Judge Michael E. Whitaker, Case Number: 22SMCV01839, Date: 2024-01-04 Tentative Ruling

Judge: Michael E. Whitaker, Case: 22SMCV01839, Date: 2024-01-04 Tentative Ruling

Plaintiff Suzanne Tito’s (“Plaintiff”) Complaint alleges six causes of action: (1) breach of written contract, count 1: multi-strategy operating agreement; (2) fraud – intentional misrepresentation, count 1: multi-strategy capital contributions; (3) common count, count 1: multi-strategy capital contributions; (4) breach of written contract, count 2: promissory notes; (5) fraud – intentional misrepresentation, count 2: loans; and (6) common count, count 2: promissory notes.

Defendants Insight Multi-Strategy U.S. Partners, LLC; Insight Advisors, LLC, and Michael Tito (“Defendants”) demur to the first, second, and third causes of action on the basis that they are preempted by federal securities laws, pursuant to Code of Civil Procedure section 430.10, subdivision (a), and Defendants demur to all causes of action for failure to state facts sufficient to constitute a cause of action, pursuant to Code of Civil Procedure section 430.10, subdivision (e).

“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 one 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.)

Defendants argue that this Court has no jurisdiction over the first three causes of action – for breach of contract, fraud, and common counts, stemming from allegations that Defendants failed to return Plaintiff’s capital contribution, pursuant to the terms of the operating agreement, because the claims are preempted by federal securities laws prohibiting states from adopting “any regulations, interpretations, or guidance that would have the effect of substantively regulating SEC-registered investment advisors” (Demurrer at p. 4) and the Complaint alleges Defendant “Insight Advisors represents itself to be a SEC Registered Investment Advisor.” (Complaint ¶ 7.)

Defendants further argue that pursuant to the “artful pleading rule,” the Court may look beyond the face of the complaint to determine whether the plaintiff has artfully pleaded what is really a federal law claim as a state law claim, and if so, “the reviewing court will uphold removal even though no federal question appears on the face of the complaint.” (Demurrer at p. 4, citing Rivet v. Regions Bank (1998) 522 U.S. 470, 475 (hereafter Rivet).)

At issue in Rivet was whether the case, which had been removed to federal court, was properly remanded back to state court. In determining that remand was proper, Rivet held that claim preclusion by reason of a prior federal judgment provided no basis for removal to federal court.

Here, Defendants have not removed the instant case to federal court. Nor have Defendants provided any binding legal authority for the proposition that California courts may look to extrinsic evidence in ruling on a demurrer. Defendants have also not provided any such extrinsic evidence or explanation as to how Plaintiff’s breach of contract, fraud, and common counts, stemming from the alleged agreement between Plaintiff and Defendants would be tantamount to regulating an SEC-registered investment advisor in violation of federal law.

Therefore, the Court overrules Defendants’ demurrer to the first three causes of action for lack of jurisdiction pursuant to Code of Civil Procedure section 430.10, subdivision (a).

The statute of limitations for actions based on a written contract is four years. (Code Civ. Proc., § 337, subd. (a).) The statute of limitations for actions based in fraud is three years from “the discovery, by the aggrieved party, of the facts constituting the fraud[.]” (Code Civ. Proc., § 338, subd. (d).) The statute of limitations for actions based on an oral contract is two years. (Code Civ. Proc., § 339.)

Through the first three causes of action, premised on the written Multi-Strategy Operating Agreement, Plaintiff alleges that Defendants promised to reimburse her capital contributions 90 days after any such request for reimbursement. Plaintiff requested reimbursement of the capital contributions on September 29, 2021, making such reimbursement due to Plaintiff on December 31, 2021, yet Defendants never paid. (Complaint ¶¶ 14-17.) Thus, the alleged breach of contract, date when the debt became due, and the date Plaintiff discovered Defendants’ alleged fraud, occurred on December 31, 2021. Plaintiff filed the Complaint less than one year later, on October 13, 2022. Thus, the first three causes of action do not appear to be barred by the applicable statutes of limitation.[1]

Causes of action four, five, and six, alleged against Defendant Michael Tito only, are premised on various promissory notes on loans allegedly issued between February 1, 2010 and February 1, 2015. (Complaint ¶ 19.) Pursuant to the terms of the promissory notes, the loan balance and interest are to be payable on demand. (Exhs. 2-3 to Complaint.) Plaintiff alleges that demand for repayment was made on July 28, 2022, yet Defendant Tito has not tendered repayment. (Complaint ¶¶ 21, 55, 69.) The Complaint was filed less than three months after Plaintiff’s demand for repayment.

Defendant Tito argues that the fourth cause of action is nonetheless untimely because the statute of limitations for a promissory note payable on demand begins to run from the date the note was issued, not the date of demand. In support, Defendant Tito cites to Clunin v. First Federal Trust Co. (1922) 189 Cal.248, 249 and Carrasco v. Greco Canning Co, Inc. (1943) 58 Cal.App.2d 673, 675.

[I]f demand for payment is made to the maker of a note payable on demand, an action to enforce the obligation of a party to pay the note shall be commenced within six years after the demand. If no demand for payment is made to the maker, an action to enforce the note is barred if neither principal nor interest on the note has been paid for a continuous period of 10 years.

Thus, all promissory notes dated on or after July 28, 2012 (ten years prior to the Demand for repayment) are timely.

With respect to the promissory notes from February 1, 2010 through July 1, 2012, Code of Civil Procedure section 360.5 provides that the parties may waive the applicable statute of limitations, by up to four years, if the waiver is in writing and signed by the person obligated. (See also California First Bank v. Braden (1989) 216 Cal.App.3d 672, 674 [written guarantees containing the phrase, “Guarantors waive the benefit of any limitations affecting their liability hereunder or the enforcement thereof to the extent permitted by law.” extended the statute of limitations by four years.])

Every obligor, maker guarantor, and endorser of the Note and every person who assumes the obligations of this Note […] (3) consents to all waivers contained in this Note: (4) waives presentment, demand, protest, notice of protest, notice of dishonor, notice of nonpayment, and notice of any kind with respect to this Note or any guaranty of it or the performance of the obligations under this Note or any guaranty of it; and (5) agrees that no delay in the enforcement of payment of this Note or any guaranty of it, and no delay or omission in exercising any right or power under this note or any guaranty of it shall affect his liability, except as specifically provided herein.

Thus, Plaintiff has waived the applicable statute of limitations with respect to enforcing the promissory notes by the legally allowable four additional years. As such, none of the promissory notes are barred by the applicable statute of limitations.

Defendants argue in reply that the waiver language is too vague for Defendants to be deemed to have made a “knowing” waiver of the statute of limitations. The Court disagrees. The language, indicating that Defendants waive presentment, demand, protest, and presentment, and that “no delay in the enforcement of payment of this Note or any guaranty of it, and no delay or omission in exercising any right or power under this note or any guaranty of it shall affect his liability, except as specifically provided herein” is a clear agreement to waive the practical effect of the statute of limitations.

“The elements of intentional misrepresentation are (1) a misrepresentation, (2) knowledge of falsity, (3) intent to induce reliance, (4) actual and justifiable reliance, and (5) resulting damage.” (Aton Center, Inc. v. United Healthcare Ins. Co. (2023) 93 Cal.App.5th 1214, 1245.)

Defendants demur to the second and fifth causes of action for fraud – intentional misrepresentation, on the basis that they fail to allege a cause of action with the requisite particularity.

“In California, fraud must be pled specifically; general and conclusory allegations do not suffice.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) “This particularity requirement necessitates pleading facts which show how, when, where, to whom, and by what means the representations were tendered.” (Ibid.)

“One of the purposes of the specificity requirement is notice to the defendant, to furnish the defendant with certain definite charges which can be intelligently met.” (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384.) As such, less specificity is required “when it appears from the nature of the allegations that the defendant must necessarily possess full information concerning the facts of the controversy[.]” (Ibid.) “Even under the strict rules of common law pleading, one of the canons was that less particularity is required when the facts lie more in the knowledge of the opposite party.” (Ibid.)

36. In or around December 2008 and January 2009, Michael Tito—in his capacity as “CEO” of Insight Advisors---represented to Plaintiff that Insight Advisors would manage Plaintiff’s funds on her behalf, using a degree of care, skill, and diligence that a prudent person acting in a fiduciary capacity would use. Thereafter, at the advice and direction of Michael Tito and Insight Advisors, Plaintiff directed that certain of her funds being managed by Insight Advisors be used for as capital contribution to Multi-Strategy in exchange for membership interest in that entity. At this same time, Insight Advisors (through its agent Michael Tito) provided Plaintiff with Multi-Strategy’s operating agreement. By way of providing this operating agreement, along with concurrent verbal representations by Michael Tito to Plaintiffs, Defendants represented to Plaintiff that she would be permitted to redeem her membership interest in Multi-Strategy and thereby withdraw her capital account at any time upon giving 90 Days’ Notice.

37. Defendants’ representations were false when they were made, and Defendants knew them to be false. Defendants never intended for Plaintiff to be able to withdraw the funds from her capital account.

38. Defendants intended for Plaintiff to rely on their false representations so that Plaintiff would make the capital contributions.

39. Plaintiff reasonably relied on Defendants’ representations and trusted Defendants would return her capital contributions upon sufficient written notice, as agreed. Based on this reliance, Plaintiff made substantial capital contributions of no less than $2,000,000.

40. Upon realizing that Defendants had no intention to honor the promise to return her capital contribution, Plaintiff has further discovered that neither Multi-Strategy nor its managing member Insight Advisors have been authorized to do business in California or Delaware for at least several years.

41. Plaintiff was harmed as a result of Defendants’ false representations as in an amount of not less than $2,764,282.17.

(Complaint ¶¶ 36-41.) Thus, Plaintiff alleges specific facts regarding the who (Michael Tito, in his capacity as CEO of Insight Advisors), what (that Plaintiff’s capital contributions would be returned to her upon 90 days’ notice), when (December 2008 and January 2009), and how (orally and via the Multi-Strategy Operating Agreement) underlying the second cause of action.

59. Michael Tito represented to Plaintiff that he would repay loan principal plus interest upon demand, for fifty-one (51) different loans.

60. Michael Tito never intended to re-pay the Loans and therefore his representations were false when they were made, and Michael Tito knew them to be false.

61. Michael Tito intended for Plaintiff to rely on his false representations so that Plaintiff would loan him money.

62. Plaintiff reasonably relied on Michael Tito’s representations and trusted Michael Tito would repay the loans, as agreed. Based on this reliance, Plaintiff loaned Michael Tito a total principal amount of $650,000.

63. Plaintiff was harmed as a result of Michael Tito’s false representations as in an amount of not less than $860,234.41

(Complaint ¶¶ 59-63.) The fifty-one (51) signed, dated promissory notes are attached to the Complaint as Exhibits 2 and 3.

Thus, Plaintiff again alleges the who (Michael Tito), what (promised to pay the loans upon demand), when (on the dates of each promissory note), and how (in writing) underlying the fifth cause of action.

With respect to Defendants’ knowledge of falsity and intent to defraud, Defendants’ subjective intent is more within Defendants’ exclusive knowledge, and thus the pleading standard is relaxed. Moreover, Plaintiff’s allegations that Defendants did not repay either the loans or the capital contributions when demanded, combined with Plaintiff’s allegations that Multi-Strategy and its managing member, Insight Advisors, have not been authorized to do business in California or Delaware for several years, sufficiently create an inference that Defendants made promises of repayment to induce Plaintiff into making capital contributions and loans, without any intent to repay them.

In reply, Defendants point out that the schedule of loans on page 6 of the Complaint indicates that Defendants previously paid $8,000 toward the initial $400,000 loan, which disproves that Defendants had the fraudulent intent not to repay at the time they took out the loan. (See Church of Merciful Saviour v. Volunteers of America, Inc. (1960) 184 Cal.App.2d 851, 858.) Even if Defendants did not have fraudulent intent with respect to the initial $400,000 loan from February of 2010, there were 50 other loans taken out between 2011-2015. Moreover, while Defendants’ repayment of $8,000 on a $400,000 loan could indicate Defendants attempted but failed to repay the loan in good faith, repaying only 2% of the initial balance of the loan could also indicate that Defendants strategically made some small payments in order to reassure Plaintiff that it was safe to make additional loans, which Plaintiff did. Thus, the $8,000 repayment does not save Defendants’ demurrer.

Defendants also contend that Plaintiff has not alleged justifiable reliance, but Plaintiff adequately pleads that in reliance upon Michael Tito’s representations that he would return Plaintiff’s capital contributions on request and repay the loan, Plaintiff made $2,000,000 in capital contributions and loaned $650,000, to Plaintiff’s financial detriment. (Complaint ¶¶ 39, 41, 62-63.)

Defendants demur to the Sixth Cause of Action because it “is an alternative way to seek the same money demanded in another specific cause of action and is based on the same facts[.]” (Demurrer at p. 8.) At this stage, the Complaint may “plead in the alternative and make inconsistent allegations.” (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1388.)

Thus, the fact that the sixth cause of action for common counts is inconsistent with or duplicative of the fourth cause of action for breach of contract is not a basis to sustain the demurrer.

For the reasons stated, the Court overrules Defendants’ Demurrer to the Complaint in its entirety.

The Court orders Defendants to file and serve an Answer to the Complaint on or before April 12, 2024.

Further, on the Court’s own motion, the Court continues the Case Management Conference from March 22, 2024 to May 7, 2024 at 8:30 A.M. in Department 207. All parties shall comply with California Rules of Court, rules 3.722, et seq., regarding the continued Case Management Conference. In particular, all parties shall adhere to the duty to meet and confer (Rule 3.724) and to the requirement to prepare and file Case Management Statements (Rule 3.725).

Defendants shall provide notice of the Court’s ruling and file a proof of service regarding the same.

[1] In Reply, Defendants argue for the first time that Plaintiff also fails to state a breach of contract cause of action because she is not a party to the Multi-Strategy Operating Agreement. Defendants have not demurred on this basis and raise the argument for the first time on Reply. As such, it would deprive Plaintiff of due process to sustain the demur on this basis. In any event, third party beneficiaries may, under certain circumstances, maintain a breach of contract cause of action against a party to the contract. (Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 821.)

DEPARTMENT	207
HEARING DATE	March 21, 2024
CASE NUMBER	22SMCV01839
MOTION	Demurrer to Complaint
MOVING PARTIES	Defendants Insight Multi-Strategy U.S. Partners, LLC; Insight Advisors, LLC; and Michael Tito
OPPOSING PARTY	Plaintiff Suzanne Tito