AXIS ENTERTAINMENT INC. et al., Plaintiffs and Appellants, v. BOB YARI et al., Defendants and Respondents.
B319669
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION SEVEN
July 13, 2023
Filed 7/13/23 Axis Entertainment v. Yari CA2/7. NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.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 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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Los Angeles County Super. Ct. Nos. 21STCV19745, BC545365)
Krane & Smith, Marc Smith and Kathleen Dority Fuster for Plaintiffs and Appellants.
Nahai Law Group, Behzad Nahai and Jeffrey A. Lewiston; Levene, Neale, Bender, Yoo & Golubchik and Kurt Ramlo; Cochran, Davis & Associates and Lisa Kralik Hansen for Defendants and Respondents.
These appeals are the latest chapter in litigation dating back to 2010, when Axis Entertainment, Inc., Isaac Michalov, and Michael Grayson (collectively, Axis) obtained a $1 million judgment against Syndicate Films International, LLC (Syndicate). In 2014 Axis sued Syndicate officer Bob Yari, Yari Film Group, LLC, and various affiliated individuals and entities, alleging they improperly diverted Syndicate‘s assets to prevent Axis from enforcing the judgment. While that case was pending, Syndicate filed a bankruptcy petition, and Axis purchased from the bankruptcy trustee the estate‘s claims and causes of action against the defendants remaining in Axis‘s state court action (the Yari Parties).1 Axis then filed this action, as successor in interest to Syndicate, against the Yari Parties and others.
Nine of the defendants in this action (the Yari Defendants)2 demurred. The trial court sustained the demurrer without leave
Axis appeals, arguing the trial court erred in ruling it lacked capacity to sue and in granting the Yari Defendants’ motion for attorneys’ fees. We affirm the judgment and order awarding attorneys’ fees.
FACTUAL AND PROCEDURAL BACKGROUND
A. Axis Sues Syndicate and Recovers $1 Million
Syndicate was a limited liability company formed in 2003 to conduct foreign sales for the Yari Film Group. In approximately 2006 Davand Holdings, LLC, which was wholly owned by Yari, became the sole member of Syndicate. In 2007 Axis sued Syndicate for $2.1 million in damages arising from, as one court described it, “‘complex and intertwined loan transactions encompassing seven years.‘” In 2010, after a jury trial, the court entered judgment in favor of Axis and against Syndicate for $1 million. Syndicate did not pay the judgment.
B. Axis Sues Yari and Others
In 2014 Axis filed an action against Yari, Yari Film Group, and other individuals and entities affiliated with Yari, asserting causes of action for fraudulent transfer, declaratory relief, unjust
C. Syndicate Files a Bankruptcy Petition, and Axis Purchases Syndicate‘s Causes of Action Against the Yari Parties from the Trustee
In 2019, while the 2014 action was pending, Syndicate filed a voluntary petition under Chapter 7 of the
Back in the bankruptcy court, the trustee filed a motion asking the court to approve a compromise that, subject to overbids at the hearing on the motion, would authorize the trustee to sell Yari “the bankruptcy estate‘s claims, causes of action, rights, interests and the State Court Action Causes of Action (whatever they may be without any warranties or representations of any type) against the [Yari] Parties.”5 At the hearing Axis outbid Yari. The bankruptcy court authorized the trustee to sell Axis the estate‘s claims against the Yari Parties for $25,000, and Axis withdrew its claim against the estate for over $1.9 million and waived any other claims it might have in the bankruptcy case.
After purchasing the claims from the bankruptcy trustee, Axis filed this action as Syndicate‘s successor in interest. Axis asserted causes of action against the Yari Parties and four other defendants (collectively, the Yari Defendants) for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, indemnity, unjust enrichment, an accounting, and declaratory relief. Axis alleged the defendants violated their fiduciary duties by siphoning away Syndicate‘s assets.
The Yari Defendants demurred. They argued (1) the statute of limitations barred Axis‘s causes of action; (2) Axis lacked standing to sue some of the defendants because Axis had not purchased claims against them; (3) Axis lacked capacity to sue as successor in interest to Syndicate because Syndicate, as a suspended corporation, could not prosecute a civil action; and (4) Axis‘s causes of action were uncertain. The trial court sustained the demurrer without leave to amend on the second and third grounds, ruling that Axis lacked standing to sue four of the defendants6 and that Axis lacked capacity to bring any cause of action as Syndicate‘s successor in interest.
The Yari Defendants moved for attorneys’ fees as the prevailing parties under attorneys’ fees and indemnification provisions in Syndicate‘s operating agreement, and the court
DISCUSSION
A. The Trial Court Did Not Err in Sustaining the Yari Defendants’ Demurrer Without Leave To Amend
1. Applicable Law and Standard of Review
A demurrer tests the legal sufficiency of a complaint. (City of Coronado v. San Diego Assn. of Governments (2022) 80 Cal.App.5th 21, 35.) “In an appeal from a judgment following an order sustaining a demurrer without leave to amend, we first review de novo ‘whether the complaint states facts sufficient to constitute a cause of action.‘” (Jane Doe No. 1 v. Uber Technologies, Inc. (2022) 79 Cal.App.5th 410, 419; see City of Oakland v. Oakland Raiders (2022) 83 Cal.App.5th 458, 472.)
2. As a Suspended Company, Syndicate Lacked Capacity To Sue
Syndicate was suspended by the Franchise Tax Board and the Secretary of State in 2015 and remained suspended when it filed a bankruptcy petition in 2019. The Franchise Tax Board may suspend the corporate powers, rights, and privileges of a limited liability company if it fails to pay taxes or file a tax return. (
A suspended company “‘“lacks the legal capacity to prosecute or defend a civil action during its suspension.“‘” (Casiopea Bovet, LLC v. Chiang (2017) 12 Cal.App.5th 656, 662 (Casiopea Bovet); see Bourhis v. Lord (2013) 56 Cal.4th 320, 324.) The purpose of the suspension “‘is to “prohibit the delinquent corporation from enjoying the ordinary privileges of a going concern” [citation], and to pressure it to pay its taxes.‘” (Cal-Western Business Services, Inc. v. Corning Capital Group (2013) 221 Cal.App.4th 304, 310.) There is no dispute that, when Syndicate filed the bankruptcy petition, it lacked capacity to sue.8
When an entity files a bankruptcy petition, the property of the entity becomes the property of the bankruptcy estate, and the trustee becomes the representative of the estate. (
The bankruptcy trustee has the capacity to sue on behalf of the estate. (
The cases Axis cites to support its assertion “Syndicate‘s suspended status had no bearing on the claims the Trustee could have brought under the Bankruptcy Code” do not support that assertion. In In re Feature Homes, Inc. (Bankr. E.D.Cal. 1990) 116 B.R. 731 the bankruptcy court held the suspension of the debtor‘s corporate status under the
Axis also cites cases stating a bankruptcy trustee may sue a debtor‘s principals for breach of fiduciary duty (as Axis did in this action). This proposition is correct as a general proposition (see, e.g., Koch Refining v. Farmers Union Cent. Exchange, Inc. (7th Cir. 1987) 831 F.2d 1339, 1347 [corporation‘s causes of action against officers, directors, and shareholders for breach of fiduciary duty “become property of the estate which the trustee alone has the right to pursue after the filing of a bankruptcy petition“]), but it ignores the fundamental problem with Axis‘s case: The Yari Defendants could have asserted the defense of incapacity against all of the causes of action Axis brought on behalf of Syndicate. Axis cites no case where a bankruptcy trustee sued on behalf of a debtor that was a suspended company lacking capacity to sue.
4. Axis Acquired Syndicate‘s Causes of Action Subject to the Incapacity Defense
Rather than pursuing the bankruptcy estate‘s causes of action against the Yari Parties, the trustee decided to sell them, and Axis bought them.10 A bankruptcy trustee may sell property
Just as the bankruptcy trustee would have been subject to the lack of capacity defense based on Syndicate‘s suspension, so too was Axis. An assignee of a cause of action generally “‘“‘stands in the shoes’ of the assignor, taking his rights and remedies, subject to any defenses which the obligor has against the assignor prior to notice of the assignment.“‘” (Cal-Western Business Services, Inc. v. Corning Capital Group, supra, 221 Cal.App.4th at p. 311; see Rubinstein v. Fakheri (2020) 49 Cal.App.5th 797, 806;
That the bankruptcy trustee assigned the causes of action to Axis under a bankruptcy court order does not change the result. “The sale of a litigation claim [under section 363] does not entitle the assignee to collect in contravention of any defenses to that claim; all that is conveyed is the right to prosecute the action and collect any potential judgment.” (In re Atlantic Gulf Communities Corp. (Bankr. D.Del. 2005) 326 B.R. 294, 299-300.)
Casiopea Bovet, supra, 12 Cal.App.5th 656 is virtually on point. In that case the trial court entered an order under the Enforcement of Judgments Law (
Axis complains the Yari Defendants were essentially arguing (and by implication the trial court ruled) the trustee sold Axis worthless claims “akin to shares in the Brooklyn Bridge.” But Axis does not contend the trustee (or anyone else) misled Axis about the value of the causes of action or about Syndicate‘s suspension. Indeed, the bankruptcy court order approving the sale described the causes of action as “whatever they may be” and provided that the trustee disclaimed “any warranties or representations of any type,” which put Axis on notice that the value of the causes of action was uncertain. (See In re Atlantic Gulf Communities Corp., supra, 326 B.R. at p. 300 [“In assigning a litigation claim, the assignor [the bankruptcy trustee] does not guarantee the merits of the action.“].) Axis does not dispute it could have ascertained Syndicate was suspended by consulting the Secretary of State‘s website. (See Wanke, Industrial, Commercial, Residential, Inc. v. AV Builder Corp., supra, 45 Cal.App.5th at p. 477 [“Requiring an assignee to ensure at the time of assignment that its assignor is not a suspended corporation is not unduly burdensome.“].) Any problems or defects in the claims Axis purchased were reflected in the purchase price.
5. Axis Brought Causes of Action on Behalf of Syndicate, Not Its Creditors
Perhaps realizing Syndicate‘s causes of action are barred by the incapacity defense, Axis argues it brought causes of action not as successor in interest to Syndicate, but “on behalf of all of the unsecured creditors as a whole.” By not making this
Even if not forfeited, the argument is meritless. Axis acquired the interests of the trustee, who had authority to sue on behalf of the estate, not Syndicate‘s creditors. While “[i]t is true in a sense that a trustee in bankruptcy represents creditors of the bankrupt,” the trustee “does so . . . only in a limited way” by “marshaling, preserving or otherwise administering the assets of the estate in bankruptcy.” (Stodd v. Goldberger (1977) 73 Cal.App.3d 827, 835.) “A bankruptcy trustee has no standing to sue third parties on behalf of the estate‘s creditors, but may assert only claims held by the bankrupt entity.” (Shaoxing County Huayue Import & Export v. Bhaumik (2011) 191 Cal.App.4th 1189, 1197; accord, Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP, supra, 133 Cal.App.4th at p. 677; Smith v. Arthur Andersen LLP (9th Cir. 2005) 421 F.3d 989, 1002; see Stodd, at p. 833 [bankruptcy trustee could not maintain an action on an alter ego theory absent some allegation of injury to the bankrupt corporation].) The bankruptcy estate includes “any actions that a debtor corporation may have to recover damages for fiduciary misconduct, mismanagement or neglect of duty, and the bankruptcy trustee succeeds to that right for the benefit of all creditors of the estate.” (Koch Refining v. Farmers Union Cent. Exchange, Inc., supra, 831 F.2d at p. 1347.)
Axis cites cases referring to the trustee as acting “on behalf of creditors.” Read in context, however, the statements in those cases make clear the trustee sued on behalf of the estate. For example, in In re Scott Acquisition Corp. (Bankr. D.Del. 2006)
And it is clear from the first amended complaint that Axis sued on behalf of Syndicate, not its creditors. Axis alleged that, when it purchased the claims in the bankruptcy court, it became “Syndicate‘s successor-in-interest to any claims Syndicate may have” against the defendants. In its cause of action for breach of fiduciary duty, Axis alleged the defendants “owed Syndicate a fiduciary duty” and “breached those duties to Syndicate” by commingling assets, placing personal interests ahead of Syndicate‘s, and “failing to pursue claims and avenues of recovery available to Syndicate necessary to protect Syndicate from its creditors.” Axis alleged that, as a result of those breaches of fiduciary duty, “Syndicate suffered harm.”
Axis also argues it asserted claims the trustee could have brought under its avoiding powers, such as the trustee‘s ability to bring “fraudulent transfer and alter ego claims seeking to recover looted assets.”12 This argument is also meritless. The Bankruptcy Code gives the bankruptcy trustee the authority to
A trustee seeking to use the avoiding powers to set aside a transfer or an obligation, however, must file an adversary proceeding in bankruptcy court. (See In re Colortran, Inc. (Bankr. 9th Cir. 1997) 218 B.R. 507, 510; In re Commercial Western Finance Corp. (9th Cir. 1985) 761 F.2d 1329, 1338;
Thus, Axis‘s causes of action were barred by the lack-of-capacity defense. The trial court did not err in sustaining the demurrer without leave to amend.13
Axis argues the trial court erred in awarding the Yari Defendants their attorneys’ fees under two provisions in Syndicate‘s operating agreement: an attorneys’ fees provision and an indemnification provision. We conclude Axis has not shown the trial court erred in awarding fees under the attorneys’ fees provision.
1. Applicable Law and Standard of Review
“Under the American rule, each party to a lawsuit ordinarily pays its own attorney fees.” (Mountain Air Enterprises, LLC v. Sundowner Towers, LLC (2017) 3 Cal.5th 744, 751.)
“‘“On review of an award of attorney fees after trial, the normal standard of review is abuse of discretion. However, de novo review of such a trial court order is warranted where the determination of whether the criteria for an award of attorney fees and costs in this context have been satisfied amounts to
2. The Attorneys’ Fees Provision Authorized the Award of Attorneys’ Fees
The trial court awarded the Yari Defendants attorneys’ fees as prevailing parties under Section 11.10 of Syndicate‘s operating agreement. Section 11.10, titled “Attorneys’ Fees,” states: “If any dispute between the Company and the Members or among the Members should result in litigation or arbitration, the prevailing party in such dispute shall be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including, without limitation, reasonable attorney‘s fees and expenses whether or not actually incurred.” (Italics added.) As a member of Syndicate, Davand Holdings, LLC, was entitled to recover its attorneys’ fees under
Axis argues the provisions of the operating agreement “are simply irrelevant” because Axis sued “to protect the rights of creditors,” not for “breach of the Operating Agreement.” As discussed, Axis‘s contention it sued on behalf of Syndicate‘s creditors is meritless; Axis sued as Syndicate‘s successor in interest after purchasing the estate‘s causes of action from the trustee. The attorneys’ fees provision is broad, covering “any dispute between the Company and the Members.” That‘s what this is: a dispute between the company (Syndicate) and one of its members (Davand Holdings, LLC). And because the provision covers not only an action on the contract, but “any dispute” between the parties, it authorizes an award of attorneys’ fees in this case. (See Santisas v. Goodin (1998) 17 Cal.4th 599, 608 [“[i]f a contractual attorney fee provision is phrased broadly enough . . . it may support an award of attorney fees to the prevailing party in an action alleging both contract and tort claims“]; Maynard v. BTI Group, Inc., supra, 216 Cal.App.4th at p. 993 [“an attorney fee provision awarding fees based on the outcome of ‘any dispute’ encompasses all claims, whether in contract, tort or otherwise“].)
Finally, the nine Yari Defendants filed a joint motion for attorneys’ fees, and the trial court granted it, awarding fees to all of them. Although Davand Holdings is the only defendant who was a member of Syndicate, the Yari Defendants argued they
The judgment is affirmed. The order awarding the Yari Defendants their attorneys’ fees is affirmed. The Yari Defendants are to recover their costs on appeal.
SEGAL, Acting P. J.
We concur:
FEUER, J.
ESCALANTE, J.*
* Judge of the Los Angeles County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.