VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al.

Legal Standard

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 01/29/2026 Hearing on Demurrer to Fourth Amended Complaint in Department 54

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 “tests the pleadings alone and not the evidence or other extrinsic matters.” (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) Extrinsic evidence may not properly be 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.)

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 dnoticed. (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 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.) 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.)

Discussion

Defendants’ demur to all three fraud causes of action – fraudulent and negligent misrepresentation and intentional concealment.

The elements of fraud are (1) a misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity; (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage. (Charney v. Cobert (2006) 145 Cal.App.4th 170, 184, citing Lazar v. Superior Court (1996) 12 Cal.4th 631.) “Each element in a cause of action for fraud ... must be factually and specifically alleged.” (Perlas v. GMAC Mortgage, LLC (2010) 187 Cal.App.4th 429, 434.) To state a misrepresentation claim, Plaintiff must allege specific facts demonstrating “who, what, where, when and how.” (Lazar, supra, 12 Cal.4th at p. 645.)

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 01/29/2026 Hearing on Demurrer to Fourth Amended Complaint in Department 54

In evaluating the factual underpinnings of a fraudulent concealment claim at the pleading stage, the Court focuses its inquiry on the unique elements of the claim as asserted by Plaintiffs. (Rattagan v. Uber Technologies, Inc. (2024) 17 Cal.5th 1, 43-44 [citations omitted].) “For instance [i]f the duty [of disclosure] allegedly arose by virtue of the parties’ relationship and the defendant’s exclusive knowledge or access to certain facts the complaint must also include specific allegations establishing all the required elements, including (1) the content of the omitted facts, (2) the defendant’s awareness of the materiality of those facts, (3) the inaccessibility of the facts to the plaintiff, (4) the general point at which the omitted facts should or could have been revealed, and (5) justifiable and actual reliance, either through action or forbearance, based on the defendant’s omission.” (Ibid.)

In addition, although in California, fraud must be pled specifically, courts have repeatedly recognized that “‘it is harder to apply [the requirement of specificity] to a case of simple nondisclosure. “How does one show ‘how’ and ‘by what means’ something didn’t happen, or ‘when’ it never happened, or ‘where’ it never happened?”’ [Citation.]” (Jones v. ConocoPhillips Co. (2011) 198 Cal.App.4th 1187, 1199.) At the same time, allegations that merely plead legal conclusions of fraud are insufficient. (Tindell v.

Murphy (2018) 22 Cal.App.5th 1239, 1249.) Thus, even in cases involving claims of fraudulent concealment, “‘the facts and circumstances which constitute the fraud should be set out clearly, concisely, and with sufficient particularity to apprise the opposite party of what he is called on to answer, and to enable the court to determine whether, on the facts pleaded, there is any foundation, prima facie at least, for the charge of fraud.’ [Citation.]” (Scafidi v. Western Loan & Bldg. Co. (1946) 72 Cal.App.2d 550, 553.)

Defendants first assert that “[o]ther than being identified as plaintiffs on the caption page or the opening paragraph, 15 of the 21 plaintiffs are never mentioned by name again. Accordingly, it is literally impossible for these 15 plaintiffs to have met the strict pleading standards for fraud ” and that “[n]one of the 21 plaintiffs have adequately alleged what specific misrepresentations they each heard, what actions each of them did or did not take in reliance, or how each of them was allegedly damaged.” (Demurrer at 1:6-14.)

Instead, the 4AC alleges that in relation to “the misrepresentations,” unidentified “Plaintiffs who had decided to invest their pro rata shares would not have done so,” and “certain Plaintiffs invested their pro rata shares,” and conversely, “multiple Plaintiffs were induced not to invest their pro rata shares.” (4AC ¶ 56, 59.) Defendants’ argument that each particular Plaintiff is required to plead exactly what he or she was told and what he or she did in reliance thereon is woven throughout the entirety of Defendants’ memorandum of points and authorities with respect to various arguments.

To the extent Defendants’ demurrer relies upon the foregoing, it is rejected because

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 01/29/2026 Hearing on Demurrer to Fourth Amended Complaint in Department 54

Defendants proffer no binding or on-point legal authority that Plaintiffs cannot collectively allege their fraud claims. Instead, Defendants cite to non-binding federal district court cases, including Abarca v. Merck & Co., 2010 U.S. Dist. LEXIS 26423 and Rodriguez v. It's Just Lunch International, 2009 U.S. Dist. LEXIS 12589, both of which concerned the inapplicable pleading standard for fraud under Federal Rule of Civil Procedure 9(b). Although Defendants’ additional legal authorities laced throughout their demurrer concern the applicable pleading standard for fraud claims under California law, none of them involve a claim for fraud brought by multiple related plaintiffs wherein a court expressly found that the fraud claim is insufficiently pled unless each plaintiff specifically alleges each element of fraud as it relates to him or her.

Instead, they discuss actions that involved only a single plaintiff. Without specific legal authority on point, the Court declines to find the 4AC insufficient based on this argument.

Next, Defendants argue that Plaintiffs’ alleged reliance is unreasonable as a matter of law. Defendants argue that because the 4AC alleges that the “Plaintiff Funding Group Proposal” was rejected by “TSG and Guardian’s board” (4AC ¶ 38), this would “naturally incentivize interested persons to make better proposals, not preclude or prevent better proposals.” (Demurrer at 7:4-5.) This argument calls for speculation, in which the Court will not engage, and it is therefore rejected.

Defendants then assert the 4AC does not sufficiently allege damage because it “does not allege any different terms under which any Plaintiff was willing to provide financing and does not allege that such terms would have been acceptable to the board of Investco or to the majority (institutional) shareholders – i.e., no resulting damage.” (Demurrer at 7:7-9.) The Court disagrees that the foregoing allegations are required to sufficiently allege damage. Defendants do not proffer any legal authorities establishing that Plaintiffs were required to specifically allege the financing terms they would have provided and that the terms would have been accepted.

Moreover, the 4AC’s damages allegation is not just based upon not making an alternative funding proposal. There are also allegations that certain Plaintiffs were damaged by investing their pro rata shares when they would not have done so had they known all of the relevant information regarding the Rescue Capital Package, including that it provided “free” stock for Halkin. (4AC ¶¶ 56-61, 68-69, 79-80.) The Court concludes the foregoing allegations are sufficient at this stage to allege Plaintiffs suffered damages due to Defendants’ alleged misrepresentations and/or omissions.

Defendants further demur on the ground that Plaintiffs have failed to sufficiently plead Defendants knew the misrepresentations were false. In the Court’s prior ruling on the demurrer to the 3AC, the Court found that the allegations (in previously numbered paragraph 39) were insufficient because there were no allegations that Defendant’s knew the representations were false. Defendants contend Plaintiffs’ revisions still fall

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 01/29/2026 Hearing on Demurrer to Fourth Amended Complaint in Department 54

short.

In the 4AC, Plaintiffs made the following revisions to paragraph 39 (now paragraph 38), shown in redline:

“Defendants represented that (1) Guardian was effectively insolvent (it was not); (2) Guardian needed a major capital infusion of only $10MM (it actually needed more than $10MM); (3) the Rescue Capital Package was the only way to save the company (it was not); and (4) the Plaintiff Group Funding Proposal was simply “not viable” (without explanation or reason) a statement Plaintiffs were induced to justifiably rely upon given Defendants superior knowledge (the proposal was actually viable). Each of these representations was false and Defendants knew they were false when made.”

Defendants argue the alleged knowledge of falsity remains a legal conclusion without any allegations regarding what the truth was or how Defendants knew the statements were false. For example, the 4AC does not allege facts to show that PSG was not close to insolvency. Instead, Defendants advance that the 4AC confirms Guardian’s financial condition was terrible and that it needed a capital infusion of more than $10MM. (4AC ¶¶ 25, 38.)

Plaintiffs assert that falsity and knowledge of falsity are alleged. Specifically, the 4AC alleges that Defendants represented to Plaintiffs that “if the Rescue Capital Package was not approved, Guardian would face certain financial ruin” and that their funding package was “the only way to save the company.” (4AC ¶ 38.) The 4AC alleges Defendants knew the statement was false because they “determined that while the Plaintiff Funding Group Proposal would be beneficial to Guardian, it would not be beneficial for each of them as co-owners and/or employees of TSG, since TSG would be required to suspend its $1,200,000.00 annual fee and pay interest on the loan pending the sale of Guardian, among other requirements.” (4AC ¶ 30.)

Further, Defendants had superior knowledge regarding this because they withheld the terms of the Rescue Capital Package from Plaintiffs and other shareholders. (4AC ¶ 31.) As stated in the 4AC, “[a]t 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.” (4AC ¶ 31.)

The 4AC also alleges Defendants “misrepresented that they were acting in the best interests of Guardian and its shareholders, including Plaintiffs” and “failed to disclose the actual and potential conflicts of interest raised by the Rescue Capital Package.” (4AC ¶ 57.) “These conflicts of interest included the fact that TSG was

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 01/29/2026 Hearing on Demurrer to Fourth Amended Complaint in Department 54

getting additional stock in Guardian as part of the Rescue Capital Package, plus payment of their fees, whereas TSG would receive neither of these ‘perks’ under the Plaintiffs Funding Group Proposal.” (4AC ¶ 57.) According to the 4AC, “Defendants knew that these representations were false and that the information they omitted or concealed from Plaintiffs was material to their decision on whether to invest their pro rata shares, or were made with utter disregard and reckless indifference to the truth.” (4AC ¶ 58.)

The Court concludes the foregoing allegations regarding knowledge of falsity are sufficient to withstand demurrer. It is not necessary for the 4AC to allege facts that PSG was, in fact, close to insolvency because the fraud claims are also based on additional misrepresentations that were made by Defendants. As discussed above, the 4AC also alleges that Defendants made certain misrepresentations including that the Rescue Capital Package was the only way to save the company and that Defendants were acting in the best interests of Guardian, but Defendants had determined that the Plaintiff Funding Group Proposal would be beneficial to Guardian and knew or should have known that the representations were false and that approving the Rescue Capital Package was a conflict of interest. (4AC ¶¶ 30, 38, 78.)

Defendants also claim the 4AC is a sham because it contains inherently contradictory allegations insofar as the 4AC now alleges PSG was not effectively insolvent, even though each prior complaint alleged PSG was effectively insolvent. Moreover, the 4AC still alleges PSG “needed a major capital infusion” and that Defendants understated that PSG needed only $10MM, while also alleging that Defendants overstated that PSG needed $15MM. (4AC ¶¶ 26, 32, 33, 38.) Even accepting this argument, it would not dispose of an entire cause of action because the fraud claims are based on more than just the allegations that PSG was insolvent.

A demurrer is not the appropriate vehicle to challenge less than an entire cause of action. (See, e.g., Fremont Indemn. Co. v. Fremont Gen. Corp. (2007) 148 Cal.App.4th 97, 119.) A general demurrer does not lie to only part of a cause of action. (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1167; see, e.g., PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682-1683; Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1402 [when pleader is in doubt about what can be established by the evidence, the modern practice allows the party to plead in the alternative].)

Defendants’ also support this argument by citing to the content of emails attached to their request for judicial notice, but the Court can only take judicial notice of the fact that the emails exist, not the truth of their contents. Thus, this argument is also rejected.

To the extent Defendants’ arguments rely upon the contents of the March 15, 2023 email and attached presentation, which was included in Defendants’ request for judicial notice, the arguments are also rejected as unsupported. The Court can only take judicial

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 01/29/2026 Hearing on Demurrer to Fourth Amended Complaint in Department 54

notice of the existence of the documents, not the truth of their contents.

Defendants’ final argument is that there was no material omission and no duty to disclose. The Court disagrees.

The 4AC states, in pertinent part: “Defendants failed to disclose special facts relating to (a) Guardian’s financial condition and alternate funding prospects when and after Plaintiffs presented the Plaintiffs’ Funding Proposal and (b) the fact that Defendants had locked-in the Rescue Capital Package before disclosing it to Plaintiffs, all to induce Plaintiffs to sit idle, unaware they could or should make any further funding proposals that would be better for Guardian (and its shareholders) than the Rescue Capital Package.” (4AC, ¶ 64.)

This is a summary of prior allegations in the 4AC, which more thoroughly discuss Defendants’ fraudulent concealment, including (a) Halkin was obtaining stock in Guardian at no cost, (b) that the Rescue Capital Package was approved by self-interested TSG insiders on Guardian’s board, and (c) that there were other ways to fund Guardian instead of the Rescue Capital Package. (4AC ¶¶ 23, 30, 38, 56, 57.) The Court concludes the foregoing sufficiently alleges material omissions.

As to duty, Defendants argue that because Plaintiffs’ approval was not required for the Rescue Capital Package, there is no duty to disclose. The Court has already determined that Plaintiffs sufficiently alleged a claim for breach of fiduciary duty. Thus, as fiduciaries, Defendants owed Plaintiffs various duties, including the duty of full and fair disclosure. (Hasso v. Hapke (2014) 227 Cal.App.4th 107, 140 [investment advisor owes fiduciary duties]; Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 188 [discussing the fiduciary duty of “full and fair disclosure”].) Defendants also owed disclosure duties because they “actively advised” Guardian and Plaintiffs regarding the need for funding and the Rescue Capital Package and made representations to Plaintiffs.

Defendants’ demurrer is OVERRULED. Defendants shall file an Answer to the 4AC no later than February 12, 2026.

The minute order is effective immediately. No formal order pursuant to California Rules of Court, Rule 3.1312, or further notice is required.

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SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 01/29/2026 Hearing on Demurrer to Fourth Amended Complaint in Department 54

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