Judge James L. Crandall, Case 22-1252985 2022-10-13 Tentative Ruling

Judge: James L. Crandall, Case: 22-1252985, Date: 2022-10-13 Tentative Ruling

1. Demurrer to Complaint

2. Motion to Portions of Complaint

Defendants, M&D Regional Center, LLC (M&D Regional) and M+D Properties’(M+D)(together, Defendants) Demurrer to the Complaint is SUSTAINED as to the second and fourth causes of action and OVERRULED as to the first and third causes of action, with 20 days leave to amend.

The court GRANTS Defendants’ Request for Judicial Notice pursuant to Evidence Code § 452(d).

A demurrer tests the pleading alone, and not the evidence or the facts alleged. . . . To the extent there are factual issues in dispute, however, this court must assume the truth not only of all facts properly pled, but also of those facts that may be implied or inferred from those expressly alleged in the complaint. [Citations.]” (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.) Code of Civil Procedure section 452, states, “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” Perez v. Golden Empire Transportation Transit District (2012) 209 Cal.App.4th 1228, 1238, provides, “This rule of liberal construction means that the reviewing court draws inferences favorable to the plaintiff, not the defendant. [Citations.]” C.A. v. William S. Hart Union High School District (2012) 53 Cal.4th 861, 872 (C.A.), provides, “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged. [Citation.]”

Defendants’ challenge the Complaint’s allegations as follows:

(1) First cause of action against M&D Regional

(2) Second cause of action against M&D Regional

(3) Third cause of action against both defendants

(4) Fourth cause of action against both defendants.

First Cause of Action for Breach of Fiduciary Duty

“The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage proximately caused by the breach.” (Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1086.)

Corporations Code section 17704.09 states:

(a) The fiduciary duties that a member owes to a member-managed limited liability company and the other members of the limited liability company are the duties of loyalty and care under subdivisions (b) and (c).

(b) A member's duty of loyalty to the limited liability company and the other members is limited to the following:

(1) To account to the limited liability company and hold as trustee for it any property, profit, or benefit derived by the member in the conduct and winding up of the activities of a limited liability company or derived from a use by the member of a limited liability company property, including the appropriation of a limited liability company opportunity.

(2) To refrain from dealing with the limited liability company in the conduct or winding up of the activities of the limited liability company as or on behalf of a person having an interest adverse to the limited liability company.

(3) To refrain from competing with the limited liability company in the conduct or winding up of the activities of the limited liability company.

(c) A member's duty of care to a limited liability company and the other members in the conduct and winding up of the activities of the limited liability company is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

(d) A member shall discharge the duties to a limited liability company and the other members under this title or under the operating agreement and exercise any rights consistent with the obligation of good faith and fair dealing.

(e) A member does not violate a duty or obligation under this article or under the operating agreement merely because the member's conduct furthers the member's own interest.

(f) In a manager-managed limited liability company, all of the following rules apply:

(1) Subdivisions (a), (b), (c), and (e) apply to the manager or managers and not the members.

(2) Subdivision (d) applies to the members and managers.

(3) Except as otherwise provided, a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.

Defendants argue that the first cause of action against M&D Regional is insufficiently pled for the following reasons: (1) Corporations Code section 17704.09(f) limits actions that constitute a breach of fiduciary duty by a manager in a manager-managed LLC, (2) the Complaint does not allege that M&D Regional, as Plaintiff’s manager, engaged in any of the actions which is considered a breach under Corporations Code section 17704.09(f), (3) the Complaint does not allege that M&D Regional had a duty to engage in any of the actions which the Complaint alleges that it failed to do, (3) the Complaint fails to allege that Plaintiff suffered damages as a result of M&D Regional’s conduct. (Demurer, 5-8.)

In opposition, Plaintiff alleges that the first cause of action is sufficiently pled because the Complaint alleges at paragraphs 31 and 60 specific actions which M&D Regional engaged in which constitute breach of fiduciary duty. (Opposition, 3-4.) The Complaint also sufficiently alleges that Plaintiff suffered damages because of M&D Regional’s conduct. (Id.)

Here, Paragraph 59 of the Complaint alleges that Plaintiff was a manager-managed LLC. The Complaint alleges that M& Regional breached its fiduciary duties to Plaintiff as the sole manager by engaging in conduct, including, for example: “a. Agreeing to permit the BOH1 Loan to be subordinated to the

Evertrust Loan in an amount that was nearly twice the size represented to the BOH1 Investors in the PPM. b. Failing to consult or even notify the BOH1 Investors that M&D Regional Center was seeking to subordinate the BOH1 Loan to such extent. c. Agreeing to permit the BOH1 Loan to be parri passu with the BOH2 Loan. d. Failing to record and/or failing to timely record BOH1’s liens on TSH’s property.” (Complaint, ¶ 60.)

Liberally construing the allegations of the Complaint in favor of Plaintiff, the court finds that the first cause of action is sufficiently pled.

Pursuant to Corporations Code section 17704.09(f)(1), Corporations Code section17704.09(b) only applies to the managers and not the members if it is a manager-managed LLC. Corporations Code section 17704.09(b) sets out broad categories of conduct required of managers in manager-managed LLCs, including “To refrain from dealing with the limited liability company in the conduct or winding up of the activities of the limited liability company as or on behalf of a person having an interest adverse to the limited liability company.” (Corporations Code § 17704.09(b)(2).) This section does not state specific categories of conduct which are statutorily acknowledged as breaches of fiduciary duty but rather, broad categories of conduct. The Complaint’s allegations at paragraph 60 are sufficient to allege liability against M&D Regional for purposes of demurrer under this section.

Further, although Corporations Code section 17704.09(e) states that a member does not violate any duty or obligation “merely because the member's conduct furthers the member's own interest,” whether or not M&D’s conduct “merely” furthers its own interest is not a proper inquiry at the demurrer stage.

Therefore, Defendants’ demurrer to the first cause of action is SUSTAINED.

Second Cause of Action for Aiding and Abetting Breach of Fiduciary Duty

“[T]he elements of a claim for aiding and abetting a breach of fiduciary duty are: (1) a third party's breach of fiduciary duties owed to plaintiff; (2) defendant's actual knowledge of that breach of fiduciary duties; (3) substantial assistance or encouragement by defendant to the third party's breach; and (4) defendant's conduct was a substantial factor in causing harm to plaintiff.” (Nasrawi v. Buck Consultants LLC (2014) 231 Cal.App.4th 328, 343.)

Defendants argue that the second cause of action is insufficiently pled because the second cause of action is alleged in a conclusory fashion and does not allege what actions M+D engaged in which constitute aiding and abetting breach of fiduciary duty. (Demurrer, 8-9.) According to Defendants, the “general knowledge of the corporate structure” is insufficient to state a cause of action against M+D. (Id.) Defendants also cite to Kidron v. Movie Acquisition Corp. (1995) 40 Cal. App. 4th 1571, 1581 (Kidron) for the argument that liability for “claims such as conspiracy cannot be based on knowledge alone.” Further, Defendants argue that the second cause of action is improperly trying to get around Corporations Code section 17704.09(f)(3).

In opposition, Plaintiff contends that the second cause of action is sufficiently pled for the following reasons: (1) the Complaint necessarily alleges that M+D, as M&D Regional’s manager, provided substantial assistance for M&D Regional’s breach of fiduciary duty because it alleges that M+D controlled M&D Regional, and (2) the demurrer’s citations to Corporations

Code section 17704.09 and case law regarding conspiracy are inapposite because the second cause of action is not based on Corporations Code section 17704.09 and does not allege a conspiracy. (Opposition, 4-6.)

Here, the Complaint alleges “M+D Properties knew that M&D Regional Center owed fiduciary duties to BOH1 because it is the manager of M&D Regional Center (as well as the manager for TSH). M+D Properties knew that BOH1 was formed for the purpose of making the BOH1 Loan to TSH, because it participated in the formation of BOH1.” (Complaint, ¶ 64.) “M+D Properties provided substantial assistance to M&D Regional Center to breach its fiduciary duties because it controlled M&D Regional Center and caused it to breach its fiduciary duties.” (Complaint, ¶ 65.)

The court finds that the second cause of action is insufficiently pled. The Complaint alleges that M+D aided and abetted in M&D Regional’s breach of fiduciary duty because it “controlled” M&D Regional and “caused” it to breach its fiduciary duties. However, the Complaint does not allege what actions M+D engaged in which constituted control of M&D Regional or which actions M+D engaged in which “caused” M&D Regional’s breach. Therefore, the second cause of action fails to allege facts sufficient to state a cause of action for aiding and abetting breach of fiduciary duty against M+D.

Third Cause of Action for Unjust Enrichment

In California, there is no cause of action for unjust enrichment. (See Rutherford Holdings LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231; Levine v. Blue Shield of California (2010) 189 Cal.App.4th 1117, 1138.) However, courts have recognized that unjust enrichment claims can be construed as quasi-contract claims seeking restitution. (See Rutherford Holdings, supra, 223 Cal.App.4th at 231; Levine, supra, 189 Cal.App.4th at 1138.)

Defendants contend that the third cause of action fails as a matter of law because there is no cause of action for unjust enrichment. (Demurrer, 9-10.)

In opposition, Plaintiff contends that Defendants’ demurrer to this cause of action should be overruled because other California cases have held that there is a cause of action for unjust enrichment and Defendants did not assert that the third cause of action is insufficiently pled. (Opposition, 6-7.)

Liberally construing the allegations of the Complaint in favor of Plaintiff, the court finds that the third cause of action is sufficiently pled.

Defendants do not argue that the third cause of action is insufficiently pled, but only that California courts do not recognize “unjust enrichment” as a cause of action. However, the case law cited by the parties do not stand for the proposition that “unjust enrichment” is a legally improper cause of action given that courts have recognized unjust enrichment claims as quasi-contract claims.

For example, Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105, 1132 states: “The elements for a claim of unjust enrichment are “receipt of a benefit and unjust retention of the benefit at the expense of another.”[citation] “The theory of unjust enrichment requires one who acquires a benefit which may not justly be retained, to return either the thing or its equivalent to the aggrieved party so as not to be unjustly enriched.” [citation] It is not, strictly speaking, a theory of recovery, “ ‘but an effect: the result of a failure to make restitution under circumstances where it is equitable to do so.’ [Citation.] ... It is synonymous with restitution.”

As an additional example,

Thus, the court in Prakashpalan recognizes a claim for unjust enrichment.

For these reasons, Defendants’ demurrer to the third cause of action is OVERRULED.

Fourth Cause of Action for Violation of Unfair Competition Law

Business and Professions Code section 17200 (“UCL”) prohibits “unfair competition,” which is defined to include “any unlawful, unfair or fraudulent business act or practice” and “unfair, deceptive, untrue or misleading advertising” and any act prohibited by business and professions code section 17500. A cause of action under the UCL must be stated with “reasonable particularity.” (Gutierrez v. Carmax Auto Superstores California (2018) 19 Cal.App.5th 1234, 1261.)

“While the scope of conduct covered by the UCL is broad, its remedies are limited. [Citation.] A UCL action is equitable in nature; damages cannot be recovered. [Citation.] [The Supreme Court has] stated that under the UCL, ‘[p]revailing plaintiffs are generally limited to injunctive relief and restitution.’” (Korea Supply Co. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1144.) UCL actions based on “unlawful” conduct may be based on violations of other statutes.  (See Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1383.)

Defendants contend that the fourth cause of action is insufficiently pled because the UCL is a “consumer protection statute” and the Complaint does not allege that Defendants engaged in any unlawful business practices affecting the public at large. (Demurrer, 10-11.) The fourth cause of action is also insufficiently pled because it does not allege that Defendants engaged in any “unfair” conduct for purposes of the UCL and conduct that is “not specifically required by law” cannot form the basis of a UCL claim under the “unfair” prong. (Id.) Finally, the fourth cause of action is not alleged with reasonable particularity.

In opposition, Plaintiff contends that the fourth cause of action is sufficiently pled because the Complaint alleges breaches of fiduciary duty, which involve violations of Corporations Code section 17704.09, a California law. (Opposition, 7-8.)

Here, the Complaint alleges “M&D Regional Center committed unlawful business practices by breaching its fiduciary duties owed to BOH1 and engaging in various acts of self-dealing.” (Complaint, ¶ 78.) “M+D Properties and Evertrust committed unlawful business practices by aiding and abetting, and enabling, M&D Regional Center’s breach of fiduciary duties.” (Complaint, ¶ 79.) “As a result of Defendants’ unlawful business practices, Defendants received monies, and Plaintiff suffered injury. Pursuant to Section 17200 of the UCL, Plaintiff is entitled to restitution.” (Complaint, ¶ 80.)

The court finds that the fourth cause of action is insufficiently pled.

The Complaint alleges that Defendants committed wrongdoings by breaching their fiduciary duties to Plaintiff, which arise out of private agreements between the parties. Therefore, the Complaint does not allege that Defendants engaged in a “business practice” for purposes of the UCL which affects the public at large. “ “What constitutes ‘unfair competition’ or ‘unfair or fraudulent business practice’ under any given set of circumstances is a question of fact . . . the essential test being whether the public is likely to be deceived . . . .” [citation] (People v. McKale (1979) 25 Cal.3d 626, 736.)

For these reasons, Defendants’ demurrer to the fourth cause of action is SUSTAINED.

Defendants are to give notice.

Future hearing dates

10/13/23 – MSC

11/13/23 – Jury Trial