Judge Jill Feeney, Case Number: 20STCV23643, Date: 2024-04-09 Tentative Ruling

This is an action for breach of contract/fiduciary duties brought by a corporate shareholder/former director against the subject corporations’ current director/managing officer(s). The Fourth Amended Complaint ("FAC") alleges as follows. In the 1970s, plaintiff Jerry Yarman Azarkman (“Plaintiff”) began selling electronics and other appliances as a door-to-door salesman in California after emigrating from Israel. By the 1980s, Plaintiff and his brother, Ron Sahar Azarkman (“Defendant” and/or “Azarkman”), opened their first brick-and-mortar department store known as “La Curacao.” The brothers eventually formed Defendants DIR International Corporation ("DIR"). Plaintiff and Defendant each have a 50% equity stake in DIR. (FAC, pp. 4:19–5:26, 16:9-28.)

In the 1990s, Curacao Ltd. ("Curacao") was formed for the acquisition and operation of the real property located at 1605-25 W. Olympic Blvd., Los Angeles, California 90015 (the “California Property”). (FAC, p. 17:1-10.) DIR is Curacao’s sole general partner, while Plaintiff and Ron are Curacao’s limited partners. (Id., pp. 6:1–7:5.) The brothers owned/co-owned several business entities,1 but the principal operating component of the network of affiliated entities was the Curacao Store (which was/is operated by Adir International). (Id., pp. 16:22–17:10.) The Curacao Store is the primary retail tenant at the California Property. (Id., p. 17:11-14.)

Plaintiff had been elected a director and officer of DIR since November 1994 until on October 21, 2019, he was ousted by his brother, Defendant Azarkman, and Mauricio Joffe Fux ("Defendant Fux") who serves as DIR’s General counsel/Vice-President of Finance. (FAC ¶¶ 20-21.) Since 2013, Plaintiff has been excluded from management and operation of the Nominal Defendants, while Defendant Azarkman remained in control of their management. (Id., ¶ 118-119.) Defendant Azarkman, though, has engaged in financial misconduct/self-dealing and concealment, i.e., fraud. (Id., ¶¶ 144-155.)

On June 23, 2020, Plaintiff filed his Complaint alleging causes of action for breach of contract, breach of fiduciary duty, breach of duty of honest services, abuse of control, corporate waste, gross mismanagement, unjust enrichment, money had and received, conversion, fraud, constructive fraud, fraudulent transfer, professional negligence, violations of Bus. & Prof. Code, section 17200, and constructive trust.

Fux demurs to the only remaining cause of action against him for breach of fiduciary duty on the grounds that (1) res judicata requires dismissal of the fourth cause of action because that claim is duplicative of the previously dismissed fifth cause of action, (2) the fourth cause of action is time-barred under Code Civ. Proc., section 340.6, (3) the fourth cause of action is uncertain, and (4) Plaintiff cannot assert the fourth cause of action derivatively.

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. 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 pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Proc., §§ 430.30, 430.70.) At the pleading stage, a plaintiff need only allege ultimate facts sufficient to apprise the defendant of the factual basis for the claim against him. (Semole v. Sansoucie (1972) 28 Cal. App. 3d 714, 721.) A “demurrer does not, however, admit contentions, deductions or conclusions of fact or law alleged in the pleading, or the construction of instruments pleaded, or facts impossible in law.” (S. Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732 (internal citations omitted).)

The elements for a breach of fiduciary duty cause of action are “the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach.” (Thomson v. Canyon (2011) 198 Cal.App.4th 594, 604.) “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.” (Apollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 246.)

A party filing a demurrer “shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” (Code Civ. Proc., section 430.41(a).) “The parties shall meet and confer at least five days before the date the responsive pleading is due. If the parties are not able to meet and confer at least five days prior to the date the responsive pleading is due, the demurring party shall be granted an automatic 30-day extension of time within which to file a responsive pleading, by filing and serving, on or before the date on which a demurrer would be due, a declaration stating under penalty of perjury that a good faith attempt to meet and confer was made and explaining the reasons why the parties could not meet and confer.” (Code Civ. Proc., section 430.41(a)(2).) A failure to meet and confer does not constitute grounds to sustain or overrule a demurrer. (See Code Civ. Proc., sections 430.41 (a)(4).)

Here, Fux’s counsel testifies that he met and conferred with Plaintiff’s counsel and informed her of the deficiencies with the FAC and that Fux intended to demur to the FAC. (Steinfeld Decl., ¶3.) Fux’s counsel did not explain whether the parties attempted to reach an agreement that would resolve Fux’s objections to the demurrer. However, failure to meet and confer is no basis for sustaining or overruling a demurrer.

Res judicata precludes the re-litigation of matters which have been resolved in a prior proceeding to preserve the “integrity of the judicial system, promote judicial economy, and protect litigants from . . .vexatious litigation.” (Brinton v. Bankers Pension Services, Inc. (1999) 76 Cal.App.4th 550, 556.) It “prevents re-litigation of the same cause of action in a second suit between the same parties or parties in privity with them.” (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896.) “Res judicata applies if (1) the decision in the prior proceeding is final and on the merits; (2) the present proceeding is on the same cause of action as the prior proceeding; and (3) the parties in the present proceeding or parties in privity with them were parties to the prior proceeding.” (Fed'n of Hillside & Canyon Associations v. City of Los Angeles (2004) 126 Cal.App.4th 1180, 1202.)¿¿¿“Collateral estoppel, or issue preclusion, precludes re-litigation of issues argued and decided in prior proceedings.” (Mycogen Corp, supra, 28 Cal.4th at p. 896.)

When applying res judicata, “the key issue is whether the same cause of action is involved in both suits. California law approaches the issue by focusing on the ‘primary right’ at stake: if two actions involve the same injury to the plaintiff and the same wrong by the defendant then the same primary right is at stake even if in the second suit the plaintiff pleads different theories of recovery, seeks different forms of relief and/or adds new facts supporting recovery.” (emphasis in original.) (Deleon v. Verizon Wireless (2008) 88 Cal.Rptr.3d 29, 35.) “As far as its content is concerned, the primary right is simply the plaintiff's right to be free from the particular injury suffered…” (Villacres v. ABM Indus. Inc. (2010) 189 Cal.App.4th 562, 575–76.)

Here, Fux first argues that res judicata requires dismissal of the fourth cause of action because the Court previously dismissed the fifth cause of action on the grounds that it was identical to the fourth cause of action which had previously been dismissed via Fux’s anti-SLAPP motion. However, as Plaintiff points out, the doctrine of res judicata applies to claims brought in a “second suit,” not further proceedings in the same suit. (Kim v. Reins International California, Inc. (2020) 9 Cal.5th 73, 92 [“[Defendant] cites no authority, and we are aware of none, holding that the resolution of some claims can bar the litigation of other claims that were asserted in the same lawsuit.].) Here, Fux alleges that the fourth cause of action is barred by the result of a demurrer in the same litigation. The doctrine of res judicata does not apply here because the demurrer was in this same litigation, not a second suit.

Additionally, the Court previously sustained Fux’s demurrer as to the fifth cause of action on the grounds that the fourth cause of action, which involved the same facts as the fifth cause of action, was time-barred. The Court took judicial notice of its decision on the anti-SLAPP motion to determine that the cause of action was time-barred because the statute of limitations for Plaintiff’s professional negligence claim began to accrue on the date Fux filed a declaration in opposition to the provisional director action. The Court of Appeal has since issued a remittitur reversing this Court’s ruling on the anti-SLAPP motion in part. The specifically, the Court of Appeal noted:

“Jerry alleged that Fux advised and assisted Ron with various business dealings, purportedly as general counsel for both the joint entities and Ron’s entities, in breach of his fiduciary duties, and that Jerry and the joint entities were harmed as a result. These allegations supply, albeit broadly, the elements of a cause of action for breach of fiduciary duty. (See Charnay v. Cobert (2006) 145 Cal.App.4th 170, 182 [“To establish a cause of action for breach of fiduciary duty, a plaintiff must demonstrate the existence of a fiduciary relationship, breach of that duty and damages.”].) We therefore are not persuaded by Fux’s argument that the breach of fiduciary duty claim arose only from the protected litigation conduct. Conversely, we reject Jerry’s contention that the fourth cause of action arose only from Fux’s unprotected conduct, and that the litigation-related activity was simply “evidence” supporting that claim. “‘If the core injury producing conduct upon which the plaintiff's claim is premised does not rest on protected speech or petitioning activity, collateral or incidental allusions to protected activity will not trigger application of the anti-SLAPP statute.’” (Area 51 Productions, Inc. v. City of Alameda (2018) 20 Cal.App.5th 581, 594.) Here, however, the complaint alleged that Fux’s protected conduct—his filing of a declaration and other assistance in opposing the provisional director action—was a substantial cause of the purported injury Jerry and the joint entities incurred when the petition was denied. As such, Fux’s protected conduct was a basis for the claim of breach of fiduciary duty, not merely “a step leading to some different act for which liability is asserted.” (Wong v. Wong (2019) 43 Cal.App.5th 358, 365.)”

Plaintiff’s fourth cause of action related to Fux’s unprotected conduct, his advice and assistance with various business dealings of the joint entities, survived Fux’s anti-SLAPP motion. Plaintiff’s claims related to Fux’s protected conduct, Fux’s actions related to the provisional director action, were dismissed. The Court has not made any decision on whether Plaintiff’s claims related to the unprotected activity will survive demurrer.

Code Civ. Proc., section 340.6, subdivision (a), the statute of limitations for a legal malpractice claim, other than a claim for actual fraud, is one year from when the plaintiff discovers, or through the use of reasonable diligence should have discovered, the facts constituting the wrongful act or omission, or four years from the date of the wrongful act or omission, whichever occurs first. (CCP § 340.6, subd. (a).) The time for commencing an action is tolled during the time when: (1) the plaintiff has not sustained actual injury; (2) the attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred; (3) the attorney willfully conceals the facts constituting the wrongful act or omission when such facts are known to the attorney, except that this subdivision shall toll only the four-year limitation; or (4) the plaintiff is under a legal or physical disability which restricts the plaintiff’s ability to commence legal action. (Id.; see Stueve Bros. Farms, LLC v. Berger Kahn (2013) 222 Cal.App.4th 303, 313.)

For purposes of the tolling rule, the test for actual injury is whether the plaintiff has sustained¿any¿damages compensable in an action. (Pointe San Diego Residential Community, L.P. v. Procopio, Cory, Hargreaves & Savitch, LLP (2011) 195 Cal.App.4th 265, 275.) Under this standard, the fact of damage, rather than the amount, is the critical factor. (Id.) Thus, a plaintiff sustains “actual injury”¿when he or she incurs attorney fees to rectify the problem caused by the prior attorney's alleged negligence. (Id.¿at 275-76.) Further, actual injury may occur even if the loss is contingent on an appeal or other final adjudication. (Village Nurseries v. Greenbaum¿(2002) 101 Cal.App.4th 26, 42.) The inquiry concerns whether events have developed to a point where plaintiff is entitled to a legal remedy, not merely a symbolic judgment such as an award of nominal damages. (Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 752.) Once the plaintiff suffers actual harm, however, neither difficulty in proving damages nor uncertainty as to their amount tolls the limitations period. (Id.)

Here, the original Complaint which contains the Fourth Cause of Action states that Fux regularly identified himself as General Counsel and/or officer of the joint entities. (Compl., ¶¶148-148.) Fux took positions and undertook actions contrary to the best interests of the partners and shareholders of the entities. (Compl., ¶150.) Fux never disclosed his conflict of interest orally or in writing and never obtained a waiver from the entities or from Plaintiff. (Compl., ¶151.) Although Fux disclosed the conflict in 2019 and 2020 when Plaintiff demanded distributions from Curacao, Plaintiff agreed to give Fux a limited waiver for drafting a resolution for distribution and offered other alternatives to resolve the conflict when Fux refused the limited waiver. (Compl., ¶152.) Fux negotiated transactions, such as leases, between the Curacao entities and Ron Azarkman’s related entities. (Compl., ¶155.) The Complaint alleges Fux’s concurrent representation of Oly, Curacao, DIR, the Curacao Store, and Ron Azarkman’s related entities constituted breaches of his fiduciary duty to Plaintiff, the joint entities, shareholders, and partners. (Compl., ¶156.) Fux continues to be general counsel for the entities named above. (Compl., ¶32.)

The parties dispute whether the applicable statute of limitations is one year under Code Civ. Proc., section 340.6 or four years under Code Civ. Proc., section 343. Section 340.6 applies only to actions arising out of the performance of professional legal services by attorneys. Here, the allegations against Fux state that he negotiated transactions and concurrently represented the Azarkman brothers’ entities without disclosing his conflicts of interest. Although the Complaint alleges Fux also served as an officer or director, the Complaint does not state that any of Plaintiff’s claims arose from Fux’s conduct as an officer or director that is distinct from performance of legal services. Rather, the only conduct described is Fux’s conduct negotiating and transacting on behalf of the entities’ as their general counsel. The applicable statute of limitations is one year under 340.6 because Plaintiff’s claims arise from Fux’s performance of professional legal services.

The parties next dispute whether the action is time-barred under section 340.6. The Court previously took judicial notice of the June 14, 2018 petition for appointment of a provisional director filed by Plaintiff. The Complaint alleges that Fux defended and defeated Plaintiff’s petition in violation of his obligations to Curacao and its limited partner, Plaintiff. (Compl., ¶¶182-183.) As alleged, Plaintiff suffered actual injury when Fux defended the action around June 2018, more than one year before Plaintiff filed this Complaint. Because it has been more than one year since the statute of limitation began accruing in June 2018, Plaintiff’s claims against Fux which arise from his performance of professional legal services is time-barred.

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.) “A demurrer for uncertainty will be sustained only where the complaint is so bad that defendant cannot reasonably respond—i.e., he or she cannot reasonably determine what issues must be admitted or denied, or what counts or claims are directed against him or her.” (Weil & Brown, Civil Procedure Before Trial (The Rutter Group) § 7:85 (emphasis in original).) “The objection of uncertainty does not go to the failure to allege sufficient facts.” (Brea v. McGlashan (1934) 3 Cal.App.2d 454, 459.) “It goes to the doubt as to what the pleader means by the facts alleged.” (Id.) “Such a demurrer should not be sustained where the allegations of the complaint are sufficiently clear to apprise the defendant of the issues which he is to meet.” (People v. Lim (1941) 18 Cal.2d 872, 882.)

Under Corp. Code, section 800(b)(2), a derivative action may not be maintained by a shareholder unless the shareholder alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as the plaintiff desired, or the reasons for not making such an effort. An action is derivative if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets. (Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal. App. 4th 282, 297.)

Here, as discussed above, the crux of Plaintiff’s claim against Fux is that Fux simultaneously served as general counsel, an officer, or a director for all of the Azarkman brothers’ corporate entities, owed the entities a fiduciary duty, and breached said duties by failing to disclose his conflicts of interest and acting against their interest. There are no facts stating Fux ever represented Plaintiff personally. Therefore, this is a derivative action which Plaintiff may not maintain as a shareholder. Although Plaintiff argues Fux owed him a duty directly, there are no facts to suggest Fux directly owed Plaintiff a fiduciary duty.