Judge David S. Cunningham, Case 22STCV03151 2023-01-06 Tentative Ruling

Judge: David S. Cunningham, Case: 22STCV03151, Date: 2023-01-06 Tentative Ruling

Winnick’s requests for judicial notice are granted. The Court judicially notices the documents’ existence.

Winnick’s demurrer is overruled as to the first, second, and third causes of action and sustained with leave to amend as to the fourth cause of action.

The first amended complaint (“FAC”) alleges that Qello, LLC (“Qello”) was formed in 2010 to provide music-themed streaming services. (See FAC, ¶ 1.) To finance the project, the company sold “renewable short term promissory notes (the ‘Original Notes’)” to “third parties (collectively, the ‘Noteholders’)[.]” (Id. at ¶ 2.) The Original Notes were “fully secured by all of Qello’s assets.” (Ibid.)

The project “manifested in the form of ‘Qello Concerts,’ which by 2015 had grown to become the world’s largest collection of on-demand full length concerts and music documentaries, live music events and other original programming.” (Id. at ¶ 4.) “To Qello’s Noteholders, and [] the public at large, Qello Concerts was the company’s flagship, ‘crown jewel’ asset.” (Id. at ¶ 5.) “Qello Concerts was also the company’s most valuable asset, as evidenced by the fact that the revenues associated therewith served both as the primary source of repayment of and principal form of security for the Original Notes.” (Ibid.)

In 2016, Winnick “set his sights on Qello as a potential investment opportunity.” (Id. at ¶ 6.) “He spent the next several months working closely with Qello’s then-Chairman, David Gentile, to develop a transition strategy whereby Winnick would acquire an equity interest in Qello and further assume total control over” the direction of the company. (Ibid.)

“Winnick saw Qello’s infrastructure as an opportunity to create a ‘white label’ streaming platform that would deliver streaming content to Asian media markets through a series of to-be-determined partnerships that Winnick hoped to deliver[,]” but there was a problem. (Id. at ¶ 7.) “Qello’s outstanding debt owed to the Noteholders — which by this time had grown to more than $11 million — was set to mature in early 2017.” (Id. at ¶ 8.) “Given the impending maturity date and total amount owed on the Original Notes, Winnick understandably viewed the Noteholders, and in particular their associated secured claim relating to both Qello’s cash flows and the underlying intrinsic value of the company, as an impediment to his plans[.]” (Id. at ¶ 9.)

Winnick responded by “develop[ing] a strategic and methodical plan to undermine the security for the Original Notes and ultimately strong-arm the Noteholders to convert their debt into equity, with the goal of minimizing, or even eliminating,” the obligation to repay. (Id. at ¶ 10.) “This in turn would create breathing room and free up cash for the ‘bet the company’ strategy Winnick was about to pursue.” (Ibid.)

“Consistent with this plan, Winnick made it clear that he was unwilling to invest in Qello with the outstanding noteholder debt coming due for payment.” (Id. at ¶ 11.) “[A]s a condition of investment he required that Qello obtain agreements from the Noteholders to extend the maturity dates on their Original Notes.” (Ibid.)

On 1/27/17, “Qello, at the direction of Winnick and Gentile, sent out a solicitation package (the ‘2017 Solicitation Package’) to the Noteholders promoting the forthcoming Winnick investment and asking the Noteholders to extend/renew the maturity date for their existing Notes for a two-year period in order to facilitate Winnick’s investment.” (Id. at ¶ 12.) “The 2017 Solicitation Package included the proposed new promissory notes (the ‘Renewed Notes’) and security agreements, which expressly stated that the Company would continue to engage in its same business . . . .” (Id. at ¶ 13.)

A main item on Winnick’s agenda was to sell Qello Concerts. (See id. at ¶ 15.) “To that end, even before the 2017 Solicitation Package was sent out, Winnick had made clear behind the scenes that he wanted no part of the music industry.” (Ibid.) “By late December 2016/early January 2017, Gentile and Winnick — who together had complete strategic control and direction of the Company — had decided to sell Qello Concerts and refocus Qello’s business on other pursuits.” (Ibid.)

“Indeed, by the time the 2017 Solicitation Package was sent out, Qello and a potential purchaser, Stingray Music USA (‘Stingray’), were in advanced negotiations concerning the purchase of Qello Concerts.” (Id. at ¶ 17.) “These negotiations yielded a detailed term sheet just four (4) days after the 2017 Solicitation Package — which was devoid of any mention of the Stingray negotiations — was sent out the Noteholders.” (Ibid.)

“Winnick’s decision to sell Qello Concerts would (and [ultimately] did) eliminate the only meaningful collateral securing the obligation to repay Noteholders.” (Id. at ¶ 18.) “The impact the Winnick Transaction would have on the Noteholder was intentionally concealed, however, by a dubious suggestion in the 2017 Solicitation Package that the Renewed Notes would remain collateralized by all of Qello’s assets . . . notwithstanding the fact that Winnick intended to, and by this time had already started creating, a new corporate structure that would acquire and hold assets outside of the Noteholders’ reach.” (Id. at ¶ 19.)

Plaintiff claims the 2017 Solicitation Package misrepresented that Qello’s “focus would remain the same following the closing of the Winnick Transaction without disclosing” “the sale of Qello Concerts” and “also failed to disclose that the Noteholders’ security position would be materially worse following the Winnick Transaction, as the Noteholders would have only limited security interests in the assets of a newly-created subsidiary, not the new restructured entity Winnick claimed to be working to build.” (Id. at ¶¶ 20, 21.)

In reliance, “the Noteholders agreed to execute and deliver the Renewed Notes and thereby extended the maturity date on the Noteholder debtor for an additional two-year term beginning in February 2017.” (Id. at ¶ 22.)

When considering demurrers, courts read the allegations liberally and in context, and “treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Serrano v. Priest (1971) 5 Cal.3d 584, 591.) “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) It is error “to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.)

The FAC repeats the word “control” but this is a legal conclusion, and facts supporting it are absent. For instance, the FAC does not allege – because it cannot – that at the time of the Solicitation Package, Winnick was an officer, director, equity holder, or even a creditor of Qello. It does not allege that Winnick had any power to direct Qello to do anything or held any official position that would give him such power. [Citations.] Nor are the FAC’s generic allegations that Gentile, as Qello’s then-Chairman, “work[ed] closely” with Winnick or made his strategic decisions in consultation with Winnick sufficient to establish control. “Allegations of influence are not the same as the power to direct the management of policies of the primary violator.” [Citations.]

The FAC’s allegations show Winnick did not have control of Qello, but rather that Winnick wanted to gain control, and his offer to fund Qello on certain conditions was a vehicle to do so. [Citation.] Qello wanted Winnick’s funding, and so it decided to obtain Plaintiff’s approval for Winnick’s conditions. [Citation.] That Qello and Plaintiff decided to accept Winnick’s conditions reflects that they made the decision to do so. That is not evidence of “control” by Winnick. [Citations.]

Plaintiff contends the FAC alleges that “Winnick was an indirect controller at the time of the solicitation[.]” (Opposition, p. 4 [citing paragraphs 15, 33, 46-50, 54, 58-61, 107, 111, 118, and 125].)

Plaintiff also contends he “recently c[a]me into possession of evidence that Winnick, through his employees, directed not only the general affairs of the company, but also the timing and content of the solicitation itself.” (Ibid.)

Alternatively, Plaintiff asserts that the demurrer should be overruled because the FAC alleges that Winnick “‘perform[ed] similar functions’ or ‘occup[ied] similar status’ to an ‘executive officer’ or ‘director’” of Qello. (Id. at p. 5.)

In reply, Winnick argues that the cited paragraphs state conclusions, not facts, the evidence cannot be considered at the demurrer stage, the evidence fails to demonstrate control, and the FAC does not allege that Winnick acted as an officer or director. (See Reply, pp. 3-6.)

It is unlawful for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.

Section 25501 makes a violator of section 25401 “liable to the person purchasing such securities for recission or damages.” (Soza & Jann, Cal. Prac. Guide – Corps. (The Rutter Group 2022) ¶ 5:390.)

Section 25504 imposes joint and several liability on “[e]very person who directly or indirectly controls the violator.” (Id. at ¶ 5:373.)

To meet the control requirement, the plaintiff must allege facts supporting an inference that the defendant “‘had the power to control the general affairs of the entity primarily liable at the time the entity violated the securities laws . . . [and] had the requisite power to directly or indirectly control or influence the specific corporate policy which resulted in the primary liability.’ [Citation.]” (Hellum v. Breyer (2011) 194 Cal.App.4^th 1300, 1317.)

“[W]hether someone qualifies as a controlling person is ‘a complex factual question.’” (Ibid.) “As such, it is ‘not ordinarily subject to resolution on a motion to dismiss,’ and dismissal is appropriate only when ‘a plaintiff does not plead any facts from which it can reasonably be inferred the defendant was a control person. [Citations.]’” (Ibid.)

The Court agrees with Plaintiff. The FAC alleges that Qello made the alleged misrepresentations and omissions in the Solicitation Package “at Winnick’s direction” and that Winnick “had complete strategic control and direction” of Qello. (FAC, ¶¶ 15, 33, 46-50, 54-56, 58-61, 105-120, 125.) These allegations create an inference of control, at least, and raise a factual question that should be decided via summary judgment or trial, so the demurrer is overruled.

It is unnecessary – and the Court declines – to consider Plaintiff’s evidence or to reach Plaintiff’s alternative argument.

Winnick contends “the FAC does not allege any facts that support the claim that [he] materially assisted in the alleged violations”:

The FAC does not allege that Winnick prepared, drafted, or distributed the Solicitation Package or any false or misleading statements sent to Plaintiff, or had any communications with Plaintiff or any investor. Instead, the FAC alleges that in 2016 Winnick became interested in investing in Qello and had a strategic vision for the Company that included selling Qello Concerts, which Winnick “made clear” to Qello during the negotiation process for his potential investment. [Citation.] Winnick conditioned his potential investment on the Noteholders extending the term of the Original Notes. [Citation.] Qello then sent the request to extend the term of the Original Notes in the Solicitation Package. [Citations.]

Winnick’s role in the Solicitation Package is limited to the allegation that it was sent “at Winnick’s direction” and that it “traded on his name and reputation” with his “full knowledge and approval.” [Citation.] The FAC does not allege that Winnick directed Qello regarding what to disclose or not disclose regarding his vision for the Company. Instead, it claims that Gentile “directed that the incomplete and/or inaccurate solicitation materials be sent out,” [citation], while alleging that Winnick “materially aided” in Qello’s violation only by “allowing the Company to trade on his name and reputation without disclosing his plans for the Company to the noteholders. . .,” [citation]. The FAC does not even allege that Winnick knew the Solicitation Package contained false statements or omissions. But even if it did, such an allegation would be insufficient. Just knowing or having reason to know of the fraud is not enough to establish aiding and abetting liability. [Citation.] The FAC does not allege any role by Winnick in the violation – the act of selling or offering to sell securities by means of false and misleading statements. And, the FAC’s rhetoric concerning an overall “scheme,” [citation], does not state a claim under Section 25504.1. [Citations.]

(Demurrer, pp. 16-17, emphasis in original; see also Reply, pp. 6-7 [“The FAC limits Winnick’s role in the Solicitation Package to ‘allowing’ the Company to trade on his name and reputation, conditioning his potential investment on renewal of the Notes, and ‘directing’ that renewal be sought. [Citation.] It does not allege that Mr. Winnick had any communication with Plaintiff or any investor, participated in drafting the Solicitation Package, or even read it. [Citation.] The Opposition claims that Winnick ‘directed’ ‘the content’ of the Solicitation Package, it does not explain what that means or which content Winnick ‘directed.’ The FAC does not unequivocally allege that Winnick prepared, drafted, edited, or distributed the Solicitation Package or any false or misleading statement sent to Plaintiff.”].)

Plaintiff says the FAC “alleges that Winnick was ‘actively involved in the sale and/or renewal of Qello promissory notes . . . and the long term plan to avoid repayment” and that he “contrived the scheme to allow Qello to avoid repayment of the noteholder debt and to force the noteholders to convert their debt instruments into equity investments.” (Opposition, p. 7.)

* “Winnick directed that the Solicitation Package be sent out prior to the formal announcement of his installation as Chairman, and further ‘allow[ed] the Company to trade on his name and reputation’ to convince the noteholders to extend their terms[.]” (Ibid.)

* “Winnick participated in the solicitation with the ‘inten[t] to deceive the noteholders in an effort to free up Qello from its noteholder debt’ so he could repurpose the company to his own ends.” (Ibid.)

* “Winnick assisted in (masterminded, in fact) the scheme to induce Plaintiffs to invest in Qello through the Renewed Notes. The Complaint specifically alleges that Winnick directed the timing and content of the Solicitation Package, which deceived the Noteholders by “omitt[ing] the existence of the negotiation for and impending sale of Qello Concerts” and by misrepresenting the scope of the Renewed Notes’ security interests in light of Winnick’s undisclosed intent to place assets and opportunities with new affiliate entities.” (Id. at p. 9.)

Section 25504.1 establishes “aider and abettor” liability. “[E]ven without any relationship to the violator [citation], a person who ‘materially assists’ in the violation ‘with intent to deceive or defraud’ – i.e., with intent to induce reliance on the knowing misrepresentation – is jointly and severally liable.” (Soza & Jann, supra, at ¶ 5:408, emphasis in original.)

Intent to defraud “is a requirement as to [] persons sought to be held liable as ‘aiders and abettors.’” (Id. at ¶ 5:409, emphasis in original.)

Moreover, the “defendant must have materially assisted in the actual securities law violation. I.e., plaintiff must show how defendant assisted in the act of selling or offering to sell securities by means of false and misleading statements (or omissions).” (Id. at ¶ 5:409.1, emphasis in original.)

The Court finds that the demurrer should be overruled. Again, the FAC states that Qello made the alleged misrepresentations and omissions “at Winnick’s direction” and that Winnick “had complete strategic control and direction” of Qello. (FAC, ¶¶ 15, 33, 46-50, 54-56, 58-61, 105-120, 125.) Winnick, himself, “omitted the existence of the negotiations for and impending sale of Qello Concerts from the 2017 Solicitation Package” and “included . . . a new security agreement ostensibly creating a security interest in all of Qello’s assets, without disclosing his plans to create new affiliate entities outside the Noteholders’ reach.” (Id. at ¶ 59.) He directed Qello to “sen[d] out the 2017 Solicitation Package[.]” (Id. at ¶¶ 12, 60.) “With [his] full knowledge and approval,” he allowed “the 2017 Solicitation Package [to] trade[] on his name and reputation, stating that [he] was being brought in to ‘increase [Qello’s] enterprise value with potential customers in the media and entertainment sector and help drive revenue to our platform business.’” (Id. at ¶¶ 61, 127.) He was

actively involved in the sale and/or renewal of Qello promissory notes pursuant to the 2017 Solicitation Package, as well as the decisions to sell Qello Concerts, restructure the Company so that its new assets and operations would not be encumbered by the security interests in favor of the Noteholders; and the long term plan to avoid repayment of the notes by forcing the Noteholders to convert those Renewed Notes into equity interests.

(Id. at ¶ 125.) And he “intended to deceive the noteholders in an effort to free up Qello from its noteholder debt, clearing the way for [him] to devote Qello’s resources to the pursuit of his vision of a ‘white label’ streaming platform that would deliver streaming content to the Asian media market.” (Id. at ¶ 126.) The allegations comply with section 25504.1.

Winnick asserts that the FAC fails to allege multiple elements of aiding and abetting:

Winnick’s role in the Solicitation Package is alleged to have been “allowing” the Company to trade on his name and reputation and conditioning his potential investment on renewal of the Notes. [Citation.] The FAC does not allege that Winnick drafted the Solicitation Package or directed the alleged misrepresentations or omissions be made. The FAC does not demonstrate any conduct by Winnick that amounts to substantial assistance or encouragement of Qello’s purported fraud. Indeed, the FAC does not even allege that Winnick reviewed the Solicitation Package or knew it contained misleading statements or omissions. Nor would such an allegation would be sufficient. Simply knowing or having reason to know of the fraud is not enough to establish aiding and abetting liability; the plaintiff must also allege intentional participation with knowledge of the object to be attained. [Citation.] Similarly, because the FAC does not allege any conduct by Winnick, it necessarily also fails to allege that Winnick’s conduct was a substantial factor in harming Plaintiff. Therefore, it fails to state a claim for this reason as well. [Citation.] The FAC’s allegations do not establish an aiding and abetting fraud claim under ordinary pleading standards – much less the applicable heightened pleading standards.

(Demurrer, pp. 17-18, emphasis in original, footnote omitted; see also Reply, p. 7 [“Despite the heightened pleading standard for aiding and abetting fraud claims, Plaintiff does not allege any conduct by Winnick that amounts to substantial assistance or encouragement in Qello’s alleged fraud. [Citation.] In response, the Opposition claims that Mr. Winnick directed the dissemination of false information and insisted the materially misleading Solicitation Package be sent to the Noteholders. [Citation.] But the FAC alleges that Gentile, “[a]s then-Chairman of the Company [] directed that the incomplete and/or inaccurate solicitation materials be sent out,” and limits Winnick’s role in the Solicitation Package to “allowing” the Company to trade on his name and conditioning his investment on renewal of the Notes. [Citation.] While the FAC alleges that the Solicitation Package was sent “at Winnick’s direction,” [citation], there is nothing actionable about this; the extension of the Notes was a condition of Winnick’s investment in Qello, [citation]. In any event, the FAC does not allege Winnick’s involvement in the purported misrepresentations, that Winnick reviewed the Solicitation Package, or knew it contained misleading statements.”], emphasis in original.)

First, the Complaint is replete with allegations that Qello defrauded Plaintiffs by inducing them to invest in the Renewed Notes on the basis of the Solicitation Package containing material omissions and misstatements. [Citation.] Second, Winnick is alleged not just to have known of the scheme to defraud, but to have “designed and orchestrated Qello’s plan” to defraud investors by soliciting purchase of the Renewed Notes by means of the Solicitation Package and further to have specifically “direct[ed] the dissemination of false information” with the “intent[ ] to not only induce” investment “but also to conceal the true nature of . . . Winnick’s scheme.” [Citation.] Third, Winnick substantially encouraged Qello to commit the fraud because, inter alia, “he insisted” that the materially misleading Solicitation Package “be sent out to the Noteholders.” [Citation.] By directing the content of the Solicitation Package, he personally “lied” to the Noteholder Plaintiffs. [Citation.] Fourth, the material failure to disclose the scheme to sell Qello Concerts and restructure Qello induced the Noteholders to purchase debt securities that “lacked meaningful assurances of repayment” and “effectively destroyed any theoretical security interest the Noteholders may have had.” [Citation.] Consequently, when “Qello defaulted on the Renewed Notes and . . . filed for bankruptcy,” the Plaintiffs suffered “a total or near-total loss” on their investment. [Citation.]

The elements of aiding and abetting fraud are (1) Winnik “knew” Qello was going to commit/committing fraud against Plaintiff, (2) Winnick “gave substantial assistance or encouragement” to Qello, and (3) Winnick’s “conduct was a substantial factor in causing harm” to Plaintiff. (CACI 3610.)

The demurrer is overruled. The analysis regarding the second cause of action applies with equal force to the third cause of action, and the allegations cited by Plaintiff satisfy the elements and state a claim. (See FAC, ¶¶ 9-12, 14-15, 19, 33, 46-50, 54-56, 58-61, 64-69, 105-120, 125-127, 132-134, 136-138.)

Winnick argues that the FAC fails to allege a misrepresentation by him or a duty to disclose accurate information:

The FAC does not allege any statement by Winnick. The FAC identifies one statement by Qello in support of the negligent misrepresentation claim: “In the Solicitation Package and attachments thereto, Qello specifically covenanted that it would ‘preserve its company existence and continue to engage in business of the same general type as conducted as of the date hereof.’” [Citation.] The FAC alleges that “[a]s officers and/or directors, of Qello, Gary Winnick and David Gentile were responsible for information published by Qello.” [Citation.] However, the FAC does not allege that Winnick was a director or officer of Qello in January 2017, when this statement was made. The FAC alleges that Gentile was “Qello’s then-Chairman” at the time of the Solicitation Package, and Winnick later assumed this role. [Citation.] And, the other allegations of the FAC make clear that Winnick was not an officer or director of Qello in January 2017. The FAC alleges that Winnick’s investment in Qello and his position on the board were contingent upon the Noteholders accepting the terms proposed by the Solicitation Package. [Citations.] The FAC does not allege any statement by Winnick; therefore, it does not allege a negligent misrepresentation against him. [Citation.]

In addition to failing to allege that Winnick made any communication to Plaintiff, the FAC also does not allege that Winnick had a duty to communicate accurate information to Plaintiff or any factual basis for such a duty. Therefore, the claim fails for this independent reason. [Citation.]

Plaintiff claims Winnick is responsible for Qello’s negligent misrepresentations in the Solicitation Package because he was “acting as and performing functions of a corporate officer or director at the time the Solicitation Package was sent to the Noteholders”:

While “[d]irectors and officers of a corporation are not rendered personally liable for its torts merely because of their official positions, [they] may become liable if they directly ordered, authorized or participated in the tortious conduct.” [Citations.] This rule recognizes that a corporate officer cannot “hide behind the corporation where [the officer was] an actual participant in the tort.” [Citation.]

Here, the Complaint pleads that Winnick is responsible for the misrepresentations contained in the Solicitation Package. [Citation.] The Complaint pleads that Winnick acted as an executive officer or manager of Qello and that Qello sent the Solicitation Package at Winnick’s direction. [Citation.] So by directing the issuance of the Solicitation Package to the Noteholders, Winnick directly participated in Qello’s negligent misrepresentation as an executive officer or director, and he cannot now hide behind the company and argue that Qello alone is responsible for misrepresentations contained in the Solicitation Package. [Citation.]

Plaintiff contends there was a duty to disclose because “the Solicitation Package was [] conveyed in a commercial setting for a business purpose – to induce investment.” (Id. at p. 12.)

The Opposition does not contest that Qello made the statements in the Solicitation Package and Winnick held no position at Qello at the time. [Citations.] The Opposition argues that Winnick is nonetheless responsible for Qello’s statements because “Winnick was acting as and performing functions of a corporate officer or director at the time the Solicitation Package was sent . . . .” [Citation.] In support, the Opposition cites case law providing that directors and officers of a corporation may be liable for a corporation’s conduct “if they directly ordered, authorized, or participated in the tortious conduct.” [Citation.] Unsurprisingly, no case cited by Plaintiff holds that a potential, outside investor may be deemed an officer and thus liable for a corporation’s tortious conduct. In every case cited by Plaintiff, the defendants held an official position at the corporation at the time of the tort. [Citations.]

Plaintiff’s negligent misrepresentation claim also fails because Winnick had no duty to disclose information to Plaintiff. [Citation.] Plaintiff argues that Winnick had a duty to disclose accurate information to Plaintiff because (1) the information in the Solicitation Package was conveyed in a commercial setting for a business purpose, [citation], and (2) Plaintiff’s claims are based on misrepresentations and omissions, [citation]. The argument misunderstands the claim’s fatal deficiency. Winnick had no duty to disclose accurate information to Plaintiff because Winnick was not the speaker in the Solicitation Package. The Solicitation Package was Qello’s statement, not Winnick’s. [Citations.] Plaintiff also claims that “the existence of a duty to disclose is not an element of a cause of action for negligent misrepresentation,” quoting an order from a Los Angeles Superior Court. [Citation.] In addition to violating the Rules of Court, [citation], the citation misstates the law. [Citations.]

Negligent misrepresentation requires “(1) the misrepresentation of a past or existing material fact, (2) without reasonable ground for believing it to be true, (3) with intent to induce another’s reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.” (Borman v. Brown (2021) 59 Cal.App.5^th 1048, 1060; see also Apollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4^th 226, 243 (“Apollo”) [stating that “negligent misrepresentation ‘encompasses “[t]he assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true” [citation], and “[t]he positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true” [citations]’”].)

“Directors and officers of a corporation are not rendered personally liable for its torts merely because of their official positions, but may become liable if they directly ordered, authorized or participated in the tortious conduct.” (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 785; see also In re JUUL Labs, Inc., Marketing, Sales Practices, and Products Liability Litigation (N.D. Cal. 2020) 497 F.Supp.3d 552, 634 [stating that “corporate officers and directors may be liable (notwithstanding the protections provided by the corporate form) for torts or other acts that they specifically authorized or directed”]; Viewsonic Corp. v. Electrograph Systems, Inc. (C.D. Cal., July 8, 2010, Case No. CV 09-04093 SJO (JCx)) 2010 WL 11506594, at *5 [stating that (1) “[a] corporate officer or director is, in general, personally liable for all torts which he authorizes or directs or in which wh participates, notwithstanding that he acted as an agent of the corporation and not on his own behalf[,]” and (2) “a corporate officer cannot ‘hide behind the corporation where [the officer was] an actual participant in the tort’”]; Ritter & Ritter, Inc. Pension & Profit Plan v. The Churchill Condominium Assn. (2008) 166 Cal.App.4^th 103, 120 [stating that “directors are jointly liable with the corporation and may be joined as defendants if they personally directed or participated in the tortious conduct”]; Frances T. v. Village Green Homeowners Association (1986) 42 Cal.3d 490, 508 [stating that, “[t]o maintain a tort claim against a director in his or her personal capacity, a plaintiff must first show that the director specifically authorized, directed or participated in the allegedly tortious conduct [citation]; or that although they specifically knew or reasonably should have known that some hazardous condition or activity under their control could injure plaintiff, they negligently failed to take or order appropriate action to avoid the harm [citations]”].)

The Court agrees with Winnick. The demurrer is sustained with leave to amend because Plaintiff fails to identify a misrepresentation by Winnick, the FAC fails to state that Winnick was a director or officer of Qello when the Solicitation Package went out, and Plaintiff fails to cite authority holding a non-director, non-officer outside investor liable for participating in a corporation’s negligent misrepresentations.

The “duty to disclose” issue is irrelevant. “[A] positive assertion is required [for negligent misrepresentation]; an omission or an implied assertion or representation is not sufficient.” (Apollo, supra, 158 Cal.App.4^th at 243.)

Winnick asserts that all four causes of action fail because the FAC does not allege a material misrepresentation or omission in the Solicitation Package. (See Demurrer, pp. 19-22 [highlighting three misrepresentation or omissions – the failure to disclose the decision to sell Qello Concerts, the statement that Qello would continue to engage in the same general type of business, and the statement that the Renewed Notes were secured – and arguing that they are immaterial]; see also Reply, pp. 9-12 [same].)

The Court disagrees. To reiterate, the FAC alleges an extensive scheme to defraud investors. Winnick allegedly directed the Solicitation Package to be sent to investors with several misrepresentations and omissions to induce investments. (See, e.g., Opposition, pp. 12-14.) The demurrer is overruled because the allegations contain enough detail to show materiality at the pleading stage and to generate a factual question.

[1] Qello is not a named Defendant in the FAC because it is in bankruptcy. (See Demurrer, pp. 8-9.)

[2] The parties disagree as to whether California law or New York law governs the third and fourth causes of action, but they only apply California law in their briefs. (See Demurrer, pp. 11-13; see also Opposition, p. 9 n.3.)