Judge Robert S. Draper, Case 20STCV23643 2023-05-16 Tentative Ruling

Judge: Robert S. Draper, Case: 20STCV23643, Date: 2023-05-16 Tentative Ruling

Case Number: 20STCV23643 Hearing Date: May 16, 2023 Dept: 78

Superior Court of California

County of Los Angeles

Department 78

JERRY YORAM AZARKMAN;

Plaintiff,

vs.

RON SAHAR AZARKMAN, et al.;

Defendants. Case No.: 20STCV23643

Hearing Date: May 16, 2023

[TENTATIVE] RULING RE:

DEFENDANT RON S. AZARKMAN’S DEMURRER TO PLAINTIFF’S FOURTH AMENDED COMPLAINT AND MOTION TO STRIKE

Defendant’s Demurrers to the Fourth Amended Complaint’s first, second, and eighth causes of action are OVERRULED.

Defendant’s Motion to Strike portions of the Fourth Amended Complaint is GRANTED as to the allegations pertaining to direct claims and punitive damages and DENIED as to the rest.

Moving party to provide notice and to file proof of service of such notice within five court days after the date of this order.

FACTUAL BACKGROUND

This is an action for breach of contract/fiduciary duties brought by a corporate shareholder/former director against the subject corporations’ current director/managing officer(s).

Jerry and Ron are brothers who co-founded the large-format department store, Curacao Store, in the 1980s. After the success of the Curacao Store, the two brothers began investing in other businesses together, including Adir International, LLC, Adir Restaurants Corp. (dba “Pollo Campero”), Adir Services Corp., Adir Services II, LLC (now dissolved), Adir Management Services, LLC (now dissolved) (the above-mentioned entities referred to collectively as “Adir Entities”), DIR International Corporation (“DIR”), Curacao Ltd. (“CURACAO LP”), and Oly, LLC (“OLY”).

Nominal Defendant DIR is a California corporation formed in 1994 and serves as the general partner of CURACAO LP. Jerry and Ron each own 50% of DIR and are both on the broad of directors. Jerry is the elected Secretary and Ron is the elected CEO and CFO. According to Jerry, this lawsuit is about the control of DIR because DIR controls CURACAO LP which, in turn, is the sole member of OLY. (4AC ¶ 11.)

Nominal Defendant CURACAO LP is a California limited partnership also formed in 1994. CURACAO LP was formed to hold title to certain real estate properties, including the lots located at 1605-25 W. Olympic Blvd., Los Angeles that housed the Curacao Store (“CURACAO BUILDING”), the parking lots adjacent to the CURACAO BUILDING (collectively as the “California Property”), and certain properties in Arizona. Pursuant to the CURACAO LP AGREEMENT, attached as Exhibit 3 to the 4AC, DIR is the General Partner and Manager of CURACAO LP and holds 1% equity of the partnership. Jerry and Ron are both limited partners of CURACAO LP and each holds 49.5% equity of the partnership. The CURACAO LP AGREEMENT was signed by Jerry as the President of DIR. The CURACAO LP AGREEMENT does not identify or refer to Ron as the general or managing partner of CURACAO LP. Rather, Jerry alleges that Ron acts as the de facto managing partner of CURACAO LP. (4AC ¶ 59.)

OLY is a Delaware LLC formed in 2012 and was formed as a special purpose entity to hold title in the CURACAO BUILDING, where the Curacao Store is located. CURACAO LP is the sole member of OLY.

Jerry alleges that from the start of these businesses until 2014, Jerry and Ron’s interests were mostly aligned. (4AC ¶ 9.) What benefited their businesses, including Nominal Defendants and the Adir Entitles, benefitted both brothers, and vice versa. (Ibid.) Before 2014, Jerry never complained about the long-established practices, such as providing parking or signage space to the Curacao Store, about which he now complains in this lawsuit. But in May 2014, in conjunction with a California Corporations Code Section 2000 appraisal, the Los Angeles Superior Court entered a decree ordering Adir Services to buy out Jerry’s shares in Adir Services. (4AC ¶ 108.) Soon thereafter, in connection with a settlement agreement, Ron bought out Jerry’s interest in Adir Services, Adir International, and Adir Money Transfer. (Ibid.) In 2016, Ron purchased Jerry’s interest in Adir Restaurants. (Ibid.) From that point forward, the only remaining entities still commonly owned by the two brothers are Nominal Defendants. (4AC ¶ 107.)

Jerry alleges that Ron began transferring money from corporate accounts into his own personal accounts which the Plaintiff, at the time, knew nothing about. (4AC ¶ 120.) Jerry also alleges that the “California Property is being operated and managed in a way that fails to maximize revenue for Nominal Defendants and their limited partner and shareholder, Plaintiff JYA.” (4AC ¶ 137.)

PROCEDURAL HISTORY

Plaintiff filed the Complaint on June 23, 2020, alleging fifteen causes of action:

1. Breach of contract

2. Breach of fiduciary duty

3. Breach of duty of honest services

4. Abuse of control

5. Corporate waste

6. Gross mismanagement

7. Unjust enrichment

8. Money had and received

9. Conversion

10. Fraud

11. Constructive fraud

12. Fraudulent transfer

13. Professional negligence

14. B&P § 17200

15. Constructive trust

On February 22, 2021, this Court granted Defendant Fux's Special Motion to Strike as to the Fourth Cause of Action and paragraph 281.

On March 1, 2021, this Court issued a Court Order/Supplemental Findings regarding the Nominal Defendants' Motion to Require Plaintiff to Post a Bond. The ruling held that the January 28, 2021 and February 22, 2021 rulings remain in full force and effect.

On April 20, 2021, Plaintiff filed the First Amended Complaint ("FAC") alleging thirteen causes of action:

1. Breach of contract (Curacao Agreement)

2. Breach of contract (Oly Agreement)

3. Breach of fiduciary duty (Defendant RSA)

4. Breach of fiduciary duty (Defendant Fux)

5. Professional negligence

6. Waste of corporate assets

7. Unjust enrichment

8. Conversion

9. Fraud

10. Concealment

11. Negligent misrepresentation

12. Injunction

13. Action to compel production of corporate books

On April 21, 2021, Plaintiff filed a Notice of Appeal of the ruling on the anti-SLAPP Motion.

On June 25, 2021, the Court issued a Notice of Default as to Plaintiff's appeal.

On July 20, 2021, this Court denied the Nominal Defendants' Motion for Reconsideration of the anti-SLAPP rulings of 2/22/21 and 3/1/21.

On August 4, 2021, this Court granted Fux's Special Motion to Strike the Fourth Cause of Action and paragraph 181 of the FAC.

On August 18, 2021, this Court sustained Defendant Fux’s Demurrer to the FAC fifth and sixth causes of action without leave. The Court held the demurrer moot as to the FAC’s fourth cause of action. With respect to the sixth, twelfth, and thirteenth causes of action, Plaintiff agreed to dismiss those claims.

On October 13, 2021, Plaintiff file a Second Amended Complaint against Defendants, asserting the following causes of action:

1. Breach Of Contract (Curacao Agreement);

2. Breach Of Contract (Oly Agreement);

3. Breach Of Fiduciary Duty (Defendant RSA);

7. Unjust Enrichment;

8. Conversion;

9. Fraud And Intentional Misrepresentation

10. Concealment; and

11. Negligent Misrepresentation.

On May 10, 2022, the Court sustained Defendant Azarkman’s demurrer to the SAC as to the third, ninth, tenth, and eleventh causes of action with leave to amend and overruled the demurrer as to the first, second, seventh, and eighth causes of action.

On September 2, 2022, Plaintiff filed a Third Amended Complaint.

On January 31, 2023, the Court signed a stipulation and order for leave to file a Fourth Amended Complaint.

On January 31, 2023, Plaintiff filed the 4AC alleging cause of action for:

1. Breach Of Contract (Curacao Agreement);

2. Breach Of Contract (Oly Agreement);

3. Breach Of Fiduciary Duty (Defendant RSA);

4. Unjust Enrichment (titled as COA 7);

5. Conversion (titled as COA 8).

On March 9, 2023, Defendant Azarkman filed the instant Demurrer to Plaintiff’s 4AC and Motion to Strike portions of it.

On May 3, 2023, Plaintiff filed opposition papers to the instant demurrer and motion to strike.

On May 9, 2023, Defendant filed reply papers.

DISCUSSION

Legal Standard for Demurrer

A demurrer tests the sufficiency of the pleading at issue as a matter of law, i.e., it raises issues of law, not fact, regarding the form or content of the opposing party's pleading (complaint, petition, answer or cross-complaint). (CCP §§ 422.10, 589; see Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.)

A demurrer should be sustained only where the defects appear on the face of the pleading or are judicially noticed. (CCP §§ 430.30, et seq.) In particular, as is relevant here, a court should sustain a demurrer if a complaint does not allege facts that are legally sufficient to constitute a cause of action. (See id. § 430.10, subd. (e).) As the Supreme Court held in Blank v. Kirwan (1985) 39 Cal.3d 311: “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. . . . Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (Id. at p. 318; see also Hahn. v. Mirda (2007) 147 Cal.App.4th 740, 747 [“A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. [Citation.]”)

“In determining whether the complaint is sufficient as against the demurrer … if on consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of Cal., Inc. (1993) 14 Cal.App.4th 612, 616.) Such demurrers “are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Mahan v. Charles W. Chan Insurance Agency, Inc. (2017) 14 Cal.App.5th 841, 848.)

A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment. (Schifando v. City of Los Angeles, supra, 31 Cal.4th at p. 1081.) The demurrer also may be sustained without leave to amend where the nature of the defects and previous unsuccessful attempts to plead render it probable plaintiff cannot state a cause of action. (Krawitz v. Rusch (1989) 209 Cal.App.3d 957, 967.)

Meet and Confer

Prior to filing a demurrer, the demurring party is required to satisfy their “meet and confer” obligations pursuant to California Code of Civil Procedure (“CCP”), section 430.41, and demonstrate that they so satisfied their meet and confer obligation by submitting a declaration pursuant to CCP, section 430.41, subdivisions (a)(2) and (a)(3).

Here, the Court finds that the parties have met and conferred in compliance with CCP, section 430.41. (See Yu Decl.)

A. Breach of the Contract Claims (First and Second Causes of Action)

Defendant demurs to the 4AC’s first and second causes of action for breach of contracts on grounds that the 4AC does not sufficiently allege facts to constitute the claim. Specifically, Defendant argues that Plaintiff has not sufficiently alleged alter ego liability and that the cause of action is duplicative of the third cause of action for breach of fiduciary duty.

“ ‘Ordinarily, a corporation is regarded as a legal entity separate and distinct from its stockholders, officers and directors. Under the alter ego doctrine, however, where a corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the corporation's acts as if they were done by the persons actually controlling the corporation....’ [Citation.]” (Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892.)

As noted in Plaintiff’s opposition, the Court has already found that Plaintiff adequately pled these allegations and overruled the demurrer of moving Defendant as to the first and second causes of action. (See 5/10/22 Ruling.) Moreover, the Court still finds the allegations sufficient at this pleading stage to allege alter ego.

Accordingly, the demurrer to the first and second causes of action cannot be sustained on this ground.

Next, Defendant argues that the breach of contracts claims are duplicative of the breach of fiduciary duty claim. A demurrer may be sustained when a cause of action is duplicative of another cause of action and thus adds nothing to the complaint by way of fact or theory of recovery. (Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal.App.4th 268, 290.) However, as pointed out in opposition, the claims do not “add nothing.” The breach of contract claims involve, inter alia, Ron’s failure to: transmit tax returns, keep accurate financial records, allocate profits/losses, and make distributions to the partners/members. (4AC, ¶¶ 202-233.) Whereas the breach of fiduciary claims involve, inter alia: Ron’s misuse of corporate assets to benefit of his separate businesses and to the detriment of Nominal Defendants (such as for parking, signage, leases, and loans), including for example leasing property to his own companies free of charge, and forgiving multi-million-dollar loans to this own companies; transferring corporate funds to his separate accounts and businesses; failing to make the required distributions to all members/partners (yet providing distributions to himself, and even threatening to continue to withhold distributions as long as this case goes forward); and allowing certain properties to fall in disrepair. (4AC, ¶¶ 234-254.) Thus, the claims are based on different facts and theories of recovery, e.g., violation of corporate disclosure, record-keeping, and other financial requirements, compared to misappropriation of corporate assets and self-dealing. Defendant does not mention this argument again in reply.

Accordingly, the Court does not find the causes of action duplicative.

Thus, the demurrer to the first and second causes of action is OVERRULED.

B. Conversion (Eighth Cause of Action)

Defendant demurs eighth cause of action for conversion on the basis that there are insufficient facts alleged to state a claim and uncertainty.

“Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages.” (Hodges v. County of Placer (2019) 41 Cal.App.5th 537, 551.)

Defendant argues that Plaintiff fails to allege any specific, definite, and identifiable amount or sum purportedly converted by Ron, and fails to demonstrate that he had any possessory interest in the “property” (i.e., money in this case) at the time the alleged conversion occurred.

Defendant argues that the following: the 4AC fails to identify any specific identifiable amount of money that was purportedly converted. The Court initially in its 9/9/2021 Ruling relating to Ron’s Demurrer to the FAC held that “the FAC sufficiently alleges conversion for a derivative claim on behalf of Curacao that Ron A converted money in a specific amount ($4,000,000) from a specific bank account …” (See 9/9/2021 Ruling.) However, in the 4AC, Jerry now alleges that “[t]he combined amount of these accounts was over $4 million in 2019, and as of the date of this filing, is now over $9 million.” (4AC ¶ 276).

The amount appears to be identifiable as $9 million now. Accordingly, this argument fails.

As to the possessory interest, Plaintiff alleges that “Plaintiff JYA and Nominal Defendants had a right to receive and possess the profits and benefits from the operations of CURACAO, LTD. and DIR, including, but not limited to: the right to receive fair rents and profits for the lease of office space, parking and signage; interest and principal from loans, a fair share of distributions of profit from the operations and increase in value of the Property and Arizona Property.” (4AC ¶266.) This is sufficient at the pleading stage.

The demurrer to the conversion cause of action is OVERRULED.

Legal Standard for Motion to Strike

Any party, within the time allowed to respond to a pleading, may serve and file a notice of motion to strike the whole or any part thereof. (CCP § 435(b)(1)). The notice of motion to strike a portion of a pleading shall quote in full the portions sought to be stricken except where the motion is to strike an entire paragraph, cause of action, count or defense. (CRC 3.1322.)¿

The grounds for a motion to strike shall appear on the face of the challenged pleading or form any matter of which the court is required to take judicial notice. (CCP § 437(a)). The court then may strike out any irrelevant, false, or improper matter inserted in any pleading and strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (CCP § 436.) When the defect which justifies striking a complaint is capable of cure, the court should allow leave to amend. (Perlman v. Municipal Court¿(1979) 99 Cal.App.3d 568, 575.)

A. References related to Jerry’s Direct Claims

Defendant moves to strike references related to Jerry’s direct claims. Direct and derivative actions are mutually exclusive: i.e., the right of action and recovery belongs either to the shareholder (direct action) or to the corporation (derivative action).” (Schuster v. Gardner (1995) 127 Cal.App.4th 305, 312.) Defendant argues that the third, seventh, and eighth causes of action are derivative in nature as the gravamen of Jerry’s complaint is Ron’s alleged self-dealing and mismanagement of Nominal Defendants.

In opposition, Plaintiff argues that Defendant’s conduct gives rise to both injury to the corporation and injury to an individual, such as Ron’s misappropriation of corporate assets, and his failure to pay Jerry distributions, both individual and derivative claims may be asserted.

“An individual cause of action exists only if damages to the shareholders were not incidental to damages to the corporation.” (Schuster, supra, 127 Cal.App.4th at 313.) As the Court previously held, Plaintiff does not allege Defendant owed or violated a duty to Plaintiff based on something other than Plaintiff’s role as a shareholder/partner.

Accordingly, the motion to strike as to these allegations is GRANTED.

B. Paragraphs 245 (a), (b), (d), (e), 247, and 248 in Support of the Breach of Fiduciary Duty Claim

Defendant moves to strike the allegations under the third cause of action which the Court has held do not support the fiduciary duty claim. Plaintiff argues that this contention is misleading, as the Court did not hold that such allegations do not support the breach of fiduciary claim. Instead, the issue the Court was deciding was whether a conflict of interest was adequately alleged to overcome the business judgment rule, not whether specific acts could support a claim for breach of fiduciary duty. (5/10/2022 Ruling.) The Court finds that Defendant has not shown that these allegations are irrelevant or improper.

Accordingly, the motion to strike as to these allegations is DENIED.

C. Paragraphs 266-275 in Support of the Conversion Claim

Defendant argue these allegations should be stricken as they cannot support a conversion claim. Defendant reiterates its argument in its demurrer, i.e., that the claim requires an identifiable sum. As discussed above, the allegations are sufficient and the argument fails.

Accordingly, the motion to strike as to these allegation is DENIED.

D. Irrelevant and Prejudicial Allegations

Defendant moves to strike certain allegations that he argues are irrelevant and prejudicial. However, Defendant’s arguments are conclusory and lack sufficient explanation as to how they are immaterial to all the claims. Plaintiff argues that at a minimum, they give background and context.

Accordingly, the motion to strike as to these allegations is DENIED.

E. Punitive Damages

Defendant moves to strike punitive damages from the 4AC. Plaintiff argues in opposition that he has alleged repeated breaches of fiduciary duties and failures to disclose which can support an award of punitive damages based on constructive fraud. However, as Defendant points out in reply, the Court already sustained the demurrer to the fraud related claims and thereafter Plaintiff voluntarily dismissed them. Plaintiff has not pled any new allegations of fraud to support punitive damages. Further, Plaintiff has not sufficiently shown that the breaches amount to constructive fraud such that punitive damages may be warranted, and further that punitive damages are warranted in this particular case. The Court also notes that Plaintiff has made no allegation of constructive fraud.

Accordingly, the motion to strike as to punitive damages is GRANTED.

Moving Party to give notice.

DATED: May 16, 2023

________________________________

Hon. Jill T. Feeney

Judge of the Superior Court