Judge: Mark C. Kim, Case: 22LBCV00191, Date: 2022-12-13 Tentative Ruling
Case Number: 22LBCV00191 Hearing Date: December 13, 2022 Dept: S27
1. Background
Facts
Plaintiff, Ashtel Studios, Inc. filed this action against Defendants,
Matthew John Sandvig, Oak Sourcing & Logistics, LLC, and Oak Insurance
Group, LLC for breach of contract, fraudulent inducement, open book account,
and quantum meruit.
Plaintiff alleges it entered into two contracts with OSL, the terms of which
will be discussed below. It alleges
Sandvig (OSL’s principal) and OIG (OSL’s parent corporation) are liable on all
causes of action on an alter ego theory.
2. Demurrer
a. Standard
on Demurrer
A demurrer is a pleading used to
test the legal sufficiency of other pleadings. It raises issues of law, not fact,
regarding the form or content of the opposing party’s pleading. It is not the function of the demurrer to challenge
the truthfulness of the complaint; and for purpose of the ruling on the demurrer,
all facts pleaded in the complaint are assumed to be true, however improbable
they may be.
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. Blank v. Kirwan 39
Cal.3d 311 (1985). No other extrinsic evidence can be considered (i.e., no “speaking
demurrers”). A demurrer is brought under CCP § 430.10 [grounds], § 430.30 [as
to any matter on its face or from which judicial notice may be taken], and §
430.50(a) [can be taken to the entire complaint or any cause of action
within]. Specifically, a demurrer may be
brought per CCP § 430.10(e) if insufficient facts are stated to support the cause
of action asserted. Per CCP §430.10(a) a
demurrer may be brought where the court has no jurisdiction of the subject of
the cause of action alleged in the pleading.
Furthermore, demurrer for uncertainty will be sustained only where the
complaint is so bad that the defendant cannot reasonably respond. CCP § 430.10(f).
However, in construing the allegations,
the court is to give effect to specific factual allegations that may modify or
limit inconsistent general or conclusory allegations. Financial Corporation of
America v. Wilburn, 189 Cal.App.3rd 764, 769 (1987). And, if the facts pled in
the complaint are inconsistent with facts which are incorporated by reference
from exhibits attached to the complaint, the facts in the incorporated exhibits
control. Further, irrespective of the name or label given to a cause of action
by the plaintiff, a general demurrer must be overruled if the facts as pled in
the body of the complaint state some valid claim for relief. Special demurrers
are not allowed in limited jurisdiction courts. (CCP § 92(c).)
Leave to amend must be allowed
where there is a reasonable possibility of successful amendment. Goodman v. Kennedy,
18 Cal.3d 335, 348 (1976). The burden is on the complainant to show the Court
that a pleading can be amended successfully. (Id.)
Finally, CCP section 430.41
requires that “[b]efore filing a demurrer pursuant to this chapter, 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).) The parties are to
meet and confer at least five days before the date the responsive pleading is due.
(CCP § 430.41(a)(2).) Thereafter, the demurring party shall file and serve a
declaration detailing their meet and confer efforts. (CCP § 430.41(a)(3).)
b. Meet
and Confer
Defense Counsel, Michael James
Maloney, filed a declaration in support of the demurrer. In his declaration, he details the parties’ telephonic
meet and confer, which did not resolve the issues posed by way of the
demurrer.
c. First
Cause of Action, Breach of Contract
i.
Allegations of First Cause of Action
Plaintiff’s first cause of action
is for breach of contract. Plaintiff
alleges the parties entered into two separate purchase agreements. Plaintiff defines the second such agreement
as “The Agreement,” and Plaintiff’s first cause of action is premised solely on
a breach of “The Agreement,” meaning the second contract. The terms and history of the first contract,
however, are relevant to an analysis of the cause of action, and therefore the
Court will discuss the allegations concerning both contracts in this ruling.
Plaintiff alleges the parties
entered into the first purchase agreement on or about 7/02/21. The purchase agreement is attached to the complaint
as Exhibit A. It is very short. It requires Plaintiff to supply 500K boxes of
nitrile gloves from China. The terms are
as follows:
·
Delivery Term:
One or more shipments commencing on or about July 2nd, 2021
CIF China
·
Payment: Buyer
to provide payment via wire post United States customs clearance and
satisfactory SGS inspection
The procedures are listed as
follows:
* Buyer issues ICPO (irrevocable
corporate purchase order)
·
Seller issues proposed SPA and Escrow Agreement
·
Subject to Buyer and Seller mutually agreeing to
all terms and conditions of the SPA and Escrow Agreement, Buyer and Seller (and
any other necessary third parties) shall sign and seal
·
Buyer to provide payment via wire post Untied States
customs clearance and satisfactory SGS inspection and Proof of Product (“POP”)
·
Full POP shall include:
o
The SGS product inspection report
o
Vessel affirms report at loading port…
o
Certificate of Origin…
o
Signed Commercial Invoice…
o
Any other documents pertaining or related to the
current trip, duly signed byt eh authorized Seller’s persons
o
Certificate of Insurance Coverage…
o
Plus, all other documents that may be reasonably
required by the Buyer.
Plaintiff alleges, at ¶28 of the
complaint, that as the goods began to arrive in the United States, OSL told
Plaintiff to move them to a warehouse, and told Plaintiff its customer (who was
ultimately receiving the gloves) would schedule inspections of the containers
before OSL would pay for the goods and pick them up. Plaintiff alleges it incurred drayage costs
and unloading costs to comply, even though the parties’ contract did not have
any language requiring Plaintiff to do so.
Plaintiff alleges, at ¶30, that OSL scheduled and cancelled the
inspection several times, and each time Plaintiff incurred costs to move the goods
for inspection and to move them back when the inspection did not occur. The goods finally passed inspection, but OSL
wouldn’t pay until other documents were provided. Plaintiff alleges the documents were not
required under the parties’ contract, but Plaintiff provided them anyway, and
OSL ultimately paid for the goods, but not for the additional costs
incurred.
Plaintiff alleges the parties
entered into the second purchase agreement on 7/07/21. At this time, the first shipment was already
en route from China. This is the
agreement that forms the basis of the second cause of action. The terms of the agreement are similar to the
terms of the first agreement, except that 1 million boxes of gloves were to be
procured at a slightly lowered cost per box of goods.
Plaintiff alleges it expected to be
paid promptly when the first shipment reached the United States, but OSL, by
failing to make prompt payment, rendered Plaintiff unable to meet the upfront
costs for the second shipment. Plaintiff
alleges Sandvig, on OSL’s behalf, understood and agreed (orally) to wait on the
second shipment until payment was made on the first. OSL ultimately paid for the goods per the
first agreement in August of 2021, and Plaintiff then had the second shipment
shipped. The containers began arriving,
and OSL once again scheduled and canceled inspections. OSL then stated it required additional documentation
and would pay within 72 hours after that was provided. Plaintiff provided the documentation, but was
not paid. Several weeks later, OSL told
Plaintiff its customer had backed out, and OSL was looking for a new customer
to take the product. At ¶48, Plaintiff
alleges, “Ashtel learned from a prospective customer of OSL that OSL was a
broker, that OSL had never had a contract with anyone, and that Sandvig’s
representations at the outset of the relationship about having existing large
scale annual contracts in place had been false.”
OSL never paid for the goods in the
second shipment, and Plaintiff commenced this litigation.
ii.
Defendants’ Arguments on Demurrer
Defendants argue Plaintiff failed
to allege a breach of the first purchase order.
They argue Plaintiff did not plead a breach of the second purchase order
because Plaintiff admits the goods were delivered late and without the required
documents. They argue any promise to
perform within 72 hours was not reduced to writing and therefore cannot be
considered.
iii.
Analysis
While slightly confusing in the complaint
itself, the first cause of action does not plead a breach of the first purchase
order. The complaint, at ¶35, defines
the second purchase order as “The Agreement.”
The first cause of action, at ¶¶54-58, alleges a breach of “The Agreement,”
thus referring to the second purchase order.
Plaintiff confirms, in opposition to the demurrer, that it is suing for
breach of the second purchase order by way of the first cause of action. The Court therefore declines to rule on
Defendants’ arguments that no breach of the first purchase order is alleged, as
Plaintiff’s first cause of action is not premised on any such breach.
Defendants argue Plaintiff has not
pled a breach of the second purchase order because (a) the complaint admits the
goods were delivered late, and (b) the complaint admits the goods were
delivered without the required documents.
Defendants’ first argument is that
Plaintiff’s complaint admits Plaintiff did not timely deliver the goods under the
second purchase agreement. Defendants do
not, in the demurrer, cite any authority concerning the parties’ rights and
duties when both parties are in breach of the material terms of a
contract. In reply, Defendants cite Wall
Street Netword, Ltd. V. N.Y. Times Co., 164 Cal.App.4th 1171, 1181
to stand for their position that a party in breach of a contract cannot sue the
other party for breach of the same contract.
Defendants’ citation is not a full and complete statement of the law in
this regard. In Durell v. Shart
Healthcare (2010) 183 Cal.App.4th 1350, 1367, the Court explained
the law in this regard as follows (citations omitted):
“A cause of action for damages for
breach of contract is comprised of the following elements: (1) the contract,
(2) plaintiff's performance or excuse for nonperformance, (3) defendant's
breach, and (4) the resulting damages to plaintiff.” (citations.) “[I]t is elementary that one
party to a contract cannot compel another to perform while he himself is in
default.” (citations.) While the
performance of an allegation “can be satisfied by allegations in general
terms” (citations), “excuses must be
pleaded specifically.” (citations).
The Court finds Plaintiff pled
facts sufficient, at the pleading stage, to allege its “excuse for
nonperformance.” The parties’ contract
is not clear concerning who is to schedule inspection of the goods. Plaintiff alleges OSL agreed to do so, but
then repeatedly scheduled and canceled those inspections, which led to a
significant delay in payment for the first shipment of goods. A reasonable juror could find OSL’s actions
excused Plaintiff from timely having the second shipment sent from China, as
Plaintiff was relying on payment from the first shipment to advance payment for
the second shipment. This is
particularly true where, as here, the second purchase agreement provides for a
date “on or about” which Plaintiff is to have the goods shipped, but no
specific deadline and no date certain.
Defendants also argue Plaintiff’s
complaint admits Plaintiff provided the goods without the necessary
documentation. This is only partly
true. Plaintiff alleges, at ¶46, that Defendants
demanded extra documentation, but “Ashtel complied with OSL’s demands.” Thus, Plaintiff alleges full compliance with
the obligation to provide all necessary documentation.
Defendants cannot have their
proverbial cake and eat it too. They cannot,
on the one hand, contend they can take as long as they want to satisfy their
obligations under the contract (having the goods inspected), but that any delay
on Plaintiff’s end concerning shipment constitutes a material breach of the
contract such that Plaintiff cannot enforce its terms. This is especially true where, as here, the
contract does not contain language explaining which party has obligations
concerning inspection, specific deadlines for shipment and receipt, etc.
The demurrer to the first cause of
action is overruled.
d. Second
Cause of Action, Fraudulent Inducement
i.
Allegations of Second Cause of Action
Plaintiff alleges Sandvig, in a
3/05/21 conversation, told Plaintiff that (a) OSL had an $800 million contract
in place for supplying PPE and that it had several long-term annual contracts
for gloves that it was fulfilling currently, (b) OSL’s needs for gloves were in
the millions of boxes per month based on its existing annual contracts, and (c)
OSL had sufficient funds to pay for the goods and money was no problem.
Plaintiff alleges each of these
representations was false, and it reasonably relied on the representations when
it entered into the second purchase agreement, which caused it to incur costs
to have the subject goods shipped and now stored.
ii.
Defendants’ Arguments on Demurrer
Defendants argue Plaintiff’s own
complaint shows that misrepresentation and knowledge of falsity have not been
pled. They also contend justifiable
reliance has not been pled.
The Court disagrees. Plaintiff alleges, at ¶48 of the complaint, that
Plaintiff learned that OSL never had a contract with anyone and the
communications at the outset of the relationship in this regard were false. Clearly, Defendants would know their own
relationships, so knowledge of falsity is assumed. Plaintiff alleges justifiable reliance,
because if Defendants had “several long-term contracts” and a need for “millions
of boxes of gloves per month,” Plaintiff would reasonably believe that it would
be paid for its shipment of gloves.
Defendants’ demurrer essentially
picks the facts that are favorable to it and uses them to demur. These are evidentiary issues. If Defendants’ version of the story is true,
then they will be able to make this showing at the evidentiary phase. At the pleading phase, however, Defendants
have not shown a fatal defect. The demurrer
is overruled.
e. Third
Cause of Action, Open Book Account
Defendants argue Plaintiff cannot
state a claim for open book account when the parties’ relationship is governed
by a written contract. Defendants rely
on Eloquence Corp. v. Home Consignment Center (2020) 49 Cal.App.5th
655, 665-666 in this regard. Eloquence
was decided on summary judgment, and held that an express contract is not, as a
rule, an open account. It held that an
exception occurs when the parties, by express or implied agreement, treat money
due under an express contract as items due on an open account. It went on to hold that, under the facts of
the case, the documents recorded by the plaintiff were not sufficient to constitute
an open book account, as they were merely secondary or incidental records.
There is a reason Eloquence was
decided on summary judgment. These are
all evidentiary findings. Defendants
have cited nothing standing for the position that Plaintiff cannot, at the
pleading stage, state a claim for open book account as an alternative remedy in
the event the breach of contract claim ultimately fails.
f. Fourth
Cause of Action, Quantum Meruit
Defendants’ argument concerning quantum
meruit is substantially similar to their argument concerning open book
account. They argue a plaintiff who has
an express contract cannot recover in quantum meruit. They cite Klein v. Chevron USA, Inc. (2012)
202 Cal.App.4th 1342, 1388 in this regard.
Klein, in contrast to Eloquence,
was decided on demurrer. The crux of the
holding concerning quantum meruit was that, “Although a plaintiff may plead
inconsistent claims that allege both the existence of an enforceable agreement
and the absence of an enforceable agreement, that is not what occurred
here. Instead, plaintiffs’ breach of contract
claim pleaded the existence of an enforceable agreement and their unjust
enrichment claim did not deny the existence or enforceability of that
agreement. Plaintiffs are therefore precluded
from asserting a quasi-contract claim under a theory of unjust enrichment.”
Plaintiff does not, in opposition to
the demurrer, show that its fourth cause of action denies the existence or
enforceability of the parties’ agreement.
Plaintiff does not meaningfully address the standard set forth in Klein in
this regard. The demurrer to the fourth cause
of action is therefore sustained. Leave to
amend is granted if and only if Plaintiff amends according to the standard set forth
in Klein.
g. Alter
Ego
Sandvig and OIG demur to the entire
complaint as pled against them on the ground that the alter ego allegations are
deficient.
Plaintiff’s alter ego allegations
are found at ¶¶14-18 of the complaint. As
to OIG, Plaintiff alleges there was a unity of interest and ownership between
the two such that the separateness of the companies never existed; Sandvig was
a managing member of both OSL and OIG and controlled the business and affairs
of both, and OSL and OIG share the same address, which address is shared with
hundreds of other companies. As to Sandvig, Plaintiff alleges Sandvig
inadequately capitalized OSL, used OSL as a mere shell for OIS and/or Sandvig,
used OSL to procure labor, services, or merchandise for other persons or
entities, manipulated the assets and liabilities between the corporate entities
so as to concentrate the assets in OIS and liabilities in OSL, and used the corporate
entities to shield against their own obligations, especially those alleged in
the complaint. Plaintiff alleges denying
the unity of interest between OSL and OIG would result in fraud and inequity to
Plaintiff.
ii.
Pleading Alter Ego
When pleading alter ego liability
against an individual, there are two basic requirements. First, the shareholders sought to be held
liable must have treated the corporation as their “alter ego,” rather than as a
separate entity, i.e., there must be such “unity of interest” and ownership
that the individuality or separateness of the corporation has ceased to exist
(or never existed in the first place). Mesler
v. Bragg Mgmt. Co. (1985) 39 Cal.3d 290, 300.
Second, the plaintiff must show that it would “sanction a fraud or
promote an injustice” to uphold the corporate entity and allow the shareholders
to escape personal liability for its debts. Mesler v. Bragg Mgmt. Co., supra,
39 C3d at 300.
When pleading alter ego liability against
a parent corporation, the Court must be aware that it is well recognized that
“[t]he law permits the incorporation of businesses for the very purpose of
isolating liabilities among separate entities”—i.e., parent and subsidiary
corporations. Cascade Energy & Metals Corp. v. Banks (10th Cir. 1990) 896
F2d 1557, 1576. Thus, a parent
corporation will not be held liable for its subsidiary's debts simply because
of its stock ownership or the existence of common directors and officers. Alter ego liability will be imposed on a
parent corporation only if (i) the parent controlled the subsidiary to such a
degree that it was a “mere instrumentality” of the parent used for an improper
purpose, and (ii) an inequitable result would otherwise occur. Laird v. Capital Cities/ABC, Inc. (1998) 68 Cal.App.4th
727, 742.
Rutherfold Holdings, LLC v. Plaza
del Rey (2014) 223 Cal.App.4th 221, 236 sets forth the pleading
standard for pleading alter ego. In
Rutherford, the Court discussed the allegations of the plaintiff’s complaint as
follows:
Rutherford alleged that Caswell
dominated and controlled PDR; that a unity of interest and ownership existed
between Caswell and PDR; that PDR was a mere shell and conduit for Caswell's
affairs; that PDR was inadequately capitalized; that PDR failed to abide by the
formalities of corporate existence; that Caswell used PDR assets as her own;
and that recognizing the separate existence of PDR would promote injustice.
These allegations mirror those held to pass muster in First Western Bank &
Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910, 915–916, 73 Cal.Rptr. 657. As
in First Western, *236 “[a]ssuming these
facts can be proved, [Caswell] ... may be held liable ... under the alter ego
principle.” (Id. at p. 916, 73 Cal.Rptr. 657.)
The Court went on to discuss the pleading
standard governing a plaintiff’s allegation of alter ego against a defendant,
holding:
Defendants argue that Rutherford
failed to allege specific facts to support an alter ego theory, but Rutherford
was required to allege only “ultimate rather than evidentiary facts.” (Doe v.
City of Los Angeles (2007) 42 Cal.4th 531, 550, 67 Cal.Rptr.3d 330, 169 P.3d
559.) Moreover, the “less particularity [of pleading] is required where the defendant
may be assumed to possess knowledge of the facts at least equal, if not
superior, to that possessed by the plaintiff,” which certainly is the case
here. (Burks v. Poppy Construction Co. (1962) 57 Cal.2d 463, 474, 20 Cal.Rptr.
609, 370 P.2d 313.) Therefore, we affirm the trial court's ruling that
Rutherford sufficiently pled an alter ego theory of liability.
iii.
Analysis
As to Sandvig, Plaintiff’s
complaint must allege ultimate facts showing unity of interest and that disregarding
the alter ego relationship would sanction a fraud or injustice. Plaintiff alleges ultimate facts in this
regard at ¶17. The facts are no more or
less sufficient than those pled in Rutherford, and therefore Sandvig’s demurrer
is overruled.
As to OIS, Plaintiff must allege a degree
of control that renders OSL a mere instrumentality, and must pled injustice if
alter ego status is ignored. Plaintiff
does so at ¶¶14, 17, and 18. The
demurrer is therefore also overruled.
h. Conclusion
Defendants’ demurrer to the fourth
cause of action is sustained with leave to amend. Defendants’ demurrer is overruled in all
other regards. Plaintiff must file an
amended complaint within twenty days. Defendants
must file a responsive pleading within the statutory time thereafter.
3. Motion
to Strike
Defendants move to strike the alter
ego allegations from the complaint. Plaintiff
argues a motion to strike is not the correct procedural vehicle for removing
the allegations, and also that the allegations are sufficient. Regardless of whether the motion is
procedurally correct, it is denied for the reasons discussed above in
connection with the demurrer; the motion to strike merely restates the same
arguments advanced in the demurrer, and no additional analysis is necessary in
this regard.
4. Motion
for a Protective Order
Plaintiff propounded 84 SROGs to
OSL, 85 to OIG, and 79 to Sandvig. Plaintiff’s
attorney served a “declaration of necessity” with the discovery, contending
more than 35 SROGs were necessary in light of the complexity of issues presented
in the litigation.
Defendants seek a protective order,
contending Plaintiff should be limited to no more than 35 SROGs per defendant,
as this case is not particularly complex, and the SROGs propounded are
repetitive and unnecessary. Plaintiff
opposes, contending the case is complex, the SROGs are not redundant, and all
the SROGs propounded are necessary.
As an initial note, Plaintiff
argues Defendants waived their right to object to the SROGs by failing to serve
timely objections. Plaintiff does not,
however, question the fact that Defendants timely filed this motion for a protective
order. Plaintiff cites no authority for
the position that objections must also be served when a motion for a protective
order is filed. Indeed, this would be
nonsensical, as the purpose of the motion for a protective order is to preclude
the party from the need to respond in the first instance.
The Court finds the parties did not
meaningfully meet and confer in good faith before this motion was filed. Defense Counsel declares Counsel had a
telephone call on 10/13/22, but Plaintiff declined to discuss any possibility
of limiting or narrowing the SROGs at issue.
The Court finds this is not “good faith” participation in the discovery
process. While an order limiting Plaintiff
strictly to 35 SROGs per defendant may not be practical in light of the issues
presented in the case, the sheer volume and repetitiveness of the SROGs
actually propounded is also not proper.
The Court orders Counsel to meet
and confer in good faith in an attempt to limit the SROGs propounded. Notably, Defendants indicate they will have
responded to RPDs, RFAs, and FROGs prior to the hearing; the Court is hopeful
that some of the information provided by way of those discovery devices will also
assist Plaintiff in narrowing the scope of the SROGs propounded.
The hearing on this motion is
continued for two months, to Tuesday, 2/14/23.
Counsel must meet and confer in good faith as soon as possible. If issues remain outstanding after good faith
meet and confer, each party must file a brief and declaration explaining the
meet and confer efforts they undertook, as well as the issues that remain unresolved,
at least two weeks prior to the continued hearing date.
The Court notes that Defendants did
not, in connection with the moving papers, seek sanctions. Plaintiff, however, seeks sanctions in the
obscene amount of nearly $20,000 in the opposition. At a minimum, the Court finds Defendants’
decision to file this motion does not constitute sanctionable conduct. The decision to do so was clearly made in good
faith in light of the sheer volume of discovery propounded.
The Court asks Counsel to meet and
confer in good faith in an attempt to resolve this issue. The Court advises Plaintiff that sanctions
are highly unlikely, and that attempts to narrow the discovery sought should be
made in good faith.
5. Case
Management Conference
The parties are reminded that there
is a CMC on calendar concurrently with the hearing on the demurrer, motion to strike,
and motion for a protective order. The Court
asks Counsel to make arrangements to appear remotely at the hearing on the motions
and the OSC.