Judge Thomas D. Long, Case 22STCV08563 2022-08-31 Tentative Ruling

On March 9, 2022, Silver Star Construction Engineering Inc. (“Silver Star”) filed this action against Amanda Ruch, Nicolas Ruch, and U.S. Bank National Association. On March 21, 2022, Amanda Ruch and Nicolas Ruch (collectively, “Cross-Complainants”) filed a cross-complaint, and on April 25, 2022, they filed a first amended cross-complaint (“FACC”) against Silver Star, John A. Tatoulian, and Steven Bray (collectively, “Cross-Defendants”). On June 23, 2022, Tatoulian and Bray each filed a demurrer.

When considering demurrers, courts read the allegations liberally and in context, accepting the alleged facts as true. (Nolte v. Cedars-Sinai Medical Center (2015) 236 Cal.App.4th 1401, 1406.) Courts also consider exhibits attached to the complaint and incorporated by reference. (See Frantz v. Blackwell (1987) 189 Cal.App.3d 91, 94.)

Tatoulian argues that the causes of action against him are nothing more than a breach of contract and are barred by the economic loss rule. (Demurrer at pp. 12-14.)

“Quite simply, the economic loss rule ‘prevent[s] the law of contract and the law of tort from dissolving one into the other.’” (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 988 (Robinson Helicopter).) However, tort damages may be permitted when the breach of contract is accompanied by a tort such as fraud. (Id. at pp. 989-990.) “Tort damages have been permitted in contract cases . . . where the contract was fraudulently induced. [Citation.]” (Erlich v. Menezes (1999) 21 Cal.4th 543, 551-552.) To plead around the economic loss rule, a party must plead the existence of a duty that arises independent of any contractual duty and independent injury, other than economic loss, that arises from the breach of that duty. (Robinson Helicopter, supra, 34 Cal.4th pp. 988-991.)

The FACC alleges that Cross-Complainants and Silver Star entered into an AIA Agreement for the construction of a swimming pool, retaining wall, and concrete work, with related grade beams, caissons, demolition and remodeling of the residential structure, including structural concrete footings, mechanical, plumbing, electrical, framing, drywall. windows and doors, finish carpentry, tile, painting and roofing. (FACC ¶ 7.) Tatoulian and Silver Star refused to perform, correct, or complete the construction problems that Cross-Complainants identified before abandoning the project. (FACC ¶¶ 3, 10.) The Cross-Defendants falsely promised within the AIA Agreement to complete the work in 365 days, perform the work according to the contract documents (plans and specifications), perform and complete the work for $1,200,819.00, and comply with the terms of the AIA Agreement. (FACC ¶¶ 30, 37.) As a result, Cross-Complainants were damaged in the amount of $1,000,000.00. (FACC ¶¶ 26, 34.) These are the same wrongs and damages alleged in connection with the breach of contract: the construction was not completed in 365 days, the work was incomplete and defective, and there were issues with compliance with the contract, causing $1,000,000.00 in damages. (FACC ¶¶ 9-10, 14, 16.) Cross-Complainants have not alleged any harms caused by the alleged misrepresentations themselves that differ from the harms caused by breaching the contract. Cross-Complainants allege only that “[i]f Cross-Complainants had known the truth, they would not have entered into any contract with Silver Star and would have hired someone else to perform the work.” (FACC ¶ 33.) The demurrer to the fourth and fifth causes of action is sustained on this ground.

With respect to the negligence cause of action, Cross-Defendants’ negligence “result[ed] in defects and deficiencies in the work, delays, overcharges and other deficiencies.” (FACC ¶ 25.) “[T]he difference between price paid and value received, and deviations from standards of quality that have not resulted in property damage or personal injury, are primarily the domain of contract and warranty law or the law of fraud, rather than of negligence. In actions for negligence, a manufacturer’s liability is limited to damages for physical injuries; no recovery is allowed for economic loss alone.” (Aas v. Superior Court (2000) 24 Cal.4th 627, 636 (Aas).) This bar includes “the cost to repair, or the diminished value attributable to, construction defects that have not caused property damage.” (Id. at p. 635.) Here, however, at least some of the alleged defects include property damage, such as retaining wall failure/cracking, excessive cracks in stucco, and drywall damage from water leakage. (FACC ¶ 9.) This differs from defects that caused only economic loss, such as tiling and nailing patterns that do not conform to building codes. (See Aas, supra, 24 Cal.4th at p. 634.) The demurrer to the third cause of action is overruled on this ground.

A cause of action for negligence requires (1) a legal duty owed to the plaintiff to use due care, (2) breach of that duty, (3) causation, and (4) damage to the plaintiff. (County of Santa Clara v. Atlantic Richfield Co. (2006) 137 Cal.App.4th 292, 318.)

Tatoulian argues that the FACC does not allege any duty other than that owed by Tatoulian to Silver Star as its corporate officer. (Demurrer at pp. 15-17.) Cross-Complainants allege that Tatoulian is a director, officer, shareholder, owner, Responsible Managing Officer, and alter ego of Silver Star. (FACC ¶ 3.) Tatoulian therefore owed “a duty to use due care and reasonableness in all dealings on the project and to perform all work, labor and services according to industry standards, building codes, plans, permits and in a workmanlike, timely and defect-free manner,” based on his relationship, actions, and dealings with Cross-Complainants and his involvement in the construction. (FACC ¶ 24.) This sufficiently alleges a duty owed to Cross-Complainants through Tatoulian being an alleged alter ego of the contracting party.

Tatoulian also argues that Cross-Complainants cannot recover based on a breach of contract. (Demurrer at p. 18.) The alleged duty does not solely arise from the contract, and as discussed previously, some of the alleged harms are beyond mere economic losses caused from a breach of contract.

The elements of fraud 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.” (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 184.) Fraud must be pleaded with specificity. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.)

Tatoulian argues that the statements are opinions and predictions of future events, not affirmative assertions of fact. (Demurrer at pp. 19-20.) “In tort law, a representation ordinarily will give rise to a cause of action for fraud or deceit only if it is a representation of fact rather than opinion. (Civ. Code, §§ 1572, 1710).” (Nibbi Brothers, Inc. v. Home Federal Sav. & Loan Assn. (1988) 205 Cal.App.3d 1415, 1423.) A fraud cause of action may be based on a false promise if “the promisor did not intend to perform at the time he or she made the promise and . . . it was intended to deceive or induce the promisee to do or not do a particular thing.” (Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 159 (Tarmann).)

Cross-Complainants identify the false promises and representations as: “1) The representation and promise to complete the work in 365 days, 2) the representation and promise to perform the work according to the contract documents (plans and specifications), 3) the representation and promise to perform and Cross-Complaint complete the work for the stipulated sum of $1,200,819.00, and 4) comply with the terms of the AIA Agreement.” (FACC ¶ 30.) Tatoulian and Silver Star made these promises and representations to induce Cross-Complainants’ reliance and cause them to enter into the AIA Agreement. (FACC ¶ 29.) These are sufficient allegations for an intentional misrepresentation, not opinions or predictions. However, as discussed above, Cross-Complainants do not allege damages caused by reliance on the misrepresentations themselves.

With respect to the allegation that “during the course of the project, Silver Star and Tatoulian created false change orders and false charges in order to defraud Cross-Complainants” (FACC ¶ 31), this lacks the required specificity.

“The elements of negligent misrepresentation are (1) a misrepresentation of a past or existing material fact, (2) made without reasonable ground for believing it to be true, (3) made with the intent to induce another’s reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.” (Ragland v. U.S. Bank National Assn. (2012) 209 Cal.App.4th 182, 196.) “As is true of negligence, responsibility for negligent misrepresentation rests upon the existence of a legal duty, imposed by contract, statute or otherwise, owed by a defendant to the injured person.” (Eddy v. Sharp (1988) 199 Cal.App.3d 858, 864 (Eddy).)

Tatoulian argues he did not owe a legal duty to Cross-Complainants, and any statements made were in his capacity as Silver Star’s agent. (Demurrer at pp. 21-22.) The basis for the alleged duty is the contract. (FACC ¶¶ 28, 37.) Furthermore, Cross-Complainants allege that Tatoulian is also the alter ego of Silver Star, not merely an agent. (FACC ¶ 3.)

The demurrer to the fourth and fifth causes of action is SUSTAINED with 20 days’ leave to amend.

Bray demurs to the second, third, sixth, seventh, eighth, and ninth causes of action.

Bray argues that the tort causes of action are nothing more than a breach of contract and are barred by the economic loss rule. (Demurrer at pp. 13-15.)

With respect to the negligence cause of action, Cross-Defendants’ negligence “result[ed] in defects and deficiencies in the work, delays, overcharges and other deficiencies.” (FACC ¶ 25.) For the same reasons as with Tatoulian’s demurrer, the demurrer to the third cause of action is overruled on this ground. (See Aas, supra, 24 Cal.4th at p. 634.)

For the fraud causes of action, Cross-Complainants allege that in connection with the Independent Contractor Agreement, Bray falsely represented that he “was qualified and experienced to perform the duties of serving as Cross-Complainant’s independent contractor, manager and representative, and would actually perform the tasks he promised to perform: that is: to obtain several competitive bids for comparison, to negotiate the best contract, to manage and oversee the construction, time for performance, quality of the work, billing, and payment and to be independent and act in Cross-Complainants’ best interests at all times.” (FACC ¶¶ 41-43; see FACC ¶ 49, 55-57.) He also concealed a pre-existing relationship with Silver Star and Tatoulian. (FACC ¶ 44; see FACC ¶ 49, 55-57.) As a result, Cross-Complainants were damaged in the amount of $1,000,000.00. (FACC ¶¶ 46, 51, 57.) These are the same wrongs and damages alleged in connection with the breach of contract: the construction was not completed in 365 days, the work was incomplete and defective, and there were issues with compliance with the contract, causing $1,000,000.00 in damages. (FACC ¶¶ 8-11, 18-22.) Cross-Complainants have not alleged any harms caused by the alleged misrepresentations themselves that differ from the harms caused by breaching the contract. Cross-Complainants allege only that “[i]f Cross-Complainants had known the truth, they would not have entered into any contract with Silver Star and would have hired someone else to perform the work.” (FACC ¶ 45.) The demurrer to the sixth, seventh, and ninth causes of action is sustained on this ground.

Cross-Complainants also allege breach of fiduciary duty based on the same facts and harms. (FACC ¶¶ 52-54.) “[C]onduct 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.) As further discussed below, Cross-Complainants cannot allege a fiduciary duty owed to them, so there is no tort-based duty independent of the contract. The demurrer to the eighth cause of action is sustained on this ground.

Bray argues there are no facts showing that he did not perform under the contract. (Demurrer at p. 24.) He contends that he was hired to manage Silver Star’s performance, and Cross-Complainants “do not allege how, with different management strategies, Bray could have obtained a different quality of work from Silver Star, or how another construction manager could have procured a different result.” (Ibid.)

The FACC alleges that the parties entered into an Independent Contractor Agreement that included specifically services in management and oversight, scope of work, billing, payment, and quality control. (FACC ¶ 19.) Bray breached the terms and conditions by working for Silver Star instead of being an independent contractor, significantly delaying the construction, producing defective work, and acting against Cross-Complainants’ interests. (FACC ¶¶ 8-9, 11, 20.) There is a factual question whether these acts were breaches of the Independent Contractor Agreement’s requirements of “[o]versight and management of General Contractor, including scope of work, billing, and quality control.” (FACC, Ex. 2 at ¶ 1.) At this stage, the FACC sufficiently alleges the basis for the breach.

Bray argues that Cross-Complainants do not allege a legally recognizable duty, and any duty arose solely from the contract. (Demurrer at pp. 15-16.) For the reasons stated with Tatoulian’s demurrer, the demurrer to the third cause of action is overruled on this ground.

Bray argues that Cross-Complainants waived their fraud claims by affirming the Independent Contractor Agreement. (Demurrer at p. 17.) “[A] party to an executory contract, who, with full knowledge of the facts constituting the fraud complained of, subsequently, with intention to do so, affirms the contract and recognizes it as valid, either by his written agreement or by acts and conduct, and accepts substantial payments, property or the performance of work or labor not required by the original contract, thereby waives his right to damages on account of the fraud.’” (Schied v. Bodinson Mfg. Co. (1947) 79 Cal.App.2d 134, 142.) “[O]ne who, after discovery of an alleged fraud, ratifies the original contract by entering into a new agreement granting him substantial benefits with respect to the same subject matter, is deemed to have waived his right to claim damages for fraudulent inducement.” (Oakland Raiders v. Oakland-Alameda County Coliseum, Inc. (2006) 144 Cal.App.4th 1175, 1186.)

The FACC alleges that between May and August 2018, Bray falsely represented that he “was qualified and experienced to perform the duties of serving as Cross-Complainant’s independent contractor, manager and representative, and would actually perform the tasks he promised to perform: that is: to obtain several competitive bids for comparison, to negotiate the best contract, to manage and oversee the construction, time for performance, quality of the work, billing, and payment and to be independent and act in Cross-Complainants’ best interests at all times.” (FACC ¶¶ 41-42; see FACC ¶ 49.) These statements were false because “Bray lacked the skill, experience and qualifications to perform the management and oversight he represented and promised, and had no intention of actually managing and overseeing the work . . . or representing Cross-Claimants interests, but in fact, acted contrary and in conflict with Cross-Complainants’ interests . . . and worked consistently to further the interests of Silver Star, and against Cross-Complainant’s interests . . . .” (FACC ¶ 43.) Bray also concealed a pre-existing relationship with Silver Star and Tatoulian and “was working actively in concert with Silver Star, behind Cross-Complainants’ back, to secure the contract and intended on becoming an employee of Silver Star, with the intent to deceive Cross-Complainants and lure them into signing contracts with both Bray and Silver Star, to enrich both at Cross-Complainant’s expense.” (FACC ¶ 44.) Bray later disclosed this fact after Cross-Complainants entered into the contracts, “and after this disclosure, Bray continued in his employment and relationship with Silver Star in direct conflict with his representations and promises of independence and loyalty, continuing to conceal his activities on behalf of Silver Star during construction.” (FACC ¶ 44.) Because the FACC alleges that the contractual relationship continued even after disclosure of the alleged misrepresentations, the demurrer to the sixth and seventh causes of action is sustained on this ground.

Bray also argues that the fraud causes of action are based on opinions and future predictions, not affirmative statements of fact. (Demurrer at p. 17.) Some of the alleged misrepresentations are promises to perform, which are sufficient for intentional misrepresentation. (See Tarmann, supra, 2 Cal.App.4th at p. 159.) “Although a false promise to perform in the future can support an intentional misrepresentation claim, it does not support a claim for negligent misrepresentation.” (Stockton Mortgage, Inc. v. Tope (2014) 233 Cal.App.4th 437, 458.) Negligent misrepresentation requires a positive assertion of fact; “[a]n ‘implied’ assertion or representation is not enough.” (Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 306.) Cross-Complainants also allege additional affirmative misrepresentations about Bray’s qualification and experience. (FACC ¶¶ 42, 49.) These are also sufficient statements of fact to support the fraud causes of action. The demurrer to the sixth and seventh causes of action is overruled on this ground.

Bray argues he did not owe a legal duty to Cross-Complainants. (Demurrer at p. 20.) The basis for the alleged duty is the contract. (FACC ¶¶ 41, 49; see Eddy, supra, 199 Cal.App.3d at p. 864 [legal duty for negligent misrepresentation may be imposed by contract].)

A cause of action for breach of fiduciary duty requires (1) a fiduciary duty, (2) breach of the duty, and (3) damage caused by the breach. (Charnay v. Cobert¿(2006) 145 Cal.App.4th 170, 182.) “A fiduciary relationship is ‘ “ ‘any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent . . . . ’ ” ’ ” (Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29.) A non-exhaustive list of legal relationships that give rise to fiduciary duties includes “(1) principal and agent, including real estate broker/agent and client, and stockbroker and customer; (2) attorney and client; (3) partners; (4) joint venturers; (5) corporate officers and directors, on the one hand, and the corporation and its shareholders, on the other hand; (6) husband and wife, with respect to the couple’s community property; (7) controlling shareholders and minority shareholders; (8) trustee and trust beneficiary; (9) guardian and ward; (10) pension fund trustee and pensioner beneficiary[;] (11) executor and decedent’s estate; and (12) trustee and trust beneficiaries.” (Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 632-633, citations and footnotes omitted.)

Bray argues that he was not a fiduciary. (Demurrer at p. 21.) The Independent Contractor Agreement expressly disclaims any fiduciary relationship: “Nothing contained in this Agreement shall be deemed or construed by the Parties to create the relationship of a partnership, a joint venture or any other fiduciary relationship.” (FACC, Ex. 2 at ¶ 5.) Additionally, Bray did not have authority to enter into agreements or contracts on behalf of Cross-Complainants. (Ibid.)

Cross-Complainants argue there was a fiduciary relationship because they “placed their confidence in the integrity of Bray to act as an ‘independent’ manager for their benefit, to gather bids from general contractors, to evaluate those bids and make recommendations, to negotiate a contract with a general contractor and to oversee and manage the project’s work, billing and quality control. Bray was entrusted with the bidding, negotiation and management of a $1.2m project.” (Opposition at pp. 9-10.) But this is contradicted by the plain language of the contract.

“The elements of the cause of action for constructive fraud are: (1) fiduciary relationship; (2) nondisclosure (breach of fiduciary duty); (3) intent to deceive, and (4) reliance and resulting injury (causation).” (Younan v. Equifax Inc. (1980) 111 Cal.App.3d 498, 516, fn. 14.)

Because Cross-Complainants have not properly alleged a fiduciary relationship, the demurrer to the ninth cause of action is sustained.

The demurrer to the sixth and seventh causes of action is SUSTAINED with 20 days’ leave to amend.

The demurrer to eighth and ninth causes of action is SUSTAINED without leave to amend because Cross-Complainants have not shown how they can allege a fiduciary duty in light of the conflicting contractual language.

Parties who intend to submit on this tentative must send an email to the Court at SMCDEPT48@lacourt.org indicating intention to submit. Parties intending to appear are encouraged to appear remotely and should be prepared to comply with Dept. 48’s new requirement that those attending court in person wear a surgical or N95 or KN95 mask.

Hon. Thomas D. Long

Judge of the Superior Court