Judge: Stephen I. Goorvitch, Case: 21STCV00960, Date: 2022-09-01 Tentative Ruling

Case Number: 21STCV00960    Hearing Date: September 1, 2022    Dept: 39

U.S. Legal Support, Inc., et al. v. Philip K. Anthony, et al.

Case No. 21STCV00960

Demurrer and Motion to Strike

INTRODUCTION

Plaintiff U.S. Legal Support, Inc. (“Plaintiff” or “Legal Support”) filed this action directly on behalf of itself and derivatively on behalf of DecisionQuest, LLC (“DecisionQuest”) against three former officers—Philip K. Anthony (“Anthony”), Michael Cobo (“Cobo”) and Nicole Khoshnoud (“Khoshnoud”)—and two entities—Deepwater, Inc. and HM&R, LLC (“HM&R”)—allegedly involved in a scheme to defraud DecisionQuest and its clients.  Several of these defendants—Anthony, Cobo, Khoshnoud, and HM&R, as well as DecisionQuest Holdings, Inc. (collectively, the “Cross-Complainants”) filed a cross-complaint against Legal Support and another entity, Abry Partners, LLC (“Abry Partners”) (collectively, the “Cross-Defendants”).  Now, the Cross-Defendants demur to three causes of action and move to strike the prayer for punitive damages.

THE PARTIES’ ALLEGATIONS 

            A.        Complaint

            Legal Support is a Texas corporation founded in 1996, which offers court reporting, remote depositions, records retrieval, legal interpretation and translation, trial support, and transcription services.  (First Amended Complaint, ¶ 6.)  DecisionQuest is a trial consulting firm which was founded in 1990 by Philip K. Anthony (“Defendant Anthony”) and Michael Cobo (“Defendant Cobo”).  (Id., ¶ 17.)  On August 30, 2019, Legal Support acquired 100% of the “membership units,” i.e., shares, of DecisionQuest from its owners, Defendant Anthony and Defendant Cobo.  (Id., ¶ 7.)  The acquisition was completed on August 30, 2019, at which point DecisionQuest became a wholly-owned subsidiary of Legal Support.  (Id., ¶¶ 7, 12.)  Afterwards, Defendant Anthony and Defendant Cobo served as President and Vice President, respectively, of Legal Support’s Trial Services Group.  (Id., ¶¶ 8-9.)  Defendant Nicole Khoshnoud (“Defendant Khoshnoud”), who worked at DecisionQuest before the acquisition, became the wholly-owned subsidiary’s Chief Financial Officer.  (Id., ¶¶ 10, 21.)  All three officers were terminated on January 11, 2021.  (Id., ¶ 11.) 

            Defendant Anthony, Defendant Cobo, and Defendant Khoshnoud (the “individual defendants”) allegedly engaged in a scheme to funnel money out of DecisionQuest.  (Id., ¶ 18.)  Defendants transferred money from DecisionQuest to two shell companies—Deepwater, Inc. (“Deepwater”) and HM&R, Inc. (“HM&R”)—operated by Defendant Anthony and Defendant Cobo.  (Id., ¶¶ 26-30.)  Defendants also allegedly used a third fictitious company, Pinetree Research Company (“Pinetree”), to bill DecisionQuest’s clients for supplier fees that were purportedly incurred while operating DecisionQuest’s proprietary system.  (Id., ¶ 27.)  The alleged fraud continued after Legal Support’s acquisition of DecisionQuest.  (Id., ¶¶ 26-30.)

            B.        Cross-Complaint

            Abry Partners is the private equity firm that owns Legal Support.  (Cross-Complaint, ¶ 2.)  Abry Partners promised the founders of DecisionQuest—Anthony and Cobo—that Legal Support would “preserve [its] stellar reputation in the field, maintain Anthony’s and Cobo’s business stewardship, and continue the successful work of [DecisionQuest’s] team of consultants while growing its reach through the use of [Legal Support’s] sales capabilities and the acquisition of further  strategic partners.”  (Ibid.)  Based upon these representations, Anthony and Cobo decided to sell DecisionQuest to Legal Support.  (Ibid.)  However, the Cross-Complainants allege that these promises of “strategic expansion and sales prowess” were false.  (Id., ¶ 3.)  Instead, Legal Support allegedly imposed “incompatible business and marketing practices” on DecisionQuest and alienated its employees and founders.  (Ibid.)  In so doing, Abry Partners and Legal Support compromised DecisionQuest’s revenue stream, thereby compromising Anthony and Cobo’s ability to maximize the earn-out payments that were part of this transaction.  (Ibid.) 

PROCEDURAL HISTORY

            Legal Support filed this action on January 11, 2021.  The cross-complaint was filed on February 7, 2022, by Anthony, Cobo, Khoshnoud, HM&R, and DecisionQuest Holdings, Inc. (“DQ Holdings”).  The cross-complaint asserts the following causes of action: (1) False promise, (2) Intentional misrepresentation, (3) Negligent misrepresentation, (4) Breach of contract, (5) Breach of the covenant of good faith and fair dealing, (6) Breach of contract (employment), (7) Breach of contract, (8) False promise, and (9) Breach of contract.  The cross-complaint also seeks punitive damages.

LEGAL STANDARD

A.        Demurrer

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)  When considering demurrers, courts read the allegations liberally and in context.  (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.)  “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, 147 Cal.App.4th at p. 747.)  However, courts do not accept as true deductions, contentions, or conclusions of law or fact.  (Stonehouse Homes LLC v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 538.)  The general rule is that the plaintiff need only allege ultimate facts, not evidentiary facts.  (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550.)  “[D]emurrers for uncertainty are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.”  (Lickiss v. Fin. Indus. Regulatory Auth. (2012) 208 Cal.App.4th 1125, 1135.)  In addition, even where a complaint is in some respects uncertain, courts strictly construe a demurrer for uncertainty “because ambiguities can be clarified under modern discovery procedures.”  (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.)  Demurrers do not lie as to only parts of causes of action, where some valid claim is alleged but “must dispose of an entire cause of action to be sustained.” (Poizner v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.)  

            B.        Motion to Strike

Courts may, upon a motion, or at any time in their discretion, and upon terms they deem proper, strike any irrelevant, false, or improper matter inserted in any pleading. (Code Civ. Proc., § 436, subd. (a).) Courts 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, subd. (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.)  

DISCUSSION 

            A.        Standing

            The Cross-Defendants demur to all causes of action by DQ Holdings, arguing that the entity does not actually exist.  The Cross-Defendants seek judicial notice of records from the Secretary of State, which the Court grants per Evidence Code section 452(c).  These records indicate that DQ Holdings does not exist, because it changed its name to “DecisionQuest Holdings Liquidating, Inc.” and then changed its name to “DQH Liquidating, Inc.”  Therefore, the demurrer is sustained to all causes of action by DQ Holdings on this basis.  The Court grants leave to amend to name the correct entity.  In the alternative, the Court adopts its rulings on the merits with respect to DQ Holdings. 

            B.        First and Second Causes of Action – By Anthony, Cobo, and DQ Holdings

            The first cause of action is for false promise.  The second cause of action is for intentional misrepresentation.  To state a claim for promissory fraud, Defendants must allege specific factual circumstances beyond contract breach, which reflect Cross-Defendants’ contemporaneous intent not to perform.  (Hills Transportation Co. v. Southwest Forest Ind., Inc. (1968) 266 Cal.App.2d 702, 707.)  Because this cause of action sounds in fraud, it must be plead with particularity.  “This means: (1) general pleading of the legal conclusion of fraud is insufficient; and (2) every element of the cause of action for fraud must be alleged in full, factually and specifically, and the policy of liberal construction of pleading will not usually be invoked to sustain a pleading that is defective in any material respect.”  (Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1331.) 

            The Cross-Complainants allege that the misrepresentations were: (a) Abry intended to and would use its purchasing power to immediately begin making strategic acquisitions that would benefit and grow DQ’s business; (b) USL’s sales force of roughly 100 people would bring DQ business in a volume that would enable Anthony, Cobo, and certain key employees, including Khoshnoud, to make the earn-out that Abry renegotiated as a key part of the transaction; (c) USL would provide a certain number of USL stock grants to a DQ employee pool at closing, without condition; and (d) that the stock provided to both the Founders and to the DQ employee pool would be of significant value based on projections provided to the Founders by Abry.  (Cross-Complaint, ¶¶ 54, 60.)  There are two problems with these allegations. 

            First, certain allegations require more detail.  At least one of these promises—that the stock would “be of significant value based on [business] projections” is too generic to form the basis of a fraud claim.  Similarly, it is unclear whether the allegation that DecisionQuest’s business would permit Anthony and Cobo to “make the earn-out” is specific enough to form the basis of a fraud claim.  General predictions of future success cannot form the basis of a fraud claim. 

            Second, the cross-complaint alleges no facts suggesting that the Cross-Defendants had no intent to perform at the time the promises were made.  This is required.  “To maintain an action for deceit based on a false promise, one must specifically allege and prove, among other things, that the promisor did not intend to perform at the time he or she made the promise and that it was intended to deceive or induce the promisee to do or not do a particular thing.  (Tarman v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 159.)  This is the distinction between a fraud claim and a breach of contract claim.  The Cross-Complainants must demonstrate that the Cross-Defendants knowingly made misrepresentations at the time, and not that their predictions or good-faith representations did not come to fruition. 

Therefore, the Court sustains the demurrers to the first and second causes of action.  These two causes of action are entirely duplicative.  Therefore, the Court will grant leave to amend to assert only one cause of action sounding in fraud based on these allegations, i.e., fraud, negligent misrepresentation, etc.   

            C.        Third Cause of Action – By Anthony, Cobo, and DQ Holdings

            The third cause of action is for negligent misrepresentation based upon the same alleged misrepresentations forming the basis of the first and second causes of action.  There is no cause of action for negligent misrepresentation based upon future conduct unless the promise is made without any intention of performing it.  (Id., pp. 158-159.)  But such a claim sounds in fraud and is duplicative of the Cross-Complainants second cause of action.  Essentially, there is either a fraud claim or breach of contract claim based upon the facts alleged by the Cross-Complainants, and not a claim for “negligent misrepresentation.”  Therefore, the demurrer to the third cause of action is sustained without leave to amend. 

            D.        Fourth and Fifth Causes of Action – By Anthony, Cobo, Khoshnoud and DQ Holdings

            The fourth cause of action is for breach of contract.  The fifth cause of action is for breach of the implied covenant of good faith and fair dealing.  The cross-complaint alleges that Legal Support breached the terms of “the agreement for purchase and sale of [DecisionQuest” by failing to provide certain grants to the DecisionQuest employee pool, which included Khoshnoud, and failing to pay amounts owed under Section 3.2(a) of the agreement.  These allegations are sufficient.  The Cross-Complainants are not required to allege all of the terms of the contracts because a party may plead the legal effect of the contract rather than its precise language.  (See Ochs v. PacifiCare of California (2004) 115 Cal.App.4th 782, 795.)  Legal Support may obtain further information in discovery.  (See Lickiss v. Financial Industry Regulatory Authority (2012) 208 Cal.App.4th 1125, 1135.)  A party may assert causes of action for both breach of contract and breach of the implied covenant of good faith and fair dealing.  The former is predicated upon the breach of a specific term and the latter is predicated upon an implied term, so they are not duplicative, and a plaintiff may plead in the alternative.  (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.)  The demurrer to the fourth and fifth causes of action is overruled.

            E.         Sixth Cause of Action – By Anthony and Cobo

            The sixth cause of action is asserted by Anthony and Cobo against Legal Support for breach of their employment contract.  The cross-complaint alleges that Anthony and Cobo are entitled to certain contractual financial benefits if their employment contracts were terminated without good cause.  (Cross-Complaint, ¶ 87.)  That is sufficient.  Legal Support attempts to argue the merits.  The Court cannot rely on matters outside the complaint and not subject to judicial notice in ruling on the demurrer.  Therefore, the demurrer to the sixth cause of action is overruled.    

            F.         Seventh Cause of Action – By Khoshnoud

            The seventh cause of action is asserted by Khoshnoud against Legal Support for breach of a transitional consulting agreement in which her employment would continue for an additional six months.  (Cross-Complaint, ¶ 91.)  Legal Support allegedly breached this agreement by terminating her without good cause.  (Id., ¶ 97.)  This is sufficient.  Therefore, the demurrer to the seventh cause of action is overruled.

            G.        Eighth Cause of Action – By Khoshnoud

            The eighth cause of action is for false promise by Khoshnoud against Legal Support.  Khoshnoud alleges that Legal Support did not provide her with vesting in certain stock option grants and did not pay her as promised.  As discussed, in order to assert a cause of action for false promise, Khoshnoud must demonstrate that Legal Support did not intend to perform at the time these promises were made, and that the promises were intended to deceive Khoshnoud.  (See Tarman v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 159.)  Therefore, demurrer to the eighth cause of action is sustained with leave to amend.

            H.        Ninth Cause of Action – By HM&R

            The ninth cause of action is for breach of contract by HM&R.  The cross-complaint alleges that that Legal Support and DecisionQuest breached their licensing agreement with HM&R.  The complaint states sufficient facts.  Therefore, the demurrer to the ninth cause of action is overruled. 

            I.          Motion to Strike Claim for Punitive Damages

            The Court grants the motion to strike the prayer for punitive damages.  The Court is sustaining the demurrer to each intentional tort, and the cross-complaint does not allege sufficient facts to satisfy the pleading standard of Civil Code section 3294(a). 

CONCLUSION AND ORDER

            Based upon the foregoing, the Court orders as follows:

            1.         The Court sustains the demurrer with respect to the causes of action that sound in fraud, viz., the first, second, third, and eighth causes of action.  The Court grants leave to amend as discussed in this order.

            2.         The Court overrules the demurrer with respect to the causes of action that sound in contract, viz., the fourth, fifth, sixth, seventh, and ninth causes of action.

            3.         The Court grants the motion to strike the claim for punitive damages.

            4.         The Cross-Complainants may file an amended cross-complaint within thirty (30) days if they wish to do so.

            5.         The Court’s clerk shall provide notice.