Judge: Douglas W. Stern, Case: 22STCV32100, Date: 2023-10-31 Tentative Ruling

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

Motion for Security

Joseph Chang vs. Marshal Tashiro, et al., 22STCV32100

Moving Party: Plaintiff and Cross-Defendant Joseph Chang

Background

            Plaintiff and Cross-Defendant Joseph Chang (Chang) filed this motion for security pursuant to Cal. Corporations Code § 17709.02. That section provides that in the context of a derivative action, a defendant “may move the court for an order, upon notice and hearing, requiring the plaintiff to furnish security” for the action based upon grounds that “there is no reasonable possibility that prosecution of the cause of action alleged in the complaint against the moving party will benefit the limited liability company or its members.” (Cal. Corp. Code § 17709.02(b)(1).) Further, “[i]f the court determines, after hearing evidence adduced by the parties, that the moving party has established a probability in support of any of the grounds upon which the motion is based, the court shall fix the nature and amount of the security, not to exceed fifty thousand dollars ($50,000), to be furnished by the plaintiff for reasonable expenses, including attorney’s fees, that may be incurred by the moving party and the limited liability company in connection with the action.” (Cal. Corp. Code § 17709.02(c)(2).)

            In its First Amended Cross-Complaint (FACC), Defendant and Cross-Complainant DRC Capital, LLC (DRC Capital) has brought derivative claims for Unjust Enrichment and Aiding and Abetting Breach of Fiduciary Duty on behalf of Avant Luxury SFR Fund, LLC (SFR Fund). DRC Capital is a member of the SFR Fund. Avant Development, LLC is the only Managing Member of the SFR Fund, and Chang was the Chief Operating Officer of Avant Development. Chang previously entered into a Separation and Release Agreement related to his interest in the Avant Development and the SFR Fund.

            Chang is arguing in this motion that there is no reasonable possibility that prosecution of DRC Capital’s derivative claims will benefit the SFR Fund because of the Separation and Release Agreement between him and Avant Development and the SFR Fund. Chang argues that because the SFR Fund cannot pursue claims against him because of the Release, then members of the LLC cannot pursue derivative claims on its behalf. Because of this, Chang argues that the Court should fix security in the amount of $50,000 to cover his expenses in defending against these claims.

            DRC Capital argues in its opposition that the direct and derivative claims are intertwined, and Chang provides no evidence of the reasonable expenses or attorney’s fees that he will incur. Further, DRC Capital argues that the Separation and Release Agreement does not apply to unknown claims; therefore, it does not apply to its claims.

            In his reply, Chang argues that DRC Capital’s contention that its claims are a mix of direct and derivative claims is without merit and does not warrant denial of the requested security. Chang also argues that the evidence shows that DRC Capital’s derivative claims were known to the SFR Fund at the time the Separation Agreement was executed. The derivative claims are based on the following wrongdoing on the part of Avant/Chang: approving/receiving “kickbacks” amounting to approximately $45,000 from transactions where the SFR Fund purchased properties; distributing/approving distribution of $800,000 in equity from the sale of one of the SFR Fund’s properties to investors in the fund; receiving $31,000 from the SFR Fund for rent payments; and receiving $225,000 for Chang’s indirect interest in the SFR Fund. Chang points to evidence in his reply that all of these things were known to the SFR Fund at the time it entered into the Separation and Release Agreement with Chang.

Analysis

            Cal. Corp. Code § 17709.02(b) reads as follows:

“In any action referred to in subdivision (a), at any time within 30 days after service of summons upon the limited liability company or upon any defendant who is a manager of the limited liability company or held that position at the time of the acts complained of, the limited liability company or the defendant may move the court for an order, upon notice and hearing, requiring the plaintiff to furnish security as hereinafter provided. The motion shall be based upon one or both of the following grounds:

(1)   That there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the limited liability company or its members.”

Based on the Separation and Release Agreement that Chang signed with the SFR Fund, the Court is inclined to order DRC to furnish security. There is no reasonable possibility that the LLC will be able to benefit from DRC Capital’s claims, as the SFR Fund released all its claims against Chang. The evidence also shows that the claims that DRC Capital is making against Chang are for things that were known to the SFR Fund at the time the Agreement was signed.

While the Court will order security, Chang needs to provide evidence for why $50,000 is reasonable security for his attorney fees. Cal. Corp. Code § 17709.02(c)(1) provides that “At the hearing upon any motion pursuant to subdivision (b), the court shall consider evidence, written or oral, by witnesses or affidavit, as may be material to the ground upon which the motion is based, or to a determination of the probable reasonable expenses, including attorney’s fees, of the limited liability company and the moving party that will be incurred in the defense of the action.”

The amount of security may be adjusted at the discretion of the Court if the security furnished is inadequate or excessive, but $50,000 is the maximum. (Cal. Corp. Code § 17709.02(c)(2).) Chang should provide evidence as to why he requires the statutory maximum for security.

Order

1.      Defendant Chang’s motion for security is GRANTED.

2.      However, the Court orders Chang to provide evidence for why he requires $50,000 in security before the Court shall set the amount of the security.