Case Number
19CV04971
Case Type
Civil Law & Motion
Hearing Date / Time
Wed, 08/28/2024 - 10:00
Nature of Proceedings
Application of Defendants David Snider and Snider Investments, LLC for Order Dissolving Preliminary Injunction and Expunging Lis Pendens
Tentative Ruling
For Plaintiff ECO Property Group, LLC: Shahrokh Sheik, Jason D. Annigian
For Defendants David Snider and Snider Investments, LLC: Robert B. Forouzandeh
RULING
For the reasons set forth below:
1. The motion of defendants David Snider and Snider Investments, LLC for order dissolving preliminary injunction and expunging lis pendens is granted.
2. Damages as the result of the preliminary injunction are denied without prejudice. Defendants may bring an appropriate motion, or action, for recovery of the undertaking, after entry of judgment and the time for appeal has expired.
3. Defendants shall prepare a formal order and submit it to plaintiff’s counsel, pursuant to California Rules of Court, rule 3.1312, for approval as conforming to the court’s order.
Background
This action commenced on September 17, 2019, and arises out of a cannabis business venture. In 2016, plaintiff ECO Property Group, LLC (“ECO”) and defendant Snider Investments, LLC (“SIL”) formed Morongo Equity Partners I, LLC (“MEPI”) for the purpose of constructing and developing a cannabis cultivation facility at 13310 Little Morongo Road, Desert Hot Springs, California. Pursuant to the MEPI operating agreement, SIL owned an 80% interest in the company and ECO owned a 20% interest. The managers of MEPI were SIL and SIL member, defendant David Snider (“Snider”). The Morongo Road property included a 46,425 sq. ft. greenhouse that was leased by MEPI to Seed to Soul Management (“Seed to Soul”), a cannabis cultivation company. MEPI later terminated the lease with Seed to Soul pursuant to a settlement agreement.
ECO alleges that SIL and Snider breached the MEPI operating agreement and on September 17, 2019, filed its complaint for breach of contract, breach of fiduciary duty, conversion, fraudulent concealment, and unfair business practices. In response, SIL cross-complained against ECO and its members Eli Owens (“Owens”), Roger MacFarlane (“MacFarlane), Scott Newby (“Newby”), and Gary Walker, Jr. (“Walker”) for fraud and rescission of the MEPI operating agreement. SIL alleges that it was fraudulently induced to enter into the MEPI operating agreement by Owens, McFarlane, Newby, and Walker, who falsely represented that Seed to Soul was experienced in large-scale cannabis operations and was fully capitalized. In a separate cross-action, MEPI seeks rescission of the lease between MEPI and Seed to Soul, as well as rescission of the settlement agreement between the two parties. In still another cross-action, Owens, MacFarlane, Newby, and Walker assert claims against MEPI for breach of the settlement agreement and against former Seed to Soul member Brent Buhrman (“Buhrman”) for breach of the Seed to Soul partnership agreement.
On October 25, 2019, ECO, pursuant to its direct complaint, sought a preliminary injunction against Snider and SIL. On December 10, 2019, the court denied the motion for reasons including that ECO failed to demonstrate that its legal remedies were inadequate, and ECO did not demonstrate irreparable harm in the event there is no preliminary injunction.
On June 23, 2020, ECO filed a derivative complaint on behalf of MEPI in Riverside County (“derivative action”). While the case was still pending in Riverside County, and as part of that action, ECO filed a Notice of Pendency of Action (“lis pendens”) regarding the cannabis cultivation facility at 13310 Little Morongo Road, Desert Hot Springs. On September 1, 2020, this court ordered the Riverside case transferred and consolidated with this action.
On January 7, 2021, ECO, derivatively on behalf of MEPI, moved for a preliminary injunction against Snider and SIL. Following a February 23, 2021, hearing on the motion, on March 11, 2021, this court signed the formal order granting the injunction. The injunction provides:
“1. An injunction against Defendants David Snider and Snider Investments, LLC (collectively as ‘Defendants’) from causing Morongo Equity Partners I, LLC (‘MEPI’) to sell, encumber, distribute, or otherwise dissipate any assets of MEPI.
“2. A constructive trust on the loan proceeds of the hard money loan dated May 16, 2019, by Reprop Investments, Inc., currently in Defendants’ possession.
“3. Defendants shall further account to the court and Plaintiff, on behalf of MEPI, for all such proceeds of the May 16, 2019 hard money loan in their possession on or before March 9, 2021.
“4. The injunction shall not prevent the distribution of Snider Investments, LLC’s share of future income, as permitted by the First Amended and Restated Operating Agreement of MEPI.
“5. Plaintiff shall post an undertaking in the amount of $50,000.”
Plaintiff posted the required undertaking of $50,000.
Trial of the action was divided into two phases. Phase 1, consisting of the SIL and MEPI cross-complaints, plus the cross-complaint of the Seed to Soul members, was tried over thirteen days in November and December 2021. Phase 2, consisting of ECO’s direct complaint, and its derivative complaint brought on behalf of MEPI, has not yet taken place.
On January 20, 2022, the court entered its final statement of decision (“SOD”) for Phase 1. The court found in favor of SIL and MEPI on their cross-complaints for recission of the MEPI operating agreement, the commercial lease between MEPI and Seed to Soul, and the settlement agreement between MEPI and Seed to Soul, and for damages. The court also found in favor of cross-defendants on the cross-complaint of Seed to Soul members Owens, MacFarlane, Newby, and Walker.
As relevant to the present motion: The court ruled in favor of SIL and against ECO. The court found, among other things, that ECO fraudulently induced SIL into the operating agreement. As such, the operating agreement was rescinded. As a result, ECO is no longer a member of MEPI. The lease of the property and the settlement agreement between MEPI were also rescinded due to fraudulent inducement by ECO.
ECO appealed the judgment arguing that substantial evidence did not support the court’s finding of fraudulent inducement. The appellate court treated the appeal as a petition for an extraordinary writ and rejected ECO’s arguments. This court’s judgment, with respect to this aspect of the appeal, was affirmed.
The court of appeals findings include:
“We agree that the judgment on the cross-complaints fully adjudicated ECO’s derivative complaint.” “The rescission of the Operating Agreement means that ECO lacked standing to bring the derivative action on behalf of Morongo because it was never a member of the limited liability company.”
Based on this court’s SOD and the holdings of the court of appeals, Snider and SIL move for an order dissolving the preliminary injunction and expunging the lis pendens.
ECO opposes the motion.
The matter was originally brought as an Ex Parte Application and, on July 18, 2024, the court continued the hearing to August 28, 2024, so that there could be a full hearing on the issues raised. A briefing schedule was imposed requiring opposition papers to be filed by August 2, 2024, and reply papers to be filed by August 16, 2024. The parties complied with the briefing schedule.
Analysis:
Injunction
“In any action, the court may on notice modify or dissolve an injunction or temporary restraining order upon a showing that there has been a material change in the facts upon which the injunction or temporary restraining order was granted, that the law upon which the injunction or temporary restraining order was granted has changed, or that the ends of justice would be served by the modification or dissolution of the injunction or temporary restraining order.” (Code Civ. Proc., § 533.)
In short, section 533 “articulates three independent bases on which a modification of an injunction may be predicated - (1) change in the facts, (2) change in the law, or (3) ends of justice” (Luckett v. Panos (2008) 161 Cal.App.4th 77, 85), and courts have inherent power to dissolve an injunction on these grounds (Green Trees Enterprises, Inc. v. Palm Springs Alpine Estates, Inc. (1967) 66 Cal.2d 782, 788). “[T]he burden is on the restrained party to show by a preponderance of the evidence that one of the circ*mstances set forth in . . . section 533 is present and justifies a termination of the [preliminary injunction].” (Loeffler v. Medina (2009) 174 Cal.App.4th 1495, 1504
Despite ECO’s assertion to the contrary, it is undeniable that there has been a material change in the facts upon which the injunction was granted. The recission of the operating agreement means that ECO cannot maintain the derivative action under which the injunction was granted because ECO has no standing to do so.
ECO argues that the motion to dissolve the injunction is premature because an amended pleading is likely. (Opp., p. 1., ll. 4-7.) In fact, almost the entirety of ECO’s argument is premised on the assumption that it will be allowed to amend its direct complaint. There is no motion to amend the complaint filed with the court at this time. Even assuming, for the sake of argument, that ECO is given permission to file an amended complaint, ECO has failed to explain how the filing of the amended complaint would give it any interest in MEPI or the real property. The court cannot, and will not, consider an unknown hypothetical amendment of ECO’s direct complaint that may, or may not, eventually be filed with the court. The ruling here will be based on the current state of this action.
ECO argues that “the Direct Complaint and the Derivative Complaint are still the operative complaints for Phase Two.” (Opp., p. 3, ll. 16-17.) As ECO points out, the parties are scheduled to appear in court on September 18, 2024, for a hearing on Return on Remittitur. However, at that time, the court will have no choice but to dismiss the derivative complaint. ECO has no standing to prosecute that action and, as acknowledged by the court of appeal, the derivative complaint has been fully adjudicated. This is certainly a change in the material facts of the case.
Simply put: (1) ECO obtained the preliminary injunction in the derivative action on behalf of MEPI; (2) the derivative action has been fully adjudicated; (3) the operating agreement that was the basis for ECO acting on behalf of MEPI has been rescinded, and ECO has no standing to seek anything on MEPI’s behalf; and (4) ECO’s prior attempt to obtain a preliminary injunction on behalf of itself was denied. As the result of phase one of the trial, the facts that existed when the preliminary injunction was granted no longer exist. As the result of fraud in inducement of the operating agreement, ECO is not a member of MEPI.
There is no basis to continue the preliminary injunction at this time given the current status of this action. The motion to dissolve the preliminary injunction will be granted. Disposition of the undertaking, in the amount of $50,000.00, will be discussed below following a brief discussion of the lis pendens.
Lis Pendens
“At any time after notice of pendency of action has been recorded, any party, or any nonparty with an interest in the real property affected thereby, may apply to the court in which the action is pending to expunge the notice. However, a person who is not a party to the action shall obtain leave to intervene from the court at or before the time the party brings the motion to expunge the notice. Evidence or declarations may be filed with the motion to expunge the notice. The court may permit evidence to be received in the form of oral testimony, and may make any orders it deems just to provide for discovery by any party affected by a motion to expunge the notice. The claimant shall have the burden of proof under Sections 405.31 and 405.32.” (Code Civ. Proc., § 405.30.)
“In proceedings under this chapter, the court shall order the notice expunged if the court finds that the pleading on which the notice is based does not contain a real property claim. The court shall not order an undertaking to be given as a condition of expunging the notice where the court finds the pleading does not contain a real property claim.” (Code Civ. Proc., § 405.31.)
“In proceedings under this chapter, the court shall order that the notice be expunged if the court finds that the claimant has not established by a preponderance of the evidence the probable validity of the real property claim. The court shall not order an undertaking to be given as a condition of expunging the notice if the court finds the claimant has not established the probable validity of the real property claim.” (Code Civ. Proc., § 405.32.)
ECO does not present any argument, specifically directed to the expungement of the lis pendens, in its opposition, as to why the lis pendens should not be expunged.
As with the preliminary injunction, the lis pendens was filed by ECO in its derivative capacity on behalf of MEPI. ECO has no standing to make a claim on behalf of MEPI. The lis pendens will be expunged for the same reasons that the preliminary injunction will be dissolved.
Damages
As a result of the Ex Parte Application, the court also set a briefing schedule to address Snider and SIL’s claimed damages. The court required moving papers to be filed by August 2, 2024, the opposition papers to be filed by August 16, 2024, and any reply papers to be filed by August 22, 2024, at noon.
The parties complied with the briefing schedule. ECO argues that the papers are procedurally defective because the issue of damages was not brought as a noticed motion. However, ECO was able to fully, and effectively, present their arguments by way of the opposition. The court will consider the request for damages as there is no prejudice to ECO and the issue was initially presented by way of Snider and SIL’s Ex Parte.
“On granting an injunction, the court or judge must require an undertaking on the part of the applicant to the effect that the applicant will pay to the party enjoined any damages, not exceeding an amount to be specified, the party may sustain by reason of the injunction, if the court finally decides that the applicant was not entitled to the injunction.” (Code Civ. Proc., § 529, subd. (a).)
“[T]he purpose of requiring security is to afford compensation to the party wrongly enjoined or restrained.” (City of South San Francisco v. Cypress Lawn Cemetery Assn. (1992) 11 Cal.App.4th 916, 922.)
As noted above, ECO filed an undertaking in the amount of $50,000.00.
“(a) If a bond is given in an action or proceeding, the liability on the bond may be enforced on motion made in the court without the necessity of an independent action.
“(b) The motion shall not be made until after entry of the final judgment in the action or proceeding in which the bond is given and the time for appeal has expired or, if an appeal is taken, until the appeal is finally determined. The motion shall not be made or notice of motion served more than one year after the later of the preceding dates.
“(c) Notice of motion shall be served on the principal and sureties at least 30 days before the time set for hearing of the motion. The notice shall state the amount of the claim and shall be supported by affidavits setting forth the facts on which the claim is based. The notice and affidavits shall be served in accordance with any procedure authorized by Chapter 5 (commencing with Section 1010).
“(d) Judgment shall be entered against the principal and sureties in accordance with the motion unless the principal or sureties serve and file affidavits in opposition to the motion showing such facts as may be deemed by the judge hearing the motion sufficient to present a triable issue of fact. If such a showing is made, the issues to be tried shall be specified by the court. Trial shall be by the court and shall be set for the earliest date convenient to the court, allowing sufficient time for such discovery proceedings as may be requested.
“(e) The principal and sureties shall not obtain a stay of the proceedings pending determination of any conflicting claims among beneficiaries.” (Code Civ. Proc., § 996.440.)
Among ECO’s arguments opposing the release of the undertaking to Snider and SIL, is that it is premature because there is no final judgment as required by Code of Civil Procedure section 996.440, subdivision (b).
ECO is correct. A judgment is final, and therefore appealable, only if it terminates the trial court proceedings and completely disposes of the matter in controversy. (Howeth v. Coffelt (2017) 18 Cal.App.5th 126, 132.)
“The dissolution of the temporary restraining order or the refusal to grant a preliminary injunction is not enough. The main action has to be terminated before an action to recover an undertaking may be brought.” (Satinover v. Dean (1988) 202 Cal.App.3d 1298, 1301.)
Snider and SIL appear to argue that because there are two complaints, there are two actions, and the derivative action has been terminated by final judgment. Although there are two separate complaints (ECOs’ direct complaint and the derivative complaint), the two case were consolidated, resulting in one case. The appeals court treated the appeal as a petition for an extraordinary writ and did make findings that resulted in the above rulings, dissolving the preliminary injunction and expunging the lis pendens, but did not terminate the trial court proceedings and completely dispose of the action. Finding that the derivative complaint was fully adjudicated does not mean that there is a final judgment. Even if it did mean that, which it does not, there has been no “entry of final judgment” filed with the court. As the case has not proceeded to final judgment, an entry of final judgment would be improper. The motion for release of the undertaking is premature.
Because the motion for release of the undertaking is premature, it will be denied without prejudice. Snider and SIL may file an appropriate post-judgment motion or action to release the bond “after entry of the final judgment in the action,” or seek release of the bond by other legally permissible means.
