Judge: Ronald F. Frank, Case: 22TRCV00482, Date: 2022-10-27 Tentative Ruling

Case Number: 22TRCV00482    Hearing Date: October 27, 2022    Dept: 8

Hearing Date:                         October 27, 2022, 10 a.m. calendar

Moving Parties:                      Defendants G. Thomas Ennis and TGE Properties, LLC

Responding Party:                  Plaintiff N/S Corporation

Motion to Expunge Several Lis Pendens, or in the Alternative, Require an Undertaking

            The Court considered the moving, opposition, and reply papers, including various declarations, exhibits, objections to evidence, and the parties’ briefs. 

TENTATIVE RULING

            The Court will entertain oral argument as to several points identified below, and then will take the motion under submission.  Although the motion has been pending for some time, this case was only recently reassigned to Inglewood and the Court will require additional time to consider the mountain of legal and factual issues presented by the parties’ papers after being informed on several key issues by oral argument. 

BACKGROUND

            On June 17, 2022, plaintiff N/S Corporation filed a complaint against G. Thomas Ennis, individually and as trustee of the G. Thomas Ennis Living Trust, dated July 1, 1992; TGE Properties, LLC; Fortress Investment Group, LLC; and Does 1 through 10 for breach of fiduciary duty, imposition of constructive trust, breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief.

            On June 29, 2022, plaintiff filed its Notice of Pendency of Action (Lis Pendens) for the real property located at 219 West Florence Avenue, Inglewood, California 90301-1212. (219 W Florence.) On the same day, plaintiff filed its Lis Pendens for the real property located at 235 West Florence Avenue, Inglewood, California 90301-1212. (235 W Florence.) (Both properties hereinafter referred to as West Florence Properties.)

            On July 5, 2022, plaintiff filed its Lis Pendens for the real property located at 1000 Pacific Coast Highway, Hermosa Beach, California 90254. (Hermosa Property.)

            While Plaintiff had also filed an application for a TRO and preliminary injunction, the application was withdrawn before any hearing or ruling after the Lis Pendens were filed.  Apparently the TRO application was withdrawn after the pending sale of the Florence Properties was cancelled by Fortress (the purchaser), who may have been reluctant to become embroiled in this litigation.

LEGAL AUTHORITY

Expunge Lis Pendens

A Lis Pendens is a powerful tool in civil litigation since it has the effect of restraining alienation of property.  Because that tool may be utilized without a hearing, and is capable of being wielded for improper motives, the law provides a mechanism for the property owner affected by an adversary’s filing of a Lis Pendens to have an early hearing challenging the propriety of its filing.  Under CCP § 405.30, at any time after a notice of pendency of action has been recorded, any party with an interest in the pertinent real property may apply to the court to expunge the notice. A lis pendens may be expunged either under CCP § 405.31 if the pleadings do not contain a real property claim; or under CCP § 405.32 if the court finds that the party claiming the Lis Pendens has not established by a preponderance of the evidence the probable validity of the real property claim. “Probable validity” exists when “it is more likely than not that the claimant will obtain a judgment on the claim.” (Code Civ. Proc., § 405.3.) Under CCP § 405.30, the party claiming the Lis Pendens, i.e., the party opposing the motion to expunge, has the burden of proof under sections 405.31 and 405.32.

Issue for Oral Argument: What is the type of analysis for the Court to apply in deciding whether Plaintiff carries its burden of proving probable validity of succeeding on the claims raised by the expungement motion?  While Plaintiff argues that it is a demurrer-like analysis, each side has submitted declarations and exhibits and has argued that evidence in all three rounds of briefing more akin to a summary judgment-like analysis.

DISCUSSION

            Defendants move this Court to expunge the Lis Pendens filed by plaintiff on 219 W Florence, 235 W Florence, and the Hermosa Property on the grounds that plaintiff cannot show it has a probable validity of succeeding on the claims in its Complaint that affect title to, or the right to possession of, the foregoing properties. In the alternative, defendants seek an undertaking by plaintiff of at least $2.5 Million to protect defendants from the alleged cloud caused by the filing and service of the Lis Pendens on the properties’ titles during this litigation. Defendants also seek attorney fees and costs, of $37,500, for bringing this motion under CCP § 405.38.

I.                Lis Pendens: Probable Validity of the Real Property Claims

A.    West Florence Properties

                                                  i.     First Cause of Action: Breach of Fiduciary Duty

Plaintiff alleges Ennis breached his fiduciary duty to N/S, including but not limited to his duty of loyalty, by (1) knowingly acting against N/S’s interests and putting his own personal interest ahead of N/S when he inserted allegedly unfair “null on sale” provisions into leases for the West Florence Properties which allowed Ennis to cancel the Leases upon a sale of the West Florence Properties, Compl. ¶¶ 20, 21, 43.; and (2) failing to provide N/S’s disinterested directors, officers and minority shareholders with full and candid information concerning the lease terms as to the West Florence Properties. Compl. ¶ 44.

Defendants claim the breach of fiduciary duty claim arising from the “null on sale” provision in the West Florence leases must fail because (1) plaintiff knew the properties would soon be sold and that the leases would only maintain the status quo, and that plaintiff benefited from below-market rent for many years because several sales fell through; (2) plaintiff’s claim is time-barred because the statute of limitations ran years ago; (3) plaintiff’s failure to challenge the leases, while accepting their benefits, establishes ratification; and (4) reformation by striking the “null on sale” provision is unavailable under the law. Mot. p. 1.

To prevail on a cause of action for breach of fiduciary duty, a plaintiff must establish the existence of a fiduciary duty owed to that plaintiff, a breach of that duty and resulting damage. Pellegrini v. Weiss (2008) 165 Cal.App.4th 515, 524. A fiduciary duty is founded upon a special relationship imposed by law or under circumstances in which “confidence is reposed by persons in the integrity of others” who voluntarily accept the confidence. Tri-Growth Centre City, Ltd. v. Silldorf, Burdman, Duignan & Eisenberg (1989) 216 Cal.App.3d 1139, 1150; see Zumbrun v. Univ. of So. Cal. (1972) 25 Cal.App.3d 1, 13.

1.     Existence of Fiduciary Duty

            Plaintiff sufficiently pleads facts to show that Ennis owed plaintiff a fiduciary duty by alleging that Ennis was the majority owner of N/S, exercised total control over N/S, and continued to hold the position of Chief Executive Officer and serve as director of N/S until May 2022. Compl. ¶¶ 10, 12; Ennis Decl. ¶¶ 6-8, 23; Chris Decl. ¶ 43; Tiffany Decl. ¶ 25. Defendants do not deny or refute the existence of Ennis’ fiduciary duty to N/S during the times material to the circumstanced underlying the grounds for the 3 lis pendens filings. Instead, Defendants attack other elements of a fiduciary duty claim, particularly breach of the duty and the statute of limitations defense.

2.     Breach of that Duty

Plaintiff contends breach of Ennis’ fiduciary duty by alleging that Ennis entered into leases with plaintiff that contained an allegedly highly unfair provision, the “null on sale” clause.  Plaintiff alleges that Ennis inserted the “null on sale” provision for his personal benefit and failed to get approval for the transaction from disinterested directors or minority shareholder. Plaintiff shows that it had an existing 10-year lease for 219 W Florence (Ong Decl. ¶¶ 4-5), and had a month-to-month lease for 235 W Florence, id., despite defendants’ claims that plaintiff’s leases had expired. Mot. p. 8. Plaintiff demonstrates that Ennis entered into an interested transaction through his emails which show that he executed the new leases with the West Florence Properties to secure and facilitate his personal loan. Exhibits F-L; Chris Decl. ¶ 10. Although Ennis claims there were no uninterested shareholders with voting rights, plaintiff shows that there were disinterested directors or minority shareholders and that Ennis failed to seek and obtain their approval. Tiffany Decl. ¶ 7.  But even if a self-dealing transaction was not approved by disinterested directors, it is not wrongful if the terms of the transaction were fair and reasonable to the company.  Here, the evidence presented for purposes of the expungement proceedings is conflicting as to whether the leases containing the “null on sale” provisions were unreasonable or unfair to the Plaintiff corporation when taking into account market value for commercial rent, payment of property taxes being required in addition to monthly rent, and other factors.

Issue for Oral Argument: If the Court were to determine that, for purposes of the expungement proceeding, Plaintiff has not carried its burden of showing that the “null on sale” provision was unfair or unreasonable to the Plaintiff, what effect does that determination have on later proceedings in the case, i.e., is that determination binding for purposes of a later motion for summary judgment or is it binding on the jury if the case proceeds to trial?

3.     Statute of Limitations

Issues for Oral Argument:

1.     If (for purposes of the expungement proceeding) the Court were to reach the statute of limitations issue raised by the Motion to Expunge, doesn’t the Defendant have the burden of proving an affirmative defense such as the statute of limitations? 

2.     As with the Issue for Oral Argument as to the unfairness of unreasonableness of the null on sale provision, what effect does a determination in this expungement proceeding as to whether the Plaintiff’s cause of action is time-barred have on later proceedings in the case, i.e., is that determination binding for purposes of a later motion for summary judgment or is it binding on the jury if the case proceeds to trial?

3.     The Court will entertain oral argument as to whether the damages element of the tort of breach of fiduciary duty has or is required to have accrued more than four years ago in this context.  The parties in their briefs disagree as to whether the Plaintiff must have suffered appreciable harm more than four years before the Tolling Agreement’s deadline earlier in 2022, given the basis of the fiduciary duty claim under the Corporations Code.

                                                ii.     Third Cause of Action: Imposition of Constructive Trust

Plaintiff claims Ennis wrongfully obtained Ennis Junior’s 50% interest in 219 W Florence by misappropriating plaintiff’s asset in a self-interested transaction in breach of his fiduciary duty to finance the settlement of his personal disputes with Ennis Junior, such that he has no legal or equitable right, claim, or interest in Ennis Junior’s 50% interest in 219 W Florence. Compl. ¶¶ 57-58. Plaintiff claims it is entitled to a constructive trust over Ennis Junior’s 50% interest in 219 W Florence. Compl. ¶ 61.

Defendants claim plaintiff’s constructive trust claim has no probable validity because plaintiff’s claim is time-barred and Ennis did not use plaintiff’s funds to acquire Junior’s interest.

1.     Time Barred Claim

The Court tentatively concludes that Plaintiff’s claim is not time barred because it is an action to impose a constructive trust on real property, which has a five-year statute of limitations. Oppo. p. 18. Here, plaintiff acquired Junior’s 50% interest in TGE in March 2018, and the action was filed on June 17, 2022, which is within the statute of limitations.  

2.     Use of Plaintiff’s Funds to Acquire Junior’s Interest

Defendant alleges that Ennis did not misappropriate plaintiff’s assets for his own use because he did not use any N/S funds to acquire Junior’s interest. Mot. p. 12, Ennis Decl., Exhibit H. Plaintiff claims that Ennis’ purchase of Junior’s shares in N/S for $3 million was from N/S’ funds because he used the proceeds from the sale of the Hermosa Property and that the “like-kind exchange” was a self-interested transaction, so the funds actually belong to N/S. Oppo. pp. 8-9. However, the Court tentatively concludes that Plaintiff has not carried its burden of proving that the proceeds from the Hermosa Property are actually N/S funds, but rather it is more likely that Ennis exchanged his own real estate for Junior’s interest.

Issue for Oral Argument:  The Court will entertain argument as to this tentative conclusion, which also affects the causes of action relating to the Hermosa Beach property.

  Fifth Cause of Action: Breach of Contract

Plaintiff claims that Ennis breached the TGE Properties’ Operating Agreement by executing a new single member LLC operating agreement without N/S’s consent and authorization and entering into an agreement to sell all the TGE Properties’ assets, namely 219 W Florence without N/S’s consent and authorization. Compl. ¶ 70.

Defendant claims plaintiff’s breach of contract fails because it is premised on plaintiff’s equitable ownership of TGE Properties, but since plaintiff has failed to show it is entitled to a constructive trust over Junior’s 50% interest in TGE, this claim necessarily fails.

Given the Court’s tentative conclusion as to the Constructive Trust cause of action, the Court tentatively concludes that Plaintiff is not likely to prevail on its breach of contract claim because it is premised on N/S’s equitable ownership of TGE Properties, and plaintiff has not shown that N/S equitably owns TGE Properties nor that N/S is the true, proper and equitable owner of Ennis Junior’s 50% interest in 219 W Florence that Ennis acquired as a part of his personal dispute with Ennis Junior.

 Issue for Oral Argument:  The Court will entertain argument as to this tentative conclusion.

                                              iii.     Sixth Cause of Action: Breach of the Implied Covenant of Good Faith and Fair Dealing

Plaintiff claims defendants breached the implied covenant of good faith and fair dealing by (1) prematurely cancelling the West Florence Properties Leases prior to the expiration; (2) failing to provide N/S with any notice that they were selling the West Florence Properties and would cancel the leases; (3) failing to allow N/S reasonable time to relocate its operations; (4) failing to negotiate reasonable leaseback option prior to the decision to sell. Compl. ¶ 77.

Defendants argue plaintiff’s claim fails because the “null on sale” provision expressly gave defendants the right to sell the properties and void the leases, so exercising this right cannot violate the covenant. Mot. p. 13. Defendants also claim that they did give N/S notice of their intent to sell, Ennis Decl. ¶ 24-27, Exhibits I-M, and that defendants had no obligation to negotiate a leaseback option with N/S. Mot. pp. 13-14.

The Court tentatively concludes that plaintiff cannot properly maintain a claim for breach of implied covenant of good faith and fair dealing because defendants did not do anything which destroyed or injured plaintiff’s rights as specified in the leases. It was not reasonable for plaintiff to expect that defendants would not exercise their right to sell the properties and void the leases as specified in the “null on sale” provision, nor was it reasonable for plaintiff to expect that defendants would negotiate a leaseback option because plaintiffs do not provide any facts which would justify such an expectation.

Issue for Oral Argument:  The Court will entertain argument as to this tentative conclusion

                                               iv.     Seventh and Eighth Cause of Action: Declaratory Relief

Plaintiff claims it is entitled to a declaration of the parties’ respective rights and obligations with respect to the Leases and to injunctive relief striking the “null on sale” provision from the Leases because there is a justiciable controversy under CCP § 1060 between the parties; the Leases will be cancelled upon the sale of the West Florence Properties; plaintiff has no plain, speedy, and adequate remedy at law; and damages would not fully redress any harm suffered by plaintiff . Compl. ¶¶ 81-83.  The Eighth cause of action makes similar allegations as to the TGE Properties.

Defendants do not address plaintiff’s declaratory relief claim as to the “null on sale” provision in the Leases or as to the TGE Properties in the Eighth cause of action.

 Issue for Oral Argument:  The Court will entertain argument as to the tentative conclusion that Plaintiff has failed to meet its burden for purposes of this expungement proceeding that it lacks an adequate remedy at law.

B.    Hermosa Property

                                                  i.     Second Cause of Action: Breach of Fiduciary Duty

Plaintiff claims Ennis breached his fiduciary duty by (1) acting against N/S’s interests and putting his own personal interest ahead of N/S’s interests by acquiring N/S’s asset, the Hermosa Property for far less than fair market value; and (2) failing to provide N/S’s disinterested directors, officers and the minority shareholders of N/S with full and candid information concerning the terms of the sale of the Hermosa Property.

Defendants claim plaintiff’s breach of fiduciary claim regarding the Hermosa Property fails because (1) it is time barred; and/or (2) it was ratified. Mot. p. 2.

1.     Existence of Fiduciary Duty

Plaintiff sufficiently shows that Ennis owed plaintiff a fiduciary duty as discussed above. Thus, the fiduciary duty element is met.

2.     Breach of that Duty

Ennis allegedly violated his fiduciary duties when he entered into a purportedly self-interested transaction concerning the Hermosa Property. Plaintiff’ alleges that the sale was not fair and reasonable, and plaintiff did not ratify the transaction. Oppo. pp. 12-13. The Court tentatively concludes that the fiduciary duty claim as to the Hermosa Property is not time-barred because the  sale of the Hermosa Property occurred in April 2018, less than four yeas before the effective date of the tolling agreement. 

Issue for Oral Argument:  The Court will entertain argument as to whether the sale was not fair and reasonable, and as to Plaintiff’s burden of proving that Ennis paid millions of dollars below market value for the property as asserted by Chris Decl. ¶ 25.

                                                ii.     Fourth Cause of Action: Imposition of Constructive Trust

Plaintiff claims Ennis wrongfully obtained the Hermosa Property in a self-interested transaction in breach of his fiduciary duty by failing to pay N/S the fair market value for the Hermosa Property, such that plaintiff is entitled to a constructive trust over the Hermosa Property. Compl. ¶¶ 63, 67.

Defendants do not address plaintiff’s constructive trust claim as to the Hermosa Property.

Issue for Oral Argument:  The Court will entertain argument as to Defendant’s position regarding this constructive trust claim.

II.             Undertaking

Defendants seek an undertaking of $2,500,000 as a condition of maintaining the lis pendens which they state is necessary because they have already been severely damaged by Fortress’s cancellation of its purchase, the difficulty of finding a buyer, the possibility of lost sale proceeds, which they estimate as $2,000,000. Ennis Decl. ¶ 32. Additionally, defendants anticipate legal fees and costs, which they estimate $50,000. Luskin Decl. ¶ 3.

Plaintiff argues that a $2,500,000 is unjust because defendants have received several offers for the West Florence Properties and the Hermosa Property, defendants have not shown that these three properties will go down in value, and that there is no requirement to post a bond to guarantee a seller’s potential profit or to reimburse defendants’ legal fees.

The Court has no tentative conclusion at this time as the requirement of an undertaking, since such a conclusion will be dependent on whether the Court expunges the Lis Pendens or not and the grounds for making such a ruling.

III.           Attorney’s Fees and Costs

The Court’s tentative conclusion is that it will not award attorney’s fees and costs to either party because there is no substantial justification for an award to either party.