Judge Salvatore Sirna, Case Number: 23PSCV03425, Date: 2024-01-09 Tentative Ruling

Judge: Salvatore Sirna, Case: 23PSCV03425, Date: 2024-01-09 Tentative Ruling

Case Number: 23PSCV03425 Hearing Date: February 7, 2024 Dept: G

Defendant Min Zhou’s Demurrer to Complaint

Respondent: Plaintiff Juan Zhao

TENTATIVE RULING

Defendant Min Zhou’s Demurrer to Complaint is SUSTAINED IN PART with twenty (20) days leave to amend as to the First and Fifth Causes of Action and OVERRULED IN PART on all other grounds.

BACKGROUND

This is a breach of contract and fraud action arising from a loan agreement. In May 2023, Plaintiff Juan Zhao entered into an agreement with Defendant Min Zhou in which Zhao agreed to loan a total of $1,500,000 to Min Zhou in exchange for repayment within one week. After two to three weeks later, Min Zhou told Zhao that Min Zhou would be unable to repay the loan and claimed the money had been lost in an online scam. On June 23, Min Zhou signed a written promissory note that acknowledged the loan, agreed to repay it within thirty days, and listed property in Diamond Bar as collateral for the loan. Subsequently, Zhao alleges Min Zhou failed to make any payments on the loan.

On July 25, 2023, Zhao filed a complaint in Orange County Superior Court against Defendants Min Zhou, Bing Zhou, and Does 1-50, alleging the following causes of action: (1) fraud, (2) promissory estoppel, (3) fraudulent transfer, (4) breach of oral contract, (5) breach of written contract, and (6) common counts.

On October 4, 2023, the parties stipulated to the transfer of this action to the present court.

On November 29, 2023, Min Zhou filed the present demurrer. On January 9, 2024, the court continued the hearing on Min Zhou’s demurrer in order for parties to further meet and confer. On January 16, Min Zhou’s counsel met and conferred remotely over Zoom with Zhao’s counsel. (Hacohen Decl., ¶ 5.)

A hearing on the present demurrer is set for February 7, 2024, along with a status conference Re: Incoming Transfer.

ANALYSIS

Min Zhou demurs to Zhao’s entire Complaint. For the following reasons, the court SUSTAINS Min Zhou’s demurrer to Zhao’s first and fifth causes of action with leave to amend and OVERRULES Min Zhou’s demurrer on all other grounds.

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.)

Fraud (First Cause of Action)

Min Zhou argues Zhao’s first cause of action for fraud is barred by the economic loss rule and fails to plead sufficient facts to state a claim. The court agrees in part.

Legal Standard

Fraud

“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.)

Economic Loss Rule

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.)

Discussion

In this case, Min Zhou argues Zhao’s fraud claim is barred by the economic loss rule because it is essentially duplicative of Zhao’s contractual claims. But Zhao’s Complaint does more than just allege Min Zhou failed to repay Zhao’s loan. Instead, it specifically alleges Min Zhou made false representations and concealments to induce Zhao to make the loan in the first place. (Complaint, ¶ 7.) Thus, the economic loss rule does not apply. (See Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 991; Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1238-1239.)

Min Zhou also argues Zhao’s fraud claim is not pled with the requisite specificity required by law. In alleging a cause of action for fraud, “[t]he specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made.” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 793.)

Here, the Complaint alleges Min Zhou reached out to Zhao on May 3, 2023, and falsely represented that Min Zhou’s company needed cash for a short-term cash crunch. (Complaint, ¶ 7.) But elsewhere, the Complaint alleges Min Zhou made these representations on May 2 and fails to specify how and through what means these alleged misrepresentations were made. (Complaint, ¶ 19.) The Complaint also alleges Min Zhou knew the promise to return repay the loan within a few weeks was false. (Complaint, ¶ 19-20.) But the Complaint fails to allege any further details as to when, how, where, and by what means this promise was made. Furthermore, it fails to satisfy the requirements of a false promise as the Complaint does not specifically allege Min Zhou had no intention of repaying the loan at the time the promise was made. (See Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 481.)

To the extent the Complaint also alleges Min Zhou fraudulently induced Zhao to make the loan through concealment of Min Zhou’s financial condition, the court notes the law is currently unsettled with regards to whether these allegations would be barred by the economic loss rule. (See Dhital v. Nissan North America, Inc. (2022) 84 Cal.App.5th 828, 843 [holding economic loss does not bar claims for fraudulent inducement by concealment], review granted Feb. 1, 2023, S277568.)

Accordingly, because Zhao failed to plead fraud with required specificity, Min Zhou’s demurrer to this cause of action is SUSTAINED with leave to amend.

Breach of Written Contract (Fifth Cause of Action)

Min Zhou contends Zhao’s fifth cause of action for breach of written contract fails to plead sufficient facts to state a claim. The court agrees.

Legal Standard

To state a cause of action for breach of contract, a plaintiff must be able to establish “(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.) If a breach of contract claim “is based on alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written agreement must be attached and incorporated by reference.” (Harris v. Rudin, Richman & Appel (1999) 74 Cal.App.4th 299, 307.) In some circumstances, a plaintiff may also “plead the legal effect of the contract rather than its precise language.” (Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 198-199.)

Discussion

In this case, Min Zhou contends Zhao’s cause of action fails to allege performance or breach of the alleged written loan agreement. Zhao’s Complaint alleges Min Zhou signed a promissory note acknowledging the $1,500,000 loan agreement from Zhao and promising to repay the loan within thirty days. (Complaint, ¶ 47.) Min Zhou contends this allegation is contradicted by the copy of the loan agreement in Zhao’s Complaint and cites SC Manufactured Homes, Inc. v. Liebert (2008) 162 Cal.App.4th 68, for the rule that “[i]f the allegations in the complaint conflict with the exhibits, we rely on and accept as true the contents of the exhibits.” (Id., at p. 83.) But “in doing so, if the exhibits are ambiguous and can be construed in the manner suggested by plaintiff, then we must accept the construction offered by plaintiff.” (Ibid.)

Here, the alleged promissory note, dated June 23, 2023, states “[t]he Lender promises to loan $1,5000,000.00 USD to the Borrower and the Borrower promises to repay this principal amount to the Lender along with $150,000.00 interest, which may be paid separately.” (Complaint, Ex. B.) Contrary to the allegation of the Complaint, the promissory note does not acknowledge the parties’ prior loan agreement and instead references a present or future promise of Zhao to loan funds to Min Zhou. And because the Complaint fails to allege Zhao performed by making this additional promised loan, it necessarily fails to state a cause of action for breach of contract against Min Zhou.

Accordingly, Min Zhou’s demurrer to this cause of action is SUSTAINED with leave to amend.

Standing

Min Zhou maintains Zhao’s second, third, fourth, fifth, and sixth causes of action fail because Zhao lacks standing to pursue claims for funds belonging to third parties. Specifically, Min Zhou maintains that Zhao’s Complaint alleges “such funds were sent by, and belonged to, third parties Yuqing Zhao and Ang Li.” (Demurrer, p. 4:14-15, citing Complaint, ¶ 9, 39, 46.) But this is not what the Complaint alleged.

Instead, the Complaint alleges Zhao transferred the funds at issue from accounts owned by these third parties. (Complaint, ¶ 9, 39, 46.) And while Min Zhou claims the Complaint fails to allege Zhao had ownership over these funds, these Complaint does exactly that by claiming the funds transferred were “earmarked for [Zhao’s] tax payments.” (Complaint, ¶ 9, 39, 46.) This is sufficient to establish Zhao had ownership interests in the funds at issue.

Accordingly, Min Zhou’s demurrer on this ground is OVERRULED.

Misjoinder of Parties

Min Zhou argues Zhao’s fourth and fifth causes of action fail because there is a misjoinder of parties. Specifically, Min Zhou maintains Yuqing Zhao and Ang Li are indispensable parties because the funds at issue belonged to them. But as noted above, this argument fails as Zhao has adequately alleged these funds belonged to Zhao. Accordingly, Min Zhou’s demurrer on this ground is also OVERRULED.

CONCLUSION

Based on the foregoing, Min Zhou’s demurrer to Zhao’s Complaint is SUSTAINED with twenty (20) days leave to amend as to the first and fifth causes of action and OVERRULED on all other grounds.