CNC Technologies, LLC v. Amrezi, LLC et al.

DEMURRER TO FIRST AMENDED COMPLAINT

 

MOVING PARTY(S):  Defendant Amrezi, LLC

RESPONDING PARTY(S): Plaintiff CNC Technologies, LLC

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

Plaintiff/Cross-Defendant CNC Technologies, LLC (“CNC”) filed the instant action against Defendants Amrezi, LLC (“Amrezi”) and Clayton Thom (“Thom”), alleging (1) breach of fiduciary duty, (2) conversion, (3) fraud–concealment, (4) breach of contract, and (5) breach of implied covenant of good faith and fair dealing.

Plaintiff/Cross-Defendant alleges Defendant/Cross-Complainant Amrezi and third parties entered into an LLC operating agreement to form CNC.  Under the agreement, Cross-complainant Amrezi was one of the initial members of CNC, and Cross-complainant Thom was appointed to CNC’s Board of Directors.  Cross-Defendant CNC alleges that in 2021 it became aware of numerous debts and obligations incurred by Cross-complainant Amrezi and Thom, purportedly on behalf of CNC, but without authority to do so.  It is further alleged that Cross-Defendant CNC discovered significant financial misconduct by Cross-complainant.

Cross-Complainant Amrezi subsequently filed a cross-complaint against CNC, its members, and individual heads of its members for (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) breach of fiduciary duty, (4) intentional interference with contractual relations, and (5) conversion.  The cross-complaint alleges that the other Members and Directors of CNC voted on certain Major Decisions, as defined under the Operating Agreement, amended the Operating Agreement, and exercised the right to repurchase Amrezi’s units at a “Net Book Value,” to which Amrezi rejects.

Defendant Amrezi now demurs to the first cause of action for Breach of Fiduciary Duty.  Plaintiff opposed.

TENTATIVE RULING:

Defendant’s demurrer to the first cause of action is OVERRULED. 

Defendant to file an Answer within 21 days.

DISCUSSION:

Demurrer

Meet and Confer

The Declaration of Attorney Michael Oberbeck reflects that the meet and confer requirement was satisfied. (CCP § 430.41.) 

Legal Standard

A demurrer for sufficiency tests whether the complaint states a cause of action.  (Hahn v. Mirda (2007) 147 Cal. App. 4th 740, 747.)  When considering demurrers, courts read the allegations liberally and in context.  (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal. App. 4th 1216, 1228.)  In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice.  (CCP § 430.30(a).)  A demurrer tests the pleadings alone and not the evidence or other extrinsic matters.  (SKF Farms v. Superior Court (1984) 153 Cal. App. 3d 902, 905.)  Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.  (Id.)  The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.  (Hahn, 147 Cal.App.4th at 747.)

Analysis

Defendant Amrezi demurs to the first cause of action for breach of fiduciary duty on the grounds it alleges insufficient facts to state claim.

The First Amended Complaint alleges that Amrezi, as a Member of CNC Tech, and Thom, as a Director of CNC Tech, “owed fiduciary duties to CNC Tech,” including but not limited to a duty of loyalty, a duty of care, and a duty to discharge duties “consistent with [their] duties under the Operating Agreement and consistent with the obligation of good faith and fair dealing.”  (FAC ¶ 15, 16.)

The FAC further alleges that Defendants breached these fiduciary duties by: 

[E]ncumbering CNC Tech with numerous unauthorized personal debts and obligations, in no way related to CNC Tech, without authority to do so, and actively concealed from CNC Tech, with at least one such debt resulting in a lawsuit against CNC Tech; substantial financial misconduct and self-dealing to the benefit of Thom and/or Amrezi, including, but not limited to, stealing CNC Tech funds and for the benefit of Thom himself; Thom’s mother; numerous entities associated with Thom including, but not limited to, CNC Motors, Craig Thom Properties, and LIG Financial; as well as several other bank accounts unknown to CNC Tech, and associated with Thom.”

(FAC ¶ 17.)

The parties agree that Delaware law applies to this dispute pursuant to the CNC Tech operating Agreement’s choice of law provision.  (FAC, Exh. A, ¶ 12.6.) The Delaware Limited Liability Company Act allows companies to expand, restrict, or eliminate common law duties, including fiduciary duties, as long as the implied covenant of good faith and fair dealing is not expressly eliminated. (See 6 Del.Code § 18-1101(c).)

The CNC Tech operating Agreement, attached to the FAC as Exhibit A, invokes this code section.  The Agreement’s Section 5.3 provides in relevant part:

No Director, Manager, Member, Officer or agent of the Company, any Affiliate of the Company, or any director, officer, shareholder, member, manager partner, trustee, employee, affiliate or agent of any of the foregoing (each such Person, a “Covered Person'”) shall be liable, responsible or accountable in damages or otherwise to the Company or any Member for any action taken or failure to act on behalf of the Company within the scope of authority conferred under or in accordance with this Agreement and the Act on such Covered Person, except where the claim at issue is based on Misconduct of such Covered Person.

In accordance with Section 18-1101 of the Act, the parties hereto hereby eliminate fiduciary duties. The Members acknowledge and agree that (a) the Directors, Manager and Officers shall not have any duties (including fiduciary duties) to the Company or the Members other than those duties expressly described herein and the implied contractual covenant of good faith and fair dealing and (b) so long as the Director, Manager and Officer acts in a manner consistent with the implied contractual covenant of good faith and fair dealing and the express provisions of this Agreement, such Director Manager or Officer shall not be in breach of any duties (including fiduciary duties) in respect of the Company and/or any Member otherwise applicable at law or in equity.

(FAC, Exh. A, ¶ 5.3, p. 24-25.)

By parsing the above paragraphs to include only what is relevant here, it becomes:

“No…Member…shall be liable…to the Company…for any action taken…within the scope of authority conferred under or in accordance with this Agreement and the Act on such [Member], except where the claim at issue is based on Misconduct of [the Member.]”  In addition, “[t]he Members acknowledge and agree that (a) the Directors, Manager and Officers shall not have any duties (including fiduciary duties) to the Company or the Members other than those duties expressly described herein…” (Emphasis added.)

Relying on this provision, Defendant argues that Amrezi owes no fiduciary duties to Plaintiff. And since “Amrezi owed no common law fiduciary duties to Plaintiff, it cannot be in breach thereof, and the First Cause of Action fails as a matter of law.”  (Dem. 6: 21-23.)  This court does not agree with Defendant’s reading of this section.

By Section 5.3’s plain terms, it only eliminates fiduciary duties that “the Directors, Manager, and Officers” would normally owe “to the Company or the Members.”  However, it does not expressly eliminate the fiduciary duties a Member owes to the Company or to other Members.  The parties apparently agree that Amrezi is a Member.  Thus, it does not appear that the waiver of fiduciary duties applies to Amrezi.

Defendant also argues that “Directors, Manager, and Officers”—but not members like Amrezi—still retain some fiduciary duties.  (Dem. 7: 12-14.) This Court agrees that the language of Section 5.3 expressly reserves only limited fiduciary duties for “Directors, Manager, and Officers.” However, this does not imply that Members owe no fiduciary duties at all.  Section 5.3 is simply silent on the fiduciary duties owed by Members.

Finally, even if the waiver of fiduciary duties is read to apply to Members, it appears the misconduct alleged here would still fall into the “misconduct” exception of Section 5.3.  The language of Section 5.3 makes references to “Misconduct,” and any purported limitation to the duties owed specifically carves out Misconduct as an exception.  Here, Plaintiff has alleged misconduct by Amrezi, which would apparently fall into “those duties expressly described herein” that have not been waived. 

Perhaps Plaintiff says it best: “[T]here is no coherent reading of Section 5.3 that could conclude that the fiduciary duties of Directors, Managers, and Officers are limited as outlined, but that those of Members are actually eliminated altogether, and even in cases of Misconduct.”  (Opp. 7: 24-27.)  In fact, it appears the opposite is true.  Drafters of an LLC agreement “must make their intent to eliminate fiduciary duties plain and unambiguous.” (Bay Ctr. Apts. Owner, LLC v. Emery Bay PKI, LLC, 2009 Del. Ch. LEXIS 54, 2009 WL 1124451, at *9 (Del. Ch. 2009)).  At the very least, this court cannot and does not find that Section 5.3 is a “plain and unambiguous” waiver of a Member’s fiduciary duties.

Accordingly, Defendant’s Demurrer to the First Cause of Action is OVERRULED.

IT IS SO ORDERED.

Dated:   September 6, 2022 ___________________________________

Randolph M. Hammock

Judge of the Superior Court

Any party may submit on the tentative ruling by contacting the courtroom via email at  Smcdept49@lacourt.org by no later than 4:00 p.m. the day before the hearing.  All interested parties must be copied on the email.  It should be noted that if you submit on a tentative ruling the court will still conduct a hearing if any party appears. By submitting on the tentative you have, in essence, waived your right to be present at the hearing, and you should be aware that the court may not adopt the tentative, and may issue an order which modifies the tentative ruling in whole or in part.