Judge Edward B. Moreton, Jr, Case Number: 24SMCV02514, Date: 2024-11-05 Tentative Ruling

Judge: Edward B. Moreton, Jr, Case: 24SMCV02514, Date: 2024-11-05 Tentative Ruling

Superior Court of California

County of Los Angeles – West District

Beverly Hills Courthouse / Department 205

STEVE ORENBERG, et al.,

Plaintiffs,

STASON STRONG, et al.,

Defendants.

Case No.: 24SMCV02514

Hearing Date: November 5, 2024

[TENTATIVE] ORDER RE:

DEFENDANTS NEWREZ LLC AND U.S.

BANK TRUST NATIONAL

ASSOCIATION’S DEMURRER TO

COMPLAINT

This is a breach of contract and fraud case. Plaintiffs Steve Orenberg and Julie Toman loaned $750,000 to Defendant Brett Livingston Strong (“B. Strong”) which remains unpaid. (Compl. ¶26.)

B. Strong had a decades-long friendship with the late pop singer Michael Jackson during which B. Strong and Jackson created hundreds of pieces of artwork together. (Id. ¶16.) In 1989, B. Strong and Jackson formed a partnership incorporated as the Jackson Strong Alliance whereby B. Strong would help Jackson manage and exhibit Jackson’s original artworks (“Jackson Artwork”) and each would receive 50% interest in the artwork. (Id. ¶17.) After Jackson’s death, B. Strong acquired the remaining 50% interest in the Jackson Strong Alliance (“JSA”) and the Jackson Artwork. (Id. ¶18.)

In late 2016 to early 2017, Orenberg was introduced to B. Strong who needed short term financing. (Id. ¶20.) In connection with this solicitation, B. Strong repeatedly represented to Plaintiffs that he personally owned the Jackson Artwork and provided Plaintiffs with appraisals which valued the collections at well over $700M. (Id. ¶21.) B. Strong also represented he was in the process of closing a deal to sell the collections for around $500 to $600 million and that he expected the deal to close by June 2017. (Id. ¶23.)

Based on B. Strong’s representations that he owned the Jackson Artwork that was worth hundreds of millions of dollars and that he was about to close the sale on the Jackson Artwork for $500 to $600 million, on January 9, 2017, Plaintiffs agreed to loan B. Strong $750,000. (Id. ¶26.) B. Strong executed a Master Promissory Note in favor of Plaintiffs that required him to make monthly interest only payments followed by a large balloon payment on the Note’s maturity. (Id. ¶28.)

The Note also provided that it would be secured by “One (1) piece of artwork from the Michael Joseph Jackson ‘Private Collection’ with value up to $5,000,000 to be picked by the lender.” (Id. ¶29.) B. Strong represented to Plaintiffs that a piece of artwork titled “Dance ‘93” was created by Michael Jackson, was part of the Private Collection, and was valued at $5,900,000. (Id. ¶31.) Based on that representation, Plaintiffs took Dance ’93 as collateral to secure the Note. (Id.)

B. Strong made three monthly interest payments, but never made any other payments towards satisfaction of the Note. (Id. ¶33.) Plaintiffs considered foreclosing the artwork-collateral but they secured two appraisals which valued the piece at only $25,000 and $15,000, less than half of 1% of the value B. Strong claimed the piece was worth. (Id. ¶37.)

On February 8, 2019, after B. Strong failed to meet his obligations under the Note, the parties entered into a Settlement Agreement and Release (“Settlement Agreement”) whereby B. Strong agreed to pay $944,381 by March 29, 2019 or, if he did not meet that deadline, to pay $1,200,000 by July 1, 2019. In exchange for payment, Plaintiffs agreed not to initiate a lawsuit or any other collection effort against B. Strong and further agreed to provide him with a full release. (Id. ¶39.) In addition, the parties stipulated to entry of judgment in the amount of $1,200,000 should B. Strong fail to perform under the settlement agreement. (Id. ¶40.)

After B. Strong failed to perform any portion of his obligations under the Settlement Agreement, Plaintiffs filed suit in the California Superior Court for the County of Los Angeles, Case No. 19SMCV01208. (Id. ¶41.) The Court entered Judgment in Plaintiffs’ favor for the sum of $1,200,000 with interest accruing at the rate of 10% per annum until the judgment is satisfied. (Id. ¶42.) The Court then issued another order adding $47,238,18 to the judgment pursuant to the parties’ stipulation for attorneys’ fees, bringing the total judgment to $1,256,443.66. (Id. ¶44.)

For the three years following entry of judgment, B. Strong not only failed to satisfy any portion of the judgment, but he frustrated Plaintiffs’ post judgment collection efforts. (Id. ¶45.) Accordingly, the Court appointed a receiver to take possession and control of B. Strong’s assets and property, including the Jackson Artwork, to sell it in hopes of satisfying Plaintiffs’ Judgment. (Id. ¶21.)

At the hearing on the motion to appoint the receiver in June 2022, B. Strong, through his counsel, claimed for the first time that he did not own the Jackson Artwork, but instead defendant JSA was the true owner and B. Strong was only acting as a broker trying to sell it. This was the very first time B. Strong made the claim to Plaintiffs that he did not own the Jackson Artwork. (Id. ¶50.) B. Strong claims that in or around 1999, he transferred all of his assets including the 50% interest he held at the time in the Jackson Artwork, to his son, defendant Stason Strong (“S. Strong”). S. Strong then transferred the Jackson Artwork to JSA. (Id. ¶56.)

In the past two years, in an alleged attempt to further defraud Plaintiffs, B. Strong and S. Strong created Hespoke, LLC for the sole purpose of fraudulently concealing and hiding valuable assets to keep the artwork and other assets away from the reach of Plaintiffs and other creditors of JSA, B. Strong and S. Strong. (Id. ¶74.) B. Strong and S. Strong hold a 50% interest in Hespoke. (Id. ¶75.) B. Strong, S. Strong and JSA executed an Art Purchase and Use Agreement dated January 9, 2024 with Hespoke, whereby JSA would transfer ownership of 134 pieces of the Jackson Artwork to Hespoke. (Id. ¶77.)

The operative complaint alleges six claims for (1) fraud, (2) voidable transfer, (3) accounting, (4) financial elder abuse, (5) violation of Cal. Penal Code §496 and (6) declaratory relief.

This hearing is on Defendants B. Strong, S. Strong and JSA’s (collectively “Moving Defendants’”) demurrer. Moving Defendants argue that (1) all claims against B. Strong should be dismissed because Plaintiffs expressly released all claims against B. Strong pursuant to the Settlement Agreement; (2) all claims against S. Strong and JSA should be dismissed because Plaintiffs are collaterally estopped from bringing the claims following entry of final judgment in Case No. 19SMCV01208 under the primary rights doctrine; (3) Plaintiffs’ claims for fraud, voidable transfer, financial elder abuse and violation of Penal Code section 496 are time-barred, (4) Plaintiffs’ claims for fraud, financial elder abuse, and violation of Penal Code section 496 against S. Strong and JSA fail because no acts or omissions are alleged on the part of these defendants; (5) there is no claim for violation of Penal Code section 496 which only applies to property obtained through theft or extortion; (6) Plaintiffs fail to allege any facts justifying an accounting; and (6) Plaintiffs cannot seek declaratory relief because the dispute has already been resolved by judgment.

Code Civ. Proc. § 430.41 requires that before the filing of a demurrer the moving 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. (Code Civ. Proc., § 430.41(a).) The parties are to meet and confer at least five days before the date the responsive pleading is due. (Code Civ. Proc., § 430.41(a)(2).) Thereafter, the moving party shall file and serve a declaration detailing their meet and confer efforts. (Code Civ. Proc., § 430.41(a)(3).) Moving Defendants submit the Declaration of Bradley Patterson which shows the parties met and conferred by telephone. This satisfies the meet and confer requirements of § 430.41.

“[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.)

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.)

REQUEST FOR JUDICIAL NOTICE

Moving Defendants request judicial notice of the following court records in Orenberg et al., v. Strong, Los Angeles County Superior Court Case No. 19SMCV01208: the complaint filed on July 3, 2019; the judgment entered on August 6, 2019; the May 9, 2024 order denying Plaintiffs’ motion to add S. Strong and JSA as alter egos of judgment debtor B. Strong, and the written settlement agreement and release entered into by and between Plaintiffs and B. Strong, which is an exhibit to the declaration of Steve Orenberg in support of Plaintiffs’ motion to amend judgment filed on April 8, 2024. The Court grants the request pursuant to Cal. Evid. Code §§ 452(d) and 452(h).

Moving Defendants argue that Plaintiffs have waived all claims against B. Strong by virtue of the settlement agreement and stipulated judgment to resolve the dispute. The Court disagrees.

Plaintiffs allege that the release was procured through fraud, based on B. Strong’s claim that he owned the Jackson Artwork. A release is invalid when it is procured by misrepresentation, deception or fraud. (Randas v. YMCA of Metropolitan Los Angeles (1993) 17 Cal.App.4th 158, 163.)

Additionally, the waiver does not bar Plaintiffs’ claims because they are outside of its scope. The waiver applies only to claims related to the prior promissory note. Plaintiffs’ current claims are based on B. Strong’s conspiracy with the other defendants to hide and transfer assets to avoid collection by Plaintiffs.

Moving Defendants argue that Plaintiffs are collaterally estopped from relitigating the causes of action here because they are based on the same primary right that was asserted in the underlying action. The Court disagrees.

“The doctrine of res judicata ‘... precludes parties or their privies from relitigating the same cause of action that has been finally determined by a court of competent jurisdiction....’” (Brenelli Amedeo, S.P.A. v. Bakara Furniture, Inc. (1994) 29 Cal.App.4th 1828, 1835.) Thus, “[t]he question in this and similar cases, of course, is whether the attempted second litigation involves the ‘same cause of action.’” (Sawyer v. First City Financial Corp., Ltd. (1981) 124 Cal.App.3d 390, 399.) “A ‘cause of action’ is conceived as the remedial right in favor of a plaintiff for the violation of one ‘primary right.’” (Id.) “That several remedies may be available for violation of one ‘primary right’ does not create additional ‘causes of action.’” (Id.) “However, it is also true that a given set of facts may give rise to the violation of more than one ‘primary right,’ thus giving a plaintiff the potential of two separate lawsuits against a single defendant.” (Id.)

The current action, which seeks redress for Defendants’ conspiracy to defraud Plaintiffs, addresses a different primary right than that addressed in the prior action for breach of contract. Two cases are instructive.

In Sawyer, the plaintiffs sold land to a defendant who partially paid with a secured promissory note. (124 Cal.App.3d at 400.) After the defendant defaulted on a loan, the plaintiffs filed a breach of contract claim seeking damages in the amount of the note. (Id.) After trial on the merits, the court found for defendants based on a waiver provision in the original sales contract. (Id. at 401.) Plaintiffs then filed a second suit, which involved the same parties, sought damages in the amount of the note plus punitive damages, and was based on the same underlying transaction. However, the second action pleaded conspiracy among the defendants to defraud plaintiffs. (Id. at 401–402.) In denying the defendants’ motion for summary judgment on the basis of res judicata, the Sawyer court concluded that while the two actions contained similar facts, the first action did not involve allegations of fraud. (Id. at 402.) Although the second action also had as its object the collection of the same promissory note, the basis of the claim was completely different and rested on separate facts. (Id.) The second action admitted facts decided in the first action, but pleaded facts beyond them: “Surely one’s breach of contract by failing to pay a note violates a ‘primary right’ which is separate from the ‘primary right’ not to have the note stolen. […] While the monetary loss may be measurable by the same promissory note amount, and hence in a general sense the same ‘harm’ has been done in both cases, theoretically the plaintiffs have been ‘harmed’ differently by tortious conduct destroying the value of the note, than by the contractual breach of simply failing to pay it.” (Id. at 402–03.)

In another instructive case, Brenelli, the plaintiff prevailed in its first suit against an entity for breach of contract, conversion, common counts, and declaratory relief, and was awarded an amount equal to the merchandise it had provided to the entity under the contract. (29 Cal.App.4th at 1833.) Before the plaintiff could collect on its judgment, the defendant entity filed for bankruptcy. (Id.) After the bankruptcy case was closed, plaintiff filed another action against the defendant entity and its shareholders alleging alter ego liability, fraudulent conveyance, conspiracy to fraudulently transfer corporate assets, accounting of profits, intentional misrepresentation of fact, suppression of fact, conspiracy to defraud, and conversion. (Id.) After the trial court concluded that res judicata precluded several of plaintiff’s claims because they arose out of the same transaction upon which the first action was based, plaintiffs appealed. (Id. at 1834.) On appeal, plaintiff argued that res judicata does not apply as the two actions involved different primary rights. (Id. At 1836.) Specifically, the first action involved a cause of action for breach of contract by the corporation, while the second action alleged tortious conduct by the shareholders that prevented it from collecting on its judgment from the first action. (Id.) Relying on Sawyer, the Brenelli court concluded, “as did the Sawyer court, the right to have contractual obligations performed is distinct from the right to be free from tortious behavior preventing collection of a judgment.” (Id. at 1837.)

Just as in Sawyer and Brenelli, Plaintiffs’ first action was narrowly based on BLS’ breach of contract. Just as in Sawyer, Plaintiffs’ second action admits the stipulated judgment, and has as its object the collection of the amounts in the Settlement Agreement, but is based on a different set of facts and seeks redress for different harm, i.e., harm suffered due to Defendants’ conspiracy to conceal and misrepresent ownership of assets and fraudulently transfer assets, or misrepresent that assets had been transferred, between themselves in an attempt to avoid Plaintiffs’ collection efforts. Just like Brenelli, Plaintiffs’ second action seeks to vindicate a different primary right, i.e., to be free from Defendants’ tortious conduct which unfairly prevented them from collecting on their judgment. As Sawyer and Brenelli explain, this action addresses a different primary right than the first action. Therefore, res judicata does not bar Plaintiffs’ claims.

Defendants argue that the fraud claim fails because there are no allegations that S. Strong and JSA engaged in any fraudulent conduct, and as to B. Strong, the only relevant representation is as to the value of the painting that served as security for the debt, and as to that representation, it was a matter of opinion and therefore cannot constitute fraud. The Court agrees in part.

Plaintiffs have alleged misrepresentations on the part of B. Strong, but not on the part of the other Defendants. Plaintiffs claim that their Complaint alleges that Defendants conspired together to induce the loan by telling Plaintiffs that (1) B. Strong owned the Jackson Artwork, which they now claim he does not; (2) it was worth hundreds of millions of dollars; (3) B. Strong was about to close a deal to sell it for hundreds of millions of dollars, and (4) the particular artwork collateralizing the Note was worth millions of dollars, all of which was not true. (Opp. at 10:6-16.) But the portions of the Complaint Plaintiffs cite only allege misrepresentations by B. Strong, and not the other Defendants. (See, e.g., Compl. ¶¶ 16-37, 50-57, 85-96.)

As to B. Strong, however, Plaintiffs have sufficiently alleged a fraud claim. Defendants argue that any misrepresentation regarding who owned the Jackson Artwork, other than the one piece that served as collateral for the note, is immaterial. But the representation is material as Plaintiffs believed that B. Strong owned the assets which would be available to them in the event of default (even if they did not serve as security). Defendants also claim that the value of the artwork is an opinion, and therefore, cannot be the basis of a fraud claim. But even assuming Defendants are correct, Plaintiffs alleges two other misrepresentations, neither of which is an opinion: that B. Strong owned the artwork, and that B. Strong was about to close a deal to sell it for hundreds of millions of dollars. These representations are clearly about existing facts, which can support a fraud claim.

Accordingly, the Court sustains the demurrer to the fraud claim as to S. Strong and JSA but overrules the demurrer as to B. Strong.

Defendants argue that Plaintiffs’ claim for voidable transfer is time-barred because the Complaint alleges the transfers occurred “on or around 1999”, and the maximum statute of limitations for a voidable transfer claim is seven years after transfer. The Court disagrees.

The statute of limitations for a voidable transfer claim is four years after the transfer was made or could reasonably have been discovered, and the statute of repose is seven years after transfer. (Civ. Code § 3439.09, subds. (a), (c).)

The Complaint alleges that within the two years immediately preceding the filing of their Complaint, Defendants conspired together to transfer the Jackson Artwork to Hespoke via an Art Agreement in order to avoid creditors. (Compl. ¶¶ 74-77.) This transfer is within the statute of limitations. Even if other alleged transfers may have occurred more than seven years ago, the Court cannot sustain a demurrer to part of a claim. Accordingly, the Court overrules the demurrer to the voidable transfer claim.

Defendants argue that there is no basis for an accounting because there were no actionable wrongs, and Plaintiffs have no interest in any monies received by Defendants as they do not constitute any compensable damages suffered by Plaintiffs. The Court agrees with the conclusion, but not the reasoning.

“A cause of action for accounting requires a showing that a relationship exists between the parties that require an accounting, and that some balance is due the plaintiff that can only be ascertained by an accounting. An action for accounting is not available where the plaintiff alleges the right to recover a sum certain or a sum that can be made certain by calculation.” (Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179.)

Here, Plaintiffs have alleged a right to recover a sum certain or a sum that can be made certain by calculation. There is no need for an accounting to determine what amounts are due Plaintiffs. Plaintiffs already know the amount that is due them. Rather, Plaintiffs seek an accounting to determine the nature of Defendants’ assets, which is not the purpose of an accounting. Accordingly, the Court sustains the demurrer to the accounting claim.

Financial Elder Abuse

Defendants argue that the financial elder abuse claim is time-barred and also no claim is stated against S. Strong and JSA. The Court disagrees.

The statute of limitations for a financial elder abuse claim is “four years after the plaintiff discovers or, through the exercise of reasonable diligence, should have discovered, the facts constituting the financial abuse.” (Cal. Welfare & Inst. Code § 15657.7.) Defendants argue that Mr. Orenberg’s elder abuse claim is time-barred because he discovered the loan was not repaid in 2017 and judgment was entered in 2019. But Plaintiffs’ claim is not simply premised on B. Strong’s failure to repay a loan and having a judgment entered against him. Rather, it is based on Defendants’ “conspiracy and shell game designed to hide assets ... prevent collection of the Judgment, and essentially steal [Mr. Orenberg’s] money.” (Compl. ¶115.)

Accordingly, the Court overrules the demurrer as to the financial elder abuse claim.

Cal. Penal Code §496

Defendants argue that Plaintiffs’ Cal. Penal Code §496 claim fails because this case does not involve stolen property; there are no allegations against S. Strong and JSA, and the claim is also time-barred. The Court agrees in part.

The statute of limitations on a claim under section 496 is three years. (People v. Grant (2003) 113 Cal.App.4th 579, 595.) The three-year statute of limitations is not deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud or mistake. (Code Civ. Proc. § 338.) Here, Plaintiffs allege they did not reasonably discover Defendants’ fraud until mid-2022. (Compl. ¶88.) Plaintiffs filed their complaint on May 28, 2024, well within the limitations period.

Defendants argue that the facts Plaintiffs allege do not support their § 496 claim because it only applies to property obtained by theft or extortion. (Motion at 8:8–9.) But “[e]very person … who shall knowingly and designedly, by any false or fraudulent representation or pretense, defraud any other person of money … is guilty of theft.” (Cal. Penal Code § 484 subd. a.) “Theft” includes theft by false pretense—i.e., the consensual but fraudulent acquisition of property (including money) from its owner. (Bell v. Feibush (2013) 212 Cal.App.4th 1041, 1049.)

The Complaint alleges that B. Strong induced Plaintiffs to loan him money and then again conspired to transfer assets, or misrepresent and conceal ownership of assets, in order to prevent Plaintiffs from being able to collect on their judgment. Thus, the Complaint adequately alleges that B. Strong, “by any false or fraudulent representation or pretense, defraud[ed Plaintiffs] of money,” and that B. Strong, knowing the money was so obtained, retained it. Accordingly, Plaintiffs adequately stated a claim under Penal Code § 496(c) against B. Strong.

However, as discussed above, Plaintiffs have not sufficiently alleged any fraudulent misrepresentations by S. Strong and JSA. There is no indication that either even had any contact with Plaintiffs. Accordingly, there is no basis to infer they obtained money from Plaintiffs by false pretense, and the Court sustains the demurrer on this claim as to S. Strong and JSA.

Defendants argue that declaratory relief is not available to Plaintiffs because they are complaining about past wrongs. The Court agrees.

“Declaratory relief operates prospectively, serving to set controversies at rest. If there is a controversy that calls for a declaration of rights, it is no objection that past wrongs are also to be redressed; but there is no basis for declaratory relief where only past wrongs are involved. Hence, where there is an accrued cause of action for an actual breach of contract or other wrongful act, declaratory relief may be denied.” (5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 869, p. 284, italics added.)

“The general purposes of declaratory relief inform the interpretation of Code Civ. Proc., §§ 1060 and 1061. The purpose of a declaratory judgment is to serve some practical end in quieting or stabilizing an uncertain or disputed jural relation. Another purpose is to liquidate doubts with respect to uncertainties or controversies which might otherwise result in subsequent litigation. One test of the right to institute proceedings for declaratory judgment is the necessity of present adjudication as a guide for the plaintiff's future conduct in order to preserve his or her legal rights.” (Osseous Technologies of America, Inc. v. DiscoveryOrthoPartners, LLC (2010) 191 Cal.App.4th 397, 364.)