Judge: Daniel S. Murphy, Case: 22STCV14915, Date: 2023-02-06 Tentative Ruling

Case Number: 22STCV14915    Hearing Date: February 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. The operative First Amended Complaint was filed October 14, 2022.

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 are various demurrers and motions to strike filed against WGH’s FAC.

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 Defendants have complied with the meet and confer requirement.

DISCUSSION

I. Conversion

            “It is the rule that when a trial court sustains a demurrer with leave to amend, the scope of the grant of leave is ordinarily a limited one. It gives the pleader an opportunity to cure the defects in the particular causes of action to which the demurrer was sustained, but that is all.” (Community Water Coalition v. Santa Cruz County Local Agency Formation Com. (2011) 200 Cal.App.4th 1317, 1329.) “The plaintiff may not amend the complaint to add a new cause of action without having obtained permission to do so, unless the new cause of action is within the scope of the order granting leave to amend.” (Harris v. Wachovia Mortgage, FSB (2010) 185 Cal.App.4th 1018, 1023.)

In granting leave to amend, the Court did not give WGH permission to assert a conversion claim, nor is conversion within the scope of the Court’s order. WGH was granted leave to amend to allege facts demonstrating a breach of Section 8.3 of the ARLLCA to the extent it based its fiduciary duty claim on that section, to allege more specificity with regards to fraud, and to allege facts demonstrating unjust enrichment by the individual defendants. (See September 19, 2022 Order.) Conversion is not implicated in the scope of this order.

Additionally, “[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 conversion claim does not lie where “[t]here is no allegation that any specific money was delivered to the defendant and that the defendant had any obligation to return the identical money.” (Ibid.) Improper charges do not constitute conversion and are more akin to indebtedness that may be discharged by repayment. (See, e.g., McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1491.) The conversion claim here is based on allegations that Defendants billed WGH for services that were never performed. (FAC ¶¶ 65, 66, 107, 111.) This does not constitute conversion. The demurrer to the fifth cause of action is SUSTAINED without leave to amend.

II. Fraud (against Louis Zylstra)

            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.) Fraud must be pleaded with specificity rather than with general and conclusory allegations. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.)

            WGH’s fraud claim against Defendant Zylstra is based on the allegation that “on an AFE Expense Form dated January 6, 2022 related to the Sawtelle oil field, Lou Zylstra signed indicating that Scott Wood had given verbal approval for $35,000 worth of work despite not actually having received such approval from Wood, and, in fact, after having been told definitely not to perform such work.” (FAC ¶ 60.) As a result, WGH allegedly paid the money for unauthorized services. (Id., ¶ 116.)

Zylstra contends that the FAC lacks specifics as to how the expense form was sent to WGH. However, whether and how the invoice was ultimately relayed to WGH can be ascertained in discovery. For pleading purposes, WGH has established the requisite specificity by identifying a specific written expense form on which Zylstra made the misrepresentation that Wood gave approval for $35,000 of work. The FAC alleges that Defendants billed impermissible amounts “to the Company” and that Zylstra “present[ed] the AFE Expense Form to the Company.” (FAC ¶¶ 60, 115.) This sufficiently establishes that the misrepresentation was directed at WGH. Zylstra’s demurrer to the sixth cause of action is OVERRULED.    

III. Fraud (against Bret Strong)

            WGH’s fraud claim against Strong is premised on the theory that while negotiating the ARLLCA on behalf of E&B, Strong concealed E&B’s poor financial condition and situation with lenders.

            However, WGH fails to articulate that Strong had a duty to disclose E&B’s financial condition. (See ABRY Partners V, L.P., supra, 891 A.2d at p. 1050.) The parties involved here are sophisticated business entities that were negotiating at arm’s length. This does not create a special relationship giving rise to a duty to disclose.

WGH argues that Strong cannot conceal material facts that would have qualified the statements he did make. Specifically, WGH contends that Strong negotiated certain aspects of the deal without disclosing the true reason those terms were necessary—that E&B was in trouble with its lenders. (FAC ¶¶ 31-32, 36-38.) However, WGH cites no authority for the proposition that it is fraud for a contracting party to not reveal its motivations in negotiating a contract. Strong’s statements were not half-truths that would have been qualified by additional disclosures. Strong was merely relaying E&B’s position in the negotiations. (FAC ¶¶ 31-32, 36-38.) No statements about E&B’s finances—partial or otherwise—were made by Strong. Just because WGH would have changed its mind about entering into the ARLLCA had it known certain facts, does not mean Strong was the one with the duty to disclose those facts. The demurrer to the first cause of action is SUSTAINED without leave to amend as to Strong.

CONCLUSION

            Defendants’ demurrers to the FAC are SUSTAINED in part as set forth above without leave to amend. The motions to strike are moot as the Court has sustained the demurrers to the conversion claim.