Judge Holly J. Fujie, Case 22STCV11217 2022-08-04 Tentative Ruling

MOVING PARTY: Defendants Theodore Farnsworth (“Farnsworth”), Vincent Butta (“Butta”), Jaeson Ma (“Ma”) and Zash Global Media and Entertainment Corporation (“Zash”) (collectively, “Moving Defendants”)[1]

This action arises out of a business relationship. Plaintiff’s complaint (the “Complaint”) alleges: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) fraud and concealment; (4) negligent misrepresentation; (5) goods and services rendered; and (6) unjust enrichment.

The relevant allegations of the Complaint are as follows: On or about January 28, 2021, Plaintiff and Zash entered into an agreement (the “Term Sheet”) pursuant to which Zash agreed to purchase a 25% ownership interest in Plaintiff and underwrite a new bank facility, both of which would be provided by April 28, 2021 (the “Outstanding Amount”). (Complaint ¶ 21, Exhibit A.) Between January and April 2021, Moving Defendants consistently represented their intent to pay the Outstanding Amount. (Complaint ¶ 24.) On or about April 1, 2021, Moving Defendants informed Plaintiff that they were unexpectedly under audit by the Securities and Exchange Commission (“SEC”) and would therefore not pay the Outstanding Amount on or before the due date, but that the amount would be paid upon the completion of the SEC’s audit. (Complaint ¶ 25.) Moving Defendants defaulted on the Outstanding Amount on or about April 28, 2021. (Complaint ¶ 27.) Despite defaulting on their obligations under the Term Sheet, Moving Defendants regularly communicated their intent to cure the breach within days. (Complaint ¶ 28.)

Between January and April 2021, Plaintiff, at the request of Zash, substantially increased its overhead costs by hiring more employees and engaging more service providers. (See Complaint ¶ 22.) Plaintiff’s efforts gave Zash a benefit that exceeded the scope of the Term Sheet. (See id.) Moving Defendants additionally requested that Plaintiff rapidly expand its business; as a result, Plaintiff incurred additional debts and obligations, which Moving Defendants were aware of. (See Complaint ¶¶ 30-32.)

On or about May 30, 2021, Moving Defendants informed Plaintiff that they were merging with another entity and that they no longer intended to pay the amounts owed to Plaintiff in cash. (Complaint ¶ 33.) Moving Defendants demanded that the Term Sheet be amended to provide that Plaintiff would be compensated in Zash private shares. (Id.) Moving Defendants represented that the Zash private shares would become public stock upon the completion of the merger and that such stock would continue to rise in price. (Id.) Plaintiff refused Moving Defendants’ demand and sent a notice of breach. (Complaint ¶ 35.) Although Moving Defendants represented that the merger would proceed within days, such merger still has not occurred. (Complaint ¶ 37.)

Moving Defendants filed a demurrer (the “Demurrer”) on the grounds that: (1) the Complaint fails to allege sufficient facts to state a cause of action for the first, second, and fifth causes of action against the Individual Defendants; (2) the Complaint fails to allege sufficient facts to state a cause of action for the third and fourth fraud-based causes of action and the allegations concerning those claims are uncertain; and (3) the Complaint fails to allege sufficient facts to state a claim for the sixth cause of action.

A demurrer tests the sufficiency of a complaint as a matter of law. (Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1358.) The court accepts as true all material factual allegations and affords them a liberal construction, but it does not consider conclusions of fact or law, opinions, speculation, or allegations contrary to law or judicially noticed facts. (Shea Homes Limited Partnership v. County of Alameda (2003) 110 Cal.App.4th 1246, 1254.) With respect to a demurrer, the complaint must be construed liberally by drawing reasonable inferences from the facts pleaded. (Rodas v. Spiegel (2001) 87 Cal.App.4th 513, 517.) A demurrer will be sustained without leave to amend if there exists no reasonable possibility that the defect can be cured by amendment. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

A plaintiff may allege on information and belief any matters that are not within his personal knowledge if he has information leading him to believe that the allegations are true. (Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1158.) A pleading made on information and belief is thus insufficient if it merely asserts the facts so alleged without alleging such information that leads the plaintiff to believe that the allegations are true. (Id. at 1158-59.)

The Demurrer argues that the Complaint fails to allege the first, second and fifth causes of action against the Individual Defendants because the Complaint does not adequately allege facts to support alter ego liability.

The Complaint alleges, on information and belief, that the Individual Defendants controlled, dominated, influenced, managed and operated Zash such that Zash was an instrumentality for the Individual Defendants used for their own business affairs and as a device to avoid liability and substitute financially irresponsible corporations in their stead such that injustice would result from treating Zash as a distinct entity. (See Complaint ¶¶ 18, 20.) The Complaint also alleges, on information and belief, that if any corporate records are kept and maintained by Zash, the records were created to cover up the Individual Defendants’ manipulation and dominance. (Complaint ¶ 19.) The Complaint fails to allege information that forms the basis for Plaintiff’s belief that the alter ego allegations are true; therefore, the Complaint does not adequately allege that the Individual Defendants are alter egos of Zash. The Court therefore SUSTAINS the Demurrer to the first, second, and fifth causes of action as alleged against the Individual Defendants with 20 days leave to amend.

The elements of a cause of action for fraud based on concealment/ omission 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 had 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. (Jones v. ConocoPhillips Co. (2011) 198 Cal.App.4th 1187, 1198.)

The heightened pleading for standard for fraud claims is relaxed if it appears from the nature of the allegations that the defendant must necessarily possess full information, or if the facts lie more in the knowledge of opposing parties. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384-85 (“Alfaro”).) The plaintiff need not plead specific information that should be within the knowledge of the defendant. (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 793.)

The Complaint alleges that before entering into the Term Sheet with Plaintiff, Moving Defendants concealed their intent to falsely promise that they would pay the Outstanding Amount. (Complaint ¶ 59.) After entering into the Term Sheet, Moving Defendants continued to conceal the fact that they did not intend to compensate Plaintiff, falsely represented that they were “happy” to pay Plaintiff, and falsely represented to Plaintiff that they would pay the amounts owed to Plaintiff after the merger was finalized, which they indicated would happen promptly. (See Complaint ¶ 60.)

As an initial matter, the third cause of action appears to be an amalgamation of three separate causes of action: (1) intentional misrepresentation; (2) fraud by omission; and (3) fraudulent inducement. Moreover, while Plaintiff argues that the Individual Defendants may be held liable based on their participation in a conspiracy to commit fraud, there are no allegations connecting Butta and Ma to any of the alleged omissions or misrepresentations. Where fraud is alleged to be the object of the conspiracy, the claim must be pleaded with particularity. (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal. App. 4th 1105, 1136.) The Court SUSTAINS the Demurrer to the third cause of action with 20 days leave to amend so that Plaintiff may clarify the nature of the cause or causes of action currently stated in the third cause of action.

The elements of negligent misrepresentation are: (1) misrepresentation of a past or existing material fact; (2) without reasonable ground for believing it to be true; (3) intent to induce another’s reliance; (4) ignorance of the truth and justifiable reliance; and (5) resulting damage. (Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. (2004) 115 Cal.App.4th 1145, 1154.) To be actionable, a negligent misrepresentation must ordinarily be as to past or existing material facts. (Tarmann v. State Farm Mutual Automobile Insurance Co. (1991) 2 Cal.App.4th 153, 158.) Statements as to future action do not constitute actionable fraud. (Id.) While broken promises of future conduct may be actionable, this would entail a false promise cause of action, not negligent misrepresentation. (See id. at 158-59.)

The fourth cause of action is rooted in Moving Defendants’ alleged misrepresentations that they would pay Plaintiff. These statements constitute a future action and are therefore not a proper basis for a negligent misrepresentation claim. The Court therefore SUSTAINS the Demurrer to the fourth cause of action with 20 days leave to amend.[2]

There is no cause of action in California for unjust enrichment. (Melchior v. New Line Productions, Inc. (2003) 106 Cal.App.4th 779, 793.) Unjust enrichment is a general principle, underlying various legal doctrines and remedies, rather than a remedy itself; it is synonymous with restitution. (Id.) In addition, there is no freestanding cause of action for restitution in California. (Munoz v. MacMillan (2011) 195 Cal. App. 4th 648, 661. The Court therefore SUSTAINS the Demurrer to the sixth cause of action with 20 days leave to amend. While Plaintiff may not file an amended pleading that reasserts an unjust enrichment claim, Plaintiff may file an amended pleading that alleges a basis for the relief of restitution.

In consideration of the current COVID-19 pandemic situation, the Court¿strongly¿encourages that appearances on all proceedings, including this one, be made by LACourtConnect if the parties do not submit on the tentative.¿¿If you instead intend to make an appearance in person at Court on this matter, you must send an email by 2 p.m. on the last Court day before the scheduled date of the hearing to¿SMC_DEPT56@lacourt.org¿stating your intention to appear in person.¿ The Court will then inform you by close of business that day of the time your hearing will be held. The time set for the hearing may be at any time during that scheduled hearing day, or it may be necessary to schedule the hearing for another date if the Court is unable to accommodate all personal appearances set on that date.¿ This rule is necessary to ensure that adequate precautions can be taken for proper social distancing.

Parties who intend to submit on this tentative must send an email to the Court at SMC_DEPT56@lacourt.org as directed by the instructions provided on the court website at www.lacourt.org. If the department does not receive an email and there are no appearances at the hearing, the motion will be placed off calendar.

[1] The Court refers to Farnsworth, Butta and Ma collectively as the “Individual Defendants.”

[2] Moving Defendants seek to strike the request for punitive damages from the Complaint based on the insufficiency of the fraud-based claims. The Court does not assess the sufficiency of allegations to support punitive damages when ruling on a demurrer, as a demurrer cannot be sustained to part of a cause of action or to a particular type of damage or remedy. (See Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal.App.4th 1028, 1047.)