Judge: Teresa A. Beaudet, Case: 22STCV16482, Date: 2023-04-13 Tentative Ruling

Case Number: 22STCV16482    Hearing Date: April 13, 2023    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

Background

             Plaintiff D/R Welch Attorneys at Law, a Professional Corporation (“Plaintiff”) filed this action on May 17, 2022 against Defendants Ian Borella (“Borella”) and Frank Borella (“Borella”) (jointly, “Defendants”), asserting causes of action for (1) fraud – intentional misrepresentation; (2) fraud – false promise; (3) negligent misrepresentation; and (4) violation of Business and Professions Code section 17200.[1]

Defendants demur to each of the causes of action of the Complaint. No opposition to the demurrer was filed.

            On February 24, 2023, the Court issued an Order continuing the hearing on the instant demurrer. The Court’s February 24, 2023 Order provides, inter alia, “the parties may present to the Court information relevant to ‘(1) the propriety of taking judicial notice of [Exhibits 1-6 to Mr. Kish’s Declaration in support of Defendants’ demurrer], and (2) the tenor of the matter to be noticed.’ (Evid. Code, § 455, subd. (a).) Pl’s brief must be filed and e-served on or before 3/31/2023, Defs’ brief must be filed and e-served on or before 4/6/23…” Plaintiff did not file any brief pertaining to the propriety of taking judicial notice of Exhibits 1-6 to Mr. Kish’s Declaration. On April 23, 2023, Defendants filed a supplemental reply in support of their demurrer.

Request for Judicial Notice

In their supplemental reply (filed pursuant to the Court’s February 24, 2023 Order), Defendants request that the Court take judicial notice of Exhibits 1-6, which are attached to the Declaration of Joseph L. Kish in support of Defendants’ demurrer. The Court grants the request.

Discussion

A.    Legal Standard

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.) For the purpose of testing the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.) A demurrer “does not admit contentions, deductions or conclusions of fact or law.” (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713.)

B.    Allegations of the Complaint

In the Complaint, Plaintiff alleges that Impact LA, LLC provides information technology (“IT”) services and equipment leasing services throughout the Los Angeles and Orange County area; and that Impact Networking, LLC provides IT services and equipment leasing services throughout the United States directly and through its subsidiaries and/or affiliates, including Impact LA. (Compl., ¶¶ 2-3.) Plaintiff refers to Impact LA, LLC and Impact Networking, LLC jointly in the Complaint as “Impact.” (Compl., ¶ 3.)

In March of 2019, Plaintiff and Impact agreed to enter into an IT services agreement and equipment lease agreement. (Compl., ¶ 13.) Borella served as Impact’s primary point of contact with Plaintiff to establish an account. (Compl., ¶ 12.) The parties negotiated the terms of the agreement, and on March 19, 2019, Plaintiff’s representative, Mr. Muramoto, emailed Borella three separate addenda which corresponded with the three contracts Impact required for the deal. (Compl., ¶¶ 15-18.) Among other changes, Plaintiff sought to change the litigation forum from state court in Illinois to mediation and arbitration in Los Angeles, California. (Compl., ¶ 15.)

On March 21, 2019, Borella informed Mr. Muramoto that Impact agreed to all of Plaintiff’s revisions in the three addenda. (Compl., ¶ 20.) Borella also indicated in a March 21, 2019 email that, inter alia, “[a]fter our conversation earlier, we are all good to go. I only removed the ‘5. Explanation of Fees’ per our conversation…” (Compl., ¶ 21.) On March 25, 2019, Mr. Byer (Plaintiff’s then Chief Financial Officer) emailed Borella a document including the original form contracts, a quote of equipment to be rented, and the negotiated and agreed upon addenda, all executed by Plaintiff’s Principal, David Welch. (Compl., ¶ 24.) Plaintiff then immediately paid all amounts due under the agreements, and Impact began to provide services and equipment in April of 2019. (Compl., ¶ 25.)

Plaintiff alleges that from the inception of the agreement until December of 2019, Impact was unable to properly service Plaintiff’s account as promised because there were constant IT service interruptions and equipment breakdowns. (Compl., ¶ 29.) In October of 2019, Impact’s primary customer service manager for Plaintiff’s account, Eric Meyer, admitted to Plaintiff that Impact had installed the wrong equipment. (Compl., ¶ 30.) As a result of Impact’s mistake,     Mr. Meyer advised, Plaintiff would not need to pay for Impact’s services until Impact fixed its issues. (Compl., ¶ 30.) Impact’s services ultimately did not improve, and on December 24, 2019, Plaintiff terminated the agreements with Impact. (Compl., ¶ 31.)

            Plaintiff alleges that on May 21, 2020, Cucco sent a letter to Mr. Welch claiming that Plaintiff was in default under its agreements with Impact. (Compl., ¶ 32.) Plaintiff alleges that “[i]n the letter, Mr. Cucco purported to attach the ‘agreements.’ Instead, however, Mr. Cucco knowing [sic] alternated the agreements to remove the signed addenda. This was critical, because the addenda contained, among other material provisions, required mediation and arbitration, removal of the acceleration clause, etc.” (Compl., ¶ 32.) Plaintiff alleges that “[i]n attaching only the adhesion contracts without the negotiated and agreed to addenda to his letter, Mr. Cucco essentially committed fraud by forgery and fraudulently misrepresented the true Impact agreements.” (Compl., ¶ 33.) Impact then filed suit on June 5, 2020 in Cook County, Illinois. (Compl., ¶ 34.)

C.     Res Judicata 

Defendants assert that each of Plaintiff’s causes of action are barred under the doctrine of res judicata. “The doctrine of res judicata consists of two different aspects. First, it precludes parties or their privies from relitigating a cause of action that has been finally determined by a court of competent jurisdiction. This aspect of res judicata has traditionally been referred to as res judicata or claim preclusion. Second, [a]ny issue necessarily decided in such litigation is conclusively determined as to the parties or their privies if it is involved in a subsequent lawsuit as to the parties on a different cause of action. This latter aspect of res judicata is known as collateral estoppel or issue preclusion.” (Rice v. Crow (2000) 81 Cal.App.4th 725, 734 [internal quotations, citations, and emphasis omitted].)

Claim Preclusion

“Claim preclusion applies only when a second suit involves (1) the same cause of action (2) between the same parties [or their privies] (3) after a final judgment on the merits in the first suit.” (Samara v. Matar (2018) 5 Cal.5th 322, 327 [internal quotations omitted].) Defendants assert that each of these three elements are met here.

Defendants indicate that on June 5, 2020, Impact Networking, LLC and Impact LA, LLC filed a Complaint against “DR Welch,” in the Circuit Court of Cook County, Illinois, Case No. 2020L006046 (the “Illinois Action”). (Kish Decl., ¶ 2, Ex. 1.) In the Illinois Action, Impact Networking, LLC and Impact LA, LLC (jointly, “Impact”) alleged counts for Breach of the Agreement and Unjust Enrichment. (Ibid.) Impact alleged, inter alia, that “Impact entered into a number of contracts to provide managed information technology services and equipment to DR Welch,” and that “DR Welch has failed to make payments to Impact when due and is in default under the contracts.” (Id., ¶¶ 1-2.)

On July 14, 2022, an Order was entered in the Illinois Action providing, inter alia, that “[t]he Court awards Impact Networking, LLC and Impact LA, LLC attorney fees in the sum of $140,972.50 and award it costs of $2,317.60…Final Judgment is entered in favor of Impact Networking, LLC and Impact LA, LLC and against DR Welch in the sum of $270,278.23.” (Kish Decl., ¶ 6, Ex. 5.)

As to the first prong of the res judicata analysis, Defendants note that “[t]o determine whether the same cause of action is involved, California courts apply the primary rights theory. The firmly settled rule in California for determining a cause of action is the primary rights theory…Under this theory, the underlying right sought to be enforced determines the cause of action. In determining the primary right, the significant factor is the harm suffered. A plaintiff’s primary right is defined by the legally protected interest which is harmed by defendant’s wrongful act, and is not necessarily coextensive with the consequence of that wrongful act.” (Fujifilm Corp. v. Yang (2014) 223 Cal.App.4th 326, 331-332 [internal quotations, citations, and emphasis omitted].)[2]

Defendants assert that Plaintiff’s Complaint in the instant action “is based on the allegation that Defendants fraudulently induced DR Welch into entering the contract…Plaintiff’s Complaint fails to explain why these allegations were not or could not have been brought as part of their defense in Illinois when all this information – the underlying contracts, addendums, and communications – could have been raised to argue the agreement was invalid and DR Welch was not in default.” (Demurrer at p. 6:6-13.) Defendants indicate that DR Welch alleged the affirmative defense of “unclean hands” in its answer to the Complaint in the Illinois Action. (Kish Decl., ¶ 3, Ex. 2.) Defendants assert that in Illinois, “fraud is one of the definitions of unclean hands.” (Demurrer at p. 6:5-6.) In support of this assertion, Defendants cite to Long v. Kemper Life Ins. Co. (1990) 196 Ill.App.3d 216, 219, where the Appellate Court of Illinois noted that “[t]he doctrine of ‘unclean hands’ precludes a party from taking advantage of his own wrong…The doctrine applies if the party seeking equitable relief is guilty of misconduct, fraud or bad faith toward the party against whom relief is sought if that misconduct is connected with the transaction at issue.”

However, in the Illinois Action, DR Welch’s affirmative defense of unclean hands alleges that “Impact’s failure to provide sufficient service and equipment contributed to the breakdown

in the contractual relationship with DR Welch.” (Kish Decl., ¶ 3, Ex. 2.) DR Welch’s unclean hands affirmative defense does not allege claims of (1) fraud – intentional misrepresentation, (2) fraud – false promise, (3) negligent misrepresentation, or (4) violation of Business and Professions Code section 17200, which are the causes of action alleged in the instant Complaint.

Defendants also cite to Shine v. Williams-Sonoma, Inc. (2018) 23 Cal.App.5th 1070, 1076, in support of the assertion that “[a] prior judgment is res judicata on matters which were raised or could have been raised, on matters litigated or litigable.” (Demurrer at p. 7:7-8.) In Shine, the Court of Appeal noted that “[a] second aspect of the res judicata doctrine is issue preclusion, also known as collateral estoppel. Under this aspect of the doctrine, the prior judgment is res judicata on matters which were raised or could have been raised, on matters litigated or litigable…” (Shine v. Williams-Sonoma, Inc., supra, 23 Cal.App.5th at p. 1076 [internal quotations and citations omitted].) Thus, this point in Shine pertains to the doctrine of issue preclusion (or collateral estoppel), not claim preclusion. Defendants’ arguments pertaining to the doctrine of collateral estoppel are discussed below.

Based on the foregoing, the Court does not find that Defendants have demonstrated that the Illinois Action involves the same causes of action as those alleged in the instant Complaint, for purposes of the doctrine of claim preclusion.

Collateral Estoppel

Defendants also assert that each of Plaintiff’s causes of action alleged in the instant Complaint are barred under the doctrine of collateral estoppel.

“Collateral estoppel is applicable to bar relitigation of issues previously litigated between the same parties on a different cause of action if the issues for which collateral estoppel is sought in the second action: (1) are identical to those litigated in the first action; (2) were actually litigated and necessarily decided in determining the first action; (3) are asserted against a participant in the first action or one in privity with that party; and (4) the former decision was final on the merits.” (Rice v. Crow, supra, 81 Cal.App.4th at p. 735 (emphasis in original).)

Defendants point out that in Shine, the Court of Appeal noted that “[c]ollateral estoppel precludes the litigation of a claim that was related to the subject matter of the first action and could have been raised in that action, even though it was not expressly pleaded.” (Shine v. Williams-Sonoma, Inc., supra, 23 Cal.App.5th at p. 1076.) Shine involved a “putative class action against defendants and respondents Williams-Sonoma, Inc., and Williams-Sonoma Stores, Inc. (jointly, Williams-Sonoma),” in which “plaintiff and appellant Harley Shine appeal[ed] from an order of dismissal following the sustaining of a demurrer without leave to amend.” (Id. at      p. 1073.)

The Court of Appeal in Shine noted that the trial court “found Mr. Shine was collaterally estopped to maintain this action against the same defendants on an issue that could have been raised in Morales. The Morales complaint sought recovery of unpaid wages on behalf of class members employed by Williams-Sonoma since June 24, 2009. The allegations in that case included the claims of failure to provide meal and rest periods, overtime and minimum wages, timely wages, and final paychecks to the Morales class plaintiffs. In the present action,            Mr. Shine seeks reporting-time pay for on-call shifts that were canceled in early 2013, within the period covered by the Morales settlement agreement. Because reporting-time pay is a form of wages, a claim for reporting-time pay could have been raised in the Morales action. The fact that no claim for reporting-time pay was alleged in Morales does not alter our determination that the same primary right, to seek payment of wages due, was involved in both Morales and this case.” (Shine v. Williams-Sonoma, Inc., supra, 23 Cal.App.5th at p. 1077 [internal citations omitted].)

The Court finds that Shine is distinguishable from the facts here. The Court does not find that Defendants have shown that the Illinois Action concerned claims by Plaintiff involving the same primary right as the claims alleged by Plaintiff in the instant action for (1) fraud – intentional misrepresentation, (2) fraud – false promise, (3) negligent misrepresentation, and (4) violation of Business and Professions Code section 17200.

Defendants assert that “DR Welch pleaded fraud (a/k/a unclean hands) as an affirmative defense to Impact’s Complaint…” (Demurrer at p. 8:4-5.) However, as discussed above, DR Welch’s affirmative defense of “unclean hands” alleged that “Impact’s failure to provide sufficient service and equipment contributed to the breakdown in the contractual relationship with DR Welch.” (Kish Decl., ¶ 3, Ex. 2.) The affirmative defense does not mention alleged fraud, negligent misrepresentation, or any violation of Business and Professions Code section 17200.

Remaining Arguments

As set forth in the Court’s February 24, 2023 Order, Defendants also assert in the demurrer that Plaintiff’s causes of action for fraud - intentional misrepresentation, fraud - negligent misrepresentation, fraud - false promise, and violation of Business and Professions Code section 17200 fail to meet California’s heightened pleadings standard for fraud-based claims. As discussed in the February 24, 2023 Order, “[t]he Court does not find that Defendants have demonstrated that Plaintiff has failed to allege facts in the Complaint demonstrating ‘how, when, where, to whom, and by what means the representations were tendered’ in these causes of action…” (Order at p. 8:19-22.) The February 24, 2023 Order also provides, “Defendants do not explain why they contend the fourth cause of action for violation of Business and Professions Code section 17200 is insufficiently pled.” (Order at p. 9:1-2.)  

Conclusion 

Based on the foregoing, the Court overrules Defendants’ demurrer in its entirety.

Defendants are ordered to file and serve their answer to the Complaint within 10 days of the date of this Order.   

Defendants are ordered to give notice of this Order.

DATED:  April 13, 2023                                ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court