Judge: Stephen P. Pfahler, Case: 22CHCV00134, Date: 2022-12-05 Tentative Ruling

Case Number: 22CHCV00134    Hearing Date: December 5, 2022    Dept: F49

Dept. F-49

Calendar # 2

Date: 12-05-22

Case # 22CHCV00134

Trial Date: None Set

DEFENDANT CDK PHARM HOLDING, LLC’S DEMURRER TO FIRST AMENDED COMPLAINT

MOVING PARTY: Defendant CDK Pharm Holding, LLC

RESPONDING PARTY: Plaintiffs Robert E. Simpson and Laura J. Simpson

RELIEF REQUESTED

Defendant demurs to the First Amended Complaint (“FAC”) as to the entire FAC based on Plaintiffs’ failure to bring the action as a derivative action and not individually. Defendant claims the second, fourth, and tenth causes of action are defective for failure to allege sufficient facts to establish a cause of action. Defendant also alleges that all claims asserted by Plaintiffs are time-barred.

SUMMARY OF ACTION

Plaintiffs filed their initial Complaint on March 1, 2022. Plaintiffs filed the FAC on July 6, 2022 alleging (1) Breach of Contract as to The Global Pharmacy Source, LLC (“GPS”); (2) Breach of Contract as to The CDK Pharm Holding, LLC (“CDK”); (3) Fraud as to GPS; (4) Fraud as to CDK; (5) Unjust Enrichment; (6) Conversion; (7) Money Had And Received; (8) Alter Ego; (9) Elder Financial Abuse; and (10) Violation of Cal. Bus. & Prof. Code Section 17200. Only the second, fourth, and tenth causes of action are asserted against Defendant CDK.

The lawsuit arises out of the business affairs of two separate limited liability companies, Defendant CDK and Defendant GPS. Both companies were set up to conduct business in the field of health care and pharmacology. They intended to operate pharmacies which, among other things, would – pursuant to a doctor’s prescription – provide specially prepared medicines to be used in chemotherapy treatments for cancer patients. The business was not successful, and in 2020, GPS ceased operations. CDK is presently active, but Defendant claims it is not likely to continue as a viable commercial entity and will likely have to start the process of winding up its affairs in the near future. Plaintiffs seek to be paid back the funds invested in the company. Defendant claims that Plaintiffs are both investors and members of CDK and GPS.

On August 31, 2022, Defendant filed its demurrer.

On November 17, 2022, Plaintiffs filed their opposition.

On November 28, 2022, Plaintiffs filed the Second Amended Complaint (“SAC”).

RULING: Sustained with Leave to Amend.

Request for Judicial Notice: Granted.

The Court takes judicial notice of the Articles of Organization (Form LLC-1) for CDK Pharm Holding, LLC under Evidence Code section 452 (h).

“Before filing a demurrer pursuant to this chapter, the demurring party shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer. If an amended complaint, cross-complaint, or answer is filed, the responding party shall meet and confer again with the party who filed the amended pleading before filing a demurrer to the amended pleading.” (Code Civ. Proc., § 430.41 subd. (a).)

Here, Plaintiffs filed the SAC based on the hearing held on November 23, 2022, where the Court sustained Defendant Ronald Kelly’s Demurrer to the FAC and granted Plaintiffs leave to amend the FAC. The SAC moots this demurrer and any other demurrers to the FAC. With that being said, the Court exercises its discretion to consider the merits of this demurrer, but all other demurrers to the FAC are now off-calendar as moot.

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc., § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (Code Civ. Proc., § 452.) The court “ ‘ “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law . . . .” ’ ” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525.) In applying these standards, the court liberally construes the complaint to determine whether a cause of action has been stated. (Picton v. Anderson Union High School Dist. (1996) 50 Cal.App.4th 726, 733.)

“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 California, Inc. (1993) 14 Cal.App.4th 612, 616; Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139 [“[U]nder our liberal pleading rules, where the complaint contains substantive factual allegations sufficiently apprising defendant of the issues it is being asked to meet, a demurrer for uncertainty should be overruled or plaintiff given leave to amend.]

1.      Derivative Claim

“A derivative claim is a property right that belongs to the corporation. [Citations.] It is properly viewed as an ‘asset’ of the corporation. [Citation.] ‘Because a corporation exists as a separate legal entity, the shareholders have no direct cause of action or right of recovery against those who have harmed it. The shareholders may, however, bring a derivative suit to enforce the corporation’s rights and redress its injuries when the board of directors fails or refuses to do so.’ [Citation.] ‘If successful, a derivative claim will accrue to the direct benefit of the corporation and not to the stockholder who litigated it. [Citations.]’ [Citation.]” (Cotton v. Expo Power Systems, Inc. (2009) 170 Cal.App.4th 1371, 1380.)

“Under the sham pleading doctrine, if a verified complaint contains allegations fatal to a cause of action, a plaintiff cannot cure the defect by simply omitting those allegations in an amended pleading without explanation… But amendment in this manner is allowed where a plaintiff clearly shows that the earlier pleading is the result of mistake or inadvertence.” (Dones v. Life Insurance Company of North America (2020) 55 Cal.App.5th 665, 688.) “Plaintiffs … may avoid the effect of the sham pleading doctrine by alleging an explanation for the conflicts between the pleadings.” (Larson v. UHS of Rancho Springs, Inc. (2014) 230 Cal.App.4th 336, 344, as modified (Oct. 2, 2014).)

Here, Plaintiffs alleged they were members of the CDK in the original Complaint when they claimed they signed the CDK Subscription Agreement and CDK Membership Agreement dated October 13, 2017 and invested $150,000 to the CDK account. The Subscription and Membership Agreements details the rights and interests of members. (Compl.; Exhs. 1-6.) Plaintiffs deny they are members in the FAC, arguing that they are not members because they did not sign the May 2018 agreement, which is a condition precedent in the CDK Subscription Agreement. The Court is unpersuaded. Plaintiffs have not provided a sufficient explanation for the conflicts concerning their membership in the CDK in the original complaint and the FAC. The Court agrees with Defendant’s argument that the mere existence of a second operating agreement dated in 2018 does not negate the fact that Plaintiffs are members of CDK due to signing the CDK Subscription and Membership Agreements dated October 13, 2017. If Plaintiffs are members, then they cannot bring their claims individually but must bring derivative claims as shareholders of CDK. Plaintiffs’ claims pertain to alleged actions of the managers and resulting damage to CDK and GPS. Despite Plaintiffs’ claims of individual injury, the gravamen of the wrong is injury to the “whole body of its stockholders.” (Nelson v. Anderson (199) 72 Cal.App.4th 111, 124.) Plaintiffs cannot cure their defect by denying their membership in the CDK in the FAC. Thus, Plaintiffs’ claims in the FAC are derivative. Therefore, the Court SUSTAINS WITH LEAVE TO AMEND Defendant’s demurrer as to the entire FAC.

Even though the demurrer should be sustained based on the fact that Plaintiffs should have brought a derivative action, the Court finds that the following are also grounds on which the demurrer should be sustained.

2.       Second Cause of Action (Breach of Contract)

“A cause of action for breach of contract requires (1) pleading of a contract, (2) plaintiff's performance or excuse for failure to perform, (3) defendant's breach and (4) damage to plaintiff resulting therefrom.”  (McKell v. Washington Mutual, Inc.¿(2006) 142 Cal.App.4th 1457, 1489.) “A written contract may be pleaded either by its terms—set out verbatim in the complaint or a copy of the contract attached to the complaint and incorporated therein by reference—or by its legal effect. [Citation.] In order to plead a contract by its legal effect, plaintiff must ‘allege the substance of its relevant terms. This is more difficult, for it requires a careful analysis of the instrument, comprehensiveness in statement, and avoidance of legal conclusions.’ [Citation.]” (McKell v. Washington Mut., Inc.¿(2006) 142 Cal.App.4th 1457, 1489 [citing 4 Witkin, Cal. Proc. (4th ed. 1997) Pleading, §§ 479-480, pp. 572-73].) 

Here, Plaintiffs fail to allege sufficient facts to support a claim for breach of contract because Plaintiffs have not properly identified the alleged contract. Plaintiffs improperly claim that the Private Placement Memorandum is integrated into the CDK Subscription Agreement, which they signed. The language in the Subscription Agreement which states, “the undersigned have read and understands the Private Placement Memorandum,” alone does not establish that the Private Placement Memorandum is integrated. However, even if it were, there is nothing in that Memorandum which could constitute a breach of promise given that the cover page states it “is for informational purposes only.” (FAC; Exhib. 11.)

3.      Fourth Cause of Action (Fraud)

The elements of fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud or induce reliance; (4) justifiable reliance; and (5) damages. (See Civil Code §1709.) Fraud actions are subject to strict requirements of particularity in pleading. (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.)

“Fraud must be pleaded with specificity rather than with ‘“‘general and conclusory allegations.’”’ (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.) The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.)” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 793.)

Plaintiffs fail to allege sufficient facts to support a claim for fraud because they have not identified a misrepresentation of a past or existing material fact. First, the representations made in the CDK Private Placement Memorandum cannot be considered a misrepresentation given the disclaimer that the content was for information purposes only, as indicated above. Additionally, the alleged representations by Kelly and Doty in the CDK Private Placement Memorandum which “boasted of incredible immediate estimated income for the first year, with each Unit earning an escalating monthly return on investment, totaling payments from $7,200.00 to $17,071.00 by the end of the year” are future projections and not statements of a past or existing material fact. Plaintiffs cannot rely on these statements as the basis for their fraud claim.

4.      Tenth Cause of Action (Unfair Competition)

California’s Unfair Competition Law prohibits unlawful, unfair or fraudulent business acts or practices. (Bus. & Prof. Code, § 17200.) It is a tool with which to enjoin deceptive or sharp practices. (Samura v. Kaiser Foundation Health Plan, Inc. (1993) 17 Cal.App.4th 1284, 1299, fn. 6.) It is intended to “safeguard the public against the creation or perpetuation of monopolies and to foster and encourage competition, by prohibiting unfair, dishonest, deceptive, destructive, fraudulent and discriminatory practices by which fair and honest competition is destroyed or prevented.” (See Bus. & Prof. Code, § 17001.)   

Plaintiffs fail to sufficiently allege a claim for unfair competition which is based on CDK’s alleged fraud, and which as discussed above, fails. Additionally, Plaintiffs cannot claim that CDK created two sham LLCs since the organizer was a third party. Any allegations regarding the formation and operation of CDK are irrelevant with regards to CDK. Thus, there are no factual allegations which support a claim for unfair competition. Furthermore, Plaintiffs do not provide an opposition concerning this cause of action. Thus, Plainti

5.      Time Barred Claims

The statute of limitations for breach of a written contract is four years. (Code of Civ. Pro. § 337(a).) Plaintiffs’ breach of contract claim is time barred since the Subscription Agreement was executed on December 11, 2017, and Plaintiffs filed their Complaint on March 4, 2022. Plaintiffs do not provide any opposing arguments.

The statute of limitations for fraud is three years. (Code Civ. Pro. § 338(d).) Plaintiffs’ fraud claim is time barred since they allege that they invested funds for the CDK on December 11, 2017, and Plaintiffs filed their Complaint on March 4, 2022. Plaintiffs argue that the statute of limitations should be tolled under the discovery rule because Defendants concealed their fraud. Plaintiffs claim that Kelly and Doty made “numerous glowing statements” concerning the CDK investments, but these statements occurred after Defendants made the alleged misrepresentations which induced Plaintiffs to invest, in December 2017. The facts supporting each element for fraud which Plaintiffs alleged occurred before or on December 11, 2017.

The statute of limitations for unfair competition is four years. (Cal. Bus. & Prof. Code § 17208.) Plaintiffs’ unfair competition claim is time barred because it is based on Defendants’ fraud, which as discussed above was filed after the statute of limitations. Plaintiffs do not provide any opposing arguments. Thus, Plaintiffs’ claims for second, fourth, and tenth causes of action are time barred.

In light of the foregoing, the Court SUSTAINS WITH LEAVE TO AMEND Defendant’s Demurrer to the FAC. All other demurrers to the FAC are ordered off-calendar as MOOT. Defendant to give notice.