Judge: Malcolm Mackey, Case: 22STCV38413, Date: 2023-08-03 Tentative Ruling
Case Number: 22STCV38413 Hearing Date: August 3, 2023 Dept: 55
HUNTINGTOWN CAPITAL, L.P. v. MICHAEL’S BAKERY PRODS, LLC, 22STCV38413
Hearing Date: 8/3/23, Dept. 55.
#9: DEMURRER TO COMPLAINT.
Notice: Okay
Opposition
MP: Defendants MICHAEL’S BAKERY PRODUCTS, LLC; MICHAEL’S COOKIES, LLC; SCOTT SUMERIL; and Specially Appearing Defendant J. DON COOKSEY, JR.
RP: Plaintiffs.
Summary
On 12/9/22, Plaintiffs HUNTINGTOWN CAPITAL, L.P. and NCHCAP, LLC filed a Complaint, alleging that MICHAEL’S BAKERY PRODUCTS, LLC and MICHAEL’S COOKIES LLC were required to submit payment to HUNTINGTON CAPITAL in the amount of $356,924 pursuant to a succession of written Warrant Agreements, Defendant J. DON COOKSEY, JR., on his own behalf and on behalf of MICHAEL’S BAKERY, misrepresented the true financial condition of MICHAEL’S BAKERY while failing to disclose the true working capital needs of it, and the amounts distributed to equity holders left it with insufficient funds to pay Plaintiffs the amounts owed under Warrant Agreements.
The causes of action are:
(1) BREACH OF CONTRACT
(2) BREACH OF CONTRACT
(3) FRAUD
(4) UNLAWFUL DISTRIBUTIONS TO LIMITED LIABILITY COMPANY MEMBERS
(5) ACCOUNT STATED.
MP Positions
Moving parties request an order sustaining the demurrer to each Cause of Action of the Complaint, on grounds including the following:
· Plaintiffs fail to allege any facts that would support holding Michael’s Cookies liable under the warrants, which are contracts to which Michael’s Cookies is clearly not a party. Michael’s Cookies did not assume Michael’s Bakery’s obligations. Because Plaintiffs do not allege any facts that could cause this transaction to be reasonably construed as a merger between Michael’s Cookies and Michael’s Bakery, the merger exception is not available.
· Plaintiffs’ cause of action for fraud is bereft of the requisite specificity needed to state a claim under the heightened pleading standard for fraud.
· The Economic Loss Rule applies. The only losses Plaintiffs allege are purely economic: they claim Michael’s Bakery and Cooksey failed to perform their contractual duties under the Second Warrant Agreement. Compl. ¶ 77.
· Plaintiffs, as potential creditors of Michael’s Bakery, lack standing to bring suit against the members of the limited liability company (“LLC”) in any capacity, whether directly or in a derivative action. Corporations Code section 17704.06 provides the LLC itself—not a creditor of the LLC—the right to enforce section 17704.05 by bringing a cause of action against members for an improper distribution.
· Plaintiffs’ cause of action for an account stated must be dismissed as to every defendant except for Michael’s Bakery because all of the underlying causes of action to which it is tethered are inadequately plead. No individual defendants nor Michael’s Cookies ever owed any money to Plaintiffs or admitted to owing any money to Plaintiffs.
RP Positions
Opposing parties advocate overruling, for reasons including the following:
· Plaintiffs sufficiently met the pleading requirements for fraud. Michael’s Bakery and Cooksey had a duty to disclose the full scope of the company’s financial need for at least three reasons, even absent a fiduciary duty. Hoffman v. 162 North Wolfe LLC (2014) 228 Cal.App.4th 1178, 1186 (“fraud may consist of a suppression of a material fact in circumstances under which the defendant has a legal duty of disclosure.”).
· An exception to the economic loss rule exists as to fraud claims.
· As expressly alleged in the Complaint, Michael’s Cookies became successor-in-interest to Michael Bakery—and assumed its liabilities—including those under the First and Second Warrant Agreements. [See, e.g., Complaint, ¶¶ 20, 52.] Defense-cited cases did not include pleading standards.
· As to the individual defendants, Plaintiffs agree to withdraw the Complaint’s fourth cause of action for unlawful distributions to LLC members.
· The account stated claim is only demurrable if the breach of contract claims are both demurrable and demurred to.
Tentative Ruling
The demurrer is sustained without leave to amend as to the Fourth Cause of Action, and is otherwise overruled.
Twenty days to answer.
Fraud
Concealment is sufficiently alleged based on duties, such as breach of a duty to disclose all important finances instead of part, even without any fiduciary duty (e.g., Complaint, ¶¶ 33 – 35, 73 - 77). See, e.g., Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal. App. 4th 1356, 1384 (rule of specifically pleading how, when, where, to whom, and by what means, misrepresentations were communicated, is intended to apply to affirmative misrepresentations, and not to concealment); Jones v. ConocoPhillips (2011) 198 Cal.App.4th 1187, 1200 (concealment is sufficiently pled when the complaint as a whole provides sufficient notice of the particular claims against defendants.); Morgan v. AT&T Wireless Services, Inc. (2009) 177 Cal. App. 4th 1235, 1262 (“If a fraud claim is based upon failure to disclose, and ‘the duty to disclose arises from the making of representations that were misleading or false, then those allegations should be described.’” ); LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 336 (There are "four circumstances in which nondisclosure or concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.’”).
Successor Liability
Successor liability is sufficiently alleged (e.g., Complaint, ¶¶ 20 (“ Michael’s Cookies recently acquired the assets and operations of Michael’s Bakery and, as successor-in-interest to Michael’s Bakery pursuant to that transaction and/or by operation of law, assumed the liabilities of Michael’s Bakery, including the amounts owed to Plaintiffs detailed below.”), 36, 49 – 52, 54, 61, 63, 70).
As for pleading the successor-in-interest theory, it is essential to state some allegation of intent to hold a successor defendant liable for acts committed by its predecessor corporation. See Hughes v. Western MacArthur Co. (1987)192 Cal. App. 3d 951, 956.
Generally, a successor corporation acquiring the assets of another corporation does not assume the selling corporation's debts and liabilities, but with five exceptions: 1) an express or implied agreement of assuming liability; 2) a merger of the two corporations; 3) a mere continuation of the seller; 4) a fraudulent attempt to avoid liability for the seller's debts; and 5) tests applicable in products liability cases. Daniell v. Riverside Partners I, L.P. (2012) 206 Cal.App.4th 1292, 1300-01; CenterPoint Energy, Inc. v. Sup. Ct. (2007) 157 Cal.App.4th 1101, 1120; Franklin v. USX Corp. (2001) 87 Cal. App. 4th 615, 627 (concluding that there was no merger, continuance or agreement to assume liabilities, for imposing any successor liability, in asbestos case); McClellan v. Northridge Park Townhome Owners Ass'n (2001) 89 Cal. App. 4th 746, 753-54.
“[S]uccessor liability … is an equitable doctrine. As with other equitable doctrines, ‘it is appropriate to examine successor liability issues on their own unique facts’ and ‘[c]onsiderations of fairness and equity apply.’ ” Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1330.
Economic Loss Rule
The Economic Loss Rule is inapplicable, because fraud is alleged, and it is not a complete defense to a cause of action. County of Santa Clara v. Atlantic Richfield Co. (2006) 137 Cal. App. 4th 292, 328 (economic loss rule is inapplicable to fraud actions); Dhital v. Nissan North America, Inc. (2022) 84 Cal.App.5th 828, 840 (“concealment-based claims for fraudulent inducement are not barred by the economic loss rule.”); Greystone Homes, Inc. v. Midtec, Inc. (2008) 168 Cal. App. 4th 1194, 1215 (economic loss rule is not a defense, but instead relates to the damages element of a tort cause of action, and requires present, appreciable, and non-speculative injury, and as to construction, property damage or involuntary out-of-pocket loss); Food Safety Net Services v. Eco Safe Systems USA, Inc. (2012) 209 Cal.App.4th 1118, 1130 (regarding the economic loss rule, “a party alleging fraud or deceit in connection with a contract must establish tortious conduct independent of a breach of the contract itself,…”).
Unlawful Distributions To Limited Liability Company Members
The opposition agrees to withdraw the Fourth Cause of Action (opp., 16:10-13, 18:21).
Courts may take judicial notice of admissions set forth in oppositions to demurrers. Rodas v. Spiegel (2001) 87 Cal.App.4th 513, 518.
Account Stated
The pleading adequately alleges implied agreements to pay stated amounts (e.g., Complaint, ¶ 86 (“Defendants, by words or conduct, promised to pay the stated amount(s) to Plaintiffs.”)). See, e.g., Truestone, Inc. v. Simi West Industrial Park II (1984) 163 Cal.App.3d 715, 725 (“‘it must appear that at the time of the statement an indebtedness from one party to the other existed, that a balance was then struck and agreed to be the correct sum owing from the debtor to the creditor, and that the debtor expressly or impliedly promised to pay to the creditor the amount thus determined to be owing.’”); Block v. D. W. Nicholson Corp. (1947) 77 Cal. App. 2d 739, 746 (“‘An account stated requires that there be an acknowledgment of a previous indebtedness, since such indebtedness constitutes the consideration upon which the new contract is based. It is also required that there be an agreement that the balance is correct, and a promise for the payment of such balance. This promise may be either express or implied.’").
Moreover, “a common count, by long continued practice is not subject to attack by general demurrer or by a special demurrer for uncertainty.” Auckland v. Conlin (1928) 203 Cal. 776, 778. Accord Smith v. Bentson (1932) 127 Cal. App. Supp. 789, 791. A common count is proper notwithstanding that it relates to an original transaction involving an express or implied contract. Utility Audit Co. v. City of L. A. (2nd Dist. 2003) 112 Cal.App.4th 950, 958.
Also, defendants are allegedly liable based on theories of agency and alter ego, even assuming that individual defendants did not agree to stated indebtedness (e.g., Complaint, ¶ 15).
HUNTINGTOWN
CAPITAL, L.P. v. MICHAEL’S BAKERY PRODS, LLC,
22STCV38413
Hearing Date: 8/3/23,
Dept. 55.
#9: MOTION TO QUASH SERVICE OF SUMMONS AND
COMPLAINT FOR LACK OF PERSONAL JURISDICTION PURSUANT TO CODE OF CIVIL PROCEDURE
§ 418.10.
Notice: Okay
Opposition
MP:
Specially Appearing Defendant J. DON
COOKSEY, JR.
RP:
Plaintiffs.
Summary
On 12/9/22, Plaintiffs HUNTINGTOWN CAPITAL, L.P. and NCHCAP,
LLC filed a Complaint, alleging that MICHAEL’S BAKERY PRODUCTS, LLC and
MICHAEL’S COOKIES LLC were required to submit payment to HUNTINGTON CAPITAL in
the amount of $356,924 pursuant to a succession of written Warrant Agreements, Defendant
J. DON COOKSEY, JR., on his own behalf and on behalf of MICHAEL’S BAKERY,
misrepresented the true financial condition of MICHAEL’S BAKERY while failing
to disclose the true working capital needs of it, and the amounts distributed
to equity holders left it with insufficient funds to pay Plaintiffs the amounts
owed under Warrant Agreements.
The causes of action are:
(1) BREACH OF CONTRACT
(2) BREACH OF CONTRACT
(3) FRAUD
(4) UNLAWFUL
DISTRIBUTIONS TO LIMITED LIABILITY COMPANY MEMBERS
(5) ACCOUNT STATED.
MP
Positions
Moving party requests an order quashing service of the
summons and Complaint and dismissing, on grounds including the following:
·
J. Don Cooksey, Jr. lives in Kentucky.
·
Cooksey has not purposefully availed
himself of the benefits and protections of California law, nor has he directed
any conduct toward Plaintiffs in this state.
·
He is not a party in his individual
capacity to any of the contracts which form the basis of this dispute.
·
None of his allegedly tortious acts
occurred in the state of California.
·
Michael’s Bakery, of which Cooksey serves
as Managing Member, is not organized under California law, maintains no offices
in the state, directs no business towards the state, and does not target the
state with any of its products.
RP
Positions
Opposing parties advocate denying, for reasons
including the following:
First,
the Court has general jurisdiction over Cooksey because his contacts with
California
are so systematic and continuous as to make it consistent with traditional
notions
of fair play and substantial justice to subject him to the Court’s jurisdiction.
Cooksey
is presently a Member of a California entity that has been continuously
operating since 2003, and which is the Manager of defendant Michael’s Bakery
Products, LLC (“Michael’s Bakery”). Cooksey is also presently the General
Partner of yet another California entity that has been continuously operating
since 1999. Cooksey’s involvement in these two California entities not only
directly contradicts his sworn declaration, but establishes the Court’s general
jurisdiction over him.
Second,
the Court has specific jurisdiction over Cooksey because he purposefully
availed
himself of the privilege of conducting activities in California, and because
Plaintiffs’
fraud claim relates to and arises out of Cooksey’s forum-related contacts. Cooksey’s personal and business affairs have
been intricately connected to California for
decades.
Cooksey lived in California until 2011, filed California tax returns every year
from
2006 to 2021, and owed real property in California until at least 2011. In
2009,
Cooksey
filed for bankruptcy and sought protection from the United States Bankruptcy
Court
in the Southern District of California. Cooksey was until recently personally
indebted
to Huntington Capital for well over $1.4 million. Plaintiffs’ fraud claim stems
from
that debt. Cooksey, both personally and professionally, has availed himself of
California’s
privileges and now must face these allegations here.
Third,
Cooksey, on his own behalf and on behalf of his business entities,
consented
to this Court’s jurisdiction by executing numerous agreements which contained California
forum selection clauses.
(Opp., pp. 4 – 5.)
Tentative
Ruling
The motion is denied.
The opposing evidence sufficiently shows that,
including as Member having membership interests, and guarantor having debt
obligations, moving party signed many written agreements contemplating some
performance in California, such as forum selection clauses for California
venue, and mailings to California. Additionally,
moving party is alleged and evidenced to have disclosed incomplete financial
information causing inducement of some agreeing, directed at California-focused
contracts. That moving party moved from
California years ago, is not determinative, because the Court is directed to
consider the timing of alleged events and of the summons. That moving party signed contracts for an
entity, does not insulate him for his own forum contacts.
“An individual's status as an employee acting on
behalf of his or her employer does not insulate the individual from personal
jurisdiction based on his or her forum contacts.” Anglo Irish Bank Corp., PLC v. Sup. Ct.
(2008) 165 Cal.App.4th 969, 981. "The
proper jurisdictional question is not whether the defendant can be liable for
the acts of another person or entity under state substantive law, but whether
the defendant has purposefully directed its activities at the forum state by
causing a separate person or entity to engage in forum contacts." Anglo Irish Bank Corp., PLC v. Sup. Ct.
(2008) 165 Cal. App. 4th 969, 983.
"In analyzing general jurisdiction, we examine
the defendant's contacts when the alleged conduct occurred and at the time of
service of summons. Several federal courts have held that in determining
whether to exercise specific
jurisdiction, 'courts must examine the defendant's contacts with the forum at
the time of the events underlying the dispute . . . .'" DVI, Inc. v. Sup. Ct. (2009) 104 Cal. App. 4th 1080, 1100-01.
“When the contacts are ‘substantial, continuous and
systematic,’ general personal jurisdiction may be exercised as to any cause of
action, even one unrelated to the nonresident's activities within the forum
state.” Muckle v. Sup. Ct. (2002)
102 Cal. App. 4th 218, 227.
“The test for whether a court may exercise ‘specific’
personal jurisdiction requires that the nonresident purposefully directed his
acts to the forum state or otherwise purposefully established contacts with the
forum state, that the cause of action be related to or arise or result from the
acts or contacts in the forum, and that the exercise of personal jurisdiction
by the forum would be reasonable.” Muckle
v. Sup. Ct. (2002) 102 Cal. App. 4th 218, 227-228.
“A contract with an out-of-state party does not
automatically establish purposeful availment in the other party's home forum.
[Citations.] Rather, a court must evaluate the contract terms and the
surrounding circumstances to determine whether the defendant purposefully
established minimum contacts within the forum.”
Stone v. Tex. (1999) 76 Cal. App. 4th 1043, 1048.
Personal jurisdiction may be shown by evidence that a
defendant expressly aimed or targeted defendant’s tortious conduct at the forum
state,... Pavlovich v. Sup. Ct.
(2002) 29 Cal. 4th 262, 273; In re
Automobile Antitrust Cases I & II (2005) 135 Cal. App. 4th 100, 122.
Nonparties to contracts containing forum-selection
clauses may not be bound, with exceptions, including those who were
third-party-beneficiaries, those who had a close relationship to the
contractual transaction and participated in the transaction, those who had an
intertwining business relationship with the signatory, or those who were the
alter ego of the signatory. Berclain
Amer. Latina v. Baan Co. (1999) 74 Cal. App. 4th 401, 408. However, a forum-selection clause, alone,
does not establish personal jurisdiction.
Global Packaging, Inc. v. Sup. Ct. (2011) 196 Cal.App.4th 1623,
1633.