Judge: Edward B. Moreton, Jr., Case: 20SMCV00576, Date: 2022-12-07 Tentative Ruling

Case Number: 20SMCV00576    Hearing Date: December 7, 2022    Dept: 200

Superior Court of California

County of Los Angeles – West District

Beverly Hills Courthouse / Department 200

BACKGROUND

This case is about the failed purchase of a cannabis dispensary.  Defendant MM Enterprises USA, LLC (“Buyer”) and Plaintiffs Ryan Rayburn  (“Rayburn”) and South Cord Management LLC (“South Cord”) (collectively, the “Sellers”) entered into a stock purchase agreement (the “Agreement”), whereby Buyer would buy Ryan Cameron Rayburn Collective, Inc. (“RCRC”), a cannabis dispensary.  Buyer would pay for the purchase through a combination of debt forgiveness and stock issuance, totaling $7.7 million.  In turn, Sellers would transfer Rayburn’s 100% equity interest in RCRC to Buyer.  After Buyer transferred substantial shares to Sellers, the transaction failed to close within the contractually required time frame.  Sellers allege Buyer failed to perform obligations necessary to close the transaction, prevented the occurrence of conditions as a means to evade closing the transaction, failed to make required stock payments and true ups, and failed to relinquish control over RCRC’s account with the City of Long Beach.  Buyer in turn alleges that Sellers have refused to return the shares issued to them and refused to repay the debt that was forgiven.

This hearing is on Buyer’s motion to amend its response to South Cord’s Request for Admission (“RFA”) No. 28.  In response to that request, Buyer initially admitted that “no ‘Material Adverse Effect’ has occurred, as that term is defined in Section 7.02(e) of the [Agreement].”  Buyer claims that after further investigation and consideration, it determined the global pandemic and government and regulatory responses to the public health crisis constituted a “Material Adverse Effect” (“MAE”).  Accordingly, Buyer seeks to amend its response to RFA No. 28 from an “Admit” to a “Deny.”

LEGAL STANDARD

Leave of court is required to withdraw or amend a response to a request for admission.  (Code Civ. Proc. §2033.300(a).)  Leave may be granted when (1) the admission was “the result of mistake, inadvertence or excusable neglect”, and (2) the propounding party would not be “substantially prejudiced in maintaining that party’s action or defense on the merits.”  (Id. at §2033.300(b).)  “[T]he court’s discretion to deny a motion under the statute is limited to circumstances where it is clear that the mistake, inadvertence or neglect was inexcusable, or where it is clear that the withdrawal or amendment would substantially prejudice the party who obtained the admission in maintaining that party’s action or defense on the merits.” (New Albertson’s Inc. v. Superior Court (2008) 168 Cal.App.4^th 1403, 1420-21.)  “Because the law strongly favors trial and disposition on the merits, any doubts in applying section 2033.300 must be resolved in favor of the party seeking relief.”  (Id.)

DISCUSSION

Buyer contends its response to RFA No. 28 was provided in error, at the early stages of discovery.  Buyer also argues Sellers have not suffered substantial prejudice because they knew Buyer intended to amend the response over a year ago (in April 2021) and since then, Sellers have conducted extensive discovery regarding the amended response.  The Court agrees.

The Court finds that Buyer’s initial response was the product of mistake, inadvertence or neglect that was excusable given the response was provided in the early stages of discovery when Buyer had not completed its investigation.  Buyer represents the mistaken admission was verified by someone who was not the ultimate decisionmaker who terminated the Agreement.  Buyer contends it was not until further investigation (i.e., speaking to the decisionmaker) that it became aware of the mistake.       

The Court also concludes there is no substantial prejudice to the Sellers.  Sellers have conducted extensive discovery into the amendment, including serving requests for production of documents supporting the MAE claim (Ex. 7 to Williams Decl., RFP Nos. 67, 77-78), propounding 13 interrogatories on the MAE claim (Exs. B & C to Perlin Decl.), and taking the deposition of Tom Lynch, the decisionmaker and Buyer’s person most qualified, about the amended response and the merits of the MAE claim.  (Ex. 5 to Williams Decl., at pp. 135, 139-154, 229-240.)  Buyer has produced documents responsive to the requests for production of documents and served an amended and detailed response to Form Interrogatory No. 17.1, stating all facts to support the amended response to RFA No. 28.  (Ex. 6 to Williams Decl., at p. 6 (incorrectly labeled as RFA No. 27).) 

Allowing Buyer to amend its response would also be consistent with the policy favoring trial on the merits.  The purpose of allowing amendment of responses to requests for admissions is to protect against “undeserved windfalls obtained through requests for admissions and [to] further[] the policy favoring the resolution of lawsuits on the merits.”  (New Albertsons, Inc., 168 Cal.App.4^th at 1418.)  The policy is to “have every litigated case tried upon its merits and [the law] looks with disfavor upon a party who, regardless of the merits of the case, attempts to take advantage of the mistake, surprise, inadvertence or neglect of his adversary.”  (Au-Yang v. Barton (1999) 21 Cal.4^th 958, 963.) 

Sellers spend much of their Opposition arguing that there are no facts to support the Buyer’s MAE claim.  But that is not a basis to deny the amendment.  To the extent there was no reasonable basis to deny the RFA, Sellers may move for attorneys’ fees and costs under Code Civ. Proc. §2033.420(a).

Sellers also point out that Buyer delayed in bringing this motion.  It “waited until the expiration of the discovery and motion filing cut-off deadlines to file this Motion.”  Opp. at 13.  But as Buyer points out, courts have allowed amendment even close to trial.  In New Albertsons, Inc., the court allowed amendment even though “only five weeks remained after the date of the hearing on the motion before the scheduled trial date.”  (168 Cal.App.4^th at 1415.)  Here, although the Court finds Buyer should have brought the motion sooner, the delay itself did not cause substantial prejudice to the Sellers as they vigorously pursued discovery as described above, and even filed a motion to compel further responses to requests for production of documents that would support a MAE claim. 

However, given the delay in bringing this motion, the Court will allow Sellers to reopen discovery on the limited issue of the MAE claim, and any reasonable costs of the additional discovery will be borne by Buyer.  Code Civ. Proc. §2033.300 provides that the court may impose conditions on the granting of a motion to amend an RFA response, including that the party opposing amendment “be permitted to pursue additional discovery related to the matter involved in the withdrawn or amended admission,” and an “[o]rder that the costs of any additional discovery be borne in whole or in part by the party withdrawing or amending the admission.”    

CONCLUSION

Based on the foregoing, the Court GRANTS Buyer’s motion to amend its response to RFA No. 28 on the conditions that (1) Sellers may reopen discovery on the limited issue of the MAE claim which must be completed within 45 days from the date of the hearing on this motion, and (2) Sellers may file a motion to seek any reasonable costs of pursuing the additional discovery.   

DATED: December 7, 2022                                                 ___________________________

 Edward B. Moreton, Jr.

 Judge of the Superior Court