Judge: Michael E. Whitaker, Case: 23SMCV04660, Date: 2024-07-18 Tentative Ruling

Case Number: 23SMCV04660    Hearing Date: July 18, 2024    Dept: 207

TENTATIVE RULING - NO. 1

MOTIONS

On October 3, 2023, Plaintiff Main Street Corridor, LLC (“Plaintiff”) brought suit against Defendants Claude Zdanow; Stadiumred Group; Stadiumred; and Stadiumred, Inc. alleging two causes of action for (1) constructively fraudulent transfer and (2) fraudulent transfer. 

Defendant Claude Zdanow (“Zdanow”) demurs to both causes of action for failure to state facts sufficient to constitute a cause of action under Code of Civil Procedure section 430.10, subdivision (e).  Plaintiff opposes the demurrer and Zdanow replies. 

REQUESTS FOR JUDICIAL NOTICE

            Zdanow’s Request for Judicial Notice

Zdanow requests judicial notice of (1) the commercial property lease between Plaintiff and Mediakix referenced in paragraphs 18 and 21 of the Complaint and of (2) the May 10, 2021 Repayment Agreement referenced in paragraphs 28-29 of the Complaint. 

Zdanow’s request is made pursuant to Evidence Code section 452, subdivision (h) as “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.”   In support of Zdanow’s request, Zdanow cites to Ingram v. Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3, and McBride v. Smith (2018) 18 Cal.App.5th 1160, 1173.  The Court finds both cases distinguishable. 

            In Ingram v. Flippo, the Court took judicial notice of a letter and media release both made by a District Attorney that the complaint quoted and summarized in detail, where both sides quoted from it in their briefing, and where there was no objection to the request.  Unlike a letter and media release by a District Attorney, which appear to be public records and therefore capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy (public government records), private contracts and agreements between parties are not capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.  

            Likewise, McBride v. Smith simply stands for the proposition that the Court will accept as true specific facts included in exhibits attached to the complaint or in documents subject to judicial notice over general conclusory allegations to the contrary.  The opinion does not stand for the proposition that a court may properly take judicial notice of private agreements.  (See, e.g., FNB Mortg. Corp. v. Pacific General Group (1999) 76 Cal.App.4th 1116, 1132 [“Language used in any opinion is of course to be understood in light of the facts and the issue before the court, and an opinion is not authority for a proposition not therein considered”].) 

            Therefore, the Court declines to take judicial notice of the agreements.  The Court similarly disregards the Declaration of Claude Zdanow, as courts may not consider extrinsic evidence when ruling on a demurrer.  (See, e.g., Childs v. State of California (1983) 144 Cal.App.3d 155, 163 [“It is an elementary rule that the sole function of a demurrer is to test the sufficiency of the challenged pleading.  It cannot, properly, be addressed to or based upon evidence or other extrinsic matters”].)

            Plaintiff’s Request for Judicial Notice

            Plaintiff requests judicial notice of the following:

Exhibit 1: the Rent Complaint naming Stadiumred as a defendant, case number 21SMCV00349

Exhibit 2: the notice/proof of service to Stadiumred that Plaintiff is seeking entry of judgment for breach of the repayment agreement, filed in the same case.

Exhibit 3: judgment entered against Stadiumred in the same case

Exhibit 4: a printout from the Small Business Association website on PPP Loan information showing that SRI received PPP loan funds on or about March 31, 2021.

Judicial notice may generally be taken of records of any court in this state.  (Evid. Code, § 452, subd. (d)(1).)  However, “while courts are free to take judicial notice of the existence of each document in a court file, including the truth of results reached, they may not take judicial notice of the truth of hearsay statements in decisions and court files.  Courts may not take judicial notice of allegations in affidavits, declarations and probation reports in court records because such matters are reasonably subject to dispute and therefore require formal proof.”  (Lockley v. Law Office of Cantrell, Green, Pekich, Cruz & McCort (2001) 91 Cal.App.4th 875, 882 [cleaned up].)

Plaintiff’s request appears to be an attempt for the Court to take judicial notice of hearsay allegations and declarations filed in another action.  Further, the Court does not find it necessary to take judicial notice that Plaintiff in fact filed a complaint against Stadiumred to recover rent amounts owed, or that the parties entered into a repayment agreement, from which Stadiumred apparently did not make payments.  These are all alleged in the Complaint, and a demurrer tests the sufficiency of the allegations, not the evidence.  Therefore, the Court declines to take judicial notice of exhibits 1-3.

As for Exhibit 4, Plaintiff has provided no legal basis for the Court to take judicial notice of the Small Business Website, or of the hearsay matters contained thereon.  Therefore, the Court similarly declines to take judicial notice of exhibit 4.

ANALYSIS

1.     DEMURRER

“It is black letter law that a demurrer tests the legal sufficiency of the allegations in a complaint.”  (Lewis v. Safeway, Inc. (2015) 235 Cal.App.4th 385, 388.)  In testing the sufficiency of a cause of action, a court accepts “[a]s true all material facts properly pled and matters which may be judicially noticed but disregard contentions, deductions or conclusions of fact or law.  [A court also gives] the complaint a reasonable interpretation, reading it as a whole and its parts in their context.”  (290 Division (EAT), LLC v. City & County of San Francisco (2022) 86 Cal.App.5th 439, 450 [cleaned up]; Hacker v. Homeward Residential, Inc. (2018) 26 Cal.App.5th 270, 280 [“in considering the merits of a demurrer, however, “the facts alleged in the pleading are deemed to be true, however improbable they may be”].)

Further, in ruling on a demurrer, a court must “liberally construe” the allegations of the complaint “with a view to substantial justice between the parties.”  (See Code Civ. Proc., § 452.)  “This rule of liberal construction means that the reviewing court draws inferences favorable to the plaintiff, not the defendant.”  (Perez v. Golden Empire Transit Dist. (2012) 209 Cal.App.4th 1228, 1238.)  

In summary, “[d]etermining whether the complaint is sufficient as against the demurrer on the ground that it does not state facts sufficient to constitute a cause of action, the rule is that if on consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated, or may be intermingled with a statement of other facts irrelevant to the cause of action shown, or although the plaintiff may demand relief to which he is not entitled under the facts alleged.”  (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)

A.    FAILURE TO STATE A CAUSE OF ACTION

Plaintiff alleges two causes of action for (1) constructively fraudulent transfer; and (2) fraudulent transfer.

“A fraudulent conveyance is a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.”  (Nautilus, Inc. v. Yang (2017) 11 Cal.App.5th 33, 39.)  Such transfers are voidable.  (Ibid.; see also Civ. Code, § 3439.04.)

“Constructive fraud exists in cases in which conduct, although not actually fraudulent, ought to be so treated—that is, in which such conduct is a constructive or quasi fraud, having all the actual consequences and all the legal effects of actual fraud.”  (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105, 1131.)  “Constructive fraud is a unique species of fraud applicable only to a fiduciary or confidential relationship.”  (Ibid.)  The “elements of constructive fraud cause of action are (1) a fiduciary or confidential relationship; (2) nondisclosure (breach of fiduciary duty); (3) intent to deceive, and (4) reliance and resulting injury (causation).”  (Ibid.)

“In California, fraud must be pled specifically; general and conclusory allegations do not suffice.”  (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.)  “This particularity requirement necessitates pleading facts which show how, when, where, to whom, and by what means the representations were tendered.”  (Ibid.) 

“One of the purposes of the specificity requirement is notice to the defendant, to furnish the defendant with certain definite charges which can be intelligently met.”  (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384.)  As such, less specificity is required “when it appears from the nature of the allegations that the defendant must necessarily possess full information concerning the facts of the controversy[.]”  (Ibid.)  “Even under the strict rules of common law pleading, one of the canons was that less particularity is required when the facts lie more in the knowledge of the opposite party.”  (Ibid.)

Plaintiff alleges the following facts applicable to both causes of action:

·       On January 25, 2017, Plaintiff entered into a commercial lease agreement (“Lease”) with non-party to the litigation, Mediakix, which required Mediakix to pay monthly rent in the amount of $14,261.  (Compl. ¶ 18.) 

·       “The Lease provided that a transfer of 40% or more of Mediakix’s ownership was deemed an assignment of the lease by Mediakix.”  (Compl. ¶ 21.)

·       In late 2019, Defendant Zdanow (who also allegedly owns the various Stadiumred entities), allegedly acquired Mediakix, through Stadiumred.  (Compl. ¶¶ 10-13; 19-20.)

·       Mediakix was allegedly solvent at the time of Zdanow’s acquisition.  (Compl. ¶ 19.)

·       Upon acquiring Mediakix, Zdanow caused Mediakix to stop paying rent, even though Mediakix had sufficient funds to make rent payments.  (Compl. ¶ 23.)

·       Mediakix did not pay rent through March 2021, at which time Mediakix abandoned the property, owing $251,984.94 in unpaid rent, late fees, and unpaid water bills.  (Compl. ¶ 25.)

·       Zdanow caused Stadiumred to apply for and receive Paycheck Protection Program (“PPP”) loans on April 13, 2020 and in March 2021, the combined total of which was $1,500,000.  Both loans were forgiven.  (Compl. ¶¶ 24, 26, 27.)

·       Zdanow did not use the PPP loan funds to pay Plaintiff any of the outstanding rent.  (Compl. ¶ 27.)

·       Plaintiff initiated an Unlawful Detainer action, after which, “[t]o avoid a judgment, the parties entered into an agreement under which [Plaintiff] would forbear evicting Mediakix and [Stadiumred] provided that these debtors repaid past-due Rent in accordance with an agreed payment schedule” but “[n]o payments were ever made” pursuant to that agreement.  (Compl. ¶¶ 28-29.)

·       Zdanow diverted funds and assets from Mediakix and Stadiumred and “left both Mediakix and SRI insolvent” and without any remaining assets.  (Compl. ¶¶ 30-32.)

·       “On information and belief, most if not all of the small media companies acquired by Zdanow as part of the [Stadiumred] Network have since been drained of funds and are no longer actively providing services, including, without limitation, MediaKix, SevenBlue Magic Bullet Media and Gyrosity Projects.”  (Compl. ¶ 14.)

Zdanow demurs to both causes of action on the grounds that (1) Plaintiff fails to identify any asset of Mediakix’s that Zdanow transferred; and (2) Stadiumred not using its PPP loan proceeds to pay the back-owed rent does not constitute a fraudulent transfer because (a) the acquisition of Mediakix did not cause an assignment of the lease to Stadiumred; and (b) the law forbade Stadiumred from using the PPP loan proceeds to pay Mediakix’s rent obligations.

As to Zdanow’s first point, the Court finds the Complaint adequately alleges that Zdanow diverted funds and assets from Mediakix.  (See Compl. ¶ 32 [“The money diverted from SRI and Mediakix by Zdanow is an ‘asset’ and qualifies as ‘property’ as specified in California Civil Code 3439.01(a) and 3439.01(j)”].)

As such, the allegations that Zdanow and Stadiumred stopped Mediakix from paying Plaintiff rent and instead diverted funds out of Mediakix, which was solvent prior to Stadiumred’s acquisition and insolvent afterwards, as Zdanow had allegedly done to other companies he acquired, are sufficient to state a cause of action at this stage of the litigation.[1] 

CONCLUSION AND ORDER

For the reasons stated, the Court overrules Zdanow’s Demurrer to the Complaint.  Further, the Court orders Zdanow to file an Answer to the Complaint on or before August 8, 2024.

Zdanow shall provide notice of the Court’s ruling and file the notice with a proof of service forthwith. 

DATED:  July 18, 2024                                                          ___________________________

                                                                                          Michael E. Whitaker

                                                                                          Judge of the Superior Court

TENTATIVE RULING - NO. 2

MOTION

On October 3, 2023, Plaintiff Main Street Corridor, LLC (“Plaintiff”) brought suit against Defendants Claude Zdanow; Stadiumred Group; Stadiumred; and Stadiumred, Inc. (collectively, “Defendants”) alleging two causes of action for (1) constructively fraudulent transfer and (2) fraudulent transfer. 

Defendant Claude Zdanow (“Zdanow”) moves for terminating and monetary sanctions against Plaintiff and Plaintiff’s counsel of record pursuant to Code of Civil Procedure section 128.7 based on the claims Plaintiff alleges against Zdanow in the complaint.  

Plaintiff opposes the motion and Zdanow replies.

ANALYSIS

Code of Civil Procedure section 128.7 states that a court may impose sanctions on a party or attorney that presents a pleading, petition, motion, or other similar papers that does not meet the following criteria:  

(1) It is not being presented primarily for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

(2) The claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.

(3) The allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.

(4) The denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.

(Code Civ. Proc., § 128.7, subd. (b)(1)-(4); see also Eichenbaum v. Alon (2003) 106 Cal.App.4th 967, 976 [a violation of any of the criteria under subdivision (b) may give rise to sanctions].)  In addition, Section 128.7 does not require a finding of subjective bad faith; instead it requires only that a court find that the conduct be objectively unreasonable.  (See In re Marriage of Reese & Guy (1999) 73 Cal.App.4th 1214, 1221.) 

Further, under Section 128.7, a court may impose sanctions if it concludes a pleading was filed for an improper purpose or was indisputably without merit, either legally or factually. (Bucur v. Ahmad (2016) 244 Cal.App.4th 175, 189-190.)  A claim is factually frivolous if it is “not well grounded in fact” and is legally frivolous if it is “not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.”  (Ibid.)  In either case, to obtain sanctions, the moving party must show the party's conduct in asserting the claim was objectively unreasonable.  (Ibid.)  A claim is objectively unreasonable if “any reasonable attorney would agree that [it] is totally and completely without merit.”  (Ibid.) However, “section 128.7 sanctions should be ‘made with restraint’ [Citation], and are not mandatory even if a claim is frivolous.”  (Peake v. Underwood (2014) 227 Cal.App.4th 428, 448.) 

Under Section 128.7, a court “may issue sanctions, including . . . terminating sanctions against a party for filing a complaint that is legally or factually frivolous.”  (Kumar v. Ramsey (2021) 71 Cal.App.5th 1110, 1120.)  A court has broad discretion to impose sanctions if the moving party satisfies the elements of Section 128.7.  (Peake v. Underwood, supra, 227 Cal.App.4th at p. 441.) 

Here, on October 3, 2021, Plaintiff filed the complaint against Defendants alleging claims for constructive fraudulent transfer and fraudulent transfer.  As discussed more fully in the concurrent tentative ruling overruling Zdanow’s demurrer to the complaint, Plaintiff alleges that in 2017, it entered into a commercial lease agreement with non-party to the lawsuit, Mediakix; in 2019, Stadiumred (owed by Zdanow) acquired Mediakix and ceased making rent payments to Plaintiff, even though Medaikix was solvent at the time of acquisition, and then diverted all of Mediakix’s funds and assets elsewhere, obtaining two PPP loans on behalf of Stadiumred in the interim, neither of which were used to pay Plaintiff any rent.  (See Compl. ¶¶ 10-14, 18-21, 23-32.) 

Plaintiff also alleges that Stadiumred’s acquisition of Mediakix assigned the lease to Stadiumred, pursuant to the terms of the lease.  (Compl. ¶ 21.)  Finally, Plaintiff alleges on information and belief that Zdanow has similarly drained other companies it has acquired of all their assets, including SevenBlue, Magic Bullet Media, and Gyrosity Projects.  (Compl. ¶ 14.)

Zdanow argues (1) there is no legal or factual basis obligating Stadiumred to pay Mediakix’s rent under the lease because the plain terms of the contract demonstrate that the conditions for an assignment to occur are not met and the law forbids using PPP loan funds for that purpose; and (2) Plaintiff misrepresents that Mediakix’s last rent payment was in 2019, when the evidence demonstrates its rent was paid in full through March 2020, with two partial payments made thereafter for April and May 2020, intentionally concealing the financial impact of the COVID-19 pandemic on Mediakix’s ability to continue paying rent.

In support, Zdanow provides the Declaration of Claude Zdanow, attached to which is a copy of the lease, the repayment agreement, and a copy of Mediakix’s rent payment records, indicating:

a. $18,565 paid on 12/30/2019 [January 2020 rent payment]

b. $18,697 paid on 01/28/2020 [February 2020 rent payment]

c. $18,565 paid on 02/24/2020 [March 2020 rent payment]

d. $4,933 paid on 04/17/2020 [partial April 2020 rent payment]

e. $4,933 paid on 05/04/2020 [partial May 2020 rent payment]

(Zdanow Decl. ¶ 5.)  Zdanow further declares: 

7. On or about January 1, 2020, following months of negotiations, SRI acquired a majority ownership stake in Mediakix from Evan Asano, Mediakix’s founder and then-CEO. The acquisition did not include or involve an assignment of the Lease to SRI, nor did it otherwise result in SRI becoming obligated to pay rent to Plaintiff. To be clear, the Lease was never assigned to SRI at any time. At no time did SRI ever conduct business from, maintain a physical office at, or become a tenant at, the Premises.

8. Following SRI’s acquisition of Mediakix, it quickly became apparent that Mr. Asano had misrepresented Mediakix’s financial health during negotiations—far from being a financially solid company, revenue was falling off quickly and Mediakix was on the verge of experiencing severe cashflow problems. Mr. Asano quickly went on leave, golden parachute in hand, leaving the remainder of Mediakix’s executive team to work with SRI in an attempt to keep the business from failing.

9. For the first couple months of 2020, it appeared that these collaborative efforts to keep Mediakix afloat might be successful. And despite its financial difficulties, Mediakix continued to timely pay rent in full for multiple months after its acquisition by SRI. At no time did Mediakix transfer any assets to me whatsoever.

10. Unfortunately, the onset of the COVID-19 pandemic, and the associated nationwide economic shutdown, was the final nail in the coffin for Mediakix. After paying rent in full for January, February, and March 2020, Mediakix was only able to make partial rent payments for April 2020 and May 2020.

11. In light of Mediakix’s inability to pay rent, the parties began looking for a new tenant to take over the Premises—that search was ultimately successful in May 2021 when they identified Swyft Technologies US Inc. (“Swyft”) as a suitable subtenant.

12. SRI applied for and received two PPP loans, the first in April 2020 and the second in March 2021. SRI certified on its PPP applications that the loans would be used to meet its payroll costs, which were approximately $1 million per month at that time. In accordance with that certification nearly all of SRI’s PPP funds were then used to make payroll, with minor amounts spent on other authorized and forgivable expenses.

(Zdanow Decl. ¶¶ 7-12.)

            As discussed in the concurrent tentative ruling on Zdanow’s demurrer, Plaintiff alleges that prior to Stadiumred’s acquisition of Mediakix, Mediakix was solvent, and that upon Stadiumred’s acquisition, Mediakix suddenly stopped making rent payments to Plaintiff, and was eventually determined to be insolvent, because Zdanow and Stadiumred fraudulently transferred Mediakix’s pre-acquisition funds and assets to themselves.  Further, Plaintiff alleges Zdanow has a pattern of depleting other companies he acquires of all their funds and assets in the same manner.  As such, Plaintiff adequately alleges a fraudulent transfer and the Court did not need to analyze the allegations regarding Stadiumred’s purported mishandling of PPP loan funds.

            Zdanow has provided some declaratory evidence that Mediakix was not as solvent as Plaintiff, Stadiumred, and Zdanow believed prior to the acquisition, and that the economic impacts of the COVID-19 pandemic were “the final nail in the coffin for Mediakix.”  However, Zdanow has not provided any evidence demonstrating that he did not fraudulently transfer Mediakix’s preacquisition assets to himself or his other entities to prevent Mediakix from paying Plaintiff the rent it owed.  Therefore, the Court finds that Zdanow has not demonstrated that the Complaint was brought for an improper purpose, or that the claims are unmeritorious under  existing law.

            However, the Court finds that there appears to be no evidentiary support or likely evidentiary support for Plaintiff’s allegation that Stadiumred’s acquisition of Mediakix operated to assign the lease to Stadiumred or that Stadiumred was obligated to use its PPP loan proceeds to pay Mediakix’s rent. 

As Zdanow points out, California law dictates that leases cannot be assigned to a third party without the assignee’s express assumption of the lease.  (Demurrer at p. 11 [citing BRE DDR B Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1000.]) 

With regard to the purported assignment, the Complaint merely alleges “The Lease provided that a transfer of 40% or more of Mediakix’s ownership was deemed an assignment of the lease by Mediakix.  Under this provision, when the Acquisition took place, pursuant to the above alleged Civil Code sections, SRI became an additional “debtor” and MSC became SRI’s creditor.”  (Compl. ¶ 21 [referring to Civil Code sections for Uniform Voidable Transactions].) 

Thus, a provision in a lease agreement between Plaintiff and Mediakix could not, by operation of law, effectuate an assignment of the lease to Stadiumred without Stadiumred’s express assumption of the lease, and Plaintiff has not otherwise alleged or provided evidence that Stadiumred ever expressly assumed the lease.  By contrast, the Zdanow declaration indicates that no such express assumption occurred.  (Zdanow Decl. ¶ 7.)  As such, there appears to be no legal or factual basis requiring Stadiumred to have used its PPP loan proceeds to pay Mediakix’s rent.

            Similarly, regarding the stopped rent payments, the Complaint alleges “On information and belief, in 2019, exercising control over Mediakix, Zdanow caused Mediakix to stop paying Rent.  Zdanow did this even though Mediakix had sufficient funds to make payment.”  (Compl. ¶ 23.)  In fact, Zdanow has presented evidence that the rent was paid in full through March 2020, with two partial payments made thereafter for April and May 2020. 

            Notwithstanding, the Court exercises its discretion and declines to award sanctions.  Regardless of whether the rent payments stopped in late 2019 or in early 2020, the heart of Plaintiff’s claims – that Mediakix owes approximately $251,984.94 in back rent – is substantially supported.  In reply, Zdanow argues that Plaintiff also misrepresented the monthly rent as being lower than it actually was, which also falsely creates the impression that Mediakix had been delinquent in its rent payments for longer than it actually had.  The Court does not find that these two small accounting discrepancies warrant sanctions.

Similarly, there is no evidence that Plaintiff did not have a good faith belief that discovery would reveal Stadiumred improperly diverted funds out of Mediakix to prevent Mediakix from paying Plaintiff its rent.  That the evidence may ultimately reveal that Mediakix had hidden financial problems before the acquisition and that the COVID-19 pandemic strained Mediakix’s finances beyond the brink does not mean that sanctions are warranted.  This provides an independent basis for Plaintiff’s claims, notwithstanding that there appears no legal or factual support for Plaintiff’s allegations that Stadiumred was obligated to use its PPP loan proceeds to pay Mediakix’s rent pursuant to an assignment of the lease by operation of Stadiumred’s acquisition.

CONCLUSION AND ORDER

Therefore, the Court denies without prejudice Zdanow’s motion for terminating and monetary sanctions under Code of Civil Procedure section 128.7. 

Zdanow shall provide notice of the Court’s ruling and file  the notice with a proof of service forthwith.

DATED:  July 18, 2024                                                          ___________________________

                                                                                          Michael E. Whitaker

                                                                                          Judge of the Superior Court