TENTATIVE RULING

 

Calendar:    7

Date:          1/27/23 

Case No: 22 GDCV00277 Trial Date: None Set 

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

DEMURRERS

MOTIONS TO STRIKE (2)

Moving Party:            Defendants Fresenius Management Services, Inc. 

Defendants Jarremy Morgan, Ana Silveira, Lisa Elie, Ferdinand Rios, Vedamay Bradford, and Anil Vaidya        

Responding Party: William Joshua, LLC      

RELIEF REQUESTED:

Fresenius Management Services

Sustain demurrer to Second Amended Complaint 

Strike punitive damages and attorney’s fees   

Manager Defendants and Morgan (Individual Defendants)

Sustain demurrer to second through fourth 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

Defendant Fresenius Management Services, Inc. (FMS) and the individual defendants alleged to have served on the FMC-Glendale board of managers, as well as individual defendant Jarremy Morgan (collectively, Individual Defendants), bring these two demurrers and motion to strike.  

Defendant FMS argues that the SAC fails to state facts sufficient to constitute a cause of action against it and are based on conclusory allegations which are time barred. 

The Individual Defendants argue that the second and third causes of action fail to allege facts sufficient to state a cause of action against the manager defendants, and are time-barred, and that the fourth cause of action against defendant Morgan fails to state a cause of action, and is time barred. 

All 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. 

Defendant FMS argues that in this case, the contract governing FMS’s relationship with FMC-Glendale, the ASA, expressly specifies that Delaware law shall apply.  The Individual Defendants argue that the OA governing their responsibilities also expressly specified that Delaware law shall apply.  Defendants argue that BMA-California is a Delaware corporation, FMS 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 the Individual Defendants 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.   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’ agreements appear 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.  

First Cause of Action—Member Derivative Action for Breach of Contract—Demurrer by FMS

The elements of a breach of contract have been set forth as follows:

“To prevail on a cause of action for breach of contract, the plaintiff must prove

(1) the contract, 

(2) the plaintiff's performance of the contract or excuse for nonperformance, 

(3) the defendant's breach, and 

(4) the resulting damage to the plaintiff.” 

Richman v. Hartley (2014, 2nd Dist.) 224 Cal.App.4th 1182, 1186.  

Defendant indicates that Delaware law similarly requires that plaintiff plead the existence of a contract, the breach of an obligation imposed by that contract, and resultant damage to plaintiff.  VLIW Technology, LLC v. Hewlett-Packard Co. (Del.2003) 840 A.2d 606, 612. 

The cause of action alleges the existence of contractual obligations between plaintiff and FMS, and a copy of the written agreement is attached to the pleading. [SAC, paras. 96, 35, Ex. 3].  The SAC alleges plaintiffs’ performance, defendant FMS’s breaches and plaintiff’s resulting damages.  [SAC, paras. 97-101, 103].  

All elements have been sufficiently alleged as against FMS. 

Defendant FMS demurs to the first cause of action “to the extent it relies on allegations of breaches before June 1, 2019,” arguing that such allegations are time-barred by the three-year statute of limitations under Delaware law.  This action was filed on June 2, 2022. 

The argument itself concedes that the statute of limitations would not bar conduct which occurred since June 1, 2019.   In fact, all of the breaches alleged in the first cause of action are alleged to have continued to occur beyond June 1, 2019, including the failure to properly solicit, train, retain and maintain sufficient non-physician personnel (“continuing through December 2020”), the failure to pursue and secure patient referrals from major medical groups (“continuing to present”), and the charging of improper interest (“continuing through March 2021”).   [SAC, paras. 98-100].    

The argument accordingly would not dispose of the entire cause of action.   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.   Defendant in the demurrer concedes that the procedural aspects of this demurrer are subject to California law.  The demurrer on this ground does not dispose of the entire cause of action, and the demurrer is overruled.  

Defendant also appears to argue that the alleged breaches are not sufficiently alleged in connection with a specific provision of the contractual agreement between the parties.  The Administrative Services Agreement is attached to the SAC as Exhibit 3, and provides that among the services to be provided by FMS is “all full-time and part-time personnel necessary to manage and operate the non-physician aspects of the Business.”  [SAC, Ex. 3, para. 2.4].  This is a provision which the SAC sufficiently alleges was breached.  [SAC, para. 98].  The first cause of action of the SAC sufficiently alleges breach of contract on at least one theory and the demurrer is overruled. 

Defendant FMS then argues that plaintiff’s claims based on an alter ego or veil piercing theory fail.  It is not clear how this argument would apply to defeat the first cause of action, which is alleged against FMS directly based on its own conduct.   The demurrer to the first cause of action is overruled. 

Second Cause of Action—Breach of Fiduciary Duty and Third Cause of Action—Breach of Fiduciary Duty—Demurrer by FMS and Manager Defendants 

Defendant FMS again argues that these causes of action are barred to the extent plaintiff bases them on events that occurred outside the three year statute of limitations.  The manager defendants also argue that these claims are barred to the extent based on time-barred events. Again, the arguments concede that events which occurred since June of 2019 are not barred.  The arguments accordingly would not dispose of either entire cause of action.  The SAC does not in those two causes of action state any actual dates which would suggest that the causes of action would be time barred.   The demurrers on this ground are overruled. 

Defendant FMS argues that the claims fail because defendant FMS had a contractual, not fiduciary, duty to plaintiff, and the ASA expressly disclaimed any fiduciary relationship between the parties.  However, defendant FMS recognizes that these causes of action allege breaches of duties owed by the manager defendants to plaintiffs, which manager defendants are alleged to have been the employees and agents, albeit allegedly undisclosed, of FMS.  [SAC, para.  107].  The fiduciary duties at issue were accordingly those of FMS’s employees who served on the board of managers.   

FMS and the manager defendants argue that to the extent these causes of action are based on the alleged failure of the manager defendants to faithfully oversee FMS’s performance under the ASA, they are barred as a result of the disclosed conflict of interest and because the ASA was a disclosed and approved Affiliate Transaction.  The manager defendants also argue that the Operating Agreement expressly charged plaintiff, and not the manager defendants, with the responsibility to oversee FMS’s performance.       

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 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 demurrers on this ground accordingly are overruled.  

Defendant FMS and the manager defendants also argue that defendants 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, and, in any case, FMC-Glendale suffered no injury from the initiation of the capital call.  

However, these arguments would not dispose of either of the causes of action to which they are 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 of defendants to faithfully discharge the duties of oversight of contractual performance of the ASA.  [SAC, paras. 106-108, 116, 117 (incorporating paras. 107-110)].  As noted above, the court cannot sustain a demurrer to only part of a cause of action.  Similarly, the arguments that plaintiff lacks standing to bring a direct claim for approval of payment to FMS of alleged unauthorized interest charges address only a portion of the causes of action at issue.  The demurrers are overruled to these causes of action in their entirety.

 

Fourth Cause of Action—Aiding and Abetting Breach of Fiduciary Duty-- Demurrer by FMS and Morgan   

Defendants argues that the cause of action appears to infer that FMS and Morgan 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 demurrers to this cause of action should also be sustained. Since the demurrers to those previous causes of action will be 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 alleged that FMS acted directly to aid and abet the breach of fiduciary duty, and further alleged that FMS has a business policy of having designated employees serve as members of the board of managers of joint venture dialysis centers.  [SAC, paras. 130-133].   The demurrer by FMS to this cause of action accordingly is overruled. 

Defendant Morgan argues that the cause of action fails as against Morgan individually because Morgan cannot be separately liable as an agent for aiding and abetting a principal.  Defendant argues that he has been alleged to have been an employee of both BMA and FMS.   The cause of action alleges that “in doing the acts as herein alleged, defendant Jerramy Morgan was acting pursuant to the express authority and instructions and following the express directions of defendant Fresenius Management Services, Inc.” and was acting pursuant to authorization by FMS as given by Andrew Pate, an officer of FMS.  [SAC, paras. 132, 133].  

Defendant Morgan cites to Delaware law under which: 

“Officers and agents cannot aid and abet their principal or each other in the commission of a tort,” but there is an exception to his rule “where an agent steps out of his role as an officer or agent and acts pursuant to personal motives.”  Largo Legacy Group, LLC v. Charles (Del. Ch. 2021) 2021 WL 2692426 at 18.  

The argument seems to be that Morgan cannot be held responsible for aiding and abetting BMA-California’s alleged wrongful conduct in the second and third causes of action, because he was an employee of BMA-California.  This fact is not alleged in the cause of action itself, which alleges that Morgan was acting for FMS.  

 

Plaintiff in opposition argues that Morgan was an agent of BMA-California only for purposes of the dealings relating to the Membership Assignment Agreement between BMA and plaintiff, but did not act as an agent related to aiding and abetting the breach of fiduciary duty by the defendant managers.  The SAC alleges in allegations stated following this fourth cause of action, in the fifth cause of action, that “in all dealings relating to the Membership Assignment Agreement, Messrs. Nottingham and Morgan in addition to acting for himself, is and was acting as the agent, servant, and representative of, and with the knowledge, consent and permission of, BMA-California.”  [SAC, para. 141]. 

The allegation appears to limit Morgan’s association with BMA-California to the dealings relating to the Membership Assignment Agreement, and also suggests that Morgan may have been acting for himself.  

The cause of action itself very clearly alleges that at the time of the aiding and abetting, Morgan was acting for the principal FMS, not for the principal BMA-California.   The demurrer accordingly is overruled. 

To the extent FMS argues that it cannot be simultaneously liable for breach of fiduciary duty and aiding and abetting a breach of fiduciary duty, as noted above, the Delaware authority cited for this law does not support that conclusion.  In any case, 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 is pled in the alternative, and the demurrer on this ground is 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—Demurrer by FMS 

Defendant FMS argues that these causes of action fail because they are based on defendant BMA-California participating in the alleged freeze out scheme and 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.   Defendant points out that plaintiff makes no specific allegations against FMS under these causes of action. 

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 FMS is implicated in these causes of action, other than through vague alter ego allegations. [SAC, paras. 150, 156]. 

The opposition does not indicate how moving defendant FMS is directly responsible.  The opposition does not indicate that plaintiffs intend to rely on their alter ego allegations in connection with these causes of action.  As pointed out in the reply, the opposition, in fact, does not separately address the sixth cause of action at all.  The opposition also does not set forth any Delaware authority under which there is a covenant of good faith and fair dealing implied in the Membership Assignment Agreement, or fiduciary duties which are owed by the moving defendant.   The demurrer is sustained.  Plaintiffs will be permitted one opportunity to amend the pleading to include FMS in these causes of action, if appropriate, and to allege specific facts and law demonstrating how this defendant has breached specific recognized duties or is responsible on some sort of vicarious liability or alter ego theory.   

Seventh Cause of Action—Fraud and Deceit—Concealment—Demurrer by FMS 

Defendant FMS argues 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.  

Defendant relies 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].

Plaintiffs in opposition argue 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—Motion by FMS and Individual Defendants   

Defendants FMS and the individual defendants seek to strike the prayer for attorney’s fees, arguing there is no basis alleged for the recovery of such fees against those defendants. 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 FMS or any of the individual defendants for an award of attorney’s fees.  The agreement relied upon in the SAC 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 the moving defendants, FMS or the individuals.   Defendants in reply argue that the oppositions fail to address the attorney’s fees arguments in any way and so concede that plaintiff has no basis to seek attorney’s fees against these defendants.  The motions accordingly is granted.  The court at the hearing will inquire whether the failure to oppose the motions on this ground was a concession that the allegations are not appropriately asserted against the moving defendants.  The motions to strike on this ground will be granted without leave to amend unless plaintiffs are able to persuade the court that plaintiffs on amendment can appropriately state a claim for attorney’s fees against FMS or the individual defendants.  

Punitive Damages 

The individual defendants argue that under Delaware law, punitive damages may be warranted when conduct was “‘outrageous’ because of ‘evil motive’ or ‘reckless indifference to rights of others.’”  Jardel Co., Inc. v. Hughes (Supreme Court Del. 1987) 523 A.2d. 518, 529, quoting Restatement (Second) of Torts, section 908, comment b.  

All defendants also argue that under Delaware law, punitive damages are not authorized for a director’s breach of fiduciary duty, or for good faith reliance on the provisions of a limited liability company agreement.  

Defendant FSM further argues that breach of fiduciary claims are directed to the Delaware Chancery court, an equitable court that lacks authority to award punitive damages. 

All 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 alleges conduct arising in the course of business dealings, and the claims are based on conclusory allegations that the alleged conduct of defendants was “cruel and unjust,” and that defendants acted “intentionally, maliciously, and willfully.”  [SAC, paras. 128, 135, 166].  

  Plaintiffs’ oppositions discuss California law, and do 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 FSM or 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 motions accordingly are granted and the punitive damages claims set forth in the third cause of action (as to FMS and the manager defendants), and fourth cause of action (as to FMS and defendant Morgan), will be granted with leave to amend.  The motion of FMS as to the punitive damages sought in the fifth and seventh causes of action is moot in light of the sustaining of the demurrer to those causes of action with leave to amend, as discussed above.   

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 Defendant Fresenius Management Services, Inc. to Plaintiff William Joshua, LLC’s Second Amended Complaint:

Demurrer to the first cause of action for member derivative action for breach of contract, second cause of action for member derivative action for breach of fiduciary duty, third cause of action for breach of fiduciary duty, and fourth cause of action for aiding and abetting breach of fiduciary duty 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 on the ground the SAC does not specify how the conduct of moving defendant FMS is implicated in these causes of action, or specify how this defendant is responsible, or specify on behalf of which defendant or defendants FMS is being pursued on an alter ego theory.  Demurrer 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 defendant FMS and does not allege the cause of action with the requisite specificity as against each defendant against which the cause of action is directed. On amendment, plaintiffs must allege in the cause of action itself how moving defendant FMS engaged in concealment, what fact or facts plaintiffs believe were concealed, and all details reasonably available to plaintiffs as to moving defendant FMS.   

Thirty (30) days leave to amend the fifth, sixth, and seventh causes of action only.

Defendant Fresenius Management Services, Inc.’s Motion to Strike Plaintiff William Joshua, LLC’s Second Amended Complaint:

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

Motion to Strike claims for punitive damages is GRANTED WITH LEAVE TO AMEND as to the claims for punitive damages set forth in the third cause of action and fourth cause of action on the ground that the allegations are not sufficiently specific to the moving defendant, FMS, and the specified conduct relied upon by plaintiff, other than the claim for fraud, to which the demurrer is sustained as to the other causes of action, does not appear to rise to a level of severity supporting punitive damages, under either Delaware or California law.

The motion of FMS as to the punitive damages sought in the fifth and seventh causes of action is MOOT in light of the sustaining of the demurrer to those causes of action with leave to amend.  

Thirty (30) days leave to amend entitlement to punitive damages against the moving defendant, FMS, if possible. 

The Court will expect that on any amendment, plaintiffs will address the arguments raised by defendant, and provide the appropriate level of detail in pleading as against the moving defendant.   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.  

Request for Judicial Notice in Support of Defendants Fresenius Management Services, Inc.’s Motion to Strike Plaintiff William Joshua, LLC’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.  

Demurrer of Defendants Jarremy Morgan, Ana Silveira, Lisa Elie, Ferdinand Rios, Vedamay Bradford, and Anil Vaidya to Plaintiff William Joshua, LLC’s Second Amended Complaint is OVERRULED. 

Defendants Jarremy Morgan, Ana Silveira, Lisa Elie, Ferdinand Rios, Vedamay Bradford, and Anil Vaidya’s Motion to Strike Plaintiff William Joshua, LLC’s Second Amended Complaint:

Motion to Strike claims for attorney’s fees as against the moving defendants is GRANTED WITHOUT LEAVE TO AMEND.  The moving papers establish that attorney’s fees are not appropriately sought as against the moving defendants, and the opposition does not address the argument.

Motion to strike claims for punitive damages is GRANTED WITH LEAVE TO AMEND as to the claims for punitive damages set forth in the third cause of action against the manager defendants, and as set forth in the fourth cause of action against defendant Morgan on the ground that the allegations are not sufficiently specific to the moving defendants, and the specified conduct relied upon by plaintiff, does not appear to rise to a level of severity supporting punitive damages, under either Delaware or California law.

Thirty (30) days leave to amend to allege entitlement to punitive damages against the moving defendants, 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 motion to strike, the parties, during meet and confer and, if necessary, any further briefing to the Court, will thoroughly address the Delaware law on this subject.  

Request for Judicial Notice in Support of Defendants Jarremy Morgan, Ana Silveira, Lisa Elie, Ferdinand Rios, Vedamay Bradford, and Anil Vaidya’s Motion to Strike Plaintiff William Joshua, LLC’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 § 435.5 before any further motion to strike may be filed.  

The Court notes the receipt of Plaintiff’s Notice of Objection and Objection to Defendants Jarremy Morgan, Ana Silveira, Lisa Eli, Ferdinand Rios, Vedamay May Bradford and Anil Vaidya’s Reply in Support of Demurrer, filed on January 24, 2023, only three court days prior to the hearing date, as well as the unauthorized Plaintiff’s Sur-Reply to Defendants Jarremy Morgan, Ana Silveira, Lisa Eli, Ferdinand Rios, Vedamay May Bradford and Anil Vaidya’s Reply in Support of Demurrer, filed on January 25, 2023, only two court days prior to the hearing date. 

The Court notes that these unauthorized documents were filed and served without permission and without permitting sufficient time for any other parties to respond before the hearing.   

The Court nevertheless notes that it has not considered any new arguments or legal authorities raised for the first time in the reply papers.  It is generally recognized that new evidence or legal arguments may accompany a reply only in the exceptional case, and that the opposing party is entitled to notice and an opportunity to respond to the new material.   Plenger v. Alza Corp. (1992) 11 Cal.App.4th 349, 362.  Balboa Ins. Co. v. Aguirre (1983) 149 Cal.App.3d.  1002, 1010 (“The salutary rule is that points raised in a reply brief for the first time will not be considered unless good cause is shown for the failure to present them before.”)

The Court has also not considered the unauthorized Sur Reply.  No permission was obtained from the Court to file such an unauthorized document.

 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.