Judge Gary Y. Tanaka, Case 22TRCV00231 2023-02-28 Tentative Ruling

LOS ANGELES SUPERIOR COURT – SOUTHWEST DISTRICT

Honorable Gary Y. Tanaka Tuesday, February 28, 2023

Department B Calendar No. 2

Plaintiff filed the Complaint on March 28, 2022, and the First Amended Complaint on June 10, 2022. Plaintiff alleges the following facts. In December 2020, Defendant approached Luke Shim, Plaintiff Brincfi’s CEO. Defendant was interested in becoming Brincfi’s head of engineering. Defendant falsely represented to Shim that he was legitimately interested in working for Brincfi and in providing engineering services. Brincfi entered into an agreement with Defendant Choi in January 2021 and appointed him head of engineering. Defendant had access to the source code of Brincfi’s smart contract system. Defendant modified the system to steal digital tokens deposited by Brincfi’s customers into his personal accounts. On or about December 14, 2021, Choi transferred approximately $1,104,602 worth of tokens into his own accounts. Defendant then laundered the money. Plaintiff alleges the following causes of action: 1. Conversion; 2. Intentional Fraud; 3. Breach of Contract; 4. Breach of Covenant of Good Faith and Fair Dealing; 5. Unjust Enrichment.

Defendant set forth a meet and confer declaration in sufficient compliance with CCP § 430.41 and CCP 435.5. (Decl., Sam M. Muriella, ¶¶ 3-7.)

A demurrer tests the sufficiency of a complaint as a matter of law and raises only questions of law. (Schmidt v. Foundation Health (1995) 35 Cal.App.4th 1702, 1706.) In testing the sufficiency of the complaint, the court must assume the truth of (1) the properly pleaded factual allegations; (2) facts that can be reasonably inferred from those expressly pleaded; and (3) judicially noticed matters. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The Court may not consider contentions, deductions, or conclusions of fact or law. (Moore v. Conliffe (1994) 7 Cal.App.4th 634, 638.) 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.) Where the complaint fails to state facts sufficient to constitute a cause of action, courts should sustain the demurrer. (C.C.P., § 430.10(e); Zelig v. County of Los Angeles (2002) 27 Cal.App.4th 1112, 1126.)

Sufficient facts are the essential facts of the case "with reasonable precision and with particularity sufficiently specific to acquaint the defendant with the nature, source, and extent of his cause of action.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 643-644.) "Whether the plaintiff will be able to prove the pleaded facts is irrelevant to ruling upon the demurrer." (Stevens v. Superior Court (1986) 180 Cal.App.3d 605, 609–610.) Under Code Civil Procedure § 430.10(f), a demurrer may also be sustained if a complaint is “uncertain.” Uncertainty exists where a complaint’s factual allegations are so confusing they do not sufficiently apprise a defendant of the issues it is being asked to meet. (Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2.)

Defendant demurs to the First Amended Complaint and the first, second, fourth, and fifth causes of action on the grounds that the causes of action are uncertain and fail to state sufficient facts to constitute a cause of action against Defendant.

The demurrer to the first cause of action is overruled. Plaintiff states sufficient facts to constitute a cause of action and the cause of action is not uncertain.

Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiff's ownership or right to possession of the property; (2) the defendant's conversion by a wrongful act or disposition of property rights; and (3) damages....” Hodges v. County of Placer (2019) 41 Cal.App.5th 537, 551. Money cannot be the subject of a cause of action for conversion unless there is a specific, identifiable sum involved. PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395.

Plaintiff alleges that Defendant converted, via a wrongful act, BRC and gBRC tokens possessed by Plaintiff valued at approximately $1,104,602, and that Plaintiff was damaged by the conversion. (FAC, ¶¶ 24-27.) Defendant contends that Plaintiff is alleging conversion of an intangible asset which is not the proper subject of conversion. “Courts have traditionally refused to recognize as conversion the unauthorized taking of intangible interests that are not merged with, or reflected in, something tangible. And Dean Prosser has cautioned against scuttling conversion’s tangibility requirement altogether, recommending instead the use of other remedies to protect intangible interests. [¶] Whether the intangible computer access code, which was never reduced to paper or reflected on a computer disk, and the tie-up of Thrifty-Tel's system could be the subjects of conversion presents an issue of first impression in California—and apparently most everywhere else as well.⁵ However, it is not necessary to resolve the question because the evidence supports the verdict on a trespass theory.” Thrifty-Tel, Inc. v. Bezenek (1996) 46 Cal.App.4th 1559, 1565–1566 (internal citations and quotations omitted; declining to rule on the issue of whether computer access code is a tangible interest for conversion).

First, the Court notes that the world has changed a great deal from 1996, and, even then, Thrifty-Tel did not resolve the issue of whether code to gain computer access constitutes a tangible interest. Instead, it specifically declined to rule on the issue. Second, the Court notes that cryptocurrency tokens are distinctly different from computer access codes. Third, the tokens are, in fact, tied to a tangible interest – the specific amount of money in which a valuation was set forth in the FAC. Finally, the Court is persuaded by non-binding federal cases which have allowed conversion claims to proceed based on the conversion of cryptocurrency tokens. Jacobo v. Doe, 2022 WL 2052637 (E.D. Cal. June 7, 2022); Shin v. Icon Foundation, 553 F.Supp.3d 724 (N.D. Cal. 2021).

The demurrer to the second cause of action is overruled. Plaintiff states facts sufficient to constitute a cause of action and the cause of action is not uncertain.

“A complaint for fraud must allege the following elements: (1) a knowingly false representation by the defendant; (2) an intent to deceive or induce reliance; (3) justifiable reliance by the plaintiff; and (4) resulting damages.” Service by Medallion, Inc. v. Clorox Co. (1996) 44 Cal.App.4th 1807, 1816. “[T]he elements of an action for fraud and deceit based on a concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he has known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 248. “Every element of the cause of action for fraud must be alleged in the proper manner and the facts constituting the fraud must be alleged with sufficient specificity to allow defendant to understand fully the nature of the charge made.” Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157. Plaintiffs must state facts which “show how, when, where, to whom, and by what means the representations were tendered.” Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.

Plaintiff has alleged specific misrepresentations made by Defendant to Shim, as well as how, when, where, and by what means the representations were made. (FAC, ¶¶ 10-12.) Plaintiff alleges that Defendant represented that he was legitimately interested in working as Brincfi’s head of engineering, but, in fact, Plaintiff was merely interested in stealing digital tokens. Id. Plaintiff has also alleged specific facts to meet the other elements of intent to deceive, justifiable reliance, and damages.

Defendant contends that the misrepresentations are not actionable because the parties’ agreement included an integration clause. However, “[a] party may claim fraud in the inducement of a contract containing a provision disclaiming any fraudulent misrepresentations and introduce parol evidence to show such fraud. Fraud in the inducement renders the entire contract voidable, including any provision in the contract providing the written contract is, for example, the sole agreement of the parties, that it contains their entire agreement and that there are no oral representations (integration/no oral representations clause). ... [A] per se rule that an integration/no oral representations clause establishes, as a matter of law, that a party claiming fraud did not reasonably rely on representations not contained in the contract is inconsistent with California law.” Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 301.

Defendant also argues that his statement that he was seeking legitimate employment was a non-actionable statement regarding future events. However, Plaintiff has specifically alleged that Defendant already knew that this was a lie at the time the representations were made. Thus, the statements may constitute actionable fraud.

Fourth Cause of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing

The demurrer to the fourth cause of action is overruled. Plaintiff states facts sufficient to constitute a cause of action and the cause of action is not uncertain.

“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. The scope of conduct prohibited by the implied covenant depends on the purposes and express terms of the contract. Although breach of the implied covenant often is pleaded as a separate count, a breach of the implied covenant is necessarily a breach of contract.” Digerati Holdings, LLC v. Young Money Entertainment, LLC (2011) 194 Cal.App.4th 873, 885 (internal citations omitted). A breach of the covenant of good faith and fair dealing does not give rise to a cause of action separate from a cause of action for breach of the contract containing the covenant. Guz v. Bechtel Nat. Inc. (2000) 24 Cal.4th 317, 327 (stating that “where breach of an actual term is alleged, a separate implied covenant claim, based on the same breach, is superfluous.”) “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.

Defendant argues that the cause of action is superfluous because the allegations repeat the breach of contract cause of action. Here, however, Plaintiff has alleged facts that go beyond the mere breach of contract allegations. Plaintiff has alleged that Defendant’s scheme and plan, as also outlined in the fraud cause of action, to steal Brincfi’s assets frustrated Plaintiff’s fundamental rights and deprived Plaintiff of the contract’s benefits.

The demurrer to the fifth cause of action is overruled. Plaintiff states facts sufficient to constitute a cause of action and the cause of action is not uncertain.

Unjust Enrichment is not a cause of action. See, Hill v. Roll Int'l Corp. (2011) 195 Cal.App.4th 1295, 1307. The Court may, however, recognize a cause of action based on quasi-contract to obtain the remedy of restitution. See, McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1490. “The elements of an unjust enrichment claim are the receipt of a benefit and [the] unjust retention of the benefit at the expense of another.” Peterson v. Cellco Partnership (2008) 164 Cal.App.4th 1583, 1593-94.

Here, the Court may recognize a cause of action for Unjust Enrichment on an alternative quasi contract theory. Plaintiff has alleged facts that Defendant retained a benefit unjustly at the expense of Plaintiff. (FAC, ¶¶ 46-49.)

The court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike any irrelevant, false, or improper matter inserted in any pleading. CCP § 436(a). The court may also strike all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. CCP § 436(b). The grounds for a motion to strike are that the pleading has irrelevant, false or improper matter, or has not been drawn or filed in conformity with laws. CCP § 436. The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. CCP § 437.

Defendant moves to strike the following allegations and prayer, related to Plaintiff’s claim for punitive damages, as false, irrelevant, and/or improper:

1: “Defendants acted willfully, oppressively, maliciously, and in wanton and conscious disregard of the rights of Plaintiff. Accordingly, punitive damages should be awarded against Defendants in an amount that will be sufficient to discourage them and others from engaging in such misconduct.” (FAC par. 22, page 6, lines 15-18.)

2: “Defendants acted willfully, oppressively, maliciously, and in wanton and conscious disregard of the rights of Plaintiff. Accordingly, punitive damages should be awarded against Defendants in an amount that will be sufficient to discourage them and others from engaging in such misconduct.” (FAC par. 28, page 7, lines 6 – 9.)

3: Prayer for “for punitive damages in an amount to be proven at trial for Defendants’ willful and malicious conduct.” (FAC page 9, lines 5 – 6.)

Civ. Code, § 3294 states, in relevant part: “(a) In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” Here, Plaintiff’s specific allegations of conversion and fraud have set forth sufficient facts that Defendant acted with fraud or malice. Thus, the factual allegations are sufficient to support the prayer for punitive damages.