Judge Michael J. Strickroth, Case 2021-01253228 2022-07-25 Tentative Ruling

Judge: Michael J. Strickroth, Case: 2021-01253228, Date: 2022-07-25 Tentative Ruling

Motion for Preliminary Injunction

Plaintiff Pala Diagnostics, LLC’s (Pala) Motion for Preliminary Injunction is GRANTED in part and DENIED in part.

Legal Standard

Code of Civil Procedure section 527(a) states,

“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.”

Code of Civil Procedure section 526(a) provides,

“(a) An injunction may be granted in the following cases:

(1) When it appears by the complaint that the plaintiff is entitled to the relief demanded, and the relief, or any part thereof, consists in restraining the commission or continuance of the act complained of, either for a limited period or perpetually.

(2) When it appears by the complaint or affidavits that the commission or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action.

(3) When it appears, during the litigation, that a party to the action is doing, or threatens, or is about to do, or is procuring or suffering to be done, some act in violation of the rights of another party to the action respecting the subject of the action, and tending to render the judgment ineffectual.

(4) When pecuniary compensation would not afford adequate relief.

(5) Where it would be extremely difficult to ascertain the amount of compensation which would afford adequate relief.

(6) Where the restraint is necessary to prevent a multiplicity of judicial proceedings.

(7) Where the obligation arises from a trust.”

Although an OSC re: Preliminary Injunction directs the responding party to show cause why the preliminary injunction should not issue, the burden is on the moving party to show all elements necessary to support issuance of a preliminary injunction. O’Connell v. Superior Court (2006) 141 Cal. App. 4th 1452, 1481.

In deciding whether to issue a preliminary injunction, the court must consider two interrelated factors: (1) the likelihood that the moving party will prevail on the merits, and (2) whether the harm the moving party will likely suffer if the motion is denied outweighs the harm the opposing party is likely to suffer if the motion is granted. Ketchens v. Reiner (1987) 194 Cal.App.3d 470, 474.

“These two showings operate on a sliding scale: ‘[T]he more likely it is that [the party seeking the injunction] will ultimately prevail, the less severe must be the harm that they allege will occur if the injunction does not issue.’ [Citation.]” Integrated Dynamic Solutions, Inc. v. VitaVet Labs, Inc. (2016) 6 Cal.App.5th 1178, 1183.

“The decision to grant or deny a preliminary injunction is committed to the discretion of the trial court after the court determines (1) the likelihood that the plaintiff will prevail on the merits at trial, and (2) the relative harms suffered by the parties.” Pleasant Hill Bayshore Disposal, Inc. v. Chip-It Recycling, Inc. (2001) 91 Cal. App. 4th 678, 695.

The plaintiff has the burden of proof to show “upon a verified complaint, or upon affidavits” all elements necessary to support the issuance of a preliminary injunction. Code Civ. Proc., § 527, (a); O’Connell v. Sup. Ct. (2006) 141 Cal.App.4th 1452, 1481.

Procedural History

On 12/16/21, the San Diego Superior Court (Judge Dahlquist) entered a temporary restraining order as follows:

“1) Restraining and/or enjoining Defendants Vivera and Mr. Edalat from accessing, transferring, or removing funds from Pala's Wells Fargo Account ending in XMOCXX0889 without the express, written authorization and consent of Pala;

2) Restraining and/or enjoining Defendants Vivera and Mr. Edalat from restricting, blocking, inhibiting, and/or otherwise preventing Pala's full, unfettered access to Pala's Wells Fargo Account ending in XXXXXX0889;

3) Ordering Defendants Vivera and Mr. Edalat to returOhe $1,398,000 in monies that Defendants wrongfully took from Pala's Wells Fargo Account ending in )0000000889 to Pala;

4) Restraining and/or enjoining Defendants Vivera and Mr. Edalat from denying Pala full access and privileges to Pala's various administrative accounts, including but not limited to Optum Pay, Laboratory Information System ("Labport"), ConnectTeam, BellMedex, and One HealthCare ID, including restoring Pala's full access and privileges to Optum Pay, Labport, ConnectTeam, BellMedex, and One Healthcare ID;

5) Restraining and/or enjoining Defendants Vivera and Mr. Edalat from restricting, blocking, prohibiting, and/or impeding Pala's access, including the access of the managing member's representative to Pala, Dan Riley, to Pala's lab located at 26021 Pala, Mission Viejo, CA 92691-2718”

Defendants appealed the order and the Court of Appeal denied the petition for writ relief.

On 2/1/22, the San Diego Superior Court (Judge Bowman) held a contempt hearing re: Defendants’ failure to comply with the TRO. The Court heard testimony and ruled as follows:

“The Court finds that Plaintiff has not met their burden in regards to willful disobedience of the restraining order against Defendants limiting Pala access to Labport. The contempt charges as to this cause of action are discharged.

The Court finds that Plaintiff has not met their burden in regards to Defendants failure to comply with the Court's order to return the $1,398,000. The Court finds that the Defendants have the ability to comply, but the Plaintiff has not met their burden. The Court orders the cashier check discussed in court today in the amount of $34,400.11 be turned over to Attorney Lichtenstein. Plaintiff complies with the order in

open court. The contempt charges as to this cause of action are discharged.”

The case was transferred from San Diego to Orange County Superior Court on 3/28/22 pursuant to stipulation.

Scope of Motion

In Plaintiff’s reply filed on 7/18/22, Plaintiff states the request for preliminary injunction is moot as to paragraphs 1, 2, and 5 of the TRO. Therefore, Plaintiff is pursuing the motion for preliminary injunction only as to paragraphs 3 and 4 of the TRO:

“3) Ordering Defendants Vivera and Mr. Edalat to return the $1,398,000 in monies that Defendants wrongfully took from Pala's Wells Fargo Account ending in XXXXXX0889 to Pala;

Plaintiff Has Not Shown Injunctive Relief is Necessary to Return its Funds at This Stage

At this time, the Court declines to enter a preliminary injunction requiring Defendants to return funds to Plaintiff over and above the amount which has already been returned by Defendants pursuant to the San Diego Court’s prior orders.

“[I]n order to obtain injunctive relief the plaintiff must ordinarily show that the defendant's wrongful acts threaten to cause irreparable injuries, ones that cannot be adequately compensated in damages.” Intel Corp. v. Hamidi (2003) 30 Cal.4th 1342, 1352.

Code of Civil Procedure section 526 provides the following grounds for injunction (emphasis added):

“(a) An injunction may be granted in the following cases:

(2) When it appears by the complaint or affidavits that the commission or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action.

(4) When pecuniary compensation would not afford adequate relief.

(5) Where it would be extremely difficult to ascertain the amount of compensation which would afford adequate relief.

(6) Where the restraint is necessary to prevent a multiplicity of judicial proceedings.

(7) Where the obligation arises from a trust.”

DVD Copy Control Assn., Inc. v. Kaleidescape, Inc. (2009) 176 Cal.App.4th 697, 721–722, holds:

“It is common to speak of the need to show threatened irreparable harm as the basis for an injunction. (6 Witkin, Cal. Procedure (2008) Provisional Remedies, § 295, p. 236.) But the concept of irreparable harm means more than harm that cannot be repaired. Irreparable harm includes “ ‘that species of damages, whether great or small, that ought not to be submitted to on the one hand or inflicted on the other.’... [Citation.] ... ‘The argument that there is no “irreparable damage,” would not be so often used by [defendants] if they would take the trouble to observe that the word “irreparable” is a very unhappily chosen one, used in expressing the rule that an injunction may issue to prevent wrongs ... which occasion damages estimable only by conjecture and not by any accurate standard.’ ” (Wind v. Herbert (1960) 186 Cal.App.2d 276, 285, 8 Cal.Rptr. 817.) Irreparable harm may be established where there is the fact of an injury, such as that arising from a breach of contract, but where there is an inability to ascertain the amount of damage. In other words, to say that the harm is irreparable is simply another way of saying that pecuniary compensation would not afford adequate relief or that it would be extremely difficult to ascertain the amount that would afford adequate relief. (Syngenta Crop Protection, Inc. v. Helliker (2006) 138 Cal.App.4th 1135, 1167, 42 Cal.Rptr.3d 191; Civ.Code, § 3422.)”

In Doyka v. Superior Court (1991) 233 Cal.App.3d 1134, 1136, the trial court enjoined Doyka from using certain funds. The appellate court overturned the order, because it “effectively imposes a prejudgment attachment upon all of Doyka's liquid assets without satisfying the statutory requirements for an attachment.” (Ibid.) The appellate court in Doyka, Id., at 1136-1137, further explained that it was outside the trial court’s authority to issue an injunction controlling the use of liquid assets and that, “[i]t is evident that Lord sought and obtained what was, in effect, a prejudgment attachment without meeting the requirements for such attachment. It is true that the attachment statutes do not preclude the granting of injunctive relief (Code Civ. Proc., § 482.020), but the superior court exceeded its authority with this injunction.” In West Coast Constr. Co. v. Oceano Sanitary Dist. (1971) 17 Cal.App.3d 693, the court upheld an injunction precluding the defendant district from spending funds on construction of a sewer system to any contractor other than the plaintiff, where the plaintiff alleged breach of contract involving construction of the sewer system. In Lenard v. Edmonds (1957) 151 Cal.App.2d 764, 769, the court upheld an injunction precluding the defendant from selling the motel which was the subject of a promissory note that gave rise to the complaint.

While there is some legal authority suggesting a preliminary injunction may encompass a party’s use of funds for a specified matter, the general rule is that an injunction should only encompass matters which cannot be compensated by pecuniary damages.

Here, Plaintiff has not met its burden to show pecuniary damages will be insufficient to compensate it for the alleged theft of Pala’s funds, or that irreparable harm will be suffered if Defendants don’t return additional funds to Plaintiff at this stage of litigation.

The most recent declaration of Plaintiff’s CFO Mr. McCollum, submitted with Plaintiff’s reply under ROA 197, states at paragraph 16, “The failure to return all of this money, or any amount of funds Defendants stole, jeopardizes Pala's ability to continue to provide its vital Covid testing services to its customers.” However, Mr. McCollum also declares that Pala now “operates a new laboratory at 9924 Mesa Rim Road, Suite A, San Diego, CA 92121.” (Id. at ¶ 17.) McCollum further declares that Pala “remains in business as evidenced by, among other things, its recording of $1,593,147 in total net revenue for the most recent fiscal quarter ending June 30, 2022. Pala continues to provide Covid-19 testing to its remaining clients, some of which are schools/colleges that are not currently in session. Pala intends to continue servicing these clients when classes resume later this summer. The return of the money stolen by Edalat and Vivera is vital capital necessary for Pala to continue its business as a going concern.” (Id. at ¶ 23.)

Although Mr. McCollum states in a conclusory manner that the funds are necessary for Pala’s continued operation, Plaintiff has not presented evidence of specific facts demonstrating that, at this time, Pala cannot continue to operate due to Defendants’ failure to return the funds. Rather, the evidence is Pala continues to operate and receive substantial revenue.

Therefore, the Court declines to order further transfer of funds from Defendants to Plaintiff at this time because Defendants’ alleged taking of Plaintiff’s funds is the type of harm that can be adequately remedied by pecuniary damages and Plaintiff has not shown irreparable harm will result if the funds are not provided at this stage of proceedings.

Although the Court declines to require Defendants to return additional funds to Pala at this time, Pala shall retain any and all funds which have already been returned by Defendants pursuant to the San Diego Superior Court’s prior orders.

Defendants Shall Ensure Continued Access to Pala’s Administrative Accounts

Plaintiff has met its burden of showing that irreparable harm will result if Defendants do not allow Plaintiff access to its administrative accounts, which are necessary to Pala’s business operations. Plaintiff has shown that Defendants have previously denied access to the following accounts:

· Optum Pay, a vendor account allowing Pala to accept customer payments.

· Labport, the system that records and stores Pala’s patient test results.

· ConnectTeam, the scheduling system for field testing teams.

· One HealthCare ID, a tracking software portal.

· BellMedex, which is a billing company.

Plaintiff has adequately demonstrated a likelihood of prevailing on the merits to support preliminary relief regarding access to the administrative accounts. Plaintiff has presented evidence that Defendants’ taking of Plaintiff’s funds and removal of Plaintiff’s access to administrative accounts was in violation of the LLC Agreement, which generally gave the majority member, Dalrada, the authority to control Pala’s business operations and funds. This evidence is sufficient to demonstrate a probability of prevailing on at least some of Plaintiff’s claims, including the causes of action for conversion, breach of contract, common counts, and breach of fiduciary duty. Defendants have not presented evidence they had legal authority to unilaterally withdraw Plaintiff’s funds or remove Pala’s access to administrative accounts necessary to operate the business.

In Defendants’ amended opposition, filed on 5/2/22 under ROA 130, Defendants argue that the request to restore access to Plaintiff’s administrative accounts is moot because Defendants have already restored Plaintiff’s access. However, Defendants’ apparent compliance with the TRO does not make the motion for preliminary injunction moot. Plaintiff has shown a preliminary injunction is necessary to ensure Pala’s continued access to its accounts.

Defendants also argue that Pala never had “full access and privileges” to Laboratory Information Systems (“Labport”), which is Defendant Vivera’s proprietary software. Defendants present the declaration of its Director Farah Barghi, who states the following at paragraph 19:

“‘Labport’ is Vivera’s proprietary software that Vivera has been developing since December of 2020. Pala was allowed to use Labport for free as Pala did not want to pay for its own software. Prior to the litigation, Pala – through Nisar - had the ability to access Vivera’s Labport software with very limited functionality to view historical data. That access was frozen

on or about December 8, 2021. Since the TRO was entered on December 16, 2021, Vivera has restored Pala’s full access to the exact same access and privileges it had prior to the dispute between the Pala and Vivera.”

At the contempt hearing on 2/1/22, Judge Bowman found Barghi’s testimony on the issue of Pala’s access to Labport to be credible and found Plaintiff’s witness Mr. Nisar to lack credibility. (See Exhibit 45 to Lichtenstein Reply Decl. filed on 7/18/22 under ROA 205, 2/1/22 Transcript at p. 166.)

Therefore, Defendants are ordered to permit Plaintiff continued access to Pala’s administrative accounts including Optum Pay, Labport, ConnectTeam, BellMedex, and One Healthcare ID. However, Defendants are not required to grant Plaintiff greater access to Labport than was available to Pala prior to this dispute. Rather, Defendants shall ensure Pala’s access to Labport consistent with Pala’s access prior to December 8, 2021, consistent with Judge Bowman’s evidentiary findings at the 2/1/22 hearing. Defendants shall refrain from any action further limiting Plaintiff’s access to these accounts.

Plaintiff’s Request to Consider New Evidence Regarding Defendants’ Use of Checks Issued to Pala

In its supplemental brief filed on 7/12/22 (nine court days before the hearing), Plaintiff asks the Court to consider new evidence that Defendants failed to return checks from third parties to Pala, and instead created a Bank of America account under Pala’s name to deposit and cash the checks. Plaintiff contends Defendants’ conduct violates Judge Dahlquist’s statement at the 12/16/21 hearing that any checks must be turned over to Pala’s officers.

On 7/18/22, Defendants filed an objection to the new evidence, stating Defendants will be prejudiced if the Court grants a preliminary injunction on this untimely evidence without giving Defendants an opportunity to respond.

The Court declines to consider this new evidence at this time because such evidence was not timely submitted with a noticed motion giving Defendants the opportunity to fully respond. However, Plaintiff may file a noticed motion to modify the preliminary injunction or seek other relief by noticed motion with regard to this issue.

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.

Defendants have not presented evidence or argument regarding the amount of bond that should be required if the motion is granted solely as to Plaintiff’s access to administrative accounts, as set out above. Therefore, the parties are asked to come prepared to discuss what a reasonable bond amount would be to maintain the preliminary injunction.

Case Management Conference

The parties are required to personally or remotely to appear.