Judge: Donald F. Gaffney, Case: "Roatchhada and Cinda, LP v. MacArthur Court Acquisition Corp.", Date: 2023-07-12 Tentative Ruling

TENTATIVE RULING:

Demurrer to Second Amended Complaint

Defendants MacArthur Court Acquisition Corp., Golden State Medicare Health Plan, Excelera ACO, Inc., Discovery Genomics, Inc., Excelera Investment 1, LLC, Sanjay Patil, M.D., Brian Gillan, Holly Brenier, Desmond Thio, Shezad Rokerya, Excelera Health, Excelera Foundation, Connected Care, Inc., Connected Care Health Services, Inc., Connected Care Resources, Inc., NPB Medical Group, P.C., NPB Management Group, Inc., and Global Pharmacy Services, Inc. (“Defendants”) demur to the second, third, fourth, fifth, sixth, and eighth causes of action of Plaintiff Roatchhada and Cindy, LP’s Second Amended Complaint (“SAC”). For the following reasons, the demurrer is OVERRULED.

In ruling on a demurrer, a court must accept as true all allegations of fact contained in the complaint. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) A demurrer challenges only the legal sufficiency of the affected pleading, not the truth of the factual allegations in the pleading or the pleader’s ability to prove those allegations. (Cundiff v. GTE Cal., Inc. (2002) 101 Cal.App.4th 1395, 1404-05.) Questions of fact cannot be decided on demurrer. (Berryman v. Merit Prop. Mgmt., Inc. (2007) 152 Cal.App.4th 1544, 1556.) Because a demurrer tests only the sufficiency of the complaint, a court will not consider facts that have not been alleged in the complaint unless they may be reasonably inferred from the matters alleged or are proper subjects of judicial notice. (Hall v. Great W. Bank (1991) 231 Cal.App.3d 713, 718 n.7.)

Second Cause of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing

“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” (Foley v. Interactive Data Corp. (1988) 47 Cal. 3d 654, 683 [internal quotations omitted].) “The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith.” (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 372.)

The grounds Plaintiff alleges in support of its implied covenant claim are also cited as supporting its breach of contract claim. (Compare SAC ¶¶ 67-73 with ¶¶ 83-85.) Plaintiff also alleges MCAC and Patil actively dissipated and misappropriated MCAC’s and GSMHP’s assets for their own benefit and to avoid paying the debts owed to Plaintiff. (SAC ¶ 87.) These allegations go beyond stating a contract breach. Plaintiff’s breach of implied covenant of good faith and fair dealing cause of action is not superfluous.

Next, Defendants contend Plaintiff’s allegations regarding the 2019 Note are insufficient to state a cause of action for breach of the implied covenant of good faith and fair dealing because there’s no claim that Plaintiff was deprived of the benefit of the agreement. A demurrer, however, does not lie to a portion of a cause of action. (PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682.) The breach of implied covenant cause of action also concerns the 2018 Note. Thus, the demurrer to the second cause of action is overruled.

Third Cause of Action for Promissory Fraud

“ ‘Promissory fraud’ is a subspecies of the action for fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638; accord, Behnke v. State Farm General Ins. Co. (2011) 196 Cal.App.4th 1443, 1453 [the elements of promissory fraud are “(1) a promise made regarding a material fact without any intention of performing it; (2) the existence of the intent not to perform at the time the promise was made; (3) intent to deceive or induce the promisee to enter into a transaction; (4) reasonable reliance by the promisee; (5) nonperformance by the party making the promise; and (6) resulting damage to the [promisee]”].) “As with any other form of fraud, each element of a promissory fraud claim must be alleged with particularity.” (Rossberg v. Bank of America, N.A. (2013) 219 Cal.App.4th 1481, 1498; see Lazar, at p. 645 [“fraud must be pled specifically; general and conclusory allegations do not suffice”].)

The SAC alleges that Patil repeated promises he made to non-party Jonathon Nguyen, M.D. to Roatchhada Nguon and Cindy Nguyen, the two partners that form the Plaintiff partnership (SAC ¶¶ 1, 37-38, 43-44), specifically that any monies invested in or loaned to MCAC would be used only for the acquisition and operation of GSMPH, that GSMPH was financially stable, that the investment would be safe, and that Patil had the business acumen to make GSMPH even more successful and profitable (SAC ¶ 44). Patil’s alleged representation that Plaintiff’s loan would be used for the acquisition and operation of GSMPH and that GSMPH was finally stable are not inactionable facts that relate to profit projections or speculative predictions. (Neubauer v. Goldfarb (2003) 108 Cal.App.4th 47, 64–65, Zeh v. Alameda Community Hotel Corp. (1932) 122 Cal.App. 366, 368.)

The SAC further alleges Patil knew that GSMPH was operating at a deficit (SAC ¶ 45) and that, upon information and belief, the Individual Defendants used GSMPH monies to pay exorbitant salaries (SAC ¶ 62). These allegations are pled with sufficient particularity and show the requisite intent.

Defendants next contend that MCAC used Plaintiff’s investment to purchase GSMHP just as Patil had promised. The SAC alleges Plaintiff transferred $13 million directly to MCAC in reliance on Patil’s promise that the funds would only be used for the acquisition and operation of GSMHP. (SAC ¶ 96.) In addition to the transferred funds, Plaintiff paid an additional $5 million directly to Tenet on behalf of MCAC to acquire GSMHP and loaned MCAC an additional $2,105,000 pursuant to the 2019 Note. (Id.) These allegations do not demonstrate that MCAC performed on Patil’s promise. The SAC alleges that none of the $13 million was used for the benefit of GSMHP. (SAC ¶ 100.) The demurrer is overruled as to the third cause of action.

Fourth Cause of Action for Breach of Fiduciary Duty

In general, directors do not owe a fiduciary duty to creditors. (See Berg & Berg Enters., LLC v. Boyle (2009) 178 Cal. App. 4th 1020, 1046.) A limited exception exists when a corporation is insolvent. (Id. at 1032.) In those instances, directors have a duty to not “divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims. This would include acts that involve self-dealing ....” (Id. at 1041 [emphasis omitted].)

The SAC alleges MCAC is insolvent because the value of its liabilities exceeds the value of its assets, and because MCAC’s income is insufficient to pay its debts as they come due. (SAC ¶ 116.) The Berg court noted there are multiple definitions of insolvency. (Berg, 178 Cal.App.4th at 1043, fn. 23.) For example, “a corporation is insolvent, if, as a result of a prohibited distribution, it would ‘likely be unable to meet its liabilities ... as they mature’ ” or when “value of liabilities exceeds the value of assets”. (Id.) Although it noted that insolvency was not well-pled by the facts in Berg, the Court of Appeal nevertheless assumed a state of actual insolvency in undertaking its analysis. (Berg, 178 Cal.App.4th at 1043.) This court will do the same. Berg does not set forth the requirement that specific facts are required to allege insolvency.

Defendants next argue that Plaintiff’s breach of fiduciary duty claim is barred by the business judgment rule. In California, a director owes a duty to the corporation and its shareholders to serve “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” (Corp. Code § 309(a).)

Directors who perform their fiduciary duties in good faith and in a manner they believe to be in the best interests of the corporation and its shareholders “shall have no liability based upon any alleged failure to discharge the person's obligations as a director.” (Corp. Code. § 309(c).) This rule is the codified version of the “business judgment rule.” (Berg, 178 Cal.App.4th at 1045.) In determining breach-of-fiduciary-duty claims brought against corporate directors, courts in California apply a common law version of the business judgment rule, which is broader than the rule codified in section 309, as it “establishes a presumption that directors' decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest.” (Id.)

The presumption raised by the business judgment rule does not apply to actions “taken without reasonable inquiry, with improper motives, or as a result of a conflict of interest.” (Berg, 178 Cal.App.4th at 1045 [citations and internal quotation marks omitted].) The presumption created by the business judgment rule “can be rebutted only by affirmative allegations of facts which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.” (Id. at 1046 [citation and internal quotation marks omitted].)

California’s business judgment rule applies only to directors, not officers, of a corporation. The SAC alleges the Individual Defendants are officers and/or directors of MCAC. (SAC ¶¶ 18-23.) Additionally, the business judgment rule is intended to protect a director from liability for a mistake in business judgment which is made in good faith and in what they believe to be the best interest of the corporation. Nevertheless, “directors are jointly liable with the corporation and may be joined as defendants if they personally directed or participated in the tortious conduct.” (Ritter & Ritter, Inc. Pension & Profit Plan v. The Churchill Condominium Assn. (2008) 166 Cal.App.4th 103, 120.) Here, the SAC alleges the Individual Defendants actively dissipated and misappropriated MCAC and GSMPH assets in order to avoid paying the debts owed to Plaintiff. (SAC ¶ 125.) Assuming this to be true, the Individual Defendants could be held liable for this tortious conduct. The demurrer is overruled as to the fourth cause of action.

Fifth Cause of Action for Aiding and Abetting Breach of Fiduciary Duty

“California has adopted the common law rule for subjecting a defendant to liability for aiding and abetting a tort. ‘ “Liability may ... be imposed on one who aids and abets the commission of an intentional tort if the person (a) knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person's own conduct, separately considered, constitutes a breach of duty to the third person.” [Citations.]’ [Citation.]” (Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1144.) Liability “depends on proof the defendant had actual knowledge of the specific primary wrong the defendant substantially assisted,” (Casey, 127 Cal.App.4th at 1145), which requires “ ‘an intentional participation with knowledge of the object to be attained’ ” and “ ‘the intent of facilitating the commission of that tort.’ ” (Id. at 1146.)

The SAC alleges the Individual Defendants are officers and Board Members of MCAC and GSMPH (SAC ¶¶ 18-23, 131.) The SAC further alleges each of the Entity Defendants: knowingly caused, ratified, participated in, and/or facilitated the diversion, dissipation, and concealment of assets in order to avoid paying creditors, knowingly received assets from MCAC, GSMPH, the Individual Defendants, and/or each other without justification and proper accounting; and engaged in conduct that unduly risked the assets of MCAC and GSMPH. (SAC ¶ 133.) The SAC identifies, with sufficient specificity, the Entity Defendants’ knowledge of the primary wrong, namely the Individual Defendants’ diversion, dissipation, and concealment of assets from creditors. The SAC also alleges the Entity Defendants are a network of subsidiary entities of MCAC, are the alter egos of MCAC and one another, and that their assets are moved around by the Individual Defendants without regard for the observation of corporate formalities and without ensuring that proper consideration was given for each transaction. (SAC ¶ 17.) The demurrer to the fifth cause of action is overruled.

Sixth Cause of Action for Violation of Corporations Code Section 25401

Corporations Code section 25401 provides: “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.”

Defendants contend that the statute of limitations bars Plaintiff’s section 25401 claim because the promotional materials, copies of MCAC’s contract to purchase GSMHP, a private placement memorandum, and Plaintiff’s signing of additional documents should have alerted Plaintiff to possible fraud in November 2018. There is no allegation that these documents do not match Patil’s representations. The demurrer to the sixth cause of action is overruled.

Eighth Cause of Action for Unfair and Deceptive Business Practices

Defendants contend the eighth cause of action for violation of Business & Professions Code section 17200 fails because it is a derivative claim and the underlying claims are inadequately pled. Given the ruling on Defendants’ demurrer to the second, third, fourth, fifth, and sixth causes of action, the demurrer to the derivative eighth cause of action is also overruled.

Defendants shall file and serve an answer to the Complaint no later than 10 days after service of the notice of ruling. (Cal. Rules Ct., Rule 3.1320(g).)

Plaintiff to give notice.