Judge: H. Jay Ford, III, Case: 23SMCV02704, Date: 2024-01-23 Tentative Ruling

Case Number: 23SMCV02704    Hearing Date: January 23, 2024    Dept: O

  Case Name:  Diamond v. Hubbard, et al.

SUBJECT:                 DEMURRER W/ MOTION TO STRIKE

MOVING PARTY:   Defendant Hayley Hubbard

RESP. PARTY:         Plaintiff Jessica Klass Diamond

TENTATIVE RULING

            Defendant Hayley Hubbard’s Demurrer is OVERRULED as to the 1^st, 3^rd and 5^th causes of action. Defendant Haley Hubbard’s Motion is Strike punitive damages is DENIED. Plaintiff Jessica Klass Diamond has properly plead all the elements of the 1^st and 3^rd causes of action. Defendant Hayley Hubbard’s Demurrer to the 5^th cause of action was procedurally improper as it did not dispose of the entire cause of action.

      I.          Demurrer

            As a general matter, 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 pleading alone, and not the evidence or facts alleged.” (E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) As such, the court assumes the truth of the complaint’s properly pleaded or implied factual allegations. (Id.) The only issue a demurrer is concerned with is whether the complaint, as it stands, states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)

            Plaintiff is only required to allege ultimate facts, not evidentiary facts. (See Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 212 [“the complaint should set forth the ultimate facts constituting the cause of action, not the evidence by which plaintiff proposes to prove those facts”); 1 Cal. Affirmative Def. § 10:2 (2d ed.) [allegations of agency, course and scope of employment, etc. qualify as ultimate facts].) Plaintiff’s allegations must be accepted as true on demurrer. (See Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 924 [“For purposes of reviewing a demurrer, we accept the truth of material facts properly pleaded in the operative complaint”].)

i.                 Defendant’s fail to establish Delaware law applies.

            Defendant Hayley Hubbard (“Hubbard”) argues that Delaware law should apply because of the Internal affairs doctrine citing to Boschetti v. Pac. Bay Invs. Inc. Hubbard argues that Delaware law must apply in this case because the parties’ LLC was formed in Delaware. (Demurrer, p. 8, fn. 2.) However, California courts do not “blindly apply the doctrine,” but instead, “California courts carefully examine the specific issue and conduct to determine whether the corporation's internal affairs truly are implicated and whether the doctrine's policies require its application in the particular case.” (Colaco v. Cavotec SA (2018) 25 Cal.App.5th 1172, 1190; see Lidow v. Superior Court (2012) 206 Cal.App.4th 351, 359 [“There is, however, a vital limitation to the internal affairs doctrine: The local law of the state of incorporation will be applied ... except where, with respect to the particular issue, some other state has a more significant relationship ... to the parties and the transaction.”]

In Boschetti the Court followed the internal affairs doctrine and held that that California law did not apply because it found that the LLCs and LPs in question did not have sufficient activity within California, and in fact most of the properties at issue were within the states where the companies were formed. (Boschetti v. Pacific Bay Investments Inc. (2019) 32 Cal.App.5th 1059, 1068 [“In these circumstances and for purposes of this action, we cannot conclude California has a more significant relationship to the LLC's and LP's than the states in which they were organized.”].)

Here, as Diamond points out, California has a greater interest in the LLC’s at interest than the situation in Boschetti since Diamond alleges, “Plaintiff Diamond resides in California (Cplt. ¶ 3); At all relevant times, Hubbard resided in California (Cplt. ¶ 4); Defendant Tri Star Sports & Entertainment, Inc., has a principal place of business in California (Cplt. ¶ 5); Meaning Full Living’s principal place of business was in California and it is a citizen of California (Cplt. ¶¶ 6, 7, 10); Diamond performed her work for the Company from California; and - Each of the in-person meetings wherein Diamond and Hubbard discussed and agreed to form a partnership took place in California (Cplt. ¶¶ 15, 16).” (Oppo, p. 9.)  Furthermore, Diamond alleges that “Meaning Full Living is not domiciled in Delaware, it has no members residing in Delaware, it does not have an office or store any documents in Delaware, and it does not even have an operating agreement applying or invoking Delaware law.” (Oppo, p. 9; see Compl., ¶¶ 3-7, 10, 15, 16.) Thus, if the internal affairs doctrine were to apply the Court finds that California has a more significant interest and relationship to the matter than Delaware and thus California law applies.

            California also follows a three-step “governmental interest analysis” to address conflict of laws claims and ascertain the most appropriate law applicable to the issues where there is no effective choice-of-law agreement.” (Washington Mutual Bank, FA v. Superior Court (2001) 24 Cal.4th 906, 919

“Under the governmental interest analysis, the court first determines whether the applicable rules of law of the potentially concerned jurisdictions are the same or different. If the applicable rules of law are identical, the court may apply California law. If the applicable rules of law differ materially, the court proceeds to the second step, which involves an examination of the interests of each jurisdiction in having its own law applied to the particular dispute. If each jurisdiction has an interest in applying its own law to the issue, there is a “true conflict” and the court must proceed to the third step. In the third step, known as the comparative impairment analysis, the court determines which jurisdiction has a greater interest in the application of its own law to the issue or, conversely, which jurisdiction's interest would be more significantly impaired if its law were not applied. The court must apply the law of the jurisdiction whose interest would be more significantly impaired if its law were not applied.”(Frontier Oil Corp. v. RLI Ins. Co. (2007) 153 Cal.App.4th 1436, 1454–1455, as modified (Sept. 5, 2007).) “The party arguing that foreign law governs has the burden to identify the applicable foreign law, show that it materially differs from California law, and show that the foreign law furthers an interest of the foreign state. (Id., at p. 1465.)

Here, Hubbard makes no argument how Delaware law is materially different from California law, nor that Delaware has any interest in having the law apply other than the conclusory statement that the internal affairs doctrine dictates Delaware law must apply. Thus,  Hubbard has not met their burden to show Delaware law must apply as a matter of law.  

ii.               Defendant fails to establish Plaintiff is alleging derivative claims.

A shareholder derivative action is one in which a corporate shareholder is a nominal plaintiff suing on “behalf of corporation for injury to the corporation for which it has failed or refused to sue.” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312.) “[A]n individual cause of action exists only if the damages were not incidental to an injury to the corporation. The cause of action is individual, not derivative, only where it appears that the injury resulted from the violation of some special duty owed the stockholder by the wrongdoer and having its origin in circumstances independent of the plaintiff's status as a shareholder. In other words, it is the gravamen of the wrong alleged in the pleadings, not simply the resulting injury, which determines whether an individual action lies.” (Nelson v. Anderson (1999) 72 Cal.App.4th 111, 124.)

Diamond alleges individual harm in the complaint separate to the derivative claims also asserted. (See Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 122 [“it is settled that one who has suffered injury both as an owner of a corporate entity and in an individual capacity is entitled to pursue remedies in both capacities.”] Diamond pleads individual harm through Hubbard locking Diamond out of the Company, by Hubbard terminating the contract with Diamond individually, and through Hubbard’ alleged individual threats towards Diamond. In light of these allegations, the complaint is not clearly one for derivative injury, as opposed to direct injury. To the extent Hubbard challenges the truth of the allegations, that is not grounds for demurrer. Therefore, Hubbard’s demurrer on grounds that Diamond’s complaint alleges derivative, not direct, injury fails.

Hubbard further argues that Diamond has not properly plead demand futility for the alleged derivative claims and thus the claims should be dismissed. “[D]emand typically is deemed futile when a majority of the directors have participated in or approved the alleged wrongdoing, [citation], or are otherwise financially interested in the challenged transactions, [citation].” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 790.) The Court finds that Diamond has adequately plead demand futility for the possible derivative claims since Diamond pleads the companies in question only involve Hubbard and Diamond, and demanding Hubbard bring a cause of action against Hubbard would be futile. (Compl., ¶¶ 22, 48.) Thus, under California law demand futility has been properly plead.

iii.             1^st cause of action for Breach of Fiduciary Duty - OVERRULED

“The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach. Whether a fiduciary duty exists is generally a question of law.” (Hodges v. County of Placer (2019) 41 Cal.App.5th 537, 546.)

“Our Supreme Court has acknowledged that it is difficult to enunciate the precise elements required to show the existence of a fiduciary relationship.  But the high court has noted that before a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.”  (Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 631–632.)  “A fiduciary duty undertaken by agreement arises when one person enters into a confidential relationship with another.”  (Das v. Bank of America, N.A. (2010) 186 Cal.App.4th 727, 742.)   

“A fiduciary relationship is any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter's knowledge or consent.”  (Hodges, supra, 41 Cal.App.5th at 546–547.)  “Traditional examples of fiduciary relationships in the commercial context include trustee/beneficiary, directors and majority shareholders of a corporation, business partners, joint adventurers, and agent/principal.”  (Id. at 547.)

Here, Diamond pleads an existence of a fiduciary relationship between Hubbard and Diamond as business partners. (Compl., ¶ 49.) Diamond successfully pleads Hubbard’s breach of fiduciary duty by listing out numerous facts constituting an alleged breach. (Id., ¶ 51.) Diamond successfully pleads damage proximately caused by the breach through alleging “Diamond has been damaged in an amount to be determined at trial, but which Diamond believes to be in the range of $250,000 to $500,000, or more, the estimated value of Plaintiff’s 50% interest in Meaning Full Living before Hubbard torpedoed the value.”

Thus, Hubbard’s Demurrer to the first cause of action for breach of fiduciary duty is OVERRULED.

iv.             3^rd cause of action for Breach of Oral Agreement

            “The elements of a breach of oral contract cause are: “(1) existence of the contract; (2) plaintiff's performance or excuse for nonperformance; (3) defendant's breach; and (4) damages to plaintiff as a result of the breach.” (Aton Center, Inc. v. United Healthcare Ins. Co. (2023) 93 Cal.App.5th 1214, 1230; see also CDF Firefighters v. Maldonado (2008) 158 Cal.App.4th 1226, 1239, 70 Cal.Rptr.3d 667 [elements of breach of contract]; Stockton Mortgage, Inc. v. Tope (2014) 233 Cal.App.4th 437, 453, 183 Cal.Rptr.3d 186 [elements of breach of oral contract and breach of written contract claims are the same].)

            Here, Diamond pleads the existence of an oral agreement or contract when stating “Diamond and Hubbard entered into an oral partnership agreement and formed the Meaning Full Living entities,” and within the oral agreement, “Diamond would contribute her experience and expertise and Hubbard would contribute her celebrity status; the two would work together and make joint decisions for the betterment of the Company, and profits would be divided 50/50. (Compl., ¶ 63.) Diamond pleads she performed all the material conditions of the oral agreement. (Id., ¶ 64.) Diamond pleads Hubbard’s breach by alleging, “Hubbard breached her obligations to Diamond by, among other things, taking the actions described herein, including actions intended to harm, or reasonably calculated to harm, Diamond’s interests and otherwise frustrate Diamond’s ability to operate as a member of the business, concealing what she had done, and gaining a personal financial advantage based on their misconduct.” (Compl., ¶ 66.) Diamond pleads damages when alleging “Diamond has been damaged in an amount to be determined at trial, but which Diamond believes to be in the range of $250,000 to $500,000, or more, the estimated value of Plaintiff’s 50% interest in Meaning Full Living before Hubbard torpedoed the value.” (Id., ¶ 67.) 

            Thus, Hubbard’s Demurrer to the third cause of action for breach of oral agreement is OVERRULED.

v.               5^th Cause of action for Dissolution and Accounting

Hubbard demurs to the 5^th cause of action but only to dissolution, not to an accounting, arguing that under Del. C. § 18-802 a claim for judicial dissolution of a Delaware LLC must be brought in the Delaware Court of Chancery. Even if this were a correct, this demurrer is procedurally deficient. “A demurrer does not lie to a portion of a cause of action” (PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682.) Thus, since Hubbard does not address the accounting portion of the claim, the demurrer must be overruled since it will not dispose of an entire cause of action.

The Court finds that Hubbard’s demurrer to the 5^th cause of action for dissolution and accounting is OVERRULED.

    II.          Motion to Strike Punitive Damagess

            CC §3294(a) provides, “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” (Cal Civ. Code § 3294, subdiv., (a).)

            “Malice is ‘conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.’ (Civ.Code, § 3294, subd. (c)(1).) Oppression is ‘despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.’ (Civ.Code, § 3294, subd. (c)(2).) Despicable conduct is conduct that is so vile, base, contemptible, miserable, wretched or loathsome that it would be looked down upon and despised by ordinary decent people. Such conduct has been described as having the character of outrage frequently associated with crime.” (Scott v. Phoenix Schools, Inc. (2009) 175 Cal.App.4th 702, 715.)

            Whether Defendants’ conduct is “despicable conduct” is a question of fact for the jury that a court should not decide in ruling on a motion to strike. (Robinson v. Managed Accounts Receivable Corp., (2009) 654 F. Supp. 2d 1051, 1065.) “[E]ven though certain language pleads ultimate facts or conclusions of law, such language when read in context with the facts alleged as to defendants' conduct may adequately plead the evil motive requisite to recovery of punitive damages.” (Monge v. Superior Ct., (1986)176 Cal. App. 3d 503, 510.)Furthermore, “[m]alice and oppression may be inferred from the circumstances of a defendant's conduct.” (Id., at p. 511.)

            The Court finds that Diamond has adequately plead allegations of malicious conduct including allegations that Hubbard demanded Diamond turn over her shares or “Hubbard would tell the world what a horrible person Diamond was,” and other alleged intentional slanderous comments to third parties. (Compl., ¶¶ 35, 37, 38, 39 42, 43, 44, 51) Whether this conduct is considered despicable or malicious is a question of fact for the jury. Thus, the Court finds Hubbard’s Motion to Strike punitive damages is DENIED.