People v. Pacific Landmark

Opinion

INTRODUCTION

The City of Los Angeles and the People of the State of California (collectively, the City) brought a red light abatement action (Pen. Code, § 11225) against the operators of a business and the owners of the strip mall where the business was located. The action alleged that the business was a front for prostitution and an illegal massage parlor. The trial court issued a preliminary injunction prohibiting the operation of a massage parlor or a house of prostitution. Pacific Landmark, LLC (Pacific), a limited liability company and owner of the property, and Ron Mavaddat, Pacific’s manager

(E) In a meeting held in January 2003 with counsel for Pacific, the deputy city attorney summarized the massage parlor and prostitution activity at the premises, and gave an overview of the City’s nuisance abatement program and the Red Light Abatement Law. Counsel for Pacific thereafter instructed his client to serve defendants with a notice to perform covenant or surrender possession of the premises. Later that month, Pacific’s attorney sent by facsimile a letter indicating that the tenant had requested a change in use from medical offices to business offices for a publication called “the Weekly Press,” and promised that the tenants would comply with the lease and conduct a valid business on the site. Nonetheless, the illegal activity continued to occur at the premises as reflected by the arrest reports through May 2003.

2. The temporary restraining order.

Appellants opposed the issuance of a temporary restraining order. They argued that as lessor, and as manager of the lessor, neither Pacific nor Mavaddat respectively, operated or had an interest in Victoria’s Health Care or the Weekly Press, nor engaged in or condoned the conduct associated with those businesses.

In his supporting declaration, Mavaddat averred that he was responsible for leasing the premises to Melikyan. Once informed of the activities occurring at Victoria’s Health Care, appellants fully cooperated with law enforcement to remedy the situation. Mavaddat served a notice to quit on Melikyan on January 8, 2003. Appellants did not thereafter institute unlawful detainer proceedings against defendants because appellants never received notice or communication from anyone, or had any knowledge, that illegal activity continued at the premises. The first time appellants learned that the illegal activity had not ceased was when the City served them with the complaint in this action in July 2003.

On July 15, 2003, the trial court issued a temporary restraining order pending hearing on the injunction request. The court restrained appellants and defendants and their agents from owning, possessing, controlling, leasing, or operating a business which permits prostitution, a disorderly house, or a massage business without a valid permit.

In opposing the request for preliminary injunction, appellants argued that it was moot because, after the restraining order was issued, the illegal activity ceased and no longer posed a threat of harm. Declarations showed that Victoria’s Health Care and the Weekly Press had vacated the premises the same day the restraining order was issued. Mavaddat changed the locks on the door and removed all signs. In September 2003, the district attorney and a police detective inspected the premises to verify that they were empty. Appellants asserted, “it is not now nor has it ever been the intent of Pacific, the owner of the subject property, [to] allow the subject premises to be used for any criminal and illegal activity.”

The City replied that the issue was far from moot. The City’s supporting evidence showed that signs advertising Victoria’s Health Care and its “services” remained posted at the strip mall in September 2003. Although it appeared that the tenants had vacated, the status of the premises remained “in limbo.” The original term of the lease did not expire for a year, after which the tenant had an option for five more years. Appellants had never provided the City with a lease termination. There had been no guarantees, evidence, or allegations that the property would not be leased to someone with ties to Spencer and Melikyan, or that appellants would disallow establishments like Victoria’s Health Care or other such enterprises to operate at the premises. The City wanted relief to prevent appellants from allowing defendants or others like them from setting up an unlawful business at the property.

Following a hearing, the court issued the preliminary injunction on September 30, 2003. In so doing, the court stated that by “permitting their premises to be used as a house of prostitution for an extended period of time, [appellants] have shown that they are likely to continue to do so unless a preliminary injunction is issued by this court.”

The preliminary injunction enjoins Pacific and Mavaddat and their agents from owning, leasing, maintaining, or managing Pacific’s property in a manner that permits prostitution, or the performance of massage therapy thereon. The injunction orders appellants to cooperate with all law enforcement investigations and to comply with all laws and Los Angeles Municipal Code regulations. Appellants’ notice of appeal was timely filed.

CONTENTIONS

Appellants contend that (1) the trial court abused its discretion in issuing a preliminary injunction because, as the premises had been vacated, there is no

The limited liability company “ ‘consists] of at least two “members” [citation] who own membership interests [citation]. The company has a legal existence separate from its members . . . but ... the members . . . actively participate in the management and control of the company [citation]’ [citation]” (PacLink Communications Internat., Inc. v. Superior Court, supra, 90 Cal.App.4th at p. 963), “[u]nless the articles of organization state that the management is vested in a manager or managers.” (9 Witkin, Summary of Cal. Law (2004 supp.) Partnership, § 152, p. 338.)

The company’s articles of organization may, but need not, provide that the business and affairs of the company are to be managed by one or more managers. (Corp. Code, § 17151, subd. (a).) The managers need not be members of the company. (Ibid.) “Every manager is an agent of the limited liability company for the purpose of its business or affairs . . . .” (Corp. Code, § 17157, subd. (b)(2).) The manager owes the same fiduciary duties to the limited liability company and to its members as a partner owes to a partnership and to the partners of the partnership. (Corp. Code, § 17153.)

While generally members of a limited liability company are not personally liable for judgments, debts, obligations, or liabilities of the company “solely by reason of being a member” (Corp. Code, § 17101, subd. (a)), they are subject to liability under the same circumstances and to the same extent as corporate shareholders under common law principles governing alter ego liability and are personally liable under the same circumstances and extent as corporate shareholders. (§ 17101, subd. (b); 9 Witkin, Summary of Cal. Law, supra, Partnership, § 140, pp. 328-329.) Also, the Act “do[es] not relieve a member from liability arising from (1) the member’s tortious conduct, or (2) the terms of a member’s written guarantee or contractual obligation.” (9 Witkin, supra, Partnership, § 140, p. 329, citing Corp. Code, § 17101, subd. (c).) By contrast, the Act does not contain a similar provision specifically exposing managers to personal liability.

Mavaddat focuses on Corporations Code section 17158, subdivision (a) to contend that the trial court erred in issuing the nuisance abatement injunction against him because that section exempts him from personal liability for any judgments against or obligations of the limited liability company he manages.

Corporations Code section 17158 reads, “No person who is a manager or officer or both a manager and officer of a limited liability company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the limited liability company,

Although research has revealed no California case to address this issue, we hold that whereas managers of limited liability companies may not be held liable for the wrongful conduct of the companies merely because of the managers’ status, they may nonetheless be held accountable under Corporations Code section 17158, subdivision (a) for their personal participation in tortious or criminal conduct, even when performing their duties as manager.

In interpreting a statute, we apply long-established principles: “ ‘The fundamental rule ... is to ascertain the intent of the Legislature in order to effectuate the purpose of the law. ... In doing so, we first look to the words of the statute and try to give effect to the usual, ordinary import of the language, at the same time not rendering any language mere surplusage. The words must be construed in context and in light of the nature and obvious purpose of the statute where they appear. . . . The statute “ ‘must be given a reasonable and commonsense interpretation consistent with the apparent purpose and intention of the Legislature, practical rather than technical in nature, and which, when applied, will result in wise policy rather than mischief or absurdity. . . ’ [Citations.]” (Klajic v. Castaic Lake Water Agency (2001) 90 Cal.App.4th 987 , 997 [ 109 Cal.Rptr.2d 454 ]; see Dyna-Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379 , 1386-1387 [ 241 Cal.Rptr. 67 , 743 P.2d 1323 ].)

The plain language of Corporations Code section 17158, subdivision (a), above quoted, expresses a circumscribed protection from liability. The phrase declaring managers exempt from liability is qualified by the phrase “solely by reason of being a manager . . . .” Reading the language of section 17158, subdivision (a) as a whole, it is clear that managers were not intended to be held liable for the wrongs their companies commit simply because of their status as managers. The qualifying clause, however, does not preclude personal liability for a manager’s own conduct. At least one commentator appears to agree that managers may be held liable for their personal wrongful conduct. (Forming & Operating California Limited Liability Companies (Cont.Ed.Bar 2005) § 6.28, pp. 212-213.)

Our construction is consistent with Corporations Code section 17155. Section 17155 allows a limited liability company to provide for

We agree with this reasoning. In California, Corporations Code section 17158, subdivision (a) does not preclude holding managers liable for their participation in wrongful conduct when acting on behalf of the company.

By way of analogy (PacLink Communications Internal, Inc. v. Superior Court, supra, 90 Cal.App.4th at p. 963 [Act incorporates many provisions of the Corporations Code]), it has long been the law elsewhere, that although officers cannot be held liable solely by virtue of their corporate title, they can and are held personally liable for actively participating in criminal and tortious conduct. (See United. States v. Park (1975) 421 U.S. 658 , 674 [ 44 L.Ed.2d 489 , 95 S.Ct. 1903 ] [jury properly instructed that the defendant’s guilt cannot be “solely on the basis of [his] position in the corporation;” but properly when the defendant “ ‘had a responsible relation to the situation,’ and ‘by virtue of his position . . . had . . . authority and responsibility’ to deal with the situation”].) In California, “[directors or officers of a corporation do

It is fair to assume that the Legislature was aware of the prior cases concerning corporate officer and director liability when it enacted section 17158, subdivision (a) in the Corporations Code, and intended to codify existing case law when it utilized similar language in section 17158, subdivision (a) to describe the liability of limited liability company managers. (City of Santa Cruz v. Municipal Court, supra, 49 Cal.3d at p. 88.) Certainly, there is no indication that the Legislature intended to confer more protections for managers of limited liability companies than for corporate officers and directors. Therefore, consistent with analogous principles of corporate law and based on the words of the statute itself, we hold that managers may not be held liable for tortious or criminal wrongs committed by the company merely because of their status as managers, but may be personally liable for their participation in those wrongs.

Turning to Mavaddat, the preliminary injunction was not imposed on him solely because of his status as manager of Pacific, but because of his personal involvement in allowing the nuisance to persist. By his own admission, Mavaddat occupied a prominent and influential position at Pacific. Mavaddat declared he had extensive knowledge and control over Pacific’s affairs, is “thoroughly familiar with all of its operations and business . . . .” He selected and authorized counsel to appear at the meeting with the City’s attorney. Mavaddat had full responsibility for and authority over the property where the nuisance occurred. He leased the premises to Melikyan, and his name appears on the lease as the agent of Pacific. He retained the right under the lease to inspect the premises to determine its compliance with the lease and all laws and ordinances. It was Mavaddat who served the notice to perform covenant and yet failed thereafter to inspect the premises to ascertain whether defendants had complied with the notice. Mavaddat served the notice to quit, arranged to have the locks changed and signs removed after defendants moved out, and intended to arrange for another tenant to lease the

DISPOSITION

The order is affirmed.

Klein, P. J., and Croskey, J., concurred.