Judge John J. Kralik, Case 22BBCV00336 2023-04-14 Tentative Ruling

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 second amended complaint (“SAC”), filed January 9, 2023, 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 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; and (10) accounting against Petrosyan and CWE.

On February 9, 2023 Defendants Karen Petrosyan and Naira Kalashyan (hereinafter, “Defendants”) filed a demurrer to the SAC and a motion to strike portions of the SAC.

Defendants Petrosyan and Kalashyan demur to the 2^nd to 7^th causes of action in the SAC.

Defendants demur to the 2^nd cause of action, arguing it is confusing and inconsistent with the breach of contract claim.[1] Defendants argue that paragraph 54 of the SAC (1^st cause of action) alleges that Petrosyan partially satisfied the loan by making payments totaling $235,000 between April and September 2020, whereas paragraph 59 (2^nd cause of action) alleges that Plaintiff provided money to Petrosyan in the sum of $285,000 pursuant to the Seal Beach Store escrow and oral agreements but the money had not been returned or repaid. (SAC, ¶¶54, 59.)

In opposition, Plaintiff argues that reading the SAC as a whole, he has alleged that he wired $570,000 into CWE, which included a $285,000 loan to Petrosyan (to which Petrosyan agreed to repay the loan within a year at 8% interest) and Plaintiff’s initial investment of $285,000. (SAC, ¶¶25-26.)

However, the allegations appear to be in conflict. In the 1^st cause of action, Plaintiff alleges that Petrosyan partially satisfied the $285,000 loan by making $235,000 in payments, such that the remaining balance owed by Petrosyan is $50,000 at 8% interest. (SAC, ¶¶52-55.) The 2^nd cause of action alleges that Plaintiff provided Petrosyan $285,000 and that money has not been repaid or returned, such that Petrosyan owes an outstanding balance of $285,000 plus 8% interest. (Id., ¶¶59-60.) While the breach of contract claim appears to be based on the $285,000 loan made by Plaintiff to Petrosyan, it is unclear whether the common counts claim is based on this same loan (such that only $50,000 would be remaining due and owing) or on the $285,000 investment Plaintiff made in CWE. The allegations should be clarified upon amendment.

B. 3^rd cause of action for breach of fiduciary duty by Plaintiff and derivatively on behalf of CWE and against Petrosyan and Kalashyan

Defendants demur to the 3^rd cause of action, arguing that this Court has previously held that the request for punitive damages must include allegations that Plaintiff is entitled to such an award.[2]

However, challenging punitive damages is improper in a demurrer and such arguments are better raised in a motion to strike. Further, as noted before in the Court’s order on the demurrer to the FAC, Plaintiff is not required to allege his breach of fiduciary duty cause of action at the heightened level of alleging a claim for punitive damages pursuant to Civil Code, § 3294. Whether the allegations for punitive damages are adequate is a separate question that is better discussed in a motion to strike.

In the reply brief, Defendants argue that the gravamen of Plaintiff’s breach of fiduciary duty claim is based on fraud, deceit, malice, oppression, and conversion and cite to paragraph 93 of the SAC. However, 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.) The Court does not find that the “gravamen” of Plaintiff’s breach of fiduciary duty cause of action is based on the oppression, fraud, and/or malice. The elements of a breach of fiduciary duty cause of action do not include a finding of oppression, fraud, and/or malice. Plaintiff’s allegations in support of the breach of fiduciary duty cause of action are stated in paragraphs 61-92; in contrast, paragraph 93 specifically seeks punitive damages in addition to the damages Plaintiff may possibly be awarded if successful on a claim for breach of fiduciary duty.

C. 4^th cause of action for trade secret misappropriation 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 4^th 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. (SAC, ¶¶96-97.) Plaintiff alleges that Petrosyan and Kalashyan engaged in misappropriation of CWE’s trade secrets, by using those trade secrets for personal gain, and wrongfully accessed, retained, and used CWE’s trade secrets without permission. (Id., ¶¶98-99.) Plaintiff alleges that their wrongful conduct proximately caused CWE’s economic harm by being disadvantaged by its competitors. (Id., ¶100.)

Defendants demur to the 4^th cause of action, arguing that Plaintiff has failed to allege facts identifying Defendants’ wrongful acquisition, disclosure, or use of trade secrets and only allege in a conclusory manner that Defendants engaged in misappropriation of CWE’s trade secrets for personal gain.

The allegations do not apprise the parties how Defendants accessed, disclosed, or used CWE’s trade secrets. At most, the allegations of the 4^th cause of action are reiterations of the elements for misappropriation of trade secrets without supporting facts. As such, the demurrer to the 4^th cause of action is sustained with leave to amend.

D. 5^th 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 5^th cause of action, Plaintiff alleges that on January 27, 2020, CWE and Ms. Gottlieb entered into a Letter of Agreement for purchase of the Stores for $1,000,000 (SB Store for $600,000 and CM Store for $400,000). (SAC, ¶102.) He alleges that on February 14, 2020, the Stores simultaneously entered into escrow after depositing $25,000 on each. (Id., ¶104.) He alleges that on May 6, 2020, Petrosyan insisted and Plaintiff agreed to cancel the CM Store escrow, resulting in the loss of $25,000. (Id.) Plaintiff alleges that Petrosyan registered Cooler G, Inc. on March 12, 2021, entered into a contract on April 29, 2021 with Ms. Gottlieb to purchase the CM Store from MP Ice Cream, Inc. for $326,000, opened escrow and wired $25,000, and closed escrow for the purchase of CM Store on June 23, 2021. (Id., ¶¶105-107.) Plaintiff alleges that Petrosyan was aware of CWE’s economic relationship with MP Ice Cream, Inc., but engaged in independent wrongful acts of negligence, errors, omissions, misrepresentations, and breaches of his fiduciary duties resulting in interference with Plaintiff and CWE’s prospective economic advantage. (Id., ¶¶108-109.) Plaintiff alleges that Petrosyan placed last minute conditions on the close of escrow knowing that Ms. Gottlieb was unwilling to accept contingencies or further extensions for the purchase of the CM Store, he misrepresented to Plaintiff his financial position, breached his fiduciary duties as CEO to Plaintiff and CWE, failed to conduct adequate due diligence and information gathering during negotiations and escrow proceedings, failed to rely professional opinions and reports, failed to act objectively and in good faith to marshal the capital and requirements to close escrow, failed to use independent judgment and disclose facts to CWE and its shareholders, and engaged in independent wrongful acts to disrupt CWE’s economic relationship with MP Ice Cream, Inc. to usurp a corporate opportunity intended for CWE’s benefit. (Id., ¶¶110-117.)

Defendants argue that Plaintiff failed to allege facts with “specificity” that Petrosyan committed intentional wrongful acts. However, Defendants have not cited case law showing that a cause of action for intentional interference with prospective economic advantage must be pled at a higher pleading standard. Here, the allegations sufficiently allege that Petrosyan engaged in independent wrongful acts that disrupted the prospective economic relationship.

Defendants also argue that Plaintiff’s cause of action fails because Petrosyan cannot disrupt a non-existent and already-terminated contractual relationship. However, Plaintiff has alleged sufficient facts that Petrosyan knew of the contractual relationship between CWE and Ms. Gottlieb for the purchase of the Stores, but that he disrupted the relationship by having Plaintiff and CWE cancel the escrow so that Petrosyan and his newly formed entity could enter into the contract themselves. As such, there are sufficient facts for an intentional interference with prospective economic advantage cause of action.

E. 6^th 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 6^th cause of action, Plaintiff alleges that on January 27, 2020, CWE and Ms. Gottlieb entered into a Letter of Agreement for purchase of the Stores for $1,000,000 (SB Store for $600,000 and CM Store for $400,000). (SAC, ¶120.) Plaintiff alleges that Petrosyan personally negotiated and oversaw performance of escrow proceedings. (Id., ¶121.) Plaintiff alleges that the negotiated terms included fixtures, equipment, goodwill tradename, etc. (Id., ¶123.) He alleges that on February 14, 2020, the Stores simultaneously entered into escrow after depositing $25,000 on each. (Id., ¶124.) He alleges that on May 6, 2020, Petrosyan insisted and Plaintiff agreed to cancel the CM Store escrow, resulting in the loss of $25,000. (Id.) Plaintiff alleges that Petrosyan registered Cooler G, Inc. on March 12, 2021, entered into a contract on April 29, 2021 with Ms. Gottlieb to purchase the CM Store from MP Ice Cream, Inc. for $326,000, opened escrow and wired $25,000, and closed escrow for the purchase of CM Store on June 23, 2021. (Id., ¶¶125-127.) Plaintiff alleges that Petrosyan engaged in wrongful conduct designed to induce the breach of disruption of a contractual relationship with MP Ice Cream, Inc. (Id., ¶128.) 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., ¶129.) Plaintiff alleges that as a result of Petrosyan’s interference, CWE has suffered harm. (Id., ¶130.)

In the Court’s prior ruling on the demurrer to the 6^th cause of action in the FAC, the Court found that Plaintiff had not alleged sufficient facts regarding the February 14, 2020 contract—i.e., whether it was an oral agreement between Plaintiff and Petrosyan, or a separate agreement altogether, or with whom CWE entered into the contract. The Court held that without the foundational element of the existence of a contract between CWE and a third party, the remainder of the elements could not be met.

In the SAC, Plaintiff now alleges that CWE and Ms. Gottlieb entered into a Letter of Agreement for purchase of the Stores on January 27, 2020, such that ambiguity on the nature of the underlying contract for this cause of action is dispelled. Further, the allegations of the 6^th cause of action sufficiently allege what conduct Petrosyan engaged in that caused an interference of CWE’s contract with Ms. Gottlieb for the purchase of the Stores. As such, the 6^th cause of action is adequately pled.

F. 7^th 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 7^th 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. (SAC, ¶133.) Plaintiff alleges that on January 27, 2020, CWE and Ms. Gottlieb entered into a Letter of Agreement for purchase of the Stores, which Petrosyan personally negotiated and oversaw performance of escrow proceedings. (Id., ¶¶134-135.) He alleges that on February 14, 2020, the Stores simultaneously entered into escrow after depositing $25,000 on each. (Id., ¶136.) Plaintiff alleges that Petrosyan failed to act with reasonable care by engaging in wrongful conduct, such as placing last-minute conditions of closing of escrow and misrepresenting to Plaintiff his personal financial position. (Id., ¶137.) He alleges that Petrosyan’s conduct was a substantial factor in disrupting CWE’s economic relationship with MP Ice Cream Enterprises, Inc. and as a result, CWE has suffered damages. (Id., ¶138.)

Defendants argue that Plaintiff has not alleged sufficient facts specifying what kind of economic advantage CWE had and the nexus between Defendants’ acts and the damages allegedly sustained by CWE.

The SAC adequately alleged the economic advantage that CWE would have had—i.e., reasonable future economic benefits and net income/revenue by running an ice cream store. (SAC, ¶133.) Further, the allegations adequately allege that Petrosyan’s conduct in placing last-minute conditions and misrepresenting his finances caused a disruption and interference with CWE’s prospective economic advantage. Thus, the 7^th cause of action is adequately pled.

Defendants move to strike portions of the SAC. Specifically, Defendants move to strike paragraphs 93, 162, and 177, as well as the Prayer for Relief at Items C and F.

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 SAC, Plaintiff seeks punitive damages in connection with the 3^rd cause of action for breach of fiduciary duty, 8^th cause of action for fraudulent concealment, and 9^th 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. (SAC, ¶¶93, 162, 177.) The Prayer for damages at Item C requests punitive and exemplary damages.

The allegations in support of punitive damages with respect to the 3^rd cause of action have been adequately pled with the requisite specificity. The Court does not look at paragraph 93 in isolation, but looks at the entirety of the cause of action and the SAC. As discussed above, Plaintiff has alleged additional facts regarding Petrosyan’s conduct, which the Court finds adequate to allege malicious or oppressive conduct. Whether there will be clear and convincing evidence to support punitive damages will be determined beyond the pleading stage upon the consideration of evidence.

Similarly, Plaintiff has alleged additional facts regarding the fraudulent conduct engaged by Defendants in relation to the fraudulent concealment cause of action. The conversion cause of action also alleges facts supporting a showing of malicious or oppressive behavior with an intent to cause injury to Plaintiff and/or CWE. As such, the Court will allow the claim for punitive damages to go forward.

Defendants move to strike Item F from the Prayer for Damages, which seeks “declaratory relief concerning the rights and duties relating to CWE and Cooler G, Inc.” Defendants argue that the Court previously sustained without leave to amend the cause of action for declaratory relief in the ruling on the demurrer to the FAC. Plaintiff does not address this argument in the opposition brief.

As the Court previously sustained without leave to amend the declaratory relief cause of action in the FAC, the motion to strike Item F is granted without leave to amend.

Defendants Karen Petrosyan and Naira Kalashyan’s demurrer to the second amended complaint is sustained with 20 days leave to amend as to the 2^nd and 4^th causes of action, and overruled as to the 3^rd, 5^th, 6^th, and 7^th causes of action.

Defendants’ motion to strike the allegations for punitive damages from the second amended complaint is denied. The motion to strike Item F from the Prayer for Damages (seeking declaratory relief) is granted without leave to amend.

[1] The Court notes that Defendants previously demurred to the common count claim in the FAC on the grounds that it was uncertain and time barred. The Court overruled the demurrer on these grounds.

[2] The Court notes that Defendants previously demurred to the 3^rd cause of action on the grounds that Plaintiff lacked standing to bring a derivative suit, was uncertain, and lacked sufficient facts in the demurrer to the FAC. The Court overruled the demurrer on these grounds.

Superior Court of California

County of Los Angeles

Department B