Judge: Salvatore Sirna, Case: 22PSCV00514, Date: 2023-08-22 Tentative Ruling

Case Number: 22PSCV00514    Hearing Date: August 24, 2023    Dept: G

Defendants Dingliang, Inc. and Zhuo Chen’s Demurrer to Plaintiff’s First Amended Complaint

Respondent: Plaintiff Simon Sun

Defendants Dingliang, Inc. and Zhuo Chen’s Motion to Strike Portions of Plaintiff’s First Amended Complaint

Respondent: Plaintiff Simon Sun

TENTATIVE RULING

Defendants Dingliang, Inc. and Zhuo Chen’s Demurrer to Plaintiff’s First Amended Complaint is SUSTAINED with ten (10) days leave to amend as to the first cause of action against Chen and as to the second, fourth, and sixth causes of action against both Defendants. Defendants’ demurrer is OVERRULED as to the first cause of action against Dingliang and as to the third and fifth causes of action against both Defendants.

Defendants Dingliang, Inc. and Zhuo Chen’s Motion to Strike Portions of Plaintiff’s First Amended Complaint is deemed MOOT.

BACKGROUND

This is a breach of contract action arising from an employment agreement. On February 14, 2018, Plaintiff Simon Sun entered into a written agreement with Defendants Dingliang, Inc. (Dingliang), Zhuo Chen, Zhiwei Wu[1], and Tungsheng Wu in which Sun agreed to work as executive director for Dingliang in exchange for compensation. Sun alleges Defendants breached the agreement by failing to provide the agreed-upon compensation.

On May 31, 2022, Sun filed a complaint against Dingliang, Chen, and Does 1-10, alleging breach of contract.

On April 18, 2023, Sun filed a First Amended Complaint (FAC) against Dingliang, Chen, Zhiwei, Tungsheng, and Does 1-50 alleging (1) breach of written contract, (2) breach of implied covenant of good faith and fair dealing, (3) fraud, (4) promissory estoppel, (5) conversion, and (6) negligent misrepresentation.

On June 16, 2023, Dingliang and Chen (collectively, Defendants) filed the present demurrer and motion to strike. On June 8, Defendants’ counsel met and conferred with Sun’s counsel. (Carter Decl., ¶ 2.) On July 13, the court continued a hearing on the present motions in order for parties to further meet and confer. On August 3, parties met and conferred telephonically but were unable to come to a resolution. (Carter Suppl. Decl., ¶ 9.)

REQUEST FOR JUDICIAL NOTICE

Sun’s request for judicial notice of a certificate of dissolution for Dingliang filed with the California Secretary of State is GRANTED. (Evid. Code, § 452, subd. (c); Friends of Shingle Springs Interchange, Inc. v. County of El Dorado (2011) 200 Cal.App.4th 1470, 1483-1484 [judicial notice of certificates of status and statements of information proper when reviewing demurrer as “documents reflecting official acts of the executive department of the State of California”].)

ANALYSIS

Defendants demur to Sun’s entire FAC. For the following reasons, the court SUSTAINS Defendants’ demurrer to Sun’s first cause of action against Chen and the second, fourth, and sixth causes of action against both Defendants with leave to amend. The court also OVERRULES Defendants’ demurrer as to Sun’s first cause of action against Dingliang and the third and fifth causes of action against both Defendants.

Legal Standard

A party may demur to a complaint on the grounds that it “does not state facts sufficient to constitute a cause of action.” (Code Civ. Proc., § 430.10, subd. (e).) A demurrer tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747 (Hahn).) When considering demurrers, courts accept all well pleaded facts as true. (Fox v. JAMDAT Mobile, Inc. (2010) 185 Cal.App.4th 1068, 1078.) 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 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.” (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) “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, supra, at p. 747.)

Alter Ego Allegations

Defendants argue Sun’s FAC fails to state a cause of action against Chen because the alter ego allegations are insufficiently pled. The court agrees.

“Two requirements must be met to invoke the alter ego doctrine: (1) ‘[T]here must be such a unity of interest and ownership between¿the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist’; and (2) ‘there must be an¿inequitable result¿if the acts in question are treated as those of the corporation alone.’” (Turman v. Superior Court of Orange County (2017) 17 Cal.App.5th 969, 980-981, quoting Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) When making alter ego allegations, pleading with particularity is not required as a plaintiff need only allege “ultimate rather than evidentiary facts.” (Rutherford Holdings, LLC v. Plaza del Rey (2014) 223 Cal.App.4th 221, 236, quoting Burks v. Poppy Construction Co. (1962) 57 Cal.2d 463, 474.)

In this case, Sun makes the conclusory allegation that Defendants are the alter egos of each other. (FAC, ¶ 8.) But Sun does not allege there is a unity of interest between Defendants. (FAC, ¶ 8-12.) Nor does Sun allege the existence of an inequitable result. And while Sun argues in opposition that the elements of Sun’s alter ego allegations have been properly alleged, Sun fails to identify where these specific allegations were made in the FAC. Accordingly, Sun failed to adequately plead that Chen is Dingliang’s alter ego.

Breach of Contract (First Cause of Action)

Defendants contend Sun’s first cause of action for breach of contract fails as a matter of law because it is a usurious loan. The court disagrees.

California’s usury law limits the interest rate for commercial loans or forbearance to ten percent annually or five percent plus the rate of interest established by the Federal Reserve Bank of San Francisco. (Korchemny v. Piterman (2021) 68 Cal.App.5th 1032, 1042, citing Cal. Const., art. XV, § 1.) “When a loan is usurious, the creditor is entitled to repayment of the principal sum only. He is entitled to no interest whatsoever.” (Winnett v. Roberts (1986) 179 Cal.App.3d 909, 921.)

In this case, Sun agreed to pay a $100,000 security deposit as part of the February 14, 2018 agreement between Sun and Dingliang, (FAC, ¶ 14(d).) Dingliang agreed to repay the deposit to Sun in fifteen months with 20% interest in an amount of no less than $120,000. (FAC, ¶ 14(g), (h).) Defendants contend this is a usurious amount and that, as a result, this provision is void. But as Defendants’ own cited authority states, “[t]he inclusion of a usurious interest provision, therefore, results, in effect, in a note payable at maturity without interest.” (Epstein v. Frank (1981) 125 Cal.App.3d 111, 122.)

Thus, even if Defendants are correct in contending that interest on the security deposit is usurious, Dingliang would still be liable for the return of the $100,000 security deposit which Sun alleges they also failed to pay. (FAC, ¶ 18.) Defendants do not provide any authority that would allow Dingliang to refuse repayment of the entire security deposit. Accordingly, because Sun still states a valid cause of action for breach of contract against Dingliang, Dingliang’s demurrer to this cause of action is OVERRULED.

With regards to Chen, Sun fails to establish Chen was a party to the February 14, 2018 agreement. Although Sun alleges “Plaintiff and Defendants entered into the Agreement,” the attached copy of the agreement only lists Dingliang and Sun as parties with Chen merely signing on Dingliang’s behalf. (FAC, ¶ 22, Ex. A; see Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505 [“[T]o the extent the factual allegations conflict with the content of the exhibits to the complaint, we rely on and accept as true the contents of the exhibits and treat as surplusage the pleader’s allegations as to the legal effect of the exhibits.”].) Accordingly, because Sun failed to allege Chen was Dingliang’s alter ego and has not established Chen was a party to the agreement, Chen’s demurrer to this cause of action is SUSTAINED with leave to amend.

Breach of Implied Covenant of Good Faith and Fair Dealing (Second Cause of Action)

Defendants maintain Sun’s second cause of action for breach of implied covenant of good faith and fair dealing fails to plead sufficient facts to state a claim. The court agrees.

“[T]he factual elements necessary to establish a breach of the covenant of good faith and fair dealing are: (1) the parties entered into a contract; (2) the plaintiff fulfilled his obligations under the contract; (3) any conditions precedent to the defendant's performance occurred; (4) the defendant unfairly interfered with the plaintiff's rights to receive the benefits of the contract; and (5) the plaintiff was harmed by the defendant's conduct.” (Rosenfeld v. JPMorgan Chase Bank, N.A. (N.D. Cal. 2010) 732 F.Supp.2d 952, 968, citing BAJI No. 325.)

In this case, Defendants maintain Sun fails to allege how Defendants prevented Sun from receiving the benefits of the February 14, 2018 agreement. In response, Sun points to an allegation in the FAC where Sun alleges Sun paid $7,675 in expenses for Dingliang and was never reimbursed by Defendants. (FAC, ¶ 19.) But according to the terms of the agreement alleged by Sun, Sun did not have the obligation or responsibility to make any payments to Dingliang other than the $100,000 security deposit discussed above. (FAC, ¶ 14.) Additionally, if there was a separate or additional agreement for Sun to cover these costs and receive reimbursement, Sun failed to allege so.

Because this payment does not appear to be part of the February 14, 2018 agreement, Sun cannot establish how Defendants’ failure to reimburse Sun for these expenses somehow interfered with Sun’s rights to receive benefits pursuant to the February 14, 2018 agreement. Accordingly, Defendants’ demurrer to Sun’s second cause of action is SUSTAINED with leave to amend.

Fraud (Third Cause of Action)

Defendants argue Sun’s third cause of action for fraud fails to plead sufficient facts to state a claim and is barred as a matter of law by the economic loss rule. The court disagrees.

“The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638, quoting 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 676, p. 778.) The facts constituting the alleged fraud must be alleged factually and specifically as to every element of fraud, as the policy of “liberal construction” of the pleadings will not ordinarily be invoked. (Id., at p. 645.)

Pursuant to the economic loss rule, “there is no recovery in tort for negligently inflicted ‘purely economic losses,’ meaning financial harm unaccompanied by physical or property damage.” (Sheen v. Wells Fargo Bank. N.A. (2022) 12 Cal.5th 905, 922.) It “functions to bar claims in negligence for pure economic losses in deference to a contract between litigating parties.” (Id., at p. 922.) “Tort damages have been permitted in contract cases where . . . the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.” (Erlich v. Menezes (1999) 21 Cal.4th 543, 551-552.)

In this case, Defendants argue Sun’s fraud cause of action is barred by the economic loss rule as it “duplicates” Sun’s breach of contract action. (Demurrer, p. 10:15-19.) But Defendants’ argument ignores the fact that the economic loss rule does not apply when an intentional tort is being alleged such as fraud which requires an intent to defraud. This argument is meritless and the court now considers whether Sun has adequately pled a cause of action for fraud.

Here, Sun alleges Dingliang’s promises in the February 14, 2018 agreement were false. (FAC, ¶ 32.) Promises of future conduct do not generally qualify as actionable misrepresentations. (San Francisco Design Center Associates v. Portman Companies (1995) 41 Cal.App.4th 29, 44 [“an actionable misrepresentation must be made about past or existing facts; statements regarding future events are merely deemed opinions.”].) But “[a] promise of future conduct is actionable as fraud only if made without a present intent to perform.” (Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 481.) In the FAC, Sun alleges Dingliang knew the promises were false as Dingliang never intended to make any payments to Sun or return Sun’s deposit. (FAC, ¶ 34.) Accordingly, because Sun has adequately pled a cause of action for fraud against Dingliang, Dingliang’s demurrer is OVERRULED.

With regards to Chen, Defendants argue there are no specific allegations against Chen and that Dingliang has not been established as Chen’s alter ego. But “[a]ll persons who are shown to have participated in an intentional tort are liable for the full amount of the damages suffered.” (PMC, Inc. v. Kadisha (2000) 78 Cal.App.4th 1368, 1381.) “This rule applies to intentional torts committed by shareholders and those acting in their official capacities as officers or directors of a corporation, even though the corporation is also liable.” (Id., at p. 1382 [collecting cases]; see also Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34, 53, fn. 20 [noting separate concepts of alter ego liability and liability for jointly committed torts].)

Even though Chen signed the allegedly fraudulent agreement as Dingliang’s representative, Chen can still be held liable in an individual capacity as Sun alleges all Defendants, including Chen, knew the promises were false and never intended to fulfill them. (FAC, ¶ 34.) Accordingly, Chen’s demurrer to Sun’s third cause of action is also OVERRULED.

Promissory Estoppel (Fourth Cause of Action)

Defendants contend Sun’s fourth cause of action for promissory estoppel fails for the same reasons as stated in the demurrer to Sun’s first cause of action for breach of contract. Accordingly, for the same reasons noted above with respect to Sun’s first cause of action, Dingliang’s demurrer is OVERRULED and Chen’s demurrer is SUSTAINED with leave to amend.

Conversion (Fifth Cause of Action)

Defendants maintain Sun’s fifth cause of action for conversion fails as a matter of law. The court disagrees.

“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.” (Burlesci v. Petersen (1998) 68 Cal.App.4th 1062, 1066.) “[C]ases recognizing claims for the conversion of money ‘typically involve those who have misappropriated, commingled, or misapplied specific funds held for the benefit of others.’” (Voris v. Lampert (2019) 7 Cal.5th 1141, 1152, quoting PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 396.)

In this case, Defendants maintain Sun cannot state a cause of action for conversion because this is a breach of contract action and Defendants did not hold the money “in trust” for Sun. But as noted above, a cause of action for conversion of money can be stated if “a specific sum capable of identification is involved.” (Software Design & Application, Ltd. v. Hoefer & Arnett, Inc. (1996) 49 Cal.App.4th 472, 485.) Here, Sun identified the specific sum converted as the $100,000 security deposit that Sun entrusted to Defendants and that Defendants allegedly refused to repay pursuant to their agreement. (FAC, ¶ 15, 46-52.) Thus, Sun adequately alleged Defendants converted Sun’s security deposit.  Therefore, Defendants’ demurrer on this ground is OVERRULED.

Negligent Misrepresentation (Sixth Cause of Action)

Defendants argue Sun’s sixth cause of action for negligent misrepresentation fails for the same reasons as stated in the demurrer to Sun’s third cause of action for fraud. The main difference between a cause of action for negligent misrepresentation and a cause of action for fraud is that with negligent misrepresentation, “[o]nly the second element is different, requiring the absence of reasonable grounds for believing the misrepresentation to be true instead of knowledge of its falsity.” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1166.)

As noted previously with regards to the fraud cause of action, Sun fails to allege the misrepresentation of past of present facts. Instead, Sun alleges Defendants made false promises about future payments and benefits. Because false promises require an intent to not perform, this “specific intent requirement also precludes pleading a false promise claim as a negligent misrepresentation.” (Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 159.)

Accordingly, Defendants’ demurrer to Sun’s sixth cause of action is SUSTAINED with leave to amend.

CONCLUSION

Based on the foregoing, Defendants’ demurrer to Sun’s FAC is SUSTAINED with ten (10) days leave to amend as to the first cause of action against Chen and as to the second, fourth, and sixth causes of action against both Defendants. Defendants’ demurrer is also OVERRULED as to the first cause of action against Dingliang and as to the third and fifth causes of action against both Defendants.

Based on the court’s ruling above, Defendants’ motion to strike portions of Sun’s FAC is deemed MOOT.