Judge: H. Jay Ford, III, Case: 21SMCV00361, Date: 2022-09-29 Tentative Ruling

Case Number: 21SMCV00361    Hearing Date: September 29, 2022    Dept: O

Case Name:  Stevens v. Manchengo LLC, et al.

SUBJECT:                 MOTION FOR SUMMARY ADJUDICATION (CONTINUED FROM 8-4-22)

MOVING PARTY:   Defendants/Cross-Complainants Manchengo, LLC and Arcade Edit New York, LLC

RESP. PARTY:         Plaintiff Damian Stevens

TENTATIVE RULING

            The Court’s prior tentative ruling of August 4, 2022, is withdrawn in its entirety.

            Defendants/Cross-Complainants Manchengo, LLC and Arcade Edit New York, LLC’s Motion for Summary Adjudication is DENIED, in its entirety.

            Defendants/Cross-Complainants’ Notice of Motion moves to adjudicate the following causes of action for adjudication from the First Amended Complaint (FAC) (1) the 1^st cause of action for breach of written contract; (2) the 4^th cause of action for declaratory relief; (3) the 5^th cause of action for reformation in the FAC.  Defendants/Cross-Complainants also moves to adjudicate the following causes of action from the Cross-Complainant (1) the 1^st cause of action for breach of contract; and (2) the 4^th cause of action for declaratory relief. 

I.  Defendants fail to properly request adjudication of a specific issue of duty, nor do they establish that adjudication would result in full disposition of any cause of action

            Defendants’ Notice of Motion does not identify any issue of duty for adjudication.  However, Defendants argue that the existence or nonexistence of Defendants’ duty to pay book value for Plaintiff’s interest is dispositive of these claims.

            As Plaintiff correctly points out, resolution of whether §11.8 applies to Plaintiff Stevens’ departure would not fully adjudicate the 1^st, 4^th or 5^th causes of action in the FAC.  Plaintiff Stevens alleges several breaches of the Operating Agreement, including his termination without cause.  See FAC, ¶¶92(A), 115.  Adjudication of a cause of action is only permitted if it fully disposes of the cause of action.  See Motion, 8:10-17 (issue of duty “critical part” or FAC’s 1^st, 4^th and 5^th causes of action and Cross-Complaint’s 1^st and 4^th causes of action); CCP §437c(f)(1). 

            Similarly, Entity Defendants’ cross-complaint alleges numerous different breaches against Plaintiff.  Adjudication of whether Plaintiff breached §11.8 of the Manchengo Operating Agreement would only resolve one of the numerous breaches of the Operating Agreement alleged against Plaintiff.  Adjudication would not result in complete disposition of the 1^st or 4^th causes of action in the cross-complaint, nor do Defendants maintain that it would.  See Motion, 8:10-17 (issue of duty “critical part” or FAC’s 1^st, 4^th and 5^th causes of action and Cross-Complaint’s 1^st and 4^th causes of action); CCP §437c(f)(1). 

However, Defendants argue adjudication of the duty to pay “book value” under §11.8 would fully resolve an issue of contractual duty, which is permitted under CCP §437c(f)(1).  See Linden Partners v. Wilshire Linden Associates (1998) 62 Cal.App.4th 508, 522; Reply, 3:4-7.  Defendants’ request to adjudicate this issue of duty must be denied for both procedural and substantive reasons. 

Procedurally, the Notice of Motion does not identify this specific issue of duty for adjudication.  The Notice of Motion does not reference “duty” at all.  The Notice is intended to serve an important purpose—to notify all parties and the Court  of the specific issues to be determined. 

The failure to clearly identify this specific issue of duty for adjudication renders the Notice defective, and Defendants are not entitled to adjudication of an issue not identified in the Notice of Motion.  Defendants separate statement also fails to “repeat verbatim” the specific issue of duty to be adjudicated.  “If summary adjudication is sought, whether separately or as an alternative to the motion for summary judgment, the specific…issues of duty must be clearly stated in the notice of motion and be repeated, verbatim, in the separate statement of undisputed material facts.” CRC Rule 3.1350(b). 

Defendants argue the Court advised it to obtain a stipulation under CCP §437c(t) from Plaintiff to adjudicate the issue of whether it had a duty to pay Plaintiff book value or market value.  CCP §437c(t) requires that any such stipulation satisfy specific criteria, including that it be in writing, that the specific issue to be adjudicated be identified and that the stipulation be filed before bringing a motion for summary adjudication.  Plaintiff never signed such a stipulation, nor was such a stipulation ever filed with the Court.  The requirements of CCP §437c(t) may not be disregarded.  Plaintiff’s decision not to follow through with the stipulation does not change the fact that CCP §437c(t)’s requirements have not been satisfied. 

II.  Defendants fail to establish that Defendants’ contractual duty under the Machengo Operating Agreement is to pay book value for Plaintiff’s membership interest

Substantively, triable issues of fact remain as to the existence of Defendants’ contractual duty to pay book value or FMV to Plaintiff for his membership interest.  Plaintiff  has never maintained that §11.8 requires payment of FMV, not book value.  See FAC, ¶92(B).  Instead, Plaintiff’s argues §11.8’s book value calculation is inapplicable to him because he was terminated without cause.  Plaintiff’s position is that his situation (termination without cause) is not covered by the Operating Agreement, because termination without cause is not allowed under that agreement.  See FAC, ¶92(A).

A. Defendants fail to cite to any portion of the Operating Agreement supporting their position that they are only obligated to pay book value to Plaintiff if Plaintiff was forced out or terminated without cause

The language of ¶11.8 is undisputed:  “Upon the occurrence of any event which gives rise to an Option pursuant to this Article 11 (or pursuant to any other provision in this Agreement), Company shall have the option to purchase the Membership Interest of the Selling Member at an amount equal to the product of (A) the ‘Book Value’ of the Company…and (B) the Selling Member’s Percentage Interest.”  See Defendants’ SSUMF No. 14; Plaintiff’s Response to SSUMF No. 14; Dec. of K. Bica, Ex. 2, Second Amendment, ¶11.8. 

Defendants interpret this provision to mean that book value applies to any member who “departs” Manchengo, regardless of how or why that member departed.  Defendants fail to cite to any provision of the Operating Agreement that would support this interpretation of “Upon the occurrence of any event which gives rise to an Option pursuant to this Article 11…” 

The only section cited by Defendants that gives rise to an “Option” to purchase is ¶3.7(b) of the Operating Agreement, which states, “A member may voluntarily withdraw, resign, or retire from [Manchego] at any time, upon two (2) months prior written notice to [Manchengo] and the Managing Member…In the event of such voluntary withdrawal, retirement, or resignation, the withdrawing, retiring or resigning Member…as the case may be, shall be deemed to grant [Manchego] an Option, exercisable in accordance with provisions of paragraph 11.7 et seq…”  Based on ¶3.7(b)’s language, it does not apply to terminations without cause or involuntary withdrawals. 

Defendants also cite to ¶11.7 of the Operating Agreement to support their theory that Plaintiff’s termination or withdrawal triggered an Option to purchase for book value under ¶11.8.  However, ¶11.7 does not create an “Option” to purchase; it merely sets forth the procedure for Manchengo to exercise the option:  “The Company may exercise the Option to purchase all, but not less than all, of the Membership Interests of the Selling Member, by delivering, during the Option Period, written notice of the Company's intent to exercise the Option.” 

Defendants cite to the deposition of Paul Kelley, but Kelley’s cited testimony does not support Defendants’ interpretation.  Kelly testified that he did not know whether a member only gets book value if they voluntarily resigned.  See Defendants’ SSUMF No. 23; Dec. of J. Reitman, ¶2, Ex. 1, Dep. P. Kelley, 112:6-19.  In fact, Kelley testified, “I think we would have to rely on the text of the agreement.” Id. 

Defendants fail to identify any text in the agreement that supports their interpretation of ¶11.8 as applying to the “departure” of a member, regardless of whether it was voluntary or termination without cause.  Defendants therefore fail to establish as an issue of law that Plaintiff had a duty to sell his membership interest to them for “book value” or that their duty was to pay “book value” to him upon his departure, regardless of whether the departure was a termination without cause and involuntary. 

B.  Defendants fail to identify any statutory basis for their claim that they are only required to pay “book value” under the Manchengo Operating Agreement

Defendants argue that even if ¶11.8 only applied to voluntary departures, Plaintiff is still only entitled to book value under “default rules” governing “dissociation” under the Corporations Code.  Defendants fail to establish that Plaintiff’s departure qualifies as a “dissociation” under Corporations Code §17706.02(e)(3).  “Dissociation” under Corp. C. §17706.02(e)(3) occurs when “on application by the limited liability company the person is expelled as a member by judicial order…”  Corporations Code §17706.02(e)(3).  Defendants submit no evidence that any such judicial order was ever obtained, nor do they maintain that Plaintiff was legally “dissociated” in this way. 

On reply, Defendants argue that in order to terminate Stevens without a specific clause in the Operating Agreement, it would have to avail itself of Corporations Code §17706.02(e)(3).  Defendants did not avail themselves of Corporations Code §17706.02(e)(3), which they admit would be the only way they could legally terminate Stevens without cause outside of the Operating Agreement.  Manchengo also admits that it lacked the power to terminate Stevens without cause.  See Reply, 4:6-7.  Based on these admissions, Manchengo (1) did not have the contractual right to terminate Stevens without cause under the Operating Agreement and (2) it did not pursue the only route to legally terminate him outside of a contractual right.   Instead, as alleged by Plaintiff, if Plaintiff was terminated without cause, that termination breached the operating agreement.

C.  Defendants fail to establish that Plaintiff’s interpretation of the Operating Agreement is unreasonable

Defendants argue that it is unreasonable to interpret the Operating Agreement as requiring payment of FMV.  Defendants’ argument misstates Plaintiff’s basis for seeking FMV.  Plaintiff does not allege that he is entitled to FMV under any specific provision of the Operating Agreement.  Plaintiff’s claim to FMV for his membership interest is based on “benefit of the bargain” damages under Civil Code §3300.  Plaintiff claims the Operating Agreement does not address how to pay out a member’s interest in the event of termination without cause, because terminating a member without cause was not allowed thereunder.  Defendants do not challenge the premise that termination of a member without cause is not allowed under the Operating Agreement, or that the Operating Agreement is silent as to what a member who is terminated without cause should be paid for that member’s membership interest. 

D.  Defendants do not negate Plaintiff’s allegation that he was terminated without cause or that he was involuntarily forced to resign or withdraw

Defendants did not argue or offer any evidence challenging Plaintiff’s allegation that he was terminated without cause.  There are therefore also triable issues of material fact remaining as to whether Plaintiff was terminated without cause. 

III.    Defendants fail to establish that there is no mistake requiring reformation of terms of  §11.8.

Alternatively, Plaintiff seeks reformation of §11.8 based on alleged mutual or unilateral mistake over the scope of §11.8.  Plaintiff alleges the use of book value under §11.8 was only intended to apply where (1) a member was terminated with cause under §11.5 of the Operating Agreement or (2) where a member requested reduced work hours. 

Civil Code Section 3399 provides: “When, through fraud or a mutual mistake of the parties, or a mistake of one party, which the other at the time knew or suspected, a written contract does not truly express the intention of the parties, it may be revised on the application of a party aggrieved, so as to express that intention.”

Defendants argue Plaintiff never identified any evidence or basis during discovery for his claim that Defendants were mistaken or knew or or suspected a mistake in the Second Amendment to the Operating Agreement.  However, a potential mutual mistake is established by Defendants’ own evidence and argument in support of this motion for summary adjudication.  Defendants argue that §11.8 applies to any departures of a member, regardless of whether the departure was involuntary or due to termination without cause.  As discussed above, the language of §11.8 does not support this interpretation.  Regardless of Plaintiff’s additional arguments in support of the claimed mistake, Defendants fail to negate any element of the reformation claim, or show Plaintiff cannot establish any element of that claim.