Judge: Gregory Keosian, Case: 20STCV17040, Date: 2023-10-31 Tentative Ruling

Case Number: 20STCV17040    Hearing Date: March 18, 2024    Dept: 61

Defendants the November First Partnership, Scott Schwartz, and Patricia K. Schwartz’s Motion to Bifurcate is GRANTED. The equitable issues shall be tried prior to legal issues.

Plaintiff Ultimate Action, LLC’s Motion to Deem Matters Admitted against Defendant November First Partnership is DENIED as MOOT.

I.                MOTION TO BIFURCATE

 “The court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition and economy, may order a separate trial of any cause of action . . . or of any separate issue . . . .” (Code Civ. Proc., § 1048, subd. (b).) Additionally, “[t]he court may, when the convenience of witnesses, the ends of justice, or the economy and efficiency of handling the litigation would be promoted thereby, on motion of a party, after notice and hearing, make an order . . . that the trial of any issue or any part thereof shall precede the trial of any other issue or any part thereof in the case . . . .” (Code Civ. Proc., § 598.)

“It is within the discretion of the court to bifurcate issues or order separate trials of actions, such as for breach of contract and bad faith, and to determine the order in which those issues are to be decided.” (Royal Surplus Lines Ins. Co., Inc. v. Ranger Ins. Co. (2002) 100 Cal.App.4th 193, 205.) “The major objective of bifurcated trials is to expedite and simplify the presentation of evidence.” (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 888.)

Defendants The November First Partnership, Scott Schwartz, and Patricia Schwartz (Defendants) move to bifurcate trial in two respects. First, they seek a bifurcation of equitable and legal issues and separate bench and jury trials on the same. (Motion at p. 2.) Second, they seek a preliminary trial on the issue of Plaintiff Ultimate Action, LLC’s (Plaintiff) standing to bring derivative claims, on the grounds that another entity, The Bearbiz Irrevocable Trust (Bearbiz), acquired Plaintiff’s interest in 2011. (Motion at p. 2.) Defendants also argue that Plaintiff’s acquisition of Gerson Fox’s transferable interest in the underlying company through foreclosure on a charging order does not provide standing. (Motion at pp. 6–7.)

Defendants’ standing arguments fail. For one, its argument as to Bearbiz’s ownership interest is cursory and unsupported by evidence or any citation thereto. And the second argument neglects that a party with a beneficial interest in an LLC membership possesses standing to bring a derivative claim.

A plaintiff has standing to bring a derivative suit on behalf of an LLC when they are “a member, of record or beneficially,” of the LLC. (Corp. Code § 17709.02, subd. (a)(2), italics added) The use of “beneficial” language in a statute prescribing the standing requirements for derivative suits mimics the use of similar language in other standing contexts. (See Save the Plastic Bag Coalition v. City of Manhattan Beach (2011) 52 Cal.4th 155, 165 [holding that one “beneficially interested” in writ of mandate must have “some special interest to be served or some particular right to be preserved or protected over and above the interest held in common with the public at large”];  TracFone Wireless, Inc. v. County of Los Angeles (2008) 163 Cal.App.4th 1359, 1364 [“In general, one who is beneficially interested in the outcome of a controversy has standing to sue. . .. Beneficial interest means a personal interest in the outcome.”].)

Similar language in Corporations Code § 800, applicable to shareholder derivative suits against corporations, has been interpreted in a manner favorable to Plaintiff here. That statute allows derivative suits by “a shareholder, of record or beneficially,” in the corporation at issue. (Corp. Code § 800, subd. (b)(1).)  The court in Pearce v. Superior Court (1983) 149 Cal.App.3d 1058, 1068, held that “the law merely requires that plaintiff was the owner of a shareholder's beneficial interest in the corporation when the alleged transactions took place.” The court cited Black’s Law Dictionary, defining “beneficial interest” to mean “Profit, benefit, or advantage resulting from a contract or the ownership of an estate as distinct from the legal ownership or control.” (Id. at p. 1063.) The court held that the income and contingent beneficiary of a trust, which held corporate stock, could thus bring a derivative suit under that statute. Although the defendants had argued that the trust beneficiary “has a relatively insignificant status which in no way approaches the equivalent of full ownership, whether legal or equitable,” the court rejected this argument, reasoning that “plaintiff is a recipient of substantial income which depends upon the well-being of the corporation.” (Id. at p. 1066.)

Defendants present no authority holding that the owner of a member’s transferable interest in the distributions of an LLC lacks standing to bring a derivative suit. They argue that the charging order only creates a lien on the membership interest, not a membership interest in itself. This much is correct: “A charging order constitutes a lien on a judgment debtor's transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.” (Corp. Code § 17705.03, subd. (a).) But Defendants’ argument does not proceed beyond this point. Defendants don’t explain why Plaintiff’s right to all membership distributions otherwise payable to the underlying member does not create a beneficial interest in that member’s membership interest, arising from Plaintiff’s right to receive “substantial income which depends upon the well-being of the corporation,” and which is directly tied to the transferable interest the plaintiff holds in the LLC.

Defendants in reply analogize Plaintiff’s situation to that of a member’s creditor. (Reply at p. 8.) But this comparison is inapposite. A member’s creditor has the right to collect a certain sum from the member, with only an indirect interest in the member’s LLC interest; the owner of that member’s transferable interest has a direct claim to the distributions from the LLC to be made to that member. Plaintiff may thus claim standing through its purchase of the transferable interest.

Defendants’ request with regard to the bifurcation of legal and equitable issues is difficult to decipher. Their notice of motion seeks trial of equitable issues before legal issues, and their authorities favor this proposition. (Motion at pp. 1, 4–5.) But Defendants then appear to seek court trial on equitable issues “after a jury trial on [Plaintiff’s] legal claims,” both in the body of their motion and their conclusion. (Motion at pp. 5, 7–8.) Framed thusly, Plaintiff expresses agreement. (Opposition at p. 13.) But Defendants in reply shift tack, and seek bench trial of equitable issues — now including all claims but Plaintiff’s cause of action for breach of contract — before any trial on Plaintiff’s remaining legal claims.

However, strangely requested, the law favors this latter approach. The ordinary rule of bifurcation favors bench trial of equitable matters before jury trial on legal matters, as Defendants note in their motion and reply.

The order of trial, in mixed actions with equitable and legal issues, has great significance because the first factfinder may bind the second when determining factual issues common to the equitable and legal issues. It is well-established in California jurisprudence that the court may decide the equitable issues first, and this decision may result in factual and legal findings that effectively dispose of the legal claims. This District Court of Appeal has observed that the “better practice” is for “the trial court [to] determine the equitable issues before submitting the legal ones to the jury. The historical reason for this procedure, at least as concerns equitable defenses, is that the same order of trial was observed when there were separate law and equity courts: If a defendant at law had an equitable defense, he resorted to a bill in equity to enjoin the suit at law, until he could make his equitable defense effective by a hearing before the chancellor. The practical reason for this procedure is that the trial of the equitable issues may dispense with the legal issues and end the case. In short, trial of equitable issues first may promote judicial economy.

(Hoopes v. Dolan (2008) 168 Cal.App.4th 146, 156–157, internal quotations, alterations and citations omitted.) The ordinary rule is thus that the bench trial of equity issues precedes jury trial of legal ones. Corporate derivative suits are equitable in nature and therefore not subject to the right of jury trial. (See Caira v. Offner (2005) 126 Cal.App.4th 12, 39 [“California entertains no right to jury trial in stockholders' derivative actions.”].) Of Plaintiff’s 13 causes of action, the first cause of action for partition, the tenth cause of action for breach of contract, and the twelfth cause of action for declaratory relief, are the only ones not brought derivatively. And of these three, the claims for partition and declaratory relief are equitable in nature. (See Cummings v. Dessel (2017) 13 Cal.App.5th 589, 596–597 [partition is “an equitable proceeding”]; Artus v. Gramercy Towers Condominium Assn. (2018) 19 Cal.App.5th 923, 930 [“declaratory relief is an equitable remedy”].) Thus all but one of Plaintiff’s claims are equitable in nature. Per the ordinary equity-first rule, bifurcation of these claims is properly made, with bench trial on equitable claims to precede jury trial on Plaintiff’s remaining legal claims.

The motion to bifurcate is GRANTED with respect to the separate trial of equitable and legal issues, with bench trial to take place on Plaintiff’s equitable claims before a jury trial on Plaintiff’s remaining legal claims. The motion is DENIED as to Plaintiff’s standing..

II.             MOTION TO DEEM ADMITTED

“Any party may obtain discovery . . . by a written request that any other party to the action admit the genuineness of specified documents, or the truth of specified matters of fact, opinion relating to fact, or application of law to fact. A request for admission may relate to a matter that is in controversy between the parties.” (Code Civ. Proc., § 2033.010.) If a party fails to serve a timely response to requests for admissions, “[t]he requesting party may move for an order that the genuineness of any documents and the truth of any matters specified in the requests be deemed admitted, as well as for a monetary sanction” (Code Civ. Proc., § 2033.280 subd. (b).)

A party who fails to timely respond to requests for admission waives all objections to the requests. (Code Civ. Proc. § 2033.280, subd. (a).)

Plaintiff served requests for admission on Defendant November First Partnership on January 23, 2024, with responses due by February 26, 2024. (White Decl. ¶ 2.) Defendant has not served responses. (White Decl. ¶ 3.)

Defendant in opposition claims to have served responses to all 22 sets of discovery served upon it on January 23, 2024, but inadvertently omitted the responses to requests for admission at issue here. (Shaeffer Decl. ¶¶ 2–3.) Responses were served on February 27, 2024, the day the motion was filed. (Shaeffer Decl. ¶ 5, Exh. 2.) These responses include both objections and denials.

The motion is DENIED as moot, as responses were served the day the motion was filed. Although Plaintiff seeks $2,760.00 in sanctions, no such sanctions are awarded, as the motion is opposed with substantial justification. (Motion at p. 4.)