Judge: Salvatore Sirna, Case: 20PSCV00361, Date: 2023-01-09 Tentative Ruling

The Court may change tentative rulings at any time. Therefore, counsel are advised to check this website periodically to determine whether any changes or updates have been made to the tentative ruling. Counsel may submit on the tentative rulings by calling the clerk in Department G at (909) 802-1104 prior to 8:30 a.m. the morning of the hearing.

Case Number: 20PSCV00361    Hearing Date: January 9, 2023    Dept: G

Defendants’ National Progressive Inc. and Tony Hsu’s Motion to Strike Punitive Damages in Second Amended Complaint

Respondent: NO OPPOSITION (Due 12/23/22)

TENTATIVE RULING

Defendants’ National Progressive Inc. and Tony Hsu’s Motion to Strike Punitive Damages in Second Amended Complaint is DENIED.

BACKGROUND

This is a collections action arising from a business loan. On February 14, 2017, Plaintiff Cathay Bank entered into a written agreement with Defendants National Progressive Inc. and Tony Hsu in which Plaintiff agreed to loan a principal sum of $150,000 to Defendants. Plaintiff alleges Defendants then breached the agreement by failing to inform Plaintiff of significant changes to Defendants’ financial condition.

On June 2, 2020, Plaintiff filed a complaint against Defendants and Does 1-100, alleging the following causes of action: (1) breach of promissory note, (2) breach of guaranty, (3) foreclosure of security agreement, and (4) money lent.

On June 29, 2022, Plaintiff filed a First Amended Complaint (FAC) against same defendants, alleging additional causes of action for (5) indebtedness, (6) breach of fiduciary duty, and (7) conversion. On July 11, Defendants filed a motion to strike punitive damages from the FAC. However, on July 20, Defendants withdrew their motion and parties stipulated to an order allowing Plaintiff to amend complaint.

On July 22, Plaintiff filed a Second Amended Complaint (SAC) against same defendants alleging the same causes of action.

On August 1, 2022, Defendant filed the present motion. Prior to filing on July 28, Defendant’s counsel met and conferred telephonically with Plaintiff’s counsel and was unable to reach a resolution. (Flyer Decl., ¶ 3.)  

A hearing on the motion to strike is set for January 9, 2023, along with a case management conference and trial setting conference.   

LEGAL STANDARD

Upon a party’s motion or the court’s own motion, the court may strike any irrelevant, false, or improper matter inserted in any pleading. (Code Civ. Proc., § 436, subd. (a).) The court may also “[s]trike out 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.” (Code Civ. Proc., § 436, subd. (b).) “The grounds for a motion to strike shall appear on the face of the challenged pleading or from any matter of which the court is required to take judicial notice.” (Code Civ. Proc., § 437, subd. (a).)

An immaterial or irrelevant allegation includes “(1) An allegation that is not essential to the statement of a claim or defense,” “(2) An allegation that is neither pertinent to nor supported by an otherwise sufficient claim or defense,” or “(3) A demand for judgment requesting relief not supported by the allegations of the complaint or cross-complaint.” (Code Civ. Proc., § 431.10.)

ANALYSIS

Defendants seek to strike punitive damages in Plaintiff’s SAC on the grounds that (1) punitive damages are not available in breach of contract claims, (2) the SAC fails to allege sufficient facts to justify punitive damages, and (3) punitive damages are not available for impairment of collateral. For the following reasons, the court DENIES Defendants’ motion to strike.

As an initial matter, the court finds Defendants’ first argument without merit as Plaintiff does not request punitive damages for breach of contract claims and only requests punitive damages for the seventh cause of action for conversion. (SAC, ¶ 80, Prayer, ¶ 22.) While punitive damages may be recovered in actions for conversion, Plaintiff must plead sufficient facts to support punitive damages. (Krusi v. Bear, Stearns & Co. (1983) 144 Cal.App.3d 664, 678, citing Civ. Code., § 3294.)

Civil Code section 3294 allows punitive damages when a plaintiff establishes by clear and convincing evidence that a defendant is guilty of oppression, fraud, or malice. (Civ. Code, § 3294, subd. (a).) For the purposes of determining punitive damages, malice is defined as “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” (Civ. Code, § 3294, subd. (c)(1).) Oppression is defined as “despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.” (Civ. Code, § 3294, subd. (c)(2).) Lastly, fraud is defined as “an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” (Civ. Code, § 3294, subd. (c)(3).) “In addition to the requirement that the operative complaint set forth the elements as stated in section 3294, it must include specific factual allegations showing that defendant's conduct was oppressive, fraudulent, or malicious to support a claim for punitive damages.” (Today’s IV, Inc. v. Los Angeles County Metropolitan Transportation Authority (2022) 83 Cal.App.5th 1137, 1193.) Furthermore, “[p]unitive damages may not be pleaded generally.” (Ibid.)

In this case, Defendants argue Plaintiff has only made conclusory allegations of malice, oppression, or fraud that are insufficient to support a request for punitive damages. However, Defendants do acknowledge that Plaintiff alleged “Defendants surreptitiously encumbered and sold the Collateral at a discounted rate, without regard to Plaintiff’s rights in the Collateral” (SAC, ¶ 72), “Defendants did so while intentionally concealing these transactions with the intent of depriving Plaintiff of its property rights in the Collateral” (SAC, ¶ 73), and “Defendants’ encumbrance and sale of the Collateral, and their intentional concealment of said encumbrance and sale, was for their own benefit and in derogation of their fiduciary duty.” (SAC, ¶ 75.)  

Here, the court finds Plaintiff has sufficiently pled facts to show Defendants intentionally encumbered or sold collateral with the intent to deprive Plaintiff of Plaintiff’s interest in the collateral. Defendants argue these allegations are insufficient because (1) Defendants did not owe Plaintiff a fiduciary duty and (2) impairment of collateral is insufficient to support punitive damages. With regards to Defendants’ first argument, Defendants are correct that a loan does not generally establish a fiduciary relationship between a bank and borrower. (Das v. Bank of America, N.A. (2010) 186 Cal.App.4th 727, 740.) In support of the second argument, Defendants cite to Voris v. Lampert (2019) 7 Cal.5th 1141, 1151 (Lampert), Welco Electronics, Inc. v. Mora (2014) 223 Cal.App.4th 202, 208 (Welco), and Baldwin v. Marina City Properties, Inc. (1978) 79 Cal.App.3d 393, 412-413 (Baldwin).

In Lampert, the California Supreme Court rejected a claim of conversion for unpaid wages. (Lampert, supra, 7 Cal.5th at p. 1163.) Defendants quoted language from Lampert, stating “it remains the case that ‘money cannot be the subject of an action for conversion unless a specific sum capable of identification is involved.’” (Id., at p. 1151, quoting Haigler v. Donnelly (1941) 18 Cal.2d 674, 681.) However, the present case does not involve the conversion of Plaintiff’s loan but rather the conversion of Plaintiff’s security interests in Defendants’ collateral. (See ibid [holding the converted object “must be a thing to which the plaintiff has a right of ownership or possession—a right with which the defendant has interfered by virtue of its own disposition of the property”].)

In Welco, the court held an employee’s unauthorized charges on a company credit card constituted conversion because plaintiff provided a specific and identifiable sum of money that had been taken. (Welco, supra, 223 Cal.App.4th at p. 217-218.) Here, Defendants claim collateral is still available for Plaintiff to collect on. Despite Defendants’ suggestion to the contrary, the court is limited to the facts pled in the operative complaint which demonstrate Defendant “encumbered and sold the Collateral at a discounted rate.” (SAC, ¶ 72; Code Civ. Proc., § 437, subd. (a) [“The grounds for a motion to strike shall appear on the face of the challenged pleading . . . .”].)

Lastly, in Baldwin, the court noted that damages for a party whose security interests were converted are limited “are limited to the alleged impairment of the value of the collateral or security interest, but in no event for a sum greater than the unpaid balance due on the secured indebtedness plus the collection cost.” (Baldwin, supra, 79 Cal.App.3d at p. 412.) The court also noted that the party had to allege and prove malice if requesting punitive damages. (Id., at p. 413.) While Defendants again claim Plaintiff seeks damages in excess of contractual entitlement, that is an issue for trial and not a motion to strike. On their face, Plaintiff’s pleadings establish Defendants’ intentionally concealed their encumbrance and sale of collateral to deprive Plaintiff of Plaintiff’s security interest, sufficiently supporting Plaintiff’s claim for punitive damages.

Accordingly, the court DENIES Defendants’ motion to strike.

CONCLUSION

Based on the foregoing, Defendants’ motion to strike punitive damages from Plaintiff’s SAC is DENIED.

Defendants to file an answer to the SAC in twenty (20) days.