Judge: Douglas W. Stern, Case: 21STCV33234, Date: 2022-09-20 Tentative Ruling

Case Number: 21STCV33234    Hearing Date: September 20, 2022    Dept: 52

Tentative Ruling:

            Defendant Ken Atchity’s Demurrer to Third Amended Complaint         

            Defendant Ken Atchity demurs to all five causes of action alleged in plaintiff Christopher Silva’s third amended complaint.

First Cause of Action for Fraud

Plaintiff alleges sufficient facts for fraud.  The elements of fraud are: (1) a misrepresentation; (2) knowledge of falsity; (3) an intent to defraud; (4) justifiable reliance; and (5) damages.  (Ryder v. Lightstorm Entertainment, Inc. (2016) 246 Cal.App.4th 1064, 1079.)  The third amended complaint alleges promissory fraud, which requires “(1) the defendant made a representation of intent to perform some future action, i.e., the defendant made a promise, and (2) the defendant did not really have that intent at the time that the promise was made, i.e., the promise was false.”  (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1060 (Beckwith).) 

Plaintiff alleges a false promise.  He alleges defendants Atchity and Gibson told him that he “would be compensated for his work co-producing the film, for working to obtain financing, the completion bond, sales agents, and distribution for the film.  In addition, he was advised that investments made for the Project would first be used for actor deposits, and that costs borne by the partners would not be paid until the financial close.  Finally, plaintiff was advised that he would be treated as a partner of defendants, and a co-owner of the Project.”  (TAC, ¶ 14.)

Plaintiff alleges the promise was false.  “The promises and inducements made by defendants to plaintiff were false, and defendants made the statements intending for plaintiff to enter into the contract and perform the services he performed, so they could obtain the fruits of his labors without compensating him.”  (TAC, ¶ 16.) 

Plaintiff alleges he justifiably relied on the promise.  “If plaintiff had been aware” the promise was false, he “would not have entered into the agreement and would not have done business with defendants.”  (TAC, ¶ 17.)  “Instead, in relying on the misrepresentations, plaintiff performed the services required of him.”  (Ibid.)

Finally, plaintiff alleges resulting damages.  A plaintiff must “allege his damages were caused by the actions he took in reliance on the defendant’s misrepresentations.”  (Beckwith, supra, 205 Cal.App.4th at p. 1064.)  Damages from fraud can include opportunity costs.  (See Ryder v. Lightstorm Entertainment, Inc. (2016) 246 Cal.App.4th 1064, 1080 [potential damages for “miss[ing] … other development opportunities]; Agosta v. Astor (2004) 120 Cal.App.4th 596, 606-607 [person induced “into changing employment” by false promise “entitled to compensation for ‘the loss of security and income associated with his former employment’ ”].)

  Plaintiff alleges he “was damaged in spending several weeks and months performing the services required of him, to no avail, when he could have used that time to conduct other business and/or seek other employment.”  (TAC, ¶ 17.)  “Further, in performing the services he performed, plaintiff went ‘out of pocket’ by spending his own funds to achieve the results he achieved.”  (Ibid.)  Plaintiff thus alleges that because he relied on defendant’s promise, he suffered damages by incurring expenses and foregoing other potential benefits, i.e., opportunity costs.

Plaintiff meets the heightened standard of pleading fraud.  “[F]raud must be pled specifically” by “pleading facts which show how, when, where, to whom, and by what means the representations were tendered.”  (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645 (Lazar), internal quotes omitted.)  “

Plaintiff amended the complaint to specifically allege “defendants Atchity and Gibson each” made the false promises “to plaintiff, in conversations taking place remotely via Zoom (which meetings took place every two weeks to cover all pending issues, with the false representations made during the months of August and September 2020).”  (TAC, ¶ 14.)

Second Cause of Action for Negligent Misrepresentation

Plaintiff fails to allege sufficient facts for this cause of action.  “To be actionable, a 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.)  There is no cause of action for a “negligent false promise.”  (Id. at p. 159.) 

As plaintiff states in his opposition, the first cause of action is for promissory fraud—a false promise, not a false representation of fact.  Plaintiff’s opposition further acknowledges this cause of action is the same as the first, but with negligence instead of intentionally false statements.  This cause of action therefore amounts to alleging a negligent false promise, which is not actionable.

Plaintiff shows no reasonable possibility of amending the complaint to cure this defect.  After a successful demurrer, where “there is a reasonable possibility that the defects can be cured by amendment, leave to amend must be granted.” (Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 601.) The plaintiff bears the burden of “demonstrat[ing] how the complaint can be amended.” (Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 711.) “Leave to amend should be denied where the facts are not in dispute and the nature of the claim is clear, but no liability exists under substantive law.” (Lawrence v. Bank of America (1985) 163 Cal.App.3d 431, 436.) 

Plaintiff has amended the complaint three times so far.  The nature of this claim is now clear: a negligent false promise.  As a matter of substantive law, that is not a valid cause of action.  The court will therefore sustain the demurrer as to this cause of action without leave to amend.

Third Cause of Action for Breach of Contract

            Plaintiff alleges sufficient facts for this cause of action.  Breach of contract requires: (1) a contract; (2) plaintiff’s performance or excuse for nonperformance; (3) defendant’s breach; and (4) resulting damages.  (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.) 

            First, plaintiff alleges the parties entered a written agreement to work together to produce a movie.  (TAC, Ex. A.)  The agreement provides, “The Parties agree to work together to finance the film for a period of six months, ending March 15, 2021, which period can be extended by agreement among the Parties.”   (Ex. A, ¶ 5.)  Plaintiff alleges, “Each of the parties did in fact agree to extend the financing period indefinitely, on or about December 18, 2020.”  (TAC, ¶ 9.) 

Second, plaintiff alleges he performed his obligations.  The agreement provides he “will provide sales agent and distributor for the film” (Ex. A, ¶ 8) and that the parties “will arrange equity financing from their contacts” (Id., ¶ 12).  The third amended complaint alleges plaintiff “introduced defendants and the Project to various financiers, sales agents and a completion bond company.”  (TAC, ¶ 10.)

Third, plaintiff alleges Atchity breached the contract.  Plaintiff alleges that, on February 19, 2021, defendants sent him a letter stating that “he would be terminated under the Agreement as of March 15, 2021, unless all work was completed, including approvals and work to be performed by defendants.”  (TAC, ¶ 25.)  Because the parties allegedly agreed to extend their contract in December 2020, prematurely terminating the agreement constituted a breach.

 The extension necessarily meant the parties’ contract would not expire on March 15, 2021.  “When there is no express term, and the surrounding circumstances and the nature of the contract do not permit the construction of the contract to have an ascertainable term of duration, the contract is usually construed as terminable at will after a reasonable time of duration has elapsed.”  (Zee Medical Distributor Association, Inc. v. Zee Medical, Inc. (2000) 80 Cal.App.4th 1, 10.)    

Before the extension, the agreement was set to expire on March 15, 2021.  (Ex. A, ¶ 5.)  Terminating the agreement on that day would mean there was no extension.  Interpreting the agreement to permit that would make the extension superfluous and ineffective.  “ ‘A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.’ Civ.Code, § 1643. ‘An interpretation which gives effect is preferred to one which makes void.’ Civ.Code, § 3541.”  (Zimco Restaurants, Inc. v. Bartenders and Culinary Workers Union, Local 340, AFL-CIO (1958) 165 Cal.App.2d 235, 238-239; accord Rest.2d Contracts, § 203.) 

Plaintiff’s third amended complaint now sufficiently alleges the breach caused damages to him.  As with fraud, a plaintiff alleging breach of contract can recover damages based on his reliance expectation.  “As an alternative to” expectation damages, “the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance.”  (Rest.2d Contracts, § 349.)  “[A] plaintiff who is entitled to a remedy for material breach or repudiation may recover damages measured by the cost or value of the plaintiff’s performance.”  (Rest.3d Restitution, § 38(1).)  “Reasonably necessary expenditures incurred, and the value of services rendered, by the contracting party not in default, may be recovered as damages for breach of contract, wherever the plaintiff has not also recovered the full price or the value of the benefits expected under the contract.”  (Patty v. Berryman (1949) 95 Cal.App.2d 159, 172.)

As discussed above, plaintiff alleges he spent “several weeks and months performing the services required of him, to no avail, when he could have used that time to conduct other business and/or seek other employment.”  (TAC, ¶ 17.)  He also alleges he “went ‘out of pocket’ by spending his own funds to achieve the results he achieved.”  (Ibid.)  These constitute damages for breach of contract based on plaintiff’s reliance interest.

Plaintiff also now alleges expectation damages.  The third amended complaint alleges “had he not been fired, the completion bond would have been obtained.”  (TAC, ¶ 27.)  Defendants “prevented him from obtaining the completion bond … to avoid paying him.”  (Ibid.)  The agreement provides that once the film been financed and acquired a completion bond, plaintiff would be paid $115,000.  (TAC, Ex. A, ¶ 14.)  Plaintiff thus alleges that, by prematurely terminating the agreement, defendants deprived him of the $115,000 payment he would have earned.

Fourth Cause of Action for Breach of Fiduciary Duty

            Plaintiff fails to allege sufficient facts for this cause of action.  “The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach.”  (Knox v. Dean (2012) 205 Cal.App.4th 417, 432, internal quotes and citations omitted.)

Plaintiff alleges a fiduciary relationship between himself and Atchity.  “ ‘A mere contract or a debt does not constitute a trust or create a fiduciary relationship.’ ”  (Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 33-34.)  “Traditional examples of fiduciary relationships in the commercial context include… business partners, joint adventurers, and agent/principal.”  (Id. at p. 30.) 

Plaintiff alleges facts constituting a partnership or joint venture.  “[T]he association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”  (Corp. Code, § 16202(a).)  “[T]o adequately plead the existence of an implied partnership or joint venture agreement, a plaintiff need only allege conduct and circumstances from which an intention to operate a business as co-owners and share management responsibilities may be inferred.”  (Second Measure, Inc. v. Kim (N.D. Cal. 2015) 143 F.Supp.3d 961, 978.)  “Whether a partnership or joint venture exists is primarily a factual question to be determined by the trier of fact from the evidence and inferences to be drawn therefrom.”  (Bank of California v. Connolly (1973) 36 Cal.App.3d 350, 364.) 

The parties entered an agreement to produce a feature film.  (Ex. A.)  The circumstances indicate they did so for profit.  Correspondence between the parties refers to Silva, Atchity, and Gibson as “owners” of an entity producing the movie.  (SAC, Ex. B.)  These allegations suffice on demurrer.   

Plaintiff alleges Atchity breached his fiduciary duty of loyalty.  “[P]artners may not take advantages for themselves at the expense of the partnership.”  (Jones v. Wells Fargo Bank (2003) 112 Cal.App.4th 1527, 1540.)  Plaintiff alleges “defendants used monies raised for actor deposits to pay themselves and others, thus depleting the amounts available for hiring talent.”  (TAC, ¶ 11.)  He further alleges, “Atchity paid himself a writer’s fee of $25,000; a director not attached to the project was paid $15,000; [and] a personal manager was paid $25,000 to try and sign additional names to the Project.”  (Ibid.)  A key element of the partnership’s business was to raise money needed to produce the movie.  Defendant allegedly diverted funds raised to himself or to others who did not advance the partnership’s efforts to make the movie.  That constitutes taking advantage for himself at the partnership’s expense.

Plaintiff also alleges Atchity “expelled plaintiff from the partnership in order to avoid paying him” in order “to preserve their investors’ funds, so that they could continue using those funds for their own personal uses and purposes.”  (TAC, ¶ 31.)  Instead of pursuing the partnership’s business for the interest of all partners, Atchity allegedly cut plaintiff out so he could personally benefit.

Finally, plaintiff alleges Atchity’s breach cause damages to him.  “Had they not expelled him, additional financing would have been obtained in order to create the film.”  (TAC, ¶ 31.)  The agreement provides that once the film been financed and acquired a completion bond, plaintiff would be paid $115,000.  (TAC, Ex. A, ¶ 14.)  Plaintiff thus alleges Atchity’s breach of fiduciary duty of loyalty stopped the project from reaching the condition upon which plaintiff would be paid. 

Fifth Cause of Action: Breach of the Implied Covenant of Good Faith and Fair Dealing

Plaintiff alleges sufficient facts for this cause of action.  “Every contract imposes on each party a duty of good faith and fair dealing in contract performance and enforcement such that neither party may do anything to deprive the other party of the benefits of the contract.” (Lueras v. BAC Home Loans Servicing, LP (2013) 221 Cal.App.4th 49, 76.)  “The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith.”  (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 372.)

The contract gives each party a discretionary power.  It provides, “If the film is not financed by the closing date [March 15, 2021], to the satisfaction of all the Parties, this agreement will terminate automatically with all rights reverting to” Ken Atchity and Alan Gibson.  (Ex. A, ¶ 17.)  It further provides that the contract would terminate on March 15, 2021, but that the “period can be extended by agreement among the Parties.”  (Id., ¶ 5.)  This provision allows any of the partners to affect the others’ rights by withholding their discretionary power to extend the agreement.

Plaintiff alleges Atchity agreed to extend the contract indefinitely (TAC, ¶ 8), but then proceeded to terminate the agreement anyways (TAC, ¶ 25).  In the alternative to breach of an express term, Atchity’s conduct constitutes acting in bad faith by withholding his agreement to extend the term.  Plaintiff alleges that had the agreement continued, “the completion bond would have been obtained” (TAC, ¶ 27) and he would have been entitled to the $115,000 payment.  Plaintiff adequately alleges damages for the same reasons as in his third cause of action for breach of contract.

Disposition   

Defendant Ken Atchity’s demurrer to the first, third, fourth, and fifth causes of action is overruled.  Defendant Ken Atchity’s demurrer to the second cause of action is sustained without leave to amend.  Defendant Ken Atchity is ordered to answer within 20 days.