Case Name: Paul Robbins, et al. v. Acuity Ventures III, L.P., et al.
Case No.: 2016-CV-293917

Currently before the Court are the demurrer and motion to strike by defendants Acuity Management Company, LLC (“AMC”), Acuity Ventures, LLC (“AV I”), Acuity Ventures II, LLC (“AV II”), Acuity Ventures III, L.P. (“AV III”), Eric Hardgrave (“Hardgrave”), and Larry Hootnick (“Hootnick”) (collectively, “Defendants”) to the third amended complaint (“TAC”) filed by plaintiffs Paul Robbins (“Paul”) and Sheri Robbins (collectively, “Plaintiffs”), trustees of the Paul B. and Sheri L. Robbins Trust u/t/d/ 12/01/91 on behalf of AV III.

Factual and Procedural Background

This consolidated action involves two cases—an individual action (Paul Robbins, et al. v. Acuity Ventures III, L.P., et al., Santa Clara County Superior Court Case No. 16-CV-293917) and a derivative action (Paul Robbins, et al. v. Acuity Management Company, LLC, et al., Santa Clara County Superior Court Case No. 17-CV-310857)—arising out of the sale and purchase of limited partnership units (“LPUs”) in AV III, the rights of limited partners in AV III, the purchase and sale of direct participation interests (“DPIs”), and the obligations of defendants concerning management of AV III.

For purposes of these motions, the Court will focus on allegations in the operative TAC in the derivative action.

Allegations of TAC

According to the allegations of the TAC, AMC is the general partner of AV III. (TAC at ¶ 4.) Plaintiffs are limited partners of AV III. (Id. at ¶ 2.) Hootnick and Hardgrave formed a series of different entities, including AV I, AV II, AV III, and AMC, and are members as well as creditors of those entities. (Id. at ¶¶ 10-15.)

AV I, AV II, and AV III were formed to make investments into early stage technologies companies. (TAC at ¶ 10.) To that end, AV III invested in Portfolio Companies by making loans documented by notes which were secured by collateral, usually consisting of securities from those entities. (Id. at ¶ 22.) The Portfolio Companies include Paravue, FlashFoto, Bay TSP, PDHI, and GCommerce. (Id. at ¶ 23.) At certain times, Hootnick and Hardgrave had direct management roles in one or more of the Portfolio Companies, giving them financial incentives to work for the benefit of those companies to the detriment of AV III. (Id. at ¶ 28.) In addition, Hardgrave, Hootnick, and AMC also invested in the Portfolio Companies, AV I, and AV II, giving them incentives to work for those entities at the expense of AV III. (Ibid.) The defendants never disclosed to AV III, or any of its limited partners, the full nature and extent of these conflicts of interests. (Id. at ¶ 29.)

The defendants made numerous financial decisions influenced by their conflicts of interests, including: (1) having AV III borrow funds to pay for the operation of AV I, AV II, AMC, and Portfolio Companies; (2) causing AV III to pay for AV I, AV II, AMC, and Portfolio Companies’ expenses without proper accountings; (3) investing more than 10 percent of AV III’s capital into the securities of a Portfolio Company; (4) charging travel expenses to AV III when such expenses should have been paid by AMC; (5) issuing DPIs to pay for the operations of the Portfolio Companies, AV I, AV II, and/or AMC; (6) extending the term of AV III even though it was supposed to end in 2011; and (7) failing to give informed consent for any conflicted decision. (TAC at ¶¶ 31-32.)

Since December 2013, AV III has been in the process of winding up and dissolving. (TAC at ¶ 33.) As a part of the dissolution process, the defendants produced financial statements from year-end 2009 to year-end 2014, which for the first time revealed the amounts borrowed by AV III. (Id. at ¶ 35.) AV III’s limited partners made further inquiries into this matter, to which defendants have not responded. (Ibid.) The defendants are not diligently proceeding with winding up and have failed to properly account to Plaintiffs for AV III’s operations. (Id. at ¶¶ 36-37.)

Based on the foregoing allegations, on July 12, 2018, Plaintiffs filed the operative TAC on AV III’s behalf, alleging five causes of action for: (1) breach of contract; (2) breach of implied covenant of good faith and fair dealing; (3) breach of fiduciary duty; (4) aiding and abetting breach of fiduciary duty; and (5) accounting.

Demurrer to the TAC

Defendants demur to the fourth and fifth causes of action on the grounds of uncertainty and failure to state a valid claim. (Code Civ. Proc., § 430.10, subds. (e), (f).) Both sides filed requests for judicial notice in conjunction with the motion. Plaintiffs filed written opposition. Defendants filed reply papers.

Defendants’ Request for Judicial Notice

Defendants’ request for judicial notice is GRANTED IN PART and DENIED IN PART. The request is granted with respect to the Orders on the Demurrers, Notice of Entry of Order, and Order granting motion to compel further responses as these constitute records of the superior court subject to judicial notice under Evidence Code section 452, subdivision (d). (See Stepan v. Garcia (1974) 43 Cal.App.3d 497, 500 [the court may take judicial notice of its own file].) The request is denied as to the Declarations of Paul Robbins and Eric Hardgrave as these are not proper subjects for judicial notice. (See People v. Woodell (1998) 17 Cal.4th 448, 455 (Woodell) [Evidence Code section 452 permits the trial court to take judicial notice of judicial opinions and court documents, but not the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact]; see also Lockley v. Law Office of Cantrell, Green, Pekich, Cruz & McCort (2001) 91 Cal.App.4th 875, 882 (Lockley) [“[c]ourts may not take judicial notice of allegations in … declarations … in court records because such matters are reasonably subject to dispute and therefore require formal proof”].)

Plaintiffs’ Request for Judicial Notice

Plaintiffs’ request for judicial notice is GRANTED IN PART and DENIED IN PART. The request is granted as to Exhibits A, B, C, D, and E as the Court’s Orders and TAC constitute records of the superior court subject to judicial notice under Evidence Code section 452, subdivision (d). The request is denied as to Exhibit F as counsel’s declaration is not a proper subject for judicial notice. (See Woodell, supra, 17 Cal.4th at p. 455 [Evidence Code section 452 permits the trial court to take judicial notice of judicial opinions and court documents, but not the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact]; see also Lockley, supra, 91 Cal.App.4th at p. 882 [“[c]ourts may not take judicial notice of allegations in … declarations … in court records because such matters are reasonably subject to dispute and therefore require formal proof”].)

Legal Standard

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. We also consider matters which may be judicially noticed.’” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

“The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. The court does not, however, assume the truth of contentions, deductions or conclusions of law. … [I]t is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 850.)

Fourth Cause of Action: Aiding and Abetting Breach of Fiduciary Duty (only as to defendant AV I)

Uncertainty

Uncertainty is a disfavored ground for demurrer; it is typically sustained only where the pleading is so unintelligible and uncertain that the responding party cannot reasonably respond to or recognize the claims alleged against it. (See Khoury v. Maly’s of Cal., Inc. (1993) 14 Cal.App.4th 612, 616.) “[T]he failure to specify the uncertain aspects of a complaint will defeat a demurrer based on the grounds of uncertainty.” (Fenton v. Groveland Community Services Dist. (1982) 135 Cal.App.3d 797, 809 [overruled on other grounds by Katzberg v. Regents of University of California (2002) 29 Cal.4th 300, 328, fn. 30].)

Here, Defendants’ memorandum of points and authorities fails to directly address the ground of uncertainty. Rather, Defendants argue the fourth cause of action is defective as it is based on legal conclusions, factual conclusions and irrelevant allegations. (See Memo of P’s & A’s at pp. 12-15.) This argument does not support a special demurrer for uncertainty. Instead, such arguments are addressed by general demurrer for failure to state a claim. Also, the proper procedural vehicle to remove any irrelevant allegations is a motion to strike, not demurrer. (See Code Civ. Proc., § 436, subd. (a).)

Therefore, the demurrer to the fourth cause of action on the ground of uncertainty is OVERRULED.

Failure to State a Claim

The fourth cause of action is a claim for aiding and abetting a breach of fiduciary duty. “Liability may … be imposed on one who aids and abets the commission of an intentional tort if the person (a) knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person’s own conduct, separately considered, constitutes a breach of duty to the third person. [Citations.]” (Saunders v. Super. Ct. (1994) 27 Cal.App.4th 832, 846.) Thus, “[t]o plead aiding and abetting by a defendant, the plaintiff must allege that the defendant had actual knowledge of the ‘specific primary wrong’ being committed, and gave substantial assistance to the wrongful conduct.” (Goonewardene v. ADP, LLC (2016) 5 Cal.App.5th 154, 188.)

As stated above, Defendants argue the fourth cause of action is based on legal and factual conclusions and irrelevant allegations. For example, Defendants contend that Plaintiffs fail to identify any single specific transaction to support the aiding and abetting claim. Again, to the extent that any allegations are irrelevant, the proper procedural vehicle to address those allegations is a motion to strike, not demurrer. Furthermore, Plaintiffs appear to allege facts to state a claim against defendant AV I. Namely that AV I knew defendant AMC was breaching fiduciary duties owed to AV III and its limited partners. (TAC at ¶ 56.) AV I thereafter encouraged or substantially assisted said breaches of fiduciary duty by directing, enabling, participating, or facilitating AMC’s breaches of fiduciary duty. (Id. at ¶ 57.) As a result of the alleged aiding and abetting conduct, AV III has been harmed. (Id. at ¶ 58.) Such allegations are sufficient to state a claim for aiding and abetting and must be accepted as true on demurrer. (See Olson v. Toy (1996) 46 Cal.App.4th 818, 823 [for purposes of demurrer, we accept these allegations as true].)

Consequently, the demurrer to the fourth cause of action on the ground that it fails to state a claim is OVERRULED.

Fifth Cause of Action: Accounting

Uncertainty

With respect to the fifth cause of action, the memorandum of points and authorities fails to address any arguments on the ground of uncertainty. Instead, Defendants argue the accounting cause of action fails to state a valid claim which is an argument for general demurrer. Accordingly, the special demurrer for uncertainty to the fifth cause of action is OVERRULED.

Failure to State a Claim

The fifth cause of action is a claim for accounting. “An accounting is an equitable proceeding which is proper where there is an unliquidated and unascertained amount owing that cannot be determined without an examination of the debits and credits on the books to determine what is due and owing.” (Prakashpalan v. Engstrom, Lipscomb and Lack (2014) 223 Cal.App.4th 1105, 1136.) “A cause of action for an accounting requires a showing that a relationship exists between the plaintiff and defendant that requires an accounting, and that some balance is due the plaintiff that can only be ascertained by an accounting.” (Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179; St. James Church of Christ Holiness v. Super. Ct. (1955) 135 Cal.App.2d 352, 359 [to state a cause of action for an accounting, only the simplest pleading is required: (1) the fiduciary relationship or other circumstances appropriate to the remedy; and (2) a balance due from the defendant to the plaintiff that can only be ascertained by an accounting].)

Defendants argue Plaintiffs fail to allege sufficient facts to state a claim for accounting and instead include only legal and factual conclusions. Here, Plaintiffs adequately allege they had fiduciary relationships with AV III and AMC because they allege they are limited partners of AV III and AMC is the general partner of AV III. (See TAC at ¶¶ 2, 51; see also Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 41l, 424 [“Partnership is a fiduciary relationship, and partners are held to the standards and duties of a trustee in their dealings with each other. [Citation] In proceedings connected with the conduct of a partnership, partners are bound to act in the highest good faith to their copartners and may not obtain any advantage over them in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.”].) These allegations are incorporated by reference into the fifth cause of action for accounting. (See TAC at ¶ 59.) As a result of Defendants’ conflicted decisions and breaches of fiduciary duty, Plaintiffs claim AV III and its limited partners have been damaged in amounts that are not certain. (Id. at ¶ 61.) Plaintiffs further allege that the balance due, as a result of Defendants’ conduct, can only be ascertained by an accounting. (Id. at ¶ 62.) While Defendants may disagree with these allegations, they are sufficient to state a claim for accounting and must be accepted as true on demurrer.

Accordingly, the demurrer to the fifth cause of action on the ground that it fails to state a claim is OVERRULED.

Motion to Strike Portions of the TAC

Defendants move to strike certain portions of the TAC in accordance with Code of Civil Procedure sections 435 and 436.

Legal Standard

A court may strike out any irrelevant, false, or improper matter asserted in a pleading. (Code Civ. Proc., § 436, subd. (a).) A court may also strike out all or any part of a pleading not filed in conformity with the laws of the State of California. (Code Civ. Proc., § 436, subd. (b).) The grounds for a motion to strike shall appear on the face of the challenged pleading or from any matter of which the court is required to take judicial notice. (Code Civ. Proc., § 437, subd. (a).)

Analysis

“A notice of motion to strike a portion of a pleading must quote in full the portions sought to be stricken except where the motion is to strike an entire paragraph, cause of action, count or defense.” (Cal. Rules of Court, rule 3.1322.) Defendants’ notice of motion does not identify any allegations, paragraphs, or causes of action to be stricken in the TAC. Instead, Defendants argue such paragraphs are set forth in their supporting memorandum of points and authorities which seek to strike paragraphs 16, 19, 20, 27, 28A-D, 30, 31, 33-35, 36, 44, 45, 49, and 53. (See Memo of P’s & A’s at p. 1:5-6.)

As a preliminary matter, Defendants fail to address why paragraphs 16, 27, 30, 35, and 44 should be stricken from the TAC. Also, it is not clear at times if Defendants intend to strike an entire paragraph or only a portion thereof. Again, to the extent that it is only a portion, it needs to be stated verbatim in the notice of motion in compliance with the rules of court. Furthermore, the majority of arguments raised by Defendants are incoherent and confusing thus making it difficult to determine whether any paragraphs or allegations included within should be stricken. To the extent that Defendants are relying on declarations submitted in their request for judicial notice, such arguments lack merit as the Court has declined to take judicial notice of those declarations. Finally, in reviewing the operative pleading, the paragraphs at issue appear to be sufficiently relevant to support claims alleged in the TAC. (See Triodyne, Inc. v. Super. Ct. for Los Angeles County (1966) 240 Cal.App.2d 536, 542 [“Where a motion to strike is so broad as to include relevant matters, the motion should be denied in its entirety.”].)

Based on the foregoing, the motion to strike portions of the TAC is DENIED.

The Court will prepare the Order.