Judge: John J. Kralik, Case: 23BBCV02244, Date: 2024-04-19 Tentative Ruling
Case Number: 23BBCV02244 Hearing Date: April 19, 2024 Dept: NCB
North Central District
EMBEDDED PIXEL, LLC, et al., Plaintiffs, v.
DI’IMAGE DIGITAL IMAGE CORPORATION, et al., Defendants. |
Case No.: 23BBCV02244
Hearing Date: April 19, 2024 [TENTATIVE] ORDER RE: DEMURRER
|
BACKGROUND
A. Allegations
Plaintiffs Embedded Pixel, LLC (“EPL”) and Hidden Pixels, LLC (“HPL”) allege that Douglas and Vesna Cavaliere are spouses and the sole members of EPL. The Cavalieres are the owner of QSR Systems, Inc. (“QSR”), which provides post-production video editing and storage system, media management tools, and lab-based video transcoding, archiving, and upload services. The Cavalieres asked Jeff Pierce to start working on a solution to stream video identification problems, and they developed the initial idea for a technically called “Screen-ID.” Plaintiffs allege that Pierce mentioned he worked for Defendant Di’Image Digital Image Corporation (“Di’Image”) as an independent contractor and that Di’Image had some related video encoding technology that may complement Screen-ID.
Plaintiffs allege that Pierce introduced the Cavalieres to Defendant John Naulin, who represented he owned groundbreaking video optimization and storage technology and had worked with large companies like Amazon, Industrial Light & Magic, Pixar, CIA, FBI, ATF, and DEA. In February 2021, John Naulin also claimed that he was an expert at drafting contracts and attempted to persuade Pierce and the Cavalieres to sign 2 agreements without consulting their lawyers first. The 2 agreements include: (1) the Prototype Agreement dated March 1, 2021 whereby Di’Image would develop Screen-ID for QSR for $82,500; and (2) the Joint Venture Agreement dated April 8, 2021 between Di’Image (49% owner) and EPL (51% owner) to start a new joint venture/company named with the temporary placeholder “NEWCO” (later named HPL) and develop/market a new technology invented by the Cavalieres and Pierced called Dynamic Data Injection (“DDI”). Plaintiffs allege that Defendant Shayna Naulin (John Naulin’s wife) was involved in the administration and creation of HPL.
Plaintiffs allege that EPL upheld its end of the agreement, but Di’Image failed to contribute to Di’RUSH (software designed to encode and optimize image files) and ACRYPTEK (cyber security software) as promised, did not have the promised software technology and industry experience, lacked contacts to bring sales/capital to HPL, and refused to contribute 49% capital required by HPL. Plaintiffs allege that Alpha Omega Corp. owned the Di’RUSH video optimization software and that an independent contractor of Di’Image possessed the Di’RUSH and ACRYPTEK software.
Plaintiffs allege that Di’Image failed to contribute $20,000 as required and that EPL’s $20,000 contribution was used to create a new video optimization and cryptographic storage software (due to the lack of access to existing systems) and was improperly used for HPL’s operating expenses. Plaintiffs allege that EPL contributed an additional $16,000 and then $7,500, but Di’Image had contributed nothing. Plaintiffs allege that they discovered that the Naulins had failed to open a separate bank account for HPL and had deposited EPL’s funds directly into Di’Image’s bank account and when Di’Image finally opened a bank account for HPL, it only included the Naulins’ names as authorized signatories.
The first amended complaint (“FAC”), filed January 22, 2024, alleges causes of action for: (1) accounting against all Defendants; (2) breach of fiduciary duty against all Defendants; (3) declaratory judgment against Di’Image; (4) breach of contract by EPL against Di’Image; (5) fraudulent inducement by EPL against John Naulin and Di’Image; (6) negligent misrepresentation by EPL against John Naulin and Di’Image; (7) breach of the covenant of good faith and fair dealing by EPL against Di’Image; (8) receipt of stolen property (Penal Code, § 496(c)) against all Defendants; and (9) unfair business practices against John Naulin and Di’Image.
B. Demurrer on Calendar
On March 18, 2024, Defendants Di’Image, John Naulin, and Shayna Naulin filed a demurrer to the FAC.
On April 8, 2024, Plaintiffs filed an opposition brief.
On April 12, 2024, Defendants filed a reply brief.
DISCUSSION
Defendants demur to the 1st, 2nd, 3rd, 4th, 8th, and 9th causes of action in the FAC.
A. Derivative Claims?
Defendants demur to the 1st, 2nd, 3rd, 8th, and 9th causes of action, arguing that they allege derivative claims on behalf of HPL and direct claims on behalf of EPL and that such mixed pleadings are improper.
As stated by the Court of Appeal in Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 650–651:
As the Supreme Court has explained: “A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act. Thus, ‘the 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.]” (Jones, supra, 1 Cal.3d 93, 106, 81 Cal.Rptr. 592, 460 P.2d 464.) In contrast, “a direct action [is one] filed by the shareholder individually (or on behalf of a class of shareholders to which he or she belongs) for injury to his or her interest as a shareholder. ... [¶] ... [T]he two actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) or the corporation (derivative action).” (Friedman, Cal. Practice Guide: Corporations, supra, ¶ 6:598, p. 6–127.)
(Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 650–651.)
Defendants argue that the 1st, 2nd, 8th, and 9th causes of action are derivative because they allege harm to HPL and that EPL (a member of HPL) lacks standing to pursue claims based on HPL’s injuries. Defendants argue that the 1st cause of action for accounting seeks an accounting for funds contributed by EPL to HPL, but that the Naulins withdrew funds from HPL’s accounts and deposited it into Di’Image’s own accounts. (FAC, ¶¶54-58.) The 2nd cause of action for breach of fiduciary duty alleges that EPL and Di’Image are fiduciaries of HPL, but Di’Image breached its fiduciary duties to EPL by failing to obtain software, making misrepresentations about owned technology, commingling HPL funds with Di’Image’s own funds, etc. (Id., ¶¶60-61.) The 3rd cause of action for declaratory relief seeks a declaration of the rights between EPL and Di’Image regarding the Joint Venture Agreement. (Id., ¶¶69-77.) The 8th cause of action for receipt of stolen property alleges that John Naulin and Di’Image took EPL’s funds paid to HPL and used it for their own benefit. (Id., ¶¶124-127.) The 9th cause of action for unfair business practices alleges that Defendants’ conduct violates the unfair competition law. (Id., ¶130.) Defendants argue that the causes of action allege injuries suffered by HPL and that EPL’s contribution of funds is now HPL’s property so that EPL lost any independent claim to the funds.
In opposition, Plaintiffs argue that they do not mix derivative and individual causes of action and that they have named HPL as a plaintiff, such that derivative claims are not necessary. A derivative claim arises when the corporation at issue fails to act. Here, as pointed out by Plaintiffs, HPL is a named plaintiff to the action and has not failed to act. Thus, a derivative lawsuit on behalf of HPL is not necessary. Plaintiffs also argue that EPL is not suing as a representative of the company or a derivative plaintiff, but instead as an individual plaintiff bringing causes of action against another member of the company and its principals. Based on the allegations of the FAC, EPL is seeking individual claims against Defendants. These causes of action do not mix derivative and direct claims in a single action. As such, the demurrer will not be sustained on this general basis. However, the Court will evaluate for each cause of action whether the HPL and/or EPL have standing to bring a certain claim against Defendants.
B. 1st cause of action for accounting against All Defendants
“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.) “An action for accounting is not available where the plaintiff alleges the right to recover a sum certain or a sum that can be made certain by calculation.” (Id.)
The accounting cause of action alleges that EP and Di’Image are fiduciaries as members of HPL. (FAC, ¶54.) Plaintiffs allege that Di’Image admits that it owes amounts to HPL. (Id., ¶55.) Plaintiffs allege that Di’Image and the Naulins derived benefits from funds EPL contributed to HPL’s operating costs and technology development and that the Naulins withdraw funds from HPL and deposited it into Di’Image’s own accounts. (Id., ¶¶56-57.)
Defendants demur to the 1st cause of action, arguing that EPL lacks standing as the FAC alleges that Di’Image admits that it owes amounts to HPL; John and Shayna Naulin are improperly named in the cause of action; and no accounting is necessary where the right to recover is made certain by calculation. Plaintiffs argue that they have sufficiently alleged facts that the Naulins were in control of the management of HPL’s funds, they had failed to open a separate bank account for HPL and were depositing funds into Di’Image’s account, when the Naulins’ finally opened a bank account for HPL they were the only authorized signatories, and the Naulins used the funds for their own benefit. (FAC, ¶¶32-35, 40, 43, 45, 56-57.)
Accepting the allegations as true as alleged in the FAC at the demurrer stage, the Court finds that Plaintiffs have sufficiently alleged a relationship involving the Naulins, such that the accounting cause of action may be alleged against the Naulins. Each of the Defendants named in the cause of action may have different information regarding the use of HPL’s funds, where the funds are, and the amount of funds that were used for HPL as opposed to Di’Image.
However, the allegations fail to allege any duty owed by Defendants to EPL. While EPL initially contributed the funds, the funds were given to HPL such that the funds are now HPL’s property. As alleged by Plaintiffs in paragraph 55, Di’Image admits that it owes funds to HPL.
The demurrer to the 1st cause of action is sustained in part only to the portion that it is brought by EPL. The remainder of the demurrer to the 1st cause of action as brought by HPL against all Defendants is overruled.
C. 2nd cause of action for breach of fiduciary duty and Alter Ego Allegations against All Defendants
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.) A fiduciary relationship is any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. (Wolf v. Superior Court (2003) 106 Cal.App.4th 625, 629.) Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter's knowledge or consent. (Id.) Examples of fiduciary relationship in the commercial context include trustee/beneficiary, directors and majority shareholders of a corporation, business partners, joint adventurers, and agent/principal. (Id.)
In the 2nd cause of action, Plaintiffs allege that EPL and Di’Image are fiduciaries as members of HPL. (FAC, ¶60.) They allege that Di’Image breached its fiduciary duties to EPL in numerous ways, such as failing to obtain control of the ACRYPTEK software and the Di’RUSH video optimization technology; representing it owned technology and patents when it did not; commingling HPL’s funds with Di’Image’s own funds in its own bank account; failing to open an HPL bank account or keep separate books; opening an HPL bank account under the Naulins’ names only; changing the manager named on HPL’s Secretary of State Statement of Information without EPL’s consent; attempting to sell HPL’s technology through Di’Image so that Di’Image would profit from sales; paying itself with HPL funds; and converting HPL’s funds for Defendants’ own benefit. (Id., ¶61.) Plaintiffs allege that the Naulins are personally, individually, and collectively responsible for Di’Image’s breaches of fiduciary duties to EPL because Di’Image is, was, and continues to be a mere shell, instrumentality, and conduit of the Naulins, who completely dominate and control Di’Image to such an extent that any individuality or separateness between them and Di’Image does not exist. (Id., ¶¶63-64.) Plaintiffs allege that the Naulins have tonrolled and operated Di’Images’ affiars so as to make it a mere instrumentality or adjunct of them without regard to its separate entity and they have treated the assets of Di’Image as their own and disregarded the corporate form by commingling assets and undercapitalizing Di’Image. (Id., ¶¶65-66.)
Defendants argue that this cause of action alleges only harm to HPL and that the facts are devoid of any facts regarding what type of fiduciary duty (of loyalty or care) was breached and how the alleged breaches in paragraph 61 equate to breaches of fiduciary duties.
Here, the allegations are somewhat ambiguous. The 2nd cause of action alleges a fiduciary duty between EPL and Di’Image and the allegations appear to focus on the breaches of this fiduciary duty owed by Di’Image to EPL only, as opposed to HPL. The pleadings should be clarified to address which Plaintiffs are bringing this cause of action against the specified Defendants. The demurrer will be sustained on this basis.
With respect to which type of duty was breached, Plaintiffs address this in their opposition brief—i.e., that the duty of loyalty was breached when Defendants failed to obtain control of promised software, duty to tell material facts and not conceal information, the commingling of funds, etc. (Leyte-Vidal v. Semel (2013) 220 Cal.App.4th 1001, 1014 [“Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.”]; Marzec v. California Public Employees Retirement System (2015) 236 Cal.App.4th 889, 915–916 [stating that fiduciaries are bound to act in good faith and not take advantage of their beneficiary by misrepresentations, concealment, threat, or adverse pressure of any kind]; Michel v. Moore & Associates, Inc. (2007) 156 Cal.App.4th 756, 762 [“A fiduciary must tell its principal of all information it possesses that is material to the principal's interests.”]; Raven's Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783, 801 [describing “basic fiduciary duties of acting in good faith and exercising basic duties of good management.”].) The allegations of breach of fiduciary duty have been adequately alleged.
Defendants also demur to the alter ego allegations alleged in paragraphs 63 to 67 in the FAC, which are alleged in the 2nd cause of action. The alter ego doctrine is used to hold the persons controlling the corporation liable for the acts of the corporation when the persons are using the corporate form to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or unequitable purpose. (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) Plaintiffs must factually allege that there is “a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.” (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 526.) The allegations for alter ego liability fail to allege facts that an inequitable result if the acts in question are treated as those of the corporation alone. Plaintiffs will be given leave to amend the 2nd cause of action’s allegations of alter ego liability to include such facts.
The demurrer to the 2nd cause of action is sustained with leave to amend so that Plaintiffs may properly allege which Plaintiff(s) is bringing this cause of action and the particular Defendant(s) the cause of action is directed against. Plaintiffs may also allege additional facts to support their claim of alter ego liability.
D. 3rd cause of action for declaratory relief against Di’Image
CCP § 1060 states in relevant part: “Any person interested under a written instrument, excluding a will or a trust, or under a contract, or who desires a declaration of his or her rights or duties with respect to another, … may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court 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. He or she may ask for a declaration of rights or duties, either alone or with other relief; and the court may make a binding declaration of these rights or duties, whether or not further relief is or could be claimed at the time. The declaration may be either affirmative or negative in form and effect, and the declaration shall have the force of a final judgment. The declaration may be had before there has been any breach of the obligation in respect to which said declaration is sought.”
A cause of action for declaratory relief is a remedy created by CCP § 1060 and it is pleaded if it: (1) sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the respective parties and (2) requests that the rights and duties be adjudged. (City of Tiburon v. Northwestern Pac. R.R. Co. (1970) 4 Cal.App.3d 160, 170; see CCP § 1060 [identifying the remedy of declaratory relief].) If these requirements are met, the Court must declare the rights of the parties whether or not the facts alleged establish that the plaintiff is entitled to a favorable declaration. (Id.) Declaratory relief is a broad remedy, and the rule that a complaint is to be liberally construed is particularly applicable to one for declaratory relief. (Id.)
The 3rd cause of action is directed against Di’Image only. Plaintiffs allege that a controversy has arisen between Plaintiffs and Defendants relating to the rights and obligations of the parties pursuant to the Joint Venture Agreement between EPL and Di’Image. (FAC, ¶69.) EPL alleges that Defendants have denied that Di’Image is responsible for 49% of HPL’s operating costs and 49% of the initial $20,000 that EPL contributed to HPL; Defendants have denied that HPL is entitled to issue a funding call for additional funds to run the company; and Defendants have at times denied that EPL is entitled to majority voting control of HPL. (Id., ¶¶70-74.) Plaintiffs contend that Di’Image’s membership in HPL is contingent upon its performance of obligations under the agreement and thus Di’Image is not a member of HPL. (Id., ¶75.)
Defendants argue that the 3rd cause of action fails against HPL because HPL is not a party to the Joint Venture Agreement and was not even formed at the time the agreement was entered. In opposition, Plaintiffs argue that HPL is a party that is interested under a written instrument or contract. In reply, Defendants argue that HPL lacks any showing that it has more than an indirect interest in the agreement. However, the Joint Venture Agreement is about the formation of HPL, and the obligations that EPL and Di’Image are contracted to perform to bring about HPL’s formation and operation. At the pleading stage, the FAC alleges sufficient facts to show that HPL has more than an indirect interest in the Joint Venture Agreement, including whether Di’Image is a member of HPL based on its alleged failure to perform its obligations under the agreement.
Next, Defendants argue that the 3rd cause of action is duplicative of the 4th cause of action. The 4th cause of action alleges that Di’Image failed to contribute 49% of operating and technology development costs of HPL and Di’Image failed to contribute ACRYPTEK and Di’RUSH software and technology as promised under the Joint Venture Agreement. (FAC, ¶¶81-82.) The allegations of the 3rd cause of action are not duplicative of the 4th cause of action. The 3rd cause of action alleges distinct points of adjudication that Plaintiffs seek that are beyond the allegations of the breach of contract cause of action. As such, the demurrer to the 3rd cause of action is overruled.
E. 4th cause of action for breach of contract by EPL against Di’Image
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.)
The 4th cause of action alleges that the Cavalieres, on behalf of EPL, and John Naulin, on behalf of Di’Image, entered into the Joint Venture Agreement. (FAC, ¶79.) Plaintiffs allege that EPL did all or substantially all of the significant things the contract required. (Id., ¶80.) They allege that Di’Image failed to contribute 49% of operating and technology development costs of HPL and Di’Image failed to contribute ACRYPTEK and Di’RUSH software and technology as promised under the Joint Venture Agreement. (Id., ¶¶81-82.)
Defendants argue that though a copy of the Joint Venture Agreement is attached, it fails to allege relevant terms. Defendants argue that though Plaintiffs allege that Di’Image was required to contribute 49% of the operating and technological costs of HPL and was required to contribute software and technology, the only reference to 49% in the agreement is that Di’Image owns 49% of the company and there are no terms requiring contribution of the software/technology (only licensing if necessary).
“If facts appearing in the exhibits [attached to the complaint] contradict those alleged, the facts in the exhibits take precedence.” (Holland v. Morse Diesel Intern., Inc. (2001) 86 Cal.App.4th 1443, 1447.) The Joint Venture Agreement is attached as Exhibit A to the FAC. It states that EPL and Di’Image have formed a relationship aimed at creatin and managing new technology and that they shall form NEWCO as a joint venture for the purpose of developing and marketing the products. Under the section regarding the Screen-ID production, the agreement states that Di’Image shall provide services to develop encoding software (a server-side media encoder/decoder). (Joint Venture Agreement at p.1.) The agreement states that Di’Image currently has a world-wide exclusive license to and/or ownership of proprietary software designed to encode and optimize image files (Di’RUSH) and has proprietary ownership of and/or worldwide license to Cyber Security Software (ACRYPTEK), which contain features that may complement the relationship. (Id. at p.2.) The agreement provides a 10-week timeline for the Screen-ID project, including a deposit at the beginning. (Id.) The development cost is anticipated to be $82,500, with $45,000 due at the start of the project, $18,750 due at week 5, and $18,750 due upon completion of the software. (Id. at p.3.) With respect to the formation of NEWCO, the parties agreed that EPL will own 51% of the company issued as voting stock and Di’Image would own 49%. (Id.)
The terms of the Joint Venture Agreement do not state how the project will be funded—whether EPL is responsible for paying the full development cost or if the costs were split. Further, the agreement does not state that Di’Image would necessarily contribute ACRYPTEK software and Di’RUSH technology, but only states that Di’Image has a world-wide exclusive license to and/or ownership in the software/technology that may prove complementary. While the terms that Plaintiffs allege in the FAC are not necessarily stated in the agreement, the Court notes that the agreement is not a fully integrated instrument. At the demurrer stage, the Court will accept the allegations of the FAC as true, along with the terms of the written agreement. Defendants’ arguments regarding the terms of the agreement (or if it is lacking in terms) is better discussed upon the consideration of evidence, such as at the summary judgment or trial stage.
The demurrer to the 4th cause of action is overruled.
F. 8th cause of action for receipt of stolen property (Penal Code, § 496(c)) against all Defendants
Penal Code, § 496 states in relevant part:
(a) Every person who buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained, shall be punished by imprisonment in a county jail for not more than one year, or imprisonment pursuant to subdivision (h) of Section 1170. However, if the value of the property does not exceed nine hundred fifty dollars ($950), the offense shall be a misdemeanor, punishable only by imprisonment in a county jail not exceeding one year, if such person has no prior convictions for an offense specified in clause (iv) of subparagraph (C) of paragraph (2) of subdivision (e) of Section 667 or for an offense requiring registration pursuant to subdivision (c) of Section 290.
(Pen. Code, § 496(a).) “[T]he elements required to show a violation of section 496(a) are simply that (i) property was stolen or obtained in a manner constituting theft, (ii) the defendant knew the property was so stolen or obtained, and (iii) the defendant received or had possession of the stolen property.” (Switzer v. Wood (2019) 35 Cal.App.5th 116, 126.)
In the 8th cause of action, Plaintiffs allege that John Naulin and Di’Image took amounts EPL paid for HPL’s operating expenses and technology development and used it for their own benefit. (FAC, ¶124.) Plaintiffs allege that Defendants knew they were taking or receiving money they knew did not belong to them. (Id., ¶125.)
“Section 496, subdivision (a) refers to ‘property that has been stolen or that has been obtained in any manner constituting theft.’ (§ 496, subd. (a), italics added.) ‘Which is to say, when the property in question comes into the defendant's hands, it must already have the character of having been stolen.’ [Citation.]” (Lacagnina v. Comprehend Systems, Inc. (2018) 25 Cal.App.5th 955, 971.) To qualify as property that “has been stolen,” Plaintiffs must allege that the funds that Defendants received were stolen property in the first place (i.e., that EPL provided stolen funds for HPL’s operating expenses and technology development). Plaintiffs have not alleged that EPL provided stolen funds to Defendants for use in HPL’s operations and that Defendants accepted the funds knowing the funds were stolen property.
To allege property that has been obtained in a manner constitute theft, Plaintiffs must “establish criminal intent on the part of the defendant beyond ‘mere proof of nonperformance or actual falsity.’ [Citation.] This requirement prevents ‘[o]rdinary commercial defaults’ from being transformed into a theft. [Citation.] If misrepresentations or unfulfilled promises ‘are made innocently or inadvertently, they can no more form the basis for a prosecution for obtaining property by false pretenses than can an innocent breach of contract.’ [Citation.] (Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333, 361–362 [finding that defendants acted not innocently or inadvertently, but with careful planning and deliberation reflecting criminal intent when concealing and withhold funds and knowing the diverted funds were so obtained].) Here, Plaintiffs have not alleged facts showing that Defendants acted with criminal intent.
The demurrer to the 8th cause of action is sustained with leave to amend.
G. 9th cause of action for unfair business practices against John Naulin and Di’Image
In order to plead a claim under Business and Professions Code § 17200, there must be allegations demonstrating that the Defendants engaged in an unlawful, unfair, or fraudulent business act or practice. (Paulus v. Bob Lynch Ford, Inc. (2006) 139 Cal.App.4th 659, 676-77.) Further, to plead this statutory claim, the pleadings must state with reasonable particularity the facts supporting the statutory elements of the violation. (Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 619.)
In the 9th cause of action, Plaintiffs allege that Defendants’ conduct violate section 17200 because the acts violate public policy. (FAC, ¶130.) Plaintiffs allege that Defendants’ conduct resulted in loss of money to Plaintiffs. (Id., ¶131.)
Defendants argue that Plaintiff has only alleged 2 short paragraphs for this cause of action, but have not alleged specific facts about what public policy was violated or injury to consumers. In opposition, Plaintiffs cite to the allegations for Di’Image’s fraudulent conduct, arguing that they can allege a UCL claim. (See Opp. at 19 [citing FAC ¶¶13-18, 26-27, and 84-114].) They also argue that Defendants’ conduct is unfair and unlawful pursuant to Penal Code, § 496(c).
The allegations of the 9th cause of action are sparse. Plaintiffs have not specifically alleged under which prong it is bringing its UCL claim and the facts under which each of the claims are being brought. However, based on Plaintiffs’ opposition brief, it appears that Plaintiffs can amend this cause of action to allege specific facts for this statutory cause of action. As such, the demurrer to the 9th cause of action is sustained with leave to amend.
CONCLUSION AND ORDER
Defendants Di’Image Digital Image Corporation, John Naulin, and Shayna Naulin’s demurrer to the 1st, 2nd, 8th, and 9th causes of action in the First Amended Complaint is sustained with 20 days leave to amend as described more fully in the Court’s written order. The demurrer to the 3rd and 4th causes of action is overruled.