Judge Thomas D. Long, Case Number: 23STCV18046, Date: 2024-03-19 Tentative Ruling

On July 31, 2023, Plaintiff Tianjin River West Real Estate Development Co. Ltd. filed this action against Defendants Cole Matthew Harris and Ying Chen. The Complaint alleges (1) fraud, (2) aiding and abetting fraud, (3) breach of fiduciary duty, (4) aiding and abetting breach of fiduciary duty, (5) civil conspiracy, and (6) unjust enrichment.

On October 18, 2023, Harris (“Defendant”) filed an answer. On October 6, 2023, Defendant filed a motion for judgment on the pleadings.

A motion for judgment on the pleadings is the functional equivalent to a general demurrer. (Lance Camper Mfg. Corp. v. Republic Indemnity Co. of Am. (1996) 44 Cal.App.4th 194, 198.) Like demurrers, motions for judgment on the pleadings challenge the legal sufficiency of the allegations, not their veracity. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) The Court “must accept as true all material facts properly pleaded, but does not consider conclusions of law or fact, opinions, speculation, or allegations contrary to law or facts that are judicially noticed.” (Stevenson Real Estate Services, Inc. v. CB Richard Ellis Real Estate Services, Inc. (2006) 138 Cal.App.4th 1215, 1219-1220.)

Defendant argues that Plaintiff fails to allege facts supporting an alter ego theory. (Motion at p. 10.)

“In California, two conditions must be met before the alter ego doctrine will be invoked. First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.” (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) Plaintiffs need not allege specific facts to support an alter ego theory when the defendants may be assumed to possess superior facts, but they still must allege some facts, not just conclusions, demonstrating unity of interest. (See Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 236; First Western Bank & Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910, 915-916.)

The Complaint alleges that both Defendants “completely controlled, dominated, managed, and operated” non-party Jialei, and they “acted as an agent, co-conspirator, alter ego and/or joint venture to each other and acted within the scope of such agency, alter ego, and/or in furtherance of the conspiracy and/or joint venture with each other’s full knowledge, consent, permission, authorization, and ratification.” (Complaint ¶¶ 33-34.) “Defendants, among other things, (1) controlled the business and affairs of Jialei; (2) commingled the funds and assets of Jialei and diverted company funds and assets to their own personal use; (3) disregarded legal formalities and failed to maintain arm’s length relationship with Jialei; (4) inadequately capitalized Jialei; and (5) used Jialei as a mere shell, instrumentality, or conduit for themselves.” (Complaint ¶ 35.) Specifically, Jialei transferred funds to Chen’s personal account, and Chen then transferred funds for Defendant’s use. (Complaint ¶¶ 10, 24, 32.) Both Defendants “treated Jialei’s bank account as their personal piggy bank and transferred substantial company funds from Jialei for their personal use.” (Complaint ¶ 25.) Because of this, “there existed and exist a unity of interest and ownership between Defendants and Jialei such that any separateness between them has ceased to exist. Defendants completely controlled, dominated, managed, and operated Jialei.” (Complaint ¶ 34.) This is sufficient to allege alter ego at the pleading stage.

B. Plaintiff Sufficiently Alleges Fiduciary Duty (Third and Fourth Causes of Action).

Defendant argues that there is no allegation showing that he owed Plaintiff fiduciary duties. (Motion at pp. 14-15.) However, Plaintiff does allege that “[a]s a co-venturer, Jialei owed a fiduciary duty to [Plaintiff],” and Defendant is an alter ego of Jialei. (Complaint ¶¶ 33-35, 49.)

C. Plaintiff Sufficiently Alleges Fraudulent Concealment (First Cause of Action).

Defendant argues that there are no specific facts about his own fraudulent conduct. (Motion at p. 12.)

“The essential elements of a count for intentional misrepresentation are (1) a misrepresentation, (2) knowledge of falsity, (3) intent to induce reliance, (4) actual and justifiable reliance, and (5) resulting damage. [Citations.] The essential elements of a count for negligent misrepresentation are the same except that it does not require knowledge of falsity but instead requires a misrepresentation of fact by a person who has no reasonable grounds for believing it to be true. [Citations.]” (Chapman v. Skype Inc. (2013) 220 Cal.App.4th 217, 230-231.) “Causes of action for intentional and negligent misrepresentation sound in fraud and, therefore, each element must be pleaded with specificity.” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1166.) “‘This particularity requirement necessitates pleading facts which show how, when, where, to whom, and by what means the representations were tendered.’ [Citation.]” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645 (Lazar).)

Plaintiff alleges that Defendant and Chen held themselves out as a married couple who purported to be successful business owners and investors from the United States and purportedly had substantial capital they would like to invest in China. (Complaint ¶¶ 6, 13, 37; Opposition at pp. 3-4.) They “made representations to [Plaintiff] about the intended purpose of the loan proceeds under the cooperative agreement, including that the loan proceeds would be used on the companies’ future joint venture project(s) and other legitimate business purposes.” (Complaint ¶ 37.) These allegations lack facts about how, when, where, to whom, and by what means the representations were made.

Plaintiff also alleges fraud based on concealment. Fraud based on concealment requires that “(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.” (Bigler-Engler v. Breg, Inc. (2017) 7 Cal.App.5th 276, 310-311.) Less specificity is required to plead fraud by concealment. (Ibid.) “Even under the strict rules of common law pleading, one of the canons was that less particularity is required when the facts lie more in the knowledge of the opposite party.” (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1256, 1384.)

Plaintiff alleges that “Defendants and Jialei intentionally failed to disclose to [Plaintiff] that Jialei functioned as the Defendants’ personal piggy bank. . . . [and] that Jialei intended to transfer and did transfer substantial company funds for Defendants’ personal use when those funds could have and should have been used to pay Jialei’s share of the loan payments under the cooperative loan agreement.” (Complaint ¶ 38.) This, along with Defendant’s fiduciary duties by way of being Jialei’s alleged alter ego, is sufficient to allege fraudulent concealment.

Although the intentional misrepresentation is not sufficiently pleaded, this cause of action also has a portion that is sufficiently pleaded. Accordingly, the motion is denied on the ground. (See Fire Ins. Exchange v. Superior Court (2004) 116 Cal.App.4th 446, 452 [“Ordinarily, a general demurrer does not lie as to a portion of a cause of action, and if any part of a cause of action is properly pleaded, the demurrer will be overruled.”].)

D. Plaintiff Sufficiently Alleges Aiding and Abetting Fraud and Civil Conspiracy (Second and Fifth Causes of Action).

“[W]hile aiding and abetting may not require a defendant to agree to join the wrongful conduct, it necessarily requires a defendant to reach a conscious decision to participate in tortious activity for the purpose of assisting another in performing a wrongful act. A plaintiff's object in asserting such a theory is to hold those who aid and abet in the wrongful act responsible as joint tortfeasors for all damages ensuing from the wrong.” (Howard v. Superior Court (1992) 2 Cal.App.4th 745, 749.)

Defendant argues that the Complaint contains only conclusory allegations and does not allege that he had actual knowledge of the fraud and provided assistance. (Motion at p. 14.) Defendant focuses on the allegations about Chen’s conduct and contends that Plaintiff “fails to plead any allegations on how Defendant Chen’s actions necessarily equate to Harris’ knowledge and action relating to the alleged fraud. Plaintiff has thus failed to sufficiently allege facts supporting Harris’ alleged involvement in the aiding and abetting of fraud.” (Ibid.)

Plaintiff alleges that “Defendants had actual knowledge of the fraud Jialei perpetrated on [Plaintiff] and provided substantial assistance.” (Complaint ¶ 46.) They intentionally made specific misrepresentations and concealed other information. (Complaint ¶¶ 37-38.) Additionally, Plaintiff alleges that Defendant is the alter ego of Chen and Jialei. (Complaint ¶¶ 33-35.) That is sufficient to allege Defendant’s knowledge of and assistance in the fraud.

The same allegations about Defendant’s knowledge, assistance, and alter ego status are also sufficient for the claim of civil conspiracy. “Conspiracy is not a separate tort, but a form of vicarious liability by which one defendant can be held liable for the acts of another. [Citations.] To establish conspiracy, a plaintiff must allege that the defendant had knowledge of and agreed to both the objective and the course of action that resulted in the injury, that there was a wrongful act committed pursuant to that agreement, and that there was resulting damage. [Citation.]” (IIG Wireless, Inc. v. Yi (2018) 22 Cal.App.5th 630, 652.)

E. Plaintiff Sufficiently Alleges Unjust Enrichment (Sixth Cause of Action).

Defendant contends that the Complaint “only alleges that Defendant Chen received funds allegedly belonging to [Plaintiff]. The Complaint fails to establish, beyond conclusory statements, that Harris received or benefitted from any of the purported fraudulently transferred funds. Moreover, [Plaintiff] fails to allege Harris had knowledge of the so-called fraudulent transfers.” (Motion at p. 17.)

For the same reason as with the second and fifth causes of action, Plaintiff again sufficiently alleges Defendant’s knowledge of and involvement in the conduct leading to the allegedly unjust retention of Plaintiff’s funds.

Defendant argues that all causes of action are barred by the three-year statute of limitations for causes of action based in fraud. (See Code Civ. Proc., § 338.) Plaintiff alleges delayed discovery of the bases for the claims. (See Complaint ¶¶ 10, 24.)

A fraud claim begins to accrue when the aggrieved party discovers the facts constituting the fraud or could have discovered the fraud through the exercise of reasonable diligence. (San Francisco Unified School Dist. v. W.R. Grace & Co. (1995) 37 Cal.App.4th 1318, 1327.) “An important exception to the general rule of accrual is the ‘discovery rule,’ which postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action. [Citation.]” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807.) “A plaintiff has reason to discover a cause of action when he or she ‘has reason at least to suspect a factual basis for its elements.’ [Citation.]” (Ibid.) “[I]f a plaintiff's reasonable and diligent investigation discloses only one kind of wrongdoing when the injury was actually caused by tortious conduct of a wholly different sort, the discovery rule postpones accrual of the statute of limitations on the newly discovered claim.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 813.)

Plaintiff previously sued Jialei for breach of a cooperative agreement and for recovery of loan payments in 2016, 2019, and 2020, and received judgments in its favor. (Complaint ¶¶ 20-23.) In connection with the execution of the 2019 judgment, Plaintiff applied for an investigation order, similar to a subpoena, from the court in 2020 to examine Jialei’s assets. (Complaint ¶ 24.) Plaintiff then discovered that Jialei had transferred funds to Chen’s personal account between March 2014 and May 2016, instead of using the money for Plaintiff’s and Jialei’s joint venture projects or any other legitimate business purposes. (Complaint ¶ 24.)

Defendant argues that Plaintiff “had reason to suspect fraud when Jialei stopped paying its portion of the loan in 2016, forcing [Plaintiff] to commence litigation in China.” (Motion at pp. 12-13.) But Plaintiff’s claims here are based on different torts that were not discovered until Plaintiff learned about the allegedly fraudulent transfers and concealment. At this stage, Plaintiff sufficiently pleads delayed discovery of Defendant’s conduct.

Parties who intend to submit on this tentative must send an email to the Court at SMCDEPT48@lacourt.org indicating intention to submit. If all parties in the case submit on the tentative ruling, no appearances before the Court are required unless a companion hearing (for example, a Case Management Conference) is also on calendar.

Hon. Thomas D. Long

Judge of the Superior Court