Judge: Richard Y. Lee, Case: 30-2022-01253098, Date: 2022-09-15 Tentative Ruling
Defendants Julie Hodson (“Hodson”), Lan Pham (“Pham”), Joshua Cua (“Cua”), and Beverage Visions, LLC (“BV”) demur to the Complaint filed by Plaintiff Andy Garcia (“Plaintiff”) on the grounds that the Complaint is uncertain, Plaintiff is barred from bringing causes of action in both his individual capacity and on a derivative basis, and each cause of action fails to state sufficient facts against them. Hodson and Pham also move to strike certain allegations that they contend violate the mediation privilege and Plaintiff’s request for punitive damages. BV has filed a joinder to Hodson and Pham’s Demurrer and Motion to Strike, in addition to its own Demurrer.
Meet and Confer
A demurring party must meet and confer in person or by telephone with the party who filed the pleading that is subject to the demurrer in an attempt to reach an informal resolution before a demurrer is filed. (Code Civ. Proc., § 430.41(a).)
Here, Hodson and Pham adequately met and conferred with Plaintiff prior to the filing of their Demurrer and Motion to Strike. Cua also met and conferred with Plaintiff before filing his Demurrer, but it is not clear whether their counsel met in person or by telephone. Counsel for BV did not satisfy the meet and confer requirement, as they only met and conferred with Plaintiff’s counsel by written correspondence.
The Court will exercise its discretion to consider the merits of the Demurrers of BV and Cua but admonishes counsel that any future failure to comply with all applicable rules and statutes may result in a motion being denied or taken off calendar, where appropriate.
Plaintiff’s Capacity to Sue and Uncertainty
The Complaint asserts the following causes of action: (1) Breach of Contract against Hodson, Pham, and BV as a nominal defendant; (2) Breach of Oral Contract against Hodson, Pham, and BV; (3) Breach of Fiduciary Duty and Conspiring with and Aiding and Abetting Breach of Fiduciary Duty against all Defendants; (4) Fraud and Conspiring with and Aiding and Abetting Fraud against all Defendants; (5) Violation of Business & Professions Code section 17200 and Conspiring with and Aiding and Abetting Such Violations against all Defendants; and (6) Involuntary Dissolution against Hodson, Pham, and BV as a nominal defendant.
Cua argues the first, third, fourth, and fifth causes of action fail because Plaintiff is seeking damages in his individual capacity and also making a derivative claim on behalf of BV, which is prohibited. Hodson and Pham attack the first and third causes of action on the same ground. Similarly, BV demurs on the ground that the Complaint is uncertain, in that Plaintiff appears to be seeking to recover damages he directly sustained, while at the same time seeking to recover damages for the benefit of BV in a derivative action, but it is unclear whether Plaintiff seeks monetary damages from BV or for the benefit of BV.
Cua cites to Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, in which the court stated that a direct action filed by an individual shareholder and a derivative action filed on behalf of a corporation are “ ‘. . . mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) or the corporation (derivative action).’ ” (Id., at pp. 650-651.) Cua also cites to Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, in which the court stated: “an injury to the corporation cannot be maintained in an action brought by an individual shareholder on his own behalf but must be asserted in a derivative action in which the shareholder is ‘a mere nominal plaintiff, the corporation is the real party in interest, and any judgment recovered inures to its benefit.’ ” (Id., at p. 1253.)
Plaintiff does not dispute that he is attempting to bring both individual claims and derivative claims in his Complaint. He argues, however, that combining these claims into a single action is proper. None of Plaintiff’s cited authority supports his argument.
Holistic Supplements, L.L.C. v. Stark (2021) 61 Cal.App.5th 530 does not stand for the proposition argued by Plaintiff. There, the plaintiff was asserting individual claims as distinct from any derivative claim for injury to the limited liability company at issue. (161 Cal.App.5th at p. 541.) The court did not address whether the plaintiff’s individual claims could be asserted in the same action as derivative claims because no derivative claims were being alleged.
The court in Denevi v. LGCC (2004) 121 Cal.App.4th 1211 also did not address whether derivative and individual claims could be asserted in a single action. There, the plaintiff had brought a derivative action and prosecuted it to judgment and subsequently filed a separate action based on his individual claims. (121 Cal.App.4th at p. 1214.) The court held that plaintiff was entitled to pursue remedies in both his individual capacity and as the owner of a corporate entity. (Id., at p. 1221.) However, the court did not infer that pursuit of those remedies could be combined in a single action.
Plaintiff also cites to Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93. In Jones, the defendants argued that the cause of action asserted against them was derivative in nature and plaintiff had no standing to sue in an individual capacity. (Id., at p. 105.) The court held that it was clear that the plaintiff was not seeking to recover on behalf of the corporation, but on her own behalf for injury done to herself. (Id., at p. 107.) The plaintiff was not attempting to bring any derivative claims and Jones therefore also did not address whether a plaintiff could combine individual claims and derivative claims in a single suit.
Therefore, the Court holds that Plaintiff may not maintain both individual claims and derivative claims in a single action.
Under the first cause of action for Breach of Contract, Plaintiff alleges that he, individually, and BV have suffered damages in an amount no less than $350,000.00 as a result of Hodson and Pham’s breaches. (Compl., ¶ 81.) Plaintiff alleges the same with regard to his third cause of action for Breach of Fiduciary Duty (Compl., ¶ 104), fourth cause of action for Fraud (Compl., ¶ 132), and fifth cause of action for Violation of California Business & Professions Code section 17200 (Compl., ¶ 143).
As alleged, the Complaint asserts damages incurred by both Plaintiff and BV. Plaintiff claims that they both have lost at least $350,000.00 as a result of the alleged misconduct. In a true derivative suit, BV would be named as a nominal defendant, but it would be the real party in interest to which any recovery belongs. (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108.) Here, where Plaintiff is seeking to both recover for BV and recover against BV, it cannot be said that BV is the real party in interest. Because Plaintiff is attempting to bring both individual claims and derivative claims in a single action, the Court agrees that the first, third, fourth, and fifth causes of action fail. (Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th at p. 1253; see also Shenberg v. De Garmo (1943) 61 Cal.App.2d 326, 331 [“An action of a personal nature resulting in injury to the plaintiff individually may not be joined with a derivative action for injuries done to the corporation.”].)
Moreover, pursuant to Code of Civil Procedure section 430.10(f), a party against whom a complaint has been filed may object by demurrer, when the pleading is uncertain. “Uncertain” includes ambiguous or unintelligible. (Ibid.) Additionally, pursuant to Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, “a Plaintiff is required . . . to set forth the essential facts of his case with reasonable precision and with particularity sufficient to acquaint a Defendant with the nature, source and extent of his cause of action.” (Id., at p. 608.)
Here, though it is clear that Plaintiff is attempting to assert both individual claims and derivative claims, it is unclear where Plaintiff is attempting to draw the line between the two sets of claims in the first, third, fourth, and fifth causes of action, leaving Defendants unable to determine the nature, source, and extent of those causes of action. Plaintiff merely alleges that he and BV have suffered damages in an amount no less than $350,000.00, without any further facts explaining how much he alleges he suffered individually and how much he alleges BV suffered as a separate entity. Thus, not only do these causes of action fail because they purport to assert both individual and derivative claims, but they are uncertain.
In light of the foregoing, the Demurrers to the first, third, fourth, and fifth causes of action is SUSTAINED with 20 days leave to amend.
Second Cause of Action for Breach of Oral Contract
Hodson and Pham demur to this cause of action on the grounds that Plaintiff has failed to allege the requisite facts to support it and the alleged contract is subject to the statute of frauds because it could not be performed in one year. BV demurs to this cause of action on the grounds that the alleged oral agreement was between Plaintiff and Hodson and Pham, not BV, and the Operating Agreement among the three members of BV expressly states that it supersedes all prior agreements, including the alleged oral agreement. BV also contends the cause of action fails due to the statute of frauds.
“A cause of action for breach of contract requires pleading of a contract, plaintiff’s performance or excuse for failure to perform, defendant’s breach and damage to plaintiff resulting therefrom.” (McKell v. Washington Mut., Inc. (2006) 142 Cal.App.4th 1457, 1489.)
Plaintiff alleges that, before entering into the Operating Agreement, Hodson and Pham orally agreed that none of them could be terminated from their employment as officers of BV until they made the decision to retire. (Compl., ¶ 84.) The oral agreement also required BV to pay him a yearly salary of $185,000.00. (Id., ¶ 85.) Plaintiff alleges he performed all his duties and obligations under the oral agreement, except those that he was prevented from performing by BV. (Id., ¶ 87.) He alleges Hodson and Pham have breached the oral agreement by depriving him of his yearly salary of $185,000.00, retaliating against him for his demands that they stop allowing Cua to take over management and control of BV, and damaging Plaintiff financially so that he would not be able to prosecute his claims. (Id., ¶ 88.) Plaintiff alleges he has suffered damages in an amount no less than $15,000.00 as a result of BV’s breach of the oral agreement. (Id., ¶ 91.)
Here, the allegations are sufficient to demonstrate an oral agreement between Plaintiff and Hodson and Pham. However, none of the allegations show any oral agreement between Plaintiff and BV. Thus, BV’s Demurrer to the second cause of action is SUSTAINED with 20 days leave to amend.
As to Hodson and Pham, though Plaintiff has alleged the existence of an oral agreement with them, his own performance, and Hodson and Pham’s breach, he has not adequately alleged the last element of damage to him resulting from their breach. Instead, Plaintiff alleges he has been damaged by BV’s breach of the oral agreement, not Hodson and Pham’s breach. Thus, Hodson and Pham’s Demurrer to the second cause of action is SUSTAINED with 20 days leave to amend.
Sixth Cause of Action for Involuntary Dissolution
Hodson and Pham demur to this cause of action on the ground that there are no facts alleged to demonstrate that Plaintiff’s interest or rights are threatened or at jeopardy. They further argue that because Plaintiff has not alleged fraud with the requisite specificity, this cause of action fails to the extent it is based on fraud.
Corporations Code section 17707.03 states:
“(a) Pursuant to an action filed by any manager or by any member or members of a limited liability company, a court of competent jurisdiction may decree the dissolution of a limited liability company whenever any of the events specified in subdivision (b) occurs.
“(b)(1) It is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. (2) Dissolution is reasonably necessary for the protection of the rights or interests of the complaining members. (3) The business of the limited liability company has been abandoned. (4) The management of the limited liability company is deadlocked or subject to internal dissension. (5) Those in control of the limited liability company have been guilty of, or have knowingly countenanced, persistent and pervasive fraud, mismanagement, or abuse of authority.”
Plaintiff alleges Hodson and Pham have engaged in persistent and pervasive fraud, mismanagement, abuse of authority, and persistent unfairness toward Plaintiff. (Compl., ¶ 149.) Plaintiff alleges dissolution is necessary to protect his rights and interests in BV because if dissolution is not granted, Hodson wand Pham will continue to allow Cue to manage and control BV and Cua will misapply and waste Plaintiff’s and BV’s property until BV is financially destroyed or severely damaged. (Compl., ¶¶ 150-152.) In his general allegations, Plaintiff alleges that Hodson and Pham have allowed Cua to be involved in the management of BV, leading to the endangerment of BV by allowing creditors of a separate entity to claim BV is a successor in interest liable for its debts. (Compl., ¶ 45.) He further alleges that Hodson and Pham allowed Cua to be compensated $122,000.00 more than the amount specified in his consulting agreement. (Compl., ¶ 41.)
These allegations are sufficient to demonstrate persistent mismanagement or abuse of authority by Hodson and Pham. The allegations are also sufficient to support a claim that dissolution is reasonably necessary to protect Plaintiff’s rights or interests, in that it is alleged that Hodson and Pham’s mismanagement and allowance of Cua to take control is leading to potential liability of BV to creditors and monetary waste. Thus, the Court finds the sixth cause of action is adequately pleaded. The Demurrer to the sixth cause of action is OVERRULED.
Hodson and Pham’s Motion to Strike
Hodson and Pham argue the Complaint contains immaterial allegations regarding the settlement communications between the parties in anticipation of mediation, which must be stricken pursuant to Evidence Code section 1119(c).
Plaintiff contends that the statements Hodson and Pham seek to strike were not made in the course of mediation and are therefore not subject to mediation confidentiality. Plaintiff asserts that the statements are alleged to support the allegation that Plaintiff made a reasonable effort to induce the managers to redress the wrongs identified in his written Demand of February 28, 2022, as required by Corporations Code section 17709.02(a)(2).
Evidence Code section 1119(c) provides that “[a]ll communications, negotiations, or settlement discussions by and between participants in the course of a mediation or a mediation consultation shall remain confidential.”
“Mediation confidentiality protects communications and writings if they are materially related to, and foster, the mediation.” (Wimsatt v. Superior Court (2007) 152 Cal.App.4th 137, 160.) “All conversations between the parties are not protected by mediation confidentiality simply because the conversations might have occurred temporally before a scheduled mediation.” (Id., at p. 161.) “Mediation confidentiality is to be applied where the writing, or statement would not have existed but for a mediation communication, negotiation, or settlement discussion.” (Id., at p. 160.)
The allegations in Paragraphs 60-69 of the Complaint are not materially related to any mediation. Rather, they only reflect the parties’ agreement to attempt to resolve their disputes at mediation on May 6, 2022, and the parties’ dispute over whether Plaintiff had resigned from BV or not.
The allegations in Paragraphs 70-73, however, include statements between the parties concerning potential settlement offers at mediation. These allegations are materially related to mediation and would not have existed but for the scheduled mediation or the parties’ settlement discussions. The Court finds that these allegations must be stricken to protect the mediation confidentiality.
Thus, the Motion is DENIED as to the allegations contained in Paragraphs 60-69. The Motion is GRANTED as to the allegations in Paragraphs 70-73.
Punitive Damages
Hodson and Pham move to strike Plaintiff’s allegations in support of his prayer for punitive damages. They argue the allegations fail to come close to the despicable conduct required for punitive damages.
Plaintiff argues that Hodson and Pham are confusing the evidentiary burden a plaintiff has in proving entitlement to punitive damages at trial with a plaintiff’s burden in alleging the right to damages in a complaint. The Complaint must only allege ultimate facts showing entitlement to such relief. Plaintiff contends he has alleged Hodson and Pham breached fiduciary duties and conspired with and aided abetted on another, and that he has been exposed to more than $3 million in debt due to Hodson and Pham allowing Cua to take over the management of the Company. He has also alleged Hodson and Pham fraudulently induced him into becoming a member of the company.
As discussed above, the Demurrers of Defendants are SUSTAINED with leave to amend, including the Demurrers as to the fourth cause of action for Fraud. Because Plaintiff has failed to adequately state any cause of action against Hodson and Pham, the Court finds that Plaintiff’s prayer for punitive damages fails as well. Thus, the Motion to Strike is GRANTED as to Plaintiff’s request for punitive damages.
Plaintiff to give notice.