Judge: Stephen P. Pfahler, Case: 24STCV12137, Date: 2025-02-10 Tentative Ruling

Case Number: 24STCV12137    Hearing Date: February 10, 2025    Dept: 68

Dept. 68

Date: 2-10-25 c/f 11-19-24

Case #24STCV12137

Trial Date: Not Set

 

DEMURRER

 

MOVING PARTY: Defendants, Kahn, et al.

RESPONDING PARTY: Plaintiffs, Black Drachen, et al.

 

RELIEF REQUESTED

Demurrer to the Complaint

·         1st Cause of Action: Breach of Fiduciary Duty

·         5th Cause of Action: Accounting

·         6th Cause of Action: Cancellation of Instrument

 

SUMMARY OF ACTION

Plaintiff N4 Capital, individually and derivatively as majority shareholder of Black Drachen,  LLC, contend Defendants John Fowler, JAF Investments, Inc., Bruce Hutchinson, and Cal 64 Exchange Services improperly diluted Black Drachen’s ownership in Plaintiff/nominal Defendant 3775 Building, LLC through the transfer of a 10% interest to a former attorney working on behalf of Defendant Kahn and Cal 64 Exchange Services. The 3775 entity purportedly holds a certain leasehold interest for the conducting of cannabis business ventures.

 

On May 14, 2024, Plaintiffs filed a complaint for 1) Breach Of Fiduciary Duty; 2) Fraud; 3) Breach of Contract; 4) Constructive Fraud; 5) Accounting; 6) Cancellation of Instrument; and, 7) Theft in Violation of Penal Code section 496(a). On August 8 and 21, 2024, the clerk entered defaults against Bruce Hutchinson and JAF Investments, Inc. On August 28, 2024, John Fowler answered the complaint.

 

RULING: Overruled.

Defendants Cal 64 Exchange Services and Jeffrey Kahn submit a demurrer to Breach of Fiduciary Duty, Accounting, and Cancellation of Instruments causes of action in the complaint on the grounds of uncertainty. Plaintiffs in opposition maintain all causes of action are well pled, or alternatively, request leave to amend. Although Defendants filed a single, consolidated demurrer, Defendants elected to file two separate replies, plus declarations containing extrinsic information.

 

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.)

 

The court will NOT consider any content submitted in the declarations attached to the replies. Extrinsic motivations are also immaterial to consideration of the demurrer. Challenges to the meet and confer efforts are in NO way dispositive towards ruling on the demurrer. (Code Civ. Proc., § 430.41, subd. (a)(4) [“A determination by the court that the meet and confer process was insufficient shall not be grounds to overrule or sustain a demurrer”].)

“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.]

 

Defendants challenge both the lack of a well-articulated factual basis of any claims against either Defendant, and further deny any legal basis of liability, even assuming some factual foundation. Plaintiff alleges a 10% interest in 3775 Building, LLC was conveyed by Defendant Fowler, thereby constituting an improper dilution of Black Drachen shareholder value. [Comp., ¶¶ 1, 15, 36, and 46.] The wrongful conduct by Kahn, former counsel to both Black Drachen and 2775 Building, LLC, is based on the acceptance of said interest without the informed, written consent of Plaintiffs. Cal 64 Exchange Services appears to be named on the basis that it constitutes an entity controlled by Kahn [Comp., ¶ 6], with an additional allegation regarding the alleged transfer also going to said entity [Comp., ¶¶ 20, 22.]

 

1st Cause of Action: Breach of Fiduciary Duty

Defendants challenge the basis of the fiduciary duty, and additionally contend even if a fiduciary duty was owed, any and all wrongful conduct occurred after Kahn ceased representation.

 

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.) “A fiduciary or confidential relationship can arise when confidence is reposed by persons in the integrity of others, and if the latter voluntarily accepts or assumes to accept the confidence, he or she may not act so as to take advantage of the other's interest without that person's knowledge or consent.” (Pierce v. Lyman (1991) 1 Cal.App.4th 1093, 1101–02.)

 

Defendants appear to conclusively dismiss the existence of the fiduciary duty owed to fellow shareholders and of counsel to the entity said attorney represents. Plaintiff counters with actual, substantive legal support regarding the existence of a fiduciary duty, including use of confidential information obtained during representation potentially benefitting counsel even after the cessation of representation. (Hunniecutt v. State Bar (1988) 44 Cal.3d 362, 370-372.) The court also notes the potential existence of a basis for the finding of a fiduciary relationship based on the business relationship between the parties. (Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1339.) Challenges in the replies based on the distinction of case law cited in opposition, when no substantive legal support was presented in the first place, will not suddenly validate certain positions. The court therefore overrules the demurrer to the subject cause of action.

 

5th Cause of Action: Accounting

Defendants challenge the accounting cause of action on grounds of lack of a valid basis for the demand of an accounting. Plaintiffs cite to the fiduciary duty owed by principals in a business enterprise to fellow shareholder investors, as well as duties owed by former counsel.

 

“A cause of action for an accounting requires a showing that a relationship exists between the plaintiff and defendant that requires an accounting, and that some balance is due the plaintiff that can only be ascertained by an accounting” (Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179.)

 

Defendants improperly rely on extrinsic evidence denying receipt of any funds from said membership interest, or otherwise lack of possession of business records for compliance. For purposes of the subject demurrer, the court rejects the extrinsic references, including the reiterated argument denying any amount of owed. (Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 910.) Reliance on the otherwise incomplete and unsupported foundational requirement regarding lack of fiduciary duty will not undermine the claim. The court finds a validly pled claim for accounting for purposes of determining the devaluation/dilution of value of corporate holdings, which is the proper subject matter of an accounting. (Teselle v. McLoughlin, supra, 173 Cal.App.4th at p. 179.)  The demurrer is overuled as to the subject cause of action.

 

6th Cause of Action: Cancellation of Instrument

Defendants challenge the subject cause of action on grounds of a lack of attached agreement sought for cancellation. Defendants cite to the breach of contract standard regarding the necessity to articulate the terms or incorporate a full copy for reference. Plaintiffs dispute the application of the breach of contract standard and instead cite to the fraud basis of relief.

 

“‘To prevail on a claim to cancel an instrument, a plaintiff must prove (1) the instrument is void or voidable due to, for example, fraud; and (2) there is a reasonable apprehension of serious injury including pecuniary loss or the prejudicial alteration of one's position. [Citation.]’” (Thompson v. Ioane (2017) 11 Cal.App.5th 1180, 1193–1194.)

 

For context, Plaintiffs allege Defendants allowed the 3775-entity to breach the property lease thereby leading to unlawful detainer proceedings, which led to an “amended” operating agreement, and the purported transfer of membership interest. Plaintiffs challenge the validity of the agreement. The court finds no legal basis for the requirement of the full terms of said agreement or attachment of an actual copy of the amended agreement in order to allege a basis of cancellation. Again, the court will not consider the extrinsic references extensively relied upon, especially in the replies. The cause of action is sufficiently supported, and the demurrer is overruled as to this cause of action.

 

The demurrer is overruled in its entirety. Defendants to answer within 10 days of this order.

 

The court will concurrently conduct the Casement Management Conference, and OSC re: Failure to Proof of Service.

 

Defendants to give notice.