Judge: Maurice A. Leiter, Case: 20STCV41207, Date: 2023-12-18 Tentative Ruling

Case Number: 20STCV41207    Hearing Date: April 5, 2024    Dept: 54

Hearing Date: April 5, 2024

Department 54, Judge Maurice Leiter

Demurrer to First Amended Complaint and Motion to Strike

Moving Party: Defendant Pearl 33 Holdings, LLC

Responding Party: Plaintiffs Gerald Whitt, Alexander Whitt, Matthew Whitt, Christopher Whitt and Deborah Milam

T/R:     DEFENDANT PEARL 33’S DEMURRER IS OVERRULED.

THE MOTION TO STRIKE IS DENIED.

DEFENDANT TO NOTICE

If the parties wish to submit on the tentative, please email the courtroom at SMCdept54@lacourt.org with notice to opposing counsel (or self-represented party) before 8:00 am on the day of the hearing.

The Court considers the moving papers, opposition, and reply.

BACKGROUND

On July 5, 2023, Plaintiffs filed the operative first amended complaint against Defendants, asserting causes of action for intentional and negligent misrepresentation, breach of fiduciary duty, breach of contract, conspiracy, malicious prosecution, and abuse of process. Plaintiffs were minority shareholders of Cloud B. Plaintiffs allege the Defendant majority shareholders conspired with the takeover Defendants to sell Cloud B and loot Cloud B’s assets, making Plaintiffs’ shares worthless.

ANALYSIS

A demurrer to a complaint may be taken to the whole complaint or to any of the causes of action in it.  (CCP § 430.50(a).)  A demurrer challenges only the legal sufficiency of the complaint, not the truth of its factual allegations or the plaintiff's ability to prove those allegations.  (Picton v. Anderson Union High Sch. Dist. (1996) 50 Cal. App. 4th 726, 732.)  The court must treat as true the complaint's material factual allegations, but not contentions, deductions or conclusions of fact or law.  (Id. at 732-33.)  The complaint is to be construed liberally to determine whether a cause of action has been stated.  (Id. at 733.)

A. Derivative v. Direct Claims

Defendant Pearl 33 demurs to the first, second, fourth, and ninth causes of action for intentional and negligent misrepresentation, civil conspiracy, and abuse of process on the ground that they are improperly pleaded derivative claims on behalf of Cloud B.

Defendant asserts the causes of action should have been derivative claims because the alleged harm was to Cloud B, not to Plaintiffs as individual shareholders. Defendant also argues the claims are barred because Cloud B released all derivative claims in its bankruptcy action.

Plaintiffs allege that Defendants as majority shareholders and officers conspired to make Plaintiffs’ minority shares worthless. This is a recognized exception to mandatory derivative actions. (See Jones v. H.F. Ahmanson (1969) 1 Cal.3d 93, 106.) The demurrer cannot be sustained on this basis.

B. Statute of Limitations

Defendant contends the first, second, fourth, sixth, and ninth causes of action are barred by the statute of limitations and do not relate back to the original complaint, filed on October 27, 2020, because the claims have been changed from derivative claims in the original complaint to direct claims in the FAC. Defendant does not cite authority stating this specific amendment prohibits application of the relation back doctrine.

C. Fourth Cause of Action for Civil Conspiracy

“The elements of a civil conspiracy are the formation and operation of the conspiracy and damage resulting to plaintiff from an act done in furtherance of the common design.” (Stueve Bros. Farms, LLC v. Berger Kahn (2013) 222 Cal.App.4th 303, 323.) Plaintiffs allege that Defendants engaged in a conspiracy by, among other things, engaging in covert negotiations to take over Cloud B and divulging Cloud B’s proprietary and confidential information to the takeover Defendants. This is sufficient to allege a civil conspiracy.

Defendant Pearl 33’s demurrer is OVERRULED.

D. Motion to Strike

“Any party, within the time allowed to response to a pleading, may serve and file a notice of motion to strike the whole or any part" of that pleading. (CCP § 435(b)(1).) “The Court may, upon a motion made pursuant to Section 435, or at any time in its discretion, and upon terms it deems proper: (a) Strike out any irrelevant, false or improper matter asserted in any pleading; (b) Strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the Court." (CCP § 436.)

Defendant moves to strike allegations that refer to the “Takeover Defendants” before Defendant Pearl 33 was formed to the extent they contain “any direct or implied reference to Moving Defendant;” the prayers for punitive damages and attorney’s fees, references to alter ego, and any “derivative” claims. Defendant, however, provides virtually no analysis to support these requests. Defendant has not shown these allegations are improper and must be stricken.

The motion to strike is DENIED.

Hearing Date: April 5, 2024

Department 54, Judge Maurice Leiter

(2) Demurrers to First Amended Complaint

Moving Party: Defendants Phillip McFillin and Kevin Ferguson

Responding Party: Plaintiffs Gerald Whitt, Alexander Whitt, Matthew Whitt, Christopher Whitt and Deborah Milam

T/R:     DEFENDANTS’ DEMURRERS TO THE FIRST, SECOND, TENTH AND ELEVENTH CAUSES OF ACTION ARE SUSTAINED WITH LEAVE TO AMEND. THE DEMURRERS TO THE REMAINING CAUSES OF ACTION ARE OVERRULED.

PLAINTIFFS TO FILE AND SERVE A SECOND AMENDED COMPLAINT WITHIN 30 DAYS OF NOTICE OF RULING. DEFENDANTS TO FILE AND SERVE RESPONSES TO THE SECOND AMENDED COMPLAINT WITHIN 30 DAYS THEREAFTER.

DEFENDANTS TO NOTICE

If the parties wish to submit on the tentative, please email the courtroom at SMCdept54@lacourt.org with notice to opposing counsel (or self-represented party) before 8:00 am on the day of the hearing.

The Court considers the moving papers, opposition, and reply.

BACKGROUND

On July 5, 2023, Plaintiffs filed the operative first amended complaint against Defendants, asserting causes of action for intentional and negligent misrepresentation, breach of fiduciary duty, breach of contract, conspiracy, malicious prosecution, and abuse of process. Plaintiffs were minority shareholders of Cloud B. Plaintiffs allege the Defendant majority shareholders conspired with the takeover Defendants to sell Cloud B and loot Cloud B’s assets, making Plaintiffs’ shares worthless.

REQUESTS FOR JUDICIAL NOTICE

Defendants’ requests for judicial notice are GRANTED.

ANALYSIS

A demurrer to a complaint may be taken to the whole complaint or to any of the causes of action in it.  (CCP § 430.50(a).)  A demurrer challenges only the legal sufficiency of the complaint, not the truth of its factual allegations or the plaintiff's ability to prove those allegations.  (Picton v. Anderson Union High Sch. Dist. (1996) 50 Cal. App. 4th 726, 732.)  The court must treat as true the complaint's material factual allegations, but not contentions, deductions or conclusions of fact or law.  (Id. at 732-33.)  The complaint is to be construed liberally to determine whether a cause of action has been stated.  (Id. at 733.)

A. Derivative v. Direct Claims

Defendants demur to the first, second, fourth, and seventh causes of action for intentional and negligent misrepresentation, civil conspiracy and breach of fiduciary duty on the ground that they are improperly pleaded derivative claims on behalf of Cloud B.

Defendants assert the causes of action should have been derivative claims because the alleged harm was to Cloud B, not to Plaintiffs as individual shareholders. Defendants also argue the claims are barred because Cloud B released all derivative claims in its bankruptcy action.

Plaintiffs allege that Defendants as majority shareholders and officers conspired to make Plaintiffs’ minority shares worthless. This is a recognized exception to mandatory derivative actions. (See Jones v. H.F. Ahmanson (1969) 1 Cal.3d 93, 106.) The demurrers cannot be sustained on this basis.

B. Seventh Cause of Action for Breach of Fiduciary Duty

Defendants contend the seventh cause of action for breach of fiduciary duty is barred by the statute of limitations and does not relate back to the original complaint, filed on October 27, 2020, because the claims have been changed from derivative claims in the original complaint to direct in this FAC. Defendant does not cite authority stating this specific amendment prohibits application of the relation back doctrine.

The demurrers to the seventh cause of action are OVERRULED.

C. First and Second Causes of Action for Intentional and Negligent Misrepresentation

The elements of fraud are: “(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 184.) In California, fraud, including negligent misrepresentation, must be pled with specificity. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.) “The particularity demands that a plaintiff plead facts which show how, when, where, to whom, and by what means the representations were tendered.” (Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1469.)

Defendants demur to the claims for fraud on the ground that they are not pleaded with the requisite specificity. Defendants assert Plaintiffs fail to allege that moving Defendants made any misrepresentations. In opposition, Plaintiffs point to misrepresentations made by other Defendants. This is insufficient to establish fraud claims against moving Defendants.

The demurrers to the first and second causes of action are SUSTAINED.

D. Fourth Cause of Action for Civil Conspiracy

“The elements of a civil conspiracy are the formation and operation of the conspiracy and damage resulting to plaintiff from an act done in furtherance of the common design.” (Stueve Bros. Farms, LLC v. Berger Kahn (2013) 222 Cal.App.4th 303, 323.) Plaintiffs allege that Defendants engaged in a conspiracy by, among other things, engaging in covert negotiations to take over Cloud B and divulging Cloud B’s proprietary and confidential information to the takeover Defendants. This is sufficient to allege a civil conspiracy.

The demurrers to the fourth cause of action are OVERRULED.

E. Ninth Cause of Action for Abuse of Process

Defendants demur to the ninth cause of action on the ground that it is barred by the litigation privilege. As stated in the Court’s ruling on Defendants’ anti-SLAPP motion, the claim for abuse of process is barred and must be stricken. The demurrers to this claim are moot.

F. Tenth and Eleventh Causes of Action for Declaratory Relief

Plaintiffs ask the Court to determine whether certain statements made by Plaintiffs were “defamatory,” as alleged in Defendants’ now-dismissed complaint against Plaintiffs in Pennsylvania. Defendants assert Plaintiffs cannot seek declaratory relief because there is no ongoing or prospective conflict between the parties. The Court agrees.

The demurrers to the tenth and eleventh causes of action are SUSTAINED.

Hearing Date: April 5, 2024

Department 54, Judge Maurice Leiter

Anti-SLAPP

Moving Party: Defendants Phillip McFillin and Kevin Ferguson

Responding Party: Plaintiffs Gerald Whitt, Alexander Whitt, Matthew Whitt, Christopher Whitt and Deborah Milam

T/R:     DEFENDANTS’ ANTI-SLAPP IS GRANTED.

DEFENDANTS TO NOTICE

If the parties wish to submit on the tentative, please email the courtroom at SMCdept54@lacourt.org with notice to opposing counsel (or self-represented party) before 8:00 am on the day of the hearing.

The Court considers the moving papers, opposition, and reply.

BACKGROUND

On July 5, 2023, Plaintiffs filed the operative first amended complaint against Defendants, asserting causes of action for intentional and negligent misrepresentation, breach of fiduciary duty, breach of contract, conspiracy, malicious prosecution, and abuse of process. Plaintiffs were minority shareholders of Cloud B. Plaintiffs allege the Defendant majority shareholders conspired with the takeover Defendants to sell Cloud B and loot Cloud B’s assets, making Plaintiffs’ shares worthless.

REQUESTS FOR JUDICIAL NOTICE

Defendants’ request for judicial notice is GRANTED.

ANALYSIS

In ruling on a special motion to strike pursuant to California Code of Civil Procedure section 425.16, or anti-SLAPP motion, the court applies a two-prong test. First, the court determines whether the moving defendant has met his or her burden to establish that the “challenged cause of action is one arising from protected activity.” (Equilon Enterprises, L.L.C. v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 66.) The moving defendant meets this burden by demonstrating that “the act or acts of which the plaintiff complains were taken ‘in furtherance of the [defendant]'s right of petition or free speech under the United States or California Constitution in connection with a public issue,’ as defined in the statute.” (Id.)

The court then moves to the second prong, in which the burden shifts to Plaintiff to demonstrate a probability of prevailing on the merits of the complaint. (Id.) “To establish such a probability, a plaintiff must demonstrate that the complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by the plaintiff is credited.” (Matson v. Dvorak (1995) 40 Cal.App.4th 539, 548.) “Only a cause of action that satisfies both prongs of the anti-SLAPP statute—i.e., that arises from protected speech or petitioning and lacks even minimal merit—is a SLAPP, subject to being stricken under the statute.” (Navellier v. Sletten (2002) 29 Cal.4th 82, 89.)

A. Protected Activity

Defendants move to strike portions of the fourth cause of action for civil conspiracy and the entire ninth cause of action for abuse of process on the ground that they are based on Defendants’ protected petitioning activity. These claims arise from Defendants’ filing and pursuit of a lawsuit and bankruptcy proceedings in Pennsylvania. Plaintiffs do not dispute that these allegations arise from protected activity. The burden shifts to Plaintiffs to establish a probability of success on the merits.

B. Probability of Success on the Merits

“To establish such a probability, a plaintiff must demonstrate that the complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by the plaintiff is credited.” (Matson, supra 40 Cal.App.4th at 548.) “Only a cause of action that satisfies both prongs of the anti-SLAPP statute—i.e., that arises from protected speech or petitioning and lacks even minimal merit—is a SLAPP, subject to being stricken under the statute.” (Navellier, supra 29 Cal.4th at 89.)

Defendants assert that Plaintiffs cannot show a probability of success on the merits because Defendants’ communications relating to the Pennsylvania lawsuit are protected by the litigation privilege. The Court of Appeal has explained the litigation privilege as follows:  

Civil Code section 47, subdivision (b), a codification of the litigation privilege, provides that, “A privileged publication or broadcast is one made: [¶] ... [¶] (b) In any (1) legislative proceeding, (2) judicial proceeding, (3) in any other official proceeding authorized by law, or (4) in the initiation or course of any other proceeding authorized by law and reviewable pursuant to Chapter 2....” “ ‘The purposes of section 47, subdivision (b), are to afford litigants and witnesses free access to the courts without fear of being harassed subsequently by derivative tort actions, to encourage open channels of communication and zealous advocacy, to promote complete and truthful testimony, to give finality to judgments, and to avoid unending litigation. [Citation.] To effectuate these purposes, the litigation privilege is absolute and applies regardless of malice. [Citation.] Moreover, “[i]n furtherance of the public policy purposes it is designed to serve, the privilege prescribed by section 47[, subdivision (b) ] has been given broad application.” [Citation.]’ ” (Komarova v. National Credit Acceptance, Inc. (2009) 175 Cal.App.4th 324, 336, 95 Cal.Rptr.3d 880.) 

“Although originally enacted with reference to defamation [citation], the privilege is now held applicable to any communication, whether or not it amounts to a publication [citations], and all torts except malicious prosecution. [Citations.] ... [¶] The usual formulation is that the privilege applies to any communication (1) made in judicial or quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that have some connection or logical relation to the action. [Citations.]” (Silberg v. Anderson (1990) 50 Cal.3d 205, 212, 266 Cal.Rptr. 638, 786 P.2d 365; see Action Apartment Assn., Inc. v. City of Santa Monica (2007) 41 Cal.4th 1232, 1241, 63 Cal.Rptr.3d 398, 163 P.3d 89; La Jolla Group II v. Bruce (2012) 211 Cal.App.4th 461, 472, 149 Cal.Rptr.3d 716.)

(Tom Jones Enterprises, Ltd. v. County of Los Angeles (2013) 212 Cal.App.4th 1283, 1293-4.)

Plaintiffs allege that Defendants abused the legal process by “knowingly and maliciously filing the CLOUD B bankruptcy in an improper venue;” “knowingly and maliciously filing the Malicious Pennsylvania Action in an improper venue;” “filing false and misleading documents with both the California Secretary of State and the Pennsylvania bankruptcy court;” “knowingly and maliciously propounding meritless discovery and refusing to respond to otherwise proper discovery;” and “knowingly and maliciously filing a meritless Motion to Dismiss in an attempt to obtain a dismissal without prejudice properly dismissed with prejudice.” (FAC ¶ 171.)

California courts have held that malicious prosecution is exempt from the litigation privilege but abuse of process is not. (See Abraham v. Lancaster Community Hospital (1990) 217 Cal.App.3d 796, 824-825.) Plaintiffs’ claims for abuse of process and civil conspiracy seek redress for Defendants’ communicative conduct in a legal proceeding; they are barred by the litigation privilege.

In opposition, Plaintiffs assert that the Court must follow Pennsylvania law because Plaintiffs allege Defendants abused the court system in Pennsylvania. Plaintiffs represent that under Pennsylvania law abuse of process is recognized exception to the litigation privilege. But Plaintiffs provide no California authority stating that the Court must follow Pennsylvania law.

Plaintiffs also argue that the claims at issue arise from Defendants’ conduct, rather than Defendants’ privileged communications. As discussed, Plaintiffs allege that Defendants abused the legal process by filing pleadings and motions, serving discovery, and making false statements in documents filed with the Pennsylvania courts. This is communicative conduct protected by the litigation privilege.

Plaintiffs have failed to establish a probability of success on the merits. Defendants’ anti-SLAPP is GRANTED.