Judge: Bruce G. Iwasaki, Case: 21STCV28803, Date: 2024-02-05 Tentative Ruling

Case Number: 21STCV28803    Hearing Date: February 23, 2024    Dept: 58

Judge Bruce G. Iwasaki

Department 58

Hearing Date:             February 23, 2024

Case Name:                Katab v. Performance Team LLC

Case No.:                    21STCV28803

Matter:                        Demurrer and Motion to Strike

Moving Party:             Defendant Performance Team LLC

Responding Party:      Plaintiff Clifford Katab

Tentative Ruling:      The Demurrer to the Third Amended Complaint is overruled as to the first, second, third, fourth, and sixth causes of action and sustained as to the fifth, seventh, eighth, ninth and tenth causes of action. The Motion to Strike is granted in part, denied in part, and moot in part.

            Plaintiff Clifford Katab is the former COO of Defendant Performance Team LLC (Performance Team); Defendant Craig Kaplan was its CEO. Plaintiff Katab now sues Defendant Kaplan and Performance Team based on events relating to the sale of Performance Team to new owners, Damco Distribution Services Inc. (Damco). The allegations include the claim that the sale resulted in Defendants’ underpayment of millions of dollars in Performance Incentive Plan Units (PIPs) and Stock Appreciation Rights Awards (SARs) owed to Plaintiff, various breaches of contracts, and wage and hour claims.

Pursuant to the terms of the purchase agreement, and immediately after the acquisition in April 2020, Plaintiff was paid over $23,000,000 in connection with Performance Incentive Plan Units (PIPs) and Stock Appreciation Rights Awards (SARs). (TAC, ¶¶ 20, 54, 173.) As a pre-condition to the payout, Plaintiff signed separate Release Agreements relating to the PIPs and SARs, releasing any claims whatsoever relating to the payments. (TAC, Exs. 12, 13.) Plaintiff signed these releases and later signed a new Employment Agreement with Damco in his executive role, until he quit in December 2020 to become the CEO of another company. (TAC, ¶ 45, Exs. 1, 2, 4, 5, 14, 15.)

On December 4, 2023, Defendant Kaplan demurred to the Third Amended Complaint. Defendant also moved to strike portions of the TAC. Plaintiff filed an opposition to the demurrer and motion to strike. The Court overruled the demurrer to first, second, and sixth causes of action and sustained as to the fifth, ninth and tenth causes of action; the motion to strike was granted in part, denied in part, and moot in part.

            Now, Defendant Performance Team LLC (Performance Team) demurs to the first through tenth causes of action on the Third Amended Complaint. Defendant also moves to strike portions of the TAC. Plaintiff filed an opposition to the demurrer and motion to strike.

            The Demurrer to the Third Amended Complaint is overruled as to the first, second, third, fourth, and sixth causes of action, and sustained as to the fifth, seventh, eighth, ninth and tenth causes of action without leave to amend. The Motion to Strike is granted in part, denied in part, and moot in part.

Legal Standard for Demurrers

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc. § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (Code Civ. Proc., § 452.) The court “ ‘ “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law . . . .” ’ ”  (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525.) In applying these standards, the court liberally construes the complaint to determine whether a cause of action has been stated. (Picton v. Anderson Union High School Dist. (1996) 50 Cal.App.4th 726, 733.)

Seventh, Eighth, Ninth and Tenth Causes of Action - Affirmative Defense based on the Releases

            Defendant Performance Team demurs to the seventh, eighth, ninth and tenth causes of action on the grounds that the claims are barred by the Releases.

            “A written release generally extinguishes any obligation covered by its terms, provided it has not been obtained by fraud, deception, misrepresentation, duress or undue influence.” (Tarpy v. County of San Diego (2003) 110 Cal.App.4th 267, 276; Skrbina v. Fleming Companies (1996) 45 Cal.App.4th 1353, 1366.) That is, “[w]hen a person with the capacity of reading and understanding an instrument signs it, he is, in the absence of fraud and imposition, bound by its contents and estopped from saying that its provisions are contrary to his intentions or understanding.” (Tarpy v. County of San Diego, supra, 110 Cal.App.4th at 276; Jefferson v. Department of Youth Authority (2002) 28 Cal.4th 299, 303.)

            Here, the seventh cause of action for breach of the PIP Agreement and the eighth cause of action for the breach of the SAR Agreement allege that Defendant Performance Team breached its obligations under the PIP Agreement by failing to pay Plaintiff Katab the full value of his PIP Units in connection with the Purchase Transaction (TAC ¶ 162) and breached its obligations under the SAR Agreement by failing to pay Plaintiff Katab the full value of his SAR Units in connection with the Purchase Transaction (TAC ¶ 168).

The ninth cause of action for conversion and the tenth cause of action for violation of Penal Code section 496 are based on Plaintiff’s allegation that he was underpaid the value of his PIPs/SARs that he earned during his employment with Performance Team when Performance Team was acquired in April 2020. (TAC ¶¶ 43-53; 172–179; 180-189.) Specifically, the ninth cause of action for conversion alleges “Defendants” unlawfully “withheld” and thereby converted $6.7 million from the “Katab Damco Funds” and proceeds of the sale of Performance Team in April 2020, which Plaintiff alleges belonged to him. (TAC ¶ 176.)

The tenth cause of action for violation of Penal Code section 496 alleges Plaintiff’s underpayment of his PIPs and SARs was the result of criminal “fraud or deceit,” and that the proceeds were withheld in a “manner constituting theft.” (TAC ¶ 182.)

            In connection with the sale of Performance Team, Defendants were required to deliver SAR and PIP Releases (Releases) to Damco on or before April 1, 2020. (TAC ¶ 33.) Those Releases released Defendant Kaplan and Performance Team from any claims that Plaintiff may have arising out of or relating to any PIP or SAR payments or Plaintiff’s employment with Performance Team. (TAC, Exs. 12-13.)

            Specifically, the PIP Release states, in relevant part:

“Effective upon the payment…of the PIP Payment Amount and consideration in the amount of $5,000…[Plaintiff]…forever, unconditionally and irrevocably releases and forever discharges (and covenants not to sue) the Company, PT Holdings, [Performance Team, LLC], [Damco Distribution Services, Inc.] and each of their current and former…directors, managers (including Craig Kaplan)…in respect of, arising out of, relating to, as a result of or in connection with…the calculation and determination of the PIP Payment Amount…or with respect to [Plaintiff’s] receipt of the PIP Payment Amount….” (TAC Ex. 12.)

            The SAR Release states, in relevant part:

“Participant understands payment under the 2019 SAR Agreement is intended as a full and complete payment satisfying any rights to related benefits or compensation under that Agreement and any predecessor or related agreements. Participant acknowledges the sufficiency and satisfaction of all payments owed to Participant by Company, Performance Team PIP LLC, or any other related entity… at the time the release is signed, including without limitation the payment of wages, bonuses, 2011 Performance Team LLC Stock Appreciation Rights Plan, and amount under the Performance Team PIP LLC Restricted Unit Incentive Plan.” C

On March 24, 2020, Plaintiff executed the Releases. (TAC ¶¶ 35-45, Exs. 12-13.) Both Releases allowed Plaintiff seven days to revoke the Releases after signing them. (TAC, Ex., 12, p. 1, Ex. 13 p. 3.)

Defendant Performance Team argues these Releases provide a complete defense to the claims relating to those payments – the seventh, eighth, ninth and tenth causes of action. Further, Defendant argues that the TAC’s allegations attempting to vitiate these Releases fail.

In opposition, Plaintiff argues three independent grounds to vitiate these Releases. These are the same grounds the Court found unpersuasive in its ruling on Defendant Kaplan’s demurrer based on the Releases.

Thus, for the reasons stated in that ruling, the demurrer is sustained to the seventh, eighth, ninth and tenth causes of action without leave to amend.

First and Second Causes of Action

            Defendant Performance Team joins Defendant Kaplan’s demurrer to the first and second causes of action. (Dem., 12:15-18.)

            The first cause of action alleges that Defendants failed to pay bonuses Plaintiff was entitled to within 72 hours of his termination. (TAC ¶¶ 56-61, 83-88.) Similarly, the second cause of action alleging that Defendant did not pay Plaintiff for accrued vacation time at the time of Plaintiff’s termination. (TAC ¶¶ 96-100.)

            For the reasons stated in the Court’s ruling on the previous demurrer, the demurrer to the first and second causes of action are overruled.

Third and Fourth Causes of Action for Breach of Contracts

            On demurrer, Defendant Performance Team argues that Plaintiff has failed to allege facts showing that Plaintiff performed all the preconditions to effectuating a “good reason” resignation and failed to plead compliance with the “good reason” notice requirements.

            The third cause of action for breach of the Employment Agreement alleges that Defendant Performance Team breached the Employment Agreement by refusing to pay to Plaintiff Katab the Performance Bonus and Add-On Bonus and by making the payment of the Performance Bonus contingent upon signing a general release which contained an invalid and unenforceable restrictive covenant. (TAC ¶ 110.) In the alternative, Plaintiff Katab is entitled to the Performance Bonus and Add- On Bonus because he terminated his employment with Defendant Performance Team for Good Reason. (TAC ¶ 111.)

            The fourth cause of action for breach of the Retention Agreement alleges Defendant Performance Team breached the Retention Agreement by failing to pay Plaintiff a Retention Bonus of $1.5 million after Plaintiff resigned from his employment with Defendant Performance Team for Good Reason. (TAC ¶ 121.)

            In demurring to both causes of action, Defendant argues that, to effectuate a “Good Reason” resignation under those agreements, Plaintiff was required to “provide written notice of termination for Good Reason to the Company [PTL] within 30 days after the event constituting the Good Reason.” (TAC, Ex. 1, § 8; Ex. 2, § 3(b).) Then, Performance Team has a period of 30 days in which it may correct the act or failure to act that constitutes the grounds for Good Reason as set forth in the Executive’s notice of termination.” (TAC, Ex. 1, § 8; Ex. 2, § 3(b). Next, and only if “the Company does not correct the act or failure to act” during the 30-day cure period, Plaintiff’s employment would “terminate for Good Reason on the first business day following the Company’s 30-day cure period.” (TAC, Ex. 1, § 8; Ex. 2, § 3(b).) These notices are only to be deemed “given” if hand-delivered or mailed by registered and certified mail to Performance Team’s General Counsel in Florham Park, New Jersey. (TAC, Ex. 1, § 15; Ex. 2, § 7.)

            The demurrer argues that Plaintiff has not pled compliance with these requirements and thus, have not demonstrated entitlement to the benefits of a “Good Reason” resignation.

            In opposition, Plaintiff argues that his communication with Defendant Kaplan modified the notice requirements of the Employment Agreement and the Retention Agreement (collectively, Agreements). Specifically, the TAC alleges Defendant Kaplan, as the alter ego of Performance Team, directed Plaintiff to only communicate with Kaplan about Plaintiff’s concerns regarding his duties and responsibilities, and to not communicate by email about his concerns. (TAC ¶ 63.)

            Plaintiff acknowledges that the Agreements provide that they can only be modified by written document signed by Plaintiff and Performance Team. However, as cited by Plaintiff in his opposition, “ ‘the parties may, by their conduct, waive such a provision’ where evidence shows that was their intent.” (Biren v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 141.) Thus, for the purposes of this demurrer, this technical defect in complying with the notice is not fatal, especially where the TAC alleges that Defendant Kaplan specifically directed Plaintiff to communicate only with him, orally. (TAC ¶ 63.) Further, the requirement that notice be written and sent to Performance Team’s General Counsel per section 15 of the Employment Agreement and section 7 of the Retention Agreement is also subject to this modification argument.

            Performance Team further contends that Plaintiff failed to comply with the requirement for timely providing notice of the Good Reason. Specifically, Defendant notes that the Plaintiff alleges that the material alteration of his duties occurred “[s]hortly after the close” of the sale of Performance Team, but it was not until December 22, 2020—over six (6) months after the close of the sale transaction—that Plaintiff allegedly “notified Defendant Kaplan … that he was resigning from his employment with Defendant Performance Team . . ..” (TAC ¶ 16.) Thus, it was not within the 30 days required. (TAC, Ex. 1, § 8; Ex. 2, § 3(b) [To effectuate a “Good Reason” resignation under those agreements, Plaintiff was required to “provide written notice of termination for Good Reason to the Company [Performance Team] within 30 days after the event constituting the Good Reason.”].)

            As argued in Plaintiff’s opposition, the exact date of when the material alternation occurred, triggering the notice requirement, is uncertain. That is, Plaintiff argues that the “TAC does not indicate that Plaintiff’s duties and responsibilities increased exactly once, and thereafter remained constant.” (Opp., 12:24-25.) At the pleading stage, this argument is well taken. The allegations do not affirmatively indicate non-compliance with this specific notice requirement given the possibility of changes to different duties and responsibility over time, culminating in the alleged material alteration.

            Defendant Performance Team further argues that, even assuming Plaintiff’s alleged notice of his resignation on December 22, 2020 to Defendant Kaplan was effective to initiate a Good Reason resignation under his agreements, Plaintiff still failed to provide Performance Team with “30 days in which it may correct the act or failure to act that constitutes the grounds for Good Reason as set forth in the Executive’s notice of termination.” (TAC, Ex. 1, § 8; Ex. 2, § 3(b).) Instead, Plaintiff alleges he stopped working for Performance Team on January 15, 2021 – 24 days after he notified Kaplan of his resignation. (TAC ¶ 67.)

            Here, the TAC alleges that Plaintiff gave notice “[w]ithin months of signing the Employment Agreement and Retention Agreement” of his concerns regarding the increase in his duties and responsibilities. (TAC ¶ 62.) Based on this allegation, the “notice of termination for Good Reason” referenced in the Employment and Retention Agreements can reasonably be interpreted to refer to notice of the grounds constituting Good Reason such that this allegation is sufficiently pleaded.

            Finally, Plaintiff generally argues the allegations demonstrate substantial performance with the notice requirements of Employment and Retention Agreements.

            “In California, a party is deemed to have substantially complied with an obligation where the deviation is “unintentional and so minor or trivial as not ‘substantially to defeat the object which the parties intend to accomplish.’ ”” (Ewing v. K2 Property Development, LLC (S.D. Cal., Oct. 4, 2018, No. 16CV678-LAB (AGS)) 2018 WL 4852159, at *3 [quoting Wells Benz, Inc. v. United States (9th Cir. 1964) 333 F.2d 89, 92 and Connell v. Higgins (1915) 170 Cal. 541, 556.) “This standard doesn't require perfection ... [and] deviations are permitted so long as they don't defeat the object of the [agreement.]” (Rouser v. White (9th Cir. 2016) 825 F.3d 1076, 1082.)

            When a contract is substantially performed, a minor breach is deemed immaterial. “Under the doctrine [of substantial performance], minor or technical breaches of a contract are excused, not because the breaching party could not have performed completely but because the performance that was rendered was so similar or close to that required under the contract that the failure to perform exactly results in an immaterial breach, the non-breaching party having gotten substantially what it bargained for.” (15 Williston on Contracts (4th ed.) § 44:52 [emphasis in original].)

            The reply does not address this opposition argument. The allegations in the TAC are sufficient at the pleading stage to demonstrate substantial performance.

            The demurrer to the third and fourth causes of action are overruled.

Fifth Causes of Action for Business and Professions Code section 17203

            Defendant Performance Team demurs to the fifth cause of action based on Plaintiff’s failure to state a claim under Business and Professions Code section 17203.

            As a preliminary matter, Defendant is correct that injunctive relief and restitution are remedies and not causes of action. (Dem., 17:12.)

            It is well settled that injunctive relief is an equitable remedy, not a cause of action. (Shell Oil Co. v. Richter (1942) 52 Cal.App.2d 164, 168 [“Injunctive relief is a remedy and not, in itself, a cause of action, and a cause of action must exist before injunctive relief may be granted.”]; Venice Coalition to Preserve Unique Community Character v. City of Los Angeles (2019) 31 Cal.App.5th 42, 54 [“An injunction is a remedy, not a cause of action.”]; Wong v. Jing (2010) 189 Cal.App.4th 1354, 1360, fn. 2 [same; anti-SLAPP appeal].)

            Further, restitution is also a remedy. (Colgan v. Leatherman Tool Group, Inc. (2006) 135 Cal.App.4th 663, 699 [“Whether restitution is in the form of an equitable remedy or legal remedy, the relief is based on a specific amount found owing.”]; American Psychometric Consultants, Inc. v. Workers' Comp. Appeals Bd. (1995) 36 Cal.App.4th 1626, 1645 [“Restitution is an equitable remedy which has primarily been utilized by courts to prevent unjust enrichment.”]; Jogani v. Superior Court (2008) 165 Cal.App.4th 901, 910 [“[R]estitution can be a legal, as opposed to equitable, remedy.”].)

However, notwithstanding the label, the claim will stand if it sufficiently states a cause of action supporting these remedies. (Daly v. Exxon Corp. (1997) 55 Cal.App.4th 39, 43 [“Regardless of the label attached to the cause of action, we must examine the complaint’s factual allegations to determine whether they state a cause of action on any available legal theory. [Citation.] Reversible error is committed if the facts alleged show entitlement to relief under any possible legal theory.”].)

            Here, the violation for unfair business practices appears to rest upon Plaintiff’s claim that there are unlawful restrictive covenants in Plaintiff’s employment agreements, which violate Business and Professions Code section 16600, and the Releases are unlawful under Labor Code section 206.5.[1] (TAC ¶¶ 134, 140.)

            In response to the restrictive covenant allegation, Defendant argues this claim is not ripe where there is no allegation that Defendant has made any attempt to enforce this restrictive covenant or otherwise suggest that this provision is at issue between the parties. The Court agrees that the mere inclusion of this arguably unlawful provision in an employment agreement is, alone, not a basis for a violation of Business and Professions Code section 16600 where there are no other allegations suggesting a real controversy. (Communities for a Better Environment v. State Energy Resources Conservation & Development Com. (2017) 19 Cal.App.5th 725, 733 [“[U]nripe cases are those “ ‘in which parties seek a judicial declaration on a question of law, though no actual dispute or controversy ever existed between them requiring the declaration for its determination.””].)

            Additionally, the Fifth Cause of Action also seeks injunctive relief to redress Defendants’ unlawful conduct regarding the Releases that Plaintiff contends violates California Labor Code section 206.5. (TAC ¶¶ 133, 140.) As discussed in the Court’s analysis of Labor Code section 260.5 in its previous ruling on the demurrer, this argument fails.

            Thus, there are no causes of action to support the requested remedies of preliminary injunction and restitution under this cause of action. The demurrer to this cause of action is sustained without leave to amend.

Sixth Cause of Action for Declaratory Relief

To state a claim for declaratory relief, the plaintiff must allege facts showing there is a dispute between the parties concerning their legal rights, constituting an “actual controversy” within the meaning of the declaratory relief statute. (Code Civ. Proc., § 1060; Artus v Gramercy Towers Condominium Assn. (2018) 19 Cal.App.5th 923, 930.)

This cause of action sets forth clear existing controversies regarding rights and obligations relating to the Employment Agreement and Retention Agreement. (TAC ¶ 147-156.) Thus, the demurrer to this cause of action is overruled.

Legal Standard for Motions to Strike

            “The court may, upon a motion made pursuant to Section 435, or at any time in its discretion, and upon terms it deems proper: (a) Strike out any irrelevant, false, or improper matter inserted in any pleading. (b) Strike out 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.”¿(Code Civ. Proc., § 436.) “Immaterial” or “irrelevant” matters include allegations not essential to the claim, allegations neither pertinent to nor supported by an otherwise sufficient claim or a demand for judgment requesting relief not supported by the allegations of the complaint. (Code Civ. Proc., § 431.10, subds. (b)(1)-(3).)

Discussion

            Defendant Performance Team, through its joinder to the Motion to Strike portions of the TAC filed by Defendant Kaplan, moves to strike the request for various forms of relief, sham allegations, allegations added without leave from the Court and punitive damages from the TAC. (Kaplan’s Mot., 2:2:5-26.) Specifically, Defendant seeks to strike the following:

1. Plaintiff's allegation that he was shown a final worksheet of his payout “on or about the April 1, 2020 closing of the Purchase Transaction,” rather than before the closing, and allegations that Plaintiff was fraudulently induced to enter into the Releases, which directly contradict Plaintiff’s prior allegations in the FAC and the Exhibit 16 thereto, as sham pleading (TAC, ¶¶ 41, 42, 45, 49, 125, 164, 170, 188);

2. Plaintiff’s allegations regarding and request for injunctive relief and restitution as alleged in his Fifth Cause of Action, as it is an unsupported and improperly alleged claim for relief (TAC, ¶¶ 129–144, and p. 32:2–5);

3. Plaintiff’s allegations regarding and request for injunctive relief and restitution as alleged in his Sixth Cause of Action, as it is an unsupported and improperly alleged claim for relief (TAC, ¶¶ 145–159, and p. 32:1);

4. Plaintiff’s addition of Performance Team PIP, LLC as a defendant and allegations regarding Performance Team PIP, LLC, as an amendment improperly made without leave of Court (TAC, p. 1 (caption), p. 2:2, ¶¶ 4, 18, 28);

5. Plaintiff’s allegations regarding alter ego liability, as an amendment improperly made without leave of Court (TAC, ¶¶ 4, 18, 19);

6. Plaintiff’s allegations regarding joint employer liability, as an amendment improperly made without leave of Court (TAC, ¶ 19); and

7. Plaintiff’s prayer for punitive damages, as Plaintiff fails to adequately allege the requisite malice, fraud, or oppression (TAC, ¶ 179, and p. 31:25).

            The Court denies the motion to strike as to Nos. 4-6.

Further, based on the Court’s ruling on demurrer, Nos. 1-3 are moot.

Moreover, after sustaining the demurrer to the fifth, ninth and tenth causes of action, no claim remains to support the request for punitive damages. As the motion to strike correctly argues, the first and second causes of action cannot, as a matter of law, support a request for punitive damages. (Mot., 18:8-15 [citing Cones v. Parexel International Corporation (S.D. Cal., July 7, 2017, No. 3:16-CV-03084-L-BGS) 2017 WL 2908789, at *1].) Plaintiff concedes this point. (Opp. To Kaplan’s Mot., 17:3-4.) Further, the remaining claims for breaches of contract and the derivative claim for declaratory relief also cannot support a request for punitive damages, as a matter of law.

Accordingly, the motion to strike is granted as to the request for punitive damages.

The motion to strike is granted in part, denied in part, and moot in part.

Conclusion

The Demurrer to the Third Amended Complaint is overruled as to the first, second, third, fourth and sixth causes of action.  The Demurrer is sustained as to the fifth, seventh, eighth, ninth and tenth causes of action without leave to amend. The Motion to Strike is granted in part, denied in part, and moot in part.