SC BLOOM NETWORK, INC. v. OLD REPUBLIC TITLE CO.

I. BACKGROUND AND FIRST AMENDED COMPLAINT

This case, and an associated case filed in Santa Clara County in 2020, are the culmination of allegedly fraudulent business transactions related to a cannabis business. Will Sump and Nate Ready formed RS Enterprise, LLC (“RS Enterprise”) to purchase and hold title to real property at 236 Encinal Street. Sump was the majority member and chief executive and Ready the minority member and secretary. RS Enterprise bought the property on August 24, 2018. (FAC at ¶¶ 8-11.) The FAC alleges “Nate Ready embarked on a scheme to convey the Property to KJM Properties, LLC, a limited liability company owned by his parents and his aunt.... .” (FAC at ¶ 14.)

Ready retained attorney Dean Sutton to assist. Nate Ready and his mother drafted a purchase contract for KJM Properties’ purported purchase of the property for $685,000.00. Then they opened an escrow with First American Title. (FAC at ¶¶ 14- 16.) When asked to sign the escrow documents by First American, Sump refused. “Nate Ready and his family members decided to clandestinely remove Mr. Sump from RS Enterprise, LLC and then effectuate the conveyance.” This included Mr. Sutton and Ready conducting a “special meeting” from which Sump was excluded; Ready voted to divest Sump of his membership and voting interest.

First American still declined to complete the transaction because it identified a disagreement between the managers and members of the LLC. (FAC at ¶¶ 17- 20.)

Sutton allegedly turned to defendant Old Republic Title (“Old Republic” or “ORTC”) to open escrow for the conveyance of the property and included the original purchase contract and an operating agreement dated October 31, 2018 that indicated the “restated” articles of organization had recently been signed but not yet filed with the Secretary of State and that Nate Ready was the sole managing member. (FAC at ¶ 21.)

The FAC alleges that Old Republic went ahead with the fraudulent transaction and caused to be recorded a grant deed from RS Enterprise to KJM, conveying the property. (FAC at ¶¶ 29-30.)

In May 2020, Will Sump, as an individual, RS Enterprise, LLC, SC Bloom Network, Inc., and R&V Consulting, Inc. sued various individuals and entities including Nate Ready, KJM Properties, LLC, RS Enterprise, R&V Consulting, Rice, Luxon, and Bolster-Grant, LLP and Accountbl, Inc. in Santa Clara County Superior Court. This action alleged 15 causes of action and asserted that the defendants conspired to defraud Sump of ownership in real property involving three separate addresses, as well as the voting and membership interest in RS Enterprise. Old Republic was not named as a defendant in this action. (Defendant’s RJN, #4.) On November 7, 2023, the first cause of action to the complaint and cross-complaint was tried before the court in a bench trial. The court granted declaratory relief in favor of plaintiffs and

LAW AND MOTION TENTATIVE RULINGS DATE: MAY 22, 2026 TIME: 8:30 A.M.

found that removal of Sump was unlawful, void, and invalid to effectuate the transfer of the property. The judgment reinstated his position in RS Enterprise. (Defendant’s RJN, #5.)

Nearly five years after the 202 case was filed, plaintiffs filed this complaint against Old Republic – in this county – for its role in the 2018 transaction. Plaintiffs contend that they “did not have or discover facts giving rise to an actionable claim for negligence against ORTC until after receiving ORTC’s response to a subpoena issued on April 8, 2022.” (FAC at ¶ 32.) The FAC alleges one cause of action for negligence against Old Republic, asserting it breached its duty of care to plaintiffs because it was in possession of information that Sump was the Chief Executive Manager of RS Enterprise and had been told that Sump had earlier refused to sign the necessary documents to effectuate the proposed sale.

The FAC asserts that Old Republic was aware that First American had not completed the transaction and failed to follow its own internal procedure when presented with the red flags that existed in connection with this transaction. (FAC at ¶¶ 35-37.)

II. DEMURRER AND MOTION TO STRIKE

Old Republic demurs to the complaint, arguing the cause of action for negligence is timebarred and that the FAC does not allege any actionable breach of duty by Old Republic because an escrow holder’s duties are limited to following escrow instructions and it has no obligation to investigate the transaction.

Old Republic first argues the negligence claim is time-barred because the applicable twoyear statute of limitations on a claim for professional negligence has run. Plaintiffs assert they were injured when the property was fraudulently transferred through Old Republic’s escrow on November 20, 2018. Thus, the statute ran on May 19, 20211 but this case was not filed until April 7, 2025.

Plaintiffs argue in opposition that their FAC pleads facts supporting the proposition that they lacked the ability, standing, and/or entitlement to prosecute RS Enterprise’s claims until RS Enterprise was reinstated by court order on November 7, 2023, citing Corporations Code section 17709.02. (Opp. at p. 3-4.) Plaintiffs maintain that though they discovered Old Republic’s wrongful conduct on or about May 2022, they did not have standing to prosecute the action until the judgment in the Santa Clara County case. (Id.) Plaintiffs contend at the very least there is an actual dispute as to when the negligence cause of action accrued which should not be decided on demurrer.

1 An additional 180 days was noted and included by defendant in its calculation pursuant to Covid Emergency Rules 9(a).

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In reply, Old Republic asserts that plaintiffs’ argument concerning standing fails as a matter of law because plaintiffs successfully filed and pursued both direct and derivative claims in their Santa Clara County action against 13 defendants and third-party professionals, including an accountant and their firm’s and RS’s former legal counsel. Old Republic contends plaintiffs have not explained why they were able to bring the Santa Clara County case against all defendants but could not bring a claim against Old Republic.

III. LEGAL STANDARD

“A demurrer tests the pleading alone, and not the evidence or the facts alleged.” (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.) “For that reason, we ‘assume the truth of the complaint's properly pleaded or implied factual allegations.’ [Citation.] We also ‘consider judicially noticed matters.’ [Citation.] ‘In addition, we give the complaint a reasonable interpretation, and read it in context.’ [Citation.]” (E-Fab, Inc. v. Accountants, Inc. Services (2007) 15 Cal.App.4th 1308, 1315.)

“A complaint, with certain exceptions, need only contain a ‘statement of the facts constituting the cause of action, in ordinary and concise language’ (Code Civ. Proc., § 425.10, subd. (a)(1)) and will be upheld ‘so long as [it] gives notice of the issues sufficient to enable preparation of a defense’ [Citation.]” (Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th 841, 848, fn. 3.)

IV. DISCUSSION

A. The statute of limitations bars the allegations

“Where the dates alleged in the complaint show the cause of action is barred by the statute of limitations, a general demurrer lies.” Further, “[t]he running of the statute must appear ‘clearly and affirmatively’ from the fact of the complaint.” (Weil & Brown Civ. Proc. Before Trial (TRG 2025) § 7.50.)

“A cause of action for professional negligence is generally governed by the two-year statute of limitations under Code of Civil Procedure section 339, subdivision 1 for an ‘action upon a contract, obligation or liability not founded upon an instrument of writing.’ [Citation.]” (Thomson v. Canyon (2011) 198 Cal.App.4th 594, 606.)

As pointed out by defendant, plaintiffs acknowledge the statute of limitations as a potential bar to their claims but argue in the FAC that they did not know of Old Republic’s involvement until after Old Republic’s responses to a subpoena issued on April 8, 2022 and that

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they “did not have the ability, standing, and/or entitlement to begin and prosecute an action on such claims until RS Enterprise LLC was reinstated by court order on or about November 7, 2023.” (FAC at ¶ 32.) Plaintiffs contend that they could not have filed a derivative action on RS’s behalf citing Sirott v. Superior Court (2022) 78 Cal.App.5th 371. “Because Mr. Sump was not continuously a member during the relevant period, he could not maintain a derivative action until after the LLC was reinstated and his membership was restored.” (Opp. at p. 4.)

Plaintiffs also point to the order on Sump’s, in his individual capacity, motion for summary adjudication in the Santa Clara County action, arguing that court found that Sump was only a purported former member of the dissolved LLC and had no standing to bring his claim. “Plaintiff Sump (as only a purported former member of this admittedly dissolved LLC) has no standing to bring this claim [for quiet title] as he never held tile to or interest in the real property in his individual capacity.” (Plaintiffs’ RJN, Ex.

B.) Old Republic argues that the language in the order on that MSA is inapplicable to the argument it is raising in this demurrer because Sump, in that motion, was seeking to quiet title in his individual capacity, not on behalf of RS Enterprise. The property was never held by Sump individually. Old Republic maintains there is an exception to the “continuous membership” standing requirement where a former member asserts they were wrongfully deprived of their ownership interest, such as in this case. (Reply at p. 7.)

“Section 17709.02 establishes the requirements for a member to pursue a derivative suit on behalf of a limited liability company. [Citation]. The statute provides that ‘[n]o action shall be instituted or maintained in right of any domestic or foreign limited liability company by any member of the limited liability company unless’ two conditions are met.” (Sirott, supra, 8 Cal.App.5th at p. 381.) “[S]ection 17709.02 requires both ‘contemporaneous’ membership— meaning the party seeking to bring a derivative claim was a member in the LLC at the time of the challenged transaction (or became a member by gaining an interest from a party who was a member at the time of the transaction)—and ‘continuous’ membership—meaning the party was a member throughout the litigation of a derivative claim.” (Id. at p. 381-382.)

Plaintiff asserts that because he was wrongfully removed as a member of the LLC in 2019 and the LLC dissolved, he did not have standing to bring the action until the court in Santa Clara County reinstated the LLC and his membership.

The problem with this argument is that Sump, on his behalf and on behalf of RS Enterprise, LLC, has already brought an action against different defendants involved in this same transaction. Plaintiffs were successful in this endeavor as demonstrated by the trial court’s judgment. (Defendant’s RJN, #5.) Plaintiffs were aware at the time of the 2020 suit of Old Republic’s involvement with the transaction as shown by the detailed, verified complaint, in that case. “On or about November 16, 2018, NATHANIEL READY unlawfully and without authorization instructed Old Republic Title Company to transfer the Property’s Deed of Title.

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NATHANIEL READY failed to disclose to Old Republic the events of the prior attempted transfer to First American Title.” (See, Defendant’s RJN #4, Ver. Compl. at ¶ 87.) Plaintiffs’ argument regarding its lack of standing is incongruous to the fact that plaintiffs already successfully brought an action based upon the fraudulent transaction. They appear to have simply left out Old Republic while prosecuting that action.

Old Republic cites Haro v. Ibarra (2009) 180 Cal.App.4th 823, which appears applicable here to address any potential standing issue. “Appellants have alleged equitable considerations that warrant an exception to the continuous ownership requirement.” (Haro, supra, 180 Cal.App. 4th at p. 837.) In Sirott, the First District affirmed the equitable exception enunciated in Haro. “Although the trial court concluded that the plaintiffs ‘lacked standing because they had not paid the assessment and were no longer shareholders,’ Haro concluded that they had ‘alleged equitable considerations that warrant[ed] an exception to the continuous ownership requirement’ and reversed the dismissal of their suit. [Citation.]” (Sirott, supra, 78 Cal.App. 5th at p. 385.)

It appears that plaintiffs could have brought their negligence claim against Old Republic at the same time they brought their other claims in Santa Clara County. The Court does not find that the 2020 trial court order in connection with Sump’s motion for summary adjudication addressed the standing requirement at issue in this motion because that motion was brought by Sump individually.

The demurrer is granted without leave to amend because there is no indication that granting leave to amend would effectively address the statute of limitations issue. The Court declines to reach the other arguments raised in the demurrer concerning the issue of duty, as well as arguments in the motion to strike. The Court finds that applicable statutes of limitations bars plaintiffs’ claim for negligence.

V. DEFENDANT’S REQUEST FOR JUDICIAL NOTICE

Ex.

1. Deed of Trust recorded in Santa Cruz County on August 24, 2018, as document no. 2018-0025958. Granted.

Ex.

2. Deed of Trust recorded in Santa Cruz County on October 1, 2018, as document no. 2018-0029701. Granted.

Ex.

3. Deed of Trust recorded in Santa Cruz County on October 1, 2018, as document no. 2018-0029702. Granted.

Ex. 4. 2020 Complaint in Sump et al. v. Ready et al. Santa Clara County Superior Court, case no. 20CV366437. Granted.

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Ex.

5. Judgment entered in case no. 20CV366437. Granted.

VI. PLAINTIFFS’ REQUEST FOR JUDICIAL NOTICE

1. Order pursuant to Government Code section 12261, subdivision (a)(1) reinstating RS Enterprise, LLC, entered by the court on November 7, 2023, in case no. 20CV366437, Ex. A: Granted.

2. Order Re: Motion for Summary Adjudication entered by the court on July 29, 2021, in the 2020 lawsuit (20CV366437), Ex. B: Granted.