Judge: Daniel S. Murphy, Case: 22STCV14915, Date: 2022-12-09 Tentative Ruling

Case Number: 22STCV14915    Hearing Date: December 9, 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. Among other things, Triton seeks a judicial declaration that it exercised an option to purchase an additional 25% of WGH, for a total ownership stake of 50%. Triton also asserts a conversion claim based on Nicholson’s vote to block Triton’s exercise of the option.

On September 1, 2022, Triton filed the instant motion for summary adjudication of: (1) WGH’s declaratory relief claim; (2) Triton’s declaratory relief cross-claim; and (3) Triton’s cross-claim for conversion. Triton contends that it rightfully owns 50% of WGH because Triton exercised the option to purchase the additional shares. Whether Triton is entitled to the additional shares depends on an interpretation of the LLC Agreement (ARLLCA) between the parties. WGH contends that Triton’s option was subject to board approval, whereas Triton argues that the requirement for board approval only applies if Triton makes an in-kind contribution of oil and gas properties. Triton attempted to exercise the option using a cash contribution.    

LEGAL STANDARD

The function of a motion for summary judgment or adjudication is to allow a determination as to whether an opposing party cannot show evidentiary support for a pleading or claim and to enable an order of summary dismissal without the need for trial. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.) Code of Civil Procedure section 437c, subdivision (c) “requires the trial judge to grant summary judgment if all the evidence submitted, and ‘all inferences reasonably deducible from the evidence’ and uncontradicted by other inferences or evidence, show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1119.) “The function of the pleadings in a motion for summary judgment is to delimit the scope of the issues; the function of the affidavits or declarations is to disclose whether there is any triable issue of fact within the issues delimited by the pleadings.” (Juge v. County of Sacramento (1993) 12 Cal.App.4th 59, 67, citing FPI Development, Inc. v. Nakashima (1991) 231 Cal. App. 3d 367, 381-382.)

As to each claim as framed by the complaint, the defendant moving for summary judgment must satisfy the initial burden of proof by presenting facts to negate an essential element, or to establish a defense. (Code Civ. Proc., § 437c, subd. (p)(2); Scalf v. D. B. Log Homes, Inc. (2005) 128 Cal.App.4th 1510, 1520.) Once the defendant has met that burden, the burden shifts to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. To establish a triable issue of material fact, the party opposing the motion must produce substantial responsive evidence. (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 166.) Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.)

EVIDENTIARY OBJECTIONS

WGH’s Objections to Triton’s Evidence:

• WGH’s objections are overruled.

Triton’s Objections to WGH’s Evidence:

• Objection No. 7 is sustained. The remaining objections are overruled.

DISCUSSION

            Section 4.2(c) of the ARLLCA states:

“The Triton Member shall have the option to make an additional Capital Contribution (the “Triton Member Option”) in the form of a [sic] cash or Contributed Oil and Gas properties valued at Fair Market Value (subject to (i) approval by a Super Majority of the Board and (ii) if required by any existing agreements of the Company, approvals or consents of any third parties required by such agreements), provided, such additional Capital Contribution cash amount and/or Fair Market Value, plus the Triton Member’s initial Capital Contribution, shall equal the CW Member’s Initial Contribution. In exchange for exercising the Triton Member Option, an additional number of Units shall be issued to the Triton Member (at a price of $1.06 per Unit) such that after giving effect to the exercise of the Triton Member Option, the Sharing Ratio of the CW Member shall be equal. In the event the Triton Member Option is exercised, the Members and the Board agree to update, supplement, or amend this Agreement, as may be reasonably necessary in order to effectuate this transaction.”

(UF 2.)

            The issue surrounds the phrase “subject to (i) approval by a Super Majority of the Board.” Triton points out that an “option” is a continuing offer which the offeree (Triton) has the unilateral right to accept or reject. (See, e.g., Walsh v. White House Post Productions, LLC (Del. Ch., Mar. 25, 2020, No. CV 2019-0419-KSJM) 2020 WL 1492543, at *5.) Once the option is exercised, the offer is accepted and cannot be revoked. (Id. at *6.) According to Triton, WGH’s contention that Triton’s option is subject to board approval contradicts the function of an option contract.  

            However, the label of “option” is not critical. (See Walsh, supra, 2020 WL1492543, at *7.) While Section 4.2(c) of the ARLLCA does refer to the “Triton Member Option,” it also contains the express language “subject to (i) approval by a Super Majority of the Board.” Triton does not cite any authority addressing a situation where, as here, a contract provision contains language qualifying the right to exercise an option. As WGH points out, if Section 4.2(c) functioned as an option contract as described by Triton, the WGH board could not block Triton’s exercise of the option in any circumstance. Yet, Triton cannot dispute the phrase “subject to board approval,” and it concedes that the option is subject to board approval in at least one scenario—where Triton makes an in-kind contribution of oil and gas properties. However, if Triton’s option may be subject to board approval in at least one circumstance, it is not truly an irrevocable option contract as Triton contends. Under these circumstances, mere usage of the word “option” is not dispositive and does not preclude a triable issue.

            Triton also argues that “approval by a Super Majority of the Board” only makes sense when applied to “Oil and Gas properties valued at Fair Market Value” because other provisions in the ARLLCA call for the board to determine fair market value. (Mtn. 17:14-18:6.) However, those other provisions call for the board to “determine” fair market value, whereas Section 4.2(c) calls for the board’s “approval.” The differing terms raise a triable issue that the board’s role differs in connection with Section 4.2(c) as opposed to those other provisions. It suggests that the board “approves” Triton’s exercise of the option under Section 4.2(c) but merely “determines” fair market value in other contexts. At the very least, WGH’s interpretation is reasonable and raises a triable issue. Although the qualifying phrase “subject to approval by a Super Majority of the board” comes directly after “Oil and Gas Properties valued at Fair Market Value,” the parenthetical could reasonably be interpreted to apply to the entire preceding phrase, “The Triton Member shall have the option to make an additional Capital Contribution (the “Triton Member Option”) in the form of a [sic] cash or Contributed Oil and Gas properties valued at Fair Market Value.”   

            Lastly, WGH argues that the validity of the ARLLCA is at issue in other claims and cross-claims. However, Triton is moving for summary adjudication of specifically its cross-claims for declaratory relief and conversion, and WGH’s claim for declaratory relief. Triton does not have the initial burden of disproving all other claims or defenses. (See Code Civ. Proc., § 437c; Oldcastle Precast, Inc. v. Lumbermens Mutual Casualty Co. (2009) 170 Cal.App.4th 554, 565.) Plaintiff’s evidence is insufficient to show that WGH was defrauded into entering the ARLLCA. Nevertheless, summary adjudication is denied for the reasons stated above.

CONCLUSION

            Triton’s motion for summary adjudication is DENIED.