Judge: Barbara M. Scheper, Case: 23STCV02596, Date: 2024-01-10 Tentative Ruling
Case Number: 23STCV02596 Hearing Date: January 10, 2024 Dept: 30
Dept.
30
Calendar
No.
PFN
Distribution, Inc., INC. vs. 40s and Shorties, LLC, et. al., Case
No. 23STCV02596
Tentative
Ruling re: Defendants’ Demurrer to
Second Amended Complaint; Motion to Strike
Defendants 40s and Shorties, LLC (40s),
Adem Niazi, Ryan De La Cruz, and Drew Byrd (collectively, Defendants) demur to and
move to strike the Second Amended Complaint (SAC) of Plaintiff PFN
Distribution, Inc. (PFN). The demurrer is sustained as to the first, second,
third, fourth and fifth causes of action against all Defendants with ten (10)
days leave to amend. The demurrer is otherwise overruled. The motion to strike
is denied.
In reviewing the legal sufficiency of a
complaint against a demurrer, a court will treat the demurrer as admitting all
material facts properly pleaded, but not contentions, deductions, or
conclusions of law. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 (Blank);
C & H Foods Co. v. Hartford Ins. Co. (1984) 163 Cal.App.3d 1055,
1062.) It is well settled that a “demurrer lies only for defects appearing on
the face of the complaint[.]” (Stevens v. Superior Court (1999) 75
Cal.App.4th 594, 601.) “The rules by which the sufficiency of a complaint is
tested against a general demurrer are well settled. We not only treat the
demurrer as admitting all material facts properly pleaded, but also give the
complaint a reasonable interpretation, reading it as a whole and its parts in
their context.” (Guclimane Co. v. Stewart Title Guaranty Co. (1998) 19
Cal.4th 26, 38 (internal quotes omitted).) For purposes of ruling on a
demurrer, the complaint must be construed liberally by drawing reasonable
inferences from the facts pleaded. (Wilner v. Sunset Life Ins. Co.
(2000) 78 Cal.App.4th 952, 958.)
When ruling on a demurrer, the Court
may only consider the complaint’s allegations or matters which may be
judicially noticed. (Blank, supra, 39 Cal.3d at p. 318.) The Court may
not consider any other extrinsic evidence or judge the credibility of the
allegations plead or the difficulty a plaintiff may have in proving his
allegations. (Ion Equip. Corp. v. Nelson (1980) 110 Cal.App.3d 868,
881.) A demurrer is properly sustained only when the complaint, liberally
construed, fails to state facts sufficient to constitute any cause of action. (Kramer
v. Intuit Inc. (2004) 121 Cal.App.4th 574, 578.)
Defendant 40s is a clothing and apparel
company. (SAC ¶ 13.) Defendants Adem Niazi, Ryan De La Cruz, and Drew Byrd
(collectively, the Founders) formed 40s in 2012. (SAC ¶ 14.) In early 2014, the
Founders approached PFN for assistance in financing, distribution, and
management, in exchange for a 25% ownership interest in 40s. (SAC ¶ 17.) On
March 4, 2014, 40s and PFN executed a written agreement (the Initial
Agreement), which stated that “[a]ll parties agree that this agreement is a
precursor to a more detailed agreement,” and that it was “an act of good faith
by [PFN] in order to speed up production time by the factory in order to meet
purchase order deadlines.” (SAC ¶ 18, Ex. A.) The Initial Agreement further
provided as follows:
(i) PFN would finance the production of
the products by providing payments to the manufacturers of the Company’s
clothing products; (ii) the manufacturers would ship the products directly to
PFN’s distribution facility; (iii) PFN and the Company would mutually approve
purchase orders; (iv) “40s agrees that [PFN] will own the rights to all
receivables on any order shipped and invoiced,” (v) all payments on purchase
orders shipped would be made directly to PFN; and (vi) PFN would deduct the
cost of goods sold from the payments collected, and PFN would allocate 25% of
the remaining profits to itself and 75% to the Company.
(SAC
¶ 19.)
After executing the Initial
Agreement, “based on the oral representations made by PFN and the Founders and
the parties’ conduct over time, the parties expanded the scope of Initial
Agreement and entered into a Partnership Agreement.” (SAC ¶ 21.) The alleged
Partnership Agreement “incorporates certain terms of the Initial Agreement as obligations
upon the Founders and contains additional terms, conditions, and modifications
that serve as obligations on both 40s and the Founders.” (SAC ¶ 22.) The
material terms of the Partnership Agreement, designated as the “Oral
Modifications,” are alleged as follows:
(i) PFN exclusively manages the
distribution of all Company products; (ii) PFN provides financing services to
the Company, including by making payments to the manufacturers of 40s’ clothing
products; (iii) PFN owns the exclusive rights to possess and control all of the
Company’s payments received for orders the Company shipped and invoiced; (iv)
PFN makes profit distributions as described in the terms of the Initial
Agreement; (v) the Founders are responsible for design, marketing, and customer
service; and (vi) PFN is the owner of a 25% membership interest in the Company.
(SAC
¶ 24.)
Consistent with the Partnership
Agreement, from March 2014 through 2022, PFN exclusively managed the
distribution of 40s’ products, provided financing for the company, owned the
exclusive rights to possess and control the Company’s receivables on orders
shipped and invoiced, and made profit distributions in line with the Initial
Agreement. (SAC ¶ 25.)
The Founders initially agreed to
handle product design, marketing, and customer service. (SAC ¶ 25.) However,
over time, the Founders made little to no effort to do this work, and so
“between approximately 2016 and 2022, PFN was forced to shoulder the burden of
managing all of the Company’s operations, with little to no involvement by the
Founders.” (SAC ¶ 36.) Consequently, in late 2021, PFN approached the Founders
to discuss modifying the Partnership Agreement, either by granting PFN a
greater percentage of ownership or buying PFN out. (SAC ¶ 39.) In response,
“[t]he Founders represented to PFN that they needed PFN and requested that PFN continue
to stay in the partnership while they explored potential modifications to the
Partnership Agreement.” (SAC ¶ 40.) However, these representations were false,
and the Founders in fact had no intention of modifying the Partnership
Agreement. (SAC ¶ 41.)
In October 2022, PFN discovered that
the Founders had directed one of 40s’ largest buyers, the retailer Zumiez, to
pay monies owed to 40s for company-invoiced orders (the Zumiez Funds) directly
to the Founders. (SAC ¶ 46.) This violated the Partnership Agreement’s
provision that PFN would own the rights to all company receivables and handle
distributions. In a September 2022 meeting, the Founders misrepresented to
PFN’s principal that they had not received the Zumiez Funds and concealed that
they had instructed Zumiez to send the funds to themselves directly. (SAC ¶
48.)
Following this meeting, the Founders
“effectively shut PFN out of the Company’s entire business” by “blocking PFN’s
access to Company communications systems and social media accounts.” (SAC ¶
50.) In addition, without PFN’s input or approval, the Founders shipped
thousands of 40s products to Zumiez locations without charging the recipients,
ostensibly for promotional purposes. (SAC ¶ 49.) The Founders told the sales
representatives who were arranging these shipments to not inform PFN’s
principal about them. (SAC ¶ 51.) The Founders also directed various third-party
buyers to make future payments directly to the Founders, and instructed sales
representatives to not tell PFN’s principal about this arrangement. (SAC ¶ 52.)
PFN alleges that “[t]he Founders have taken permanent possession and control of
these funds, to the exclusion of PFN and in breach of the Partnership
Agreement.” (SAC ¶ 53.) The Founders have “received and misdirected other
receivables owed to PFN or the Company,” paid some or all of these funds to
themselves, and made distributions to themselves to the exclusion of PFN’s 25%
interest. (SAC ¶¶ 54-56.)
First and Second Causes
of Action for Breach of Contract; Third Cause of Action for Breach of Implied
Covenant of Good Faith and Fair Dealing
“The elements of a cause of
action for breach of a partnership agreement are: (1) the partnership
agreement; (2) plaintiff's performance or excuse for nonperformance; (3)
defendant's breach; and (4) the resulting damages to plaintiff.” (Jones v.
Goodman (2020) 57 Cal.App.5th 521, 527 fn
2.) “For breach of a partnership or joint
venture, the plaintiff must . . . allege an agreement to participate in the
management of the business. [Citation.] However, a plaintiff need not allege
further formalities, such as sharing of profits and losses, because the
existence of a partnership is determined from ‘the intent of the parties
revealed in the terms of their agreement, conduct, and the surrounding
circumstances.’ ” (Second Measure, Inc. v. Kim (N.D. Cal. 2015)
143 F.Supp.3d 961, 971-72 [applying California law].)
“The covenant of good faith and fair
dealing, implied by law in every contract, exists merely to prevent one
contracting party from unfairly frustrating the other party’s right to receive
the benefits of the agreement actually made. The covenant thus cannot ‘be
endowed with an existence independent of its contractual underpinnings.’ It
cannot impose substantive duties or limits on the contracting parties beyond
those incorporated in the specific terms of their agreement.” (Guz v.
Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350.)
PFN’s first cause of action for
Breach of Written Contract against Defendants is premised upon 40s’ alleged
breaches of the Initial Agreement, by “(1) failing to recognize Plaintiff’s
ownership of the rights to all receivables on any order shipped and invoiced;
(2) failing to remit payments on all purchase orders to Plaintiff; (3) failing
to honor Plaintiff’s approval and refusal rights; (4) failing to pay Plaintiff
its share of the profits on goods sold; (5) shutting Plaintiff out of operation
of the company; (5) directing 40s’ vendors to send payment directly to
Plaintiff ; and (6) taking steps to conceal from Plaintiff improper direct
payments to 40s.” (SAC ¶ 94.) PFN further alleges that the Founders “conspired
with 40s to commit the breaches of contract,” and that “[the Founders] are the
alter egos of 40s and are therefore liable for damages flowing from the
breaches of contract described [sic] above." (SAC ¶ 98.)
The
Court agrees with Defendants that the first cause of action fails because the
attached Initial Agreement only addresses PFN’s production of 40s’ summer 2014
line of products. (SAC, Ex. A.) The agreement begins, “40’s recognizes that [PFN]
has agreed in principle to fund the production of 40’s summer 2014 line of
socks.” It provides that PFN will pay the deposit and invoice for the socks to
the manufacturer, and that the product would then be shipped to PFN’s
distribution facility. The agreement then states, “40’s agrees that [PFN] will
own 25% of all profits related to the sale and distribution of 40’s products
for summer 2014, or until a more formal agreement is agreed upon by all
parties.” Defendants’ alleged acts fail to show any breaches related to the
2014 products, and, as Defendants point out, any breach would be barred by the
statute of limitations.
The
language granting PFN a 25% interest in “profits related to the sale and
distribution of 40’s products for summer 2014, or until a more formal
agreement is agreed upon by all parties” (emphasis added), does not support
PFN’s argument that the Initial Agreement was effective indefinitely. Rather,
the allegation that “a more formal agreement,” the Partnership Agreement, was
agreed upon shortly after the Initial Agreement supports the conclusion that
the Initial Agreement’s provisions became ineffective because they were
superseded by the Partnership Agreement, which was allegedly executed as early
as 2014. (SAC ¶¶ 21, 32.)
The second cause of action for
“Breach of Written, Oral, and Implied Contract” alleges that Defendants (both 40s
and the Founders) orally agreed to the modifications constituting the
Partnership Agreement and subsequently acted in accordance with those
modifications. (SAC ¶¶ 100-102.) Defendants’ breaches of the Partnership
Agreement are based upon the same conduct alleged under the first cause of
action. (SAC ¶ 108.)
The Court agrees with Defendants
that the second cause of action is uncertain as to the nature of the
Partnership Agreement and the parties’ relations under it. A demurrer for uncertainty may be sustained when a
defendant cannot reasonably determine to what he or she is required to respond;
for example, when a plaintiff joins multiple causes of action as one, fails to
properly identify each cause of action, or fails to state against which party
each cause of action is asserted if there are multiple defendants, a complaint
is uncertain. (Williams v. Beechnut Nutrition Corp. (1986) 185
Cal.App.3d 135, 139, fn. 2.) Here, the SAC alleges that “PFN is
the owner of a 25% membership interest in the Company” (¶¶ 4, 24), but
elsewhere alleges that PFN and Defendants were “partners” or in a “partnership”
(¶¶ 26, 27, 36, 40, 120).
The third cause of action alleges, “there
existed a valid contract between Plaintiff and Defendants,” and “Defendants
breached the implied covenant of good faith and fair dealing by . . . withholding
contract benefits; acting without a subjective belief in the validity of their actions;
possessing no intention to perform their contractual obligations; and otherwise
engaging in conduct that is objectively unreasonable, dishonest, deceitful, and
malicious.” (SAC ¶¶ 114-115.) These general allegations fail to specify the
contract at issue, and so are insufficient to allege the existence of a
contract between the parties underlying the claim.
Fourth and Fifth Causes of Action for Breach of Fiduciary Duty
“The elements of a cause of action for
breach of fiduciary duty 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.) “[P]artners or joint venturers
have a fiduciary duty to act with the highest good faith towards each other
regarding affairs of the partnership or joint
venture.” (Pellegrini v. Weiss (2008) 165 Cal.App.4th
515, 524.) “A partner has no right to deal with partnership
property other than for the sole benefit of the partnership.”
(Bardis v. Oates (2004) 119 Cal.App.4th 1, 12.)
A partner’s duty of loyalty
to the partnership and other partners includes the duty “[t]o account to the
partnership and hold as trustee for it any property, profit, or benefit derived
by the partner in the conduct and winding up of the partnership business or
derived from a use by the partner of partnership property or information,
including the appropriation of a partnership opportunity.” (Corp. Code, § 16404, subd. (b)(1).) “A
partner's duty of care to the partnership and the other partners in the conduct
and winding up of the partnership business is limited to refraining from
engaging in grossly negligent or reckless conduct, intentional misconduct, or a
knowing violation of law.” (Corp. Code, § 16404, subd. (c).)
“It is no answer that the
proceeds from self-dealing might be deemed ‘fair compensation’ to
the faithless partner. ‘Courts will not permit an investigation into the
fairness or unfairness of such a transaction or allow the trustee to show that
the dealing was for the best interest of the beneficiaries. It is a trustee's
duty in all things to first consider and always to act for the best interests
of the trust.’ [Citations.]” (Bardis, 119 Cal.App.4th at 13.)
The fourth cause of action,
asserted against all Defendants, alleges that “the Founders and Plaintiff were
partners in the Company,” and that the Founders breached their fiduciary duties
to PFN by depriving PFN of its exclusive right to distribute and handle
receivables, defaming and disparaging PFN to customers and vendors, failing to
account to PFN for distributions, and withholding from PFN its 25% share of net
proceeds. (SAC ¶ 121.)
The fifth cause of action
for “Breach of Fiduciary Duty – Duty to Use Reasonable Care” is asserted
against the Founders and labeled “Derivative Claim.” (SAC ¶ 130.) The claim alleges
both that “the Founders and Plaintiff were partners in the management and
ownership of the Company,” and that “[a]t all relevant times herein, the
Founders and Plaintiff were and are owners of equal membership interest in the
Company.” (SAC ¶¶ 131-132.) The Founders allegedly breached their duty to use
reasonable care in managing 40s when they “diverted the Zumiez Funds,
mismanaged the company, failed to fulfill orders, diluted the Company brand,
and diminished the Company’s goodwill.” (SAC ¶ 137.)
As discussed with respect
to the second cause of action, the allegations in the SAC are unclear as to the
nature of PFN’s interest in 40s. “A plaintiff may plead inconsistent counts or
causes of action in a verified complaint, but this rule does not entitle a
party to describe the same transaction as including contradictory or
antagonistic facts.
[Citations.] In such circumstances, we may accept as true the more specific
allegations.” (Alfaro
v. Community Housing Improvement System & Planning Assn., Inc. (2009)
171 Cal.App.4th 1356, 1381.) Assuming as true the allegations that the parties
formed a partnership over 40s, PFN has failed to state a claim because
derivative actions are not available to general partnerships. Although
California law allows derivative actions for limited partnerships (Corp. Code §
15910.02) and corporations (Corp. Code § 800), the Uniform Partnership Act of
1994 (Corp. Code §§ 16100, et seq.) does not contain any such provision.
(See Corp. Code § 16405.) Consequently, the fifth cause of action fails.
Sixth
Cause of Action for Conversion; Ninth
Cause of Action for Violation of Penal Code § 496
To
plead a cause of action for conversion, one must allege (1) the plaintiff’s
ownership or right to possession of personal property; (2) defendant’s
disposition of the property inconsistent with plaintiff’s rights; and (3)
resulting damages. (Fremont Indemnity Co. v. Fremont General Corp.
(2007) 148 Cal.App.4th 97, 119.) “To mandate a conversion action ‘it is not essential that
plaintiff shall be the absolute owner of the property converted but she must
show that she was entitled to immediate possession at the time of conversion.’ ” (Hartford Financial Corp. v.
Burns (1979) 96 Cal.App.3d 591, 598.)
Penal Code § 496, subd. (a), imposes
criminal penalties on “[e]very person who buys or receives any
property that has been stolen or that has been obtained in any manner
constituting theft or extortion, knowing the property to be so stolen or
obtained, or who conceals, sells, withholds, or aids in concealing, selling, or
withholding any property from the owner, knowing the property to be so stolen
or obtained.” Under Penal Code § 496, subd. (c), “[a]ny person
who has been injured by a violation of subdivision (a) or (b) 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.)
“[A] criminal conviction under section 496(a) is not a prerequisite to recovery
of treble damages under section 496(c).” (Bell v. Feibush (2013) 212
Cal.App.4th 1041, 1043.)
The sixth cause of action is based on Defendants’ alleged
conversion of the Zumiez funds, and is pled in the alternative, “such as in the
event the parties’ contract is valid but does not provide a contractual claim
to the Zumiez Funds.” (SAC ¶ 142.) PFN alleges, “[it] had the exclusive right
to immediately possess, own, receive and control the Zumiez Funds. Defendants intentionally
and substantially interfered with Plaintiff’s right by falsely representing to
Zumiez that 40s owned the funds. Defendants, and each of them, consequently
received and took possession of the Zumiez funds without Plaintiff’s knowledge
or consent, preventing Plaintiff from accessing the Zumiez Funds.” (SAC ¶ 142.)
The allegations suffice to show Defendants’ conversion of
funds to which PFN held the right to possession. Contrary to Defendants’
argument, PFN’s alleged rights under the Partnership Agreement to “possess and
control all of the Company’s payments received for orders the Company shipped
and invoiced,” make distributions, and receive net proceeds are not “a mere
contractual right of payment, without more.” (Farmers Ins. Exchange v. Zerin
(1997) 53 Cal.App.4th 445, 452.)
The allegations also support a claim
under Penal Code § 496. “Theft” under the Penal Code includes when one
“fraudulently appropriate[s] property which has been entrusted to him or her, or . . . knowingly and designedly, by any false or
fraudulent representation or pretense, defraud[s] any other person of money,
labor or real or personal property.” (Pen. Code § 484, subd. (a).) As discussed
below, PFN has sufficiently alleged that Defendants defrauded PFN of the Zumiez
Funds “by any false or fraudulent representation or pretense.”
Seventh
Cause of Action for Declaratory Relief
“Any person interested under a
written instrument, excluding a will or a trust, or under a contract, or who
desires a declaration of his or her rights or duties with respect to another,
or in . . . property . . . may, in cases of actual controversy relating to the
legal rights and duties of the respective parties, bring an original action or
cross-complaint in the superior court for a declaration of his or her rights
and duties in the premises, including a determination of any question of
construction or validity arising under the instrument or contract.” (Code Civ.
Proc. § 1060.)
The seventh cause of action seeks
declaratory relief as to whether “(a) a partnership between Plaintiff and the
Founders exists, (b) Plaintiff is a member of the Company holding a 25%
membership interest therein, (c) Plaintiff has the exclusive right to manage
distribution of the Company’s products and to receive and control all monies in
connection with the Company’s accounts receivables, and (d) as a member,
Plaintiff is entitled to the same member rights and protections in the Company
as the Founders.” (SAC ¶ 148.) These allegations show an “actual controversy”
appropriate for declaratory relief. (See Columbia
Pictures Corp. v. De Toth (1945) 26 Cal.2d
753, 760 [finding declaratory relief proper for disputed oral employment
contract].) Although Defendants argue that the declaratory relief is
duplicative of other causes of action, they fail to point to any specific cause
of action of which it is duplicative.
Eighth
Cause of Action for Accounting
A cause of action for an accounting
requires a showing that a relationship exists between the plaintiff and
defendant that requires an accounting and that some balance is due to the
plaintiff that can only be ascertained by an accounting. (Teselle v.
McLoughlin (2009) 173 Cal.App.4th 156, 179.) “Equitable principles govern,
and the plaintiff must show the legal remedy is inadequate.... Generally, an
underlying fiduciary relationship, such as a partnership, will support an
accounting, but the action does not lie merely because the books and records
are complex. Some underlying misconduct on the part of the defendant must be
shown to invoke the right to this equitable remedy.” (Green Valley
Landowners Assn. v. City of Vallejo (2015) 241 Cal.App.4th 425, 442.)
Assuming as true that PFN and
Defendants are partners, the allegations are sufficient to support a claim for
an accounting. Although Defendants argue that the amount due from the Zumiez Funds can be made certain by calculation, PFN has
also alleged that the Founders have “received and misdirected other
receivables owed to PFN or the Company,” paid some or all of these funds to
themselves, and made distributions to themselves to the exclusion of PFN’s 25%
interest. (SAC ¶¶ 54-56.)
Tenth Cause of Action for
Fraud
The
elements of fraud are: (1) misrepresentation (false representation,
concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent
to defraud or induce reliance; (4) justifiable reliance; and (5) damages. (See
Civil Code §1709.) Fraud actions are subject to strict requirements of
particularity in pleading. (Committee on Children’s Television, Inc. v.
General Foods Corp. (1983) 35 Cal.3d 197, 216.)
The liberal construction of pleadings
does not apply to a fraud claim. Instead, a fraud claim must be pled with
specificity. (Tenet Healthsystem Desert, Inc. v. Blue Cross of California¿(2016)
245 Cal.App.4th 821, 837.) “The particularity requirement demands that a
plaintiff plead facts which show how, when, where, to whom, and by what means
the representations were tendered.” (Cansino v. Bank of America (2014)
224 Cal.App.4th 1462, 1469.)
PFN’s fraud claim, asserted against all
Defendants, is premised upon the Founders’ alleged misrepresentations that “they
intended to (1) modify the Partnership Agreement to provide fairer terms for
Plaintiff, and (2) actually perform on the agreed-to modifications.” (SAC ¶
168.) The Court finds the allegations sufficiently specific to plead a cause of
action for fraud. PFN alleges that the misrepresentations were made during a
September 2022 meeting with PFN’s principal at a restaurant in Los Angeles.
(SAC ¶ 48.) When PFN’s principal asked about the status of the Zumiez payments,
the Founders told him that they had not received the funds and concealed that
they had instructed Zumiez to send the funds to themselves personally. (SAC ¶
48.) These allegations show “how, when, where, to whom, and by what means the
representations were tendered.” (Cansino, 224 Cal.App.4th at 1469.)
Motion
to Strike
Finally, Defendants move to strike
PFN’s prayers for punitive damages, attorney’s fees, and injunctive relief.
Because the demurrer is overruled as to the cause of action for fraud, PFN has
alleged facts sufficient to support recovery of punitive damages based on
fraud. (Civ. Code § 3294.) PFN has also pled entitlement to recovery of
reasonable attorney’s fees under Penal Code § 496, subd. (c). The claims for
declaratory relief and an accounting support injunctive relief. Accordingly,
the motion to strike is denied.