Judge: Armen Tamzarian, Case: 22STCV30344, Date: 2023-01-23 Tentative Ruling

Case Number: 22STCV30344    Hearing Date: January 23, 2023    Dept: 52

Defendants 1906 Inc. and Kevin B. Sanchez’s Demurrer

Defendants 1906 Inc. and Kevin B. Sanchez demur to plaintiff Upland Development, LLC’s complaint for (1) breach of written lease and (2) accounting.

1st Cause of Action: Breach of Written Lease

            Plaintiff alleges sufficient facts for this cause of action.  Defendants demur solely on the basis that plaintiff lacks standing to sue under the lease because it no longer owns the leased premises.  (Demurrer, pp. 3-4; RJN, Ex. 1.) 

Selling the premises does not mean plaintiff lacks standing to sue under the lease for debts incurred before the sale.  “A transferor of an interest in the leased property retains the benefit of an express promissory obligation under the lease, which benefit he held before the transfer, to the extent the benefit is not assigned by the transferor and does not run with the transferred interest.”  (Rest.2d Property, § 16.2.)  “After the sale of leased property, the former landlord can sue and collect rent that accrued before the date of the sale unless the rents have been assigned to the buyer.”  (10 Miller and Starr, Cal. Real Est. (4th ed. 2022) Rent, § 34:75, citing Ginsberg v. Austin (1992) 968 F.2d 1198.)

Plaintiff alleges defendants breached a lease for premises at the Upland Hills Country Club by failing to pay beginning in April 2020.  (Comp., ¶¶ 18-21.)  At that time, plaintiff was the lessor, and defendant 1906 Inc. was the lessee.  (Comp., Ex. B.)  Plaintiff seeks one form of damages (3% of 1906’s revenue over a certain threshold) “through to January 12, 2022.”  (Comp., prayer ¶ 3.)  Plaintiff retains standing to sue for the damages it alleges it incurred before selling the property.

2nd Cause of Action: Accounting

            Plaintiff alleges sufficient facts for this cause of action.  “An action for an accounting has two elements: (1) ‘that a relationship exists between the plaintiff and defendant that requires an accounting’ and (2) ‘that some balance is due the plaintiff that can only be ascertained by an accounting.’ ”  (Sass v. Cohen (2020) 10 Cal.5th 861, 869 (Sass).)

First, plaintiff alleges a relationship that requires an accounting.  The complaint alleges the lease required 1906 to pay 3% of its gross revenue exceeding a specified amount (which gradually escalated).  (Comp., ¶¶ 11-13; Ex. B, § 3.B-E.)  It further alleges, “The Lease required 1906 Inc. to provide Upland a financial statement and Profit & Loss Statement (‘Accounting’) each month so that the total value of the percentage amount owed could be calculated.”  (Id., ¶ 16.) 

  The lease, attached as Exhibit B to the complaint, requires 1906 to keep “accurate records of the F&B [food and beverage] Gross Revenues, showing in detail all revenues and costs allocable to the F&B.” (Comp., Ex. B, § 4.A.)  It further provides that 1906 must furnish its “annual statement of gross revenue” each year.  (Id., § 4.B.)  The lease also states that Upland “shall have the right to inspect, audit and copy the books and records of lessee,” and provides remedies to Upland if, “pursuant to such audit, a discrepancy of more than 3% exists between the rent reported and paid to lessor and the rent actually due.”  (Id., § 4.C.)  This suffices to show a contractual relationship that requires 1906 Inc. to give an accounting to plaintiff. 

Second, plaintiff alleges a balance is due that can only be ascertained by an accounting.  The complaint alleges “1906 Inc. also never provided any payment of Percentage Gross Revenue Payment to Upland, in breach of the written lease.”  (Comp., ¶ 21.)  The purpose of the lease’s section on books and records was to permit plaintiff a way to verify 1906 Inc. was paying the right amount for the 3% of its gross revenue exceeding the specified threshold.  Without an accounting, plaintiff has no way of determining the proper amount due.

Defendants argue an accounting is unnecessary because plaintiff has an adequate remedy at law and can determine any amount owed via discovery.  As the California Supreme Court has recognized, “An action for an accounting has been characterized as ‘a means of discovery.’ ”  (Sass, supra, 10 Cal.5th at p. 869.)  “The plaintiff’s lack of knowledge drives the need for discovery; and the fact that the gap can be filled via discovery implies the information is within the control of the defendant.  In other words, the defendant in an accounting action possesses information unknown to the plaintiff that is relevant for the computation of money owed.”  (Ibid.) 

That is what plaintiff alleges here.  Defendant knows its gross revenues during the lease.  Plaintiff does not.  Plaintiff needs to know that information to determine if defendant failed to pay everything it owed under the lease.  The allegations are analogous to a claim for accounting of “profits made by defendants on account of [a] property.”  (Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 180.)

Defendant Kevin B. Sanchez

            Plaintiff alleges sufficient facts for both causes of action against Sanchez under the alter ego doctrine.  An individual can be liable for a corporation’s acts when there is: (1) “such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist”; and (2) “an inequitable result if the acts in question are treated as those of the corporation alone.”  (Tucker Land Co. v. State of California (2001) 94 Cal.App.4th 1191, 1202.)   

            The complaint alleges the required ultimate facts for both elements.  It alleges Sanchez was “an officer, director, agent for service of process, and/or principal of 1906 Inc.”  (Comp., ¶ 3.)  1906 Inc.’s statement of information filed with the Secretary of State in 2021 states Sanchez is the corporation’s chief executive officer, secretary, chief financial officer, director, and agent for service of process.  (Comp., ¶ 3, Ex. A.) 

The complaint further alleges, “[T]here existed and continues to exist a unity of interest and ownership between the corporate defendant, 1906 Inc., and the individual defendants such that any individuality and separateness has ceased to exist and that the corporate defendant is a mere shell, instrumentality, and conduit with which the individual defendants have comingled their funds and assets.  Adherence to the fiction of the separate existence between the individual defendants would sanction fraud and promote injustice in that the individual defendants would be permitted to avoid legal and financial responsibility for their actions as herein alleged.”  (Comp., ¶ 5.)

            Accepting these allegations as true, they suffice as a basis for holding Sanchez liable on both causes of action.

Disposition

            Defendants’ demurrer is overruled.  Defendants 1906 Inc. and Kevin B. Sanchez are ordered to answer within 20 days.