2018-00233774-CU-BC

Baystone Holdings, Inc. vs. Brian Galletta

Nature of Proceeding: Motion for Summary Judgment and/or Adjudication

Filed By: Turner, Marcus L.

Defendant Brian Galletta’s motion for summary judgment, or in the alternative summary adjudication, is denied.

In this action, Plaintiffs Baystone Holdings, Inc. and Metro Health Systems allege causes of action against Defendant including for breach of contract, conversion, trespass to chattels. Plaintiffs allege that Defendant agreed to sell a 55% interest in Metro and its permitted cannabis retail store in exchange for $800,000. Plaintiffs allege that the parties also entered a Continuity Agreement and that Baystone would receive an equal number of seats on Metro’s board. Plaintiffs allege that Defendant has failed to comply with the parties’ partnership and has been attempting to exclude Baystone from Metro’s operation.

The Court considered Plaintiffs’ opposition despite the fact that it was served by email.

Defendant was able to file a complete reply.

Any party may move for summary judgment in any action or proceeding if the party contends that (1) the action or proceeding has no merit or (2) there is no defense to the action or proceeding. CCP 437c(a). A cause of action has no merit if one or more of the elements of the cause of action cannot be separately established, even if that element is separately pleaded, or a defendant establishes an affirmative defense to that cause of action. CCP §437c(o).

The Court must grant a motion for summary judgment if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. (CCP §437c(c); Mann v. Cracchiolo (1985) 38 Cal.3d 18, 35). Section 437c(c) imposes an affirmative duty on a Court to grant summary judgment motion in appropriate case. (Preach v. Moister Rainbow (1993) 12 Cal. App.4th 1441, 1450). The Court must decide if a triable issue of fact exists; if none does, and the sole remaining issue is one of law, the Court has a duty to determine it. ( Pittelman v. Pearce (1992) 6 Cal. App. 4th 1436, 1441; see also Seibert Sec. Servs., Inc. v. Superior Court (1993) 18 Cal. App. 4th 394, 404).

Summary judgment is properly granted only if the moving party’s evidence establishes that there is no issue of material fact to be tried. ( Huynh v. Ingersoll-Rand (1993) 16 Cal. App. 4th 825, 830). In evaluating a motion for summary judgment or summary adjudication the court engages in a three step process.The Court first identifies the issues framed by the pleadings. The pleadings define the scope of the issues on a motion for summary judgment or summary adjudication. (FPI Dev. Inc. v. Nakashima (1991) 231 Cal. App. 3d 367, 381-382). Because a motion for summary judgment or summary adjudication is limited to the issues raised by the pleadings (see Lewis v. Chevron (2004) 119 Cal. App. 4th 690, 694), all evidence submitted in support of or in opposition to the motion must be addressed to the claims and defenses raised in the pleadings. An issue that is “within the general area of issues framed by the pleadings” is properly before the court on a summary judgment or summary adjudication motion. ( Lennar Northeast Partners v. Buice (1996) 49 Cal. App. 4th 1576, 1582-1583.) A party may not raise new issues in a declaration submitted in connection with a summary judgment motion. Lewinter v Genmar Indus., Inc. (1994) 26 Cal. App. 4th 1214, 1223.

Next, the Court is required to determine whether the moving party has met its burden. A plaintiff moving for summary judgment meets its burden of showing that there is no defense to its cause of action by proving each element of its cause of action. CCP §437c(p)(1). It is no longer required also to disprove any defense asserted by the defendant. Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2008) ¶ 10:235, p. 10-89 (rev. # 1, 2006) [when plaintiff moves for summary judgment “[u]nlike former law, it is not plaintiff’s initial burden to disprove affirmative defenses and cross-complaints asserted by defendant”].) If the plaintiff does so, the burden shifts to the defendant to show that a triable issue of fact exists as to that cause of action or defense. In doing so, the defendant cannot rely on the mere allegations or denial of its pleadings, “but, instead, shall set forth the specific facts showing that a triable issue of material fact exists … .” (Code Civ. Proc., § 437c, subd. (p)(1).) A triable issue of material fact exists “if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof. [Fn. omitted.]” (Aguilar v. Atlantic Richfield Co., (2001) 25 Cal. 4th 826, 850.)

A defendant (or cross-defendant) moving for summary judgment meets its burden of showing that the plaintiff’s (or cross-complainant’s) cause of action has no merit by showing that one or more elements of the cause of action cannot be established or that there is a complete defense to the cause of action. CCP §437c(p) (2); Id. A defendant is not required to conclusively negate one or more elements of the plaintiffs cause of action; (Saelzer v Advance, Group 400 (2001) 25 Cal 4th 763, 780-781). Rather, to meet its burden, the defendant is only required to show that the plaintiff cannot prove an element of its cause of action, i.e., that the plaintiff does not possess and cannot reasonably obtain evidence necessary to show this element. (Aguilar v Atlantic Richfield Co., supra, 25 Cal 4th at 853-855).

Finally, the Court must determine whether the opposing party has met its burden. Once the moving party has met its burden, the burden shifts to the opposing party to show that a material factual issue exists as to the cause of action alleged or a defense

to it. CCP 437c(p). (see generally Bush v. Parents Without Partners (1993) 17 Cal. App. 4th 322, 326-327; Planned Parenthood v. City of Santa Maria (1993) 16 Cal. App. 4th 685, 690.) When the defendant has met its burden of production, the burden shifts to the plaintiff to show that a triable issue of one or more material facts exists as to the plaintiff’ s cause of action or a defense to it. (CCP §437c(p) (2); Bowen v. Ziasun Technols., Inc.(2004) 116 Cal App 4th 777, 780.) In meeting this burden, a plaintiff may not rely on the mere allegations or denial of its pleadings to show that a triable issue of material fact exists but, instead, must set forth specific facts showing that a triable issue of material fact exists as to that cause of action or a defense to it. (CCP §437c(p)(2); Aguilar v Atlantic Richfield, supra, 25 Cal. 4th at 849). The plaintiff or cross-complainant cannot simply point to an absence of evidence to avoid summary judgment. Borders Online LLC v State Bd. of Equalization (2005) 129 Cal. App. 4th 1179, 1192. The plaintiff must present concrete evidence of causation and damages. Wiz Tech, Inc. v Coopers & Lybrand (2003) 106 Cal. App. 4th 1, 14-15)

Defendant’s separate statement includes the following. Metro Health Systems (“Metro”) is a California nonprofit mutual benefit corporation which has members but no share or stock holders. Metro’s Amended and Restated Articles of Incorporation provide that “no part of the net earnings of (Metro) shall inure to the benefit of any member, private shareholder, or individual.” Metro was licensed by the City of Sacramento to operate a cannabis retail store.

Plaintiffs’ verified complaint alleges that Plaintiff Baystone entered into a “Continuity Agreement” with Defendant for the purpose of purchasing Defendant’s interest in Metro for $800,000 and providing Baystone an equal number of seats on Metro’s Board of Directors. Defendant Galletta was and is a member of Metro and its CEO. Metro was not and has not been in the process of dissolving. While the Continuity Agreement indicated that Baystone was to pay Defendant the $800,000, Defendant was ultimately paid by Metro. Baystone then caused Metro to reimburse the $800,000 to Baystone.

Metro has never held a meeting as required by its Bylaws where Baystone or any of its shareholders were appointed as directors of Metro. Baystone operated Metro’s retail cannabis store between November 5, 2015 and May 14, 2018. When Defendant learned in May 2018 that Baystone had not met its obligations under the Continuity Agreement, as Metro’s CEO and founding member, he causes Metro to replace Metro’s existing personnel, security staff and changed the locks.

Illegality

Defendant first moves for summary judgment on the basis that the Continuity Agreement is illegal and unenforceable as a matter of law. Defendant’s evidence consists solely of his brief six paragraph declaration attaching copies of Metro’s Bylaws and Articles of Incorporation and references to Plaintiffs’ verified complaint. Defendant does not include a copy of the Continuity Agreement with his evidence.

“Where a contract has but a single object, and such object is unlawful, whether in whole or in part,…the entire contract is void.” (Civil Code § 1598.) “An illegal contract is void; it cannot be ratified by any subsequent act, ‘and no person can be estopped to deny its validity.’” (Downey Venture v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 511 [citations omitted].)

Defendant argues that the Continuity Agreement is illegal because Metro is a nonprofit mutual benefit corporation and pursuant to Corporations Code § 7411 this type of corporation may not make a distribution except on dissolution. Directors of such corporations are liable for approving distribution of assets or income of the corporation other than in connection with a dissolution. (Corp. Code § 7236(a)(1).) In addition, “[a] ny person who with knowledge of facts indicating the impropriety thereof receives any distribution…prohibited by this chapter is liable to the corporation for the amount so received.” (Corp. Code § 7420(a).)

Defendant reasons that the Continuity Agreement is illegal under the above Corporations Code sections because the object of the Continuity Agreement was for Baystone to purchase a portion of Defendant’s interest in Metro for $800,000 which “by definition, includes the transfer of the right to receive a portion of the net proceeds from Metro’s retail cannabis store.” (Mot. 6:8-10.) Defendant argues that the provisions for control of Metro was not the objective of the transaction but only the means to acquire Metro’s revenue stream. Defendant reasons that this is demonstrated by a lack of a provision in the Continuity Agreement for any renumeration to be paid Baystone, for example, a management fee. This is the sum and substance of the argument and there is little in the way of any analysis.

The Court finds that Defendant has failed to carry his initial burden to demonstrate that he is entitled to judgment as a matter of law on the basis that the Continuity Agreement is illegal. At the outset, while Defendant relies on Corporations Code § 7411 to argue that the Continuity Agreement is illegal, that section does not provide for the unenforceability of a contract that involves a distribution in a non-dissolution circumstance. Rather where such a distribution is made, §§ 7236 and 7420 provide specific remedies. § 7236 provides for an action to recover the amount of the claimed illegal distribution. (Corp. Code § 7236(d).) “In some cases, on the other hand, the statute making the conduct illegal, in providing for a fine or administrative discipline excludes by implication the additional penalty involved in holding the illegal contract unenforceable; or effective deterrence is best realized by enforcing the plaintiff’s claim rather than leaving the defendant in possession of the benefit; or the forfeiture resulting from unenforceability is disproportionately harsh considering the nature of the illegality. In each such case, how the aims of policy can best be achieved depends on the kind of illegality and the particular facts involved.” (Keller v. Thornton Canning Co. (1967) 66 Cal.2d 963, 966.) Defendant has failed to provide any authority demonstrating that a contract involving a distribution in violation of Corporations Code § 7411 is unenforceable as a matter of law.

However, even assuming that a contract that provided for a distribution in violation of Corporations Code § 7411 was unenforceable due to illegality, Defendant has failed to demonstrate that the Continuity Agreement violated that section. Again, Defendant did not even provide a copy of the Continuity Agreement with his moving papers and thus this Court cannot determine simply based on his arguments that the agreement provided for a distribution in violation of Corporations Code § 7411. Moreover, Defendant’s declaration does not even discuss the Continuity Agreement. (Galetta Decl.)

Defendant’s references to Plaintiffs’ verified complaint do not assist him in meeting his burden to show that the Continuity Agreement is illegal. First, the Court must note that the Continuity Agreement is not attached to the complaint. To that end Defendant points to the fact that in the verified complaint Plaintiffs seek damages in the form of

the “loss of revenue wrongfully appropriated by (Galletta) in violation of the contract…” (Comp. ¶ 27.) However, that isolated allegation, which is ambiguous at best does not show that the Continuity Agreement involved a distribution. One of the Plaintiffs here is Metro, and Plaintiff Baystone alleges it holds the majority of the seats on Metro’s Board. An allegation that Defendant, a member of Metro, allegedly misappropriated revenue from Metro does not show that the purpose of the Continuity Agreement was for Baystone to obtain control over Metro’s revenue stream. Defendant also stresses that the verified complaint makes clear that Baystone was purchasing an interest in Metro in violation of the Corporations Code sections. But, the Corporations Code sections relied upon simply state that a non-profit mutual benefit corporation may not make a distribution except on dissolution. The Corporations Code defines a distribution as “the distribution of any gains, profits or dividends to any member as such.” (Corp. Code § 5049.) Distribution is not defined to include a sale of an interest in a corporation. There are no allegations in the verified complaint that definitively reveal the illegality of the Continuity Agreement on the basis that it violated Corporations Code § 7411.

Defendant also argues that the Continuity Agreement violated Metro’s bylaws Article 4.8 which provides that “no membership or right arising from the membership shall be transferred.” (Galetta Decl. Exh. 1 at p. 3.) Defendant argues that Baystone was essentially buying his membership interest and refers to various allegations in the complaint. Again, the Continuity Agreement was not provided by Defendant, and the allegations in the complaint, while referring to Baystone purchasing an interest in Metro, do not contain specific allegations that show that Galetta was transferring his specific membership rights to Baystone in violation of Metro’s bylaws. Indeed, the complaint shows he remained a member even after Baystone’s acquisition of an interest in Metro. (Comp. ¶ 19.) Moreover, even assuming the Continuity Agreement violated Metro’s Bylaws, there is no authority cited to support the claim that such a violation rendered the agreement illegal and unenforceable as a matter of law. Indeed, “unlawful” is defined as “1. Contrary to an express provision of law; [¶] 2. Contrary to the policy of express law though not expressly prohibited; or, [¶] 3. Otherwise contrary to good morals.” (Civil Code § 1667.)

At best, Defendant is arguing that the Continuity Agreement was structured in such a manner as to conceal a distribution. But in doing so he relies on the absence of a compensation term from the Continuity Agreement which again, he did not even present in his motion, isolated allegations in the complaint and his declaration that Metro was not in the process of dissolving. None of this shows as a matter of law that the Continuity Agreement was illegal and unenforceable. Again, the Corporations Code defines a distribution as “the distribution of any gains, profits or dividends to any member as such.” (Corp. Code § 5049.) None of the evidence presented by Defendant, nor any allegation in the complaint absolutely demonstrates that a distribution was made pursuant to the Continuity Agreement.

It must be noted that “[c]ourts in California have, depending on the facts, carved out exceptions to the statutory and judicial language that illegal contracts are void and unenforceable.” (Kashani v. Tsann Kuen China Enterprise Co. (2004) 118 Cal.App.4th 531, 541-542.) “In some cases,…effective deterrence is best realized by enforcing the plaintiff’s claim rather than leaving the defendant in possession of the benefit; or the forfeiture resulting from unenforceability is disproportionally harsh considering the nature of the illegality. In each case, how the aims of policy can best be achieved depends on the kind of illegality and the particular facts involved. (Tri-Q, Inc. v. Sta-Hi

Corp. (1965) 63 Cal.2d 199, 220.) Here, Defendant seeks summary judgment on Plaintiff’s entire complaint on the basis that the Continuity Agreement but has failed to present not only the agreement itself, but failed to present the specific facts of the transaction which would allow the Court the ability to properly evaluate the illegality defense.

The Court concludes that Defendant failed to meet his burden as a matter of law that there are no triable issues of material fact as to whether the Continuity Agreement is illegal and thus unenforceable. As a result, the motion on this basis is denied and the burden never shifted to Plaintiffs to demonstrate the existence of a triable issue of material fact.

In any event, even if Defendant met his burden, Plaintiffs have met their burden to demonstrate the existence of a triable issue of material fact. First, Plaintiffs have offered the Continuity Agreement as evidence. The plain language of the Continuity Agreement, indicated that Defendant currently had operational control of Metro and that Baystone wanted to contribute to the effort of Defendant continuing Metro’s work financially. The agreement indicated that Metro had certain debts and obligations which Baystone was prepared to pay. (Rodriguez Decl. Exh. D.) The Continuity Agreement states that Baystone would pay Defendant $800,000 and would pay Metro’s debts and liabilities and assume responsibilities for Metro’s lease agreements. (Id.) It provided that after closing, Defendant and Baystone would have equal voting power and control an equal number of seats on Metro’s board of directors. (Id.) After Baystone paid the entire balance, it would be entitled to on additional seat on the board. (Id.) There is nothing in the Continuity Agreement indicating that Baystone was obtaining control of Metro’s revenue stream or that a distribution was being made. Rather it provides that Baystone would become board members on Metro’s board and that Defendant would continue to be a member in exchange for a specific sum. Nothing shows that this agreement involved a distribution of “gains, profits, or dividends to any member.” (Corp. Code § 5049.)

Further, Defendant himself testified at his deposition that he understood that the $800,000 was paid for the purpose of eliminating Metro’s debt. (Goodrow Decl. Exh. D and E [Galetta Depo Def.’s Depo. 31:24-32:3; 33:6-11; 33:22-34:1; 35:7-24; 36:11-22; 108:8-11; 189:4-10l 194:18-24.) Plaintiffs’ understanding was consistent with Defendant’s. (Rodriguez Decl. ¶¶ 4, 9, 11, 18; Darrow Decl. ¶¶ 9, 11.)

“It is a familiar rule that where a contract does not provide for an illegal mode of performance, but may be lawfully performed, it will be assumed that the parties contracted for a lawful performance.” (West Covina Enterprises, Inc. v. Chalmers (1958) 49 Cal.2d 754, 759.) Defendant has essentially argued that illegality in the Continuity Agreement is inferred from the lack of a compensation term. But as set forth above, there is no illegality on the face of the agreement. “There was, of course, nothing illegal per se in the agreement…for that agreement could have been carried out in an entirely legal manner…As a general rule, if a contract can be performed legally, a court will presume that the parties intended a lawful mode of performance.” ( Redke v. Silvertrust (1971) 6 Cal.3d 94, 102.)

In addition, as set forth above, there are numerous exceptions to the general rule of unenforceability of contracts. (Kashani, supra, 118 Cal.App.4th at 541.) To that end “[c]ivil Code sections 1598 and 1608 are not always applied literally; in many cases they have simply been overlooked or ignored.” (R.M. Sherman Co. v. W.R.

Thomason, Inc. (1987) 191 Cal.App.3d 559, 564.) For example, an illegal contract may be enforced where the defendant would be unjustly enriched or the plaintiff would be subject to a harsh penalty. (Asdourian v. Araj (1985) 38 Cal.3d 276, 292-294.) Further a Court will consider whether the public cannot be protected because the law has already been violated and the unlawful act is completed and not ongoing, no serious moral turpitude was involved, the defendant is more at fault, and the defendant would otherwise be unjustly enriched. (Tri-Q, Inc., supra, 63 Cal.2d at 218-220.) Here, Plaintiffs present evidence that Defendant made all of Metro’s financial decisions and received $800,000 and later an additional $100,000 to pay corporate debt for which he was personally liable. Further after execution of the Continuity Agreement, Baystone members worked towards managing Metro’s operations from late 2015 to May 2018. (Rodriguez Decl. ¶ 11; Darrow Decl. ¶ 11.) During that time, Baystone paid Defendant approximately $30,000 per month for eighteen successive months. These sums were derived from Baystone member salaries for operating Metro. (Rodriguez Decl. ¶ 14; Darrow Decl. ¶ 14.) Baystone had the ability to set compensation as a member of Metro’s board. (Galletta Decl. Exh. 1 § 6.1(2)(g), p. 9 [Bylaws-providing that the Board has the power to set its compensation].) During this period of time, Defendant never complained that the Continuity Agreement was unlawful and he regularly visited Metro to collect payments. (Rodriguez Decl. ¶¶ 11, 17, 18, and 21; Darrow Decl. ¶¶ 12, 14, 15, and 21.) Plaintiffs’ evidence shows that it was not until the final payment was made under the Continuity Agreement that Defendant took steps to exclude Baystone from Metro’s premises. (Rodriguez Decl.¶¶ 18-21; Darrow Decl. ¶ 23.) Under this evidence there are triable issues of material fact as to whether even if the Continuity Agreement was illegal, that the agreement would nevertheless be enforced because for example, Plaintiffs did not act with moral turpitude, any unlawful conduct is completed, and Defendant would be unjustly enriched and Plaintiffs could suffer a hard forfeiture.

Further, Defendant’s material fact no. 8 states that Metro never held any board meeting whereby Baystone or its shareholders were appointed as Metro’s directors. Plaintiffs present evidence that once Baystone assumed Metro’s operational duties, they met every Thursday for meeting of Metro’s board of directors. (Rodriguez Decl. ¶ 11.) Mr. Rodriguez declares that Defendant attended many of the initial board meetings. (Id.) Mr. Rodriguez also declared that Defendant asked Baystone members to elect a representative to serve as Metro’s Secretary which they did. (Id. ¶ 12.) Mr. Rodriguez or Ms. Darrow notified Defendant of the weekly board meetings and he never objected to them holding the meetings. (Id. ¶ 17; Darrow Decl. ¶ 12.) There is also evidence that Defendant specifically requested that Baystone members elect someone from Baytsone at a board meeting in 2016. (Darrow Decl. ¶ 13.) Further, Defendant himself never noticed Mr. Rodriguez or Ms. Darrow regarding any different board meeting. (Rodriguez Decl. ¶ 17; Darrow Decl. ¶ 12.) In addition, Plaintiffs present evidence that Defendant testified at his deposition that he informed board members of the Continuity Agreement and there was no objection. (Goodrow Decl. Exh. E [Galetta Depo Galleta Depo. 193:5-14; 194:4-10.) There is a triable issue of material fact as to whether Metro held any board meeting whereby Baystone representatives were appointed as board members.

In short, the motion for summary judgment on the basis that the Continuity Agreement is illegal is denied. Defendant failed to meet his initial burden on this issue and in any event there are numerous triable issues of material fact.

Given the above, the Court need not address Plaintiffs’ numerous other arguments

raised in opposition which were not specifically addressed above.

Consideration

Defendant also moves for summary judgment on the basis that the Continuity Agreement fails for a lack of consideration. To this end, he argues that the Continuity Agreement required Baystone to pay Defendant $800,000 but that the $800,00 was actually paid by Metro as seen from the allegations in the complaint.

Here, the Court finds that Defendant failed to meet his initial burden on this issue. To that end, Defendant simply refers to Plaintiffs’ complaint which Defendant argues shows that he was paid by Metro not Baystone. The subject paragraph indicates that Defendant would receive cash payments from Metro’s proceeds and that Baystone repaid itself from Metro’s cash proceeds after Defendant was fully paid. (Comp. ¶ 13.) That paragraph (and the complaint for that matter) is not entirely clear, but the complaint also alleged that Plaintiffs specifically paid Defendant a down payment of $10,000 and a subsequent payment of $250,000 directly. (Id. ¶ 16.) The allegations of the complaint do not, as Defendant argues, demonstrate a total failure of consideration.

In any event, there are triable issues of material fact on this issue. To that end, Plaintiffs’ evidence shows that Baystone paid Defendant $10,000 and then an additional $250,000 at the inception of the Continuity Agreement. (Goodrow Decl. Exh. D [Galetta Depo. 32:11-14, 42:3-9, 50:1-19; 51:1-23]; Darrow Decl. ¶¶ 6, 17; Rodriguez Decl. ¶¶ 2, 8, 13, and 19.) The evidence also shows that Defendant was paid the remaining balance from salary that Baystone members earned for operating Metro. (Rodriguez Decl. ¶ 14; Darrow Decl. ¶ 14.) The fact that Baystone may have ultimately been reimbursed from Metro does not show a failure of consideration. There are numerous triable issues of material fact as to the failure of consideration issue.

Defendant’s motion for summary judgment is denied in its entirety.

Defendant’s objections are overruled. The Court notes that while Defendant objected to the Darrow Declaration on the basis that it was not signed, the copy filed with the Court was signed. (ROA 57 at p. 130.)

Plaintiffs’ counsel is directed to prepare an order for the Court’s signature pursuant to CCP § 437c(g) and CRC Rule 3.1312.