Judge Randolph M. Hammock, Case Number: 21STCV14556, Date: 2023-10-03 Tentative Ruling

Plaintiff JD Classics Limited (in administration) was a dealer and restorer of high value classic and prestige cars. Plaintiff alleges that its founder and former Chief Executive Officer, Derek Hood, formed a scheme with Defendant Jeff Lotman to misrepresent JDCL’s financial information to facilitate a sale of the Company. This caused JDCL’s accounting and financial records to be materially misstated, which led to the eventual sale of JDCL. Plaintiff brings causes of action against Lotman for (1) fraud, (2) aiding and abetting fraud, (3) aiding and abetting breach of fiduciary duty, and (4) negligent misrepresentation.

Pursuant to Defendant’s request, the court takes judicial notice of Exhibits 1 and 2. The court takes judicial notice of the exhibits without assuming the truth of the assertions contained therein. (See Seelig v. Infinity Broad. Corp. (2002) 97 Cal. App. 4th 798, 808.)

The function of a motion for summary judgment or adjudication is to allow a determination as to whether an opposing party cannot show evidentiary support for a pleading or claim and to enable an order of summary dismissal without the need for trial. Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843. In analyzing motions for summary judgment, courts must apply a three-step analysis: “(1) identify the issues framed by the pleadings; (2) determine whether the moving party has negated the opponent's claims; and (3) determine whether the opposition has demonstrated the existence of a triable, material factual issue.” Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294. Thus, summary judgment is granted when, after the Court’s consideration of the evidence set forth in the papers and all reasonable inferences accordingly, no triable issues of fact exist and the moving party is entitled to judgment as a matter of law. Code Civ. Proc. § 437c(c); Villa v. McFarren (1995) 35 Cal.App.4th 733, 741.

As to each claim as framed by the Complaint, the defendant moving for summary judgment must satisfy the initial burden of proof by presenting facts to negate an essential element, or to establish a defense. Scalf v. D. B. Log Homes, Inc. (2005) 128 Cal.App.4th 1510, 1520. Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” Dore v. Arnold Worldwide, Inc.¿(2006) 39 Cal.4th 384, 389. A defendant has met its burden of showing that a cause of action has no merit if it demonstrates the absence of any single essential element of plaintiff’s case or a complete defense to plaintiff’s action. Code Civ. Proc. § 437c(o)(2); Bacon v. Southern Cal. Edison Co. (1997) 53 Cal.App.4th 854, 858. Once the defendant moving party has met the burden, the burden shifts to the plaintiff to show via specific facts that a triable issue of material facts exists as to a cause of action or a defense thereto. § 437c(o)(2).

In analyzing motions for summary judgment, courts must apply a three-step analysis: “(1) identify the issues framed by the pleadings; (2) determine whether the moving party has negated the opponent's claims; and (3) determine whether the opposition has demonstrated the existence of a triable, material factual issue.” (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.)

Plaintiff JDCL “was a leading retailer of classic and prestige cars.” (Compl. ¶ 19.) Non-party Derek Hood (“Hood”) was founder, majority owner, and sole director and CEO of JDCL. (Id. ¶ 20.) Defendant Jeff Lotman is a car collector and enthusiast. (Id. ¶ 21.)

Plaintiff alleges in or around 2011, Hood and Defendant agreed to an arrangement to profit from the purchase, restoration, and sale of high-value vehicles. (Id. ¶ 22.) The arrangement involved identifying a suitable car; Defendant Lotman would fund the purchase of the car; Hood or JDCL would undertake the restoration work and charge Lotman for that work at cost; The car would be shown at Pebble Beach and/or other events; The car would be sold within a year; and Hood and Lotman would split the profits from the sale. (Id. ¶ 22.)

Between 2011 and 2014, Lotman purchased three cars at the direction of Hood. (Id. ¶ 23.) All three were sold. However, “no proceeds were distributed to Lotman during that time,” and “[b]y 2015, Hood still owed Lotman a total of £3,398,000 in connection with the Arrangement.” (Id. 24.)

Hood eventually became interested in a sale of JDCL, which would allow him to pay his outstanding debt to Defendant Lotman. (Id. ¶ 25.) “In or around 2016, Hood provided, or instructed others to provide, JDCL’s financial records to JDCL’s auditors, PricewaterhouseCoopers LLP (“PwC”), and to potential purchasers of the Company.” (Id. ¶ 26.) Hood represented to PwC and to the potential purchasers of the JDCL that the financial records were “fair and accurate” and the “product of genuine and lawful trading.” (Id. ¶ 27.)

“On September 6, 2016—in reliance on the accuracy of PwC’s audit and JDCL’s financial information as presented by Hood,” Bidco acquired 100% of JDCL. (Id. ¶ 30.) On October 4, 2016, “Hood caused JDCL to pay Lotman £3.4 million.” (Id. ¶ 34.)

By September 10, 2018, JDCL entered into administration “following a determination by its board of directors that it was unable to pay its debts as they came due, and/or that its liabilities (including its contingent and prospective liabilities) exceeded the value of its assets.” (Id. ¶ 32.) “The Administrators’ investigations into the conduct of Hood revealed numerous acts of fraud in breach of his fiduciary duty as a director of JDCL. In particular, JDCL’s revenue, EBITDA, profit, and stock value figures were all inflated by dishonest transactions and practices of Hood.” (Id. ¶ 33.)

The Administrators’ investigation allegedly also revealed “multiple fictitious sale and purchase transactions” involving Lotman. (Id. ¶¶ 41-47.) This included fictitious invoices for the purported sale of two vehicles to Defendant Lotman: a Jaguar Tojeiro and a Ferrari LaFerrari Prototype. (Id. ¶ 42.) Lotman allegedly “confirmed” the veracity of the fictitious invoices by two separate emails. (Id. ¶¶ 44, 45.)

But “[i]t did not come to light until May 2019 that Lotman had materially assisted in the misstatement of JDCL’s financial information by Hood. Until May 2019, the Administrators were unaware—and had no reason to suspect—that Lotman had engaged in the fraudulent conduct.” (Id. ¶ 34.)

Defendant argues that Plaintiff’s claims against him are time-barred. It is undisputed that a three-year statute of limitations applies to each cause of action in the Complaint. Defendant proposes three separate periods of time, any of which he suggests displayed circumstances to put Plaintiff on inquiry notice of Defendant’s alleged fraud.

First, Defendant argues the limitations period began running in 2016 when JDCL’s auditor, PwC—and by extension, Plaintiff—should have realized numerous fictitious vehicle sales and “obvious red flags of fraud in JDCL’s financial records.” (Mtn. 19: 10-11.)

Second, Defendant argues Plaintiff had “actual knowledge” of the fraud in August of 2017 because PwC and JDCL knew then that the La Ferrari had never been sold to Lotman (and therefore that Lotman’s 2016 email saying otherwise was false). Defendant contends this should have placed Plaintiff on notice that the Tojeiro sale also never happened.

Third, Defendant argues Plaintiff was on inquiry notice by January 2018 when Plaintiff’s new owners launched an investigation into irregularities with the company’s books. Considering these points, Defendant asserts the “statute of limitations expired no later than January 31, 2021 – three months before the filing of the Complaint.” (Mtn. 21: 8-8.)

In opposition, Plaintiff notes the three-year limitations period “was tolled for an additional 178 days (from April 6, 2020 to October 1, 2020) as part of the California Judicial Council’s response to the COVID-19 pandemic.” (Opp. 1: 16-17.) “Thus, to prevail on this Motion,” Plaintiff asserts, “Lotman would have to show on undisputed facts that JDCL discovered or should have discovered its claims against Lotman by October 20, 2017.” (Opp. 1: 17-19.)

Plaintiff then argues that Lotman cannot meet this burden because the “adverse domination doctrine” prevents the statute of limitations from running while Hood—himself an alleged player in the fraud—controlled JDCL. Therefore, Plaintiff asserts “Hood’s universal control over all aspects of JDCL’s business tolled any statutes of limitations until at least June 2018 when Hood was suspended from JDCL.” (Opp. 15: 1-2.)

Plaintiff correctly presents the application of Emergency Rule 9, which Defendant does not a materially dispute. Emergency Rule 9 provides that “[n]otwithstanding any other law, the statutes of limitations and repose for civil causes of action that exceed 180 days are tolled from April 6, 2020, until October 1, 2020.” The Advisory Committee Comment to rule 9 states that it “is intended to apply broadly to toll any statute of limitations on the filing of a pleading in court asserting a civil cause of action.” “[T]he Judicial Council clearly and repeatedly expressed its intent that Emergency rule 9 applies only to initial pleadings that commence a civil cause of action or special proceeding.” (People v. Fin. Cas. & Sur., Inc. (2021) 73 Cal. App. 5th 33, 40.)

The Emergency Rule 9 extension applies here. Therefore, the parties appear to agree that the relevant date for purposes of the statute of limitations is October 20, 2017. In other words, for Defendant to prevail on this motion, the undisputed evidence must establish that Plaintiff had actual or inquiry notice of Lotman’s fraud by this date.

Here, the disputed evidence demonstrates that PwC, as JDCL’s auditor, apparently went three years without discovering the alleged fraud. And while PwC may have been negligent in its audits—as JDCL alleges in its Particulars of Claim filed against PwC in England —this says little of JDCL’s notice of the fraud.

It also appears essentially undisputed that Hood and JDCL operated by “handshake” deals and informal documentation. It is similarly undisputed that Hood would unilaterally rescind sales if he got a better offer, causing uncertainty as to whether and to whom ownership transferred. (SSUMF 27.) Therefore, the lack of formalized documentation in the Lotman deals would not necessarily raise a clear red flag. Indeed, the auditors at PwC reviewed the La Ferrari and Tojeiro transactions without questioning their legitimacy. Defendant has provided no authority suggesting it was unreasonable for Plaintiff to rely on PwC’s audit opinions.

Finally, to the extent it is necessary to the statute of limitations question in this motion, there are triable issues of material fact as to the application of the “adverse-dominion doctrine” following the sale of JDCL. The adverse-dominion doctrine applies where a director of a corporation “was in full control of its affairs and the expenditure of its funds” because a corporate wrongdoer cannot “be expected to bring an action against [himself].” (San Leandro Canning Co. v. Perillo (1931) 211 Cal. 482, 487.) “[T]he statute of limitations does not commence to run against unlawful acts and expenditures made by or under the direction of directors of the corporation while they were in full control of its affairs and of the expenditures of its funds.” (Id.)

Here, there is evidence that Hood—who is allegedly the architect of Lotman’s alleged fraud—maintained nearly exclusive control of JDCL’s financial books and records until he was suspended in June 2018. (SSADMF 4, 46). At best for Defendant, Hood’s ongoing control (or lack thereof) is a disputed question of material fact. Therefore, this also supports denial of the motion.

Put simply, whether the purported “red flags” in the business should have provided inquiry notice of the alleged fraud before October 20, 2017, is a question for the trier of fact. Considering the evidence, and “liberally constru[ing] the evidence in support of the party opposing summary judgment and resolv[ing] doubts concerning the evidence in favor of that party,” this court cannot find that the undisputed evidence establishes Plaintiff’s claim is untimely. (Dore v. Arnold Worldwide, Inc.¿(2006) 39 Cal.4th 384, 389.)