East Hill Financial Corp vs Equicann Inc et al

Case Number

22CV02932

Case Type

Hearing Date / Time

Mon, 11/25/2024 - 10:00

Nature of Proceedings

CMC; Motion: Set Aside Default

Tentative Ruling

East Hill Financial Corp. v. EquiCann, Inc., et al.          

Case No. 22CV02932

           

Hearing Date: November 25, 2022                                                    

HEARING:              Lincoln Fish, San Diego Naturals, LLC, & San Diego Natural, Inc.’s, Motion To Set Aside Default

                                   

ATTORNEYS:        For Plaintiff East Hill Financial Corp.: E. Patrick Morris

For Defendants Outco Labs, Inc., Outco Mendocino-CD LLC, East Hill Properties LLC, Samuel Birch aka Austin Birch, Lincoln Fish, San Diego Naturals, LLC, and San Diego Natural, Inc.: William L. Miltner, Autumn S. Frye, Miltner & Menck, APC

TENTATIVE RULING:

The motion of defendants Lincoln Fish, San Diego Naturals, LLC, and San Diego Natural, Inc., for an order setting aside their defaults is continued to December 9, 2024. On or before December 2, 2024, defendant San Diego Natural, Inc., shall file and serve a copy of the pleading it proposes to file in this action in accordance with this ruling. The parties are not authorized to and shall not file any other papers in support of or in opposition to the motion of defendants.

Background:

On July 29, 2022, plaintiff East Hill Financial Corp., Inc. (EHF), filed its original complaint in this action.

On September 30, 2022, without any response having been filed to the original complaint, EHF filed an amended complaint (the FAC), asserting six causes of action: (1) breach of contract; (2) fraud; (3) fraud; (4) accounting; (5) preliminary injunction; and (6) foreclosure. As alleged in the operative FAC:

EHF was the sole owner of 100 percent of the membership interests in East Hill Properties, LLC (EHP), which was formed on January 5, 2017. (FAC, ¶ 25 & exhibit 1, recital A.) At the time, EHP was operating a fully functional and properly licensed medical cannabis growing business in Mendocino County. (FAC, ¶ 26.)

In March 2018, EHF entered into a Membership Interest Purchase and Sale Agreement (the MIPA) with defendant EquiCann, Inc. (EquiCann) by which EquiCann acquired all of the membership interest in EHP. (FAC, ¶¶ 25, 26 & exhibit 1.) For the membership interest, EquiCann agreed to pay the sum of $2,750,000 on terms set forth in the MIPA and in a concurrently signed installment note (the Note) in the amount of $2,650,000 partially secured by a deed of trust (DoT) as to real property owned by EHP located in Willits, California. (FAC, ¶ 27 & exhibits 2, 3.) The MIPA did not transfer ownership of the real property owned by EHP to any other person. (FAC, ¶ 28.)

In April 2018, EquiCann, with the consent of EHF, assigned all of its interest in the MIPA, and in particular the ownership interest in EHP, to defendant Outco Labs, Inc. (Outco Labs). (FAC, ¶ 29.) By such assignment, Outco Labs assumed all liabilities of EquiCann and EHP under the MIPA, Note, and DoT. (Ibid.) The assignment agreement did not relieve EquiCann of its obligations to EHF. (Ibid.) At about the same time, EHF agreed to allow EquiCann to sublease the business of EHP to defendant Outco Mendocino-CD LLC (Outco Mendocino) for which Outco Mendocino agreed to pay to EHF 10 percent of its net operating income (NOI) for calendar years 2018, 2019, and 2020. (FAC, ¶ 30.)

In February 2019, at the request of EquiCann and Outco Labs and based on representations made by defendant Lincoln Fish (Fish) regarding the financial soundness of Outco Labs, EHF consented to Outco Labs’ assuming all of EquiCann’s obligations to EHF under the terms of the MIPA, Note, and Dot. (FAC, ¶ 31.) The documents reflecting this agreement do not relieve EquiCann from its obligations under the MIPA, Note, or DoT. (Ibid.)

In January 2021, EquiCann, Outco Labs, Outco Mendocino, or Fish made numerous representations to the principals of EHF, as well as to the individual who holds the licenses for the legality of the cannabis growing business engaged in by EHF, regarding the ability of Outco Labs to maintain the assets of EHP and to keep EHP as an ongoing enterprise. (FAC, ¶ 32.) As of January 1, 2021, EHF and Outco Labs entered into an Extension Agreement by which the terms of the agreements among the parties and the principal payout of the Note was extended to January 1, 2022, with interest payments continuing during 2021. (FAC, ¶ 32 & exhibit 4.) In the Extension Agreement, EquiCann, Outco Labs, Outco Mendocino, or Fish made various representations including with respect to assets operated through defendants San Diego Naturals, LLC (SD LLC), or San Diego Natural, Inc. (SD Inc.) which are owned and controlled by Outco Labs, among other things. (FAC, ¶ 33.)

On August 31, 2021, with the consents of EHF, the EHP real property asset was transferred to defendant Nutritional High LLC (NH), subject the DoT and all subsequent agreements. (FAC, ¶ 34.) No money was loaned by EHF to NH. (Ibid.)

On March 13, 2023, Outco Labs and Outco Mendocino (collectively, Outco) answered the FAC generally denying its allegations and asserting twenty-six affirmative defenses.

On October 12, 2023, Outco Labs, Outco Mendocino, and EHP filed an answer to the FAC generally denying its allegations and asserting twenty-six affirmative defenses.

On May 22, 2024, EHF separately filed requests for dismissal of the complaint, without prejudice, as to defendants EquiCann III, LLC, Outco CMD LLC, and Palo Verde, only.

On September 11, 2024, the defaults of Fish, SD Inc., and SD LLC, were entered as requested by EHF.

On September 12, 2024, defendant Samuel Birch aka Austin Birch answered the FAC generally denying its allegations and asserting twenty-eight affirmative defenses.

On September 23, Fish, SD LLC, and SD Inc. (collectively, the SD Defendants) filed a motion to set aside the defaults entered against them. In support of the motion, the SD Defendants submit the declaration of their counsel, William L. Miltner (Miltner), who declares that he is the managing partner of Miltner & Menck, and the attorney in charge of all phases of litigation for this matter. (Miltner Decl., ¶ 1.) Miltner declares or effectively declares that on July 26, 2024, he received an email regarding a proof of service of summons as to the SD Defendants which Miltner promptly forwarded to Autumn Frye (Frye), another attorney in Miltner’s office, with the understanding that Frye would calendar the deadline to file a responsive pleading. (Id. at ¶ 4.) Though Miltner assumed that Frye had calendared the response deadline, Frye failed to do so and did not timely file a responsive pleading or request an extension. (Ibid.) As a result of Frye’s failure to calendar the deadline, the SD Defendants filed to timely file a responsive pleading. (Ibid.)

The motion is opposed by EHF.

Analysis:

The SD Defendants effectively contend that defaults were entered against each of them due to the mistake, inadvertence, or neglect of their counsel with respect to the timely filing of an answer or other response to the FAC. Though EHF contends in its opposition to the motion that Fish purportedly attempted to evade service of process, EHF does not present any information or evidence to dispute that the sole grounds for relief asserted in the motion is attorney mistake, inadvertence, or neglect with respect to the timely filing of a responsive pleading.

EHF further contends that the motion is procedurally deficient because it is not accompanied by a proposed responsive pleading. EHF also asserts that Miltner and Frye were served with two proofs of service for the SD Defendants, and that Miltner has fabricated claims of non-cooperation by EHF, failed to produce evidence demonstrating the date on which he was retained by the SD Defendants, has concealed his representation of the SD Defendants in this action, and has offered inadmissible hearsay and impermissibly vague arguments including with respect to whether any reliance on Frye to calendar a response deadline was reasonable. For these reasons, EHF argues, the motion should be denied.

Code of Civil Procedure section 473, subdivision (b) provides for both discretionary and mandatory relief. (Pagnini v. Union Bank, N.A. (2018) 28 Cal.App.5th 298, 302.) Relevant under the circumstances present here which do not show that any conduct by the SD Defendants resulted in the entry of the defaults at issue, “the court shall, whenever an application for relief is made no more than six months after entry of judgment, is in proper form, and is accompanied by an attorney’s sworn affidavit attesting to his or her mistake, inadvertence, surprise, or neglect, vacate any (1) resulting default entered by the clerk against his or her client, and which will result in entry of a default judgment, or (2) resulting default judgment or dismissal entered against his or her client, unless the court finds that the default or dismissal was not in fact caused by the attorney’s mistake, inadvertence, surprise, or neglect.” (Code Civ. Proc., § 473, subd. (b).) (Note: Undesignated code references herein shall be to the Code of Civil Procedure unless otherwise indicated.)

“The purpose of [the] mandatory relief provision is to alleviate the hardship on parties who lose their day in court due to an inexcusable failure to act by their attorneys. [Citation.] More recently, the Court of Appeal has stated the purpose was to relieve the innocent client of the burden of the attorney’s fault, to impose the burden on the erring attorney, and to avoid precipitating more litigation in the form of malpractice suits.” (Rodriguez v. Brill (2015) 234 Cal.App.4th 715, 723.) “By its terms, the mandatory provision applies when the dismissal is caused by an attorney’s mistake, inadvertence, surprise, or neglect, whether or not excusable.” (Jackson v. Kaiser Foundation Hospitals, Inc. (2019) 32 Cal.App.5th 166, 174; see also SJP Limited Partnership v. City of Los Angeles (2006) 136 Cal.App.4th 511, 519 (SJP) [section 473 requires the attorney’s conduct to be a cause in fact].)

There is no information to suggest that the assertions of Miltner, made under penalty of perjury, is untruthful. The evidence and information presented in the Miltner declaration is alone sufficient to demonstrate that inadvertence, mistake, or neglect on the part of counsel for the SD Defendants, and not any conduct of the SD Defendants, resulted in the entry of defaults against these defendants. (Martin Potts & Associates, Inc. v. Corsair, LLC (2016) 244 Cal.App.4th 432, 439 (Martin Potts) [mandatory relief under section 473 must be “confined to situations in which the attorney, rather than the client, is the cause of the default, default judgment, or dismissal”]; SJP, supra, 136 Cal.App.4th at pp. 519-520.) For these reasons, the Court finds that the defaults of the SD Defendants were in fact caused solely by the neglect of their counsel. (Vaccaro v. Kaiman (1998) 63 Cal.App.4th 761, 771; see also Cisneros v. Vueve (1995) 37 Cal.App.4th 906, 912 [noting that the mandatory provision of section 473 “is … a causation testing device”].) Under the circumstances present here, relief under section 473 is mandatory notwithstanding whether any neglect by counsel is inexcusable. (Martin Potts, supra, 244 Cal.App.4th at p. 438.)

The SD Defendants also submit, in support of their reply to the opposition of EHF, the declaration of Frye, in which Frye states that the only attorney identified on the proof of service of the summons to the SD Defendants was Miltner. (Frye Decl., ¶ 2.) Frye further states that she received the July 26, 2024, forwarding email from Miltner but failed to open the email and to calendar the deadline for the SD Defendants to file a responsive pleading. (Id. at ¶ 3.) Frye contends that the defaults of the SD Defendants was entered due to her mistake and neglect in failing to open the email forwarded by Miltner and to calendar the response deadline. (Ibid.)

Frye further asserts that on September 11, 2024, she attempted to file an answer on behalf of the SD Defendants which was rejected due to the entry of defaults against these defendants. (Frye Decl., ¶ 3.) A copy of the answer that Frye attempted to file is attached to the Frye declaration as exhibit A. Frye further declares that on September 12, 2024, she requested that counsel for EHF set aside the default of the SD Defendants and forwarded a proposed stipulation to that effect, but that counsel for EHF advised he was not authorized to do so. (Id. at ¶ 4.)

Though the information appearing in the Frye declaration could and should have been included with the moving papers (Code Civ. Proc., § 473, subd. (b); Hernandez v. First Student, Inc. (2019) 37 Cal.App.5th 270, 277), the information is not substantively different from the information presented in the opening memorandum and directly responds to the arguments presented in the opposition of EHF to the motion. Moreover, available information and evidence appears to suggest that counsel for EHF was notified of Frye’s attempt to file an answer on September 11, 2024. (See Frye Decl., exhibit A at PDF p. 6 [notification from One Legal stating that “Edward Morris” retrieved and partially viewed the answer on the filing date].) As the matters first raised in reply relate to issues and arguments raised in the opposition of EHF, and taking into consideration judicial efficiency and due process concerns, the Court will consider these matters.

“The policy of the law is to have every litigated cause tried on its merits; and it looks with disfavor on a party who, regardless of the merits of his cause, attempts to take advantage of the mistake, surprise, inadvertence, or neglect of his adversary.” (Reed v. Williamson (1960) 185 Cal.App.2d 244, 248 [also noting that Code of Civil Procedure section 473 “is remedial in its nature and is to be liberally constructed”].) “When the moving party promptly seeks relief and there is no prejudice to the opposing party, very slight evidence is required to justify relief.” (Ibid.; Mink v. Superior Court (1992) 2 Cal.App.4th 1338, 1343.)

Because the record before the Court demonstrates, without substantial conflict, that the defaults of the SD Defendants were caused solely by and resulted from the mistake, inadvertence, or neglect of Frye, section 473, subdivision (b), requires the Court to vacate the defaults. In addition, the motion was filed within six months of the entry of defaults and is therefore timely. (Code Civ. Proc., § 473, subd. (b).) EHF also has failed to set forth any reasoned factual or legal argument demonstrating why it would suffer prejudice if the relief requested in the motion was granted. (Zamora v. Clayborn Contracting Group, Inc. (2002) 28 Cal.4th 249, 258.)

Though the Court is presently inclined to grant the motion, there exist procedural deficiencies. The answer submitted as exhibit A to the Frye reply declaration identifies Samuel Birch, Fish, and SD LLC as the answering parties, but does not include SD Inc. as an answering party. Therefore, SD Inc. has failed to submit a copy of the pleading it proposes to be filed. The Court will require SD Inc. to submit a copy of its proposed pleading. (See Code Civ. Proc., § 473, subd. (b).) To permit sufficient time for SD Inc. to file and serve a copy of its proposed pleading, the Court will briefly continue the hearing on the motion. The pleading which SD Inc. proposes to file in this action may be attached to a declaration of its counsel. The parties shall not be permitted to file any additional papers in support of or in opposition of the motion apart from the proposed pleading authorized herein.