Judge: Michael J. Strickroth, Case: 2021-01238083, Date: 2022-07-25 Tentative Ruling
Motion for Appointment of Receiver and for Preliminary Injunction
Plaintiff Vivera Pharmaceuticals, Inc.’s (“Vivera”) motion for Appointment of a Receiver is DENIED. Vivera’s motion for a Preliminary Injunction is GRANTED.
The court declines to rule on the Evidentiary Objections of defendants Dalrada Financial Corporation; Dalrada Health Products; Kyle McCollum; Brian Bonar; Fawad Nisar; Daniel Riley; and Empower Genomics (collectively, “Defendants”) on the grounds that the objections are not material to the disposition of the Motion.
APPOINTMENT OF A RECEIVER:
Vivera moves for appointment of a receiver pursuant to Code of Civil Procedure sections 564(b)(1) and 564(b)(9).
Code of Civil Procedure section 564, subdivision (b) states in pertinent part: “A receiver may be appointed by the court in which an action or proceeding is pending, or by a judge of that court, in the following cases: [¶] (1) In an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to subject any property or fund to the creditor's claim, or between partners or others jointly owning or interested in any property or fund, on the application of the plaintiff, or of any party whose right to or interest in the property or fund, or the proceeds of the property or fund, is probable, and where it is shown that the property or fund is in danger of being lost, removed, or materially injured. . . [¶] (9) In all other cases where necessary to preserve the property or rights of any party.”
“Because the appointment of a receiver transfers property—or, in this case, a business—‘out of the hands of its owners’ and into the hands of a receiver [citation], the appointment of a receiver is a very ‘drastic,’ ‘harsh,’ and costly remedy that is to be ‘exercised sparingly and with caution.’ [Citatons.] Due to the ‘extraordinary’ nature of this remedy and the special costs it imposes, courts are strongly discouraged—although not strictly prohibited—from appointing a receiver unless the more intrusive oversight of a receiver is a ‘necessity’ because other, less intrusive remedies are either ‘ “inadequate or unavailable.” ’ ” [Citations.]” Medipro Med. Staffing LLC v. Certified Nursing Registry, Inc. (2021) 60 Cal. App. 5th 622, 628. “Where an injunction will protect all the rights to which the applicant for the appointment of a receiver appears to be entitled, a receiver will not be appointed.” Alhambra-Shumway Mines, Inc. v. Alhambra Gold Mine Corp. (1953) 116 Cal. App. 2d 869, 873, 254 P.2d 599, 602 (Alhambra).
“The requirements of [section 564] are jurisdictional, and without a showing bringing the receiver within one of the subdivisions of that section the court’s order appointing a receiver is void.” Turner v. Superior Court (1977) 72 Cal.App.3d 804, 811.
“The appointment of a receiver rests largely in the discretion of the trial court. If it appears that the party seeking the appointment has at least a probable right or interest in the property sought to be placed in receivership and that the property is in danger of destruction, removal or misappropriation, the appointment of a receiver will not be disturbed on appeal [citation.] The discretion of the trial court is so broad that an order based upon facts concerning which reasonable minds might differ with respect to the necessity for the receiver will not be reversed [citation].” Maggiora v. Palo Alto Inn, Inc. (1967) 249 Cal. App. 2d 706, 710–11 (Maggiora).
To invoke the court’s authority to appoint a receiver under section 564, subdivision (b)(1), a plaintiff seeking a receiver must establish by a preponderance of the evidence a “joint interest with [the] defendant in the property; that the same was in danger of being lost, removed or materially injured, and that plaintiff's right to possession was probable.” Alhambra, supra, at 873. The trial court is “not required to determine the ultimate issues involving the precise relationship of the parties. At this stage of the proceedings, nothing more than a probable joint or common interest in the property concerned need be shown [citations].”Maggiora, supra, at 711. An interest in the profits of a concern is “a significant factor in determining the necessity of a receiver [citation]....” Id., at 711, fn. 3.
Joint interest in the property:
As to the first requirement of joint interest, Vivera has shown that on July 23, 2021, Vivera entered into a Limited Liability Company Agreement (“LLC Agreement”) with Dalrada Health Products, LLC (“Dalrada Health”) pursuant to which Vivera and Dalrada Health agreed that Dalrada Health would become a 51% Majority Member of Vivera, and Vivera would be the 49% Minority Member. (Edalat Decl., ¶11; Ex. 3 [LLC Agreement] at § 7.01) The LLC Agreement provided that Vivera would receive a distribution consisting of 80% of the reasonable reserves realized from the COVID testing sales that Vivera generated, and Dalrada Health would be entitled to 20% of such reserves. (Ex. 3, §6.01(a)(i)).)
Defendants argue that Vivera cannot have an interest in the property at issue because as a Non-Contributing Member that has not satisfied its capital account obligations, it is not entitled to any distributions from Pala’s assets. Specifically, Defendants have shown that the LLC Agreement authorizes the Majority Member to call for additional capital contributions, as “reasonably necessary to pay any operating, capital or other expenses relating to the Business.” (Ex. 3, § 3.02(a).) A member that provides the additional capital contribution is a “Contributing Member,” whereas a member that fails to pay its share becomes a “Non-Contributing Member.” (Ex. 3, § 3.02(b).) Under the LLC Agreement, a Contributing Member may contribute the Non-Contributing Member’s portion of the additional capital contribution; however, the amount the Non-Contributing Member failed to pay becomes a “Default Loan” (to be repaid by the Non-Contributing Member) accruing interest at 10% per annum. (Ex. 3, § 3.02(b).) Dalrada Health issued a written request for additional capital contributions on September 13, 2021. (McCollum Decl. ¶ 5.) The capital request required Vivera to contribute $245,000. (McCollum Decl. ¶ 5.) Defendants have shown that Vivera failed to pay the additional capital contribution and therefore became a “Non-Contributing Member” as defined by the LLC Agreement. Therefore, Defendants contend Vivera is not entitled to any distributions from Pala’s assets. (McCollum Decl. ¶¶ 5-9.)
Vivera does not dispute it did not make the additional capital contribution but argues that it was not obligated to make an additional contribution because the demand for an additional capital contribution was in violation of the LLC Agreement. Specifically, Vivera argues Section 3.02 of the LLC Agreement states that “Additional Capital Contributions shall not exceed the corresponding amounts expressly provided for in the then-current Budget, as it may be amended from time to time in accordance with Section [] 7.05(b).” (Ex. 3; § 3.02(a).) The then-current Budget capped monthly operating expenses at $89,659.00. (Ex. 4). Thus, Vivera has shown it was not obligated to comply with Dalrada Health’s capital request for a $245,000 capital contribution, and its failure to do so does not deprive it of a right to a distribution under the terms of the Operating Agreement. Based on the foregoing, Vivera has made a sufficient showing of joint interest in the property.
Property in danger of being lost, removed or materially injured:
As to the second requirement that Pala is in danger of being lost, removed or materially injured, Vivera argues that: (1) Dalrada Health violates the LLC Agreement by incurring liabilities and making excessive payments without the prior authorization of Vivera; (2) Dalrada Heath causes Pala to violate the LLC Agreement by exceeding the approximately 90k monthly operating budget; (3) Dalrada Health has ignored Vivera’s request for financial information and demanded additional capital; (4) Dalrada Heath has formed a competing business and is using Pala funds to pay expenses of its competitor; and (5) Dalrada Health has ceased operations and diverted all of Pala’s business to a newly formed Pala entity and Empower Genomics.
First, as to Vivera’s argument that Dalrada Health violates the LLC Agreement by incurring liabilities and making excessive payments without the prior authorization of Vivera, Vivera contends that between July 23, 2021 and November 30, 2021, Dalrada Health caused Pala to incur liabilities in the amount of $1,685,631.30, and paid $1,359,197.81 to various “Persons,” the majority of which was paid/incurred without the prior consent of Vivera, in violation of Section 7.02(k) and (m) of the LLC Agreement.
Section 7.02 of the LLC Agreement states in pertinent part: “Without the unanimous written approval of all Members, the Company shall not, and shall not enter into any commitment to: . . . (k) Settle any lawsuit, action, dispute or other proceeding or otherwise assume any liability with a value in excess of TWO THOUSAND (2,000) dollars or agree to the provision of any equitable relief by the Company; . . . (m) Make any payment investments in any other Person in excess of TWO THOUSAND (2,000) . . .”
Specifically, Vivera has shown that in violation of Section 7.02(k) and (m) of the LLC Agreement, Pala incurred liability for defendant Riley’s “consulting fees” in the amount of $23,090.00 per month without Vivera’s prior knowledge or consent. (Edalat Dec., ¶17; Ex. 5 [Pala Ledger]). Vivera has also shown that in violation of Section 7.02(k) and (m), Dalrada Health paid/incurred liabilities to the following companies without Vivera’s prior knowledge or consent: (a) $285,712.59 to Afinida, Inc.; (b) $153,148.76 to CSL; (c) $12,5000 to Trucept; (d) $166,715 to Americare, Inc.; (e) $138,540 to Dalrada Financial; (f) approximately $5,000 to Dalrada Health; and (g) $80,347.43 to Nightmaker Science, (Edalat Dec., ¶¶ 18-27.) Although Vivera has sufficiently shown that these liabilities were incurred in violation of the Sections 7.02 of the LLC Agreement, Vivera has failed to show these payments were not necessary, excessive or incurred in bad faith, such that Pala is danger of being materially injured.
Second, Vivera argues that Dalrada Health causes Pala to violate Section 7.05(a) of the LLC Agreement by exceeding the approved monthly operating budget of approximately 90K. Section 7.05(a) states in pertinent part: “The Managing Member shall operate the Company in accordance with the Initial Budget (the Initial Budget, as it may be updated or replaced in accordance with Section [] 7.05(b).” (Ex. 3.) The then-current Budget capped monthly operating expenses at $89,659.00. (Ex. 4). Vivera contends that in the 4.5-month period, Pala incurred over $1,685,631.30 in liabilities to vendors/creditors, and paid out $1,359,197.81 to “Persons” – many of which are friends and relatives of Dalrada Health. (Ex. 9.) Vivera further contends Pala has generated $12 million in net revenue and managed to spend $10 million of that. However, Vivera has not shown how the $10 million spent was unnecessary, excessive or improperly spent by Dalrada Health such that Pala is in danger of being lost, removed or materially injured.
Third, Vivera argues a receiver should be appointed because Dalrada Health has ignored Vivera’s request for financial information and demanded additional capital. Although Vivera has shown Dalrada Health has not been forthcoming with providing Vivera financial information for Pala, and in fact to avoid transparency, Dalrada Health paid for Pala’s expenses through its parent, Dalrada Financial, Vivera has not shown that the lack of transparency has impacted Pala such that it is in danger of being injured. As for the capital request, not only did Vivera not make the capital contribution of $245,000 but Delgada Health has shown that Vivera made an unauthorized withdrawal of $1,876,710.70 in funds from Pala’s accounts. (McCollum Decl. ¶ 19.) Dalrada Health does not dispute Pala’s overall revenue has declined but states that it is due to multiple facts, including the government ceasing funding/subsidies for Covid-19 testing and losses due to Vivera’s and Edalat’s unauthorized withdrawal of funds from Pala’s accounts. Despite the decline in revenue, Pala still recorded a total net revenue of $1,593,147 for the most recent quarter ending June 30, 2022. (McCollum Decl. ¶ 41.) As such, Dalrada Health lack of transparency and demand for additional capital does not support appointing a receiver.
Fourth, Vivera argues Dalrada Health has formed a competing business and is using Pala funds to pay expenses of its competitor. Specifically, Vivera contends Dalrada Health has opened a new Covid-19 testing lab by the name of Empower Genomics which is a direct competitor of Pala. Section 7.07 of the Operating Agreement permits Dalrada Health to compete with Pala, but must first present the competing Business Opportunity to Pala. (Ex. 3.) Here, there is a factual dispute as to whether Dalrada Health presented the competing Business Opportunity to Pala. Nevertheless, Vivera has not shown that Pala funds were used to pay the expenses of its competitor. Vivera speculates “Dalrada Health is very likely using Pala’s funds to pay for operating expenses of Empower Genomics.” (Motion, 14:9-10.) In support of this contention, Vivera states that Dalrada Health inadvertently emailed a Vivera employee a November 2021 invoice from Nightmaker Science, LLC issued to Dan Riley of Empower Genomics. (Edalat Dec., ¶ 29; Ex. 14). Vivera contends that Nightmaker Science is also a vendor of Pala which Dalrada Health caused to Pala to incur in excess of 80K in liabilities, and to pay nearly 64K in payments. (Ex. 9). The CFO of Dalrada Financial avers that “[o]n one occasion an Empower Genomics invoice was inadvertently sent to Pala, but that oversight was caught and the invoice was not paid by Pala; it was paid by Empower Genomics. Further, Empower has never serviced any Pala customers, its funds have never been comingled with Pala’s, and it has never received any Pala assets.” (McCollum Decl. ¶ 30.) Accordingly, there is presently no evidence before the court to show that Dalrada Health used Pala funds to pay expenses of Empower Genomics.
Lastly, Vivera argues Dalrada Health has ceased operations and diverted all of Pala’s business to a newly formed Pala entity, Pala Diagnostic, Inc. and Empower Genomics. Dalrada Health has shown that Pala has not ceased its operations and that although Pala’s overall revenue has declined due to multiple factors, including the government ceasing funding/subsidies for Covid-19 testing and losses due to Vivera’s and Edalat’s thefts, it remains in business as evidenced by its recording of $1,593,147 in total net revenue for the most recent quarter ending June 30, 2022. (McCollum Decl. ¶ 41.) Dalrada Health has also shown that contrary to Vivera’s contention that Empower Genomics is providing testing services for Golden West College and Orange Coast College, two of Pala’s remaining customers, Pala “processed all of the PCR testing for these two customers and all revenue derived from these tests went to Pala, not to Empower Genomics.” (McCollum Decl. ¶ 30.)
Vivera also argues Dalrada Health formed a new entity named Pala Diagnostic, Inc. Dalrada Health contends that formation of the Pala Diagnostic, Inc. was an error. Dalrada Health has submitted a declaration of Michele Kinser who states she made a request to Registered Agents, Inc. to prepare an updated statement of information for Pala Diagnostics, LLC, but that unknown to her at the time, Registered Agents, Inc., without direction or authorization, filed paperwork to form a new company called Pala Diagnostics, Inc. (Kinser Decl., ¶ 3.) Kinser further states that on May 23, 2022, Dalrada Health learned that Pala Diagnostics, Inc. had been formed without authorization and she immediately caused paperwork to be filed with the California Secretary of State terminating Pala Diagnostics, Inc. (Kinser Decl., ¶ 4, Ex. N.) Although Vivera states in its reply that “[s]uch story is difficult to believe considering that on April 27, 2022, Registered Agents did file an updated Statement of Information for Pala Diagnostics, LLC” (Reply, 7:14-15), it has not submitted any evidence to show that Pala Diagnostics, Inc.’s creation was not an error and that business was diverted to it.
Based on the foregoing, Vivera has not shown by a preponderance of the evidence that Pala is in danger of being lost, removed or materially injured.
Accordingly, the request for Appointment of a Receiver is DENIED.
PRELIMINARY INJUNCTION:
Plaintiff also moves for a preliminary injunction to issue, enjoining Defendants and their respective agents, affiliates, attorney’s servants, representatives, employees and all persons acting in concert with or for them, from disposing or disbursing Pala’s assets in violation of the LLC Agreement, entering into, canceling, or modifying agreements with respect to Pala, destroying, altering or removing any portion of the company records relating to Pala, and doing any other acts which would interfere with the operations of a receiver.
Code of Civil Procedure section 527, subdivision (a) provides: “A preliminary injunction may be granted at any time before judgment upon a verified complaint, or upon affidavits if the complaint in the one case, or the affidavits in the other, show satisfactorily that sufficient grounds exist therefor. No preliminary injunction shall be granted without notice to the opposing party.”
The burden is on plaintiff to show all elements necessary to support issuance of the injunction. O’Connell v. Superior Court (2006) 141 Cal.App.4th 1452, 1481. “A superior court must evaluate two interrelated factors when ruling on a request for a preliminary injunction: (1) the likelihood that the plaintiff will prevail on the merits at trial and (2) the interim harm that the plaintiff would be likely to sustain if the injunction were denied as compared to the harm the defendant would be likely to suffer if the preliminary injunction were issued.” Smith v. Adventist Health System/West (2010) 182 Cal.App.4th 729, 749. The court employs a more probable than not standard. Robbins v. Superior Court (1985) 38 Cal.3d 199, 206. Further “[t]he trial court's determination must be guided by a “mix” of the potential-merit and interim-harm factors; the greater the plaintiff's showing on one, the less must be shown on the other to support an injunction.” Butt v. State of California (1992) 4 Cal. 4th 668, 678. “A trial court may not grant a preliminary injunction, regardless of the balance of interim harm, unless there is some possibility that the plaintiff would ultimately prevail on the merits of the claim.” (Ibid.)
Likelihood of prevailing on the merits:
The operative First Amended Complaint (“FAC”) filed by Vivera alleges causes of action for: (1) Intentional Misrepresentation; (2) Negligent Misrepresentation; (3) Constructive Fraud; (4) Conversion; (5) Conversion – Derivative; (6) Violation Of Penal Code 496; (7) Breach of Contract; (8) Breach of Fiduciary Duty; (9) Breach Of Fiduciary Duty – Derivative; (10) Dissolution; (11) Accounting; (12) Rescission; (13) Injunctive and Other Equitable Relief; and (14) Declaratory Relief.
Vivera has not separately addressed the likelihood of prevailing on each cause of action but contends that it is likely to prevail in its causes of action for breach of contract, breach of fiduciary duty and dissolution. (Motion, 21:10-13.)
“To state a cause of action for breach of contract, a party must plead the existence of a contract, his or her performance of the contract or excuse for nonperformance, the defendant’s breach and resulting damage.” Harris v. Rudin, Richman & Appel (1999) 74 Cal.App.4th 299, 307. Here, Vivera has sufficiently shown the existence of the LLC Agreement between Plaintiff and Dalrada Health (Edalat Decl., ¶11; Ex. 3 [LLC Agreement].) Vivera has also shown that they performed all the obligations required under the LLC Agreement. As discussed above, Vivera has also shown that Dalrada Health has violated (1) Section 7.02 of the LLC Agreement by making payments in excess of $2,000 without the prior consent of Vivera; (2) Section 7.05(a) of the LLC Agreement by failing to operate Pala within the approved Budget which authorized monthly operating expenses of $89,659; and (3) Section 6.01(a)(i) by failing to pay distributions to Vivera despite receiving $4 million in net income. Vivera has also shown that it has been damaged in that it has, among other things, not received any distribution. Accordingly, Vivera has sufficiently shown a likelihood of prevailing on the breach of contract cause of action.
The elements of breach of fiduciary duty are (1) existence of a fiduciary duty, (2) breach of that duty, and (3) damage proximately caused by the breach. Twomey v. Mitchum, Jones & Templeton Inc. (1968) 262 Cal. App. 2d 690. Vivera has shown that Dalrada Health was the sole Managing Member of Pala and Vivera was a Minority member to which Dalrada Health owed a fiduciary duty. Vivera has also shown that Dalrada Health breached is fiduciary duty to Vivera by not being forthcoming with providing Vivera financial information, and in fact to avoid transparency, Dalrada Health paid for Pala’s “expenses” through its parent, Dalrada Financial. Vivera has also shown that due to Dalrada Health’s breach it has not received distributions it was owed.
Accordingly, Vivera has met its burden on the first prong by showing that it is likely to prevail on its causes of action for breach of contract and breach of fiduciary duty.
Balancing of Harm:
“An evaluation of the relative harm to the parties upon the granting or denial of a preliminary injunction requires consideration of: ‘(1) the inadequacy of any other remedy; (2) the degree of irreparable injury the denial of the injunction will cause; (3) the necessity to preserve the status quo; [and] (4) the degree of adverse effect on the public interest or interests of third parties the granting of the injunction will cause.’ ” (Vo v. City of Garden Grove (2004) 115 Cal. App. 4th 425, 435.) “The trial court’s determination must be guided by a ‘mix’ of the potential-merit and interim-harm factors; the greater the plaintiff's showing on one, the less must be shown on the other to support an injunction.” Butt v. State of California, Supra, at 678.
Vivera has shown that it will suffer irreparable harm if Dalrada Health is allowed to continue to operate Pala without complying with the LLC Agreement. In contrast, Dalrada Health will not be harmed or suffer prejudice in any way if the requested relief is granted because Dalrada Health expressly agreed to comply with the requirements of the LLC Agreement when it entered into the LLC Agreement with Vivera. Therefore, Vivera has shown that it will suffer irreparable harm without an injunction, and the balance of hardships tips in favor of Vivera.
Accordingly, the court GRANTS a preliminary injunction enjoining Defendants and their respective agents, affiliates, attorney’s servants, representatives, employees and all persons acting in concert with or for them, from disposing or disbursing Pala’s assets in violation of the LLC Agreement, entering into, canceling, or modifying agreements with respect to Pala, destroying, altering or removing any portion of the company records relating to Pala.
Posting of a Bond:
A bond is required upon granting a preliminary injunction. Cal. Code Civ. Proc. § 529; Abba Rubber Co. v. Seaquist (1991) 235 Cal.App.3d 1, 10 (1991).
Neither party addresses the bond requirement. Therefore, the parties are asked to come prepared to discuss what a reasonable amount would be to maintain the preliminary injunction.
Moving party to give notice.
Case Management Conference
The parties are required to personally or remotely appear.