Judge: Daniel S. Murphy, Case: 22STCV14915, Date: 2022-10-10 Tentative Ruling

Case Number: 22STCV14915    Hearing Date: October 10, 2022    Dept: 32

BACKGROUND

            On May 4, 2022, Plaintiff WG Holdings SPV, LLC (“WGH”) 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.

On August 3, 2022, Triton filed a First Amended Cross-Complaint against Scott Wood (“Wood”), William Nicholson (“Nicholson”), and CW Children Holdings, LLC (“CWC”). The FACC asserts causes of action for harm done to Triton and asserts claims derivatively on behalf of WGH. Triton and CWC are allegedly the sole members of WGH. Wood and Nicholson are two of three board members on WGH, both appointed by CWC. The FACC alleges that Wood, Nicholson, and CWC colluded to deprive Triton of its rights and also mismanaged WGH assets. On September 2, 2022, Nicholson filed the instant demurrer to the third through tenth causes of action in the FACC.  

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.)

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 Defendant has complied with the meet and confer requirement. (Zucker Decl. ¶2.)

DISCUSSION

I. Triton’s Own Causes of Action

a. Conversion

“Conversion is any distinct act of dominion wrongfully exerted over the property of another, in denial of [the plaintiff's] right, or inconsistent with it.” (Kuroda v. SPJS Holdings, L.L.C. (Del.Ch. 2009) 971 A.2d 872, 889.) “A stockholder's shares are converted by any act of control or dominion ... without the [stockholder's] authority or consent, and in disregard, violation, or denial of his rights as a stockholder of the company.” (Arnold v. Society for Sav. Bancorp, Inc. (Del. 1996) 678 A.2d 533, 536, internal citations omitted.)

Triton alleges that Nicholson interfered with its ownership interest in shares of WGH by voting to prevent Triton from exercising its option to purchase the shares. (FACC ¶¶ 36(b), 63.) Triton alleges that it exercised the option on March 15, 2022 and that the LLC Agreement does not allow the WGH board to block that exercise. (Ibid.)

Nicholson argues that Triton does not have a present possessory interest in the WGH shares because Triton was merely prevented from exercising a future option. (Dem. 6:2-17.) However, a stockholder’s shares may be converted by any act of control or dominion in denial of the stockholder’s rights. (See Arnold, supra, 678 A.2d at p. 536.) Nicholson need not have “taken” Triton’s shares in the traditional sense. Triton alleges that it has an ownership right in the shares because it exercised the option on March 15, 2022 and that Nicholson wrongfully interfered with that interest by voting to block the option in contravention of the LLC Agreement. This is sufficient to state a claim for conversion.

The demurrer is OVERRULED as to the third cause of action.

b. Implied Covenant of 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, supra, 971 A.2d at p. 888.) “It is a general principle of contract law that only a party to a contract may be sued for breach of that contract. Indeed, Delaware law clearly holds that officers of a corporation are not liable on corporate contracts as long as they do not purport to bind themselves individually.” (Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood (Del. Ch. 1999) 752 A.2d 1175, 1180.)

            According to the FACC, Triton and CWC entered into the LLC Agreement in June 2021. (FACC ¶ 68.) Nicholson is not a party to the contract and did not purport to bind himself individually to the contract. Triton does not dispute this,  but Triton claims that “officers and board managers are subject to duties of good faith and fair dealing even where they are not signatories to an LLC agreement.” (Opp. 8:13-14.) Triton’s cited authority does not stand for that proposition.

            Triton cites to Zachman v. Real Time Cloud Services, LLC (Del. Ch., Mar. 31, 2020, No. CV 9729-VCG) 2020 WL 1522840, at *15, where the court found that “[a]s a manager of the LLC and controller of the LLC's other member, CBS Accounting, Chhabra owed fiduciary duties as well as the obligation of good faith and fair dealing to Zachman.” However, the court did not address the issue of holding non-signatories liable on a contract. Furthermore, the operating agreement in that case identified “Zachman and Chhabra on behalf of CBS Accounting as LLC signatories.” (Id., at *1, fn. 8.) Triton further relies on Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC (Del. Ch., Apr. 20, 2009, No. CIV. A. 3658-VCS) 2009 WL 1124451. However, the court there acknowledged that the contract claim was “limited because, among other things, PKI is the only defendant who was a party to that Agreement.” (Id., at *1.) The court found that the plaintiff had “stated a claim for breach of the implied covenant of good faith and fair dealing against PKI . . . .” (Ibid.) The court did not hold that non-signatories to a contract are bound by the implied covenant of good faith and fair dealing.  

            The demurrer is SUSTAINED without leave to amend as to the fourth cause of action.

            c. Declaratory Relief

            Triton alleges that the WGH board improperly required a supermajority as a predicate for Triton’s exercise of the option, even though the LLC Agreement does not require a supermajority when the option is exercised with cash. (FACC ¶ 75.) Triton alleges that declaratory relief is necessary to establish the proper interpretation of the terms in the LLC Agreement so as to determine the parties’ respective rights. (Id., ¶ 76.) As part of its prayer for relief, Triton requests a judicial declaration to specifically enforce the option and a judicial declaration that WGH provide indemnification to Triton. (Id., 33:12-13.)  

Nicholson argues that there is no actual controversy justifying declaratory relief, at least not as to Nicholson personally. (Dem. 7:19-27.) For an actual controversy to exist: “(1) It must be a controversy involving the rights or other legal relations of the party seeking declaratory relief; (2) it must be a controversy in which the claim of right or other legal interest is asserted against one who has an interest in contesting the claim; (3) the controversy must be between parties whose interests are real and adverse; (4) the issue involved in the controversy must be ripe for judicial determination.” (Rollins International, Inc. v. International Hydronics Corp. (Del. 1973) 303 A.2d 660, 662-63.)  

            Nicholson argues that the requested relief can only be provided by WGH, since WGH is the one actually holding the shares, and Nicholson is not a party to the LLC Agreement. (Dem. 7:24-27.) However, Nicholson cites no authority for the proposition that this precludes a controversy between himself and Triton. Nicholson was the one who voted to block Triton from exercising the option and receiving its shares. Triton alleges that Nicholson has colluded with Wood and acts as a board member purely at Wood’s behest to operate the company for Wood’s personal benefit. (FACC ¶¶ 3, 6.) The blocking of Triton’s option was allegedly done to preserve Wood’s percentage interest. (Id., ¶ 3.) Triton’s requested relief for a declaration of specific performance of the option would in essence prohibit the board, including Nicholson, from continuing to block Triton’s purchase of the shares. Thus, this is a controversy that involves Nicholson’s interests, which are adverse to Triton’s.  

            Nicholson also argues that declaratory relief cannot be applied to redress past wrongs, and the denial of the option has already occurred, leaving at most a breach of contract action. (Dem. 8:1-8.) However, Triton seeks declaratory relief to end a continuing dispute over its entitlement to purchase the shares. Triton wishes to move forward as a member of WGH entitled to 50% ownership. Nicholson, Wood, and CWC allegedly dispute this, so the matter is ripe for resolution.

            The demurrer is OVERRULED as to the fifth cause of action.

II. Derivative Claims Brought on Behalf of WGH

            a. Triton’s Standing to Bring Derivative Claims

Nicholson first argues that Triton cannot assert the sixth through tenth causes of action derivatively on behalf of WGH because there is a conflict of interest since Triton is itself being sued by WGH for fraud and mismanagement. (Dem. 11:5-15.) The determination of whether a derivative plaintiff can adequately represent a class depends on various factors, one of which is litigation pending between the parties. (Emerald Partners v. Berlin (Del. Ch. 1989) 564 A.2d 670, 673.) A defendant bears the burden of showing that a derivative plaintiff is an inadequate representative due to a conflict of interest. (Id. at p. 674.)

Nicholson does not adequately articulate how the existence of litigation between WGH and Triton renders Triton an improper derivative plaintiff. “A plaintiff in a stockholder derivative suit will not be disqualified simply because he may have interests which go beyond the interests of the class and, as long as the plaintiff's interests are coextensive with the class, his representation of the class will not be proscribed.” (Emerald Partners, supra, 564 A.2d at p. 674.) The allegations in the FACC establish harm to both Triton individually and WGH as a whole. While Triton asserts some causes of action on its own behalf, the derivative claims focus on wrongdoing directed at WGH. Triton’s attorneys are not conflicted simply by virtue of filing a derivative action with WGH as the real plaintiff in interest, absent an actual attorney-client relationship with WGH. (See Shen v. Miller (2012) 212 Cal.App.4th 48, 56-57 [rejecting the contention that “the attorney for a shareholder prosecuting a derivative action on behalf of a corporation enters an attorney-client relationship with the corporation simply by filing the derivative action”]; Blue Water Sunset, LLC v. Markowitz (2011) 192 Cal.App.4th 477, 487-91 [finding that attorney-client relationship existed, resulting in conflict, because attorney made special appearance on behalf of LLC at demurrer hearing].)

Nicholson also argues that Triton has not established that it would be futile to demand the WGH board to file the lawsuit. (Dem. 9:17-27.) “[C]ourts should ask the following three questions on a director-by-director basis when evaluating allegations of demand futility: (i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand; (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.” (United Food & Commer. Workers Union v. Zuckerberg (Del. 2021) 262 A.3d 1034, 1059.) “If the answer to any of the questions is ‘yes’ for at least half of the members of the demand board, then demand is excused as futile.” (Ibid.)

Triton alleges that one or more of these factors are true for Wood and Nicholson, which constitutes more than half the board. Wood allegedly mismanaged WGH assets for his own personal benefit. (See, e.g., FACC ¶ 3.) This means Wood personally benefitted from the misconduct and faces potential liability arising from the claims being brought. Nicholson also faces liability for his actions, including breach of fiduciary duty for denying access to company records, obstructing board meetings, and failing to approve any budget. (FACC ¶¶ 19, 40, 51.) Nicholson also allegedly has “extensive social and professional ties with” Wood. (Id., ¶ 83.) Nicholson allegedly acts as a board member purely at Wood’s behest to operate the company for Wood’s personal benefit. (FACC ¶¶ 3, 6.) This is sufficient to demonstrate demand futility. (See United Food, supra, 262 A.3d at p. 1061 [“while the plaintiff is bound to plead particularized facts in . . . a derivative complaint, so too is the court bound to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant, when dismissal of a derivative complaint is sought”].)

In sum, Triton may bring claims derivatively on behalf of WGH.

b. Implied Covenant of Good Faith and Fair Dealing

As discussed above, Nicholson is not a party to the LLC Agreement and therefore cannot be bound by an implied contract term. The demurrer is SUSTAINED without leave to amend as to the sixth cause of action.

c. 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.) Nicholson’s conduct, as discussed herein, inferably constitutes bad faith. Moreover, the FACC alleges conduct that constitutes breaches of specific fiduciary duties outlined in the LLC Agreement. (See, e.g., FACC ¶¶ 19, 20, 40.)

The demurrer is OVERRULED as to the seventh cause of action.

d. Intentional Interference with Business Relations

To state a claim for Tortious 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. (Malpiede v. Townson (Del. 2001) 780 A.2d 1075, 1099.)

This claim alleges that Cross-Defendants frustrated a key opportunity for WGH in the form of a $60 million sale of a property named Santa Fe Springs to prospective buyers. (FACC ¶ 35(b).) Cross-Defendants allegedly refused to provide financial and other information that was necessary to negotiate with the buyers. (Ibid.) Wood and Nicholson also allegedly refused to consider lucrative options for disposing of the Santa Fe lot and refused to engage with prospective buyers. (Id., ¶ 108.)  

Nicholson argues that this claim requires the defendant to be a stranger to the transaction at issue, citing Mesirov v. Enbridge Energy Company, Inc. (Del. Ch., Aug. 29, 2018, No. CV 11314-VCS) 2018 WL 4182204, at *12.) However, that court dealt with a claim for interference with contract, not business relations. The court held: “[A] party to a contract cannot tortiously interfere with that same contract . . . In other words, Delaware law generally requires that a defendant to a tortious interference claim be a stranger to both the contract and the business relationship giving rise to and underpinning the contract.” (Ibid.) Nicholson cites no authority for the proposition that a board member cannot interfere with the business opportunities of the company at which he serves. (See also AM General Holdings LLC on behalf of Ilshar Capital LLC v. Renco Group, Inc. (Del. Ch., Oct. 31, 2013, No. CV 7639-VCN) 2013 WL 5863010, at *12 [“a plaintiff may allege facts to demonstrate that an interference by an affiliated entity was motivated by some malicious or other bad faith purpose and by making such a showing could thereby overcome the limited privilege granted by the affiliate exception”].)   

Nicholson also argues that declining to deal with the prospective buyers does not constitute a wrongful act. There are multiple factors to consider in determining whether an intentional interference is wrongful: “(a) the nature of the actor's conduct, (b) the actor's motive, (c) the interests of the other with which the actor's conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor's conduct to the interference and (g) the relations between the parties.” (WaveDivision Holdings, LLC v. Highland Capital Management, L.P. (Del. 2012) 49 A.3d 1168, 1174.)

Triton alleges that Wood and Nicholson engaged in their conduct in order to personally benefit Wood. (FACC ¶ 3.) Their actions allegedly allowed Wood to pilfer WGH assets to pay unrelated third parties or make unnecessary purchases. (Ibid.) Wood was allegedly enriched personally through the rejection of the Santa Fe offer. (Ibid.) Additionally, their failure to disclose financial information allegedly constitutes a breach of their fiduciary duties. (See FAC ¶¶ 19, 20, 40.) Therefore, the nature of Cross-Defendants’ conduct and the motives behind them lead to a reasonable inference that their actions were wrongful. (See WaveDivision, supra, 49 A.3d at p. 1174.)

Lastly, Triton contends that the LLC Agreement waives all duties except those enumerated in the Agreement, and there is no duty to accept the Santa Fe transaction. (Dem. 14:2-5.) However, this is not a breach of fiduciary duty or contract claim. The waiver of duties in the Agreement does not insulate Nicholson from any and all tort claims.

However, Delaware law does not appear to recognize a claim for negligent interference, instead referring to the claim as tortious interference and requiring intentional interference as one of the elements. (See also OC Tint Shop, Inc. v. CPFilms, Inc. (D. Del., Sept. 27, 2018, No. CV 17-1677-RGA) 2018 WL 4658211, at *5 [“As a matter of law, Delaware does not recognize a cause of action for negligent interference with prospective economic relations”].) Therefore, Triton may state a claim for intentional interference only.

            The demurrer is SUSTAINED without leave to amend as to the eighth cause of action and OVERRULED as to the ninth cause of action.  

            e. Conversion

            This claim derives from the allegation that “Wood and Nicholson wrongfully exercised control over WG Holdings’ personal property, including its cash, business opportunities, and relationships with third parties.” (FACC ¶ 119.) Nicholson argues that Triton fails to identify the property that was converted.  

            A plaintiff must “show that he had a right to the money--other than a right pursuant to the contract--that was violated by the defendants' exercise of dominion over the money.” (Kuroda, supra, 971 A.2d at p. 890.) “Generally, an action in conversion will not lie to enforce a claim for the payment of money.” (Ibid.) Here, Wood allegedly pilfered WGH assets to pay unrelated third parties or make personal purchases. (FACC ¶ 3.) Wood also diverted WGH’s money to bank accounts and recipients that he controls. (Id., ¶ 80.) This constitutes conversion of an identifiable sum of money. This is not a claim for payment of money pursuant to a contract. The precise amount need not be alleged at the pleading stage. However, this conduct is attributed to Wood, not Nicholson. Additionally, Triton cites no authority for the proposition that business opportunities or relationships can be converted.

The demurrer is SUSTAINED with leave to amend as to the tenth cause of action.

CONCLUSION

            Cross-Defendant William Nicholson’s demurrer is SUSTAINED in part as set forth above.