Judge: Stephen I. Goorvitch, Case: 21STCV00960, Date: 2023-04-13 Tentative Ruling
Case Number: 21STCV00960 Hearing Date: April 13, 2023 Dept: 39
U.S. Legal
Support, Inc., et al. v. Philip K. Anthony, et al.
Case No.
21STCV00960
Demurrers and
Motions to Strike to First Amended Cross-Complaint
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”). The Court previously sustained demurrers to
causes of action sounding in fraud and granted motions to strike the claim for
punitive damages. The cross-complainants
filed a first amended cross-complaint. Cobo,
Anthony, and DQH Liquidating, Inc. (“DQHL”) assert the first cause of action,
which is intentional misrepresentation, against cross-defendants. Khoshnoud asserts the sixth cause of action,
which is false promise, against Legal Support.
cross-complainants seek punitive damages. Now, cross-defendants demur to the first and
sixth causes of action. Legal Support
also moves to strike a factual allegations in the first amended cross
complaint. The Court overrules the
demurrers to the first cause of action and sustains the demurrer to the sixth
cause of action without leave to amend.
The Court denies the motion to strike.
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. First
Amended Cross-Complaint – First Cause of Action
Abry Partners is the private equity
firm that owns Legal Support. (First
Amended Cross-Complaint, ¶ 2.) Nicholas
Scola is a principal at Abry Partners and allegedly made a series of
misrepresentations to convince Anthony and Cobo to sell DecisionQuest. (Id., ¶¶ 2, 45.)
The
cross-complainants allege that in February and May 2019, Scola represented to
Anthony and Cobo that Abry and Legal Support “had an existing and developed
strategy” to expand Legal Support through “immediate acquisitions of other
companies.” (Id., ¶ 48.) The cross-complainants allege that Abry had
no intention of performing on this promise because Anthony and Cobo identified
and vetted other potential acquisition targets, but Abry failed to consider
them, notwithstanding Abry’s other multimillion dollar acquisitions during the
same time period. (Id., ¶ 49.)
The
cross-complainants allege that in February and May 2019, Scola “represented to
Anthony and Cobo that Abry and [Legal Support] would provide high value stock
grants at closing to certain key [DecisionQuest] employees, including Khshnoud,
to incentive their performance and post-acquisition commitment to [Legal
Support] . . . [and] further committed to making the employee pool stock grants
free of condition.” (Id., ¶ 50.) The cross-complainants allege that Abry and
Legal Support had no intention of performing because Legal Support did not make
the promised stock grants for many months, and when they finally were made, the
grants were of much lesser value and conditioned on signing “onerous and
unenforceable covenants not to compete on leaving [Legal Support].” (Id., ¶ 51.)
The
cross-complainants allege that in February and May 2019, Scola represented to
Anthony and Cobo that Legal Support “had a sales force fully capable of taking
over [DecisionQuest’s] sales and marketing efforts and substantially expanding
those efforts . . . .” (Id., ¶ 52.) The cross-complainants allege those
representations were false because Legal Support’s existing sales force had
“experience solely in the marketing and sales of [Legal Support’s] general
litigation services (i.e., court reporting, transcription, and records
retrieval) to administrative-level decisionmakers” and “lacked the necessary
experience, capability and contacts to market and make sales in
[DecisionQuest’s] field of expertise, where personal relationships with
executive-level decisionmakers had to be personally cultivated and were
required given the elective expense nature of private jury consulting . . .
.” (Id., ¶ 53.)
The
cross-complainants allege that in May 2019, Scola represented to Anthony and
Cobo that “Abry was unable to obtain bank financing to close on the original
terms, and therefore needed to restructure the deal.” (Id., ¶ 54.)
The cross-complainants allege this representation was false because at
the time, Abry “had billions in assets under management and therefore was
well-positioned financially to close the deal on the original terms.” (Ibid.)
C. First
Amended Cross Complaint – Sixth Cause of Action
Khousnoud alleges that Legal Support
made a series of false promises to convince her “to remain temporarily employed
as a consultant . . . through a six-month transition period . . . [beginning]
in November 2020 . . . .” (First Amended
Cross Complaint, ¶ 88.) Khousnoud
alleges as follows: (a) Legal Support would accelerate her second anniversary
stock grant vesting at the conclusion of the six-month consulting agreement,
providing her with a total of 40% vesting in her Legal Support stock grants;
(b) Legal Support would pay a bonus of $60,000 at the end of the first four
months of the consulting agreement period; (c) Legal Support would pay her
another $40,000 at the end of the consulting agreement period; and (d) Legal
Support would pay severance of $60,000 on execution of a release agreement. (Id., ¶ 89.) Khousnoud alleges that Legal Support knew
these promises were false and had no intention of honoring them for two
reasons. First, the day before these
representations were made, Darren Yausie reported to Legal Support’s management
“that he suspected financial misdealing by Khousnoud and that he was putting
her under investigation.” (Id., ¶
90.) Second, on December 21, 2020, after
the representations were made, Legal Support told Khoshnoud that it was
“reevaluating” the offer and would “get back to her after the holdings” but
“assured her that she remained an active employee even though she remained
under investigation . . . .”
(Ibid.) Khoushnoud alleges that
Legal Support did not “apprise her of that investigation” at the time. (Ibid.)
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.)
EVIDENTIARY
ISSUES
The
cross-defendants request that the Court take judicial notice of several
documents. The Court grants the request
with respect to the Membership Interest Purchase Agreement (the “MIPA”) merely
for the purpose of considering the choice of law provision. The Court also takes judicial notice of the
cross-complainants’ opposition to the prior demurrer. The Court denies the request for judicial
notice in all other respects.
DISCUSSION
A. Choice
of Law Provision
The parties dispute whether Delaware
or California law applies to this dispute.
The cross-defendants argue that Delaware law applies to every cause of
action based upon the choice of law provision in the Membership Interest
Purchase Agreement (the “MIPA”). The
cross-complainants argue that this choice of law provision applies only to
contractual claims, and California law applies to the fraud claims. The Court agrees with the cross-complainants.
The choice of law provision in the
MIPA states: “This Agreement shall be governed by and constructed and enforced
in accordance with the Laws of the State of Delaware without reference to its
choice of law rules.” (Request for
Judicial Notice, Exh. #1, ¶ 10.5.) By
its plain language, this choice of law provision applies only to the
interpretation and enforcement of the contract.
Under Delaware law, a choice of law provision must include express
language including torts stemming from alleged misconduct in the formation of
the contract, e.g., “litigation that arises out of or relates to” the MIPA or
the underlying transaction. (See Gloucester
Holding Corp. v. U.S. Tape and Sticky Products, LLC (2003) 832 A.2d 116,
124.) This clause does not contain such
language. In the absence of clear
language to the contrary, Delaware law would require this Court to apply
California law. Delaware courts rely on
the Restatement (Second) of Conflict of Laws, which states: “The rights and
liabilities of the parties with respect an issue in tort are determined by the
local law of the state which, with respect to that issue, has the most significant
relationship to the occurrence and the parties.” (Ibid.)
The cross-defendants argue that
“[t]he interpretation of a contract is a judicial function.” (Wolf v. Walt Disney Pictures &
Television (2008) 162 Cal.App.4th 1107, 1125.) To the extent the Court is required to
interpret the choice of law provision independently of the Delaware courts, the
Court finds that it applies only to contractual claims.
Based upon the foregoing, the Court
finds that the claims sounding in contract shall be governed by Delaware
law. The Court finds that the claims
sounding in fraud shall be governed by California law.
B. The
First Cause of Action
The first cause of action is for intentional
misrepresentation. The elements are as
follows: (1) The cross-defendants made a misrepresentation; (2) The
cross-defendants knew the misrepresentation was false or made the
misrepresentations recklessly and without regard for their truth; (3) The
cross-defendants intended that the cross-complainants would rely on the
misrepresentation; (4) There was actual and justifiable reliance on the
misrepresentation; and (5) There were resulting damages. (See Chapman v. Skype Inc. (2013) 220
Cal.App.4th 217, 230-231; see also Engalla v. Permanente Medical Group, Inc.
(1997) 15 Cal.4th 951, 974.) The
cross-complainants must allege specific
factual circumstances beyond contract breach, which reflect the
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 Court finds
that the allegations are sufficient in general.
A demurrer lies to an entire cause of action, and a motion to strike
cannot be used as a “line item veto” with respect to individual factual
allegations supporting a cause of action.
The cross-defendants argue that there
was no reasonable reliance on any misrepresentations because the MIPA contains integration
and anti-reliance clauses to the contrary.
The cross-complainants argue that the Court previously considered and
rejected this argument. Both parties are
incorrect. In fact, the Court did not
resolve this issue previously because it was not necessary to rule on the prior
demurrer. But the Court now rejects the
cross-defendants’ argument. As
discussed, California law applies to this dispute. Integration and anti-reliance clauses do not
preclude fraud claims as a matter of law.
(See, e.g., Ron Greenspan Volkswagen, Inc. v. Ford Motor Land
Development Corp. (1995) 32 Cal.App.4th 985, 996.) Undoubtedly, the cross-defendants will rely
on the integration and anti-reliance clauses in arguing that there was no
reasonable reliance on any alleged oral misrepresentations. But this is a factual issue that must be
resolved on summary adjudication or at trial.
The cross-defendants argue that the
sham pleading doctrine precludes the first amended cross complaint. “Under the sham pleading doctrine,
allegations in an original pleading that rendered it vulnerable to demurrer or
other attack cannot simply be omitted without explanation.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740,
751.) The sham pleading doctrine is not
at issue. Previously, the
cross-complainants predicated their misrepresentation claim on promises 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.” (See Court’s Minute Order, dated
October 10, 2022, p. 5.) The Court held
that this alleged misrepresentation “is too generic to the form the basis of a
fraud claim.” (Ibid.) The omitted factual allegations—the impact of
the pandemic on revenues and stock value—do not relate to or necessarily
foreclose the allegations in the first amended cross complaint. The sham pleading doctrine applies narrowly,
and doubts are resolved in favor of the cross-complainants.
Finally, the cross-defendants make a
series of arguments that fail on their face.
The cross-defendants argue that “general predictions of success are
insufficient as a matter of law.” While
that is true, the allegations are more specific than general predictions of
success. The cross-complainants allege
specific misrepresentations. The
cross-defendants argue that the cross-complainants “still failed to plead
intent not to perform at the time the alleged representations were made.” The Court acknowledges the inherent
difficulty in pleading intent. The
allegations may support a finding that the cross-defendants did not intend to
expand Legal Support through immediate acquisitions of other companies, and did
not intend to provide the stock grants as promised. Regardless, the cross-complainants’
allegations are not based exclusively on the cross-defendants’ failure to honor
promises, e.g., the alleged misrepresentations concerning their expertise and
their ability to obtain financing. The
Court disagrees that the allegations about Legal Support’s salesforce as
“puffery” as a matter of law, given the specificity of the allegation. That is a factual dispute.
The Court has considered the cross-defendants’
remaining arguments concerning the first cause of action and finds that none
has any merit. Therefore, the Court
overrules the demurrer to the first cause of action.
C. The
Sixth Cause of Action
The sixth cause of action is for
false promise, which has the same elements as intentional misrepresentation. The Court finds that the allegations are not
sufficient as they do not establish that Legal Support made a knowing false
promise to Khoshnoud. Essentially, Khoshnoud
alleges that the management of Legal Support necessarily lied to her merely
because, at the time, Yausie “suspected” she may have been involved in
financial misdealing and had initiated an investigation. This is not sufficient because Khoshnoud does
not allege that Yausie had conclusively determined at that point that she had
committed fraud or that Legal Support had decided to terminate her based upon
Yausie’s mere suspicion before the investigation had been completed. The allegations that Legal Support was
re-evaluating her contract were made after the alleged misrepresentations and
are not actionable. The Court sustains
Legal Support’s demurrer to the sixth cause of action. The Court denies leave to amend, as the Court
previously granted leave to amend, and counsel for the cross-complainants does
not articulate any facts suggesting that an amendment would be successful.
D. Motion
to Strike
In the original cross complaint, the
cross-complainants asserted a cause of action for breach of contract, to which
the cross-defendants demurred. The Court
overruled the demurrer. Although the
cross-defendants had filed a motion to strike, it only sought to strike
allegations relating to the claim for punitive damages. Now, Legal Support seeks to strike one
factual allegation supporting the cause of action for breach of contract: Legal
Support breached the terms of the agreement for purchase and sale of
DecisionQuest by failing to provide the grants to the DecisionQuest employee
pool, including Khoshnoud, in the terms committed to by the cross-defendants,
including that the grants would be issued at closing. (See First Amended Cross Complaint, ¶ 62.)
The cross-complainants argue that Legal
Support waived this motion by not raising the issue previously. Contrary to the cross-complainants’ argument,
Legal Support could not have addressed this issue previously for two
reasons. First, a demurrer does not lie
as to a part of a cause of action.
Second, the admission that the representation was oral was made after
the demurrer and motion to strike were filed, and it would have been improper
to raise the issue orally at the hearing, as doing so would not have afforded
proper notice and opportunity to be heard.
Regardless, the Court has discretion to consider this motion at any
time, per Code of Civil Procedure section 436(a), and so exercises its
discretion.
The cross-complainants admitted that
Scola had made an oral promise: “Contrary to USL’s argument, as to the stock
grants, the Cross-Complaint alleges the oral (albeit false) promise made by
Scola, on behalf of USL committing to the stock grant.” (Request for Judicial Notice, Exh. #4, p.
9.) The cross-complainants argue that
the Court cannot consider this pleading.
They are incorrect. The Court can
take judicial notice of admissions in the cross-complainants’ opposition to a
demurrer. (See Rodas v. Spiegel
(2001) 87 Cal.App.4th 513, 517; see also Larson v. UHS of Rancho Springs,
Inc. (2014) 230 Cal.App.4th 336, 345 fn. 3.)
Breaches of oral contracts have a
two-year statute of limitations. (Code
Civ. Proc., § 339.) The first amended
cross complaint alleges that Legal Support delivered the stock grants in or
about October 2019, at which point it became clear Legal Support had violated
the terms of the agreement. (First
Amended Complaint, ¶¶ 36, 37, 62, 63.) The
breach of contract for this oral promise accrued in or about October 2021. The original cross complaint was filed on February
7, 2022. Therefore, the breach of contract
cause of action is untimely to the extent it relies on this oral representation.
In the alternative, the Court grants
the motion to strike under Code of Civil Procedure section 430.10(g) because
the second cause of action does not make clear whether this predicate is based
upon a written, oral, or implied contract.
The Court declines leave to amend because it is clear that any amendment
would be unsuccessful, because the promise was oral, and therefore the cause of
action is untimely. Counsel for the
cross-complainants has never represented that Legal Support had made a written,
as opposed to an oral, representation.
CONCLUSION
AND ORDER
Based upon the foregoing, the Court
orders as follows:
1. The
Court overrules the demurrer to the first cause of action.
2. The
Court sustains the demurrer to the sixth cause of action without leave to amend.
3. The
Court grants the motion to strike and orders that the second cause of action
may not be predicated upon an allegation that Legal Support breached an oral
agreement to provide grants to the DecisionQuest employee pool on certain terms
at closing.
4. The
cross-defendants shall file answers within ten (10) days.
5. The
cross-defendants’ counsel shall provide notice and file proof of such with the
Court.