Judge: Randy Rhodes, Case: 22CHCV00371, Date: 2023-03-23 Tentative Ruling
Case Number: 22CHCV00371 Hearing Date: March 23, 2023 Dept: F51
Dept. F-51¿¿
Date: 3/23/23¿
Case #22CHCV00371
DEMURRER
WITH MOTION TO STRIKE
¿
Demurrer with Motion to
Strike Filed: 12/7/22
¿
MOVING PARTY: Defendants Andrew Smith, an individual;
Heather Smith, an individual; and Brit with Grit, a California corporation (“Defendants”)
RESPONDING PARTY: Plaintiff
Raphael Conelly, individually and derivatively on behalf of Better Ideas Team,
Inc. (“Plaintiff”)
NOTICE: OK¿
¿
RELIEF REQUESTED: Defendants
demur to Plaintiff’s entire first amended complaint (“FAC”). Defendants also
seek an order striking provisions of the FAC relating to punitive damages and
attorney fees, and Plaintiff’s fourth cause of action.
¿
TENTATIVE RULING: The demurrer is sustained as to the fourth cause of
action in Plaintiff’s FAC, and
overruled as to the first, second, and third causes of action. The motion to
strike is denied. Plaintiff is granted 20 days leave to amend the FAC to cure
the defects set forth herein.
BACKGROUND¿
Plaintiff
brings this action against defendants Andrew Smith (“Andrew”), Heather Smith
(“Heather”), and Brit with Grit (“BWG”). Plaintiff alleges that Andrew, his
former business partner at Better Ideas Team, Inc. (“BIT”), induced Plaintiff
to invest in BIT, and subsequently misappropriated BIT funds for his own
personal use, as well as for Heather and BWG’s benefit. (FAC ¶¶ 10–11.)
On 5/25/22,
Plaintiff filed his original complaint, alleging against Defendants the
following causes of action: (1) Derivative Claim for Breach of Fiduciary Duty;
(2) Derivative Claim for Aiding and Abetting Breach of Fiduciary Duty; (3)
Derivative Claim for Conversion; and (4) Direct Action for Fraud. On 10/21/22,
Plaintiff filed his FAC, alleging the same causes of action.
On 12/7/22,
Defendants filed the instant demurrer and motion to strike. On 2/6/23,
Plaintiff filed his opposition to the demurrer. On 2/9/23, Defendants filed their
reply. On 3/8/23, Plaintiff filed his opposition to the motion to strike. On
3/14/23, Defendants filed their reply.
DEMURRER
Meet-and-Confer
Before filing its demurrer, “the demurring party shall meet
and confer in person or by telephone with the party who filed the pleading that
is subject to demurrer for the purpose of determining whether an agreement can
be reached that would resolve the objections to be raised in the demurrer.”
(Code Civ. Proc. § 430.41, subd. (a).) The demurring party must file and
serve a meet and confer declaration stating either: “(A) The means by which the
demurring party met and conferred with the party who filed the pleading subject
to demurrer, and that the parties did not reach an agreement resolving the
objections raised in the demurrer;” or “(B) That the party who filed the
pleading subject to demurrer failed to respond to the meet and confer request
of the demurring party or otherwise failed to meet and confer in good faith.” (Id.
at subd. (a)(3).)
Here, Defendants’ counsel declares that on November 7, 8,
16, and 17, he met and conferred with Plaintiff’s counsel regarding the issues
raised in the instant demurrer and motion to strike, but the parties were
unable to come to a resolution. (Decl. of David Ching, ¶¶ 4–8.) Therefore, the
Court finds that Defendants’ counsel has satisfied the preliminary meet
and confer requirements of Code of Civil Procedure section 430.41, subdivision
(a).
Legal Standard
As a general matter, a party may respond to a pleading
against it by demurrer on the basis of any single or combination of eight
enumerated grounds, including that “the pleading does not state facts
sufficient to constitute a cause of action” and is uncertain, meaning
“ambiguous and unintelligible.” (Code Civ. Proc., § 430.10, subds. (e) and (f).) In a demurrer proceeding, the defects must be apparent on
the face of the pleading or via proper judicial notice.¿(Donabedian v.
Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.)¿
“A demurrer tests the pleading alone, and not the evidence
or facts alleged.” (E-Fab, Inc. v. Accountants, Inc. Servs.
(2007) 153 Cal.App.4th 1308, 1315.) As such, the court assumes the truth of the
complaint’s properly pleaded or implied factual allegations. (Ibid.) The
only issue a demurrer is concerned with is whether the complaint, as it stands,
states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th
740, 747.)
Here,
Defendants¿demur to Plaintiff’s entire FAC on the basis that the pleading
fails¿to allege facts sufficient to¿state¿each of its causes of action.
A. Derivative
Claims
Plaintiff’s
first, second, and third causes of action are derivative claims brought as a
shareholder of BIT. A shareholder cannot initiate a derivative suit without
first informing the directors about the action and making a reasonable effort
to induce them to commence suit themselves or otherwise redress the wrong,
unless such efforts would be “useless” or “futile.” (Corps. Code § 800, subd.
(b)(2).) The complaint must allege, with particularity, specific facts as to
each director showing why a demand would be futile. (Bader v. Anderson
(2009) 179 Cal.App.4th 775, 790.)
Here, Defendants
argue that Plaintiff’s FAC contains “insufficient facts to show a proper demand
was made on the board of directors, or that it would be futile to make a demand
to constitute a derivative claim.” (Dem. 6:25–27.) In opposition, Plaintiff
argues that such facts are pled in paragraph 17 of the FAC. (Pl.’s Opp.,
3:15–23.)
The cited
paragraph states as follows: “17. Conelly made certain demands on Andrew – the
sole officer and director of BIT – to remedy his breach of duty to BIT by
repaying the amounts taken from the company. Andrew refused, necessitating this
action. Demand on the corporation to bring this suit is excused as such a
demand would be futile as Andrew is the sole officer and director of BIT.” (FAC
¶ 17.)
The Court
finds that Plaintiff has sufficiently alleged facts to satisfy the demand
requirement under Corporations Code section 800, subdivision (b)(2), as he has
alleged that he made a such demand to Andrew. The Court also notes that
Defendants have not addressed this issue in their reply papers. Accordingly,
the demurrer is overruled on this basis as to Plaintiff’s first, second, and
third causes of action.
B. Conversion
Plaintiff’s
third cause of action is a derivative claim for conversion against Defendants. “Conversion
is the wrongful exercise of dominion over the property of another. The elements
of a conversion claim are: (1) the plaintiff’s ownership or right to possession
of the property; (2) the defendant’s conversion by a wrongful act or
disposition of property rights; and (3) damages.” (Lee v. Hanley (2015) 61 Cal.4th 1225, 1240.) “Money cannot be the
subject of a cause of action for conversion unless there is a specific,
identifiable sum involved, such as where an agent accepts a sum of money to be
paid to another and fails to make the payment.” (PCO, Inc. v. Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th
384, 395.)
Here, the
parties disagree as to what the “specific, identifiable sum” requirement
entails. Defendants argue that “Plaintiff’s cause of action for conversion
fails as a matter of law and cannot be sustained because a specific dollar
amount was not stated or identified in the complaint.” (Dem. 10:1–2.) In
opposition, Plaintiff argues that it is sufficient at the pleading stage to
allege that “Defendants wrongfully took possession of specific sums of money by
(1) withdrawing specific sums from BIT bank accounts for their own personal use
by check or cash withdrawal; (2) paying personal bills with specific sums
belonging to BIT; and (3) using BIT credit cards to pay for personal bills.”
(FAC ¶ 31.)
As Plaintiff
observes, the cases cited by Defendants only stand for “the proposition that
generalized claims of damage are not subject of conversion.” (Pl.’s Opp., 5:10–11.)
The Court finds it sufficient at the demurrer stage that the sums at issue are
specific and capable of being identified, as Plaintiff has pled that they are
sums that were allegedly withdrawn from the BIT bank accounts. (FAC ¶ 31.) Further
refinement of the amount can be resolved in discovery.
Accordingly, as the Court finds
that Plaintiff has alleged facts sufficient to constitute a cause of action for
Conversion, the demurrer is overruled on this basis as to Plaintiff’s third
cause of action.
C. Fraud
Plaintiff’s
fourth cause of action alleges fraud against Andrew. “One who willfully
deceives another with intent to induce him to alter his position to his injury
or risk, is liable for any damage which he thereby suffers.” (Civ. Code §
1709.) Such deceit includes “a promise, made without any intention of
performing it.” (Civ. Code § 1710.) The elements that must be pleaded in a
cause of action for fraud are: (1) a misrepresentation (false representation,
concealment or nondisclosure); (2) knowledge of its falsity (or “scienter”);
(3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and
(5) resulting damage. (Philipson & Simon v. Gulsvig (2007) 154
Cal.App.4th 347, 363.)¿¿
Fairness
requires that allegations of fraud be pled “with particularity” so that the
court can weed out nonmeritorious actions before a defendant is required to answer.
(Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.) The
particularity requirement necessitates pleading facts that “show how, when,
where, to whom, and by what means the representations were tendered.” (Lazar
v. Superior Court (1996) 12 Cal.4th 631, 645.)
Here,
Defendants argue that Plaintiff fails to meet the particularity requirement in
pleading his fraud cause of action because Plaintiff alleged that Andrew made
the written misrepresentation in the “Executive Summary” of Spring 2016, while
attaching and incorporating by reference the March 2017 Executive Summary.
In his FAC,
Plaintiff alleges that “Andrew represented to Plaintiff that the funds from his
investment in BIT would be used to develop BIT’s business, specifically to ‘construct
the Member’s website, to set up the lead systems, and to set up the hosting of
the site on the … platform.’ Andrew made these representations to Conelly in
writing in the ‘Executive Summary’ attached as Exhibit A and verbally in the
Spring of 2016. These representations were material to Conelly’s decision to
invest in BIT.” (FAC ¶ 36.) Plaintiff appears to concede that the incorrect
document was mistakenly attached to his FAC, and requests leave to amend his
FAC to attach the correct document. Plaintiff’s counsel also declares that this
issue was not raised during meet and confer efforts. (Decl. of Michael
Velthoen, ¶ 3.)
Based on
the foregoing, the Court finds that Plaintiff has not pled with sufficient
particularity a cause of action for fraud, therefore the Court sustains the
demurrer as to Plaintiff’s fourth cause of action.
D. Leave
to Amend
Where a
demurrer is sustained, leave to amend must be allowed where there is a
reasonable possibility of successful amendment. (Goodman v. Kennedy
(1976) 18 Cal.3d 335, 348.) The burden is on the plaintiff to show the court
that a pleading can be amended successfully. (Id.; Lewis v. YouTube,
LLC (2015) 244 Cal.App.4th 118, 226.) However, “[i]f there is any
reasonable possibility that the plaintiff can state a good cause of action, it
is error to sustain a demurrer without leave to amend.” (Youngman v. Nevada
Irrigation Dist. (1969) 70 Cal.2d 240, 245).
Here, the
Court notes that this is the first demurrer heard in this action, though
Plaintiff has previously amended his complaint. Therefore, pursuant the Court’s
liberal policy of granting leave to amend, the Court grants Plaintiff 20 days
leave to amend the complaint to cure the defects set forth above.¿
MOTION TO STRIKE
Meet and Confer
“Before filing a motion to strike pursuant
to this chapter, the moving party shall meet and confer in person or by
telephone with the party who filed the pleading that is subject to the motion
to strike for the purpose of determining if an agreement can be reached that
resolves the objections to be raised in the motion to strike.” (Code Civ. Proc.
§ 435.5, subd. (a).) The parties are required to meet and confer at least five
days before the date a motion to strike must be filed, otherwise the moving
party is granted a 30-day extension to file the motion. (Ibid.)
Here, as previously mentioned, Defendants’ counsel declares that on November 7, 8, 16, and
17, he met and conferred with Plaintiff’s counsel regarding the issues raised
in the instant demurrer and motion to strike, but the parties were unable to
come to a resolution. (Ching Decl., ¶¶ 4–8.) Therefore, counsel has
satisfied the preliminary meet and confer requirements of Code of Civil
Procedure section 435.5, subdivision (a).
Timeliness
The Court observes that Plaintiff’s
opposition to the motion to strike was filed late under Code of Civil Procedure
section 1005, subdivision (b). Under the statute, “All papers opposing a motion
so noticed shall be filed with the court and a copy served on each party at
least nine court days, and all reply papers at least five court days before the
hearing.” (Code Civ. Proc. § 1005, subd. (b).)
Here, the deadline for Plaintiff to file and
serve his opposition was 2/3/23, nine court days before the original hearing
date of 2/17/23. Plaintiff filed and served his opposition to the motion to
strike on 3/8/23, 21 court days late. Plaintiff’s counsel declares that he did
not receive service of the motion to strike until he was served with
Plaintiff’s notice of non-opposition thereto on 2/9/23. (Velthoen Decl. ¶ 2.)
Defendants argue in reply that Mr. Velthoen was included on the service list
for all of the moving papers, and attaches the underlying proofs of service.
(Ching Decl. iso MTS Reply.)
Notwithstanding the foregoing, “the law
respects form less than substance.” (Civ. Code § 3528.) Additionally, the
public policy of California favors adjudicating cases on the merits. (Elston
v. City of Turlock¿(1985) 38 Cal.3d 227, 235; Hernandez v. Superior
Court¿(2004) 115 Cal.App.4th 1242, 1246.) The Court thus exercises its
discretion, under Rule 3.110 of the California Rules of Court, to excuse the
untimely filed opposition, particularly where Defendants have not alleged any
prejudice resulting from Plaintiff’s untimely filing.
Plaintiff is advised to take note of the
filing deadlines under the statute, as future filings made past the statutory
deadlines may result in the Court declining to consider the late-filed papers
at the hearing.¿
A.
Punitive
Damages
Punitive damages may be recovered upon a proper showing of
malice, fraud, or oppression by clear and convincing evidence. (Civ. Code §
3294, subd. (a).) “Malice” is defined as conduct intended to cause injury to a
person or despicable conduct carried on with a willful and conscious disregard
for the rights or safety of others. (Turman v. Turning Point of Cent. Cal.,
Inc. (2010) 191 Cal.App.4th 53, 63.) “Oppression” means despicable conduct
subjecting a person to cruel and unjust hardship, in conscious disregard of the
person’s rights. (Ibid.) “Fraud” is an intentional misrepresentation,
deceit, or concealment of a material fact known by defendant, with intent to
deprive a person of property, rights or otherwise cause injury. (Ibid.)
Punitive damages
must be supported by factual allegations. Conclusory allegations, devoid
of any factual assertions, are insufficient to support a conclusion that
parties acted with oppression, fraud or malice. (Smith v. Superior Court
(1992) 10 Cal.App.4th 1033, 1042; Anschutz
Entertainment Group, Inc. v. Snepp (2009) 171
Cal.App.4th 598, 643.)
Here, Defendants argue that “the FAC lacks facts or allegations
that discuss any malicious or oppressive acts. There are only conclusory
allegations of punitive damages in paragraphs 24, 29, 34, 41.” (MTS 15:5–6.) Plaintiff
argues in opposition that this action is based upon Defendants’ alleged
fraudulent conduct in misappropriating corporate funds, and therefore the
“fraud” element of a prayer for punitive damages has been satisfied.
Plaintiff
alleges in his FAC that “Andrew represented to Plaintiff that the funds from
his investment in BIT would be used to develop BIT’s business,” knowing that
said representations were not true, and with the intent to use Plaintiff’s
investment funds “to pay for [Andrew’s] personal expenses and his own business
interests.” (FAC ¶¶ 36–37.)
Based on the allegations made in the FAC, the Court finds that
Plaintiff has sufficiently alleged facts to support his prayer for punitive
damages based on Defendants’ allegedly fraudulent conduct. Accordingly, the
motion to strike portions of the FAC relating to punitive damages is denied.
B.
Attorney Fees
An award of attorney fees is proper when authorized by contract,
statute, or law. (Code Civ. Proc. §§ 1032, subd. (b); 1033.5, subd. (a)(10).)
Here, Plaintiff asserts that he is entitled to attorney fees based on the stock
purchase agreement entered into between himself and Andrew on 3/7/16. The
agreement, attached to the FAC as Exhibit B, states: “In the event that
litigation results from or arises out of this Agreement or the
performance thereof, the parties agree to reimburse the prevailing party’s
reasonable attorney’s fees. Court costs and all other expenses whether or not
taxable by the court as costs, in addition to any other relief to which the
prevailing party may be entitled.” (Ex. B to FAC, ¶ 5.2 [emphasis added].)
Here, Defendants argue that the scope of the attorney fee provision
in the stock purchase agreement does not extend to the instant action, because
“since there is no dispute that the Stock Purchase Agreement was fully
performed, as evidenced by the fact that Plaintiff did not sue for a breach of
contract, the claims alleged in this case, namely: (1) breach of fiduciary
duty; (2) aiding and abetting breach of fiduciary duty; (3) conversion; and (4)
fraud, the nucleus of facts alleged in this complaint do not relate to the
stock purchase agreement.” (MTS 12:4–8.)
Plaintiff
argues in opposition that the instant action “results from” and “arises out of”
the stock purchase agreement because he has alleged in his FAC that “he was
fraudulently induced to invest in BIT.” (Pl.’s Opp. to MTS, 5:17–18.) Moreover,
Plaintiff alleges that his investment funds were appropriated for Defendants’
personal use, and therefore the claim “arises out of” the stock purchase
agreement. (Id. at 5:20–22.)
Based on
the foregoing, the Court finds that the instant action “results from or arises
out of” the stock purchase agreement, and either party is therefore entitled to
recover reasonable attorney fees upon the outcome of litigation. Accordingly,
the motion to strike portions of the FAC relating to attorney fees is denied.
C.
Fraud Cause of
Action
Defendants argue that Plaintiff’s entire cause of action for Fraud
must be stricken from the FAC based on the purportedly mistakenly attached
Executive Summary. As Plaintiff notes, Plaintiff has requested leave to amend
his FAC to attach the proper documentation, which the Court grants. As such,
the motion to strike Plaintiff’s fourth cause of action in its entirety is denied.
CONCLUSION¿
The demurrer is
sustained as to the fourth cause of action in Plaintiff’s FAC, and overruled as to the first, second,
and third causes of action. The motion to strike is denied. Plaintiff is granted
20 days leave to amend the FAC to cure the defects set forth herein.