Judge: Alison Mackenzie, Case: 24STCV12552, Date: 2024-10-15 Tentative Ruling

Case Number: 24STCV12552    Hearing Date: October 15, 2024    Dept: 55

NATURE OF PROCEEDINGS: Hearing on Chohyun Lee’s Demurrer with Motion to Strike

The Demurrer – with Motion to Strike (CCP 430.10) filed by Chohyun Lee on 8/28/24 is Sustained in Part and Overruled in Part.

The Motion to Strike (not initial pleading) filed by Chohyun Lee on 8/28/24 is Granted in Part and Denied in Part.

BACKGROUND

Plaintiff Chohyun Lee brought this action against Defendant Paul Woo Hyun Kim, alleging damages resulting from their business relationship.

The causes of action are: (1) Breach of Contract; (2) Breach of the Covenant of Good Faith and Fair Dealing; (3) Breach of Oral Contract; (4) Common Count; (5) Fraud – Intentional Misrepresentation; (6) Fraud – False Promise Without Intent to Perform; (7) Fraud – Negligent Misrepresentation; and (8) Unjust Enrichment. 

Kim filed a First Amended Cross-Complaint alleging: (1) Breach of Contract; (2) Breach of Fiduciary Duty; (3) Negligent Misrepresentation, (4) Fraud; and (5) Negligence.

The motion now before the Court is Lee’s Demurrer with Motion to Strike. Kim opposes, and Lee filed a reply. 

LEGAL STANDARD

When considering demurrers, courts read the allegations liberally and in context. Wilson v. Transit Authority of City of Sacramento (1962) 199 Cal.App.2d 716, 720-21. In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994. “A demurrer tests the pleading alone, and not on the evidence or facts alleged.” E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315. As such, courts assume the truth of the complaint’s properly pleaded or implied factual allegations. Ibid. However, it does not accept as true deductions, contentions, or conclusions of law or fact. Stonehouse Homes LLC v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 538. “When the facts are undisputed, as they are deemed to be on a ruling on a demurrer, the interpretation of a contract … is a question of law.” Hervey v. Mercury Casualty Co. (2010) 185 Cal.App.4th 954, 962-963.

Further, the court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike any irrelevant, false, or improper matter inserted in any pleading. Code Civ. Proc., § 436(a). The court may also strike all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. Id., § 436(b). The grounds for a motion to strike are that the pleading has irrelevant, false, or improper matter, or has not been drawn or filed in conformity with laws. Id. § 436. The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. Id. § 437.

ANALYSIS

I. Demurrer

A. Breach of Fiduciary Duty

First, Lee argues that Kim’s claim fails to state a cause of action because Lee did not owe Kim a fiduciary duty. 

“The elements of a breach of fiduciary duty cause of action are: (1) existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damage proximately caused by the breach.” Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1086.

In the Cross-Complaint, Kim alleges that Lee owed him a fiduciary duty “as partners pursuant to the Partnership Agreement.” FACC ¶ 10-11. Lee contends that the “Partnership Agreement” did not create a legal partnership despite its title. Instead, it was a contract to “lay the foundations for their future business together, which was to incorporate their business venture and allocate their roles.”

A partnership is “an association of two or more persons to carry on as coowners a business for profit,” “whether or not the persons intended to form a partnership.” Corp. Code § 16101, subd. (a)(9); Corp. Code § 16202, subd. (a). “An association organized as another entity (e.g., a corporation) is not a partnership.” Eng v. Brown (2018) 21 Cal.App.5th 675, 694 (citing Corp. Code., § 16202, subd. (b)). In the usual case … a partnership does not continue to exist after the formation of a corporation. Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1157. 

Here, the Partnership Agreement provides for the creation of a joint stock company. Complaint Ex. B. Despite its use of the term “partnership,” the document is a contract for the creation of “CLPK Inc.,” a corporation that would be owned 51% by Lee and 49% by Kim. Complaint Ex. B. While the Court accepts all factual allegations as true, the legal effect of the Partnership Agreement is a question of law. Based on the plain terms of the agreement, the parties had no intent to carry on a business as an association but as a corporation. Therefore, the Court concludes that Kim failed to plead the existence of a fiduciary duty under the Partnership Agreement.  

Kim alternatively argues that as manager of their LLC, Lee owed Kim, a member of that LLC, a fiduciary duty. Opposition at p. 2.  However, Kim failed to plead such an allegation in the FACC. Accordingly, the Court sustains Lee’s demurrer to the breach of fiduciary duty claim with leave to amend.

B. Negligent Malpresentation

Lee argues that Kim’s claim for negligent misrepresentation fails because the alleged representation is not false.

“The elements of a negligent misrepresentation are (1) the misrepresentation of a past or existing material fact, (2) without reasonable ground for believing it to be true, (3) with intent to induce another’s reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.” Borman v. Brown (2021) 59 Cal.App.5th 1048, 1060 (internal quotation marks omitted”).

Lee argues that Kim fails to allege the first element, misrepresentation of a material fact because he contradicts his claim that Lee misrepresented having certain funds by alleging “she was late on making payments which hindered timely progress” and  that “[a]t the end when more money was needed to keep the project going, [Lee] decided not to proceed…” Demurrer at p. 6:16-21; FACC ¶ 6.  No contradiction exists. Kim alleges that Lee claimed she “had sufficient funds to carry forth with the project.” FACC ¶ 3. Kim further alleges that Lee “did not have the funds she said she had, and in fact, it was discovered that she used EIDL loan money from another restaurant for the funds she deposited, which was an improper use of the funds.” FACC ¶ 6. Whether or not Lee ultimately paid the specific amounts due under the agreement does not speak to the falsity of the representation at the time it was made. Kim alleges that Lee used loan money from another restaurant when she made the late payments. Therefore, there is no contradiction in Kim’s allegation that Lee misrepresented her funds for the project.

Because Kim adequately alleged misrepresentation of a material fact, and Lee does not argue that Kim fails to plead any other elements, the Court overrules the demurrer as to negligent misrepresentation.

C. Fraud

Lee argues that Kim’s claim for fraud should be dismissed because it is duplicative of his claim for breach of contract. 

While it is true that a person may not recover duplicative damages for breach of contract and fraud, “it has long been the rule that where a contract is secured by fraudulent representations, the injured party may elect to affirm the contract and sue for the fraud.” Rattagan v. Uber Technologies, Inc. (2024) 17 Cal.5th 1, 41 (quoting Lazar v. Superior Court (1996) 12 Cal.4th 631, 645) (Lazar) (internal quotation marks omitted). Moreover, the elements of fraud are “(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or “scienter”); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” Lazar, supra, (1996) 12 Cal.4th at p. 638. In contrast, the elements of breach of contract are “(1) the contract, (2) Lee’s performance or excuse for nonperformance, (3) Kim’s breach, and (4) the resulting damages to Lee.” Kumaraperu v. Feldsted (2015) 237 Cal.App.4th 60, 70. Accordingly, the causes of action for breach of contract and fraud are not duplicative, and the demurrer is overruled.

D. Negligence

Finally, Lee argues that the economic loss rule bars the negligence claim.

The economic loss rule provides that “[i]n general, there is no recovery in tort for negligently inflicted ‘purely economic losses,’ meaning financial harm unaccompanied by physical or property damage. Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 922 (quoting, Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 400). Furthermore, it “requires a [contractual party] to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise.” Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 988.

Kim argues that the negligence claim should be permitted as an exception to the economic loss rule because Lee’s negligence induced him to sign the contract. See Opp. at p. 3:2. However, ”[n]egligent misrepresentation is a separate and distinct tort” from negligence. Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 407. Moreover, Kim concedes that this cause of action is redundant to the negligent misrepresentation claim. Opp. at p. 3:3. Accordingly, the Court sustains the demurrer to the negligence claim without leave to amend.

II. Motion to Strike

Lee further moves to strike the following portions of the Cross-Complaint.

A. Punitive Damages

First, Lee argues that Kim’s request for punitive damages should be stricken because he fails to plead sufficient facts to support the allegations of “oppression, fraud, or malice.”

To state a prima facie claim for punitive damages, a complaint must set forth the elements as stated in the general punitive damage statute, Civil Code Section 3294. College Hospital, Inc. v. Superior Court (1994) 8 Cal.4th 704, 721. These statutory elements include allegations that the defendant has been guilty of oppression, fraud, or malice. Civ. Code § 3294, subd. (a). “‘Malice’ means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” Civ. Code, § 3294 subd. (c)(1).

“In order to survive a motion to strike an allegation of punitive damages, the ultimate facts showing an entitlement to such relief must be pled by a plaintiff. In passing on the correctness of a ruling on a motion to strike, judges read allegations of a pleading subject to a motion to strike as a whole, all parts in their context, and assume their truth. In ruling on a motion to strike, courts do not read allegations in isolation.” Clauson v. Superior Court (1998) 67 Cal.App.4th 1253, 1255. (citations omitted). “The mere allegation an intentional tort was committed is not sufficient to warrant an award of punitive damages. Not only must there be circumstances of oppression, fraud or malice, but facts must be alleged in the pleading to support such a claim.” Grieves v. Superior Ct. (1984) 157 Cal.App.3d 159, 166 (fn. omitted) (citations omitted). Punitive damages may be assessed against an employer where the employer authorized or ratified a malicious act. College Hospital Inc., supra,8 Cal.4th at. p 723.

The Cross-Complaint includes a request for punitive damages under the second cause of action for breach of fiduciary duty and fourth cause of action for fraud. Because the Court sustained the demurrer to the breach of fiduciary duty, the motion to strike as to that claim is now moot. 

An award of punitive damages is statutorily permitted for fraud. Punitive damages are properly recoverable where oppression, fraud, or malice is proven by clear and convincing evidence. See Civil Code §3294(a). “Fraud,” for purposes of punitive damages, “means an intentional misrepresentation, deceit or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” Civil Code §3294(c).

Since this Court has overruled Lee’s demurrer to the fraud cause of action, the Court must also deny Lee’s motion to strike the claim for punitive damages included under that cause of action. Moreover, as pleaded, the Cross-Complaint includes allegations that Lee made fraudulent allegations as to her available funds and ability to perform under the contract and knew that Kim would not have entered the contract if she told the truth. Cross-Complaint at pp. 3, ¶¶ 13, 17. Accordingly, the Court denies the motion to strike the request for punitive damages from the fraud claim.

 B. Tort Claims

Lee moves to strike all the tort claims in the Cross-Complaint because the alleged conduct amounts to a breach of contract, and Kim fails to allege an independent duty.

Code of Civil Procedure section 436 is not the appropriate procedural vehicle to attack an entire cause of action. Where an entire cause of action is properly subject to a pleading challenge, the court should sustain a demurrer to the cause of action rather than grant a motion to strike. See Quiroz v. Seventh Ave. Center (2006) 140 Cal. App. 4th 1256, 1281; Ferraro v. Camarlinghi (2008) 161 Cal. App. 4th 509, 528.

Accordingly, the motion to strike the fraud and negligent misrepresentation causes of action is denied.

C. Injunctive and Declaratory Relief

Lee argues that the Cross-Complaint includes in the prayer for relief “injunctive and /or declaratory relief” but fails to include what acts are to be enjoined or an explanation of the sought declaratory relief sought. Kim does not oppose the motion on this point and notes that he is not currently seeking an injunction and presently has no intention of seeking one. Opp. at p. 2:11-13.  Accordingly, the motion to strike injunctive and declaratory relief is granted with leave to amend. 

D. Attorney’s Fees

Lee argues that Kim’s request for attorney’s fees should be stricken because he fails to allege that he is entitled to attorney’s fees under any statute or contract.

Attorney’s fees are recoverable as costs when authorized by contract, statute, or law. Code Civ. Proc., § 1033.5, subd. (a)(10).  “A party may not recover attorney fees unless expressly authorized by statute or contract.” Brown Bark III, L.P. v. Haver (2013) 219 Cal.App.4th 809, 818.

Here, the Cross-Complaint does not specify any contractual or statutory basis for an award of attorney’s fees. Kim argues that the Partnership Agreement arguably allows for the recovery of fees. However, because the contract lacks any specific reference to attorney’s fees, it is an improper basis for an attorney fee award. See Complaint, Ex. B. Accordingly, the Court grants the motion to strike the request for attorney’s fees with leave to amend.

CONCLUSION

Lee’s demurrer is sustained in part and denied in part. The demurrer to the breach of fiduciary duty claim is sustained with leave to amend. The demurrer to the negligent misrepresentation claim is overruled. The demurrer to the fraud claim is overruled. The demurrer to the negligence claim is sustained without leave to amend.

Lee’s motion to strike is granted in part and denied in part.  The motion to strike is granted with leave to amend as to injunctive and declaratory relief and attorney’s fees.  The motion to strike is denied as to punitive damages and the fraud and negligent misrepresentation causes of action. 

Kim shall have 14 days from service of the Court’s ruling to file and serve an amended cross-complaint.

Lee shall then have 20 days to respond to the amended cross-complaint.