Judge Bruce G. Iwasaki, Case Number: 23STCV14308, Date: 2023-10-06 Tentative Ruling

Moving Party: Defendants Michael Sarian and American Healthcare Systems Corp., Inc.

This action arises over a dispute on a promise to pay $2,080,000. The Complaint alleges Plaintiff Modern HR, Inc. (Plaintiff) had a Client Services Agreement with a hospital located in St. Louis, Missouri known as South City Hospital (SCH) to provide human resources services. In the course of providing these services, SCH had become indebted to Plaintiff in the amount of $800,000. Plaintiff announced its intent to terminate its agreement with SCH and declare a default. In May 2022, Defendant American Healthcare Systems Corp., Inc. entered into negotiations for a purchase of the assets and right to operate SCH. At the same time, the Complaint alleges that Defendant Michael Sarian, made an oral promise to Plaintiff, on his own behalf and on behalf of Defendant American Healthcare Systems Corp., Inc., that if Plaintiff advanced further payroll and payroll-related expenses to SCH totaling in excess of $1,280,000, Defendants would repay Plaintiff a total amount in excess of $2,080,000 within one week. The Complaint alleges that Defendants breached this agreement and also never intended to honor this promise. On June 20, 2023, Plaintiff Modern HR, Inc. filed a Complaint alleging (1.) breach of contract, (2.) promissory fraud.

Defendants now demur to the Complaint based on the statute of frauds and failure to state a claim. Plaintiff opposes 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.) 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.)

Defendants demur to this cause of action on the grounds that it is barred by the statute of frauds, Civil Code section 1624, subdivision (a)(2).

The Complaint alleges that in May 2022, Defendant Michael Sarian made an oral promise to Plaintiff, on his own behalf and on behalf of Defendant American Healthcare Systems Corp., Inc., that if Plaintiff advanced further payroll and payroll-related expenses to SCH totaling in excess of $1,280,000, Defendants would repay Plaintiff a total amount in excess of $2,080,000 within one week, which included the $800,000 owed by SCH. (Compl., ¶ 10.)

“The statute of frauds requires any contract subject to its provisions to be memorialized in a writing subscribed by the party to be charged or by the party’s agent. (Civ. Code § 1624; Secrest v. Security National Mortgage Loan Trust 2002–2 (2008) 167 Cal.App.4th 544, 552.) Civil Code section 1624, subdivision (a)(2) provides, in relevant part: “The following contracts are invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged or by the party’s agent :…(2) A special promise to answer for the debt, default, or miscarriage of another, except in the cases provided for in Section 2794.”

In opposition, Plaintiff relies on the exception to the statute of frauds set forth in Civil Code section 2794.

Civil Code section 2794 provides, in relevant part: “A promise to answer for the obligation of another, in any of the following cases, is deemed an original obligation of the promisor, and need not be in writing: [¶] . . . [¶] (4) Where the promise is upon a consideration beneficial to the promisor, whether moving from either party to the antecedent obligation, or from another person.”

First, the Complaint sufficiently alleges new consideration on Plaintiff’s part in exchange for new consideration offered by Defendants. That is, the contract at issue here is not a contract solely to answer for the debt of another. It is an entirely new contract with an exchange of new consideration by both sides. Here, the Complaint alleges that Plaintiff agreed to advance additional payroll expenses in the amount of $1,280,000 in exchange for Defendants’ payment for these services within one week. This oral agreement also, incidentally, included an agreement to pay for the $800,000 debt of SCH. As such, as a preliminary matter, the entirety of the agreement is not subject to the statute of fraud.

Further, based on the allegations, the exception set forth in Civil Code section 2794 applies to the portion of the oral agreement promising to answer for the $800,000 debt owed to Plaintiff by SCH. This is illustrated by Regus v. Schartkoff (1957) 156 Cal. App. 2d 382. In Regus, the Court of Appeal applied this exception to find that no writing was required to enforce an insurance adjuster’s promise that the insurance company would pay plaintiff’s damages if plaintiff did not retain counsel. Specifically, an Allstate agent orally promised that plaintiff's damages would be paid by Allstate if plaintiff did not retain legal counsel and file a lawsuit (Id. at 390-391.) By promising not to sue, plaintiff provided new consideration, creating a separate enforceable contract that is not subject to the statute of frauds under Civil Code section 1624, subdivision (a)(2).

In reaching this decision, the Regus court held that: “Whenever a promise to answer an antecedent obligation of another is made upon a fresh consideration beneficial to the promisor, no matter from what source it may move, the promise is an original one and valid though oral; or, as was said in an early case, whenever the leading and main object of the promisor is not to become surety or guarantor of another, but to subserve some purpose or interest of his own, his promise is not within the statute, although the effect of the promise may be to pay the debt or discharge the obligation of another.” (Id. at 391.)

Here, Plaintiff alleges, at the time of the oral promise, it refrained from terminating its contract with SCH in exchange for the oral promise from Defendants that they would pay $800,000 owed to it by SCH. This forbearance constitutes “fresh” consideration[1] for purposes of Civil Code 2794. In exchange, the Complaint alleges that Defendant also received a benefit for its promise because this forbearance aided Defendants’ efforts to “consummate the purchase” of “the assets and right to operate SCH.” (Compl., ¶ 11.)

The breach of an oral contract has also been adequately alleged against Defendant Michael Sarian, individually. (Compl., ¶ 10,) The Court is required to take the allegations as true for pleading purposes on demurrer. (River's Side at Washington Square Homeowners Association v. Superior Court of Yolo County (2023) 88 Cal.App.5th 1209, 1226 [“The sole issue raised by a general demurrer is whether the facts pleaded state a valid cause of action, not whether they are true. No matter how unlikely or improbable, plaintiff's allegations must be accepted as true for the purpose of ruling on the demurrer.”].)

The Complaint adequately alleges facts showing a breach of contract and also alleges facts demonstrating an exception to the statute of frauds. The demurrer to this cause of action is overruled.

Defendants also argue that the second cause of action fails to state a claim with respect to the $800,000 in damages sought.[2]

Promissory fraud or false promise “ ‘is a subspecies of the action for fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud.’ [Citations.]” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 973–974.) “An action for promissory fraud may lie where a defendant fraudulently induces the plaintiff to enter into a contract.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.)

The elements of promissory fraud “are: (1) a promise made regarding a material fact without any intention of performing it; (2) the existence of the intent not to perform at the time the promise was made; (3) intent to deceive or induce the promisee to enter into a transaction; (4) reasonable reliance by the promisee; (5) nonperformance by the party making the promise; and (6) resulting damage to the promise[e].” (Behnke v. State Farm General Ins. Co. (2011) 196 Cal.App.4th 1443, 1453.)

As with any other form of fraud, each element of a promissory fraud claim must be alleged with particularity. (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1059–1060.) “A plaintiff's burden in asserting a fraud claim against a corporate employer is even greater. In such a case, the plaintiff must ‘allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.’ [Citation.]” (Lazar v. Superior Court, supra, 12 Cal.4th at 645.)

In demurring to this cause of action, Defendants argue that SCH already owed $800,000.00 before any alleged promise was made by Defendants such that Plaintiff cannot allege that they incurred these damages as a result of relying on any alleged promise by Defendants. Thus, Defendants argue that “Plaintiff cannot allege or even argue that they incurred the damages of $800,000.00 as a result of the alleged promises made by Defendants, and Plaintiff’s cause of action for promissory fraud should be dismissed as to the $800,000.00 previously owed by SCH.” (Dem., 4:26-28.)

Nonetheless, Defendants’ arguments are not an appropriate argument on demurrer. Plaintiff seeks $2,080,000 in damages based on Defendants’ allegedly false promise. (Compl., ¶¶ 12-13, 20-23, Prayer, ¶ a.) The demurrer here only challenges a portion of these damages: $800,000. (Dem., p. 5:3-4 [“For these reasons, Plaintiff’s Complaint should be dismissed as to Count I of the Complaint and as to the $800,000.00 previously owed by South City Hospital under Count II.”].) This is an improper basis for a demurrer. (Grieves v. Superior Court (1984) 157 Cal.App.3d 159, 163 [“[A] demurrer does not lie to a part of a cause of action.”]; PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682 [“A demurrer does not lie to a portion of a cause of action.”].)

The demurrer is overruled in its entirety. Defendants shall serve and file their Answer on or before October 27, 2023.

[1] Defendants’ attempt to challenge the adequacy of the consideration on demurrer is not well-taken. Civil Code section 1605 defines “good consideration,” providing: “Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promise.” “[T]he adequacy of consideration to support a contract must be determined as of the date the contract was entered into, and not in the light of subsequent events. [Citations.]” (Crail v. Blakely (1973) 8 Cal.3d 744, 753.)

[2] With respect to the second cause of action for promissory fraud, the statute of frauds defenses does not apply. (See Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 28-30 [fraud claim not barred by statute of frauds if plaintiff can establish oral promise was made with fraudulent intent].)

Judge Bruce G. Iwasaki

Department 58