TENTATIVE RULING

 

Calendar:    3

Date:          1/20/2023 

Case No: 22 GDCV00277 Trial Date: None Set 

Case Name: William Joshua, LLC v. Fresenius Medical Care Holdings, Inc. et al.

DEMURRER

MOTION TO STRIKE

Moving Party:            Defendants Fresenius Medical Care Holdings, Inc. and Bio-Medical Applications of California, Inc.       

Responding Party: William Joshua, LLC      

RELIEF REQUESTED:

Sustain demurrer to second through seventh causes of action of Second Amended Complaint 

Strike punitive damages and attorney’s fees    

CAUSES OF ACTION: from Second Amended Complaint   

1) Member Derivative Action for Breach of Contract 

2) Member Derivative Action for Breach of Fiduciary Duty

3) Breach of Fiduciary Duty 

4) Aiding and Abetting Breach of Fiduciary Duty 

5) Breach of Fiduciary Covenant of Good Faith and Fair Dealing Membership Interest Assignment Agreement 

6) Breach of Implied Covenant of Good Faith and Fair Dealing Membership Interest Assignment Agreement

7) Fraud and Deceit—Concealment 

SUMMARY OF FACTS:

Plaintiff William Joshua, LLC, individually and derivatively on behalf of nominal defendant Fresenius Medical Care Glendale, LLC (FMC Glendale) alleges that in June of 2015, FMC Glendale, a dialysis center, entered into an Administrative Services Agreement with Fresenius Management Services, Inc. (FMS) pursuant to which FMS was engaged by FMC Glendale to provide comprehensive administrative services to FMC Glendale.   Plaintiff alleges that beginning in June of 2018, and continuing through December of 2020, FMS breached the Administrative Services Agreement by failing to properly solicit train, retain, and maintain sufficient non-physician personnel to reasonably conduct day-to-day business operations, resulting in personnel expense costs overruns, non-availability of essential staffing personnel, excessive employee turnover and inability to accept new dialysis patients.  It is also alleged that from July 2018 to the present, FMS breached the agreement by failing to pursue and secure patient referrals from major medical groups.  Plaintiff also alleges that FMS breached the agreement by charging interest on the accrued but unpaid amount due on the Due to Manager account.  

The SAC alleges that FMC Glendale’s authorized Board of Managers consisted of plaintiff William Joshua’s managing member, Sevag Balikian, M.D., and that at various times defendants Ana Silveira, Lisa Elie, Ferdinand Rios, Vedamy Bradford and Anil Vaidya served as the other members of the FMC Glendale Board of Managers, and that the member defendants breached their fiduciary duties to FMC Glendale and its members by failing to disclose to FMC Glendale and member William Joshua the fact that at the time they served as members, they were also employees of FMS, whose interests are adverse to those of FMC Glendale.  It is also alleged that the member defendants failed to faithfully discharge their duties of oversite of contractual performance of the Administrative Services Agreement and abdicated their managerial authority and acquiesced to the demands of defendant Jarremy Morgan in matters of utmost financial concern to FMC Glendale and its members.  Plaintiff alleges that defendant Bio-Medical Applications of California, Inc. (BMA-California) held a majority member interest in FMC Glendale, and also breached its duty of good faith and fair dealing by concealing the fact that the members of the Board of Directors designated by it were also employees of FMS, and otherwise breached its duties to minority members.  Plaintiff alleges that the individual member defendants were acting pursuant to express authority and instructions of defendant FMS, which had a business policy that designated employees are to serve as members of the board of managers of joint venture dialysis centers. 

The SAC alleges that defendants implemented a freeze out scheme in connection with refinancing FMC Glendale and raising capital which diluted plaintiff’s interest in FMC Glendale and rejected plaintiffs’ request that the managers hire independent counsel to review the clinic finances.  

The SAC alleges that defendants engaged in fraud by intentionally failing to disclose important facts, including the fact that members of the board of directors designated by defendants were also employees of FMS, and that within 21 months of the initial agreement FMC Glendale would demand additional capital contribution of $6 million, that plaintiffs would experience the loss of a significant member interest, and that the tier-2 loan at issue would mature in June of 2020, and FMC would not consider a reduced interest tier-1 loan unless and until FMC Glendale achieved profitability for at least 12 months consecutively.   

ANALYSIS:

Demurrer

Choice of Law

Defendants Fresenius Medical Care Holdings, Inc. (FMC) and Bio-Medical Applications of California, Inc. (BMA-California), two of the defendants, bring this demurrer and motion to strike.  Defendant FMC primarily argues that the only allegations alleged against it are alter ego allegations, which are insufficient.  Defendant BMA-California argues that the allegations against it are insufficient. 

Defendants argue that this matter is subject to application of the substantive law of the state of Delaware.  The SAC alleges that California law applies to plaintiff’s substantive claims, “with the possible exception of the derivative breach of contract claim.”   [SAC, paras. 90-92].  Defendants argue that this is incorrect, and that the contracts governing BMA-California’s relationships with FMC Glendale all expressly specify that Delaware law is to apply.   The Operating Agreement for FMC-Glendale provides:

“Applicable Law. Notwithstanding the place where this Agreement may be executed by any of the parties, the parties expressly agree that all the terms and provisions of this Agreement are construed under and governed by the laws of the State of Delaware, without giving effect to conflict of laws principles.”

[SAC, Ex. 1, para. 7.2.7]

The Membership Interest Assignment Agreement provides:

“This Assignment is given in, and shall be interpreted, construed and enforced according to the substantive law of, the State of Delaware, without giving effect to its principles of choice of law or conflicts of law.” 

[SAC, Ex. 2, para. 6].   

The Administrative Services Agreement between FMS and FMC Glendale provides: 

“Governing Law.  This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware without regard to conflict of laws principles.”  

[Ex. 3, para. 7.11].  

The SAC concedes that the three agreements each contain a provision stating the Delaware law is to apply.  [SAC, para. 91].  

  

Defendants argue that California courts consistently enforce a contractual choice-of-law provision when the chosen jurisdiction has a substantial relationship to the parties, or their transaction and the chosen jurisdiction’s law is not contrary to California public policy.  Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 465. 

The California Supreme Court in Nedlloyd set forth the proper test to be considered in connection with the enforceability of a contractual choice of law provision:

“In determining the enforceability of arm's-length contractual choice-of-law provisions, California courts shall apply the principles set forth in Restatement section 187, which reflects a strong policy favoring enforcement of such provisions.

More specifically, Restatement section 187, subdivision (2) sets forth the following standards: “The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either [¶] (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or [¶] (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.” 

Briefly restated, the proper approach under Restatement section 187, subdivision (2) is for the court first to determine either: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties' choice of law. If, however, either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties' choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a “materially greater interest than the chosen state in the determination of the particular issue ....” (Rest., § 187, subd. (2).) If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state's fundamental policy.”

Nedlloyd, at 465-466, footnotes omitted, italics in the original. 

Defendants argue that in this case, BMA-California is a Delaware corporation, FMC is a Delaware corporation, and FMC Glendale is a Delaware limited liability company.  [SAC, paras. 5, 6, 8].  Defendants argue that this is sufficient to establish that these parties are domiciled in the chosen state of Delaware and provides a sufficient relationship to support the choice of law provisions.  Nedlloyd, at 467-467 (“A state of incorporation is certainly at least one government entity with a keen and intimate interest in internal corporate affairs, including the purchase and sale of its shares, as well as corporate management and operations.).     

Defendants also argue that applying Delaware law to plaintiff’s claims against FMC and BMA-California is consistent with the internal affairs doctrine set forth in California Corporations Code section 17708.01(a), which provides:

“(a) The law of the state or other jurisdiction under which a foreign limited liability company is formed governs all of the following:

(1) The organization of the limited liability company, its internal affairs, and the authority of its members and managers.

(2) The liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of the limited liability company.”

Defendants rely on Fox v. JAMDAT Mobile, Inc. (2010) 185 Cal.App.4th 1068, in which the Second District noted:

“‘The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs-matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders-because otherwise a corporation could be faced with conflicting demands.’ [Citations.]” (State Farm Mutual Automobile Ins. Co. v. Superior Court (2003) 114 Cal.App.4th 434, 442, 8 Cal.Rptr.3d 56.)”

Fox, at 1079, n. 3.  

Defendants also point out that the application of another state’s statute of limitations pursuant to a choice of law provision does not violate California public policy.  Hambrecht & Quist Venture Partners v. American Medical International, Inc. (1995 2nd Dist.) 38 Cal.App.4th 1532, 1540-1541.   

Plaintiff argues that Delaware law is contrary to a fundamental policy of California, and California has a materially greater interest in the determination of the issue.  Plaintiff argues that California has a strong public policy in assuring that corporate officers, directors, majority shareholders and others are faithful to their fiduciary obligations to minority shareholders.  Plaintiff relies on Steinberg v. Amplica, Inc. (1986) 42 Cal.3d 1198,1210, in which the California Supreme Court, in determining the scope of a California statute which the Court concluded involved a consideration of public policy, noted that there was a countervailing policy in that case, “the strong public interest in assuring that corporate officers, directors, majority shareholders and others are faithful to their fiduciary obligations to minority shareholders.”  Steinberg, at 1210.   The case did not involve a choice of law provision or identify this public interest as a fundamental public policy in California. 

Plaintiff notes that the Court in Steinberg cited to Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, which also stated that majority shareholders may not use their power to control corporate activities to the detriment of the minority but did not go so far as to frame the issue as a fundamental California policy.  

Plaintiff does not point to any particular Delaware law which would be applied here which violates a fundamental California public policy.  There is no analysis by a legal expert, for example, comparing the two sets of laws.  The opposition veers into arguing about the arm’s length status of the transaction concerning the refinancing, rather than the status of the transaction pursuant to which the choice of law provision was agreed to.   Plaintiff also relies on a potential violation of fundamental policy that the Operating Agreement attempts to circumvent with an express provision limiting liability for breaches of duty, but this does not appear to constitute a Delaware law which differs from California law which would result in violation of a fundamental public policy.  In addition, it appears that the internal affairs doctrine contemplates that the laws of other states may fairly be applied to corporate governance, as long as there is some mechanism providing advance notice that such laws will be applied.   Here, the parties’ agreement appears to have provided such notice. 

Under the circumstances, plaintiffs have not met their considerable burden to defeat the choice of law provision voluntarily agreed to by the parties, and the court will apply Delaware law to the substantive analysis of the demurrer and motion to strike.  

Alter Ego Allegations

Defendants argue that the pleading fails to allege facts sufficient to constitute a cause of action against moving defendants FMC or BMA-California based on an alter ego theory, and all causes of action based on such a theory must be dismissed. 

Defendants argue that piercing the corporate veil is difficult to achieve under Delaware law.  Defendants rely on MicroStrategy Inc. v. Acacia Research Corp. (2010) 2010 WL 5550455, at 11, in which the Court of Chancery of Delaware observed:

“Specific facts a court may consider when being asked to disregard the corporate form include: (1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the dominant shareholder siphoned company funds; and (5) whether, in general, the company simply functioned as a façade for the dominant shareholder.  A decision to disregard the corporate entity generally results not from a single factor, but rather some combination of them, and an overall element of injustice or unfairness must always be present, as well.” 

MicroStrategy, at *11, quotation, footnote omitted. 

The SAC sets out in some details how the alter ego entities are alter egos of each other or a single business enterprise, including facts concerning common ownership, sharing of business offices, common officers, use of alter egos to claim entitlement to accrued interest, control and domination of the operation, and also alleges facts showing how recognizing the corporate separateness of the entities would work injustice, specifically by permitting the enterprise to prevent exposure to liability through concealment of the responsible entity and conflicts of interest.  [SAC, paras. 37, 38].  Several factors have been alleged, and the allegations are sufficient to withstand demurrer on this general ground. 

The demurrer on this ground is overruled, except as noted specifically below. 

Second Cause of Action—Breach of Fiduciary Duty and Third Cause of Action—Breach of Fiduciary Duty 

Defendants argue that these causes of action are based on the alleged failure of the manager defendants to faithfully oversee FMS’s performance under the ASA and are barred as a result of the disclosed conflict of interest between BMA-California and its affiliates.  

As argued in the opposition, the pleading concedes that there were disclosures concerning the connection between the parties in the Operating Agreement, but the SAC sufficiently alleges that there was never a disclosure that the managers which were designated by BMA-California and charged with the oversight of FMS’s performance were also employees of FMS charged with performing the services.  [SAC, paras. 32-34].  There is nothing presented in the attached documentation which would contradict this allegation, which must be taken as true for purposes of demurrer.  Defendants argue that the knowledge of the manager defendants concerning their employment is imputed to defendant FMC-Glendale, but this fact does not appear from the face of the pleading.  Moreover, as pointed out in the opposition, even the Delaware authority relied upon in the moving papers recognizes that a conflicted fiduciaries’ knowledge is not imputed to the corporation for purposes of holding fiduciaries liable for harm caused the corporation.  See In Re Am. International Group, Inc. (Del. Ch. 2009) 965 A.2d 763, 806-807.   The demurrer on this ground accordingly is overruled.  

Defendants also argue that they cannot be responsible for breach of fiduciary duty in choosing to make a capital call which would dilute plaintiff William Joshua’s interest in FMC-Glendale, as this was authorized by the Operating Agreement.  

However, this argument would not dispose of either of the causes of action to which it is addressed, as those causes of action also allege that fiduciary duties were breached by the concealment of the employment relationship, as well as by the alleged failure to faithfully discharge the duties of oversight of contractual performance of the ASA.  [SAC, paras. 106-108, 116, 117 (incorporating paras. 107-110)].  

A demurrer does not lie to only part of a cause of action (or to a particular type of damage or remedy), and a cause will survive demurrer if there are sufficient allegations that might entitle the pleader to relief.  Kong v. City of Hawaiian Gardens Redevelop. Agency (2003, 2nd Dist.) 108 Cal.App.4th 1028, 1046; PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682.   Defendants in the demurrer concede that the procedural aspects of this demurrer are subject to California law.  The demurrer on this ground does not dispose of either entire cause of action, and the demurrer is overruled.  

Defendants also argue that defendants’ alleged failures are time-barred to the extent based on events which occurred outside the three-year statute of limitations under Delaware law, that is, actions which occurred prior to June 1, 2019.  Again, the argument itself concedes that the statute of limitations would not bar conduct which occurred since June 1, 2019. The argument accordingly would not dispose of either entire cause of action.  The SAC does not in the causes of action state any actual dates which would suggest that the causes of action would be time barred.  Similarly, the argument that plaintiff lacks standing to bring a direct claim for approval of payment to FMS of alleged unauthorized interest charges addresses only a portion of the causes of action at issue.  The demurrer is overruled in its entirety.

Fourth Cause of Action—Aiding and Abetting Breach of Fiduciary Duty  

Defendants argues that the cause of action appears to infer that BMA-California aided and abetted the manager defendants in breaching fiduciary duties.  

Defendants argue that since the second and third causes of action are not sufficiently stated, the demurrer to this cause of action should also be sustained. Since the demurrer to those previous causes of action is overruled, this argument, and the same arguments made here, such as statute of limitations, also are rejected.  

Defendants indicate that under Delaware law, a claim for aiding and abetting requires proof of four elements: (1) the existence of a fiduciary relationship, (2) the fiduciary breached its duty, (3) a defendant, who is not a fiduciary, knowingly participated in a breach, and                (4) damages to the plaintiff resulted from the concerted action of the fiduciary and the nonfiduciary.  Cargill, Inc. v. JWH Special Circumstance LLC (Del. Ch. 2008) 959 A.2d 1096, 1125, citation omitted.   Defendants also indicate that defendants cannot simultaneously be liable for breach of fiduciary duty and aiding and abetting that breach, based on the same authority, which does not in fact mention this proposition.    

The SAC alleges all of these elements as to FMS.  [SAC, paras. 130-133]. It is not clear if BMA-California is intended to be a party to this cause of action, as it is not mentioned by name.  [SAC, paras. 130- 133].  FMC also is not named in the cause of action itself.   The cause of action alleges generally that the conduct of defendants “was undertaken on behalf of the Alter-Ego Entities…”  [SAC, para. 134].  Plaintiffs in opposition argue that that BMA-California had direct knowledge that Jarremy Morgan was aiding and abetting the BMA-California designated managers, but this is not clearly alleged in the SAC.  The demurrer is sustained with leave to amend to clarify how FMC and BMA-California knowingly participated in a specific breach or breaches.  

To the extent the argument is that defendants cannot be simultaneously liable for breach of fiduciary duty and aiding and abetting a breach of fiduciary duty, this matter is at the pleading stage, and under the liberal rules of pleading, parties are permitted to plead duplicative, alternative, or even inconsistent causes of action.   See Jackson v. County of Los Angeles (1997, 2nd Dist.) 60 Cal.App.4th 171, 177, 180.  This theory appears to be pled in the alternative, and the demurrer on this ground will be overruled.  

Fifth Cause of Action—Breach of the Fiduciary Covenant of Good Faith and Fair Dealing and Sixth Cause of Action—Breach of Implied Covenant of Good Faith and Fair Dealing 

Defendants argue that these causes of action fails because they are based on the manager defendants appointed by BMA-California initiating capital calls that diluted plaintiff’s ownership interests in the clinic and deprived plaintiffs of the benefit of the MIAA, but this method of proceeding was expressly provided for in the OA, and an implied covenant cannot override the express terms of a contract.  

The SAC alleges that there was a fiduciary covenant of good faith and fair dealing, so it is not clear that the causes of action are limited to a contractual covenant of good faith and fair dealing, as argued in the demurrer.  The fiduciary responsibilities are evidently alleged to include a duty not to conceal information concerning financial circumstances with the loans and defendants’ methods of addressing such loans in connection with minority members.  [SAC, paras. 140-145].  Plaintiff in opposition focuses on these fiduciary duties.  The SAC does not specify how FMC is implicated in these causes of action, other than through vague alter ego allegations, and the opposition does not indicate how FMC is responsible.  [SAC, paras. 150m 156].  The demurrer is sustained with leave to amend as to that entity but overruled as to BMA-California.  

Seventh Cause of Action—Fraud and Deceit-- Concealment 

Defendants argue that the SAC makes bare-bones allegations that defendants intentionally failed to disclose important facts, and actively concealed important facts, and that plaintiff entered into a business relationship with defendants in reliance on those facts.  

Defendants rely on Lazar v. Superior Court (1996) 12 Cal.4th 631, 645, in which it was held that in fraud complaints against a corporation, a plaintiff must allege all of the following:

-the names of the persons who made the misrepresentation;

-their authority to speak for the corporation;

-to whom they spoke; 

-what they said or wrote; and 

-when it was said or written.

These details are not provided in the cause of action, which refers to other paragraphs of the complaint, and does not specify which of the defendants concealed or failed to disclose the referenced facts.  [SAC, paras. 160-161].

Plaintiff in opposition argues that where defendants are in a better position to know the facts concerning the alleged fraud, the requirement of specificity is relaxed.  Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.

In fact, there is authority under which the rule that fraud must be pled with specificity does not necessarily apply to claims for fraudulent concealment.  See Alfaro v. Community Housing Improvement System & Planning Association, Inc. (2009) 171 Cal.App.4th 1356, 1384:

“As restated by Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 993 [22 Cal. Rptr. 3d 352, 102 P.3d 268], “‘[i]n California, fraud must be pled specifically; general and conclusory allegations do not suffice. [Citations.] “Thus ‘“the policy of liberal construction of the plead- ings … will not ordinarily be invoked to sustain a pleading defective in any material respect.”’ [Citation.] [¶] This particularity requirement necessitates pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’ ” ’ ” (Cf. Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC, supra, 162 Cal.App.4th 858, 878.)

This statement of the rule reveals that it is intended to apply to affirmative misrepresentations. If the duty to disclose arises from the making of representations that were misleading or false, then those allegations should be described. (Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC, supra, 162 Cal.App.4th 858, 877–878.) However, as noted above (see fn. 18, ante, at p. 1381), plaintiffs have apparently abandoned their earlier claims of intentional and negligent misrepresentations. As plaintiffs accurately respond, it is harder to apply this rule to a case of simple nondisclosure. “How does one show ‘how’ and ‘by what means’ something didn't happen, or ‘when’ it never happened, or ‘where’ it never happened?”

Alfaro, at 1384.

The pleading here does not sufficiently allege in the cause of action itself which defendant engaged in concealment, or what plaintiffs believe was concealed, and the demurrer is sustained with leave to amend to permit plaintiffs to make these allegations.  The court will not require the details required under Lazar, to the extent such details would not be reasonably known to plaintiffs but will require that the details available to plaintiffs as to each defendant subject to this cause of action be provided in the cause of action itself. 

Motion to Strike 

Attorney’s Fees 

Defendants seek to strike the prayer for attorney’s fees, arguing there is no basis alleged for the recovery of such fees against FMC.  Defendants rely on Delaware case law, under which “regardless of the outcome of litigation, each party is responsible for paying his or her attorney’s fees.”  In re SS&C Techs., Inc. Shareholders Litigation (Del. Ch. 2008) 948 A.2d 1140, 1149.  Defendants also cite CCP section 1021, under which, “Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties...”  There does not appear to be any agreement entered into by FMC for an award of attorney’s fees.  The agreement relied upon would permit fees to be awarded against BMA-California.     

Plaintiff in opposition does not address this argument, or provide any law, Delaware law or California law, within which the prayer for attorney’s fees is appropriately stated against FMC.  Defendants in reply argue that the opposition fails to address the attorney’s fees argument in any way and so concedes that plaintiff has no basis to seek attorney’s fees against FMC.  The motion accordingly is granted.  The court at the hearing will inquire whether the failure to oppose the motion on this ground was a concession that the allegations are not appropriately asserted against FMC.  The motion to strike is granted without leave to amend unless plaintiff is able to persuade the court that plaintiff on amendment can appropriately state a claim for attorney’s fees against FMC.  

Punitive Damages 

Defendants argue that in connection with the second through sixth causes of action of the SAC, plaintiffs have failed to allege facts warranting punitive damages.  Defendants argue that under Delaware law, punitive damages are not authorized for a director’s breach of fiduciary duty, but that breach of fiduciary claims are directed to the Delaware Chancery court, an equitable court that lacks authority to award punitive damages. 

Defendants also argue that the conduct giving rise to punitive damages must be alleged with specificity, as is also the case in California.  The pleading here appears to allege conduct arising in the course of business dealings, and, as discussed above, for several causes of action one or the other of the moving defendants is not alleged to have engaged in any direct conduct whatsoever.   

Plaintiffs in opposition discusses California law, and does not address the Delaware standards for awarding punitive damages, or the Delaware authority in connection with breach of fiduciary duty.  Plaintiffs concede that a high level of culpability, in California, malice, is required to support a claim for punitive damages, and then points to allegations in the SAC, including the concealment of employees’ status, ignoring a loan, calling for additional capital, and requiring plaintiff William Joshua to pay a share of additional capital calls.  [SAC, paras. 61, 62, 65, 67, 73, 77 and 112].  Plaintiffs do not show how these allegations are made specifically as to the moving defendants or cite to case law under which the specified conduct, other than a properly alleged cause of action for fraud, would rise to a level supporting punitive damages.  The motion accordingly is granted, and the punitive damages claims set forth in the second through sixth causes of action are sustained with leave to amend.  

The court will expect that on any amendment, plaintiffs will address the arguments raised by defendants, and provide the appropriate level of detail in pleading as against the moving defendants.   The court will also expect that in connection with any further challenge to the pleading, the parties, during meet and confer and, if necessary, any further briefing to the court, will thoroughly address the Delaware law on this subject.  

RULING:

Demurrer of Defendants Fresenius Medical Care Holdings, Inc. and Biomedical Applications of California, Inc. to Plaintiff William Joshua, LLC’s Second Amended Complaint:

Demurrer is OVERRULED to the second cause of action for member derivative action for breach of fiduciary duty and third cause of action for breach of fiduciary duty. 

Demurrer to the fourth cause of action for aiding and abetting breach of fiduciary duty is SUSTAINED WITH LEAVE TO AMEND as moving defendants FMC and BMA-California are not named in the allegations of the cause of action, and it is not clearly alleged how these defendants knowingly participated in a specific breach of fiduciary duty by the other defendants.  Plaintiffs in opposition argue that that BMA-California had direct knowledge that defendant Jarremy Morgan was aiding and abetting the BMA-California designated managers, but this is not clearly alleged in the cause of action in the SAC.  

Demurrer on all other grounds, is OVERRULED. 

Demurrer to the fifth cause of action for breach of implied covenant of good faith and fair dealing and sixth cause of action for breach of fiduciary covenant of good faith and fair dealing is SUSTAINED WITH LEAVE TO AMEND as brought by defendant FMC on the ground the SAC does not specify how the conduct of FMC is implicated in these causes of action, or specify how this defendant is responsible, or specify on behalf of which defendant or defendants FMC is being pursued on an alter ego theory.  

Demurrer as brought by defendant BMA-California. and on all other grounds, is OVERRULED. 

Demurrer to the seventh cause of action for fraud and deceit-- concealment is SUSTAINED WITH LEAVE TO AMEND on the ground the cause of action does not name the moving defendants and does not allege the cause of action with the requisite specificity as against each defendant. On amendment, plaintiffs must allege in the cause of action itself which defendant engaged in concealment, what fact or facts plaintiffs believe were concealed, and all details reasonably available to plaintiffs as to each defendant plaintiffs intend to pursue in connection with this cause of action.   

Ten days leave to amend the fourth cause of action, the fifth and sixth causes of action as against defendant FMC, and the seventh cause of action only.  

Defendants Fresenius Medical Care Holdings, Inc. and Biomedical Applications of California, Inc.’s Motion to Strike Plaintiff’s Second Amended Complaint:

Motion to Strike claims for attorney’s fees as against defendant FMC only is GRANTED WITHOUT LEAVE TO AMEND.  The moving papers establish that attorney’s fees are not appropriately sought as against this defendant, and the opposition does not address the argument. The claims for attorney’s fees are not stricken as to defendant BMA-California   

Motion to strike claims for punitive damages is GRANTED WITH LEAVE TO AMEND as to the claims set forth in the second through sixth causes of action on the ground that the allegations are not sufficiently specific to the moving defendants, FMC or BMA-California, and the specified conduct relied upon by plaintiff, other than the claim for fraud, to which the demurrer will be sustained, does not appear to rise to a level of severity supporting punitive damages, under either Delaware or California law.

Ten days leave to amend, if possible. 

The Court will expect that on any amendment, plaintiffs will address the arguments raised by defendants, and provide the appropriate level of detail in pleading as against the moving defendants.   The Court will also expect that in connection with any further challenge to the pleading, the parties, during meet and confer and, if necessary, any further briefing to the Court, will thoroughly address the Delaware law on this subject.  To the extent the motion is intended to challenge the request for punitive damages in connection with the seventh cause of action, the motion is MOOT in light of the sustaining of the demurrer with leave to amend as to that cause of action. 

Request for Judicial Notice in Support of Defendants Fresenius Medical Care Holdings, Inc. and Bio-Medical Applications of California, Inc.’s Motion to Strike Plaintiff’s Second Amended Complaint is GRANTED to the extent permitted by Day v. Sharp (1975) 50 Cal.App.3d 904, 914 (e.g., the Court takes judicial notice of the existence of court records, but not the truth of hearsay allegations contained therein, except in connection with certain exceptions enumerated in that case.). 

The parties are ordered to meet and confer in full compliance with CCP §§ 430.41 and 435.5 before any further demurrer or motion to strike may be filed.  

 GIVEN THE CORONAVIRUS CRISIS, AND TO ADHERE TO HEALTH GUIDANCE THAT DICTATES SAFETY MEASURES, DEPARTMENT D IS ENCOURAGING AUDIO OR VIDEO APPEARANCES

Please make arrangement in advance if you wish to appear via LACourtConnect/Microsoft Teams by visiting www.lacourt.org to schedule a remote appearance.  Please note that LACourtConnect/Microsoft Teams offers free audio and video appearance. Counsel and parties (including self-represented litigants) are encouraged not to personally appear.  With respect to the wearing of face masks, Department D recognizes that currently, the Los Angeles Department of Public Health strongly recommends masks indoors, especially when interacting with individuals whose vaccination status is unknown; for individuals who have a health condition that puts them at higher risk for severe illness; individuals who live with someone who is at higher risk; and for individuals who are around children who are not yet eligible for vaccines.  In accordance with this guidance, it is strongly recommended that anyone personally appearing in Department D wear a face mask.  The Department D Judge and court staff will continue to wear face masks.  If no appearance is set up through LACourtConnect/Microsoft Teams, or otherwise, then the Court will assume the parties are submitting on the tentative.