Judge: Teresa A. Beaudet, Case: 21STCP00625, Date: 2023-04-24 Tentative Ruling

Case Number: 21STCP00625    Hearing Date: April 24, 2023    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

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 and Barbara Clark Cambilargiu, and “Nominal Defendant” Lily Bleu, Inc. (“Lily Bleu”).

On March 1, 2023, Plaintiff filed the operative Amended Verified Derivative Complaint (the “Amended Complaint”) against Defendants Michael Weiss, Barbara Clark Cambilargiu (“Barbara Cambilargiu”), Miriam Weiss, Carl Cambilargiu, Jessica Weiss Sonnabend (“Jessica Weiss”), Jenna Cambilargiu, Good Day Gardena Properties, LLC, and Nominal Defendant Lily Bleu. The Amended Complaint asserts causes of action for (1) breach of fiduciary duty, (2) corporate waste, (3) unjust enrichment, (4) fraud (concealment), (5) fraud (misrepresentation), and (6) negligent misrepresentation.

In the Amended Complaint, Plaintiff alleges, inter alia, that Michael Weiss and Barbara Cambilargiu (jointly, the “Defendant Directors”) are each a director of Lily Bleu. (Amended Compl., ¶ 3.) Miriam Weiss and Carl Cambilargiu are the Defendant Directors’ spouses. (Ibid.) Jessica Weiss and Jenna Cambilargiu are the Defendant Directors’ daughters. (Ibid.)

Lily Bleu is a corporation engaged in the clothing business. (Amended 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 Amended Complaint. (Amended Compl., ¶ 4.)

Plaintiff alleges that the Defendant Directors failed to disclose to Plaintiff and have paid themselves and their daughters salaries, bonuses, other payments, and reimbursement of personal expenses exceeding the reasonable value of their services to Lily Bleu. (Amended Compl., ¶ 9.) Plaintiff alleges that the Defendant Directors also caused Lily Bleu to pay personal expenses of the Defendant Directors’ spouses. (Amended Compl., ¶ 9.)

Plaintiff further alleges that the Defendant Directors failed to disclose to Plaintiff and have paid themselves, their spouses, and/or their daughters automobile, travel, and entertainment expense reimbursements which are unreasonable and bear no relationship to the value of these reimbursements to Lily Bleu. (Amended Compl., ¶¶ 10-11.) Plaintiff alleges that the Defendant Directors failed to disclose to Plaintiff and have arranged to contribute for the benefit of themselves and their daughters deferred compensation and/or profit sharing benefits which are unreasonable in relation to the compensation reasonably owing to the Defendant Directors and their daughters for their services to Lily Bleu. (Amended Compl., ¶ 12.) Plaintiff also alleges that the Defendant Directors have engaged in accounting practices designed to conceal Lily Bleu’s profits. (Amended Compl., ¶ 13.) Plaintiff seeks punitive damages in connection with the first, fourth, and fifth causes of action. (Amended Compl., ¶¶ 36, 51, 57.)

Plaintiff now moves for an order allowing discovery into the financial condition of

Michael Weiss and Barbara Cambilargiu (jointly, the “Defendant Directors”). The Defendant Directors oppose.

Discussion

Plaintiff asserts that the Court should allow pre-trial discovery into the Defendant Directors’ financial condition “because there is a substantial likelihood the directors will be found to have committed fraud and breach of fiduciary duty, and are liable for exemplary damages.” (Mot. at p. 2:21-24.)

Civil Code section 3295, subdivision (a) provides that “[t]he court may, for good cause, grant any defendant a protective order requiring the plaintiff to produce evidence of a prima facie case of liability for damages pursuant to Section 3294, prior to the introduction of evidence of: (1) The profits the defendant has gained by virtue of the wrongful course of conduct of the nature and type shown by the evidence. (2) The financial condition of the defendant.”

Civil Code section 3295, subdivision (c) provides as follows: 

“No pretrial discovery by the plaintiff shall be permitted with respect to the evidence referred to in paragraphs (1) and (2) of subdivision (a) unless the court enters an order permitting such discovery pursuant to this subdivision. However, the plaintiff may subpoena documents or witnesses to be available at the trial for the purpose of establishing the profits or financial condition referred to in subdivision (a), and the defendant may be required to identify documents in the defendant’s possession which are relevant and admissible for that purpose and the witnesses employed by or related to the defendant who would be most competent to testify to those facts. Upon motion by the plaintiff supported by appropriate affidavits and after a hearing, if the court deems a hearing to be necessary, the court may at any time enter an order permitting the discovery otherwise prohibited by this subdivision if the court finds, on the basis of the supporting and opposing affidavits presented, that the plaintiff has established that there is a substantial probability that the plaintiff will prevail on the claim pursuant to Section 3294. Such order shall not be considered to be a determination on the merits of the claim or any defense thereto and shall not be given in evidence or referred to at the trial.” (Emphasis added.)

Civil Code section 3294, subdivision (a) provides that “[i]n an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.”

“Section 3295(c)…was enacted in 1980 in order to protect defendants from being subjected to pretrial discovery into their financial affairs until a plaintiff establishes the likelihood he will prevail on his punitive damages claim.” ((Jabro v. Superior Court (2002) 95 Cal.App.4th 754, 757.) The Jabro Court found that “[a]gainst this backdrop of legislative intent, in which protecting the financial privacy of defendants is paramount, we interpret the language of section 3295(c), requiring the trial court to find based on supporting and opposing affidavits that the plaintiff has established there is a substantial probability he will prevail on his claim for punitive damages, to mean that before a court may enter an order permitting discovery of a defendant’s financial condition, it must (1) weigh the evidence submitted in favor of and in opposition to motion for discovery, and (2) make a finding that it is very likely the plaintiff will prevail on his claim for punitive damages. In this context, we interpret the words ‘substantial probability’ to mean ‘very likely’ or ‘a strong likelihood’ just as their plain meaning suggests. We note that the Legislature did not use the term ‘reasonable probability’ or simply ‘probability,’ which would imply a lower threshold of ‘more likely than not.’” (Id. at p. 758.)  

            In the motion, Plaintiff asserts that “the Directors fraudulently used corporate funds to pay their personal AMEX expenses, to pay their spouses’ personal AMEX expenses, and to pay unearned salaries and other sums to their daughters.” (Mot. at p. 3:20-23.) Plaintiff further asserts that “the Directors intentionally mischaracterized the personal expenses charged to the Corporation’s AMEX card as business expenses and buried them in the Corporation’s book and records; all to hide the payments from the shareholders and the IRS, thus constituting fraud and breach of fiduciary duty. This deliberately fraudulent pattern of misconduct supports a finding that there is a substantial probability that Plaintiff will prevail on claims pursuant to Section 3294.” (Mot. at pp. 3:23-4:2.)

Carl Cambilargiu

Plaintiff contends that Carl Cambilargiu’s personal expenses were fraudulently disguised as business expenses and paid by Lily Bleu.

Plaintiff indicates that Carl Cambilargiu testified in his deposition that he has never been employed by Lily Bleu. (Kolber Decl., ¶ 2, Ex. B (Carl Cambilargiu Depo.) at p. 28:18-20.) Plaintiff contends that Carl Cambilargiu concedes that he is unable to prove that any of the expenses he charged to Lily Bleu’s AMEX card were for Lily Bleu’s benefit. In support of this assertion, Plaintiff cites to the following deposition testimony: “Q: Has anyone at Lily Bleu ever questioned you about the credit card expenses that you charge to Lily Bleu’s credit card? A: No. Q: Has anyone from Lily Bleu ever asked you to verify that the items you charged to Lily Bleu’s credit card were for Lily Bleu’s benefit? A: No.” (Kolber Decl., ¶ 2, Ex. B (Carl Cambilargiu Depo.) at p. 45:3-11.)

Plaintiff’s counsel also attaches as Exhibits to his declaration “copies of relevant pages from American Express Statements paid by Lily Bleu, and received from Lily Belu [sic] during Plaintiffs inspection of Lily Bleu’s books and records…” (Kolber Decl., ¶ 3, Exs. D-G.) Plaintiff provides asserted examples of personal expenses Carl Cambilargiu purportedly charged to Lily Bleu. (See Mot. at p. 6:12-25, citing Kolber Decl., ¶ 3, Ex. F.) Plaintiff contends that such charges were falsely disguised as business expenses. In support of this assertion, Plaintiff asserts that there are certain handwritten codes listed in the American Express statements attached as Exhibit F to Mr. Kolber’s Declaration. (Kolber Decl., ¶ 3, Ex. F.) Plaintiff’s counsel also provides a “list of General Ledger Codes [he] obtained and compiled from Lily Bleu’s 2017-2020 General Ledgers.” (Kolber Decl., ¶ 5, Ex. E.) It appears Plaintiff is asserting that the handwritten codes in the American Express statements correspond to the “General Ledger Codes” set forth in Exhibit E.

In the opposition, the Defendant Directors assert that Plaintiff provides no evidence that Carl Cambilargiu used Lily Bleu credit cards for personal expenses. In support of this assertion, the Defendant Directors cite to the following testimony from Carl Cambilargiu’s deposition: “Q. Do you also use Lily Bleu’s credit care for personal expenses? A. No.” (Kraml Decl., ¶ 2, Ex. A (Carl Cambilargiu Depo.) at p. 39:22-24.) The Defendant Directors also point to the following testimony: “Q. Is [a specific charge for Chevron gas totaling $79.74] related to Lily Bleu? A. Yes. Q. How can you tell? A. Because it’s on the American Express card. I use my own personal card for my own personal stuff.” (Id. at p. 47:3-8.)

The Defendant Directors also submit the Declaration of Barbara Cambilargiu, who states that “[a]s a family operated business, Michael and I often ask our spouses to assist with errands for the benefit of Lily Bleu. Neither Michael’s spouse, Miriam Weiss, nor my spouse, Carl Cambilargiu, are employees of Lily Bleu. Although not employees, Miriam and Carl both assist with Lily Bleu errands at Michael or my request. As such, both Miriam and Carl have Lily Bleu credit cards which they use for expenses related to Lily Bleu. Both Carl and I have personal credit cards which we use for our personal expenses. There has been no effort to falsify or hide any expenditures made by myself, Michael, or our spouses.” (Barbara Cambilargiu, Decl., ¶ 5.)

            The Defendant Directors also assert that Plaintiff provides no evidence that Carl Cambilargiu’s personal expenses were “falsely disguised” by the Defendant Directors as Lily Bleu business expenses. The Defendant Directors assert that “Plaintiff provides a list of charges that debatably have coding errors, but there is no evidence that the charges were ‘falsely disguised’. As Plaintiff has both the AMEX statements and Ledger Codes, this underscores the fact that nothing was hidden or disguised. Third, Plaintiff provides no evidence that Officer Defendants falsely disguised any expenses or otherwise engaged in any activity that rises to the level of fraud, malice or oppression.” (Opp’n at p. 9:12-17.) Indeed, other than providing a complied list of General Ledger Codes (Kolber Decl., ¶ 5, Ex. E), Plaintiff does not present evidence clearly demonstrating that Carl Cambilargiu (and Miriam Weiss’s) asserted personal expenses were falsely disguised as business expenses.

Miriam Weiss

            Plaintiff also contends that Miriam Weiss’s personal expenses were fraudulently disguised as business expenses and paid by Lily Bleu. Plaintiff indicates that Miriam Weiss testified that she has never been employed by Lily Bleu. (Kolber Decl., ¶ 2, Ex. C (Miriam Weiss Depo.) at p. 19:16-17.) Plaintiff contends that Miriam Weiss concedes that she is unable to provide that any of the expenses she charged to the Lily Bleu’s AMEX card were for Lily Bleu’s benefit. In support of this assertion, Plaintiff cites to testimony from Miriam Weiss’s deposition that: “Q:…You’ve already testified that you do not have receipts for purchases that you made on Lily Bleu’s credit cards; correct? A: Yes… Q: And you’ve also testified that you do not have any forms that Lily Bleu asked you to fill out showing that your purchases were made for Lily Bleu; correct? A: Correct…Q:…Is there any other way that we can verify that these purchases, as you say, were made for Lily Bleu? A: Not that I know.” (Id. at pp. 74:13-75:6.)  

Plaintiff provides examples of asserted personal expenses Miriam Weiss purportedly charged to Lily Bleu. (See Mot. at p. 8:5-20, citing Kolber Decl., ¶ 3, Ex. G.)

In the opposition, the Defendant Directors assert that there is no evidence that they fraudulently disguised Miriam Weiss’s personal expenses as Lily Bleu expenses. The Defendant Directors note that Ms. Weiss testified that she would use Lily Bleu credit card to buy lunch for Lily Bleu employees when asked to do so by the Director Defendants. They cite to the following testimony: “Q. You also said you sometimes buy lunch on Lily Bleu’s credit cards; right? A. For the employees. Q. How does that work? A. Michael or Barbara says can you please get us lunch for the employees, and I go and I get it.” (Kraml Decl. ¶ 3, Ex. B (Miriam Weiss Depo.) at p. 33:1-6.) “Q. Are there certain places that you typically buy lunch for Lily Bleu when asked to do so? A. Yes. I usually do it at Target. It’s easy.” (Id at p. 35:12-14.) “Q. When you buy food at Target for Lily Bleu’s employees, do you use the Lily Bleu credit card? A. Yes.” (Id. at p. 35:23-25.)

The Defendant Directors also submit the Declaration of Michael Weiss, who asserts that “[n]either my spouse, Miriam Weiss, nor Barbara’s spouse, Carl Cambilargiu, are employees of Lily Bleu. Although not employees, Miriam and Carl both assist with Lily Bleu errands at Barbara or my request. As such, both Miriam and Carl have Lily Bleu credit cards which they use for expenses related to Lily Bleu. Both Miriam and I have personal credit cards which we use for our personal expenses. There has been no effort to falsify or hide any expenditures made by myself, Barbara, or our spouses.” (Michael Weiss Decl., ¶ 5.)

Plaintiff also contends that handwritten codes in the American Express statements attached as Exhibit “G” to Mr. Kolber’s declaration demonstrate that Miriam Weiss’s purported personal expenses were fraudulently disguised as business expenses. This argument is discussed above in the section of the Order pertaining to Carl Cambilargiu.

Jenna Cambilargiu

            In addition, Plaintiff contends that the Defendant Directors fraudulently disguised Barbara Cambilargiu’s daughter Jenna Cambilargiu’s college expenses as salary.

Plaintiff cites to the following deposition testimony from Jenna Cambilargiu’s deposition: “Q: And is it accurate that, from 2016 through 2020, you received the same salary from Lily Bleu regardless of the number of hours you worked? A: Yes.” (Kolber Decl., ¶ 2, Ex. I (Jenna Cambilargiu Depo.) at p. 56:17-20.) Plaintiff also cites to the following testimony: “Q: Well, whether you were instructed, or whether you understood it without being specifically instructed, isn’t it true that you understood that you were receiving, basically, a full-time salary from Lily Bleu while you were attending Santa Barbara, and you were to use that full-time salary that you were receiving to pay your college expenses?...A: Yes. I – I did use the money that I received in – you know, in my salary to help support my education.” (Id. at p. 64:19-65:10.)  

            The Defendant Directors assert that there is no evidence that they fraudulently disguised Jenna Cambilargiu’s college expenses as salary.  The Defendant Directors point to the following testimony from Jenna Cambilargiu’s deposition: “Q And is it true that the purpose of your salary was to pay for college expenses? A No. I was working -- I was getting paid for my work that I was doing at Lily Bleu. I wasn’t directed on how I should spend the money that I was receiving.” (Kraml Decl. ¶ 4, Ex. C (Jenna Cambilargiu Depo.) at p. 58:7-12.) The Defendant Directors note that Jenna Cambilargiu was asked the question, “[i]s it accurate to say that once you began the school year at Santa Barbara each year that you attended Santa Barbara, that you stopped working for Lily Bleu full-time?” to which she testified, “Yeah. I would say my -- my hours, you know, as I was in school, were lower. And then when we had breaks, such as winter break, spring break, summer break -- you know, any three- -- you know, time that we had off, I would -- I would go and I would help at Lily Bleu.” (Id. at p. 36:1-10.) Jenna Cambilargiu also testified, “I worked for Lily Bleu, you know, full-time during summer and on an as-needed basis throughout the year in addition to, you know, costing throughout the year when I was working -- you know, when I was up in Santa Barbara.” (Id. at p. 62:8-12.)

Barbara Cambilargiu also indicates in her declaration that “[f]rom 2016-2020, [her] daughter, Jenna Cambilargiu was employed to do costing for Lily Bleu,” and that Jenna Cambilargiu “provided services to Lily Bleu.” (Barbara Cambilargiu Decl., ¶ 4.)

Jessica Weiss

            Plaintiff also asserts that “to equalize the fraudulent payment of personal expenses between the Directors, [Lily Bleu] also employed Director Weiss’s Daughter.” (Mot. at p. 9:19-20.) In support of this assertion, Plaintiff cites to the following testimony from Jessica Weiss’s deposition: “Q:…does seeing the 2019 W-2 and the 2018 W-2 – does it refresh your recollection that you were hired by Lily Bleu to work for $52,000 a year? A Yes. I believe so. Yes.” (Kolber Decl., ¶ 2, Ex. J (Jessica Weiss Depo.) at p. 30:4-8.) Jessica Weiss also testified that she received health care insurance while she was working for Lily Bleu. (Id. at p. 44:20-22.) Jessica Weiss’s deposition also included the following testimony: “Q: And from 2018 through 2020, was anyone else at Lily Bleu working with you on social media? A: No. Q: So you had that job all by yourself? A. Correct.” (Id. at p. 43:12-16.) Plaintiff contends that Jessica Weiss had no experience in the area of social media, pointing to Jessica Weiss’s deposition testimony that she was a former teacher. (Id. at p. 16:11-23.) But as noted by the Defendant Directors, Plaintiff does not provide evidence that Lily Bleu employed Jessica Weiss to “equalize fraudulent payment of personal expenses between the Directors.”

            As set forth above, Plaintiff seeks an order “allowing discovery into the financial condition of Defendant Director Michael Weiss and Defendant Director Barbara Clark Cambilargiu.” (Mot. at p. 1:25-26.) Based on a consideration of the arguments and evidence presented by the parties, the Court does not find that Plaintiff has demonstrated that “it is very likely [Plaintiff] will prevail on his claim for punitive damages.” ((Id. at p. 758.)

Conclusion

Based on the foregoing, Plaintiff’s motion is denied.

The Defendant Directors are ordered to give notice of this Order. 

DATED:  April 24, 2023                                ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court