Judge: Daniel S. Murphy, Case: 22STCV14915, Date: 2022-12-07 Tentative Ruling

Case Number: 22STCV14915    Hearing Date: December 7, 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 WGH. Due to financial issues with its lenders, E&B could not directly deal with WGH. Instead, E&B allegedly formed Defendant Triton LA, LLC (Triton) to hold E&B’s 25% interest in WGH. The complaint alleges that the arrangement was induced by fraud and that Defendants merely sought to take over WGH’s assets for themselves. Triton allegedly demanded a higher ownership stake in WGH, which WGH’s board denied. Thereafter, Defendants allegedly mismanaged WGH’s finances and operations, leading to the damages sought in this action.

Triton has cross-complained against Scott Wood (Wood), William Nicholson (Nicholson), and CW Children Holdings, LLC (CWH). Triton asserts causes of action for harm done to Triton and asserts claims derivatively on behalf of WGH. Triton and CWH are allegedly the sole members of WGH. Wood and Nicholson are two of three board members on WGH, both appointed by CWH. Triton alleges that Wood, Nicholson, and CWH colluded to deprive Triton of its rights and also mismanaged WGH assets.

Wood and CWH have filed their own cross-complaint against Triton, E&B, and various others. Wood wanted to invest in oil and gas properties and came into contact with Galesi Group (Galesi), a consortium of companies with experience in operating oil and gas assets. Wood was allegedly led to believe that Galesi was financially solvent and had the expertise needed to operate the oil and gas properties he sought to purchase. Wood paid the money to purchase the oil and gas assets and formed CWH and WGH to hold his 75% interest. Wood agreed to give Galesi 25% in return for Galesi’s promise to operate the assets and pay government bond premiums. Cross-Defendants allegedly lied about their financial stability, capability to operate the assets, and intent to pay the government bond premiums. Wood and CWH then replaced Cross-Defendants and rescinded the LLC Agreement (ARLLCA) that the parties had signed.

At issue presently are demurrers and motions to strike filed by Zylstra & Associates Engineering (Z&A), Louis Zylstra (Zylstra), and Steve Layton (Layton) against the cross-complaint of Wood and CWH. The operative cross-complaint was filed September 6, 2022. Defendants filed their motions on October 25, 2022.

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 Cross-Defendants have complied with the meet and confer requirement.

DISCUSSION

 I. Wood’s Standing

“As a general principle, standing to invoke the judicial process requires an actual justiciable controversy as to which the complainant has a real interest in the ultimate adjudication because he or she has either suffered or is about to suffer an injury of sufficient magnitude reasonably to assure that all of the relevant facts and issues will be adequately presented to the adjudicator.” (Holmes v. Cal. Nat. Guard (2001) 90 Cal.App.4th 297, 314-315.) “To have standing, a party must be beneficially interested in the controversy; that is, he or she must have some special interest to be served or some particular right to be preserved or protected over and above the interest held in common with the public at large.” (Ibid.) 

Cross-Defendants argue that Wood is not the real party in interest for the fourth, fifth, eighth, ninth, and tenth causes of action, which concern CWH’s equity stake in WGH. Cross-Defendants contend that Wood has no standing because he is not a party to the ARLLCA and does not have a possessory interest in the equity stake. In opposition, Wood points out that he formed CWH to represent his interest in the oil and gas assets, and he owns 100% of CWH. (Cross-Compl. ¶ 43.) Wood arranged the financing to purchase the assets, personally guaranteeing the loan and selling personal assets to secure enough funds. (Id., ¶ 27.) However, Wood’s personal guarantees have not been put at issue in the cross-complaint, and the causes of action at issue relate only to the equity stake owned by CWH. (Id., ¶¶ 146, 160, 182, 187, 189.) Even if Wood wholly owns CWH, that does not mean he can personally sue for the equity stake belonging to the corporation. (See Wood v. U.S. Bank Nat'l Ass'n (Del. Ch. 2021) 246 A.3d 141, 148 [“The Delaware Uniform Limited Liability Act ... makes clear that an LLC has a separate juridical existence distinct from its members…”].)

Therefore, Wood does not have standing to pursue the claims at issue as alleged. Wood may amend the cross-complaint to assert claims based on his personal interests.   

II. Alter Ego

            As to the causes of action at issue in this demurrer, Wood and CWH rely on alter ego allegations to hold the moving defendants liable for the acts of other cross-defendants. While Z&A concedes that the cross-complaint sufficiently alleges alter ego for demurrer purposes, Zylstra and Layton maintain that alter ego is not adequately pled as to them.

            The cross-complaint alleges that Cross-Defendants acted collectively for the benefit of their interrelated organization, share a unity of interest and ownership, and do not exercise corporate separateness. (Cross-Compl. ¶¶ 101-109.) These allegations are sufficient to establish a reasonable inference that Cross-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.) Therefore, the cross-complaint adequately pleads alter ego.

III. 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 v. SPJS Holdings, L.L.C. (Del.Ch. 2009) 971 A.2d 872, 888.) “The implied covenant seeks to enforce the parties' contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought to address them.” (Gerber v. Enter. Prods. Holdings, LLC (Del. 2013) 67 A.3d 400, 418.) “Express contractual provisions always supersede the implied covenant, but even the most carefully drafted agreement will harbor residual nooks and crannies for the implied covenant to fill.” (Id. at p. 419.)

Here, the cross-complaint alleges that “Cross-Defendants had an implied contractual obligation to provide capable and cost-efficient Operations & Management Services for WGH” and that “Cross-Defendants promised that Triton would make the Triton Initial Capital Contribution in exchange for receiving an equity stake in WGH.” (Cross-Compl. ¶¶ 112-113.) Cross-Defendants argue that both of these “implied” duties actually stem from an express contractual duty—Triton’s promise to provide the Initial Capital Contribution, as stated in section 4.1 of the ARLLCA. As a result, Cross-Defendants argue, Wood and CWH cannot manufacture an implied covenant claim.

However, Cross-Defendants do not adequately explain how the obligation to provide capable and cost-efficient services is equal to Triton’s duty to provide the Initial Capital Contribution. It is not apparent on the face of the complaint or incorporated ARLLCA that the duty to perform competent services is part of the Initial Capital Contribution. Even if the Initial Capital Contribution is an express term in the ARLLCA, the obligation to provide capable and cost-effective services is not. CWH relied on Cross-Defendants to operate the oil and gas assets in exchange for 25% stake. (Cross-Compl. ¶¶ 28, 45.) The obligation to operate the assets in a capable and cost-efficient manner may be implied as a term that the parties would have agreed to had they considered it during the original negotiations. (See Gerber, supra, 67 A.3d at p. 418.)

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

IV. Constructive Fraud

“Constructive fraud is simply a term applied to a great variety of transactions, having little resemblance either in form or nature, which equity regards as wrongful, to which it attributes the same or similar effects as those which follow from actual fraud.” (In re Wayport, Inc. Litig. (Del.Ch. 2013) 76 A.3d 296, 327.) “The principal factor distinguishing constructive fraud from actual fraud is the existence of a special relationship between the plaintiff and the defendant, such as where the defendant is a fiduciary for the plaintiff.” (Ibid.)

Here, the cross-complaint alleges that “[s]eparately, Galesi Group, Triton, Buicko, and Layton were in a special or confidential relationship with CWH based on their negotiations with CWH to enter into a business partnership with CWH.” (Cross-Compl. ¶ 128.) Cross-Defendants allegedly promised to be financially stable partners but concealed E&B’s poor financial condition, thereby inducing CWH to give away the 25% equity stake. (Id., ¶¶ 129-131.)

Layton argues that the claim is not pled with the requisite specificity and that a special relationship does not arise from an arms-length transaction. (Layton Dem. 19:16-20:2.) “Constructive fraud, like actual fraud, must be pleaded with specificity.” (Knox v. Dean (2012) 205 Cal.App.4th 417, 434.) Where “the gravamen of the present dispute arises from a transaction that ostensibly was the product of arms-length negotiation between sophisticated parties,” there is no special relationship giving rise to constructive fraud. (Fortis Advisors LLC v. Dialog Semiconductor PLC (Del. Ch., Jan. 30, 2015, No. CV 9522-CB) 2015 WL 401371, at *9.)

Wood’s and CWH’s opposition merely incorporates their opposition to Triton’s and E&B’s demurrers. (Opp. to Layton Dem. 14:11-12.) However, Triton argued that the constructive fraud claim should be stricken because it was superfluous to the breach of fiduciary duty claim. Triton made no argument regarding the specificity of the allegations or the effect of an arms-length transaction. Therefore, incorporating the opposition to Triton’s demurrer does nothing to address this demurrer. As a result, Wood and CWH effectively do not oppose Layton’s argument regarding this claim.  

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

V. Fraud

            The elements of fraud are “(1) the defendant falsely represented or omitted facts that the defendant had a duty to disclose; (2) the defendant knew or believed that the representation was false or made the representation with a reckless indifference to the truth; (3) the defendant intended to induce the plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable reliance on the representation; and (5) the plaintiff was injured by its reliance.” (ABRY Partners V, L.P. v. F&W Acquisition LLC (Del.Ch. 2006) 891 A.2d 1032, 1050.) “Most of those elements must be pled with particularity . . . .” (Ibid.) This means “a complaint must allege: (1) the time, place, and contents of the false representation; (2) the identity of the person making the representation; and (3) what the person intended to gain by making the representations. Essentially, the plaintiff is required to allege the circumstances of the fraud with detail sufficient to apprise the defendant of the basis for the claim.” (Ibid.) However, “[m]alice, intent, knowledge and other condition of mind of a person may be averred generally.” (Ibid.)

            Cross-Defendants argue that the fraud claims are not pled with specificity. The Court agrees. Many of the fraud allegations refer generally to representations and conversations without specifying the actual statements made, and attribute the conduct broadly to all Cross-Defendants. (See, e.g., Cross-Compl. ¶¶ 32-41.) These allegations lack the requisite specificity. (See ABRY, supra, 891 A.2d at p. 1050.)  

            Cross-Defendants also argue that the statements amount to mere puffery, which cannot support a fraud claim. “[T]he misrepresentation forming the basis for the fraud or negligent misrepresentation claim must be material, and the plaintiff generally cannot rely, for example, on puffery, expressions of mere opinion, or representations that are obviously false.” (Vichi v. Koninklijke Philips Elecs, N.V. (Del.Ch. 2014) 85 A.3d 725, 775.) At the same time, “the mere fact that a material statement is in the form of an opinion, or of an estimate, is not necessarily conclusive as to whether it must be treated as such.” (Wal-Mart Stores, Inc. v. AIG Life Ins. Co. (Del. 2006) 901 A.2d 106, 115.) If Cross-Defendants made specific misrepresentations about their current financial condition with the intent to induce Wood and CWH into the ARLLCA and give up 25% stake, that could constitute fraud. Those types of statements would not be mere opinion or puffery, assuming they are alleged with the requisite specificity.

            Lastly, the fraud claims failed for the same reasons as to the other cross-defendants, so alter ego does not save the claim here.    

            The demurrer is SUSTAINED with leave to amend as to the fourth and fifth causes of action.

VI. Promissory Estoppel and Unjust Enrichment

            “To prevail on a promissory estoppel claim, a plaintiff must establish that:

(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, 1200-1201.)  

            Cross-Defendants first argue that the promissory estoppel claim is based on mere puffery. That argument has been addressed above.

            Cross-Defendants further argue that promissory estoppel does not apply where a fully integrated, enforceable agreement governs the promise at issue. (SIGA Techs., Inc. v. Pharmathene, Inc. (Del. 2013) 67 A.3d 330, 348.) Also, “Delaware courts have consistently refused to permit a claim for unjust enrichment when the alleged wrong arises from a relationship governed by contract.” (Nemec, supra, 991 A.2d at p. 1130.)

However, it cannot be determined at this stage whether the ARLLCA is enforceable. Claims may be alleged in the alternative. “A party may set forth 2 or more statements of a claim or defense alternately or hypothetically . . . regardless of consistency.” (Grunstein v. Silva (Ch. Dec. 8, 2009, No. 3932-VCN) 2009 Del. Ch. LEXIS 206, at *29.) “A plaintiff may plead cumulative or inconsistent causes of action.” (Gherman v. Colburn (1977) 72 Cal.App.3d 544, 565.)  

The demurrer is OVERRULED as to the sixth and seventh causes of action.

VII. Civil Conspiracy

            “Civil conspiracy is not an independent cause of action; it must be predicated on an underlying wrong. Thus, if plaintiff fails to adequately allege the elements of the underlying claim, the conspiracy claim must be dismissed.” (Kuroda, supra, 971 A.2d at p. 892.)

            Here, the cross-complaint alleges breach of fiduciary duty. None of the moving cross-defendants challenge the fiduciary duty claim. Thus, the fiduciary duty claim can serve as the underlying tort supporting the civil conspiracy claim. While the cross-complaint does not assert breach of fiduciary duty against all of the cross-defendants, “the utility of the conspiracy concept is that a person who did not commit all the required elements of a tort can still be held liable if her co-conspirators' joint actions completed the tort.” (Am. Int'l Group, Inc. v. Greenberg (Del.Ch. 2009) 965 A.2d 763, 805, fn. 149.)

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

VIII. Unfair Competition

Business and Professions Code section 17200 prohibits unlawful, unfair, or fraudulent business acts or practices. Each of the three prongs is an independent basis for relief. (Smith v. State Farm Mutual Automobile Insurance Co. (2001) 93 Cal.App.4th 700, 718.)

Cross-Complainants concede that they are not proceeding under the unlawful prong. The complaint lacks allegations supporting the unfair prong, and as discussed above, lacks the requisite specificity to support fraud.

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

IX. Declaratory Judgment

“Any person interested under a written instrument . . . or under a contract . . . may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court for a declaration of his or her rights and duties . . . arising under the instrument or contract.” (Code Civ. Proc., § 1060.)   

            The declaratory judgment claim alleges that “Triton materially failed to make the Triton Initial Capital Contribution, and instead deceitfully arranged to have WGH pay for the Bonds that Triton was supposed to contribute as part of the Triton Initial Capital Contribution.” (Cross-Compl. ¶ 192.) As a result, the complaint alleges, “[b]ecause of Triton’s complete failure of consideration, CWH contends that it was entitled to terminate and rescind the ARLLC Agreement.” (Id., ¶ 193.) “Triton contends that CWH was not entitled to terminate and rescind the ARLLC Agreement.” (Id., ¶ 194.) Thus, there is an actual controversy over the parties’ rights and duties under the agreement.

Cross-Defendants argue that “a recital in a written agreement that a stated consideration has been given facially supports a finding that the agreement is supported by consideration, absent facts suggesting that no such consideration was actually given or expected.” (Moscowitz v. Theory Entertainment LLC (Del. Ch., Oct. 28, 2020) 2020 WL 6304899, at *12.) Cross-Defendants point to section 4.1 of the ARLLCA acknowledging Triton’s Initial Capital Contribution as good and valuable consideration. However, here, there are “facts suggesting that no such consideration was actually given.” The cross-complaint alleges that Triton did not pay for the bonds that made up the Initial Capital Contribution and instead tricked WGH into paying for the bonds. (Cross-Compl. ¶¶ 96-98.)

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

X. 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).) “‘Malice’ means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” (Id., subd. (c)(1).) “‘Oppression’ means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.” (Id., subd. (c)(2).) Fraud is “intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” (Id., subd. (c)(3).)

As discussed above, the claims which form the basis for punitive damages have not been adequately pled. The complaint lacks specific allegations demonstrating malice, oppression, or fraud. Therefore, the motion to strike is GRANTED with leave to amend.

CONCLUSION

            The demurrers filed by Z&A, Zylstra, and Layton are SUSTAINED in part as set forth above with leave to amend. Their motion to strike is GRANTED with leave to amend.