Judge: Daniel S. Murphy, Case: 22STCV14915, Date: 2022-09-19 Tentative Ruling

Case Number: 22STCV14915    Hearing Date: September 19, 2022    Dept: 32

BACKGROUND

            On May 4, 2022, Plaintiff WG Holdings SPV, LLC initiated this action for breach of fiduciary duties, breach of contract, interference, and fraud stemming from Defendants’ purported mismanagement of Plaintiff.

The complaint alleges that Defendant E&B Natural Resources Management Corporation (“E&B”) sought to purchase a 25% stake in Plaintiff. Due to financial issues with its lenders, E&B could not directly deal with Plaintiff. Instead, E&B allegedly formed Defendant Triton LA, LLC (“Triton”) to hold E&B’s 25% interest in Plaintiff. The complaint alleges that the arrangement was induced by fraud and that Defendants merely sought to take over Plaintiff’s assets for themselves. Triton allegedly demanded a higher ownership stake in Plaintiff, which Plaintiff’s board denied. Thereafter, Defendants allegedly mismanaged Plaintiff’s finances and operations, leading to the damages sought in this action.

Defendants E&B, Steve Layton, Samuel Layton, Zylstra & Associates, and Louis Zylstra presently demur and move to strike portions of the complaint.  

LEGAL STANDARD

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Ibid.) The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action. (Hahn, supra, 147 Cal.App.4th at 747.) A complaint will survive demurrer if it sufficiently apprises the defendant of the issues, and specificity is not required where discovery will clarify the ambiguities. (See Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 608.) All reasonable inferences are drawn in favor of the complaint. (Kruss v. Booth (2010) 185 Cal.App.4th 699, 713.)

Any party, within the time allowed to respond to a pleading, may serve and file a notice of motion to strike the whole or any part of that pleading. (Code Civ. Proc., § 435, subd. (b).) The court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike (1) any irrelevant, false, or improper matter inserted in any pleading and (2) all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (Id., § 436.) The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. (Id., § 437.)

MEET AND CONFER

Before filing a demurrer or a motion to strike, the demurring or moving party is required to meet and confer with the party who filed the pleading demurred to or the pleading that is subject to the motion to strike for the purposes of determining whether an agreement can be reached through a filing of an amended pleading that would resolve the objections to be raised in the demurrer. (Code Civ. Proc., §§ 430.41, 435.5.) The Court notes that Defendants have complied with the meet and confer requirement.

DISCUSSION

I. Demurrer

            a. Alter Ego

            Defendants first argue that they cannot be held liable on a theory of alter ego because Plaintiff’s alter ego allegations are insufficient. The complaint alleges that Defendants have used multiple entities to disguise their actions, share a unity of interest and ownership, do not exercise corporate separateness, and are financially insolvent. (Compl. ¶¶ 48-56.) Triton was allegedly formed simply to hold E&B’s 25% interest in Plaintiff. (Id., ¶ 22.) These allegations are sufficient to establish a reasonable inference that the Entity Defendants are alter egos of each other. (See Kruss, supra, 185 Cal.App.4th at p. 713.) The specific facts that would prove or disprove the alter ego claim can be ascertained in discovery. (See Ludgate, supra, 82 Cal.App.4th at p. 608.)

            b. Breach of Fiduciary Duty

            Delaware law allows parties to contract to limit fiduciary duties. (Del. Code Ann. 6 § 18-1101(e).) In this case, the LLC Agreement limits the duties of the members to those duties enumerated in the Agreement. (Compl., Ex. B, § 9.3.) However, the LLC Agreement does not restrict such a claim that is attributable to gross negligence, willful misconduct, or bad faith. (Id., §§ 9.3, 9.5.)

Here, the alleged willful and bad faith acts include failing to hold required safety meetings, failing to maintain necessary infrastructure, instructing employees to not perform their jobs, billing WGH for services not rendered, refusing to provide adequate transition assistance to other contractors brought in to repair the damage done, and failing to address numerous regulatory violations stemming from their misconduct. (Compl. ¶¶ 33-46.) Defendants also allegedly placed individuals in positions for which they were unqualified, failed to process invoices, and mismanaged finances. (Ibid.) This is sufficient at the pleading stage to infer a breach of fiduciary duty. The demurrer to the first cause of action is OVERRULED.

However, to the extent Plaintiff bases this claim on a breach of Section 8.3 of the LLC Agreement regarding related-party transactions, the Court will grant leave to amend to assert facts demonstrating such a breach.  

c. Intentional Interference with Contractual Relations

To properly plead a claim for Intentional Interference with Contractual Relations, a plaintiff must allege “(1) a valid contract, (2) about which the defendants have knowledge, (3) an intentional act by defendants that is a significant factor in causing the breach of the [contract], (4) done without justification, and (5) which causes injury.” (James Cable, LLC v. Millennium Digital Media Sys., L.L.C. (Del. Ch. June 11, 2009.) 2009 WL 1638634, at *4.)

The complaint alleges that “Steve Layton and/or the Entity Defendants also caused Allan White to back out of his contract to manage operations on WGH properties.” (Compl. ¶ 44.) Defendants allegedly “provided damaging, false, and/or misleading information to each JGB Capital, Texican, and Allan White.” (Id., ¶ 63.) Defendants allegedly provided this information intending to “dissuade each JGB Capital, Texican, and Allan White from entering into or remaining in contracts with WGH.” (Id., ¶ 64.)

When read together, these allegations lead to a reasonable inference that Defendants knew about Plaintiff’s contract with Allan White and provided false information to White with the intent of causing White to withdraw from the contract. This sufficiently alleges a contract and Defendants’ intentional acts designed to interfere with it. The validity of the contract may be presumed at the pleading stage.  

Because Plaintiff has pled intentional interference with at least one contract, the demurrer is OVERRULED as to the second cause of action.

d. Intentional Interference with Business Relations

To state a claim for Intentional Interference with Business Relations, a plaintiff must allege: “(a) the reasonable probability of a business opportunity, (b) intentional interference with that opportunity, (c) proximate causation, and (d) damages,” and that the alleged conduct was “wrongful.” (World Energy Ventures, LLC v. Northwind Gulf Coast LLC (Del. Super. Nov. 2, 2015) 2015 WL 6772638 at *6.)

The complaint alleges that “when Steve Layton learned that Texican was in negotiations to purchase all of the Company’s oil and take responsibility for the royalty owner decks, Steve Layton called Texican and warned them not to make the deal.” (Compl. ¶ 44.) Moreover, “the Entity Defendants intentionally disrupted the Company’s banking relationship with JGB Capital by sending an improper and disputed lien to JGB Capital prior to even sending it to WGH.” (Ibid.) Defendants allegedly “provided damaging, false, and/or misleading information to each JGB Capital, Texican, and Allan White,” intending to “dissuade each JGB Capital, Texican, and Allan White from engaging in a business relationship with WGH.” (Id., ¶¶ 69-70.)

These facts adequately establish interference with Plaintiff’s business relations, through the wrongful act of providing false and misleading information such as a disputed lien. The precise details of the wrongful act can be ascertained in discovery. Therefore, the demurrer to the third cause of action is OVERRULED.

            e. Fraud

            “In order to state a claim for fraud…, plaintiff must plead with particularity the following elements: (1) a false representation of material fact; (2) the defendant's knowledge of or belief as to the falsity of the representation or the defendant's reckless indifference to the truth of the representation; (3) the defendant's intent to induce the plaintiff to act or refrain from acting; (4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as a result of such reliance.” (Duffield Assocs., Inc. v. Meridian Architects & Eng’rs, LLC (Del. Super. July 12, 2010) 2010 WL 2802409, at *4.) A claim for fraud must be pled with specificity. (Abry Partners V, L.P. v. F&W Acquistion LLC (Del. Ch. 2006) 891 A.2d 1032, 1050.)

            The complaint lacks the requisite specificity to maintain a fraud claim. The complaint alleges fraud against multiple Defendants but does not attribute specific statements to each Defendant or articulate the required details regarding each representation. The fourth cause of action asserts fraud against all of the Entity Defendants for billing for unperformed work. (Compl. ¶¶ 73-78.) The fifth cause of action against Louis Zylstra alleges fraud based on representations made in “at least one” unspecified expense form. (Id., ¶¶ 79-84.) The tenth cause of action asserts fraudulent inducement against all Defendants for providing inaccurate financial records. (Id., ¶¶ 107-112.) At best, this amounts to general dishonesty regarding finances but does not specify the particular misrepresentations made, who made them, when they were made, or how they were made. The demurrer is SUSTAINED with leave to amend as to the fourth, fifth, and tenth causes of action.   

            f. Good Faith and Fair Dealing

            “The implied covenant of good faith and fair dealing inheres in every contract and requires ‘a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits’ of the bargain.” (Kuroda v. SPJS Holdings, L.L.C. (Del. Ch. 2009) 971 A.2d 872, 888.) “All contracts are subject to an implied covenant of good faith and fair dealing. This doctrine, however, does not provide a . . . court with the authority to rewrite or supply omitted provisions to a written contract. Rather, a court should be cautious when implying a contractual obligation and do so only where obligations which can be understood from the text of the written agreement have nevertheless been omitted from the agreement in the literal sense.” (Fitzgerald v. Cantor (Ch. Nov. 10, 1998, C.A. No. 16297-NC) 1998 Del. Ch. LEXIS 212, at *3-4.) “In order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.” (Id., at *4.)

            Here, the complaint alleges that “[p]ursuant to the ARLLCA, the Entity Defendants had an implied contractual obligation to manage the operations at Company-owned oil fields.” (Compl. ¶ 86.) “The Entity Defendants breached that obligation by, inter alia, failing to code or process invoices, failing to comply with government regulations and/or respond to notices of violations of government regulations, and failing to perform work to a reasonably competent standard.” (Id., ¶ 87.)

            Defendants argue that the LLC Agreement disclaims all duties except those enumerated in the Agreement itself, and an obligation to manage the oil fields is not found in the Agreement. Defendants also argue that the complaint fails to specify which Defendants engaged in the actions that allegedly constitute a breach of the implied covenant and fails to allege that such conduct caused Plaintiff’s harm.

            However, a “limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.” (Del. Code Ann. 6 § 18-1101(c).) Furthermore, if the express terms of a contract already address a dispute, then the express terms govern rather than the implied covenant of good faith and fair dealing. (Fitzgerald, supra, 1998 Del. Ch. LEXIS 212, at *4.) The fact that the obligation to manage the oil fields does not appear in the LLC Agreement is precisely why Plaintiff asserts a claim under the implied covenant of good faith and fair dealing. The lack of any express language regarding management of the oil fields is a reason to maintain the claim, not strike it. Therefore, the limitation on duties prescribed by the LLC Agreement does not serve as justification for sustaining a demurrer to this claim.

            Additionally, the complaint contains sufficient factual allegations to support the claim. The complaint details the actions that constitute the alleged breach and attributes the actions to all of the Entity Defendants. (Compl. ¶ 87.) This claim is not based in fraud, and heightened specificity is not required. The complaint also alleges Plaintiff’s resulting harm in that “WGH must pay overdue invoices with interest, respond to and remediate regulatory violations, and spend additional monies to remedy the harm caused by the Entity Defendants’ performance.” (Id., ¶ 88.) The demurrer is OVERRULED as to the sixth cause of action.  

            g. Declaratory Relief

            Defendant Zylstra & Associates appears to demur to the seventh cause of action, according to its notice of motion. However, Defendant does not articulate further in its memorandum of points and authorities or reply brief. Therefore, no reason is provided for why this claim fails. As such, the demurrer is OVERRULED as to the seventh cause of action.

            h. Promissory Estoppel

            A claim for promissory estoppel contains the following elements: “(i) a promise was made; (ii) it was the reasonable expectation of the promisor to induce action or forbearance on the part of the promisee; (iii) the promisee reasonably relied on the promise and took action to his detriment; and (iv) such promise is binding because injustice can be avoided only by enforcement of the promise.” (Harmon v. Del. Harness Racing Comm'n (Del. 2013) 62 A.3d 1198, 1201.)

            The complaint alleges that “[t]he Entity Defendants promised to provide professional operations management services for Company-owned oil fields,” intending to induce Plaintiff to enter into the LLC Agreement, and Plaintiff in fact did so by giving 25% equity to the Entity Defendants. (Compl. ¶¶ 95-98.) The complaint alleges that “[i]njustice can only be avoided if the Entity Defendants’ promise is enforced.” (Id., ¶ 99.)

            Defendant Zylstra & Associates demurs to this cause of action on the grounds that “Plaintiff seeks specific performance of this promise, but does not, as it must, also allege that it has no other remedy at law.” (Dem. 18:9-14.) However, specific performance is a contract claim. Promissory estoppel is not a contractual claim, and in fact exists to provide a remedy for plaintiffs injured by a false promise in the absence of an enforceable contract. (See Boulden v. Albiorix, Inc. (Del. Ch., Jan. 31, 2013, No. CIV.A. 7051-VCN) 2013 WL 396254, at *13, as revised (Feb. 7, 2013).) Defendant cites Boulden for the proposition that specific performance requires an inadequate remedy at law, but in Boulden, the specific performance and promissory estoppel claims were pled and analyzed separately. The court did not hold that promissory estoppel is the same as specific performance and therefore requires a plaintiff to establish inadequate legal remedy. The demurrer is OVERRULED as to the eighth cause of action.

i. Unjust Enrichment

            Unjust enrichment is a theory of restitution that involves: (1) receipt of a benefit; and (2) unjust retention of the benefit at the expense of another. (Elder v. Pacific Bell Telephone Co. (2012) 205 Cal.App.4th 841, 857.) Courts have construed unjust enrichment claims as quasi-contract claims seeking restitution. (Rutherford Holdings LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231.) “[A]n action based on an implied-in-fact or quasi-contract cannot lie where there exists between the parties a valid express contract covering the same subject matter.” (Rutherford Holdings LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231.) However, “[a] plaintiff may plead cumulative or inconsistent causes of action.” (Gherman v. Colburn (1977) 72 Cal.App.3d 544, 565.) “[R]estitution may be awarded in lieu of breach of contract damages when the parties had an express contract, but it was procured by fraud or is unenforceable or ineffective for some reason.” (McBride v. Boughton (2004) 123 Cal.App.4th 379, 388.)   

The alleged benefits that Defendants have unjustly retained consist of the 25% stake and money for services not performed or wrongly invoiced. (Compl. ¶ 101.) The 25% stake admittedly belonged to Triton, and there are no allegations that the individual Defendants personally took money from Plaintiff for services not performed. However, the Entity Defendants are alleged to have wrongly billed Plaintiff for services and are alleged to be Triton’s alter egos and inferably the true beneficiaries of the 25% stake. Therefore, the complaint sufficiently alleges a claim as against the Entity Defendants. The demurrer is SUSTAINED with leave to amend as to the individual Defendants.  

            j. Waiver

            Lastly, Defendants argue that a Letter Agreement incorporated into the complaint waives all claims against them. The Letter Agreement purports to waive any past or future claims that Plaintiff and E&B or their respective members may have against each other arising out of their arrangement. (Compl., Ex. A.) However, the arrangement with E&B was allegedly induced by fraud, and E&B allegedly pressured Plaintiff into signing the Letter Agreement. (Compl. ¶¶ 19, 23.) This is sufficient to place the validity of the Agreement at issue. Thus, the complaint does not admit on its face that Plaintiff waived all claims against Defendants.

II. Motion to Strike

            a. Attorneys’ Fees

            “Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties . . . .” (Code Civ. Proc., § 1021.) Thus, a plaintiff must set forth a statutory or contractual basis for attorney’s fees in order to recover such fees.  

            Plaintiff contends that the LLC agreement contains an attorneys’ fees provision. The cited provision states that “[e]ach Member shall indemnify and hold harmless the Company and its respective directors, managers, officers, agents and employees . . . from and against any and all losses, liabilities, claims . . . and reasonable out-of-pocket costs and expenses (including reasonable attorneys’ fees) . . . arising under, out of or in connection with any Proceeding, as incurred, arising out of or relating to the breach or inaccuracy of any of the representations, warranties or covenants of such Member contained in this Article XV.” (Compl., Ex. B, § 15.2.) The provision plainly requires only Members to provide the described indemnity. Although Triton entered the Agreement and the Entity Defendants are allegedly Triton’s alter egos, the individual Defendants are not alleged to be members to the LLC Agreement.

Additionally, the indemnity applies only for proceedings that arise “out of or relating to the breach or inaccuracy of any of the representations, warranties or covenants of such Member . . . .” (Compl., Ex. B, § 15.2.) Plaintiff argues that the complaint alleges false representations, “including that Triton and its alter egos were not authorized to enter into the ARLLCA.” However, the complaint does not contain allegations of statements made about Triton or others’ authority to enter into the LLC Agreement, nor does the complaint specify who made such statements. Thus, Plaintiff has failed to articulate a proper basis for recovering attorneys’ fees. The motion to strike is GRANTED with leave to amend as to attorneys’ fees.

            b. Punitive Damages

            “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” (Civ. Code, § 3294, subd. (a).)  

            Plaintiff contends that punitive damages are warranted under its fraud or fraudulent inducement claims. As discussed above, Plaintiff has failed to properly allege a fraud claim. Accordingly, the complaint lacks a sufficient basis for punitive damages. The motion to strike is GRANTED with leave to amend as to punitive damages.

CONCLUSION

            The demurrers filed by Steve Layton, Samuel Layton, Zylstra & Associates, Louis Zylstra, and E&B Natural Resources Management Corporation are SUSTAINED in part as set forth above with leave to amend. Their motions to strike are GRANTED with leave to amend.

            William Nicholson’s demurrer to First Amended Cross-Complaint is continued to October 10, 2022, pursuant to the parties’ original reservation and their stipulation.