Judge: Gail Killefer, Case: 23STCV22726, Date: 2024-03-07 Tentative Ruling

Case Number: 23STCV22726    Hearing Date: March 7, 2024    Dept: 37

HEARING DATE:                 Thursday, March 7, 2024

CASE NUMBER:                   23STCV22726

CASE NAME:                        DSS Risk Consultants, LLC v. ArentFox LLP, et al.

MOVING PARTY:                 Defendants DSS Equity Holdings, Inc., Dorna Brown, and Trent Brown

OPPOSING PARTY:             Plaintiff DSS Risk Consultants, LLC

TRIAL DATE:                        Not Set

PROOF OF SERVICE:           OK

PROCEEDING:                      Demurrer with Motion to Strike

OPPOSITION:                        23 February 2024

REPLY:                                  29 February 2024

TENTATIVE:                         Defendants’ demurrer is sustained in part as to the first cause of                                                           action for conversion, second cause of action for breach of                                                                 contract, and sixth cause of action for violation of Bus. & Prof.                                                           Code § 1700 et seq. and overruled as to the fifth cause of action                                                      for unjust enrichment. Defendants’ motion to strike is granted                                                         with leave to amend.

                                                Plaintiff is granted 30 days leave to amend. OSC re: Amended                                                        Complaint set for __.

                                                Defendants to give notice.

Background

On September 19, 2023, DSS Risk Consultants, LLC (“Plaintiff”) filed a Complaint against ArentFox Schiff LLP; DSS Equity Holdings, Inc.; DB Nevada Trust; Dorna Brown; Trent Brown, and Does 1 to 50.

The operative Complaint alleges six causes of action for (1) conversion, (2) breach of contract, (3) breach of fiduciary duty, (4) violation of Fin. Code § 17414, (5) unjust enrichment, and (6) violation of Bus. & Prof. Code § 17200 et seq.

On February 1, 2024, Defendants DSS Equity Holdings, Inc., Dorna Brown, and Trent Brown (collectively “Defendants”) filed a demurrer with a motion to strike Plaintiff’s Complaint. Plaintiff opposes the Motion. The matter is now before the court.

request for JUDICIAL notice

The Court may take judicial notice of records of any court of record of the United States. (Evid. Code, § 452(d)(2).) However, the court may only judicially notice the existence of the record, not that its contents are the truth. (Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1565.) 

 Plaintiff requests judicial notice of the following:

1)     July 11, 2023, Complaint in Brown v. Arent Fox Schiff LLP, Case No. 2023CUPN011223, in the Superior Court of California, County of Ventura, attached as Exhibit A.

Plaintiff’s request for judicial notice is granted.

Discussion

I.         Legal Standard

A.        Demurrer 

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.)¿¿ 

B.        Motion to Strike 

¿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”].)¿¿¿¿ 

C.        Leave to Amend 

“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.)¿¿¿ 

II.        Demurrer[1]

A.        The Court has the Discretion to Consider the Defendants’ Demurrer and                                     Motion to Strike

Defendants assert that they met and conferred with Plaintiff’s counsel regarding this demurrer and motion to strike on November 29, 2023. (Boock Deck. ¶ 2, Ex. A.)

Defense counsel asserts that on December 19, 2023, Plaintiff agreed to grant Defendants an extension until December 22, 2023, for Defendants to file and serve this demurrer and motion to strike. (Supp. Boock Decl. ¶ 2.) On December 22, 2023, Defendants served and filed the demurrer and supporting documents but despite receiving a filing confirmation, Defendants failed to notice that the demurrer and motion to strike were rejected by the court because Defendant had not paid the proper fee. (Id. ¶ 3, Ex. 1.) Defense counsel asserts that through mistake, inadvertence, and/or excusable neglect, they confused this action with a similar action involving the same parties in Ventura County in which the fees had already been paid. (Id. ¶ 4.) Since the pleadings were filed during the December holidays, Defense counsel did not learn that this Motion and the Motion to Strike were rejected by the court after filing until January 2024. (Id. ¶ 5.) On February 1, 2024, Defendants re-filed and re-served the demurrer and motion to strike, explaining to Plaintiff that the documents most recently filed were the ones initially served in December but due to an error in the appearance fee, were not being reserved and refiled. (Id. ¶ 6, Ex. 2.)

Plaintiff opposes the demurrer and the motion to strike on the basis that they were untimely served and filed. Plaintiff fails to show that it was unduly prejudiced by the Defendants’ error. “Contrary to plaintiff's argument, the trial court had discretion to consider defendant's untimely demurrer.” (Jackson v. Doe (2011) 192 Cal.App.4th 742, 749.) First, the language of CCP § 430.40 is permissive, not mandatory, because it uses the term “may” rather than “must.” (See McAllister v. County of Monterey (2007) 147 Cal.App.4th 253, 279.) Second, “‘[t]here is no absolute right to have a pleading stricken for lack of timeliness in filing where no question of jurisdiction is involved, and where, as here, the late filing was a mere irregularity [citation]; the granting or denial of the motion is a matter which lies within the discretion of the court.’ [Citation.]” (Id. at pp. 281-282.) Accordingly, “[t]he trial court may exercise this discretion so long as its action does ‘not affect the substantial rights of the parties.’ [Citation.]” (Id. at p. 282.) Lastly, pursuant to CCP § 473(a), the court may “increase the time for filing a demurrer in furtherance of justice and on any terms that may be proper” so long as it does not affect the Plaintiff’s “ ‘substantial rights’ where plaintiff did not take steps to obtain a default judgment or demonstrate the delay prejudiced her.” (Jackson, supra, 192 Ca.App.4th at p. 750.)

Here, the court exercises its discretion to consider the Defendants’ demurrer and motion to strike on the merits.

            B.        Summary of Allegations in Complaint

In 2021, Paul Philips’ (“Philips”) company, DSS Risk Consultants, LLC (“Plaintiff” or “DSS”) bought a small risk management company called Development Solutions and Services LLC (the “company”) from DDS Equity Holdings Inc., which is owned by Dorna Brown (“Defendants”). (Compl. ¶¶ 1, 2, Ex. A, B.) ArentFox Schiff LLP, through its partner Ira J. Deitsch, represented the Defendants, while Philips, who is not an attorney, represented himself. (Compl. ¶ 4.)

“The parties agreed that the final purchase price of DSS would be determined through a multi-step process that considered the profitability of DSS in the first twelve months following the acquisition. ArentFox established an escrow account to hold a portion of the DSS purchase funds that, under the purchase agreement, might be refundable depending on the final purchase price.” (Compl. ¶ 6.) To induce Plaintiff to buy the company, $1,169,950 was held in escrow so that one year after the sale was completed, the final value of the company could be determined, and the purchase price could be discounted. (Compl. ¶ Ex. A §§ 1, 3(h)(i)–(iii); Ex. C (Dec. 7, 2021, escrow release letter agreement).) ArentFox acted as the escrow agent in the transaction. (Compl. ¶ 8, Ex B §6(i)(1).)

“The Escrow Agreement provided that the escrow funds may be disbursed only by court order or a joint payment instruction signed by both Plaintiff and Ms. Brown or their attorneys. (Compl. ¶ 10, Ex. B §4(a)-(b).) In December 2021, the parties agreed to reduce the escrow to $1,005,000 but the escrow agreement remained “in full force and effect with respect to the balance of the Escrow Amount.” (Compl. ¶ 11, Ex. C.) Nevertheless, in November 2022, Defendants instructed ArentFox to disburse the escrow fund to Defendants, and ArentFox did so, disregarding the Escrow Agreement and without telling Plaintiff. (Comp. ¶ 12.)

In April 2023, Plaintiff, not knowing the escrow funds had been disbursed, asked Defendants to sign a joint written instruction telling ArentFox to release the funds to Plaintiff per the Escrow Agreement, but Defendants refused. (Compl. ¶ 13.) Weeks later, Defendants’ attorney informed Plaintiff that the escrow funds had been disbursed and none remained. (Compl. ¶ 13.)

Plaintiff filed suit against the Defendants and Defendants now demurrer to all the causes of action alleged against them, including the first cause of action for conversion, second cause of action for breach of contract, fifth cause of action for unjust enrichment, and sixth cause of action for violation of Bus. & Prof. Code section 17200, et seq.

            C.        Defendants’ Demurrer to Entire Complaint

Defendants demurrer to the entire Complaint on the basis there are no facts alleging wrongful conduct by Defendants that support the causes of action alleged against them because the only wrongdoing alleged was by Defendant ArentFox.

However, the court notes that Defendant Trent Brown is alleged to have been the one who instructed ArentFox to disburse the escrow funds. (Compl. ¶ 12.) The Complaint alleges that Trent Brown (“Brown”) is Dorna Brown’s son, that he is a partner at the accounting firm Deloitte & Touche LLP, and that he “helped” in the transaction between the parties. (Compl. ¶ 2.) Plaintiff also in a conclusory manner, without specific facts, alleges that “Defendants DSS Equity Holdings, Inc., DB Nevada Trust, Dorna Brown, and Trent Brown are alter egos of one another.” (Compl. ¶ 22.) The Complaint also alleges that Phillips discussed amendments to the Membership Interest Purchase Agreement (“MIPA”) with Mr. Brown and that he agreed to the final version of the contract. (Compl. ¶ 26.)

The court may not consider contentions, deductions, or conclusions of fact or law. (Moore v. Conliffe (1994) 7 Cal.App.4th 634, 638.) Accordingly, Plaintiff’s alter ego allegations fail because they are a legal conclusion, devoid of facts. Because a demurrer tests the legal sufficiency of a complaint, the plaintiff must show that the complaint alleges facts sufficient to establish every element of each cause of action. (Rakestraw v. California Physicians Service (2000) 81 Cal.App.4th 39, 43.) Here, Plaintiff fails to allege facts to show that Defendant Brown acted as an agent of Defendants DSS Equity Holdings, Inc. and Dorna Brown. “[F]acts not alleged are presumed not exist.” (Schick v. Lerner (1987) Cal.App.3d 1321, 1327.) Plaintiff fails to allege what ostensible or apparent authority Brown had that made Plaintiff think that Dorna Brown and DSS Holdings, Inc. acquiesced to Brown being their agent. (See Flores v. Evergreen at San Diego, LLC (2007) 148 Cal.App.4th 581, 587-588 [Conduct by the principal is essential to create an agency relationship or some intentional or negligent conduct by the principal that created the belief that that an agency relationship exists].) Similarly, Plaintiff fails to allege how Defendants DSS Equity Holdings, Inc. and Dorna Brown ratified ArentFox’s conduct of releasing the escrow funds.

                        i.          First Cause of Action – Conversion

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.) 

Plaintiff’s Complaint alleges that ArentFox released the escrow funds to Defendants “which constituted a conversion of a specific sum earmarked for Plaintiff based on the parties’ agreement to adjust the purchase price of the business based on the post-closing accounting.” (Compl. ¶ 49.) “Defendants wrongfully converted the escrow funds.” (Compl. ¶ 50.)

As stated above, Plaintiff failed to allege facts sufficient to show that Defendant Brown acted as an agent of Defendants Dorna Brown and DSS Holdings, Inc. and that Defendants ratified ArentFox’s conduct. Moreover, Plaintiff states in a conclusory manner that the conversation claim is for a “specific sum” without providing the specific sum that was converted.

Accordingly, the demurrer to the first cause of action is sustained with leave to amend.

                        ii.         Second Cause of Action – Breach of Contract

“To prevail on a cause of action for breach of contract, the plaintiff must prove (1) the contract, (2) the plaintiff’s performance of the contract or excuse for nonperformance, (3) the defendant’s breach, and (4) the resulting damage to the plaintiff. [Citation.]” (Richmond v. Hartley (2014) 224 Cal.App.4th 1182, 1186.)

The Complaint alleges that on October 1, 2021, Plaintiff and Defendant DSS Equity Holdings, Inc. entered into the Membership Interest Purchase Agreement (“MIPA”) and an Escrow Agreement. (Compl. ¶¶ 10, 53, 54, Ex. B. “The Escrow Agreement states that the escrow funds could be disbursed in only two circumstances: upon ArentFox’s receipt of a court order or joint written instructions signed by both the buyer and seller.” (Compl. ¶¶ 10, 55, Ex. B § 4(a)-(b.)

The Complaint alleges that Defendant Brown acted on behalf of the other Defendants by instructing ArentFox to disburse the escrow funds to an account controlled by Defendants despite Brown and ArentFox being aware of the terms of the Escrow Agreement. (Compl. ¶¶ 57, 58, 59.) As the Complaint did not allege sufficient facts to show that Brown was an agent of Defendants DSS Equity Holdings, Inc. and Dorna Brown, such that the latter Defendants could be held liable for Brown’s conduct, the breach of contract claims against the Defendant fails. Only Defendant DSS Equity Holdings, Inc. and ArentFox are parties to the Escrow Agreement. (Compl. Ex. B.) More importantly, only ArentFox had the obligation to disburse the funds according to the terms of the Escrow Agreement. (Compl. Ex. B §4.) Accordingly, per the terms of the Escrow Agreement, only ArentFox had the contractual duty to disburse the funds according to the Escrow Agreement and only ArentFox breached that duty.

Accordingly, the demurrer to the second cause of action is sustained with leave to amend.

                        iii.       Fifth Cause of Action – Unjust Enrichment

“Generally, one who is unjustly enriched at the expense of another is required to make restitution. [Citations.] The elements of a cause of action for unjust enrichment are simply stated as ‘receipt of a benefit and unjust retention of the benefit at the expense of another.’ ” (Professional Tax Appeal v. Kennedy-Wilson Holdings, Inc. (2018) 29 Cal.App.5th 230, 238.)

The Complaint alleges that the funds from the escrow were disbursed into an account controlled by Defendants. (Compl. ¶ 56.) “DSS Equity Holdings and Trent Brown have been unjustly enriched by wrongfully withholding money from Plaintiff.” (Compl. ¶ 70.) “Defendants owe Plaintiff the full amount that was in escrow and all interest accrued from the escrow account.” (Compl. ¶ 72.)

The court finds that Plaintiff has sufficiently alleged that the escrow funds were transferred into an account controlled by the Defendants, and because the funds were disbursed in violation of the terms of the Escrow Agreement the Defendants' retention of those funds is unjust. (Compl. ¶¶ 55, 56.) Accordingly, the demurrer to the fifth cause of action is overruled.

                        iv.        Sixth Cause of Action – Unfair Competition

Business and Professions Code § 17200 (“UCL”) prohibits “any unlawful, unfair or fraudulent business act or practice.”¿(Bus. & Prof. Code, § 17200;¿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 Complaint alleges as follows:

Defendants’ unfair, unlawful, or deceptive business practices in connection with this transaction include (without limitation):

·       Violating contracts detailing the process for disbursing funds from escrow;

·       Giving over $1 million to Seller Defendants when they had no claim to those funds; and

·       Failing to inform Plaintiff of the release of all funds in escrow.

As a result of these practices, Plaintiff has been harmed in an amount to be proved at trial but exceeding $1 million. Plaintiff demands restitution of these sums.

(Compl. ¶¶ 76, 77.)

As Plaintiff’s agency and alter ego allegations are not sufficiently pled, Plaintiff fails to show that Trent Brown and Dorna Brown can be held liable for violating the Escrow Agreement when they were not parties to that agreement. The Complaint also fails to plead the UCL claim with specificity as there is no allegation that Defendants, other than ArentFox, gave away the money from the escrow funds. Defendants assert that per the terms of the Escrow Agreement, only ArentFox and not Defendants had the authority to release of the funds. (Compl. Ex. B § 4(a)-(b).) Accordingly, by releasing the funds without complying with the Escrow Agreement, it was ArentFox and not Defendants that breached the Escrow Agreement. Plaintiff also fails to explain why Defendants had a duty to inform Plaintiff that the escrow funds had been disbursed. Lastly, Plaintiff must allege the applicable under each of the prongs of the UCL and explain whether the offending conduct falls under the unfair, unlaw, or deceptive prong of the UCL.

Based on the above, the demurrer to the sixth cause of action is sustained with leave to amend. 

III.      Motion to Strike

Defendants move to strike the following from Plaintiff’s Complaint:

·       “It seeks compensatory and punitive damages, as well as attorney fees and costs.’ (Compl., ¶ 14);

·       “Plaintiff asks the Court for ... punitive damages...” (Compl., ¶ 64);

·       “Punitive damages.” (Compl., Claim for Relief, ¶ 78); and

·        “Attorney fees.” (Compl., Claim for Relief, ¶ 78)

To state a claim for punitive damages under Civ. Code § 3294, a plaintiff must allege specific facts showing that the defendant has been guilty of malice, oppression or fraud. (Smith v. Superior Court (1992) 10 Cal. App. 4th 1033, 1042.)¿ The basis for punitive damages must be pled with specificity; conclusory allegations devoid of any factual assertions are insufficient. (Ibid.)¿¿“Malice” is defined in Civ. Code § 3294 (c)(1) as “conduct which is intended by the defendant to cause injury” or “despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” “Oppression” is defined as “despicable conduct subjecting a person to cruel and unjust hardship in conscious disregard of that person’s rights.” (Civ. Code § 3294(c)(2).) The term “despicable” has been defined in the case law as actions that are “base,” “vile,” or “contemptible.” (Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 891.) Fraud means “an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” (Civ. Code § 3294(c)(3). 

Plaintiff asserts that because it pleads a conversion claim, the Complaint states a viable claim for punitive damages. The demurrer to the conversion claim, however, has been sustained. Moreover, Plaintiff must also plead malice, fraud, or oppression by each of the individual defendants to support a claim for punitive damages. In Haigler v. Donnelly (1941) 18 Cal.2d 674, the California Supreme Court awarded punitive damages to the plaintiff because the conversion claim arose as “the result of a fraudulent scheme to secure plaintiffs' money by means of trickery and deliberate falsehood. Such action constitutes ‘oppression, fraud, or malice’ within the meaning of section 3294 of the Civil Code.” (Id. at p. 681–682.) Here, there are no facts alleged sufficient to find that Defendants acted with malice, fraud, or oppression.

Finally, while Plaintiff alleges that under the MIPA, Plaintiff can recover attorney’s fees, Plaintiff does not allege a violation of the MIPA but only of the Escrow Agreement. Plaintiff fails to show that under the Escrow Agreement Plaintiff can recover attorney’s fees. Moreover, the facts as alleged are insufficient to show that Plaintiff can recover attorney’s fees from Trent Brown and Dorna Brown who are not parties to the Escrow or MIPA agreement.

Accordingly, the motion to strike is granted with leave to amend.

Conclusion

Defendants’ demurrer is sustained in part as to the first cause of action for conversion, second cause of action for breach of contract, and sixth cause of action for violation of Bus. & Prof. Code § 1700 et seq. and overruled as to the fifth cause of action for unjust enrichment. Defendants’ motion to strike is granted with leave to amend.

Plaintiff is granted 30 days leave to amend. OSC re: Amended Complaint set for __.

Defendants to give notice.