Judge: Michael Small, Case: 19STCV05991, Date: 2024-10-16 Tentative Ruling

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Case Number: 19STCV05991    Hearing Date: October 16, 2024    Dept: 57

Steven Gordon (“Gordon”) and Saul Brandman (“Brandman”) formed multiple limited liability companies (“LLCs”) to hold their extensive real  estate portfolio.  The management of each LLC was memorialized in a “Governing Agreement.”  The Governing Agreements were essentially identical in material respects.   Brandman died in 2008.  His interests in the LLCs were transferred to the Saul Brandman Foundation (“the Foundation”).   By the terms of the Governing Agreements, Brandman’s death left Gordon as the sole Manager of the LLCs.  The Foundation is a non-Manager Member of the LLCs.

Following Brandman’s death, disputes arose between Gordon and the Foundation over the scope of Gordon’s authority, as the Manager, under Section 12.9 of the Governing Agreements to make certain amendments to them Agreements unilaterally without the Foundation’s consent.  Captioned “Amendments,” Section 12.9 provides that “[a]ll amendments to th[e] Agreement will be in writing and must be approved and signed by Each Manager, provided that no amendment may (i) alter the distribution of Net Profits, Net Losses and distributions of the [LLC] or (ii) require additional contributions from any Member without the written consent of all Members adversely affected by such amendment.”  As a result of Brandman’s death, there is only one Manager, Gordon, and so the term “Each Manager” in Section 12.9 now necessarily refers just to Gordon.

Gordon sued the Foundation in 2019 seeking an order declaring his authority under Section 12.9 of the Governing Agreements to make the amendments in question unilaterally, without the Foundation’s consent.    The Foundation cross-complained against Gordon seeking an order declaring that Gordon lacks that authority under the Governing Agreements.   The Foundation’s cross-complaint also sets forth other claims against Gordon, including for breach of fiduciary duty.

In July 2024, the parties asked the Court to rule on their competing declaratory relief claims.  To facilitate that effort, the Court directed the parties to select a representative Governing Agreement for one of the LLCs and submit briefs setting forth their respective positions on how Section 12.9 should be interpreted and applied to the amendments in question.   Having reviewed the representative Governing Agreement the parties selected and their briefs, the Court issues the following rulings on the parties’ declaratory relief claims.  (Although the Foundation briefed issues related to whether Gordon’s amendments to the Governing Agreement breached his fiduciary duty to the Foundation and violated provisions of the Corporations Code, the Court is not addressing those issues here. That is because those issues are separate and distinct from the claim for declaratory relief in the Foundation’s Cross-Complaint.)

First, there is nothing in the Governing Agreements that constrains Gordon’s authority to amend them, except for Section 12.9.  The Foundation’s citation to, and reliance on, other provisions of the Agreements as imposing limits on Gordon’s amendment authority is unpersuasive.  Neither the language of those provisions nor the extrinsic evidence the Foundation submitted supports that interpretation of the Governing Agreements.  In short, whether Gordon has the unilateral authority to make a particular amendment as the sole Managing Member is determined exclusively by Section 12.9. 

Second, for purposes of assessing Gordon’s authority to make the amendments in question, the critical portion of Section 12.9 is the phrase “alter the distribution of . . . distributions . . . .”  The terms “Net Profits” and Net Losses, which are defined elsewhere in the Agreement, are not implicated by the amendments.  That is because even if an amendment reduces the aggregate pool of monies available for distribution in the form of Net Profits (as some amendments arguably might do), the calculation of Net Profits and Net Losses is a separate undertaking conducted based on the definitions of those terms in the Governing Agreement.  Gordon’s argument on this point is persuasive.

Third, the Foundation has, however, offered the better interpretation of the phrase alter the distribution of . . . distributions . . . ” in Section 12.9.    Gordon contends that, based on its plain language, the phrase should be interpreted to mean actions that affect “the manner” of distributions.   The Foundation contends that, based on its plain language, that phrase should be interpreted to mean actions that affect both “the manner” and “timing” of distributions.  In the Court’s view, the phrase is ambiguous, and both sides’ interpretations are reasonable.  The Foundation’s interpretation is the better one, however.   Because Section 12.9 is reasonably susceptible to Gordon’s interpretation, Gordon could have offered extrinsic evidence to provide further support for it.  Gordon did not present any extrinsic evidence, however. He relied solely on the language of Section 12.9 itself, and the Court believes that the Foundation’s interpretation is more consistent with the language.  The Foundation provided extrinsic evidence. But it did so to support its contention (rejected by the Court) that other provisions of the Governing Agreements, and not just Section 12.9, constrain Gordon’s authority to make amendments.

Fourth, applying the Court’s construction of Section 12.9, what follows here are the Court’s determinations on whether the specific amendments in question can be made by Gordon unilaterally or require the Foundation’s consent.  The Court observes that the Foundation’s objection to a number of the amendments is that they purportedly require the Foundation to share in costs that benefit Gordon.  Even if the Foundation’s characterization of those amendments is correct, this does not require consent Section 12.9 consent, for the reasons that Gordon has offered.  In making these rulings, the Court is not opining on whether an amendment, either in theory or in practice, constitutes a breach of Gordon’s fiduciary duty to the Foundation. 

·       Member-Entity Transactions  -- Unilateral

·       Admission of Additional Members -- Consent, which Gordon concedes

·       Elimination of Last to Die Provision --  Consent

·       Modification of Tax Provision – Unilateral, which the Foundation concedes

·       Compensation to Manager – Unilateral

·       Related Party Transactions  -- Unilateral in general, but specific transactions, in application, may require Consent

·       Distribution of Real Property Sale Proceeds – Consent

·       Change in Accounting Method -- Unilateral

·       Indemnification Obligations   -- Unilateral

·       Advancement of Defense Costs  -- Unilateral

·       Purchase of Insurance  -- Unilateral