Judge: Douglas W. Stern, Case: 22STCV32100, Date: 2023-01-31 Tentative Ruling

Case Number: 22STCV32100    Hearing Date: January 31, 2023    Dept: 68

Joseph Chang vs. Marshall Tashiro, et al., Case No. 22STCV32100

MOVING PARTY:  Defendant DRC Capital LLC

[There are 3 virtually identical demurrer by Defendant DRC Funding, LLC, Defendant DRC Capital LLC and Zen2 Productions Inc]

RESPONDING PARTY:     Plaintiff Joseph Chang

MOTION:                               Demurrer to Complaint with Motion to Strike

I. BACKGROUND

Plaintiff filed his complaint on September 30, 2022. In Plaintiff’s complaint, he alleges two causes of action, both for aiding and abetting breach of fiduciary duty. The first cause of action is just directed at Defendant DRC Capital LLC, while the second one is directed at DRC Capital LLC and the other defendants.

Plaintiff is alleging that a third party, Wellington Yang, breached his fiduciary duty to Plaintiff, as the two were members of Avant Development, which managed the Avant Luxury SFR Fund, an entity that specialized in flipping house for resale. Plaintiff is alleging that Yang breached his fiduciary duty to Plaintiff as members of the LLC by conspiring with Brian Liu through his entity Defendant DRC Capital LLC to undercut opportunities that could have benefited Avant Development. (Opposition at pp. 2-3.)

In another instance, Yang and Liu allegedly conspired to make investments that resulted in Defendants DRC Capital LLC and the other entities founded by Liu, DRC Funding LLC, and Zen2 Productions Inc., undercutting an opportunity for Avant Development. (Opposition at pp. 2-3.)

Plaintiff alleges that in both instances Liu knew what Yang was doing and conspired with Yang, through the different entities, including Defendant Capital LLC, to breach Yang’s duties to Plaintiff. (Opposition at p. 3.)

Defendant filed its demurrer with motion to strike on November 16, 2022. Plaintiff filed his opposition on January 18, 2023. No reply has been filed.

            Request for Judicial Notice: Defendant has asked the Court to take judicial notice of a few documents. The Court takes judicial notice of the Statements of Information for Avant Development, LLC, and Avant Luxury SFR Fund, LLC. The Court also take judicial notice of the First Amended Complaint attached as Exhibit 2.

II. ANALYSIS

A. The Demurrer

As a general matter, in a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) “A demurrer tests the pleading alone, and not the evidence or facts alleged.” (E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) As such, the court assumes the truth of the complaint’s properly pleaded or implied factual allegations. (Id.) The only issue a demurrer is concerned with is whether the complaint, as it stands, states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)

Where a demurrer is sustained, leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.) The burden is on the plaintiff to show the court that a pleading can be amended successfully. (Id.; Lewis v. YouTube, LLC (2015) 244 Cal.App.4th 118, 226.) However, “[i]f there is any reasonable possibility that the plaintiff can state a good cause of action, it is error to sustain a demurrer without leave to amend.” (Youngman v. Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 245).

1. First Cause of Action for Aiding and Abetting Breach of Fiduciary Duty I

            “The elements of a claim for aiding and abetting a breach of fiduciary duty are: (1) a third party’s breach of fiduciary duties owed to plaintiff; (2) defendant’s actual knowledge of that breach of fiduciary duties; (3) substantial assistance or encouragement by defendant to the third party’s breach; and (4) defendant’s conduct was a substantial factor in causing harm to plaintiff.” (Nasrawi v. Buck Consultants LLC (2014) 231 Cal.App.4th 328, 343; see also Hooked Media Group, Inc. v. Apple Inc. (2020) 55 Cal.App.5th 323, 333.) A claim for aiding and abetting breach of fiduciary duty cannot stand absent the existence of a fiduciary duty. (See Judicial Council of Cal. Civ. Jury Instructions (CACI) (July 2022) No. 3610; Hooked Media Group, Inc., 55 Cal.App.5th at 333-334.) A complaint must allege the aider and abettor had the specific intent to facilitate the wrongful conduct. (See Schulz v. Neovi Data Corp. 152 Cal.App.4th 86, 95 (2007).)

            In this case, Avant Development, LLC is a Delaware Limited Liability Company. The parties agree that Delaware law governs what fiduciary duties were owed to Plaintiff.

            The members of a member-managed LLC owe one another fiduciary duties of loyalty and care: “Delaware cases interpreting Section 18–1101(c) have concluded that, despite the wide latitude of freedom of contract afforded to contracting parties in the LLC context, ‘in the absence of a contrary provision in the LLC agreement,’ LLC managers and members owe ‘traditional fiduciary duties of loyalty and care’ to each other and to the company.” (Kelly v. Blum (Del. Ch., Feb. 24, 2010, No. CIV.A. 4516-VCP) 2010 WL 629850, at *1 (emphasis added) (cited by Feeley v. NHAOCG, LLC (Del. Ch. 2012) 62 A.3d 649, 660 n. 1.).) Any variance from the default fiduciary duties owed by the members of an LLC to one another must be explicitly spelled out in the LLC operating agreement. (Auriga Capital Corp. v. Gatz Properties, (Del.Ch.,2012) 40 A.3d 839, 851; see also Werner v. Miller Technology Management, L.P. (Del. Ch. 2003) 831 A.2d 318, 333 (“Where there is no clear contractual language that preempts default fiduciary duty rules, the courts of this state will continue to apply them.”).)

            Here, third party Wellington Yang owed a fiduciary duty of loyalty to Plaintiff, as they were members of Avant Development, LLC. Plaintiff indicates in his complaint that Yang breached his fiduciary duty to Plaintiff by making deals with potential investors, i.e., Brian Liu’s DRC Capital LLC, behind Plaintiff’s back. Plaintiff alleges that DRC Capital LLC, through Brian Liu, who was also a member of Avant Luxury’s advisory council, assisted in the breach by encouraging and supporting Yang’s secret deals and pushing the approval of the disputed sale. (Comp. ¶ 43.)

            Based on the foregoing, Plaintiff has alleged facts sufficient to maintain cause of action for aiding and abetting breach of fiduciary duty against DRC Capital LLC. The demurrer as to this cause of action is overruled.

2. Second Cause of Action for Aiding and Abetting Breach of Fiduciary Duty II

            This cause of action involves another instance in which Plaintiff alleges that Wellington Yang and DRC Capital LLC conspired against him and breached fiduciary duties.

            The elements of the cause of action are the same as above.

            Once again, Plaintiff has alleged sufficient facts to show that there was a fiduciary duty owed, that fiduciary duty was breached, and DRC Capital assisted in the breach of the fiduciary duty.

            Accordingly, the demurrer as to this cause of action is overruled.

B. Motion to Strike

            DRC Capital requests that the following language in the Complaint at the following paragraphs be stricken:

1.    Paragraph 76, on page 13, lines 14-18, reading as follows: “Marshall Tashiro’s conduct was malicious, oppressive, and in conscious disregard of the rights of Joseph Chang, as expressed in numerous emails where he referred to the buyout of Joseph Chang as the ‘Joe disposal fee,’ and later offered to assist Wellington Yang in pushing Joseph Chang from another business deal they were involved in, writing ‘if you need help with the extermination, Brian and I can help you work on it for a small amount of net savings.’”

2.    Paragraph 76, on page 13, lines 18-19, reading as follows: “An award of punitive damages and exemplary damages is justified.”

3.    That portion of the prayer seeking punitive damages, which appears on page 14, paragraph b, lines 1-2, reading as follows: “As to Breach of Fiduciary Duty II, punitive and exemplary damages against Defendant Marshal Tashiro.”

4.    That portion of the prayer seeking attorneys’ and experts’ fees and expenses, which appears on page 14, paragraph c, line 3, reading as follows: “Costs and reasonable attorneys’ and experts’ fees and expenses.”

Plaintiff has agreed to remove the language regarding attorneys’ fees and expert fees, but not the language regarding costs. The Court agrees that the language regarding costs does not need to be stricken.

Further, Plaintiff argues that DRC Capital lacks standing to request that the references to Defendant Tashiro’s malicious conduct and punitive damages as to Defendant Tashiro be stricken. (Requests 1-3 above.) The Court agrees.

Accordingly, DRC Capital’s motion to strike is granted only as to the references to attorneys’ fees and expert fees.

Defendant’s Demurrer as to the two causes of action is overruled. Defendant’s motion to strike is granted in part, with 20 days leave to amend.