Judge: Teresa A. Beaudet, Case: 21STCP00625, Date: 2023-03-01 Tentative Ruling
Case Number: 21STCP00625 Hearing Date: March 1, 2023 Dept: 50
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KENNETH WENGROD,
Plaintiff, vs. MICHAEL WEISS, et
al., Defendants. |
Case No.: |
21STCP00625 |
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Hearing Date: |
March 1, 2023 |
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Hearing Time: |
10:00 a.m. |
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[TENTATIVE]
ORDER RE: MOTION FOR AN ORDER ALLOWING
LEAVE TO AMEND COMPLAINT |
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Background
On February 25, 2021, Plaintiff Kenneth Wengrod, Trustee of
The Manhattan Trust, derivatively on behalf of Lily Bleu, Inc. (“Plaintiff”) filed
this action against Defendants Michael Weiss (“Weiss”) and Barbara Clark
Cambilargiu (“Cambilargiu”), and “Nominal Defendant” Lily Bleu, Inc. (“Lily
Bleu”) (collectively, “Defendants”). The Complaint asserts causes of action for
(1) breach of fiduciary duty, (2) corporate waste, and (3) unjust enrichment.
In the Complaint, Plaintiff alleges that Weiss and Cambilargiu
(jointly, the “Defendant Directors”) are each a director of Lily Bleu. (Compl.,
¶ 3.) Lily Bleu is a corporation engaged in the clothing business. (Compl.,
¶ 2.) Plaintiff was and is the owner of 5% of the shares of Lily Bleu’s
common stock at the time of the transaction(s) complained of in the Complaint.
(Compl., ¶ 4.)
Plaintiff alleges that the Defendant Directors failed to disclose to
Plaintiff
and have paid themselves salaries and bonuses exceeding the reasonable value of
their services to Lily Bleu. (Compl., ¶ 6.) Plaintiff further
alleges that the Defendant Directors failed to disclose to Plaintiff
and have paid themselves automobile, travel, and entertainment expense
reimbursements which are unreasonable and bear no relationship to the value of
these reimbursements to Lily Bleu. (Compl., ¶¶ 7-8.) Plaintiff alleges
that Defendant Directors failed to disclose to Plaintiff and have arranged to
contribute for the benefit of themselves deferred compensation and/or profit
sharing benefits exceeding $500,000 annually which are unreasonable in relation
to the compensation reasonably owing to the Defendant Directors for their
services to Lily Bleu. (Compl., ¶ 9.) Plaintiff also alleges
that the Defendant Directors have paid unreasonable design assistant
fees/salaries. (Compl., ¶ 10.)
In addition, Plaintiff alleges that on or about July 2, 2008, Defendant
Directors formed a new California limited liability company named Good Day
Gardena Properties, LLC (“Good Day”), to which they diverted Lily Bleu
funds, which were then used to purchase a new industrial building at 1406 West
178th Street, Gardena, CA 90248 (the “Facility”). (Compl., ¶
18.) Plaintiff alleges that from the date of Lily Bleu’s
move to the Facility, Lily Bleu has made rental payments to Good
Day, and paid the property taxes, insurance and other expenses of maintaining
the Facility. (Compl., ¶ 22.) Plaintiff alleges that such payments increase the
expense burden on Lily Bleu in excess of the reasonable rental value
of the Facility, to the detriment of Lily Bleu and the sole benefit of Defendant
Directors. (Compl., ¶ 22.)
Plaintiff now moves for an order allowing leave to amend the
Complaint. Defendants oppose.
Discussion
Pursuant to
A motion to amend a
pleading before trial must include a copy of the proposed amendment or amended
pleading, which must be serially numbered to differentiate it from previous
pleadings or amendments. (Cal. Rules of Court,
rule 3.1324, subdivision (a).) The motion must also state what
allegations are proposed to be deleted or added, by page, paragraph, and line
number. (Ibid.) Finally, “[a] separate declaration must accompany the motion and must
specify: (1) The effect of the amendment; (2)
Why the amendment is necessary and proper; (3) When the facts giving rise to
the amended allegations were discovered; and (4) The reasons why the request for
amendment was not made earlier.” (Cal. Rules of Court, rule 3.1324, subd.
(b), emphasis added.)
The
Court finds that Plaintiff has complied with the procedural requirements of California Rules of Court, rule 3.1324. Plaintiff’s
counsel’s supporting declaration includes the proposed amendments to the
Complaint in a redlined document showing the differences between Plaintiff’s
Complaint and the proposed amended complaint. (Kolber Decl., ¶ 7, Ex. L.)
Plaintiff seeks to amend
the Complaint to add causes of action for fraud (concealment), fraud
(misrepresentation), and negligent misrepresentation. (Kolber Decl., ¶ 7, Ex.
L.) Plaintiff
Plaintiff also seeks to add additional
allegations to the Complaint. (Ibid.)
Plaintiff indicates that
the primary effect of the proposed amendments is to add causes of action against the Defendant
Directors for fraud
(concealment), fraud (misrepresentation), and negligent misrepresentation.
(Kolber Decl., ¶ 9.) The proposed amendments also add to the
caption page of the Complaint four individuals (the Defendant Directors’
spouses and daughters) and an entity (Good Day Gardena Properties, LLC) that
were previously added to the action as Does on November 29, 2022 and December
7, 2022; and add facts identifying them as parties. (Kolber Decl., ¶ 9.) The proposed
amendments also allege that the Defendant Directors’ engaged in accounting
practices designed to conceal Lily Bleu’s profits, and provides examples
thereof. (Kolber Decl., ¶ 9.) Plaintiff also indicates that although the
original complaint prayed for an award of punitive damages, the amendment adds
such language to the first cause of action for breach of fiduciary duty.
(Kolber Decl., ¶ 9.)
Plaintiff asserts that the new causes of action for fraud and
misrepresentation against the Defendant Directors are necessary because of
information revealed at recent depositions, i.e., that the Defendant Directors
have been charging personal expenses to the Lily Bleu credit card, allowing
their spouses to do so, and deliberately disguising the personal expenses as
business expenses. (Kolber Decl., ¶ 10.) Plaintiff states that additionally,
the newly acquired information included that the Defendant Directors had Lily
Bleu pay for one of the director’s daughter’s college and disguised it as a
business expense (salary). (Kolber Decl., ¶ 10.) Plaintiff asserts that the
Defendant Directors hired the other director’s daughter for a position for
which she was unqualified, and that recently acquired information also revealed
that the Defendant Directors have been engaged in accounting practices that
appear designed to hide profits. (Kolber Decl., ¶
10.)
Plaintiff asserts that he did not discover until the Defendant
Directors’ spouses and daughters were deposed on October 24, 2022 and November
9, 2022 that the salaries, expense reimbursements, and use of credit cards were
actually payment of personal expenses and served no purpose whatsoever for the
corporation. (Kolber Decl., ¶ 11.) Plaintiff asserts that it was not possible
to discover these facts earlier because the fact that these expenses were
personal expenses and not business expenses was deliberately hidden from
Plaintiff. (Kolber Decl., ¶ 11.) Plaintiff states that this is why the request
for amendment was not made earlier. (Kolber Decl., ¶ 13.)
As referenced above, on November 29,
2022, Plaintiff filed amendments to the Complaint naming Miriam Weiss in place
of “Doe 1,” Jessica Weiss Sonnabend in place of “Doe 2,” Carl Cambilargiu
in place of “Doe 3,” and Jenna Cambilargiu in place of “Doe 4.” On December 7,
2022, Plaintiff filed an amendment to the Complaint naming Good Day Gardena
Properties, LLC (“Good Day”) in place of “Doe 5.” In the opposition, Defendants
assert that naming these parties as Doe Defendants was improper and “appears
to have not been done in good faith, and to circumvent the necessity to seek
leave to amend the Complaint to properly add these parties as defendants.”
(Opp’n at p. 9:21-23.) More specifically, Defendants contend that “nowhere
in the Complaint is there any reference to any Doe Defendants. Rather, only the
caption lists Does 1-20, which is not a substitute for properly adding a
Defendant by a Doe amendment…There were no
reference or implication in the Complaint that any other party or fictitiously
named Defendant could be liable…” (Opp’n at p. 10:7-15.) Defendants cite
to Code of Civil Procedure section 474, which provides,
inter alia, that “[w]hen the
plaintiff is ignorant of the name of a defendant, he must state that fact in
the complaint…and such defendant may be designated in any pleading or
proceeding by any name, and when his true name is discovered, the pleading or
proceeding must be amended accordingly…”
But as Plaintiff notes, the proposed
amended complaint that is the subject of the instant motion does not seek to
add additional defendants. Rather, the caption page of the proposed amended
complaint lists the new parties that were previously named as Does 1-5 on
November 29, 2022 and December 7, 2022. (Kolber Decl., ¶ 7, Ex. L.) Thus,
the Court agrees with Plaintiff that Defendants’ arguments pertaining to the
previous amendments to the Complaint naming Doe Defendants are not relevant to
the instant motion. Defendants also assert that the unjust enrichment cause of
action alleged against the new Doe Defendants is barred by the statute of
limitations. The Court notes that the asserted
legal deficiency of a proposed amendment does not warrant denial of leave to
amend. (¿See Kittredge Sports Co. v. Superior
Court (1989) 213 Cal.App.3d 1045, 1048
[“the preferable practice would be to permit the amendment and allow the
parties to test its legal sufficiency by demurrer, motion for judgment on the
pleadings or other appropriate proceedings”]¿.)
Next, Defendants assert that
Plaintiff has unreasonably delayed in seeking the proposed amendments. Defendants
cite to Fisher v. Larsen (1982) 138 Cal.App.3d 627, 649, where the Court of Appeal noted that “[t]he
rights to amend a complaint rest within the sound discretion of the court, and
may be denied where there has been a long delay in seeking the amendment.” (Internal citation omitted.) Defendants assert that Lily
Bleu allowed Plaintiff to conduct corporate record inspections on November 2,
2021 and April 19, 2022, and that among the documents produced at the November
2021 inspection were Lily Bleu American Express statements showing charges from
2017-2020, which listed expenses that were
incurred
for business by the Defendant Directors’ spouses. (Cambilargiu Decl., ¶¶
5-6.) Defendants’ counsel also asserts that “on May 17, 2022, Plaintiff’s counsel,
Richard A. Kolber, Esq., sent [Defendants’ counsel] a spread sheet attached
to a communication, which is Exhibit A to Plaintiff’s Motion…the spread sheet
and Mr. Kolber’s communication made it clear that Plaintiff had concluded,
without supporting facts, that all expenses incurred by Carl Cambilargiu and
Miriam Weiss on AMEX charge card statements from 2017-2021 were personal, not
business related, an all wages or payments made to Jenna Cambilargiu and
Jessica Weiss Sonnabend were equally personal.” (Walter Weiss Decl., ¶ 3.)
Plaintiff counters that while it was
“aware
that the Directors paid salaries to their daughters, and allowed their
spouses to use a corporate credit card, that conduct alone is not tortious.
Plaintiff
did not discover until the spouses and daughters were deposed on October 24 and
November 9, 2022 that the salaries, expense reimbursements, and use of
credit cards were actually payment of personal expenses and served no
purpose whatsoever for the corporation.” (Kolber Decl., ¶ 11.) Plaintiff
asserts that he promptly sought to amended the complaint to add concealment and
misrepresentation claims against the Defendant Directors after deposing the
Defendant Directors’ daughters and spouses and obtaining evidence of the Defendant
Directors’ wrongdoing.[1]
Defendants also assert that they “will
be prejudiced by incurring additional expense for having to conduct discovery,
and to investigate these allegations, along with deposing Plaintiff and third
parties as to facts supporting the amended allegations that [the Director
Defendants] fraudulently concealed expenses or payments made to the daughters
and spouses.” (Opp’n at p. 13:11-15.)
Defendants also assert that the Director Defendants will likely need to retain
expert witnesses and/or consultants to investigate the proposed amended
allegations.
Plaintiff asserts that Defendants
have not shown that they will be prejudiced by having to conduct additional
discovery, because the Defendant Directors “without waiting for the hearing on
this Motion for Leave, have already propounded discovery regarding the new
claims asserted against them.” (Kolber Decl., ¶ 14.) Plaintiff also asserts
that Defendants already sought to depose Plaintiff a second time and scheduled
an Informal Discovery Conference (“IDC”) on this issue. Indeed, Defendants
filed an IDC Statement on November 22, 2022, which indicates, inter alia,
that “Defendants’ are requesting an Informal Discovery Conference (IDC)
to obtain a second deposition of Plaintiff Kenneth Wengrod pursuant to Code of Civil Procedure § 2025.610(b)…The second
deposition is necessary because Plaintiff has recently made new and additional
claims since filing his verified complaint and being deposed…” The Court held
an IDC on November 30, 2022, and the Court’s November 30, 2022 minute order
provides, inter alia, that “[t]he deposition issue regarding Plaintiff
is now moot due to the addition of new parties who will have the right to
depose Plaintiff but the parties agree not to re-ask the questions previously
asked of Plaintiff.”
Defendants also argue that the Court
should “disregard Plaintiff’s strenuous efforts to have the Court decide the
validity of his proposed amended Complaint.” (Opp’n at p. 16:14-15.) The Court
does not find that the instant motion asks the Court to decide the validity of
Plaintiff’s proposed amended Complaint. As set forth above, Plaintiff solely “move[s]
the
Court for an order allowing leave to amend the complaint.”
In light of the foregoing, the Court finds that Plaintiff
has demonstrated good cause to file the proposed amended Complaint.
Lastly, Defendants assert that if the motion is granted, the Court
should condition its granting of the motion upon Plaintiff paying Defendants’ anticipated
increased legal fees and costs. Defendants cite to Code
of Civil Procedure section 473, subdivision (a)(1), which provides that “[t]he court may, in furtherance of
justice, and on any terms as may be proper, allow a party to amend any pleading
or proceeding by adding or striking out the name of any party, or by correcting
a mistake in the name of a party, or a mistake in any other respect; and may,
upon like terms, enlarge the time for answer or demurrer. The court may
likewise, in its discretion, after notice to the adverse party, allow, upon any
terms as may be just, an amendment to any pleading or proceeding in other
particulars; and may upon like terms allow an answer to be made after the time
limited by this code.” (Code Civ. Proc., § 473, subd. (a)(1).)
Defendants also cite to Fuller v. Vista Del Arroyo Hotel (1941) 42 Cal.App.2d 400. In Fuller, when the case “was
first called for trial and a jury impaneled, the attention of defendant was
directed to the fact that its answer failed to deny its negligence…” ((Id. at p. 402.) The Court of Appeal
found that “defendant’s counsel through inadvertence failed by the original
answer to deny negligence upon the part of defendant. It was
therefore the trial court’s duty, under section
473 of the Code of Civil Procedure, to permit defendant to file an amended
answer, in the furtherance of justice, so that the facts might properly be
brought before the court. The trial court having exercised a sound
discretion in its ruling, its order will not be disturbed.” (Id. at p. 405.)
The Court of Appeal referenced the following excerpt between the trial court and counsel: “[t]he Court: I am going to allow you to
amend, and I am going to put it off calendar to give you a chance to get your
witnesses in, and make the defendant pay all the expenses of the delay.” (Id. at p. 404.) However, the Court finds that
the facts of Fuller are distinguishable. Here,
Plaintiff seeks to amend the Complaint well before the current trial date set
for August 16, 2023. Thus, the Court declines to condition granting the instant
motion upon Plaintiff paying Defendants’ asserted increased legal
fees and costs.
Conclusion
Based on the
foregoing, Plaintiff’s motion for leave to file an amended complaint is
granted. The Court orders Plaintiff to file and serve the amended Complaint
within 3 days of the date of this Order.
Plaintiff is
ordered to give notice of this Order.
DATED:
Hon. Teresa A.
Beaudet
Judge, Los
Angeles Superior Court