Corporate Recovery Associates LLC v. Kevin Ruelas, et al.
Case No: 18CV05060
Hearing Date: Tue Jun 11, 2019 9:30

Nature of Proceedings: Demurrer to First Amended Complaint

Demurrer of Defendant Kevin Ruelas to First Amended Complaint

ATTORNEYS:

For Plaintiff Corporate Recovery Associates, LLC, as trustee for the Liquidating Trust of Channel Technologies Group, LLC: Edward Jason Dennis, Samuel B. Hardy, Christian A. Orozco, Lynn Pinker Cox & Hurst, LLP

For Defendant Kevin Ruelas: Eugene J. Egan, Zubin Farinpour, Manning & Kass Ellrod, Ramirez, Trester LLP

For Defendants Charles Miller, Pierre Chao, John Mei, David Oldham, and Christopher Holmes: Howard J. Steinberg, Greenberg Taurig, LLP

For Defendant Lynn Chen: Stephen F. McAndrew, Kaufman McAndrew LLP

For Defendant Mark Shaw: Timothy J. Trager, Meghan K. Woodsome, Reicker, Pfau, Pyle & McRoy LLP

RULING: For the reasons set forth herein, the general and special demurrers of defendant Kevin Ruelas to the first amended complaint are overruled in their entirety. Ruelas shall file and serve his answer to the first amended complaint on or before June 26, 2019.

Background:

As alleged in the first amended complaint (FAC):

Channel Technologies Group, LLC (CTG) designed and manufactured piezoelectric ceramics, transducers, sonar equipment, and other related products. (FAC, ¶ 14.)

In December 2011, Blue Wolf Capital Partners, through Blue Wolf Capital Fund and agents Adam Blumenthal, Haranjeet Narulla, and Charles Miller, formed BW Piezo for the sole purpose of acquiring CTG from Alta Properties, Inc. (collectively Blue Wolf entities). (FAC, ¶ 15.) After the acquisition, on December 28, 2011, BW Piezo and CTG executed the Operating Agreement of CTG, naming BW Piezo as the sole member of CTG. (Ibid.) Pursuant to the Operating Agreement, BW Piezo maintained the rights to remove or replace CTG’s manager and dissolve CTG in its sole discretion. (Ibid.)

The Operating Agreement named defendants Kevin Ruelas and Pierre Chao as managers of CTG. (FAC, ¶ 16.) As managers, Ruelas and Chao were vested with the full, exclusive, and complete discretion to manage and control the affairs of CTG. (Ibid.) Additionally, the Operating Agreement required that the entirety of CTG’s assets and company funds be held in the name of CTG. (Ibid.) Ruelas was named President, Secretary, and Treasurer of CTG. (Ibid.)

Ruelas and other CTG managers identified the corporate opportunity of acquiring H.C. Materials, Inc. (HC Materials), a crystal manufacturer with a focus on medical ultrasound imaging, ocean mining, and ocean exploration systems, at least as far back as February 2012. (FAC, ¶ 19.) In May 2012, CTG managers, including Ruelas, and Blue Wolf Capital Partners extensively discussed the acquisition of HC Materials. (Ibid.) The original term sheet and loan documents listed CTG as the acquirer. (Ibid.) Ruelas and the other managers, however, allowed those documents to be changed to identify Blue Wolf Piezo as the acquirer, failing to protect CTG from Blue Wolf Piezo and the Blue Wolf entities usurping the corporate opportunity of CTG. (Ibid.) The loan documents mortgaged all of the assets of CTG for a purported acquisition by Blue Wolf Piezo and no benefit to CTG. (Ibid.)

While the closing of the acquisition of HC Materials occurred after Ruelas left CTG, during Ruelas’s tenure as manager, Ruelas permitted or directed CTG to pay for services and liabilities for the benefit of entities other than CTG. (FAC, ¶ 20.) For instance, the law firm Holland & Knight LLP worked on and billed CTG for activities such as “Possible Acquisition of HCMC,” “Refinancing Portion of Debt Facility,” and “Review Grant Thornton engagement agreement.” (Ibid.) This work done by Holland & Knight LLP and Grant Thornton LLP was done for the benefit of entities other than CTG before Ruelas’ departure. (Ibid.) At the time, Ruelas had a pecuniary interest in Blue Wolf Piezo, through “mirror” units held in Piezo LLC so this usurpation of a corporate opportunity and permitted transfers to benefit entities other than CTG were self-dealing transactions. (FAC, ¶ 21)

In June 2013, BW Piezo replaced Ruelas as a manager and officer with Ralph L. Phillips, hiring Phillips as President and Chief Executive Officer of CTG. (FAC, ¶ 22.)

In October 2013, the Blue Wolf entities used the loan proceeds and CTG’s cash to acquire HC Material’s assets for $48 million. (FAC, ¶ 24.) The acquisition was structured so that HC Material’s assets were not owned by CTG but by a new entity, CTG Advanced Materials. (FAC, ¶ 25.) CTG Advanced Materials was a sister company to CTG under the ownership of BW Piezo instead of as a wholly-owned subsidiary of CTG. (Ibid.) Notwithstanding the segregation of assets into these entities, CTG Advanced Materials was run as a division of CTG, and the companies were operated as a single enterprise. (FAC, ¶ 26.)

In March 2016, BW Piezo and CTG’s management sold CTG Advanced Materials for approximately $73 million. (FAC, ¶ 31.) The sale was structured so that the proceeds of the sale went to the Blue Wolf entities and not to CTG. (Ibid.)

In October 2016, CTG filed for bankruptcy in October 2016. (FAC, ¶ 33.) The bankruptcy court confirmed a Chapter 11 Liquidating Plan that resulted in plaintiff Corporate Recovery Associates, LLC, (Trustee) serving as the trustee for the liquidating trust of CTG. (FAC, ¶¶ 2, 34.) After Trustee was appointed, Trustee discovered the incidents that give rise to this complaint. (FAC, ¶ 34.)

On October 15, 2018, Trustee filed its original complaint in this action asserting causes of action for breach of fiduciary duty and negligence against defendants Ruelas, Chao, John Mei, Lynn Chen, Christopher Holmes, Mark Shaw, Charles Miller, and David Oldham.

On April 2, 2019, the Court ruled on the demurrers of each of the defendants, overruling the demurrers as to each of the defendants other than Ruelas. The Court noted that the incidents alleged in the complaint to give rise to the causes of action asserted by the other defendant occurred after Ruelas was alleged to have left CTG. As a result, the original complaint failed to state any cause of action against Ruelas and the Court sustained the demurrer of Ruelas with leave to amend.

On April 12, 2019, Trustee filed its FAC again asserting causes of action for breach of fiduciary duty and negligence.

Ruelas now demurs to the FAC, asserting that the FAC fails to state these causes of action against him and that the FAC is uncertain.

Trustee opposes the demurrer.

Analysis:

“ ‘The rules by which the sufficiency of a complaint is tested against a general demurrer are well settled. We not only treat the demurrer as admitting all material facts properly pleaded, but also ‘give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.’ ” (Zhang v. Superior Court (2013) 57 Cal.4th 364, 370, internal quotation marks and citations omitted.)

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.)

Trustee’s first cause of action is for breach of fiduciary duty. “In order to plead a cause of action for breach of fiduciary duty, a plaintiff must show the existence of a fiduciary relationship, its breach, and damage caused by the breach.” (Apollo Capital Fund LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 244.)

Ruelas argues that Trustee has not adequately alleged causation.

Trustee has alleged damages proximately caused by the alleged breach of fiduciary duty. As identified above, Trustee has alleged, among other things, that Ruelas caused CTG to pay for legal services for the benefit of entities other than CTG. (FAC, ¶ 20.) As alleged, this is a diversion of CTG’s assets in violation of Ruelas’s fiduciary duties to CTG and the damages caused by this diversion are sufficient to satisfy the element of the “damage caused by the breach.” To the extent that Ruelas asserts that the FAC fails to allege causation other than in the context of whether a cause of action is stated, that argument cannot be reached by demurrer: “[A] demurrer cannot rightfully be sustained to part of a cause of action or to a particular type of damage or remedy.” (Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1047.)

Ruelas’s demurrer to the first cause of action will be overruled.

Trustee’s second cause of action is for negligence. ““[T]he well-known elements of [a] negligence cause of action [are] duty, breach of duty, proximate cause and damages.” (Artiglio v. Corning Inc. (1998) 18 Cal.4th 604, 614.)

Pleading negligence is straightforward and does not require specificity: “No strict requirements exist for the form of such allegations. The legal conclusion that a ‘duty’ exists is not necessary. … The negligence element may be generally pleaded; the breach of duty of care may be alleged by stating the act was negligently done. [Citations.] … Proximate cause, as here, may also be simply set forth.” (Pultz v. Holgerson (1986) 184 Cal.App.3d 1110, 1117, fns. omitted.)

As with the first cause of action, Trustee has alleged a specific incidence of damage caused by the action of Ruelas. The element of causation and damages is sufficiently pleaded. Accordingly, the demurrer to the second cause of action will be overruled.