Judge: Mark C. Kim, Case: 22LBCV00021, Date: 2022-07-26 Tentative Ruling
Case Number: 22LBCV00021 Hearing Date: July 26, 2022 Dept: S27
Plaintiffs, Brenda Rivera and
Navarro Hospitality Group, Inc. (“NHG”) filed this action against Defendants,
Simon Haxton and Portuguese Bend Distilling, LLC (“PBD”) for damages arising
out of the parties’ joint operation of a restaurant and distillery. Plaintiffs’ operative FAC includes causes of
action for:
·
Breach of Contract (Rivera v. PBD);
·
Breach of Contract (NHG v. PBD);
·
Open Book Account (mis-stated as Breach of
Contract in body of FAC) (NHG v. PBD);
·
Breach of Contract (Rivera v. Haxton, PBD nominal);
·
Breach of Fiduciary Duty (Rivera v. Haxton, PBD
nominal);
·
Fraud and Aiding and Abetting Fraud (Rivera v.
Haxton, PBD nominal);
·
Violation of Labor Code §§1194 and 558.1 (Rivera
v. Haxton and PBD);
·
Violation of Labor Code §§226 and 558.1 (Rivera
v. Haxton and PBD);
·
Violation of Labor Code §§201-203 and 558.1
(Rivera v. Haxton and PBD);
·
Violation of BPC §17200, et seq. (Rivera v.
Haxton, PBD nominal);
·
Involuntary Dissolution (Rivera v. Haxton, PBD
nominal).
A demurrer is a pleading used to test the legal sufficiency of other
pleadings. It raises issues of law, not fact, regarding the form or content of
the opposing party’s pleading. It is not the function of the demurrer to
challenge the truthfulness of the complaint; and for purpose of the ruling on
the demurrer, all facts pleaded in the complaint are assumed to be true,
however improbable they may be.
A demurrer can
be used only to challenge defects that appear on the face of the pleading under
attack; or from matters outside the pleading that are judicially noticeable.
Blank v. Kirwan 39 Cal.3d 311 (1985). No other extrinsic evidence can be
considered (i.e., no “speaking demurrers”). A demurrer is brought under CCP §
430.10 [grounds], § 430.30 [as to any matter on its face or from which judicial
notice may be taken], and § 430.50(a) [can be taken to the entire complaint or
any cause of action within]. Specifically, a demurrer may be brought per CCP §
430.10(e) if insufficient facts are stated to support the cause of action
asserted. Per CCP §430.10(a) a demurrer may be brought where the court has no
jurisdiction of the subject of the cause of action alleged in the pleading.
Furthermore, demurrer for uncertainty will be sustained only where the
complaint is so bad that the defendant cannot reasonably respond. CCP §
430.10(f).
However, in construing the allegations, the court is to give effect to
specific factual allegations that may modify or limit inconsistent general or
conclusory allegations. Financial Corporation of America v. Wilburn, 189
Cal.App.3rd 764, 769 (1987). And, if the facts pled in the complaint are
inconsistent with facts which are incorporated by reference from exhibits
attached to the complaint, the facts in the incorporated exhibits control. Further,
irrespective of the name or label given to a cause of action by the plaintiff,
a general demurrer must be overruled if the facts as pled in the body of the
complaint state some valid claim for relief. Special demurrers are not allowed
in limited jurisdiction courts. (CCP § 92(c).)
Leave to amend
must be allowed where there is a reasonable possibility of successful
amendment. Goodman v. Kennedy, 18 Cal.3d 335, 348 (1976). The burden is on the
complainant to show the Court that a pleading can be amended successfully.
(Id.)
Finally, CCP section 430.41 requires that “[b]efore filing a demurrer
pursuant to this chapter, the demurring party shall meet and confer in person
or by telephone with the party who filed the pleading that is subject to
demurrer for the purpose of determining whether an agreement can be reached
that would resolve the objections to be raised in the demurrer.” (CCP
§430.41(a).) The parties are to meet and confer at least five days before the
date the responsive pleading is due. (CCP §430.41(a)(2).) Thereafter, the
demurring party shall file and serve a declaration detailing their meet and
confer efforts. (CCP §430.41(a)(3).)
On June 14, 2022, the Court continued the demurrer to July 26,
2022. The Court issued a tentative
ruling indicating it would continue the hearing to require the parties to meet
and confer based on the guidance provided in the tentative ruling.
Plaintiffs submitted supplemental briefing on July 19, 2022. PBD submitted supplemental briefing on July
20, 2022.
A review of the parties’ supplemental briefing shows that, while it
appears Plaintiffs have agreed to amend the FAC to allege more specific facts
for the most part, the parties were unable to resolve the issues as to
misjoinder and the related conflict of interest.
As noted in the Court’s prior tentative
ruling, PBD’s primary argument on demurrer is that the FAC suffers from
misjoinder of parties. Specifically, PBD
contends Plaintiff cannot sue PBD directly and nominally in the same lawsuit.
The Court noted in the prior
tentative ruling that the cases cited by PBD generally holding that a party
cannot be a plaintiff and a defendant in the same lawsuit do not involve the
naming of a nominal defendant and are thus not directly on point. The Court noted PBD also did not cite a case
to support its argument that, because a nominal defendant can only defend
itself on limited grounds such as standing, its ability to defend itself in
connection with the direct claims “rings unclear.”
The Court also discussed in the prior
tentative ruling the cases cited by Plaintiffs in opposition (i.e., Denevi v. LGCC (2004) 121 Cal.App.4th
1211, 1221-1222 and Sprengel v. Zbylut
(2019) 40 Cal.App.5th 1028, 1040-1041) to support their contention that these
are cases where appellate courts have allowed direct and derivative claims to
coexist in the same lawsuit. The Court
found that the Sprengel decision did
not involve the propriety of joining direct and derivative claims in the same
action as the issue in Sprengel was
whether certain claims were direct OR derivative, and whether there was an
attorney-client relationship between the plaintiff asserting the claims and the
entity’s attorney.
As for Denevi, the Court summarized the case in the prior tentative ruling
as follows. In Denevi, the plaintiff had filed a prior action against the entity
defendant for both direct and also derivative claims. The trial court sustained a demurrer on the
ground that there was a misjoinder of parties in light of the presence of
direct and derivative claims in the same lawsuit. The plaintiff therefore dismissed his direct
claims and pursued only his derivative claims.
Subsequently, the plaintiff brought a second action. In the second action, the plaintiff asserted
personal claims. The trial court denied
the plaintiff’s motion to consolidate the two action, noting judicial
diseconomy, including the fact that the plaintiff would be suing on behalf of
the entity while at the same time bringing suit against the entity. The defendant moved to dismiss the second
suit, contending it was precluded by the policy against double recovery. The trial court granted the motion. The court of appeals reversed. It held that pursuing the derivative claims
in the first lawsuit was not an “election of remedies,” and the plaintiff was
free to pursue his personal claims in the second lawsuit. Based on this, the Court concluded in its
tentative ruling that nothing in Denevi
suggests that a plaintiff can pursue a derivative and a direct action in the
same lawsuit and that, to the extent the issue is decided, it appears to be to
the contrary.
According to the parties’ supplemental
briefing, during the further meet and confer process, Plaintiffs provided PBD
the cites to Orozco v. WPV San Jose, LLC
(2019) 36 Cal.App.5th 375, 404 and Corrections
USA v. Dawe (E.D. Cal.2007) 504 F.Supp.2d 924, 931-32 to support their
position that they may bring derivative and individual causes of action in the
same lawsuit. Although Plaintiffs cite
to these cases within their supplemental briefing, Plaintiffs have not
discussed in great detail how these cases support their position. Instead, Plaintiffs focus their supplemental
briefing on Jones v. H.F. Ahmanson &
Co. (1969) 1 Cal.3d 93 and Denevi. PBD does not address the Jones case in their supplemental briefing.
The Court has
reviewed the Jones case and finds
that it does not stand for the proposition that a plaintiff may bring both
derivative and individual causes of action in the same lawsuit. Rather, the Jones Court merely recognized that a minority shareholder may have
an individual claim rather than a derivative claim. (Jones,
supra, 1 Cal.3d at 106-07.) There are no
indications that both derivative and individual claims may be asserted in the
same lawsuit.
Sutter v. General Petroleum Corp. (1946)
28 Cal.2d 525, 530, also cited by Plaintiffs in their supplemental brief, also
merely provides that “a stockholder may sue as an individual where he is
directly and individually injured although the corporation may also have a
cause of action for the same wrong.”
However, although a plaintiff may have both direct and derivative
claims, there are no indications from Sutter
that these claims may be brought in the same lawsuit.
Plaintiffs argue
that Denevi actually recognized,
based on Jones, that the plaintiff
could have brought both types of claims in the same action. As discussed above and in the prior tentative
ruling, nothing in Deveni suggests
that a plaintiff can pursue a derivative and direct action in the same lawsuit. Further, the Court of Appeal in Denevi indicated that to the extent the
derivative and individual claims may be interrelated “that justifies an order for their separate prosecution.” (Denevi,
suupra, 121 Cal.App.4th at 1223 (emphasis in original).) It thus appears that the Court of Appeal
signaled approval for the trial court’s decisions to sustain the demurrer to
the personal claims based on misjoinder and deny the motion to consolidate the
derivative and individual actions.
Given Denevi and the lack of cases directly
holding a plaintiff may bring both a derivative and direct action in the same
lawsuit, the demurrer based on misjoinder is sustained. The Court will allow leave for Plaintiffs to
amend their complaint to pursue either the derivative or direct claims in this
action.
As the demurrer
is sustained based on misjoinder, the Court need not address PBD’s other
arguments. However, for the sake of
completeness and as a guide to any subsequent amendments, the Court will
address these issues.
PBD argues Plaintiff lacks standing
to bring this suit because (a) she did not allege demand futility, and (b) she
has an insurmountable conflict of interest that destroys her ability to
represent PBD in a derivative action.
i.
Demand Futility
Corporations Code §17709.02(a)
requires a plaintiff bringing a derivative action to allege “with
particularity” her “efforts to secure from the managers the action the
plaintiff desires or the reasons for not making that effort,” as well as that
she “has either informed the limited liability company or the managers in
writing of the ultimate facts of each cause of action against each defendant or
delivered to the limited liability company or the managers a true and correct
copy of the complaint” that she proposes to file. This requirement is generally referred to as
the “demand futility” requirement.
PBD argues Plaintiff’s sole
allegations in this regard are found at ¶61 of the FAC, and are
insufficient. Plaintiff, in opposition,
argues that her allegations at ¶¶61 and 62 are sufficient to allege demand
futility. These paragraphs allege:
61. On September 27, 2021, RIVERA,
through her counsel, made a demand upon
HAXTON and the COMPANY- to HAXTON
and the COMPANY's legal counsel
and agent for service of process,
Diane M. Medina, requesting that the COMPANY
pursuant to California Corporation
Code § 17709.02(a)(2), and prior to filing a
derivative action, take action to
halt and/or remedy HAXTON wrongful conduct,
which has damaged and continues to
damage not only RIVERA personally, but the
COMPANY and its other investors as
well.
62. On January 11, 2022, RIVERA and
HAXTON, acting on behalf of himself and
the COMPANY, attended a full-day
mediation before Judge Francisco Firmat in
an effort to resolve the disputes
between all parties. However, no resolution of the
disputes between the parties
occurred.
As indicated in the Court’s prior
tentative ruling, these allegations are not “particular” and are general. In their supplemental briefing, Plaintiffs
have indicated that they can state more specific facts and provide
documentation showing demand futility.
To this extent, the demurrer to the derivative claims is also sustained
on this ground.
ii.
Conflict of Interest
PBD’s second standing argument is
that Plaintiff has a conflict of interest that precludes her from representing
PBD in a derivative capacity.
As indicated in the Court’s prior
tentative ruling, PBD’s reliance on the Rutter Guide on Corporations, §6:620a,
et seq., and its cited cases, to support its position is misplaced as §6:620a
specifically indicates, in its caption, that it applies to federal actions
only. Grosset v. Wenaas (2008) 42 Cal.4th 1100, 111 4 also does not
support PBD’s contention that the California Supreme Court has adopted the
federal standard concerning conflict of interest standing in a derivative
action. Grosset did not consider or decide this issue; its analysis was
limited to the issue of whether a plaintiff in a derivative lawsuit must own
stock in the subject corporation throughout the pendency of the lawsuit.
Further, as noted in the Court’s
prior tentative ruling, this issue is very similar to the issue concerning
misjoinder—i.e., that Plaintiffs cannot bring a derivative action in the same
lawsuit as a direct action for individual claims because of potential issues
with conflicting positions. As the
demurrer has been sustained based on misjoinder, this issue has already been
dealt with.
PBD argues Plaintiff’s first cause of
action for breach of contract fails to state a claim because it violates
California’s at-will employment presumption.
PBD also argues the allegations concerning constructive discharge are
insufficient. Plaintiff, in opposition,
argues the allegations of constructive discharge are sufficient.
In the prior tentative ruling, the
Court noted Plaintiff failed to address the issue that California has a
presumption of at-will employment, and that, absent a contract specifying a
duration or term of the employment, a party can be terminated at any time and
it is not a breach of the parties’ contract.
In the supplemental briefing,
Plaintiff has not addressed this issue, but rather requests leave to plead a Tameny claim. To the extent Plaintiff elects to pursue this
action as a direct action, the Court will sustain the demurrer with leave to
amend and permit Plaintiff to plead a Tameny
claim.
PBD argues the second cause of
action fails to state a claim for breach of contract because the complaint
fails to make clear whether the contract is written, oral, or implied in
conduct and, to the extent it is written, fails to clearly state its
terms.
In their supplemental briefing,
Plaintiff NHG indicates it is able to include allegations alleging what
consulting and labor services were contracted for, how much the parties agreed
to pay, and what the terms of the contract were. To the extent Plaintiff elects to pursue this
action as a direct action, the demurrer to this cause of action is sustained
with leave to amend.
The parties disagree concerning
whether a claim for open book account has been pled. Plaintiff relies on Professional Collection Consultants v. Lujan (2018) 23 Cal.App.5th
685,690-691 to support its position that the claim has been adequately
stated. That case, however, was decided
in the context of a summary judgment motion premised on statute of limitations
grounds. It did not consider or
determine the appropriate standard for pleading an open book account.
PBD relies on H. Russell Taylor’s Fire Prevention Serv., Inc. v. Coca Cola Bottling
Corp. (1979) 99 Cal.App.3d 711, 728 to support its position that an open
book account cannot be based on an oral agreement. The case does not so state. Indeed, it states, “Parties to a written or
oral contract may, however, provide that monies due under such contract shall
be the subject of an account between them.”
(Id. at 728.) The Court went on to affirm the trial court’s
ruling, after trial, that the parties’ particular contract did not support a
finding that an open book account existed.
Neither party cites a case directly
on point. The Court is guided by the
Rutter Guide, Civil Procedure Before Trial, §6:126, which notes that a claim
for common counts, including open book account, can be pled based on conclusion
of law rather than ultimate fact, and is good against general and special
demurrer. Pursuant to Farmers Ins. Exchange v. Zerin (1997) 53
Cal.App.4th 445, 460, the only essential allegations of a common count are a
statement of indebtedness in a certain sum, consideration, and nonpayment. To this extent, this cause of action is
sufficiently pled. The demurrer to this
cause of action based on a failure to sufficiently plead facts to state this
cause of action is thus overruled
PBD argues the final claim for
involuntary dissolution fails because (a) it cannot be stated as a derivative
claim, and (b) the allegations of mismanagement against Haxton are insufficient
to state a claim for dissolution.
In the Court’s prior tentative
ruling, the Court noted that neither party adequately addressed the issue of
whether Haxton committed sufficient wrongdoings to justify dissolution, that
this did not seem to be an issue appropriately handled by way of demurrer, and
that the pleading otherwise appears to be sufficient in this regard. The Court also suggested Plaintiffs clarify,
by way of an amended pleading, that this cause of action is not being pursued
on a derivative basis.
In their supplemental briefing,
Plaintiffs have requested leave to name the LLC as a defendant instead of a
nominal defendant. To the extent
Plaintiffs elect to pursue this action as a direct action, the demurrer to this
cause of action is sustained with leave to amend.
Based on the foregoing, the demurrer
to the First Amended Complaint is SUSTAINED on the basis of misjoinder. The Court grants Plaintiffs leave to amend
their complaint to pursue either the derivative or direct claims in this
action.
PBD is ordered to give notice.
Parties who intend to submit
on this tentative must send an email to the court at gdcdepts27@lacourt.org indicating intention to submit on the tentative
as directed by the instructions provided on the court website at www.lacourt.org. If the department
does not receive an email indicating the parties are submitting on the tentative
and there are no appearances at the hearing, the motion may be placed off
calendar. If a party submits on the
tentative, the party’s email must include the case number and must identify the
party submitting on the tentative. If any party does not submit on the
tentative, the party should make arrangements to appear remotely at the hearing
on this matter.