Judge: Lynne M. Hobbs, Case: 21STCV44259, Date: 2024-10-17 Tentative Ruling

Case Number: 21STCV44259    Hearing Date: October 17, 2024    Dept: 61

HEXADYNE CORPORATION, A DELAWARE CORPORATION vs MASON ELECTRIC COMPANY, INC., A DELAWARE CORPORATION

TENTATIVE

Cross-Defendants Hexadyne Corporation and Robert Sanchez’s Demurrer and Motion to Strike Portions of Mason Electric Company’s First Amended Cross-Complaint is SUSTAINED as to the third cause of action for concealment, without leave to amend, OVERRULED as to the remaining claims, and DENIED as to the prayer for punitive damages.

Moving party to give notice.

DISCUSSION

A demurrer should be sustained only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Pro., §§ 430.30, et seq.) In particular, as is relevant here, a court should sustain a demurrer if a complaint does not allege facts that are legally sufficient to constitute a cause of action. (See id. § 430.10, subd. (e).) As the Supreme Court held in Blank v. Kirwan (1985) 39 Cal.3d 311: “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. . . . Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (Id. at p. 318; see also Hahn. v. Mirda (2007) 147 Cal.App.4th 740, 747 [“A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. [Citation.]”)

“In determining whether the complaint is sufficient as against the demurrer … if on consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of Cal., Inc. (1993) 14 Cal.App.4th 612, 616.) Such demurrers “are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Mahan v. Charles W. Chan Insurance Agency, Inc. (2017) 14 Cal.App.5th 841, 848.)

A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment. (Schifando v. City of Los Angeles, supra, 31 Cal.4th at p. 1081.) The demurrer also may be sustained without leave to amend where the nature of the defects and previous unsuccessful attempts to plead render it probable plaintiff cannot state a cause of action. (Krawitz v. Rusch (1989) 209 Cal.App.3d 957, 967.)

Cross-Defendants Hexadyne Corporation and Robert Sanchez (Hexadyne) demurrer to the Cross-Complaint’s third through sixth causes of action for concealment, fraudulent misrepresentation, negligent misrepresentation, and false promise, reasoning that the claims are inadequately pleaded and barred by the economic loss rule. (Demurrer at pp. 6–15.)

1. Economic Loss Rule

The economic loss rule states: “In general, there is no recovery in tort for negligently inflicted ‘purely economic losses,’ meaning financial harm unaccompanied by physical or property damage.” (Rattagan v. Uber Technologies, Inc. (2024) 17 Cal.5th 1, 20, emphasis in original.) The rule “requires a [contractual party] to recover in contract for purely economic loss due to disappointed expectations, unless [the party] can demonstrate harm above and beyond a broken contractual promise.” (Ibid.) “If all the defendant has allegedly done is violate the terms of the parties' contract, depriving the plaintiff of the benefits the contract ensures, the defendant's liability is limited by the contract. Broader tort liability only arises if a defendant violates an independent legal duty and the type of harm that ensues was not reasonably contemplated or accounted for by the contractual parties.” (Id. at p. 37.)

As specifically applied to fraudulent concealment claims asserted in the context of a contractual relationship, the California Supreme Court has held as follows:

A plaintiff may assert a tort claim for fraudulent concealment based on conduct occurring in the course of a contractual relationship, if the elements of the cause of action can be established independently of the parties' contractual rights and obligations and the tortious conduct exposes the plaintiff to a risk of harm beyond the reasonable contemplation of the parties when they entered into the agreement. (Rattagan, supra, 17 Cal.5th at p. 38.) No concealment claim will arise “from a nondisclosure [that] is determined to have been within the reasonable contemplation of known risks to the parties before entering into their agreement and the parties accounted for that risk.” (Id. at p. 42.) A claim for concealment may arise, however, when nondisclosure and detrimental reliance expose the relying party “to risks of harm not reasonably contemplated when the contract was formed.” (Id. at p. 43.)

Here, Cross-Complainant Mason Electric (Mason) alleges that it contracted with Hexadyne to solicit purchasers of its products in Japan and process orders for those products, which it would then submit to Mason, but failed to disclose Mason’s ability to increase its prices, Hexadyne’s markup on Mason’s pricing, and Hexadyne’s receipt of a commission from one of the purchasers. (XC ¶ 92.) It is also alleged that when Mason cancelled the contract, and Hexadyne asked Mason to fulfill outstanding orders, it did not disclose that it intended to file suit in quasi contract to collect the proceeds collected by Mason. (XC ¶ 97.)

Mason’s concealment claims arising from the failure to disclose Hexadyne’s pricing, markups, or commissions are within the risks contemplated by the contract, and are barred under the above authority. The agreement is one for Hexadyne to purchase and sell Mason’s products to customers in Japan. Pricing is “solely the responsibility” of Hexadyne. (FAXC Exh. A, ¶ 6.1.) Hexadyne is required to “actively endeavor to establish and maintain excellent oral and written communication” with Mason. (FAXC Exh. A, ¶ 7.5.) Hexadyne is prohibited from accepting “fees or commissions” from purchasers. (FAXC Exh. A, ¶ 6.5.) Under the above case authority and provisions, Hexadyne’s failure to communicate its pricing information and commissions were risks contemplated within the formation of the contract. The demurrer is properly SUSTAINED therefore as to the third cause of action based on the concealments alleged in paragraph 92 of the FAXC.

However, the same logic does not apply to the concealment claim arising from Hexadyne’s failure to disclose its “true motive” behind asking Mason to fulfill orders outstanding at the time of contract termination, since this act occurred after the termination of the contract. (FAXC ¶ 93.)

The arguments from the economic loss rule also do not provide a basis to sustain the demurrer as to the sixth cause of action for false promise, despite Hexadyne’s argument. (Demurrer at p. 14.) As noted in the ruling on the prior demurrer, this claim is essentially one for fraudulent inducement of the contract at issue, and the economic loss rule “does not apply “where the contract was fraudulently induced.” (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 990.) Hexadyne’s further arguments on this point are solely to the adequacy of that claim’s supporting allegations, and have no further bearing on the application of the rule.

Accordingly, it is appropriate to assess the adequacy of the allegations supporting the remaining claims.

2. Concealment

This court previously sustained Hexadyne’s demurrer to these causes of action with leave to amend based on Mason’s failure to plead these fraud claims with adequate particularity. Fraud causes of action must be pleaded with particularity, meaning that the plaintiff must allege “how, when, where, to whom, and by what means the representations were tendered.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.)

“‘The required elements for fraudulent concealment are (1) concealment or suppression of a material fact; (2) by a defendant with a duty to disclose the fact to the plaintiff; (3) the defendant intended to defraud the plaintiff by intentionally concealing or suppressing the fact; (4) the plaintiff was unaware of the fact and would not have acted as he or she did if he or she had known of the concealed or suppressed fact; and (5) plaintiff sustained damage as a result of the concealment or suppression of the fact. [Citation.]’ [Citation.]” (Hambrick v. Healthcare Partners Medical Group, Inc. (2015) 238 Cal.App.4th 124, 162.)

There are “four circumstances in which nondisclosure or concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.” (Heliotis v. Schuman (1986) 181 Cal.App.3d 646, 651.)

Here, the remaining cause of action for concealment arises solely out of Hexadyne’s failure to disclose that, when it sought Mason’s fulfillment of its outstanding orders, Hexadyne intended to bring an action for quasi contract for the proceeds that Mason obtained. (FAXC ¶¶ 51–54, 93.)

This allegation is insufficient to state a duty to disclose for the purposes of a concealment claim. This is because the claim arises from Hexadyne’s alleged duty to disclose its intent to commit a fraud upon Mason. However, while Hexadyne “had a duty to refrain from committing fraud, it had no independent duty to disclose . . . its alleged intent to defraud.” (Bank of America Corp. v. Superior Court (2011) 198 Cal.App.4th 862, 873.)

Accordingly, the demurrer is SUSTAINED without leave to amend as to the third cause of action for concealment.

3. Fraudulent Misrepresentation

“To establish a claim for fraudulent misrepresentation, the plaintiff must prove: ‘(1) the defendant represented to the plaintiff that an important fact was true; (2) that representation was false; (3) the defendant knew that the representation was false when the defendant made it, or the defendant made the representation recklessly and without regard for its truth; (4) the defendant intended that the plaintiff rely on the representation; (5) the plaintiff reasonably relied on the representation; (6) the plaintiff was harmed; and (7) the plaintiff's reliance on the defendant's representation was a substantial factor in causing that harm to the plaintiff.” (Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 605–606.) The elements of negligent misrepresentation are the same, except the defendant need not have knowledge of falsity, instead requiring only no reasonable grounds to believe the alleged representation is true. (National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Services Group, Inc. (2009) 171 Cal.App.4th 35, 50.)

Hexadyne argues that the claims for misrepresentation fail to allege any misrepresentations with particularity, has failed to allege any affirmative false statements of fact, fails to allege reliance, and such reliance as it alleges is contradicted by the provisions of the contract it attaches to the Complaint.

The claims here are pleaded with specificity. Mason identifies the nature of the misrepresentations at issue — i.e. Hexadyne’s instructions that no price increases were possible, and even that they should be reduced. (FAXC ¶ 34, 58–59.) Mason identifies two of Hexadyne’s employees who made the alleged misrepresentations, Bruce Lazarus and Jake Todoroki, and states they made them throughout the business relationship between the parties. (FAXC ¶ 56.) Mason identifies one such interaction as an example, being the representation made on January 11, 2021, in which Todoroki assured a named Mason employee that no price increases were possible as customers would then stop buying Mason’s products. (FAXC ¶ 39.) Another specific instance of similar misrepresentations is alleged to have taken place on March 18, 2020. (FAXC ¶ 58.) It is also alleged that Lazarus on February 14, 2021, told the same employee that it was “essential” that Mason continue supplying Sojitz as the previously maintained price levels, with the undisclosed intent to later sue Mason for doing so. (FAXC ¶ 63, 66.)

Actual reliance is alleged. Mason pleads that, in reliance on Hexadyne’s misrepresentations, it reduced its prices. (FAXC ¶ 58, 109, 122.) Although Hexadyne contends that Mason did not rely on its price representations, this argument is applicable only to the final such representations that occurred in January and February 2021, which preceded the termination of the agreement. (Demurrer at pp. 12–13.) This argument does not refute allegations that these representations took place throughout the relationship, and that Mason reduced prices in reliance on them. And contrary to Hexadyne’s argument, there is nothing in the price-setting section of the agreement that Hexadyne identifies that would foreclose Mason from relying on Hexadyne’s representations. (FAXC Exh. A, § 5.)

The demurrer is therefore OVERRULED as to the third and fourth causes of action for misrepresentation.

4. False Promise

“The only circumstances under which a future promise may form the basis of a fraud claim is where the plaintiff can allege facts that the promisor made a promise with no intent of performing.” Indeed, the nature of promissory fraud is that it is a promise of future performance with no present intent to actually perform.” (Miles v. Deutsche Bank National Trust Co. (2015) 236 Cal.App.4th 394, 402–403.)

Hexadyne argues that the promissory fraud claim is ill-pleaded because the FAXC does not allege the how, where, or when of the alleged misrepresentations, or that Hexadyne has the specific intent not to perform the agreement. (Demurrer at p. 15.) Hexadyne misreads the claim. The false promise alleged on the part of Hexadyne is its promise to solicit orders from customers in Japan for purchasing Mason’s products, consistent with its extracontractual representations that it would do so. (FAXC ¶ 129.) This allegations are specific, as the contract in which the false promise is contained is attached to the pleading. (FAXC Exh. A.) It is further alleged that Hexadyne “did not intend to perform those promises when it made them.” (FAXC ¶ 130.) The promise of future performance is not mere opinion or puffery, as Hexadyne suggests, but may form a basis for a claim of promissory fraud, if made with no intention to perform.

The demurrer is therefore OVERRULED as to the sixth cause of action.

Hexadyne’s motion to strike is expressly premised upon the sustaining of its demurrer to Mason’s fraud claims. (Motion at pp. 1–2.) Because the demurrer has been overruled as to some of Mason’s fraud claims, the motion to strike is DENIED.