KB Acquisitions, LLC v. Alysanne, LLC, et al. 

DEMURRER TO COMPLAINT

 

MOVING PARTY: Defendants Alysanne, LLC, and Snyder Vine Owner, LLC

RESPONDING PARTY(S): Plaintiff KB Acquisitions, LLC

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

Plaintiff KB Acquisitions contracted with Defendants Alysanne, LLC, and Snyder Vine Owner, LLC, to purchase a commercial office building. Around the time of the contemplated purchase, Skims Body, Inc., had signed a lease to occupy the premises. Plaintiff alleges it was a term of the agreement and necessary for financing from its lender that the premises be 70% occupied by Skims. Plaintiff alleges that it discovered that Skims had little, if any, activity at the premises, and therefore did not close the transaction. In response, Defendant Snyder Vine contended that Plaintiff defaulted under the Agreement and that Defendant was entitled to retain Plaintiff’s $5,000,000 deposit. Plaintiff now brings this action for (1) breach of contract and (2) violation of the UCL to recover a portion of its deposit on the failed transaction. 

Defendants now demurrer to the Complaint. Plaintiff opposed.

TENTATIVE RULING:

Defendants’ Demurrer to the Complaint is OVERRULED. 

Defendants are ordered to file an Answer to the Complaint within 21-days of this Ruling.

Plaintiff is ordered to give notice, unless waived.

DISCUSSION:

Demurrer

I. Meet and Confer

The court exercises its discretion to consider the motion absent a meet and confer, assuming none occurred. The parties are admonished to comply with all meet and confer obligations going forward. 

II. Legal Standard

A demurrer for sufficiency tests whether the complaint states a cause of action.  (Hahn v. Mirda (2007) 147 Cal. App. 4th 740, 747.)  When considering demurrers, courts read the allegations liberally and in context.  (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal. App. 4th 1216, 1228.)  In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice.  (CCP § 430.30(a).)  A demurrer tests the pleadings alone and not the evidence or other extrinsic matters.  (SKF Farms v. Superior Court (1984) 153 Cal. App. 3d 902, 905.)  Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.  (Id.)  The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.  (Hahn, 147 Cal.App.4th at 747.)

III. Analysis

A. Allegations in the Complaint

Plaintiff alleges it entered into a written purchase and sale agreement (the “PSA”), effective February 7, 2023, to purchase a commercial office building at 1601 Vine Street, Los Angeles, CA, from Defendants. (Compl. ¶ 7.) Under the original PSA, Plaintiff made initial escrow deposits totaling $2.5 million. (Id.) 

Plaintiff alleges that “[b]ecause of the nature of the financing that [Plaintiff] was obtaining to complete the purchase of the Building, the status of the tenancy of the Building was extremely important to the transaction and the ability to close on the purchase.” (Id. ¶ 8.) As of January 23, 2023, Skims Body, Inc., had signed a lease to eventually occupy nearly 98% of the premises. (Id.)  Because of the “importance of the status of the Skims tenancy to the financing of the transaction and to Kingsbarn’s lender, the deal was structured so that there would be the equivalent of a $15,000,000 ‘holdback’ of the purchase price by the lender. Specifically, section 4.3.7 of the PSA provided that the Seller (Alysanne), or alternatively, the tenant, Skims, would provide Kingsbarn’s lender with a binding letter of credit for $15,000,000, which letter of credit would only be released by the lender ‘once Skims actively occupies at least seventy percent (70%) of the net rentable square footage of the Building ….” (Id. ¶ 9.)

Because Plaintiff’s lender required a new appraisal of the Building in order to proceed with financing for a potential purchase of the Building, “[b]etween March 5, 2024 and March 19, 2024, Kingsbarn repeatedly attempted to schedule an on-site appraisal inspection through Snyder Vine’s broker.” (Id. ¶ 21.) Snyder Vine alleged “rebuffed” each attempt. (Id.) Plaintiff alleges Defendant “did this in order to conceal the fact that Skims still, by that date, was not actively occupying and conducting business operations from at least 70% of the Premises.” (Id.)

Plaintiff alleges that on March 19, 2024, the appraiser for Plaintiff’s new lender issued an appraisal report for the Building determining that the fair market value of the property was $100,000,000. (Id. ¶ 22.) This was only 83.82% of the purchase price of $119,300,000 under the PSA, as amended. (Id.) Thus, on March 22, 2024, Plaintiff “provided written notice to Snyder Vine, Alysanne, and their counsel that, pursuant to Section 3(b) of the Third Amendment, Kingsbarn was electing not to proceed with Closing, that escrow should be cancelled, and that $2,500,000 of Kingsbarn’s deposit should be returned to Kingsbarn.” (Id.)

Plaintiff alleges Defendants have “failed and refused to return to Kingsbarn any portion of the deposit made by Kingsbarn” despite Plaintiff’s repeated demands. (Id. ¶ 23.) Plaintiff therefore filed this action to pursue recovery of the $2,500,000 and its attorney’s fees and costs. (Id. ¶ 24.) 

B. Demurrer to First Cause of Action for Breach of Contract

Defendants demurrer to the Complaint, first arguing that the First Cause of Action for breach of contract fails. Defendants contend that Plaintiff cannot recover its deposit because the first condition under the Third Amendment allowing a refund of deposit—that Skims fails to occupy 70% of the premises on or after December 28, 2023—was not satisfied. In support, Defendants asserts that the letter from Skims’ General Counsel purporting to confirm that Skims occupied the premises was sufficient to certify that occupancy.  

The Third Amendment to the PSA contains a paragraph labeled “Skims Closing Occupancy.” (Compl., Exh. 4, ¶ 3(b).) It provides in full:

Skims Closing Occupancy. If (i) the Skims Closing Occupancy occurs on or after December 28, 2023, (ii) a new lender appraisal is required by Buyer's lender prior to Closing and is issued during the first quarter of 2024, (iii) the lender appraisal shows a Property value of less than 90% of the Purchase Price, and (iv) Buyer elects not to proceed to Closing on the basis thereof by notice to Seller no later than five (5) days after the appraisal issuance (with failure to provide notice constituting an election to proceed to Closing), then, notwithstanding that the same shall be considered a default by Buyer under Section 16.2 of the Original Purchase Agreement, in this specific instance, Buyer and Seller agree that Seller shall be entitled to retain $2,500,000 of the Deposit as liquidated damages pursuant to Section 16.2 of the Original Purchase Agreement, and Seller shall return the remaining portion of the Deposit made by Buyer pursuant to Sections 2 and 3 above, in the amount of $2,500,000.

(Id.)

The Third Amendment defines “Skims Closing Occupancy” as “if Skims occupies seventy percent (70%) of the ‘Premises’ under the Skims Lease.” (Id. 3(a).) Notably, the Third Amendment also provides that the 70% occupancy “may be evidenced by a writing from Tenant certifying such occupancy.” (Id.)

Defendants apparently concede that Plaintiff met conditions (ii) through (iv). Thus, for purposes of this demurrer, the only issue is condition (i), that is, whether a 70% occupancy occurred only on or after December 28, 2023. 

Defendant points to the December 13, 2023, letter from Colin Bennett (“the Letter”), General Counsel for Skims, as conclusively establishing the occupancy requirement. In the letter, Bennett stated the following: 

Please take notice that Tenant hereby certified that, as of December 13, 2023, Tenant occupies the Premises. [¶] This letter may be relied upon by any prospective purchaser of any part or interest in the Premises or Building, or any encumbrancer or lender with interest in the Premises of Building.

(See Schiller Decl., Exh. A.)

Plaintiff therefore argues that under its interpretation of the PSA—which expressly required a 70% occupancy—the letter was insufficient to establish the requisite occupancy. (See Compl. ¶ 17 [alleging that the Letter “did not say that Skims, as the tenant, was actively occupying and conducting business from at least 70% of the demised Premises under the Skims Lease, which was the applicable standard for tenant occupancy contemplated and required by Section 3(b) of the Third Amendment.”].)

When addressing a demurrer to a breach of contract claim, the court must determine whether the alleged written agreement is “reasonably susceptible” to the meaning given it by the plaintiff. (Hervey v. Mercury Cas. Co. (2010) 185 Cal. App. 4th 954, 964.) “[W]here an ambiguous contract is the basis of an action, it is proper, if not essential, for a plaintiff to allege its own construction of the agreement. So long as the pleading does not place a clearly erroneous construction upon the provisions of the contract, in passing upon the sufficiency of the complaint, we must accept as correct plaintiff's allegations as to the meaning of the agreement.” (Aragon-Haas v. Fam. Sec. Ins. Servs., Inc. (1991) 231 Cal. App. 3d 232, 239.)

Here, there exists a reasonable question, and therefore a dispute of fact, as to whether the Letter satisfied the occupancy requirements. While the letter stated that Skims “occupies the Premises,” it failed to state that Skims occupied 70% of the Premises. Under the plain terms of the Third Amendment, it was the not any occupancy, but rather a threshold occupancy—70%—that mattered. It would not be unreasonable, from Plaintiff’s perspective, to conclude that the Letter’s failure to state the 70% occupancy might have a been an implicit concession that occupancy was not at that level. At the very least, Plaintiff might have reasonably raised alarm. 

Hence, the day after receiving the letter, Plaintiff’s representative allegedly visited the building “to assess the actual physical status of Skims’ tenancy” and found “absolutely no evidence of office workers or other Skims’ employees in the Building.” (Compl. ¶ 18.) Thus, Plaintiff alleges “the letter was false or erroneous.” (Id.) Considering these allegations, which the court must accept as true, Plaintiff has stated a claim for breach of contract based on the failure to return Plaintiff’s deposit despite all conditions being met.

Even ignoring that the Letter did not expressly state that Skims’ occupancy was at 70%, the parties dispute whether the letter was conclusive evidence of the requisite occupancy. (See Third Amendment, Exh. 4, ¶ 3(a) [stating occupancy “may be evidenced by a writing from Tenant certifying such occupancy].) In other words, Defendants argue that the letter, standing alone, was sufficient to establish the requisite occupancy. Plaintiff, in opposition, suggests the Letter was merely one factor it could consider in assessing the building’s occupancy.

Here, Plaintiff’s interpretation of the contract is reasonable, and therefore not susceptible to demurrer. It is not obvious what the parties intended when stating the 70% occupancy “may be evidenced by a writing.”

Plaintiff’s suggestion that the letter was evidence of the occupancy, but not dispositive evidence, is not clearly erroneous. Indeed, if the parties contemplated that the letter, by itself, would be conclusive evidence of the required occupancy, they could have clearly established that desire with language to that effect. Because they did not, there exists a reasonable ambiguity as to whether the letter was sufficient to establish the requisite tenancy—especially in light of the allegation that Plaintiff’s owned investigation found the premises to be virtually empty. (Compl. ¶ 18.) 

Thus, even assuming the Letter established the requisite 70% occupancy—despite not expressly mentioning an occupancy of 70%—there still exists a reasonable dispute as to whether Plaintiff’s own investigation or other evidence could rebut this point.   

Accordingly, Defendants’ Demurrer to the First Cause of Action is OVERRULED.

C. Demurrer to Second Cause of Action for Violation of the UCL

Defendants also demurrer to the Second Cause of Action, arguing that Plaintiff lacks standing to assert a violation of the UCL. First, Defendants argue Plaintiff lacks standing because it has not alleged harm to the public at large or consumers generally.

Business and Professions Code section 17200 defines “unfair competition” to include “any unlawful, unfair or fraudulent business act or practice....” “The scope of section 17200 is broad, encompassing ‘anything that can properly be called a business practice and that at the same time is forbidden by law.’ ... It governs ‘anti-competitive business practices’ as well as injuries to consumers, and has as a major purpose ‘the preservation of fair business competition.’” [Citations.] (Linear Tech. Corp. v. Applied Materials, Inc., (2007) 152 Cal. App. 4th 115, 133).  Whether a practice violates the section “is generally a question of fact which requires ‘consideration and weighing of evidence from both sides’ and which usually cannot be made on demurrer.” [Citation].  (Id.)

“The UCL confers standing on a private plaintiff to seek relief under the statute only if that plaintiff has ‘suffered injury in fact’ and ‘lost money or property as a result of the unfair competition’ at issue.” (California Med. Assn. v. Aetna Health of California Inc. (2023) 14 Cal. 5th 1075, 1082, [citing Bus. & Prof. Code, § 17204].) The UCL “broadly define[s]” the word “person” to “mean and include natural persons, corporations, firms, partnerships, joint stock companies, associations and other organizations of persons.” (Cal. Bus. & Prof. Code § 17201; California Med. Assn., supra, 14 Cal. 5th at 1082.)

Here, Defendants have presented no binding California authority clearly precluding the cause of action or the broad standing conferred by the UCL. The California cases relied on by Defendant are distinguishable because they involved representative actions. For example, in Linear Tech, the court sustained a demurrer to the UCL cause of action, holding that the alleged victims were “neither competitors nor powerless, unwary consumers, but Linear and other corporate customers in Silicon Valley, ‘each of which presumably has the resources to seek damages or other relief ... should it choose to do so’.” (Linear Tech. Corp. v. Applied Materials, Inc. (2007) 152 Cal. App. 4th 115, 135.) However, because this was a representative case, the Court’s ruling was only to “the extent that Linear purports to represent other customers.” (Id.) 

The same was true of the plaintiff in Rosenbluth—acting on his own behalf and “for the interests of the general public”—where the court held that a “UCL action based on a contract is not appropriate where the public in general is not harmed by the defendant's alleged unlawful practices.” (Rosenbluth Internat., Inc. v. Superior Ct. (2002) 101 Cal. App. 4th 1073, 1077.) Therefore, this argument fails.

Defendants also argue that Plaintiff lacks standing because it has not alleged “actual reliance” on the allegedly fraudulent Skims Letter. Under both the “fraud” and “unlawful” prongs of the UCL, a consumer must demonstrate “actual reliance.” (In re Tobacco II Cases (2009) 46 Cal.4th 298; Durell v. Sharp Healthcare (2010) 183 Cal. App. 4th 1350.) 

However, Plaintiff here alleges that Defendants engaged in “unlawful, unfair, and fraudulent business practices,” which includes “fraudulently” obtaining and relying on the Letter, “wrongfully denying access to the Building to the appraiser for Kingsbarn’s lender in order to prevent the appraiser from producing an appraisal in the first quarter of 2024…,” and “failing and refusing to return the $2,500,000 to Kingsbarn despite multiple demands from Kingsbarn and Kingsbarn’s legal right to the return of such funds.” (Compl. ¶ 34.) Thus, Plaintiff has alleged “unfair” practices, and such unfair practices do not require actual reliance. This argument therefore fails.

Relatedly, Defendants argue that Plaintiff has not alleged sufficient allegations to support a claim under the “unfair prong.” However, whether conduct is unfair “is generally a question of fact which requires ‘consideration and weighing of evidence from both sides’ and which usually cannot be made on demurrer.” [Citation].  (Linear Tech. Corp., supra, 152 Cal. App. 4th 115, 133). Considering the allegations, Plaintiff has adequately alleged a violation of the unfair prong to survive the demurrer.

Accordingly, Defendants’ Demurrer to the Second Cause of Action is OVERRULED.

IT IS SO ORDERED.

Dated:   August 23, 2024 ___________________________________