Judge: Helen Zukin, Case: 22SMCV01275, Date: 2022-10-21 Tentative Ruling
Case Number: 22SMCV01275 Hearing Date: October 21, 2022 Dept: 207
Background
This action arises from a dispute regarding the operation
and management of the company Pali Cap Management 9, LLC (“the Company” or “PCM
9”) which was the owner and developer of real estate located in Pacific
Palisades. Plaintiff was a member of the Company and brings this case against
Defendants Patrick McKenna (“McKenna”), Palisades Capital Management LLC,
Palisades Capital Growth Fund, LLC, and Palisades Development Company, Inc.
(collectively with McKenna, “Defendants”), alleging McKenna, as the founder,
manager, and operating director of the Company improperly settled a claim
raised by a buyer of real property sold by the Company without first obtaining
Plaintiff’s consent. This real property is located at 1362 Bella Oceana Vista
in Pacific Palisades, California. Plaintiff’s Complaint, filed August 2, 2022,
asserts four causes of action against all Defendants for breach of contract,
breach of fiduciary duty, breach of duty of loyalty, and accounting.
Defendants bring this demurrer to each of these causes of
action, arguing each fails to state sufficient facts to constitute a cause of
action against them under Code Civ. Proc. § 430.10(e) and is uncertain under
Code Civ. Proc. § 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.)
Analysis
1. Meet
and Confer Requirement
The Court
finds Defendants have complied with the meet and confer requirements set forth
under Code of Civil Procedure §§ 430.41. (Kaltgrad Decl. at 2.)
2. Untimeliness
Defendants
argue Plaintiff’s opposition to their demurrer was untimely and ask the Court
to strike it. (Reply at 2.) The Court agrees Plaintiff’s opposition is
untimely, however, the Court is not free to strike Plaintiff’s opposition on
that basis alone. California Rules of Court, rule 3.1300(d) expressly prohibits
the Court from doing so: “No paper may be rejected for filing on the ground
that it was untimely submitted for filing. If the court, in its discretion,
refuses to consider a late filed paper, the minutes or order must so indicate.”
Defendants do not claim they suffered any prejudice as a result of the
untimeliness of Plaintiff’s filing. The Court notes Defendants filed a reply
responding to the substance of Plaintiff’s opposition and did not move for an
extension of their time to reply. The Court in its discretion will consider the
arguments raised by Plaintiff’s opposition.
3. Individual Capacity
Plaintiff brings his claims individually and derivatively on
behalf of the Company. Defendants argue Plaintiff has no standing to bring
these claims in his individual capacity and is limited to asserting these
claims derivatively. Plaintiff argues it may bring its claims both individually
and derivatively because, as a member of the Company, Defendants owed him
specific duties which are alleged to have been breached. The Court agrees with
Defendants.
Paclink
Communications Internat. v. Superior Court is on point. Plaintiffs in Paclink were members of a
limited liability corporation who brought suit against various entities and
individuals alleging they had fraudulently transferred the assets of the LLC
without paying required compensation to the LLC’s members. The defendants
demurred, arguing plaintiffs could only assert their claims derivatively and
not individually. The trial court overruled the demurrer and the Court of
Appeal reversed, holding plaintiffs’ challenged causes of action could only be
brought derivatively on behalf of the company and not individually. The Court
stated the rule that “[i]n determining whether an individual action as
opposed to a derivative action lies, a court looks at ‘the gravamen of the
wrong alleged in the pleadings.’” (Paclink Communications Internat. v.
Superior Court (2001) 90 Cal.App.4th 958, 965 [quoting Nelson v.
Anderson (1999) 72 Cal. App. 4th 111, 124].) The Court turned to
plaintiffs’ claims and determined the gravamen of the wrong alleged was an injury
to the corporation:
In this case,
the essence of plaintiffs’ claim is that the assets of PacLink-1 were fraudulently
transferred without any compensation being paid to the LLC. This constitutes an
injury to the company itself. Because members of the LLC hold no direct ownership
interest in the company’s assets (Corp. Code, § 17300), the members cannot be directly
injured when the company is improperly deprived of those assets. The injury was
essentially a diminution in the value of their membership interest in the LLC occasioned
by the loss of the company’s assets. Consequently, any injury to plaintiffs was
incidental to the injury suffered by PacLink-1.
“ ‘It is a general rule that a corporation which suffers damages through
wrongdoing by its officers and directors must itself bring the action to recover
the losses thereby occasioned, or if the corporation fails to bring an action, suit
may be filed by a stockholder acting derivatively on behalf of the corporation.
An individual [stockholder] may not maintain an action in his own right . . . for
destruction of or diminution in the value of the stock. . . .’ “ ( Rankin v. Frebank Co. (1975) 47 Cal. App. 3d 75, 95 [121
Cal. Rptr. 348].)
(Id. at 964-965.)
Plaintiff here alleges “Defendant
McKenna, as the manager of Pali Cap 9, took unilateral action to settle the
dispute, and without getting the necessary vote and consent of Plaintiff
Greenfeld, and losing Pali Cap 9 literally millions of dollars that were
rightfully owed and due to it. This action was taken, despite express promises
by Defendant McKenna to Plaintiff Greenfeld that a proper vote would be taken,
with full disclosure of all facts, prior to any settlement of the dispute which
affected any of Pali Cap 9’s rights.” (Complaint at ¶ 12.) Plaintiff also
alleges Defendants “dispos[ed] of all the assets of Pali Cap 9 … for inadequate
consideration” (id at ¶ 21) and put McKenna’s interests before the
interest of the Company (id at ¶¶ 24-25, 30.) As with plaintiffs in Paclink,
Plaintiff’s alleged injury here is essentially the diminution in the value of
his membership interest in the Company. The gravamen of Plaintiff’s claims is
thus injury to the Company and not to himself and as such he can only bring
these claims derivatively, not individually.
However,
Paclink recognized an exemption to this rule where a plaintiff is
alleging breach of fiduciary duty, citing Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107. As the Paclink
Court explained, “In Jones, supra, 1 Cal. 3d 93, our Supreme Court
recognized an exception to the requirement that a shareholder must bring a
derivative action in the name of the corporation. It held that if a minority
stockholder was bringing suit against the majority stockholders for breach of
fiduciary duty, ‘an individual cause of action exists’ because the injury was
‘not incidental to an injury to the corporation.’” (Paclink, supra, 90 Cal.App.4th at 964.) The Court thus
finds Plaintiff may assert his second cause of action for breach of fiduciary
duty in an individual capacity.
As
to the remaining three causes of action, Defendants argue Plaintiff has failed
to satisfy the pleading requirements codified at Corporations Code § 800.
Specifically, Defendants argue Plaintiff must allege “with particularity
plaintiff’s efforts to secure from the board such action as plaintiff desires,
or the reasons for not making such effort, and alleges further that plaintiff
has either informed the corporation or the board in writing of the ultimate
facts of each cause of action against each defendant or delivered to the
corporation or the board a true copy of the complaint which plaintiff proposes
to file.” (Corp. Code § 800.) The Court agrees. Plaintiff argues paragraphs 12
and 13 of the Complaint satisfy this obligation. In paragraph 12 Plaintiff
alleges McKenna promised Plaintiff a vote would be taken before the claim was
settled. In paragraph 13 Plaintiff alleges McKenna was informed by Plaintiff
and Plaintiff’s counsel that Plaintiff would not consent to the settlement of
the claim between the Company and the purchaser of the Company’s property.
Plaintiff argues these facts show it would have been futile to seek relief from
the Company’s board before bringing this action. However, this allegation of futility
does not appear in the Complaint itself. Further, paragraphs 12 and 13 do not
address the second requirement imposed by section 800 under which Plaintiff
must allege he has “informed the corporation or the board in writing of the
ultimate facts of each cause of action against each defendant or delivered to
the corporation or the board a true copy of the complaint which plaintiff
proposes to file.”
Accordingly,
the Court SUSTAINS Defendants’ demurrer as to the first, third, and fourth
causes of action. As requested, Plaintiff will be granted leave to further
amend these causes of action to either assert a valid basis for pursuing such
claims in an individual capacity and satisfy all pleading requirements for
asserting any such causes of action in a derivative capacity.
4. Alter
Ego
Defendants
also challenge each cause of action raised in the Complaint, arguing it fails
to include factual allegations as to each Defendant showing how they can be
held liable for the causes of action asserted therein. In his opposition,
Plaintiff argues he is relying on alter ego theories of liability, particularly
as to Palisades Development Company, Inc., Palisades Capital Management, LLC,
and Palisades Capital Grown Fund LLC. However, the Complaint itself does not
draw the distinction made in Plaintiff’s opposition and instead asserts general
allegations against all Defendants without making clear the alleged basis for
liability as to each. For example, Plaintiff states “Defendants breached” the
operating agreement, suggested each of the Defendants took some action in
violation of the operating agreement. However, from Plaintiff’s opposition it
appears Plaintiff is alleging McKenna breached the operating agreement and the
remaining defendants can be held liable for this breach as the alter egos of
McKenna. If this is indeed Plaintiff’s theory of liability, it should be stated
in the Complaint.
Defendants
also argue Plaintiff’s allegations as to alter ego are insufficiently pled.
Plaintiff claims he is not required to plead alter ego claims with specificity
and cites Platt v.
Billingsley (1965) 234
Cal.App.2d 577 for the proposition that “even the most bare-bones pleading is
sufficient to put the matter at issue.” (Opp. at 4.) Platt is of no help
to Plaintiff. The Court in Platt was faced with an appeal following a
trial verdict in the plaintiff’s favor based on alter-ego liability. The
question before the Court was not whether the plaintiff’s alter ego allegations
would have survived a demurrer, rather the question was whether the theory of
alter ego liability was “raised by the pleadings” at all. (Platt, supra,
234 Cal.App.2d at 580.) In finding that it was, the Court examined the
operative complaint and determined the plaintiff had properly alleged “the
corporation was grossly undercapitalized, heavily indebted to various
creditors, was lacking assets and working capital with which to do business,
and was not operating in compliance with the California Corporations Code, the
Corporate Articles of Incorporation and the Corporate Bylaws; and, in fact, the
defendants were the alter ego of the corporation and were conducting a
restaurant business, known as Fred Button's Trader Island, in the City of
Newport Beach, State of California, as their individual enterprise and as a
joint venture among themselves.” (Id. at 581.)
Plaintiff’s
Complaint contains similar factual allegations with respect to Palisades
Development Company, Inc. (Complaint at ¶ 6.) However, the Complaint contains
no such allegations with respect to Palisades Capital Management LLC or
Palisades Capital Growth Fund, LLC. (Complaint at ¶¶ 4-5.) Indeed, for each of
those two entities Plaintiff alleges only that they are “essentially” the alter
egos of McKenna. The Court finds the Complaint fails to sufficiently allege a
factual basis for holding Palisades Capital Management LLC or Palisades Capital
Growth Fund, LLC liable as alter egos.
The Court
will SUSTAIN Defendants’ demurrer to all causes of action and will grant
Plaintiff leave to amend to clarify the basis for which it is asserting
liability for each Defendant for each cause of action.
5. Accounting
“A cause
of action for an accounting requires a showing that a relationship exists
between the plaintiff and defendant that requires an accounting, and that some
balance is due the plaintiff that can only be ascertained by an accounting. An
action for accounting is not available where the plaintiff alleges the right to
recover a sum certain or a sum that can be made certain by calculation.” (Teselle
v. McLoughlin (2009) 173 Cal.App.4th 156, 179, citations and paragraph
break omitted.) “The right to an accounting can arise from the possession by
the defendant of money or property which, because of the defendant's
relationship with the plaintiff, the defendant is obliged to surrender.” (Id.
at 179-180.)
Plaintiff
asserts a cause of action against all Defendants for accounting. Plaintiff
seeks an accounting of PCM 9 as well as third party entity Palisades
Capital Fund 1, LLC (“PCF 1”) and a property located at 15951 Alcima Avenue in
Pacific Palisades, California. The Complaint alleges Plaintiff was also a
member of PCF 1, which was also managed by McKenna. (Complaint at ¶ 36.)
Plaintiff claims he has “repeatedly demanded a full, complete, and accurate
accounting from Defendant McKenna with regard to Palisades Capital Fund 1, LLC,
but despite these demands, Defendant McKenna has failed to provide any
meaningful or detailed or accurate accounting regarding that company, or the
property owned by that company, located at 15951 Alcima Ave., Pacific
Palisades, CA.” (Id.)
Defendants argue Plaintiff does not allege he is a partner,
member, or shareholder in Defendants Palisades Capital Management LLC,
Palisades Capital Growth Fund, LLC, and Palisades Development Company, Inc. and
thus has no right to assert a cause of action for accounting against these
entities. Defendants also contend there is no basis to assert a cause of action
against McKenna as an individual. Plaintiff offers no rebuttal to these
arguments but claims he has sufficiently stated a cause of action against all
Defendants because he repeatedly sought a proper accounting of PCM 9 and PCF 1.
The Complaint alleges McKenna owed Plaintiff a fiduciary
duty. (Complaint at ¶ 24.) A fiduciary relationship will support a duty to
account. (See Fleet v. Bank of America N.A. (2014) 229 Cal.App.4th 1403,
1413 [“A cause of action for accounting requires a showing of a relationship
between the plaintiff and the defendant, such a fiduciary relationship, that
requires an accounting”].) However, Plaintiff does not allege any fiduciary
relationship between himself and Defendants Palisades Capital Management LLC,
Palisades Capital Growth Fund, LLC, and Palisades Development Company, Inc.,
nor does Plaintiff allege any other basis which would require an accounting
from those three Defendants, such as by “showing that the accounts are so
complicated they cannot be determined through an ordinary action at law.” (Id.)
Accordingly, the Court finds the Complaint fails to state sufficient factual
allegations to constitute a cause of action for accounting against Defendants
Palisades Capital Management LLC, Palisades Capital Growth Fund, LLC, and
Palisades Development Company, Inc.
Defendants also argue Plaintiff has failed to allege he
lacks an adequate remedy at law to justify an equitable accounting claim.
Plaintiff offers no rebuttal to this argument. Fleet v. Bank of America N.A.
is instructive. Fleet was a case in which plaintiffs asserted multiple
causes of action against several defendants in connection with plaintiffs’
attempt to modify the terms of their loan to avoid defaulting on their home
mortgage. Plaintiffs’ causes of action included claims for breach of contract,
fraud, and accounting. The trial court sustained defendants’ demurrer to
plaintiffs’ complaint without leave to amend and plaintiffs appealed. The Court
determined the trial court had correctly sustained defendants’ demurrer to the
cause of action for accounting. Plaintiffs’ claim for accounting included two
parts: (1) there were surplus funds left over from the trustee’s foreclosure
sale of plaintiffs’ property which should have been distributed to plaintiffs
and (2) defendants had misapplied the loan payments made by plaintiffs prior to
foreclosure. The Court found the trial court had correctly determined the first
part to be barred by res judicata. (Fleet, 229 Cal.App.4th at
1413-1414.) As to the second part of plaintiffs’ accounting claim, the Court
found it was subsumed by plaintiffs’ other causes of action:
As to the part dealing with how the
loan payments were applied before foreclosure, it appears this issue can be
folded into the fraud and breach of contract causes of action. If the Fleets
are maintaining that they overpaid BofA—either under the trial period plan
agreement or because of the fraudulent promise—the overpayment will constitute
an element of their damages. If something else turns up in discovery, they can
request leave to amend. As of now, however, they do not appear to have alleged
the necessary elements of a separate cause of action for accounting.
(Id. at 1414.) Plaintiff appears to acknowledge the
claim for accounting is duplicative of his other causes of action against
Defendants, as he states in his opposition that “this ‘accounting’ is clearly
going to be rendered during discovery in this matter regardless, which
Plaintiff believes will show the full extent of Defendant McKenna’s
malfeasance….” (Opp. at 6.)
Plaintiff’s claim for accounting here has two parts: (1)
Plaintiff’s claim for accounting as to PCM 9, and (2) Plaintiff’s claim for
accounting as to PCF 1. The Court finds Plaintiff’s claim for accounting as to
PCM 9 is subsumed by Plaintiff’s claims for breach of contract, breach of
fiduciary duty, and breach of duty of loyalty, all of which concern the alleged
mismanagement of PCM 9. This leaves Plaintiff’s claim for accounting with
respect to PCF 1. As to PCF
1, the Court finds Plaintiff has not pled facts showing some balance is due to
him with respect to the assets of PCF 1 that can only be ascertained by an
accounting. Rather, Plaintiff merely alleges that he has previously requested
McKenna provide an accounting of PCF 1, which McKenna has not done. (Complaint
at ¶ 36.) Accordingly, the Court finds Plaintiff has failed to allege
sufficient facts to constitute a cause of action for accounting as to PCF 1
against all Defendants. The Court thus SUSTAINS Defendants’ demurrer to this
cause of action, and will grant Plaintiff leave to amend to state a cause of
action for accounting concerning PCF 1.
Conclusion
Defendants’ demurrer is SUSTAINED as to each cause of action
asserted in the Complaint with 30 days’ leave to amend as set forth above.