Judge: Joseph Lipner, Case: 21STCV46389, Date: 2024-11-14 Tentative Ruling

Case Number: 21STCV46389    Hearing Date: November 14, 2024    Dept: 72

SUPERIOR COURT OF CALIFORNIA

COUNTY OF LOS ANGELES

DEPARTMENT 72

TENTATIVE RULING

Plaintiffs Pacific Green, LLC (“Pacific Green”) and Big Tree Holdings, LLC (“Big Tree”) (collectively, “Plaintiffs”) move for leave to file a Sixth Amended Complaint (“6AC”).

The Court DENIES the motion.

Background

Factual Background

The following allegations are taken from the Fifth Amended Complaint (“5AC”) except where otherwise noted.

This is an action between Plaintiffs Pacific Green and Big Tree; and Defendants Paul Fiore (“Fiore”); One Eleven Advisors, LLC (“One Eleven”) (collectively with Fiore, the “Fiore Parties”); Jay Rifkin (“Rifkin”), Rebel Holdings LLC (“Rebel”) (collectively with Rifkin, the “Rifkin Parties”); Alex Reyter (“Reyter”); Tudor Capital, LLC (“Tudor”) (collectively with Reyter, the “Reyter Parties”)  Hills Group, LLC (“Hills Group”); and Hills One LLC (“H. One LLC”) (collectively, “Defendants”).

This case arises out of a cannabis investment project gone awry. In about 2017, Reyter, Fiore, and Rifkin (collectively, the “Principals”) decided to enter the cannabidiol (“CBD”) market and seek investors. They formed Hills Group.

Additionally, Fiore owns and manages One Eleven; Rifkin owns and manages Rebel; and Reyter manages 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, eventually, Big Tree. Over the course of the ensuing months, the Principals, primarily through Reyter, allegedly made a number of false representations to Stein, including that Hills Group and H. One LLC had received substantial investment, that the principals had invested certain amounts of money in H. One LLC, 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 in Support of Demurrer to 4AC, 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”). (5AC ¶ 95, Ex. A.) This Agreement provided for the governance of H. One LLC, which had been formed by filing a certificate of formation shortly beforehand on March 29, 2018. (5AC, 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 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 Agreement states, in part, that any “dispute, claim or controversy, arising out of or relating to [the] 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 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.)

(5AC, Ex. A.)

Defendants’ enterprise generated almost no revenue.

Plaintiffs allege that the Principals failed to tend to the day-to-day operations of H. One LLC 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 ¶ 152.)

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.

Procedural History

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 granted pleading motions as to the 1AC, Second Amended Complaint (“2AC”), and Third Amended Complaint (“3AC”).

Plaintiffs then filed the Fourth Amended Complaint (“4AC”), naming all of the Moving Defendants as well as Reyter and Tudor. (Defendants Reyter and Tudor are not among the parties who have filed demurrers.)  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 H. One LLC); (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.

On May 31, 2024, the Court sustained H. One LLC’s demurrer to the 4AC claims against it without leave to amend.

The Court sustained the demurrers of Fiore, One Eleven, Rebel, Rifkin and Hills Group to the 4AC in part and with leave to amend.

The Court overruled the demurrer to the claims for fraud and deceit, negligent misrepresentation, and fraudulent inducement with respect to Hills Group. The Court overruled the demurrer to the claims for breach of contract and negligence with respect to all of the moving defendants. The Court overruled the demurrer to the claim for conversion with respect to Hills Group and Rifkin.

The Court sustained, with leave to amend, the demurrer to the claims for fraud and deceit, negligent misrepresentation, and fraudulent inducement with respect to Fiore, One Eleven, Rebel, and Rifkin. The Court sustained, with leave to amend, the demurrer to the conversion claim with respect to Fiore, One Eleven, and Rebel. The Court sustained, with leave to amend, the claim for aiding and abetting torts with respect to all of the presently Moving Defendants.

            The operative complaint is now the 5AC. The 5AC names H. One LLC as a nominal defendant only, and names the remaining Defendants as well. The 5AC raises claims for (1) fraud and deceit; (2) negligent misrepresentations; (3) fraudulent inducement to enter into contract; (4) [listed as 5] breach of contract (against Hills Group); (5) [listed as 6] negligence as a derivative claim (against Hills Group); (6) [listed as 7] conversion (against Fiore, Rifkin, Reyter, and Hills Group); and (7) [listed as 8] aiding and abetting torts.

            On September 26, 2024, the Court overruled the various Defendants’ demurrers to the 5AC.

            On October 11, 2024, Plaintiff filed this motion for leave to amend.

            The Reyter Parties filed an opposition. The Rifkin Parties and Hills Group jointly filed a second opposition. The Fiore Parties join in both of the oppositions filed by the other parties.. Plaintiff filed a single reply brief in response to both oppositions.

Legal Standard

A complainant may obtain leave from the trial court to amend their pleading beyond the number of amendments allowed under Code of Civil Procedure section 472 (a) by filing a noticed motion. (Cal. Rules of Court, Rule 3.1324.) The motion must be accompanied by a declaration stating: (1) the effect of the amendment; (2) why the amendment is necessary and proper; (3) when the facts giving rise to the amended allegations were discovered; and (4) why the request was not made earlier.¿(Cal. Rules of Court, Rule 3.1324 (b).)

“Any judge, at any time before or after commencement of trial, in the furtherance of justice, and upon such terms as may be proper, may allow the amendment of any pleading or pretrial conference order.”¿(Code Civ. Proc., § 576.) In the absence of a showing of prejudice from the opposing side, the trial court ordinarily lacks discretion to deny a motion to amend a pleading. (Honig v. Financial Corp. of America (1992) 6 Cal.App.4th 960, 965.)

Discussion

Plaintiff seeks leave to amend to add a claim for civil theft under Penal Code, section 496, subd. (c).

Background on Penal Code, Section 496(c)

Penal Code, section 496 provides that to sustain a conviction for receiving stolen property, the plaintiff must prove (1) the property was stolen; (2) the defendant knew the property was stolen; and, (3) the defendant had possession of the stolen property. (People v. Land (1994) 30 Cal.App.4th 220, 223; Pen. Code, § 496.) “A principal in the actual theft of the property may be convicted pursuant to this section.” (Pen. Code, § 496, subd. (a).)

“Any person who has been injured by a violation of subdivision (a) or (b) may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney’s fees.” (Pen. Code, § 496, subd. (c).)

Section 496(c)’s applicability to investment fraud was determined relatively recently in 2022.

In Switzer v. Wood (2019) 35 Cal.App.5th 116, the plaintiff sued for misappropriated distributions that the defendant owed to him in their joint business venture. (Switzer v. Wood (2019) 35 Cal.App.5th 116, 121.) The jury returned a verdict for the plaintiff on his civil claim for violation of section 496. (Ibid.) The Court of Appeal stated that “it is undisputed that the jury specifically and unequivocally found all the factual elements necessary to establish that Wood and Access Medical had engaged in conduct constituting a violation of section 496(a).” (Id. at p. 127.) The court stated that the jury’s factual findings “clearly establish violation(s) of section 496(a).” (Id. at p. 128.) The trial court’s position, which the Court of Appeal rejected, was “that section 496(c) should not be applied in a literal manner because the Legislature could not have intended to extend the statutory treble damage remedy into the context of an ordinary business dispute where traditional remedies for breach of contract, fraud and conversion were available. Rather, it is argued that despite the clear and unambiguous wording of the statutory provision, a narrower construction should be adopted to avoid absurdity, such as a construction that limits treble damages to theft crimes involving common carriers’ cargo.” (Id. at p. 128.) The court stated that “[t]he wording of the statute makes no exception for cases involving preexisting business relationships, nor does it limit applicability to violations involving common carriers or truck cargo, and we are not at liberty to insert such omitted terms into the statute.” (Id. at pp. 129-130.) “Based on the plain wording of section 496(c), the Legislature apparently believed that any violation of section 496(a) (or of subdivision (b)), if proven, would warrant the availability of treble damages …. The fact that the treble damage remedy may come into play where (as here) the parties were in a preexisting business relationship in which the remedies at law have traditionally been limited (e.g., for fraud, conversion or breach of contract)—while arguably a valid policy argument—manifestly falls short of establishing the absurdity exception.” (Id. at p. 130 [emphasis in original].)

            Siry Investment, L.P. v. Farkhondehpour further solidified the applicability of section 496 to shareholder distribution claims. The California Supreme Court stated that the case concerned “whether a trial court may award treble damages and attorney's fees under Penal Code section 496, subdivision (c) in a case involving, not trafficking of stolen goods, but instead, fraudulent diversion of a partnership's cash distributions. ….

We answer yes[.]” (Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333, 339.) The Supreme Court stated that “[v]iewing the issue independently as a matter of law, we endorse the analysis of Bell and Switzer — even though, at the same time, we acknowledge that some of the policy considerations highlighted in those cases, and elaborated upon by the appellate court below, give pause. Fundamentally, we agree with the conclusions of Bell and Switzer that section 496(c) is unambiguous, and that read together with sections 496(a) and 484, and in conformity with our standard approach to interpretation [citation], section 496(c) must be understood as yielding the understanding attributed to it in those decisions: A plaintiff may recover treble damages and attorney's fees under section 496(c) when property has been obtained in any manner constituting theft.” (Id. at p. 361.)

The Court believes that Switzer, standing alone, would have supported a section 496 claim. However, the law was not entirely clear. The Court of Appeal in Siry Investment found that section 496 did not apply. (Siry Investment, L.P., supra, 13 Cal.5th at p. 342.) Thus, until Siry Investment, whether an investor could bring a claim under section 496(c) was a live issue.

Plaintiffs’ Motion

Plaintiffs’ section 496 claim is based on the same underlying facts as their conversion and fraud claims. These are facts that, for the most part, Plaintiff has had access to since the beginning of this litigation in December 2021, almost three years ago. Siry Investment was decided on July 21, 2022, more than two years ago. Plaintiffs have filed four different amended complaints in the time since Siry Investment was issued. Plaintiffs’ counsel declares that he only recently learned about the existence of Siry Investment from another attorney. (Crawford Decl. ¶ 5.)

“There is a platoon of authority to the effect that a long unexcused delay is sufficient to uphold a trial judge's decision to deny the opportunity to amend pleadings[.]” (Green v. Rancho Santa Margarita Mortgage Co. (1994) 28 Cal.App.4th 686, 692.) “[E]ven if a good amendment is proposed in proper form, unwarranted delay in presenting it may—of itself—be a valid reason for denial.” (Melican v. Regents of University of California (2007) 151 Cal.App.4th 168, 175 [quotation marks and citations omitted].) Leave to amend may be properly denied where the party seeking leave “had knowledge of the circumstances on which [it] based the amended complaint … almost three years before he sought leave to amend.” (Record v. Reason (1999) 73 Cal.App.4th 472, 486-487.)

Plaintiffs contend that “although the case has been pending for almost three years (and two years since the Siry Investment decision) the case is still effectively at the front end of the litigation” and that “[a]lmost no discovery has been conducted in the case due to a variety of factors, including long periods when discovery was stayed by court order or procedural rules beyond the parties’ control.” (Motion at p. 9:1-7.)

This is not the full story. This case went through a substantial period of merits discovery while in federal court, during which Defendants made an initial production of 25,163 pages of documents on November 1, 2023. Furthermore, on October 25, 2024, nearly a year later, Plaintiff’s counsel emailed David Azar, counsel for Hills Group and the Rifkin Parties, requesting that the electronic links to the document production be turned back on. (Azar Decl. ¶ 4.) It thus appears that Plaintiffs’ counsel did not download the document production that they did receive.

            The Court determines that there has been substantial, unjustified delay in asserting Plaintiff’s new claim. The Court also finds that this delay has caused prejudice under the facts of this case.

            The delay has caused the parties (as well as the Court) to spend substantial resources that would now be unnecessarily multiplied by further proceedings if an amendment were allowed.  Since this case was remanded from federal court, it has proceeded through two sets of demurrers, to the fourth and fifth amended complaints. Due to the multiplicity of defendants, three demurrers were filed against the 4AC and two against the 5AC. The 4AC was 40 pages in length and contained an additional 54 pages of exhibits. The 5AC is 45 pages in length with the same exhibits. Hundreds of pages of documents were filed in connection with the demurrers to each of these complaints. Resolving these disputes consumed a great degree of judicial resources and, presumably, an even greater deal of attorney resources. Had Plaintiffs timely added these claims, they would have been dealt with more efficiently as part of this process.

There has also been a pattern of piecemeal amendment by the Plaintiffs. Here, there have been five prior amendments to the complaint in less than three years, including repeated cycles of demurrers or motions to dismiss. Further, Plaintiffs have already delayed in asserting known claims – although Reyter was alleged to be the primary wrongdoer, Reyter was not added as a defendant until the fourth amended complaint.

Leave to amend need not be granted to reward “an inefficient and piecemeal approach to litigation”, even where amendment “only adds legal theories of recovery to facts already alleged in the first amended complaint, and … these legal theories were part of the litigation for years”. (Bidari v. Kelk (2023) 90 Cal.App.5th 1152, 1173.) In Bidari, the Court denied leave to amend to add claims which the plaintiffs had previously withdrawn, where the plaintiffs argued that “permitting amendment would not cause delay, because these causes of action have already survived demurrers and anti-SLAPP motions, which might otherwise be brought immediately following amendment.” (Id. at pp. 1173-1174.) The Court observed that “it is inherently inefficient to permit a plaintiff to hold partially litigated claims waiting in the wings until the plaintiff deems it strategically convenient to resurrect them. Such inefficiency will inevitably cause some delay.” (Id. at p. 1174.)

The same inefficiency appears here. Although Plaintiff contends that the addition of a new claim, and any resulting objections to it, will not result in a higher marginal resource cost compared to if this had been handled in a single iteration of the complaint, the Court disagrees. There are substantial ‘transaction costs’ associated with the process of litigating a demurrer. Requests for judicial notice must be marshalled, briefs must be organized (and in this case, coordinated between the various defendants), introductions and fact statements must be written, hearings must be attended, and filing fees must be paid. The Court must review evolving complaints and demurrers and conduct additional hearings.  Each successive demurrer must be noticed and briefed on its full timeline, delaying the resolution of the case by months. An ‘extreme’ example illustrates this point – ten demurrers to one claim each will necessarily take more time for the attorneys and court to handle than one demurrer to ten claims. The problem is that this example is not actually extreme here. Four motions to dismiss were filed against the 4AC in federal court. Three demurrers were filed against the 4AC in this Court. Two demurrers were filed against the 5AC. Between the last two iterations of the complaint – of six iterations total – nine demurrers or demurrer-equivalents were litigated.

In arguing that this pattern of amendment does not warrant denial, Plaintiff contends that “when the Court ruled on sufficiency of the Fifth Amended Complaint it was the first time in the case when a court had actually reached the legal sufficiency of Plaintiffs’ factual allegations or legal claims.” (Reply at p. 4:18-20.) That is not fully accurate. This Court ruled on the sufficiency of Plaintiff’s claims in resolving the three demurrers to the 4AC. Furthermore, the federal court ruled on the sufficiency of Plaintiff’s RICO claim, finding that cannabis-related businesses were not protected by RICO. (Fiore Request for Judicial Notice in Support of Demurrer to 4AC, Ex. 5 at p. 11:4-12, 13:6-8.) That ruling was the reason that this case was remanded from federal court.

Defendants appear to contend that Plaintiffs have engaged in a broad strategy of maximizing burden on opposing counsel and increasing the resources that must be spent by Defendants. The Court is not prepared to make such a finding without clearer evidence and explanation on what Defendants mean by this. However, even absent such a finding, the Court determines that granting leave to amend would be unduly prejudicial to Defendants and would not be in the interest of justice.

The Court denies leave to amend.