Judge: Mark A. Young, Case: 21SMCV01994, Date: 2022-12-07 Tentative Ruling

Case Number: 21SMCV01994    Hearing Date: December 7, 2022    Dept: M

CASE NAME:           Surrey, et al., v. Zukin, et al.

CASE NO.:                21SMCV01994 

MOTION:                  Demurrer to the Third Amended Complaint

HEARING DATE:   12/7/2022

BACKGROUND

Defendants/Cross-complainants James Zukin and Zukin Partners LLC (“Zukin”) filed a cross complaint (CC) against Cross-Defendant WCE CA Fertility Inc. (“WCE”). The CC states five claims against WCE for: 1) breach of contract; 2) equitable indemnity; 3) declaratory relief; 4) breach of contract; and 5) declaratory relief.

In the underlying action, Plaintiffs Mark W. Surrey, Hal C. Danzer, Shahin Ghadir, Carolyn Alexander, Alin Lina Akopians, and Jason Barritt assert claims arising out of the sale of their interest in the Southern California Reproductive Center Inc. (“SCRC”).  Zukin acted as SCRC’s investment banker in that transaction. The written agreements provide that SCRC shall hold harmless Zukin Partners and James Zukin in connection with claims arising out of services provided by the Zukin Parties and reimburse them for all reasonable expenses incurred in connection with any proceeding arising out of the Agreements. According to the CC, SCRC’s successor-in-interest, WCE failed to fulfill these contractual obligations and the Zukin Parties continue to expend attorney’s fees and costs to defend themselves against Plaintiffs’ claims, and as a third-party witness in another lawsuit. (CC ¶ 12, Exs. A-B.)

The CC further alleges that the Zukin Partners promised to act as SCRC’s financial advisor, which involved analyzing SCRC’s financial condition and business, assisting SCRC in evaluating proposals from potential purchasers, and assisting the company in negotiating financial aspects of a potential transaction. For its services, Zukin Partners was to be paid compensation when the contemplated sale closed and, pursuant to the second agreement, an up-front fee that was not contingent on closing. (CC ¶14.) Both of the agreements contain an identical indemnification clause. (CC ¶¶ 15, 16.)  Zukin Partners provided investment banking services to SCRC for the entire duration of the sale process. (CC ¶ 18.) In December 2019 (i) WCE acquired all or substantially all of SCRC’s assets and equity; (ii) SCRC was dissolved; and (iii) WCE SCRC, LLC purchased WCE. (CC ¶ 19.)

Plaintiffs assert claims for damages, including claims for intentional and negligent misrepresentation, arising out of Zukin Partners’ engagement under the Agreements. The Complaint does not (a) allege that Plaintiffs were parties to the Agreements; (b) allege that Zukin Partners materially breached the Agreements in any way; or (c) assert claims based on any alleged breach of the Agreements.  (¶ 20.)

Finally, on November 11, 2021, Zukin was served with a third-party subpoena for documents in an action captioned Advanced Reproductive Technologies of Santa Barbara LLC v. David Hill, PhD, et al., LASC case no. 18STCV08895 (the “ART Action”). The subpoena sought documents relating to services Zukin Partners rendered to SCRC in connection with the transaction. (¶ 22.) Zukin Partners requested that WCE indemnify and hold harmless Zukin Partners for its reasonable costs and expenses in responding to the third-party subpoenas.

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 submits a sufficient declaration. (See Baldwin Decl., ¶ 2.)

JUDICIAL NOTICE

WCE’s request for judicial notice of the ART action pleadings are GRANTED. (Exs. A-B.)

Analysis

First Cause of Action: Breach of Contract

WCE argues that Cross-Complainants cannot demonstrate the existence of a contract breach by WCE because no duty to indemnify is triggered under the Agreements and no duty to defend exists under the Agreements.  In general, indemnity refers to “the obligation resting on one party to make good a loss or damage another party has incurred.” (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 628.) Historically, the obligation of indemnity took three forms: (1) indemnity expressly provided for by contract (express indemnity); (2) indemnity implied from a contract not specifically mentioning indemnity (implied contractual indemnity); and (3) indemnity arising from the equities of particular circumstances (traditional equitable indemnity). (Ibid.) Although the foregoing categories of indemnity were once regarded as distinct, California courts now recognize only two basic types of indemnity: express indemnity and equitable indemnity. (See Bay Development, Ltd. v. Superior Court (1990) 50 Cal.3d 1012, 1029–1030, fn. 10.) Though not extinguished, implied contractual indemnity is now viewed simply as “a form of equitable indemnity.” (Id. at 1029.)  “First, it may arise by virtue of express contractual language establishing a duty in one party to save another harmless upon the occurrence of specified circumstances. Second, it may find its source in equitable considerations brought into play either by contractual language not specifically dealing with indemnification or by the equities of the particular case. [Citations.]”  (E. L. White, Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497, 506-07.) 

            The elements of a cause of action for indemnity are: (1) a showing of fault on the part of the indemnitor; and, (2) resulting damages to the indemnitee for which the indemnitor is contractually or equitably responsible." (Great Western Drywall, Inc. v. Interstate Fire & Gas Co. (2008) 161 Cal.App.4th 1033, 1041.) In order for the doctrine of equitable indemnity to apply, there must be some basis for tort liability against the proposed indemnitor, which generally is based on a duty owed to the underlying plaintiff; although vicarious liability, strict liability, and implied contractual indemnity between the indemnitor and the indemnitee can provide a basis for equitable indemnity. (BFGC Architects Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 119 Cal.App.4th 848, 852 [equitable indemnity “applies only among defendants who are jointly and severally liable to the plaintiff.”].) Unless the prospective indemnitor and indemnitee are jointly and severally liable to the plaintiff there is no basis for indemnity. (Columbus Line Inc. v. Gray Line Sight-Seeing Companies Associated Inc. (1981) 120 Cal.App.2d 622, 628.) 

Breach of express contractual indemnity relies on the existence of a contract between the parties. “The standard elements of a claim for breach of contract are: ‘(1) the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) damage to plaintiff therefrom.’” (Wall Street Network, Ltd. v. New York Times Co. (2008) 164 Cal.App.4th 1171, 1178.)

As an initial matter, WCE argues that the agreement is only applicable to “unaffiliated third party losses, claims, damages or liabilities[.]” (CC ¶12, Exhibits A-B, p. 8.) WCE reasons that since “Unaffiliated” is not defined in the Agreement, and thus, under its plain meaning (See, e.g. Valencia v. Smyth (2010) 185 Cal.App.4th 153, 162), the Court should interpret unaffiliated against Cross-Complainants and conclude that the Doctors are not “unaffiliated third parties” whose suit would trigger the indemnity clause. WCE cites a dictionary definition of “unaffiliated” means, “not connected with something (such as a program or organization) as a member or partner.” (Unaffiliated, Britannica Dictionary (2022); see also, Affiliated, Merriam-Webster Dictionary (9th ed. 1988) (“closely associated with another typically in a dependent or subordinate position”).) WCE argues that since the Plaintiffs are officers, directors, and shareholders of SCRC, they are “affiliated” with SCRC, and thus don’t fall within the indemnity agreement. (Compl., ¶¶ 6-11.) Four of the Doctors who are Plaintiffs in the action are the individuals who executed the Agreements on behalf of SCRC. (Compl., ¶ 12.)

Here, the court makes all reasonable interpretations in favor of cross-complaints, as the pleading and nonmoving party. “On a demurrer, the court must consider the sufficiency of the allegations, including any parol evidence allegations, to determine whether the contract is reasonably susceptible to [the] alleged interpretation.” (George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1128.) Cross-Complainants’ interpretation of the Agreements would place the Plaintiffs outside of the “unaffiliated” parties. In the very same sentence as the term “unaffiliated third party losses,” the indemnification provision uses the term “affiliates” in reference to Zukin Partners, LLC. Specifically, “the Company agrees (i) to indemnity and hold harmless Zukin and its affiliates . . . from and against any and all unaffiliated third party losses, claims, damages, or liabilities . . ..”  In other words, WCE is not responsible for losses among Zukin and its own related entities. The term “unaffiliated third party losses” would thus be losses by third parties unaffiliated with Zukin Partners, meaning SCRC would not indemnify Zukin Partners for losses suffered by Zukin’s affiliates. Considering the allegations in the complaint and cross-complaint, and that Plaintiffs filed suit against Zukin in the first place, Plaintiffs are not affiliated parties with Zukin.

WCE further argues that their liability rests upon a judicial determination that the loss was not the result of the willful misconduct, bad faith, fraud or gross negligence of Zukin.  WCE’s contention is incorrect. Contrary to WCE’s interpretation, Schedule A to the Agreements states that WCE is obligated “to reimburse each Indemnified Person for all reasonable out-of-pocket expenses (including, without limitation, the reasonable fees and expenses of counsel) as they are incurred in connection with investigating, preparing, pursuing, defending, settling, compromising, or otherwise becoming involved in any action . . ..” (CC, Ex. B, Schedule A Emphasis Added.) There is no other reasonable interpretation of this provision, except that it requires reimbursement of expenses “as they are incurred[.]” WCE’s cited exception would not affect their liability unless they can demonstrate that the loss resulted primarily from the willful misconduct, bad faith, fraud or gross negligence of Zukin. As Schedule A states:

“However, the Company shall not be liable under the foregoing indemnification and reimbursement provisions for any loss, claim, damage or liability which is finally judicially determined by a court of competent jurisdiction to have resulted primarily from the willful misconduct, bad faith, fraud or gross negligence of Zukin or such Indemnified Party or from the material breach of the Agreement.”

(CC, Ex. B, Schedule A.)

WCE argues that the clause would not indemnify Zukin for its active negligence because the indemnity clause does not expressly protect from active negligence, so it is a “general indemnity” clause. (See McCrary Construction Co. v. Metal Deck Specialists (2005) 133 Cal.App.4th 1528, 1537 [three types of recognized contractual indemnity clauses: 1) where the indemnitor must indemnify for all liabilities, expressly including negligence of indemnitee, 2) where indemnitee is indemnified for passive negligence, but not their active negligence, and 3) where the indemnitor must indemnify for liabilities it caused, but not where the indemnitee contributed to the liability].) However, the above-quoted section of Schedule A demonstrates that the outer limit of liability is for “willful misconduct, bad faith, fraud or gross negligence” (emphasis added). Thus, the contract does expressly provide indemnification for all liability, expressly including negligence of indemnitee.

Accordingly, WCE’s demurrer is OVERRULED on this ground.

Second Cause of Action: Equitable Indemnity

WCE asserts that the claim for equitable indemnity fails because it is uncertain. The Court disagrees. A special demurrer for uncertainty is disfavored and will only be sustained where the pleading is so bad that defendant cannot reasonably respond—i.e., cannot reasonably determine what issues must be admitted or denied, or what counts or claims are directed against him/her. (Code Civ. Proc., § 430.10(f); Khoury v. Maly’s of Calif., Inc. (1993) 14 Cal.App.4th 612, 616.) Moreover, even if the pleading is somewhat vague, “ambiguities can be clarified under modern discovery procedures.” (Id.) Here, WCE has the ability to respond to the CC. The basis of the equitable indemnity claim is that any harm suffered by Plaintiffs because of SCRC’s deal with WCE is attributable to SCRC. (CC ¶¶ 33-34.) There is nothing unclear about this theory.

WCE asserts that the alleged conduct in the complaint demonstrates an intentional scheme by Zukin to increase its own commissions at the sacrifice of Plaintiffs’ profit on the sale of the company that they built, and therefore, falls outside the coverage parameters. Of course, this position ignores the pled ultimate facts of the CC. As alleged in the CC, Zukin denies that they are in any way responsible for the damages purportedly suffered by Plaintiffs. (CC ¶ 33.) “If any harm was suffered by Plaintiffs as a result of SCRC’s deal with WCE, the harm is attributable to SCRC . . ..  In the event that Plaintiffs establish liability on the part of the Zukin Parties, which liability is expressly denied, such liability arises solely by reason of acts and omissions of SCRC . . ..” (CC ¶¶ 33-34.)  WCE attempts to resolve this issue of fact and equity at the demurrer stage

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

 Fourth Cause of Action: Breach of Contract re: ART Action

WCE argues that it could not owe Zukin “for a case that arose prior to the time the Agreements were entered into.” WCE points out that the first Agreement with an indemnity provision entered into between Zukin and SCRC was entered into after the ART Action was filed -- September 21, 2018. WCE, however, does not give any reasoned explanation as to why this would defeat the cause of action. The CC alleges that the Agreements require WCE to reimburse Zukin for their attorney’s fees and costs incurred in becoming involved in any lawsuit arising from or related to the Agreements. (CC ¶ 41.) Zukin was a third party witness in the ART Action, which arose from the performance of their duties to WCE. (CC ¶ 42.) The filing of the ART action is immaterial.   Thus, the demurrer is OVERRULED as to this cause of action.

Third and Fifth Causes of Action:  Declaratory Relief

As to the declaratory relief causes of action, WCE reasserts its arguments set forth in its demurrer to the prior causes of action.  Accordingly, the demurrer is OVERRULED for the same reasons discussed infra.

Cross-Defendant WCE to file an answer within ten days.