Judge: Daniel S. Murphy, Case: 22STCV14915, Date: 2023-04-05 Tentative Ruling

Case Number: 22STCV14915    Hearing Date: April 5, 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. The operative First Amended Cross-Complaint was filed on January 9, 2023. 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 six demurrers filed by various cross-defendants against the FACC of Wood and CWH. Louis Zylstra, Zylstra & Associates, and Steve Layton have joined Triton’s demurrer. E&B filed a separate demurrer that is substantively identical to Triton’s. Lastly, Rotterdam Ventures, Inc. and David Buicko have filed a separate demurrer.  

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 the parties 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 causes of action in the FACC, 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 personally have a possessory interest in the equity stake even if his company does.

However, the FACC places more than just the 25% stake at issue. The FACC also alleges that the fraud “damaged Wood personally by: (i) inducing him to sell his home in Carpinteria, California in order to purchase the Oil & Gas Assets based on the promises that Cross-Defendants would provide him with a capable, financially-stable, and cost-effective business affiliate; and (ii) make personal guarantees for $20 million that may ruin him financially if Cross-Defendants’ scheme succeeds.” (FACC ¶ 158.) It is possible that Wood was personally defrauded at the same time that CWH was induced into giving away the 25% stake. The overall scheme could have defrauded both parties, and Wood’s allegations must be taken as true. At the pleading stage, it cannot be determined as a matter of law that Wood suffered no personal harm.

Therefore, Wood has standing to pursue this action. However, Wood concedes that he has no standing for the eighth cause of action (UCL) and ninth cause of action (declaratory relief) because those claims concern CWH only.

II. 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-Defendants argue that the FACC fails to plead the unlawful and unfair prongs of the UCL, but Cross-Defendants admittedly do not challenge the fraudulent prong. Because each of the three prongs is an independent basis for relief, any one of them may serve as a basis for a UCL claim. In other words, the claim only fails as a matter of law if a plaintiff fails to establish liability under any prong. If the fraud prong is met, then the FACC sufficiently asserts a UCL claim, and the demurrer must be overruled. “[A] demurrer cannot rightfully be sustained to part of a cause of action or to a particular type of damage or remedy.” (Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1047.) Triton does not cite any authority holding that the UCL is an exception to this rule. In Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1360-66, the plaintiff conceded the fraud prong, and the court held that there was no tenable claim under the unlawful or unfair prongs. Therefore, the entire UCL claim failed. The court in Durell did not hold that some prongs can be demurred to while others remain in the complaint.  

            Rotterdam and Buicko separately challenge the UCL claim. First, they point to the choice-of-law provision in the ARLLCA, which selects Delaware law to govern disputes arising out of the agreement. They argue that as a result, Wood and CWH cannot pursue a UCL claim, which derives from California law. (See Century 21 Real Estate LLC v. All Prof'l Realty, Inc. (9th Cir. 2015) 600 F.App'x 502, 506.) However, the FACC alleges that the ARLLCA was fraudulently induced and rescinded, so it is possible the choice-of-law provision does not apply. (See FACC ¶¶ 124, 139-158.) A UCL claim does not depend upon a valid enforceable contract.    

 This claim cannot be adjudicated at the pleading stage.

            Rotterdam and Buicko next argue that a private dispute not involving the public cannot give rise to a UCL claim. (See Linear Technology Corp. v. Applied Materials, Inc. (2007) 152 Cal.App.4th 115, 135.) However, “[a] private plaintiff has standing to bring a UCL claim if the plaintiff ‘has suffered injury in fact and has lost money or property as a result of the unfair competition.’” (Moore v. Centrelake Medical Group, Inc. (2022) 83 Cal.App.5th 515, 527, quoting Bus. & Prof. Code, § 17204.) “There are innumerable ways in which economic injury from unfair competition may be shown.” (Ibid.) “Whether a practice is deceptive, fraudulent, or unfair is generally a question of fact which requires consideration and weighing of evidence from both sides and which usually cannot be made on demurrer.” (Linear, supra, 152 Cal.App.4th at pp. 134-35.)

            It cannot be determined at the pleading stage that Wood and CWH lack standing as a matter of law or that the alleged wrongdoing does not implicate public harm. Wood and CWH have alleged injury in fact and money lost as a result of Cross-Defendants’ actions, and the UCL allows for restitution for such injury. Therefore, the UCL claim survives.

III. Fiduciary Duty

            Buicko argues that the cross-complaint impermissibly groups him in with other cross-defendants. However, the FACC specifically alleges conduct attributable to Buicko. That the other cross-defendants are alleged to have breached their duties in the same manner does not mean the FACC fails to attribute conduct to Buicko. Buicko can still be treated independently if, for example, he is found not liable for certain conduct while other cross-defendants are. But for pleading purposes, if Wood and CWH allege that Buicko and the other cross-defendants breached their fiduciary duties in the same way, then the allegations must be taken as true. Additionally, California law governs procedural pleading requirements, and California law does not prohibit grouping defendants together, so long as the claim does not require heightened specificity, such as fraud.

Buicko argues that he cannot be liable for breach of fiduciary duties because he was not a board member of WGH yet and therefore owed no fiduciary duties at the time of the alleged wrongdoing. The FACC does not reveal on its face that all of Buicko’s alleged wrongdoing occurred prior to his board membership. This is a factual issue.

            Buicko further points out that the ARLLCA acknowledges that Triton made the Initial Capital Contribution (ICC), and therefore Buicko cannot be liable for failing to ensure Triton made the ICC. However, Wood and CWH allege that Triton did not in fact make the ICC. This cannot be resolved on the pleadings.

            Buicko also argues that the FACC contradicts itself by accusing Buicko of orchestrating operational failures and failing to provide adequate management services, while simultaneously alleging that a Master Service Agreement between WGH and Excalibur was “never presented to WGH’s Board of Managers for a vote.” (See FACC ¶ 81.) Buicko wonders how he could possibly be liable for operations and management services if he had no part in approving agreements in his managerial capacity. However, this misreads the FACC. Buicko is not absolved of all liability just because one particular agreement was not presented to the board. The claims against Buicko are not entirely premised on the Master Service Agreement.

Buicko also argues that Wood and CWH blocked him from performing his duties and cannot now blame him. This is a factual issue. The complaint does not reveal on its face that Wood and CWH prevented Buicko from performing his duties.   

            Lastly, the Court has already held that the ARLLCA does not restrict fiduciary duty claims “attributable to gross negligence, willful misconduct, or bad faith.” (Aug. 11, 2022 Order re Demurrer 4:5-9.)

            The allegations sufficiently state a claim for breach of fiduciary duty against Buicko. Buicko’s liability cannot be adjudicated at the pleading stage.

CONCLUSION

            Cross-Defendants’ demurrers to the First Amended Cross-Complaint of Scott Wood and CWH are SUSTAINED without leave to amend as to Wood’s individual claims under the eighth and ninth causes of action and OVERRULED in all other respects.