Judge Elaine Lu, Case 22STCV34229 2023-02-28 Tentative Ruling

On October 24, 2022, Plaintiffs Elysian Health LLC (“Elysian”), Modern Management Solutions, Inc. (“MM”) and Zachary Ament (“Ament”) (collectively “Plaintiffs”) filed the instant breach of fiduciary action regarding the management of Elysian.

On November 3, 2022, Plaintiffs filed the operative First Amended Complaint (“FAC”) against Defendants Justin White, Applied Approach Services, Inc., Gerry Van Nortwick, Deena Manion, David Bifulco, and Priya Martindale (collectively “Defendants”). The FAC asserts twelve causes of action for (1) Breach of Fiduciary Duty, (2) Enforcing Manager/Member Rights and Inspection Rights, (3) Transfer of Ownership of Company Assets, (4) Challenging Election of Director, (5) Compel Payment of Lawfully Declared or Paid Dividends, (6) Appointment of Provisional Director, (7) Removal of Dishonest and Fraudulent Member and Director, (8) Accounting, (9) Declaratory Relief, (10) Reformation, (11) Cancellation of Instruments, and (12) Defamation.

On February 2, 2022, Defendants Justin White, Applied Approach Services, Inc., Deena Manion, David Bifulco, and Priya Martindale (collectively “Moving Defendants”) filed the instant demurrer to the complaint. On February 3, 2023, Defendant Gerry Van Nortwick filed a notice of joinder to the demurrer. On February 15, 2023, Plaintiffs filed an opposition. On February 21, 2023, Moving Defendants filed a reply.

Plaintiff Elysian is a member managed Limited Liability Company. (FAC ¶ 1.) Plaintiff MM is the manager of Elysian. (FAC ¶ 2.) Plaintiff Ament is the principle and shareholder of MM and the manager and member of Elysian. (FAC ¶ 3.) Plaintiff Ament through MM holds a 42% voting and equity interest in Elysian. (FAC ¶¶ 13-14.) “[A]s of the filing of this complaint, MM is the manager of ELYSIAN, and entitled to appoint two directors to the Board of ELYSIAN.” (FAC ¶ 17.)

Defendants Justin White (“White”) and Gerry Van Nortwick (“Nortwick”) are the other members of Elysian. (FAC ¶¶ 5-6, 20.)

Defendant Deena Manion (“Manion”) is a Licensed Clinical Social Worker who in January 29, 2020 entered into a contract with Plaintiff Elysian under “which MANION would be paid $20,000 per month and be privy to ELYSIAN’s private and confidential information, and dutybound to preserve the confidentiality of such information, as well as having access to ELYSIAN’s patients and finances, such that MANION owed fiduciary duties to ELYSIAN at all times relevant herein. MANION’s title at the time of hire was Chief Clinical Officer. In or about February 2022 MANION was promoted to Executive Director with a $3000.00 per month raise.” (FAC ¶ 8.)

Defendant David Bifulco (“Bifulco”) was “an employee of ELYSIAN serving in the position of Admissions Director since approximately April, 2018 whereby he would have control over and direct contact with patients of ELYSIAN, and had knowledge and authority to discuss finances with patients as well as assessing other factors for admitting them into ELYSIAN programs.” (FAC ¶ 9.) In February 2022, Bifulco was promoted to Chief Operating Officer. (FAC ¶ 9.) Defendant Priya Martindale (“Martindale”) was “an employee of ELYSIAN as Director of Operations and Human Resources since approximately June 2020 whereby she would have control over and direct contact with patients of ELYSIAN, and had knowledge and authority as to review company financials, approve payroll, oversee compliance, and handle all company files.” (FAC ¶ 10.)

“In or about 2020, WHITE began a campaign of attempting to usurp control and oversight of operations within EYLSIAN, under the manager’s authority, initially when Tiga Systems and Bradly Athens were managers, and later when MM became manager. As a result of the death of its CEO, WHITE became involved in day to day operations and handling some access to company databases, and convinced AMENT to have him acquire signature rights on ELYSIAN’s bank account. Over time, without AMENT’s knowledge, WHITE was controlling access to information and limiting others’ access to information within ELYSIAN.” (FAC ¶ 22.)

“Beginning in 2020 and continuing to the present, Plaintiffs, having learned on information and belief, allege that WHITE engaged in self-dealing, in converting ELYSIAN funds for his own purposes and for his company APPLIED. While WHITE and AMENT and Wells under MM were working and drawing salaries for work being performed by WHITE”s entity APPLIED and by MM, VAN NORTWICK was not drawing a salary. When Wells passed away, MM continued to perform the tasks previously being performed by Wells, yet WHITE surreptitiously convinced AMENT that such salary would be withdrawn requiring AMENT to take a lower combined salary than before. WHITE also claimed that his own salary should be increased, and purported to create improperly noticed meetings of the Board that would approve such increases.” (FAC ¶ 37.)

“On or about August 25, 2022, believing they had obtained control of ELYSIAN, WHITE and VAN NORTWICK orchestrated a plan of improperly denying AMENT and MM access to ELYSIAN’s offices, and access to all company emails, books, files, financials and bank accounts.” (FAC ¶ 39.)

“In or about 2022, ELYSIAN lost its very important certificate for in-patient Substance abuse with the California Department of Healthcare Services (‘DHCS’) because there was a patient death at one of its facilities, which as a result meant that the insurance providers that paid ELYSIAN would no longer pay for their patients enrolled in such services. ELYSIAN was advised by its regulatory counsel that the loss of the In-patient would not affect their outpatient services or certification, which proved to be false as Plaintiffs learned in or about August/September 2022.” (FAC ¶ 40.)

“Unbeknownst to AMENT at the time, WHITE and VAN NORTWICK had already initiated and committed themselves to a plan going forward which would jeopardize ELYSIAN’s existence and its’ ability to properly provide its services going forward, or to ever obtain a DHCS certificate in the future.” (FAC ¶ 43.) “WHITE acted contrary to the best interest of the company and planned to engage in unethical and illegal behavior to re-obtain a license against Plaintiffs approval. In doing so, WHITE also prevented Plaintiffs access to engage in any activities in its position as manager. This prevented Plaintiffs from being able to reconstruct the company’s business model and keep the company afloat after the loss of the license. Plaintiffs were then notified that the company was experiencing a 30-50% decrease in all revenue.” (FAC ¶ 44.)

“Plaintiff AMENT and MM tried to access ELYSIAN’s accounting database to assess the expenses and other matters in order to adjust to the new change by updating budgets, addressing changing needs to hiring, potential layoffs and salary adjustments, and tried to set up meetings with management and with staff to address necessary changes to ELYSIAN business model and programs after the September 30, 2022 loss of its certificate. However, WHITE resisted this inquiry and tried to prevent MM from conducting its duties as manager because WHITE did not want staff and other members of Elysian’s management team to know about the loss of the certificate, among other reasons.” (FAC ¶ 45.) “WHITE had restricted or removed AMENT and MM’s access to company documents, financials, including cutting off AMENT’s access to his own company email account. As a result, AMENT was unable to retrieve any of his past sent or received emails to any person, including to employees of ELYSIAN. WHITE also removed AMENT as a signatory from the company’s bank accounts and stopped his salary.” (FAC ¶ 46.)

“WHITE and VAN NORTWICK, recognizing that MM and AMENT’s actions would undermine their ulterior plans for their own benefit but to the detriment and potential destruction of ELYSIAN, then attempted to remove MM as manager of ELYSIAN, but did so improperly, and sent various notices and claims that were illegal, contradictory, and purported to conduct Board meetings improperly.” (FAC ¶ 47.) “On or about September 22, 2022, Plaintiffs’ counsel sent a letter to WHITE formally objecting to and disputing the improper actions taken in relation to ELYSIAN and MM.” (FAC ¶ 48.)

“Plaintiffs are informed and believe that defendants and each of them have started a competing business with that of ELYSIAN’s intending to divert ELYSIAN’s business, goodwill and operations to their competing business, by actually taking actions that would jeopardize ELYSIAN’s existence, while illegally maintaining a stream of income to ELYSIAN which they would divert through improper distributions and salary payments for themselves. Plaintiffs are further informed and believe that WHITE and VAN NORTWICK intended to form the competing business to apply to DHCS for a new certificate under their own names, and purporting to transfer ELYSIAN’s existing business and patients to the new business when the certificate was obtained, thereby depriving Plaintiffs of their ownership interest in ELYSIAN, and at the same time jeopardizing ELYSIAN’s future ability to conduct the same business, or preventing any of its members from ever obtaining DHCS certificates in the future.” (FAC ¶ 49.)

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. (Blank v. Kirwan (1985) 39 Cal 3d 311, 318.) No other extrinsic evidence can be considered (i.e., no “speaking demurrers”). (Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881.)

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal. App. 4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dep’t of Water & Power (2006) 144 Cal. App. 4th 1216, 1228.) 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 pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.” (SKF Farms v. Superior Ct. (1984) 153 Cal. App. 3d 902, 905.) “The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.” (Hahn, supra, 147 Cal.App.4th at 747.)

Code of Civil Procedure § 430.41, subdivision (a) 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.” The parties are to meet and confer at least five days before the date the responsive pleading is due and if they are unable to meet the demurring party shall be granted an automatic 30-day extension. (CCP § 430.41(a)(2).) The demurring party must also file and serve a declaration detailing the meet and confer efforts. (Id.¿at (a)(3).)¿ If an amended pleading is filed, the parties must meet and confer again before a demurrer may be filed to the amended pleading. (Id.¿at (a).)

Moving Defendants have satisfied the meet and confer requirement. (Burns Decl. ¶ 2.)

Defendants contend that the respective claims raised against them fail because Plaintiffs lack standing as to the first through eleventh causes of action.

Code of Civil Procedure § 367 provides that “[e]very action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute.” (CCP § 367.) “Only the real party in interest has ‘an actual and substantial interest in the subject matter of the action,’ and stands to be ‘benefited or injured’ by a judgment in the action.” (City of Santa Monica v. Stewart (2005) 126 Cal.App.4th 43, 60.)

“Shareholders may bring two types of actions, ‘a direct action filed by the shareholder individually (or on behalf of a class of shareholders to which he or she belongs) for injury to his or her interest as a shareholder,’ or a ‘derivative action filed on behalf of the corporation for injury to the corporation for which it has failed or refused to sue.’ [Citation.] ‘The two actions are mutually exclusive: i.e., the right of action and recovery belongs either to the shareholders (direct action) or to the corporation (derivative action).” [Citation.] When the claim is derivative, the ‘shareholder is merely a nominal plaintiff.... Even though the corporation is joined as a nominal defendant ..., it is the real party in interest to which any recovery usually belongs.’ [Citation.]” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311–312.) “Thus, ‘the action is derivative, I.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’” (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106.) However, “[a] single cause of action by a shareholder can give rise to derivative claims, individual claims, or both.” (Goles v. Sawhney (2016) 5 Cal.App.5th 1014, 1019 Fn.3.) Further, there is no requirement that the alleged wrong be unique to that Plaintiff and can affect any number of shareholders, rather “[i]f the injury is not incidential [sic] to an injury to the corporation, an individual cause of action exists.” (Jones, supra, 1 Cal.3d at p.107.)

“Because a corporation exists as a separate legal entity, the shareholders have no direct cause of action or right of recovery against those who have harmed it. The shareholders may, however, bring a derivative suit to enforce the corporation's rights and redress its injuries when the board of directors fails or refuses to do so.” (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108, [italics added].) Moreover, a shareholder cannot initiate a derivative suit without first informing the directors about the action and making a reasonable effort to induce them to commence suit themselves or otherwise redress the wrong, unless such efforts would be “useless” or “futile.” (Corp. Code, § 800(b)(2); Corp. Code, § 2900(d)(2).) A plaintiff must allege compliance. (Ibid.) “Failure to comply with the requirements of the statute deprives a litigant of standing.” (Nelson v. Anderson (1999) 72 Cal.App.4th 111, 127.)

Here, the Defendants contend that as to Plaintiff Elysian the first through eleventh causes of action fail because pursuant to the operating agreement, Elysian must have the board of directors vote to initiate an action. (FAC, Exh. 1 [Operating Agreement at § 4.4(o)].) As noted by the FAC, Plaintiff MM, Defendant White, and Defendant Nortwick are the members of Plaintiff Elysian. (FAC ¶ 20.) As conceded in the complaint, Plaintiff MM has only 42% voting membership in Elysian. (FAC ¶ 14.) As noted by the attached agreement, each member has only one vote and “all questions at a meeting of the Members will be decided by Members who hold a majority of the number of Class A Units represented at the meeting at the time of the vote.” (FAC, Exh. 1 at § 3.9(a).) Thus, under the operating agreement attached to the complaint Plaintiff Elysian cannot maintain a suit absent agreement of another member as Plaintiff MM only controls a minority of Elysian.

In opposition, Plaintiffs contend that only Plaintiff Ament could vote in favor of filing a suit and Defendants White and Nortwick were precluded from voting on whether or not to initiate the instant lawsuit. The Court disagrees.

The FAC and attached operating agreement clearly denote that for Elysian to initiate suit that a majority of the members Plaintiff MM[1], Defendant White, and Defendant Nortwick. (FAC ¶ 14, 20, Exh. 1 at §§ 3.9(a), 4.4(o).) The FAC does not allege compliance with this requirement. Moreover, the authority cited by Plaintiffs does not excuse non-compliance. Corporations Code section 310 provides that contracts between a corporation and one of its directors are neither void or voidable if certain procedures are followed or if fairness of the contract is proven. Similarly, Corporations Code section 1203 provides that written tender offers for sale of company assets or reorganization by an interested officer or director of the company requires a written opinion as to the fairness of the proposal to be delivered to the shareholders. (Corp. Code, § 1203(a).) None of the authority cited by Plaintiffs provide that Plaintiff can circumvent the requirements that a majority of the members including Plaintiff MM, Defendant White, and Defendant Nortwick must approve of a suit for Elysian to properly bring a lawsuit. Plaintiffs fail to cite any authority nor is the Court aware of such authority providing that members in a limited liability corporation cannot vote against a suit against them.

As to Plaintiffs MM and Ament, there is similarly no basis for standing alleged. As noted above, a derivative claim cannot be brought unless the company fails to do so. (Grosset, supra, 42 Cal.4th at p.1108.) Here, as Plaintiff Elysian is a party, no derivative action can be brought by Plaintiffs MM and Ament.

Accordingly, Defendants demurrer to the FAC as to standing as to Plaintiff Elysian is SUSTAINED. As to Plaintiffs MM and Ament it is unclear which causes of action state direct claims as the FAC is unclear as to which party is alleging each cause of action.

Defendants assert that the entire complaint fails because Plaintiffs fail to identify which Plaintiff’s are bringing which causes of action.

Pursuant to California Rules of Court, Rule 2.112, “[e]ach separately stated cause of action, count, or defense must specifically state: … [¶] (3) The party asserting it if more than one party is represented on the pleading (e.g., ‘by plaintiff Jones’)[.]” (Cal. Rules of Court, Rule 2.112(3).) “[F]ailure to comply with rule 2.112 presumably renders a complaint subject to a motion to strike (Code of Civ. Proc., § 436), or a special demurrer for uncertainty.” (Grappo v. McMills (2017) 11 Cal.App.5th 996, 1014.)

A special demurrer for uncertainty, Code of Civil Procedure §430.10(f), is disfavored and will only be sustained where the pleading is so bad that defendant cannot reasonably respond—i.e., cannot reasonably determine what issues must be admitted or denied, or what counts or claims are directed against him/her. (Khoury v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616.) Moreover, even if the pleading is somewhat vague, “ambiguities can be clarified under modern discovery procedures.” (Ibid.)

Here, the Court agrees that the complaint is uncertain because the first through eleventh causes of action fail to indicate which Plaintiffs are bringing each cause of action. As noted above, Plaintiffs MM and Ament cannot allege a derivative action while Plaintiff Elysian is a party. Thus, claims such as the first cause of action claiming that Defendants breach fiduciary duties to Elysian could only be brought by Elysian – unless the action is brought by MM solely as a derivative action. Given this confusion it is unclear what specific fiduciary duties and obligations Plaintiffs are referring to as to each defendant. This issue is exacerbated as there are numerous defendants which Plaintiff interchanges without distinction. For example, there are no substantive allegations against Defendant Applied Approach Services, Inc. such that it could reasonably determine what claims are asserted against it or what it needs to admit or deny. Similarly, as to Defendants Manion, Bifulco, and Martindale, there are no substantive allegations against them other than on information and belief Defendants Manion, Bifulco, and Martindale have with the other defendants started a competing business. (FAC ¶ 49.) However, there is no allegation to support this belief. (See Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550; [A “[p]laintiff may allege on information and belief any matters that are not within his personal knowledge, if he has information leading him to believe that the allegations are true.”].) Thus, the FAC is uncertain as to what specifically is being alleged by which specific Plaintiff against each specific Defendant.

Accordingly, Defendants demurrer to the first through eleventh causes of action is also sustained on this additional ground.

Defendants contend that the twelfth cause of action fails because Plaintiffs admit that the alleged defamation is true.

“Defamation ‘involves (a) a publication that is (b) false, (c) defamatory, and (d) unprivileged, and that (e) has a natural tendency to injure or that causes special damage.’ [Citation.]” (Price v. Operating Engineers Local Union No. 3 (2011) 195 Cal.App.4th 962, 970.) “Whether the challenged statement is reasonably susceptible of an interpretation which implies a provably false assertion of actual fact is a question of law.” (Morningstar, Inc. v. Superior Court (1994) 23 Cal.App.4th 676, 686–687.) “To ascertain whether the statements in question are provably false factual assertions, courts consider the ‘ “totality of the circumstances.” ’ [Citation.] ‘ “First, the language of the statement is examined. For words to be defamatory, they must be understood in a defamatory sense .... [¶] Next, the context in which the statement was made must be considered.... [¶] This contextual analysis demands that the courts look at the nature and full content of the communication and to the knowledge and understanding of the audience to whom the publication was directed.” ’ [Citations.]” (Seelig v. Infinity Broadcasting Corp. (2002) 97 Cal.App.4th 798, 809–810.)

Here, the FAC alleges that Defendant White on October 2, 2022 “made statements to Elysian vendors Samer Saah and Frank Groff in writing disparaging AMENT, including statements that AMENT had been fired from ELYSIAN and to ‘not engage or respond to any inquiries by text, phone, or emails by Zach Ament.’” (FAC ¶ 113.) Contrary to Defendants claim, the FAC does not allege or concede that Plaintiff Ament was fired. Rather, the FAC alleges that White and Nortwick improperly attempted to remove MM as manager. (FAC ¶ 47.)

Accordingly, Defendants’ demurrer to the twelfth cause of action is OVERRULED.

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. (Goodman v. Kennedy, supra, 18 Cal.3d at p.348; Lewis v. YouTube, LLC (2015) 244 Cal.App.4th 118, 226.)

As this is the first time that the Court has sustained a demurrer to Plaintiffs’ complaint, the Court finds it is proper to allow Plaintiffs an opportunity to cure the defects discussed in this order. Moreover, there is no reason to belief that Plaintiffs could not amend the complaint to properly state derivative claims by Plaintiff MM on behalf of Elysium. (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349; Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1037.)

Based on the forgoing, Defendant Justin White, Applied Approach Services, Inc., Gerry Van Nortwick, Deena Manion, David Bifulco, and Priya Martindale demurrer to the first amended complaint is SUSTAINED WITH LEAVE TO AMEND as to the first through eleventh causes of action and otherwise OVERRULED.

Plaintiffs are to file and serve an amended complaint with twenty (20) days of notice of this order.

Moving Parties are ordered to provide notice of this order and file proof of service of such.

[1] Plaintiffs are somewhat unclear on the ownership of the shares of Elysian and repeatedly allege that Ament is the member. However, the FAC Ament holds his ownership of Elysian through MM. (FAC ¶ 14.) Thus, the claim that Ament is a member is incorrect as a matter of law as MM is the member. To the extent that Ament is directly a member a future pleading must clearly and precisely specify exactly Ament’s membership in Elysian. If Ament solely has membership through MM, Ament is not a member, and such allegations will be disregarded as incorrect as a matter of law.

Superior Court of California

County of Los Angeles

Department 26