Judge Ralph C. Hofer, Case Number: 22GDCV00277, Date: 2023-07-21 Tentative Ruling

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, which operates 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 Administrative Services Agreement by failing to pursue and secure patient referrals from major medical groups. Plaintiff also alleges that FMS breached the Administrative Services Agreement by charging interest on the accrued, but unpaid amount due, on the Due to Manager account.

The TAC 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, Vedamay 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 oversight 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 TAC 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 analyze and review the financial history of FMC Glendale.

The TAC alleges that defendant BMA-California engaged in fraud during the negotiations of the Member Assignment Agreement by intentionally failing to disclose important facts, including the fact that members of the board of directors designated by defendant were also employees of FMS, the fact that BMA-California’s representative, Morgan, knew but failed to disclose that within 21 months Morgan would spearhead the Freeze Out Scheme by appropriating the power to of the FMC Glendale Board of Managers to initiate calls for additional capital contribution of $6 million, the fact that Morgan knew that a recapitalization of the FMC Glendale debt would be necessary, and that the most likely means of achieving that goal would require substantial additional capital contributions from the FMC Glendale members. The TAC alleges that the conduct alleged was undertaken with the full knowledge and consent of FMC Holdings and was approved, authorized and ratified by FMC Holdings.

On January 20, 2023, the court heard a demurrer and motion to strike filed in response to the Second Amended Complaint brought by defendants FMC Holdings and BMA-California. The court issued a tentative ruling via posting on LACourt.org website, which was to overrule the demurrer 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, and to also overrule the fifth cause of action for breach of implied covenant of good faith and fair dealing and sixth cause of action for breach of covenant of good faith and fair dealing as brought by defendant BMA-California. The tentative was to sustain with leave to amend the fourth cause of action for aiding and abetting breach of fiduciary duty and seventh cause of action for fraud and deceit—concealment as brought by both moving defendants, and to also sustain with leave to amend the 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 covenant of good faith and fair dealing as brought by defendant FMC Holdings only.

In advance of the January 27, 2023 hearing, the court also issued a tentative ruling via posting, which was to overrule the demurrer of FMS to the first cause of action for member derivative action for breach of contract, the second cause of action for member derivative action for breach of fiduciary duty, the third cause of action for breach of fiduciary duty and the fourth cause of action for aiding and abetting breach of fiduciary duty.

The tentative ruling ruled that the demurrer by FMS was sustained with leave to amend as to the fifth cause of action for breach of implied covenant of good faith and fair dealing, sixth cause of action for breach of implied covenant of good faith and fair dealing and seventh cause of action for fraud and deceit—concealment.

The motion to strike as brought by defendant FMS was granted without leave to amend as to the claims for attorney’s fees and granted with leave to amend as to the claims for punitive damages in the third and fourth causes of action and deemed moot to the claims set forth in the fifth and seventh causes of action in light of the sustaining of the demurrer with leave to amend.

The motion to strike brought by the individual defendants was granted without leave to amend as to the claims for attorney’s fees and granted with leave to amend as to the claims for punitive damages against the manager defendants in the third cause of action and as against defendant Morgan in the fourth cause of action.

Plaintiff argues that the court should nevertheless revisit its determination concerning choice of law given the amendments made to the TAC on this issue, and the court’s previous indication in oral argument that the issue had not been particularly satisfactorily briefed by plaintiff, and that the choice of law issue was not to be considered conclusively determined. [See Baldridge Decl., Ex. 1, Hearing Transcript, 01/27/2023, pp. 11, 13]. The court in such previous comments intended that the issue could be considered anew once this action had proceeded to the point where evidentiary matter could be submitted and considered, not that the determination could be revisited on further demurrer. In addition, as discussed below, the issue of choice of law does not impact the outcome of the ruling on the demurrer, particularly with respect to the causes of action to which demurrers had previously been overruled, which rulings are not properly challenged in the new demurrer, and are not considered by the court.

Plaintiff argues in both the TAC and the opposition that the exculpatory clause included in the Operating Agreement (which is not included in any other of the agreements at issue in this matter), even if construed under Delaware law, does not effectively eliminate the existence of fiduciary duties, but, even if found enforceable, expressly limits only liabilities, but not duties.

“(c) To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing….

(e) A limited liability company agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.”

This appears to be a colorable reading of the Delaware statutes and the provision in this matter, and reinforces the finding by the court in connection with the demurrer to the previous pleading that the arguments made by defendants concerning the issues of duty do not in any case dispose of these entire causes of action, based on a variety of alleged misconduct and breach of duty. It also appears that even under Delaware statutory law, the Operating Agreement, the limited liability company agreement, could “not eliminate the implied contractual covenant of good faith and fair dealing.” 6 Del. Code section 18-1101(c).

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.”

This court in connection with the previous demurrers found that the requirements had been satisfied here for application of the choice of law provisions designating Delaware law to govern the dispute in part because plaintiff had failed to sufficiently argue that Delaware law presented a fundamental conflict with California law. Plaintiff now alleges and argues that the Delaware law permitting the limitation of liability and duties with respect to limited liability companies, set forth above in 6 Delaware Code section 18-1101 conflicts with California Corporations Code section 17701.10, which provides, in pertinent part:

“(g) The operating agreement may alter or eliminate the indemnification for a member or manager provided by subdivision (a) of Section 17704.08 and may eliminate or limit a member or manager’s liability to the limited liability company and members for monetary damages, except for the following:

Plaintiff relies on Tunkl v. Regents of University of California (1963) 60 Cal.2d 92, which involved an analysis of the validity of a release from liability for future negligence imposed as a condition to admission to a charitable research hospital. Plaintiff relies on the following passage from Tunkl, in which the California Supreme Court, in analyzing whether the subject agreement affected the public interest and could not be enforced, set forth the following standard:

“In placing particular contracts within or without the category of those affected with a public interest, the courts have revealed a rough outline of that type of transaction in which exculpatory provisions will be held invalid. Thus, the attempted but invalid exemption involves a transaction which exhibits some or all of the following characteristics. It concerns a business of a type generally thought suitable for public regulation. The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public. The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards. As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services. In exercising a superior bargaining power, the party confronts the public with a standardized adhesion contract of exculpation and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence. Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents.”

Plaintiff argues here that the contracts relating to the operation of a dialysis center in California involve a California licensed and certified dialysis center, subject to extensive public regulation, which provides services of great importance to the public, and which holds itself out as willing to perform such services to any member of the public which seeks such treatment. Plaintiff argues that each of the prerequisites to determine that a public policy is fundamental have been met here. Plaintiff also argues that California has a materially greater interest than Delaware in the determination of this case, as the agreements were negotiated and executed in California, the day-to-day business operations are conducted in California, and relate to the Glendale dialysis center in California, and all the members of plaintiff and of the Glendale Board of managers are residents of California.

This showing presents a slightly more well-developed argument for resolving the choice of law provision in favor of applying California law with respect to the Operating Agreement provision which defendants argue contractually abrogate their duties to plaintiff as a matter of law. However, as pointed out in the reply, it is not clear that the Tunkl analysis is the analysis to be applied to determine a fundamental public policy for purposes of the choice of law determination, and the court notes that the analogy to Tunkl would be stronger if the agreement affected not the running of the business of the dialysis center here, and the duties of the business operators to each other, but to the duties owed to the public and patients of the dialysis centers, as was the situation in Tunkl.

The court at this juncture continues to apply Delaware law but continues to consider the issue subject to further analysis as the facts in this case develop. The court is particularly concerned that the fundamental policy argument was not addressed by defendants until the reply papers, when the theory was pleaded in some detail in the TAC itself and should have been directly addressed in the moving papers, particularly as this court previously had cautioned defendants that matter addressed for the first time in a reply will rarely be considered by the court.

In any case, the court does not view the choice of law determination to be critical at this juncture, as the majority of the challenged causes of action have already been found sufficiently stated under either law, and the sufficiency of the remaining causes of action are also evaluated in terms of application of California procedural law, which the parties have conceded governs procedural matters in this action, as well as the application of either state substantive law.

As noted above, and pointed out in the opposition, the demurrer brought by defendants FMC Holdings and BMA-California to these causes of action was previously overruled by the court. The demurrer brought by defendants FMS to these causes of action was also overruled. The demurrer brought by the individual defendants to the SAC was overruled. The previous demurrers by the moving parties were accordingly all previously overruled to these causes of action.

The Second District holds that where a demurrer is sustained as to some causes of action, but overruled as to others, and the pleading is then amended, a party may not demur again on the same grounds to those portions of the amended pleading to which an earlier demurrer was overruled. Bennett v. Suncloud (1997) 56 Cal.App.4th 91, 96-97.

In Bennett, the Second District held that a trial judge was “foreclosed from rendering a new determination on the viability of” causes of action which had been the subject of a previous demurrer on the same grounds where the demurrer had been overruled, “unless some new facts or circumstances were brought to his attention.” Bennett, at 97.

Here, there are no new facts or circumstances argued, and the opposition confirms that based on the court’s previous ruling, the causes of action were not in fact substantively amended but amended only to clarify specific parties rather than generic alter ego entities, (TAC, paras. 114, 129), and to insert additional language to address the court’s specificity concerns in connection with claims for punitive damages. (TAC, para. 119). There have been no amendments to the causes of action which would eliminate the previous determination that sufficient facts had been alleged. The demurrers clearly had been overruled, so that it is appropriate to consider anew defendants’ arguments.

“(b) A party demurring to a pleading that has been amended after a demurrer to an earlier version of the pleading was sustained shall not demur to any portion of the amended complaint, cross-complaint, or answer on grounds that could have been raised by demurrer to the earlier version of the complaint, cross-complaint, or answer.”

To the extent the demurrer appears to argue that the TAC now acknowledges that the Operating Agreement expressly eliminated liabilities for breaches of duties, including fiduciary duties, pursuant to the language of the exculpatory clause discussed above, the clause can be reasonably construed to not have expressly eliminated duties as required under Delaware law, as also discussed above. In addition, the TAC does not appear to concede anything, but makes arguments in the alternative with respect to the meaning of the exculpatory clause based on its language, and the potential consequences of its interpretation as eliminating duties on the choice of law analysis. [See TAC, paras. 107, 112, 117, 122, 91, 92]. 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; Adams v. Paul (1995) 11 Cal.4th 583, 593 (“a party may plead in the alternative and may make inconsistent allegations.”).

“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.

The TAC now names both FMC Holdings and BMA-California in the heading and the allegations of the cause of action, alleging that defendant Morgan substantially assisted and encouraged the members of the FMC Glendale Board of Managers to implement the Freeze Out Scheme, and that “FMC had knowledge of any actively participated in the Freeze Out Scheme,” that its joint venture and legal department worked with the others “to explore a potential solution” to the calls for additional capital contributions, and “knowingly” participated in the Freeze Out Scheme, and “ratified the actions of Jarremy Morgan and the BMA-Designated Glendale Managers in effectuating the calls for additional capital.” [TAC, paras. 134, 135]. The TAC alleges in connection with BMA-California that it “had notice of and participated in the Freeze Out Scheme,” with details provided at paragraphs 62-77, that each of the Glendale managers that signed the Morgan calls for additional capital were designated by BMA-California, and that BMA-California knew or should have known that by contributing the full amount of the calls for capital, plaintiff’s minority membership interest would be severely diminished and its super majority voting rights eliminated. [TAC, para. 136]. These amendments satisfy the concerns the court previously had noted concerning the sufficiency of the cause of action against those defendants.

The demurrer again argues that since the previous causes of action are not sufficiently stated with respect to stating a breach of fiduciary duty on behalf of the manager defendants and BMA, plaintiff’s claims for aiding and abetting must fail. As noted above, the previous causes of action do not fail, and the demurrer to those causes of action again is overruled, as the previous demurrers also were overruled. The demurrer to this cause of action on that ground also is overruled.

The demurrer argues that the three paragraphs added to the TAC do not allege how these defendants knowingly participated in or ratified the manager defendants’ actions, but the TAC now alleges contacts and knowledge and participation in the Freeze Out Scheme and appears to sufficiently allege aiding and abetting the conflicted managers taking deliberate action to compromise plaintiff’s interests.

The demurrer again seems to argue that even accepting the new allegations as true, they cannot support a claim for aiding and abetting a breach of a fiduciary duty, as plaintiff cannot prove any underlying breach of a fiduciary duty because those duties were expressly eliminated by the Operating Agreement. As discussed above, there is a reasonable reading of the provision in connection with Delaware law governing elimination of duties and liability which would support an argument that the duties were not sufficiently expressly limited. The demurrer to this cause of action accordingly is overruled.

In addition, it appears that the Operating Agreement was attached to the SAC, and this argument concerning the effect of any of its provisions on the existence of or breach of a fiduciary duty is an argument which could have been previously made in support of the demurrer to the SAC, but was not, as was required under CCP section CCP § 430.41(b)(“A party demurring to a pleading that has been amended after a demurrer to an earlier version of the pleading was sustained shall not demur to any portion of the amended complaint…on grounds that could have been raised by demurrer to the earlier version of the complaint.”). No explanation for not raising the argument earlier has been offered. The demurrer to this cause of action is overruled.

There is no explanation why this demurrer is being brought anew when it was previously overruled. The opposition again indicates that based on the court’s previous ruling, the causes of action were amended to remove defendants FMC Holdings and FMS from each cause of action, and delete the alter ego claims, and delete punitive damages from the fifth cause of action. Further amendments were not required to be made given the court’s previous ruling.

The demurrer argues again that plaintiff cannot base a claim for breach of the implied covenant of good faith and fair dealing based on conduct authorized by the agreement, in effect, that the causes of action are based on defendant 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 Operating Agreement.

The court previously rejected this argument, finding that the causes of action did not appear to be limited to a contractual covenant of good faith and fair dealing, as argued in the demurrer, with the responsibilities 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. [Minute Order, 01/20/2023, p. 10 of 16]. The TAC was amended to delete FMC Holdings from these causes of action but has not been amended to change the allegations against BMA-California, as the demurrer was previously overruled.

To the extent the argument is that fiduciary duties have been eliminated by language in the Operating Agreement, the causes of action are based on alleged duties arising from the Membership Assignment Agreement, which it is not argued included an exculpatory clause. In addition, as discussed above, this argument could have been made previously, and is also rejected on its merits, also as discussed above. The demurrer again 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.”

a. As described more fully at paragraph 112 above, as the Glendale majority member, BMA-California was empowered to and did designate the majority of the members of the Glendale Board of Managers. Plaintiff is informed and believes and thereon alleges that each time BMA-California designated a Glendale Manager, it had full knowledge of the fact that each such designee was also an employee of FMS. Plaintiff is informed and believes and on that basis alleges that BMA-Californa knew that, due to the BMA-Designated Managers obligations as FMS employees, FMC Glendale would be without effective representation of its interests in interactions with FMS.

b. As described more fully at paragraphs 140 - 141 above, BMA-California was represented by Defendant Jarremy Morgan in negotiations of the Member Assignment Agreement. Plaintiff is informed and believes and on that basis alleges that, as Director of Finance, Joint Ventures, Defendant Jarremy Morgan knew that FMC would not consider extending the Glendale Tier-2 Loan or offering a reduced rate Tier-1 loan unless and until FMC Glendale achieved profitability for at least 12-consecutive months. Plaintiff is informed and believes and on that basis alleges that, at the time (July 2018), Defendant Jarremy Morgan knew that FMC would not extend the FMC-Glendale Tier-2 loan nor would it extend a lower rate Tier-1 loan to FMC Glendale.

c. As described more fully at paragraph 140 above, in or about July 2018 BMA California agent JarremyMorgan provided to William Joshua alternate proformas of FMC Glendale financial projections for a 5-year period. Defendant JarremyMorgan stressed to William Joshua that (i) FMC-Glendale was heavily in debt (ii) that all William Joshua members would be "on the hook" for their proportionate share of that debt and (iii) it would be several years before William Joshua would receive any cash distributions from FMC Glendale. Glaringly absent from those negotiations was any mention, or even a hint, that within 21-months Defendant Jarremy Morgan himself would spearhead the Freeze Out Scheme by appropriating to himself the power of the FMC Glendale Board of Managers to initiate calls for $6 Million additional capital contributions from the FMC Glendale members. Plaintiff is informed and believes and on that basis alleges that at the time of negotiations, Defendant Jarremy Morgan knew that a recapitalization of the FMC Glendale debt would be necessary and that the most likely means of achieving that goal would require calls substantial additional capital contributions by the FMC Glendale members.

It is also alleged when defendants failed to disclose/concealed these important facts, plaintiff knew that certification of the dialysis center was imminent and with three new nephrology members, plaintiff “would be able to quickly increase the FMC Glendale patient census,” and did not know and could not have discovered the “BMA-California undisclosed facts,” that defendants intended to deceive plaintiff, and that in reliance on the deception, plaintiff was induced to enter into a business relationship with defendants. [TAC, paras. 159, 160].

As to defendant FMC Holdings, there are certain allegations made concerning knowledge on the part of “defendants,” intent to deceive by defendants, and reliance on “Defendants’ deception.” [TAC, paras. 159, 160]. It is not clear how FMC Holdings participated in the conduct specifically alleged against defendant BMA-California. The TAC only mentions FMC Holdings in paragraph 161, in which the TAC broadly states, “Plaintiff is informed and believes and thereon alleges that the conduct of the defendants herein described was undertaken with the full knowledge and consent of FMC and the actions and conduct were approved, authorized and ratified by FMC.” [TAC, para. 161].

As noted above, the court previously ruled that on amendment plaintiff allege which defendant engaged in concealment, the facts plaintiffs believe were concealed, and the details reasonably available to plaintiff as to each defendant plaintiff intended to pursue in connection with this cause of action.

The court had also previously observed that since the cause of action was for concealment, the court would not strictly require the heightened level of specificity ordinarily required on fraudulent representation claims, based on 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?”

The demurrer argues that not only has plaintiff failed to directly allege that FMC Holdings concealed any material facts it had any duty to disclose to plaintiff, the pleading also fails to allege the cause of action with any degree of specificity, as it is not alleged how FMC Holdings was informed of any conduct, what was said, or who allegedly approved, authorized or ratified the conduct. While the court is not applying the strict specificity requirements due to the nature of the cause of action as “concealment,” the cause of action as to FMC Holdings lacks any allegations supporting that this party engaged in actionable fraud. The demurrer is sustained.

The opposition appears to argue that new allegations in the TAC at paragraph 161 clarify that the reference to “Alter Ego Entities” was a reference to FMC Holdings, which had full knowledge of the conduct of BMA and Morgan and approved and ratified that conduct. That conclusion is not at all clear from the paragraph, quoted above. This state of the pleadings is confusing, as alter ego allegations are not directly asserted in this cause of action and are argued by plaintiff to have been dropped from other causes of action in response to the previous demurrer. This argument does not demonstrate how the cause of action as alleged is sufficient as against FMC Holdings, and the demurrer is sustained.

With respect to BMA-California, the demurrer also argues that the only new allegations as to BMA under this cause of action are that BMA designated the Glendale Board of Managers and had knowledge that the managers were employees of FMS, such that plaintiff would be without effective representation of FMC Glendale’s interests, but that plaintiff has admitted that each of the managers was affiliated with FMC Holdings. For this argument, defendants seem to rely on allegations that there was knowledge that managers were affiliated in some manner with FMC Holdings, and that the members were designated on e-mails, meeting minutes, business cards, letters, with reference to FMC-NA, and other Fresenius entities. [TAC, para. 70].

As argued in the opposition, these allegations are consistent with the allegation by plaintiff here that it was concealed from plaintiff that the BMA appointed managers were affiliated with FMS, as opposed to FMC Holdings. The allegations do not show any inconsistency with this stated theory, as a designation of affiliation with any of the other entities does not reveal employment directly by FMS. The allegations of the TAC in this respect must be accepted as true. See Serrano v. Priest (1971) 5 Cal.3d 584, 591; Del E. Webb Corp. v. Structural Materials Co. (1981, 2nd Dist.) 123 Cal.App.3d 593, 604.

The demurrer also points to provisions of the Operating Agreement and ASA. The demurrer quotes the Operating Agreement with respect to affiliate transactions, which are permitted, if the transaction “is negotiated at arms’ length for Fair Market Value,” without explaining how the appointment of managers who were employees of FMS would fall under this provision. The demurrer also quotes a provision of the ASA which provides that company employees’ expenses will be paid by the company, and not the owner, without explaining how this disclosure would implicate a disclosure that FMS employees would be appointed to the Board, rather than be employed to provide bargained for and disclosed administrative services for the business. [See ASA, Ex. 3]. This does not establish as a matter of law that the matter concealed was somehow disclosed. The concealment cause of action as to BMA-California is overruled on this ground.

The demurrer also argues that the theory that defendants failed to predict future capital calls cannot support a fraudulent concealment claim. This argument would not dispose of the entire cause of action, which is sufficiently stated on at least one theory, as discussed above. 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.

In addition, as argued in the opposition, while plaintiff may have had constructive knowledge of the authority of the Glendale Board under the Operating Agreement to initiate a capital call to resolve the debt issues, plaintiff was also aware that the Board had authority to seek loans from third parties, without reducing plaintiff’s member interest, and the TAC alleges that the 5-year pro forma prepared and provided to plaintiff was devoid of any mention of either scenario occurring during that period, and the facts alleged support a theory that the failure to disclose was not in good faith. [TAC, para. 158]. The demurrer to this cause of action as to BMA-California is overruled.

Here, plaintiff has failed to sufficiently amend the pleading to allege this claim against FMC Holdings after being given leave to do so with the specific input of the court. Plaintiff does not specify in the opposition further facts which could be alleged in any further amended pleading to support such a cause of action against FMC Holdings for direct fraud, so has accordingly failed to meet any burden of showing that any appropriate amendment can be made.

The court also notes that plaintiff in opposition to the motion to strike has conceded that punitive damages are not being sought in connection with this cause of action, so that it does not appear that this claim against FMC Holdings would provide remedies to plaintiff distinct from those available under the other causes of action. The opposition suggests that this cause of action is sought to be pursued on an alter ego theory, but this theory is not clearly alleged in the cause of action, and not discussed as a possible amendment. Plaintiff has not clearly articulated facts it could allege on amendment to the seventh cause of action based on alter ego allegations which would support a theory that FMC Holdings treated BMA-California as its alter ego sufficient to pierce the BMA-California corporate veil such that its conduct is the conduct of FMC Holdings.

The opposition appears to concede that the alter ego allegations have been deleted from the causes of action, in additional amendments by plaintiff. However, there seems to be an argument by plaintiff that the alter ego allegations support the seventh cause of action as to defendant FMC Holdings.

Plaintiff also argues that the court had previously overruled defendants’ demurrer to the alter ego allegations. The demurrer to the alter ego allegations had been previously “overruled, except as specifically noted below.” [Minute Order 01/20/2023]. There is no specific indication in the minute order that the alter ego allegations were insufficient in connection with the seventh cause of action. The seventh cause of action is the only cause of action mentioned in the opposition in connection with identifying previous alter ego defendants, but there is no mention of alter ego liability, and no allegations to support alter ego liability alleged in the cause of action itself. As discussed above, the demurrer to that cause of action as to FMC Holdings is sustained without leave to amend.

The court will hear from plaintiff whether plaintiff by concessions in the opposition intends to withdraw the alter ego allegations set forth at paragraphs 37-38, or if it would be appropriate for the court on its own motion to strike those paragraphs as immaterial to the causes of action alleged in the operative complaint. The material would be stricken without leave to amend, but without prejudice to the plaintiff seeking leave to amend the pleading to add such allegations if discovery discloses that such a theory is appropriate as to a particular cause of action.

The court will also consider whether the demurrer on this ground, which was previously overruled, should again be overruled, which would appear to have no impact on the claims alleged and challenged by defendants, as none of the causes of action in the TAC appear to intend to invoke an alter ego theory. It would also appear that under such circumstances, a determination concerning the sufficiency of those general alter ego allegations would not dispose of an entire cause of action, as is required on demurrer. There has been no motion to strike filed addressed to those allegations.

Defendants indicate that court had previously granted a motion to strike plaintiff’s claims for punitive damages in the SAC as to the second through sixth causes of action as to FMC Holdings and BMA-California, and to the third cause of action as to FMS and the Manager Defendant and fourth cause of action as to FMS and Morgan. A previous motion to strike was deemed moot as to the seventh cause of action due to a demurrer to that cause of action having been sustained with leave to amend.

As an initial matter, with respect to the seventh cause of action for fraud and deceit-concealment, plaintiff in opposition indicates that plaintiff does not challenge defendants’ motion to strike the punitive damages allegations from the seventh cause of action. [Opposition, p. 1:11-12]. The motion to strike accordingly is granted without leave to amend as to the punitive damages sought in connection with the seventh cause of action at the concession of plaintiff in the opposition.

“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.”

“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.”

Defendants again argue that the requests for punitive damages in connection with the third and fourth causes of action is not proper because under Delaware law, the Legislature has not authorized punitive damages for a director’s breach of fiduciary duty. Defendants rely on Adams v. Calvarese Farms Maintenance Corporation, Inc. (Del. Ch. 2010) 2010 WL 3944961, in which the Court of Chancery of Delaware, in a footnote, observed:

“Among other things, Adams seeks punitive damages for alleged breaches by the CFMC directors and officers of their fiduciary duties of care and loyalty. The Court of Chancery, however, lacks jurisdiction to award punitive or exemplary damages unless it has received express statutory authority from the Delaware Legislature. See Seals v. Wash. Int'l, Inc., 386 A.2d 1156, 1158–59 (Del. Ch.1978); see also Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 2.05 (2010). The Legislature has not authorized punitive damages for a director's breach of fiduciary duty; thus, Adams's claim for such relief must be denied.

This opinion is not a published decision in Delaware, and this court will not consider it other than to the extent it cites and relies on published Delaware decisional and secondary sources. Specifically, the Court of Chancery of Delaware in a published decision, Beals v. Washington Intern., Inc. (1978) 386 A.2d 1156 (Not “Seals,” as identified in Adams), granted a motion to dismiss a portion of a complaint which sought punitive or exemplary damages, holding, on a question the court noted had apparently never been considered in a reported decision, that the Chancery court was precluded from awarding punitive damages; “I therefore hold that Chancery historically and traditionally did not enforce forfeitures or penalties and that this was the rule of law in the high court of chancery in England in 1776 and is therefore the rule in this Court today.” Beals, at 1159. The court in Beals further held, “If this Court is to impose penalties in stockholder derivative suits, it is for the General Assembly to so decide. This Court should not assume this mantle on its own volition.” Beals, at 1160.

Defendants also rely on Albert v. Alex. Brown Management Services, Inc. (Del. Sup. Ct. 2004) 2004 WL 2050527, which is a Delaware Superior court unpublished decision, which will also not be considered by this court in the absence of legal authority under Delaware law explaining how such a decision constitutes citable precedent in Delaware.

Plaintiff seems to vaguely argue that the court should at best be applying Delaware law only to interpretation of and actions arising directly under the agreements other than the Operating Agreement, which do not include exculpatory clauses, but should apply California law to the Operating Agreement, which contains the exculpatory clause and renders the Delaware choice of law provision unenforceable as violative of fundamental policy in California. As discussed above, the court is not persuaded that plaintiff has established that the policy at issue is a fundamental one, and there is also no analysis presented with respect to why plaintiff believes that this court may analyze this action under two different sets of state laws.

As discussed in connection with the demurrers to the Second Amended Complaint, and again argued by defendants in the demurrer and motion to strike in connection with the TAC, there is authority under which this court is authorized to apply only one State’s laws to this dispute. Specifically, defendants rely upon the internal affairs doctrine set forth in California Corporations Code section 17708.01(a), which provides:

“‘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.)”

It would appear that this court would accordingly be subject to a choice of law determination which would result in one body of law applying to the entire dispute. Again, the court at this juncture applies Delaware law, under which punitive damages are not awardable for based on breach of fiduciary duty. The motion to strike is granted.

Even if the court were to apply California law, under that law, Civil Code § 3294 (a) authorizes recovery of punitive damages on the basis of findings that “the defendant has been guilty of oppression, fraud, or malice…” “Oppression” is defined to mean “despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.” Civil Code § 3294 (c)(2). “Malice” is defined to mean “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” Civil Code § 3294 (c)(a).

“Despicable” has been defined as a powerful term that refers to circumstances that are “base,” “vile,” or “contemptible.” College Hospital, Inc. v. Superior Court (1994) 8 Cal.4th 704, 725. “Despicable conduct” is defined as, “conduct which is so vile, base, contemptible, miserable, wretched or loathsome that it would be looked down upon and despised by ordinary, decent people.” Mock v. Michigan Millers Mutual Ins. Co. (1990, 2nd Dist.) 4 Cal. App. 4th 306, 331, quoting BAJI 14.72.1; See CACI 3940 (“’Despicable conduct’ is conduct that is so vile, base, or contemptible that it would be looked down on and despised by reasonable people.”) Such conduct has been described as “[having] the character of outrage frequently associated with crime.” Taylor v. Superior Court (1979) 24 Cal.3d 890, 894, quotation omitted. Punitive damages are appropriate if the defendant’s acts are “reprehensible, fraudulent or in blatant violation of law or policy.” Tomiselli v. Transamerica Insurance Co. (1994) 25 Cal.App.4th 1269, 1287.

The third and fourth causes of action here are based on alleged breaches of fiduciary duty and aiding and abetting such breaches. The causes of action continue to allege, as they had in the SAC, that the breaches of fiduciary duty include the concealment of the management defendants’ employment status with FMS, failing to properly pursue or explore a loan option to address company debt, calling for additional capital, executing Actions Taken by Written Consent, and making business decisions which plaintiff alleges unnecessarily and intentionally diluted plaintiff’s share of the Glendale dialysis business. [TAC, paras. 112, 113, 119-127, 134-136]. This conduct did not result in physical injury, but purely financial consequences for plaintiff, a business entity.

Plaintiff in opposition argues that the conduct alleged is sufficient to rise to the level warranting the imposition of punitive damages, in reliance on Peterson v. Superior Court (1982) 31 Cal.3d 147, 158, Bell v. Sharp Cabrillo Hospital (1989) 212 Cal.App.3d 1034, 1044, and Flyer’s Body Shop Profit Sharing Plan v. Ticor Title Ins. Co. (1986) 185 Cal.App. 3d 1149, 1156.

As noted in the reply, those cases do not involve similar allegations to those which are made here, and two of them found that punitive damage were not recoverable under their facts. Specifically, in Peterson, the California Supreme Court noted that the case before it involved allegations of “conduct amounting to a conscious disregard of the safety of others” which were in that case, “sufficient to support punitive damages in the intoxicated driver context.” Peterson, at 158.

In Bell, the court of appeal affirmed a trial court order refusing to instruct a jury on punitive damages in a wrongful death action against a hospital which failed to conduct a complete screening of a treating physician’s competence by not formally inquiring of a second hospital why it had revoked the physician’s staff privileges. The court of appeal acknowledged that punitive damages could be awarded where a party knew or should have known of “the probable dangerous consequences” of its failure to act, “and willfully and deliberately failed to avoid those consequences,” but noted in that case that the record lacked any evidence that the physician posed a threat to patient safety, or that if inquiry had been made to the second hospital, the physician would not have been nonetheless given privileges at defendant hospital. Specifically, the court of appeal noted that the information which was known to defendant may have overcome any inquiry concerning the privileges at the second hospital, as that information included the lack of complaints about the physician and his consistent competency at defendant hospital, the strong recommendation for extending the physician’s staff privileges by the surgeon responsible for the emergency room at defendant hospital, and informal inquiry of the chief of staff at a third hospital. Bell, at 1047.

In Flyer’s Body Shop, the court of appeal reversed a punitive damages award in a judgment based on an award of a jury, where an escrow holder had negligently disbursed a client’s funds in breach of its fiduciary duty, holding, “A title insurance company which negligently disburses a client’s funds in breach of its fiduciary duty is not liable for punitive damages where the evidence fails to show a conscious disregard for plaintiff’s rights.” Flyer’s Body Shop, at 1152. The court of appeal emphasized that, “a breach of a fiduciary duty alone without malice, fraud or oppression does not permit an award of punitive damages.” Flyer’s Body Shop, at 1154.

Here, the allegations involve conduct which would be even less likely to support a conscious disregard finding, not involving risk to safety, but allegations of conduct engaged in in connection with a business relationship between fairly sophisticated parties. The conduct does not rise to the level of malice, conscious disregard for plaintiff’s rights, or conduct in the nature of a crime.

Again, plaintiff has been permitted an opportunity to amend the pleading with respect to these damages, with the detailed input of the court, and has failed to successfully do so. The opposition does not indicate how the pleading could be further amended to sufficiently claim these damages. Plaintiff has also disregarded this court’s request that plaintiff provide analysis based on Delaware law. Plaintiff has failed to meet its burden of showing how the pleading could be further amended to correct the deficiencies, and the motion to strike now is granted without further leave to amend.

Demurrer to the second cause of action for member derivative action for breach of fiduciary duty, third cause of action for breach of fiduciary duty, fourth cause of action for aiding and abetting breach of fiduciary duty as against defendants FMS and Morgan, 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 again OVERRULED. The demurrers to these causes of action by the moving defendants were previously overruled. The demurrer does not establish sufficient basis for revisiting those determinations. The arguments in the opposition based on the provisions of 6 Del. Code section 18-1101 reinforce the sufficiency of the allegations concerning the existence of alleged duties. The Court incorporates the analysis and determinations as set forth above, and as set forth as to each cause of action in the Court’s minute orders of 01/20/2023 and 01/27/2023.

Demurrer to the fourth cause of action for aiding and abetting breach of fiduciary duty as against defendants FMC Holding and BMA-California is OVERRULED. The cause of action is now sufficiently stated against these defendants, and the Court’s previous concerns have been satisfied by the amended pleading.

Demurrer is SUSTAINED WITHOUT LEAVE TO AMEND as to defendant FMC Holdings, as the allegations of the cause of action themselves fail to allege how this defendant directly engaged in concealment, and what facts plaintiff believes were concealed by this defendant, as plaintiff had been previously ordered to allege.

The Court will hear argument concerning whether plaintiff will be permitted leave to amend the seventh cause of action as against defendant FMC Holdings, only, as plaintiff in the opposition does not offer to allege any further facts as against this defendant as to this cause of action or otherwise meet plaintiff’s burden of establishing how this cause of action could be further amended to cure the defect, given that plaintiff has already been permitted leave to amend the prior complaint with the detailed input of the court. The Court is inclined to sustain the demurrer without leave to amend but without prejudice to plaintiff seeking leave to amend the pleading if facts are developed in discovery supporting this cause of action against defendant FMC Holdings.

The Court has previously overruled the challenges to these allegations, but is mindful that in opposition to the motion, plaintiff has repeatedly represented that plaintiff in the TAC amended the SAC to eliminate this theory of recovery, particularly as to the second through sixth causes of action. The Court will hear argument whether plaintiff concedes that this theory has been withdrawn, so that the general allegations of alter ego liability remaining in the TAC at paragraphs 37-38, should be withdrawn or stricken by the court on its own motion as immaterial.

UNOPPOSED Request for Judicial Notice in Support of Defendants’ Demurrer to Plaintiff William Joshua, LLC’s Third 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.).

To the extent the “Objection” to reply is an unauthorized Sur-Reply, plaintiff is cautioned, for the second time, that the Court will not entertain unauthorized pleadings, without an advance order of the Court permitting them to be filed. The Court is also concerned about ensuring that other parties are permitted sufficient time to respond to such pleadings.

The Court also notes, again for the second time, that it has not considered any new arguments or legal authorities raised for the first time in the reply papers which are not directly responsive to issues raised for the first time in the opposition. 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.”) To the extent the new evidence, arguments and law are intended to respond to the choice of law issues raised in the opposition, the Court recognizes that many of these issues were previously raised in the TAC itself, as recognized in the moving papers, and should have been addressed in the moving papers challenging the sufficiency of those allegations.

Motion to Strike is GRANTED WITHOUT LEAVE TO AMEND as to the claims for punitive damages in connection with the seventh cause of action for fraud and deceit-concealment, based on plaintiff’s representation in the opposition papers that “Plaintiff does not challenge Defendants’ Motion to Strike the punitive damages allegations from COA No. 7.” [Opposition, p. 1:11-12].

Motion to Strike is GRANTED WITHOUT LEAVE TO AMEND as to the claims for punitive damages in connection with the third cause of action for breach of fiduciary duty and fourth cause of action for aiding and abetting breach of fiduciary duty. The allegations of the TAC are subject to Delaware law under which punitive damages are not awardable for breach of fiduciary duty in the present context, and also do not rise to a level of oppression, fraud, malice, or conscious disregard for the rights of others sufficient to support a claim for punitive damages under either Delaware or California law. Plaintiff has failed to correct the deficiencies despite being permitted the opportunity to do so, with the input of the Court, and has also failed in the opposition to indicate how the pleading could be further amended to address the deficiencies. The motion is accordingly granted without further leave to amend.

UNOPPOSED Request for Judicial Notice in Support of Defendants’ Motion to Strike Plaintiff William Joshua, LLC’s Third 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.).