Judge Daniel M. Crowley, Case 23SMCV00316 2023-05-03 Tentative Ruling

Plaintiff The Nacelle Company, LLC (“Plaintiff”) brings this action for breach of contract, negligent misrepresentation, and fraud, against Defendants Supernova Licensing, LLC f/k/a Silverhawks, LLC (“Silverhawks LLC”), Super 7 Retail, Inc. (“Super 7”), and Brian Flynn (“Flynn”) (collectively “Defendants”) stemming from a purported agreement between Plaintiff and Silverhawks LLC to develop and pitch a modern television series reviving the Silverhawks television series which originally aired in the 1980s. Plaintiff contends Defendants falsely represented to have ownership of the Silverhawks intellectual property and it relied on this representation in attempting to develop a show based on that property. Defendants now bring a demurrer to Plaintiff’s causes of action for breach of contract against Silverhawks and Super 7 and fraudulent misrepresentation against Flynn. Defendants also demurrer to each cause of action asserted against Super 7 on the basis that the Complaint fails to sufficiently allege a basis for imposing alter ego liability against it. Plaintiff opposes Defendants’ demurrer.

When considering demurrers, courts read the allegations liberally and in context. (Wilson v. Transit Authority of City of Sacramento (1962) 199 Cal.App.2d 716, 720-21.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) “A demurrer tests the pleading alone, and not on the evidence or facts alleged.” (E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) As such, the court assumes the truth of the complaint’s properly pleaded or implied factual allegations. (Id.) However, it does not accept as true deductions, contentions, or conclusions of law or fact. (Stonehouse Homes LLC v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 538.)

The general rule is that the plaintiff need only allege ultimate facts, not evidentiary facts. (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.) “All that is required of a plaintiff, as a matter of pleading, even as against a special demurrer, is that his complaint set forth the essential facts of the case with reasonable precision and with sufficient particularity to acquaint the defendant with the nature, source and extent of his cause of action.” (Rannard v. Lockheed Aircraft Corp. (1945) 26 Cal.2d 149, 156-157.)

Defendants demurrer to Plaintiff’s Complaint on the grounds “that it does not state facts sufficient to constitute a cause of action, the complaint is uncertain, ambiguous, and unintelligible, plaintiff lacks capacity to sue, it cannot be ascertained whether the contractual claims are written, oral, or implied by conduct, and there is a defect or misjoinder of the parties.” (Demurrer at 2.) However, the demurrer itself only argues the Complaint fails to set forth sufficient facts to constitute a cause of action. Defendants’ demurrer is thus OVERRULED as to every other stated basis for demurrer beyond the failure to state a claim under Code Civ. Proc. § 430.10(e).

The Court finds Cross-Defendants have complied with the meet and confer requirements set forth under Code Civ. Proc. § 430.41. (Powers Decl. at ¶2.)

To state a cause of action for breach of contract, Plaintiff must be able to establish “(1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.)

Plaintiff’s cause of action for breach of contract against Silverhawks LLC and Super 7 is based on an alleged breach of the Shopping Agreement attached as Exhibit A to the Complaint. The agreement is between Plaintiff as a production company and “Silerhawks [sic] LLC, f/s/o Brian Flynn” as executive producer. The agreement was made to develop a television series based on the existing Silverhawks intellectual property. The agreement states the rights to the Silverhawks property “are solely owned and controlled by Executive Producer.” (Ex. A to Complaint at 1.) It further specifies “Each party hereto represents and warrants that: (a) it has the full right and power to make and perform this Agreement; (b) It does not need to obtain the consent of any third party before entering Into this Agreement or performing in connection with the Project, and granting the rights so granted hereunder; and (c) it's [sic] contributions to the Project If any, are and will be original (other than those based on the Property or material in the public domain) and to the best of their knowledge, do not violate any third party rights.” (Ibid.) The agreement, dated January 4, 2021, provided for a 12-month term, after which it would automatically terminate unless extended as further provided for in the agreement itself. (Ibid.)

Defendants argue the breach of contract cause of action fails because all the facts giving rise to the claim occurred after the contract had already expired. Defendants therefore claim that any alleged breach of the agreement occurred after Silverhawks, LLC and Super 7 were no longer subject to the terms of the agreement. But Plaintiff’s cause of action is based on Defendants’ failure to secure the rights to Silverhawks during the term of the agreement. The Complaint alleges “Silverhawks materially breached the representations and warranties under the Agreement because it did not actually maintain the intellectual property rights to SilverHawks that it specifically represented owning. [¶] Super 7 is the alter ego of Silverhawks and is liable for its breach of the Agreement.” (Complaint at ¶¶85-86.) The Complaint alleges Plaintiff acted in reliance on these representations in shopping for a buyer to develop a Silverhawks series. (Id. at ¶87.) The Complaint alleges Plaintiff took such actions in October 2021 and November 2021, which is unquestionably within the original 12-month term contemplated by the agreement. (Id. at ¶¶39-41.) The Court thus finds Plaintiff’s cause of action for breach of contract is not solely based on conduct occurring after the expiration of the contract but is based on the alleged failure of Defendants to own and control the rights to Silverhawks during the 12-month contract term.

Defendants’ demurrer to the first cause of action for breach of contract is OVERRULED.

To establish an alter ego theory at the pleading stage, sufficient facts need to be alleged, and these facts must show both a “unity of interest and ownership” and an unjust result if the corporate entity is treated as a sole actor. (Leek v. Cooper (2011) 194 Cal. App. 4th 399, 417.) Ownership is just one of many factors that can be considered. (Id. at 417-418.) “No single factor is determinative, and the result depends on the circumstance of each case.” (Id. at 418.) Additionally, evidentiary facts are not required to support an alter ego theory. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 236.)

Defendants argue the Complaint does not sufficiently allege that Super 7 can be considered the alter ego of Silverhawks LLC. The Court disagrees. The Complaint alleges “Silverhawks acted as an alter ego of Super 7 because a unity of interest and ownership existed between Defendants such that any separateness between them ceased to exist in that Super 7 and its owner Brian Flynn completely controlled, dominated, operated, and managed Silverhawks.” (Complaint at ¶16.) It further alleges Defendant Bryan Flynn is the founder, controlling owner, and registered agent of both entities, the entities use the same office space and employees, Super 7 has previously held itself out to be the rightful owner of the Silverhawks intellectual property, Super 7 used Silverhawks as a shell company to carry out the business affairs of Super 7, Silverhawks is inadequately capitalized and uses the funds and assets of Super 7 to carry out its business, and that injustice would result if they were held to be separate entities. (Id. at ¶¶17-18.) The Court finds these allegations are sufficient to state a basis for alter ego liability at the pleading stage.

Defendants’ argument that Plaintiff has not provided sufficient evidence for the Court to impose alter ego liability goes to the merits of Plaintiff’s allegations and not the sufficiency of its pleading. The Court is required to assume the truth of Plaintiff’s allegations in ruling on Defendants’ demurrer, and Plaintiff is not required to produce evidence or evidentiary facts at the pleading stage.

“The elements of fraud,” including a cause of action for intentional misrepresentation, “are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Hinesley v. Oakshade Town Ctr. (2005) 135 Cal.App.4th 289, 294.) The facts constituting the alleged fraud must be alleged factually and with particularity as to every element of fraud, as the policy of “liberal construction” of the pleadings will not ordinarily be invoked. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) “This particularity requirement necessitates pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’” (Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73 [quoting Hills Trans. Co. v. Southwest (1968) 266 Cal.App.2d 702, 707].)

Defendants’ demurrer to the fraud claim against Flynn focuses on the element of scienter, alleging Plaintiff has failed to sufficiently plead that Flynn had knowledge of the falsity of the alleged misrepresentations concerning Silverhawks LLC and Super 7’s ownership of the Silverhawks property.[1] Defendants argue Flynn’s representations stating Silverhawks LLC and Super 7 did own the rights to the property is evidence that he did not know this claim to be false. The Court rejects this circular reasoning. If the Court were to adopt Defendants’ argument, it would be impossible to ever plead a claim for intentional misrepresentation because the alleged misrepresentation itself would preclude the element of scienter.

The Court finds the Complaint sufficiently alleges Flynn’s knowledge of the falsity of his representations. The Complaint alleges Flynn received notice from Warner Brothers in November 2021 that Warner Brothers owned the rights to Silverhawks, yet Flynn continued thereafter to represent that Silverhawks LLC and Super 7 owned the rights to the property. (Complaint at ¶¶42, 97.) This is sufficient to plead Flynn’s knowledge of the falsity of his representations.

Defendants next argue Plaintiff cannot establish any damages stemming from the purported fraud because Warner Brothers did not approach the parties with a claim of ownership until February 2022, after the parties’ agreement had expired and thus at a time when Plaintiff had no legal right to shop or develop the Silverhawks series. Even if the Court were to assume the contract expired in January 2022 and was not further extended by the agreement of the parties—a fact which appears to be in dispute by the parties—as the Court set forth above, Plaintiff’s claimed damages are not limited to actions taken after January 2022, but rather are based on fruitless work performed by Plaintiff during the original 12-month term of the contract.

Defendants also argue Plaintiff’s fraud “claims” (the Court assumes Defendants intend to refer to the third cause of action for fraudulent misrepresentation) is barred by the economic loss rule because its damages are limited to economic losses stemming from the alleged breach of contract. “[C]onduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law.” (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 989 (Robinson Helicopter).) In other words, “[t]he economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise.” (Ibid.) In Robinson Helicopter, the tort claim at issue was a fraud and misrepresentation claim. (Id. at p. 990.) The California Supreme Court held that the economic loss rule did not bar recovery where “a defendant’s affirmative misrepresentations on which a plaintiff relies and which expose a plaintiff to liability for personal damages independent of the plaintiff’s economic loss.” (Id. at p. 993.)

To plead around the economic loss rule, a party must plead the existence of a duty that arises independent of any contractual duty and independent injury (other than economic loss) that arises from the breach of that duty. (Id. at 988-991.) Accordingly, “Tort damages have been permitted in contract cases where a breach of duty directly causes physical injury; for breach of the covenant of good faith and fair dealing in insurance contracts; for wrongful discharge in violation of fundamental public policy; or where the contract was fraudulently induced. In each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.” (Id. at 989-990.) However, “Not all tort claims for monetary losses between contractual parties are barred by the economic loss rule. But such claims are barred when they arise from—or are not independent of—the parties’ underlying contracts.” (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 923-924.)

The Court declines to find Plaintiff’s fraud claim is barred at the pleading stage. As set forth above, there is a dispute between the parties as to when their agreement expired. If it expired on January 4, 2022, as Defendants claim, and Plaintiff continued to incur damages after that point based on its reasonable reliance on Defendants’ representations, then Plaintiff would be able to assert a tort claim which did not arise from the parties’ underlying contract. It may be that Plaintiff’s fraud claims is in fact barred by the economic loss rule, but that determination is more properly made on a motion for summary judgment or adjudication where, as here, it is not conclusive from the face of the Complaint that Plaintiff’s claims are necessarily barred.

For these reasons, the Court OVERRULES Defendants’ demurrer to the third cause of action for fraud.

[1] Defendants’ demurrer refers to Plaintiff’s “fraud claims” though their argument centers on the element of scienter, which is only a required element for the fraudulent misrepresentation claim alleged against Flynn. Scienter is not a required element for the negligent misrepresentation claim against Silverhawks LLC and Super 7, accordingly, the Court construes Defendants’ scienter argument to focus only on the fraud claim alleged against Flynn.