Judge: Douglas W. Stern, Case: 22STCV38443, Date: 2023-04-18 Tentative Ruling

Case Number: 22STCV38443    Hearing Date: April 18, 2023    Dept: 68

Limelight International, Ltd., v. Oneworld Apparel, LLC; Case No. 22STCV38443

MOVING PARTY: Cross-Defendant Limelight International, Ltd.

RESPONDING PARTY: Cross-Complainant RLoom, LLC, fka Oneworld Apparel, LLC

Demurrer to Cross-Complaint

I. BACKGROUND

A. Factual

This lawsuit apparently arises out of a commercial relationship over a couple of years.  Plaintiff/ Cross-Defendant Limelight International (Limelight) filed its original complaint against Defendant/Cross-Complainant RLoom (RLoom) for causes of action related to RLoom’s alleged breach of contract and failure to pay invoices in the amount of $586,962.09 for garments that Limelight had sold to RLoom. Limelight had delivered over $2,000,000 worth of garments to RLoom. (Demurrer at p. 2.)

RLoom has filed a cross-complaint alleging that Limelight was charging excessive prices for low quality garments and delivered defective goods. Further, RLoom is alleging that its employee, Sylvia Huynh, had conspired with Limelight to sell these goods to RLoom because she would receive monetary benefits from Limelight for doing so. (Demurrer at p. 2.) RLoom seeks to hold Limelight liable for the $2,000,000 worth of garments that it purchased from Limelight. (Demurrer at p. 2.)

RLoom’s Cross-Complaint alleges causes of action for (1) fraud (inducement); (2) fraud (concealment); (3) conspiracy to defraud; (4) breach of fiduciary duty; (5) aiding and abetting breach of fiduciary duty; (6) civil theft; (7) unfair business practices; and (8) rescission. Limelight demurrers to the First, Third, Fifth, Sixth, Seventh, and Eighth Causes of Action.

B. Procedural

This action was originally filed by Limelight on December 9, 2022. On January 27, 2023, RLoom filed its Cross-Complaint. Limelight filed its demurrer as to the Cross-Complaint on February 27, 2023. RLoom filed its opposition on April 5, 2023. Limelight filed its reply on April 11, 2023.

C. Request for Judicial Notice

Limelight has asked the Court to take judicial notice of its own docket and RLoom’s Cross-Complaint that was filed with the Court. It is unnecessary to make that request as the Court inherently must look at the Cross-Complaint to evaluate a demurrer.  This Court is aware of no reason why it is necessary to request judicial notice of the pleading in this case that is attacked by the demurrer.

II. ANALYSIS

A. The Demurrer

As a general matter, 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 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.) The only issue a demurrer is concerned with is whether the complaint, as it stands, states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)

Where a demurrer is sustained, leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.) The burden is on the plaintiff to show the court that a pleading can be amended successfully. (Id.; Lewis v. YouTube, LLC (2015) 244 Cal.App.4th 118, 226.) However, “[i]f there is any reasonable possibility that the plaintiff can state a good cause of action, it is error to sustain a demurrer without leave to amend.” (Youngman v. Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 245).

1. First Cause of Action for Fraud (Inducement)

Limelight demurs to this cause of action on the basis that it fails to meet the heightened pleading standard and fails to state facts sufficient to constitute a cause of action for fraud in the inducement.

Fraud in the inducement occurs when a party's assent to a contract is obtained through “conscious misrepresentations, or concealment, or non-disclosure of a material fact which induces the innocent party to enter the contract.” (Odorizzi v. Bloomfield Sch. Dist. (1966) 246 Cal.App.2d 123, 128.) More specifically, “[a] complaint for fraud must plead misrepresentation, knowledge of falsity, intent to induce reliance, justifiable reliance, and resulting damage.” (Id.; see also Lazar v. Superior Ct. (1996) 12 Cal.4th 631, 638 (“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.”).)

California law imposes a heightened pleading standard when the cause of action is for fraud. For fraud, the pleading cannot be vague, “every element of the cause of action for fraud must be alleged in full, factually and specifically, and the policy of liberal construction of pleading will not usually be invoked to sustain a pleading that is defective in any material respect.” (Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1331.) General and conclusory allegations are insufficient; the allegations of fraud must be plead with particularity. (See id.; see also Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 182.) “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 (1990) (quoting Hills Trans. Co. v. Southwest Forest Indus. (1968) 266 Cal.App.2d 702, 707).)

The only vague misrepresentation which RLoom pleads is that “in or about 2020, to induce Cross-Complainant to place orders with limelight Cross-Defendants for manufacturing of garments, Limelight Cross-Defendants and each of them represented to Cross-Complainant that Limelight Cross-Defendants would manufacture high quality goods at prices which were competitive and/or below market.” (Cross-Comp., ¶ 29.) The Cross-Complaint fails to allege when the statements were specifically made, where they were made, to whom they were made, and by what means the representations were tendered. These aspects are required in order to plead the misrepresentations with specificity and move beyond generalized or conclusory allegations.

The Cross-Complaint also does not move beyond the mere conclusory allegations that Limelight knew the misrepresentations were false. (Cross-Comp., ¶ 30.) The Cross-Complaint does not explain how Limelight knew the misrepresentations were false, nor does the Cross-Complaint include any specific allegations regarding Limelight’s intent.

Accordingly, Limelight’s demurrer as to RLoom’s First Cause of Action is SUSTAINED with leave to amend.

2. Third Cause of Action for Conspiracy to Defraud

Limelight demurs to this cause of action on the basis that it fails to meet the heightened pleading standard and does not state facts sufficient to constitute a cause of action for conspiracy to defraud.

“To support a conspiracy claim, a plaintiff must allege the following elements: ‘(1) the formation and operation of the conspiracy, (2) wrongful conduct in furtherance of the conspiracy, and (3) damages arising from the wrongful conduct.’” (AREI II Cases (2013) 216 Cal.App.4th 1004, 1022 (quoting Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1581).) Specifically, a claimant “must show that each member of the conspiracy acted in concert and came to a mutual understanding to accomplish a common and unlawful plan, and that one or more of them committed an overt act to further it.” (Choate v. Cnty. of Orange (2000) 86 Cal.App.4th 312, 333, as modified on denial of reh'g (Jan. 17, 2001) (citations omitted).) There must be a meeting of the minds to accomplish an unlawful act. (See id.)

RLoom has failed to plead facts sufficient to show the formation and operation of the conspiracy. Instead, RLoom only makes conclusory allegations that the conspiracy was formed by Limelight and Huynh in order to get Huynh kickbacks. (Cross-Comp., ¶ 40.) Further, as detailed above, RLoom has failed to plead facts sufficient to show fraud.

Accordingly, Limelight’s demurrer as to RLoom’s Third Cause of Action is SUSTAINED with leave to amend.

3. Fifth Cause of Action for Aiding and Abetting Breach of Fiduciary Duty

Limelight demurs to this cause of action on the basis that it does not state facts sufficient to constitute a cause of action for aiding and abetting breach of fiduciary duty.

California law provides the following:

“The elements of a claim for aiding and abetting a breach of fiduciary duty are: (1) a third party's breach of fiduciary duties owed to plaintiff; (2) defendant's actual knowledge of that breach of fiduciary duties; (3) substantial assistance or encouragement by defendant to the third party's breach; and (4) defendant's conduct was a substantial factor in causing harm to plaintiff.”

(Nasrawi v. Buck Consultants LLC (2014) 231 Cal.App.4th 328, 343 (citing Judicial Council of Cal. Civ. Jury Instns. (CACI) (2014) No. 3610; American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1478).)

While RLoom pleads that Limelight had knowledge of Huynh’s alleged fiduciary breaches, RLoom fails to plead with specificity how Limelight had this knowledge. RLoom also fails to plead how Limelight assisted or encouraged Huynh’s alleged breaches, or how Huynh allegedly obtaining kickbacks from Limelight damaged RLoom.

Accordingly, Limelight’s demurrer as to RLoom’s Fifth Cause of Action is SUSTAINED with leave to amend.

4. Sixth Cause of Action for Civil Theft

Limelight demurs to this cause of action on the basis that it does not state facts sufficient to constitute a cause of action for civil theft.

Pursuant to Cal. Penal Code § 496, a person may assert a civil claim against another for possession or receipt property that has been stolen or obtained in a manner constituting theft.

The facts as currently alleged in RLoom’s Cross-Complaint lack specificity. RLoom claims that Limelight and Huynh stole “funds” from RLoom (Cross-Comp., ¶ 56), but the Cross-Complaint is unclear and ambiguous as to what funds were stolen and how they were stolen. Further, this cause of action appears to be based on the premise that Limelight committed fraud, and since that cause of action does not survive, nor does this one.

Accordingly, Limelight’s demurrer as to RLoom’s Sixth Cause of Action is SUSTAINED with leave to amend.

5. Seventh Cause of Action for Unfair Business Practices Under California Business & Professions Code § 17200

Limelight demurs to this cause of action on the basis that it does not state facts sufficient to constitute a cause of action for Unfair Business Practices.

“Because [Bus. & Prof. Code] section 17200 is written in the disjunctive, it establishes three varieties of unfair competition —acts or practices which are unlawful, or unfair, or fraudulent.” (Cansino v. Bank of Am. (2014) 224 Cal.App.4th 1462, 1473.) “A plaintiff alleging unfair business practices under these statutes must state with reasonable particularity the facts supporting the statutory elements of the violation.” (Khourv v. Maly's Cal., Inc. (1993) 14 Cal.App.4th 612, 619 (dismissing § 17200 claim on a demurrer where complaint fails to set forth facts with “reasonable particularity,” and where “[t]he complaint does not describe the manner in which respondent's practice is ‘unlawful’”); see Saunders v. Superior Court (1994) 27 Cal.App.4th 832, 841-842 (dismissing § 17200 claim where allegations are too vague, conclusionary, and uncertain).)

RLoom’s allegations under this cause of action are generalized and rather vague. RLoom claims that Limelight engages in unlawful or fraudulent business practices, but does not elaborate on what these are other than its previous ambiguous allegations of bribes and kickbacks. (Cross-Comp., ¶ 62.) This cause of action is not set forth with reasonable particularity.

Accordingly, Limelight’s demurrer as to RLoom’s Seventh Cause of Action is SUSTAINED with leave to amend.

6. Eighth Cause of Action for Rescission

Limelight demurs to this cause of action on the basis that it does not state facts sufficient to constitute a cause of action for rescission.

“Rescission extinguishes the contract and restores the parties to their original position. Each party typically must return what was received under the contract.” (E. Remedies, Cal. Prac. Guide Civ. Pro. Trial Claims and Def. Ch. 9.; see also Civil Code §§ 1691-92.) Therefore, in order to plead a claim for rescission, the rescinding party must have the ability to return what was received under the contract.

Limelight argues that because RLoom failed to plead which contracts it wished to rescind and instead argues for the rescission of “any and all contracts” between the parties (Cross-Comp., ¶ 70), then the Cross-Complaint is not pled with enough specificity because there were hundreds of different contracts between the parties. RLoom would need to plead with specificity which contracts it wished to be rescinded in order to return the parties to their former positions.

Further, Limelight argues that that RLoom cannot maintain causes of action for both rescission and fraud. “[A] party who is fraudulently induced to execute a contract can either rescind the contract and restore the consideration, or can affirm the contract and recover damages for fraud.” (Geraghty v. Shalizi (2017) 8 Cal.App.5th 593, 597 (citing Village Northridge Homeowners Assn. v. State Farm Fire & Casualty Co. (2010) 50 Cal.4th 913, 923; Chapman v. Skype Inc. (2013) 220 Cal.App.4th 217, 234).)

RLoom argues in its opposition that it can plead the two causes of action as alternatives to each other. (Opposition at p. 16.) While RLoom must, at some point in time, elect to rescind or alternatively seek damages.  The authorities cited by Limelight do not support its assertion that the election or remedies must take place at the pleading stage.  On the contrary, the case cited by moving party states:

“A party alleging that she was fraudulently induced to enter into a contract may either rescind the contract, offer to restore any benefits received, and seek restitution or retain the benefits of the contract and seek damages for fraud.⁷

⁷  A plaintiff ordinarily may pursue inconsistent remedies in her complaint and need not make an election of remedies at the pleading stage. (Roam v. Koop (1974) 41 Cal.App.3d 1035, 1039, 116 Cal.Rptr. 539.) Skype does not contend the election of remedies doctrine precludes any count alleged in the complaint, so we need not consider the issue.”  Chapman v. Skype Inc. (2013) 220 Cal.App.4th 217, 234 [162 Cal.Rptr.3d 864, 878].  (Bold added.)

Because the basis for the claim of recission is the claim of fraud, the claim is deficient as it lacks the particularity required.  Also, to the extent that RLoom seek recission, it must be capable of restoring to Limelight the product that it obtained under each contract (or all contracts).  It must be capable of alleging that it shall do so.

Accordingly, Limelight’s demurrer as to RLoom’s Eighth Cause of Action is SUSTAINED with leave to amend.

III. ORDER

1.            Limelight’s Demurrer as to RLoom’s First, Third, Fifth, Sixth, Seventh, and Eighth Causes of Action is sustained with leave to amend.

2.            RLoom is given 20 days from the date of this order to amend its Cross-Complaint.