Judge: Colin Leis, Case: 22STCV16538, Date: 2023-04-05 Tentative Ruling

Case Number: 22STCV16538    Hearing Date: April 5, 2023    Dept: 74

SUPERIOR COURT OF CALIFORNIA 

COUNTY OF LOS ANGELES – CENTRAL DISTRICT 

DEPARTMENT 74 

MOVING PARTIES:             Defendants Henry Elkus, William Gross, Zia Huque, Andrea Pedretti, Robert Piconi, Andrea Wuttke, Jeffrey Foster, Robert Laikin, and Larry Paulson.

RESPONDING PARTIES:    Plaintiff 1791 Management, LP.

Demurrer to Plaintiff’s Second Amended Complaint.

The court considered the moving papers, opposition, and reply in connection with this motion.

BACKGROUND

            On May 18, 2022, Plaintiff 1791 Management, LP filed this action against Defendant Energy Vault, Inc.

            On September 13, 2022, Plaintiff filed the operative Second Amended Complaint (SAC) against Defendants Energy Vault, Inc. and Novus Capital Corporation (Corporate Entity Defendants.) The SAC also added Henry Elkus, William Gross, Zia Huque, Andrea Pedretti, Robert Piconi, Andrea Wuttke, Jeffrey Foster, Robert Laikin, and Larry Paulson as defendants. (Individual Defendants.)

            The SAC asserts causes of action for: (1) breach of fiduciary duty; (2) common law fraud; (3) negligent misrepresentation; (4) negligence; (5) constructive fraud; (6) violation of Corporations Code §§ 25110-25118; and (7) violation of Corporations Code §§ 25400-25550.      Plaintiff alleges all Defendants fraudulently induced Plaintiff to invest in Defendant Energy Vault, Inc. by purchasing warrants.

            On December 27, 2022, the individual Defendants filed a demurrer as to the first five causes of action in the SAC.

LEGAL STANDARD 

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (¿¿Blank v. Kirwan (1985) 39 Cal.3d 311, 318¿¿.) “¿To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.¿” (¿¿C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872¿¿.) For the purposes of testing the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded. (¿Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967¿.) A demurrer “¿does not admit contentions, deductions or conclusions of fact or law.¿” (¿¿Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713¿¿.) 

A pleading is uncertain if it is ambiguous or unintelligible. (Code Civ. Proc., § 430.10, subd. (f).) A demurrer for uncertainty may lie if the failure to label the parties and claims renders the complaint so confusing defendant cannot tell what he or she is supposed to respond to.  (Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2.) However, “[a] demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (¿Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 616¿.) 

DISCUSSION 

            First Cause of Action - Breach of Fiduciary Duty.

            “The elements of a cause of action for breach of fiduciary duty are (1) existence of a fiduciary duty, (2) breach of the fiduciary duty, and (3) damage proximately caused by the breach.” (Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1599.)

            A warrant contract does not give rise to a fiduciary duty. (Speirs v. BlueFire Ethanol Fuels, Inc. (2015) 243 Cal.App.4th 969, 982 [“[Defendants] did not owe a fiduciary duty to warrant holders, which is the role in which plaintiffs were allegedly harmed by defendants’ actions.”].)

            The SAC alleges, “[b]y reason of Plaintiff’s position beginning in late 2021 as a potential investor, and later as a warrant shareholder beginning on or about February 5, 2022, and continuing from those times to the present, all Defendants owed Plaintiff a fiduciary duty. (SAC, ¶ 67.) A warrant contract does not give rise to a fiduciary duty, though. As a result, all Defendants did not owe a fiduciary duty to Plaintiff and this claim fails.

            However, Plaintiff has since learned that Energy Vault Holdings, Inc. (EVH), should be a party to the litigation because it issued the stock and warrants at the IPO. (Opposition, at p. 7.) Additionally, Plaintiff has learned that the individual Defendants are officers and directors of EVH (Opp., at p. 7.) And Plaintiff further alleges that it owned stock in EVH during the relevant period. (Opp., at p. 8.) If true, EVH and the individual Defendants owe Plaintiff a fiduciary duty for the purposes of this cause of action (Singhania v. Uttarwar (2006) 136 Cal.App.4th 416, 426 [“California law clearly recognizes that officers and directors owe a fiduciary duty to stockholders . . .”].)

            Accordingly, the court sustains Defendants’ demurrer as to the first cause of action with leave to amend.

            Second Cause of Action - Common Law Fraud.

            The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.)

                        Plaintiff’s Common Law Fraud Claim as to the Individual Defendants.

            Fraud must be pled with particularity which “necessitates pleading facts which 'show how, when, where, to whom, and by what means the representations were tendered.” (Id. at p. 645.) The burden of pleading fraud against a corporate entity is even greater as 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. (Ibid.) “However, the requirement of specificity is relaxed when the allegations indicate that the defendant must necessarily possess full information concerning the facts of the controversy or when the facts lie more in the knowledge of the defendant.” (Orcilla v. Big Sur, Inc. (2016) 244 Cal.App.4th 982, 1008 (quotations omitted).)

            The individual Defendants argue that Plaintiff’s SAC fails to specifically allege that any of the individual Defendants made any fraudulent misrepresentations. (Demurrer, at. p. 6.) But the SAC alleges that all Defendants made misrepresentations in the 2021 Presentation. (SAC, ¶¶ 35-40.) The SAC further alleges that all Defendants made misrepresentations in the 2021 Press Release. (SAC, ¶¶ 41-43.) The SAC also alleges that Defendants made misrepresentations in the 2022 Press Release. (SAC, ¶¶ 58-59.) Moreover, the SAC names each individual Defendant and identifies his or her role in the corporate entity Defendants. (SAC, ¶¶ 13-22.) The court finds that this information, taken together, is sufficient to allege that the individual Defendants made fraudulent representations to Plaintiff. In addition, “the requirement of specificity is relaxed when the allegations indicate that the defendant must necessarily possess full information concerning the facts of the controversy (or when the facts lie more in the knowledge of the opposite party).” (Tarmann v. State Farm Mut. Auto Ins. Co. (1991) 2 Cal.App.4th 153, 158.) Here, the corporate entity Defendants and the individual Defendants are in a better position than Plaintiff to clarify who authored the presentations and press releases at issue. Thus, the SAC’s allegations as to the individual Defendants’ potential common law fraud are sufficiently specific.

            The individual Defendants also contend that Plaintiff’s allegations are deficient because they are pleaded on “information and belief” yet lack a supporting statement of facts. (SAC, ¶ 34.) All parties invoke Woodring v. Basso (1961) 195 Cal.App.2d 459. In that case, the court held that a complaint’s allegations concerning fraud were insufficient. (Id. at pp. 464-465.) For the allegations were based on information and belief but devoid of a foundational statement of facts. (Ibid.). Here, Plaintiff has provided supporting facts. As noted above, Plaintiff has listed the name of each individual Defendant and his or her position in the corporate entity Defendants. (SAC, ¶¶ 13-22.) From this, it is evident that any of these individual Defendants could have partaken in the alleged fraud in the presentations and press releases at issue. Thus, the SAC does not fail to state a claim for common law fraud as to the individual Defendants.

                        Plaintiff’s Common Law Fraud Claim as to Defendant Piconi.

            Defendants contend that Plaintiff’s SAC fails to allege that Defendant Piconi made the statement in 2021 Press Release with knowledge of its falsity (Demurrer, at p. 7; Kalnoki v. First American Trustee Servicing Solutions, LLC (2017) 8 Cal.App.5th 23, 35 [requiring knowledge of falsity in fraud claim].) Defendants also claim that Plaintiff’s SAC fails to allege reliance on Defendant Piconi’s statement because Plaintiff had already purchased the warrants. (Demurrer, at p. 7.) However, the SAC includes a knowledge of falsity allegation as to all individual Defendants’ fraudulent misrepresentations, and Defendant Piconi is one such Defendant. (SAC, ¶¶ 79, 81, 83.) Moreover, the SAC alleges that Plaintiff relied on the individuals Defendants’ misrepresentations, and Defendant Piconi is one of those individual Defendants. (SAC, ¶¶ 44-55.)

            Accordingly, the court overrules the demurrer as to the second cause of action.

            Third Cause of Action - Negligent Misrepresentation.

            “The same elements [for intentional misrepresentation] comprise a cause of action for negligent misrepresentation, except there is no requirement of intent to induce reliance.” (Cadlo v. Owens-Illinois, Inc. (2004) 125 Cal.App.4th 513, 519.) “Each element in cause of action for fraud or negligent misrepresentation must ordinarily be as to past or existing material facts. (Tarmann v. State Farm Mut. Auto Ins. Co. (1991) 2 Cal.App.4th 153, 158.)

            Under the Economic Loss Rule (ELM), there is generally no recovery in tort for negligently inflicted purely economic losses. (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 922.) True, courts can permit tort damages in contract cases. (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th  979, 989.) For example, “[t]ort damages have been permitted in contract cases where […] the contract was fraudulently induced. (Erlich v. Menezes (1999) 21 Cal.4th 543, 551-552.) However, the duty that gives rise to tort liability must be either completely independent of the contract or arise from conduct that is both intentional and intended to harm.” (Id. at p. 552.) If every negligent breach of contract gave rise to a tort damages, the distinction between tort and contract remedies would be meaningless. (Id. at pp. 553-554.)

            Plaintiff alleges that it agreed to invest in corporate entity Defendants based on the individual Defendants’ misrepresentations. (SAC, ¶¶ 86-93.) Moreover, Plaintiff alleges economic damages of “no less than $1,000,000.” (SAC, ¶ 92.)  If these misrepresentations resulted from negligence, then Defendants’ conduct was not intentional. As a consequence, ELM would bar Plaintiff’s cause of action for negligent misrepresentation. Plaintiff, for its part, argues that the economic loss only applies to consumer products. (Opp., at p. 15.) But ELM applies in various contexts to bar tort claims for monetary losses between contractual parties, not just contracts concerning consumer products. (Sheen, supra, 12 Cal.5th at 927.)

            Accordingly, the court sustains the demurrer as to Plaintiff’s third cause of action without leave to amend.

            Fourth Cause of Action – Negligence.

            The elements of a negligence cause of action are “duty, breach of duty, proximate cause, and damages.” (Paz v. State of California (2000) 22 Cal.4th 550, 559.)

            Plaintiff alleges all Defendants owed Plaintiff a duty to act reasonably when they solicited and accepted investment monies, failed to act in a reasonable manner, and that this breach caused Plaintiff economic harm. (SAC, ¶¶ 94-99.) As noted above, though, ELM does not permit recovery in tort for negligently inflicted purely economic losses. (Sheen, supra, 12 Cal.5th 905, 922.) Here, the individual Defendants’ conduct, as alleged, is not intentional and intended to harm, meaning Plaintiff’s negligence claim is barred under ELM.

            Accordingly, the court sustains the demurrer as to Plaintiff’s fourth cause of action without leave to amend.

            Fifth Cause of Action - Constructive Fraud.

            “Constructive fraud is a unique species of fraud applicable only to a fiduciary or confidential relationship.” (Assilzadeh v. California Federal Bank (2000) 82 Cal.App.4th 399, 415.; see also Everest Investors 8 v. Whitehall Real Estate Limited Partnership XI (2002) Cal.App.4th 1102, 1108 [“. . . only a fiduciary can be liable for constructive fraud.”].)

            As pleaded in the SAC and noted above, the individual Defendants do not owe a fiduciary duty to Plaintiff. (SAC, ¶ 67.) Absent a fiduciary relationship, the constructive fraud claim fails.

            Nevertheless, as noted above, Plaintiff has since learned EVH should be a party to the litigation. (Opp., at p. 7.) That is, EVH was the corporate entity that issued the stock and warrants at the IPO. (Opp., at p. 7.) Additionally, Plaintiff has learned that the individual Defendants are officers and directors of EVH (Opp., at p. 7.) And Plaintiff claims that it owned stock in EVH during the relevant period. (Opp., at p. 8.) If true, EVH and the individual defendants owe Plaintiff a fiduciary duty for the purposes of this cause of action. (Singhania v. Uttarwar (2006) 136 Cal.App.4th 416, 426 [“California law clearly recognizes that officers and directors owe a fiduciary duty to stockholders . . .”].)

            Accordingly, the court sustains the demurrer as to the fifth cause of action with leave to amend.

CONCLUSION

                Based on the foregoing, the court sustains Defendants’ demurrer to Plaintiff’s first and fifth causes of action with leave to amend. The court sustains Defendants’ demurrer to Plaintiff’s third and fourth causes of action without leave to amend. The court overrules Defendant’s demurrer to Plaintiff’s second cause of action.

            Defendants are ordered to give notice of this ruling. 

IT IS SO ORDERED. 

DATED:  ¿April 6, 2023

_____________________________ 

Colin Leis 

Judge of the Superior Court