Judge: Monica Bachner, Case: 20STCV19564, Date: 2022-12-12 Tentative Ruling

Case Number: 20STCV19564    Hearing Date: December 12, 2022    Dept: 71

Superior Court of California

County of Los Angeles

DEPARTMENT 71

TENTATIVE RULING

Plaintiffs’ motion to amend judgment pursuant to C.C.P. §187 is granted. Nonparties Stem Holdings Inc. is added to Plaintiffs’ Judgment as an additional defendant. 

Motion to Amend Judgment

Plaintiffs Chris Haas (“Haas”), Carla Baumgartner (“Baumgartner”), and Eric Steele (“Steele”) (collectively, “Plaintiffs”) move to amend the Judgment to add nonparty Stem Holdings, Inc. (“Stem”) as an additional defendant because Stem is successor in interest to Defendant Driven Deliveries, Inc. (“Driven Deliveries”) (“Defendant”).  (Notice of Motion, pg. 2; C.C.P. §187.)

Requests for Judicial Notice

Plaintiffs’ 9/8/22 request for judicial notice of Exh. A, Stem Holdings, Inc.’s, SEC filing is granted.  (P-RJN, Exh. A.)

Plaintiffs’ 9/8/22 request for judicial notice of Exh. B, Driven Deliveries, Inc.’s, filing with the Nevada Secretary of State is granted.  (P-RJN, Exh. B.)

Plaintiffs’ 9/8/22 request for judicial notice of Exh. C, the Statement of Information for Deliverd IP Holdings, Inc., is granted.  (P-RJN, Exh. C.)

Plaintiffs’ 9/8/22 request for judicial notice of Exh. D, Stem Holdings, Inc.’s, May 2022 SEC filing is granted.  (P-RJN, Exh. D.)

Plaintiffs’ 9/8/22 request for judicial notice of Exh. E, Brian Hayek’s SEC filing is granted.  (P-RJN, Exh. E.)

Plaintiffs’ 9/8/22 request for judicial notice of Exh. F, Stem Holdings, Inc.’s, December 2020 SEC filing is granted.  (P-RJN, Exh. F.)

Stem’s 10/20/22 request for judicial notice of Exh. A, the Nevada Articles of Conversion/Exchange/Merger dated December 23, 2020, is granted.  (S-RJN, Exh. A.)

Stem’s 10/20/22 request for judicial notice of Exh. B, the State of Delaware Certificate of Merger of Foreign Corporation into a Domestic Corporation dated December 23, 2020, is granted.  (S-RJN, Exh. B.)

Background

Plaintiffs filed their initial complaint (“Complaint”) in the instant action on May 22, 2020.  Plaintiffs filed the operative first amended complaint (“FAC”) on August 18, 2020.  On March 28, 2022, Plaintiffs obtained a stipulated judgment in this action in the amount of $349,876.69 against Defendants Driven Deliveries, Brian Hayek (“Hayek”), and Christian Schenk (“Schenk”) (collectively, “Defendants”).  (3/28/22 Judgment.) 

Plaintiffs declare that during the litigation of the instant action, Baumgartner negotiated the essential terms of a settlement with Driven Deliveries’ President, Salvador Villanueva (“Villanueva”), and Villanueva represented to Baumgartner that he was in charge of the litigation and a deal could be worked out between the two of them to resolve the case.  (Decl. of Baumgartner ¶3.)  Plaintiffs declare the basic terms of a settlement were reached between Villanueva and Baumgartner, and Plaintiffs signed a settlement agreement (“Settlement Agreement”) on November 24, 2020.  (Decl. of Baumgartner, ¶2, Exh. 2.)  Defendants, including Hayek, signed the Agreement on November 30, 2020.  (Decl. of Steele, Exh. 1; Decl. of Haas, Exh. 1.)  Plaintiffs declare they signed the Settlement Agreement because they knew Driven Deliveries was merging with Stem.  (Decl. of Steele ¶2; Decl. of Haas ¶2.)  Plaintiffs declare that for this reason, they made sure to state in the Settlement Agreement that in the event of a merger between Driven Deliveries and Stem, Stem would be bound by the Settlement Agreement and would be named on the Judgment.  (Decl. of Baumgartner ¶8; Exh. 2 §12.)  Plaintiffs also declare that when they signed the Settlement Agreement, they relied on the fact Hayek, Stem’s new Chief Compliance Officer and former Driven Deliveries officer, was signing the Settlement Agreement to bind his new company.  (Decl. of Baumgartner ¶8; Decl. of Steele ¶2; Decl. of Haas ¶2; P-RJN Exh. F at pg. 12.)  Plaintiffs declare Defendants made payments on the Settlement Agreement until November 2021, when payments stopped.  (Decl. of Khachaturian ¶4.)  Plaintiffs declare the settlement checks were mostly written by Villanueva.  (Decl. of Baumgartner ¶4, Exh. 4; P-RJN Exh. D.)

Plaintiffs declare that shortly after they signed the Settlement Agreement, Driven Deliveries officially completed its merger with Stem, and all of Plaintiffs’ shares in Driven Deliveries were converted to shares of Stem.  (Decl. of Baumgartner ¶9; Decl. of Steele ¶2; Decl. of Haas ¶2; P-RJN Exhs. A, D.)  In January 2022, Villanueva listed himself as President, Secretary, and Treasurer of Driven Deliveries.  (P-RJN Exh. B.)

Plaintiffs filed the instant motion on September 8, 2022.  On October 3, 2022, Defendant Driven Deliveries filed its notice of bankruptcy proceedings, and this Court ordered a stay as to Driven Deliveries.  (10/7/22 Minute Order.)  On October 20, 2022, nonparty Stem filed its opposition.  On October 26, 2022, Plaintiffs filed their reply.  At the November 2, 2022 hearing on the instant motion, this Court requested Plaintiffs and Stem submit supplemental briefs on which state law to apply regarding successor liability.

Motion to Amend Judgment

C.C.P. §187 grants to every court the power to use all means necessary to carry its jurisdiction into effect, even if those processes are not set out in the code.  C.C.P. §187 provides as follows: “When jurisdiction is, by the Constitution or this Code, or by any other statute, conferred on a Court or judicial officer, all the means necessary to carry it into effect are also given; and in the exercise of this jurisdiction, if the course of proceeding be not specifically pointed out by this Code or the statute, any suitable process or mode of proceeding may be adopted which may appear most conformable to the spirit of this Code.”

Successor in interest

Plaintiffs argue that Stem is liable as a successor corporation.  (Motion, pgs. 1, 6-7.)  Parties were asked to submit supplemental briefs on the law to apply to Stem’s successor liability.  Plaintiffs argue regardless of which states’ laws apply, Stem assumed Driven’s liability to Plaintiffs under Florida, Delaware, Nevada, and California law.  (Pls.’ Supp. Br., pg. 2.)  Stem argues California law does not apply, that Stem is a Nevada Corporation, and Stem cannot be held liable for Driven’s liabilities as Driven’s shareholder under Delaware and Nevada law.  (Stem Supp. Br., pgs. 3-5.)  

Stem argued at the November 2, 2022 hearing that Florida law applies to the Merger Agreement between Stem, SDA, and Driven.  (Pls.’ Supp. Br., Exh. 1, Tr. at 3:23-24.)  Further, Section 8.7 of the Merger Agreement explicitly states Florida law applies. (Decl. of Haas, Exh. 2 §8.7; see Pls.’ Supp. Br., Exh. 1, Tr. at 3:23-24.)  However, Stem has not briefed this court on the application of Florida law to the merger agreement at issue.

1. Florida Law

Under Florida Statute §607.1106, entitled “Effect of merger or share exchange”:

1. When a merger becomes effective:

    

1. The domestic or foreign eligible entity that is designated in the plan of merger as the survivor continues or comes into existence, as the case may be;

    

2. The separate existence of every domestic or foreign eligible entity that is a party to the merger, other than the survivor, ceases;

. . .

(d) All debts, obligations, and other liabilities of each domestic or foreign eligible entity that is a party to the merger, other than the survivor, become debts, obligations, and liabilities of the survivor.

(Fla. Stat. Ann. §§607.1106(1)(a)-(b), (d), emphasis added.)

Generally, Florida law does not impose the liabilities of a predecessor corporation on a successor corporation unless: “(1) the successor expressly or impliedly assumes obligations of the predecessor, (2) the transaction is a de facto merger, (3) the successor is a mere continuation of the predecessor, or (4) the transaction is a fraudulent effort to avoid the liabilities of the predecessor.”  (Laboratory Corp. of America v. Professional Recovery Network (Fla. Dist. Ct. App. 2002) 813 So.2d 266, 269, emphasis added.)  “The imposition of liability upon a successor corporation is based on the notion that no corporation should be permitted to commit a tort or breach of contract and avoid liability through corporate transformation in form only.”  (Id.) 

Here, Stem expressly agreed to assume Driven’s liability to Plaintiffs.  In its official Form S-4 filing with the United States government on December 28, 2020, after the Driven-Plaintiffs settlement agreement was signed, Stem declared: “Following the completion of the Merger, Stem will also assume Driven’s outstanding net indebtedness.”  (RJN, Exh. F, pgs. 4, 9.)

Stem argues Stem’s December 28, 2020 Form S-4 filing made an erroneous statement regarding its assumption of Driven’s outstanding net indebtedness that is contradicted by the actual transactional documents.  (Stem Supp. Br., pg. 4.)  Stem argues the erroneous statement in its SEC report is not enough to act as a transfer of indebtedness.  (Stem Supp. Br., pgs. 4-5.)  Rather, Stem holdings did not merge with any other entity and merely held stock in Driven, and as Driven’s shareholder, did not consent to take on Driven’s liabilities.  (Del. Corp. Law §102(b)(6); Nev. Rev. Stat. Ann. §78.747(1).)  The Court is not convinced that Stem’s prior statement in its SEC filings contradicts the transactional documents indicating SDA’s merger with Driven.  (S-RJN, Exhs. A, B.)  Under Florida law, Stem expressly agreed to assume Driven’s liabilities to Plaintiff, stating, “Pursuant to the Merger Agreement, SDA [“Stem Driven Acquisition, Inc.”], a direct, wholly owned subsidiary of Stem, will merge with and into Driven, with Driven surviving the merger as a wholly owned subsidiary of Stem (the “Merger”). Stem, together with Driven following the Merger, is referred to herein as the combined company.”  (P-RJN, Exh. F, pg. 9.)

The merger between SDA and Driven Deliveries transformed Stem into Driven Deliveries’ parent company. Hayek, as Driven Deliveries’ board member, signed the Settlement Agreement between Driven Deliveries and Plaintiffs on November 30, 2020.  (Decl. of Steele, Exh. 1; Decl. of Haas, Exh. 1.)  On December 28, 2020, Stem filed its S-4 Statement to the SEC, its prospectus proposed merger of SDA and Driven Deliveries, which states the Board of Directors of Driven Deliveries approved the merger proposal on October 5, 2020, and the Board of Directors of SDA approved the merger on December 22, 2020.  (P-RJN Exh. F, pgs. 4, 9.) 

1. Delaware Law

Assuming, in arguendo, Delaware law applies, §253 of Delaware’s Corporations Code provides:

1. In any case in which: (1) at least 90% of the outstanding shares of each class of the stock of a corporation or corporations. . . and (2) 1 or more of such corporations is a corporation of this State, unless the laws of the jurisdiction or jurisdictions under which the foreign corporation or corporations are organized prohibit such merger, the parent corporation may either merge the subsidiary corporation or corporations into itself and assume all of its or their obligations, or merge itself, or itself and 1 or more of such other subsidiary corporations, into 1 of the subsidiary corporations by executing, acknowledging and filing, in accordance with § 103 of this title. . . .

(Del. Code Ann. tit. 8, §253(a)(1)-(2), emphasis added.)

Delaware also follows the same, general rule for successor liability throughout the United States that a corporation that purchases another corporation is responsible for the “obligations of the selling corporation in any one of the following four situations: (1) the purchaser expressly or impliedly assumes such obligations; (2) the transaction amounts to a consolidation or merger of the seller into the purchaser; (3) the purchaser is merely a continuation of the seller; or (4) the transaction has been entered fraudulently.”  (Elmer v. Tenneco Resins, Inc. (D. Del. 1988) 698 F.Supp. 535, 540, emphasis added.)

Accordingly, applying Delaware law, Stem assumed Driven’s liability to Plaintiffs.

1. Nevada Law

Assuming, arguendo, Nevada law applies, Nevada agrees with the “general rule” in other states that a successor-purchasing entity assumes the debts of the predecessor: “ (1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction is really a consolidation or a merger; (3) when the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction was fraudulently made in order to escape liability for such debts.  (Village Builders 96, L.P. v. U.S. Laboratories, Inc. (2005) 121 Nev. 261, 268, emphasis added.)

Accordingly, applying Nevada law, Stem assumed Driven’s liability to Plaintiffs.

1. California Law

Assuming, arguendo, California law applies, a “successor corporation” may be added as a judgment debtor under C.C.P. §187 where there is substantial evidence that the successor is a mere continuation of its predecessor corporation.  (See, e.g., Favila v. Pasquarella (2021) 65 Cal.App.5th 934, 940; McClellan v. Northridge Park Townhome Owners Association, Inc. (2001) 89 Cal.App.4th 746, 753-756 [successor homeowners association properly added as additional judgment debtor where predecessor association failed to comply with CC&Rs when forming successor association and both associations had same membership, unit owners, board of directors, management company and income from homeowner dues].)

“Upon merger . . . the separate existence of the disappearing corporations ceases and the surviving corporation shall succeed, without other transfer, to all the rights and property of each of the disappearing corporations and shall be subject to all the debts and liabilities of each in the same manner as if the surviving corporation had itself incurred them.”  (Cal. Corp. Code §1107(a).)

“If a domestic corporation owns all the outstanding shares, or owns less than all the outstanding shares but at least 90 percent of the outstanding shares of each class, of a corporation or corporations, domestic or foreign, the merger of the subsidiary corporation or corporations into the parent corporation or the merger into the subsidiary corporation of the parent corporation and any other subsidiary corporation or corporations, may be effected by a resolution or plan of merger adopted and approved by the board of the parent corporation and the filing of a certificate of ownership as provided in subdivision (e). The resolution or plan of merger shall provide for the merger and shall provide that the surviving corporation assumes all the liabilities of each disappearing corporation and shall include any other provisions required by this section.”  (Corp. Code §1110(a).)

Stem argues it is not bound by parties’ successor provision in their Settlement Agreement because (1) Stem was not a party to the Agreement; (2) at the time the Settlement Agreement was signed the merger between Stem and Driven Deliveries had not yet occurred; and (3) Defendants had no authority to bind Stem because Hayek, who signed the Settlement Agreement on behalf of Driven Deliveries, was not an employee, officer, or director of Stem at the time he signed the Agreement.  (Stem Opposition, pg. 5; Decl. of Cohen ¶5.)

Plaintiffs argue Stem and Driven Deliveries merged on October 8, 2020.  (P-RJN Exh. A, pg. 1.)  Stem’s wholly owned subsidiary, Stem Driven Acquisition, Inc. (“SDA”), merged with Driven Deliveries, with Driven Deliveries as the surviving entity and a wholly owned subsidiary of Stem.  (P-RJN Exh. A, pg. 1.)  The merger between SDA and Driven Deliveries transformed Stem into Driven Deliveries’ parent company. Hayek, as Driven Deliveries’ board member, signed the Settlement Agreement between Driven Deliveries and Plaintiffs on November 30, 2020.  (Decl. of Steele, Exh. 1; Decl. of Haas, Exh. 1.)  On December 28, 2020, Stem filed its S-4 Statement to the SEC, its prospectus proposed merger of SDA and Driven Deliveries, which states the Board of Directors of Driven Deliveries approved the merger proposal on October 5, 2020, and the Board of Directors of SDA approved the merger on December 22, 2020.  (P-RJN Exh. F, pgs. 4, 9.) 

          Under California law, Stem as Driven Deliveries’ parent company is legally required to assume Driven Deliveries’ debt to Plaintiffs.  (Corp. Code §1110(a)[“If a domestic corporation owns all the outstanding shares, or owns less than all the outstanding shares but at least 90 percent of the outstanding shares of each class, of a corporation or corporations, domestic or foreign, the merger of the subsidiary corporation or corporations into the parent corporation or the merger into the subsidiary corporation of the parent corporation and any other subsidiary corporation or corporations, may be effected by a resolution or plan of merger adopted and approved by the board of the parent corporation and the filing of a certificate of ownership as provided in subdivision (e). The resolution or plan of merger shall provide for the merger and shall provide that the surviving corporation assumes all the liabilities of each disappearing corporation and shall include any other provisions required by this section.”].)  Stem’s S-4 Statement to the SEC states, “Driven [is] surviving the merger as a wholly owned subsidiary of Stem (the ‘Merger’). Stem, together with Driven following the Merger, is referred to herein as the combined company. . . . Following the completion of the Merger, Stem will also assume Driven’s outstanding net indebtedness.”  (P-RJN Exh. F, pg. 9.)  Plaintiffs argue that while the merger with Stem was pending, Driven and Stem’s COO, Brian Hayek agreed to be bound by California law in executing the Settlement Agreement.  (Decl. of Baumgartner, Exh. 1.)

Accordingly, applying California law, Stem assumed Driven’s liability to Plaintiffs.

Conclusion

Accordingly, Plaintiffs have demonstrated Stem is Driven Deliveries’ successor in interest.  In the interest of justice pursuant to C.C.P. §187, this Court grants Plaintiffs’ motion to amend judgment to add nonparty Stem Holdings Inc. as an additional defendant.

Dated:  December _____, 2022

Hon. Monica Bachner

Judge of the Superior Court