Judge Stephen P. Pfahler, Case Number: 21CHCV00423, Date: 2023-08-07 Tentative Ruling

Judge: Stephen P. Pfahler, Case: 21CHCV00423, Date: 2023-08-07 Tentative Ruling

Case Number: 21CHCV00423 Hearing Date: August 7, 2023 Dept: F49

Dept. F-49

Date: 8-7-23 c/w 6-8-23 Hearing

Case #21CHCV00423

Trial Date: Not Set

DEMURRER

MOVING PARTY: Cross-Defendants, Numair Fakir, et al.

RESPONDING PARTY: Cross-Complainants, World Tech Toys, Inc., et al.

RELIEF REQUESTED

Demurrer to the First Amended Cross-Complaint

· 1^st Cause of Action: Breach of Contract

· 2^nd Cause of Action: Fraud/Deceit

· 3^rd Cause of Action: Negligent Misrepresentation

· 4^th Cause of Action: Quantum Meruit

Motion to Strike

SUMMARY OF ACTION

Plaintiff Win Partners, LLC alleges a January 24 or 25, 2021, oral agreement, whereby defendants World Tech Toys, Inc., World Trading 23, Inc., and/or Kevork Kouyoumjian, agreed to deliver certain personal protective equipment (PPE) described as “medical grade disposable seamless rubber gloves.” Plaintiff alleges payment of five million dollars ($5,000,000), but only received non-medical grade, non-FDA approved, “counterfeit” equipment, which lacks any resale value.

On June 2, 2021, Plaintiff filed a complaint for Breach of Contract, Unfair Business Practices, Breach of Fiduciary Duties, and Fraud. On February 18, 2022, the court granted Plaintiff’s motion for leave to amend. On February 28, 2022, Plaintiff substituted in Jacques Kouyoumjian for Doe 3. On March 2, 2022, Plaintiff filed a first amended complaint for Breach of Contract, Unfair Business Practices, Breach of Fiduciary Duties, and Fraud.

On August 4, 2022, the court granted Plaintiff leave to file a second amended complaint. On August 5, 2022, Plaintiff filed the second amended complaint for Breach of Contract, Unfair Business Practices, Beach of Fiduciary Duties, and Fraud. On September 7, 2022, World Tech Toys, Inc., et al. answered and filed a cross-complaint against Win Partners, LLC, et al. for Breach of Contract, Fraud/Deceit, Negligent Misrepresentation, and Quantum Meruit.

On January 11, 2023, the court sustained the demurrer of Jacques Kouyoumjian, Azniv Kouyoumjian, and Vicken Kouyoumjian to the second amended complaint. On February 10, 2023, Plaintiff dismissed Jacques Kouyoumjian, Azniv Kouyoumjian, and Vicken Kouyoumjian. On February 22, 2023, the court sustained the demurrer of Win Partners, LLC to the second and third causes of action in the cross-complaint of World Tech Toys, Inc., et al.

On March 16, 2023, the court declarated part of the demurrer moot and sustained the remainder of the demurrer of Numar Fakir and Hasham Hussain to the Breach of Contract, Fraud/Deceit, Negligent Misrepresentation, and Quantum Meruit causes of action in the cross-complaint with leave to amend. The first amended cross-complaint was filed on April 3, 2023, for Breach of Contract, Fraud/Deceit, Negligent Misrepresentation, and Quantum Meruit.

RULING

Demurrer: Sustained with Leave to Amend in Part/Overruled in Part.

Cross-Defendants Win Partners, LLC (Win), Numar Fakir, Hasham Hussain filed separate demurrers to the first amended cross-complaint. The court consolidates the hearing to a single date, and provides a single ruling. Fakir and Hussain challenge all four causes of action for Breach of Contract, Fraud/Deceit, Negligent Misrepresentation, and Quantum Meruit, while Win only challenges the second and third causes of action.

Fakir and Hussain

Individual Cross-Defendants Fakir and Hussain challenge the cross-complaint on grounds of no basis of individual liability, and insufficiently pled facts for the individual causes of action. The court electronic filing system shows no opposition to the demurrer of Fakir and Hussain at the time of the tentative ruling publication cutoff. Fakir and Hussain filed a notice of non-opposition.

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc., § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (Code Civ. Proc., § 452.) The court “ ‘ “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law . . . .” ’ ” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525.) In applying these standards, the court liberally construes the complaint to determine whether a cause of action has been stated. (Picton v. Anderson Union High School Dist. (1996) 50 Cal.App.4th 726, 733.)

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 616; Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139 [“[U]nder our liberal pleading rules, where the complaint contains substantive factual allegations sufficiently apprising defendant of the issues it is being asked to meet, a demurrer for uncertainty should be overruled or plaintiff given leave to amend.]

Fakir and Hussain initially challenge the cross-complaint on grounds of a lack of individual liability under both the agent “immunity rule” for agents and employees of a corporate entity. The argument arises from California Corporations Code section 17703.04, which limits liability in contract for claims incurred by the limited liability entity. (Corp. Code, § 17703.04, subd. (a)(1).) Fakir and Hussain also challenge the lack of any articulated exception to the rule, including a sufficiently articulated, alternative alter ego claim.

The operative cross-complaint alleges agent liability as to Hussain notwithstanding a denial of any other relationship with the WIN entity in the same paragraph. [First Amend. Cross-Comp., ¶ 5.] The first cross-complaint lacks any claim as to Fakir in the form of agency, and instead relies on an alter ego statement. [First Amend. Cross-Comp., ¶¶ 7-8.] The operative cross-complaint adds an allegation of single enterprise theory or integrated theory liability. [First Amend. Cross-Comp., ¶ 6.] The unopposed demurrer sufficiently establishes the lack of sufficiently pled agency and alter ego claims. (Corp. Code, § 17703.04, subd. (e); Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300.) The demurrer is therefore sustained with leave to amend as to Hussain and Fakir, in their individual capacity.

1^st Cause of Action, Breach of Contract: Sustained with Leave to Amend.

The individual cross-defendants challenge the sufficiency of the contract claim on the basis of lack of an existing contract with the individual defendants.

“To state a cause of action for breach of contract, [a plaintiff] must plead the contract, his performance of the contract or excuse for nonperformance, [defendant’s] breach and the resulting damage. (Citation.) Further, the complaint must indicate on its face whether the contract is written, oral, or implied by conduct. (Citation.)” (Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal.App.3d 452, 458–59; (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1388.) In examining a breach of contract claim, the court is required to examine the terms, or at least the legal effect of the contract. (Blank v. Kirwan, supra, 39 Cal.3d at p. 318 [“we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context”]; Otworth v. Southern Pac. Transportation Co., supra, 166 Cal.App.3d at p. 459 [“If the action is based on an 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 instrument must be attached and incorporated by reference”]; Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 198–199 [“In an action based on a written contract, a plaintiff may plead the legal effect of the contract rather than its precise language”].)

The operative cross-complaint offers a brief conclusion of an oral contract between all parties, with proof of a written invoice (not incorporated in the operative pleading), and breach. [First Amend. Comp., ¶¶ 24-25.] The court finds the unopposed demurrer establishes insufficiently pled terms of the existing agreement between all parties.

2^nd Cause of Action, Fraud/Deceit: Sustained with Leave to Amend.

3^rd Cause of Action, Negligent Misrepresentation: Sustained with Leave to Amend.

The individual defendants challenge the lack of facts in support of the fraud claims.

“‘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.’” … [¶] ‘Promissory fraud’ is a subspecies of the action for fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.)

“‘Active concealment or suppression of facts by a nonfiduciary “is the equivalent of a false representation, i.e., actual fraud.” [Citation.] (Citation).)’ A fraud claim based upon the suppression or concealment of a material fact must involve a defendant who had a legal duty to disclose the fact. (Civ.Code, § 1710, subd. (3) [a deceit includes “[t]he suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact”]; Citation.)” (Hoffman v. 162 North Wolfe LLC (2014) 228 Cal.App.4th 1178, 1186.) “[T]he elements of an action for fraud and deceit based on concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” (Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal.App.4th 603, 612–613.)

“Negligent misrepresentation is a separate and distinct tort, a species of the tort of deceit. ‘Where the defendant makes false statements, honestly believing that they are true, but without reasonable ground for such belief, he may be liable for negligent misrepresentation, a form of deceit.’” (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 407.) “‘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.)

To the extent the challenged causes of action depend on the individual defendants making fraudulently representations in their capacity as an agent and/or alter ego, the court finds the basis of liability insufficiently pled. The unopposed demurrer additionally establishes that the operative cross-complaint otherwise insufficiently articulates the claims.

4^th Cause of Action, Quantum Meruit: Sustained with Leave to Amend.

Individual cross-defendants challenge the lack of elements establishing quantum meruit. Quantum meruit requires a party to “establish both that he or she was acting pursuant to either an express or implied request for services from the defendant and that the services rendered were intended to and did benefit the defendant.” (Ochs v. PacifiCare of California (2004) 115 Cal.App.4th 782, 794.) “‘The measure of recovery in quantum meruit is the reasonable value of the services rendered provided they were of direct benefit to the defendant.’” (Maglica v. Maglica (1998) 66 Cal.App.4th 442, 449.) For the reasons addressed in the contract claim, the court finds the demurrer sufficiently establishes the lack of a valid basis for a claim.

The demurrer is therefore sustained with 15 days leave to amend as to the individual cross-defendants as to the entire first amended cross-complaint.

Win

The court declines to overrule the demurrer due to the lack of a sufficient meet and confer effort. (Code Civ. Proc., § 430.41, subd. (a)(4).)

2^nd Cause of Action, Fraud/Deceit: Overruled.

Win challenges the subject cause of action on grounds of the economic loss rule and lack of damages. Cross-Complainants counter the operative cross-complaint sufficiently articulates fraud without any bar under the economic loss rule and with sufficient articulation of damages. Cross-Complainants specifically contend the economic loss rule will not bar a fraudulent inducement claim. Win in reply reiterates the economic loss rule bar and lack of sufficient facts.

The economic loss rule requires the pleading of wrongful conduct separate and independent from the obligations within the contract itself. (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 923; Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 991; Erlich v. Menezes (1999) 21 Cal.4th 543, 554; Dhital v. Nissan North America, Inc. (2022) 84 Cal.App.5th 828, 838 (CA Supreme Court review pending).) Cross-Complainants allege fraud on the basis that cross-defendant knowingly and falsely represented the intention to pay for the imported gloves unless and until they could be successfully sold to a third party customer. [First Amend. Cross-Comp., ¶ 28.]

“A breach of contract remedy assumes that the parties to a contract can negotiate the risk of loss occasioned by a breach. ‘[W]hen two parties make a contract, they agree upon the rules and regulations which will govern their relationship; the risks inherent in the agreement and the likelihood of its breach. The parties to the contract in essence create a mini-universe for themselves, in which each voluntarily chooses his contracting partner, each trusts the other's willingness to keep his word and honor his commitments, and in which they define their respective obligations, rewards and risks. Under such a scenario, it is appropriate to enforce only such obligations as each party voluntarily assumed, and to give him only such benefits as he expected to receive; this is the function of contract law.’ (Citation.) However, ‘[a] party to a contract cannot rationally calculate the possibility that the other party will deliberately misrepresent terms critical to that contract.’ (Citation.) No rational party would enter into a contract anticipating that they are or will be lied to. ‘While parties, perhaps because of their technical expertise and sophistication, can be presumed to understand and allocate the risks relating to negligent product design or manufacture, those same parties cannot, and should not, be expected to anticipate fraud and dishonesty in every transaction.’ (Citation.) Dana's argument therefore proposes to increase the certainty in contractual relationships by encouraging fraudulent conduct at the expense of an innocent party. No public policy supports such an outcome.” (Robinson Helicopter Co., Inc. v. Dana Corp., supra, 34 Cal.4th at pp. 992–993 (internal quotation marks omitted).)

The economic loss rule will not bar a breach of contract claim, but Plaintiff must still allege either a separate and independent basis of liability, or conduct that arises from an intent to harm, thereby vitiating the purpose of the contract. (Sheen v. Wells Fargo Bank, N.A., supra, 12 Cal.5th at pp. 923-924.) The operative cross-complaint alleges a representation to make payment “related to transport, palletizing, in-house labor, and storage without condition … Cross-Defendants understood they were not purchasing gloves directly from Cross-Complainants ... [and] fraudulently represented that they chose the gloves and the box file and accepted the gloves the way they were and the amended boxes they chose as is and that other than having the gloves delivered and stored in America.” [First Amend. Cross-Comp., ¶ 28.]

The subject allegation in no way alleges a separate and distinct basis of liability arising from the contractual obligations. [First Amend. Cross-Comp., ¶¶ 16, 18, 20-21.] The breach of contract itself specifically addresses said additional costs, and therefore reliance on the admitted contract. Nevertheless, a single sentence in paragraph 21 alleges fraudulent intent to induce the importation of the gloves knowing the gloves were non-conforming for medical needs and would not be accepted by the intended customers. “Their statements to the contrary before sending the money to China fraudulently induced Cross-Complainants into allowing Cross-Defendants into this purchase of the gloves and has caused damages well beyond the contractual promises that they breached.”

While the pleading relies on a number of conclusions, the gravamen of the representation regarding the agreement for the payment of costs for the importation and storage of the gloves with knowledge that the gloves were non-conforming constitutes a form of fraud at the understandings and benefit of the bargain itself. (Robinson Helicopter Co., Inc. v. Dana Corp., supra, 34 Cal.4th at pp. 992–993.) For purposes of the demurrer, the cross-complaint sufficiently articulates fraudulent inducement around the economic loss rule bar.

The demurrer is overruled.

3^rd Cause of Action, Negligent Misrepresentation: Overruled.

Unlike the intentional fraud claims, cross-complaints allege the negligence standard on grounds of no reason to believe the promise to pay for expenses associated with the importation and storage of the gloves. Other than conclusions in the operative cross-complaint itself, the opposition lacks any actual address of the difference between the intentional standard relied upon in regards to the intentional fraud claim. Again, however, the standard falls towards an item disrupting the negotiated expectations of the parties. The court declines to make factual distinctions based on allowable alternative pleading standards. [First Amend. Cross-Comp., ¶ 35.] The demurrer is overruled.

Motion to Strike: Granted.

Win moves to strike allegations in support of, and claim for, punitive damages. Win challenges any recovery on a contract based claim (dependent on the economic loss rule bar). Cross-Complainants contend the punitive damages claim is properly stated. Win in reply reiterates the improper contractual basis of recovery.

Civil Code Section 3294, subdivision (c) authorizes punitive damages upon a showing of malice, oppression, or fraud, which are defined as follows:

(1) “Malice” means 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.

(2) “Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.

(3) “Fraud” means 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.

As to a corporate employer, Civil Code section 3294, subdivision (b) states:

An employer shall not be liable for damages pursuant to subdivision (a), based upon acts of an employee of the employer, unless the employer had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud, or malice. With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.

Whether a supervisor is a “managing agent” turns on whether “they exercise substantial discretionary authority over decisions that ultimately determine corporate policy.” (White v. Ultramar, Inc. (1999) 21 Cal.4th 563, 576–577; Cruz v. HomeBase (2000) 83 Cal.App.4th 160, 168.)

While a party can reasonably rely on the articulated fraud claims in support of punitive damages, the punitive damages claims rely on the alleged representations of the individual cross-defendants. The court sustained the demurrer of the individual defendants as to the fraud claims, thereby factually eviscerating the basis of liability for punitive damages against the corporate entity. The court finds the factual basis of the claim for punitive damages moot and therefore grants the motion to strike.

In summary, the demurrer of Fakir and Hussain to the entire complaint is sustained with 15 days leave to amend. The demurrer of Win to the fraud and negligent misrepresentation causes of action in the cross-complaint is overruled. The motion to strike is granted with 15 days leave to amend.

The court has now twice considered challenges to the cross-complaint by the individual cross-defendants (and the motion to strike). “In response to a demurrer and prior to the case being at issue, a complaint or cross-complaint shall not be amended more than three times, absent an offer to the trial court as to such additional facts to be pleaded that there is a reasonable possibility the defect can be cured to state a cause of action. The three-amendment limit shall not include an amendment made without leave of the court pursuant to Section 472, provided the amendment is made before a demurrer to the original complaint or cross-complaint is filed.” (Code Civ. Proc., § 430.41, subd. (e)(1).) Should a second amended cross-complaint be filed and a third demurrer presented to the court, the court will consider the applicable standard in determining whether cross-complainants can properly allege the challenged claims.

If cross-complainant fails to file an amended pleading within 15 days of this order, cross-defendants Fakir and Hussain may seek a dismissal, and Win is ordered to answer the remaining causes of action within 10 days of the lapsed period for amendment.

Moving Cross-Defendants to give notice to all parties.