Velasco, et al. vs The Smithfield Group., A California Corporation, et al.

purposes. These included Pure Safety Group Investco Limited (“Investco”) and Pure Safety Group Holdings Limited (“Holdco”). Plaintiffs allege:

Luxco, Investco, and Holdco do not trade, sell, or engage in any commercial activity related to the sale of Guardian products. Instead, the sole entity engaging in commercial activity and the sole entity generating any business is Guardian. Luxco, Investco, and Holdco are merely entities set up by TSG and W&C for Guardian shareholders to hold their Guardian shares indirectly for tax purposes. Notwithstanding this tax structure, each of the Plaintiffs is a “beneficial owner” of Guardian in that each “directly or indirectly . . . has or shares: (1) [v]oting power which includes the power to vote, or to direct the voting of, such security; and/or (2) [i]nvestment power which includes the power to dispose, or to direct the disposition of, such security.”

(SAC, ¶ 3.)

Plaintiffs allege that they are each “equitable owners” of Guardian “in that the legal title to the shares of each Plaintiff in Guardian are ‘in the hands of [Luxco, Investco and Holdco] who holds the stock for the benefit of [Plaintiffs].’” (SAC, ¶ 4.)

They allege “Luxco is a partial owner of Investco, which is a 100% owner of Holdco, which is a 100% owner of Guardian.” (SAC, ¶ 5.)

Plaintiffs allege Guardian hired and continues to employ TSG as an investment advisor. They allege that TSG’s California office is run and managed by Paton. Plaintiffs allege that from, and after the time they hired TSG, Guardian’s business declined precipitously, until Guardian was effectively insolvent and required an immediate infusion of capital. Plaintiffs offered to lend Guardian $15 million. However, as part of the offer, Plaintiffs required that TSG suspend the collection of its $1.2 million annual advisory fee from Guardian until the business was sold. Plaintiffs allege that TSG determined that while Plaintiffs’ funding proposal would be beneficial for Guardian, it would not be beneficial for TSG, since TSG would be required to suspend its $1.2 million annual fee and pay interest on the loan pending the sale of Guardian, among other requirements.

Plaintiffs allege that TSG, Paton, and other insiders, caused Guardian to enter into a financing transaction called the Rescue Capital Package, rather than Plaintiffs’ Funding Group Proposal. Plaintiffs allege the Rescue Capital Package was objectively worse for Guardian than Plaintiffs’ Funding Group Proposal and caused harm to Guardian.

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

Plaintiffs allege that:

The materials and emails Paton circulated to Plaintiffs and other shareholders in 2022 disclosed none of these major issues with the Rescue Capital Package. These issues were intentionally concealed by Paton and TSG from Plaintiffs. Furthermore, in other documents and emails sent in October 2022, Paton and TSG asserted that a capital infusion of $15,000,00.00 was mandatory if Guardian was to survive. Until the Rescue Capital Package was revealed for the first time in March 2023, neither Paton nor anyone else at TSG informed Plaintiffs or other shareholders that Guardian really did not need $15,000,000.00 to survive, or that their secret financing arrangement with Halkin would, at most, only provide $10,950,000.00 of capital for Guardian.

Further, between October 2022 and March 2023, Paton and [alleged Guardian Board of Directors member and TSG Partner Julian] Ameler, acting on behalf of both Guardian and TSG, falsely and fraudulently represented to Plaintiffs that TSG’s $15,000,000.00 make-or-break financing needs for Guardian remained the same as disclosed by Paton in October 2022. At the time these representations were made, Paton and TSG knew them to be false.

(SAC, ¶ 33.)

Plaintiffs allege that TSG and Paton violated various duties owed to Plaintiffs, Guardian, and Guardian’s shareholders, resulting in damage to both them individually as well as to Guardian.

The SAC asserts causes of action for breach of fiduciary duty, fraudulent misrepresentation, intentional concealment, and negligent misrepresentation.

TSG and Paton each separately demur to each cause of action in the SAC on the ground that each is uncertain, fails to state sufficient facts, and Plaintiffs fail to satisfy threshold standing requirements.

The Hublet Declaration and Plaintiffs’ Objections

The Court considered the Declaration of Alexandre Pierre Vincent Hublet (“Hublet”) filed in support of Defendants’ demurrer only to the extent its purpose is to authenticate documents in Defendants’ request for judicial notice and provide analysis of foreign law. When ruling on a demurrer, court may consider matters subject to judicial notice, such as foreign law, and in taking judicial notice, they may rely on the advice of persons learned in the subject matter, whether or not furnished by a party. (Mireskandari v.

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23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

Gallagher (2020) 59 Cal.App.5th 346, 359, as modified on denial of reh’g (Jan. 21, 2021).)

The Court, however, will not consider the portions of Hublet’s declaration where he provides facts and factual conclusions based on foreign law that are outside of the complaint or not subject to judicial notice. In ruling on a demurrer, this Court is limited to reviewing allegations in the complaint or subject to judicial notice.

Plaintiffs’ objections to Mr. Hublet’s declaration are ruled upon as follows:

Sustained: 1-2, 4, 8, 9, 10, 11, 15, 17, 18, 19, 20, 21.

Overruled: 3, 5, 6, 7, 12, 13, 14, 16, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32.

Defendants’ Request for Judicial Notice

Exhibit 1: DENIED

Exhibit 1 is purportedly a copy of a web page pulled from the website of the Luxembourg Registre de Commerce et des Sociétés (“RCS”) found at www.lbr.lu. The Court has sustained Plaintiff’s objection no. 10 to Exhibit 1 on grounds of hearsay and lack of foundation (Mr. Hublet fails to aver that the Exhibit is a true and correct copy). Further, although Defendants cite to federal authorities for the proposition the Court may take judicial notice of this document, the court in Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 889, noted that while there may be federal cases that adopt this approach, “we know of no ‘official Web site’ provision for judicial notice in California. (See L.B.

Research & Education Foundation v. UCLA Foundation (2005) 130 Cal.App.4th 171, 180, fn. 2 [29 Cal.Rptr.3d 710].) ‘Simply because information is on the Internet does not mean that it is not reasonably subject to dispute.’ (Huitt v. Southern California Gas Co. (2010) 188 Cal.App.4th 1586, 1605, fn. 10 [116 Cal. Rptr. 3d 453].)”

Exhibit 2: DENIED

Exhibit 2 is purportedly the last coordinated version of the articles of incorporation of Pure Safety Luxco dated 23 July 2020 obtained through RCS. The Court has sustained Plaintiff’s objection no. 16 to Exhibit 2 on grounds of hearsay and lack of foundation (Mr. Hublet fails to aver that the Exhibit is a true and correct copy). Defendants appear to suggest that the Court may take judicial notice of the facts cited within Exhibit 2, as well as the legal effect derived from the exhibit so long as the facts are not or cannot be disputed.

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

Defendants reliance on Scott v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 743 is misplaced. In Scott, the FDIC was appointed the receiver of Washington Mutual Bank (“WaMu”). FDIC and JPMorgan entered into a Purchase and Assumption Agreement (“P&A Agreement”) under which JPMorgan did not assume liability for borrower claims related to loans, or commitments to lend, made by WaMu, held by WaMu, or purchased by WaMu. Plaintiff then sued JPMorgan, WaMu and others for predatory lending. JPMorgan demurred to the second amended complaint and requested judicial notice of certain documents, including the P&A Agreement.

The trial court granted the request for judicial notice, including the legal effect of the P&A Agreement, and sustained the demurrer without leave to amend. On appeal, the First District Court of Appeal found that the trial court properly granted the request for judicial notice because “the court may take notice not only of the fact of the document and its recording or publication, but also facts that clearly derive from its legal effect. Moreover, whether the fact derives from the legal effect of a document or from a statement within the document, the fact may be judicially noticed where, as here, the fact is not reasonably subject to dispute.” (Id. at 754.)

The Court of Appeal found that the legal effect of the P&A Agreement was not reasonably subject to dispute for a number of reasons. First, the plaintiff did not question legal effect of the P&A Agreement. (Id., at 753.) Second, the P&A Agreement expressly provided that it was the intent of the parties that WaMu’s assets, but not liabilities would be transferred to JPMorgan, and that was its legal effect. Therefore, the fact that JPMorgan did not assume liability of borrowers’ claims was “derive[d] from the legal effect of the documents themselves, rather than any disputed hearsay statement of fact within them.” (Id. at 754 (emphasis added).)

Lastly, the P &A Agreement had already been the subject of judicial interpretation by multiple courts, which found that it precluded JPMorgan’s liability for borrowers’ claims, and justified dismissal of borrowers’ claims at the pleading stage. (Id. at 757.)

As initial matter, Defendants provide no legal authority or legal analysis that the fact of Luxco’s place of incorporation (purportedly Luxembourg) is derived from the legal effect of the articles of incorporation. Instead, it appears to the Court that the fact derived from the legal effect of the articles of incorporation is that Luxco was incorporated. The place of incorporation is a hearsay statement within the articles of incorporation. Moreover, unlike Scott, Defendants have not shown that Luxco's articles of incorporation has already been subject to judicial notice by multiple courts. Lastly, Plaintiffs dispute the authenticity of the articles of incorporation as they have filed objections thereto.

The other cases upon which Defendants rely are also inapposite. (See Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106 [court took judicial notice of the legal effect a First Assignment of Note and Deed of Trust, thus, the plaintiff was not entitled to recover fees its foreclosure fees because it had assigned the deed of trust and had no right to initiate foreclosure proceedings.]; See

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

Jazayeri v. Mao (2009) 174 Cal.App.4th 301 [no discussion or analysis of taking judicial notice of document or legal effect thereof].)

Exhibits 3 and 4: GRANTED

Defendants’ request for judicial notice of Exhibit 3 which is the “unofficial but commonly used as authoritative” English version language of certain provisions of Luxembourg’s 10 August 1916 Law on Commercial Companies (as amended)” is GRANTED, although the Court did not consider this exhibit since it was not material to the Court’s disposition of the demurrer.

Defendants’ request for judicial notice of Exhibit 4 which is the copy of the October 22, 2022 email referenced in the SAC but not attached is GRANTED.

In taking judicial notice of these documents, the court accepts the fact of their existence, not the truth of their contents. (See Professional Engineers v. Dep’t of Transp. (1997) 15 Cal.4th 543, 590; Steed v. Department of Consumer Affairs (2012) 204 Cal.App.4th 112, 120-121.)

Legal Standard

The function of a demurrer is to test the sufficiency of the pleading it challenges by raising questions of law. (Salimi v. State Comp. Ins. Fund (1997) 54 Cal.App.4th 216, 219; Nordlinger v. Lynch (1990) 225 Cal.App.3d 1259, 1271.)

A demurrer and a motion to strike “tests the pleadings alone and not the evidence or other extrinsic matters.” (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) The purpose of a demurrer is to test the legal sufficiency of a claim. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) For the purpose of determining the effect of a complaint, its allegations are liberally construed, with a view toward substantial justice. (Code Civ. Proc. §452; Amarel v. Connell (1988) 202 Cal.App.3d 137, 140-141; Quelimane Co. v.

Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 43, fn. 7.) In this respect, the Court treats the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law, and considers matters which may be judicially noticed. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318; Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1111-1112.) A general demurrer does not admit contentions, deductions, or conclusions of fact or law alleged in the complaint; facts impossible in law; or allegations contrary to facts of which a court may take judicial notice. (Blank v.

Kirwan (1985) 39 Cal.3d 311, 318, William S. Hart Union High School Dist. v. Regional Planning Com. (1991) 226 Cal.App.3d 1612, 1616 n.2.) Extrinsic evidence may not properly be

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23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

considered on demurrer or on a motion to strike. (Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881; Hibernia Savings & Loan Soc. v. Thornton (1897) 117 Cal. 481, 482.)

A demurrer may be sustained only if the complaint lacks any sufficient allegations to entitle the plaintiff to relief. (Financial Corp. of America v. Wilburn (1987) 189 Cal.App.3d 764, 778.) “Plaintiff need only plead facts showing that he may be entitled to some relief . . ., we are not concerned with plaintiff’s possible inability or difficulty in proving the allegations of the complaint.” (Highlanders, Inc. v. Olsan (1978) 77 Cal.App.3d 690, 696-697.) “[Courts] are required to construe the complaint liberally to determine whether a cause of action has been stated, given the assumed truth of the facts pleaded.” (Picton v.

Anderson Union High School Dist. (1996) 50 Cal.App.4th 726.) A demurrer admits the truth of all material facts properly pled and the sole issue raised by a general demurrer is whether the facts pled state a valid cause of action – not whether they are true. (Serrano v. Priest (1971) 5 Cal.3d 584, 591.)

Standing

Defendants contend that Plaintiffs fail to allege facts sufficient to establish standing under Delaware law, which requires Plaintiffs to have standing (at a minimum) under Luxembourg Law. According to Defendants, although Plaintiffs allege that they are “equitable or beneficial owners” of PSG, the SAC’s allegations now show that Plaintiffs are not actually shareholders in PSG, but instead “they own stock in a greatgrandparent entity of PSG, Luxco, that itself is only a ‘partial owner’ of Investco.” (Demurrer, 6:3-6, citing SAC, ¶¶ 1-5.)

Defendants argue that given this multi-tier relationship, Delaware law requires that Plaintiffs must first satisfy the standing requirements that apply to the parent company in which the Plaintiffs own shares. (Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A. (Del. 2011) 34 A.3d 1074, 1078, 1080 [“Under Delaware law, a shareholder that holds shares only in a parent corporation must establish its standing to proceed derivatively at the parent level, in order to claim standing to enforce, on the parent’s behalf, a claim belonging to that parent’s Delaware subsidiary.”].)

Relying on Hublet’s declaration and Defendants’ request for judicial notice (including Exhibits 1 and 2 attached to both), Defendants claim that Luxco is incorporated in Luxembourg, thus, Luxembourg law applies, which does not allow shareholders of a corporation to bring derivative actions even on behalf of the company in which they own shares.

The Court, however, has denied Defendants’ request for judicial notice of, and sustained Plaintiffs’ objections to Exhibits 1 and 2, which appear to be the basis for Defendants’ claim that Luxco is incorporated in Luxembourg. The Court has also sustained the portions of Hubert’s declaration wherein he concludes that LuxCo is

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

incorporated in Luxembourg and that Luxco is subject to Luxembourg corporate law. (Court’s ruling on Plaintiffs’ objection nos. 10, 11, 17, 18, 19, 20, 21.) Accordingly, Defendants have not demonstrated that Luxco is incorporated in Luxembourg such that Luxembourg law applies.

Defendants’ demurrer for lack of standing is OVERRULED.

Uncertainty

The demurrer for uncertainty is OVERRULED. Where a demurrer is made upon uncertainty, it must distinctly specify exactly how or why the pleading is uncertain, and where such uncertainty appears (by reference to page and line numbers of the complaint). (See Fenton v. Groveland Comm. Services Dist. (1982) 135 CA3d 797, 809, 185 CR 758, 765 (disapproved on other grounds by Katzberg v. Regents of Univ. of Calif. (2002) 29 Cal.4th 300, 328, fn. 30).) Additionally, demurrers for uncertainty are disfavored and are only granted where the complaint is so muddled that the defendant cannot reasonably respond.

The favored approach is to clarify theories in the complaint through discovery. (See Khoury v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616; Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group, June 2023 Update), sec. 7:85.) The allegations are not so uncertain that Defendants cannot frame a response.

Breach of Fiduciary Duty

Defendants demur on the ground that Plaintiffs fail to allege a duty or breach as to Paton or a breach of a fiduciary duty as to TSG.

Duty from Paton to Plaintiffs individually

Defendants contend that Plaintiffs have now acknowledged they are not shareholders in PSG, but rather shareholders of Luxco, and Paton therefore did not owe Plaintiffs a fiduciary duty. Relying on Anadarko Petroleum Corp. v. Panhandle Eastern Corp. (Del. 1988) 545 A.2d 1171, Defendants insists that the fiduciary duties of directors of subsidiaries only run to parents (and their shareholders) that wholly own the subject subsidiary. According to Defendants, any duty on Paton’s part would be to grandparent Investco and its shareholders, but not to Plaintiffs.

In opposition, Plaintiffs argue that Anadarko is inapposite, and that pursuant to Delaware law, PSG’s board of directors, including Paton, owed them a fiduciary duty because they are equitable or beneficial shareholders of PSG. (Reis v. Hazelett Strip- Casting Corp. (Del. Ch. 2011) 28 A.3d 442, 478 [“a plaintiff who has been bequeathed

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

shares in a corporation is an ‘equitable owner’ to whom fiduciary duties are owed and who has standing to sue for breach of fiduciary duty directly or derivatively.”].)

The Court agrees with Plaintiffs that Anadarko is inapposite as it concerned “whether a corporate parent and directors of a wholly-owned subsidiary owe fiduciary duties to the prospective stockholders of the subsidiary after the parent declares its intention to spinoff the subsidiary.” (Anadarko Petroleum Corp., supra, 545 A.2d at 1173.) The court concluded that “prior to the date of distribution the interests held by Anadarko’s prospective stockholders were insufficient to impose fiduciary obligations on the parent and the subsidiary’s directors.” (Ibid.) No issue of prospective stockholders is at issue here. Additionally, Andadarko involved a motion for summary judgment, rather then a challenge to the pleadings.

Here, whether Plaintiffs are equitable or beneficial owners as alleged in the SAC is a question of fact. Accordingly, the demurrer is OVERRULED.

Breach by Paton (Individual or Derivative)

Defendants next demur on the ground that Plaintiffs fail to adequately allege that Paton breached any fiduciary duty either derivatively or to the individual plaintiffs because directors of a wholly-owned subsidiary are required to act in accordance with the parent’s wishes, even if doing so renders the subsidiary less valuable. (Trenwick America Litigation Trust v. Ernst & Young, L.L.P. (Del. Ch. 2006) 906 A.2d 168, 201 [“Delaware law does not embrace the concept that a director of a wholly-owned subsidiary owes a duty to second-guess the business judgment of its parent corporation when following and supporting the parent’s strategy would not violate any legal obligation the subsidiary owes to another.”) Thus, according to Defendants, “unless Plaintiffs allege that directors of PSG acted contrary to the wishes to the directors of Holdco and Investco, no claim for breach of fiduciary duty is stated against Paton. (Demurrer, 15:14-15.)

The Court is not persuaded by Defendants’ argument that Plaintiffs must affirmatively allege that the directors of PSG acted contrary to the wishes of Holdco and Investco. Defendants proffer no legal authority that such facts must be alleged. Here, there are no allegations that Holdco and Investco made a business judgment to enter into the Rescue Capital Package which would cause the PSG directors to second guess that decision in order for Trenwick to apply.

Defendants further suggest that Plaintiffs fail to sufficiently allege Paton’s breach of fiduciary duty as to PSG as there are no allegations that “PSG did anything, or that PSG’s directors caused PSG do to anything, or that PSG itself relied on any alleged

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

statements/concealments in connection with the Rescue Capital Package.” (Demurrer, 15:20-23.)

Plaintiffs disagree and argue that they have sufficiently alleged that Paton breached its fiduciary duty to PSG by engaging in self-dealing to preserve TSG’s annual fees that PSG must pay and giving TSG an equity stake in PSG for no valuable consideration. (SAC, ¶¶ 30, 32, 50.)

The Court finds that Plaintiffs sufficiently alleged breach by Paton on the derivative and individual claims for breach of fiduciary duty. The demurrer is OVERRULED.

Breach by TSG (Derivative)

Defendants lastly demur on the ground that Plaintiffs fail to adequately allege that TSG breached any fiduciary duty to PSG. According to Defendants, while Plaintiffs allege that PSG hired TSG as an investment advisor, Plaintiffs fail to allege any advisory breaches, and fail to allege facts that, as an alleged investment advisor, TSG had the power to or did enter into the transactions.

Plaintiffs disagree and argue that they have sufficiently alleged that TSG breached its fiduciary duty to PSG by engaging in self-dealing to preserve its annual fees that PSG must pay and giving itself an equity stake in PSG for no valuable consideration. (SAC, ¶¶ 32, 50.) TSG also took control of PSG’s board, reduced the size of the board and then systematically removed from the board those members that did not subscribe to TSG’s agenda. (SAC, ¶ 40.)

The Court finds that Plaintiffs sufficiently alleged breach by TSG on the derivative claim for breach of fiduciary duty. The demurrer is OVERRULED.

Fraudulent Misrepresentation and Negligent Misrepresentation

In these causes of action, Plaintiffs allege that Defendants misrepresented: (1) the risks and benefits of the Rescue Capital Package to Plaintiffs and (2) that they were acting in the best interests of Guardian and its shareholders, including Plaintiffs.

Defendants demur on the ground that Plaintiffs fail to plead with specificity any representations, intent, reliance, justifiable reliance and damages.

When pleading a claim for fraud/negligent misrepresentation, each and every element must be alleged, “and the facts constituting the fraud must be alleged with sufficient specificity to allow defendant to understand fully the nature of the charge made.”

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

(Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73; Cadlo v Owens-Illinois, lnc. (2004) 125 Cal.App.4th 513, 519 [stating that “[e]ach element in a cause of action for fraud or negligent misrepresentation must be factually and specifically alleged”].)

The demurrer for failure to sufficiently allege justifiable reliance is SUSTAINED with leave to amend. Plaintiffs point to paragraphs 25-33 of the SAC, insisting that these paragraphs sufficiently allege that “Plaintiffs forwent proposing alternative funding solutions and had no choice but to go along with the Rescue Capital Package.” (Opposition, 11:26-12:2.) The Court has reviewed these paragraphs, and the only paragraph that references Plaintiffs forgoing proposed alternative funding solutions is paragraph 31 which states, in relevant part:

31. . . . At no time prior to March 16[,] 2023, did TSG disclose to Plaintiffs that it was in discussions with Halkin concerning the Rescue Capital Package, nor did it disclose any of the terms of the Rescue Capital Package being discussed with Halkin, fearing that if such terms were disclosed to Plaintiffs, Plaintiffs would have had the opportunity to present a better (i.e., better for Guardian) funding package than Halkin. Therefore, TSG intentionally kept the Rescue Capital Package secret.

(SAC, ¶ 31.)

The Court also notes that in paragraph 35, Plaintiffs allege:

Following the disclosure of the Rescue Capital Package on March 16, 2023, when Plaintiffs requested that Paton, Ameler, and others at TSG provide additional information and documents, including Guardian board meeting minutes, which they needed to inform their decision-making, Paton, Ameler, and others at TSG summarily refused to provide all of the requested information, limiting Plaintiffs to that information which TSG, in its sole discretion, determined should be provided. Plaintiffs were then forced to make critical decisions concerning their rights and interests with less than all of the information they needed and requested.

(SAC, ¶ 35.)

These allegations of Plaintiffs’ purported reliance appear to concern Defendants’ alleged failure to disclose or fraudulent concealment. Plaintiffs fail to sufficiently allege any nexus between Defendants’ alleged misrepresentations and Plaintiffs forgoing the proposal of alternative funding solutions and being “forced to make critical decisions concerning their rights and interests.” Additionally, paragraph 31, does not state that

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

Plaintiffs actually forewent proposing alternative funding solutions. Rather, the paragraph merely states that Defendants did not disclose any terms of the Rescue Capital Package fearing that Plaintiffs would present a better funding package.

Accordingly, the demurrer is SUSTAINED with leave to amend.

Having sustained the demurrer on this ground, the Court need not address Defendants’ remaining arguments.

Intentional Concealment

While fraud must be plead with specificity, the particularity requirement is less stringent in cases of alleged nondisclosure. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384.) “Less specificity should be required of fraud claims when it appears from the nature of the allegations that the defendant must necessarily possess full information concerning the facts of the controversy [citation]; even under the strict rules of common law pleading, one of the cannons was that less particularly is required when the facts lie more in the knowledge of the opposite party.” (Ibid.)

“The elements of a claim for fraudulent concealment require a plaintiff to show that: ‘(1) the defendant concealed or suppressed a material fact, (2) the defendant [was] under a duty to disclose the fact to the plaintiff, (3) the defendant...intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff [was] unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.’” (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105, 1130.)

Defendants contend that Plaintiffs fail to sufficiently allege that either TSG or Paton owed Plaintiffs a fiduciary duty. The Court disagrees as it has overruled Defendants’ demurrer on the ground that Paton owed no fiduciary duty to the individual Plaintiffs. Moreover, Defendants did not demur on the ground that Paton owed no fiduciary duty to PSG or that TSG owed no fiduciary duty to PSG or the individual plaintiffs. As a result, Defendants have not challenged the allegation of a fiduciary duty owed by Paton to PSG or owed by TSG to PSG or the individual plaintiffs.

Defendants further contend that they had no duty to pre-disclose the Rescue Capital Package. This argument, however, will not dispose of the entire cause of action since Plaintiffs also allege that Defendants failed to disclose any or actual conflicts of interests due to the Rescue Capital Package. (SAC, ¶ 48.)

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

Relying on an unpublished case from the Court of Chancery of Delaware, Sussex, Defendants add that Plaintiffs’ allegations they were not provided sufficient information for their subsequent investment decision is deficient. Defendants suggest that “disclosure claims must identify the missing facts and ‘state why they meet the materiality standard and how the omission caused injury’ – that such facts ‘would have ‘significantly altered the total mix of information’ available to the stockholders.’” (Demurrer, 11:15-17, quoting Wayne County Emples. Ret. Sys. v. Corti (July 24, 2009) 2009 Del. Ch. LEXIS 126, at *27.) The Court will not consider this unpublished case, and Defendants provide no other legal authority that Plaintiffs must plead the fraudulent concealment cause of action as set forth in Corti.

Defendants next argue that each plaintiff fails to sufficiently plead intent, unawareness of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and damages. Defendants proffer no legal authority that Plaintiffs cannot collectively allege the above.

The Court, however, agrees with Defendants that Plaintiffs fail to sufficiently allege they would not have acted as they did if they had known of the concealed or suppressed fact.

Plaintiffs again point to paragraphs 25-33 of the SAC, insisting that these paragraphs sufficiently allege that “Plaintiffs forwent proposing alternative funding solutions and had no choice but to go along with the Rescue Capital Package.” (Opposition, 11:26-12:2.) As noted above, the Court has reviewed these paragraphs, and the only paragraph that references Plaintiffs forgoing proposed alternative funding solutions is paragraph 31 which states, in relevant part:

31. . . . At no time prior to March 16 2023, did TSG disclose to Plaintiffs that it was in discussions with Halkin concerning the Rescue Capital Package, nor did it disclose any of the terms of the Rescue Capital Package being discussed with Halkin, fearing that if such terms were disclosed to Plaintiffs, Plaintiffs would have had the opportunity to present a better (i.e., better for Guardian) funding package than Halkin. Therefore, TSG intentionally kept the Rescue Capital Package secret.

(SAC, ¶ 31.)

This paragraph, however, does not state that Plaintiffs actually forewent proposing alternative funding solutions. Rather, the paragraph merely states that Defendants did not disclose any terms of the Rescue Capital Package fearing

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that Plaintiffs would present a better funding package.

In paragraph 35, Plaintiffs allege:

Following the disclosure of the Rescue Capital Package on March 16, 2023, when Plaintiffs requested that Paton, Ameler, and others at TSG provide additional information and documents, including Guardian board meeting minutes, which they needed to inform their decision-making, Paton, Ameler, and others at TSG summarily refused to provide all of the requested information, limiting Plaintiffs to that information which TSG, in its sole discretion, determined should be provided. Plaintiffs were then forced to make critical decisions concerning their rights and interests with less than all of the information they needed and requested.

(SAC, ¶ 35.)

Yet, there is no allegation that Plaintiffs would not have acted as they did if they had known of the concealed or suppressed fact. Additionally, although Plaintiffs allege that by making the omissions, Defendants intended to induce Plaintiffs not to invest their pro rate shares, there is no allegations that Plaintiffs did not invest their pro rata shares.

Having sustained the demurrer on this ground, the Court need not address Defendants’ remaining arguments.

The Court grants leave to amend as this is the Court’s second ruling on Defendants’ challenge to the complaint, and the Court is not convinced that Plaintiffs will be unable to cure the defects noted above.

Where leave to amend is granted, Plaintiffs may file and serve a third amended complaint (“3AC”) by no later than August 12, 2024, Response to be filed and served within 30 days thereafter, 35 days if the 3AC is served by mail. (Although not required by any statute or rule of court, Plaintiffs are requested to attach a copy of the instant minute order to the 3AC to facilitate the filing of the pleading.)

This minute order is effective immediately. No formal order or other notice is required. (Code Civ. Proc. §1019.5; CRC Rule 3.1312.)

NOTICE:

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 07/30/2024 Hearing on Demurrer to the Second Amended Complaint in Department 54

Consistent with Local Rule 1.06(B), any party requesting oral argument on any matter on this calendar must comply with the following procedure:

To request limited oral argument, on any matter on this calendar, you must call the Law and Motion Oral Argument Request Line at (916) 874-2615 by 4:00 p.m. the Court day before the hearing and advise opposing counsel. At the time of requesting oral argument, the requesting party shall leave a voice mail message: a) identifying themselves as the party requesting oral argument; b) indicating the specific matter/motion for which they are requesting oral argument; and c) confirming that it has notified the opposing party of its intention to appear and that opposing party may appear via Zoom using the Zoom link and Meeting ID indicated below. If no request for oral argument is made, the tentative ruling becomes the final order of the Court.

Unless ordered to appear in person by the Court, parties may appear remotely either telephonically or by video conference via the Zoom video/audio conference platform with notice to the Court and all other parties in accordance with Code of Civil Procedure §367.75. Although remote participation is not required, the Court will presume all parties are appearing remotely for non-evidentiary civil hearings. The Department 53/54 Zoom Link is https://saccourt-cagov.zoomgov.com/my/sscdept53.54 and the Zoom Meeting ID is 161 4650 6749. To appear on Zoom telephonically, call (833) 568-8864 and enter the Zoom Meeting ID referenced above. NO COURTCALL APPEARANCES WILL BE ACCEPTED.

Parties requesting services of a court reporter will need to arrange for private court reporter services at their own expense, pursuant to Government code §68086 and California Rules of Court, Rule 2.956. Requirements for requesting a court reporter are listed in the Policy for Official Reporter Pro Tempore available on the Sacramento Superior Court website at https://www.saccourt.ca.gov/court-reporters/docs/crtrp-6a.pdf. Parties may contact Court- Approved Official Reporters Pro Tempore by utilizing the list of Court Approved Official Reporters Pro Tempore available at https://www.saccourt.ca.gov/court-reporters/docs/crtrp- 13.pdf.

A Stipulation and Appointment of Official Reporter Pro Tempore (CV/E-206) is required to be signed by each party, the private court reporter, and the Judge prior to the hearing, if not using a reporter from the Court’s Approved Official Reporter Pro Tempore list.

Once the form is signed it must be filed with the clerk. If a litigant has been granted a fee waiver and requests a court reporter, the party must submit a Request for Court Reporter by a Party with a Fee Waiver (CV/E-211) and it must be filed with the clerk at least 10 days prior to the hearing or at the time the proceeding is scheduled if less than 10 days away. Once approved, the clerk will forward the form to the Court Reporter’s Office and an official reporter will be provided.