Murry v. Carras CA2/8 ( 2014 )

Filed 11/6/14 Murry v. Carras CA2/8
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
ELMER MURRY, JR., B251381
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. VC061416)
v.
MICHAEL J. CARRAS et al.,
Defendants and Respondents.
APPEAL from the judgment of the Superior Court of Los Angeles County.
Margaret Miller Bernal, Judge. Reversed.
John A. Bunnett for Plaintiff and Appellant.
Michael J. Carras and Daniel A. Conforti, in pro. per.; and for Defendants and
Respondents.
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This is an appeal from the sustaining of a demurrer without leave to amend.
Plaintiff Elmer Murry, Jr., sued his former attorneys, defendants Michael J. Carras and
Daniel A. Conforti, as well as nonattorney Ricky Grayson and the individual defendants’
business, Draft Picks Management Group, LLC. Murry alleged defendants wrongfully
divested him of his interest in his business, Draft Picks Limited Liability Company (the
LLC), and that they raided and mismanaged the LLC’s assets. The LLC was a named
plaintiff in the original complaint, but was omitted from the first amended complaint after
the defendants pointed out, on demurrer to the original complaint, that the LLC’s
privileges were suspended for nonpayment of taxes. Defendants thereafter demurred to
the first amended complaint on the basis that Murry, as an individual, lacked standing to
assert claims belonging to the LLC. The trial court sustained the demurrer without leave
to amend.
We find the first amended complaint states facts which would support individual
claims by Murry that do not depend on the LLC’s participation in the lawsuit, and we
reverse.
BACKGROUND
The original complaint was brought by plaintiff Elmer Murry, Jr., and his LLC,
Draft Picks Limited Liability Company (the LLC), of which Murry was the sole member.
The defendants are Michael J. Carras, Daniel A. Conforti, Ricky Grayson, and Draft
Picks Management Group, LLC. The complaint alleged claims for fraud, cancellation of
written instrument, rescission, imposition of constructive trust, conversion, breach of
fiduciary duty, declaratory relief, and an accounting.
The LLC was the holding company for Murry’s sports restaurant, Draft Picks
Sports Grill. Murry retained the attorney defendants, Carras and Conforti, to represent
him in a dispute with his business partner in another sports restaurant, Draft Picks Pizza
Pub. Over the course of that representation, the attorney defendants gained access to
confidential information about Murry’s businesses, which they used to defraud Murry out
of his interest in the LLC.
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Defendants Carras and Conforti learned that Murry owed $205,000 to a friend,
John Adger, and that Murry was soliciting investors to invest in the LLC so he could pay
off the loan. They also learned that the Sports Grill was very profitable, netting over
$300,000 in profits each year, with a fair market value of $1,000,000 to $1,200,000.
Carras approached Murry with a plan, claiming Murry could pay off the Adger debt and
retain his ownership of the LLC. Carras told Murry that if Murry gave him and the other
individual defendants control of the LLC, that defendants would pay off the loan, and
Murry could avoid bankruptcy.
On June 25, 2009, Carras and Conforti presented Murry with a contract to sign
(the Memorandum of Understanding). They did not give him an opportunity to retain
independent counsel to advise him concerning the contract. At this time, Murry had
reduced the Adger debt to $195,000. The contract provided that Carras, Conforti, and
Grayson would pay $90,000 to further reduce the debt, and in exchange they would
acquire 51 percent of the LLC. Murry was required to pay the balance of $105,000 by
July 31, 2009. If Murry failed to pay, he would relinquish all interest in the LLC to the
individual defendants.
Specifically, the Memorandum of Understanding recited that John Adger had a
security interest in the LLC’s assets, and that Adger would perfect his security interest if
not paid in full by July 31, 2009. Upon the payment of $90,000 to Adger by Carras,
Conforti, and Grayson, “Murry will turn over all control [of] Draft Picks finances to
Carras and Conforti” and Murry would no longer manage business’s employees. Murry
would remain responsible for overseeing building maintenance, ordering food and
beverages, and promotional events. He was required to work at least 30 hours per week
in the business. Carras and Conforti would be responsible for “all administration and
financial matters, including audit and oversight, regulatory compliance and negotiating
Draft Picks back debts.”
In the event that Murry did not pay the remainder of the Adger loan before
July 31, 2009, he would relinquish his ownership interest in the LLC, and would “execute
all documents to effectuate this transfer.” If the individual defendants elected to pay the
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rest of the Adger loan, they could either elect to sell the LLC or to operate it, in which
case they would retain Murry as an “employee/manager.” In the event that Murry stayed
on as an employee, he would be entitled to earn “sweat equity”; he could regain as much
as 45 percent of his interest in the LLC if the business met certain profit goals.
The Memorandum of Understanding also recited that the LLC had an additional
$150,000 in debt for which Murry would remain responsible.
The contract included a noncompetition clause, providing that Murry would not
work for or have any involvement in any similar establishment, including his business,
Draft Picks Pizza Pub. If Murry violated the noncompetition clause, he would lose any
earned or contingent interest in the LLC.
Murry signed the Memorandum of Understanding individually, and as managing
member of the LLC. However, the contract recited that it was only “between Elmer
Murry [], Michael Carras [], Ricky Grayson [] and Daniel Conforti . . . .” The LLC was
not listed as a “party” to the contract.
On August 1, 2009, after Murry failed to pay the remainder of the loan, defendants
presented him with an Asset Purchase Agreement, purporting to transfer all of the LLC’s
assets to a new entity they had created, defendant Draft Picks Management Group. The
agreement provided that defendants were not assuming any liabilities of the LLC, except
those required by state or federal law. The agreement also provided for the establishment
of an escrow, to effect transfer of the LLC’s liquor license to the new entity. The Asset
Purchase Agreement provided for a purchase price of $200,000, representing full
satisfaction of Adger’s promissory note. Murry again was not given an opportunity to
retain independent counsel to advise him concerning the agreement.
The parties to the Asset Purchase Agreement were the LLC and defendant Draft
Picks Management Group. Murry was not a party to the Asset Purchase Agreement. The
Asset Purchase Agreement included a noncompetition clause, binding the LLC (the
“seller” under the agreement) and its principal, Murry, from engaging in a similar
business. The agreement included an integration clause, providing that “[t]his Agreement
constitutes the entire agreement between the parties with respect to the subject matter of
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this Agreement and supersedes all prior agreements, oral and written, between the parties
hereto with respect to the subject matter of this Agreement.” Plaintiff signed the
agreement solely in his capacity as “Manager/Member” of the LLC. An addendum to the
agreement, however, incorporated the terms of the Memorandum of Understanding which
permitted Murry to be retained as an employee and to earn “sweat equity.”
Ultimately, the defendants mismanaged the business and manipulated the books as
part of a scheme to divest Murry of any ability to recapture his interest in the business.
Defendants demurred to the original complaint, contending the plaintiff LLC was
suspended for failure to pay taxes, and therefore lacked the capacity to sue. Before the
hearing on the demurrer, Murry filed a first amended complaint, which was nearly
identical to the original complaint, but omitted the LLC as a plaintiff. The first amended
complaint newly alleged that defendants caused the LLC’s status to be suspended by
failing to pay its tax liabilities, and therefore they were estopped from challenging
Murry’s standing.
Defendants again demurred, challenging Murry’s standing to bring the claims,
arguing that the claims belonged to the LLC and not to Murry individually, and that the
damages sought belonged to the LLC. The demurrer also argued that the claim for
breach of fiduciary duty failed because no fiduciary relationship was created by the
“contingent” sweat equity interest given to Murry in the Asset Purchase Agreement.
Defendants also requested that the court take judicial notice of various taxes and
judgments owed by the LLC, that predated the parties’ dealings.
The trial court sustained the demurrer without leave to amend, finding that the
omission of the LLC as a plaintiff brought the first amended complaint under the sham
pleading doctrine, and that “[t]he defect is fatal and cannot be cured by merely ignoring
the existence of his own corporate entity.” The trial court found Murry was not a party to
the Asset Purchase Agreement, which contained an integration clause superseding the
Memorandum of Understanding to which Murry was a party. From this, the court
concluded that all the claims asserted by Murry belonged only to the LLC. The trial
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court later awarded defendants their attorney fees. Murry timely appealed the order of
dismissal.
DISCUSSION
A demurrer tests the legal sufficiency of the complaint. We review the complaint
de novo to determine whether it alleges facts sufficient to state a cause of action. For
purposes of review, we accept as true all material facts alleged in the complaint, but not
contentions, deductions or conclusions of fact or law. We also consider matters that may
be judicially noticed. (Blank v. Kirwan (1985) 39 Cal. 3d 311, 318; McKell v. Washington
Mutual, Inc. (2006) 142 Cal. App. 4th 1457, 1491.) When a demurrer is sustained without
leave to amend, “we decide whether there is a reasonable possibility that the defect can
be cured by amendment: if it can be, the trial court has abused its discretion and we
reverse; if not, there has been no abuse of discretion and we affirm.” (Blank, supra, at
p. 318.)
1. Standing
Defendants contend that Murry lacks standing to seek damages or other remedies
for the wrongful taking of the LLC’s assets. Essentially, they contend that Murry’s
claims are derivative, belonging to the LLC, rather than to Murry individually.
“In determining whether an individual action as opposed to a derivative action
lies, courts look at ‘the gravamen of the wrong alleged in the pleadings.’ (Nelson v.
Anderson (1999) 72 Cal. App. 4th 111, 124 [(Nelson)].)” (PacLink Communications
Internat., Inc. v. Superior Court (2001) 90 Cal. App. 4th 958, 965 (PacLink).) “[A]n
individual cause of action exists only if the damages were not incidental to an injury to
the corporation. [Citation.]” (Nelson, supra, at p. 124.) “The cause of action is
individual, not derivative, only ‘“where it appears that the injury resulted from the
violation of some special duty owed the stockholder by the wrongdoer and having its
origin in circumstances independent of the plaintiff’s status as a shareholder.” ’
[Citation.]” (Ibid.) “In other words, it is the gravamen of the wrong alleged in the
pleadings, not simply the resulting injury, which determines whether an individual action
lies.” (Ibid.)
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Defendants rely on PacLink, supra, where the court held that the plaintiff LLC
members’ action was derivative because their complaint alleged assets of the LLC were
transferred fraudulently to a new company, in which plaintiffs had no involvement,
without any payment to the LLC. (PacLink, supra, 90 Cal.App.4th at p. 964.) Any
injury to the plaintiffs was deemed to be incidental to the harm caused to the LLC itself,
“[b]ecause members of the LLC hold no direct ownership interest in the company’s
assets, [therefore] the members cannot be directly injured when the company is
improperly deprived of those assets.” (Id. at p. 965, citation & fn. omitted.) The plaintiff
LLC members claimed that the transfer of the assets had caused a “diminution in the
value of their membership interest in the LLC,” but because this reduction in value was
directly attributed to the reduction in value of the LLC’s assets, the claim was deemed to
be derivative, and the individual plaintiffs lacked standing to assert the claims. (Id. at
pp. 965-966.)
Murry maintains that the first amended complaint has stated individual claims, not
claims belonging to the LLC, arguing that based on their fraud, the defendants initially
acquired 51 percent of Murry’s interest in the LLC (the Memorandum of Understanding),
and then Murry’s entire interest (the Asset Purchase Agreement), thereby wrongfully
excluding him from his business. Murry contends the Memorandum of Understanding
was between defendants and Murry in his individual capacity, and that the LLC was
unaffected by its terms. He also contends that both the Memorandum of Understanding
and Asset Purchase Agreement vested him with an individual and personal right to regain
his shares of the LLC, and that defendants wrongfully cooked the books and boosted
costs to ensure that the target profit margins would not be achieved.
In arguing his claims are individual, Murry relies on Jones v. H.F. Ahmanson &
Co. (1969) 1 Cal. 3d 93; Smith v. Tele-Communication, Inc. (1982) 134 Cal. App. 3d 338;
Crain v. Electronic Memories & Magnetics Corp. (1975) 50 Cal. App. 3d 509; and Low v.
Wheeler (1962) 207 Cal. App. 2d 477. However, these cases involved individual claims
by minority shareholders, for breaches of fiduciary duty by the majority shareholders.
This is not a case where majority shareholders favored themselves to the minority’s
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detriment. Murry did not sue defendants in their capacity as owners of the LLC; rather,
he describes them as “outsiders, seeking to defraud [Murry] of his interest in his
company.”
Nevertheless, we agree that Murry suffered individual harm separate from the
harm allegedly suffered by the LLC. The first amended complaint alleges the attorney
defendants violated their ethical obligations to Murry, and that defendants manipulated
the books in an attempt to divest Murry of his sweat equity in the new entity. These facts
support causes of action for breach of fiduciary duty and breach of the covenant of good
faith and fair dealing owed specially to Murry, and perhaps other causes of action arising
from duties owed to Murry separate from any duty owed to the LLC. (See Nelson, supra,
72 Cal.App.4th at p. 124 [“The cause of action is individual, not derivative, only ‘ “where
it appears that the injury resulted from the violation of some special duty owed the
stockholder by the wrongdoer and having its origin in circumstances independent of the
plaintiff’s status as a shareholder” ’ ”].)
As for the claims asserted in the first amended complaint on behalf of the LLC,
Murry urges that defendants should be estopped from challenging his standing to bring
those claims, reasoning the amended pleading includes allegations that defendants caused
the privileges of the LLC to become suspended. Murry has cited no authority supporting
his position that equity can somehow overcome the strong public policy goals served by
the laws prohibiting judicial action by suspended entities, or that he can circumvent the
requirement of standing. (Kaufman & Broad Communities, Inc. v. Performance
Plastering, Inc. (2006) 136 Cal. App. 4th 212, 217-218.) We are not persuaded Murry
may pursue the derivative claims of the LLC.
Murry should be given the opportunity to amend his complaint to state claims
based on the harm unique to him, seeking recovery of individual damages he suffered as
a result of defendants’ wrongdoing.
2. Motion for Judicial Notice
Defendants have moved for judicial notice of four sets of documents. The first set
includes various tax liens against the LLC, of which the trial court took judicial notice.
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The other documents were never presented to the trial court, and include documents
related to the transfer of the LLC’s liquor license. Finding that none of these documents
is relevant to our disposition of this appeal, we deny the request. (See Mangini v. R. J.
Reynolds Tobacco Co. (1994) 7 Cal. 4th 1057, 1063 [a court will not take judicial notice
of irrelevant evidence].)
DISPOSITION
The judgment is reversed. Plaintiff and appellant shall recover his costs on appeal.
GRIMES, J.
We concur:
BIGELOW, P. J.
RUBIN, J.
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