Judge Bruce G. Iwasaki, Case 22STCV20028 2022-10-28 Tentative Ruling

Case Name: Kathleen M. Meehan, individually and as Personal Representative of the Estate of Jacob Benadon v. Shapiro Villalobos & Associates, et al.

Moving Party: Defendants Shapiro Villalobos & Associates, Stuart Shapiro, and Laila Villalobos

Tentative Ruling: The demurrer is overruled. Defendants’ Answer is due November 17, 2022.

This is an action for breach of contract. Kathleen M. Meehan, individually and as Personal Representative of the Estate of Jacob Benadon (Plaintiff) sues Shapiro Villalobos & Associates (SVA), Stuart Shapiro, and Laila Villalobos (collectively Defendants).

Plaintiff alleges that her husband and decedent, Jacob Benadon, was a director of Benadon, Shapiro, and Villalobos (BSV), an accounting firm. In August 2012, individual Defendants Shapiro and Villalobos allegedly entered into an agreement with Benadon to purchase his interest in BSV. On September 1, 2013, a separate Promissory Note was allegedly executed in which BSV agreed to pay Benadon $850,880.00 spread out over 96 monthly payments. Plaintiff avers that after paying $323,499.50, Defendants stopped payment as an offset for loss of client revenue and indemnification of possible client claims. Plaintiff attaches the Promissory Note as Exhibit A to the Complaint.

Defendants collectively demur, arguing that the individual Defendants were not parties to the Promissory Note, that Plaintiff fails to sufficiently allege an alter ego theory of liability against them individually, and that the Promissory Note is not supported by mutual consideration, Plaintiff filed an opposition and Defendant replied. Defendants’ counsel’s declaration satisfies the meet and confer requirement. (Smith Decl., ¶ 2.)

The two agreements, while made on separate dates, are part of one transaction. Accordingly, the Court overrules the demurrer.

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.) The complaint must be construed liberally by drawing reasonable inferences from the facts pleaded. (Rodas v. Spiegel (2001) 87 Cal.App.4th 513, 517.)

Plaintiff sufficiently pleads the existence of a separate contract that is incorporated into the Promissory Note.

The individual Defendants, Shapiro and Villalobos, contend that only SVA and Benadon were the contracting parties, and they are not named in the Promissory Note. In addition, they argue that Plaintiff has not sufficiently alleged a theory of alter ego liability. Plaintiff counters that the individual Defendants are “jointly and severally” liable. She also contends that Defendants’ “own characterization of the facts . . . paint a clear picture that Shapiro and Villalobos ‘used the corporation as a conduit to accomplish their personal affairs.’”

“Under California law, ‘[s]everal contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.’ (Civ. Code, § 1642.) Thus, for example, a note, mortgage and agreement of sale constitute one contract, despite the existence of separate documents, as they are part of the same transaction. [Citation.] That the documents were not executed contemporaneously does not change the fact they all relate to the same transaction.” (San Diego City Firefighters, Local 145 v. Board of Administration of San Diego City Employees’ Retirement System (2012) 206 Cal.App.4th 594, 616.) The multiple writings “need not each be contracts, and that they need not be executed on the same day or within any particular period of time.” (1 Witkin, Summary of Cal. Law (11th ed. 2022) Contracts, § 770.)

Here, Defendants ignore that Plaintiff is alleging the existence of two agreements. In Paragraph 8 of the Complaint, she alleges that Shapiro and Villalobos “entered into an agreement to purchase Benadon’s interest in BSV.” The Promissory Note itself references the “Shareholder’s Agreement” in Section 1. (Complaint, Ex. A.) Thus, Plaintiff is asserting individual liability from Shapiro and Villalobos “jointly and severally.” (Id. at ¶ 9.) Accordingly, the demurrer is overruled.

As to alter ego, such allegations are not a claim for substantive relief, but are procedural, “i.e., to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable.” (Hennessey’s Tavern, Inc. v. American Air Filter Co. (1988) 204 Cal.App.3d 1351, 1359.) However, courts will sustain demurrers if the facts are insufficient to allege a theory of liability under alter ego. (See Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 74.)

The Court agrees that Plaintiff’s alter ego allegations are deficient. Plaintiff argues that “Defendants’ own characterization of the facts surrounding the complaint” is evidence that they “‘used the corporation as a conduit to accomplish their personal affairs.’” As an example, she argues that the individual Defendants were parties to the 2012 agreement to purchase Benadon’s shares, but only the corporation was party to the 2013 Promissory Note that required payment to Benadon. But Plaintiff did not allege this in the Complaint. She cannot rely on arguments (or implied arguments) in the demurrer as a basis to oppose the demurrer. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747; SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905 [a demurrer tests only the pleadings, not evidence or extrinsic matters].)

For alter ego, a plaintiff need only allege ultimate facts pleading unity of interest and that inequity will result if the corporate entity is treated as the sole actor. (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) A plaintiff may also allege other factors such as the commingling of funds, holding out by the entity that it is liable for the debts of the other, equitable ownership, use of same offices, and the use of one as a mere shell or conduit for the other. Here, the Complaint makes none of these allegations. Merely stating that all Defendants are the alter ego of each other is insufficient. (Complaint, ¶ 6.) However, since the Court overrules the demurrer based on joint liability, it does not consider this argument further. Should Plaintiff seek to alternatively allege alter ego, she may later request leave to do so. Defendants, the Court assumes, will have no legitimate reason to oppose such a request.

There is mutual consideration for the Promissory Note based on the prior Shareholder’s Agreement.

Separately, SVA argues that under the language of the Promissory Note, there was no consideration because Benadon did not provide a benefit or incur any detriment. It also argues that Plaintiff “affirmatively pleads that SVA was not a party to the August 2012 Buy-Out Agreement.” It then contends that even if Plaintiff amends to allege that SVA was a party, that a “ ‘[a] promise to perform a preexisting legal duty is not supported by consideration.’ ”

Defendants’ arguments are disingenuous. The Court will not elevate form over substance. (Civ. Code, § 3528 [“The law respects form less than substance”].) The Promissory Note recites in its opening line that it is made “for valuable consideration, the receipt of which is hereby acknowledged.” (Capitalization modified.) In any case, the instrument is presumptive evidence of consideration, which Defendants have the burden of showing is nonexistent. (Civ. Code, §§ 1614 and 1615.) If Defendants’ argument is that it undertook the Promissory Note with the knowledge that there was no consideration for the promise, then this contention borders on bad faith.[1]

Here, again, the Promissory Note referenced and incorporated the Shareholder’s Agreement in which the individual Defendants received Benadon’s shares. (Complaint, Ex. A, § 1.) Defendant is requesting that the Court view the Promissory Note in a vacuum. But the Complaint itself pleads the existence of a separate Shareholder’s Agreement, which forms the basis for consideration on this Promissory Note. (Complaint, ¶ 8.) The Court must accept this fact as true for purposes of demurrer. (Ramsden v. Western Union (1977) 71 Cal.App.3d 873, 879.)

Furthermore, Defendant’s argument that Plaintiff affirmatively pleads that SVA was not a party to the Shareholder’s Agreement is inaccurate. The Complaint merely pleads that the agreement was between the individual parties, Shapiro, Villalobos, and Benadon – it did not purport to say that SVA was not a part of the transaction. The Court therefore finds that both agreements are “parts of substantially one transaction” and must consider them together. (Civ. Code, § 1642.)

The demurrer is overruled. Defendants shall file and serve their Answer on or before November 17, 2022.

[1] The Court considers Defendants’ Reply arguments as elevating form over substance in a manner that undermines the credibility of Defendants and their counsel.

Department 58