Michael Dennis vs Ralph T Iannelli et al

Case Number

18CV03317

Case Type

Hearing Date / Time

Fri, 09/06/2024 - 10:00

Nature of Proceedings

Motion: Dismiss

Tentative Ruling

For the reasons set forth below, defendants Montecito Bank & Trust and Janet Garufis’ motion to dismiss plaintiff’s second amended complaint is denied.

Background:

This action commenced on July 3, 2018, by the filing of the original complaint by plaintiffs Michael Dennis (“Dennis”) and all those similarly situated against defendants Ralph T. Iannelli (“Iannelli”), Essex Capital Corporation (“Essex”), and Does 1 through 30. The complaint is a class action and sets forth causes of action for: (1) Negligence; (2) Violation of California Security Laws; (3) Negligence Per Se; (4) Fraud; and (5) Financial Elder Abuse.

On October 11, 2023, plaintiffs substituted defendants Janet Garufis (“Garufis”) for Doe 1 and Montecito Bank & Trust (“MBT”) for Doe 2. Garufis and MBT were served on December 1, 2023.

On March 18, 2024, plaintiffs filed a first amended class action complaint (“FAC”) setting forth causes of action for: (1) Negligence by Class Representatives; (2) Negligence by Receiver Winkler; (3) Violation of California Security Laws; (4) Fraud and Aiding and Abetting Fraud; and (5) Financial Elder Abuse.

The FAC added Geoff Winker (“Winkler”), as receiver for Essex, as a plaintiff.

In essence, the complaint alleged that Essex and Iannelli committed securities fraud by defrauding investors into loaning money to Essex for its equipment leasing business.

On May 9, 2024, plaintiffs filed an Amended First Amended Class Action Complaint (“AFAC”) adding in Marcia Bischoff and Lee Heller as additional class representatives. The basic causes of action and allegations are unchanged.

Allegations against MBT and Garufis are essentially that they coordinated with Essex and Iannelli to allow the perpetration of the fraud.

MBT and Garufis demurred to the AFAC on the grounds that each cause of action is barred by the applicable statutes of limitation and that they do not state facts sufficient to state causes of action.

On June 21, 2024, the demurrer to the AFAC was sustained in part and denied in part.

On July 29, 2024, plaintiffs filed the operative second amended complaint (“SAC”). The allegations of the SAC, although more detailed than those contained in the AFAC, are based on the same operative facts as the prior complaints.

Garufis and MBT now move to dismiss the SAC, as to them, pursuant to Code of Civil Procedure section 583.250 for failure to serve Garufis and MBT with the summons and complaint within three years.

Plaintiffs oppose the motion.

Analysis:

1. Requests for Judicial Notice

Plaintiffs request that the court take judicial notice of the following documents: (1) Order regarding Preliminary Injunction entered by the Federal District Court in the Securities & Exchange Commission v. Essex Capital Corporation and Ralph Iannelli matter; (2) Preliminary Injunction issued by the District Court in that action; and (3) Permanent Injunction issued by the District Court in that action.

Judicial notice may be taken of “[r]ecords of (1) any court of this state or (2) any court of record of the United States or any state of the United States.” (Evid. Code, § 452, subd. (d).)

“ ‘Judicial notice may not be taken of any matter unless authorized or required by law.’ ” (Evid. Code, § 450.) Matters that are subject to judicial notice are listed in Evidence Code sections 451 and 452. A matter ordinarily is subject to judicial notice only if the matter is reasonably beyond dispute. [Citation.] Although the existence of a document may be judicially noticeable, the truth of statements contained in the document and its proper interpretation are not subject to judicial notice if those matters are reasonably disputable. (StorMedia, Inc. v. Superior Court (1999) 20 Cal.4th 449, 457, fn. 9.) StorMedia stated: “ ‘In ruling on a demurrer, a court may consider facts of which it has taken judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) This includes the existence of a document. When judicial notice is taken of a document, however, the truthfulness and proper interpretation of the document are disputable. [Citation.]’ ” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 113.)

Garufis and MBT do not object to the court taking judicial notice of the documents and their contents are not reasonably disputed. The court will take judicial notice.

            2. Three-Year Deadline for Service

“(a) The summons and complaint shall be served upon a defendant within three years after the action is commenced against the defendant. For the purpose of this subdivision, an action is commenced at the time the complaint is filed.

“(b) Proof of service of the summons shall be filed within 60 days after the time the summons and complaint must be served upon a defendant.” (Code Civ. Proc., § 583.210.)

There is no dispute that the complaint was not served on Garufis and MBT until more than three-years lapsed following the commencement of the action.

“In computing the time within which service must be made pursuant to this article, there shall be excluded the time during which any of the following conditions existed:

“(a) The defendant was not amenable to the process of the court.

“(b) The prosecution of the action or proceedings in the action was stayed and the stay affected service.

“(c) The validity of service was the subject of litigation by the parties.

“(d) Service, for any other reason, was impossible, impracticable, or futile due to causes beyond the plaintiff's control. Failure to discover relevant facts or evidence is not a cause beyond the plaintiff's control for the purpose of this subdivision.” (Code Civ. Proc., § 583.240.)

“(a) If service is not made in an action within the time prescribed in this article:

“(1) The action shall not be further prosecuted and no further proceedings shall be held in the action.

“(2) The action shall be dismissed by the court on its own motion or on motion of any person interested in the action, whether named as a party or not, after notice to the parties.

“(b) The requirements of this article are mandatory and are not subject to extension, excuse, or exception except as expressly provided by statute.” (Code Civ. Proc., § 583.250.)

“The purpose of Code of Civil Procedure section 583.210 is to give a defendant timely notice of the action so that the defendant can take adequate steps to preserve evidence. [Citation.] “ ‘The excuse of impossibility, impracticability, or futility should be strictly construed’ ” to foster this purpose.” (Damjanovic v. Ambrose (1992) 3 Cal.App.4th 503, 510.)

Plaintiffs argue that the injunctions imposed by the district court (“SEC injunction”) delayed discovery and affected service. Garufis and MBT argue that the SEC injunction did not affect service because it did not legally prohibit service on Garufis and MBT and did not deprive plaintiffs of reasonable means of identifying them.

The preliminary injunction, of October 1, 2018, and the December 21, 2018 order granting preliminary injunction and appointing Winkler as Essex monitor, prohibited anyone, either directly or indirectly, from taking certain actions against “Defendant Iannelli, Defendant Essex, or its subsidiaries or affiliates,” including “commencing, prosecuting, continuing or enforcing any suit or proceeding (other than the present action by the SEC or any other action by the government) against any of them.” (Foley Decl., Exh. B, § XIV.) This language prevented plaintiffs from conducting any discovery against Essex or Iannelli while the injunction was in place. There is no dispute that discovery in this action was stayed.

The permanent injunction, of September 9, 2019, contained the same restrictions. The injunction was eventually lifted on February 15, 2024.

In support of their opposition, each of the plaintiffs have submitted declarations. Dennis, Bischoff, Heller, and Boyle all declare that: “Prior to September 2023, I was not aware of any facts suggesting that MBT and/or Janet Garufis may have aided and abetted Ralph Iannelli in perpetrating his investment scheme . . .” (Decls., ¶ 2.) Each then declare: “I only became aware of facts supporting knowledge and assistance by MBT and Janet Garufis in September 2023, after speaking with my attorney Thomas Foley.” (Decls., ¶ 3.)

Foley provided a declaration and declares: “[F]rom October 1, 2018, Plaintiff Dennis was not only precluded from conducting any discovery in this action, but also from filing any action against any potential aiders and abettors which have aided and abetted defendant Iannelli because that would have ‘indirectly’ violated the District Court’s Injunction.” (Foley Decl., ¶ 6.) Foley declares that he only gained access to documents indicating Garufis’ and MBT’s potential liability when Winkler provided documents to him and asked him to review financial records which included emails between Iannelli and Garufis in August 2023. (Foley Decl., ¶ 7.) Prior to that, “public records pertaining to Essex and which referenced MBT merely reflected that MBT was Essex’s bank, but nothing more. No amount of informal investigation prior to August 2023 would have revealed sufficient facts to plead any type of claim against MBT . . .” (Foley Decl., ¶ 8.)

Winkler acknowledges that: “In or around September 2023, I contacted Mr. Thomas Foley . . . to request that he perform a review of materials I obtained in the course of my service as receiver in the SEC Action. Prior to September 2023, I had not granted Mr. Foley access to any materials I obtained in the course of my service as receiver in the SEC Action.” (Winker Decl., ¶ 7.)

“It is self-evident that a party must be identified before it can be served. In many cases, formal discovery is the only reasonable means of identifying a party. In such cases, if a stay prevents discovery, it also, as a practical matter, impedes (affects) service.” (Steciw v. Petra Geosciences, Inc. (2020) 52 Cal.App.5th 806, 812.)

“First, [Code of Civil Procedure] section 583.240, subdivision (b), applies where a stay “ ‘affects’ ” service. The subdivision does not say that the stay must “ ‘prevent’ ” service or “ ‘prohibit’ ” service. Consequently, for the tolling to apply, formal discovery need be reasonably necessary, not essential. For example, suppose plaintiffs could have identified Petra by reviewing documents in the building inspector's office, but Petra was only identified in an obscure footnote. We would not necessarily expect plaintiffs to find that information as a matter of course, and thus formal discovery would be reasonably necessary to identify Petra, even though it may have been technically possible to do so without discovery. A plaintiff need not go to extraordinary efforts.” (Ibid.)

“Second, if the stay did not legally prohibit service, and if plaintiffs had a practical means of identifying Petra outside of formal discovery, the tolling provision would not apply. The parties’ focus in this appeal was principally on whether the stay presented a legal impediment to service. In other words, did the stay itself prohibit service. We conclude the stay was not a legal impediment to service, but instead, potentially, a practical one.” (Ibid.)

“[T]he proper focus here is on whether the stay affected service as a practical matter by depriving plaintiffs of the only reasonable means of identifying Petra. If plaintiffs did have other reasonable means of identifying Petra, then, because the stay itself did not directly prohibit service, the stay did not affect service. It is, after all, still a plaintiff's burden to serve all parties within three years of filing the complaint. And if there were practical and reasonably discoverable means of doing so without formal discovery, then the stay did not impede service and the tolling provision does not apply.” (Id. at p. 813.)

Here, there exist no facts inferring that plaintiffs could have discovered Garufis’ and MBT’s alleged participation in Essex’s and Iannelli’s fraudulent schemes without formal discovery. It is true, as Garufis and MBT point out, that plaintiffs eventually discovered the information, which they base their claims against Garufis and MBT, through means other than formal discovery in August or September 2023. However, this discovery was purely coincidental. Had Winkler not forwarded documentation to plaintiffs’ counsel, informally, plaintiffs would not have discovered the documents upon which they rely. Had discovery not been stayed due to the SEC injunctions, and formal discovery been permitted to go forward between October 1, 2018 and February 15, 2024, plaintiffs would have been able to obtain relevant documents through formal discovery and serve Garufis and MBT within three years of commencement of the action.

Despite the arguments by Garufis and MBT to the contrary, the injunctions issued in the SEC case affected service as a practical matter and the injunctions deprived plaintiffs of the only reasonable means of identifying Garufis and MBT as potential defendants. As was previously recognized by the court, in relation to Garufis’ and MBT’s statute of limitations argument, the previous documents in plaintiffs’ possession did not provide any information regarding wrongdoing on the part of Garufis or MBT. They, and other public documents that the court has been made aware of, only indicated that MBT was Essex’s bank. It took documents that were informally provided by Winkler in 2023, to allow plaintiffs to move forward against Garufis and MBT. As such, the period of the injunction is not included in the calculation of the three-year period. The motion will be denied.

While the motion will be denied for the above stated reasons, it is worth noting: To the extent that plaintiffs argue that the relation-back doctrine prevents the dismissal of the SAC as against Garufis and MBT:

“The relation-back doctrine applicable to a fictitiously named defendant and the requirement that a plaintiff serve the summons and complaint within three years are independent concepts. Thus, even where the filing of an amended complaint on a Doe defendant relates back to the filing of an original complaint, the plaintiff must nonetheless identify and serve a Doe defendant with a summons and complaint within three years of the commencement of the action.” (Higgins v. Superior Court (2017) 15 Cal.App.5th 973, 982.) As such, the court is not relying on this aspect of plaintiffs’ argument in denying the motion.