Judge: Mark A. Young, Case: 21SMCV00789, Date: 2022-08-10 Tentative Ruling
Case Number: 21SMCV00789 Hearing Date: August 10, 2022 Dept: M
CASE NAME: Militello, et al., v. VFarm 1509 Inc., et al.
CASE NO.: 21SMCV00789
MOTION: Motion for Bond
HEARING DATE: 8/10/2022
Legal Standard
Corporations Code section 800(c) provides, “In any action referred to in subdivision (b), at any time within 30 days after service of summons upon the corporation or upon any defendant who is an officer or director of the corporation, or held such office at the time of the acts complained of, the corporation or the defendant may move the court for an order, upon notice and hearing, requiring the plaintiff to furnish a bond as hereinafter provided.” (Corp. Code, § 800(c); Corp. Code, § 800(b) [describing an action “instituted or maintained in right of any domestic or foreign corporation by any holder of shares or of voting trust certificates of the corporation”].) “The motion shall be based upon one or both of the following grounds: (1) That there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its shareholders[;] or (2) That the moving party, if other than the corporation, did not participate in the transaction complained of in any capacity.” (Corp. Code, § 800(c).) “The court on application of the corporation or any defendant may, for good cause shown, extend the 30-day period for an additional period or periods not exceeding 60 days.” (Corp. Code, § 800(c).)
“At the hearing upon any motion pursuant to subdivision (c), the court shall consider such evidence, written or oral, by witnesses or affidavit, as may be material (1) to the ground or grounds upon which the motion is based, or (2) to a determination of the probable reasonable expenses, including attorneys' fees, of the corporation and the moving party which will be incurred in the defense of the action.” (Corp. Code, § 800(d).) “If the court determines, after hearing the evidence adduced by the parties, that the moving party has established a probability in support of any of the grounds upon which the motion is based, the court shall fix the amount of the bond, not to exceed fifty thousand dollars ($50,000), to be furnished by the plaintiff for reasonable expenses, including attorneys' fees, which may be incurred by the moving party and the corporation in connection with the action, including expenses for which the corporation may become liable pursuant to Section 317.” (Corp. Code, § 800(d).)
Corporations Code section 17709.02(b) provides, “In any action referred to in subdivision (a), at any time within 30 days after service of summons upon the limited liability company or upon any defendant who is a manager of the limited liability company or held that position at the time of the acts complained of, the limited liability company or the defendant may move the court for an order, upon notice and hearing, requiring the plaintiff to furnish security as hereinafter provided.” (Corp. Code, § 17709.02(b).) “The motion shall be based upon one or both of the following grounds: (1) That there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the limited liability company or its members[;] [or] (2) That the moving party, if other than the limited liability company did not participate in the transaction complained of in any capacity.” (Corp. Code, § 17709.02(b).) “The court, on application of the limited liability company or any defendant, may, for good cause shown, extend the 30-day period for an additional period not exceeding 60 days.” (Corp. Code, § 17709.02(b).)
For a bond under section Corporations Code section 17709.02,“[i]f the Court determines, after hearing the evidence adduced by the parties, that the moving party has established a probability in support of any of the grounds upon which the motion is based, the court shall fix the nature and amount of security, not to exceed fifty thousand dollars ($50,000), to be furnished by the plaintiff for reasonable expenses, including attorney's fees, that may be incurred by the moving party and the limited liability company in connection with the action.” Corp. Code, § 17709.02(c)(2).)
“In assessing whether there is no reasonable possibility the action will benefit the corporation, the court ‘must evaluate the possible defenses which the plaintiffs would have to overcome before they could prevail at trial.’ (2 Ballantine & Sterling, Cal. Corporation Laws, supra, § 293.02, p. 14–23.)” (Donner Management Co. v. Schaffer (2006) 142 Cal.App.4th 1296, 13031304 [discussing bond under Corporations Code section 800].)
Analysis
Defendant Ann Lawrence Athey renews her motion for a bond pursuant to Corporations Code § 800(c) and 17709.02(b). Cannaco Research Corporation (CRC) joins the motion.
As an initial matter, the Court concludes that there are separate 30-day period for each corporation that is subject to the motion. The statute states that the time period starts upon service upon “the corporation” or upon a defendant-officer or director of “the corporation.” Thus, each entity would have time to serve their own bond motion based on their service of summons. (Corp. Code, § 17709.02(b).)
1. LMP and GBC
Lawrence was served prior to the original bond motion, but only as to CRC. Lawrence is also apparently an officer/director of Lankershim Marine Properties LLC (LMP) and GBC LLC (GBC). However, the evidence demonstrates that Lawrence has not been served in that capacity for LMP or GBC. Thus, the motion is timely as to LMP and GBC and the Court has the discretion to determine whether Moving Parties met their initial burden to show that there is no “reasonable possibility” that the action against the moving party “will benefit the corporation or its shareholders” as to LMP and GBC.
The Court concludes that the Moving Parties have not met their burden as to GBC or LMP. As to LMP, there is no evidence presented to the Court as to the LMP claims, whether they have been pled as direct or derivative. Similarly, the Court concludes that the “reasonable possibility” standard has not been met as to GBC. The fact that Militello will “directly” benefit from this lawsuit does not mean that there is no reasonable possibility LMP or GBC will benefit. Moving parties argue that they have shown that because LMP and GBC would expend fees and potentially have to reimburse Lawrence, that this shows there is no reasonable possibility that LMP and GBC would benefit from the suit. Implicit in this argument is that the substantive claims are unmeritorious—thus, if they were meritorious, LMP and GBC would benefit from this suit no matter the direct or indirect nature of the suit.
Moving parties failed to put on significant evidence showing the suit is unmeritorious, and thus would not benefit the corporations. The only substantive evidence relates to the claims against GBC only, and only as to a single basis for liability. The Moving Parties, however, fail to address all of the breaches of fiduciary duty as set forth in paragraphs 264-269 of the SAC. Specifically, on January 5, 2021, Lawrence declares that her and Militello signed a Dissolution Agreement and Release, in which they agreed to dissolve GBC. Moving Parties argue that this agreement would waive both the direct and indirect claims involving GBC. However, Moving Parties do not present sufficient legal authority for the proposition that the release would affect Militello’s ability to assert a derivative claim generally. (Citing unpublished Delaware District Court case In re Nanthealth, Inc. Stockholder Derivative Litig., (D. Del. 2021) No. 18-CV-00551-SB, 2021 WL 1909885, at *2.) The release is also distinguishable from the release in In re Nanthealth. In that matter, the release affected all claims that could be “asserted” by the signing parties. Here, on the other hand, the Members “hereby release, remise, and forever discharge each other from any and all claims, potential claims, demands, and cause or causes of action of any kind or nature whatsoever up through the Effective Date of this GBC Distribution Agreement.” There is no similar language regarding claims they could assert, versus any and all claims they have against “each other.”
Moreover, even if the court assumes that there is no liability related to the misrepresentations/breaches regarding the 20-year Contracts, the motion would still fail as to GBC. Moving parties do not address with evidence the allegations that Lawrence pretended to file and pay GBC’s taxes and secretly attempted to force the entity into suspension. Instead, Lawrence simply contests, through evidence submitted for the first time in reply, that Lawrence filed GBC’s tax returns. Moving parties had to present this evidence as a part of their initial burden to comport with due process. (San Diego Watercrafts, Inc. v. Wells Fargo Bank (2002) 102 Cal.App.4th 308, 313 (“While the code provides for reply papers, it makes no allowance for submitting additional evidence or filing a supplemental separate statement.”)
2. CRC
As an initial matter, the Court concludes that the motion is timely. Corporations Code section 800(c) requires the motion to be filed “. . . within 30 days after service of summons.” The moving party was personally served with the summons and complaint in this action on May 3, 2021. (Militello Decl. ¶ 2; Mot. at 2.) Lawrence initially filed a timely motion on June 1, 2021. However, at the October 21, 2021, hearing, the Court took this motion off calendar as moot since it addressed a superseded pleading. This is despite being filed after the filing of the first amended complaint (FAC) although the FAC was not served until July 22, 2021.
Plaintiff, however, is estopped from arguing that this motion is untimely. The four elements for the application of equitable estoppel are: (1) the party to be estopped must be apprised of the facts; (2) he must intend that his conduct shall be acted upon, or must so act that the party asserting the estoppel had a right to believe it was so intended; (3) the other party must be ignorant of the true state of facts; and (4) he must rely upon the conduct to his injury. (Lentz v. McMahon (1989) 49 Cal.3d 393, 399.) “The doctrine of equitable estoppel is based on the theory that a party who by his declarations or conduct misleads another to his prejudice should be estopped from obtaining the benefits of his misconduct.” (Stillwell v. The Salvation Army (2008) 167 Cal. App. 4th 360, 368.) Here, the earlier hearing demonstrates that Militello’s counsel indicated they were going to remove all the derivative claims (Exh. 4, pg 7, line 19.) Based on that representation, Defendants reasonably believed that Millitello intended to file an SAC without the derivative claims and without the need for this motion. As such, Defendants did not file a renewed motion for a bond, which would be mooted by the pending SAC, until after the Court considered the leave to amend motion and plaintiff subsequently filed the SAC. Plaintiff should not now be allowed to benefit from this representation, which lulled Defendants into not immediately filing a new motion.
The motion, however, lacks merit. Moving Parties fail to demonstrate with supporting evidence that the claims would “not benefit” the corporations. Notably, the only evidence presented does not support any effect that the prosecution of this action would have on the companies. Instead, Lawrence and CNC focus on the nature of Plaintiff’s “direct” claims. For example, regarding the LMP dissolution, they argue that because an LLC is not a potential plaintiff for an involuntary dissolution action authorized under Corporations Code § 17707.03, the cause of action is a “direct” cause of action. Moving Parties do not explain why this would render her claim unmeritorious. Even if it were unmeritorious, this does not explain why the LMP dissolution would not have any reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party “will benefit the corporation or its shareholders” as required for a bond. The other substantive arguments similarly fail.
Accordingly, the motion for a bond is DENIED.