Judge: Robert S. Draper, Case: 20STCV38456, Date: 2022-09-07 Tentative Ruling

Case Number: 20STCV38456    Hearing Date: September 7, 2022    Dept: 78

Superior Court of California 

County of Los Angeles 

Department 78 

Defendants’ Demurrer to the First through Sixth Causes of Action is OVERRULED.

Defendants’ Demurrer to the Seventh Cause of Action is SUSTAINED without leave to amend.

Defendants’ Motion to Strike is DENIED.

.

FACTUAL BACKGROUND 

Plaintiff Lida Fischer (“Lida”) and Robijn Fischer (“Robijn” are members of Plaintiff Lyda Beauty, LLC (“Lyda Beauty” and collectively, “Plaintiffs”). (TAC ¶¶ 2-3.) Defendant Mark Kane (“Kane”) holds himself out as the owner of Defendant MMG Brands (“MMG”) and is the C.E.O, Secretary and C.F.O. of Defendant M.S.A. Trading, Inc. (“MSA”). (TAC ¶¶ 5-6.)

Robijn was a sub-contractor for MSA. (TAC ¶ 13.) While employed there, Robijn told Kane about a specialty eyeliner (the “Eyeliner”) that he was working on with his wife, Lida. (TAC ¶ 15.) Kane told the Fischers that he was excited about the Eyeliner and encouraged them to let him handle the manufacturing process in China. (TAC ¶ 18.) The Fischers were reluctant, as they wanted to create a high-end product, and felt that Defendants manufactured lower-end products. (TAC ¶ 20.) However, Kane assured Plaintiffs that their products would be sent through quality control, and that Kane had non-disclosure agreements with every factory he worked with in China, so their design would be safe. (TAC ¶¶ 25-26.) The products were not sent through quality control, and Kane did not have an NDA with the factory used to produce the Eyeliner in China. (TAC ¶¶ 35-36.) The factory patented Plaintiffs’ design in China, which resulted in Plaintiffs’ being unable to obtain an American patent. (TAC ¶ 36.)

In August 2017, Plaintiffs wanted to order 10,000 units of Eyeliner. (TAC ¶ 41.) Kane informed Plaintiffs that the Chinese factory’s minimum production run was 25,000 units. (Ibid.) Kane told Plaintiffs that he would store the units in his warehouse, and that Plaintiffs could purchase them as needed for $5 at first, then lower once the mold was paid in full. (TAC ¶ 42.) Regardless, Kane would ask for arbitrary, higher amounts when Plaintiffs tried to purchase units. (TAC ¶ 45.)

On November 8, 2018, Plaintiffs arranged to purchase the remaining units of Eyeliner after Kane threatened to sell the rest of the product to stores in downtown Los Angeles unless Plaintiffs delivered $100,000. (TAC ¶ 49.) Plaintiffs discovered that the stock was 6,400 units short. (TAC ¶ 50.) Kane had been selling Plaintiffs’ product without their knowledge to stores downtown. (TAC ¶ 50.)

PROCEDURAL HISTORY

On October 7, 2020, Plaintiffs filed the Complaint asserting ten causes of action:

1.    Fraud;

2.    Breach of Contract;

3.    Breach of Implied Covenant of Good Faith and Fair Dealing;

4.    Breach of Fiduciary Duty;

5.    Intentional Interference with Prospective Economic Advantage;

6.    Negligent Interference with Prospective Economic Advantage;

7.    Conversion;

8.    Unfair Competition and Business Practices;

9.    Unjust Enrichment; and,

10.                   Accounting

On December 23, 2020, Plaintiffs filed the First Amended Complaint, removing the causes of action for interference with economic advantage, and adding a cause of action for Misappropriation of Funds.

On January 25, 2021, Defendants filed a Demurrer to the First Amended Complaint.

On September 14, 2021, Plaintiffs filed the Second Amended Complaint before the hearing on Defendants’ Demurrer.

On October 18, 2021, Defendants filed a Demurrer to the Second Amended Complaint.

On April 7, 2022, the Court overruled Defendants’ Demurrer to the First Cause of Action and sustained with leave to amend Defendants’ Demurrer to the Third, Fifth, Sixth, and Seventh Causes of Action.

On May 9, 2022, Plaintiffs filed the operative Third Amended Complaint asserting seven causes of action:

1.    Fraudulent Inducement;

2.    Breach of Oral Contract;

3.    Breach of Written Contract;

4.    Breach of Implied Covenant of Good Faith and Fair Dealing;

5.    Breach of Implied Covenant of Good Faith and Fair Dealing;

6.    Conversion; and,

7.    Unjust Enrichment.  

On June 8, 2022, Defendants filed the instant Demurrer to the Third Amended Complaint and Motion to Strike.

On August 24, 2022, Plaintiffs filed Oppositions.

On August 30, 2022, Defendants filed Replies.

DISCUSSION

I.               REQUEST FOR JUDICIAL NOTICE

In ruling upon demurrers, courts may consider matters that are proper for judicial notice. (ABF Capital Corp. v. Berglass (2005) 130 Cal.App.4th 825, 834.)  

The court may take judicial notice of “official acts of the legislative, executive, and judicial departments of the United States and of any state of the United States,” “[r]ecords of (1) any court of this state or (2) any court of record of the United States or of any state of the United States,” and “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.” (Evid. Code § 452, subds. (c), (d), and (h).)  

Evidence Code Section 452 provides that judicial notice may be taken for facts and propositions that are “not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.” (Cal. Evid. Code § 452(h).) Further, “a court may take judicial notice of [recorded documents and] the fact of a document's recordation, the date the document was recorded and executed, the parties to the transaction reflected in a recorded document, and the document's legally operative language, assuming there is no genuine dispute regarding the document's authenticity. From this, the court may deduce and rely upon the legal effect of the recorded document, when that effect is clear from its face.” (Scott v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 743, 745-755.)  

Taking judicial notice of a document is not the same as accepting the truth of its contents or accepting a particular interpretation of its meaning. (Fremont Indem. Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 113-14 (citations and internal quotations omitted).) In addition, judges “consider matters shown in exhibits attached to the complaint and incorporated by reference.”  (Performance Plastering v. Richmond American Homes of California, Inc. (2007) 153 Cal.App.4th 659, 665.) However, “[w]hen judicial notice is taken of a document . . . the truthfulness and proper interpretation of the document are disputable.” (Aquila, Inc. v. Sup. Ct. (2007) 148 Cal.App.4th 556, 569 (quoting StorMedia Inc. v. Sup. Ct. (1999) 20 Cal.4th 449, 457 n. 9).) 

The party requesting judicial notice must (a) give each adverse party sufficient notice of the request to enable the adverse party to prepare to meet the request and (b) provide the court with sufficient information to enable it to take judicial notice of the matter. (Cal. Evid. Code § 453.)

Defendants Request Judicial Notice of:

1.    U.S. Design Patent, Patent No. US D945,074 S, for Eye Liner, Applicants and Inventors: Lisa Djarar Fischer and Robijn Fischer, Date of Patent: Mar. 1, 2022, a true and correct copy attached as Exhibit 1, and last accesses online by Defendants’ Counsel on June 7, 2022.

2.    California Secretary of State’s Business Search - Entity Detail for M. S. A. Trading, Inc., a true and correct copy attached as Exhibit 2, and last accessed online by Defendants’ Counsel on March 14, 2022.

3.    The search results for Fictitious Business Names registered in Ventura County, where Registrant Name contains M. S. A. TRADING, INC., a true and correct copy attached as Exhibit 3, and last accessed online by Defendants’ Counsel on March 14, 2022

None of these documents meet the criteria for judicial notice and the request for judicial notice is denied.

II.             DEMURRER

Defendants Demur to all seven causes of action in the Third Amended Complaint.

A demurrer should be sustained only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Pro., §§ 430.30, et seq.) As is relevant here, a court should sustain a demurrer if a complaint does not allege facts that are legally sufficient to constitute a cause of action. (See id. § 430.10, subd. (e).) As the Supreme Court held in Blank v. Kirwan (1985) Cal.3d 311: “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. . . . Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (Id. at p. 318; see also Hahn. v. Mirda (2007) 147 Cal.App.4th 740, 747 [“A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. [Citation.]”)

“In determining whether the complaint is sufficient as against the demurrer … if on consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)

A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment. (Schifando v. City of Los Angeles, supra, 31 Cal.4th at p. 1081.) The demurrer also may be sustained without leave to amend where the nature of the defects and previous unsuccessful attempts to plead render it probable plaintiff cannot state a cause of action. (Krawitz v. Rusch (1989) 209 Cal.App.3d 957, 967.

A.  Liability as to Kane

First, Defendants demur to all causes of action as to Kane, arguing that all of Plaintiffs’ claims were based on contractual relationships between Plaintiffs and MMG/MSA. Defendants contend that though Kane signed the contracts in question, he did so as an agent of MMG/MSA, not in his individual capacity. In addition, Defendants argue that Plaintiffs fail to allege sufficient facts to support alter ego liability against Kane.

In Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 235-36, the Court of Appeal held the following was sufficient to allege alter ego liability:  

Rutherford alleged that Caswell dominated and controlled PDR; that a unity of interest and ownership existed between Caswell and PDR; that PDR was a mere shell and conduit for Caswell's affairs; that PDR was inadequately capitalized; that PDR failed to abide by the formalities of corporate existence; that Caswell used PDR assets as her own; and that recognizing the separate existence of PDR would promote injustice. These allegations mirror those held to pass muster in First Western Bank & Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910, 915–916, 73 Cal.Rptr. 657. As in First Western, “[a]ssuming these facts can be proved, [Caswell] ... may be held liable ... under the alter ego principle.” (Id. at p. 916, 73 Cal.Rptr. 657.) 

Defendants argue that Rutherford failed to allege specific facts to support an alter ego theory, but Rutherford was required to allege only “ultimate rather than evidentiary facts.” (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550, 67 Cal.Rptr.3d 330, 169 P.3d 559.) Moreover, the “less particularity [of pleading] is required where the defendant may be assumed to possess knowledge of the facts at least equal, if not superior, to that possessed by the plaintiff,” which certainly is the case here. (Burks v. Poppy Construction Co. (1962) 57 Cal.2d 463, 474, 20 Cal.Rptr. 609, 370 P.2d 313.) Therefore, we affirm the trial court's ruling that Rutherford sufficiently pled an alter ego theory of liability. 

Here, Plaintiff has made analogous allegations.  

The Third Amended Complaint alleges:

At all times relevant hereto, Defendant MSA was the alter ego of Defendant Kane, and there exists, and at all times herein mentioned has existed, a unity of interest and ownership between Defendants MSA and Kane, including but not limited to the simultaneous use of the fictitious name MMG Brands, such that any separateness between them has ceased to exist in that Defendant Kane completely controlled, dominated, managed, and operated MSA to suit his convenience. (TAC ¶ 9.)

Specifically, at times relevant hereto, Defendant Kane (1) simultaneously used the fictitious name MMG Brands individually and as a fictitious name for MSA, (2) exercised complete dominance and control over the business and affairs of MMG and MSA, (3) commingled personal and MSA funds and assets, and (4) diverted corporate funds and assets for his own personal use. (TAC ¶ 10.)

Adherence to the fiction of a separate existence of any Defendants organized as an entity would sanction fraud and permit an abuse of the legal benefits of true entity organization. Plaintiffs allege that each of the Defendants herein is liable for any judgment hereunder against any Defendants organized as an entity. (TAC ¶ 11.)

Defendants’ demurrer based on the the allegation that Kane does not have alter ego liability is OVERULED.  

B.  Economic Loss Rule

Next, Defendants argue that Plaintiffs’ Tort claims, the First, Fourth, and Fifth Causes of Action, are precluded by the economic loss rule.

The economic loss rule posits that a purchaser of a product that does not live up to the buyer’s expectations can only recover in contract and not tort, “unless [the purchaser] can demonstrate harm above and beyond a broken contractual promise.” (Food Safety Net Services v. Eco Safe Systems USA, Inc. (2012) 209 Cal.App.4th 1118, 1130 (quoting Robinson Helicopter Company, Inc. v. Dana Corporation (2004) 34 Cal.4th 979, 988).) A tort claim for fraud must be sufficiently independent from a breach of contract claim for which the plaintiff suffered economic loss. (Robinson Helicopter, supra, 34 Cal.4th at 991.) Thus, in order to plead around the economic loss rule, a party must plead the existence of a duty that arises independent of any contractual duty and independent injury, other than economic loss, that arises from the breach of that duty. (Robinson Helicopter, supra, 34 Cal.4th at 988-91.)  

As to an independent duty, fraudulent inducement of the contract is one means by which California law recognizes the existence of a duty independent of the duties imposed by the contract. (See Erlich v. Menezes (1999) 21 Cal.4th 543, 551-52.) Fraud in the inducement occurs where a party’s assent to a contract is obtained through “conscious misrepresentation, or concealment, or non-disclosure of a material fact which induces the innocent party to enter the contract.” (Odorizzi v. Bloomfield School Dist. (1966) 246 Cal.App.2d 123, 128; see also Civ. Code, § 1572.) 

As to an independent injury, “[e]conomic loss consists of ‘damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits—without any claim of personal injury or damages to other property’” (Robinson Helicopter, supra, 34Cal.4th at 988 (quoting Jimenez v. Superior Court (2002) 29 Cal.4th 473, 482).) However, where a party is fraudulently induced to a contract, allegations that as a result of the fraudulent inducement the induced party was exposed to potential liability may be sufficiently independent to avoid being barred by the economic loss rule. (See Robinson Helicopter, supra, 34 Cal.4th at 993.) 

In ruling on this matter on the Demurrer to the Second Amended Complaint, the Court found:

California courts have long recognized an exception to the Economic Loss Rule for fraudulent inducement. That is what is alleged here, with sufficient facts to survive the pleading stage.

In their reply, Defendants argue that the fraudulent inducement exception should not apply because the exception is “limited to a defendant’s affirmative misrepresentations in which a plaintiff relies and which expose a plaintiff to liability for personal damages independent of the plaintiff’s economic loss.” [Citations.]

In the SAC, Plaintiffs allege that Kane assured them that the Eyeliner would go through quality control, that they relied on this assertion in agreeing to contract with him, that there was no such quality control, and that the end product had numerous defects. (SAC ¶¶ 30-33.)

A defective cosmetic product could very conceivably and reasonably expose its seller to personal damages independent of economic loss. Therefore, the exception applies.

Defendants’ demurrer based on the allegation that Plaintiffs‘ claims are barred by the economic loss rule is OVERULED.

C.  Implied Covenant of Good Faith and Fair Dealing

Next, Defendants demur to the Fourth and Fifth Causes of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing. Defendants argue that the causes are duplicative of Plaintiffs’ Breach of Contract claims.

The elements for breach of the implied covenant of good faith and fair dealing are: (1) existence of a contract between plaintiff and defendant; (2) plaintiff performed his contractual obligations or was excused from performing them; (3) the conditions requiring defendant’s performance had occurred; (4) the defendant unfairly interfered with the plaintiff’s right to receive the benefits of the contract; and (5) the plaintiff was harmed by the defendant’s conduct. (Merced Irr. Dist. V. County of Mariposa (E.D. Cal. 2013) 941 F.Supp.2d 1237, 1280 (discussing California law).) Allegations must demonstrate defendant’s conduct for failure or refusal to discharge contractual responsibilities was a conscious and deliberate act, not an honest mistake, bad judgment or negligence. (Id.) “‘[T]he implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract and cannot be extended to create obligations not contemplated by the contract.’” (Ragland v. U.S. Bank Nat. Assn. (2012) 209 Cal.App.4th 182, 206 (quoting Pasadena Live v. City of Pasadena (2004) 114 Cal.App.4th 1089, 1094).) 

Defendants are correct that a plaintiff’s allegations of breach of the covenant of good faith that do not go beyond a statement of a mere contract breach may be disregarded as superfluous. (See Bionghi v. Metropolitan Water District (1999) 70 Cal.App.4th 1358, 1370.) 

However, the Third Amended Complaint does contain allegations that, while they do not directly breach the contracts as written, do demonstrate Plaintiffs’ efforts to frustrate Defendants’ ability to receive the benefits of the contract.

For example, the Third Amended Complaint states that Defendants “fail[ed] to obtain an NDA from the Chinese factory and [] fail[ed] to pay the Chinese factory for the mold, resulting in the Chinese factory filing a patent in China using Plaintiffs product design.” (TAC ¶ 79.)

Additionally, the Third Amended Complaint states that Defendants “intentionally misrepresent[ed] delivery dates over a period of 11 months” and “demand[ed] $50,000 cash payment under threat of refusing to obtain the release of Plaintiffs’ eyeliner products from the Port of Los Angeles.” (TAC ¶ 91.)

These alleged actions, while not directly breaches of the contracts in question, do demonstrate Defendants’ attempts to interfere with Plaintiffs’ full rights under the contract. Accordingly, the Breach of the Implied Covenant of Good Faith and Fair Dealing causes of action are not mere surplusage of the Breach of Contract claims and Defendants’demurrers to the Fourth and Fifth Causes of Action are OVERULED.

D.  Conversion

Next, Defendants argue that Plaintiffs’ Sixth cause of Action  for Conversion is time-barred.

For a statute of limitations to bar a claim on demurrer, “the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred.” (Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42, internal quotation marks omitted.)  In general, a statute of limitations begins to run “when the cause of action is complete with all of its elements,” namely, wrongdoing, causation, and resulting harm. (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 397 (Norgart).)   

Defendants argue that the gravamen of Plaintiffs’ Conversion cause of action is breach of oral contract. Accordingly, Defendants argue, the cause is subject to the two-year statute of limitations of breach of oral contract. As Plaintiffs learned of the breach in March 2018, and filed the Complaint in October 2018, this would render the claim time-barred.

In Opposition, Plaintiffs argue that they have successfully stated a cause of action for conversion, and as conversion has a three-year statute of limitations, their cause is not time-barred.

To plead a cause of action for conversion, one must allege (1) the plaintiff’s ownership or right to possession of personal property; (2) defendant’s disposition of the property inconsistent with plaintiff’s rights; and (3) resulting damages. (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.)  

“‘Conversion is any act of dominion wrongfully exerted over another’s personal property in denial of or inconsistent with his rights therein.’” (Enterprise Leasing Corp. v. Shugart Corp. (1991) 231 Cal.App.3d 737, 747 (quoting Messerall v. Fulwider (1988) 199 Cal.App.3d 1324, 1329).) “‘It is not necessary that there be a manual taking of the property; it is only necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property to his own use.’” (Id.) 

Here, Plaintiffs allege that Kane was supposed to store the Eyeliner for Plaintiffs, that he acknowledged Plaintiffs’ ownership of the Eyeliner, nonetheless he sold approximately 6,500 units of Plaintiffs’ eyeliner without their permission. (TAC ¶¶ 95-100.)

Defendants argue that Plaintiffs did not have a possessory interest in the sold Eyeliner as they agreed to pay for the products over time. (TAC ¶ 41.) Though this is true and was the reason the Court sustained Defendant’s Demurrer as to this cause in the Second Amended Complaint, Plaintiffs have inserted information alleging that Defendants “had at all times acknowledged that the Cleopatra Cat Eye Stamp eyeliner products were Plaintiffs.” (TAC ¶ 98.)

Accordingly, Plaintiffs have added facts demonstrating that they did have possessory rights to the Eyeliner. As Plaintiffs successfully state a claim for conversion, the demurrer to the Sixth is OVERRULED.

E.   Unjust Enrichment

Finally, Defendants demur to the Seventh Cause of Action arguing that unjust enrichment is not a cause of action.

In California, there is no cause of action for unjust enrichment. (See Rutherford Holdings LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231; Levine v. Blue Shield of California (2010) 189 Cal.App.4th 1117, 1138.)

Accordingly, Plaintiffs’ Seventh Cause of Action for Unjust Enrichment is SUSTAINED. W.

III.           MOTION TO STRIKE

Defendants move to strike Plaintiffs’ Prayer for Punitive Damages, Emotional Distress Damages, and allegations of alter ego liability from the Third Amended complaint.

The court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike any irrelevant, false, or improper matter inserted in any pleading. (Code Civ. Proc., § 436(a).) The court may also strike all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (Id., § 436(b).) The grounds for a motion to strike are that the pleading has irrelevant, false or improper matter, or has not been drawn or filed in conformity with laws. (Id. § 436.) The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. (Id. § 437.) 

A.  Punitive Damages

California Civil Code section 3294 authorizes the recovery of punitive damages in non-contract cases where “the defendant has been guilty of oppression, fraud, or malice . . . .” (Civ. Code § 3294(a).) Punitive damages thus require more than the mere commission of a tort. (See Taylor v. Superior Court (1979) 24 Cal.3d 890, 894-95.) Specific facts must be pleaded in support of punitive damages. (See Hillard v. A.H. Robins Co. (1983) 148 Cal.App.3d 374, 391-92.)

Here, as Plaintiffs’ claim for fraud survives, and as the Third Amended Complaint repeatedly accuses Defendants of defrauding Plaintiffs, the Motion to Strike as to Punitive Damages is DENIED.  

B.  Emotional Distress Damages

C.  Defendants claim that Emotional Distress Damages are not available when the only damages shown are economic and the gravamen of the Complaint is breach of contrac. IIt is too early in these proceedings to make this judgment and the motion to strike the emotional distress damages is DENIED.Alter Ego Liability

Finally, Defendants move to strike Plaintiffs’ allegations regarding alter ego liability from the Complaint. As the Court found that there are facts alleged supporting alter ego liability above, the Motion to Strike alter ego liability allegations from the Third Amended Complaint is DENIED.

DATED: September 7, 2022                _____________________

Hon. Robert S. Draper 

Judge of the Superior Court