Judge: Theresa M. Traber, Case: BC691484, Date: 2024-02-06 Tentative Ruling
Case Number: BC691484 Hearing Date: February 6, 2024 Dept: 47
PARTIAL TENTATIVE RULING FOR PHASE 1 BENCH TRIAL
HEARING DATE: February 6, 2024
CASE: Dorothy Diller v. Barry Weiss, et al.
CASE NO.: BC691484
I. JURISDICTIONAL AND TIMELINESS ISSUES
A. Plaintiff’s Right to Seek Declaratory Relief
Code of Civil Procedure § 1060 establishes the right to seek declaratory relief interpreting a contract or other written instrument. It provides:
Any person interested under a written instrument, excluding a will or a trust, or under a contract, or who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property, or with respect to the location of the natural channel of a watercourse, may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court for a declaration of his or her rights and duties in the premises, including a determination of any question of construction or validity arising under the instrument or contract. He or she may ask for a declaration of rights or duties, either alone or with other relief; and the court may make a binding declaration of these rights or duties, whether or not further relief is or could be claimed at the time. The declaration may be either affirmative or negative in form and effect, and the declaration shall have the force of a final judgment. The declaration may be had before there has been any breach of the obligation in respect to which said declaration is sought.
(Code. Civ. Proc. § 1060.)
“’The purpose of a declaratory judgment is to “serve some practical end in quieting or stabilizing an uncertain or disputed jural relation.”’ [Citation.] ‘Another purpose is to liquidate doubts with respect to uncertainties or controversies which might otherwise result in subsequent litigation [citation].’ [Citation.]” [Citation.] “’One test of the right to institute proceedings for declaratory judgment is the necessity of present adjudication as a guide for plaintiff's future conduct in order to preserve his legal rights.’”’ [Citation] “’[S]ection 1060 does not require a breach of contract in order to obtain declaratory relief, only an “actual controversy.” Declaratory relief pursuant to this section has frequently been used as a means of settling controversies between parties to a contract regarding the nature of their contractual rights and obligations.’ (Ibid.)” (Osseous Techs. of Am., Inc. v. DiscoveryOrtho Partners LLC (2010) 191 Cal. App. 4th 357, 364-365.) “The mere circumstance that another remedy is available is an insufficient ground for refusing declaratory relief, and doubts regarding the propriety of an action for declaratory relief ... generally are resolved in favor of granting relief.” (Filarsky v. Superior Court (2002) 28 Cal.4th 419, 433.)
Here, the Court finds an active controversy exists between the parties on each of Plaintiff’s declaratory relief claims (1st, 5th, 6th, 7th, 8th, and 9th causes of action), for the reasons explained in her reply brief on pages 2-4. There are vigorous disputes between the parties about Defendants’ right to delay or control Plaintiff’s access to the Partnership’s books and records (1st C/A) and Defendants’ authority to pay management fees to Edmundo Rosenberg’s company (5th C/A), to secure loans (6th C/A) and to amend the Partnership Agreement (8th C/A) without Plaintiff’s written consent, as well as the validity of Defendant’s transfers of their interests to their LLCs (7th and 9th C/A). Thus, declaratory relief to construe the Partnership Agreement and establish the rights and obligations of the parties is plainly proper.
B. Whether Edmundo Rosenberg is Subject to Suit as a Defendant in this Case
Defendant Edmundo Rosenberg contends he cannot be sued for improper transfer of his interests to SZD, LLC, arguing that his grandfather, Stanley Diller, transferred his interest in the Partnership to SZD, LLC, in March 2011, and Rosenberg simply inherited his grandfather’s interest in SZD, LLC, after Diller’s death in January 2012. (Ds’ Trial Brief, p. 7; Ds’ Compendium, Exh. 53.) There are at least three factual issues that prevent adoption of this position without trial. First, Plaintiffs object to the admission of Exhibit 53 without adequate authentication. Second, under the operative Articles of Partnership of Brookside Partners, Stanley Diller was generally restricted from conveying his Partnership interest, without approval, unless it was transferred to “(i) any other person who is a member of said party; (ii) to his or her spouse; (iii) to one or more of his children or grandchildren subject to the terms of this agreement, but not to any other person” or to a “General or Limited Partnership or Corporation in which they or one of their original members or partners own and maintain a controlling interest.” (Ds’ Exh. 5, 1984 Article 7.02A, p. 037.) According to the Assignment document, Stanley Diller assigned and transferred his Partnership interest to himself as Trustee of the Stanley Diller Living Trust, dated November 14, 1995, and then to SZD, LLC. (Ds’ Compendium, Exh. 53.) The parties do not address whether this two-step transaction is permitted under the Partnership Agreement. Finally, the issue of how Rosenberg acquired his interest is complicated by his sworn declaration and that of Barry Weiss, both filed 2/16/21 and stating that Rosenberg acquired his interest when Stanley Diller died and bequeathed “his 20% partnership interest in Brookshire Partners” to Rosenberg. (Plaintiff’s Reply, pp. 4-5.) On this record, the Court cannot determine, therefore, whether Plaintiff has a valid claim against Rosenberg grounded on an invalid transfer of assets to the LLC, but it appears there is a colorable argument that Rosenberg received his Partnership interest directly from Stanley Diller, as his declaration states, and then effectuated the transfer to the LLC.
Even so, several claims against Rosenberg do not appear to rest on any illegal transfer of assets to his LLC. Specifically, Plaintiff seeks declaratory relief and damages for breach of contract with regard to Rosenberg’s receipt of management fees and his participation in securing Partnership loans and amending the Partnership Agreement without Plaintiff’s consent.
C. Failure to Name Indispensable Parties
Defendants urge the Court to dismiss this action pursuant to Code of Civil Procedure § 389 based on their Forty-First Affirmative Defense that Plaintiff has failed to join necessary parties, to wit, the LLCs created by Defendants Weiss and Rosenberg, the other LLCs that were created in 2008, and the Partnership itself. For the reasons explained below, the Court declines to dismiss this action on this basis.
Code of Civil Procedure section 389 states in relevant part:
(a) A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if (1) in his absence complete relief cannot be accorded among those already parties or (2) he claims an interest relating to the subject of the action and is so situated that the disposition of the action in his absence may (i) as a practical matter impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest. If he has not been so joined, the court shall order that he be made a party.
(b) If a person as described in paragraph (1) or (2) of subdivision (a) cannot be made a party, the court shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed without prejudice, the absent person being thus regarded as indispensable. The factors to be considered by the court include: (1) to what extent a judgment rendered in the person's absence might be prejudicial to him or those already parties; (2) the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; (3) whether a judgment rendered in the person's absence will be adequate; (4) whether the plaintiff or cross-complainant will have an adequate remedy if the action is dismissed for nonjoinder.
(Code Civ. Proc. § 389 [emphasis added].)
“Subdivision (a) defines the ‘persons who ought to be joined if possible (sometimes referred to as ‘necessary’ parties).’ [Citation] A determination that the persons are necessary parties is the predicate for the determination whether they are indispensable parties. Thus, subdivision (b) sets forth the factors the court should consider in determining ‘whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed without prejudice, the absent person being thus regarded as indispensable.’ (Italics added.)” (Deltakeeper v. Oakdale Irrigation District (2001) 94 Cal. App. 4th 1092, 1100 [Deltakeeper].) “[A] person is an indispensable party [only] when the judgment to be rendered necessarily must affect his rights.’” (Olszewski v. Scripps Health (2003) 30 Cal. 4th 798, 808-809 [Citation omitted].) “Stated differently, Where the plaintiff seeks some type of affirmative relief which, if granted, would injure or affect the interest of a third person not joined, that third person is an indispensable party. . . . An indispensable party is not bound by a judgment in an action in which he was not joined.” (Washington Mut. Bank v. Blechman (2007) 157 Cal. App. 4th 662, 667-668 [Citations and internal quotations omitted].)
The first question then is whether the allegedly indispensable parties are “necessary” within the meaning of subdivision (a) of § 389 under clause (1) about whether “complete relief” can be granted or under clause (2) regarding whether a disposition in the case will impair the non-party’s interests. “Clause (1) stresses the desirability of joining those persons in whose absence the court would be obliged to grant partial or ‘hollow’ rather than complete relief to the parties before the court. The interests that are being furthered here are not only those of the parties, but also that of the public in avoiding repeated lawsuits on the same essential subject matter. Clause (2)(i) recognizes the importance of protecting the person whose joinder is in question against the practical prejudice to him which may arise through a disposition of the action in his absence. Clause (2)(ii) recognizes the need for considering whether a party may be left, after the adjudication, in a position where a person not joined can subject him to a double or otherwise inconsistent liability.” (Countrywide Home Loans, Inc. v. Superior Court (1999) 69 Cal.App.4th 785, 792–793, quoting Cal. Law Revision Com. com., 14 West’s Ann.Code Civ. Proc. (1973 ed.) § 389, p. 224.)
The “complete relief” clause “focuses not on whether complete relief can be afforded all possible parties to the action, but on whether all relief can be afforded the parties named in the action.” (Deltakeeer, supra, 94 Cal. App. 4th at p. 1101.) The Court finds that the absence of the identified non-parties will not impair the Court’s power to adjudicate the claims and defenses of the parties and award appropriate relief. Focusing first on the declaratory relief claims, the Court can decide whether Plaintiff has a right to access, inspect and copy the Partnership’s books and records without Defendants’ interference (1st C/A), whether Defendant Rosenberg has a right to receive management fees under the Partnership Agreement, without securing Plaintiff’s consent (5th C/A), whether Defendants were authorized as Managing Partners to secure loans without Plaintiff’s consent (6th C/A), whether Defendants were entitled to amend the Partnership Agreement without Plaintiff’s consent (8th C/A), and whether each Defendant’s transfer of his partnership interests to a limited liability company is permissible and valid without Plaintiff’s prior written consent (7th and 9th C/A). All these determinations are focused on Plaintiff’s rights as a partner and, if Plaintiff’s contentions are accepted, the validity of actions taken by Defendants acting individually or as Managing Partners for the Partnership. Building on the legal declarations she requests, Plaintiff also seeks rulings on whether the named Defendants breached the Partnership Agreement through their conduct (3rd C/A) and, as a result, should be expelled and disassociated from the Partnership pursuant to Corporations Code §§ 16601(5)(A) and (B) (10th and 11th C/A). Again, these causes of action zero in on Defendants’ own actions and, if found to be improper, the legal consequences that should flow from them. Defendants have not demonstrated that the Court’s ability to provide complete relief in this case will be impaired by the absence of any non-parties.
Turning to the second clause of §389(a), the Court concludes Defendants have not shown any practical impairment of the rights of the identified non-parties. “[T]he pertinent question is whether their absence from the litigation would impair their ability to protect their interests in the ‘subject of the action,’” that is, the interpretation of the Partnership Agreement as it relates to the rights and obligations of Plaintiff and Defendants. (Deltakeeper, supra, at p. 1101.) Addressing this question in People ex rel. Lungren v. Community Development Agency (1997) 56 Cal. App. 4th 868, the Court of Appeal examined whether the Attorney General’s action against a community redevelopment agency to set aside the agency’s contract with a Native American tribe could be litigated without joining the tribe. The appellate court found the tribe was not a necessary party for two reasons: first, the action challenged the legality of the agency’s actions in reaching the agreement, not the tribe’s conduct; and second, to the extent the tribe would lose out on the contract if the attack was successful, that interest was adequately represented by the agency as the named defendant in the litigation. (Id., at p. 877.) It is established that “[a] party’s ability to protect its interest is not impaired or impeded as a practical matter where a joined party has the same interest in the litigation.” (Deltakeeper, supra, at p. 1102.)
Here, there is no question that Defendants’ LLCs have the same interest as Defendants in litigating this matter and, thus, cannot demonstrate a practical impairment of their interests. Similarly, the other unnamed LLCs are more than adequately represented by Defendants. To be clear, Plaintiff does not challenge the validity of the transfers to these entities, but to the extent any interpretation of the Partnership Agreement would impact those transfers, the defense mounted by the named Defendants is more than adequate to protect their identical interests in protecting their ownership interests. Nor can it be said that the Partnership itself is left vulnerable, since its interests are championed by Defendants either as individual partners whose views are aligned with the entities’ current status or as Managing Partners advancing their governance perspectives on behalf of the Partnership. To the extent the Partnership’s best interests are more in sync with Plaintiff’s objectives, these views too are sufficiently represented and advanced in this action. Based on this analysis, the Court finds that Defendants have not proven that the identified non-parties are necessary parties under subdivision (a) of section 389, much less indispensable parties under subdivision (b).
D. Defenses of Laches and Statute of Limitations
Plaintiff filed this action on January 29, 2018. She seeks declaratory relief regarding Defendants’ right to impede her access to the Partnership’s books and records (1st C/A), and Defendants’ authority to pay management fees to Edmundo Rosenberg’s company (5th C/A), to secure loans (6th C/A) and to amend the Partnership Agreement (8th C/A) without Plaintiff’s written consent, as well as the validity of Defendant’s transfers of their interests to their LLCs (7th and 9th C/A). Plaintiff also asserts that Defendants breached the Partnership Agreement through their conduct (3rd C/A) and, as a result, should be expelled and disassociated from the Partnership pursuant to Corporations Code §§ 16601(5)(A) and (B) (10th and 11th C/A).
Defendants contend the limitations period for Plaintiff’s declaratory relief actions are derived from the theory of the underlying claim, citing the four-year statute of limitations for breach of contract and the three-year limitations period of claims based on fraud and fiduciary breach. (Defendants’ Trial Brief, p. 12.) Because Plaintiff’s equitable claims are largely grounded in alleged breaches of the Brookshire Partnership Agreement, the Court applies the four-year limitations period to determine whether Plaintiff’s causes of action were untimely when they were asserted on January 29, 2018.
In her first cause of action, Plaintiff seeks declaratory relief in response to Defendants’ restriction on her partnership right to inspect the Partnership’s books and records. Based on Plaintiff’s evidence, Defendants’ restrictions on Plaintiff’s inspection rights occurred between Intermittently, from 2014 through 2017, Plaintiffs requested an opportunity to inspect Brookshire’s financial records, but their entreaties were generally ignored or met with the disclosure of minimal information. (Declaration of Arthur Diller, ¶¶ 31-35.) When Plaintiff made a formal request to inspect the Partnership’s records through her attorney in October 2017, rather than producing the records for inspection, Defendants suddenly discontinued Dorothy’s monthly distributions in October 2017. (Id., ¶ 34.) These breaches plainly give rise to a declaratory relief action regarding Plaintiff’s inspection rights that was timely asserted a few months later, on January 29, 2018.
Plaintiff’s right to challenge the payment of management fees to Defendant Rosenberg through his company under the fifth cause of action is also timely. From at least January 2014 forward, Brookshire paid Brookshire Dolan Management, Inc., for management fees. (Exh. 103.) Plaintiff contends, however, that Defendants did not advise her that these management fees were being paid to Defendant Rosenberg using Brookshire Dolan Management, Inc., as a conduit. (A. Diller Decl. ¶ 28.) Further, Plaintiff did not discover that Rosenberg owned and controlled Brookshire Dolan Management, Inc., until “some months after October 2017, when Dorothy’s distributions were cut-off by Barry Weiss and Rosenberg.” (Id.) Given Plaintiff’s delayed discovery of these centrally important facts, it cannot be said that her declaratory relief action seeking to challenge what she claims to be unauthorized payments made to Rosenberg in violation of the Partnership Agreement was timely when asserted in January 29, 2018.
Plaintiff’s sixth cause of action challenges Defendants’ authority to arrange for Partnership loans without prior consent of all partners, as she claims is required under the Partnership Agreement. The facts support a delayed discovery contention with respect to the Bank Leumi loan obtained in 2011. Plaintiff’s evidence shows that Defendant Weiss and Stanley Diller contacted Dorothy in early 2011, in connection with a Partnership loan they were seeking to secure, to obtain her signature on an Amendment and Power of Attorney that would have established all the named partners’ LLCs as the new partners of Brookshire (Exh. 30), but Dorothy and Arthur steadfastly objected to the Amendment and refused to sign it. (A. Diller Decl., ¶¶ 22-25 and Exh. 31, 32, 50.) According to Arthur’s declaration, however, he did not discover that Brookshire had proceeded to secure the loan based on representations that the LLCs were Brookshire partners until the loan documents were produced in response to a Court order in this case. (A. Diller Decl., ¶ 25.) Further, according to Arthur, it was not until Defendants filed their demurrer that Plaintiff and Arthur discovered that the latter’s signature had been forged on the 2011 Amendment and Power of Attorney, and not until the bank’s records were produced, that they learned the allegedly fraudulent Amendment was submitted in connection with the 2011 loan application. (Id., ¶¶ 38-39.) Defendant Rosenberg testifies that he met with Arthur Diller sometime in May-July 2011 to provide him with “a copy of the loan documents for the 2011 Bank Leumi $6 million loan to the Partnership.) (E. Rosenberg Decl., ¶ 34.) He does not describe or produce the documents he claims to have provided to Arthur, so it is unclear whether he is saying he produced the underlying documentation in which Defendants represented to the bank that their LLCs were Brookshire partners or the allegedly forged 2011 Amendment. In any event, Arthur vociferously denies Rosenberg’s account, potentially setting up a disputed issue that must be resolved at trial. (A. Diller Supp. Decl., ¶ 6.)
The second loan transaction was consummated after the case was filed. On February 10, 2021, Rosenberg wrote a letter to all Brookshire Partners, including Plaintiff, asking that they confirm to Pacific Premier Bank that Defendants’ LLCs were partners. Defendants’ attorney also asked that Dorothy execute loan documents in which Defendants represented that their LLCs are partners. (Id., ¶ 46.) After Dorothy refused, defense counsel provided Plaintiff with documents showing that Defendants had secured a $4,345,000 loan from Valley National Bank based on representations that Defendants’ LLCs were Brookshire partners. (Id., ¶ 47.) Based on these facts, there is no question that Plaintiff’s claims challenging the loans as unauthorized are timely.
The eighth cause of action asserts the need for a judicial determination about whether the Partnership Agreement can be amended without Plaintiff’s consent. The issue of whether Plaintiff’s approval was required to amend the Partnership Agreement was an active but unresolved dispute in 2011. As of October 7, 2014, Weiss sent a letter to Plaintiff with an enclosed email from Rosenberg that seemed to confirm that both Defendants agreed that no amendment could be effected without Plaintiff’s consent. (Exh. 37.) In the Rosenberg email forwarded by Weiss, the managing partners stated that a Change of Ownership Application could be delayed by two problems: first, that Dorothy needed to submit documentation regarding her LLC to the licensing board; and second, that “we need to resolve the Partnership Agreement, which was executed by all the partners except Mrs. Diller in 2011.” (Id.) Thus, as of October 7, 2014 – less than four years before the lawsuit was filed in January 2018 – Plaintiff had no reasons to conclude that Defendants disagreed with her argument that her consent was required to amend the Partnership Agreement. Her challenge to their subsequent reversal on this issue was, thus, timely brought.
Defendants argue that execution of the Amendment and Power of Attorney would not have amended the Partnership Agreement, but this is an argument that goes to the substance of Plaintiff’s claim not to its timeliness. Defendants also contend that any cause of action based on this document accrued in 2011 when Plaintiff refused to sign it. But her protest would not support a claim for improper amendment of the Partnership Agreement. Based on undisputed evidence, Plaintiff argues she did not know that there was an executed Amendment and Power of Attorney document, albeit with Arthur’s forged signature, until after this case was filed. Defendants’ contentions do not provide cogent support for their limitations defense as to this declaratory relief claim.
Given the Court’s rulings on these declaratory relief actions grounded on alleged breaches of the Partnership Agreement, it follows that Plaintiff’s third cause of action for breach of the Partnership Agreement and her tenth and eleventh causes of action for expulsion and disassociation of Defendants because of those breaches are also timely brought. Because the underlying conduct that is being attacked occurred within the four-year limitations period or was only discovered within that period, these claims too will stand against a statute of limitations defense.
Plaintiff’s quest to invalidate Defendants’ transfers of their partnership interests to their LLCs via the seventh and ninth causes of action presents a more complicated timeline for analysis of a limitations defense. Plaintiff first learned of Defendants’ efforts to transfer their interests to their LLCs in connection with a loan application in 2011. The evidence is that is that Dorothy steadfastly refused to sign the proffered Amendment and Power of Attorney that would have established all the partners’ LLCs as the new partners of Brookshire (A. Diller Decl., ¶¶ 22-25 and Exh. 30, 31, 32, 50.) But, according to Arthur’s declaration, he did not discover that Brookshire had proceeded with the loan based on representations that the LLCs were Brookshire partners until the loan documents were produced in response to a Court order in this case. (A. Diller Decl., ¶ 25.)
When she learned in December 2011 that Brookshire was issuing checks to Weiss’ LLC, Dorothy sent a letter to him objecting that, since she had never signed the Amendment, the LLC was not a partner and should not be paid any distributions and directing Weiss to cease and desist any such distributions. (Id., ¶ 26, Exh. 26.) Neither Dorothy nor Arthur received any response to the letter. (A. Diller Decl., ¶ 27.) According to Defendants, these facts gave rise to inquiry notice requiring Dorothy to conduct further investigations or bring a lawsuit to challenge the allegedly improper transfers to Defendants’ LLCs, with the limitations period beginning to run sometime in 2011 – more than 6 years before the action was commenced.
The evidence supports the conclusion that Plaintiff in fact conducted an investigation by repeatedly seeking documentation to expose the true financial situation of Brookshire and its partners. While Plaintiffs’ evidence is not clear about when Barry Weiss took over management of Brookshire, the implication is that it was after Stanley Diller’s death in January 2012. Thereafter, Plaintiffs complain of missing, sporadic, incomplete, and inaccurate monthly reports about Brookshire operations and irregular partnership distributions. (A. Diller Decl. ¶¶ 29-32.) Their requests to inspect the partnership records fell on deaf ears. (Id., ¶ 31.) Then, on October 7, 2014, Plaintiff received concrete information about partnership distributions to the LLC partners. In his letter of that date, Weiss sent Dorothy an enclosed email with “the information you requested regarding Brookshire Partners.” (Exh. 37.) The enclosure set forth the breakdown of the partners’ interests in Brookshire, indicating that the LLCs of both defendants had received distributions as partners in 2012 and 2013. (Exh. 37.) Plaintiff and Arthur made further efforts to get information to understand the situation. Questions posed by Arthur in late 2015 about the sharp differential in 2014 net income and the total distributions made to partners were answered in a February 3, 2016 letter from Weiss’ accountant disclosing that, around the time the partnership distributions abated, Weiss and Rosenberg paid themselves $300,000, which they claimed to be a loan repayment. (Id., ¶ 32.) Although Plaintiffs asked Defendants to provide loan documents to substantiate the loan, none were produced until after the lawsuit was filed. (Id.) Intermittently, from before 2014 through at least 2017, Plaintiffs requested an opportunity to inspect Brookshire’s financial records, but their entreaties were ignored or denied. (Id., ¶¶ 31-35.) Given this evidence of investigation about Plaintiff’s concerns and her timely commencement of suit within less than four years after the Weiss letter and Rosenberg email were disclosed to Plaintiff, the Court finds, at least on this record, that Plaintiffs’ challenges to the partnership status of Defendants’ LLC were timely asserted in January 2018.
In support of their laches defense, Defendants urge the Court to consider that the Partnership “continued to file tax returns, pay distributions and submit licensing applications that were premised upon the effectiveness of the transfer of the partnership interests to LLCs in and before 2011.” (Defendants’ Trial Brief, p. 12.) Unfortunately, Defendants cite no evidence that the Court should examine to corroborate this argument. Nor do they direct the Court’s attention to evidence that these documents were distributed to Dorothy or Arthur or that they otherwise received notice of these activities such that they should have launched an earlier challenge. To the extent Dorothy knew of the distributions to Defendants’ LLCs, this knowledge alone may not be considered sufficient to prompt awareness of an illegal transfer. As Rosenberg testified in his deposition, Brookshire paid distributions to either the individual or the LLC based on the partner’s convenience so who received payment did not necessarily identify the actual partner. (Supp. McMillen Decl., Exh. A, pp. 103-104.)
E. Plaintiff’s Standing
As they did in their unsuccessful motion for summary judgment, Defendants assert that Plaintiff lacks standing to bring suit as a Brookshire partner because she transferred her interest to her own LLC in 2000. (Defendants’ Trial Brief, pp. 19-21.) Apparently seeking to relitigate the Court’s construction of the relevant provisions, Defendants argue that Plaintiff did not need their consent to transfer her partnership interest to her LLC and that, in any event, the Court should conclude that such consent was granted. Defendants insert other arguments in their standing challenge that are immaterial to the standing question. (Id., p. 21.) Thus, whether Dorothy had a right to be heard in partnership affairs is a substantive claim that will be addressed separately and is wholly distinct from the question of whether she retained her Partnership share. Defendants’ separate affirmative defenses based on timeliness contentions and Plaintiff’s own alleged misconduct or breaches are similarly irrelevant to the standing question.
The Court has already ruled that the Partnership Agreement and its 1984 and 1988 Amendments are reasonably susceptible of Plaintiff’s construction that she needed prior written consent to transfer her partnership interest to her LLC, because she was not granted transfer rights under Article 7.02.A of the Partnership Agreement. (Ruling on Submitted Matter, filed June 3, 2021, p. 7.) In reaching that conclusion, the Court noted Defendants’ failure to offer any alternative construction of the 1988 Amendment adding Plaintiff as a partner that somehow granted Plaintiff the rights of previous partners under Article 7.02.A to exercise certain transfer rights without the approval of the other Brookshire partners. (Id., pp. 6-7.) The same is true for Defendants’ trial brief. After conducting a thorough analysis of the issue, the Court held that, “[b]ased on the plain terms of the partnership agreement as amended in 1984 and 1988, . . . , under Article 7.02.A, . . . Plaintiff could not simply transfer her interest to a corporation or other entity she owned but had to obtain the ‘previous written consent of all the Partners’ required under § 7.02.B to effectuate such a transfer.” (Id., p. 8.) “Having construed the partnership agreement based on its plain terms and finding no ambiguity in those terms, the Court decline[d] to discuss the parole evidence submitted by the parties.” (Id.) In the context of the summary judgment motion, Defendants failed to proffer any evidence of “previous written consent,” which under the Partnership Agreement must be in writing, signed, and maintained with the books of the Partnership. (Id.)
Similarly, in the current posture, Defendants have submitted no evidence of previous written consent given by all Partners to approve Plaintiff’s transfer to her LLC. The evidence regarding Plaintiff’s 2000 attempt to assign her interests to her LLC is as follows. It is true, as Defendants contend, that Plaintiff purported to assign her partnership share to her LLC in May 2000 and that her attorney wrote two letters in late May 2000 asserting the assignment had already been accomplished and directing that her distributions be sent to the LLC. (Exh. 11, 12, 44.) But Defendants did not accept or agree to this assignment, nor did they send distribution checks to the LLC as requested. Instead, Defendants’ attorney conveyed a revised Assignment document and proposed Amended Statement of Partnership to Plaintiff’s attorney that included modifications that Plaintiff and Arthur considered “completely unacceptable.” (A. Diller Decl., ¶¶ 14-15, Exh. 109.) In response, Plaintiff abandoned her efforts to get approval of the assignment she had sought. (D. Diller Decl., ¶ 7.) Multiple documents in the record corroborate that the partnership interest remained in Dorothy’s name and did not transfer to her LLC, which she abandoned. (Exh. 25; 37; 66, p. 38; 67, p. 19; 70, p. 20; 71, p. 13; 96; 97.)
In summary, there is no evidence of the Brookshire partners’ written consent to Plaintiff’s assignment, and the clear inference from Defendants’ refusal to forward distributions to Plaintiff’s LLC in compliance with her attorney’s request and their effort to have a different, revised Assignment document executed by Plaintiff is that they did not consent to or recognize the proposed assignment. On this record, there is no question that Plaintiff is a named Brookshire partner and, as such, she has standing to raise the claims asserted. The fact that Defendants may have approved transfers by other partners to their LLCs says nothing about how they responded to Plaintiff’s effort to make a similar assignment. (Defendants’ Trial Brief, p. 21.)
PARTIAL TENTATIVE RULING FOR PHASE 1 BENCH TRIAL
HEARING DATE: February 6, 2024
CASE: Dorothy Diller v. Barry Weiss, et al.
CASE NO.: BC691484
II. PLAINTIFF’S CLAIMS
A. Breaches of Article 1.03.C of the Partnership Agreement
Plaintiff asserts that Defendants breached Article 1.03.C because they have never been Brookshire’s appointed agents with power to sign “all documents, leases, deeds, trust deeds, notes, amended certificates of fictitious firm names, amended statements of partnership and/or any other agreements affecting the property or business.” (Exh. 1-2.) This appointment is to be accomplished by a “statement and Power of Attorney signed, acknowledged and verified by each of the partners” and must be filed with the County Recorder in each county where the partnership owns real estate. (Id., Art. 1.03.C.) Plaintiff regards these appointed agents to be distinct from Brookshire’s Managing Partners, who are charged with “complete management and control of the operation of the business of the Partnership” and must “devote so much of their time as may be required in connection with the affairs and operation of this Partnership’s business,” with the optional assistance of a hired management company. (Id., Art. 3, § 3.01.) Indeed, the original Partnership Agreement did not name the same persons to serve as the Partnership’s agents (Joseph K. Kornwasser or Jerald Friedman, together with Stanley Diller) and the Managing Partners (Joseph K. Kornwasser and Stanley Diller). In 1988, the Brookshire partners executed the Second Amendment to the Articles of Partnership on November 16, 1988, naming Joseph Kornwasser and Morris Weiss as the Managing Partners. (Exh. 1-35.) They separately affixed their notarized signatures to an Amended Statement of Partnership and Power of Attorney, in which Joseph Kornwasser and Morris Weiss were appointed as “the agent and true and lawful attorney to execute documents with respect to or affecting the property of the business of the Partnership.” (Exh. 2-1.) In 1997, when Kornwasser and Friedman withdrew from the Partnership, the Amended Statement of Partnership did not amend the existing appointment of the Partnership’s agents or appoint new ones. (Exh. 110.)
It is undisputed that Defendants have signed the kind of real estate documents, including deeds and trust deeds, that the Partnership Agreement says only appointed agents are authorized to execute. There is apparently no dispute, moreover, that all the partners, except Plaintiff, executed the Amended Statement of Partnership and Power of Attorney in March 2011, purporting to appoint Defendant Weiss and now deceased Stanley Diller as the Partnership’s attorneys in fact and to name their LLCs as Brookshire’s Managing Partners. (Defendants’ Exh. 14 and 51.) The legitimacy of Weiss’ appointment as the Partnership’s attorney in fact rests largely on whether Plaintiff’s approval was necessary and, if so, whether it was obtained. There are two arguments to be considered in this regard. The first concerns whether Plaintiff enjoyed any authority to vote on or control partnership matters after she acquired her partnership share in 1988. The second issue boils down to whether Arthur actually signed the Amended Statement or, alternatively, his signature was forged. The first issue is addressed below, while the second is a matter that will likely require a trial and cross-examination of the key witnesses.
Defendants also seek to fend off Plaintiff’s challenge to Defendant’s authority to sign real estate documents by arguing that each family had the right to appoint successors to serve as managing partners in the wake of the death of one of the named managing partners. (Defendants’ Reply, p. 25.) Because the issue raised by Plaintiff involves the authority of Defendants to act as attorneys in fact for Brookshire, not as Managing Partners, however, this contention is beside the point.
B. The Scope of Plaintiff’s Authority to Act on or Approve Partnership Actions
Plaintiff contends that her partnership rights included the right to approve the appointment of the Partnership’s attorney in fact and to modify the terms of the Partnership Agreement – both of which were rights accorded all partners when the partnership was created in 1982. In opposition, Defendants argue Plaintiff never had such authority because the 1988 Amendment that deemed her a partner denied her any right to participation in the management of the Partnership’s business and any “voice or vote in [the termination of the Partnership] or any partnership matter except in the event of a dispute under Article 3.01.” (Exh. 1-25, 1988 Amendment, Art. 3.01.A and 4.01.) The question involves the construction of the 1988 Amendment as a modification of the Partnership Agreement as previously amended in 1984.
At the time the 1988 Amendement was executed, many provisions of the Partnership Agreement require the joint participation of all partners to modify the relationship between the partners or engage in conduct regarding control of the Partnership. Thus, for example, it is “the partners” who were responsible for filing and publishing a Fictitious Business Name Statement and for signing, filing, and publishing an amended version upon “any subsequent change in the membership of this Partnership.” (Exh. 1, Art. 1.03.B.) Similarly, as noted above, a Power of Attorney appointing Brookshire’s attorney in fact had to be “signed, acknowledged and verified by each of the partners” and then recorded in each county where the Partnership owns real estate. (Id., Art. 1.03.C.) In addition, a termination of the Partnership could occur only if there is unanimous agreement of all Partners. (Art. 4.01.) Further, the “members of this Partnership shall have the irrevocable right and option to terminate the interest of any Partner” in the event certain listed financial events impinge upon the partner’s interest in Brookshire. (Art. 6.01.) Although parties to the Partnership Agreement enjoy the right to make certain transfers of their interests to closely aligned persons and parties, any other transfers by a Partner required the “previous written consent of all of the Partners.” (Art. 7.02.)
Finally, and of significance here, the Partnership Agreement may only be amended or modified “in whole or in part, but any amendment or modification shall be in writing and singed by all of the Partners.” (Art. 9.06.) The agreement provides, in relevant part, “where any conflict arises between the provisions of said amendment or modification and provisions incorporated in earlier documents, the most recent provisions shall be controlling. It shall not be necessary to revise the entire Partnership Agreement where only minor changes are affected and alteration shall be permitted either on the face of this instrument, by way of addendum, or in an entirely new document, providing only, that such alteration shall be dated and the signatures of the Partners shall appear in reasonable proximity to such alteration.” (Id.)
Moreover, as noted above, the Partners act jointly to appoint an attorney in fact who is given the power to sign “all documents, leases, deeds, trust deeds, notes, amended certificates of fictitious firm names, amended statements of partnership and/or any other agreements affecting the property or business.” (§ 1.03.C.)
The question here involves the nature of Plaintiff’s right, if any, to vote on Partnership decisions after she became a partner in 1988. There is no dispute that she and her ex-husband were explicitly excluded from participation in managing the affairs of the Partnership. Thus, the 1988 Amendment to the Partnership Agreement includes a modification of Article 3.01’s grant of complete control to the Managing Partner over Brookshire’s business operations, unless there is dispute between the designated managers. (1988 Amendment, § 3.01.A.) In that situation, the “majority in interest of the Partners will prevail.” (Id.) The amendment clarifies that this tie-breaking mechanism includes Plaintiff and Stanley Diller, but that otherwise they “shall have no voice or management in the affairs of the Partnership.” (Id.) The amendment also clarifies Plaintiff’s consent to allow the Managing Partner to bind and act on her behalf. (Id.) To the extent any decisions fall within the scope of the Managing Partner’s authority, then, Plaintiff has no power to complain or cast a dissenting vote.
Plaintiff’s complaints about the amendment of the Partnership Agreement and the appointment of Brookshire’s attorney-in-fact do not fall within the scope of the Managing Partners’ authority or the management of the Partnership’s regular business operations. Managing Partners have “complete management and control of the operation of the business of the Partnership” and must “devote so much of their time as may be required in connection with the affairs and operation of this Partnership’s business,” with the optional assistance of a hired management company. (Id., Art. 3, § 3/01.) Specific powers are also granted to the Managing Partners who are charged with giving “express written consent” to a request to withdraw the capital of the Partnership. (Id., Art. 2.04.) They are also given authority to determine the method for keeping the records of the Partnership and to make withdrawals from Partnership accounts. (Art. 2.08, 2.15.B.) The Managing Partners are also empowered to give consent to the Partnership’s efforts to borrow funds and to determine the amount of funds that may be withdrawn by the Partners. (Art. 2.17, 3.04.) “Only the Managing Partners shall have authority to bind the Partners in making contracts and incurring obligations in the name and on the credit of the Partnership in the ordinary course of the Partnership business.” (Art. 3.05; 3.07.) A majority of the managing partners may also issue a call for additional capital contributions from the Partners. (Exh. 1, 1984 Amendment, §2.01(b), § 2.02.) The defaulting partner shall “have his voting rights terminated under any of the provisions of this Partnership Agreement,” and “any and all profits and/or losses of the Partnership shall cease for such defaulting Partner” until the defaulted amount is paid. (Id.) The Court concludes that the actions challenged by Plaintiff here do not fall within the restriction placed on her involvement in Partnership business by the version of Article 3.01 adopted in 1988.
Article 4.01 was also amended in 1988. Whereas it previously dictated that “the Partnership may be terminated at any time upon the unanimous agreement of the Partners,” the 1988 Agreement authorized termination “upon the agreement of K&F and the Weiss Group,” thus excluding Plaintiff and Stanley Diller, who “agree[d] that they have no voice or vote in this matter or any other partnership matter except in the event of a dispute under Article 3.01.” (Exh. 1-35.) An Article 3.01 dispute would not concern a “partnership matter” like the termination of the Partnership, however, but rather a dispute between the Managing Partners about how to operate the Partnership’s business operations. Plaintiff argues that Articles 3.01 and 4.01 should be read as the only restrictions placed on Plaintiff’s partnership power, leaving intact Articles 1.03.C and 9.06 and the authority they grant to all partners to appoint the Partnership’s attorney in fact and modify the Partnership Agreement. In support of this construction, she urges the Court to conclude that the interpretation advanced by Defendants would result in a drastic change in the partnership bargain and, thus, would have mandated an entirely new agreement. Given the absence of a new Partnership Agreement and the 1988 Amendment’s reference to only specific articles being modified, the Court should conclude, according to Plaintiff, that she was granted all other partnership rights other than the right to vote on termination and any power to meddle in partnership business.
In support of her narrow interpretation of the 1988 version of Article 4.01, Plaintiff directs the Court’s attention to the parties’ dealings over time as evidence that Defendants have recognized the kinds of partnership rights that have regularly been accorded to Plaintiff. Plaintiff points first to a letter written by her attorney in 1999, asserting her right to object to loans taken out in the Partnership’s name without Plaintiff’s approval (Plaintiff’s Exh. 40), but this is only a statement of Plaintiff’s position not proof of the parties’ joint course of action or of Defendants’ acquiescence in Plaintiff’s view. In contrast, Defendants’ actions over many years convey their view that Plaintiff’s consent was required to implement structural and loan decisions by the other partners, including the 2011 Amendment of the Partnership Agreement and the appointment of Weiss as Brookshire’s attorney-in-fact. (Plaintiff’s Exh. 31, 32, 50.) It is also significant that, in welcoming Plaintiff as a new partner in 1988 with somewhat limited partnership rights, the Partnership had both Plaintiff and Stanley Diller sign the Amended Statement of Partnership and Power of Attorney in November 1988, thus exercising their partnership rights and duties to appoint the attorney-in-fact to act on behalf of Brookshire. (Plaintiff’s Exh. 2.) The decision to include Plaintiff in this appointment – required to be accomplished by all the Partners – appears to be inconsistent with Defendants’ narrow reading of the 1988 Amendment.
On the other side of the coin, Defendants rely on the November 15, 1988 letter in which Plaintiff agreed to sell 13.5 percent of Brookside, representing one-half of her holdings. In that letter, Plaintiff agreed to waive “any rights to manage the partnership or to obligate or negotiate on its behalf in any matter whatsoever except that you shall have the right to vote in partnership meetings as to the sale of the property but you agree to be bound by a majority vote.” (Defendants’ Exh. 6.) As parol evidence used to interpret the 1988 Amendment, this document interjects additional confusion rather than clarity. Plaintiff’s exclusion from managing the partnership’s business or negotiating on its behalf does not appear to be in dispute, so the first part of the restrictive clause is of little help. The second part indicates that Plaintiff would have a right to vote on the sale of the property, but this is not addressed at all in the 1988 Amendment, which only addresses a vote to resolve a dispute among the Managing Partners and a right to vote on a non-judicial termination of the Partnership. The letter does not appear to address any other restrictions on Plaintiff’s ability to exercise the customary partnership rights and, thus, if it has any force, tends to support Plaintiff’s interpretation of the 1988 Amendment. This conclusion is consistent with the testimony of Arthur Diller who negotiated the sale of the 13.5 percent share to Jerald Friedman. Arthur states there was “no discussion or agreement whatsoever that Dorothy would give up her right to vote on future amendments to the Partnership Agreement such as to add new partners,” only an agreement that she would not be involved in operating the Partnership’s business. (A. Diller Decl, ¶ 9.)
The Court will entertain argument on two key points with respect to the issue of what rights Plaintiff was provided in connection with the 1988 Amendment. First, is there an ambiguity in the 1988 Amendment such that the Court should consider parol evidence in construing it? Second, if there is an ambiguity, how should the Court interpret the 1988 Amendment as it relates to Plaintiff’s partnership rights, based on the evidence submitted? Considering Arthur Diller’s declaration about the negotiations in which he was involved, it appears to the Court that any ambiguity will have to be resolved after the Court receives evidence at trial.
Individual partners are also accorded certain rights and responsibilities under the Partnership Agreement. They are entitled to receive bona fide offers to buy Partnership property, exercise an option to respond to such offers, and purchase the property tendered on a pro rata basis before the property is sold to the bona fide purchaser. (Art. 8.) In addition, certain identified partners are authorized to transfer their Partnership shares to closely aligned parties, including “a General or Limited Partnership or Corporation in which they or one of their original members or partners own and maintain a controlling interest.” (Partnership Agreement, § 7.02; 1984 Amendment, § 7.02.A; 1988 Amendment, § 7.02.A.)