Judge Jill Feeney, Case Number: 23STCV29610, Date: 2024-05-13 Tentative Ruling

This is an action for fraud, breach of contract, unjust enrichment, constructive trust, unfair business practices, breach of fiduciary duty, and civil theft. The Complaint alleges that in 2018, Zadeh began soliciting investors for PVI and other related ventures. (Compl., ¶51.) Because Zadeh had been barred by the SEC from serving as an officer or director of a public company, Defendants Ortega, Credle, Feinstein, and Rullo are officers and directors of PVI. (Compl., ¶52.) In June 2018, Plaintiff’s owner, Bolleber, responded to an online advertisement for investments in the cannabis industry. (Compl., ¶53.)

After Bolleber toured a warehouse facility called Pineapple Park, Scottsdale invested $150,000 to SII to develop Pineapple Park. (Compl., ¶59-62.) On June 21, 2018, Scottsdale entered into a Revenue Sharing Agreement (RSA 1) with SII where Plaintiff would receive 5% of monthly rent for the facility in return for its investment. (Id.) Ortega personally guaranteed RSA 1. (Compl., ¶63.) Additionally, Scottsdale would have put rights to compel PVI to refund 110% of its investment. (Compl., ¶64.)

In August 2018, Plaintiff entered into a stock purchase and shareholder agreement with SII for the purchase of 25,000 shares of AVI in exchange for $250,000. (Compl., ¶70.) In October 2018, Defendants informed Plaintiff that they would not be moving forward with Pineapple Park and moved Plaintiff ‘s investment to a new facility, the Nordhoff Property. (Compl., ¶71.)

On November 1, 2018, the parties executed a new Revenue Sharing Agreement (RSA 2). (Compl., ¶72.) Under the new agreement, Plaintiff’s investment under RSA 1 would go towards the renovation of the Nordhoff Property and Plaintiff would again receive 5% of monthly rent. (Compl., ¶73.) Ortega again personally guaranteed the agreement. (Compl., ¶74.) RSA 2 also contained the same put rights provisions as RSA 1. (Compl., ¶75.)

At the time the parties executed RSA 2, Defendants also informed Plaintiff that they were selling AVI. (Compl., ¶76.) Defendants did not return Plaintiff’s investment in AVI or give Plaintiff any part of the profit from the sale of AVI. (Compl., ¶¶77-78.)

In November 2018, Plaintiff entered into a stock purchase agreement with PVI to purchase 2,000 shares of TAVI, SCI, and MYI in exchange for the $250,000 Plaintiff originally invested in AVI. (Compl., ¶79.) Ortega again personally guaranteed the agreement. (Compl., ¶80.) The agreement contained the same put right provision as before. (Compl., ¶81.)

In June 2020, Defendants informed Plaintiff they were giving up the lease on the Nordhoff Property and that TAVI, SCI, and MYI would be ceasing operations. (Compl., ¶85.) Plaintiff had not received any dividends from those entities. Defendants issued Plaintiff an additional 1% ownership in PVI. (Compl., ¶¶86-88.) In September 2020, Defendants gifted Plaintiff another 0.5% of PVI. (Compl., ¶92.)

Defendants had only paid 11 of 24 rent payments and failed to repay Plaintiff’s $150,000 investment. (Compl., ¶90.) In August 2023, Plaintiff attempted to exercise his put rights under the PVI and Nordhoff Agreements. (Compl., ¶¶94-96.) Defendants failed to honor Plaintiff’s put rights. (Compl., ¶97.)

On December 4, 2023, Plaintiff Scottsdale Properties, LLC filed its Complaint against Defendants Vincent Mehdizadeh aka Vincent Zadeh (Zadeh), Jaime Ortega, Marco Rullo, Matthew Feinstein, Shawn Credle, Pineapple Ventures, Inc. (PVI), Neu-Ventures, Inc. (NVI), Sky Island, Inc. (SII), Total Accountability Ventures, Inc. (TAV), Supreme Compliance, Inc. (SCI), Maximum Yield, Inc. (MYI), and Pineapple Consolidated, Inc. (PCI).

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).)

Movants request judicial notice of a screenshot taken from the California Secretary of State business search engine and the fact that Plaintiff is not registered to transact intrastate business as a foreign limited liability company in California. The requests are denied because these are not matters which may be judicially noticed under Evid. Code, section 452.

“A foreign limited liability company transaction intrastate business in this state shall not maintain an action or proceeding in this state unless it has a certificate of registration to transact intrastate business in this state.” (Cal. Corp. Code, § 17708.07(a).) “A foreign limited liability company that enters into repeated and successive transactions of business in this state, other than in interstate or foreign commerce, is considered to be transacting intrastate business in this state within the meaning of this article.” (Id., section 17708.03(a).)

Here, Plaintiff is a limited liability company organized in Michigan. (Compl., ¶1.) Plaintiff entered into a series of transactions in California to invest in Defendants’ cannabis business. (Compl., ¶¶40-95.) These allegations show that Plaintiff is a foreign limited liability company engaged in intrastate business. Plaintiff is thus required to comply with Corporations Code section 17708.07(a) in order to maintain this action. While Plaintiff asserts in the opposition that it is registered to do business in California, there are no allegations indicating such registration in the Complaint. Thus, the Complaint fails to state facts sufficient to show Plaintiff has standing to maintain an action in California.

A claim for fraud must plead all of the following elements: (1) misrepresentation; (2) knowledge of falsity; (3) intent to induce reliance; (4) justifiable reliance; and (5) resulting damage. (Odorizzi v. Bloomfield School Dist. (1966) 246 Cal.App.2d 123, 128; Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1332.)

“The discovery rule only delays accrual until the plaintiff has, or should have, inquiry notice of the cause of action.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807 (Fox); Nelson v. Indevus Pharms, Inc. (2006) 142 Cal.App.4th 1202, 1206 (Nelson).) “A plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence. The burden is on the plaintiff to show diligence, and conclusory allegations will not withstand demurrer.” (McKelvey v. Boeing N. Am. (1999) 74 Cal.App.4th 151, 160 (McKelvey), superseded by statute on unrelated grounds as stated in Grisham v. Philip Morris U.S.A., Inc. (2007) 40 Cal.4th 623, 637 (Grisham).)

Here, Movants first allege that the cause of action for fraud is time-barred. Movants allege that Plaintiff had a duty to exercise diligence to discover the true facts and that Plaintiff knew of the true facts at least five years before commencing this action. Movants argue that Plaintiff should have known of the alleged fraud in 2018 when Plaintiff’s initial investment in RSA 1 was transferred to RSA 2, when AVI was sold, or when Plaintiff’s investment was reinvested in Movants. Alternatively, Plaintiff should have known of the alleged fraud when Defendants voided Plaintiff’s shares in Movants.

Plaintiff argues that Defendants made repeated excuses and enticed Plaintiff into other deals to distract from Plaintiff’s lost investments and did not question Defendants’ motives until Defendants failed to honor his put rights in August 2023. Although Plaintiff also alleges it discovered Movants had not ceased operations, this allegation was not included in the Complaint.

Nevertheless, the Court cannot find, as a matter of law, that Plaintiff knew of the alleged fraud between 2018 and 2020. When Defendants chose not to proceed with Pineapple Park, Plaintiff’s investment moved to a different development and the parties executed a new agreement superseding the original agreement. (Compl., ¶¶71-75.) After Defendants sold AVI, Defendants moved Plaintiff’s investment to PVI and Movants and executed a new agreement with Plaintiff. (Compl., ¶¶79-81.) When Movants ceased operations, Defendants issued Plaintiff additional shares of PVI. (Compl., ¶¶87-92.)

Each time one of Defendants’ projects failed, Plaintiff agreed to devote its investments to different projects. The mere fact that these projects failed does not mean that Plaintiff would have known that Defendants never intended to return Plaintiff’s investment because Defendants offered and Plaintiff accepted different opportunities. Thus, the Court cannot find from the facts alleged that Plaintiff would have had reason to suspect that Defendants never intended to return Plaintiff’s investments. Because Plaintiff discovered the alleged fraud when Defendants failed to honor the put right options in 2023, the cause of action for fraud is not time-barred.

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.)

The specificity standard is less stringent when the defendant already has “‘full information concerning the facts of the controversy.’” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 217, superseded by statute on other grounds as stated in Californians for Disability Rights v. Mervyn's, LLC (2006) 39 Cal.4th 223, 227.) Relaxation of the specificity requirement is particularly appropriate in a¿concealment¿case. Unlike intentional misrepresentation, which requires some affirmative representation or promise, a fraudulent¿concealment¿is the absence of something, the suppression of a fact. (Civ. Code § 1710.)

The courts have ruled that specificity as to fraud claims is required if it appears from the nature of allegations that defendant must necessarily possess full information, or if the facts lie more in the knowledge of opposing parties. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384-1385 [“it does not appear necessary to require each of the 38 plaintiffs to allege each occasion on which an agent of either defendant could have disclosed …. Surely defendants have records of their dealings with the plaintiffs”] accord Bushell v. JPMorgan Chase Bank, N.A. (2013) 220 Cal.App.4th 915, 931 [“plaintiffs did not have to specify the … personnel who prepared these documents because that information is uniquely within … [defendant’s] knowledge”].) “‘[T]he courts should not ... seek to absolve the defendant from liability on highly technical requirements of form in pleading. Pleading facts in ordinary and concise language is as permissible in fraud cases as in any others, and liberal construction of the pleading is as much a duty of the court in these as in other cases.’” (Appollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 242.)

Relevant to Movants, the Complaint alleges that Plaintiff entered into a stock purchase agreement with a put right provision and Ortega’s personal guarantee in November 2018. (Compl., ¶¶79-81.) Additionally, all three entities were formed by Ortega. (Compl., ¶¶24, 26, 28.) All Defendants represented to Plaintiff that if it chose to exercise its put rights under the agreement, it would be repaid 110% of the investments within 30 days. (Compl., ¶105.) Defendants knew the representations were false and were made with the intention of inducing Scottsdale to invest with Defendants. (Compl., ¶106.) Plaintiff reasonably relied on these representations because Defendants presented plans and projections and Plaintiff’s investment had been moved to a different site. (Compl., ¶¶71, 107.)

The Court finds that the Complaint alleges sufficient facts to support each element of fraud, including how and when the representations were made. Even if the Complaint does not specify where or to whom the representations were made, it is reasonable to infer that Defendants have access to this information because they were parties to this transaction and would have records of the transaction. Therefore, this cause of action is pled with sufficient particularity.

“[T]he elements of a cause of action for breach of contract are (1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff.” (Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1244.)

An action upon a contract, obligation or liability founded upon a writing is subject to a four-year statute of limitations. (Code Civ. Proc., section 337, subd. (a).) The statute of limitations for breach of an oral contract is two years. (Code Civ. Proc., section 339, subd. (1).)

Here, Plaintiff alleges in the Complaint that (1) Defendants breached the RSA by failing to issue guaranteed monthly payments to Plaintiff and (2) failing to honor Plaintiff’s put rights. (Compl., ¶¶113-114.) The Complaint does not state whether these agreements were written or oral. This action was filed on December 4, 2023.

With respect to the monthly payments, Defendants breached the RSA when they gave up the lease for the Nordhoff Property in June 2020. (Compl., ¶¶85, 90.) The cause of action as to this breach is time-barred if the RSAs were oral. The cause of action is not time-barred if the RSAs were written. As will be discussed below, the demurrer is sustained as to this cause of action for various reasons, including that the Complaint fails to state whether the contract was written, oral, or implied.

A plaintiff is permitted to plead a written contract according to its legal effect. However, this is more difficult because it requires careful analysis of instrument, comprehensiveness in statement, and avoidance of legal conclusions. (Heritage Pacific Financial, LLC v. Monroy (2013) 215 Cal.App.4th 972, 993.)

When an action is founded upon a contract, the complaint is subject to demurrer if it cannot be ascertained from the pleading whether the contract is written, is oral, or is implied by conduct. (Code Civ. Proc., section 430.10(g); Maxwell v. Dolezal (2014) 231 Cal.App.4th 93.)

Here, the Complaint states that on November 2, 2018, Plaintiff entered into a stock purchase agreement with PVI to purchase shares in Movants. (Compl., ¶79.) The parties to this contract do not include Movants, only Plaintiff and PVI. Therefore, the Complaint fails to allege a contract existed between Plaintiff and Movants.

“The elements of an unjust enrichment claim are the receipt of a benefit and the unjust retention of the benefit at the expense of another.” (Peterson v. Cellco P’ship (2008) 164 Cal.App.4th 1583, 1593.) “Unjust enrichment is not a cause of action, however, or even a remedy, but rather a general principle, underlying various legal doctrines and remedies. It is synonymous with restitution.” (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231.)

The weight of authority in California is that there is no cause of action for a constructive trust. Under California law, "[a] constructive trust . . . is an equitable remedy, not a substantive claim for relief." (PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, (2007) 150 Cal. App. 4th 384, 398; Glue-Fold, Inc. v. Slautterback Corp. 82 Cal. App. 4th 1018, 1023 (stating that a constructive trust is not an independent cause of action).)

“A demurrer is not the appropriate vehicle to challenge a portion of a cause of action demanding an improper remedy.” (Caliber Bodyworks, Inc. v. Superior Court (2005) 134 Cal.App.4th 365, 384-85; see PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682-83 (“A demurrer does not lie to a portion of a cause of action.”).) “The appropriate procedural device for challenging a portion of a cause of action seeking an improper remedy is a motion to strike.” (Caliber Bodyworks, Inc., supra, 134 Cal.App.4th at 385.)

Movants next allege that the cause of action for unfair business practices fails because it is based on the fraud and breach of contract causes of action. Specifically, Movants argue that (1) the Complaint fails to state Movants engaged in a business practice that was unlawful or unfair and (2) the Complaint fails to state that the alleged fraudulent conduct is likely to deceive members of the public.

To successfully plead a UCL claim for unfair business practices, a plaintiff must allege facts justifying relief in the form of protecting the public from unfair business practices or deceptive advertising. (Day v. AT&T Corp. (1998) 63 Cal.App.4th 325, 331-332.) A plaintiff must plead and prove that the defendant engaged in a business practice that was either unlawful (i.e., is forbidden by law) or unfair (i.e., harm to victim outweighs any benefit) or fraudulent (i.e., is likely to deceive members of the public). (Albillo v. Intermodal Container Services, Inc. (2003) 114 Cal.App.4th 190, 206.)

“[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).)

The remedies for UCL claims brought by private individuals are limited to (1) injunctive relief to prevent practices of unfair competition and (2) restitution. (See, e.g., Prakashpalan v. Engstrom, Lipscomb and Lack (2014) 223 Cal.App.4th 1105, 1133; Bus. & Prof. Code, section 17203.)

As discussed above, the Complaint alleges that Defendants misrepresented that they would honor Plaintiff’s put rights within 30 days to induce Plaintiff to invest in their projects and then failed to honor the put rights. The Complaint alleges that Defendants are likely to continue committing unlawful acts. (Compl., ¶143.) The Court finds that these facts are sufficient to show that Defendants engaged in fraudulent conduct that is likely to mislead the public.

Here, the Complaint alleges that Plaintiff was given shares in Movants in exchange for Plaintiff’s original investment in AVI. However, there is no law that a corporate entity owes shareholders a fiduciary duty. Plaintiff in opposition cites Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 345 and other cases which provide that a corporation’s officers and directors have fiduciary duties to both the corporation and stockholders. However, Movants are corporate entities, not officers or directors. Because there is no authority which states a corporation owes its shareholders a fiduciary duty, the demurrer is SUSTAINED as to this cause of action.

Movants finally argue that the theft cause of action fails as a matter of law because theft is not a civil claim but a criminal matter. Additionally, the cause of action must fail because it is based on the same facts as the causes of action for fraud and breach of contract.

Penal Code section 496 applies when a person “buys or receives any property that has been stolen or has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained.” (Penal Code, section 496, subd. (a).)

Here, as Plaintiff points out, anyone injured by the sale, receipt, concealment, or withholding of stolen property may bring a civil action for three times the amount of actual damages, costs, and attorney’s fees. (Penal Code, section 496, subd. (c); Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333, 348.)