Judge David S. Cunningham, Case Number: 22STCV03151, Date: 2024-10-30 Tentative Ruling

Judge: David S. Cunningham, Case: 22STCV03151, Date: 2024-10-30 Tentative Ruling

The hearing on Plaintiff’s motion for class certification is continued. The Court grants Plaintiff’s counsel leave to file a supplemental declaration addressing adequacy.

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.)

(1/6/23 Ruling Re: Demurrer to First Amended Complaint, pp. 1-3, footnote omitted.)

In January 2023, the Court heard Winnick’s demurrer. The Court overruled the demurrer as to the first three causes of action and sustained it with leave to amend as to the fourth. (See id. at pp. 3-12.)

The plaintiff bears the burden of demonstrating that class certification is proper. (See City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 460; see also Caro v. Procter & Gamble Co. (1993) 18 Cal.App.4th 644, 654.) To do so, [t]he party advocating class treatment must demonstrate the existence of an ascertainable and sufficiently numerous class, a well-defined community of interest, and substantial benefits from certification that render proceeding as a class superior to the alternatives.” (Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1021.)

A class is “ascertainable when it is defined ‘in terms of objective characteristics and common transactional facts’ that make ‘the ultimate identification of class members possible when that identification becomes necessary.’” (Noel v. Thrifty Payless, Inc. (2019) 7 Cal.5th 955, 980.)

“The class must be ‘numerous’ in size. But there is no fixed minimum or maximum number . . . The numerosity analysis is limited to how many individuals fall within the class definition and whether their joinder is impracticable, not how many ‘net’ class members there might be after considering affirmative defenses.” (Edmon & Karnow, Cal. Practice Guide: Civ. Procedure Before Trial (The Rutter Group June 2023 Update) ¶ 14:21, emphasis in original.)

“A party seeking class certification bears the burden of satisfying the requirements of Code of Civil Procedure section 382, including numerosity, and the trial court is entitled to consider ‘the totality of the evidence in making [the] determination’ of whether a ‘plaintiff has presented substantial evidence of the class action requisites.’” (Soderstedt v. CBIZ S. California, LLC (2011) 197 Cal.App.4th 133, 154.)

Plaintiff seeks to certify one class. The proposed class definition is “[a]ll persons who purchased and/or renewed a promissory note offered by Qello Holdings, LLC pursuant to written solicitation materials dated January 27, 2017 (i.e., the Solicitation Package).” (Motion, p. 9; see also id. at pp. 9-10 [excluding: “any investors who previously released claims for payment under the notes (including Dora Zhang and/or Brilight Investments); any immediate family members of Judge David S. Cunningham III; any current or former directors or officers of Qello Holdings, LLC and its parents, subsidiaries, or affiliates; and any entity in which Qello Holdings, LLC has a controlling interest”].)

The Qello notes purchased by the proposed class members were private placements offerings arising out of a single, “common transaction,” namely, the renewal of promissory notes in January/February 2017 following receipt of the Solicitation Package. The Solicitation Package was specifically directed to a particular individual or investor, thus providing the exact names and addresses of each member of the proposed class. Distributed copies of the Solicitation Package were produced in discovery.

. . . Approximately 25 noteholders are included in the class, which is within the range California courts recognize as sufficient to certify a class. . . .

Defendant did not contest this prong. (See Opposition, pp. 16-20 [merely addressing commonality and typicality].)

The Court agrees with Plaintiff. The facial definition contains sufficient objective characteristics and transactional facts, and it is undisputed that the putative class members can be ascertained from Defendant’s records. Moreover, 25 members is more than enough. (See Edmon & Karnow, supra, at ¶ 14:21.1 [instructing that “[n]o minimum number of plaintiffs is required as a matter of law for maintenance of a state court class action”]; see also id. at ¶ 14:21.3 [finding a class of 10 permissible]; Hendershot v. Ready to Roll Transportation, Inc. (2014) 228 Cal.App.4^th 1213, 1222-1223 [reversing denial of a nine-member class].)

“[T]he proponent of certification must show, inter alia, that questions of law or fact common to the class predominate over the questions affecting the individual members[.]” (Washington Mutual Bank, FA v. Superior Court (2001) 24 Cal.4^th 906, 913.) This means “each member must not be required to individually litigate numerous and substantial questions to determine his [or her] right to recover following the class judgment[.]” (Edmon & Karnow, supra, at ¶ 14:11.6.) “[T]he issues which may be jointly tried, when compared with those requiring separate adjudication, must be sufficiently numerous and substantial to make the class action advantageous to the judicial process and to the litigants.” (Ibid.)

* “the Solicitation Package was misleading (relevant to all claims)” (Motion, p. 12);

* “Winnick controlled Qello when the Solicitation Package was sent out (relevant to claim under Corp. Code § 25504)” (ibid.);

* “Winnick never intended to repay the renewed notes in accordance with their terms (relevant to claims under Corp. Code § 25504.1 and for aiding and abetting fraud)” (ibid.); and

* “Winnick provided critical aid and assistance that induced the noteholders to renew (relevant to claims under Corp. Code § 25504.1 and for aiding and abetting fraud).” (Ibid.)

Defendant contends the issue of reliance is individualized and predominates over common issues:

. . . The essence of the putative class’s claim is that the Solicitation Package contained misleading statements and omissions concerning the direction of the company, particularly the decision to sell Qello Concerts. Proof of any violation will thus necessarily require proof that each member of the class justifiably relied on Qello not selling the concerts arm and pursuing a white label strategy. . . .

(Opposition, p. 17; see also id. at p. 18 [citing Cohen v. DIRECTV, Inc. (2009) 178 Cal. App. 4th 966 and Kaldenbach v. Mutual of Omaha Life Insurance Co. (2009) 178 Cal. App. 4th 830 for the proposition that “California courts have refused to certify class actions seeking to recover for fraudulent or misleading conduct where the class would include members that had differing knowledge or received different information from the Defendant”].)

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.)

At the demurrer hearing, Winnick argued that Plaintiff failed to state facts showing control. (See id. at pp. 3-4.)

Here, the issue is different. The opposition brief does not discuss control, and Defendant did not object to the control evidence. Instead, Defendant asserts that (1) Plaintiff must show reliance to establish the first cause of action, and (2) reliance is an individual issue. (See Opposition, pp. 16-18.)

The Court disagrees. Per section 25504, when a violator violates section 25401, the controller of the violator is liable for the violation. (See Soza & Jann, supra, at ¶ 5:373.) Effectively, on the current record, Winnick’s alleged control over Qello is undisputed. As for reliance, section 25401 does not require it. (See Bowden v. Robinson (1977) 67 Cal.App.3d 705, 715; see also Reply, pp. 3-4.) The key question is whether the violator made a “written . . . communication that include[d] an untrue statement of a material fact or omit[ted] . . . a material fact[.]” (Cal. Corps. Code § 25401.) It is the kind of question that can be decided on a class-wide basis by, in part, looking at the face of the document without considering reliance. Bottom line, whether certain uniform statements and/or omissions in the Solicitation Package were untrue and material is a predominating common question that should be certified.

Cohen and Kaldenbach do not change the result. The Cohen and Kaldenbach plaintiffs alleged Unfair Competition Law and Consumer Legal Remedies Act causes of action, which have reliance as an element. (See id. at 969, 980; see also Kaldenbach, supra, 178 Cal.App.4^th at 833; Stern, Business & Professions Code Section 17200 (The Rutter Group March 2023 Update) ¶ 3:167.1; In re Tobacco II Cases (2009) 46 Cal.4^th 298, 306; Durell v. Sharp Healthcare (2010) 183 Cal.App.4^th 1350, 1355.)

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.)

Defendant’s argument is the same. (See Opposition, pp. 16-18 [claiming the reliance issue predominates].)

The analysis is also the same. “Section 25504.1 states that any person who materially assists in the violation of section 25401 with the requisite intent ‘is jointly and severally liable with any other person liable’ for the violation.” (Moss v. Kroner (2011) 197 Cal.App.4^th 860, 878.) Again, at this stage, Winnick’s purported control is undisputed, and reliance is unrequired. The Court finds the commonality prong satisfied because the alleged violation of section 25401 is a common question, and the evidence does not indicate that individual inquiries would be needed to resolve the intent issue (presumably, Winnick’s intent was uniform vis-à-vis the Solicitation Package’s uniform statements and/or omissions).

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.)

For Winnick to be liable for aiding and abetting Qello’s alleged fraud, Plaintiff must prove that the alleged fraud occurred. This would necessitate “proof of reliance[.]” (Motion, p. 13; see also Reply, p. 4 n.3; Hoffman v. 162 North Wolfe LLC (2014) 228 Cal.App.4^th 1178, 1185-1186 [listing fraud elements].)

Plaintiff asserts that reliance can be inferred because the statements and/or omissions in the Solicitation Package were uniform and material. (See Motion, pp. 13-14; see also Reply, p. 4 n.3.)

. . . . Documents produced in this case have already shown [] that the noteholders were differently situated . . . .

For example, it is clear that Henry Sang and James MacDonald were well-informed about the plan to spin off the concerts division. [Citation.] Additionally, Doug Maurer was also always kept in the loop about Brian Lisi and Qello’s plan to sell the concerts platform (and the particularly onerous licensing fees that came with it) in aid of monetizing Qello’s technology stack through white label deals. Doug Maurer was the Qello noteholders’ representative and an investment advisor to many of them. Thus, he inevitably will have informed at least some – but not necessarily all – of the noteholders about the direction of the company. It is also apparent that on January 16, 2017 – eleven days before the Solicitation Package was distributed – Gary Winnick and others had a conference call with at least some of the Qello noteholders in which he discussed the very information the putative class now claims was withheld. [Citation.]

Defendant’s evidence consists of seven emails and an excerpt from Plaintiff’s deposition transcript. (See Mitts Decl., Exs. 1-8.) Defendant claims the emails, in particular, demonstrate that, prior to and/or near the time when Qello distributed the Solicitation Package to investors, Winnick and some investors discussed the possibility of “Qello and Winnick . . . sell[ing] Qello Concerts” for $25,000,000.00 to “pay off a good portion of the debt.” (Mitts Decl., Ex. 3, p. MACDONALD000901; see also id. at Exs. 2, 5-7; Opposition, p. 17.)

* “the Solicitation Package’s failure to discuss the sale of Qello Concerts is just one of several” statements and/or omissions that Plaintiff alleges were misleading (Motion, p. 13; see also Reply, p. 5);

* it probably is a merits question whether the emails themselves are misleading (see Reply, p. 4);

Q. Okay. At the time that you extended your note to Qello, were you aware that a sale of Qello Concerts was contemplated?

Q. Okay. If you had been made aware that a sale of Qello Concerts was contemplated, would you have extended your note?

THE WITNESS: Well, subject to what would it mean to sell Qello, Qello was at the core of why I invested in the original note, and I would imagine for other noteholders as well. So to sell the entity on which the note was secured would definitely raise questions. So I can’t answer the question unless I would know for what value Qello would be sold for and why. If it was being sold to pay the noteholders off and there was certainty for that, I would certainly have evaluated that.

* Defendant fails to controvert the Solicitation Package’s other alleged statements and/or omissions.[2]

Ultimately, the Court agrees with Plaintiff’s position. California law does permit an inference of reliance. (See, e.g., Marler v. E.M. Johansing, LLC (2011) 199 Cal. App. 4th 1450, 1464; see also, e.g., In re Tobacco II Cases, supra, 46 Cal.4^th at 327.) An inference appears appropriate, for now, due to the distinctions between Plaintiff’s case and Cohen and Kaldenbach. In Cohen, the putative class included:

subscribers who never saw DIRECTV advertisements or representations of any kind before deciding to purchase the company's HD services, and subscribers who only saw and/or relied upon advertisements that contained no mention of technical terms regarding bandwidth or pixels, and subscribers who purchased DIRECTV HD primarily based on word of mouth or because they saw DIRECTV's HD in a store or at a friend's or family member's home.

Mutual’s training materials and methods were not uniform, there was no requirement insurance agents provide any written materials or illustrations to purchasers during a sales presentation, agents were not required to take Mutual’s training or to utilize any particular sales method or materials in their sales presentations, and agents were free to ignore the training and written materials. Mutual had no control over what a particular independent agent would illustrate for a prospective purchaser, as the agent could rely on numerous variables including age, risk, motives, coverage, and desired premium amount.

(Kaldenbach, supra, 178 Cal.App.4^th at 851.) In both cases, the putative class members stood “in a myriad of different positions” in terms of what they saw, read, and heard. (Cohen, supra, 178 Cal.App.4^th at 979.) They did not receive a uniform Solicitation Package with uniform statements and/or omissions.

“The ‘test of typicality is whether other members have the same or similar injury, whether the action is based on conduct which is not unique to the named plaintiffs, and whether other class members have been injured by the same course of conduct.’” (Edmon & Karnow, supra, at ¶ 14:29 [quoting Martinez v. Joe’s Crab Shack Holdings (2014) 231 Cal.App.4^th 362, 375].)

“That the purported class representative's claims must be ‘typical’ does not mean they must be identical to the claims of other class members. It is sufficient that the representative is similarly situated so that he or she will have the motive to litigate on behalf of all class members.” (Id. at ¶ 14:29.2.) “Thus, it is not necessary that the class representative have personally incurred all of the damages suffered by each of the other class members.” (Ibid., emphasis in original.)

The class representative’s claim is atypical “if it is subject to ‘factually intensive or legally complex unique defenses that pose any significant risk of diverting [plaintiff’s] attention from class issues.’” (Id. at ¶ 14:35.10 [citing Fireside Bank v. Superior Court (2007) 40 Cal.4^th 1069] emphasis in original.)

Defendant claims Plaintiff is atypical because he had actual notice of Winnick’s plan to sell Qello Concerts before Qello released the Solicitation Package. (See Opposition, p. 19.)

The Court disagrees. Plaintiff and the putative class received the same Solicitation Package with the same allegedly misleading statements and/or omissions. This makes him typical.

Two points need to be reiterated. One, the statement and/or omission regarding Qello Concerts is just one of the many statements and/or omissions alleged in the FAC. Two:

* Plaintiff testified that he did not remember if he knew about the potential sale of Qello Concerts when he made his investment (see Mitts Decl., Ex. 8, p. 72); and,

* when defense counsel asked him if he would have still invested if he had known about the potential sale, Plaintiff said he could not answer the question and needed more information. (See id. at Ex. 8, pp. 72-73.)

“The class representative, through qualified counsel, must be capable of ‘vigorously and tenaciously’ protecting the interests of the class members.” (Edmon & Karnow, supra, at ¶ 14:36.)

“The prospective class representative must file a declaration stating that he or she desires to represent the class and understands the fiduciary obligations of serving[.]” (Ibid.) “Counsel’s declaration to that effect will not suffice.” (Ibid.)

The Court believes the hearing should be continued. Plaintiff’s declaration contains the necessary information (see MacDonald Decl., ¶¶ 3, 7-11), but Plaintiff’s counsel’s declaration does not address his qualifications to be class counsel or potential conflicts of interest. (See Centner Decl., ¶¶ 1-3; see also Motion, pp. 15-16 [only discussing Plaintiff’s declaration].) A supplemental declaration from Plaintiff’s counsel is warranted.

“The proponent of class certification must demonstrate that the proposed class action is manageable [citation].” (Edmon & Karnow, supra, at ¶ 14:11.10.) “This requires the trial court ‘to carefully weigh the respective benefits and burdens of a class action, and to permit its maintenance only where substantial benefits will be accrued by both litigants and the courts alike.’ [Citation.]” (Ibid., emphasis in original.)

“In certifying a class action, the court must also conclude that litigation of individual issues, including those arising from affirmative defenses, can be managed fairly and efficiently.” (Duran v. U.S. Bank Nat. Assn. (2014) 59 Cal. 4th 1, 28-29.) “Trial courts must pay careful attention to manageability when deciding whether to certify a class action. In considering whether a class action is a superior device for resolving a controversy, the manageability of individual issues is just as important as the existence of common questions uniting the proposed class.” (Id. at 29.)

“A class action is not ‘superior’ where there are numerous and substantial questions affecting each class member's right to recover, following determination of liability to the class as a whole.” (Edmon & Karnow, supra, at ¶ 14:46, emphasis in original.)

In light of the commonality analysis, the Court finds that Plaintiff meets his burden. The class method is manageable and superior given the predominating common issues.

Plaintiff’s counsel needs to file a supplemental declaration to show adequacy.

If the supplemental declaration ends up being sufficient, the Court intends to grant certification.

[1] Defendant is the “executrix” of Gary Winnick’s estate “and trustee of the GKW Trust[.]” (Opposition, p. 5.) Plaintiff filed this case against Winnick in January 2022. Winnick passed away in November 2023. (See Motion, p. 1 n.1.) Plaintiff “continues to prosecute” the case against Winnick’s estate and trust. (Ibid.)

[2] The Court notes that Plaintiff further argues that “the Solicitation Package is an integrated document that by its terms precludes reliance on any prior written or oral communications between the parties[.]” (Motion, p. 13; see also Reply, p. 4.)