Judge: Kevin C. Brazile, Case: 21STCV41644, Date: 2022-12-15 Tentative Ruling

Hearing Date: December 15, 2022

Case Name: Garcia, et al. v. YH Solutions, Inc., et al.

Case No.: 21STCV04623

Matter: Motions for Summary Judgment/Adjudication (2x)

Moving Party: Defendants Steve Yeschin and Adam Hilaly

Responding Party: Plaintiffs Andrew Garcia and Alan Garcia

Notice: OK

Ruling: The Motions for Summary Judgment are granted.

Moving parties to give notice.

If counsel do not submit on the tentative, they are strongly 

encouraged to appear by LACourtConnect rather than in person due to the COVID-19 pandemic. 

This is an action arising from alleged breaches of development and operation agreements for two marijuana facilities, followed by alleged breaches of a settlement agreement relating to these facilities.  On February 5, 2021, Plaintiffs Andrew Garcia and Alan Garcia filed the operative Complaint against Defendants YH Solutions, Inc., YH Solutions, LLC, Steve Yeschin, Adam Hilaly, and Does 1-100 for (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) breach of contract, (4) breach of implied covenant of good faith and fair dealing, (5) breach of contract, (6) unfair business practices, (7) conversion, (8) breach of fiduciary duties, (9) negligent interference with prospective economic advantage, (10) accounting, and (11) unjust enrichment.

Defendants Steve Yeschin and Adam Hilaly seek summary judgment or, alternatively, summary adjudication of all causes of action.  Defendants contend that all claims fail in light of Defendants’ affirmative defenses of illegality and unclean hands.  Specifically, they contend that because Plaintiffs’ claims all arise out of contracts relating to the unlicensed and illegal cultivation of cannabis, there can be no recovery. 

Plaintiffs contend that they “understood that operations at the Torrance Facility were legal and authorized based on Defendants’ representation that they were cultivating for Cal Vet Meds under the Compassionate Use Act. (PMF 10.) Plaintiffs further reasonably believed that Cal Vet Meds provided a pathway toward licensing the Torrance Facility under the Recreational Use Act which was yet to take effect. (PMF 5.)”  Plaintiffs further contend that they “confirmed that cultivation at the Lockness Facility was authorized through the existing tenant, who was already legally operating at the property pursuant to the Compassionate Use Act, and under an existing interim control ordinance. (PMF 14.)”

In their Reply, Defendants argue that “Plaintiffs fail to present any legal argument or analysis as to how these alleged facts constituted an affirmative defense to violation of Proposition D in 2017 and LAMC §104.15 in 2018.”

The law of summary judgment provides courts “a mechanism to cut through the parties’ pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute.”  (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.)  In reviewing a motion for summary judgment or adjudication, courts employ a three-step analysis: “(1) identify the issues framed by the pleadings; (2) determine whether the moving party has negated the opponent’s claims; and (3) determine whether the opposition has demonstrated the existence of a triable, material factual issue.”  (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.)  The moving party bears the initial burden of production to make a prima facie showing of the nonexistence of any triable issue, in which case the burden shifts to the opposing party to make a prima facie showing of the existence of a triable issue.  (Code Civ. Proc. § 437c(p)(2).)  To show a triable issue of material fact exists, the opposing party may not rely on the mere allegations or denials of the pleadings, but instead must set forth the specific facts showing that a triable issue exists as to that cause of action or a defense thereto.  (Aguilar, at p. 849.)  Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.”  (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.) 

“An illegality relating to a contracting party may or may not bar that party from suing on the contract. Contracting parties that are not licensed as required by law or that have had their corporate powers suspended will typically be barred.”  (2 Cal. Affirmative Def. § 37:26 (2d ed.).)

A contract “must be lawful when the contract is made.”  (Civ. Code § 1596.)  “Ordinarily, ‘ “all applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, necessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incorporated.” ’ ” (City of Torrance v. Workers' Comp. Appeals Bd. (1982) 32 Cal.3d 371, 378; accord, Swenson v. File (1970) 3 Cal.3d 389, 393.)  Stated differently, “laws enacted subsequent to the execution of an agreement are not ordinarily deemed to become part of the agreement unless its language clearly indicates this to have been the intention of the parties.”  (Swenson, at p. 393.)  That is, illegality is typically examined at the time of formation.

Here, the oral agreements for the Torrance and Lockness facilities were entered into in 2017.  Defendants have established that, even in 2017, the subject facilities did not comply with Proposition D and were, therefore, illegal.  Indeed, Proposition D requires that “the business ‘was established as of September 14, 2007, and registered with the City Clerk by November 13, 2007 [citation]; submits proof of continual “operation at the location set forth in its original or any amended business tax registration or tax exemption certificate” [citation]; [and] registered to pay and pays applicable taxes to the City.’ ”  (Holistic Supplements, L.L.C. v. Stark (2021) 61 Cal.App.5th 530, 550.)  It is undisputed the subject facilities were not in existence in 2007, and no showing has been made that Cal Vets or an existing tenant complied with Proposition D at the subject facilities.  Given that the subject contracts for the two facilities have an illegal purpose, all causes of action arising from such contracts fail.  

Plaintiffs argue that the doctrine of illegality should not apply when “the public cannot be protected because the transaction has been completed, where no serious moral turpitude is involved, where the defendant is the one guilty of the greatest moral fault, and where to apply the rule will be to permit the defendant to be unjustly enriched at the expense of the plaintiff, the rule should not be applied.”  (Norwood v. Judd (1949) 93 Cal.App.2d 276, 289.)

The Court, respectfully, finds that illegality should apply because, notwithstanding Defendants’ representations, nothing stopped Plaintiffs from determining whether their facilities actually complied with licensing requirements.  Indeed, as Defendants point out, “[i]t is an emphatic postulate of both civil and penal law that ignorance of a law is no excuse for a violation thereof.”  (People v. O’Brien (1892) 96 Cal. 171, 176.)  As the Court previously pointed out, “[c]ontracting parties that are not licensed as required by law . . . will typically be barred.”  (2 Cal. Affirmative Def. § 37:26 (2d ed.).)  Also, text messages show Plaintiffs decided to continue operating their business even when pursuing the required licenses in 2018. 

With respect to the parties’ May 2018 “settlement agreement”, Plaintiffs allege that “To resolve the dispute that arose between the Plaintiffs and Defendants as to how to effectively and fairly terminate their relationship, and also, in exchange for Plaintiffs’ agreement not to initiate any legal action against Defendants who compromised the success of the agreements by prematurely cultivating cannabis plants without a license, on or about May 18, 2019 the parties entered into a settlement agreement . . . that would return to Plaintiffs the majority of the funds Plaintiffs contributed to the build out and, disclaimed any interest in the Lockness Facility.”  (Compl. ¶ 29.)

This settlement similarly cannot be enforced because it essentially divides up the parties’ assets from their illegal cannabis business.  Indeed, the written agreement explicitly assigns Defendants’ payments based on Plaintiffs’ initial investment and Defendants’ past and even future sales of cannabis, providing an offset to Defendants Steve Yeschin and Adam Hilaly of $50,000 based on $41,000 in product that was already sold on consignment and $9,000 for 6 units yet to be sold.  Notably, “The consideration of a contract must be lawful . . . .”  (Civ. Code § 1607.)

The remaining equitable and tort claims similarly arise from the parties’ illegal contracts and business enterprise and are, therefore, also barred.  (See, e.g., Sayadoff v. Warda (1954) 125 Cal.App.2d 626, 631 [“No Court will lend its aid to a man who founds his cause of action upon an immoral or illegal act”].)

Thus, the Motions for Summary Judgment are granted.  The Request for Judicial Notice is granted.

Moving parties to give notice.

If counsel do not submit on the tentative, they are strongly encouraged to appear by LACourtConnect rather than in person due to the COVID-19 pandemic.