales Co., Inc. (2006) 140 Cal.App.4th 1395, 1402 [“When a pleader is in doubt about what actually occurred or what can be established by the evidence, the modern practice allows that party to plead in the alternative and make inconsistent allegations”].) Plaintiff is thus free to allege PCM 9 was member-managed or alternatively manager-managed and can plead alternative theories of liability based on either scenario.

Defendants correctly point out that Plaintiff’s theories regarding the management structure of PCM 9 appear only in Plaintiff’s opposition and not the FAC. As the Court has sustained Defendants’ demurrer as to these entities with leave to amend, Plaintiff is also granted leave to amend to clarify the factual allegations with respect to PCM 9’s management structure or to expressly plead alternative theories in inconsistent counts.

Conclusion

Defendants’ demurrer is OVERRULED as to Plaintiff’s second and third causes of action as asserted against Palisades Development. Defendants’ demurrer is SUSTAINED without leave to amend as to the Plaintiff’s first cause of action as asserted against McKenna and is SUSTAINED without leave to amend as to the remaining causes of action as set forth above.