Holistic Supplements, L. L.C. v. Stark

• Decision Date: 02 March 2021
• Docket Number: B300711
• Citation: 61 Cal.App.5th 530,275 Cal.Rptr.3d 791
• Court: California Court of Appeals Court of Appeals
• Parties: HOLISTIC SUPPLEMENTS, L.L.C., et al., Plaintiffs and Appellants, v. Christopher STARK et al., Defendants and Respondents.

61 Cal.App.5th 530

275 Cal.Rptr.3d 791

HOLISTIC SUPPLEMENTS, L.L.C., et al., Plaintiffs and Appellants,

v.Christopher STARK et al., Defendants and Respondents.

B300711

Court of Appeal, Second District, Division 8, California.

Filed March 2, 2021

Horvitz & Levy, Lisa Perrochet, Burbank, and Aaron Henson ; Nelson Hardiman, Salvatore J. Zimmitti and Mark S. Hardiman, Los Angeles, for Plaintiffs and Appellants.

Buchalter, Robert M. Dato, Irvine; and Arthur D. Hodge, North Hollywood, for Defendants and Respondents.

BIGELOW, P. J.

This case arises from an ownership dispute over a medical marijuana dispensary in Los Angeles. In essence, plaintiff Jamie Kersey claims defendant Christopher Stark transferred his ownership in Holistic Supplements, L.L.C. (hereafter the LLC) to her in April 2015. Unbeknownst to Kersey and despite that alleged transfer, he later converted the LLC from a limited liability company to a corporation and then a mutual benefit corporation in his name called Holistic Supplements Inc. (the corporation) and changed the business address. In that process, he claimed rights to a Business Tax Registration Certificate, a city-issued tax document that enabled the dispensary to operate.

Kersey and the LLC sued Stark and the corporation for conversion, unfair competition, and declaratory relief, among other claims. The case went to a jury trial, presenting the core factual dispute of whether Stark validly signed the April 2015 transfer documents or whether his signatures were forged. The jury ultimately decided only a single claim of conversion asserted by the LLC against the corporation, returning a defense verdict. The trial court removed the rest of the claims from the jury by granting nonsuit to defendants.

On appeal, plaintiffs argue nonsuit was improper and the trial court committed prejudicial instructional error on the conversion claim decided by the jury. We agree on both points. We conclude: (1) nonsuit was erroneous on Kersey's individual claims because she has standing to sue for conversion of her personal property membership interest in the LLC; (2) nonsuit was erroneous on claims against Stark in his individual capacity, since he can be held liable for personally participating in the tortious conduct of the corporation; (3) nonsuit was erroneous on plaintiffs’ claims under the unfair competition law ( Bus. & Prof. Code, § 17200 et seq. ; the UCL) because we reject the only two grounds for nonsuit defendants raise on appeal; and (4) the BTRC is property subject to conversion, so the trial court prejudicially erred when it instructed the jury it was not.

We also reject defendants’ contention Kersey lacked standing because she failed to file a petition for reinstatement of the LLC pursuant to Government Code section 12261. The plain language of that provision permits a court to order reinstatement of a falsely or fraudulently terminated business entity upon either submission of "a petition to the superior court containing the legal and factual basis for reinstatement or as part of a civil action for damages or equitable relief." ( Gov. Code, § 12261, subd. (c), italics added.) Plaintiffs permissibly sought reinstatement as part of this lawsuit, so they did not need to file a separate petition in the superior court.

We reverse the judgment.

BACKGROUND

Holistic Supplements, LLC is a limited liability company formed in 2005 to operate a medical marijuana dispensary in Canoga Park consistent with California's Medical Marijuana Program Act. ( Health & Saf. Code, § 11362.7 et seq. ) For practical purposes, Brad Barnes owned the dispensary. He also owned a strip club, a bar, and an adult entertainment store in the same shopping center. Although Barnes was a member of the LLCs that owned his other businesses, he was not a member of the LLC that owned the dispensary. Instead, the sole member was David Gold, with Barnes overseeing operations. Barnes worried having his name on the LLC would jeopardize the licenses for his other businesses. So in exchange for 10 percent of the dispensary's net revenue, he and Gold agreed Gold would be listed as the sole member of the LLC.

Shortly after formation, the LLC obtained a Business Tax Registration Certificate, or BTRC, from the City of Los Angeles (the City), listing the dispensary's Canoga Park address. The City requires every business to have a BTRC, not just marijuana dispensaries. (L.A. Mun. Code, § 21.03, subd. (a).) The BTRC bears the disclaimer: "ISSUED FOR TAX COMPLIANCE PURPOSES ONLY [¶] NOT A LICENSE, PERMIT, OR LAND USE AUTHORIZATION." As we will discuss in more detail below, various City laws after 2007 prevented medical marijuana dispensaries from operating unless they had a pre-2007 BTRC. In light of this prohibition, the LLC's grandfathered BTRC allowed it to continue operating after 2007.

In April 2014, Gold left the LLC and transferred his interest to defendant Christopher Stark, Barnes's friend and employee at the strip club. Gold backed out because he no longer wanted to work with Barnes. He also feared he might be arrested after the dispensary was raided by police in 2011.

In July 2014, the LLC filed an updated "Statement of Information" with the Secretary of State reflecting Stark as the new sole member. Barnes and Stark orally agreed to the same arrangement Barnes had with Gold—Stark would be the sole member of the LLC in exchange for 10 percent of net revenue.

The dispensary was not profitable during this time, and by the start of 2015, the relationship between Stark and Barnes had deteriorated. The parties dispute what happened next.

According to plaintiffs, in April 2015, Stark told plaintiff Kersey (who is Barnes's ex-wife) and the dispensary's corporate attorney Robert Manuwal that he no longer wanted to own the dispensary. Stark explained he didn't want to work with Barnes anymore, the dispensary wasn't profitable, and the dispensary still owed Barnes for financing the opening and fixing property damage from the 2011 raids. Barnes testified Stark agreed to transfer his LLC interest to Kersey. Kersey similarly testified she talked to Stark, who agreed to transfer his ownership to her in exchange for her agreeing to repay the dispensary's debt to Barnes.

Documents dated April 23, 2015 reflect the transfer of ownership of the LLC from Stark to Kersey. They bear Stark's signatures, but Stark disputes their authenticity. Kersey, attorney Manuwal, and Barnes testified that on the night of April 23, 2015, Stark and Kersey signed these documents at Manuwal's home transferring Stark's interest in the dispensary to Kersey, leaving her with the debts and assets of the LLC. Manuwal and Barnes testified they personally witnessed Stark signing; Kersey arrived later.

For his part, Stark confirmed he went to Manuwal's house that night. He claimed he went to pick up dispensary-related documents and endorse some checks at Barnes's request. The only documents he signed were the check endorsements; he did not sign any transfer documents and claimed his signatures were forgeries. When pressed at trial, he conceded the signatures could be his, but he never knowingly signed any documents transferring his interest in the LLC.

After that night, Stark had no further involvement in the dispensary operations at the Canoga Park location. He never returned to pick up any assets, cash, marijuana product, or equipment. The day after the alleged transfer, Kersey met with dispensary employees to tell them about the change in ownership. Dispensary operations continued as normal. A few weeks later on May 11, 2015, the LLC filed an updated "Statement of Information" with the Secretary of State identifying Kersey as the new sole member.

Unbeknownst to Kersey and Barnes, Stark did not relinquish his ownership of the LLC. On September 2, 2015, he filed "Articles of Incorporation With Statement of Conversion" with the Secretary of State. The form listed Stark as the managing member of the LLC and purported to convert the LLC to Holistic Supplements, Inc., a corporation with Stark as the sole shareholder. The document listed Stark's home address as the business address for the corporation. On September 30, 2015, Stark converted the corporation to a nonprofit mutual benefit corporation "in order to comply with state and local laws and regulations." He was still listed as the sole shareholder. He filed a statement of information with the Secretary of State on the same day listing the corporation's address as his home address.

On September 30, 2015, Kersey and Barnes first learned Stark was still claiming ownership of the dispensary. Kersey and the LLC filed this lawsuit against Stark and the corporation in November 2015. As relevant here, Kersey and the LLC each asserted causes of action for conversion, violation of the UCL, and declaratory relief.¹

In December 2015, Stark changed the address for the BTRC to a downtown Los Angeles location. Throughout 2016, the parties submitted a number of competing requests to change the BTRC address back and forth between the Canoga Park and downtown Los Angeles locations. The City eventually froze the BTRC at Stark's downtown address sometime in late 2016 or 2017, saying a court must determine the rightful owner of the tax account.

In response to the dispute over the BTRC, plaintiffs filed a supplemental complaint, alleging defendants had illegally operated a dispensary at the downtown Los Angeles location between December 2015 through April 2017, and had "hijacked ... and purported to use [the LLC's] business taxation accounts, including business tax registration certificate account no. 0002072981-0001-4." Plaintiffs alleged Stark's attempts to take the BTRC were additional bases for their unfair competition, conversion, and declaratory relief claims.

For the declaratory relief claim, plaintiffs alleged Stark "was never authorized to change Holistic Supplements, LLC's organization from a limited liability company to a stock corporation to a mutual...