Judge Michael Shultz, Case 21CMCV00087 2022-09-13 Tentative Ruling

[TENTATIVE] ORDER GRANTING PLAINTIFFS’ MOTIONS TO SEAL RECORDS FILED IN THEIR MOTION AND REPLY BRIEF

The complaint filed on April 20, 2021, alleges that Plaintiffs, Michael Buck, and John Gonzalez (“Plaintiffs”) are members and leaders of the Peace Apostolic Church, Inc. (“PAC” or “Church”). Plaintiffs allege that after the death of the church’s pastor, Howard Swancy (“Pastor Swancy”), Defendants, Tamara Swancy-Prince (“Prince”) and Priscilla Woods Brown (“Brown”), (collectively “Individual Defendants”), alleged to be de facto officers or directors of PAC, improperly spent PAC funds, and engaged in other misconduct. Plaintiffs allege that Defendants refuse to permit Plaintiffs’ inspection of PAC’s records. The complaint alleges causes of action for declaratory relief, enforcement of inspection rights, breach of fiduciary duty, accounting, fraud, conversion, unjust enrichment, and false advertising.

On June 16, 2022, the Hon. Thomas D. Long granted Plaintiffs’ Motion for a Preliminary Injunction. The Individual defendants were enjoined from using Church assets for personal use. The defendants were also required to provide to Plaintiffs’ counsel, weekly reports listing all transactions made with Church assets for the preceding week.

Plaintiffs request the appointment of a Receiver to take possession over the Church’s current and future cash assets and payment intangibles. Plaintiffs request an order setting forth the rights, duties, and compensation for the Receiver and assigning to the receiver all the Church’s rights to payment as set forth in the proposed order.

At the hearing for a preliminary injunction, Judge Long believed that the situation “cried out for a receiver” based on his belief that defense counsel has a conflict that cannot be waived. Judge Long declined to appoint one because that issue was not before the court.

Despite being enjoined by the court from further depleting Church funds for personal use and requiring weekly reports to Plaintiffs’ counsel, Plaintiffs have since discovered more evidence of financial misappropriation totaling over $350,000.

Defendants argue that a receivership is an extreme remedy that is not warranted. The alleged improper spending has been halted. Appointing a receiver will bankrupt the Church, the employees will lose their jobs and the appointment of a Receiver is unnecessary. The injunction and weekly transaction reports is all the oversight needed. Defendants dispute that any expenditures were personal, however, Defendants have ceased the allegedly improper charges.

Plaintiffs lack standing as members or directors. Only members or directors of a corporation have inspection rights. Plaintiffs are simply congregants. Plaintiffs lack a possessory interest in the funds allegedly at issue to pursue the appointment of a receiver. The court sustained demurrer to the claim for conversion. Defendants argue that Plaintiff did not propose a bond as required by statute.

Defendants contend that if the court appoints a Receiver, the receivership’s duties should be limited to accounting and bookkeeping functions needed to halt alleged improper spending, rather than a “full-blown corporate takeover” and Plaintiffs should be responsible for the cost of a Receiver. Additionally, the proposed duties of the receiver violates the freedom of religion and establishment clause. The court cannot resolve internal church disputes over religious doctrine and practice.

Plaintiffs argue that the Individual Defendants have not demonstrated that they have taken any meaningful steps to safeguard the Church and its assets. Individual Defendants failed to address Plaintiffs’ new evidence of improper spending. There is an immediate need to put someone in place who is working for the Church’s interests as opposed to those of the Individual Defendants.

The receiver is required to give an oath and post an undertaking as directed by the court. Code Civ. Proc§ 567. The receiver is required to give an oath and post an undertaking as directed by the court. Code Civ. Proc § 567. The powers of a receiver are governed by Code of Civil Procedure §568, which provides that "[t]he receiver has, under the control of the Court, power to bring and defend actions in his own name, as receiver; to take and keep possession of the property, to receive rents, collect debts, to compound for and compromise the same, to make transfers, and generally to do such acts respecting the property as the Court may authorize." Code Civ. Proc., § 568

The court’s file reflects that on August 5, 2021, Judge Long heard Defendants’ demurrer to Plaintiffs’ complaint. Defendants contended that Plaintiffs lacked standing to pursue the complaint because they were not directors nor members of the corporation, based on corporate records filed with the California Secretary of State. The court declined to grant judicial notice of the corporate records because there was “no authority that materials prepared by private parties and merely on file with state agencies may be judicially noticed pursuant to [Evidence Code § 422] subdivision (c).” People v. Thacker (1985) 175 Cal.App.3d 594, 598.

On June 16, 2022, the court heard and granted Plaintiffs’ Application for a Preliminary injunction. Defendants again asserted that Plaintiffs lacked standing to inspect the records of the church since they were neither “members” nor “directors” of the Church as provided by Corporations Code §§ 9512-9513. The Code defines “members” as “any person who, pursuant to a specific provision of a corporation's articles or bylaws, has the right to vote for the election of a director or directors or on a disposition of all or substantially all of the assets of a corporation or on a merger or on a dissolution unless the provision granting such right to vote is only effective as a result of paragraph (2) of subdivision (a) of Section 7132. ‘Member’ also means any person who is designated in the articles or bylaws as a member and, pursuant to a specific provision of a corporation's articles or bylaws, has the right to vote on changes to the articles or bylaws." Corp. Code, § 5056

Judge Long previously determined that statutes cited by Defendants were relevant to determine issues of voting rights and governance of the religious entity. Erickson v. Gospel Foundation of Cal. (1954) 43 Cal.2d 581, 584-585. Defendants here cite to the August 23, 1985, Articles of Incorporation, which do not mention the voting rights of “members”, nor does it declare that the Church does not have members. Declaration of Brown ISO Opposition, Ex. A. The Articles’ only reference to “members” declares that no assets of the Church “shall ever inure to the benefit of any director, officer or member thereof, or to the benefit of any private person.” Id., Ex. A, ¶ V. Thus, the Articles contemplated the inclusion of members.

As Judge Long previously determined at the hearing, Plaintiffs have demonstrated an interest in the Church’s property as donors, obtained through Defendants’ solicitation and receipt of the Plaintiffs’ donations which created a fiduciary relationship to use the donations for charitable and religious purposes as the Articles provide. See M.O. of 6/16/22, page 7, ¶ 4.

Finally, the Plaintiffs’ status as members or directors of the Church does not determine Plaintiffs’ right to request appointment of a receiver conferred on “partners or others jointly interested in any property or fund, or of any party with a probable right or interest in the property or fund and where it is shown that the property or fund is in danger of being lost, removed, or materially injured. Code Civ. Proc., § 564 subp. (b)(1).

A. Plaintiffs have demonstrated that an appointment of a receiver is warranted under the circumstances.

The order granting a preliminary injunction issued by the court on June 16, 2022, required Defendants to provide weekly reports listing all transactions made with Church assets during the preceding week. Baucher Declaration ISO Motion, Ex. 15. Defendants were enjoined from using assets owned by the Church to make personal expenditures, to pay off personal credit cards, or to make purchases unrelated to Church business. Id., 2:8-15. The weekly, court-ordered transaction reports reveal continuing questionable transactions. Baucher Declaration ISO Motion, Appx. E. These transactions include car payments, on-line purchases, streaming services, services for “Manscaped,” and medical bills, among other transactions. Id.

Defendants contend that the appointment of a receiver would render the Church insolvent. Opp. 12:2-4. However, Plaintiffs’ examination of Defendants’ credit card records since obtained reflect potentially personal expenses totaling more than $1.4 million in Church funds over three years. Id. at ¶ 18-19. These expenses were in addition to the annual salaries paid to the Individual Defendants of $100,800; $102,000; and $63,600, respectively. Id. at ¶ 19. Given the extent of the potential misappropriation, the appointment of a receiver is warranted.

Defendants continue to maintain without evidence that the alleged improper charges are not improper. Opp. 8:10-11. Defendants also argue that although not improper, they have ceased making those charges, which is inconsistent. Id. There is no evidence of any purported “investigation” Defendants represented would be conducted by the Individual Defendants. Defendants’ contention that appointment of a receiver would strip the Individual Defendants of their jobs further demonstrate the court’s concern of a continuing conflict of interest between the Church and the Individual Defendants. Opp. 13:15-18; Baucher Declaration, 7:4-15. Accordingly, Plaintiffs have demonstrated that Church property or funds “is in danger of being lost, removed, or materially injured. Code Civ. Proc., § 564 subp. (b)(1).C.

B. Defendants’ contention that appointing a receiver violates the freedom of religion and establishment clause is unsupported.

The court can properly decide internal church disputes concerning control of church property if it applies “neutral principles of law” by adopting “any one of various approaches for settling church property disputes so long as it involves no consideration of doctrinal matters, whether the ritual and liturgy of worship or the tenets of faith." Jones v. Wolf (1979) 443 U.S. 595, 602. The proposed order expressly precludes the Receiver from interfering with religious practice or doctrine and requires application of neutral principles of law. Prop. Ord. ¶ 2.

The issues raised by Plaintiffs’ motion are focused on financial oversight of the Church’s expenditures. However, Plaintiffs propose that the Receiver assume “full control of the Receivership Entity and act as sole manager or director and remove” any employee or attorney from the control, management or participation in the affairs of the Receivership entity.” Prop. Ord. ¶ 2.a. This proposal goes beyond the interests of the Church in preventing further depletion of its assets for reasons contrary to its Articles. As the court previously suggested at the motion for preliminary injunction, “I don’t think a receiver is needed to take over and conduct all of the business of the Church. It may be that a receiver is needed to do nothing more than define what expenses are reasonable and appropriate and comply with the preliminary injunction and what expenses don’t.” Ex. 16 10:1-7. Accordingly, the Receiver’s powers should be constrained to perform those duties to carry out the order for preliminary injunction.

Defendants’ request that Plaintiffs alone should bear the burden of the costs of a Receiver is denied. The court urged the parties to confer and agree to appoint a receiver to “try to pick someone who would be efficient and reasonable.” Baucher declaration, Ex. 16 9:20-10:7. It is in the best interest of all parties to limit the Receiver’s reach to accomplish the purpose of the preliminary injunction without placing the Church at further risk of financial peril. Therefore, the court is inclined to limit the order proposed by Plaintiffs.

Subject to these limitations, the Plaintiffs’ Motion is GRANTED. The court has considered the qualifications of Thomas W. McNamara, whose experience is directed to corporate securities, business, and securities litigation. Baucher declaration, Ex. 17. Mr. McNamara refers to an in-house forensic accountant, Lisa Jones, whose experience appears more suitable to enforcing compliance with the injunction. The proposed scope of the Receiver, “to assume operational and financial control of PAC, including taking control of bank accounts and other assets,” is broader than the circumstances here require. Baucher declaration, Ex. 17, page 3, ¶ B.

The parties are ordered to confer and agree to a more focused Receiver with the limited obligations of providing the necessary financial oversight to accomplish the purposes of the injunction. Upon appointment of a Receiver, that court will require an undertaking of $10,000 to be posted by the Receiver before entering upon their duties. Code Civ. Proc., § 571.

[TENTATIVE] ORDER GRANTING PLAINTIFFS’ APPLICATION FOR AN ORDER TO SEAL RECORDS IN SUPPORT OF PLAINTIFFS’ MOTION FOR APPOINTMENT OF RECEIVER

[TENTATIVE] ORDER GRANTING PLAINTIFFS’ APPLICATION FOR AN ORDER TO SEAL PORTIONS OF PLAINTIFFS’ REPLY TO DEFENDANTS’ OPPOSITION

Plaintiffs request leave to redact from its Motion and Reply briefs, any personal identifying and financial information referenced. The information is highly sensitive. Plaintiffs argue that the requested order is appropriate and no less restrictive means exist to achieve the parties’ overriding interests. Defendants did not file an opposition.

To protect a party’s personal privacy and other legitimate interests, parties must not include or must redact information where necessary including financial account numbers. CA ST CIVIL RULES Rule 1.201(a). Financial information, account numbers and other personal identifying information must be redacted from records to which the court allows remote access. CA ST CIVIL RULES Rule 8.83(d), (d)(2).

The parties entered into a Stipulated Protective Order, wherein Defendants have agreed to designate documents as either confidential or highly confidential and to limit the disclosure of such documents. Therefore, under an abundance of caution, Plaintiffs request that the court redact the personal identifying financial information, including credit card and other financial information. See Motion, Ex. 1.

Court records are presumed to be open. CA ST CIVIL RULES Rule 2.550(d). The burden is on the moving party to show compelling reasons for sealing records. Mary R. v. B. & R. Corp. (1983) 149 Cal. App. 3d 308, 317. The order to seal must be narrowly tailored to achieve the overriding interest. Cal Rules of Court 2.550(e).

The right to privacy under article I, section 1 of the California Constitution “extends to one's confidential financial affairs…” Valley Bank of Nevada v. Superior Court (1975) 15 Cal.3d 652, 656.) This right embraces confidential financial information in “whatever form it takes, whether that form be tax returns, checks, statements, or other account information.” Overstock.com, Inc. v. Goldman Sachs Group, Inc. (2014) 231 Cal.App.4th 471, 503. An agreement not to disclose can constitute an “overriding interest” where there is also a showing of serious injury. Publicker Industries, Inc. v. Cohen, 733 F.2d 1059, 1073 1074 (3d Cir. 1984); cited by the court in NBC Subsidiary (KNBC TV), Inc. v. Superior Court (1999)( 20 Cal. 4th 1178, 1223; Universal City Studios, Inc. v. Superior Court (2003) 110 Cal. App. 4th 1273, 1282-1283.

The court’s records reflects that the parties entered into a Stipulated Protective Order agreeing to designate confidential, sensitive, proprietary business and/or financial information as “Confidential” and “Highly Confidential” and require that such designated information be filed under seal.

Accordingly, the court finds that the parties’ Stipulated Protective Order constitutes an overriding interest that overcomes the right of public access to the record; that the interest supports sealing the record; there is a substantial probability that the overriding interest will be prejudiced if the record is not sealed; the proposed sealing is narrowly tailored to include redaction of only those portions that refer to financial, confidential, and other identifying information; and no less restrictive means exist to achieve the overriding interest.” Cal Rules of Court 2.550(d). Therefore, both motions are GRANTED.