Judge: Stephen I. Goorvitch, Case: 23STCV02223, Date: 2023-08-07 Tentative Ruling

Case Number: 23STCV02223    Hearing Date: August 24, 2023    Dept: 39

Brett Kane v. Yana Bakshiy, et al.

Case No. 23STCV02223

Demurrer and Motion to Strike

BACKGROUND

            Plaintiff Brett Kane (“Plaintiff”) filed this action against Yana Bakshiy (“Defendant”), among others, asserting causes of action for breach of fiduciary duty, unfair competition, constructive fraud, and conversion.  Plaintiff asserts both direct claims and derivative claims on behalf of Terraform Farms, Inc. (“Terraform”).  Now, Defendant demurs to each cause of action and moves to strike certain allegations in the complaint, which Plaintiff opposes.  The demurrer is overruled and the motion to strike is denied. 

PLAINTIFF’S ALLEGATIONS

            Plaintiff was the Chief Operating Officer and Secretary of Terraform.  (Complaint, ¶ 1.)  Defendant is the Chief Executive Officer and Chief Financial Officer of Terraform.  (Id., ¶ 4.)  Plaintiff and Defendant were the two directors of Terraform during the relevant time period.  (Id., ¶¶ 1, 4.)  Terraform is a licensed marijuana business in the City of Los Angeles.  (Id., ¶ 6.)

            The parties formed Terraform in or about January 2016 to operate as a licensed cannabis cultivation and distribution business.  (Id., ¶ 14.)  Terraform was incorporated on March 1, 2016, as a nonprofit mutual benefit corporation.  (Ibid.)  Defendant and her husband purchased a property for Terraform to use for its business operations through a company called Gentleman Bradley LLC (“GB”).  (Id., ¶¶ 7, 14, 16.)  At the time GB was formed, Defendant and her husband owned 50% of that entity.  (Id., ¶ 16.)  Terraform was to receive a ten-year lease with a ten-year renewal option.  (Id., ¶ 14.)  This lease was important because marijuana cultivation requires the purchase of expensive equipment and construction for a cultivation facility.  (Id., ¶ 15.)  Also, marijuana leases are specific to the property, and relocations are not always possible.  (Ibid.)

            Contrary to the parties’ agreement, GB provided Terraform a one-year lease at a rental rate of $28,000 per month.  (Id., ¶ 17.)  The modification was related to Terraform’s license, and after registration of the license, Terraform would receive a nine-year lease.  (Ibid.)  But one year later, GB gave Terraform only a five-year lease with an option to renew for two additional terms of five years each at a rental rate of $35,000 per month.  (Id., ¶ 18.)  When Plaintiff raised concerns, Defendant “made an oral confirmation that she, on behalf of GB, would provide a total of ten (10) years’ lease.”  (Ibid.) 

            Due to Plaintiff’s efforts, Terraform received a distribution license on May 7, 2019, and a cultivation license on January 6, 2020.  (Id., ¶ 19.)  During this time period, Plaintiff borrowed $500,000 to pay for all the equipment and construction necessary to develop the property into an operational cannabis cultivation facility.  (Id., ¶ 20.)  On December 7, 2020, the parties converted Terraform to a for-profit corporation, and the parties designated themselves as the two directors with each owning 50% of Terraform’s total authorized shares.  (Id., ¶ 21.)  In 2020, Defendant and her husband, through GB, unilaterally raised the rent to $52,000 per month without an amended lease.  (Id., ¶ 23.)  This was nearly $20,000 per month in excess of the agreed rental amount.  (Id., ¶ 24.)  Defendant also hired her son in a low-level administrative position at an annual salary of over $100,000, to the detriment of Terraform.  (Ibid.)  On or about January 1, 2021, Defendant and her husband, through GB, raised the rent to $77,000 per month despite blocking Plaintiff’s ability to complete the buildout in order to generate more revenue for Terraform.  (Id., ¶ 26.)  Prior to the lease’s expiration on January 1, 2022, Plaintiff requested an extension, and Defendant informed him that GB would not extend a new lease or allow him to finish the buildout unless he paid $150,000 in cash.  (Id., ¶ 27.) 

            In 2022, the parties agreed to dissolve the company.  (Id., ¶ 29.)  However, Defendant has refused to cooperate in the process of liquidating Terraform’s assets.  (Ibid.)  In particular, the licenses and equipment are worth approximately $2.5 million, and Defendant has refused to permit the sale of the license to any third parties.  (Id., ¶ 30.)  As a result, Terraform risked losing its license completely.  (Ibid.)  Plaintiff received two offers from third parties, one for $2.5 million and another for $2 million, but Defendant has refused to consider them in good faith.  (Id., ¶ 31.)  Nevertheless, Defendant and her husband are actively seeking other persons to purchase Terraform’s licenses without Plaintiff’s approval.  (Id., ¶ 35.)  Defendant also has transferred cannabis product from Terraform to her dispensary without compensating Terraform.  (Id., ¶ 30.) 

            In late 2022, Defendant and her husband “entered into a scheme to deprive [Plaintiff[ of his interest in Terraform.”  (Id., ¶ 33.)  GB sent a demand letter to Plaintiff and Terraform demanding over $1 million in back rent, demanding that Terraform vacate the property on or before December 6, 2022.  (Ibid.)  On January 2, 2023, GB served Plaintiff with a notice of termination demanding that Terraform vacate the premises within thirty (30) days.  (Id., ¶ 34.) 

LEGAL STANDARD

A.        Demurrer

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)  When considering demurrers, courts read the allegations liberally and in context.  (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.)  “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.”  (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.)  “The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.” (Hahn, supra, 147 Cal.App.4th at p. 747.)  However, courts do not accept as true deductions, contentions, or conclusions of law or fact.  (Stonehouse Homes LLC v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 538.)  The general rule is that the plaintiff need only allege ultimate facts, not evidentiary facts.  (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.)  “[D]emurrers for uncertainty are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.”  (Lickiss v. Fin. Indus. Regulatory Auth. (2012) 208 Cal.App.4th 1125, 1135.)  In addition, even where a complaint is in some respects uncertain, courts strictly construe a demurrer for uncertainty “because ambiguities can be clarified under modern discovery procedures.”  (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.)  Demurrers do not lie as to only parts of causes of action, where some valid claim is alleged but “must dispose of an entire cause of action to be sustained.” (Poizner v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.)  

            B.        Motion to Strike

Courts may, upon a motion, or at any time in their discretion, and upon terms they deem proper, strike any irrelevant, false, or improper matter inserted in any pleading. (Code Civ. Proc., § 436, subd. (a).) Courts may also strike 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. (Id., § 436, subd. (b).)  The grounds for a motion to strike are that the pleading has irrelevant, false or improper matter, or has not been drawn or filed in conformity with laws. (Id., § 436.) The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. (Id., §¿437.)  

DISCUSSION  

            Plaintiff alleges sufficient facts to assert derivative claims on behalf of Terraform.  In order to maintain derivative claims, a plaintiff must allege that he was a shareholder at the time of the alleged misconduct.  (Corp. Code § 800(b)(1).)  Plaintiff alleges that he owned 50% of the outstanding shares during the relevant time period and was a director of Terraform.  The allegations are sufficient to assert derivative causes of action against Defendant. 

            The underlying facts also support each cause of action.  Plaintiff can assert a claim for breach of fiduciary duty because an officer and director owe a fiduciary duty to her corporation and the shareholders.  (See, e.g., Singhania v. Uttawar (2006) 136 Cal.App.4th 416, 426; DHC Health Services Corp. v. Waite (2022) 95 Cal.App.4th 829, 850.)  The allegations are specific enough to satisfy the pleading standard for a fraud claim.  Money can be the subject of a cause of action for conversion if the claim relates to a specific, identifiable sum.  (PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395, 397.)  Finally, the underlying facts and causes of action support a claim for unfair competition under Business and Professions Code section 17200.

            Defendant argues that the claims are untimely because the complaint references activities in 2016.  The complaint makes clear that the operative facts occurred within three to four years before this action was filed.  The mere fact that the complaint references foundational events in 2016 does not render the causes of action untimely.  At best, this issue may pose a limitations on damages at trial, which may be addressed in a motion in limine.

            The Court denies the motion to strike.  For the most part, Defendant seeks to use the motion to strike as a “line item veto,” which is improper.  (See PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1683.)  Regardless, the motion is denied for the reasons discussed.  The Court finds that the complaint satisfies the pleading standard for purposes of punitive damages.    

CONCLUSION AND ORDER

            Based upon the foregoing, the Court orders as follows:

            1.         The Court overrules Defendant’s demurrer.

            2.         The Court denies Defendant’s motion to strike.

            3.         Defendant shall file an answer within thirty (30) days.

            4.         The Court advances and continues the hearings on Defendant’s motion to compel further responses to form interrogatories and requests for production of documents from August 24, 2023, to October 4, 2023, at 8:30 a.m.

            5.         The Court orders Plaintiff to serve the remaining defendants forthwith.  The Court advances and continues the Order to Show Cause re: Dismissal of Unserved Defendants to October 4, 2023, at 8:30 a.m.

            6.         The Court advances and continues the case management conference to October 4, 2023, at 8:30 a.m.

            7.         Defendant’s counsel shall provide notice and file proof of such with the Court.