Judge: Joseph Lipner, Case: 21STCV46389, Date: 2024-04-16 Tentative Ruling
Case Number: 21STCV46389 Hearing Date: April 16, 2024 Dept: 72
SUPERIOR COURT OF CALIFORNIA
COUNTY OF LOS ANGELES
DEPARTMENT 72
TENTATIVE
RULING
|
PACIFIC GREEN, LLC, et al., Plaintiffs, v. PAUL FIORE, et al., Defendants. |
Case No:
21STCV46389 Hearing Date: April 16, 2024 Calendar Number: 10 |
Defendants Paul Fiore, One Eleven Advisors, LLC (“One
Eleven”), Rebel Holdings LLC (“Rebel”), Jay Rifkin, Hills Group, LLC (“Hills
Group”), and Hills One LLC (“Hills One”) (collectively, “Moving Defendants”)
demur to the Fourth Amended Complaint (“4AC”) filed by Plaintiffs Pacific
Green, LLC (“Pacific Green”) and Big Tree Holdings, LLC (“Big Tree”)
(collectively, “Plaintiffs”).
The Court OVERRULES the demurrer to the first, second, and
fourth claims with respect to Hills Group.
The Court SUSTAINS the demurrer to the first, second, and
fourth claims WITHOUT LEAVE TO AMEND with respect to the remaining Moving defendants.
The Court OVERRULES the demurrer to the fifth claim.
The Court OVERRULES the demurrer to the sixth claim.
The Court OVERRULES the demurrer to the seventh claim as to
Hills Group and Rifkin. The Court
SUSTAINS the demurrer to the seventh claim WITH LEAVE TO AMEND as to the
remaining Moving Defendants.
The Court SUSTAINS the demurrer to the eighth claim WITH LEAVE
TO AMEND.
Plaintiffs shall have twenty days to amend the complaint
where leave has been granted.
The following allegations are taken from the 4AC except
where otherwise noted.
This case arises out of a cannabis investment project gone
awry. In about 2017, Fiore, Rifkin, and Alex Reyter (collectively, the
“Principals”) decided to enter the cannabidiol (“CBD”) market and seek
investors. They formed Hills Group and Hills One for this purpose.
Additionally, Fiore owns and manages One Eleven; Rifkin owns and manages Rebel;
and Reyter manages Tudor Capital, LLC (“Tudor”).
Plaintiffs allege that the Principals did not have
experience, expertise, or connections in the CBD industry, and that they
therefore falsely represented themselves to investors as being highly
experienced and well-connected in the CBD industry in order to gain investors.
Around January or February 2018, Reyter began speaking with
Jacob Stein, the manager of both Plaintiffs Pacific Green and Big Tree. Over
the course of the next few months, the Principals, primarily through Reyter,
allegedly made a number of false representations to Stein, including that Hills
One and Hills Group had received substantial investment, that the principals
had invested certain amounts of money in Hills One, that Hills Group controlled
other companies of certain values, that Hills Group owned an industrial
production plant in Oregon for its venture, and that the Principals would all
devote nearly all of their time to manage the venture.
Plaintiff Pacific Green was incorporated on April 3, 2018
and Plaintiff Big Tree was incorporated on June 13, 2018. (See Fiore’s Request
for Judicial Notice Ex. 2, 3.)
On July 16, 2018, Pacific Green and Tree Holdings entered
into a written agreement with Hills Group entitled (“Limited Liability Company
Agreement – Hills One, LLC” (the “Agreement”). (4AC ¶ 95, Ex. A.) Stein
delivered an initial payment of $1 million in investment funds from Plaintiffs
to the Principals’ enterprise pursuant to the Agreement. Pacific Green made
additional payments of $1.7 million on September 28, 2018, $1 million on
December 10, 2018, and $1 million on January 23, 2019.
Section 15.11 of the Hills One Agreement states, in part:
“All issues and questions concerning the application, construction, validity,
interpretation and enforcement of the Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware…”
However, section 15.12 of the Hills One Agreement states, in part, that any
“dispute, claim or controversy, arising out of or relating to [Hills One]
Agreement and/or a Member’s investment in the Company or in an investment
opportunity or to the rights, duties and obligations of the parties arising out
of or relating to this [Hills One] Agreement” (subd. b) “shall be determined in
accordance with the substantive laws of the State of California and the
procedural laws of the State of California…” (Subd. d.)
(4AC, Ex. A.)
Defendants’ enterprise generated almost no revenue.
Plaintiffs allege that the Principals failed to tend to the
day-to-day operations of Hills one or devote sufficient time to their
management duties. Plaintiffs allege that the Principals infrequently traveled
to Oregon. Plaintiffs allege that in 2019, Fiore and Rifkin reduced their work
for the business “to the point where they were more like passive investors than
active managers.” (4AC ¶ 135.)
Plaintiffs also allege a number of acts of mismanagement.
Plaintiffs allege that Rifkin usurped a number of hemp business opportunities
and took investment money for his own purposes or engaged in self-dealing on a
number of occasions.
Conversely, Defendants contend that the business failed
because a third-party supplier mistakenly shipped them a batch of CBD oil with
a THC content above the federal limit, resulting in the seizure of most of
their business assets by law enforcement. Defendants contend that Key
Compounds LLC v. Phasex Corporation (D. Or., Aug. 31, 2021, No.
6:20-CV-00680-AA) 2021 WL 3891586, at *3 lays out these facts. However, the
procedural posture of Key Compounds was that of a motion to dismiss,
where federal courts accept the pleaded facts as true, much like on a demurrer.
Thus, the Court could not rely on the Key Compounds court’s acceptance
of the facts of the facts as pleaded there in order to contradict the
allegations of the 4AC here, even assuming that consideration of the contents
of the decision would otherwise be proper.
Plaintiffs filed this action in the Los Angeles Superior
Court on December 20, 2021. On November 30, 2022, Plaintiffs filed a First
Amended Complaint (“1AC”). On December 12, 2022, Rebel filed a notice of
removal to federal court. The federal court sustained demurrers to the 1AC,
Second Amended Complaint (“2AC”), and Third Amended Complaint (“3AC”).
The operative complaint is now the 4AC, naming all of the
Moving Defendants as well as Tudor Capital, LLC (“Tudor”) and Reyter. The 4AC
raises claims for (1) fraud and deceit; (2) negligent misrepresentations; (3)
Civil RICO Violation under 18 U.S.C. §§ 1961, et seq.; (4) fraudulent
inducement to enter into contract (against all defendants except Hills One);
(5) breach of contract (against Hills Group); (6) negligence as a derivative
claim (against Hills Group); (7) conversion (against Fiore, Rifkin, Reyter, and
Hills Group); and (8) aiding and abetting torts.
On February 12, 2024, the federal court dismissed the RICO
claim and issued a notice of remand, returning the case to this Court.
Moving Defendants, divided into three separate groups, filed
a total of three demurrers and joined in each other’s demurrers. Reyer and
Tudor did not join the demurrers. The parties, including Plaintiffs, request
that the Court consider the demurrers and oppositions together. The Court will
do so.
The Court grants the parties’ requests for judicial notice.
As a general matter, 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 pleading
alone, and not the evidence or facts alleged.” (E-Fab, Inc. v. Accountants,
Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) The court assumes the truth
of the complaint’s properly pleaded or implied factual allegations. (Ibid.) The only issue a demurrer is
concerned with is whether the complaint, as it stands, states a cause of
action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)
Where a demurrer is sustained, leave to amend must be
allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335,
348.) The burden is on the plaintiff to show the court that a pleading can be
amended successfully. (Ibid.;
Lewis v. YouTube, LLC (2015) 244 Cal.App.4th 118, 226.) However, “[i]f
there is any reasonable possibility that the plaintiff can state a good cause
of action, it is error to sustain a demurrer without leave to amend.” (Youngman v. Nevada Irrigation Dist.
(1969) 70 Cal.2d 240, 245).
“The elements of
fraud are (a) a misrepresentation (false representation, concealment, or
nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce
reliance; (d) justifiable reliance; and (e) resulting damage.” (Hinesley v. Oakshade Town Ctr. (2005)
135 Cal.App.4th 289, 294.)
The facts
constituting the alleged fraud must be alleged factually and specifically as to
every element of fraud, as the policy of “liberal construction” of the
pleadings will not ordinarily be invoked. (Lazar
v. Superior Court (1996) 12 Cal.4th 631, 645.) To properly allege
fraud against a corporation, the plaintiffs must plead the names of the persons
allegedly making the false representations, their authority to speak, to whom
they spoke, what they said or wrote, and when it was said or written. (Tarmann v. State Farm Mut. Auto. Ins. Co.
(1991) 2 Cal.App.4th 153, 157.)
Defendants argue that Plaintiffs cannot rely on
representations made before they were formed on April 3, 2018 for Pacific Green
and on June 13, 2018 for Big Tree. However, Plaintiffs allege that Defendants
repeated the alleged representations to Stein even after Plaintiffs’
formations.
Defendants next argue that Plaintiffs cannot rely on
representations prior to the execution of the Agreement on July 16, 2018
because the Agreement contained an anti-reliance clause. Plaintiffs agree that
an effective anti-reliance clause in a contract precludes pre-execution fraud claims
but argue that the Agreement does not contain an effective anti-reliance
clause.
Plaintiffs argue that the Agreement only covers
misrepresentations about Hills One, but that the representations at issue were
actually about Hills Group. This argument is unavailing. Plaintiffs invested in
Hills One, and not Hills Group. Insofar as Defendants made misrepresentations
about Hills Group (which, as a matter of fact, Defendants represented would be
a member of Hill One and would contribute resources to Hill One), those
misrepresentations were only material insofar as they impacted Hills
One’s prospects. Thus, any otherwise actionable misrepresentations, which would
necessarily have to pertain to Hills One’s situation or prospects, would be
affected by the anti-reliance clause.
Plaintiffs argue that Delaware law precludes enforcement of
the anti-reliance clause in this case because an effective anti-reliance clause
requires “affirmative expression by [the plaintiff] of (1) specifically what it
was relying on when it decided to enter the [agreement] or (2) that it is was
not relying on any representations made outside of the [agreement].” (FdG
Logistics LLC v. A&R Logistics Holdings, Inc. (Del. Ch. 2016) 131 A.3d
842, 860, aff'd sub nom. A & R Logistics Holdings, Inc. v. FdG Logistics
LLC (Del. 2016) 148 A.3d 1171.)
The relevant portion of the Agreement states as follows:
“(d) Such Member has conducted its own independent review
and analysis of the
business,
operations, assets, liabilities, results of operations, financial condition and
prospects of the Company and such Member acknowledges that it has been provided
adequate access to the personnel, properties, premises and records of the
Company for such purpose;
(e) The determination of such Member to acquire Units has
been made by such
Member independent of any other Member and independent of
any statements or
opinions as to the advisability of such purchase or as to
the business, operations,
assets,
liabilities, results of operations, financial condition and prospects of the
Company that may have been made or given by any other Member or by any agent or
employee of any other Member;”
(4AC, Ex. A, § 4.02.)
Thus,
the Agreement satisfies the second disjunctive prong of the rule laid out in FdG
Logistics. The Agreement therefore precludes reliance on pre-Agreement
representations.
Defendants
argue that the Agreement precludes reliance on post-Agreement representations
as well. This argument is waived because it was not raised until the reply
brief.
Plaintiffs plead a number of allegedly false representations
following the Agreement about the state of the business. (4AC ¶¶ 113, 117, 118.)
Contrary to Defendants’ arguments, Plaintiffs plead these representations with
adequate specificity – with respect to Reyter. While Plaintiffs allege that
Reyter claimed to speak on behalf of the other Principals, they do not state
those allegations with adequate specificity.
Hills One only came into existence as of the Agreement and
could not have made prior representations. Further, Plaintiffs do not allege
any specific representations by Hills One. Plaintiffs allege that Hills One was
created to lend respectability to the Principals’ alleged plot and to be the
vehicle through which they operated their scheme. None of those allegations
constitute representations. Plaintiffs allege in a conclusory that Hills One
conspired and worked together with the other defendants on the fraud scheme.
Those allegations lack the specificity necessary for fraud claims. Plaintiffs
admit that that is all that they are prepared to allege against Hills One at
this time. Plaintiffs therefore have not stated a claim against Hills One.
The
Court therefore overrules the demurrer to this claim as to Hills Group. (Reyter does not demur here). Plaintiffs have
had plenty of opportunities to amend the complaint. The Court therefore
sustains the demurrer to this claim without leave to amend as to the remaining
defendants.
“California courts
have recognized a cause of action for negligent misrepresentation, i.e., a duty
to communicate accurate information, in two circumstances. The first situation
arises where providing false information poses a risk of and results in physical
harm to person or property. The second situation arises where information is
conveyed in a commercial setting for a business purpose.” (Friedman v. Merck & Co. (2003) 107 Cal.App.4th 454, 477.)
The parties argue all of the fraud claims together and
without apparent differentiation. For the reasons discussed above, the Court
overrules the demurrer to this claim as to Hills Group. Plaintiffs have had
plenty of opportunities to amend the complaint. The Court therefore sustains
the demurrer to this claim without leave to amend as to the remaining
defendants.
“The elements of fraud,” including a cause of action for
fraudulent inducement, “are (a) a misrepresentation (false representation,
concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c)
intent to induce reliance; (d) justifiable reliance; and (e) resulting damage.”
(Hinesley v. Oakshade Town Ctr.
(2005) 135 Cal.App.4th 289, 294.) The facts constituting the alleged fraud must
be alleged factually and specifically as to every element of fraud, as the
policy of “liberal construction” of the pleadings will not ordinarily be
invoked. (Lazar v. Superior Court (1996)
12 Cal.4th 631, 645.) To properly allege fraud against a corporation, the
plaintiffs must plead the names of the persons allegedly making the false
representations, their authority to speak, to whom they spoke, what they said
or wrote, and when it was said or written. (Tarmann
v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157.)
For the reasons discussed above, the Court overrules the
demurrer to this claim as to Hills Group. Plaintiffs have had plenty of
opportunities to amend the complaint. The Court therefore sustains the demurrer
to this claim without leave to amend as to the remaining defendants.
Defendants do not appear to raise any actual arguments
against this claim. The Court therefore overrules the demurrer to this claim.
In order to state a claim for negligence, Plaintiff must
allege the elements of (1) “the existence of a legal duty of care,” (2) “breach
of that duty,” and (3) “proximate cause resulting in an injury.” (McIntyre v. Colonies-Pacific, LLC (2014)
228 Cal.App.4th 664, 671.)
“[W]here the wrongful acts of a majority shareholder
amounted to misfeasance or negligence in managing the corporation’s business,
causing the business to lose earnings, profits, and opportunities, and causing
the stock to be valueless,” the claim is derivative, because the resulting
injury is to the corporation and the whole body of its stockholders. (Everest
Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 426.) “Where a
cause of action seeks to recover for harms to a business entity, the owners
themselves have no direct cause of action [b]ecause a corporation exists as a
separate legal entity.” (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108;
Avikian v. WTC Financial Corp. (2002) 98 Cal.App.4th 1108, 1115 [plaintiffs’
“core claim” of mismanagement that caused the corporation’s demise “amounted]
to a claim of injury to [the corporation] itself”].) The entity “is the
ultimate beneficiary of such a derivative suit.” (Patrick v. Alacer Corp.
(2008) 167 Cal.App.4th 995, 1003.)
Plaintiffs’ allegations meet these requirements. Accordingly, the Court overrules the demurrer
as to the sixth claim.
Defendants argue
that this claim is defective because money cannot be the subject of a
conversion claim unless there is a specific, identifiable sum at issue
involved. (PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil
& Shapiro, LLP (2007) 150 Cal.App.4th 384, 395-96.) However, PCO
Inc. was decided on summary judgment, and not at the pleading stage.
Plaintiffs persuasively argue that courts should not require a plaintiff to
plead an exact dollar figure to state a conversion claim – at least not without
more precise authority dictating as such. Further, Plaintiffs have alleged that
Defendants converted all of the investment money.
Plaintiffs have
adequately alleged that Reyter defrauded Plaintiffs out of the post-Agreement
investment money. Plaintiffs have adequately alleged that Rifkin improperly
took investment money from the business.
Plaintiffs have not, however, adequately explained their conversion
claim as to the other Moving Defendants.
The Court overrules
the demurrer to this claim as to Hills Group and Rifkin. The Court sustains the
demurrer with leave to amend with respect to the remaining Moving Defendants.
Plaintiffs’
allegations only state the legal conclusions that Defendants knew about the
tortious conduct and assisted in and encouraged it. While Plaintiffs need not
plead evidentiary facts or meet the plausibility standard of federal courts,
they must still plead ultimate facts that in fact indicate that such conduct
occurred. Plaintiffs have failed to do so in their Fourth Amended Complaint.
The Court sustains the demurrer to this claim with leave to amend.