Judge: Mel Red Recana, Case: 22STCV10008, Date: 2024-02-29 Tentative Ruling

Case Number: 22STCV10008    Hearing Date: March 13, 2024    Dept: 45

Superior Court of California 

County of Los Angeles 

Hearing Date:          March 13, 2024

Moving Party:         Defendant Australis Capital, Inc.

Responding Parties: Plaintiffs DelMorgan Group, LLC and Globalist Capital, LLC

Demurrer to FAC

The court considered the moving, opposition, and reply papers.

The court SUSTAINS Defendant’s demurrer to the single cause of action of the FAC, with 20 days leave to amend.

Background

Plaintiffs DelMorgan Group, LLC and Globalist Capital, LLC (collectively “Plaintiffs”) filed this action on March 22, 2022 against Defendant Australis Capital, Inc. (“Defendant” or “Australis”), asserting two causes of action for (1) Breach of Written Contract; and (2) Breach of the Implied Covenant of Good Faith and Fair Dealing.

On March 20, 2023, the court sustained Defendant’s demurrer to the first and second causes of action of the Complaint, with 20 days leave to amend.

On April 5, 2023, Plaintiffs filed their First Amended Complaint (“FAC”) against Defendant asserting a single cause of action for Breach of Written Contract.

The FAC alleges the following: Plaintiffs entered into a Letter of Engagement on July 12, 2021, by which Plaintiffs would serve “as exclusive strategic transaction advisor to Australis to perform advisory services . . .”  (FAC, ¶ 17, Ex. A.)  The purpose of the engagement was for Plaintiffs to provide advisory services for a variety of transactions, including to introduce Defendant to institutional investors, assistance with negotiations related to a potential transaction, and preparing due diligence presentations.  (Id. at ¶ 18.)  Defendant is a Nevada-based investment company that operates in the cannabis space.  (Id. at ¶ 16.)  Plaintiffs were to receive an upfront cash payment and a “Transaction Fee” for their services.  (Id. at ¶ 21.)  The Letter of Engagement also contemplated that Plaintiffs would be entitled to a “Post-Termination Transaction Fee” if Defendant entered into a transaction with a “Covered Party” within one year of termination.  (Id. at ¶ 22.)  Under the Letter of Engagement, a “Covered Party” is an investor or entity who is introduced or identified by or on behalf of Plaintiffs or Defendant with respect to a transaction during the term of the agreement.  (Id.)

Plaintiffs provided extensive and valuable services under the Letter of Engagement.  (Id. at ¶ 26.)  Plaintiffs negotiated a term sheet between Defendant and LDA Capital, LLC for a private placement transaction.  (Id. at ¶ 27.)  Defendant and LDA Capital executed their Convertible Facility Investment Agreement.  (Id. at ¶ 28.) LDA Capital emailed Plaintiffs on January 11, 2022 with concerns regarding the transaction with Defendant, indicating that it received conflicting reference checks from industry advisors and lacked confidence in Defendant’s management team.  (Id. at ¶ 34.)  LDA Capital paused the transaction with Defendant.  (Id.)

Defendant wrote to Plaintiffs on January 25, 2022 advising that it was terminating Plaintiffs’ services under the Letter of Engagement.  (Id. at ¶ 35.)  Within 30 business days following termination, Plaintiffs delivered to Defendant a list of Covered Parties on February 25, 2022.  (Id. at ¶ 36; Ex. “D.”)  Defendant issued a press release on February 14, 2022 indicating that Defendant entered into a $10 million transaction with LDA Capital, with an option to extend for an additional $10 million.  (Id. at ¶ 37; “C.”)  On February 15, 2022, Plaintiffs issued an invoice to Defendant for the unpaid balance and transaction fee, and followed up on February 23 and 25, 2022.  (Id. at ¶ 40.) Defendant has not paid Plaintiffs the transactions fees or the unpaid balance due under the Letter of Engagement.  (Id. at ¶ 45.)

Defendant filed its demurrer to the FAC on May 9, 2023.  Plaintiffs filed their opposition on February 29, 2024.  Defendant filed it reply on March 8, 2023.

Legal Standard

When considering demurrers, courts read the allegations liberally and in context.  (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.)  “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters.  Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.”  (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.)  “The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)

Discussion

Meet and Confer

CCP § 430.41(a) states, in relevant part: “Before filing a demurrer . . . 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)(2) states, in relevant part: “The parties shall meet and confer at least five days before the date the responsive pleading is due.  If the parties are not able to meet and confer at least five days prior to the date the responsive pleading is due, the demurring party shall be granted an automatic 30-day extension of time within which to file a responsive pleading, by filing and serving, on or before the date on which a demurrer would be due, a declaration stating under penalty of perjury that a good faith attempt to meet and confer was made and explaining the reasons why the parties could not meet and confer.”

CCP § 430.41(a)(3) provides: “The demurring party shall file and serve with the demurrer a declaration stating either of the following: (A) The means by which the demurring party met and conferred with the party who filed the pleading subject to demurrer, and that the parties did not reach an agreement resolving the objections raised in the demurrer.  (B) That the party who filed the pleading subject to demurrer failed to respond to the meet and confer request of the demurring party or otherwise failed to meet and confer in good faith.”

Defendant’s counsel attests counsel emailed a letter to opposing counsel describing the additional deficiencies in the FAC and requesting that opposing counsel suggest dates that he is available for a telephonic meet and confer.  (Declaration of Polica Ross (“Ross Decl.”), ¶ 2.)  Defendant’s counsel declares that an associate of opposing counsel responded to counsel’s May 1 email.  (Id. at ¶ 3.)  Plaintiffs’ counsel offered no amendments to cure the deficiencies.  (Id. at ¶ 3.)  Defendant’s counsel attests the parties were therefore unable to resolve the objections raised in the demurrer. (Id.)

Given the circumstances, the court finds the meet-and-confer efforts were sufficient.  The parties were unable to resolve the issues raised in the demurrer despite good faith efforts.  The court therefore proceeds to rule on the merits of the demurrer.

Demurrer

Defendant demurs to the single cause of action of the FAC for Breach of Written Contract on the grounds that it fails to state facts sufficient to constitute a cause of action and it is uncertain.  (CCP §§ 430.10(e), (f).)

Uncertainty

Defendant demurs to the cause of action on the ground of uncertainty. (CCP § 430.10(f).)

The court finds Plaintiff’s cause of action is not subject to demurrer for uncertainty. “[D]emurrers for uncertainty are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.”  (Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th 841, 848, fn. 3, quoting Lickiss v. Financial Industry Regulatory Authority (2012) 208 Cal.App.4th 1125, 1135.)  “A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.”  (Khoury v. Maly’s California, Inc. (1993) 14 Cal.App.4th 612, 616.)  Plaintiffs’ cause of action for Breach of Written Contract is not so incomprehensible that Defendant cannot reasonably respond.

First Cause of Action – Breach of Written Contract

Defendant contends that (1) the facts alleged still do not satisfy the “Covered Parties” list condition precedent required to trigger a “Post-Termination Transaction Fee”; (2) the facts alleged do not satisfy the condition for a “Transaction Fee”; and (3) the alleged “Prior Balance” owed fails to state a cause of action.  In opposition, Plaintiffs argues that they adequately plead the cause of action for breach of contract: existence of a contract, performance under the contract, breach and damages. Defendant reiterates its argument in response.

“To establish a cause of action for breach of contract, the plaintiff must plead and prove (1) the existence of the contract, (2) the plaintiff's performance or excuse for nonperformance, (3) the defendant's breach, and (4) resulting damages to the plaintiff.”  (Maxwell v. Dolezal (2014) 231 Cal.App.4th 93, 97-98.)

“Where a complaint is based on a written contract which it sets out in full, a general demurrer to the complaint admits not only the contents of the instrument but also any pleaded meaning to which the instrument is reasonably susceptible.” (Aragon-Haas v. Family Security Ins. Services, Inc. (1991) 231 Cal.App.3d 232, 239.) “Facts alleging a breach, like all essential elements of a breach of contract cause of action, must be pleaded with specificity.”  (Levy v. State Farm Mut. Auto. Ins. Co. (2007) 150 Cal.App.4th 1, 5-6.)

(1)   “Covered Parties” List Condition

As to Defendant’s argument regarding Plaintiffs’ compliance with the “Covered Parties” list condition precedent required to trigger a “Post-Termination Transaction Fee,” the court finds the FAC’s allegations are sufficient.

On March 20, 2023, the court sustained Defendant’s demurrer to the first and second causes of action of the Complaint for Breach of Written Contract and Breach of Implied Covenant of Good Faith and Fair Dealing, respectively, with 20 days leave to amend.  (Minute Order 3/20/2023.)  As to the first cause of action for Breach of Written Contract, the tentative ruling, which became the final Order of the court and incorporated by reference to the court’s March 20 Minute Order, provided that the Complaint’s allegations were insufficient.  (Id.; Order at p. 7.)  Specifically, Plaintiffs failed to identify any allegation demonstrating that Plaintiffs satisfied the following condition of the contract: “Within thirty (30) business days following Termination, Advisors shall deliver to the Company, a list of Covered Parties, which list shall establish the basis for compensation under the provisions of the Agreement following Termination.”  (Id.; Order at pp. 7-8.) 

Subsequently, Plaintiffs filed their FAC in attempt to address and cure this deficiency.  Plaintiffs now allege in their FAC the following.  “Advisors have fulfilled all of the conditions of the agreement, including delivering a list of Covered Parties to Australis within 30 business days following termination.”  (FAC,  ¶ 48)  “Within thirty (30) business days following termination, Advisors timely delivered to Australis a list of Covered Parties which establishes the basis for compensation under the provisions of the Agreement following Termination.  That is, on February 25, 2022, Advisors emailed Australis a copy of the Covered Parties List.”  (Id. at ¶ 36.)  Plaintiffs also attached a copy of the Covered Parties List to the FAC as Exhibit D.  (Id.; Ex. “D.”)  That list contains 166 names of Covered Parties.  (Id.)

The condition that is at issue here is located in the Post-Termination Transaction Fee provision of the parties’ Letter of Engagement:

4) Post-Termination Transaction Fee. If the Company consummates a Transaction at any date (the “Consummation Date”) within one (1) year of Termination (a “Post-Termination Transaction”) with a Covered Party (as defined below), the Company agrees to promptly pay Advisor a Transaction Fee (a “Post-Termination Transaction Fee”) as if such Transaction had occurred during the Term.  For the purposes of this Agreement, the Consummation Date of a Transaction shall be deemed to have occurred if any agreement in principle which includes material terms of such Transaction is reached, even if the closing occurs later.  A “Covered Party” means an investor or entity (or any affiliate of any such investor or entity) who is introduced or identified by or on behalf of Advisor or the Company, or who is in contact with or is contacted by Advisor or the Company, with respect to a Transaction with the Company prior to or during the Term of the Agreement.  Within thirty (30) business days following Termination, Advisor shall deliver to the Company a list of Covered Parties, which list shall establish the basis for compensation under the provisions of the Agreement following Termination.

(FAC, ¶ 1; Ex. “A” [Engt Agmt, pp. 4-5], emphasis added.)

Defendant contends that the new allegations by Plaintiffs in their FAC still do not satisfy the “Covered Parties” list condition precedent required to trigger a “Post-Termination Transaction Fee.”  According to Defendant, Plaintiffs’ allegation at ¶ 36 of the FAC that Plaintiffs timely delivered to Defendant a list of Covered Parties “which establishes the basis for compensation under the provisions of the Agreement following termination” is conclusory because the list is merely just that, a list of names with “no information whereby it ‘establishes the basis for compensation under the provisions of the Agreement following Termination,’ including that each of the 166 names listed meets the restrictive definition of ‘Covered Parties’ in the first instance.”  (Demurrer, p. 10.)  Defendant contends that “Plaintiffs were required to provide a Covered Parties list containing information necessary to ‘establish’ that each name so listed is in fact a person that would entitle Plaintiffs to be paid ‘under the provisions of the Agreement’ itself. . . .” (Id. at p. 11.)   

In opposition, Plaintiffs argue they have cured the prior deficiency regarding the Covered Party List and thus have alleged their performance under the Contract.  Plaintiffs specifically point to ¶ 36 and Exhibit D of their FAC to show that they sufficiently alleged the condition provision of the Engagement Agreement.  (Opposition, pp. 7-8.)  According to Plaintiffs, Defendant’s interpretation of the Engagement Agreement is incorrect because the Engagement Agreement “says no such thing”; instead, “it simply requires Plaintiffs 'deliver to [Defendants] a list of Covered Parties, which list shall establish the basis for compensation under the provisions of the Agreement following Termination.”  (Id. at p. 8.)

In reply, Defendant reiterates its argument made in the moving papers.

Here, the Court finds the condition that is at issue is not ambiguous, and Plaintiffs’ reasonable interpretation prevails.  The subject condition provides that in the event of termination, Plaintiffs were required to “deliver to the [Defendant] a list of Covered Parties, which list shall establish the basis for compensation under the provisions of the Agreement following Termination.”  (FAC, ¶ 1; Ex. “A” [Engt Agmt, pp. 4-5].)  The terms “Covered Parties,” “Agreement,” and “Termination” are each a defined term.  A “Covered Party,” in particular, means “an investor or entity (or any affiliate of any such investor or entity) who is introduced or identified by or on behalf of [Plaintiffs] or the [Defendant], or who is in contact by [Plaintiffs] or the {Defendant], with respect to a Transaction with the Company prior to or during the Term of the Agreement.”  (Id.)  Thus, the Engagement Agreement did not require Plaintiffs to provide merely any list to Defendant to satisfy the condition precedent to the Post-Termination Transaction Fee, but a list of “Covered Parties,” which the Engagement Agreement sets forth a specific definition of.  Plaintiffs have alleged their performance under the contract and cured the prior deficiency regarding the Covered Party list by “[delivering] to [Defendant] a list of Covered Parties, which list shall establish the basis for compensation….”  (FAC ¶¶ 26-29, 35-38; Ex. “D.”) 

Defendant argues that the phrase “shall establish the basis for compensation under the provisions of the Agreement following Termination” also required Plaintiffs to “‘establish’ that each name so listed is in fact a person what would entitle Plaintiffs to be paid ‘under the provisions of the Agreement’ itself, e.g., that facts show that each of the 166 names actually do meet the contractual definition of a ‘Covered Party.’”  (Demurrer, p. 10.)  However, based on the express language of the Engagement Agreement, the contract provides no such thing.  The definition of a “Covered Party” does not provide for such; the Post-Termination Transaction Fee provision does not provide for such; no where in the Engagement Agreement provides for such.  By arguing that Plaintffs’ list does not comply with an additional requirement, Defendant is essentially treating this phrase as a defined term, which it is not.  Also, Defendant’s interpretation of the phrase is attenuated based on the fact that “Covered Party” is a defined term and based on its meaning.  Thus, the court finds Plaintiffs’ interpretation  of the Engagement Agreement is reasonable and prevails.  Accordingly, the court finds the FAC’s allegations are sufficient regarding Plaintiffs’ compliance with the Covered Party list. 

(2)   “Transaction Fee” Condition

As to Defendant’s argument regarding Plaintiffs’ compliance with the condition for a “Transaction Fee,” the court finds the FAC’s allegations are insufficient.

The Engagement Agreement states that “[i]n the event that the [Defendant] proceeds with a Transaction during the Term, the [Defendant]  will, in addition to the consideration described in the ‘Advisor Warrants’ section of this Agreement, pay to [Plaintiffs] a fee (a ‘Transaction Fee’)….”  (FAC, ¶ 1; Ex. “A” [Engt Agmt, pp. 3-4].)  For purposes of a “Transaction Fee,” the obligation to pay arises at or contemporaneous with “Closing.”  (Id.)  The Engagement Agreement expressly provides: “[t]he closing (‘Closing’) of a Transaction shall be deemed to occur on the earlier of the date of execution of all material legal documentation or the transfer (if applicable) of funds.”  (Id.)  Plaintiffs do not deny the conditions precedent to satisfy a “Transaction Fee.”  Plaintiffs also fail to identify allegations demonstrating that Plaintiffs satisfied this condition of the contract. 

On January 25, 2022, Defendant terminated the Engagement Agreement.  (Id. at ¶ 35.)   Plaintiffs do not assert that a transfer of funds occurred before their January 25, 2022 termination.  Thus, Plaintiffs must assert that the “execution of all material legal documentation” occurred before their termination, which Plaintiffs failed to do.  Instead, Plaintiffs assert that Defendant released a press release on December 9, 2021, announcing it has entered into a Letter of Intent with LDA and touting “the work done by DelMorgan securing the Funding.”  (Id. at ¶¶  3, 30; Ex. “B.”)  Plaintiffs then assert that:

On December 14, 2021, [Plaintiffs] inquired of LDA about when the transaction was likely to close.  LDA notified [Plaintiffs] that they expected to deliver a draft of the deal documents by the end of the week.  On December 21, 2021, counsel for [Defendant] provided [Plaintiffs] with a blacklined version of the Facility Agreement for submittal to LDA.

(Id. at ¶¶ 31-32.)  Further, the February 14, 2022 press release states, “[Defendant] has entered into a Capital Commitment Agreement…with LDA Capital Limited.”  (Id. at ¶ 37; Ex. “C.”)  As such, Plaintiffs’ allegations in the FAC do not establish that Plaintiffs satisfied the condition precedent for a “Transaction Fee” because Plaintiffs do not allege the “execution of all material legal documentation” prior to termination.  Rather, Plaintiffs merely allege a letter of intent, a draft of the deal, and an agreement.  Without allegations establishing that Plaintiffs satisfied the contract’s conditions for a “Transaction Fee,” the pleadings are insufficient.

(3)  “Prior Balance”

As to Defendant’s argument that the portion of the FAC alleging a “previous balance” of $1,386.55 owed to Plaintiffs fails to state a cause of action, the court agrees considering that there are no allegations that Defendant agreed to pay this amount or was obligated to pay.  (Id., at ¶¶ 5, 40, 45.)

(4)  Leave to Amend

Plaintiffs seeks leave to amend if the demurrer is sustained.  Plaintiffs state, “[s]ince the filing of the instant suit, Plaintiffs have unearthed additional relevant information such as Defendant’s security filings which provide information concerning the Transaction at issue.”  (Opposition, p. 10.)

Accordingly, the court SUSTAINS Defendant’s demurrer to the first cause of action because it does not state facts sufficient to constitute a cause of action.  (CCP § 430.10(e).)  The court grants Plaintiffs 20 days leave to amend.

It is so ordered.

Dated: March 13, 2024

_______________________

ROLF M. TREU

                                                        Judge of the Superior Court