Judge: Elaine Lu, Case: 23STCV07427, Date: 2023-07-20 Tentative Ruling

Case Number: 23STCV07427    Hearing Date: July 20, 2023    Dept: 26

Superior Court of California

County of Los Angeles

Department 26

Procedural Background

            On April 4, 2023, Plaintiffs David Talasazan (“Talasazan”) and Seven Lions, Inc. (“Seven Lions”) (jointly “Plaintiffs”) filed the instant action against Defendants GreenCoast Hydroponics, Inc. (“GreenCoast”) and Hydrobuilder Holdings, LLC (“Hydrobuilder”) (jointly “Defendants”).  The complaint asserts three causes of action for (1) Conversion, (2) Fraudulent Misrepresentation, and (3) Fraudulent Concealment.

            On June 16, 2023, Defendant Hydrobuilder filed the instant demurrer to the complaint.  On June 28, 2023, Defendant GreenCoast filed a notice of joinder.  On July, 7, 2023, Plaintiffs filed an opposition.  On July 13, 2023, Hydrobuilder filed a reply.

Allegations of the Operative Complaint

            The complaint alleges that:

            Plaintiff Talasazan is the President of Plaintiff Seven Lions.  (Complaint ¶ 2.)  Seven Lions owns a California Seller’s Permit authorizing Seven Lions to legally purchase goods without paying sales tax for the purpose of reselling the items purchased.  (Id. ¶ 9.)  Plaintiffs “utilize a Seller's Permit to buy and resell clothing, textiles, and other items.”  (Ibid.)

            In 2017, GreenCoast representative Paul Lawton Christopher – a sales manager at one of GreenCoast’s Los Angeles storefronts – informed Plaintiff Talasazan that Seven Lions would receive a 45% discount off of all purchases if Seven Lions provided its Seller’s Permit number.  (Id. ¶ 10.)  Plaintiff Talasazan provided Seven Lions Seller’s Permit number to Paul Lawton Christopher to receive the discount.  (Id. ¶ 11.)  “During the time period between 2017 through 2020, Plaintiffs made approximately $65,860.73 worth of purchases from GreenCoast. Plaintiffs received the Wholesale Discount for those purchases which amounted to approximately 50 transactions.”  (Id. ¶ 12.) 

            In 2021, the California Department of Tax and Fee Administration (“CDTFA”) alleged “that Plaintiffs failed to report several millions of dollars in ex-tax purchases.”  (Id. ¶ 13.)  “Upon further investigation, it was disclosed that GreenCoast had reported to the CDTFA that Seven Lions had allegedly made ex-tax purchases from GreenCoast in excess of $5,489,141.00 between July l, 2017 and June 20, 2021.”  (Id. ¶ 14.) 

            The CDTFA then conducted a formal audit of Seven Lions.  (Id. ¶ 15.)  “To help conduct the audit, the CDTF A requested that Plaintiffs and GreenCoast produce documents evidencing sales transactions between Seven Lions and GreenCoast.”  (Id. ¶ 16.)  “Documents GreenCoast produced to the CDTFA showed that the ex-tax purchases were allegedly made using a Resale Certificate, dated 2013 associated with Seller's Permit SR AA 101-623476 for the purchases SOWA/Triple A. The purported signature of the purchaser is Mr. Talasazan on behalf of Seven Lions.”  (Id. ¶ 17.)  Plaintiffs have no relation to SOWA or Triple A and were unaware of those companies’ existence before the audit.  (Id. ¶ 18.)

            “Plaintiffs are informed and believe, and based thereon allege, that GreenCoast was using Seven Lions' Seller's permit number for purchases that Plaintiffs had not authorized and had no knowledge of.”  (Id. ¶ 19.)  Plaintiffs are informed and believe, and based thereon allege, that GreenCoast has either knowingly attributed the ex-tax purchases of other businesses to Seven Lions.”  (Id. ¶ 20.)  As a result, Plaintiffs have incurred a tax liability of $1,032,835.26.  (Id. ¶¶ 21, 32.) 

Legal 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.) 

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).) 

Here, Defendant Hydrobuilder has fulfilled the meet and confer requirement.  (Caros Decl. ¶¶ 5-7, Exh. A.) 

Discussion

First Cause of Action: Conversion

            Defendant Hydrobuilder and Defendant GreenCoast through joinder contend that the first cause of action for conversion fails because (1) no specific allegations have been made against Hydrobuilder, (2) Plaintiffs assented to the use, and (3) the first cause of action is barred by the statute of limitations.

            Liability as to Hydrobuilder

            “A parent corporation is not liable on the contract or for the tortious acts of its subsidiary simply because it is a wholly owned subsidiary. Some other basis of liability must be established.”  (Northern Natural Gas Co. v. Superior Court (1976) 64 Cal.App.3d 983, 991.)  For example, “[i]n a parent-subsidiary relationship, the agency doctrine may bind a parent to the contracts of its subsidiary where, in addition to owning the subsidiary, the parent company exercises ‘sufficient control over the [subsidiary's] activities’ such that the subsidiary becomes a ‘mere agen[t] or “instrumentality” of the parent.’ [Citations.]”  (Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 862.)  Similarly, liability can be imposed if the subsidiary is a mere alter-ego of the parent company.  (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1249.)

            Here, the complaint alleges – in relevant part – that “[w]ithout permission and without authorization, GreenCoast used Seven Lions’ re-seller's permit number on transactions attributed to other business entities, such as, SOWA.”  (Complaint ¶ 31.)  The only specific allegation made against Hydrobuilder is that Hydrobuilder acquired GreenCoast in 2021.  (Id. ¶ 4.)  The sole allegation providing any possible basis for liability as an alter ego or an agent is the conclusory allegation that:

Plaintiffs are informed and believe, and based thereon allege, that Defendants, and each of them, and Does 1 through 50, at all times relevant were, and currently are, the agents, servants, employees, representatives, co-conspirators, principals, affiliates, and/or alter egos of one another, and in such capacity or capacities have participated in the conduct alleged in this Complaint and were, and currently are, acting within the scope and furtherance of each of their respective agencies, servitudes, employment, conspiracies, and/or authorities and in such capacity or capacities have participated in the breaches, act and omissions alleged in this Complaint or in some manner are responsible indirectly or directly for the injuries and damages suffered by Plaintiffs.

(Complaint ¶ 5.)

            There is no allegation that Hydrobuilder had any control over the day-to-day activities of GreenCoast such that GreenCoast was the mere instrumentality of Hydrobuilder.  In fact, there are no factual allegations at all to support the claim that on information and believe GreenCoast was acting as the agent of Hydrobuilder.  (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.”], [italics added].)  Rather, the complaint implies otherwise because the alleged wrongdoing occurred between July l, 2017 and June 20, 2021, but Hydrobuilder did not acquire GreenCoast until an unspecified date in 2021.  (Complaint ¶¶ 4, 14.)  Further, the vague allegations of the Complaint are insufficient to support a finding of alter ego. 

“To recover on an alter ego theory, a plaintiff need not use the words ‘alter ego,’ but must allege [1] sufficient facts to show a unity of interest and ownership, and [2] an unjust result if the corporation is treated as the sole actor. [Citation.] An allegation that a person owns all of the corporate stock and makes all of the management decisions is insufficient to cause the court to disregard the corporate entity.”  (Leek v. Cooper (2011) 194 Cal.App.4th 399, 415.)  For example, in Vasey v. California Dance Co. (1977) 70 Cal.App.3d 742, the Court of Appeal found that the allegations in the complaint were insufficient to uphold a default judgment against the alleged alter ego defendants.  (Vasey, supra, 70 Cal.App.3d at pp.748–749.)  “[T]he complaint alleged that any individuality and separateness of the corporation had ceased and that [the corporate defendant] was the alter ego of the individual defendants.” (Id. at p.745.) The complaint made no mention of the second element—inequity resulting from the recognition of the corporate form. (Id. at p.749.)

Here, there is no mention of any lack of individuality or separateness between GreenCoast and Hydrobuilder such that there is a unity of interest.  Nor is there any allegation that an unjust result would occur if the corporate distinction between GreenCoast and Hydrobuilder is recognized.

Accordingly, Defendant Hydrobuilder’s demurrer to the first cause of action is SUSTAINED on this basis.

            Consent to Alleged Use

            “Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiff's ownership or right to possession of the property; (2) the defendant's conversion by a wrongful act or disposition of property rights; and (3) damages.”  (Lee v. Hanley (2015) 61 Cal.4th 1225, 1240, [internal citations omitted].)  However, “the law is well settled that there can be no conversion where an owner either expressly or impliedly assents to or ratifies the taking, use or disposition of his property.”  (Farrington v. A. Teichert & Son (1943) 59 Cal.App.2d 468, 474.)

            Defendants contend that Plaintiffs consented to the use of Seven Lions Seller’s Permit information because they voluntarily provided that Seller’s Permit information to GreenCoast.  However, the allegations of the complaint are clear in that the consent Plaintiffs gave was limited.  The complaint alleges that Plaintiffs provided the reseller’s permit number to GreenCoast in order to take advantage of a substantial discount for Plaintiffs’ own purchases.  (Complaint ¶ 10.)  There is no allegation that Plaintiffs consented for GreenCoast to use Seven Lions’ Seller’s Permit for other companies’ purchases.  Accordingly, Defendants’ demurrer to the complaint on this ground is overruled.

            Statute of Limitations

“A demurrer based on a statute of limitations will not lie where the action may be, but is not necessarily, barred.  In order for the bar ... to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred.”  (Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42, [internal citations omitted].) 

“Under Code of Civil Procedure, section 338, subdivision (c), which applies to the conversion of personal property, there is a three-year limitations period for ‘action[s] for taking, detaining, or injuring any goods or chattels.’  Under California law, the general rule is well established: ‘[T]he statute of limitations for conversion is triggered by the act of wrongfully taking property.’ [Citation.]”  (AmerUS Life Ins. Co. v. Bank of America, N.A. (2006) 143 Cal.App.4th 631, 639.) However, when the conversion has been fraudulently concealed, “‘the statute of limitations does not commence to run until the aggrieved party discovers or ought to have discovered the existence of the cause of action for conversion.’” (Ibid.)  

“The discovery rule only delays accrual until the plaintiff has, or should have, inquiry notice of the cause of action. The discovery rule does not encourage dilatory tactics because plaintiffs are charged with presumptive knowledge of an injury if they have ‘information of circumstances to put [them] on inquiry’ or if they have ‘the opportunity to obtain knowledge from sources open to [their] investigation.’ [Citation.] In other words, plaintiffs are required to conduct a reasonable investigation after becoming aware of an injury, and are charged with knowledge of the information that would have been revealed by such an investigation.”  (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807–808 [internal citations omitted].)  However, “[i]n order to rely on the discovery rule for delayed accrual of a cause of action, ‘[a] plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.’  In assessing the sufficiency of the allegations of delayed discovery, the court places the burden on the plaintiff to ‘show diligence’; ‘conclusory allegations will not withstand demurrer.’”  (Id. at p.808.)

            Here, the complaint alleges that the wrongful use of the Seller’s Permit took place between July l, 2017 and June 20, 2021.  (Complaint ¶ 14.)  Plaintiffs filed the complaint on April 4, 2023.  Thus, on the face of the complaint, even if the discovery rule did not apply, some of the alleged wrongful conduct occurred within three years of filing the complaint – i.e., from April 4, 2020 to June 20, 2021.  Therefore, the Court must overrule the demurrer on this ground.  (Elder v. Pacific Bell Telephone Co. (2012) 205 Cal.App.4th 841, 856, Fn. 14, (A “demurrer does not lie as to a portion of a cause of action and if any part of a cause of action is properly pleaded, the demurrer will be overruled.”].)

            Moreover, the complaint alleges that the improper use of the Seller’s Permit by GreenCoast was concealed.  (Complaint ¶¶ 43-48.)  As such, Plaintiffs were not aware of the alleged misuse of the Seller’s Permit until the tax proceeding in 2021.  (Id. ¶¶ 13-18.)  Therefore, the first cause of action is not clearly barred by the statute of limitations.  Defendants’ demurrer to the first cause of action on this additional ground is overruled.

Second and Third Causes of Action: Fraud

            Defendants contend that the second and third causes of action for fraudulent misrepresentation and fraudulent concealment are not alleged with sufficient specificity.

            “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.)  “[T]he elements of an action for fraud and deceit based on concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.”  (Boschma v. Home Loan Ctr., Inc. (2011) 198 Cal. App. 4th 230, 248, [internal citations omitted].)

“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.) 

“A plaintiff's burden in asserting a fraud claim against a [corporation] is even greater. In such a case, the plaintiff must ‘allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.’ [Citation.]”  (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) 

However, “[a]s one court has aptly observed, “it is harder to apply [the requirement of specificity] to a case of simple nondisclosure.  ‘How does one show “how” and “by what means” something didn’t happen, or “when” it never happened, or “where” it never happened?’ ”  (Jones v. ConocoPhillips Co. (2011) 198 Cal.App.4th 1187, 1199 [citing Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384 and Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 217, [“ ‘[e]ven under the strict rules of common law pleading, one of the canons was that less particularity is required when the facts lie more in the knowledge of the opposite party ...’ ”].)

            As noted above, the Complaint fails to include any substantive allegations against Defendant Hydrobuilder.  Accordingly, as to Defendant Hydrobuilder, the complaint clearly fails to plead fraud with the required specificity, and Hydrobuilder’s demurrer is sustained on this ground.

            As to GreenCoast, the complaint alleges that GreenCoast’s representative, Paul Lawton Christopher, represented that “Plaintiffs could get the Wholesale Discount of 45% any purchase Seven Lions's [sic] made at GreenCoast if Mr. Talasazan furnished GreenCoast with Seven Lions' re-sellers permit number.”  (Complaint ¶ 36.)  However, Paul Lawton Christopher concealed and did not tell Plaintiffs that GreenCoast intended to use Seven Lions' re-sellers permit number for sales to other customers.  (Id. ¶¶ 36, 45.)  These allegations are insufficient.  As both claims of fraud are based in part on Paul Lawton Christopher’s affirmative representations coupled with concealment, Plaintiffs must plead with further specificity.  There is no indication as to when or where Paul Lawton Christopher made the alleged misrepresentation.  Nor has Plaintiff alleged the context of the alleged representation or how Paul Lawton Christopher made these representations.  Further, at least as to the claim for affirmative fraudulent misrepresentation, it is unclear what the alleged misrepresentation is because Plaintiffs concede that they did obtain the discount as represented.  (Complaint ¶ 12.) 

            Accordingly, Defendants’ demurrer to the second and third causes of action is SUSTAINED.

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, as this is the first time that the court has sustained a demurrer to these causes of action on these grounds and the claims are not necessarily barred, 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.) 

Conclusion and Order

Based on the foregoing, Defendant Hydrobuilder Holdings, LLC’s demurrer to the complaint is SUSTAINED WITH LEAVE TO AMEND as to the first, second, and third causes of action.

Defendant GreenCoast Hydroponics, Inc.’s demurrer to the complaint is SUSTAINED WITH LEAVE TO AMEND IN PART as to the second and third causes of action and otherwise OVERRULED.

Plaintiffs are to file an amended complaint within twenty (20) days of notice of this order.

The case management conference is continued to October 4, 2023 at 8:30 am.

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

DATED: July ___,  2023                                                        ___________________________

                                                                                          Elaine Lu

                                                                                          Judge of the Superior Court