Judge: Douglas W. Stern, Case: 21STCV08013, Date: 2022-08-30 Tentative Ruling

Case Number: 21STCV08013    Hearing Date: August 30, 2022    Dept: 52

Tentative Ruling:

            Defendant Hyundai Motor America’s Demurrer and Motion to Strike Portions of Plaintiff Bernhard G. Mueller’s First Amended Complaint

The court exercises its discretion not to consider any untimely reply filed by defendant Hyundai Motor America.  (Cal. Rules of Court, rule 3.1300(d).) 

Demurrer

Defendant Hyundai Motor America demurs to Bernhard G. Mueller’s sixth cause of action for fraud by omission.

A. Sufficient Factual Allegations

            Plaintiff alleges sufficient facts for this cause of action.  Fraud by omission requires that: (1) defendant omitted or concealed a material fact; (2) defendant had a duty to disclose the fact to plaintiff; (3) defendant intentionally omitted or concealed the fact with intent to defraud plaintiff; (4) plaintiff must have been unaware of the fact and would have acted otherwise if he had known of the concealed fact; and (5) the omission caused damages.  (Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 248.)  

Generally, “[e]very element of the cause of action for fraud must be alleged in the proper manner and the facts constituting the fraud must be alleged with sufficient specificity to allow defendant to understand fully the nature of the charge made.”  (Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157, internal quotes omitted.)  That requirement, however, is relaxed in claims of fraud by omission.  As Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384 explained: “ ‘How does one show “how” and “by what means” something didn’t happen, or “when” it never happened, or “where” it never happened?’ ” 

            First, plaintiff alleges defendant “failed to disclose the material fact that the Subject vehicle had design and manufacturing defects that could result in sudden and catastrophic engine stalling, failure, and fire.”  (FAC, ¶ 42.)

Second, plaintiff alleges sufficient facts showing defendant had a duty to disclose.  The duty to disclose does not require an affirmative misrepresentation or a direct transaction.  (Heliotis v. Schuman (1986) 181 Cal.App.3d 646, 651.)  A defendant can be liable for fraud by omission “when the defendant had exclusive knowledge of material facts not known to the plaintiff.”  (Ibid.; accord LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 336.) 

Here, plaintiff alleges defendant knew “of the Engine Defect and its potential consequences prior to Plaintiff acquiring the Vehicle, through sources not available to consumers such as Plaintiff, including but not limited to pre-production testing data, early consumer complaints about the Engine Defect made directly to Defendant and its network of dealers, aggregate warranty data compiled from Defendant’s network of dealers, testing conducted by Defendants in response to these complaints, as well as warranty repair and part replacements data received by Defendant from Defendant’s network of dealers, amongst other sources of internal information.”  (FAC, ¶ 111.a.) 

Third, plaintiff sufficiently alleges intent to defraud.  “[T]he only intent by a defendant necessary to prove a case of fraud is the intent to induce reliance.  Moreover, liability is affixed not only where the plaintiff's reliance is intended by the defendant but also where it is reasonably expected to occur.”  (Lovejoy v. AT&T Corp. (2001) 92 Cal.App.4th 85, 93.)  “It may be inferred that [defendant] concealed [a material fact] with fraudulent intent, for the purpose of making a profit; it may also be inferred that plaintiff, who was unaware of the [fact], would have acted differently had he known of the suppressed fact.”  (Id. p. 96.)

The first amended complaint alleges defendant “concealed the truth, intending for Plaintiffs and other consumers to rely on these omissions.”  (FAC, ¶ 42.)  Defendant reasonably would have expected potential purchasers to rely on its nondisclosure of the engine defect.  The first amended complaint alleges sufficient facts to infer defendant concealed the defect for the purpose of profit. 

Fourth, plaintiff alleges he was unaware of the engine defect and relied on defendant’s omission in that he would not have leased his vehicle if he knew about the defect.  (FAC, ¶¶ 113-114.) 

Finally, plaintiff alleges he suffered damages resulting from his reliance.  He experienced his vehicle “stuttering and stalling” (FAC, ¶ 64), and the vehicle “continued to experience symptoms of the Engine Defect despite Defendant’s representations that the engine was repaired.”  (FAC, ¶ 67.)  He alleges he paid to lease a vehicle he would not have wanted if he knew about the defect.  (FAC, ¶ 115.)  

B. Economic Loss Rule

            Defendant also argues the economic loss rule bars plaintiff’s cause of action for fraud by omission because plaintiff alleges only an economic loss and therefore cannot collect tort damages.  Economic losses consist of “damages of inadequate value, costs of repair and replacement of the defective product or consequent loss of profits—without any claim of personal injury or damages to other property.”  (Robinson Helicopter Co. v Dana Corp. (2004) 34 Cal.4th 979, 988, internal quotes omitted (Robinson).)  Under the rule, “[w]here a purchaser’s expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only economic losses.”  (Ibid., internal quotes omitted; accord Jimenez v. Superior Court (2002) 29 Cal.4th 473, 482.) 

            The economic loss rule maintains the common law distinction between the law of contract and the law of tort.  (Robinson, supra, 34 Cal.4th at p. 988.)  A plaintiff recovers different kinds of damages for breach of contract than he or she recovers for a tort claim. (See Harris v. Atlantic Richfield Co. (1993) 14 Cal.App.4th 70, 77-79.)  “Tort damages have been permitted in contract cases [1] where a breach of duty directly causes physical injury [citation]; [2] for breach of the covenant of good faith and fair dealing in insurance contracts [citation]; [3] for wrongful discharge in violation of fundamental public policy [citation]; or [4] where the contract was fraudulently induced.”  (Erlich v. Menezes (1999) 21 Cal.4th 543, 551-552 (Erlich).)  “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 p. 552.)

            The issue in Robinson was whether the economic loss rule “applies to claims for intentional misrepresentation or fraud in the performance of a contract.”  (Robinson, supra, 34 Cal.4th at p. 984, italics added.)  Before addressing this novel issue, Robinson cited Erlich for the four well-established exceptions to the general rule that tort damages could not be recovered in a breach of contract case.  (Robinson, supra, 34 Cal.4th at pp. 989-990.) 

The Robinson court then analyzed the economic loss rule “[w]ith respect to situations outside of those set forth above,” i.e., when none of the four main exceptions applied.  (Robinson, supra, 34 Cal.4th at p. 990.)  Turning to the case at bar, the court concluded: “We hold the economic loss rule does not bar [the plaintiff’s] fraud and intentional misrepresentation claims because they were independent of [defendant’s] breach of contract” (Id. at p. 991.)  The court thus essentially restated the then-existing rule—a plaintiff can recover tort damages when defendant breached an independent tort duty.

When Robinson was published, California appellate courts had repeatedly held that a cause of action for fraudulent inducement to enter a contract was not barred by the economic loss rule.  (Erlich, supra, 21 Cal.4th 543 at p. 552; Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1238-1240 [affirming judgment of punitive damages against defendant who fraudulently induced contracts when it “made the guaranties without an intent to perform them”]; Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 135 [“Having found that Misbin and Holmes committed a fraud upon Glendale in inducing it to make the Window Hill improvement loan on [a] false promise…, the court properly awarded punitive damages.”]; Kuchta v. Allied Builders Corp. (1971) 21 Cal.App.3d 541, 549 [punitive “damages may be awarded where defendant fraudulently induces plaintiff to enter into a contract.”].)  That is because the tort of fraudulent inducement violates a legal duty that is independent from breach of contract.  It is independent because fraudulently inducing a contract necessarily occurs before the parties enter the contract and before any party can breach the contract.

Unlike the present case, Robinson was not a fraudulent inducement case.  In Robinson, the plaintiff was a helicopter manufacturer, and the defendant was a subcontractor who manufactured clutches that were used in plaintiff’s helicopters.  The parties had entered a contract years before defendant’s alleged fraud.  During their business dealings, defendant fraudulently sent certificates of compliance falsely stating the clutches met certain manufacturing requirements.  (Robinson, supra, 34 Cal.4th at p. 986.)  Based on those fraudulent statements, plaintiff kept accepting delivery of the clutches to its detriment.  (Id. at pp. 990-991.)

The Robinson court cautiously created a new exception to the economic loss rule in very narrow terms.  The court stated: “Because [defendant’s] affirmative intentional misrepresentations of fact . . . are dispositive fraudulent conduct related to the performance of the contract, we need not address the issue of whether [defendant’s] intentional concealment constitutes an independent tort.”  (Id. at p. 991, italics added.)  The court further stated its holding was “narrow in scope and limited to 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.) 

The Robinson court did not address or overrule the then-existing rule that a plaintiff can maintain a cause of action for fraudulent inducement against a defendant with whom he or she entered a contract without violating the economic loss rule.  In the present case, plaintiff’s allegations fit within the well-established fraudulent inducement exception to the economic loss rule.  He alleges that if defendant had not fraudulently omitted the material fact of the engine defect, he would not have leased his 2018 Hyundai Tucson.

C. Federal Preemption

            Finally, defendant argues plaintiff’s sixth cause of action is preempted by federal law and regulations.  Defendant contends the National Highway Traffic Safety Administration (NHTSA) has sole authority over vehicle recall notices.  The court rejects this argument.

Defendant relies on only two cases in support of its position.  First, Geier v. American Honda Motor Co., Inc. (2000) 529 U.S. 861 held, under the doctrine of conflict preemption, a regulation requiring airbags in certain vehicles preempted a claim for negligence based on failing to install airbags in a vehicle exempt from the regulation.  Defendant, however, identifies no conflict between fraud liability and NHTSA regulations. 

Second, In re Bridgestone/Firestone, Inc. Tires Products Liability Litigation (S.D. Ind. 2001) 153 F.Supp.2d 935, 938 applied conflict preemption to dismiss a claim asking “the Court to order a ‘recall, buy back, and/or replace[ment of] the Tires.’ ”  The court reasoned: “For a court to step in, on the basis of state law, once a member of the public becomes dissatisfied with the progress of the decision-making process at the agency would unnecessarily divert resources and attention from NHTSA and disturb the careful administrative procedure envisioned by Congress.”  (Id. at p. 946.)  Here, plaintiff brings an action for damages.  He is not asking this court to order a recall or buyback or exercise a power exclusively vested in the NHTSA.  Imposing liability for fraud by omission on defendant would not frustrate Congress’s purpose in enacting laws regarding vehicle safety and notices to consumers. 

D. Disposition

Defendant’s demurrer is overruled.

Motion to Strike

Defendant moves to strike two portions of the complaint regarding punitive damages and 39 other portions of the complaint as irrelevant.  Courts may strike allegations that are “not essential to the statement of a claim or defense,” “neither pertinent to nor supported by an otherwise sufficient claim or defense,” or “[a] demand for judgment requesting relief not supported by the allegations.”  (CCP § 431.10(b).) 

A. Punitive Damages

            Plaintiff fails to allege sufficient facts for punitive damages against defendant Hyundai Motor America.  For a corporate employer to be liable for punitive damages, “the advance knowledge and conscious disregard [of an employee’s unfitness], authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.”  (Civ. Code, § 3294(b).)

Plaintiff only makes the conclusory allegation that “[a]ll acts of corporate employees as alleged herein were authorized or ratified by an officer, director, or managing agent of the corporate employer.”  (FAC, ¶ 11.)  Plaintiff fails to allege sufficient facts supporting that conclusion.  Plaintiff’s opposition did not respond to this argument. 

B. Irrelevant Allegations

             Defendant moves to strike numerous portions of the first amended complaint that allege various facts about other vehicles and a different manufacturer.  Plaintiff alleges his 2018 Hyundai Tucson is defective.  (FAC, ¶ 6.)  The first amended complaint repeatedly makes allegations about Kia Motor America, Inc., and other classes of vehicles including the Kia Soul, Kia Sportage, Kia Optima, Kia Sorento, Hyundai Sonata, and 2011-2013 Hyunda Tucson.  The first amended complaint fails to allege facts showing that Kia and Kia Soul vehicles are pertinent to any cause of action.

            Plaintiff’s opposition did not respond to defendant’s motion to strike these portions of the complaint as irrelevant.  The opposition only argues about punitive damages.

            Defendant, however, includes three portions of the first amended complaint that do not belong in this category.  Paragraphs 27, 37, and 46 (Notice of Motion, Portion Nos. 12, 21, 29) each allege facts about recent Hyundai Tucson models.

C. Disposition

            Defendant’s motion to strike is granted in part.  The court hereby strikes the following portions of plaintiff’s first amended complaint:

1.      Paragraph 13, lines 2-4: “… along with Kia Motors America, Inc. and their Korean parent entities, released certain vehicles, including the 2011-2019 Hyundai Tucson and the 2012-2016 Kia Soul with a 2.0 …”

2.      Paragraph 28, lines 13-16: “In the past, Hyundai and Kia have recalled numerous other models with GDI engines to repair defects that could lead to engine failures and fires, but these issues have recurred despite the recalls.  Hyundai and Kia are recalling many of those vehicles yet again for the same problems.”

3.      The entirety of paragraphs 15-17, 20-25, 29-31, 33-36, 38-41, 43-45, 47-54, 57, and 72.

4.      Prayer, paragraph h., page 25, line 3: “For punitive damages.”