Case Number: EC060707 Hearing Date: June 06, 2014 Dept: NCD

1.) Demurrer of Defendant Jon S. Edwards to the Complaint

2.) Demurrer of Defendant Lynda Kay Parker to the Complaint

3.) Plaintiff and Cross-Defendant Jay Baumgardner’s Demurrer to Cross-Complaint

4.) Plaintiff and Cross-Defendant NRG Recording Services, Inc.’s Demurrer to Cross-Complaint

5.) Plaintiff and Cross-Defendants Jay Baumgardner and NRG Recording Services, Inc.’s Motion to Strike Cross-Complaint

6.) Cross Defendant Annette Scott’s Demurrer to Cross-Complaint

7.) Cross Defendant Deanna R. Baugardner’s Demurrer to Cross-Complaint

TENTATIVE:
1.) Demurrer of Defendant Jon S. Edwards to the Complaint is SUSTAINED for the reasons stated in the moving papers. Edwards is not alleged to have been a party to the subject agreement, so cannot be held personally responsible under the facts alleged for breach of the contract. The cause of action is not a tort claim, and as argued in the reply, any purported claim for interference with contract is not and cannot likely be stated under these circumstances where Edwards was acting as the managing member on behalf of the company.

Ten days leave to amend, if possible.

2.) Demurrer of Defendant Lynda Kay Parker to the Complaint is SUSTAINED for the reasons stated in the moving papers. The pleading fails to sufficiently allege the elements to request an accounting as against this defendant, as no facts support any claim that she is a fiduciary or otherwise owes a duty to account. To the extent the claim is for unjust enrichment, this is not a stand alone claim, and the pleading fails to sufficiently allege a cause of action against this defendant which could give rise to a right of restitution.

Ten days leave to amend, if possible.

3.) Plaintiff and Cross-Defendant Jay Baumgardner’s Demurrer to Cross-Complaint is SUSTAINED as to the eleventh through nineteenth causes of action (derivative claims). The pleading fails to allege that cross-complainant complied with Corporations Code section 17501 as it is not alleged that Edwards either informed the limited liability company or managers in writing of the ultimate facts of each cause of action against each defendant or delivered to the limited liability company or the managers a true copy of the complaint he proposed to file.
Demurrer is OVERRULED as to all other causes of action and on all other grounds.

Ten days leave to amend.

4.) Plaintiff and Cross-Defendant NRG Recording Services, Inc.’s Demurrer to Cross-Complaint is SUSTAINED as to the fourth cause of action for aiding and abetting breach of fiduciary duty and sixth cause of action for aiding and abetting fraudulent concealment WITHOUT LEAVE TO AMEND, as NRG Recording has no fiduciary duty or duty to disclose based on such duty to cross-complainant. See Everest Investors 8 v. Whitehall Real Estate Ltd. Partnership XI (2002, 2nd Dist.) 100 Cal.App.4th 1102, 1107-1108.

Demurrer is SUSTAINED as to the eleventh through nineteenth causes of action (derivative claims). The pleading fails to allege that cross-complainant complied with Corporations Code section 17501 as it is not alleged that Edwards either informed the limited liability company or managers in writing of the ultimate facts of each cause of action against each defendant or delivered to the limited liability company or the managers a true copy of the complaint he proposed to file.

Demurrer is SUSTAINED to the seventh cause of action for unfair competition, as it is not clear from the pleading what conduct engaged in by cross-defendants, other than Baumgardner, constitutes unfair, unlawful or fraudulent business practices, and the claim is not specifically pleaded.

Demurrer is SUSTAINED to the ninth cause of action for intentional interference with prospective economic advantage on the ground it is not clear how this cross-defendant, as opposed to Baumgardner and Scott, was involved in such conduct.

Ten days leave to amend as to the seventh, ninth, and eleventh through nineteenth causes of action only.

5.) Plaintiff and Cross-Defendants Jay Baumgardner and NRG Recording Services, Inc.’s Motion to Strike Cross-Complaint is MOOT as to the prayer for attorneys’ fees in connection with the derivative causes of action. Motion to strike is DENIED on all other grounds.

Plaintiffs and Cross-Defendants Jay Baumgardner and NRG Recording Services’ Motion to Strike is otherwise DENIED.

6.) Cross Defendant Annette Scott’s Demurrer to Cross-Complaint is SUSTAINED as to the sixth cause of action for aiding and abetting fraudulent concealment WITHOUT LEAVE TO AMEND, as Scott has no fiduciary duty or duty to disclose based on such duty to cross-complainant. See Everest Investors 8 v. Whitehall Real Estate Ltd. Partnership XI (2002, 2nd Dist.) 100 Cal.App.4th 1102, 1107-1108.

Demurrer is SUSTAINED as to the eleventh through nineteenth causes of action (derivative claims). The pleading fails to allege that cross-complainant complied with Corporations Code section 17501 as it is not alleged that Edwards either informed the limited liability company or managers in writing of the ultimate facts of each cause of action against each defendant or delivered to the limited liability company or the managers a true copy of the complaint he proposed to file.

Demurrer is SUSTAINED to the seventh cause of action for unfair competition, as it is not clear from the pleading what conduct engaged in by cross-defendants, other than Baumgardner, constitutes unfair, unlawful or fraudulent business practices, and the claim is not specifically pleaded.

Demurrer is OVERRULED as to the ninth cause of action for intentional interference with prospective economic advantage. [See para. 48].

Ten days leave to amend as to the seventh, and eleventh through nineteenth causes of action only.

7.) Cross Defendant Deanna R. Baumgardner’s Demurrer to Cross-Complaint is SUSTAINED as to the sixth cause of action for aiding and abetting fraudulent concealment WITHOUT LEAVE TO AMEND, as Deanna Baumgardner has no fiduciary duty or duty to disclose based on such duty to cross-complainant. See Everest Investors 8 v. Whitehall Real Estate Ltd. Partnership XI (2002, 2nd Dist.) 100 Cal.App.4th 1102, 1107-1108.

Demurrer is SUSTAINED as to the eleventh through nineteenth causes of action (derivative claims). The pleading fails to allege that cross-complainant complied with Corporations Code section 17501 as it is not alleged that Edwards either informed the limited liability company or managers in writing of the ultimate facts of each cause of action against each defendant or delivered to the limited liability company or the managers a true copy of the complaint he proposed to file.

Demurrer is SUSTAINED to the seventh cause of action for unfair competition, as it is not clear from the pleading what conduct engaged in by cross-defendants, other than Baumgardner, constitutes unfair, unlawful or fraudulent business practices, and the claim is not specifically pleaded.

Ten days leave to amend as to the seventh, and eleventh through nineteenth causes of action only.

CAUSES OF ACTION: from Complaint
1) Breach of Operating Agreement
2) Breach of Fiduciary Duty
3) Breach of Lease Agreement
4) Accounting/Unjust Enrichment
5) Declaratory and/or Injunctive Relief
6) Dissolution of Casecore, LLC

CAUSES OF ACTION: from Cross-Complaint
1) Dissolution and Winding Up
2) Breach of Contract
3) Breach of Fiduciary Duty
4) Aiding and Abetting Breach of Fiduciary Duty
5) Fraudulent Concealment
6) Aiding and Abetting Fraudulent Concealment
7) Unfair Competition
8) Conversion
9) Intentional Interference with Prospective Economic Advantage
10) Declaratory Relief
11) Breach of Contract—Derivative Claim
12) Breach of Fiduciary Duty—Derivative Claim
13) Aiding and Abetting Breach of Fiduciary Duty—Derivative Claim
14) Fraudulent Concealment—Derivative Claim
15) Aiding and Abetting Fraudulent Concealment – Derivative Claim
16) Unfair Competition—Derivative Claim
17) Intentional Interference with Prospective Economic Advantage—Derivative Claim
18) Conversion—Derivative Claim
19) Declaratory Relief—Derivative Claim

SUMMARY OF FACTS:
Plaintiff Jay Baumgardner alleges that he and Jon Edwards each own a 50% interest in the member managed company Casecore, LLC, which is in the business of producing, importing and selling musical instrument cases, guitar pedals, purses and other products.

Plaintiff alleges that he has contributed a total of capital and loans to Casecore in excess of $500,000, and that defendant Edwards and his wife have misappropriated funds, and that Edwards has continued to use his own name to register intellectual property developed by Casecore, and has entered into deals in his own name instead of the company name.

The complaint also alleges that Casecore leased warehouse space from plaintiff NRG Recording Services, Inc., a company owned by plaintiff independently of defendant, but that Casecore did not pay rent owed to NRG.

The complaint alleges that defendant Edwards has failed and refused to provide access to plaintiff to the company book and records, and seeks a judicial dissolution of Casecare and accounting of member rights and interests.

Defendant Edwards has filed a cross complaint against plaintiffs Baumgardner and NRG, as well as against Baumgardner’s mother, Deanna Baumgardner, and Annette Scott, an employee of NRG, alleging that Baumgardner breached the Casecore Operating Agreement by failing to contribute capital as promised, and by directing Scott not to show the funds were due by him on the company books and records, and that Baumgardner misappropriated funds from the company by entering into a purported lease with his company NRG, making payments to his mother and to defendant Scott, and making payments from Casecore funds on his home loan, and to pay for his and third parties’ personal expenses. The cross-complaint also alleges that Baumgardner entered into transactions for his own personal benefit concerning matters which should have been entered into on behalf of the company.

ANALYSIS:
Demurrers to Complaint (2)
Demurrer of Defendant Edwards
Defendant Edwards argues that the third cause of action for breach of the purported lease agreement between Casecore and NRG is not sufficiently stated against Edwards, who is not alleged to be a party to the lease.

Plaintiffs argue that the cause of action, although not so labelled, actually states a cause of action against Edwards for inducing Casecore to breach its contract.

As pointed out in the reply, while case law recognizes that a corporate officer can be liable for a tort which he authorizes the corporation to commit or participate in, the cause of action here is for breach of contract, not a tort claim. In addition, to the extent the argument is that Edwards interfered with a contract, Edwards as the managing member of Casecore, cannot have interfered by inducing breach a contract, as an agent for a contracting principal generally cannot be held liable for interfering with the principal’s contract with a third party. Mintz v. Blue Cross of California (2009) 172 Cal.App.4th 1594, 1604 (holding that Blue Cross, acting as agent for CalPERS in administering insurance contract in course and scope of its agency, could not be held liable for inducing a breach of the corporation’s contract). The demurrer is sustained.

Demurrer of Defendant Parker
Defendant Parker, the wife of defendant Edwards, demurs to the only cause of action asserted against her, the fourth cause of action for accounting and unjust enrichment. She argues that there is no legal relationship or contract between plaintiff and Parker, she has never been a member, manager or employee of Casecore, and so the claim fails against her.

To state a cause of action for an accounting, a complaint must allege
1) Fiduciary relationship or other circumstances appropriate to the remedy (e.g. accounts so complicated that ordinary legal action demanding fixed amount is impracticable)
2) Balance due plaintiff from defendant which can only be ascertained by an accounting
San Pedro Lumber Co. V. Reynolds (1896) 111 Cal. 588, 596.

The cause of action alleges that defendant Edwards and his wife diverted money that belonged to plaintiffs to themselves. [Para. 52]. The complaint also alleges that defendants owe a “duty” or have failed to properly account. [Para. 56]. There is no allegation that a fiduciary relationship exists between plaintiff and Parker, and it appears that while an accounting can be obtained with respect to Edwards, there is no basis for an accounting to be sought against his wife.

To the extent the claim seeks recovery for unjust enrichment, defendant argues that there is no such cause of stand alone cause of action, and no separately actionable wrong has been alleged with respect to Parker.

Here, no other cause of action giving rise to restitution has been stated against Parker, and the demurrer is therefore sustained.

Demurrers to Cross-Complaint (4)
Fourth Cause of Action—Aiding and Abetting Breach of Fiduciary Duty—Demurrer by NRG
Cross-defendant NRG argues that this cause of action cannot be maintained because NRG cannot be held liable for a conspiracy to breach a fiduciary duty when it owes no such duty to Edwards.

In Everest Investors 8 v. Whitehall Real Estate Ltd. Partnership XI (2002) 100 Cal.App.4th 1102, the Second District affirmed the trial court’s dismissal of a complaint after sustaining a demurrer without leave to amend where an alleged co-conspirator to a breach of fiduciary duty claim owed no direct fiduciary duty to plaintiff. The court held:
“As the Supreme Court put it in Applied
Equipment, the “invocation of conspiracy does not alter th[e]
fundamental allocation of duty. Conspiracy is not an independent tort; it cannot
create a duty or abrogate an immunity. It allows tort recovery only against a
party who already owes the duty and is not immune from liability based on
applicable substantive tort law principles.” (Id. at p. 514.)

Since the only duty allegedly breached as a result of the alleged conspiracy
is a fiduciary duty owed by the General Partners but not by Whitehall, Whitehall
cannot be held accountable to Everest on a conspiracy theory.
Everest, at 1107-1108.

Here, there is no direct fiduciary duty alleged to be owed by NRG to Edwards, and it does not appear any can be alleged. The demurrer is sustained without leave to amend.

Fifth Cause of Action—Fraudulent Concealment—Demurrer by Baumgardner
Baumgardner argues that the claim is not alleged with sufficient specificity. The cause of action is not ideal, as it incorporates all previous allegations and alleges that Baumgardner owed a duty to disclose the amounts, dates, payees and purpose for the disbursement of Casecore funds “alleged above.” The opposition relies on paragraph 35, in which Edwards alleges in some detail unauthorized transfers, when they were made, and the amount transferred, which were concealed from Edwards. This is sufficient to allege at least one instance of fraudulent concealment, and the demurrer is therefore overruled.

Sixth Cause of Action—Aiding and Abetting Fraudulent Concealment—Demurrer by NRG, Deanna Baumgardner and Scott
Again, as noted above, no conspiracy liability can be imposed for breach of fiduciary duty where the party to be charged owes no direct fiduciary duty under Everest Investors 8 v. Whitehall Real Estate Ltd. Partnership XI (2002, 2nd Dist.) 100 Cal.App.4th 1102. The gravamen of this claim is based on aiding and abetting fraudulent concealment, which only becomes fraudulent because there was a fiduciary duty to disclose. The Second District in Everest compared the situation before it to a case of constructive fraud, which depends on the existence of an underlying fiduciary duty, as opposed to a case of actual fraud, which depends on a duty to abstain from injuring plaintiff through express misrepresentations, independent of any fiduciary duty. The demurrers to this cause of action are therefore sustained without leave to amend.

Seventh Cause of Action—Unfair Competition– Demurrer by Baumgardner, NRG, Deanna Baumgardner and Scott
Defendants argue that this claim is insufficient as it is not clear what unfair business practices are alleged here.

To state a cause of action for Unfair Business Practices, a plaintiff must allege the following elements:
1) Defendant has engaged in more than one unlawful, unfair, or fraudulent transaction, including unfair, deceptive, untrue or misleading advertising
2) Plaintiff’s right to restitution, if any. Damages are not recoverable.
3) Plaintiff’s right to injunctive relief, if any.
Bus. & Prof. Code § 17200 et seq.; Dean Witter Reynolds, Inc. v. Superior Court (1989) 211 Cal.App.3d 758.

The cause of action is again very general, incorporating previous allegations and stating, “The cross-defendants’ actions, as alleged above, constitutes unfair competition within the meaning of California Business and Professions Code § 17200.” [Para. 68]. Again, the court may refer to paragraph 35 and find that fraudulent practices have been alleged as to Baumgardner. However, as to the other cross-defendants, it is not clear what is meant to be incorporated, and generally since this is a statutory cause of action, it should be pleaded with specificity. In addition, there is authority under which UCL claims cannot be based on vicarious liability, making it particularly inappropriate to refer to the conduct of more than one defendant jointly as is done here. See Emery v. Visa International Service Association (2002) 95 Cal.App.4th 952, 960:
“We need go no further than to remind plaintiff that his unfair practices claim under section 17200 cannot be predicated on vicarious liability. “The concept of vicarious liability has no application to actions brought under the unfair business practices act.” ( People v. Toomey (1984) 157 Cal. App. 3d 1, 14 [203 Cal. Rptr. 642] (Toomey).) A defendant’s liability must be based on his personal “participation in the unlawful practices” and “unbridled control” over the practices that are found to violate section 17200 or 17500. ( Toomey, supra, 157 Cal. App. 3d at p. 15.) Unlike Mr. Toomey, VISA exercised no control over the preparation or distribution of the solicitations, nor did it have any relationship with the merchants who did.”
Emery, at 960.

The demurrer by the remaining cross-defendants is sustained with leave to amend.

Eighth Cause of Action—Conversion—Demurrer by Baumgardner
To state a cause of action for conversion, plaintiff must allege the following elements: Ownership, or right to possession of property; wrongful disposition of property right; and damages. Imperial Valley Land Co. v. Globe Grain & Milling Co. (1921) 187 Cal.352, 354. See also 5 Witkin, Cal.Proc.3d section 654.

The pleading standards with respect to conversion are ordinarily not particularly strict, and it has long been held that a general allegation that defendant “converted the property to his own use” is sufficient to withstand demurrer. See Daggett v. Gray (1895) 110 Cal. 257, 260; 5 Witkin Cal.Proc. 3d sec. 662.

Here, the cause of action fairly clearly alleges that Baumgardner took personal property belonging to Edwards, describes the property, including two guitars, road cases, a dinette set and tools. [Para. 72].

The argument seems to be that Baumgardner could not have converted property of Casecore, which belonged at least in part to Baumgardner. However, the cause of action alleges conversion of personal property which belonged to Edwards, and the court cannot sustain a demurrer to part of a cause of action. The demurrer is overruled.

Ninth Cause of Action—Intentional Interference With Prospective Economic Advantage—Demurrer by Baumgardner, NRG, and Scott
To state a claim for interference with prospective economic advantage, the complaint must allege:
a) an economic relationship between the plaintiff and the third party, with the probability of future economic benefit to the plaintiff.
b) defendant knew of the relationship
c) intentional and wrongful acts on the part of the defendant designed to disrupt the relationship
d) actual disruption of the relationship
e) economic harm to the plaintiff proximately caused by the acts of the defendant.
Youst v. Longo, (1987) 43 Cal.3d 64, 71 See also, Witkin §§ 730-732.

Here, the cause of action itself is very general, but incorporates previous allegations, in which several specific instances of interference are alleged in some detail, implicating both Baumgardner and Scott, although it is not clear how NRG Recording was involved in the alleged interferences. [See Para. 48]. The demurrer by NRG is sustained, but the demurrer by Baumgardner and Scott is overruled.

Tenth Cause of Action—Declaratory Relief—Demurrer by NRG
A very liberal pleading standard applies to declaratory relief claims:
“ A complaint for declaratory relief is sufficient if it sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the respective parties… and requests that these rights and duties be adjudged by the court.”
Wellenkamp v. Bank of America (1978) 21 Cal.3d 943, 947.

NRG argues that there is no actual controversy between NRG and Edwards. The pleading alleges that there is an actual controversy between the parties concerning the validity of the transactions entered into by Baumgarden without authorization with NRG. [Para. 78].

Eleventh Through Nineteenth Causes of Action—Demurrer by Baumgardner, NRG, Deanna Baumgardner and Scott
The demurrers argue that the derivative claims are duplicative of the direct claims and unnecessary, but the claims may clearly be brought in the alternative. There is no clear legal argument that such claims are solely direct or solely derivative, as might be expected. In any case, under the liberal rules of pleading, parties are permitted to plead duplicative, alternative, or even inconsistent causes of action. See, Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 181.

Cross-defendants also argue that Edwards cannot maintain these claims because he did not first seek approval of Casecore to bring a derivative action. Although not cited by cross-defendants, the matter is governed by Corporations Code § 17501.

§ 17501. Requirements to institute class action by member; Furnishing of security

(a) No action shall be instituted or maintained in right of any domestic or foreign limited liability company by any member of the limited liability company unless both of the following conditions exist:

(1) The plaintiff alleges in the complaint that plaintiff was a member of record, or beneficiary, at the time of the transaction or any part thereof of which plaintiff complains, or that plaintiff’s interest thereafter devolved upon plaintiff by operation of law from a member who was a member at the time of the transaction or any part thereof complained of. Any member who does not meet these requirements may nevertheless be allowed in the discretion of the court to maintain the action on a preliminary showing to and determination by the court, by motion and after a hearing at which the court shall consider any evidence, by affidavit or testimony, as it deems material, of all of the following:

(A) There is a strong prima facie case in favor of the claim asserted on behalf of the limited liability company.

(B) No other similar action has been or is likely to be instituted.

(C) The plaintiff acquired the interest before there was disclosure to the public or to the plaintiff of the wrongdoing of which plaintiff complains.

(D) Unless the action can be maintained, the defendant may retain a gain derived from defendant’s willful breach of a fiduciary duty.

(E) The requested relief will not result in unjust enrichment of the limited liability company or any member of the limited liability company.

(2) The plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the managers the action plaintiff desires or the reasons for not making that effort, and alleges further that plaintiff has either informed the limited liability company or the managers in writing of the ultimate facts of each cause of action against each defendant or delivered to the limited liability company or the managers a true copy of the complaint that plaintiff proposes to file.
(emphasis added)

The pleading alleges:
“Edwards is entitled to assert derivative claims to recover for Casecore, without having made any attempt to get Casecore’s managers to file the action themselves, because any attempt would not be likely to succeed. The reason is that, as explained above, there are only two members, namely, Edwards and Baumgardner; they are deadlocked; and it is a foregone conclusion that Baumgardner would not authorize Casecore to sue him to recover the funds he misappropriated from Casecore.”
[Para. 83].

This may be sufficient under the circumstances to establish a reason for not making an effort to secure from the managers the action plaintiff desires, as it would have been futile. However, the pleading does not allege the further requirement that the LLC has been informed in writing or a copy of the complaint was delivered to the LLC or the managers. The demurrer therefore is sustained with leave to amend to allege compliance with this section.

Motion to Strike
Cross-defendants Baumgardner and NRG Recording seek to strike the claims for punitive damages, and for attorneys’ fees.

As for punitive damages, the pleading sufficiently alleges at least one fraud claim.
Civil Code § 3294 authorizes recovery of punitive damages on the basis of findings that “the defendant has been guilty of oppression, fraud or malice.”

A properly pleaded fraud claim will itself support recovery of punitive damages; no allegations of malice or intent to injure are required. Stevens v. Superior Court (1986) 180 Cal.App.3d 605, 610. The motion to strike is therefore denied.

With respect to attorneys’ fees, the argument is that prayers for fees based on incurring fees in litigation with third parties due to unauthorized transactions, and for fees incurred in prosecuting a derivative claim for the benefit of Casecore, are unnecessary and duplicative of the claim for fees based on the Third Amended Operating Agreement. The prayer with respect to derivative claims is a moot point in light of the sustaining of the demurrer to those claims. The motion to strike is denied.