Judge: Lisa K. Sepe-Wiesenfeld, Case: 21SMCV01858, Date: 2023-03-16 Tentative Ruling


Case Number: 21SMCV01858    Hearing Date: March 16, 2023    Dept: N

TENTATIVE RULING

Plaintiff/Cross-Defendant Joe Phelps and the Phelps Group’s Demurrer is SUSTAINED as to the second cause of action. But the Demurrer is OVERRULED as to the fourth, fifth, and sixth cause of action.

 

 

REASONING

Meet and Confer –

 

Legal Standard for Meet and Confer Requirement

“Before filing a demurrer…the demurring party shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.”  (CCP § 430.41(a); see also CCP § 435.5 (imposing similar requirements for a motion to strike).)

 

Analysis for Meet and Confer Requirement

Here, the demurring party, Cross-Defendants, has met the meet and confer requirement as outlined in CCP § 430.41(a). Before bringing the instant Demurrer, Cross-Defendants sent a meet and confer letter on November 28, 2022 and spoke over the phone with Cross-Complainant. (Demurrer, Declaration of Zachary D. Schorr (hereinafter, “Schorr Dec.”), ¶3). Both parties agreed to extend Cross-Defendant’s deadline to file its responsive pleading to the FAXC to December 16, 2022. (Ibid, ¶ 4). After further communication on December 13, 2022, the parties were unable to reach an agreement. (Ibid. ¶ 5).

 

Conclusion for Meet and Confer Requirement

Accordingly, the meet and confer requirement of CCP § 430.41(a) satisfied.

 

Demurrer -

 

Legal Standard for a Demurrer

“[A] demurrer tests the legal sufficiency of the allegations in a complaint.” (Lewis v. Safeway, Inc. (2015) 235 Cal.App.4th 385, 388.) A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (See Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994 [in ruling on a demurrer, a court may not consider declarations, matters not subject to judicial notice, or documents not accepted for the truth of their contents].) For purposes of ruling on a demurrer, all facts pleaded in a complaint are assumed to be true, but the reviewing court does not assume the truth of conclusions of law. (Aubry v. Tri-City Hosp. Dist. (1992) 2 Cal.4th 962, 967.)

 

Analysis for Demurrer

 

            Second Cause of Action – Breach of Guaranty

Breach of guaranty has four elements: (1) defendant guaranteed payment of the indebtedness of the primary obligor to the plaintiff; (2) default on the indebtedness; (3) plaintiff notified the guarantor of the default; (4) the guarantor did not remit funds to the plaintiff under the guaranty agreements. (Torrey Pines Bank v. Sup. Ct. (1989) 216 Cal.App.3d 813, 819. See also Civ. C. §2787 (defining “guarantor”). See also River Bank America v. Diller (1995) 38 Cal.App.4th 1400, 1415 (“guaranty contracts are construed according to the same rules as those used for other contracts, with a view to ascertaining the intent of the parties.…Guaranty contracts ‘may be explained by reference to the circumstances under which they were made and the matter to which they relate, the main object being to ascertain and effectuate the intention of the parties.’”); Central Bldg., LLC v. Cooper (2005) 127 Cal.App.4th 1053, 1059 (“A guarantor may validly waive rights and defenses in the guaranty contract.”); River Bank America, supra, at 1422 (as for the sham guaranty rule, it is a factual question whether a person is a true guarantor or a principal obligor).

 

Here, Cross-Complaint’s primary contention for the second cause of action surrounds the second element, default on indebtedness. Cross-Defendant’s argue that Cross-Defendant Joe Phelps “satisfied his obligations under the Lease by paying TPG’s [The Phelps Group] monthly rent when TPG was no longer able to do so. (Demurrer, 3:28 and 4:1).

 

Cross-Complainant does not allege that Cross-Defendants failed to pay rent before the Guaranty Reduction Date of February 15, 2021 (the issue of the Second Amendment regarding partial rent abatement is addressed below). Cross-Complainant argues that the lease provides that the tenant, Cross-Defendant The Phelps Group, must notify the landlord in writing of any proposed transfer. Because Cross-Defendant The Phelps Group failed to do so, they were in default. (FAXC, ¶ 35.)

 

Default is defined as “The omission or failure to perform a legal or contractual duty; esp., the failure to pay a debt when due.” (Black's Law Dictionary (11th ed. 2019), default). Although the failure of a legal duty may constitute default, in the context of a lease agreement and a breach of guaranty action, default is primarily understood to mean the failure of a tenant to timely pay rent due.

 

Here, there is no allegation of that rent was not received prior to the Guaranty Reduction Date of February 15, 2021. Additionally, there is no showing that Cross-Defendant was notified of the default and subsequent indebtedness, nor any allegation that they did not remit necessary funds to pay the agreed upon rent. Therefore, the Demurrer to the second cause of action is sustained.      

 

            Fourth Cause of Action – Rescission

A party to a contract may rescind it where the contract is unlawful, was the result of mistake, duress, menace, fraud, or undue influence, or will prejudice the public interest if permitted to stand, or if there was a failure of consideration. (Civ. Code, § 1689, subd. (b).).

 

Here, Cross-Defendant Demurs to the fourth cause of action solely on the argument that rescission is a remedy, not a cause of action. (Demurrer, 12:28 and 1:1-5). However, Cross-Complainant is basing its rescission on misrepresentation. Additionally, California provides for rescission as a cause of action (see (Civ. Code, § 1689, subd. (b).).

 

Cross-Complainant lays out their allegations clearly as to the fourth cause of action, arguing that but for the alleged misrepresentations of Cross-Defendant’s alleged transfer and strenuous financial situation during the COVID-19 pandemic, Cross-Complainant would not have agreed to the Second Amendment (FAXC, ¶ 20 and 27). Cross Complainant provided specific examples including that Cross-Defendant The Phelps Group was changing its business name from “The Phelps Group to 9th Wonder”, and not disclosing the Asset Purchase Agreement dated April 16, 2018. (FAXC, ¶ 16 & 19 respectively). The Demurrer with regard to the fourth cause of action is overruled.

 

 

            Fifth Cause of Action – Fraud by Misrepresentation & Concealment

“The elements of fraud are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Hinesley v. Oakshade Town Ctr. (2005) 135 Cal.App.4th 289, 294.) The facts constituting the alleged fraud must be alleged factually and specifically as to every element of fraud, as the policy of “liberal construction” of the pleadings will not ordinarily be invoked. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) To properly allege fraud against a corporation, the plaintiffs must plead the names of the persons allegedly making the false 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.)

 

Similar to the fourth cause of action, Cross-Complainant alleges all the necessary elements with specificity. Both misrepresentation and scienter are alleged when Cross-Complainant stated that Cross-Defendant The Phelps Group was changing its business name from “The Phelps Group to 9th Wonder”, and when Cross-Defendant did not disclose the Asset Purchase Agreement dated April 16, 2018. (FAXC, ¶ 16 & 19 respectively). The intent to induce reliance stems from the alleged misrepresentations made regarding Cross-Defendant’s financial status (FAXC, ¶ 27). Justifiable reliance is alleged, and subsequent damages are alleged. (Ibid. at ¶27 and 29).                 

 

Cross-Defendant additionally contends that the Cross-Complainant is time barred from bringing this action pursuant to Code of Civil Procedure § 338(d). This section provides that an action for relief based on fraud must be brought within three years of discovery. Here, Cross-Defendant argues that the date of discovery is October of 2018 based on the correspondence regarding the alleged transfer. (Demurrer, 11:21-26). The Court disagrees.

 

Cross-Complainant argues that when it entered into the Second Amendment in December of 2020, it was still unaware of the Advisory Agreement nor the alleged improper transfer. (Opposition Papers, 16:15-16). Additionally, it was not until discovery that Cross-Complainant found the fraud and amended its Cross-Complaint to reflect the new information. (Opposition Papers, 17:1-3). The FAXC was filed on October 24, 2022, well within any time limitation dictated by Code of Civil Procedure § 338(d). The Demurrer with regard to the fifth cause of action is overruled.

 

 

            Sixth Cause of Action – Intentional Interference with Contract

The elements of a 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.” (I-CA Enterprises, Inc. v. Palram Americas, Inc. (2015) 235 Cal.App.4th 257, 289.)

 

Cross-Complainant alleges sufficient facts to state a cause of action for intentional interference with a contract. There is no argument as to the first two elements from either party, both elements have been clearly established. Cross-Complainant argues that the intentional acts of non-disclosure and misrepresentation mentioned above were designed to induce disruption of the contractual relationship. Finally, there have been both breach and damages alleged.

 

The Cross-Defendants main argument on Demurrer is that a party to the contract cannot be charged with intentional interference of said contract, citing Applied Equip. Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515. Cross-Claimant contends that, with respect to Cross-Defendant Joe Phelps, he is not a party to the contract. We agree.

 

The four elements to create a contract under California law are: (1) parties capable of contracting, (2) their consent, (3) a lawful object, and (4) consideration. (See Cal. Civ. Code § 1550). Each party must meet the four elements. Assuming arguendo that (1) Cross Defendant and Guarantor Joe Phelps is capable of contracting, (2) that he consented to the contract, and (3) that the contract is lawful, his status as a party fails on the fourth. The lease agreement lacks any form of bargained-for-consideration flowing to or from Cross-Defendant Joe Phelps. It only details that he is to step in, if the tenant, Cross-Defendant The Phelps Group, fails to uphold its obligations. This leaves the door open for this cause of action to move forward. The Demurrer as to the sixth cause of action is overruled.

 

Conclusion for Demurrer

As to the Plaintiff/Cross-Defendant Joe Phelps and the Phelps Group’s Demurrer, the Demurrer is SUSTAINED as to the second cause of action. But the Demurrer is OVERRULED as to the fourth, fifth, and sixth cause of action.

 

Legal Standard for Leave to Amend

Leave to amend must be allowed where there is a reasonable possibility of successful amendment. (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 [court shall not “sustain a demurrer without leave to amend if there is any reasonable possibility that the defect can be cured by amendment”];

 

Analysis and Conclusion for Leave to Amend

As there is a reasonable possibility of successful amendment, the Court will grant leave to amend.