Judge John J. Kralik, Case EC069344 2022-10-14 Tentative Ruling

Plaintiff Michael Lawrence Kline (“Plaintiff”) and Defendant Michael Dibacco (“Defendant”) each own 50% ownership of Two Michaels LLC and MRRS Co. LLC. Two Michaels LLC owns and operates 2 businesses located at 10057 Riverside Drive in Toluca Lake, consisting of a lounge and restaurant in the back of the property called “The Red Door”, and a full restaurant in the front called “Riverside.” Plaintiff is the head chef and kitchen manager of the businesses, while Defendant is the bar manager, maintains the corporate records, and manages finances. Plaintiff alleges that Defendant mishandled and misappropriated company funds, misrepresented and concealed banking and credit card records, and filed fraudulent tax returns.

Plaintiff filed the verified complaint on September 7, 2018. That same day, Plaintiff filed the verified amended complaint. Thereafter, on December 28, 2018, Plaintiff filed a Second Amended Verified Complaint. On June 24, 2022, Plaintiff filed the Third Amended Complaint (“TAC”), which alleges causes of action for: (1) breach of contract; (2) breach of fiduciary duty; (3) breach of implied covenant of good faith and fair dealing; (4) fraud/intentional misrepresentation and concealment; and (5) injunctive relief.

On February 16, 2022, the Court ordered stricken the answer filed by Two Michaels LLC. The Court also dismissed without prejudice DiBacco’s complaint and Kline’s cross-complaint filed in Case No. 19BBCV00258.

On October 30, 2020, the Court granted Plaintiff’s motion for preliminary injunction as follows:

Defendant, his officers, agents, representatives and all persons in privity are enjoined from:

(1) Demanding, collecting, receiving, transferring, or in any way diverting or using any of the account receivable funds, bank accounts, or other funds derived from Two Michaels LLC’s businesses to non-business accounts, non-business purposes, or any purposes without the consent of Plaintiff;

(2) Transferring, directly or indirectly, any interest in Two Michaels LLC’s assets and property, or disposing of such without the consent of Plaintiff;

(3) Using Two Michaels LLC’s assets to conduct any business (i.e., the company’s lease agreements, restaurant assets, licenses, fixtures, etc.), obtain loans, or accrue additional debt; and

(4) Interfering with or hindering in any way whatsoever in the performance of Plaintiff’s duties including but not limited to committing or permitting any waste on the Two Michaels LLC’s business and/or business premises, or acting detrimentally to affect the business, or any act in violation of the law.

In addition, to the extent Plaintiff seeks the production of the company records, such as bank checking and savings account information and existing contact information for Two Michaels LLC’s creditors, debtors, or anyone else who should be legally notified of the dissolution of the company, Defendant is ordered to promptly produce the information. Defendant must produce “all books records, and documents of every kind owned or kept on behalf of Two Michaels LLC” for inspection and copying for a two consecutive eight-hour day at the premises where they are currently kept. Defendant must also provide access to Plaintiff to the real property for inspections to occur during business hours based upon reasonable notice, not less than 24 hours.

On July 11, 2022, the Court granted Plaintiff’s motion for a third amended preliminary injunction. The Court’s ordered stated that Defendant Michael A. Di Bacco, his officers, agents, representatives and all persons in privity are enjoined from:

(1) Using Two Michaels LLC’s assets to conduct any business (i.e., the company’s lease agreements, restaurant assets, licenses, fixtures, etc.), obtain loans, or accrue additional debt;

(2) Demanding, collecting, receiving, transferring, or in any way diverting or using any of the account receivable funds, bank accounts, or other funds derived from Two Michaels LLC’s businesses, or money earned using the assets of Two Michaels LLC’s, to nonbusiness accounts, non-business purposes, or any purposes without the consent of Plaintiff;

(3) Transferring, directly or indirectly, any interest in Two Michaels LLC’s assets and property, or disposing of such without the consent of Plaintiff;

(4) Using Two Michaels LLC’s assets to conduct any business during the “winding up” and final stages of the dissolution process; and

(5) Interfering with or hindering in any way whatsoever in the performance of Plaintiff’s duties herein described and any duties incident thereto, including, but not limited to, by way of committing or permitting any waste on the Two Michaels LLC’s assets, or any act in violation of law.

In addition, to the extent Plaintiff seeks all existing contact information for Two Michaels LLC’s creditors, debtors, and anyone else it should be legally notified of the dissolution of the company, the Court will order Defendant to promptly disclose this information to Plaintiff. (See Corp. Code, §§ 17707.04, 17707.05.) In addition, the parties should begin cooperating with the process of collecting and discharging obligations, disposing of and conveying Two Michaels LLC’s property, and collecting and dividing its assets pursuant to section 17707.06(a).

Plaintiff shall provide notice of this order and prepare an appropriate order which will take effect upon the filing of a bond in the amount of $55,000.

On September 2, 2022, the Court held an OSC re: Narrowing of the Injunction and Reducing the Bond Due to the Limited Relief Being Sought. The Court reduced the bond to $1,000 and ordered that the proceeds of assets sold by the company be held in the trust account of Plaintiff’s counsel and ordered that proceeds may not be distributed without further order of the Court. The preliminary injunction shall remain in full force and effect.

On September 15, 2022, Plaintiff filed an ex parte application for an order shortening time to hear Plaintiff’s ex parte motion for an order to enforce the preliminary injunction and request for sanctions.

On September 20, 2022, the Court granted the ex parte application such that the motion was set for October 14, 2022. The Court ordered any additional pleadings from Plaintiff to be filed by September 21, 2022; any opposition brief by Defendant was due by October 5, 2022; and any reply brief by plaintiff was due by October 10, 2022.

On September 21, 2022, Plaintiff filed supplemental papers in support of the motion.

Plaintiff moves for an order enforcing the preliminary injunction order against Defendant. Plaintiff argues that on September 7, 2022, defense counsel, Steve Burton, forwarded an email to Plaintiff’s counsel outlining Defendant’s plan to sell/auction the restaurant’s assets the following day. (Hougnon Decl., ¶5, Ex. 2.) Plaintiff’s counsel responded that same day agreeing to the plan, reminding Defendant that sale proceeds must be deposited into Plaintiff’s counsel’s state Bar Trust Account, and requesting contact information for the potential buyers. (Id., ¶6, Ex. 3.) Plaintiff argues that when it contacted one of the buyers, PCI Liquidators, Plaintiff’s counsel was told that Defendant had canceled the sale. (Id., ¶¶7-8, Exs. 4-6; Kline Decl., ¶¶4-5.) At the time the ex parte application was filed, Plaintiff stated that the demolition of the restaurant was approaching on September 22, 2022. (Kline Decl., ¶7; Mot., Ex. 7.) (In Mr. Hougnon’s September 13, 2022 email, he informs defense counsel that the landlord stated he could not get rid of the restaurant without court approval. [Mot., Ex. 8.]) On September 13, 2022, Plaintiff’s counsel sent an email to defense counsel once again stating Plaintiff’s agreement to sell/auction the LLC’s assets, pursuant to certain conditions.[1] (Hougnon Decl., ¶¶11-12, Ex. 9.) On September 13, 2022, Mr. Burton responded that he was unable to contact Defendant, thereby prompting Plaintiff to file this ex parte application/motion. (Id., ¶13, Ex. 10.)

After the filing of the ex parte application, Plaintiff provides supplemental facts. Plaintiff conducted an inventory on August 21, 2022 per the Court’s order and confirmed that all of the assets that were listed in the Michaels Red Door Inventory List were there at that time. (Houhnon Suppl. Decl., ¶8.) Plaintiff states that on September 17, 2022, he discovered that many of the LLC’s assets were missing. (Pl’s Suppl. Decl., ¶9.) Plaintiff states that when he confronted Defendant about the missing assets, Defendant admitted that some assets were sold without Plaintiff’s knowledge or agreement and that he would provide a summary of items sold and the contact information of the purchasers. (Id., ¶10.) Plaintiff argues that since the filing of the motion, Defendant has not sent information about the sold assets. (Id., ¶11; Hougnon Suppl. Decl., ¶10.) Plaintiff believes that Defendant has been secretly selling assets at night. (Pl.’s Suppl. Decl., ¶10.) Plaintiff states that Defendant has finally agreed to allow PCI Liquidators to come to the restaurants on September 21, 2022 to pick up the LLC’s assets prior to the scheduled demolition. (Id., ¶13.)

In opposition, Defendant argues that he has sold the restaurant’s assets and provided a summary and receipts thereto. In his declaration, he states that he did not cancel the sale with the auctioneers PCI Liquidators, but only put the sale on “hold” and that the hold had nothing to do with him keeping the money. (DiBacco Decl., ¶¶6-7, Ex. A.) He states that he is concerned about the money owed to Tony DiBacco by the LLC and that the Court awarded Tony DiBacco a writ of attachment for loans in Case No. 19BBCV00258. (Id., ¶¶9-10.) Defendant states that the property was fenced on August 1, 2022, he had the legal right to possess the restaurant keys until the demolition permit was posted, and he was able to complete daily tasks with the project manager at the construction site. (Id., ¶¶12, 17, 18.) He states that he solely owned the restaurant from September 2, 2020 to August 1, 2022 and that he had numerous items, food, and beverages that were his personal items. (Id., ¶¶19-20.) Defendant denies taking furniture out of the restaurant at night and instead states that there were 4 attempted break-ins, of which he has some footage. (Id., ¶¶21-24, 43.) He states that the demolition started on September 28, 2022 as to one of the buildings on the property, but not the restaurant. (Id., ¶25.) Defendant states that he was communicating with the auctioneer and the available sale/auction options, as well as a restaurant called Benny to consider how best to dispose of the assets, but states that Plaintiff kept delaying the process. (Id., ¶¶26-32.) Defendant states that though the parties were supposed to wind down the assets together, he ended up doing it himself. (Id., ¶¶33, 38-39.) He states that he has signed receipts and a list of items sold. (Id., ¶41, Ex. D.) He states that on October 3, 2022, he emailed his counsel a copy of all scanned receipts and inventory and he sent Mr. Hougnon a cashier’s check for $6,592 to hold in his trust account. (Id., ¶¶56-57, Exs. F-G.) He asks that the Court not sanction him because he worked hard to deal with the auctioneers, find storage space, make trips to the restaurant and storage, and abide with the Court’s order as fast as he could, and he states that he now has no source of income such that a sanction would be a heavy financial burden on him. (Id., ¶¶54, 58.)

As the assets have been sold from the restaurant; Defendant has provided a list of inventory and prices, as well as copies of the receipts of assets sold; and has delivered a check to Mr. Hougnon, the motion to enforce the preliminary injunction order is essentially moot. Further, it appears that demolition of the property has already begun. In reply, Plaintiff argues that the motion should be granted because though Defendant has finally made efforts to cooperate, Plaintiff doubts whether Defendant will follow through and act in good faith moving forward. (Reply at p.10.) However, if future issues arise, then those issues may be addressed at that time. As the assets in the restaurant have been sold and the property has undergone/is undergoing demolition, it does not appear that enforcing the preliminary injunction would have any further effect.

With respect to the Asian Screens, the parties’ declarations are conflicting whether Plaintiff “tagged’” the Asian Screens with blue tape to signify it as property he wanted to keep or purchase. However, the Asian Screens have been sold and a receipt is provided in Defendant’s opposition showing that the panels were sold for $600 with Receipt No. 736514. (Opp. at Ex. D.) The inventory list does not specify who the assets were sold to. Detailing who purchased each of the assets was not a requirement under the preliminary injunction order, nor was there any order that Defendant pursue purchasers for assets that Plaintiff may have wanted to keep or purchase himself. However, the parties should communicate and discuss who the Asian Screens were sold to so that Plaintiff may undertake efforts to repurchase the panels if he so wishes.

Thus, the only remaining issue is whether sanctions are appropriate. In his supplemental declaration, Mr. Hougnon states that he is seeking $6,062.50 in sanctions for the 19.25 hours he spent prior to filing the ex parte application and the 10+ hours he spent thereafter. (Hougnon Suppl. Decl., ¶13; Mot., Ex. 22 [Pl.’s Counsel’s billing].) He states that he is willing to reduce the hours, such that he is only seeking 24.25 hours at $250/hour. (Hougnon Suppl. Decl., ¶13.) The billing records attached with the reply brief reflect 29.7 hours at $250/hour for a total of $7,425. (Mot., Ex. 22.)

The Court finds that the request for sanctions is well-taken. The previous orders in this case have clearly delineated the Plaintiff’s right to participate in the sale of the assets of the business, and to close the business to prevent further exposure to liabilities. Defendant has consistently resisted and frustrated the exercise of the Plaintiff’s legal rights. The Defendant’s last-minute, grudging, and partial compliance with the Court’s order does not excuse his prior conduct. The Court awards sanctions in the amount of $6,062.50.

Plaintiff Michael Kline’s motion to enforce the preliminary injunction order is moot as the assets of the business have been sold. Plaintiff’s request for sanctions is granted in the amount of $6,062.50.

[1] The “conditions” include: (1) Defendant’s written confirmation that he will follow the Court’s orders; (2) a summary of an LLC assets that have been sold thus far and their prices; (3) if Defendant sold assets, then to send a cashier’s check payable to Joseph P. Hougnon, State Bar Trust Account; (4) Defendant’s agreement to return the money he received from the sale of the “Asian Screen” and to promise he will get it back from the person who purchased it as stolen property (because Plaintiff wanted to purchase it); (5) a promise to provide a list of known TM LLC creditors including contact information; (6) a promise to take the time to determine and provide a summary of any known debts of either LLC; and (7) a promise to allow Plaintiff access to the property. (See Mot., Ex. 9.)

Superior Court of California

County of Los Angeles

Department B