Judge: Glenda Sanders, Case: 30-2021-01191735, Date: 2023-01-05 Tentative Ruling

Cross-Defendants Windsail Capital Group, LLC (WindSail Group), Windsail Capital Fund, L.P. (WindSail Capital), and Crate Modular, Inc. (Crate) (collectively, WindSail Cross-Defendants) demur to the Second Cause of Action for Fraud in the Cross-Complaint of Cross-Complainant Arthur Cohen, individually and as Trustee of the Cohen Family Trust dated April 6, 1988 (Cohen).

The Court GRANTS WindSail Cross-Defendants’ unopposed requests for judicial notice of Exhibit 2, Certificate of Incorporation of Adaptive Modular Solutions, Inc. filed on September 18, 2018 with the Delaware Secretary of State and Exhibit 3, Certificate of Amendment of Certificate of Incorporation of Adaptive Modular Solutions, Inc. filed on February 22, 2019 with the Delaware Secretary of State. The Court DENIES WindSail Cross-Defendants’ request for judicial notice of Exhibit 1, Key Employee Incentive Agreement dated March 8, 2018 and Exhibit 4, Credit and Security Agreement dated June 29, 2015. Cohen’s objections to Exhibits 1 and 4 are well-taken since it is unclear whether Exhibit 1 is the same document referenced in the Cross-Complaint at paragraph 9 and Exhibit 4 does not fall within the categories of Evidence Code § 452, does not form the basis of the allegations in the Cross-Complaint and is not relevant to the ruling on this demurrer.

Relevant Law. A general demurrer challenges the legal sufficiency of a complaint on the ground that it fails to state facts sufficient to constitute a cause of action. (Code Civ. Proc. § 430.10(e).) The allegations in the complaint as a whole must be reviewed to determine whether a set of alleged facts constitutes a cause of action. (People v. Superior Court (Cahuenga’s the Spot) (2015) 234 Cal.App.4th 1360, 1376.) A complaint need only meet fact-pleading requirements, which requires a statement of facts constituting a cause of action in ordinary and concise language, and should allege ultimate facts that, as a whole, apprise defendant of the factual basis of the claim. (Code Civ. Proc. §425.10(a)(1); Navarrete v. Meyer (2015) 237 Cal.App.4th 1276, 1284.)

A demurrer for uncertainty should be sustained only where the pleading is so bad that defendant cannot reasonably respond.  See Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 615. (“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures. [Citations]”).

In ruling on a demurrer the court is guided by the following long-settled rules: The court treats the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. The court may also consider matters which may be judicially noticed. Further, the court gives the complaint a reasonable interpretation, reading it as a whole and its parts in their context. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

And, as held in Holland v. Morse Dieset Internat. Inc. (2001) 86 Cal.App.4th 1443, 1447, “If facts appearing in the exhibits [to the complaint] contradict those alleged, the facts in the exhibits take precedence.” 

WindSail Cross-Defendants argue that the fraud cause of action is barred by the 3-year statute of limitations. WindSail Cross-Defendants also argue that there are no allegations of misrepresentations by them on which Cohen reasonably relied, and the allegations of misrepresentations and omissions by WindSail Defendants are vague and uncertain and are contradicted by the express terms of the Participation Agreement between Cross-Complainant and Windsail Capital Fund, L.P. ROA 216, Cross-Complaint, Ex. A.

Statute of Limitations. A demurrer on the ground of the bar of the statute of limitations will not lie where the action may be, but is not necessarily barred. (Lee v. Hanley (2015) 61 Cal.4th 1225, 1232.) It must appear clearly and affirmatively, upon the face of the complaint, that the right of action is necessarily barred. (Id.) 

Here, the Court cannot conclude that the statute of limitations necessarily bars Cohen’s claims.

Although the Cross-Complaint alleges that Cohen loaned $4,050,000 to WindSail Capital Fund for Growthpoint in February 2018 and an additional $950,000 more in March 18, 2018 (ROA 216, Cohen Cross-Complaint, ¶¶31, 36), the Cross-Complaint also alleges that it was not until May 2018 that Cohen “began to realize” Growthpoint may not have received $4,000,000. ROA 216, Cohen Cross-Complaint, ¶39. Additionally, the Cross-Complaint alleges in September 2018, Pickell and WindSail Cross-Defendants obtained all the assets of Growthpoint without paying Cohen for any of his $5 million in loans to Growthpoint or repaying his interest and collateral share for his $2 million. ROA 216, Cohen Cross-Complaint, ¶¶42-44. Since there are allegations that Cohen was not aware of any misrepresentations or potential fraud until May 2018, the allegations in the Cross-Complaint are insufficient to “necessarily” bar Cohen’s claims.

The demurrer is overruled on this ground. 

No allegations of Misrepresentations to Establish Fraud. Fraud claims require the following elements: (a) a misrepresentation (false representation, concealment or nondisclosure); (b) knowledge of falsity/scienter; (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638; Philipson & Simon v. Gulsvig (2007) 154 Cal.App.4th 347, 363.) “If a fraud claim is based upon failure to disclose, and the duty to disclose arises from the making of representations that were misleading or false, those allegations should be described. (Morgan v. AT & T Wireless Services, Inc. (2009) 177 Cal.App.4th 1235, 1262.)

Every element of the cause of action for fraud must be alleged in full, factually and specifically. The policy of liberal construction of pleading will not be invoked to sustain a pleading defective in any material respect. (Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1332; Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157.) “The particularity requirement necessitates pleading facts that “show how, when, where, to whom, and by what means the representations were tendered.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) Moreover, when fraud is alleged against a corporate defendant, the complaint must also allege: the names of the persons who made the misrepresentations; their authority to speak for the corporation; to whom they spoke; what they said or wrote; and when it was said or written. (Id.; Tarmann v. State Farm Mut. Auto. Ins. Co., supra, 2 Cal.App.4th at 157.)

The particularity requirements for pleading fraud are relaxed when the defendant is in a better position to know the facts concerning the alleged fraud. (Tarmann v. State Farm Mut. Auto. Ins. Co., supra, 2 Cal.App.4th at 158.)

WindSail Cross-Defendants argue that the Cross-Complaint fails to identify any misrepresentations by Crate. Moreover, WindSail Cross-Defendants argue that no representations could have been made on behalf of Crate because it was not formed until September 2018 and all the alleged actions that form the basis for Cohen’s fraud claim occurred prior to March 2018. ROA 956, P&A, p. 5 and RJN, Exs. 2 and 3.

Cohen does not dispute WindSail Cross-Defendants’ arguments regarding Crate but merely argues that Pickell and WindSail Capital “schemed together” and that WindSail Capital and Crate are controlled by the same officers. ROA 1014, Opp., p. 6:24-27. This is insufficient to establish fraud by Crate. The demurrer is SUSTAINED as to Crate.

Similarly, there are no allegations in the Cross-Complaint regarding WindSail Group. Again, the Opposition does not dispute this argument or make any argument that WindSail Group is a proper party in this action. The demurrer is SUSTAINED as to WindSail Group. 

As for WindSail Capital, WindSail Cross-Defendants argue that the Key Employee Incentive Agreement contradicts the allegations in the Cross-Complaint that Pickell was WindSail Capital’s agent, that there are no allegations of any misrepresentations by Michael Rand (Rand) as WindSail’s agent, and that Cohen represented in the Participation Agreement that he did not rely on any representations by WindSail Capital, and consequently, he is precluded from arguing the opposite now.

As indicated above, the Court declined to take judicial notice of the Key Employee Incentive Agreement. As such, the Court cannot look to the terms of the Key Employee Incentive Agreement to contradict the allegations in the Cross-Complaint that Pickell was acting as undisclosed agent for WindSail Capital. E.g., ROA 216, Cross-Complaint, ¶¶9, 33, 43, 44.

The Cross-Complaint alleges misrepresentations by Pickell to Cohen that were designed to obtain money from Cohen in order to dispose of the assets of Growthpoint in favor of WindSail Capital. These alleged misrepresentations include but are not limited to: failing to disclose Pickell’s relationship with WindSail Capital and his financial incentive in the Key Employee Incentive Agreement with WindSail Capital to change control of Growthpoint and obtain its assets for WindSail Capital; the failure to disclose his agreement with Equity Partners HG LLC for the exclusive right to restructure, sell or otherwise dispose of Growthpoint’s assets or find investors for Growthpoint; the representations that WindSail was willing to “partner with Cohen to loan money to Growthpoint”; that Growthpoint’s problems could be resolved through the infusion of more capital. ROA 216, Cross-Complaint, ¶¶9, 28, 30, 32, 33, 36, 44.

However, in support of the fraud cause of action, the Cross-Complaint expressly alleges that Growthpoint made misrepresentations through its agents, Clark and Pickell, and WindSail Capital made misrepresentations through its agent, Rand. ROA 216, Cross-Complaint, ¶57. The Cross-Complaint also alleges Pickell concealed the Key Employment Agreement from Cohen and failed to disclose that WindSail would not provide all of Cohen’s $2 million to Growthpoint. ROA 216, Cross-Complaint, ¶61. But contrary to the allegations in the Cross-Complaint, the Participation Agreement, which is attached to the Cross-Complaint, sets forth Cohen’s relationship with WindSail Capital in loaning funds to Growthpoint, and how Cohen’s $2 million loan will be distributed, which does not include going to Growthpoint. ROA 216, Participation Agreement, ¶¶2(e), 3. The Participation Agreement also expressly provides that Cohen did not rely on any representations by WindSail Capital. ROA 216, Participation Agreement, ¶7.

Given the particularity requirement for fraud allegations, and the contradictory allegations in the Cross-Complaint and the Participation Agreement, the Cross-Complaint fails to adequately identify what misleading or false representations were made by Pickell on behalf of WindSail giving rise to any duty to disclose and/or misrepresentations by Pickell.

WindSail Cross-Defendants are also correct that the Cross-Complaint does not plead with particularity the alleged misrepresentations attributed to Rand. There is no information on how, when, where or by what means any representations by Rand were provided to Cohen.

The demurrer to the 2^nd cause of action for fraud is SUSTAINED.

Since Cohen has not had an opportunity to amend his Cross-Complaint, the Court grants Cohen 15 days leave to amend.

WindSail Cross-Defendants are ordered to give notice.