A-List Inc. v. Salus Capital Partners, LLC

• Decision Date: 12 August 2022
• Docket Number: B306617
• Parties: A-LIST INC. et al., Plaintiffs and Appellants, v. SALUS CAPITAL PARTNERS, LLC, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

A-LIST INC. et al., Plaintiffs and Appellants,
v.
SALUS CAPITAL PARTNERS, LLC, Defendant and Respondent.

B306617

California Court of Appeals, Second District, Seventh Division

August 12, 2022

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Los Angeles County No. BC630062, Teresa A. Beaudet, Judge. Affirmed.

Brown, Neri, Smith, &Khan, Amjad M. Khan and Patricia E. Tenenbaum for Plaintiffs and Appellants.

Greenberg Traurig, LLP, Scott D. Bertzyk, John F. Farraher Jr., Adil M. Khan and Michael E. McCarthy for Defendant and Respondent.

SEGAL, J.

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INTRODUCTION

A-List Inc. and another corporation A-List later acquired, H-List Inc. (collectively, A-List), owned a retail brand called Kitson. A-List and its founder, Fraser Ross, sued one of A-List's lenders, Salus Partners LLC, alleging Salus took control of and mismanaged A-List's business operations. The trial court granted Salus's motion for summary judgment for one of the two reasons Salus argued it was entitled to judgment as a matter of law. The court ruled that, because Ross no longer owned shares in A-List, he did not have "standing" or "authority" to direct A-List to file the lawsuit and that therefore neither Ross nor A-List had standing to assert the causes of action in the complaint. A-List (but not Ross) appeals from the ensuing judgment in favor of Salus. We affirm the judgment, but for the other reason Salus moved for summary judgment, which the trial court did not reach: A-List lacked standing to bring its causes of action because it had assigned them to a third party.

FACTUAL AND PROCEDURAL BACKGROUND

A. A-List Struggles Financially and Enters into an Assignment for the Benefit of Creditors

Ross founded the Kitson retail brand in 2000 and formed A-List to operate Kitson fashion boutique stores. According to Ross and A-List, the company began to suffer financially after Ross had a serious illness in 2012. A-List and Salus subsequently entered into a credit agreement, in which Salus agreed to loan A-List up to $15 million, depending on the value of A-List's inventory and intellectual property.

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Ross eventually transferred his shares in A-List to Christopher Lee, who was A-List's chief executive officer at the time. After Lee left A-List (Lee says he resigned; Salus says he was fired), A-List hired James Wong as chief financial officer and chief restructuring officer and passed a resolution authorizing Wong to "determine . . . whether it [was] desirable and in the best interest" of A-List and its creditors to "commence a sale or liquidation process, including . . . entering into an Assignment for the Benefit of Creditors with a company of Wong's choosing ...."

In December 2015 Wong signed, on behalf of A-List, an assignment for the benefit of creditors with Winter Harbor LLC. As part of the agreement, A-List assigned "in trust for the benefit of [A-List's] creditors generally, all of [A-List's] property and assets of every kind and nature . . ., including but not limited to . . . all choses in action (personal or otherwise) that are legally assignable together with the proceeds of any existing non-assignable choses in action" A-List later received.

B. Ross Files This Action Against Lee; Winter Harbor Files a Lawsuit Against Salus

In August 2016 Ross (but not A-List) filed this action, initially naming Lee as the only defendant. Ross alleged Lee made "false representations to induce [Ross] to forego . . . opportunities" that would have been "beneficial to [Ross] and Kitson and instead, enter into a series of transactions" that benefitted Lee. Ross also alleged Lee mismanaged the Kitson businesses, causing the value of the companies to decrease.

Two months later Winter Harbor, in its capacity as A-List's assignee, sued Salus in the United States District Court for the Central District of California. Winter Harbor alleged Salus

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breached a funding agreement that required Salus to pay, using proceeds obtained from liquidating A-List's assets, $2.3 million A-List owed the federal taxing authorities. Winter Harbor and Salus ultimately settled that action and, as part of the settlement, Winter Harbor and Salus released each other from all known and unknown claims they had against each other "with respect to [A-List] or the Assignment for the Benefit of Creditors related thereto ...."

C. Ross Adds Salus as a Defendant and Settles With Lee; A-List Joins as a Plaintiff

After Winter Harbor and Salus settled their lawsuit, Ross added Salus as a defendant in this action, along with two entities related to Salus, HGI Management Holdings, LLC, Salus's parent company, which Ross claimed "directed Salus's operations," and Spencer Spirit Holdings, Inc., which Ross alleged loaned A-List an additional $4 million after A-List obtained the loan from Salus.^[1] Ross alleged Salus and Spencer later "assert[ed] direct operational control over Kitson," "failed to act in a commercially reasonable manner," and ran "the [c]ompany to ruin." In particular, Ross claimed that the two lenders engaged in a "strategy to pump up Kitson's inventory before liquidating" the company's assets by ordering "more inventory than Kitson could sell" and promising "the vendors that they would be paid upon the sale of their merchandise," but that the lenders instead

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"closed all Kitson stores, hired liquidation firms to monetize the inventory, and never paid the vendors ...."^[2]

In July 2018 Ross and Lee reached a settlement where Lee agreed to transfer back to Ross some of the shares Lee claimed he still owned in A-List,^[3] and Ross agreed to dismiss his causes of action against Lee. After the settlement, A-List joined the lawsuit as a plaintiff and with Ross filed the operative, third amended complaint. As relevant to this appeal, A-List asserted causes of action for negligence, breach of fiduciary duty, and constructive fraud against Salus (as well as the other lenders), based on the same alleged scheme by Salus and Spencer to increase Kitson's inventory and liquidate the business's assets.

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D. The Court Grants Summary Adjudication on A-List's Causes of Action and Later Enters Judgment in Favor of Salus

Salus and the other lenders filed a motion for summary adjudication on each of A-List's causes of action, asserting they were entitled to judgment as a matter of law for two reasons. First, they argued A-List did not have standing to assert its causes of action because it had assigned them to Winter Harbor as part of the assignment for the benefit of creditors. Second, they argued A-List did not have standing to assert its causes of action because Ross did not own shares in A-List and "therefore has no authority to direct Kitson to assert any claims." The lenders contended that, when Lee left A-List in 2015, A-List reacquired all of Lee's shares pursuant to a stockholders' agreement between Lee and A-List. Therefore, according to the lenders, Lee did not have any A-List shares to transfer to Ross when he agreed to do so in his settlement agreement with Ross.

The trial court granted the motion on the second ground. The court ruled that A-List reacquired Lee's shares when his employment ended and that Lee had no shares in A-List "to transfer to Ross in 2018 ...." Therefore, the court ruled, Ross did not have "the requisite authority to direct the claims asserted by" A-List against the lenders. The court declined to consider the lenders' alternative argument that, because A-List had assigned its causes of action to Winter Harbor, A-List lacked standing to assert those claims in this action.

Meanwhile, Salus had filed a cross-complaint against A-List, seeking to recover money A-List allegedly failed to repay under their credit agreement. After the court granted summary adjudication on A-List's causes of action, Salus's cross-complaint

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remained pending. A-List and Salus, however, agreed to a stipulated judgment in favor of Salus and against A-List on the cross-complaint. In June 2020 the trial court entered the stipulated judgment on the cross-complaint, and in July 2020 the court entered judgment in favor of Salus and against A-List on the third amended complaint.^[4] A-List timely filed a notice of appeal from the judgment on the third amended complaint.^[5]

DISCUSSION

A. Applicable Law and Standard of Review

"Summary judgment is appropriate only where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law.'" (Regents of University of California v. Superior Court (2018) 4 Cal.5th 607, 618; see Code Civ. Proc., § 437c, subd. (c); Valdez v. Seidner-Miller, Inc. (2019) 33 Cal.App.5th 600, 607.) "A defendant moving for summary adjudication of a cause of action must show that one or more elements cannot be established or," as relevant here, "that there is a complete defense." (Clark v. Superior Court (2021) 62 Cal.App.5th 289, 298; see Regents, at p. 618;

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Mattei v. Corporate Management Solutions, Inc. (2020) 52 Cal.App.5th 116, 122.)

A "'"defendant moving for summary judgment based upon the assertion of an affirmative defense . . . 'has the initial burden to show that undisputed facts support each element of the affirmative defense' ...."'" (Shiver v. Laramee (2018) 24 Cal.App.5th 395, 400; see Severin Mobile Towing, Inc. v. JPMorgan Chase Bank, N.A. (2021) 65 Cal.App.5th 292, 302; Sumner v. Simpson University (2018) 27 Cal.App.5th 577, 580.) If "the defendant meets that burden, the burden shifts to the plaintiff to show a triable issue of material fact regarding the defense." (Filosa v. Alagappan (2020) 59 Cal.App.5th 772, 778; see Shiver, at p. 400.)

We review a ruling on a motion for summary adjudication de novo (Jacks v. City of Santa Barbara (2017) 3 Cal.5th 248, 273; Michaels v. Greenberg Traurig, LLP (2021) 62 Cal.App.5th 512, 520) and "decide independently whether the facts not subject to triable dispute warrant...