Judge: Lee W. Tsao, Case: 23NWCV02630, Date: 2024-09-19 Tentative Ruling

Case Number: 23NWCV02630    Hearing Date: September 19, 2024    Dept: C

HAO v. SG INVESTMENT LLC

CASE NO.:  23NWCV02630

HEARING:  09/19/24

#6

     I.        Defendants SG INVESTMENT LLC; USIH, LLC; and HONGPENG WANG’s Demurrer to Plaintiffs’ First Amended Complaint is SUSTAINED with 20 days leave to amend in part and OVERRULED in part.

    II.        The Motion to Strike Portions of the First Amended Complaint is MOOT.

Moving Party to give notice.

This contractual fraud action was filed by Plaintiffs ZHIDONG HAO and FANG WANG (collectively “Plaintiffs”) on August 17, 2023. On November 17, 2023, the operative First Amended Complaint (“FAC”) was filed.

Plaintiffs allege that they entered into an Investment Agreement on or about May 15, 2019. (FAC ¶11.) Plaintiffs purportedly fully performed under the terms of the Investment Agreement, and that Defendants are in breach. (FAC ¶17.) Plaintiffs specifically allege that “Defendants failed to register Plaintiffs as investors…. [¶] Defendants never provided Plaintiffs an English language version of the investment documents…. [¶] Defendants did not issue any stock certificates to Plaintiffs, nor have Plaintiffs received from Defendants the English-language investment documents….” (Id. at ¶¶19-21.) “Plaintiffs made demands for return of their capital including the guaranteed return of 12%. Defendants then presented Plaintiffs with an agreement for return of their capital, only Defendants have a legal obligation to return the capital and has the legal obligation to also pay the guaranteed return of 12%, because this is expressly set forth in the Investment Agreement.” (Id. ¶22.)

Consequently, the parties entered into a Settlement Agreement to resolve the outstanding monies owed by Defendants. (Id. ¶26.) “Under the Settlement Agreement, Defendants were required to pay a total of $900,000 through four separate payment installments, via an initial payment of $100,00 within 5 days of the signing of the Settlement Agreement, second payment of $200,000 by July 31, 2023, and then payments of $300,000 on October 31, 2023 and December 15, 2023…. [¶] Defendants made the required $100,000 payment. Defendants then failed to make any further payments under the Settlement Agreement.” (FAC ¶¶26-27.)

The FAC asserts the following causes of action:

(1) Rescission of Settlement Agreement;

(2) Breach of Settlement Agreement;

(3) Breach of Contract;

(4) Fraud – False Promise;

(5) Conversion;

(6) Violation of Penal Code §496; and

(7) Restitution – Unjust Enrichment

Defendants SG INVESTMENT LLC (“SGI”); USIH, LLC (“USIH”); and HONGPENG WANG (“Wang”) (collectively “Defendants”) specially and generally demur to the first, second, fourth, fifth; and sixth causes of action.

First Cause of Action – Rescission of Settlement Agreement   

Cal. Civ. Code §1689 sets forth grounds for rescission stating, in part, that “[a] party to a contract may rescind the contract in the following cases: (1) If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained throughout duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party. (2) If the consideration for the obligation of the rescinding party fails, in whole or in part, through the fault of the party as to whom he rescinds. (3) If the consideration for the obligation of the rescinding party becomes entirely void from any cause. (4) If the consideration for the obligation of the rescinding party, before it is rendered to him, fails in a material respect from any cause. (5) If the contract is unlawful for causes which do not appear in its terms or conditions, and the parties are not equally at fault. (6) I the public interest will be prejudiced by permitting the contract to stand. (7) Under the circumstances provided for…. Or any other statute providing for rescission.” (Id.)

Defendants argue that the first cause of action is moot “because Defendants have confirmed their consent to rescind the Settlement Agreement.” (Dem. 7:7.)

The demurrer to the first cause of action is OVERRULED. The arguments raised by Defendants in the subject Demurrer raise factual and evidentiary determinations which are not properly resolved at this juncture. Moreover, the Court finds that Plaintiffs adequately allege elements to maintain this cause of action at this time. Plaintiffs plead that they were induced into entering into the Settlement Agreement with Defendants: “But for Defendants’ promise and contractual representation and agreement to pay Plaintiffs $900,000, Plaintiffs would not have entered into the Settlement Agreement.” (FAC ¶30)

Although not argued in the Moving Papers, the Court notes that rescission is a remedy that may be coupled with a cause of action for breach of contract or fraud, not an independent cause of action. (Wong v. Stoler (2015) 237 Cal.App.4th 1375, 1384-1385.) However, at the demurrer state, the Court does not look only at the title of the claim, but at the underlying allegations to see if the facts alleged support any cause of action. For reasons stated below, the Court finds that Plaintiffs adequately allege claims to support the remedy of rescission.

Second Cause of Action – Breach of Settlement Agreement

Defendant argues that the second cause of action is subject to Demurrer because Plaintiffs’ rescission claims extinguish any claim for breach of contract. Defendants do not raise any other substantive arguments against this claim.

As indicated above, rescission is a remedy—not a cause of action. “A party to a contract has two different remedies when it has been injured by a breach of contract or fraud and lacks the ability or desire to keep the contract alive. [Citation.] The party may disaffirm the contract, treating it as rescinded, and recover damages resulting from the rescission. [Citation.] Alternatively, the party may affirm the contract, treating it as repudiated, and recover damages for breach of contract or fraud. [Citation.] [¶] Recission and damages are alternative remedies. [Citation.] A party may seek rescission or damages for breach of contract or fraud ‘in the event rescission cannot be obtained’ in the same action. [Citations.] But ‘[t]he election of one remedy bars recover under the other.’ [Citation.]” (Wong v. Stoler (2015) 237 Cal.App.4th 1375, 1384-1385.)

Plaintiffs are allowed to plead rescission and damages for breach of contract as alternative remedies.

The demurrer to the second cause of action is OVERRULED.

Fourth Cause of Action – Fraud (False Promise)

The elements of a cause of action for intentional misrepresentation are 1) misrepresentation (false representation, concealment, or nondisclosure); 2) knowledge of falsity (scienter); 3) intent to defraud or induce reliance; 4) justifiable reliance; and 5) damages. (See Cal. Civ. Code §1709.)

The elements of a claim for fraudulent false promise are: (1) a promise made regarding a material fact without any intention of performing it; (2) the existence of the intent at the time of making the promise; (3) the promise was made with intent to deceive or with intent to induce the party to whom it was made to enter into the transaction; (4) the promise was relied on by the party to whom it was made; (5) the party making the promise did not perform; (6) the party to whom the promise was made was injured. (Muraoka v. Budget Rent-A-Car, Inc. (1984) 160 Cal.App.3d 107, 119.)

Whether intentional or negligent in nature, fraud actions are subject to strict requirements of particularity in pleading. (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) “Fraud must be pleaded with specificity… [t]o withstand a demurrer, the facts constituting every element of the fraud must be alleged with particularity, and the claim cannot be salvaged by references to the general policy favoring the liberal construction of pleadings. (Goldrich v. Natural Y Surgical Specialties, Inc. (1994) 25 Cal.App.4th 772, 782.) “This particularity requirement necessitates pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’” (Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73.) “The requirement of specificity in a fraud action against a corporation requires the plaintiff to allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” (Tarmann v. State Farm Mut. Auto Ins. Co. (1991) 2 Cal.App.4th 153, 157.)

As the basis for their fraud claim, Plaintiffs allege that FANG WANG spoke with Hongpeng Wang’s spouse sometime in early 2019.  Based on these communications Plaintiffs “were directed to speak directly with HONGPENG.” (FAC ¶53.) “Beginning on April 3, 2019, and thereafter, the parties exchanged communications via an application called We Chat, which was followed by in-person meetings, voicemails, and discussions over the phone.” (Ibid.) The Court determines that Plaintiffs have not shown with sufficient specificity “how, when, where, to whom, and by what means the representations were tendered.”

The demurrer to this cause of action is SUSTAINED with 20 days leave to amend. Plaintiffs allegations lack the specificity required to maintain this claim. Conclusory allegations are insufficient. Particularity is required.

Fifth Cause of Action – Conversion

The elements of a cause of action for conversion are: (1) Plaintiff’s ownership or right to possession of personal property; (2) defendant’s disposition of the property inconsistent with plaintiff’s rights; and (3) resulting damages. (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.) “A cause of action for conversion of money can be stated only where a defendant interferes with the plaintiff’s possessory interest in a specific, identifiable sum, such as when a trustee or agent misappropriates the money entrusted to him.” (Kim v. Westmoor Partners, Inc. (2011) 201 Cal.App.4th 267, 284.) [U]nless there is a specific, identifiable sum involved, such as where an agent accepts a sum of money to be paid to another and fails to make the payment,” money cannot be the subject of a cause of action for conversion. (McKell v. Wash. Mut., Inc. (2006) 142 Cal.App.4th 1457, 1491.)

The demurrer to this cause of action is SUSTAINED with 20 days leave to amend. Plaintiffs allege that “Plaintiff HAO has been damaged in an amount not less than $1,024.037.12…. Plaintiff FANG WANG has been damaged in an amount not less than $340,251.86. The exact amount of said damages will be proven at trial.” (FAC ¶69.) Plaintiffs fail to allege an entitlement to a specific, identifiable sum of money.

Sixth Cause of Action – Violation of Penal Code §496

The demurrer to this claim is SUSTAINED with 20 days leave to amend. “A plaintiff may recover treble damages and attorney’s fees under section 496(c) when property has been obtained in any manner constituting theft.” (Siry Investment, L.P. v. Farkhondehpour (2022) 13 Cal.5th 333, 361.) Plaintiffs base this claim on Defendants’ purported misrepresentations cited throughout the claim for fraud. For the same reasons noted above under the cause of action for fraud, this claim is also insufficiently alleged. Statutory causes of action must be pleaded with particularity. (Searcy v. Hemet Unified School Dist. (1986) 177 Cal.App.3d 792, 802.)

Motion to Strike

The Motion to Strike punitive damages and treble damages is MOOT given the Court’s ruling with respect to the fourth and sixth causes of action.