Judge Christian R. Gullon, Case Number: 23PSCV02630, Date: 2023-12-04 Tentative Ruling

Judge: Christian R. Gullon, Case: 23PSCV02630, Date: 2023-12-04 Tentative Ruling

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Primary Partners Financial’s DEMURRER TO PLAINTIFF’S FIRST AMENDED COMPLAINT is SUSTAINED in its entirety with leave to amend as the issue of the hacker has created contradictory allegations.

This case arises from a purported fraud. Plaintiff PASADENA FEDERAL CREDIT UNION, a federally chartered credit union (“Plaintiff” or “PFCU”), alleges the following against PALOMARES ESCROW, INC. (“Palomares” or Palomares Escrow”) and PRIMARY PARTNERS FINANCIAL (“PPF”): Plaintiff and PPF entered into a Residential Mortgage Loan Agreement (“Agreement”) for PPF to originate, process, and underwrite residential mortgages for PFCU’s members. On August 30, 2022, PPF represented to Plaintiff that Palomares would act as the escrow holder for two of Plaintiff’s members. Ultimately, through a series of events, false instructions were sent to PPF, leading to the wiring of funds to a Truist Bank, not Palomares.

On November 1, 2023, DEFENDANT PALOMARES ESCROW, INC filed the instant DEMURRER and MOTION TO STRIKE TO PLAINTIFF’S COMPLAINT.

On November 22, 2023, Plaintiff filed a first amended complaint (FAC). Though the caption on the FAC indicates that there are 6 COAs, the body of the FAC provides for the following 8 COAs:

On November 1, 2023, the court deemed the demurrer and MTS moot as a FAC was filed thereafter.

On January 22, 2024 (see also 1/23/24 NPT), the court in ruling on Palomares’s Demurrer and MTS, struck the 6th COA for sham pleading, without leave to amend and SUSTAINED the 8th COA for conversion without leave to amend.

Defendant PPF demurs to the entirety of the FAC and specifically demurs as to the following COAs asserted against it: (1) 1^st COA for breach of contract, (2) 4^th COA for negligent misrepresentation, (3) 5^th COA for intentional misrepresentation, (4) 7^th COA for conversion. PPF demurs on the grounds that each fails to state sufficient facts and is uncertain. (Code of Civ. Proc., §§ 430.10(e), (f).)[2]

The FAC alleges, in relevant part, that “PPF represented and warranted that it would engage in reasonable due diligence and that there would be no fraudulent information or misrepresentation in any loan package sent to Plaintiff” (FAC ¶39) but that PPF breached its agreement with Plaintiff by (1) “fail[ing] to engage in reasonable due diligence required by the Agreement and was aware of the fraud and misrepresentation to PFCU” and (2) “fail[ing] to repurchase the loan sold under the Agreement or resolve the matter within 30 days after the fraud was discovered.” (FAC ¶¶40-43.)

While Defendant’s demurrer addresses some of the aforementioned allegations, it does not address the allegation about the terms of the agreement required PPF to investigate, to initiate verification, to exercise reasonable due diligence and repurchase the loan or resolve the matter within 30 days. For the first time in Reply, Defendant addresses the allegation, but does not analyze the allegation. (See Reply p. 3:221-22 [“[T]he FAC does not allege Defendant’s actions that constituted a breach and resulted in Plaintiff’s alleged damages.”].)

Therefore, the breach of contract COA has stated sufficient facts. That said, see infra as the COA is uncertain.

The 4^th COA is predicated upon the wire transfer specifically in that “PPF had no reasonable basis for believing the wire instructions were true as they contained a payee that was not typical to similar transactions, and they were sent from an external email address.” (FAC ¶68.)

In its demurrer, Defendant focuses on the allegation that PPF was the first to raise the issue of suspected fraud and immediately contacted the relevant parties regarding the hacked email address. (See FAC ¶25 [“On or about September 1, 2022, a PPF agent sent an email to Ms. Black regarding suspected wire fraud.”]; see also ¶29.)

But that misses the point. It isn’t entirely about what happened after the wire transfer but what happened leading up to the wire transfer, and Plaintiff is alleging that PPF should have known/knew that the external email address (homebrokerp@gmail.com) was wrong when PPF had previously corresponded with a @PalomaresEscrow.com account. (FAC ¶29.)[3]

Therefore, negligent misrepresentation COA has stated sufficient facts. That said, see infra as the COA is uncertain.

This allegation is predicated upon the allegation that “PFCU inquired further into the validity of the wire instructions, and PPF again intentionally represented that the wire instructions were safe and accurate without any investigation into the truthfulness of their statement.” (FAC ¶72.)

Now, Defendant’s reliance on a heightened pleading standard is correct and the pleading falls short of that. The FAC does not describe with the requisite particularity that Defendant knew that the representation was false.

In Opposition, Plaintiff relies upon the allegations that Plaintiff’s employee sought confirmation of the wire details from PPF (FAC, ¶20-23), but that PPF represented that “everything was good to proceed.” But there is no allegation Defendant had a basis to believe that the email address was hacked or false notably when the email allegedly originated from a representative of Palomeras Escrow. (¶28 [“The email signature reads Patti Black, Escrow Officer Palomares Escrow, Inc. 1425 West Foothill Blvd. Suite #230 Upland CA, 91786 Office (909) 946-5594 Fax (909) 946-5957.”].)

At most what is alleged is negligence/negligent misrepresentation in that Plaintiff voiced concerns over the email account and PPF did not perform due diligence to confirm that the wire instructions were safe and accurate without any investigation into the validity of the wire instructions.

Therefore, the court SUSTAINS the demurrer WITH LEAVE TO AMEND as to the 5^th COA for intentional misrepresentation.

The basis of this COA is that PPF has wrongfully exercised control over the funds of two of Plaintiff’s members. But, as noted in Palomares’ demurrer, Truist purportedly has the funds. (See also Demurrer p. 16:24-25 [“However, Plaintiff alleges that the funds were transferred to Truist Bank and Truist Bank did not return the full amount of the wire transfer.”].)

In opposition, Plaintiff makes an argument outside the pleadings. As a court is bound by the four corners of the pleading on a demurrer, the court cannot address whether the argument is sufficient for the COA. (See Opp. p. 9:14-20 [“Although outside the allegations in the pleadings, early discovery has revealed that after the wire transfer, the account at Truist Bank was locked for suspected fraud on September 1, 2022. At that point, no transactions were permitted in or out of the account. Thus, as employees of PPF had access to the account on August 30, 2022 until the account was subsequently locked, Plaintiff believes that PPF employees in possession of the account information wrongfully dispossessed the member’s funds supporting the allegations in ¶¶ 21-23, 92- 94 of the pleadings.”].)

Therefore, the court SUSTAINS the demurrer with leave to amend as to the conversion COA as the conversion COA could use clarification as it is uncertain.

Notwithstanding the foregoing, the issue of who is the hacker remains an issue (as it was with Palomares’ demurrer). The FAC not only alleges that Ms. Black (employee of Palomares) is the supposed hacker but that Apryll Held, a senior account executive at PPF, is also the hacker specifically in that she sent emails from an external email address “pretending to be an employee of Palomares.” (See generally ¶¶51-52.) This allegation alone creates uncertainty as to the entire basis of the lawsuit against PPF as Plaintiff appears to predicate PPF’s liability upon the actions of Ms. Held, but what Ms. Held exactly did is unclear. With that, the court sustains the demurrer in its entirety as the complaint lacks is ambiguous.

[1] As observed by Plaintiff in opposition, PPF misstates the standard for some of the COAs. For example, Defendant argues that specificity is required for a breach of contract COA (Demurrer p. 13:25-26) and negligent misrepresentation (Demurrer p. 14), but heightened pleading is not required for non-statutory or non-fraud COAs. Thus, to the extent that Defendant relies upon the incorrect pleading standard, it will not be discussed.

[2] The demurrer states that Defendant demurs to the entirety of the FAC, but only specifically discusses all COAs against it except the negligence COA.

[3] In Reply, Defendant contends that the FAC does not mention that the parties corresponded “only” with the @PalomarasEscrow.com account, as the opposition suggests. (Reply p. 6:1-5.) That is a fair point. But while that exact allegation may not be pled, a holistic reading of the FAC suggests that the PalomaresEscrow.com account was the email address that the parties were (normally) communicating with. (See e.g., FAC ¶68 [“PPF had no reasonable basis for believing the wire instructions were true as they contained a payee that was not typical to similar transactions, and they were sent from an external email address.”], emphasis added.) Should further clarity be needed, this can be cured with leave to amend.