Judge: Christopher K. Lui, Case: 23STCV23410, Date: 2024-05-24 Tentative Ruling

Case Number: 23STCV23410    Hearing Date: May 24, 2024    Dept: 76



            Plaintiffs allege that Defendants breached an agreement to provide website design services and create Plaintiff’s online platform and its consumer facing front-end website related to music licensing.

Defendants Pretty Big Monster, LLC and Jason Steinberg demur to the Second Amended Complaint and move to strike portions thereof.

TENTATIVE RULING

Defendants Pretty Big Monster, LLC and Jason Steinberg’s demurrer to the Second Amended Complaint is OVERRULED as to the first cause of action and SUSTAINED with leave to amend as to the third, fourth and fifth causes of action.

Defendants’ motion to strike is DENIED as to Plaintiff’s Second Amended Complaint, and paragraph 1-21 insofar as Observation and compliance with corporate formalities are alleged therein, must properly be stricken as manifestly contrary to California law and GRANTED with leave to amend as to Plaintiff’s prayer for punitive (paragraph 4). 

Plaintiff is given 30 days’ leave to amend.

ANALYSIS

Demurrer To Second Amended Complaint

Meet and Confer

            The Declaration of Kenneth R. Zuetel reflects that Defendants’ counsel satisfied the meet and confer requirement set forth in Civ. Proc. Code, § 430.41.

Discussion

Defendants Pretty Big Monster, LLC and Jason Steinberg demur to the Second Amended Complaint as follows:

1.         First Cause of Action (Unfair Trade Practices).

            Defendants argue that there are no facts pled which indicate that Defendants’ conduct was fraudulent, unlawful or unfair, only an allegation that a contract was breached.

            Plaintiff argues that the allegations are fraud are sufficient to support this cause of action. 

 

“In order to state a cause of action under the fraud prong of the UCL a plaintiff need not show that he or others were actually deceived or confused by the conduct or business practice in question. ‘The “fraud” prong of [the UCL] is unlike common law fraud or deception. A violation can be shown even if no one was actually deceived, relied upon the fraudulent practice, or sustained any damage. Instead, it is only necessary to show that members of the public are likely to be deceived.’ ” (Schnall v. Hertz Corp., supra, 78 Cal.App.4th at p. 1167.)


(Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, 1274.)

 

A breach of contract in turn may form the predicate for a UCL claim, “ ‘provided it also constitutes conduct that is “unlawful, or unfair, or fraudulent.” ’ [Citations.]” (Citation omitted.)


(Arce v. Kaiser Foundation Health Plan, Inc. (2010) 181 Cal.App.4th 471, 489.)

 

“[A] breach of contract may … form the predicate for Section 17200  claims, provided it also constitutes conduct that is ‘unlawful, or unfair, or fraudulent.’ ” (Citations omitted.) . . .

 

B

 

The term “fraudulent” as used in section 17200 “does not refer to the common law tort of fraud but only requires a showing members of the public ‘ “are likely to be deceived.” ’ ” (Citations omitted.) Unless the challenged conduct “ ‘targets a particular disadvantaged or vulnerable group, it is judged by the effect it would have on a reasonable consumer.’ ” (Citation omitted.)

 

(Puentes v. Wells Fargo Home Mortgage, Inc. (2008) 160 Cal.App.4th 638, 645 [italics in original, bold emphasis added]].)

 

            As discussed below, the allegations that Defendants made representations to induce Plaintiff to continue making progress payments, when in fact Defendants were not performing such services is sufficient to allege a fraudulent business practice, i.e., one that would be likely to deceive a reasonable consumer. Although the fraud cause of action is not specifically pled, the common law pleading standard does not apply to a Bus. & Prof. Code § 17200 claim.

 

            The demurrer to the first cause of action is OVERRULED.

 

2.         Third Cause of Action (Fraud).

 

            Defendants argue that this cause of action is barred by the economic loss doctrine, as only contractual damages are alleged and there is no allegation of personal damages independent of economic loss, nor of fraud independent of the breach of contract.

 

            Defendants also argue that Plaintiff has not pled reliance on a misrepresentation.  

 

            Plaintiff argus that Defendants intentionally told Plaintiff during meetings that certain features (“sprints”) were finished, and that the website contained features and functions that it did not actually contain, in order to induce Plaintiff to make the progress payments, and Plaintiff made those payments.

 

            “To establish a claim for deceit based on intentional misrepresentation, the plaintiff must prove seven essential elements: (1) the defendant represented to the plaintiff that an important fact was true; (2) that representation was false; (3) the defendant knew that the representation was false when the defendant made it, or the defendant made the representation recklessly and without regard for its truth; (4) the defendant intended that the plaintiff rely on the representation; (5) the plaintiff reasonably relied on the representation; (6) the plaintiff was harmed; and (7) the plaintiff's reliance on the defendant's representation was a substantial factor in causing that harm to the plaintiff. (Citations omitted.)” (Manderville v. PCG&S Group, Inc. (2007) 146 Cal.App.4th 1486, 1498 [italics omitted].)

 

 

            “The mere failure to carry out a promise is not a tort, and it is therefore essential, in pleading fraud consisting of a false promise, to allege the elements of fraud.” (Maynes v. Angeles Mesa Land Co. (1938) 10 Cal.2d 587, 589.)

 

Fraud must be pleaded with specificity rather than with “ ‘general and conclusory allegations.’ ” (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184 [132 Cal. Rptr. 2d 490, 65 P.3d 1255].)  The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made. (Lazar v. Superior Court, supra, 12 Cal.4th at p. 645.)

 

We enforce the specificity requirement in consideration of its two purposes. The first purpose is to give notice to the defendant with sufficiently definite charges that the defendant can meet them. (Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216 [197 Cal. Rptr. 783, 673 P.2d 660].) The second is to permit a court to weed out meritless fraud claims on the basis of the pleadings; thus, “the pleading should be sufficient ‘ “to enable the court to determine whether, on the facts pleaded, there is any foundation, prima facie at least, for the charge of fraud.” ’ ” (Id. at pp. 216–217.)

 

(West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 793.)

 

The economic loss rule does not apply here, because Defendant provided services, not products.

 

From all of these cases, we conclude that in actions arising from the sale  or purchase of a defective product, plaintiffs seeking economic losses must be able to demonstrate that either physical damage to property (other than the defective product itself) or personal injury accompanied such losses; if they cannot, then they would be precluded from any tort recovery in strict liability or negligence. However, such authorities would seem to have little or no application when the commercial relationship of the parties does not involve the sale of goods or products, nor the rules developed under the law merchant and the Uniform Commercial Code, but rather relates only  [*781]  to the performance of services. It is established that where the commercial agreement between the parties involves the performance of services, the Commercial Code has no application. (See, e.g., Sacramento Regional Transit Dist. v. Grumman Flxible, supra, 158 Cal. App. 3d at pp. 299-300; LAVWMA v. Northwest Pipe & Casing Co. (N.D.Cal. 1995) 915 F. Supp. 1066, 1072-1074; Frank M. Booth, Inc. v. Reynolds Metals Co. (E.D.Cal. 1991) 754 F. Supp. 1441, 1449-1450.)  Thus, in circumstances such as those presented by this case, the policy concerns underlying the limitations on recovery of economic losses articulated by the Seely court and its progeny are not present. As a result, when the contract relates to the performance of services there is a different rule supported by an entirely different line of cases. (See Huang v. Garner (1984) 157 Cal. App. 3d 404, 421-423 [203 Cal. Rptr. 800], and cases cited therein.) Again, a Supreme Court decision, articulating a new legal principle, led the way.

 

(North American Chemical Co. v. Superior Court (1997) 59 Cal.App.4th 764, 781 [bold emphasis and underlining added].)

 

 

            Moreover, even the economic loss rule does not apply where there is fraud in the performance of a contract:

The most widely recognized exception is when the defendant's conduct constitutes a tort as well as a breach of the contract. For example, when one party commits a fraud during the contract formation or performance, the injured party may recover in contract and tort. (Godfrey v. Steinpress (1982) 128 Cal.App.3d 154 [180 Cal.Rptr. 95]: knowing nondisclosure of termite damage.)

(Harris v. Atlantic Richfield Co. (1993) 14 Cal.App.4th 70, 78 [bold emphasis and underlining added].)

 

 

            The 2AC alleges the following at ¶¶ 12 – 20:

 

12. Per the Agreement, the initial period of the project the Defendants and Plaintiffs reviewed the project deliverables, aligned all resources, established a project plan and outlined success criteria for the project.  From April 24, 2019 through January 21, 2020, Defendants communicated regularly with Plaintiff to provide its services.  Defendants and Plaintiff conducted bi-weekly status calls and online meetings to evaluate the progress of the services Defendants were to provide.  Defendants communicated to Plaintiff throughout these calls, online meetings

and in email communication detailing progress updates and status reports that Defendants performed certain services and Defendants requested progress payments to be made by Plaintiff according to the Agreement.   Defendants intentionally made representations to Plaintiff that the

website contained functionality that they knew to be false and made such representations with the intention to deceive and defraud Plaintiff and to induce Plaintiff to act in reliance on such representations in the manner herein alleged, or with the expectation that Plaintiff would indeed so act.

 

13. Plaintiff paid Defendants progress payments as per the Agreement and Defendants requests totaling One Hundred Forty-nine Thousand Dollars ($149,000.00).  Plaintiff relied on the information that Defendants falsely provided and its representations in issuing these payments.  

 

14. On January 21, 2020, after exhausting the contracted budget amount in the Agreement, Defendants informed Plaintiff in email communication that it was not completing the agreed upon work.  Defendant Jason Steinberg wrote:  

 

“I wanted to update you that we'll be completing the outstanding items, namely the Data Query and ensuring the front end works as intended, but no additional features or design changes past what has already been implemented will be made.  It was not an easy decision, but after reflection and consultation with my partners, it appears for the best that PBM to complete this work and close out its work for MIBE.” 

 

15. Defendants further suggested Plaintiff work directly with Defendants’

subcontractor, Tractus, Inc. (“Tractus”).   Defendants introduced Plaintiff to Tractus to complete the work Plaintiff originally contracted Defendants to perform.

 

16. Defendants did not complete the outstanding items. Defendants failed to deliver on its obligation and deliverables in the Agreement. Defendants did not migrate Plaintiffs media from its old website to the new website Defendants were to build.  Defendants did not begin work on the direct-to-consumer facing section of the website.  Defendants did not deliver any change orders to Plaintiff claiming additional work per the Agreement.

17. Following a failed attempt to work with Tractus, Tractus informed Plaintiff they were closing down their company and referred Plaintiff to a subsequent developer.

 

18. Upon hiring the subsequent developer Tractus forwarded Defendants code to subsequent developer, which performed an extensive series of code assessments on the code and source files that were included in Defendants’ services.  The code assessments revealed that most

of Defendants code was incomplete or simply did not exist as Defendants claimed.  The website was not significantly completed as Defendants stated and not functional at all.  

 

19. Plaintiff’s subsequent developer worked continuously for 2 years to complete the work Defendants stated was performed.  

 

20. Plaintiff has incurred over $400,000 in expenses in website development fees and lost over three (3) years of commercial activity for its direct-to-consumer sales estimated at $2,500,000, for total losses of $2,900,000. 

 

     (2AC, ¶¶ 12 – 20.)

 

            These allegations demonstrate reliance leading to out-of-pocket loss in the form of progress payments. (Kenly v. Ukegawa (1993) 16 Cal.App.4th 49, 54 [bold emphasis added].) However, the actual misrepresentations themselves are not pled with the requisite specificity as to who said exactly what, when and in what manner, and why each representation was known to be false when  made.

 

            As such, the demurrer to the third cause of action is SUSTAINED with leave to amend.

 

3.         Fourth Cause of Action (Breach of Implied Covenant of Good Faith and Fair Dealing).

 

            Defendants argue that this cause of action is uncertain.

 

            Plaintiff argues that the elements of this cause of action are adequately pled.

 

            The elements of a breach of the implied covenant of good faith and fair dealing sounding in contract are: (1) the existence of a contractual relationship between the parties (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031); (2) defendant was not expressly permitted by the contract to engage in the conduct which constitutes the alleged breach (Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.App.4th 1107, 1120-1121); (3) defendant subjectively lacked a good faith belief in the validity of the act or the act was intended to frustrate the common purpose of the agreement (Wolf, supra, 162 Cal.App.4th at 1123) or defendant’s conduct was objectively unreasonable (Carma Developers, Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 372-73); (4) the act or conduct was contrary to the contract’s express purposes or the parties' legitimate expectations as expressed in a specific contractual obligation (Carma Developers, supra, 2 Cal.4th at 373) or otherwise frustrates the other party’s rights to express contractual benefits (Racine & Laramie, Ltd., supra, 11 Cal.App.4th at 1031-32; Pasadena Live v. City of Pasadena (2004) 114 Cal.App.4th 1089, 1094); and (5) resulting damages (Thompson Pacific Construction, Inc. v. City of Sunnyvale (2007) 155 Cal.App.4th 525, 541).

 

            A claim for breach of the implied covenant which merely realleges the breach of contract is superfluous and is properly disposed of on demurrer. (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 352-53.)

 

            Here, Plaintiff has not pled the above elements of BICGFFD. Moreover, ¶ 42 only makes the vague allegation that: “Defendants breached the covenant of good faith and fair dealing by failing to compensate under the Agreement, in bad faith and for reasons extraneous to the Agreement.”

 

            The demurrer to the fourth cause of action is SUSTAINED with leave to amend.

 

4.         Fifth Cause of Action (Unjust Enrichment).

 

            Defendants argue that unjust enrichment is not recognized as an independent cause of action.

 

            Plaintiff argues that some cases have recognized this cause of action.

 

“Unjust enrichment is not a cause of action, however, or even a remedy, but rather ‘ “ ‘a general principle, underlying various legal doctrines and remedies’ ” … . [Citation.] It is synonymous with restitution.’ ” (Citation omitted.) Like the trial court, we will construe the cause of action as a quasi-contract claim seeking restitution.

 

“[A]n action based on an implied-in-fact or quasi-contract cannot lie where there exists between the parties a valid express contract covering the same subject matter.” (Citation omitted.) However, “restitution may be awarded in lieu of breach of contract damages when the parties had an express contract, but it was procured by fraud or is unenforceable or ineffective for some reason.” (Citation omitted.) Thus, a party to an express contract can assert a claim for restitution based on unjust enrichment by “alleg[ing in that cause of action] that the express contract is void or was rescinded.” (Citation omitted.) A claim for restitution is permitted even if the party inconsistently pleads a breach of contract claim that alleges the existence of an enforceable agreement. (Citation omitted.)

 

(Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231.)

 

            Here, Plaintiff has not articulated a reason why the express contract between the parties is void or was rescinded.

 

            The demurrer to the fifth cause of action is SUSTAINED with leave to amend.

 

Motion To Strike

 

Meet and Confer

 

            The Declaration of Kenneth R. Zuetel reflects that Defendants’ counsel satisfied the meet and confer requirement set forth in Civ. Proc. Code, § 435.5.

 

Discussion

 

            Defendants did not file a memorandum of points and authorities in support of the motion to strike, only a notice of motion, and duplicate points and authorities in support of the demurrer. Nonetheless, the Court is able to rule on the motion to strike.

 

Defendants Pretty Big Monster, LLC and Jason Steinberg move to strike the following portions of the Second Amended Complaint as follows:

 

¿        Plaintiff’s Second Amended Complaint, and paragraph 1-21 insofar as Observation and compliance with corporate formalities are alleged therein, must properly be stricken as manifestly contrary to California law.

 

            DENIED.

 

            The notice of motion does not quote in full the portions sought to be stricken, as required by Cal. Rules of Court, Rule 3.1322(a). The reference to “”insofar as” is insufficient.

 

¿        Plaintiff’s prayer for punitive (paragraph 4) must properly be stricken as manifestly contrary to California law.

 

            GRANTED with leave to amend.

 

            Following the ruling on the demurrer, there are no viable tort causes of action to support a claim for punitive damages, which are not available for breach of contract. (Civ. Code, § 3294(a)), nor for violation of Bus. & Prof. Code, § 17200. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal. 4th 1134, 1148.)

 

Plaintiff is given 30 days’ leave to amend.