Judge: Martha K. Gooding, Case: 2019-01097240, Date: 2022-10-31 Tentative Ruling

1) Demurrer to Amended Complaint

2) Status Conference

Defendants’ Demurrer to Plaintiffs’ Second Amended Complaint is OVERRULED.  Defendants are ordered to answer the Second Amended Complaint within 15 days.

Defendants contend the Second Amended Complaint, and every cause of action asserted therein, is subject to a general demurrer. For the following reasons, the Court finds the claims are adequately pled.

First, Defendants have not established that Plaintiff WSRI cannot bring derivative claims on behalf of WSHH, WSHO and SBHO. Defendants contend that WSRI is the managing member of WSHH and thus cannot bring derivative claims on its behalf. (Dem. at 12.) In making this argument, Defendant points out that the court determined there “existed a dispute” that “triggered the change in managing members,” with respect to SDHI, such that SDHI became the “managing member” of SDHCH. Defendant further points out that the language in the SDHCH Operating Agreement that the Court referenced in making this ruling exists verbatim in the WS Operating Agreement. As pointed out in the ruling on Defendants’ prior demurrer, the Court’s rulings were limited to SDHI. (See ROA 22 [11/08/19 Minute Order]; ROA 36 [12/09/19 Minute Order].)  (And in any event, they were simply part of a ruling on preliminary injunctive relief, not a final factual finding in the case.)

Further, Plaintiffs contend, “WSRI never made any attempt to replace the managers in those entities,” and, “[a]s a matter of fact, Defendants’ entities are still in control of WSHH, WSHO, and SBHO.” (Opp’n at 15.) Whether a “change in managing members” was triggered” under the WS Operating Agreement was not an issue before the court, and the Court declines to speculate as to whether such a finding would have been reached.

Second, Defendants have not shown that Plaintiff SDHI has failed to allege any “direct” claims.

There may be instances where a shareholder has suffered injury both as an owner of the business entity and in the shareholder’s individual capacity. (Friedman & Fotenos, Cal. Prac. Guide Corps. (The Rutter Group 2021)  at ¶ 6:598.3, citing Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 1221; Goles v. Sawhney (2016) 5 Cal.App.5th 1014, 1019.)

Here, the wrongful conduct alleged by SDHI appears to present a mix of derivative and direct claims. For example, Plaintiffs allege that the “SD Fiduciaries,” (defined to include PHSD, Dumon LLC, Dumon, Hershman, Payne, and Horn), breached their fiduciary duties by engaging in “self-dealing” and “entering into impermissible contracts with one or more of the Lund-Perillo Parties, including agreeing to pay CHRG Manager the sum of at least $662,905.27 in the aggregate for the hotels.” As alleged, this is arguably a derivative claim, because the “damages” caused by the breach is CHRG Manager’s assertion that SDHCH now owes CHRG Manager for the “unauthorized” property management services. (See SAC at ¶ 62 [“Defendants agreed on behalf of SDHCH and WSHH to pay CHRG Manager the sum of at least $662,905.27 in the aggregate for the hotels”], ¶ 83 [“CHRG Manager asserts that it is owed the sum of at least $662,905.27 in the aggregate for property management services for the Hotel Properties”].)

However, Plaintiffs also allege that, “[a]s a result of the Transfers, Plaintiffs have had to pay Lender the sum of nearly $1,000,000.00 as consideration for the Lender to not enforce the purported default for the Transfers.” (SAC at ¶ 61.)

At this juncture, the Court cannot conclude that Plaintiffs have not stated any “direct” claims.

Finally, Plaintiffs have sufficiently alleged their 7th COA for Negligent Interference with Prospective Economic Relations.

“The tort of negligent interference with prospective economic advantage is established where a plaintiff demonstrates that (1) an economic relationship existed between the plaintiff and a third party which contained a reasonably probable future economic benefit or advantage to plaintiff; (2) the defendant knew of the existence of the relationship and was aware or should have been aware that if it did not act with due care its actions would interfere with this relationship and cause plaintiff to lose in whole or in part the probable future economic benefit or advantage of the relationship; (3) the defendant was negligent; and (4) such negligence caused damage to plaintiff in that the relationship was actually interfered with or disrupted and plaintiff lost in whole or in part the economic benefits or advantage reasonably expected from the relationship.” (North American Chemical Co. v. Superior Court (1997) 59 Cal.App.4th 764, 786.)

Here, Plaintiffs have alleged: (1) the existence of an economic relationship with third parties, (i.e., Marriott, Hilton and Lender), (SAC at ¶ 143); (2) Defendants knew or should have known about the relationships, (¶ 144); (3) Defendants were negligent in “engaging in the Transfers and, further, engaging in poor management of Plaintiffs’ interests led to the various breaches of the hotel operating agreements and loan documents detailed above, and to the eventual foreclosure of the hotels by Lender,” (¶ 146); and, (4) the negligent acts caused damage to those relationships, including “the eventual foreclosure of the hotels by Lender,” (¶ 146).

Defendants contend this claim fails because “it is a tort claim based on breach of contract.” In support thereof, Defendants cite a string of cases for the proposition that a contracting party’s negligent failure to perform its contractual obligations allows for recovery of contractual damages only, not tort. (Dem. at 16-17.) But, as Plaintiffs point out, “each of the cases Defendants rely on involve one party to a contract suing another in tort instead of contract, not a party to a contract suing a non-party [to the contract] for tortious interference with the contract.” (Opp’n at 17.)

Although Plaintiffs may also have had contractual agreements with the Defendants, this claim is premised on Defendants’ interference in the contracts Plaintiffs had with third parties, including Marriott, Hilton and Lender. Defendants allegedly used the “great trust and confidence conferred upon them [to run the hotels]” to transfer the control of the companies to these unauthorized third parties, for the purpose of “self-dealing” and to allow the unauthorized third parties to “take control and full ownership of the hotels.” (SAC at ¶¶ 2-5.) At this juncture, the Court cannot conclude, as a matter of law, that Plaintiffs have not allege a duty of care sounding in tort.

The Demurrer is OVERRULED in its entirety. Defendants are ordered to answer the Second Amended Complaint within 15 days.

Plaintiffs are ordered to give notice of the ruling.