Judge: Gail Killefer, Case: 21STCV33357, Date: 2023-11-07 Tentative Ruling
Case Number: 21STCV33357 Hearing Date: November 7, 2023 Dept: 37
HEARING DATE: Tuesday, November 7, 2023
CASE NUMBER: 21STCV33357
CASE NAME: FH10523, LLC., et al. v. AMCO Insurance Company, et al.
MOVING PARTY: Defendants KeyBank National
Association and ReadyCap Commercial, LLC
OPPOSING PARTIES: Plaintiffs FH10523, LLC, Fariborz
Halimi, FH10545, LLC, and F.H. Investments LLC. (collectively
“Plaintiffs”)
TRIAL DATE: None
PROOF OF SERVICE: OK
MOTION: Defendants’ Demurrer to Second Amended
Complaint
OPPOSITION: 25 October 2023
REPLY: 31 October
2023
TENTATIVE: Defendants ReadyCap
and KeyBank’s demurrers are sustained with leave to amend as to the second,
seventh, and ninth causes of action. The demurrer to the 10th cause of action
is sustained without leave to amend. KeyBank’s demurrer to the third cause of
action is overruled. Plaintiffs are granted 30 days leave to amend.
The court sets an OSC
re Amended Complaint for December 15, 2023, at 8:30 a.m. Defendants are to give notice.
Background
This action arises in connection with the ownership by FH10523,
LLC (“FH10523”); Fariborz Halimi; FH10545, LLC (“FH10545”); and F.H.
Investments LLC’s (collectively “Plaintiffs”) of two commercial properties
located at 10523 Burbank Blvd. and 10545 Burbank Blvd. in North Hollywood, CA
91601 (the “Properties”). Plaintiffs obtained a commercial liability insurance
policy (the “Policy”) for the Property from Defendant AMCO Insurance Company
(“AMCO”). Defendant E360 Insurance Services (“E360”) acted as FH10523’s
insurance broker.
In order to refinance the Properties, F.H. Investments LLC
transferred ownership to FH10523 and FH10545, respectively. ReadyCap
Commercial, LLC (“ReadyCap”) was the lender for refinance and required
Plaintiffs to obtain and maintain the Properties and commercial general
liability throughout the loan’s term.
Under the terms of the loan agreement, KeyBank N.A.
(“KeyBank”) acted as ReadyCap’s agent.
KeyBank assumed responsibility for ensuring that the properties were
insured through FH10523 and FH10545, and for paying all insurance premiums
through escrow or reserve accounts held by FH10523 and FH10545. FH10523 and
FH10545 also authorized KeyBank to act as the loan servicer, to maintain
insurance, and to pay all insurance premiums on behalf of FH10523 and FH10545.
On January 22, 2018, Eduardo Phillips filed a premises
liability action against F.H. Investments and FH10523 for a slip and fall claim
(the “Underlying Action”). Plaintiffs contend the AMCO Policy covered the claim
and tendered the Underlying Action claim to AMCO. On March 7, 2019, AMCO issued
a Reservation of Rights letter, agreeing to insure F.H. Investments, LLC and
not FH10523 or FH10545. On September 11, 2019, AMCO completed its investigation
and declined to insure or defend FH10523.
As to Defendant AMCO, Plaintiffs allege that FH10253 should
have been insured under Section (II)(2)(b) of the Policy in its capacity as the
property manager for the 10523 Property, or as the assigned of the 10523
Property, or as a successor of F.H. Investments. Alternatively, Defendant E360
Insurance Services negligently failed to obtain insurance coverage for FH10523
and FH10545, despite being instructed to do so and agreeing to do so. As to
Defendants ReadyCap and KeyBank, they failed to ensure that FH10523 and FH10545
were insured under the Policy and failed to maintain insurance for FH10523 and
FH10545 – a duty, responsibility, and obligation that ReadyCap and KeyBank
assumed.
Plaintiffs’ First Amended Complaint (“FAC”) alleges the
following causes of action: (1) breach of contract against AMCO; (2) bad faith
denial of insurance claim and breach; (3) negligent failure to obtain insurance
coverage against E360; and (4) negligence against KeyBank.
On April 17, 2023, the demurrer was sustained with leave to
amend. On June 1, 2023, Plaintiff filed the operative Second Amended Complaint
(“SAC”) alleging eleven causes of action:
1)
Breach of Contract against AMCO;
2)
Breach of Contract against ReadyCap;
3)
Breach of Contract against KeyBank;
4)
Bad Faith Denial of Claim/Breach of Implied
Covenant of Good Faith and Fair Dealing against AMCO;
5)
Negligent Failure to Obtain Insurance Coverage,
against E360;
6)
Fraud and Deceit: Intentional Misrepresentation
against E360;
7)
Fraud and Deceit: Intentional Misrepresentation
against KeyBank and ReadyCap
8)
Negligent Misrepresentation against E360;
9)
Negligent Misrepresentation against KeyBank and
ReadyCap;
10) Negligence
against KeyBank and ReadyCap; and
11) Recission
and Restitution against AMCO.
On July 31, 2023, Defendants KeyBank and ReadyCap, each
filed a demurrer to Plaintiffs’ SAC. Plaintiffs filed a joint opposition on
October 25, 2023. Defendants KeyBank and ReadyCap filed a joint reply brief.
The matter is now before the court.
Demurrer to SAC[1]
I.
Legal Authority
A demurrer is an objection to a pleading, the grounds for
which are apparent from either the face of the complaint or a matter of which
the court may take judicial notice. (CCP
§ 430.30(a); see also Blank v. Kirwan
(1985) 39 Cal.3d 311, 318.) The purpose
of a demurrer is to challenge the sufficiency of a pleading “by raising
questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) The court “treat[s] the demurrer as admitting
all material facts properly pleaded, but not contentions, deductions or
conclusions of fact or law. . . .” (Berkley v. Dowds (2007) 152 Cal.App.4th
518, 525 (Berkley).) “In the construction of a pleading, for the
purpose of determining its effect, its allegations must be liberally construed,
with a view to substantial justice between the parties.” (CCP § 452; see also Stevens v. Sup. Ct. (1999) 75 Cal.App.4th 594, 601.) “When a court evaluates a complaint, the
plaintiff is entitled to reasonable inferences from the facts pled.” (Duval
v. Board of Trustees (2001) 93 Cal.App.4th 902, 906.)
The general rule is that the
plaintiff need only allege ultimate facts, not evidentiary facts. (Doe v.
City of Los Angeles (2007) 42 Cal.4th 531, 550.) “All that is required of a plaintiff, as a
matter of pleading, even as against a special demurrer, is that his complaint
set forth the essential facts of the case with reasonable precision and with
sufficient particularity to acquaint the defendant with the nature, source and
extent of his cause of action.” (Rannard v. Lockheed Aircraft Corp.
(1945) 26 Cal.2d 149, 156-157.)
“[D]emurrers for uncertainty are disfavored and are granted only if the
pleading is so incomprehensible that a defendant cannot reasonably
respond.” (Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th
841, 848, fn. 3, citing Lickiss v. Fin.
Indus. Regulatory Auth. (2012) 208 Cal.App.4th 1125, 1135.) In addition, even where a complaint is in
some respects uncertain, courts strictly construe a demurrer for uncertainty
“because ambiguities can be clarified under modern discovery procedures.” (Khoury
v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.)
Demurrers do not lie as to
only parts of causes of action where some valid claim is alleged but “must
dispose of an entire cause of action to be sustained.” (Poizner
v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.) “Generally it is an abuse of discretion to
sustain a demurrer without leave to amend if there is any reasonable possibility
that the defect can be cured by amendment.”
(Goodman v. Kennedy (1976) 18
Cal.3d 335, 349.)
II. Request for Judicial Notice
The court may
take judicial notice of “official acts of the legislative, executive, and
judicial departments of the United States and of any state of the United
States,” “[r]ecords of (1) any court of this state or (2) any court of record
of the United States or of any state of the United States,” and “[f]acts and
propositions that are not reasonably subject to dispute and are capable of
immediate and accurate determination by resort to sources of reasonably
indisputable accuracy.” (Evid. Code § 452(c), (d), and (h).) “Taking
judicial notice of a document is not the same as accepting the truth of its
contents or accepting a particular interpretation of its meaning.” (Joslin v. H.A.S. Ins. Brokerage (1986) 184 Cal.App.3d 369, 374.)
Defendants
ReadyCap and KeyBank request judicial notice of the following:
1)
Exhibit A: The Assignment of Deed of
Trust, Assignment of Rents, Loan Documents dated as of December 21, 2015,
recorded in the Official Records, Recorder’s Office, Los Angeles County,
California, as Document No. 20200694979.
2)
Exhibit B: The Assignment of Deed of
Trust, Assignment of Rents, Loan Documents dated as of December 22, 2015,
recorded in the Official Records, Recorder’s Office, Los Angeles County,
California, as Document No. 20200694979. A true and correct copy is attached
hereto as Exhibit B.
Defendants’
request for judicial notice is granted.
III. Discussion
A. The SAC fails
to show that ReadyCap is a Proper Party
ReadyCap asserts that it is not a proper party to this
action because ReadyCap sold and assigned the subject loans to Trust Lender on
or about November 30, 2015. (RJN Ex. 1, 2.)
“An
assignee stands in the shoes of the assignor, acquiring all of its rights and
liabilities.” (Professional Collection Consultants v. Hanada (1997) 53
Cal. App. 4th 1016, 1018-1019.) Therefore, upon assignment, ReadyCap’s rights
and liabilities were assigned to the Trust Lender such that ReadyCap cannot be
held liable for any acts that occurred after the assignment. (See Civ. Code §
1459 [“A
non-negotiable written contract for the payment of money or personal property
may be transferred by indorsement, in like manner with negotiable instruments.
Such indorsement shall transfer all the rights of the assignor under the
instrument to the assignee, subject to all equities and defenses existing in
favor of the maker at the time of the indorsement.”].)
Here, the burden is on Plaintiffs to show
that the assignment is void or state facts as to why the ReadyCap can be held
liable even after the assignment occurred. (See Myles v.
PennyMac Loan Services, LLC (2019) 40 Cal.App.5th 1072, 1075 [“It is not
enough for a homeowner merely to allege a mortgage assignment was voidable.
[Citation.] Rather, the homeowner must allege facts supporting a legally viable
theory as to why the challenged assignment is void as a matter of law.”]
[italics original].) Plaintiffs fail to meet this burden.
Therefore,
the demurrer as to Defendant ReadyCap is sustained with leave to amend.
B. Plaintiff’s
Remedies are Limited Under the Loan Agreement
For the first time on reply, Defendants ReadyCap and KeyBank
assert that Plaintiffs’ remedies are limited by section 15.4 of the Loan
Agreement. (Reply at pp. 9:20-10:11.) Because this argument was raised for the
first time on reply, the court will not consider it. (See Malmstrom v.
Kaiser Aluminum & Chemical Corp. (1986) 187 Cal.App.3d 299, 320
[“Points raised for the first time in a reply brief will not be considered.”].)
C. Second and Third Causes of Action: Breach
of Contract Against ReadyCap and KeyBank
The
elements of a claim for breach of contract are: “(1) the existence of the
contract, (2) plaintiff’s performance or excuse for nonperformance, (3)
defendant's breach, and (4) the resulting damages to the plaintiff.” (Oasis
West Realty, LLC v. Goldman (2011) 51 Cal. 4th 811, 821.) In addition, the
complaint must demonstrate damages proximately caused by the breach. (St.
Paul Ins. v. American Dynasty (2002) 101 Cal.App.4th 1038, 1060.) Furthermore,
“the complaint must [also] indicate on its face whether the contract is
written, oral, or implied by conduct.” (Otworth v. Southern Pac.
Transportation Co. (1985) 166 Cal.App.3d 452, 458-59 citing CCP, §
430.10(g).)
“If the action is based on alleged breach of written
contract, the terms must be set out verbatim in the body of the complaint or a
copy of the written agreement must be attached and incorporated by reference.”¿
(Harris v. Rudin, Richman & Appel (1999) 74 Cal.App.4th 299,
308.) Alternatively, “a plaintiff may plead the legal effect of the contract
rather than its precise language.”¿ (Construction Protective Services, Inc.
v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 198-199.)¿¿“[A]ll essential elements of a breach of
contract cause of action [] must be pleaded with specificity.”¿(Levy
v. State Farm Mutual Automobile Ins. Co. (2007) 150 Cal.App.4th 1, 5.)
i. General Allegations
Against ReadyCap and KeyBank as to the Breach of Contract Claims
The SAC alleges that in May 2015, ReadyCap
approved F.H. Investments, LLC’s (hereinafter “F.H. Investments”) loan for
refinance on the condition that F.H. Investments reorganize as two separate
limited liability companies. (SAC ¶ 14.) ReadyCap approved refinancing for FH10523, LLC and
FH10545, LLC via the “Loan Agreements.” (SAC ¶ 14, Ex. 2.) In June of 2015,
F.H. Investments reorganized as FH10523 and FH10545, with both entities being
the successors of F.H. Investments and Hariborz Halimi remaining the
managing-member and sole owner and member of FH10523 and FH10545. (SAC ¶ 15.)
Ownership of the Properties also transferred from F.H. Investments to FH10523
and FH10545. (SAC ¶ 15.)
The SAC alleges that under the
Loan Agreements, ReadyCap had the right to have an “agent” service and maintain
the Loan Agreements and that KeyBank served as ReadyCap’s authorized agent. As such, KeyBank assumed responsibility for
ensuring that the Properties were respectively insured through FH10523 and
FH10545 and for paying all insurance premiums through escrow or reserve
accounts held by FH10523 and FH10545. (SAC ¶ 18.) Plaintiffs FH10523 and FH10545 also authorized
KeyBank to act as the loan servicer, to maintain insurance, and to pay all
insurance premiums on behalf of FH10523 and FH10545. (SAC ¶ 18.)
The SAC alleges that under the
Loan Agreements, ReadyCap had the right to assume the duties in ensuring that
FH10523 and FH10545 were insured under the policy and in paying their insurance
premiums. (SAC ¶ 39.) ReadyCap breached the Loan Agreements by failing to
ensure that FH10523 and FH10545 were insured under the Policy and failed to
maintain insurance for FH10523 and FH10545 and caused Plaintiffs’ damages. (SAC
¶¶ 40, 41.)
As to Defendant KeyBank, KeyBank
is alleged to have entered into a written agreement with ReadyCap to service
FH10523’s and FH10545’s loans with ReadyCap. (SAC ¶ 44.) KeyBank assumed the
responsibility of ensuring that FH10523 and FH10545 were insured under the
policy and of paying the insurance premiums from FH10523 and FH10545’s
escrow/reserve accounts. As such, FH10523 and FH10545 were intended third-party
beneficiaries to the loan servicing agreement(s) between ReadyCap and KeyBank.
(SAC ¶ 45.)
ii. The Second Cause of Action is Insufficiently Pled as to
Defendant ReadyCap
Defendant ReadyCap asserts that Section 6.3 of the Loan
Agreements gives ReadyCap the option to obtain insurance for the Properties,
but only if FH10523 and FH10545, as the borrowers, fail to obtain the required
insurance.
Section 6.3 of the Loan Agreements, entitled “Force
Placement,” states:
If at
any time Lender is not in receipt of written evidence that all insurance
required hereunder is in full force and effect, Lender shall have the right,
without notice to Borrower to take such action as Lender deems necessary to
protect its interest in the Propert[ies], including, without limitation, the
obtaining of such insurance coverage as Lender deems appropriate, and all
expenses incurred by Lender in connection with such action or in obtaining such
insurance and keep it in effect shall be paid by Borrower to Lender upon demand
and until paid shall be secured by Security Instrument and shall bear interest
at the Default Rate.
(SAC ¶ 4, Ex. 2, § 6.3.)
The court notes that for ReadyCap to be obligated to act and
procure insurance for the Properties, it must not be “in receipt of written
evidence that all insurance required hereunder is in full force and effect[.]”
(SAC Ex. 2, § 6.3.) This is a condition precedent, an act or event that must
happen before ReadyCap is obligated to act. (See Barroso
v. Ocwen Loan Servicing, LLC (2012) 208
Cal.App.4th 1001, 1009 [“ ‘ In contract law, a ‘condition precedent’ is ‘either an act of a party
that must be performed or an uncertain event that must happen before the
contractual right accrues or the contractual duty arises.’ “].) This is consistent
with the allegation that ReadyCap required FH10523 and FH10545 to maintain the property and commercial
general liability insurance throughout the loans’ term. (SAC ¶ 14.)
Here, the SAC fails
to allege that ReadyCap was in “receipt of written evidence” that the insurance
for the Properties was not in full force and effect, such that it was obligated
to act. Moreover, section 6.3 gives ReadyCap the right to act, but does not
obligate ReadyCap to act.
In other words, the
Loan Agreements do not impose on ReadyCap a duty to act, even if the Plaintiffs
are third party beneficiaries of the Loan Agreements. Furthermore, the allegation
that ReadyCap “exercised those rights and assumed those duties” of ensuring
that FH10523 and
FH10545 were insured, without facts as to how ReadyCap assumed those duties, is
a conclusory allegation insufficient to survive a demurrer. (See Interior
Systems, Inc. v. Del E. Webb Corp. (1981) 121 Cal.App.3d 312, 316 [“These
are but legal conclusions which the trial court was authorized to ignore.
conclusionary allegations without facts to support them are ambiguous and may
be disregarded.”].)
Based on the information above and the fact that Plaintiffs
failed to show that ReadyCap’s assignment was void, the demurrer to the second
cause of action is sustained with leave to amend.
iii. Third Cause of Action Against KeyBank is
Sufficiently Pled
KeyBank asserts that
the third cause of action fails because no contract exists between KeyBank and
Plaintiffs. Instead, Plaintiffs allege that KeyBank entered a written contract
with ReadyCap that included (a) ensuring that FH10523 and FH10545 were insured under the policy; and (b)
paying the insurance premiums from FH10523 and FH10545’s escrow/reserve
accounts. (SAC ¶ 45.) “As such, FH10523 and FH10545 were intended third-party
beneficiaries to the loan servicing agreement(s) between Readycap and Keybank.”
(SAC ¶ 45.) Thus, Plaintiffs have pled sufficient facts to show that they are
third party beneficiaries to the contract between KeyBank and ReadyCap.
Whether a written contract exists between ReadyCap and
KeyBank is a disputed issue of fact. Moreover, Plaintiff can plead the legal
effects of the contract between KeyBank and ReadyCap attaching a copy or
pleading verbatim its terms. “ ‘There is no need to require specificity in the
pleadings because 'modern discovery procedures necessarily affect the amount of
detail that should be required in a pleading.' [Citation.]" (Ludgate
Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 608.)
Therefore, Plaintiffs’ third cause of action does not fail due to lack of
specificity. Whether Plaintiffs are in fact a third party beneficiaries to the
contract between ReadyCap and KeyBank remains a disputed issue of fact not
subject to resolution on demurrer. (See Fremont Indemnity Co. v. Fremont
General Corp. (2007) 148 Cal.App.4th 97, 113-114 [“On
a demurrer a court's function is limited to testing the legal
sufficiency of the complaint. [Citation.] 'A demurrer is simply not the
appropriate procedure for determining the truth of disputed facts.’ “.].)
Lastly, KeyBank asserts that the Plaintiffs’ policy with
AMCO states that any claim thereunder must be brought within one year of such a
claim arising. (SAC Ex. 1 at p. AMCO 00044.) Here, the Underlying Action was
brought in January 2018 based on an incident that occurred in 2016, but
Plaintiff did not sue KeyBank until November 2022, four years and 10 months
after the commencement of the Underlying Action. Under California’s four year
statue of limitations, Plaintiffs’ claim is untimely. (CCP §377(1).)
In opposition, Plaintiffs assert that KeyBank is not a party
to AMCO’s policy, and no agreement exists between KeyBank and the Plaintiffs
limiting the time to bring an action against KeyBank. Plaintiffs further assert
that the statute of limitations did not begin to accrue until the Plaintiffs
suffered damages or knew or should have known about KeyBank’s wrongful conduct.
Here, the SAC alleges KeyBank continued to misrepresent Plaintiffs’ status as
an insured through January 2022, the same time Plaintiffs were settling the
Underlying Action and incurring damages based on KeyBank’s representation. (SAC
¶¶ 29, 77, 100)
Therefore, KeyBank’s demurrer to the third cause of action
is overruled.
D. Seventh Cause of Action- Fraud and
Deceit: Intentional Misrepresentation Against KeyBank and ReadyCap
The elements of a misrepresentation claim are (1)
misrepresentation (false representation, concealment, or nondisclosure); (2)
knowledge of falsity (scienter); (3) intent to defraud or induce reliance; (4)
justifiable reliance; and (5) damages. (See Chapman v. Skype Inc. (2013)
220 Cal.App.4th 217, 230–231 (Chapman); see also Civ. Code § 1709.)
Fraud actions are subject to strict requirements of particularity in pleading.
(Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) A plaintiff must
allege what was said, by whom, in what manner (i.e., oral or in writing), when,
and, in the case of a corporate defendant, under what authority to bind the
corporation. (See Goldrich v. Natural Y Surgical Specialties, Inc.
(1994) 25 Cal.App.4th 772, 782.)
“The requirement of specificity in a fraud action against
a corporation requires the plaintiff to 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.” (Tarmann
v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157.
However, “the requirement of specificity is relaxed when the allegations indicate that
“the defendant must necessarily possess full information concerning the facts
of the controversy or when the facts lie more in the knowledge of the opposite
party.” (Id. at 158 [citations omitted].)
i.
The Misrepresentations made by
KeyBank and ReadyCap
The SAC
alleges that KeyBank’s employees or agents, including Janelle Brown, KeyBank’s
Insurance Specialist, represented to Plaintiffs that FH10523 and FH10545 were
insured under AMCO’s Policy. (SAC ¶ 77.) KeyBank’s representations “were
implied and in writing through emails and invoices that represented that
FH10523 and FH10545 had paid for, and were paying for, insurance premiums that
included FH10523 and FH10545 as insureds (the “Keybank Representations”).” (SAC
¶ 77.) The representations were false, and KeyBank knew of their falsity when it
made the representations and knew that Plaintiffs would rely on the
representations. (SAC ¶¶ 79, 80, 81.) ReadyCap is jointly liable as KeyBank’s
principal. (SAC ¶ 86.)
Contrary to Defendants assertion,
at this stage in the pleadings, the Plaintiffs are not required to prove their
allegations. Although the SAC sufficiently alleges that through emails and
invoices, Janelle Brown, and other KeyBank employees represented that FH10523
and FH10545 had paid for and were insured under AMCO’s policy, Plaintiffs fails
to state who the other employees are or why the Plaintiffs do not possess such
information. (SAC ¶ 77.) Moreover, the Plaintiffs fail to state to whom the emails
and invoices were addressed. This is all information that is known to the Plaintiffs
and does not excuse the Plaintiffs’ lack of specificity in providing details
about the specific representations made in the invoices and emails.
Defendants also argue that the Plaintiffs’
seventh cause of action is time-barred by the three-year statute of limitations
because the limitations period began to accrue as of January 2018. (CCP §
338(d).) However, Plaintiffs sufficiently alleged that KeyBank made the
representations between August 17, 2015, and January 2020, when Plaintiff
FH10523 was settling the Underlying Action and thus did not discover KeyBank’s
misrepresentations. (SAC ¶¶ 29, 77.) Thus, the action is not time-barred.
As the seventh cause of action is
not pled with the requisite specificity, the demurrer to the seventh cause of
action is sustained with leave to amend.
E. Ninth Cause of Action – Negligent
Misrepresentation Against KeyBank and ReadyCap
The essential elements for negligent misrepresentation
are the same as those for intentional misrepresentation, “except that it does
not require knowledge of falsity but instead requires a misrepresentation of
fact by a person who has no reasonable grounds for believing it to be true.” (Chapman,
supra, 220 Cal.App.4th at p. 231.)
As stated above, the court agrees that the Plaintiffs’
ninth cause of action is not pled with the requisite specificity. Accordingly,
the demurrer to the ninth cause of action is sustained with leave to amend.
F. Tenth
Cause of Action – Negligence Against ReadyCap and KeyBank
Negligence consists of the
following elements: (1) the defendant owed the plaintiff a duty of care, (2)
the defendant breached that duty, and (3) the breach proximately caused the
plaintiff’s damages or injuries. (Lueras v. BAS Home Loan
Servicing, LP (2013) 221 Cal.App.4th 49, 62 (Lueras).)
“The existence of a duty of care owed by a defendant to a plaintiff is a
prerequisite to establishing a claim for negligence.” (Nymark v.
Heart Fed. Savs. & Loan Ass’n (1991) 231 Cal.App.3d
1089, 1095.) “Whether a duty of care exists is a question of law to be
determined on a case-by-case basis.” (Lueras, at p. 62.)
Defendants ReadyCap and KeyBank
demur to the ninth cause of action on the basis that the claim barred by the
economic loss rule and on the basis that they owe no duty to Plaintiffs. As explained by the
California Supreme Court, “the economic loss rule prevents the law of contract
and the law of tort from dissolving into the other.” (Robinson Helicopter
Co., Inc. v. Dana Corp. (2004) 34 Cal. 4th 979, 989 (Robinson).)
Plaintiffs rely on Southern California Gas Leak Cases (2019) 7 Cal.5th 391 (Southern
California) for the
assertion that they can recover tort damages because they allege that a special
relationship exists between Defendants ReadyCap and KeyBank and Plaintiffs,
since KeyBank assumed the responsibility of servicing Plaintiffs’ loan with
ReadyCap, including ensuring FH10523 was insured under the policy and
maintaining insurance paying the premiums from FH10523’s and FH10545’s
escrow/reserve accounts. (SAC ¶ 111.)
“The primary exception to the general rule of
no-recovery for negligently inflicted purely economic losses is where the
plaintiff and the defendant have a ‘special relationship.’” (Southern California, supra, 7
Cal.5th at p. 400.) However, in Southern California,
the Supreme Court noted that “purely economic losses flowing from a financial
transaction gone awry — which were at issue in Biakanja, J'Aire, Bily,
and our other negligence cases to date about purely economic losses — ‘are
primarily the domain of contract and warranty law or the law of fraud, rather
than of negligence.’ [Citations.]” (Id. at p. 402.) For this
reason, the Supreme Court advised against extending tort liability in
circumstances where the loss is purely economic. (Id. at p. 402.) In Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905 (Sheen),
the California Supreme Court recognized that the economic loss rule means that
“there is no recovery in tort for negligently inflicted ‘purely economic
losses,’ meaning financial harm unaccompanied by physical or property damage. (Id.
at p. 922.) For this reason, to “[t]he economic loss rule requires a purchaser
to recover in contract for purely economic loss due to disappointed
expectations, unless he can demonstrate harm above and beyond a broken
contractual promise.” (Robinson, supra, 34 Cal.4th at p. 988.)
Here, the Plaintiffs fail to show that contract damages
would be insufficient to compensate Plaintiffs for their damages, or that case
law supports extending tort liability to the type of harm Plaintiffs where the
losses suffered remain purely economic.
Therefore, the demurrer to the tenth cause of action is
sustained without leave to amend.
Conclusion
Defendants
ReadyCap and KeyBank’s demurrers are sustained with leave to amend as to the
second, seventh, and ninth causes of action. The demurrer to the 10th cause of
action is sustained without leave to amend. KeyBank’s demurrer to the third
cause of action is overruled.
Plaintiffs
are granted 30 days leave to amend. The court sets an OSC re Amended Complaint
for December 15, 2023, at 8:30 a.m.
Defendants
are to give notice.