Judge: Helen Zukin, Case: 22SMCP00154, Date: 2022-09-07 Tentative Ruling
Case Number: 22SMCP00154 Hearing Date: September 7, 2022 Dept: 207
Background
This case is a dispute between two
brothers, Barry Blenkhorn (“Plaintiff”) and Craig Blenkhorn (“Defendant”) who
are members and managers of Blenkhorn Properties LLC (“BP” or the “Company”)
concerning the operation of the Company’s affairs. Plaintiff’s original Complaint,
filed on April 8, 2021, alleged four causes of action against Defendant: (1)
involuntary dissolution, (2) declaratory relief, (3) breach of fiduciary
duties, and (4) conversion. Defendant previously demurred to the first, third,
and fourth causes of action asserted in the Complaint. The Court sustained
Defendant’s demurrer as to the third and fourth causes of action and grated
Plaintiff leave to amend. Defendant also previously moved to strike Plaintiff’s
allegations concerning punitive damages and attorney’s fees. The Court denied
Defendant’s motion as to Plaintiff’s claim for attorney’s fees and granted it
with leave to amend as to Plaintiff’s claim for punitive damages.
On June 1, 2022, Plaintiff filed a
First Amended Complaint (“FAC”), asserting the same causes of action against
Defendant. Defendant now brings this demurrer to the third and fourth causes of
action in the FAC, alleging Plaintiff does not have the legal capacity to sue
under Code Civ. Proc. §§ 430.10(b). Defendant further demurrers to the third
cause of action, arguing it fails to set forth sufficient facts to constitute a
cause of action and is uncertain under Code Civ. Proc. §§ 430.10(e) and 430.10(f).
Demurrer Standard
When considering demurrers, courts read the allegations
liberally and in context. (Wilson v. Transit Authority of City of Sacramento
(1962) 199 Cal.App.2d 716, 720-21.) 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 on 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.) However, it does not accept as true
deductions, contentions, or conclusions of law or fact. (Stonehouse Homes LLC v. City of Sierra
Madre (2008) 167 Cal.App.4th 531, 538.)
A special demurrer
for uncertainty under Section 430.10(f) is disfavored and will only be
sustained where the pleading is so unintelligible that a defendant cannot
reasonably respond—i.e., cannot reasonably determine what issues must be
admitted or denied, or what counts or claims are directed against him/her. (Khoury
v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616.) Moreover, even
if the pleading is somewhat vague, “ambiguities can be clarified under modern
discovery procedures.” (Id.)
Motion to Strike Standard
The court may, upon a motion,
or at any time in its discretion, and upon terms it deems proper, strike any
irrelevant, false, or improper matter inserted in any pleading. (Code Civ.
Proc., § 436(a).) The court may also strike all or any part of any pleading not
drawn or filed in conformity with the laws of this state, a court rule, or an
order of the court. (Id., § 436(b).)
The grounds for a motion to strike are that the pleading has irrelevant, false
or improper matter, or has not been drawn or filed in conformity with laws. (Id. § 436.) The grounds for moving to
strike must appear on the face of the pleading or by way of judicial notice. (Id. § 437.)
Analysis
1. Meet
and Confer Requirement
The Court
finds that Defendant has complied with the meet and confer requirements set
forth under Code of Civil Procedure §§ 430.41 and 435.5. (Tokar Decl. at ¶ 2.)
2. Standing to Assert Derivative Claims
Defendant asserts Plaintiff does
not have standing to assert derivative claims on behalf of the Company because the
allegations in the FAC do not satisfy the requirements set forth in Corporations
Code § 17709.02(a)(2).
Corporations Code § 17709.02(a) states
in pertinent part:
(a) “[n]o action
shall be instituted or maintained in right of any domestic or foreign limited liability
company by any member of the limited liability company unless both of the following
conditions exists:
…
(2)
The plaintiff alleges in
the complaint with particularity the plaintiff's efforts to secure from the managers
the action the plaintiff desires or the reasons for not making that effort, and
alleges further that the plaintiff has either informed the limited liability company
or the managers in writing of the ultimate facts of each cause of action against
each defendant or delivered to the limited liability company or the managers a true
copy of the complaint that the plaintiff proposes to file.
Here, Defendant argues Plaintiff has
failed to satisfy the latter requirement because there are no allegations establishing
Plaintiff informed the Company or its manager “in writing of the ultimate facts
of each cause of action against each defendant” or delivered to them “a true copy
of the complaint that the plaintiff proposes to file.”
Paragraph 5 of the FAC alleges, in part, “During the year
prior to filing this action, Barry and his counsel sent numerous written
demands to Craig and his counsel in an attempt to obtain Craig's agreement to take
the acts requested in this complaint. Those written demands set forth the
ultimate facts of the causes of action set forth in this complaint.” In his
demurrer, Defendant acknowledges these allegations in the FAC but states “Defendant
contends that these allegations do not contain the sufficient particularity to
bring a derivative claim pursuant to Corporations Code Section 17709.02(a).”
(Demurrer at 7.) Defendant offers no argument or authority for this assertion.
In his reply, Defendant argues paragraph 5 is insufficient because it “does not
identify with any specificity the nature of these demands, when they were sent
or what ultimate facts they contained; just that said demands contained the
applicable ‘ultimate facts.’” (Reply at 3.) Defendant offers no authority
suggesting section 17709.02(a) imposes a heightened pleading standard on a
plaint, or that a plaintiff must plead the date and content of each such demand
with specificity or particularity to satisfy section 17709.02(a)(2).
The
Court finds paragraph 5 is sufficient to satisfy Corporations Code §
17709.02(a)(2). Plaintiff has alleged he made demands on Defendant and his
counsel to undertake the actions requested in the FAC and that those demands
set forth the same ultimate facts which are contained in the FAC itself.
Accordingly, Defendant’s demurrer to the derivative claims based on lack of
standing is OVERRULED.
3. Third
Cause of Action for Breach of Fiduciary Duty
In addition to challenging
Plaintiff’s standing to assert a cause of action for breach of fiduciary duty
derivatively on behalf of the Company, Defendant disputes the sufficiency of
certain allegations of breach of fiduciary duty asserted by Plaintiff in an
individual capacity, arguing they are barred by the Company’s operating
agreement. Plaintiff argues Defendant’s demurrer is improper as the FAC asserts
four different bases for the cause of action for breach of fiduciary duty
(paragraphs 31.1-31.4 in the FAC) and Defendant only challenges the sufficiency
of three of these bases (paragraphs 31.2-4). Plaintiff cites Daniels v. Select
Portfolio Servicing. Inc. (2016) 246 Cal.App.4th 1150, 1167 for the
proposition that a demurrer cannot lie as to only part of a cause of action but
can only be sustained as to an entire cause of action. (Opposition at 9.)
Defendant argues Daniels
only applies to general demurrers, such as those brought under Code Civ. Proc.
§ 430.10(e), and not his special demurrer to Code Civ. Proc. § 430.10(f). The
Court disagrees. The Court in Poizner v. Fremont General Corp. (2007) 148 Cal.App.4th 97 applied the rule that “A
demurrer must dispose of an entire cause of action to be sustained” to find
that a trial court had improperly sustained a special demurrer for lack of
standing which only applied to certain allegations within a cause of action. (Id.
at 119.) Defendant cites to no contrary authority which holds this rule is
applicable only to general demurrers.
Additionally, as set forth above, a demurrer for uncertainty
under Code Civ. Proc. § 430.10(f) is proper where the pleading is so unintelligible that a
defendant cannot reasonably respond. Defendant does not argue Plaintiff’s cause
of action for breach of fiduciary duty is unintelligible, rather he argues the
factual allegations of paragraphs 31.2-4 cannot form the basis for a cause of
action against him for breach of fiduciary duty. Upon review of the FAC, the
Court finds Plaintiff’s cause of action for breach of fiduciary duty is not
unintelligible or uncertain, rather it alleges clear and specific actions
undertaken by Defendant which breached Defendant’s duties of care and loyalty
as limited by sections 5.4.3 and 5.4.4 of the operating agreement. Accordingly,
the Court OVERRULES Defendant’s demurrer for uncertainty under Code Civ. Proc.
§ 430.10(f).
Finally, Defendant
argues his demurrer to paragraphs 31.2-4 of the FAC should be construed instead
as a motion to strike. (Reply at 2-3.) Defendant offers no showing as to why
these provisions should be stricken by the Court pursuant to Code Civ.
Proc., § 436. The gravamen of Defendant’s argument is the operating agreement
for the Company limits Defendant’s duties of loyalty and care, and cannot be
held liable for the breaches alleged in paragraphs 31.2-4 of the FAC.
Section 5.4.4 of the operating agreement limits Defendant’s
duty of care to “refraining from engaging in grossly negligent or reckless
conduct, intentional misconduct, or a knowing violation of law.” (FAC at ¶ 30.)
Paragraph 31.2 of the FAC alleges Defendant intentionally withheld his consent
to retitle a property owned by the Company into Plaintiff’s name. Paragraph
31.3 alleges Defendant knowingly and willfully refused to sign tax returns
which cased the Company to incur interest charges and penalties. Paragraph 31.4
alleges Defendant refused to provide Plaintiff with certain financial records
for the Company and falsely misrepresented he did not have them in violation of
Corporations Code § 17704.10(b). The Court finds Defendant has not shown these
claims are barred by the limitations on Defendant’s duty of care under section
5.4.4. Each of these paragraphs allege Defendant engaged in intentional
misconduct or the knowing violation of law (Corporations Code § 17704.10(b)).
Defendant argues the allegations in paragraph 31.2 are not
actionable because the FAC elsewhere alleges the property at issue was
purchased with funds held by the Company. This fact is of no bearing as to
whether Defendant previously agreed to retitle the property in Plaintiff’s name
and then refused to do so. Similarly, Defendant alleges paragraph 31.3 is
insufficient because “Defendant had ‘all the authority’ on tax issues.”
(Demurrer at 6.) However, this does not obviate Defendant’s obligation to
exercise such authority consistent with his duties of care and loyalty under
the operating agreement.
Defendant argues paragraph 31.4 cannot form the basis of a
claim for breach of fiduciary duty because it is “an independently actionable
claim” which could have been asserted as its own cause of action. Defendant
cites to no authority, and the Court is not aware of any, which holds that
conduct may not form the basis for a claim for breach of fiduciary duty if it
could also be separately alleged as a distinct cause of action. Further,
section 5.4.4 expressly states Defendant has a duty of care to refrain from
engaging in “a knowingly violation of law.” Thus, the Court finds Plaintiff’s
allegations of Defendant’s violation of Corporations Code § 17704.10(b) may
properly form the basis of Plaintiff’s claim for breach of fiduciary duty
against Defendant.
Defendant further argues paragraph
31.4 is insufficient because Plaintiff does not allege he ever requested such
documents from Defendants. The Court disagrees, paragraph 31.4 of the FAC
alleges Defendant breached his duty by “failing and refusing” to provide Plaintiff
with copies of the documents. The use of the term “refusing” necessarily
suggests a demand was made. The Court thus finds no basis to strike paragraphs
31.2-4 of the FAC, and Defendant’s request to do so is DENIED.
The elements of a cause of action
for breach of fiduciary duty are the existence of a fiduciary relationship,
breach of fiduciary duty, and damages.” (Oasis
West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.) Upon review of the
FAC, the Court finds these elements are satisfied in the FAC.
For the reasons set forth above,
the Court OVERRULES Defendant’s demurrer to this cause of action under Code
Civ. Proc. § 430.10(e) and (f).
4. Motion to
Strike Reference to Punitive Damages
Defendant contends that the
allegations in the Complaint regarding punitive damages are unsupported and boilerplate.
Plaintiff argues that the Complaint sufficiently alleges conduct that could
give rise to punitive damages. Plaintiff’s allegations regarding punitive
damages are contained in Plaintiff’s causes of action for breach of fiduciary
duty and conversion, respectively. Boilerplate or conclusory characterizations
of conduct as malicious, oppressive, or fraudulent are insufficient, standing
alone, to support a claim for punitive damages.
While the FAC does contain such
characterizations of Defendant’s conduct, the Court examines the alleged
conduct itself to determine if it could properly support a claim for punitive
damages. The Court finds the allegations of the FAC are sufficient to support a
claim for punitive damages. Plaintiff alleges Defendant intentionally took
actions which resulted in damage to the Company and to Plaintiff in direct
violation of his duties under the operating agreement, including taking money
from the Company for his personal use. Plaintiff further alleges Defendant
fraudulently misrepresented whether he was in possession of Company financial
records. The Court offers no opinion as to the merit of Plaintiff’s claim for
punitive damages, but finds these allegations are sufficient at the pleading
stage to survive Defendant’s motion to strike.
Accordingly the Court DENIES
Defendant’s motion to strike the allegations of the Complaint regarding
punitive damages with leave to amend.
Conclusion
The Court OVERRULES Defendant’s demurrer to Plaintiff’s
causes of action for breach of fiduciary duty and conversion.
The Court DENIES Defendant’s motion to strike the portions
of the FAC concerning punitive damages.