Judge: Kenneth J. Medel, Case: 37-2022-00019279-CU-BC-CTL, Date: 2023-12-01 Tentative Ruling

SUPERIOR COURT OF CALIFORNIA,

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HALL OF JUSTICE

TENTATIVE RULINGS - November 30, 2023

12/01/2023  09:30:00 AM  C-66 COUNTY OF SAN DIEGO

JUDICIAL OFFICER:Kenneth J Medel

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Civil - Unlimited  Breach of Contract/Warranty Demurrer / Motion to Strike 37-2022-00019279-CU-BC-CTL ALUMICRAFT LLC VS ALUMI CRAFT INC [IMAGED] CAUSAL DOCUMENT/DATE FILED: Demurrer, 05/02/2023

Request for Judicial Notice The Request is GRANTED as to (1), (2), (3), (6), (7), (14) DENIED as to (4), (5), (8), (9), (10), (11), (12), (13) Defendant ALUMI CRAFT INC.'s Demurrer to the Third Amended Complaint is OVERRULED.

The underlying case is a breach of contract, fraud and indemnity case. Pursuant to a written Asset Purchase Agreement dated May 21, 2021, Alumicraft LLC, a Wyoming limited liability company purchased certain assets of Defendant. The parties are involved in manufacture and sale of off-road racing vehicles.

Cross-Complainants JOHN W. COOLEY and GRINDLE L. COOLEY are married and are the founders and owners of Defendant ALUMI CRAFT INC., which was in the business of building off-road vehicles.

In 2020, due to JOHN's health problems, JOHN and GRINDLE decided to sell the INC. Cross-Defendant A longtime customer and friend, MATTHEW FLEMING, decided to purchase and negotiated an asset purchase, memorialized in the Asset Purchase Agreement dated May 21, 2021 (the 'PSA'). The parties to the PSA are ALUMI CRAFT, INC. and ALUMICRAFT LLC, a Wyoming limited liability company ('WY LLC'). The PSA forms the basis for every cause of action alleged by Plaintiff(s). (Request for Judicial Notice ['RJN'], Exs. A-C.) One year after the PSA was signed, on May 20, 2022, and the day before the first of five annual payments of $95,000 was due to be paid under the PSA, the original Plaintiff, WY LLC, filed suit against Defendant, INC., alleging claims stemming from the PSA.

The problem was that WY LLC did not have capacity to sue in California due to its failure to register as a foreign entity. (Corp. Code § 2203.) A FAC was filed that alleged that ALUMICRAFT LLC, a California limited liability company, was 'intended' to, and allegedly did, acquire the assets of INC. pursuant to an 'assignment' that was allegedly 'effective as of May 21, 2021'. (RJN, Ex. B-1, at ¶8; Ex. B-2, at ¶ 8-13.) WY LLC was dismissed as plaintiff and the FAC alleged Alumicraft CA as the plaintiff.

In February, 2023, this Court sustained INC.'s Demurrer. On February 23, 2023, CA LLC filed the Second Amended Complaint. Pursuant to a stipulation, on April 7, 2023, CA LLC filed the Third Amended Complaint. Substantively, the TAC is identical to the FAC except for additional paragraphs 10-14, 17 and 52.

Paragraph 10 alleges: 'The business assets purchased from Defendant were transferred to Plaintiff, and from and after May 21, 2021 Plaintiff possessed, controlled, and operated the assets (including the business) that are the subject of the Agreement. Defendant expressly approved and agreed to the assignment of all rights and interests acquired under the Agreement; the Agreement, at page 14, provides, 'Buyer shall have the right to assign its rights and obligations under this Agreement to one or more affiliates of Buyer which are under Buyer's exclusive control.' Calendar No.: Event ID:  TENTATIVE RULINGS

3031380  45 CASE NUMBER: CASE TITLE:  ALUMICRAFT LLC VS ALUMI CRAFT INC [IMAGED]  37-2022-00019279-CU-BC-CTL Paragraph 11 summarizes facts demonstrating that plaintiff intended to operate the business from May 21, 2021.

Paragraph 12 alleges: 'A written Assignment of Asset Purchase Agreement effective as of May 21, 2021 (the 'Assignment') confirms and memorializes the transfer of the business and related assets to Plaintiff, and confirms and memorializes that Plaintiff acquired all right, title and interest in the Agreement and all assets and rights transferred by Defendant pursuant to the Agreement, including without limitation the claims alleged herein, to whatever extent (if any) those claims are not held by Plaintiff in the first instance. The Assignment is effective as of May 21, 2021, because Plaintiff is the entity that actually possessed, controlled, and operated the assets (including the business) that are the subject of the Agreement from that date forward.' Paragraph 13 alleges: 'Investigation to confirm the identity of the entity that operated the business following the transfer of the assets by Defendant was performed, and it was confirmed that the business was operated by Plaintiff following the transfer of assets by Defendant, and not by Alumicraft Wyoming, including by confirmation of the facts alleged above. Because Plaintiff is the holder of the claims alleged herein, with the right to raise and assert those claims, the operative complaint in this action was amended to provide that Plaintiff is the party seeking and entitled to affirmative relief in this proceeding.' According to defendant INC., the Assignment of Asset Purchase Agreement, produced by CA LLC (in discovery) on November 4, 2022, is dated July 28, 2022, executed July 30, 2022, and has an alleged 'effective date' of May 21, 2021 (the date the PSA was executed). (RJN, Ex. B-2, at ¶¶ 8-13; Exs. C-D.) Defendant contends that this Assignment is 'manufactured' and does not confer standing on CA LLC because it was not actually or legally 'effective' May 21, 2021. Defendant argues that to the extent it is an effective Assignment at all, it is effective on the date it was reduced to writing - July 30, 2022.

Inc. demurs again, arguing that the timing and terms of the Assignment and pleadings render the TAC subject to demurrer on the following bases: (1) the person who filed the pleading does not have the legal capacity to sue; (2) there is a defect or misjoinder of parties; (3) the TAC fails to state a claim. (CCP §§ 430.10(b), (d), (e).) The TAC alleges (1) that the parties 'intended' that CA LLC 'would acquire the assets that were the subject of the Agreement,' (2) that through the Assignment, 'Plaintiff acquired all right, title and interest in the Agreement and all assets and rights transferred pursuant to the Agreement,' and (3) that the 'the Assignment is effective as of May 21, 2021, because Plaintiff is the entity that actually possessed, controlled, and operated the assets (including the business) that are the subject of the Agreement from that date forward.' (TAC, at ¶ 9-12.) The TAC also alleges that an investigation was needed to determine who the real party in interest was. (TAC, at ¶ 13.) WY LLC – original plaintiff – lacked capacity First, it is clear that, the original plaintiff, WY LLC lacked capacity to sue when the Complaint was originally filed. When WY LLC initiated this lawsuit in May 2022, it did not have standing or capacity to maintain this lawsuit because it was/is an unqualified foreign entity transacting intrastate business in California in violation of Corporations Code ('Corp. Code') §§ 2105 and 2203. WY LLC is a Wyoming LLC that is not registered with the California Secretary of State to conduct business in California. (RJN, Exs. E-F; Dec., ¶ 3-4.) Corp. Code § 2105(a) provides that a 'foreign corporation shall not transact intrastate business without having first obtained from the Secretary of State a certificate of qualification.' Corp. Code § 2203(c) states that a foreign corporation 'which transacts intrastate business without complying with Section 2105 shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state,' until it has complied with Corp. Code § 2105.

'Once a nonqualified foreign corporation commences an action regarding intrastate business, the defendant may assert by demurrer . . .lack of capacity to maintain an action arising out of intrastate business.' (United Medical Management Ltd. v. Gatto (1996) 49 Cal.App.. 4th 1732, 1740.) 'Standing is a threshold issue . . . without it no justiciable controversy exists.' (Saterbak v. JPMorgan Chase Bank, N.A. (2016) 245 Cal.App.4th, 808, 813.) Assignment Plaintiff relies on an alleged assignment of the claims from WY LLC to CA LLC. The Third Amended Complaint avoids reference to the date of the actual assignment. The pleadings alleges: 'A written Assignment of Asset Purchase Agreement effective as of May 21, 2021 (the 'Assignment') confirms and memorializes the transfer of the business and related assets to Plaintiff.' Defendant INC wants to argue based on the actual written assignment that it was effective when signed Calendar No.: Event ID:  TENTATIVE RULINGS

3031380  45 CASE NUMBER: CASE TITLE:  ALUMICRAFT LLC VS ALUMI CRAFT INC [IMAGED]  37-2022-00019279-CU-BC-CTL in July, 2022 and thus, at the time of the filing of the lawsuit in May, 2022, plaintiff lacked standing or capacity like its predecessor in interest, WY LLC. The problem is that this date is beyond the pleading.

The pleading alleges that the assignment was effective as of May 21, 2021. The Court must accept the pleading as true.

All the arguments related to whether or not the assignment is valid are beyond the pleadings. Plaintiff makes a strong case that they were operating in California under an assumption of an assignment.

Defendant INC argues that the assignment prior to the writing is barred by the Statute of Frauds, which bars oral agreements that cannot be performed within one year. Because the Court has to accept the allegation that the assignment was effective May 21, 2021, the Court does not need to reach this argument. However, the writing itself would defeat the statute of frauds regardless of when it was executed. A later-written contract defeats any assertion of a statute of frauds argument. (Ayoob v. Ayoob (1946) 74 Cal. App. 2d 236, 242 ['Under California law, an oral agreement may be taken out of the operation of the statute [of frauds] by a written memorandum executed subsequently, even though the agreement has already been performed by one party.'].) Request for Judicial Notice of the Assignment.

The written assignment is offered by defendant as a Request for Judicial Notice. There is no statutory authority cited for the court to take judicial notice of the assignment produced outside the pleading. As stated above, the Request is denied. Absent taking judicial notice, the Court cannot reach the issues raised by the 'dates' of the written assignment or the language of the assignment. As stated above, the pleading alleges that the assignment was effective on May 21, 2021.

Sham 'Under the sham pleading doctrine, plaintiffs are precluded from amending complaints to omit harmful allegations, without explanation, from previous complaints to avoid attacks raised in demurrers or motions for summary judgment.' (Deveny v. Entropin, Inc. (2006) 139 Cal. App. 4th 408, 425.) Case law provides that Plaintiffs may avoid the sham pleading doctrine by alleging an explanation for the conflicts between pleadings. (See State of California ex rel. Metz v. CCC Information Services, Inc. (2007) 149 Cal. App. 4th 402, 412.) Plaintiff has provided an explanation for the change in plaintiffs, which the Court allowed in granting leave to amend in the previous demurrer ruling. Plaintiffs allege that there was an assignment effective at the time of the PSA. The Court must accept the allegations as true for purposes of the demurrer.

Third Cause of Action for Fraudulent Concealment Defendant INC. also demurs to the Third Cause of Action for failure to state a cause of action. The TAC alleges that as part of the sale, certain employees were obligated to work for the buyer after the close of sale to allow for transfer of intellectual property, and Seller's non-disclosure related to employee retention fraudulently induced Plaintiff(s) to enter into the contract. (TAC, at ¶¶ 16-20, 37-43.) According to defendant, all the allegations related to the Fraudulent Concealment claim are based on the PSA, but the terms of PSA are 'diametrically' opposed to the fraud claim. The elements of fraudulent concealment are as follows: (1) the defendant [ ] concealed or suppressed a material fact, (2) the defendant [was] under a duty to disclose the fact to the plaintiff, (3) the defendant [ ] intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff [was] 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.' (Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 248.) According to defendant, the claim for Fraudulent Concealment fails for the following reasons. (1) The PSA required termination of all employees, (2) INC. was prohibited from entering into any employment contracts, (3) the TAC relies on false definition of intellectual property, and (4) the intellectual property was transferred 'at closing,' not over the course of months or years, and (5) the integration clauses preclude extraneous employment agreements. (TAC, at ¶¶ 16-20, 37-43; RJN, Ex. C, at p. 3, 5, 10- 11, 28, 34.) Defendant contends that without a contractual obligation, ALUMI CRAFT INC. had no duty to disclose employees' intentions related to employment. (Id., p. 5-6.) Under the PSA, the buyer was free to enter into employment contracts, while ALUMI CRAFT INC. was obligated to sever ties with employees. (Id., p. 5-6; passim.) Without a material fact or a duty to disclose, the rest of the elements fail as a matter of law. Without a fraud claim, there would be no basis upon which to seek punitive damages.

The TAC alleges: 'Defendant had a duty to disclose materially important information about the business Calendar No.: Event ID:  TENTATIVE RULINGS

3031380  45 CASE NUMBER: CASE TITLE:  ALUMICRAFT LLC VS ALUMI CRAFT INC [IMAGED]  37-2022-00019279-CU-BC-CTL and its assets, including information regarding employees and any notices or expressed intentions of any employees to resign their positions and/or depart the business. Defendant knew, prior to and/or at the time of the making of the Agreement and/or closing of the transaction, that one of the key employees of the business intended to depart the business. Defendant intentionally failed to disclose this information . . . This information concealed by Defendant was material. Without this key employee, the value of the business was substantially reduced. Had Defendant disclosed that this particular employee intended to depart the business, Plaintiff would not have paid the purchase amount provided by the Agreement and/or would not have agreed to pay this amount.' (TAC ¶ 38 – 40.) The fact that the contract indicates that employees were to be terminated would go to the merits of the claim – specifically, whether there was the requisite intent or a duty to disclose. However, plaintiff has alleged the elements of the claim and that the issue was material to their decision to proceed with the deal.

Motion to Strike The Motion to Strike is DENIED.

Sham Defendant seeks to strike the entire TAC on the grounds that it is a sham pleading. As stated above, plaintiff has, at least for purposes of the pleading, sufficiently explained any contradictions, which the Court granted plaintiff leave to do in the previous demurrer ruling.

Allegations that allegedly contradict PSA Defendant seeks to strike several allegations that purportedly contradict the PSA. While Defendant alleges that the PSA contradicts the Breach of Contract cause of action, Defendant does not go on to explain how. Allegations have been made and whether they support breach is a question of merit of the claim.

Defendant also seeks to strike specific allegations related to employment as contradictory of the PSA.

Again, as stated above in the demurrer, the fact that the PSA addressed employees does not necessarily mean that plaintiff has not stated a basis for fraudulent concealment regarding a specific employee that plaintiff thought was still with the company at the time of purchase.

Attorney Fees Defendant alleges there is no basis for attorney fees cited in the TAC. This is not addressed in the Opposition. However, the Court notes that the pleading states that fees are based upon contract or statute as allowed by law. For purposes of pleading, the Court allows the attorney fees to be alleged.

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