Judge: John J. Kralik, Case: 22BBCV00336, Date: 2022-12-09 Tentative Ruling
Case Number: 22BBCV00336 Hearing Date: December 9, 2022 Dept: NCB
North Central District
RAYMOND ZARGARYAN, Plaintiff, v.
KAREN PETROSYAN, et al., Defendants. |
Case No.: 22BBCV00336
Hearing Date: December 9, 2022 [TENTATIVE] ORDER RE: DEMURRER; MOTION TO STRIKE |
BACKGROUND
A. Allegations
Plaintiff Richard Zargaryan (“Plaintiff”) alleges that on January 6, 2020, Defendant Karen Petrosyan (“Petrosyan”) solicited Plaintiff to, jointly and equally, purchase Cold Stone Creamery number 20242 in Seal Beach (“SB Store”) and Cold Stone Creamery number 22066 in Costa Mesa (“CM Store”). The SB Store was owned and operated by SGB Enterprise, Inc. and the CM Store was owned and operated by MP Ice Cream, Inc., both of which Plaintiff believes Sharon Gottlieb was the primary officer, director, and shareholder of SGB Enterprise, Inc. and MP Ice Cream, Inc.
Plaintiff alleges that on January 21, 2020, he and Petrosyan formed Cooler West Enterprises (“CWE”) for the purpose of purchasing and operating both Stores. Plaintiff alleges that CWE reached an agreement with Gottlieb and simultaneously entered into escrow for both stores, putting an earnest money deposit of $25,000 each. The escrows for the SB Store and the CM Store were scheduled to close on April 1, 2020 and April 8, 2020 respectively, based on several conditions including approval from franchisor Kahala Franchising, LLC (“Kahala”). On April 8, 2020, CWE executed a franchise agreement with Kahala on the SB Store and closed escrow upon the deposit of $620,000 from Plaintiff and $50,000 from Petrosyan. Plaintiff alleges that he deposited $620,000 into escrow with an agreement and understanding between Petrosyan and Plaintiff, that Plaintiff would be reimbursed $285,000, which was loaned and promised to be paid back by Petrosyan, in order to finalize the closing of the SB Store. Plaintiff alleges that Petrosyan failed to reimburse him.
Plaintiff alleges that the CM Store was delayed due to Petrosyan’s inability to marshal capital to finance his portion of the investment and that Petrosyan canceled escrow on the CM Store on May 6, 2020, resulting in the loss of the $25,000 earnest money deposit.
Plaintiff alleges that CWE took over possession of the SB Store and almost immediately Petrosyan, with the cooperation of his spouse Defendant Naira Kalashyan (“Kalashyan”), conspired to defraud Plaintiff by converting and misappropriating CWE’s funds for personal benefit and excluding Plaintiff from the books, accounts and suppliers, in order to cover their wrongdoing. By October 2021 Petrosyan insisted that he bought CWE for upwards of $500,000 but was unwilling to provide access to CWE’s books for Plaintiff to conduct due diligence and assess the corporate value. Plaintiff alleges that Petrosyan and Kalashyan conspired to exclude Plaintiff and his family from overseeing the SB Store. He alleges that Petrosyan and Kalashyan embezzled cash receipts and diverted supplies for personal gain. Plaintiff alleges that Petrosyan closed escrow on the CM Store in June 2021 and began converting and embezzling CWE’s bank funds for his personal benefit.
The first amended complaint (“FAC”), filed September 8, 2022, alleges causes of action for: (1) breach of contract against Petrosyan; (2) common count against Petrosyan; (3) breach of fiduciary duty by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan; (4) trade secret misappropriation by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan; (5) tortious interference with prospective economic advantage derivatively on behalf of CWE and against Petrosyan; (6) intentional interference with contract derivatively on behalf of CWE and against Petrosyan; (7) negligent interference with prospective economic advantage derivatively on behalf of CWE and against Petrosyan; (8) fraudulent concealment by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan; (9) conversion by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan; (10) unfair business practice by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan; (11) declaratory relief against Petrosyan; (12) accounting against Petrosyan and CWE; and (13) constructive trust against all Defendants.
B. Motions on Calendar
On October 7, 2022, Defendants Karen Petrosyan and Naira Kalashyan (hereinafter, “Defendants”) filed a demurrer to the FAC and a motion to strike portions of the FAC.
On November 28, 2022, Plaintiff filed opposition briefs.
On December 5, 2022, Defendants filed reply briefs.
REQUEST FOR JUDICIAL NOTICE
Defendants request judicial notice of: (A) a copy of the Cancellation Instruction signed by Plaintiff on May 6, 2020; and (B) a copy of the original complaint filed in this action on May 13, 2022. The Court previously declined to take judicial notice of Exhibit A when ruling on the demurrer to the complaint and will again deny the request for judicial notice of the Cancellation Instruction. The request is granted as to Exhibit B. (Evid. Code, § 452(d).)
DISCUSSION RE DEMURRER
Defendants Petrosyan and Kalashyan demur to the 1st to 13th causes of action in the FAC.
A. Defendants’ Memorandum of Points and Authorities
According to CRC, Rule 3.1113(d), “Except in a summary judgment or summary adjudication motion, no opening or responding memorandum may exceed 15 pages. … No reply or closing memorandum may exceed 10 pages.” A memorandum that exceeds the page limit must be filed and considered in the same manner as a late-filed paper. (CRC, Rule 3.1113(g).) Pursuant to CRC, Rule 3.1300(d), the court may in its discretion refuse to consider a late filed paper.
As an initial matter, the Court notes that Defendants’ memorandum of points and authorities spans from pages 15 to 64 and is thus 49 pages in length. (Many of the arguments in the demurrer papers are reiterations of the same arguments that could have been consolidated.) In response, Plaintiff’s opposition memorandum of points and authorities spans from pages 5 to 28 and is thus 23 pages in length. Defendants’ reply memorandum is also 21 pages.
Neither party obtained leave of Court to file extensive briefs. The Court will consider the merits of both motions in their full length. However, for future motions and responsive documents, the parties are cautioned to follow the Rules of Court. If this happens again in this case, the offending briefs will be disregarded.
B. Derivative Suit and Sham Pleading
Defendants demur to the FAC, arguing that Plaintiff cannot maintain a derivative suit because Plaintiff lacks standing and has failed to allege in particularity that he made a demand for action to the Board of Directors of CWE. Defendants rely on Corporations Code, § 800(b): “No action may be instituted or maintained in right of any domestic or foreign corporation by any holder of shares or of voting trust certificates of the corporation unless both of the following conditions exist”: (1) the plaintiff alleges in the complaint that plaintiff was a shareholder at the time of the transaction or any part of which plaintiff complains; and (2) the plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.
In opposition, Plaintiff argues the Court should exercise its discretion to permit the action to proceed as a direct action against Defendants and CWE and that a demand requirement under a derivative action is futile because a direct cause of action exists if the individual injury is not incidental to the corporation injury. Plaintiff relies on Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238 for the proposition that the Court possesses discretion to permit an entire action to proceed as a direct action.
However, an “action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets. [Citations.] In contrast, a stockholder's individual suit is a suit to enforce a right against the corporation which the stockholder possesses as an individual.” (Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, 1254 [citing Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106-107] [internal quotation marks and citations omitted].) In the FAC, Plaintiff alleges certain causes of action individually and derivatively on behalf of CWE. (See FAC at 3rd, 4th, 5th, 6th, 7th, 8th, 9th, and 10th causes of action.) While there may be some causes of action that Plaintiff asserts in his own individual capacity, a majority of the causes of action also seek relief on behalf of CWE through a derivative suit. Based on the FAC’s allegations, it does not appear that Plaintiff has undertaken efforts to comply with Corporations Code, § 800(b).
Next, Plaintiff argues that any demand would have been futile and no demand is necessary when conspiracy, fraud, or criminal conduct of the defendants are charged. Further, Plaintiff argues that CWE is a privately held corporation where Petrosyan is a 50% shareholder, and the only other member is Plaintiff. (See FAC, ¶¶12-14; Reed v. Norman (1957) 152 Cal.App.2d 892, 898.) Here, Plaintiff has alleged facts supporting a showing that making a demand on CWE where Petrosyan would be the only other shareholder would have resulted in futile attempts. By filing this action and serving the complaint on Petrosyan, Petrosyan and CWE have been put on notice of Plaintiff’s causes of action.
The demurrer on the basis that Plaintiff did not properly bring a derivative suit is overruled.
Defendants also argue that the FAC is defective and a sham because he now alleges in the FAC causes of action that are brought derivatively on behalf of CWE. Defendants claim that the derivative allegations in the FAC are inconsistent with Plaintiff’s allegations in the original complaint because Plaintiff did not bring a derivative action in the original complaint. However, amending the complaint to allege additional facts to bring a derivative suit does not necessarily make the allegations in the FAC inconsistent or a sham. As such, the demurrer on this basis will be overruled as well.
C. 1st cause of action for Breach of Contract against Petrosyan
The essential elements of a cause of action for breach of contract are: “(1) the existence of the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to plaintiff.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.) “An oral contract may be pleaded generally as to its effect, because it is rarely possible to allege the exact words.” (Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 616.)
In the 1st cause of action, Plaintiff alleges that on April 6, 2020, Plaintiff and Petrosyan entered into a mutual oral agreement for Plaintiff to loan Petrosyan $285,000 at 8% interest, compounded monthly, after Petrosyan was unable to qualify for an SBA loan. (FAC, ¶45.) Plaintiff alleges that he deposited $285,000 into escrow IRL41512-LL at Lawyers Title on Petrosyan’s behalf to finalize the sale and transfer of the SB Store. (Id., ¶46.) Plaintiff alleges that Petrosyan agreed to repay the loan within a year, but Petrosyan partially and materially breached the agreement by failing to sufficiently perform on reimbursing the total loaned amount. (Id., ¶48.)
Defendants demur to the 1st cause of action, arguing that the terms of the oral contract are uncertain and lack sufficient facts to show what promise Petrosyan made to Plaintiff. However, the allegations of the 1st cause of action sufficiently state the terms of the oral contract—i.e., that Plaintiff would lend $285,000 to Petrosyan and that Petrosyan would pay back the loan at 8% interest within 1 year.
Defendants also demur on the grounds that the FAC is uncertain as to the partial breach of the oral contract. The allegations of the FAC allege that Petrosyan partially breached the oral agreement, but fails to specify what part of the agreement was partially breached. The FAC lacks facts supporting the element of (partial) breach. (For example, did Petrosyan make partial payments prior to the due date of the loan, or did he breach the oral contract in some other capacity that was not alleged?) The Court will sustain the demurrer to the 1st cause of action on this basis.
Defendants also argue that Plaintiff’s 1st cause of action as alleged in the FAC is a sham because it omits facts that Petrosyan “immediately” defrauded Plaintiff in paragraph 23 of the original complaint. However, it is unclear how the omission of this one word would constitute a sham or make the pleadings so inconsistent. This will not be a basis to sustain the demurrer.
Finally, Defendants argue that the action is time-barred pursuant to CCP § 339’s 2-year statute of limitations period for oral obligations. Defendants base their argument on the date the oral contract was entered on April 6, 2020 and based on the filing of the complaint on May 13, 2022, which is more than 2 years after the formation of the contract. However, the date upon which the statute of limitations would apply is the date of the breach, which would have been within a year of April 6, 2020, and not when the contract was entered. The allegations as currently worded in the FAC are not specific enough to allow the Court to determine if the 1st cause of action is time-barred. “In order for the bar of the statute of limitations to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows merely that the action may be barred.” (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1315-16.) Thus, the demurrer on this basis is overruled.
The demurrer to the 1st cause of action is sustained with leave to amend.
D. 2nd cause of action for common count against Petrosyan
Defendants demur to the 2nd cause of action, arguing it is uncertain and time barred.
To the extent that Defendants argue that the 2nd cause of action constitutes a sham between paragraphs 48 and 52 of the FAC, the demurrer is overruled.
Next, to the extent that Defendants argue that the common counts cause of action is time-barred by the 2-year statute of limitations based on a breach of oral contract claim is overruled for the same reasons discussed above, as the FAC does not affirmatively show that this claim is time-barred.
The demurrer to the 2nd cause of action is overruled.
E. 3rd cause of action for breach of fiduciary duty by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan
To state a cause of action for breach of fiduciary duty, Plaintiff must allege: (1) the existence of a fiduciary relationship; (2) its breach; and (3) damage proximately caused by that breach. (Roberts v. Lomanto (2003) 112 Cal. App. 4th 1553, 1562.)
Defendants demur to the 3rd cause of action, arguing that Plaintiff lacks standing to bring a derivative suit. As discussed above, the demurrer on this basis is overruled.
Next, Defendants argue that the 3rd cause of action is uncertain as to which type of fiduciary duty is at issue: the duty of care or the duty of loyalty. Defendants previously raised this argument in their demurrer to the complaint. Similar to the Court’s prior ruling, the Court finds that the FAC alleges that Petrosyan breached both duties, which is not improper. (See FAC., ¶¶55-68.)
Next, Defendants argue that Plaintiff fails to allege sufficient facts supporting his allegations that Defendants acted with malice, oppression, and/or fraud. (See FAC, ¶93.) However, such allegations are made in connection with Plaintiff’s request for punitive damages pursuant to Civil Code, § 3294 and are not necessary allegations for a breach of fiduciary duty claim. As such, this is better raised in a motion to strike, as it does not necessarily address whether the breach of fiduciary duty cause of action is sufficiently pled. In contrast, punitive damages allegations require a high level of specificity to be properly pled.
The demurrer to the 3rd cause of action is overruled.
F. 4th cause of action for trade secret misappropriation by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan
A cause of action for monetary relief under the California Uniform Trade Secrets Act (“CUTSA”) consists of the following elements: “(1) possession by the plaintiff of a trade secret; (2) the defendant's misappropriation of the trade secret, meaning its wrongful acquisition, disclosure, or use; and (3) resulting or threatened injury to the plaintiff.” (Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4th 210, 220 disapproved on other grounds by Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310.)
In the 4th cause of action, Plaintiff alleges that CWE maintains proprietary trade secrets, including proprietary processes, practices, designs, formulas, recipes, and methods, which it has made efforts to protect. (FAC, ¶¶76-77.) Plaintiff alleges that Petrosyan and Kalashyan engaged in wrongful actual and threatened misappropriation of CWE’s trade secrets, by using those trade secrets for personal gain. (Id., ¶78.) Plaintiff alleges that their wrongful conduct proximately caused CWE’s economic harm. (Id., ¶80.)
To the extent Defendants demur to this cause of action on the grounds that Plaintiff has not sufficiently alleged standing for a derivative suit, the demurer is overruled.
Next, Defendants argue that CWE is a misjoined party because Plaintiff alleges that CWE is the owner of the trade secrets but that CWE also used its own trade secrets. However, the FAC alleges that Petrosyan and Kalashyan, misappropriated CWE’s trade secrets—not that CWE misappropriated its own trade secrets. However, to the extent that Plaintiff is bringing the cause of action on his own behalf is improper as he does not allege that he is the owner of the trade secret. Thus, the demurrer to the 4th cause of action will be sustained with leave to amend so that Plaintiff may allege the proper party bringing this claim.
G. 5th cause of action for tortious interference with prospective economic advantage derivatively on behalf of CWE and against Petrosyan
The elements of the tort of intentional interference with prospective economic advantage are: “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.” (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153.) “In addition, the plaintiff must allege that the defendant's conduct was wrongful by some measure beyond the fact of the interference itself. [Citation.] In this context, an act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard. [Citation.] The conduct must be independently actionable. The act of interference with prospective economic advantage is not tortious in and of itself but requires pleading that a defendant has engaged in an act that was independently wrongful in order to distinguish lawful competitive behavior from tortious interference.” (Stevenson Real Estate Services, Inc. v. CB Richard Ellis Real Estate Services, Inc. (2006) 138 Cal.App.4th 1215, 1220 [internal quotation marks and citations omitted].)
In the 5th cause of action, Plaintiff alleges that CWE entered into a valid and binding contract to purchase the CM Store business from MP Ice Cream, Inc. (FAC, ¶82.) Plaintiff alleges that Petrosyan was aware of CWE’s economic relationship with MP Ice Cream, Inc. by personally overseeing the negotiations. (Id., ¶83.) Plaintiff alleges that Petrosyan engaged in independent wrongful acts to interfere with Plaintiff and CWE’s prospective economic advantage, such as by placing last-minute conditions of closing of escrow to his personal assets in South Carolina (which Ms. Gottlieb was unwilling to accept), by misrepresenting to Plaintiff his personal financial position, and failing to act in a reasonably prudent manner as CEO of CWE, etc. (Id., ¶¶84-91.) Plaintiff alleges that Petrosyan engaged in wrongful acts to disrupt Plaintiff’s economic relationships so that the relationships could be usurped for his personal financial benefit. (Id., ¶92.) Plaintiff alleges that as a result of Petrosyan’s wrongful conduct, MP Ice Cream, Inc. terminated the escrow of CM Store and the prospective relationships with CWE, causing economic harm to Plaintiff and CWE. (Id., ¶93.)
To the extent Defendants demur to this cause of action on the grounds that Plaintiff has not sufficiently alleged standing for a derivative suit, the demurer is overruled.
Defendants also argue that the 5th cause of action for tortious interference is duplicative of the 7th cause of action for negligent interference with prospective economic advantage. However, Plaintiff has alleged sufficient facts at the demurrer stage to show what intentional conduct Petrosyan engaged in that would constitute a tortious interference. (See FAC, ¶¶84-91.)
Finally, Defendants argue that Plaintiff lacks standing to bring this cause of action because it was CWE that entered into the contract with MP Ice Cream, Inc. and thus any rights to the prospective economic relationships would have belonged to CWE and not Plaintiff. The Court finds merit with this argument. While this cause of action may be pleaded derivatively on CWE’s behalf, Plaintiff has not alleged how he was individually harmed as he was not the party to the agreement or economic relationship. Thus, the demurrer to the 5th cause of action will be sustained with leave to amend so that Plaintiff may allege the proper party bringing this claim.
The demurrer to the 5th cause of action is sustained with leave to amend.
H. 6th cause of action for intentional interference with contract derivatively on behalf of CWE and against Petrosyan
“The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of this contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.” (Pac Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1126.) “Where there is no existing, enforceable contract, only a claim for interference with prospective advantage may be pleaded.” (PMC, Inc. v. Saban Entertainment, Inc. (1996) 45 Cal.App.4th 579, 601, disapproved on other grounds by Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134.)
In the 6th cause of action, Plaintiff alleges that CWE entered into a valid and binding agreement on February 14, 2020 for the purchase of CM Store, whereby CWE was to purchase CM Store for $400,000, putting down $25,000 with the remaining funds and inventory to be deposited on or before the close of escrow. (FAC, ¶¶95-96.) Plaintiff alleges that the negotiated terms included fixtures, equipment, goodwill tradename, etc. (Id., ¶97.) Plaintiff alleges that Petrosyan personally negotiated the performance of escrow proceedings and that he engaged in wrongful conduct by intentionally disrupting performance of and inducing the breach of escrow and purchase of CM Store. (Id., ¶¶98-99.) Plaintiff alleges that Petrosyan’s interference, including demanding last-minute conditions to close, was a substantial factor of CWE’s breach of the purchase agreement and cancellation of escrow of CM Store. (Id., ¶100.) Plaintiff alleges that as a result of Petrosyan’s interference, CWE has suffered harm. (Id., ¶101.)
To the extent Defendants demur to this cause of action on the grounds that Plaintiff has not sufficiently alleged standing for a derivative suit, the demurer is overruled.
Defendants demur to the 6th cause of action, arguing that Plaintiff has not alleged the existence of a valid contract. The February 14, 2020 contract is alleged only in connection with the 6th cause of action (paragraph 95) and 7th cause of action (paragraph 105), but no further allegations of what the February 14, 2020 agreement entails is provided. It is unclear if this is a part of the oral agreement between Plaintiff and Petrosyan, or a separate agreement altogether. It is also unclear with whom CWE entered into this contract.. Without this foundational element of the existence of a contract between CWE and a third party, the remainder of the elements have not been met.
The demurrer to the 6th cause of action is sustained with leave to amend.
I. 7th cause of action for negligent interference with prospective economic advantage derivatively on behalf of CWE and against Petrosyan
“The tort of negligent interference with prospective economic advantage is established where a plaintiff demonstrates that (1) an economic relationship existed between the plaintiff and a third party which contained a reasonably probable future economic benefit or advantage to plaintiff; (2) the defendant knew of the existence of the relationship and was aware or should have been aware that if it did not act with due care its actions would interfere with this relationship and cause plaintiff to lose in whole or in part the probable future economic benefit or advantage of the relationship; (3) the defendant was negligent; and (4) such negligence caused damage to plaintiff in that the relationship was actually interfered with or disrupted and plaintiff lost in whole or in part the economic benefits or advantage reasonably expected from the relationship.” (Venhaus v. Shultz (2007) 155 Cal.App.4th 1072, 1078.)
In the 7th cause of action, Plaintiff alleges that CWE and MP Ice Cream Enterprises, Inc. had an economic relationship that would have resulted in future economic benefit to Plaintiff. (FAC, ¶104.) Plaintiff alleges that CWE entered into a binding agreement on February 14, 2020 for the purchase of CM Store, whereby CWE was to purchase CM Store for $400,000. (Id., ¶¶105-106.) Plaintiff alleges that Petrosyan knew of this relationship and should have known that this relationship would be disrupted if he failed to act with reasonable care. (Id., ¶107.) Plaintiff alleges that, Petrosyan failed to act with reasonable care by engaging in wrongful conduct by among other things, demanding last minute conditions, in order to interfere with the Plaintiff's expectation of profit. (Id., ¶108.) He alleges that Petrosyan’s conduct was a substantial factor in disrupting Plaintiff's economic relationship with MP Ice Cream Enterprises, Inc. and as a result, Plaintiff and CWE have suffered damages. (Id., ¶109.)
To the extent Defendants demur to this cause of action on the grounds that Plaintiff has not sufficiently alleged standing for a derivative suit, the demurer is overruled.
Defendants argue that the allegations constitute a sham in the FAC because the original complaint alleged that Plaintiff was the one that had the economic relationship. However, Plaintiff has amended the pleading to name the real party in interest and has made this a derivative cause of action on CWE’s behalf. Thus, this is not a sham pleading, but rather a clarification of the correct party in interest.
Defendants also argue that Plaintiff fails to allege what duty Petrosyan owed to Plaintiff that caused Plaintiff injury. The 7th cause of action appears to be alleged on behalf of CWE, but confusingly alleges that Plaintiff was the one that had an economic relationship disrupted and that he (and CWE) was injured. The 7th cause of action should be clarified and amended so that the correct party as indicated in the heading is CWE who suffered the harm.
The demurrer to the 7th cause of action is sustained with leave to amend.
J. 8th cause of action for fraudulent concealment by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan
The elements for fraudulent concealment are the following: (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. (Lovejoy v. AT&T Corp. (2004) 119 Cal. App. 4th 151, 157-158.) This cause of action is a tort of deceit and the facts constituting each element must be alleged with particularity; the claim cannot be saved by referring to the policy favoring liberal construction of pleadings. (Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) Since the claim must be pleaded with particularity, the cause of action based on misrepresentations must allege facts showing how, when, where, to whom, and by what means the misrepresentations were tendered. (Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73.)
In the 8th cause of action, Plaintiff alleges that he and Petrosyan are officers, directors, shareholders and partners of CWE and that Petrosyan owed certain duties to CWE and its shareholders. (FAC, ¶111.) Kalashyan is alleged to have been retained by CWE as a manager of the SB Store and under an agency relationship so that she owed fiduciary duties to her principals. (Id., ¶112.) Plaintiff alleges that Petrosyan knowingly failed to disclose and/or prevented Plaintiff from discovering further negotiations with Ms. Gottlieb for the purchase of CM Store from MP Ice Cream, Inc. in order to usurp a business opportunity originally presented to and otherwise rightfully belonging to CWE. (Id., ¶¶113-114.) He alleges that Petrosyan intended to deceive him by concealing the opportunity for personal gain from a newly formed shell corporation called Cooler G. Inc. to purchase CM Store. (Id., ¶115.) On April 12, 2021, Petrosyan transferred $300,000 from South Carolina Armenian Properties, LLC to Cooler G, Inc. and on June 23, 2021, he wire-transferred the contracted balance of $37,673.22 to escrow to complete the sale of the CM Store. (Id., ¶¶116-117.) Plaintiff alleges that he was unaware that Petrosyan and MP Ice Cream, Inc. had reentered negotiations and escrow for the sale of the CM Store, originally contracted and in escrow with CWE, and did not consent to Petrosyan individually acquiring it. (Id., ¶¶118-120.) He alleges that Petrosyan concealed his conversion and embezzlement of CWE funds by opening and shifting funds through multiple bank accounts. (Id., ¶¶121-122.) Plaintiff alleges Petrosyan’s concealment was a substantial factor in causing his harm. (Id., ¶123.)
To the extent Defendants demur to this cause of action on the grounds that Plaintiff has not sufficiently alleged standing for a derivative suit, the demurer is overruled.
Defendants argue that the gravamen of Plaintiff’s fraudulent concealment claim is based on fraud, deceit, malice, oppression, and conversion. He argues that Plaintiff has not alleged facts pursuant to Civil Code, § 3294(c). However, whether punitive damages have been adequately pled in connection with a fraudulent concealment claim is not at issue in determining whether the cause of action itself alleges sufficient facts to establish the elements of a fraudulent concealment claim. Whether punitive damages have been sufficiently pled is better discussed in a motion to strike.
Finally, Defendants Petrosyan and Kalashyan argue that Plaintiff has not alleged this cause of action with the requisite specificity for a fraud cause of action, but does not state specifically what facts were not adequately alleged—except for the facts in connection with punitive damages. As such, the demurrer on this basis is overruled.
The demurrer to the 8th cause of action on the aforementioned grounds is overruled.
K. 9th cause of action for conversion by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan
The elements of a conversion claim are the following: (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, interfering with plaintiff’s possession; and (3) damages. (Lee v. Hanley (2015) 61 Cal.4th 1225, 1240; PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395.) In this cause of action, it is necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to his own use. (Shopoff & Cavallo LLP v. Hyon (2008) 167 Cal.App.4th 1489, 1507.)
To the extent Defendants demur to this cause of action on the grounds that Plaintiff has not sufficiently alleged standing for a derivative suit, the demurer is overruled.
Defendants argue that Plaintiff fails to allege facts showing what property rights he had that constitutes the basis for his conversion claim. The 9th cause of action alleges that Petrosyan and Kalasyhan conspired to interfere with Plaintiff’s ownership interest in CWE by taking possession of CWE’s monies and vendor accounts and using it for their personal benefit through Cooler G, Inc. (FAC, ¶128.) He alleges that Petrosyan interfered with his ownership interest in CWE by debiting and retrieving certain amounts in CWE’s funds and using CWE’s credit card for personal expenses. (See id., ¶¶129-135.)
In the Court’s prior ruling on the demurrer to the complaint, the Court found that the allegations of the conversion cause of action in the initial complaint were lacking in identifying Plaintiff’s ownership or right to possession in property that constitute the basis for his conversion claim (i.e., if it is converted funds that he initially invested or something else that is identifiable, he should make these allegations to apprise Defendants and this Court of the basis of his claim). Here, in the FAC, Plaintiff has now identified the sums of money allegedly taken or converted by Petrosyan and Kalashyan from CWE’s bank accounts and how the funds were used for personal matters.
Defendants argue that Kahala Franchising should be the party against whom this cause of action is brought since Plaintiffs allege that Petrosyan authorized Kahala Franchising to debit royalty fees from one of CWE’s savings accounts. (See FAC, ¶130.) While Kahala Franchising may be a party against whom Plaintiff can also allege conversion, this does not mean that Plaintiff’s claims for conversion on other bank accounts owned by CWE cannot be alleged against Petrosyan and Kalashyan.
The demurrer to the 9th cause of action is overruled.
L. 10th cause of action for unfair business practice by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan
In the 10th cause of action, Plaintiff alleges that Defendants breached their duty of loyalty and care, substantially interfered with Plaintiff’s business relationships, misappropriated assets and trade secrets, converted CWE’s business bank funds, and engaged in other conduct, which constitute unlawful and unfair business practices. (FAC, ¶141.) However, it is not clear how this cause of action is separate from the other causes of action. The purpose of the UCL is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services. (Buller v. Sutter Health (2008) 160 Cal.App.4th 981, 986.) Plaintiff has not shown how this cause of action applies between Plaintiff as a shareholder or business partner and Defendants.
The demurrer to the 10th cause of action is sustained with leave to amend.
M. 11th cause of action for declaratory relief against Petrosyan
“Any person interested under a written instrument … or under a contract, or … in, over or upon property… may in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint … for a declaration of his or her rights and duties in the premises, including a determination of any question of construction or validity arising under the instrument or contract.” (CCP §1060.) Declaratory relief is allowed if the seeking party presents two essential elements: “(1) a proper subject of declaratory relief, and (2) an actual controversy involving justiciable questions relating to [the party's] rights or obligations.” (Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 909.)
In the 11th cause of action, Plaintiff alleges: “An actual controversy has arisen and now exists between the Plaintiff and Petrosyan concerning their respective ownership and status of Cooler West Enterprise, Cooler G., Inc[.] and the two Cold Stone Creamery Stores.” (FAC, ¶145.)
Defendants demur to this cause of action, arguing that it is a sham because Plaintiff omits “all Defendants” from the allegations and instead only names Petrosyan. The demurrer on this basis is overruled as it appears that the amendment was a clarification against whom the cause of action was directed.
Next, Defendants argue that Plaintiff has not alleged what contract or written instrument Plaintiff is basing his claim for declaratory relief. Plaintiff has not made such allegations. This was previously raised by the Court in its ruling on the initial demurrer and has not been addressed upon amendment in the FAC.
Thus, the demurrer to the 11th cause of action is sustained without leave to amend.
N. 12th cause of action for accounting against Petrosyan and CWE
“A cause of action for an accounting requires a showing that a relationship exists between the plaintiff and defendant that requires an accounting, and that some balance is due the plaintiff that can only be ascertained by an accounting.” (Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179.)
Defendants argue that this cause of action fails because Plaintiff is an officer, director, and shareholder of CWE and has in his own custody and control the relevant documents. However, whether Plaintiff has the documents is an extrinsic argument that is not alleged in the complaint. Rather, Plaintiff alleges that he has been denied access to the corporate and employment records of CWE.
The Court previously overruled the demurrer to the accounting cause of action in the initial complaint on the same grounds.
As such, the demurrer to the 12th cause of action is overruled.
O. 13th cause of action for constructive trust against all Defendants
Under California law, a constructive trust is an equitable remedy and not a substantive claim for relief. (PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 398.) The essence of the theory of constructive trust is to prevent unjust enrichment and to prevent a person from taking advantage of his or her own wrongdoing. (Id.)
Since the 13th cause of action is a remedy, it does not plead a cause of action. Therefore, the Court will sustain the demurrer to the 13th cause of action. Since this is a remedy and not a cause of action, the Court will not grant leave to amend.
DISCUSSION RE MOTION TO STRIKE
Defendants move to strike portions of the FAC.
A. Derivative Suit
Defendants move to strike allegations regarding the derivative suit, similar to the reasons discussed above in the demurrer. For the same reasons discussed above, the allegations regarding Plaintiff’s derivative suit is denied.
B. Each of the Causes of Action
Defendants move to strike each of the causes of action alleged in the FAC on the same grounds discussed in their demurrer. The arguments are redundant. As the causes of action were already discussed in the ruling on the demurrer above, the motion to strike is denied.
C. Punitive Damages
A complaint including a request for punitive damages must include allegations showing that the plaintiff is entitled to an award of punitive damages. (Clauson v. Superior Court (1998) 67 Cal.App.4th 1253, 1255.) A claim for punitive damages cannot be pleaded generally and allegations that a defendant acted "with oppression, fraud and malice" toward plaintiff are insufficient legal conclusions to show that the plaintiff is entitled to an award of punitive damages. (Brousseau v. Jarrett (1977) 73 Cal.App.3d 864, 872.) Specific factual allegations are required to support a claim for punitive damages. (Id.)
Civil Code § 3294 authorizes a plaintiff to obtain an award of punitive damages when there is clear and convincing evidence that the defendant engaged in malice, oppression, or fraud. Section 3294(c) defines the terms in the following manner:
(1) "Malice" means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.
(2) "Oppression" means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.
(3) "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.
In the FAC, Plaintiff seeks punitive damages in connection with the 3rd cause of action for breach of fiduciary duty, 8th cause of action for fraudulent concealment, and 9th cause of action for conversion. Plaintiff alleges that Defendants’ actions constituted malice, oppression, or fraud under Civil Code, § 3294 and defines each of the terms. (FAC, ¶¶73, 124, 138.)
The allegations seeking punitive damages are conclusory and are not alleged with the requisite particularity. “To support punitive damages, the complaint asserting one of those causes of action must allege ultimate facts of the defendant's oppression, fraud, or malice.” (Cyrus v. Haveson (1976) 65 Cal.App.3d 306, 316-17.) For example, the complaint in Brousseau v. Jarrett, which the court held was “a patently insufficient statement of ‘oppression, fraud, or malice, express or implied’”, as it stated:
Defendant engaged in the conduct described in the second count ‘intentionally, wilfully, fraudulently, and with a wanton, reckless disregard for the possible injuries [sic] consequences ... and as a result of ... said intentional, wilful, wanton, reckless, oppressive, and fraudulent conduct, plaintiff is entitled to exemplary damages. . . .
(Brousseau v. Jarrett (1977) 73 Cal.App.3d 864, 869 & 872.) Here, the facts fail to meet the requisite particularity to allege a claim for punitive damages.
The motion to strike the allegations for punitive damages is granted with leave to amend.
D. Other requests
Defendants also move to strike specific allegations. However, Defendants have not addressed why certain factual allegations should be stricken from the FAC, except that they are irrelevant, false, improper, and/or not drawn in conformity with the laws, local rules, or order of the Court. Thus, the motion to strike is denied as to the remainder of the motion.
CONCLUSION AND ORDER
Defendants Karen Petrosyan and Naira Kalashyan’s demurrer to the first amended complaint is sustained with 20 days leave to amend as to the 1st, 4th, 5th, 6th, 7th, and 10th causes of action. The demurrer is overruled as to the 2nd, 3rd, 8th, 9th, and 12th causes of action. The demurrer to the 11th and 13th causes of action is sustained without leave to amend.
Defendants’ motion to strike the allegations for punitive damages from the first amended complaint is granted with 20 days leave to amend. The remainder of the motion is denied.
Defendants shall provide notice of this order.