Superior Court of California

County of Los Angeles

North Central District

Department B

AARON JUSTIS, et al.,

Plaintiffs,

MICHAEL HODGES,

Defendant.

CROSS-COMPLAINTS

Case No.: EC067546

Consolidated with: EC069206

Hearing Date: April 7, 2023

[TENTATIVE] ORDER RE:

DEMURRER; MOTION TO STRIKE

BACKGROUND

A. Allegations

Cross-Complainant Rodney Rice alleges that in 2010, he entered into a joint venture agreement with Defendants Aaron Justis and Michael Hodges to identify, acquire, and operate a cannabis retail dispensary. Pursuant to the agreement, Mr. Justis who had more experience in the execution of cannabis cultivation and sales would invest labor and know-how, while Mr. Hodges and Mr. Rice would invest the initial capital. To conduct the joint venture, Mr. Justis would move to California and use the funds provided by Mr. Hodges and Mr. Rice, and the parties would take over operations of Buds & Roses Collective Inc. (“B&R”). Pursuant to the agreement, Mr. Justis would have 50% ownership, Mr. Hodges would have 25% ownership, and Mr. Rice would have 25% ownership in B&R. Mr. Rice alleges that the parties agreed that he and Mr. Hodges would recoup their initial investment to the joint venture until paid back and, until then, Mr. Justis would work for free and essentially provide sweat equity.

Mr. Rice alleges that the first step in the joint venture was to buy control of B&R from Merav Agig, and thus the parties entered into an agreement with Ms. Agig for control of B&R. Under this Directors Agreement, Ms. Agig would receive $300,000 right away and then be paid the remaining $300,000 over the course of 4 years, and would remain as a Director of B&R until the company was granted a “commercial cannabis license.” CannBe, Mr. Rice, and Mr. Hodges advanced $300,000 and a subsequent $55,000 to Ms. Agig, such that Mr. Rice paid $170,000 as an initial contribution to the joint venture. On February 26, 2014, Ms. Agig filed a lawsuit for the remainder of the payments, which settled in September 2014 and was enforced via an arbitration in August 2015. Ms. Agig was then removed from the board in early 2016 after the arbitration award was ultimately paid.

Mr. Rice alleges that he was not to be appointed a Director of B&R immediately, but that he began communicating with Mr. Justis regarding his director seat and repayment of the loan in late 2016. He alleges that he began suspecting impropriety by Mr. Justis and Mr. Hodges regarding their performance under the joint venture agreement. Mr. Rice alleges that Mr. Justis and Mr. Hodges cultivated cannabis at illegal sites, created different entities in order to pay themselves for inventory sold to B&R at inflated prices, misappropriated funds, denied him access to accounting information, and entered into a Restated Articles of Incorporation – Mutual Benefit to Stock whereupon Mr. Justis and Mr. Hodges were issued stock and are the sole owners of B&R. Mr. Rice alleges that B&R has now been converted to a for-profit entity in late 2022.

The Second Amended Cross-Complaint (“SACC”), filed February 23, 2023, alleges causes of action for: (1) breach of oral contract against Mr. Justis and Mr. Hodges; (2) conversion against Mr. Hodges; (3) unjust enrichment against Mr. Hodges; and (4) promissory estoppel against Mr. Hodges.

B. Motions on Calendar

On March 14, 2023, Mr. Justis filed a demurrer and motion to strike portions of Rice’s SACC.

On April 3, 2023, Mr. Rice filed an untimely opposition brief. The Court notes that any opposition brief was due by March 24, 2023. Mr. Rice filed the opposition brief after the date that Mr. Justis’ responsive reply brief would have been due (March 30, 2023).

REQUEST FOR JUDICIAL NOTICE

Mr. Justis requests judicial notice of Exhibits: (A) the Final Statement of Decision in this case filed on May 23, 2022; and (B) the Transcript of Proceedings on September 9, 2021 in this action containing the direct examination of Mr. Rice; (C) Phase 1 Trial Exhibit 118, which includes the Settlement Agreement between Mr. Justis, Mr. Hodges, B&R, and Merav Agig executed on September 24, 2014; (D) Phase 1 Trial Exhibit 163, which includes the Ariston Group business records; and (E) Phase 1 Trial Exhibit 177, which includes an email between Mr. Hodges and Mr. Rice dated July 13, 2015. The request is granted. (Evid. Code, § 452(d).) With respect to Exhibits C-E, the Court will take judicial notice of the existence of the documents that were presented at trial, but not for the truth of the matters stated therein.

DISCUSSION RE DEMURRER

Mr. Justis demurs to the 1^st cause of action for breach of the joint venture agreement in Rice’s SACC on the grounds that it fails to state sufficient facts to constitute a cause of action against him.

By way of background, the Court previously granted with leave to amend Mr. Justis’ motion for judgment on the pleadings as to the 1^st cause of action for breach of oral agreement in Rice’s FACC. The Court found that Mr. Justis’ argument regarding unclean hands lacked merit, but granted the motion on the grounds that there were issues regarding the 2-year statute of limitations.

A. Statute of Limitations

Mr. Justis argues that Mr. Rice’s breach of contract claim is barred by the 2-year statute of limitations.

In the 1^st cause of action, Mr. Rice alleges that Mr. Rice, Mr. Hodges, and Mr. Justis entered into an oral, joint venture agreement, such that Mr. Hodges and Mr. Rice would equally supply the funds necessary to purchase, improve, and operate a medical cannabis dispensary, while Mr. Justis would relocate and invest his time in building the business. (SACC, ¶¶38-39.) Mr. Rice alleges that any available funds from the business would first be applied to repay Mr. Hodges and Mr. Rice before Mr. Justis received a salary, and then once allowed, they would convert the business to a for-profit entity and hold equal equity interest in the medical cannabis dispensary. (Id., ¶39.) Mr. Rice alleges that he performed his obligations under the contract or was excused from doing so. (Id., ¶40.) He alleges that he made payments to Mr. Justis for the benefit of the joint venture, totaling over $172,000, but Mr. Justis and Mr. Hodges breached the agreement by misrepresenting B&R’s financials, failing to make payment to Mr. Rice, embezzling money from B&R in order to reduce funds for repayment, refusing to appoint Mr. Rice as a Director after Ms. Agig resigned from the Board, and by amending and restating the Articles of Incorporation for B&R to reclassify it as a stock corporation without assigning Mr. Rice his entitled ownership. (Id., ¶41.) Mr. Rice alleges that he has incurred damages from August 2016. (Id., ¶42.)

CCP § 339(1) states that the statute of limitations for an action upon a contract that is not founded upon an instrument of writing is 2 years.

Mr. Justis argues that Mr. Rice’s claim for repayment is untimely based on the 2-year statute of limitations period. According to the SACC, Mr. Rice alleges that in November 2016, after final payments were made to Ms. Agig, B&R had available funds to begin repaying the loan obligation to Mr. Hodges and Mr. Rice, but Mr. Rice has not been paid in full for his contributions to the joint venture or issued stock/ownership in B&R. (SACC, ¶35.) Mr. Justis argues that this allegation is in conflict with Mr. Rice’s prior allegation in the FACC that B&R had available funds in November 2011 to begin repaying the loan obligation to Mr. Hodges and Mr. Rice. (FACC, ¶25.) Mr. Rice filed his initial cross-complaint in January 2018. Here, there is an issue between the prior allegations in the FACC and the current allegations in the SACC. In his untimely opposition brief, Mr. Rice argues that the breach of oral agreement occurred in 2016 for failure to continue repayment of the initial capital and that his cross-complaint alleges sufficient breaches occurring between 2016 and 2022. (Opp. at ¶¶4, 20.) It is unclear of Mr. Rice is alleging a continual breach theory and whether such a theory would be appropriate under the context of this case. Regardless, Mr. Rice has not explained the inconsistency of when he had notice of his breach of oral contract claim from 2011 (as alleged in the FACC) to 2016 (as alleged in the SACC). “[W]hen a complaint contains allegations that are fatal to a cause of action, a plaintiff cannot avoid those defects simply by filing an amended complaint that omits the problematic facts or pleads facts inconsistent with those alleged earlier. [Citations.] Absent an explanation for the inconsistency, a court will read the original defect into the amended complaint, rendering it vulnerable to demurrer again.” (Banis Restaurant Design, Inc. v. Serrano (2005) 134 Cal.App.4th 1035, 1044.) As such, a plaintiff “cannot avoid a demurrer by filing an amended complaint that contradicts its earlier complaint.” (Id. at 1046.) If Mr. Rice intends to go forward with his breach of contract claim on the basis that he was not timely repaid, then such inconsistencies should be explained as the allegations currently constitute sham pleading and is thereby subject to a demurrer.

With respect to the breach of oral joint venture agreement based on the Directorship Agreement, the Court has previously found that the Directorship Agreement could not be taken at face value as individuals were essentially paying for director seats in a nonprofit corporation. (5/23/22 Final Statement of Decision at p.45.) In the SACC, Mr. Rice alleges that Ms. Agig, B&R, Mr. Justis, and Mr. Hodges entered into the Settlement Agreement and Mutual Release of All Claims in September 2014. (Justis RJN, Ex. C; SACC ¶24.) Mr. Rice also alleges that the matter went to arbitration in August 2015 when Ms. Agig tried to enforce the terms and that Ms. Agig was finally removed as a director of B&R in early 2016 when the arbitration award was ultimately paid. (SACC, ¶ 24.) Mr. Rice alleges that he began suspecting impropriety by Mr. Justis and Mr. Hodges in late 2016 when they failed to perform under the joint venture agreement. (Id., ¶27.) Based on his allegations, Mr. Rice has alleged that he intended to be made a director sometime in 2016 when B&R was still a nonprofit organization. However, Mr. Rice lacks a viable claim for breach of oral joint venture agreement based on the Directorship Agreement, for the same reasons discussed in the Court’s Statement of Decision regarding the impropriety of individuals attempting to buy directorship seats in a nonprofit corporation; and this finding is the law of the case. Thus, the Court sustains the demurrer on the 1^st cause of action with respect to Mr. Rice’s allegations that he was not appointed a director pursuant to the Directorship Agreement.

Finally, Mr. Justis argues that Mr. Rice admitted that the oral contract was not to be performed within a year. Civil Code, § 1624(a)(1) states that a contract is invalid unless it is in writing and subscribed by the party to be charged or by the party’s agent for an agreement that by its terms is not to be performed within a year from the making thereof. Mr. Justis argues that Mr. Rice testified that he did not expect to be paid within a year of the agreement and that it turned out that it took a total of 12 years. (Justis RJN, Transcript at pp. 106-107; SAC, ¶15.) In the SACC, Mr. Rice alleges that at the time in 2010, it was unknown how long B&R would be required to operate as a nonprofit before it could be converted into a for-profit corporation, but that it turned out that it took 12 years for B&R to be converted to a for-profit entity in late 2022. (SAC, ¶15.) Further, the transcript states as follows:

Q. AND SO WHEN DID YOU EXPECT TO GET REPAID IN FULL FROM THE INITIAL $150,000?

A. I MEAN, IT REALLY WASN’T A TIMETABLE THAT WAS DISCUSSED, SO—

Q. DID YOU EXPECT IT WITHIN 2010?

A. NO.

(Justis RJN, Ex. B [Transcript of Proceedings of September 9, 2021 at pp.106].) Taken together, Mr. Rice’s testimony and his allegation in the SACC at least indicate that he was not sure when the joint venture agreement would be performed with respect to getting repaid the funds he initially invested. It is also not entirely clear when Mr. Hodges and Mr. Rice made their initial investment in 2010, such that it is unclear if Mr. Rice would have expected to be paid in 2010. (For example, if they invested funds in December 2010, it is probably unlikely for Mr. Rice to have expected repayment in 2010.) Thus, at this time, the issue regarding the statute of frauds cannot be determined based on the pleadings and judicially noticeable documents. This is better raised beyond the pleading stage when the Court and the parties may consider evidence.

Thus, the demurrer to the 1^st cause of action in Mr. Rice’s SACC is sustained.

DISCUSSION RE MOTION TO STRIKE
Mr. Justis moves to strike certain allegations from the SACC, arguing that they were outside the scope of the Court’s order granting leave to amend following the motion for judgment on the pleadings on the FACC and that some allegations are inconsistent with the FACC’s allegations.

For the reasons discussed above, the Court grants the motion to strike paragraphs 27 and 35 in the SACC as it constitutes sham pleading because Mr. Rice has not addressed the inconsistency of the allegations from the FACC to the SACC. (The claims as far back as 2011 would be beyond the statute of limitations period, while claims from 2016 and onward would be within the 2-year statute of limitations period from when Mr. Rice filed the initial cross-complaint in January 2018. The issue is when Mr. Rice was on notice of his claim for repayment of the loan and when the time for his breach of oral contract cause of action began to accrue.) The Court will grant leave to amend to allow Mr. Rice an opportunity to explain the inconsistency.

The Court will grant the motion to strike without leave to amend as to allegations regarding the Directorship Agreement in paragraphs 24 and 25 for the reasons discussed above in the order on the demurrer to the extent these allegations were intended to support a cause of action for breach of the Directorship Agreement.

The Court denies the motion as to the remainder of the allegations cited in the notice of motion. Although Mr. Justis argues that the additional allegations are outside of the Court’s prior order on the motion for judgment on the pleadings, the Court will allow the additional/supplemental allegations for the reasons discussed above.

CONCLUSION AND ORDER

Cross-Defendant Aaron Justis’ demurrer to the 1^st cause of action for breach of the oral joint venture agreement in Cross-Complainant Rodney Rice’s second amended cross-complaint is sustained with 20 days leave to amend as to the allegations regarding the statute of limitations with respect to Mr. Rice’s allegations for repayment and sustained without leave to amend as to allegations relating to the Directorship Agreement.

Cross-Defendant Aaron Justis’ motion to strike is granted with 20 days leave to amend as to paragraphs 24, and 25 without leave to amend. The motion to strike is granted with leave to amend as to paragraphs 27 and 35 as stated in the written order. The motion to strike is denied as to the remainder.

Cross-Defendant shall provide notice of this order.