Judge: Michael D. Washington, Case: 37-2023-00013706-CU-BC-NC, Date: 2024-04-05 Tentative Ruling

SUPERIOR COURT OF CALIFORNIA,

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SOUTH BUILDING TENTATIVE RULINGS - April 04, 2024

04/05/2024  01:30:00 PM  N-31 COUNTY OF SAN DIEGO

JUDICIAL OFFICER:Michael D Washington

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Civil - Unlimited  Breach of Contract/Warranty Demurrer / Motion to Strike 37-2023-00013706-CU-BC-NC NEXTMED III OWNER, LLC VS. OSTENDO TECHNOLOGIES, INC [IMAGED] CAUSAL DOCUMENT/DATE FILED: Demurrer, 01/29/2024

The Demurrer to First Amended Complaint brought by defendants Ostendo Technologies Inc.

(Ostendo), Hussein El-Ghoroury (Mr. El-Ghoroury), and Dale McNeill (Mr. McNeill) (collectively, Defendants or the Tenants) is disposed as follows: --Fourth Cause of Action (Fraudulent Conveyance) – SUSTAINED without leave to amend, but also without prejudice to the filing of a motion for leave to amend under California Rules of Court, rule 3.1324 if facts are uncovered in discovery that would allow this cause of action to be plead with the required particularity --Fifth Cause of Action (Breach of Fiduciary Duty) – SUSTAINED without leave to amend, but also without prejudice to the filing of a motion for leave to amend under California Rules of Court, rule 3.1324 if facts are uncovered in discovery that would allow this cause of action to be plead with the required particularity --Sixth Cause of Action (Negligent Misrepresentation) – OVERRULED The time for defendants El-Ghoroury and McNeill to answer or otherwise plead shall be as set forth in California Rules of Court, rule 3.1320.

Request for Judicial Notice The Request for Judicial Notice brought by plaintiff NextMed III Owner LLC (Plaintiff or the Landlord) is GRANTED pursuant to Evidence Code § 451, et seq. as to Exhibits A through D; however, with regard to Exhibit D, the judicial notice only extends to the fact of filing of the declaration and the fact that the declarant has made certain representations under penalty of perjury – not to the truth of those representations.

Factual Background This case is a landlord-tenant dispute in the context of a commercial lease for the premises of 6185 Paseo Del Norte, Suite 200, Carlsbad, California 92011 (the Premises). The original lease for the Premises began in November 1999 and went through several updates/revisions/renewals, and the property itself went through several different owners during that time. It is undisputed in this case that the Tenants – a technology start-up company – eventually fell on hard times financially and fell behind on their rental payments.

The lease agreement itself was technically between Ostendo – a corporation – and the Landlord, though Calendar No.: Event ID:  TENTATIVE RULINGS

3090637 CASE NUMBER: CASE TITLE:  NEXTMED III OWNER, LLC VS. OSTENDO TECHNOLOGIES, INC  37-2023-00013706-CU-BC-NC there were allegedly certain guarantees made by individuals in control of Ostendo in connection with earlier leases. The Landlord alleges that there were certain efforts to resolve the unpaid rental amounts that were piling-up while Ostendo was behind on its obligations and that emails were sent to the Landlord representing that sources of funding were expected shortly. The Landlord alleges that those representations amount to negligent misrepresentations designed to the delay the filing of legal action to evict the Tenants and recover unpaid rent.

The Landlord eventually filed legal action to evict the Tenants anyway. That legal action (which actually began as two separate cases) eventually resulted in a stipulated judgment – i.e. Ostendo admitted that it owed back rent and agreed to turn over the premises. The judicially-noticeable result of that eviction proceeding was a stipulated judgment that identifies the 'current' monthly rental for the premises was $61,456.03 and that the full amount of the past-due back rent was $496,108.15. (Notice of Lodgments, Ex. A.) The Landlord is now suing the Tenants (which is defined to include Mr. El-Ghoroury and Mr. McNeill individually) in the instant civil action for the following: (1) breach of lease – against Ostendo (2) breach of lease – against El-Ghoroury and McNeill (3) breach of guarantee – against El-Ghoroury and McNeill (4) fraudulent conveyance – against El-Ghoroury and McNeill (5) breach of fiduciary duty – against El-Ghoroury and McNeill (6) negligent misrepresentation – against El-Ghoroury and McNeill Mr. El-Ghoroury and Mr. McNeill (collectively, the Individual Defendants) now demur to the fourth, fifth, and sixth causes of action against them.

Merits of Motion – Fourth Cause of Action (Fraudulent Conveyance) There is no dispute in the briefing that fraud, generally speaking, must be pled with particularity. What is disputed is that Plaintiff, the landlord, takes the position that that requirement is softened in situations where the defendant who committed the alleged fraud is in the position to know more about it and where a plaintiff cannot necessarily know the particulars of how the fraud was committed. See Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197 (superseded by statute on other grounds). This is known as the doctrine of 'less particularity.' The question presented via the instant Demurrer is whether that doctrine should apply here. The Court concludes that it should not.

The doctrine of less particularity appears to be designed to apply to scenarios in which there is a hidden scheme – machinations behind the scenes that make it difficult or impossible for a complainant to identify how he or she was defrauded. The way the plaintiff-landlord is attempting to apply the doctrine in this case would effectively allow the exception to swallow the rule. There is no real dispute based on the briefing that the tenants owe a significant debt in the form of unpaid rent that has ripened into a formal judgment after unlawful detainer proceedings. There also does not appear to be a dispute that the defendant-tenant has been involved in the a wind-down of sorts due to difficult financials. The position is of the Landlord is that the owners of the Tenant, which is a corporate entity, have essentially been siphoning or re-directing monies from the corporate entity to their own pockets, but the Landlord cannot make any specific allegations about how or when that was done – only general allegations implied based on the circumstances. That, without more, is insufficient to allege fraud.

The caveat to the above is that the Landlord holds a judgment and can act on it and enforce it against the corporate entity. To the extent that the Landlord alleges the present fraudulent conveyance claim on 'information and belief,' it has failed to identify a foundation for that 'information and belief' – to wit, the Landlord has not alleged that it has actually attempted to enforce the judgment against the corporate entity and, via post-judgment discovery such as a debtor's exam, learned that monies were transferred out of the corporate entity and to the individual defendants. To allege fraud, an 'odious' claim that is never presumed, the Landlord needs to have a basis for believing that funds have been fraudulently Calendar No.: Event ID:  TENTATIVE RULINGS

3090637 CASE NUMBER: CASE TITLE:  NEXTMED III OWNER, LLC VS. OSTENDO TECHNOLOGIES, INC  37-2023-00013706-CU-BC-NC conveyed.

Having concluded that a claim for fraudulent conveyance is not adequately pled, the Court turns to the question of whether leave to amend is appropriate to grant. The general rule is that leave to amend is to be liberally granted so that complaining parties can have multiple opportunities to properly allege their legal claims and thereby protect their substantive legal rights. However, in the instant circumstance, the Landlord appears to essentially admit that it does not have that more particularized information at the ready. (Opposition, p. 12:20-22 ('Plaintiff is not required to identify a specific transfer at the pleadings stage, particularly when such information is exclusively in Individual Defendants' possession, and Individual Defendants cite no authority otherwise.').) Notably, however, there appear to be methods by which the Landlord can find out about whether certain fraudulent transfers have occurred – first by enforcing the judgment the Landlord already holds, but second because there are three causes of action remaining in this lawsuit (for breach of lease and breach of guarantee) and the prosecution of those claims comes with a right to conduct civil discovery. If facts supporting a claim of fraudulent conveyance are discovered, the Landlord can seek leave to amend in light of such newly-acquired factual information under California Rules of Court, rule 3.1324. As such, in declining to grant leave to amend today, the Court is threading a fine needle designed in the interest of judicial efficiency to not impose a burden on the Landlord to continue attempting (via multiple rounds of costly and time-consuming pleading) to try to get around the present specificity problem with its pleading, while, on the other hand, not entirely foreclosing the right to bring such claims if the actual facts are discovered that would support the specific pleading of such a claim.

Merits of Motion – Fifth Cause of Action for Breach of Fiduciary Duty The Individual Defendants argue that they do not owe a fiduciary duty to the creditor of the Tenant, which, again, is a corporate entity. The Landlord responds that they do – albeit a 'limited' fiduciary duty.

(Opposition, p. 14: 1 ('Though the scope of that fiduciary duty may be limited...').) The 'limited' fiduciary duty that the Landlord is referring to is created by legal fiat. When a corporate entity becomes insolvent: ...the scope of any extra-contractual duty owed by corporate directors to the insolvent corporations' creditors is limited in California, consistently with the trust-fund doctrine, to the avoidance of actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditor claims. This would include acts that involve self-dealing or the preferential treatment of creditors. Berg & Berg Enterprises, LLC (2009) 178 Cal.App.4th 1020, 1041 (emphasis removed).

The Tenant emphasizes that the duty imposed under this doctrine is quite narrow. Further, though not necessarily the controlling law, the Tenant cites the case of North American Catholic Educational Programming Foundation v. Gheewalla (Del. 2007) 930 A.2d 92, 101-103, a case out of Delaware that Tenants characterize as 'seminal,' for the proposition that modern legal thinking in this area allows creditors to act like shareholders and bring derivative lawsuits where corporate officers or directors are engaging in mismanagement. That, however, is not the same as a creditor holding officers and/or directors personally liable for the debts of a corporate entity; rather it allows for holding officers and/or directors liable for mismanagement.

The response of the tenant-defendant in this action to that argument is: While individual creditors, such as NextMed, may complain about the decisions the Individual Defendants make with those limited funds, it is not a breach of fiduciary duty, even in the 'trust fund' context, if the decisions were made in the good faith belief that the company, as a whole, would benefit. (Reply, p. 7:17-20, citing Berg & Berg Enterprises, LLC (2009) 178 Cal.App.4th 1020, 1046.) Thus, the question presented via the instant Demurrer is whether the Landlord has adequately pled that the Individual Defendants have made decisions for the company that were not based on a good faith belief that the company, as a whole, would benefit. The Landlord's allegations in this regard are as follows: Calendar No.: Event ID:  TENTATIVE RULINGS

3090637 CASE NUMBER: CASE TITLE:  NEXTMED III OWNER, LLC VS. OSTENDO TECHNOLOGIES, INC  37-2023-00013706-CU-BC-NC 59. As a result of Ostendo's insolvency, the Individual Defendants, as Ostendo's officers and/or directors, owed a fiduciary duty directly to Landlord not to divert assets of the company for themselves or other insiders or creditors.

60. On information and belief, from and after the time that Ostendo became insolvent, the Individual Defendants transferred Ostendo's assets to themselves and other insiders rather than satisfying Ostendo's debts to third parties, such as Landlord.

...

63. Landlord is informed and believes, and on that basis alleges, that the Individual Defendants transferred and/or distributed assets of Ostendo to themselves and/or their designees and/or beneficiaries at a time when Ostendo was insolvent and/or with the intent or belief that Ostendo would incur debts beyond its ability to pay as those debts became due. (First Amended Complaint, ¶¶ 59-60 and 63 (bold added).) As discussed above, Landlord is incorrect as to its allegation that the legal standard is that the Individual Defendants owed a fiduciary duty 'not to divert assets of the company for themselves or other insiders or creditors.' The legal standard is that the corporate officers and/or directors owed a fiduciary duty to make corporate decisions with a good faith belief that the decisions will, as a whole, benefit the company. Ultimately, incorrect recitation of the legal standard is not the issue on demurrer – adequate pleading of facts to constitute a cause of action is the issue. As discussed above with regard to the claim of fraudulent conveyance, the Landlord is only able to make allegations on 'information and belief' and has not really specified a basis for where that information was obtained or how that belief has been formed.

In the context of breach of fiduciary duty, the Landlord is not subject to the same heightened pleading requirement that applies in the context of fraud where the claim must be alleged with specificity.

However, even without that heightened pleading requirement, the Landlord's present allegations are shrouded in the vagueness of 'information and belief' without any clear foundation as to how that 'information and belief' was obtained or formed. The problem is the same as above: the Landlord has not utilized post-judgment discovery procedures to attempt to collect on the judgment against the Tenant and, in so doing, discovered proverbial 'roadblocks' due to redistribution of corporate assets by officers and/or directors in a manner that was not designed to look after the interests of the corporate entity in good faith. As with the claim for fraudulent conveyance, providing leave to amend at this juncture, though generally favored, would place the Landlord in the position of having to stretch to make factual allegations that it does not appear to have at present. As such, the Court exercises careful discretion and denies leave to amend at this juncture in order to prevent judicial inefficiency and waste, but expressly notes that if either post-judgment discovery efforts to collect on the unlawful detainer judgment or discovery in pursuit of the remaining causes of action brought in this lawsuit uncovers information that could support a claim that the corporate officers and/or shareholders made decisions that were not designed, in good faith, to, as a whole, benefit the company, then the Landlord is not foreclosed from bringing a motion under California Rules of Court, rule 3.1324 to seek leave to amend in light of such newly-discovered information.

Merits of Motion – Sixth Cause of Action for Negligent Misrepresentation The Landlord's negligent misrepresentation claim is premised on the notion that agents of the Tenant were making representations to string the Landlord along and induce the Landlord to delay filing legal action once the rent went unpaid – representations that the Tenant was expecting to obtain an influx of capital and financial resources to keep the business afloat. Though styled as a single cause of action, the claim identifies to discrete representations that form the basis of the claim for negligent misrepresentation: (1) June 8, 2022 – an email was sent to the Landlord by an alleged agent of the Tenant stating that the Tenant expected additional financing as follows: Tenant had 'engaged Bank of America Securities to Calendar No.: Event ID:  TENTATIVE RULINGS

3090637 CASE NUMBER: CASE TITLE:  NEXTMED III OWNER, LLC VS. OSTENDO TECHNOLOGIES, INC  37-2023-00013706-CU-BC-NC lead a private placement of $50 million in Series D preferred stock and we believe Samsung will be the primary investor in this financing round.' (First Amended Complaint, ¶ 69.) (2) March 22, 2023 – an email was to the Landlord by an alleged agent of the Tenant stating that the Tenant expected additional financing as follows: one of the Individual Defendants 'is working with two individuals who signed an agreement to raise up to $50 million for Ostendo over the next several months, of which he believes up to $20 million could be raised during April and May.' (First Amended Complaint, ¶ 72.) The Individual Defendants challenge these allegations in three ways.

First, the Individual Defendants argue that these statements cannot form the basis of a claim for negligent misrepresentation against them in their individual capacity because the alleged agent was an agent of the corporation – not of the individuals. The Landlord responds that it has specifically pled that the agent, one Doug Pierce, was 'authorized and instructed' to make the representations in question by the Individual Defendants. (Opposition, p. 17:24-27.) However, the actual allegation by the Landlord reads as follows: Landlord is informed and believes, and thereon alleges, that the Individual Defendants authorized and instructed Doug Pierce, an officer of Ostendo, and other agents to make representations to Landlord as to Ostendo's sources of funding to induce Landlord... (First Amended Complaint, ¶ 68 (emphasis added).) The Landlord's own argument thus appears to be taking its own allegations out of context, as the Landlord specifically alleged that Mr. Pierce is 'an officer of Ostendo' – not an agent of other officers of Ostendo.

Second, the Individual Defendants argue that 'the representations made by Pierce to NextMed are demonstrably true' and that 'Defendants genuinely held those opinions at the time they were made.' (Demurrer, pp. 15:25-16:1.) The Landlord responds that this argument is too fact-intensive to be resolved on demurrer. The Court agrees. Whether the representations are demonstrably true, and whether the individual making the representations genuinely believed them is a question of fact that is not well-suited to resolution via demurrer.

Third, the Individual Defendants argue that the Landlord has not pled reliance or damages. Focusing on only one of the two representations itemized above (the second email of March 22, 2023), the Individual Defendants argue that the Landlord filed the unlawful detainer lawsuit a mere 10 days after the representation such that the representation did not actually induce the Landlord to delay in taking legal action. This argument is not persuasive, as it is fact-intensive. A delay is a delay. While the delay at issue may have been small, such that the damages flowing from it (a few days of interest and back rent) may likewise be small, that does not mean that no damage occurred or that no reliance occurred.

Essentially, the argument being made by the Individual Defendants is that the delay and reliance are de minimis to the point that a court, on demurrer, without the benefit of any fact-finding, can summarily dismiss the claims as being insufficient. The Court rejects this argument as it stands. As argued by the Landlord, the claim for negligent misrepresentation has two representations, and this argument only focuses on one. A demurrer must lie as to an entire cause of action, existing a particular part of a claim is the province of a motion to strike. But, even if there was only one representation at issue here (the March 22, 2023 representation), the timing between that representation and the filing of the legal action to evict the tenant was not so small as to be sufficiently de minimis to be able to be resolved via demurrer.

Unless the ruling(s) above indicate that an appearance is necessary, parties who wish to submit, who are satisfied with the above tentative ruling(s), and/or who do not otherwise wish to argue the motion(s) are encouraged to give notice to the Court and each other of their intention not to appear.

Calendar No.: Event ID:  TENTATIVE RULINGS

3090637 CASE NUMBER: CASE TITLE:  NEXTMED III OWNER, LLC VS. OSTENDO TECHNOLOGIES, INC  37-2023-00013706-CU-BC-NC Calendar No.: Event ID:  TENTATIVE RULINGS

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