Judge: Richard Y. Lee, Case: 30-2021-01197544, Date: 2022-09-22 Tentative Ruling
Defendants SBF Development, LLC (“SBF Development”); EBF Holding, LLC (“EBF Holding”); Universal Pacific, LLC (“Universal Pacific”) ; and Ryan Fisher (“Fisher”) (collectively, “Defendants”) move for an order sustaining their demurrer to the Second Amended Complaint (“SAC”) and the First through Fourth Causes of Action on the grounds that they fail to state facts sufficient to constitute causes of action and are uncertain.
The Court finds that the parties adequately met and conferred by telephone regarding Defendants’ Demurrer, as required by Code of Civil Procedure section 430.41(a). (See Declaration of Wyatt Butler, ¶¶ 7-8.)
Uncertainty
Defendants demur to the SAC on the ground that it is uncertain. However, the Memorandum of Points and Authorities cites no legal authority and contains no argument in support of this contention. Thus, the Demurrer to the SAC on the basis of uncertainty is OVERRULED.
First Cause of Action for Breach of Contract and Second Cause of Action for Breach of Implied Covenant of Good Faith and Fair Dealing
Defendants contend that these causes of action as alleged in the SAC fail for the same reasons they failed in the FAC: the SAC and exhibits show that the subject agreement is between Plaintiff Plumbing Supply Distributor, LLC, and non-party Plumbing Supply Distribution, LLC and none of the Defendants are a party to that agreement and, therefore, there is no privity of contract. Defendants further contend that Plaintiffs’ allegations that Defendants are the alter egos of each other are conclusory and insufficient to justify alter ego liability.
Plaintiffs argue that Defendants’ Demurrer ignores the allegations that Fisher entered into the subject agreement on behalf of Plumbing Supply Distribution, LLC and the alleged facts show Fisher is using these alter ego Defendants to avoid the obligations under the agreement. Plaintiffs contend that alter ego liability is adequately pleaded to support all four causes of action. Plaintiffs further argue that a claim for breach of the implied covenant of good faith and fair dealing can be brought against a non-party of the contract.
“[T]he elements of a cause of action for breach of contract are (1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.)
The allegations which assert a breach of the implied covenant of good faith and fair dealing “must show that the conduct of the defendant, whether or not it also constitutes a breach of a consensual contract term, demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement.” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395.)
“A complaint must set forth the facts with sufficient precision to put the defendant on notice about what the plaintiff is complaining and what remedies are being sought. [Citation.] To recover on an alter ego theory, a plaintiff need not use the words ‘alter ego,’ but must allege sufficient facts to show a unity of interest and ownership, and an unjust result if the corporation is treated as the sole actor. [Citation.] An allegation that a person owns all of the corporate stock and makes all of the management decisions is insufficient to cause the court to disregard the corporate entity. [Citation.]” (Leek v. Cooper (2011) 194 Cal.App.4th 399, 415.) “ ‘The alter ego doctrine arises when a plaintiff comes into court claiming that an opposing party is using the corporate form unjustly and in derogation of the plaintiff's interests. [Citation.] In certain circumstances the court will disregard the corporate entity and will hold the individual shareholders liable for the actions of the corporation: “As the separate personality of the corporation is a statutory privilege, it must be used for legitimate business purposes and must not be perverted. When it is abused it will be disregarded and the corporation looked at as a collection or association of individuals, so that ... the [individuals will be] liable for acts done in the name of the corporation.” [Citation.]’ ” (Ming-Hsiang Kao v. Holiday (2020) 58 Cal.App.5th 199, 205.) Factors a court may consider when deciding the issue of a claim of alter ego theory include “the use of the corporate entity to procure labor, services or merchandise for another person or entity.” (Id., at p. 206.)
As with the FAC, the SAC is filed by Plaintiffs against Defendants SBF Development, EBF Holding, Universal Pacific, and Fisher. The SAC alleges that “Plaintiff, Plumbing Supply Distributor, LLC and Plumbing Supply Distribution, LLC, a newly formed entity with Ryan Fisher as the sole owner, president and managing member,” entered into a 2017 Purchase and Sale of Assets Agreement on November 18, 2017 (the “Agreement”), wherein Plaintiff agreed to sell and Fisher, representing Plumbing Supply Distribution, LLC, agreed to purchase substantially all of the assets related to and/or necessary for the operation of Plaintiff’s business for a purchase price of $4,525,000, but that one month prior to when the first interest payment was due to Plaintiffs, Fisher told Plaintiff that Plumbing Supply Distribution, had defaulted and that it was forced to liquidate the business, and that Fisher has breached the Agreement by failing to make the full purchase price to Plaintiffs, and instead defrauded Plaintiffs to avoid Plumbing Supply Distribution’s obligations. (SAC, ¶¶ 1-3, 20-22, 37-39.) The SAC alleges, on information and belief, that after Fisher liquidated Plumbing Supply Distributor, LLC, he created SBF Development, “which is also in the business of selling plumbing and hardware supplies.” (SAC, ¶¶ 5, 26-27.) The SAC contends that Fisher serves as the chief executive officer of SBF Development, and that EBF Holding, LLC is the managing member. (SAC, ¶¶ 10-11.) The SAC also contends that Fisher is listed as the managing member of Universal Pacific. (SAC, ¶ 12.)
The SAC includes the following new allegations:
“Based on information and belief, Defendant Ryan Fisher moved the existing inventory that he purchased from Plaintiff for sale and use in his new entity, SBF Development, LLC, for marketing and sales. Plaintiff had an expectation that Defendant Ryan Fisher would at least return the inventory to Plaintiff in either full or partial satisfaction of the defaulted loan.” (SAC, ¶ 5.) “Plaintiffs assert claims against Defendants Ryan Fisher, SBF Development, LLC, EBF Holding, LLC, and Universal Pacific, LLC as alter egos of Plumbing Supply Distribution for breach of contract, breach of implied covenant of good faith and fair dealing unjust enrichment, and declaratory relief due to Defendants’ unity of interest, and each of them, in selling and marketing the plumbing supply inventory purchased from Plaintiffs and continue to do so. Allowing Defendants to continue to market and sell through their plumbing supply entities the inventory that they have failed to fully purchase would result in inequities to Plaintiffs and unjustly enrich all Defendants.” (SAC, ¶ 7.)
“Defendant Ryan Fisher used the new entities SBF Development, EBF Holding, and Universal Pacific as alter egos for the purpose of defrauding Plaintiffs. Defendant Ryan Fisher has been conducting, managing, and controlling the affairs of the Defendant entities since incorporation, using these entities for individual personal benefit as to avoid legal obligations under the Agreement with Plaintiffs from the dissolved corporation, Plumbing Supply Distribution.” (SAC, ¶ 40.) “At all times relevant to this Complaint, Defendants, and each of them, were acting as the agents, employees, and/or representatives of each other, and were acting within the course and scope of their agency and employment with the full knowledge, consent, permission, authorization, and ratification, either express or implied, of each of the other Defendants in performing the acts alleged in this Complaint.” (SAC, ¶¶ 41, 49.) Further, the SAC alleges that “[e]ach Defendant entity acted in alignment with the other Defendants with full knowledge of their respective wrongful conduct. As such, all of the Defendants conspired together, building upon each other’s wrongdoing, in order to accomplish the acts outlined in this Complaint.” (SAC, ¶ 27.)
The allegations in the SAC still indicate that the subject agreement was entered into between Plaintiffs and non-party Plumbing Supply Distribution, LLC and none of the Defendants are a party to that agreement. Thus, whether these causes of action are sufficiently pleaded depends upon whether there are sufficient factual allegations to show agency, service, employment, partnership, conspiracy, joint venture, ratification, or alter ego liability. In this regard, the SAC sufficiently alleges a basis for liability against Fisher under the alter ego theory. Plaintiffs have alleged a unity of interest and ownership between Fisher and Plumbing Supply Distribution, LLC by alleging that Fisher was the entity’s sole owner, president and managing member. The SAC also adequately alleges that there will be an unjust result if Plumbing Supply Distribution, LLC is treated as the sole actor because Fisher, as the sole owner, moved the inventory purchased from Plaintiffs into SBF Development to avoid Plumbing Supply Distribution, LLC’s contractual duties and dissolved Plumbing Supply Distribution, LLC in an attempt to avoid the contractual obligations to Plaintiffs.
The SAC fails to allege a basis for liability upon the entity Defendants. Plaintiffs’ alter ego liability allegations as to them remain conclusory. There are no facts alleged showing any of the entity Defendants are the alter ego of Plumbing Supply Distribution, LLC. Thus, the Court OVERRULES the Demurrer to the First and Second Causes of Action as against Fisher. The Court SUSTAINS the Demurrer to the First and Second Causes of Action as against SBF Development, EBF Holding, and Universal Pacific.
Third Cause of Action for Unjust Enrichment
Defendants contend that the Third Cause of Action for Unjust Enrichment is not a viable cause of action, but a general principle and this cause of action fails because Plaintiffs have failed to plead the existence of a contract or grounds for liability against Defendants, who were not parties to the agreement.
Plaintiffs contend that a cause of action for unjust enrichment has been construed as a quasi-contract claim seeking restitution. Plaintiff further contends that a claim for breach of the implied covenant of good faith and fair dealing can be brought against Defendants who were not named in the agreement because the breach involves something beyond breach of the contractual duty itself.
“The doctrine [of unjust enrichment] applies where plaintiffs, while having no enforceable contract, nonetheless have conferred a benefit on defendant which defendant has knowingly accepted under circumstances that make it inequitable for the defendant to retain the benefit without paying for its value. The defendant in an unjust enrichment claim must pay the amounts necessary to place the plaintiff in as good a position as he or she would have been had no contract been made…the measure of damages for unjust enrichment is synonymous with restitution.” (Hernandez v. Lopez (2009) 180 Cal.App.4th 932, 938-939.)
Common law principles of restitution require a party to return a benefit when the retention of such benefit would unjustly enrich the recipient; a typical cause of action involving such remedy is ‘quasi-contract.’’ (Munoz v. MacMillan (2011) 195 Cal.App.4th 648, 661.)
“[A]n action based on an implied-in-fact or quasi-contract cannot lie where there exists between the parties a valid express contract covering the same subject matter.’ [Citation] However, restitution may be awarded in lieu of breach of contract damages when the parties had an express contract, but it was procured by fraud or is unenforceable or ineffective for some reason. [Citation.] Thus, a party to an express contract can assert a claim for restitution based on unjust enrichment by alleg[ing in that cause of action] that the express contract is void or was rescinded. [Citation.] A claim for restitution is permitted even if the party inconsistently pleads a breach of contract claim that alleges the existence of an enforceable agreement. [Citation.]” (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231, internal quotations omitted.)
Here, the SAC alleges that Fisher promised, through an entity he owned and controlled, to purchase substantially all of the assets related to and/or necessary for the operation of Plaintiffs’ business; that Plaintiffs delivered the business and provided the services as promised; that Fisher “failed to perform the obligations pursuant to the Agreement, whereby he has been unjustly enriched and it will be otherwise inequitable if he is permitted to retain the benefit of the business without paying Plaintiffs for the value;” that “[u]pon information and belief, Defendant made false representations to Plaintiff regarding his intent to perform under the Agreement;” that Plaintiffs reasonably believed the false representations were true; and that Fisher had no intentions of paying the full amount of the purchase price and instead dissolved the contracting entity and created a new entity that continued the business of the defaulting entity with the same supplies, inventory, and employees. (FAC, ¶¶ 51-55.)
As the SAC sufficiently pleads the existence of Fisher’s contractual liability to Plaintiffs, under an alter ego theory of liability, the cause of action for Unjust Enrichment against Fisher is also adequately pleaded. The SAC fails to allege that Plaintiffs have conferred a benefit on any of the entity Defendants which the entity Defendants have knowingly accepted under circumstances that make it inequitable for them to retain the benefit without paying for its value. Because the SAC also does not sufficiently allege the existence of contractual liability as to the entity Defendants, the cause of action for Unjust Enrichment against those entity Defendants is insufficiently pleaded. Thus, the Court OVERRULES the Demurrer to the Third Cause of Action as against Fisher. The Court SUSTAINS the Demurrer to the Third Cause of Action as against SBF Development, EBF Holding, and Universal Pacific.
Fourth Cause of Action for Declaratory Relief
Defendants contend that a claim for declaratory relief requires the existence of an actual controversy relating to the legal rights and duties of the respective parties, and that since all of the claims are premised on the Agreement to which Defendants are not a party, Plaintiffs have no such rights.
Plaintiffs contend that this claim is properly brought as they are aggrieved parties and have sufficiently alleged alter ego liability against Defendants.
“Declaratory relief operates prospectively to declare future rights, rather than to redress past wrongs. . . . Where, . . . , a party has a fully matured cause of action for money, the party must seek the remedy of damages, and not pursue a declaratory relief claim.” (Canova v. Trustees of Imperial Irr. Dist. Employee Pension Plan (2007) 150 Cal.App.4th 1487, 1497.) “To qualify for declaratory relief under section 1060, plaintiffs were required to show their action (as refined on appeal) presented two essential elements: ‘(1) a proper subject of declaratory relief, and (2) an actual controversy involving justiciable questions relating to the rights or obligations of a party.’. . . ‘The ‘actual controversy’ language in . . . section 1060 encompasses a probable future controversy relating to the legal rights and duties of the parties.’ . . . It does not embrace controversies that are ‘conjectural, anticipated to occur in the future, or an attempt to obtain an advisory opinion from the court.’ ” (Lee v. Silveira (2016) 6 Cal.App.5th 527, 546.)
Here, the Fourth Cause of Action alleges that there is an actual controversy between the parties regarding their rights, duties, and liabilities for which a judicial determination and declaration of rights and duties are sought as Plaintiffs contend that Defendants, as alter egos of Plumbing Supply Distribution, have breached the Agreement, and Defendants contend the contrary. (FAC, ¶¶ 57-58.)
As shown above, the SAC adequately alleges liability against Fisher under an alter ego theory of liability. This cause of action is therefore adequately pleaded as against Fisher. However, as to the entity Defendants, because this cause of action is premised upon the subject agreement and Plaintiffs fail to adequately allege a basis for liability against them, the Fourth Cause of Action is inadequately pleaded. Thus, the Court OVERRULES the Demurrer to the Fourth Cause of Action as against Fisher. The Court SUSTAINS the Demurrer to the Fourth Cause of Action as against SBF Development, EBF Holding, and Universal Pacific.
Plaintiffs request leave to amend should any portion of the Demurrer be sustained. However, Plaintiffs have failed to demonstrate any reasonable possibility that the defects of the SAC can be cured by amendment. It is Plaintiffs’ burden to state how a valid cause of action can be pled. (See Hendy v. Losse (1991) 54 Cal.3d 723, 742.) Thus, the Court finds that there is no reasonable possibility that the lack of standing can be cured by amendment. Therefore, leave to amend is DENIED. (Jones v. Aetna Casualty & Surety Co. (1994) 26 Cal.App.4th 1717, 1725.)
Fisher to file an answer to the SAC within 10 days.
Fisher to give notice.