Judge Deirdre Hill, Case 22TRCV00096 2023-05-24 Tentative Ruling

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On February 9, 2022, plaintiffs TelcoLynx, LLC and The Roosk Group Inc. filed a complaint against Jamie McDaniel, Friendly Llama, Inc, Diane Zane, and Zane Consulting, Inc. for (1) breach of contract, (2) breach of covenant of good faith and fair dealing, (3) breach of fiduciary duties, (4) fraud, (5) rescission of contract, and (6) unjust enrichment.

On August 12, 2022, the court granted defendant Friendly Llama’s motion to disqualify counsel, Callagy Law, P.C. as counsel for plaintiff TelcoLynx.

On January 12, 2023, the court granted plaintiff Roosk Group, Inc.’s motion for leave to file a SAC.

On January 17, 2023, The Roosk Group, Inc. and nominal party Telcolynx, LLC filed a SAC against Jamie McDaniel, Friendly Llama, Inc., Diane Zane and Zane Consulting, Inc. for (1) breach of contract, (2) breach of covenant of good faith and fair dealing, (3) breach of fiduciary duties, (4) fraud, (5) rescission of contract, and (6) unjust enrichment.

“The court may, upon a motion . . ., or at any time in its discretion, and upon terms it deems proper: (a) Strike any irrelevant, false, or improper matter inserted in any pleading. (b) Strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.” CCP §436(b).

The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. CCP §437.

Defendant Friendly Llama, Inc. requests that the court strike “nominal plaintiff” TelcoLynx, LLC from the SAC because the SAC was “not filed in conformity with” the August 12, 2022 prior ruling.

As background, on August 12, 2022, the court granted defendant Friendly Llama’s motion to disqualify Callagy, P.C. as counsel for plaintiff TelcoLynx, stating that “[t]his action shall be stayed for a period of 30 days pending the appearance of new counsel for plaintiff TelcoLynx, LLC.” Defendant had argued that as a general partner of TelcoLynx it opposed and did not approve the appointing of counsel Callagy as TelcoLynx’s counsel. Plaintiff had argued that TelcoLynx had been added as a nominal plaintiff only, but the court determined that the pleadings did not so state. Plaintiff Roosk Group then sought leave to amend the complaint to clarify that all claims are being brought either directly by Roosk Group or derivatively by Roosk Group on behalf of TelcoLynx, which would be listed as a “nominal party” and to clarify that Callagy did not represent or purport to represent TelcoLynx directly. Defendant did not oppose the motion for leave to amend. The court granted leave and Roosk Group filed a SAC on behalf of itself and derivatively, naming TelcoLynx as “nominal plaintiff.”

Defendant contends that the parties agree that a “nominal party” must be included in a derivative action and that a corporation cannot represent itself but that there is a disagreement on whether a “nominal party” requires separate representation given the facts of this case. Defendant argues that naming TelcoLynx as a “nominal plaintiff” does not resolve the conflicts of interest cited in the order to disqualify Callagy. Defendant also explains that TelcoLynx is a member-managed LLC in which plaintiff Roosk and defendant Friendly Llama maintain equal ownership and control and that as a distinct entity, no decision has been made by TelcoLynx concerning its legal representation.

In opposition, plaintiff Roosk asserts that it is bringing claims on behalf of itself and derivative claims on behalf of TelcoLynx and that it is well settled that in a derivative action the corporation is required to be listed as a nominal party. Plaintiff argues that such a nominal party is not an actual party in the case and does not participate or behave as one and thus does not require independent counsel. Plaintiff asserts that TelcoLynx is not attempting to pursue direct claims without counsel. Plaintiff further contends that its claims “cannot be struck simply because Defendant Friendly Llama demands, but prevents the appointment of, independent counsel for TelcoLynx.”

The court rules as follows: The court finds that counsel Callagy is representing plaintiff Roosk only as to Roosk’s claims on behalf of itself and derivative claims on behalf of TelcoLynx as alleged in the SAC, and that Callagy is not representing Telcolynx. See Shen v. Miller (2012) 212 Cal. App. 4^th 48, 57-58 (citation omitted), which explains the “basic nature of a shareholder derivative action” and that “a shareholder may only bring a derivative suit on behalf of the corporation if the corporation has refused to pursue the claim. In bringing the derivative action, the shareholder’s attorney is acting against the corporation’s wishes. Nevertheless, should the shareholder prevail in the derivative action, the corporation is the ultimate beneficiary. Therefore, the corporation must be joined in the action. Normally, the corporation is joined as a nominal defendant because of ‘its refusal to join the action as a plaintiff.’ . . . . In essence, the corporation that is the subject of the derivative claim is generally a nominal party only.” The Shen court also pointed out that “Shen’s individual and derivative claims revolve around the ‘same nucleus of facts’ alleging ‘misconduct by corporate mismanagement’ and that “’the case law is virtually unanimous in holding that one counsel can represent a stockholder bringing both an individual and a derivative action.’” Id. at 63. Thus, there is no ground for “striking” nominal plaintiff TelcoLynx.

“The limited liability companies may wish to take an active role in the litigation. If so, the weight of authority indicates that the limited liability companies must obtain independent counsel. . . . [S]ome authorities opine that a corporation in a derivative action should retain independent counsel if it elects to take an active role in the litigation, and other authorities opine that a corporation in a derivative action must always retain independent counsel.” Blue Water Sunset, LLC v. Markowitz (2011) 192 Cal. Ap. 4^th 477, 491 (citations omitted). In that case, “[w]e conclude that neither side can be trusted to make decisions on behalf of the limited liability companies. Therefore, if the limited liability companies elect to take an active role in the litigation, they must retain counsel with no past or present relationship with [the individual parties].” Id.

The SAC clarifies TelcoLynx has not taken an active role in the litigation and is not asserting any claims on its own behalf; if it were, Roosk would not have had to bring suit. See Shen v. Miller, supra, 212 Cal.App.4^th at 58. Therefore, the court reconsiders its prior order that TelcoLynx obtain independent counsel so long as TelcoLynx acts as a nominal plaintiff who “remain[s] neutral in the action.” Id.

Because TelcoLynx is properly a party to this action as a “nominal plaintiff,” defendant’s motion to strike is DENIED.