Judge: Elaine Lu, Case: 20STCV11554, Date: 2023-09-18 Tentative Ruling

Case Number: 20STCV11554    Hearing Date: January 16, 2024    Dept: 26

Superior Court of California

County of Los Angeles

Department 26

Procedural Background

            On March 20, 2020, Plaintiff DCR Mortgage 7 Sub 2, LLC (“Plaintiff”) filed the instant action against defendants North American Title Insurance Company (“NATIC”) and North American Title Company (“NATC”) (jointly “Defendants”).  The complaint asserted eleven causes of action for (1) Breach of Contract, (2) Negligence, (3) Breach of Fiduciary Duties, (4) Negligent Misrepresentation, (5) Fraud by Concealment, (6) Breach of Insurance Contract, (7) Breach of the Implied Covenant of Good Faith and Fair Dealing, (8) Violation of Penal Code § 496, (9) Reformation of Contract based on Mistake of Fact, (10) Reformation of Contract based on Mutual Mistake of Fact, and (11) Reformation of Contract based on Fraud.  On October 7, 2020, the Court sustained Defendants’ demurrer to the eighth cause of action with ten days leave to amend.  (Order 10/7/20.)  However, Plaintiff did not file any amended complaint.  Accordingly, only the first through fifth causes of action against NATC and the sixth, seventh, and ninth through eleventh causes of action against NATIC remained. 

            On November 13, 2023, the Court granted NATIC’s motion for summary adjudication as to the sixth and seventh causes of action and granted Plaintiff’s motion for leave to file a first amended complaint to reassert the eighth cause of action.  (Orders 11/13/23.)  On November 20, 2023, the parties stipulated to the dismissal of the ninth through eleventh causes of action.

            On November 20, 2023, Plaintiff filed the operative First Amended Complaint (“FAC”) against Defendants.  The FAC asserts six causes of action for (1) Breach of Contract, (2) Negligence, (3) Breach of Fiduciary Duties, (4) Negligent Misrepresentation, (5) Fraud by Concealment, and (8) Violation of Penal Code § 496.  The first five causes of action are asserted against only Defendant NATC.  The final cause of action for Violation of Penal Code § 496 is asserted against both Defendants.

            On December 20, 2023, Defendants filed the instant demurrer and motion to strike portions of the FAC.  On January 3, 2024, Plaintiff filed an opposition.  On January 10, 2024, Defendants filed a reply.

Allegations of the Operative Complaint

            The FAC alleges that:

In approximately July 2014, the State Bank of India (California) (“Bank”) made a loan of $1,753,383.00 to Spirit of Women of California, Inc.  (“Borrower”) that was secured by a deed of trust to real property at 327 W. Belmont Avenue, Fresno, California 93728 (“Subject Property”).  (FAC ¶¶ 2, 3, 14.)  Defendants were to record this deed of trust pursuant to escrow instructions.  (FAC ¶ 14.)  The escrow instructions specified that Defendants were to “only close the escrow for the Loan if the Bank’s Deed of Trust could be recorded by the Defendants in a ‘1^st position[,]’” such that there is no prior lien or encumbrance active on the property.  (FAC ¶ 17, Exh. 2.)  

            On “July 31, 2014, Defendants issued to the Bank a Preliminary Report which fraudulently misrepresented, concealed and failed to disclose to the Bank that the Property was encumbered by a Declaration of Restrictive Covenants which had been recorded against the Property on October 28, 2008.”  (FAC ¶ 15.)  Defendants closed escrow on the Bank’s Loan, creating a lien subordinate to the recorded Declaration of Restrictive Covenants.  (FAC ¶¶ 18, 25.)  On August 28, 2014, Defendants issued title insurance “against any loss or damage sustained or incurred by the Bank and/or its assignees if the Bank’s Deed of Trust were not a valid and enforceable first priority lien on the Borrower’s Property.” (FAC ¶¶ 20-21, Exh. 6.)  On August 14, 2017, Bank sold and assigned the loan to Plaintiff, including the Deed of Trust and the Title Insurance Policy.  (FAC ¶ 22, Exh. 7.)  The Declaration of Restrictive Covenants which had been of record since October 26, 2008 rendered the later filed title to the Subject Property and the Deed of Trust unmarketable and valueless.  (FAC ¶ 23.)  Plaintiff and Bank did not have knowledge of the prior encumbrance on the Subject Property.  (FAC ¶¶ 25-26.)

Request for Judicial Notice

            In conjunction with the moving papers, Defendants request that the Court take judicial notice of:

1.     Minute Order dated October 31, 2023 in the Instant Action

2.     Minute Order dated March 8, 2023 in the Instant Action

3.     Minute Order dated November 13, 2023 in the Instant Action

4.     Declaration of John Hosack In Support of Plaintiff DCR Mortgage 7 Sub 2, LLC’s Notice of Motion and Motion for Leave to File an Amendment to DCR’s Complaint and Exhibit “C” thereto, Red lined version of Proposed Amended Complaint in the Instant Action

The Court may take judicial notice of court records and actions of the State.  (See Evid. Code, § 452(c),(d).)  Accordingly, Defendants request for judicial notice is GRANTED.  However, the Court does not take judicial notice of the truth of hearsay assertions within the court records. (See Herrera v. Deutsche Bank National Trust Co. (2011) 196 Cal.App.4th 1366, 1375.) 

Legal Standard

Demurrer Standard 

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack; or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal 3d 311, 318.) No other extrinsic evidence can be considered (i.e., no “speaking demurrers”). (Ion Equipment Corp. v. Nelson (1980) 110 Cal.App.3d 868, 881.)

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 “give the complaint a reasonable interpretation, and read it in context.”  (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.)  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 pleadings alone and not the evidence or other extrinsic matters.  Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.”  (SKF Farms v. Superior Ct. (1984) 153 Cal. App. 3d 902, 905.)  “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.) 

Motion to Strike Standard

Motions to strike are used to reach defects or objections to pleadings that are not challengeable by demurrer (i.e., words, phrases, prayer for damages, etc.).  (See CCP §§ 435-437.)  A party may file a motion to strike in whole or in part within the time allowed to respond to a pleading.  However, if a party serves and files a motion to strike without demurring to the complaint, the time to answer is extended.  (CCP §§ 435(b)(1), 435(c).)

A motion to strike lies only where the pleading has irrelevant, false, or improper matter, or has not been drawn or filed in conformity with laws.  (CCP § 436.)  The grounds for moving to strike must appear on the face of the pleadings or by way of judicial notice.  (CCP § 437.)

Meet and Confer Requirement

Code of Civil Procedure § 430.41, subdivision (a) requires that “[b]efore filing a demurrer pursuant to this chapter, the demurring party shall meet and confer¿in person or by telephone¿with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.” The parties are to meet and confer at least five days before the date the responsive pleading is due and if they are unable to meet the demurring party shall be granted an automatic 30-day extension.  (CCP § 430.41(a)(2).)  The demurring party must also file and serve a declaration detailing the meet and confer efforts.  (Id.¿at (a)(3).)¿ If an amended pleading is filed, the parties must meet and confer again before a demurrer may be filed to the amended pleading.  (Id.¿at (a).)  There is a similar meet and confer requirement for motions to strike.  (CCP § 435.5.)

Here, Defendants have fulfilled the meet and confer requirements.  (Humphrey Decl. ¶¶ 3-6, Exh. A.)

Discussion - Demurrer

            Defendants assert that the final cause of action for Violation of Penal Code § 496 fails because the FAC fails to allege any facts establishing a theft.  The Court agrees.

            Penal Code section 496 provides in relevant part that “[a]ny person who has been injured by a violation of subdivision (a) or (b) may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney's fees.”  (Pen. Code, § 496(c).)  Subdivision (b) applies only to swap meet vendors.  Thus, only a violation of subdivision (a) could potentially apply to the instant action.  Pursuant to Penal Code section 496(a), “[e]very person who buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained, shall be punished by imprisonment in a county jail for not more than one year, or imprisonment pursuant to subdivision (h) of Section 1170.”  (Pen. Code, § 496(a).) 

            “Penal Code section 484 describes acts constituting theft. The first sentence of section 484, subdivision (a) states: “Every person who shall feloniously steal, take, carry, lead, or drive away the personal property of another, or who shall fraudulently appropriate property which has been entrusted to him or her, or who shall knowingly and designedly, by any false or fraudulent representation or pretense, defraud any other person of money, labor or real or personal property, or who causes or procures others to report falsely of his or her wealth or mercantile character and by thus imposing upon any person, obtains credit and thereby fraudulently gets or obtains possession of money, or property or obtains the labor or service of another, is guilty of theft.” (Italics added.)’ [Citations.]”  (Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333, 349–350.)  Thus, “[a] plaintiff may recover treble damages and attorney's fees under section 496(c) when property has been obtained in any manner constituting theft.”  (Id. at p.361.)

            “To prove theft, a plaintiff must establish criminal intent on the part of the defendant beyond ‘mere proof of nonperformance or actual falsity.’ [Citation.] This requirement prevents ‘ “[o]rdinary commercial defaults” ’ from being transformed into a theft. [Citation.] If misrepresentations or unfulfilled promises ‘are made innocently or inadvertently, they can no more form the basis for a prosecution for obtaining property by false pretenses than can an innocent breach of contract.’ [Citation.]”  (Siry Investment, L.P, supra, 13 Cal.5th at pp.361–362.)

            Here, the FAC alleges in relevant part that “[Plaintiff] is informed and believes, and based on that information and belief alleges, that on or before Defendants purportedly closed the escrow for the Loan, recorded the Deed of Trust, disbursed the money and issued the Policy, the Defendants knew that the Loan would not be secured by a valid, enforceable, first priority lien position Deed of Trust on the Borrower’s Property and therefore Defendants knew that they should not have recorded the Deed Of Trust and should not have disbursed money.”  (FAC ¶ 92.) 

            “[Plaintiff] is informed and believes, and based on that information and belief alleges, that the Defendants by representing that the Bank would receive a valid and enforceable first priority lien on the Borrower’s Property, purportedly closing the escrow for the Loan, recording the Bank’s Deed of Trust, disbursing money and issuing the Policy, all while knowing that the Loan would not be secured by a valid and enforceable first priority lien position Deed of Trust on the Borrower’s Property, the Defendants knowingly aided the Borrower in the theft of the money and thereby aided in concealing and withholding the money from its true owner, the Bank and now [Plaintiff] by assignment. The Borrower could not have stolen the money without the Defendants having aided the Borrower by purportedly closing the escrow for the Loan in violation of the Bank’s Escrow Instructions, all the while falsely representing to the Bank that Defendants had actually complied with those Escrow Instructions which resulted in Defendants knowingly aiding the Borrower in concealing and withholding the money from its true owner, the Bank and now [Plaintiff] by assignment.”  (FAC ¶ 93.) 

            “[Plaintiff] is informed and believes, and based on that information and belief alleges, that NATC, acting as an agent of a disclosed principal, NATIC, in offering to close the escrow, record the Deed of Trust, disbursing the money and issuing the Policy, all the while having actual knowledge that the Loan would not be secured by a valid, enforceable, first priority lien position Deed of Trust on the Borrower’s Property, aided the Borrower in concealing, stealing and withholding the money from its true owner. In addition, the recordation of the Deed of Trust, disbursement of money and the issuance of the Policy constituted a false representation by Defendants that the Deed Of Trust was secured by a valid, enforceable, first priority lien position Deed of Trust on the Borrower’s Property which resulted in the Defendants knowingly aiding the Borrower in concealing, stealing and withholding the money from its true owner, the Bank and now [Plaintiff] by assignment.”  (FAC ¶ 94.) 

            “[Plaintiff] is informed and believes, and based on that information and belief alleges, that the Bank deposited its Escrow Instructions, Loan documents and Loan proceeds for the Loan to the Borrower, and that the Bank’s Escrow Instructions required that upon the close of escrow the Bank was to receive, among other things, a valid and enforceable first priority lien on the Borrower’s Property. If the Court should determine that the Bank, on the purported close of escrow, did not receive a valid and enforceable first priority lien on the Borrower’s Property, then Defendants, without first having complied with the Bank’s escrow instructions, had knowingly concealed, obtained and withheld the Bank’s loan proceeds by false pretenses in violation of Penal Code section 496, subdivision (c), and [Plaintiff] is entitled to recover from Defendants three times the amount of [Plaintiff]’s actual damages, its reasonable attorney’s fees and costs.”  (FAC ¶ 95.) 

These allegations of the FAC are insufficient to state a violation of Penal Code section 496(a).  As worded, Penal Code section 496(a) has two separate provisions for stating a violation.  The first provides that a violation occurs when a person “buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained …”  (Pen. Code, § 496(a), [italics added].)  As set forth in the allegations above, the property – the escrow funds of $1,753,383.00 – was not bought, received, or obtained by Defendants in any manner constituting theft.  Rather, Plaintiff’s assignor – the Bank – provided Defendant NATC the loan proceeds to hold in escrow and then closed escrow and distributed the loan proceeds to the Borrower.  (FAC ¶¶ 2, 16, 18, Exh. 2.)  Nor does Plaintiff claim that Defendants bought, received, or obtained the loaned funds of $1,753,383.00 in a manner constituting theft.  Rather, Plaintiff claims that Defendants aided the Borrower in stealing the loan proceeds and violated the second portion of Penal Code section 496(a).  (FAC ¶¶ 93-94; Opp. at p.15:12-14, [“Such conduct violates Penal Code § 496 because [Defendants] knowingly aided the Borrower in the theft of money (‘loan scam’) from the Bank and aided in concealing and withholding the money from the Bank - and now [Plaintiff] by assignment.”].) 

            Under the portion of Penal Code section 496(a) on which Plaintiff relies, a violation occurs when a person “conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained…”  (Pen. Code, § 496(a), [italics added].)  Under this provision of Penal Code section 496(a), a violation can occur when a person aids in concealing, selling, or withholding property if the property was stolen by another and the person knows that it was stolen – i.e., that the Borrower obtained the loan proceeds in a manner constituting theft.  Plaintiff’s bare allegations implying that Borrower stole the loan proceeds, (see e.g., FAC ¶¶ 93-94), are a mere conclusion of law and must be disregarded.  (Wexler v. California Fair Plan Association (2021) 63 Cal.App.5th 55, 70 [“We disregard legal conclusions in a complaint; they are just a lawyer's arguments.”].)  Disregarding these implied allegations that Borrower stole the loan proceeds, there are no factual allegations to support the claim that the Borrower obtained the loan proceeds in a manner constituting theft.

            As the Supreme Court has explained, “[t]o prove theft, a plaintiff must establish criminal intent on the part of the defendant beyond ‘mere proof of nonperformance or actual falsity.’ [Citation.]”  (Siry Investment, L.P., supra, 13 Cal.5th at pp.361–362.)  At a minimum, Plaintiff must allege such criminal intent on the part of the borrower at the time of the transaction – in approximately 2014.  However, Plaintiff fails to do so.  In California, fraud, including negligent misrepresentation, must be pleaded with specificity.  (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.)  “The particularity demands that a plaintiff plead facts which show how, when, where, to whom, and by what means the representations were tendered.”  (Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1469.)  Here, the allegations of the FAC are woefully inadequate to plead fraudulent intent on the part of Borrower.  In fact, the FAC is silent as to Borrower’s intent at the time the loan was obtained in 2014.  There is no allegation whatsoever that Borrower obtained the loan proceeds in a manner constituting theft under Penal Code section 484.  The FAC is vague – perhaps deliberately so – as to when Borrower defaulted on the refinanced loan.  Instead, the FAC merely alleges that “[t]he Borrower failed to make the Note payments which were owed to DCR” without specifying when this default occurred.  (FAC ¶ 29.)  The only related allegations is that “[a]ccordingly, on or about April 16, 2019, DCR recorded a Notice of Default and Election to Sell under the Deed of Trust.”  (FAC ¶ 29.)  The fact that DCR did not record the notice of default until 2019 – approximately five years after the funding of the loan in 2014 – strongly suggests that the Borrower made payments on the loan up to a date shortly before 2019, and the fact that Borrower made payments for this period after obtaining the loan in turn suggests a lack of criminal intent on the Borrower’s part when it obtained the loan in 2014.  In any event, in the absence of any allegation that Borrower had fraudulent intent at the time it obtained the loan in 2014 precludes a finding that Borrower stole the loan proceeds, and Defendants could not have aided Borrower in concealing, selling, or withholding knowing they were stolen by Borrower if the loan proceeds were not stolen by Borrower.  Nor is there any allegation that Borrower concealed, sold, or withheld the loan proceeds from the Bank or Plaintiff after the assignment of the loan. 

Thus, Plaintiff fails to set forth how Defendants could have aided Borrower in concealing, selling, or withholding stolen property.

            Accordingly, Defendants demurrer to the eighth cause of action is SUSTAINED.

Discussion – Motion to Strike

            Defendants move to strike (1) the claim for treble damages under Penal Code section 496, (2) the allegations and prayer for punitive damages, (3) the allegations relating to Does 1-50, and (3) the allegations regarding Doma Title Insurance, Inc.

            For the reasons discussed above, the claim for treble damages under Penal Code section 496 fails because Plaintiff’s claim for violation of Penal Code section 496 fails.  The allegations and prayer for Punitive Damages must be stricken as the Court has previously granted summary adjudication of Plaintiff’s claim for punitive damages on the basis that such a claim cannot be assigned.  (RJN Exh. 2, [Minute Order 10/31/23].) 

As to Doe defendants, all Does were dismissed on March 8, 2023.  (RJN 3, [Minute Order 3/8/23].)  Moreover, no Does may be added at this late juncture.  Pursuant to Code of Civil Procedure section 583.210, “(a) [t]he summons and complaint shall be served upon a defendant within three years after the action is commenced against the defendant. For the purpose of this subdivision, an action is commenced at the time the complaint is filed. [¶](b) Proof of service of the summons shall be filed within 60 days after the time the summons and complaint must be served upon a defendant.” (CCP § 583.210(a).)  Accordingly, a plaintiff has 3 years and 60 days to filed proof of service of summons from the date of filing the complaint.  (Biss v. Bohr (1995) 40 Cal.App.4th 1246, 1251.)  However, “[b]ecause the summons and complaint must be ‘served’ within three years, an answer will excuse the failure to do so only if it is filed within that period. [Citations.] Similarly, because the summons must be returned within 3 years, 60 days, an answer during that period likewise excuses compliance.”  (Ibid.)  Moreover, Doe defendants must also be served within this three year and 60 day deadline. (Higgins v. Superior Court (2017) 15 Cal.App.5th 973, 982 [“even where the filing of an amended complaint on a Doe defendant relates back to the filing of an original complaint, the plaintiff must nonetheless identify and serve a Doe defendant with a summons and complaint within three years of the commencement of the action.”].)

Here, Plaintiff filed the instant action on March 20, 2020.  Thus, the three year and sixty day deadline has passed.  The Doe allegations are improper.

            Finally, the additional allegations regarding Doma Title Insurance, Inc. were beyond the scope of leave to amend granted and thus improper.  (RJN Exhs. 3-4.) 

Accordingly, Defendants’ unopposed motion to strike is GRANTED.

Leave to Amend

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. (Goodman v. Kennedy, supra, 18 Cal.3d at p.348; Lewis v. YouTube, LLC (2015) 244 Cal.App.4th 118, 226.) 

            Here, Plaintiff fails to show that the pleading can be successfully amended.  As to the claim for Violation of Penal Code section 496, “the general rule that statutory causes of action must be pleaded with particularity is applicable.”  (Lopez v. Southern Cal. Rapid Transit Dist. (1985) 40 Cal.3d 780, 795.)  Here the allegations are merely made on information and belief with no allegations indicating why Plaintiff would have any reason to believe these allegations in support of the Penal Code section 496 to be true.  (See Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550; [A “[p]laintiff may allege on information and belief any matters that are not within his personal knowledge, if he has information leading him to believe that the allegations are true.”].)  As noted above, there is no allegation regarding the Borrower’s intent or how the Borrower took the loan proceeds in a manner constituting theft.  Thus, Defendants could not know that Borrower had stolen the loan proceeds.  Moreover, the proposed amendments mentioned that Plaintiff references in opposition merely go to Defendants’ knowledge of the Bank’s desire for the Deed of Trust to be in the first lien position and Defendants’ knowledge of the Declaration of Restrictive Covenant.  (Opp. at pp.15:25-16:15.)  However, this knowledge alone is insufficient.  As explained above, Plaintiff must allege not only that Defendants aided in the Borrower’s unspecified concealing, selling, or withholding of the loan proceeds, but also that Defendants had the requisite criminal intent, i.e., that Defendants knew that Borrower had obtained the Loan Proceeds in a manner constituting theft.  Thus, there does not appear to be a reasonable possibility of successful amendment as to the claim for Violation of Penal Code section 496.

            As to the motion to strike, Plaintiffs fail to file any opposition or provide any explanation as to how the issues raised in the motion to strike can be successfully amended.  Accordingly, leave to amend is DENIED.

Conclusion and ORDER

            Based on the foregoing, Defendant North American Title Insurance Company and North American Title Company’s demurrer is SUSTAINED WITHOUT LEAVE.

            Defendants’ motion to strike portions of the first amended complaint is GRANTED WITHOUT LEAVE.

            As no claim remains against Defendant North American Title Insurance Company, Defendant North American Title Insurance Company is to file a proposed judgment of dismissal within five (5) court days of notice of this order.

            Defendant North American Title Company must file and serve an answer within 20 days. An OSC re filing of Defendant North American Title Company’s answer is set for February 23, 2024 at 8:30 am.

Moving Parties are to give notice and file proof of service of such.

DATED:  January ___, 2024                                                             ___________________________

Elaine Lu

                                                                                          Judge of the Superior Court