Judge Gail Killefer, Case Number: 23STCV22639, Date: 2024-12-18 Tentative Ruling

TENTATIVE: Defendant City’s demurrer to the second and third causes of action in the TAC is granted with leave to amend. Defendant City’s motion to strike is granted with leave to amend as to Paragraph 2 of Prayer for Relief. The motion to strike is granted without leave to amend as to Paragraph 33(b). The motion to strike is denied as to Paragraphs 28 and 38. Plaintiff is granted 20 days leave to amend. The court sets the OSC RE: Amended Complaint for January 17, 2025, at 8:30 a.m. Defendant to give notice.

On September 19, 2023, Tristar Risk Management (“Plaintiff”) filed a Complaint against the City of Los Angeles (“Defendant” or “City”) and Does 1 to 25.

The operative Third Amended Complaint (“TAC”) alleges three causes of action: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; and (3) violation of Civ. Code § 1671.

Defendant City of LA now demurs and moves to strike the TAC. Plaintiff opposes the Motions. The matter is now before the court.

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, subds. (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.)

Exhibit A: Fourth Amended and Restated Agreement, Contract No. C-121812-4, between Plaintiff TRISTAR Risk Management (“Plaintiff”) and the City, available at https://cityclerk.lacity.org/lacityclerkconnect/index.cfm?fa= ccon.viewrecord&contractnum=C-121812.

Exhibit B: Legislative History for Civil Code Section 1671, including Law Revision Commission Comments.

Exhibit C: Redline comparing Plaintiff’s Third Amended Complaint (“TAC”) with its Second Amended Complaint.

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.)¿For the purpose of testing 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.)¿¿¿

Demurrer[1]

The Complaint alleges that beginning November 20, 2012, Plaintiff entered into a contract (Contract No. C-121812) with the City of LA (the “Contract”) to provide workers’ compensation third-party administration services. (TAC, ¶¶ 6, 30.) Plaintiff alleges that Defendant breached the Contract by failing to pay Plaintiff’s invoices when they became due “and instead unlawfully assessed and deducted penalties amounting to a two-fold recovery for the City based on the same purported underlying contract violations for which they had already made payment adjustments.” (Id., ¶ 32.)

The TAC alleges that “Sections 4.5 – 4.8, 4.9, and 4.11 of the Contract provided an express mechanism for the City to capture its actual damages stemming from staffing vacancies as well as any damages stemming from TRISTAR’s purported mishandling of the claims due to staffing shortages and caseload averages, and the City in fact used those provisions to recoup its purported damages.” (TAC, ¶ 24.) “As such, the penalties set forth in Section 4.8.3 and 4.8.4 were arbitrary, duplicative, and excessive and in no way reflected an accurate approximation of any harm to the City.” (Ibid.)

A. Second Cause of Action – Breach of the Implied Covenant of Good Faith and Fair Dealing

“Every contract contains an implied covenant of good faith and fair dealing providing that no party to the contract will do anything that would deprive another party of the benefits of the contract.¿The implied covenant protects the reasonable expectations of the contracting parties based on their mutual promises.” (Digerati Holdings, LLC v. Young Money Entertainment, LLC (2011) 194 Cal.App.4th 873, 885.) “The covenant thus cannot ‘be endowed with an existence independent of its contractual underpinnings.’ [Citation].” (Guz v. Bechtel Nat. Inc.(2000) 24 Cal.4th 317, 349.)

Defendant City demurs to the second cause of action on the basis that it is derivative of the breach of contract claim because Plaintiff’s claims derive from the same conduct and seeks the same remedies as the breach of contract claim. “If the allegations do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated.” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395.) The TAC alleges that Defendant City impaired Plaintiff’s right to receive the benefits and reasonable expectations under the contract by imposing “duplicative and unreasonable penalties against TRISTAR” and manufacturing “bases to seek unreasonable penalties and deductions against TRISTAR.” (TAC, ¶ 40.)

The TAC states that “Sections 4.5 – 4.8, 4.9, and 4.11 of the Contract” expressly allowed Defendant City to charge penalties. (TAC, ¶ 24.) Plaintiff’s opposition further asserts that “Defendant concurrently issued simultaneous and duplicative penalties under Section 4.9 of the Contract related to staffing levels and other vacancies . . . [and] in addition to the penalties assessed pursuant to Sections 4.8.3 and 4.8.4 discussed above, Defendant reduced payments due to TRISTAR by $444,573.85 based on Section 4.9 of the Contract.” (Opp. at p. 5:1-5.)

Accordingly, Defendant City takes the position that the second cause of action fails because the Contract expressly allowed the City to impose penalties and if the penalties were unreasonably imposed, Plaintiff’s relief lies in a breach of contract claim, not a claim for breach of the implied covenant of good faith and fair dealing. “We are aware of no reported case in which a court has held the covenant of good faith may be read to prohibit a party from doing that which is expressly permitted by an agreement.” (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 374.) “‘As to acts and conduct authorized by the express provisions of the contract, no covenant of good faith and fair dealing can be implied which forbids such acts and conduct.’” (Id. citing VTR, Incorporated v. Goodyear Tire & Rubber Company (S.D.N.Y.1969) 303 F.Supp. 773, 777–778.)

Therefore, if Defendant City’s motives for charging penalties were improper or without justification, this alone does not support a claim for breach of the implied covenant because such conduct is an express breach of a contractual provision. “‘[A] tortious breach of contract … may be found when (1) the breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion; or (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.’ [Citation.]” (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 990.)

Here, no common law tort is alleged nor does the TAC allege conduct amounting to deceit or undue coercion by Defendant City engaged in support of a claim for breach of the implied covenant of good faith and fair dealing. Nor does Plaintiff allege facts to support an allegation that Defendant City intentionally breached the contract and caused Plaintiff to suffer ever harm, such a substantial consequential damage. (See Robison, supra, 34 Cal.4th 979.) “Focusing on intentional conduct gives substance to the proposition that a breach of contract is tortious only when some independent duty arising from tort law is violated.” (Erlich v. Menezes (1999) 21 Cal.4th 543, 554.)

The fact that Defendant City improperly assessed Plaintiff penalties pursuant to a Contract does not give rise to a breach of an independent duty. Therefore, the court agrees that second cause of action is derivative of the first cause of action for breach of contract and cannot be pled as an alternative to the first cause of action.

(a) This section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract.

(b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.

(c) The validity of a liquidated damages provision shall be determined under subdivision (d) and not under subdivision (b) where the liquidated damages are sought to be recovered from either:

(1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party's personal, family, or household purposes; or

(2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support.

(d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

Defendant City asserts that the third cause of action fails because it is duplicative of the breach of contract claim as “Plaintiff has already invoked section 1671(b) in its breach of contract claim to allege that the City breached the Contract by making deductions pursuant to contractual provisions that are unenforceable.” (Mot., at p. 11:18-10.)

Defendants refused to pay the balance of TRISTAR’s invoices when they became due and instead unlawfully assessed and deducted penalties amounting to a two-fold recovery for the City based on the same purported underlying contract violations for which they had already made payment adjustments. Such assessments and deductions also operated as unreasonable penalties in violation of California Civil Code section 1671(b).

A demurrer to a cause of action is properly sustained when the “alleged causes and thus adds nothing to the complaint by way of fact or theory of recovery.” (Rodrigues v. Campbell Industries (1978) 87 Cal.App.3d 494, 501.) The TAC alleges that “Defendants have violated, and continue to violate, California Civil Code section 1671 by assessing unreasonable and duplicative staffing penalties on TRISTAR under Section 4.9 of the Contract and fee reductions and adjustments pursuant to Sections 4.8.3 and 4.8.4 related to TRISTAR exceeding the caseload averages.” (TAC, ¶ 46.) These allegations are duplicative of the breach of contract claim.

As to the allegation, the penalties amounted to unreasonable liquidated damages, the allegations would make the provision void, but not the contract. “[W]e do note that Civil Code section 1671 addresses the validity of a liquidated damages provision, rather than the validity of a contract containing such a provision.” (Greentree Financial Group, Inc. v. Execute Sports, Inc. (2008) 163 Cal.App.4th 495, 502 [italics added].)

Defendant City further maintains that section 1671(b) does not provide for a private cause of action. “A private party can sue for violation of a statute only where the statute in question allows it.” (Mayron v. Google LLC (2020) 54 Cal.App.5th 566, 571.) Defendant City asserts section 1671(b) does not provide for a private right of action. “Sections 1670.5 and 1671 are indeed similar, to the extent that their enactment did not create new law but simply codified the existing common law.” (Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383, 1398.) Because section 1671 is rooted in common law “a party could sue in equity for affirmative relief from a contractual predetermination of damages for breach, and after 1697 relief from excessive fees could be sought at law in a defensive posture.” (Id., at p. 1399.) “If monetary relief could be sought under the common law of liquidated damages, and section 1671, subdivision (d), represents a codification of the theoretical underpinnings of such relief, then the codification necessarily encompasses the notion of seeking such relief.” (Id., at p. 1399.)

The court fails to see how section 1671(b), as opposed to section 1671(d), provides Plaintiff with a private right of action.

Moreover, the TAC alleges several bases as to why the penalties and adjustments operated as an unreasonable liquidated damages provision. (TAC, ¶ 47.) However, none of the bases asserted show the penalty provisions were unreasonable at the time the parties entered into the Contract. (Ibid.) “Based on section 1671(b)’s presumption that liquidated damage provisions in nonconsumer contracts are valid, the party challenging the provision bears the burden to show the provision was unreasonable under the circumstances existing when the parties entered into the contract.” (Vitatech Internat., Inc. v. Sporn (2017) 16 Cal.App.5th 796, 806.)

In the cases where subdivision (b) applies, the burden of proof on the issue of reasonableness is on the party seeking to invalidate the liquidated damages provision. The subdivision limits the circumstances that may be taken into account in the determination of reasonableness to those in existence “at the time the contract was made.” The validity of the liquidated damages provision depends upon its reasonableness at the time the contract was made and not as it appears in retrospect. Accordingly, the amount of damages actually suffered has no bearing on the validity of the liquidated damages provision.

Plaintiff fails to show how at the time the Parties entered the Contract, it was unreasonable for the Defendant City to include an assessment of penalties and adjustments based on staffing levels, caseload, and nature and status of claims. (TAC, ¶ 47.)

Consequently, the demurrer to the third cause of action is sustained with leave to amend.

2) Entirety of Paragraph 33(b): “Section 4.9 of the Contract provides that fee reductions may be assessed each month TRISTAR’s average caseload exceeds 150. Such fee reductions, when coupled with the penalties set forth in Sections 4.8.3 and 4.8.4 of the Contract as discussed above, amount to a two-fold recovery for Defendants based on the same purported underlying contract violation and amount to unlawful liquidated damages depriving TRISTAR of the full consideration and payment it was owed in breach of the Contract.”

3) Portions of Paragraph 33(c): “However, even then, the City unreasonably imposed penalties where TRISTAR were [sic] in accordance with the provisions of the Contract.”

4) Entirety of Paragraph 38: “As a result of the breaches perpetuated by Defendants, including the failure to pay TRISTAR for the services rendered and the assessment of unlawful penalties and adjustments, TRISTAR has been damaged in an amount in excess of $907,190.02.”

5) Entirety of Paragraph 45: “Pursuant to California Civil Code section 1671(b), a liquidated damages provision that bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from the breach is unenforceable.”

6) Portions of Paragraph 46: “unreasonable and duplicative staffing penalties on TRISTAR under Section 4.9 of the Contract and.”

7) Entirety of Paragraph 48: “Because the liquidated damages provisions set forth in Sections 4.8.3, 4.8.4, and 4.9 of the Contract are not directly related to the actual damages purportedly suffered by Defendants, if any, and the escalating nature of the liquidated damages provision is disproportionate to any actual harm, these sections of the Contract are not enforceable penalties and TRISTAR is entitled to payment of the unlawful amounts improperly deducted by Defendants for the services rendered by TRISTAR in an amount to be proven at trial.”

8) Paragraph 2 of Prayer for Relief: “For special damages, including but not limited to, unlawful liquidated damages, excessive deductions, unlawful penalties and deductions in an amount to be proven at trial according to proof equal to or in excess of $907,190.02.”

As the demurrer to the second and third causes of action have been sustained with leave to amend, Paragraphs 33(c), 45, 46, 48, and Paragraph 2 of Prayer for Relief are stricken with leave to amend.

Plaintiff does not oppose the striking of Paragraph 33(b) because the wrong contract provision is cited. (Opp., at p. 7:5-6.) The request to strike Paragraph 33(b) is granted without leave to amend.

The motion to strike Paragraphs 28 and 38 is denied because the allegations go towards Plaintiff’s assessment of damages as to the breach of contract of the case. “In passing on the correctness of a ruling on a motion to strike, judges read allegations of a pleading subject to a motion to strike as a whole, all parts in their context, and assume their truth.” (Clauson v. Superior Court (1998) 67 Cal.App.4th 1253, 1255.) As discovery in this case is ongoing, Plaintiff not required to prove their damages at this stage of the pleadings.

Defendant City’s demurrer to the second and third causes of action in the TAC is granted with

leave to amend. Defendant City’s motion to strike is granted with leave to amend as to Paragraph

2 of Prayer for Relief. The motion to strike is granted without leave to amend as to Paragraph

33(b). The motion to strike is denied as to Paragraphs 28 and 38. Plaintiff is granted 20 days

leave to amend. The court sets the OSC RE: Amended Complaint for January 17, 2025, at 8:30

[1] Pursuant to CCP §§ 430.41 and 435.5(a), the meet and confer requirement has been met.(Stephens Decl., ¶ 2; Colangelo Decl., ¶¶ 2-10.) “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 on to the merits.