Case Number: SC121128 Hearing Date: April 09, 2014 Dept: P

TENTATIVE RULING – DEPT. P

APR. 9, 2014 CALENDAR No: 2

SC121128 — FRIEDMAN, AS TTE. v. MURPHY, et al.

MOTIONS OF MAAG DEFENDANTS AND DEFENDANT MURPHY FOR ORDERS REQUIRING UNDERTAKING PURSUANT TO CCP 1030 and MOTION OF DEFENDANT MURPHY FOR ORDER REQUIRING PLAINTIFFS TO POST CORP. CODE 800 BOND

The Court will deny the motions.

This action concerns the disposition of assets of Southwestern Research Inc. (“SRI”), a medical corporation which specializes in clinical trials. The (Subchapter S) corporation was formed by doctors Dennis Munjack and (the principal defendant herein) John Murphy. After Dr. Munjack’s death, litigation ensued over three competing claims to ownership of his 50% share in SRI. The probate court determined that Dr. Munjack’s trust owned the shares. In this action, which alleges 13 causes of action and names eight different defendants, the trustee of that trust (Lois Freedman) and SRI’s Vice President, secretary, and director (Jared Stein) allege that Dr. Murphy, Murphy’s counsel in the underlying probate litigation (Edwin Schreiber and his law firm, who are also representing Murphy in this action), SRI’s Clinical Research Manager (Darrell Maag), SRI’s and Murphy’s CPAs (William Maxwell and his accounting firm), and others engaged in various defalcations resulting in, essentially, a looting of SRI’s assets. Plaintiffs also assert that Murphy and Maag have unlawfully started competing with SRI via a company which they operate, defendant Southern California Research, LLC (“SCR”), and that they have utilized SRI’s trade secrets, staff, and the like to SCR’s benefit – and SRI’s detriment.

SRI’s default has been entered. Plaintiff has requested default judgment against SRI; Murphy and the Schreiber Defendants filed written opposition to Plaintiffs’ request for entry of a default judgment by court.

Two sets of defendants – Darrel Maag and SCR (“the Maag Defendants”), on the one hand, and defendant Murphy, on the other – each move for an order requiring Plaintiffs, who reside in Massachusetts and Florida, to post a CCP 1030 plaintiff’s bond. In addition, Murphy moves for an order requiring that the trustee post a CCP 800 derivative action bond in the (statutory maximum) amount of $50,000.00. The Court will deny all three (related) motions.

Code of Civil Procedure section 1030 provides that an out-of-state plaintiff may be ordered to file an undertaking to secure an award of costs that may be awarded in the action. “The motion shall be made on the grounds that the plaintiff resides out of the state … and that there is a reasonable possibility that the moving defendant will obtain judgment in the action ….” CCP 1030(b). If the plaintiff fails to file the undertaking, the action “shall be dismissed as to the defendant in whose favor the order requiring the undertaking was made.” Id. “The purpose of the statute is to enable a California resident sued by an out-of-state resident to secure costs in light of the difficulty of enforcing a judgment for costs against a person who is not within the court’s jurisdiction.” Yao v. Superior Court (2002) 104 Cal.App.4th 327, 331 (internal quotations omitted).

Corporations Code section 800 sets forth “the terms and conditions under which a shareholder derivative action may be maintained. [Citation.]” West Hill Farms, Inc. v. RCO Ag Credit, Inc. (2009) 170 Cal.App.4th 710, 715. The purpose of the bond provision of subdivision (c) of section 800 is to shield the corporation from meritless lawsuits by requiring the plaintiff to provide a bond as a condition of maintaining the lawsuit. Jara v. Supreme Meats, Inc. (2004) 121 Cal.App.4th 1238, 1259. When a motion for a bond is made, the defendant must demonstrate either that he or she did not participate in the transaction complained of or that “there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its shareholders.” Corp. Code sec. 800, subds.(c)(1), (2). Here, Murphy moves for a bond on the latter ground, viz., he asserts that there are no true derivative claims in the complaint, but rather, individual claims “masquerading” as derivative claims.

As is well-explained in Plaintiffs’ opposition briefs filed in response to all three motions: (1) the complaint does allege derivative claims; (2) Murphy cannot seek bonds under both Corp. Code 800 and CCP 1030, as Corp. Code 800 applies here and the provisions of CCP 1030 are thus inapplicable; and (3) in any event, CCP 1030 does not apply to the plaintiff trustee, who is not suing in her individual capacity but rather, in her representative capacity. As to the first point, the three moving defendants have disregarded numerous allegations of the complaint, and construed others in an unduly narrow manner.

At this very preliminary stage in this litigation, the Court rejects the respective defendants’ assertions that, based solely on the allegations of the complaint, Plaintiffs have failed to state any viable claim against them, as a matter of law (in this regard, the Court observes that the Maag Defendants did not address three of Plaintiffs’ claims [See, Opp. To Maag Defendants’ CCP 1030 Motion, at 8:8-15]). This is particularly true considering that the complaint at bar is the initial iteration of the complaint, viz., even if the claims were subject to demurrer, it is highly likely that the Court would grant leave to amend.

The Court notes that the combined reply brief filed by Murphy on April 4, 2014 merely re-iterates arguments asserted in the moving briefs on Murphy’s motions under CCP 1030 and Corp. Code 800, and does not meaningfully respond to the well-written, facially valid arguments interposed in Plaintiff’s opposition briefs as to the arguments described in the immediately-preceding paragraph. The reply brief filed by the Maag Defendants on April 1, 2014 does address these arguments, albeit in a perfunctory – and also unconvincing – manner.

All three motions for bonds are denied with prejudice in their entirety.

In light of the Court’s rulings today:

The Schreiber Defendants’ motion for a CCP 1030 bond currently set for hearing on August 26, 2014 is advanced to this date and denied with prejudice.

PLAINTIFF FRIEDMAN’S APPLICATION FOR LEAVE TO TAKE EXPEDITED DISCOVERY

Evidentiary matters

Plaintiffs’ purported request for judicial notice (Motion, 8:2) is denied due to non- compliance with CRC 3.1113(l) and 3.1306(c).

Merits

Plaintiff Friedman as Trustee (the motion is not made on behalf of the other plaintiff represented by the same law firm) seeks leave to conduct expedited discovery in support of the request for an OSC re Preliminary Injunction against Murphy and the Maag Defendants. The Schreiber Defendants filed an anti-SLAPP motion, which motion is currently set for hearing on June 18, 2014.

Under CCP 425.16(g), upon the filing of a special motion to strike, all discovery proceedings in the action are stayed until notice of entry of the trial court’s ruling on the special motion to strike. Accordingly, Plaintiffs filed the motion at bar. She asserts that the CCP 425.16 discovery stay was too broadly worded by the Legislature and was not intended to apply under the unusual circumstances at bar, and that, in any event, the “good cause” required to modify or lift the stay (CCP 425.16(g), last sentence) exists here. Three sets of defendants – Murphy, the Maag Defendants, and the Schreiber Defendants – each filed an opposition to the motion.

Section 425.16(g) provides: “All discovery proceedings in the action shall be stayed upon the filing of a notice of motion made pursuant to this section. The stay of discovery shall remain in effect until notice of entry of the order ruling on the motion. The court, on noticed motion and for good cause shown, may order that specified discovery be conducted notwithstanding this subdivision.”

Section 425.16 expresses a legislative intent “to protect defendants from having to expend resources defending against frivolous SLAPP [strategic lawsuit against public participation] suits unless and until a plaintiff establishes the viability of [his] claim by a prima facie showing.” Britts v. Superior Court (2006) 145 Cal.App.4th 1112, 1124. In enacting such legislation, “‘not only did the Legislature desire early resolution to minimize the potential costs of protracted litigation, it also sought to protect defendants from the burden of traditional discovery pending resolution of the motion.'” Id.

As previously noted, the Court may permit limited discovery “for good cause shown” notwithstanding the discovery stay imposed after a motion to strike has been filed. CCP 425.16(g); see, Schroeder v. Irvine City Council (2002) 97 Cal.App.4th 174, 190. “Decisions that have considered what constitutes such a showing of good cause have described it as a showing ‘that a defendant or witness possesses evidence needed by plaintiff to establish a prima facie case.’ [Citation.] The showing should include some explanation of ‘what additional facts [plaintiff] expects to uncover….’ [Citations.] Only in these circumstances is the discretion under section 425.16, subdivision (g) to be ‘liberally exercise[d].’ [Citation.]” 1-800 Contacts, Inc. v. Steinberg(2003) 107 Cal.App.4th 568, 593.

Plaintiffs’ assertion that the CCP 425.16 discovery stay was too broadly worded by the Legislature and was not intended to apply under the unusual circumstances at bar, viz., was not intended to prevent discovery pertaining to claims against co- defendants who have not brought an anti-SLAPP motion, is a reasonable one. Indeed, considering that in numerous actions the denial of injunctive relief effectively ends an action, it is appropriate to consider that a defendant could abuse the anti-SLAPP statute by filing a frivolous anti-SLAPP motion primarily or solely to prevent discovery which would aid the plaintiff in obtaining crucial injunctive relief; in such an instance the defendant may, after conducting a cost/benefit analysis, opt to pay attorney’s fees under CCP 425.16(c) as the “price” of an order denying plaintiff’s request for injunctive relief.
The Court will hear argument on whether the circumstances in this case warrant giving effect to the final sentence of subsection 425.6(g), and, if so, the scope of discovery to be allowed; e.g., all all of the items in plaintiff’s request at page 7 of the Notice of Motion and Motion appropriate at this stage?

In his regard, counsel should address the following language from 1-800 Contacts, Inc. v. Steinberg, supra, 107 Cal.App.4th at 594, which was not discussed in any of the briefs presented to the Court, notwithstanding its pertinence: “The request for discovery that plaintiff presented exceeded the contemplation of section 425.15, subdivision (g) in other respects. Plaintiff expressly sought to take Steinberg’s deposition so as to prepare not only for the motion to strike but also for the motion for preliminary injunction, by which plaintiff sought to enjoin Steinberg from representing or assisting optometrists regarding mail order contact lens regulation, with or without Conder or plaintiff’s confidential information. And to that end, the notice of deposition extended to documents beyond the elements of a prima facie case.”

Plaintiff should also discuss whether her reliance on Lafayette Morehouse, Inc. v. Chronicle Publishing Co. (1995) 37 Cal.App.4th 855, for the proposition that leave to conduct discovery should be liberally granted, is misplaced. At best, Lafayette stands for the proposition that liberality of leave to conduct limited discovery should be granted when the information sought by a request for limited discovery is within the particular knowledge of the defendant, or the defendant’s agents or employees, and then only to establish a prima facie case. See, Lafayette Morehouse, Inc. at 868. In this regard, instructive is Paterno v. Superior Court (2008) 163 Cal.App.4th 1342: “[Plaintiff] misconstrues dicta in Lafayette Morehouse, Inc. v. Chronicle Publishing Co. (1995) 37 Cal.App.4th 855, 868…, an early anti-SLAPP case, for the proposition that trial courts should ‘liberally’ allow pre-SLAPP discovery in defamation cases. The court in Lafayette Morehouse affirmed the dismissal of a libel action against a newspaper because the anti-SLAPP statute applied to news reporting activities. The court hinted, in dicta, that trial courts should ‘liberally’ exercise their discretion to authorize reasonable discovery ‘when evidence to establish a prima facie case is reasonably shown to be held, or known, by defendant or its agents and employees.’ … [Para.] The Lafayette Morehouse decision ‘predate[s] the 1997 amendment requiring a broad interpretation of section 425.16.’ (Damon v. Ocean Hills Journalism Club (2000) 85 Cal.App.4th 468, 478, 102 Cal.Rptr.2d 205.) Accordingly, we join the courts that have limited the reach of Lafayette Morehouse’s language.” Paterno, 163 Cal.App.4th at 1350-51 (emphasis added).

Motion is __________________________.

PLAINTIFF’S APPLICATION FOR TEMPORARY RESTRAINING ORDER AND OSC RE PRELIMINARY INJUNCTION

Evidentiary matters

Murphy filed approximately 65 evidentiary objections to declarations filed in support of Plaintiff’s motion for injunctive relief, in which objections the Maag Defendants joined. The sheer number of evidentiary objections is burdensome to the Court, particularly in this time of crippling budget cuts which have stretched the Court’s time and resources quite thin. Based on the Court’s denial of the application for other reasons, the objections are moot. Nevertheless, insofar as the application may be renewed, lest the objections find their way before the Court once again: counsel are to meet and confer on the evidentiary objections these morning in a good faith effort to resolve as many of the objections as is reasonably possible — AND THEN REPORT TO THE COURT ON WHICH OBJECTIONS REMAIN TO BE RULED UPON.

Merits

There are defects in the motion. As matters of example only, notwithstanding the accusations leveled in the motion at bar, Plaintiffs did not specifically describe the conduct sought to be enjoined; nor did they submit a proposed order in compliance with CRC 3.1150; nor did Plaintiffs discuss the mandatory injunction bond. Do these defects alone require that the application be denied without prejudice?

If it is denied, then:

If the application is renewed, same is to be entirely-self contained, viz., the Court should not be required to look through the file in this action or previously-filed documents; likewise, any opposition documents are to be entirely self-contained. Plaintiffs’ counsel should bear in mind that, considering the likely harm to Murphy and the Maag Defendants (Murphy asserts that injunctive relief will “kill” SCR), the Court must, and will, closely scrutinize any application for injunctive relief.

PLAINTIFF’S REQUEST FOR DEFAULT JUDGMENT BY COURT AGAINST SOUTHWESTERN RESEARCH, INC.

The Court agrees with the assertions of Murphy and the Schreiber Defendants, posited in their oppositions to Plaintiffs’ request for default judgment, that the requested several judgment against SRI would result in an unfair procedural advantage (intended or not) in Plaintiffs’ favor and against the real parties in interest in this litigation, viz., Murphy and the Schreiber Defendants.

The Court exercises its discretion under CCP 579 and denies the request for a several judgment against SRI.

Request is denied without prejudice to a request for court judgment by default after judgment or dismissal is entered against all other named parties.

OTHER MATTERS

SRI has already been the subject of intense litigation – and the concomitant use of the resources and time of the trial and appellate courts. The Court urges counsel for all five sets of parties to consider a prompt settlement of this action.

Counsel are now ordered to comply with Local Rule 3.26 and Appendix 3A [formerly Rule 7.12], which by this order is now made mandatory in this action.

NOTICE