Judge Mary H. Strobel, Case 22STCV12678 2022-07-28 Tentative Ruling

Plaintiff HCT Packaging, Inc. (“Plaintiff” or “HCT”) moves for writs of attachment against Defendants Lilah Beauty, Inc., Cheryl Foland, and Steven Foland (“Defendants”) in the amount of $460,275.39.

On April 15, 2022, Plaintiff filed a complaint against Defendants for breach of contract, promissory estoppel, and declaratory relief.

On April 21, 2022, Plaintiff filed the instant applications for writ of attachment.

On June 16, 2022, Defendants filed a cross-complaint against Plaintiff for accounting, violation of unfair competition law, conversion, and declaratory relief.

On July 21, 2022, Defendants filed an opposition to the applications for writ of attachment.

“Upon the filing of the complaint or at any time thereafter, the plaintiff may apply pursuant to this article for a right to attach order and a writ of attachment by filing an application for the order and writ with the court in which the action is brought.” (CCP § 484.010.)

The application shall be executed under oath and must include: (1) a statement showing that the attachment is sought to secure the recovery on a claim upon which an attachment may be issued; (2) a statement of the amount to be secured by the attachment; (3) a statement that the attachment is not sought for a purpose other than the recovery on the claim upon which the attachment is based; (4) a statement that the applicant has no information or belief that the claim is discharged or that the prosecution of the action is stayed in a proceeding under the Bankruptcy Act (11 U.S.C. section 101 et seq.); and (5) a description of the property to be attached under the writ of attachment and a statement that the plaintiff is informed and believes that such property is subject to attachment. (CCP § 484.020.)

“The application [for a writ of attachment] shall be supported by an affidavit showing that the plaintiff on the facts presented would be entitled to a judgment on the claim upon which the attachment is based.” (CCP § 484.030.)

The Court shall issue a right to attach order if the Court finds all of the following:

(1) The claim upon which the attachment is based is one upon which an attachment may be issued.

(2) The plaintiff has established the probable validity of the claim upon which the attachment is based.

(3) The attachment is not sought for a purpose other than the recovery on the claim upon which the attachment is based.

“A claim has ‘probable validity’ where it is more likely than not that the plaintiff will obtain a judgment against the defendant on that claim.” (CCP § 481.190.)

“The Attachment Law statutes are subject to strict construction.” (Epstein v. Abrams (1997) 57 Cal.App.4th 1159, 1168.)

“In determining the probable validity of a claim where the defendant makes an appearance, the court must consider the relative merits of the positions of the respective parties and make a determination of the probable outcome of the litigation.” (Loeb & Loeb v. Beverly Glen Music, Inc. (1985) 166 Cal.App.3d 1110, 1120.) The court’s determination in an attachment proceeding “shall have no effect” on the main action. (CCP § 484.100.)

Defendants Cheryl Foland and Steven Foland (“Individual Defendants”) contend that Plaintiff failed to serve on them the applications and notices of hearing naming them as defendants. (Oppo. 11-13.) Individual Defendants submit evidence that Plaintiff only served the application and notice of hearing that identified Lilah Beauty, Inc. as the defendant. (S. Foland Decl. ¶ 3; C. Foland Decl. ¶ 19.)

Plaintiff filed with the court applications and notices of hearing naming Individual Defendants as the defendants. However, the proofs of service filed by Plaintiff on May 6, 2022, only state that Plaintiff served the “Notice of Application for Right to Attach Order and Issuance of Writ of Attachment,” without specifying that the papers pertaining to Individual Defendants were served. In reply, Plaintiff seeks to augment the proofs of service with declarations of diligence from the process server. One of the declarations of diligence filed on July 26, 2022, states a different date of service (as to Steven Foland) than was stated in the proof of service filed May 6, 2022. Furthermore, the process server does not state clearly in the declaration that he served all documents attached as exhibits to the declaration. The list of documents served does not state clearly that the notices and applications pertaining to the Individual Defendants were served. Nonetheless, the proofs of service and declarations of diligence provide some evidence that Plaintiff served all notices and applications on Defendant Steven Foland.

A noticed motion for attachment is governed by the procedures in CCP sections 482.010 et seq. and 484.010, et seq. As relevant here, CCP section 484.040 states: “No order or writ shall be issued under this article except after a hearing. At the times prescribed by subdivision (b) of Section 1005, the defendant shall be served with all of the following: (a) A copy of the summons and complaint. (b) A notice of application and hearing. (c) A copy of the application and of any affidavit in support of the application.” (bold italics added.) Relatedly, the notice of application and hearing “shall inform the defendant” of various legal rights and protections. (See CCP § 484.050.) “The Attachment Law statutes are subject to strict construction.” (Epstein v. Abrams (1997) 57 Cal.App.4th 1159, 1168.)

There is a factual dispute as to whether the notices and applications naming Individual Defendants were properly served. Individual Defendants filed a lengthy opposition on the merits and submitted opposing evidence on the merits in the declaration of Cheryl Foland. They requested a ruling on a number of issues, including an affirmative defense for economic duress that applied only to Individual Defendants. “It is well settled that the appearance of a party at the hearing of a motion and his or her opposition to the motion on its merits is a waiver of any defects or irregularities in the notice of motion. (Citations.) This rule applies even when no notice was given at all.” (Carlton v. Quint (2000) 77 Cal.App.4th 690, 697; see also Loeb & Loeb v. Beverly Glen Music, Inc. (1985) 166 Cal. App. 3d 1110, 1116 (1985) [court finding no prejudice from allegedly deficient notice in attachment proceeding].) In these circumstances, there is a strong argument Individual Defendants have waived any defect in the notice. In any event, the court tentatively denies the applications on other grounds.

The application is based on Plaintiff’s causes of action for breach of contract and breach of guaranty. To establish a claim for breach of contract, a plaintiff must prove: (1) existence of a contract; (2) plaintiff’s performance or excuse for nonperformance; (3) defendant’s breach of the contract; and (4) damages incurred by plaintiff as a result of the breach. (Durell v. Sharp Healthcare, (2010) 183 Cal.App.4th 1350, 1367.)

Plaintiff “is in the business of developing, manufacturing, and selling cosmetic, beauty, and skin care solutions, among other things.” (Corcoran Decl. ¶ 3.) Lilah Beauty, Inc. (“Lilah Beauty”), referred to by Defendants as Lilah b., “is a cosmetics company that sells beauty, skin care, and personal care products both directly to consumers and also to other retailers who then sell to consumers.” (C. Foland Decl. ¶ 3.) In or about 2014, Lilah Beauty began working with Plaintiff in anticipation of launching its brand of cosmetic and beauty products. (Id. ¶ 4.) Lilah Beauty worked with Plaintiff’s team to develop the products and Plaintiff caused the products to be manufactured and shipped to Lilah Beauty. (Id. ¶ 4; see Sung Decl. ¶ 3, Exh. 1-2.)

Beginning in 2018 and continuing through 2021, Lilah Beauty ordered various products from Plaintiff pursuant to written purchase orders. (Sung Decl. ¶¶ 3-4, Exh. 1-2.) The purchase orders incorporate various terms and conditions. (Id. ¶ 5 Exh. 3.) In connection with the purchase orders, Plaintiff also issued to Lilah Beauty invoices, which reflect the amount owed by Lilah Beauty. (Id. ¶¶ 3-4, Exh. 2.)

Plaintiff’s Vice President of Sales, Winnie Sung, declares that Plaintiff “fully performed its obligations under the Purchase Orders, including but not limited to by manufacturing and delivering Product to Lilah Beauty and beginning production of Product not yet delivered.” (Sung Decl. ¶ 4.)

Plaintiff’s Divisional Controller for North America, Tara Corcoran, declares that she has reviewed Lilah Beauty’s account information, payment history, and a guaranty executed by Individual Defendants on May 20, 2020. Corcoran declares that Defendants breached their contractual obligations and owe “at least $460,275.39.” (Corcoran Decl. ¶ 8.)

In opposition, Defendant Cheryl Foland declares that “as a direct result of the [Covid-19] Pandemic, Lilah b. no longer needed the substantial amount of Finished Products it had ordered.” (C. Foland Decl. ¶ 7.) In March 2020, Defendants requested that Plaintiff cancel certain orders and place others on hold due to business impacts related to the pandemic. (Id. ¶ 8.) According to Cheryl Foland, Plaintiff subsequently communicated to Defendants that “almost all of the Open Orders had been started in production such that certain Components, labels, cartons and product bulk had already been manufactured or produced.” (Id. ¶ 10, Exh. C.)

In May 2020, Individual Defendants executed the written guaranty referenced in the Corcoran declaration (“Guaranty”). (C. Foland Decl. ¶ 16; Corcoran Decl. Exh. 2.) In the Guaranty, Individual Defendants “unconditionally and irrevocably” guaranteed full payment of Lilah Beauty’s “present and future obligations, debts, and liabilities for the amount of” $800,000. (Corcoran Decl. Exh. 2 at sec. 1.) In opposition, Defendants state that the debt arose in part from goods that Plaintiff delivered but for which Defendants have not paid (“Aging Receivables.”). Defendants “[d]o not dispute that HCT was entitled to be remunerated for all amounts owed as Aging Receivables.” (Oppo. 10 and fn. 2.) In section 1(b) of the Guaranty also stated the following:

(b) Guarantor’s willingness to enter into this Guaranty, and the consideration underlying this obligation, is the express understanding and agreement by the Beneficiary and its shareholders and affiliates that the amount owing under the Enhanced Invoices will (i) be paid in accordance with the payment schedule indicated in Exhibit A and (ii) Beneficiary will require an initial payment in the amount of Seventy-Five Thousand … ($75,000 USD) upon execution of this Guaranty.

The “Enhanced Invoices” refer to a payment schedule in Exhibit A to the Guaranty and incorporated by reference. (Id. at Recitals.)

In the first cause of action for breach of contract, Plaintiff alleges that Lilah Beauty breached its obligation under numerous purchase orders by failing to pay the amount due. (Compl. ¶¶ 25-26.) To support this contract claim, Plaintiff cites to paragraph 8 of the Corcoran declaration. (Mot. 5-6.) In paragraph 8, Corcoran declares:

Based upon my review of Lilah Beauty’s account with HCT after the effective date of the Guaranty, Lilah Beauty has paid HCT a total of $860,000 pursuant to the Payment Schedule that is attached to the Guaranty. Other than these payments, no other payments have been received by HCT, either from Lilah Beauty or from the Folands pursuant to the Guaranty. The total amount owed by Lilah Beauty to HCT before crediting these payments equaled $1,320,275.39. After crediting the payments received, the outstanding balance owed equals $460,275.39, exclusive of interest, costs, or legal fees. Prior to commencing this action, HCT made several demands on Lilah Beauty and the Folands to cure this default, and attempted to make accommodations for payment of the outstanding amounts in default. See Corcoran [sic] Despite these efforts, Lilah Beauty and the Folands continue to breach their obligations and are in default in the amount of at least $460,275.39. (Corcoran Decl. ¶ 8.)

This explanation of damages is unclear. Lilah Beauty is not a party to the Guaranty and can have no liability itself under the Guaranty. Corcoran seems to assert that Lilah Beauty has unpaid debts under the purchase orders of $1,320,275.39. However, Corcoran does not so state and she provides no explanation of how she calculated the amount owed by Lilah Beauty under the purchase orders. Rather, Corcoran seems to refer to the payment schedule attached as Exhibit A to the Guaranty.

The Exhibit A submitted with Corcoran’s declaration is printed in small, blurry font and is difficult to read. It appears that a legible version of Exhibit A to the Guaranty is submitted with the unverified complaint as Exhibit 2. Assuming the Exhibit 2 to the complaint is the payment schedule attached to the Guaranty, the court cannot determine from Corcoran’s declaration or the payment schedule how Lilah Beauty’s alleged debt of $1,320,275.39 was calculated. The payment schedule is not self-explanatory and Corcoran does not discuss the tables in the payment schedule or discuss payments that have been made according to the schedule.

Plaintiff also submits a declaration of Plaintiff’s Vice President of Sales, Winnie Sung. (Sung Decl. ¶ 4.) Sung authenticates purchase orders and invoices, but does not provide a calculation of damages. Thus, the Sung declaration does not prove Plaintiff’s damages in any specific amount.

Even if the payment schedule could be construed to admit a debt owed by Lilah Beauty, Defendants submit evidence that they have paid Plaintiff $1,025,495 since the Guaranty was executed in May 2020. (C. Foland Decl. ¶ 17, Exh. F.) In moving papers, Plaintiff did not address any payments made by Defendants above the $860,000. (Corcoran Decl. ¶ 8.) In reply, Plaintiff appears to concede that Defendants have paid $1,025,495, but they claim some of that amount does not pertain to “liabilities subject to the Guaranty.” (Reply Illson Decl. ¶ 9, Exh. 5.) Plaintiff should have presented this evidence with the moving papers so that Defendants could respond. Whether a liability was subject to the payment schedule in the Guaranty requires some accounting or explanation by Plaintiff of the liabilities and the payments made. “The salutary rule is that points raised in a reply brief for the first time will not be considered unless good cause is shown for the failure to present them before.” (Balboa Ins. Co. v. Aguirre (1983) 149 Cal.App.3d 1002, 1010; see also Regency Outdoor Advertising v. Carolina Lances, Inc. (1995) 31 Cal.App.4th 1323, 1333.) Because there is a factual dispute as to the amount owed by Lilah Beauty, Plaintiff does not show good cause to present new evidence in reply on the issue of whether payments should be applied to the debt stated in the Guaranty.

In reply, Plaintiff argues that “Defendants’ concede that the evidence demonstrates a writs of attachment totaling $294,780.39 would be appropriate.” (Reply 1.) In relevant part, Defendants stated the following in the opposition brief: “Since the Folands signed the Guaranty, Defendants have in fact paid HCT $1,025,495 in satisfaction of the Guaranty. (C. Foland Decl., ¶ 17, Exh. F). This simple fact not only demonstrates that HCT’s evidence in support of attachment is false, but that (if it were to issue, which it should not) any writ of attachment should only be for a balance of $294,780.39.” (Oppo. 14.) Defendants also argued that “[n]either the Corcoran Decl., nor the Sung Decl. provides documentation to substantiate the $1,320,275.39 that it purportedly charged the Folands under the Guaranty.” (Oppo. 19.) Reading the opposition in full, Defendants did not concede that Plaintiff has proven any specific amount of damages. Furthermore, given the uncertainty in Plaintiff’s calculations of damages, Defendants’ admission to paying $1,025,495 is insufficient to prove Plaintiff’s damages in any specific amount.

Petitioner’s evidence does not preponderate that Defendants owe damages in any specific amount. The application for writ of attachment against Lilah Beauty is DENIED.

Plaintiff contends that Individual Defendants breached the Guaranty and owe $460,275.39 in damages. Plaintiff relies on the same calculation of damages in paragraph 8 of the Corcoran declaration, discussed above. (Mot. 3-5.)

In Paragraph 1(a) of the Guaranty, Individual Defendants “unconditionally and irrevocably” guaranteed full payment of Lilah Beauty’s “present and future obligations, debts, and liabilities for the amount of” $800,000. (Corcoran Decl. Exh. 2 at sec. 1.) Plaintiff concedes that Individual Defendants have since paid $860,000 toward the Obligations specified in the Guaranty, more than the $800,000 stated in Paragraph 1(a). (Corcoran Decl. ¶ 8; Illson Decl. ¶ 9, Exh. 5.)

In the moving brief, Plaintiff seems to contend that Individual Defendants guaranteed full payment of the amount stated in the payment schedule attached to the Guaranty. (Mot. 3-5.) However, Plaintiff does not quote or analyze any contract language that supports that position. The court does not make the parties’ arguments for them. (Pfeifer v. Countrywide Home Loans, Inc. (2012) 211 Cal.App.4th 1250, 1282.) Furthermore, even if Individual Defendants guaranteed payment of the full amount stated in the payment schedule, there is substantial uncertainty in the payment schedule which Plaintiff has not explained, as analyzed above.

In reply, Plaintiff asserts a new legal theory and interpretation of the Guaranty. Specifically, Plaintiff contends that “Folands agreed to be responsible for all of Lilah’s present and future debts to HCT, so long as their total exposure under the Guaranty could not exceed $800,000 at any given time.” (Reply 6.) Plaintiff contends that “[t]he current balance (exclusive of other fees and costs) owed and subject to the Guaranty as of the filing of the Applications totaling $460,275.39—an amount well below the $800,000 ‘cap’ of the Folands’ Guaranty.” (Ibid.) Especially for an attachment motion, in which the reply is due two court days before the hearing, Plaintiff does not show good cause to raise this argument for the first time in reply. (See Balboa Ins. Co. v. Aguirre (1983) 149 Cal.App.3d 1002, 1010.) Plaintiff should have known of this legal theory at the time the motion was filed and could have raised it so that Defendants could respond in their opposition. For purposes of this application, the court denies this reply argument on procedural grounds because it was not properly raised in the opening brief.[1]

The applications for writ of attachment against Individual Defendants is DENIED.

Because the court denies attachment on other grounds, the court need not decide Defendants’ other opposition arguments. However, for purposes of oral argument, the court some discussion of disputed issues.

Defendants do not submit sufficient evidence for the court to conclude that, during the pandemic, Plaintiff could have further mitigated its damages. Moreover, Defendants do not provide a specific calculation of damages that could have been mitigated. (Oppo. 15-16 and C. Foland Decl. generally.)

“‘The doctrine of economic duress ‘may come into play upon the doing of a wrongful act which is sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrator's pressure. [Citations.] But courts … will apply ‘economic duress' only in limited circumstances and as a ‘last resort.’” (Perez v. Uline, Inc. (2007) 157 Cal.App.4th 953, 959.)

“The underlying concern of the economic duress doctrine is the enforcement in the marketplace of certain minimal standards of business ethics. Hard bargaining, ‘efficient‘ breaches and reasonable settlements of good faith disputes are all acceptable, even desirable, in our economic system.” (Rich & Whillock, Inc. v. Ashton Development, Inc. (1984) 157 Cal.App.3d 1154, 1159.) The doctrine of economic duress incorporates “equitable notions of fairness and propriety which preclude the wrongful exploitation of business exigencies to obtain disproportionate exchanges of value.” (Ibid.)

The party asserting economic duress has the burden of proof. (Saheli v. White Mem. Med. Ctr. (2018) 21 Cal. App. 5th 308, 324.)

While Defendants submit some evidence relevant to the defense of economic duress (C. Foland Decl. ¶¶ 5-16), they apparently have not provided the court the full context of the negotiations of the Guaranty. In reply, Plaintiff submits evidence that Individuals Defendants are experienced and sophisticated businesspersons; that the Guaranty was negotiated at arms-length and for an extensive period of time; Defendant Steve Foland graduated from law school; and that Individual Defendants consulted an attorney in negotiation of the Guaranty. (Reply 6-10; see Reply Nevarez Exh. 1; Illson Decl. ¶¶ 5-7, Exh. 2-4.) The evidence suggests that the Folands made revisions to the Guaranty, which were adopted; that the Folands worked with Plaintiff for several months to finalize an acceptable agreement; and that the Guaranty provided important benefits to Lilah Beauty. On this record and briefing, Defendants do not prove a defense for economic duress with respect to the Guaranty under the probable validity standard. Furthermore, this defense would not apply to Lilah Beauty, which is not a party to the Guaranty.

Code of Civil Procedure section 487.010(a) provides that “[w]here the defendant is a corporation, all corporate property for which a method of levy is provided” is subject to attachment. Thus, a request for attachment of all of Lilah Beauty’s property is appropriate.

Plaintiff requests attachment against the Individual Defendants, natural persons, of items listed in CCP § 487.010(c) and (d). (Appl. Attach. 1.) That request is proper. (See Bank of America v. Salinas Nissan, Inc. (1989) 207 Cal. App. 3d 260, 267-268.)

However, Plaintiff also requests attachment against the Individual Defendants of “vehicles.” That item is not listed in CCP section 487.010 as property subject to attachment of a natural person. Plaintiff may only obtain attachment against the Individual Defendants of items listed in CCP section 487.010(c) or (d).

Code of Civil Procedure section 483.015(b) provides that the amount to be secured by the attachment shall be reduced by, inter alia: “(2) The amount of any indebtedness of the plaintiff that the defendant has claimed in a cross-complaint filed in the action if the defendant’s claim is one upon which an attachment could be issued.”

To the extent Defendants seek to reduce the attachment by a cross-claim or affirmative defense, Defendants do not establish all elements of attachment for any cross-claim or affirmative defense, including any specific amount of damages. (See Oppo. 15-16.) Accordingly, Defendants do not show any basis to reduce any attachment issued to Plaintiffs.

[1] The court also notes that, even if this interpretation of the Guaranty were correct, Plaintiff still has not provided a sufficient calculation of damages, as analyzed above.