Judge Michael E. Whitaker, Case Number: 21SMCV00045, Date: 2024-12-19 Tentative Ruling

Judge: Michael E. Whitaker, Case: 21SMCV00045, Date: 2024-12-19 Tentative Ruling

This case arises from allegations of property damage stemming from construction work done on an adjacent property. Plaintiff H. Jewel Engstrom, individually and as trustee of the Engstrom Family Trust (“Plaintiff”) brings the operative Second Amended Complaint (“SAC”) against Defendants 1400 Linda Flora Associates, LLC (“Linda Flora”); Bay Post Builders, Inc. (“Bay Post”); Stella Nova, LLC (“Stella Nova” or “Defendant”); Eri Kroh (“Kroh”); M&M Landscaping and Gardening Services (“M&M”); Geoworks Engineering Group, Inc. (“Geoworks”); EGM Construction, Inc. (“EGM”); Youssef Mikhail (“Mikhail”); Renaissance Construction Group, Inc. (“Renaissance”); Gold Hillside Construction, Inc. (“Gold”); Unique Homes by Caspian, Inc. (“Unique”); and Amir Babak Miradami (“Miradami”); alleging five causes of action for (1) trespass; (2) negligence; (3) private nuisance; (4) public nuisance; and (5) financial elder abuse.

Stella Nova demurs to the fifth cause of action on the grounds that the SAC fails to state facts sufficient to constitute a cause of action pursuant to Code of Civil Procedure section 430.10, subdivision (e). Stella Nova also moves to strike alter ego allegations and requests for punitive damages.

Stella Nova requests judicial notice of the Substitution of Trustee and Total Reconveyance, which was notarized August 16, 2024 and recorded with the Los Angeles County Recorder’s Office on August 20, 2024.

Courts can take judicial notice of the existence and recordation of real property records, including deeds, if authenticity is not reasonably disputed. (Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 264-265.) “The official act of recordation and the common use of a notary public in the execution of such documents assure their reliability, and the maintenance of the documents in the recorder’s office makes their existence and text capable of ready confirmation, thereby placing such documents beyond reasonable dispute.” (Ibid.) Moreover, courts can take judicial notice not only of the existence and recordation of recorded documents but also matters that can be deduced from the documents, including the parties, dates, and legal consequences of recorded documents relating to real estate transactions. (Ibid.)

Therefore, the Court takes judicial notice of the Substitution of Trustee and Total Reconveyance.

“It is black letter law that a demurrer tests the legal sufficiency of the allegations in a complaint.” (Lewis v. Safeway, Inc. (2015) 235 Cal.App.4th 385, 388.) In testing the sufficiency of a cause of action, a court accepts “[a]s true all material facts properly pled and matters which may be judicially noticed but disregard contentions, deductions or conclusions of fact or law. [A court also gives] the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (290 Division (EAT), LLC v. City & County of San Francisco (2022) 86 Cal.App.5th 439, 450 [cleaned up]; Hacker v. Homeward Residential, Inc. (2018) 26 Cal.App.5th 270, 280 [“in considering the merits of a demurrer, however, “the facts alleged in the pleading are deemed to be true, however improbable they may be”].)

Further, in ruling on a demurrer, a court must “liberally construe” the allegations of the complaint “with a view to substantial justice between the parties.” (See Code Civ. Proc., § 452.) “This rule of liberal construction means that the reviewing court draws inferences favorable to the plaintiff, not the defendant.” (Perez v. Golden Empire Transit Dist. (2012) 209 Cal.App.4th 1228, 1238.)

In summary, “[d]etermining whether the complaint is sufficient as against the demurrer on the ground that it does not state facts sufficient to constitute a cause of action, the rule is that if on consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated, or may be intermingled with a statement of other facts irrelevant to the cause of action shown, or although the plaintiff may demand relief to which he is not entitled under the facts alleged.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)

(1) Physical abuse, neglect, abandonment, isolation, abduction, or other treatment with resulting physical harm or pain or mental suffering.

(2) The deprivation by a care custodian of goods or services that are necessary to avoid physical harm or mental suffering.

(Welf. & Inst. Code, § 15610.07, subd. (a).) “Financial abuse” of an elder or dependent adult occurs when a person or entity does any of the following:

(1) Takes, secretes, appropriates, obtains, or retains real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.

(2) Assists in taking, secreting, appropriating, obtaining, or retaining real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.

(3) Takes, secretes, appropriates, obtains, or retains, or assists in taking, secreting, appropriating, obtaining, or retaining, real or personal property of an elder or dependent adult by undue influence, as defined in Section 15610.70.

“A wrongful use is defined as taking, secreting, appropriating, or retaining property in bad faith. Bad faith occurs where the person or entity knew or should have known that the elder had the right to have the property transferred or made readily available to the elder or to his or her representative.” (Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 174.)

Further, allegations of elder abuse must be pleaded with particularity. (Covenant Care, Inc. v. Superior Court (2004) 32 Cal.4th 771, 790.) “[A] plaintiff prosecuting a claim for heightened civil remedies under the Elder Abuse Act is required in any event to plead and to prove by clear and convincing evidence “recklessness, oppression, fraud, or malice.” (Id. at p. 788.) “In order to obtain the Act's heightened remedies, a plaintiff must allege conduct essentially equivalent to conduct that would support recovery of punitive damages.” (Id. at p. 789 [noting punitive damages under Civil Code, section 3294 require “clear and convincing evidence” of “oppression, fraud, or malice” and the heightened remedies for Elder Abuse under Welfare & Institutions Code, section 15657 require “clear and convincing evidence” of “recklessness, oppression, fraud, or malice”].) (Ibid.)

Defendant argues that the SAC fails to state a cause of action for financial abuse of an elder because it does not state with particularity facts demonstrating Stella Nova’s requisite knowledge to constitute wrongful use or intent to defraud.

1. Plaintiff is an elderly homeowner (1455 Roscomare Road, Los Angeles, CA 90077, “Plaintiff’s Property”) and is bringing this action for injunctive relief and damages against the owner, contractors, and their agents (collectively, “Defendants”) regarding a massive development they are constructing on the adjacent uphill real property (30.3 acres), which street address is 1400 Linda Flora Drive, Los Angeles, California; Assessor Parcel Number 4377-002- 028 (“Defendant’s Property,” or the “1400 Property”). Defendants’ development project includes graded hilltop building pad, driveway, and double retaining wall 1500’ in length, for a luxury residence (the “Project”).

2. Plaintiff’s next-door neighbors at 1467 Roscomare Road, Anthony and Teresa Aldave, filed an action against the same Defendants for damages to their property that the Defendants caused, Anthony Aldave, et al. vs 1400 Linda Flora Associates, LLC, et al., Los Angeles County Superior Court Case Number 19SMCV01169.

3. Plaintiff is bringing this action for the damages her Property suffered, including without limitation diminution in value and stigma proximately resulting from Defendants’ construction on Plaintiff’s Property without Plaintiff’s permission, among other tortious acts of Defendants.

4. Beginning during the weekend of February 3-5, incidents of soil movement from Defendant’s Property proximately caused severe damage to Plaintiff’s Property, as more fully alleged below. Plaintiff is informed and believes the damage to Plaintiff’s Property is in addition to those damages alleged in the Complaint she filed about January 11, 2021, and on the basis of that information and belief Plaintiff submits this Amended and Supplemented Complaint, to add and recover for damages Plaintiff suffered to Plaintiff’s Property and to herself as a proximate result of Defendants’ acts and omissions.

24. About May 5, 2014, 1400 LLC made a Deed of Trust (“DOT #1”), signed by KROH, on the 1400 Property for the benefit of Hankey Capital, LLC, to secure indebtedness in the total principal amount of up to $9,800,000, recorded in the County of Los Angeles on that date as Document no. 20140464747. Plaintiff is informed and believes, and on that basis alleges, the debt secured by this Deed of Trust exceeded the value of assets of 1400 LLC.

25. About December 1, 2020, Hankey Capital, LLC, made an Assignment of Deed of Trust, Security Agreement and Fixture Filing with Assignment of Rents (the “Assignment”), assigning “all beneficial interest under [DOT #1],” Document no. 20140464747, to Knight Insurance Company, Ltd., a Cayman Islands Company. About December 28, 2020, Hankey Capital, LLC, requested the Assignment be recorded in the County of Los Angeles as Document no. 20201731207, and when recorded mailed to Hankey Capital, LLC, not to Knight Insurance Company, whose rights the Assignment documented.

26. About June 25, 2021, less than six months after this lawsuit was filed, 1400 LLC made a Grant Deed, recorded in the County of Los Angeles as Document no. 20211038783 on July 2, 2021, granting the 1400 Property to STELLA NOVA. Although the Grant Deed recited Documentary Transfer Tax of $22,660.00, and City Transfer Tax of $92,700.00, and 1400 LLC acknowledged receipt of “A VALUABLE CONSIDERATION,” the beneficial title taken by Hankey Capital, LLC, and assigned to Knight Insurance Company, Plaintiff is informed and believes, and on that basis alleges, was not reconveyed.

27. About June 29, 2021, STELLA NOVA made a Deed of Trust (“DOT #2”) on the 1400 Property for the benefit of Hankey Capital, LLC, to secure indebtedness in the total principal amount of up to $15,000,000, recorded in the County of Los Angeles on that date as Document no. 20211038784. This Deed of Trust was executed by Geoffrey M. Gold, an attorney at the Beverly Hills law firm of Ervin, Cohen & Jessup LLP, for STELLA NOVA MANAGER LLC, a Delaware limited liability company that is not registered in California.

28. Plaintiff is informed and believes, and on that basis alleges, about July 30, 2024, after the Amended & Supplemental Complaint was served on STELLA NOVA, and more than three years after STELLA NOVA’s purchase of the 1400 Property, Hankey Capital, LLC, made a Substitution of Trustee and Total Reconveyance (the “Substitution”), signed by Priyesh R. Bhakta, President, substituting Hankey Capital, LLC, as Trustee in place of North American Title Company on DOT #1, as well as beneficiary, and “reconvey[ing], without warranty, to the person or persons legally entitled thereto, the estate and interest now held by it thereunder in and to [the 1400 Property].” About August 20, 2024, Hankey Capital, LLC, requested the Substitution be recorded in the County of Los Angeles as Document no. 20240558704, and when recorded mailed to Hankey Capital, LLC.

29. Knight Insurance Company was not identified in, nor a party, to the Substitution, despite Hankey Capital, LLC’s, having assigned to Knight Insurance Company the beneficial interest purportedly reconveyed in the Substitution “to the person or persons legally entitled thereto,” whom the Substitution also did not identify. As of July 30, and August 20, 2024, Knight Insurance Company held the interest Hankey Capital, LLC, purported to convey in the Substitution. Thus, in addition to being made three years late, the Substitution was ineffective.

30. Plaintiff is informed and believes, and on that basis alleges, the 1400 Property is the sole asset of STELLA NOVA. Plaintiff is further informed and believes, and on that basis alleges, the debt secured by the June 29, 2021, Deed of Trust exceeds the value of STELLA NOVA’s assets – particularly in view of the fact that the 1400 Property was already encumbered by a $9.8 million Deed of Trust in favor of Hankey Capital, LLC, assigned to Knight Insurance Company, which appears still to hold a beneficial interest in the 1400 Property.

31. The June 29, 2021, Deed of Trust (DOT #1) effectively burdened the 1400 Property with a debt of $24,800,000, consisting of $9,800,000, from the May 5, 2014, Deed of Trust granting beneficial title to Hankey Capital, LLC, then assigned to Knight Insurance Company, which has not reconveyed any interest passed by that Deed of Trust, plus $15,000,000 from the June 29, 2021, Deed of Trust (DOT #1). Plaintiff is informed and believes, and on that basis alleges, a total encumbrance of $24,800,000 is manifestly in excess of the value of the 1400 Property, which for at least the last 10 years has been simply a graded ridge, leveled dirt without more, from which have cascaded multiple volumes of dirt and mud damaging homes beneath it.

32. Plaintiff is informed and believes, and on that basis alleges, 1400 LLC and STELLA NOVA are mere shells and instrumentalities employed by Defendants KROH and others simply to evade personal liability and as a fraud on creditors. Plaintiff is informed and believes, and on that basis alleges, assets of 1400 LLC and STELLA NOVA are manifestly inadequate to meet its legal obligations and responsibilities. Plaintiff is further informed and believes, and on that basis alleges, KROH and others knew and know[ ] of that manifest inadequacy and intentionally structured and conducted the business of 1400 LLC and STELLA NOVA for the purpose of creating entities that would be inadequately capitalized to meet their obligations, while enriching themselves and concealing their involvement behind these sham entities created and maintained for the sole purpose of limiting KROH’s and others’ liability unjustly.

33. Plaintiff is informed and believes, and on that basis alleges, 1400 LLC, STELLA NOVA, and KROH share a unity of identity and purpose, commingling funds and acting in concert to evade and defraud creditors, such that adherence to the corporate fiction or its continued application to 1400 LLC or STELLA NOVA would work fraud and injustice on Plaintiff, who seeks this Court’s leave to impose liability for Plaintiff’s damages on KROH and others using those forms and fictions in connection with the operations of 1400 LLC or STELLA NOVA to work such fraud and injustice personally and execute against KROH and those others any judgment awarded to Plaintiff as against 1400 LLC or STELLA NOVA.

34. Plaintiff is informed and believes, and on that basis alleges, substantial portions of the work done at the 1400 Property that caused Plaintiff’s damages were done without observing appropriate formalities, such as, for example, written contracts between the owner and Contractors such as BAYPOST, M&M, GEOWORKS, EGM, MIKHAIL, RCG, [ ]GHC, MIRADAMADI, and UNIQUE. Plaintiff is further informed and believes, and on that basis alleges, Defendants 1400 LLC and STELLA NOVA – as well as MIKHAIL, RCG, [ ]GHC, MIRADAMADI, and UNIQUE – failed to maintain adequate records. Plaintiff is further informed and believes, and on that basis alleges, Defendants’ purpose in failing to maintain adequate records, was to deprive those who might suffer foreseeable injury as a proximate result of the acts and omissions of those Defendants of the ability to determine with certainty when Defendants were acting for themselves as individuals or when they were acting for Defendant entities, and of the ability to determine which of the Defendants performed which acts or omissions alleged to have caused such damages.

35. Since service on STELLA NOVA of Summons and the Amended and Supplemental Complaint, Plaintiff is informed and believes, and on that basis alleges, STELLA NOVA has been served with items of written discovery seeking evidence relating to Plaintiff’s’ alter ego allegations. Plaintiff is informed and believes, and on that basis alleges, STELLA NOVA objected to and refused to answer or produce in response to that discovery, thus depriving Plaintiff of such evidence

36. STELLA NOVA and 1400 LLC have been represented by the same counsel in this action. In addition to being undercapitalized, Plaintiff is informed and believes, and on that basis alleges, STELLA NOVA has represented that it does not have any insurance to cover the matters at issue.

37. Plaintiff is further informed and believes, and on that basis alleges, that STELLA NOVA has failed to observe formalities appropriate to its form and status as a limited liability company, including being formed without and having no Articles of Organization or Operating Agreement.

38. Plaintiff is informed and believes and on that basis alleges, Defendants, MIKHAIL, RCG, [ ]GHC, MIRADAMADI, and UNIQUE, failed to observe appropriate formalities (as evidenced in part by MIKHAIL’s history of associations with multiple entities expired, current, and suspended), failed to maintain separate records, failed to properly demarcate when individuals acted for themselves or on behalf of Defendant entities, failed to properly memorialize their agreements, obligations, and activities concerning their work at the 1400 Property or their relationships with 1400 LLC or STELLA NOVA, and failed to adequately capitalize RCG, GHC, and UNIQUE proportionate to its legal duties and obligations.

42. Defendants are developing and constructing a new large, graded hilltop building pad, driveway, and double retaining wall 1500’ in length, for a large luxury residence, swimming pool and related features (the “Project”).

43. Defendants, in constructing the Project, have repeatedly trespassed onto Plaintiff’s Property; have constructed a roadway, retaining wall, and related improvements on Plaintiff’s Property; and, in excavating the 1400 Property, have damaged Plaintiff’s Property. Defendants also trespassed on Plaintiffs’ property to construct a permanent, paved road that runs generally between the south and north ends of the 1400 Property, providing access to and from all portions of the 1400 Property, which road includes substantial portions of Plaintiff’s property. This road, and the access it provides, is integral to the development and value of the 1400 Property, benefiting and unjustly enriching Defendants, 1400 LLC and Stella Nova, who use and continue to use Plaintiff’s property without right or justification.

44. Plaintiff was recently informed that Defendants sought and obtained a grading permit from the Los Angeles Department of Building & Safety (LADBS) to remediate erosional scars that Defendants had caused based on Defendant’s false representation that the scars were located on the 1400 Property. Defendants repaired the scars per that permit, even though one of the scars was located on Plaintiff’s Property.

45. Plaintiff is informed and believes that Defendants entered Plaintiff’s Property, removed or compacted soil, landscaped the area, and remediated the erosional scar, all without Plaintiff’s consent. Defendants’ excavation for the Project was not proper or usual excavation for the purpose of construction. Plaintiff is informed and believes that Defendants entered Plaintiff’s Property and performed or caused to be performed excavation and other conduct on Plaintiff’s Property, including, without limitation: the entry of workers and equipment onto Plaintiff’s Property; the removal and / or compaction of soil thereon; the removal of native plants therefrom; and the planting of landscaping thereon; all without any prior notice to Plaintiff and without Plaintiff’s consent.

46. As a direct and proximate result of Defendants’ excavation work on the 1400 Property and Plaintiff’s Property for the Project, lateral and subjacent support along the uphill western and northern boundaries of Plaintiff’s Property was removed, causing soil movement and continuing, progressive, and substantial damage to the Plaintiff’s Property.

47. Soil movement that, Plaintiff is informed and believes, and on that basis alleges, resulted directly and proximately from Defendants’ excavation work on the 1400 Property and Plaintiff’s Property, as well as from Defendants’ grading, brush clearance, and other acts and omissions creating or worsening drainage and other issues relating to moisture traveling over and through the 1400 Property and Plaintiff’s Property, recently led to a slide of catastrophic proportions, which inundated portions of Plaintiff’s Property with mud, as deep as 6-8 inches in places. Plaintiff is informed and believes, and on that basis alleges, as a direct and proximate result of these recent events, Plaintiff’s Property has suffered physical damage, including without limitation damage both integral and aesthetic to structural, electrical, plumbing, irrigation, mechanical, and HVAC systems. In addition to this substantial property damage, Plaintiff has also suffered stigma and diminution of value damages, all proximately resulting from Defendants’ alleged acts and omissions.

48. Plaintiff is further informed and believes, and on that basis alleges, on or about May 21, 2019, the City of Los Angeles issued to Defendants an Order to Comply, No. B0120718-574, following which, about June 6, 2019, Inspector Brian Olson of the City’s Department of Building and Safety issued inspection results providing in pertinent part as follows: “Bottom/Toe – Partial Approval;” “Initial Grading – Approved;” and, “Special Order Compliance – Corrections Issued.” Plaintiff is informed and believes, and on that basis alleges, Defendants have known about the requirements from Building and Safety that they make corrections to meet the City’s requirements stated in the Order to Comply and the inspection results of Mr. Olson since June 2019, but Defendants have willfully failed to comply as required. Plaintiff is informed and believes, and on that basis alleges, these alleged failures have proximately caused substantial damage to Plaintiff, including as alleged in this pleading.

49. Plaintiff is informed and believes, and on that basis alleges, the acts and omissions of Defendants alleged in this pleading evidence their conscious disregard for the safety of Plaintiff, who is an elder as defined by statute. Plaintiff is informed and believes, and on that basis alleges, Defendants knew of activities they caused to be performed that caused a loss of subjacent support and consequent slides, which the City ordered Defendants to redress. Plaintiff is further informed and believes, and on that basis alleges, Defendants were aware at least as early as the date of issuance of the City’s Order(s) to Comply of the probable dangerous consequences of their conduct, and willfully and deliberately failed to avoid those consequences.

50. Plaintiff is further informed and believes, and on that basis alleges, STELLA NOVA in particular knew from the allegations of the complaints filed in Los Angeles Superior Court in this Action and in Case No. 19SMCV01169, which were matters of public record, that there had been slides and damage to Plaintiff’s Property due to acts and omissions for which the City cited Defendant, 1400 LINDA FLORA. STELLA NOVA did not act to comply with the City's outstanding orders or to complete the ordered corrections and provide proof for the City to sign off. Plaintiff is informed and believes, and on that basis alleges, STELLA NOVA’s conduct exhibits a conscious disregard for the safety of Plaintiff, who is an elder as defined by statute.

114. Plaintiff is older than 65 years of age, as Defendants knew or should have known.

116. Welfare and Institutions Code §15610.30(b) states that there is a conclusive presumption of financial elder abuse if a person or entity took, secreted, appropriated, obtained, or retained property for a wrongful use, if among other things, the person or entity that took, secreted, appropriated, obtained, or retained the property knew or should have known that the conduct would be harmful to the elder.

117. Here, Defendants knew or should have known that their conduct in taking and retaining Plaintiff's Property, would be harmful to Plaintiff and to Plaintiff's interest in the Property.

118. Each Defendant's conduct, individually, and all of the Defendants' conduct, collectively, was a substantial factor in causing Plaintiff's harm.

119. Plaintiff is entitled to her attorney's fees for Defendants violation of the Elder Abuse Act, per Welfare and Institutions Code §15657.5.

120. Defendants’ violations of the Elder Abuse Act were willful, oppressive, and fraudulent. Therefore, Plaintiff seeks punitive and exemplary damages.

121. As a direct and proximate result of Defendants' violations of the Elder Abuse Act, Plaintiff was injured in an amount far in excess of $25,000, which shall be proven at trial.

122. Plaintiff is also entitled to punitive damages against Defendants for their fraudulent, malicious and/or oppressive conduct, which includes intentional trespass onto Plaintiff’s Property, constructing improvements on Plaintiff’s Property and because Defendants had full knowledge of the hazard posed by the condition of the graded and excavated slope on the 1400 Property, and the adjacent graded and excavated slope on Plaintiff’s Property, including the fact that these slopes were unstable, dangerous and prone to landslides and mudslides, and risked causing substantial injury to persons and property if no or insufficient remedial measures were taken. Despite such knowledge, Defendants failed and refused to take reasonable or effective remedial measures.

Thus, the SAC alleges with requisite specificity that Defendants, including Stella Nova, (1) conducted fraudulent transfers among shell entities for the sole purpose of escaping liability; (2) overleveraged their property by a substantial margin; (3) disregarded formalities between entities when contracting for the construction work; (4) encroached their development onto Plaintiff’s property, removing not only soil and plants from Plaintiff’s property, but also effectively usurping parts of Plaintiff’s real property itself, by way of the roadway, retaining wall, and related improvements; and (5) with recklessness and conscious disregard for Plaintiff’s safety, caused erosion scars and mudslides onto Plaintiff’s property.

This is sufficient to withstand demurrer. Whether Stella Nova in fact did these things are factual questions to be resolved at later stages of the litigation.

Any party, within the time allowed to respond to a pleading, may serve and file a motion to strike the whole pleading or any part thereof. (Code Civ. Proc., § 435, subd. (b)(1); Cal. Rules of Court, rule 3.1322, subd. (b).) On a motion to strike, the court may: (1) strike out any irrelevant, false, or improper matter inserted in any pleading; or (2) strike out all or any part of any pleading not drawn or filed in conformity with the laws of California, a court rule, or an order of the court. (Code Civ. Proc., § 436, subd. (a)-(b); Stafford v. Shultz (1954) 42 Cal.2d 767, 782.)

To succeed on an alter ego claim, Plaintiff must ultimately be able to prove (1) such a unity of interest and ownership between the corporation and its owner that no separation actually exists, and (2) an inequitable result if the acts in question are treated as those of the corporation alone. (Leek v. Cooper (2011) 194 Cal.App.4th 399, 417.) Several factors are considered in determining whether the alter ego doctrine applies, including:

(1) commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses;

(3) the failure to obtain authority to issue stock or to subscribe to or issue the same;

(4) the holding out by an individual that he is personally liable for the debts of the corporation;

(6) sole ownership of all of the stock in a corporation by one individual or the members of a family;

(9) the use of a corporation as a mere shell, instrumentality or conduit for a single venture or the business of an individual or another corporation;

(10) the concealment and misrepresentation of the identity of the responsible ownership, management and financial interest, or concealment of personal business activities;

(11) the disregard of legal formalities and the failure to maintain arm's length relationships among related entities;

(12) the use of the corporate entity to procure labor, services or merchandise for another person or entity;

(13) the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another;

(14) the contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability, or the use of a corporation as a subterfuge of illegal transactions; and

(15) the formation and use of a corporation to transfer to it the existing liability of another person or entity.

Stella Nova argues the SAC fails to adequately plead alter ego because (1) Plaintiff does not allege common ownership interest because she alleges 1400 Linda and Stella Nova have different managers (Kroh and Stella Nova Manager, LLC); (2) Plaintiff’s undercapitalization allegations are based on the faulty premise that the $9.8 million encumbrance remained on the property, when in fact it was repaid from the purchase proceeds, as evidenced by a now-recorded Substitution of Trustee and Total Reconveyance; and (3) Plaintiff pleads inadequate facts to support her “information and belief” that Stella Nova and 1400 Linda were created to defraud and evade creditors.

Plaintiff alleges a “unity of identity and purpose” which, if disregarded, would “work fraud and injustice on Plaintiff[.]” (SAC ¶ 33.) There is no heightened pleading requirement to allege alter ego liability, thus Plaintiff is not required to support her information and belief with more specific facts. But in any event, Plaintiff has done so here, by alleging the scheme of undercapitalization and disregarded formalities. Thus, Plaintiff has pleaded the requisite ultimate facts[1] to allege the entities are alter egos of each other.

As for Stella Nova’s arguments that the property was not in fact over encumbered by the $9.8 million figure, even if true, the property may still be overleveraged by virtue of the other $15,000,000 encumbrance alleged. Whether the property is in fact overleveraged requires a property valuation and thus goes beyond the four corners of the amended complaint and judicially noticeable documents. These are factual questions to be determined at later stages of the litigation.

In ruling on a motion to strike punitive damages, “judges read allegations of a pleading subject to a motion to strike as a whole, all parts in their context, and assume their truth.” (Clauson v. Superior Court (1998) 67 Cal.App.4th 1253, 1255.) To state a prima facie claim for punitive damages, a plaintiff must allege the elements set forth in the punitive damages statute, Civil Code section 3294. (College Hosp., Inc. v. Superior Court (1994) 8 Cal.4th 704, 721.) Per Civil Code section 3294, a plaintiff must allege that the defendant has been guilty of oppression, fraud, or malice. (Civ. Code, § 3294, subd. (a).) As set forth in the Civil Code,

(1) “Malice” means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others. (2) “Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights. (3) “Fraud” means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.

Further, a plaintiff must assert facts with specificity to support a conclusion that a defendant acted with oppression, fraud or malice. To wit, there is a heightened pleading requirement regarding a claim for punitive damages. (See Smith v. Superior Court (1992) 10 Cal.App.4th 1033, 1041-1042.) “When nondeliberate injury is charged, allegations that the defendant’s conduct was wrongful, willful, wanton, reckless or unlawful do not support a claim for exemplary damages; such allegations do not charge malice. When a defendant must produce evidence in defense of an exemplary damage claim, fairness demands that he receive adequate notice of the kind of conduct charged against him.” (G. D. Searle & Co. v. Superior Court (1975) 49 Cal.App.3d 22, 29 [cleaned up].) In Anschutz Entertainment Group, Inc. v. Snepp, the Court of Appeal noted that the plaintiffs’ assertions related to their claim for punitive damages were “insufficient to meet the specific pleading requirement.” (Anschutz Entertainment Group, Inc. v. Snepp (2009) 171 Cal.App.4th 598, 643 [plaintiffs alleged “the conduct of Defendants was intentional, and done willfully, maliciously, with ill will towards Plaintiffs, and with conscious disregard for Plaintiff's rights. Plaintiff's injuries were exacerbated by the malicious conduct of Defendants. Defendants' conduct justifies an award of exemplary and punitive damages”]; see also Grieves v. Superior Court (1984) 157 Cal.App.3d 159, 166 [“The mere allegation an intentional tort was committed is not sufficient to warrant an award of punitive damages. Not only must there be circumstances of oppression, fraud, or malice, but facts must be alleged in the pleading to support such a claim”].)

Moreover, “the imposition of punitive damages upon a corporation is based upon its own fault. It is not imposed vicariously by virtue of the fault of others.” (City Products Corp. v. Globe Indemnity Co. (1979) 88 Cal.App.3d 31, 36.) “Corporations are legal entities which do not have minds capable of recklessness, wickedness, or intent to injure or deceive. An award of punitive damages against a corporation therefore must rest on the malice of the corporation’s employees. But the law does not impute every employee’s malice to the corporation. Instead, the punitive damages statute requires proof of malice among corporate leaders: the officers, directors, or managing agents.” (Cruz v. Home Base (2000) 83 Cal.App.4th 160, 167 [cleaned up].)

Here, as discussed above, Plaintiff has alleged with requisite specificity that the entities were created as shells for the purpose of evading liability for overleveraging the property and careless construction work.

For the reasons stated, the Court overrules Stella Nova’s Demurrer to the Fifth Cause of Action and denies Stella Nova’s Motion to Strike in its entirety.

Stella Nova shall file and serve an Answer to the SAC on or before January 17, 2025.

Stella Nova shall provide notice of the Court’s ruling and file the notice with a proof forthwith.

[1] Ultimate facts are those “constituting the cause of action” or those upon which liability depends, e.g., duty of care, breach of the duty and causation (damages). (See Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.) “[T]he term ultimate fact generally refers to a core fact, such as an essential element of a claim. Ultimate facts are distinguished from evidentiary facts and from legal conclusions.” (Central Valley General Hosp. v. Smith (2008) 162 Cal.App.4th 501, 513 [cleaned up]; see also Rodriguez v. Parivar, Inc. (2022) 83 Cal.App.5th 739, 750–751 [“The elements of a cause of action constitute the essential or ultimate facts in a civil case”].)

DEPARTMENT	207
HEARING DATE	December 19, 2024
CASE NUMBER	21SMCV00045
MOTIONS	Demurrer and Motion to Strike Portions of Second Amended Complaint
MOVING PARTY	Defendant Stella Nova, LLC
OPPOSING PARTY	Plaintiff H. Jewel Engstrom, individually and as trustee of the Engstrom Family Trust