Judge: Mark H. Epstein, Case: 21SMCV00832, Date: 2023-01-13 Tentative Ruling

Case Number: 21SMCV00832    Hearing Date: January 13, 2023    Dept: R

The demurrer to the first cause of action is SUSTAINED.  The demurrer to the second cause of action is OVERRULED.

The court notes that the demurrer was filed in the wrong case; it should have been filed in 22STCV35303.  However, that is of no moment; the order will apply to that case.

According to the complaint, plaintiff sued defendant, a payroll processing company.  Plaintiff hired defendant to process plaintiff’s payroll for plaintiff’s employees.  One such employee, Venegas, was a bad actor and stole money by creating false documents and submitting them to defendant.  Defendant processed the false documents and supposed wages were paid to a non-existent person for the benefit of the erstwhile employee (who had previously been defendant’s employee before working directly for plaintiff).  Plaintiff contends that defendant breached its contract and committed various torts by not stopping the theft, which took place over a six year period, notwithstanding numerous red flags that plaintiff claims should have put defendant on high alert.  Plaintiff alleges that the fraud stopped only when plaintiff inadvertently discovered Venegas’s misconduct through a conversation with another accountant.  Plaintiff also alleges that when plaintiff brought this to defendant’s attention and asked for help, defendant ignored the problem and failed to help plaintiff at all.  In fact, plaintiff asserts, it had to subpoena defendant in June 2021 to get information and even then defendant did not produce a number of documents.  Among the torts is misrepresentation, and as a result plaintiff also seeks punitive damages.

The court notes quickly that the demurrer for uncertainty is OVERRULED.  Defendant simply argues that plaintiff fails to plead the claims with the requisite specificity. A demurrer for uncertainty does not address whether the pleading fails to “incorporate sufficient facts in the pleading but is directed at the uncertainty existing in the allegations actually made.”  (Butler v. Sequeira (1950) 100 Cal.App.2d 143, 145-146.)  Rather, a demurrer is intended to address whether a pleading is so incomprehensible that a defendant cannot understand the allegations actually made. (Id. at p. 146.) Defendant makes no such argument, and any such argument would be untenable.

The demurrer to the professional negligence claim is SUSTAINED.  “Citing Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515, the court noted that ‘conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law.’  (Erlich v. Menezes, supra, at p. 551; see also Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 102.)  Thus, ‘[t]ort damages have been permitted in contract cases where a breach of duty directly causes physical injury [citation]; for breach of the covenant of good faith and fair dealing in insurance contracts [citation]; for wrongful discharge in violation of fundamental public policy [citation]; or where the contract was fraudulently induced. [Citation.]  In each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.’ (Erlich v. Menezes, supra, at pp. 551–552.)”  (Butler-Rupp v. Lourdeaux (2005) 134 Cal.App.4th 1220, 1227.) 

Here, but for the contract, defendant owed plaintiff no duty of care or the like.  For that reason, the claim is essentially one for breach of contract.  Plaintiff cites Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817 as supporting its position.  But the case does not.  Our Supreme Court was considering whether a payroll company owed a duty of care to its client’s employee for wage and hour claims.  It held the payroll company did not and imposing tort liability was unnecessary. It made this comment:  “Under its contract with the employer, the payroll company is already obligated to act with due care in ensuring that the employer fulfills its obligations to its employees under the labor statutes and wage orders.”  (Id. at p. 839.)  Applying that doctrine to the instant facts, plaintiff’s theory cannot stand.  (The facts are a bit different here.  In Goonewardene, the plaintiff was an employee suing the payroll company—an entity with which it had no contractual relationship.  After determining that the employee could sue under a third party beneficiary theory, the Court went on to analyze whether the plaintiff could sue not only in contract, but in tort as well.  It is that part of the decision to which the court now adverts.)  Because the payroll company’s duties arose only from contract and not from any other source, no tort could be alleged.  The same is true here.  Defendant has no duty to plaintiff of which the court is aware regarding its performance other than those set forth in the contract.  Because there is no duty other than a contractual one, there can be no negligence, for fundamentally, negligence requires a breach of a non-contractual duty.  None of the other California authority cited by plaintiff indicates that a payroll processor owes a tort duty independent of the contract to its clients.  Aside from Goonewardene, the cases cited by plaintiff concern attorneys or home inspectors, all of whom owe separate professional and statutory duties to their clients.  Tort and contract are two different things; they cannot be conflated in this manner.

For those reasons, the negligence cause of action cannot stand and the demurrer to it is SUSTAINED.  The court will grant leave even though it is not convinced the defect can be cured.  In that regard, merely re-alleging the same facts or adding some aspect of detail that does not go to the issue the court has set forth is an exercise plaintiff might want to consider avoiding.

The negligent misrepresentation claim survives the above argument, however, because it is a form of fraud.  “Negligent misrepresentation is a separate and distinct tort, a species of the tort of deceit. ‘ Where the defendant makes false statements, honestly believing that they are true, but without reasonable ground for such belief, he may be liable for negligent misrepresentation, a form of deceit.’  (5 Witkin, Summary of Cal.Law (9th ed. 1988) Torts, § 720 at p. 819; see also § 1572, subd. 2 [‘[t]he positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true’]; § 1710, subd. 2 [‘The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true’].)”  (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 407–408.)  Thus, because one has a duty independent of contract not to negligently misrepresent material facts, the Applied Equipment rule does not foreclose this tort.  And, for the same reason, the economic loss rule is no barrier to the tort.

The court does not find defendant’s causation argument to be convincing.  That is a question of fact and the allegations here lead to a reasonable inference of causation.  Defendant represented that “it would ‘employ commercially reasonable security measures, using no less than industry standard security methodologies, to maintain the security of the CAPS Solution, including any Producer data stored on the CAPS Solution,’ ‘utilize[e] security or other management technology and otherwise monitoring usage of the CAPS Solution,’ and ‘monitor[] time, date, and access and implement[] other controls, counters, passwords, user i.d.’s, and/or other devices or procedures’ as appropriate and necessary.”  (Compl., ¶33.)  These representations, especially the first one, were allegedly part of the reason why plaintiff chose defendant as “the company’s exclusive payroll vendor over a competitor.”  (Id. at ¶¶18-19.)  Yet these representations were false because (according to the complaint) defendant did not employ reasonable security measures.  Venegas was therefore able to do what she did and do it for years.  That is sufficient for pleading purposes.  One major point (one could presume) of using security measures is not only to prevent a third party from hacking the database, but also to be sure that there is no fraud from within.  At least that is a plausible inference, which the court must draw at this stage of the proceedings.  If that is the case, then the fact that Venegas was a criminal actor is precisely the kind of thing that the security methodologies were intended to prevent, and there is no superseding cause that breaks the chain of causation.

Defendant also argues that the misrepresentations are about future events and thus not actionable.  “To be actionable, a negligent misrepresentation must ordinarily be as to past or existing material facts.  ‘[P]redictions as to future events, or statements as to future action by some third party, are deemed opinions, and not actionable fraud.’ (5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 678, pp. 779–780;  Richard P. v. Vista Del Mar Child Care Service (1980) 106 Cal.App.3d 860, 865.)”  (Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 158, parallel citations omitted.)  The promises, defendant notes, are all in the contract and represent a false promise for future action.  The court is not so sure.  The language in the contract can reasonably be read as a promise regarding existing facts, namely the use of existing security measures.  “CAPS will employ the commercially reasonable security measures, using no less than industry standard security methodologies, to maintain the security of the CAPS Solution, including any Producer data stored on the CAPS Solution.”  (Compl., Exh. B to Exhibit A, ¶2.4.)  It takes no great leap of logic to presume that if defendant in fact did not employ commercially reasonable measures or use industry standard security methodologies, it knew as much when it made the representations.  The demurrer is OVERRULED.

Thus, the demurrer is SUSTAINED IN PART AND OVERRULED IN PART.  Plaintiff has 30 days to file an amended complaint.  If plaintiff elects to stand on the current complaint, defendant will have 20 days from the date plaintiff so elects or from the date plaintiff’s time to amend expires (whichever comes first) to answer.