Judge: Mark A. Young, Case: 19SCV02159, Date: 2023-01-20 Tentative Ruling

Case Number: 19SCV02159    Hearing Date: January 20, 2023    Dept: M

CASE NAME:           HDevelopment, et al., v. Schimmel, et al.

CASE NO.:                19SCV02159

MOTION:                  Motion to Substitute Plaintiff

HEARING DATE:   1/20/2023

Legal Standard

Code of Civil Procedure section 368.5 provides: 

An action or proceeding does not abate by the transfer of an interest in the action or proceeding or by any other transfer of an interest. The action or proceeding may be continued in the name of the original party, or the court may allow the person to whom the transfer is made to be substituted in the action or proceeding. 

Furthermore, Business & Professions Code section 17710.16 states:

(a) Upon a merger of limited liability companies or limited liability companies and other business entities pursuant to this article, the separate existence of the disappearing limited liability companies and disappearing other business entities ceases and the surviving limited liability company or surviving other business entity shall succeed, without other transfer, act or deed, to all the rights and property, whether real, personal, or mixed, of each of the disappearing limited liability companies and disappearing other business entities, and shall be subject to all the debts and liabilities of each in the same manner as if the surviving limited liability company or surviving other business entity had itself incurred them.

[…]

(c) Any action or proceeding pending by or against any disappearing limited liability company or disappearing other business entity may be prosecuted to judgment, which shall bind the surviving limited liability company or surviving other business entity, or the surviving limited liability company or surviving other business entity may be proceeded against or be substituted in the place of the disappearing limited liability company or disappearing other business entity.

(Emphasis added.)

Analysis

Plaintiffs move to substitute the surviving entity Red Letter Management LLC, an Arizona LLC, with the disappearing entity Plaintiff Red Letter Management (RLM), LLC, a California LLC. Plaintiffs already filed a Third Amended Complaint (TAC) pursuant to this Court’s October 28, 2022, ruling on Defendants’ motion for judgment on the pleadings. With respect to that motion, Defendants moved for judgment on the grounds that the California entity no longer existed. The Court granted leave to allow Plaintiffs to correct the pleadings and attempt to substitute the Arizona LLC. Here, Plaintiffs demonstrate that the two LLCs were merged, and section 17710.16 applies. As was established in the prior motion for judgment on the pleadings, RLM moved to Scottsdale, Arizona, formed a separate Arizona LLC of the same name, and then merged the two LLCs. (Marino Decl., Ex. D.) Given this merger, RLM (AZ) should be substituted into this action.  

Defendants argue that Arizona law would disallow this substitution because successor corporations are generally “not liable for the former corporation’s debts and liabilities.” (A.R. Teeters & Assocs., Inc. v. Eastman Kodak Co. (1992) 172 Ariz. 324, 329.) However, the court in Teeters explained that Arizona law is consistent with California law on this point. “As a general rule, when a corporation sells or transfers its principal assets to a successor corporation, the latter will not be liable for the debts and liabilities of the former, unless (1) there is an express or implied agreement of assumption, (2) the transaction amounts to a consolidation or merger of the two corporations”. (Id., [citing both California and Arizona law in support].) Thus, the application of Arizona law would not change the outcome of this motion.

Defendants make a request in their opposition to impose a bond on the now-foreign RLM, pursuant to Code of Civil Procedure section 1030(b). That section provides that when the plaintiff is a “foreign corporation, the defendant may at any time apply to the court by noticed motion for an order requiring the plaintiff to file an undertaking…”  As such, the Court will require a noticed motion before potentially imposing a bond.

Accordingly, Plaintiffs’ motion is GRANTED.