Judge: Robert S. Draper, Case: 21STCV40546, Date: 2022-12-16 Tentative Ruling

Case Number: 21STCV40546    Hearing Date: December 16, 2022    Dept: 78

Superior Court of California 

County of Los Angeles 

Department 78 

Defendant Sound (ABC), LLC’s Demurrer to the Second Amended Complaint is OVERRULED.

Defendant Sound (ABC), LLC’s Motion to Strike is DENIED.

Defendants Wilson Sonsini Goodrich & Rosati, Robert Kornegay and Zachary Myers’ Motion to Strike is GRANTED. Plaintiff Creative Resonance, Inc. is granted thirty days to file an amended Complaint.

FACTUAL BACKGROUND   

This is an action for breach of contract and fraud. The operative Second Amended Complaint (“SAC”) alleges as follows.

Plaintiff Creative Resonance, Inc. (“CRI”) is a food science company owned and founded by Roberto Capodieci (“Capodieci”), an accomplished food scientist. (SAC ¶¶ 2-3.) In 2018, Defendant Don Dillon (“Dillon”) approached Capodieci about creating a snack company, Defendant Sound Nutrition, Inc (“SNI”.) (SAC ¶ 4.) Dillon promised Capodieci $1.5 million if he transferred certain patents and manufacturing equipment to SNI. (Ibid.)

Dillon hired Defendant law firm Wilson Sonsini Goodrich & Rosati (“WSGR”) to draft legal documents establishing the sale of the patents and manufacturing equipment to SNI. (SAC. ¶ 7.) Capodieci was under the impression that WSGR would represent his best interests in the transaction. (SAC. ¶ 8.) Instead, he alleges that WSGR colluded with SNI to defraud Capodieci out of his agreed upon payment. (Ibid.)

In 2021, SNI informed CRI that SNI had been placed into an insolvency process. (SAC ¶ 48.) In November of 2021, non-party accounting firm Armanino LLP informed Capodieci that SNI had made a general assignment for the benefit of creditors by transferring all of the company’s assets to Defendant Sounds (ABC), LLC (“Sound ABC”). (Ibid.) Included in Sound ABC’s assets for sale were the Patents and Physical Assets that CRI transferred to SNI. (Ibid.) Plaintiff alleges that SNI transferred, and Sound ABC received, the assets intending to prevent CRI from recovering the Patents and Physical Assets. (SAC ¶ 138.)

PROCEDURAL HISTORY 

On November 3, 2021, Plaintiff filed the Initial Complaint

On November 29, 2021, Plaintiff filed the First Amended Complaint asserting twelve Causes of Action:

1.    Breach of Contract;

2.    Breach of Implied Covenant of Good Faith and Fair Dealing;

3.    Fraudulent Misrepresentation – Contracts;

4.    Fraudulent Misrepresentation – Legal Representation;

5.    Fraudulent Concealment – Legal Representation;

6.    Professional Negligence;

7.    Breach of Fiduciary Duty;

8.    Civil Conspiracy – Fraudulent Misrepresentation;

9.    Fraudulent Transfer;

10.                   Conversion:

11.                   Civil Conspiracy – Fraudulent Transfer; and,

12.                   Declaratory Relief.

On February 1, 2022, Sound ABC filed a Demurrer to the First Amended Complaint.

On April 29, 2022, the Court sustained Sound ABC’s Demurrer without leave to amend as to the Tenth and Twelfth Causes of Action and sustained Sound ABC’s Demurrer with thirty days leave to amend as to the Ninth and Eleventh Causes of Action.

On May 27, 2022, Plaintiff filed the operative Second Amended Complaint.

On June 13, 2022, Sound ABC filed the instant Demurrer to the Second Amended Complaint and Motion to Strike. 

On June 23, 2022, Plaintiff filed an Opposition to both motions.

On June 28, 2022, Kornegay, Myers, and WSGR filed the instant Motion to Strike.

On June 30, 2022, Sound ABC filed Replies.

On September 19, 2022, CRI filed an Opposition to the WSGR Defendants’ Motion to Strike.

On September 26, 2022, the WSGR Defendants filed a Reply.

On October 3, 2022, following argument, the Court took the matter under submission.

DISCUSSION

I.                ADDENDUM FOR DECEMBER 14, 2022, RULING

The Court, after careful consideration of the papers, the parties’ arguments, and research into the role of ABCs generally, holds that the tentative was correctly decided. While Sound ABC identified complications arising from its role as an assignee for the benefit of creditors, the Court finds that at the pleading stage, Plaintiff has alleged sufficient indicators of fraud to overcome the assumption of validity afforded to ABCs.

Moreover, the Court finds that it would be improper to hold, as a matter of law, that Sound ABC’s transfer of the disputed assets to Treadstone could not put the assets out of Plaintiff’s reach.

Finally, the Court notes that it failed to address Defendant Wilson Sonsini Goodrich & Rosati, Zachary Myers, and Robert Kornegay’s Motion to Strike in its initial tentative. That matter is discussed in Section III of this Order.  

II.              DEMURRER 

Sound ABC demurs to the Ninth and Eleventh Causes of Action. These are the only causes in which Sound ABC is a named Defendant.

A demurrer should be sustained only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Pro., §§ 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) 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.) 

A.   Assignment for the Benefit of Creditors

The creation of an ABC entity is governed by CCP section 493.010, which states that an assignment for the benefit of creditors exists when the assignment satisfies three requirements.

1.    The assignment is an assignment of all of the defendant’s assets that are transferable and not exempt from enforcement of a money judgment.

2.    The assignment is for the benefit of all the defendant’s creditors.

3.    The assignment does not create a preference of one creditor or class of creditors over any other creditor or class of creditors, but the assignment may recognize the existence of preferences to which creditors are otherwise entitled.

B.   Ninth Cause of Action – Fraudulent Transfer

Sound ABC demurs to the Ninth Cause of Action for Fraudulent Transfer, making two arguments. First, Sound ABC argues that the SAC fails to allege damages sufficient to constitute a cause of action. Second, Sound ABC argues that all the allegations in the SAC regarding Sound’s fraudulent behavior occurred after the conveyance to Sound ABC, and therefore are irrelevant to the discussion.

In California, a fraudulent conveyance under the Uniform Voidable Transactions Act (“UVTA”) involves “a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.” (Filip v. Bucurenciu (2005) 129 Cal.App.4th 825, 829.) A transfer under the UVTA is fraudulent as to a creditor if the debtor made the transfer with actual intent to hinder, delay, or defraud any creditor of the debtor. (See Civ. Code, § 3439.04(a); Filip, supra, 129 Cal.App.4th at 829.) 

To find a transfer voidable as to a creditor, the transfer by the debtor must be made with actual intent to hinder, delay, or defraud the creditor or the debtor. (See id., § 3439.04(a).) Some factors that may be considered in determining actual intent are: (1) whether the transfer or obligation was to an insider; (2) whether the debtor retained possession or control of the property transferred after the transfer; (3) whether the transfer or obligation was disclosed or concealed; (4) whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) whether the transfer was of substantially all the debtor’s assets; (6) whether the debtor absconded; (7) whether the debtor removed or concealed assets; (8) whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor. (Id., § 3439.04(b).)  

Whether the conveyance was indeed made with fraudulent intent requires an evidentiary finding and is thus more proper on summary judgment. (See Filip, supra, 129 Cal.App.4th at 834.) 

Here, much of the discussion centers on whether evidence of fraudulent behavior occurring subsequent to the transfer between SNI and Sound ABC, but precedent to the transfer between Sound ABC and non-party Treadstone, is relevant to the conveyance between SNI and Sound ABC. Sound ABC argues that Plaintiff improperly conflates two transfers, as the “subsequent sale by the Assignee is not relevant to a finding that the assignment to the Assignee was a transfer within the meaning of the UVTA.” (Demurrer at p. 13.)

Sound ABC’s argument is unavailing. Many of the factors explicitly listed as indicating actual intent in section 3439.04(a) can only be determined after the transfer is completed. For instance, whether the debtor retained possession or control of the property after the transfer, whether the debtor absconded after the transfer, and whether the debtor was insolvent or became insolvent shortly after the transfer all inherently require consideration of behavior occurring after the transfer. To say that allegations occurring after the transfer are irrelevant to the discussion would completely obviate these factors.

Additionally, in sustaining the demurer to the First Amended Complaint, the Court noted that “the allegation is only that the transfer to Sound ABC is a fraudulent conveyance and that hypothetically in the future there will be something wrongful that happens.” (Ruling at p. 5, fn. 2.) Here, Plaintiff has added specific allegations of collusive behavior between SNI and Sound ABC, (See SAC, Ex. 2) and allegations regarding the eventual outcome of that collusion and its effect on Plaintiff. (SAC ¶ 127.) The Court will consider these allegations, even if they occur after the initial transfer.

Next, Sound ABC argues that the fraudulent transfer claim fails because Plaintiff fails to allege actual damages resulting from the transfer, as the transfer from SNI to Sound ABC did not put the assets out of Plaintiff’s reach. In response, Plaintiff contends that Plaintiff fails to address the subsequent transfer from Sound ABC to Treadstone, which did put assets that Plaintiff has asserted its right to out of Plaintiff’s reach. (Opposition at p. 7.)

Although Sound ABC is correct in noting that the transfer between Sound ABC and Treadstone is separate from the transfer between SNI and Sound ABC, the Court declines to find as a matter of law that the intervening transaction protects Sound ABC from liability. The SAC alleges that the transfer of assets between SNI and Sound ABC was a fraudulent attempt to shield the assets from Plaintiff, and that this fraudulent behavior was completed with the transfer to Treadstone. (SAC ¶ 127.) The SAC contains specific factual allegations supporting this theory. (SAC ¶ 129-36.) Accordingly, the allegations contained in the Second Amended Complaint satisfy Plaintiffs’ burden at the pleading stage.

Finally, Sound ABC argues that the reason for the eventual sale of the subject assets to the “insider” Treadstone was not fraudulent but was a result of its inability to find another buyer due to Plaintiff’s pending litigation. This is an argument properly made for a finder of fact, not law.

Accordingly, Sound ABC’s Demurrer to the Ninth Cause of Action is OVERRULED.

C.   Eleventh Cause of Action – Civil Conspiracy – Fraudulent Transfer   

Sound ABC demurs to the Eleventh Cause of Action for Civil Conspiracy arguing that “Plaintiff fails to adequately allege fraudulent transfer, thus the underlying wrong needed to support a conspiracy claim is absent.” (Demurrer at p. 18.)

“The elements of a civil conspiracy are the formation and operation of the conspiracy and damage resulting to plaintiff from an act done in furtherance of the common design.” (Stueve Bros. Farms, LLC v. Berger Kahn (2013) 222 Cal.App.4th 303, 323.) 

In making allegations of conspiracy, bare legal conclusions, inferences, generalities, presumptions, and conclusions are insufficient.¿State of California ex rel. Metz v. CCC Information Services, Inc. (2007) 149 Cal. App. 4th 402, 419 (finding that allegations that defendants conspired to conceal improper loss valuations was insufficient). There must be allegations that the purported conspirators had actual knowledge of the planned tort and had the intent to aid in the commission of the tort.¿Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1580. 

As CRI successfully states a cause of action for Fraudulent Transfer, and as the Second Amended Complaint contains specific allegations of collusion between SNI and Sound ABC, Sound ABC’s Demurrer to the Eleventh Cause of Action is OVERRULED.

III.            MOTION TO STRIKE

A.   SOUND ABC’S MOTION TO STRIKE

Next, Sound ABC moves the Court to strike Plaintiff’s Prayer for Actual and Punitive Damages as the UVTA does not support non-equitable remedies. Sound ABC cites Civil Code section 3439.07, which states that:

(a) In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 3439.08, may obtain:

(1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim.

(2) An attachment or other provisional remedy against the asset transferred or other property of the transferee in accordance with the procedures described in Title 6.5 (commencing with Section 481.010) of Part 2 of the Code of Civil Procedure, or as may otherwise be available under applicable law.

(3) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure, the following:

(A) An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or other property of the transferee.

(B) Appointment of a receiver to take charge of the asset transferred or other property of the transferee.

(C) Any other relief the circumstances may require.

Additionally, Sound ABC cites Forum Insurance Company v. Devere Limited, 151 F. Supp. 2d 1145, 1148 (C.D. Cal. 2001), as standing for the proposition that claims under the UVTA can not support punitive damages.

In Opposition, Plaintiff notes that Civil Code section 3439.07 explicitly contains a “catch-all” provision allowing for “any other relief the circumstances may require.” (Civ. Code § 3439.07(a)(3)(C).) Plaintiff argues that this catch-all provision allows the Court to grant relief not explicitly listed in the section.

Additionally, Plaintiff argues that Filip v. Burueniu, (2005) 129 Cal.App.4^th 825, stands for the proposition that the UVTA allows for the judiciary to retain authority to fashion a remedy based on the specific circumstances of each case.

Finally, Plaintiff cites Cheung v. Daley, (1995) 35 Cal.App.4^th 1673, 1675, and Berger v. Varum (2019) 35 Cal.App.5^th 1013, as supporting punitive damages under the UVTA.

None of the cited cases directly address whether punitive damages are available under the UVTA.

First, Sound ABC’s primary case, Devere, is non-binding federal authority, and only stands for the proposition that remedies under the UFTA are equitable in nature. However, the case did not analyze whether the language set forth in catch-all section 3439.07(a)(3), is also solely limited to equitable relief and, thus, would not make available punitive damages.

Second, Plaintiff’s cited case, Cheung, held that punitive damages could not be awarded to plaintiff because compensatory damages were not awarded. The court did not analyze the propriety of a punitive damages award under the UFTA. It simply reversed on the ground that an award of zero actual damages cannot support a finding of punitive damages

Third, the Berger plaintiff did not contend that plaintiff could recover consequential or punitive damages under the UVTA, only that he is entitled to assert a claim for common law fraudulent transfer, which does give rise to such remedies. (Berger at p. 1019.)

As this appears to be an issue of first impression, the Court finds at the pleading stage that a claim under the UVTA can support non-equitable remedies. Moreover, as addressed above, the Complaint sufficiently alleges that Sound ABC conspired with SNI to fraudulently place assets out of Plaintiff’s reach for which Plaintiff had asserted a legal right. This is sufficient to support a claim for punitive damages.

Accordingly, Sound ABC’s Motion to Strike is DENIED.

B.   WIILSON SONSINI GOODRICH & ROSATI, ROBERT KORNEGAY, AND ZACHARY MYER’S MOTION TO STRIKE

Next, Defendants Wilson Sonsini Goodrich & Rosati, Robert Kornegay, and Zachary Myers move to strike allegations from the Second Amended Complaint that Defendants allege are chronologically impossible.

Defendants note that Plaintiff bases its claims against Defendants Kornegay and Myers based on an early 2019 phone call with Kornegay, in which Kornegay responded, “Of Course!” when asked if he was “looking out for [CRI’s] interests.” (SAC ¶¶ 45, 80, 99.) CRI alleges it relied on that statement when executing the Founder Agreement, Asset Transfer Agreement and Security Agreement. (SAC ¶¶ 82, 86.) However, as Defendants note, the Second Amended Complaint alleges that the agreements were executed on December 20, 2018, before CRI alleges Kornegay made the statement in question. (SAC ¶ 35.)

Accordingly, Defendants argue, it is chronologically impossible for CRI to have relied on an alleged statement made in early 2019 in signing agreements executed on December 20, 2018.

In Opposition CRI contends that CRI’s Counsel erroneously alleged that the date on which Kornegay made the alleged statement was early 2019, when it should have been alleged to have occurred “in or around July of 2018.” (Opposition at p. 3.) CRI contends that, as CRI filed a Notice of Errata correcting the mistake on September 19, 2022, the matter is now moot.

However, on Reply, Defendants argue that “erratas are usually permissible only to correct errors, typically errors of a clerical nature.” (Reply at p. 2; Pacific Gas and Electric Company v. Public Utilities Commission, 237 Cal.App.4^th 812, 860.) Defendants contend that allowing CRI to repeatedly correct a misstated date in its Complaint constitutes a substantive amendment not properly corrected through a Notice of Errata.

Defendants’ argument is well taken. What CRI alleges occurred here exceeds a clerical error and represents a substantive issue that CRI must seek leave of the Court to amend.

However, as the Court is obligated to liberally grant leave to amend, and as CRI has presented a reasonable method by which the Complaint can be amended to remedy the defect, the Court grants CRI thirty days leave to amend the Complaint to reflect the proper date.

Defendants Kornegay, Myers, and WSGR’s Motion to Strike is GRANTED. CRI is granted thirty days leave to amend.

DATED: December 16, 2022            

____________________________ 

Hon. Robert S. Draper

Judge of the Superior Court