Judge Gail Killefer, Case Number: 22STCV30056, Date: 2024-02-06 Tentative Ruling

TENTATIVE: Defendant Tellez’s demurrer is sustained without leave to amend as to the first, second, third, fourth, and seventh causes of action and sustained with leave to amend under the fifth and sixth cause of action only. The Plaintiff is granted 30 days leave to amend. Defendant Tellez is to give notice.

This action arises in connection with the sale, financing, and leasing of Defendant Throgmorton’s Frame Clinics, Inc. (“Frame Clinics”), a business entity operating in California. David M. Throgmorton (“Plaintiff”) entered into an agreement with Jack Tellez III (“Defendant” or “Tellez”) for the purchase of the Frame Clinics business on September 1, 2021 (“Purchase Agreement”). On September 1, 2021, Plaintiff and Defendant also entered into a Promissory Note (“Promissory Note”) regarding the purchase of the business, and a commercial leasing agreement (“Lease”) regarding the premises located at 2414 Connor Avenue, Commerce, CA 90040 (“Premises”). The complaint alleges Defendants Frame Clinics and Tellez abandoned the Premises on August 31, 2022, with an unpaid rent balance and monies owed pursuant to the agreements between the parties.

On December 16, 2022, Plaintiff filed the First Amended Complaint (“FAC”). The FAC alleges the causes of action as follows: (1) breach of contract (Lease); (2) breach of contract (Promissory Note); (3) breach of contract (Purchase Agreement); (4) fraud in the inducement; (5) conversion; (6) violation of Penal Code § 496; (7) restitution of benefits unjustly received/retained; (8) unfair business practices (Business & Professions Code §17200). Defendant demurred to the entirety of the FAC. The Defendant also moved to strike portions of the FAC. The Court sustained with leave to amend the FAC.

On April 17, 2023, Plaintiff filed the Second Amended Complaint (“SAC”). The SAC alleges the causes of action as follows: (1) breach of contract (Lease); (2) conversion/embezzlement; (3) fraud in the inducement; (4) financial elder abuse; (5) restitution of benefits unjustly received/retained; (6) unfair business practices (Business & Professions Code §17200). On July 24, 2023, the Defendant’s demurrer to the SAC was again sustained with leave to amend.

On September 8, 2023, Plaintiff filed the operative Third Amended Complaint (“TAC”), alleging seven causes of action for (1) breach of contract – count 1 (Purchas Agreement); (2) breach of contract count 2 (Promissory Note – Personal Guaranty); (3) breach of contract - count 3 (Promissory Note-Securing the Purchase Price ); (4) breach of contract count 4 (Lease); (5) conversion/embezzlement; (6) financial elder abuse; and (7) business practices (Business & Professions Code §17200).

Defendant Tellez now demurs to the entirety of the TAC and to strike portions of the TAC. The Plaintiff opposes the demurrer. The matter is now before the court.

Discussion

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.)¿“To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.”¿(C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.)¿To test the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded.¿ (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.)¿A demurrer “does not admit contentions, deductions or conclusions of fact or law.”¿(Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713.)¿¿

¿Any party, within the time allowed to respond to a pleading may serve and file a notice of motion to strike the whole or any part thereof. (CCP § 435(b)(1); CRC, rule 3.1322(b).) The court may, upon a motion or at any time in its discretion and upon terms it deems proper: (1) strike out any irrelevant, false, or improper matter inserted in any pleading; or (2) strike out all or any part of any pleading not drawn or filed in conformity with the laws of California, a court rule, or an order of the court. (CCP § 436(a)-(b); Stafford v. Shultz (1954) 42 Cal.2d 767, 782 [“Matter in a pleading which is not essential to the claim is surplusage; probative facts are surplusage and may be stricken out or disregarded”].)¿¿¿¿

“Where the defect raised by a motion to strike or by demurrer is reasonably capable of cure, leave to amend is routinely and liberally granted to give the plaintiff a chance to cure the defect in question.” (CLD Construction, Inc. v. City of San Ramon (2004) 120 Cal.App.4th 1141, 1146.) The burden is on the complainant to show the Court that a pleading can be amended successfully. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.)¿¿¿

Defendant Tellez demurs to the first through fourth causes of action for breach of contract on the basis that the TAC fails to allege sufficient facts to constitute a cause of action and demurs to the fifth through seventh causes of action on the bases that TAC fails to allege sufficient facts to constitute a cause of action and is uncertain. (CCP § 430.10(e).)

This is the Plaintiff’s third attempt to amend the pleadings to state viable causes of action in light of the demurrers granted in favor of Defendant Tellez on March 16, 2023, and July 24, 2023.

A. Breach of Contract Claims - Purchase Agreement, Promissory Note, and Lease

On July 24, 2023, the court stated that it agreed with Defendant Tellez that “the Promissory Note is not a standalone document, but an Extension of the Purchase Agreement.” (Order 07/24/23.) Support for this conclusion was found in the fact that the purchase price in Paragraph 7 of the Purchase Agreement and the Promissory Note are for the same amount, $350,000.00. (TAC Ex. A, B.) Defendant, Tellez asserts that the TAC treats the Purchase Agreement and the Promissory Note as separate documents, instead of the Promissory Note being part of the Purchase Agreement. (Opp. at pp. 6:24-7:5.)

“If facts appearing in the exhibits [attached to the pleadings,] contradict those alleged, the facts in the exhibits take precedence.” (Holland v. Morse Diesel Intern., Inc. (2001) 86 Cal.App.4th 1443, 1447.) This applies contracts terms attached to a complaint. “But where a plaintiff himself sets forth the contract in the terms in which it is written, and then proceeds by averment to put a false construction upon the terms, the allegations, as repugnant to the terms, should be regarded as surplusage, to be struck out on motion.” (Stoddard v. Treadwell (1864) 26 Cal. 294, 302.) The terms that appear in the Purchase Agreement, Promissory Note, and Lease Agreement take precedence over any contrary allegation in the TAC.

This Purchase of Business Agreement is made and entered into this 1st of July, 2021, between David M. Throgmorton and Jack Tellez III. In consideration of the provisions contained in this Agreement the Parties agree as follows:

1. Seller is the sole owner of all issued and outstanding shares of Throgmortons’ Frame Clinics Inc., located at 2414 Connor Avenue, Commerce, CA 90040, which is licensed as and carries out business as an Auto Body Repair and Paint shop. Seller desires to sell the business and shares to Purchaser. Purchaser agrees to buy the business and shares.

7. A deposit of $50,000 will be payable by the Purchaser on or before July 1, 2021. The balance of $350,000 will be paid by execution of a promissory note in the amount of $350,000.00 in the form attached or accompanying this Agreement.

h. Purchaser shall have no personal liability for the monetary payments set forth in this Agreement; any such obligations shall be, after the closing date, Throgmorton’s Frame Clinics, Inc.’s sole obligations.

41. The terms of this contract supersede any oral representations or understandings. This agreement can only be modified by a writing executed by both parties.

On the same date, September 1, 2021, that the parties executed the Purchase Agreement, the parties also executed the Promissory Note. (TAC Ex. B.) The promissory note lists “Borrower” as Defendant Tellez and “Lender” as Plaintiff, with the principal amount being $350,000.00, as asserted in Paragraph 7 of the Purchase Agreement. “Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.” (Civ. Code, § 1642.) The court again finds that the Promissory Note is not a standalone agreement but is part of the Purchase Agreement. (TAC Ex. A, ¶ 7.)

The TAC alleges that for Plaintiff to accept payments towards the purchase price of the business, Defendant Tellez “was required to personally guarantee payment, in the event that the corporate entity that he was buying, THROGMORTON CORP. was unable to pay.” (TAC ¶ 33.) The TAC alleges that it was for this reason that there is no reference to the corporate entity in the Promissory Note. However, the court finds that there is no ambiguity in the Promissory Note because Defendant Tellez assumes no personal liability under the terms of the Promissory Note.

If the Borrower defaults in the performance of any obligation under this Promissory Note, the lender may declare the unpaid payment(s) due and payable, and shall bear interest thereon at the rate of 10% per year. In addition, in the case of default by Borrower, the Borrower shall be liable for all costs and legal fees of Lender with regard to such default and litigation.

This Promissory Note is given to secure payment of the purchase price of the following security: tools and equipment located at 2414 Conner Avenue, Commerce, CA 90040.

In the case of default by Borrower Lender shall be limited to repossession of the Security and liquid assets of the business located at 2414 Conner Avenue, Commerce, AC 90040, and Lender shall not be able to place a lien on or execute any personal assets of Borrower.

“‘[L]anguage in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract. [Citation.] Courts will not strain to create an ambiguity where none exists.’ [Citations].” (S.B.C.C., Inc. v. St. Paul Fire & Marine Ins. Co. (2010) 186 Cal.App.4th 383, 389.) Taking the Purchase Agreement and Promissory Note together, the court finds there is no ambiguity regarding the fact that Defendant Tellez was not to be held personally liable for any defaults under the Purchase Agreement or Promissory Note. Any obligations under the Purchase Agreement are Throgmorton’s Frame Clinic, Inc.’s alone, and in case of breach of the Promissory Note, Plaintiff is only entitled to repossession of the Security and liquid assets of the business. (TAC Ex. A, ¶ 14(h), Ex. B, ¶ 4.) The fact that Defendant Tellez was not to be held personally liable and there is a prohibition on seeking a lien or execution of any personal assets belonging to Defendant Tellez, is an express term the parties appeared to have agreed to and serves to clarify that Defendant Tellez shall bear no personal liability.

The Purchase Agreement is fully integrated, and the court finds that no ambiguity exists, and that parol evidence is not admissible to create ambiguity. (CCP § 1856.) Accordingly, under the express and clear terms of the Purchase Agreement and the Promissory Note, Defendant Tellez cannot be held personally liable for any breach of these agreements.

Similarly, in the Lease Agreement, the parties again agreed that Defendant Tellez should not be held personally liable for any breach under the Lease.

1. Landlord is the sole owner of the real property known as Throgmorton's Frame Clinics, Inc., located at 2414 Conner Avenue, Commerce, CA 90040. Landlord desires to sell the business to Jack Tellez III, and to lease the real estate to Tenant, who will be the new owner and operator of Throgmorton’s Frame Clinics, Inc., as owned by Jack Tellez, III. The financial obligations in this lease shall be obligations of Throgmorton’s Frame Clinics, Inc., and not personal obligations of Jack Tellez II.

Plaintiff maintains that Defendant Tellez can be held personally liable as the alter ego of Defendant Throgmorton’s Frame Clinics, Inc. (TAC ¶¶ 10 – 30.)

“ ‘A claim against a defendant, based on the alter ego theory, is not itself a claim for substantive relief, e.g., breach of contract or to set aside a fraudulent conveyance, but rather, procedural, i.e., to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice.’ [Citations]” (Shaoxing County Huayue Import & Export v. Bhaumik (2011) 191 Cal.App.4th 1189, 1198.) “In applying the alter ego doctrine, the issue is not whether the corporation is the alter ego of its shareholders for all purposes, or whether the corporation was organized for the purpose of defrauding the plaintiff, but rather, whether justice and equity are best accomplished in a particular case, and fraud defeated, by disregarding the separate nature of the corporate form as to the claims in that case.” (Ibid.)

The court finds that because Plaintiff and Defendants contracted for the express provision that Defendant Tellez would not be held personally liable for any breaches under the agreement, Plaintiff cannot allege an “inequitable result from treatment of the corporation as the sole actor.” (Leek v. Cooper (2011) 194 Cal.App.4th 399, 415.) In other words, Plaintiff cannot complain that it would be an injustice to only have Defendant Throgmorton’s Frame Clinic, Inc. answer for the breaches under the Purchase Agreement, the Promissory Note, and the Lease Agreement when Plaintiff agreed to this exact provision. Plaintiff fails to point to specific language in agreements that would show contrary intent, or that creates ambiguity as to the intent of the parties regarding said provision. More importantly, the Plaintiff fails to cite case law permitting piercing the corporate veil to reach an individual defendant for breach of contract when the contract at issue, negotiated and agreed to by both parties, expressly provided that the individual defendant would not be held personally liable for any breaches of the corporate entity. To permit the corporate veil to be pierced and impose personal liability on Defendant Tellez, would be to enforce a contract provision neither party agreed to, which would have the effect of rewriting the terms of the agreements, something the court cannot do. (See Arriagarazo v. BMW of North America, LLC (2021) 64 Cal.App.5th 742, 748; see also Mills v. Vista Pools, Inc. (1960) 184 Cal.App.2d 668, 673 [“Neither can the trial court rewrite or provide new terms for a contract which is plain and unambiguous on its face”].)

Based on the above, the demurrer to the first through fourth causes of action is sustained without leave to amend.

To plead a cause of action for conversion, one must allege (1) the plaintiff’s ownership or right to possession of personal property; (2) defendant’s disposition of the property inconsistent with plaintiff’s rights; and (3) resulting damages. (Fremont Indemnity Co. v. Fremont General Corp.(2007) 148 Cal.App.4th 97, 119.) “Money may be the subject of conversion if the claim involves a specific, identifiable sum . . . .” (WelcoElectronics, Inc. v. Mora(2014) 223 Cal.App.4th 202, 209.) In 1927, the Legislature consolidated the separate common law crimes of larceny, embezzlement, and theft by false pretense in Penal Code section 484, subdivision (a).” (Bell v. Feibush (2013) 212 Cal.App.4th 1041, 1048, see also Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333, 350.)

Defendant Tellez alleges that the fifth cause of action is uncertain because Plaintiff combines two possible theories of recovery under one single cause of action. In California, the complaint must contain a “statement of the facts constituting the cause of action, in ordinary and concise language.” (Civ. Proc. §, 425.10.) A complaint will be upheld if it provides the defendants with “notice of the issues sufficient to enable preparation of a defense.” (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 549-550.)

Paragraph 48 subdivisions (a) to (v) list the “Secured Items” secured by the Promissory Note. (TAC ¶ 48.) The security items belong to Plaintiff and Defendant Tellez “did not have the right to take, secrete, appropriate, obtain, retain, sell, trade, barter, and/or remove any such Secured Items from the Premise; and if f TELLEZ did cause any of such Secured Items to be removed from the Premises then TELLEZ would be subjected to personal liability for the secured Principal Amount of $350,000, minus any installment payments made, under the Promissory Note.” (TAC ¶ 49 [italics added].) On information and belief, Plaintiff believed Defendant Tellez did take, secrete, appropriate, obtain, retain, sold, traded, bartered, and/or removed such liquidated assets that were secured by the Promissory Note. (TAC ¶¶ 49, 75, 78.) The TAC alleges that Defendant Tellez took the Secured items for his own personal gain in violation of Penal Code sections 503, 504a, 507, et seq. As such, Defendants are liable under Penal Code section 496(c).

The court finds that Plaintiff may be able to properly pled a cause of action for conversion and liability under Civ. Code section 3336 and embezzlement under Penal Code sections 503, 504a, and 507. However, conversion and embezzlement are to separate causes of action that must be separately pled, as a claim for conversion asserts that a plaintiff has the right of possession while embezzlement of goods involves the absconding of items already in in the defendant’s possession because they have been entrusted to the defendant.

However, the court finds that Plaintiff has failed to state facts to show that the Secured Items have “been obtained in any manner constituting theft or extortion[.]” (Pen. Code. § 496.) Plaintiff fails to show that embezzlement or conversion are punishable under Penal Code section 496.

Accordingly, the demurrer to the fifth cause of action is sustained with leave to amend. Plaintiff is to plead each cause of action for conversion and embezzlement separately.

C. Sixth Cause of Action for Edler Abuse in Violation of Welf. & Inst. Code

Financial abuse” of an elder or dependent adult occurs when a person or entity does any of the following:

(1) Takes, secretes, appropriates, obtains, or retains real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.

(2) Assists in taking, secreting, appropriating, obtaining, or retaining real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.

(3) Takes, secretes, appropriates, obtains, or retains, or assists in taking, secreting, appropriating, obtaining, or retaining, real or personal property of an elder or dependent adult by undue influence [.]

“[U]nder subdivision (b) of 15610.30, wrongful conduct occurs only when the party who violates the contract actually knows that it is engaging in a harmful breach, or reasonably should be aware of the harmful breach.” (Paslay v. State Farm General Ins. Co. (2016) 248 Cal.App.4th 639, 658 (Paslay).)

Plaintiff alleges that the sixth cause of action is sufficiently pled because he alleges that Plaintiff “had the right of possession” and “despite such knowledge, [Defendant Tellez] intentionally deprived [Plaintiff] of his ability to regain possession.” (TAC ¶¶ 88090.) Defendant Tellez took “the Secured Items for a wrongful use or with the intent to defraud, or both with the knowledge that such conduct would likely be harmful” to the Plaintiff. (TAC ¶ 88.) “Plaintiff is informed and believes and based thereon alleges that, despite such knowledge, TELLEZ intentionally deprived DAVID of his ability to regain possession of such Secured Items, and instead benefitted himself by secretly, wrongfully and fraudulently, taking possession of the Secured Items, removing them from the Premises and using and/or selling such Secured Items to third-party(ies) while falsely presenting himself to others an owner with the right to sell the Secured Items.” (TAC ¶ 98.)

“[A] party may engage in elder abuse by misappropriating funds to which an elder is entitled under a contract.” (Paslay, supra, 248 Cal.App.4th at p. 656.) “[T]o establish a ‘wrongful use’ of property to which an elder has a contract right, the elder must demonstrate a breach of the contract or other improper conduct.” (Id. at p. 657.) The court finds that Plaintiff may plead a cause of action based on Defendant Tellez's failure to maintain the Secured Items. The TAC states that Defendant Tellez had knowledge that he did not own the Secured Items and had no right to sell them or remove them and that Plaintiff had the right of possession to the Secured Items. (TAC ¶¶ 77, 87, 89.) Moreover, at this stage in the pleadings, Plaintiff is not required to prove that Defendant Tellez acted with malice, oppression, or fraud, in converting or embezzling the Secured Items, it is sufficient that Plaintiff alleges that such conduct was done with the “intent to defraud” or for “wrongful use.” (Welf. & Inst. Code, § 15610.30.)

However, “[i]n order to obtain the Act's heightened remedies, a plaintiff must allege conduct essentially equivalent to conduct that would support recovery of punitive damages.” (Covenant Care, Inc. v. Superior Court (2004) 32 Cal.4th 771, 789.) The assertion that “Defendants are guilty of oppression, fraud, and/or malice” is conclusory and fails to allege specific facts to show that Defendant Tellez is guilty of oppression, fraud, or malice to support a claim for punitive damages.

Business and Professions Code § 17200 (“UCL”) prohibits “any unlawful, unfair or fraudulent business act or practice.” (see Clark v. Superior Court (2010) 50 Cal.4th 605, 610.) To plead this statutory claim, the pleadings 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.) “An unlawful business practice or act is an act or practice, committed pursuant to business activity, that is at the same time forbidden by law.” (Klein v. Earth Elements, Inc. (1997) 59 Cal.App.4th 965, 969.) “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.” (McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1473.) Lastly, a fraudulent business practice claim under section 17200 “is not based upon proof of the common law tort of deceit or deception, but is instead premised on whether the public is likely to be deceived.” (Pastoria v. Nationwide Ins. (2003) 112 Cal.App.4th 1490, 1499.)

The court finds that Plaintiff’s seventh cause of action is conclusory and fails to assert sufficient facts as to whether the cause of action is pled under the unfair, unlawful, or fraudulent business prong of the UCL. (See TAC ¶¶ 98, 99.) In a private unfair competition law action, the remedies are “‘generally limited to injunctive relief and restitution.’” (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 950, 119; see Bus. & Prof. Code, § 17203.) Plaintiff fails to allege the what the unfair competition is and/or that he had an ownership interest in the monies he was deprived of, and what the amount is sufficient to support a finding that Plaintiff is entitled to restitution under the UCL.

Plaintiff alleges that the while Defendant Tellez, operated Throgmorton’s Frame Clinic, Inc., “TELLEZ used the corporate entity and the goodwill of the corporate name (which used to be operated by DAVID) TELLEZ, to commit fraud by obtaining goods on credit from third-party vendors without any intention of paying for them, due to his personal knowledge that THROGMORTON CORP. was undercapitalized and unable to pay.” (TAC ¶ 16.) However, Plaintiff fails to show that he has a security interest in the credit obtained by third-party vendors.

As the allegation that “TELLEZ also intentionally and fraudulently absconded with the Secured Items (as defined below) so as to deprive DAVID’s ability to benefit from such Secured Items after regaining possession of the Premises,” Plaintiff fails to allege if said conduct constituted an unfair, unlawful or fraudulent business practice. Similarly, the allegation that “TELLEZ also manipulated and/or diverted income and liquid assets generated by THROGMORTON CORP. to his own personal use, so as to deprive creditors, such as [Plaintiff], from enforcing collection of existing debts against the company,” also fails to specify if the conduct is an unfair, unlawful or fraudulent business practice. (TAC ¶ 18.)

Based on the above, the court finds that Plaintiff’s UCL claim remains conclusory and is not pled with the requisite specificity. In the ruling to the demurrers to the First Amended Complaint and the Second Amended Complaint, the court stated that Plaintiff’s incorporated allegations made in other claims only to support the UCL claim and that UCL is not pled with the requisite particularity. (See Ruling of 03/16/23 and 07/24/23.) Despite two prior demurs to the UCL claim and two opportunities to amend the UCL cause of action, Plaintiff failed to successfully amend the seventh cause of action. Accordingly, the demurrer is sustained without leave to amend.

As Defendant Tellez’s demurrer to the TAC is sustained, the motion to strike is now moot.

Defendant Tellez’s demurrer is sustained without leave to amend as to the first, second, third, fourth, and seventh causes of action and sustained with leave to amend under the fifth and sixth cause of action only. The Plaintiff is granted 30 days leave to amend. Defendant Tellez is to give notice.

[1] Pursuant to CCP §§ 430.41 and 435.5(a), Defense counsel’s efforts meet and confer requirement with Plaintiff’s counsel were unsuccessful. (Omar Decl. ¶ 2, Ex. A.) “Any determination by the court that the meet and confer process was insufficient shall not be grounds to overrule or sustain a demurrer.” (CCP § 430.41(a)(4).) As the failure to meet and confer does not constitute grounds to overrule a demurrer, the court continues to the merits.