Judge: Michael E. Whitaker, Case: 24SMCV03520, Date: 2025-04-07 Tentative Ruling

Case Number: 24SMCV03520    Hearing Date: April 7, 2025    Dept: 207

TENTATIVE RULING

MOTION

This case arises from the alleged mismanagement of a family business. 

On July 23, 2024, Plaintiffs Jack Rubin & Sons, Inc. (“JRS”); Bruce Rubin; and Francile Rubin (“Plaintiffs”) filed an initial Complaint.  On December 30, 2024, Plaintiffs filed the operative First Amended Complaint (“FAC”) against Defendants Michael Brown and Roger A Brown & Company, LLP dba Roger A Brown & Company (“Defendants”) alleging three causes of action for (1) negligence (professional malpractice); (2) breach of fiduciary duty; and (3) financial elder abuse. 

Defendants now demur to the FAC on the ground that it fails to state facts sufficient to constitute a cause of action, pursuant to Code of Civil procedure section 430.10, subdivision (e).  Plaintiffs oppose the demurrer and Defendants reply.

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

                                                         i.          First Cause of Action – Professional Negligence

“The elements of a cause of action for negligence are (1) a legal duty to use reasonable care, (2) breach of that duty, and (3) proximate [or legal] cause between the breach and (4) the plaintiff's injury.”  (Phillips v. TLC Plumbing, Inc. (2009) 172 Cal.App.4th 1133, 1139.) 

“Civil Code section 1714, subdivision (a) establishes the general duty of each person to exercise, in his or her activities, reasonable care for the safety of others.  When applied to [] professionals, this duty of care imposes a duty to use such skill, prudence and diligence as other members of his profession commonly possess and exercise.”  (Flores v. Liu (2021) 60 Cal.App.5th 278, 290 [cleaned up].)  Thus, to prevail on a claim for professional negligence, a plaintiff must demonstrate that: (1) the professional had a duty to use the skill, prudence and diligence that members of the profession commonly possess and exercise; (2) breach of that duty; (3) an injury that resulted from the breach of that duty; and (4) actual loss or damage resulting from the breach of that duty.  (Banerian v. O’Malley (1974) 42 Cal.App.3d 604, 612.) 

Defendants demur to the first cause of action on the grounds that it is time barred.  The statute of limitations for negligence is two years.  (Code Civ. Proc., § 339(1).)  Here, Plaintiffs  allege:

12. In 2019, JRS then CPA reported that Michael Rubin had $500,000 in tax liability because he had been taking excessive compensation from JRS without Bruce’s permission. Michael Rubin could not afford the tax liability. Michael and/or Staci Rubin asked Bruce to switch CPA because they said that Brown claimed that he could eliminate or at least substantially reduce their tax liability. Brown also represented that he specialized and providing accounting, tax and related advice and services to family-owned, multiple generation businesses, and that his accounting firm was a second-generation family-owned business that was started by his father

13. Based on Brown’s promises and representations, Plaintiffs agreed to retain him and his firm to provide accounting, tax and related advice and services for JRS and also for Plaintiffs Bruce and Fran, individually.

14. Among other things, Brown promised that he would provide on a monthly basis an income statement and balance sheet, and that every month he would “verify and clean things up” regarding JRS’ accounting records.

15. In 2020, Bruce discussed with Brown whether he could provide Michael Rubin additional compensation, but he did not want their distributions be based on their relative stock ownership, which was that Bruce and Francile owned 61% of JRS stock and Michael Rubin owned 33.36%. Bruce made it clearly known to Brown that Bruce was to retain controlling interest and control of JRS while he was alive. However, Brown’s loyalty was really to Michael Rubin, who believed he was entitled to take control of JRS from Bruce. Furthermore, Michael Rubin wanted to limit the rights of his nephew Max Turner (“Max”)[1] who was Bruce’s eldest grandson, who was then studying accounting in college.  Bruce wanted Max to work at JRS when he graduated college, which dream Max also shared.

16. Brown recommended to Bruce that they re-do the overall structure of JRS and Buce (sic) and Francile’s estate plan. Brown was deeply involved in meeting and coordinating with attorneys, who were all involved with preparing trusts and other legal documents and tax returns that purported to transfer additional JRS stock to Michael Rubin and to limit Max’s rights. In other words, Brown was involved in preparing the various documents for Michael Rubin to attempt to steal JRS from Bruce and Francile. Those documents were discovered in October 2022. Those documents include, among other things, a forged gift trust tax return, various trusts, including a “special needs” trust for Max’ JRS shares, a new will from Bruce and Fran, and fraudulent corporate minutes.

17. Plaintiffs believe that Brown further had and/or aided Michael Rubin to declare himself President of JRS an (sic) then sign falsified Board minutes and resolutions, stock certificates, and even federal tax filings. Some of these falsified corporate documents were even falsely signed by Michael as “President” of the Company, even though he was never elected or appointed to serve as President by Bruce. Michael Rubin further attempted to cancel or terminate the prior 2017 Buy-Sell Agreement between Bruce and Michael Rubin, which precluded their attempt to steal control and ownership of JRS from Bruce.

18. In October 2022, Plaintiffs discovered the various shenanigans that Brown was part of recommending and/or concocting with Michael Rubin to steal JRS from Bruce, Francile and Max. Discovery of Brown’s and Michael Rubin conduct continued during the next few months.

19. Also during this time, Plaintiffs discovered that Michael Rubin had wrongfully misused corporate expenses to pay for personal expenses without Bruce’s permission.

20. Bruce tried to resolve the dispute with Michael Rubin. But on January 26, 2023, Michael Rubin announced that he would no longer be working at JRS’ corporate offices and that he refused to work with Max. Neither of those conditions were acceptable to Bruce.

21. On January 27, 2023, Brown terminated his engagement with JRS.

22. On January 31, 2023, Plaintiffs’ attorney laid out their findings of fraud and forged documents in a letter to Michael Rubin’s attorney. In response, Michael Rubin agreed to try to resolve the dispute by mediation with Judge Roy L Paul (Ret.).

23. On March 9, 2023, Michael Rubin signed a binding Settlement Agreement by which he agreed that his ownership interest in JRS was 38.86%, and that he would sell his interest to Bruce for the amount to be determined by three appraisers.[2]

24. Following the execution of the Settlement Agreement, Plaintiffs had to retain a new CPA because Brown had quit. At or about the time that Brown quit, Plaintiffs discovered that JRS was the subject of an audit by the Francise Tax Board (“FTB”). Plaintiffs later discovered that the audit was because of various improper accounting and tax information that Brown had provided the FTB.

25. Plaintiffs also needed new CPA to provide JRS’ accounting records for the appraisal that was required to determine the purchase price of Michael Rubin’s 38.86% in JRS. In reviewing JRS’ accounting records for the FTB audit and appraisal, the new CPA discovered that JRS’ accounting records did not match what Brown had reported to the FTB: there was at least a $6 million discrepancy that Brown either created or concealed.

26. In May and June 2023, the new CPA reported to Plaintiffs numerous material discrepancies and fundamental problems in the accounting services that had been provided by Defendants [….]

(FAC ¶¶ 12-26.)

            Thus, the Complaint alleges that the wrongdoing began on or after 2019 and continued through January 2023, and Plaintiffs discovered the wrongdoing in October of 2022.  The original complaint was filed on July 23, 2024.  Thus, it appears that the original complaint was filed within two years of the October 2022 discovery of wrongdoing.

            Defendants argue, however, that the wrongdoing alleged includes improper handling of the company’s 2019 tax return.  Because Tax Day is traditionally April 15, the complaint was time barred as to improprieties with the 2019 tax return as of April 15, 2022, as to the 2020 tax return as of April 15, 2023, and as to the 2021 tax return as of April 15, 2024, yet Plaintiffs did not file the original complaint until July 23, 2024.  Moreover, Defendants allegedly provided Plaintiffs a monthly income statement and balance sheet.  (FAC ¶ 14.)  As such, Plaintiffs should have been timely aware of any other financial problems right away, and claims pertaining to other financial mismanagement is also time barred.

            The Court disagrees.  As an initial matter, Tax Day was delayed three months in 2020, due to the COVID-19 pandemic.  Moreover, it generally possible to obtain a further 6-month extension of time to file—bringing the typical extended tax filing deadline to about October 15.  Furthermore, because tax and financial documents are of a nature that an accounting expert is typically retained to process and manage, even if Plaintiffs had the problematic tax and financial documents in hand by April 15, 2020, they would not have been aware that there was a problem unless and until they were alerted to the issue by the Franchise Tax Board, IRS, or another accounting firm, as is alleged here.

            Therefore, the Court cannot say that the professional negligence claim is time-barred as a matter of law.

                                                       ii.          Second Cause of Action – Breach of Fiduciary Duty

“The elements of a claim for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) its breach, and (3) damage proximately caused by that breach.”  (O'Neal v. Stanislaus County Employees' Retirement Assn. (2017) 8 Cal.App.5th 1184, 1215.)  Plaintiffs allege in the FAC:

35. As the facts alleged provide, Brown owed Plaintiffs a fiduciary duty. Brown was acting more than an accountant and tax preparer for Plaintiffs. As licensed Certified Public Accountants, Brown was engaged to provide professional accounting services, including financial statement preparation, tax planning, and estate planning services. But the relationship that Brown sought from Plaintiffs extended beyond merely preparing tax returns and included providing advice and recommendations related to the ownership interest in Plaintiff JRS, company structure, and distributions to owners. The fiduciary duty arises from the trust and confidence that Brown sought to have that Plaintiffs placed in him to act in their best interests for all of Plaintiffs’ family. Brown's role involved significant control over the Plaintiffs' financial affairs, which is a hallmark of a fiduciary relationship. Furthermore, Brown's actions, such as advising Bruce Rubin to relinquish ownership interest in JRS and conspiring with Michael Rubin to defraud Bruce Rubin out of his majority interest in JRS, demonstrate a breach of this fiduciary duty. One of many examples of Brown’s conduct that Plaintiffs will prove at trial are the emails that Brown exchanged with attorneys Joe Longo and Scott Tansey as part of the scheme for Michael Rubin to try to steal JRS from his parents and nephew, and steal considerable portion of his parents’ estate from his sister.

36. Defendants violated their fiduciary duty to Plaintiffs by, among other things:

• Falsely advising Plaintiff Bruce Rubin that it was necessary for him to relinquish ownership interest Plaintiff JRS to reconcile with company distributions;

• Concocting fraudulent accounting entries and tax returns as part of the plan to defraud Plaintiffs, particularly Bruce Rubin of his interest and control of JRS;

• Conspiring with Michael Rubin with regard to the foregoing to carry out a scheme whereby Michael Rubin attempted to defraud Plaintiff Bruce Rubin out of his majority interest in Plaintiff JRS.

37. As a result of the foregoing breaches, Plaintiffs were damaged in an amount estimated to be over $20,000,000.

(FAC ¶¶ 35-37.)

            Defendants argue that no reported California decisions have found a fiduciary relationship between accountant and client.  In opposition, Plaintiffs argue that a fiduciary duty can arise where a financial advisor colludes against the client’s best interests.  In support, Plaintiffs cite to City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith (1998) 68 Cal.App.4th 445, 483 (hereafter Atascadero) and Pierce v. Lyman (1991) 1 Cal.App.4th 1093, 1101 (hereafter Pierce). 

            In Atascadero, Merrill Lynch provided the County investment advice, which the County undertook to the detriment of its beneficiaries.  (Atascadero, supra, 68 Cal.App.4th at p. 484.)  The appellate court extended the fiduciary duty the County owes to its beneficiaries to Merrill Lynch as a third party that undertook to provide investment advice, and then made fraudulent misrepresentations and concealed facts to enrich its own monetary interests.  (Ibid.)

            Similarly, in Pierce, the appellate court found a fiduciary duty as between the attorneys who colluded with their trustee client and the beneficiaries of that trust.  (1 Cal.App.4th at pp. 1101-1106.)

            By contrast, here, there is no such underlying trust or other fiduciary relationship as between Defendants and Bruce Rubin or Francile Rubin as mutual shareholders of JRS.[3]  Nor does the FAC allege a fiduciary relationship as between Michael Rubin and JRS for the Court to impute to Defendants, similar to Atascadero.  As such, Atascadero and Pierce are inapposite.

            Therefore, because there is no fiduciary relationship between accountant and client, or any fiduciary relationship alleged between Michael Rubin and Plaintiffs, the Court sustains Defendants’ demurrer to the second cause of action.

                                                     iii.          Third Cause of Action – Elder Financial Abuse

“Financial abuse” of an elder or dependent adult occurs when a person or entity does any of the following:

(1)   Takes, secretes, appropriates, obtains, or retains real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.

(2)   Assists in taking, secreting, appropriating, obtaining, or retaining real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.

(3)   Takes, secretes, appropriates, obtains, or retains, or assists in taking, secreting, appropriating, obtaining, or retaining, real or personal property of an elder or dependent adult by undue influence, as defined in Section 15610.70.

(Welf. & Inst. § 15610.30, subd. (a).)

Defendants demur to the third cause of action on the ground that Elder Financial Abuse is merely a remedy, not a private cause of action in its own right.  In support, Defendants cite to Berkeley v. Dowds (2007) 152 Cal.App.4th 518, 529 (hereafter Dowds) which provides:   “The [Elder Abuse] Act does not create a cause of action as such, but provides for attorney fees, costs and punitive damages under certain conditions.”  However, in context, Dowds explains further:  “Abuse of a dependent adult or elder will justify heightened remedies when the cause of action includes facts showing […] (a) Physical abuse, neglect, financial abuse, abandonment, isolation, abduction, or other treatment with resulting physical harm or pain or mental suffering; or (b) The deprivation by a care custodian of goods or services that are necessary to avoid physical harm or mental suffering.”  (Ibid.) 

In Dowds, the appellate court held that the facts alleged underlying the negligence/willful misconduct cause of action were insufficient to sustain “her elder abuse claim” because the negligence/willful misconduct allegations were insufficient to show harmful conduct or injury to support either claim.  (Dowds, supra, 152 Cal.App.4th at pp. 529-530.)  Thus, a plaintiff may state a claim for heightened damages under the Elder Abuse Act.   

Defendants also demur on the grounds that the FAC does not allege with requisite specificity that Defendants took anything from Plaintiffs, or that such taking was done with the requisite fraudulent intent.

In addition to the above, Plaintiffs allege:

26. In May and June 2023, the new CPA reported to Plaintiffs numerous material discrepancies and fundamental problems in the accounting services that had been provided by Defendants, including but not limited the following:

• The accounting records of JRS were maintained in a substandard manner, with improper or non-existent journal entries making it difficult if not impossible to track and verify basic and important financial transactions at the company;

• Defendants had provided completely incorrect and fraudulent financial and accounting advice concerning the ability of the company to pay distributions to its shareholder owners, which resulted in direct damage to Bruce Rubin;

• Defendants had misstated and misclassification various distributions resulting in an ongoing audit of Plaintiffs financials by the FTB;

• Defendants failed to provide information to JRS for purposes of reconciling JRS financial statements, causing incorrect information to be stated in tax returns.

• Defendants failed to reconcile, explain, or provide any backup information for major discrepancies in stockholder basis schedules and across multiple years.

• Defendants failed to reconcile, explain, or provide any backup information for material adjustments made to the beginning basis numbers in the 2019 tax return.

• Defendants failed to reconcile, explain, or provide any backup information for the questionable disposal of assets for no amount in 2020, along with discrepancies in reported distributions compared to internal financial statements, raising concerns about the accuracy of the filed tax returns for Plaintiffs.

• Defendants failed to reconcile, explain, or provide any backup information for the material adjustments made to the accumulated adjustments account, especially in 2020 and 2021, which created serious inconsistencies that need clarification.

• Defendants failed to reconcile, explain, or provide any backup information for issues related to ownership percentages not aligning with prior years, including undocumented adjustments and discrepancies in distributions reported in the 2021 tax return.

[…]

39. Defendants’ actions, and particularly their intentional actions toward Plaintiffs Bruce Rubin and Francile Rubin, who were both elderly and well over the age of 65 at the time the actions occurred, violated the Elder Abuse and Dependent Adult Civil Protection Act, and specifically its protections against “financial abuse” (California Welfare and Institutions Code Section 15610.30) by taking, or allowing and assisting Michael Rubin to take, inappropriate financial advantage of Plaintiffs Bruce Rubin and Francile Rubin.

40. Specifically, Defendants assisted and aided Michal Rubin in fraudulently advising Plaintiff Bruce Rubin that it was necessary for him to relinquish ownership interest Plaintiff JRS to reconcile with company distributions; in fraudulently failing to make necessary accounting entries to reflect actual distributions being paid to or on behalf of the shareholders of JRS; and in directly conspiring with Michael Rubin with regard to the foregoing to carry out a scheme whereby Michael Rubin attempted to defraud Plaintiff Bruce Rubin out of his majority interest in Plaintiff JRS.

41. As a result of the foregoing violations, Plaintiffs Bruce Rubin and Francile Rubin were damaged in an amount to be proven with specificity at trial, but estimated to be over $20,000,000. In addition, because Defendants’ actions were intentionally undertaken, and the false representations intentionally made, with fraud, malice or oppression, punitive damages are warranted.

(FAC ¶¶ 26, 39-41.)

            Thus, the FAC adequately alleges that Defendants provided Plaintiffs bad accounting advice to wrest control of the company away from Plaintiffs in favor of Michael Rubin.

2.     LEAVE TO AMEND

A plaintiff has the burden of showing in what manner the complaint could be amended and how the amendment would change the legal effect of the complaint, i.e., state a cause of action. (See The Inland Oversight Committee v. City of San Bernardino (2018) 27 Cal.App.5th 771, 779; PGA West Residential Assn., Inc. v. Hulven Int'l, Inc. (2017) 14 Cal.App.5th 156, 189.) A plaintiff must not only state the legal basis for the amendment, but also the factual allegations sufficient to state a cause of action or claim. (See PGA West Residential Assn., Inc. v. Hulven Int'l, Inc., supra, 14 Cal.App.5th at p. 189.) Moreover, a plaintiff does not meet his or her burden by merely stating in the opposition to a demurrer or motion to strike that “if the Court finds the operative complaint deficient, plaintiff respectfully requests leave to amend.” (See Major Clients Agency v Diemer (1998) 67 Cal.App.4th 1116, 1133; Graham v. Bank of America (2014) 226 Cal.App.4th 594, 618 [asserting an abstract right to amend does not satisfy the burden].)

Here, although Plaintiffs generally request leave to amend, they have not met their burden to articulate what facts they could add to cure the deficiency identified above. 

CONCLUSION AND ORDER

For the reasons stated, the Court sustains Defendants’ demurrer to the second cause of action for breach of fiduciary duty without leave to amend, but overrules Defendants’ demurrer to the first and third causes of action. 

Further, the Court orders Defendants to file and serve an Answer to the FAC on or before April 25, 2025 

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

DATED:  April 7, 2025                                                          ___________________________

                                                                                          Michael E. Whitaker

                                                                                          Judge of the Superior Court