Corporate Recovery Associates LLC v. Kevin Ruelas, et al.
Case No: 18CV05060
Hearing Date: Tue Apr 02, 2019 9:30

Nature of Proceedings: Case Management Conference; Demurrer (3)

CMC

Demurrers (4)

Attorneys: For Plaintiff: Edward Jason Dennis, et al. (Lynn, Pinker, et al. – Dallas, TX)

For Defendants Miller, Chao, Mei, Oldham, and Holmes: Howard J. Steinberg (Greenberg Traurig – Los Angeles)

For Defendant Shaw: Timothy J. Trager, et al., (Reicker, Pfau, et al.)

For Defendant Ruelas: Eugene J. Egan, et al. (Manning & Kass, et al. – Los Angeles)

For Defendant Chen: Stephen F. McAndrew (Kaufman McAndrew – Encino)

Ruling: The Court overrules defendants Pierre Chao, John Mei, Christopher Holmes, Charles Miller, and David Oldham’s demurrer; defendant Lynn Chen’s demurrer; and defendant Mark Shaw’s demurrer to the complaint of plaintiff Corporate Recovery Associates, LLC, as Trustee for the Liquidating Trust of Channel Technologies Group, LLC.

The Court sustains defendant Kevin Ruelas’s demurrer to the complaint of plaintiff Corporate Recovery Associates, LLC, as Trustee for the Liquidating Trust of Channel Technologies Group, LLC, with leave to amend on or before April 12, 2019.

Analysis

The Complaint:

On October 15, 2018, plaintiff Corporate Recovery Associates, LLC, as Trustee for the Liquidating Trust of Channel Technologies Group, LLC (“Trustee”) filed its complaint against defendants Kevin Ruelas, Pierre Chao, John Mei, Lynn Chen, Christopher Holmes, Mark Shaw, Charles Miller, and David Oldham. (Review of the complaint is difficult as Trustee did not provide electronic bookmarks for Exhibits 2-7 as required by CRC 3.1110(f)(4).) Trustee alleges:

The managers of Channel Technologies Group, LLC (“CTG”), acting in concert with its parent company’s insiders, siphoned and diverted the company’s assets to benefit “subsidiaries.” But the managers allowed the controlling shareholder to sell these entities and keep all the proceeds. In doing so, the managers allowed the company to become insolvent. [Complaint ¶1]

CTG designed and manufactured piezoelectric ceramics, transducers, sonar equipment, and other related products sold primarily to military, commercial, and industrial customers in the United States and internationally. [¶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. 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. Pursuant to the Operating Agreement, BW Piezo maintained the rights to remove or replace CTG’s manager and dissolve CTG in its sole discretion. [¶15]

The Operating Agreement named Kevin Ruelas and Pierre Chao as managers of CTG and required that the entirety of CTG’s assets and company funds be held in the name of CTG. During the relevant time alleged in the complaint, defendants Ruelas, Chao, Mei, Chen, Holmes, Shaw, Miller, and Oldham, and non-party Ralph Phillips served as managers of CTG. [¶16]

BW Piezo removed Ruelas and began interviewing potential management candidates; decided to expand CTG’s business to medical, ocean, and mining applications; and began negotiations with Pengdi Han to acquire H.C. Materials, Inc., a crystal manufacturer with a focus on medical ultrasound imaging, ocean mining, and ocean exploration systems. [¶17] In June 2013, BW Biezo replaced Ruelas as manager and officer with Phillips, hiring Phillips as President and Chief Executive Officer of CTG. Prior to employing him, BW Piezo represented to Phillips that CTG was in the process of acquiring H.C. Materials as a wholly owned subsidiary of CTG. [¶18]

After hiring Phillips, BW Piezo and CTG’s management, including Phillips and Chao, continued to negotiate with Han regarding the acquisition of H.C. Materials. To obtain a loan to purchase H.C. Materials, BW Piezo and CTG’s management represented to lenders that CTG was purchasing H.C. Materials as a wholly-owned subsidiary. CTG’s management mortgaged CTG’s assets, forced CTG to guarantee a significant loan, and directed CTG to contribute its own cash assets for the purchase of H.C. Materials. [¶19] In October 2013, Blue Wolf used the loan proceeds and CTG’s cash to acquire H.C. Material’s assets for $48 million. Blue Wolf Capital Partners, BW Piezo, and CTG’s management issued press releases and represented to news media that CTG was acquiring H.C. Materials, including an October 15, 2013 Press Release. [¶20; Exhibit 2]

CTG’s management team permitted the Blue Wolf Entities to segregate the companies on paper. BW Piezo created a new entity named CTG Advanced Materials (“CTG AM”) to hold the H.C. Materials assets, and Blue Wolf structured CTG AM to be a sister company to CTG under the ownership of BW Piezo instead of as a wholly-owned subsidiary of CTG. [¶21] The segregation was fictional. Throughout the company’s duration, the CTG Managers ran CTG AM as a division of CTG, and the companies were operated as a single enterprise. CTG’s management directed CTG to transfer funds to pay for CTG AM’s liabilities, including payroll and legal bills; had CTG guarantee loans for CTG AM’s benefit; and treated the assets of each company as one and the same. CTG’s management operated all of CTG’s subsidiaries in a similar manner, commingled funds, and directed CTG to transfer funds to pay for liabilities of CTG’s subsidiaries, specifically but not limited to Electro Optical Industries and Materials Systems, Inc. [¶22]

These actions caused CTG to struggle financially. [¶¶23, 25, 26] In middle to late 2015, CTG’s management, including Phillips and Chen, discovered that CTG’s liabilities threatened its status as a going concern and brought this to BW Piezo’s attention. [¶24]

In March 2016, BW Piezo and CTG’s management, including Holmes, Shaw, Miller, and Oldham, sold CTG AM for approximately $73 million. Instead of returning the proceeds of the sale to CTG, defendants allowed Blue Wolf to structure the transaction to have the purchaser, CTS Corporation, transfer the proceeds to the Blue Wolf Entities, CIT Bank, CTG’s mezzanine lenders, Pengdi Han, and to Blue Wolf and CTG’s insiders as bonus payments. [¶27]

BW Piezo and CTG’s management intended to delay CTG’s filing for bankruptcy protection as long as possible to protect the validity of the transfers related to the CTG AM sale. To accomplish this, BW Piezo and CTG’s management directed CTG, in April 2016, to enter a prepetition lending agreement with Blue Wolf Capital Fund II, L.P. to provide a cash infusion in exchange for a security interest in CTG’s assets. Next, in June 2016, BW Piezo and CTG’s management sold one of CTG’s most profitable subsidiaries, Electro-Optical Industries, at a “cutrate.” CTG’s management allowed this sale to occur to a foreign company without notifying the U.S. Government, jeopardizing the entire business of CTG and its defense contracts. [¶28] CTG’s manager filed for bankruptcy protection in October 2016. [¶29]

The causes of action in the complaint are breach of fiduciary duty and negligence.

Multi-Defendant Demurrer:

Defendants Chao, Mei, Holmes, Miller, and Oldham (for purposes of this demurrer “defendants”) demur to the complaint on the ground that the allegations are conclusory in nature and, therefore, are not sufficient to state the causes of action; all acts giving rise to the alleged claims took place outside the applicable statutes of limitation periods; and the business judgment rule forecloses the remedy Trustee seeks. Trustee opposes the demurrer. (Trustee’s lawyers cite many cases using regional reporter references instead of official California citations, i.e., “P.2d” or “Cal.Rptr.2d” instead of “Cal.” or “Cal.App.” While “Bluebook” citations are permitted under CRC 1.200 and the Bluebook permits either official or regional reporter citations, the Court prefers official citations.)

There are four demurrers on calendar for this hearing. The Court will state the demurrer standards once.

The court’s only task in ruling on a demurrer is to determine whether the complaint states a cause of action. Moore v. Regents of University of California, 51 Cal.3d 120, 125 (1990). The court treats “the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law”; considers “matters which may be judicially noticed”; and gives “the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” Evans v. City of Berkeley, 38 Cal.4th 1, 6 (2006) [internal quotation marks and citations omitted]. The court also considers the reasonable inferences that may be drawn from the properly pleaded material facts. Reynolds v. Bement, 36 Cal.4th 1075, 1083 (2005).

A plaintiff need only plead ultimate facts and need not plead probative or evidentiary facts. McCaughey v. H. C. Schuette, 117 Cal. 223, 224 (1897). The court examines “only whether plaintiffs have pleaded sufficient ultimate facts in support of their [causes of action] to survive demurrer.” Sisemore v. Master Financial, Inc., 151 Cal.App.4th 1386, 1422 (2007).

“When a written instrument which is the foundation of a cause of action or defense is attached to a pleading as an exhibit and incorporated into it by proper reference, the court may, upon demurrer, examine the exhibit and treat the pleader’s allegations of its legal effect as surplusage.” Weitzenkorn v. Lesser, 40 Cal.2d 778, 785-786 (1953) [internal quotations and citation omitted]. “While the ‘allegations [of a complaint] must be accepted as true for purposes of demurrer,’ the ‘facts appearing in exhibits attached to the complaint will also be accepted as true and, if contrary to the allegations in the pleading, will be given precedence.’” Brakke v. Econ. Concepts, Inc., 213 Cal.App.4th 761, 767 (2013) [citations omitted].

“Doubt in the complaint may be resolved against plaintiff and facts not alleged are presumed not to exist.” C & H Foods Co. v. Hartford Ins. Co., 163 Cal.App.3d 1055, 1062 (1984). “A demurrer tests only the sufficiency of the pleading and lies only where the defect appears on the face of the pleading or from matters judicially noticed by the court.” Fiorito v. Superior Court, 226 Cal.App.3d 433, 437 (1990).

1. First Cause of Action—Breach of Fiduciary Duty:

a. Statute of Limitation: Defendants argue that the four-year statute of limitation has run on alleged breaches of fiduciary duty that occurred before October 15, 2014 (four years before Trustee filed the complaint). “Breach of fiduciary duty not amounting to fraud or constructive fraud is subject to the four-year ‘catch-all statute’ of [CCP §] 343.” William L. Lyon & Assocs., Inc. v. Superior Court, 204 Cal.App.4th 1294, 1312 (2012).

Defendants contend that the cause of action began to run in October 2013 when Blue Wolf allegedly used the loan proceeds and CTG’s cash to acquire H.C. Material’s assets for $48 million; and then the Blue Wolf Entities and BW Piezo created CTG AM to hold the H.C. Materials assets, and structured CTG AM to be a sister company to CTG under the ownership of BW Piezo instead of as a wholly-owned subsidiary of CTG. [Complaint ¶¶20, 21] Trustee contends the delayed discovery rule delays accrual of the cause of action, particularly in instances involving fiduciaries. Trustee also argues that 11 U.S.C. § 108 extends the applicable limitation period by two years.

i. Delayed Discovery: “The discovery rule provides that the accrual date of a cause of action is delayed until the plaintiff is aware of her injury and its negligent cause.” Jolly v. Eli Lilly & Co., 44 Cal.3d 1103, 1109 (1988). “Under the discovery rule, the statute of limitations begins to run when the plaintiff suspects or should suspect that her injury was caused by wrongdoing, that someone has done something wrong to her.” Id. at 1110. “Once the plaintiff has a suspicion of wrongdoing, and therefore an incentive to sue, she must decide whether to file suit or sit on her rights.” Id. at 1111.

“The ‘discovery rule’ assumes that all conditions of accrual of the action — including harm — exist, but nevertheless postpones commencement of the limitation period until ‘the plaintiff discovers or should have discovered all facts essential to his cause of action.’” CAMSI IV v. Hunter Technology Corp., 230 Cal.App.3d 1525, 1536 (1991) [citations omitted].

“[P]laintiffs are required to conduct a reasonable investigation after becoming aware of an injury, and are charged with knowledge of the information that would have been revealed by such an investigation.” Fox v. Ethicon Endo-Surgery, Inc., 35 Cal.4th 797, 807-808 (2005). The plaintiffs “must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.” Id. at 808.

“Delayed accrual of a cause of action is viewed as particularly appropriate where the relationship between the parties is one of special trust such as that involving a fiduciary, confidential or privileged relationship.” Moreno v. Sanchez, 106 Cal.App.4th 1415, 1424 (2003). “The manager of an LLC has a fiduciary duty and owes to the members of the LLC the same duties of loyalty and good faith as a partner owes to the partnership and its partners.” Feresi v. The Livery, LLC, 232 Cal.App.4th 419, 425 (2014).

“Where a fiduciary obligation is present, the courts have recognized a postponement of the accrual of the cause of action until the beneficiary has knowledge or notice of the act constituting a breach of fidelity. The existence of a trust relationship limits the duty of inquiry. Thus, when a potential plaintiff is in a fiduciary relationship with another individual, that plaintiff’s burden of discovery is reduced and he is entitled to rely on the statements and advice provided by the fiduciary.” WA Sw. 2, LLC v. First Am. Title Ins. Co., 240 Cal.App.4th 148, 157 (2015) [internal quotations and citations omitted]. But “this does not mean that plaintiffs had no duty of inquiry if they were put on notice of a breach of such duty.” Id.

Defendants contend that the facts alleged in the complaint demonstrate notice of the misconduct. Trustee alleges the purchase of HG Materials’ assets with CTG’s money and that holding those assets in CTG AM was a fiction. This is supported by the press release saying CTG was acquiring HG Materials. Defendants also argue that an exhibit to the complaint demonstrates the knowledge of Phillips, CTG’s former CEO, which is imputed to CTG and, therefore, the Trustee. The statement in Phillips’ complaint on which defendants rely is: “BW Piezo acquired HC Materials for $48 million in October 2013 and changed its name to CTG Advanced Materials, but H.C. Materials and CTG LLC were not merged as previously represented by Defendants.” [Complaint, Exhibit 3, ¶18 at p.7 (p.35 of 123 of the Complaint)] But that statement does not say when he knew of these facts. The complaint was not filed until September 8, 2016.

Still, Trustee must plead the time and manner of discovery and the inability to have made earlier discovery despite reasonable diligence. However, it is unnecessary to sustain the demurrer to the complaint with leave to amend on this ground as 11 U.S.C. § 108 rescues Trustee from the limitation period.

ii. 11 U.S.C. § 108: If a statute of limitation fixes a period for commencing an action and that period has not expired when the debtor files bankruptcy, the trustee may commence the action before the later of the end of the limitation period or two years after the order for relief in bankruptcy. 11 U.S.C. § 108(a). (Defendant Ruelas argues that this statute may not apply because it is unclear whether the bankruptcy was a Chapter 11 or 7 bankruptcy and statute applies to chapter 11 debtors in possession but not to chapter 7 debtors. California Aviation, Inc. v. Leeds, 233 Cal.App.3d 724, 731 (1991). That may be but the statute applies to all trustees in bankruptcy regardless of chapter. Trustee is not a debtor in bankruptcy. In any event, based on the order of which the court takes judicial notice with respect to the Shaw demurrer, infra, the case is a Chapter 11 case. Trustee is the trustee of the liquidating trust under CTG’s confirmed Chapter 11 plan.)

Defendants concede that this statute is applicable but claim that Trustee filed his complaint one day beyond the extended period. CTG filed its bankruptcy on October 14, 2016; the extended limitation period under § 108 was October 14, 2018; and Trustee filed the complaint on October 15, 2018. But defendants fail to acknowledge that October 14, 2018 was a Sunday. The limitation period is, therefore, extended to October 15, 2018. CCP §§ 12a, 12b, 135; Gov’t Code § 6700(a)(1). The limitation period for the first cause of action had not expired by October 14, 2016. Therefore, it was extended to October 15, 2018, and the complaint is not time-barred.

b. Business Judgment Rule: “The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) a breach of the fiduciary duty; and (3) resulting damage.” Pellegrini v. Weiss, 165 Cal.App.4th 515, 524 (2008). The business judgment rule “establishes a presumption that directors’ decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest.” Berg & Berg Enterprises, LLC v. Boyle, 178 Cal.App.4th 1020, 1045 (2009).

“An exception to the presumption afforded by the business judgment rule accordingly exists in circumstances which inherently raise an inference of conflict of interest and the rule does not shield actions taken without reasonable inquiry, with improper motives, or as a result of a conflict of interest.” Id. [internal quotations and citations omitted]. “[C]onclusory allegations of improper motives and conflict of interest” are not sufficient to rebut the business judgment rule. Id. The presumption “can be rebutted only by affirmative allegations of facts which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.” Id. at 1046 [internal quotations and citations omitted].

A manager’s “duty of care to a limited liability company and the other members in the conduct and winding up of the activities of the limited liability company is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” Corp. Code § 17704.09(c), (f).

Trustee alleges that defendants used CTG assets to purchase assets that became the assets of CTG AM, an entity structured to be a sister company to CTG under the ownership of BW Piezo instead of as a wholly-owned subsidiary of CTG. [Complaint ¶¶20, 21] In March 2016, BW Piezo and CTG’s management, including Holmes, Miller, and Oldham, sold CTG AM for approximately $73 million. Instead of returning the proceeds of the sale to CTG, defendants allowed Blue Wolf to structure the transaction to have the purchaser, CTS Corporation, transfer the proceeds to the Blue Wolf Entities, CIT Bank, CTG’s mezzanine lenders, Pengdi Han, and to Blue Wolf and CTG’s insiders as bonus payments. [Complaint ¶27] BW Piezo and CTG’s management delayed CTG’s filing for bankruptcy protection as long as possible to protect the validity of the transfers related to the CTG AM sale. [Complaint ¶28]

The Court finds that Trustee has alleged sufficient ultimate facts to demonstrate improper motives and conflicts of interest among CTG’s managers sufficient to rebut the business judgment rule. The alleged facts demonstrate conduct that is grossly negligent and/or reckless.

In this context, defendants argue that Trustee makes no distinction between defendants individually, alleging instead that all defendants breached their fiduciary duties through the same set of acts and consistently fails to identify specific acts that each defendant took that give rise to their liability. Several times in the complaint, Trustee simply refers to actions by “CTG’s management” without specifying which managers are responsible for those actions. It is true that Trustee does not state when each defendant served as a manager. In ¶27, discussed above, Trustee does allege specific action by three of these demurring defendants. These defendants demurred as a group and the others have not separately stated grounds for demurrer. Defendants have not demurred on grounds of uncertainty.

c. Alter Ego: Defendants contend that, while Trustee does not allege that CTG and CTG AM are alter egos, “it does allege that their segregation was ‘fictional.’ (Comp., ¶22) To the extent the Trustee seeks to affirmatively use an alter ego claim as a basis to assert claims against the Defendants, this is impermissible.” [Demurrer 19:5-7]

The Court does not understand this argument as it relates to this complaint. There is no attempt to establish alter ego liability based on the fictional separation of CTG and CTG AM. Trustee alleges that CTG’s managers breached their duties to CTG by directing assets to CTG AM.

Although Trustee claims to be able to assert an alter ego claim, neither defendants nor Trustee explain how the complaint asserts an alter ego claim. (Trustee does allege that defendants are alter egos of each other. [Complaint ¶¶7, 8] But that is not the allegation defendants are addressing.)

d. Conclusion: The Court overrules the demurrer to the first cause of action.

2. Second Cause of Action—Negligence:

a. Statute of Limitation: The parties agree that the statute of limitation for negligence is two years. The arguments regarding the statute of limitation, delayed discovery, and 11 U.S.C. § 108 are addressed above and apply equally here.

Defendants argue that some alleged acts occurred more than two years before CTG filed bankruptcy. They contend that “to the extent that the alleged commingling occurred in 2013, any negligence causes of action would have become time-barred by 2015, and thus would not be subject to § 108(a)’s grace period.

First, commingling is not the only negligent act alleged. Second, Trustee alleges acts that occurred within two years of the bankruptcy. So, this ground for demurrer attacks only part of the cause of action. A demurrer cannot rightfully be sustained to part of a cause of action. Kong v. City of Hawaiian Gardens Redevelopment Agency, 108 Cal.App.4th 1028, 1047 (2002); PH II, Inc. v. Superior Court, 33 Cal.App.4th 1680, 1682 (1995). “A demurrer based on the statute of limitations may not properly be sustained if any part of the cause of action be not barred.” Vassere v. Joerger, 10 Cal.2d 689, 694 (1938).

b. Elements of Negligence: Defendants contend that Trustee has not alleged the elements of a negligence cause of action. To state a cause of action for negligence, a plaintiff must allege that the defendant owed a duty to the plaintiff, that the defendant breached that duty, and that the breach proximately caused the plaintiff’s injuries. John B. v. Superior Court, 38 Cal.4th 1177, 1188 (2006). “Negligence may be generally pleaded, but there are limits to the generality with which the plaintiff is allowed to state a cause of action. The complaint must indicate the acts or omissions which the plaintiff claims were negligently performed.” Quelimane Co. v. Stewart Title Guaranty Co., 19 Cal.4th 26, 60 (1998).

Defendants argue that Trustee has not pled duties. Plaintiff does incorporate its description of fiduciary duties. Defendants dismiss these as “nothing more than retreads of the Trustee’s breach of fiduciary allegations.” [Demurrer 22:2-4] Defendants cite no authority why fiduciary duties cannot be duties supporting a negligence cause of action. Defendants do not suggest that LLC managers do not owe a duty to exercise care in the management of the LLC.

Defendants contend that the allegations are insufficient because Trustee alleges categories of conduct without alleging specific acts. But Trustee has alleged specific conduct as discussed above.

c. Conclusion: The Court overrules the demurrer to the second cause of action.

3. Order: The Court overrules defendants Pierre Chao, John Mei, Christopher Holmes, Charles Miller, and David Oldham’s demurrer to the complaint of plaintiff Corporate Recovery Associates, LLC, as Trustee for the Liquidating Trust of Channel Technologies Group, LLC.

Defendant Chen’s Demurrer:

Defendant Chen demurs to the complaint on the ground that Trustee does not state facts sufficient to state a cause of action. Chen contends that Trustee does not allege any facts, only unsupported conclusions. Trustee opposes the demurrer.

1. Request for Judicial Notice: Chen asks the Court to take judicial notice of a complaint to avoid preferential transfer that Trustee filed against Chen in the United States Bankruptcy Court. Specifically, Chen wants the Court to take judicial notice of Trustee’s allegations that her employment with CTG began May 25, 2015, and terminated in February 2016. Trustee contends that the Court cannot take judicial notice of the truth of matters asserted in pleadings in another court.

“Evidence Code sections 452 and 453 permit the trial court to ‘take judicial notice of the existence of judicial opinions and court documents, along with the truth of the results reached – in the documents such as orders, statements of decision, and judgments – but [the court] cannot take judicial notice of the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact.’” People v. Woodell, 17 Cal.4th 448, 455 (1998).

A court may properly take judicial notice of a party’s earlier pleadings and positions. McKell v. Washington Mut., Inc., 142 Cal.App.4th 1457, 1491 (2006). “It is true that a court may take judicial notice of a party’s admissions or concessions, but only in cases where the admission ‘cannot reasonably be controverted,’ such as in answers to interrogatories or requests for admission, or in affidavits and declarations filed on the party’s behalf.” Arce v. Kaiser Found. Health Plan, Inc., 181 Cal.App.4th 471, 485 (2010).

A statement of fact in an unverified complaint is not a position taken in another proceeding nor is it an admission of which the Court can take judicial notice. The Court could take judicial notice of the fact of the filing of the pleading in another court but that is not why Chen seeks judicial notice. Therefore, the Court denies Chen’s request for judicial notice.

2. Facts Constituting Causes of Action: Chen argues that all the alleged acts occurred either before she worked for CTG or after she was terminated. This argument depends entirely on the judicial notice request.

Chen argues that the conclusory allegations against her do not state what she did. But Trustee does make specific allegations about what Chen did in Complaint ¶¶23 and 25 and Exhibits 4 and 5. Chen does not address how these are insufficient.

3. Order: The Court overrules defendant Lynn Chen’s demurrer to the complaint of plaintiff Corporate Recovery Associates, LLC, as Trustee for the Liquidating Trust of Channel Technologies Group, LLC.

Defendant Shaw’s Demurrer:

Defendant Shaw demurs to the complaint on the ground that Trustee has not alleged facts sufficient to constitute the causes of action. Shaw alleges that judicially noticed facts demonstrate he was not a manager of CTG and the business judgment rule bars both causes of action. Trustee opposes the demurrer.

1. Page Numbering of Pleadings: Shaw did not properly number the pages of his memorandum in support of the demurrer. CRC 2.109 provides that the page numbering of papers filed in trial court “must begin with the first page and use only Arabic numerals (e.g., 1, 2, 3).” “The pages of a memorandum must be numbered consecutively beginning with the first page and using only Arabic numerals (e.g., 1, 2, 3). The page number may be suppressed and need not appear on the first page.” CRC 3.1113(h). This made it difficult for the Court to locate pages in the electronically filed pleading that correspond to the pages listed in the table of contents.

2. Request for Judicial Notice: Shaw requests that the Court take judicial notice of four documents CTG filed with the Secretary of State of California; and a motion, an order, and a status report filed in CTG’s bankruptcy case. Shaw wants the Court to notice facts in these documents, to wit: CTG’s managers were persons other than Shaw; and Sonatech, LLC was not an insider of CTG or a party affiliated with CTG.

As for the Secretary of State documents: Evid. Code § 452(c) permits the court to take judicial notice of “Official acts of the legislative, executive, and judicial departments of the United States and of any state of the United States.” “‘Official acts include records, reports and orders of administrative agencies.’” Ordlock v. Franchise Tax Bd., 38 Cal.4th 897, 912 (2006) [citation omitted]. However, the court will not take notice of official acts or records that “are not signed, dated, executed or certified.” Jordan v. Superstar Sandcars, 182 Cal.App.4th 1416, 1421 n2 (2010). These records are not certified.

“While we may take judicial notice of court records and official acts of state agencies (Evid. Code, § 452, subds. (c), (d)), the truth of matters asserted in such documents is not subject to judicial notice.” Arce v. Kaiser Foundation Health Plan, Inc., 181 Cal.App.4th 471, 482 (2010).

Shaw cites O’Gara Coach Co., LLC v. Ra, 30 Cal.App.5th 1115 (2019), in which the Court of Appeal granted a request for judicial notice of facts in documents filed with the Secretary of State. Id. at 1121 n2. The court did not address any law on the subject of judicial notice and there is no indication that the request was opposed. “A decision, of course, does not stand for a proposition not considered by the court.” Nolan v. City of Anaheim, 33 Cal.4th 335, 343 (2004).

The Court will not take judicial notice of the facts stated in Exhibits 1 through 4. Even if the Court were to take judicial notice of the facts set forth in these documents, they would only establish who was a manager on the date the documents were executed and not who was or was not a manager in between the filing of the documents.

The Court has addressed judicial notice of court documents above with respect to Chen’s request for judicial notice. The Court will not take judicial notice of the truth of facts asserted in the motion or status report.

The court can take judicial notice of the truth of facts asserted in documents such as orders, findings of fact and conclusions of law, and judgments. Day v. Sharp, 50 Cal.App.3d 904, 914 (1975). The Court will take judicial notice of the finding that Sonatech, LLC, “is not an ‘insider’ of [CTG] or any party affiliated with [CTG], as that term is defined in section 101 of the Bankruptcy Code.” The Court denies the request for judicial notice in all other respects.

The Court is not considering the document Trustee attached to its opposition. On demurrer, the court does not take any evidence. Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 478 n4 (1992). Any declaration submitted in support of or in opposition to a demurrer is “a nullity, of no purpose or effect” and “extraneous factual recitals” are not considered. Allred v. Bekins Wide World Van Services, 45 Cal.App.3d 984, 993 (1975).

3. Late Opposition: Trustee served the opposition by mail on March 19. Opposition papers are to be served by personal delivery or some means reasonably calculated to ensure delivery on the next business day. CCP § 1005(c). Regular mail is not reasonably calculated to achieve service the next business day and Shaw’s counsel says it did not arrive until March 21. Shaw asks that the Court disregard the opposition. The court does not encourage noncompliance with the statute. But Shaw was able to fully address the opposition in his reply. The Court will consider the opposition.

4. Duty: Shaw contends that he owed no duty because he was never a manager. This argument depends on the documents of which Shaw sought judicial notice. As discussed above, the Court denied the request to take judicial notice of documents showing managers of CTG. Even if the Court were to take judicial notice of the facts set forth in those documents, they would only establish who was a manager on the date the documents were executed and not who was or was not a manager in between the filing of the documents.

5. Allegations Regarding Shaw: Shaw contends that the allegations do not fairly apprise him of the factual basis of the claims against him. He did not file a special demurrer on the ground of uncertainty. He appears to contend that the allegations are not particular and specific enough to constitute the causes of action.

Shaw discusses several allegations in the complaint that refer to Shaw. These include ¶25 (Shaw, et al., assumed CTG AM liabilities and instructed them to stretch out payments because of cash management issues); ¶27 (Shaw, et al., sold CTG AM and, instead of returning the proceeds from the sale to CTG, they allowed Blue Wolf to structure the transaction to have the purchaser transfer the proceeds elsewhere); ¶28 (CTG management delayed bankruptcy to protect validity of transfers related to CTG AM sale).

Negligence and breach of fiduciary duty may be pled generally. Shaw characterizes the allegations as conclusions of law. While some allegations include some conclusory terms, others are allegations of ultimate fact. A plaintiff need only plead ultimate facts and need not plead probative or evidentiary facts. McCaughey v. H. C. Schuette, supra, 117 Cal. at 224; Sisemore v. Master Financial, Inc., supra, 151 Cal.App.4th at 1422. “[W]here a complaint is in some respects uncertain, … ambiguities can be clarified under modern discovery procedures.” Khoury v. Maly’s of California, Inc., 14 Cal.App.4th 612, 616 (1993).

6. Business Judgment Rule: The Court has discussed the business judgment rule above with respect to the multi-defendant demurrer. The Court incorporates that discussion here.

7. Order: The Court overrules defendant Mark Shaw’s demurrer to the complaint of plaintiff Corporate Recovery Associates, LLC, as Trustee for the Liquidating Trust of Channel Technologies Group, LLC.

Defendant Ruelas’s Demurrer:

Defendant Ruelas demurs to the complaint on the grounds that Trustee has failed to states facts sufficient to constitute the causes of action and that the causes of action are uncertain. He argues that he was no longer a manager when the alleged misconduct or breaches occurred, allegations are conclusory, and the causes of action are time-barred. Trustee opposes the demurrer.

1. Ruelas as Manager: As to Ruelas, the complaint shows on its face that he was manager of CTG from December 28, 2011, to June 2013.

In December 2011, BW Piezo was formed for the purposes of acquiring CTG. After the acquisition, BW Piezo and CTG executed the operating agreement for CTG on December 28, 2011, naming Ruelas and Chao as managers of CTG. [Complaint ¶¶15, 16] “After over a year of controlling CTG, BW Piezo decided to make changes at CTG. First, BW Piezo removed Mr. Ruelas and began interviewing potential management candidates. Next, BW Piezo decided to expand CTG’s business to medical, ocean, and mining applications. To effect this, BW Piezo began negotiations with Pengdi Han to acquire H.C. Materials, Inc.” [Complaint ¶17] “On or about June 2013, BW Piezo replaced Kevin Ruelas as a manager and officer with Ralph L. Phillips, hiring Mr. Phillips as President and Chief Executive Officer of CTG.” [Complaint ¶18]

Trustee alleges that all of the allegedly wrongful acts by CTG managers took place after Ruelas was replaced as manager. After ¶18, the Trustee does not mention Ruelas again until ¶¶31, 32, 35, and 36, which are conclusory paragraphs after incorporating the allegations in ¶¶1-29.

Trustee says that “Ruelas permitted BW Piezo to unilaterally control CTG for over a year,” referencing ¶17 of the complaint. [Opposition 6:1-2] First, Trustee does not allege that Ruelas permitted the owner to control the LLC, though that would not be surprising. Second, Trustee does not allege anything that Ruelas or BW Piezo did between December 28, 2011, and June 2013 that proximately caused harm to CTG.

The allegations of the complaint make it clear that Ruelas had no duties after June 2013 and all of the alleged breaches of duties took place after that date. Duty and breach of duty are elements of both of the causes of action in the complaint. Therefore, in the complaint, Trustee does not state facts sufficient to constitute a cause of action against Ruelas.

2. Statute of Limitation: For reasons discussed above with respect to the multi-party demurrer, the Court has determined that, based on the pleadings, the causes of action are not time-barred.

3. Leave to Amend: Trustee generally asks for leave to amend. He does not say what he would allege in any amendment.

“If there is a reasonable possibility that the defect in a complaint can be cured by amendment, it is an abuse of discretion to sustain a demurrer without leave to amend. [Citation.] The burden is on the plaintiff, however, to demonstrate the manner in which the complaint might be amended. [Citation.]” Hendy v. Losse, 54 Cal.3d 723, 742 (1991). “It is not up to the judge to figure that out.” Lee v. Los Angeles County Metropolitan Transportation Authority, 107 Cal.App.4th 848, 854 (2003). The plaintiff has the burden “to show what facts he or she could plead to cure the existing defects in the complaint.” McClain v. Octagon Plaza, LLC, 159 Cal.App.4th 784, 792 (2008). “The assertion of an abstract right to amend does not satisfy this burden. The plaintiff must clearly and specifically set forth the ‘applicable substantive law’ and the legal basis for amendment, i.e., the elements of the cause of action and authority for it. Further, the plaintiff must set forth factual allegations that sufficiently state all required elements of that cause of action. Allegations must be factual and specific, not vague or conclusionary.” Rossberg v. Bank of Am., N.A., 219 Cal.App.4th 1481, 1491 (2013) [internal quotations and citations omitted].

Still, “[i]f the plaintiff has not had an opportunity to amend the complaint in response to the demurrer, leave to amend is liberally allowed as a matter of fairness, unless the complaint shows on its face that it is incapable of amendment.” City of Stockton v. Superior Court, 42 Cal.4th 730, 747 (2007). It is conceivable that Trustee could allege something that happened between December 28, 2011, and June 2013 that would support the causes of action. Therefore, if Trustee can truthfully allege facts indicating that Ruelas had duties and breached those duties, he may amend the complaint.

4. Order: The Court sustains defendant Kevin Ruelas’s demurrer to the complaint of plaintiff Corporate Recovery Associates, LLC, as Trustee for the Liquidating Trust of Channel Technologies Group, LLC, with leave to amend on or before April 12, 2019.