Judge Bruce G. Iwasaki, Case 22STCV11771 2023-04-13 Tentative Ruling

Case Name: Truconnect Communications, Inc. v. Ground Floor Marketing, LLC, et al.

Tentative Ruling: Defendant’s demurrer to the second, third, fourth, fifth, and sixth causes of action is overruled. Defendant’s motion to strike is denied.

On April 7, 2022, Plaintiff TruConnect Communications Inc. (“Plaintiff”) filed this action against Defendant Ground Floor Marketing, LLC, (“Defendant”) alleging breach of agreement. After getting leave to amend the Complaint, Plaintiff filed a First Amended Complaint (“FAC”) on August 2, 2022. The operative FAC alleges (1) breach of contract, (2) intentional interference with prospective economic relations, (3) negligent interference with prospective economic relations, (4) aiding and abetting interference with prospective economic relations, (5) fraud, and (6) violation of California Penal Code § 496.

Plaintiff manages a free wireless telephone program for qualified, low-income households. In May 2021, Plaintiff contracted with Defendant. As part of the agreement, Plaintiff sent cellular devices to Defendant (with zero paid upfront), and Plaintiff was to provide the devices to qualified individuals who enrolled in the programs. (FAC ¶ 19-20.) On March 8, 2022, Plaintiff exercised its right to terminate the contract and demanded that Defendant return the devices or remit payment of $978,899.00 for the devices. (FAC ¶ 27-31.)

After filing the initial complaint, Plaintiff alleges that it discovered an online seller with the pseudonym “mr.hikmat642” selling its inventory online through eBay. Plaintiff then requested leave to file an amended complaint, which the court granted. The FAC additionally alleges that Defendant is selling these cellular tablets and devices through eBay, using the pseudonym to avoid detection. (FAC ¶ 6.) Plaintiff alleges that Defendant never intended to enter into the agreement for legitimate purposes, but instead created the appearance of being a legitimate company to deceive Plaintiff and take its devices to sell them to the outside market. (FAC ¶ 64.)

The Court has granted a preliminary injunction to enjoin Defendant from selling or transferring the 20,446 cellular tablets and devices in its possession.

On January 30, 2023, Defendant filed this demurrer. Defendant demurs to the second, third, fourth, fifth, and sixth causes of action. Defendant argues that the second, third, fourth, and fifth causes of action are barred by the economic loss rule. Defendant argues that the sixth cause of action does not plead the requisite criminal intent. Plaintiff has filed an opposition, and Defendant has filed a reply.

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.)

Defendant alleges that Plaintiff’s tortious interference and fraud claims are barred by the economic loss rule.

“The economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise. Quite simply, the economic loss rule ‘prevent[s] the law of contract and the law of tort from dissolving one into the other.” (Robinson Helicopter Co., Inc. v Dana Corp. (2004) 34 Cal.4th 979, 988 (citations omitted).)¿

“Tort¿damages¿have been permitted in contract cases where a breach of duty directly causes physical injury; for breach of the covenant of good faith and fair dealing in insurance contracts; for wrongful discharge in violation of fundamental public policy; or where the contract was¿fraudulently¿induced.¿In each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.” (Id. at 989-990.)¿

“Generally, outside the insurance context, ‘a tortious breach of contract ... may be found when (1) the breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion; or (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.’ [Citation.] Focusing on intentional conduct gives substance to the proposition that a breach of contract is tortious only when some independent duty arising from tort law is violated. [Citation.] If every negligent breach of a contract gives rise to tort damages the limitation would be meaningless, as would the statutory distinction between tort and contract remedies.” (Erlich v. Menezes (1999) 21 Cal.4th at 551, 553–554.)

The FAC alleges that Plaintiff engaged Defendant to help provide Internet service and cellular services to assist in its programs which provide Internet service to qualified low-income households. (FAC ¶¶ 2-3.) Specifically, Defendant agreed to order cellular devices from Plaintiff and provide those devices exclusively to qualified low-income consumers. (FAC ¶ 3.) However, Defendant failed to pay for the 20,446 cellular tablets and devices that it took from Plaintiff, and Plaintiff alleges that Defendant is selling the devices online on e-Bay to general consumers. (FAC ¶ 4-6.) Plaintiff alleges that Defendant “never intended to help TruConnect increase lifeline support participation. Instead, they created the appearance of being a legitimate company in order to deceive TruConnect and take its devices (which were intended solely for low-income consumers), so that they could then sell those same tablets on the open market…” (FAC ¶ 8.) Plaintiff alleges that it had multiple discussions with Defendants Voloshin and Merrill, who represented that Ground Floor was (a) was an industry-leading sales performance company, (b) was committed to helping TruConnect increase enrollment in the Programs, and (c) would guarantee increased enrollment in the Programs. (FAC ¶ 65.) Plaintiff alleges that these representations were falsely made to induce Plaintiff to give Defendant its devices so that they could sell the devices online to the general public. (FAC ¶¶ 66-68.)

It is clear that the FAC is alleging that the agreement was fraudulently induced. This is an exception to the economic loss rule, as stated above. (Robinson Helicopter, supra, 34 Cal.4th at 989-990; see Dhital v. Nissan North America, Inc. (2022) 84 Cal.App.5th 828, 841 [explaining that “a defendant's conduct in fraudulently inducing someone to enter a contract is separate from the defendant's later breach of the contract”].) Defendant argues that this exception does not apply, citing multiple cases where the fraud allegations were based on facts that a defendant did not intend to comply with the agreement, but falsely represented that it would comply. (See UMG Recordings, Inc. v. Glob. Eagle Ent., Inc. (C.D. Cal. 2015) 117 F. Supp. 3d 1092, 1106; Audigier Brand Mgmt. v. Perez, No. CV 12-5687-CAS RZX, 2012 WL 5470888, at *5 (C.D. Cal. Nov. 5, 2012); Grand Fabrics Int’l Ltd. v. Melrose Textile, Inc., No. 18-748 DSF (AFMX), 2018 WL 5880175, at *3 (C.D. Cal. Aug. 6, 2018).)

In opposition, Plaintiff cites to Robinson Helicopter, which held that plaintiff could bring a claim for fraud when the defendant provided intentionally false conformance certificates when supplying plaintiff with components pursuant to an agreement. (Robinson Helicopter, supra, 34 Cal.4th at 986, 990-991.) The court in this case found that providing the false certificates was “independent fraudulent conduct” distinct from the defendant’s contractual duty, explaining that “[t]he economic loss rule is designed to limit liability in commercial activities that negligently or inadvertently go awry, not to reward malefactors who affirmatively misrepresent and put people at risk.” (Id. at p. 991 fn. 7.)

Here, the allegations in the FAC are not premised on Defendant’s failure to comply with the terms of the contract, but rather independent fraudulent inducement to enter into the agreement. The FAC alleges that Defendant created the appearance of a legitimate business that was committed to helping Plaintiff gain enrollment with low-income consumers, all the while intending that Plaintiff provide the devices so that it could sell these devices on e-Bay to the general public. (FAC ¶¶ 64-65.) This is not analogous to the cases where a defendant only misrepresented that it would perform under the agreement, but rather is more analogous to Robinson Helicopter where the defendant engaged in independent fraud not within the bounds of the contract. Thus, the fraudulent inducement exception applies. Defendant’s demurrer as to the fifth cause of action is overruled.

Defendant argues that the second, third, and fourth causes of action are also barred by the economic loss rule, arguing that there is no harm independent of its breach of contract.

Defendant mischaracterizes these causes of action as solely based on its failure to return any of Plaintiff’s devices and pay the value of the inventory. Rather, these claims are primarily based on Defendant’s sale of the devices on eBay after the agreement was terminated between the parties. The FAC alleges that Plaintiff “had an existing relationship with the USAC and various government agencies (including the FCC), whereby those agencies would reimburse TruConnect for each qualified application that TruConnect submitted to them for enrollment in the Programs.” (FAC ¶ 35, 44, 53.) It alleges that “Defendants knew that by taking devices out of the Programs’ marketplace, and selling them through unapproved channels (e.g., e-Bay.com), they were interfering with TruConnect’s ability to receive reimbursements properly owed from the USAC and various other government agencies.” (FAC ¶ 38, see FAC ¶¶ 46, 54.)

Defendant cites cases in which the court found that negligence claims could not stand because the negligence allegations “closely parallel” the negligence claims. In Lincoln, the court found that the negligence claims were barred because the breach of contract claim alleged that defendant “failed to properly investigate liability, prepare reports, handle claims in accordance with established claims procedures, and coordinate litigation activity,” while the negligence claim alleged that defendant failed to respond to plaintiffs' demand letter, notify plaintiff of the claim, and obtain legal counsel to adequately represent plaintiff. (Lincoln Gen. Ins. Co. v. Access Claims Adm'rs, Inc., No. CIV. S071015LKK/EFB, 2007 WL 2492436, at *8 (E.D. Cal. Aug. 30, 2007.) The court found that the breach of contract claim subsumed the negligence claim. (Id.)

Here, the tortious interference claims are based on Defendant’s secret sale of the devices on eBay to the general public. This conduct is distinct from the claim for breach of contract. (See FAC ¶¶18-33.) Further, these actions allegedly occurred after the contract was terminated. (See FAC ¶¶ 6, 27.) Again, the court finds that this case is more closely analogous to Robinson Helicopter than the cases cited by Defendant, as independent tortious activity distinct from the breach of contract claim. Defendant does not explain how the alleged sale of the devices on eBay is related to, or “closely parallels” the breach of contract claim.

Defendant’s demurrer to the second, third, and fourth causes of action is overruled.

Defendant alleges that the sixth cause of action fails because it does not plead criminal intent.

Penal Code § 496 provides that “(a) Every 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, or imprisonment pursuant to subdivision (h) of Section 1170.” Subsection (c) provides that “[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.”

Here, the FAC pleads that “Defendants intended to defraud TruConnect. Defendants never intended to help increase LifeLine support participation, and only told TruConnect they would do so in order to take possession of 20,446 tablets, so that they could then sell those same tablets on the open market (i.e., rather than provide those devices to the specific consumers for whom they were intended). That Ground Floor is now selling those devices under a pseudonym named “mr.hikmat642” is indicative that it intended for TruConnect never to learn of those online sales.” (FAC ¶ 79.) This sufficiently provides facts to establish the requisite intent. The Complaint alleges that Defendant knew the tablets were obtained through false pretenses, and that they are selling them.

“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.)

Defendant requests that the second, third, fourth, fifth, and sixth causes of action be stricken. However, the arguments that Defendant puts forward are duplicative of the arguments put forward in the demurrer. Thus, these arguments fail.

Defendant also requests that the requests for treble and punitive damages should be stricken because these forms of relief arise from the tort and fraud claims. However, as the demurrers to these causes of action are overruled, the requests for treble and punitive damages can remain.

Defendant’s demurrer to the second, third, fourth, fifth, and sixth causes of action is overruled. Defendant’s motion to strike is denied.

Department 58