Bui Simon etc. v. Angela Scott, et al

Case Number

23CV02376

Case Type

Hearing Date / Time

Wed, 03/13/2024 - 10:00

Nature of Proceedings

Motion of Defendants for Judgment on the Pleadings

Tentative Ruling

For Plaintiff Bui Simon, derivatively on behalf of Office of Angela Scott LLC: Patricia L. Glaser, Cynthia E. Organ, Alexander R. Miller, Glaser Weil Fink Howard Jordan & Shapiro LLP                                  

For Defendants Angela Scott, Scott Milden, and Milden, LLC: Bert H. Deixler, Patrick J. Somers, David T. Freenock, Kendall Brill & Kelly LLP

Issue
Motion of Defendants for Judgment on the Pleadings

RULING

For the reasons discussed herein, the motion of Defendants for judgment on the pleadings is denied. The Court on its own motion strikes the words “sixteenth cause of action” from page 32, line 10 of the first amended complaint as improper matter inserted in the pleading.

Background

(Note: This case is related to Simon v. Scott, case number 23CV03184, in which a motion for judgment on the pleadings is also set for this hearing.)

(1)       Allegations of First Amended Complaint

As alleged in Plaintiff’s first amended complaint (FAC):

Plaintiff Bui Simon (Simon) is a founder and 50 percent owner/ member of The Office of Angela Scott LLC (TOOAS or Company). (FAC, ¶¶ 14, 18.) Defendant Angela Scott (Scott) is the other 50 percent owner/ member of TOOAS. (FAC, ¶¶ 15, 18.) Scott was appointed as the original manager of TOOAS. (FAC, exhibit A, § 4.2.) Nominal Defendant TOOAS is a Texas limited liability company, formed on October 4, 2010, that is now headquartered and operated in Santa Barbara. (FAC, ¶ 32.) On August 3, 2015, Simon and Scott entered into a Restated Operating Agreement (Operating Agreement) for TOOAS, which is the current operating agreement for the Company. (FAC, ¶ 35 & exhibit A.)

The Operating Agreement includes the following provisions (underscoring omitted):

“1.2     Term. The term of the Company commenced on October 4, 2010, the date on which the Certificate of Formation (‘Certificate’) was filed with the Texas Secretary of State, and shall continue until terminated under Section 9.1.”

“1.4     Business of the Company. Notwithstanding the purpose of the Company which is described in the Certificate, the Company shall not engage in any business other than the following without the approval of all of the Members:

            “(a)      The business of designing, licensing, manufacturing and selling footwear; and

            “(b)      Such other activities incidental to the foregoing business, including, but not limited to, the designing, licensing, manufacturing and selling of apparel, handbags and related fashion accessories.”

“3.5     Payments to Members. Except as specified in this Agreement or pursuant to a transaction permitted by Section 4.7, no Member, Manager, or person or entity controlled by, controlling or under common control with the Member or Manager, or person who is an officer, director, partner or trustee of the Member (each such person or entity is defined as an ‘Affiliate’), is entitled to remuneration for services rendered or goods provided to the Company. However, the Company shall reimburse the Members, Managers and their Affiliates for organizational expenses (including, without limitation, legal and accounting fees and costs) incurred to form the Company, prepare the Articles and this Agreement and, as approved by the Managers, for the actual cost of goods and materials used by the Company.”

“4.2     Appointment and Removal of Managers. The initial Manager or Managers of the Company shall be appointed with the approval of all of the Members and each such Manager shall serve until the earlier of (i) such Manager’s resignation, retirement, death or permanent disability; (ii) such Manager ceasing to be an individual Member or an individual then serving as an officer, manager, director, partner, trustee or other controlling person of a Member which is not an individual; or (iii) such Manager’s removal for cause by the Members. The Members initially appoint Angela Marie Scott as the sole Manager. A Manager may be removed with cause at any time upon the approval of the Members excluding, however, any Voting Interest held by the Manager to be removed for cause. For the purpose of this section, ‘cause’ shall mean the gross negligence or willful misconduct of such Manager in the performance of his or her obligations under this Agreement. If such Manager is also a Member, such removal for cause shall not affect the Manager’s rights as a Member except as provided in this section 4.2 or constitute a withdrawal of a Member. Upon a Manager’s removal for cause by the Members, a new Manager shall be appointed by the approval of the Members excluding, however, any Voting Interest held by the Manager removed for cause. Upon a Manager’s resignation, retirement, death or disability, a new Manager shall be appointed by a majority of the remaining Managers or the sole remaining Manager, as the case may be, or if there is no remaining Manager, by the approval of all of the Members.”

“4.3.    Management and Powers. Except as provided by Section 4.4 below, the Managers shall have full, complete and exclusive authority, power, and discretion to manage and control the business, property, and affairs of the Company, to make all decisions regarding those matters, and to perform any and all other acts or activities customary or incident to the management of the Company’s business,

property, and affairs, subject in all cases to the other provisions of this Agreement and the requirements of applicable law.”

“4.4     Limitations on Power of Managers. No Manager shall have authority to (i) do any act in contravention of this Agreement, (ii) do any act which would make it impossible to carry on the ordinary business of the Company, or (iii) confess a judgment against the Company. Additionally, no Manager shall have authority to cause the Company to engage in the following transactions without first obtaining the approval of all of the Members:

            “A.       The sale, exchange or other disposition of all, or substantially all of the properties or assets of the Company.

            “B.       The hypothecation or encumbrance of any of the properties

or assets of the Company.

            “C.       The merger of the Company with or the acquisition by the Company of the assets of another limited liability company, general partnership, limited partnership, corporation or other entity.

            “D.       The hiring of employees, accountants and attorneys for the

Company.

            “E.       An alteration of the authorized business of the Company as

set forth in Section 1.4.”

“4.5     Devotion of Time; Compensation. So long as she is a Manager, Angela shall devote full business time to the business and affairs of the Company. Each other Manager shall devote whatever time or effort as such Manager deems appropriate for the furtherance of the Company’s business. Each Manager shall be entitled to compensation for such Manager’s services to the Company as shall be determined by the approval of all of the Members, and to reimbursement for all expenses reasonably incurred by such Manager in the performance of such Manager’s duties under this Agreement.”

“11.6   Amendments. All amendments to this Agreement shall be in writing and signed by all of the Members in order to be valid.”

“11.8   Governing Law. Except as otherwise specified in this Agreement, the parties hereto agree that for as long as Bui is a Member, the laws of the State of California concerning contracts entered into and to be performed wholly within California between residents of California shall govern the validity of this Agreement, the interpretation and enforcement of its terms, and the rights and duties of the parties hereto (whether a cause of action is asserted in contract, in tort, or otherwise).”

In the fall of 2022, Scott approached Simon requesting a $500,000 bonus to make a down payment on a house. (FAC, ¶ 43.) Simon agreed to review the Company’s finances to see if the Company was in a financial position to pay such a bonus. (Ibid.) Instead, Simon discovered that Scott had embezzled more than $2.5 million in undisclosed compensation and personal expenditures in violation of the Operating Agreement. (Ibid.)

For example, as a result of Simon’s investigation, Simon discovered that the Company has been making substantial payments for multiple Porsches being driven by Scott during the years 2015 through 2023 primarily for personal purposes. (FAC, ¶¶ 44-46.) The payment of these expenses with Company funds was never approved by Simon. (Ibid.) Scott used Company funds to pay for unauthorized personal expenses, including retail shopping and personal trips. (FAC, ¶¶ 47, 48.)

Defendant Scott Milden (Milden) is Defendant Scott’s husband. (FAC, ¶ 1.) Defendant Milden, LLC (Milden LLC) is a California limited liability company with Milden as its sole member and manager. (FAC, ¶ 17.) Milden was given multiple Company credit cards by Scott that were used for improper personal expenses. (FAC, ¶ 50.) Simon has identified more than $1 million in payments to Milden. (FAC, ¶ 57.) Milden was paid as an employee of the Company without the approval of Simon. (FAC, ¶¶ 57, 58.) Improper payments were also made to Milden LLC. (FAC, ¶¶ 59-60.)

On July 19, 2023, Simon took the step of removing Scott as manager of the Company “for cause” under the Operating Agreement. (FAC, ¶¶ 69-72.) Simon then appointed Gene Montesano as Manager. (FAC, ¶ 72.) Montesano was succeeded by Todd Steele. (FAC, ¶ 82.) Scott has disputed whether she has been legally removed as manager. (FAC, ¶¶ 74-76, 83.)

(2)       Procedural History

On June 2, 2023, Simon filed the original complaint in this action. Pursuant to the stipulation of the parties and order of the Court, Simon filed the operative pleading, the FAC, on September 12, 2023. The FAC asserts 16 causes of action: (1) declaratory relief; (2) breach of fiduciary duty; (3) aiding and abetting breach of fiduciary duty; (4) waste of corporate assets; (5) fraud; (6) aiding and abetting fraud; (7) conversion; (8) violation of Penal Code section 496; (9) third-party beneficiary breach of contract; (10) third-party beneficiary breach of the covenant of good faith and fair dealing; (11) inducing breach of contract; (12) intentional interference with contractual relations; (13) money had and received; (14) accounting; (15) restitution from unjust enrichment; and (16) injunctive relief. These claims are all asserted by Simon as a derivative action for the benefit of nominal Defendant TOOAS. (FAC, ¶¶ 22-26.)

On October 12, 2023, Defendants Scott, Milden, and Milden LLC (collectively, Defendants) filed their answer to the FAC, generally denying the allegations thereof and asserting 32 affirmative defenses.

On December 29, 2023, Defendants filed this motion for judgment on the pleadings. Defendants argue that Plaintiff has failed adequately to allege demand futility as to claims against each of the Defendants, and that Plaintiff’s causes of action for money had and received, unjust enrichment, and permanent injunction fail as a matter of law.

The motion is opposed by Simon.

Analysis

“A party may move for judgment on the pleadings.” (Code Civ. Proc., § 438, subd. (b)(1).) “The motion provided for in this section may only be made on one of the following grounds: [¶] … [¶] (B) If the moving party is a Defendant, that either of the following conditions exist: [¶] (i) The Court has no jurisdiction of the subject of the cause of action alleged in the complaint. [¶] (ii) The complaint does not state facts sufficient to constitute a cause of action against that Defendant.” (Code Civ. Proc., § 438, subd. (c)(1)(B).)

“The grounds for motion provided for in this section shall appear on the face of the challenged pleading or from any matter of which the Court is required to take judicial notice.” (Code Civ. Proc., § 438, subd. (d).)

“The standard for granting a motion for judgment on the pleadings is essentially the same as that applicable to a general demurrer, that is, under the state of the pleadings, together with matters that may be judicially noticed, it appears that a party is entitled to judgment as a matter of law. [Citations.] [¶] Judgment on the pleadings does not depend upon a resolution of questions of witness credibility or evidentiary conflicts. In fact, judgment on the pleadings must be denied where there are material factual issues that require evidentiary resolution.” (Schabarum v. California Legislature (1998) 60 Cal.App.4th 1205, 1216, fn. omitted.)

The Court notes that Defendants’ notice of motion states that the parties met and conferred regarding the motion as required by Code of Civil Procedure section 439 but were unable to reach an agreement. (Notice, at p. 2.) This statement does not comply with section 439 in that the “moving party shall file and serve with the motion for judgment on the pleadings a declaration ….” (Code Civ. Proc., § 439, subd. (a)(3).) No declaration is attached to the motion. The opposition includes a declaration stating that some, but not all, of the arguments raised in the motion were discussed at this meet and confer. To avoid further delay, the Court will address the merits of the motion, but the Court reminds counsel of their obligation to follow all procedural requirements under the Code of Civil Procedure and the California Rules of Court.

(1)       Demand Futility

Defendants base their demand futility argument on the requirements of Corporations Code section 17709.02.

“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: [¶] … [¶] (2) The Plaintiff alleges in the complaint with particularity the Plaintiff’s efforts to secure from the managers the action the Plaintiff desires or the reasons for not making that effort, and alleges further that the 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 the Plaintiff proposes to file.” (Corp. Code, § 17709.02, subd. (a)(2).)

In their moving papers, Defendants argue that Simon has not adequately alleged demand futility as required by section 17709.02. In opposition, Simon argues that the demand futility requirement does not apply because Texas law, rather than California law, applies to TOOAS, and, in any case, there are sufficient allegations to establish demand futility under California law. In reply, Defendants argue that the Operating Agreement has an enforceable choice of law provision (§ 11.8, quoted above) that adopts California law.

            (A)       Applicable Law

In support of the assertion that California law applies, Scott cites to Colaco v. Cavotec SA (2018) 25 Cal.App.5th 1172 (Colaco). In Colaco, the litigation arose out of a transaction whereby a manufacturer of aircraft servicing equipment (Inet) agreed to sell substantially all of its assets to the buyer’s Delaware subsidiary corporation (Cavotec). (Id. at p. 1178.) When the transaction closed, Inet’s CEO and sole shareholder (Colaco) became the subsidiary’s president and a member of its board of directors. (Ibid.) Colaco’s employment was subject to a written agreement that included a choice-of-law provision stating that “All the rights and liabilities of the parties shall be governed by and construed in accordance with the law of California.” (Ibid.) After the deal closed, numerous disagreements arose between Colaco and Cavotec regarding Inet’s business. (Id. at p. 1179.) Based on these disagreements, Cavotec refused to make a post-closing payment when it came due and asked Colaco to step down as president of the subsidiary. (Ibid.) Cavotec and Colaco then entered into a short agreement by which Colaco would resign both as a director and president and Cavotec would make the overdue payment and accelerate the second and last post-closing payment. (Ibid.) A few days later, Cavotec locked Colaco out of its facilities because it suspected Colaco of soliciting employees to start a competing business and destroying or stealing files. (Ibid.) After completing its investigation, Cavotec refused to make the second post-closing payment because of actions taken by Colaco. (Ibid.)

The parties then sued each other. (Colaco, supra, 25 Cal.App.5th at p. 1179.) Colaco sued for breach of the asset purchase agreement as modified by the short agreement based on non-payment of amounts due. (Id. at pp. 1179-1180.) Cavotec filed a cross-complaint alleging breach of the asset purchase agreement, for breach of fiduciary duty, and for breach of the employment agreement. (Id. at p. 1180.) Shortly before trial, Colaco moved to strike the fiduciary duty claims because Delaware law governed and did not authorize a jury trial for breach of fiduciary duty. (Ibid.) The trial Court denied the motion and applied California law. (Ibid.) The jury returned a verdict for Cavotec on the complaint, finding that it was not liable, and against Colaco on the cross-complaint for various breaches, awarding compensatory and punitive damages. (Id. at p. 1181.) Colaco argued in post-trial motions, among other things, that the breach of fiduciary duty claims and punitive damages claims failed as a matter of Delaware law. (Ibid.) The trial Court denied the motion. (Id. at p. 1182.)

On appeal in Colaco, the Court found that the trial Court did not err in applying California law:

“Provided the parties or their transactions have a substantial relationship to the state whose laws they selected, or some other reasonable basis for the parties’ choice of law exists, California Courts will enforce a choice-of-law provision unless (1) the chosen state’s law conflicts with a fundamental public policy of the state whose law otherwise would apply, and (2) the other state ‘has a “materially greater interest than the chosen state in the determination of the particular issue.” ’ [Citations.]” (Colaco, supra, 25 Cal.App.5th at p. 1188.) “The party seeking to enforce the choice-of-law provision bears the burden to establish a sufficient relationship to the state whose law the parties chose, but the party opposing the provision’s enforcement bears the burden to establish a fundamental conflict in the states’ laws and the nondesignated state’s materially greater interest in the determination of the particular issue.” (Ibid.)

“ ‘ “ ‘The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands.’ ” ’ [Citations.] [¶]

‘ “ ‘Matters falling within the scope of the [internal affairs doctrine] ... include steps taken in the course of the original incorporation, the election or appointment of directors and officers, the adoption of by-laws, the issuance of corporate shares, preemptive rights, the holding of directors’ and shareholders’ meetings, methods of voting including any requirement for cumulative voting, shareholders’ rights to examine corporate records, charter and by-law amendments, mergers, consolidations and reorganizations and the reclassification of shares.’ ” ’ [Citations.] The internal affairs doctrine recognizes ‘ “[i]t would be impractical to have matters ... which involve a corporation’s organic structure or internal administration[ ] governed by different laws.” ’ [Citations.]” (Colaco, supra, 25 Cal.App.5th at pp. 1189–1190.)

“Although California Courts generally follow the internal affairs doctrine and apply the laws of a corporation’s state of incorporation to resolve disputes concerning a corporation’s internal affairs, they do not blindly apply the doctrine. Instead, California Courts carefully examine the specific issue and conduct to determine whether the corporation’s internal affairs truly are implicated and whether the doctrine’s policies require its application in the particular case.” (Colaco, supra, 25 Cal.App.5th at p. 1190.)

The Colaco Court found that the pertinent issue was the conflict between the California choice of law provision in the employment agreement and the application of the internal affairs doctrine applying Delaware law. (Colaco, supra, 25 Cal.App.5th at p. 1192.) As between these two alternatives, the Court found on the facts in Colaco that California law should govern because, among other things, “[a]pplying California law to these issues will not alter the duties Colaco owed as an officer nor will it subject Cavotec’s officers to different duties.” (Id. at p. 1195.)

From Colaco, Scott argues that Simon fails to identify a fundamental conflict between California and Texas law and to show that Texas has a materially greater interest in the determination of the particular issues involved. Accordingly, Scott argues that the choice of law provision in the Operating Agreement should be respected to apply California law.

The particular issue here is whether the demand requirement for derivative actions for limited liability companies is determined under Texas law or California law. It is not uncommon for owners of a corporation or limited liability company to incorporate or organize in a foreign jurisdiction even though operating, even exclusively, in California in order to take advantage of the organizing jurisdiction’s applicable corporate law. Here is the exceptional case where the parties have determined to organize in Texas but included a provision incorporating California law in their operating agreement. There appears nothing on the face of the pleadings, which incorporate the Operating Agreement as exhibit A, to suggest that the choice of law provision in the Operating Agreement is not binding on the parties here. Simon argues that TOOAS is not bound to the Operating Agreement because it is not a party, but that argument is inconsistent with both California and Texas law. (See Corp. Code, §§ 17701.10 [identifying subjects of operating agreement], 17701.11, subd. (a) [“A limited liability company is bound by and may enforce the operating agreement.”]; Tex. Bus. Orgs. Code Ann. §§ 101.001(1) (West) [defining “company agreement” as equivalent to operating agreement], 101.052 [identifying scope of company agreement and its enforceability by and against the limited liability company].) As a general principle, the alleged facts demonstrate a strong interest in California applying its own law to a business operating principally in California where the parties themselves have elected to apply California law. The Court therefore determines on the allegations of the FAC that California law applies.

            (B)       Sufficiency of Allegations of Futility

Simon alleges: “Plaintiff has not made a demand on the other member of TOOAS, Defendant Scott, to institute this action because such demand would be a futile and useless act as this lawsuit is directed against Defendant Scott who was directly responsible for the complained of course of conduct as well as her husband, Defendant Milden, and his company, Milden, LLC. Defendant Scott is therefore unlikely to approve of any action by TOOAS aimed at herself and her conduct.” (FAC, ¶ 25.)

“The test commonly employed in determining the adequacy of the pleading of demand futility was enunciated by the Delaware Supreme Court in Aronson v. Lewis (Del.1984) 473 A.2d 805 (Aronson). The Court there observed that ‘the entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability.’ [Citation.] Aronson held that a Court, in deciding whether a Plaintiff will be excused from making a demand on the board, must evaluate ‘whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.’ [Citations.] ‘[F]utility is gauged by the circumstances existing at the commencement of a derivative suit.’ [Citation.] And the two-prong test under Aronson is disjunctive; accordingly, there is demand excusal if either prong is satisfied.” (Bader v. Anderson (2009) 179 Cal.App.4th 775, 790–791 (Bader), fn. omitted.)

“The Delaware Supreme Court later clarified in Rales v. Blasband (Del. 1993) 634 A.2d 927, 933 (Rales), that the Aronson test could not be applied mechanically to all derivative suits in which no prior demand is made. Instead, although the Aronson two-prong standard is well-suited to actions challenging conscious decisions by boards to act or refrain from acting, the business judgment rule (and hence the test in Aronson) could not be applied where there was no board action, such as where (1) the business decision complained of was made by the board, the majority of whose members were no longer part of the directorate when the suit was filed; (2) the matter complained of was not a board business decision; or (3) the challenged decision was made by the board of a different corporation. [Citation.] In those instances, the Court inquires ‘whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. Thus, a Court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.’ [Citation.]” (Bader, supra, 179 Cal.App.4th at pp. 791–792.)

“A director will be deemed not to be disinterested if the facts alleged ‘demonstrate[ ] a potential personal benefit or detriment to the director as a result of the decision.’ [Citations.] The personal benefit must arise out of the transaction being challenged. [Citation.] Such a showing that a director may not be disinterested is not made through general allegations that he or she sold stock in the company while in possession of material, nonpublic information. [Citation.] But where there is a showing that a director is not disinterested, and the transaction has not been approved by a majority of directors, the business judgment rule does not come into play; demand futility is established.” (Bader, supra, 179 Cal.App.4th at p. 792.) California generally tracks Delaware law as to its demand requirements. (Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222, 244 (Apple).)

In the case, as here, where the entity is a limited liability company rather than a corporation, the demand by a member must be made to the “managers” and thus the futility of such demand must be determined with respect to the managers rather than to any board of directors.

It is “the general rule that demand futility is measured as of the time the derivative action is filed.” (Apple, supra, 18 Cal.App.5th at p. 243.) The situation changes somewhat when a complaint is amended:

The [Braddock v. Zimmerman (Del. 2006) 906 A.2d 776 (Braddock)] Court specified three conditions that ‘must exist to excuse a Plaintiff from making demand ... when a complaint is amended after a new board of directors is in place: first, the original complaint was well pleaded as a derivative action; second, the original complaint satisfied the legal test for demand excusal; and third, the act or transaction complained of in the amendment is essentially the same as the act or transaction challenged in the original complaint.’ [Citation.] Since claims that have been dismissed without prejudice and with leave to amend are ‘not validly in litigation,’ the Braddock Court concluded that a Plaintiff who files an amended complaint under those circumstances must comply with the demand requirement ‘by reference to the board in place at the time when the amended complaint is filed.’ [Citation.]” (Apple, supra, 18 Cal.App.5th at p. 245.)

The Apple Court limited its holding to its particular procedural context: “Where … an amended complaint alleges derivative claims that were previously deemed legally insufficient, the demand requirement must be assessed in relation to the board of directors in place when the amended complaint is filed.” (Apple, supra, 18 Cal.App.5th at p. 251.)

In Defendants’ demurrer, Defendants distinguish between claims asserted against Scott and claims asserted against Milden and Milden LLC (collectively, the Milden Defendants). In Plaintiff’s original complaint, only Scott was a Defendant and the complaint asserted only 11 causes of action: (1) breach of fiduciary duty; (2) waste of corporate assets; (3) fraud; (4) conversion; (5) violation of Penal Code section 496; (6) third-party beneficiary breach of contract; (7) third-party beneficiary breach of the covenant of good faith and fair dealing; (8) money had and received; (9) accounting; (10) restitution from unjust enrichment; and (11) injunctive relief. The FAC repeats these causes of action as against Scott as FAC causes of action (2), (4), (5), (7), (8), (9), (10), (13), (14), (15), and (16). The first (declaratory relief) is the only new cause of action against Scott. The third (aiding and abetting breach of fiduciary duty), fifth (fraud), sixth (aiding and abetting fraud), seventh (conversion), eighth (violation of Pen. Code, § 496), eleventh (inducing breach of contract—operating agreement), twelfth (intentional interference with contract—operating agreement), thirteenth (money had and received), fourteenth (accounting), and fifteenth (restitution) causes of action of the FAC are new or newly asserted against the Milden Defendants.

Putting aside the first cause of action (declaratory relief) for the moment, the other claims in the FAC against Scott are the same as those asserted in the original complaint. No demurrer was asserted against the original complaint or against the FAC. The FAC was filed by stipulation of the parties. Each of the Defendants filed an answer in response to the FAC. This motion for judgment on the pleadings was filed two months after the answer was filed and was thus the first challenge to the pleadings. In this motion for judgment on the pleadings, Scott challenges the pleading as to only three of these cause of action on grounds other than demand futility, namely, the thirteenth (money had and received), fifteenth (unjust enrichment), and permanent injunction (sixteenth). This situation is noticeably different from the procedural facts in Apple and leaves open a number of possible paths for analysis.

Looking only at the claims against Scott and the nature of the non-demand futility pleading challenges now asserted, the core claims against Scott arise out of allegations of improper taking, through various means, of substantial TOOAS assets for personal purposes and are not challenged as insufficiently pleaded. The derivative allegations are the same in both the original complaint and the FAC except as to the later inclusion of reference to the Milden Defendants. Thus, under the Braddock test as discussed in Apple, supra, if the original complaint is sufficient when it was filed, it is reasonable to conclude that these claims are also sufficient in the FAC. At the time the original complaint was filed, Scott is alleged to be the sole manager, the person to whom the demand is to be addressed under Corporations Code section 17709.02 (and thus in the same position as the board of directors under section 800, subdivision (b)(2)). Both prongs of the Aronson test discussed in Bader, supra, demonstrate that the demand on Scott would be futile as the allegations make clear beyond a reasonable doubt that Scott is not disinterested and independent as the alleged recipient of Company assets and that the challenged transaction could not, as alleged contrary to Operating Agreement restrictions, be the product of a valid exercise of business judgment.

Citing Park Employees’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Smith (Del.Ch., May 31, 2016, No. CV 11000-VCG) 2016 WL 3223395, aff’d sub nom. Park Employees’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago on behalf of BioScrip, Inc. v. Smith (Del. 2017) 175 A.3d 621 (Park Employees), Scott argues that demand futility should be determined based upon the reasonableness of the demand to be made on a post-filing-appointed manager. Park Employees is an unpublished memorandum opinion of the Delaware Court of Chancery (id. at p. *1); the decision was summarily affirmed by the Delaware Supreme Court in an unpublished disposition referenced in the Atlantic Reporter. This status potentially affects the persuasive value of such opinion but does not affect its citability to this Court. (Lam v. Ngo (2001) 91 Cal.App.4th 832, 841, fn. 5.) The Court will therefore address this authority.

As explained by the Delaware Vice-Chancellor in Park Employees:

“[T]he Court generally evaluates demand futility as of the date of the filing of the complaint, disregarding a superseded board that lacks the power to act—the board in place at the time of the alleged wrongdoing—in favor of the board that would actually be tasked with determining whether or not the corporation will pursue the litigation. In most cases, the application of this rule is straightforward, and the appropriate board is the board in place at the time of the filing of the complaint. However, under the facts presented by this case, this consideration weighs in favor of the May 11 Board; here, it was the May 11 Board, not the May 7 Board, that was in a position to actually assess the Plaintiff’s Complaint. The Plaintiff filed its Complaint on May 7, 2015. Just four days—and two business days—later, the Company held previously disclosed and uncontested elections for its board of directors, immediately following which several incumbent directors unexpectedly resigned. A majority of this new board (both before and after the unexpected resignations) was made up of non-Defendant directors who potentially could have evaluated the Plaintiff’s Complaint. As a practical matter, even had the May 7 directors received a demand on May 7, 2015, they would not have had time to assess the Complaint in keeping with their fiduciary responsibilities before being replaced by the new members of the May 11 Board. This, coupled with the fact that the Company was not served with the Complaint until May 27, 2015, nearly three weeks later, and after the May 11 Board was in place, convinces me that the May 11 Board is the appropriate board for purposes of assessing demand futility.” (Park Employees, supra, 2016 WL 3223395, at p. *9, fn. omitted.)

“The derivative suit is a device that exists to aid a stockholder in vindicating the corporation’s rights, only where the board of the corporation, typically entrusted with that responsibility, is not capable of doing so. Only where a manipulation of board composition is employed to discourage meritorious derivative litigation is the matter problematic.” (Park Employees, supra, 2016 WL 3223395, at p. *10, fn. omitted.) “The Plaintiff’s real argument here is simply that Delaware case law has established a ‘firm,’ bright-line rule that demand must be assessed as of the day of the filing of a complaint. But it is axiomatic that equity ‘regards substance rather than form; a Court of equity generally does not favor bright-line rules, instead using its discretion to make decisions on a case-by-case basis. Here, I do not disturb the general rule—that demand should be assessed as of the date a complaint is filed. I find that, under the unique facts presented by this case, a departure from the general rule is both equitable and in keeping with the policy behind Rule 23.1.” (Ibid., fns. omitted.)

Scott argues from Park Employees that because Simon could, and ultimately did, replace Scott as manager, the Court should consider demand futility based upon the potential demand on the current manager. Park Employees is distinguishable in a number of ways, including the peculiarities of this case in which the Company is owned by two people equally, one of whom is the principal Defendant in this action. The Park Employees Vice-Chancellor was clear in noting that the reasoning in Park Employees was based on an equitable departure from the general rule, decided on a case-by-case basis, that was appropriate under the unique facts of that case. (Park Employees, supra, 2016 WL 3223395, at p. *10.) The facts of this case point to equity working in a different direction.

One addition in the FAC over the original complaint is the first cause of action for declaratory relief. In the declaratory relief cause of action, Simon alleges that an actual controversy exists between Simon and Scott as to whether Scott was lawfully removed as manager of the Company and whether the successor managers were properly instituted as managers, and in particular that Scott disputes that she was properly removed as manager. (FAC, ¶¶ 82, 83.) Thus, the legal ability of Simon to replace Scott as manager is, and was, contested by Scott. Under these circumstances, there is no equitable basis to vary from the general rule of determining demand futility at the time of the filing of the complaint. The FAC therefore sufficiently alleges demand futility as to the claims against Scott.

The causes of action against the Milden Defendants in the FAC are all derivative of the causes of action against Scott. The third cause of action is for aiding and abetting Scott’s breach of fiduciary duty. The fourth and fifth causes of action for fraud include Milden’s participation in Scott’s fraud or aiding and abetting such fraud. The seventh cause of action is for conversion of Company assets paid by Scott to the Milden Defendants. The eighth cause of action is for receipt of such stolen property. The thirteenth, fourteenth, and fifteenth causes of action are for common counts, accounting, and restitution to recover such property. The eleventh and twelfth causes of action are for inducing and interfering with Scott’s breach of contract. So, although the Milden Defendants were not Defendants in the original complaint, “the transaction complained of in the amendment is essentially the same as the act or transaction challenged in the original complaint” and the core claims were “validly in litigation.” The issue of demand futility is appropriately determined as of the filing of the original complaint. The FAC sufficiently alleges demand futility as to the claims against the Milden Defendants.

The motion for judgment on the pleadings to the FAC on the grounds of demand futility will therefore be denied.

(2)       Sufficiency of Pleading Claims

Apart from the issue of pleading demand futility, Defendants also move for judgment on the pleadings as to the causes of action for common counts, unjust enrichment, and permanent injunction.

            (A)       Common Counts

Plaintiff’s thirteenth cause of action is a common count for money had and received. Defendants argue that this cause of action is defeated by Plaintiff’s allegation of an express contract.

“To prevail on a common count for money had and received, the Plaintiff must prove that the Defendant is indebted to the Plaintiff for money the Defendant received for the use and benefit of the Plaintiff. [Citations.] In an action on an express contract, a claim for money had and received is permitted where there has been a total failure of consideration. [Citation.] ‘ “Failure of consideration is the failure to execute a promise, the performance of which has been exchanged for performance by the other party.” ’ [Citation.] ‘[T]he failure of the consideration is total ... [where] nothing of value has been received under the contract by the party...’ seeking restitution. [Citation.] Where the failure of the consideration is total, ‘the law implies a promise on the part of the other to repay what has been received by him under the contract....’ [Citation.] Such a promise is implied because the ‘Defendant cannot in equity and good conscience retain the benefits of the agreement and repudiate its burdens....’ [Citation.]” (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 230 (Rutherford Holdings).)

In opposition, Simon argues that the claim is an alternative pleading and that the cause of action is not brought solely on a breach of contract claim. In reply, Defendants point out that Plaintiff has brought an express contract claim (the ninth cause of action) and that the Operating Agreement is enforceable by the Company.

“In the common law action of general assumpsit, it is customary to plead an indebtedness using ‘common counts.’ [Citation.] In California, it has long been settled the allegation of claims using common counts is good against special or general demurrers. [Citation.] The only essential allegations of a common count are ‘(1) the statement of indebtedness in a certain sum, (2) the consideration, i.e., goods sold, work done, etc., and (3) nonpayment.’ [Citation.] A cause of action for money had and received is stated if it is alleged the Defendant ‘is indebted to the Plaintiff in a certain sum “for money had and received by the Defendant for the use of the Plaintiff.” ’ [Citation.]” (Farmers Ins. Exchange v. Zerin (1997) 53 Cal.App.4th 445, 460.)

As stated in Rutherford Holdings, supra, the common count for money had and received is a shorthand pleading for a promise implied by law. In the context of an express contract, the implied promise is to repay what has been received under that contract. However, the thirteenth cause of action, by its terms, includes receipt of money not received under a contract. Thus, even if some of the cause of action is precluded by the express contract, the entirety of the cause of action is not necessarily barred by the express contract. The motion for judgment on the pleadings will not be granted as to part of a cause of action. (See Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1047 [demurrer].)

Moreover, the thirteenth cause of action is asserted against all Defendants. As to the Milden Defendants, there are no allegations which assert, or are argued to assert, a breach of contract claim against either of the Milden Defendants. There is therefore no impediment to bringing a common count claim against the Milden Defendants on the basis of the existence of an express contract.

Accordingly, the motion for judgment on the pleadings will be denied as to the thirteenth cause of action.

            (B)       Unjust Enrichment

Making an argument similar to the argument regarding the common count cause of action, Defendants argue that the fifteenth cause of action for restitution from unjust enrichment is barred by the express contract claims.

“ ‘There are several potential bases for a cause of action seeking restitution. For example, restitution may be awarded in lieu of breach of contract damages when the parties had an express contract, but it was procured by fraud or is unenforceable or ineffective for some reason. [Citations.] Alternatively, restitution may be awarded where the Defendant obtained a benefit from the Plaintiff by fraud, duress, conversion, or similar conduct. In such cases, the Plaintiff may choose not to sue in tort, but instead to seek restitution on a quasi-contract theory.... [Citations.] In such cases, where appropriate, the law will imply a contract (or rather, a quasi-contract), without regard to the parties’ intent, in order to avoid unjust enrichment.’ [Citation.]” (Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1370 (Durell).)

“ ‘Under the law of restitution, “[a]n individual is required to make restitution if he or she is unjustly enriched at the expense of another. [Citations.] A person is enriched if the person receives a benefit at another’s expense. [Citation.]” [Citation.] However, “[t]he fact that one person benefits another is not, by itself, sufficient to require restitution. The person receiving the benefit is required to make restitution only if the circumstances are such that, as between the two individuals, it is unjust for the person to retain it. [Citation.]” ’ [Citation.] As a matter of law, an unjust enrichment claim does not lie where the parties have an enforceable express contract.” (Durell, supra, 183 Cal.App.4th at p. 1370.)

Defendants argue that because the Plaintiff has alleged an enforceable contract, namely, the Operating Agreement, the unjust enrichment claim is barred. Defendants’ argument is too broad. The principle that there is no claim for restitution based on unjust enrichment where there is an express contract rests upon the parties’ agreement to determine whether enrichment by payment under the contract is “unjust.”

“ ‘ “There is no equitable reason for invoking restitution when the Plaintiff gets the exchange which he expected.” ’ [Citation.] ‘If the money is paid in satisfaction of an obligation actually owed by the Plaintiff, he or she is obviously not entitled to restitution even though the performance was induced by mistake or fraud.’ [Citation.]” (Durell, supra, 183 Cal.App.4th at p. 1371.) But where the payment is not actually owed and where there the benefit is obtained “by fraud, duress, conversion, or similar conduct,” restitution is an available legal theory. (Id. at p. 1370.) Thus, for example, a partner obtaining profits from self-dealing in violation of the partnership agreement is liable to disgorge those profits as unjust enrichment. (See Bardis v. Oates (2004) 119 Cal.App.4th 1, 13; Haurat v. Superior Court (1966) 241 Cal.App.2d 330, 334.) Simon has alleged claims for fraud, conversion, and breach of fiduciary duty. (E.g., FAC, ¶¶ 86-87, 101-107, 115-116.) These are sufficient allegations of the benefit being obtained by fraud, conversion, or similar conduct to permit an alternative legal theory of restitution based on unjust enrichment. Moreover, as discussed above, there are no allegations of the existence of a contract covering the subject matter as to the Milden Defendants.

Accordingly, the motion for judgment on the pleadings will be denied as to the fifteenth cause of action.

            (C)       Injunction

Plaintiff designates its sixteenth cause of action as “injunctive relief.” Defendants argue that injunctive relief is a remedy and not a cause of action. In opposition, Simon concedes that injunction is a remedy but argues that the pleading is appropriate because the remedy is dependent upon other causes of action.

The parties agree that a claim for injunctive relief is not a standalone cause of action. At the same time, allegations relating to an injunction are both appropriate and, in some cases, necessary. (See Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 527 [preliminary injunction may be based on allegations of a verified complaint]; Dennis v. Overholtzer (1957) 149 Cal.App.2d 101, 104 [“if a preliminary injunction is sought upon a complaint rather than upon affidavits the complaint must state a cause of action for such relief”]; see also Classis of Central California v. Miraloma Community Church (2009) 177 Cal.App.4th 750, 754, 759 [affirming grant of permanent injunction based on summary judgment of “cause of action” for injunction incorporating other causes of action].) The cases cited by Defendants in reply affirm a trial Court’s sustaining of a demurrer and grant of summary adjudication as to “causes of action” for injunction relief. (Allen v. City of Sacramento (2015) 234 Cal.App.4th 41, 65; Shamsian v. Atlantic Richfield Co. (2003) 107 Cal.App.4th 967, 985.) However, there was no practical effect to these determinations as both cases expressly stated that injunctive relief was not precluded by those rulings:

“Although the order sustaining the demurrer was proper because an injunction is not a cause of action, Plaintiffs may still obtain injunctive relief if they prevail on a cause of action.” (Allen v. City of Sacramento, supra, 234 Cal.App.4th at pp. 65–66.)

“Correctly, the respondents state that a request for injunctive relief is not a cause of action. [Citation.] Therefore, we cannot let this ‘cause of action’ stand. However, that said, on remand the trial Court shall permit the appellants to amend their nuisance cause of action to include their request for injunctive relief.” (Shamsian v. Atlantic Richfield Co., supra, 107 Cal.App.4th at pp. 984–985.)

In the present instance, Simon has alleged causes of action that are unchallenged except as to the demand futility and for which an injunction is legally available as a remedy. This leads the Court to conclude that the only problem with Plaintiff’s FAC as to the sixteenth “cause of action” is the use of the words “cause of action” in the title on page 32. Defendants make no argument that the allegations themselves are improper and such allegations may therefore be proper when deemed annexed to causes of action for which injunctive relief is available. Thus, even if the Court were to grant the motion for judgment on the pleadings as to the sixteenth cause of action, an amendment would necessarily be permitted to allege the same facts but under a different title.

“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.” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38.)

Because Simon concedes in opposition that the claim for injunctive relief expressed in the sixteenth “cause of action” consists of allegations in support of the remedy of injunctive relief based upon other causes of action (see San Diego Unified Port Dist. v. Gallagher (1998) 62 Cal.App.4th 501, 503), the Court will address the semantic issue directly and, on its own motion (see Code Civ. Proc., § 436, subd. (a)), strike the words “sixteenth cause of action” from page 32, line 10, of the FAC, and deem the allegations of paragraphs 158 through 162 as allegations specific to the remedy of injunctive relief. With this verbiage removed there is no substantive change to the FAC required or appropriate on this issue. The motion for judgment on the pleadings will therefore be denied as to the sixteenth “cause of action.”