Judge: Mark A. Young, Case: 20SMCV01593, Date: 2022-10-26 Tentative Ruling

Case Number: 20SMCV01593    Hearing Date: October 26, 2022    Dept: M

CASE NAME:           Bullock, v. Untouchable J Productions, et al.

CASE NO.:                20SMCV01593

MOTION:                  Demurrer to the Third Amended Complaint

HEARING DATE:   10/26/2022

BACKGROUND

            On October 22, 2020, Plaintiff Brian Bullock dba Lightsmith Entertainment brought this breach of contract/fraud action against Defendant Untouchable J Productions, Ryder Resorts, and Jojo Ryder. The operative First Amended Complaint (FAC) states three causes of action for: 1) breach of agreement; 2) fraud; and 3) accounting.  On April 4, 2022, Defendants filed a demurrer against the FAC.

Legal Standard

            A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. In a demurrer proceeding, the defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) 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. (CCP §§ 430.30, 430.70.) At the pleading stage, a plaintiff need only allege ultimate facts sufficient to apprise the defendant of the factual basis for the claim against him. (Semole v. Sansoucie (1972) 28 Cal. App. 3d 714, 721.) A “demurrer does not, however, admit contentions, deductions or conclusions of fact or law alleged in the pleading, or the construction of instruments pleaded, or facts impossible in law.” (S. Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732, internal citations omitted.)

            “Liberality in permitting amendment is the rule, if a fair opportunity to correct any defect has not been given.” (Angie M. v. Superior Court (1995) 37 Cal.App.4th 1217, 1227.) It is an abuse of discretion for the court to deny leave to amend where there is any reasonable possibility that plaintiff can state a good cause of action. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.) The burden is on plaintiff to show in what manner plaintiff can amend the complaint, and how that amendment will change the legal effect of the pleading. (Id.)

MEET AND CONFER

Before filing a demurrer or motion to strike, the moving party must meet and confer in person or by telephone with the party who filed the pleading to attempt to reach an agreement that would resolve the objections to the pleading. (CCP §§ 430.41, 435.5.) Counsel’s declaration satisfies this requirement. (Rosenberg Decl.)

Analysis

First Cause of Action for Breach of Contract

In the previous demurrer, the Court found that the original complaint failed to allege facts supporting a breach by Defendants under the attached agreement. The Court found that the factual allegations of certain “guarantees” made by Defendants in the complaint contradicted the terms of the attached agreement. The attached exhibit simply did not contain such language. Moreover, the exhibit contained “best efforts” provision, undermining the notion of a guarantee. The Court thus found that Plaintiff alleged no breach under the terms of the attached contract. The Court also found that Jojo Ryder and Defendant Ryder Resorts, Inc. were not parties to the alleged contract.

In the FAC, Plaintiff now asserts that the written agreement did not represent the entire agreement, and that the most essential terms of the agreement were oral. In opposition, Defendants raise the sham pleading rule. ¿“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, emphasis added.) “A plaintiff may not avoid a demurrer by pleading facts or positions in an amended complaint that contradict facts pleaded in the original complaint, or by suppressing facts which prove the pleaded facts false.” (Cantu v. Resolution Trust Corporation (1992) 4 Cal.App.4th 857, 877-878.)¿Where an amended complaint omits harmful allegations without explanation, the Court may take judicial notice of the prior pleadings and disregard any inconsistent allegations in the amended pleading.¿(Hahn v. Mirda (2007) 147 Cal.App.4th 740, 751.)¿The sham pleading doctrine is not intended to prevent honest complainants from correcting erroneous allegations or to prevent correction of ambiguous facts.¿(Ibid.)¿Instead, it is intended to enable courts “ ‘to prevent an abuse of process.’ ” (Amid v. Hawthorne Community Medical Group, Inc. (1989) 212 Cal.App.3d 1383, 1390–1391; see, e.g., Owens v. Kings Supermarket (1988) 198 Cal.App.3d 379 [pleadings were substantially altered when the plaintiff first alleged that the slip and fall occurred on a street adjacent to a supermarket, and then alleged that the slip and fall occurred on the defendant’s premises rather than on the street in order to avoid a demurrer on a premises liability theory; absent satisfactory explanation for the change, the court properly disregarded the sham pleadings].)  

On their face, the FAC’s allegations contradicts the Complaint’s allegations. The FAC alleges that in October 2015, Defendants (represented by Ryder) entered into an agreement, in part written and in part oral. (FAC ¶ 10.) The FAC emphasizes that the “most essential terms of the agreement were oral.” Plaintiff would put up $500,000.00 in capital for the project. Defendants would professionally produce and distribute “at least 10 episodes in one season of the Real estate-oriented Fix & Flip show[.]” From 2015 through 2019, Ryder promised full and complete production of at least 10 episodes. This included an “oral guarantee” of certain profit outputs. Each episode would generate a minimum of $100,000.00 profit for Plaintiff, and up to $300,000.00 per episode, with a guaranteed profit of $1,000,000.00. In “Mid or late” 2019, Ryder admitted that he had not done any significant work on the project. (FAC ¶ 11.)

Initially, Plaintiff alleged that the parties entered the “short form agreement whereby… [Defendants] promised and guaranteed that they would professionally produce and distribute Plaintiff's reality fix and flip production which would generate substantial sums of monies for Plaintiff. [As reflected by the exhibit,] Plaintiff was to receive 60% of the gross receipts generated per the production. A true and correct copy of the written agreement is attached hereto as Exhibit 1 and incorporated herein by reference.” (Compl., ¶ 9.)

Plaintiff attempts to explain this discrepancy by pointing out that the short form agreement a) does not purport to represent all the terms of the parties’ agreement, as there is no integration clause specifically excluding oral terms, and b) represents that a more detailed written agreement would be drafted. Plaintiff thus reasons that there is no inconsistency and no prejudice to Defendants. While these points are true, this does not explain the discrepancy between factual allegations of the FAC and complaint.

The Complaint’s factual allegations admitting that the contract was written and that the attachment represented the terms of the agreement are plainly inconsistent with the new allegations stating the “essential” terms of the contract were oral.  Plaintiff would have the Court conclude that he failed to plead the essential “oral” terms of the contract in the first instance, and instead plead terms that were consistent with the attached written agreement. Plaintiff has not explained why the allegations regarding the written nature of the contract and its terms should be omitted. As noted, Plaintiff only tries to explain that the contract itself does not foreclose the possibility of oral amendments. Plaintiff does not state why these “essential” terms were not pled in the first place.

Without an adequate explanation, the Court will ignore the newly inserted facts regarding oral terms. As such, Plaintiff has still failed to allege a breach based on the terms of the pled, written contract. 

SOL and SOF

The Court does not sustain the demurrer based on the statute of limitations of an oral contract. As alleged in the complaint, the contract is “founded upon an instrument of writing” and the 2-year period would not apply to this claim. (CCP § 339.) The statute of frauds would also not apply since there is a written memorandum. Moreover, even if the Court considered an oral contract, the contract could be performed within a year and therefore falls outside the scope of the statue of frauds. (Civ. Code § 1624(a)(1).)

Resorts and Ryder

Resorts and Ryder, individually, are also not alleged to be parties under the written contract. Plaintiff appears to rely on a theory of alter ego. The corporate veil may be pierced “where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation.” (Sonora Diamond Corp. v Superior Court (2000) 83 Cal.App.4th 523, 538.) “Under the alter ego doctrine . . . when the corporate form is used to . . . accomplish some [] wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners.” (Id.)  

In California, two conditions must be met before the alter ego doctrine will be invoked. First, there must be such 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. [Citations.] “Among the factors to be considered in applying the doctrine are commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other [Citations.]” Other factors which have been described in the case law include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers. [Citations.] No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied. [Citations.] Alter ego is an extreme remedy, sparingly used. [Citations.] 

(Id. at 538-539.) Thus, to invoke the alter ego doctrine, the plaintiff must plead unity of interest and ownership and that an inequity will result if the corporate entity is treated as the sole actor, with sufficient supporting factors. (Vasey v. California Dance Co. (1977) 70 Cal.App.3d 742, 749.)

The FAC alleges that Ryder owned and controlled Ryder Resorts and Untouchable. (FAC ¶3.) Further Ryder had dominion and control over the “undercapitalized” Untouchable and Resorts “such that any legitimate entity separateness and existence has been eviscerated and vitiated by Defendants.” (Id.) Aside from this conclusion, Plaintiff pleads a single factor: undercapitalization. Plaintiff fails to plead any other necessary facts. For instance, Plaintiff does not allege that an inequity would result if the corporate form is respected. Thus, the basic elements of alter ego liability are not met and Plaintiff has not pled liability against Ryder and Resorts.

Accordingly, Defendants’ demurrer is SUSTAINED with leave to amend as to the first cause of action.

Second Cause of Action for Fraud

Defendants assert that Plaintiff has failed to meet the heighted pleading standard for fraud.  In order to allege a cause of action for fraud, a party must allege that Defendant made a (1) misrepresentation; with (2) knowledge of falsity (or “scienter”); (3) an intent to defraud (induce reliance); (4) Plaintiff’s justifiable reliance; and (5) resulting damage. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) In addition, fraud actions are subject to heightened pleading standards. Plaintiffs are required to allege the factual basis for each of the elements of a fraud claim with specificity despite the general policy favoring liberal construction of pleadings on demurrer. (Goldrich v. Natural Y Surgical Specialties, Inc. (1994) 25 Cal.App.4th 772, 782- 783.) The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made. (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 793.)

The FAC relies on numerous, unspecified representations. In “October 2015, and on multiple occasions through 2019, in Southern California, [Ryder], on behalf of all the defendants, falsely represented that it had a guaranteed output agreement and could guarantee and would guarantee the production and distribution of a minimum of 10 episodes of Plaintiff's Real Estate oriented Fix and Flip show. That the show, which Defendants would produce and guaranteed distribution in a reasonable period, and that [Ryder], guaranteed that on top of the e $500,000 or so that Plaintiff would invest that Plaintiff would shortly receive a minimum of $ 100,000 per episode (minimum of 10 episodes guaranteed in first season) and up to $300,000 per episode in just the first season. He expressly guaranteed the return and distribution on multiple occasions up to 2019. [Ryder] orally repeated these facts on multiple occasions to Plaintiff after 2015 and up though parts of 2019 all 13 in Southern California or thereabouts.” (FAC ¶ 14.) IN reliance on those representations, Plaintiff invested approx. $500,000.00 to Defendants from 2015 to 2019. (FAC ¶15.) Defendants admitted that they had not produced or done any work, and denied the guarantees. (FAC ¶ 16.)

These allegations fail to state any of the specific misrepresentations. All of the misrepresentations are generically stated as relating to the guarantees, without any specificity as to the communication itself. There is no allegations as to how/by what means any representation(s) was made prior to investment. There is no specific date beyond a four year date range. Similarly, there is no specific location pled beyond Southern California generally. The FAC is further unclear to whom these representations were made. Presumably, these were made to Plaintiff, but the FAC does not clearly state so.  

Accordingly, Defendants’ demurrer is SUSTAINED with leave to amend.

Third Cause of Action – Accounting

“A cause of action for accounting requires a showing of a relationship between the plaintiff and the defendant, such as a fiduciary relationship, that requires an accounting or a showing that the accounts are so complicated they cannot be determined through an ordinary action at law.” (Fleet v. Bank of America N.A. (2014) 229 Cal.App.4th 1403, 1413.) “‘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 right to an accounting can arise from the possession by the defendant of money or property which, because of the defendant’s relationship with the plaintiff, the defendant is obliged to surrender.” (Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179-80.)  

Here, the FAC alleges a fiduciary relationship concerning Plaintiff’s investment. The FAC alleges that Defendants held monies Plaintiff provided in trust for a specific purpose under the contract. (FAC ¶ 21.) Per the contract, Defendants agreed to fully account for expenditures made with regard to the production of the Fix and Flip realty show, or monies provided exceeding $500,000.00. (FAC ¶ 21.) Defendants did not spend this money on the project, despite their agreement to do so, and now refuse to provide an accounting on how the money was spent. (FAC ¶ 22.)

The exhibit also shows that there is a relationship that requires an accounting. The contract provides, “In the event that the full amount of Investment is not secured within fourteen (14) business days from the Effective date [(defined as October 26, 2015)], then Lightsmith shall, at its option, have the right to terminate this Agreement by sending such notice via email or postal delivery. Upon such delivery, Untouchable shall immediately cease all expense-generating activities on the Show and return to Lightsmith any and all unused portions of the Investment and provide a detailed accounting for all monies spent.” (Ex. 1, §1.) Reading this language in the light most favorable to pleading party, the Court cannot conclude that this term would foreclose an accounting action. The contract specifically provides an escape clause with a 14-day time limit. Exercising that option would require Untouchable to provide an accounting. This time limit on the option to terminate the agreement does not suggest that Plaintiff otherwise waived its right to an accounting under the agreement. Thus, the Court cannot conclude that the time for an accounting has expired. Moreover, the availability of an accounting after termination would also tend to show that the parties to the contract are in a relationship requiring an accounting.

The terms explaining that there is no agency between the parties, and that the parties are independent contractors, does not contradict a claim to a fiduciary duty or an accounting. While the parties may be independent contractors, and not each other’s agents, the FAC still pleads that Plaintiff reposed confidence in Defendants regarding the funds to be used for a particular purpose. The FAC pleads that Untouchable failed to spend the money as agreed and refuses to account for how that money was spent. (FAC ¶ 22.) Therefore, the FAC states a cause for an accounting.

Accordingly, Defendants’ demurrer is OVERRULED as to this cause of action.

Plaintiff has 10 days leave to file an amended complaint consistent with this order.