Judge Elaine Lu, Case 22STCV23538 2023-01-19 Tentative Ruling

On July 21, 2022, Plaintiffs Blue Pine Construction Corp. (“Blue Pine”), Jay Tallon (“Jay”)[1], Linda Dorothy Tallon (“Linda”), and Jennifer Tallon-Miranda (“Linda”) (collectively “Plaintiffs”) filed the instant fraud action against Defendants Blaise Hilton (“Hilton”) and Russell Square Consulting, Inc., (“Russel Square”) (jointly “Defendants”). The Complaint asserts eleven causes of action for (1) Fraud, (2) Fraud, (3) Breach of Implied Covenant of Good Faith and Fair Dealing, (4) Breach of Fiduciary Duty, (5) Conversion, (6) Civil Extortion, (7) Defamation, (8) Intentional Interference with Prospective Economic Advantage (Jackson Square), (9) Intentional Interference with Prospective Economic Advantage (Employees), (10) Unfair Competition (B&P § 17200), and (11) Equitable Indemnity. The first through fourth, seventh, and eleventh causes of action are against Defendant Hilton. The remaining claims are against both Defendants.

On October 6, 2022, Defendants filed the instant demurrer to the complaint. On January 5, 2023, Plaintiffs filed an opposition. On January 11, 2023, Defendants filed a reply.

In early 2017, Hilton and Jay agreed to form Blue Pine – a construction business --together. (Complaint ¶ 10.) “Hilton represented that there would be a 30% profit margin.” (Ibid.) “Hilton was also the majority shareholder of Blue Pine and owned 60% of Blue Pine's stock shares at all relevant times.” (Ibid.) “Hilton made several false representations to [Jay], and concealed facts and Hilton's true intentions, to induce [Jay] to agree to go into business with Hilton.” (Id. ¶ 11.) “Hilton represented to [Jay], and Hilton and [Jay] agreed, that Russell Square [Hilton’s wholly owned business] would assist in Blue Pine's construction business, in that Russell Square would handle the work necessary prior to breaking ground on a construction project (e.g., obtaining permits, hiring architects and contractors), and then Blue Pine would perform the construction from the ground up.” (Id. ¶ 15.)

“Until Hilton resigned from Blue Pine in December 2020, Hilton was in complete control of Blue Pine's finances. Hilton was the one who priced all the jobs for Blue Pine. Hilton managed and controlled all the expenses for Blue Pine, and oversaw all of the personnel who performed the construction work on behalf of Blue Pine.” (Id. ¶ 12.)

“Hilton mismanaged Blue Pine's finances and caused Blue Pine to accrue significant debt it could not afford. Hilton also concealed and/or made material misrepresentations about the financial status of Blue Pine to [Jay] and the other Blue Pine shareholders.” (Id. ¶ 13.)

The majority of Blue Pine’s business came from Jackson Square Properties, LLC. (Id. ¶ 14.) Jackson Square Properties, LLC would routinely pay Blue Pine money for jobs not yet completed which “Hilton would then take for his own personal uses, and/or to pay other people.” (Ibid.)

“Hilton separated from Blue Pine in or around December 2020. At that time, Hilton resigned from Blue Pine and sold all of his shares in the corporation to the remaining shareholders of Blue Pine. To that end, in December 2020, Blue Pine and Hilton entered into a Stock Repurchase and Separation Agreement (the ‘Agreement’), in which Hilton sold all of his shares of company stock to Blue Pine in exchange for the cancellation of a $189,887.97 debt Hilton owed to Blue Pine. ... The other stockholders of Blue Pine, including [Jay] and Jennifer, were also parties to the Agreement.” (Id. ¶ 16, Exh. A.)

“In connection with the Agreement and Hilton' s separation from Blue Pine, Hilton misrepresented to [Jay] in or around November/December 2020 that Blue Pine had a total debt of approximately $1.5 million. In fact, Blue Pine's debts at that time totaled over $2 million, unbeknownst to [Jay] or any other Blue Pine shareholders. At the time, Hilton had exclusive control of Blue Pine's financial records and exclusive knowledge of Blue Pine's true financial state. Blue Pine and its shareholders relied on Hilton's representation of Blue Pine's financial status, and failure to disclose material facts and information, in their decision to enter into the Agreement. Hilton concealed the true financial status of Blue Pine in order to induce Blue Pine and its shareholders to enter into the Agreement.” (Id. ¶ 17.)

“After Hilton left Blue Pine, Hilton wanted to use some of Blue Pine's employees to perform work for Jackson Square. Based on his close relationship with Jackson Square, Hilton threatened to pull all of the Jackson Square jobs that Blue Pine had under contract if Blue Pine did not rent out Blue Pine's employees to Hilton and Russell Square for Hilton’s and Russell Square's own benefit. Since Jackson Square was Blue Pine's main source of income, Blue Pine had no other choice but to agree to Hilton’s demands, and allowed Hilton to use Blue Pine's employees to its detriment.” (Id. ¶ 18.) “Hilton ultimately took all of Jackson Square's business away from Blue Pine, that otherwise would have gone to Blue Pine, as well as several Blue Pine employees, thereby resulting in the demise of Blue Pine.” (Id. ¶ 19.)

With the moving papers, Defendants request that the Court take judicial notice of the following:

As to Defendants’ requests for judicial notice, though the Court may take judicial notice of official public records (see Evid. Code, § 452(c)), these documents were taken from a website, namely from First American DataTree. California has not recognized a provision for taking judicial notice of documents from websites. (See Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 888-889.) Furthermore, information on websites can reasonably be subject to dispute. (See Ibid.; Huitt v. Southern Cal. Gas Co. (2010) 188 Cal.App.4th 1586, 1605 n.10 [“Simply because information is on the Internet does not mean that it is not reasonably subject to dispute”]; Ragland v. U.S. Bank Nat. Assn. (2012) 209 Cal.App.4th 182, 194 [“Nor may we take judicial notice of the truth of the contents of the Web sites and blogs, including those of the Los Angeles Times and Orange County Register. . . The contents of the Web sites and blogs are ‘plainly subject to interpretation and for that reason not subject to judicial notice. [Citation omitted]’”].) Accordingly, Defendants’ request for judicial notice is denied.

In opposition, Plaintiffs request that the Court take judicial notice of the following:

A. The First Amended Complaint filed by The Sherwin-Williams Company against Blue Pine Construction Corp., Jay Tallon, and North American Specialty Insurance Company (Case No. 34-2021-00306439) in Sacramento County, California on March 24, 2022

B. The Cross-Complaint filed by ARA, Woodlands, LP, et al., against Blue Pine Construction Corp., Jay Tallon, Linda Dorothy Tallon, Jennifer Tallon-Miranda, and Miriam Leal (Case No. 34-2021-00306439) in Sacramento County, California on October 20, 2021

As the Court may take judicial notice of its own records and records of the State, (See Evid. Code, § 452(c)(d)), Plaintiffs’ unopposed request for judicial notice is granted. However, the Court does not take judicial notice of the truth of assertions within the court records. (See Herrera v. Deutsche Bank National Trust Co. (2011) 196 Cal.App.4th 1366, 1375.)

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.)

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).)

Here, Defendants have fulfilled the meet and confer requirement. (Mullins Decl. ¶¶ 2-5.)

Defendants assert that the first through fifth and the eighth through eleventh causes of action are barred by the release in the separation agreement.

The Agreement provides in relevant part that “[t]his Agreement has been entered into in the State of Delaware, and its validity, construction, interpretation and legal effect shall be governed by the laws of the State of Delaware applicable to contracts entered into and performed entirely within the State of Delaware.” (Complaint, Exh. A at ¶ 9(e).)

“Choice of law provisions in agreements are enforceable, unless grounds exist for not enforcing them.” (Gramercy Investment Trust v. Lakemont Homes Nevada, Inc. (2011) 198 Cal.App.4th 903, 908.) “In assessing the validity of a choice-of-law clause, ‘“the proper approach ... is for the court first to determine either: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties' choice of law. If, however, either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties' choice of law.”’ [Citation.]” (Peleg v. Neiman Marcus Group, Inc. (2012) 204 Cal.App.4th 1425, 1446.)

Here, the choice of law has a clear substantial relationship to the parties, and there is a reasonable basis for the parties’ choice of law. “‘A party's incorporation in a state is a contact sufficient to allow the parties to choose that state's law to govern their contract’ [Citation.]” (Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 467.) Similarly, “‘[i]f one of the parties resides in the chosen state, the parties have a reasonable basis for their choice.’ [Citation.]” (Ibid.) Further, the application of the law chosen would not be contrary to a fundamental policy of California, nor does any party contend otherwise. Thus, the Delaware Law applies to the Agreement and the release within said agreement.

“‘[A]n effective release terminates the rights of the party executing and delivering the release and ... is a bar to recovery on the claim released.’ [Citations.]” (Seven Investments, LLC v. AD Capital, LLC (Del. Ch. 2011) 32 A.3d 391, 396.) “Under settled Delaware law, ‘a general release ... [is] one which is intended to cover everything—what the parties presently have in mind, as well as what they do not have in mind....Such general releases are in common use .... Their validity is unchallenged.’ [Citation.]” (Corporate Property Associates 6 v. Hallwood Group Inc. (Del. 2003) 817 A.2d 777, 779.)

“‘In construing a release, the intent of the parties as to its scope and effect are controlling, and the court will attempt to ascertain their intent from the overall language of the document.’ [Citation.] If the language of the release is clear, it will be given effect. If it is ambiguous, however, ‘it must be construed most strongly against the party who drafted it.’ [Citation.]” (Ibid.)

“[T]he party seeking enforcement of the release bears the burden of proving that the released fraud claim was within the contemplation of the releasing party.” (E.I. DuPont de Nemours and Co. v. Florida Evergreen Foliage (Del. 1999) 744 A.2d 457, 461.) However, “this allocation [of burden] does not preclude the granting of a motion to dismiss.” (Seven Investments, LLC, supra, 32 A.3d at p.397.) “Rather, ‘ “[w]hen a motion to dismiss relies upon affirmative defenses, such as waiver and release, the Court may dismiss a claim if the plaintiff includes in its pleadings facts that incontrovertibly constitute an affirmative defense to a claim.” ’ [Citations.]” (Ibid.)

As the Delaware Supreme Court explained in E.I. DuPont de Nemours and Co., a general release does not necessarily cover a claim for fraud in the inducement concluding that “absence of a specific reference to the actionable fraud limits the scope of the general release[.]” (Id. at p.462.)

In [E.I. DuPont de Nemours and Co.], the Delaware Supreme Court answered a question of law certified by the United States District Court for the Southern District of Florida. The DuPont plaintiffs had filed a products liability action in October 1992 alleging that Benlate, a DuPont fungicide, was defective and damaged their plants and nursery. DuPont, 744 A.2d at 458. In May 1994, the parties settled, with DuPont paying the plaintiffs $2.3 million in exchange for a general release of claims against DuPont. Id. at 458–59. Over four years later, the plaintiffs brought a second suit against DuPont, alleging that they were fraudulently induced to enter into the settlement agreement because DuPont (i) “wrongfully, illegally, and fraudulently withheld from discovery vital scientific data and information that DuPont was under an obligation to produce,” (ii) “gave false testimony in other Benlate cases about the product's alleged defects and about scientific tests of Benlate,” and (iii) “withheld ... data and information and made false statements in implementation of a scheme to defraud Plaintiffs and others who had used Benlate and suffered resulting damage.” Id. at 459.

The Delaware Supreme Court held that the complaint's allegations were sufficient, at the pleadings stage, to state a cause of action for fraud in the inducement that could void the release. Importantly, the “very essence of the fraud” was “the separate conduct of DuPont in creating a false representation and inducing reliance thereon after the litigation commenced.” Id. at 462

(Seven Investments, LLC, supra, 32 A.3d at p.399.) However, in Seven Investments, the Court of Chancery of Delaware noted that “[t]he DuPont decision does not prevent parties from executing general releases that extinguish claims for fraud, including claims for fraud in the inducement, particularly where the party granting the release is on notice of potential fraud claims.” (Seven Investments, supra, 32 A.3d at 399.) The Court in Seven Investments distinguished DuPont on the grounds that the alleged fraud on which the Seven Investments plaintiff relied was not “different sequentially and conceptually” from the fraud that was the subject of the settlement. Instead, the Seven Investments plaintiff’s claim for fraud represented an attempt to revive and litigate the very issues that were resolved by the parties’ agreement. (Seven Investments, supra, 32 A.3d at 400.)

Here, the release in the Agreement attached to the complaint is a general release that provides in relevant part that:

In exchange for the covenants and consideration contained herein, and to the fullest extent possible under the laws of the State of Delaware, and any other applicable jurisdiction, the Company [Blue Pine] and Hilton on behalf of themselves and their respective present and former parents, subsidiaries, affiliates, officers, directors, stockholders, successors, and assigns (collectively, "Releasors") hereby release, waive, and forever discharge each other and their respective present and former, direct and indirect, parents, subsidiaries, officers, directors, employees, agents, representatives, permitted successors. and permitted assigns (collectively. "Releasees"), of and from any and all claims, liabilities, obligations, demands, costs, charges, expenses, actions, causes of action, and judgments of every kind and nature whatsoever, whether now known or unknown, in law or in equity, which any of such Releasors ever had, now have, or hereafter can, shall, or may have against any of such Releasees for, upon, or by reason of any matter, cause, or thing whatsoever from the formation of the Company through the Closing Date of this Agreement.

Plaintiffs concede that they are parties to the release. (Complaint ¶ 16.) The release clearly and unequivocally provides that all claims known and unknown prior to the closing date of the Agreement (defined as January 4, 2021) have been released. (Complaint, Exh. A.)

Here, the second cause of action for fraud arises from Defendant’s misrepresentations to Plaintiff Jay to form Blue Pine in 2017. (Complaint ¶¶ 10, 27.) The fourth cause of action for breach of fiduciary duty arises from the allegations that Hilton mismanaged Blue Pine’s finances. (Id. ¶¶ 40-44.) The fifth cause of action for conversion alleges that Defendants converted company money for Hilton’s own personal uses while in charge of Blue Pine before the Closing Date. (Id. ¶¶ 12-13, 46-48.) The eleventh cause of action for equitable indemnity is based on Hilton’s alleged mismanagement of Blue Pine which must have occurred before the Closing Date in the Agreement. (Id. ¶¶ 79-81.) As such, the second, fourth, fifth, and eleventh causes of action would be barred by the release.

The third cause of action for breach of the implied covenant of good faith and fair dealing alleges a breach of the Agreement and thus had to occur after the Agreement closed. (Id. ¶¶ 35-38.) The eighth cause of action is based on the allegation that “Defendants took away Jackson Square's business from Blue Pine that Blue Pine otherwise would have gotten. Hilton also made defamatory statements about Blue Pine and its officers that caused Jackson Square to cease doing business with Blue Pine.” (Id. ¶ 62.) This defamation is alleged to have occurred in August 2021 -- after the Agreement’s Closing Date of January 4, 2021. (Id. ¶ 54.) The ninth cause of action is based on Defendants stealing away Blue Pine’s employees. (Id. ¶¶ 68-74.) As alleged in the complaint, this occurred after Hilton left Blue Pine and thus after the closing date of the Agreement. (Id. ¶ 18.) The tenth cause of action for unfair business practices is derivatively based on the entirety of the other wrongful conduct alleged in the complaint. (Id. ¶¶ 76-77.) Multiple of these claims are based on conduct that was after the Closing Date and thus would not be barred by the release in the Agreement. Thus, the third, eighth, ninth, and tenth causes of action occurred after the Agreement and release became effective. Thus, the release is ineffective as to these claims.

In sum, the second, fourth, fifth, and eleventh causes of action are barred by the release absent a valid claim for fraud in the inducement of the release in the Agreement. While the complaint does allege a claim for fraud in the inducement of the agreement which seeks rescission, the claim for inducement fails on the pleading.

“The elements of fraud are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.) “Fraud allegations ‘involve a serious attack on character’ and therefore are pleaded with specificity. [Citation.] General and conclusory allegations are insufficient. [Citation.] The particularity requirement demands that a plaintiff plead facts which ‘‘‘show how, when, where, to whom, and by what means the representations were tendered.’’’ [Citation.]” (Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1469.) Moreover, “each element must be pleaded with specificity. [Citations.]” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1166 disapproved of on other grounds by Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905.)

Here, the complaint alleges that “[i]n connection with the Agreement and Hilton' s separation from Blue Pine, Hilton misrepresented to [Jay] in or around November/December 2020 that Blue Pine had a total debt of approximately $1.5 million. In fact, Blue Pine's debts at that time totaled over $2 million, unbeknownst to [Jay] or any other Blue Pine shareholders. At the time, Hilton had exclusive control of Blue Pine's financial records and exclusive knowledge of Blue Pine's true financial state. Blue Pine and its shareholders relied on Hilton's representation of Blue Pine's financial status, and failure to disclose material facts and information, in their decision to enter into the Agreement. Hilton concealed the true financial status of Blue Pine in order to induce Blue Pine and its shareholders to enter into the Agreement.” (Complaint ¶ 17; See also Complaint ¶ 21.) There is no specificity as to how, when, and by what means Hilton misrepresented that Blue Pine had $2 million in debt instead of $1.5 million in debt. Nor is there any allegation as to how these representations deceived and induced Plaintiffs to enter into the Agreement which expressly provides “[e]ach party has received all the information it considers necessary or appropriate for deciding whether to enter into this Agreement. Each party had an opportunity to ask questions and receive answers from each other party regarding the terms and conditions of this Agreement, the transactions contemplated hereunder, and the business and financial condition of the Company. Each party hereto has had the opportunity to obtain such additional information it considers necessary or appropriate to verify the accuracy of any information furnished to it or to which it had access.” (Complaint, Exh. A at ¶ 8(b), [italics added].) Thus, the Agreement expressly states that Plaintiffs did not rely on representations as they had the ability and opportunity to verify such facts. “[F]acts appearing in exhibits attached to the complaint will also be accepted as true and, if contrary to the allegations in the pleading, will be given precedence.” (Dodd v. Citizens Bank of Costa Mesa (1990) 222 Cal.App.3d 1624, 1627.) Thus, as alleged, the complaint fails to allege reliance on any misrepresentations by Hilton.

Accordingly, the complaint fails to allege that Plaintiffs were fraudulently induced into entering into the release agreement. Accordingly, Defendants’ demurrer to the first, second, fourth, fifth, and eleventh causes of action are SUSTAINED.[2]

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

Defendants contend that the third cause of action is also barred because the Agreement permits Defendants to compete with Plaintiffs.

“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 Nat. Inc. (2000) 24 Cal.4th 317, 349.) “It cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement.” (Id. at pp.349–350.) Similarly, under Delaware law, “[t]he implied covenant of good faith and fair dealing inheres in every contract and ‘requires “a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits” of the bargain.’ [Citation.]” (Kuroda v. SPJS Holdings, L.L.C. (Del. Ch. 2009) 971 A.2d 872, 888.) As with California law, under Delaware law, [t]he implied covenant cannot be invoked to override the express terms of the contract.” (Ibid.)
Here, the complaint alleges that by “misrepresenting Blue Pine's financial status and wrongfully stealing Blue Pine's business and employees, Hilton has breached the covenant of good faith and fair dealing contained in the Agreement by unfairly interfering with Blue Pine and its stockholders' rights to receive the benefits of said agreement.” (Complaint ¶ 37.) However, the misrepresentation occurred before the parties entered into the Agreement. (Id. ¶ 17.) The misrepresentation could not be a breach of the implied covenant because the Agreement was not yet in existence.

As to Defendants’ alleged stealing of business and employees, Defendants contends that the agreement expressly permitted Defendants to compete with Blue Pine. Under the Agreement, “[t]he parties hereto acknowledge and agree that to the fullest extent permitted by applicable law: (i) the Hilton Parties on the one hand, and the Company and the Remaining Stockholders on the other (the "Company Parties"), shall have no obligation to refrain from competing, making investments in competing businesses or otherwise engage in any commercial activity that competes with the other …” (Complaint Exh. A at ¶ 8(d).) While this clause does permit Defendants to compete with Plaintiffs, this does not permit Defendants to “wrongfully steal[] Blue Pine's business and employees” (Complaint ¶ 37.) Thus, the alleged breach does not directly conflict with the express terms of the Agreement.

Defendants contend that the complaint fails to allege conduct that would constitute civil extortion.

Civil Extortion “is essentially a cause of action for moneys obtained by duress, a form of fraud.” (Fuhrman v. California Satellite Systems (1986) 179 Cal.App.3d 408, 426 disapproved of on other grounds by Silberg v. Anderson (1990) 50 Cal.3d 205.) “To be actionable the threat of prosecution must be made with the knowledge of the falsity of the claim.” (Ibid.) “[I]n many [extortion] cases the threat is to do something in itself perfectly legal, but that threat nevertheless becomes illegal when coupled with a demand for money.” (Philippine Export & Foreign Loan Guarantee Corp. v. Chuidian (1990) 218 Cal.App.3d 1058, 1079.) For example, a threat of boycott based on false allegations “if used as a lever to force [a plaintiff employer] to submit to defendants' demands that terminated employees be rehired, would qualify as extortion.” (Overhill Farms, Inc. v. Lopez (2010) 190 Cal.App.4th 1248, 1270.)

Here, the complaint alleges in relevant part that “[a]fter Hilton left Blue Pine, Hilton wanted to use some of Blue Pine's employees to perform work for Jackson Square. Based on his close relationship with Jackson Square, Hilton threatened to pull all of the Jackson Square jobs that Blue Pine had under contract if Blue Pine did not rent out Blue Pine's employees to Hilton and Russell Square for Hilton's and Russell Square's own benefit. Since Jackson Square was Blue Pine's main source of income, Blue Pine had no other choice but to agree to Hilton's demands, and allowed Hilton to use Blue Pine's employees to its detriment.” (Id. ¶ 18.)

These allegations are insufficient to state a claim for extortion. Plaintiffs fail to allege that Hilton was threatening any false representation to Jackson Square to make Blue Pine lose business. Nor does the complaint allege any of the bases for extortion under Penal Code section 519. (Pen. Code, § 519, [“Fear, such as will constitute extortion, may be induced by a threat of any of the following: [¶] 1. To do an unlawful injury to the person or property of the individual threatened or of a third person. [¶] 2. To accuse the individual threatened, or a relative of his or her, or a member of his or her family, of a crime. [¶] 3. To expose, or to impute to him, her, or them a deformity, disgrace, or crime. [¶] 4. To expose a secret affecting him, her, or them. [¶] 5. To report his, her, or their immigration status or suspected immigration status.”].) Moreover, it is unclear what the harm alleged is. The complaint implies that Hilton paid Blue Pine for using the employees by “rent[ing] out” the employees. (Id. ¶ 37.) Thus, absent specific allegations of how Hilton threatened Plaintiffs or the harm Plaintiffs faced, the complaint fails to sufficiently allege civil extortion.

Defendants contend that the seventh cause of action for defamation fails because the claim is not pled with specificity, and in any event, the alleged conduct is protected under the common interest privilege.

“Defamation ‘involves (a) a publication that is (b) false, (c) defamatory, and (d) unprivileged, and that (e) has a natural tendency to injure or that causes special damage.’ [Citation.]” (Price v. Operating Engineers Local Union No. 3 (2011) 195 Cal.App.4th 962, 970.) Defamation consists of either libel or slander. (Civ. Code, § 44.) “‘The general rule is that the words constituting an alleged libel must be specifically identified, if not pleaded verbatim, in the complaint.’ [Citations.]” (Medical Marijuana, Inc. v. ProjectCBD.com (2020) 46 Cal.App.5th 869, 884.) However, “slander can be charged by alleging the substance of the defamatory statement.” (Okun v. Superior Court (1981) 29 Cal.3d 442, 458.)

Civil Code section 47 “extends a conditional privilege against defamatory statements made without malice on subjects of mutual interest.” (Hailstone v. Martinez (2008) 169 Cal.App.4th 728, 739–740.) “Such malice is established by a showing that the publication was motivated by hatred or ill will toward the plaintiff or by a showing that the defendant lacked reasonable grounds for belief in the truth of the publication and therefore acted in reckless disregard of the plaintiff's rights.” (Id. at p.740.) “Parties in a business or contractual relationship have the requisite ‘common interest’ for the privilege to apply.” (King v. United Parcel Service, Inc. (2007) 152 Cal.App.4th 426, 440.)

Here, the complaint alleges that in “August 2021, Hilton made false representations about Plaintiffs Blue Pine, [Jay], Linda, and Jennifer to Jackson Square's directors, officers, employees, and/or agents, including but not limited to Jackson Square's Chief Financial Officer, Suzann Cabling - namely, that [Jay], Linda, and Jennifer had wrongfully taken money from Blue Pine to purchase houses for their own personal benefit.” (Complaint ¶ 54.) There is no indication as to the method of how these representations were made – i.e., spoken or written. However, the complaint appears to imply that the statements were made orally because there is no indication of any writing. Moreover, “[l]ess particularity is required when it appears that defendant has superior knowledge of the facts, so long as the pleading gives notice of the issues sufficient to enable preparation of a defense.” (Okun, supra, 29 Cal.3d at p.458.)

Moreover, the common interest does not apply in the instant action – at least at the pleading stage. The complaint alleges that the statements were made with malice in that Defendant Hilton made the statements knowing that they were false or without reasonable belief. (Complaint ¶ 58, [“In making the aforementioned defamatory statements, Hilton acted with malice, oppression, and/or fraud, and knew that the statements were false or had serious doubts about the truth of the statements, so as to justify an award of punitive damages under Civil Code section 3294.”].)

Accordingly, Defendants’ demurrer to the seventh cause of action is OVERRULED.

“To establish a prima facie case of intentional interference with prospective economic advantage, a plaintiff must demonstrate (1) an economic relationship between the plaintiff and a third party, with a probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of this relationship; (3) intentional and wrongful conduct on the part of the defendant, designed to interfere with or disrupt the relationship; (4) actual disruption or interference; and (5) economic harm to the plaintiff as a proximate result of the defendant's wrongful conduct.” (Overstock.com, Inc. v. Gradient Analytics, Inc. (2007) 151 Cal.App.4th 688, 713.) “With respect to the third element, a plaintiff must show that the defendant engaged in an independently wrongful act.” (San Jose Construction, Inc. v. S.B.C.C., Inc. (2007) 155 Cal.App.4th 1528, 1544.)

“ ‘[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard .... an act must be wrongful by some legal measure, rather than merely a product of an improper, but lawful, purpose or motive.’ [Citation.]” (San Jose Construction, Inc., supra, 155 Cal.App.4th at p.1545.) As noted by the Supreme Court, “[t]he tort of intentional interference with prospective economic advantage is not intended to punish individuals or commercial entities for their choice of commercial relationships or their pursuit of commercial objectives, unless their interference amounts to independently actionable conduct. [Citation.] We conclude, therefore, that an act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1158–1159.) “The plaintiff must also prove that the interference was wrongful, independent of its interfering character.” (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 944.)

Here, the eighth cause of action alleges that “Defendants took away Jackson Square's business from Blue Pine that Blue Pine otherwise would have gotten. Hilton also made defamatory statements about Blue Pine and its officers that caused Jackson Square to cease doing business with Blue Pine.” (Complaint ¶ 62.) The Complaint clearly alleges independently wrongful conduct – i.e., defamation – that was targeted at Jackson Square to cause Jackson Square to cease doing business with Plaintiffs. As Plaintiffs sufficiently allege defamation, Plaintiffs’ interference claim is also sufficient. Accordingly, Defendants’ demurrer to the eighth cause of action is OVERRULED.

As to the ninth cause, the complaint alleges that “Hilton breached his fiduciary duties and committed fraud and extortion against Blue Pine in stealing away Blue Pine's employees. Russell Square committed extortion against Blue Pine in stealing away Blue Pine's employees.” (Complaint ¶ 70.) As noted above, the claims for breach of fiduciary duty and extortion are insufficiently alleged. Accordingly, as to the ninth cause of action, Plaintiffs fail to sufficiently allege an independently wrongful act.

Defendants contend that the tenth cause of action fails because there is no allegation of unlawful, unfair, or fraudulent business practices. Defendants also contend that the remedy of disgorgement is improper.

California’s Unfair Competition Law (“UCL”). The purpose of the UCL “is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services. [Citation.]” (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 949.) Thus, the UCL prohibits unlawful, unfair or fraudulent business acts or practices. (Bus. & Prof. Code, § 17200.) “The Legislature intended this ‘sweeping language’ to include ‘anything that can properly be called a business practice and that at the same time is forbidden by law.’” (Bank of the West v. Sup. Ct. (1992) 2 Cal.4th 1254, 1266.) “A plaintiff alleging unfair business practices under these statutes must state with reasonable particularity the facts supporting the statutory elements of the violation.” (Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 619.)

“Because the statute is framed in the disjunctive, a business practice need only meet one of the three criteria to be considered unfair competition.” (Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1359.) Section 17200’s “unlawful” prong “borrows violations of other laws ... and makes those unlawful practices actionable under the UCL.” (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1383.) “[V]irtually any law or regulation—federal or state, statutory or common law—can serve as [a] predicate for a ... [section] 17200 ‘unlawful’ violation.’ ” (Ibid.) “A business practice is “fraudulent” within the meaning of section 17200 if it is “likely to deceive the public.” (Id. at p.1380.) “‘A business practice is unfair within the meaning of the UCL if it violates established public policy or if it is immoral, unethical, oppressive or unscrupulous and causes injury to consumers which outweighs its benefits.’ [Citation.]” (Nolte v. Cedars-Sinai Medical Center (2015) 236 Cal.App.4th 1401, 1407–1408.) The determination of whether a business practice is unfair involves an examination of that practice’s impact on its alleged victim, balanced against the reasons, justifications, and motives of the alleged wrongdoer. (Ibid.) In brief, the court must weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim. (Nolte, Supra, 236 Cal.App.4th at pp. 1407–1408; Cf. Durell v. Sharp Healthcare, supra, 183 Cal.App.4th at 1365 [“[u]nfair” business practices are those which offend an “established public policy” that is tethered to “specific constitutional, statutory, or regulatory provisions”]; Morgan v. AT & T Wireless Services, Inc. (2009) 177 Cal.App.4th 1235, 1254–1255.)

“‘[O]n November 2, 2004, Proposition 64 passed, amending [Business and Professions Code] section 17204 to delete language expressly authorizing any person acting for the interests of the general public to bring a UCL cause of action, and to add language expressly authorizing ‘any person who has suffered injury in fact and has lost money or property as a result of such unfair competition’ to bring a UCL cause of action.’ [Citation.]” (Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1335.)

Here, as noted above, the complaint does sufficiently unlawful actions, such as the seventh cause of action for defamation. As to the claim that the complaint seeks an improper remedy of disgorgement, this is not a proper ground for a demurrer. “[A] demurrer tests the sufficiency of the factual allegations of the complaint rather than the relief suggested in the prayer of the complaint.” (Venice Town Council, Inc. v. City of Los Angeles (1996) 47 Cal.App.4th 1547, 1562.)

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.)

As this is the first time that the court has sustained a demurrer to the complaint on these grounds, the court finds it is proper to allow Plaintiffs an opportunity to cure the defects discussed in this order. (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349; Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1037.)

Based on the foregoing, Defendants Blaise Hilton and Russell Square Consulting, Inc.’s demurrer to the complaint is SUSTAINED IN PART as to the first, second, fourth, fifth, sixth, ninth, and eleventh causes of action WITH LEAVE TO AMEND. Defendants’ demurrer is otherwise OVERRULED.

Plaintiffs are to file an amended complaint within thirty (30) days of notice of this order.

[1] As multiple plaintiffs have the same last name the Court refers to the individual plaintiffs by first name without any intent of disrespect to any of the parties.

[2] As the Court is sustaining on these grounds, the Court declines to address Defendants’ additional arguments.

County of Los Angeles

Department 26