Case Name: James B. Little, et al. v. Heritage Bank of Commerce, et al.

Case No.: 2013-1-CV-241744 (lead case)

In this action, which has been consolidated for pre-trial purposes, multiple trusts allege they are victims of a fraudulent scheme to misappropriate trust funds. Plaintiffs allege the scheme was designed by defendant Leo J. Kennedy with the assistance of defendants Heritage Bank of Commerce and defendant Christine Backhouse, then-trustee of the trusts. Other named defendants include Kennedy’s law firm Bucknell, Stehlik, Sato & Stubner, LLP, and various start-up companies that allegedly received trust funds including Orions Digital Solutions, Saint Andrews Lane Acquisition LLC, The Emma Group, Inc., Groupmark, LLC, and Validus Technologies Corporation.

Four motions by Heritage are before the Court: (1) a demurrer to the third amended complaint (“TAC”) in Elkins, et al. v. Heritage Bank of Commerce, et al. (Super Ct. Santa Clara County, No. 2014-1-CV-265103); (2) a motion to strike the TAC in Elkins, and/or its first and third causes of action; (3) a motion to strike portions of the TAC in Karleen, et al. v. Heritage Bank of Commerce, et al. (Super. Ct. Santa Clara County, No. 2014-1-CV-262065); and (4) a motion to consolidate Elkins and Karleen with other cases for trial. A fifth motion, Heritage’s demurrer to the TAC in Karleen, was taken off-calendar prior to the hearing, after Heritage answered the TAC in that action.

I. Heritage’s Motion to Strike Portions of the TAC in Karleen

Heritage’s motion to strike references in the TAC in Karleen to plaintiff Donald James Karleen is DENIED. As urged by the Karleen plaintiffs in their opposition, their TAC is clear that Donald James Karleen is a party only to those claims asserted against defendant Backhouse Fiduciary Services, Inc. (“BFSI”) (namely, the first and fourth through sixth causes of action), and is not a party to the claims against Heritage (namely, the second and third causes of action).

II. Heritage’s Demurrer to and Motion to Strike the TAC in Elkins

Heritage demurs to each of the eight causes of action in the TAC in Elkins for failure to state a claim and uncertainty. (Code Civ. Proc., § 430.10, subds. (e) and (f).) It also moves to strike the TAC and the first and third causes of action therein due to changes by the plaintiffs that it contends are beyond the scope of the Court’s order sustaining Heritage’s prior demurrer with leave to amend. (Code Civ. Proc., §§ 435-436.) The Elkins plaintiffs do not oppose the demurrer to the first and third causes of action, but otherwise oppose both motions.

a. The Motion to Strike

The Elkins plaintiffs’ request for judicial notice of the Court’s January 13th, 2016 order sustaining Heritage’s demurrer to their second amended complaint with leave to amend is GRANTED. (Evid. Code, § 452, subd. (d).)

Heritage moves to strike the entire TAC because plaintiffs have filed it in a new capacity—as directors of the Hoven Foundation, rather than as co-trustees of the Hoven Foundation Trust—without leave of court. In their brief opposition, plaintiffs do not explain their assertion that the change in their capacity is merely a correction of a misnomer. They state that they will work with Heritage to reach a stipulation regarding this change prior to the hearing on this matter, and request leave to amend the TAC in the event a stipulation is not reached. In its reply papers, Heritage indicates that it may be willing to stipulate to the change in capacity if plaintiffs explain how they have standing to sue as directors of the Hoven Foundation, which they have not yet done.

Heritage is correct that its prior demurrer did not raise any issues related to plaintiffs’ standing to sue as trustees of the Hoven Foundation Trust, and the Court’s January 13th order did not grant plaintiffs leave to file an amended complaint in a new capacity. The motion to strike is properly granted on this basis alone. (See Community Water Coalition v. Santa Cruz County Local Agency Formation Com. (2011) 200 Cal.App.4th 1317, 1329 [“It is the rule that when a trial court sustains a demurrer with leave to amend, the scope of the grant of leave is ordinarily a limited one. It gives the pleader an opportunity to cure the defects in the particular causes of action to which the demurrer was sustained, but that is all.”].) More fundamentally, “naming a new party in a complaint without obtaining prior leave of court is a nullity” (Shapell Industries, Inc. v. Superior Court (Stark) (2005) 132 Cal.App.4th 1101, 1107), and “a motion to strike will be granted where new parties are added to a pleading without permission of court” (Himmel v. City Council of Burlingame (1959) 169 Cal.App.2d 97, 101, citing Code Civ. Proc., § 473). Heritage may or may not ultimately wish to oppose the change in the capacity in which the Elkins plaintiffs bring their action, but it is entitled to the opportunity to do so within the proper procedural framework. (See Shapell Industries, Inc. v. Superior Court, supra, 132 Cal.App.4th at p. 1107 [explaining that the proper procedure to add a party is through a noticed motion]; Demetriades v. Yelp, Inc. (2014) 228 Cal.App.4th 294, 306 [“Substitution of new plaintiffs requires leave of court pursuant to section 473. Although there is a policy of great ‘liberality’ in permitting amendments to pleadings, the trial court must consider various factors, including whether the substitution would prejudice the defendant (e.g., by delaying trial, or increasing discovery burden).”].)
The motion to strike the TAC is accordingly GRANTED without leave to amend, but without prejudice to plaintiffs moving for leave to file an amended complaint as directors of the Hoven Foundation. The parties may also submit a stipulation to this outcome for approval by the Court. (See Shapell Industries, Inc. v. Superior Court, supra, 132 Cal.App.4th at p. 1105 [noting that the trial court had granted the defendant’s motion to strike a plaintiff added without leave of court, but gave defendant leave to file a “motion, application, and/or stipulation”].) The parties are directed to meet and confer about this issue, and are reminded of their meet and confer obligations associated with any future demurrer pursuant to recently-enacted section 430.41 of the Code of Civil Procedure.

b. The Demurrer

In light of the ruling on Heritage’s motion to strike, its demurrer to the TAC in Elkins is MOOT.

III. Heritage’s Motion to Consolidate Cases for Trial

Heritage moves to consolidate Karleen, Elkins, and the following additional cases for trial: the lead case, Little, et al. v. Heritage Bank of Commerce, et al. (Super Ct. Santa Clara County, No. 2013-1-CV-241744), Hall v. Heritage Bank of Commerce, et al. (Super Ct. Santa Clara County, No. 2015-1-CV-277007), and Sugarman, et al. v. Heritage Bank of Commerce, et al. (Super Ct. Santa Clara County, No. 2014-1-CV-272869).

a. The Parties’ Positions

Heritage’s counsel declares that the allegations in these cases are virtually identical and involve claims by various trusts that Heritage is responsible for Kennedy’s embezzlement of money from BFSI, on theories of aiding and abetting fraud and breach of fiduciary duty and fraud by concealment of information from Backhouse. The lead Little action already involves 23 plaintiffs who each claim separate unauthorized transfers as damages. While Heritage opposed the consolidation of these actions for trial in 2014 on the ground that such consolidation was premature, counsel has subsequently engaged in extensive discovery and believes that the witnesses, documents, and exhibits that will be produced at each trial will be virtually identical, while the legal issues to be determined will also be nearly the same. Counsel represents that the only issue that will differ among the plaintiffs is the amount of damages they claim. Heritage asserts that Backhouse and BFSI have settled with all of the plaintiffs other than the Hall plaintiff, while the defendants other than Heritage have had their defaults taken.

The Little and Elkins plaintiffs filed a conditional non-opposition to the motion to consolidate, stating that they do not oppose consolidation so long as trial in their cases moves forward as currently scheduled on January 9, 2017. In its reply brief, Heritage indicates that it will not seek to postpone the trial due to the proposed consolidation, but may seek to do so because the Little plaintiffs recently disclosed approximately $1.4 million in additional alleged unauthorized transfers, and it may need to conduct discovery regarding these transactions.

b. Analysis

Code of Civil Procedure section 1048 provides that, “[w]hen actions involving a common question of law or fact are pending before the court, it may order a joint hearing or trial of any or all the matters in issue in the actions; it may order all the actions consolidated and it may make such orders concerning proceedings therein as may tend to avoid unnecessary costs or delay.” (Code Civ. Proc., § 1048, subd. (a).) “Consolidation under section 1048 is permissive, and the trial court granting consolidation must determine whether the consolidation will be for all purposes or will be limited.” (Comm. for Responsible Planning v. City of Indian Wells (1990) 225 Cal.App.3d 191, 196, fn.5.) The court should consider whether the cases have common issues and whether undue confusion or prejudice is likely to result from consolidation. (Todd-Stenberg v. Dalkon Shield Claimants Trust (1996) 48 Cal.App.4th 976, 979; see also Weil & Brown, Cal. Prac. Guide: Civ. Pro. Before Trial (The Rutter Group 2015) ¶ 12:362 [court should consider whether consolidation would delay the trial of any of the cases involved, whether discovery in one or more cases has proceeded without all parties present, and whether consolidation would make the trial too confusing or complex for a jury].)

The actions at issue here are of a type that is generally appropriate for consolidation. (See Jud Whitehead Heater Co. v. Obler (1952) 111 Cal.App.2d 861, 867 [consolidation appropriate where actions arose from a series of alleged embezzlements by defendant].) Trial in all of the actions will focus on Heritage’s role in a common scheme perpetrated by Kennedy, and will clearly involve the presentation of much of the same evidence and argument. Any potential for confusion resulting from the large number of plaintiffs can be alleviated by the adoption of appropriate procedures at trial, and the need to calculate damages specific to each plaintiff is not prohibitive. (See Todd-Stenberg v. Dalkon Shield Claimants Trust, supra, 48 Cal.App.4th at p. 980 [noting that it was highly unlikely that the jury would have confused consolidated cases where it “was given a separate binder of evidence and separate chronologies prepared on each plaintiff”].) Since these actions have already been consolidated for pre-trial purposes, the parties have participated together in such proceedings, and there does not appear to be any reason to anticipate that consolidation will delay trial. The conclusory list of potential arguments in opposition to consolidation set forth by the Little and Elkins plaintiffs in their conditional non-opposition is not persuasive, and plaintiffs do not otherwise oppose consolidation.

The Court accordingly finds that consolidation of these actions is appropriate. Heritage’s motion to consolidate is GRANTED.