Judge Lee W. Tsao, Case 21NWCV00133 2023-01-10 Tentative Ruling

Judge: Lee W. Tsao, Case: 21NWCV00133, Date: 2023-01-10 Tentative Ruling

Case Number: 21NWCV00133 Hearing Date: January 10, 2023 Dept: C

TENTATIVE RULING:

SAADIA SQUARE LLC v. ALL-WAYS PACIFIC, LLC, et al.

CASE NO.: 21NWCV00133

HEARING: 01/10/23

The Court has reviewed the parties’ briefs and considered the arguments raised at the hearing, and rules as follows:

I. Defendants SM LOGISTICS HOLDCO LLC, SM LOGISTICS RIALTO LLC, SM LOGISTICS MEMBER LLC, SQUARE MILE CAPITAL MANAGEMENT LLC, SQUARE MILE PARTNERS V LP, SQUARE MILE PARTNERS V-A LP, SQUARE MILE PARTNERS V (AIV) LP, SQUARE MILE PARTNERS V (AIV 2) LP, SQUARE MILE PARTNERS V (AIV 3) LP, and MSD PRIVATE CREDIT OPPORTUNITY MASTER (ECI) FUND II, L.P.’s Demurrer to Plaintiff’s Second Amended Complaint is OVERRULED.

Moving party to give notice.

Defendants’ Request for Judicial Notice if GRANTED.

This action was filed by Plaintiff SAADIA SQUARE LLC (“Plaintiff”) on March 5, 2021. On September 22, 2022, the operative Second Amended Complaint (“SAC”) was filed.

The SAC alleges the following relevant facts: “This action was initiated on March 5, 2021 and arises out of the scheme to violate Plaintiff’s Right of First Offer (‘ROFO’) and deprive Plaintiff of the right to purchase the industrial property in Rialto, CA (the ‘Property’).” (SAC ¶ 1.) “Saadia and SM Member are the sole members of SM Holdco. SM Holdco, in turn, is the sole member of SM Logistics Owner LLC (‘SM Owner’) which, in turn, is the sole member of SM Rialto, the single-asset entity that owned the Property. The Property is a unique industrial real estate asset located in Rialto, CA…. [¶] In order to protect its investment in SM Holdco, Saadia negotiated for a ROFO…. The ROFO allows Saadia to purchase the Property and protect its multi-million dollar financial stake in SM Holdco. Without this ROFO, Saadia’s interest in the Property was at risk of being wiped out by SM Member’s virtually unfettered control The ROFO right was Saadia’s primary protection.” (SAC ¶¶ 26-27.) “Rather than honor the ROFO, and without Saadia’s knowledge or consent, SM entered into an Option Agreement dated March 11, 2020 (the ‘Option Agreement’) with Rialto Holdings, LLC (‘RH’) … The Option Agreement defines the ‘Effective Date’ as March 11, 2020, the date of the Option Agreement, and sets the deadline by which [the purchaser of the Property, defendant Rialto Merrill Holdings LLC (“RMH”)] must exercise the option as March 10, 2020, ‘the last day of the twelfth (12th) full calendar month following the Effective Date (the ‘Option Exercise Period’), time being of the essence.’… Although the deadline to exercise the option set forth in the Option Agreement was March 10, 2020, in a related action, RMH… alleges that RH assigned the Option Agreement to RMH and that RMH purportedly exercised the option on March 11, 2021, not March 10, 2021.” (SAC ¶ 28.) “[I]n violation (and with knowledge) of Saadia’s ROFO, on information and belief, the Property was sold to RMH on August 3, 2021.” (SAC ¶ 31.) “Although SM Rialto entered into the Lease with RD and entered into the Option Agreement with non-party Rialto Holdings, LLC (‘RH’) on March 11, 2020, SM did not disclose either agreement to Saadia. RMH alleges in a separate action that RH later assigned the Option Agreement to RMH, against without Saadia’s knowledge. SM concealed the identity of RD, RH, and RMH from Saadia and referred to them merely and interchangeable as ‘All-Ways’.” (SAC ¶ 46.)

The SAC asserts the following cause of action: (1) Breach of Contract; (2) Breach of Covenant of Good Faith and Fair Dealing; (3) Intentional Interference; (4) Specific Performance and Injunctive Relief; and (5) Declaratory Relief.

Defendants (A) SM Logistics Holdco LLC (the “Company”), SM Logistics Rialto LLC (“Rialto”), SM Logistics Member LLC (“Managing Member”), Square Mile Capital Management LLC (“Square Mile” and together with the Company, Rialto and Managing Member, the “Square Mile Defendants”) and (B) Square Mile Partners V LP, Square Mile Partners V-A LP, Square Mile Partners V (AIV) LP, Square Mile Partners V (AIV 2) LP, Square Mile Partners V (AIV 3) LP, and MSD Private Credit Opportunity Master (ECI) Fund II, L.P. (together, the “Indemnifying Parties” and collectively with the Square Mile Defendants, the “SM Defendants”) demur to Plaintiffs’ SAC.

SM Defendants demur to the first, second, fourth, and fifth causes of action on the grounds they fail to allege facts sufficient to state a cause of action and the first cause of action is also barred.

Legal Standard

A general demurrer only tests the legal sufficiency of the complaint. It only challenges defects that appear within the four corners of a complaint, or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) In ruling on a demurrer, the court must accept as true all material facts properly pleaded, no matter how improbable. (Serrano v. Priest (1971) 5 Cal.3d 584, 591.)

First Cause of Action – Breach of Contract

SM Defendants demur to the first cause of action on the ground that (1) the SAC does not allege facts sufficient to allege a cause of action against the Company, Rialto or Square Mile for breach of contract and (2) to the extent the first cause of action is based on an alleged failure to provide Plaintiff with access to the books and records of the Company and/or Rialto, the cause of action is barred because Saadia was required to, and in fact did pursue that claim in Delaware, where its rights have been adjudicated.

To state a cause of action for breach of contract, Plaintiff must be able to establish “(1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.)

Alter ego liability has two elements; the corporate form will only be disregarded where: (1) there exists a unity of interest in the corporation and the individual; and (2) facts which show the ends of justice require the corporate form to be disregarded. (Leek v. Cooper (2011) 194 Cal. App. 4th 399, 409.) The application of the alter ego doctrine depends on a non-exclusive combination of factors, including “the commingling of funds and assets of the two entities, identical equitable ownership in the two entities, use of the same offices and employees, disregard of corporate formalities, identical directors and officers, and use of one as a mere shell or conduit for the affairs of the other.” (Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217 Cal.App.4th 1096, 1108—1109.)

For the trial Court to overrule a demurrer to a pleading, the pleading need only state ultimate facts, not evidentiary facts. (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.) The factors necessary to find alter ego liability are considered ultimate facts for the purposes of a demurrer analysis, and these factors must be pleaded. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 235—236 (alter ego liability sufficiently pleaded upon stating defendant’s domination and control, unity of interest, use of corporate alter ego as “mere shell and conduit,” inadequate capitalization, and failure to observe corporate formalities).

The Delaware Chancery Court has exclusive jurisdiction over claims seeking to enforce contractual and statutory rights of access to a Delaware LLC’s books and records. See 6 Del. C. § 18-305(f) (“Any action to enforce any right arising under this section shall be brought in the Court of Chancery . . . The Court of Chancery is hereby vested with exclusive jurisdiction to determine whether or not the person seeking such information is entitled to the information sought.”). “A party may not obtain both specific performance and damages for the same breach of contract, either in single or multiple actions.” (Mycogen Corp. v. Monsanto Co., 28 Cal. 4^th 888, 905 (2002).)

Here, as to SM Defendants’ first ground, Plaintiff alleges, in pertinent part the following. Square Mile controls SM Member, and through SM Member, controls SM Holdco, SM Owner and SM Rialto. (SAC ¶ 37.) “SM Holdco and SM Rialto are shell entities owned, operated, and controlled by SM Member and Square Mile. The Operating Agreement between Saadia and SM Member expressly disregards the corporate form. Specifically, while Saadia and SM Member agreed to form SM Holdco, the Operating Agreement expressly acknowledged that all material decisions for SM Holdco, SM Logistics Owner LLC, and SM Rialto, would be made by SM Member – not by officers or directors duly appointed to those sub-entities.” (SAC ¶ 61.) “In addition to SM’s agreement to disregard the corporate form, SM shares the same offices and employees, and – on information and belief – commingles funds. Thus, for example, Saadia is informed and believes that the net sales proceeds obtained from the sale of the Property were distributed to SM Rialto and swept by SM Member, disregarding SM Owner and SM Holdco.” (SAC ¶ 64.) “All the individuals acting on behalf of SM are employees of Square Mile, and sign their e-mails and other correspondence on behalf of Square Mile – not SM Member, SM Holdco, SM Logistics Owner LLC, or SM Rialto. (SAC ¶ 65.) Additionally, “none of SM Member, SM Holdco, or SM Rialto, has employees, officers, or directors – and none of these entities has an office other than Square Mile’s office.” (SAC ¶ 66.) Based on the foregoing, the Court finds that Plaintiff’s complaint identifies ultimate facts concerning domination and control, use of corporate alter egos as “shell entities,” failure to observe corporate formalities, use of the same offices and employees, and comingling of funds which may serve as the basis for finding alter ego liability. (Toho–Towa Co. 217 Cal.App.4th at 1108—1109; Rutherford Holdings 223 Cal.App.4th at 235-236.) The Court also finds that Plaintiff sufficiently pled facts showing justice requires the corporate form to be disregarded. (SAC ¶¶ 12-25, 37, 61-66.)

As to SM Defendants’ second ground, Mycogen is relied upon. However, Plaintiff pursued the Delaware action to protect its statutory inspection rights and no breach of contract claim was involved. (SAC; Exhibit “B”.) The Court finds that the SAC sufficiently alleges facts to state a cause of action for breach of the operating agreement and damages. Accordingly, the demurrer to the first cause of action for breach of contract is OVERRULED.

Second Cause of Action – Breach of Covenant of Good Faith and Fair Dealing

SM Defendants argue that the implied covenant claim in the SAC is based solely on the same factual allegations of purported misconduct as the claim for breach of the operating agreement.

“A breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself and it has been held that bad faith implies unfair dealing rather than mistaken judgment.” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1394.) “If the allegations do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated … [T]he only justification for asserting a separate cause of action for breach of the implied covenant is to obtain a tort recovery.” (Id. at pp. 1394-1395.) To recover in tort for breach of the implied covenant, the defendant must “have acted unreasonably or without proper cause.” (Id. at p. 1395, citations and italics omitted.)

Here, in support of their argument, SM Defendants refer to SAC ¶ 68 (realleging and incorporating paragraph 1 to 67) and ¶ 75 (realleging and incorporating paragraphs 1 to 74.) However, Plaintiff alleges that “SM breached the implied covenant of good faith and fair dealing by taking actions to deprive Saadia of the benefit of its bargain and the ability to protect its investment….” (SAC ¶ 77.) As a result, Plaintiff alleges a breach of the implied covenant beyond a breach of the contractual duty under the operating agreement. The Court finds that the SAC sufficiently alleges facts to state a cause of action for breach of the implied covenant of good faith and fair dealing. Accordingly, the demurrer to the second cause of action is OVERRULED.

Fourth Cause of Action – Specific Performance and Injunctive Relief

“Specific performance is [a]… remedy and the cause of action is for breach of contract.” (5 Witkin, California Procedure (5th), Pleading, Section 784.) A standalone claim for specific performance is unnecessary. “To obtain a specific performance after a breach of contract, a plaintiff must generally show: (1) the inadequacy of his legal remedy; (2) an underlying contract that is both reasonable and supported by adequate consideration; (3) the existence of a mutuality of remedies; (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce; and (5) a substantial similarity to the requested performance to that promised in the contract.” (Real Estate Analytics, LLC v. Vallas (2008) 160 Cal.App.4th 463, 472.) Injunctive relief is a remedy, not a cause of action. (Shamsian v. Atlantic Richfield Co. (2003) 107 Cal.App.4th 967, 984-985.).

When a seller conveys title to a third party prior to the consummation of the transaction with a buyer, the buyer’s right to pursue the remedy of specific performance depends on the status of the third party transferee. If the third party transferee is a bona fide purchaser, having paid value for the property without knowledge of the prior sales contract, the buyer cannot obtain a decree of specific performance and the buyer’s remedy is limited to an action for damages against the seller. (Cal. Civ. Code §3395).

Here, Plaintiff alleges that it “learned in discovery that RMH did not strictly comply with the terms of the Option Agreement by 5 p.m. on March 10, 2021, and thus, the Option and Option Agreement terminated at that time. In any event, as shown below, RMH did not perform material terms of the Option – e.g., RMH did not send to SM the required $6.2 MILLION, NON-REFUNDABLE deposit – until August 2021, many months following the March 10, 2021 deadline. Nevertheless, in violation (and with knowledge) of Saadia’s ROFO, on information and belief, the Property was sold to RMH on August 3, 2021.” (SAC ¶¶ 30-31.) However, SM Defendants contend that the expungement of the lis pendens vested RMH with bona fide purchaser status, as Plaintiff has acknowledged in submissions to this Court and the Court of Appeal. Notwithstanding SM Defendants’ argument, according to the Court’s December 5, 2022 Minute Order in connection with RMH’s demurrer to the SAC, the Court already held that the SAC “alleges facts to show that RMH was not a bona fide purchaser and actually had knowledge of Saadia’s ROFO when the property was sold to RMH on August 3, 2021. (SAC ¶ 31.)” (Minute Order 12/05/22.) In effect, SM Defendants ask this court to reconsider its December 5, 2022 order. The court was not asked to reconsider the order within the time prescribed by CCP §1008, and the court declines to do so now. The Court finds that the SAC sufficiently alleges facts giving rise to the remedy of specific performance for purposes of surviving demurrer. Accordingly, the demurrer to the fourth cause of action for specific performance and injunctive relief is OVERRULED.

Fifth Cause of Action – Declaratory Relief

There are two essential elements for declaratory relief: “(1) a proper subject of declaratory relief, and (2) an actual controversy involving justiciable questions relating to [plaintiff’s] rights or obligations.” (Brownfield v. Daniel Freeman Marina Hospital (1989) 208 Cal.App.3d 405, 410.) “Declaratory relief operates prospectively only, rather than to redress past wrongs.” (Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1404.) The “actual controversy” requirement concerns the existence of present controversy relating to the rights and legal duties of the respective parties pursuant to contract, statute or order.” (see CCP §1060; see also Maguire v. Hibernia S. & L. Soc. (1944) 23 Cal.2d 719, 728.)

Here, SM Defendants argues dismissal of the fifth cause of action because it seeks solely a declaration that the SM Defendants’ past acts were invalid or in violation of contractual rights. In other words, the complaint does not identify any future conduct that could be regulated or informed by declaratory relief. However, the Court previously ruled on RMH’s demurrer, “For purposes of demurrer, Plaintiff has adequately alleged all of the elements necessary to maintain a claim for Declaratory Relief/Judgement. (See SAC ¶¶ 88-101.)” (December 5, 2022 Minute Order.) The demurrer to the fifth cause of action for declaratory relief is OVERRULED.

Based on the foregoing, SM Defendants’ Demurrer to Plaintiff’s Second Amended Complaint is OVERRULED.

Moving party to give notice