Judge: Anne Richardson, Case: 23STCV00233, Date: 2023-07-10 Tentative Ruling

Case Number: 23STCV00233    Hearing Date: July 10, 2023    Dept: 40

­­Superior Court of California

County of Los Angeles

Department 40

Background

Plaintiff Alex Yutkovsky, Trustee of the Alex Yutkovsky Living Trust, sues Defendants NOHO 10 LLC (NOHO), Artur Nesterenko, German Nesterenko (Nesterenko), German Simakovski a/k/a Greg Simakovski (Simakovski), Bronzetree Terraces, LLC (Bronzetree), and Does 3 through 50 pursuant to a February 3, 2023 First Amended Complaint (FAC) alleging claims of (1) Fraud, (2) Conversion, (3) Aiding and Abetting Conversion, (4) Breach of Written Contract, (5) Breach of the Implied Covenant of Good Faith and Fair Dealing, (6) Intentional Interference with Contractual Relations, (7) Cancellation of Instrument, and (8) Declaratory Relief.

The claims arise from allegations that Plaintiff is the victim of an intricate fraud perpetrated by Defendants German and Artur Nesterenko, managers of NOHO, through which, with the aid of other Defendants, Plaintiff was coaxed into loaning Defendants $1,056,000, as secured by a Deed of Trust on real property, with Plaintiff’s security instrument being second in priority amongst secured lenders, and that Defendants then forged the requisite documents to fraudulently record a Substitution of Trustee and Full Reconveyance (the Reconveyance) of Plaintiff’s Deed of Trust, which extinguished Plaintiff’s lien and allowed Defendants to abscond with Plaintiff’s funds and secure a new loan on the Property that placed new mortgagee Bronzetree in the second position that Plaintiff’s security interest previously held.

In connection with these claims, Plaintiff is seeking to have the Reconveyance cancelled and new mortgage lender Bronzetree’s Deed of Trust placed in a junior priority position to Plaintiff’s Deed of Trust.

            The original Complaint in this action was filed on January 5, 2023 and alleged claims of (1) Cancellation of Instrument and (2) Declaratory Relief.

            On February 3, 2023, Plaintiff filed their FAC.

            On April 7, 2023, Defendants NOHO and German Nesterenko (hereinafter, Defendants) demurred and moved to strike portions of the FAC.

            On June 26, 2023, Plaintiff opposed the demurrer and motion to strike.

            On June 29, 2023, Defendants replied to Plaintiff’s oppositions.

The demurrer and motion to strike are now before the Court.

Demurrer

Sufficiency Standard [Code Civ. Proc. § 430.10, subd. (e)]

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747; see Code Civ. Proc., § 430.10, subd. (e).) This device can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “To survive a [general] demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.) In testing the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.) A demurrer, however, “does not admit contentions, deductions or conclusions of fact or law.” (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228, disapproved on other grounds, Jones v. Lodge at Torrey Pines Partnership (2008) 42 Cal.4th 1158, 1162.) The face of the complaint includes exhibits attached to the complaint. (Frantz v. Blackwell (1987) 189 Cal.App.3d 91, 94.) If facts appearing in the exhibits contradict those alleged, the facts in the exhibits take precedence. (Holland v. Morse Diesel Intern., Inc. (2001) 86 Cal.App.4th 1443, 1447, superseded by statute on other grounds as stated in White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 521.)

FAC, Alter Ego Liability: OVERRULED.

            Defendants contend that Plaintiff has insufficiently pled the unity of the interest and ownership, bad faith or fraud, or resulting inequity necessary to disregard NOHO’s corporate form and permit the application of alter ego liability against Nesterenko.

Defendants specifically argue that Plaintiff has not presented any factual allegations that show Nesterenko dominated, controlled, or used NOHO as a mere shell, conduit, or instrumentality for Nesterenko’s own activities. Additionally, Defendants argue that ownership (including ownership of corporate stock) and control (including making all management decisions, whether as an officer, director, or shareholder) are insufficient to establish alter ego liability.

In opposition, Plaintiff contends that he has properly alleged alter ego liability and that he is not required to prove alter ego allegations or fraud for alter ego at the demurrer stage. Specifically, Plaintiff contends he has alleged a unity of interests between Defendants, that German and Artur Nesterenko made fraudulent misrepresentations, that injustice will result, that NOHO was inadequately or illusorily capitalized, that Nesterenko conducted personal business through NOHO, and that NOHO was a mere shell.

In reply, Defendants contend that Plaintiff has only stated, but not sufficiently established, that there is a “unity of interests” and that “injustice will result” if NOHO’s corporate form is not disregarded. As to unity of interests, Defendants argue Plaintiff has presented no factual allegations explaining how Nesterenko engaged in or caused undercapitalization, commingled corporate and personal funds, or failed to observe corporate formalities.

Invoking the alter ego doctrine requires that (1) “a unity of interest and ownership between the corporation and its equitable owner [show] that the separate personalities of the corporation and the shareholder do not in reality exist” and (2) “an inequitable result [will arise] if the acts in question are treated as those of the corporation alone.” (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.)

Among the factors to be considered in determining whether a unity of interest and ownership exists for alter ego purposes, courts consider the (1) commingling of funds and other assets, (2) the holding out by one entity that it is liable for the debts of the other, (3) identical equitable ownership in the two entities, (4) use of the same offices and employees, (5) use of one entity as a mere shell or conduit for the affairs of the other, (6) inadequate capitalization, (7) disregard of corporate formalities, (8) lack of segregation of corporate records, and (9) identical directors and officers. (Id. at pp. 538-539.) “No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied.” (Id. at p. 539.)

The Court finds that Plaintiff has pled sufficient facts in the FAC to hold Nesterenko liable for the obligations of NOHO. Regarding the required unity of interests, the FAC alleges sufficient ultimate facts amounting to a unity of interest between Nesterenko and NOHO. (FAC, ¶¶ 10-10c.) Similar pleadings have been found sufficient to state a unity of interest for alter ego purposes on demurrer. (See First Western Bank & Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910, 915-916; Shaoxing County Huayue Import & Export v. Bhaumik (2011) 191 Cal.App.4th 1189, 1193-1194, 1198.) While Defendants argue more factual allegations are necessary, plaintiffs are “required to allege only ‘ultimate rather than evidentiary facts.’” (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 236.) As to the requisite inequitable results, the Court finds that the FAC sufficiently alleges that recognizing a separate existence in NOHO would sanction fraud and promote injustice. (See FAC, ¶ 10.)

FAC, First Cause of Action, Fraud: OVERRULED.

Defendants contend that the fraud claim fails because it lacks the legally required specificity for Defendants to determine what specific fraudulent acts they purportedly committed.

Specifically, Defendants argue Plaintiff does not specifically allege any misrepresentation of fact or bad act by Defendants or that Plaintiff relied on any such misrepresentations from Defendants; rather, that the allegations are solely based on alleged representations and wrongful acts by Artur Nesterenko and Simakovski, not German Nesterenko, without specifying their authority to speak or act, or dates of any such the representations.

In opposition, Plaintiff contends that less particularity is required when the facts lie more in the knowledge of the opposite party, and that here the full and complete details of the fraudulent scheme lie with Defendants. Plaintiff also argues that misrepresentations may be implied or inferred from the circumstances and that they have alleged Defendants made material misrepresentations and committed bad acts, including specific allegations that Artur and German Nesterenko used NOHO as a shell to defraud Plaintiff and remove Plaintiff’s lien.

In reply, Defendants argue that the lack of knowledge exception applies to circumstances where a plaintiff omits from their allegations information concerning the facts of a controversy but that is obviously in the defendant's possession, such as names of people or their authority. Additionally, Defendants argue that the exception is typically limited to elements regarding a defendant’s intent and representations. Defendants contend that the FAC does not make similar allegations.  

The Court agrees with Plaintiff that certain exceptions mitigate the rigor of the rule requiring specific pleading of fraud. Less specificity is required when “it appears from the nature of the allegations that the defendant must necessarily possess full information concerning the facts of the controversy.” (Bradley v. Hartford Acc. & Indem. Co. (1973) 30 Cal.App.3d 818, 825.) “[Even] under the strict rules of common law pleading, one of the canons was that less particularity is required when the facts lie more in the knowledge of the opposite party ….” (Turner v. Milstein (1951) 103 Cal.App.2d 651, 658.)

The Court also agrees that the FAC pleads fraud against Defendants NOHO and German. The FAC pleads that an agent of NOHO—Artur—intentionally made false representations to Plaintiff insofar as promising Defendants’ ability to repay Plaintiff’s loans, the falsity of which can be inferred from the Reconveyance and surrounding acts. (See FAC, ¶¶ 15-29.) This imposes liability on NOHO, as well as German, who could face NOHO’s alleged liability based on the alter ego doctrine.

FAC, Second Cause of Action, Conversion: SUSTAINED, With Leave to Amend.

Defendants contend that individuals are improperly lumped in this claim, that there are no facts alleged that Defendants converted and wrongfully appropriated money belonging to Plaintiff, and that money cannot be the subject of a cause of action for conversion unless there is a specific, identifiable sum involved.

Specifically, Defendants argue that Plaintiff cannot state with certainty whether they allegedly possessed, owned, or controlled specifically identifiable and traceable funds or property, whether funds were wired from one account or multiple accounts, or whether Defendants received Plaintiff’s purported funds.

In opposition, Plaintiff contends that money can be the subject of an action for conversion if a specific sum capable of identification is involved and where a defendant interferes with a plaintiff’s possessory interest in said sum, including by misappropriation, commingling, or misapplication of said funds. Here, Plaintiff argues he have alleged Defendants surreptitiously extinguished Plaintiff’s security instrument via a fabricated document representing acknowledgement of full payment of loaned funds totaling $1,056,000 (a specifically identifiable sum). As such, Plaintiff argues Defendants interfered with their possessory interest in the loaned funds. Additionally, Plaintiff argues that Defendants accepted the funds for a specific purpose but never used the funds for that consented-to-purpose, and that this was wrongful exercise of dominion and control over Plaintiff’s money because it exceeded the scope of consent.

In reply, Defendants contend that the FAC fails to state how much money Nesterenko and NOHO converted, that the $1,056,000 sum is not clear because the money consisted of multiple purported loans over time, that Plaintiff has not specified whether he transferred the money to Nesterenko or NOHO, and that all this amounts to conclusory allegations that every defendant converted an uncertain sum at an uncertain time from uncertain accounts to uncertain bank accounts.

The Court finds the conversion claim is defective. “California cases permitting an action for conversion of money typically involve those who have misappropriated, commingled, or misapplied specific funds held for the benefit of others. (See, e.g., Haigler v. Donnelly, supra, 18 Cal.2d at p. 681, 117 P.2d 331 [real estate broker]; Fischer v. Machado, supra, 50 Cal.App.4th at pp. 1072-1074, 58 Cal.Rptr.2d 213 [sales agent for consigned farm products]; Weiss v. Marcus (1975) 51 Cal.App.3d 590, 599, 124 Cal.Rptr. 297 [attorney’s claim for $6,750 fee from proceeds of settlement subject to lien]; Watson v. Stockton Morris Plan Co. (1939) 34 Cal.App.2d 393, 403, 93 P.2d 855 [savings and loan issued duplicate passbook and delivered funds to third party].) In each of these cases, the amount of money converted was readily ascertainable.” (PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 396.)

Here, the FAC does not allege that NOHO and/or German misappropriated, commingled, or misapplied specific funds held for the benefit of Plaintiff, but rather, that Defendants misused loan monies lent to Defendant by Plaintiff for purposes other than those represented to Plaintiff without any intention of paying Plaintiff back his loan. Such circumstances may more closely support a claim for theft by false pretenses, i.e., the consensual but fraudulent acquisition of property (including money) from its owner. (Pen. Code, § 484, subd. (a); Bell v. Feibush (2013) 212 Cal.App.4th 1041, 1049.)

In future pleadings, Plaintiff may amend the allegations to attempt to sufficiently state a conversion claim or allege a different claim.

FAC, Fifth Cause of Action, Breach of Implied Covenant of Good Faith and Fair Dealing: OVERRULED.

Defendants contend that this claim is wholly duplicative of the fourth cause of action for alleged breach of contract and must be dismissed.

            Specifically, Defendants argue that this claim is based on the same alleged facts contained in the breach of contract claim, seeks the same damages or relief as the contract claim, and does nothing more than allege a mere contract breach.

In opposition, Plaintiff argues that in all circumstances, there must be an underlying contract for a breach of the implied covenant claim to survive, that there will always be overlapping facts, but that in a breach of an implied covenant claim there must be allegations of intentional acts taken to frustrate the purpose of the agreement. Whether identical damages are being sought here and in the breach of contract claim, Plaintiff argues the prayer is for protection in the event of a default.

In reply, Defendants argue that the breach of contract claim alleges NOHO failed to meet its obligations under the loan, consolidated the loan, and issue a deed of trust, and that the implied covenant claim merely realleges that NOHO and Nesterenko breached the loan agreement, thus failing to allege new or different facts from the breach of contract claim.

The Court agrees with Plaintiff in arguing that a claim for a breach of implied covenant of good faith and fair dealing necessarily requires the existence of an underlying contract. (Merced Irr. Dist. v. County of Mariposa (E.D. Cal. 2013) 941 F.Supp.2d 1237, 1280 [discussing California law].) The Court also finds that this claim is not duplicative of the breach of contract claim. The breach of contract claim is premised on Defendants’ failure to comply with the terms of “Loan 3” between the parties. (See FAC, ¶¶ 61-67.) If the breach of implied covenant of good faith and fair dealing claim alleged harm to Plaintiff based on the same grounds, it would be superfluous and duplicative. (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 327 [“[W]here breach of an actual term is alleged, a separate implied covenant claim, based on the same breach, is superfluous”].) However, the breach of implied covenant claim here alleges frustration of Plaintiff’s right to receive the benefits of “Loan 3” based on a series of wrongful acts by Defendants. (See FAC, ¶¶ 74-75.) The claims are thus not duplicative.

FAC, Seventh Cause of Action, Cancellation of Instrument: OVERRULED.

Defendants contend that Plaintiff has presented no facts demonstrating the existence of an instrument the court should cancel.

Defendants specifically argue that cancellation does not apply because Plaintiff’s claim is not concerned with the effect the instrument may have on Plaintiff’s purported future rights and remedies; rather, it is concerned with Plaintiff’s rights and remedies under his purported loans.

            In opposition, Plaintiff contends that Defendants have recorded a forged Reconveyance to cancel Plaintiff’s lien, that this forged document is the instrument Plaintiff seeks to cancel, and that a Reconveyance is void/voidable due to fraud.

In reply, Defendants argue that Plaintiff fails to meet the second pleading prong for cancellation, i.e., a reasonable apprehension of serious injury, whether physical or financial. Defendants argue that Plaintiff fails to allege and establish how cancelling the Reconveyance would impact Plaintiff’s future rights as opposed to merely shuffling around the state of Plaintiff’s purported interest in the property.

“To prevail on a claim to cancel an instrument, a plaintiff must prove (1) the instrument is void or voidable due to, for example, fraud; and (2) there is a reasonable apprehension of serious injury including pecuniary loss or the prejudicial alteration of one’s position.” (U.S. Bank National Assn. v. Naifeh (2016) 1 Cal.App.5th 767, 778.)

The Court finds that the FAC both alleges that the instrument is void or voidable due to fraud and that there is a reasonable apprehension of serious injury including the prejudicial alternation of Plaintiff’s position in priority over the Subject Property, such that, if the Property is foreclosed on, Plaintiff’s rights to compensation for its consolidated loans may be extinguished if its secured lender position follows rather than precedes the Bronzetree’s secured lender position. (See FAC, ¶¶ 86-92.)

FAC, Eighth Cause of Action, Declaratory Judgment Claim: OVERRULED.

Defendants argue that this cause of action is unnecessary and superfluous because the issue of the priority of the liens to the property owned by NOHO is already fully engaged by other causes of action insofar as it arises from the same facts and involves the same issues and where a demurrer is properly sustained as to a claim for declaratory relief that is wholly derivative of other causes of action.

            In opposition, Plaintiff contends that the determination of the priority of the liens falls within the equitable power of this Court, that the claim is not duplicative of any other cause of action, and that due to Defendants having allegedly forged and recorded a Reconveyance, a conflict will exist as to whose lien is in second position.

In reply, Defendants contend that Plaintiff’s claim is not ripe because a controversy would only exist upon judgment for the Plaintiff. Additionally, Defendants argue that the relief sought does not make sense considering Plaintiff is seeking to cancel the Reconveyance.

The fundamental basis of declaratory relief is a present and actual controversy between the parties over a proper subject. (City of Cotati v. Cashman (2002) 29 Cal.4th 69, 80.)

The Court finds that this claim is sufficiently stated. The FAC sufficiently alleges that a controversy has arisen between Plaintiff and Defendants and Bronzetree as to whether, if the Reconveyance is cancelled, Plaintiff’s security interest on the Subject Property would have priority over Bronzetree’s. (FAC, ¶¶ 94-95.) A cancellation of the Reconveyance by itself would not resolve this question, nor would a resolution of the other claims in the FAC clearly address priority amongst the lenders having a security interest in the Subject Property.

Motion to Strike

Legal Standard

The court may, upon a motion or at any time in its discretion and upon terms it deems proper: (1) strike out any irrelevant, false, or improper matter inserted in any pleading; or (2) strike out all or any part of any pleading not drawn or filed in conformity with the laws of California, a court rule, or an order of the court. (Code Civ. Proc. § 436, subds. (a)-(b).) For the purposes of a motion to strike pursuant to Sections 435 to 437 of the Code of Civil Procedure, the term “pleading” means a demurrer, answer, complaint, or cross-complaint, (Code Civ. Proc., § 435, subd. (a)), and an immaterial allegation or irrelevant matter in a pleading entails (1) an allegation that is not essential to the statement of a claim or defense, (2) an allegation that is neither pertinent to nor supported by an otherwise sufficient claim or defense, or (3) a demand for judgment requesting relief not supported by the allegations of the complaint or cross-complaint (Code Civ. Proc., § 431.10, subds. (b)(1)-(3).)

FAC, Punitive Damages: DENIED.

Defendants also filed a motion to strike Paragraphs 40 and 49 of the FAC on the grounds that they improperly request relief for punitive damages on a breach of contract claim.

Specifically, Defendants contend that Plaintiff is not entitled to punitive damages for the fraud and conversion claims because those claims arise solely from allegations of a contractual obligation between Plaintiff and Defendant NOHO, and punitive damages are not a remedy available for a breach of contractual obligation. Defendants further argue that in the absence of an independent tort, punitive damages may not be awarded for a breach of contract even where the defendant's conduct in breaching the contract was willful, fraudulent, or malicious.

In opposition, Plaintiff contends that the motion to strike is a repeat of the demurrer to the first and second causes of action. Plaintiff argues that the FAC primarily and separately claims Defendants committed fraud and conversion, which make the punitive damages proper for those causes of action, and that the breach of contract claim is independent and in the alternative to the first and second causes of action, where such alternative pleadings are permitted by law.

In reply, Defendant contends that the contract is at the heart of the parties’ dispute and so it makes no difference that fraud and conversion are separately pled. Defendants further argue that the conversion claim is more intricately linked to the contract claim because it relates to money purportedly lent to Defendants under the purported loans, and that the FAC only contains allegations that Defendants did not follow through with their loan obligations.

“[P]unitive or exemplary damages, which are designed to punish and deter statutorily defined types of wrongful conduct, are available only in actions ‘for breach of an obligation not arising from contract.’” (Civ. Code, § 3294, subd. (a), emphasis added.) In the absence of an independent tort, punitive damages may not be awarded for breach of contract ‘even where the defendant’s conduct in breaching the contract was wilful, fraudulent, or malicious.’” (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 516; see Crogan v. Metz (1956) 47 Cal.2d 398, 405 [same].)

The Court finds that the punitive damages prayer tied to the fraud and/or conversion claims is wholly proper as pled. This is because the damages alleged in the FAC do not arise from Defendants’ alleged breach of contractual terms, but rather, arise from Defendants engaging in conduct that goes beyond the contractual terms and amounts to separate wrongs against Plaintiff. Namely, these actions involve allegations of Defendants working to defraud Plaintiff of his security interest, entitlement to loan repayment, and priority in secured lender status on the Subject Property, as through Defendants’ actions related to the Reconveyance, among other things. (See FAC, ¶¶ 26-29.) The Court finds Defendants’ position—that because their alleged fraud arose within the context of a contract between the parties, the alleged tort cannot leave the province of contractual liability alone—strains credulity.

Accordingly, the Court DENIES the motion to strike.

Conclusion

Defendants NOHO 10, LLC and German Nesterenko’s Demurrer to First Amended Complaint is OVERRULED in Part and SUSTAINED in Part as follows:

(1) OVERRULED as to the FAC’s first, fifth, seventh, and eighth causes of action, as well as to the FAC’s alter ego allegations; and

(2) SUSTAINED as to the FAC’s second cause of action, With Leave to Amend.

Defendants NOHO 10, LLC and German Nesterenko’s Motion to Strike Portions of Plaintiff’s First Amended Complaint is DENIED.

Plaintiff is granted leave to amend and required to file any Second Amended Complaint within 14 days.