Judge: Richard Y. Lee, Case: "Huzyakvs.1973Preuss,LLC", Date: 2022-10-20 Tentative Ruling

Defendants Breakform 1973 Preuss, LLC (“Breakform”), 1973 Preuss, LLC (“Preuss”), and Ridaa Murad (“Murad”) (collectively, “Defendants”) jointly seek an order sustaining their demurrer to the entire Verified First Amended Comoplaint as to Plaintiff Marshall Properties, LLC; to the Second Cause of Action for purported Breach of Fiduciary Duty; to the Third Cause of Action for purported Conversion; and Breakform and Preuss seek an order sustaining the demurrer to the Seventh Cause of Action for purported Involuntary Dissolution.

Initially, the Court notes abuses of the California Rules of Court and other issues requiring a continuance of the matter.

First of all, both parties cite to both California and Delaware law interchangeably and/or to support specific arguments without a real analysis as to why either States’ law applies to the particular causes of action addressed in the Demurrer.

Additionally, the Court notes that neither side has lodged the Delaware authority with the Court. [See CRC, Rule 3.1113(i)(1).]

Finally, Plaintiff’s Opposition is eighteen (18) pages, and the first eleven (11) pages contain considerable footnotes. This violates CRC, Rule 3.1113(d). A memorandum exceeding the permissible page limits “must be filed and considered in the same manner as a late-filed paper”; i.e., the court in its discretion may refuse to consider it in ruling on the motion. [CRC 3.1113(g).]

Similarly, the Reply brief also exceeds the permissible page limits. 

The Court sternly admonishes the parties to comply with the local rules and not attempt to circumvent them by excessive footnotes.  The rules exist for a reason, and failure to comply will only result in unnecessary delay and possible sanctions.

Nonetheless, the Court will attempt to address the merits below:

STANDING

Initially, all Defendants jointly seek an order sustaining their demurrer to the entire Verified First Amended Complaint (“FAC”) as to Plaintiff Marshall Properties, LLC (“Marshall Properties”), being a proper plaintiff based upon its lack of standing.

Defendants argue an “assignment merely transfers the interest of the assignor. The assignee ‘stands in the shoes’ of the assignor, taking his rights and remedies, subject to any defenses which the obligor has against the assignor prior to notice of the assignment.” [Citation.] Once a claim has been assigned, the assignee is the owner and has the right to sue on it. [Citations.] In fact, once the transfer has been made, the assignor lacks standing to sue on the claim. [Citation.]’ ” [California Bank & Trust v. Piedmont Operating Partnership, L.P. (2013) 218 Cal.App.4th 1322, 1347.]

Plaintiffs appear to oppose this argument in Footnote 1 of the Opposition, suggesting that Marshall only partially assigned its tort claims to Huzyak.  However, this argument contradicts what is pled in the FAC.

Therefore, the demurrer is SUSTAINED as to the entire First Amended Complaint as to claims by Plaintiff Marshall Properties LLC.

DERIVATIVE ACTION

Preliminarily, it appears from a reading of the FAC that all Plaintiffs bring all causes of action against all Defendants, and there is no distinction in the FAC between “direct” or “derivative” claims. 

Defendants argue that despite bringing a purported derivative action on behalf of the members of Breakform and Preuss, Huzyak only alleges direct damages and seeks only relief on his own behalf. [Verified FAC, ¶¶ 10-55, Prayer]. Critically, Huzyak and Marshall Properties fail to allege any cognizable damages to Breakform or Preuss at large.

Again, Plaintiffs’ arguments in response are found in the footnotes of their Opposition. See Opp. page 3, Footnote 4. Notably, Plaintiffs did not argue that Delaware law did not apply, but rather, that Breakform Delaware suffered harm, and would receive benefit of any recovery under the fraud and breach of fiduciary claims.

However, as to the 1st cause of action for Misrepresentation, Plaintiffs plead, “Murad’s, 1973 Preuss’ and Breakform Delaware’s collective failures to disclose material facts to Marshall Properties and Huzyak, substantially caused Marshall Properties’ damages in an amount to be proven at trial. At a minimum, such damages include, but are not limited to, (i) their lost investments in and loan funds paid to 1973 Preuss and Breakform California; (ii) lost profits; (iii) lost business opportunities, and (iv) lost interest.” (FAC ¶28). The gravamen of this cause of action does not appear to be derivative as to 1973 Preuss and Breakform Delaware, but rather, direct losses sustained by Marshall Properties and Huzyak.

As to the 2nd cause of action for Breach of Fiduciary Duties, Plaintiffs plead that “Murad, Breakform Delaware and Breakform California violated their respective fiduciary duties to Marshall Properties” (FAC ¶32), and as such, “As a direct result, Marshall Properties’ investment essentially has been rendered valueless, among other things. By reason thereof, Marshall Properties has been damaged, without limitation, by a loss of its investment, interest thereon, and other business opportunities.” (Id. ¶33). Again, Plaintiffs own pleadings establish this is a direct cause of action, and not derivative.

Therefore, the demurrer to the entire FAC is SUSTAINED to the extent the FAC is brought by Plaintiffs derivatively.

2nd cause of action for BREACH OF FIDUCIARY DUTY

As to the 2nd cause of action for Breach of Fiduciary Duty, Plaintiffs plead as against all Defendants as follows:

“31. At all relevant times, Murad, Breakform Delaware and Breakform California acted in a fiduciary capacity toward Marshall Properties in, among other things, soliciting that entity to invest in 1973 Preuss, and thereafter Breakform Delaware, overseeing use of Marshall Properties investment in these limited liability companies, and generally managing and operating the affairs of these limited liability companies. As such, Murad and his affiliates had duties to deal with Marshal Properties with the utmost care, honesty and loyalty, to diligently exercise reasonable and prudent care in each’s respective management and oversight responsibilities in 1973 Preuss and Breakform Delaware, to disclose all facts known to them materially affecting the value and desirability of the investment to be made and made by Marshall Properties, and to represent them in good faith with respect to these investment transactions.” [FAC ¶31.]

Plaintiffs have also pled at FAC ¶7 that,  “On information and belief, 1973 Preuss, Breakform Delaware, Breakform California, their affiliates, and Murad, among other legal and factual characteristics, are and were alter egos of one another…” FAC ¶7 is incorporated into the 2nd cause of action at FAC ¶30.

Notably, Defendants (Breakform, Preuss, and Murad) filed a joint demurrer. Therefore, the demurrer may be overruled if the cause of action is sufficient against any one of them. [See for example, Majestic Realty Co. v. Pacific Lighting Corp. (1974) 37 Cal.App.3d 641, 642-643; Fox v. JAMDAT Mobile, Inc. (2010) 185 Cal.App.4th 1068, 1078.]

Defendants argue that the Second Cause of Action for Breach of Fiduciary Duty fails because no allegations are made in the Verified FAC establishing any fiduciary duty of Breakform or Preuss to Huzyak or Marshall Properties and because, under Delaware law, an entity cannot be a fiduciary to its own stakeholders.

Defendants also argue that as to Murad, the Tenants-In-Common Agreement (attached to the Verified FAC as Exhibit 2, the “TIC Agreement”) and the Operating Agreement (attached to the Verified FAC as Exhibit 5) contradict any claim that Murad owed either Huzyak or Marshall Properties a fiduciary duty, and in fact establish that Murad had no fiduciary duty to Huzyak or Marshall Properties.

Plaintiff argues that as to Murad, the FAC pleads that he was the promoter of the initial investment opportunity, and pursuant to Eisenbaum v. Western Energy Resources, Inc. (1990) 218 Cal.App.3d 314, 322, “A promoter or insider, or a seller of a limited partnership interest, owes a fiduciary duty to the prospective purchaser of such an interest.”

Indeed, even before the TIC or any other agreement was entered into, it would appear as “promoter”, Murad had a fiduciary duty to Plaintiffs which was apparently breached by his misrepresentations. (See for example FAC¶24.)

As such, it appears Plaintiffs stated sufficient facts to put Defendant Murad on notice of the cause of action pled against him.

As the Defendants filed a “joint” demurer, the demurrer is OVERRULED as to the 2nd cause of action for Breach of Fiduciary Duty.

3rd cause of action for Conversion

The elements of a conversion are the plaintiff's ownership or right to possession of the property at the time of the conversion; the defendant's conversion by a wrongful act or disposition of property rights; and damages. (Farmers Ins. Exchange v. Zerin (1997) 53 Cal.App.4th 445, 451–452.) Money can be the subject of an action for conversion if a specific sum capable of identification is involved. (Id.)

As to the 3rd cause of action for Conversion, Plaintiffs plead the following:

“36. From in or about December 2018 to present, Murad, 1973 Preuss and Breakform Delaware converted, among other things, at least $1,350,000 to be paid to Marshall Properties from proceeds of an alleged construction loan to their own use and benefit. Marshall Properties continually, since at least December 2018, orally and in writing, have demanded each for an immediate return of these funds, but they have failed and refuse to return the funds. They also have systematically refused to provide Marshall Properties with any meaningful accounting, as required by the operative governing documents, so that Marshall Properties could trace the use of investment by these business entities. On information and belief, Murad, Breakform Delaware and Breakform California have converted use of Marshall Properties investment to their own benefit.” [FAC¶36.]

Here, it appears the subject of the conversion is money. However, “at least $1,350,000” is not a specific sum. Furthermore, elsewhere in the FAC it spears the amount of the loan was $950,000 (See FAC ¶10), so the allegation appears contradictory.

Therefore, the demurrer to the 3rd cause of action is SUSTAINED with leave to amend.

7th cause of action for Involuntary Dissolution and Winding Up of A Limited Liability Company

Defendant argues that Huzyak’s reliance on California law to compel an involuntary dissolution is improper because Delaware law applies based upon the internal affairs doctrine. See, Grosset v. Wenaas (2008) 42 Cal.4th 1100, n 2; and, Corp. Code. § 17708.01(a)

Indeed, Cal. Corp. Code§17708.01(a)(1) states that the “law of the state or other jurisdiction under which a foreign limited liability company is formed governs” the “organization of the limited liability company, its internal affairs, and the authority of its members and managers.”

In Plaintiffs’ 7th cause of action, Plaintiffs cite to California Corporations Code in seeking dissolution. (See FAC¶¶52, 54. ) However, Breakform Delaware is a Delaware LLC. (FAC¶3.) Therefore, to the extent Plaintiffs seek to dissolve Breakform Delaware (FAC¶50), Delaware law, and not California law, appears to apply.

Furthermore, to the extent this cause of action is “derivative” in nature, Plaintiffs have not stated sufficient facts as suggested above.

As such, the demurrer to the 7th cause of action for Involuntary Dissolution and Winding Up of a Limited Liability Company is SUSTAINED with leave to amend.

20 days leave to amend is granted.

Parties are reminded to meet and confer prior to filing subsequent motions attacking the pleadings.  Failure to do so will result in the demurrer or motion to strike being taken off-calendar.

Defendants to give notice.