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

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 06/30/2025 Hearing on Demurrer in Department 54

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 be forward the form to the Court Reporter’s Office and an official reporter will be provided.

Tentative Ruling: Defendants The Smithfield Group, Inc. (“TSG”) and Jock Paton’s (“Paton”) (collectively “Defendants”) demurrer to Plaintiffs’ third amended complaint (“3AC”) is ruled upon as follows. Defendants’ request for judicial notice is GRANTED as to the existence of the documents requested. This is a direct and derivative action filed by twenty-one Plaintiffs against TSG, Paton, and nominal Defendant Pure Safety Group, Inc. (“PSG”) for breach of fiduciary duty and fraud claims. Defendants previously demurred to Plaintiffs’ second amended complaint (SAC), which demurrer was sustained, in part, with leave to amend. (August 2, 2024 Order.)

Defendants now demur to the 3AC on the following grounds: DEMURRER TO SECOND CAUSE OF ACTION 1. The second cause of action for Fraudulent Misrepresentation fails to allege facts sufficient to constitute a cause of action against each Defendant. Cal. Civ. Proc. Code § 430.10(e). DEMURRER TO THIRD CAUSE OF ACTION 2. The third cause of action for Intentional Concealment fails to allege facts sufficient to constitute a cause of action against each Defendant. Cal. Civ. Proc. Code § 430.10(e). DEMURRER TO FOURTH CAUSE OF ACTION 3.

The fourth cause of action for Negligent Misrepresentation fails to allege facts sufficient to constitute a cause of action against each Defendant. Cal. Civ. Proc. Code § 430.10(e). (Demurrer, 2:4-14.)

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 06/30/2025 Hearing on Demurrer in Department 54

Plaintiffs oppose the motion.

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 “tests the pleadings alone and not the evidence or other extrinsic matters.” (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) “If the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated, that aspect of the complaint is good against demurrer.' (Quelimane Co. v.

Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38-39; Bagatti v. Dept. of Rehabilitation (2002) 97 Cal.App.4th 344, 352.) 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 (Blank); Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1111-1112.) The Court treats as true not only the complaint's material factual allegations, but also facts that may be implied or inferred from those expressly alleged. (Amarel v. Connell, supra, 202 Cal.App.3d at p. 141.) “A court will not consider facts which have not been alleged in the complaint unless they may be reasonably inferred from the matters which have been pled or are proper subjects of judicial notice.” (Hall v.

Great Western Bank (1991) 231 Cal.App.3d 713, 722, n. 7.) Rather, “facts not alleged are presumed not to exist.” (Schick v. Lerner (1987) 193 Cal.App.3d 1321, 1327.) Extrinsic evidence may not properly be considered on demurrer. (Ion Equipment Corp. v. Nelson (1980) 110 Cal. App. 3d 868, 881; Hibernia Savings & Loan Soc. v. Thornton (1897) 117 Cal. 481, 482.) 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, supra, 39 Cal. 3d at 318; William S.

Hart Union High School Dist. v. Regional Planning Com. (1991) 226 Cal.App.3d 1612, 1616, fn.2.) The Court is to give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. (Blank, supra, 39 Cal.3d at p. 318) 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, 733, citation omitted.) A demurrer admits the truth of all

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 06/30/2025 Hearing on Demurrer in Department 54

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.)

Analysis

Fraudulent Misrepresentation and Negligent Misrepresentation The elements of intentional/negligent misrepresentation are: (1) misrepresentation; (2) knowledge of falsity (for negligent, no reasonable ground for belief in its truth); (3) intent to defraud; (4) justifiable reliance; and (5) resulting damage. (Lazar v. Super. Ct. (1996)12 Cal. 4th 631, 638; West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal. App. 4th 780, 792 (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. (3AC, ¶¶ 57-58, 76-77.)

These allegations were also previously alleged in the SAC. Defendants again demur on the ground that Plaintiffs fail to plead fraud with specificity. 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.” (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 to the SAC was sustained for failure to sufficiently allege justifiable reliance was SUSTAINED with leave to amend. The Court’s order sustaining the demurrer to the SAC on this ground stated: 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.

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 06/30/2025 Hearing on Demurrer in Department 54

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 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. (August 2, 2024 Order, p.11-12.) In the 3AC, Plaintiffs leave paragraphs 31 and 5 unchanged. Plaintiffs added a paragraph (¶39), alleging: Defendants represented that (1) Guardian was effectively insolvent; (2) Guardian needed a major capital infusion; (3) the Rescue Capital Package was the only way to save the company; and (4) the Plaintiff Group Funding Proposal was simply “not viable” (without explanation or reason).

In reliance on these representations, the Plaintiff Funding Group forewent proposing any additional alternative funding solutions

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 06/30/2025 Hearing on Demurrer in Department 54

beyond their first proposal, which TSG and Guardian’s board rejected. According to Defendants, if the Rescue Capital Package was not approved, Guardian would face certain financial ruin. In reliance on these representations, the Plaintiff Funding Group did not propose a new funding solution. Further, at the time the Rescue Capital Package was revealed, Defendants concealed board minutes, financial records, and other details regarding Defendants’ vetting and approval of the Rescue Capital Package from Plaintiffs.

Plaintiffs were also unaware that the three TSG-related members of Guardian’s board of directors (Paton, Arney and Ameler) did not recuse themselves from the vote on the Rescue Capital Package, even though the Rescue Capital Package included several provisions which were beneficial to TSG, but detrimental to Guardian (such as the grant of equity in Guardian to TSG). These serious conflicts of interest and self-dealing by Defendants were undisclosed to Plaintiffs. The only explanation Defendants gave to Plaintiffs as to why they selected the Rescue Capital Package over the Plaintiff Group Funding Proposal was that the latter was simply “not viable.” Plaintiffs were thus kept in the dark as to the conflicts of interest and self-dealing engaged in by TSG and Paton.

If Plaintiffs had received the material information that was withheld, Plaintiffs would have taken steps to expose the conflicts and self-dealing inherent in the Rescue Capital Package to all of Guardian’s shareholders, saving those shareholders from approving/ratifying the Rescue Capital Package on false pretenses and incomplete information. (3AC, ¶39.) While Plaintiffs now allege, “Defendants represented that (1) Guardian was effectively insolvent; (2) Guardian needed a major capital infusion; (3) the Rescue Capital Package was the only way to save the company; and (4) the Plaintiff Group Funding Proposal was simply “not viable” (without explanation or reason).

In reliance on these representations, the Plaintiff Funding Group forewent proposing any additional alternative funding solutions beyond their first proposal ”(3AC, ¶39; Emphasis added), Defendants argue that Plaintiffs do not allege that Defendants knew that the purported “representations” relied upon by Plaintiffs were false. Indeed, Plaintiffs affirmatively allege that Guardian was effectively insolvent. (3AC, ¶28). Defendants also argue that Plaintiffs also fail to allege facts to show that Defendants knew that a representation that “the Plaintiff Group Funding Proposal was simply ‘not viable' (without explanation or reason)” was false.

Plaintiffs further fail to allege that the representation was actually false. The justifiable reliance that must be alleged to support a fraud claim must be justifiable reliance on a representation that Defendants knew was false. Plaintiff has failed to allege facts to support a fraud claim in the 3AC.

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 06/30/2025 Hearing on Demurrer in Department 54

While Plaintiffs have had multiple attempts to resolve the deficiencies in their complaint, the Court concludes that it is possible that the deficiencies can be resolved through amendment. Defendants’ demurrer to Plaintiffs causes of action for intentional and negligent misrepresentation are SUSTAINED WITH LEAVE TO AMEND. 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.) As to purported concealment, Plaintiffs allege (as alleged in prior complaints): Defendants failed to disclose special facts relating to (a) [PSG’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... (3AC, ¶ 65, 78.) Having been previously challenged for failing to include factual allegations of what “special facts” should have been disclosed and when, what statements were thereby rendered “misleading” and how they were misleading, and Plaintiffs reliance on such omissions, Plaintiffs allege in paragraph 39: at the time the Rescue Capital Package was revealed, Defendants concealed board minutes, financial records, and other details regarding Defendants’ vetting and approval of the Rescue Capital Package from Plaintiffs.

Plaintiffs were also unaware that the three TSG-related members of Guardian’s board of directors (Paton, Arney and Ameler) did not recuse themselves from the vote on the Rescue Capital Package, even though the Rescue Capital Package included several provisions which were beneficial to TSG, but detrimental to Guardian

SUPERIOR COURT OF CALIFORNIA COUNTY OF SACRAMENTO

23CV002266: VELASCO, et al. vs THE SMITHFIELD GROUP., A CALIFORNIA CORPORATION, et al. 06/30/2025 Hearing on Demurrer in Department 54

(such as the grant of equity in Guardian to TSG). These serious conflicts of interest and self-dealing by Defendants were undisclosed to Plaintiffs. Plaintiffs were thus kept in the dark as to the conflicts of interest and self-dealing engaged in by TSG and Paton. If Plaintiffs had received the material information that was withheld, Plaintiffs would have taken steps to expose the conflicts and self-dealing inherent in the Rescue Capital Package to all of Guardian’s shareholders, saving those shareholders from approving/ratifying the Rescue Capital Package on false pretenses and incomplete information.

These are similar to allegations made in the 2AC that Paton or another person “refused to provide additional information requested by Plaintiffs,” (2AC, ¶ 26), Plaintiffs were not given board minutes (2AC, ¶ 36), and requests for “accurate and up-to-date financials” (2AC, ¶ 37) and “additional information as to Guardian’s sales and overall business” were ignored (2AC, ¶ 38). Defendants argue that the 3AC continues to fail to meet strict pleading standards, and the Court agrees. In addition, in the order on the demurrer to the SAC, the Court stated, “[T]here 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.” (August 2, 2024 Order.) Defendants note, “The 3AC ignores the Court’s admonition that the 2AC did not allege “that Plaintiffs did not invest their pro rata shares.” August 2, 2024 Order at 14. Again, the 3AC still does not allege for each Plaintiff (or any Plaintiff) if they invested their pro rata shares.” (Defendants’ Memorandum, 13:15-17.)

Plaintiffs do not address this argument by Defendants. The Court finds that Plaintiffs have not resolved the deficiencies in their claim for negligent misrepresentation. Again, while Plaintiffs have had multiple attempts to resolve the deficiencies in their complaint, the Court concludes that it is possible that the deficiencies can be resolved through amendment. Defendants’ demurrer to Plaintiffs’ cause of action for intentional concealment is SUSTAINED WITH LEAVE TO AMEND. Plaintiffs may file and serve a fourth amended complaint (“4AC”) by no later than July 10, 2025, Response to be filed and served within 30 days thereafter, 35 days if the 4AC is served by mail.

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