Judge: Theresa M. Traber, Case: 23STCV11610, Date: 2025-01-15 Tentative Ruling

Case Number: 23STCV11610    Hearing Date: January 15, 2025    Dept: 47

Tentative Ruling

Judge Theresa M. Traber, Department 47

HEARING DATE:     January 15, 2025                   TRIAL DATE: NOT SET

CASE:                         Roberto Diaz, et al. v. Krystal Alfaro Canty

CASE NO.:                 23STCV11610           

DEMURRER TO FIRST AMENDED CROSS-COMPLAINT

MOVING PARTY:               Cross-Defendants Roberto Diaz, Skin Body Lounge, LLC, and Skin Body Lounge Med Spa, Inc.

RESPONDING PARTY(S): Cross-Complainant Krystal Alfaro Canty

CASE HISTORY:

·         05/22/23: Complaint filed.

·         12/18/23: First Amended Complaint filed.

·         02/27/24: Second Amended Complaint filed.

·         03/28/24: Cross-Complaint filed.

·         05/24/24: First Amended Cross-Complaint filed.

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

            This is an action for breach of contract and conversion. Plaintiffs allege that Defendant failed to adhere to an oral agreement between the parties and misappropriated corporate assets and trade secrets.

Cross-Defendants demur to the first, fourth, fifth, and sixth causes of action in the First Amended Cross-Complaint.

TENTATIVE RULING:

Cross-Defendants’ Demurrer to the First Amended Cross-Complaint is SUSTAINED with leave to amend as to the first cause of action and otherwise OVERRULED.

            Cross-Complainant shall have 30 days leave to amend the Cross-Complaint.

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DISCUSSION:

Cross-Defendants demur to the first, fourth, fifth, and sixth causes of action in the First Amended Cross-Complaint.

Legal Standard

A demurrer tests whether the (cross-) 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.) 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, 147 Cal.App.4th at p. 747.) The ultimate facts alleged in the [cross-] complaint must be deemed true, as well as all facts that may be implied or inferred from those expressly alleged. (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403; see also Shields v. County of San Diego (1984) 155 Cal.App.3d 103, 133 [stating, “[o]n demurrer, pleadings are read liberally and allegations contained therein are assumed to be true”].) “This rule of liberal construction means that the reviewing court draws inferences favorable to the plaintiff, not the defendant.” (Perez v. Golden Empire Transit Dist. (2012) 209 Cal.App.4th 1228, 1238.)

Meet and Confer

Before filing a demurrer, the demurring party shall meet and confer in person or by telephone with the party who has filed the pleading subject to the demurrer and file a declaration detailing their meet and confer efforts.  (Code Civ. Proc., § 430.41(a).) However, an insufficient meet and confer process is not grounds to overrule or sustain a demurrer.  (Code Civ. Proc., § 430.41(a)(4).)

Attorney Matthew J. Cave, counsel for Cross-Defendants, states that counsel for the parties had telephonically met and conferred regarding the original Cross-Complaint in this action. (Declaration of Matthew J. Cave ISO Dem. ¶ 3.) Those discussions resulted in the filing of the operative First Amended Cross-Complaint on May 24, 2024. (Id.) Counsel for Cross-Defendants sent a meet-and-confer letter by email to Cross-Complainant’s counsel on June 13, 2024, proposing dates for a teleconference. (Id. ¶ 4; Exh. A.) Cross-Complainant’s counsel asked if the proposed demurrer would be on the same grounds as discussed with respect to the original Cross-Complaint. (Id.) Upon receiving an answer in the affirmative, Cross-Complainant’s counsel responded “we respectfully disagree. You can move forward with the demurrer.” (Id.) The Court therefore finds that Cross-Defendants have satisfied their statutory meet-and-confer obligations.

First Cause of Action: Fraud

            Cross-Defendants demur to the first cause of action for fraud for failure to state facts sufficient to constitute a cause of action.

“The elements of fraud that will lead to a tort action are: (a) misrepresentation; (b) knowledge of falsity; (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 974.) Every element of the cause of action for fraud must be alleged in the proper manner and the facts constituting the fraud must be alleged with sufficient specificity to allow defendant[s] to understand fully the nature of the charge made. (Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73.) “This particularity requirement necessitates pleading facts which show how, when, where, to whom, and by what means the representations were tendered.” (Ibid.) “[G]eneral and conclusory allegations do not suffice.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) When the facts are necessarily in the possession of the defendant, less specificity is required, since the purpose of the specificity requirement is in part to provide notice to the defendant of the basis for the claim. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384.)

            The First Amended Cross-Complaint alleges that in “early 2020,” Defendant/Cross-Complainant Krystal Canty and Plaintiff/Cross-Defendant Roberto Diaz “agreed to go into business together to own and operate a retail personal services business providing personal aesthetic body and face treatments and related services to the general public.” (FAXC ¶ 1 [second]; ¶ 10 [second].) To that end, the parties acquired Skin Body Lounge, in which Cross-Complainant became a 10% minority owner. (FAXC ¶¶ 2[second]-3[second].) Cross-Defendant Diaz owned the remaining 90%. (Id.) Cross-Complainant alleges that Cross-Defendant Diaz formed a separate entity, Skin Body Med Spa, providing the same services at the same location as Skin Body Lounge, in an effort to usurp Cross-Complainant’s interest and profits from the first entity. (FAXC ¶¶ 5[second]-6[second].)

With respect to the fraud cause of action, the Cross-Complaint further alleges that “in early 2020, Diaz specifically represented and stated that Canty will receive 10% equity and net profits of the business.” (FAXC ¶ 11.) Cross-Complainant alleges that Cross-Defendant Diaz “had no intention of sharing any profits” and “knew he never intended to share any profits at the time he made those representations.” (¶¶ 16-17.) The Cross-Complaint does not specifically allege an intent to induce reliance, but it does allege that Cross-Complainant’s reliance on the offer to share profits was “reasonable.” (FAXC ¶ 15.) Cross-Complainant claims that Cross-Defendant Diaz formed a competing business entity to provide the same services while keeping all profits for himself. (FAXC ¶¶ 18-20.)

Cross-Defendants argue that the first cause of action is inadequately pled because it does not allege any fraudulent representations with the requisite specificity, does not allege knowledge of falsity, and does not adequately allege intent to defraud. Cross-Complainant, in opposition, argues that the elements of fraud are specifically pled. The Court disagrees with Cross-Complainant with respect to the representations as pled. A general statement that Cross-Defendant Diaz “in early 2020. . . stated that Canty will receive 10% equity and net profits of the business” does not provide the facts of that representation with sufficient detail as contemplated by Lazar and its progeny. (See FAXC ¶ 11.) Moreover, as Cross-Defendants state, the promise of an ownership share in Skin Body Lounge, as memorialized in the alleged May 10, 2020 operating agreement, cannot support an allegation of fraud standing on its own because Cross-Complainant admits that she received that share of that entity. (FAXC ¶ 12; see also ¶ 3[second].) That concession does not necessarily preclude Cross-Complainant’s allegations of a broader promise for a 10% share in any business enterprise started by the Parties “providing personal aesthetic body and face treatments and related services to the general public,” (FAXC ¶ 1[second].) The Court concurs with Cross-Defendants, however, that the allegations pertaining to that promise lack the requisite detail of what specific statements were made, when and where they were made, and by what means they were tendered.

Accordingly, Cross-Defendants’ Demurrer to the first cause of action is SUSTAINED.

Fourth Cause of Action: Conversion

            Cross-Defendants demur to the fourth cause of action for conversion as barred by the economic loss rule.

As the California Supreme Court stated: “conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law.” (Erlich v. Menezes (1999) 21 Cal.4th 543, 551.) The Erlich Court found that mere negligent breach of a contract is not sufficient to meet this standard. (Id. at 552.) The high court explained, “[g]enerally, outside the insurance context, a tortious breach of contract ... may be found when (1) the breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion or; (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.” (Erlich v. Menezes (1999) 21 Cal.4th 543, 553-54 [internal quotations and citations omitted, emphasis added].) The Fourth Cause of Action does not simply allege a breach of contract by failing to distribute profits.  Instead, it contends that Cross-Defendants “intentionally diverted” profits owed to Cross-Complainant to Cross-Defendants’ separately owned business. By the plain language of Erlich, Cross-Complainant’s fourth cause of action for conversion is outside the scope of the economic loss rule.

            Accordingly, Cross-Defendants’ Demurrer to the fourth cause of action is OVERRULED.

Fifth Cause of Action: Breach of Fiduciary Duty

            Cross-Defendants demur to the fifth cause of action for breach of fiduciary duty for failure to state facts sufficient to constitute a cause of action.

            To plead a claim for breach of fiduciary duty, a plaintiff must allege (1) the existence of a fiduciary relationship, (2) its breach and (3) damage proximately caused by that breach. (Meister v. Mensinger (2014) 230 Cal. App.4th 381, 395).

According to Cross-Defendants, this cause of action is deficient because Cross-Defendant Diaz did not owe any fiduciary duties to Cross-Complainant in his capacity as a member of Skin Body Lounge, LLC. As Cross-Defendants state, under Corporations Code section 17704.09(f)(3), a member of a manager-managed limited liability company does not have any fiduciary duty to the company or to other members merely by reason of being a member. (Corp. Code § 17704.09(f)(3).) However, Cross-Defendants offer nothing to support the conclusion that Skin Body Lounge is manager-managed, rather than member-managed. Moreover, even if they had done so, the First Amended Cross-Complaint plainly alleges that Cross-Defendant Diaz was also a manager of Skin Body Lounge. (FAXC ¶ 46.) Cross-Defendants’ argument therefore fails to engage with the allegations pled in the operative Cross-Complaint.

Cross-Defendants also assert that the First Amended Cross-Complaint does not allege any fiduciary duties which were breached. The Court disagrees. The fifth cause of action alleges that Cross-Defendant Diaz is a manager of Skin Body Lounge (FAXC ¶ 46), that managers owe duties of loyalty and care (¶ 47; see also Corp. Code § 17704.09(f)(1)), and that Cross-Defendant Diaz breached those duties by the acts which form the basis of the Cross-Complaint. (FAXC ¶ 50.) These allegations are sufficient.

Accordingly, Cross-Defendants’ Demurrer to the fifth cause of action is OVERRULED.

Sixth Cause of Action: Breach of Implied Covenant of Good Faith and Fair Dealing

            Cross-Defendants demur to the sixth cause of action for breach of the implied covenant of good faith and fair dealing for failure to state facts sufficient to constitute a cause of action.

            “There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 [internal citations omitted].) “The covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party’s right to receive the benefits of the agreement actually made. The covenant thus cannot ‘“‘be endowed with an existence independent of its contractual underpinnings.’”’ It cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350 [internal citations omitted, emphasis in original].)

            Cross-Defendants assert that this cause of action is inadequately pled because it is merely duplicative of Cross-Complainant’s claim for breach of contract. Not so. Plaintiff’s second cause of action for breach of contract expressly arises exclusively out of the May 10, 2020 written operating agreement. (FAXC ¶¶ 28-34.) In contrast, the sixth cause of action, which incorporates the entirety of the preceding allegations of the complaint, arises at least in part out of the contention that Cross-Defendant Diaz formed a separate business entity outside the scope of the May 10, 2020 agreement so as to frustrate Cross-Complainant’s right to benefit from that agreement by competing with Skin Body Lounge. (See FAXC ¶¶ 53-56; see also ¶¶ 1[second]-8[second]; ¶¶ 18-21.) Construed in the light most favorable to Cross-Complainant, as required on a demurrer, the Court considers these allegations to be sufficient to state a cause of action for breach of the implied covenant of good faith and fair dealing.

            Accordingly, Cross-Defendants’ Demurrer to the sixth cause of action is OVERRULED.

Leave to Amend

            When a demurrer is sustained, the Court determines whether there is a reasonable possibility that the defect can be cured by amendment. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318).  When a plaintiff “has pleaded the general set of facts upon which his cause of action is based,” the court should give the plaintiff an opportunity to amend his complaint, since plaintiff should not “be deprived of his right to maintain his action on the ground that his pleadings were defective for lack of particulars.” (Reed v. Norman (1957) 152 Cal.App.2d 892, 900.) Accordingly, California law imposes the burden on the plaintiffs to demonstrate the manner in which they can amend their pleadings to state their claims against a defendant.  (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.) “Denial of leave to amend constitutes an abuse of discretion unless the complaint shows on its face it is incapable of amendment.  [Citation.]  Liberality in permitting amendment is the rule, if a fair opportunity to correct any defect has not been given." (Angie M. v. Superior Court (1995) 37 Cal.App.4th 1217, 1227.)

            Cross-Complainant has not demonstrated how the Cross-Complaint might be alleged to cure the deficiencies identified on this demurrer. However, as the failure of the first cause of action is rooted in the lack of specificity in the pleadings, the Court finds that the means of amendment is facially apparent. Therefore, given the strong presumption in favor of permitting amendment, the Court will grant Cross-Complainant an opportunity to amend to provide more detail in support of the fraud cause of action.

CONCLUSION:

            Accordingly, Cross-Defendants’ Demurrer to the First Amended Cross-Complaint is SUSTAINED with leave to amend as to the first cause of action and otherwise OVERRULED.

            Cross-Complainant shall have 30 days leave to amend the Cross-Complaint.

            Moving Parties to give notice.

IT IS SO ORDERED.

Dated:  January 15, 2025                                ___________________________________

                                                                                    Theresa M. Traber

                                                                                    Judge of the Superior Court

            Any party may submit on the tentative ruling by contacting the courtroom via email at Smcdept47@lacourt.org by no later than 4:00 p.m. the day before the hearing. All interested parties must be copied on the email. It should be noted that if you submit on a tentative ruling the court will still conduct a hearing if any party appears. By submitting on the tentative you have, in essence, waived your right to be present at the hearing, and you should be aware that the court may not adopt the tentative, and may issue an order which modifies the tentative ruling in whole or in part.