Judge: Daniel S. Murphy, Case: 22STCV14915, Date: 2023-01-06 Tentative Ruling

Case Number: 22STCV14915    Hearing Date: January 6, 2023    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. The operative Second Amended Cross-Complaint (SACC) was filed on October 27, 2022.

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 Wood and CWH then replaced Cross-Defendants and rescinded the LLC Agreement (ARLLCA) that the parties had signed.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 is Wood’s and CWH’s demurrer to Triton’s SACC. The demurrer was filed November 18, 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.)

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 Wood and CWH have complied with the meet and confer requirement. (See Athey Decl. ¶ 2.)

DISCUSSION

I. Alter Ego

            Triton pursues certain causes of action against Wood on the theory that Wood is the alter ego of CWH. Wood argues that the alter ego allegations are insufficient. The SACC alleges that Wood and CWH do not comply with corporate formalities, do not maintain separateness, and have intermingled business affairs. (SACC ¶¶ 41-45.) These allegations are sufficient to establish a reasonable inference that Wood and CWH 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.) Facts may be alleged on information and belief. (People v. Superior Court (J.C. Penney Corp., Inc.) (2019) 34 Cal.App.5th 376, 415, fn. 25; Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550; Schessler v. Keck (1954) 125 Cal.App.2d 827, 835.) Therefore, the cross-complaint adequately pleads alter ego.

II. Contract Claims

            Wood and CWH argue that because the ARLLCA was terminated, there is no valid contract for them to breach. However, that is a factual contention that cannot be resolved on a demurrer. Triton’s allegation that the ARLLCA is valid and was breached must be accepted as true at the pleading stage.

            Wood also argues that he cannot be liable for breach of contract because he is not a party to the ARLLCA, and the alter ego allegations are insufficient to bind him to CWH’s obligations. However, as discussed above, the alter ego allegations are sufficient. Additionally, “[a] member or manager of a limited liability company . . . is bound by the limited liability company agreement whether or not the member or manager . . . executes the limited liability company agreement.” (Del. Code, § 18-101(9).) Wood is allegedly a manager of WGH. (SACC ¶¶ 41, 50.) Wood does not dispute this Delaware law or that he is a manager of WGH.

            Wood and CWH also argue that the derivative implied covenant of good faith and fair dealing claim fails because WGH is not a party to the ARLLCA and therefore cannot assert the claim on its own behalf, much less allow Triton to assert it derivatively. However, “[a] limited liability company . . . is not required to execute its limited liability company agreement.” (Del. Code, § 18-101(9).) “A limited liability company agreement may provide rights to any person, including a person who is not a party to the limited liability company agreement, to the extent set forth therein.” (Ibid.) The ARLLCA is WGH’s LLC agreement. WGH can enforce its own LLC agreement and is in fact suing to enforce the ARLLCA in the underlying complaint. (FAC ¶¶ 119-122.) The ARLLCA sets forth duties owed to “the Company,” as in WGH. (See, e.g., ARLLCA § 9.3.) “[A] claim of mismanagement that, if proven, represents a direct wrong to the corporation that is indirectly experienced by all shareholders . . . is entirely derivative in nature.”

(Dieterich v. Harrer (Del.Ch. 2004) 857 A.2d 1017, 1028.) Therefore, Triton can assert a breach of implied covenant claim on behalf of WGH.

            The demurrer is OVERRULED as to the first, fourth, and sixth causes of action.

III. Breach of Fiduciary Duty

            Wood argues that the fiduciary duty claims are superfluous given the breach of contract claims. However, a fiduciary duty claim may be pled in the alternative alongside a contract claim. (Garfield v. Allen (Del.Ch. 2022) 277 A.3d 296, 357-60.) “[A] court is not required to wrestle at the pleading stage with how one claim might interact with another.” (Id. at p. 361.) “It is thus not grounds for a pleading-stage dismissal for a defendant to argue that one legal theory is or could be duplicative of another.” (Goldstein v. Denner (Ch. June 2, 2022, No. 2020-1061-JTL) 2022 Del. Ch. LEXIS 125, at *35.) Even though Triton itself maintains that the ARLLCA is valid and enforceable, that does not mean the ARLLCA will ultimately be found as such, and Triton is still allowed to plead in the alternative. “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 second and seventh causes of action.

IV. Interference with Business Relations

            Triton stipulates that the eighth and ninth causes of action should be stricken. (Opp. 10:5-9.) The demurrer is SUSTAINED without leave to amend as to the eighth and ninth causes of action.  

V. Conversion

            Wood and CWH argue that the conversion claim is defective because money cannot be the subject of conversion. This contention is not entirely accurate. In reality, “[m]oney is subject to conversion only when it can be described or identified as a specific chattel, but not where an indebtedness may be discharged by the payment of money generally.” (Goodrich v. E.F. Hutton Group, Inc. (Del.Ch. 1988) 542 A.2d 1200, 1203.) 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 v. SPJS Holdings, L.L.C. (Del.Ch. 2009) 971 A.2d 872, 890.)   

            Triton’s conversion claim derives from the allegation that “WOOD and NICHOLSON wrongfully exercised control over WG Holdings’ personal property, including its cash and its proceeds from the sale of its Assets.” (SACC ¶ 119.) In particular, “WOOD wrongfully and unlawfully caused the transfer of WG Holdings’ property from the company to entities and bank accounts that WOOD controlled,” and Nicholson allegedly aided and abetted these actions. (Id., ¶ 121.) This constitutes conversion of an identifiable sum of money rather than money owed pursuant to a debt or contract. The SACC seeks recovery of identical money—the funds that Wood and Nicholson allegedly pilfered to Wood’s accounts.   

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

CONCLUSION

            Wood’s and CWH’s demurrer to Triton’s SACC is SUSTAINED without leave to amend as to the eighth and ninth causes of action and OVERRULED in all other respects.  

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. The operative Second Amended Cross-Complaint (SACC) was filed on October 27, 2022.

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 is Nicholson’s demurrer to Triton’s SACC, which Nicholson filed on November 21, 2022. Specifically, Nicholson argues that Triton cannot assert the derivative fiduciary duty and conversion claims on behalf of WGH because WGH is also suing Triton, resulting in an impermissible conflict.

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

DISCUSSION

I. Derivative Claims

The Court has already addressed the issue of Triton’s derivative claims in a previous ruling issued October 17, 2022. Nicholson acknowledges that the instant demurrer is based “on points raised on a prior Demurrer.” (Dem. 6:17-19.) “[A] party cannot seek to dismiss the same claim based on a previously rejected argument without seeking reconsideration.” (Goncharov v. Uber Technologies, Inc. (2018) 19 Cal.App.5th 1157, 1167.)

            Even if the Court were to reconsider the merits (see Darling v. Kritt (1999) 75 Cal.App.4th 1148, 1156), Nicholson has not offered any basis to deviate from the prior ruling. Nicholson has already argued, and the Court has acknowledged, that Triton is being sued by WGH and that Triton is asserting claims on its own behalf. (Oct. 17 Ruling 6:17-19, 7:4-6.) However, “[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 v. Berlin (Del. Ch. 1989) 564 A.2d 670, 674.) To disqualify a plaintiff suing derivatively, the defendant has the burden of showing “that the plaintiff cannot be expected to act in the interests of the others because doing so would harm his other interests.” (Ibid.)

Nicholson does not sufficiently demonstrate how suing for harm done to WGH harms Triton’s other interests. If anything, protecting WGH would benefit Triton in the event Triton is found to rightfully own a portion of WGH shares. The fact that Triton denies WGH’s allegations of fraud and mismanagement and seeks to acquire additional stake in WGH does not render Triton an inadequate representative of WGH. “[A] derivative action may be brought even if the representative does not have the support of a majority of the corporation's shareholders, or even all of the minority shareholders.” (Emerald Partners, supra, 564 A.2d at p. 675.) In the claims that Triton asserts derivatively, its interests are coextensive with those of WGH.

Nicholson also argues that Triton’s attorneys are conflicted because they simultaneously represent WGH. The Court has rejected this argument previously. (Oct. 17 Ruling 7:9-8:3.) An attorney for a plaintiff suing derivatively on behalf of a corporation does not represent the corporation merely by virtue of filing the derivative suit. (Shen v. Miller (2012) 212 Cal.App.4th 48, 56-57.) If the attorney directly represented the corporation, there would be no need for a derivative suit, because the corporation would be pursuing the claims on its own behalf. (Id. at p. 58.) Nicholson has no evidence that Triton’s attorneys formed an attorney-client relationship with WGH or appeared directly on behalf of WGH. (See Blue Water Sunset, LLC v. Markowitz (2011) 192 Cal.App.4th 477, 487-91.) Captions in certain court filings are not evidence of an attorney-client relationship or proof of appearances. (See Nicholson’s RJN, Ex. E, G, H.) There is no indication that Triton’s attorneys appeared on behalf of WGH in the impermissible manner described in Blue Water.

II. Conversion

            Nicholson separately argues that the conversion claim is defective because money cannot be the subject of conversion. This contention is not entirely accurate. In reality, “[m]oney is subject to conversion only when it can be described or identified as a specific chattel, but not where an indebtedness may be discharged by the payment of money generally.” (Goodrich v. E.F. Hutton Group, Inc. (Del.Ch. 1988) 542 A.2d 1200, 1203.) 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 v. SPJS Holdings, L.L.C. (Del.Ch. 2009) 971 A.2d 872, 890.)

            Triton’s conversion claim derives from the allegation that “WOOD and NICHOLSON wrongfully exercised control over WG Holdings’ personal property, including its cash and its proceeds from the sale of its Assets.” (SACC ¶ 119.) In particular, “WOOD wrongfully and unlawfully caused the transfer of WG Holdings’ property from the company to entities and bank accounts that WOOD controlled,” and Nicholson allegedly aided and abetted these actions. (Id., ¶ 121.) This constitutes conversion of an identifiable sum of money rather than money owed pursuant to a debt or contract. The SACC seeks recovery of identical money—the funds that Wood and Nicholson allegedly pilfered to Wood’s accounts.   

            The Court previously held that these allegations were sufficient to state a conversion claim notwithstanding the absence of a precise amount. (Oct. 17 Ruling 11:1-5.) The demurrer was sustained because the conduct was attributed to Wood and not Nicholson, and Triton could not establish that business opportunities and relationships can be converted. (Id. at 11:5-8.) In the present demurrer, Nicholson does not contend that the SACC fails to attribute conduct to him. The SACC alleges that Nicholson aided and abetted Wood’s conduct. (SACC ¶ 121.) Triton no longer contends that Nicholson converted its relationships and opportunities. As a result, there is no defect remaining to justify sustaining the demurrer. The conversion claim is properly stated.

CONCLUSION

            William Nicholson’s demurrer to Triton LA, LLC’s Second Amended Cross-Complaint is OVERRULED. Nicholson’s motion for judgment on the pleadings is DENIED.