Judge Ralph C. Hofer, Case 20GDCV00728 2022-09-09 Tentative Ruling

The complaint which is the subject of these demurrers 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 Dixieline 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 those 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, cross-complainant refused to make any further direct payments, and demanded that cross-defendants complete construction and perform an accounting. The cross-complaint alleges that cross-defendants then 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, including the operative First Amended Complaint, 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 defendant Dixieline Builders Fund Control (“Dixieline”) and defendant 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.

On August 12, 2022, the court heard a demurrer and motion to strike brought by defendants U.S. Bank National Association and U.S Bancorp as to the First Amended Complaint, the same pleading which is the subject of these demurrers. The demurrer was overruled to the first cause of action for negligence, second cause of action for breach of contract, and fourth cause of action for breach of contract. The demurrer was sustained with leave to amend to the sixth cause of action for unfair business practices.

Here, the FAC was served by mail and electronic service on May 17, 2022. Thirty days from this date, permitting an additional two days for service by electronic service, would have been June 20, 2022. The demurrers were filed and served by email on August 12, 2022. This is late by 53 days, over seven weeks. This is not the initial pleading in this matter, and even if it had been, the filing and service was well beyond any maximum 15-day extension to which the parties were permitted to stipulate without leave of court.

The Declarations of Melissa Corona in support of the demurrers indicate that on June 17, 2022, defendants filed a declaration regarding inability to meet and confer which entitled defendants to a 30-day automatic extension to plead to July 20, 2022, and the parties then stipulated to additional extensions of time to plead to August 12, 2022. [Corona Decl., paras. 5-8]. The declaration regarding inability to meet and confer was filed in Case No. 22 GDCV00004, on June 17, 2022.

“(2) The parties shall meet and confer at least five days before the date the responsive pleading is due. If the parties are not able to meet and confer at least five days prior to the date the responsive pleading is due, the demurring party shall be granted an automatic 30-day extension of time within which to file a responsive pleading, by filing and serving, on or before the date on which a demurrer would be due, a declaration stating under penalty of perjury that a good faith attempt to meet and confer was made and explaining the reasons why the parties could not meet and confer. The 30-day extension shall commence from the date the responsive pleading was previously due, and the demurring party shall not be subject to default during the period of the extension. Any further extensions shall be obtained by court order upon a showing of good cause.”

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 and paid for all costs and expenses related to the FCA, including prepayment for 22 inspections and inspection reports, and the control fee of Dixieline. [FAC, para. 31]. It is alleged that “Dixieline was paid by Plaintiff a total of $5,121 to act as Control Fund and to perform inspections and prepare and submit Inspection Reports.” [FAC, para. 31].

The FAC alleges that defendant 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]. The FAC alleges that defendant Dixieline failed in its duties to plaintiff by failing to properly screen, hire and supervise Pro Build, its designated Inspector, to ensure it performed its duties as designated inspector, and failed to perform or cause to be perform 14 of the 22 inspections and inspection reports which plaintiff fully paid for, and that Dixieline disbursed funds during a period when no inspections were performed or inspection reports issued. [FAC, para. 32b]. It is also alleged that Dixieline disbursed funds to King Cobra without validating the accuracy of the claim for payment. [FAC, para. 32d].

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 as against the moving defendants.

Dixieland argues 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.

Dixieline argues that the FCA states that “control’s responsibilities under this agreement are limited and that it will act in accordance with instructions given to it by the person(s) authorized to order disbursements….” [Fund Control Agreement, p. 2]. The Fund Control Agreement also states that the control,

However, as noted above, the FAC also alleges that Dixieland assumed a duty to conduct inspections for which plaintiff had paid, and that its conduct in performing that duty failed to meet the requirements of that duty. [FAC, para. 32b]. Defendant argues the allegation that Dixieland failed to perform or cause to be performed the inspections is not supported by the language of the contracts, which do not state that Dixieland needed to perform, or cause to be performed, all 22 inspections within a specified period, and since King Cobra abandoned the construction before the project was completed, those inspections can still be performed. Defendant does not point to any contractual provisions which would directly contradict the allegations in the FAC that Dixieland undertook the duty to perform all inspections for which Dixieland was paid, and provide inspection reports, and that it failed to perform those duties pursuant to the agreement of the parties.

Dixieland also argues that the FAC fails to sufficiently allege causation between the lack of inspections and plaintiff’s alleged damages. However, it is alleged that due to the failure of defendant to perform the inspections and provide reports plaintiff was unaware of the true state of progress, and the construction funds were nearly depleted without significant completion of the project. [FAC, para. 33]. This allegation of causation is not contradicted by any terms of the attached contracts.

Dixieland argues that it is not alleged that plaintiff requested inspection reports, as required by the Inspection Agreement. This assertion does not appear to be contradicted by anything in the documents or pleading and does not appear to be a pleading requirement. It is not clear that the duty sought to be imposed on Dixieline to properly conduct or see that Pro Build was properly conducting agreed upon 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,” particularly given that it was agreed that each report was for the “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]. The reports were to assist plaintiff in making specified determinations, and it is alleged plaintiff was deprived of the opportunity to make an informed determination by Dixieline’s breach of duty.

Moreover, as argued in the opposition, the court has previously found, in connection with the previous demurrer by the USB lender defendants, that the FAC sufficiently alleges facts supporting a determination that the USB defendants owed a duty to plaintiff with respect to the inspections which the USB defendants are alleged to have retained Dixieline to fulfill. [FAC, paras. 17, 19]. Dixieline does not argue that Dixieline was not the agent of USB, and subject to the duty to plaintiff which was conferred by USB on Dixieline. The demurrer by Dixieline to the negligence cause of action is overruled.

Defendant Pro Build argues that the first cause of action is insufficient as to Pro Build because the complaint fails to allege the nexus of duty Pro Build owed to plaintiff. Pro Build argues that the allegations are that Dixieland hired Pro Build to conduct inspections, but the FAC as alleged, which states that plaintiff Dixieland and King Cobra were parties to the FCA, does not allege that Pro Build had a duty to plaintiff, but any contractual duty was owed to Dixieland, not to plaintiff.

Pro Build concedes however, that the FAC alleges that Dixieland hired Pro Build to conduct inspections pursuant to the alleged DX-PB Agreement, in order for Dixieland, and, ultimately, for the USB defendants, to perform their duties to plaintiff. [FAC, paras. 22, 32(c)]. Pro Build does not argue that it was not the agent of Dixieland, or the USB defendants, sufficient to support a “nexus” between the duty owed and plaintiff. Pro Build seems to argue that plaintiff has not included any law to show that Pro Build owed a duty of care tethered to Dixieland’s duty of care to plaintiff, but the facts alleged show a clear sequence of duty by contractual assignment, and defendant has not submitted any legal authority under which a duty could not be voluntarily undertaken by Pro Build in this situation. By undertaking that duty by agreement, Pro Build also undertook a duty to perform with due care. The demurrer by Pro Build to the negligence cause of action is overruled.

The FAC alleges that in furtherance of executing Dixieline’s duties as USB’s Fund Control, USB and Dixieline entered into the Inspection Agreement, that plaintiff has performed all conditions required of her to be performed under the Inspection Agreement, including paying timely on the loan, paying the control fee, and prepaying the 22 inspections on the subject property, that Dixieline delegated its duty to perform inspections to Pro Build, and that Pro Build only performed 8 of the 22 inspections which plaintiff paid for, and Dixieland only issued 8 reports from these inspections. [FAC, paras. 37-40]. It is alleged that this failure to perform inspections breached the Inspection Agreement, and that plaintiff was not delivered the reports to enable her to make a determination of the percentage completion of the construction job and has thereby suffered damages. [FAC, paras. 41-43]. All elements of the cause of action are sufficiently stated.

Defendant Dixieland argues that the cause of action is directed to the Inspection Agreement, but that plaintiff fails to sufficiently allege a breach of contract claim against Dixieland, again, because allegations concerning the failure to perform inspections are unsupported by the terms of the Inspection Agreement. As discussed above, it has not been established that the allegations of the pleading, in effect, that the parties agreed to and plaintiff advanced payment for 22 inspections to assist the Owner, all of which were not conducted, and not reported, are somehow contradicted by the Inspection Agreement attached to the FAC.

Where an incorporated written instrument is the foundation of a cause of action, its recitals may serve as a substitute for direct allegations ordinarily essential to the pleading. Lambert v. Haskell (1889) 80 Cal. 611. Where these recitals are contrary to allegations in the pleading, the recitals will be given precedence, and the pleader’s inconsistent allegations as to the meaning and effect of an unambiguous document will be disregarded. Stoddard v. Treadwell (1864) 26 Cal. 294, 303; See also Witkin, Cal.Proc.4th 4 Pleading section 392; Mission Oaks

Defendant essentially argues that the attached Inspection Agreement does not in some respects support the theory of liability, not that it affirmatively contradicts allegations in the pleading, as was also argued above. To the extent the argument is that there are no allegations that plaintiff requested inspections, this does not appear to be a pleading requirement, and plaintiff has alleged that she “has performed all conditions, covenants, and promises required of her to be performed in accordance with the terms and conditions of the Inspection Agreement…” [FAC, para. 39]. This allegation must be accepted as true for purposes of demurrer. The issue appears to be more properly addressed by discovery.

To the extent the argument is that there was no obligation to verify the work before making disbursements, this would only apply to one theory of liability alleged in the cause of action, when the cause of action is primarily based on a breach of a contractual duty to perform all of the inspections contracted for, which is properly stated. The court cannot sustain a demurrer to only part of a cause of action. A demurrer does not lie to only part of a cause of action, and a cause will survive demurrer if there are sufficient allegations that might entitle the pleader to relief. Kong v. City of Hawaiian Gardens Redevelop. Agency (2003, 2nd Dist.) 108 Cal.App.4th 1028, 1046; PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682. Dixieline’s demurrer to the second cause of action accordingly is overruled.

The opposition primarily argues that the court has already determined in connection with the demurrer by USB that the FAC sufficiently alleges facts showing that plaintiff is a third-party beneficiary of the contract, and Dixieline, as the agent assigned to perform USB’s inspection duties, must also be held liable to answer to plaintiff for breach of that obligation. The demurrer does not challenge the pleading on the ground plaintiff cannot enforce the subject contract.

“(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 the Inspection Agreement. [FAC, Ex. A, para. 2]. This allegation is sufficient to show an express intent to benefit plaintiff as Owner. The general allegations also allege that plaintiff was provided a copy of the Inspection Report in escrow. [FAC, para. 19]. 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. The FAC sufficiently alleges plaintiff’s interest as a third-party beneficiary to withstand challenge on such grounds.

The cause of action again alleges all elements of a breach of contract claim, alleging that Dixieline and plaintiff entered into the FCA, plaintiff has performed under the FCA, including paying the control fee and prepaying for 22 inspections, and that Dixieline breached the contract by failing to perform the inspections which were paid for, and failing to prepare the reports of the inspections and deliver them to plaintiff to enable plaintiff to make a determination concerning the percentage of completion of the job, which resulted in damages to plaintiff. [FAC, paras. 46-52].

Defendant Dixieland argues that the FCA does not state Dixieline had a duty to perform or cause to be performed the 22 inspections within a specified period of time. As discussed above, there is no contradiction here between the allegations in the pleading and a specific written term of the attached agreement. Again, as discussed above, the argument that Dixieland had no duty to verify that work was done in a reasonable state only addresses part of the cause of action.

Dixieland argues that there is no mention of inspection reports in the subject contract. However, the FCA is not devoid of any mention of inspections, as it expressly states, “Inspections will be prepaid at $100.00 per inspection. Any additional inspections will be billed at $125.00 each.” [FAC, Ex. B, FCA, para. 15]. The FCA also indicates that Dixieline will remain liable for the amount of any disbursement made as a result of its “willful misconduct or sole negligence.” [FAC, Ex. B, FCA, para. 10]. This allegation is sufficient to support the inspection allegations included in this cause of action. Dixieline’s demurrer to the third cause of action is overruled.

The cause of action alleges that in furtherance of that USB-DX Agreement, Dixieline required plaintiff to enter into the Inspection Agreement, and that Dixieline entered into the FCA, and that plaintiff is entitled as a third-party beneficiary to enforce the USB-DX Agreement. [FAC, paras. 54-57]. The FAC also alleges similar allegations as the foregoing causes of action with respect to defendants breaching such an agreement by only performing 8 of the 22 inspections, as a result of which plaintiff suffered damages. [FAC, paras. 58, 60, 62].

These arguments again fail to defeat the sufficiency of the breach of contract as alleged, and the arguments are in fact even weaker in connection with this cause of action, which is based on an agreement of which plaintiff indicates she is not in possession, so that its terms are not attached to the pleading to be relied upon to contradict the allegations of the FAC. [FAC, paras. 18, 54]. The court, in connection with the demurrer by USB, has previously noted that the allegations of this cause of action must be accepted as true concerning the existence and effect of this particular agreement, and that the matter may be further addressed once discovery discloses the actual terms of this alleged agreement. [See Minute Order 08/12/2022, p. 11 of 15].

The FAC sufficiently alleges the existence of such an agreement, and also alleges that plaintiff was a beneficiary of the agreement. [FAC, paras. 67-69, Ex. C]. The FAC also alleges similar allegations as the foregoing causes of action with respect to defendants breaching such an agreement by not performing several of the prepaid inspections or preparing the inspection reports, depriving plaintiff of the information from the inspections and reports, as a result of which plaintiff suffered damages. [FAC, paras. 71-75].

Dixieline again argues that the cause of action, although alleging plaintiff performed all conditions required of her, does not allege she requested inspections to take place. Again, there is nothing from the FAC which would contradict this allegation of full performance, and, again, the arguments based on this alleged failure to request inspections are particularly weak in connection with this cause of action, which is based on an agreement which plaintiff indicates she is not in possession of, so that its terms are not attached to the pleading to be relied upon to contradict the allegations of the FAC. [FAC, paras. 22, 67, 68].

Dixieline also argues that plaintiff has admitted in her cross-complaint that Keshishyan undertook to complete forms that Dixieline required, which she signed without reviewing in detail, so that any allegations that plaintiff was deprived of the information and oversight which would have been provided by inspection reports is contradicted by plaintiff’s admission that she did not expect such information and oversight. The allegation relied upon from the cross-complaint, is, when read in full, that “Initially, Corazon was grateful” that Keshishyan took over completing the Dixieline/US Bank forms, “sparing her the stress of navigating a landscape of construction to which she was unfamiliar.” [RFJN, Ex. 2, Cross-complaint, para. 20, emphasis added]. The word “Initially,” is not included in the quotation submitted in the demurrer, leaving the argument somewhat misleading. The balance of the cross-complaint goes on to explain the break-down of the relationship and how this initial gratefulness devolved into distrust. This statement is not an admission at all of what Dixieline has argued, let alone the type of clear admission sufficient to call into question the validity of the allegation that plaintiff was harmed by the deprivation of the information and oversight she had paid for. Dixieline’s demurrer to this cause of action accordingly is overruled.

Defendant Pro Build makes the same arguments in support of its demurrer to this fifth cause of action, in effect that there is no allegation that an inspection was requested, and that the same alleged admissions in the cross-complaint defeat the claim. Those arguments are rejected for the reasons stated above. Pro Build’s demurrer to this cause of action accordingly is overruled.

Procedurally, the demurrer is untimely, filed and served 23 days late. While the Court recognizes that the parties evidently stipulated to extensions of time to plead, the First Amended Complaint is not the initial pleading, and the parties were not permitted to enter into such stipulations to extend the time to plead but were required to obtain leave of court. See CRC Rule 3.110(d). The moving papers also concede that defendants invoked CCP section 430.41(a)(2) to obtain a 30-day extension to plead, which statute expressly prohibits further extensions beyond that 30-day extension to be made other than by court order. (“The 30-day extension shall commence from the date the responsive pleading was previously due…. Any further extensions shall be obtained by court order upon a showing of good cause.”)

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