Judge: Gregory Keosian, Case: 21STCV44259, Date: 2023-11-28 Tentative Ruling

Case Number: 21STCV44259    Hearing Date: April 15, 2024    Dept: 61

Plaintiff Mason Electric Company’s Motion for Leave to File Cross-Complaint is GRANTED.

Plaintiff to provide notice.

I.                   Motion for Leave to File Cross-Complaint

“A party shall file a cross-complaint against any of the parties who filed the complaint or cross-complaint against him or her before or at the same time as the answer to the complaint or cross-complaint. Any other cross-complaint may be filed at any time before the court has set a date for trial.” (Code Civ. Proc., § 428.50(a)–(b).) A cross-complaint filed outside either of the aforementioned times requires leave of court, which may be granted “in the interest of justice at any time during the court of the action.” (Code Civ. Proc., § 428.50(c).)

A party who fails to plead a cause of action subject to the requirements of this article, whether through oversight, inadvertence, mistake, neglect, or other cause, may apply to the court for leave to amend his pleading, or to file a cross-complaint, to assert such cause at any time during the course of the action. The court, after notice to the adverse party, shall grant, upon such terms as may be just to the parties, leave to amend the pleading, or to file the cross-complaint, to assert such cause if the party who failed to plead the cause acted in good faith. This subdivision shall be liberally construed to avoid forfeiture of causes of action.

(Code Civ. Proc., § 426.50.) Leave to file a cross-complaint may also be granted “in the interest of justice at any time during the course of the action.” (Code Civ. Proc. § 428.50, subd. (c).)

Failure to bring claims in a cross-complaint may have consequences. “[I]f a party against whom a complaint has been filed and served fails to allege in a cross-complaint any related cause of action which (at the time of serving his answer to the complaint) he has against the plaintiff, such party may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded.” (Code Civ. Proc., § 426.30, subd. (a).)

Defendant Mason Electric Company, Inc. (Defendant) seeks leave to file a cross-complaint against Plaintiff Hexadyne Corporation (Plaintiff) and its executive Robert Sanchez alleging six causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, concealment, intentional misrepresentation, negligent misrepresentation, and false promise. (O’Connor Decl. Exh. A.) The basis for these claims are alleged misrepresentations and contract breaches by Plaintiff, such as impermissible price mark-ups that Plaintiff pocketed the orders it delivered to its customers in Japan, secret commissions got on side-deal with one of these customers in violation of the contract, and the failure to solicit additional business for Defendant as required in the contract. Defendant also alleges that upon its termination of the contract, Plaintiff misrepresented its circumstances, falsely claiming economic duress and the existence of penalties which did not exist, as a means of goading Defendant into fulfilling outstanding orders, thereby allowing Plaintiff to later sue for quasi-contract on the proceeds gained thereby. (O’Connor Decl. Exh. A.) Defendant contends that the basis for these causes of action was disclosed for the first time in Plaintiff’s February 9, 2024 document production. (O’Connor Decl. ¶ 13.)

Plaintiff in opposition argues that the claims asserted in the cross-complaint are not related to its own claims, and are therefore not compulsory. (Opposition at pp. 11–13.) Plaintiff contends that the motion is timed tactically, and that Defendant had notice of its claims before the Complaint was filed, when it began to fulfill the orders that are at issue in Plaintiff’s complaint. (Opposition at pp. 13–16.) Plaintiff also contends that it will be prejudiced by the allowance of the claims, because the claims will require new discovery and cause confusion at trial. (Opposition at pp. 16–17.)

The claims asserted in the cross-complaint are compulsory. Compulsory claims are those that are “related” to the suit in which the cross-complaint is brought, and a “related cause of action” is one that “arises out of the same transaction, occurrence, or series of transactions or occurrences as the cause of action which the plaintiff alleges in his complaint.” (ZF Micro Devices, Inc. v. TAT Capital Partners, Ltd. (2016) 5 Cal.App.5th 69, 81.) Plaintiff here alleges a quasi-contract claim based on Plaintiff’s undertaking of orders under the contract, Defendant’s termination of the contract, and then Defendant’s fulfilling of those orders. Defendant’s claims arise from the same subject matter: Plaintiff’s undertaking of orders under a contract, Defendant’s termination, and its subsequent fulfilling of those orders.

Plaintiff claims that this court has already rejected any notion that this case arises from a contract, in overruling Defendant’s demurrer to the Complaint. (Demurrer at p. 16.) The court, in rejecting Defendant’s argument that the contract at issue barred Plaintiff’s claims, stated:

Defendant’s argument is unpersuasive because the transaction upon which Plaintiff sues occurred after Defendant terminated the contract. The unjust enrichment that Plaintiff alleges is not Defendant’s termination of the contract (although said termination is alleged to be in “bad faith”), but Defendant’s subsequent exploitation of Plaintiff’s circumstances to claim all of the proceeds of certain purchase orders arranged through Plaintiff, effectively depriving Plaintiff of compensation for its work in arranging those purchases. No contact was in effect at the time this transaction took place, thus the “express binding contract” that Defendant identifies did not define the parties’ rights with respect to the conduct alleged in the complaint.

(See 5/19/2022 Order.)

Plaintiff misreads the ruling. First, the court in that ruling determined only the dispositive effect of the contract on Plaintiff’s claim for relief, not the factual relatedness of the contract with that claim under Code of Civil Procedure § 426.30. Second, the ruling itself recognized that Plaintiff’s claim was factually related to conduct occurring under the contract, as the work for which Defendant allegedly stole Plaintiff’s compensation after the contract was “purchases arranged through Plaintiff” during the life of the contract. (Ibid.) Defendant had argued that this fact barred Plaintiff’s claim for relief under the contract, and the court rejected the argument, stating that “a plaintiff may seek reimbursement against a party who unjustly retains the benefits of work performed during a contract term after that contract expires,” and citing relevant authority. (Ibid.) In other words, Plaintiff claims that Defendant unjustly retained benefits after the termination of the contract for work that Plaintiff performed during the contract. The hard post-contract demarcation that Plaintiff asserts is not in keeping with the facts. Defendant’s claims are therefore related and compulsory.

Because Defendant’s claims are compulsory, leave to assert them in this action may not be denied absent a showing of bad faith. (See Silver Organizations Ltd. v. Frank (1990) 217 Cal.App.3d 94, 99 [“Factors such as oversight, inadvertence, neglect, mistake or other cause, are insufficient grounds to deny the motion unless accompanied by bad faith.”].)

No bad faith has been shown here. Plaintiff contends that Defendant was aware of Plaintiff’s allegedly “exorbitant” markups on Defendant’s orders when it began to fulfill those orders after the contract’s termination in February 2021. (Opposition at p. 15; O’Connor Decl. Exh. A.)  But this amounts to little showing of bad faith. Although Defendant may have known of the markups on Plaintiff’s outstanding orders that it fulfilled in 2021, there is no evidence that it had information concerning Plaintiff’s side-commissions, its efforts to solicit business for Defendant, the true state of its financial duress (and potential penalties), or markups on prior orders under the contract until document production was made in February 2024. (O’Connor Decl. ¶ 13.)

Nor will Plaintiff suffer substantial prejudice from permitting the cross-complaint. The parties have already agreed to a continuance of trial from its May 7, 2024 date to October 22, 2024. (See 3/29/2024.) Although Plaintiff claims that the cross-complaint is an attempted “end-around” the ruling on Defendant’s demurrer, this is not the case, as explained above. The addition of the claims is unlikely to significantly expand discovery, as the facts that Defendant allege would likely be relevant to Plaintiff’s claims for unjust enrichment in any event, which is founded in equitable principles. (Welborne v. Ryman-Carroll Foundation (2018) 22 Cal.App.5th 719, 725.) Defendant indeed represents that no depositions of witnesses or experts has yet taken place, and therefore need not be redone to account for cross-claims.(Reply at p. 11.) Plaintiff’s contentions regarding potential jury confusion are speculative. (Opposition at pp. 16–17.)

The motion is therefore GRANTED.