Judge: H. Jay Ford, III, Case: 22TRC00482, Date: 2024-06-04 Tentative Ruling

Case Number: 22TRC00482    Hearing Date: June 4, 2024    Dept: O

Case Name:               N/S Corporation v. G. Thomas Ennis, et al.

SUBJECT:                Motion for Preliminary Injunction

MOVING PARTY:   Plaintiff N/S Corporation (“Plaintiff”)

RESP. PARTY:         Defendants G. Thomas Ennis, individually and as trustee of the G. Thomas Ennis Living Trust Dated July 1, 1992, and Green Forest Car Wash (“Defendants”)

TENTATIVE RULING

            Plaintiff N/S Corporation’s Motion for Preliminary Injunction is GRANTED. The preliminary injunction shall be issued once Plaintiff posts a bond in the amount of $59,000 with the Court.

Judicial Notice

            On March 25, 2024, Plaintiff filed its request for judicial notice. It requests the Court to take judicial notice of the following documents: (1) Declaration of G. Thomas Ennis In Support of Defendants’ Motion to Expunge Lis Pendens filed in this action on August 18, 2022; (2) Supplemental Declaration of G. Thomas Ennis In Support of Defendants’ Reply In Support of Motion to Expunge Lis Pendens filed in this action on September 26, 2022; and (3) May 30, 2023 Minute Order of the Honorable David K. Reinert issued in this action. Pursuant to Evidence Code § 452(d), this request is granted.

            On May 3, 2024, Defendants filed their own request for judicial notice. They request the Court to take judicial notice of the following documents: (1) Plaintiff’s initial complaint filed in this action on June 17, 2022; (2) Declaration of Tiffany Altschul In Support of Cross-Defendants’ Motion for Sanctions filed in this action on November 7, 2022; and (3) the Agreement for Purchase and Sale of Stock and Exchange of Real Estate which was attached as Exhibit H to the Declaration of G. Thomas Ennis In Support of Motion to Expunge Lis Pendens. This request is also granted pursuant to Evidence Code § 452(d).

            On May 9, 2024, Plaintiff filed a supplemental request for judicial notice of the following documents: (1) Defendants G. Thomas Ennis and TGE Properties, LLC’s Answer to Plaintiff N/S Corporation’s Complaint filed in this action on August 26, 2022; (2) Defendants G. Thomas Ennis and TGE Properties, LLC’s Notice of Motion and Motion to Expunge Lis Pendens, Or, in the Alternative, Require An Undertaking filed in this action on August 18, 2022; and (3) Ex Parte Application to Continue Hearing on Plaintiff’s Motion for Preliminary Injunction filed in this action on November 16, 2023. This supplemental request is granted pursuant to Evidence Code § 452(d).

REASONING

            Plaintiff requests the Court impose a constructive trust on all of the rental income Defendants have received from the lessee of the real property located at 1000 Pacific Coast Highway, Hermosa Beach, California, and require Defendants and their agents to deposit the rent into one of Green Forest Car Wash’s Wells Fargo bank accounts and to maintain the rental income in those accounts during the pendency of this action. (See Notice of Motion at pg. 2.)

A.              A Preliminary Injunction in the Form of Ordering A Constructive Trust is an Appropriate Remedy.

            Defendants argue that the requested relief is not appropriate under the circumstances because Plaintiff is unable to trace its own funds used by Ennis in purchasing the Hermosa Beach property. (Opposition at pg. 17.) They also argue that Plaintiff seeks inconsistent and mutually exclusive remedies by way of its fiduciary duty claim in that Plaintiff wants to rescind the sale and keep the money paid by Ennis. (Id. at pp. 17-18.) However, this argument is not persuasive. The imposition of a constructive trust is an appropriate remedy where a breach of fiduciary duty has occurred. (Hicks v. Clayton (1977) 67 Cal.App.3d 251, 264.) Because Plaintiff contends that the transaction is void, it would follow that Ennis has been unjustly enriched by any rental income that he has received. (Meister v. Mensinger (2014) 230 Cal. App. 4th 381, 399.) Therefore, because Plaintiff seeks to curtail Ennis’ unjust enrichment by requiring him to preserve any monthly income from the Hermosa Beach property in a bank account belonging to Green Forest Car Wash, LLC during the pendency of litigation, the requested relief is appropriate under the circumstances.

            Defendants also argue that the requested preliminary injunction is not appropriate because it would not preserve the status quo because it would prevent Ennis from obtaining rental income from the Hermosa Beach property lessee. (Opposition at pg. 13.)  The rent for this property was originally paid to Green Forest Car Wash, LLC, and it was not until December 2022 that Ennis directed the lessee to pay him directly. (Motion, McKenna Decl. ¶ 3.) Also, the 1031 property exchange was made in connection with Green Forest Car Wash, LLC and not directly in Ennis’ name. (Motion, Eskandani Decl. ¶¶ 5-6, Exh. D.) Thus, in order to preserve the status quo, it is appropriate that any rental income from the Hermosa Beach property is maintained and preserved in a bank account belonging to Green Forest Car Wash, LLC.

B.              Whether Plaintiff has Been Unreasonably Dilatory in Seeking Preliminary Injunctive Relief and Whether the Doctrine of Laches Bars the Relief Sought.

            Defendants contend that Plaintiff has waited too long in seeking injunctive relief because the transaction involving the Hermosa Beach property occurred in 2018, and Ennis was no longer a majority shareholder by December 2020. (Opposition at pp. 12-13.) However, Defendants point out that the issue presented by the instant motion was not even considered until a year after this action had commenced. (Id. at pg. 13.) Additionally, Defendants argue that the doctrine of laches bars Plaintiff’s ability to invalidate the transaction because of this delay, and thus, they reason Plaintiff is unable to establish a likelihood of success of the merits of its breach of contract claim. (Opposition at pg. 16.)

            "Long delays in assertion of rights can be the basis of denial of mandatory injunctive relief.” (170 Lusk v. Krejci (1960) 187 Cal.App.2d 553, 556 “There is no artificial rule as to the lapse of time or circumstances which will justify the application of the doctrine of laches, and each case as it arises must necessarily be determined by its own circumstances.” (Marsh v. Lott (1909), 156 Cal. 643, 647.)

            Based on the factual circumstances of this case, the motion is not defective due to delay or barred by the doctrine of laches.  It is undisputed that Ennis maintained majority control over Plaintiff until December 2020. Moreover, Ennis has admitted that, even after gifting his majority shares to his daughter Tiffany Alschul, he remained as Plaintiff’s CEO and sole director. (RJN Exh. A at ¶ 23.)  Thus, because the corporation and the board of directors was under the domination of Ennis, Plaintiff was in “the same position as an incompetent person or a minor without legal capacity either to know or to act in relation” to the harm committed against it. (Beal v. Smith (1920) 46 Cal. App. 271, 279.) Moreover, the parties attempted to mediate their disputes in early 2022, and even after the commencement of this action, the parties have had attempted two more times to settle their disputes. (C. Altschul Decl. ¶ 17; Suppl. C. Altschul Decl. ¶ 5; Suppl. T. Altschul Decl. ¶ 10.) For this reason, the delay in seeking the requested relief should not be held against Plaintiff. (Youngblood v. Wilcox (1989) 207 Cal. App. 3d 1368, 1376.)

            Accordingly, Plaintiff’s requested relief is not foreclosed by unreasonable delay or the doctrine of laches.

C.              Whether Plaintiff has Established a Likelihood of Success on its Breach of Fiduciary Duty Claim

            To prevail on a cause of action for breach of fiduciary duty, a plaintiff must establish the existence of a fiduciary duty owed to that plaintiff, a breach of that duty and resulting damage. (Pellegrini v. Weiss (2008) 165 Cal.App.4th 515, 524.) A fiduciary duty is founded upon a special relationship imposed by law or under circumstances in which “confidence is reposed by persons in the integrity of others” who voluntarily accept the confidence. (Tri-Growth Centre City, Ltd. v. Silldorf, Burdman, Duignan & Eisenberg (1989) 216 Cal.App.3d 1139, 1150; see Zumbrun v. Univ. of So. Cal. (1972) 25 Cal.App.3d 1, 13.)

                                     i.          Existence of a Fiduciary Duty

            Here, Plaintiff has met its burden in establishing that Ennis owed Plaintiff a fiduciary duty. In particular, Plaintiff has presented facts Ennis was the majority owner of the company, exercised total control over it, and continued to hold the position of Chief Executive Officer and serve as director within the company until May 2022. (RJN, Exh. A, Ennis Decl. ¶¶ 6-8, 23; C. Altschul Decl. ¶ 2, 5, 16.) Notably, Defendants do not contest this issue.

                                   ii.          Breach of Duty

            Plaintiff argues that Ennis breached its fiduciary duty by entering into a purportedly self-interested transaction regarding the Hermosa Beach property for less than fair market value. (Motion at pp. 13-17.)

            “[Corporations Code] Section 310 governs situations where a matter before a board of directors is one in which a director has an interest. Section 310(a) provides that a vote on the matter is not void or voidable because the interested director is present at the board meeting if one of three alternatives are satisfied.” (Sammis v. Stafford (1996) 48 Cal.App.4th 1935, 1941.) These alternatives include:

(1) The material facts as to the transaction and as to such director’s interest are fully disclosed or known to the shareholders and such contract or transaction is approved by the shareholders (Section 153) in good faith, with the shares owned by the interested director or directors not being entitled to vote thereon, or

(2) The material facts as to the transaction and as to such director’s interest are fully disclosed or known to the board or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified, or

(3) As to contracts or transactions not approved as provided in paragraph (1) or (2) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.

(Corps. Code § 310(a)(1)-(3).)

            Here, Plaintiff has provided evidence wherein Ennis concedes that the aforementioned transaction was self-interested. (Motion, RJN, Exh. A, Ennis Decl. ¶ 22.) “Once it is shown a director received a personal benefit from the transaction, … the burden shifts to the director to demonstrate not only the transaction was entered in good faith, but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.” (Heckmann v. Ahmanson (1985) 168 Cal. App. 3d 119, 128.)

            Plaintiff argues that Ennis is unable to meet this burden because the transaction was not just or reasonable to the company. In support of this argument, Plaintiff relies on the following evidence. Initially, it was indicated that Ennis would purchase the Hermosa Beach property for $4.1 million as part of his Section 1031 tax deferred exchange for a separate property that he had sold. (Eskandani Decl. ¶ 5, Exh. D.) However, because only sale of the building could qualify for the Section 1031 exchange, the sale price decreased to $2.6 million. (Id.at ¶ 6.) Both of these figures are lower than the $6 million Ennis had demanded from a third-party buyer for the Hermosa Beach property in July 2017, which was based on a appraisal of $7 million. (C. Altschul Decl. ¶¶ 6-8, Exh. A-B; T. Altschul Decl. ¶ 17, Exh. B.) Following this transaction, Ennis directed the proceeds to finance a personal settlement he had reached with his son, wherein he agreed to purchase his son’s share of the company for $3 million. (Ong Decl. ¶¶ 4-6, Exh. A at ¶ 2.1; T. Altschul Decl. ¶ 18, Exh. C.) Once Ennis’ son received his settlement payment, he in turn paid Ennis $3.1 million pursuant to the same agreement. (Ong. Decl, Exh. A at ¶¶ 3.1 & 4.1.) Thus, Plaintiff asserts that Ennis was able to walk away with the Hermosa Beach property and its rental income as well as the $2.6 million he paid to Plaintiff and $40,000 of Plaintiff’s funds. (Ong. Decl. ¶ 6; C. Altschul Decl. ¶15.) Ennis failed to seek the approval of the company’s board or minority shareholders to conduct these string of transactions. (C. Altschul Decl. ¶ 16.)

            In opposition, Defendants argue that the transaction pertaining to the purchase of the Hermosa Beach property was not voidable for the following reasons. First, Defendants contend that the company’s shareholders approved of the transaction. (Opposition at pp. 14-15.) In support of this contention, Defendants rely on the declarations of Ennis’s daughter, Savannah Ennis, and son, Thomas G. Ennis. Defendants assert that each of them was a disinterested shareholder. (Ibid.) Upon review of their declarations, the Court does not find that they are sufficient to establish that these shareholders were disinterested. While his son attests having discussed the particulars of the transaction and finding that the purchase price was fair based on the condition of the property (T. Ennis Decl. ¶¶ 4-5), he indirectly benefited from the transaction. As stated above, Plaintiff has presented evidence to establish that the proceeds from the sale of the Hermosa Beach property were used to purchase Thomas’ shares. With this understanding, it cannot be determined that he was a disinterested shareholder, especially if he had discussed the particulars of the transaction with Ennis.

            With regard to Savannah’s declaration, she states that she does not recall whether or not she had a discussion with Ennis regarding his purchase of the Hermosa Beach property, but she claims that she would not have opposed the transaction. (S. Ennis Decl. ¶¶ 3-4.) However, her declaration is insufficient to support the contention that she was fully informed at the time of approving the transaction. Thus, the Court finds that Defendants have failed to submit sufficient evidence to show that Plaintiff’s shareholders were fully informed and disinterested when approving of the transaction.

            Second, Defendants argue that Plaintiff ratified the transaction in two ways. They reason that Altschul approved of the sale documents on behalf of Plaintiff.  (Opposition at pg. 15; Ennis Decl., Exhs. C-D.) Next, they assert that Plaintiff ratified the transaction by accepting the funds to pay down its line of credit. (Opposition at pg. 16, relying on Civ. Code §§ 1589, 3522 and Gaillard v. Natomas Co. (1989) 208 Cal. App. 3d 1250, 1273–1274.) As to the latter argument, the Court does not find that it has merit. As discussed above, the proceeds were redirected to pay for Thomas’ shares that Ennis had agreed to in a personal settlement with his son. There is no indication that Plaintiff agreed to assume liability for Ennis own settlement obligations. Thus, it cannot be stated that proceeds of the transaction were used for Plaintiff’s benefit.

            As to the former argument, Plaintiff argues that Altschul was in no position to ratify Ennis breach because he was not a shareholder or director. (Reply at pg. 5.) In their sur-reply, Defendants present evidence that Altschul was the director of Hermosa Beach Car Wash Inc. beginning in June 18, 2012. (Sur-Reply at pg. 3; Suppl. Ennis Decl. ¶ 3, Exh. F.) Thus, Defendants assert Altschul was a disinterested director when he approved the Hermosa Beach property transaction, and as a result, Defendants argue that the business judgment rule should apply to the transactions. (Sur-Reply at pp. 3-4.) However, this argument is unavailing because Altschul attests that he did not find the transaction was fair for $2.6 million and opposed it for the risk involved. (C. Altschul Decl. ¶ 11.) When it came to signing the sale documents, Altschul attests that “Ennis took advantage of me by directing me to execute the sale documents knowing that I was in no position to question his authority and actions since he was the majority owner of N/S and Chief Executive Officer, ran its operations, and is my father-in-law.” (C. Altschul Decl. ¶ 12.) Thus, it cannot be determined from this evidence that Altschul approved of the transaction in good faith.

            Third, Defendants argue that the transaction was fair and reasonable to Plaintiff. In support of this argument, Defendants rely on the appraisal report of certified appraiser Stephen J. Morse who opines that, at the time of the transaction, the Hermosa Beach property’s fair market value was $3,260,000. (Lem Decl. ¶ 6, Exh. E.) Additionally, Defendants point out that Altschul highlighted to others after the transaction that the sale price allowed Plaintiff to avoid significant tax liability. (Lem Decl., Exh. C.)

            In reply, Plaintiff argues that appraisal report is insufficient to show that transaction was fair and reasonable. The Court agrees. While the Court is not bound by the prior rulings in this case on this issue, the Court still finds that Defendant has not submitted sufficient evidence to show that the Hermosa Beach property transaction was fair and reasonable under the circumstances. Notably, the appraisal report does not reconcile the issues that a third-party buyer offered to pay $4.6 million for this property and that a prior valuation of $7 million had been provided. (See C. Altshul Decl. ¶¶ 6-7, Exhs. A-B.) Even if the Hermosa Beach property’s correct valuation was $3,360,000, Defendants fail to adequately explain why it was fair or reasonable for Plaintiff to accept the lower amount of $2.6 million. As previously discussed, the evidence shows that Plaintiff did not receive a benefit from the transaction because the funds were summarily used to purchase Thomas’ shares, even though this was not a transaction that Plaintiff authorized. Also, Defendants fail to quantify or elaborate on the tax liability that Plaintiff was able to avoid as a result of the transaction.  Therefore, the Court maintains that Defendants have not established that the Hermosa Beach property transaction was fair and reasonable.

            Accordingly, because an exception to Corporations Code § 310 does not apply, Plaintiff has established a likelihood of success in its breach of fiduciary duty claim as it concerns Ennis’ self-interested transaction involving the Hermosa Beach property.

                                 iii.          Aiding and Abetting Claim

            Plaintiff also argues that it will likely prevail on its aiding and abetting breach of fiduciary duty claim against Green Forest Car Wash, LLC because Ennis is the sole member of Green Forest Car Wash LLC, and he executed the sale document on this company’s behalf. (Eskandani Decl. ¶¶ 3, Exhs. A-C; Altschul Decl. ¶ 12, Exh. D.)

            Under the circumstances, the Court agrees. Ennis was able to facilitate the purported breach by conducting a Section 1031 exchange using Green Forest Car Wash, LLC. Additionally, because Ennis completely controlled Green Forest Car Wash LLC at the time of the transaction and continues to do so, his knowledge is imputed on the company. (See Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP (2005) 133 Cal. App. 4th 658, 679.)  Thus, it is likely that Plaintiff would be succeed on its aiding and abetting claim against Green Forest Car Wash, LLC. (Am. Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal. App. 4th 1451, 1477.)  It is for this reason that a constructive trust would be appropriate against Green Forest Car Wash, LLC. (King v. King (1971) 22 Cal. App. 3d 319, 329.)

D.     Whether the Balancing of Harm Warrants the Issuance of a Constructive Trust.

            “To obtain a preliminary injunction, a plaintiff ordinarily is required to present evidence of the irreparable injury or interim harm that it will suffer if an injunction is not issued pending an adjudication of the merits.”¿(White, supra, 30 Cal.4th at p. 554.) “In evaluating interim harm, the trial court compares the injury to the plaintiff in the absence of an injunction to the injury the defendant is likely to suffer if an injunction is issues.” (Shoemaker v. County of Los Angeles (1995) 37 Cal.App.4th 618, 633.) “An evaluation of the relative harm to the parties upon the granting or denial of a preliminary injunction requires consideration of: (1) the inadequacy of any other remedy; (2) the degree of irreparable injury the denial of the injunction will cause; (3) the necessity to preserve the status quo; [and] (4) the degree of adverse effect on the public interest or interests of third parties the granting of the injunction will cause.” (Vo v. City of Garden Grove (2004) 115 Cal.App.4th 425, 435.)

            Here, Plaintiff argues that it will suffer an irreparable injury if a preliminary injunction is not issued because Ennis’ conduct since the start of the litigation runs the risk that any judgment entered against him will be ineffectual. (Motion at pg. 19.) Plaintiff asserts that Ennis has engaged in a practice of siphoning away the rental income from the Hermosa Beach property, liquidating his assets and transferring the proceeds to Mexico, and has failed to pay his debts as they come due. (McKenna Decl. ¶ 3; T.Altshul Decl. ¶¶ 2, 4, 19, Exh. D; Eskandani Decl. ¶¶ 4, 7-8.)

            In opposition, Defendants argues that Plaintiff is unable to establish that it faces irreparable harm because Plaintiff has delayed in seeking this form of relief. (Opposition at pg. 12-13.) However, for the reasons stated above, this argument is unavailing. Also, Defendants argues that Ennis would suffer a greater harm if the injunction is issued because he would lose access to a source of him that he has relied upon. (Ennis Decl. ¶ 6.) This argument is equally unpersuasive because it suggests that Ennis intends to use the rental income solely for his benefit, and this corroborates Plaintiff’s concern that recovery of the judgment ineffectual. (Heckmann v. Ahmanson (1985) 168 Cal. App. 3d 119, 136.) While a lis pendens is attached to the Hermosa Breach property, recovery of this property would not necessarily lead to the recovery of the rental income that Ennis is purportedly dissipating.

            Accordingly, the Court finds that the balance of harms weigh in Plaintiff’s favor.

E.     Whether an Undertaking Should be Issued.

            A preliminary injunction ordinarily cannot take effect unless and until the plaintiff provides an undertaking for damages which the enjoined defendant may sustain by reason of the injunction if the court finally decides that the plaintiff was not entitled to the injunction.  (See Code Civ. Pro. § 529(a); City of South San Francisco v. Cypress Lawn Cemetery Ass’n., (1992) 11 Cal. App. 4th 916, 920.)

            Defendant argues that an undertaking should be issued in the amount of $500,000 to account for Ennis’ loss of access to rental payments from June 2024 through August 2024, which amounts to $441,000 plus loss of interest and other consequential damages. (Opposition at pg. 20.) In reply, Plaintiff argues that an undertaking is not warranted because the rental income would be persevered in Green Forest Car Wash LLC’s bank accounts. (Reply at pg. 13.) While it is true that the rental income would be preserved, this does not account for Ennis’s loss of interest and consequential damages. Thus, Plaintiff shall be required to post an undertaking of $59,000 before the preliminary injunction is issued.

Conclusion

            The Motion for Preliminary Injunction is GRANTED. Before the requested trust is issued, Plaintiff is required to post an undertaking of $59,000 with the Court.