Opinion
D070685
12-27-2016
DANIEL DIAZ, Plaintiff and Appellant, v. ABG TAPOUT, LLC et al., Defendants and Respondents.
Vivoli Saccuzzo, Michael W. Vivoli and Jason P. Saccuzzo, for Plaintiff and Appellant. Seyfarth Shaw, T. Larry Watts, James M. Harris, and Aaron Belzer, for Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2011-00462171) APPEAL from a judgment of the Superior Court of Orange County, Frederick P. Aguirre, Judge. Affirmed. Vivoli Saccuzzo, Michael W. Vivoli and Jason P. Saccuzzo, for Plaintiff and Appellant. Seyfarth Shaw, T. Larry Watts, James M. Harris, and Aaron Belzer, for Defendants and Respondents.
Daniel Diaz sued several entities and individuals arising from his status as a minority member and employee of a limited liability company, Fight Industries, LLC (Fight LLC). Diaz alleged defendants engaged in various forms of wrongful conduct that caused economic injury to himself and Fight LLC. After settling with several of the defendants (including Fight LLC) and dismissing each of those settling parties, Diaz pursued claims against the two remaining defendants: ABG Tapout, LLC and Authentic Brands Group, LLC (together Respondents).
Diaz's allegations against Respondents centered on Respondents' receipt of the assets previously held by Fight LLC, and Diaz's allegations that Respondents obtained these assets without paying adequate consideration and with the intent to facilitate the transferors' wrongful conduct. At the time of trial, Diaz's causes of action against Respondents included (1) fraudulent conveyance and (2) aiding and abetting breaches of fiduciary duty. Diaz brought each of these causes of action in two capacities: on his own behalf and on behalf of Fight LLC.
The court bifurcated the trial into a standing phase and a merits phase. After conducting a one-day trial in the first (standing) phase, the court concluded Diaz did not have legal standing to recover against Respondents on either cause of action in either capacity. The court found the causes of action were solely shareholder derivative claims (and not personal claims) brought on behalf of Fight LLC, and the derivative claims must be dismissed because Fight LLC was no longer a party in the action. On the fraudulent conveyance claim, the court additionally found Diaz had no standing under California law providing that a party cannot recover on a fraudulent conveyance cause of action against the transferee party if the underlying debt owed by the transferor has been satisfied. The court entered judgment in Respondents' favor.
Diaz challenges the court's rulings on appeal. We affirm.
FACTUAL AND PROCEDURAL SUMMARY
Background
In about 2002, Diaz began marketing a line of mixed martial arts clothing known as Hitman Fight Gear (Hitman). In 2007, Marc Kreiner and Dan Caldwell sought to purchase the Hitman brand. At the time, Kreiner and Caldwell were principals of TapouT, LLC (Tapout LLC), another mixed martial arts clothing company.
On March 11, 2008, Diaz signed an agreement in which he (and his entities) agreed to sell the Hitman brand to Fight LLC, a newly created limited liability company managed by Kreiner and Caldwell. In the agreement, Diaz sold all his rights and interest (including all intellectual property) in the Hitman brand to Fight LLC. In exchange, he received $15,000, a 10 percent membership interest in Fight LLC, and an employment contract.
Fight LLC was composed of six members, including Kreiner, Caldwell, and Diaz. Kreiner and Caldwell together held a majority interest. Kreiner and Caldwell had managerial powers, and Diaz owned a Class B minority interest with no voting or management authority. Fight LLC's operating agreement provided that "[n]o [m]ember has any interest in specific property of Fight [LLC]." The next year, in December 2009, Diaz signed a document acknowledging that "Fight [LLC] shall be deemed the sole and exclusive owner of all rights, interest and title in and to the Hitman Marks."
It appears Kreiner and Caldwell held their interests in wholly owned entities rather than as individuals. Because this fact is not relevant for purposes of this appeal, we refer to Kreiner and Caldwell as the owners of these interests.
In about September 2010, Kreiner and Caldwell caused Fight LLC's assets to be transferred to one of the Respondents in a two-step transaction.
First, they transferred all of Fight LLC's assets (including the Hitman brand and marks) to Tapout LLC. Kreiner and Caldwell controlled Tapout LLC, which was composed of all of the members of Fight LLC, except Diaz. As consideration for this transfer, Tapout LLC agreed to cancel all of Fight LLC's liabilities owed to it, including $875,000 in debt. The Fight LLC-Tapout LLC purchase agreement stated that Tapout LLC was obtaining the Fight LLC assets for the purpose of selling them to Respondents. Caldwell signed the agreement on behalf of Fight LLC, and Kreiner signed the agreement on behalf of Tapout LLC.
In the second step of this transaction, Tapout LLC sold the former Fight LLC assets to Respondents.
The transfer was made to only one of the Respondents (ABG Tapout, LLC), a subsidiary of the other Respondent. However, because this fact is not relevant for purposes of this appeal, and Diaz does not differentiate between the two parties in his appellate briefing, we shall refer to Respondents (in the plural) as the entities that took possession of the former Fight LLC assets in the transaction.
This double transaction (Fight LLC assets transferred to Tapout LLC, and Tapout LLC assets then transferred to Respondents) will be referred to as the September 2010 Transaction.
Complaint
About one year after the September 2010 Transaction, Diaz filed a complaint against Fight LLC, Kreiner, Caldwell, Tapout LLC, and Respondents. Diaz alleged claims arising from his minority interest in Fight LLC and claims arising from his employment with Fight LLC. Regarding his minority interest, Diaz alleged two sets of claims: (1) those arising during the existence of Fight LLC; and (2) those arising from the transfer of Fight LLC's assets.
Diaz also named two additional members of Fight LLC and Tapout LLC, Gary Gallinot and Gallinot Enterprises, but the facts pertaining to these individuals are not relevant for purposes of this appeal. We thus omit a discussion of these facts.
As to the first, Diaz alleged Kreiner and Caldwell, as majority Fight LLC members, had "systematically breached their fiduciary duties [owed] to Diaz by using the assets of [Fight LLC] . . . as their own personal piggy banks, and by. . . appropriat[ing] all the value of . . . [Fight LLC] for themselves personally." The alleged wrongful acts included Kreiner's actions in accepting personal bribes (such as cars and watches) from vendors and receiving "hundreds of thousands of dollars" in illegal kickbacks. Diaz alleged these acts were intended "to line Kreiner's pockets at the expense of . . . [Fight LLC] and [its] respective owners."
As to the second, Diaz alleged the September 2010 Transaction was "patently unfair"; benefitted only Kreiner and Caldwell personally; and "represented a fraudulent transaction designed to defraud legitimate creditors and investors" of Fight LLC, including Diaz.
Based on these and other allegations, Diaz brought numerous causes of action against Kreiner and Caldwell, including breach of fiduciary duty, fraudulent conveyance, and conversion. He brought these causes of action on his own behalf and as derivative claims on behalf of Fight LLC. Diaz also asserted employment-based causes of action and fraudulent inducement claims against Kreiner, Caldwell and Fight LLC.
As to Respondents, Diaz's claims included: (1) fraudulent conveyance; and (2) aiding and abetting the alleged breaches of fiduciary duty committed by Kreiner and Caldwell. Diaz asserted these claims as an individual and in a derivative capacity on behalf of Fight LLC. Diaz alleged Respondents were liable on these claims because they knowingly facilitated a fraudulent asset transfer for their own financial gain and were aware of Kreiner and Caldwell's past breaches of fiduciary duties.
Settlement Between Diaz and All Defendants Except Respondents
About 18 months after filing the complaint, Diaz entered into a settlement agreement (Settlement Agreement) with all defendants (including Caldwell, Kreiner, Fight LLC), except for Respondents. In the Settlement Agreement, Diaz agreed to dismiss with prejudice all of his claims against the settling defendants in exchange for $500,000. Diaz agreed payment of this amount "shall constitute . . . payment in full for . . . all claims made and/or related to the Action . . . ." Diaz further agreed to release these defendants from "any and all debts, sanctions, claims, potential claims, demands, liabilities, obligations, causes of action, and rights . . . which [Diaz] ever had, now has or hereafter may have . . . ." The Settlement Agreement excluded Respondents from the settlement provisions, stating: "[I]t is expressly understood and agreed that [Diaz's] releases do not extend to [Respondents] or their successors or assigns."
The settling defendants successfully moved for an order determining the settlement to be in good faith. Diaz then dismissed with prejudice all of his claims against each of the settling defendants, including Fight LLC, Kreiner, and Caldwell.
Pretrial Litigation
After the dismissal of the other defendants, Respondents moved for summary adjudication on Diaz's derivative claims, asserting these claims were no longer viable because Fight LLC was an indispensable party to these claims and Fight LLC was no longer a party to the action. The court denied the motion on procedural grounds.
On the day set for trial, the court considered numerous motions in limine and oppositions to those motions. Because many of these motions raised issues pertaining to Diaz's standing to recover on his claims against Respondents, the court decided (with the parties' agreement) to conduct a bench trial on the standing issues before it made final decisions on the evidentiary issues.
Trial on Standing Issues
At the standing trial, Diaz's remaining claims against Respondents were (1) fraudulent conveyance (Civ. Code, § 3439 et seq.); and (2) aiding and abetting breaches of fiduciary duty by Caldwell and Kreiner. Diaz brought each of these claims on behalf of Fight LLC and on his own behalf.
Diaz also brought an unfair competition law (UCL) claim against Respondents, but Diaz does not individually discuss this cause of action in his appellate briefing. He has thus forfeited any claim of error on appeal. In any event, our conclusions on the fraudulent conveyance and aiding and abetting claims apply equally to the UCL claim.
Respondents' counsel argued that Diaz had no legal standing to assert these claims because the causes of action were purely derivative claims on behalf of Fight LLC; derivative claims are viable only if the entity is a party to the action; and this requirement was not met because Diaz had dismissed Fight LLC from the lawsuit. Respondents alternatively argued Diaz had no standing on the fraudulent conveyance cause of action because the claims against the debtors (Caldwell and Kreiner) had been released in the Settlement Agreement and a fraudulent conveyance claim is not valid if the claims against the debtor have been satisfied. In support of these arguments, Respondents relied primarily on documentary evidence (e.g., the Settlement Agreement, the pleadings in the case, and the various transactional documents).
Diaz opposed Respondents' standing arguments. Diaz's counsel argued case law allows individual actions against majority shareholders if the minority shareholder suffers "a unique and specific injury," particularly where the plaintiff alleges he or she is the "sole party" who was harmed by the conduct. Diaz relied on Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93 (Jones) and Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238 (Jara). As to Diaz's fraudulent conveyance claim, Diaz's counsel argued the settlement between Diaz and the underlying debtors did not preclude this claim because the evidence showed Diaz "settled for less than what he believed he was owed" and the Settlement Agreement specifically excluded the claims against Respondents. In support of these arguments, Diaz relied on documentary evidence (e.g., the Settlement Agreement and transactional documents) and his own testimony.
Diaz was the sole witness to testify at the hearing. Of relevance here, Diaz confirmed that in 2008 he sold all of his interest in the Hitman brand to Fight LLC, and that he owned 10 percent membership interest in Fight LLC. He acknowledged he had no right to vote or participate in management, and he had no ownership interest in any specific property transferred to Fight LLC.
Diaz testified that after he sold his interest in the Hitman brand to Fight LLC, Fight LLC essentially "shelved" the brand. It did not pursue sales or distribution opportunities and barred all employees from wearing Hitman fight gear. Diaz said he was not provided any information about the business, including financial information.
In about August 2010, Caldwell informed Diaz for the first time about the plan to sell Fight LLC's assets to Respondents (via Tapout LLC). Caldwell told Diaz he had 48 hours to sign an agreement consenting to the sale. A Tapout LLC employee told Diaz he should not sign any document because "they were going to fuck" him. Diaz testified the documents showed that Caldwell and Kreiner would each be receiving $2.25 million plus $300,000 per year for five years for a noncompetition agreement, whereas Diaz would be offered a $100,000 annual salary for an at-will employment opportunity with Respondents. Diaz also learned of facts showing Kreiner and Caldwell had been committing fraud and embezzlement against Fight LLC and Tapout LLC. When Diaz showed the proposed consent agreement to his mother (who he said has a master's degree in human resources), she responded that " 'only a moron would sign that.' " Diaz testified that under the proposed transaction, only the members of Tapout LLC would receive economic benefits, and all the members of Fight LLC were members of Tapout LLC except himself.
After Diaz informed Caldwell he would not sign the consent document, Caldwell repeatedly telephoned him ("ten times a day") attempting to obtain his signature. At about that same time, Respondents' principal (Perry Wolfman) "aggressively" sought to obtain Diaz's signature on the consent document. Diaz told Wolfman that Kreiner and Caldwell "had been stealing money out of the company [and] embezzling; they had been engaging in tax evasion, money laundering, theft, creating false invoices, stealing merchandise, international tax fraud, customs fraud." Wolfman responded: "We can't talk about that. The deal's already done. We're not worried about that. This deal is happening. We just need to get you to sign." Diaz refused to sign the document.
Diaz also testified about the Settlement Agreement. He said he agreed to settle his claims for less than he believed he was owed because he had "reach[ed] the financial end of my ability to move forward" and the case was "wearing on the relationship with my attorney." Diaz said he also agreed to the settlement because he anticipated difficulty in enforcing a judgment against Kreiner and Caldwell because they were experienced in hiding their assets.
On cross-examination, Diaz testified that he received the $500,000 payment under the Settlement Agreement and understood he had fully released the settling defendants. He also acknowledged that Caldwell's and Kreiner's alleged wrongful conduct (e.g., "skim[ming] money" from the business for their own personal use, stealing merchandise, generating false invoices, demanding lavish gifts from vendors for personal gain) lowered the value of Fight LLC and caused it to suffer economic injury. He said he believed Respondents obtained the assets of Fight LLC for free, and that in his lawsuit he was seeking to recover royalties and commissions that Respondents took from Fight LLC.
Court's Ruling
After taking the matter under submission, the court found Diaz had no legal standing to bring his claims against Respondents. In an oral ruling, the court explained that Diaz's causes of action were solely derivative claims that were no longer viable because Fight LLC had been dismissed with prejudice. The court reasoned that the gravamen of the claims against Respondents was the alleged fraudulent conveyance of Fight LLC's assets to Respondents, and this injury was solely an injury to Fight LLC, and not personal to Diaz for which he could recover for individual losses. The court also found the Settlement Agreement extinguished all claims against the debtors and therefore the settlement precluded Diaz from recovering on a fraudulent conveyance claim under California law.
The court's written statement of decision was consistent with these findings. The court entered judgment in Respondents' favor.
DISCUSSION
Diaz contends the court erred because he was legally entitled to pursue his derivative claims despite Fight LLC's dismissal from the lawsuit; and alternatively his fraudulent conveyance and aiding and abetting causes of action were individual, not derivative claims. Respondents counter that the court correctly dismissed these causes of action because they were solely derivative claims that could not be pursued once Fight LLC was dismissed from the lawsuit. Respondents also argue the court's standing ruling was proper on the fraudulent conveyance claim because a party cannot recover against a transferee party if there is no remaining claim against the transferor/debtor.
As explained below, we determine Diaz's causes of action were solely derivative and the derivative claims must be dismissed because Fight LLC was no longer a party. Thus the court properly entered judgment in Respondents' favor. Based on this determination, we do not reach Respondents' second argument on the fraudulent conveyance claim.
I. Diaz's Derivative Claims
A. Applicable Legal Principles
A derivative claim is brought "on behalf of a corporation for injury to the corporation, often for breach of fiduciary duty, mismanagement or other wrongdoing by corporate officers or directors, or for wrongs against the corporation by third parties." (Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282, 297 (Vega).) Because the injury is suffered by the legal entity and the shareholders are distinct from the entity, the shareholders have no direct cause of action or right of recovery. (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108 (Grosset).) Instead, the shareholders must bring a derivative action to enforce the corporation's rights and redress its injuries if the managing board fails or refuses to do so. (Ibid.)
"When a derivative suit is brought to litigate the rights of the corporation, the corporation is an indispensable party and must be joined as a nominal defendant." (Grosset, supra, 42 Cal.4th at p. 1108, italics added.) This rule ensures the party to be directly benefited by the claim is a party in the lawsuit. "The corporation must be joined because 'its rights, not those of the nominal plaintiff, are to be litigated . . . ', . . . . Naming the corporation a defendant, not a plaintiff, follows from the [statutory] joinder rules: 'If the consent of any one who should have been joined as plaintiff cannot be obtained, he may be made a defendant. . . .' [Citation.] So 'although the corporation is made a defendant in a derivative suit, the corporation nevertheless is the real plaintiff. . . .' [Citation.] [¶] . . . The only reason the corporation is named a nominal defendant [in a derivative action] is its refusal to join the action as a plaintiff. . . . In a real sense, the only claim a shareholder plaintiff asserts against the nominal defendant corporation in a derivative action is the claim the corporation has failed to pursue the litigation." (Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1004, fn. omitted.)
Although these principles arose in the context of corporations, they apply equally to limited liability companies. (See PacLink Communications Internat., Inc. v. Superior Court (2001) 90 Cal.App.4th 958, 963 (PacLink); see also Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 1214; Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 425.) As with corporations, limited liability companies are entities distinct from their members, and thus a derivative claim is required when the alleged harm is to the entity. (PacLink, supra, 90 Cal.App.4th at p. 963.)
B. Analysis
Diaz brought two derivative causes of action on behalf of Fight LLC (fraudulent conveyance and aiding and abetting), and properly named Fight LLC as a nominal defendant in the complaint. However, after the parties entered into the Settlement Agreement, Diaz dismissed Fight LLC from the lawsuit with prejudice. This dismissal meant Diaz could no longer proceed on his derivative action because the real party in interest was no longer a party. (See Beyerbach v. Juno Oil Co. (1954) 42 Cal.2d 11, 28 ["dismissal of the corporation at any stage in a representative action must result in a discontinuance of the action, not for a mere defect in parties, but for lack of jurisdiction to proceed"]; see also Keeler v. Schulte (1957) 47 Cal.2d 801, 803.)
In seeking to avoid this rule, Diaz relies on Kraus v. Willow Park Public Golf Course (1977) 73 Cal.App.3d 354. The Kraus court analyzed the general concept of an indispensable party (id. at pp. 363-370), and noted the failure to join an indispensable party is not " 'a jurisdictional defect' in the fundamental sense" (id. at p. 364). However, Kraus did not involve a shareholder derivative action or suggest a derivative lawsuit may be maintained without the corporation as a nominal defendant. The California Supreme Court has made clear that a shareholder derivative lawsuit may not proceed without the entity's status as a nominal defendant. (See Grosset, supra, 42 Cal.4th at p. 1108; Beyerbach v. Juno Oil Co., supra, 42 Cal.2d at p. 28.) This rule was binding on the trial court and on this court.
Diaz also argues the indispensable party rule was inapplicable because the Settlement Agreement contained language reserving his right to proceed against Respondents. He relies on three provisions of the Settlement Agreement.
First, the Settlement Agreement states it does not "operate as a retraxit with respect to any right [Diaz] may have against" Respondents, and the settling defendants agree to "appear and truthfully testify at any future proceedings involving [Diaz's] retained claims against [Respondents] . . . without need of subpoena . . . ." Second, the Settlement Agreement states: "Notwithstanding any of the foregoing, it is expressly understood and agreed that [Diaz's] releases do not extend to [Respondents] or their successors or assigns." Third, after stating the parties intended to waive Civil Code section 1542 rights, the Settlement Agreement states: "Notwithstanding anything to the contrary set forth above, it is understood that [Diaz's] releases do not extend to and are not intended to benefit the [Respondents]."
These provisions do not create an exception to the rule that the entity must be a party in a derivative action. In the Settlement Agreement, Diaz reserved his right to assert viable claims against Respondents. But the agreement did not give Diaz any special rights to recover against Respondents, or assign any new rights to Diaz. Even after the Settlement Agreement, Diaz was entitled to prevail against Respondents only if he proved the elements of each claim and complied with all applicable procedural requirements. One of these requirements is the settled rule that a corporation or a limited liability company be a nominal defendant in a shareholder derivative lawsuit.
The court properly dismissed Diaz's causes of action brought on behalf of Fight LLC.
II. Diaz's Personal Causes of Action
Diaz contends that even if he could not recover on his causes of action on behalf of Fight LLC, he suffered individual injuries for which he is entitled to recover in a direct action against Respondents. We reject this contention because the gravamen of Diaz's causes of action concerns solely injuries to the limited liability entity, and not to Diaz as an individual.
A. General Principles
Generally, when a corporate entity is injured, a shareholder's only remedy is a shareholder derivative suit. A " 'stockholder . . . has no personal or individual right of action . . . for a wrong or injury to the corporation which results in the destruction or depreciation of the value of his stock, since the wrong thus suffered by the stockholder is merely incidental to the wrong suffered by the corporation and affects all stockholders alike.' " (Jones, supra, 1 Cal.3d at p. 107.) However, under limited circumstances, a shareholder may have a personal or direct action if he or she suffered an injury separate and apart from the corporate injury. (Id. at pp. 106-107; see Vega, supra, 121 Cal.App.4th at p. 297; Denevi v. LGCC, LLC, supra, 121 Cal.App.4th at pp. 1221-1222.)
The determination whether a claim is derivative or direct depends primarily on whether the claim alleges a breach of duty to the entire entity (derivative action) or whether the claim alleges a separate harm to the plaintiff's individual assets (personal action). An action is derivative " 'if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.' " (Jones, supra, 1 Cal.3d at p. 106; Vega, supra, 121 Cal.App.4th at p. 297.) A cause of action is individual, not derivative, " ' "where it appears that the injury resulted from the violation of some special duty owed the stockholder [or stockholders] by the wrongdoer and having its origin in circumstances independent of the plaintiff's status as a shareholder." ' " (Nelson v. Anderson (1999) 72 Cal.App.4th 111, 124 (Nelson).)
Under these rules, an "individual cause of action exists only if [the] damages [claimed by the plaintiff] were not incidental to" the injury to the corporation. (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 313; accord, Jones, supra, 1 Cal.3d at p. 107; Nelson, supra, 72 Cal.App.4th at p. 124.) Additionally, if the injury is not incidental to an injury to the corporation, an individual cause of action exists even if more than one shareholder suffers the same loss. (Jones, supra, at p. 107.)
Applying these rules, the courts have permitted individual actions when the corporation itself was not injured by the alleged wrongful conduct, but the distribution or allocation of the corporate assets caused the plaintiff to suffer an adverse impact. (Avikian v. WTC Financial Corp. (2002) 98 Cal.App.4th 1108, 1115 (Avikian); see Jones, supra, 1 Cal.3d at p. 107; Smith v. Tele-Communication, Inc. (1982) 134 Cal.App.3d 338, 343-345.) For example, in Jones, the plaintiff alleged the majority shareholders had restructured the company's assets, using the device of a holding company, in a way that advantaged their own interests over other minority shareholders. (Jones, at pp. 101-105.) Based on its observation that the alleged acts did not "reflect[ ] an injury to the corporation," but instead affected only the way in which the parties owned the entity, the high court upheld the plaintiff's standing to sue the majority shareholders. (Id. at p. 107.) Similarly, in Smith, the court recognized the plaintiff's right to bring a direct action after the majority shareholder allegedly manipulated a transaction to obtain a tax benefit in which the minority shareholder would not share, thus allowing the majority shareholder to retain a disproportionate share of the corporation's ongoing value. (Smith, supra, 134 Cal.App.3d at pp. 341-346.) The Smith court explained that an individual action was appropriate because the injury was inflicted only on that shareholder, and did not affect the corporation or cause a depreciation in the value of the corporate stock. (Id. at p. 343.) Likewise, in Jara, the court found an individual claim permissible because there was no claim that the corporation itself was injured. (Jara, supra, 121 Cal.App.3d at p. 1258.)
By contrast, in Avikian, the court found only a derivative lawsuit was permissible because the plaintiff's "core claim" was "that defendants mismanaged [the corporation], and entered into self-serving deals to sell [corporate] assets to third parties." (Avikian, supra, 98 Cal.App.4th at p. 1115.) The court explained that these "assertions—both the improper selling and purchasing of assets—amount to a claim of injury to [the corporation] itself. . . . [D]efendants chose to pursue their own self-serving arrangements, causing the demise of [the corporation]. . . . [T]hose damages are nothing other than a claim of damage to the corporation generally. [The plaintiff's] own damages, the loss in value of their investments in [the corporation], were merely incidental to the alleged harm inflicted upon [the corporation] and all its shareholders." (Id. at pp. 1115-1116.) Similarly, in PacLink, the court found the only alleged injury from a fraudulent asset transfer was an injury to corporate property as a whole, and therefore only a derivative action was permissible. (PacLink, supra, 90 Cal.App.4th at pp. 964-966.)
In distinguishing between a derivative claim and an individual claim, the courts focus on the gravamen of the complaint. (Grosset, supra, 42 Cal.4th at p. 1108; Nelson, supra, 72 Cal.App.4th at p. 124.) Whether an action is derivative or individual depends on the substance of the action, not its form.
Under these principles, we examine whether Diaz's causes of action—fraudulent conveyance, and aiding and abetting breaches of fiduciary duty—were solely derivative or assert claims for which an individual recovery is permissible.
B. Fraudulent Conveyance Cause of Action
In his fraudulent conveyance claim against Respondents, Diaz alleged: (1) he held matured claims and accrued causes of action against Kreiner and Caldwell; (2) these parties transferred Fight LLC's assets to Respondents with the intent to hinder, delay or prevent Diaz's recovery on these claims; (3) Respondents were aware of Kreiner and Caldwell's intent to conceal their assets; and (4) Respondents "actively and fraudulently aided, participated in and facilitated that intention through their conduct by participating in and facilitating these fraudulent transfers for their own financial gain."
Diaz brought this claim under the statutory scheme that entitles a defrauded creditor to reach property in a transferee's possession. (Civ. Code, § 3439, et seq.; see Mejia v. Reed (2003) 31 Cal.4th 657, 664.) Under this law, a debtor's transfer is fraudulent if the debtor made the transfer with the intent to "hinder, delay, or defraud" the creditor or with certain constructive knowledge of the fraud. (Civ. Code, § 3439.04, subd. (a).)
These allegations challenge the transfer of Fight LLC's property to Respondents. The record is undisputed that the transferred assets at issue (mainly the Hitman mark and license) were owned solely by Fight LLC, and not Diaz. Thus, the gravamen of the fraudulent conveyance cause of action is injury to the limited liability entity, and not to the individual. (PacLink, supra, 90 Cal.App.4th at pp. 964-966.) The fact the other defendants ultimately benefited from the transfer because of their ownership interest in a second entity does not change this rule. (Ibid.)
In these respects, PacLink is indistinguishable from the circumstances here. In PacLink, the majority members of a limited liability company transferred the company's assets, without receiving consideration, to another company in which the plaintiffs (minority members) had no interest or involvement. (PacLink, supra, 90 Cal.App.4th at p. 961.) The plaintiffs sued several parties including the transferees, alleging the plaintiffs were deprived of payment for their ownership interests in the company and its business and assets, and asserting several causes of action, including fraudulent transfer. (Id. at pp. 961-962.) Two of the transferee entities demurred, arguing the limited liability company was the injured party, and thus was the only party with standing to sue for the purported wrongful transfer of company assets. (Id. at p. 962.) The trial court overruled the demurrer. (Id. at p. 963.)
In ruling on the defendants' writ petition, the Court of Appeal disagreed and ordered the trial court to sustain the demurrer on the standing issue. (PacLink, supra, 90 Cal.App.4th at pp. 966-967.) The PacLink court explained: "[T]he essence of plaintiffs' claim is that the assets of [the limited liability company] were fraudulently transferred without any compensation being paid to the LLC. This constitutes an injury to the company itself. Because members of the LLC hold no direct ownership interest in the company's assets (Corp. Code, § 17300), the members cannot be directly injured when the company is improperly deprived of those assets. The injury was essentially a diminution in the value of their membership interest in the LLC occasioned by the loss of the company's assets. Consequently, any injury to plaintiffs was incidental to the injury suffered by [the limited liability company]." (Id. at p. 964, fn. omitted.)
As in PacLink, Diaz's allegations that Respondents wrongfully accepted transfer of Fight LLC's assets describes an injury to the limited liability company and not to the individual members. Although Diaz alleges he did not benefit from or share in the transfer of the property to Respondents and that he was substantially harmed by the transfer, this injury was merely incidental to the harm to the entity. (See PacLink, supra, 90 Cal.App.4th at p. 964; see also Avikian, supra, 98 Cal.App.4th at pp. 1115-1116.) When Respondents obtained the assets of Fight LLC, Diaz was deprived of his interest in the limited liability company and suffered loss to the value of his interest. As in PacLink, this is not a personal loss for which he is entitled to recover in a direct action. (PacLink, supra, at p. 964; see Jones, supra, 1 Cal.3d at p. 107 [when the alleged injury is to "the destruction or depreciation of the value of the stock . . . the wrong . . . is merely incidental to the wrong suffered by the corporation"].)
Diaz argues that PacLink is not good law because PacLink relied on Rankin v. Frebank Co. (1975), which he says conflicts with Jones, supra, 1 Cal.3d 93 and thus " 'represents questionable authority.' " (See Jara, supra, 121 Cal.App.4th at p. 1256.) This argument is without merit. PacLink cited Rankin only once on a well-settled legal point upheld in Jones. (PacLink, supra, 90 Cal.App.4th at p. 965; see Rankin, at p. 95.) PacLink's citation to Rankin on an uncontroversial point does not weaken the logic of its analysis.
Seeking to distinguish PacLink, Diaz contends he is entitled to bring a direct claim because he was the only limited liability member to suffer economic loss from the asset transfer. He emphasizes that all other Fight LLC members substantially benefited from the transaction through their membership in Tapout LLC. However, the same situation occurred in PacLink. The majority members of the original limited liability company organized or owned one or more of the new entities "through which [the original entity's] assets passed," causing economic loss to the original minority members. (PacLink, supra, 90 Cal.App.4th at p. 961.) This fact did not mean the claim became direct, rather than derivative. As the court explained, regardless of which parties ultimately benefited, the corporation suffered the injury resulting from the transfer and the plaintiffs' losses were incidental to that injury. (Id. at p. 964.) Here, as in PacLink, the claim involved an alleged fraudulent transfer. Fight LLC essentially lost all of its value when its assets were transferred to Tapout LLC for allegedly inadequate consideration. Diaz's cause of action seeks to recover that value and/or obtain compensation for his lost monetary interest in the company. On this record, Fight LLC (or a party bringing a derivative action on its behalf) was the sole party with standing to recover for any wrongful conduct that caused this loss.
To support his argument that he has standing to sue Respondents based on his status as the sole member of the entity to suffer harm from the asset transfer, Diaz relies on Jara, supra, 121 Cal.App.4th 1238. Jara is materially distinguishable because the plaintiff in that case conceded the entity was not injured by the alleged wrongful conduct.
Jara involved a three-person shareholder corporation in which a minority shareholder sued to recover excess compensation from the two other majority shareholders. (Jara, supra, 121 Cal.App.4th at p. 1242.) The plaintiff claimed the majority shareholders used their control of the corporation to increase their salaries as corporate officers to more than the amount agreed to by all three shareholders, with the objective of reducing the amount of profit they had to share with the plaintiff. (Id. at pp. 1244-1248.) In upholding the minority shareholder's standing to sue directly, the Jara court noted the shareholder was not alleging the extra compensation paid to the majority shareholders injured the corporation, but rather the minority member "maintain[ed] that the payment of generous executive compensation was a device to distribute a disproportionate share of the profits to the two officer shareholders during a period of business success." (Id. at p. 1258, italics added.)
Under these particular circumstances, the Jara court found the case fell within the rule allowing a direct action. (Jara, supra, 121 Cal.App.4th at pp. 1257-1260.) Specifically, the court found that on the facts before it—and particularly the plaintiff's admission that the diversion of assets did not affect or injure the corporation itself, but only affected the way in which the parties owned their shares—the plaintiff had suffered personal injuries that were not incidental to any harm suffered by the corporation. (Ibid.)
In reaching this conclusion, the Jara court recognized that the case was close on the derivative/direct action issue because the challenged compensation payments to the majority shareholders had the potential for causing injury to the business as a whole. (Jara, supra, 121 Cal.App.4th at p. 1258.) But the court ultimately upheld the plaintiff's standing because it was undisputed the corporation suffered no injury and instead the business had benefited and profited from the majority's services. (Ibid.) The court also bolstered its conclusion by noting (in dicta) that certain of the policies underlying the derivative action requirement (preventing multiplicity of lawsuits, assuring equal treatment for all aggrieved shareholders, and preserving corporate assets for creditors) were not implicated "when there is only one minority shareholder" and where the corporation remains a viable business. (Id. at pp. 1258-1259.)
Jara is materially distinguishable. In this case, unlike Jara, it is undisputed the alleged wrongful conduct caused the entity to lose its value. Additionally, the members of Fight LLC in their role as owners of the entity were equally injured (in proportion to their prior ownership interests) by the alleged wrongful conduct—the transfer of Fight LLC's assets to Respondents. The fact that some of the members later substantially profited from the transfer does not negate that Diaz's fraudulent conveyance claim asserts only a corporate injury. By challenging the transfer of Fight LLC's assets to Respondents, Diaz is asserting Fight LLC's right to recover the value of the assets wrongfully removed. Because Diaz was not an owner of the assets, he has no standing to bring a direct action or to recover for the value of those assets. It was Fight LLC, and not Diaz, who owned these assets.
We also find unhelpful Diaz's reliance on the Jara court's discussion of the policies supporting derivative actions. (Jara, supra, 121 Cal.App.4th at pp. 1258-1259.) By identifying these policies, the court did not change the settled rules that claims seeking recovery for an injury to a corporate entity require a derivative lawsuit. Nor did the court create a new rule that derivative lawsuit rules are inapplicable where there is only one minority shareholder. Such a rule would be contrary to settled California law. (See Nelson, supra, 72 Cal.App.4th at p. 127 ["Whether there is one minority shareholder or many, an action is individual only if the stock of the individual plaintiff . . . is the only stock affected adversely."]; see also Jones, supra, 1 Cal.3d at p. 107.) The Jara court's holding, based on the unique facts showing the corporation was not harmed by the majority shareholders' alleged wrongdoing, does not logically extend to the situation before us.
Crain v. Electronic Memories & Magnetics Corp. (1975) 50 Cal.App.3d 509 (Crain), relied upon by Diaz, is also distinguishable. In Crain, the court held the minority shareholders stated an individual action where they alleged the majority shareholders engaged in activities (including forming a second corporation holding only their own shares in the corporation) that rendered worthless only the stock of the minority shareholders. Here, the challenged conveyance of the stock rendered worthless all of the members' interests in Fight LLC. Moreover, to the extent the language in Crain suggests a broader holding, it is inconsistent with Jones and its progeny. (See 2 ALI, Principles of Corporate Governance: Analysis and Recommendations (1994) § 7.01(a), Reporter's Note 1H, p. 27 [criticizing Crain as not consistent with majority rule that actions causing claims of injury to corporation are solely derivative actions].)
In reaching these conclusions, we make no judgment regarding the alleged misconduct of Caldwell, Kreiner, or Respondents. We decide only that if Diaz sought to recover from Respondents for damages caused by the transfer of Fight LLC's assets to Respondents, he was required to bring a derivative lawsuit. By settling with Caldwell, Kreiner, and Fight LLC for $500,000 and agreeing to dismiss Fight LLC from the lawsuit with prejudice, Diaz elected to accept a payment of $500,000 for his economic losses, including those resulting from the diminution of value to his interests in Fight LLC.
C. Aiding and Abetting Breach of Fiduciary Duty
Diaz also brought a claim against Respondents for aiding and abetting Caldwell and Kreiner's breaches of fiduciary duty against him. On this cause of action, the complaint alleged two categories of wrongs: (1) Respondents aided and abetted Kreiner and Caldwell to wrongfully divest Fight LLC of its assets by participating in the September 2010 Transaction; and (2) Respondents "conspired with Kreiner and Caldwell to aid and abet their past breaches of fiduciary duties." (Italics added.)
Under California law, " ' "[l]iability may . . . be imposed on one who aids and abets the commission of an intentional tort if the person (a) knows the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person's own conduct, separately considered, constitutes a breach of duty to the third person." [Citation.]' [Citation.]" (Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1144 (Casey), italics added.) --------
The first category is substantively identical to the fraudulent conveyance claim. Diaz challenges Respondents' actions in assisting Kreiner and Caldwell's wrongful conveyance of Fight LLC's assets to Tapout LLC and then to Respondents. Because Fight LLC was the sole owner of the transferred assets, it was the sole party injured by Respondents' alleged aiding and abetting conduct. As with the fraudulent conveyance claim, Diaz's economic losses to his minority interest in the limited liability company caused by the alleged aiding and abetting conduct were incidental to the losses suffered by Fight LLC. Thus, Diaz had no standing to sue directly for this alleged wrongful conduct, and was limited to a derivative action.
In the second category, Diaz seeks to hold Respondents liable for Caldwell and Kreiner's prior conduct in allegedly looting and stealing assets from the company. However, as with the transfer of assets from Fight LLC, the alleged wrongful conduct by the majority members lowered the value of the entity as a whole, and not merely the interest held by Diaz. Thus, Diaz's losses were incidental to the entity's loss and he could not bring a direct, personal claim for this loss.
Additionally, even assuming the wrongful conduct by Kreiner and Caldwell, as majority members of the company, could be viewed as essentially a wrongful redistribution of assets between members and thus affecting only Diaz's shares (see Jones, supra, 1 Cal.3d at p. 107; Crain, supra, 50 Cal.App.3d at pp. 520-523), this allegation does not support a direct action against Respondents. Diaz did not allege, nor present any evidence, that Respondents had any participation in or involvement with these prior breaches. At most, Diaz alleges that Respondents were aware of the prior breaches when they facilitated the transfer of the remaining assets of the company. However, awareness of past wrongful conduct alone is not sufficient to support a cause of action for aiding and abetting a past breach of fiduciary duty; the party must also have given substantial assistance or encouragement. (See Casey, supra, 127 Cal.App.4th at p. 1144; see also Goonewardene v. ADP, LLC (2016) 5 Cal.App.5th 154, 188.) " 'Mere knowledge that a tort is being committed and the failure to prevent it does not constitute aiding and abetting.' " (Contreras v. Dowling (2016) 4 Cal.App.5th 774, 795, fn. 13.)
In the aiding-and-abetting section of his reply brief, Diaz argues he "can and will demonstrate through admissible evidence that [Respondents] actually knew of Kreiner and Caldwell's breaches of their fiduciary duties to [Diaz] but proceeded with the Asset Sale anyway for their own personal gain while simultaneously rendering [Diaz's] debtors judgment proof and causing injury to [Diaz], individually." (Italics added.) However, this assertion pertains to the fraudulent conveyance claim. It concerns the September 2010 Transaction, not Respondents' responsibility for the alleged prior breaches of fiduciary duty. Diaz does not identify any allegations or facts supporting that Respondents participated with, or provided substantial assistance to, Kreiner and Caldwell when they committed their alleged fraudulent actions before the sale (looting and stealing assets from the company). Although the court conducted a trial solely on the standing issue, Diaz was required to make a prima facie showing of these facts or at least make an offer of proof if he sought to establish standing to bring claims for aiding and abetting the prior conduct.
In reaching these conclusions, we agree that majority shareholders owe a fiduciary duty to minority shareholders, and can be held liable if they use their power to control corporate activities to benefit themselves alone (see Jones, supra, 1 Cal.3d at pp. 108-112), and that these principles may extend to limited liability entities (see Corp. Code, § 17704.09; People v. Pacific Landmark, LLC (2005) 129 Cal.App.4th 1203, 1211-1212). But the issue here is not whether the majority members (Caldwell and Kreiner) breached their fiduciary duties; instead it is whether Diaz has standing to recover against third parties on a direct, rather than a derivative action. Guided by well-settled legal principles and the particular facts before us, the court properly held there was no standing to do so.
DISPOSITION
Judgment affirmed. Appellant to bear Respondents' costs on appeal.
/s/_________
HALLER, J. WE CONCUR: /s/_________
NARES, J., Acting P.J. /s/_________
AARON, J.