Judge Cherol J. Nellon, Case Number: 23STCV15892, Date: 2024-02-07 Tentative Ruling

Plaintiff alleges that he started a restaurant and bar venture with his ex-wife and her family. His claim is that his ex wife separated from him within hours of closing escrow on the premises for the venture, and that the other partners promptly cut him out of the deal.

On October 10, 2023, Plaintiff filed his First Amended Complaint (“FAC”)[1] for (1) Fraud, (2) Conversion, (3) Violation of Penal Code § 496, (4) Breach of Fiduciary Duty, (5) Unjust Enrichment, (6) Accounting, (7) Breach of Contract, and (8) Declaratory Relief against Defendants Leann Jones aka Leann Radochonski (“Leann”), Leslie Jones (“Leslie”), Glenn Zardes (“Zardes”), and JDZ Venture Group 1, LLC (“JDZ”), and DOES 1-20.

Defendants Leann, Leslie, Zardes, and JDZ now demur to the first, second, third, fourth, fifth, and sixth causes of action in the FAC, on the grounds that Plaintiff has failed to allege sufficient facts to support those causes of action.

Defendants’ Request for Judicial Notice is GRANTED as to Exhibit 3 and otherwise DENIED. The court must review operative and/or past complaints to rule on any demurrer, and need not take judicial notice to do so.

Plaintiff’s Request for Judicial Notice is DENIED. Review of evidence submitted in another case is not proper at this stage of these proceedings.

The demurrer to the first, third, fourth, fifth, and sixth causes of action is OVERRULED.

The demurrer to the second cause of action is SUSTAINED, with 20 days leave to amend.

Defendants argue that they are covered by a settlement agreement executed between Plaintiff and his ex-wife. (Defendants’ Request for Judicial Notice Exhibit 3). Paragraph 6 of this agreement provides in relevant part as follows:

“Except as expressly set forth herein, or which may otherwise be provided in the Deal Memo as between Lia and Colin only: Colin… hereby releases and discharges, collectively and individually, fully and forever, Lia, the LC Venture, and their respective heirs, partners, employees, limited liability companies, members, agents. shareholders, attorneys, predecessors, subsidiaries, successors, affiliates, insurers, personal representatives, employers employees, and all persons, partnerships, limited liability companies or corporations acting in concert or participating with them, individually and collectively, of and from any and all liabilities, claims, obligations, judgments, demands for damages, injunctive or equitable relief, declaratory relief, costs, expenses, actions, or any other thing whatsoever, whether absolute or contingent, ripe or unripe, known or unknown, from the beginning of time and including the date hereof, whether based on contract, tort, statute, or other legal or equitable theory of recovery, that Colin ever had, now has, or may have hereafter have…[including] The Civil Action.”

“This agreement, in no way, shape or form affects the continuation of the lawsuit against the “Collective” aka, JDZ, Venture Group (Leslie Jones, LeAnn Jones, Glenn Zardes). The lawsuit will then continue in all other respects, in all other parties and is not to be impacted in any way, shape or form by this settlement agreement.”

Plaintiff does not dispute that, facially, Paragraph 6 releases the claims asserted in this lawsuit. He argues instead that Paragraph 16 constitutes an exception to that release. Defendants respond by referring the court to the old rule of contra proferentem – ambiguities in a contract are construed against the drafter. They read “except as expressly set forth herein” as referring to Paragraph 6 rather than the entire contract, and they focus on the “as between Lia and Colin only” to argue that any exception outside Paragraph 6 would be limited to claims flowing between Plaintiff and his ex-wife.

Aside from assuming too much (there is no evidence as to who actually drafted the settlement agreement), this argument runs squarely into two other canons of contractual interpretation. The first is that the goal of contractual interpretation is to give effect to the intention of the parties to the contract. See Coral Farms, L.P. v. Mahony (2021) 63 Cal.App.5^th 719, 727. This was a divorce settlement that included releases of other claims. The intent of the parties was to end all disputes between themselves. It would be precisely backwards if, in service to this aim, they wrote a provision which released claims against everyone else and excepted only claims pending between them.

Second, contracts must be read as a whole, and construed in such a manner that avoids rendering any term as mere surplus verbiage. See Coral Farms, supra, 63 Cal.App.5^th at 727. If this court accepted Defendants’ reading of Paragraph 6, it would eliminate Paragraph 16. Defendants offer no alternate meaning of Paragraph 16, and none appears reasonably possible – the clause clearly means to allow Plaintiff to proceed with this lawsuit against these Defendants.

Plaintiff’s divorce settlement does not appear to supply a defense to these claims on this record.

The elements of a cause of action for fraud are: (1) a false representation, actual or implied, or concealment of a matter of fact material to the transaction which defendant had a duty to disclose or defendant’s promise made without the intention to perform; (2) defendant’s knowledge of the falsity; (3) defendant’s intent to deceive; (4) plaintiff’s justifiable reliance thereon; and (5) resulting damage to plaintiff. Mosier v. Southern Calif. Physicians Ins. Exchange (1998) 63 Cal.App.4^th 1022, 1045.

Fraud must be specifically pled, and the particularity requirement necessitates the pleading of facts that “show how, when, where, to whom, and by what means the representations were tendered.” Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73. The purpose of the rules of fraud pleading is to inform the defendant and the court of the specific grounds of the charge and enable them to evaluate it. See Chapman v. Skype Inc. (2013) 220 Cal.App.4^th 217, 231.

Plaintiff’s theory as set forth in paragraphs 41-43 of the FAC is as follows. The parties had a contractual relationship that bound them to a joint venture. When the joint venture was created, all parties knew that Plaintiff and his now ex-wife were having marital difficulties. Plaintiff pleads two alternative states of mind on the part of defendants: either (a) they never intended to follow through with their agreement, or (b) they only intended to honor the agreement so long as Plaintiff’s marriage survived. (FAC ¶ 43).

The first alternative is sufficient to satisfy the requirements for pleading promissory fraud. Defendants concede for present purposes that they had a contractual relationship; they have not challenged the two contract claims asserted against them. To plead promissory fraud, the Plaintiff need only plead the promise and the lack of intent to perform. Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1060. He has done so.

The elements of a claim for conversion are (1) plaintiff’s ownership or right to possession of personal property (2) defendant’s conversion of the property to their own use (3) by a wrongful act or disposition, and (4) damages. See Prakashpalan v. Engstrom, Lipscomb and Lack (2014) 223 Cal.App.4^th 1105, 1135.

A conversion only occurs where the plaintiff has both ownership and either (a) actual possession or (b) the legal right to demand possession at the time the property is converted. Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4^th 221, 232-233. For this reason, the voluntary surrender of funds and the mere right of repayment do not qualify. See Kim v. Westmoore Partners, Inc. (2011) 201 Cal.App.4^th 267, 284. Conversion of money generally occurs where a defendant has misappropriated a specific sum of money which was entrusted to them for the benefit of the plaintiff. See Welco Electronics, Inc. v. Mora (2014) 223 Cal.App.4^th 202, 216.

Plaintiff’s theory appears to be that he had an agreement to form a joint venture with the Defendants, that he contributed to the joint venture, and that the Defendants are now operating the joint venture without paying him his share of the proceeds. (FAC ¶¶ 52-56). This is not sufficient to plead conversion.

The analysis might be different if this were a confidence operation – if Defendants had gotten him to deposit money into an empty corporate vehicle which they then promptly looted. But that is not the pleading here. The pleading is that Plaintiff and Defendants have a business venture, governed by a contract, that continues in operation. The policy of the law as stated above is that business disputes over money should not turn into tort battles. If Plaintiff believes an agreement has been breached, his remedy is his breach of contract claim. If he believes he was duped into the investment, his remedy is his fraud claim.[2]

“(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…

(c) Any 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.”

Plaintiff rests his pleading of this claim on the case of Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5^th 333. In that case, three partners were engaged in business as commercial landlords in Los Angeles. Id. at 339. Two of the partners formed a separate, side entity, and diverted the rental income into that entity. Id. at 340. They concealed their diversion from the third partner by lying to him about the amount of the rental income and the business expenses. Id.

The California Supreme Court found that Defendants had engaged in a theft by false pretenses pursuant to Penal Code § 484(a), had subsequently “concealed” the money from its true owner, and therefore were subject to liability under Section 496. Siry, supra, 13 Cal.5^th at 361. That scenario closely matches what is alleged here: Defendants induced Plaintiff to make payments by means of a false promise and are now “withholding” that money from him. (FAC ¶¶ 57-60).

Defendants argue that Plaintiff has not properly alleged theft, or criminal intent. However, Siry was decided after a default, based on the legal presumption that the defendants had admitted all facts pled, and was thus in a procedural posture identical to demurrer. Siry, supra, 13 Cal.5^th at 361. The Court clearly contemplated that claims where the requisite intent might be lacking should be weeded out by the taking of evidence, not by way of pleadings challenges. Id. at 361-362.

“The elements of a cause of action for breach of fiduciary duty are: 1) the existence of a fiduciary duty; 2) a breach of the fiduciary duty; and 3) resulting damage.” Pellegrini v. Weiss (2008) 165 Cal.App.4^th 515, 524.

Defendants do not dispute the existence of a fiduciary duty. They argue instead that Plaintiff is required to plead the cause of action with particularity, and that this claim falls afoul of the Business Judgment Rule. Neither argument is persuasive at this time.

Defendants derive their particularity requirement not from any discussion of the elements of a claim for breach of fiduciary duty, but from a discussion of various exceptions to the Business Judgment Rule. Lee v. Interinsurance Exchange (1996) 50 Cal.App.4^th 694, 715. As for that Rule, it generally applies to protect directors of corporations from liability for their decisions about dividends. See e.g. Barnes v. State Farm Mut. Auto. Ins. Co. (1993) 16 Cal.App.4^th 365, 378. It is not clear that the Rule applies to the members of an LLC who are being sued for locking a fellow member out of the organization.

While “unjust enrichment” is a legal principle rather than a concrete cause of action, when a party uses that label, the court should construe the claim as one for restitution. Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4^th 221, 231. Restitution is a form of alternative pleading which allows a party to recover for breach of an agreement even if the agreement itself turns out to be unenforceable as written. Id.

Both parties suggest that this cause of action is derivative of the fraud claim. Since that claim survives, so does this.

“A cause of action for an accounting requires a showing that a relationship exists between the plaintiff and defendant that requires an accounting, and that some balance is due the plaintiff that can only be ascertained by an accounting.” Teselle v. McLoughlin (2009) 173 Cal.App.4^th 156, 179.

“The right to an accounting is derivative and depends on the validity of a plaintiff's underlying claims.” Duggal v. G.E. Capital Communications Services, Inc. (2000) 81 Cal.App.4^th 81, 95.

Plaintiff has pled the existence of a relationship between the parties, and his need for an accounting. (FAC ¶¶ 74-78).

Plaintiff and his ex-wife have divorced. This court is now left to handle the “business divorce” between Plaintiff and his in-laws. Such processes are inherently unpleasant, and emotions understandably run high. The best outcome would be for the parties to work out a solution for themselves. Failing that, the court is available to them. However, a demurrer is not the best place for the sorting to begin. The concerns raised by the Defendants are better addressed on summary judgment, after evidence has been developed and positions researched.

For the reasons given above, the demurrer to the first, third, fourth, fifth, and sixth causes of action is OVERRULED. The demurrer to the second cause of action is SUSTAINED, with 20 days leave to amend.

[1] The original Complaint included additional defendants – Lia Jones-Dias, LC Venture Group 2 LLC, and Oakhurst Income Fund 1 LP. Those defendants were voluntarily dismissed without prejudice on October 10, 2023 and excluded from the FAC.

[2] The alleged fraud is the only potential wrongful act to support the third element of the conversion claim.