Judge Michael J. Strickroth, Case 2021-01207429 2023-05-15 Tentative Ruling

Judge: Michael J. Strickroth, Case: 2021-01207429, Date: 2023-05-15 Tentative Ruling

Demurrer to Amended Complaint

Defendants’ (Michael Scott Allen and Arthur E. Allen) Demurrer to Plaintiff David Michery’s Second Amended Complaint is OVERRULED.

“A demurrer tests the pleading alone, and not the evidence or the facts alleged. . . . To the extent there are factual issues in dispute, however, this court must assume the truth not only of all facts properly pled, but also of those facts that may be implied or inferred from those expressly alleged in the complaint. [Citations.]” City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459. Code of Civil Procedure section 452, states, “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” Perez v. Golden Empire Transportation Transit District (2012) 209 Cal.App.4^th 1228, 1238, provides, “This rule of liberal construction means that the reviewing court draws inferences favorable to the plaintiff, not the defendant. [Citations.]”

C.A. v. William S. Hart Union High School District (C.A.) (2012) 53 Cal.4th 861, 872, provides, “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged. [Citation.]” “Thus, the complaint ordinarily is sufficient if it alleges ultimate rather than evidentiary facts. [Citations.]” Doe v. City of Los Angeles (Doe) (2007) 42 Cal.4th 531, 550. “‘ “[D]emurrers for uncertainty are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.”’ [Citations.] ‘“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.”’ [Citations.]” A.J. Fistes Corp. v. GDL Best Contractors, Inc. (2019) 38 Cal.App.5th 677, 695.

Even if the complaint is uncertain in some respects, “ambiguities can be clarified under modern discovery procedures.” Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 615.

Committee for Green Foothills v. Santa Clara County Board of Supervisors, (2010) 48 Cal.4th 32, 42 provides: “‘A demurrer based on a statute of limitations will not lie where the action may be, but is not necessarily, barred. [Citation.] In order for the bar ... to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred. [Citation.]’ [Citation.]” (Geneva Towers Ltd. Partnership v. City and County of San Francisco (2003) 29 Cal.4th 769, 781, 129 Cal.Rptr.2d 107, 60 P.3d 692.)”

Defendants demur to the first through eighth causes of action on the basis of failure to state facts to support a cause of action and uncertainty: (1) Rescission; (2) Restitution After Rescission; (3) Cancellation; (4) Unjust Enrichment; (5) Bus. & Prof. Code 17200; (6) Reformation of Contract; (7) Declaratory Relief; (8) Constructive Fraud.

1. First Cause of Action for Rescission

The first cause of action for rescission of the Settlement Agreement is based on the grounds of mistake, fraud and lack of consideration. Defendants primarily attack this cause of action based on the contention it is barred by the statute of limitations. Plaintiff does not dispute that absent the exception of the discovery rule, the statute of limitations on the cause of action has run.

Code Civ. Proc. § 337(a) provides that a lawsuit for a breach of a contract in writing must be brought within four years. Code Civ. Proc § 337(c) states: “An action based upon the rescission of a contract in writing. The time begins to run from the date upon which the facts that entitle the aggrieved party to rescind occurred. Where the ground for rescission is fraud or mistake, the time shall not begin to run until the discovery by the aggrieved party of the facts constituting the fraud or mistake.” A plaintiff only needs to have a suspicion the claim exists, and need not be aware of the specific facts necessary to establish his claim. Jolly v. Eli Lilly & Co. (1988) 44 Cal.3d 1103, 1110-11; Apple Valley Unified School Dist. v. Vavrinek, Trine, Day & Co. (2002) 98 Cal. App. 4th 934, 943 as amended at 99 Cal. App. 4th 815.

Code Civ. Proc. § 337(d) states: “An action for relief on the ground of fraud or mistake. The cause of action in that case is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.”

As a general rule, the statute of limitations begins to run when a claim accrues, i.e., when it is complete with all of its elements—those elements being wrongdoing, harm, and causation. (Pooshs v. Philip Morris USA, Inc., (2011) 51 Cal. 4th 788, 797.)

Committee for Green Foothills, supra, at 42, states, “‘“A demurrer based on a statute of limitations will not lie where the action may be, but is not necessarily, barred. [Citation.] In order for the bar . . . to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred. [Citation.]” [Citation.]’ [Citation.]”

However, one exception to when the statute of limitations begins to run is the delayed discovery rule. Aryeh v. Canon Business Solutions, Inc., (2013) 55 Cal. 4th 1185, 1192. Under the delayed discovery rule, accrual of a cause of action, and thus the running of the statute of limitations, is postponed until the plaintiff discovers, or has reason to discover, the cause of action. Fox v. Ethicon Endo-Surgery, Inc., (2005) 35 Cal. 4th 797, 806–807; Stella v. Asset Management Consultants, Inc., (2017) 8 Cal. App. 5th 181, 192. In short, “under the delayed discovery rule, a cause of action accrues and the statute of limitations begins to run when the plaintiff has reason to suspect an injury and some wrongful cause, unless the plaintiff pleads and proves that a reasonable investigation at that time would not have revealed a factual basis for that particular cause of action.” Fox, supra, at 803. In cases invoking the delayed discovery rule, the statute of limitations does not begin to run until the person suspects, or by the exercise of reasonable care should suspect, that the injury was caused by wrongdoing. Jolly, supra, at 1103.

The California Supreme Court in Jolly stated: “Because a plaintiff is under a duty to reasonably investigate and because a suspicion of wrongdoing, coupled with a knowledge of the harm and its cause, will commence the limitations period, suits are not likely to be unreasonably delayed, and those failing to act with reasonable dispatch will be barred. At the same time, plaintiffs who file suit as soon as they have reason to believe that they are entitled to recourse will not be precluded.” Id. at 1112.

In order to invoke the discovery rule, the plaintiff must specifically plead facts that show “(1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence. [Citation.] Mere conclusory assertions that delay in discovery was reasonable are insufficient and will not enable the complaint to withstand general demurrer.” Saliter v. Pierce Brothers Mortuaries, (1978) 81 Cal. App. 3d 292.

Here, the Settlement Agreement which Plaintiff seeks to rescind was signed “on or about May 10, 2016.” (Second Amended Complaint (SAC), ¶ 10) Paragraph 9 of the SAC alleges: “At or near that time, Plaintiff discovered that Mullen Motor Company was worth less than the represented $833,000.00. Mullen Motor Company had no value of $833,000.00 as the assets sought to be sold by the Allens were a rusted vehicle(s) and related parts that had been sitting in Arthur’s barn. The assets had no value of $833,000.00 and the Allens had made false representations to Plaintiff to induce Plaintiff into seeking to purchase Mullen Motor Company. Because Plaintiff had no use for Mullen Motor Company or its assets as they had no value of $833,000.00, and because the Allens had made false representations, which were clearly not what was represented by the Allens, Plaintiff offered to return Mullen Motor Company to the Allens. However, Arthur begged Plaintiff to retain possession of Mullen Motor Company asserting it’s [sic] assets, which included: an M-11 prototype; GT rolling chassis, body, and suspension; M-11 and GT molds; jigs for producing the chassis and suspension components; two spare frames; spare body parts and other shop equipment; a website; logo; and other branding elements still had substantial value. Plaintiff believed the Allens and relied on their representation of Mullen Motor Company’s new value when he decided to move forward and enter into a subsequent Agreement on May 10, 2016.”

Paragraph 10 of the SAC further alleges: “Specifically, due to the purported inequities of the previous transaction, but believing the Allens’ representation that Mullen Motor Company still had substantial value, on or about May 10, 2016, Plaintiff and the Allens entered into a written Settlement Agreement (“Agreement”) related to the Memorandum of Understanding, the Amendment thereof, and the fraudulent sale of Mullen Motor Company and assets thereof to Plaintiff. The Allens drafted the Agreement. The Agreement was signed by each party both individually and on behalf of Mullen Motor Company. The sole consideration to be provided Plaintiff for entering into the Agreement was the purported release of the Allens’ claims against Plaintiff, which turned out to be a sham. In truth and fact, the Allens had no claims in law or equity against Plaintiff to release as a result of the Allens’ fraudulent sale of Mullen Motor Company to Plaintiff. This was not fully discovered until approximately October 2019 when Plaintiff had to personally guarantee multiple loans (including the execution of Confessions of Judgment) that exceeded $57,000,000 in order to keep the business afloat.”

The initial Complaint was filed on 6-25-21. Thus, if Plaintiff properly pled he did not discover the fraud or mistake until October 2019, this would be within the statute of limitations for a written contract.

As Defendants point out, the SAC asserts the allegedly fraudulent Memorandum of Understanding was entered into “On or about November 27, 2013” and was amended on “on August 25, 2014.” (SAC, ¶ 8) The SAC further alleges that “[a]t or near that time, Plaintiff discovered that Mullen Motor Company was worth less than the represented $833,000.00. Mullen Motor Company had no value of $833,000.00 as the assets sought to be sold by the Allens were a rusted vehicle(s) and related parts that had been sitting in Arthur’s barn. The assets had no value of $833,000.00 and the Allens had made false representations.” (SAC ¶ 8)

Defendants contend “Plaintiff had all the assets of the company and could have conducted an audit. Not having done so, shows Plaintiff has not been diligent and was negligent.” (Reply, 6:10-12.)

The Court agrees the facts alleged in the SAC should have raised a reasonable suspicion of the value of the company and that Defendants did not have any claims against Plaintiff at the time of entering the Settlement Agreement.

Paragraph 10 of the SAC further alleges: “Plaintiff was unable to discover this earlier because there was no way for Plaintiff to know that Mullen would require the magnitude and scope of future financing in the amount of $57,000,000 to keep it afloat at the time he entered into the Agreement. Additionally, the fact that Mullen Motor Company was actually worth $0 was not fully known until recently when the assets of Mullen Motor Company were reviewed by independent auditors and were determined to have ‘No Value’. Ultimately, the auditors concluded there was no value in the assets from the Allens at the ‘lower of cost or market’ and therefore, they had a $0 value. Prior to this audit, the basis for the value of Mullen Motor Company was based solely on the Allens’ representations, which Plaintiff relied on to his detriment. As such, Plaintiff had no way of knowing Mullen was actually worth $0 until the independent auditors concluded the same in 2019. Had Plaintiff known at that time of execution of the Agreement that Mullen had a $0 value and would require this magnitude and scope of financing to keep it afloat, he would not have agreed. Since the Allens had no claims against Plaintiff to release, Plaintiff received no consideration for entering into and performing pursuant to the Agreement.”

Here, Plaintiff pleads “the inability to have made earlier discovery despite reasonable diligence.” Saliter, supra. This is sufficient at the pleading stage.

Furthermore, the cause of action is not so uncertain that Defendants cannot respond. Any uncertainty can be resolved during discovery.

Based on the foregoing, the Court OVERRULES the demurrer to the First Cause of Action for Recission.

2. Second Cause of Action for Restitution After Rescission, Third Cause of Action for Cancellation, Fourth Cause of Action for Unjust Enrichment

Defendants attack the second, third, and fourth causes of action on the same ground as the first cause of action. Based on the same reasoning, the Court OVERRULES the demurrer to the Second Cause of Action for Restitution After Rescission, Third Cause of Action for Cancellation, Fourth Cause of Action for Unjust Enrichment.

3. Fifth Cause of Action for Violation of Business and Professions Code §17200

Bus. & Prof. Code § 17208 states: “Any action to enforce any cause of action pursuant to this chapter shall be commenced within four years after the cause of action accrued.”

Defendants attack the fifth cause of action on the same ground as the first cause of action. Based on the same reasoning, the Court OVERRULES the demurrer to the Fifth Cause of Action for violation of Bus & Prof. Code §17200.

4. Sixth Cause of Action for Reformation of Contract

Defendants attack the sixth cause of action on the same ground as the first cause of action. Based on the same reasoning, the Court OVERRULES the demurrer to the Sixth Cause of Action for Reformation of Contract.

5. Seventh Cause of Action for Declaratory Relief

“[W]here a complaint shows on its face that all relief is barred by the statute of limitations, it is unnecessary for the court to make a declaration of rights, and a general demurrer may be sustained. [Citation.]’” Phillis v. City of Santa Barbara, (1964) 229 Cal. App. 2d 45, 53.

Defendants attack the seventh cause of action on the same ground as the first cause of action. Based on the same reasoning, the Court OVERRULES the demurrer to the Seventh Cause of Action for Declaratory Relief.

6. Eighth Cause of Action for Constructive Fraud

Defendants attack the eighth cause of action on the same ground as the first cause of action. Based on the same reasoning, the Court OVERRULES the demurrer to the Eighth Cause of Action for Constructive Fraud.

Accordingly, the Court OVERRULES Defendants’ (Michael Scott Allen and Arthur E. Allen) Demurrer to Plaintiff David Michery’s First Amended Complaint. Defendants are ordered to file an Answer within 10 days.

Plaintiff to give notice.

Motion for Sanctions

Defendants’ (Michael Scott Allen and Arthur E. Allen) Motion for Sanctions is DENIED.

Code Civ. Proc. § 128.7(d) authorizes sanctions “…sufficient to deter repetition of this conduct or comparable conduct by others similarly situated. Subject to the limitations in paragraphs (1) and (2), the sanction may consist of, or include, directives of a nonmonetary nature, an order to pay a penalty into court, or, if imposed on motion and warranted for effective deterrence, an order directing payment to the movant of some or all of the reasonable attorney's fees and other expenses incurred as a direct result of the violation.”

Pursuant to Code Civ. Proc. § 128.7, by presenting a pleading to the court, an attorney or unrepresented party is certifying that, to the best of the person’s knowledge, information and belief, formed after an inquiry reasonable under the circumstances that all of the following conditions are met: “(1) it is not being presented primarily for an improper purpose; ¶ (2) the claims, defenses, or other legal contentions are warranted by existing law or by a non-frivolous argument for the extension, modification or reversal of existing law or the establishment of new law; ¶ (3) the allegations and other factual contentions have evidentiary support, or if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and ¶ (4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.” Code Civ. Proc. § 128.7(b).

“Sanctions are proper only if the ‘pleading, motion or paper’ is without merit. Therefore, if the pleading or motion is otherwise meritorious, the fact that one of the supporting arguments is frivolous does not justify sanctions.” Golden Eagle Distributing Corp. v. Burroughs Corp. (9th Cir. 1986) 801 F2d 1531, 1540-41 [interpreting FRCP 11].) “Although the ‘improper purpose’ and ‘frivolousness’ inquiries are separate and distinct, they will often overlap since evidence bearing on frivolousness or non-frivolousness will often be highly probative of purpose.” Townsend v. Holman Consulting Corp. (9th Cir. 1990) 929 F.2d 1358, 1362 [interpreting FRCP 11].

Here, Defendants contend Plaintiff’s Complaint lacks merit because the claims are barred by the statute of limitations. As discussed in the concurrent ruling on the demurrer, the Court finds the claims are not barred on the face of the pleading.

Based on the foregoing, the Court DENIES Defendants’ (Michael Scott Allen and Arthur E. Allen) Motion for Sanctions.

Plaintiff to give notice.

Case Management Conference

Regardless whether the parties submit on the tentative to the court’s ruling on the demurrer and motion above, counsel for the parties are required to appear, either in person or remotely, for the Case Management Conference.