Stan Kanarowski v. Bruker Nano, Inc.
Case No: 19CV02277
Hearing Date: Mon Aug 05, 2019 9:30

Nature of Proceedings: Demurrer

Stan Kanarowski v. Bruker Nano, Inc., #19CV02277, Judge Sterne

Hearing Date: August 5, 2019

Matter: Demurrer

Attorneys:

For Plaintiff: Samuel G. Brooks (Call & Jensen – Newport Beach)

For Defendant: Conor C. McNamara (Nixon Peabody – San Francisco)

Tentative Ruling: The court sustains, in part, and overrules, in part, defendant Bruker Nano, Inc.’s demurrer to plaintiff Stan Kanarowski’s complaint. The court sustains the demurrer to the breach of the implied covenant of good faith and fair dealing cause of action without leave to amend. The court overrules the demurrer in all other respects.

Background:

In his complaint, plaintiff Stan Kanarowski alleges:

Kanarowski is agent and attorney-in-fact for former Securityholders of Vutara, Inc. [Complaint ¶1] On February 6, 2013, Vutara entered into a confidentiality agreement with defendant Bruker Nano, Inc., for the purpose of exploring Bruker’s acquisition of Vutara. [¶7] On March 11, 2014, Bruker provided a Letter of Intent proposing that Bruker purchase Vutara. The Letter of Intent anticipated a $5.65 million up-front payment, coupled with additional “earn out” payments based on Vutara’s revenues in the years 2015, 2016, and 2017. [¶¶8, 9] After a period of due diligence and negotiation, the parties reached an agreement for Bruker to purchase Vutara. Pursuant to the agreement, Bruker formed Vutara Mergerco, Inc. for the purpose of the transaction, and the parties executed an Agreement and Plan of Merger (the “Merger Agreement”). [¶10] The Merger Agreement closed on July 25, 2014. [¶11] The Merger Agreement reduced the up-front payment to $3.9 million and added two potential milestone earn-outs, in addition to the previously contemplated revenue earn-outs. [¶¶12, 13]

Both the letter of intent and the final Merger Agreement required Bruker to commit to a specific staffing plan, and to budget for internal capital expenditures for four demonstration systems to be deployed in the field-selling process during the calendar years 2014 and 2015. [¶19] Bruker did not perform its obligations under the Merger Agreement to provide proper staffing and internal capital expenditures for Vutara. [¶24] Because of Bruker’s failure to provide the agreed upon staff and delays caused by Bruker, Vutara was prevented from completing the actual manufacture of three systems by the December 31, 2014 deadline, causing the Securityholders’ loss of a milestone earn-out payment of $1,125,000. [¶25] Bruker also failed to make efforts to reach the second milestone, causing the Securityholders’ loss of another milestone earn-out payment of $1,125,000. [¶26] Bruker’s breaches of the Merger Agreement also caused losses of revenue earn-out payments. [¶¶33, 34, 35]

In the complaint, plaintiff asserts causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing.

Demurrer: Defendant demurs to both causes of action in the complaint on the grounds that plaintiff fails to state facts sufficient to constitute the causes of action and for uncertainty. Specifically, defendant contends plaintiff has no authority for maintaining the causes of action. Plaintiff opposes the demurrer.

1. Pleadings and Rule Compliance: 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). Both parties violate these rules by not counting the first page and by numbering tables with Roman numerals. This made it difficult for the court to locate pages in the electronically filed pleadings that correspond to the pages listed in the tables of contents. CRC 2.109 and current 3.1113(h) have been in effect since January 1, 2017. Responsible counsel must familiarize themselves with and follow applicable court rules.

2. Demurrer Standards: 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).

3. Real Party in Interest: Defendant contends that plaintiff Kanarowski cannot maintain the breach of contract and breach of the implied covenant of good faith and fair dealing causes of action because he is not a party to the contract. (Defendant points out that plaintiff originally filed a complaint in the United States District Court, which dismissed the federal claims with prejudice and, as to the contract claims, “cautioned Plaintiff that if he did not plead facts demonstrating how he could bring this lawsuit as an individual on behalf of the former Securityholders, it would constitute a very serious deficiency in his Complaint.” Defendant does not provide anything from that court. This court is not bound by any ruling or dicta in the federal court and will address the issues inedependently.)

“Every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute.” CCP § 367. But “a person with whom, or in whose name, a contract is made for the benefit of another” “may sue without joining as parties the persons for whose benefit the action is prosecuted.” CCP § 369(a)(3). “[S]ection 369 is an exception to the real party in interest requirement set forth in section 367.” Brown v. Superior Court, 19 Cal.App.5th 1208, 1220-1221 (2018).

The preamble to the Merger Agreement reads: “THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made and entered into as of June 20, 2014, by and among BRUKER NANO, INC., an Arizona corporation (“Buyer”), VUTARA MERGERCO, INC., a Delaware corporation and wholly-owned subsidiary of Buyer (“Mergerco”), VUTARA, INC., a Delaware corporation (the “Company”), and Stan Kanarowski, an individual (“Securityholders’ Representative”).” The Merger Agreement indicates on its face that plaintiff is a party in a representative capacity.

Defendant stresses that plaintiff did not sign the Merger Agreement in his individual capacity. This is true and he does not purport to bring this action in his individual capacity but “in his representative capacity as the appointed Securityholders’ Representative for former security holders in Vutara, Inc., including himself.” [Complaint ¶1]

Defendant argues that plaintiff Kanarowski is not a “real party in interest” because he has not set forth any facts demonstrating that he has the power or authority to bring this case on behalf of all Vutara Securityholders. But, at §2.9(a), the Merger Agreement provides: “By virtue of the adoption and approval of the Merger and this Agreement by the Securityholders, each Securityholder shall be deemed to have agreed to appoint Stan Kanarowski as the sole representative of such Securityholder to act as the agent and on behalf of such Securityholder for all purposes under this Agreement and Stan Kanarowski hereby accepts its appointment as Securityholders’ Representative.” That subsection goes on to list powers and authorities of the Securityholders’ Representative “without limiting the foregoing.” Defendant, as “Buyer” under the Merger Agreement, expressly agreed that the Merger Agreement and other Transaction Documents “constitutes the legal, valid and binding agreement of Buyer and Mergerco, enforceable against Buyer and Mergerco, as applicable, in accordance with its terms….” [Merger Agreement §5.3] Since Kanarowski is “as the sole representative of [each] Securityholder to act as the agent and on behalf of such Securityholder for all purposes under this Agreement,” he necessarily has the contractual power and authority to enforce the agreement on behalf of each Securityholder.

Defendant argues that CCP § 369(a)(3) does not give plaintiff the right to sue on behalf of the securityholders, citing Brown v. Superior Court, supra. But that case did not involve a party who contracted with the defendant in his name for the benefit of others. Rather, the plaintiff took an assignment of claims individuals had against entities that made or serviced their home loans and those individuals transferred a 5% interest in each of their homes to the plaintiff. Id., 19 Cal.App.5th at 1212. The Court of Appeal held that § 369 did not address situations created by partial assignments or allow a partial assignee to pursue litigation on behalf of one or more partial assignors without joining the assignors. “[W]hen the contract or contracts in question do not create a fiduciary relationship in which the plaintiff is acting solely for the benefit of another person or group of persons, the plaintiff is not ‘a person with whom … a contract is made for the [sole] benefit of another.’” Id. at 1222. “In summary, section 369, subdivision (a)(3) does not apply to assignments where the plaintiff obtains a partial interest in the outcome of the litigation and the assignors retain a partial interest in the outcome.” Id.

The situation here is different from that in Brown. Plaintiff here did not take a partial assignment of securityholders’ claims. Rather, he contracted in his name as representative for the securityholders’ benefit—precisely the relationship contemplated in § 369(a)(3). The contract not created a fiduciary relationship in which the plaintiff is acting solely for the benefit of a group of persons. That he is one of the securityholders does not mean the action is maintained solely for the group as a whole. The court concludes that § 369(a)(3) and the Merger Agreement do authorize plaintiff to bring this action.

4. Breach of the Implied Covenant of Good Faith and Fair Dealing: Defendant demurs to this cause of action as duplicative of the breach of contract cause of action. Plaintiff acknowledges that allegations of breach of the implied covenant of good faith and fair dealing do not support an independent cause of action in this case and does not oppose the demurrer on this discrete issue. The court will sustain the demurrer to the breach of the implied covenant of good faith and fair dealing without leave to amend.

5. Uncertainty: Defendant contends the complaint is uncertain because it does not identify which former securityholders have agreed to allow plaintiff to represent them or how many are included in plaintiff’s “vague grouping.” As discussed above, the Merger Agreement allows plaintiff to bring this action. As to who the securityholders are, that is an issue for plaintiff in the event of any recovery as he is acting in a fiduciary capacity with respect to them. Also, the Merger Agreement expressly defines the category of securityholders. [Merger Agreement §1.1, pp. 15-16] The complaint is not uncertain.

6. Order: The court sustains, in part, and overrules, in part, defendant Bruker Nano, Inc.’s demurrer to plaintiff Stan Kanarowski’s complaint. The court sustains the demurrer to the breach of the implied covenant of good faith and fair dealing cause of action without leave to amend. The court overrules the demurrer in all other respects.