ECO Property Group, LLC v. Snider Investments, LLC, et al

Case Number

19CV04971

Case Type

Hearing Date / Time

Wed, 01/15/2025 - 10:00

Nature of Proceedings

Defendants Demurrer to Plaintiff ECO Property Group, LLC’s First Amended Complaint

Tentative Ruling

For Plaintiff ECO Property Group, LLC: Shahrokh Sheik, Jason D. Annigian

For Defendants David Snider and Snider Investments, LLC: Robert B. Forouzandeh

[For additional appearances see list.]    

                       

RULING

For the reasons set forth below:

1. Defendants David Snider and Snider Investments, LLC’s demurrer to Plaintiff ECO Property Group, LLC’s first amended complaint is sustained with leave to amend.

2. ECO Property Group, LLC shall separately file and serve its second amended complaint, that is attached as Exhibit 1 to the declaration of its counsel, no later than January 22, 2025.

Background

This action commenced on September 17, 2019, and arises out of a cannabis business venture. In 2016, Plaintiff ECO Property Group, LLC (“ECO”) and Defendant Snider Investments, LLC (“SIL”) formed Morongo Equity Partners I, LLC (“MEPI”) for the purpose of constructing and developing a cannabis cultivation facility at 13310 Little Morongo Road, Desert Hot Springs, California. Pursuant to the MEPI operating agreement, SIL owned an 80% interest in the company and ECO owned a 20% interest. The managers of MEPI were SIL and SIL member, Defendant David Snider (“Snider”). The Morongo Road property included a 46,425 sq. ft. greenhouse that was leased by MEPI to Seed to Soul Management (“Seed to Soul”), a cannabis cultivation company. MEPI later terminated the lease with Seed to Soul pursuant to a settlement agreement.

On June 23, 2020, ECO filed a derivative complaint on behalf of MEPI in Riverside County (“derivative action”). While the case was still pending in Riverside County, and as part of that action, ECO filed a Notice of Pendency of Action (“lis pendens”) regarding the cannabis cultivation facility at 13310 Little Morongo Road, Desert Hot Springs. On September 1, 2020, this court ordered the Riverside case transferred and consolidated with this action.

On December 23, 2021, with leave of court, ECO filed its first amended complaint for: (1) Breach of Contract, (2) Breach of the Implied Covenant of Good Faith and Fair Dealing, (3) Breach of Fiduciary Duty of Loyalty, (4) Breach of Fiduciary Duty to Use Reasonable Care, (5) Conversion, (6) Money Had and Received, (7) Fraudulent Concealment, (8) Fraudulent Misrepresentation, (9) Declaratory Relief, (10) Violation of Corporations Code section 17704.10, (11) Violation of Corporations Code section 17713.07, (12) Violation of Corporations Code section 17713.06, and (13) Unfair Business Practices.

To summarize: ECO alleges that SIL and Snider breached the MEPI operating agreement and on September 17, 2019, filed its complaint for breach of contract, breach of fiduciary duty, conversion, fraudulent concealment, and unfair business practices. In response, SIL cross-complained against ECO and its members Eli Owens (“Owens”), Roger MacFarlane (“MacFarlane), Scott Newby (“Newby”), and Gary Walker, Jr. (“Walker”) for fraud and rescission of the MEPI operating agreement. SIL alleges that it was fraudulently induced to enter into the MEPI operating agreement by Owens, McFarlane, Newby, and Walker, who falsely represented that Seed to Soul was experienced in large-scale cannabis operations and was fully capitalized. In a separate cross-action, MEPI seeks rescission of the lease between MEPI and Seed to Soul, as well as rescission of the settlement agreement between the two parties. In still another cross-action, Owens, MacFarlane, Newby, and Walker assert claims against MEPI for breach of the settlement agreement and against former Seed to Soul member Brent Buhrman (“Buhrman”) for breach of the Seed to Soul partnership agreement.

Trial of the action was divided into two phases. Phase 1, consisting of the SIL and MEPI cross-complaints, plus the cross-complaint of the Seed to Soul members, was tried over thirteen days in November and December 2021. Phase 2, consisting of ECO’s direct complaint, and its derivative complaint brought on behalf of MEPI, has not yet taken place.

On January 20, 2022, the court entered its final statement of decision (“SOD”) for Phase 1. The court found in favor of SIL and MEPI on their cross-complaints for recission of the MEPI operating agreement, the commercial lease between MEPI and Seed to Soul, and the settlement agreement between MEPI and Seed to Soul, and for damages. The court also found in favor of cross-Defendants on the cross-complaint of Seed to Soul members Owens, MacFarlane, Newby, and Walker.

The court found, among other things, that ECO fraudulently induced Snider and SIL into the operating agreement. As such, the operating agreement was rescinded. As a result, ECO is no longer a member of MEPI. The lease of the property and the settlement agreement between MEPI were also rescinded due to fraudulent inducement by ECO.

ECO appealed the judgment arguing that substantial evidence did not support the court’s finding of fraudulent inducement. The appellate court treated the appeal as a petition for an extraordinary writ and rejected ECO’s arguments. This court’s judgment, with respect to this aspect of the appeal, was affirmed.

The court of appeals findings include:

“We agree that the judgment on the cross-complaints fully adjudicated ECO’s derivative complaint.” “The rescission of the Operating Agreement means that ECO lacked standing to bring the derivative action on behalf of Morongo because it was never a member of the limited liability company.”

On September 12, 2024, following remitter from the court of appeal, ECO moved for leave to file a second amended complaint (“SAC”). The proposed SAC contained causes of action for: (1) Breach of Fiduciary Duty, (2) Conversion, (3) Fraud, (4) Unfair Business Practices, (5) Constructive Trust, and (6) Restitution for Unjust Enrichment. On October 16, 2024, the court denied the motion for leave to file a second amended complaint.

Snider and SIL now demur to the FAC, and each cause of action therein, on the grounds that the FAC fails to state facts sufficient to constitute any cause of action. Snider askes that the demurrer be sustained without leave to amend.

On January 2, 2025, ECO filed an opposition to the demurrer. By way of the opposition, ECO acknowledges that in light of the Phase 1 rulings, the demurrer is meritorious. However, ECO argues that the demurrer should be sustained with leave to amend because there is a reasonable possibility that ECO can state one or more viable claims by way of an amended complaint.

Analysis

“When any ground for objection to a complaint, cross-complaint, or answer appears on the face thereof, or from any matter of which the court is required to or may take judicial notice, the objection on that ground may be taken by a demurrer to the pleading.” (Code Civ. Proc., § 430.30, subd. (a).) “Our consideration of the facts alleged includes ‘those evidentiary facts found in recitals of exhibits attached to [the] complaint.’ [Citation.]” (Alexander v. Exxon Mobil (2013) 219 Cal.App.4th 1236, 1250.)

“[A] court must treat a demurrer as admitting all material facts properly pleaded, it does not, however, assume the truth of contentions, deductions or conclusions of law.” (Travelers Indem. Co. of Connecticut v. Navigators Specialty Ins. Co. (2021) 70 Cal.App.5th 341, 358, citing Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.)

“If the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated, that aspect of the complaint is good against a demurrer. “ ‘[W]e are not limited to Plaintiffs’ theory of recovery in testing the sufficiency of their complaint against a demurrer, but instead must determine if the factual allegations of the complaint are adequate to state a cause of action under any legal theory. The courts of this state have . . . long since departed from holding a Plaintiff strictly to the ‘form of action’ he has pleaded and instead have adopted the more flexible approach of examining the facts alleged to determine if a demurrer should be sustained.’ ” [Citations.]” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38-39.)

“To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the Plaintiff’s proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.)

Snider and SIL generally argue that, because the operating agreement was rescinded by operation of the Phase 1 judgment, and because the court found that ECO committed fraud upon Snider and SIL, ECO has no viable causes of action to assert against them.

As noted above, ECO concedes that the demurrer should be sustained. The only issue here is whether ECO should be granted leave to amend.

“If there is a reasonable possibility that a Plaintiff can amend his complaint to cure the defects, leave to amend must be granted.” (Galbiso v. Orosi Public Utility Dist. (2010) 182 Cal.App.4th 652, 674.)

“Denial of leave to amend constitutes an abuse of discretion unless the complaint shows on its face it is incapable of amendment. [Citation.] Liberality in permitting amendment is the rule, if a fair opportunity to correct any defect has not been given. [Citation.]” (Angie M. v. Superior Court (1995) 37 Cal.App.4th 1217, 1227.)

ECO argues that there is a reasonable possibility that ECO can adequately state one or more viable equitable claims. ECO spends the entirety of the opposition explaining its position, and stating ways in which it believes the complaint can be amended to plead causes of action that were not completely disposed of by way of the Phase 1 judgment and are not dependent on the existence of the operating agreement. The courts duty in this respect is not to determine the merits of the equitable claims argued by ECO, at this time. Rather, it is for the court to determine if there is a reasonable probability that the FAC is capable of amendment to state any valid cause of action.  

In reply, Snider and SIL largely argue the merits of the case, the merits of affirmative defenses, and claim that ECO’s request for leave to amend is simply another attempt to obtain leave to file a second amended complaint. Snider and SIL assert that ECO is “rehashing the same arguments that this Court found unconvincing at the hearing for ECO’s Motion for Leave to File a Second Amended Complaint on October 16, 2024.” (Reply, p. 2, ll. 24-26.)

ECO’s motion to file a second amended complaint, denied on October 16, 2024, was decided based on the law as it pertains to motions for leave to amend. It is a different standard than that on granting or denying leave to amend upon the sustaining of a demurrer. Further, despite Snider and SIL’s arguments to the contrary, the proposed modifications are significantly different, and more limited, than those involved in the motion for leave to file a second amended complaint.

While the court fully understands and appreciates the arguments set forth by Snider and SIL, in the interests of allowing ECO a full opportunity to present the potential equitable claims it asserts, in its attached proposed SAC, leave to amend will be granted. This in no way implies one way or the other, that the SAC is not subject to further demurrer or that ECO will ultimately prevail on the merits of its claims.