Superior Court of California 

County of Los Angeles – West District  

Beverly Hills Courthouse / Department 205 

 

 

MOVING PARTY: Defendant Focus Financial Partners, LLC 

 

RESPONDING PARTY: Plaintiff KSFB Management, LLC 

 

BACKGROUND 

 This action relates to a dispute over a non-compete provision.  Defendant Focus Financial Partners LLC (“Focus”) is an acquirer of, and investor in, financial wealth management firms and other financial services firms.  (Compl. ¶6.)  Focus—through its wholly owned subsidiary NKSFB, LLC (“NKSFB”)—acquired substantially all assets of Nigro Karlin Segal Feldstein & Bolno, LLC (“Nigro Karlin”), a business management firm.  (Id. ¶¶ 6, 16.)  At the same time, the principals of Nigro Karlin formed a management company—Plaintiff KSFB Management LLC (“KSFB”) – through which those principals would. pursuant to a Management Agreement, manage and oversee the NKSFB business.  (Id. ¶ 17.) 

As part of the initial acquisition, KFSB and its principals agreed to a Transaction Management Agreement (“TMA”).  (Id. ¶ 18.)  The TMA contains a non-competition covenant which applied for two years following the termination of (a) the TMA or (b) a principal’s employment or affiliation with KSFB.  (Id.)  The parties also signed a separate Non-Competition and Non-Solicitation Agreement, which contained a five year non-compete provision expiring on April 1, 2023, which KSFB concedes is valid and enforceable.  (Id. ¶ 19.) 

On July 1, 2022, the parties entered into an Amended and Restated Management Agreement (“ARMA”) which is an amended and restated version of the TMA.  (Id. ¶ 20.) The ARMA contains a materially similar non-competition covenant to the one to which the parties agreed in the TMA.  The ARMA’s non-compete provision also applied for two years following the termination of (a) the ARMA or (b) a principal’s employment or affiliation with KSFB.  (Id. ¶¶ 21, 25.)  Focus has asserted that it will seek to enforce the non-compete provision of the ARMA if KSFB’s principals terminate their relationship with KSFB and seek to work in the same line of business as KSFB.  (Id. ¶ 29.) 

On June 7, 2023, KSFB sued Focus, seeking a declaratory judgment that the ARMA’s non-compete covenant is not enforceable under California law.  The operative complaint alleges two claims for (1) declaratory relief and (2) injunctive relief.   

This hearing is on Focus’ demurrer.  Focus demurs to the Complaint on grounds that there is no actual controversy to support a claim for declaratory relief because KSFB has not taken any action to compete with Focus, and accordingly, KSFB’s claim that the non-compete provision is void and unenforceable is not ripe for adjudication.   

REQUEST FOR JUDICIAL NOTICE 

Defendant asks the Court to take judicial notice of (1) Plaintiff’s responses to Defendant’s special interrogatories, set one served August 11, 2023 in this action, (2) Plaintiff’s notice of motion and motion for protective order, filed on July 7, 2023, in Case No. 23STCV06825, (3) Defendant’s opposition to Plaintiff’s motion for protective order filed on July 20, 2023 in Case No. 23STCV06825, and (4) Plaintiff’s reply in support of motion for protective order filed on July 26, 2023 in Case No. 23STCV06825.   

Defendant argues these are court records subject to judicial notice under Evid. Code § 452(d) or “facts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputably accuracy” subject to judicial notice under Evid. Code § 452(h).  

The Court denies the request for judicial notice as doing so would turn “[t]he hearing on demurrer … into a contested evidentiary hearing through the guise of having the court take judicial notice of affidavits, declarations, depositions, and other such material which was filed on¿behalf of the adverse party and which purports to contradict the allegations and contentions of the plaintiff.”  (Bounds v. Superior Ct. (2014) 229 Cal.App.4th 468, 477.)   

It is true that a court may take judicial notice of the pleading party’s discovery responses to the extent “they contain statements of the [party] or his agent which are inconsistent with the allegations of the pleading before the court.” (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 605.)  Here, Defendant does not seek to have the Court judicially notice statements of fact that contradict allegations in the complaint.  Rather, it asks us to draw factual inferences from the discovery materials.  Defendant asks us, for example, to draw the inference that Plaintiff is not competing with Defendant based on a discovery response that says Plaintiff is not aware of any actions taken by Plaintiff to terminate any relationship with Defendant.  (Motion at 10:19-24 fn. 4.)   

But that is not a proper use of judicial notice in a demurrer proceeding.¿ (See¿Bounds, 229 Cal.App.4th at 477-478 (denying request for judicial notice of discovery responses where defendant asks the court to draw factual inferences from the discovery materials); Williams v. Southern California Gas Co.¿(2009) 176 Cal.App.4th 591, 600¿(in a negligence action alleging liability for a leaky gas wall furnace, “the court could take judicial notice of the discovery responses, [but] it was not authorized to draw from those responses the inference that [a defendant] was unaware of defects in the wall furnace, nor was it correct to find, based on this inference, that the operative complaint was not truthful”);¿C.R. v. Tenant Healthcare Corp.¿(2009) 169 Cal.App.4th 1094, 1103–1104¿(“[T]he contents of a document [that is judicially noticed] may only be accepted ‘where there is not or cannot be a factual dispute concerning that which is sought to be judicially noticed.’ [Citations.]”).)¿   

Also, while the Court can take judicial notice of filings in another action, “the truth of the matters alleged in [a court record] is not the proper subject of judicial notice” (Voris v. Lampert¿(2019) 7 Cal.5th 1141, 1147, fn. 5); see also Williams v. Wraxall¿(1995) 33 Cal. App. 4th 120, 130, fn. 7 (while courts are free to take judicial notice of the¿existence¿of each document in a court file, including the truth of results reached, they may not take judicial notice of the truth of hearsay statements in decisions and court files); Gilman v. Dalby (2021) 61 Cal.App.5th 923, 930 (declining to take judicial notice of the truth of matters asserted in court filings).)  Accordingly, the Court denies Defendant’s request for judicial notice.   

LEGAL STANDARD 

“[A] demurrer tests the legal sufficiency of the allegations in a complaint.” (Lewis v. Safeway, Inc. (2015) 235 Cal.App.4th 385, 388.)  A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable.  (See Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994 (in ruling on a demurrer, a court may not consider declarations, matters not subject to judicial notice, or documents not accepted for the truth of their contents).)  For purposes of ruling on a demurrer, all facts pleaded in a complaint are assumed to be true, but the reviewing court does not assume the truth of conclusions of law. (Aubry v. Tri-City Hosp. Dist. (1992) 2 Cal.4th 962, 967.)  

A demurrer to a complaint may be general or special.¿ A general demurrer challenges the legal sufficiency of the complaint on the ground it fails to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).)¿ A special demurrer challenges other defects in the complaint, including whether a pleading is uncertain. (Code Civ. Proc., § 430.10, subd. (f).)¿ The term uncertain means “ambiguous and unintelligible.”¿ (Id.)¿ A demurrer for uncertainty should be sustained if the complaint is drafted in such a manner that the defendant cannot reasonably respond, i.e., the defendant cannot determine what issues must be admitted or denied, or what counts are directed against the defendant. (Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 616.)¿  

Leave to amend must be allowed where there is a reasonable possibility of successful amendment. (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 (court shall not “sustain a demurrer without leave to amend if there is any reasonable possibility that the defect can be cured by amendment”); Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1037 (“A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment.”).)  The burden is on the complainant to show the Court that a pleading can be amended successfully. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) 

MEET AND CONFER 

Code Civ. Proc. §430.41 requires that “[b]efore filing a demurrer pursuant to this chapter, the demurring party shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” (CCP § 430.41(a).)  The parties are to meet and confer at least five days before the date the responsive pleading is due. (CCP § 430.41(a)(2).)  Thereafter, the demurring party shall file and serve a declaration detailing their meet and confer efforts. (CCP § 430.41(a)(3).)  Focus submits the Declaration of Scott Glass which fails to specify whether the parties conferred in person or by telephone.  While this meet and confer fails to comply with § 430.41, the Court cannot overrule the demurrer based on an insufficient meet and confer.  (CCP § 430.41(a)(4).)  Counsel is cautioned, however, to comply with future meet and confer requirements or their motion will be continued.   

 

 

DISCUSSION 

Under California law, a party to a contract may bring an action “for a declaration of his or her rights and duties” under the contract, “including a determination of any question of construction or validity arising under the … contract.”  (Code Civ. Proc. § 1060.)  Such an action may only be brought “in cases of actual controversy relating to the legal rights and duties of the respective parties.”  (Id.)  To constitute an “actual controversy,” the dispute must be “ripe for adjudication.”  (Dominguez v. Bonta (2022) 87 Cal.App.5th 389, 418.)  The burden is on the party seeking declaratory relief to establish the existence of an actual controversy.¿ (Lee v. Silveira (2016) 6 Cal. App. 5th 527, 546.) 

In determining whether a controversy is ripe, courts engage in a two-pronged analysis: “(1) whether the dispute is sufficiently concrete to make declaratory relief appropriate, and (2) whether the withholding of judicial consideration will result in a hardship to the parties.”  (Communities for a Better Env’t v. State Energy Res. Conservation & Dev. Com. (2017) 19 Cal.App.5th 725, 733.)     

Under the first prong, the courts will decline to adjudicate a dispute if the abstract posture of the proceeding makes it difficult to evaluate the issues, if the court is asked to speculate on the resolution of hypothetical situations, or if the case presents a contrived inquiry.  Under the second prong, the courts will not intervene merely to settle a difference of opinion; there must be an imminent and significant hardship inherent in further delay.  (Farm Sanctuary Inc. v. Dep’t of Food & Agric. (1998) 63 Cal.App.4th 495, 502.)  “A claim is not ripe for adjudication if it rests upon contingent future events that may not occur as anticipated or indeed may not occur at all.”  (Texas v. United States (1998) 523 U.S. 296, 300.)  

Here, KSFB alleges that “an actual controversy has arisen and exists as to the legality, validity and enforceability of (i) the contractual restraints of trade imposed by Defendant on Plaintiff in the ARMA, including the non-compete provisions set forth in Sections 2.12(a) and (b) and (ii) the Delaware choice of law provision set forth in Section 8.1.”  (Compl. ¶31.)  The actual controversy is ripe because the complaint alleges Focus has asserted it will seek to enforce the non-compete provision.  (Id. ¶ 29.)    

Focus argues that KSFB does not allege Focus has sought to enforce the ARMA’s non-compete against it or its principals.  (Motion at 9:25-26.)  Not so.  As noted above, the Complaint alleges Focus has indicated it will enforce the non-compete provision.   

Focus also argues there is no evidence KSFB has taken steps to breach the non-compete.  But Section 1060 does not require a breach of contract, nor does it require that a party take steps toward breaching a contract, in order to obtain declaratory relief; it only requires an “actual controversy.”  (Osseous Technologies of America, Inc. v. DiscoveryOrtho Partners LLC (2010) 191 Cal. App. 4th 357, 365.)  Indeed, declaratory relief is designed to settle disputes before they lead to an actual violation of rights.   

Focus’s reliance on Kordich v. Salton, Inc. (S.D. Cal. July 5, 2005) 2005 U.S. Dist. LEXIS 52679 is misplaced.  First, the case is not controlling authority.  Second, the plaintiffs in Kordich, unlike here, did not allege that defendant intended to enforce the non-compete provision.  Third, to the extent Kordich requires that the plaintiffs breach the contract before asserting a claim for declaratory relief, it is contrary to California law.  

CONCLUSION 

Based on the foregoing, the Court OVERRULES Defendant’s demurrer to the Complaint.   

IT IS SO ORDERED. 

 

DATED: October 5, 2023 ___________________________ 

Edward B. Moreton, Jr. 

Judge of the Superior Court