Judge Jon R. Takasugi, Case 22STCV30718 2023-05-17 Tentative Ruling

Defendant’s demurrer is SUSTAINED, WITH 20 DAYS LEAVE TO AMEND. Accordingly, Defendant’s motion to strike is MOOT.

a directive capacity on behalf of Geminon Properties, LLC (Plaintiff) against Arsalan Hamidi (Defendant), alleging: (1) breach of operating agreement; (2) breach of fiduciary duties; (3) constructive fraud; (4) constructive trust; (5) conversion; (6) cessation; and (7) declaratory relief.

Now, Defendant demurs to Plaintiff’s Complaint. Defendant also moves to strike portions of the Complaint.

Defendant argues that Plaintiff fails to state a claim because he lacks individual standing to bring these claims as a direct action, and Plaintiff is barred from bringing a derivative claim because Plaintiff failed to allege that he made a demand on Geminon Properties, LLC. Moreover, Defendant argues that Plaintiff has failed to allege sufficient facts to state a claim for the underlying causes of action.

The principles of derivative lawsuits applicable to corporations are likewise applied to limited liability companies such as Geminon. (Paclink Communications Internat. v. Superior Court (2001) 90 Cal.App.4th 958, 963.) “A derivative claim is a property right that belongs to the corporation. . . . Because a corporation exists as a separate legal entity, the shareholders have no direct cause of action or right of recovery against those who have harmed it. The shareholders may, however, bring a derivative suit to enforce the corporation's rights and redress its injuries when the board of directors fails or refuses to do so.” (Cotton v. Expo Power Systems, Inc. (2009) 170 Cal.App.4th 1371, 1380.) The action is derivative “if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets.” (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106.) Indeed, “where a cause of action seeks to recover for harms to the corporation, the shareholders have no direct cause of action ‘[b]ecause a corporation exists as a separate legal entity’ [citation] and ‘is the ultimate beneficiary of such a derivative suit.’ [Citation.]” (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 149.) A direct (as opposed to a derivative) action is maintainable “only if the damages [are] not incidental to an injury to the corporation. [Citation.]” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 793.) In determining whether a direct or derivative action is appropriate, courts look at “the gravamen of the wrong alleged in the pleadings.” (Nelson v. Anderson (1999) 72 Cal. App. 4th 111, 124.)

In Packlink, supra, 90 Cal.App.4th at p. 961, the plaintiffs were members of an LLC. The assets of the LLC were transferred by other members twice to companies with which the plaintiffs were not involved. (Ibid.) The plaintiffs filed suit against four business entities as well as nine individual defendants, alleging causes of action for fraudulent transfer, conspiracy to defraud creditors and commit conversion, imposition of a constructive trust, conversion, breach of fiduciary duties, and breach of contract. (Id. at p. 962.) Two of the defendant business entities filed a demurrer as to the fraudulent transfer, conspiracy, and constructive trust causes of action, on the basis that the real party in interest was the original LLC, and not the individual plaintiffs. (Ibid.) The remaining causes of action were not asserted against these business entities and therefore not at issue in the demurrer. (Ibid.) The trial court overruled the demurrer. (Id. at p. 963.) The Court of Appeal, however, issued a peremptory writ of mandate compelling the trial court to set aside its order overruling the demurrer and instead enter a new order sustaining the demurrer without leave to amend on the basis that the plaintiffs could only sue by derivative action. (Id. at p. 966.) The court explained, “[i]n this case, the essence of plaintiffs’ claim is that the assets of [the LLC] were fraudulently transferred without any compensation being paid to the LLC. This constitutes an injury to the company itself. Because members of the LLC hold no direct ownership interest in the company’s assets (Corp. Code, § 17300), the members cannot be directly injured when the company is improperly deprived of those assets. The injury was essentially a diminution in the value of their membership interest in the LLC occasioned by the loss of the company's assets. Consequently, any injury to plaintiffs was incidental to the injury suffered by [the LLC].” (Id. at p. 964.)

Here, similarly, the gravamen of the injury alleged in the Complaint is suffered by Geminon, and not by Plaintiff.[1] Specifically, the essence of Plaintiff’s Complaint is that Defendant allegedly and improperly withdrew and commingled monies from Geminon’s account, which have not been returned, and deployed capital without unanimous manager approval. (Complaint, ¶¶ 25- 26, 29, 35, 40, 49, 53-54, 64.) Indeed, the allegation that Defendant unilaterally withdrew funds from Geminon’s account forms the basis for each of Plaintiff’s seven causes of action. (Id.) As such, there is no direct injury alleged to Plaintiff. Instead, the only alleged injury to Plaintiff, i.e., a diminution in the value of his membership interest in the LLC, is entirely incidental to the injury suffered by Geminon. Plaintiff cannot show a direct injury if the monies at issue are assets of Geminon only. (See Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 1214 fn. 1 [“Like corporate shareholders, members of a limited liability company hold no direct ownership interest in the company’s assets.”].) Georgia laws governing LLCs reflect the same. (See O.C.G.A. § 14-11-501, subd. (a) [“. . . A member has no interest in specific limited liability company property.”].)

As such, the Court finds that Plaintiff cannot individually assert claims based on injuries to Geminon.

The Court also agrees that Plaintiff has failed to allege sufficient facts to show that the derivative claim is properly asserted. Pursuant to Georgia law, “[a] member may commence a derivative action in the right of the limited liability company to recover a judgment in its favor if all of the following conditions are met: . . . (2) The plaintiff has made written demand on those managers or those members with such authority requesting that such managers or such members take suitable action; (3) Ninety days have expired from the date the demand was made unless the member has earlier been notified that the demand has been rejected by the limited liability company or unless irreparable injury to the limited liability company would result by waiting for the expiration of the 90 day period”. (Ga. Code Ann. § 14-11-801.) Moreover, futility is not an exception under Georgia law. (Pinnacle Benning, LLC v. Clark Realty Capital, LLC (2012) 314 Ga.App. 609, 616.) [“because we find the language of our statute and the intent of the General Assembly clear and unambiguous, we will not judicially create a futility exception out of whole cloth, and we affirm the trial court's dismissal of Pinnacle's derivative action as a result of this procedural defect”].)

Here, Plaintiff’s Complaint makes no allegation that Plaintiff made a written demand, as required to properly assert this claim under Georgia law.

In opposition, Plaintiff argues that the derivative action is not governed by Georgia law, and that California’s choice of law rule favors the application of California law here. Based on the application of California law, Plaintiff alleges that he has satisfied the requirements for pursuing a derivative action.

However, as a preliminary matter, California law requires that before bringing a derivative action, a shareholder is required to make a demand on the board, unless demand is excused. (See, e.g., Fornaseri v. Cosmosart Realty & Bldg. Corp. (1929) 96 Cal. App. 549, 556 (“Before a stockholder’s suit for redress will lie…demand must first be made upon the officers to institute appropriate proceedings, unless such demand would be futile.”; see also Cal. Corp. Code § 800(b)(2).)

As such, even assuming California law governs here, Plaintiff must still allege facts which could show that a written demand was made, or allege facts which could show that such a demand would have been futile.

Moreover, California Corporations Code, section 17708.01, subdivision (a), provides, in relevant part, that:

The law of the state or other jurisdiction under which a foreign limited liability company is formed governs all of the following: (1) The organization of the limited liability company its internal affairs, and the authority of its members and managers…

California Courts have interpreted he procedural requirements for bringing a derivative suit to be subject to the internal affairs doctrine: “the procedural requirements of shareholder derivative suits [citation] involve matters of internal corporate governance and thus, fall within a corporation’s internal affairs.” (Lidow v. Superior Court (2012) 206 Cal.App.4th 351, 363; see also Boschetti v. Pacific Bay Investments Inc. (2019) 32 Cal.App.5th 1059, 1068 [where “the shareholder of a foreign corporation must fulfill certain procedural requirements set before bringing a derivative suit[], courts are more apt to apply the internal affairs doctrine.”].)

In Vaughn v. LJ Internat., Inc. (2009) 174 Cal.App.4th 213, a shareholder of a corporation which was incorporated in the British Virgin Islands, filed a derivative action against the corporation and its directors in California, alleging breach of fiduciary duty. (Id. at pp. 216-218.) The defendants filed a demurrer on the basis that the plaintiff was not entitled to sue derivatively without following the procedural requirements of the British Virgin Islands. (Id. at p. 218.) The trial court sustained the demurrer. (Ibid.) The Court of Appeal affirmed, reasoning that the procedural requirement applicable there, “in establishing a condition precedent to the right of a shareholder to derivatively sue corporate directors on behalf of the company, most definitely regulates the internal affairs of the corporation.” (Id. at p. 225.)

Similarly, here, Georgia’s procedural requirement establishing a condition precedent to pursuing a derivative action regulates the internal affairs of the corporation. Thus, under California Corporations Code, section 17708.01, subdivision (a) and the internal affairs doctrine, the Court agrees Georgia law regarding this procedural requirement should govern.

The Court will grant leave to amend to allow Plaintiff the opportunity to address these deficiencies, i.e., to show that Plaintiff suffered direct, rather than purely incidental injuries, and to show that he has satisfied the requirements for asserting a derivative claim under Georgia law.

Based on the foregoing, Defendant’s demurrer is sustained, with 20 days leave to amend. Accordingly, Defendant’s motion to strike is moot.

Parties who intend to submit on this tentative must send an email to the court at smcdept17@lacourt.org by 4 p.m. the day prior as directed by the instructions provided on the court website at www.lacourt.org. If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative. If all parties to a motion submit, the court will adopt this tentative as the final order. If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar.

Due to Covid-19, the court is strongly discouraging in-person appearances. Parties, counsel, and court reporters present are subject to temperature checks and health inquiries, and will be denied entry if admission could create a public health risk. The court encourages the parties wishing to argue to appear via L.A. Court Connect. For more information, please contact the court clerk at (213) 633-0517. Your understanding during these difficult times is appreciated.

[1] In opposition, Plaintiff attempts to distinguish PackLink arguing that this action does not involve the same causes of action. However, whether an action is derivative or individual depends on the substance of the claim, not the form. (PacLink, supra, 90 Cal.App.4th at p. 965 [“In determining whether an individual action as opposed to a derivative action lies, a court looks at ‘the gravamen of the wrong alleged in the pleadings.”]