Judge Lon F. Hurwitz, Case 21-01225031 2023-08-25 Tentative Ruling

Judge: Lon F. Hurwitz, Case: 21-01225031, Date: 2023-08-25 Tentative Ruling

1. Motion to Compel Production

2. Motion to Compel Production

1. Motion to Compel Further Responses to Requests for Production, Set One, and Request for Sanctions 2. Motion to Compel Further Responses to Requests for Production, Set Four, and Request for Sanctions

Moving Party: Plaintiff/Cross-Defendant Martin C. Knudsen

Responding Party: Defendant/Cross-Complainant Solnsoft, LLC d/b/a XCentium

SERVICE: July 31, 2023, via U.S. Mail and electronic service.

RELIEF SOUGHT: Plaintiff/Cross-Defendant Martin Knudsen seeks an order compelling Defendant/Cross-Complainant Solnsoft, LLC to produce further responses and documents to the Amended Requests for Production of Documents, Set One and Set Four. Plaintiff also moves for an order imposing monetary sanctions on Solnsoft, LLC and its attorneys.

UPCOMING EVENTS:

1. Motion to Seal, September 1, 2023

2. Status Conference, September 1, 2023

FACTS/OVERVIEW: This is a dispute among the owners of a closely-held LLC about how much money is owed to Plaintiff Martin C. Knudsen (“Knudsen”) for his ownership interest in Solnsoft, LLC d/b/a XCentium (“Company”) after he made a request to withdraw.

On October 4, 2021, Knudsen filed the original Complaint against Defendants Company, Amrit Raj, and Steven J. Miller (collectively, “Defendants”) alleging three causes of action for: (1) Breach of Fiduciary Duty; (2) Breach of Contract; and (3) Conversion. (ROA 2.) On November 23, 2021, as a matter of right, Knudsen filed the First Amended Complaint alleging the same causes of action. (ROA 18.)

On December 28, 2021, Company filed a Cross-Complaint against Knudsen alleging a single cause of action for Declaratory Relief. (ROA 29.)

On May 2, 2022, Defendants filed a petition to confirm the September 21, 2021 arbitration award which determined the fair value of Knudsen’s 22.5% capital interest in the Company after his withdrawal. (ROA 89.) At the hearing on September 7, 2022, the Court took the matter under submission. (ROA 194.) On November 3, 2022, the Court granted the petition and confirmed the appraisal award, which found that the fair value of Knudsen’s ownership interest is $11 million. (ROA 216.) The Interlocutory Judgment was entered on December 7, 2022. (ROA 236.)

On April 19, 2023, Knudsen moved for leave to file an amended complaint. (ROA 289.) On June 30, 2023, the Court granted the motion. (ROA 339). On July 5, 2023, Knudsen filed the operative Second Amended Complaint (“SAC”), which added causes of action for intentional misrepresentation and negligent misrepresentation. (ROA 344).

On July 31, 2023, Knudsen filed the current Motion to Compel Further Responses to Requests for Production of Documents, Set One. (ROA 363). The motion also seeks the imposition of sanctions against Company and its counsel. Company opposes the motion (ROA 382), and Knudsen replies (ROA 394).

Concurrently, Knudsen filed the current Motion to Compel Further Responses to Requests for Production of Documents, Set Four. (ROA 368). Knudsen seeks sanctions with regards to this motion as well. Company opposes the motion (ROA 374), and Knudsen replies (ROA 396).

CONTENTIONS AND ANALYSIS:

Statement of the Law

Generally, the granting or denial of a motion to compel rests within the court's sound discretion. In ruling on the motion, the court considers the relationship of the information sought to the issues framed in the pleadings; the likelihood that disclosure will be of practical benefit to the party seeking discovery; and the burden or expense likely to be encountered by the responding party in furnishing the information sought. (Weil & Brown, Cal. Prac. Guide (TRG 2013), Civil Procedure Before Trial, §8:1180-8:1181.)

Under the Civil Discovery Act, Code of Civil Procedure section 2031.310 governs the production of further responses to an inspection demand. To establish "good cause" to compel further responses, the burden is on the moving party to show both relevance to the subject matter (e.g., how the information in the documents would tend to prove or disprove some issue in the case), and specific facts justifying discovery (e.g., why such information is necessary for trial preparation or to prevent surprise at trial). (Glenfed Develop. Corp. v. Sup.Ct. (1997) 53 Cal.App.4th 1113, 1117.) In the context of discovery, evidence is relevant if it might reasonably assist a party in evaluating its case, preparing for trial, or facilitating a settlement. (Id.) Absent a claim of privilege or attorney work product, the party who seeks to compel production has met his burden of showing good cause simply by a fact-specific showing of relevance. (Kirkland v. Superior Court (2002) 95 Cal.App.4th 92, 98.) If "good caus is shown by the moving party, the burden is then on the responding party to justify any objections made to document disclosure just as in motions to compel answers to interrogatories or deposition questions. (Coy v. Sup. Ct. (1962) 58 Cal.2d 210, 220-221.)

Motion re Requests for Production, Set One

Knudsen is seeking to compel Company to provide further responses to Requests for Production (“RFPs”) 3-7, 10-12, 22, 28, 29, 30, 32, 33, and 35, which seek the following information:

• RFP Nos. 3 and 4: Company’s books and records, and Knudsen’s emails;

• RFP Nos. 5-7: Company’s banking records;

• RFP Nos. 10-12: Company’s dealings with its investment banker;

• RFP Nos. 22, 28, and 29: Company’s accounting practices; and

• RFP Nos. 30, 32, 33, and 35: Income and profits claimed by Defendants Raj and Miller since terminating Knudsen.

Knudsen contends Company has been withholding documents and other information that are directly relevant to the claims alleged in the operative Second Amended Complaint (SAC). For instance, Knudsen alleges that Defendant Raj engaged in an oppression campaign to push him out of the Company. In addition, Defendant Miller purportedly led Knudsen to believe that he, Miller, was also dissatisfied with Raj’s tactics and wanted to team up with Knudsen to redeem their respective ownership interests in the Company. Knudsen alleges, however, that Miller and Raj were working together to ambush him and fire him as a manager and employee of the Company. Knudsen notes that the next day, he sent his notice of withdrawal as a member of the Company after Miller allegedly confessed to “stabbing [Knudsen] in the back.” [SAC, ¶¶ 89-99.]

Knudsen alleges Raj and Miller began depriving him of millions of dollars of compensation and distribution of Company’s profits, while simultaneously giving themselves distributions in violation of Company’s Operating Agreement. In addition, Knudsen contends that although the December 2022 Interlocutory Judgment confirmed the appraisal of the fair value of Knudsen’s ownership interest in the Company is $11,000,000.00, Defendants have yet to pay him any portion of this amount—even though the Company requested and received the Judgment liquidating his interest as of January 8, 2021.

Therefore, Knudsen contends the resolution of Defendants’ Petition to Confirm Arbitration Award and the resulting Interlocutory Judgment did not affect the relevance of the discovery sought, and all of the discovery requests at issue in this motion involve his pending claims against Defendants. Although Knudsen acknowledges he originally sought this information for his now mooted claims regarding the appraisal of his ownership interest in the Company, he contends he still has good cause to compel further responses to these discovery requests because he still “owns” 22.5% of the Company, and the requested documents are necessary to demonstrate Raj’s and Miller’s past and continuing self-dealing regarding distribution of Company profits as well as their misconduct regarding his ouster from the Company. In addition, Knudsen argues the requested documents are relevant to his claims for “compensation, bonuses, distributions, and other money” that he is owed as a result of his ownership interest in Company.

In opposition, Company first notes that it has already produced almost 479,000 documents consisting of more than 1,200,000 pages of information. According to Company, it has produced all responsive non-privileged documents in its custody and control for the time period through January 8, 2021—the effective date of Knudsen’s withdrawal as a member of the Company. Now, Company contends that since Knudsen originally sought these documents solely to attack the appraisal of his ownership interest, he should have withdrawn his original motion to compel production of these documents after entry of the Interlocutory Judgment.

Company argues Knudsen’s discovery requests are overbroad and irrelevant because they pertain to confidential and proprietary business and financial documents for the period after Knudsen withdrew as a member of the Company. In addition, Company contends that in the eight months since the Interlocutory Judgment was entered, Knudsen has not met and conferred regarding the current motion. [Declaration of Christopher A. Johnson (“Johnson Decl.”) (ROA 388), ¶¶ 5-7.] Company challenges Knudsen’s contention that the discovery requests at issue are relevant to his remaining claims. Moreover, Company contends all of Knudsen’s remaining claims arise out of alleged conduct that pre-dates his withdrawal from the Company. Company also argues Knudsen is no longer an owner in the Company, as evidenced by his purported position as CEO of Arkane Digital—a direct competitor of Company. [Id., ¶¶ 2-3.]

In reply, Knudsen reiterates that the requested documents were relevant not only to the appraisal of his ownership interest, but also to his remaining claims regarding compensation, distributions, and other amounts owed to him by Defendants. Knudsen argues that he is entitled to the requested discovery because it is relevant to his breach of fiduciary duty and misrepresentation claims and related damages based on his continuing 22.5% ownership interest in the Company. Knudsen again notes that Defendants have refused to pay him the money they admit he is owed, and he argues that under the Company’s Operating Agreement, he is still entitled to receive disbursements from the Company. As a result, Knudsen argues that under the Corporations Code, his economic interest in the Company, which is separate and apart from a membership interest, survived his withdrawal as a member due to Defendants’ refusal to pay him.

As a preliminary matter, it is noted that the procedural history of this motion (and the underlying discovery requests) is somewhat complicated, and belies portions of Company’s argument.

On November 8, 2021, Knudsen propounded his amended Requests for Production of Documents (“RFPs”), Set One, on Company. [Declaration of David A. Yudelson (“Yudelson Decl.”) (ROA 366), ¶ 3, Exh. 1.] On January 12, 2022, Company served its objections and responses to the RFPs. [Id., ¶ 4, Exh. 2.] Two weeks later, Knudsen’s counsel sent a meet and confer letter to Company’s counsel regarding the deficiencies in the discovery responses. [Id., ¶ 5, Exh. 3.] On February 9, 2022, Knudsen’s counsel engaged in a telephonic meet and confer discussion with Company’s counsel, and Company’s counsel agreed to supplement Company’s responses and produce further documents. However, Company’s counsel also stated he needed to confer with Defendant Raj about the production of documents for the entirety of 2021. In addition, after determining there was a technical glitch in the transmission of the produced documents, Company’s counsel agreed the production was incomplete and the parties should continue to meet and confer since Company still had documents to review and produce. [Id., ¶ 6.]

On March 22, 2022, Company produced additional documents. [Yudelson Decl., ¶ 7, Exh. 4.] A few weeks later, Company’s counsel sent a letter explaining they found various technical glitches in the supplemental production, and that as a result, some documents were missing. [Id., ¶ 8, Exh. 5.] A few days later, Company served its amended responses which addressed certain errors, but did not include the production of any additional documents. [Id., ¶ 9, Exh. 6.] Knudsen’s counsel conducted another telephonic meet and confer session with Company’s counsel regarding the outstanding issues and RFPs that Company had not yet fully addressed, including the responses to RFPs 3-7, 10-12, 17-22, 28-30, 32, 33, and 35. Company’s counsel stated he was following up with Company regarding these issues. [Id., ¶ 10.] Shortly thereafter, Knudsen’s counsel asked to continue the meet and confer efforts. Company’s counsel responded and stated that Company would be producing additional documents. [Id., ¶ 12, Exh. 7.]

On April 17, 2022, counsel conducted another telephonic meet and confer session regarding the outstanding discovery issues. [Yudelson Decl., ¶ 13.] The next day, Knudsen’s counsel sent another meet and confer letter memorializing the telephone call and noting Company’s inconsistent production and missing documents that should have been produced. [Id., ¶ 14, Exh. 8.] A few days later, Company’s counsel stated Company was still working on its discovery responses for the identified issues. [Id., ¶ 15, Exh. 9.] Shortly thereafter, Company’s counsel advised that Company was still searching for documents, and he would “get back to” Knudsen’s counsel about the remaining issues. [Id., ¶ 16, Exh. 10.] On April 26, 2022, Company produced approximately 300 documents that were purportedly responsive to RFPs 3, 10, and 25. Company’s counsel stated he would continue to follow up on the remaining issues discussed during the meet and confer sessions. [Id., ¶ 17, Exh. 11.]

On April 28, 2022, Knudsen’s counsel advised Company’s counsel that the piecemeal production was responsive to only a few requests and did not address several outstanding issues raised during meet and confer. Knudsen’s counsel specifically noted the status of responses to RFPs 3-6, 17-22, 28-30, 32, 33, and 35. [Yudelson Decl., ¶ 18, Exh. 12.] On May 2, 2022, Company’s counsel sent a letter stating that certain documents for 2021 would not be produced, even though Company had already produced documents from 2021. Company’s counsel also offered to produce a more limited set of documents related to three of the 15 outstanding discovery requests. [Id., ¶ 19, Exh. 13.]

On May 3, 2022, Company, along with Defendants Raj and Miller, filed a Petition to Confirm Arbitration Award (Appraisal). [Yudelson Decl., ¶ 20.] A week later, Company took the position that in light of the pending petition, its May 2nd offer regarding a more limited production was a “halfway point,” and Knudsen was not entitled to further responses to RFPs 3-7, 10-12, 17-22, 28-30, 32, 33, and 35. [Id., ¶ 21, Exh. 14.]

Knudsen filed his original motion to compel further responses to the RFPs on June 23, 2022. (ROA 124). On June 27, 2022, the parties stipulated to stay all discovery until 10 days after the Court’s ruling on Defendants’ pending Petition to Confirm Arbitration Award. (ROA 139). On October 6, 2022, Knudsen asked to continue his discovery motion to February 2022. (ROA 202, 207). As noted above, the Court granted the petition on November 3, 2022 (ROA 216), and entered the Interlocutory Judgment on December 7, 2022 (ROA 236).

On January 17, 2023, Knudsen asked for another continuance of his pending discovery motion from February 2, 2023, to May 5, 2023. (ROA 238). On the Court’s own motion, the matter was continued to May 12, 2023. (ROA 261).

Notably, on April 27, 2023, the parties entered a stipulation agreeing to rescheduled Knudsen’s pending discovery motions.1 (ROA 297). At that time, the parties acknowledged Knudsen’s then-pending motion for leave to file the SAC and its possible effect on the discovery motions. In the stipulation, the parties agreed that if the Court granted Knudsen leave to amend his pleading, then:

Knudsen would be able to amend the first of his Discovery Motions to conform to any newly filed operative pleading, and [he] could amend the first of his Discovery Motions in any event to remove certain requests from consideration by the Court that were addressed by the Court’s December 7, 2022 Interlocutory Judgment. (Ibid.)

The parties also stipulated to continue the discovery motions to August 25, 2023. (Ibid.)

It is this stipulation that contradicts Company’s assertions that Knudsen should have withdrawn the original motion and did not meet and confer before filing the instant motion. Indeed, by virtue of its agreement to enter into the April 2023 stipulation, Company essentially admitted that Knudsen had claims that survived entry of the Interlocutory Judgment and his discovery requests survived as well. In addition, the chronology set forth above clearly indicates that the parties engaged in an extensive meet and confer about these discovery issues before Defendants filed the appraisal petition. Company has not cited to any authority requiring Knudsen to engage in another meet and confer effort after continuing the hearing on a pending discovery motion.

Moreover, contrary to Company’s assertions, there is no provision in the Civil Discovery Act preventing discovery of facts arising after suit is filed—particularly in cases alleging a continuing tort or breach of contract, where such discovery may be needed to show that conduct before suit was part of a continuing scheme or that the tortious conduct or breaches continue. Here, although the discovery requests may have been propounded at the time the appraisal was ongoing, the requested information also pertains to Knudsen’s remaining claims. The April 2023 stipulation specifically contemplates allowing Knudsen to continue his attempt to compel further responses to his discovery requests as they pertain to claims other than his challenge to the appraisal. It is noted that in granting Knudsen’s motion for leave to amend his complaint, this Court expressly found that “the Interlocutory Judgment did not address any of Knudsen’s other claims regarding compensation, distributions, and other amounts he claims are owed to him by Defendants.” (ROA 339). It is on that basis that Knudsen apparently seeks to compel further responses.

Furthermore, as noted above, Knudsen contends that he still has a 22.5% economic interest in the Company based upon the terms of the LLC Operating Agreement. As a result, as correctly noted by Knudsen, he has a statutory right to inspect Company’s financial records. Under the Corporations Code, although Knudsen is no longer a member of the Company, it appears he is a “transferee” to whom all or part of a “transferable interest” in the Company has been transferred. A “transferable interest” is the right, as originally associated with Knudsen’s capacity as a member, to receive distributions from the Company in accordance with the Operating Agreement, whether or not he remained a member or continues to own any part of the right. (Corp. Code, §§ 17701.02, subds. (aa), (ab).) Accordingly, as a transferee, Knudsen “has the right, upon reasonable request, for purposes reasonably related to the interest … as a … transferee, … to inspect and copy during normal business hours any of the records required to be maintained pursuant to [Corporations Code] Section 17701.13.” (Corp. Code, § 17704.10, subd. (b)(1).) Those records include: (1) information about the contribution and the share in profits and losses of each member and transferee; (2) copies of the Company’s federal, state, and local tax returns and reports for the six most recent fiscal years; (3) copies of the financial statements for the six most recent fiscal years; and (4) the books and records related to the internal affairs of the Company for at least the current and past four fiscal years. (Corp. Code, § 17701.13, subd. (d).)

As a result, although Knudsen withdrew as a member of Company in January 2021, he is entitled to the financial statements and books and records of Company after his withdrawal, as well as information about Raj’s and Miller’s contributions and shares in profits and losses.

Motion re Requests for Production, Set Four

Knudsen is seeking to compel Company to provide further responses to the following RFPs:

• RFP 106: Documents sent to Arke between January 8, 2021, and June 5, 2021;

• RFP 107: Documents received from Arke between January 6, 2021, and June 5, 2021;

• RFP 108: Documents sent to Arke between June 6, 2021, and December 31, 2021; and

• RFP 109: Documents received from Arke between June 6, 2021, and December 31, 2021.

Arke is purportedly a competitor of Company. Knudsen alleges that Company’s investment banker was working with Raj and Miller on a possible purchase of Arke before, during, and after Knudsen left the Company. According to Knudsen, these documents pertain to his claims because while Raj and Miller were making contributions to themselves, but not Knudsen, they were also secretly trying to leverage more value for the Company for themselves. [SAC, ¶¶ 104-117, 124-127, 152-166.] Therefore, Knudsen contends he is entitled to discover information as to how Raj and Miller were effectuating this plan, how much more value they hoped to leverage, and why they were engaged in this scheme.

Knudsen propounded Requests for Production, Set Four on May 12, 2022. [Declaration of David A. Yudelson (“Yudelson Decl.”) (ROA 369), ¶ 3.] After agreeing to extend the relevant deadlines until after this Court ruled on Defendants’ then-pending Petition to Confirm Arbitration Award, Company served its responses and objections to these discovery requests on November 14, 2022. [Id., ¶¶ 4, 5; Exh. A.] On December 23, 2022, Knudsen’s counsel sent a meet and confer letter to Company’s counsel regarding various deficiencies in the responses. [Id., ¶ 6, Exh. B.] However, Company refused to provide further responses. After the parties agreed to various extensions of time, Knudsen filed the original version of the current motion on January 27, 2023. [Id., ¶ 8; see also, ROA 253.] On April 27, 2023, the parties stipulated to continue the hearing on this motion (and the companion motion regarding RFPs, Set One) until after this Court ruled on Knudsen’s then-pending motion for leave to amend his complaint. (ROA 297). The Court granted Knudsen leave to amend (ROA 339), and the operative Second Amended Complaint was filed on July 5, 2023 (ROA 344).

RULING:

Plaintiff Martin Knudsen’s Motion to Compel Further Responses and Production of Documents, Set One, and Request for Sanctions is CONTINUED to November 3, 2023 at 1:30 p.m. in Department CX103.

Plaintiff Martin Knudsen’s Motion to Compel Further Responses and Production of Documents, Set Four, and Request for Sanctions is CONTINUED to November 3, 2023 at 1:30 p.m. in Department CX 103.

The parties are ordered to schedule and attend an Informal Discovery Conference on September 19, 2023, at 2:00 p.m. in Department CX103. The parties are ordered to file their IDC statements with the Court no later than three (3) calendar days before the IDC.

The Court does not require any physical or remote appearance at the hearing scheduled for August 25, 2023.

The Motion to Seal is CONTINUED to November 3, 2023, at 1:30 p.m. in Department CX103.

The Status Conference is OFF CALENDAR.

Clerk to give Notice.