Judge: Monica Bachner, Case: 21STCV11963, Date: 2023-02-22 Tentative Ruling

Department 71: Attorneys who elect to submit on these published tentative rulings, without making an appearance at the hearing, may so notify the Court by communicating this to the Department's staff at (213) 830-0771 before the set hearing time.  See, e.g., CRC Rule 324(b).   All parties are otherwise encouraged to appear by Court Call for all matters.

Case Number: 21STCV11963    Hearing Date: February 22, 2023    Dept: 71

Superior Court of California

County of Los Angeles

DEPARTMENT 71

TENTATIVE RULING

Defendants Cuckoo Homesys Co Ltd., Cuckoo Rental America, Inc., Cuckoo Electronics America, Inc., and Michael Won Jun Yi’s demurrer to the third amended complaint is overruled. 

Defendants’ motion to strike is denied.

A.   Demurrer

          Defendants Cuckoo Homesys Co. Ltd (“Homesys”), Cuckoo Rental America, Inc. (“CKRA”), Cuckoo Electronics America, Inc. (“CEA”), and Michael Won Jun Yi (“Yi”) (collectively, “Defendants”) demur to the 4^th (fraud), 6^th (intentional misrepresentation), 7^th (concealment), 8^th (negligent misrepresentation), 10^th (conspiracy to defraud), 11^th (breach of fiduciary duty), 12^th (constructive fraud), and 13^th (misappropriation of trade secrets) causes of action in the third amended complaint (“SAC”) of Plaintiffs Eric Hosuk Yoon (“Yoon”) and Caresys, Inc. (“Caresys”) (collectively, “Plaintiffs”).  Defendants demur on the grounds the causes of action fail to allege sufficient facts to support the causes of action.  (Notice of Demurrer, pgs. 2; C.C.P. §§430.10(e).) 

          Background of Action and Summary of Allegations

          On March 29, 2021, Plaintiffs filed their initial complaint in this action against Defendants, Homesys, and Bonkak Koo (“Koo”), and on October 19, 2021, Plaintiffs filed their First Amended Complaint (“FAC”).  This Court dismissed Defendant Koo on March 7, 2022.  Defendants’ prior demurrer to the FAC was sustained on March 28, 2022.  Plaintiffs filed the Second Amended Complaint (“SAC”) on April 26, 2022. The Court sustained Defendants’ demurrer to the SAC with respect to all causes of action except the 1^st and 5^th causes of action for breach of contract and bad faith. On October 5, 2022, Plaintiffs filed the Third Amended Complaint (“TAC”). The Court notes the 1^st, 4^th, 5^th, 6^th, 7^th, 8^th, 10^th, 11^th, 12^th and 13^th  causes of action are brought by Plaintiffs against Defendants while the 2^nd, 3^rd, and 9^th causes of action are brought by Yoon against Defendants. 

On November 4, 2022, Defendants filed the instant demurrer and motion to strike portions of the TAC.

This action arises from an alleged joint venture between the parties.  Plaintiffs allege Koo and Homesys are manufacturers of rice cookers, and CEA was established in 2016 by Yi, Koo, and Homesys to sell and rent home appliances. (TAC ¶¶26-28.)  Plaintiffs allege Yoon, a small business owner, established Caresys, which primarily sold, rented, and installed water filtration and home appliances, in Los Angeles.  (TAC ¶¶34-36.)  Plaintiffs allege they approached Koo and Homesys to initiate a joint venture in an effort to grow Caresys. (TAC ¶¶38-39.) Plaintiffs allege in June 2019, they reached an oral agreement with Defendants pursuant to which they agreed to the following: (1) Yoon would serve as an employee and CEO of CKRA; (2) Yoon would be paid wages in the amount of $120,000 per year paid twice per month by Defendants; (3) Caresys would no longer sell, rent, or install water filtration and coolers and instead all such future sales, rentals and installation would be through CKRA beginning in January 2020; (4) Defendants would have CEA not sell/rent or have similar products to that of CKRA and that Defendants would not provide similar products to CEA; (5) in light of Plaintiffs being the only parties with the “know-how,” Plaintiffs were to develop and maintain the operations of CKRA; (6) “in lieu of” Yoon receiving 20% of shares in CKRA and equal decision making therein, Plaintiffs would pay for operating costs, have Caresys staff devote more than 50% of work time to CKRA; (7) Plaintiffs would serve as CKRA’s guarantors when necessary; (8) Defendants would indemnify and hold Plaintiffs harmless from any liability; (9) Plaintiffs would share their business contacts and proprietary information (“Proprietary Information”) to further the growth of CKRA while remaining Plaintiffs’ sole property; (10) Koo and Homesys would timely provide the products and parts to CKRA; (11) this venture would start in or about September 2019; (12) and Yi would serve as an officer of CKRA. (TAC ¶41.)

Plaintiffs allege that in reliance on the promises and reassurances of Yi, Koo, and Homesys, in June 2019, Plaintiffs began putting significant time and money into preparation for the joint venture, including spending nearly $1,000,000 on operational costs on CKRA’s behalf and Yoon guaranteeing various loans, lines of credit, and leases with balances in the amount of $230,000. (TAC ¶¶45, 53-55.)  Plaintiffs allege CKRA’s September 1, 2019 Statement of Information indicated Yoon was its CEO, Koo its Secretary, and Yi its CFO.  (TAC ¶46.)  Plaintiffs allege in December 2019, they stopped their own operations relating to water, but unbeknownst to Plaintiffs, Yi, Koo, and Homesys continued selling products similar to those of CKRA through CEA.  (TAC ¶¶48-49.) Plaintiffs allege that despite their efforts to grow CKRA, beginning in September 2019, Defendants reached out to Plaintiffs in an attempt to change the terms of the Agreement by demanding Yoon and other employees of CKRA not be paid wages for their services, which Yoon refused to agree to, which resulted in Defendants’ scheme to oust Plaintiffs, steal their Proprietary Information, breach the Agreement, and take over CKRA.  (TAC ¶¶59-61.)  Plaintiffs allege in July 2020, Defendants again attempted to change the terms of the Agreement by demanding Yoon only receive 10% of all shares of CKRA, which Yoon refused.  (TAC ¶¶62-64.)  Plaintiffs allege Defendants resisted implementing changes and systems (e.g., an inventory tracking system) that would allow CKRA to run effectively and that Koo and Homesys failed to timely provide necessary parts to for CKRA to properly operate which led to customer complaints.  (TAC ¶¶65-66.) 

Plaintiffs allege in August 2020, Defendants informed Plaintiffs that they wanted to memorialize the Agreement in writing (“Terms”), and in November 2020, Defendants provided the Terms which completely diverted from the parties’ original Agreement and sought to squeeze Plaintiffs out.  (TAC ¶¶67-69.)  Plaintiffs allege the Terms made clear Defendants had no intention of adhering to the Agreement, that they would not pay Yoon’s salary, and that they would have complete control.  (TAC ¶70.)  Plaintiffs allege they refused to agree to the Terms.  (TAC ¶71.)  Plaintiffs allege on January 23, 2021, Defendants informed Yoon a meeting relating to CKRA would take place and on January 25, 2021, the meeting was held, and Yoon was terminated by Defendants.  (TAC ¶¶72-73.)  Plaintiffs further allege Yoon has not been paid wages by Defendants, Plaintiffs have not been paid for their contributions by Defendants, and Defendants continue to use Plaintiffs’ Proprietary Information, continue to dispute Yoon is a CKRA shareholder, and continue to mischaracterize Yoon as an independent contractor.  (TAC ¶¶74-78.)  Plaintiffs allege CKRA has since designated Koo as its CEO and Secretary, Yi as its CFO and director, and CEA continues the sell the same products as CKRA.  (TAC ¶¶80-81.)

Plaintiffs allege “each Defendant” was the agent, affiliate, officer, director, manager, principal, partner, joint venture, alter-ego, and/or employee of the remaining Defendants.  (TAC ¶10.)  Plaintiffs allege Yi utilized CKRA, Homesys, and CEA solely for the for purpose of shielding himself from liability, and Homesys similarly utilized CKRA and CEA .  (TAC ¶12.)  Plaintiffs allege Defendants were interest-holders, promoters, and/or agents of CKRA, CEA, and Homesys, and Plaintiffs allege, “there exists, at all times herein mentioned…, a unity of interest between Defendants such that individuality and separateness between the Defendants has ceased and the corporations are the alter ego of each of the respective Defendants.”  (TAC ¶13.)  Plaintiff further alleges the Corporations were shells and shams without capital, assets, stock or shareholders, were inadequately capitalized.  (TAC ¶¶ 14-15.) Plaintiff further alleges that the Corporations were alter egos of the Defendant Interest-holders (vaguely describes as each of the Defendants) and used the assets of the Corporations for their personal use, the Corporations were shells, instrumentalities and conduits for the Defendant-interest holders, and that the fiction of a separate existence of the Corporations would permit abuse of the corporate privilege and produce an inequitable result.  (TAC ¶ ¶ 13, 16-19.)

Fraud, Intentional Misrepresentation, & Negligent Misrepresentation (4^th, 6^th, & 8^th COAs) [by Plaintiffs]

The elements of fraud and intentional misrepresentation are: “(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 184.) 

“Negligent misrepresentation is a species of the tort of deceit and, like fraud, requires a misrepresentation, justifiable reliance and damage. [Citation] ‘The elements of negligent misrepresentation are similar to intentional fraud except for the requirement of scienter; in a claim for negligent misrepresentation, the plaintiff need not allege the defendant made an intentionally false statement, but simply one as to which he or she lacked any reasonable ground for believing the statement to be true.’ [Citation]” (Melican v. Regents of University of California (2007) 151 Cal.App.4th 168, 181-182.)  “To be actionable, a negligent misrepresentation must ordinarily be as to past or existing material facts. ‘[P]redictions as to future events, or statements as to future action by some third party, are deemed opinions, and not actionable fraud.’[Citation]” (Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 158.) 

In California, fraud, including negligent misrepresentation, must be pled with specificity and the plaintiff must plead facts showing “how, when, where, to whom, and by what means the representations were tendered. [Citation]”. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.)  “The requirement of specificity in a fraud action against a corporation requires the plaintiff to allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.”  (Tarmann v. State Farm Mut. Auto Ins. Co. (1991) 2 Cal.App.4th 153, 157.)

Plaintiffs’ fraud-based causes of action are based on the general underlying allegations discussed above. In connection with each of the causes of action, Plaintiffs allege that Defendants’ conduct in connection with entering the Agreement and failing to uphold the agreement satisfied the elements of the causes of action.  (TAC ¶¶ 103, 120, 134.)  Plaintiffs state that the Defendants made false representations including: (1) that Yoon would serve as CKRA’s CEO, (2) that Yoon would be paid $120,000 per year, (3) that CI would no longer sell, rent, or install water filtrations and coolers, and (4) that Defendants would not have CEA sell or rent similar products to that of CKRA. (TAC ¶ 106.) Defendants state that these representations were false and made to induce Plaintiffs to enter into the Agreement and invest their knowledge and money and would drive Plaintiffs out of the market. (TAC ¶ 106.)

Defendants argue that Plaintiffs fail to state which representations were false. However, as stated above, Plaintiffs specifically mention which representations were false in paragraph 106.

Defendants also argue that the only specific individuals referenced as associated with the corporate defendants are Yi and dismissed defendant Koo and Plaintiff offers no facts as to where and how each of the representations took place. However, Plaintiffs allege that “KOO, YI… at the June 2019 “meeting” stated that they also spoke on behalf of Homesys, CEA, and CKRA since they are one in the same and had authority to speak on their behalf. 103. At the “meeting” Defendants agreed verbally as follows…” (TAC ¶ 102-103.) This sufficiently states who made the statements, that they were made verbally, and that Yi and Koo had the authority to speak on behalf of the other Defendants. Plaintiffs have alleged sufficient alter ego allegations. (TAC ¶ 10-19.) Plaintiffs are not required to explain why “Yi or Koo as lower ranking officers could commit fraud against Yoon” and Defendants do not cite to any authority that states that lower ranking officers cannot commit fraud. A demurrer can only be used to challenge defects that appear on the face of the pleading and facts are assumed to be true. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

Defendants also argue there are no facts supporting the intent to defraud or showing justifiable reliance. However, Plaintiffs allege that Defendants intended to defraud Plaintiffs by stating that he would be CEO and make a $120,000 salary, when in reality, they had no intention of doing so, but merely wanted Plaintiff to invest and provide his business knowledge. (TAC ¶ 106.) Moreover, “less particularity [of pleading] is required where the defendant may be assumed to possess knowledge of the facts at least equal, if not superior, to that possessed by the plaintiff,” which is the case here, as Plaintiffs cannot know all facts about Defendants’ state of mind. (Burks v. Poppy Construction Co. (1962) 57 Cal.2d 463, 474.)  Plaintiffs allege that they justifiably relied by entering into the Agreement. (TAC ¶ 107.)

The Court overrules Defendants’ demurrer to the 4^th, 5^th, and 8^th causes of action.

Conspiracy to Defraud (10^th COA) [by Plaintiffs]

Plaintiffs’ conspiracy cause of action is based on allegations Defendants collectively and knowingly entered into the agreement to defraud Plaintiffs and acted in concert with the mutual understanding to accomplish this common and unlawful plan and that “one or more of them committed an overt act to further it.” (TAC ¶¶143-149.) 

“Liability for civil conspiracy generally requires three elements: (1) formation of a conspiracy (an agreement to commit wrongful acts); (2) operation of a conspiracy (commission of the wrongful acts); and (3) damage resulting from operation of a conspiracy. [Citation]” (I-CA Enterprises, Inc. v. Palram Americas, Inc. (2015) 235 Cal.App.4th 257.) “Standing alone, a conspiracy does no harm and engenders no tort liability. It must be activated by the commission of an actual tort.” (Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 206.) 

Defendant argues that this cause of action fails because there is no allegation that there was an agreement among defendants to defraud Plaintiffs. However, the TAC clearly states that “all the Defendants, based on their conduct as set forth herein this Complaint, entered into an Agreement to defraud Plaintiffs.” (TAC ¶ 148.) Plaintiffs do not have to provide facts about this Agreement, as it is likely they were not present for this Agreement, and “less particularity [of pleading] is required where the defendant may be assumed to possess knowledge of the facts at least equal, if not superior, to that possessed by the plaintiff,” which is the case here. (Burks v. Poppy Construction Co. (1962) 57 Cal.2d 463, 474.) 

As Plaintiffs have sufficiently alleged fraud, they have shown that the overt act that furthered the conspiracy to defraud.

Based on the foregoing, Defendants’ demurrer to the 10^th cause of action is overruled.

Concealment, Breach of Fiduciary Duty, and Constructive Fraud (7^th, 11^th & 12^th COAs) [by Plaintiffs]

“To establish a cause of action for breach of fiduciary duty, a plaintiff must demonstrate the existence of a fiduciary relationship, breach of that duty and damages. [Citations]” (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 182.)

“Constructive fraud ‘arises on a breach of duty by one in a confidential or fiduciary relationship to another which induces justifiable reliance by the latter to his prejudice.’ [Citation.] Actual reliance and causation of injury must be shown. [Citation.]” (Tyler v. Children’s Home Society (1994) 29 Cal.App.4th 511, 548; see also Younan v. Equifax Inc. (1980) 111 Cal.App.3d 498, 516, fn. 14 [elements of constructive fraud cause of action are “(1) a fiduciary or confidential relationship; (2) nondisclosure (breach of fiduciary duty); (3) intent to deceive, and (4) reliance and resulting injury (causation)”].) For fraudulent concealment to be actionable, the defendant must have been under a duty to disclose the facts to plaintiff. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 745.)

A fiduciary duty is founded upon a special relationship imposed by law or when “confidence is reposed by persons in the integrity of others,” who voluntarily accept the confidence.  (Tri-Growth Centre City, Ltd. v. Silldorf, Burdman, Duignan & Eisenberg (1989) 216 Cal.App.3d 1139, 1150; see CACI 4100, et seq.) “‘[B]efore a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.’” (City of Hope Nat’l Med. Ctr. v. Genentech (2008) 43 Cal.4th 375, 386.)

          Plaintiffs’ breach of fiduciary duty cause of action is based on the following allegations: (1) Defendants and Plaintiffs were a joint venture or at the very least a partnership per the terms of the Agreement, (2) Defendants were interest holders, officers, directors, and had control over CKRA all while knowing Plaintiffs made significant investments and Yoon’s involvement was as a “shareholder,” (3) Defendants and Plaintiffs had “shared interests” in CKRA, (4) as a result Defendants owed a fiduciary duty to Plaintiffs, (5) that Defendants failed to act “a reasonably careful person” would have under the circumstances, and (4) Plaintiffs were harmed.  (TAC ¶¶156-161.) 

Plaintiff’s concealment and constructive fraud causes of action are based on the following similar allegations: (1) Defendants and Plaintiffs were in a joint venture or at the very least a partnership per the terms of the Agreement; (2) Defendants were interest holders, officers, directors, and had control over CKRA all while knowing Plaintiffs made significant investments and Yoon’s involvement was as a “shareholder,” (3) Defendants failed to disclose pertinent facts, including but not limited to Defendants selling similar items through CEA, scheming to take Plaintiffs Proprietary information, failing to timely provide the product to CKRA all in an attempt to oust Plaintiffs; (4) that Plaintiffs did not know of these concealed facts, (5) that Defendants intended to deceive Plaintiffs by concealing these facts, (6) Defendants knew that selling the same if not similar items as CKRA would harm Plaintiffs and CKRA; (7) “Defendant” misled Plaintiffs by failing to disclose this information; and (8) Plaintiffs were harmed. (TAC ¶¶126-132, 164-168.)

Plaintiff has sufficiently alleged a fiduciary relationship. “ ‘[E]amples of relationships that impose a fiduciary obligation to act on behalf of and for the benefit of another are “a joint venture, a partnership, or an agency.’ ”   Cleveland v. Johnson, (2012) 209 Cal. App. 4^th 1315, 1339.)

Based on the foregoing Defendants’ demurrer to the 7^th, 11^th and 12^th causes of action is overruled.

Misappropriation of Trade Secrets (13^th CA)

A cause of action for misappropriation of trade secrets requires the following elements: (1) plaintiff owned or was a licensee of the subject information; (2) this information was trade secret at the time of misappropriation; (3) defendant acquired, used, or disclosed the trade secret; and (4) plaintiff suffered damages or defendant was unjustly enriched resulting from such.  (CACI No. 4401.)

Plaintiffs’ misappropriation cause of action is based on the following allegations: (1) Plaintiffs had various proprietary and trade secrets including but not limited to business projections, forecasts, client contacts and sales information relating to the sale of home appliances including but not limited to water filtrations; (2) this information amounted to trade secrets and were trade secrets at the time of the misappropriation; (3) Defendants improperly and continue to use this information despite wrongfully terminating and ousting Plaintiffs; (4) Plaintiffs have been damaged as a result.

Plaintiffs have alleged sufficient facts to support the cause of action. Plaintiffs allege that the Agreement included the fact that “Plaintiffs would share their business contacts and proprietary information to further the grown of CKRA but that such Proprietary Information would remain the sole property of Plaintiffs and Defendants were not allowed to use the Proprietary Information should this Agreement terminate.” (TAC ¶ 41.) Plaintiffs allege that this information were “trade secrets and continued to be Plaintiffs trade secrets even at the time of Defendants’ misappropriation” (TAC ¶ 44.) Plaintiffs have also alleged that Defendants continue to sell similar items through CEA that they agreed not to sell. (TAC ¶ 49.)

Defendants argument that “it can be inferred from the Pleading that the subject information was not trade secret since plaintiffs allegedly “shared” it with defendants without any written agreement, or nondisclosure agreement” is meritless and not supported by caselaw.

Defendants’ demurrer to the 13^th cause of action is overruled.

B.   Motion to Strike

Defendants move to strike the claim for punitive damages. Civil Code §3294(a) provides, as follows: “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.”  Here, as discussed above, Plaintiff has sufficiently alleged fraud. Accordingly, Defendants’ motion to strike is denied.

Dated:  February 22, 2023

Hon. Monica Bachner

Judge of the Superior Court