Judge Bruce G. Iwasaki, Case 21STCV45776 2022-08-23 Tentative Ruling

Tentative Ruling: The demurrer is sustained as to the first, second, third, and tenth causes of action with leave to amend. The demurrer is overruled as to the fourth, fifth, seventh, ninth, and thirteenth causes of action. Plaintiff shall have 30 days leave to amend the Complaint.

This case involves several business contracts dealing with cannabis distribution. Woodrow Wong (Wong) and GWC Real Estate Services (Plaintiffs) sued Defendants Jerrod Gutierrez (Gutierrez); Otto Beasley; JFTC Group, Inc.; Loyalty AC, LLC; GMM International, Inc.; Cannacore Medical Network, Inc.; TFB Solutions; and Flawless Vodka for breach of contract, racketeering activity, conversion, unfair business practices, money had and received, violation of the Ralph Act, breach of fiduciary duty, unjust enrichment, fraudulent inducement, negligent misrepresentation, account, and violation of Penal Code section 496(a).

Wong alleges that he entered into a partnership with Gutierrez in September 2016 (Pomona Project). In early 2017, as part of that project, Wong organized a group of his family and friends who lent money to Gutierrez. A total of five promissory notes were executed:

The Complaint alleges that all the interests above were assigned to Wong for collection purposes.

In June 2017, Gutierrez allegedly proposed another partnership to Wong, as to an operation of a cannabis cultivation facility in Phelan, California (Phelan Project). The Complaint alleges that Gutierrez represented this operation was legal. Wong allegedly provided $650,000.00 to Gutierrez to purchase the land for this operation.

On August 31, 2017, Gutierrez and Wong allegedly entered into another partnership as to a storefront cannabis dispensary in San Bernardino (Arrowhead Project). The Complaint alleged that Wong provided $125,000.00, but Gutierrez never opened the dispensary.

After not receiving any payments under the Pomona Project, Phelan Project, Arrowhead Project, or the five promissory notes, Wong began pressuring Gutierrez. In response, between June 2018 and December 2019, Gutierrez allegedly called Wong racial epithets and threatened him with violence.

Gutierrez and Flawless Vodka separately demur to the Complaint. The arguments made by both parties are nearly identical and so the Court will combine the analysis.

Gutierrez demurs to the claims for breach of contract, Racketeer Influenced and Corrupt Organizations (RICO), conversion, unfair business practices, Ralph Act violations, unjust enrichment, fraudulent inducement, and violation of Penal Code section 496(a).

Flawless Vodka demurs to the claims for RICO, conversion, unfair business practices, and unjust enrichment.

Plaintiffs oppose, arguing that the facts are sufficient. Defendants replied, reiterating the arguments in their 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.” (§ 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.) 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.)

To state a claim for breach of contract, a plaintiff must allege sufficient facts to establish: (1) a contract between the parties; (2) plaintiff's performance or excuse for nonperformance; (3) defendant's breach; and (4) damages to plaintiff from the breach. (Wall Street Network, Ltd. v. New York Times Co. (2008) 164 Cal.App.4th 1171, 1178.)

If multiple contracts are involved, it is better to plead them as separate causes of action. Otherwise, there may be a lack of clarity about which contract is the basis of the cause of action, and which acts are the alleged breaches of which contract, as well as the associated damages. (See, Leader v. Health Industries of America, Inc. (2001) 89 Cal.App.4th 603, 608; Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2022) ¶¶ 6:104.)

Here, Defendant demurs to the first cause of action based on insufficient facts and uncertainty because multiple contracts are described. The Court agrees. Plaintiffs allege the existence of five different contracts. (Complaint, ¶¶ 58, 60, 61, 62, 64.) However, there is no allegation that Plaintiffs performed under any of those contracts. While this element is essential, it is easily pleaded. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1389 [“It is sufficient for a plaintiff to simply allege that he has ‘duly performed all the conditions on his part’ ”].)[1]

Furthermore, the Complaint does not contain sufficient facts. A complaint may plead the contract verbatim, attach a copy as an exhibit, or set forth its legal effect. If Plaintiffs opt to plead a contract’s legal effect, they must “ ‘allege the substance of its relevant terms.’ ” (McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1489.) In their first cause of action, Plaintiffs allege that Defendants have defaulted in payment and cites to “Section 6(a) of the Promissory Note” and “Section 7(i).” (Complaint, ¶¶ 59, 60, 61, 62, 64.) But Plaintiffs do not provide any details as to what is stated within those sections. In addition, the damages are pled in a vague manner in that Plaintiffs allege Defendants owe “most of” the amounts but does not specify the number. (Ibid.)

Finally, while Plaintiff alleges that the other four borrowers assigned their interest to Plaintiff, there may be potential confusion and uncertainty as to combining all the contracts into one cause of action. The Court therefore sustains the demurrer as to the first cause of action.

The demurrer is similarly sustained for the second cause of action for breach of the partnership agreements. Plaintiffs again allege two different partnership agreements: the Phelan Project and the Arrowhead Project. And again, they allege that Defendant breached “Sections 2 and 9” of the respective partnership agreements without specifying the terms of those sections.

However, the Court disagrees with Defendant’s argument that the partnership contracts are illegal because none of the parties had cannabis licenses. Both of Defendant’s cited cases, Yoo v. Jho (2007) 147 Cal.App.4th 1249, 1251 and Fellom v. Adams (1969) 274 Cal.App.2d 855, 859, were appeals from a judgment on a trial. The trial court in those cases made factual findings that the contracts were illegal. Here, Defendant cites to no law and his argument is circular: “All parties were aware to be an owner of a cannabis license, you must both be on the license and neither party was on a cannabis license nor participated in applying and receiving one.” Assuming Defendants mean distribution of cannabis, then Plaintiffs have pled that Gutierrez represented himself as “fully licensed” to serve as a cannabis distribution collective. (Complaint, ¶ 25.) The Court assumes the truth of these allegations for demurrer purposes.

In sum, the Court sustains the demurrer as to these two causes of action. Plaintiff is granted thirty days leave from the date of the hearing to amend the Complaint.

“The elements of a civil RICO cause of action have been variously stated and in fact differ according to the type of prohibited activity alleged. In general, however, the plaintiff must prove that the defendant caused injury to the plaintiff's business or property by engaging in a pattern of racketeering activity in connection with an enterprise which affects interstate commerce.” (Gervase v. Superior Court (1995) 31 Cal.App.4th 1218, 1232.) Broken down into elements, plaintiffs must generally plead “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” (McMartin v. Children’s Institute International (1989) 212 Cal.App.3d 1393, 1406.) “For an act or omission to qualify as racketeering activity, it must be included in the list of activities set forth in title 18 United States Code section 1961(1).” (Gervase v. Superior Court, supra, 31 Cal.App.4th at p. 1232.)

Plaintiffs are required to “specifically plead the time, place or nature of the alleged communications constituting racketeering activity.” (McMartin v. Children’s Institute, supra, 212 Cal.App.3d at p. 1407.)

Racketeering activity is defined as any act “chargeable” under numerous state criminal laws, any act “indictable” under numerous specific federal criminal provisions, including mail and wire fraud, and any “offense” involving bankruptcy or securities fraud or drug-related activities that is “punishable” under federal law. (18 USC § 1961(1).) A “pattern of racketeering activity” requires at least two acts of racketeering activity. (18 USC § 1961(5).)

Defendants assert that a conclusory allegation that there was interstate commerce is insufficient. Plaintiff opposes, arguing that ultimate facts are sufficient, relying on United States v. Fernandez (9th Cir. 2004) 388 F.3d 1199 (Fernandez).

Fernandez is factually distinguishable because that case involved a challenge to a criminal indictment, which are generally held sufficient “ ‘if it sets forth the elements of the charged offense so as to ensure the right of the defendant not to be placed in double jeopardy and to be informed of the offense charged.’ ” (Fernandez, supra, 388 F.3d at pp. 1217-1218.)

Apart from the interstate commerce issue, the Complaint does not allege a pattern of racketeering activity in connection with an enterprise. Plaintiffs merely allege that Defendant Gutierrez held himself out as a “cannabis and herbal collective operations expert throughout the southwestern United Sates [sic] for over 15 years” and that Gutierrez “uses the appearance and trappings of a wealthy lifestyle . . . to dupe investors and business partners into investing money in his enterprise.” (Complaint, ¶ 82.) This is too vague and broad.

Plaintiffs further allege that Gutierrez “uses these tactics to gain investors, form new companies with victims, or infiltrate and seize control of existing legitimate companies,” thus implementing a “cycle [that] has been repeated multiple times.” (Complaint, ¶ 85.) However, these allegations fail specifically to name the time and victims of such alleged racketeering activity, and thus fail to allege the requisite pattern.

The tort of conversion requires “ ‘(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.’ ” (Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1405.)

Defendants cite no authority for their proposition that Plaintiffs must “be specific as to what was removed or claimed to be removed.” In any event, the Court finds that the Complaint sufficiently identifies the converted items were “products, equipment, supplies, resources, and devices therefrom, including cannabis crops and tools of the trade.” (Complaint, ¶ 101.) The demurrer to the fourth cause of action is overruled.

California Business and Professions Code section 17200 prohibits “any unlawful, unfair or fraudulent business act or practice.” (Bus. & Prof. Code § 17200; see Clark v. Superior Court (2010) 50 Cal.4th 605, 610.) “A plaintiff alleging unfair business practices under these statutes must state with reasonable particularity the facts supporting the statutory elements of the violation. [Citations.]” (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 619.)

This cause of action is predicated on the conversion and fraud claims. (Complaint, ¶¶ 108, 109.) Because the Court finds that conversion is sufficiently pled, the demurrer as to this cause of action is overruled.

The Ralph Civil Rights Act provides that “All persons within the jurisdiction of this state have the right to be free from any violence, or intimidation by threat of violence, committed against their persons or property because of political affiliation, or on account of any characteristic listed or defined in subdivision (b) or (e) of section 51, or position in a labor dispute, or because another person perceives them to have one or more of those characteristics." (Civ. Code, § 51.7, subd. (b)(1).)

Defendant argues that the statute of limitations for a claim under Civil Code section 51.7 is one year. However, he relies upon two cases from 1990 and 2000. In January 2006, the Legislature amended the corresponding statutes to reflect a three-year statute of limitations. Under Civil Code section 52, subdivision (b)(2), an action for the civil penalty to be awarded to the “person denied the right provided by Section 51.7 . . . shall be commenced within three years of the alleged practice.” Similarly, Code of Civil Procedure section 338, subdivision (n) provides for a three-year period for “[a]n action commencing under Section 51.7 of the Civil Code.” Because the Complaint alleged discriminatory insults and threats in 2019, the Court overrules the demurrer as to this cause of action.

Unjust enrichment is not an independent cause of action but is synonymous with the remedy of restitution. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231.) Recovery is allowed if the plaintiff asserts a proper basis for recovering restitution such as quasi-contract, fraud, duress, conversion or other similar conduct. (See Durrell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1370; McBride v. Boughton (2004) 123 Cal.App.4th 379, 387-88.) “[T]he elements for a claim of unjust enrichment [are] receipt of a benefit and unjust retention of the benefit at the expense of another.” (Lectrodryer v. Seoulbank (2000) 77 Cal.App.4th 723, 726.)

Appellate courts are split as to whether unjust enrichment is a cause of action or a principle of law. (Compare Jogani v. Superior Court (2008) 165 Cal.App.4th 901, 911 [not a cause of action] with Hirsch v. Bank of America (2003) 107 Cal.App.4th 708, 721 [unjust enrichment claim survives demurrer because it is “grounded in equitable principles of restitution”].)

Regardless of whether unjust enrichment is a separate cause of action, the Court overrules the demurrer. To the extent that Plaintiffs are seeking restitution on the conversion claim, this is sufficient. (Complaint, ¶ 141; Newhall Land & Farming Co. v. Superior Court (1993) 19 Cal.App.4th 334, 351 [“A complaint may state multiple legal theories upon which recovery might be predicated for one claim for relief”].)

Fraud must be pled specifically, not with “general and conclusory allegations.” (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184; Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73 [“This particularity requirement necessitates pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.”)

Defendant argues that the Complaint alleges nothing more than non-performance of the contract. This is well-taken. The Complaint asserts that Gutierrez made “material misrepresentations and false assurances to Plaintiff, including, without limitation, the promise that no monies derived from the projects would be distributed to Defendant until 100% of the principal plus interest was fully recouped and paid.” (Complaint, ¶ 144.) However, there are no details as to when and where this was stated, and how (whether orally or written) it was conveyed. Given that there are at least eight different contracts at issue here, Plaintiff must plead specifically as to what Gutierrez stated with respect to each contract.

Penal Code section 496, subdivision (a) states that “[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, shall be punished by imprisonment in a county jail for not more than one year.” Subdivision (c) creates a private right of action for victims to “bring an action for three times the amount of actual damages, if any, sustained.”

Defendant argues that allowing for treble damages under Penal Code section 496, subdivision (c) would violate public policy, relying on Siry Investment, L.P. v. Farkhondehpour (2020) 45 Cal.App.5th 1098. Specifically, he asserts that (1) the law of torts already provides adequate remedies and additional remedies under the Penal Code would be excessive, (2) allowing for treble damages would effectively repeal the punitive damages statute, and (3) the attorney fee provision would authorize fee shifting in nearly every tort case. However, the California Supreme Court has recently reversed the Court of Appeal and rejected its statutory reasoning. (Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333 (Siry).)[2]

In Siry, the parties formed a partnership to renovate and lease space in a mixed-use building. Defendants then created a separate entity and required the tenants to pay rent to that entity, improperly diverting rental income away from the partnership. The first jury trial resulted in an ambiguous verdict because it was unclear whether defendant was liable as a trustee or individually. After the Court of Appeal remanded the case for retrial, defendants failed to respond to discovery and the trial court issued terminating sanctions. This resulted in a default judgment of over $12 million against the defendants. (Id. at pp. 340-341.) The trial court awarded treble damages, but the Court of Appeal ordered this to be stricken for the policy reasons that Defendants cite above. The Court of Appeal held that the statutory language “ ‘sweeps more broadly than its intent’ ” and that treble damages were unavailable for “ ‘torts not involving stolen property.’ ” (Id. at p. 360.) In so holding, the court noted that the current case “presents a situation in which perceived ‘legislative intent’ (to maintain traditional remedies for torts involving fraud, misrepresentation, or breach of fiduciary duty) ‘trump[s] [the] statute’s plain language.’ ” (Id. at pp. 360-361.)

Our Supreme Court disagreed with the reasoning of the Court of Appeal and reversed as to the treble damages issue. In analyzing three different appellate cases, the High Court agreed that the statutory language of Penal Code section 496(c) is “unambiguous, and that read together with sections 496(a) and 484 . . . must be understood as yielding the understanding attributed to it in those decisions: A plaintiff may recover treble damages and attorney’s fees under section 496(c) when property has been obtained in any manner constituting theft.” (Siry, supra, 13 Cal.5th at p. 361.) Such a manner includes “fraudulent diversion of partnership funds.” (Id. at pp. 364-367.)

The Supreme Court was mindful that a plaintiff must still “establish criminal intent on the part of the defendant beyond ‘mere proof of nonperformance or actual falsity.’ [Citation.]” (Id. at pp. 361-362.) However, it recognized that these “policy issues have not been hidden from the Legislature’s attention” and that it is the task of the Legislature, not the courts, to address those concerns. (Id. at p. 367.)

Siry overrules the concerns that Defendants express in their demurrer. In any event, Siry also involved matters that were post-judgment and the Court need not address these concerns at the pleading stage. Thus, the Court finds that Plaintiffs may plead a violation of Penal Code section 496 and request treble damages. As pled, the allegations are sufficient: Plaintiffs assert that the Defendants stole cannabis products, embezzled funds, and burglarized the warehouses on three separate occasions. (Complaint, ¶¶ 170-172.) Accordingly, the Court overrules the demurrer as to the thirteenth cause of action.

The Court sustains the demurrer as to the first, second, third, and tenth causes of action. Plaintiff shall have leave to file and serve an amended Complaint no later than thirty days after the hearing. The demurrer is overruled as to the fourth, fifth, seventh, ninth, and thirteenth causes of action.

[1] Plaintiffs do allege performance in Paragraphs 68 and 71, but these were as to different partnerships.

[2] The Supreme Court’s decision was published after the demurrer was filed, but before the Plaintiff’s opposition, which failed to cite it.