Judge: David J. Cowan, Case: SC120777, Date: 2023-01-05 Tentative Ruling

Case Number: SC120777    Hearing Date: January 5, 2023    Dept: 200

LOS ANGELES SUPERIOR COURT – WEST DISTRICT

BEVERLY HILLS COURTHOUSE, DEPT. 200

JUDGE DAVID J. COWAN

TENTATIVE RULING

CASE: 1169 11^th St., et al. v. Tolk, SC 120777 & related case, SC125858

MOTION: Request for Cottle hearing

HEARING DATE: January 5, 2023

INTRODUCTION

At this final status conference prior to the scheduled trial date, the Court is asked to reach a fundamental legal issue that may dispose of much if not all of this case. The trial is scheduled to last nearly two months and is to be tried by the Court. As discussed below, the procedure Cross-defendants suggest is not one that this Court can adopt. However, the Court is open to consideration of other ways to schedule the order of proof or to bifurcate issues at trial so that all concerned can avoid what might otherwise be unnecessary and or in any event to focus first on key issues that may impact later issues. The Court has not yet itself analyzed the merits of the underlying contention that the claims to be tried are derivative as opposed to ones Tolk and Alsbury can bring themselves directly and or determined whether it is bound by earlier decisions. The Court will not now recite the allegations as to the underlying events; however, it has reviewed the parties’ various contentions and notes that much concerning the underlying transactions is not in fact in dispute.

RELEVANT PROCEDURAL HISTORY

On September 26, 2016, the Court, by Judge Nancy L. Newman, granted the motion to dismiss, without prejudice, the third and fourth causes of action in Tolk’s second amended cross-complaint on the basis of the forum selection clause in the underlying Asset Purchase Agreement between old Daqri and new Daqri. These causes of action were derivative shareholder claims on behalf of the old company. In that agreement, old Daqri submitted to claims on its behalf related to that agreement be decided in the Chancery courts in Delaware where old Daqri was incorporated.  

On May 8, 2017, Judge Newman ruled on a demurrer that Tolk could assert a direct claim against cross-defendants; finding that neither Avikian v. WTC Financial Corp. (2002) 98 Cal.App.4^th 1108 nor PacLink Communications v. Superior Court (2001) 90 Cal.App.4^th 958 were on point and did not preclude an independent claim that was “not incidental to any injury to the corporation.” The Court ruled that the allegations fell within that definition. However, Judge Newman sustained without leave to amend the 11^th cause of action for fraudulent transfer; finding this to be derivative rather than direct.

On September 7, 2017, Judge Newman similarly dismissed the shareholder derivative cause of action in Alsbury’s second amended complaint.

On December 21, 2017, in the Tolk case, Judge Newman granted a motion for judgment on the pleadings as to the causes of action for fraudulent transfer, citing PacLink.

On April 30, 2019, in the Tolk case, the Court, by Judge Elaine W. Mandel (who by then had assumed Judge Newman’s courtroom), denied the motion for summary judgment - premised on Tolk’s claims being derivative, not direct; finding there was a triable issue of fact whether Tolk’s claims suffered individual injury distinct from those suffered by other shareholders. Judge Mandel stated she was following Jara v. Suprema Meats (2004) 121 Cal.App.4^th 1238, rather than the earlier Avikian, supra, in reaching that determination, noting that Jara implicitly overruled Avikian and applied a broader standard for individual shareholder standing than Jara (which Judge Mandel found required that claims of mismanagement and self-dealing be brought as derivative claims.)

On July 7, 2020, the Court, by Judge Victor E. Chavez, granted a motion for the Court to apply Delaware law in determining the scope of the directors’ fiduciary duties in the upcoming long cause trial he was intending to conduct. Judge Chavez passed away before he was able to conduct trial.

On June 10, 2021, Judge Mandel issued a default judgment in favor of Tolk and against Old Daqri in the total sum of $741,570.28.

On June 29, 2022, the parties filed their stipulation that Tolk was not seeking to recover lost income or wages from Cross-defendants.

On July 14, 2022, Judge Mandel ruled that Tolk’s shareholder claims arising from breach of fiduciary duty were equitable as opposed to legal in nature and that therefore there was no right to a jury trial.

On November 10, 2022, this bench officer, then sitting as Supervising Judge in Dept. 1 (Dept. 1 having previously having accepted the case from Judge Mandel for assignment to a long cause trial judge), assigned the case to himself as a future long cause trial judge in 2023. The Court scheduled trial to commence on January 9, 2023.

On December 7, 2022, Cross-Defendants filed a request for a so called Cottle hearing. They argue that more recent authority in this District’s Court of Appeal – Schrage v. Schrage (2021) 69 Cal.App.5^th 126- suggests Jara may have been decided in error. Further, that since Judge Mandel made that ruling Judge Chavez ruled that Delaware law applies and that application of Delaware law rather than the California law Judge Mandel relied upon as to whether the claims were derivative would result in a different conclusion.

On December 21, 2022, Tolk and Alsbury filed Opposition to the request. They argue the foregoing is effectively an impermissible motion for reconsideration of the order denying the motion for summary judgment and an improper attempt to derail the start of trial. They argued also that granting this request would impermissibly shift the burden of proof from cross-defendants to them. Tolk and Alsbuy contend that since cross-defendants were self-interested in the transaction at issue the burden was on them first to show that the process whereby the assets of old Daqri were sold for $5 million was fair.

On December 27, 2022, Cross-Defendants filed a Reply in support of the request. They argue that whether there is triable issue of fact about whether the claims are direct does not mean there is any ruling that those disputed claims are in fact direct ones as opposed to derivative ones.

DISCUSSION

In Cottle v. Superior Court (1992) 3 Cal.App.4^th 1367, the Court held that it was not error for the trial court on a motion in limine to exclude evidence at trial that their specific personal injury was caused by exposure to chemicals where there was no question for the jury as to causation as to any plaintiff’s particular injury. This was a case that had been designated as Complex and involved one hundred and seventy five property owners or renters seeking to recover from developers for hazardous wastes that had been on the property. The trial court found based upon the declarations that had been filed that there was only “the most tenuous possibility” that a witness could testify any illness was caused by the hazardous waste. Plaintiffs argued the Court lacked statutory authority to make the order and that they were wrongly deprived their right to a jury trial. The Court held that trial courts have broad authority over admission of evidence, that the trial court has inherent power, including under the Trial Court Delay Reduction Act, to reduce delay in litigation, that the proposed trial would have likely lasted a year or more, and that the Court had properly reviewed the proffer of evidence in making that order in making the assessment it did that there was nothing to submit to a jury. In concluding, the Court issued a clarification: “While an order excluding evidence for the failure to make a prima facie showing is proper in a complex case so that the court can manage and control the case, we give no opinion on such an order in any other context. Our holding is limited to complex litigation cases.” Significantly, as discussed further below, there was also a lengthy dissent: Justice Johnson opined that a trial court was without authority to terminate a cause of action for lack of proof before trial without complying with the summary judgment procedure that the Legislature enacted for that purpose. He noted further that the special rules for complex cases are focused not on how to conduct trial but on active management of the case, and in particular discovery issues.

Here, this case is not one which has been designated as “Complex.” A Complex designation is one that requires analysis of a number of factors under Calif. Rules of Court, Rule 3.400, et seq. and no such showing has been made here that the Court should now designate the case as Complex. Moreover, as indicated above, a Complex determination more concerns case management. A request for a Complex determination is meant to be made at the start of the case; not five years later - on the brink of trial. While this trial is estimated to take longer than twenty days, and hence why it was treated as “long cause,” does not necessarily make this case Complex. In particular, there are not the same issues of some hundred and fifty plaintiffs as there were in Cottle. Hence, Cottle simply does not apply here.

Even if this case was deemed “complex” in the casual sense of that term where this case involves several difficult issues to decide, and the stakes are high, more recent authorities indicate other concerns that would preclude the Court granting the requested hearing: Though the request at issue is styled as a mere request and not per se as a motion in limine, review of Cottle indicates it was a motion in limine that was at issue there and what is effectively sought here by making the requested determination without first consideration of the evidence at trial. In Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1593-1595, the Court of Appeal set forth the relevant considerations in ruling on a motion in limine. The Court quotes these here at length since they are directly on point: 

“In limine motions are designed to facilitate the management of a case, generally by deciding difficult evidentiary issues in advance of trial. “‘The usual purpose of motions in limine is to preclude the presentation of evidence deemed inadmissible and prejudicial by the moving party. A typical order in limine excludes the challenged evidence and directs counsel, parties, and witnesses not to refer to the excluded matters during trial. (Citation omitted) “The advantage of such motions is to avoid the obviously futile attempt to unring the bell in the event a motion to strike is granted in the proceedings before the jury. (Citations omitted) What in limine motions are not designed to do is to replace the dispositive motions prescribed by the Code of Civil Procedure. It has become increasingly common, however, for litigants to utilize in limine motions for this purpose.

These nontraditional in limine motions can result in a court’s dismissing a cause on the pleadings. (Citation omitted) [trial court construed motions in limine as a motion for judgment on the pleadings and dismissed the action].) Some courts have also used the in limine process to examine the sufficiency of the evidence. For example, in Michelson v. Camp (1999) 72 Cal.App.4th 955, 960, in response to allegations in the defendant’s trial brief, the trial court instructed the plaintiffs to make an offer of proof as to the existence of damages. Construing the plaintiffs’ offer of proof as tantamount to an opening statement with regard to evidence of damages, the trial court concluded that, as a matter of law, the plaintiffs could not show recoverable damages and granted a nonsuit for the defense. (Id. at p. 961) A similar situation was considered in Stein–Brief Group, Inc. v. Home Indemnity Co. (1998) 65 Cal.App.4th 364, an insurance coverage case. The trial court ordered the plaintiff to file a pretrial motion in limine setting forth its “‘best case scenario’” in favor of coverage. (Id. at p. 368) The trial court concluded that, even under plaintiff’s best case scenario, there was no potential for coverage and entered judgment for the defense. (Ibid.) The appellate court characterized the “unusual and unorthodox procedure” as, in effect, a motion for nonsuit, or demurrer to the evidence. (Id. at p. 369); see also Atkinson v. Elk Corp. (2003) 109 Cal.App.4^th 739, 748-749 [trial court granted nonsuit on its own motion after studying the law and inviting stipulations concerning the contractual relationship between the parties].)

In purpose and effect, the foregoing nonstatutory procedures are merely substitutes for the dispositive motions authorized by statute. Appellate courts are becoming increasingly wary of this tactic. (See R & B Auto Center, Inc. v. Farmers Group, Inc. (2006) 140 Cal.App.4th 327, 371 (conc. opn. of Rylaarsdam, J.), “To have the sufficiency of the pleading or the existence of triable issues of material fact decided in the guise of a motion in limine is a perversion of the process.”) The disadvantages of such shortcuts are obvious. They circumvent procedural protections provided by the statutory motions or by trial on the merits; they risk blindsiding the nonmoving party; and, in some cases, they could infringe a litigant’s right to a jury trial. (Cal. Const., art. I, § 16.) Adherence to the statutory processes would avoid all these risks. Furthermore, these irregular procedures can result in unnecessary reversals. The risk of reversal arises when appellate courts are required to review a dispositive ruling on an in limine motion as if it were the product of a motion for nonsuit after opening statement. “[G]ranting of a nonsuit after an opening statement is a disfavored practice; it will be upheld only when it is clear that counsel has undertaken to state all of the facts which he expects to prove and it is plainly evident that those facts will not constitute a cause of action.” (Citations omitted) The standard of review in such cases requires that all inferences and conflicts in the evidence be resolved in favor of the losing party and against the judgment. (Citation omitted) In contrast, on appeal from a judgment following trial, appellate review favors the judgment. (Citation omitted) Thus, some cases will be subject to reversal where, had the trial court just taken the time to hold a trial, reversal would not be warranted. (Citation omitted)

In spite of the obvious drawbacks to the use of in limine motions to dispose of a claim, trial courts do have the inherent power to use them in this way. (Citations omitted) [finding the court’s nonsuit before opening statement to be “irregular” but not prejudicial]; and see Code Civ. Proc., § 128.) Courts have inherent power, separate from any statutory authority, to control the litigation before them and to adopt any suitable method of practice, even if the method is not specified by statute or by the Rules of Court. (Citations omitted) But when the trial court utilizes the in limine process to dispose of a case or cause of action for evidentiary reasons, we review the result as we would the grant of a motion for nonsuit after opening statement, keeping in mind that the grant of such a motion is not favored, that a key consideration is that the nonmoving party has had a full and fair opportunity to state all the facts in its favor, and that all inferences and conflicts in the evidence must be viewed most favorably to the nonmoving party.

(A motion for nonsuit “concedes the truth of the facts proved, but denies as a matter of law that they sustain the plaintiff's case,” and has been described as a “demurrer to evidence.” (Edwards v. Centex Real Estate Corp. (1997) 53 Cal.App.4th 15, 27; Darr v. Lone Star Industries, Inc. (1979) 94 Cal.App.3d 895, 899) “A trial court may grant a nonsuit only when, disregarding conflicting evidence, viewing the record in the light most favorable to the plaintiff and indulging in every legitimate inference which may be drawn from the evidence, it determines there is no substantial evidence to support a judgment in the plaintiff's favor.” (Edwards, supra, 53 Cal.App.4th at 27) “[G]ranting of a nonsuit after an opening statement is a disfavored practice; it will be upheld only when it is clear that counsel has undertaken to state all of the facts which he expects to prove and it is plainly evident that those facts will not constitute a cause of action.” (Amtower, supra, 158 Cal.App.4th at 1594))

See also, to same effect, Pellegrini v. Weiss (2008) 165 Cal.App.4th 515 and Miller v. Campbell, Warburton, et al. (2008) 162 Cal.App.4th 1331) (reversing order granting motion in limine where the hasty process deprived party of a full and fair opportunity to present its case; motion in limine was improper way to decide an issue of fact where had parties had not stipulated what those facts were.)

Here, applying first the test for a traditional motion in limine, the evidence would need to be both inadmissible and prejudicial if it were introduced. The purpose of this request is solely to exclude evidence that would be inadmissible; i.e., assuming Tolk and Alsbury prove what they allege, no claim would lie since this is purely derivative. However, Cross-Defendants make no showing that they would be prejudiced if witnesses testified in the sense of not being able to un-ring the bell. Moreover, where the trial here is before the bench, not a jury, there is even less cause for a traditional motion in limine. On the other hand, proceeding to trial would take considerable time and be a huge expense. And in that different sense would be prejudicial if it could be permissibly avoided: This issue will be discussed separately below where prejudice in this sense is not what Amtower is concerned with on traditional motion in limine.

Were the Court to treat the request as a non-traditional motion in limine, under the above-referenced considerations, the motion could be granted only if “it is clear that counsel has undertaken to state all of the facts which he expects to prove and it is plainly evident that those facts will not constitute a cause of action.” The standard of review in such event would also require that all inferences and conflicts in the evidence be resolved in favor of the losing party and against the judgment.

Applying those considerations here, it seems doubtful Tolk has stated all facts he expects to prove. Presumably, the intended witnesses will explain in various ways why Tolk and Alsbury suffered damages distinct from other shareholders. This Court cannot now find (to the level that would be required if this motion were one for nonsuit) – without hearing from at least what some witnesses testify – that Tolk or Alsbury will not be able to show they have a direct versus derivative claim. There is considerable argument that he and Alsbury were damaged in ways other than how other shareholders suffered; however, some of those relate to employment issues which Tolk and Alsbury agree are not sought as damages. Nonetheless, where on a motion for nonsuit (which is how a motion in limine would be treated), the Court is required to resolve inferences and conflicts in favor of the non-moving parties. See Lockheed Martin v. Continental Ins. Co. (2005) 134 Cal.App.3d 799, 817 (“A Cottle hearing is in the nature of a motion for nonsuit in that the court tests the sufficiency of the evidence without regard to conflicting evidence the opposing party may present. In evaluating a nonsuit motion, the trial court may not weigh the evidence or consider the credibility of witnesses, but must accept as true the evidence most favorable to the plaintiff, indulging every legitimate inference in the plaintiff's favor.”) Furthermore, to not give Tolk and Alsbury their “day in court” on this claim, would result in a change in the standards of review on appeal - prejudicial also to Cross-defendants -- who would otherwise enjoy a presumption in their favor were they to prevail at trial.

All of that said, Cross-defendants’ general point related to efficiency is well taken. The key underlying legal issue related to whether the remaining shareholder claims at issue are derivative or direct might be resolvable at the start of trial if the parties were willing to assume for these purposes the truth of those claims. Lockheed Martin, supra. The Court notes those claims do not include ones related to Tolk’s employment and instead seemingly relate solely to his status as a shareholder and how to value their ownership interests in the company. Therefore, this approach might work if a statement of facts could be agreed upon prior to addressing valuation for damages purposes. Under Evidence Code sec. 310, the Court may have the authority to now decide this question of law if certain facts were undisputed. The Court will hear from counsel at the hearing on this request their suggestions concerning the most efficient, as well as fair, way to permissibly address these issues at trial. The Court has reached no conclusion as to the merits of the underlying substantive issue.

CONCLUSION

For these reasons, the Court denies the request without prejudice to ruling in a different context concerning whether the claims are derivative rather than direct.