Judge Jill Feeney, Case Number: 22STCV27438, Date: 2023-07-10 Tentative Ruling

Non-parties Tracy Brennan and William Brennan (the “Brennans”) founded Kalologie Medspa (“Kalologie”). (FAC ¶ 25.) The Brennans formed Kalologie Spa Destinations LLC (“Franchisor”) to franchise the concept. (Ibid.)

At the start of 2018, there were four franchised Kalologie locations in Los Angeles: Brentwood, Thousand Oaks, Studio City, and Melrose Ave. (FAC ¶ 26.) The Brentwood and Studio City locations were located in properties owned by defendants 11906 San Vincente, LLC (“11906 San Vincente”) and Laurel Ventura Place LLC (“Laurel Ventura”) respectively. (FAC ¶ 27.) 11906 San Vincente and Laurel Ventura were both owned by defendant Sina Akhtarzad (“Sina”). (Ibid.) Additionally, Sina owned defendant NASA Group, Inc. (“NASA”), which managed the Brentwood and Studio City properties. (Ibid.)

The franchisee who owned the Brentwood, Studio City, and Melrose locations wanted to exit the franchise system. (FAC ¶ 28.) Under an addendum to the lease agreement for the Brentwood location, the Franchisor had the right to take over the lease and cure any defaults. (FAC ¶ 28.) Sina’s son, defendant Joshua Akhtarzad (“Joshua”) signed that addendum. (Ibid.) Despite this, when the Brentwood franchisee defaulted on the lease, Sina refused to allow Franchisor to cure the default and threatened to evict the franchisee. (FAC ¶ 29.)

To avoid eviction, Sina required that his nephew, defendant Michael Akhtarzad aka Michael Starson (“Michael”) take 50% ownership in several Kalologie franchises. (FAC ¶ 30.) Additionally, Sina required that his stepson, defendant Sam Ghalili (“Sam”), act as the medical director for those locations. (Ibid.) Finally, Sina required that all franchisees maintain their banking at his bank, that NASA employees have unfettered access to those funds, and that any new locations be opened in locations owned by Sina. (Ibid.) Sina threatened that if his demands were not met, he would evict the Studio City, Brentwood, and Melrose locations and rent them to direct competitors. (Ibid.) The Brennans were forced to accede to Sina’s demands. (FAC ¶ 33.)

Sina formed K360 Brentwood Management Inc., K360 Studio City Management Inc. And K360 Melrose Management Inc. to manage these locations. (FAC ¶ 34.) All the franchisees entered into new leases with their respective management entities, each lease requiring that a property management fee be paid to NASA. (FAC ¶ 36.) In 2019, Michael surrendered his interest in the locations to international investors. (FAC ¶ 38.) However, he still behaved as if he maintained his interest. (Ibid.)

A vacancy opened at one of Sina’s properties at 11301 W. Olympic Blvd., owned by defendant Lenton Properties, Inc. (“Lenton”). (FAC ¶ 42.) Sina demanded that a Kalologie location be opened there with Michael and Sam as co-owners. (FAC ¶ 42.) Sina promised that Michael and Sam would exit ownership as soon as the store was up and running. (Ibid.) Michael and Sam refused to exit the business. (Ibid.) The parties formed K360 WLA, which signed a lease with Lenton. (FAC ¶ 42.) K360 WLA opened its doors for one week before shutting down for COVID; it never reopened as Lenton renovated the entire building. (FAC ¶ 44.) This process repeated for a location on Robertson Blvd where K360 signed a lease with La Cienega No. 57 (“La Cienega”). (FAC ¶ 45.)

Michael and Sina represented that the Melrose location was damaged during the George Floyd protests. (FAC ¶ 47). That location was not damaged. (Ibid.) Plaintiffs allege that Michael and Sina said that the location was damaged so that Plaintiffs would move the franchise from the Melrose location, which Sina did not own, to the Robertson location, which Sina did own. (FAC ¶ 47.) Upon reviewing the financials of K360 Melrose, Plaintiffs discovered that Michael and Sina made several unsupported loan repayments from this location’s profits. (FAC ¶ 48.)

All K360 locations were forced to close due to COVID. (FAC ¶ 53.) However, Michael and Sina did not inform Plaintiffs that a rent moratorium existed in LA County and required that the locations continue to pay rent to Sina and to entities owned by Sina. (FAC ¶ 55.) K360 Brentwood, K360 Studio City, K360 Melrose, K360 Robertson and K360 WLA applied for PPP funds to pay their employees. (FAC ¶ 57.) However, Michael, Sina, and NASA directed a large portion of the PPP funds to pay rent. (FAC ¶ 58.) Defendant Desiree Ghalili (“Desiree”), Sam’s wife, harassed LA360 and the K360 Kalologies to pay Sam using the PPP funds. (FAC ¶ 59.)

Sina’s business entities collected rent on their properties even when the Kalologie locations were closed for remodeling. (FAC ¶ 61.) Other tenants at these locations did not pay rent during reconstruction. (FAC ¶ 64.) When Plaintiffs raised these issues, Sina retaliated by advertising competing businesses on his properties. (FAC ¶ 67.)

Defendant Sam Ghalili demurs to the Third, Fourth, Sixth, Tenth, and Eleventh Causes of action. Movant contends that the First Amended Complaint is fatally uncertain as to Movant, and that Plaintiffs fail to allege facts sufficient to state a cause of action against Movant.

“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.)

Upon review of the First Amended Complaint, the Court finds that the allegations as to Movant are sufficiently clear to apprise Movant of the issues which it is to meet. Accordingly, the Demurrer as to uncertainty is OVERRULED.

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.)

Majority shareholders have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner. (Jara v. Supreme Meats, Inc. (2004) 121 Cal.App.4th 1238, 1253; Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108-112.)

In the employment context, “an officer who participates in management of the corporation, exercising some discretionary authority, is a fiduciary of the corporation as a matter of law.” (GAB Business Services, Inc. v. Lindsey & Newsom Claim Services, Inc. (2000) 83 Cal.App.4th 409, 420-21, disapproved on other grounds by Reeves v. Hanlon (2004) 33 Cal.4th 1140.) “Conversely, a ‘nominal’ officer with no management authority is not a fiduciary.” (Id. at 421.)

Here, the FAC alleges that Movant served as medical director for the Brentwood, Studio City, and Melrose locations and received 8% of all revenues at these locations. (FAC ¶34.) Movant also owned 5% of the West Los Angeles location and served as medical director there. (FAC ¶43.) Movant also claimed to be a member of K360 Robertson. (FAC ¶17.) Between 2020 and 2021, Sina and Michael misused PPP funds to pay rent to Movant and to pay Movant for expenses unrelated to the pandemic. (FAC ¶¶58-59.) Movant and his wife also harassed the K360 locations to pay Movant out of the PPP funds.

Movant owed a fiduciary duty of good faith and fair dealing because of his ownership in K360 Robertson and K360 WLA. (Id.) Movant breached his fiduciary duty by putting the landlords’ interests above those of the K360 locations, requiring and charging rent when it was not due, and repaying loans that were not paid or due. (FAC ¶90.) As a result of this breach, the K360 locations suffered damages. (FAC ¶92.)

The FAC alleges facts that Movant served as a medical director and received revenues from each K360 location. However, the facts do not show that he had any managerial authority or discretionary authority over the K360 entities. Although he received PPP funds and harassed the entities to pay him from the PPP funds, there are no facts showing he directed the entities to pay him. The facts merely show he was paid through the PPP funds. These facts do not show that Movant was anything more than a nominal officer. Therefore, the FAC fails to allege facts showing that Movant owed a fiduciary duty to the K360 entities.

The elements of fraud are: “(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 184.) In California, fraud, including negligent misrepresentation, must be pled with specificity. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.) “The particularity demands that a plaintiff plead facts which show how, when, where, to whom, and by what means the representations were tendered.” (Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1469.)

Here, Plaintiffs allege that Movant, together with Starson, Sina, the NASA Group, San Vicente, Lenton and La Cienega falsely represented that rent was due during the pandemic, that there was no relief for tenants, and rent was due during construction. (FAC ¶¶95-97.) These parties also concealed the relief available from the Los Angeles City and County moratoriums on eviction and collecting rent. (FAC ¶ 96.) Plaintiffs would not have paid rent during the pandemic had they known it could be deferred and was not due. (FAC ¶96.) Ghalili was paid rent through PPP funds between 2020 and 2021. (FAC ¶58.)

The FAC sufficiently alleges facts showing what misrepresentations were made because it states Movant, among other Defendants, made misrepresentations such as false representations and concealments about whether rent was still due during construction and whether rent was deferred due to the pandemic. K360 made these rent payments between 2020 and 2021. These facts thus show when and how Movant and other Defendants made these misrepresentations. The FAC alleges facts sufficient to support a fraud cause of action with the requisite particularity under California law.

To plead a cause of action for conversion, one must allege (1) the plaintiff’s ownership or right to possession of personal property; (2) defendant’s disposition of the property inconsistent with plaintiff’s rights; and (3) resulting damages. (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.)

“‘Conversion is any act of dominion wrongfully exerted over another’s personal property in denial of or inconsistent with his rights therein.’” (Enterprise Leasing Corp. v. Shugart Corp. (1991) 231 Cal.App.3d 737, 747 (quoting Messerall v. Fulwider (1988) 199 Cal.App.3d 1324, 1329).) “‘It is not necessary that there be a manual taking of the property; it is only necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to his own use.’” (Id.)

Here, the FAC alleges that Plaintiffs owned or had the right to possess the money in their bank accounts. (FAC ¶110.) Movant, together with together with Defendant Desiree unlawfully took and kept possession of funds from Plaintiffs’ bank accounts to pay Movant amounts that were not owed to him. (FAC ¶111.) Plaintiffs did not consent to Defendants’ retention of these funds. (FAC ¶112.) As a result of Defendants’ retention of funds, Plaintiffs have been damaged in an amount to be proven at trial. (FAC ¶113.)

Plaintiff’s FAC adequately pleads the elements of conversion by alleging that Movant and Desiree unlawfully took possession of funds from Plaintiffs’ bank accounts without their consent and caused Plaintiffs’ damages. The Court finds that the FAC properly pleads a cause of action for conversion as to Movant.

Here, the Court notes that Plaintiffs allege all defendants “are and acted as agents, servants, employees, partners, co-venturers, or shareholders of each other with respect to the allegations alleged herein.” (FAC ¶ 24.)

“‘[I]t is basic in the law of conspiracy that you must have two persons or entities to have a conspiracy. A corporation cannot conspire with itself any more than a private individual can, and it is the general rule that the acts of the agent are the acts of the corporation . . ..’” (Black v. Bank of America (1994) 30 Cal.App.4th 1, 6 (quoting “Kerr v. Rose (1990) 216 Cal.App.3d 1551, 1564).) “To hold that a subordinate employee of a corporation can be liable for conspiring with the corporate principal would destroy what has heretofore been the settled rule that a corporation cannot conspire with itself.” (Id.)

Here, Plaintiffs allege that all defendants were agents, employees, partners, co-venturers, or shareholders of one another, creating issues as to whether a viable conspiracy has been alleged with respect to any defendant, including Movant.

To set forth a claim for a violation of Business and Professions Code section 17200 (“UCL”), Plaintiff must establish Defendant was engaged in an “unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising” and certain specific acts. (Bus. & Prof. Code, section 17200.) A cause of action for unfair competition “is not an all-purpose substitute for a tort or contract action.” (Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 173.)

“To bring a UCL claim, a plaintiff must show either an (1) unlawful, unfair, or fraudulent business practice, or (2) unfair, deceptive, untrue or misleading advertising.” (Adhav v. Midway Rent A Car, Inc. (2019) 37 Cal.App.5th 954, 970 (internal quotations omitted).)

“[T]he ‘practice’ requirement envisions something more than a single transaction . . . ; it contemplates a ‘pattern of conduct’ [citation], ‘on-going . . . conduct’, ‘a pattern of behavior’ [citation], or ‘a course of conduct’ . . . .” (Hewlett v. Squaw Valley Ski Corp. (1997) 54 Cal.App.4th 499, 519 (quoting State of California ex rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147, 1169-70).)

Here, the FAC alleges that Defendants, including Movant, engaged in business practices that violate California public policy, including the provisions of California’s Corporations Code relating to corporations, the conversion and embezzlement of company funds, and Civ. Code, sections 1770, et seq. (FAC ¶138.)

The FAC alleges facts showing Movant and Desiree converted the K360 entities’ funds by paying amounts that were not paid or due to Movant. Additionally, the FAC alleges that Defendants converted PPP funds intended for the K360 entities’ benefit to pay rent that was not due to Movant. Movant also harassed the K360 entities to pay him through the PPP funds. These facts show a pattern of unlawful conduct sufficient to sustain a cause of action for violation of Bus. & Prof. Code, section 17200.