Judge: Theresa M. Traber, Case: 23STCV23190, Date: 2024-11-08 Tentative Ruling

Case Number: 23STCV23190    Hearing Date: November 8, 2024    Dept: 47

Tentative Ruling

Judge Theresa M. Traber, Department 47

HEARING DATE:     November 8, 2024                 TRIAL DATE: NOT SET

CASE:                         Genius Fund I ABC, LLC v. Ari Stiegler et al.

CASE NO.:                 23STCV23190           

DEMURRER TO SECOND AMENDED COMPLAINT; MOTION TO STRIKE PORTIONS OF SECOND AMENDED COMPLAINT

MOVING PARTY:               Defendants Ari Stiegler & Gabriel Borden

RESPONDING PARTY(S): Plaintiff Genius Fund I ABC, LLC

CASE HISTORY:

·         09/25/23: Complaint filed.

·         02/16/24: First Amended Complaint filed.

·         06/07/24: Second Amended Complaint filed.

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

            This is an action for breach of fiduciary duties. Plaintiff alleges that Defendants catastrophically mismanaged a private equity fund involved in the production and sale of cannabis products.

Defendants demur to the Second Amended Complaint and move to strike portions of the complaint.

TENTATIVE RULING:

Defendants’ Demurrer to the Second Amended Complaint is OVERRULED.

Defendants’ Motion to Strike is DENIED.

DISCUSSION:

Demurrer to Second Amended Complaint

            Defendants demur to the Second Amended Complaint in its entirety.

Legal Standard

A demurrer 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.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) “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.) The ultimate facts alleged in the complaint must be deemed true, as well as all facts that may be implied or inferred from those expressly alleged. (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403; see also Shields v. County of San Diego (1984) 155 Cal.App.3d 103, 133 [stating, “[o]n demurrer, pleadings are read liberally and allegations contained therein are assumed to be true”].) “This rule of liberal construction means that the reviewing court draws inferences favorable to the plaintiff, not the defendant.” (Perez v. Golden Empire Transit Dist. (2012) 209 Cal.App.4th 1228, 1238.)

Meet and Confer

Before filing a demurrer, the demurring party shall meet and confer in person or by telephone with the party who has filed the pleading subject to the demurrer and file a declaration detailing their meet and confer efforts.  (Code Civ. Proc., § 430.41(a).) However, an insufficient meet-and-confer process is not grounds to overrule or sustain a demurrer.  (Code Civ. Proc., § 430.41(a)(4).)

The Declaration of Sharon N. Choi filed with the demurrer states that Defendants sent meet-and-confer correspondence on July 5, 2024, inviting Plaintiff to meet and confer telephonically regarding the issues raised in this demurrer. (Declaration of Sharon N. Choi ISO Demurrer ¶ 8.) Defendants received no response. (Id.) Defendants have therefore satisfied their statutory meet-and-confer obligations.

Requests for Judicial Notice

            Defendants request that the Court take judicial notice of (1) the Complaint in this action; (2) the Parties’ stipulation regarding the filing of a Second Amended Complaint; and (3) the Second Amended Complaint in this action. Defendants’ requests are GRANTED pursuant to Evidence Code section 452(d) (court records.)

First Cause of Action: Breach of Fiduciary Duty

            Defendants demur to the first cause of action for breach of fiduciary duty for failure to state facts sufficient to constitute a cause of action.

            Article 5.5 of the Fourth Amended and Restated Limited Liability Company Agreement of Genius Management LLC, attached to the Second Amended Complaint, states that members of the LLC “shall have no liability, due solely to their capacity as Members, with respect to debts, liabilities, or obligations of the Company, or of other Members, except as provided herein.” (RJN Exh. A Art. 5.5.) Article 5.7 states that “the Company and Members elect and agree that no fiduciary duties . . . shall be imposed on any Member other than the requirement of good faith and fair dealing.” (Id. Art. 5.7.) Article 6.5(a) further limits the liability of any Member, Manager, officer, or affiliate for, as relevant here, any act performed within the scope of their authority under the agreement except for gross negligence, fraud, willful misconduct, or dishonesty. (Id. Art. 6.5(a).)

            Defendants contend that the first cause of action fails because Plaintiff cannot allege any fiduciary duty under the language of Article 5.7. However, the plain language of that clause expressly imposes the fiduciary duty of good faith and fair dealing—a duty which Plaintiff plainly alleges that Defendants violated by knowingly mismanaging company assets. (SAC ¶ 120.)

            Defendants next contend that they cannot be liable to Plaintiff because officers and directors do not owe fiduciary duties to outside creditors, citing Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1040-41. However, Plaintiff is not a creditor of Genius Management, notwithstanding that the action is brought for the benefit of those creditors; Plaintiff is the successor-in-interest to Genius Management for the purpose of winding up its affairs and satisfying its obligations. (SAC ¶¶ 10-14.) Defendants’ citation to Berg & Berg Enterprises is therefore wholly inapposite.

            Finally, Defendants contend that, to the extent the breach of fiduciary duty claims sound in fraud, Plaintiff lacks standing to assert those claims, has failed to plead those claims with specificity, and the claims are barred by the three-year statute of limitations for fraud. These arguments are immaterial to the gravamen of the Complaint, which does not concern misrepresentations but rather concerns Defendants’ alleged incompetence, gross mismanagement, and self-dealing. (See generally SAC.) The allegation that Defendants misrepresented their experience is collateral to those claims. (See SAC ¶ 120.)

            Defendants have failed to demonstrate that the first cause of action is deficient. Accordingly, Defendants’ demurrer to the first cause of action is OVERRULED.

Second Cause of Action: Breach of Duty of Loyalty

            Defendants demur to this cause of action on the same basis as the first cause of action. Accordingly, for the reasons stated above, Defendants’ demurrer to the second cause of action is OVERRULED.

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Third Cause of Action: Breach of Contract

Defendant contends that the third cause of action is uncertain because it does not set forth the relevant terms of the contract, does not allege which provisions were breached or the manner of the breach, and does not demonstrate injury as a result of those breaches. These contentions go to the failure to allege sufficient facts, not to uncertainty, and Defendants do not bring these arguments in support of the contention that the third cause of action is insufficiently pled.

            Accordingly, Defendants’ demurrer to the third cause of action is OVERRULED.

Conclusion

            Defendants’ Demurrer to the Second Amended Complaint is OVERRULED in its entirety.

Motion to Strike Second Amended Complaint

            Defendants also move to strike paragraph 120, lines 13 through 15 and paragraph 128, lines 20 through 23 of the Second Amended Complaint as improper.

Legal Standard

The court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike any irrelevant, false, or improper matter inserted in any pleading. Code Civ. Proc., § 436(a). The court 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(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. “When the defect which justifies striking a complaint is capable of cure, the court should allow leave to amend.” Vaccaro v. Kaiman (1998) 63 Cal.App.4th 761, 768. A motion to strike can be used where the complaint or other pleading has not been drawn or filed in conformity with applicable rules or court orders.  Code Civ. Proc., § 436(b). This provision is for "the striking of a pleading due to improprieties in its form or in the procedures pursuant to which it was filed."  Ferraro v. Camarlinghi (2008) 161 Cal.App.4th 509, 528 (emphasis in original).

Meet and Confer

 Before filing a motion to strike, the moving party shall meet and confer in person or by telephone with the party who has filed the pleading subject to the motion to strike and file a declaration detailing their meet and confer efforts.  (Code Civ. Proc., § 435.5(a).) However, an insufficient meet-and-confer process is not grounds to grant or deny a motion to strike.  (Code Civ. Proc., § 435.5(a)(4).)

The Declaration of Sharon N. Choi filed with the motion states that Defendants sent meet-and-confer correspondence on July 5, 2024, inviting Plaintiff to meet and confer telephonically regarding the issues raised in this demurrer. (Declaration of Sharon N. Choi ISO Mot. ¶ 8.) Defendants received no response. (Id.) Defendants have therefore satisfied their statutory meet-and-confer obligations.

Misrepresentation

            Defendants move to strike paragraph 120, lines 13 through 15 as improper. These allegations pertain to Defendants’ alleged misrepresentation of their abilities to develop and lead a vertically-integrated cannabis company. Defendants’ arguments rest on the purported impropriety of any fraud claims asserted against them. As the Court rejected this argument in the context of the Demurrer, that argument is likewise rejected here.

Conclusion

            Accordingly, Defendant’s Motion to Strike is DENIED.

CONCLUSION:

Accordingly, Defendants’ Demurrer to the Second Amended Complaint is OVERRULED.

Defendants’ Motion to Strike is DENIED.

Moving Parties to give notice.

IT IS SO ORDERED.

Dated:  November 8, 2024                              ___________________________________

                                                                                    Theresa M. Traber

                                                                                    Judge of the Superior Court

            Any party may submit on the tentative ruling by contacting the courtroom via email at Smcdept47@lacourt.org by no later than 4:00 p.m. the day before the hearing. All interested parties must be copied on the email. It should be noted that if you submit on a tentative ruling the court will still conduct a hearing if any party appears. By submitting on the tentative you have, in essence, waived your right to be present at the hearing, and you should be aware that the court may not adopt the tentative, and may issue an order which modifies the tentative ruling in whole or in part.