Keith Garl v. PMWC Mutual Water Company, et al.

Keith Garl v. PMWC Mutual Water Company, et al., 24CV-0586 (Consolidated with 25CV-0221)

Hearing: Demurrer

Date: September 9, 2026

On September 20, 2024, Keith Garl filed this action individually and derivatively in his capacity as shareholder of PMWC Mutual Water Company (PMWC).

After a demurrer filed by defendant The Management Trust (TMT), Plaintiff filed a First Amended Complaint (FAC) on July 14, 2025 as both an individual and in his capacity as a shareholder of PMWC. (FAC, ¶ 1.)

Defendants Michael Ellison, Troy Ellison, Charles Ellison and Daneal Nally (collectively Defendants) demurred to the FAC and their demurrer to the derivative claims in the FAC was sustained with leave to amend.

On February 27, 2026, Plaintiff filed a Second Amended Complaint (SAC). Defendants now demur to the derivative claims in the SAC for breach of bylaws, wase and breach of fiduciary duty. 1

This action arises out of claims relating to the settlement of a prior lawsuit, 16CV-0309, regarding the operation of a shared water system and other issues regarding six parcels/properties in a subdivision in Arroyo Grande, between the then owners of the properties, Plaintiff and defendants Ben Ferrari and Robert Nicholson. (SAC, ¶¶ 24, 26, 27.) That action settled, and the parties entered into a Settlement Agreement. (SAC, ¶ 27.) As part of the settlement, the parties and their assigns were required to cooperate to form PMWC to manage and operate the water system located on and servicing the properties. (SAC, ¶ 28.)

Defendants are alleged to be shareholders, officers and board of directors of PMWC. (FAC, ¶¶ 6- 9, 80.)

Defendants demur pursuant to Code of Civil Procedure section 430.10 (e), to Garl’s derivative claims in the SAC in the third, fourth and ninth causes of action on the ground that Plaintiff failed to comply with Corporations Code section 800 (b)(2) and that he therefore lacks standing to assert derivative claims on PMWC’s behalf. 2

1 These are the third, fourth and ninth causes of action respectively. 2 Plaintiff states in his opposition, for the first time, that while the SAC and the demurrer both address derivative standing under Corporations Code section 800, PMWC is a California nonprofit mutual benefit corporation, therefore Corporations Code section 7710 is the governing statute. Plaintiff explains that section 800, subdivision (b)(2), and section 7710, subdivision (b)(2), impose materially the same requirements concerning particularized efforts to obtain Board action or reasons excusing such efforts, together with written presentment of the ultimate facts. Accordingly, the SAC’s allegations may be evaluated under section 7710 without changing the substance of the derivative-standing analysis. 1

Defendants’ counsel declares that he attempted to meet and confer with Plaintiff’s counsel on numerous occasions before filing the demurrer. (See Declaration of Randolph Greenwald, ¶ 2; Code Civ. Proc., § 430.41.)

Plaintiff opposes the demurrer.

I.

Legal Standard

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack, or from matters outside the pleading that are subject to judicial notice. (Code Civ. Proc., § 430.30 (a).)

A demurrer tests only the legal sufficiency of the pleading, and “[t]he facts alleged in the pleading are deemed to be true, however improbable they may be. [citation].” (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1034.) While the Court must accept as true all material facts properly pled, it may disregard logical inferences, contentions, or conclusions of fact or law. (Schep v. Capital One, N.A. (2017) 12 Cal.App.5th 1331, 1335-1336; Winn v. Pioneer Medical Group, Inc. (2016) 63 Cal.4th 148, 152.) A demurrer must be overruled if the plaintiff has stated a cause of action under any possible legal theory. (Hale v. Sharp Healthcare (2010) 183 Cal.App.4th 1373, 1379.)

II.

Discussion

Where it is contended that a party lacks standing to sue, the complaint can be challenged by general demurrer for failure to state a cause of action in this plaintiff. (County of Fresno v. Shelton (1998) 66 Cal.App.4th 996, 1009.)

Corporations Code section 800 (b) and section 7710(b) both provide that:

[N]o action may be instituted or maintained in right of any domestic or foreign corporation by any holder of shares or of voting trust certificates of the corporation unless...(2) [t]he plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.

(Corp. Code, §§ 800 (b)(2); 7710(b)(2).)

Defendants’ argument is brief and is the same as in their previous demurrer.3 Defendants again

3 Defendants’ reply also simply copies their argument in the points and authorities and continues to cite Corporations Code section 800(b)(2) without addressing Plaintiff’s explanation that the correct section is section 7710(b)(2). The reply also addresses the “First, Fourth, sixth, eighth and ninth causes of action,” [capitalization from original] which were the causes of action challenged in the FAC, not the SAC. (Reply, p. 2, ll. 22-23.) 2

contend that Plaintiff has failed to allege the required particularized facts against the director Defendants required by Corporations Code section 800(b)(2), preventing them or the Court from reviewing the allegations on a director-by-director basis. Defendants contend that Garl makes only general allegations of “excessive fees,” “mismanagement” and “waste,” but that the SAC fails to state facts to describe the fees or to challenge the Directors business judgment. Defendants contend that Garl has failed to allege extraordinary conditions to adequately show demand futility.

Defendants wholly fail to address the new allegations for demand and/or futility alleged in paragraphs 80-90 of the SAC and have failed to meet their burden as the moving party to show that the allegations are insufficient as a matter of law. (Quantum Cooking Concepts, Inc. v. LV Associates, Inc. (2011) 197 Cal.App.4th 927, 934 [the trial court is not obligated “to comb the record and law for factual and legal support that a party has failed to identify or provide”].)

III.

Conclusion

Defendants’ demurrer to Plaintiff’s derivative claims in the SAC is overruled.

Defendants shall file and serve their answer within ten days of service of notice of this order. (Cal. Rules of Court, rule 3.1320(j).) Plaintiff shall serve notice.

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