Judge: Robert B. Broadbelt, Case: 21STCV23209, Date: 2023-02-22 Tentative Ruling

Case Number: 21STCV23209    Hearing Date: February 22, 2023    Dept: 53

Superior Court of California

County of Los Angeles – Central District

Department 53

MOVING PARTIES:             Defendants Corey Rogan, Rogan Enterprises, LLC, and SOHO Mgmt., LLC

RESPONDING PARTIES:    Plaintiffs Shahrouz Darvish, Richard Jasminski, and Michael Simonian

Demurrer to Second Amended Complaint

The court considered the moving, opposition, and reply papers filed in connection with this demurrer.

BACKGROUND

Plaintiffs Shahrouz Darvish, Richard Jasminski, and Michael Simonian (“Plaintiffs”) filed this action on June 22, 2021.  Plaintiffs filed the operative Second Amended Complaint on October 24, 2022, against defendants Corey Rogan (“Rogan”), Rogan Enterprises, LLC, and SOHO Mgmt. LLC (collectively, “Defendants”).

Plaintiffs allege eight causes of action for (1) breach of contract; (2) breach of partnership; (3) breach of fiduciary duty; (4) intentional interference with prospective economic advantage; (5) fraud (Civil Code section 1572); (6) breach of the covenant of good faith and fair dealing; (7) unfair competition (Business and Professions Code section 17200); and (8) civil recovery for receipt of stolen property (Penal Code section 496).

Defendants move the court for an order sustaining their demurrer to each cause of action alleged by Plaintiffs.

REQUEST FOR JUDICIAL NOTICE

As to Exhibit 1, the court grants Defendants’ request for judicial notice as to the Limited Liability Company Agreement of CDLA5 Holdings LLC, dated August 31, 2019, because it is attached to the Second Amended Complaint.  (Evid. Code, § 452, subd. (d).)  The court denies Defendants’ request for judicial notice as to the Management Services Agreement, dated August 27, 2019, as an improper subject for judicial notice.  (The Travelers Indemnity Co. of Connecticut v. Navigators Specialty Ins. Co. (2021) 70 Cal.App.5th 341, 354-355 [the existence of a contract between private parties cannot be established by judicial notice because the existence and terms of a private agreement are not facts that are not reasonably subject to dispute and that can be determined by indisputable accuracy].)

The court grants Defendants’ requests for judicial notice as to Exhibits 2 and 3.  (Evid. Code, § 452, subd. (b).)

DEMURRER

The court sustains Rogan’s demurrer to Plaintiffs’ first cause of action for breach of contract because it does not state facts sufficient to constitute a cause of action since this cause of action is based on the enforcement of a contract that is illegal and therefore unenforceable.  (Code Civ. Proc., § 430.10, subd. (e).)

“Where a contract has but a single object, and such object is unlawful, whether in whole or in part, or wholly impossible of performance, or so vaguely expressed as to be wholly unascertainable, the entire contract is void.”  (Civ. Code, § 1598.)  “‘ “ ‘[N]o principle of law is better settled than that a party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out.’ ” ’  [Citation.]  The courts ‘generally will not enforce an illegal bargain or lend their assistance to a party who seeks compensation for an illegal act.’”  (Yoo v. Jho (2007) 147 Cal.App.4th 1249, 1255.)

On August 31, 2019, the parties executed the document entitled Limited Liability Company Agreement of CDLA5 Holdings, LLC, a Limited Liability Company (the “Operating Agreement”).  (SAC ¶ 14; SAC Ex. A, Operating Agreement.)  Plaintiffs allege that they organized CDLA5 Holdings, LLC (“CDLA5”) “with the business purpose of obtaining a Type 10 cannabis retail license and opening and operating a cannabis retail store in the city of Los Angeles.”  (SAC ¶ 12.)  To be eligible for and receive a Type 10 cannabis retailer license, an applicant must have an individual owner that is a verified Social Equity Applicant.  (SAC ¶ 11.) In August 2019, the City of Los Angeles Department of Cannabis Regulations verified defendant Rogan as a Social Equity Applicant based on his (1) low-income status, and (2) residence in an area that was disproportionately negatively impacted by restrictive cannabis laws in the past.  (SAC ¶ 13.)  The parties thereafter executed the Operating Agreement to operate their cannabis business.  (SAC ¶ 14; SAC Ex. A.)

The court finds that, because Plaintiffs have alleged that the purpose of the Operating Agreement was to organize and operate a cannabis business by obtaining a Type 10 license pursuant to the Social Equity Program, the Operating Agreement was required to comply with the terms of the program.  The court finds that the Operating Agreement (1) includes provisions that are in violation of the requirements of the Social Equity Program, as set forth in the Los Angeles Municipal Code, and the Business and Professions Code, and (2) excludes a provision required by the Los Angeles Municipal Code.

As set forth above, Plaintiffs allege that they formed CDLA5 for the purpose of obtaining a Type 10 cannabis retail license pursuant to the Social Equity Program.  (SAC ¶¶ 11-12.)  To obtain this license, an applicant must have an individual owner that is a Social Equity Applicant.  (SAC ¶ 11.)  A Social Equity Applicant is classified as a Tier 1 Social Equity Individual Applicant (“Tier 1 Applicant”) if, at the time of applying for a license, they meet the following criteria: (1) low-income and prior California cannabis arrest or conviction, or (2) low-income and a minimum of five years’ cumulative residency in a Disproportionately Impacted area.  (LAMC Chapter X, Art. 4, § 104.20, subd. (a)(1)(4).)  A Social Equity Applicant is classified as a Tier 2 Social Equity Individual Applicant (“Tier 2 Applicant”) if, at the time of applying for a license, they meet the following criteria: (1) low-income and a minimum of five years’ cumulative residency in a disproportionately impacted area, or (2) a minimum of 10 years’ cumulative residency in a disproportionately impacted area.  (LAMC Chapter X, Art. 4, § 104.20, subd. (a)(1)(5).)  A Tier 1 Applicant shall own no less than 51 percent equity share in the person to whom a license is issued.[1]  (LAMC Chapter X, Art. 4, § 104.20, subd. (a)(2)(i).)  “Equity share” is specifically defined to include various rights.  (LAMC Chapter X, Art. 4, § 104.20, subd. (a)(2)(ii).)

The court finds that the Operating Agreement contains four terms that are in violation of the Los Angeles Municipal Code and Business and Professions Code.

First, a Social Equity Individual Applicant shall receive “[a]t least their Equity Share percent of the voting rights on all business decisions, including, but not limited to, long-term decisions, daily business operations, retention and supervision of the executive team, managers, and management companies, and the implementation of policies.”  (LAMC Chapter X, Art. 4, § 104.20, subd. (a)(2)(ii)(3)(A).)  However, the Operating Agreement provides that each member—including defendant Rogan—“shall each have one Vote equal to the Vote of each other Member, regardless of the Member’s share of Membership Interest in the Company.”  (SAC Ex. A, Operating Agreement, § III, subd. (G)(1).)

Thus, defendant Rogan, despite being a Social Equity Individual Applicant, was given one-sixth voting rights instead of his equity share percent (i.e., 51 percent) of the voting rights.  (SAC Ex. A, Operating Agreement, § III, subd. (A) [defining the “Members” to include six individuals].)  Further, the Operating Agreement provides that Rogan is the only non-managing member, and therefore is the only member that is not responsible for running the management and operation of the business in violation of this provision.  (SAC Ex. A, Operating Agreement, § III, subd. (E) [provision that (1) states that Managing Members “shall be responsible for running the management and operation of the business” and (2) defines Rogan to be a non-managing member].)

Second, a Social Equity Individual Applicant shall receive (1) “[a]t least their Equity Share percent” of the distribution of profits paid to the owners; (2) 100 percent of the value of each share of stock owned by them in the event that the stock is sold; and (3) both (i) at least their equity percent of the retained earnings of the Social Equity Applicant and (ii) 100 percent of the unencumbered value of each share of stock, member interest, or partnership interest owned in the event of dissolution of the company.  (LAMC Chapter X, Art. 4, § 104.20, subd. (a)(2)(ii)(2).)  However, the Operating Agreement provides that the managing members—i.e., all members aside from defendant Rogan—“have the authority to fix the compensation of individual Members.”  (SAC Ex. A, Operating Agreement, § III, subd. (K).)  Thus, the Operating Agreement does not provide for defendant Rogan’s receipt of 51 percent of the distribution of profits and retained earnings.

Third, all owners are required to incorporate an addendum into any operating agreement that includes the following language: “‘To the extent that any provision of this agreement, or part thereof, is or may be construed to be inconsistent with or in violation of the “Equity Share” requirements set forth in Los Angeles Municipal Code section 104.20, such provision(s) shall be ineffective, unenforceable, and null and void.’”  (LAMC Chapter X, Art. 4, § 104.20, subd. (a)(2)(iii)(4).)  The Operating Agreement does not include this language.  (SAC Ex. A, Operating Agreement.)

Finally, the Operating Agreement includes an unenforceable non-compete clause providing that each member “shall refrain from competing with the Company in the conduct of the Company’s business unless a majority, by individual vote, of the Members excluding the interested Member, consents thereto.”  (SAC Ex. A, Operating Agreement, § III subd. (I)(2).)  “[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void” except where (1) a person sells the goodwill of a business, or (2) a partner agrees not to compete in anticipation of dissolution of a partnership.  (Bus. & Prof. Code, §§ 16600, 16601, 16602; Kelton v. Stravinski (2006) 138 Cal.App.4th 941, 946.)  Plaintiffs do not allege facts establishing that the non-complete clause was executed in either situation.  The court therefore finds that this provision is void and unenforceable.

The parties dispute whether the court can sever the unenforceable terms set forth above.  “Where a contract has several distinct objects, of which one at least is lawful, and one at least is unlawful, in whole or in part, the contract is void as to the latter and valid as to the rest.”  (Civ. Code, § 1599.)  “Civil Code section 1599 grants courts the power, not the duty, to sever contracts in order to avoid an inequitable windfall or preserve a contractual relationship where doing so would not condone illegality.”  (Marathon Entertainment, Inc. v. Blasi (2008) 42 Cal.4th 974, 992.)  To determine whether severance is available, “‘[t]he overarching inquiry is whether “ ‘the interests of justice . . . would be furthered’” by severance.’”  (Id. at p. 996.)  Courts must look to the purposes of the contract; “[i]f the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced.”  (Ibid.)

Plaintiffs have alleged, as set forth above, that the purpose of the Operating Agreement was (1) to organize and operate a cannabis business (i.e., CDLA5) by (2) obtaining a Type 10 cannabis retail license, and opening and operating the cannabis retail store in Los Angeles, which (3) required Plaintiffs to have an individual owner that is a verified Social Equity Applicant in order to qualify for the Social Equity Program.  (SAC ¶¶ 15, 11-12.)  The court therefore finds that the central purpose of the Operating Agreement was to obtain a license under the Social Equity Program, with which Plaintiffs were obligated to comply, and to operate a cannabis retail store using that license.  The court has found that the Operating Agreement contains numerous terms that violate provisions of the Social Equity Program, and also violate the Business and Professions Code.  The court finds significant that the provisions in the Operating Agreement that violate these laws concern management rights, distribution of profits and earnings, and voting rights.  Defendants argue, and the court agrees, that the illegal provisions permeate the Operating Agreement “because they are fundamental to the operation of the LLC.”  (Demurrer, p. 9:11-14.)  The court finds that the Operating Agreement’s single object is unlawful, cannot be severed, and is therefore void and unenforceable.  (Civ. Code, § 1598; Marathon Entertainment, Inc., supra, 42 Cal.4th at p. 991, fn. 9 [“Civil Code section 1598 codifies the companion principle for when severability is infeasible”].)

The court therefore finds that Plaintiffs cannot base their breach of contract cause of action on, and request the court to enforce, the unlawful and unenforceable Operating Agreement.  (Yoo, supra, 147 Cal.App.4th at p. 1255 [the courts will not enforce an illegal bargain].)

The court sustains Rogan’s demurrer to Plaintiffs’ second cause of action for breach of partnership because it does not state facts sufficient to constitute a cause of action.  (Code Civ. Proc., § 430.10, subd. (e).)  This cause of action alleges the existence of a partnership that is based on the same purpose and agreement as the Operating Agreement (i.e., to own and operate a cannabis retail store by obtaining a Type 10 cannabis retail license pursuant to the Social Equity Program) and is therefore unenforceable for the same reasons set forth above in connection with the first cause of action.  (SAC ¶¶ 11-12, 46-47.)

The court sustains Rogan’s demurrer to Plaintiffs’ third cause of action for breach of fiduciary duty because it does not state facts sufficient to constitute a cause of action since it is based on the existence of (1) a partnership that the court has determined is alleged to have been formed based on the same unlawful agreement as set forth in the second cause of action, and (2) the Operating Agreement that the court has determined is unlawful and therefore unenforceable as set forth in the first cause of action.  (Code Civ. Proc., § 430.10, subd. (e); SAC ¶¶ 50-51 [alleging that Rogan owed duties to (1) Plaintiffs because he “was a partner in business with Plaintiffs” and (2) CDLA5 since he was a member thereof].)

The court sustains Defendants’ demurrer to Plaintiffs’ fourth cause of action for intentional interference with prospective economic advantage because it does not state facts sufficient to constitute a cause of action since (1) it is based on the economic relationship created by the Operating Agreement which the court has determined is unlawful and therefore unenforceable (SAC ¶ 55), and (2) Plaintiffs do not allege the existence of an economic relationship that contains the probability of future economic benefit to Plaintiffs between Plaintiffs “and some third party,” instead alleging the existence of an economic relationship between Plaintiffs and Rogan (SAC ¶ 55).)  (Code Civ. Proc., § 430.10, subd. (e); Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc. (2017) 2 Cal.5th 505, 513 [elements of cause of action for intentional interference with prospective economic advantage].)

The court sustains Rogan’s demurrer to Plaintiffs’ fifth cause of action for fraud because it does not state facts sufficient to constitute a cause of action since the false promise of which Plaintiffs complain is based on the same alleged agreement to carry on the cannabis retail store by obtaining a license pursuant to the Social Equity Program, which the court has determined is unlawful and therefore unenforceable for the reasons set forth above.  (Code Civ. Proc., § 430.10, subd. (e); SAC ¶¶ 61, 63 [alleging that Rogan made promises to Plaintiffs when entering the agreement and “to perform under the Operating Agreement”].)

The court sustains Rogan’s demurrer to Plaintiffs’ sixth cause of action for breach of the covenant of good faith and fair dealing because it does not state facts sufficient to constitute a cause of action since this covenant is alleged to be implied in the Operating Agreement, which the court has determined is unlawful and therefore unenforceable for the reasons set forth above.  (Code Civ. Proc., § 430.10, subd. (e); SAC ¶¶ 68-72.)

The court sustains Defendants’ demurrer to Plaintiffs’ seventh cause of action for unfair competition pursuant to Business and Professions Code section 17200 because it does not state facts sufficient to constitute a cause of action since (1) Plaintiffs do not allege, with the requisite particularity, facts establishing that Defendants’ conduct constitutes an unlawful, unfair, or fraudulent business act or practice within the meaning of Business and Professions Code section 17200, and (2) to the extent that Plaintiffs base this cause of action on conduct concerning any agreement to operate a cannabis retail store by obtaining a license pursuant to the Social Equity Program, the court has determined that such agreement is an illegal contract and is therefore unenforceable.  (Code Civ. Proc., § 430.10, subd. (e); Bus. & Prof. Code, § 17200.)

The court sustains Defendants’ demurrer to Plaintiffs’ eighth case of action for civil recovery for receipt of stolen property pursuant to California Penal Code section 496 because it does not state facts sufficient to constitute a cause of action since Plaintiffs have not alleged facts establishing that Defendants wrongfully obtained (1) real property, or (2) personal property such as money, goods, chattels, things in action, and evidences of debt.  (Code Civ. Proc., § 430.10, subd. (e); Pen. Code, § 7, subds. (10) [providing that in the Penal Code, “property” includes both real and personal property] (11) [defining real property to be coextensive with lands, tenements, and hereditaments], (12) [defining personal property to include money, goods, chattels, things in action, and evidences of debt]; People v. Gonzalez (2017) 2 Cal.5th 858, 872 [explaining that Penal Code defines property to include both real and personal property as set forth in section 7].)

The court overrules Defendants’ demurrer to constructive trust because it is improper to demur to a remedy requested in a prayer for relief.  (Caldera  Pharmaceuticals, Inc. v. Regents of University of California (2012) 205 Cal.App.4th 338, 368.)

The burden is on the plaintiff “to articulate how it could amend its pleading to render it sufficient.”¿ (Palm Springs Villas II Homeowners Assn., Inc. v. Parth (2016) 248 Cal.App.4th 268, 290.)¿ To satisfy that burden, a plaintiff “must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading.”¿ (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.)  The court finds that Plaintiffs have not met their burden to show in what manner they can amend their complaint and how that amendment will change the legal effect of their pleading as to each cause of action.  The court therefore sustains Defendants’ demurrer without leave to amend.    

ORDER

The court sustains defendants Corey Rogan, Rogan Enterprises, LLC, and SOHO Mgmt. LLC’s demurrer to plaintiffs Shahrouz Darvish, Richard Jasminski, and Michael Simonian’s Second Amended Complaint without leave to amend.

The court orders defendants Corey Rogan, Rogan Enterprises, LLC, and SOHO Mgmt. LLC to lodge and serve a proposed order of dismissal of the Second Amended Complaint filed by plaintiffs Shahrouz Darvish, Richard Jasminski, and Michael Simonian within 10 days of the date of this order pursuant to Code of Civil Procedure section 581, subdivision (f)(1). 

The court orders defendants Corey Rogan, Rogan Enterprises, LLC, and SOHO Mgmt. LLC to give notice of this ruling.

IT IS SO ORDERED.

DATED:  February 22, 2023

_____________________________

Robert B. Broadbelt III

Judge of the Superior Court