Judge Ralph C. Hofer, Case 20GDCV00728 2022-08-12 Tentative Ruling

The complaint which is the subject of this demurrer and motion to strike was consolidated with this case, the lead case, in which plaintiff King Cobra Construction, P.C. (“King Cobra”) alleges that it is a licensed general contractor, and in 2019 entered into a written agreement with defendants Corazon S. Nieves, Trustee of the Corazon Revocable Trust Dated October 10, 2013, to act as the general contractor for a project located on 3080 Hollywell Place in Glendale, which property was owned by defendant. There were also approved change orders and extra work performed that improved the property.

Plaintiff alleges that it performed all of the conditions of the agreement, but defendant materially breached the terms of the agreement by failing to pay for the work performed and owes plaintiff no less than the sum of $288,000 plus interest and prompt payment penalties. The complaint alleges causes of action for breach of written contract, breach of implied covenant of good faith and fair dealing, indebitatus assumpsit, account stated, foreclosure of mechanic’s lien and declaratory relief.

Defendant Nieves, individually, and as trustee, has filed a cross-complaint in the lead case against King Cobra and its principal, Haroutyan Keshishyan, as cross-defendants, alleging that the construction contract between the parties did not contain any provision for payment of construction supervision fees to cross-defendants, or payment of profits, and that there were no executed change orders. The cross-complaint alleges that to finance the construction, Corazon obtained a loan from U.S. Bank (“USB”) (the “Construction Loan”), disbursements from which were handled by Dixieline Builders Fund Control, Inc. (“Dixieline”). The cross-complaint alleges that as of the time of the filing of this action, USB and Dixlieline have paid to King Cobra the total sum of $613,501.00 out of the original contact price, and there remains $39,499.00 in escrow on hold until the instant litigation is resolved.

Cross-complainant alleges that during the construction, Keshishyan alerted Nieves that disbursements were being held up by Dixieline because Dixieline required additional or specific forms to be completed, which Keshishyan offered to complete to spare cross-complainant the trouble of reviewing and completing the forms. Cross-complainant alleges that cross-complainant would sign the forms completed by cross-defendants, and was not permitted to review the documents, and was assured that cross-complainant would have the opportunity to review the documents and make adjustments or corrections later in the process. The cross-complaint alleges that unbeknownst to cross-complainant, the Dixieline Standard Cost Breakdown included a provision for “supervision” fees of $35,000 and “profit” of $60,000, which were not discussed or agreed upon by the parties.

The cross-complaint alleges that over the course of the construction, Keshishyan began requesting that Nieves pay King Cobra directly for monies to fund the construction, separate and apart from the Construction Loan, representing that such would expedite completion, and that defendants would agree to an accounting for cross-defendants to reimburse any overpayment from reimbursement received from Dixieline. The cross-complaint alleges that cross-complainant ultimately paid cross-defendants direct payments of $332,579.22, and that cross-defendants have been paid a total sum of $946,080.22 from the Construction Loan and direct payments. The cross-complaint alleges that in April of 2020, after cross-complainant refused an offer to sell the property as is to a buyer located by cross-defendants to resolve cross-complainant’s growing liquidity problems, refused to make any further direct payments, and demanded that cross-defendants complete construction and perform an accounting, cross-defendants abandoned construction, and took with them personal property belonging to cross-complainant, including appliances in fixtures, with the approximate value of $25,000. Cross-defendant King Cobra then recorded a mechanic’s lien and sued cross-complainant in this lawsuit. The cross-complaint in the lead case alleges causes of action for breach of written contract, breach of covenant of good faith and fair dealing, conversion, fraud, elder financial abuse, unfair competition, unjust enrichment, and declaratory relief.

This case, originally Case Number 22 GDCV00004, was consolidated with the lead case on July 29, 2022, with all further matters to be handled in Case Number 20 GDCV000728. Because of the timing of the consolidation, some of the pertinent papers were filed in Case Number 22 GDCV00004 and can be located there. The First Amended Complaint in the case is brought by Nieves as plaintiff, on behalf of herself and as attorney in fact for her brother, who allegedly co-owns the subject property. Plaintiff alleges that defendants U.S. Bank National Association (“USB”), and its servicers and agents Dixieline Builders Fund Control (“Dixieline”) and Pro Build, were negligent in issuing payments to the construction company King Cobra in connection with the construction project at 3600 Hollywell Place in Glendale because work was not performed in a workmanlike fashion, and defendants failed to properly inspect and verify that the construction work was properly done.

To state a cause of action for negligence, plaintiff must allege the following elements: Defendant owed a legal duty of care to plaintiff; defendant breached the duty (negligent act or omission); plaintiff was injured as a result (proximate or legal cause); and damages. Palmer v. Crafts (1936) 16 Cal.App.2d 370, 375.

The FAC alleges that plaintiff entered into the Fund Control Agreement (“FCA”) to support and validate the progression of payments to King Cobra from the construction funds, paid for all costs and expenses related to the FCA, including prepayment for 22 inspections and inspection reports, and the control fee of Dixieline, and that USB failed in its duties to plaintiff by failing to properly screen, hire and supervise Dixieline, its Fund Control, to ensure it performed its duties including properly verifying that work was provided properly and in a reasonable state prior to payment, and that job site inspections were performed and inspection reports prepared and issued to plaintiff. [FAC, paras. 31-32a]. It is alleged that as a result of defendants’ negligent acts and failures to perform duties, plaintiff was unaware of the true state and progress of construction, and that the construction fund was nearly depleted without significant progress of the construction plan, and plaintiff was damaged when King Cobra abandoned construction and plaintiff was required to remove the negligent work and retain other construction companies to work on the project. [FAC, paras. 33, 34]. This scenario appears to allege all elements of a negligence claim.

Defendants argue that there is no duty owed here under Nymark v. Heart Federal Savings & Loan Association (1991) 231 Cal.App.3d 1089, 1096, in which the court of appeal recognized that, “as a general rule, a financial institution owes no legal duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.”

Defendants rely on Bradler v. Craig (1969) 274 Cal.App.2d 466, in which the Second District affirmed a judgment of dismissal against plaintiffs entered after the trial court sustained general demurrers to a complaint for alleged negligent construction of a house brought by defendants a general contract and a construction and purchase money lender. The complaint was filed by plaintiffs who bought the house from a previous owner, eighteen years after the construction project had been completed.

The Second District distinguished the case before it from the California Supreme Court case of Connor v. Great Western Sav. & Loan Assn. 69 Cal.2d 850, in which a duty to the purchasers of improved property had been found to exist, and which Bradler cites for the conclusion, “The fact that a building contractor and the construction money lender were not in privity of contract with the purchaser of the improved property does not absolve them of liability for negligence in creating an unreasonable risk of harm to the purchaser.” Bradler, at 472, citing Connor, at 865-866.

The Second District in Bradler distinguished Conner, noting that in that case the Court had noted that the lender “voluntarily undertook business relationships” with Conejo, the buyer and seller of the homes, “to develop a market for the tract houses in which prospective buyers would be directed to Great Western for their financing.” Bradler, at 474, quoting Connor, at 864. In Connor, the Court had observed that the lender:

“became much more than a lender content to lend money at interest on the security of real property. It became an active participant in a home construction enterprise. Its financing, which made the enterprise possible, took on ramifications beyond the domain of the usual money lender. It received not only interest on its construction loans, but also substantial fees for making them, a 20 percent capital gain for ‘warehousing’ the land, and protection from loss of profits in the event individual home buyers sought permanent financing elsewhere.”

The Second District noted that the case before it did not involve any such active interest in the development at the time, or the arrangements noted in Conner, the lender in that case having “loaned money to an unidentified person to purchase five lots and build homes thereon for sale to the public.” Bradler, at 474. The Second District held that in such a case, “Approval of plans and specifications, and periodic inspection of houses during the construction is normal procedure for any construction money lender.” Bradler, at 475.

The instant case is not a case where a duty is sought to be imposed toward a plaintiff who was an eventual purchaser of property, with a distant connection to the transaction, but the actual owner of the property to whom the lender loaned the funds, and in which the lender affirmatively arranged to undertake, appoint, and supervise the duties of inspection for the express direct benefit of plaintiff as owner.

Defendants also rely on Meyers v. Guarantee Sav. & Loan Assn. (1978) 79 Cal.App.3d 307, which concluded that a lender did not assume a duty with respect to inspections in a case in which the court of appeal concluded that no duty to inspect the premises arose for the benefits of appellants, where “the contract provided that respondent had no duty to inspect,” and respondent lender’s vice president stated in a declaration that “the occasional inspections he did make were very general and solely to protect respondent’s security interest…” Meyers, at 312.

Plaintiff in opposition argues that the situation here involves defendants undertaking to oversee the inspections, for the express benefit of both the Lender and plaintiff as the Owner, and so owed a duty to see that the inspections paid for were made, the results reported to the Owner, and to see that the inspections were conducted within the applicable standard of care.

Plaintiff relies on Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872. In that case the court of appeal reversed the trial court’s entry of summary judgment for a lender/acquiring bank on a cause of action for negligence, finding there were triable issues of fact with respect to whether there was a duty of care to the borrower in that case. The court of appeal noted that the case before it involved a construction loan, which differed significantly from a residential home loan:

“We note that we deal with a construction loan, not a residential home loan where, save for possible loan servicing issues, the relationship ends when the loan is funded. By contrast, in a construction loan the relationship between lender and borrower is ongoing, in the sense that the parties are working together over a period of time, with disbursements made throughout the construction period, depending upon the state of progress towards completion. We see no reason why a negligent failure to fund a construction loan, or negligent delays in doing so, would not be subject to the same standard of care.”

Here, the matter similarly involves a construction loan with an ongoing relationship between the lender and borrower, and with the lender assuming certain duties to ensure inspection before the release of construction funds, for the benefit of the Lender and the Owner, which duties have been alleged here to have been performed negligently, not performed at all, or not reported to the Owner. “A bank may be liable in negligence if it fails to discharge its contractual duties with reasonable care.” Das v. Bank of America, N.A. (2010) 186 Cal.App.4th 727, 741.

Plaintiff also relies on Biakanja v. Irving (1958) 49 Cal.2d 647, in which the California Supreme Court allowed recovery against a notary public for negligence in the drafting of a will in an action brought by the intended beneficiary of the will, who was not in privity with the notary in connection with the will preparation. See Biakanja, at 651 (“We have concluded that plaintiff should be allowed recovery despite the absence of privity…”),

“The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm. Cf. Prosser, Torts (2d ed. 1955), ss 36, 88, 107, pp. 168, 172, 544-545, 747; 2 Harper and James, Torts (1956), s 18.6, p. 1052.”

Plaintiff argues that these factors favor the imposition of a duty here, as the Inspection Agreement expressly states the inspection reports are for the benefit of the Lender and the Owner, suggesting both an intent to benefit plaintiff and foreseeability of harm if undertaken negligently. [FAC, Ex. A]. Plaintiff argues that the FAC alleges a certainty that plaintiff suffered harm, and a close connection between the harm and defendants’ conduct as in reliance on the Inspection Agreement, plaintiff did not immediately become concerned when King Cobra did not complete the construction as scheduled and was faced with King Cobra abandoning the construction in an incomplete, deficient and dangerous state, and a lawsuit for the remaining funds. [FAC, paras. 26-28; see also paras. 32-35]. Plaintiff suggests that the lender in this circumstance was in the best position to avert the harm by conducting appropriate oversight of its inspectors and will be so in other similar cases.

Defendants also argue that the negligence claim is contrary to the terms of the contract. It is generally held that when there is a contract between two parties, “it is appropriate to enforce only such obligations as each party voluntarily assumed, and to give him only such benefits as he expected to receive…” Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 517.

Defendants argue that the duty sought to be imposed on defendants to properly screen, hire, and supervise Dixieline to ensure that it was properly verifying that work was being properly done, or conducting job site inspections, is contrary to the contractual provision that “Control has no duty to determine that any labor and materials used in the job are in accordance with the plans and specifications,” and that each “report is for the sole purpose of assisting Lender and/or Owner in making a determination of the percentage of completion of the job by costs category.” [FAC, Ex. B, para. 7, Ex. A, para. 2].

It is not clear at this pleading stage that the duty to ensure that inspections which were pre-paid for by plaintiff/Owner and were made in order to permit the Owner to determine the stage of completion of the project being funded by the Owner’s loan, and reports prepared and forwarded to permit the Owner to make these determinations, would be contrary to those contractual provisions. The demurrer to this cause of action is overruled.

To plead a cause of action for breach of contract, plaintiff must allege the following elements: Contract formed, and terms alleged verbatim or according to legal effect; plaintiff’s performance or excuse for nonperformance; defendant’s breach; and damage to plaintiff. Walsh v. Standart (1917) 174 Cal. 807.

“(1) whether the third party would in fact benefit from the contract, but also (2) whether a motivating purpose of the contracting parties was to provide a benefit to the third party, and (3) whether permitting a third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.”

The FAC alleges that the Inspection Agreement expressly accords rights and duties to plaintiff, as it expressly states that job site inspections will be conducted at the request of “Owner or Lender,” and that the reports are for the purpose of “assisting Lender and/or Owner in making a determination of the percentage of completion,” for which the Owner prepaid. [FAC, para. 19 A-C, Ex. A, Inspection Agreement, paras. 1-3]. The language concerning the purpose of the reports appears under the heading, “Purpose of Inspections” in Inspection Agreement. [FAC, Ex. A, para. 2]. This language is sufficient to show an express intent to benefit plaintiff as Owner. It also appears that plaintiff’s interest can be reasonably viewed as a motivating purpose for the agreement, and that permitting plaintiff to bring plaintiff’s own breach of contract action is consistent with the stated objectives of the contract.

Defendants also argue that the Inspection Agreement contains language limiting the scope of the reports to be provided, but as discussed above, the language does not foreclose a duty or breach with respect to the agreement that 22 inspections and were prepaid, with only 8 conducted. The demurrer to this cause of action is overruled.

Defendants argue that plaintiff cannot maintain this cause of action for breach of an alleged USB-DX Agreement, as plaintiff is not a party to that agreement, and in fact admits plaintiff is not in possession, custody or control of that agreement and cannot confirm its existence. [See FAC, paras. 18, 54].

However, the demurrer concedes that the FAC alleges that the alleged agreement imposed on defendants a supervisory duty to ensure Dixieline’s performance of the Inspection and Fund Agreements. [FAC, paras. 19 A-C, 55-57]. Plaintiff has also alleged facts, which, if taken as true, as they must be on demurrer, would establish that plaintiff was a third-party beneficiary of the alleged agreement, which allegedly required plaintiff to agree to the Inspection Agreement, which, as discussed above, included language and duties suggesting third party beneficiary status. [FAC, paras 56-59]

This matter is now in a posture where once discovery discloses the actual terms and parties to this agreement, and its stated purposes, plaintiff’s allegations concerning the agreement may prove to not be correct. However, the allegations must be accepted as true for purposes of demurrer. See Serrano v. Priest (1971) 5 Cal.3d 584, 591; Del E. Webb Corp. v. Structural Materials Co. (1981, 2nd Dist.) 123 Cal.App.3d 593, 604 (“As a general rule in testing a pleading against a demurrer the facts alleged in the pleading are deemed to be true, however improbable they may be.”)

To state a claim, there must be allegations showing unlawful, unfair or fraudulent business acts or practices. Paulus v. Bob Lynch Ford, Inc. (2006) 139 Cal.App.4th 659, 676-677. Because such a claim is based on statute, it must be alleged with particularity; it is held that pleadings must state with reasonable particularity the facts supporting the statutory elements of the violation. Khoury v. Maly’s of California, Inc. (1993, 2nd Dist.) 14 Cal.App.4th 612, 619.

“We need go no further than to remind plaintiff that his unfair practices claim under section 17200 cannot be predicated on vicarious liability. "The concept of vicarious liability has no application to actions brought under the unfair business practices act." (People v. Toomey (1984) 157 Cal. App. 3d 1, 14 [203 Cal. Rptr. 642] (Toomey).) A defendant's liability must be based on his personal "participation in the unlawful practices" and "unbridled control" over the practices that are found to violate section 17200 or 17500. ( Toomey, supra, 157 Cal. App. 3d at p. 15.).

The FAC alleges that, “the actions as alleged against USB, Dixieline and Pro Build in entering into,” the various agreements, “is an unfair practice.” [FAC, para. 80, see also, para. 81]. The allegations are not directed to the conduct of each defendant with the requisite specificity, and the demurrer is sustained on this ground.

“Actions for any relief pursuant to this chapter shall be prosecuted exclusively in a court of competent jurisdiction by the Attorney General or any district attorney...or upon the complaint of any board, officer, person, corporation or association or by any person who has suffered injury in fact and has lost money or property as a result of such unfair competition.”

The FAC alleges that plaintiff has suffered pain and suffering, anxiety, embarrassment, and emotional distress, which is not a loss of money or property, and broadly alleges that, “Plaintiff also has suffered and continues to suffer monetary damages as alleged.” [FAC, para. 83]. Depending upon what conduct is alleged to have constituted improper practices by each defendant, and what allegations are being referred to, it is not clear that his broad statement sufficiently alleges standing to pursue the claim. The demurrer is sustained with leave to amend to address this issue as well.

Defendants U.S. Bank National Association and U.S. Bancorp move to strike allegations concerning emotional distress from paragraph 83 in the FAC in connection with the sixth cause of action for Unfair Business Practices, and the request for attorney’s fees from paragraph 84 in the FAC in connection with the same cause of action, as well as the prayer for attorney’s fees in paragraph 4 of the prayer.

Plaintiff has filed a “Response” to the motion to strike, indicating that plaintiff agrees that the provisions sought to be stricken from the pleading in the motion “be stricken from the First Amended Complaint.” The motion accordingly is granted without leave to amend at the concession of plaintiff.

Demurrer is SUSTAINED WITH LEAVE TO AMEND to the sixth cause of action for unfair business practices on the ground the cause of action is not alleged with sufficient specificity, and not alleged with specificity to each defendant. The cause of action also fails to appropriately allege facts showing that plaintiff has standing to pursue this cause of action, in effect, that plaintiff has suffered injury in fact and has lost money or property as a result of any alleged unfair competition.

Defendants U.S. Bank National Association and U.S. Bancorp’s UNOPPOSED Request for Judicial Notice in Support of Demurrer to Plaintiff’s First Amended Complaint is GRANTED IN PART. The Court takes judicial notice only of the fact that the subject Deed of Trust was recorded, the date of its recording, the date it was recorded and executed, the parties to the transaction reflected in the recorded document, the document’s legally operative language, and any legal effect of the document which is clear from its face. See Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal. App.4th 256, 265.

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