Rajeev Chitrabhanu v. Richard Dean Carson, et al

Case Number

23CV05200

Case Type

Hearing Date / Time

Wed, 09/25/2024 - 10:00

Nature of Proceedings

(1) Motion of Defendant Carson for Judgment on the Pleadings (2) Joinder of Defendant ProHealth, Inc., to Motion for Judgment on the Pleadings

Tentative Ruling

For Plaintiff and Cross-Defendant Rajeev Chitrabhanu: Jeremy Ostrander, Jack E. Pace III, Balaji Venkatakrishnan, White & Case LLP; Nathan Rogers, Rogers, Sheffield & Campbell, LLP

                                   

For Defendant Richard Dean Carson: J. Paul Gignac, Claire K. Mitchell, Rimon, P.C.

                                   

For Defendant and Cross-Complainant ProHealth, Inc.: Nick S. Jojji, Emma Moralyan, Dentons US LLP

RULING

For the reasons set forth herein, the motion of defendant Richard Dean Carson, joined by defendant ProHealth, Inc., is denied.

Background

On November 21, 2023, plaintiff Rajeev Chitrabhanu filed a complaint against defendants ProHealth Inc. (ProHealth) and Richard Dean Carson, in his personal capacity as the Chairman of ProHealth (Carson) (collectively, defendants), alleging seven causes of action: (1) breach of contract; (2) anticipatory breach of contract; (3) quantum meruit; (4) fraud; (5) negligent misrepresentation; (6) breach of fiduciary duty; (7) accounting. As alleged in the complaint:

Plaintiff is a business advisor and entrepreneur who has built a career devising exit strategies for businesses. (Complaint, ¶ 7.) Plaintiff is also the founder of Magnetic, a firm based in Mumbai, India. (Ibid.) Plaintiff is now directing his efforts as an investor and advisor through Magnetic to develop and grow businesses and to place them in a position for a potential sale. (Ibid.)

ProHealth is a corporation located in Carpinteria, California. (Complaint, ¶ 8.) Carson founded ProHealth in 1988 to market nutritional supplement products containing nicotinamide mononucleotide (NMN). (Ibid.) Carson is the owner, shareholder, and Chairman of ProHealth, and has also served as ProHealth’s Chief Financial Officer. (Complaint, ¶ 9.)

ProHealth has struggled to generate revenue for the majority of its history. (Complaint, ¶ 12.) Plaintiff contacted Carson in November 2020 to express excitement for ProHealth and its NMN nutritional supplement products. (Complaint, ¶ 13.) The two men communicated regularly. (Ibid.) At the time, Carson was developing a business venture named ProHealth Longevity with the goal of generating revenue by selling supplement products, including NMN, using ProHealth’s existing network of customers. (Complaint, ¶ 14.)

In late 2020 and early 2021, Carson communicated to plaintiff that he wished to leverage plaintiff’s knowledge and expertise to benefit ProHealth and ProHealth Longevity. (Complaint, ¶ 15.) Defendants solicited plaintiff’s advice on all aspects of ProHealth’s business and operations, including ProHealth’s sales, inventory, finances, marketing, and personnel. (Ibid.) During this period, plaintiff invested time to learn about and counsel defendants regarding ProHealth’s business goals. Carson and plaintiff communicated often and for lengthy periods of time discussing all aspects of ProHealth’s business. (Ibid.)

Carson communicated to plaintiff that he wished to devise an exit strategy with the goal of selling ProHealth and that he wished to use plaintiff’s experience to accomplish that goal. (Complaint, ¶ 15.) Plaintiff told Carson that he would assist with the exit strategy, but that plaintiff’s involvement would be conditioned on plaintiff receiving an upfront equity stake in ProHealth in return. (Ibid.) Plaintiff told defendants that it was his regular practice to enter only into those arrangements that provided plaintiff with equity in the businesses he advised. (Complaint, ¶ 16.) Plaintiff communicated this requirement to defendants in early 2021 and in the spring of 2021. (Ibid.)

In the first half of 2021, defendants told plaintiff on numerous occasions that plaintiff would be compensated for advising defendants by receiving an upfront equity stake in ProHealth. (Complaint, ¶ 17.) Carson also told ProHealth’s Board of Directors that plaintiff would receive an equity stake in ProHealth in exchange for plaintiff’s services. (Ibid.) Defendants and plaintiff ultimately came to an agreement pursuant to which plaintiff would be provided with an upfront equity interest in ProHealth. (Ibid.)

During the summer of 2021, upon defendants’ request to formalize the partnership between the parties, defendants finalized the terms of plaintiff’s ownership in ProHealth. (Complaint, ¶ 19.) On June 28, 2021, plaintiff sent Carson an email titled “Terms of Engagement” (the TOE) stating the terms that plaintiff and defendants had discussed regarding plaintiff’s ownership, equity interest, compensation, and performance obligations in and to ProHealth. (Complaint, ¶ 20.) The TOE itemized the consideration plaintiff would receive from defendants in exchange for plaintiff’s services and stated plaintiff’s performance obligations which defendants and plaintiff had previously discussed. (Ibid.)

Pursuant to the TOE, defendants agreed that plaintiff would receive a $5,000 monthly fee beginning in July 2021, a 10 percent upfront equity share in ProHealth, and a guaranteed 40 percent share of sales proceeds if ProHealth was sold at a valuation above $19 million, which was Carson’s best-case scenario as conveyed at the time to plaintiff. (Complaint, ¶ 20.) For example, if ProHealth was sold at a $25 million valuation, the parties agreed that plaintiff would receive $1.9 million (a 10 percent equity share in ProHealth), plus an additional $2.4 million or 40 percent of the sales proceeds above the $19 million mark. (Ibid.)

On July 24, 2021, Carson sent an email to plaintiff regarding the TOE stating “Your message below is nicely summed up and is exactly what we discussed. Good job.” (Complaint, ¶ 22.) Carson also described plaintiff as his “business partner” to ProHealth’s board of directors, employees, and third-party business contacts, before and after the TOE. (Complaint, ¶ 23.)

Plaintiff performed his obligations pursuant to the TOE. (Complaint, ¶ 23.) To plan for ProHealth’s exit, plaintiff worked to establish a business advisory board which included efforts by plaintiff to identify, find, and recruit qualified individuals to populate the business advisory board because Carson and other members of ProHealth’s management lacked experience with corporate finance, growing businesses, and developing exit strategies. (Complaint, ¶¶ 24-26.) Carson described plaintiff as the “founding member” of ProHealth’s business advisory board. (Complaint, ¶ 25.)

Plaintiff also worked to expand ProHealth into markets in Asia, improved ProHealth’s marketing strategy which resulted in increased sales on Amazon, evaluated ProHealth’s finances, and advised defendants on improving cash flow as well as inventory and personnel management. (Complaint, ¶¶ 27-42.) These efforts included plaintiff negotiating an amicable departure of ProHealth’s former Chief Executive Officer and identifying and hiring a new successor Chief Executive Officer. (Complaint, ¶¶ 47-54.) As a result of plaintiff’s efforts, ProHealth’s revenues increased to greater than $20 million in 2022. (Complaint, ¶ 58.)

From November 2020 through February 2022, plaintiff devoted time and effort to providing advisory and consulting services to defendants in reliance on defendants’ commitment to provide an upfront equity stake in ProHealth to plaintiff in exchange for his services. (Complaint, ¶ 18.) Defendants paid plaintiff the $5,000 monthly fee provided in the TOE from August to December 2021. (Complaint, ¶ 6.)

In late 2021 and early 2022, defendants disavowed and refused to acknowledge the TOE. (Complaint, ¶¶ 59-60.) In April 2022, defendants took the position that the parties never entered into an agreement and, throughout the spring of 2022, defendants disengaged from communications with plaintiff. (Complaint, ¶¶ 60-61.) In late November 2021, Carson proposed to plaintiff that they modify the compensation set out in the TOE from $5,000 per month to an hourly fee of $715. (Complaint, ¶ 62.)

Defendants have not provided plaintiff with any payment or remuneration related to his equity interest in ProHealth, including the 10 percent upfront equity stake to which they agreed in June 2021. (Complaint, ¶¶ 6, 65.) Defendants also refused to acknowledge plaintiff’s right to 40 percent of all sales proceeds in the event ProHealth is sold at a valuation above $19 million. (Complaint, ¶ 6.)

On January 12, 2024, ProHealth filed a demurrer to the complaint on the grounds that each cause of action alleged in the complaint fails to state facts sufficient to constitute a cause of action and is uncertain. On the same date, ProHealth filed a motion to strike all allegations for punitive damages against ProHealth alleged in the complaint.

Also on January 12, 2024, Carson filed a demurrer to the complaint on the grounds that each cause of action alleged in the complaint fails to state facts sufficient to constitute a cause of action. Carson also filed a joinder in the ProHealth demurrer and motion to strike.

On February 21, 2024, the court sustained the demurrer of ProHealth, with leave to amend, as to the seventh cause of action (accounting), and sustained the demurrer of Carson, with leave to amend, as to the first (breach of contract), second (anticipatory breach of contract), and third (quantum meruit) causes of action, but otherwise overruled the demurrer.

Plaintiff did not file an amended complaint notwithstanding leave to do so. On March 25, 2024, Carson filed an answer to the complaint generally denying the allegations thereof and asserting 12 affirmative defenses. On April 8, pursuant to stipulation and order, ProHealth filed an answer to the complaint generally denying the allegations thereof and asserting 33 affirmative defenses. ProHealth concurrently filed a cross-complaint against plaintiff asserting four causes of action: (1) unjust enrichment; (2) breach of contract; (3) fraudulent inducement; and (4) negligent misrepresentation. On May 10, plaintiff, now also as cross-defendant, filed an answer to the cross-complaint generally denying the allegations thereof and asserting 19 affirmative defenses.

On August 28, 2024, Carson filed this motion for judgment on the pleadings asserting that the sixth cause of action fails to allege facts sufficient to state a cause of action. Also on August 28, ProHealth filed a joinder in Carson’s motion. The motion and joinder are opposed by plaintiff.

Analysis

A party may move for judgment on the pleadings pursuant to Code of Civil Procedure section 438. This motion may be made on the grounds that “[t]he complaint does not state facts sufficient to constitute a cause of action against that defendant.” (Code Civ. Proc., § 438, subd. (c)(1)(B)(ii).) The motion may be made to a single cause of action. (Code Civ. Proc., § 438, subd. (c)(2)(A).)

“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. Where the motion is based on a matter of which the court may take judicial notice pursuant to Section 452 or 453 of the Evidence Code, the matter shall be specified in the notice of motion, or in the supporting points and authorities, except as the court may otherwise permit.” (Code Civ. Proc., § 438, subd. (d).)

(1)       Prior Demurrer

Plaintiff argues that the motion for judgment on the pleadings is improper because Carson and ProHealth have previously demurred to this cause of action, the demurrer was overruled, and there has been no material change in the law. “The motion provided for in this section may be made even though either of the following conditions exist: [¶] (1) The moving party has already demurred to the complaint … on the same grounds as is the basis for the motion provided for in this section and the demurrer has been overruled, provided that there has been a material change in applicable case law or statute since the ruling on the demurrer.” (Code Civ. Proc., § 438, subd. (g)(1).)

Carson and ProHealth both expressly demurred to the sixth cause of action on the grounds that it failed to state facts sufficient to constitute a cause of action. (Carson Demurrer, filed Jan. 12, 2024, at p. 4; ProHealth Demurrer, filed Jan. 12, 2024, at p. 4.) In ProHealth’s demurrer as to the sixth cause of action, ProHealth argued that the cause of action failed because no fiduciary relationship between the parties had been alleged, specifically, because the allegations failed to establish the existence of a valid contract between the parties. (ProHealth Demurrer, at p. 21.) In Carson’s demurrer as to the sixth cause of action, Carson argued that Carson could not be liable because the complaint does not allege wrongdoing in his personal capacity and because Carson could not be liable as an agent for ProHealth. (Carson Demurrer, at pp. 6, 8.) Carson also filed a joinder in ProHealth’s demurrer requesting that the demurrer be granted as to Carson for the same reasons set forth in the ProHealth demurrer. (Carson Joinder, filed Jan. 12, 2024, at p. 2.)

In ruling on the ProHealth demurrer as to the sixth cause of action, the court stated: “To the extent ProHealth demurs to the sixth cause of action solely on the grounds that plaintiff has failed to allege the existence of a valid contract which establishes a fiduciary relationship between the parties, the same analysis applies and the court will overrule the ProHealth demurrer to the sixth cause of action alleged in the complaint. Moreover, as ProHealth asserts no additional grounds for demurrer to the sixth cause of action (see Demurrer at p. 21), the court declines to issue an advisory opinion regarding whether the sixth cause of action is otherwise sufficient. (Stocks v. City of Irvine (1981) 114 Cal.App.3d 520, 531 [a court ‘has no power to issue advisory opinions’].)” (Minute Order, filed Feb. 21, 2024, at p. 11.)
 

In ruling on the Carson demurrer as to the sixth cause of action, the court stated: “In the fourth, fifth, and sixth causes of action, Plaintiff expressly and effectively alleges that Carson participated in the tortious conduct described in the complaint including with respect to the representations described above and in the July email.” (Minute Order, filed Feb. 21, 2024, at p. 16.) “As the Court will overrule the ProHealth demurrer to the fourth, fifth, and sixth causes of action alleged in the complaint, each of which sufficiently allege that Carson and ProHealth each and together participated in the torts described in those causes of action, the Court will also overrule the Carson demurrer to these same causes of action.” (Id. at p. 17.)

In this motion, defendants argue that neither Carson nor ProHealth owe fiduciary duties to plaintiff because plaintiff is not a shareholder of ProHealth. (Motion, at pp. 5-7; Joinder, at p. 4.) Plaintiff asserts that this argument is essentially the same ground as ProHealth’s demurrer that no fiduciary duty had been alleged.

In reply, defendants argue that this motion is based on a different ground than the demurrer and that the court “explicitly highlighted that there were further grounds upon which ProHealth (and, implicitly therefore, Carson as well) could argue that Plaintiff failed to state a cause of action for breach of fiduciary duty ….” (Carson Reply, at p. 3.)

The court notes first that its language in the ruling on the demurrer was not intended to suggest the existence of further grounds for arguing that plaintiff failed to state a cause of action. The court’s point was merely that the demurrer was expressly contingent upon the defendants’ argument in the demurrer that no contract had been adequately alleged. The court disagreed and found that a contract had been adequately alleged. Because defendant’s argument was contingent upon a contrary finding by the court, defendant’s argument failed by logical necessity. The court simply indicated that because no other argument was made, the court ended its analysis there. Because the argument on demurrer was expressly abbreviated, the court did not want to leave the impression that the court had considered whether or not other grounds for demurrer may or may not arguably exist. In any event, the court neither considered nor formed any opinion as to the existence of other grounds for demurrer.

The remaining procedural issue is thus whether the argument on demurrer constitutes the “same grounds” as the argument here. The court agrees that the “same grounds” is not the generic “fails to allege facts sufficient to state a cause of action,” but would have to be keyed to a legal argument. Nevertheless, the legal argument sufficient to be the “same grounds” cannot be so specific that a litigant can make the same general argument repeatedly with minor variations. The purpose of subdivision (g) is to set pleadings to rest while still allowing potentially dispositive pleading issues to be resolved after the filing of an answer.

Defendants’ argument here constitutes the “same grounds” as asserted in the demurrer. Defendants argued that the breach of fiduciary duty claim fails because of the lack of allegation of the element of duty. As discussed below, the allegations of the contract are sufficient to allege the element of duty. This is essentially what the defendants argued against in the initial demurrer. The motion for judgment on the pleadings will therefore be denied as procedurally improper.

(2)       Fiduciary Duty

Although the court determines that the motion is procedurally improper, in order to clarify the court’s ruling on demurrer and as an alternative basis for denying the motion, the court will also address the merits of the motion.

“The elements of a claim for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) its breach, and (3) damage proximately caused by that breach.” (Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1405.)

“A fiduciary duty is ‘a duty “to act with the utmost good faith for the benefit of the other party.” ’ [Citation.] It can arise from ‘ “ ‘a recognized legal relationship such as guardian and ward, trustee and beneficiary, principal and agent, or attorney and client’ or from a ‘ “ ‘ “confidential relationship” ... founded on a moral, social, domestic, or merely personal relationship.” ’ ” ’ [Citation.] The ‘essential elements’ of a confidential relationship have been described as ‘ “1) The vulnerability of one party to the other which 2) results in the empowerment of the stronger party by the weaker which 3) empowerment has been solicited or accepted by the stronger party and 4) prevents the weaker party from effectively protecting itself.” ’ [Citation.] [¶] ‘ “[B]efore a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.” ’ [Citation.]” (Thomas v. Regents of University of California (2023) 97 Cal.App.5th 587, 629.)

A directors and majority shareholders of a corporation owe fiduciary duties to minority shareholders. (Corp. Code, § 309, subd. (a); Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108.) “ ‘Shareholder’ means one who is a holder of record of shares.” (Corp. Code, § 185.) Plaintiff does not allege that he was a holder of record of shares of ProHealth. From this, Carson argues that plaintiff was not a shareholder and therefore Carson owed no fiduciary duty on account of shareholder status. This argument, however, does not resolve the question of whether plaintiff has alleged a fiduciary duty since it is dependent upon a single source of the fiduciary duty, where plaintiff has alleged multiple sources of such duty. (And for that reason, the court does not need to determine whether ProHealth’s failure formally to issue shares in breach of contract is a sufficient basis by itself, by estoppel or otherwise, to find the existence of a fiduciary duty based on shareholder status.)

As the court identified in ruling on the demurrer, plaintiff has adequately alleged a contract by which plaintiff was to receive “10 % equity to be given upfront.” “Up front” means, among other things, “in advance.” (<https://www.merriam-webster.com/dictionary/up-front&gt; [as of Sept. 23, 2024].) So, whether or not stock was actually issued, plaintiff has alleged that Carson and ProHealth intended the relationship of stockholder to exist before plaintiff performed under the contract. This is a sufficient allegation to imply that Carson and ProHealth contractually accepted the fiduciary duties inherent in such a relationship.

Or the same contractual allegations can be interpreted consistent with plaintiff’s other argument, that in being held out as Carson and ProHealth’s “business partner” (Complaint, ¶ 96), plaintiff was a joint venturer with ProHealth and Carson. (See Weiner v. Fleischman (1991) 54 Cal.3d 476, 482.) This relationship also implies a fiduciary duty by both Carson and ProHealth to plaintiff. (Ibid.)

In any case, plaintiff has alleged a role of more than a mere creditor and defendants have not demonstrated that fiduciary duties cannot exist based upon a confidential relationship among them apart from the issue of plaintiff’s shareholder status. Plaintiff’s allegations are sufficient to state a cause of action for breach of fiduciary duty against both Carson and ProHealth. This is all that is required for pleading purposes. The motion for judgment on the pleadings will be denied on this alternative ground.