Judge: David Sotelo, Case: BC717394, Date: 2022-07-27 Tentative Ruling
Case Number: BC717394 Hearing Date: July 27, 2022 Dept: 40
Plaintiffs Michael
N. Koenig and Lauren M. Koenig bring this action against 24 defendants, but Defendants
Centralia Apartments, Centralia Limited Investors, Pioneer Limited Investors,
LP, Centralia G.P., LLC, InAmerica Holdings, LLC, Debra L. Duggan, and Proland
Management Company, LLC (the “Duggan Defendants”) on the grounds these Defendants--general
and limited partners--engaged in conduct amounting to breach of partnership, contract,
and fiduciary duties to the Plaintiffs.
The Duggan
Defendants now bring this opposed Motion for Protective Order against the
Plaintiffs’ Requests for Production, served on Axos Bank on October 25, 2021,
pursuant to Code of Civil Procedure section 2031.010 et seq., seeking
production of records related to Centralia Apartments and Investor Limited
Partnerships and an $8,050,000 loan made to Centralia Apartments for the
benefit of the Duggan Defendants.
Because the Duggan
Defendants fail to show proper meet and confer efforts before making of this
Motion and because they fail to present sufficient evidence in support of the
merits of a protective order, the Court DENIES the Protective Order.
Sanctions requests by the Duggan Defendants are DENIED.
Michael N. Koenig and Lauren M. Koenig (“Plaintiffs”) brought
this suit on August 10, 2018, filed an Amended Complaint in 2029. On January 13, 2022, Plaintiffs filed their
operative Second Amended Complaint (“SAC”) against defendants Centralia
Apartments (a California general partnership), Centralia Limited Investors
(“CLI”), Pioneer Limited Investors, LP (“Pioneer”), Shelter Financial
Corporation (“SFC”), Shelter Centralia Properties, Inc. (“Shelter Centralia”),
Centralia G.P., LLC (“Centralia GP”), Donald E. Hollingshead (“Hollingshead”),
Hollingshead Management Company, InAmerica Holdings, LLC (“InAmerica”), Debra
L. Duggan aka Debra Gregg (“Duggan”), Proland Management Company, LLC
(“Proland”), Arbor Commercial Mortgage, Axos Bank, and numerous other
individuals and entities alleging seventeen (17) causes of action:
individually, (1) breach of partnership agreements, (2) breach of fiduciary
duty, (3) breach of fiduciary duty, (4) conversion (5) conversion, (6) fraud,
(7) fraud, (8) declaratory relief, and (9) dissolution of Centralia Apartments;
and derivatively, (10) breach of contract, (11) breach of fiduciary duty, (12)
conversion, (13) fraud, (14) declaratory relief, (15) disassociation of general
partner of Centralia Limited, (16) disassociation of general partner of
Centralia Apartments, and (17) dissolution of Centralia Apartments. The SAC
premises these claims on the following allegations.
Centralia Apartments is a California general partnership and
the owner of a 64-unit apartment building located at 21114 Pioneer Blvd.,
Lakewood, CA 90715 (the “Apartment Complex”). (SAC, ¶¶ 2-3.) CLI is a California
limited partnership that previous owned 75% of Centralia Apartments but
currently owns 73% of the general partnership. (SAC, ¶¶ 3, 83(I), 94(I), 126,
155(I), 165(E).)
To form CLI, SFC (a California corporation) and some
individuals (as limited partners, including Plaintiffs’ father) executed a
partnership agreement in 1972 titled the Limited Partnership Agreement (the
“1972 LP Agreement”). (SAC, ¶ 33; Ex. B.) After Plaintiffs’ father passed away
in 1994, Plaintiffs received his 9.986 percent limited partnership interest in
CLI. (SAC, ¶ 1.)
In November and December 2005, Centralia Apartments was in
the process of obtaining a $3,000,000 loan. (SAC, ¶ 36.) Therefore, CLI’s
General Partner Hollingshead executed the Amended and Restated Certificate of
Limited Partnership (the “2005 Amendment”), amending the 1972 LP Agreement and
admitting new limited partners. (SAC, ¶ 36; Ex. D.) The 2005 Amendment made
Plaintiffs full limited partners of CLI with full limited partner status as to
profits and voting rights. (SAC, ¶ 36.)
In 2017, Plaintiffs received letters from Hollingshead
offering to purchase their partnership interests in CLI. (SAC, ¶ 37; Ex. E.) In
the letters, Hollingshead falsely stated that under the 1972 LP Agreement,
heirs became assignees, not limited partners, and, therefore, did not have the
right to vote in partnership affairs or have access to partner business
information. (SAC, ¶ 37; Ex. E.)
While investigating Hollingshead’s buyout offers, Plaintiffs
discovered there was an undisclosed and unvoted upon $5,000,000 refinance of
the Apartment Complex in 2015 to pay off Centralia Apartments’ $3,000,000 loan.
(SAC, ¶ 38.) Plaintiffs also discovered that as of December 2015, Hollingshead
was no longer CLI’s general partner. (SAC, ¶ 38.) Instead, the new general
partner was Duggan, the managing member of InAmerica. (SAC, ¶ 38.) Prior to
their investigation, Plaintiffs did not have knowledge of Duggan, InAmerica, or
the $5,000,000 refinance of the Apartment Complex. (SAC, ¶¶ 38, 123.)
Subsequently, Plaintiffs discovered that the 1972 LP
Agreement was amended in 2015 without their knowledge. (SAC, ¶ 42.) An
Amendment to Agreement, Certificate and Articles of Limited Partnership of
Centralia Limited Investors LP dated April 29, 2015 (the “2015 Amendment”)
stated that: CLI’s “General Partners and a majority-in-interest of the Limited
Partners … previously authorized the substitution of Hollingshead as a General
Partner with a corporation at least 50% owned by Mr. Hollingshead.” (SAC, Ex.
F, p. 1, ¶ 3.) Hollingshead was a 50% stockholder of defendant Centralia GP. (SAC,
Ex. F, p. 1, ¶ 4.) Therefore, Hollingshead assigned the right, title, and
interest in his general partnership interest in CLI to Centralia GP. (SAC, Ex.
F, p. 1, ¶ 1.) Further, the other CLI partners consented to the assignment of
Centralia GP as general partner. (SAC, Ex. F, p. 1, ¶ 1.)
However, Plaintiffs never consented to the withdrawal of
Hollingshead, and the installation of Centralia GP, as CLI’s general partner.
(SAC, ¶ 42.) They also never participated in the drafting of the 2015
Amendment, authorized its creation, or voted for it. (SAC, ¶ 42.)
Paragraphs 44, 50, 57, 83, 94, and 135 of the SAC best
summarize the wrongful acts for which the Plaintiffs are suing the defendants. Through
paragraphs allege that: Defendants SPC, Shelter Centralia Properties, Inc.,
Centralia GP, Hollingshead, InAmerica, Dugan, and Proland usurped partnership
opportunity from CLI by purchasing limited partnership interest in CLI (SAC, ¶¶
44(A), 50(B), 57(B), 83(B), 135(A)); engaged in self-dealing by changing CLI’s
general partner without going through a voting procedure or disclosing that
they were doing so (SAC, ¶¶ 44(B), 50(H), 135(H)); acquired nearly 40 percent
of CLI partnership interests through misrepresentations (SAC, ¶¶ 44(C)-(D), 50(G),
57(G)); paid themselves management fees, despite not being properly licensed
and, thereby, diverting rental income to themselves instead of making
distributions to CLI’s limited partners. (SAC, ¶¶ 50(A), 57(A), 135(A));
(except for Proland) obtained Centralia Apartments’ $5,000,000 loan without
disclosing the loan to CLI’s limited partners, conducting a vote, or disclosing
excess proceeds to limited partners. (SAC, ¶ 44(F)-(O)); and used proceeds from
the 2015 $5,000,000 refinance of the Apartment Complex to purchase CLI’s
partnership interests and gain a majority interest in CLI. (SAC, ¶¶ 44(L)).
These claims assert that various defendants concealed and
failed to disclose that Centralia Limited’s ownership interest in the Centralia
Apartments had been reduced from 75% to 73% without the participation,
knowledge, and approval of the Centralia Limited, limited partners (SAC, ¶
83(I)); and concealed and failed to disclose that Axos Bank, pursuant to a Deed
of Trust, loaned to Centralia Apartments $8,050,000 in 2019, authorized by
Defendant Debra Duggan, the proceeds of which were used by Defendants Debra
Duggan, Hollingshead, Centralia GP, and InAmerica to pay off the 2015 refinance
loan and to finance Ms. Duggan’s acquisition of new property and defense costs in
this action (SAC, ¶¶ 15, 44(R)-(S), 94(X)), 135(E)).
Pioneer did not engage in any of the above acts. However,
Plaintiffs are suing it because it owns 25 percent of Centralia Apartments.
(SAC, ¶ 4.)
On October 25, 2021, the Plaintiffs served a Request for
Production of Documents on Axos Bank as Doe 13. (No corresponding Doe Amendment
appears in the record for this action.) The Requests were made pursuant to Code of Civil Procedure section
2031.010 et seq. and seek all documents relating to the loan file, escrow file,
assignment of deed of trust, and promissory note for the $8,050,000 loan by
Axos Bank, insofar as the documents pertain to Centralia Apartments, as well as
all general records relating to Centralia Apartments and Axos Bank. (Mot.,
Racek Decl., Ex. C, Request Nos. 1-5.) The Request for Production also requests
the loan file, escrow file, promissory note, and general documents for the
$8,050,000 loan by Axos Bank, but instead as these documents pertain to CLI.
(Mot., Racek Decl., Ex. C, Request Nos. 6-9.)
The Defendants now
bring this opposed Motion for Protective Order against the Plaintiffs’ Requests
for Production. The Plaintiffs’ Opposition indicates that Centralia Apartments
expired in June 2017 and CLI that expired in December 2015.
Meet and Confer: A motion for a discovery protective
order must be accompanied by a meet and confer declaration under Section
2016.040. (Code Civ. Proc., §§ 2030.090, subd. (a) [interrogatories], 2031.060,
subd. (a) [request for production], 2025.420, subd. (a) [deposition].) A proper
meet and confer declaration in support of a motion must state facts showing a
reasonable and good faith attempt at an informal resolution of each issue
presented by the motion. (Code Civ. Proc., § 2016.040.)
Here, the Defendants do not make sufficient showing of a
good faith attempt at informal resolution of the issues on motion. The only
support to meet this standard is provided in the Declaration of Edward W.
Racek, which indicates that Racek—as Defense Counsel—met the standards of
section 2016.040 by (1) sending a letter to Plaintiffs’ counsel regarding the
issues on motion, (2) conferring with Axos Bank via telephone, and (3) exchanging
emails with Plaintiff’s counsel. (Mot., Racek Decl., ¶ 2, Ex. A [copy of email
communications and letters exchanged between parties’ counsel].) These attempts
insufficient: Counsel cast aspersions on one another rather than work together
to resolve this issue.
Legal Standard: A protective order can be issued to
protect any party or other affected person or organization from unwarranted
annoyance, embarrassment, oppression, or undue burden or expense. (Code Civ.
Proc., §§ 2030.090, subd. (b) [interrogatories], 2031.060, subd. (b) [request
for production], 2025.420, subd. (b) [oral deposition]; see, e.g., Liberty
Mut. Ins. v. Superior Ct. (1992) 10 Cal.App.4th 1282, 1285 [defendant
sought protective order to prohibit apex deposition on grounds of annoyance and
embarrassment].)
To prevail on the motion, the movant must establish good
cause. (See Code Civ. Proc., §§ 2030.090, subd. (b) [interrogatories],
2031.060, subd. (b) [request for production], 2025.420, subd. (b) [oral
deposition], 2028.070 [written deposition].) To do so, the movant must show
specific facts that establish the grounds for relief, e.g., unwarranted
annoyance, oppression, or undue burden. (See, e.g., Durst v. Superior Ct.
(1963) 218 Cal.App.2d 460, 467-68 [trial court abused discretion in granting
protective order when the defendant made no factual showing of annoyance,
expenses, embarrassment, or oppression]; see also Greyhound Corp. v.
Superior Court (1961) 56 Cal.2d 355, 388, superseded by statute on other
grounds as stated in Coito v. Superior Court (2012) 54 Cal.4th 480,
491-92 [good-cause showing must satisfy court that protective order can be
granted without “abuse of the inherent rights of the adversary” to requested
discovery].)
Analysis: Defendants seek a protective order over the
entire Request for Production made on Axos Bank arguing that (1) Plaintiffs
lack standing to request these documents as to Centralia Apartments (Mot.,
6:8-17), (2) Plaintiffs lack rights with respect to the control of Centralia
Apartments (Mot., 6:18-26), (3) Axos Bank was never properly joined as a Doe
Defendant and that any such amendment is a sham to obtain discovery without
respecting proper procedural safeguards (Mot., 7:1-20), and (4) that Requests 5
and 9 are vague, ambiguous, overly broad, and unduly burdensome (Mot., 8:1-8).
None of these arguments are availing.
Defendants’ initial points are immaterial because the scope
of discovery is controlled by Code of Civil Procedure section 2017.010. Within
that context, the documents Plaintiffs request (Mot., Racek Decl., Ex. C, Nos.
1-9) are extremely relevant to this action as they involve documents that could
prove evidence wrongful conduct by Debra Duggan and others, i.e., without
proper authorization from the appropriate limited partners, Duggan and the
other Duggan Defendants leveraged CLI’s position in Centralia Apartments to
obtain a $8,050,000 loan in the name of Centralia Apartments, but to the
benefit of the Duggan Defendants in practice, and to the detriment of the
Plaintiffs, who were completely unaware of these and prior transactions
injuring the Plaintiffs’ positions in CLI (see SAC, ¶¶ 15, 42).
Defendants’ arguments fail because, as stated by the Supreme
Court in Willian v. Superior Court (2017) 3 Cal.5th 531, 558, “the way
to raise lack of standing is to plead it as an affirmative defense, and
thereafter to bring a motion for summary adjudication or summary judgment, not
to resist discovery until a plaintiff proves he or she has standing.” (See
Opp’n, 3:24-4:15.)
Defendants’ fourth point—discovery requests 5 and 9 are
overbroad—has some merit, but the Court finds the issue insufficient to grant a
protective order at this stage. The 5th and 9th requests function as a
‘catch-all’ discovery device permitting the Plaintiffs to obtain production of
all documents related to Centralia Apartments or CLI and Axos Bank beyond the
loan file, escrow file, assignment of deed of trust, and promissory notes for
the $8,050,000 loan from Axos Bank to Centralia Apartments. Such documents
could be extremely relevant in showing how the Defendants courted a
relationship with Axos Bank, through use of the CLI-majority-owned Centralia
Apartments, to obtain an $8,050,000 loan, in favor of Centralia Apartments, but
for the ultimate benefit of the Defendants, to the detriment of the in-the-dark
Plaintiffs. Such evidence could help support claims of breach of partnership,
contract, and fiduciary duty against the Defendants. A proper balancing of
these interests leads this Court to conclude that the requests are not
overbroad at this stage of the proceedings. If requests numbers 5 and 9 lie
outside of the scope of the allegations of the Second Amended Complaint, those
production requests may be irrelevant, but such issues are not before the Court
here.
Sanctions: The Duggan Defendants’ request for
sanctions is also DENIED given that its underlying support—the Motion for
Protective Order—was denied.
Defendants Centralia Apartments, Centralia Limited
Investors, Pioneer Limited Investors, LP, Centralia G.P., LLC, InAmerica
Holdings, LLC, Debra L. Duggan, and Proland Management Company, LLC’s Motion
for Protective Order is DENIED.