Judge: Andrew E. Cooper, Case: 23CHCV03420, Date: 2024-08-05 Tentative Ruling

Counsel wishing to submit on a tentative ruling may inform the clerk or courtroom assisant in North Valley Department F51, 9425 Penfield Ave., Chatsworth, CA 91311, at (818) 407-2251.  Please be aware that unless all parties submit, the matter will still be called for hearing and may be argued by any appearing/non-submitting parties. If the matter is submitted on the court's tentative ruling by all parties, counsel for moving party shall give notice of ruling. This may be done by incorporating verbatim the court's tentative ruling. The tentative ruling may be extracted verbatim by copying and specially pasting, as unformatted text, from the Los Angeles Superior Court’s website, http://www.lasuperiorcourt.org. All hearings on law and motion and other calendar matters are generally NOT transcribed by a court reporter unless one is provided by the party(ies).

Case Number: 23CHCV03420    Hearing Date: August 5, 2024    Dept: F51

DEMURRER

Demurrer filed: 1/22/24

MOVING PARTY: Defendants Duane Roberts; and Steve Garnock (collectively, “Defendants”)

RESPONDING PARTY: Plaintiff Electronic Health Plans, Inc. (“Plaintiff”)

NOTICE: OK 

RELIEF REQUESTED: Defendants demur to Plaintiff’s entire complaint.

TENTATIVE RULING: The demurrer is overruled. Defendants to file their answers to Plaintiff’s complaint within 20 days.

BACKGROUND 

This action involves Plaintiff’s allegations that Defendants, two former executive officers of the corporate Plaintiff, embezzled “from the company for their own benefit and for the benefit of Garnock’s family member.” (Compl. ¶ 1.)

On 11/6/23, Plaintiff filed its complaint against Defendants, alleging the following causes of action: (1) Conversion (Embezzlement); (2) Unjust Enrichment; (3) Receipt of Stolen Funds (California Penal Code Section 496(a)); (4) Monies Had and Received; (5) Breach of Fiduciary Duty (against Roberts); and (6) Breach of Fiduciary Duty (against Garnock).

On 1/22/24, Defendants filed the instant demurrer. On 7/24/24, Plaintiff filed its opposition thereto. On 7/29/24, Defendants filed their reply.

ANALYSIS

As a general matter, a party may respond to a pleading against it by demurrer on the basis of any single or combination of eight enumerated grounds, including that “the pleading does not state facts sufficient to constitute a cause of action.” (Code Civ. Proc., § 430.10, subd. (e).) 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 the evidence or facts alleged.” (E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) As such, the court assumes the truth of the complaint’s properly pleaded or implied factual allegations. (Ibid.) The only issue a demurrer is concerned with is whether the complaint, as it stands, states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)

Here, Defendants demur to the entire complaint on the basis that it is barred by the applicable statutes of limitation, and that Plaintiff fails¿to allege facts sufficient to state its first, third, fifth, and sixth causes of action.

A.    Meet-and-Confer

Before filing its demurrer, “the demurring party shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” (Code Civ. Proc. § 430.41, subd. (a).) The demurring party must file and serve a meet and confer declaration stating either: “(A) The means by which the demurring party met and conferred with the party who filed the pleading subject to demurrer, and that the parties did not reach an agreement resolving the objections raised in the demurrer;” or “(B) That the party who filed the pleading subject to demurrer failed to respond to the meet and confer request of the demurring party or otherwise failed to meet and confer in good faith.” (Id. at subd. (a)(3).)

Here, Defendants’ counsel declares that on 1/10/24, he sent Plaintiff’s counsel a meet and confer letter discussing the issues raised in the instant demurrer. (Decl. of Craig A. Hansen, ¶ 4.) On 1/15/24, counsel for the parties met and conferred telephonically, but were unable to resolve the issues set forth below. (Ibid.) Accordingly, the Court finds that counsel has satisfied the meet and confer requirements set forth in Code of Civil Procedure section 430.41.

B.     Statute of Limitations

Here, Defendants argue that Plaintiff’s entire complaint is time-barred by the applicable statute of limitations. The statute of limitations for an action for theft is three years. (Code Civ. Proc. § 338, subd. (c)(1).) “Generally speaking, a cause of action accrues at the time when the cause of action is complete with all of its elements. … An important exception to the general rule of accrual is the ‘discovery rule,’ which postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 806–807 [quotations and citations omitted].) “In order to rely on the discovery rule for delayed accrual of a cause of action, ‘[a] plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.’” (Id. at 808.)

Plaintiff’s complaint alleges that between 2018 and 2021, Defendants wrongfully raised their own salaries, and that of Garnock’s relative (who was also Plaintiff’s employee), without Plaintiff’s knowledge or authorization. (Compl. ¶¶ 29–50.) Plaintiff further alleges that in 2023, Defendants wrongfully obtained additional corporate funds. (Id. at ¶¶ 57–72.) “In June 2023, the Board first learned about the payments by Garnock and Roberts to themselves and to the Relative in 2023. Thereafter, the Board engaged in a more thorough review of financial records and discovered the full extent of the increases in compensation by Garnock and Roberts for themselves and for the Relative between 2018 and 2021.” (Id. at ¶¶ 73–74.)

Here, Defendants argue that “the Complaint conspicuously fails to plead facts necessary to invoke the discovery rule.” (Dem. 7:20–21, citing Compl. ¶¶ 81, 82, 89, 90, 94, 95, 101, 102, 109, and 114.) Specifically, Defendants contend that “the Complaint says nothing about any diligence, or the ‘inability to have made earlier discovery despite reasonable diligence.’” (Id. at 9:18–19.) Defendants further argue that “the facts related to what reviews were undertaken, when, and by whom are not pled anywhere in the Complaint, beyond the bare, conclusory assertions in paragraphs 74-76. In addition, facts related to who, what, where, when and how the Board discovered any extent of the alleged increases in compensation and unauthorized payments are not set out anywhere in Complaint, let alone ‘specifically.’” (Id. at 9:20–24.)

Plaintiff argues in opposition that “the Demurrer completely ignores the breadth of EHP’s specific allegations and instead attempts to impose a more stringent pleading requirement that finds no support in law, suggesting, for example, that EHP was required to actually mention the words ‘reasonable diligence’ in the Complaint and to plead seemingly every possible fact related to its allegations, including even a specific accounting of what financial records were or were not exclusively in Garnock’s control.” (Pl.’s Opp. 11:6–10.) “As to EHP’s inability to have made earlier discovery of Roberts and Garnock’s 2018 through 2020 compensation increases, despite reasonable diligence, the Complaint alleges that Roberts and Garnock failed to inform and seek the requisite approval of EHP’s Board for these increases as was required under Section 10 of EHP’s bylaws, and that EHP had no knowledge of the unauthorized compensation increases. … Furthermore, the Complaint also alleges that Roberts and Garnock used their positions of power as CEO and CFO of EHP to shield EHP’s discovery of all their embezzlement, and that Garnock controlled EHP’s bank accounts and records, payroll records, financial statements, and other confidential financial information.” (Id. at 10:20–27, citing Compl. ¶¶ 2, 25–26, 39–41.)

Defendants maintain in reply that “specific facts as to EHP’s ‘reasonable diligence’ and ‘inability to have made earlier discovery’ are not pled at all in the Complaint, and certainly not with the required specificity. (Defs.’ Reply 3:25–27.) “EHP says nothing about its alleged inability to have made earlier discovery before November 2021, or that it acted with reasonable diligence in that time.” (Id. at 4:4–5.)

Based on the foregoing, the Court finds Plaintiff has sufficiently alleged that Defendants’ otherwise time-barred conduct did not accrue until June 2023, when Plaintiff first learned about the unauthorized payments made by Defendants. (Compl. ¶¶ 73–76.) The Court finds it sufficient that Plaintiff has alleged that Defendants had superior and/or exclusive knowledge of the company’s financial information until Plaintiff’s discovery of the alleged misconduct in June 2023. (Id. at ¶¶ 25, 77–79.) As Plaintiff filed this action on 11/6/23, within three years of June 2023, the Court finds that Plaintiff’s complaint is not time-barred by the applicable statute of limitations. Accordingly, the demurrer is overruled on this ground.

C.    First, Fifth, and Sixth Causes of Action

Plaintiff’s first cause of action alleges Conversion against Defendants, and its fifth and sixth causes of action allege Breach of Fiduciary Duty against each defendant. Here, Defendants argue that each of these causes of action are subject to the heightened pleading standard for fraud causes of action. Fairness requires that allegations of fraud be pled “with particularity” so that the court can weed out nonmeritorious actions before a defendant is required to answer. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.) The particularity requirement necessitates pleading facts that “show how, when, where, to whom, and by what means the representations were tendered.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.)

“Conversion is generally described as the wrongful exercise of dominion over the personal property of another.” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.) “The elements of a conversion claim are: (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages.” (Lee v. Hanley (2015) 61 Cal.4th 1225, 1240.) It is not necessary that there be a manual taking of the property; it is only necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to his or her own use. (Oakdale Village Group v. Fong (1996) 43 Cal. App. 4th 539, 544.) “The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, breach of fiduciary duty, and damages.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.)

Here, Defendants argue the causes of action are subject to demurrer because they are not pled with the adequate particularity required for fraud. (Dem. 12:2–3.) Specifically, Defendants argue that “the alleged ‘shield[ing]’ and ‘concealing,’ when and how that happened, and how Defendants allegedly ‘used their positions of power’ and ‘position of trust’ are not pled at all in the Complaint, let alone with the required specificity required to allege fraudulent conduct.” (Id. at 13:3–5, citing Compl. ¶¶ 2, 87.)

Plaintiff argues in opposition that the heightened particularity standard for alleging fraud causes of action is inapplicable here, as “Defendants have cited no case law by which the Court should impose an element of scienter or other attributes of a fraud cause of action to the straightforward causes of action of conversion or breach of fiduciary duty alleged in the Complaint. Thus, the heightened pleading standard that applies to causes of action for fraud does not apply to these causes of action, and Defendants’ attempts to argue otherwise lack merit.” (Pl.’s Opp. 12:2–6.)

In reply, Defendants highlight Plaintiff’s use of the word “fraudulent” in paragraphs 87, 111, 116 as it relates to Plaintiff’s request for punitive damages. (Defs.’ Reply 6:9–25.) The Court agrees with Plaintiff, and declines Defendants’ invitation to accept this interpretation of Plaintiff’s first, fifth, and sixth causes of action for Conversion and Breach of Fiduciary Duty. Based on the foregoing, the Court finds that Defendants’ argument that Plaintiff’s first, fifth, and sixth causes of action are subject to the heightened pleading standard for fraud causes of action is without merit. Accordingly, the demurrer against Plaintiff’s first, fifth, and sixth causes of action is overruled.

D.    Third Cause of Action

Plaintiff’s third cause of action alleges Receipt of Stolen Funds against Defendants, in violation of Penal Code section 496. Under the statute, any person who has been injured by the defendant’s receiving or buying property “that has been obtained in any manner constituting theft” “may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney's fees.” (Pen. Code § 496, subds. (a), (c).)

Here, Defendants argue that “although the Complaint asserts in generic terms that ‘[t]his action arises out of the intentional actions of Roberts and Garnock to abuse their executive positions of trust at EHP to embezzle from the company for their own benefit and for the benefit of Garnock’s family member’ … the specific allegations do not allege a criminal intent, as required for a violation of Penal Code section 496.” (Dem. 13:22–26.) Specifically, Defendants argue that “nowhere in the Complaint is there an allegation that Defendants intended to steal or commit theft, such that the monies actually consist of stolen property, as required for liability under Penal Code 496(a).” (Id. at 14:17–20, citing Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333, 361–362; Finton Construction, Inc. v. Bidna & Keys, APLC (2015) 238 Cal.App.4th 200, 213.)

“To prove theft, a plaintiff must establish criminal intent on the part of the defendant beyond ‘mere proof of nonperformance or actual falsity.’” (Siry, 13 Cal.5th at 361–362.) The Siry court elaborated that “if misrepresentations or unfulfilled promises are made innocently or inadvertently, they can no more form the basis for a prosecution for obtaining property by false pretenses than can an innocent breach of contract. … In this case, the record appears consistent with a conclusion that defendants acted not innocently or inadvertently, but with careful planning and deliberation reflecting the requisite criminal intent.” (Id. at 362 [internal quotations and citations omitted].)

The Court notes that the Siry case did not involve the sufficiency of the factual allegations of the pleadings, but the recovery of treble damages and attorney fees upon judgment in the plaintiff’s favor. (Id. at 339–342.) Here, as Plaintiff argues, “the only knowledge element EHP was required to allege—and did indeed allege—was that Roberts and Garnock knew that the funds they received, concealed or withheld were stolen.” (Pl.’s Opp 12:22–23, citing Compl. ¶¶ 96–98, Finton Construction, 238 Cal.App.4th at 213.)

The Court agrees, and further finds that Plaintiff’s factual allegations, taken as a whole, state that Defendants wrongfully diverted corporate funds to themselves and another employee without the Board’s knowledge or authorization, which the Court cannot infer as innocent or inadvertent. (Compl. ¶¶ 29–72; Siry, 13 Cal.5th at 361–362.) Moreover, Defendants’ requisite “criminal intent” is a question of fact that the Court declines to reach at the pleading stage. (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1061.)

Based on the foregoing, the Court finds that Plaintiff has alleged facts sufficient to constitute a cause of action for violation of Penal Code section 496. Accordingly, the demurrer against Plaintiff’s third cause of action is overruled.

CONCLUSION 

The demurrer is overruled. Defendants to file their answers to Plaintiff’s complaint within 20 days.