Case Number: BC316696    Hearing Date: July 10, 2014    Dept: 34

Moving Party: Plaintiff Blue Water Sunset LLC (“plaintiff”)

Resp. Party: Defendant Philip Markowitz (“Markowitz” or “defendant”)

Plaintiff’s motion for summary adjudication is DENIED in its entirety.

Plaintiff’s Request for Judicial Notice is DENIED as unnecessary. It is not necessary to request judicial notice for pleadings that are part of the case file.

PRELIMINARY COMMENTS:

One hundred years ago this month, the great European powers started World War I; each side expected to achieve a resounding victory after a short battle. When the war ended four years later, some 50 million people were dead and virtually all of the great colonial empires were destroyed.

Ten years ago, the parties commenced this action. This case currently spans 59 volumes of files. We are now adjudicating plaintiff’s Fifth Amended Complaint; Markowitz’s Fourth Amended Cross-Complaint was previously dismissed. At least five judicial officers – not counting the Court of Appeal – have issued rulings in this matter. This is the fourth motion for summary adjudication that has been filed by plaintiffs; it appears that regardless of the result of the upcoming trial, this case will be appealed.

The Court believes it would behoove all parties to learn from the errors made by the Great Powers on the eve of World War I, and attempt to resolve this case before the judicial battlefield is strewn with further casualties.

BACKGROUND:

Plaintiff commenced this action on June 4, 2004, against defendants asserting eleven causes of action. On April 14, 2009, plaintiff filed a fifth amended complaint (“5AC”) against defendants for: (1) judicial dissolution of First View LLC; (2) judicial dissolution of Rail Prop LLC; (3) appointment of receiver for Rail Prop LLC; (4) judicial dissolution of Markowitz Investment Group LLC; (5) rescission of addendum to M.I.G. operating agreement; (6) fraud; (7) breach of contract; (8) breach of fiduciary duty; (9) refusal to make distribution; (10) accounting; and (11) declaratory relief.

Plaintiff was and is a 50% member of defendants First View LLC (“FV”), Rail Prop LLC (“RP”) and Markowitz Investment Group LLC (“MIG”); and defendant Philip Markowitz claims he was and is the other 50% member, which plaintiff disputes. (5AC ¶ 9.) Defendant caused certain parcels of property belonging to RP to be titled under Four Star General Properties, LLC (“Four Star”), a limited liability company of which defendant Markowitz is the sole member and manager. (Id., ¶¶ 10-11.) Plaintiff alleges that Four Star should be declared the alter ego of RP and the parcels should be traceable to RB, due to admissions of the language inserted by Markowitz in the deeds. (Id., ¶ 11.) Plaintiff also alleges that Four Star is the alter ego of Markowitz. (Id., ¶ 12.)

Plaintiff alleges that FV and Markowitz have failed to keep accurate books and records and have failed to file tax returns. (Id., ¶ 14.) Plaintiff alleges that Markowitz is guilty of fraud, mismanagement, abuse of authority. (Id., ¶ 17.) Plaintiff makes similar allegations about RP and MIG. (See id., ¶¶ 20-21, 24-26, 33, 36.)

On July 15, 2001, plaintiff and Markowitz entered into a written agreement entitled “Addendum to Limited Liability Company Operating Agreement of Markowitz Investment Group LLC,” whereby the parties promised to contribute certain assets as additional capital contributions to MIG. (Id., ¶ 39.) Plaintiff alleges that the representation made by Markowitz was a representation of a promise without the intent to perform. (Ibid.) Markowitz has failed and continues to fail to contribute to the MIG properties listed in the agreement. (Id., ¶ 50.)

Plaintiff alleges Markowitz breached his fiduciary duties to plaintiff with respect to the operation and management of the LLCs. (Id., ¶¶ 55-59.)

On May 27, 2009, Markowitz filed an answer to plaintiff’s fifth amended complaint, which asserted twenty-one affirmative defenses.

On July 20 through 23, 2009, the Court, the Honorable Rex Heeseman presiding, held a bench trial to determine contract interpretation and related issues. The Court issued a decision on July 30, 2009, which found that pre-execution verbal representations concerning future contributions were barred by the parol evidence rule, but post-execution verbal representations were allowed to be presented at trial. The Court declines to decide issues as to fraud, waiver, estoppel, reliance, and related matters.

On October 7, 2009, the Court denied defendant’s motion to dismiss for failure to bring the action to trial within five years, finding that trial had commenced with the July 20, 2009, bench trial.

A jury trial was to be held in February and March 2010, but the matter was stayed pending review of plaintiff’s verified statement of disqualification. The stay was lifted on March 11, 2010. After several continuances, a jury trial was commenced on October 27, 2010, and continued into November 2010.

On November 15, 2010, Judge Heeseman recognized that a verified statement of disqualification and request for reassignment had been filed. Judge Heeseman thereafter transferred the case to the Supervising Judge for reassignment. The case was reassigned to the Honorable Judge Ramona G. See.

Judge See determined that the jury verdict rendered on November 4, 2010, was null and void and that the action would be re-tried, but that rulings made by Judge Heeseman prior to October 22, 2010, need not be vacated. (See Minute Order dated 12/2/2011.) A new trial date was set for June 29, 2012. Trial was eventually continued to April 30, 2013. This trial date was taken off calendar on March 19, 2013.

On May 31, 2012, the Court ruled on plaintiff’s motion for summary adjudication of causes of action asserted in Markowitz’s fourth amended cross-complaint. The Court granted the motion as to the first, second, fourth, fifth, and sixth causes of action.

On July 3, 2012, plaintiff filed a motion for summary adjudication of the third and seventh causes of action in the fourth amended cross-complaint, as well as the first, second, eighth, ninth, tenth, eleventh, and twelfth affirmative defenses in Markowitz’s answer to the fifth amended complaint. The Court granted the motion in its entirety on October 2, 2012.

On November 16, 2012, plaintiff filed a motion for summary adjudication of the fourth, fifth, sixth, seventh, thirteenth, fourteenth, fifteenth, sixteenth, seventeenth, eighteenth, nineteenth, twentieth, twenty-first, twenty-second, and twenty-third affirmative defenses in Markowitz’s answer to the fifth amended complaint. On March 21, 2013, Markowitz filed a motion for summary judgment/adjudication of plaintiff’s fifth amended complaint.

After several continuances, the motions were heard on December 4, 2013. The Court granted plaintiff’s motion as to all but the eighteenth affirmative defense. The Court denied defendant’s motion because it was based on affirmative defenses that were not properly alleged in its answer.

On 1/24/14 the Court denied plaintiff’s motion for sanctions against defendant.

ANALYSIS:
Plaintiff moves for summary adjudication of defendant’s 18th affirmative defense in his answer to the fifth amended complaint, plaintiff’s 1st, 2nd, and 4th causes of action in the fifth amended complaint, and the issue of duty.

Defendant’s Eighteenth Affirmative Defense

Defendant is correct that plaintiff has previously moved for summary adjudication as to the eighteenth affirmative defense. “[A] party may not move for summary judgment based on issues asserted in a prior motion for summary adjudication and denied by the court, unless that party establishes to the satisfaction of the court, newly discovered facts or circumstances or a change of law supporting the issues reasserted in the summary judgment motion.” (Code Civ. Proc., § 437c(f)(2).)

Defendant argues that plaintiff previously raised the argument that the eighteenth affirmative defense is not sufficiently pled. This is incorrect. It is true the previous motion for summary adjudication asserted, and the Court determined, that several of the affirmative defenses were not sufficiently pled. (See MSA, filed 11/16/12, pp. 1, 6, 7, 8, 10; Def. Exh. B, p. 6 [arguing that the 4th, 5th, 6th, 7th, 13th, and 14th affirmative defenses were not sufficiently alleged].) However, this argument was not raised as to the 18th affirmative defense. (See MSA, filed 11/16/12, pp. 17-19; Def. Exh. B, pp. 11-12 [addressing the 18th affirmative defense].) Because this issue was not raised or considered in the previous motion for summary adjudication, plaintiff is not precluded from arguing in the instant motion that the eighteenth affirmative defense is not sufficiently alleged.

Nonetheless, for the reasons indicated below, plaintiff’s Motion for Summary Adjudication as to defendant’s Eighteenth Affirmative Defense fails.

The Allegations of the Eighteenth Affirmative Defense are Sufficiently Pled

Plaintiff first argues that the eighteenth affirmative defense is not sufficiently pled. For a summary judgment/adjudication motion, the “pleadings serve as the ‘outer measure of materiality’ . . . and the motion may not be granted or denied on issues not raised by the pleadings.” (Weil & Brown, Civ. Proc. Before Trial (The Rutter Group 2013) ¶ 10:51.1.) A motion for summary adjudication “‘necessarily includes a test of the sufficiency of the complaint’ and its legal effect is the same as a demurrer or motion for judgment on the pleadings.” (Id., ¶ 10:52.) “If the court concludes the complaint (or any claim or defense) is insufficient as a matter of law, it ‘may elect to treat the hearing of a summary judgment motion as a motion for judgment on the pleadings and grant the opposing party an opportunity to file an amended complaint to correct the defect.’ [Citations.]” (Id., ¶ 10:52.5.)

Defendant’s eighteenth affirmative defense alleges that any and all claims in the fifth amended complaint are set off by the entities’ obligations to defendant for monies he spent for the entities and their businesses, which may be treated as loans pursuant to the operating agreements. (See Pl. RJN, Exh. 1, p. 4.) Unlike the fourth, fifth, sixth, seventh, thirteenth, and fourteenth affirmative defenses, which include conclusory legal statements, defendant does allege sufficient facts in the eighteenth affirmative defense. The defense asserts that defendant spent money on the entities and their businesses, and that this should be treated as a loan for which the entities are obligated to repay defendant. To the extent that plaintiff wished to learn more information about this defense, plaintiff could have sought such information during the discovery process. Plaintiff’s assertion that the defense gave no notice as to what discovery could have been sought is not well taken; for example, plaintiff could have easily propounded interrogatories asking defendant to identify the entities to which loans were made and to describe the allegedly contributed property. Plaintiff cannot argue that it is “in the dark” as to this defense if plaintiff chose not to seek more information during the discovery process. Therefore, the Court rejects plaintiff’s first argument that this affirmative defense is not sufficiently pled.

The Eighteenth Affirmative Defense is not Barred by the Law of the Case

Plaintiff next argues that the defense is precluded by the law of the case.

In plaintiff’s third amended complaint, plaintiff added causes of action for fraud and fraudulent conveyance which alleged that defendant engaged in misconduct as to the operation and management of the defendant LLCs. Several defendants, including Markowitz, thereafter filed a motion for judgment on the pleadings as to these causes of action, which was granted with leave to amend in July 2007. (See Pl. Exhs. 4, 5.) Plaintiff then filed a fourth amended complaint which reasserted these two causes of action. The defendants demurred to the causes of action on the ground that plaintiff was required to bring the claims derivatively, and the Court sustained the demurrer and entered judgment for moving defendants Kramer and Four Star General Properties LLC (“Four Star”). (See Pl. Exhs. 6, 7.) Plaintiff appealed the decision and the Court of Appeal affirmed. (See Pl. Exh. 9.)

In support of its argument, plaintiff points to the following language in the appellate court’s decision:

[W]hen the essence of a claim is that a limited liability company’s assets were fraudulently transferred, “[t]his constitutes an injury to the company itself. Because members of the [limited liability company] hold no direct ownership interest in the company’s assets …, the members cannot be directly injured when the company is improperly deprived of those assets. The injury [is] essentially a diminution in the value of their membership interest in the [limited liability company] occasioned by the loss of the company’s assets.” [Citation.] Members of a limited liability company cannot sue individually for injury to the company. [Citation.]

(Pl. Exh. 9, p. 6.)

Plaintiff argues that this language holds that contributions are the assets of the LLCs and, because the contributions are assets of the LLCs and neither plaintiff nor defendant hold any direct interest in the LLCs’ assets, defendant cannot reclassify the contributions as loans because he has no interest in them. This argument is not well taken because it misconstrues the eighteenth affirmative defense. Defendant’s eighteenth affirmative defense alleges that any and all claims are set off by the entities’ obligations to defendant for monies he spent for the entities and their businesses, which may be treated as loans pursuant to the operating agreements. In the eighteenth affirmative defense, defendant is alleging that the loans are not contributions or assets of the LLCs. The Court of Appeal decision at most suggests that contributions may be assets of the LLCs; plaintiff does not point to any language in the appellate court decision which suggests that defendant cannot seek reimbursement for separate loans to the LLCs. To the extent that plaintiff is arguing that the subject payments are contributions and not loans, this argument was previously raised and rejected in plaintiff’s prior motion for summary adjudication. (See Minute Order, 12/5/13, p. 16.) Plaintiff fails to establish “newly discovered facts or circumstances or a change of law” to support a reassertion of this issue. (See Code Civ. Proc., § 437c(f)(2).)

Prior Orders in this Action do not preclude the Eighteenth Affirmative Defense

Plaintiff argues that this Court’s past orders preclude defendant’s eighteenth affirmative defense. Plaintiff presents a somewhat confusing argument that, in the eighteenth affirmative defense, defendant is improperly seeking a rescission of the operating agreement based on fraud, and that the Court has already determined that there was no fraud in the inception of the agreement. The Court rejects this argument. Nothing in the language of the eighteenth affirmative defense suggests that defendant is seeking any rescission of the operating agreement based on fraud, and plaintiff points to no evidence which suggests that defendant, through the eighteenth affirmative defense, is asserting fraud related to the agreement.

Plaintiff also argues that defendant’s assertion that the property constitutes loans is similar to conduct for which he was found in contempt in 2006. This argument is also not well taken. The contempt proceeding pertained to a receiver that had been appointed in April 2006, and the receiver’s claim that defendant failed to turn over business income in the amount of $876.00. (See Pl. Exh. 2.) Defendant had argued that he had offsetting claims against the business and the Court rejected this argument because any such offsets were unsecured claims to which defendant had no priority over other unsecured creditors. (Ibid.) The Court found defendant guilty of contempt and ordered him to pay $1,000.00 to the clerk and to pay plaintiff’s attorney’s fees for the proceeding. (Ibid.) This decision has no bearing on the eighteenth affirmative defense. Notably, the Court in the June 2006 ruling did not determine that defendant had no right to any offset; instead, the Court merely found that defendant was at most an unsecured creditor for the subject monies and that he had no priority over other unsecured creditors. Nothing in the Court’s ruling suggests that defendant could not assert an affirmative defense to set off amounts that defendant allegedly loaned to the business.

Plaintiff next argues that defendant cannot set off the alleged loans because Corporations Code section 17707.5(a) provides the assets of LLCs are distributed to creditors first and then to members, and that defendant does not allege that he is a creditor. This argument again assumes that the property which defendant claims as loans actually consists of contributions. As stated above, the Court has previously rejected this argument and it cannot be reasserted in this motion. Moreover, though the eighteenth affirmative defense does not expressly use the word “creditor,” it does allege facts which suggest that the businesses are obligated to repay loans from defendant, which suggests that he is at the very least an unsecured creditor. Members of an LLC may be treated as creditors. (See Corp. Code, § 17707.5(a).)

Collateral Estoppel does not Bar the Eighteenth Affirmative Defense

“Collateral estoppel, or issue preclusion, ‘precludes relitigation of issues argued and decided in prior proceedings.’ [Citation.]” (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896.) Plaintiff argues that the eighteenth affirmative defense is based on the same facts as the first two causes of action in defendant’s fourth amended cross-complaint, and that these two causes of action were dismissed on 9/25/12 when Judge See granted plaintiff’s motion for summary adjudication. The Court rejects this argument. In his fourth amended cross-complaint, defendant asserted causes of action for capital contribution and rescission for failure of consideration, based on allegations that plaintiff failed to make its agreed contributions. (See Pl. Exh. 10.) This is not what is asserted in the eighteenth affirmative defense, which focuses on money paid by defendant for the entities, and at no point mentions any contributions by plaintiff. Plaintiff does not point to any allegation in the fourth amended cross-complaint where defendant asserts that he made loans to the businesses.

Plaintiff’s request for summary adjudication of defendant’s eighteenth affirmative defense is DENIED.

Plaintiff’s First, Second, and Fourth Causes of Action

Plaintiff’s first, second, and fourth causes of action seek dissolution of First View LLC, Rail Prop LLC, and Markowitz Investment Group LLC, respectively.

(a) Pursuant to an action filed by any manager or by any member or members of a limited liability company, a court of competent jurisdiction may decree the dissolution of a limited liability company whenever any of the events specified in subdivision (b) occurs. [¶] (b) (1) It is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. [¶] (2) Dissolution is reasonably necessary for the protection of the rights or interests of the complaining members. [¶] (3) The business of the limited liability company has been abandoned. [¶] (4) The management of the limited liability company is deadlocked or subject to internal dissention. [¶] (5) Those in control of the limited liability company have been guilty of, or have knowingly countenanced persistent and pervasive fraud, mismanagement, or abuse of authority.

(Corp. Code, § 17707.03.)

Plaintiff argues that section 17707.03(b)(4) applies because defendant concedes that the parties cannot manage the LLCs together. It is undisputed that defendant has alleged that plaintiff’s membership status in the LLCs should be ignored and that plaintiff’s current member and manager has no interest in the LLCs. (See PMF/DMF 22-23.) It is undisputed that, in sworn testimony, defendant stated that he did not welcome plaintiff as a partner and refused to work with plaintiff’s principal. (See PMF/DMF 24-27.) It is undisputed that defendant never recognized plaintiff as a member. (See DMF 28, 44-48.) It is undisputed that defendant attempted to transfer Rail Prop’s property to Four Star. (See PMF/DMF 29.)

Assuming plaintiff and defendant are both members of the LLCs, these undisputed facts would be sufficient to establish that the management of the LLCs is subject to deadlock or internal dissention. However, at this point the dispute in this action appears to primarily focus on whether plaintiff has any interest in the LLCs. Therefore, the determination as to whether there are any triable issues remaining as to the winding up and dissolution of the LLCs should focus on whether plaintiff is a cognizable member of the LLC.

Plaintiff is correct that the Court’s dismissal of the fourth amended cross-complaint precludes defendant from asserting the same facts alleged therein. (See Torrey Pines Bank v. Superior Court (1989) 216 Cal.App.3d 813, 821.) However, as mentioned above, the decision does not preclude defendant from asserting other defenses unrelated to the allegations therein. Moreover, plaintiff acknowledges that the fourth amended complaint did not allege that plaintiff was not a member of the LLCs. (See Mot., p. 16, fn. 2.)

In addition to the eighteenth affirmative defense, which asserts triable issues as to the distribution of the LLCs’ assets, defendant has asserted a general denial of plaintiff’s claims. A general denial puts the material allegations of the complaint in issue. (FPI Development Inc. v. Nakashima (1991) 231 Cal.App.3d 367, 384.) Such a denial is limited by the allegations of the complaint, and does not assert new matters which should be brought in an affirmative defense. (Ibid.) “A general denial allows the denying party the opportunity to present evidence to refute the allegations in the complaint.” (Walsh v. West Valley Mission Community College Dist. (1998) 66 Cal.App.4th 1532, 1545.)

In the fifth amended complaint, plaintiff alleges that it is a member of the LLCs. (See 5AC, ¶ 9.) By asserting a general denial, defendant has put this fact at issue. As the moving party in this motion, the burden is on plaintiff to show that there are no triable issues as to this allegation. The only evidence cited by plaintiff to support this allegation includes the operating agreements which name plaintiff as a member of the LLCs. (See PMF 59-62.) This does is not sufficient, by itself, to establish that there are no triable issues of fact as to whether plaintiff actually should be determined to be a member of the LLCs. For example, plaintiff provides no evidence showing that it performed the obligations of a member, or otherwise should be deemed a member.

Plaintiff argues that defendant is barred by the doctrine of judicial estoppel from asserting that plaintiff is not a member of the LLCs. “ ‘Judicial estoppel prevents a party from asserting a position in a legal proceeding that is contrary to a position previously taken in the same or some earlier proceeding.’ ” (Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 181.) “In accordance with the purpose of judicial estoppel, we conclude that the doctrine should apply when: (1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake.” (Id. at p. 183.)

Plaintiff argues that defendant is judicially estopped from arguing that plaintiff is not a member of the LLCs because, in the motion for judgment on the pleading on the third amended complaint and the demurrer to the fourth amended complaint, defendant took the position that plaintiff, as a member of the LLCs, should have brought its claims derivatively. This argument is not well taken. Plaintiff ignores the fact that demurrers and motions for judgment on the pleadings test the sufficiency of the challenged pleadings, and raise issues of law, not fact. (See Weil & Brown, Civ. Proc. Before Trial (The Rutter Group 2014) ¶ 7.5. See also id., ¶ 7:275 [a motion for judgment on the pleadings has the same function as a demurrer].) In a demurrer or motion for judgment on the pleadings, the moving party does not challenge the truth of the allegations; indeed, all facts in the challenged pleadings must be assumed to be true. (Id., ¶¶ 7.5, 7:322.) Therefore, for the purposes of his motion for judgment on the pleadings and demurrer, defendant was required to accept plaintiff’s allegations as true. In so moving, defendant was not admitting for all purposes that plaintiff was a member of the LLCs; instead, pursuant to the function of such motion or demurrer, he merely asserted that, even assuming that plaintiff was a member, plaintiff’s causes of action would still fail because they would be derivative.

Plaintiff’s request for summary adjudication of its first, second, and fourth causes of action is DENIED.

Fiduciary duty

Finally, plaintiff moves for summary adjudication of the issue of whether defendant owes fiduciary duties to plaintiff. Plaintiff is correct that members of a limited liability company owe certain fiduciary duties to other members. (See Corp. Code, § 17704.09; PMF/DMF 69, 70.) Plaintiff’s request for summary adjudication of this issue assumes that there is no dispute as to whether plaintiff is a member of the LLCs and is owed certain fiduciary duties. As discussed above, plaintiff has not sufficiently established that there are no triable issues of material fact as to whether it is a member of the LLCs.

Plaintiff’s request for summary adjudication on the issue of defendant’s duties to plaintiff is DENIED.