Judge: Elaine W. Mandel, Case: 19SMUD01085, Date: 2023-05-04 Tentative Ruling
Case Number: 19SMUD01085 Hearing Date: May 4, 2023 Dept: P
Tentative Ruling
SREG, LLC v. K
& K, LLC, Case No. 19SMUD01085
Hearing Date May 4,
2023
Defendants Kallberg’s
Demurrers & Motions to Strike Second Amended Complaint
Cross-Defendant
SREG’s Demurrer & Motion to Strike First Amended Cross-Complaint
Defendant K&K
and managers/members Kevin and Kenneth Kallberg leased property where they
operated a bar/grill. Plaintiff SREG, the property manager authorized by the
owner, alleges K&K failed to pay over $200,000 in rent and CAM charges and
that K&K transferred assets to prevent SREG from collecting the debt.
Defendants Kallberg demur and move to strike portions of the second amended
complaint (SAC).
K&K cross-complains,
alleging SREG retaliated for complaints about plumbing issues, manufactured
false breaches of contract and posted fraudulent demolition notices to force
K&K to give up their lease. SREG demurs and moves to strike portions of the
first amended cross-complaint.
Kallberg Demurrers
to Second Amended Complaint
Alter Ego
To pierce the
corporate veil and hold a business entity’s principals liable for the entity’s
debts, plaintiff must show there is such unity of interest and ownership that
separate personalities of the corporation and alleged alter ego no longer exist
and that if the acts are treated as the corporation’s alone, an inequitable
result will follow. Assoc. Vendors, Inc. v. Oakland Meat Co. (1962) 210
Cal.App.2d 825, 837. A court will sustain a demurrer based on alter ego
liability if the facts supporting the alter ego claim do not fulfill these
prongs. Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 74.
The Kallbergs’
liability is based on SREG’s allegation that they are K&K’s alter egos. The
Kallbergs argue SREG has not adequately alleged either alter ego prong.
The SAC alleges
the Kallbergs comingled funds with K&K, failed to maintain adequate
corporate records, disregarded corporate formalities, diverted K&K funds to
their own use, failed to adequately capitalize K&K and drained K&K of
corporate assets. SAC ¶7. These allegations, on demurrer, must be treated as
true and fulfill the first prong of the Assoc. Vendors test. The SAC
alleges the Kallbergs pilfered K&K’s bank account for their own benefit,
rendering K&K unable to cover its rental debts. SAC ¶35. This allegation,
if proven, would show the corporate form was used to sanction fraud, alleging
the second prong. OVERRULED.
Fraudulent
Transfer §3439.04
To prevail on a
claim under the Uniform Voidable Transaction Act, plaintiff must show the
transfer was made “[w]ith actual intent to hinder, delay, or defraud any
creditor of the debtor,” or “without receiving a reasonably equivalent value in
exchange for the transfer” knowing the transfer would leave the debtor with
unreasonably small assets or while intending to incur debts beyond the debtor’s
ability to pay. Civ. Code §3439.04(a)(1)-(2). Under the UFTA, certain transfers
are voidable “whether the creditor’s claim arose before or after the transfer
was made.” Potter v. Alliance United Ins. Co. (2019) 37 Cal.App.5th 894,
909.
Kallbergs allege
the SAC does not allege K&K was a debtor at the time of transfer, intended
to defraud a creditor when it transferred assets or that any transfer was made
without reasonably equivalent value. Kallbergs also the SAC fails to allege
damages.
The SAC alleges the
Kallbergs “distributed [K&K’s] single most valuable asset [the liquor
license] to one of their sons for less than fair value in order to render
Defendant K&K unable to pay its own debts.” SAC ¶35. This alleges an
exchange for less than reasonably equivalent value, stating a claim under Cal.
Civ. Code §3439.04. SREG need not allege the actual value of the liquor
license. The allegation that the transfer was made “for less than fair value”
is sufficiently specific for pleading purposes. It is immaterial that the
transfer was made before K&K became a debtor—the statute states a transfer
can be voidable if it was made “while intending to incur debts beyond the
debtor’s ability to pay,” i.e. before the debt is incurred. Regarding damages,
the SAC alleges K&K was left “unable to pay its debts, including those it
owes plaintiff” because of the alleged fraudulent transfers. SAC ¶39. This is sufficient.
OVERRULED.
Fraudulent Transfers
3439.05
The demurrer is
essentially the same as the demurrer to the 3439.04 claim and fails for the
same reason. SREG sufficiently alleges a transfer of K&K’s liquor license
for less than fair market value, causing K&K to become unable to pay its
debts. These allegations set forth the elements of fraudulent transfer. OVERRULED.
Motion to Strike
Defendants Bonus
Eventus and K&K file motions to strike identical to the Kallbergs’ motions,
and the ruling applies to all the motions.
Monetary Damages
The Kallbergs
argue the Uniform Voidable Transfers Act does not permit an award of monetary
damages, only allowing a recovery “for the value of the asset transferred.” To
support the argument that these damages are not recoverable under Cal. Civ.
Code §3439.08, the Kallbergs cite Forum Ins. Co. v. Devere, Ltd. (C.D.
Cal. 2001) 151 F.Supp.2d 1145, 1148. Forum is a federal case and not
binding. SREG cites Berger v. Varum (201) 35 Cal.App.5th
1013, 1019, which held the UVTA does not supplant common law fraudulent transfer
law, so monetary damages are recoverable. DENIED.
Injunctive Relief
The Kallbergs
argue the requested injunctive relief is improper, since SREG has not alleged
facts showing defendants are likely to engage in ongoing or recurring
wrongdoing. The UVTA allows a successful plaintiff to obtain injunctive relief
per Civ. Code §3439.07(a)(3)(A). DENIED.
Punitive Damages
The Kallbergs
argue punitive damages are not recoverable under the UVTA. Per Berger, a
plaintiff alleging fraudulent transfer can recover all damages are “required
under the circumstances.” This includes punitive damages. SREG adequately
alleged fraudulent conduct, so the request for punitive damages is appropriate.
DENIED.
SREG Demurrers to
First Amended Cross-Complaint
Intentional
Interference with Prospective Business Advantage
To recover for
interference with prospective economic relations, plaintiff must plead
defendant engaged in conduct wrongful by some legal measure other than the fact
of interference itself. Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995)
11 Cal.4th 376, 393.
SREG argues
K&K has not alleged any independently wrongful conduct in support of the interference
claim. SREG argues the claim is based on two acts: SREG seeking to audit K&K’s
books and posting a notice of application for demolition permit. SREG claims this
conduct was not wrongful because it was permitted by the lease and/or required
under Santa Monica municipal law.
The FACC alleges
notice of demolition was posted “when no demolition was going to occur,” and
SREG attempted to “manufactur[e] an alleged breach of contract when none
existed.” FACC at ¶21. While seeking to enforce a lease and/or posting a
demolition notice are not wrongful in a vacuum, K&K alleged context that,
if proven, would convert otherwise permissible acts into acts of fraudulent
misrepresentation. Additionally, even if the conduct was not wrongful, K&K’s
claim is also based on the allegation that SREG sent “people to
Cross-Complainant’s business to make spurious offers for the business[.]” FACC
¶21. The demurrer does not address this allegation and fails to show the FACC
does not allege wrongful conduct.
SREG argues
K&K’s causation allegations are contradicted by its answer, which states
COVID-19 and pandemic regulations caused its business to fail, not SREG’s interference.
The FACC alleges the business’ failure was caused by a combination of COVID
lockdowns and SREG’s alleged interference. FACC ¶19. The FACC does not
contradict any allegations in the answer. Causation and damages are adequately
alleged. OVERRULED.
Bad Faith
Retaliation
SREG argues there
is no cause of action for retaliatory eviction for commercial tenants. The
affirmative cause of action for retaliatory eviction, codified in Cal. Civ.
Code §1942.5, refers to “dwellings,” not commercial leases. K&K’s lease
with SREG was for operation of a business, so the retaliatory eviction statute
does not apply. SUSTAINED without leave to amend.
Motion to Strike
SREG moves to
strike punitive damages on the grounds that K&K has not sufficiently
alleged fraud, malice or oppression and failed to allege ratification of the
conduct by an officer, director or managing agent. The FACC alleges SREG posted
a false notice of demolition to harm the business, without intending to perform
demolition work. This allegation, if proven, constitutes fraudulent behavior
sufficient to support a claim for punitive damages. K&K’s opposition admits
the FACC does not allege ratification, which is required for a punitive damages
award against a corporation. GRANTED with ten days leave to amend.