Judge: Malcolm Mackey, Case: BC717394, Date: 2023-04-27 Tentative Ruling

Case Number: BC717394    Hearing Date: April 27, 2023    Dept: 55

KOENIG v. CENTRALIA APARTMENTS,                                                        BC717394

Hearing Date:  4/27/23,  Dept. 55.

#8:   

DEMURRER TO PLAINTIFFS’ FOURTH AMENDED COMPLAINT.

MOTION TO STRIKE PORTIONS OF THE FOURTH AMENDED COMPLAINT.

 

Notice:  Okay

Opposition

 

MP:  Defendants CENTRALIA APARTMENTS; CENTRALIA LIMITED INVESTORS; PIONEER LIMITED INVESTORS, LP; CENTRALIA G.P., LLC;  INAMERICA HOLDINGS, LLC; DEBRA L. DUGGAN; and PROLAND MANAGEMENT COMPANY LLC.

RP:  Plaintiffs

 

 

Summary

 

On 8/10/18, plaintiffs filed a Complaint.

On 12/12/22, plaintiffs filed a Fourth Amended Complaint, alleging:  Plaintiffs are limited partners and co-owners of a 10.986% interest in CENTRALIA LIMITED INVESTORS, LP.  Defendant, DONALD E. HOLLINGSHEAD was, before his passing and ensuing Probate proceedings, an individual who was the shareholder/member, President and a director of the General Partner or acting General Partner of CENTRALIA APARTMENTS, CENTRALIA LIMITED and PIONEER 28 LIMITED.  After this action was filed, HOLLINGSHEAD  filed his own action (LASC Case No. 19STCV05411) against DEBRA DUGGAN, PROLAND MANAGEMENT COMPANY, LLC, CENTRALIA GP, LLC, INAMERICA HOLDINGS, LLC and other Defendants from multiple partnerships, alleging that DUGGAN and her late husband, RONALD GREGG, through PROLAND MANAGEMENT, engaged in a series of financial and management misconduct that resulted in HOLLINGSHEAD losing his partnership interests in numerous properties with an estimated value of over $100 million.  Defendant DUGGAN created multiple entities, including CENTRALIA GP, INC, CENTRALIA GP, LLC, and INAMERICA HOLDINGS, LLC, in order to shield herself from potential liability going forward with the ACQUISITION AGREEMENT dated 4/10/15, DUGGAN entered into with HOLLINGSHEAD and HOLLINGSHEAD MANAGEMENT, for the allegedly illegal purchase by DUGGAN of the alleged General Partnership interests in the various Partnerships that are the subject of Hollingshead v.  Duggan.  As part of an illegal and improper ACQUISITION AGREEMENT, DUGGAN, and her illegal and improper entities, agreed with HOLLINGSHEAD to purchase Limited Partners' interests at a reduced price through the use of the familiar PRO LAND in an attempt to reduce their future exposure. Without Limited Partners’ approval, HOLLINGSHEAD and DEBRA and each alter ego, effectuated the ACQUISITION AGREEMENT, to self-deal to usurp Partnership opportunity.  A 1972 CENTRALIA LIMITED PARTNERSHIP AGREEMENT was breached by HOLLINGSHEAD and DEBRA including by failing to distribute Profits and Losses. A 2005 CENTRALIA LIMITED PARTNERSHIP AGREEMENT was breached by HOLLINGSHEAD and DEBRA, such as by failing to terminate the Partnership as of 12/15/15, diverting yearly rental income and failing to obtain 51% approval of the Limited Partners on refinance loans.  A 2015 CENTRALIA LIMITED PARTNERSHIP AGREEMENT was breached by  HOLLINGSHEAD and DEBRA wrongfully omitting the obligation to Share Profits to Limited Partners, et cetera.

 

The causes of action are

:

1. BREACH OF PARTNERSHIP AGREEMENTS;

2. BREACH OF FIDUCIARY DUTY;

3. BREACH OF FIDUCIARY DUTY;

4. CONVERSION;

5. CONVERSION;

6. DECLARATORY RELIEF;

7. DISSOLUTION OF CENTRALIA LIMITED;

8. BREACH OF CONTRACT  (DERIVATIVELY ON BEHALF OF CENTRALIA LIMITED INVESTORS, LP AGAINST CENTRALIA APARTMENTS );

9. BREACH OF FIDUCIARY DUTY;

10. CONVERSION;

11. FRAUD;

12. DECLARATORY RELIEF;

13. DISSOCIATION OF GENERAL PARTNER OF CENTRALIA LIMITED;

14. DISSOCIATION OF GENERAL PARTNER OF CENTRALIA APARTMENTS;

15. DISSOLUTION OF CENTRALIA APARTMENTS.

 

 

MP Positions

 

Moving parties request an order sustaining the demurrer to the First, Fourth, Fifth, Seventh, and Fifteenth Causes of Action of the Fourth Amended Complaint, and granting the motion to strike allegations regarding alter ego, Penal Code Section 496, and allegedly illegal conduct, on grounds including the following:

 

·         Previously, Judge Broadbelt sustained Defendants’ Demurrer to the entire First Amended Complaint and all causes of action. Successor Judge Sotelo reversed some of Judge Broadbelt’s rulings, while sustaining Defendants’ prior Demurrer in part.

·         1st Cause of Action – Breach of Contract:  Plaintiffs continue to allege that every defendant caused every breach since 2005, instead of alleging which defendant did which breach. Plaintiffs list various alleged breaches of the 2005 Centralia Limited Partnership Agreement. For example, Plaintiffs allege there were profits (not net profits) that should have been distributed year by year since 2005.  Plaintiffs were not granted leave to add “AND EACH ALTER EGO” to the named defendants in each cause of action.

·         4th & 5th Causes of Action – Conversion:  The allegation of a failure to pay money owed is not conversion.  Voris v. Kapmpers (2019) 7 Cal.5th 1141.  Plaintiffs need to identify specific funds that these Plaintiffs owned which were converted, not merely gross rental payments paid to Centralia Apartments. Plaintiffs assert in the Opposition that, by alleging a contractual right to net income received by Centralia Apartments, they have met the Court’s requirements to establish a claim for conversion. But they do not identify any net income.  The complaint establishes no support for the claim that the Acquisition Agreement was illegal or improper. It is based solely on the complaint of Donald Hollingshead, which was withdrawn because it was unfounded.

·         7th Cause of Action – Fraud:  Plaintiffs conceded that there was no prior basis for plaintiffs’ Seventh Cause Of Action for fraud, and have abandoned that claim.

·         9th Cause of Action – Dissolution:  On December 2, 2022, the Court received the Application under Code Section 15908.02 for a statutory buyout of Michael Koenig and Lauren Koenig, by Defendant Proland Management Company. Section 15908.02 provides: “The court, upon application of the purchasing parties, either in the pending action or in a proceeding initiated in the superior court of the proper county by the purchasing parties, shall stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair market value of the partnership interests owned by the moving parties.

·         Motion to Strike:  Plaintiffs failed to request leave to amend, beyond the scope of prior leave to amend, to add allegations against an alter egos and Penal Code Section 496.  It was inappropriate for plaintiffs to label an agreement as illegal when there is no basis for asserting criminal liability. Allegations that a 2015 Agreement was “illegal”, based on the unverified claims of a since deceased Donald Hollingshead in a frivolous and dismissed lawsuit, comprise inappropriate muck-raking that lacks integrity.

 

 

 

RP Positions

 

Opposing parties advocate overruling and denying, for reasons including the following:

 

·         The First Cause of Action for Breach of Contract claim is well pled, by Exhibit and Paragraphs of the Agreement, following the Court's instructions, in deleting the paragraphs. It alleges the Party, and the Agreement by Exhibit and the Paragraphs that were breached by the Defendants.

·         The Fourth Cause of Action is well pled, by following Court instructions. It is now segregated by agreement and parties.  The core allegations of the claim are that the  Acquisition Agreement was used by Debra L. Duggan to buy the General Partnership interests from Donald E. Hollingshead, that multiple pieces of litigation were being litigated at the time of the Acquisition Agreement, that Pro land Management used funds from three loan transactions to acquire a majority interest in Centralia Limited, that the Partnership Agreements expired, that there were no yearly net rental profit income received by Centralia Limited and its Limited Partners and no distributions have been made to Limited Partners of Centralia Limited in relation to the 2015 Arbor Commercial loan for $5 million and the 2019 Axos Bank loan for $8,050,000.

·         The Fifth Cause of Action is well plead, by following Court instructions.  Stealing a partner’s share is actionable conversion.  E.g.,  Oakdale Village Group v. Fong, (1996) 43 Cal.App.4th 539.

·         As to the Seventh Cause of Action, the Court must first grant the Motion for Buyout before the involuntary action can be supplanted/stayed.  Goles v. Sawhney, (2016) 5 Cal.App.5th 1014, 1018-21.

·         The Fifteenth Cause of Action is sufficiently pled, considering that defendants lack standing to challenge a derivative action without standing by benefitting.  Here, the Partnership Agreement with Centralia Limited expired on December 31, 2015, and the one with Centralia Apartments expired in June 2017.  E.g., Corporations Code,§ 15908.01 (a).

·         The "EACH ALTER EGO" allegations is properly based upon 11/30/22 notice of ruling, at page 15.

·         Penal Code Section 496's remedy of treble damages is based on the 7/21/22 decision in Siry Investment, L.P. v. Saeed Farkhondehpour, (2022) 13 Cal.5th 333.

·         The phrase "illegal and improper" is based on language in Enea v. Superior Court, (2005) 132 Cal.App.4th 1559, 1564 and Agam v. Gavra, (2015) 236 Cal.App.4th 91, 112, where appellate decisions state: "First, illegal contracts are unenforceable. One type of illegal-and thus unenforceable- contract is '[a] promise by a fiduciary to violate his or her  fiduciary duty, or one that tends to induce such a violation.'... It follows that a contract procured by a fiduciary duty breach likewise is illegal and unenforceable. Second, 'partners are held to the standards and duties of a trustee in their dealing with each other.'"

 

 

Tentative Ruling

 

The demurrer is overruled.

The motion is denied.

Twenty days to answer.

 

            Prior Rulings

 

This Court is not bound by rulings of the predecessor judges, including because they never ruled as to the instant matters addressing the Fourth Amended Complaint, and this case has been reassigned out of their Departments after CCP Section 170.6 challenges.  Successor judges have authority to alter orders issued by their predecessors who are unavailable in the case after reassignment.   In re Marriage of Nicholas (2010) 186 Cal.App.4th1566, 1577-78.  “[A] successor judge may review an interlocutory ruling of another judge when the facts have changed or when the judge has considered further evidence and law.“  Golin v. Allenby (2010) 190 Cal.App.4th 616, 644.

Further, the Court may cite governing law, sua sponte.  “In considering a demurrer, the court is not required to ignore controlling law merely because the plaintiff does not rely on it.”  Dey v. Continental Central Credit (2008) 170 Cal. App. 4th 721, 730.

 

            Leave to Amend Scope

 

This Court has discretion to allow the entire Fourth Amended Complaint.  The prior rulings as to demurrers to the Third Amended Complaint, partly overruling, and sustaining with and without leave to amend, did not specify that leave to amend was confined to addressing prior issues raised  (see notice of ruling, filed 12/2/22).  Following orders sustaining demurrers, complainants may amend as authorized by the court's order, and can add claims outside the scope of the order if that would directly respond to reasons for sustaining the demurrer.  Harris v. Wachovia Mortg., FSB (2010) 185 Cal.App.4th 1018, 1023.  After a demurrer is sustained with leave to amend, plaintiffs may add new claims involving legal theories based upon prior allegations.  Datig v. Dove Books, Inc. (1999) 73 Cal.App.4th 964, 983 n. 19,  superseded on other grounds as stated in  Sino Century Dev. Ltd. v. Farley (2012) 211 Cal. App. 4th 688, 696.  After the court grants leave to amend, complainants may add new causes of action, if it “directly responds to the court's reason for sustaining the earlier demurrer.”  Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1015.   Complainants have the burden to demonstrate how complaints can be amended, but that showing may be made even as late as on appeal to the appellate court.   Oglio Entertainment Group, Inc. v. Hartford Cas. Ins. Co. (2011) 200 Cal.App.4th 573, 585.  Judges even have discretion to allow complaints filed without obtaining permission for leave to amend, under some circumstances.  See  Harlan v. Department of Transp. (2005) 132 Cal.App.4th 868, 873  ("While the court had discretion to require a noticed motion before permitting Harlan to file the second amended complaint late, we think it also had discretion under these circumstances to accept the filing without a noticed motion.").

 

            Alter Ego

 

The alter ego allegations suffice to include all defendants without narrowly specifying breaches as to specified defendants, and are not added causes of action.  As to contract-based claims, the alter ego doctrine is sufficiently alleged by an allegation that defendant made the contract involved.  Los Angeles Cemetery Assoc. v. Sup. Ct. (1968) 268 Cal.App.2d 492, 494.  "[C]ourts have followed a liberal policy of applying the alter ego doctrine where the equities and justice of the situation appear to call for it rather than restricting it to the technical niceties depending upon pleading and procedure."  First Western Bank & Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910, 915.  A “court may disregard the corporate entity and treat the corporation's acts as if they were done by the persons actually controlling the corporation.’”  Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892.  “Under the alter ego doctrine…, when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation's acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners.”  Sonora Diamond Corp. v. Sup. Ct. (2000) 83 Cal. App. 4th 523, 538.  “A claim based upon an alter ego theory is not itself a claim for substantive relief.”  Leek v. Cooper  (2011) 194 Cal.App.4th 399, 418. 

Further, a demurrer should not be sustained on the ground of uncertainty regarding which defendant committed the alleged conduct, where the pleading alleged that all defendants were responsible. Dillard v. County of Kern (1943) 23 Cal. 2d 271, 279  (“The complaint charges all the defendants and their agents and servants with having negligently operated . . . the truck. Liberality in pleading compels the conclusion that the demurrer should not have been sustained. Defendants were in a superior position to know….”).  Alleging conduct of defendants and each of them was sufficient to charge each with liability.  Lee v. Escrow Consultants, Inc. (1989) 210 Cal. App. 3d 915, 925.  Distinguishably, if the body of the pleading completely fails to mention a defendant, then a boilerplate allegation of global liability of all defendants is insufficient to state a cause of action.  Falahati v. Kondo (2005) 127 Cal. App. 4th 823, 829 ("Although the complaint contains a boilerplate allegation each defendant was the agent and employee of the others and contains some charging allegations respecting 'defendants and each of them' these allegations do not result in the complaint stating a cause of action against Kondo because he is nowhere mentioned in the body of the complaint.").

 

            Conversion

 

The conversion claim need not:  Allege more detail, include factual support better than relying on another Complaint or avoid partially including contractually owed payments in the mix of other allegations.

The required elements of a claim for conversion are:

  1. Plaintiff's ownership or right to possession of personal property;
  2. defendant's disposition of the property inconsistent with plaintiff's rights; and
  3. resulting damages.

PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395, 397 (money cannot be the subject of a cause of action for conversion unless there is an identifiable sum, and dictum that, “plaintiffs may have stated a cause of action for conversion by alleging, in effect, an amount of cash ‘capable of identification.’”);  Fischer v. Machado (1996) 50 Cal.App.4th 1069, 1072;  Farmers Ins. Exchange v. Zerin (1997) 53 Cal. App. 4th 445, 451, 452 ("a mere contractual right of payment, without more" does not constitute conversion).  See also  Weiss v. Marcus (1975) 51 Cal.App.3d 590, 599  (“While money cannot be the subject of an action for conversion unless a specific sum capable of identification is involved, it is not necessary that each coin or bill be earmarked.”);  Franklin v. Muni. Ct. (1972) 26 Cal. App. 3d 884, 902 (“A general allegation that the defendant ‘converted the property to his own use’ suffices to allege conversion.… An allegation that the plaintiff demanded return of the property and that the defendant refused to return said property has been deemed sufficient….”);  Plummer v. Day/Eisenberg, LLP (2010) 184 Cal. App. 4th 38, 45 (complainants need only allege entitlement to immediate possession and need not necessarily allege ownership).

A demurrer procedure does not legitimately involve evaluating complainants’ inabilities to prove the allegations.  Citizens of Humanity, LLC v. Costco Wholesale Corp. (2009) 171 Cal. App. 4th 1, 16,  disapproved on other grounds by  Kwikset Corp. v. Sup. Ct. (2011) 51 Cal. 4th 310, 337.

Demurrers do not lie as to only parts of causes of action, where some valid claim is alleged.  Poizner v. Fremont General Corp.  (2007) 148 Cal.App.4th 97, 119 (“A demurrer must dispose of an entire cause of action to be sustained.”);  Kong v. City of Hawaiian Gardens Redev. Agency (2003) 108 Cal.App.4th 1028, 1046;  Caliber Bodyworks, Inc. v. Sup. Ct.  (2005) 134 Cal.App.4th 365, 384-85,  disapproved on other grounds by  ZB, N.A. v. Sup.Ct. (2019) 8 Cal. 5th 175, 196 n. 8.

 

            Ninth Cause of Action – Dissolution

 

A statutory stay, such as under Corporations Code Section 15908.02, is not a recognized basis for a demurrer.  Instead, demurrers are to be sustained where a pleading fails to plead adequately any essential element of the cause of action.  Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 879-80.

The operative pleading sufficiently alleges a claim of dissolution of a limited partnership, which requires alleging:  It is not reasonably practicable to carry on the activities of the limited partnership in conformity with the partnership agreement.   Corp. C. 15908.02;  Panakosta Partners, LP v. Hammer Lane Management, LLC (2011) 199 Cal.App.4th 612, 619. 

 

            Uncertainty

 

Demurring defendants can clarify the allegations via discovery.  Demurrers for uncertainty are strictly construed, because discovery can be used for clarification, and apply where defendants cannot reasonably determine what issues or claims are stated.  Khoury v. Maly’s of Cal., Inc. (1993) 14 Cal.App.4th 612, 616.   Regarding uncertainty, "[t]here is no need to require specificity in the pleadings because 'modern discovery procedures necessarily affect the amount of detail that should be required in a pleading.'”  Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 608.  “[S]pecific dates and details . . . are properly addressed during discovery, not on demurrer.”  People v. Highland Fed. Sav. & Loan (1993) 14 Cal. App. 4th 1692, 1716.

 

            Motion to Strike

 

Alter ego allegations are properly included, as already addressed with regard to the demurrer. 

Alleged illegality of an agreement is not revealed by the Fourth Amended Complaint to be irrelevant, false or improper, and more supportive allegations are not required.  The grounds for a motion to strike are that the pleading has irrelevant, false or improper matter, or has not been drawn or filed in conformity with laws.  CCP §436.  The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice.  CCP §437.  In ruling on a motion to strike punitive-damages allegations, judges assume the truth of the pleading allegations.  Kaiser Foundation Health Plan, Inc. v. Sup. Ct. (2012)  203 Cal.App.4th 696, 699 n.1.  A motion to strike cannot be based upon insufficient facts, but instead is properly based on grounds of superfluous or abusive allegations, or improprieties in form or procedure.  Ferraro v. Camarlinghi (2008)  161 Cal.App.4th 509, 528-29.  “[C]ourts recognize varying forms and degrees of illegality, and that the particular facts of the case must be considered before remedy is refused.”  Kyablue v. Watkins  (2012) 210 Cal.App.4th 1288, 1292.