NATURE OF PROCEEDINGS: Hearing on Defendants' Demurrer with Motion to Strike

 

Defendants' Demurrer is sustained in part and overruled in part. Plaintiff’s motion to strike is denied.

 

BACKGROUND

Plaintiff JB Jewelry House, Inc. (Plaintiff) filed this action against Eco Jewelry, Inc. (Eco), Dong Sil Park, Sok Kyu Kang, and Blue Echo Jewelry, Inc. (Blue Echo) (collectively “Defendants”), alleging that Defendants failed to pay for merchandise ordered from Plaintiff.

The causes of action are: (1) Breach of Contract; (2) Fraudulent Inducement; (3) Fraudulent Transfer; (4) Account Stated; (5) Goods and Services Rendered; (6) Unjust Enrichment; (7) Constructive Trust; and (8) Unfair Business Practices.

Defendants filed a Demurrer with Motion to Strike. Plaintiff filed an Opposition.

 

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.

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.

Leave to amend must be allowed where there is a reasonable possibility of successful amendment. See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 (court shall not “sustain a demurrer without leave to amend if there is any reasonable possibility that the defect can be cured by amendment”); Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1037 (“A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment.”). The burden is on the complainant to show the Court that a pleading can be amended successfully. Blank v. Kirwan (1985) 39 Cal.3d 311, 318.

 

DEMURRER

I. Alter Ego

First Defendants argue that there is no basis for alter ego liability against Park and Kang for Eco and Blue Echo.

“The ‘single enterprise,’ or alter ego, doctrine is an equitable doctrine: ‘A corporate identity may be disregarded—the “corporate veil” pierced—where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation.” Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1341 (citation omitted). “In appropriate circumstances, traditional veil piercing permits a party to pierce the corporate or limited liability company (LLC) veil ‘so that an individual shareholder [or LLC member] may be held personally liable for claims against the corporation [or LLC].’” Blizzard Energy, Inc. v. Schaefers (2021) 71 Cal.App.5th 832, 840 (Blizzard) (quoting Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1513 (alterations by Blizzard court).

“To recover on an alter ego theory, a plaintiff need not use the words ‘alter ego,’ but must allege sufficient facts to show a unity of interest and ownership, and an unjust result if the corporation is treated as the sole actor. An allegation that a person owns all of the corporate stock and makes all of the management decisions is insufficient to cause the court to disregard the corporate entity.” Leek v. Cooper (2011) 194 Cal.App.4th 399, 415 (citations omitted). Difficulty in enforcing a judgment does not alone satisfy [the unjust result] element. There also must be some conduct amounting to bad faith that makes it inequitable for [the defendant] to hide behind the corporate form.” Id. at p. 418.

In applying the doctrine, courts consider the following nonexclusive factors: (1) the commingling of funds and assets of the two entities, (2) identical equitable ownership in the two entities, use of the same offices and employees, (3) disregard of corporate formalities, (4) identical directors and officers, and (5) use of one as a mere shell or conduit for the affairs of the other. Cam-Carson, LLC v. Carson Reclamation Authority (2022) 82 Cal.App.5th 535, 549-550. Courts look to the totality of the circumstances, and no one factor is dispositive. Whether a party is liable under an alter ego theory is normally a question of fact. Zoran Corp. v. Chen (2010) 185 Cal.App.4th 799, 811.

The Complaint alleges that Defendants Park and Kang commingled the funds and assets of Eco and Blue Echo, diverted corporate funds for their personal use, disregarded legal formalities, inadequately capitalized the corporations, used the same offices and employees, and used the corporate entities as mere shells. Compl. ¶ 8.

These facts are sufficient to support a finding of alter ego liability against Park and Kang.

II. Breach of Contract

Defendants argue that the Complaint fails to allege whether the contract was written, oral, or implied.

It is grounds for a demurrer where “[i]n an action founded upon a contract, cannot be ascertained from the pleading whether the contract is written, is oral, or is implied by conduct.” Code Civ. Proc., § 430.10, subd. (g).

To properly plead breach of contract, “[i]f the action is based on an alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written instrument must be attached and incorporated by reference.” Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal. App. 3d 452, 459. Alternatively, “in an action based on a written contract, a plaintiff may plead the legal effect of the contract rather than its precise language.” Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal. 4th 189, 198-199. 189, 198-199. “‘In order to plead a contract by its legal effect, plaintiff must “allege the substance of its relevant terms. This is more difficult, for it requires a careful analysis of the instrument, comprehensiveness in statement, and avoidance of legal conclusions.”’” Heritage Pacific Financial, LLC v. Monroy (2013) 215 Cal.App.4th 972, 993 (quoting McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1489) (citations omitted).

The Complaint alleges that “Plaintiff and Defendants agreed that Eco would order merchandise from Plaintiff and that Eco would make monthly payments of $1,500 toward each order, with the outstanding balance on each order to be paid within six months.” Compl. ¶ 16. It further alleges, Eco placed … orders for merchandise from Plaintiff, and Plaintiff provided the requested merchandise, in the total sum of $87,315.53….” ¶ 17. Eco owes “an outstanding balance of $80,299.80.” Compl. ¶ 19. That sum was due no later than May 3, 2024. Compl. ¶ 20.

Plaintiff did not include a copy of any written contract attached to the Complaint, nor does the Complaint otherwise clarify whether the parties' agreement was written, oral, or implied. Accordingly, the demurrer is sustained to the first cause of action with leave to amend.

III. Fraudulent Inducement

Defendants argue Plaintiff fails to plead fraud with the requisite specificity and that the claim is uncertain.

“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 v. Superior Court (1996) 12 Cal.4th 631, 638 (Lazar) (citations omitted) (internal quotation marks omitted).

“Fraud must be specifically pleaded; a general pleading of the legal conclusion of fraud is insufficient. Every element of the cause of action must be alleged in full, factually and specifically.” Tindell v. Murphy (2018) 22 Cal.App.5th 1239, 1249; see also Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1331 (affirming demurrer where the complaint failed to plead with specificity a factual basis for how a defendant attorney knew the representations she communicated on behalf of her client were false). “This particularity requirement necessitates pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’” Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73 (quoting Hills Trans. Co. v. Southwest (1968) 266 Cal.App.2d 702, 707.) “The requirement of specificity in a fraud action against a corporation requires the plaintiff to allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157.

Plaintiff alleges Park and Kang represented to Plaintiff through its representative, Soo Sang Chung, that Eco would make monthly payments of $1,500 toward each order, with the outstanding balance on each order to be paid within six months. Compl. ¶ 25. Plaintiff alleges these representations were made between January 2023 till at least June 2023. Ibid. These meetings took place at various restaurants or cafes, initially on weekends, but later on Wednesdays. Ibid.

Defendants take issue with the fact that Plaintiff does not allege Park or Kang made any direct representations to Plaintiff, but rather to Plaintiff’s representative, Soo Shang Chung. This argument lacks merit because “a corporation, as an artificial entity created by law, can only act in its affairs through its natural person agents and representatives.” CLD Construction, Inc. v. City of San Ramon (2004) 120 Cal.App.4th 1141, 1146. Nor do Defendants offer any authority for their assertion that identifying Soo Shang Chung as Plaintiff’s “representative” is insufficient.

However, Defendants are correct that Plaintiff is required to state whether the alleged representations were oral or in writing. See Lazar, supra, (1996) 12 Cal.4th at p. 645 (This particularity requirement necessitates pleading facts which show … by what means the representations were tendered.”).

Accordingly, the demurrer to the second cause of action is sustained with leave to amend.

IV. Fraudulent Transfer

Defendants argue Plaintiff fails to state a cause of action for fraudulent transfer because Eco Jewelry is not named as a defendant in this cause of action. Additionally, Defendants argue Plaintiff failed to articulate whether the basis of the cause of action is actual fraudulent transfer or constructive fraudulent transfer.

“Claims for fraudulent transfer are governed by the [Uniform Voidable Transactions Act (UVTA), Civil Code section 3439 et seq.].The purpose of the UVTA is to prevent debtors from placing, beyond the reach of creditors, property that should be made available to satisfy a debt.” Chen v. Berenjian (2019) 33 Cal.App.5th 811, 817.

“A creditor may set aside a transfer as fraudulent under Civil Code section 3439.04 by showing actual fraud as defined in subdivision (a)(1) or by showing constructive fraud as defined in subdivision (a)(2).” Ibid (fn. omitted) (citations omitted). “Actual fraud, as defined in subdivision (a)(1), is a transfer made with ‘actual intent to hinder, delay, or defraud any creditor of the debtor.’ Constructive fraud, as defined in subdivision (a)(2), requires a showing that the debtor did not receive ‘reasonably equivalent’ value for the transfer, and the transfer was made when the debtor ‘(A) [w]as engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction’; or (B) the debtor ‘[i]ntended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.,’” Optional Capital, Inc. v. DAS Corp. (2014) 222 Cal.App.4th 1388, 1401-1402 (Optional Capital).

Defendants cite no authority for the proposition that the debtor (here, Eco Jewelry), and not merely the transferee, must be named as a defendant to void a fraudulent transfer. Moreover, as explained above, Plaintiff has adequately pleaded a theory of alter ego liability; therefore, even if Plaintiff is required to name the debtor, that requirement is met by bringing the claim against Park and Kang.

Nor is there merit to Defendants’ argument that Plaintiff is required to specify in the Complaint whether it is suing for actual or constructive fraudulent transfer. Optional Capital, supra, 222 Cal.App.4th at p. 1402 (“Section 3439.04 is construed to mean a transfer is fraudulent if the provisions of either subdivision (a)(1) or subdivision (a)(2) are satisfied.” ).

Plaintiff has alleged sufficient facts to support either theory. First, it alleges that Park and Kang transferred merchandise and/or the sale proceeds of Eco to Blue Eco, and Defendants knew that the transferred sale proceeds belonged to Eco and its shareholders for Eco’s business operations, including payment of the money owed to Plaintiff. Compl. ¶ 36. Second, it alleges Eco did not receive anything of value from Blue Echo in exchange for the transfer, the Plaintiff’s right to payment arose before the transfer, and Eco became insolvent as a result of the transfer. Compl. ¶¶. 37, 39. These facts are sufficient to allege actual fraudulent transfer and constructive fraudulent transfer.

Accordingly, the demurrer to the third cause of action is overruled.

V. Unjust Enrichment

Next, Defendants argue that unjust enrichment is not a cause of action.

Defendants are correct that “‘there is no cause of action in California for unjust enrichment.’” Everett v. Mountains Recreation & Conservation Authority (2015) 239 Cal.App.4th 541, 553 (quoting Melchior v. New Line Productions, Inc. (2003) 106 Cal.App.4th 779, 793). However, the Court reads the Complaint as stating a claim for restitution based on unjust enrichment, which is a valid claim.

“Whether termed unjust enrichment, quasi-contract, or quantum meruit, the equitable remedy of restitution when unjust enrichment has occurred ‘is an obligation (not a true contract [citation]) created by the law without regard to the intention of the parties, and is designed to restore the aggrieved party to his or her former position by return of the thing or its equivalent in money.’” Federal Deposit Ins. Corp. v. Dintino, 167 Cal. App. 4th 333, 346 (quoting 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 1013, p. 1102.) In O’Grady v. Merchant Exchange Productions, Inc., 41 Cal. App. 5th 771, 79, the court noted that while there are decisions holding unjust enrichment is not a cause of action, “[t]he point is largely academic because this district has long taken the position that, even if unjust enrichment does not describe an actual cause of action, the term is synonymous with restitution, which can be a theory of recovery.” (citations omitted) (internal quotation marks omitted).

“The elements of a cause of action for unjust enrichment are simply stated as ‘receipt of a benefit and unjust retention of the benefit at the expense of another.’” Professional Tax Appeal v. Kennedy-Wilson Holdings, Inc. (2018) 29 Cal.App.5th 230, 238 (quoting Lectrodryer v. Seoulbank (2000) 77 Cal.App.4th 723, 726.) “‘The term “benefit” denotes any form of advantage.’” Ibid. (quoting Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51). “‘[T]he benefit that is the basis of a restitution claim may take any form, direct or indirect. It may consist of services as well as property. A saved expenditure or a discharged obligation is no less beneficial to the recipient than a direct transfer.’” Ibid. (quoting Rest.3d Restitution and Unjust Enrichment, § 1, com. d, p. 7.)

Here, Plaintiff has alleged Defendants have received and unjustly retained the benefits of Plaintiff’s merchandise without paying for it. Accordingly, the demurrer to the sixth cause of action is overruled.

VI. Violation of Bus. & Prof. Code § 17200

Defendants argue Plaintiff fails to state a cause of action under Business and Professions Code section 17200 because there is no predicate offense.

“Unfair competition under the [Unfair Competition Law (UCL)] includes ‘any unlawful, unfair or fraudulent business act or practice.’” Jackson v. Lara (2024) 100 Cal.App.5th 337, 346 (quoting Bus. & Prof. Code, § 17200. “[A] plaintiff alleging an unfair business practice must show the defendant’s conduct is tethered to an[] underlying constitutional, statutory or regulatory provision, or that it threatens an incipient violation of an antitrust law, or violates the policy or spirit of an antitrust law.” Id. at p. 347 (citations omitted) (internal quotation marks omitted). “An ‘unlawful’ business activity includes ‘anything that can properly be called a business practice and that at the same time is forbidden by law.’” Smith v. State Farm Mut. Auto. Ins. Co., 93 Cal.App.4th 700, 717-718 (2001). Section 17200 “borrows” from violations of other laws and “treats them as ‘unlawful’ practices independently actionable under the unfair competition law.” Id. at 718.

“A plaintiff alleging unfair business practice under these statutes must state with reasonable particularity the facts supporting the statutory elements of the violation.” Khoury v. Maly’s of California, Inc. 14 Cal.App.4th 612, 619 (1993).

To establish standing under the UCL, a plaintiff must (1) establish a loss or deprivation of money sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that the economic injury was the result of, i.e., caused by, the unfair business practice that is the gravamen of the claim. See Kwikset Corp. v. Superior Court (Benson) (2011) 51 Cal. 4th 310, 337.

The Court concludes that Plaintiff’s well-pleaded fraudulent transfer cause of action serves as a predicate offense under the UCL. Accordingly, the demurrer to the seventh cause of action is overruled.

VII. Constructive Trust

Defendants argue that Plaintiff fails to properly allege constructive trust.

“A constructive trust is an equitable remedy to compel a person who has property to which he is not justly entitled to transfer it to the person entitled thereto. Weiss v. Marcus (1975) 51 Cal.App.3d 590, 600 (Weiss). The principal constructive trust situations are set forth in two statutes. Civil Code section 2223 provides, “One who wrongfully detains a thing is an involuntary trustee thereof, for the benefit of the owner.” Civil Code section 2224 provides: “One who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act, is, unless he has some other and better right thereto, an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it.” “The cause of action is not based on the establishment of a trust, but consists of the fraud, breach of fiduciary duty, or other act which entitles the plaintiff to some relief. That relief, in a proper case, may be to make the defendant a constructive trustee with a duty to transfer to the plaintiff.” Weiss, supra, 51 Cal.App.3d at p. 600 (citation omitted) (internal quotation marks omitted).

“[A] constructive trust may only be imposed where the following three conditions are satisfied: (1) the existence of a res (property or some interest in property); (2) the right of a complaining party to that res; and (3) some wrongful acquisition or detention of the res by another party who is not entitled to it.” Communist Party v. 522 Valencia, Inc. (1995) 35 Cal.App.4th 980, 990.

As pleaded, Plaintiff has no specific right to the merchandise (or their proceeds) that it sold to Eco. Rather, it has an alleged contract right to be paid for that merchandise. Because the Court sustained Defendants’ demurrer to the fraud claim, there are no grounds to show that Defendants acquired Plaintiff’s property wrongfully. Accordingly, the Court sustains the demurrer to the eighth cause of action with leave to amend.

MOTION TO STRIKE

Defendants move to strike Plaintiff’s prayer for punitive damages.

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. Coll. Hosp., 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).

“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).

Civil Code § 3294 authorizes the recovery of punitive damages in non-contract cases where “the defendant has been guilty of oppression, fraud, or malice ….” The court in Taylor v. Superior Court (1979) 24 Cal.3d 890, 894-95 held, “Something more than the mere commission of a tort is always required for punitive damages. There must be circumstances of aggravation or outrage, such as spite or ‘malice,’ or a fraudulent or evil motive on the part of the defendant, or such a conscious and deliberate disregard of the interests of others that his conduct may be called willful or wanton.”

A claim for punitive damages may not be based on conclusory allegations of oppression, fraud, or malice but instead must be based on factual allegations that support such a conclusion. See Smith v. Superior Court (1992) 10 Cal. App. 4th 1033, 1041-1042 (Court of Appeal issued peremptory writ directing trial court to issue order striking plaintiff’s prayer for punitive damages because “[t]he sole basis for seeking punitive damages are … conclusory allegations” which were “devoid of any factual assertions supporting a conclusion [defendants] acted with oppression, fraud or malice”).

Plaintiff’s fraudulent transfer claim and the factual allegations showing actual intent to defraud are sufficient to permit the imposition of punitive damages.

Accordingly, Defendants’ motion to strike is denied.

 

CONCLUSION

Defendants' Demurrer is sustained as to causes of action one and two and overruled as to causes of action three, six, seven, and eight. Defendant’s Motion to Strike is denied.  Plaintiff has 20 days to amend.