Opinion
B310115
09-28-2021
MICHAEL DRAZ, Plaintiff and Appellant, v. PETER M. NEWTON, Defendant and Respondent.
Weiss & Zaman, Thomas J. Weiss and Shawn Zaman for Plaintiff and Appellant. Sparks Law Firm and Jerry R. Sparks for Defendant and Respondent.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. 19STCV07706, Rupert A. Byrdsong, Judge. Affirmed.
Weiss & Zaman, Thomas J. Weiss and Shawn Zaman for Plaintiff and Appellant.
Sparks Law Firm and Jerry R. Sparks for Defendant and Respondent.
CRANDALL, J. [*]
This appeal involves a long-running feud over a failed hotel project in Dana Point, California, and constitutes the second of two lawsuits among the three members (Michael Draz, Gal Lipkin, and Peter M. Newton) of a limited liability company, Beverly Hills Hospitality Group, LLC (the LLC), established in 2007.
In 2010, Newton, Lipkin and the LLC sued Draz for fraud. That lawsuit was settled in 2011 with Lipkin being confirmed as the manager of the LLC and with Newton and Lipkin holding a majority of the voting power. Eight years later, Draz filed this lawsuit on behalf of himself and the LLC against Lipkin and Newton.
The claims against Lipkin involve breach of his fiduciary duties as manager of the LLC. At the time of this appeal, those claims remained active. However, Draz also alleged that Newton conspired with and aided Lipkin in breaching his managerial fiduciary duties. The trial court twice permitted Draz to amend his complaint. However, the trial court sustained Newton's demurrer to the third amended complaint and dismissed him from the lawsuit with prejudice.
On appeal, Draz argues the trial court erred in dismissing Newton from the lawsuit because he alleged Newton behaved like a manager and, thus, he sufficiently stated the elements for conspiracy and aiding and abetting a breach of fiduciary duty against Newton.
Both under the Corporations Code, and as provided in the operating agreement, only the managing member (Lipkin) has a fiduciary duty to the LLC or its other members. Newton did not explicitly assume any fiduciary obligations, and his alleged conduct is not a sufficient basis on which to find that he assumed any fiduciary obligations.
Because Newton owed no fiduciary duty to Draz, he cannot be found liable for conspiring to breach that duty. Further, any challenge to the dismissal of the aiding and abetting allegations against Newton has been waived. We conclude the trial court did not abuse its discretion in dismissing Newton with prejudice. We affirm.
BACKGROUND
A. The Operating Agreement, Prior Lawsuit, and Amendments to the Operating Agreement
To the operative complaint, Draz attached and incorporated by reference the August 26, 2007, operating agreement for Beverly Hills, an unexecuted document he alleged was an August 2009 amendment to the operating agreement, and a January 2011, second amendment to the operating agreement, and a number of other documents. Each of these documents is therefore made a part of the allegations of the complaint. (See Del Mar Beach Club Owners Assn. v. Imperial Contracting Co. (1981) 123 Cal.App.3d 898, 908 [finding the plaintiff could withstand a general demurrer by reference to the contents of an exhibit attached to the complaint].) We derive our factual summary, in part, from these exhibits.
On August 26, 2007, Draz, Lipkin, and Newton entered into an operating agreement forming the LLC. It is a manager-managed limited liability company, and initially, Draz was designated as its sole manager. Under the operating agreement, a manager could be removed or appointed by a majority vote of the members, and the members voted “in proportion to the[ir] [p]ercentage [i]nterest.” The operating agreement specified that the fiduciary duties owed by the managing member to the LLC and the other members “are those of a partner to a partnership and to the partners of the partnership.”
As to the members' duties, section 4.8 of the operating agreement stated, “The [m]embers do not violate a duty or obligation to [the LLC] merely because the [m]ember's conduct furthers the [m]ember's own interests. The [m]embers may lend money to and transact other business with [the LLC], and the rights and obligation of the [m]ember in such transactions shall be the same as those of a person who is not a member.” Additionally, section 4.7, entitled “Duty of Loyalty” provides that the members may enter into transactions that are competitive with the LLC's business. The operating agreement does not identify any fiduciary duties owed by the members.
As to member liabilities, section 4.5 of the operating agreement prohibits member liability for the LLC's debts “solely by reason of being such [m]ember or acting or omitting to act in such capacity or participating in any capacity in the conduct of the business of [the LLC].” Section 4.6 provides, “Except as otherwise provided by law, the [a]rticles or this [a]greement, a member shall have no personal liability, merely as a member, for any liabilities or losses of [the LLC] beyond the member's contributions.” The LLC is required to indemnify the members for liabilities paid or accrued by the members in connection with the business of the LLC, or because the member is a member.
Further, section 4.6 states, “The failure of [the LLC] to observe any formalities or requirements relating to the exercise of its powers or the management of its business or affairs under this [a]greement or the [Limited Liability Company] Act shall not be grounds for imparting personal liability on the [m]ember for liabilities of [the LLC].”
The operating agreement specified that a vote of the majority of the members was required before the LLC could take certain acts, including filing a petition for bankruptcy.
On March 24, 2010, the LLC, Lipkin, and Newton filed a complaint against Draz, entitled Beverly Hills Hospitality Group, et al. v. Draz, et al., case No. BC434476. Plaintiffs alleged causes of action for injunctive relief, breach of fiduciary duty, gross negligence, accounting, breach of operating agreement, conversion, fraudulent misrepresentation, fraudulent concealment, false promise, and declaratory relief, in which they sought, among other things, a declaration that Lipkin replaced Draz as the managing member.
In a January 2011 second amendment of the operating agreement, Lipkin and Newton agreed to dismiss, with prejudice, the lawsuit against Draz. Lipkin was to “remain” managing member of the LLC, and Draz “assume[d] the title of [Chief Executive Officer] and Director of Development.” The second amendment also reflected that Newton had the largest percentage interest at 47.44 percent. Draz had 35.13 percentage interest; Lipkin had 17.42 percentage interest. Thus, together, Newton and Lipkin had a majority of the voting power.
B. The Current Litigation
1. Factual Background
According to the third amended complaint, in October 2013 and February 2014, Lipkin sent emails requesting each member contribute money to meet the LLC's financial obligations. Lipkin stated the cash would be treated as an emergency loan that would convert into equity within 30 days. He further stated that if any member failed to contribute, the loan would be converted into equity at a rate of 10 to 1. Lipkin stated that both he and Newton contributed $130,000.
In or about February 2014, the Dana Point property suffered fire damage. Lipkin allegedly failed to comply with the requirements for disbursement of approximately $600,000 in insurance proceeds. “Consequently, the hotel repairs and restoration were not completed, and [the LLC] was unable to resume operations of its hotel in Dana Point. This contributed to [the LLC's] bankruptcy....”
“In 2015, the financial needs of [the LLC] were between $3.5 and $4 million dollars, needed to pay loan debt, repair the hotel and complete the entitlement process.” The members disagreed as to how to proceed.
In 2014 and in 2015, Draz disclosed to Lipkin and Newton that he had identified investors willing to contribute $5 million to the LLC “under the condition that N[ewton] and L[ipkin] give up control of management.” Specifically, Draz sought to “take over management immediately” and “take full control of [the LLC] and make all decisions on behalf of [the LLC].” Lipkin and Newton rejected these terms.
In July 2015, the LLC “needed” $150,000 “to avoid losing the hotel.” “D[raz] offered to provide the cash to repair the hotel and keep the [LLC] alive, if he could resume his position as chief executive.” “L[ipkin] and N[ewton] [then] conspired not to accept any offer that would allow D[raz] or any other person or entity to become [m]anaging [m]ember of [the LLC].” Newton stated, “For $150,000 you want to take management? Absolutely not, that is not going to happen!” The LLC filed for bankruptcy.
According to the complaint, Lipkin and Newton advised bankruptcy counsel not to attend a March 22, 2016, hearing on the lender's motion to lift the bankruptcy stay. Bankruptcy counsel explained to Draz via email that “[t]he March 22 hearing on the relief from stay [m]otion occurred after the case was converted to chapter 7 and was being managed and controlled by the chapter 7 trustee. We met with the trustee in an effort to convince her to oppose the relief from stay and administer the property. We also provided the trustee with documents, per her request, to assist in her response to the motion. We were in frequent contact with [Newton] and [Lipkin] throughout and were instructed not to attend, which we agreed with since the decision on disposition of the property was in the hands of the chapter 7 [t]rustee and we had no basis to block her from settling.” The bankruptcy stay was lifted.
On March 24, 2016, at a foreclosure sale of the Dana Point property, the lender's assignee purchased the property for $2.7 million, approximately $8 million below its 2009 market value. Lipkin and Newton had asked bankruptcy counsel to omit Draz from communications. Thus, Draz did not know of the date of the foreclosure sale and could not purchase the property or arrange for other investors to purchase the property. There were no other bidders at the foreclosure, and there was approximately a $7 million deficiency on the note for which the members were liable on their personal guarantees.
Thereafter, the lender's successor proposed that the LLC give up any claim to the property in exchange for releasing the members from their obligations on the guarantees. Newton rejected this proposal, and the lender's successor sued the members to enforce the guarantees. “N[ewton] then purchased the guaranty debt from the lender's successor at a discount..., and sued D[raz] for the undiscounted full amount.”
2. Procedural Background
On March 5, 2019, Draz initiated this lawsuit. In a first amended complaint, Draz alleged Lipkin breached his fiduciary duties to Draz and to the LLC and breached the operating agreement. In the fifth cause of action, Draz alleged that Newton conspired with Lipkin, and aided and abetted him in breaching Lipkin's fiduciary duties to Draz. The sixth cause of action raised the same allegations against Newton on behalf of the LLC.
Lipkin and Newton demurred to each cause of action on the ground that Draz failed to allege that he performed his obligations under the operating agreement. As to the fifth and sixth causes of action, Newton also argued he did not owe a fiduciary duty as a matter of law. The trial court sustained a demurrer with motion to strike, with leave to amend.
The trial court delivered an oral tentative and ruling at the hearing. A reporter's transcript is not included in the appellate record. The trial court's minute orders do not reflect its reasoning for sustaining the demurrers to the first, second, or third amended complaints.
On August 30, 2019, Draz filed a second amended complaint. The fifth and sixth causes of action against Newton were substantively the same as before. Newton demurred on the same grounds and on the ground that there were insufficient facts to establish the elements of specific intent to facilitate the alleged wrongful conduct and substantial assistance. The trial court again sustained Newton's demurrer with leave to amend.
On February 22, 2020, Draz filed the third amended complaint, which is the subject of this appeal. Draz added allegations that, “[Newton] was able to effectively manage the [LLC] by virtue of his conspiracy with L[ipkin] and his ability to dominate and control L[ipkin] financially and by force of personality.” Draz also alleged several facts purporting to demonstrate that Newton behaved as a manager-in-fact, and thus assumed the fiduciary duties of a manager under the operating agreement.
Newton again demurred on the bases that he did not owe a fiduciary duty as a matter of law and that “there [were] insufficient facts to establish that [he] had specific intent to facilitate the alleged wrongful conduct and/or that he provided substantial assistance to Lipkin's alleged breach of fiduciary duty.” As to the sixth cause of action, Newton also argued that the LLC failed to state any facts demonstrating damages as a result of the alleged breach of fiduciary duty. Newton and Lipton also filed a motion to strike certain portions of the third amended complaint.
The trial court sustained Newton's demurrer without leave to amend. It denied as moot the motion to strike except for any allegations that Newton was a managing member or partner of the LLC, that he was part of a conspiracy, or that he could be held liable for breaching a fiduciary duty.
On November 11, 2020, the trial court dismissed Newton from the lawsuit pursuant to Code of Civil Procedure section 581, subdivision (f)(1).
Draz timely appealed the order.
DISCUSSION
A. Legal Standard and Standard of Review
“ ‘The function of a demurrer is to test the sufficiency of [a pleading] as a matter of law.' ” (Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1238 (Thrifty Payless).) “A complaint ‘is sufficient if it alleges ultimate rather than evidentiary facts,' but the plaintiff must ‘ “ ‘ “set forth the essential facts of his [or her] case with reasonable precision and with particularity sufficient to acquaint [the] defendant with the nature, source, and extent”' ”' of the plaintiff's claim. Legal conclusions are insufficient. [Citation.]” (Ibid.) “ ‘Where written documents are the foundation of an action and are attached to the complaint and incorporated therein by reference, they become a part of the complaint and may be considered on demurrer.' [Citation.]” (Qualcomm, Inc. v. Certain Underwriters at Lloyd's, London (2008) 161 Cal.App.4th 184, 191.)
We use the de novo standard of review when an order sustains a demurrer without leave to amend. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “ ‘We assume the truth of the allegations in the complaint, but do not assume the truth of contentions, deductions, or conclusions of law.' ” (Thrifty Payless, supra, 218 Cal.App.4th at p. 1238.) “Although we conduct a de novo review, we ‘must presume the judgment is correct, and the appellant bears the burden of demonstrating error.' [Citation.]” (Tubbs v. Berkowitz (2020) 47 Cal.App.5th 548, 554.)
To the extent a plaintiff's factual allegations conflict with the content of exhibits to the complaint, “we rely on and accept as true the contents of the exhibits and treat as surplusage the pleader's allegations as to the legal effect of the exhibits.” (Barnett v. Fireman's Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505.)
B. Draz Failed to State a Claim for Civil Conspiracy to Breach Fiduciary Duty in Either the Fifth or Sixth Causes of Action
A person who does not owe a fiduciary duty to a plaintiff cannot be held liable for conspiracy to breach that duty. (See Everest Investors 8 v. Whitehall Real Estate Limited Partnership XI (2002) 100 Cal.App.4th 1102, 1106, 1107-1108 [“By its nature, tort liability arising from a conspiracy presupposes that the conspirator is legally capable of committing the tort-that he owes a duty to the plaintiff recognized by law and is potentially subject to liability for the breach of that duty”]; Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1597 [“A nonfiduciary cannot conspire to breach a duty owed only by a fiduciary”].)
Juxtaposed with the allegations in the third amended complaint, neither Corporations Code section 17704.09, subdivision (f) (governing limited liability companies) nor the operating agreement provides any support for imposing fiduciary duties on Newton.
We begin by noting that the operating agreement designates the LLC as a manager-managed limited liability company with a sole manager. Under the Corporations Code, “[i]n a manager-managed limited liability company, ... [¶]... [¶]... a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.” (Corp. Code, § 17704.09, subd. (f)(3).)
Support for manager-only liability can also be found in the operating agreement, which expressly identifies the fiduciary duties of the managing member, but identifies no such duties for the other members. Sections 4.5, 4.6, 4.7, and 4.8 of the operating agreement further reflect a policy of limiting liabilities and duties of members as opposed to managing members.
Draz argues that Newton owed a fiduciary duty to him and to the LLC because Newton behaved like a manager. However, he provides us no California law to support this proposition, which is additionally contraindicated by Supreme Court precedent.
None of the four cases cited by Draz supports his argument. Feresi v. The Livery, LLC (2014) 232 Cal.App.4th 419 does not discuss or support extending fiduciary duties to the member. Nor does Evans v. Galardi (1976) 16 Cal.3d 300, 307-308. BT-I v. Equitable Life Assurance Society (1999) 75 Cal.App.4th 1406, 1412 talks only about fiduciary responsibilities of a general partner, which have no applicability here. Broffman v. Newman (1989) 213 Cal.App.3d 252 likewise talks in a dicta footnote about liabilities of a general partner under Corporations Code provisions that have no bearing on this case. (See Corp. Code, § 15903.03 [current version statute].) Draz has not identified, and we are not aware of, any statutory provision applicable to limited liability companies that permits a member to be held liable as a manager.
In the context of basic fiduciary obligations, our Supreme Court has stated, “before 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.” (Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 221; see City of Hope National Medical Center. v. Genentech, Inc. (2008), 43 Cal.4th 375, 386 [same].) The Supreme Court's requirement about knowing assumption of fiduciary responsibilities is supported in subdivision (e) of Corporations Code section 17701.10, which states that the fiduciary duties of a manager “shall only be modified in a written operating agreement with the informed consent of the members.”
Although given three chances to do so, Draz was unable to allege conduct demonstrating that Newton knowingly undertook to act as a fiduciary on his or the LLC's behalf. Whether Newton may have used his force of personality, superior financial position, or voting power to sway the direction of the LLC's business is insufficient. After all, Lipkin and Newton together had a majority and could outvote Draz on any LLC matters.
Accordingly, the trial court did not err in sustaining the demurrer to Draz's claim that Newton conspired to breach fiduciary duties. (See Everest Investors 8 v. Whitehall Real Estate Limited Partnership XI, supra, 100 Cal.App.4th at pp. 1107-1108.)
C. Draz Waived the Argument that He Stated a Cause of Action for Aiding and Abetting a Breach of Fiduciary Duty
A person may be liable for aiding and abetting a breach of fiduciary duty under two theories. (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1477.) Under the first theory, he must independently owe a fiduciary duty to the plaintiff. (Ibid.) As we have said, Draz cannot establish that Newton owed him or the LLC any such duty.
“The second theory for imposing liability for aiding and abetting a breach of fiduciary duty arises when the aider and abettor commits an independent tort. [Citation.] This occurs when the aider and abettor makes ‘ “a conscious decision to participate in tortious activity for the purpose of assisting another in performing a wrongful act.”' [Citations.]” (American Master Lease LLC v. Idanta Partners, Ltd., supra, 225 Cal.App.4th at p. 1477.)
More particularly, to show aider and abettor liability, a plaintiff must plead and prove: (1) a third party's breach of fiduciary duties owed to plaintiff; (2) defendant's actual knowledge of that breach; (3) substantial assistance or encouragement to the third party's breach; and (4) substantial factor causation. (Nasrawi v. Buck Consultants LLC (2014) 231 Cal.App.4th 328, 343, citing Judicial Council of Cal. Civ. Jury Instns. (CACI) (2014) No. 3610 and American Master Lease LLC v. Idanta Partners, Ltd., supra, 225 Cal.App.4th at p. 1478.)
Specific intent to facilitate the wrongful act has been read into these elements. “The fact [CACI No. 3610] does not use the word ‘intent' is not determinative. ‘California courts have long held that liability for aiding and abetting depends on proof the defendant had actual knowledge of the specific primary wrong the defendant substantially assisted. In Lomita Land & Water Co. v. Robinson (1908) 154 Cal. 36..., the California Supreme Court... stated, “The words ‘aid and abet' as thus used have a well understood meaning, and may fairly be construed to imply an intentional participation with knowledge of the object to be attained.” [Citation.]' (Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1145-1146....)” (Upasani v. State Farm Gen. Ins. Co. (2014) 227 Cal.App.4th 509, 519, italics omitted.)
Both in the trial court and on appeal, Newton argued Draz failed to allege facts, as opposed to conclusions, establishing the elements of actual knowledge and specific intent, substantial assistance, and/or causation. Draz responds, only in general terms wholly lacking in specific citations to the third amended complaint, that he sufficiently alleged these elements.
“[A]n appellant must do more than assert error and leave it to the appellate court to search the record and the law books to test his claim. The appellant must present an adequate argument including citations to supporting authorities and to relevant portions of the record.” (Yield Dynamics, Inc. v. TEA Systems Corp. (2007) 154 Cal.App.4th 547, 557; see Bernard v. Hartford Fire Ins. Co. (1991) 226 Cal.App.3d 1203, 1205 [“It is the duty of a party to support the arguments in its briefs by appropriate reference to the record, which includes providing exact page citations”].)
Because Draz fails to argue with any specificity how the third amended complaint alleged each of these elements, he has waived this argument on appeal. (See Duarte v. Chino Community Hospital (1999) 72 Cal.App.4th 849, 856 [“If a party fails to support an argument with the necessary citations to the record, that portion of the brief may be stricken and the argument deemed to have been waived”].)
During oral argument, we asked Draz's counsel to identify where in Draz's appellate briefs he cited to allegations in the third amended complaint establishing each of the elements for aiding and abetting. Counsel pointed us to certain pages in the reply brief. However, neither those pages nor any pages in Draz's opening brief included such citations. Even had the reply brief included citations, this would not have been sufficient. (See American Drug Stores, Inc. v. Stroh (1992) 10 Cal.App.4th 1446, 1453 [“Points raised for the first time in a reply brief will ordinarily not be considered, because such consideration would deprive the respondent of an opportunity to counter the argument”].)
DISPOSITION
The trial court properly sustained Newton's demurrer to the fifth and sixth causes of action. Its November 11, 2020, order dismissing Newton from the lawsuit is affirmed.
Each party is to bear its own costs on appeal.
We concur: CHANEY, J., BENDIX, Acting P. J.
[*] Judge of the San Luis Obispo County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.