Judge: Daniel S. Murphy, Case: 24STCV03860, Date: 2025-01-03 Tentative Ruling

Case Number: 24STCV03860    Hearing Date: January 3, 2025    Dept: 32

BACKGROUND

            On February 14, 2024, Plaintiff 8231 Delogpre, LLC filed this action against Defendants Kingston Management Group, Inc. (KMG) and Ian Hollinger (Hollinger). Plaintiff filed the operative First Amended Complaint on August 1, 2024, asserting causes of action for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) negligence, (4) fraud, (5) breach of fiduciary duty, (6) accounting, and (7) violation of Business and Professions Code section 7031.

            Plaintiff hired KMG to perform property management, construction supervision, and oversight with respect to an apartment building in West Hollywood. The FAC alleges that KMG and its principal, Hollinger, engaged in unlicensed construction work, failed to secure storage rooms and lock boxes, failed to properly register leases, failed to perform services as required, failed to keep Plaintiff updated, and failed to provide a full accounting of funds.

            On November 25, 2024, Defendants filed the instant demurrer and motion to strike against the FAC. Plaintiff filed its opposition on December 19, 2024. Defendants filed their reply on November 23, 2024.  

LEGAL STANDARD

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Ibid.) The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action. (Hahn, supra, 147 Cal.App.4th at 747.)

Any party, within the time allowed to respond to a pleading, may serve and file a notice of motion to strike the whole or any part of that pleading. (Code Civ. Proc., § 435, subd. (b).) The court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike (1) any irrelevant, false, or improper matter inserted in any pleading and (2) all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (Id., § 436.) The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. (Id., § 437.)

MEET AND CONFER

Before filing a demurrer or a motion to strike, the demurring or moving party is required to meet and confer with the party who filed the pleading demurred to or the pleading that is subject to the motion to strike for the purposes of determining whether an agreement can be reached through a filing of an amended pleading that would resolve the objections to be raised in the demurrer. (Code Civ. Proc., §§ 430.41, 435.5.) The Court finds that Defendants have satisfied the meet and confer requirement. (See Liston Decl.)

DISCUSSION

I. Demurrer

a. Breach of Contract

To establish breach of contract, a plaintiff must show: (1) the contract existed, (2) the plaintiff’s performance of the contract or excuse for nonperformance, (3) the defendant’s breach, and (4) the resulting damage to the plaintiff. (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.) “Where a complaint is based on a written contract which it sets out in full, a general demurrer to the complaint admits not only the contents of the instrument but also any pleaded meaning to which the instrument is reasonably susceptible. [Citation.] While plaintiff's interpretation of the contract ultimately may prove invalid, it [is] improper to resolve the issue against her solely on her own pleading.” (Aragon-Haas v. Family Security Ins. Services, Inc. (1991) 231 Cal.App.3d 232, 239.)

Defendants argue that the alleged breaches (FAC ¶ 17) are not reflected in the actual terms of the agreement attached as Exhibit 1 to the FAC. However, what the contract terms are and how KMG breached them are different matters. Exhibit 1 sets forth the terms of the contract, while paragraph 17 of the FAC sets forth the ways in which KMG allegedly breached the contract. Defendants cite no authority for their proposition that if a certain act is not expressly prohibited by the contract terms, then the act cannot constitute a breach. (See Reply 3:1-9.) If that were true, parties would have to predict every single act that could potentially constitute a breach and write the corresponding prohibition into their contract. Of course, California law imposes no such requirement. Ultimately, whether the alleged acts in paragraph 17 constitute a breach of the contract is a factual question unsuited for demurrer.   

For example, the alleged acts may constitute a breach of section (a) on page 2 of the contract: “Manager shall perform its duties hereunder in a commercially reasonable manner consistent with local industry practices in the area where the Project is located and Manager shall exercise the same degree of care, prudence and skill that Manager exercises (or would exercise) in the management of Manager's own properties.” (FAC, Ex. 1.) The list of misconduct alleged in paragraph 17 sufficiently demonstrates a failure to perform manager duties in a commercially reasonable manner or with the requisite degree of care. Plaintiff has pled a reasonable interpretation of the contract for demurrer purposes. (See Aragon-Haas, supra, 231 Cal.App.3d at p. 239.)

The demurrer is OVERRULED as to the first cause of action.

b. Implied Covenant of Good Faith and Fair Dealing

            “The covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party’s right to receive the benefits of the agreement actually made.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-50.) “The covenant of good faith and fair dealing imposes obligations on the contracting parties separate and apart from those consensually agreed to.” (Bodenhamer v. Superior Court (1987) 192 Cal.App.3d 1472, 1477.) “The obligations imposed by the implied covenant of good faith and fair dealing are not those set out in the terms of the contract itself, but rather are obligations imposed by law.” (Id. at p. 1478.) Therefore, “breach of a specific provision of the contract is not a necessary prerequisite to a claim for breach of the implied covenant of good faith and fair dealing.” (Schwartz v. State Farm Fire & Casualty Co. (2001) 88 Cal.App.4th 1329, 1339.)

            Nonetheless, “the scope of conduct prohibited by the covenant of good faith is circumscribed by the purposes and express terms of the contract.” (Avidity Partners, LLC v. State of California (2013) 221 Cal.App.4th 1180, 1204.) “The implied covenant of good faith and fair dealing does not impose substantive terms and conditions beyond those to which the parties actually agreed.” (Ibid.) “It cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement.” (Ibid.)

            Defendants argue that the alleged actions under the implied covenant claim do not pertain to the express terms of the contract. The Court disagrees. For pleading purposes, the list of failures detailed in the FAC are sufficiently related to the express terms of the contract such that they may be considered obligations that were contemplated by the parties. (See FAC ¶ 23.) It is a factual question whether the alleged acts actually constitute a breach of the implied covenant. The FAC further alleges that KMG and its agents acted “to enjoy and use the wrongfully withheld sums to further their own interests.” (Id., ¶ 24.) This establishes that KMG “unfairly frustrat[ed] the [plaintiff]’s right to receive the benefits of the agreement actually made.” (See Guz, supra, 24 Cal.4th at pp. 349-50.) For pleading purposes, Plaintiff has sufficiently alleged a breach of the implied covenant.  

            The demurrer is OVERRULED as to the second cause of action.

c. Fraud

“The elements of fraud that will give rise to a 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.’” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 974, quoting Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) Fraud must be pleaded with specificity rather than with general and conclusory allegations. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.) The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made. (Lazar, supra, 12 Cal.4th at p. 645.)

Here, the FAC lacks the requisite specificity. While the FAC attributes some statements to Hollinger that allegedly induced Plaintiff to enter the contract, it fails to specify how the statements were made, when they were made, and to whom they were made. (See FAC ¶¶ 44-46.) Therefore, the fraud claim has not been sufficiently pled.

The demurrer is SUSTAINED as to the fourth cause of action.

d. Breach of Fiduciary Duty

            “The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damages proximately caused by the breach.” (Tribeca Companies, LLC v. First American Title Insurance Company (2015) 239 Cal.App.4th 1088, 1114.)

            The FAC alleges that KMG, as Plaintiff’s property manager, owed Plaintiff “duties of care, loyalty, and good faith” and was “obligated to act in the best interests of Plaintiff and to place Plaintiff’s interests ahead of their own.” (FAC ¶ 57.) The facts alleged throughout the complaint establish that KMG failed to do this. Thus, Plaintiff has adequately pled a breach of fiduciary duty. As this is not a fraud claim, the specificity called for by the demurrer is unwarranted. The particular facts proving a breach of fiduciary duty may be ascertained in discovery.

            The demurrer is OVERRULED as to the fifth cause of action.

e. Business and Professions Code Section 7031

            “[A] contractor is any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or other structures or works in connection therewith.” (Bus. & Prof. Code, § 7026.) “[A] person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.” (Id., § 7031(b).)

            The FAC alleges that “KMG directly hired its own employees (as this term is defined under the worker’s compensation laws) to perform construction services and repairs at the Property. By directly hiring and supervising unlicensed construction workers to perform work and deliver materials to the Property, KMG acted as a ‘Contractor’ as defined by Bus. & Prof. Code § 7026.” (FAC ¶ 64.) KMG allegedly performed the work itself and “did not retain the services of a licensed contractor to perform the work.” (Id., ¶ 67.) KMG was not licensed. (Id., ¶ 66.) Plaintiff allegedly paid KMG directly for the work. (Id., ¶ 68.) For pleading purposes, these facts establish KMG as a contractor and state a cause of action for unlicensed contracting. (See Bus. & Prof. Code, §§ 7026, 7031(b).)

            Defendants argue that KMG is referenced throughout the complaint as a property manager, not a contractor. However, the label is not dispositive. Plaintiff has alleged that KMG directly performed the construction work and was directly paid for the work, thereby acting as an unlicensed contractor. (See Bus. & Prof. Code, § 7026.) For pleading purposes, this is sufficient to state a cause of action under section 7031.

            Defendants further contend that the cause of action is uncertain because it fails to plead the specific acts amounting to unlicensed contracting and fails to demonstrate that the acts fall within the one-year statute of limitations. (See San Francisco CDC LLC v. Webcor Construction L.P. (2021) 62 Cal.App.5th 266, 278 [one-year statute of limitations applies to claims under Business and Professions Code section 7031(b)].)

However, a demurrer for uncertainty is disfavored and is only granted “if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (A.J. Fistes Corp. v. GDL Best Contractors, Inc. (2019) 38 Cal.App.5th 677, 695.) A complaint does not need to be a “model of clarity” to survive a demurrer because most ambiguities can be clarified through discovery. (Ibid.) Here, the FAC has alleged sufficient facts to place Defendants on notice of the nature of the claim. Specific facts, such as the precise acts and their dates, are ascertainable from discovery. Their absence from the complaint does not render it so incomprehensible that Defendants cannot respond. Moreover, a demurrer does not lie unless a statute of limitations defect appears on the face of the complaint. (Roman v. County of Los Angeles (2000) 85 Cal.App.4th 316, 324-25.) There is nothing in the complaint establishing that the claim is time-barred as a matter of law.

The demurrer is OVERRULED as to the seventh cause of action.

II. Motion to Strike

            a. Punitive Damages

            “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” (Civ. Code, § 3294, subd. (a).) “‘Malice’ means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” (Id., subd. (c)(1).) “‘Oppression’ means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.” (Id., subd. (c)(2).) Fraud is “intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” (Id., subd. (c)(3).)

            Here, KMG allegedly hired incompetent workers for construction, failed to supervise the work, overcharged Plaintiff to retain secret profits, mishandled dealings with the City causing Plaintiff to lose income, failed to keep Plaintiff apprised of insurance payment deadlines, failed to provide accurate financial records, and converted funds from Plaintiff’s trust account, among other things. (FAC ¶¶ 8-13.) KMG allegedly sought to maximize its own profits at Plaintiff’s expense. (Id., ¶ 53.) For pleading purposes, these acts sufficiently constitute a breach of fiduciary duty and additionally show “willful and conscious disregard of the rights or safety of” Plaintiff and “unjust hardship in conscious disregard of [Plaintiff’s] rights.” (See Civ. Code, § 3294(c).)

            The motion is DENIED as to punitive damages.

            b. Attorney’s Fees

“Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties . . . .” (Code Civ. Proc., § 1021.) Thus, “[a]ttorney fees are not recoverable unless a fee award is expressly authorized by either statute or the parties’ contract.” (Ilshin Investment Co., Ltd. v. Buena Vista Home Entertainment, Inc. (2011) 195 Cal.App.4th 612, 627.)   

Plaintiff claims attorney’s fees under an indemnification provision in the parties’ contract:

“Manager shall indemnify, defend and hold Owner harmless from and against all loss, cost, expenses, claims, demands, or legal proceedings (including costs, expenses, and reasonable attorney's fees) due to the negligence or willful misconduct of Manager or any of Manager's employees, agents or consultants or arising out of any action taken by Manager or any of Manager’s employees, agents, or consultants in breach of this Agreement. The terms and conditions of this paragraph shall survive the termination or expiration of this Agreement.”

(FAC, Ex. 1, p. 3.)

            “Generally, an indemnification provision allows one party to recover costs incurred defending actions by third parties, not attorney fees incurred in an action between the parties to the contract.” (Alki Partners, LP v. DB Fund Services, LLC (2016) 4 Cal.App.5th 574, 600.) “A clause that contains the words ‘indemnify’ and ‘hold harmless’ generally obligates the indemnitor to reimburse the indemnitee for any damages the indemnitee becomes obligated to pay third persons.” (Ibid.) “The court will not infer that the parties intended an indemnification provision to cover attorney fees between the parties if the provision ‘does not specifically provide for attorney's fees in an action on the contract.’” (Id. at pp. 600-601, emphasis in original.) Even an indemnification clause in which one party promised to indemnify the other from “any, all, and every claim” arising out of “the performance of the contract” did not cover first-party claims. (See Myers Building Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949, 974.)

            The indemnification clause cited by Plaintiff is nothing more than a typical indemnification clause pertaining to actions by third parties. It does not expressly provide for attorney’s fees in an action between the parties themselves. Thus, there is no contractual basis for attorney’s fees.  

            Plaintiff also argues that attorney’s fees are warranted under the “tort of another” doctrine. (See Prentice v. North American Title Guaranty Corp. (1963) 59 Cal.2d 618, 620-21.) However, Plaintiff admits that this theory is not pled in the complaint. (Opp., p. 7, fn. 1.) Plaintiff may amend the complaint to allege this theory.

            The motion is GRANTED as to attorney’s fees.

            c. Treble Damages

            “Any unlicensed person who causes injury or damage to another person as a result of providing goods or performing services for which a license is required . . . shall be liable to the injured person for treble the amount of damages assessed in a civil action.” (Code Civ. Proc., § 1029.8(a).)

            As discussed above, Plaintiff has pled that KMG acted as an unlicensed contractor. Thus, treble damages are applicable under section 1029.8(a).

            The motion is DENIED as to treble damages.

d. Stearman Costs

            “For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this Code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.” (Civ. Code, § 3333.) In a construction defect case, expert fees for investigation related to the cost of repair are recoverable as damages under section 3333. (Stearman v. Centex Homes (2000) 78 Cal.App.4th 611, 624-25.)

            As discussed above, Plaintiff has pled that KMG acted as an unlicensed contractor that directly performed the allegedly inadequate construction work. Plaintiff alleges that it has incurred investigation costs as a result. (FAC ¶ 41.) Thus, Plaintiff has sufficiently established a basis for Stearman costs.

            The motion is DENIED as to Stearman costs.

CONCLUSION

            Defendants’ demurrer is SUSTAINED as to the fourth cause of action with leave to amend and OVERRULED in all other respects. The motion to strike is GRANTED as to attorney’s fees with leave to amend and DENIED in all other respects.